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We're here today with Wharton Marketing
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Professor Peter Federer to talk a little
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bit about Apple's recent acquisition of
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Beats. The acquisition came with the
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purchase of the Beat streaming music
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service, hardware, and talent. Pete,
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thanks for being with us today. Glad to
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talk to you. So, our first question is
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is what do you think was Apple's
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strategy behind this acquisition? It's
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very interesting. It's a very unusual
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move for Apple to to go out there and
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work with a a different firm and
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something that's going to require them
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to to open up and actually accept other
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people's standards and lose some of the
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control that they insist upon. Uh more
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than anything, I think it's an
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acknowledgement that that iTunes just
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hasn't worked for them. I think the the
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original business model uh that is uh
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focusing on the those 99 cent downloads
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was was really an utter failure for for
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the music industry as a whole. They
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finally waved the white flag. They're
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moving to the to the streaming
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subscription space, something they said
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they would never ever do before. Uh and
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and even their own efforts to do that
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with iTunes radio uh uh weren't working
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very well. So, not clear that this is
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going to be any better, but it is a sign
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that they acknowledge some of their
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failings in this space. And what does
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this say? I mean, does this represent a
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change in Apple's innovation strategy,
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i.e. that they're now going to be
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innovating through acquisition as
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opposed to innovating internally. And
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what does that mean for the company?
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It's a huge change in this regard. In
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fact, if we changed the cast of
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characters a little bit, suppose we said
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that Microsoft was buying Beats instead,
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everyone would laugh at it. Everyone
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would say, "Uhoh, here comes another
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Zoom." They, you know, they're they're
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buying a company because they can't
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invent things on their own. It's a
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company that has a very small base when
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it comes to the subscription side. Uh,
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so you know they they they they'd call
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it desperation on the part of Microsoft
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and and would kind of declare it dead
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before it ever got off the ground. So I
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think a a lot of it we have to take into
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account who's doing the acquiring more
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than what's being acquired over here.
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Uh, and because Apple's doing it and
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because it is such an unusual move for
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them, there's a lot of people who are
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willing to give them a lot more slack
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than they might if it were a Microsoft
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or another company on the other side of
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it.
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Now, Apple is also has its worldwide
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development conference this developer
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conference this week. What's at stake
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for them there? I mean, what do they
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have to do either with their other
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technology that exists or around the
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Beats acquisition for people to kind of
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maybe continue to feel optimistic about
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the company and about this particular
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acquisition? Of course, it's always hard
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to say. We never know exactly what's
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going to come out of one of their
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developer conferences. I think that that
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the news about Beats and the the new
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iOS, all that stuff is is is nice and
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interesting and and it'll give people
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something to talk about, but but but all
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eyes are on the potential iPhone
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announcement. And if they come up with
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with the big screen, uh that could be a
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gamecher at least for Apple because we
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know that it's been a gamecher for
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everyone else. And once again, uh Apple,
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they they wouldn't admit it to the
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outside, but internally they're probably
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saying, "Man, we should have come up
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with those big screens a long time ago."
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One of the reasons why Samsung has
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caught up and in many ways surpassed
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them is simply because of the size of
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the screen, forgetting about anything
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else. Now, if you can take that larger
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screen and combine it with some of the
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other still unique aspects of the the
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Apple phone experience, you might have a
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great device which will make these other
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stories really uh moot, but no one will
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be paying attention to them uh if they
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do make an announcement like that. Now,
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be that as it may, how important is it
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that the Beats acquisition includes
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their streaming music service? I think
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that's why they made the acquisition.
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The the the Beats product is is a very
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nice one. Uh there's no no question
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about it. But but they're they they
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bought Beats because iTunes Radio wasn't
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working. No one's downloading music
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anymore. Uh there's just an Beats is is
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is big enough that it's it's a real
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brand name. It has some cache. Uh, but
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it's small enough uh that that Apple can
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supposedly mold it into something that
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would be more of an an Apple branded
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service than than just Apple being
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tacked on to an existing brand. But the
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problem is it's so small they're going
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to have a real hard time competing with
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Pandora and Spotify and and and some of
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the other uh bigger players out there.
