Episode 50 Apple Beats



In episode 50 of Acquired, hosts Ben Gilbert and David Rosenthal delve into the story behind Apple's $3 billion acquisition of Beats by Dre in 2014. They explore the founding of Beats Electronics by music industry legends Jimmy Iovine and Dr. Dre, who recognized a gap in the market for high-quality, emotionally resonant headphones and leveraged their connections to popularize the brand. The episode also covers Beats' evolution into music streaming with Beats Music, the strategic partnership with HTC, and the eventual buyout by Apple, which sought to bolster its music services and hardware offerings. The acquisition, fueled by Iovine's vision of artist involvement and respect in the music industry, positioned Apple to compete in the changing digital music landscape and expand its ecosystem with a lifestyle brand that resonates deeply with consumers.

Summary Notes

Introduction to Acquired Podcast Episode 50

  • Ben Gilbert and David Rosenthal host the 50th episode of Acquired, a podcast about technology acquisitions and IPOs.
  • The episode focuses on a classic format discussing a significant acquisition.
  • The acquisition in question is Apple's purchase of Beats by Dre in 2014 for $3 billion.
  • Ben is slightly under the weather during the recording.
  • David and Ben express excitement about covering the Beats acquisition.

"So today we are doing a classic episode of Acquired. It's the reason we started the show. It's the original format. It's one we've been talking about doing for a long time, and it's one that we've probably had 2030 requests for this since we started the show. Finally, we are covering finally, it's an Apple episode. So we have to say finally, we are covering the acquisition of Beats by Apple in 2014 for $3 billion."

The quote sets the stage for the episode's focus, which is a detailed discussion on the acquisition of Beats by Apple, a topic that has been highly requested by listeners and is of great significance to the podcast's theme.

Sponsorship from Pilot

  • Pilot, a company offering accounting, tax, and bookkeeping services, sponsors the episode.
  • Pilot is highlighted as a valuable resource for startups and growth companies, emphasizing the importance of focusing on core business aspects and outsourcing non-core functions like accounting.
  • Pilot has grown to be a billion-dollar company, backed by prominent investors including Sequoia, Index, Stripe, and Jeff Bezos.
  • The service is recommended for companies looking to focus on their "beer taste better," a metaphor for core product and customer experience.

"Our next sponsor for this episode is one of our favorite companies and longtime acquired partner pilot for startups and growth companies of all kinds. Pilot is the one team for all of your company's accounting, tax, and bookkeeping needs, and in fact, now is the largest startup focused accounting firm in the US."

The quote introduces Pilot as a sponsor, emphasizing its role in supporting startups and growth companies by managing their accounting needs, which aligns with the podcast's audience and themes of business growth and management.

Founding Story of Beats by Dre

  • Beats was founded in 2006 by Jimmy Iovine and Andre Young (Dr. Dre).
  • Jimmy Iovine is a music producer and executive, having worked with artists like John Lennon, Bruce Springsteen, and Stevie Nicks.
  • Dr. Dre is a renowned musician and producer, known for his work with NWA and artists like Tupac and Eminem.
  • The idea for Beats originated from a conversation between Iovine and Dre, with Dre initially considering a sneaker endorsement.
  • Iovine suggested that Dre, as a recording artist, should focus on selling speakers, leading to the creation of Beats headphones.

"So Beat was founded in 2006 by Jimmy Iovine and Andre Young. And those names may mean something to you or they may not, but they certainly will in a minute."

The quote introduces the founders of Beats, Jimmy Iovine and Andre Young (Dr. Dre), setting the stage for the story of Beats' inception and its connection to the music industry.

Music Industry Context

  • Jimmy Iovine had a deep understanding of the music industry's transformation due to digital disruption.
  • Iovine's experience with Interscope Records and his relationship with Apple and Steve Jobs influenced his perspective on the evolving industry.
  • The shift from physical albums to digital singles and the direct artist-listener relationship were key changes in the industry.
  • The concept for Beats headphones was to create an emotional music experience, not just a technical reproduction of sound.

"So, Iovine, as we've talked about, he is like the music industry executive. And what he's great at, like we were saying, is he reinvents himself."

This quote highlights Jimmy Iovine's ability to adapt to the changing music industry and his foresight into the potential for a new kind of headphone product.

