With Beats, Apple Has Its Next iPod - Mashable

Apple on Wednesday confirmed it is buying Beats for $3 billion.

When acquisition talks between Beats and Apple leaked approximately three weeks ago, users and analysts alike expressed confusion over the pairing.

At the Code Conference, Apple's Eddy Cue talked about what attracted Apple to Beats, focusing on talent, hardware and the Beats Music subscription service.

To be clear, those are all great reasons to buy a company. The thing is, historically speaking, Apple isn't like most other technology companies when it comes to acquisitions. Unlike Facebook, Google and Microsoft, Apple doesn't make a habit of spending a few billion dollars on a company or brand. In fact, before Beats, Apple's biggest acquisition was the 1997 purchase of NeXT for $404 million — and that was as much about getting Steve Jobs and a modern desktop operating system as it was anything else.

Moreover, Apple almost never acquires consumer-facing companies, and when it does, the companies tend to be smaller and on the software side. Again, the last time Apple acquired a hardware company that sold products direct-to-consumer (rather than making semiconductors or flash memory controllers) was also in 1997, when it bought Power Computing Corporation — and that purchase wasn't to continue to sell Power Computing's machines, it was to kill the Mac clone program once and for all.

So for Apple to buy a company with an existing (and very strong) brand and two distinct product lines (Beats Music and Beats Electronics) with the intention of keeping the brand and the product lines in operation, the rationale has to be about more than just liking the people and the products.

So what gives? Why is Apple suddenly interested in this company, this brand?

It's all about creating a new halo product.

Beats are the new iPod

Right after the Apple/Beats rumors first leaked, my initial reaction to the news was similar to many others: confusion. The more I thought about it, however, the more similarities I started to see between the two companies.

Then it hit me. Beats headphones are the iconic representation for music for this decade the same way the iPod represented music a decade ago.

After I had this epiphany, I shared my thoughts on Twitter.

A decade ago, white iPod earbuds were a status symbol into themselves. Yes, the earbuds hurt like heck; yes, the sound quality was quite bad — but that white earphone cable meant you had an iPod. And the iPod was the gadget of the decade.

I was an early adopter on the iPod bandwagon, buying a second-generation model the day it was released in September 2002. In a span of 18 months, I went from having to explain to my relatives that no, spending $500 on an MP3 player was not absurd, to seeing white earbuds and iPods everywhere. I went from being one of the only people at my university to have an iPod, to having to make sure I had a sticker or a special case on mine so it wouldn't get confused with someone else's at a party or sorority meeting.

I also watched the iPod slowly but surely take over nearly every demographic. Everyone had an iPod. I even got a pink iPod nano for my mom one year for Mother's Day.

With Beats, I've watched the same thing happen. I got my first pair of Beats in late 2008. Initially, I didn't see many Beats-wearers in public — mostly just online or on the ears of celebrities or athletes. By mid-2010, however, Beats were starting to show up everywhere.

As with the iPod, I also saw the Beats demographic expand. Granted, Beats aren't as universal and ubiquitous as the iPod — but with newer designs and colors — it's changing. I got my mom a Fitbit for Mother's Day this year — but I actually did consider getting her a pair of Beats to go with her iPhone 5S.

In fact, when it comes to cultural iconography, the white earbuds of the iPod have been replaced by the lowercase "b" in the Beats logo. Beats headphones are the gadget/accessory of this decade.

The halo effect revisited

Alright, fine, so instead of spending $300 on an MP3 player as a fashion statement, kids are now spending $300 on headphones. Why does this matter to Apple?

Because of the halo effect. The iPod was an incredibly successful product. Nearly 13 years after the initial launch, it's easy to take that success for granted, but Apple as we know it was built on the back of the iPod. Yes, the iPhone is the product that catapulted Apple into the stratosphere — but without the success of the iPod, it's unlikely the iPhone would have ever been able to achieve mass-market visibility, media coverage and consumer interest right out of the gate.

In 2004, when iPod sales really started to take off, Apple also started to sell a lot more Macs. Moreover, most of the sales were not to existing Mac owners, but to first-time Mac buyers — users switching over from Windows. After losing PC marketshare for nearly 18 years, Apple actually started to reverse course.

Analysts attributed the newfound interest in the Mac — especially amongst "switchers" — directly to the success of the iPod. Dubbed the "iPod halo effect," the theory is that after buying and having such a great experience with the iPod, customers were more open and eager to buy other Apple products — including the Mac.

There was some debate about the validity of the halo effect, but by 2007, it was generally recognized as having a major impact on Apple's business. In fact, the halo has now shifted from the iPod to the iPhone and even iPad. These are the gateway drugs to Apple addiction.

There's an important aspect of the halo effect that often gets overlooked however: the generational impact.

In August 2001, just two months before the iPod was released, I started college. Over the summer, I had to make a tortured decision between buying a Mac or a Windows PC for school. The iMac and iBook were great, but Mac OS X 10.0 had just come out the previous spring. It was still buggy and required running the aging Mac OS 9 as an app.

Meanwhile, Windows XP was about to be released and was really good. So despite using Apple products at school — and despite majoring in film — I took a new Windows computer to college. I wasn't alone. I remember the operating statistics of the network at my university: during my freshmen year, it was 98.5% Windows.

Cut to 2005. I had taken some time off school and when I returned, I was surprised to show up for class to see a wave of glowing Apple logos. In 2006, there were even more. By my last year of school, 2007, there were three Macs for every 1 Windows laptop in a typical lecture.

Nearly overnight, the generation of users that came of age on the iPod started to adopt the Mac en masse. Today, college campuses across America are absolutely overrun by glowing Apple logos. It's gone from being a rounding error in terms of adoption at my university, to account for over 90% for incoming freshmen.

The dividends of the iPod are still paying off, and Apple is more successful than ever.

There's just one problem: What is Apple's current "gateway drug"?

A new gateway drug

This is the opportunity I see in Beats. There are millions of consumers who are spending $200-$300 on Beats headphones every year. This might just be a fraction of the phones Apple sells, but for many of these users, a pair of Beats is their first high-end premium electronics purchase.

Right now, many Beats buyers don't use an iPhone. There are no official reports as to the actual breakdown, but in some parts of the world, the majority of Beats owners have Android phones.

The iPod halo effect was particularly powerful because it was able to help create customers and buyers out of an entire generation of users.

Arguably, the smartphone could be that gateway drug and product — and Apple has certainly seen continued halo effects from the iPhone and iPad — but as the smartphone becomes more and more essential, its ability to be a gateway drug dissipates. iPod owners already had a computer before they got an iPod — the halo effect came into play when they went to buy their next purchase.

I see headphones working the same way. The person who buys Beats already has a smartphone. The goal should be to make the experience and the brand so positive that the consumer considers getting and iPhone as her next smartphone.

Moreover, just as iTunes for Windows helped usher hundreds of millions of users into the Apple ecosystem, Beats Music could be iTunes for the streaming age.

That's even more true if Apple and Beats can offer a good experience to all users on all platforms for streaming music, but a better and easier experience for iOS/Mac users.

The biggest potential I see in the Apple/Beats acquisition isn't about Apple's existing customer base, but for the next-generation of would-be Apple customers.

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