Acquired - Apple - Beats

0:00Oh, 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 it. Yeah. I love the cheese. Yeah. I, uh, that's perfect. Then I can make money 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.

0:37So today, we are doing a classic episode of Acquired. So 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, you know, 2030 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.

1:04I'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, 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. You're going to rise to the occasion, Ben. Thank you, David. All right, listeners.

1:35Now is a great time to talk about a new partner of ours here on Acquired. Lagora, the agentic operating system that is redefining how the world's best legal teams work. Yup, 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. Lagora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

2:02So 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. And that's how you get features that customers love like tabular review where you.

2:22drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lagores Bed 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.

2:41And they recently launched LaGora 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. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves when they have a head-to-head pilot with their top competitor they win 70% of the time. Legora now has over a hundred thousand lawyers on the platform from 1200 legal teams in 50 countries and crazily they went from one million to a hundred million in ARR in about 18 months. Truly insane numbers and that is the real test.

3:34Plenty 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 legora.com slash acquired and just tell them that Ben and David sent you. All right, David. That is all I've got between us and I can't wait and beats. I am ready to start. I'm going to start talking over you.

4:04That would be new. 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 as long as we do the show, it's going to be hard to find a cooler founding story than the most possible. I don't think it's going to be possible. And certainly the coolest founders. So beat.

4:34was founded in 2006 by Jimmy Irvine and Andre Young 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 inner scope records. But this guy, he is a legend. And there's a great documentary about him.

5:15and his co-founder who will get into a minute called the Defiant Ones on HBO. I highly recommend watching. 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 studio engineer.

5:36Then 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 Dragon 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 Dragon My Heart Around. But he doesn't stop there. He discovers you too. So like, That's him. He discovers no doubt. Trent Resner and Nineage Nails. And then he completely re-events himself. So Tupac, Snoop Dogg, Eminem, 50 Cent, Lady Gaga, Kendrick Lamar. These are all products of Jimmy Ibein. Yeah, very similar sound, right? You understand how the same person can be responsible for all these artists. Just amazing. He does the soundtrack for 16 Candles, many other movies.

6:31And then found, you know, inner scope 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 impact is. So his co-founder, Andre Young, who's that guy? Well, it turns out, as he says, you know, lots of people say that they forgot about Dre.

6:56Andre Young is Dr. Dre. Oh, David. I couldn't help myself there. 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, is actually part of the world class recon crew, I think, originally, and then was a member of NWA. And, you know, there, you know, huge rise 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 piece about how Dre basically gets on stage at this this like

7:45you 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. He sort of builds all the stuff on his own and assembles it that 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.

8:12rather than just like fading one into the other or lining up to their very similar BPM and it's like an old 60s hit with new hip hop song and the audience does like no one knows what to do. He just created this new thing, which of course we hear all the time now that's sampled and mixed across decades and mixed from different tempos, but he gets up there and no one can believe it, no one knows what to do. He just created this new...

8:39thing that no one even knows how to dance to. And as someone that, you know who Dr. Dre is, but you don't know what his sort of origin story is. It's just amazing to, it's a great documentary. I can't recommend it. So great. And I mean, Dre is like, 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. But like he is, you know, one of the greatest musicians of all time. I mean, he just creates these perfect, so he's obviously had his NWA career. He's a rapper and makes music himself, but he produces, he's produced Tupac, he's produced Snoop, Eminem, 50 Cent, Kendrick Lamar. I mean, California love, that's him, that's Dre. He's not only rapping on it, but the beat, that's Dre. Pretty amazing. So Jimmy and Dre have been,

9:37business associates, collaborators, and 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 Dre is at his beach house.

9:59And he sees Jimmy out there. They're good friends. He's like, hey, Jimmy calls him over. And they start talking. They start chatting and Jerry's like, my lawyer called me the other day. And Nike and Adidas, they're kind of after me. They want me to sell sneakers. They want me to do a sneaker deal.

