May 29, 2014, 1:01 PM

Apple feels the Beats

Apple acquires Beats’ headphones and speakers, along with its music streaming service, for $3 billion.

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Apple has agreed to acquire Beats Electronics, which makes headphones, speakers and audio software, and its subscription streaming music service Beats Music. The purchase price is $3 billion, Apple says, consisting of about $2.6 billion in cash and $400 million in stock.

In addition to Beats Music, which launched in January, Apple, No. 2 in Internet Retailer’s 2014 Top 500 Guide, gains the market leader in premium-priced headphones. Beats Electronics makes Beats by Dr. Dre headphones. Sales of premium headphones, those priced higher than $100, have surpassed $1 billion annually in the U.S. and Beats owned more than 60% of sales in the segment for the 12 months ending in April 2014, according to Ben Arnold, executive director and industry analyst at NPD Group, a global marketing research firm.

“For Apple, acquiring Beats helps them push further into the living room,” Arnold says. “While they have a sturdy presence already with their existing products, audio and speakers in particular is not a space they currently play in. They have a wireless technology for streaming already, called Airplay. Tapping into Beats’ existing hardware portfolio helps to strengthen Apple's presence in music, especially in multi-room wireless audio where Sonos has created their own ecosystem of products.” Sonos Inc. manufactures and sells wireless speakers and audio systems for the home.

The Beats music service is reportedly an important piece of the acquisition, Arnold says. The acquisition’s impact on streaming music services such as Spotify or Pandora is unclear, he says, “but it was mentioned when Beats Music launched that they wanted to sell more things than music subscriptions via the service. I think this is a leg up Beats/Apple music will have over these other services.”

Beats Music also offers a “curated” music feature that build playlists and song sequences based on individual customers’ musical tastes at a given moment. Subscribers send the service information about their location or mood and a set of related tunes are sent back to the listener.

The Beats headphone and speaker product lines represent a new direction for Apple hardware. Beats rely heavily on co-branding with popular music stars, such as Lady Gaga, Lil Wayne and Nicki Minaj who have designed their own headphones and speakers. Fashion designers and “street” artists such as Alexander Wang, Futura and Snarkitecture have collaborated on special limited-edition products as well.

Recording artist and producer Dr. Dre and Jimmy Iovine, chairman of Interscope Geffen A&M Records, established Beats Electronics in 2008. As part of the acquisition, Beats co-founders Jimmy Iovine and Dr. Dre will join Apple.

“Music is such an important part of Apple’s DNA and always will be,” says Eddy Cue, Apple’s senior vice president of Internet Software and Services. “The addition of Beats will make our music lineup even better, from free streaming with iTunes Radio to a world-class subscription service in Beats, and of course buying music from the iTunes Store as customers have loved to do for years.”

Apple launched the iTunes Radio music streaming service in June 2013. Tunes are free to users because they must listen to ads, but is ad-free to subscribers to Apples iTunes Match service at $24.99 per year. Apple did not report iTunes Radio sales.

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