Acquired - Episode 50: Apple - Beats

Episode Date: December 11, 2017

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:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!Carve Outs: * Ben: HQ * David: Wooden on Leadership

Oh, man. All right. Too cheesy. Yeah, you should do it. It's going to be cheesy, but you should do it. And I'll make, yeah. I love the cheese. Yeah, I, uh, that's perfect. Then I can make fun of you for dad jokes. Welcome back to the Big Half Century Mark, episode 50 of Acquired, the podcast about technology, acquisitions, and IPOs. I'm Ben Gilbert.

I'm David Rosenthal. 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 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 probably had 20, 30 requests for this since we started the show. Finally, we are covering, finally, it's an Apple episode, so we have to say finally, we are covering the acquisition of Beats by Apple

in 2014 for $3 billion. I'm so excited about this one. Yeah. Yeah, me too. I wish I wasn't a little under the weather for it, but listeners, bear with me. I know I'm a little nasally this episode. You're like, this is going to be like Michael Jordan

in game six of the finals playing with the flu. He's like, you're going to rise to the occasion, Ben. Thank you, David. Okay, listeners, now is a great time to tell you about longtime friend of the show, ServiceNow. Yes, as you know, ServiceNow is the AI platform for business transformation. And they have some new news to share. ServiceNow is the AI platform for business transformation. And they have some new news to share. ServiceNow is introducing AI agents. So only the ServiceNow platform puts AI agents to work across every corner of your business.

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All right, David, that is all I've got between us and Beats. I am ready to start. I almost started talking over you. That would be new. No, that would not be new. All right, let's do it. So this is probably probably certainly thus far the coolest founding story on acquired maybe maybe as long as we do the show it's going to be hard to find a cooler founding story than

yeah i don't think that's possible i don't think it's going to be possible and certainly the coolest so beat was founded in 2006 by jimmy ivan and andre young and those names may mean something to you or they may not but they certainly will in a minute so jimmy ivan who 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 uh called the defiant ones on hbo highly recommend watching i uh i had a chance to watch some of it preparing for this episode and jimmy is the actual coolest person alive so the first album that he works on is i think john lennon's first solo album as a, 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 seventies. Like how awesome is that? And he's, he's responsible for stop dragging my heart around Tom Petty 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 you too um so like that's him uh he discovers no doubt trent resner and nine inch nails and then he completely reinvents himself uh so tupac snoop dogg eminem 50 cent lady gaga kendrick lamar these are all products of jimmy eyvine yeah very similar sound right you understand how the same person could be responsible for all these artists just amazing uh you know he also he does the soundtrack for 16 candles uh many other movies and then founds you know interscope records along the way that you know all these artists are on probably you could make an argument that there is no more important figure

in popular music you know of the last century that's how big his his impact is so his co-founder andre young who's that guy uh well it turns out uh as he says know, lots of people say that, uh, they forgot about Dre. Andre Young is Dr. Dre. Oh, David. I couldn't help myself there. So probably Jimmy's most favorite or most, uh, known for, um, musical collaboration, uh, 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, they're, you know, huge rise to prominence and there's, you know, many movies have been made about Dre and NWA. There's a great, and I'm sure this is covered in lots of places, but in the HBO documentary, there's a great um and i'm sure this is covered in lots of places but in the um

in the hbo documentary there's a great piece about how dre basically gets on stage at this this like you know emerging nightclub um for west coast hip-hop and uh he's the first person after experimenting a ton um with a pre sortmixer turntable combination, he sort of builds all the stuff on his own and assembles it. 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 fading one into the other or or you know lining up two that are very similar bpm and it's like an old 60s hit with uh 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 you know who dr dre is but you don't know what his sort of origin story is it's just amazing to to um it's a great documentary i can't recommend it so great and uh i mean dre is like yeah he's the whole image like this is why he's dr dre like he 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 um but like he is you know one of the greatest you know musicians 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 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 uh 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 he's not only rapping on it but like the beat like that's dre pretty Pretty amazing. So Jimmy and Dre have been, you know, business associates, collaborators, 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 completely true. If so, this is certainly the most amazing story. Jimmy's out running on the beach in LA. He's exercising and, uh, 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 and, uh, and they start talking, uh, 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 me 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 me and he's like,