Marketing and Development of Beats

  • Beats headphones were treated as an artist, with a marketing strategy similar to promoting a musical act.
  • The headphones were tested and refined with feedback from artists like will.i.am and Gwen Stefani.
  • The first product, "Beats by Dr. Dre Studio Headphones," launched in late 2008, featuring prominent placement in music videos.
  • LeBron James was an early influencer, requesting multiple pairs for himself and his teammates, which helped promote the brand.

"We decided we were going to market it like it was Tupac or you two or guns n'Roses."

The quote illustrates the innovative marketing approach taken by Beats, treating the headphones as a music artist to create a lifestyle brand rather than just a tech accessory.

Marketing Headphones and Speakers with Athletes

  • Beats by Dre capitalized on the visibility of sports teams, particularly the US basketball team during the 2008 Olympics, to market their headphones.
  • The brand leveraged the association with high-profile athletes to become a lifestyle brand, transcending the music industry.
  • Beats' marketing strategy included impactful commercials featuring athletes like Richard Sherman, Colin Kaepernick, and Kevin Garnett.
  • The NFL's deal with Bose and the subsequent ban on Beats headphones inadvertently boosted Beats' publicity.

"Like, that's a signature of the company now, right? Is like a sports team walking out of the tunnel onto the floor in their warm up stuff, all wearing beats." "The NFL does a deal with Bose headphones, and they ban beats."

These quotes highlight the strategic use of athlete endorsements to create a strong brand identity for Beats by Dre. The NFL's ban of Beats headphones, while initially seeming detrimental, actually served as an unexpected marketing boon.

Beats' Company Growth and Partnerships

  • Beats' first product launch in 2008 was successful, prompting them to seek partnerships for growth.
  • HTC acquired a majority stake in Beats in 2010, valuing the company at over $600 million.
  • Jimmy Iovine recognized the potential of integrating Beats technology with smartphones.
  • Beats later took control of hardware production, ending their partnership with Monster.
  • The Carlisle Group invested in Beats, allowing them to buy out HTC's remaining stake.

"HTC ends up acquiring a majority stake in Beats in August 2010, and they pay $309,000,000 for a 50.1% stake." "They don't renew the partnership with Monster. They move to producing the hardware themselves."

These quotes detail the strategic business decisions made by Beats to expand and take control of their product development. The partnership with HTC and the move to in-house production were key steps in Beats' growth trajectory.

  • Monster attempted to replicate Beats' success with branded headphones but failed to capture the market.
  • After Beats severed ties with Monster, Monster sued Beats and Apple, claiming they were cheated out of revenue.
  • Apple's response was to revoke Monster's certification for Apple accessories.
  • The lawsuit was eventually thrown out as baseless.

"Monster decides, like, oh, we can do this, too. We're going to come out with lifestyle branded headphones and work with artists." "They revoke monster's membership in the certified Apple accessories."

These quotes illustrate the competitive landscape in the headphone industry and the legal challenges that arose. Apple's decisive action against Monster reflects the company's strong stance on protecting its business interests.

Beats Music Streaming Service and Acquisition by Apple

  • Beats acquired the music streaming company Mog to launch Beats Music.
  • Beats Music emphasized artist involvement, differentiating itself from algorithm-based competitors.
  • Beats reached a revenue run rate of over a billion dollars solely from headphones before launching the streaming service.
  • Apple acquired Beats for $3 billion in 2014, which included both the electronics and music streaming services.

"So Beats acquires them and starts working on totally redoing the Mog service and rebranding it as beats music." "Apple, Jimmy's old friends, are in negotiations to buy beats for $3.2 billion."

The acquisition of Mog and the subsequent launch of Beats Music were strategic moves to enter the streaming market. The quotes emphasize the importance of artist involvement in Beats' approach and the significant acquisition by Apple, which was a major milestone for both companies.

Cultural Impact and Integration with Apple

  • Beats headphones became a cultural phenomenon, worn by both youths and adults.
  • The Beats acquisition by Apple was not only about the streaming service but also the cultural impact and technology of the headphones.
  • Apple Music was launched as a rebranded Beats Music, and Beats' influence can be seen in Apple's deeper involvement in headphone technology.

"It totally overtakes pop culture. I mean, kids everywhere are wearing them." "Apple has gone much deeper into headphone technology over the last couple of years."

