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(Reuters) - Apple Inc is close to paying a record $3.2 billion for Beats Electronics, two people with knowledge of the matter said, an expensive foray into music streaming and headphone gear that would mark a departure for the usually cash-conservative iPhone maker.
Both companies are hashing out details and the envisioned deal could still fall through, one person told Reuters on condition of anonymity because the discussions were private.
A second source familiar with the matter told Reuters that Apple was in the market for a subscription-based music service to complement its "iRadio" ad-based offering, launched in 2013 as part of an attempt to jump into a music-streaming arena then split between a handful of startups such as Pandora Inc.
Founded by rapper Dr. Dre and legendary music producer Jimmy Iovine, Beats Electronicsis best known for its "Beats by Dr Dre" line of trendy headphones that vie with the likes ofSkullcandy Inc, Sennheiser Electronic and Bose Corp. This year, it launched a music service that has won plaudits for its slick design and human music curation, versus the computer-algorithms that determine playlists for most of its rivals.
But analysts on Thursday questioned whether Beats, valued at just $1 billion during its last funding round in September, was worth that price. Apple had more than $130 billion in cash as of the end of March, but the vast majority of that is parked abroad and investors have called on the company to return more cash in the form of dividends and buybacks.
Apple-watchers have speculated that the company that upended the music industry - and today is the single largest seller of tunes - was contemplating a Spotify-like on-demand music service to go with iRadio service and iTunes.
"This is really puzzling," said Forrester analyst James McQuivey, who said there was huge overlap between the two companies' customer base. "You buy companies today to get technologies that no one else ... or customers that no one has."
"They must have something hidden ... under the hood," he said.
In two of the largest deals this year, Facebook paid $19 billion for WhatsApp and its half-billion users, and it paid $2 billion for Oculus VR and its cutting-edge virtual reality headset.
Apple declined to comment on the report. Beats Electronics did not respond to requests for comment on the news, which was reported first by the Financial Times.
Apple has not made a billion-dollar acquisition in at least a decade. The company prefers to develop and design its products in-house, though it has tended to pay several hundred million dollars for small but important bits of technology to propel its core consumer electronics business, such as the acquisition of PA Semi in 2008 that led to the processor now found in all iPhones.
The company has been under pressure to try to revitalize growth as iPhone sales slow in a rapidly maturing market. Critics have also accused the company of slowly "losing its cool" and innovative edge to new and upcoming technology companies, and missing the music-streaming bandwagon.
Technology giants Google and Amazon began jockeying for position in music last year, looking at ways to make streaming profitable and to develop a service seen as crucial to retaining users in an increasingly mobile environment. For Google and Apple especially, the endeavor was critical to ensure users remain loyal to their mobile products.
They realized they had to stake out a place or risk ceding control of one of the largest components of mobile device usage. Analysts estimate roughly half of smartphone users listen to music on their device, making it the fourth most popular media-related activity after social networking, games and news.
Apple launched its own streaming music service last year, hoping to jump into the fast-expanding arena as growth of its iTunes service falters.
Apple's Chief Executive Tim Cooks met with Iovine, the Beats CEO, last year on a potential partnership involving Beats's planned music-streaming service, Reuters reported in March, citing sources. (r.reuters.com/ter29v)
Dre - who guided the careers of a string of rap artists such as Eminem and 50 Cent - compared his company with Apple in 2011.
"We're trying to eventually be second to Apple. And I don't think that's a bad position," Dre told The Fader music website.(r.reuters.com/cur29v)
Beats Electronics received a $500 million investment from Carlyle Group in September that valued the company at over $1 billion. It also bought back in September a 24.84 percent stake held by Taiwan smartphone maker HTC Corp, which once held as much as 50.1 percent of the company.
(Corrects ninth paragraph to show that Facebook paid $19 billion for WhatsApp)
(Reporting by Sweta Singh and Edwin Chan; Additional reporting by Sweta Singh in Bangalore; Editing by Rodney Joyce and Ken Wills)
I didn't know Apple's geeks love Rap music? LOL! I am glad I don't like either of them.
You'd actually have to be stupid to pay more for a phone that isn't as good. Why would you do that? Who knows? I guess Apple used to be "cool" or something but that's long gone. It's not counter culture anymore it's the same as any other company.
I can't believe people actually buy those headphones. I bought a pair of regular headphones for 20 bucks and they do what they're supposed to. I can't imagine a $300 pair being worth it. I don't care about the technical garbage, the music comes out same as any other
I"ll take Bose products over beats anyday of the week and twice on Sunday. Screw apple, they suck.
It's a fairly stunning amount to pay for a company that produces a product that is technologically mediocre at best ...simply read the various reviews. BOSE, another ordinary product in terms of sonic quality, outperform BEATS. Obviously, they appeal to a demographic that Apple feels is important to their future.
crap buys crap
glad they are not as many apple haters as they are users.cause im a proud apple product user. long story short their products work like you think they should work not buggy like the others.
samsung will outgrow apple over the next 10 years and steal their profits..................
And you're happy about a foreign company overtaking an American company for some reason.
I would never buy those over priced headphones and put money in Dr. Dre's pocket. I think people should have their head examined and more over, Apple has a decent product, but with the loss of Steve Jobs, I only see Apple going one way......DOWN. Once my contract on my 5S expires.......SAMSUNG S5 baby!
Yeah let me know how that works out! As many of my friends found the novelty wears off when you find it not so easy to work!!!!
right you are- they have no direction at this point-samsung all the way!
Yup, glad I already have my Beats headphones. Apple without a doubt is the greediest company on earth. Don't let the jeans and t-shirt fool you. Wolf in sheep clothing.
stupid comment--apple changed tech and the world for the better. greed and capitalism are unfortunately relatives. think where the world was before capitalism-----billions of years where nothing happened. usa went in to biz and 50 yrs later the greatest industrial revolution took off----the shining star of tech--APPLE.
Not worth 3.2 billion, not even close.
There are only a few companies worth what their stock and price are today-and Yahoo, Google, and facebook aint them-especially facebook-what the heck! The only thing driving these companies are the arrogant people in the bay area, and the overseas market of tech nerds in countries such as China, Japan, Korea, and India. Got to hand it to these companies though, they knew their market had billions of people there and they ran with it. Steve Jobs was a tool that knew how to manipulate people-and he is still doing it from the grave, because so many are so manipulatable. (new word)