Apple buys Beats: It's paying less than $500 million for the streaming service

Apple’s Beats acquisition is one of the biggest in the company’s history and besides the hardware business, Apple also gets Beats Music, the up-and-coming music streaming service. It’s a cross-platform service, so Apple now has apps on Android and Windows Phone for the first time. Beats Music is the key for Apple as it looks to augment its music portfolio.

But it hasn’t had to spend too much. Apple is paying a little less than $500 million for the Beats Music streaming service, according to a Wall Street Journal report.

The report quotes people familiar with matter. It also quotes a “person familiar with Beats said its 2013 sales totaled close to $1.3 billion—all from the electronics unit that sells headphones and other audio gear—and the company was profitable.”

The music-streaming service was launched in January this year and has close to 250,000 paid users, adds the report. The difference in price for the two Beat units is because they are backed by different investors, says the report. Apple paid a total of $3 billion for the company which was founded by Jimmy Iovine and Dr Dre.

Beats Music charges users up to $10 a month but as an AP report pointed out streaming services end up paying as much as 70 percent of their revenue in artist royalty fees which leaves little left for advertising and promotional campaigns to explain to consumers the benefits of paying for a music service.

The report quotes Mark Mulligan, a music industry analyst and blogger with MIDiA Consulting, as saying, “The only people that can afford to get into this business have other main businesses. Every service ends up putting itself into significant debt just to cover its basic operating costs.”

According to analysts Apple’s purchase is largely an acquisition of talent and a way to offset the declining popularity of iTunes for digital music, the company notes its main source of revenue has always been from devices. Music is just a hook to make those devices more usable and attractive.

And if Apple does hope to offset the decline in iTunes music sales, the $500 million for Beats seems to be a very good deal indeed.