Apple - Beats

Acquired crosses the half-century mark with an instant classic: Apple’s 2014 purchase of Beats, its largest acquisition ever. If you knew Beats as just another headphone company, think again—the history on this one will keep your heads ringin’. Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Carve Outs: * Ben: HQ * David: Wooden on Leadership

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  Oh, man. All right.

• 0:01David Rosenthal?

  Too cheesy?

• 0:02Speaker 00

  Yeah, you should do it. It's going to be cheesy, but you should do it. Yeah.

• 0:06David Rosenthal?

  I love the cheese.

• 0:07Speaker 00

  Yeah, I, uh, that's perfect. Then I can make fun of you for dad jokes.

• 0:23Speaker 00

  Welcome back to the big half century mark, episode 50 of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert.

• 0:33David Rosenthal?

  I'm David Rosenthal.

• 0:34Speaker 00

  And we are your hosts. So today we are doing a classic episode of Acquired. It's the reason we started the show. It's the original format. It's one we've been talking about doing for a long time, and it's one that we've, we've probably had, you know, 20, 30 requests for this since we started the show. Finally, we are covering, finally, it's an Apple episodes. We have to say finally, we are covering the acquisition of Beats by Apple in 2014 for $3 billion.

• 1:04David Rosenthal?

  I'm so excited about this one.

• 1:06Speaker 00

  Yeah. Yeah, me too. I, um, I wish I wasn't a little under the weather for it, but listeners, bear with me. I know I'm a little, little nasally this episode.

• 1:16David Rosenthal?

  You're like, this is gonna be like Michael Jordan in game six of the finals, playing with the flu. Like, you're gonna rise to the occasion, Ben.

• 1:27Speaker 00

  Thank you, David.

• 1:32Speaker 00

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• 1:51David Rosenthal?

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• 2:12Ben Gilbert?

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• 2:34David Rosenthal?

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• 2:52Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you.

• 3:19Speaker 00

  All right, David, that is all I've got between us and...

• 3:23David Rosenthal?

  Oh, I can't wait.

• 3:25Speaker 00

  And Beats.

• 3:26David Rosenthal?

  I am ready to start. I almost started talking over you.

• 3:28Speaker 00

  That would be new.

• 3:31David Rosenthal?

  No, that would not be new. All right, let's do it. So this is probably, certainly thus far, the coolest founding story on Acquired. Maybe, maybe as long as we do the show, it's gonna be hard to find a cooler founding story than this one.

• 3:50Speaker 00

  Yeah, I don't think that's possible.

• 3:51David Rosenthal?

  I don't think it's gonna be possible. And certainly, the coolest founders. So Beats was founded in 2006 by Jimmy Iovine and Andre Young.

• 4:04David Rosenthal?

  And those names may mean something to you, or they may not, but they certainly will in a minute. So Jimmy Iovine, who is Jimmy? Who is this guy? Well, he's a music producer and an executive. He started as a sound engineer early in his career. He dropped out of college. He grew up in New York City, in Brooklyn. His dad was a longshoreman. And he loved music, was obsessed with music. He eventually rises and he becomes the head of Interscope Records. But this guy, he is a legend. And there's a great documentary about him and his co-founder, who we'll get into in a minute, called The Defiant Ones on HBO. Highly recommend watching.

• 4:46Speaker 00

  I had a chance to watch some of it preparing for this episode. And Jimmy is the actual coolest person alive.

• 4:52David Rosenthal?

  So the first album that he works on is, I think, John Lennon's first solo album as a studio engineer. Then he works on Bruce Springsteen's Born to Run album. Then he starts working with Stevie Nicks and Tom Petty. He actually dates Stevie Nicks in the 70s. Like, how awesome is that? And he's responsible for Stop Dragging My Heart Around, Tom Petty's song. So Jimmy is like, Stevie's doing her first solo album. Like, she needs a single. Like, Tom, do this with Stevie. And boom, Stop Dragging My Heart Around. But he doesn't stop there. He discovers U2. So like, that's him. He discovers No Doubt, Trent Reznor and Nine Inch Nails. And then he completely re-events himself.

• 5:36David Rosenthal?

  So Tupac, Snoop Dogg, Eminem, 50 Cent, Lady Gaga, Kendrick Lamar. These are all products of Jimmy Iovine.

• 5:43Speaker 00

  Yeah, very similar sound, right? You understand how the same person can be responsible for all these artists.

• 5:49David Rosenthal?

  Just amazing. He also, he does the soundtrack for 16 Candles, many other movies, and then founds Interscope Records along the way that all these artists are on. You could make an argument that there is no more important figure in popular music of the last century. That's how big his impact is. So his co-founder, Andre Young, who's that guy? Well, it turns out, as he says, lots of people say that they forgot about Dre. Andre Young is Dr. Dre.

• 6:22Speaker 00

  Oh, David.

• 6:26David Rosenthal?

  I couldn't help myself there.

• 6:31David Rosenthal?

  So probably Jimmy's most favorite or most known for musical collaboration and business collaboration is with Dr. Dre. Dre, you know, started his musical career. He's actually part of the world-class wrecking crew, I think, originally, and then was a member of NWA. And, you know, their huge rise prominence and there's many movies have been made about Dre and NWA.

• 6:57Speaker 00

  There's a great, and I'm sure this is covered in lots of places, but in the HBO documentary, there's a great piece about how Dre basically gets on stage at this, this like, you know, emerging nightclub for West Coast hip hop. And he's the first person after experimenting a ton with a pre sort of like mixer turntable combination. You know, he sort of builds all the stuff on his own and assembles it. And he's, he's doing it in his house and his mom buys him this little mixer. And he's the first person to basically mix two different tempo songs rather than just like fading one into the other or, or,

• 7:40Speaker 00

  you know, lining up to their very similar BPM. And it's like an old 60s hit with, you know, new hip hop song. And the audience does like, no one knows what to do. Like he just like created this new thing, which of course we hear all the time now that's that's sampled and mixed across decades and mixed from different tempos. But he gets up there and like, no one can believe it. No one knows what to do. He just like created this new thing that no one even knows how to dance to. And, you know, as someone that, you know, you know who Dr. Dre is, but you don't know what his sort of origin story is. It's just amazing to, to, it's a great documentary. I can't recommend it enough.

• 8:19David Rosenthal?

  So great. And I mean, Dre is like, he's the whole image, like this is why he's Dr. Dre. Like, you know, he goes off in the lab and he cooks up, you know, a beat. And sometimes it takes him a decade to do it. But like, he is, you know, one of the greatest, you know, Positions, you know, of all time. I mean, like, he just creates like these perfect. So like, he's, he's obviously, you know, had his NWA career, you know, he's a rapper and makes music himself, but he produces, you know, he's produced Tupac, he's produced Snoop, Eminem, 50 Cent, Kendrick Lamar. I mean, you know, like California Love, like, that's him. That's Dre, you know?

• 8:54David Rosenthal?

  He's not only rapping on it, but like the beat, like, that's Dre. Pretty amazing. So Jimmy and Dre have been, you know, business associates, collaborators, and, you know, deep friends for a long time. And in 2006, so this is the actual story of the founding of Beats, which according to Jimmy is, is completely true. If so, this is certainly the most amazing story. Jimmy's out running on the beach in LA. He's exercising and, and Dre is at his beach house and he, he sees, he sees Jimmy out there, you know, like they're good friends. He's like, hey, you know, Jimmy calls him over.

• 9:30David Rosenthal?

  And, and they start talking, they start chatting and Dre's like, you know, man, my lawyer called me the other day and like Nike and Adidas, like they're kind of after me. They want me to sell sneakers. They want me to do a sneaker deal. What do you think? And, and Jimmy, Jimmy looks at him and he's like, sneakers, like Dre, nobody cares what you wear on your feet. Like, you know, you're, you're a recording artist. You're not, you know, you're not an NBA player. You know, you shouldn't sell sneakers. You should sell speakers. And Dre looks at him and he's like, you think we can really do that? And Jimmy's like, yeah. Like, we can definitely do that. And Dre's like, oh yeah, like we could call them Beats. Like, you know, that's what I do. I make Beats. We could call those speakers Beats. And, and that's how Beats got started on the beach in LA.

• 10:15David Rosenthal?

  Legendary. Totally legendary. I think Dre made the right choice, not, not going with the shoe deal, um, instead going with, with headphones and speakers.

• 10:25Speaker 00

  It seems like it. So at this point, is it just Beats Electronics? There's no Beats Music?

• 10:31David Rosenthal?

