Episode 50: Apple - Beats

[0] Oh, man. All right.

[1] Too cheesy.

[2] Yeah, you should do that.

[3] It's going to be cheesy, but you should do it.

[4] And I'll make it, yeah.

[5] I love the cheese.

[6] Yeah.

[7] That's perfect.

[8] Then I can make one of you for dad jokes.

[9] Welcome back to the big half century mark, episode 50 of Acquired, the podcast about technology, acquisitions, and IPOs.

[10] I'm Ben Gilbert.

[11] I'm David Rosenthal.

[12] And we are your hosts.

[13] So today we are doing.

[14] a classic episode of Acquired.

[15] It's the reason we started the show.

[16] It's the original format.

[17] It's one we've been talking about doing for a long time, and it's one that we've probably had, you know, 20, 30 requests for this since we started the show.

[18] Finally, we are covering, finally, it's in Apple episodes.

[19] We have to say, finally, we are covering the acquisition of beats by Apple in 2014 for $3 billion.

[20] I'm so excited about this one.

[21] Yeah.

[22] Yeah, me too.

[23] I wish I wasn't a little under the weather for it, but listeners, bear with me. I know I'm a little nasly this episode.

[24] You're like, this is going to be like Michael Jordan in game six of the finals playing with the flu.

[25] She's like, you're going to rise to the occasion, Ben.

[26] Thank you, David.

[27] Okay, listeners, now is a great time to thank one of our big partners here at Acquired Service Now.

[28] Yes, ServiceNow is the AI platform for business transformation, helping automate processes, improve service delivery, and increase efficiency.

[29] 85 % of the Fortune 500 runs on them, and they have quickly joined the Microsoft's at the NVIDias as one of the most important enterprise technology vendors in the world.

[30] And, just like them, Service Now has AI baked in everywhere in their platform.

[31] They're also a major partner of both Microsoft and NVIDIA.

[32] I was at NVIDIA's GTC earlier this year, and Jensen.

[33] brought up ServiceNow and their partnership many times throughout the keynote.

[34] So why is ServiceNow so important to both Nvidia and Microsoft companies we've explored deeply in the last year on the show?

[35] Well, AI in the real world is only as good as the bedrock platform it's built into.

[36] So whether you're looking for AI to supercharge developers and IT, empower and streamline customer service, or enable HR to deliver better employee experiences, Service Now is the platform that can make it possible.

[37] Interestingly, employees can not only get answers to their questions, but they're offered actions that they can take immediately.

[38] For example, smarter self -service for changing 401k contributions directly through AI -powered chat, or developers building apps faster with AI -powered code generation, or service agents that can use AI to notify you of a product that needs replacement before people even chat with you.

[39] With ServiceNow's platform, your business can put AI to work today.

[40] It's pretty incredible that ServiceNow built AI directly into their platform.

[41] So all the integration work to prepare for it that otherwise would have taken you years is already done.

[42] So if you want to learn more about the ServiceNow platform and how it can turbocharge the time to deploy AI for your business, go over to servicenow .com slash acquired.

[43] And when you get in touch, just tell them Ben and David sent you.

[44] Thanks, ServiceNow.

[45] All right, David, that is all I've got between us and...

[46] Oh, I can't wait.

[47] I am ready to start.

[48] I almost started talking over you.

[49] That would be new.

[50] No, that would not be new.

[51] All right.

[52] Let's do it.

[53] So this is probably, certainly thus far, the coolest founding story on Acquired.

[54] Maybe as long as we do the show, it's going to be hard to find a cooler founding story than this one.

[55] I don't think that's possible.

[56] I don't think it's going to be possible.

[57] And certainly the coolest founders.

[58] So, Beat was founded in 2006 by Jimmy Iovine and Andre Young.

[59] And those names may mean something to you, or they may not, but they certainly will in a minute.

[60] So Jimmy Iovine, who is Jimmy?

[61] Who is this guy?

[62] Well, he's a music producer and an executive.

[63] He started as a sound engineer early in his career.

[64] He dropped out of college.

[65] He grew up in New York City in Brooklyn.

[66] his dad was a longshore man and he would love music was obsessed with music he eventually rises and he becomes the head of Interscope records but this guy he is a legend and there's a great documentary about him and his co -founder who will get into it in a minute called The Defiant Ones on HBO highly recommend watching I had a chance to watch some of it preparing for this episode and Jimmy is the actual coolest person alive so the first album that he works on is, I think, John Lennon's first solo album as a studio engineer.

[67] Then he works on Bruce Springsteen's Born to Run album.

[68] Then he starts working with Stevie Nix and Tom Petty.

[69] He actually dates Stevie Nix in the 70s.

[70] Like, how awesome is that?

[71] And he's responsible for Stop Dragging My Heart Around, Tom Petty song.

[72] So Jimmy is like, Stevie's doing her first solo album.

[73] Like, she needs a single.

[74] Like, Tom, do this with Stevie.

[75] And boom, stop dragging my heart around.

[76] but he doesn't stop there.

[77] He discovers you too.

[78] Um, so like, that's him.

[79] Uh, he discovers no doubt.

[80] Trent Resner and nine inch nails.

[81] And then he completely re -events himself.

[82] Uh, so Tupac, Snoopac, Snoop Dog, Eminem, 50 Cent, Lady Gaga, Kendrick Lamar.

[83] These are all products of Jimmy Ibein.

[84] Yeah, very similar sound, right?

[85] You understand how the same person can be responsible for all these artists.

[86] Just amazing.

[87] Uh, you know, he also, he does the soundtrack for 16 Candles, many other movies, and then founds, you know, Interscope Records along the way that, you know, all these artists are on, probably, you could make an argument that there is no more important figure in popular music, you know, of the last century.

[88] That's how big his impact is.

[89] So his co -founder, Andre Young, who's that guy?

[90] Well, it turns out, as he says, you know, lots of people say that they forgot about Dre.

[91] Andre Young is Dr. Dre.

[92] Oh, David.

[93] I couldn't help myself there.

[94] So probably Jimmy's most favorite or most known for musical collaboration and business collaboration is with Dr. Dre.

[95] Dre, you know, started his musical career.

[96] He was actually part of the world -class Reck and crew, I think, originally.

[97] And then was a member of NWA.

[98] And, you know, their huge rise of prominence.

[99] And there's, you know, many movies have been made about Drey and NWA.

[100] There's a great, and I'm sure this is covered in lots of places, but in the HBO documentary, there's a great piece about how Drey basically gets on stage at this, this, like, you know, emerging nightclub for West Coast hip -hop.

[101] And he's the first person after experimenting a ton with a pre sort of like mixer turntable.

[102] combination.

[103] He sort of builds all the stuff on his own and assembles it.

[104] He's doing it in his house and his mom buys him this little mixer.

[105] And he's the first person to basically mix two different tempo songs rather than just like fading one into the other or, you know, lining up to their very similar BPM.

[106] And it's like an old 60s hit with, you know, new hip -hop song.

[107] And the audience like no one knows what to do.

[108] Like he just like created this new thing, which, of Of course, we hear all the time now that's sampled and mixed across decades and mixed from different tempos.

[109] But he gets up there and like no one can believe it.

[110] No one knows what to do.

[111] He just like created this new thing that no one even knows how to dance to.

[112] And, you know, as someone that, you know, you know who Dr. Dre is, but you don't know what his sort of origin story is.

[113] It's just amazing to, to, it's a great documentary.

[114] I can't recommend it enough.

[115] So great.

[116] And, I mean, Dre is like, you know, he's the whole image.

[117] why he's Dr. Dre.

[118] Like he, you know, he goes off in the lab and he cooks up, you know, a beat.

[119] And sometimes it takes him a decade to do it.

[120] But like he is, you know, one of the greatest, you know, musicians, you know, of all time.

[121] I mean, like, he just creates like these perfect fees.

[122] So like he's, he's obviously, you know, had his NWA career.

[123] You know, he's a rapper and makes music himself.

[124] But he produces, he's produced Tupac.

[125] He's produced Snoop.

[126] Eminem, 50 Cent.

[127] Kendrick Lamar.

[128] I mean, you know, like California love.

[129] That's him.

[130] That's Dre.

[131] He's not only rapping on it, but like the beat, like that's Dre.

[132] Pretty amazing.

[133] So Jimmy and Dre have been, you know, business associates, collaborators and, you know, deep friends for a long time.

[134] And in 2006, so this is the actual story of the founding of Beats, which according to Jimmy is completely true.

[135] If so, this is certainly the most amazing story.

