Apple hopes to lift street cred with $3B Beats buy

CUPERTINO, Calif. – Apple is striking a new chord with a $3 billion acquisition of Beats Electronics, a headphone and music streaming specialist that also brings the swagger of rapper Dr. Dre and recording impresario Jimmy Iovine.

Wednesday’s announcement comes nearly three weeks after deal negotiations were leaked to the media. It’s by far the most expensive acquisition in Apple’s 38-year history, a price that the company is paying to counter a threat posed to its iTunes store.

The price consists of $2.6 billion in cash and $400 million in Apple stock that will vest over an unspecified time period. The deal is expected to close before October.

With $1.1 billion in revenue last year, Beats is already making money and will boost Apple’s earnings once the new fiscal year begins in October, Apple CEO Tim Cook said in an interview.

“We have known these guys forever,” Cook said of Iovine and Dre. “We’ve dated, we’ve gone steady and now we are getting married. This relationship started a decade ago, so we know there is an incredible cultural fit. These two guys have a very rare set of skills. It’s like finding a particular grain of sand on the beach. It’s that rare.”

Iovine, 61, and Dre, 49, will both become key executives in Apple’s music divisions, though Cook said their roles haven’t been determined yet. Cook indicated Beats’ music streaming service was the main selling point in the deal, though the headphone line also is expected to continue growing, too.

Although he believes most technology companies are “culturally inept,” Iovine said he believes Apple will empower Beats to realize its goals of improving the sound of digital music and creating playlists tailored for each subscriber.

“To complete our dream, we needed a company like (Apple),” Iovine said in an interview. “We couldn’t finish this on our own.”

The growing popularity of music streaming services such as Pandora and Spotify has been reducing sales of songs and albums, a business that iTunes has dominated for the past decade. U.S. sales of downloaded songs slipped 1 percent last year to $2.8 billion while streaming music revenue surged 39 percent to $1.4 billion, according to the Recording Industry Association of America.

Although Apple broke into streaming with the launch of iTunes Radio last September, the service has not been as popular or as lucrative as the company expected, according to two people familiar with the matter. The people were not authorized to speak publicly about the matter and spoke on condition of anonymity.