On Thursday night shortly after news broke that Apple was close to acquiring Beats Electronics for a reported $3.2 billion, former Myspace and MTV executive Jason Hirschhorn tweeted, “Jimmy Iovine could sell fire to hell. Or Beats to Apple.”
As Steve Jobs famously said, “People don’t know what they want until you show it to them.”
Apple created a market for digital music when there was none; Beats created a market for fashionable, high-end headphones that no one actually needed, but everyone coveted.
For $3.2 billion, Apple will be purchasing a team that can expertly sell headphones that cost a reported $14 to make for $200 and a billion dollar a year business with youth marketing expertise. Apple has acquired 24 companies in just the last 18 months, but this would be Apple’s biggest acquisition ever (though $3.2 billion still only accounts for 2.3% of Apple’s cash).
For some perspective: in 2013 total US Recorded music revenue was $6.996 billion and streaming music revenue in the U.S. grew 39%, generating $1.4 billion. Google bought automated home product company Nest for $3.2 billion in February while Facebook acquired the virtual reality headset company Oculus VR for $2 billion in March.
And for a comparable sum, Apple is essentially acquiring a hardware line with a young audience and high profit margin that also happens to have a music streaming service.
Jobs was notoriously skeptical of the streaming music business. When asked how he viewed the music subscription model in a 2004 interview with Billboard on the one year anniversary of iTunes, Jobs said:
“We have more discussions with the content owners than anyone else. This is something we’ve pursued right from day one. If for $10 a month you could put 10,000 songs on your iPod, we’d like to know about it. But you can’t, because there’s no business model that makes sense for the labels, or the subscription fees you would have to pay are ridiculous. It doesn’t matter what kind of technology we develop (…) just because you build it doesn’t mean they will come.”
Jobs echoed these thoughts in an interview with Rolling Stone in 2003, “The subscription model of buying music is bankrupt.” he said. “I think you could make available the Second Coming in a subscription model, and it might not be successful.”
Continuing, “The first record company to really understand this stuff was Warner. Next was Universal. Then we started making headway. And the reason we did, I think, is because we made predictions. And we were right. We told them the music subscription services they were pushing were going to fail. MusicNet was gonna fail. Pressplay was gonna fail. Here's why: People don't want to buy their music as a subscription. They bought 45s, then they bought LPs, they bought cassettes, they bought 8-tracks, then they bought CDs. They're going to want to buy downloads.”
And to his point, so far streaming music has had a difficult time gaining a mainstream audience in the U.S. Even with a super-bowl ad and an AT&T partnership, Label sources estimate to Billboard that the Beats Music subscriber count is in the "low six figures," others reporting around 200,000 subscribers. Spotify last reported 2 million paying subscribers in the U.S. and has yet to turn a profit. In contrast, Apple still has 800 million iTunes account holders, but digital track sales are down a staggering 12.5% in Q1 of this year.
In 2011, Hirchhorn described a meeting with Steve Jobs to Cnet, “I give him my views on the future of music, and I was always big on subscription services. He listened and then he said, "Jason, you seem like a nice guy, but your ideas are all wrong."
Iovine explained a similar experience to Inc. magazine, “I’ve been meeting with Apple about subscriptions since 2004. Every two months. I think they’re an incredible company, and I wanted them to do subscriptions.”
"Steve Jobs was the first to marry technology directly with popular culture. I thought, 'Wow, technology is the new artist.' They're making a beautiful white object with all the music in the world in it, I'm going to make a beautiful black object that will play it back,” Iovine says.
In the same interview with Inc. Dr. Dre adds, "Apple was selling $400 iPods with $1 earbuds. 'Man, it's one thing that people steal my music. It's another thing to destroy the feeling of what I've worked on.”
In an interview with All Things D, Iovine said, “Steve called me in once. He said, “You know something, you should feel really good. You’re the only guys from software that ever built a piece of hardware successfully.” That means that we can be the guys who cracked this code as well. Because we live in both worlds. We’re actually arguably better at this than at hardware. You know why they call it hardware? It’s really hard.”
Music has never really been the product—consumers buy containers. Whether that’s a turntable, iPod, wireless speaker or a pair of cool looking headphones: It’s the hardware that's coveted most.
In the early 2000's, dancing silhouette TV commercials and iconic white earbuds made owning a $399 iPod fashionable. Over a decade later, the concept of paying $10 a month for access to all of the worlds recorded music just isn't that exciting or cool to teens who grew up with YouTube.
If anyone can make wearables or subscription music services coveted and cool to a mainstream audience, it’s the combination of Jimmy Iovine and Apple. The ability to sell people what they don’t know they want—perhaps that is what is worth the $3.2 billion. And perhaps, too, Jobs would have realized this.