EU Commission’s Approval Is a Good Sign for the Apple-Beats Deal

Andrew Burton/Getty Images

Andrew Burton/Getty Images

Apple’s (NASDAQ:AAPL) pending purchase of Beats Electronics has overcome its first regulatory hurdle after being approved by the European Commission. The EU Commission was tasked with examining the Apple-Beats deal to ensure that the merger wouldn’t lead to negative anticompetitive effects in the European Economic Area (EEA). While Apple announced that it was purchasing Beats Electronics and the Beats Music streaming service for a combined $3 billion in May of this year, the deal is not expected to be finalized until later this quarter.

Although Apple and Beats both sell headphones and provide music-streaming services, the EU Commission concluded that the relatively small size of the companies’ two overlapping businesses and the existence of several other large competitors meant that the deal wouldn’t create a monopoly in the European market. Besides citing the two companies’ minor share in the EEA’s overall headphones market, the EU Commission also noted that, “Apple and Beats Electronics are not close competitors because the headphones they sell differ markedly in functionality and design. Moreover, even after the transaction, a large number of global competitors such as Bose, Sennheiser, and Sony (NYSE:SNE) would remain.”

The EU Commission also looked at both companies’ digital music services, even though Beats Music is currently not available in any other country besides the U.S. “Apple offers a music downloading service through iTunes and Beats Music offers a music streaming service, although it is currently not available in the EEA,” noted the EU Commission. “The Commission concluded that Apple faces several competitors in the EEA such as Spotify and Deezer, making it implausible that the acquisition of a smaller streaming service that is not active in the EEA would lead to anticompetitive effects. The Commission also concluded that the transaction would not give Apple the ability and incentive to shut out competing streaming services from access to iOS, Apple’s operating system for mobile devices.”

Although the EU Commission did not mention iTunes Radio by name, it is unlikely that the regulators would have found any reason to oppose the acquisition based on Apple’s native music streaming service. Beats Music is a paid subscription music streaming service, while Apple’s iTunes Radio is a free ad-supported service. It is widely believed that one of the primary reasons that Apple wanted to purchase Beats was to acquire its subscription music streaming service to offset its declining digital download sales in iTunes. According to the Nielsen Entertainment & Billboard’s 2014 Mid-Year Music Industry Report, digital album sales and digital track sales have declined by 11.6 percent and 13 percent, respectively, in the first half of 2014. Meanwhile, the on-demand audio streaming market — which includes services like Beats Music and Spotify — grew by 50.1 percent compared to the same period last year.

The approval of the Apple-Beats deal in Europe also means that the acquisition is more than likely to be approved by regulators in the U.S. At Re/Code’s first annual Code Conference earlier this year, Apple senior vice president of Internet software and services Eddy Cue revealed that the iPhone maker would continue to make the Beats Music app available on the Android operating system. That is an unusual move for Apple, which usually kills the Android versions of apps made by companies that it acquires. Several commentators have speculated that Apple is only keeping the Beats Music app available on Android in order to ease U.S. regulators’ anticompetitive concerns.

While it appears that the Apple’s acquisition of Beats will be completed without a hitch, a recent patent-infringement lawsuit filed by Bose against Beats may put a dent in the company’s premium headphone business. According to a Delaware court filing, Bose alleges that the Studio and Studio Wireless brands Beats headphones are infringing on several of its patents related to a noise cancelling technology.

Follow Nathanael on Twitter (@ArnoldEtan_WSCS)

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