San Francisco - Apple has agreed to buy Beats Electronics for $3 billion (R31.4bn), its biggest acquisition, nabbing a popular line of headphones and a nascent subscription music-streaming service as the iPhone maker seeks to rev up growth.
Beats founders Dr Dre and music industry executive Jimmy Iovine would join Apple, the companies said on Wednesday. The purchase price is $2.6bn, with $400 million more that will vest over time. The acquisition is projected to close in the quarter to September.
The deal signifies that Apple chief executive Tim Cook is willing to use the company’s $150.6bn in cash more aggressively, a departure from predecessor Steve Jobs’s playbook of acquiring smaller companies to bring in technology and talent.
As sales of digital music downloads fall, buying Beats gives Apple a foothold in internet-based streaming, where Google’s YouTube, Spotify and Pandora Media dominate.
“Music is such an important part of all of our lives and holds a special place within our hearts at Apple,” Cook said. “That’s why we have kept investing in music and are bringing together these extraordinary teams so we can continue to create the most innovative music products and services in the world.”
The deal indicates how the chief executive, who is facing pressure to jump-start Apple’s revenue amid cooling iPhone and iPad sales, is shifting tack to acquire some growth.
Even as Google and Facebook have spent billions on purchases, Apple previously avoided tie-ups of this size. Its biggest past deal was $400m for NeXT in 1997, which brought Jobs back to Apple.
Maynard Um, an analyst at Wells Fargo Securities, wrote in a note on Wednesday that Apple should focus its deals on new types of businesses.
“While we believe Apple should get some benefit of the doubt because of its historical success, a music-related acquisition still seems, to us, more defensive,” Um wrote.
“Given the changing landscape and our view that Apple will have to eventually evolve its business model, we believe Apple should be acquiring more offensive assets to better position itself.”
News of Apple’s talks with Beats emerged earlier this month. Apple made the official announcement on Wednesday, a few hours before its head of iTunes Eddy Cue and Iovine were scheduled to speak at a technology conference. Cue will oversee the Beats Music team for Apple, while marketing chief Phil Schiller will run the Beats headphones group.
Iovine told the Code conference that he had initially approached Apple about a deal, with Cook and Cue involved in talks to seal the deal. Cue said he had wanted to work with Iovine for a long time.
“It’s not about what Apple or Beats is doing today. The things that we’re going to do together are going to be much greater than anything we could do on our own,” Cue said.
A central part of the deal’s allure is the Beats Music service, which highlights how serious Apple is about its own music-subscription service. While iTunes remains the largest music seller, it only offers downloads of tracks and albums.
Music-streaming services had gained in popularity, said Mike McGuire, an analyst at Gartner. Yet the services, where a customer pays for access to songs instead of owning them in a digital library, were not lucrative and presented business challenges, even for Apple, he said.
Beats introduced its music-subscription service earlier this year. Like Spotify and other rivals, it offers unlimited access to millions of songs in exchange for a monthly fee. Beats hired music critics, radio DJs and record-label veterans to create playlists and other curation tools to help customers navigate the overwhelming amount of music available – a component Iovine said had been missing. – Bloomberg