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Apple buys Beats Electronics for $3 billion

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

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

The deal is expected to close before October.

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

Beats was founded in 2008 by Dr. Dre, whose real name is Andre Young, and Iovine, a longtime recording industry executive who is stepping down as chairman of Universal Music Group's Interscope Geffen A&M Records to join Apple. It now dominates the luxury headphone market. Its equipment also has been a big seller in Apple's stores.

Operating from its Culver City, Calif., headquarters, Beats commands 62 percent of the $1 billion U.S. market for headphones priced above $100, according to NPD Group. Iovine, 61, and Dre, 49, will both become key executives in Apple's music divisions, though Cook said their roles haven't been determined yet. Cook indicated Beats' music streaming service was the main selling point in the deal, though the headphone line also is expected to continue growing, too.

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

Although Apple broke into streaming with the launch of iTunes Radio last September, the service has not been as popular or as lucrative as the company expected, according to two people familiar with the matter who asked not to be identified by the Associated Press.

ITunes Radio has 40 million listeners and will continue as a free service with ads while Beats Music will try to tap into the more than 800 million accounts to sell more subscriptions to its customized service. Beats Music currently has more than 250,000 subscribers, Cook said. That's well below the more than 10 million paying customers that Spotify's streaming service boasts.

Apple is counting on the Beats acquisition to boost its cachet with teenagers and younger adults while trying to remain a leader in digital music — an industry that looks much different than when Apple reshaped the scene with the 2001 debut of the iPod.

"Apple suddenly has regained its cool," said Sony Music CEO Doug Morris, who was one of the first recording executives to embrace iTunes at Iovine's urging more than a decade ago.

Apple buys Beats Electronics for $3 billion 05/28/14 [Last modified: Wednesday, May 28, 2014 7:50pm]

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