These quotes underscore the cultural significance of Beats headphones and the impact of the acquisition on Apple's product offerings. The integration of Beats' branding and technology into Apple's ecosystem was a strategic move that extended beyond just the streaming service.

AirPods and Beats Hardware Development

  • Apple's existing hardware teams continue to develop AirPods.
  • Beats hardware teams advance the development of Beats headphones.
  • The W1 chip is shared between AirPods and the latest Beats wireless headphones.
  • Layoffs occurred during the consolidation of the companies, with around 200 people affected.

"But for the most part, I believe it's Apple's existing hardware teams continuing to work on the AirPods and Beats hardware teams continuing to push the ball forward on beats headphones."

The quote explains that Apple's existing teams are responsible for the ongoing development of AirPods, while the Beats teams focus on improving Beats headphones, highlighting the internal division of labor post-acquisition.

Acquisition Categories

  • The acquisition of Beats by Apple fits multiple categories including business line, asset, and people.
  • Beats was generating over a billion dollars in revenue before Apple's acquisition.
  • The Beats brand is a significant cultural asset that Apple gained access to.
  • The acquisition is likened to a talent acquisition, with Jimmy Iovine and Dr. Dre's impact being compared to Steve Jobs' return to Apple.
  • The discussion suggests that the acquisition was not just about the product but also about integrating Beats' understanding of music and audio into Apple's culture.

"It's also an asset. It's the brand of beat, for sure."

This quote emphasizes that the Beats brand itself is a valuable asset that Apple acquired, which held cultural significance and was a key part of the acquisition's value.

Analysis of the Beats Acquisition

  • The acquisition is analyzed as a mixture of acquiring a profitable headphones line and an existing music service.
  • Apple could have developed a music service in-house but chose to acquire Beats Music for a head start.
  • The acquisition cost is not justified by the app/service alone, but by the combination of the headphones business, the music service, and the industry relationships brought by Jimmy Iovine and Dr. Dre.
  • The talent and industry connections are seen as crucial for competing with Spotify and other music services.

"What they, in my mind, bought was two things. It's one, an existing app and service that was well done so that they didn't have to start from scratch in house."

This quote suggests that part of the acquisition's value was in acquiring a well-made app and service, which saved Apple from having to build a music service from scratch.

Beats as a Potential Threat to Apple

  • Beats had the potential to become a significant competitor to Apple in the long term due to its vision and deep customer relationships.
  • The acquisition prevented Beats from possibly becoming a standalone powerhouse, similar to Apple's growth trajectory post-Steve Jobs.
  • The integration of Beats into Apple's ecosystem is seen as a strategic move to maintain leadership in the tech and music industries.

"I think beats could have been a serious threat to Apple in the long term."

This quote indicates that Beats had the potential to challenge Apple's dominance, which was a consideration in Apple's decision to acquire the company.

Apple's Position in the Music Streaming Market

  • Apple Music launched with no free tier, only a free trial, and has grown to 30 million paying subscribers.
  • Apple Music's growth is compared to Spotify's, with Spotify having double the listener base and accelerating its paid subscriber count.
  • The discussion highlights the philosophical differences between Apple's and Spotify's approaches to music streaming.
  • Apple's strategy is seen as more artist-friendly, with a higher payout to record labels and a focus on fair compensation.

"Apple Music has basically been growing linearly since launch."

This quote provides an overview of Apple Music's growth pattern and its position in the music streaming market relative to competitors like Spotify.

Financial Implications of the Beats Acquisition

  • The acquisition's financial success is measured by Apple Music's subscriber base and revenue.
  • Apple Music contributes significantly to Apple's gross margin, justifying the acquisition cost.
  • The broader impact of the acquisition includes the integration of the Beats brand and its influence on Apple's product ecosystem.

"That's over a billion a year. That's pretty good for paying 3 billion for beats."

This quote assesses the financial return on Apple's investment in Beats, suggesting that the revenue from Apple Music supports the acquisition's cost.

Amazon's Role in the Music Streaming Landscape

  • Amazon is a significant competitor in the music streaming market with its Prime Music and Music Unlimited services.
  • Amazon's aggressive pricing and inclusion of music streaming in Prime memberships pose a challenge to both Apple Music and Spotify.
  • The discussion suggests that Apple is in a better position to compete with Amazon than Spotify is.