  So yeah, the idea, well, we'll get, we'll get into what happens next in a sec, but I want to step back first. Just give a little bit of context. So, you know, I have, as we've talked about, he's, he is like the music industry executive. And what he's great at, you know, like we were saying, is like, he reinvents himself. He sees the future coming. You know, he goes from Stevie Nicks and Tom Petty and Bruce Springsteen to, you know, Tupac and Snoop and Eminem and Dre. And he sees, you know, this is 2006, like he's known for a while that like digital, the music industry is, is dead as it was, once was. It's, needs to be transformed. Digital has completely disrupted it. You know, it started with Napster. But then Apple is, is really big at this point. And, you know, with the iPod and the iTunes Store.

• 11:17David Rosenthal?

  And Jimmy's actually been, he, he was good friends with Steve Jobs. He got to know Steve and Apple in 2003, when, when Apple was launching the iTunes Music Store. So Interscope was, was a big part of that and all of the content. And so, so Jimmy's been thinking about this for a while. And, and the thing is that like, he knows, I mean, he's an executive, like the whole business model has changed because of, because of digital. It's not just piracy, but it's like now, you know, music is sold as singles, not albums. One. Two, the entire distribution model, like it used to be like you needed, you needed radio, you know, to get distribution and then you needed like to get like physical CDs or vinyl, like cassettes into stores.

• 11:58David Rosenthal?

  And you'd have a relationship with the stores. That's all blown up. Like it's now just, you know, iTunes and other digital platforms. The marketing's totally changed. But what's also happened is that like the channel is much wider and the relationship between like the artist and the music and the listener, like there's now all those steps that used to be in the middle are now just completely collapsed. So Jimmy's like been thinking about this. And at the same time, he's also close to Apple and like he's inspired by, you know, what they've done with hardware and with the iPod. And actually, cool side, I don't know if folks remember, there was a lot of marketing for the iPod with U2 and U2 was like the first product that like U2 ever. There was the U2 edition iPod. I had it. It was awesome. With that red scroll wheel.

• 12:40David Rosenthal?

  I had that. It was so cool. You know, that's all like Jimmy, like, cause Jimmy discovered U2. You know, and he's close with, close with them. Like he, he's the one who made that happen. So he's thinking about all this and that's like in his mind as they're having this conversation on the beach. So he's thinking like, thinking about hardware, thinking about Apple, the evolving music industry. So they have the conversation and a little over a week later, I guess Jimmy calls, you know, nothing to say. Jimmy calls Dre up and he says, Hey, I want you to come over. And Dre comes over and Jimmy has gone out. He has bought every single headphone on the market. He's got them like all on a big table. It's like, it feels like a like Johnny Ive, like product review, you know?

• 13:22David Rosenthal?

  And, uh, and they listen to him and he's like, it's a thing like they all suck. They decide they all suck and it's not because they're not like good technology. But there's, there's two problems that they realize with the headphone industry. One, you've got like the headphones that come with the, you know, with the iPod. They're like, you know, the, the ear pods, you know, and other, you know, bundled headphones. These things cost like a dollar to make, like they're super low end and like, you know, they're fine for what they are, but they're just like really cheap. They're not that good. But the other end of the problem at the, at the high end of the market. To Jimmy and to Dre's mind, they're doing it all wrong. It's these tech companies that are making headphones and they're making them as reference equipment. And so the idea like the, the, you know, what audio files want the pristine audio quality is like reproducing

• 14:06David Rosenthal?

  the exact nature of like every sound, every instrument, like exactly as it comes off of the, you know, the guitar, the bass of the drummer, you know, the violin or whatever. But, but they realize like, that's not like, music isn't technical. It's emotional. Right? And so like the experience that most people want when they listen to music is they want to be like emotionally, you know, they want it to be dramatic. They want it to be taken by the music. They don't want it reproduced exactly as it sounded, you know, coming off the instrument. They want it to sound emotional. Uh, and that's not what any of these headphones are doing.

• 14:39Speaker 00

  And this is the very first point where we realize good headphones and the ideal that Jimmy and Dre were shooting for here is not at all the same thing that audiophiles are shooting for.

• 14:51David Rosenthal?

  Exactly.

• 14:52Speaker 00

  They're not a beloved headphone by people that have a certain way to evaluate, are these high-quality replica of what happened in the studio headphones?

• 15:02David Rosenthal?

  Exactly, exactly. But what Jimmy and Dre realize, and they know from their experience making popular music, is the audiophile category is like a tiny, tiny, tiny market compared to the rest of the population who wants to experience music when they're working out, when they're focusing, whatever. It's part of their life. It's not something they want to reproduce exactly.

• 15:24Speaker 00

  It's amazing how there was an opportunity for a brand and a category that was kind of unbranded. The brands there were, oh, well, I also have a stereo that's Sony, so I have Sony headphones. Or I also have a Walkman, so I have Sony headphones. Or I have an iPod, so I'm using the stock iPod. It was always like, this is the electronics company that I have for something else, so I got their headphones too. I have no emotional connection and there's not a lifestyle that I have that's defined by the headphones that I'm using. And no one thought that that was a thing. People always thought, oh, it's an accessory. Or the very high-end people thought, oh, it's a product on its own, but that's not a thing that permeates life.

• 16:04Speaker 00

  But it really defined a lifestyle and how you wanted to think about yourself when you put on Beats headphones.

• 16:12David Rosenthal?

  Yeah, and it's also like, it's also unlike a tech device that you keep in your pocket or on your desk or whatever. It's on your body. It's also like a piece of fashion and it's an advertisement for the brand that you're walking around with every day. So Jimmy and Dre, they realized this and he even says, they decided they were going to market the product just like they marketed an artist. The product is an artist. And this is totally revolutionary at the time. Who would have thought to market headphones like you would market, like Jimmy says, we decided we were going to market it like it was Tupac or U2 or Guns N' Roses. That's not what Sony is.

• 16:49David Rosenthal?

  That's the, that's the business plan. They decide, you know, rather than like trying to make all this hardware ourselves and get into the tech game, we'll just partner with somebody. So they partner with Monster, the high-end cable company. Beats, Dre and Jimmy and the team, super small team. They design the headphones. They create all the specs. Monster produces them. But what they do, they also do essentially like, you know, what are, what are these guys? They're music guys. They do like artist development. They're treating the headphones like an artist. They do the same thing with the headphones. So like, as they're getting prototypes over the next year, year and a half, like they're bringing them all into the office, into the Interscope office, and they're getting all the artists to like, use them and give them feedback.

• 17:29David Rosenthal?

  So like, every, you know, Will.i.am, you know, Gwen Stefani, like all these people, you know, Lady Gaga, they're all like, using them, trying them out, giving feedback.

• 17:37Speaker 00

  That's like the best way to get sort of early customers or early influencers is like, make them feel part of the process, right? That they're involved in, I helped shape this thing. I've known about this since the very beginning, like, oh, I've, you know, I have, even though they don't actually have skin in the game, they have some sort of reputational or cool factor, skin in the game and a reason to be super excited and promotional about it when it finally debuts.

• 17:58David Rosenthal?

  Yep. Well, and it's exactly what they do, you know, with artists, right? Like, you know, what did they do with Eminem, right? Like, they brought him in, they paired him with Dre. And then like, you know, Eminem's first, you know, songs that came out, like, you know, Dre's in them and Dre did the beats and like, you know, Eminem learns from Dre, right? But then also like, he gets marketed by Dre. Same thing they do with the headphones. So the first product, quote, Beats by Dr. Dre, Studio Headphones.

• 18:24Speaker 00

  No way. It was Beats by Dr. Dre?

• 18:26David Rosenthal?

  It was Beats by Dr. Dre in the beginning. Come out late 2008. And, and this is what they do. They put the headphones in the music videos of all of the artists on, on Interscope. So it's like, you know, when you do like, you know, you know, whatever song, you know, for a new artist to come out and it'll feature Dre on the, you know, the album or whatever, like, you know, this is like a new song, like new headphones coming out. And they're featured on the albums of, you know, on the videos of, of all these other artists.

• 18:52Speaker 00

  That's awesome.

• 18:53David Rosenthal?

  Totally awesome.

• 18:54Speaker 00

  What great, unique. Marketing channel that other people just couldn't possibly have.

• 19:00David Rosenthal?

  Totally. I didn't even think of like, cause they're not thinking of headphones, you know, in this way. So then the other thing that they do pretty early on is they, they give a pair to LeBron James. I think they actually give it to his manager, maybe or somehow like they get, they get a pair to LeBron. He's like, oh yeah, these are cool. Like, and he's like, give me, I'll tell you what, give me 15 of them. Like, all right, LeBron, you're like, here you go. Here's 15, you know, pairs of Beats. And this is right before the 2008 Olympics. And next thing they know, the NBA, the basketball, US basketball team shows up for the Olympics in Shanghai. They are all wearing Beats. And

• 19:35Speaker 00

  And that's like, that's a signature of the company now, right? Is like a, a sports team walking out of the tunnel onto the floor in their warm up stuff, all wearing Beats.

