Beats Electronics and Beats Music share a brand name and senior management but are really two different companies, each with its own investors. Private equity giant The Carlyle Group, for instance, invested $500 million in Beats last year for a 30 percent stake in the electronics business but owns only a token stake in the music streaming company. Len Blavatnik, the billionaire owner of Warner Music Group, on the other hand, is the largest outside investor in Beats Music but owns no stake in Beats Electronics.
The separate ownership structures means that Apple’s $3 billion acquisition of the entire Beats brand has to be allocated via separate valuations. and according to the Wall Street Journal‘s sources, the deal values Beats Music at just under $500 million and Beats Electronics at just over $2.5 billion.
Beats Electronics had revenue last year of $1.3 billion and was profitable, so a valuation of 2X revenue seems reasonable enough. But Beats Music has a mere 250,000 paying subscribers. A valuation of $500 million works out to a whopping $2,000 per subscriber, fully five times the $400 per subscriber implied by Spotify’s $4 billion valuation last fall when it raised $250 million.
It’s especially rich considering neither Beats nor anyone else has figured out how to make money from streaming music, including Spotify, which has more than 40 times the number of paying subscribers as Beats has.
As Triton Research analyst Rett Wallace put it to the Journal, assigning a value to individual subscribers “is clearly not how they got there.”
However they got to the number, though, the specific valuation of Beats Music is largely an accounting convenience for the purposes of the deal. In comments to the Wall Street Journal Wednesday, Apple CEO Tim Cook made it clear he wasn’t doing the deal based on ARPU.
“We think these guys have a very rare talent,” Cook said, referring to Beats co-founders Jimmy Iovine and Dr. Dre, both of whom will join Apple. “We love the subscription service that they built—we think it’s the first subscription service that really got it right.”
What did Beats get right that other streaming services, including presumably Apple’s own iTunes Radio, get wrong? Cook singled out the human factor in creating playlists. Unlike other streaming services, where playlists are largely generated by algorithm, Beats uses a roster of experienced DJs and music directors, musicians and other music industry types to curate collections.
“It’s not all about zeros and ones,” Cook told the Journal.
The curator system is more than just a gimmick — or at least has the potential to be more than a gimmick. What Beats has begun to build is essentially a platform, on which people in the music business can engage with groups of listeners. That engagement is pretty limited right now because the platform is still nascent and the audience is still small. But if plugged into Apple’s tens of millions of iTunes users worldwide, and supported with Apple’s platform-engineering chops, it could get pretty interesting. Like a good DJ who learns to read the floor to keep them dancing, the level of engagement on the Apple/Beats platform has the potential to grow and deepen over time.
If it pans out that way it could bring a much needed breath of fresh air to the increasingly poison atmosphere surrounding the music streaming business, where the artists resent the service providers due to the low royalties they receive from streaming plays, and the service providers are going broke because of the high licensing fees they pay to the record labels and publishers.
In Apple’s hands, the Beats platform could eventually become the App Store of the music business: a place where “developers” — in this case artists, managers, rights owners and entrepreneurs– could begin to build direct-to-consumer businesses around music.
Speaking at the Dive Into Media conference last year, where he first spoke publicly about the Beats Music business plan, Iovine already seemed to be thinking along those lines — long before talks with Apple got serious.
“We have to make [Beats] user-friendly for the artist, they have to be able to build build businesses on it. They have to be able to have the information about who is using their music,” Iovine said. “Right now, [service providers] have all the information and the artist have no information. No one knows. I don’t know. I run a record company. I would die to know who bought my records on iTunes or bought my tickets on TicketMaster.”
Ironically, Apple itself historically has been rather parsimonious when it comes to sharing information with developers and others that work within its ecosystem. But if it can build something close to what Iovine was describing last year, at iTunes scale, it could be worth far more than $500 million.