I Haven’t Updated My iTunes Software Since 2011. That’s Why Apple Needs Beats

Apple is reportedly considering buying Beats Electronics for $3.2 billion. The deal, if it comes to pass, is shocking for many reasons—because Beats is in the middle of an aggressive expansion of its own brand with a new on-demand streaming service; because Apple has historically shied away from big purchases; because CEO Tim Cook just said company isn’t trying to make acquisitions just to generate a lot of buzz. Whether or not the acquisition actually happens, the mere fact that it’s being considered illustrates the huge shift that has occurred in the digital music landscape over the last decade. Apple is no longer the bellwether for what is cool.

I remember unboxing my first iPod, a 20 GB white, fourth-generation one that I got in 2004. At the time, it was a revelation: I could dump my bulky CD booklet in favor of a pocket-sized device that held 20,000 songs. My range of musical tastes exploded, and the idea of listening to songs from entirely different genres back-to-back became natural. Apple’s brilliant marketing, featuring dancing silhouettes rocking out to U2 and Daft Punk while wearing those iconic white earbuds, made all my high school friends immediately envious of my new toy. The surging importance of singles over albums, the multi-genre music festivals that are now summer staples and the frenetic mashups from artists like Girl Talk all owe some debt to the iPod, which taught a generation of listeners to enjoy music in an entirely new way. “Apple profoundly changed the way the recorded music business did business,” says Catherine Moore, associate professor of music business at the Steinhardt School of Culture, Education and Human Development at New York University. “They changed the pricing structure, they changed the distribution structure, they changed the listening experience.”

But that was a long time ago. While Apple has ably transferred its cool cachet to other, more profitable devices, such as smartphones and tablets, its place at the center of the music ecosystem has faded along with the iPod. If I’m listening to music on my phone or at my desk these days, it’s probably through Spotify or YouTube. Sure, my iPhone is essential to accessing music on the go, but it’s just the device I happen to use to open a non-Apple music streaming service. I haven’t updated the iTunes software on my PC since 2011. I no longer need Apple to organize or acquire my music.

I am not the only one whose habits have shifted. Digital download sales for individual tracks declined for the first time ever in 2013, dropping six percent. They slid another 12 percent in the first quarter of this year, according to Nielsen. Revenue from streaming services, meanwhile topped $1 billion for the first time last year. The transition to streaming music instead of downloading it has happened faster than many in the music industry predicted, and it’s seemingly caught Apple flat-footed. The company has offered up some solutions—a Pandora-like service called iTunes Radio and some windowed exclusives like Beyonce’s latest album. But Pandora’s number of active users are up since iTunes Radio launched last fall, and no number of timed exclusives can change the fact that many people want to have simple access to all music at all times. It’s clear that iTunes’ music download business is past its peak. “It’s still a strong brand, but there’s no doubt that other offerings have captured increased mindshare relative to just a few years ago,” says Bill Kreher, an Apple analyst at Edward Jones. “But I believe it extends beyond iTunes to the Apple brand itself.”

Enter Beats. The company launched by Dr. Dre and Jimmy Iovine took a niche product—premium headphones—and turned it into a $1.2 billion business. You can’t step onto a New York subway train without seeing at least one pair of Beats, illustrating the grip the brand currently has on youth culture (even as critics gripe that their products are overpriced, just like Apple’s). Young people today are envious of those giant headphones the way my friends were of my iPod a decade ago.

Perhaps, then, Beats is the quickest way for Apple to reclaim its position at the epicenter of the music world. The company’s headphones are already a huge business in a market Apple doesn’t currently address. Beats also has ironed out deals with all the major record labels to launch its streaming service Beats Music, which boasts a slick, intuitive mobile interface that would make Steve Jobs proud. It’s not clear how many subscribers Beats has, but reports indicate that many of the people who are being offered free trials through Beats’ deal with AT&T are becoming paying members. “Beats Electronics has a giant business that transformed and now dominates its category,” says Larry Miller, a music business professor at NYU. “If the nascent Beats Music streaming service is included, this deal could provide an outstanding flanking strategy for Apple’s declining iTunes Music download business.”

Still, it’s a decidedly un-Apple move to simply buy up cool. The company typically innovates its way out of trouble instead of opening its checkbook. A Beats purchase would be an admission that there are some problems that Apple can’t solve internally. “Apple has always been known as the innovator with the sort of perfectionist mentality,” Kreher says. “The sense is that innovation is slowing. It’s evidenced by a lack of new game-breaking types of products.”

Make no mistake: as the single largest music retailer in the world, Apple is still supremely important to record labels and artists, with or without Beats. And declining music sales mean little for the company’s bottom line. Overall, Apple’s digital sales were up 11 percent year-over-year in the most recent quarter thanks to the continued popularity of mobile apps.

But music is integral to Apple’s DNA in a way that extends beyond the balance sheet. It’s what first defined the resurgent tech giant in the early 2000’s, and it is still often used as a central element of the company’s marketing. Music is part of what makes Apple cool, and the company doesn’t want to lose that. “iTunes is a tastemaker,” Moore reminds us. “There’s a reason for people to think of Apple as being something that is in the midst of everything that’s new, that’s in the midst of launching new careers for creative people. That’s something that only enhances their brand as a computer innovator.”