The tech giant said on Wednesday it is buying Beats Electronics LLC for $3 billion to bolster a music business that has lost some of its mojo, as streaming-music services encroached on the downloads dominated by Apple's iTunes service.
In Beats, Apple is getting a music-streaming service, high-end headphones and music-industry connections. Beats' co-founders, rap star Dr. Dre and music mogul Jimmy Iovine, will join Apple.
The deal will make Apple "cool" again by uniting Mr. Iovine's feel for "the culture of young people" with Apple's "many millions of young peoples' credit cards," said Sony Music Entertainment Chief Executive Doug Morris, who, as the former chief executive of Universal Music, was Mr. Iovine's boss when he carved out a sideline running Beats Electronics. "Apple was starting to lose their edge," Mr. Morris said.
Apple didn't immediately respond to a request for comment.
Apple will continue to use the Beats brand, a rare move for a company that has almost always focused on its Apple brand. It became one of the world's largest technology companies by creating huge, new consumer electronics categories with the iPhone and iPad. But it hasn't introduced a breakthrough product since co-founder Steve Jobs died in 2011.
At the same time, it has lost some of its grip on the music business, as listeners increasingly turn to streaming services such as Spotify and Pandora Media Inc.
P -1.33% Instead of making people pay for songs they will own indefinitely, these services let users listen to music from a huge library, in return for a recurring subscription payment or being exposed to the occasional ad in Pandora's case.
U.S. sales of single downloads slid 6% to 1.3 billion tracks last year, while album downloads were flat at 118 million. Pandora's free, ad-supported service has more than 70 million active users and it had 3.3 million paying subscribers in March. Spotify, which entered the U.S. in 2011, now counts 10 million paying subscribers world-wide.
Apple launched its own free music-streaming service, iTunes Radio, last September. It counts 40 million U.S. users, but has yet to make much of a competitive dent. Beats started its $9.99-per-month subscription music-streaming service in January and has 250,000 paying subscribers so far, according to Apple.
Apple CEO Tim Cook said the acquisition will help Apple bridge divides between Silicon Valley and Hollywood.
"We think these guys have a very rare talent," Mr. Cook said of Mr. Iovine and Dr. Dre, whose real name is Andre Young. "We love the subscription service that they built—we think it's the first subscription service that really got it right."
Mr. Iovine said on Wednesday that Mr. Cook told him that Apple wanted to acquire Beats during a meeting at Apple's headquarters in Cupertino, Calif., two months ago. Though Mr. Iovine had been working closely with Apple for 11 years on Apple's music strategy, he said he was in disbelief.
"I kept selling like he didn't say anything," recalled Mr. Iovine.
Apple said it would pay $2.6 billion in cash and $400 million in equity for Beats Music, a subscription music-streaming business, and Beats Electronics, which makes pricey headphones, speakers and audio software. The equity is intended as incentive to keep Mr. Iovine and Dr. Dre at Apple. Carlyle Group
CG +0.92% LP, which invested about $500 million in Beats in late October, is poised to receive about double its money, according to a person familiar with the matter.
The deal, which needs regulatory approval, is expected to close in Apple's fiscal fourth quarter, ending in September, the company said. Mr. Cook said the acquisition will contribute to Apple's earnings in the fiscal year beginning in October.
Apple shares rose 24 cents to $624.25 in after-hours trading on Wednesday. The stock has climbed more than 11% so far this year and hit a 52-week high earlier on Wednesday.
Mr. Iovine said he will leave his post as chairman of Vivendi SA
VIVHY -0.38% 's Interscope Records and will work full-time at Apple. Dr. Dre said he will continue to produce music, but do "as much as it takes" for Apple.
The Beats deal is an effort by Mr. Cook to place his own stamp on Apple, which is still using much of the playbook established by Mr. Jobs. However, Beats pushes Apple in an unfamiliar direction. Not only will it take two celebrities into the company—it will acquire a new stand-alone brand, in a culture where the nearly exclusive brand until now has been Apple.
The acquisition is the largest in the company's history, far surpassing Apple's $400 million acquisition of NeXT Software Inc. in 1997. That deal brought Mr. Jobs back to the company, laying the foundation for its resurgence.
Now, Apple is counting on Mr. Iovine, a longtime friend of Mr. Jobs, to nurture partnerships with the music industry and other content creators, according to people familiar with the matter. Mr. Iovine's personality and entertainment industry connections may help Apple with content deals.
Mr. Iovine began his career as a music producer, working with Bruce Springsteen, U2, Patti Smith and others, but he has distinguished himself with savvy and inventive marketing. When online piracy eroded music sales, Mr. Iovine encouraged Interscope executives to think of themselves as "brand managers" with an array of products beyond recordings, including clothing, electronics, and even beverages. Beats By Dr. Dre headphones represent the most successful version of that strategy.
Beyond music, Apple has been working for several years on a device that allows users to stream live and on-demand TV programming and digital-video recordings stored in the "cloud," effectively taking the place of a traditional cable set-top box. However, it has struggled to strike the deals with media companies and cable providers to make it a reality. The hope, according to one person familiar with the matter, is that Mr. Iovine can help in this process.
"Iovine joining Apple can't hurt. But this won't make the difference between unbundling HBO from a typical pay-TV package and not being able to do it," said Benedict Evans, a partner at venture-capital firm Andreessen Horowitz. While relationships are important, he said "you do deals with an economic model and a checkbook."
Apple's share of online sales and rentals of movies and TV shows dropped to about 55% in the first quarter of this year, down from almost 75% in 2007, according market-research firm IHS. Growing competition from rivals including Amazon.com Inc.
AMZN -0.21% and Comcast Corp.
CMCSA -0.40% , which recently began its own movie-download service, could erode that share even further.
As with music, Apple lacks the kind of movie-subscription service that has made NetflixInc.
NFLX +0.61% a major force in Hollywood. Its television strategy has remained largely limited to offering downloads of old episodes via the iTunes Store and its Apple TV set-top box.