you think we can really do that? And Jimmy's 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 the speakers beats and and that's how beats got started on the beach in LA 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 it seems like it so at this point is it just beats electronics there's no beats music 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 been as we've talked about, he's, he is like the music industry executive. Um, 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 and Jimmy's actually been, 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 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 to 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 cassettes into stores and you'd have relationship with the stores that's all all blown up. Like it's now just, you know, iTunes, uh, and other digital platforms, the marketing's totally changed. But what's also happened is that like the channel is much wider

in 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. Um, so Jimmy's like been thinking about this and at the same time, he 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 endorsed there was the u2 edition ipod i had it it was awesome with that red scroll wheel i had that it was so cool you know that's all like jimmy like because you know jimmy discovered you too 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 think about 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, 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, and and they listen to him and he's 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, you know, with the iPod, they're like, you know, the earpods, 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 audiophiles want, the pristine audio quality is like reproducing the exact nature of like every sound, every instrument, like exactly as it comes off of the, you know, the guitar or 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. And this is the very first point where we we realize good headphones and and the ideal that uh jimmy and dre were shooting for here is not at all the same thing that audiophiles are shooting for exactly 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. Exactly, exactly. But what they what Jimmy and Dre realize and they know from, you know, 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, you know, when they're

working out, when they're focusing, when they're, you know, whatever, it's part of their life. It's not something they want to like reproduce exactly. Um, 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, you know, I have Sony headphones or I have an 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, you know, life. But it really defined a lifestyle and how you wanted to think about yourself when you, when you put on Beats headphones. Yeah. And it's also like, you know, it's a, uh, also unlike a tech device that you keep in

your pocket or on your desk or whatever, like it's on your body. It's also like a, you know, a piece of fashion and it's an advertisement for the brand that you're walking around with every day. So, you know, Jimmy and Dre, they realized this and he even says like they decided they were going to market the product just like they marketed an artist, you know, like the product is an artist. And this is totally revolutionary at the time. Like, you know, who, who would have thought to market headphones like you would market you know like jimmy says you know we decided we're going to market it like it was tupac or u2 or guns and roses you know like that's not that's not what sony's doing 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 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 um so like everybody 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 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 help 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 reason to be super excited and promotional about it when it finally debuts yep well and it's exactly what they do you know with artists 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, uh, quote beats by Dr. Dre studio headphones, uh, no way it was beats by Dr. Dre. It was beats by Dr. Dre in the beginning, come out late 2008. Uh, 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. That's awesome. Totally awesome. What great, unique marketing channel that other people just couldn't possibly have. 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. 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 mv the basketball u.s basketball team

shows up for the olympics in shanghai they are all wearing beats and uh and then that's like that's a signature of the company now right Is like a sports team walking out of the tunnel onto the floor and their warm up stuff all wearing beats. 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 hear what you want commercials that they do with Richard Sherman and Colin Kaepernick and Kevin Garnett. Just so good. And, you know, really 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 and then we're skipping ahead a couple 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 bows 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 him jimmy's like this is the best thing that ever happened to us like i literally could not have planned this any better it's like the the narrative of like these rich guys want to come in and pay money so that people can't have what they want and what they want is beats it's like uh you know it's like the parallels to when uh when facebook tried to copy snapchat with poke you know and it's like you take a step back you're like this is the best thing that ever happened to snapchat but okay so back to the company story so they 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 is super small company they're just you know the brand and they're the design and reference designs but they decide you know they want to grow so they they partner with um with htc we've referenced this in other episodes on the android episode and others but what was the one we did uh i think it was the uh the h. 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.

This is his thing. Dre, he's just in the lab. Like he hates talking to, hates talking to anyone, little in 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, um, you know, our headphones and our technology into, uh, uh into these phones so this is where you have like beats by dre htc android phones that are coming out for a while which are hilarious uh 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

uh a next station we get a HTC Beats phone. Oh, yeah. We didn't do an episode on it, but we referenced that HP iPod. Oh, yeah. Oh, totally. Oh, and we should get the U2 iPod. Of course. Oh, this is great. Maybe we can finally get all that U2 music off my iPhone that was put on it without my permission. Oh, yeah, that's right. I forgot about that. Oh man, that was a disaster. Yeah.

