Apple Buys Beats Entertainment For $3 Billion

As part of the deal, Dr Dre and Jimmy Iovine, will both be taking executive positions at Apple.

Adam Hunger / Reuters

Apple took a dramatic new direction in the digital music business it once led, officially announcing its purchase of Beats Entertainment, a company built by Dr. Dre and music mogul Jimmy Iovine that sells high-priced headphones and a music streaming service, for $3 billion.

The purchase, despite much hand-wringing over what Apple is actually buying, is at its core a way return Apple to a leadership position in digital music, as download sales give way to subscription streaming services. As part of the deal, Dre and Iovine are taking executive positions at Apple running its music operations. The deal consists of a $2.6 billion straight-up purchase with a $400 million earn-out clause.

The deal, which ranks as Apple's largest ever, is the culmination of a relationship Iovine has had with Apple for years. Apple CEO Tim Cook reportedly met with Beats executives in February last year to discuss a potential partnership involving the new streaming service released by Beats. Iovine and Apple founder Steve Jobs were long-time friends who often sought advice from each other, with Jobs sometimes staying at Iovine's house when visiting Los Angeles before he passed away and handed the reigns of the company over to Cook.

Though Iovine is leaving Universal Music to join Apple, the record label can't be too unhappy about the deal — it will receive a $420 million windfall by virtue of its 14%4 stake in Beats.

Acquiring Beats gives Apple another way into the increasingly popular streaming music market beyond its existing streaming service, iTunes Radio. According to IFPI, more than 28 million consumers paid for a music subscription in 2013, up from 8 million in 2011. What's more, the $1.1 billion in revenue that IFPI attributed to subscriptions for streaming music in 2013 represents a year-over-year increase in excess of 51%. Many industry watchers are viewing streaming music as a way to return to growth as downloads — iTunes' bread and butter — have begun to flatline.

The deal is also a rather significant break in character for Apple, which has often sought to build out services rather than acquire them — such as iCloud, iMessage, or iTunes Radio. While companies like Google and Facebook are willing to shell out billions for companies that seem to have a natural product fit, Apple has never done a billion dollar plus deal, even though it is sitting on more than $150 billion in cash.

AP Photo/Damian Dovarganes

via IFTTT