[136] Jimmy's out running on the beach in L .A. He's exercising.

[137] and Dre is at his beach house and he sees he sees Jimmy out there you know like they're good friends he's like hey you know Jimmy calls him over and and they start talking they start chatting and Dre is like you know man my lawyer called me the other day and like Nike and Adidas like they're kind of after me they want me to sell sneakers they want me to do a sneaker deal what do you think and Jimmy to me looks at he's like sneakers like Dre nobody cares what you wear on your feet.

[138] Like, you know, you're, you're a recording artist.

[139] You're not, you know, you're not an NBA player.

[140] You know, you shouldn't sell sneakers.

[141] You should sell speakers.

[142] And Dre looks at it.

[143] He's like, you think we can really do that?

[144] And Jimmy's like, yeah, like, we can definitely do that.

[145] And Drey's like, oh, yeah, like we could call them beats.

[146] Like, you know, that's what I do.

[147] I make beats.

[148] We could call those speakers beats.

[149] And that's how beats got started on the beach in LA.

[150] Legendary.

[151] Totally legendary.

[152] I think Dre made the right choice not not going with the shoe deal um instead going with with headphones and speakers it seems like it so at this point is it just beats electronics there's no beats music so yeah the idea well we'll get we'll get into what happens next in a sec but i want to step back first just give a little bit of context so you know i have in as we've talked about he's he is like the music injuries to executive um and what he's great at you know like we're saying is like he re -invents himself.

[153] He sees the future coming.

[154] You know, he goes from Stevie Nix and Tom Petty and Bruce Springsteen to, you know, Tupac and Snoop and Snoop and Snoop and Eminem and Dre.

[155] And he sees, you know, this is 2006.

[156] Like, he's known for a while that like digital, the music industry is, is dead as it once was.

[157] It needs to be transformed.

[158] Digital has completely disrupted it.

[159] You know, it started with Napster.

[160] But then Apple is is really big at this point.

[161] And, you know, with the iPod and the iTunes store.

[162] And Jimmy's, actually been, he was good friends with Steve Jobs.

[163] He got to know Steve and Apple in 2003 when Apple was launching the iTunes music store.

[164] So Interscope was a big part of that and all the content.

[165] And so Jimmy's been thinking about this for a while.

[166] And the thing is that like he knows, I mean, he's an executive.

[167] Like the whole business model has changed because of, because of digital.

[168] It's not just piracy, but it's like now, you know, music is sold as singles, not albums, one.

[169] Two, the entire distribution model, like, it used to be like you needed, you needed radio, you know, to get distribution and then you needed like to get like physical CDs or vinyl like cassettes into stores and you need to have relationship with the stores.

[170] That's all blown up.

[171] Like it's now just, you know, iTunes and other digital platforms.

[172] The marketing's totally changed.

[173] But what's also happened is that like the channel is much wider in the relationship between like the artist and the music and the listener.

[174] Like there's now all those steps that used to be in the middle are now just completely collapsed.

[175] So Jimmy's, like, been thinking about this.

[176] And at the same time, he's also close to Apple.

[177] And, like, he's inspired by, you know, what they've done with hardware and with the iPod.

[178] And actually, cool side, I don't know if folks remember there was a lot of marketing for the iPod with U2.

[179] And U2 was like the first product that, like, U2 ever enjoys.

[180] There was the U2 edition iPod.

[181] I had it.

[182] It was awesome.

[183] With that red scroll wheel.

[184] I had that.

[185] It was so cool.

[186] You know, that's all like Jimmy.

[187] Like, because, you know, Jimmy discovered U2.

[188] You know, and he's close with them.

[189] he's the one who made that happen.

[190] So he's thinking about all this.

[191] And that's like in his mind as they're having this conversation on the beach.

[192] So he's thinking like, think about hardware, thinking about Apple, the evolving music industry.

[193] So they have the conversation.

[194] And a little over a week later, I guess, Jimmy calls, you know, nothing to have it.

[195] It's like, Jimmy calls Dre up.

[196] And he says, hey, I want you to come over.

[197] And Dre comes over.

[198] And Jimmy has gone out.

[199] He has bought every single headphone on the market.

[200] He's got him like all on a big table.

[201] It's like a, It feels like a, like, Johnny I have, like, product review, you know?

[202] And, and they listen to him, and he's like, they're the thing.

[203] Like, they all suck.

[204] They decide.

[205] They all suck.

[206] And it's not because they're not, like, good technology.

[207] But there's, there's two problems that they realize with the headphone industry.

[208] One, you've got, like, the headphones that come with the, you know, with the iPod.

[209] They're like, you know, the earpods or, you know, and other, you know, bundled headphones.

[210] And these things cost, like, a dollar to make.

[211] Like, they're super low end.

[212] And, like, you know, they're fine for what they are.

[213] but they're just like really cheap.

[214] They're not that good.

[215] But the other end of the problem, at the, at the high end of the market, to Jimmy and to Dre's mind, they're doing it all wrong.

[216] It's these tech companies that are making headphones and they're making them as reference equipment.

[217] And so the idea like the, you know, what audio files want, the pristine audio quality is like reproducing the exact nature of like every sound, every instrument like exactly as it comes off of the, you know, the guitar or the bass of the drum or, you know, the violin or whatever.

[218] But, but.

[219] But they realize, like, that's not, like, music isn't technical, it's emotional, right?

[220] And so, like, the experience that most people want when they listen to music is they want to be, like, emotionally, you know, they want it to be dramatic.

[221] They want it to be taken by the music.

[222] They don't want it reproduced exactly as it sounded, you know, coming off the instrument.

[223] They want it to sound emotional.

[224] And that's not what any of these headphones are doing.

[225] And this is the very first point where we realize good headphones and the ideal that Jimmy and Dreher, shooting for here is not at all the same thing that audio files are shooting for.

[226] Exactly.

[227] They're not a beloved headphone by people that have a certain way to evaluate are these high quality replica of what happened in the studio headphones.

[228] Exactly.

[229] Exactly.

[230] But what Jimmy and Dre realize and they know from their experience making popular music is the audiophile category is like a tiny, tiny, tiny market compared to the rest of the population who wants to experience music.

[231] And you know, when they're working out, when they're focusing, when they're, you know, whatever.

[232] It's part of their life.

[233] It's not something they want to like reproduce exactly.

[234] It's amazing how there was an opportunity for a brand and a category that was kind of unbranded.

[235] The brands there were, oh, well, I also have a stereo that's Sony, so I have Sony headphones.

[236] Or I also have a Walkman, so you know, I have Sony headphones.

[237] Or I have an iPod, so I'm using the stock iPod.

[238] It was always like, this is the electronics company that I have for something else.

[239] So I got their headphones too.

[240] I have no emotional connection and there's not a lifestyle that's that I have that's defined by this headphones that I'm using.

[241] And no one thought that that was a thing.

[242] Like people always thought, oh, it's an accessory or, you know, the very high end people thought, oh, it's a product on its own, but that's not a thing that permeates, you know, life.

[243] But it really defined a lifestyle and how you wanted to think about yourself when you put on beats headphones.

[244] Yeah.

[245] And it's also like, you know, it's a, also unlike a tech device that you keep in your pocket or on your desk or whatever, like, it's on your body.

[246] It's also like a, you know, a piece of fashion.

[247] And it's an advertisement for the brand that you're walking around with every day.

[248] So, you know, Jimmy and Dre, they realized this.

[249] And he even says, like, they decided they were going to market the product just like they marketed an artist, you know, like the product is an artist.

[250] And this is totally revolutionary at the time.

[251] Like, you know, who would have thought to market headphones like you would market, you know, like Jimmy says, you know, we decided we were going to market it like it was Tupac or you two or guns and roses, you know, like that's not, that's not what Sony's doing.

[252] That's the business plan.

[253] They decide, you know, rather than like trying to make all this hardware ourselves and get into the tech game, we'll just partner with somebody.

[254] So they partner with Monster, the high -end cable company, beats Dre and Jimmy and the team, super small team.

[255] They design the headphones.

[256] They create all the specs.

[257] Monster produces them.

[258] But what they do, they also do essentially like, you know, what are these guys?

[259] They're music guys.

[260] They do like artist development.

[261] They're treating the headphones like an artist.

[262] They do the same thing with the headphones.

[263] So like as they're getting prototypes over the next year, year and a half, like they're bringing them all into the office, into the Interscope office, and they're getting all the artists to like use them and give them feedback.

[264] So like every, you know, Will I Am, you know, Gwen Stefani, like all these people, you know, Lady Gaga, they're all like using them, trying them out, giving feedback.

