Apple’s Beats Deal Comes Into Focus After iPhone 7 Loses Headphone Jack
Apple’s decision to remove the headphone jack in the iPhone 7 brings to light an important question: Would Apple have made the move now if it didn’t own Beats?
Apple acquired Beats in 2014 for over $3 billion. Although Beats was largely known as a headphones company run by music executive Jimmy Iovine and artist and producer Dr. Dre, it also had a streaming-music service attached that many believed Apple was after. Many analysts and industry pundits correctly predicted that Apple would use the streaming service as the framework for Apple’s own alternative to popular services like Spotify. Best of all, Apple could tap into the important relationships Iovine and Dr. Dre had with the music industry and attract more albums and talent to its service.
Lost amid the conversation was headphones—Beats’ core product at the time. Over the last two years, Apple (AAPL) has allowed Beats to live on under its own banner, offer up new products, and continue to sell headphones. Now, though, Apple’s decision to remove the headphone jack from the iPhone 7 has brought the Beats deal back into the spotlight. And it might make some wonder whether there really was more to Apple’s acquisition that a streaming-music service.
Beats is one of the most prominent headphone makers in the world and sells a wide array of both wired and wireless headphones. And while that hasn’t changed, Apple was quick to note at its press event on Wednesday that three Beats headphone options, including a new line known as the Beats X, offer Apple’s new W1 chip that allows those devices to easily (and wirelessly) connect to an iPhone and Apple Watch.
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After Apple made its announcement on Wednesday, Beats sent out a press release promoting wireless headphones and its interchange with the iPhone 7. The company’s site has been taken over by talk of wireless headphones and the company has sent emails to customers promoting its latest innovations.
Suddenly, Beats is starting to look like a more interesting division within Apple. The iPhone maker has long been rumored to have called on Beats’ expertise in developing headphones to improve its own sound technology, and there’s a good chance that the Beats engineering team at least had some input into how the AirPods would be developed. Moreover, by integrating the W1 chip in Beats headphones and Apple’s seeming desire to get more customers interested in Beats’ wireless headphones, the iPhone maker is hoping to bolster that division’s hardware revenue and keep Beats and Apple atop the headphone heap.
“When taken in combination with the W1 chipset, a rise in convenience is offset by a clear aggregate move by Apple to move iOS device owners’ accessories purchases away from third parties and industry standards, and more distinctly into Apple’s own product families,” IHS senior analyst Paul Erickson said. “It should be noted that wireless models are the highest revenue-generating products within the headphone market, as well.”
Simply put, eliminating the headphone jack might have given Apple an opportunity to leverage the intellect within Beats and at the same time, find ways to drive more customers to a division that cost it billions of dollars.
Better yet, the move seems to be in keeping with industry trends.
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According to Slice Intelligence, a research firm that analyzed online sales over the last 12 months, wireless headphone sales continue to rise, and in June, more people bought wireless headphones than wired headphones. Ian Fogg, head of mobile analysis at IHS Technology, a research firm, added that Apple is by no means the first to remove a headphone jack and noted that the Moto Z and “select models” from other companies have also ditched the port. Apple might be the biggest company to make the move, but it’s not the first.
The ultimate question, then, is how will customers respond?
Right now, analysts are unsure and many, including Fogg, have called the move to eliminate the headphone jack “risky.” But when taken as a whole, it appears there’s more to the story than Apple simply wanting to remove an ancient port. Apple’s decision could be a play to help Beats grow revenue, and perhaps most importantly to Apple, gain more market control.
“In totality, these moves represent Apple’s desire to bolster declining mobile device revenues by capturing as much of its device owners’ expenditures in the burgeoning audio accessories market as possible—via a deliberate transition away from industry audio standards and towards ones it controls, and the introduction of unique proprietary functionality,” Erickson argues.