Having become mainstream over the course of the last decade, Apple's purchase of music streaming service Beats could be seen as an attempt to promote themselves as 'alternative' 

Once known as the perfect blend of hipster cool and technological innovation, Apple’s reputation has in recent years shifted in the eyes of the public to one of mainstream dominance and bland uniformity. A company that was a decade ago heralded as providing a hip alternative to the stuffy dominance of Microsoft has now reached a point where it’s considered to be mainstream. Gone are the days of your typical Apple user being someone that works in the creative industries. Instead, it’s much more likely that Apple’s core users are white, middle-aged, middle class or extremely wealthy.

Its reputation for innovation has also always been well ahead of its competitors. Turning touchscreen phones and tablets into mainstream products is something that Apple has been credited with, and it did so by designing these products in-house. Despite its colossal cash pile – said to be roughly $150bn at the time of press – Apple has been reluctant to acquire rival companies, instead developing new products itself.

While it may buy a few small start-ups, it has rarely made the sort of large-scale acquisitions that rivals Google and Facebook have become known for. However, the recent purchase of headphone-maker and music streaming service Beats for $3bn has been criticised by many observers as a sign that Apple has run out of ideas and is in desperate need of an injection of the sort of cool that it was once known for.

The deal represents a dramatic departure from Apple’s usual strategy, and some think it’s because Beats has captured a number of demographics that Apple has struggled to attract over the years. Targeting young, fashion-conscious people, Beats has successfully secured a hold of this market as a result of its celebrity endorsements and design, rather than the quality of its audio. The huge popularity among these fashion-conscious groups is also similar to the reaction of the same types of people who a decade ago wanted Apple’s white iPod headphones.

While neither are renowned for their sound quality, Beats has taken over from Apple’s white headphones as the preferred choice for vain music fans the world over. Senior Apple Executive Eddy Cue may have claimed after the deal “you don’t buy cool, you make the best products in the world and make them cool,” but it certainly seems as though the Beats acquisition is an attempt by Apple to recapture the image it had a decade ago.

Out of ideas?
Although many put the decline in innovation and image down to the death of iconic founder Steve Jobs in 2011, in reality, the company had achieved its mainstream status long before his demise. Ever since the iPhone became the must-have tech accessory, the company’s outsider status has been diminished. Even before that, a surer sign of its status was reflected in its partnership with rock giants U2 – the biggest band in the world at the time – for an iPod advert.

However, some observers do believe that the loss of Jobs to the company, and his replacement by the more reserved Tim Cook as CEO, has led to a decline in innovation and a lack of fanfare to its new products. Such was Steve Jobs’ charisma that the phrase ‘reality distortion field’ was dubbed to describe the effect he had on employees and fans of Apple’s products.

Whereas the innovations that the company would announce were on the face of it quite similar to existing products on the market – such as the many MP3 players available before the iPod – the reactions that they got from the press were said to be totally out of proportion with reality.

Certainly the company hasn’t released anything as ground breaking as the iPad or iPhone since Jobs passed away, and it has lost considerable ground in the mobile device market to the likes of Google and Samsung. However, there are signs that it is looking to address these issues with a range of new products, as well as strategic acquisitions, as seen with the deal for Beats.

Initially reported to be worth $3.2bn, the deal was revised down to $3bn when officially announced at the end of May. While no official reason was given for this decision, the over-eager way Beats founder Dr Dre announced himself as “hip hop’s first billionaire” in an online video two weeks before the announced might have had something to do with it.

Some people have reservations about the deal, however. While Apple founder Steve Wozniak told CNET recently that the Beats deal represented the company “getting back to some cool roots”, Yukari Iwatani Kane, author of the book Haunted Empire: Apple After Steve Jobs told World Finance the thinking behind the deal is “difficult to understand”.

“Apple in the past has done acquisitions where they buy technology or talent, but they’ve never bought a company for its brand and for its ‘cool’. It’s Apple that has defined ‘cool’ for the last decade plus, and so the fact that they have to borrow or capitalise from somebody else, I think is a problem,” said Kane.

“The best reason I’ve heard is that [the deal] is part of Apple’s vision for a connected home. But I still keep coming back to the price. $3bn is a lot of money, and you would think that the company could do a lot with that themselves. The iPhone was developed internally with a couple hundred million dollars, so why does it need to buy Beats?”

Music streaming
The breakdown of the deal seems to value the music streaming service at just below $500m, with the headphones business at over $2.5bn. However, many observers believe the music service is Apple’s main reason for buying Beats. It has lost ground to rivals like Spotify in recent years, with music fans preferring subscription services to the download model of iTunes.

Kane says that buying Beats Music is a response to the decline in popularity for iTunes, but the company is not big enough yet to challenge the likes of Spotify and Rdio. “iTunes is not what it once was, so I can see why Apple would want to capitalise on Jimmy Iovine and Dr Dre’s relationships with the music industry and to come up with something more hip. But the [Beats] music service is so nascent: there aren’t that many subscribers, it’s just in the US, and most of the subscribers aren’t paying anything yet. So if Apple were looking for a music service, you’d think there would be better companies to buy.”

