Technology

130 | GlobeAsia June 2014

They say an apple a day keeps the doctor away but Apple could soon ink a deal that keeps famed music producer and chief

executive officer of Beats, Dr. Dre, very close indeed. The tech world has been rocked recently with news that Apple is in the final stages of acquiring headphone maker Beats Audio.

While not officially confirmed by Cupertino yet, videos by Dr. Dre and rapper Tyrese (although quickly deleted) appeared to confirm these initial reports. For those wondering what this all means, you are not alone. Reactions from pundits ran the gamut from shock to gleeful anticipation and everything in between.

On the face of it, Apple’s purchase of Beats is unique for several reasons, not least of which is the price. At a reported $3.2 billion, the Beats deal towers over other acquisitions Apple has made in the recent past. Indeed, the numbers indicate that this single deal is larger than all of Apple’s previous purchases combined!

Another interesting factor is that this is the first major acquisition for Tim Cook post-Steve Jobs and this single deed could go on to define his entire reign at Apple’s helm. Certainly the responsibility of carrying on Jobs’s legacy must weigh heavily on Cook’s shoulders and this must have factored heavily in Apple’s latest move.

If the rumoured Beats acquisition has many analysts scratching their heads, it’s only because the acquisition does not give Apple any single thing they cannot do on their own - and cheaper. In broad strokes, the Beats deal gives them a headphone brand that massively controls

its market space (clearly a good thing) and a fledgling music streaming service that’s quickly growing in popularity.

The puzzle is that Apple’s iTunes Radio continues to limp around and Apple certainly has the hardware chops to make a premium pair of headphones itself, so why the acquisition? Pundits remain puzzled. Wells Fargo analyst Maynard Um was blunt in a recent CNET article: “We believe Apple should be acquiring other assets to better position itself, particularly for $3.2 billion.” Other experts were equally unimpressed, but there could be more to this deal than meets the eye.

Apple: The next episodeApple’s move is about the future. Those following Apple’s story know that its rebirth can be traced directly back to 2001 with music and the iPod. In a sense this acquisition would bring the company full circle, back to the time where the music was the point.

Jobs astutely realized that customers make an emotional connection with their music and that people would soon associate their devices so closely with their music that Apple could become cool again if only it could influence that experience. Apple’s music cred has waned over the past few years and it is no longer known as innovative in this space.

The acquisition would be an explosion of cool for the company. Jimmy Iovine and Dr Dre are considered luminaries in their field and their knowledge of what music should sound like

Apple’s acquisition of Beats:

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What the doctor ordered

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is heavily influenced by their own time in the studio.

Reports also indicate that the deal is likely to introduce several personnel changes. Dre and Iovine will be joining Apple as executives and Apple’s first head of design, Bob Brunner, would also be returning to the fold. These changes are precisely what Apple needs if it is to recapture the magic.

is Beats’ music the real prize?Some pundits like Mark Milian of Bloomberg, for example, have suggested that Apple’s purchase is not about the headphones but Beats Music. The company’s music streaming service is still in its infancy but has 200,000 customers and continues to grow. The problem with that argument, unfortunately, is that none of it makes sense.

The Beats user base is miniscule and in large part due to a bundle offer the company has with AT&T. A recent article in The New York Times confirmed that the Beats music service and the

company’s hardware division are structured as distinct companies that, while sharing key figures in their management team, have different investors. According to the same article, the Beats music service accounts for only a small percentage of the total dollar amount of the deal. Bucking conventional wisdom, Beats’ hardware division accounts for the lion’s share of the company’s value.

The reason for this is because as per standard music industry practices, the licenses for the music streaming service are likely non-transferable in case of an acquisition. Without their existing deals in place, the Beats Music service is little more than a website. Further discounting that theory, Apple could easily replicate the streaming service, especially given that it would be in a better negotiating position for licenses than Beats. Since it has become increasingly clear that this is not about Beats Music, why is Apple set to walk down the aisle with a company so different from itself?

Jason FernandesTech commentator and the founder of SmartKlock.

Apple loves to reinvent itself and this move takes it back to the basics.

Technology

132 | GlobeAsia June 2014

to absorb Beats and its line of products into the Apple family. Apple’s acquisition does bring with it some conflicts of interest, since Beats already has deals in place to power the audio gear of HTC smartphones and HP laptops.

Deepening the mystery as to Beats’ future in the Apple universe, pundit John Gruber recently pointed out that with the exception of the software Filemaker, Apple does not sell any products not already under its own brand. Gruber expressed scepticism that Apple would keep the Beats brand around for headphones. I disagree. The process of listening to music in the modern age consists of three major components: The song, the music device and the speakers. Apple would like to control the whole experience end to end.

With its existing line-up of iTunes, iPod and iPhone products, the only component missing is the headphones. Beats headphones is the turnkey solution, without which the entire purchase is of very little value to Apple. It appears likely, therefore, that Beats will continue to rule the premium headphone market for the foreseeable future.

The challengeWhile on the whole I am optimistic about the Beats acquisition, the challenge for Apple going forward is in branding and message. Apple will have to walk the tightrope of absorbing Beats while at the same time keeping it distinct from Apple. For a company with a storied history like Apple, its brand is its most valuable asset. With Beats also being so universally recognized, there is a certainly a danger of diluting the two brands.

On the other hand, both companies are known for their premium products and Beats has done a great job of capturing over 70% of the premium headphone market. This opens up a whole new world of possibilities, allowing Apple to be competitive in both the device and the high-end audio accessory space, essentially giving the company a second bite at the apple.

In summation Apple will benefit enormously by signing on big names like Dre and Iovine to burnish its music credentials. Apple loves to reinvent itself and this move takes it back to the basics. Dre and Iovine have exactly the kind of music street cred that’s been missing from Apple lately. Apple’s experience in the consumer electronic device category will serve Beats well while Beat’s deep ties in the music industry could revitalize Apple’s image as a music company. The combination of the two could just be a match made in heaven.

Upping the cool factorA deal with Beats will both up Apple’s waning street cred and throw in 70% of the premium headphone market for good measure. Reports indicate that Beats doubled its previous year’s earnings, taking in a cool $1 billion in 2013 alone. The explosive growth of Beats is because Beats’ strategy has always been to leverage its relationship with larger-than-life personalities in the music industry (like Dre and Iovine) to connect directly with their customers. This unified strategy runs through its Beats Music service as well.

Beats differentiates itself from its competitors by emphasizing its DJ- and artist-curated tracklists. While other companies rely on computerized algorithms, Beats relies on people. This approach puts real musicians front and center in the listening experience and allows Beats to make best use of its music industry pedigree.

Apple needs strong personalities now that Jobs is no longer at its helm. Iovine and Dre could make Apple relevant in the audio accessory space solely by banking on their existing reputation as music industry pioneers.

In many ways Apple revolutionized music in 2001 with the iPod and particularly iTunes. Times have changed for Apple and today the company realizes that the writing is on the wall for standalone portable music players. The Beats acquisition is in keeping with Apple’s attempt to stay relevant with its customers on an emotional level by continuing to be associated with their music. Apple hopes connections made with users here go on to translate to increased sales across the board, even among non-music-centric products.

iPhone – audio by Beats?Audio purists will cringe at the thought of Beats audio as the default audio on Apple devices but it would be interesting to see how Apple is able

A deal with Beats will both up Apple’s waning street cred and throw in 70% of the premium headphone market for good measure.