Ever since Apple Inc. (NASDAQ:AAPL)’s $3.2 billion acquisition of Beats was leaked, analysts have been wondering what they were missing that would justify such a high price. No one questioned that co-founders Dr. Dre and Jimmy Iovine had built a strong brand and good company, but the $3.2 billion just seemed too high. There had been speculation that there could be tax benefits at play, but now it looks like the focus on Beats headphone business may have missed the bigger opportunity: Beats Music.
“It’s not what Apple and Beats are doing today, it’s what we believe pairing the two together can produce for the future. It’s seeing around the next corner,” said Apple Inc. (NASDAQ:AAPL) CEO Tim Cook.
Beats Music as an MSP
Since Apple Inc. (NASDAQ:AAPL) already controls iTunes, one of the most lucrative portals for selling digital music, the streaming service Beats Music might seem like an unnecessary addition, but UBS analyst Steven Milunovich argues that it would play a different role in the industry, acting as a multi-sided platform (MSP) bringing together artists, brand partners, and customers.
“Apple’s retail stores and iTunes are not MSPs because they have a direct contractual relationship with the consumer,” writes Milunovich, who gives Apple Inc. (NASDAQ:AAPL) a Buy rating with a $700 price target, “but the iOS operating system is [an MSP] in bringing together app developers and users. Other examples are Visa, eBay, and Uber.”
Milunovich explains that Iovine has already had success with this approach, notably working with Lady Gaga and her manager Troy Carter to build connections with fans through social media and partnerships with consumer brands so that they could monetize Lady Gaga’s popularity beyond just trying to sell records.
“Music, we realized, sells everything but music,” said Carter.
Beats Music could attract musicians just like iOS attracts developers
iTunes isn’t going anywhere, it’s an established product and an important part of Apple Inc. (NASDAQ:AAPL)’s ecosystem, but if it can turn Beats Music into the music industry’s equivalent of iOS, a platform where anyone can vie for consumer’s attention and potentially build a successful business, Apple will have something even more valuable.
As smartphones and tablets become commodified, Apple Inc. (NASDAQ:AAPL)’s best chance of protecting its market position is by giving people a compelling reason to be a part of its network. Acting as the conduit that connects musicians, fans, and all the brands that surround the music business can be that reason, on top of giving an entirely new stream of revenue.