Skip to main content

Apple Bought Beats Because Streaming Fits Its Demographic

$3bn seems like a large amount of money for Apple to have invested in a brand-led headphone business, even though there were obvious parallels with Apple's own user base. Figures released over the last few weeks suggest that the headphone business was purely incidental to the real purchase: Beats Music, the curated music service.

Album sales have been declining for a while - partially as a result of consumers abandoning the CD and partially because buying tracks on iTunes is eminently more sensible than hoovering up a whole album loaded with filler. iTunes is important here because there isn't really another service that sells as much digital music to the consumer.

Last week fewer than four million albums sold in the US, a poor result for combined digital and physical sales and ominous given that overall digital music sales declined over the last year, for the first time since Apple launched the iTunes Music Store.

At the same time music streaming subscriptions are on the rise - Midia Research is predicting that there will be 37m people paying for streaming music by the end of this year - with another 210m using free, ad supported services. The same report claims that 45% of people who have bought downloads are now using streaming services - not necessarily exclusively, but I'm sure that once those users have moved to a rental rather than purchase model, they aren't likely to jump back.

With iTMS revenue falling and streaming looking a likely replacement Apple faced a real problem. Its users were the sort of tech savvy, adventurous and, above all, financially capable users who would see the benefits of a jump to streaming services. Which meant that Apple required a streaming service. At the same time it didn't want to panic those iTMS customers who weren't ready to abandon the service into doing just that by going big on an Apple branded store. In the short term purchasers generate more profit than streamers.

Beats Music allows Apple to continue servicing downloaders needs through the iTMS whilst offering a service for those who prefer streaming. Ultimately the Beats branding will disappear and Beats Music will become part of Apple's core assets. That time will only come when Apple decides that the iTMS is in its final throes.

Until then will Beats pay back its $3bn purchase price by keeping customers in the Apple fold?

If Apple converts 1% of it's iTMS customers to Beats each year,  that's a revenue stream of around $100m, rising to $500m by year five. The division of streaming revenues is a murky subject right now, but if we assume that Apple maintains its 30% cut, then that equates to $450m in profit by year five. That's a pretty good return on a $3bn investment, without even considering the contribution of the headphone business.

While the purchase of Beats cost more than building its own streaming service, the benefits Apple gained - including removing a direct brand-driven competitor from the market - clearly add up to a clever move on the part of Tim Cook and team.


Popular posts from this blog

F1: Robert Kubica Impresses In Renault Test Run

The car may be old but its the performance of the driver that's the story here. Robert Kubica returned to F1, after a fashion, earlier this week with an extensive test run in a 2012 Lotus Renault F1 car at Valencia.
The age of the car and the circuit were likely determined by F1's current rules which ban testing, but the reason for Kubica being in the car is far more interesting. Considered by many to be a potential World Champion and certainly one of the fastest drivers of his generation, Kubica's F1 career seemed to be over after a 2011 crash whilst driving in the Rally of Andora. His Skoda Fabia was penetrated by a guardrail in the high speed accident partially severing his right arm.
Up until last year Kubica has been competing in rallying, with the expectation that the limited movement in his repaired arm would prohibit a return to single seater racing.
So this week's test is both interesting and confusing. Interesting because Kubica completed 115 laps of the ret…

F1: Robert Kubica's Williams Test Asks More Questions Than It Answers

Comparing driver's times at a tyre evaluation test like last week's Abu Dhabi event is difficult at the best of times, but when trying to assess the performance of a driver who has been out of the sport for six years, that difficulty level is raised even higher.
On the face of it Robert Kubica's test for Williams was a success. Fastest of the three Williams drivers present the headlines look promising. However, taking into consideration the different tyres used to set those times muddies the water considerably.
Kubica ran a three lap qualifying simulation on the new 'hyper-soft' tyre - which should have given him a two-second advantage. Correcting for tyres it would appear that Kubica was significantly slower than Sergei Sorotkin - who was on the harder 'soft' tyre - and marginally quicker than Lance Stroll, the team's only contracted driver.

Stroll's family fortune currently funds Williams, so there' no chance that he will be anywhere but in a…

Panos Panay's Defence Of Microsoft Surface Hardware Sounds Eerily Familiar

This weekend I went out with my ten year old daughter to select a laptop for her school year beginning in January. The schools requirements are quite specific, requiring a Windows 10 device, with a preference for a touchscreen and a stylus. She chose a Surface Pro, after trying a large number of different options. Having seen the way I use my own Surface Pro - and tried it herself there was only ever going to be two options - and the other was a Surface Laptop.
I tell you this so that you understand I am a buyer of Microsoft's products through choice, not compulsion. I'm on my third Surface device now. 
So when Panos Panay dismissed reports of the death of the Surface hardware line, I was very interested to see exactly how strong these denials were. Especially how they reflect what has gone before. To whit: Windows 10 Mobile.
Panay claimed that Microsoft is in hardware for the long haul. Almost exactly mirroring the words of Terry Myerson, when he claimed Windows Mobile was g…