Why Does Apple Want to Spend $3.2 Billion on Beats Electronics?

Several sources, including the Finacial Times and Bloomberg, have reported that Apple Inc. (AAPL) is in talks to purchase Beats Electronics LLC for $3.2 billion. If true, this would be the most money Apple has ever paid to acquire another company. But why is Apple considering paying so much for Dr. Dre and Jimmy Iovine’s music accessory company? While Apple hasn't officially announced its decision to buy Beats Electronics there are a few theories floating around as to why the iPhone-maker is making such a big move.

iTunes

Apple changed the music industry with the release of the iPod and iTunes, but services like Pandora and Spotify are causing an industry-wide drop in music downloads. According to various sources, Apple is reportedly looking to bolster its music-offerings by incorporating Shazam's song ID feature in iOS 8. The company's iTunes Radio has also also gotten off to a slow start, but adding Beats Music could help change all that.

Dr. Dre and Jimmy Iovine’s subscription based music service didn't explode out of the starting gate either. In April Billboard Magazine reported that Beats Music early subscriber numbers were "disappointing" and only tally in the "low six figures". However, the service has been met with positive reviews for its unique approach to curating music, and Beats Music CEO Ian Rogers disagrees with Billboard pointing to strong numbers such as 17.5 million tracks, genres and albums having been "loved" by Beats subscribers.

Jon Irwin, the former president Rhapsody International Inc. told Bloomberg, "[Apple] is buying into the future and the future is going to be streaming and subscription".

"Revenue from streaming and subscription is growing," said Irwin. "Files and downloads are shrinking. Everyone has to engage in streaming and subscription.”

Apple Isn't Cool Anymore

Like Facebook, who has been on a spending spree itself acquiring WhatsApp for $19 billion and Oculus VR for $2 billion, Apple is loosing its "cool factor". At one time owning an iPod or early iPhone was like being in a members only club, but now everyone has an iDevice. Owning an iPhone does not make you stand out in a crowd, but sporting a $200 pair of Beats by Dre headphones does. If Apple buys Beats Electronics LLC they will gain control of the Beats' accessories.

Why Pay So Much?

Apple is known for purchasing smaller companies and incorporating the technology and staff into their own products, not paying large sums of money to own larger separate entities. Anthony Wing Kosner from Forbes has speculated that Beats used Facebook or other companies to drive up the price on Apple.

"My guess is that Beats may have played Facebook or others to drive the price up, but secretly (or not so secretly) have always wanted to be acquired by Apple.

Kosner also points out that Apple may need something to give its rumored iWatch more "street cred," and Beats headphones could be just the product the company needs.