[265] That's like the best way to get sort of early customers or influencers is like make them feel part of the process right that they're involved in I help shape this thing I've known about this since the very beginning like oh I you know I have even though they don't actually have skin in the game they have some sort of reputational or cool factor skin in the game and reason to be super excited and promotional about it when it finally debuts yeah well and it's exactly what they do you know with artists right like you know what did they do with m &M right like they brought him in they paired him with dray and then like you know m &M's first you know songs that came out, like, you know, Dre's in them.

[266] And Dre did the beats.

[267] And, like, you know, Eminem learns from Dre, right?

[268] But then also, like, he gets marketed by Dre.

[269] Same thing they do with the headphones.

[270] So the first product, quote, beats by Dr. Dre, studio headphones.

[271] No way.

[272] It was Beats by Dr. Dre?

[273] It was Beets by Dr. Dre in the beginning.

[274] Come out late 2008.

[275] And this is what they do.

[276] They put the headphones in the music videos of all of the artists on Interscope.

[277] So it's like, you know, when you do, like, you know, when you do.

[278] Like, you know, you know, whatever song, you know, for a new artist come out and it'll feature Dre on the, you know, the album or whatever.

[279] Like, you know, this is like a new song, like new headphones coming out.

[280] And they're featured on the albums of, you know, on the videos of all these other artists.

[281] That's awesome.

[282] Totally awesome.

[283] What great, unique marketing channel that other people just couldn't possibly have.

[284] Totally.

[285] I didn't even think of, like, because they're not thinking of headphones, you know, in this way.

[286] So then the other thing that they do pretty early on is they, they give a. pair to LeBron James, I think they actually give it to his manager, maybe, or somehow.

[287] Like, they get, they get a pair to LeBron.

[288] He's like, oh, yeah, these are cool.

[289] And he's like, give me 15 of them.

[290] Like, all right, LeBron.

[291] You're like, here you go.

[292] Here's 15, you know, pairs of beats.

[293] And this is right before the 2008 Olympics.

[294] And next thing they know, the NBA, the U .S. basketball team shows up for the Olympics in Shanghai.

[295] They are all wearing beats.

[296] And that's like, that's a signature of the company now, right?

[297] Is like a sports.

[298] team walking out of the tunnel onto the floor in their warm -up stuff all wearing beats.

[299] Yep.

[300] So they fall into, they realize that like sports is going to be massive for them.

[301] I mean, again, you know, headphones, totally crazy that nobody had thought about marketing headphones and speakers with like musicians before.

[302] But, but what about athletes, right?

[303] Like, you know, it really is, it goes back to Dre and the shoe deal, you know, like, let's market it the same way.

[304] So this leads to a couple years later, the awesome, they hear what you want commercials that they do, you know, with Richard Sherman and Colin Kaepernick.

[305] Kevin Garnett, just so good.

[306] And, you know, really a big part of the marketing, especially for people that maybe might not be as much into music or artists particularly, but like are into sports.

[307] Like it really becomes a lifestyle brand.

[308] And then we're skipping ahead a couple of years.

[309] We'll come back.

[310] But in 2014, you know, the beats are so popular in the NFL and all these commercials are hitting.

[311] The NFL does a deal with Bose headphones and like, and they ban beats.

[312] and Jimmy's like they actually Jimmy gives an interview about this like as it's happening and there's so much publicity and they're like everybody's talking about it all the athletes are talking about him Jimmy's like this is the best thing that ever happened to us like I literally could not have planned this any better it's like the narrative of like these rich guys want to come in and pay money so the people can't have what they want what they want is beats it's like uh you know it's like the parallels to when uh when Facebook tried to copy Snapchat with poke you know and it's like you take a step back and you're like this is the best thing that ever happened to Snapchat but okay so back to the company story so they the launched first product in 2008 it's really successful they're growing but they're still you know they've got this partnership with Monster beats itself as super small company they're just you know they're the brand and they're the design and reference designs but they decide you know they want to grow so they they partner with with HTC we've referenced this and other episodes on the Android episode and others but what was the one we did uh I think it was the uh the HG DC Google.

[313] Yeah, HTC Google, right, HTC itself.

[314] HTC ends up acquiring a majority stake in Beats in August 2010, and they pay $309 million for a 50 .1 % stake.

[315] So the company's valued at over 600 million.

[316] As Jimmy talks about it, it's mostly Jimmy because Dre doesn't talk much.

[317] Like, this is his thing.

[318] Like, Dre, he's just in the lab.

[319] Like, he hates talking to, hates talking to anyone, little in the press.

[320] but Jimmy talks a lot and so Jimmy talk about it and he's like well you know I knew the future of music was going to be you know on smartphones and so I thought like we needed to you know we needed to tie up with a smartphone manufacturer to get you know our headphones and our technology into into these phones so this is where you have like beats by Dre HTC Android phones that are coming out for a while which are hilarious we totally should like we should find somewhere that's like an acquired like museum and put some of these products in there we can get a next station.

[321] We'd get an HTC beats phone.

[322] Oh, yeah.

[323] We didn't do an episode on it, but we referenced that HP iPod.

[324] Oh, yeah.

[325] Oh, totally.

[326] Oh, and we should get the U2 iPod.

[327] Of course.

[328] Oh, this is great.

[329] Maybe we can finally get all that YouTube music off my iPhone that was put on it without my permission.

[330] Oh, yeah, that's right.

[331] I forgot about that.

[332] Oh, man. That was a disaster.

[333] Yeah.

[334] That's actually a great idea.

[335] We should do an acquired museum.

[336] If anyone wants to sponsor an acquired museum somewhere.

[337] David.

[338] You know what?

[339] I hope one day this show gets to the level where we have an actual physical museum.

[340] For now, maybe in one of our houses.

[341] You got a dream.

[342] Okay.

[343] So they do the deal with HTC and the company beats and continues to grow.

[344] It totally overtakes pop culture.

[345] I mean, kids everywhere wearing, um, not.

[346] on kids are wearing them.

[347] They're growing and growing.

[348] 2012, Jimmy and Dre kind of realize like, okay, there's a huge opportunity here.

[349] And if we're really going to make this a big company, we got to own, we got to control our own destiny.

[350] We got to kick Monster out and, you know, and build everything in -house.

[351] And again, remember Jimmy, you know, knows everybody at Apple.

[352] He's super inspired by them.

[353] And this idea of, you know, like hardware and brand and software altogether.

[354] So they don't renew the partnership with Monster.

[355] they moved to producing the hardware themselves.

[356] Monster, this is just such an example of, like, the competition these guys were facing in the headphone industry.

[357] Monster decides like, oh, we can do this too.

[358] We're going to come out with, like, lifestyle branded headphones and work with artists.

[359] So they release Earthwind and Fire branded headphones.

[360] I love Earth Wind and Fire.

[361] Great group from the 60s and 70s.

[362] But, like, are you serious?

[363] Drey, Earthwind, and Fire.

[364] Same residents, you know, same group of people.

[365] Totally.

[366] Oh, yeah.

[367] And have reverence.

[368] Our twin and fire headphones are totally going to de -throne, you know, Beats by Dre and Richard Sherman and Colin Kaepernick and LeBron James.

[369] Like, you know, are you kidding me?

[370] To be fair to Monster, they also come out with Miles Davis branded headphones, which, you know, again, like Miles Davis, great.

[371] But like, how big is that market versus, you know, LeBron James fans?

[372] Yeah.

[373] And I mean, the mark that they miss there is not that, like, I love Dr. Dre, so I listen to beats.

[374] It's that Dre is cool and there's, and he's behind beats and beats of the.

[375] brand.

[376] Not that, like, I want to represent Dr. Dre every time I wear my beats around.

[377] Totally.

[378] Totally.

[379] Um, so then they actually, this is monster.

[380] They end up suing after the Apple acquisition a couple of years later, they end up suing beats and Apple.

[381] They're like, oh, you deal.

[382] Cheetahs out of all this.

[383] And Apple's like, this is such a baller move.

[384] Apple's like, okay, fine.

[385] So they revoke Monsters membership in the like certified Apple accessories.

[386] Like, you want to play hardball.

[387] We'll play hardball.

[388] The MFI is certified.

[389] Yeah, the MFI is certified and Monster pursues the case.

[390] A court eventually throws it out.

[391] Like, this is totally baseless case.

[392] So there are, I'm sure, a large group of people in Apple that have like zero respect for what Monster does as a company anyway.

