Apple bet big on the future of headphones
On May 28, 2014, Apple officially announced that it had made the biggest, most expensive acquisition in the company’s history. But the company Apple bought was not a competitor, nor was it a traditional tech hardware or software company whose flagship products could be integrated into Apple’s lineup of iPhones, Mac computers, or iPads. Instead, Apple chose to spend $3 billion on Beats Electronics, the company started by music industry mogul Jimmy Iovine and legendary rapper/producer Dr. Dre that was famous for its popular, stylish, high-priced Beats by Dre headphones.
It was a move that left countless Wall Street analysts and tech commentators scratching their heads while repeating the already common refrain that Apple was lost and doomed without founder Steve Jobs, who had died just three years earlier in 2011. Why on earth would Apple spend so much money on a company whose audio products were widely derided by audiophiles and reviewers for lacking good sound quality while also being vastly overpriced? Was Apple signaling a change in philosophy away from selling best-in-class, iconic hardware in favor of fashionable, high-margin junk? Or was Apple simply confirming what critics had been saying for years, that Apple has always been about style over substance, utilizing clever marketing to trick the vain and ignorant into spending too much for attractive but sub-par hardware that “serious” users would never touch? Before the ink was even dry on the contracts, many were already calling the deal a mistake and a failure.
Even six years after the acquisition, there seems to be a sentiment that, while perhaps not a total failure, that Apple has made little use of Beats. On a recent episode of the Vergecast podcast where the hosts were discussing Apple’s recent purchase of the weather app Dark Sky, Verge editor-in-chief Nilay Patel held up Beats as an example of how Apple has squandered certain past acquisitions. “Apple’s history with acquisitions is actually not wonderful,” Patel said. “Remember Beats? They seem deeply respected inside of Apple. They bought the Beddit sleep tracker. No one’s heard from them again. Shazam! Apple bought Shazam! What happened to them? So their history of these acquisitions is a little jumpy.”
But I think the claims that Apple’s acquisition of Beats was a mistake, a failure, or a missed opportunity couldn’t be more wrong. Not only has Apple surely made its $3 billion back in the past six years, but they’ve almost certainly made way more than that and will continue to generate billions off Beats for the foreseeable future. And with Beats releasing more products enhanced with Apple’s proprietary technology, we are now getting a better idea of Apple’s plans for Beats, and why the $3 billion Apple spent on them is looking more and more like a bargain.
Beats Was Already Profitable And Popular
When Apple bought Beats in 2014, Beats wasn’t some startup hoping to someday turn a profit, nor were they a dying company that could be sold off for parts, patents, and intellectual property. Beats was — and continues to be — perhaps the most profitable, popular, and recognizable headphone brand in the world, capturing 64% of the market for headphones over $100 in 2012. In 2013, Beats was estimated to have earned $1.5 billion in revenue and had a stable of world-famous musicians (particularly rappers) and athletes as paid brand ambassadors, with even more providing free, invaluable advertising and product placement by being photographed using Beats headphones in their everyday lives. With their headphones’ vibrant colors, focus on fashion, and iconic “b” logo, Beats actually made headphones cool and aspirational. For most young people, Beats by Dre were the only headphones they wanted and the only ones that mattered. Because of smartphones and other mobile electronics, I would guess that most people today would choose a good pair of headphones over an equally (or even more expensively) priced home stereo system.
If Apple had bought Beats and then left Beats to operate completely independently with no input or assistance from Apple, it still would have been a profitable investment that would have earned back the $3 billion Apple spent for Beats within a few short years. And Beats probably would have continued to grow in size, popularity, and influence since there really isn’t another headphone company that can compete with Beats when it comes to brand recognition, cultural clout, or profits aside from Apple with their AirPods. So put together, Apple is now undoubtedly the world’s most profitable headphone company.
Headphones Are More Important Than Ever
When Apple announced that they were buying Beats in 2014, I was among the many who didn’t completely understand Apple’s objective. But when Apple, to the chagrin and rage of tech pundits and millions of consumers, announced two years later that they were eliminating the headphone jack from the iPhone 7 and most likely all future iPhones, Apple’s decision to buy the world’s most popular and profitable headphone company made complete sense.
