Apple Places Recurring Revenue Bet on Beats

Apple Places Recurring Revenue Bet on BeatsWell, this week it’s finally official: Apple is buying Beats Electronics.

So, why is Apple plunking down its highest acquisition price ever for this headphone maker, a commodity item in a market known for its low margins and fickle customers? Rest assured, it’s not just about headsets.

It’s clear that Apple wants a bigger slice of the fast-growing streaming music business. Beats offers unlimited streaming for $10 month, which gives all those buyers using Dr. Dre’s stylish headsets something to listen to.

Apple will most likely meld Beats’ streaming music service into its current offerings. This includes not only the traditional iTunes store, but iTunes Radio as well, the online audio option that was launched in 2013.

According to industry observers, Beats has signed as many as 200,000 subscribers and the service has been growing quickly, proving how popular subscriptions for popular music are and will be.

Streaming is here to stay, eclipsing the transactional model for downloads (which Apple dominates). With a double dip into the streaming music market, Apple’s hedging its bets on disrupting its own iTunes downloadable music business. This acquisition shows Apple is finally conceding that streaming is the future, and if it wants iTunes to dominate it must jump into this pool head first – and there’s no quicker way to do it than with a bold acquisition vs. grinding through an organic evolution.

Better yet, with this purchase Apple also gets elegant hipster hardware to marry to the streaming service. This combination is a continuation of Apple’s vertical playbook of hardware plus attached services. The one-time purchase of headsets coupled with a continuous “stream” of recurring revenue mirrors the classic model found in the razor blade industry; sell the razor once, then sell the blades in perpetuity thereafter. It would be natural to see some bundle of a headset purchase that includes streaming subscription discounts or trials.

This marriage of hardware with accompanying services will become more and more pervasive across business models, and is at the very core of belabored themes such as IoT. Don’t be surprised if we see further moves in the space; companies like Sonos, Jawbone and FitBit are ripe targets for this type of consolidation.

While this acquisition may be a real head scratcher to many, it says a lot about how hardware and recurring services are converging.

-Tom Dibble