Dr Dre is a happy man. On 28 May, he became a billionaire. After months of negotiations and weeks of rumours, Apple announced it was buying Beats, the company that he co-founded, for US$3bn. That’s not bad for a high school drop-out from the gang-ridden streets of Compton, Los Angeles.
Of course, this particular drop-out is one of the most famous rappers and hip-hop producers of all time. Over the last three decades, he has worked with some of the biggest names in the business, producing albums that have sold tens of millions of copies. But it’s when he teamed up with legendary producer James “Jimmy” Iovine in 2008 that Dre’s career as an entrepreneur reached the next level.
Their idea was simple — a line of high-quality headphones, each with Dre’s explicit stamp of approval. Recognising that more and more music was being consumed using mobile devices, Dre and Iovine capitalised on both the appetite for quality headphones and the enormous power and authenticity of Dre’s personal brand.
It’s fair to say that the results exceeded all their expectations. The business now generates more than $1bn in sales each year. And the intrepid pair are not resting on their laurels. They’ve already branched out into car and personal audio systems and, tellingly, an online streaming service named Beats Music.
It’s this service that most likely attracted Apple’s attention. Although it has only 250 000 subscribers, Beats Music has a unique approach. While larger competitors like Spotify rely entirely on software to suggest new music to subscribers, Beats is built around the idea of expert curators. These are usually well respected music journalists and producers — people who really know the business in other words.
The other big attraction for Apple is the talent behind the brand. Both Dre and Iovine will become full-time employees of Apple as part of the deal. Apple has enjoyed more than a decade of good relationships with the music industry, founded on the groundbreaking deals made by Steve Jobs when iTunes was launched. But having two of the industry’s living legends on staff might take that business to new heights.
From that perspective, the headphone business might seem like an afterthought. Apple makes $1bn in revenue in an average week, so Beats is tiny by comparison. But given that they paid $3bn in total, the package looks more and more like a good deal. Apple doesn’t currently have a line of high-end headphones, so why not buy one?
But, beyond all the high-fiving and champagne drinking, this deal is part of an important shift for Apple. Like a lot of other media businesses, music is slowly moving from an ownership model to a rental model. Tens of millions of people now listen to music online via streaming services. This gives them on-demand access to huge libraries of music, usually for a flat monthly fee.
Whereas before you had to buy an LP, a tape or a CD to hear the latest album by your favourite band, now you can simply open an app on your phone. And if you have a sudden yearning for classic rock, 1990s techno or Swedish polka, they’re all just a few swipes of the finger away.
Apple is already feeling this shift in its iTunes business. After more than a decade of constant growth, paid downloads of music are declining. Streaming services, by comparison, are growing at more than 30%/year. Falling mobile bandwidth costs and advances in cloud computing are making streaming both cheaper and better at a rapid rate.
As bets go, Apple has made weirder ones than Beats. Gangster rapper reputation notwithstanding, Dre has proved an exceptionally savvy entrepreneur. Whether he and Iovine can take Apple’s music business to the next level remains to be seen, but the folks at Cupertino are about to welcome a very different kind of employee into their fold. — (c) 2014 Mail & Guardian