That's actually a great idea. We should do an acquired museum. If anyone wants to sponsor an acquired museum somewhere. David, you know what? I hope one day this show gets to the level where we have an actual physical museum. For now, maybe in one of our houses. You got a dream um okay so they do the deal with uh htc and the company beats continues to grow uh it totally overtakes pop culture i mean

kids everywhere wearing them non-kids are wearing them uh they're growing and growing 2012 jimmy and dre kind of realized like okay uh there's a huge opportunity here and if we're really going to 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 um and this idea of you know like hardware and at Apple. He's super inspired by them. Um, and this idea of, you know, like hardware and brand and software altogether. So they don't renew the partnership with monster. They moved 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 going gonna come out with like lifestyle branded headphones and work with artists so they released earth wind and fire branded headphones i love earth

wind and fire great group from the 60s and 70s but like are you serious like dre earth wind and fire same resonance you know same same group of people totally oh yeah and have reverence earth wind and fire headphones are totally gonna dethrhrone, you know, Beats by Dre and Richard Sherman and Colin Kaepernick and LeBron James. 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? Yeah. And I mean, the mark that they miss there is not that like, I love Dr. Dre, so I listen to Be you deal 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 want to play hardball we'll play hardball the um the mfi is certified and monster pursues the case a court eventually throws it out like this is totally baseless case so there 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 it probably felt good just to like be able to to stick it to him there because i mean for in in my mind the thing that I'll always know Monster for is 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, that having, uh, having recourse to tell that company to, you know, stick it somewhere is a nice feeling. I feel like there was some, I don't know if this has come out in court cases or otherwise, but there must've been some like massive collusion between Best Buy and Monster throughout like all of the nins about all this stuff like it's digital right like the quality of the kids ones and zeros like it's not analog

it's gold plated you don't understand all right let's get out of monster land the other part about kind of controlling their own destiny um you know jimmy and jay 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, uh, by 2013 from the cap table. Did Jimmy and Dre get any liquidity from

that, that initial 50.1% purchase from HTC? Do you know? 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. Oh, because all the manufacturing was still contract? 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 HTC, that you could build such value and that HTC paid 300 million for half the company

with like five people. Yeah, talk about a talent acquisition. Yeah, seriously. Well, we'll get into that in a minute. 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. Yeah, totally. 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 wireless speaker which was a massive success of a product uh is now on multiple generations the other thing they do uh as they're doing all this is they acquire a small uh 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 that this was going to 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 u.s and kind of won the market but they did some interesting things and

they had some some definitely good tech talent 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. So there's like playlists that are made, there's recommendation curation by by Dre, by the Interscope artists, byimmy you know everybody else is just a an algorithm

at this point and dre and jimmy think this is the future yeah and this is i'll borrow from tech themes ahead now but this is the the jimmy iovine vision that 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 he's there's a quote from him where he's like people people like to attribute 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 1 radio, you know, it's human curated and that's actually a value proposition rather than algorithmically selected or in fact, not even algorithmically selected and just showing you, you know, huge lists song for you to to search and browse through and then you know a tenant of 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 his party line through and through and and really sets him apart from a lot of the other sort of disruption that's happening in the in the space 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 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 you want like dre queuing up what's next you want stevie you know queuing up what's next maybe maybe we'll see my discover weekly is really good well totally i'm not saying it's right i'm just saying this is jimmy's you know vision and 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 unacquired certainly thus far so may 8th 2014 uh remember in january they launch beats music uh just a couple months before so a few months go by may the

financial times reports uh breaks the news that apparently Apple, Jimmy's old friends, are in negotiations to buy Beats for $3.2 billion. 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 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 you 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 is uh the actor and singer tyrese gibson they're hanging in the studio and they're talking about this of course like what are you going to talk about like you're about to sell their company for you know 3.2 billion dollars and uh they're excited and it's late at night and they you know they're drinking they get drunk and uh Tyrese you know pulls out his phone and makes a video of all of them and they're celebrating and uh and 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 uh and they're like you know or their party whatever they go to bed

that night 4 a.m uh 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 jay's like what do you mean and jimmy's like that video and jay's like what do you mean tyree's 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 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 this article uh so there's some rockiness to the deal and um honestly i i can't believe apple still went through with it i can't either uh but they do 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 three billion dollars not3.2 billion. Nobody discusses why and there's speculation. Well, it could be that the Beats Music subscriber numbers were actually a little lower than they thought they will. Maybe it's the Tyrese video. We'll never know. But pretty hilarious.

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. You messed up. We're no longer moving forward with this. You've proved yourselves to be people that we can't trust to live the Apple way.

