JEFF SOMMER NY Times 05/17/14
Apple’s reported plans to acquire Beats Electronics for $3.2 billion seemed downright strange to some of the people who follow Apple closely. Yet a deal could help jump-start two important industries.
Apple’s own shares fell on the news this month, and some analysts were skeptical about the merits of combining with Beats, which makes Beats by Dr. Dre headphones. Beats also has a streaming service, Beats Music, that is said to be part of a possible deal. Neither Apple nor Beats executives would comment on whether substantive talks were underway.
But Toni Sacconaghi, a tech analyst at AllianceBernstein, was perplexed by the rumors. “We struggle with the rationale for this deal,” he wrote to clients. Apple might acquire businesses that it doesn’t need without gaining the ability to sell more iPhones and other gadgets, he wrote.
Over the short term, that may well be true. But if an Apple-Beats combination occurs, it could affect at least two entire categories of business: the badly battered music industry and the nascent world of wearable technology, a.k.a. fashion electronics.
“Big changes in these industries are happening even if we don’t know where they’ll end up,” said Russ H. Crupnick, senior vice president of the NPD Group, a consumer research firm.
Consider the recent history of the music business, which has been hammered by the digital revolution. After more than a decade of experimentation, the recording industry is a shadow of its former self. Last year, it was a mere 40 percent of its size in 1999, its high-water year, according to inflation-adjusted revenue data from the Recording Industry Association of America.
And 1999 wasn’t only an industry peak; it was when Napster, the digital-downloading site, emerged. “Mention Napster to anyone in the recording business and they shudder,” said James L. McQuivey, principal analyst of Forrester Research. “It’s like they have post-traumatic stress. The industry has never gotten over it.”
As a nexus of digital piracy, Napster is long gone — thanks to a legal onslaught by the recording industry against sites like Napster, Kazaa and Grokster and some of their most avid users. But compact disc sales plummeted anyway, and the industry hasn’t found an adequate replacement. “The industry thought it was selling music; it was really selling physical objects containing music — CDs — and it wasn’t prepared for people buying fewer of them,” Mr. McQuivey said.
With the advent of the iPod, the iTunes Store and outlets like Amazon’s MP3 service, paid digital downloads began to supplant CDs but haven’t made up for the drop in CD sales. What’s more, in recent months, paid downloads have begun to decline. Major artists have prospered through concerts and sponsorship deals, but recording companies have struggled.
That thumbnail history helps explain why reports of a possible Apple-Beats deal have caused a stir: It’s a reminder that another round of disruptive innovation is likely to further transform industry categories. And it may be a sign that newer offerings are beginning to hit their stride.
“Music streaming and subscription services may have reached a turning point,” Mr. McQuivey said. “This is probably the next big thing in the business.”
The stock market has viewed the rumored Apple-Beats deal that way. Shares of Pandora Media, an Internet radio service, rose more than 8 percent on news of the possible deal, though shares gave up ground in midweek. Pandora streams music playlists through a variety of web-connected devices, and while it has a paid, ad-free service, it relies mainly on advertising.
Wells Fargo Securities issued an interesting research note on Apple, Beats and Pandora. It said that with apparent stagnation in the iTunes store, Beats Music could “serve as an entry for Apple into on-demand subscriptions,” supplementing or supplanting iTunes Radio, a streaming service that began a year ago.
But Wells Fargo rated Pandora shares “outperform,” saying that while the Apple-Beats talks have attracted attention to Pandora, it should flourish even if Apple and Beats combine forces. “Pandora,” it said, “has a substantial and defensible first-move advantage as the only digital audio provider with audience scale, accredited and comparable audience data, a broad ad format offering, and skilled radio sales force.”
Pandora is itself a category-defying business. It claims a large and committed audience — more than 76 million active users, who average 21 hours a month. Pandora competes with yet another battered industry, AM and FM radio — or “terrestrial radio” — whose revenues have been in decline since 2006, according to the Radio Advertising Bureau. It also battles for listeners with SiriusXM, the satellite radio service. And it goes up against a host of Internet music services, like Beats and iRadio, Spotify, iHeartRadio, Songza, YouTube and others, some of which offer full access to specific songs and albums, not just to the radiolike playlists that are Pandora’s focus. Pandora also competes for the online advertising pie shared by Yahoo and Google and many other web outfits.
Many music streaming services offer advertising-free paid subscriptions, and they compete on the quality of their “curation” of music, which is usually done through a combination of humans and computers. Beats was founded by two music heavyweights — Jimmy Iovine, the impresario who was John Lennon’s sound engineer, and Dr. Dre, the producer and legendary hip-hop artist — and it stresses its deep roots among music professionals.
In an interview, Ian Rogers, chief executive of Beats Music, said his service is committed to playlists that work well “culturally and emotionally” for listeners and that help them discover new music. “The really cool thing is to build our playlists into a unit of currency — as something you know you can trust,” he said.
Songza, which calls itself a “concierge service,” wants to provide music for the moods and activities of life, said Elias Roman, Songza’s chief executive. (There is music for ballroom dancing, barbecuing, being creative and breaking up, and that’s just the activity list for the letter B.)
Mr. Roman said the possible Apple-Beats combination “should help people understand the real value of a service like ours.” Why? Beats headphones, already a fashion statement for many, could be a big hit as wearable technology, coupled with useful and enjoyable data streams. And what could be better than daylong, mood-and-activity-appropriate music, he asks?
“Music is one of the most intimate connections people have,” he said. “I think all of this attention should make clear what we’re getting at. We’re just getting started. And with wearables, music will be an important part of the ecosystem.”