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It's not clear whether they can take
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this small service and turn it into a
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giant one. whether the Apple name is
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enough to do that when the Apple name
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wasn't enough to make iTunes work. Now,
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you have been saying for a long time, I
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mean, I think as far back as from our
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stories from 2002, that streaming was
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where the industry was eventually going
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to end up. Do you feel like this
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acquisition is a sign that maybe Apple
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has realized that the iTunes download
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model was really a transitional
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technology? In that regard, this is the
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most wonderful I told you so story that
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I've heard in a long time. I've been
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calling for this for for truly over a
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decade. And even went as far as saying
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that that one day when Apple announces
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that it's getting into a streaming
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subscription model in a big way. Not
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only will they do well with it, but it's
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it's it's going to be a rising tide
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that's going to lift all boats. It's
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going to legitimize streaming in a way
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that it's it it hasn't been fully
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legitimized. A lot of people are waiting
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for Apple to give this kind of big
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blessing. Now again, Apple has made some
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steps in that direction with iTunes
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Radio, but no one really paid any
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attention to that. By by doing it with
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with a brand, by having a more
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established service, I think that's
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actually going to help Spotify, Pandora,
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everybody else out there. And it might
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end up actually helping those other
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services more than it actually helps
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Apple itself. Why Why do you feel that
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way? Because a lot of people who have
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been having waiting and seeing, you
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know, I'm not quite sure I want to jump
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onto Spotify because after all, I I own
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an iPhone and I want to do whatever the
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the iPhone offers for me. Fact is that
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that uh that that most iPhone people or
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more iPhone people are using Pandora or
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or Spotify than they're using iTunes
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radio. But there's still a lot of folks
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who are holding out hope that Apple
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would would have a kind of a worldclass
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uh entry into the streaming music world.
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uh Beats might be that one. But again,
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it it's it's it now gives a green light
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to these other ones. And it's also going
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to encourage the industry to be a little
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bit more accepting, a little bit more
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progressive. I don't want to say that
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they've stood in the way of sp of
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Spotify and Pandora, but they haven't
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made life easy for those other services.
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I think th this acknowledgment that the
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that the download model is is over and
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that it's all about streaming, I think
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it it's going to force the industry as a
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whole to embrace streaming in in in a
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bigger, more aggressive, proactive way
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than they ever did before. So, it's
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going to help everybody in the industry,
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but especially consumers. Consumers are
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just much better off using these
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services. I don't even care which one.
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We can nitpick about any of these big
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ones. They're all good. Uh, and they're
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all a much better consumer experience
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than than Allakart downloading. Now, so
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Apple had kind of a hoham product in
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iTunes Radio, at least from consumer
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response, and now they've acquired
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Beats, so they're going to get whoever
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those subscribers to Beats or people
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that were using it. What do you think
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Apple needs to do to kind of take these
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two services and really stand out in
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this market because they're entering a
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market that has a lot of established
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players in Pandora, Spotify, Artio? It's
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a very good question and a very
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difficult question because usually when
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whenever Apple announces something, it
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just turns to gold. There's just enough
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enough people out there whether it's
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because of of true love for different
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Apple products and services or maybe out
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of inertia. I I I don't even want to
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think about it. I'm just going to go
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with the one that Apple endorses. That's
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usually the way it works. But it didn't
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work with iTunes radio. Uh, and it's not
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clear that that that just moving to a
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different horse that they're they're
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putting, you know, the Apple name on on
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on beats instead or in addition is is
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going to lead to a dramatic difference,
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but it does signal that Apple is going
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to be investing a whole lot more in this
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space than they were before. It could be
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that some of the the disappointments
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with iTunes Radio wasn't so much the
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service itself, but that Apple it really
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wasn't a major focus for them. So, maybe
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this is a sign that they're going to get
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real serious about it. and whether it's
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it's the the Beats platform itself or
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just uh Apple's in increased seriousness
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uh that might help them and they're
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going to have to advertise heavily uh
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and they're going to have to do all
