Steve-Jobs-iPhone

There are two numbers that you need to pay attention to in order to make sense of Apple’s breathtaking acquisition of Beats Electronics. Neither of them is the rumored $3.2 billion price. They are 13.3 and 800 million.

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Apple’s saint Steven P. Jobs  said customers wanted to own their music. Not anymore.

The first number is the percentage that music downloads have decreased in Q1 of this year compared with 2013. This is on the heels of a 5% decrease last year, so it’s looking like the decline is picking up speed. It’s pretty clear that the download era is waning and Apple knows this better than anyone. I’m sure the company has a phalanx of data analysts poring over projections and understand that the rate that customers buy downloads might not be in a freefall, but it could be coming quicker than anyone expects.

It’s pretty clear when it comes to the choice between buying downloads or using a streaming service, customers are beginning to choose streaming. But so far, Apple has sat out of the subscription music trend. After all, the Book of Jobs says that customers wanted to own rather than rent music.

Those days have passed. Apple needed to hedge their bets and get into streaming. But instead of building another bolt-on to iTunes as the company did with their underperforming radio service, Apple decided to speed their way to market by purchasing a hot new service that had a lot of buzz, but hadn’t scaled so much that it was prohibitively expensive. Beats is the most viable of all acquisition targets.

While music purchases may be falling, it’s still a big business for Apple. So instead of creating another option in iTunes that would potentially cannibalize download sales, why not just buy a service and keep it separate? Streaming blows up: Apple wins. Streaming doesn’t pan out, well, it will still have the iTunes store chugging along.

In The Cards

The second number refers to the 800 million iTunes accounts, most with credit cards on file.  Those credit cards are the keys to the kingdom for anyone who wants to sell something in the store. Apple charges a 30 percent premium for companies to use their in-app purchasing system, where a customer can subscribe directly from the native app.

After Beats Music’s troubled launch period didn’t produce many subscribers from the 7-day trial, company executives were calling around to see how other firms dealt with the 30 percent Apple tax (answer—you eat the $3 per customer a month).  In late April, Beats launched in-app purchase and the results were stunning. Their iOS app became the number one overall free app.

Just as important as in-app purchase is getting featured in the iTunes store. Placement in the iTunes store can make a hit out of an app and can mean hundreds of thousands of downloads. Combined with in-app purchase, the store is a kingmaker that can make or break a company. So once Apple integrates the Beats app, it wouldn’t be surprising that the app will get a permanent featured position in the store. Cha-ching.

Oh, and that $3.2 billion price tag? With Beats Electronics’ hardware business already creating significant profits, Apple’s purchase price could be covered within a couple years. So in essence the company is getting into streaming music for a song.

More Acquiring Minds

FT: Apple In Talks to Acquire Beats

Re/Code: Why Apple Is Betting Big On Beats

Om.co: On Streaming: Apple, Beats & Spotify

Apple Insider: Jimmy Iovine Set To Join Apple?

Join the conversation! 27 Comments

  1. smart POV mr. maples…hope all is well.

    On Thu, May 8, 2014 at 9:35 PM, JonMaples.com

    Reply
  2. […] Maples:Apple buying Beats is an affordable bet on streaming to hedge against the decline of downloads — The Magic Numbers: How Apple Beats The Demise of Music Downloads — There are two […]

    Reply
  3. […] $3.2 billion package. That has led to two interpretations of the deal: Some people think it’s all about digital music, while others argue that Beats Audio with an estimated $1.5 billion in hardware sales per year is, […]

    Reply
  4. […] Maples, a trusted journalist in the digital music space, had the following to say regarding the […]

    Reply
  5. […] Jimmy Iovine and Dr. Dre. (It’s the streaming. It’s the cool factor. It’s a hedge in case iTunes flops. It’s Jimmy.) The truth is likely a mix that samples from all those […]

    Reply
  6. […] $3.2 billion package. That has led to two interpretations of the deal: Some people think it’s all about digital music, while others argue that Beats Audio with an estimated $1.5 billion in hardware sales per year is, […]

    Reply
  7. Makes total sense to me, crazy all the hate today regarding the deal.

