Apple, Beats, and Content as Differentiation

by Ben Bajarin   |   May 28th, 2014

Moment’s ago, Apple confirmed they are acquiring Beats Electronics and, once the acquisition is approved, they will begin working on a roadmap together. In this Insider analysis, I share some perspective on the hardware side of the company. At the end of the article, I tease out how this deal may play into the future of entertainment. That is where I think the real pot of gold is in this deal.

Hollywood and the tech industry have never seen eye to eye. During my time working with labels, I realized this was front and center. They are two completely different industries with differing culture in every which way. Yet these two industries need each other to advance. Hollywood’s content wants to be digital, with a supporting business model, and be offered to the masses. Technology is the mechanism for taking it there.

Note Tim Cook’s remarks in this article:

“The ugly truth is that there is such a Berlin Wall between Silicon Valley and L.A.,” Mr. Cook said in an interview. “The two don’t respect each other, don’t understand each other.

“We think these guys have a very rare talent,” Mr. Cook continued. “We love the subscription service that they built—we think it’s the first one that really got it right.”

Rare talent to be sure. All things that sound very Apple-esque. Jimmy Iovine is one of the most powerful people in the entertainment industry and I am betting his vision goes far beyond music. But the pot of gold at the end of the rainbow could be content as differentiation. While I acknowledge this is a very hard long shot, and has been tried before, the kind of weight the Beats team has with decision makers has had not been a variable in many of the prior efforts.

What makes Apple’s products stand out is they are differentiated by hardware and by software. Much of their software runs on no other computers than their own. What if they can bring content into this fold? What if they can acquire exclusive deals, even if exclusive for short time windows, that are only available on their hardware and through their software? Then what if they do release lower cost phones in the $350 range? If you are in China, India, Brazil, Indonesia, and you are a fan of American music, movies, and even TV, would you pay $100 or $200 more for exclusive hardware, software, and content? Again, while I acknowledge the difficulty or “moon shot” of this effort, content (beyond apps) is an interesting differentiator if done right.

If Apple can bring the universe of Hollywood and consumer tech together it could be monumental, with many new sustainable revenue streams for all parties at a global level. Hollywood content is extremely popular in every major market across the globe. We can’t underestimate how valuable this content is at a global level.

Things like this are never easy and there are never any guarantees. If there is a bigger vision behind this acquisition on the future of entertainment in a global digital world then it will certainly be worth it. If my contacts in the entertainment industry are right in what they tell me about how powerful the team is, particularly Jimmy Iovine, then Apple may very well be in the driver’s seat for the future of entertainment. The next few years will be interesting to watch to see the fruit that comes from this deal.

Cross Platform
Another interesting tidbit is that the Beats service will be available on Android and Windows Phone. What makes this interesting is, for Android in particular, that service could serve as the first experience with an Apple product for hundreds of millions and soon to be billions of potential customers. I would argue that Apple paved the way for their future success in iPhone and iPad by bringing iTunes to Windows. It helped get iPods in the hands of millions of people who never owned an Apple product. Much great research exists that point out that once a customer tries one of your products they strongly consider more in the future.

What is Apple’s halo product for billions of mid-low end Android users that could sway them into the Apple ecosystem? Perhaps Beats Music, or even the headphones, are a step in that direction.

If you are a Tech.pinions Insider log in and see the continuation of this post on Understanding the Apple ecosystem and how they can harness the Internet of Things.

Ben Bajarin

Ben Bajarin is a Principal Analyst at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research. He is a husband, father, gadget enthusiast, trend spotter, early adopter and hobby farmer. Full Bio
  • Terry

    How does Beats differentiate itself from say, Spotify? Why would the industry favor Beats? Because of Iovine? What if Iovine dies tomorrow? I don’t see it with the subscription service. It’s not special. Iovine must be special, but in the end he’s merely an individual.

    The only thing I see is how Beats made headphones cool and charged a premium succesfully.

    • benbajarin

      Only time will tell what comes of this. But the content angle remains the most interesting to me at this point in time.

      • Terry

        I fully agree with the content angle, makes a lot of sense. But why does Beats qualify for that angle and not Spotify? Spotify has got the users and when you got the users, you got the leverage.

