Apple Beats deal (Tim Cook, Jimmy Iovine, Eddy Cue and Dr Dre 001)

According to a breakdown of Apple’s $3 billion Beats buy published Thursday by The Wall Street Journal, the company basically paid less than $500 million for the Beats Music subscription service and about $2.5 billion for Beats Electronics LCC, which makes the popular Beats headphones, speakers and audio software (which some dismiss as a software equalizer that boosts the bass).

The report alleges that the acquisition – the most expensive in Apple’s history – gives the Cupertino firm Beats’ brand power and star leadership. The story downplays the importance of the generic Beats Music streaming service to the overall deal…

From the paper’s report:

A person familiar with Beats said its 2013 sales totaled close to $1.3 billion—all from the electronics unit that sells headphones and other audio gear—and the company was profitable.

The valuation of the $10-a-month streaming service, which counts 250,000 paying subscribers, is generous based on its subscriber numbers.

Apple publicly said it’s acquiring Beats Music and Beats Electronics for a total of $3 billion, consisting of a purchase price of approximately $2.6 billion and approximately $400 million that will vest over time.

WSJ’s sources added that Apple “never contacted Spotify” during the process of acquiring Beats so that gives you a clear idea that Apple was after Beats talent, namely its co-founder and powerful music mogul Jimmy Iovine.

The other Beats co-founder, music producer and rapper Dr. Dre (real name: Andre Young), came in the package, so to speak.

Apple acknowledged as much in its press release. The talking points Cook used in his memo to troops and in various interviews with big media reiterate the notion.

“These guys are really unique,” he told The New York Times, for example. “It’s like finding the precise grain of sand on the beach. They’re rare and very hard to find.”

Indeed, Iovine’s rich career in the music industry has turned him into one of the most powerful figures in entertainment, and I’m not even mentioning that he has successfully guided the careers of such acts as U2 and Eminem.

As you know, Steve Jobs personally handled Apple’s negotiations with record labels and Hollywood studios. However, since his passing no one at Apple could quite fill his shows as a chief negotiator with content industries.

Beats by Cook
The Apple-Beats deal has inspired some amusing memes.

Iovine, 61 years old, has CEOs of record labels and Hollywood studios on speed dial.

You could say the guy is the closest thing to Jobs in that respect. Therefore, bringing him on board makes perfect sense as he should help Apple revitalize stalled relationships with content owners.

The New York Times agrees, writing in today’s detailed profile of Jimmy Iovine that he brings to Apple “deep celebrity connections and a devil-may-care attitude that stands in stark contrast to the businesslike manner of Mr. Cook”.

The following excerpt is equally telling:

Mr. Iovine is also famously relentless in business. To seal a joint-venture deal, he once called an executive at another label every day at 3 p.m. for a year.

And this from Cook’s interview to Re/code:

What Beats brings to Apple are guys with very rare skills. People like this aren’t born every day. They’re very rare. They really get music deeply. So we get an infusion in Apple of some great talent.

But mostly, backing up — it’s because we always are future-focused. So it’s not what Apple and Beats are doing today. It’s what we believe pairing the two together can produce for the future.

Here are Iovine and John Lennon in a studio during the 1974 recording of Lennon’s ‘Walls and Bridges’ album in New York.

Jimmy Iovine and John Lennon (1974 recording studio)

Also important: even though Apple confirmed that the Beats Music team will report to Eddy Cue, its SVP of Internet Software and Services, which makes sense, it said that Beats hardware will continue to evolve under the leadership of Apple’s SVP of Worldwide Marketing Phil Schiller.

I find it fairly odd that a hardware unit would report to a marketing guy.

I think Apple’s innovation here won’t as much center around applying its design magic, build quality and manufacturing prowess to Beats headphones as it’ll be about world-class marketing, something right up Phil’s alley.

Beats Solo2 (image 006)
The improved on-ear Beats Solo² headphones launched earlier today.

Jonh Gruber reached a similar conclusion on his Daring Fireball blog:

What Beats needs as an Apple subsidiary is product marketing, a replacement for Ammunition, the firm that previously handled this for Beats.

By the way, Robert Brunner, the industrial designer behind Beats through his company Ammunition, will not be joining Apple. Before you start with the ‘there can be only one Jony Ive’ jokes, Gizmodo let us in on a little known secret.

Not only did Brunner work at Apple 25 years ago, he originally founded Apple’s industrial design department in 1989 and personally hired then up and coming London-born designer Jony Ive:

In fact, Brunner didn’t just hire Ive, he discovered him. He saw talent in this very young, very quiet student when he interviewed at his former company, Lunar. And he pursued him to join Apple, aggressively, over the course of six years until Ive finally said yes.

Ive eventually joined Brunner’s team at Apple full time in 1996.

This is all very fascinating and Fast Company’s oral history of Apple has more on the interactions between the two men, so give it a read if you want to learn more.

My favorite part is Brunner joking about Ive becoming more influential than himself.

“I sometimes joke that when I die, my tombstone will say, ‘Here lies the guy who hired Jonathan Ive,'” he was quoted as saying.

Photo top of post: music mogul Jimmy Iovine, Apple CEO Tim Cook, Dr. Dre and Apple’s online services chief Eddy Cue. Via Tim Cook on Twitter.

  • ap3604

    So if they paid $1.5 billion for hardware and $0.5 billion for the music subscription service. What did they pay the other $1 billion for?

    • n0ahcruz3

      Patents? Oh wait…

    • Should be $2.5B instead of $1.5B, fixed now

  • n0ahcruz3

    They are a perfect match anyway. They overcharge their products. Which are overrated. Beats headphones are crap ask any audiophiles out there.

    • Sokrates

      Brands are everything. But build a brand first!

    • Jason B

      What is a good pair of noise cancelling, over ear headphones?

  • Sokrates

    Very informative article Chris!

  • Darkanio Beecham

    Beats by Dr Cook