• 19:44David Rosenthal?

  Yep. So they fall into, they realize that like, sports is going to be massive for them. I mean, again, you know, headphones, totally crazy that nobody had thought about marketing headphones and speakers with like musicians before. But, but what about athletes, right? Like, you know, it really is, it goes back to Dre and the shoe deal, you know, like, let's market it the same way. So this leads to a couple of years later, the awesome, the hear what you want commercials that they do, you know, with Richard Sherman and Colin Kaepernick and Kevin Garnett. Just so good. And, uh, you know, really a, a big part of the marketing, especially for people that maybe might not be as much into music or artists particularly, but like are into sports, like it really becomes a lifestyle brand.

• 20:24David Rosenthal?

  And then we're skipping ahead a couple of years, we'll come back, but in 2014, you know, the show Beats are so popular in the NFL and all these commercials are hitting. The NFL does a deal with Bose headphones and like, and they ban Beats. And Jimmy's like, they actually, Jimmy gives an interview about this, like as it's happening and there's so much publicity and like, everybody's talking about it. All the athletes are talking about it. Jimmy's like, this is the best thing that ever happened to us. Like, I literally could not have planned this any better.

• 20:51Speaker 00

  It's like the, the narrative of like, these rich guys want to come in and pay money so that people can have what they want. And what they want is Beats.

• 21:01David Rosenthal?

  It's like, uh, you know, it's like the parallels to when, uh, when Facebook tried to copy Snapchat with Poke. And it's like, you take a step back and you're like, this is the best thing that ever happened to Snapchat.

• 21:12Ben Gilbert?

  All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

• 21:26David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 21:40Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower.

• 21:50David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent visible and secure in one place.

• 22:07Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 22:24David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 22:40Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 22:49David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. So back to the company story. So they launched the first product in 2008. It's really successful. They're growing, but they're still, you know, they've got this partnership with Monster. Beats itself as a super small company. They're just, you know, they're the brand and they're the design and reference designs. But they decide, you know, they want to grow. So they partner with HTC. We've referenced this in other episodes on the Android episode and others. But what was the one we did?

• 23:24Speaker 00

  I think it was the HTC Google.

• 23:26David Rosenthal?

  Yeah, HTC Google, right, HTC itself. HTC ends up acquiring a majority stake in Beats in August 2010. And they pay $309 million for a 50.1% stake. So the company's valued at over 600 million. As Jimmy talks about it, it's mostly Jimmy because Dre doesn't talk much. Like, this is his thing. Like Dre, he's just in the lab. He hates talking to, hates talking to anyone, let alone the press. But Jimmy talks a lot. And so Jimmy talked about it. And he's like, well, you know, I knew the future of music was going to be, you know, on smartphones. And so I thought like, we needed to, you know, we needed to tie up with a smartphone manufacturer to get, you know, our headphones and our technology into, into these phones.

• 24:10David Rosenthal?

  So this is where you have like Beats by Dre HTC Android phones that are coming out for a while, which are hilarious. We totally should like, we should find somewhere that's like an acquired like museum and put some of these products in there. We could get a Next, a Next station. We could get a HTC Beats phone.

• 24:29Speaker 00

  Oh, yeah. They, we didn't do an episode on it, but we referenced that HP iPod.

• 24:34David Rosenthal?

  Oh, yeah. Oh, totally. Oh, and we should get the U2 iPod.

• 24:38Speaker 00

  Of course.

• 24:38David Rosenthal?

  Oh, this is great.

• 24:39Speaker 00

  Maybe we can finally get all that U2 music off my iPhone that was put on it without my permission.

• 24:44David Rosenthal?

  Yeah, that's right. I forgot about that. Oh, man, that was a disaster.

• 24:49Speaker 00

  Yeah.

• 24:50David Rosenthal?

  That's actually a great idea. We should do an acquired museum. If anyone wants to sponsor an acquired museum somewhere.

• 24:55Speaker 00

  David, you know what? I hope one day this show gets to the level where we have an actual, physical museum. For now, maybe, maybe in one of our houses.

• 25:09David Rosenthal?

  You got a dream. Okay, so they do the deal with HTC. And the company Beats continues to grow. It totally overtakes pop culture. I mean, kids everywhere are wearing them. Non-kids are wearing them. They're growing and growing. 2012, Jimmy and Dre kind of realized like, okay, there's a huge opportunity here. And if we're really They're gonna make this a big company. We gotta own, we gotta control our own destiny. We gotta kick Monster out and, you know, and build everything in-house. And again, remember Jimmy, you know, knows everybody at Apple. He's super inspired by them. And this idea of, you know, like hardware and brand and software altogether.

• 25:51David Rosenthal?

  So they don't renew the partnership with Monster. They move to producing the hardware themselves. Monster, this is just such an example of like the competition these guys were facing in the, in the headphone industry. Monster decides like, oh, we can do this too. We're gonna come out with like lifestyle branded headphones and work with artists. So they released Earth, Wind & Fire branded headphones. I love Earth, Wind & Fire. Great group from the sixties and seventies, but like, are you serious?

• 26:18Speaker 00

  Dre, Earth, Wind & Fire, same residence, you know, same, same group of people.

• 26:23David Rosenthal?

  Oh, yeah.

• 26:24Speaker 00

  And have reverence.

• 26:25David Rosenthal?

  Earth, Wind & Fire headphones are totally gonna dethrone, you know, Beats by Dre and Richard Sherman and Colin Kaepernick and LeBron James. They're like, you know, are you kidding me? To be fair to Monster, they also come out with Miles Davis branded headphones, which, you know, again, like Miles Davis, great, but like, how big is that market versus, you know, LeBron James fans?

• 26:43Speaker 00

  Yeah. And I mean, the, the mark that they missed there is not that like, I love Dr. Dre, so I listen to Beats. It's that Dre is cool and there's, and he's behind Beats and Beats are the brand. Not that like, I wanna represent Dr. Dre every time I wear my Beats around.

• 26:58David Rosenthal?

  Totally, totally. So then they actually, this is Monster, they end up suing after the Apple acquisition a couple of years later. They end up suing Beats and Apple. They're like, oh, you cheated us out of all this. And Apple's like, this is such a baller move. Apple's like, okay, fine. So they revoke Monster's membership in the like certified Apple accessories. Like you wanna play hardball, we'll play hardball.

• 27:25Speaker 00

  The MFI is certified.

• 27:26David Rosenthal?

  The MFI certified and Monster pursues the case. A court eventually throws it out and like, this is totally baseless case, so.

• 27:33Speaker 00

  There are, I'm sure, a large group of people in Apple that have like zero respect for what Monster does as a company anyway. And I think it probably felt good just to like be able to stick it to them there. Because I mean, for, in my mind, the thing that I'll always know Monster for is like complete BS, lying to you, marketing about the quality of connectors that are no better than the connectors that you could get for something that is a fifth the price and then charging you $150 for an HDMI cable. I just have to imagine that having recourse to tell that company to, you know, stick it somewhere is a nice feeling.

• 28:17David Rosenthal?

  I feel like there was some, I don't know if this has come out in court cases or otherwise, but there must have been some like massive collusion between Best Buy and Monster throughout like all of the 90s about all this stuff. Like, it's digital, right? Like, the quality of the kit, it's ones and zeros. Like, this is not analog.

• 28:34Speaker 00

  David, it's gold plated. You don't understand.

• 28:38David Rosenthal?

  All right, let's get out of Monsterland. The other part about kind of controlling their own destiny, you know, Jimmy and Dre also realized that like tying up with HTC is not the future here. First, they get HTC to sell back half of their stakes. They own 50.1%. They sell back 25% to the company in 2012. And then in 2013, the Carlyle Group, the big private equity fund, they actually invest 500 million in Beats and use part of that proceeds to buy back all the rest of HTC. So HTC is completely gone by 2013 from the cap table.

• 29:12Speaker 00

  Did Jimmy and Dre get any liquidity from that initial 50.1% purchase from HTC? Do you know?

• 29:19David Rosenthal?

  I don't know. I mean, I suspect so, but I don't, I don't know. But apparently, I think when that happened, I could be wrong here, but I think the company was like five people. Like, I mean, it was literally just like Jimmy and Dre.

• 29:31Speaker 00

  Oh, because all the manufacturing was still contract?

• 29:33David Rosenthal?

  Yeah, it was all done by Monster. So it was just like, you know, the Beats was just doing like the design, the sound tuning, and that was done by, you know, mostly Dre, and then the marketing. So it's kind of crazy that like HTC, you know, that you could build such value and that HTC paid, you know, 300 million for half the company with like five people.

• 29:56Speaker 00

  Yeah, talk about a talent acquisition.

• 29:58David Rosenthal?