    Reply
  8. […] Jon Maples on the Apple/Beats Acquisition […]

    Reply
  9. […] Maples, a trusted journalist in the digital music space, had the following to say regarding the […]

    Reply
  10. “Underperforming”? Reports I’ve found pegged iTunes Radio at 20 million users soon after launch, hot on the heals of Pandora, and Beats Music at 200,000 users which people apparently didn’t know existed until this acquisition. They’ve already got a much larger user base.

    Reply
    • preach the truth! this has nothing to do with streaming music now but rather how music streaming and hardware will integrate with other innovative services and applications in 4-5 years time. You’ll see

      Reply
    • Good point about user growth. 20m users isn’t bad considering the product has been out less than a yr. however comparing a free product w a $10 a month product isn’t quite fair, in terms of revenue. Labels have been disappointed in the revenues the radio product is producing, hence underperforming comment. And pandora is 80 million, so I wouldn’t quite characterize iTunes as on the heels of them.

      Reply
  11. don’t think this is about music at all, because an itunes radio app would be pre-installed on the front-screen of rvery ios and mac device to start so your argument is senseless but rather about Apple failing to create beautiful hardware in terms of headphones (Ive isn’t an universally good design-robot) and failing in marketing to a young and/or urban audience in the past 2 years

    All of Apple’s bigger acqusitions have an important hardware component. You will be surprised how these headphones will be integrated to Apple’s new product / service offering

    This is basically a marketing cost in terms of the high price, with it’s own communication Apple has given birth to a generation that only cares for a great product and ignores ads, no matter how

    Reply
  12. So funny.

    Essentially, Apple is getting Beats for free because Beats’ hardware profits will pay for the purchase in a few years.

    From Beats, Apple gets:
    1. Beats Streaming Music Service – with tie-ins to purchase the music from iTunes.
    2. Beats Audio Accessories – a hardware money maker addition to the Apple Ecosystem.
    3. Additional talent to expand the Apple Ecosystem.

    Reply
  13. […] jonmaples.com – There are two numbers that you need to pay attention to in order to make sense of Apple’s breathtaking acquisition of Beats Electronics. Neither of them is the rumored $3.2 billion price. They are 13.3 and 800 million. The first number is the percentage that music downloads have decreased in Q1 of this year compared with 2013. This is on the heels of a 5% decrease last year, so it’s looking like the decline is picking up speed. […]

    Reply
  14. […] Most of the talk Friday was not about headphones but what typically pounds through them. Many analysts and media members believe the reported acquisition is more about growing Apple’s streaming-music offering as iTunes downloads drop. […]

    Reply
  15. […] billion package. That has led to two interpretations of the deal: Some people think it’s all about digital music, while others argue that Beats Audio with an estimated $1.5 billion in hardware sales per year […]

    Reply
  16. […] Jimmy Iovine and Dr. Dre. (It’s the streaming. It’s the cool factor. It’s a hedge in case iTunes flops. It’s Jimmy.) The truth is likely a mix that samples from all those […]

    Reply
  17. […] digital music sale business is in decline. As Jon Maples astutely noted in his take on the supposed Beats deal, digital sales fell 13.3% in 2013. Even if […]

    Reply
  18. […] download sales are falling while streaming is booming. Digital track sales fell 6% in 2013 and 13.3% total from Q1 2013 to Q1 2014. Meanwhile, US streaming music consumption grew 32% in 2013. […]

    Reply
  19. […] How will Apple function differently? Let’s use iTunes Radio as an example. The product was envisioned as a stopgap. Instead of trying to build a compelling offering that would get customers to switch from Pandora, iTunes Radio was primarily designed to help boost sales of tracks. I’m assuming that the people at Apple are smart, and knew that customer demand of track sales was going into the toilet, especially when attached to a streaming product. So they balanced that desire with the fact that both Apple and the labels had to protect track sales. […]

    Reply

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