Michael Battista, Senior Consulting Analyst at Info-Tech Research Group, told World Finance that the music service would offer Apple a route to partnerships with the music industry, but the service still needed to be rolled out internationally to turn it into a big music-streaming player. “On the streaming side, a challenge will be maintaining or developing partnerships with labels and artists. Maybe that’s part of what Apple is buying into with the acquisition, but there are still issues such as getting the service out internationally.”

The Beats headphone business is certainly profitable, with revenues for 2013 hitting $1.4bn. However, it has a reputation for being more about style than the quality of its audio. Kane says that this doesn’t match with Apple’s usual approach. “The headphones are obviously very popular, but they’re known more for design than the sound quality. The design is also the complete opposite of Apple’s style. I’m not sure how that fits in Apple’s product offering.”

Battista agrees that the deal may not fit with Apple’s traditional product strategy. “One challenge is the recent image of Beats hardware. It’s become known for being high in style, high in price, but low in quality. Apple is known for being high in style, high in price, and high in quality. That quality, or at least perception of it, needs to rise for the Beats hardware to fit in at Apple.”

Utilising a new approach
Another reason for the deal seems to be Apple’s efforts to attract high profile, charismatic talent. Jimmy Iovine – as the Chairman of record label giant Interscope Geffen – is known for his sway within the music and film industries. Hip-hop icon Dr Dre has also been able to secure a number of exclusive deals and endorsements from artists for Beats in the past. Despite having criticised Apple’s App Store censorship policies in the past, Nine Inch Nails front man and Beats Music Chief Creative Officer Trent Reznor has also agreed to stay part of the company. It is a coup for Apple, which can now boast two very different but equally idolised musicians in Dr Dre and Reznor as members of its staff.

Apple also seems to be pushing some of its more charismatic executives into the spotlight, perhaps to make up for the more reserved presence of Cook and the loss of Jobs. Craig Federighi, Senior Vice President for Software Engineering, has been praised for his light-hearted and enthusiastic performances at recent keynote speeches. Frederighi and acclaimed British designer Jony Ive even shared the cover of a BusinessWeek feature with Cook last year, something that would never have happened were Jobs still around.

Aside from the Beats acquisition, Apple unexpectedly hired Burberry CEO Angela Ahrendts earlier in the year to head up its retail division. A high profile hire, Ahrendts is seen as someone that can bring a fashion-conscious mind to the tech giant, just as the market for wearable computing becomes mainstream. All these efforts seem to be part of a new strategy by Cook to bat off accusations that the company has become stagnant under his leadership.

For example, he is actively looking to broaden Apple’s user base into new demographics. Part of the reason why Beats is seen as a good fit is that it is a hugely popular brand among the young black community. It is this community that Apple has struggled to attract, with a survey by Nielsen showing that 73 percent of black Americans own Android-based smartphones. Kane says that these changes appear necessary if Apple is to emerge from Jobs’ shadow. “I do feel that Apple and Tim Cook are trying to evolve, and becoming more comfortable with their post-Steve Jobs reality knowing that they have to do something different, and that they can’t just stick with what they’ve done in the past.

“It feels like Cook is trying to create his own vision and make his own decisions, and what’s interesting to me is that he’s hiring outside talent. Apple’s head of PR [Katie Cotton], who had been at the company since Jobs returned in 1997, has gone as well, and that looks to me like Apple trying to move on. The question to me is whether a new vision can convince. The biggest thing Apple seems to have lost is its ability to inspire and convince everybody that their products are the greatest. What will be interesting to me is how they paint this new vision, because they really haven’t yet.”

A number of years without much innovation has meant Apple is slipping behind rivals like Google in terms of offering exciting new products, but there are signs that this might be set to change. The recent World Wide Developer Conference in June unveiled a range of new software that was more open and forward thinking than anything from the company in years.

Giving developers access to new tools, as well as the previously closed-off Siri and TouchID, could position the firm at the centre of everyone’s digital lives – especially with home automation, health tracking and payment technologies set to go mainstream. They might just be going back to being the company that that was welcoming to third party developers, rather than insisting on their ‘walled-garden’ model.

iWatch and Beats headphones will look to target the fashion-conscious consumers that are so lucrative. Indeed, iWatch is rumoured to come in a number of increasingly expensive styles, less because of the tech and more due to the stylish materials that house it. Indie musicians and major labels alike trust Jimmy Iovine, meaning it will be easier to secure important rights deals. The artist focused and human-curated model that Beats Music employs will also go some way to making Apple appear less of a software provider reliant on a recommendation algorithm and more of an entertainment platform that has the most knowledgeable people with their fingers firmly on the pulse of their audience.

While no one can predict where Apple will go in the coming years, the challenges it faces are a consequence of its staggering success over the last 15 years. Countless examples of seemingly unstoppable businesses have crumbled throughout history, as a consequence of many factors.

Apple remains in an incredibly strong market position, the challenges of competition and stagnation are however, leading it to rethink the strategies that have made it so successful. While these challenges might be considerable, Apple’s record of pulling out surprises should not be ignored. Although the Beats deal represents a huge – and expensive – departure for Apple, the company is banking on it being able to restore it to its former ‘cool’ glory.