The video-streaming market isn't the only one heating up with new developments. Apple (AAPL 0.96%) has reportedly gotten quite close to finalizing a $3.2 billion deal with Beats Audio, in hopes of evolving its music streaming service. The trendy accessory of Beats headphones to go with Apple's hardware doesn't hurt either.
Mixed emotions
According to Forbes.com, the acquisition could bode well for the tech giant because the iTunes Radio service hasn't been performing well compared to competitors Pandora (P +0.00%) and Spotify. While iTunes Radio is non-interactive, much like Pandora, Apple wants to stay competitive in the music streaming industry, and the best way to achieve that is to have an interactive streaming service comparable to Spotify. Not only does Beats provide the infrastructure needed to launch an interactive streaming service, but it also brings -- supposedly -- at least 10,000 paying subscribers and a contract with AT&T for families to have access to streaming music and unlimited downloads for only $15.
However, plenty of analysts were not impressed with the 10-figure-deal. The Financial Times reported this quote from Silicon Valley analyst Ben Bajarin:
If Apple wanted to build some flashy headphones with audio compression and bass boosting, they could have done it themselves for much cheaper." Venture capitalist Om Malik took to Twitter, saying, "Buying BeatsAudio (aka a Baboon'sAss) is a good sign that Apple is pretty much out of ideas & unable to come up w/an anti-Spotify strategy.
The Financial Times also reported that the Beats brand and its pop-culture-based target market adds value to the acquisition, and while that may be true, let's ask ourselves this: When has Apple ever not been trendy? Although many focus on the acquisition of a brand of headphones, investors, consumers, and analysts need to keep in mind that this transaction is based on keeping Apple relevant in the streaming market, not audio equipment.
Streaming it all together
Sirius XM (SIRI +0.00%) is a dominant player in the music streaming market, but it's more of an extension of traditional radio than a customizable music streaming service that allow access to music downloads. However, Apple started offering its CarPlay automotive platform on some Ferrari, Honda, Hyundai, Mercedes-Benz and Volvo models. While Sirius XM has become standard software in many vehicles, people are still in love with their iPhones and iPods, so Apple adding a Spotify-like app among the others may give Apple the in-car edge it needs.
Pandora has 76 million monthly users, and it offers ad-free subscriptions costing $4.99 a month. However, the company relies on compulsory licensing deals for music, and this has created friction with artists and record companies. Beats has a better licensing setup -- especially with record labels like Universal Music Group being initial investors who stand to do well when the acquisition becomes final.
Spotify is the world's largest music streaming service, with more than 9 million users worldwide. The company offers a $9.99-a-month ad-free subscription option. Beats service is $9.99 as well. The marriage of Apple and Beats could produce a quality competitor to Spotify.
Foolish listening
In February of this year, Reuters reported that Spotify recruited a U.S. financial reporting specialist, adding fuel to the fire of speculation that the company was planning to file an IPO. At the time, the company was valued at $8 billion. While there has been no comment from the company, Spotify is the key player to watch for Apple -- even more so if it were to go public. Pandora would seem to come in at a close second, but analysts are speculating that the better move would be for companies like Google or Amazon to acquire streaming services like Pandora and Spotify -- or even Sirius XM.
Apple doesn't need Beats for developing headphone technology or the streaming service. Apple's main revenue driver has always been hardware -- iPods, iPhones, Macbooks, and so on. However, the company has also gained much from the music industry, including market opportunities for hardware and software. So although Beats may not seem like the best investment, Apple still stands to be able to take emerging technology and enhance it so that it outperforms its competitors over the long term. Hold on and see how this plays out.