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. The day it gets announced is actually the Recode conference is going on. Jimmy and Eddie Q.die q's always been the media and content guy at apple and uh the day the deal gets announced he's scheduled to be interviewed on stage uh at the code conference by kara and kara swisher and walt mossberg

and um and the deal gets announced right so so he and jimmy come up on stage together and they're interviewed by Kara Wall and they're like, well, this is big news. But people knew it was coming. But the thing that Jimmy makes the point and Eddie both several times in this interview is like, this didn't happen overnight. Jimmy had been working with Apple and with Eddie for over a decade,

going back to the launch of iTunes Music Store. So to your point, Ben, I mean mean the relationships like that's got to be what saved the deal here yeah god to be a fly on that wall to understand the phone call that eddie q makes to jimmy or did dre yeah well it's funny i kind of hope that eddie just called dre up i know right in in the defiant ones they do talk a lot about and i haven't finished it yet but in the at least in the the first part of it they talk a lot about the how 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 uh 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 in and like do this at some point. Yeah, great point. 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 was more valuable, more strategic, 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 seem 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 yep yep totally you know the sort of coda here uh is just over a year later uh apple music launches apple's first streaming service, and it is a rebranded and revamped Beats Music, including the Beats 1 radio station. That's part of it that's hosted by Dre and other artists. And so that launches and that becomes Apple's primary music offering. But then also, as we know, Ben is wearing them right now,

Apple has gone much deeper into headphone technology over the last couple years 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 um innovation But Apple actually doesn't influence the Beats hardware stuff very much. I think they're taking advantage of some economies of scale and some innovation where they're sharing things between those two. For example, the W1 chip that's in the AirPods appears also in the most recent Beats wireless headphones.

But for the most part, I believe it's apple's uh existing hardware teams continuing to work on the airpods and beats hardware teams continuing to push the ball forward on uh 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 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 grading and other segments. 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, um, 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. Yep. Totally. And that's when Apple acquired the company, you know, it's also an asset. It's the brand of beats, uh, for sure. Um, as we've talked about, know the that's um it was at the time and still

is a huge part of pop culture um that apple's getting access to but i think it's also like if i had to choose one um 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 uh the next acquisition here and um you know steve jobs coming back to apple i i wouldn't put jimmy and dre's impacted apple anywhere near the level of steve jobs but it is an impact for sure and and there's that long relationship and 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 know, audio, what is music? Is it something technical or is it something that's like part of your life?

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 brand, and it's a great source of revenue, and it's only continued to improve since they bought it. Though they don't break it out, I think Beats has become more and more prominent over the years. What they, in my mind, bought was two things. It's one, an existing app and service that was well done so that they didn't have to start from scratch in-house. You could imagine Apple knowing they were going to do Apple Music and knowing that they wanted to compete with Spotify in this world where

a thing they pioneered, music over the internet um was being largely disrupted and they needed to become a player in the changing world they totally could have done it on their own yep well and but but also apple i mean in the sound jam episode uh which is like totally the precursor to this episode uh you know they made the same decision like let's buy uh a good technical service and like you know use that as a starting point right and so that's not worth three billion dollars for sure totally that's all that's where i was going you know sound jam is worth what was sound jam is is um i think we decided like yeah like 10 million or less 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 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, we're 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 large debate over how that's going. Although I think a lot more people use Apple Maps than at least in the tech world we give it credit for. 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 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. 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 jim and and beats you know dre and jimmy's position within the industry and so to to enable that sort of technology product that they built um to to really start to to be differentiated and and uh and scale you know is is the talent there i totally agree but i 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 have funds. But I actually think there are a lot of parallels here to the Instagram acquisition at 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.immy and dre and particularly jimmy well maybe dre too he just doesn't talk much so we don't know uh but they had a vision right of like what was beats and what was this combination jimmy talks about it all the time in these interviews like how much he idolized 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? 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 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 um in order to do that and apple i think it's pretty hard to be a new entrant to commute with apple there 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 um technology going but also where is like you know where is society where 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 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 impacts your life. To me, that's like, the biggest thing here is a people deal. And that's why this is a $3 billion acquisition and Apple's largest ever. And that's why Sound Jam was, you know, acqui-hire. 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? I don't think Apple would do that. And I don't think that's how you should think about it. Because it's about, again, it's about the AirPods, which isn't Beats at all, right?

