The Apple/Beats Deal for Dummies
(This is part of a series called, “Will Streaming Kill the music Business For Good“) Read Part 1 for more background.)
WALL STREET IS STUMPED!
They can’t understand why Apple, one of their darlings, has broken its acquisition celibacy by purchasing of all things, a headphone/music company, Beats. In the wake of this deal an astounding thing will happen: The world’s most powerful record executive, Jimmy Iovine, is now working for music’s nemesis– a computer company. What does all this mean for the ailing business of music?
Wall Street cannot grasp the why of it because they are not music insiders. They don’t subscribe to Moses Supposes, The Lefsetz Letter, Music Tech Policy, The Trichordist or Jay Frank’s blog (who did a brilliant prediction of the Beats/Apple fallout). If they did they would understand why Apple wasted little time bidding for Beats and why Jimmy said yes without driving the hard bargain for which he is famous.
Well, I can’t speak for my contemporaries but here’s what I think:
First, it may seem like $3 billion is a lot of scratch, but for Apple it’s the change they throw in a tip jar. $3 billion is barely two years’ worth of Beats earnings. Most are wondering why Beats didn’t hold out for a larger number.
Why did Beats sell cheap? That’s the better question; not why Apple tossed a few shekels at a music company.
Why Beats Sold-Out Cheap
Universal Music owned Beats. Once called MOG, Interscope (a Universal subsidiary) purchased them a few years ago. Initially the idea was to create a seamless integration where one company would control every aspect of music from the acquisition of rights (the label) through to the sales platform (streaming). This is something that no record company has been able to do since RCA half a century ago with their Jazz radio stations and Phonograph players.
With the metamorphosis of MOG into Beats the plan seemed to be working. But Jimmy had a problem: the Federal Trade Commission. After RCA, the FTC decided that record companies should not own retail stores or radio stations because it created an unfair advantage. Now that streaming services have become a hybrid of radio and retail, the possibility of the FTC forcing Universal to sell Beats in an anti-trust fire-sale was a looming shadow.
Jimmy thought, why gamble when you can sell today and get rich(er)?
Why Apple Really Bought Beats
For over a decade Apple and the major labels have hated one another.
Labels hated Apple for forcing universal pricing–every song being the same price–and for being an enabler to the destruction of their main model: the album. Apple needed the iTunes Store to sell singles (small files) to support the ecosystem of their devices, but Apple’s music licenses came up for renewal– every three years!
At one point, it’s believed that Universal threatened to NOT renew if Apple didn’t allow variable pricing. Steve Jobs ultimately gave in because he knew that losing Universal’s catalog would be the eventual end of iTunes.
And so it was proved that Universal had ultimate power over iTunes, which meant they also had indirect power over Apple itself.
Apple has dreamed of getting out from under that thumb every day since. And although it has not been discussed in the news, insiders should know that a perpetuity license for content is what Apple is really buying today for $3.5B. Not a bunch of code they could write themselves in a weekend.
Does Apple care about the headphones? Of course. Every day they watch Beats leave their store with a 30% margin going into Iovine and Dr. Dre’s pockets. This has the analysts on CNBC focused on Apple’s intent to venture into “wearables.” Yes there’s probably some truth to this. But the simpatico of the Beats deal boils down to this:
Apple is tired of negotiating with the world’s largest record company and the world’s largest record company needed to get out of the conflicted streaming space.
Personally I think Apple got the better end of the deal and if you’re an artist on Universal you just lost a healthy amount of leverage.
This is a tough one. Jimmy doesn’t lose. And he’s going over to Apple. And he’s been right far more often than he’s been wrong. But…
He comes from a culture that notoriously does not get along with technology companies.
Will Jimmy be able to lead geeks as effectively as he did creatives? Will he be able to succeed where the geniuses at AOL failed with the Warner Music acquisition?
We will see.
To me the more interesting question than why Apple bought Beats is, Will Jimmy Iovine, the ultimate record man, be able to turn Apple Computers into Apple Music?
I for one would not bet against him.