Apple Paying Less Than $500 Million for Beats Music Streaming Service - Wall Street Journal

Updated May 30, 2014 12:51 a.m. ET

Apple Inc. AAPL -0.37% Apple Inc. U.S.: Nasdaq $633.00 -2.38 -0.37% May 30, 2014 4:00 pm Volume (Delayed 15m) : 19.82M AFTER HOURS $633.40 +0.40 +0.06% May 30, 2014 7:59 pm Volume (Delayed 15m): 328,063 P/E Ratio 15.04 Market Cap $545.25 Billion Dividend Yield 2.08% Rev. per Employee $2,185,850 05/30/14 Apple's New Finance Chief Maes... 05/30/14 Google's Motorola Mobility to ... 05/30/14 Samsung's Formidable Tablet Ri... More quote details and news » is paying slightly less than $500 million for the Beats Music streaming service, and more than $2.5 billion for Beats Electronics in its $3 billion deal, according to people familiar with the matter.

The breakdown between the two portions of Beats Electronics LLC offers insight into Apple's thinking for the most expensive acquisition in its history.

A person familiar with Beats said its 2013 sales totaled close to $1.3 billion—all from the electronics unit that sells headphones and other audio gear—and the company was profitable. Beats launched its streaming-music service in January.

The valuation of the $10-a-month streaming service, which counts 250,000 paying subscribers, is generous based on its subscriber numbers. Spotify AB, which has 10 million subscribers world-wide, raised $250 million in November at a valuation of $4 billion, or $400 per subscriber. By that measure, Beats would be worth $100 million.

Calculating subscribers' worth "is clearly not how they got there," said Triton Research analyst Rett Wallace.

The people familiar with the matter cautioned that the breakdown of the purchase price was largely an accounting issue, because the two Beats units are backed by different investors.

Apple Chief Executive Tim Cook said in an interview Wednesday that growing Beats' existing businesses was "not the reason for doing the deal."

Instead, he said, the deal was about recruiting the right people for Apple, which revolutionized music consumption with the iPod and its iTunes digital-music store but has risked falling behind in newer businesses such as streaming.

Beats, the high-end headphone company founded by music mogul Jimmy Iovine and rap star Dr. Dre, bought the streaming service Mog for about $14 million in 2012 and launched a new version, Beats Music, in January. It will discontinue the Mog service in June.

Some investors, such as billionaire Len Blavatnik, whose holding company Access Industries owns Warner Music Group, had invested only in the music-streaming service. Beats Music's chief executive, Ian Rogers, and its chief creative officer, Nine Inch Nails frontman Trent Reznor, both have stakes in Beats Music but don't own stock in Beats Electronics.

Others are more heavily invested on the electronics side. Carlyle Group spent $500 million last year on an approximate 30% stake in the headphone division, and a 5% stake in the music service, which was reduced after Mr. Blavatnik's group bought in. When Carlyle purchased its stake last year, it valued the entire Beats empire at between $1.5 billion and $2 billion, according to people familiar with the matter.

An Apple takeover of Beats figured into Carlyle's thinking from the onset. As they pondered investing in Beats, Carlyle's deal makers sent a memo to the firm's executives that listed Apple as a potential acquirer of the business, according to a person familiar with the matter.

Apple never contacted Spotify during the process of acquiring Beats, according to two people familiar with the matter, suggesting that Apple was more interested in Beats for its brand power and star leadership than in acquiring a generic streaming service. A Spotify spokesman declined to comment.

In the Wednesday interview, Mr. Cook said Beats Music is a better service than Spotify and Pandora Media because it uses humans to help pick which songs to stream. Other services mostly rely on computer algorithms, he noted.

"It's not all about zeros and ones," Mr. Cook said.

Horace Dediu, founder of Asymco, an independent analysis firm focused on the mobile industry, said Apple may have paid more than other potential acquirers for Beats because of the strategic value to the company. "To reposition the iTunes music empire for the future, that's easily worth $3 billion," he said.

Apple's entrance into subscription streaming comes as Inc. prepares to launch its own music-streaming service, possibly as soon as next month. Amazon has signed deals with Warner Music Group and Sony Corp.'s Sony Music Entertainment that will allow Amazon Prime customers to stream some older music on demand, according to people familiar with the matter. The offerings won't include the record companies' new releases, those people said, only a limited catalog of songs more than six months old. Amazon raised the price of its Prime membership to $99 from $79 in March.

Write to Hannah Karp at, Ryan Dezember at and Alistair Barr at

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