        • benbajarin

          ah, well that is because Spotify, Pandora, etc. just simply pay the labels for a basic catalogue. There is nothing unique they have negotiated. Apple has been able to do this so far, getting all kinds of pre-releases, exclusives etc.

          Think about it like DVD rentals. Netflix doesn’t get movie titles until quite some time after VOD to Comcast, other services, providers and the movie is released to physical DVD. This has everything to do with contract rights and money that was paid up front to secure certain rights.

          Imagine if Apple with the help of Iovine and probably some cash, can do the same and secure loads of exclusives on their service. Thus they have all the early access and if you use Pandora or Spotify you don’t get it until months after the release date.

          These are the kinds of things Apple could do should they go after this angle.

          • jfutral

            Pretty much every content provider—Spotify, Pandora, Netflix, Amazon, even Google, Comcast, and Clear Channel—is trying to make money from the content itself, either sales or ads. Apple is one of the few (only?) content distribution point that makes most of its money indirectly through devices and only has expressed that it mostly breaks even with music sales (although many companies would love to “break even” like that.) Apple is in a position, such as with temporary exclusives, they could easily afford to give an even greater cut than usual to the artist or copyright owners to make those exclusives more desirable. In this regard, beats is probably more like Apple than not. They only need to either make the music pay for itself, or even take a small loss, in order to sell more profitable hardware. Apple, with its vertical model, is uniquely positioned like no one else.

            I listened to your Cubed Podcast with Benedict Evans and I can’t remember who made a comment about music being unimportant and content no longer being king. I couldn’t disagree more. Music is and will always be important and content is always king. That is the culture we live in. That is a defining trait of culture, its music.

            Now it is just a question if Iovine and Dre are enough royalty to make hay.

            Joe

          • Defendor

            I really think the issue is size. The Netflix/Apples are the 800lb Gorillas and everyone is leery of getting in bed with King Kong because he might roll over.

            OTOH it is relatively easy for smaller players like Beats to score interesting contracts because they essentially are no potential threat or competition. They won’t potentially be brought up in other deals, etc…

            I expect Iovine is going to have a MUCH tougher time negotiating any deals going forward now that he is part of the 800lb Gorilla, and I would be fairly certain that all previously negotiated deals have an escape clause on the sale of the company.

          • Nevermark

            I agree! Apple’s iTunes was successful getting into music in part because they didn’t seem like much of a threat at that time.

            But music (and all kinds of media experience) have been important to Apple for a long time, so if they have the “disadvantages” of an overdog then they need the best media insider negotiators they can get. Looks like they just made progress on that.

          • jfutral

            “I agree! Apple’s iTunes was successful getting into music in part because they didn’t seem like much of a threat at that time.”

            Sort of, though, right? I mean the 800lb gorilla at that time was Napster. And the music industry was making NO money there. Apple wasn’t just not much of a threat. They were the music industry’s only chance at survival.

            Joe

          • Nevermark

            They wouldn’t have thought that when they signed with Apple. Apple was small, iTunes was only on Mac. For the music industry it looked like a safe experiment.

    • Kenny

      Who do you prefer to choose your music for you, and engineer or a DJ?

      Beats music is about Culture while Spotify is about technology.

      • aardman

        Or worse, have an algorithm pick your music, which is the worst thing of all. Especially algorithms that are based on customer purchase or listening histories. –Which means a convergence to the most pedestrian mean as the schmuck down the road with really awful musical taste gets as much weight as the discerning music aficionado.

        • Kenny

          most people do not understand how valuable good music is to a culture and also how nowadays the experience is broken due in huge part to technical issue

          Listen to music are the first things we do when we are sad or happy.

          people listen to music more than watching television. reading books, or play video games hence if Apple with the help of Jimmy Iovine and Dr Dre can Fix it, it will be a revolution.

  • Defendor

    To me this signals a directional shift at Apple from an Engineer based culture, to a Celebrity based culture.

    I can’t say that is directional shift that I like.

    • jfutral

      I’m curious as to what part of media sales (i.e., pretty much everything you can buy in iTunes) do you think is not celebrity based?

