Why Apple might want to buy Beats, and what it could mean for you

Last night, the Internet was buzzing with news that Apple was in talks to purchase Beats Electronics, the company behind the popular Beats by Dre headphones and the newer Beats Music streaming service.

So why would Apple, already incredibly successful in its own right, want to make this move, which would be the largest acquisition in its history? And more important, what does it mean for you? Here is my take on what might happen if the deal goes through.

Premium headphones and wireless speakers

Apple's headphone business right now is largely a replacement business; if you lose or break the pair that comes with your Apple device, you just get another set. Owning Beats would not only give Apple access to the higher-margin premium headphone segment but would also do so with the preeminent brand in the fastest-growing headphone category, models priced $100 or more. According to NPD data from early this year, Beats had the No. 1 market share (in dollars) in stereo headphones in 2013 Apple was No. 5. In this category, the top five companies account for 56 percent of headphone sales.

Beats has diversified into another audio growth category where Apple has little presence—wireless speakers, with the Beats Pill and other models. Beats also had a licensing deal to include Beats electronics in HTC phones, though it ended last fall. Apple could include the Beats technology in its iPhones and iPads, or perhaps create a step-up line that uses the technology and branding as an upsell to a premium product.

The takeaway: Beats can help Apple improve the sound quality of its hardware, and allow for tighter integration of headphones and wireless speakers with iTunes and whatever form the Beats Music service takes. We'll have to see whether Apple simply relies on the Beats brand in these audio categories, or whether it will also offer Apple-branded products. We'll also be watching to see whether Apple leverages the Beats brand in its long-rumored Apple television. Having a premium Audio by Beats sound system would be one way of differentiating the set, especially at a time when most TVs can't deliver a great audio experience.

Streaming music

Apple is by a large margin the most successful music download service, but it's clear that the industry is shifting to a streaming model. Launched in January, Beats is a relative newcomer compared with competitors such as Pandora and Spotify. In addition to having some nice, unique features—it uses human beings, not algorithms to build some wildly creative playlists, and has a number of well known musicians, such as Trent Reznor, curating some—perhaps the more important issue from a business sense is that it already has deals in place with the major labels, which is a difficult, time-consuming, and often contentious process.

The takeaway: Apple will immediately have a credible contender with Spotify and Pandora. How Apple chooses to approach this business will be interesting. We don't expect radically lower pricing—Beats Music is now $10 per month, within the ballpark of what other services charge—but Apple could offer promotions and incentives that tie its hardware to its services. We'll also be looking to see if Apple believes there should be a more limited, but free, version of Beats music. Finally, we wonder how Beats Music will coexist with Apple's current iTunes and Itunes Radio services.

Before you buy, check our headphone buying guide and Ratings.

Talent

Apple clearly appreciates talent and creativity, and Beats has some proven leadership. In addition to its two high-profile executives, the artist Dr. Dre and music mogul Jimmy Iovine, Beats also has Ian Rogers, who went from showing the Internet to the Beastie Boys back in the '90s to heading Yahoo Music, and Julie Pilat, who was head of content at Clear Channel, the giant radio and events network. And the former Gang of Four punk bassist Dave Allen—who's had music-tech and business development stints at eMusic and Intel—is on board as the company's artist advocate.

What's less clear is the kind of tech talent pool Apple would be acquiring beyond these executives. The Beats headphones were really engineered by Monster, which had a contract that foolishly let Beats walk away with all the intellectual property—the design, engineering, and the brand rights to the Beats headphones—when Beats decided not to renew its contract in favor of HTC taking a majority stake in the company. (Beats bought back those shares last year.) But Beats has proven it can develop a great music app, and with Apple's backing, it could soon be a formidable contender in streaming and downloads.

The takeaway: There's less immediate impact here, especially for consumers, since it's not clear how Apple will structure the leadership teams. The Beats team has been fairly autonomous, so it will be interesting to see how Apple integrates management responsibilities and roles. But if the deal goes through, the two areas I'll be watching most closely are how Beats' and Apple's technology and design teams will interact and affect each other, and what new products may emerge as a result of the two teams collaborating.

And maybe this deal will finally result in the new Apple television we've been hearing about for two years finally coming to market.

—James K. Willcox