NEW YORK --The obvious question drumming around in everybody's head ever since news broke yesterday that Apple was on the verge of snatching Beats Electronics for the reported sum of $3.2 billion is why the company synonymous with iTunes would be attracted to Dr. Dre's outfit?
I doubt that the main driver is Beats headphones, no matter how mediocre Apple's own earbuds are, or, as they're called now, EarPods. I've never been much of a fan.
The truth is that Beats own higher-end headphones are also a matter of taste. You certainly have to give Dre and his partner, Interscope Records co-founder Jimmy Iovine, their due in helping create a market for expensive celebrity-driven headphones, with a major assist early on from Monster, before Monster and Beats went their separate ways.
Ben Arnold, an industry analyst with the NPD Group, says U.S. sales of premium headphones — those priced north of $100 -- have surpassed $1 billion, with Beats owing more than 60% of that segment. He expects the category to grow by 10% to 14% this year. Beats headphones are among those prominently featured in Apple Stores.
It's not hard to see how Apple could implement Beats into its own product line. Beats audio technology used to be included in HTC phones — HTC owned a stake in Beats for a little while before selling it back to the founders last year — and is currently used in HP computers and tablets.
Beats hardware certainly has promise in the living room, perhaps through some yet-to-be-defined connection with Apple TV and Apple's wireless AirPlay technology. It likely has a role in the car too, via Apple's emerging CarPlay initiative. What kind of role Beats has inside a future Apple wearable is also something to watch.
Which leaves us with Beats Music, the real reason, I suspect, that Apple came calling on Dr. Dre. That's the online streaming service that Beats launched in January. Beats Music supposedly has 200,000 subscribers, a very modest total, to be sure, and Apple has long dominated the digital download space with iTunes.
But the momentum is in streaming not downloads, and that's an area where Apple hasn't had much success — iTunes Radio hasn't captured the fancy of listeners like rival such as Pandora or Spotify. Indeed, forgive the pun but it is Spotify that has becomes the apple of the music lover's ear and my first reaction after hearing about the Beats deal was why didn't Apple just buy Spotify, which it will now more directly compete against.
I do think that the mere act of Apple becoming aligned with Beats — and the publicity that Apple's largest acquisition to date inevitably generates --- will make consumers take a long and hard look at Beats Music. I'm not buying the sentiment that Apple needed Beats to somehow become more hip. "I thought they were already cool," Monster CEO Noel Lee told me.
Apple stubbornly dismissed the idea of a digital subscription service for years, and given the vast popularity of iTunes downloads who could blame them. But in Spotify and other rival streaming services, consumers discovered the benefits of being able to listen to virtually any song on a whim, without having to own the tracks -- and Apple seems to have finally gotten the word.
Monster's Lee, reflecting on the Apple news and his own current headphone line which he claims is five years more advanced than Beats', says, "I'm glad the valuation was so high because it (puts) our own valuation in that neighborhood, maybe. Wow! Throw me a few billion, why don't you. There's a price for everything."
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