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The largest acquisition in the history of the largest company in the world – Apple (NASDAQ: AAPL) – didn’t add technology to make its iPhone faster or its Macbook lighter. It didn’t streamline Apple’s supply chain or boost its wildly successful retail presence.
Instead, Apple largest acquisition added Beats Electronics to the Apple family, as well as its founders, hip-hop mogul Dr. Dre and music industry titan Jimmy Iovine. The acquisition of Beats cost Apple $3 billion.
At the time, I assumed the deal was about headphones. Beats headphones had already captured almost 70% of the market for premium headphones since its founding in 2006.
I was wrong.
The acquisition of Beats Electronics was all about its Beats Music service. And its Beats Music service is about to crush Spotify.
The $3 billion price tag shocked a lot of investors, and understandably. At the time, Beats was really only known for its headphones. And with the way Beats headphones rapidly penetrated the younger demographic’s popular culture, it wouldn’t surprise me if many investors had barely even heard of Beats before the deal was announced.
In time, I think $3 billion will prove to be a great deal. Consider that rival music streaming service Pandora (NYSE: P) was, at the time, worth more than $4.5 billion. Today, Pandora is only worth around $3.4 billion.
Not only did $3 billion buy Apple the Beats Music streaming service, it also picked up the wildly successful headphones business and its iconic founders.
Now Apple is beginning to flex the music muscle that it acquired.
Apple is widely rumored to be working on an overhaul of its music services. It is said to be planning a subscription service under the Beats Music name and is retooling its iTunes Radio to compete more directly with services like Pandora.
Spotify offers a “freemium” model, through which users can gain access to basic features for free but must pay for a monthly subscription to use premium features, like the ability to listen to music without being connected to the Internet. And many do.
The company claimed it had 15 million paid users in January. If true, that means annual revenues of around $150 million. It’s the 45 million free users that are causing the problem.
In November 2014, Taylor Swift made headlines when she pulled all of her music from Spotify’s library. Though she wasn’t the first to do so, she was certainly the most high-profile artist to revolt against Spotify, a service these artists have argued is hurting the record industry.
Apple has dealt with this before, as some individual artists held out when the iTunes music store was just getting going. I have no doubt that Apple can work through this.
Apparently the European Union is looking into agreements between record labels and Apple for possible antitrust violations. This tells me that whatever Apple is structuring is irritating its competition enough to complain to regulators and is, therefore, likely to be lucrative.
Apple doesn’t even have to undercut Spotify’s $9.99 per month pricing model to offer a superior service. With its music service built right into the software that Apple seamlessly integrates into its hardware, I’m sure that Apple can design a better user experience than Spotify, and can even throw in other perks like a larger library and syncing across devices.
Beats Music, Dr. Dre, Jimmy Iovine and the full force of Apple is a lot to compete against. I doubt Spotify and Pandora can survive in an environment where Apple is trying to crush them.
What do you think? Let us know in the comments section below!
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