But it's about 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 and they just happen to bring a lot of really helpful assets along the way yeah and ask but you can't value the assets right like again back to sound jam like sound jam had no brand sound sound jam had no like they had customers who who like used the product and liked it right but like it wasn't like be like the nfl wasn't banning Sound Jam, you know? Right?

Oh, man. I don't know. I'm definitely out on a limb here, but I think it's true, right? Because the question is, why did Apple pay $3 billion for Beats and $3 million for Sound Jam? Right. All right. I'll roll with you there. All right, listeners. Our next sponsor is a new friend of the show, Huntress.

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bit on how is Apple Music doing and what did the world of streaming services, how did that evolve? So let's rewind to before the uh the beats acquisition so spotify had collected 20 million paying subscribers while apple had no offer you know no offering in the market and you know they're the pioneers of digital music and or the the yeah of you, 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.

So Spotify has got this huge free tier with 20 million paying. Pandora's got 4 million-ish paying. If you fast forward to today, what 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. The 30 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 show notes called Growth of Music Subscribers. Apple Music has basically been growing linearly since launch.

After 12 months, they were at about 14 million subscribers. After 24 months, they were at about 26. And here we are around 36 months where they've just crossed the 30 threshold. And so they're growing much faster than Spotify, who took years and years and years to get to 30 million. But now Spotify is really starting to sort of hit their acceleration in their exponential curve. So still a very fierce battle. 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 it at sort of breakneck speed to actually

convert their free tier to paid tier. 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 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 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 charge for music and we give it to the artists.

And Apple is sort of okay with growing more slowly or has sort of taken the position 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 look and see what the margins look like, Apple Music, it looks like, operates around a 42% gross margin when you're just working off of the fees that they're paying to the record labels. 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 paying 58% to 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. Apple way late to this market, but obviously with a huge cash pile to be able to fight. 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, hyper aggressive discount of like, say, you know, two thirds of that is is like one third 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 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. That's over a billion a year. Like that's pretty good for paying, you know, 3 billion for, for beats. So financially, like that's pretty good. Um, 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 a 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. 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. It's very Steve Jobs of you. It's very like, I mean, this is Apple's largest acquisition ever, right? Yeah, it's all about the music. And another interesting thing, I should point this out. Well, 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 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, 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, uh, on giving this away free. 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 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 because spotify has to now deal with competing directly with amazon but apple and beats don't compete directly with amazon 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. All right. Well, I feel like we've done category and what would have happened otherwise. Should we do tech themes quickly? What would have happened otherwise? Could Apple have successfully created Apple Music without acquiring Beats? Oh, yeah, of course they could have. What would it be missing? Let's look at like what apple's you know starting to do in video or amazon too like right like the best apple i think could have done

without beats is 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 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 but apple music is definitely not the beats brand like you don't get that for free 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 isn't credible, you know? Yeah. Yeah. In fact, he's, he's feared in many ways by, by what he did last time around to, to pin that down a little bit more, uh, is the service worse? So there is more churn. So there 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 um would they be sitting at 30 million subscribers today if they tried to do this without jimmy and dre 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 um the music industry and with artists was um tenuous at times uh and uh now it's much much better right well if they had waited a couple more years i guess they could have bought title they could have that's true yeah all right tech theme that would be a fun show uh tech themes uh all right so one uh one for me is just like technology in 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 um but uh but two what i want to talk about is this actually is totally similar to the Stitch Fix IPO for me. Like that Jimmy and Dre saw something that was overlooked in the market 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 Ratcliffe, who was one of the founders of Benchmark. And he talked about, he took this from Howard Marks at Oak Tree, 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.

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 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 uh 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 um so i think this is like a great illustration of that 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 in 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. 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. God, they're great VCs, man. 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 you too, right? Like they found Eminem, uh, and then they give it the resources to succeed. Uh, I mean, that's like, these guys are VCs. Theycs they are great vcs well here's another one and that it it was something we've been talking about on a previous show but the content is king narrative where yeah 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 yeah and yeah well and that's what apple music wouldn't have right right right and does this now put us in a world, you know, fast forward to today, Apple's investing a billion dollars into original programming.