[393] And I think it probably felt good just to like be able to to stick it to him there.

[394] Because I mean, for, in my mind, the thing that I'll always know Monster for is, is like, complete B .S. lying to you marketing about the quality of connectors that are no better than the connectors that you could get for something that is a fifth the price and then charging you $150 for an HDMI cable.

[395] I just have to imagine that having recourse to tell that company to, you know, stick it somewhere is a nice feeling.

[396] I feel like there was some, I don't know if this has come out in court cases or otherwise, but there must have been some, like, massive collusion between Best Buy and Monster throughout, like, all of the 90s about all this stuff.

[397] Like, it's digital, right?

[398] Like, the quality of the kids, it's ones and zeros.

[399] Like, it's not analog.

[400] It's gold -plated.

[401] You don't understand.

[402] All right, let's get out of Monster Land.

[403] The other part about kind of controlling their own destiny, you know, Jimmy and Jay also realized that, like, tying up with HTC is not the future here.

[404] First, they get HTC to sell back half of their stakes.

[405] They own 50 .1%.

[406] They sell back 25 % to the company in 2012.

[407] And then in 2013, the Carlisle Group, the big private equity fund, they actually invest 500 million in Beats and use part of that proceeds to buy back all the rest of HTC.

[408] So HTC is completely gone by 2013 from the cap table.

[409] Did Jimmy and Dre get any liquidity from that initial 50 .1 % purchase from HTC?

[410] Do you know?

[411] I don't know.

[412] I mean, I suspect so, but I don't know.

[413] I don't know.

[414] but apparently I think when that happened I could be wrong here but I think the company was like five people like I mean it was literally just like Jimmy and Dre oh because all the manufacturing was still contract yeah it was all done by Monster so it was just like you know the beats was just doing like the design the sound tuning and that that was done by you know mostly Dre and then the marketing so it's kind of crazy that like HTC you know that you could build such value and that HTC paid, you know, 300 million for half the company with like five people.

[415] Yeah.

[416] Talk about a talent acquisition.

[417] Yeah, seriously.

[418] Well, we'll get into that in a minute.

[419] Actually, that would be kind of a fun, yeah.

[420] Probably not another episode, but it's interesting.

[421] We should, when we're classifying what type of acquisition it was for Apple, we should also do that for HDC.

[422] Yeah, totally.

[423] Good point.

[424] Let's remember to do that.

[425] As part of all this, they start producing the products themselves.

[426] They're done with Monster.

[427] are the first in -house beats products that come out are the beats executive headphones first and the beats pill wireless speaker, which was a massive success of a product is now on multiple generations.

[428] The other thing they do as they're doing all this is they acquire a small tech company, a music streaming company called MOG.

[429] And this is part of, you know, back to Jimmy's vision about like the whole music industry needs to change.

[430] Like he's.

[431] always wanted, you know, I mean, headphones is great, and that was, you know, how they started Beats, but, like, his vision was, like, much bigger that this was going to be his way of writing the next wave in the music industry.

[432] So MoG was fairly struggling.

[433] I mean, it was, at this point, Spotify had entered the U .S. and kind of won the market.

[434] But they did some interesting things, and they had some definitely good tech talent.

[435] So Beets acquires them and starts working on totally redoing the Moog service and rebranding it as, as Beets music.

[436] So they work on that for about 18 months and in the meantime hit over a billion dollar revenue run rate just on the headphones and then in January 2014 they relaunched MOG as the beats music streaming service but the thing that beats music has that none of these other streaming service has have that they think is really important is they have actual involvement by the artists themselves so there's like playlists that are made there's recommendation curation by by dray by the Interscope artist by Jimmy you know everybody else is just an algorithm at this point and dray and jimmy think this is the future yeah and this is i'll i'll borrow from tech themes ahead now but this is the the jimmy iavine vision that manifest in multiple forms that's really respect the artist keep the artist involved it's all about the artist in fact in the defiant one's documentary he's there's a quote from him where he's like people people like to attribute things i did to me and success to producers and producers try and take credit for that a lot of the time.

[437] It's 99 .9 % the artist and you've got to respect that and you've got to understand that.

[438] And that's what makes a great producer.

[439] And it's interesting looking at the streaming service and saying, you know what the artists need more involvement with this.

[440] Human curation.

[441] So foreshadowing the beats one radio, you know, it's human curated and that's actually a value proposition rather than algorithmically selected or, in fact, not even algorithmically selected and just showing you, you know, huge lists of song for you to search and browse through.

[442] And then, you know, a tenant of Jimmy's as beats would grow later is we don't have a freemium tier.

[443] And we'll talk a lot about this.

[444] But like artists get paid for music and that's final.

[445] And that's his, his party line through and through and really sets him apart from a lot of the other sort of disruption that's happening in the in the space.

[446] Yep.

[447] Yep.

[448] Well, and the, you know, just the whole ethos again, getting back to the headphones of like music is personal.

[449] Music is emotional.

[450] Music is not technical.

[451] And I think that's part of the vision here, too, is like, you know, your music service, you don't want an algorithm, you know, queuing up what's next.

[452] You want, like, Dre queuing up what's next.

[453] You want Stevie, you know, queuing up what's next.

[454] Maybe.

[455] Maybe.

[456] We'll see.

[457] My Discover Weekly is really good.

[458] Well, totally.

[459] I'm not saying it's right.

[460] I'm just saying this is Jimmy's, you know, vision.

[461] And certainly for, you know, for a big part of the market, I think that resonates.

[462] We'll get to the end of the story here now.

[463] And the end is kind of just as fun.

[464] might also be the coolest end to a acquisition story that we'll ever have on Acquired, certainly thus far.

[465] So May 8th, 2014, remember in January, they launch beats music just a couple months before.

[466] So a few months go by, May. The Financial Times reports breaks the news that apparently Apple, Jimmy's old friends, are in negotiations to buy beats for $3 .2 billion, and this would be the largest acquisition in Apple's history by literally an order of magnitude.

[467] So the previous largest was the next acquisition, which we covered, which was just over $400 million.

[468] This would be, you know, Apple doesn't do things like this.

[469] This is huge news.

[470] And it's true, negotiations are going on, but they're not done yet.

[471] And so Jimmy calls up Dre.

[472] And he's like, all right, this came out.

[473] Like, we got like, this is Apple.

[474] They're so secretive.

[475] Like, they could walk at any moment.

[476] Like, we know these guys.

[477] Like, we got to keep quiet until this is done.

[478] You can't say anything.

[479] Just keep it on the DL, like be completely, like do not do anything.

[480] Drey's like, yeah, yeah, got you.

[481] So Drey's in the studio that weekend and he's hanging out with friends.

[482] And one of his friends is the actor and singer Tyrese Gibson.

[483] They're hanging in the studio and they're talking about this.

[484] Of course.

[485] Like, what are you going to talk about?

[486] Like you're about to sell their company for, you know, $3 .2 billion.

[487] And they're really excited.

[488] And it's late at night, and they, you know, they're drinking.

[489] They get drunk.

[490] And Tyrese, you know, pulls out his phone and makes a video of all of them.

[491] And they're celebrating.

[492] And, and Tyrese says, like, the Forbes list just changed.

[493] Just came out.

[494] They're going to have to, like, new information.

[495] They've got to change the Forbes list.

[496] And then Dre pops up.

[497] And he's like, first billionaire in hip hop right here.

[498] And they're like, you know, or their party, whatever.

[499] They go to bed.

[500] So goodchworthy.

[501] That night, 4 a .m. so early early morning jimmy calls up dray and he's like what the you know f like like what the heck are you doing and jay's like what do you mean and jimmy's like that video and jr's like what do you mean tyrese posted it to facebook and this was right when facebook video was like launching so people didn't really understand like what facebook video was and so obviously it's on the internet now they don't actually say that Apple is acquiring beats, but like, it's strongly implied here, especially corroborating this, this article.

[502] So there's some rockiness to the deal.

[503] And honestly, I, I can't believe Apple still went through with it.

[504] I can't either.

[505] But they do.

[506] But, you know, supposedly like it was, you know, the Financial Times was reporting beginning of May, it's close to done.

[507] Nothing gets announced until the end of May. So May 28th, 20 days later.

[508] And when it gets announced, Apple is doing the acquisition for $3 billion, not $3 .2 billion.

[509] Nobody discusses why.

[510] And there's speculation.

[511] Well, it could be that the beats music subscriber numbers were actually a little lower than, you know, they thought they will.

[512] Maybe it's the Tyrese video.

[513] We'll never know.

