Apple reportedly buying Beats

beats audio and apple 520wIn what would be a blockbuster $3.2-billion deal that would re-shape the ownership structure of streaming music, Apple is reportedly in final talks to acquire Beats Electronics, which includes Beats Music. Beats Music opened its subscription service in January, partnering with AT&T as a bundled component of the telecom giant’s phone service.

If it plays out as rumored, the acquisition would vault Apple into the music-subscription industry, adding a third pillar to its music business which currently includes the iTunes Music Store (paid downloads) and iTunes Radio (non-interactive streaming). In March, a rumor floated that Apple was considering adding on-demand music streaming to its ecosystem, with no word of whether the company would build it or buy it.

In addition to speed-to-market, the acquisition would be interpreted by many as a sad sign of Apple’s fall from leader to follower in digital music. The iTunes Music Store, launched in 2003, revolutionized music consumption in the U.S., and significantly altered the music-product business for labels and artists.

“In my opinion, ironically, I believe the increasing capacity of the iPod over the years made the decline of the iTunes music download store inevitable,” noted Kurt Hanson, Founding Editor of RAIN and founder of AccuRadio. “Once your shirt-pocked size music player was able to hold 10,000 or more songs, it became economically unreasonable that you could fill it with songs for which you had to pay $1 each.  Today, now that an always-Internet-connected iPhone is your music-listening device, an on-demand streaming service may be a better solution for consumers.”

Jennifer Lane, President of RAIN Summits, hit the same theme more succinctly: “This is a white flag that downloads and iPods are done.”

While the focus here is on the music-service acquisition, that part is arguably the less certain investment, even if adding on-demand streaming is mandatory to Apple’s current strategy. The other major component in Beats Electronics is the music accessory business, spearheaded by the wildly popular branded headphones. The New York Times reports an analyst estimate that a pair of high-end headphones can cost as little as $14 to build; prices for Beats headphones rise into the hundreds of dollars.

Before knowing the outcome, the most certain part of this rumor is that Apple is talking to Beats Electronics about an acquisition in the first place. That reality alone underlines the fact of fading music downloads, consumer migration to music access, and the uncertainty of Apple’s dominating position in digital music.

Brad Hill