Apple (NASDAQ:AAPL) recently announced it has agreed to acquire the streaming music service Beats Electronics. Apple is acquiring the company to counter the threat posed to its iTunes Store by Pandora (NYSE:P), Google (NASDAQ:GOOG) (NASDAQ:GOOGL) , and Spotify. Apple's deal will bolster a music business that has lost its steam, help Apple with content deals, and give Apple newer revenue streams from Beats hardware and streaming segments.
The new deal
Apple is striking a new chord with the deal, which is by far the most expensive acquisition in its 38-year history. The price consists of $2.6 billion in cash and $400 million that will vest over time. The deal is expected to end by the end of the fiscal year 2014. With the purchase, Apple will get Beats' audio accessories business, which includes a line of pricey headphones.
The music streaming business
Apple's iTunes transformed the music industry in 2003 when the service began selling singles for 99 cents. The growing popularity of music streaming services has been reducing sales of songs and albums. U.S. sales of downloaded songs fell 1% in 2013, while streaming music revenue surged 39%, according to the Recording Industry Association of America. The Beats acquisition is Apple's way of getting into the streaming music business.
What are the prospects in the music streaming sector?
Price Waterhouse Cooper, a research firm, expects the digital delivery of music to explode in the next few years. It forecasts a 14.5% compound annual growth rate for music streaming revenue from 2014 to 2018. The sector will grow earnings from $848 million to $1.7 billion within the period. The music streaming sector is also forecast to account for 37% of the digital recorded music revenue, up from 23% in 2013.
Does Apple's new acquisition make sense?
Due to founders Jimmy Iovine and Dr. Dre, Beats has close ties to the music industry. Apple's new deal will give it an opportunity to nurture partnerships with the music industry and other content creators. This will make Apple's music offerings more attractive. Beats is a market leader in the headphone space. Headphone sales will drive revenue through Apple's online store, worldwide retail stores, and authorized resellers.
The competition is not sleeping
Apple's music offerings will face a lot of competition. Pandora recently announced its May's listening hours rose 28% on a year-on-year basis to 1.73 billion. The company now has more than 75 million active users.
Spotify boasts 10 million paying subscribers worldwide. It recently announced it was partnering with Sprint and HTC on HTC One smartphone to stream music that restores some of the fidelity lost to digital compression. Spotify is doing well in spite of the competition from Apple and Google.
The Beats acquisition will give Apple a much stronger foothold in the music industry. Though other companies are threatening iTunes in the sector, Apple will almost certainly benefit from the technology utilized at Beats. Overall, I believe the Beats deal will give Apple's revenue a boost in the long term.
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Mark Girland has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Pandora Media. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.