  Yeah, seriously. Well, we'll get into that in a minute.

• 30:00Speaker 00

  Actually, that would be kind of a fun, yeah. Probably not another episode, but it's interesting. We should, when we're classifying what type of acquisition it was for Apple, we should also do that for HTC.

• 30:11David Rosenthal?

  Yeah, totally. Good, good point. Let's remember to do that. As part of all this, they start producing the products themselves. They're done with Monster. The first in-house Beats products that come out are the Beats Executive headphones first, and the Beats Pill Wireless Speaker, which was a massive success for a product and is now on multiple generations. The other thing they do as they're doing all this is they acquire a small tech company, a music streaming company called Mog, M-O-G. And this is part of, you know, back to Jimmy's vision about like, the whole music industry needs to change. Like, he's always wanted, you know, I mean, headphones is great, and that was, you know, how they started Beats, but like, his vision was like, much bigger,

• 30:55David Rosenthal?

  that this was gonna be his way of riding the next wave in the music industry. So Mog was fairly struggling. I mean, it was, at this point, Spotify had entered the US and kind of won the market. But they did some interesting things, and they had some definitely good tech talent. So Beats acquires them and starts working on totally redoing the Mog service and rebranding it as Beats Music. So they work on that for about 18 months, and in the meantime, hit over a billion dollar revenue run rate just on the headphones. And then in January 2014, they relaunched Mog as the Beats Music streaming service. But the thing that Beats Music has, that none of these other streaming service has, have, that they think is really important, is they have actual involvement by the artists themselves.

• 31:40David Rosenthal?

  So there's like playlists that are made, there's recommendation, curation by Dre, by the Interscope artists, by Jimmy. You know, everybody else is just an algorithm at this point. And Dre and Jimmy think this is the future.

• 31:53Speaker 00

  Yeah, and this is, I'll borrow from Tech Themes ahead now, but this is the Jimmy Iovine vision that manifests in multiple forms. That's really, respect the artist, keep the artist involved, it's all about the artist. In fact, in the Defiant Ones documentary, there's a quote from him where he's like, "People like to attribute things I did to me and success to producers." And producers try and take credit for that a lot of the time. It's 99.9% the artist, and you've got to respect that and you've got to understand that, and that's what makes a great producer. And it's interesting, looking at the streaming service and saying, "You know what? The artists need more involvement with this. Human curation." So foreshadowing the Beats One radio, you know, it's human curated, and that's actually

• 32:37Speaker 00

  a value proposition rather than algorithmically selected, or in fact, not even algorithmically selected, and just showing you, you know, huge lists of songs for you to search and browse through. And then, you know, a tenet of Jimmy's, as Beats would grow later, is "We don't have a freemium tier." And we'll talk a lot about this, but like, artists get paid for music, and that's final. And that's his party line through and through, and really sets him apart from a lot of the other sort of disruption that's happening in the space.

• 33:08David Rosenthal?

  Yep, yep. Well, and the, you know, just the whole ethos, again, getting back to the headphones of like, "Music is personal, music is emotional, music is not technical." And I think that's part of the vision here, too, is like, you know, your music service, you don't want an algorithm, you know, queuing up what's next. You want like Dre queuing up what's next. You want Stevie, you know, queuing up what's next.

• 33:29Speaker 00

  Maybe, maybe. We'll see. My Discover Weekly is really good.

• 33:32David Rosenthal?

  Well, totally. I'm not saying it's right. I'm just saying this is Jimmy's, you know, vision. And certainly for, you know, for a big part of the market, I think that resonates. We'll get to the end of the story here now, and the end is kind of just as fun. Might also be the coolest end to a acquisition story that we'll ever have on Acquired, certainly thus far. So, May 8th, 2014. Remember, in January, they launched Beats Music, just a couple of months before. So, a few months go by, May. The Financial Times reports, breaks the news that apparently Apple, Jimmy's old friends, are in negotiations to buy Beats for $3.2 billion.

• 34:16David Rosenthal?

  And this would be the largest acquisition in Apple's history by literally an order of magnitude. So the previous largest was the next acquisition, which we covered, which was just over $400 million. This would be, you know, Apple doesn't do things like this. It's huge news. And it's true, negotiations are going on, but they're not done yet. And so Jimmy calls up Dre and he's like, all right, this came out, like, we got like, this is Apple, they're so secretive, like, they could walk at any moment, like, we know these guys, like, we gotta keep quiet until this is done. Like, can't say anything, just keep it on the DL, like, be completely, like, do not do anything. Dre's like, yeah, yeah, gotcha. So Dre's in the studio that weekend and he's hanging out with friends and one of his friends

• 35:01David Rosenthal?

  is the actor and singer Tyrese Gibson. They're hanging in the studio and they're talking about this, of course, like, what are you gonna talk about? Like, you're about to sell their company for, you know, $3.2 billion. And they're excited and it's late at night and they, you know, they're drinking, they get drunk. And Tyrese, you know, pulls out his phone and makes a video of all of them and they're celebrating and Tyrese says, like, the Forbes list just changed, just came out, they're gonna have to, like, new information, they gotta change the Forbes list. And then Dre pops up and he's like, first billionaire in hip hop, right here. And they're like, you know, they're party, whatever. They go to bed.

• 35:40Speaker 00

  So cringe-worthy.

• 35:41David Rosenthal?

  That night, 4 a.m., so early, early morning, Jimmy calls up Dre and he's like, what the, you know, F, like, it's like, what the heck are you doing? And Dre's like, what do you mean? And Jimmy's like, that video. Dre's like, well, what do you mean? Tyrese posted it to Facebook. And this was right when Facebook video was, like, launching. So people didn't really understand, like, what Facebook video was. And so obviously, you know, it's on the internet. Now, they don't actually say that Apple is acquiring Beats, but like it's strongly implied here, especially corroborating this article.

• 36:21David Rosenthal?

  So there's some rockiness to the deal and.

• 36:25Speaker 00

  Honestly, I can't believe Apple still went through with it.

• 36:29David Rosenthal?

  I can't either, but they do. But you know, supposedly like it was, you know, the Financial Times was reporting, beginning of May, it's close to done. Nothing gets announced until the end of May, so May 28th, 20 days later. And when it gets announced, Apple is doing the acquisition for $3 billion, not $3.2 billion. Nobody discusses why and their speculation, well, it could be that the Beats Music subscriber numbers were actually a little lower than, you know, they thought they will. Maybe it's the Tyrese video. We'll never know, but pretty hilarious.

• 37:04Speaker 00

  I mean, it really shows a few things. One, how badly Apple wanted to do what they were going to do with Apple Music and how integral they viewed Beats in doing that. Two, the power of Jimmy and his relationships. The characteristic Apple we know of, it's done. Like you messed up, we're not, we're no longer moving forward with this. You've proved yourselves to be people that we can't, you know, can't trust to sort of live the Apple way.

• 37:34David Rosenthal?

  And lead a huge part of the company going forward. This is the largest acquisition by an order of magnitude that Apple's ever made.

• 37:39Speaker 00

  Yep.

• 37:40David Rosenthal?

  So the day it gets announced is actually the Recode Conference is going on, Code Conference is going on. And so Jimmy and Eddie Q, so Eddie Q's always been the media and content guy at Apple. And the day the deal gets announced, he's scheduled to be interviewed onstage at the Code Conference by Kara and Kara Swisher and Walt Mossberg. And the deal gets announced, right? So he and Jimmy come up onstage together and they get, and they're interviewed by Kara and Walt and they're like, wow, this big news. But people knew it was coming. But the thing that Jimmy, you know, makes the point and Eddie both several times in this interview is like, this didn't happen overnight, you know, that Eddie had, Jimmy

• 38:22David Rosenthal?

  had been working with Apple and with Eddie for over a decade, you know, going back to the launch of iTunes Music Store and to, you know, so to your point, Ben, I mean, the relationships, like that's gotta be what saved the deal here.

• 38:32Speaker 00

  Yeah. God, to be a fly on that wall, to understand the phone call that Eddie Q makes to Jimmy.

• 38:40David Rosenthal?

  Or did Dre?

• 38:41Speaker 00

  Yeah, well, it's funny.

• 38:42David Rosenthal?

  I kind of hope that Eddie just called Dre up.

• 38:44Speaker 00

  I know, right? In the Defiant ones, they do talk a lot about, and I haven't finished it yet, but in the, at least in the first part of it, they talk a lot about the, how Jimmy finds out and talking with Dre about it. We don't hear at all what the communication from Apple is like. And so, you know, it's very, it's, there's still, there's still the core of Apple in there.

• 39:07David Rosenthal?