But what I didn’t appreciate at the time — and which has become increasingly clear since then — was the bet that Apple’s Beats acquisition was making on the increasing importance of headphones in the smartphone era.
Headphones have always been integral to the modern smartphone. Apple, who correctly realized that smartphones would ultimately replace their ultra-successful iPod product line, knew this better than anyone. When Jobs unveiled the first iPhone in 2007, he emphasized that being “a widescreen iPod with touch controls” was one of the iPhone’s three most important functions. Headphones would continue to be required to access one of the iPhone’s core features.
Now, thirteen years later, we consume way more content with audio than was even possible in 2007 when wireless data network speeds were at a crawl and content was more limited. Since then, podcasts have exploded in popularity; streaming music providers give us instant access to nearly every song ever recorded; smartphone games have become a multibillion-dollar industry; video on YouTube, Instagram, Facebook, TikTok, Snapchat, etc. has become a major cultural force; and LTE networks along with dozens of video providers have made it possible to stream HD content from almost anywhere. Many of us today spend as much or more time listening to our phones as we do looking at them, and it seems clear now that Apple knew audio would become increasingly vital to the expanding smartphone experience.
Yet for the entire history of personal audio going all the way back to the Sony Walkman in 1979, the vast majority of users have been content to use whatever headphones came included with their devices, which were almost always flimsy, ugly junk with poor sound quality that were designed to do the bare minimum for the lowest possible price. Amazingly, Apple was able to turn this to their advantage with the white earbuds that came with every iPod, which Apple made iconic by highlighting them in a long-running ad campaign for the iPod that has become the stuff of marketing legend. Those white earbuds surely taught Apple a big lesson: while our devices remain hidden from view in our pockets, headphones can not only signal what kind of devices we have, but can also signal our values (like love of music) and be a fashion accessory by themselves.
Beats had already proven that there was a large non-audiophile market for expensive headphones, provided they had some style, personality, and good marketing. Apple knew that headphones and audio would continue to increase in importance for smartphone owners — which is basically everyone.
Wireless audio via Bluetooth was gaining momentum in 2014 and was the logical next step for personal audio, but it was still beset by high prices and connectivity/reliability issues. Apple already had ideas for how to solve Bluetooth’s biggest problems (more on this later), and by abandoning the headphone jack in the iPhone 7, Apple would hasten the adoption of and market for Bluetooth headphones. This would help set off a once-in-a-lifetime upgrade cycle as consumers moved from the corded headphones that had been their only choice for the entire history of personal audio to more expensive Bluetooth ones. And when that supercycle happened, Apple would own the most popular, profitable headphone maker in the world.
It was like buying the world’s most profitable hand sanitizer company right before the coronavirus pandemic.
Turning Beats Music Into Apple Music
Steve Jobs famously was very against the idea of streaming music. “People want to own their music” Jobs said in 2007, not “rent” it from a monthly subscription service. It’s an idea that makes a ton of logical sense, and purchasing tracks was also the model that Apple’s popular, profitable iTunes music store was built upon. But as correct as Jobs’ thinking might have been at one time, it delayed Apple’s entrance into the streaming market, giving Spotify a huge early-mover advantage that positioned them as the default music streaming service in the same way Netflix is for video.
By 2014, Apple was way behind when it came to music streaming. So to make up a lot of ground quickly, Apple bought Beats, which had launched its Beats Music streaming service just a few months before being acquired by Apple. Some have speculated that Beats Music was the primary reason Apple bought Beats in the first place, with the headphone business just being a profitable ancillary perk. According to Apple CEO Tim Cook, it was Beats Music’s focus on curation and the emotional response it elicited that made it stand out from other streaming services.
Could Apple have built Apple Music from the ground up with their own engineers? Certainly. Would this have taken more time and given Spotify an even bigger opportunity to cement themselves as the one dominant streaming music service? Absolutely.
