The Puzzle Piece That Apple Really Bought

Now that the announcement has been made that Apple’s acquisition of Beats Electronics has been completed for $3 billion, and that Beats co-founders Jimmy Iovine and Dr. Dre will join Apple in yet unspecified executives roles, it’s important to take a step back and examine what has really gone down here. There’s much more than meets the eye.

As I alluded to in a previous post, there were just as many reasons for Apple to avoid the Beats deal as there were to make it. That said, just about everyone (myself included until now) has missed the big picture point of the purchase. The deal really isn’t about Beats music service or its headphone business. It’s all about Iovine.

Apple CEO Tim Cook realized that while he may be a great operations guy, he doesn’t have the market vision of his predecessor Steve Jobs (who could?). Music has been responsible for the resurgence and subsequent market rise and dominance of Apple, not so much from a revenue point of view (although the sales from music are substantial), but as means to an end to sell what really makes the company money - its hardware. Apple needs someone who is capable of looking into the future in a way that no one else at Apple has been able to since Jobs passed nearly three years ago.

While it’s too much to expect Iovine to be another Jobs, he has proved to be quite deft at navigating the minefield that is the entertainment industry - enough so to build a substantial billion dollar company in a mere seven years. This was done by seeing a hole in the market (high-end headphones), then recruiting the well-respected hip hop producer Dr. Dre to provide credibility and marketability to an underserved market. He then granted an exclusive manufacturing and distribution license to Monster Cable, a company perfectly suited to instantly provide widespread availability of the product. The distribution deal we terminated at the beginning of 2012, at which time Beats took the manufacturing and distribution in-house. All the hard work of establishing the brand had already been done. Read more on Forbes.

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Beats Buys MOG

Here's something I don't think anyone saw coming. Headphone maker Beats Electronics, owned by rap artist/producer Dr. Dre and music exec Jimmy Iovine, has acquired the digital music service MOG Inc. What's particularly interesting is that the purchase price was reportedly "less than $10 million" for a service that has 500,000 registered users. Sounds like a bargain to me.

The deal makes sense at that price since Beats is trying to create an ecosystem built around their headphones. If you have a supply of high-quality tunes to listen to (MOG uses a very good 320kbs codec), that side of the company can feed the headphone side and vice versa. With Iovine being the ultimate music industry insider, any licensing problems should be easy to overcome, especially since both Universal and Sony were owners in MOG (beside 3 venture capital groups).

Beats is an interesting story in that they take some more or less crappy Chinese headphones, jack up the price to way beyond what they're worth, and somehow get people to buy them. It sort of reminds me of Monster Cable, who does the same thing. The company has now taken over more than 43% of the headphone market, I'm sure much to the chagrin of quality headphone manufacturers like Audio Technica, Sennheiser, Shure and others. You snooze you loose, guys.

Let's see if Beats continues with their magic touch as they proceed with MOG in the fold.

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