[514] But pretty hilarious.

[515] I mean, it really shows a few things.

[516] one, how badly Apple wanted to do what they were going to do with Apple music and how integral they viewed beats in doing that, two, the power of Jimmy and his relationships.

[517] The characteristic Apple we know of, it's done.

[518] Like, you messed up.

[519] We're no longer moving forward with this.

[520] You've proved yourselves to be people that we can't, you know, can't trust to sort of live the Apple way.

[521] And lead a huge part of the company going from.

[522] I mean, this is the largest acquisition by an order of magnitude that Apple's ever made.

[523] Yep.

[524] So the day it gets announced is actually the recode conferences is going on.

[525] Code conference is going on.

[526] And so Jimmy and Eddie Q, so Eddie Q's always been the media and content guy at Apple.

[527] And the day the deal gets announced, he's scheduled to be interviewed on stage at the code conference by Kara and Kara Swisher and Walt Mossberg.

[528] And the deal gets announced, right?

[529] So he and Jimmy come up on stage together and they get in there, they're interviewed by Kara and they're like, well, this is big news.

[530] But people knew it was coming.

[531] But the thing that Jimmy, you know, makes the point on Eddie both several times in this interview is like, this didn't happen overnight, you know, that Eddie had, Jimmy had been working with Apple and with Eddie for over a decade, you know, going back to the launch at iTunes Music Store and to, you know, so to your point, Ben, I mean, the relationships, like, that's got to be what saved the deal here.

[532] Yeah.

[533] God, to be a fly on that wall.

[534] to understand the phone call that Eddie Q makes to Jimmy.

[535] Or did Dre?

[536] Yeah, well, it's funny.

[537] I kind of hope that Eddie just called Dre up.

[538] I know, right?

[539] In the Defiant ones, they do talk a lot about, and I haven't finished it yet, but in the, at least in the first part of it, they talk a lot about the, how, how Jimmy finds out and talking with Dre about it.

[540] We don't hear at all what the communication from Apple is like.

[541] And so, you know, it's very, it's, there's still, there's still the core of Apple in there.

[542] they're really like somebody someday should do like a book and like go in and research like all like the actual stories behind all this stuff at Apple it starts it leaks out you know a little bit over the years as things get older but there's so many of these that um you know there should be there should be an actual historian go it and like do this at some point yeah great point so so at this point the acquisition it's actually two LLCs it's beats electronics LLC and beats music LLC.

[543] And I remember when I first heard the news, it not being totally clear to me which was more valuable, more strategic, why Apple was actually doing this.

[544] I mean, to me, it seemed like beats music was, yeah, it had some people using it, but like clearly not going to be a winner.

[545] Like Spotify was going to be a winner.

[546] It paled in comparison to people still doing the 99 cent thing from Apple.

[547] Like the headphones were super popular and permeated.

[548] pop culture and seemed to be doing really well.

[549] So I think in my head, at the time of the acquisition, before Apple Music was announced, I'd sort of chalk that up to like, okay, they bought the headphones company.

[550] Yep, yep, totally.

[551] You know, the sort of Coda here is just over a year later, Apple Music launches Apple's first streaming service, and it is a, you know, rebranded and revamped beats music, including the Beets One radio station.

[552] That's part of it that's hosted by, Dre and other artists.

[553] And so that launched and that becomes, you know, Apple's primary music offering.

[554] But then also, as we know, Ben is wearing them right now, Apple has gone much deeper into headphone technology over the last couple years.

[555] Yeah.

[556] You know, I'd say we did a good amount of research, not totally clear how much the beats folks were involved in the AirPods design.

[557] I mean, I think there's a little bit of crossover, but Apple actually doesn't influence the beats hardware stuff very much.

[558] I think they're taking advantage of some economies of scale and some innovation where they're sharing things between those two.

[559] For example, the W -1 ship that's in the AirPods appears also in the most recent beats wireless headphones.

[560] But for the most part, I believe it's Apple's existing hardware teams continuing to work on the AirPods and beats hardware teams continuing to push the ball forward on on beats headphones.

[561] And there was some layoffs in the consolidation.

[562] They laid off, I believe, 200 people in combining the companies.

[563] Yep.

[564] Well, this is probably a good segue into acquisition category, and we can get into some of the numbers of analyzing the deal later and grading and other segments.

[565] But I think it comes down to, like, what was this acquisition?

[566] You know, I mean, for me, I was thinking about it, like, it actually kind of fits a bunch of our categories.

[567] Like it's a business line for sure.

[568] Like, you know, Apple now owns Beats.

[569] They're selling Beats headphones.

[570] Which in itself is over a billion dollars.

[571] I mean, even before the acquisition, I think this is 2013, 2014 numbers, but over a billion dollars in revenue just on the headphones.

[572] Yep, totally.

[573] And that's when Apple acquired the company.

[574] You know, it's also an asset.

[575] It's the brand of Beats for sure.

[576] As we talked about, you know, that's, um, that's, um, was at the time and still is a huge part of pop culture that Apple's getting access to.

[577] But I think it's also like if I had to choose one, I think it's actually people.

[578] And I think, you know, there's there's a lot of really, in some ways, kind of funny and unexpected parallels to the next acquisition here.

[579] And, you know, Steve Jobs coming back to Apple.

[580] I wouldn't put Jimmy and Dre's impacted Apple anywhere near the level of Steve Jobs.

[581] But it is an impact for sure.

[582] and there's that long relationship and I think it comes back to the AirPods too like whether or not the beats team was involved in the AirPods it is this like view of what is you know audio what is music is it something technical or is it something that's like part of your life yeah I mean it's definitely a scattering of categories the way that I was thinking about this acquisition and how to do the analysis I sort of discarded I did discard the headphones line of business I mean, yes, it's a brand, and it's a great source of revenue, and it's only continued to improve since they bought it.

[583] Though they don't break it out, I think Beats has become more, more, more prominent over the years.

[584] What they, in my mind, bought was two things.

[585] It's one, an existing app and service that was well done so that, you know, they didn't have to start from scratch in -house.

[586] You could imagine Apple being, knowing they were going to do Apple music and knowing that they wanted to compete with Spotify in this world where a thing they pioneered, music over the internet, was being largely disrupted and they needed to become a player in the changing world.

[587] They totally could have done it on their own.

[588] Yep.

[589] But also Apple, I mean, in the Sound Jam episode, which is like totally the precursor to this episode, you know, they made the same decision.

[590] like let's buy a good technical service and like, you know, use that as a starting point.

[591] Right.

[592] And so that's not worth $3 billion for sure.

[593] Totally.

[594] That's all that's where it was going.

[595] You know, sound jam is worth.

[596] What was sound jam is just a talent acquisition.

[597] Yeah, like 10 million or less.

[598] Yeah.

[599] One piece of analysis that I read was like, well, consider if they had decided to do it on their own to compete, you know, let me paint this picture.

[600] A competitor of theirs rises to prominence using their own.

[601] devices as distribution in a thing that, a service that people consider core to their lives.

[602] And this analysis was talking about Google Maps.

[603] Apple decides to do something on their own to compete and comes out with Apple Maps.

[604] And there's, you know, a large debate over how that's going.

[605] Although I think a lot more people use Apple Maps than like, you know, at least in the tech world we give it credit for.

[606] Right.

[607] There's also an element of Apple, they're not great at social they're not great at services compared to other companies so there's a lot of risk in them having complete and total control to shape the product of what does this service look like and by buying you know beats music they had a really good starting point now again none of this is worth three billion dollars some of that is because the headphones business was already doing great so anybody who wanted to just buy that thing would have to pay a billion or more for that on its own.

[608] Then when you layer on, okay, great, we're going to get this scaffolding of a great music service.

[609] So call that a technology.

[610] I'd say product, but I really, well, let's say product.

[611] What you really need on top of that to make the whole thing tick and to really start competing with Spotify is Jimmy's relationships and beats, you know, Drey and Jimmy's position within the industry.

[612] And so to enable that sort of technology product that they built to really start to be differentiated and scale, you know, is the talent there.

[613] I totally agree, but I would even go one step farther.

[614] I think maybe this is heresy, given, you know, like we're talking about, the way audio files view, you know, beats and whatnot have funs.

[615] But I actually think there are a lot of parallels here to the Instagram acquisition at Facebook.

[616] I'm just going to paint this picture.

[617] Who knows it would have been successful, how long it would have taken.

[618] I think Beats could have been a serious threat to Apple in the long term.

[619] Jimmy and Dre, and particularly Jimmy, well, maybe Dre too.

