Apple in Rumored $3.2 Billion Bid for Beats Electronics

Apple in Rumored $3.2 Billion Bid for Beats Electronics

But why?

 While Apple has quietly purchased dozens of companies in the past few years, it's never made a deal as big as this: The firm is rumored to have consummated a $3.2 billion deal to acquire Beats Electronics, the maker of bass-heavy headphones and a fledgling subscription music service. While many are questioning the logic of such a deal, it would give the consumer electronics maker a new opening with a younger crowd that increasingly finds Apple to be uncool.

News of Apple's pending acquisition of Beats first surfaced last Friday in the Financial Times. That report notes that the deal could be announced as soon as this week, and that some niggling details could still cause the deal to fall apart. But a subsequently leaked video, showing Beats cofounder Dr. Dre celebrating his ascension to billionaire status, suggests that he at least believes the deal is on.

So why would Apple buy Beats?

Beats is most famous for its lineup of expensive consumer headphones, which are marketed under the Beats by Dr. Dre brand. Known for their bass-heavy sound, the headphones are generally derided by audio experts, but command Apple-like margins and are extremely successful. Beats also partners with PC and mobile device makers, and even automakers, to provide speaker hardware. And it recently launched Beats Music, a subscription music service that competes with Spotify and other similar services.

Each of the product lines could be of interest to Apple, and Beats Audio is of particular interest as consumer spending shifts from ad hoc music purchases to subscription offerings. And Apple's initial test of this market, with iTunes Radio, has proven unsuccessful.

Beats Music is interesting on a number of levels, but it differentiates itself from the competition in a number of ways. Most important is the human element: Rather than rely on algorithm-based music matching—software that makes a music playlist of songs that are similar to a song the listener says they enjoy—Beats employs real music experts to create carefully curated playlists that are updated and expanded regularly. It's the type of white glove service that would fit naturally within Apple's luxury brands.

But Apple may be most interested in Beats' co-founders, particularly Jimmy Iovine, who also serves as the chairman of Interscope Geffen A&M Records. Considered a legend in the music business, Iovine could jumpstart Apple's music efforts at a time when its core businesses are slowing dramatically with nothing truly new to pick up the slack.

And who knows? Maybe the next iPod will be a pair of headphones.

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