  They're really like, somebody someday should do like a book and like go in and research like all, like the actual stories behind all this stuff at Apple. It would start, it leaks out, you know, a little bit over the years as things get older, but there's so many of these that, um, you know, there should be, there should be an actual historian go ahead and like do this at some point.

• 39:29Speaker 00

  Yeah, great point. So, so at this point, the acquisition, it's actually two LLCs. It's Beats Electronics LLC and Beats Music LLC. And I remember when I first heard the news, it not being totally clear to me which, which was more valuable, more strategic, why, why Apple was actually doing this. I mean, to me, it seemed like Beats Music was, yeah, it had some people using it, but like clearly not going to be a winner. Like Spotify was going to be a winner. It didn't, it paled in comparison to people still doing the 99 cent thing from Apple. Like the headphones were super popular and permeated pop culture and seemed to be doing really well. So I think in my head, at the time of the acquisition, before Apple Music was announced, I'd sort of chalk that up to like, okay, they bought the headphones company.

• 40:15David Rosenthal?

  Yep, yep, totally. You know, the sort of coda here is just over a year later, Apple Music launches Apple's first streaming service and it is a, you know, rebranded and revamped Beats Music, including the Beats One, uh, radio station that's part of it that's hosted by Dre and other artists. And, and so that launch and that becomes, you know, Apple's primary, uh, music offering. But then also, as we know, uh, Ben is wearing them right now. Apple has gone much deeper into headphone technology over the last couple of years.

• 40:51Speaker 00

  Yeah, you know, I'd say we did a good amount of research, not totally clear how much the Beats folks were involved in the AirPods design. I mean, I think there's a little bit of crossover, but but Apple actually doesn't influence the Beats hardware stuff very much. I think it's they're they're taking advantage of some economies of scale and some innovation where they're they're sharing things between those two. For example, the W1 chip that's in the in the AirPods appears also in the the most recent Beats wireless headphones. But for the most part, I believe it's Apple's existing hardware teams continuing to work on the AirPods and Beats hardware teams continuing to push

• 41:33Speaker 00

  the ball forward on on Beats headphones. And there was some layoffs in the consolidation. They they laid off, I believe, 200 people in in combining the companies, but.

• 41:43David Rosenthal?

  Yep. Well, this is probably a good segue into acquisition category, and we can get into some of the numbers of analyzing the deal later and in, you know, grading and other segments. But but I think it comes down to like, what was this acquisition? You know, I mean, for me, I was thinking about it like, it actually kind of fits a bunch of our categories. Like, it's a business line, for sure. Like, you know, Apple now owns Beats. They're selling Beats headphones.

• 42:08Speaker 00

  Which in itself is over a billion dollars. I mean, even before the acquisition, I think this 2013, 2014 numbers, but over a billion dollars in revenue just on the headphones.

• 42:18David Rosenthal?

  Yep, totally. And that's when Apple acquired the company. You know, it's also an asset. It's the brand of Beats, for sure. As we talked about, you know, that's was at the time and still is a huge part of pop culture that Apple's getting access to. But I think it's also like, if I had to choose one, I think it's actually people. And I think, you know, there's, there's a lot of really, in some ways, kind of funny and unexpected parallels to the next acquisition here. And, you know, Steve Jobs coming back to Apple. I wouldn't put Jimmy and Dre's impact at Apple anywhere near the level of Steve Jobs, but it is an impact for sure. And and there's that long relationship. And

• 43:00David Rosenthal?

  I think it comes back to the AirPods, too. Like, whether or not the Beats team was involved in the AirPods, it is this like view of what is, you know, audio, what is music? Is it something technical? Or is it something that's like, part of your life?

• 43:14Speaker 00

  Yeah, I mean, it's definitely a scattering of categories. The way that I was thinking about this acquisition and how to do the analysis, I sort of discarded, I did discard the headphones line of business. I mean, yes, it's a, it's a, it's a brand and it's a great, a great source of revenue. And it's, it's only continued to improve since they bought it. Though they don't break it out, I think Beats has become more, more and more prominent over the years. What they, in my mind, bought was two things. It's, it's one, an existing app and service that was well done so that, you know, they, they didn't have to start from scratch in-house. You could imagine Apple being, knowing they were going to do Apple Music,

• 43:59Speaker 00

  and knowing that they wanted to compete with Spotify in this world where they're, a thing they pioneered, music over the internet, was being largely disrupted and they needed to become a player in the changing world. They totally could have done it on their own.

• 44:13David Rosenthal?

  Yep. Well, and, but, but also Apple, I mean, in the Sound Jam episode, which is like totally the precursor to this episode. You know, they made the same decision, like, let's buy a good technical service and like, you know, use that as a starting point.

• 44:28Speaker 00

  Right. And so that's not worth $3 billion for sure.

• 44:31David Rosenthal?

  Totally. That's where, that's where I was going.

• 44:32Speaker 00

  You know, Sound Jam is worth, what was Sound Jam is, is just a talent acquisition.

• 44:37David Rosenthal?

  Yeah, like 10 million or less.

• 44:38Speaker 00

  Yeah. One piece of analysis that I read was like, well, consider if they had decided to do it on their own to compete, you know, let me paint this picture. A competitor of theirs rises to prominence using their own devices as distribution in a thing that, a service that people consider core to their lives. And this analysis was talking about Google Maps. Apple decides to do something on their own to compete and comes out with Apple Maps. And there's, you know, a, a large debate over how that's going.

• 45:10David Rosenthal?

  Although I think a lot more people use Apple Maps than like, you know, at least in the tech world, we give it credit for.

• 45:16Speaker 00

  Right. There's also an element of Apple. They're not great at social. They're not great at services compared to other companies. So there's a lot of risk in them having complete and total control to shape the product of what does this service look like? And by buying, you know, Beats Music, they had a really good starting point. Now, again, none of this is worth $3 billion. Some of that is because the headphones business was already doing great. So anybody who wanted to just buy that thing would have to pay a billion or more for that on its own. Then when you layer on, okay, great, we're going to get this scaffolding of a great music service. So call that a technology. I'd say product, but I really, well, let's say product.

• 45:59Speaker 00

  What you really need on top of that to make the whole thing tick and to really start competing with Spotify is Jimmy's relationships and Beats, you know, Dre and Jimmy's position within the industry. And so to enable that sort of technology product that they built to really start to be differentiated and scale, you know, is the talent there.

• 46:21David Rosenthal?

  I totally agree, but I would even go one step farther. I think, um, maybe this is heresy, uh, given, you know, like we're talking about the way audiophiles view, you know, Beats and whatnot headphones. But I actually think there are a lot of parallels here to the Instagram acquisition of Facebook. I'm just going to paint this picture. Who knows it would have been successful, how long it would have taken. I think Beats could have been a serious threat to Apple in the long term. Jimmy and Dre, and particularly Jimmy, well, maybe Dre too. He just doesn't talk much, so we don't know.

• 46:53David Rosenthal?

  But they had a vision, right, of like, what was Beats? And what was this combination? Jimmy talks about it all the time in his interviews, like how much he idol, you know, he respected Steve Jobs's view of like technology plus liberal arts. And you could argue with like, how well Beats did on that, but like, that was the driving vision. It was like, we're not just a headphones company. We're not just a tech company. We're also not just a music company. We are like part of your life and like the relationship that we have to our. Customers is super deep and that's exactly what Apple is too, right? Like, so maybe we're bleeding into what would have happened otherwise now, but like, say this acquisition hadn't happened, like, what does Beats look like now? What does Beats look like in 10 years as a standalone company?

• 47:35David Rosenthal?

  Like, just like Apple started with, you know, let's take, you know, Apple version two, you know, after Steve Jobs comes back, starts with like a MP3 player, you know, like, oh yeah, that's nice. Apple's doing consumer electronics now. That's, that's cute. Now Apple's the biggest company in the world and like the most personal relationship with like billions of people around the world. Maybe headphones was the way that like Beats could have done that, too.

• 47:57Speaker 00

  It's interesting to think about, especially in the future that we've like painted on other episodes where, where a headphones and a watch or a headphones and a wearable in some way are the, the new phone, but you sort of do need to be the ecosystem owner of all of those things in order to do that. And it's Apple, I think it's pretty hard to be a new entrant to compete with Apple there.

• 48:20David Rosenthal?

  Yeah, totally. Well, I think Beats would have had a really hard time technologically doing it on their own without Apple, right? But this is where it comes back to the AirPods, right? And like, where is computing going? Where is technology going? But also where is like, you know, where is society? Where are the liberal arts going? Like, and that's why you're back to the people, the relationships, like you're saying, like Jimmy and Dre, like, they understand why people use things, like people buy headphones and listen to music because of the emotional, you know, impact of the music, not because of the tech specs, you know, like, and I think that's what Apple got so right about the iPhone, right? Like, it's not about like, you know, like, you know, the talk show talks about this all the time, like, Apple doesn't market on speeds and feeds, like, it markets on like, how this

• 49:01David Rosenthal?

  impacts your life. To me, that's like, the biggest thing here is a people deal and, and that's why this is a $3 billion acquisition and Apple's largest ever. And that's why Sound Jam was a, you know, aqua hire.