[620] He just doesn't talk much, so we don't know.

[621] But they had a vision, right, of like, what was Beets and what was this combination?

[622] Jimmy talks about it all the time in these interviews, like, how much he idol, you know, he respected Steve Jobs' view of, like, technology plus liberal arts.

[623] And you could argue with, like, how well Beets did on that, but, like, that was the driving vision.

[624] It was like, we're not just a headphones company.

[625] We're not just a tech company.

[626] We're also not just a music company.

[627] We are like part of your life.

[628] And like the relationship that we have to our customers is super deep.

[629] And that's exactly what Apple is too.

[630] Right.

[631] Like so maybe we're bleeding into what would it happen otherwise now?

[632] But like say this acquisition hadn't happened.

[633] Like what does beats look like now?

[634] What does beats look like in 10 years as a standalone company?

[635] Like just like Apple started with, you know, let's take, you know, Apple version two, you know, after Steve Jobs comes back, starts with like a MP3 player, you know, like, oh yeah, that's nice.

[636] Apple's doing consumer electronics now.

[637] That's, that's cute.

[638] Now Apple's the biggest company in the world and like the most personal relationship with like billions of people around the world.

[639] Maybe headphones was the way that like beats could have done that too.

[640] It's interesting to think about it, especially in the future that we've like painted on other episodes where wear a headphones and a watch.

[641] or headphones in a wearable in some way are the new phone.

[642] But you sort of do need to be the ecosystem owner of all of those things in order to do that.

[643] And Apple, I think it's pretty hard to be a new entrant to commute with Apple there.

[644] Yeah, totally.

[645] Well, I think Beetz would have had a really hard time technologically doing it on their own without Apple, right?

[646] But this is where it comes back to the AirPods, right?

[647] And like, where is computing going?

[648] Where is technology going?

[649] But also where is like, you know, where is society?

[650] where the liberal arts going, like, and that's why you're back to the people, the relationships like you're saying, like, Jimmy and Dre, like, they understand why people use things.

[651] Like people buy headphones and listen to music because of the emotional, you know, impact of the music, not because of the tech specs, you know, like, and I think that's what Apple got so right about the iPhone, right?

[652] Like, it's not about, like, you know, like, you know, the talk show, what talks about this all the time.

[653] Like, Apple doesn't market on speeds and feeds.

[654] Like, it markets on, like, how this impacts your life.

[655] To me, that's like the biggest thing here is a people deal, and that's why this is a $3 billion acquisition and Apple's largest ever, and that's why Sound Jam was a, you know, aqua hire.

[656] Wow.

[657] It's a bold statement.

[658] If you were to attribute, I'm sure there is actual models with attribution to this, if you were to attribute that $3 billion allocated across beats electronics and beats music, how would you do it?

[659] I just see, I don't think Apple would do that.

[660] And I don't think that's how.

[661] how you should think about it because it's about like again it's about like the AirPods you know like which isn't beats at all right but it's about like what this vision can get to and how beats as a company beats as a brand jimmy and dray's leaders can help apple you know get there and they just happen to bring a lot of really helpful assets along the way yeah and ask but you can't value the assets right like again back to sound jam like sound jam had no brand sound Sound Jam had no, like, they had customers who, who, like, used the product and liked it, right?

[662] But, like, it wasn't, like, the NFL wasn't banning Sound Jam, you know?

[663] Right.

[664] Oh, man. Yeah.

[665] I don't know.

[666] I mean, like, I'm definitely out on a limb here, but I think it's true, right?

[667] Like, because the question is, why did Apple pay $3 billion for beats and, you know, $3 million for Sound Jam?

[668] Right.

[669] All right.

[670] All right.

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[689] Before we go into what would have happened otherwise, why don't I catch us up a little bit on how is Apple Music doing?

[690] And what did the world of streaming services have that evolve?

[691] so let's rewind to before the uh the beats acquisition so spotify had collected 20 million paying subscribers while apple had no offer you know no offering in the market and you know they're the pioneers of digital music and or the yeah of you know legal legal digital music and here they are sitting there while they're being completely disrupted in fact pandora even grabbed 80 million active listeners, and it looks like about 4 million paying subscribers, still Apple's doing nothing.

[692] So Spotify's got this huge free tier with 20 million paying.

[693] Pandora's got 4 million -ish paying.

[694] If you fast forward to today, what has sort of happened with Apple Music, they've obviously launched in 2015.

[695] They now have 30 million paying subscribers, no free tier, just I think free trial.

[696] That's right.

[697] 30 -day free trial.

[698] And where Spotify is, is that Spotify has about twice that.

[699] They've got about 60 million paying subscribers and over 60 million who are free.

[700] So Spotify has about double the listener base that Apple does.

[701] If you consider, and there's this amazing chart on Asimco that we'll link to in the show notes called Growth of Music subscribers, Apple Music has basically been growing linearly since launch after 12 months they were at about um it looks like about 14 million subscribers after 24 months they were at about 26 uh and and here we are around 36 months um where they're they've just crossed the 30 threshold and so they're they're growing much faster than than Spotify who took years and years and years to to 30 million but now Spotify is is really starting to um sort of hit their acceleration in their exponential curve.

[702] So still a very fierce battle.

[703] Well, while Apple, if you consider a number of months since launch is way out ahead, but obviously Spotify launched way earlier and is now accelerating it at sort of breakneck speed to actually convert their free tier to paid tier.

[704] You know, we're in this world today where Spotify is preparing for some kind of liquidity.

[705] A lot of people are speculating that it's going to be a direct listing and go public.

[706] There's talk of it being a $20 billion.

[707] market cat for that company when they do a direct listing.

[708] And they are accelerating faster than Apple Music is in terms of paid subscribers right now.

[709] And there's a very philosophical difference between Spotify's ad -supported sort of freemium tier that converts to paid or Jimmy Iavines, we don't give away music.

[710] We charge for music and we give it to the artists.

[711] And Apple is sort of okay with growing more slowly or has sort of taken the position that we're okay, growing more slowly because we have a more sustainable model that rewards everyone fairly.

[712] And honestly, Apple's got the cash pile where, you know, it can be a loss leader for Apple.

[713] And, you know, of course, they make money on it.

[714] If you, if you look in and see what the margins look like, Apple Music, it looks like, operates around a 42 % gross margin when you're just working off of the fees that they're paying to the record label.

[715] So there's obviously other costs in there.

[716] So they pay 58 % to the record labels.

[717] Spotify actually pays less.

[718] Spotify pays, they've dropped it from 55 % down to 52%.

[719] And so Apple's paying 58 % to the record label.

[720] So the labels look at Apple Music and at Jimmy as, hey, this is a thing that's better for us.

[721] They have a strategy that's better for us where Apple doesn't need to make as much margin on this thing.

[722] They're doing better by the artists.

[723] So it'll be really interesting to see how this whole thing plays out between Apple Music and Spotify with different philosophies, Apple way late to this market, but obviously with a huge cash pile to be able to fight.

[724] Well, I'd say two things.

[725] I mean, one, it's also interesting to just think about the numbers and relative to me, we're foreshadowing ahead a bit to grading, but Apple Music has 30 million subscribers right now at $10 a month.

[726] Now, some of them are on the free trial and whatnot.

[727] So, like, you know, a discount, hyperaggressive discount of, like, say, you know, two -thirds of that is like one -third is is not paying the full $10 a month.

[728] They also have family plans where you can get the whole family on for $15 a month.

[729] So we'll be aggressive.

[730] I'm sure it's not quite a third that they're losing, but say it's third.

[731] So they have 20 million people paying $10 a month.

[732] That's $200 million a month at roughly 50 % gross margin.

[733] So $100 million a month gross margin contribution to Apple.

[734] That's over a billion a year.

[735] Like that's pretty good for paying you know, three billion for for beats.

[736] So financially, like, that's pretty good.

[737] Um, but also be, I think like, I do really believe there's this other part of the story to music.

[738] Like, it's not just music.

[739] It's not just Spotify versus Apple.

[740] It's the whole ecosystem and the impact on your life.

[741] So like Apple music is smaller than Spotify for sure.

[742] But like with Apple music, you know, you have like there's beats, right?

[743] And like if you're a beats, if you use beats headphones, like that's partially maybe important to you, at least from a brand standpoint.

[744] But then there's also just like, you know, things like the watch, you know, right?

[745] Like, and now Apple music on the watch.

[746] And it's like, and with AirPods.

[747] And so now you can just start to get this integration into your life like I was talking about earlier in a way that's just part of a whole larger product in being part of your customer's life that Spotify will never be part of.

