Apple to buy Beats Electronics for $3B, Dr. Dre and Jimmy Iovine will join firm

Apple (NASDAQ: AAPL) confirmed it will buy Beats Electronics for around $3 billion, acquiring a maker of premium headphones with a fledgling streaming music service but also getting cachet and connections to the music industry.

The deal consists of $2.6 billion in cash and $400 million in Apple stock that will vest over an unspecified period of time, and is expected to close by the end of September. The transaction represents Apple's largest in its 38-year history. Rumors first swirled earlier this month that Apple would buy Beats for around $3.2 billion.

The big question surrounding the deal has been why Apple would spend so much money for a company that is somewhat peripheral to its core businesses selling iPhones, iPads and Macs. Apparently, Apple likes the business Beats has built and wants to make new products using the company's talent.

"We could build about anything that you could dream of. But that's not the question," Apple CEO Tim Cook said in an interview with Re/code. "The thing that Beats provides us is a head start, and it provides us with incredible people, kindred spirits."

Beats was co-founded by music industry executive Jimmy Iovine and rapper Dr. Dre, and both will be joining Apple as full-time employees. Apple will also keep the Beats hardware brand intact, as well as the Beats Music streaming service. Beats Music CEO Ian Rogers will now report to Eddy Cue, Apple's senior vice president of Internet software and services.

Cook told Re/code that the economics of the deal are not as important as what it means for Apple's future products, though what that means is still fairly hazy. "The instant that this deal is approved, we can begin working on the future together," he said. "And I believe that that future is better than anything either company could build on its own."

Investors were not so rosy about the deal. Wells Fargo analyst Maynard Um wrote in a research note that Apple should be focusing on growing new businesses not protecting old ones like digital music. "While we believe Apple should get some benefit of the doubt because of its historical success, a music-related acquisition still seems, to us, more defensive," he wrote. "Given the changing landscape and our view that Apple will have to eventually evolve its business model, we believe Apple should be acquiring more offensive assets to better position itself."

Apple shares rose less than 1 percent to $629.41 in morning trading Thursday after the deal was announced.

The deal could also give Apple a leg up amid weakening music downloads as streaming music services have taken off. U.S. sales of single downloads fell 6 percent to 1.3 billion tracks in 2013, while album downloads were flat at 118 million, according to the Wall Street Journal.

Apple launched its own free music-streaming service, iTunes Radio, in September 2013, and though it has 40 million U.S. users it is still seen as a laggard to Pandora, which has more than 70 million active users, and Spotify, which entered the U.S. in 2011 and now counts 10 million paying subscribers globally.

Beats started its $9.99-per-month subscription music-streaming service in January, and Iovine said Wednesday at the Re/code Code Conference that the service now has 250,000 paying subscribers. Cue said at the conference the service will remain available for users with phones running Google's (NASDAQ: GOOG) Android and Microsoft's (NASDAQ: MSFT) Windows Phone. "It's on Android now, and we want to keep it that way," he said. That stands in contrast to some acquisitions Apple has made in the past, when apps and services shut down operations for rival platforms so the services can run only on Apple's hardware. 

Beats Music features a catalog of more than 20 million fully licensed songs from all the major labels, including Universal Music Group, Sony Music Entertainment and Warner Music Group, as well as all independent labels. The service offers unlimited access to curated music (both streaming and downloaded for offline listening) of the songs, albums and playlists. In addition to personalization technology, Beats Music uses human experts to curate hand-picked songs while streaming.

AT&T Mobility (NYSE: T) in January announced it would offer the Beats Music streaming service at a discount to its family plan customers. AT&T also pays to market the service.

This is not the first time Beats has partnered with a mobile hardware company. HTC bought a majority stake in Beats in 2011 for $300 million only to later sell it all back in September 2013. In all, HTC got $415 million from selling its stake after making the $300 million investment. HTC recently announced a deal with speaker maker Harman Kardon to put the company's audio technology in its One M8 smartphone.

For more:
- see this release
- see this AP article
- see this Re/code article
- see this The Verge article
- see this NYT article
- see this WSJ article (sub. req.)
- see these four different articles from Re/code
- see this Bloomberg article

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Article updated May 29 with additional details.