CUPERTINO, Calif. — In an unprecedented teaming of tech brains and musical ears, Apple confirmed Wednesday that it was doubling down on the digital music space it pioneered with iTunes by purchasing Beats Electronics for $3 billion, of which $400 million will vest over time.
"We're gaining rare talent, a fast-growing subscription service and premium headphones that have done incredibly well, but none of those are the reason for doing this deal," says Apple CEO Tim Cook of the deal, which nabs both Beats' popular line of headphones and its nascent streaming music service. "It's the future we're betting on."
Cook met with USA TODAY along with iTunes chief Eddy Cue and Beats co-founders Dr. Dre and Jimmy Iovine.
"I've been working with Apple on projects for 11 years," says Iovine. "You feel like when you walk in here, these guys get what we do. Will our products get better? Absolutely; we want our stuff to be made by Apple. But mostly, it's about feeling that these guys can bridge the gap between the tech and music worlds."
Cook says Iovine and Dr. Dre will spend more time in Silicon Valley and that the Beats brand will remain intact. While declining to outline specific next steps, Cook said expanding the reach of Beats' electronics and music service are among top priorities.
"This is about music and its importance to society and to Apple," he says. "We've found kindred spirits in Jimmy and Dre, and we're going to advance what they've done to a whole different level."
Apple stock was little changed on the news, which had been expected.
The deal represents perhaps Apple's brashest fiscal move since buying Steve Jobs' NeXT computer company in 1997. But while that deal triggered Apple's rebirth, this one comes at a critical juncture. Consumers and analysts alike are looking to see if Apple can reclaim the spotlight in the wake of a product and advertising fusillade from rival Samsung.
"It provides Beats with the market clout, cachet, credibility and deep pockets that can take (them) to an even larger audience," says Ted Cohen, managing partner of TAG Strategy, a digital entertainment consultancy firm. Meanwhile, "it gives (Apple) real rock stars in Iovine and Dr. Dre."
By welcoming Beats into his portfolio, Apple CEO Cook is acknowledging a shift away from its pioneering iTunes pay-per-song model and toward streaming audio. He also is side-stepping founder Jobs' insistence that all Apple hits be crafted in-house.
Cook shrugged off suggestions that the purchase was in response to charges of stagnation.
"This is a big deal. But to put it in some perspective, we acquired 15 companies last year and 12 this year, some 27 in 18 months," he says. "But this one is all about music, which we've always felt is in our veins, and we've always appreciated that technology alone was not enough."
Beyond its industry significance, the purchase could vault Iovine and Dr. Dre into the billionaire club, which would make the latter the first rapper with a 10-digit net worth. Dr. Dre, born Andre Young, was a pioneering force in the Los Angeles rap scene in the '80s and '90s. Iovine first made his name engineering records for the likes of Bruce Springsteen and Tom Petty, later becoming chairman of Interscope-Geffen-A&M Records.
Dre, who remained quiet during much of the round-table conversation, just smiled at the suggestion: "Financially, I'm in a place I never dreamed of. Now, I'm just ready to get started with the work."
The purchase price might seem high, considering that Beats Music just launched in January, standing out for its emphasis on human vs. algorithm-centric curation. But it represents a fraction of Apple's $160 billion cash stockpile and is in line with other news-making purchases, including Google's $3.2 billion Nest buy and Facebook's $19 billion WhatsApp gamble.
With Beats Music, Apple is instantly in position to fight for market share in the lucrative subscription-based streaming audio category, which saw a 50% jump in revenue last year to $1.1 billion, while download sales dropped 2% to just under $4 billion, according to IFPI, the global music industry association.
Perhaps as important, Apple's newest toy comes with built-in street cred dating to its 2006 founding.
Beats co-founders Iovine and Dr. Dre used their broad contacts to ensure that their headphones wound up on the skulls of top music and sports stars ranging from Lady Gaga to LeBron James. And when it came time to conjure up Beats Music, Iovine tapped Oscar-winning metal rocker Trent Reznor to guide the sonic ship.
"Jimmy's one of those guys who's always coming up with new ideas; he's never someone to let things just happen to him," says Gwen Stefani, whose garage band No Doubt was signed by Iovine. "What I love about him is he's all about the artist."
Stefani recalls the time No Doubt auditioned for Iovine in 1991. After a few songs, "he pulled me aside and said in five years, I'd be a star. And I thought, 'Uh, no, in five years, I'll have like 10 kids, and you're a bit weird.' Of course, he was right; in about that time, our song Don't Speak was a huge hit. Jimmy's a pioneer."
Iovine says he hasn't been able to say much about the impending to deal to his music industry friends, but the few he's confided in have shared the same emotion.
"They feel like one of them has gotten into a game where they can have impact, where what we do will be understood," he says. "We've managed to bridge those worlds, because we come from music, but we've worked in software and hardware."
"Apple will be doing some great things in the near term that are exciting, and you're going to love them," he says, referencing the company's upcoming Worldwide Developers Conference starting June 2.
"But today's announcement is about the long term," he says. "Dre and Jimmy bring us the artists' lens. We've had that from a relationship point of view, but there's nothing like having that under our roof, that expert ear of audio. So when you take all of those intangibles, you get excited."