Apple to buy Beats for $3 billion

Apple, the company that turned digital music into a mainstream phenomenon, said on Wednesday that it was buying Beats Electronics, a rising music brand, for $3 billion, in a move that will help it play catch-up with rivals that offer subscription-based music services.

Apple and Beats executives said the companies would work together to give consumers around the world more options to listen to music. The Beats brand will remain separate from Apple’s, and Apple will offer both Beats’s streaming music service and premium headphones.

Apple said iTunes, which sells individual songs and albums and offers a streaming radio service, would be offered alongside the Beats music service.


The Beats deal brings Jimmy Iovine, a longtime music executive, and Dr. Dre, the rapper, to work under Eddy Cue, Apple’s executive in charge of Internet services. Dr. Dre and Mr. Iovine, who founded Beats in 2006, join a list of prominent executives whom Apple has added to its roster, including Angela Ahrendts, the former chief of Burberry, and Paul Deneve, the former chief of Yves Saint Laurent.

n an interview here at Apple’s headquarters, Timothy D. Cook, Apple’s chief executive, repeatedly emphasized the talent that Dr. Dre and Mr. Iovine would bring to Apple. He also praised the Beats music service, which creates playlists for subscribers.

“These guys are really unique,” Mr. Cook said. “It’s like finding the precise grain of sand on the beach. They’re rare and very hard to find.”

Apple is paying for the deal with $2.6 billion in cash — hardly a dent in the company’s huge cash pile of more than $150 billion — and $400 million in stock. The company expects the deal to be approved this year.

For Apple, the acquisition of Beats, expected for weeks, largely follows a familiar pattern. Apple has historically bought technology outfits that have resources and talent that it can blend into future devices and online services. Beats fits that criterion.

But the Beats deal is also different. Until now, Apple, the richest tech company in the world, has avoided billion-dollar takeovers in favor of smaller deals. The Beats deal is its largest ever.

Apple declined to disclose plans for products it will make with Beats, so it will take time to see how the acquisition materializes. In the meantime, it will raise questions about why Apple, the pioneer of digital music, is buying a music company instead of expanding its own products.

The growth of Apple’s iTunes Store is being hurt by companies like Spotify and Pandora, which allow people to stream music freely with ads or with a paid subscription.

“Apple was at the front of that curve, and if that’s the reason for the acquisition, it would lend credence to the view that maybe they’re not ahead of the curve anymore,” said Maynard Um, a financial analyst at Wells Fargo.

Mr. Cook called the deal a “no-brainer.” He said Apple had bought 27 companies since last year but that did not mean Apple had to buy those companies.

“Could Eddy’s team have built a subscription service? Of course,” he said. “We could’ve built those 27 other things ourselves, too. You don’t build everything yourself. It’s not one thing that excites us here. It’s the people. It’s the service.”

Mr. Iovine said that he and Dr. Dre had long admired Steven P. Jobs and Mr. Cue at Apple.

“We met with the guys, and what we realized is they get it,” Mr. Iovine said on stage at the Code Conference in Southern California. “They have feel. They understand culture.”

In 2002, Mr. Jobs, the Apple chief who died nearly three years ago, began trying to persuade record companies to start selling their music online. It was an opportune time for Mr. Jobs because Apple was still relatively small and a less intimidating partner than it could be today, and the music industry was unhappy that people could pirate songs by downloading them online.

Mr. Jobs offered the record companies a legitimate online music outlet, the iTunes Store, to sell their music. But he wanted to make one big change: Customers would have to be permitted to buy any music they wanted à la carte, or one song at a time. The record companies initially resisted, but Mr. Jobs eventually persuaded them to come on board.

The iTunes Store opened in 2003, and it has dominated digital music sales over the last decade. Apple said that it had sold 35 billion songs on iTunes and that iTunes Radio had 40 million listeners.

“When we first approached the labels, the online music business was a disaster,” Mr. Jobs was quoted in “The Perfect Thing” by Steven Levy, a book about the iPod and iTunes. “Nobody had ever sold a song for 99 cents. Nobody really ever sold a song. And we walked in, and we said, ‘We want to sell songs à la carte. We want to sell albums, too, but we want to sell songs individually.’ They thought that would be the death of the album.”

Over the years, Mr. Jobs dismissed many calls for Apple to offer music subscription services because he believed that consumers did not want to rent songs.

Now the technology industry has made a sharp shift. Smartphones, which are miniature Internet-connected computers, are used by more than half of the world’s population. People consume music, games and video on the go, not just when sitting in front of a computer. In the fourth quarter of 2013, 52 percent of American smartphone owners used apps for streaming music like Pandora, according to the NPD Group, a research firm.

At the same time, much has changed for Apple. The company, now under Mr. Cook, is no longer an underdog but the leader of the tech industry, with a lot of money to spend.

Steven Milunovich, a financial analyst for UBS, said he thought the bulk of the acquisition might have been devoted to hiring Mr. Iovine to handle big media negotiations, as Mr. Jobs did for iTunes music in the past.

“Jobs had a distortion field, and that was kind of a unique capability,” Mr. Milunovich said. He added about Mr. Iovine: “Within the music world, this guy’s probably the closest thing you’re going to get to it.”

Still, some other analysts, like Toni Sacconaghi, a financial analyst for Sanford C. Bernstein, were puzzled by the acquisition, especially at the high price. After all, in 1996, Apple paid much less — about $400 million — to acquire the computer company NeXT, which brought Mr. Jobs back to the company.

That turned out to be one of the most transformative technology acquisitions in history: With Mr. Jobs back at the helm, Apple rose from near-bankruptcy into a dominant company.

Mr. Cook said Dr. Dre, born Andre Young, and Mr. Iovine would work with Apple on the next generation of music offerings but declined to share details about future products.

He said they would be working on “products you haven’t thought of yet, and seeing around the next corner to articulate the way to take music to an even higher level than it is now.”