10:17What do you think? And Jimmy, Jimmy looks at what he's like, sneakers. Like, Drey, nobody cares what you wear on your feet. Like, you're a recording artist. You're not an NBA player. You shouldn't sell sneakers. You should sell speakers. And Drey looks at what he's like.

10:35You think we can really do that? And Jimmy's like, yeah, like we can definitely do that. And he's like, oh yeah, like we could call him beats. Like, you know, that's what I do. I make beats. We could call those speakers beats. And that's how beats got started on the beach in LA. Legendary. Legendary. Totally legendary. I think Dre made the right choice not not going with the shoe deal. Instead going with with headphones and speakers.

11:00it 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 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 Ian, as we've talked about, he's, he is like the music industry executive. And what he's great at, you know, like we're 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 dead as it was once was. It's...

11:42needs to be transformed. Digital has completely disrupted it. It started with Napster. But then Apple is really big at this point and 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 Apple was launching the iTunes music store. So InterScope was a big part of that and all the content. And so Jimmy's been thinking about this for a while. 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 sets into stores and you'd have relationship with the stores. That's all blown up. Like it's now just, you know,

12:38iTunes and other digital platforms. The marketing's totally changed. But what's also happened is that the channel is much wider in the relationship between the artist and the music and the listener. There's now all those steps that used to be in the middle are now just completely collapsed. Jimmy's been thinking about this. At the same time, he's also close to Apple and he's inspired by...

12:59what they've done with hardware and with the iPod. And actually cool said, 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 of iPod. I had it. It was all aquifat red scroll wheel. I had that. It was so cool. You know, that's all like Jimmy, like because Jimmy discovered U2. You know, and he's close with them. Like he's the one who made that happen.

13:24So 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 hardware, think 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 and he has bought every single headphone on the market.

13:50He's got them all on a big table. It feels like Johnny I have product review. And they listen to him and he's like, they all suck. They all suck. And it's not because they're not good technology. But there's two problems that they realize with the headphone industry. One, you've got like...

14:10the headphones that come 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, you know, what audio files want the pristine

14:40audio 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, the bass of the drummer, you know, the violin or whatever.

14:52But, 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. And that's not what any of these headphones are doing.

15:15And 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 audio files 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.

15:37Exactly, exactly. But what Jimmy and Dre realized, and they know from their experience making popular music, is the audio file 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. 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 Sony, so I have Sony headphones. Or I also have a Walkman, so you know, 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 this.

16:27the headphones that I'm using. And no one thought that that was a thing. Like people always thought, oh, it's a accessory. Or, you know, 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 lifestyle and how you wanted to think about yourself when you, when you put on beach headphones. Yeah. And it's also like, you know, it's a 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 Jimmy and Dre, they realize this, and even since 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? Jimmy says, we decided we were going to market it. It was Tupac or YouTube or Guns and Roses. That's not what Sony is doing.

17:25That'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.

17:45But 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 inner scope office, and they're getting all the artists to like use them and give them feedback. So like every, you know, will I am, you know, Gwen Stefani, like all these people, you know, lady guy, guy, they're all like using them, trying them out, giving feedback. That's like the best way to get

18:14Sort 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 you know, I have even though they don't actually have skin in the game They have some sort of reputational or cool factors 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 right like, you know, what did they do with M&M right like they brought him in they paired him with Dre and then like you know M&M's first you know

18:44as long as they 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. Come out. It was beats by Dr. Dre. It was beats by Dr. Dre in the beginning. Come out late 2008.

19:06And this is what they do. They put the headphones in the music videos of all of the artists on, on inner scope. So it's like, you know, when you do like, you know, you know, whatever song, you know, for new artists come out and they'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.

