Apple Inc. agreed to buy Beats Electronics LLC for $3 billion, its biggest-ever acquisition, nabbing a popular line of headphones and a nascent subscription music-streaming service as the iPhone maker seeks to rev up growth.
Beats founders Dr. Dre and music industry executive Jimmy Iovine will join Apple (Nasdaq: AAPL), according to a statement from the companies Wednesday.
The purchase price is $2.6 billion, with an additional $400 million that will vest over time.
The acquisition is projected to close in the fiscal fourth quarter.
The deal signifies that Apple CEO Tim Cook is willing to use the company’s $150.6 billion in cash more aggressively, a departure from predecessor Steve Jobs’ playbook of acquiring smaller companies to bring in technology and talent.
As sales of digital media downloads fall, buying Beats gives Apple a foothold in Internet-based streaming, where Google Inc. (Nasdaq: GOOG), YouTube, Spotify Ltd. and Pandora Media Inc. (NYSE: P) dominate.
“Music is such an important part of all of our lives and holds a special place within our hearts at Apple,” Cook said in the statement.
The deal indicates how the CEO, who is facing pressure to jumpstart Apple’s sales amid cooling iPhone and iPad sales, is shifting to acquire growth.
Even as Google and Facebook Inc. (Nasdaq: F) have spent billions on acquisitions, Apple previously avoided tie-ups of this size. Its biggest past purchase was the $400 million deal for NeXT in 1997, which brought Jobs back to Apple.
A central part of the deal’s allure is the Beats Music service.
While the purchase would use just a fraction of the cash and investments on Apple’s balance sheet, it shows that the Cupertino-based company is serious about introducing its own music-subscription service.
Jobs had long resisted such a move, insisting that people don’t want to rent their music.
Apple took a step in that direction last year, introducing iTunes Radio, an advertising-supported music-streaming service that competes with Pandora.
While Apple’s iTunes remains the world’s largest seller of music, it offers only downloads of single tracks and albums.
Music-streaming services, where a customer pays for access to the songs instead of owning them in a digital library, have gained in popularity, especially among younger listeners, said Mike McGuire, an analyst at Gartner Inc. (NYSE: IT)
Yet the services aren’t lucrative and present business challenges, even for Apple, he said.
“They haven’t moved to a subscription model, and there is a lot of good reason they didn’t,” McGuire said. “The big one is there isn’t a lot of money to be made.”
Musical acts including Radiohead have criticized subscription services because they don’t compensate artists as well as the pay-per-track model.
For instance, the latest album from the band The Black Keys is available on iTunes, though not Spotify.
Beats introduced its music-subscription service earlier this year. Like Spotify and other rivals, the company offers unlimited access to millions of songs in exchange for a monthly fee.
Beats hired music critics, radio DJs and record-label veterans to help create playlists and other curation tools to help customers navigate the overwhelming amount of music available -- a component Iovine said was missing from the experience.
“It needs feel. It needs culture,” Iovine said in an interview with Bloomberg Businessweek in 2012. “What Apple has in the downloading world is very, very good. But subscription has an enormous hole in it, and it’s not satisfying right now.”
In buying Santa Monica-based Beats, Apple also would get the company’s colorful, high-end headphones. Iovine and Dr. Dre, whose given name is Andre Young, started Beats in 2006 amid rising use of iPods and smartphones to listen to music on the go.
The pair quickly proved their marketing acumen. The headphones, priced at about $170 to $450, gained popularity as stylish accessories for the general public and not just audiophiles, fueled by partnerships with athletes including San Francisco 49ers quarterback Colin Kaepernick and NBA All-Star LeBron James, who helped pitch the products to a younger audience.
“They have done a hell of a job in branding,” McGuire said.
Apple and Beats have deep ties. Iovine was a friend of Jobs’ and an early music-industry advocate for Apple’s efforts with the iPod and iTunes.
The acquisition is a boon for Iovine, who has worked on projects as varied as Bruce Springsteen’s “Born to Run” and the movie “8 Mile,” and Dr. Dre, whose seminal rap album “The Chronic” helped make rap music popular with suburban teenagers in the 1990s.
Iovine may become a billionaire. He owns 25 percent of Beats, and with the proceeds from the deal and millions of dollars collected from more than four decades working with artists such as U2 and Fleetwood Mac, he’ll have a net worth of more than $1 billion, according to the Bloomberg Billionaires Index.
Dr. Dre, meanwhile, is projected to collect $640 million if a deal is completed, according to data compiled by Bloomberg.
Other investors in Beats include private equity firm Carlyle Group LP (Nasdaq: CG) and Universal Music Group, the world’s biggest record label.