      Joe

      • Defendor

        Apple is first and foremost a HW/SW company. iTunes is just support for the HW sales.

        • jfutral

          That’s the perpetual existential question about Apple, I suppose. I kind of agree with you, although I think that is a bit too reductionist to say iTunes is just support. That’s why I don’t think Apple gains anything by making iTunes available on Android. Itunes is a driver of sales. Where would the iPod, and by extension iPhone and iPad, be if iTunes didn’t open up to the Windows platform? So it is a bit more strategic than simply support. But opening it to Android doesn’t drive anything except maybe iTunes sales. That’s a great idea for Amazon, but pretty much means nothing to Apple.

          But Apple has always been more than just hw/sw. They have always been about what one does with the sw/hw. iTunes isn’t just support, iTunes (as software, BTW) plays a vital role in giving that hw a reason. Take away iTunes and Apple is just another Dell or HP. iTunes is a hinge-pin to the ecosystem. These days Apple is just as much an ecosystem company as it is hw/sw.

          Besides that music has always been important to Apple, Iovine (hopefully) gives Apple a strategic person to help keep that ecosystem a differentiator, as Ben points out. But as he also says, only time will tell, if that is what happens.

          Joe

        • Shameer Mulji

          That is a bit simplistic. Apple is a software platform provider that happens to wrap its platforms in pretty hardware. Most of what Apple has been doing the last few years and even more recently is providing platforms that other 3rd party developers and accessory makers can piggyback off of.

    • Kenny

      Music has always been about Celebrity culture first, not technology.

  • Kenny

    I congratulate Tim Cook on this Deal, very smart move.

    the strength of a leader is to know how to find the best to complement its weakness, which is exactly what Tim Cook have done with this deal.

    I believe the next iPod will be an iWatch with a beats headphones and the best streaming service on the market.

  • Space Gorilla

    A few thoughts… this deal was always more about the music service and Iovine (as well as Dre). A great music service with excellent curation and discovery has a lot of value. It’s no accident that Apple listed the music service first in the announcement (and with great praise). And as I’ve said before Iovine seems to bring an almost Jobsian quality to the table re: dealmaking. With both the music service and future deals, Apple gains value in content.

    On the subject of the headphones, I’ve never tried Beats but they say the goal is to replicate the sound of playback in the recording studio, which would be pretty cool. I’ve done quite a few recording sessions over the last ten years, and there’s something different about sitting in the control room on a comfy couch listening to the music, it feels warmer, deeper, richer. Anyone who has been in a recording studio knows what I’m talking about. It sounds different. Now, maybe it isn’t technically accurate, but who cares, it sounds good. Poseur audiophiles that can’t tell a sharp from a flat can kiss my ass, music sounds different for lots of reasons, from the venue to the mic placement to the amps to the engineering, and on and on and on. There is no one true replication of the sound experience. I’ll have to test Beats headphones next time I’m in a place that sells them, hear for myself, find out if they’re actually good or not.

    Finally, what if the long term plan is for Beats to develop its own music label? Once again, content value. And what artist wouldn’t love a 70 percent cut of their music revenue? Artists get screwed right now. A few years back a couple members of the Headstones (great Canadian rock band) were at a gig I was playing, so I chatted with them after, they couldn’t afford to buy houses, the record company took almost all the revenue they made, they were pretty much broke.

    Apple already has the distribution, but it feels heavy handed for Apple to do a label. Maybe Beats could do it as a subsidiary. Perhaps there are hurdles I’m missing, but it seems like a good idea.

  • Andrew F

    In tech land, the reaction to this deal is obviously all over the place, but in Hollywood the reaction to this deal is overwhelmingly positive and hopeful. I think the people in tech who are drooling over the idea of Jimmy Iovine being Apple’s negotiating bulldog are going to be disappointed. I take Apple’s statement at face value: this is about doing right by music, and it reminds me that the most exciting thing Apple does in music is the iTunes Festival.

    The negligible revenue Apple generates from music that techies so easily dismiss is actually an enormous amount of money that means a lot to the music industry.