"Amazon's making a huge push with Amazon music."

This quote acknowledges Amazon as a key player in the music streaming industry, which affects the competitive dynamics between Apple Music and Spotify.

Apple's Acquisition of Beats

  • Apple could have created Apple Music without acquiring Beats, but it would have likely been a service similar to Amazon's — functional but not exceptional.
  • Beats brought an existing customer base, a strong brand identity, and a vision for the music service led by industry leaders Jimmy Iovine and Dr. Dre.
  • The acquisition improved Apple's previously tenuous relationship with the music industry.

"But by bringing on beats, they got a couple things like we've talked about. They got the existing customer base. Now, most of those were headphones, right? But, like, millions and millions and millions of people that identify with the brand and have a relationship with the brand."

This quote highlights the strategic advantage Apple gained in terms of customer base and brand relationship through the acquisition of Beats.

Technology and the Liberal Arts

  • Technology in the liberal arts is a key theme, with Apple's approach being likened to the intersection of technology and culture.
  • The Beats acquisition is compared to the Stitch Fix IPO in terms of identifying and capitalizing on overlooked market opportunities.
  • The two-by-two matrix from Howard Marks at Oaktree is mentioned, emphasizing the importance of being right and non-consensus in investing and building companies.

"This idea of, like a two by two matrix, when you think about investing or building companies, you can be right or you can be wrong in what you're doing. That's like one of the axes of the two by two matrix. And obviously you want to be right, not wrong. If you're wrong, you lose money no matter what. But if you're right, you only make money in one circumstance."

This quote explains the concept of the two-by-two matrix used for evaluating investments and business strategies, emphasizing the value of non-consensus but correct insights.

Defining a Lifestyle Brand

  • Jimmy Iovine and Dr. Dre were adept at identifying "holes" in the market and creating lifestyle brands where none existed before.
  • The discussion points to the potential for other categories to be transformed into lifestyle brands, suggesting that similar opportunities may exist elsewhere.

"And Jimmy talks about, says he refers to it as he and Dre, they look for holes out there. Like, where is there a hole? And this is the same thing."

This quote reflects the strategic thinking of Jimmy Iovine and Dr. Dre in finding untapped market opportunities and creating successful brands.

Content is King

  • The "content is king" narrative is discussed in the context of Apple Music and its potential to deliver exclusive, high-quality content.
  • The acquisition of Beats is suggested to have provided Apple with the vision and industry relationships necessary to offer compelling content.
  • Apple's investment in original programming is seen as a move towards a comprehensive subscription service, akin to Amazon Prime.

"Well, and that's what Apple music wouldn't have."

This quote suggests that without the Beats acquisition, Apple Music might have lacked the unique content and vision that it currently has.

Business Models and Vertical Integration

  • Apple's highly vertically integrated business model is contrasted with Google's and Amazon's more device-agnostic approaches.
  • The discussion explores the implications of Apple Music's availability on Android and whether it serves as a gateway to Apple's hardware ecosystem.
  • The services narrative is analyzed in the context of Apple's earnings and overall business strategy.

"Apple's business model has always been make really great devices that are differentiated by their software and services and sell them for an excellent premium."

This quote summarizes Apple's core business model and how it traditionally integrates hardware, software, and services.

Final Grading of the Beats Acquisition

  • The acquisition is graded in context with other major tech acquisitions, with a focus on its impact and execution.
  • The Beats deal is generally viewed positively but not as transformative or clear-cut in its success as other acquisitions like Instagram.

"I don't think the execution, though, has been as good as Instagram. And next, and specifically, well, next was its own beast."

This quote provides an assessment of the Beats acquisition, comparing it to other notable acquisitions and their respective outcomes.

Consumer Phenomena and Startup Strategies

  • The rise of the HQ trivia game is discussed as an example of a fast-growing consumer phenomenon and a successful customer acquisition strategy.
  • The founders' backgrounds and previous ventures are mentioned, highlighting the innovative and interactive nature of their new project.

"It is a game show that happens interactively through your phone, that comes on twice a day, and it is from the creators of vine."

This quote describes the HQ trivia game, emphasizing its innovative use of technology for interactive entertainment.

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