19:35Totally I didn't even think of like because 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 somehow like they get they get a pair to LeBron He's like, oh, yeah, these are cool like and he's like give it tell you what give me 15 of them like all right LeBron you know here's 15, you know pairs of beats and this is right before the 2008 Olympics And next thing they know, the U.S. basketball team shows up for the Olympics in Shanghai. They are all wearing beats. And 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.

20:19Yup, so they found that they realized that sports is going to be massive for them. I mean, you know, headphones, totally crazy that nobody had thought about marketing headphones and speakers with musicians before, but what about athletes, right? It really 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, awesome. They hear what you want, commercials that they do with Richard Sherman and Colin Kaepernick and Kevin Garnett. Just so good.

20:48you 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.

20:59brand, and then, we're skipping ahead a couple of years, we'll come back. But in 2014, you know, the beats are so popular in the NFL and all these commercials are hitting. The NFL does a deal with bows. Headphones are 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 they're 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 plan this any better. It's like the, the narrative of like, these rich guys want to come in and pay money so the people can't have what they want and what they want is beats. It's like, 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 and you're like, this is the best thing that ever happened to Snapchat. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture.

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23:35So 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 is 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 and we've referenced this in other episodes on the Android episode and others. But what was the one we did?

23:58I think it was the HTC Google. Yeah, HTC go right HTC itself HTC ends up acquiring a majority stake in beats in August 2010 and they pay $309 million for a 50.1 percent stake. So the company's valued it 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, like he hates talking to, hates talking to anyone little in the press. But Jimmy talks a lot, so Jimmy talks about it. And he's like, well, you know, I knew the future of music was gonna be, you know, on smartphones. And so I thought like we needed to, you know, we needed to tie up with a...

24:39smartphone manufacturer to get, you know, our headphones and our technology into these phones. So this is where you have like beats by a Dre HTC Android phones that are coming out for a while, which are hilarious. We totally should like, we shouldn't find somewhere that's like an acquired like museum and put some of these products in there. We can get 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.

25:08Oh, yeah, totally. Oh, and we should get the YouTube iPod. Of course. Oh, this is great. Maybe we can finally get all that YouTube 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.

25:33You 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 You got a dream Okay, so they do the deal with HTC and Company beats continues to grow you totally overtakes pop culture. I mean kids everywhere wearing non kids are wearing them They're growing and growing 2012 Jimmy and Dre kind of realize like, okay, there's a huge opportunity here. And if we're really going to make this a big company, we got a...

26:10Oh, and we got a controller on Destiny. We got a kick monster out and build everything in-house. And again, do you remember Jimmy knows everybody at Apple. He's super inspired by them. And this idea of hardware and brand and software all together. So they don't renew the partnership with Monster. They moved to producing the hardware themselves in Monster. This is just such an example of the competition these guys were facing in the headphone industry.

26:37Monster decides like, oh we can do this too. We're gonna come out with like lifestyle branded headphones and work with artists. So they release earth wind and fire branded headphones.

26:48I love Earthwind and Fire. Great group from the 60s and 70s. But like, are you serious? Like Dre, Earthwind and Fire, same resident, you know, same group people. Oh, yeah. And have reverence. Earthwind and Fire headphones are totally going to dethrone, you know, beats by Dre and Richard Sherman and Colin Kavernick 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, I mean, 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 of the brand. Not that like, I want to represent Dr. Dre every time I open my beats around. 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

27:43beats an apple. They're like, oh, you'd be like, she just 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 the MFI certified. And monster proceeds the case accord eventually throws it out. And like, this is totally baseless case. So I'm sure a large group of people in Apple that have zero respect for what Monster does as a company anyway, and I think it probably felt good just to be able to stick it to them there. Because I mean, 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

28:35the 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 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 have been some massive collusion between Best Buy and Monster throughout all of the 90s about all this stuff.

29:04It's digital, right? Like the quality of the kid, it's 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.

29:18You know, Jimmy and Jerry 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 Carlisle 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.

