Apple to buy Beats Electronics for $3.2 billion? Why?

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The Financial Times is reporting that Apple is in discussions to buy Beats Electronics (caution: paywall), the headphone-maker and streaming-music service-provider co-founded by hip-hop’s Dr. Dre.

If true, it would—at an estimated value of $3.2 billion—be the biggest acquisition ever by Apple. (The report points out that a $500 million investment in September 2013 valued the company at more than $1 billion.) The Financial Times says the deal, if finalized, could be announced as early as next week. Under its terms, Apple would acquire the Beats streaming music service as well as the audio hardware business.

Predictably enough, both Apple and Beats declined to comment.

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Not the current Apple executives page.

Why would Apple want such a deal? The hardware angle is a little hard to understand. While the Beats brand has a bit of fashionable cachet, the headphones themselves are routinely panned by people who care about sound. But the streaming side of the Beats business could be a lot more attractive.

That’s because the industry trend is away from music-download services such as iTunes in favor of music-streaming products such as Spotify and Beats. iTunes Radio was one response to that change, but so far not a notably successful one.

Beats Music, on the other hand, has a lot going for it. Having people like Dr. Dre and co-founder Jimmy Iovine in the company gives the service credibility, which can help when it comes to making deals with industry insiders; Rhapsody, Spotify, and Rdio don’t have that.

Beats is also the first music-streaming service to do curation right. It’s one thing to have access to millions of tracks. But how do listeners choose which ones to listen to? Algorithms can only go so far. Having real people who really know particular genres of music make Beats’ recommendations really valuable. iTunes Radio has tried to do both, combining algorithms with a smattering of curation. But the results have not been great. It could also be that Beats would bring Apple valuable content-licensing deals.

With the “buy music you love” model dying, the younger end of the audience prefer streaming. If Apple’s looking ahead to where the music market’s going, Beats could be where it's at.

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