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kinds of things that that doesn't come
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naturally for Apple. We'll see how well
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they do, but it is going to be a much
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tougher challenge for them than other
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areas where they've been successful to
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date. Now, is that because they're kind
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of having to instead of being kind of
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the market creator or the market buster,
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they're going to kind of have to see
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what everyone else has done and really
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want to do and really sort of follow on
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someone's coattails when they haven't
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done that before or that's a big part of
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it that it's it's a rapidly
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commoditizing business. Uh, and uh it's
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not clear that they can go in and and
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and truly shake it up in a disruptive
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way that they're able to do with the
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iPad and the iPhone. This is just not
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not something they've been uh very good
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at. uh that that is to say a service of
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this sort. Uh but Apple's a smart
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company and they're very resourceful
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company and if they really do set their
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mind to it, then they're they're they
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need to be taken seriously. But it's not
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clear that they're going to be able to
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jump right to the top and and and get
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people to actually give up on their uh
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Pandora or Spotify or or unauthorized
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services that they might be using and
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jumping over to this one here. It is
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possible, but uh put it this way, I
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wouldn't bet on it. Now, what about the
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hardware and talent sides of the Beats
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acquisition? How can Apple deploy those
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effectively? Well, again, be the Beats
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headphones are a fine product and and in
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many ways, it's it's a very good fit
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with Apple. It is just a best-in-class.
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Price is no issue. If if if you want the
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best, this is going to be the thing that
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you buy. So, so there's there's a good
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fit in that regard. And just even some
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of the uh some of the design elements
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are are aligned well with Apple. So I
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think that they can make beats fit the
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that is again the hardware side fit
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quite well under their umbrella. It's
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still unusual for them to to work with
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outsiders but this is about as good an
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outsider as they can find when it comes
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to the hardware but how much interplay
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there is between the hardware and the
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software and and a lot of speculation
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about how much of the reasons for the
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acquisition is the hardware versus the
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software that remains to be seen. Now
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what about the talent side of this? I
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mean do you expect to see them using I
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guess Dr. Dre or Jimmy Iiovine in a
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particular way or are they mostly kind
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of figureheads for this to lend sort of
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street cred to Apple or I think that's
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that's right. I think that that that
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it's more to show that that that we're
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cool and that we're endorsed by folks
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who are respected within the music
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industry, but I don't think that that
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that those particular folks are going to
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be game changers in any way. They're
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respected. There's no question about it.
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But I I don't think that people that
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consumers are going to say now there's a
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reason to be switching to to the Beats
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service instead of other services
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because let let's face it those guys and
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the the whole Beats team have been
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associated with them all along and that
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wasn't enough to get them even within an
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order of magnitude of Spotify or
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Pandora. So it's not clear that
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attaching those names to Apple is going
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to really change anything. Now, final
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question. I guess what do you see this
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acquisition? How do you see that fitting
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into kind of Tim Cook's performance as
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Apple CEO overall? I mean, what does
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this say about kind of the direction
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that his leadership is going in? And
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what do you think are going to be the
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challenges for him as this goes forward?
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Well, it's an interesting historic
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moment because on one hand, you could
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say this is an admission of defeat and
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that Apple can't innovate on its own and
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can't develop best-in-class products and
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services. On the other hand, you might
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say the reason why they haven't gone to
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the outside is a bit of arrogance that
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they've always just felt that they could
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do it better. But you know what? There
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are times when it makes sense to partner
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and to acquire. So, so the fact that
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they're they're open to doing it, does
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that represent desperation? Does that
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represent opportunity? I'm not really
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sure. But we're going to look back at it
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for sure within the next few years and
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and and say, "Oh, it's real clear that
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it was one or the other." So, it is a
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pivotal moment. Uh, and I think there's
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a lot writing on it and it might be a
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precedent that then gets followed in in
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other unimaginable ways. Uh, but it's
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it's a big step forward for Apple.
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Right. Pete, thanks so much for being
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with us today. Always a pleasure.
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[Music]
