Apple poised to buy Beats for music streaming May 12 2014

Pressure on iTunes will force Apple to embrace streaming whole-heartedly at last, and start buying larger companies

By Caroline Gabriel 

Ever since Apple launched iTunes and made a star of the iPod, the connection between digital content and device success has been clear. With many new services eating at iTunes' dominance in music, Apple has made its biggest ever acquisition to fight back, paying $3.2bn for Beats Electronics. The purchase, which reports indicate will be finalized soon, will bring the firm both a strong consumer brand in peripherals and an entry to streamed music.

Apple founder Steve Jobs backed away from the previously successful peripherals business and encouraged high profile third party products to surround the iDevices. However, as it gets harder to differentiate the iPhone and other offerings, it may be that Apple sees the popular, highly branded Beats headphones as a way to add value.

More importantly, Apple could use Beats' fledgling streamed music service as the basis of an expanded platform for iTunes, which built its success around downloads, but has been pressurized by the rise of cloud-based streaming and storage. Beats Music is a small player as yet, though it recently gained support from AT&T, which said it would offer the service at a discount to its family plan subscribers. However, it is estimated to have only about 200,000 users, while its headphones and speakers are said to bring in about $1bn a year.

"They are buying into the future and the future is going to be streaming and subscription," Jon Irwin, former president of rival music service Rhapsody, told Bloomberg. "Revenue from streaming and subscription is growing. Files and downloads are shrinking. Everyone has to engage in streaming and subscription."

Last September, Apple launched its own long-awaited streaming option via iTunes Radio but the ad-supported offering gives users limited control over the songs they can hear. If they exclude the ads by paying $25 a year for iTunes Match, which includes cloud storage, they still have to buy individual songs via the iTunes store. This compromise solution is not protecting iTunes from declining sales, with Spotify the kind of site which is stealing its gold. With $150bn in cash, some will believe Apple should have been bolder and made a play for Spotify - valued at about $4bn - rather than Beats.

If the deal is concluded, Apple will depart from its usual acquisition pattern, focused on small start-ups. CEO Tim Cook has signalled that the firm may have to spend some of its cash mountain on larger takeovers as competitive pressures mount. On the most recent earnings call, he said Apple had acquired 24 companies in the past 18 months, adding:

"We are expanding Apple's products and services into new categories, and we are not going to underinvest in this business."

Beats previously had a close alliance with HTC, which bought a majority stake in the firm in 2011 for $300m but failed to build significant music-based differentiation out of the deal. Amid pressure from other music-focused handsets, notably Sony's iconic brands, HTC sold its stake back last September for $415m and recently formed a partnership with another speakers firm, Harman Kardon, to bring advanced audio capabilities to the One M8 handset.