• 49:14Speaker 00

  Wow. It's a bold statement. If you were to attribute, I'm sure there is actual models with attribution to this. If you were to attribute that $3 billion allocated across Beats Electronics and Beats Music, how would you do it?

• 49:30David Rosenthal?

  I just see, I don't think Apple would do that. And I don't think that's how you should think about it. Cause it's about like, again, it's about like the AirPods, you know, like, which isn't Beats at all, right? But it's about like, what this vision can get to and how Beats as a company, Beats as a brand, Jimmy and Dre as leaders can help Apple, you know, get there.

• 49:49Ben Gilbert?

  And they just happen to bring a lot of really helpful assets along the way.

• 49:52David Rosenthal?

  Yeah. And asked, but you can't value the assets, right? Like, again, back to Sound Jam, like, Sound Jam had no brand. Sound Jam had no, like, they had customers who, who like, used the product and liked it, right? But like, it wasn't like, like, the NFL wasn't banning Sound Jam, you know?

• 50:09David Rosenthal?

  Right?

• 50:10Ben Gilbert?

  Yeah.

• 50:10David Rosenthal?

  I don't know. I'd be like, I'm definitely out on a limb here, but, but I think it's true, right? Like, because the question is, why did Apple pay $3 billion for Beats and, you know, $3 million for Sound Jam?

• 50:20Ben Gilbert?

  Right. All right. I'll, I'll roll with you there. All right, listeners. Now is a great time to talk about a new partner of ours here on acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 50:36David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 50:53Ben Gilbert?

  So the founders did exactly what great founders do. Operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 51:08David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 51:32Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 51:51David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 52:21Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at logora.com/acquired and just tell them that Ben and David sent you.

• 52:46Speaker 00

  Before we go into what would have happened otherwise, why don't I catch us up a little bit on how is Apple Music doing? And what did the world of streaming services have that evolve? So let's rewind to before the Beats acquisition. So Spotify had collected 20 million paying subscribers while Apple had no offer, no offering in the market. And they're the pioneers of digital music and are the, yeah, of legal, legal digital music. And here they are sitting there while they're being completely disrupted. In fact, Pandora even grabbed 80 million active listeners and it looks like about 4 million paying subscribers. Still, Apple's doing nothing.

• 53:29Speaker 00

  So Spotify has got this huge free tier with 20 million paying. Pandora's got 4 million-ish paying.

• 53:37Speaker 00

  If you fast forward to today, what has sort of happened with Apple Music? They obviously launched in 2015. They now have 30 million paying subscribers, no free tier, just I think free trial. That's right, 30 day free trial. And where Spotify is, is that Spotify has about twice that. They've got about 60 million. Paying subscribers and over 60 million who are free. So Spotify has about double the listener base that Apple does. If you consider, and there's this amazing chart on ASIMCO that we'll link to in the in the show notes called growth of music subscribers. Apple Music has basically been growing linearly since launch.

• 54:21Speaker 00

  After 12 months, they were at about, it looks like about 14 million subscribers. After 24 months, they were at about 26. And here we are around 36 months where they're, they've just crossed the 30 threshold. And so they're, they're growing much faster than Spotify, who took years and years and years to get to 30 million. But now Spotify is, is really starting to sort of hit their acceleration in their, in their exponential curve. So still a very fierce battle. Well, while Apple, if you consider a number of months since launch is way out ahead, but obviously Spotify launched way earlier and is now accelerating at, at sort of breakneck

• 55:03Speaker 00

  speed to actually convert their, their free tier to paid tier. You know, we're in this world today where Spotify is preparing for some kind of liquidity. A lot of people are speculating that it's going to be a direct listing and go, go public. There's talk of it being a $20 billion market cap for that company when they do a direct listing. And they are accelerating faster than, than Apple Music is in terms of paid subscribers right now. And there's a very philosophical difference between Spotify's ad-supported sort of freemium tier that converts to paid or Jimmy Iovine's, we don't give away music. We, we, we charge for music and we give it to the artist. And Apple is sort of okay with, with growing more slowly or has sort of taken the position

• 55:47Speaker 00

  that we're okay growing more slowly because we have a more sustainable model that rewards everyone fairly. And honestly, Apple's got the cash pile where, you know, it can be a loss leader for Apple. And, you know, of course, they make money on it. If you, if you look in and see what the, the margins look like, Apple Music, it looks like operates around a 42% gross margin.

• 56:11Speaker 00

  When you're just working off of the fees that they're paying to the record label. So there's obviously other costs in there. So they pay 58% to the record labels. Spotify actually pays less. Spotify pays, they've dropped it from 55% down to 52%. And so Apple's, Apple's paying 58% to the, the record label. So the labels look at Apple Music and at Jimmy as, hey, this is a thing that's better for us. They have a strategy that's better for us where Apple doesn't need to make as much margin on this thing. They're doing better by the artists. So it'll be really interesting to see how this whole thing plays out between Apple Music and Spotify with different philosophies.

• 56:52Speaker 00

  Apple way late to this market, but obviously with a huge cash pile to be able to fight.

• 56:58David Rosenthal?

  Well, I'd say two things. I mean, one, it's also interesting to just think about the numbers and relative to, maybe we're foreshadowing ahead a bit to grading, but Apple Music has 30 million subscribers right now at $10 a month. Now, some of them are on the free trial and whatnot. So like, you know, a discount, a hyper aggressive discount of like, say, you know, two thirds of that is, is like one third is, is not paying the full $10 a month. They also have family plans where you can get the whole family on for $15 a month. So, so we'll be aggressive. I'm sure it's not quite a third that they're losing, but say it's a third. So they have 20 million people paying $10 a month. That's $200 million a month at a roughly 50% gross margin. So $100 million a month gross margin contribution to Apple.

• 57:42David Rosenthal?

  That's over a billion a year. Like, that's pretty good for paying, you know, three billion for, for Beats. So financially, like, that's pretty good. But also be, I think, like, I do really believe there's this other part of the story to music. Like, it's not just music. It's not just Spotify versus Apple. It's the whole ecosystem and the impact on your life. So like, Apple Music is smaller than Spotify for sure. But like with Apple Music, you know, you have like, there's Beats, right? And like, if you're Beats, if you use Beats headphones, like, that's partially maybe important to you, at least from a brand standpoint. But then there's also just like, you know, things like the watch, you know, right? Like, and now Apple Music on the watch. And it's like, and with AirPods.

• 58:24David Rosenthal?

  And so now you can just start to get this integration into your life, like I was talking about earlier, in a way that's just part of a whole, a larger product and being part of your customer's life that Spotify will never be part of.

• 58:35Speaker 00

  It's very Steve Jobs of you. It's very like.

• 58:38David Rosenthal?

  I mean, this is Apple's largest acquisition ever, right?

• 58:42Speaker 00

  Yeah, it's all about the music. And another interesting thing I should point this out, when I was diving into this is there's a great Quartz article that's called 90% of revenue comes from 30% of Spotify's Spotify's users. If you look at it like they probably have about twice as many free as they do paid. So that's sort of a one third, two thirds thing. 90% of their revenue comes from that smaller group of paid subscribers. So if you're ever thinking like, boy, it really seems like they want me to upgrade to this paid tier, they're not making jack off of you as a, as a, you know, listening to ads. That's really just a way to subsidize like, you know, we don't want to lose too much money on, on giving this away free.

• 59:21David Rosenthal?

  Yeah, interesting, interesting. The other player we absolutely should, you know, mention here is Amazon. Like, Amazon's making a huge push with Amazon Music and including, so there's two tiers of Amazon Music. There's Prime Music included for free in Prime, which is streaming of a couple million songs. So nowhere near as large a library as Spotify or Apple, but like enough for people who don't care that much about music, like, oh, I could pay 10 bucks a month or I could get this included in my Prime subscription. And then Amazon also has unlimited Music Unlimited, which is a direct competitor to Apple Music and Spotify, which is also priced cheaper at, I think, seven or eight bucks a month. And this is where, right, like, I would rather be Apple than Spotify in this situation

• 1:00:06David Rosenthal?

  because Spotify has to now deal with competing directly with Amazon. But Apple and Beats don't compete directly with Amazon.

• 1:00:12Speaker 00

  Yeah, Spotify is in the unfortunate middle here. Either compete with Apple head on or compete with Amazon head on, but you don't want to be kind of caught in the middle.

• 1:00:21David Rosenthal?

  All right, well, I feel like we've done category and what would have happened otherwise. Should we do tech themes quickly?

