Why would Apple want to buy Beats for $3.2B?

Apple’s biggest problem is the declining global market share of the iPhone relative to Android smartphones. According to Gartner, between 2012 and 2013, Apple’s smartphone market share dropped from 19.1% to 15.6% while Android’s grew from 66.4% to 78.4%.

It could become a death spiral as top-tier app developers shift to developing Android-first instead of iOS-first; while iOS currently has the upper hand in ease-of-development and monied users, it’s hard for developers to ignore a steadily growing Android majority. Without a constant flow of new exclusive apps for iOS, the iPhone loses a critical selling advantage over Android smartphones.

Apple needs to meaningfully shore up its global market share to keep developers excited about developing on iOS first. However, it is unwilling to drastically drop the $549 price of the iPhone 5C closer to no-contract Android levels despite underwhelming sales worldwide. Price it too low and it threatens the premium pricing of the entire iPhone line. Skimp on the hardware and it threatens the Apple brand as a whole.

One way to solve this is to create a separate brand of iOS smartphones to take on the cheap no-contract Android smartphones and the demographic that buys them — similar to how Toyota created the Scion brand.

Apple could create a brand on its own, but it takes years, hundreds of millions in marketing, and there’s substantial risk that the new brand won’t resonate with its intended customers.

This is where Apple buying Beats makes sense.

Beats is an established premium consumer electronics brand. It successfully sells headphones and speakers in the $99-$449 range that are never discounted. The Beats brand is strong in North America, Europe, and Asia Pacific. With its brand DNA tied to music, Beats has a deep emotional pull.

Applying the Beats brand to “unapologetically plastic” iOS smartphones would allow iOS to compete with Android in the no-contract phone arena without devaluing the Apple brand.

(More wild speculation: AT&T bought Cricket (an MVNO) in March and is looking to sell the Muve music subscription service that was bundled with all Cricket plans because they’re “explor[ing] alternative music options to Muve.” Given AT&T’s partnership with Beats, perhaps they’ll rebrand Cricket as a Beats phone service that comes with a Beats 5C phone)