Dr. Dre could be upping Apple’s cool factor in $3.2 billion deal to buy Beats

Apple is close to buying the hip maker of Dr. Dre headphones and speakers, Beats Electronics. Sources say Apple is prepared to dish up $3.2 billion which would make Beats the largest Apple acquisition ever. (Reuters)

Apple is reportedly buying Beats Electronics, the audio equipment and music-streaming service co-created by hip-hop mogul Dr Dre.

The Financial Times broke the news of the reported deal which, at $3.2 billion, will be Apple’s largest ever. Apple and Beats declined to comment on the report.

The deal would come as Apple’s sales are flagging, a problem that stems from a lack of major new products that bring consumers to Apple stores, according to an investor note from Needham analyst Charlie Wolf obtained by Apple Insider. Apple also faces intense competition from Microsoft, Google and smartphone maker Samsung.

Why splurge on Beats, which can cost more than $300? Part of the reason: the cool factor. Despite the hefty price tag, the headphones, a streetwise fashion statement with a signature “B” on the ear, are as popular with teens as they are with celebrities.

The “Dre” in “Beats by Dre” is Andre Young, better known as Dr. Dre. The Washington Post’s Soraya McDonald has a refresher:

He helped popularize West Coast gangsta rap, especially a sub-genre called G-funk, and was one of the founding members of NWA (Niggaz With Attitude). His 1992 debut solo record, “The Chronic,” is a classic within the hip-hop pantheon. He’s also credited with launching the careers of Eminem and 50 Cent when he signed them to his record label, Aftermath Entertainment. His is the sort of cool that doesn’t fade in the wash.

The deal could also be Apple’s entrée into the streaming business, where it has recently experimented with limited success. Subscription services such as Spotify and Rhapsody are the biggest growth area in the music industry. Revenue went up by more than 50 percent last year, topping $1 billion for the first time, according to a recent International Federation of the Phonographic Industry report.

Meanwhile, music downloads from services such as iTunes are declining. Album sales were down by 14.2 percent and individual song downloads by 12.5 percent at the end of last quarter, according to Nielsen SoundScan.

But the possible deal left some scratching their heads. Introduced in January, the Beats Music streaming service was late to the game, and its product has been panned by some critics, noted Business Insider, who described the potential acquisition as “un-Apple.” If Apple’s mission is to make the best products, why go after Beats?

Writes Gary Allen in Forbes:

….The biggest asset of Beats would be the company’s streaming music service, which offers a much more thorough—and successful—social experience than iTunes. It’s advertised as ‘The right music for right now,’ using a very simple interface crafted especially for the mobile experience. Using the Beats iOS app, the user simply creates a ‘sentence’ explaining where they are, what they’re feeling and who they’re with. Beats then creates a playlist of the appropriate music. There are also additional paths to finding music, including by genre, artist playlist and curator. Once your music is playing, there are additional options to follow artists and explore their work, share playlists and comment on music….There’s no streaming music service so close to the ‘the scene’ than Beats. Incorporating the Beats technology into iTunes could generate a entirely new list of subscribers for the service, which now has over 800 million accounts.

Ben Bajarin, a consumer technology analyst for Creative Strategies, doesn’t think the deal would be a departure from Apple’s strategy of buying companies with promising technology and talent to help develop future products. “This would have to fit into a much longer, more innovative strategy around perhaps the hardware and the service,” he told the New York Times.

If the deal goes through, it will make Dr. Dre the richest man in hip-hop, according to Forbes.

Related:

After reports that Apple is buying Beats Audio, Tyrese Gibson posted a video to his Facebook page showing an enthusiastic celebration with Beats co-creator, Dr. Dre. Before it was removed from Gibson's Facebook page, PostTV got the video and remixed it (new soundtrack and all) into a work-safe version. (Jonathan Elker, Kate M. Tobey and Davin Coburn/The Washington Post)

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Gail Sullivan covers business for the Morning Mix blog.
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