Apple (NASDAQ:AAPL) bought Beats, but it isn't buying headphones and it isn't buying a streaming music service.
It's buying cultural authority.
Apple wants to create the next MTV, with Dr. Dre and Jimmy Iovine leading the charge. I'm not talking about the modern reality-TV machine MTV. I'm talking about the original MTV that reinvigorated the music business in the 1980s while serving as the premier pop-culture tastemaker.
What Is Apple Buying With Beats?
In terms of hardware, Beats is a very strong lifestyle-infused electronics brand. But it doesn't make anything Apple couldn't make itself. Perhaps the only advantage is that if Apple were to make high-end, expensive headphones, it would primarily appeal to Apple freaks and not outsiders from the Google (NASDAQ:GOOG) Android and Microsoft (NASDAQ:MSFT) Windows camps.
The Beats Music streaming service is a more complex topic. Compared to rivals like Pandora (NYSE:P) and Spotify, Beats Music's main point of differentiation is that it has a human-driven curation model for suggestions and playlists, rather than a data-driven one.
The paid music-download model is clearly failing. In the US, digital music sales fell 13.3% in Q1 2014, according to Nielsen SoundScan. Meanwhile, music streams were up 35%. In 2013, Apple dipped its own toe in the streaming game with iTunes Radio, but largely as a way to generate paid downloads -- a strategy that hasn't paid off.
Nothing to Lose
The surging popularity of Beats headphones basically ensures that the $3 billion Apple is spending doesn't go down the drain, so perhaps the thinking is, "Let's take the Beats Music mentality and scale it." And why not? The download model is on the decline no matter what.
As of now, Beats Music is small, with just 250,000 paid subscribers; Spotify just crossed the 10-million mark. Beats Music by nature has trouble scaling because it has no free component beyond a seven-day free trial -- but that's where iTunes Radio comes in.
At the end of the day, what's Apple really buying with the Beats Music streaming service? It's not a $2.5-million-per-month revenue stream. So it's got to be the dealmaking and tastemaking capabilities of the Beats team headed by Dre and Iovine.
Will it succeed? I suspect the current Apple and Beats Music models will be fused and turned upside down in ways we can't imagine now, so there's really no telling what will happen. I see Apple/Beats functioning as more of a creative/curatorial force than a technological one. Time will tell if it's the best way forward, but I do know one thing: What the world doesn't need is just another music streaming service.
It needs a new MTV.
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