Few audiophiles would consider Apple to be a big player in the hi-fi world. After all, their iTunes store doesn’t offer 16-bit/44.1kHz content, let alone anything of higher resolution. Nor does their iTunes music platform play hi-rez material. Hell, the folks from Cupertino, California, don’t even see fit to play nicely with FLAC. So far, so bad. Then there’s Beats Electronics, LLC, a company whose headphones offer more in the way of bling and popularity than fidelity or quality. The company didn’t exist ten years ago, but, as they say, the proof is in the market value -- it’s now valued north of a billion dollars. A billion.
So when rumors broke that Apple, known for the iMac, the iPhone, and the iPad, was closing in to buy Beats for over $3 billion, more than a few heads got scratched, including mine. Known for small, tactical acquisitions of talent and technologies, the computer company tends to absorb and integrate, rather than branch out into different arenas. Also, given Apple’s penchant for selling premium products of class-leading quality at premium prices, why, of all the headphone manufacturers out there, would they choose Beats? Surely something like a Sennheiser would be a better -- and far cheaper -- investment.
There’s another wrinkle. Streaming music services, which we profiled in detail here last month, have made slow but steady gains not only in popularity but as sources of earnings for the music industry. In fact, the popularity of music streaming increased by 32% in 2013 -- the first year since 2003, when Apple launched the iTunes Store, that sales of digital music have fallen. That drop was no doubt keenly felt by Apple, which is not only the world’s most valuable company (by market capitalization), but also the dominant player in digital music downloads, accounting for more than half of all digital music sold. With a music industry that arguably never enjoyed the transition from CDs to MP3s, this shift in distribution will have repercussions beyond the long-term viability of the iTunes Store. Indeed, the entire music industry no doubt sees the trend quickly swinging away from downloads and toward streaming. After all, 34% of peak Internet downstream traffic in the US is due to Netflix’s streaming of video content to its customers, a figure almost an order of magnitude greater than iTunes’ 3.6% share. Why bother buying a single movie or TV series when I can pay less for access to thousands of each? This line of thinking is clearly finding traction with listeners as well as viewers.
Beats Music, the streaming service of Beats Electronics, was launched in January 2014 on a subscription-only model of $10/month, in line with industry leader Spotify. Unlike Spotify, however, Beats doesn’t offer a free counterpart to its paid-subscription service, and most estimates point to Beats having signed up fewer than 250,000 users at the time of writing. It’s also worth noting that Beats Music arrived on the scene after iTunes Radio, Apple’s streaming radio service. Consumers clearly have no problem with streaming music, free, paid, or whatever -- they just want to listen to music. How to make a profit from streaming that music to them is the challenge for providers such as Spotify, which passes along more than 70% of its revenues to the music labels whose music it distributes. Popularity, it turns out, isn’t everything.
That suits Apple just fine. They weren’t pioneers in the unknown lands of MP3 players when they released the iconic iPod, in 2001. Nor were they the first to introduce a touchscreen phone, or even a tablet computer. Rather, in each case, they were the first to get it right. That philosophy has worked out well for them.
The key for Apple, according to most analysts, is Jimmy Iovine (right), co-founder of Interscope Records and of Beats Electronics. The popular assumption among financial analysts is that Apple is after Beats for neither its headphones nor its streaming service, but for Iovine himself. $3.2 billion is an expensive way to get someone to work for you, but seeing as Apple has three times as much cash -- $150 billion -- as the US government, it becomes almost trifling by comparison. Iovine has terrific connections in the music industry, and could help the tech behemoth transition from dominating digital downloads to dominating streaming, and making a profit by doing so. Apple could surely secure more favorable terms in their contracts with record labels than Spotify ever could, and Iovine would prove most helpful if he were on Apple’s side of the negotiating table.
Supposing that a dominant streaming service is the endgame, Apple would have to offer something unique, and of fundamentally higher quality, in order to draw market share and drive continued consumer investment, month after month. “Quality” could certainly be defined as the size of its music catalog, and the intuitiveness and integration within Apple’s software ecosystem. Maybe. And here is where things get interesting for audiophiles. What if Apple were hedging on being the first mainstream streaming service to offer CD-quality sound, and began stocking its virtual shelves with ALAC files (Apple’s proprietary lossless codec), or files of even higher resolution? A recent report fingers Apple as having the largest catalog of hi-rez audio files in the world, having for years reportedly insisted on the highest-quality masters from which to encode its lossy offerings.
Imagine, then, an iTunes with hi-rez downloads, CD-quality streaming, and a dominant stake in the gourmet-headphones market. Apple doesn’t always hit a home run, and one always pays more for their products. But they don’t make garbage. Rest assured, the Beats by Dr. Dre line of headphones would be redesigned, inside and out, to offer higher, Apple-approved sound quality. Nor do I see Apple stopping there. There have been years of rumors about Apple making inroads into television, whether via a physical TV set or a sophisticated set-top box. Could AirPlay-enabled loudspeakers be far behind? You laugh, but who foresaw Apple demonstrating an interest in Beats? Stranger things have happened, but not many.
Calm, collected, and patient, a juggernaut once known only for its idiosyncratic personal computers looks set to bet big on the future of music. Like iTunes before it, whatever Apple’s new streaming service turns out to be may well come to define how we consume music in the next decade and beyond. Audiophiles decried iTunes for its peddling of lossy trash at the expense of the almighty Compact Disc, but soon we may have something from Apple to cheer and applaud. Wouldn’t that be a pleasant change of pace? I’ve almost forgotten what it’s like not to bitch about the status quo.
. . . Hans Wetzel
hansw@soundstagenetwork.com