Wolff: The unlikely marriage of Apple and Beats

Jimmy Iovine? Apple's new partner? To judge by the media hurrahs, Apple's future?

What's wrong with this picture?

Apple is a top-down, buttoned-down, lockstep enterprise managed, after Steve Jobs' death, by his apparatchiks and other relative automatons. Iovine, a producer and impresario from the music industry's bad days, is a promoter and publicity seeker who has often veered toward outré practices and personalities.

So, Apple, teaming up with Iovine, seems either to have a Machiavellian plan of extraordinary vision and incalculable nuance and subtlety, or is taking a wild roll of the dice.

Or both. That is, the Apple of sui generis design and savant marketing, offering among the most singular visions of consumer desire, is over. And now it begins a force-of-will effort to build a more broad-based, if less exceptional, consumer products and entertainment content company. Kind of a Sony (in its better days), with lots of products, some good, some not so good.

Still, Beats Electronics, Iovine's company, which Apple is acquiring for $3 billion, makes headphones and has a minor streaming music service. It's a peculiar rather than an audacious expansion.

The headphones are an inelegant piece of mediocre or commonplace engineering — a middle-market consumer electronics accessory. This is rather the antithesis of the kind of products that have defined Apple. Indeed, headphones are a product that, were they judged worthy of Apple, the company might have reimagined and transformed (audio Google Glass? Some next step in wearable computing or neural communication?). Or, probably not. In the oversaturated world of ever-commodified consumer electronics devices, headphones would have been an SKU the old Apple would have gladly overlooked.

Then there's streaming music. Instead of buying the leading player in the streaming game, Spotify, or one of the growing contenders, it bought the laggard. The bottom of the heap. Spotify has 10 million customers. Beats has little more than 100,000 (it says it has 250,000, but that number has been widely challenged). What's more, the streaming music business is much less the music business than it is the technology business — not a business of taste and relationships, but of functionality.

In Beats, Apple has acquired a platform that has tried to substitute taste — now called curation — for what it lacks in technology development. (Curiously, Beats' chief creative officer, Trent Reznor, the singer-songwriter and producer of Nine Inch Nails fame responsible for Beats' tastemaking, has reportedly left the company. Also, one of Beats' principal technology executives, Fredric Vinna, has recently gone to Spotify, and its co-founder, Ola Sars, to a Spotify-backed venture.)

Still. If Apple foresees a future in which its key market attribute (i.e., its cool) will diminish or be lost, then it makes sense to leverage its clout into new areas — even if this involves turning yourself into a less iconic and less cool company. Clout is transferable in a way that cool is not.

Indeed, almost all of Beats' growth in its music service has come from its promotion in the Apple App store. This seems now, obviously, to have been a smart marketing move by Iovine, because it led to Beats' purchase by Apple. It is, however, a suicidal move by anyone trying to build an actual streaming music business.

The business is a simple one. Seventy percent of the money goes to the record labels holding the overriding music licenses; 30 percent goes to the streaming company, out of which it covers all its costs. The Apple App store is also a simple business, and quite a draconian one: Apple gets 30 percent of the subscription fees generated by sales in the App store. In other words, Beats has built its business by incurring serious losses. That's why other streaming services, most notably Spotify, eschew Apple — they can't afford it.

Of course, the math improves if Apple owns the steaming service. Apple might charge everyone else 30 percent on its App site, but cut a special deal for itself. Or, maintaining appearances, it might continue to charge its house service 30 percent, but underwrite its losses. That is a powerful, and peculiarly legal, advantage — at least in the U.S. On the other hand, it promises a monster anti-competitive battle in Europe, where such self-dealing isn't legal.

Of note, there is, in every label deal, a change of control provision. The labels have the right to exit from or renegotiate deals with Beats after the Apple acquisition — a payback moment, perhaps, for the pitiless deals Apple has cut with the labels for the iTunes store

And then there is Iovine. In some sense, he may be the music industry's ultimate revenge on Apple. Quite possibly, Apple believes he represents that ineffable pixie dust of "relationships" which, for so long, the music business traded in and prospered from. He will, Apple seems to believe, be able to help hold the line on change of control negotiations. And he will be able to give Apple the music bona fides that Spotify has acquired. Iovine — as far from the Apple ethos and ethic and sense of itself as two different points of culture can be — will make it cool again. (Even though Apple has contributed to making Iovine and the excesses and baloney of the music business quite uncool.)

Iovine, Apple must inexplicably believe, is a team player. Easy prediction: He's gone in 12 months.

So what is Apple doing?

It might be forgiven for not knowing. Apple has distinguished itself largely thanks to the leadership of a man who is dead. Its products, once unique, now exist in an overheated market. The specter of anti-competitive regulation is everywhere. Music, a business it thought it was going to own, has gone somewhere else.

In such a state of uncertainty and worry, and with billions in the bank, it's pretty normal to get snookered by someone like Jimmy Iovine.