Apple tries to ‘think different’ with music deal
Even with its first multibillion-dollar acquisition, Apple is trying to “think different”.
At a time when its Silicon Valley neighbours are throwing billions of dollars at start-ups with minimal revenues, such as WhatsApp Messenger, Oculus VR and Nest, Apple believes its $3bn purchase of Beats will soon boost its earnings, rather than drag on profits.
“Bizarrely maybe, because you haven’t heard a technology CEO say this in a long time, we believe it’s accretive in the fiscal year 15,” said Tim Cook, Apple chief executive, in an interview at its Cupertino headquarters on Wednesday.
Analysts have said Apple is overpaying for a music streaming service that has only 250,000 subscribers, but Mr Cook insists that the deal makes financial sense on the basis of sales of its premium-priced headphones alone.
Beats’ headphones generated $1.1bn in revenues last year and grew by another 30 per cent in the first quarter of 2014, he said. For now, most of those sales are in the US, while two-thirds of Apple’s business is overseas.
“So there is a natural synergy there from a geographic point of view,” Mr Cook said, including taking its nascent music streaming service abroad.
“There are of course all kinds of synergies in some of the product things that we can work on together . . . Over time we are hitting the gas.”
That answers just some of the many questions raised about the deal since the FT first reported it this month.
Benedict Evans, partner at Andreessen Horowitz, said in a tweet the transaction marked a return to Apple’s unpredictable ways. “The Beats deal is totally in character for Apple: everyone is puzzled.”
Despite the hoped-for financial lift from the headphones business, Mr Cook said Apple’s motivation for buying Beats lay in its music streaming service, and the people behind it.
“What Apple gets in Beats is incredible talent, people who understand music deeply,” Mr Cook said. Playlists are curated by celebrities rather than automatically generated by algorithms, as they are in services such as Pandora and Spotify. “Technology by itself won’t produce the deep feeling that people need in music.”
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But Beats will also see Apple break with a longstanding tradition that its own apps and services are available only on its iPhones, iPads and Macs. Beats Music will remain available for Google’s rival Android smartphone and Microsoft’s Windows Phone.
“Yes we are going to be cross platform,” [with Beats Music] Mr Cook said. “We want everyone to enjoy music.”
Apple made iTunes available for Windows PCs soon after the iPod launched, but Android and Windows users cannot access Apple’s flagship music app on their mobile devices today.
“We’ve never had a religious issue against having a product on a different platform,” Mr Cook said. “It hasn’t been a priority. It became one with iTunes because we recognised that for iTunes to achieve its ultimate objectives it needed to be cross platform. That’s much the same case now with a subscription service.”
Many have questioned why Apple could not build its own streaming service, especially after launching iTunes Radio last year. But some digital music industry insiders say that Apple was forced to make a rapid move to catch up after global music download sales declined in 2013 for the first time in a decade.
“The fact that download numbers declined at all freaked out the music industry, right on the heels of the launch of iTunes Radio,” one digital music executive said.
However, Mr Cook said that the decline of downloads had been “way overstated”. “I suspect the download business will be big for a long, long time,” he said.
Right now we are focused on music. But these guys bring us incredible skills. We have always wanted to pull the thread [in the TV market] to see where it takes us
- Tim Cook
Despite the focus Apple put on music, some see a longer-term vision behind the Beats deal.
“This is not just about music,” said Ben Bajarin, analyst at Creative Strategies. “Beats was going after the entire entertainment landscape and their goal was to own subscription services across the board.”
With Beats co-founder and industry veteran Jimmy Iovine on its team, Apple may be able to regain that “reality distortion field” that its late co-founder Steve Jobs was able to use to such advantage with the music industry.
Apple has already seen success through exclusive content deals with artists such as Beyoncé, and Mr Cook is betting that Mr Iovine will be able to land many more.
Mr Cook did not rule out using the Beats team to help build out its video service. “It’s not something we are talking about today,” he said. “Right now we are focused on music. But these guys bring us incredible skills. We have always wanted to pull the thread [in the TV market] to see where it takes us.”
As for Dr Dre, who along with Mr Iovine is now Apple’s newest employee, the deal is “a great opportunity . . . to create something amazing. I can’t wait to get started.”