Dr Dre wears a pair of Beats headphones

*Apple has officially announced that it has purchased Dr. Dre’s Beats Electronics for $3 billion.

With iTunes sales slowing, the move gives Apple something it desperately needs to compete in today’s digital music world – a subscription music service.

While Apple’s App Store revenue is increasing, Morgan Stanley analyst Katy Huberty notes that iTunes revenue is falling as users turn to streaming services such as Pandora and Spotify to meet their music needs.

Spotify, which is generally viewed as the leader in streaming music, has 10 million paying subscribers or about 25% of its over 40 million active user base. If Apple charges $10 per month, same as Spotify, every 1% penetration of Apple’s 800 million user base, equates to $960 million revenue annually, adding 8 pts of growth to online services and half a point to total company growth.

apple beats

In addition to bringing a streaming music service under the iTunes umbrella, the deal also brings veteran music producer Jimmy Iovine and producer Dr. Dre to Apple. The pair are considered to be the “big prizes” of the acquisition and could help Apple negotiate favorable music deals.

As previously reported, Dre spilled the beans earlier this month when he appeared in a YouTube video touting himself as rap’s first billionaire due to the deal.