It was 20 years ago today (plus about 25 years) that the Beatles recorded one of the most acclaimed albums in music history, Sgt. Pepper’s Lonely Hearts Club Band, and they did it on Harman recording gear. As a reminder of that heritage, Harman International Industries (HAR) Chief Executive Officer Dinesh Paliwal keeps the Studer tape deck used on Sgt. Pepper’s in his office. Despite having manufactured much of the studio equipment and touring gear used from Abbey Road to Kanye West, Harman is in the midst of an identity crisis. Today’s buyers of consumer electronics gear are increasingly drawn to products from Apple (AAPL) or celebrity-endorsed brands such as Beats Electronics, which in three years has won half the U.S. market for high-end ($100-plus) headphones.
Although Paliwal denies that he’s responding to Beats’ rapid advance, he’s boosting Harman’s marketing budget 50 percent to an estimated $50 million this year to challenge Beats at its own star-driven game. He’s recruited Paul McCartney to pitch JBL, a Harman brand of studio and concert gear he’s used since his Fab Four days. The ad, which aired during the Grammy Awards telecast, is the first time the former Beatle has endorsed a product.
Other ads focused on headphones, iPod docks, and stereo systems will feature Jennifer Lopez, Maroon 5, and Tim McGraw in the U.S., as well as Mandopop singer Liu Huan in China and Indian composer A.R. Rahman, who wrote the score for the film Slumdog Millionaire. In 2010, Harman launched a line of AKG studio headphones designed by producer Quincy Jones, and another from country star McGraw will be available this summer. Rapper Kanye West also is helping develop a line, Paliwal says. “These artists have passion about what they use,” he says. “They are the best ambassadors for the marketplace. Why shouldn’t we be taking advantage of the great visionaries out there?”
Celebrity branding has worked well for Beats, whose pricey Beats by Dr. Dre headphones—endorsed by the hip-hop super producer and co-owner of the brand—have helped transform headphones from functional accessories to symbols of urban cool. Beats also markets the Justin Bieber and Lady Gaga audio lines. High-end headphones are a $600 million market, one that has doubled in size each of the past two years, according to researcher NPD Group. Beats, started in 2008 by Dre and Jimmy Iovine, chairman of the Interscope Geffen A&M record label, has a 55 percent share. No Harman brand is in the top five.
Harman’s more credentialed audio brands—besides JBL, it makes AKG headphones and microphones, Harman Kardon stereo gear, Infinity speakers, Studer mixing consoles, and Crown Audio amps—are well-known with music professionals but less so with consumers, says Ben Arnold, NPD’s director of industry analysis. “There’s a trendy aspect to this stuff,” he says. “A brand has to have a certain amount of visibility with consumers.”
That could be more crucial for Harman now that Beats is expanding. A recent partnership with Chrysler Group lets buyers add Beats speakers to the automaker’s 300S sedan. Beats also has begun supplying its branded speakers, amps, and headphone jacks for Hewlett-Packard (HPQ) computers and HTC smartphones. (Taiwan-based HTC last year acquired a 51 percent stake in Beats for $300 million.) That puts the upstart further onto the turf of Harman, which supplies stereo and infotainment systems for Porsche, Daimler’s (DAI:GR) Mercedes-Benz, and BMW (BMW:GR). Its gear is in 25 million cars, including 80 percent of luxury vehicles.
Paliwal says Harman’s long history of producing audio systems—used everywhere from Applebee’s (DIN) restaurants to Radio City Music Hall to the Sydney Opera House—gives it a leg up against Beats, whose headphones are manufactured by Monster Cable Products. “Dr. Dre had a great vision but who makes it? Monster Cable,” Paliwal sniffs. “They’re a damn good cable company, but they don’t know much about digital sound processing. We have a 60-year heritage of sound and acoustics. Putting that together with the star power, that’s a game changer.”