Experts search for method to Apple's Beat madness

Is Apple after Beat's pricy headphones, the Beats Music subscription service, or both?

Analysts today struggled to explain why Apple might acquire Beats Electronics, the headphone maker and music subscription service operator, for $3.2 billion, as several reports claimed.

If nothing else, the diversity of expert opinion illustrated the difficulty in analyzing the famously secretive company, the several plays Apple might make with Beats' assets, and the inherent interest in a deal of such magnitude by the typically miserly firm.

"This would be the biggest deal ever by Apple, the first significant acquisition by [CEO] Tim Cook, and the first where Apple would likely want to keep the brand going, rather than absorb it," said Jan Dawson, chief analyst at Jackdaw, outlining some of the reasons the reports have struck a nerve among Apple observers.

Some analysts believe Apple wanted the trendy but expensive headphones Beats sells, others saw Beats Music, the $10-per-month music service that launched earlier this year, as the plum. Still others thought Apple is eyeing a two-fer that would immediately help a pair of revenue streams climb out of stagnation.

The deal was first reported Thursday by the Financial Times (subscription required), with other outlets quickly following, including the New York Times, Reuters and the Wall Street Journal. All cited anonymous sources, and said that while nothing has yet been inked, an announcement would likely be made very soon.

"I think Apple is primarily a hardware company and services are just a moat to increase customer loyalty," said Sameer Singh, an independent analyst who covers mobile technology at his Tech-Thoughts website. Singh was one of those who saw the deal's origins in Apple's attraction to Beats headphones, which cost hundreds and reportedly have huge profit margins. If that sounds familiar, it should: Apple uses the same model for many of its products, which command premium prices.

The bulk of Beats' revenue -- estimated at around $1 billion last year -- reportedly stemmed from its headphone sales.

"I don't think Apple was too focused on the streaming service. It's probably a 'nice to have' from Apple's perspective," Singh continued.

Wrong, argued Aram Sinnreich, a media professor at Rutgers University.

"The headphones would be nice to have, but they're not the reason for this deal," said Sinnreich. "This is part of the transition Apple must make to create stronger service relationships with its customers."

To Sinnreich, acquiring Beats makes sense only if Beats Music, the subscription service that debuted in January, is the primary reason Apple put billions on the table.

"It's very clear from the market that the music download business is stagnating and failing," said Sinnreich. "So it comes down to whether Apple wanted to build versus buy" a streaming service of its own.

Music subscription services, particularly Spotify, have eroded download sales as consumers increasingly switch to a rental model that gives them on-demand access to millions of tracks. Although Apple kicked off iTunes Radio last year, a free, ad-supported service that competes more directly with Pandora, it has received mixed reviews and gotten little traction among listeners.

Sinnreich believes that Apple thought it needed a subscription service faster than it could build one, and so went shopping. While it was unclear whether rights that Beats Music has acquired with record labels would transfer -- Sinnreich assumed they would if Apple's willing to put up $3.2 billion, others said Apple would have to renegotiate streaming rights -- Sinnreich pointed out that there is more to Beats Music than meets the eye.

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