• 1:00:26Speaker 00

  Ooh, what would have happened otherwise? Could Apple have successfully created Apple Music without acquiring Beats?

• 1:00:31David Rosenthal?

  Oh. Yeah, of course they could have.

• 1:00:33Speaker 00

  What would it be missing?

• 1:00:35David Rosenthal?

  Let's look at like what Apple's starting to do in video or Amazon too, like, right? Like, the best Apple, I think, could have done without Beats is what Amazon's done. There's like, you know, totally serviceable service, right? And that's part of the larger ecosystem and that's great. But by bringing on Beats, they got a couple of things like we've talked about. They got the existing customer base. Now, most of those were headphones, right? But like millions and millions and millions of people that identify with the brand and have a relationship with the brand.

• 1:01:07Speaker 00

  But Apple Music is definitely not the Beats brand. Like, you don't get that for free.

• 1:01:11David Rosenthal?

  You don't, but like, but they could draw a lot of that customer base into it. But then also they get like, you know, they get a vision for it, right? Like, in, in what Jimmy, you know, has articulated. And again, like, has it been as successful thus far as it could be or will be in the fullness of time? I don't know, but I don't think they would have had that without a leader, you know, like leaders, like Jimmy and Dre to come in and do it. Again, because it's all about the artists and the marketing. And so you need to be like, like Eddie Q going and being that leader in the music industry is incredible, you know?

• 1:01:44Speaker 00

  Yeah, yeah. In fact, he's feared in many ways by, by what he did last time around. To pin that down a little bit more, is the service worse? So there is more churn, so there's, I guess what I'm getting at is they already had like the best channel you could possibly have to try and sell people a music service by being baked into the platform. Would they be sitting at 30 million subscribers today if they tried to do this without Jimmy and Dre?

• 1:02:10David Rosenthal?

  Yeah, I don't know. Maybe they would, maybe they wouldn't. But I don't think they would have, you know, as you pointed out, like, Apple's relationship with the music industry and with artists was tenuous at times.

• 1:02:26David Rosenthal?

  And now it's much, much better.

• 1:02:28Speaker 00

  Right. Well, if they had waited a couple more years, I guess they could have bought Tidal.

• 1:02:34David Rosenthal?

  They could have. That's true.

• 1:02:36Speaker 00

  Yeah. All right. Tech themes.

• 1:02:37David Rosenthal?

  That would be a fun show.

• 1:02:40David Rosenthal?

  Tech themes. All right. So one, one for me is just like technology and the liberal arts. And obviously, as you guys can tell from this episode, I'm drinking the Kool-Aid here. I mean, how could we not? It's an Apple show.

• 1:02:52David Rosenthal?

  But, but two, what I want to talk about is this actually is totally similar to the Stitch Fix IPO for me. Like that, that Jimmy and Dre saw something that was overlooked in the market and, and built a business around that. And had an insight that nobody else had. And this is really like, going back to business school. One of my professors was Andy Rackliff, who was one of the founders of Benchmark. And, and he talked about, he took this from Howard Marks, Howard Marks at Oaktree. This idea of like a two by two matrix, when you think about investing or building companies, you can be right or you can be wrong in what you're doing. That's like, you know, one of the axes of the two by two matrix. And obviously you want to be right, not wrong. If you're wrong, you lose money no matter what.

• 1:03:35David Rosenthal?

  But if you're right, you only make money in one circumstance. You could be right and it could be consensus that that's what's going to happen. You actually don't make any money in that scenario because you're not doing anything like different or outsized or, you know, whatnot. Where you make money is when you're right and it's non-consensus. And, and that's what Stitch Fix did, right? Like women don't need a, you know, personal shopping clothes service. Well, actually turns out they do, you know? And, and with Beats and headphones, it was like, well, you know, people who are audiophiles, like, you know, the high end music market, they want totally fidelity, you know, accurate reproduction of the sound. Well, it turns out they don't, you know?

• 1:04:16David Rosenthal?

  So I think this is like a great illustration of that.

• 1:04:18Speaker 00

  Yeah, I love that. I think that's a great, great parallel. And it's, it's a better dive into something that, that I was thinking about is, is defining a lifestyle brand where there previously was no lifestyle brand. Like realizing that a category is something that can play an important role and define people's lives rather than just being throwaway. It's certainly worth looking around and considering where are there other opportunities to do that?

• 1:04:42David Rosenthal?

  And Jimmy talks about this. He's like, you know, he says, he refers to it as he and Dre, they look for holes out there. Like where is there a hole? And this is the same thing.

• 1:04:51Speaker 00

  God, they're great VCs, man.

• 1:04:53David Rosenthal?

  Totally. Well, that's what they did. I mean, like, you know, Jimmy, his whole career, and then Dre, as he's become more of a producer and less of a, you know, direct artist himself. Like, that's what they do. They find talent and they identify it. You know, this is, they found U2, right? Like, they found Eminem. And then they give it the resources to succeed. I mean, that's like, these guys are VCs. They are great VCs.

• 1:05:16Speaker 00

  Well, here's another one, and that, it was something we've been talking about on a previous show, but the content is king narrative, where, you know, we're talking about it's these guys and it's their vision and their relationships. What that really leads to is having the best content.

• 1:05:31David Rosenthal?

  Yep. Well, and that's what Apple Music wouldn't have.

• 1:05:34Speaker 00

  Right. Right. Right. And does this now put us in a world, you know, fast forward to today, Apple's, you know, investing a billion dollars into original programming. First of all, I'm very curious to see if that will be released. It's, it's obviously video original programming, under the Apple Music moniker, much like, are they going to overload it the same way that they did iTunes and make iTunes your rich multimedia hub when it was originally about music? You know, Apple is, is now well positioned with a subscriber base of 30, 30 million people to actually have a credible offering of, hey, you know, pay X dollars per month, the way that, that, you know, you do to Netflix and we'll be able to put great content on your device. It's, it's interesting to see Apple spanning

• 1:06:18Speaker 00

  across modalities doing this. They may have a, a service much like Prime, that is, you pay X dollars per month to Apple and you get the full Apple Music, you get all of our original programming, you get access to other videos or other TV shows that are on demand. It's Apple taking advantage of the vertical integration that they have and saying, look, everybody, we're just gonna, we're gonna pour a new for-pay services tier on top of everybody that's already in our massively integrated Apple ecosystem.

• 1:06:50David Rosenthal?

  Yeah, it's interesting too to think about like Apple versus Amazon here because they're taking the total opposite approaches and like they'll both be very, this is why they're perhaps the two most valuable companies in the world right now, I think like Amazon is like, we're just gonna like, you know, the Jeff Bezos, your margin is my opportunity, right? Like, I'm gonna fly so close to the ground on all of these things that in aggregate, like, I make a ton of money, but nobody can compete with me on any individual aspect. Like, you know, I would be, we should, we'll cover Spotify someday in another episode, but like, I should be, I would be terrified if I'm Spotify, like, Apple's, Amazon is now giving away what most of my users, you know,

• 1:07:32David Rosenthal?

  pay me for, and Apple takes the opposite approach, which is like, I'm going to create this entire ecosystem, you're gonna pay a lot of money for access to it, you're gonna get an iPhone X, you're gonna get an Apple Watch with cellular, you're gonna get AirPods, and then I'm gonna have all these services too and content around it, and like, but, but I'm going to be your like, your best friend and constant companion in your life, you know?

• 1:07:53Speaker 00

  You know, this just occurred to me, so I mentioned Apple, you know, Apple's a highly, highly vertically integrated company, unlike, you know, Google or Amazon, that's, that's going across devices and not necessarily married to the specific hardware that you pay them for. So, Apple's business model has always been, make really great devices that are differentiated by their software and services and sell them for an excellent premium. They've been selling the services narrative recently, that is on their earnings call every time, it's Apple is transitioning to a services company, look at all these services, blah, blah, blah. The numbers on that look like, you know, if we say that Apple Music revenue is about $30 billion a year,

• 1:08:37Speaker 00

  based on their 30 million subscribers, their last four quarter of services revenue have been about $28 billion. So, Apple Music's still small, the vast majority of that still comes from, from iOS app downloads. When you think about what their total annual revenue looked like, it was $216 billion, so, you know, most of their, I know, right?

• 1:08:59David Rosenthal?

  These numbers are just laughable, by the way.

• 1:09:02Speaker 00

  Most of their revenue still, still comes from their, their core business model, but certainly a fast-growing segment of, of services revenue. The number one thing that really drives that home for me is, there's an Apple Music Android app. And it's not nearly as widely used, I don't think, as the one for iOS. Like if you're in the Android ecosystem, are you really likely to pay for Apple Music and make that your choice instead of Amazon or Google or Spotify? But that still is very puzzling to me and a very interesting hedge on their classic business model to build and maintain an Android user base on Apple Music.

