Apple to Buy Beats for $3 Billion

As expected, Beats co-founders Iovine and rapper Dr. Dre will join Apple as part of the acquisition of the music streaming and audio equipment company. They should prove key in forging relationships with an industry that historically viewed Apple with suspicion but in recent years has pressed the iPhone maker to do more on subscription services, a market expected to eclipse song downloads in the long run.

(Also see: Apple Reportedly Eyes Beats in What Would Be Its Biggest Acquisition Ever)

Iovine's music industry relationships could ease notoriously difficult licensing negotiations for a future streaming service, recording industry executives say.

"The ugly truth is that there is such a Berlin Wall between Silicon Valley and LA," Apple Chief Executive Tim Cook told the Wall Street Journal in an interview. "The two don't respect each other, don't understand each other."

While the price tag represents an iota of Apple's roughly $150 billion cash hoard, it marks a significant departure for a company that for two decades has stuck mainly to acquisitions worth hundreds of millions of dollars. The deal is seen as Apple's effort to jump-start an uneven attempt to make headway in music streaming, the fastest-growing segment of the market, as iTunes sales decline. Pandora Media Inc and Spotify have raced ahead while Apple's eight-month-old iTunes Radiohas not made much of a dent.

With music downloads in decline, record labels have also put pressure on Apple to get its act together on streaming. The record labels hope Apple can turn Beats Music into a strong competitor to Spotify and other streaming services, sources familiar with the matter have said.

"Apple created the digital download business and has had an amazing run, but the industry is going in the streaming service direction," said Daniel Weisman, a manager for Roc Nation who represents bands.

The transaction is expected to close in the fourth quarter, Apple said on Wednesday. Shares in the company stood largely unchanged in after-hours trade.

Gaining cool
Apple is also gaining a line of high-end headphones popular with a young urban demographic, bumping up its "cool" factor, analysts have said. But industry executives say the company was most impressed with Beats' five month-old music service.

The market as a whole is burgeoning. Streaming subscriptions jumped 51 percent in 2013 to $1.1 billion, out of $15 billion spent on music, according to the International Federation of the Phonographic Industry. Meanwhile, downloads slipped 2.1 percent.The other prize is Beats' co-founder himself. Iovine, 61, is best known as the co-founder of Interscope Records, a rap music pioneer that branched out to include acts like Lady Gaga and U2.

"He founded, and for more than 20 years has led Interscope, a label that has consistently been in the forefront of the music business," Lucian Grainge, chairman of Universal Music Group, said in a statement on Wednesday. "We ... look forward to enhancing our partnerships with Apple and Beats for many years to come."

© Thomson Reuters 2014