29:47Did Jimmy and Dre get any liquidity from that initial 50.1% purchase from HTC? Do you know? I don't know. I mean, I suspect so, but 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, I was all done by monster. So it was just like, you know, the...

30:12Beats was just doing the design, the sound tuning, and that was done by mostly Dre and then the marketing. So it's kind of crazy that HTC, you could build such value in that HTC paid 300 million for half the company with 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.

30:38I'd 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. I want to remember to do that. As part of all this, they...

30:51start 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 of product is now on multiple generations.

31:09The other thing they do, as they're doing all this, is they acquire a small tech company, a music streaming company called MOG, MOG. 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 writing 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.

31:55And in the meantime, hit over a billion dollar revenue run rate just on the headphones. And then in January 2014, they relaunch 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.

32:16playlists that are made, there's recommendation, curation by, by Dre, by the inner scope artist, by Jimmy, you know, everybody else is just an algorithm at this point. And Dre and Jimmy think this is the future. Yeah. And this is all I'll borrow from tech themes ahead now. But this is the Jimmy I have in 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 One's 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. That's what makes a great producer. And it's interesting looking at

33:02the streaming service and saying, you know, the artists need more involvement with this human curation. So foreshadowing the beats one radio, you know, it's 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 of song for you to search and browse through. And then, you know, a tenant 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 them 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

33:54your music service, you don't want an algorithm, you know, queuing up what's next, you want like, drag 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.

34:07Well, totally, I'm not saying it's right. I'm just saying this is Jimmy's vision. And certainly 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 just as fun. It might also be the coolest end to an acquisition story that we'll ever have unacquired, certainly thus far. So May 8th, 2014. Remember in January, they launched Beats Music just a couple of months before.

34:37A 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. 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 as huge news. And it's true.

35:06Negotiations aren't 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 in 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. So Dre's like, yeah, yeah, got you. So Dre's in the studio.

35:33that weekend and he's hanging out with friends and one of his friends is the actor and singer Tyree Skibson. They're hanging in the studio and they're talking about this. Of course, what are you going to talk about? You're about to sell their company for $3.2 billion and they're excited and it's late at night and they're drinking and they get drunk. Tyree pulls out his phone and makes a video of all of them and they're celebrating.

35:57and tell you says 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, or they're party, whatever. They go to bed. And that night, 4am, so early morning, Jimmy calls up Dre and he's like, what the, you know, 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? And Jay's like, Tyree's posted it to Facebook. And this was right when Facebook video was like launching. So if 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.

36:54So there's some rockiness to the deal. And honestly, I can't believe Apple still went through with it. I can either. But they do. But, you know, supposedly it was, you know, it was the finished times of supporting 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 Tigris 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.

37:51to the power of Jimmy and his relationships. The characteristic Apple we know of, it's done. Like you messed up. We're no longer moving forward with this. You've proved yourselves to be people that we can't trust to sort of live the Apple way. And lead a huge part of the company going from this is the largest acquisition by an order of magnitude that Apple's ever made. So the day gets announced is actually the recode conference is going on. Code conference is going on.

38:21And so Jimmy and Eddie Q. So Eddie Q's always been the media and content guide Apple. And the day the deal gets announced, he's scheduled to be interviewed on stage at the code conference by Kara and Kara Swisher and Walt Mossberg.

38:39And the deal gets announced, right? So he and Jimmy come up on stage together and they get, and they're interviewed by Cara while knowing what was 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 had been working with Apple and with Eddie for over a decade, you know, going back to the launch of iTunes Music Store until, you know, so to your point Ben, I mean, the relationships like, that's gotta be what saved the deal here. Yeah.

39:08God, 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 the defiant ones, they do talk a lot about, and I haven't finished it yet, but at least in the first part of it, they talk a lot about the...

