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Apple and Beats — Making Music Together?

So after a couple of weeks of on-again and of-again rumors that Apple was acquiring Beats Electronics, a maker of boutique headphones, the transaction has been officially announced. The figures mentioned a $3.2 billion purchase price, but new reports appeared the day ahead of the announcement that Apple had knocked down the final price to $3 billion. The actual transaction involves $2.6 billion in cash and $400 million in stock according to Apple’s press release.

That said, this would still be Apple’s most expensive acquisition, ever, far eclipsing the 1996 acquisition of NeXT that brought Steve Jobs back to the company. That deal was valued at an estimated $429 million, which would be over $651 in 2014 dollars, but still Apple’s largest single acquisition until Beats came along. Of course a few billion dollars isn’t much compared to Apple’s huge war chest, but the critics have been out in force railing against the deal.

The largest question has been why?

While Beats headphones, ear buds and such are quite popular, particularly with millennials, reviews in the tech media have been mixed. Some complain of boomy bass and a general mushy character to the sound, which may appeal to hip-hop fans I suppose, while others extoll the virtues of the latest versions, which have supposedly been “revoiced” to provide a more realistic sonic signature.

So we have the Studio Wireless getting four stars and general accolades from CNET, while the Executive noise-canceling headphones are rated tops in that category by Consumer Reports. The day after the Apple deal was confirmed, Beats announced an update to its Solo line, the Solo², promising better comfort and superior, wider-range audio. It does seem the company is trying to move past the the bass-heavy character of the original products.

Regardless, clearly Apple isn’t buying Beats just to sell fancy headphones. There are a number of quality audio makers who can do as well or better, even if the products don’t carry the buzz of Beats by Dre. Apple CEO Tim Cook is clearly impressed with Beats Music, a streaming service that uses live curators, consisting of DJs and musicians, in addition to computer algorithms to put together playlists for you. Although the service may have only a bit more than 100,000 members according to some reports, a proper Apple marketing campaign would boost the numbers real fast.

As with FileMaker, Beats will run as a separate brand, which means that, in the near term, not much will change. Over time, though, you’ll no doubt see various forms of integration between the Apple and Beats products and services.

But the most important advantage in this deal appears to be the two new employees who will be working under Eddy Cue, Apple’s Internet services chief, consisting of Beats co-founders Jimmy Iovine, a powerhouse music executive and producer, and Dr. Dre, a famous rapper.

Now Dr. Dre may have spilled the beans prematurely, when he announced in public at a party recently that he had become the first billionaire hip-hop artist. Some estimates, however, put his fortune at somewhat less than that figure after taxes. But when your net worth is that high, what’s a few hundred million among friends?

Iovine had a long personal history with Steve Jobs, and is said to have helped in crafting some of the early music contracts that helped establish iTunes as the world’s largest music download service. So one would expect that he’d help Cue make the difficult deals. But the fledgling Beats Music service is also a key factor. Supposedly growth of digital music sales has been stalled by the rise of Spotify and Pandora. In contrast, Apple’s first foray into the music streaming game, iTunes Radio, has gotten at best tepid reviews.

Although Beats Music will run separately, at least at the start, one expects the technology and musical expertise will infuse iTunes Radio with better quality playlists.

I suppose you can’t just look at the surface in trying to assess the value of this deal. After all, Apple does a lot of things in secret, and there are no doubt long-range plans being devised by Apple and the Beats crew that we know nothing about. It may expand the Beats moniker into other businesses too. Remember that Chrysler uses Beats technology for some of its infotainment systems, and I wonder how that will play out in the future. Would Apple want to attempt to license that technology to other auto makers in competition with Bose, Infinty and other companies who build premium sound systems? This might represent a huge enhancement over CarPlay, which is just an AirPlay-style feature that offers closer integration with recent iPhones and your car.

It’s also hard to know how long this deal was in the works. Last September, Beats ended its partnership with a smartphone maker, HTC, in a transaction involving a $265 million buyback. The move ostensibly came when HTC moved to a different audio technology, but you wonder whether it was fueled, in part at least, by ongoing talks with Apple. There’s also a deal between Beats and HP to supply audio technology in note-books that’s reportedly due to expire at the end of the year, although HP has distribution rights through 2015.

In any case, we may or may not hear more about the Beats deal at the WWDC next week, where the rumors persist that Iovine and Dr. Dre will take the stage. Still, the skeptics will continue to wonder what the fuss was all about, unless and until we have a closer look at some of the as-yet-unknown fruits of this transaction.

Yet there is one more question: Would Steve Jobs have made a similar transaction given the opportunity? Or is this the latest evidence of how Tim Cook is putting his own unique stamp on Apple?