Why did Apple buy Beats by Dre?

$3 Billion is the confirmed price tag that Apple paid to Beats Electronics and Beats Music. It seems to be a purchase of contradictions. The iPhone design seems to clash with the flashy appeal of the Beats headphones, and the music streaming service of Beats is a fraction of the size of Spotify. But digging a little deeper, and the buyout starts to make sense.

Is it just Headphones?

After trying on a pair earlier this year, I am unimpressed. A typical headband-type set goes for around $170 at Best Buy and according to the New York Times, costs as little as $14 to make. Yet Beats has done something most brands would kill for, it's established market share. In a generation influenced by marketing, the Beats is to headphones what iPhones are to cellphones.

And here in come the endorsements. Starting from the founder and rapper Dr. Dre and music producer Jimmy Iovine, to hundreds of sports celebrities and actors. Its a magnetic attachment that the product endorses. It's the "famous-people-use-this" marketing style that has propelled this very mediocre headphones into stardom. And consumers really do buy the influence the brand offers.

Music Streaming

Spotify, Accuradio, Rdio, Pandora, Youtube playlists, a dozen more, and then Beats Music. There are many music streaming services available. All of them have their merits ranging from curated lists to automated playlists.

Let's start with what Beats Music did right: Professional Curation. No one makes playlists like the people behind Beats Music. The playlists seems to be a combination of matching algorithms and professional DJs blended in to create music that works with your taste. In comparison, Spotify's Radio attempt is a weak combination of music that should go together, but doesn't always.

But this is where it ends for them. Outside a great playlist, it doesn't offer more. The iPhone app interface seems gimmicky and limited. And if you already have a great playlist, importing it in is a tedious process. There is room to improve, but they will be playing catch-up to the industry top performer - Spotify. 

The 3 Billion Dollar Answer

The music streaming service paired along with the headphone and the celebrity endorsements can easily support Beats for the next 5 years. Apple brought them because they realized that there are things that you build, and things that you buy.

Apple launched their own attempt of managing music back in 2010 called Ping, and then shuttered it two years later. They also realize that they couldn't simply launch their own headphones and work their way up an existing market. Unlike mobile phones, stereo headphones have been essentially the same since 1943 (Wikipedia research went into this).

I guess at the end of the day, Apple realized that $3 billion was 1.8% of its $160 billion cash reserve. In exchange, they would get a product that would return the investment in 3 to 5 years, grow their subscriber base and allow Apple to add another product to their line-up.
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