Apple Inc. (AAPL), a mere 18 months after buying the Beats, an audio company with a headphones empire and a strong streaming music platform, AAPL is shuttering its streaming arm, Beats Music.
All Beats Music subscriptions will be cancelled on Nov. 30, as the company tries to encourage users to transition to its own brand-named streaming music service, Apple Music. It’s an interesting decision, but one that was telegraphed when AAPL stopped accepting new subscribers to Beats Music.
It’s a curious strategy, especially considering Apple shelled out a cool $3 billion for Beats a year and a half ago.
So why is AAPL doing this, and is it the right strategy?
For the Sake of Statistics, Diversification
There are two simple motivations behind Apple’s acquisition of Beats and its subsequent decision to shutter Beats Music.
Reason #1: Diversification
Yes, when AAPL bought beats for $3 billion it was technically buying more than just the streaming platform. Beats headphones had become a cultural staple, commanding a large price premium to the competition.
Technically, they’re called Beats by Dre, and with the concept, design, and marketing orchestrated by hip-hop legend Dr. Dre, the over-the-ear headphones go for a minimum of $200, and as much as $1,200 for a co-branded Beats x Fendi collaboration.
But the real reason AAPL bought Beats was for Beats Music and its built-in subscriber base. It needed to diversify its revenue streams in the music industry, considering Apple was over-exposed to digital music sales and under-exposed to streaming music revenue, which was beginning to stifle iTunes growth.
It’s the same sort of strategy that the old school cable programmers of yesteryear, 21st Century Fox (FOXA), Walt Disney (DIS), Comcast (CMCSA) — and perhaps Time Warner (TWX), if recent rumors are true — are pursuing with Hulu, their jointly owned streaming video service.
Reason #2: Juicing the Statistics
Admittedly, it’s a little curious that AAPL isn’t simply keeping Beats Music subscribers in their own ecosystem, since some users will inevitably fail to switch to Apple Music.
But there is a logic behind the move: AAPL just wants to make Apple Music subscriber numbers as impressive as possible. CEO Tim Cook revealed that there are 15 million Apple Music subscribers through last month, of which 6.5 million are paying customers and 8.5 million are freeloading, free trial scum (phrasing mine).
By forcing Beats Music subscribers to switch to Apple Music or screw off, those numbers should become more impressive.
That said, I’m sure Apple will be able to juice its subscriber base much more effectively by leveraging its iTunes platform to pitch users on a monthly subscription. At $10 per month, it’s priced identically to Spotify and at a slight premium to Pandora (P) at $5 per month.
We’ll see what kind of traction Apple Music gets, but as long as the average user who pays $10 monthly for Apple Music was buying less than $10 per month in songs, it’ll be a profitable pursuit for AAPL.
As of this writing, John Divine was long AAPL stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
