Apple to buy Beats this week, source says

The leaf on the Apple symbol is tinted green at the Apple flagship store on 5th Ave in New York. Credit: REUTERS
The leaf on the Apple symbol is tinted green at the Apple flagship store on 5th Ave in New York. Credit: REUTERS

More than a decade ago, the late Steve Jobs pulled one of his trademark reality distorting maneuvers, browbeating music label executives into selling songs on Apple Inc’s then-nascent iTunes digital store for a mere 99 cents apiece.

Now, the tables have turned and it’s Apple that is being forced into a deal that is far from a sure-fire winner.

The iPod and iPhone maker is expected to announce as early as this week a $3.2 billion agreement to buy Beats Electronics, the music streaming service and headphone maker founded by legendary music producer Jimmy Iovine and rapper Dr. Dre, according to three sources familiar with Apple’s thinking.

The deal would come after Pandora Media Inc. and Spotify have already claimed the vanguard of the music streaming revolution, while Apple’s riposte – the eight-month-old iTunes Radio – is stumbling.

“Apple is about two years late, behind Spotify,” said David Pakman, a digital music investor with Venrock Capital and a co-creator of Apple’s Music Group. “They need a streaming offering.”

With digital music downloads in decline, record labels have put pressure on Apple to get its act together on streaming, according to two of the three sources. The record labels hope Apple can turn Beats Music into a strong competitor with Spotify and other streaming services, the sources said.

“The labels wanted Apple to build a premium service,” said one of the sources, who like the others were not authorized to speak about the matter on the record. “They wanted … to make money through the stream.”

In recent months, the major labels had grown dissatisfied with the performance of iTunes Radio, the source said. Streaming subscriptions are now the fastest-growing revenue source for the music industry, but Apple has not made a dent.

Streaming subscriptions jumped 51 percent in 2013 to $1.1 billion, out of a $15 billion total spent on music, according to the International Federation of the Phonographic Industry. Meanwhile, digital downloads slipped 2.1 percent.

Per-user spending is higher with streaming services than for music downloads. A good customer spends $25 to $35 a year on music purchases, but a subscriber spends $9 or more a month – or more than $100 a year, according to one source.

Labels earn royalties of a fraction of a cent for every stream, which the source said works out to a higher revenue per user than pure digital sales.

Apple, Beats and record labels Warner Music Group and Sony Music Entertainment declined to comment for this story. A spokeswoman for Universal Music Group did not respond to requests for comment.

THAWING

In buying Beats, Apple would get an up-and-coming music streaming service, a well-connected team of industry executives, and high-margin hardware. But the high price tag would represent a departure for Apple after two decades of acquisitions mainly in the hundreds of millions of dollars.

Some Wall Street analysts have termed Apple’s plan purchase of Beats “puzzling.” Despite the rapid growth of streaming, it remains a small slice of the overall music market. If the labels do not agree to lower royalties rates, then, like Pandora or Spotify, Apple may struggle to make its streaming profitable. And Beats is several years behind Pandora and Spotify, which have 99 million active users combined.

Still, the fact that the record labels are getting behind Apple marks a thawing in what had been at times an openly adversarial relationship, industry sources said. The “a la carte” model that iTunes introduced in 2001 had slashed revenue for the labels as it no longer required customers to buy whole albums.

Now, the music industry believes streaming is the way of the future, though its rise has not been smooth. Industry sources say licensing negotiations with the likes of Spotify and Pandora come up every 12 to 15 months and can be difficult.

It is unclear what terms an Apple-owned Beats might command. Apple does have a big bargaining chip in iTunes, which has 800 million members.

“ITunes is the number one for digital downloads,” said Daniel Weisman, a manager at Roc Nation who represents bands. “If iTunes can flip the switch on their user base to become streaming subscribers, that will be a huge win for everyone.”

A source at a music publisher said the labels like Beats because it was “created from within the music industry.” Getting Iovine on board will give Apple huge leverage across the negotiating table as streaming develops. He will likely leave Interscope records and join Apple, according to two sources.

Apple is seldom a first mover into markets, preferring to bide its time and monitor early entrants. The company had been watching Beats Music’s take-up rates since its January launch and was impressed when the service signed up some 1,000 customers a day in the initial weeks, one of the sources familiar with Apple’s thinking said.

“Google, YouTube, Spotify and others are working on ways to stream music,” said Andrew Mains, former vice president of digital at Interscope Records, who worked closely with Iovine and Apple’s iTunes team. “If Apple can control the future of music distribution by buying Beats, they will retain control of the devices.”

 



News
Entertainment
Sports
Lifestyle
Local

Tattooed, bearded suspect sought in Williamsburg bike theft:…

The suspected thief faces grand larceny charges after investigators said he entered the building on North 5th Street in Williamsburg.

Local

Report: Rich New Yorkers don't move from NYC…

An Independent Budget Office analysis found that the wealthiest residents don't move out of the city any more or less than other New Yorkers.

National

Pioneers for domestic violence push on

Reporter was commissioned to write this in-depth article. Two decades have passed since the O.J. Simpson trial captivated the country. But in the 20 years…

Local

Food truck with a mission hires at-risk New…

A group branding itself as food trucks for social justice specifically hires and trains young men and women with troubled pasts.

Entertainment

'Bachelorette' recap: Episode 10, 'Men Tell All'

Why does the #MenTellAll episode exist? Because they don’t, and it shouldn’t. Is it a lazy vehicle to sell more ad space? Is it to…

Television

Olivia Williams explains the ins and outs of…

Olivia Williams plays a botanist beginning to suspect her physicist husband's work on the Manhattan Project might be ominous in WGN America's "Manhattan."

Movies

Scarlett Johansson on 'Lucy':' 'I guess I’m the…

Scarlett Johansson continues her foray into action movies with thriller “Lucy”, admitting it’s been an unexpected adventure.

Movies

Review: Liking Woody Allen's 'Magic in the Moonlight'…

Woody Allen's latest, "Magic in the Moonlight," concerns a magician (Colin Firth) trying to debunk an alleged psychic (Emma Stone).

NFL

5 players to watch at Giants training camp

Metro takes a look at five players who will be on everyone’s mind when Giants training camp gets underway.

NFL

'Vicktory dogs' travel road to rehabilitation seven years…

Of the dozens of dogs groomed by Bad Newz Kennels, 48 were rescued and 22 of the pit bull terriers have emerged at Best Friends Animal Society.

MLB

Yankees looking at trade for Cliff Lee, according…

Yankees looking at trade for Cliff Lee, according to report

NFL

Giants lineman Chris Snee to retire: Reports

The Giants report to training camp on Tuesday, but Chris Snee may not be there when they do.

Parenting

Buy gently worn back-to-school clothes with Kidizen

Kidizen allows parents to buy and sell gently worn back-to-school clothes.

Wellbeing

Ruling could be beginning of the end for…

This morning, a federal appeals court threw out an IRS regulation that implements subsidies for low-income Americans who bought insurance through Obamacare. These Affordable Care…

Tech

RocketSkates let users roll with a motor

Los Angeles company Acton has raised funds on Kickstarter to roll out a nifty alternative – motor-powered "RocketSkates."

Tech

Knicks star Carmelo Anthony becomes a tech entrepreneur

He's been an All-Star, an Olympian, and a celebrity spokesperson. Now NBA player Carmelo Anthony is adding the position "tech entrepreneur" to his resume. Along…