Apple’s $3 billion purchase of Beats has already paid off

Music streaming, better headphones and the brains behind them both.

Billy Steele
05.28.19 in Business
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    "Oh shit, the Forbes list just changed," Tyrese Gibson proclaimed in a 2014 Facebook video.

    "The first billionaire in hip-hop, right here from the motherfucking West Coast," Dr. Dre chimed in.


    By this point in early May, the rumors were all but confirmed. Financial Times may have been the first to report Apple's acquisition of Beats Electronics was a done deal, but Bloomberg, The New York Times and The Wall Street Journal were also quite sure pens had met paper. Even though the rumblings started a month earlier, both companies remained silent. That is, until the bombastic Facebook post that was only live for an (understandably) short time.

    It's one thing to discuss sensitive business info in a celebratory social post, but it's another thing entirely to basically announce the deal was done. It was objectively a crazy thing to watch unfold. The official announcement wouldn't come until May 28th, when Apple put a bow on its $3 billion purchase with a press release and photo. That price tag still represents Apple's most expensive acquisition.

    Perhaps the best account of those events comes from Beats co-founder Jimmy Iovine. He found out about the video when Sean Combs (P. Diddy, Puff Daddy, Diddy, Puffy) called him, yelling, around 2AM.

    "We had gone for like six weeks without it leaking," Iovine explained. "This thing has leaked, this thing is loud." He said he warned Dre "don't move" that weekend. And ... welp.

    You can hear the story from Iovine on the first episode of HBO's The Defiant Ones, but his side isn't any less insane. "I had been wanting to work with Apple, at that point, it's probably 10 years," Iovine said in an interview for the show. "Sure, I thought the deal could blow."

    Luckily for him, Dr. Dre and Apple, it didn't.

    Jimmy Iovine is just as important to the Beats story as Dr. Dre. The Interscope records co-founder started the company alongside the rapper/producer in 2006. Beats initially focused on headphones and speakers, and in 2012 the company would grab 64% of the $100-and-up headphone market. But as the industry inched its way into the streaming age, it would follow in early 2014 with Beats Music.

    Iovine's experience as a producer, label executive and businessman would set the tone for Beats' success. Heck, he's worked with Bruce Springsteen, Tom Petty, Patti Smith, Stevie Nicks (whom he also dated), U2 and more. He's unquestionably one of the most notable music producers of the 1980s. That resume was also a key component of the Apple deal, as Iovine (and Dr. Dre) would become an employee, working alongside Vice President of Services Eddy Cue and Senior Vice President Phil Schiller on the hardware side. A streaming service was exactly what Apple needed to compete with the likes of Spotify, Google, Rdio (RIP) and others.

    Let's back up a bit. Beats Music wasn't entirely built from the ground up. The company bought streaming service MOG in 2012 and, before shuttering it two years later, transformed the pieces into its own subscription option. MOG's key features included a handy playlist generator and Pandora-like artist radio stations. Beats would put a lot of stock in curation as well, mostly around emotion and personal preferences. It also had help from creative powerhouses like Trent Reznor, who continued to work with Apple following the acquisition. The first time you fired up Beats Music, you were met with a tap-driven questionnaire that learned your tastes. The service didn't exist for very long on its own, as Apple would buy Beats just four months after it launched, and before the end of 2015, Beats Music was gone for good.

    Beats Music

    Hours after the deal was official, Cue and Iovine appeared at Recode's Code Conference to discuss the day's events. The Apple VP made it clear he felt Beats Music was the "first music service done right," referring mainly to the focus on curation and playlists.

    "It was a no-brainer for us," Cue explained at the event.

    Apple had iTunes and its massive catalog of digital music for purchase, but the iPod generation was coming to an end. It needed an on-demand subscription service to keep up with the industry's pivot, and rather than build its own, it decided to buy one.

    "Music is such an important part of all of our lives and holds a special place within our hearts at Apple," Tim Cook explained when Apple bought Beats. "That's why we have kept investing in music and are bringing together these extraordinary teams so we can continue to create the most innovative music products and services in the world."

    Indeed, Apple Music would launch in June 2015, and amass 10 million subscribers by January 2016 -- 20 million paid users that December. Less than two years later, and after some redesigns, it would double its tally to 40 million. Sure, the company hasn't caught Spotify globally, and it may never be able to. But in the US, Apple reportedly has more paying users than its biggest rival.

    On the streaming side alone, the investment has paid off. Apple has cemented itself as a key player in the most popular way people now listen to music.

    Beats has relied on the marketing power of celebrities, including NBA superstar LeBron James

    Of course, Beats has that massive headphone and speaker business -- it's not all about turning Beats Music into Apple's own service. After joining Apple, the company would release new headphones, but the fruits of the relationship didn't blossom until fall 2016. As part of the iPhone 7 reveal, Beats announced that it had three new headphone options in the works. All three would feature the W1 chip that powered Apple's own true wireless AirPods. The Powerbeats 3, Beats Solo3 Wireless and the eventually delayed BeatsX would pack in quick-pairing features, improved battery life and Fast Fuel rapid charging. Apple had benefited from Beats' streaming service, and now Beats headphones were benefiting from Apple's engineering smarts. The company would follow up a year later with a fourth model that leveraged the power of the W1 chip: the noise-canceling Studio3 Wireless.

    Beats headphones have been (rightfully) criticized for too much bass, and for their cheaper build quality that relied more on brand recognition than good design. In recent years though, that's changed. The tuning on the Studio3 wireless, specifically, stood out to me as a new sound profile for Beats. There was still plenty of bass but it was no longer overpowering, and thus the headphones were much more enjoyable to use.

    Beats by Dre

    "We thought we were pretty good until we got to Apple, and then we started learning what 'good' really was," Beats President Luke Wood told TechRadar last month. "Apple had so much incredible discipline and rigor around product quality." He would go on to explain that in the early days of Beats, "no one was making headphone products to articulate the bottom end." However, the company didn't ignore its critics, and Wood noted that the bass-heavy reputation was "absolutely taken into consideration" when the company was building its first true wireless model: the Powerbeats Pro.

    In a lot of ways, Powerbeats Pro epitomizes how being part of Apple has affected Beats products. The W1 chip has been replaced by the H1 found in the latest AirPods. In addition to fast pairing, quick charging and more-reliable connectivity, the H1 chip enables Siri to be always listening -- without you having to press a button to summon it. The sound quality on the Powerbeats Pro is also much improved: better tuned to keep plenty of bass, while not sacrificing the detail from the mids and highs. It's hands-down the most well-rounded, best-sounding set of Beats headphones.

    Overall, Beats products have improved over the past five years, and Apple can take most of the credit. Of course, better Beats headphones now affect its own bottom line and will do so for the foreseeable future.

    Apple's Phil Schiller discusses Apple Music on the new HomePod smart speaker at WWDC 2017

    In five years, Apple caught Spotify in the US, and its 40 million subscribers (likely way more at this point), are paying off the investment in Beats. More important, the company is a major player in music streaming, the medium that accounts for nearly half of global revenue industrywide. Sure, Beats headphones are better, but Apple was primarily interested in Beats Music, which it has successfully transformed into its own service.

    Working on its own, this could've taken years to build, and even then, it may not have been as good as what it has done with the help of Iovine, Dr. Dre, Reznor and others. Apple bought a company, commandeered its assets and retained its talent to keep the records spinning as it's done many times and will continue to do. Five years later, business is booming, and that's business as usual in Cupertino.

    Images: Apple (Apple Music and group photo); Beats by Dre (Beats Music); Andrew D. Bernstein via Getty Images (LeBron James); Beats by Dre (Powerbeats Pro)

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