Apple finally confirms it's buying Beats for $3B

The company says Beats founders Jimmy Iovine and Dr. Dre will join Apple.

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These happy gentlemen just signed a $3 billion deal. From left: Beats co-founder Jimmy Iovine, Apple CEO Tim Cook, Beats co-founder Dr. Dre, and Apple SVP Eddy Cue. Apple

Apple on Wednesday confirmed it's buying Beats for $3 billion, giving the electronics giant a popular headphones business and subscription streaming music service.

The acquisition -- Apple's biggest ever -- includes $2.6 billion up front and $400 million that will vest over time. Early reports said Apple was planning to buy Beats for $3.2 billion, but recent speculation said the price had dropped. The company said Beats co-founders Jimmy Iovine and Dr. Dre, whom it called "sound pioneers," will join Apple. Apple will continue to use the Beats brand.

"Music is such an important part of all of our lives and holds a special place within our hearts at Apple," Apple CEO Tim Cook said in a statement. "That's why we have kept investing in music and are bringing together these extraordinary teams so we can continue to create the most innovative music products and services in the world."

He also told The Wall Street Journal that Iovine and Dr. Dre "have a rare talent," a sentiment he also echoed in a memo to employees.

"We love the subscription service that they built," Cook told the WSJ. "We think it's the first one that really got it right."

Iovine, meanwhile, said he always believed Beats "belonged with Apple."

"The idea when we started the company was inspired by Apple's unmatched ability to marry culture and technology," Iovine said in a press release. "Apple's deep commitment to music fans, artists, songwriters and the music industry is something special."

News of the deal broke earlier this month. At the time, it was unclear just why Apple would want to make the biggest acquisition in its 38-year-history. Yes, Beats sells a lot of headphones, but Apple, which already sells its own branded in-ear headphones as part of a line of accessories for the iPhone and iPad, could make similar headphones of its own. As for a curated streaming music service such as the one offered by Beats, that's also something Apple could probably create on its own.

Eddy Cue, Apple senior vice president of Internet software and services, said Beats will make Apple's music lineup "even better," with the company now able to offer a subscription service along with the free iTunes Radio and song purchases.

Cook, meanwhile, told Recode that Apple can build "about anything you could dream of," but Beats gives the company "a head start."

"It's not what Apple and Beats are doing today," Cook said. "It's what we believe pairing the two together can produce for the future."

He added that Beats should add to earnings in fiscal 2015, which starts at the end of September.

Apple also noted that Beats has "become the brand of choice in the music and sports worlds" and "has quickly become part of pop culture in the US." The company plans to expand Beats to more countries through the Apple online store, Apple's retail stores, and select Apple authorized resellers.

The company expects the deal to close the fiscal fourth quarter, which ends in September.

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Apple CEO Tim Cook tweeted a photo of himself with iTunes chief Eddy Cue and Beats cofounders Jimmy Iovine and Dr. Dre. Screenshot by Shara Tibken/CNET

Apple has followed a predictable script for the past four decades, shunning big, well-known companies and instead buying small players with talent or core technology -- such as the Siri voice recognition technology -- to supplement its current products or help it offer something new.

Most of those acquisitions have been so small Apple wasn't even required to disclose them. Before Beats, Apple's largest public acquisition on record was the $429 million it paid in 1996 for Steve Jobs' software maker Next. Cook and his team have bought 27 companies between its fiscal 2013 and this year. Beats is the biggest deal so far.

Analysts and investors on Wednesday continued to question the rationale behind the deal, despite efforts by Apple to share its thoughts with the press.

"While we believe Apple should get some benefit of the doubt because of its historical success, a music-related acquisition still seems, to us, more defensive," Wells Fargo analyst Maynard Um noted. "Given the changing landscape and our view that Apple will have to eventually evolve its business model ... we believe Apple should be acquiring more offensive assets to better position itself."

Meanwhile, at least one Beats partner has to figure out its future relationship with the headphone designer. Hewlett-Packard, which directly competes with Apple in the competitive laptop and desktop computer market, has included Beats Audio technology and Beats branding in nearly all of its mainstream and high-end PCs over the past few years. Currently, about 15 percent to 20 percent of HP's devices use Beats technology.

The company maintains the rights, through the end of 2014, to offer new technologies that include Beats Audio, and it plans to release "an aggressive lineup" throughout the year that features the technology. In addition, HP's rights to distribute products with Beats Audio extends through 2015.

"HP will continue to develop and offer leading products that include premium technology experiences, including the richest and most dynamic sound experience," the company said in a statement.

Updated at 1:50, 2:30, 3:15, and 3:50 p.m. PT with additional details, information about HP's relationship with Beats, and an analyst comment.

 

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