• 1:09:48David Rosenthal?

  Yeah, it's super different, even from all the things we were just talking about, right?

• 1:09:53Speaker 00

  And I'll say, I think it's a departure from, and I love this, this is like always a hilarious thing if people bring this up, and I usually get mad at them, but I'll do it anyway. Like, you know, the thing about what would Steve Jobs have done? Or would Steve Jobs have done this if he was still alive? I mean, there was a Windows iTunes app, but that was all about, and a Windows Safari app, but the Windows iTunes app was all about being able to get people's foot in the door in the Apple ecosystem, get them to buy an iPod so they could see the Apple, you know, see the Apple light, and then perhaps buy a Mac. And, you know, they made good money on the iPods too, and really a foot in the door into the Apple ecosystem. Is that the same thing that we're seeing here with Apple Music?

• 1:10:37Speaker 00

  Where if you're an Apple Music customer on Android, then it's a foot in the door in the Apple ecosystem, and maybe you'll go buy some of their high-margin hardware? I don't think so. I think it's more like we see an opportunity to have a great business as a services company.

• 1:10:53David Rosenthal?

  It's a little more muddled, but there is some element. I mean, like, you might go buy some Beats headphones or AirPods. Like, AirPods, you know, work with Android too, not as integrated or as well.

• 1:11:05Speaker 00

  Yeah, how many people have you seen with AirPods that have an Android phone?

• 1:11:09David Rosenthal?

  I haven't seen many, but, but how often do you, you know, meet somebody in your work life who doesn't have an iPhone?

• 1:11:17Speaker 00

  Uh, in esports, a lot.

• 1:11:19David Rosenthal?

  Uh, in esports, a lot.

• 1:11:21Speaker 00

  But, yeah.

• 1:11:22David Rosenthal?

  All right. Should we bring this one on home?

• 1:11:24Speaker 00

  Let's do it.

• 1:11:25David Rosenthal?

  So let's see, I'll go first on grading. I've been, been, I think, pretty laudatory of this deal thus far for Apple. And I'm going to continue to do so. I mean, as I, I think about some of the acquisitions I compared it to, I compared it to Instagram and, and Next, which are our references for an A+ on this show. I think the only, did we give Instagram an A+ when we did it? We gotta go back and redo that episode because it was our first one.

• 1:11:58Speaker 00

  Yeah.

• 1:11:59David Rosenthal?

  That would- If we didn't, we should have.

• 1:12:01Speaker 00

  I think that would actually make it the third time that we've done it, including the unreleased pilot.

• 1:12:06David Rosenthal?

  Oh yeah. And the unreleased pilot. Oh man, that goes in the, that goes in the acquired museum.

• 1:12:10Speaker 00

  That's right.

• 1:12:14David Rosenthal?

  So I think this is kind of in that category. I don't think the execution though, has been as good as Instagram and, and Next. And specifically, well, Next was its own beast, that was Steve. Like Instagram, like the thing that made Instagram, all these dynamics were at play there. It's like reinventing, like what is Facebook, right? Like, well, Facebook, it's photos, right? And like, like, let's make Instagram that. And all the growth, like, and how much Instagram is worth now and plugging into the ecosystem, blah, blah, blah. The thing about Beats, it's not, as we've been talking about here, it's not as clear, like what the vision is and how it evolves. Like, the vision was there. Jimmy and Dre had the vision. And it's now gotten a little bit diluted as part of Apple. Like,

• 1:12:58David Rosenthal?

  I think it's still there, but it's not like, this is not an A+. Like, you can't point to this. Like, you can point to Instagram and be like, Instagram is now like, you know, worth a hundred plus billion dollars. You can't say that with Beats for sure. So I think I go A-, thus far.

• 1:13:13Speaker 00

  I'm gonna go A minus two, just from a, basically from a cash flow perspective. Will this thing pay for itself and has it paid for itself in a reasonable timeframe? Yeah, yeah, I feel great about that. Has it been absolutely transformative to their business?

• 1:13:29Speaker 00

  No, but has it been, has it helped Apple evolve their digital music to this decade of what digital music means, when digital music is a core part of Apple and their business and their, what their customers do with their devices? Absolutely. I'm between B plus and A minus, but I'm gonna go A minus because I'm, I'm encouraged by the fact that we're a few years in, it's still growing strong. You know, they, they did manage to very quickly get 30 million paying subscribers on this thing. I think it's laudable.

• 1:14:02David Rosenthal?

  Well, and I think maybe, maybe we just, this is where we disagree. I think it's, I, everything you said, but I think it's also, it's not just digital music. It's, it is, there is this element of like what the vision is for the future of, you know, computing and society here. And like, I don't want to say that like, certainly as we've talked about, like the Beats team did not like directly lead to the AirPods, but it's just part of the mindset, right? Like, audio quality and music's a big part of that, but also podcasts, you know, also everything, like this is, this is part of people's lives and was being more so. And like, the more you can integrate technology and that, whether, you know, Steve Jobs called it liberal arts, or you know, when Jimmy talks, talks about culture and cool and understand, like the more you can integrate that, like, and understand it, like, the more successful

• 1:14:47David Rosenthal?

  you're gonna be. All right, there we have it.

• 1:14:50Speaker 00

  Carvats?

• 1:14:51David Rosenthal?

  Our 50th episode.

• 1:14:54Speaker 00

  Yep.

• 1:14:55David Rosenthal?

  Cool, Carvats. I'll go quickly, my, the same theme, Jimmy and what an amazing person he is, and I talked about the Kareem Abdul Jabbar book about his relationship with John Wooden, I think last time or the time before. I also read John Wooden on Leadership, a book by, by John Wooden, where he talks about his pyramid of success, just so cool. And I think like, John and Jimmy are both people that have like, been incredibly successful at the very, very top of their industry, across multiple complete sea changes in what that industry is around them. Just super cool to like, learn about those people and how they did it. So, John Wooden, Jimmy Iovine, separated at birth.

• 1:15:37Speaker 00

  Awesome.

• 1:15:39Speaker 00

  Uh, David, are you playing HQ?

• 1:15:41David Rosenthal?

  No.

• 1:15:42Speaker 00

  Have you heard about this?

• 1:15:43David Rosenthal?

  No.

• 1:15:44Speaker 00

  So it's this incredibly fast-growing consumer phenomenon that has a quarter of a million people concurrently playing when it's live. It is a game show that happens interactively through your phone that comes on twice a day. And it is from the creators of Vine. And it is, it is basically a host who comes on, asks you questions, very simple, awesome UI. You get to answer the questions and you, you progress to the end where there's a cash prize that gets split the number of ways of however many winners there are. And there will be like 250,000 people concurrently, and this thing's like a month or two old. It's crazy.

• 1:16:26Speaker 00

  250,000 people concurrently in there answering the questions. You basically see how far you can get and the questions get progressively more difficult and they go from like piece of cake to very impossible, very fast. But if you're left standing at the end, then you, you split the cash prize and that can be anywhere from 250 to, I think the biggest they've done is like two, $3,000. And

• 1:16:51David Rosenthal?

  It's like Who Wants to be a Millionaire?

• 1:16:52Speaker 00

  It is. And I, there's so many like startup things to take from it. Like they, they have this great, I mean, it's a great acquisition hack of literally giving away money and the number of people that, that it's, it's bringing on relative to the small amount that they're giving away, even let's say it's 2,500 bucks, super low cost of customer acquisition. And it's really fun, really poppy. The founders not only created Vine, but had a couple of failed things in the interim that this is sort of pivoted from. So it's, it's really cool to read the backstory. There's been, there's been a lot of controversy. If you want to look up HQ news, there's been some, all sorts of interesting controversy about the company that I won't go into, but their backstory of trying really new interactive

• 1:17:35Speaker 00

  models that are fun on your phone with, with, with video. It's just cool to watch and it's cool to see that they, they found something that's like really, really hitting and it's super fun. So every day at noon, you can, you can go in and play the, the live interactive game show on your phone.

• 1:17:51David Rosenthal?

  Cool. I'm gonna have to check that out. I heard that there was something new from the founders of Vine, but now I know what it is.

• 1:17:59Speaker 00

  Yeah, well, we'll play it and tell me how far you get.

• 1:18:04David Rosenthal?

  Probably not far. Unless the question's about John Wooden and Jimmy Iovaz. That's right.

• 1:18:11Speaker 00

  All right, listeners.

• 1:18:13David Rosenthal?

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• 1:18:19Ben Gilbert?

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• 1:19:03David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 1:19:14Speaker 00

  Thanks so much for joining us today. If you like the show, rate us on iTunes and have a great day.

• 1:19:20David Rosenthal?

  See you next time.