Update: Apple announced the $3 billion deal on May 28th.
Apple is after Beats for its streaming music expertise, not the hardware that most find mediocre at best, according to a new Bloomberg report on the deal, which is expected to be made official later sometime this week according to earlier reports. The main driver for the talks started because Apple was impressed with the rate at which Beats Music was converting its free trial members into paid subscribers, the news organization claims.
Bloomberg also says that Apple intends to work with Beats to “improve the quality of design in future versions” of its high-end headphone business. The company would also likely continue to run under separate branding, the report says, which would be unusual for Apple’s M&A strategy, although it does run the FileMaker business as a separate entity despite the fact that it is a wholly owned Apple subsidiary.
Somewhat ironically, Beats has targeted the quality of Apple’s earbuds and other devices for delivering good-sounding digital tracks in the past, with Beats co-founder Jimmy Iovine saying last year that “Apple got everything right except that ear bud.” Beats itself has often been cited as more bluster and fashion than substance when it comes to sound quality, however. Recent designs seem to have improved over past models, however, with the Pill XL delivering pretty impressive and powerful sound in a small package, and the Beats Studio Wireless headphones also performing better than their predecessors.
But the main deal Apple would pursue here is logically the streaming business. Beats Music is new, but if Apple is seeing a lot of paid conversions through its App Store, then that’s bound to pique its interest. iTunes Radio is Apple’s own entry into the subscription streaming music business, but we don’t have a sense of how many of its users are paying for iTunes Match vs. simply using it for free.
Apple has to be keen to build a formidable streaming subscription service in light of the growth of that segment in recent years, and if Beats Music behind the scenes looks much more impressive than it might to outside observers (and Apple is especially privy to that information), than this potential acquisition makes a lot more sense. Apple CEO Tim Cook also says frequently in earnings calls that Apple isn’t against making big name, big-ticket acquisitions, so long as the fit is correct, and perhaps in terms of Apple’s long-term view of where the digital music industry is headed, this one makes the most sense of all.