Business analysts still don’t “get” the Apple/Beats deal

May 15, 2014

Days after I posted this quick take on the Apple/Beats deal, several mainstream analysts came out with similar theories: A big part of the deal involves “acquiring” Jimmy Iovine.

Yet still, at this late date, business journalists are still referring to Beats as a “headphone” company and Iovine as a record producer.

Does anyone do any homework any more? Does anyone think?

Jim Iovine is a record producer in the same way that Steve Jobs was a gadget maker. Yes, I guess it’s technically true. Iovine is capable of producing records and he’s produced some epically successful ones.

But he’s also the chairman of Interscope/Geffen/A&M records which makes him high music industry royalty. How on earth do you fail to mention that in an article about a $3.2 billion acquisition?

Consider this too: If you’re a Silicon Valley god, what does that buy you? It means you’ve got a successful tech company because you offer something that no one else does and/or you do it better than anyone else does.

What does this mean for your ability to influence and lead other tech leaders and carry out complex industry-impacting negotiations?

Pretty much nothing.

In contrast, music labels are all doing the same thing selling the same stuff to the same people, the same way (record, package, distribute, collect) and you can count the significant music conglomerates on two hands (with fingers left over.)

Iovine is the one guy in this group who “gets” technology. He’s the one guy in the group with has hung out with Steve Jobs and made (an apparently soon-to-be-announced) deal with Apple that has the potential to transport his music subscription service (or another one they come up with) into the stratosphere.

All of which makes him even more important than he was a few weeks ago.

Apple and music companies need to get creative. They need to break some eggs and make some omelets. Apple needs a music insider like Iovine and music labels need one of their own inside Apple.

This deal does it.

Is it worth $3.2 billion?

Who knows?

My guess though is Apple stock is something worth spending right now (assuming this is a cash and stock deal) and even the most optimistic at Apple have to know its stock is probably worth more now than it will be worth in the short term future.

So why not acquire Iovine?

Why not face the music company/digital world mishmash and try to create a long term New Music Order out of it all that benefits musicians, music companies and Apple?

What else is Apple going to do with its money?

My guess about how this will shake out:

Apple wants to pay lower royalties and music companies want direct connections to their buyers.

That’s the bargain Iovine is going to try to strike.

In exchange for hammering down royalty rates on downloads, music companies are going to get the Holy Grail that I have been talking about since 1994 (and on video too): DIRECT access to music buyers.

Apple iTunes will be their lead generator and, handled correctly, the labels will have the potential to harvest far more value from fans than they can under the current sad-for-them regime.

Apple will be happy because they’ll have a great license deal on their music subscription business and will be much less vulnerable to the Spotify’s of the world.

Everyone wins. Even fans.

– Ken McCarthy

P.S. For over 25 years I’ve been sharing the simple but powerful things that matter in business with my clients.

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