[748] It's very, like, I mean, this is Apple's largest acquisition ever, right?

[749] Yeah.

[750] It's all about the music.

[751] Another interesting thing I should point this out when I was diving into this is there's a great quartz article that's called 90 % of revenue comes from 30 % of Spotify's users.

[752] If you look at it like they probably have about twice as many free as they do paid, so that's sort of a one -third, two -thirds thing, 90 % of their revenue comes from that smaller group of paid subscribers.

[753] So if you're ever thinking like, boy, it really seems like they want me to upgrade to this paid tier, they're not making jack off of you as a, as a, you know, listening to ads.

[754] That's really just a way to subsidize, like, you know, we don't want to lose too much money on giving this away free.

[755] Yeah, interesting, interesting.

[756] The other player we absolutely should, you know, mention here is Amazon.

[757] Like, Amazon's making a huge push with Amazon music and including, so there's two tiers of Amazon music.

[758] There's prime music included for free in prime, which is streaming of a couple million songs.

[759] So nowhere near as large a library as Spotify or Apple, but like enough for people who don't care that much about music, like, oh, I could pay 10 bucks a month or I could get this included in my prime subscription.

[760] And then Amazon also has unlimited, music unlimited, which is a direct competitor to Apple music and Spotify, which is also priced cheaper at, I think, seven or eight bucks a month.

[761] And this is where, right, like, I would rather be Apple than Spotify in this situation, because Spotify.

[762] Spotify has to now deal with competing directly with Amazon, but Apple and beats don't compete directly with Amazon.

[763] Yeah, Spotify is in the unfortunate middle here.

[764] Either compete with Apple head -on or compete with Amazon head -on, but you don't want to be kind of caught in the middle.

[765] All right.

[766] Well, I feel like we've done category and what would have happened otherwise.

[767] Should you do tech themes quickly?

[768] Ooh, what would have happened otherwise?

[769] Could Apple have successfully created Apple music without acquiring beats?

[770] Oh, yeah, of course they could have.

[771] What would it be missing?

[772] let's look at like what apple's starting to do in video or Amazon too like right like the best Apple I think could have done without beats is is what Amazon's done is like you know totally serviceable service right and that's part of the larger ecosystem and that's great but by bringing on beats they got a couple of things like we've talked about they got the existing customer base now most of those were headphones right but like millions and millions and millions of people that identify with the brand and have a relationship with the brand.

[773] But Apple Music is definitely not the beats brand.

[774] Like you don't get that for free.

[775] You don't, but like, but they could draw a lot of that customer base into it.

[776] But then also they get like, you know, they get a vision for it, right?

[777] Like in what Jimmy, you know, has articulated.

[778] And again, like, has it been as successful thus far as it could be or will be in the fullness of time?

[779] I don't know.

[780] But I don't think they would have had that without a leader, you know, like leaders.

[781] like Jimmy and Dre to come in and do it.

[782] Again, because it's all about the artists and the marketing.

[783] And so you need to be like, like Eddie Q going and being that leader in the music industry isn't credible, you know?

[784] Yeah, yeah.

[785] In fact, he's feared in many ways by what he did last time around.

[786] To pin that down a little bit more, is the service worse?

[787] So there is more churn.

[788] So there's, I guess what I'm getting at is they already had like the best channel you could possibly have to try and sell people a music service by being baked into the platform.

[789] would they be sitting at 30 million subscribers today if they tried to do this without Jimmy and Dre?

[790] Yeah, I don't know.

[791] Maybe they would, maybe they wouldn't.

[792] But I don't think they would have, you know, as you pointed out, like Apple's relationship with the music industry and with artists was tenuous at times.

[793] And now it's much, much better.

[794] Right.

[795] Well, if they had waited a couple more, I guess they could have bought title.

[796] they could have that's true yeah all right tech themes that would be a fun show tech themes uh all right so one uh one for me is just like technology in the liberal arts and obviously as you guys can tell from this episode i'm drinking the kool -aid here i mean how can we not it's an apple show um but uh but two one i want to talk about is um this actually is totally similar to the stitch fix IPO for me like that that jimmy and dray saw something that was overlooked in the market and built a business around that and had an insight that nobody else had.

[797] And this is really like going back to business school, one of my professors was Andy Rackleff, who was one of the founders of benchmark.

[798] And he talked about, he took this from Howard Mox, Howard Marks at Oak Tree, this idea of like a two by two matrix when you think about investing or building companies, you can be right or you can be wrong in what you're doing.

[799] That's like, you know, one of the axes of the two by two.

[800] matrix and obviously you want to be right not wrong if you're wrong you lose money no matter what but if you're right you only make money in one circumstance you could be right and it could be consensus that that's what's going to happen you actually don't make any money in that scenario because you're not doing anything like different or outsized or you know what not where you make money is when you're right and it's non consensus and and that's what stitch fix did right like women don't need a you know personal shopping clothes service well actually turns out they do you know, and with beats and headphones, it was like, well, you know, people who are audiophiles, like, you know, the high -end music market, they want totally fidelity, you know, accurate reproduction of the sound.

[801] Well, it turns out they don't, you know.

[802] So I think this is like a great illustration of that.

[803] Yeah, I love that.

[804] I think that's a great, great parallel.

[805] And it's, it's a better dive into something that, that I was thinking about is defining a lifestyle brand where there previously was no lifestyle brand.

[806] Like, realizing that a category, is something that can play an important role in define people's lives rather than just being throw away.

[807] It's certainly worth looking around and considering where are there other opportunities to do that.

[808] And Jimmy talks about this.

[809] He's like, you know, he says, he refers to it as he and Dre, they look for holes out there.

[810] Like, where is there a hole?

[811] And this is the same thing.

[812] God, they're great VCs, man. Totally.

[813] Well, that's what they did.

[814] I mean, like, you know, Jimmy, his whole career, and then Dre has, he's become more of a producer and less of a, you know, direct artist himself.

[815] Like, that's what they do.

[816] They find talent and they identify it.

[817] You know, this is, they found you too, right?

[818] Like, they found M &M.

[819] And then they give it the resources to succeed.

[820] I mean, that's like these guys are VCs.

[821] They are great VCs.

[822] Well, here's another one.

[823] And that it was something we've been talking about on a previous show, but the content is king narrative where, you know, we're talking about it's these guys and it's their vision and their relationships.

[824] What that really leads to is having the best content.

[825] Yep.

[826] Yep.

[827] Well, and that's what Apple Music wouldn't have without this.

[828] Right, right, right.

[829] And does this now put us in a world, you know, fast forward to today, Apple's, you know, investing a billion dollars into original programming?

[830] First of all, I'm very curious to see if that will be released.

[831] It's obviously video original programming under the Apple Music moniker, much like are they going to overload it the same way that they did iTunes and make iTunes your rich multimedia hub when it was originally about music?

[832] you know apple is is now well positioned with a subscriber base of 30 million people to actually have a credible offering of hey you know pay x dollars per month the way that that you know you do to Netflix and we'll be able to put great content on your device it's interesting to see apple spanning across modalities doing this they may have a a service much like prime that is you pay x dollars per month to apple and you get the full apple music you you get all of our original programming, you get access to other videos or other TV shows that are on demand.

[833] It's Apple taking advantage of the vertical integration that they have and saying, look, everybody, we're just going to pour a new for pay services tier on top of everybody that's already in our massively integrated Apple ecosystem.

[834] Yeah, it's interesting too.

[835] They'll think about like Apple versus Amazon here because they're taking the total opposite approaches.

[836] And like they'll both be very six this is why they're perhaps the two most valuable companies in the world right now i think like amazon is like we're just going to like you know you're the jeff bezos your margin is my opportunity right like i'm going to fly so close to the ground on all of these things that in aggregate like i make a ton of money but nobody can compete with me on any individual aspect um like you know i i would be we should we'll cover spotify someday in another episode but like I should be I would be terrified if I'm Spotify like Apple's Amazon is now giving away what most of my users you know pay me for and Apple takes the opposite approach which is like I'm going to create this entire ecosystem you're going to pay a lot of money for access to it you're going to get an iPhone 10 you're going to get an Apple watch with cellular you're going to get AirPods and then I'm going to have all these services too and content around it and like but I'm going to be your like your best friend and constant companion in your life you know you know this just occurred to me so I mentioned and Apple, you know, Apple is a highly, highly vertically integrated company, unlike, you know, Google or Amazon that's going across devices and not necessarily married to the specific hardware that you pay them for.