Currently, Apple Music is estimated to have close to 70 million paid subscribers, which is over half of the 124 million paid subscribers Spotify announced at the beginning of 2020. Considering that Spotify launched in 2008 and Apple Music started in 2015, Apple has made up considerable ground in a relatively short amount of time. It’s hard to know exactly how much money Apple is making off these subscribers since a single subscription costs $10/month, the Apple Music family plan can include up to six users for $15/month, and Apple also offers $5/month student subscriptions. But if we estimate that each of those 70 million subscribers is worth $4/month, that means that Apple will make over $3.3 billion off Apple Music in 2020 — or about the cost of buying the entirety of Beats Electronics.
An Acquihire For the (Streaming Music) Ages
Including Beats’ headphone business and Beats Music, the third factor Cook cited for buying Beats was talent, particularly that of Beats cofounders Jimmy Iovine and Dr. Dre.
But Iovine and Dre are way more than just two guys who started a successful headphone company. Iovine has been the recording engineer and producer for some of the biggest names in rock, including Bruce Springsteen, Tom Petty and the Heartbreakers, Stevie Nicks, U2, John Lennon, the Pretenders, and Patti Smith before starting his own successful label, Interscope Records. Dr. Dre is true rap royalty, starting the gangsta rap genre with his group N.W.A., pioneering the west coast/G-funk sound, founding Death Row Records, and becoming the most important and influential producer in hip-hop by shepherding the careers of artists like Snoop Dogg, Eminem, 2Pac, 50 Cent, and Kendrick Lamar. And not mentioned by Cook was Trent Reznor, the singer/songwriter/producer of Nine Inch Nails, who was brought in to Beats as chief creative officer in 2013 to launch Beats Music along with TopSpin Media founder Ian Rogers.
All three of these men are bona fide titans of the music world that any company interested in music would be overjoyed to have on their team. But unique among all three is their deep interest and concern for how music is discovered and listened to. In a 2014 interview at the ReCode/DeCode conference, it was revealed that Iovine had been working behind the scenes with Apple for years to ensure that the digital compression of music files did not rob songs of their soul and emotion, and that Iovine believed that human curation, not algorithms, was the only way that consumers could get value from streaming services offering tens of millions of songs. Dr. Dre started Beats out of frustration that his children were experiencing the music he had slaved over through the tiny earbuds that came with their iPods and smartphones. And Reznor, with his wide-ranging musical influences, was a firm believer that intelligent human curation of streaming services could be “like having your own guy when you go into the record store, who knows what you like but can also point you down some paths you wouldn’t necessarily have encountered.”
So not only do Iovine, Dre, and Reznor know the music world both as creatives and industry veterans, but are also keenly aware of the issues facing the music industry today when it comes to finding great artists and connecting emotionally with music. If there is anyone who could get a streaming music service off the ground, differentiate it from its competitors, and make it truly an asset to users, it would be these guys.
What Apple Brings to Beats
Several years ago, I decided to see what all the fuss was about and tried on my first pair of Beats headphones at an Apple store. In a word, I thought their sound quality was garbage. I couldn’t get over their bass-heavy tuning — a Beats signature — and when I listened to some of my favorite songs that I knew very well, there were often sounds that were muffled that I knew were supposed to be more prominent. I couldn’t figure out why someone would want to use headphones that made music sound so different from what the artist intended. After a minute or two, I concluded that Beats headphones were for dummies who valued fashion over sound quality and were willing to pay exorbitantly to look cool.
But over the years, I’ve become more understanding and charitable towards Beats headphones, especially after receiving two free pairs (Solo3 and Studio3) with the purchase of Apple hardware as part of Apple’s back-to-school sales. While I’m still not a fan of Beats’ tuning, I now get that Beats headphones are not trying and failing to create the kind of flat, even reference sound audiophiles desire. Instead, Beats is trying to create the booming, bone-rattling, distortion-free bass prized by listeners of rap, hip-hop, and electronic music. They’re trying to replicate the kind of sound you’d hear at a club or blasting from an expensive car stereo system, not from perfectly-calibrated studio monitors. Beats’ sound isn’t a mistake, but a choice aimed at a younger, hipper demographic and the music they listen to.
