Now that Apple has formally announced its $3 billion acquisition of Beats, both Apple SVP Eddy Cue and Beats co-founder Jimmy Iovine have a lot to talk about. Three weeks after the deal was first reported by the FT, Apple SVP Eddy Cue and Beats co-founder Jimmy Iovine talked through the reasons for the deal and how it’s going to work on stage at the inaugural CODE Conference.
We already have some understanding of the terms of the deal, and some of the business structure behind it. Under the terms of the deal, Apple will pay $2.6 billion in cash and another $400 million in equity for the Beats team and assets. And now, we know that the service has amassed 250,000 subscribers after just three months.
Jimmy Iovine has agreed to quit his day job at Interscope and will be joining Apple full-time. Dre will keep being Dre, but he’ll also be expected to fly up to Cupertino on a regular basis. They’ll report to Cue, Apple’s SVP of Internet software and services.
At the conference, Cue said that there were three things that Apple wanted out of Beats: There’s the talent of Iovine and Dre; the premium music hardware line, which Cue called “hugely successful”; and, then there is the Beats Music line.
“We think what we’re going to do today is incredible. It’s not about what Apple is doing today or what Beats is doing today, but what we’re going to do together,” Cue said.
He also said that the number of new releases in iTunes is the smallest they’ve ever seen, noting that music is ‘dying’ in the way that we know it and hasn’t been growing.
Iovine says Beats had 5 million visitors to its service, but that it didn’t use Apple’s in-app purchase option at first, so lost out on conversions to paying customers. Cue then noted that Apple has some 800 million credit cards on file.
“It’s not two plus two equals four, it’s something much greater than that,” Cue said.
Beats Music will continue to operate independently of the iTunes music group. The unit will also continue to create hardware, although it will no longer lean on design firm Ammunition for its product design.
While reviews of Beats headphones have been mixed, Cue and Iovine both talked up the quality of the Beats headphones and how the products will provide better quality than what Apple currently offers.
Iovine said that Apple makes earbuds “to see if the machine works,” and “They make a phone… It’s not their responsibility to make the headphones.” Cue followed up and admitted, “Jimmy will tell you, we make the best headphones that come in the box.”
Beats has also been very successful in marketing its products in new ways. Iovine said the company reached $500 million in sales without spending a dime on marketing. One of the ways it was able to do that was with product placement.
As others have noted, the deal is about bringing in some serious hardware revenues now — Time Cook expects the deal to be accretive in Fiscal 2015.
But it’s also about securing Apple’s future in a digital music ecosystem that is becoming more and more about subscription streaming and less about content ownership.
That would mean Apple could end up competing against upstarts like Spotify and Rdio. It’s also long-range replacement for the traditional iTunes music owenrship model, which is slowly being chipped away at by those subscription streaming services.
While Cue admitted that growth in music sales had “leveled off,” he said the theory that music sales are “going away or severely going down is way overrated.” As evidence, he noted that Apple passed 35 billion songs sold last week.