39:27How 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, they're still the core of Apple in there. They're really like somebody someday should do like a book and like go in and research like all 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, you know, there should be, there should be an actual story and go ahead 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,

40:25Beats music was, yeah, it had some people using it, but clearly not gonna be a winner. Spotify was gonna be a winner. It didn't pale in comparison to people still doing the 99 cent thing from Apple. 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.

40:52You 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 radio station. That's part of it that's hosted by Dre and other artists. And so that launched 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 Apple actually doesn't influence the...

41:40beats 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 existing hardware teams continuing to work on the AirPods and Beats hardware teams continuing to push the ball forward on on Pete's headphones. And there was some layoffs in the consolidation. They laid off, I believe, 200 people 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 grating 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

42:38Business line for sure like you know Apple now owns beats they're selling beats headphones Which in itself is over a billion. I mean even before the acquisition. I think this is 2013 2014 numbers but over a billion dollars in revenue just on the headphones Yep, totally and that's you know 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 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 there's a lot of really in some ways kind of funny and unexpected parallels to the next acquisition here and Steve Jobs coming back to Apple. I wouldn't put Jimmy and Dre's impacted Apple anywhere near the level of Steve Jobs, but it is an impact for sure.

43:33and there's that long relationship and I think it comes back to the AirPods too. Whether or not the Beats team was involved in, the AirPods, it is this view of what is audio, what is music, is it something technical or is it something that's 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 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

44:27you know, they didn't have to start from scratch in house. You could imagine Apple being, you know, knowing they were going to do Apple music and knowing that they wanted to compete with Spotify in this world where there are 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.

44:48But also Apple in the Sound Jam episode, which is totally the precursor to this episode, they made the same decision. Let's buy a good technical service. Use that as a starting point. Right. And so that's not worth $3 billion for sure. Totally. That's all that's where we go. Sound Jam is worth. What was Sound Jam is, is telling that position. 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 this picture.

45:23competitor 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 a large debate over how that's going. Although I think a lot more people use Apple Maps than like, you know, at least in the tech world we give a credit for. Right.

45:51There'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. 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 beats.

46:41you 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. I totally agree, but I would even go one step farther, I think.

47:00Maybe this is heresy. Given, you know, like we're talking about the way audio files view, you know, beats and whatnot have fun. 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 what 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.

47:24Well, maybe Dre too. He just doesn't talk much so we don't know. But they had a vision of what was Beats and what was this combination. Jimmy talks about it all the time in his interviews. How much he respected Steve Jobs' view of technology plus liberal arts. And you could argue with...

47:43How well Beats did on that, but 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 part of your life. And the relationship that we have to our customers is super deep. And that's exactly what Apple is, too. So maybe we're bleeding into what would have happened otherwise now. But say this acquisition hadn't happened. What does Beats look like now? What does Beats look like in 10 years as a standalone company?

48:10just 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. Interesting to think about, especially in the future that we've like painted out other episodes where Where headphones and a watch or headphones in a wearable in some way are 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 Apple, I think it's pretty hard to be a new entrance to commute with Apple there. Yeah.

48:56Totally. 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 impact of the music, not because of the tech specs, you know?

49:25And 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 will talk 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 a, you know, aquaire. Wow. It's a bold statement.

49:51If 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 just see, 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 like, 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, an asset, but you can't value the assets, right? Like, again, back to SoundJM, like, SoundJM had no brand. SoundJM had no, like, they had customers who like used the product and liked it, right? But like, it wasn't like...

50:39The NFL wasn't banning sound jam. You know? Right. Yeah. I'd be like, 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.

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52:35So 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 slash acquired and tell them that Ben and David sent you. 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 had that evolve? So let's rewind to before the the Beats acquisition. So Spotify had collected 20 million paying subscribers, while Apple had no offering in the market. And they're the pioneers of digital music, and are the legal digital music, and here they are sitting there while they're being completely disrupted.

