Apple & Beats FINALLY Make Beautiful Music Together - Here’s Why (& Why $3 Billion)

Finally, the music industry’s worst-kept secret -- the Apple/Beats $3 Billion mega-deal -- is official!  (Note -- previously we anticipated $3.2 billion, but now the deal is reported to be $2.6 billion cash and $400 million in Apple stock.)  And, in a surprising twist (to me), legendary music exec Jimmy Iovine is joining Apple full-time -- and Dr. Dre is joining Apple too (to work with long-time Apple music head Eddy Cue).

What took so long?  While I don’t know for sure, a good bet is that securing the requisite consents from the labels to transfer Beats’ music licenses to Apple was a big part of it.  I have been in that position before in M&A -- and it is not a great position to be in.  The one whose consent is required -- here, the labels -- hold all the cards.

So, here we are.  Why Beats?  Why Now?  And, why $3 Billion?

Here’s why.

Top 10 reasons Apple is buying Beats --

(1) Apple needs to make a bold move -- it’s been quiet for too long;

(2) Music has always been core to its DNA -- near-and-dear to Steve Jobs in every respect, especially marketing his products;

(3) Apple needs to get into the on-demand music streaming business; downloads are declining, subscriptions are on the rise.  Yes, Apple has its own Pandora-like service -- but it doesn’t have its own Spotify-like service;

(4) Beats and Apple are simpatico in many many ways -- the perfect marriage -- share the same DNA;

(5) Beats, unlike Spotify -- but VERY much like Apple -- is a hardware-first company; music services (like new Beats Music) are a Trojan Horse to drive more hardware sales of headphones and other hardware products (remember, Beats drove about $1.2 billion in revenues last year, all of which were hardware-driven); Apple markets music and media to drive more hardware sales -- THAT’s its business model (music is the means to an end);

(6) Beats and Apple are both artist-focused and have deep ties to the artist community; contrast this to Spotify which bills itself as a technology-first company; it’s just a different way to think about the world;

(7) As a result, Beats and Apple executives know each other well -- very well -- so there is a significant comfort factor here;

(8) In fact, Apple and Beats have been partners for a long time -- Apple features Beats products in its retail stores;

(9) Why?  Both Apple and Beats products share the “cool” factor; both make and sell premium products that represent more than the hardware itself -- they represent a lifestyle; they are aspirational; consumers are invested in those brands;

(10) Both share significant partnerships with AT&T; Beats Music just recently launched with AT&T as its primary distribution partner; Apple -- a few years back -- launched its game-changing iPhone with AT&T as its primary distribution partner.

That’s all well and good.  But how can the $3 billion price-tag be justified?  Here are 6 reasons how -

(1) Beats already generates between $1-$1.5 billion annually -- and that’s before any revenues by the just-launched Beats Music; so, the multiple on revenues is a fraction of those used to justify the vast majority of tech deals that are widely applauded;

(2) Beats is reported to be growing its revenues at a rapid clip (30% year-over-year, I believe); and Apple -- with its massive marketing budgets and global retail reach -- can only accelerate the growth of those numbers; by my math, that means that this deal likely will pay for itself in the not-too-distant future; compare that reality to the fuzzy math used to rationalize many (most?) of the deals you typically read about;

(3) Beats is an extremely valuable brand -- just ask the kids; some of you will say (I have heard this a lot in the last few days) that Beats headphones aren’t worthy of Apple, but to that I say “the numbers don’t lie.”  Bottom line -- Beats is doing something right.  Consumers -- and especially the coveted Gens Y and Z -- are devouring Beats products.  Beats is the cool kid on the block, plain and simple.  So Apple would be the beneficiary of this newly-constituted cool;

(4) Beats just launched its compelling on-demand streaming business Beats Music and, oh yes, Apple needs to be in that Spotify-like game (but isn’t ... yet); Beats built it -- now Apple will buy it -- and immediately be a force in a world it hasn’t yet known due to its legacy control of the overall digital download market (a market that is declining rapidly as on demand subscriptions a la Beats Music and Spotify rapidly ascend);

(5) Beats -- founded by Dre and legend Jimmy Iovine -- are widely hailed by the artist community for being all about real musicians and creative authenticity; their relationships with musicians run deep; they are trusted.  Apple -- on its own -- is still viewed by many in the music industry with suspicion as a result of the virtual monopoly Apple has held on digital music retail for the past decade;  so long as Dre and Jimmy are on board with the deal -- and stay on with Apple (which they will, albeit with great independence) -- then some of that respect and trust will carry over to Apple (and that is exceedingly important in this brave new world of music subscriptions where all players in the eco-system face challenging financials); and

(6) Many other factors here that can be used to justify the $3 billion price-tag, including the fact that Beats would accelerate Apple’s entrance into the lucrative wearables and “in the car” markets; and, of course, Apple needed to pay up in order to derail Beats’ bee-line to an inevitably highly successful IPO.

As I wrote previously, maybe this $3 billion price-tag isn’t so confounding after all.

I can hear boardroom doors now closing frenetically as we speak -- at Spotify, Pandora, Samsung and numerous others -- as they plot their own responsive strategic salvos.