After living with Beats headphones for several years now, the sound is definitely something I can live with and even appreciate when listening to certain types of music (I’ve also heard that newer Beats headphones like Powerbeats and Solo Pro are tempering the bass somewhat). And when you throw in the fact that I paid nothing for these headphones and that they’re comfortable, well-built, and have the added benefits of Apple’s custom H1 and W1 wireless chips (which I’ll get to later), I’m more than happy to have and use them, especially when traveling or watching movies. And when it’s time for me to get another pair of on- or -over-ear headphones, there’s a good chance that it will be timed with the purchase of more Apple hardware during their back-to-school sale.
I’d say that my experience reveals a lot about how Beats and Apple benefit from each other.
I used to think that Beats headphones gave you nothing for the hefty premium charged for them. But after joining Apple, Beats headphones received a huge advantage over every other headphone maker: Apple’s H1 and W1 chips, which initially debuted in the Apple Watch and AirPods before making their way to the Beats line. With these chips (and future ones to come), Apple is essentially providing next-generation Bluetooth performance today, delivering on the promise of Bluetooth in a way that even the makers of Bluetooth can’t seem to fulfill. With its wireless chips, Apple made the initial pairing process a one-tap breeze while automatically propagating your pairing information to all your other Apple devices. The chips also increased battery life, range, connection stability, and enabled always-on “Hey Siri” support. Apple has also filed patents hinting that future headphones could have health-tracking capabilities that would almost certainly rely on its W-series chips.
So now, vastly improved Bluetooth performance is a selling point for Beats headphones. And having used Beats headphones as well as AirPods for a few years now, I wouldn’t want to go back to the flaky, unreliable, inferior variation of Bluetooth that all other Bluetooth headphones are stuck with. This is a huge advantage for Apple and Beats.
For the past few years, Apple’s back-to-school summer sale has offered free Beats headphones with the purchase of Apple hardware. This means that millions of young people who might be getting their first computers might also be getting their first taste of headphones with Apple’s proprietary wireless technology. If these young people are like most people, they’ll be loathe to go back to something inferior after they’ve experienced a superior alternative. As long as Apple keeps improving on Bluetooth and adding new and useful features to its headphones while standard Bluetooth continues to overpromise and underdeliver, these young users may end up buying Apple/Beats headphones for as long as they own Apple products. If the speculation is true that a pair of Beats headphones that retails for $200-$300 only costs around $20-$40 to manufacture, that’s an awful lot of money to be made over a customer’s lifetime, even if they get their first pair of Beats for free.
With Apple’s W-series chips, Beats headphones and AirPods are now the likely default wireless headphones of Apple’s nearly one billion active users. While Beats headphones are popular, they’ve never had access to a potential customer base like that. And the more headphones Beats sells, the more money Apple makes.
Apple and Beats Aren’t Competing (Yet?)
Some tech writers have claimed that Apple is actually competing with Beats by making AirPods and supposedly planning to make their own Apple-branded over-ear headphones. Others have claimed that Apple eventually wants to get rid of the Beats brand, preferring that users be seen wearing headphones with an Apple logo than Beats’ “b”.
I think the idea of killing off the Beats brand is nonsensical, and 9to5Mac has confirmed through a source at Apple that they have no such plans. Why on earth would you buy the most successful, beloved, well-recognized brand in premium headphones worn by some of the most popular musicians, celebrities, and professional athletes around the world, only to destroy it? Apple and Beats have two very different brand identities that are not at all interchangeable, so the idea that fans of Beats would easily move to Apple-branded headphones seems far from likely. If Apple makes money off of every pair of Beats sold, I don’t imagine they care very much whose logo is on them. Beats are also worn by a large number of Android users who might not know that Apple owns Beats but would probably not want to wear headphones with an Apple logo on them.
