Apple CEO Tim Cook had an esoteric explanation for why Apple bought Beats, the headphones and music-streaming company. "These guys are really unique," Cook told the New York Times. "It's like finding the precise grain of sand on the beach. They're rare and very hard to find."
But here's the grim financial logic that shows why Cook felt he had to pay $3 billion for the company. Revenue from iTunes is in decline, according to this analysis from Morgan Stanley's Katy Huberty.
Macrumors, which first saw the Morgan Stanley note, says:
Huberty notes that iTunes revenue is falling as users turn to streaming services such as Pandora and Spotify to meet their music needs. This decline "raises concerns about Apple's ability to monetize the new base of emerging market customers," writes Huberty. According to Huberty's calculations, each iTunes account spent an average of $3.29 in the first quarter of this year, down 24% year-over-year.
This chart shows iTunes revenue falling as a percentage of Apple's online services unit:
And this one shows iTunes' revenue per user falling:
Macrumors / Morgan Stanley
Given those headwinds, it appears that music was actually a battle Apple was losing to challengers like Pandora and Spotify. Beats, presumably, is intended to give Apple a new beachhead in subscription music services that run alongside iTunes Radio's legacy free streaming service. And - another factor for Apple - the headphones themselves give Apple a device platform with its own existing distribution network that it can also improve and build out.