Apple said to be in talks to buy Beats Electronics for $3.2B

Tentative deal between iPhone maker and Beats is reportedly in the works and could be one of Apple's biggest buys yet.

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Sarah Tew/CNET

Apple is reportedly in talks to acquire Beats Electronics, the high-end-headphone maker co-founded by hip-hop artist Dr. Dre, in a deal worth $3.2 billion, according to the Financial Times.

The deal could be announced as early as next week, the report says, but has yet to be finalized and could still fail to materialize pending discussions between the two companies.

Beyond its line of bass-boosting ear pieces, Beats has also broken into the competitive market for subscription streaming-services, with a mobile offering that, unlike Apple's iTunes and iTunes Radio, offers ad-free, on-demand music listening for about $10 per month. If the deal goes through, Apple will acquire the subscription business alongside Beats' hardware division, with the Beats management team reporting to Apple CEO Tim Cook, the FT adds.

Beats declined to comment for this story. CNET has also contacted Apple and will update this story when we hear back.

While Apple has long had a favorable relationship with Beats -- the Dre-branded headphone line is featured prominently in both its physical Apple stores and the accessory section of its online store -- the crux of the deal may prove to be Beats Music.

Beats' streaming service could become a central part of Apple's music strategy, following the launch of its online radio service, iTunes Radio, last year. Beats Music debuted with a powerful billing and marketing partnership with AT&T and it has reportedly been growing quickly. Though the company has yet to disclose hard and fast subscriber numbers, industry estimates peg the total at about 200,000.

The talks come as trends in music purchasing are shifting to subscription services like Beats Music from the one-off digital purchases Apple's iTunes has long dominated. Data from the Recording Industry Association of America found that paid subscription services grew the fastest of all digital formats last year, rising 57 percent, while revenues from permanent digital downloads that are iTunes' specialty declined 1 percent.

Beats, established in 2008 by Dre and longtime music industry executive Jimmy Iovine, is known for hyper-hyped headphones that critics dismiss as being all celebrity endorsement and little substance. But the splashy branding and big-name partnerships have resonated with mainstream consumers, with Beats holding the biggest share of the headphone market despite the high prices of its products, which start at around $99 for earbuds and go all the way up to $450 for pro-grade over-the-ear headphones.

In Beats, Apple could have a brand partner that knows how to instill a refreshed cool factor into the Cupertino, Calif. company's product line and marketing.

Despite its hardware lead, Beats has had a rocky relationship with investors. In August 2011, hardware manufacturer HTC pumped $309 million into the company to acquire a majority stake of 50.1 percent. But it sold back half of that stake in July 2012 and the rest in September 2013 to ensure that it did not incur its second ever quarterly loss.

But around the time of Beats' buyback of HTC's remaining 25 percent stake, Beats received a $500 million investment from private equity firm Carlyle Group that valued the headphone maker at $1 billion. Apple has more than $150 billion in cash reserves, so overpaying for Beats to the tune of $2 billion is unlikely to raise alarms.

Apple's biggest acquisition ever?

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A custom Beats design featuring an Apple logo. OneMoreBlog.com

An Apple-Beats marriage would mark a significant shift for the iPhone maker under Cook, who took over as CEO from Steve Jobs in August 2011. The company has long shied away from headline-making purchases in the realm of billions of dollars, and has often kept the details of its splashiest purchases, like iOS-software-staple Siri, under wraps.

Still, at $3.2 billion, a Beats acquisition would be one of the highest -- if not the highest -- price tags Apple has ever considered. "In terms of acquisitions, Apple has been very, very light in their activity," Richard Lane, an analyst at Moody's, told the Financial Times. "I don't think they've spent $1 billion in any of the last four years."

Apple's largest public acquisition on record is the $400 million plus debt it paid in 1996 for computer manufacturer NeXT and its NeXTstep operating system, the company Jobs founded nearly a decade earlier after being ousted by Apple.

Since taking over as CEO, Cook has slowly been molding Apple's narrative to one more open to bolder moves -- unlike Jobs who preferred holding on to the company's cash. In the last few months, Cook has talked openly about Apple's acquisition strategy.

"We're not in a race to pay the most. Not in a race to get the headline," Cook said at a shareholder meeting in February. That was likely a veiled reference to both Facebook's blockbuster acquisition of messaging service WhatsApp for about $19 billion and Google's buyout of smart thermostat maker Nest for $3.2 billion.

But he didn't rule out a splashy buy. "That doesn't mean we won't buy a big company tomorrow afternoon." Beats would join a growing list of purchases Apple has made since ramping up its portfolio-building under Cook.

"From an acquisition point of view, we have done 24 in 18 months," Cook said during a conference call last month to discuss the company's second-quarter earnings. "That shows that we're on the prowl, I suppose you could say.

"We're in a race to make the world's best products, that really enrich people's lives," Cook added. "So to the tune that acquisitions can help us do that -- and they've done that and continue to do that -- then we will acquire. And so you can bet that you will continue to see acquisitions and some of which we'll try to keep quiet and some of which seems to be impossible to keep quiet."

It would appear that a $3.2 billion deal is one Apple can't keep confined to Cupertino, Calif.

CNET's Joan E. Solsman contributed to this report.

 

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