The Magic Numbers: How Apple Beats The Demise of Music Downloads

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.

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 On Streaming: Apple, Beats & Spotify

Apple Insider: Jimmy Iovine Set To Join Apple?

28 thoughts on “The Magic Numbers: How Apple Beats The Demise of Music Downloads

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

    On Thu, May 8, 2014 at 9:35 PM,

  2. “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.

    1. 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

    2. 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.

  3. 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

  4. 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.

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