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The tech world is still buzzing about last night’s news that Apple is in talks to buy Beats Electronics for a whopping $3.2 billion. While the deal has yet to close and may yet fall apart, Re/code‘s Peter Kafka rightly notes that it should be viewed as two separate acquisitions: Beats’ electronic devices business is estimated to generate $1 billion annually, so Apple could quickly expand its hardware portfolio to include high-end (and high-margin) headphones. The more important, component, however — at least in the long term — is likely Beats Music, the subscription streaming service that launched in January and has struggled to find much of an audience.
Key to the deal, then, is Beats co-founder Jimmy Iovine, one of very few music-industry veterans who is also a visionary. As Iovine told All Things D‘s Walt Mossberg in this great interview from last year (which is well worth spending 15 minutes to watch), technology broke the traditional music-industry business model but it hasn’t been able to build a sustainable replacement — and curation is the answer. The idea, Iovine said, is to glean as much information as possible from their users and provide highly customized streams and playlists based on musical tastes, listening habits and even daily schedules (like time spent at the gym), minimizing — or even eliminating — the need to search for music:
There’s a sea of music. There’s an ocean of music out there. And there’s absolutely no curation for it…. It’s all about what song comes next. No one knows what song comes next…. They have the information. Apple knows a lot about your musical tastes… but no one’s using it to curate…. iTunes was great, but it needs a step forward now…. Most technology companies are culturally inept. I don’t care what they do, they’re never going to get curation right. That’s not what they do.
That’s an ambitious goal, but one that a highly sophisticated mobile app should eventually make possible. The problem, though, is that streaming music services still aren’t profitable, and there is little evidence they ever will be. Spotify, which is said to be planning an IPO, said in its annual earnings report last August that it lost $77 million in 2012 after losing $60 million in 2011. Pandora recently posted a loss of $28.9 million in the first quarter (which was an improvement on the same period a year earlier) and issued a disappointing outlook for the second quarter. And AT&T is now reportedly looking to sell off Muve Music, whose success stemmed largely from the fact that its service was packaged with data plans from the prepaid wireless provider Cricket, which AT&T acquired last year.
Iovine certainly seems to understand the confluence of music and technology in a way few others do, and any deal may essentially be an acqui-hire with a secondary element of high-end headphones and other electronics. Indeed, Iovine may help Apple develop the most customized, compelling streaming music service in the market. But it isn’t at all clear that such a service could be lucrative, or even profitable. And while such a service certainly could be a big selling point for iOS as a whole, it’s tough to see how that could justify an investment north of $3 billion.