Why Would Apple Buy Beats?

beats_wireless_headphones_white.jpgRumors have circulated for the past few days that Apple is in discussions to buy Beats, the headphone and streaming audio company, for $3.2 billion. Assuming this turns out to be true, and not a hoax, like the recent story about earbuds with blood pressure sensors, which the gullible tech (and non-tech) press reported gleefully, the question to ask is: Why?

Beats makes headphones, earphones and speakers (both portable speakers and car stereo systems), and also runs the Beats Music streaming music service. While the Beats Music service could make sense – there have been rumors about Apple launching a full à la carte streaming music service, like Spotify, to replace or complement iTunes Radio – the rest of the company doesn’t.

First, lets look at Beats Music. Beats bought MOG, a streaming company, in 2012 for $10 – $16 million. The Beats Music service was rolled out in January, 2014, and, while it’s garnered good reviews, it’s a new player in a crowded market. There’s no reason for Apple to pay $3.2 billion for a service like that. (According to Digital Music News, Beats Music has only 111,000 subscribers.)

As for the headphones, Beats’ products are very popular, but they’re generally considered to be all style with little substance. The sound of Beats headphones may be appropriate for certain types of music, but pretty much all objective reviews of their sound quality are negative. (This forum thread on Head-Fi gives a good idea what people who care about sound quality think of them.)

Beats Audio is a thing – a process? – that Beats says provides “sound as the artist intended,” but we’ve heard that a lot. It seems that it’s nothing more than some equalization and different wiring, but the company doesn’t seem forthcoming; nothing on their website explains what’s so special about their products. Beats Audio is available on some mobile phones and PCs, but it doesn’t seem like something Apple would want to add to its products.

There’s a core disconnect between Apple and Beats. Apple makes products that are more expensive than others, but that are, in most cases, objectively better; Beats makes headphones that are more expensive than others, but that seem to be fluff. Their bass-heavy sound and fashion-based marketing approach – it’s true that certain people think these headphones are stylish – don’t fit with the way Apple sells products. Apple is understated; they focus on design and quality; Beats is brash and loud. (I’ve only listened to Beats headphones for a few minutes in stores; they are not at all what I look for in headphones.)

The history of Beats is interesting. Mobile phone maker HTC bought 50.1% of Beats in August, 2011, presumably to try and make their phones seem hip with younger users. Less than a year later, HTC dumped half of its stake, and a year later sold back the rest, making a small profit on the deal. The private equity firm The Carlyle Group – that had investments from the bin Laden family, and the Bush family – invested $500 million in Beats, in September, 2013, giving the company a value of around $1 billion. Could the company suddenly be worth three times that amount, just months later?

This all strikes me as odd. While we may be witnessing a sharp change in direction from Apple, Beats simply doesn’t seem to fit with Apple’s image. While it could give Apple more creed with younger users, I doubt the company really needs that to sell iPhones. If it’s about expanding the iTunes Store, and adding streaming music, that cred only touches certain users; the iTunes Store is more than hip-hop, rock and loud pop. And, again, the streaming service is certainly not worth what Apple is rumored to be paying.

It will be interesting to see if this is true.