Apple Announces $3 Billion Beats Deal

As expected, Apple (AAPL) confirmed its intention to buy Beats Electronics for some $3 billion, the largest deal in the company’s long history and one surrounded by questions over what the IT heavyweight plans to do with the music company’s profitable, high-end headphones business and its smallish music subscription service.

Beats founders Jimmy Iovine and Dr. Dre come along with the deal, as reported. Under terms of the agreement, Apple will pay $2.6 billion in cash and the remaining $400 million in stock. The companies expect the deal, which is subject to regulatory approval, to close in the third quarter. Beats rang up $1.3 billion in sales in 2013.

The initial buzz had the deal valued at about $3.2 billion but the New York Post reported that Apple’s due diligence uncovered the fact that Beats Music had only 111,000 subscribers to its streaming service as of March. By comparison, Spotify has some 10 million paying subscribers in addition to another 30 million free users.

Most observers expected Apple to announce the Beats purchase at its upcoming Worldwide Developers Conference in San Francisco starting June 2, but perhaps with word already out Apple believed timing the news beforehand was the better choice.

From the way the principals described the deal, it sounded more like a romance than a business deal.

“Music is such an important part of all of our lives and holds a special place within our hearts at Apple,” said Tim Cook, Apple’s chief executive. “That’s why we have kept investing in music and are bringing together these extraordinary teams so we can continue to create the most innovative music products and services in the world.”

Iovine, who has a history with Apple through his relationship with late founder Steve Jobs, said, “I’ve always known in my heart that Beats belonged with Apple. The idea when we started the company was inspired by Apple’s unmatched ability to marry culture and technology. Apple’s deep commitment to music fans, artists, songwriters and the music industry is something special.”

Some of the more obvious conclusions from the deal is it gives Apple a highly profitable new product line with Beats’ headphones and a ready-made music subscription business. Moreover, with the pace of iPhone sales slowing, the deal could deflect questions for a while about Apple’s ability to deliver new, innovative products. And, sales of digital music, an Apple staple, recently have ebbed in favor of music subscription services, perhaps making Apple’s timing to enter that business more calculated than it appears.

Two big questions, of course, are: Will Apple leverage Beats Music to build a streaming service for content such as movies and television? And, what will become of iTunes Radio, Apple’s free streaming music service?