First of all, I'm very curious to see if that will be released. 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? Apple is now well positioned with a subscriber base of 30 million people to actually have a credible offering of, hey, pay X dollars per month the way that you do to Netflix and we'll be able to put great content on your device. It's interesting to see Apple spanning across modalities doing this. They may have 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 going to we're going to pour a new for pay services tier on top of everybody that's already in our massively integrated Apple ecosystem. Yeah, it's interesting 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 you're 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, but nobody can compete with me on any individual aspect. Um, like, you know, I, I would be, we should, we'll, 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, pay me for. And Apple takes the opposite approach, which is like, I'm going to create this entire ecosystem. You're going to pay a lot of money for access to it you're going to get an iphone 10 you're going to get an apple watch with cellular you're going to get airpods and then i'm going to 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 you know this just occurred to me so i mentioned apple uh you know apple You know, this just occurred to me. So I mentioned Apple, you know, Apple is a highly, highly vertically integrated company,

unlike, you know, Google or Amazon 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 three ish billion dollars a year, based on their 30 million subscribers, their last four quarter of services revenue have been about 28 billion dollars. So Apple Music is still small. The vast majority of that still comes from iOS app downloads. When you think about what their total annual revenue looked like, it was 216 billion. So, you know So most of their...

I know, right? These numbers are just laughable, by the way. Most of their revenue still comes from their core business model. But certainly a fast-growing segment 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. 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.

Yeah, it's super different, even from all the things we were just talking about, right? And I'll say, you know, this is a, I think it's a departure from, and I love this, this is always a hilarious thing when people bring this up, and I usually get mad at them, but I'll do it anyway. Think 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, 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, where if you're an Apple Music customer on Android, then it's a foot in the door in the Apple ecosystem. Is that the same thing that we're seeing here with Apple Music, 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. It's a little more muddled, but there is some element. I mean, you might go buy some Beats headphones or AirPods.

AirPods work with Android, too. Not as integrated or as well. Yeah, how many people have you seen with AirPods that have an Android phone? I haven't seen many. But how often do you meet somebody in your work life who doesn't have an iPhone? In eSports, a lot. Ah, in uh in esports a lot uh in esports a lot but yeah all right should we bring this one on home let's do it 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 think about some of the acquisitions

I compared it to, I compared it to Instagram and Next, which are our references for an A-plus on this show. I think the only, did we give Instagram an A-plus when we did it? We got to go back and redo that episode because it was our first one. Yeah. That would, if we didn't, we should have.

I think that would actually make it the third time that we've done it, including the unreleased pilot. Oh yeah. And the unreleased pilot. Oh man, that goes in the, that goes in the acquired museum. That's right. So I think this is kind of in that category i don't think the execution though has been as good as um instagram and and next and specifically well next was its own beast and 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 uh 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 um and it's now gotten a little bit diluted as part of apple like i think it's still there but it's not like this is not an a plus like you can't point to this like you can point to instagram 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 minus thus far

i'm gonna go a minus two uh just from Just 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? No. But 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 their what their customers do with their devices absolutely i'm between b plus and a minus but i'm going to go a minus because i'm i'm um encouraged by the fact that we're a few years in it's's still growing strong. You know, they did manage to very quickly get 30 million paying subscribers on this thing. I think it's laudable.

Well, and I think maybe we just, this is where we disagree. I think it's, 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 just like the more you can integrate that like and understand it like the more successful you're gonna be all right there we have it carve outs our 50th episode yep cool carve outs um i'll go quickly my My, the same theme, uh, you know, 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, um, 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, um, 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, uh, John Wooden,iva and separated at birth awesome uh david are you playing hq no have you heard about this no 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 basically a host who comes on,

asks you questions, very simple, awesome UI. You get to answer the questions, and 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. 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 quite very impossible very fast um 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 three thousand dollars um and like who wants to be a millionaire 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 uh relative to the small amount that they're giving away even let's say it's 2500 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 has sort of pivoted from. So it's really cool to read the backstory. There's been a lot of controversy. If you want to look up HQ News, there's been all sorts of interesting controversy about the company that I won't go into. But their backstory of trying really new interactive models that are fun on your phone with, with, uh, with video. It's just cool to watch. And it's cool to see that they found

something that's like really, really hitting and it's super fun. So, uh, every day at noon, um, you can, you can go in and play the, the live interactive game show on your phone. 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. Yeah, well, play it and tell me how far you get. Probably not far. Unless the question's about John Wooden and Jimmy Iovine. That's right.

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