53:20In fact, Pandora even grabbed 80 million active listeners. And it looks like about 4 million paying subscribers. Still, Apple is doing nothing. So Spotify's got this huge free tier with 20 million paying. Pandora's got 4 million-ish paying. 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, 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

54:24It looks like 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.

54:53still 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 it at sort of breakneck speed to actually convert 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 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 Iovines we don't give away music.

55:40we charge for music and we give it to the artist. 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 it can be a loss leader for Apple. And of course, they make money on it. If you look at and see what the margins look like, Apple music, it looks like operates around 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.

56:22Spotify 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.

56:47how 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 me, we're foreshadowing ahead of it to grading, but...

57:07Apple 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, at discount, hyper aggressive discount of like, say, you know, two-thirds of that 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 we'll be aggressive. I'm sure it's not quite a third that they're losing, but I'd 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. That's pretty good for paying $3 billion for beats. So financially, that's pretty good. But also, I do really believe there's this other part of the story to music. It's not just

57:58Music 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 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.

58:45And another interesting thing I should point this out, what 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 on giving this away free yeah interesting interesting the other player we absolutely should

59:26you know, mentioned 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 ten bucks a month or I could get this included in my prime.

59:51subscription. 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, 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.

1:00:21All right, well, I feel like we've done category and what would have happened otherwise. Should you do tech themes quickly? Ooh, 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 what Amazon's done. There's like, you know, totally...

1:00:48serviceable service, right? And that's part of the large 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. But Apple music is definitely not the beats brand. Like, you don't get that for me.

1:01:12but they could draw a lot of that customer base into it. But then also they get a vision for it, right? And what Jimmy has articulated. And again, has it been as successful as 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. Leaders, Jimmy and Dre to come in and do it.

1:01:36Again, because it's all about the artists and the marketing, and so you need to be like any cue going and being that leader in the music industry isn't credible, you know? Yeah, yeah, in fact, he's feared in many ways by what he did last time around. To pin that down a little bit more.

1:01:53is 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? 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. And 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 themes. That would be a fun show. Tech themes. All right.

1:02:42One 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 can we not? It's an Apple show. But two of what I want to talk about is this actually is totally similar to the StitchFix IPO for me. Like that Jimmy and Dre saw something that was overlooked in the market.

1:03:05and 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 Racola, who was one of the founders of Benchmark, and he talked about, he took this from Howard Marx at Oak Tree. This idea of like a two by two matrix when you think about investing or building companies, you can be...

1:03:27right 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 gonna 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.

1:03:55And that's what StitchFix did, right? Like, women don't need a, you know, personal shopping closed service. Well, it actually turns out they do, you know? 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? 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...

1:04:23It's a better dive into something that I was thinking about is defining a lifestyle brand where there previously was no lifestyle brand. Realizing that a category is something that can play an important role and define people's lives rather than just being throw away. It's certainly worth looking around and considering where are there other opportunities to do that. And Jimmy talks about this. He's like, he refers to it as he and Dre, they look for holes out there. Where is there a hole? And this is the same thing. They're great VCs, man.

1:04:53Totally. Well, that's what they did. Jimmy is all career and then Dre has become more of a producer and less of a direct artist himself. That's what they do. They find talent and they identify it. This is found YouTube. They found Eminem and then they give it the resources to succeed. I mean, these guys are VCs. They are great VCs. Well, here's another one and it was something we've been talking about in a previous show.

1:05:21The content is king narrative, where 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. And that's what Apple music wouldn't have. Right, right. And does this now put us in a world, fast forward to today, Apple's investing a billion dollars into original programming.

1:05:45First of all, I'm very curious to see if that will be released. It's obviously video original programming. Under the Apple Music Monitor, 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 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

1:06:37taking 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 to your on top of everybody that's already in our massively integrated Apple ecosystem. Yeah, it's interesting too. They'll 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'll cover Spotify someday in another episode, but like, I should be, I would be terrified if I'm Spotify, like...

