Why Apple Paid $3 Billion to Acquire Beats

AP Photo/Apple, Paul Sakuma

Some are speculating that the deal has a lot to do with music mogul Jimmy Iovine's Hollywood connections.

This story first appeared in the June 13 issue of The Hollywood Reporter magazine.

On May 28, Apple confirmed its purchase of Beats Electronics and Beats Music, but many still have questions about the Cupertino, Calif.-based tech giant's long-term content plans. They note that $3 billion -- Apple's biggest acquisition price to date -- is a hefty sum for a company that manufactures headphones and operates a fledgling subscription music service, which leaves some speculating the deal is more about music mogul Jimmy Iovine's Hollywood connections.

"Apple's motivation to acquire Beats … appears to be to bring Jimmy Iovine … to lead Apple's content strategy," wrote Piper Jaffray analyst Gene Munster in a research note after news of a sale emerged in early May. After all, reports have swirled for months that Apple is looking to fill its Apple TV set-top box with more live and on-demand television programming. In their new executive roles at Apple, Iovine, 61, and Beats co-founder Dr. Dre, 49, could function as Los Angeles-based emissaries to the creative community.

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But Iovine has denied he is joining Apple to do anything more than get his still-unproven Beats Music service off the ground amid stiff competition from Spotify, Pandora and other streaming competitors. "I have an enormous job getting our music idea right," he said at the Code Conference in Rancho Palos Verdes, Calif., the day of the acquisition announcement. "I wouldn't dare enter into Apple's TV plans."

Iovine, whose stake in Beats is said to be about 25 percent, has had a long, fruitful relationship with Apple and its late co-founder Steve Jobs, helping bring record labels to the bargaining table for the 2003 launch of the iTunes Store. And his marketing skills and ability to turn a piece of hardware into a must-own fashion accessory make him a valuable addition to the company's team, notes TAG Strategic managing partner Ted Cohen. "This is a great move, akin to a sports team acquiring a free agent like LeBron James," he says. "Iovine and Dr. Dre are rock stars and difference makers. Apple's not acquiring market share as much as mindshare."

Iovine made his name in the music business producing records for the likes of Bruce Springsteen, Tom Petty, Patti Smith, Stevie Nicks and U2, but he has proved even more of a whiz at marketing his artist discoveries. Who else could have turned Gerardo and Marky Mark and the Funky Bunch into hitmakers during the early days of Interscope, the label he co-founded in 1989? More recently, he developed TV relationships as a mentor on Fox's American Idol for three seasons.

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But Iovine insists he isn't about to start churning out original TV shows or chart-topping hits for Apple's flagging iTunes Store, which saw a 24 percent drop in spending during the second quarter of 2014, according to Morgan Stanley analyst Katy Huberty. Iovine has said he is staying out of the production business, too.

"I'm not even thinking about [making content for Apple]," he said at the Code Conference while sharing a stage with Apple software chief Eddy Cue. "I'm thinking about getting the delivery and curation right."