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Is this the real reason Apple wants to buy Beats?

Published May 19th, 2014 6:00PM EDT
Why Did Apple Buy Beats

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Two weeks ago, news broke that Apple was about to purchase Beats Technology for $3.2 billion. The deal, which has apparently been delayed, has confused industry experts, with some viewing it as a sign of Apple’s lack of direction without Steve Jobs and others calling it Apple’s “best idea since the iPad.” Most believe Apple is buying Beats mostly for its music streaming service, rather than for its headphones. If that is the case, Reuters published a piece today showing why this would make sense, and why the record labels are rooting for Apple to succeed in music streaming.

Reuters notes that the record labels are starting to recognize that streaming music is the future, but are frustrated that Apple has yet to make an impact in this area. Pandora and Spotify currently have the market cornered, but struggle to make a profit, and Reuters’ sources say that negotiations with Pandora and Spotify are always difficult. In contrast, Apple has 800 million iTunes accounts, most of which have credit cards attached, that the record labels are dying to convert from iTunes downloads to subscriptions.

“iTunes is the number one for digital downloads,” said Daniel Weisman, a Roc Nation manager. “If iTunes can flip the switch on their user base to become streaming subscribers, that will be a huge win for everyone.”

One industry insider explained to Reuters how streaming music could make more money for the record labels than downloads: A “good customer” might spend $25 to $35 each year on music downloads, but a subscriber to a music streaming service typically spends at least $9 per month, or at least $108 per year.

So far, though, Apple has been unable to “flip the switch” and the record labels have been underwhelmed with iTunes Radio, Apple’s Pandora competitor. The record labels are now looking to Beats Music as a potential opportunity for Apple to compete in music streaming. Beats co-founder Jimmy Iovine has deep relationships with the record labels, in part as co-founder of Interscope Records, a division of Universal Music Group, one of the big three record labels. If the deal with Apple is ever finalized, Iovine would likely leave Interscope, according to two of Reuters sources. Perhaps as a result of Iovine’s relationships, one of Reuters’ sources said Beats Music was “created from within the music industry.”

If Apple purchased Beats, it would then have an executive with deep ties in the music industry, a music streaming service that has the blessings of the record labels, and 800 million iTunes accounts with credit cards that are potential Beats Music subscribers. Perhaps that is worth $3.2 billion to Apple after all.