Pictured above: Dr. Dre, Lady Gaga and Jimmy Iovine
When Apple bought Beats Electronics in May, many people were confused. Beats was mainly a hardware company that made headphones, but they did nothing that Apple couldn’t. The Beats brand was strong but nothing compared to Apple’s brand. And the $3 billion purchase price seemed a little generous. Was Apple’s CEO Tim Cook showing his first big acquisition mistake post-Steve Jobs?
When the details are examined Apple’s decision had little to do with branding or quality hardware, the company was after something else. We got a hint of Apple’s desires recently when it was announced Beats CEO Ian Rogers would be moving to Apple HQ in Cupertino to head up iTunes Radio and a small division of Beats Electronics that came along with the acquisition, Beats Music.
Beats Music, the company’s subscription music streaming service, is actually quite new, only launched on January 21, several months before Apple made its acquisition. Yet, the Wall Street Journal reported Apple paid $500 million for Beats Music, a lot of money for a subscription service that only has 250,000 subscribers. This and the fact that CEO Ian Rogers along with co-founders Dr. Dre and Jimmy Iovine will all join Apple indicates the company has ambitions beyond Beats headphones.
A new business model
iTunes days are certainly numbered. Though Apple, artists and the record companies would prefer a service the sold direct music downloads, consumers prefer streaming subscription or advertising supported services. Of those Apple faces a lot of competition. Panodra, Spotify, Songza, now a Google company, all offer streaming music services in direct compitition with iTunes. And those are just the closest competitors; Amazon has a music streaming service called Amazon Prime, Microsoft has a music streaming service called Xbox music, and Clear Channel Broadcasting has an Internet radio station called iHeartRadio. There are many more smaller music streaming services beyond that.
For Apple to just get into the music streaming service would not differentiate the company; it would not put the company in good position to make above average profits. To do that, they needed original content.
This is where Dr. Dre and Jimmy Iovine become hugely valuable. Both highly successful producers, Dr. Dre has worked with artists including Eminem, 50 Cent, and Kendrick Lemar, and Jimmy Iovine through his label Interscope Records has produced a huge number of hits with artists such as Bruce Springsteen, Gwen Stefani and Lady Gaga. These two know music. They can find talent, produce hits and know how to distribute music to maximize its value.
Why is original content so valuable? Well, take content distributors and creators in another space: television. HBO, now the king of original programming, wasn’t always so. The Home Box Office made its name for its first 20 years distributing other people’s content; that is rerunning movies(much like Spotify, Pandora, Songza and iTunes Radio stream other people's songs). It didn’t move to original scripted content until the 1990’s. First with Oz, a gritty prison drama, then with Sex and the City, a salacious tell-all diary about the inner lives of successful New York women, and finally with The Saprano’s, a mob drama turned family drama, HBO realized original content could not only be hugely popular but profitable. Netflix later made a similar move from distributing movies and TV shows to then developing huge hits like House of Cards and Orange is the New Black.
Music is beginning to go the same route as television has. For a subscription service to differentiate itself, it needs original content. If Apple with the help of Dr. Dre and Jimmy Iovine can develop the next Eminem, Bruce Springsteen or Lady Gaga and exclusively distribute them on their streaming platform, they will have differentiated themselves from other music streaming services. They will also have begun to escape from the thin margins and uncertain future that comes with selling other peoples content. By doing so they will have set themselves up to make a profit far larger than Apple’s $3 billion acquisition of Beats.