In any case, there’s no good reason to eliminate the Beats brand because I don’t see Apple and Beats headphones as being in competition with each other — at least not yet — because Beats does things with their headphones that Apple would never do. Beats not only makes their headphones in a range of colors and patterns, they’ve taken many queues from the sneaker and fashion worlds, like their NBA Collection in six team colors, collaborations with brands like Disney and Fendi, and special editions with celebrities like Lady Gaga, Neymar, LeBron James, DJ Khaled, and Kylie Jenner. In comparison, both styles of AirPods come in exactly one color — white — even though Apple could surely make a mint by offering them in different colors. But Apple would rather that white AirPods be iconic and instantly recognizable, while Beats sees value in their headphones being more personal and individually expressive.
While AirPods have the sweat-resistance to be suitable for exercising, they aren’t nearly as rugged or secure-fitting as Beats’ Powerbeats line with its over-ear hooks and longer battery life for extended workouts. In the ad for the truly wireless Powerbeats Pro, we see athletes doing gymnastics, skateboarding, rock climbing, and other head-shaking activities that would possibly send AirPods flying.
And, of course, there’s the fact that Beats makes on- and over-ear headphones while Apple doesn’t…yet. But if they do, my guess is that Apple headphones will not be going after fans of Beats. I’m sure Apple headphones would use some sort of proprietary speaker technology (perhaps borrowing some from Beats) and feature a more neutral sound profile aimed at audiophiles, not Beats’ often-criticized bass-heavy signature. Sound-wise, they’d be more like the HomePod — think HomePods for the ears — where Apple combined beam-forming tweeters, equalization software, and microphones and an accelerometer for spatial awareness to create the best-sounding smart speaker on the market. Apple would then combine that with technology taken from the AirPods Pro like active noise cancellation, transparency mode, and whatever new features Apple has up its sleeve for their W-series chips. And Apple headphones would probably only come in 1–3 colors, or more likely just in white. I’d also guess that they’d be more expensive than Beats’ most expensive headphones — the $350 Studio3 — maybe coming in at $400-$450.
Apple over-ear headphones would be for tech enthusiasts, sound quality snobs, audio professionals, and those who don’t mind buying headphones that cost as much as a 65-inch TV, while Beats headphones would be aimed at a younger, hipper, more fashion-conscious audience who want the big bass beloved by hip-hop and electronic music fans. Similarly, I doubt there is much confusion for those trying to choose between AirPods and Powerbeats. If you value noise cancellation and overall size, you’ll get AirPods. If you value battery life, big bass, and a more rugged build and secure fit for workouts, you’ll get Powerbeats.
There’s also the fact that many people own multiple headphones for different use cases, like traveling, exercising, watching TV/movies at home, creating audio/video content, or commuting. By owning Beats, Apple is positioned to make money off whatever combination of personal audio needs you might have.
When a larger company acquires a beloved smaller one, people are generally hoping for one of two scenarios. In the first scenario, the parent company leaves the smaller company alone to continue developing their successful products while using the larger company’s size to scale up and improve production, marketing, and logistics. In the second scenario, the parent company takes the assets of the smaller company, effectively destroying it, in order to create something new and better that combines the strengths of both companies.
In the case of Apple buying Beats, it seems that both of these scenarios have effectively played out. Beats Music is gone, but its technology and the expertise of Iovine, Dre, and Reznor were used to quickly start Apple Music, which now has a greater reach and a bigger following than Beats Music could’ve ever hoped for. Conversely, Beats by Dre headphones was largely left alone for the first few years to continue doing what made them the world’s most popular premium headphone brand, but with the increased global reach of being sold in Apple stores around the world. And now, Apple is making Beats headphones way better by injecting them with proprietary hardware and software that provide features no other headphone maker can match, yet while retaining the Beats brand. In the first quarter of 2020, Apple’s wearables category — which comprises Apple Watch, AirPods, HomePod, and Beats headphones — earned $10 billion, the size of a Fortune 150 company.
It may not be Apple acquiring NeXT and effectively rehiring Steve Jobs, or Google buying YouTube in what now looks to be the tech deal of the century. But if you don’t think Apple buying Beats has been one of the most successful dollar-for-dollar tech acquisitions in the last decade, you might not be paying attention.