1:07:28Apple's Amazon is now giving away what most of my users pay me for. 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. Then I'm going to have all these services too and content around it. But I'm going to be your best friend and constant companion in your life. This just occurred to me. I mentioned Apple Apple is a highly highly vertically integrated company unlike 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.

1:08:23that 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 $3-ish billion a year 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 iOS app downloads.

1:08:52When you think about what their total annual revenue looked like, it was 216 billion. 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.

1:09:21you know, nearly as widely used, I don't think as the one for iOS. Like if you have, if you're in the Android ecosystem or you're 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 based on Apple music. Yeah, it's super different.

1:09:50Even from all the things we were just talking about, right? Like, and I'll say, you know, this is like, I think it's a departure from and I love this. This is like always hilarious thing if people bring this up and I usually get mad at them, but I'll do it anyway. Like a thing about what would Steve Jobs have done or what 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 iPods, they could see the Apple, you know...

1:10:26see the Apple light and then perhaps buy a Mac and 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 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.

1:10:55But 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. Yeah, I'm how many people have you seen with AirPods that have an Android show? I haven't seen many, but how often do you, you know, meet somebody in your work life who doesn't have an iPhone? In esports a lot. In esports a lot. But yeah.

1:11:22All 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, I think, pretty lotatory of this deal thus far for Apple. And I'm gonna 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 one... 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 acquired museum. That's right. So I think this is kind of in that category. I don't...

1:12:18I think the execution, though, has been as good as Instagram and next. And specifically, well, next was the toned piece, just so you know, 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. I'm plugging into the ecosystem, blah, blah, blah.

1:12:46The 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 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 and be like Instagram is now like, you know, worth 100 plus billion dollars. You can't say that with beats for sure. So I think I go A minus thus far.

1:13:13I'm gonna go A-2, just from a, basically from a cash flow perspective, will this thing pay for itself and has it paid for itself in a reasonable time frame? Yeah, yeah, I feel great about that. Has it been absolutely transformative to their business? 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 they're 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 encouraged by the fact that we're a few years in, it's still growing strong. 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.

1:14:06I think it's everything you say, but I think it's also it's not just digital music. There is this element of what the vision is for the future of computing and society here. I don't want to say that certainly as we've talked about, the Beats team did not directly lead to the AirPods, but it's just part of the mindset. Audio quality and music is a big part of that, but also podcasts, also everything. This is part of people's lives and was...

1:14:34being more so and like the more you can integrate technology and that what you know Steve Jobs called it liberal arts or you know Jimmy talks talks about culture and cool and I 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 Carbats are 50th episode yep go Carbats um I go quickly my the same theme Jimmy and what an amazing person he is and I talked about their cream Abdul Jabbar book about his relationship with John Wooden I think last time or the time before I also read John Wooden on leadership 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

1:15:25across multiple complete sea changes in what that industry is around them. It's super cool to learn about those people and how they did it. So John Wooden, Jimmy Ivan, separated at birth. Awesome. 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.

1:15:54when 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 to answer the questions, and you progress to the end where there's a cash prize that gets split.

1:16:16the 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...

1:16:35progressively more difficult and they go from like piece of cake to quite 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 three thousand dollars And it's like who wants to be a millionaire it is and there's so many like start-up 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 it's bringing on Relative to the small amount that they're giving away even let's say it's 2500 bucks super low cost of customer acquisition

1:17:13And 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 really cool to read the backstory. There's been a lot of controversy. If you want to look up HQ news, there's been some sort of interesting controversy about the company that I won't go into.

1:17:32They're back story of trying really new interactive models that are fun on your phone 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 every day at noon, you can go in and play 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.

1:17:59Yeah, we'll play it and tell me how far you get. Probably not far. Unless the questions are about John Wooden and Jimmy Eiffel. That's right. All right, listeners. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

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1:19:14Thanks so much for joining us today. If you like the show rate us on iTunes and have a great day. See you next time.