[837] So Apple's business model has always been make really great devices that are differentiated by their software and services and sell them for an excellent premium.

[838] They've been selling the services narrative recently that is on their earnings call every time.

[839] It's Apple is transitioning to a services company.

[840] Look at all these services, blah, blah, blah.

[841] The numbers on that look like, you know, if we say that Apple music revenue is about three -ish billion dollars a year based on their 30 million subscribers, their last four quarter of services revenue have been about $28 billion.

[842] So Apple Music's still small.

[843] The vast majority of that still comes from iOS app downloads.

[844] When you think about what their total annual revenue looked like it was 216 billion.

[845] So, you know, most of their, I know, right?

[846] These numbers are just laughing, by the way.

[847] Most of their revenue still comes from their core business model.

[848] But certainly a fast -growing segment of services revenue, the number one thing that really drives that home for me is there's an Apple Music Android app.

[849] And it's not nearly as widely used, I don't think, as the one for iOS.

[850] Like if you're in the Android ecosystem, are you really likely to pay for Apple Music and make that your choice instead of Amazon or Google or Spotify?

[851] But that still is very puzzling to me and a very interesting hedge on their classic business model to build and maintain an Android user base on Apple, Apple Music.

[852] Yeah, it's super different.

[853] even from all the things we were just talking about, right?

[854] And I'll say, you know, this is a, I think it's a departure from, and I love this, this is like, oh, it's a hilarious thing when people bring this up, and I usually get mad at them, but I'll do it anyway.

[855] Like, you know, a thing about what would Steve Jobs have done, or would Steve Jobs have done this if he was still alive?

[856] I mean, there was a Windows iTunes app, but that was all about, and a Windows Safari app, but the Windows iTunes app was all about being able to get people's foot in the door in the Apple ecosystem, get them to buy an iPod so they could see the Apple, you know, see the Apple light and then perhaps buy a Mac and, you know, they made good money on the iPods too and really a foot in the door into the Apple ecosystem.

[857] Is that the same thing that we're seeing here with Apple Music, where if you're an Apple Music customer on Android, then it's a foot in the door on the Apple ecosystem and maybe you'll go buy some of their high margin hardware?

[858] I don't think so.

[859] I think it's more.

[860] like we see an opportunity to have a great business as a services company.

[861] It's a little more muddled, but there is some element.

[862] I mean, like, you might go buy some beats headphones or AirPods.

[863] Like AirPods, you know, work with Android too, not as integrated or as well.

[864] How many people have you seen with AirPods that have an Android phone?

[865] I haven't seen many.

[866] But how often do you, you know, meet somebody in your work life who doesn't have have an iPhone?

[867] In esports a lot.

[868] In esports a lot.

[869] But yeah.

[870] All right.

[871] Should we bring this one on home?

[872] Let's do it.

[873] So let's see.

[874] I'll go first on grading.

[875] I've been, I think, pretty laudatory of this deal thus far for Apple.

[876] And I'm going to continue to do so.

[877] I mean, as I think about some of the acquisitions I compared it to, I compared it to Instagram and next, which are our references for an A -plus on this show.

[878] I think the only, did we give Instagram an A -plus when we did it?

[879] We got to go back and redo that episode because it was our first one.

[880] Yeah.

[881] If we didn't, we should have.

[882] I think that would actually make it the third time that we've done it, including the unreleased pilot.

[883] Oh, yeah, and the unreleased pilot.

[884] Oh, man, that goes in the acquired museum.

[885] That's right.

[886] So I think this is kind of in that category.

[887] I don't think the execution, though, has been as good as Instagram and Next.

[888] And specifically, well, next was its own piece, which is that was Steve.

[889] Like, Instagram, like, the thing that made Instagram, all these dynamics were at play there.

[890] It's, like, reinventing, like, what is Facebook, right?

[891] Like, well, Facebook, it's photos, right?

[892] And, like, let's make Instagram that and all the growth, like, and how much Instagram is worth now and plugging into the ecosystem, blah, blah, blah.

[893] The thing about beats, it's not, as we've been talking about here, it's not as clear, like, what the vision is and how it evolves.

[894] Like, the vision was there.

[895] Jimmy and Dre had the vision, and it's now gotten a little bit diluted as part of Apple.

[896] Like, I think it's still there, but it's not like, this is not an A plus, like, you can't point to this, like, you can point to Instagram and be like, Instagram is now, like, you know, worth $100 plus billion.

[897] You can't say that with beats for sure.

[898] So I think I go A minus thus far.

[899] I'm going to go A minus two, just from a, basically from a cash flow perspective, will this thing pay for itself and has it paid for itself in a reasonable time frame?

[900] Yeah, yeah, I feel great about that.

[901] Has it been absolutely transformative to their business?

[902] No, but has it been, has it helped Apple evolve their digital music to this decade of what digital music means when digital music is a core part of Apple and their business and what their customer.

[903] customers do with their devices?

[904] Absolutely.

[905] I'm between B plus and A minus, but I'm going to go A minus because I'm encouraged by the fact that we're a few years in.

[906] It's still growing strong.

[907] You know, they did manage to very quickly get 30 million paying subscribers on this thing.

[908] I think it's laudable.

[909] Well, and I think maybe we just where this is where we disagree.

[910] I think it's everything you said, but I think it's also, it's not just digital music.

[911] It's, it is, is this element of like what the vision is for the future of you know computing in society here and like i don't want to say that like certainly as we've talked about like the beats team did not like directly lead to the AirPods but it's just part of the mindset right like audio quality and music's a big part of that but also podcasts you know also everything like this is this is part of people's lives and was being more so and like the more you can integrate technology and that whether you know steve jobs called it liberal arts or you know when jimmy talks talks about culture and cool and just like the more you can integrate that like and understand it like the more successful you're going to be.

[912] All right there we have it.

[913] Carvouts our 50th episode.

[914] Cool.

[915] Carvouts.

[916] I'll go quickly my the same theme Jimmy and what an amazing person he is and I talked about the Kareem Abdul -Jabbar book about his relationship with John Wooden.

[917] I think last time or the time before I also read John Wooden on leadership book by by john wooden where he talks about his pyramid of success just so cool and i think like john and jimmy are both people that have like been um incredibly successful at the very very top of their industry across multiple complete sea changes in what that industry is around them just super cool to like learn about those people and how they did it so uh john wood and jimmy iva and separated at birth awesome uh david are you playing hq Have you heard about this?

[918] No. So it's this incredibly fast -growing consumer phenomenon that has a quarter of a million people concurrently playing when it's live.

[919] It is a game show that happens interactively through your phone that comes on twice a day.

[920] And it is from the creators of Vine.

[921] And it is basically a host who comes on, asks you questions, very simple, awesome UI.

[922] to answer the questions and you progress to the end where there's a cash prize that get split the number of ways of however many winners there are.

[923] And there will be like 250 ,000 people concurrently, and this thing's like a month or too old.

[924] It's crazy.

[925] 250 ,000 people concurrently in there answering the questions, you basically see how far you can get.

[926] And the questions get progressively more difficult and they go from like piece of cake to quite very impossible very fast but if you're left standing at the end then you split the cash prize in that can be anywhere from 250 to I think the biggest they've done is like two three thousand dollars and who wants to be a millionaire it is and there's so many like startup things to take from it like they they have this great I mean it's a great acquisition hack of literally giving away money and the number of people that it's bringing on relative to the small amount that they're giving away.

[927] Even, let's say it's $2 ,500, super low cost of customer acquisition.

[928] And it's really fun, really poppy.

[929] The founders not only created Vine, but had a couple of failed things in the interim that this is sort of pivoted from.

[930] So it's really cool to read the backstory.

[931] There's been a lot of controversy.

[932] If you want to look up HQ news, there's been some all sorts of interesting controversy about the company that I won't go into.

[933] but their backstory of trying really new interactive models that are fun on your phone with video, it's just cool to watch and it's cool to see that they found something that's like really, really hitting.

[934] And it's super fun.

[935] So every day at noon, you can go in and play the live interactive game show on your phone.

[936] Cool.

[937] I'm going to have to check that out.

[938] I heard that there was something new from the Founders of Vine, but now I know what it is.

[939] Yeah, well, play it.

[940] Tell me how far you get.

[941] Probably not far.

[942] Unless the questions about John Wooden and Jimmy Ivon.

[943] That's right.

[944] All right, listeners.

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[973] Thanks so much for joining us today.

[974] If you like the show, rate us on iTunes and have a great day.

[975] See you next time.

[976] Thank you.