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Beats Electronics Is Breaking Up with Monster

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The popular headphone line parts ways with its manufacturing
partner

By Cliff Edwards
     Jan. 12 (Bloomberg BusinessWeek) -- In a Las Vegas hotel a
few days before the start of the Consumer Electronics Show on
Jan. 10, Interscope Geffen A&M Chairman Jimmy Iovine takes out an
iPad and swipes through photos of celebrities wearing headphones
from Beats Electronics, the company he co-owns with rapper Dr.
Dre. There’s Nicole Kidman, the late Steve Jobs listening to his
iPod, and Kobe Bryant sporting a pair in L.A. Lakers purple.
Before Beats, “Guys were making headphones that looked like
medical equipment,” says Iovine.
     Nowhere to be found among the photos is Noel Lee, the chief
executive of Monster Cable Products, which has manufactured the
headphones under exclusive license since their debut in 2009. The
partnership between Beats and Monster, an electronics company
best known for expensive stereo cables, has been an unmitigated
success. Its products captured 53 percent of the $1 billion
annual headphone market last year, according to researcher NPD
Group. Now the partnership is coming to an end. Beats has opted
not to renew its five-year contract with Monster when it ends
late this year.
     Though both companies publicly say the separation is
amicable, the relationship turned sour over financial terms, with
divergent views on which side deserves the most credit for the
line’s success and Beats balking at its share of the revenue,
according to two people who asked not to be identified because
the talks were private. While Monster manufactures and helped
design the headphones, and even takes credit for the idea (“They
wanted to do speakers and I said, ‘The new speaker is the
headphone,’ ” says Lee), Iovine and Dr. Dre are the partnership’s
frontmen. The pair marshaled their celebrity friends to
successfully position Beats headphones as something more than
run-of-the-mill audio gear. “Now a big part of what you’re paying
for is the brand and fashion,” says Ben Arnold, director of
industry analysis for NPD.
     At CES, Lee was busy preparing his company for a Beats-free
future. Audio gear sales, most of which came from the Beats
partnership, last year accounted for nearly 60 percent of
privately held Monster’s revenues and profit, says Lee, who gets
around conferences like CES on a Segway scooter that’s
gold-plated, just like some of the company’s pricey HDMI cables.
After the split, Beats will retain the rights to the
bass-thumping sound technology, the prominent circular design,
and the brand. So last year Lee asked nearly half his 650
employees to come up with Monster-branded headphones. “We’re
competing with ourselves,” Lee says of the Beats products he’s
trying to outdo. “We can be the Apple of the headphones space,
with or without Beats.”
     With Beats already dominant among hip twentysomethings, Lee
is targeting athletes, women, business professionals, and others
who haven’t yet been persuaded to spend hundreds of dollars on
headphones. He showed off the company’s offerings, which became
available for preorder to distributors on Jan. 9. One $200 pair
of in-ear headphones bears the name of the ’70s soul act Earth,
Wind & Fire. A Miles Davis line has earbuds shaped like trumpets
and a volume controller that looks like piston valves. In all,
there are eight new lines in 50 different styles. “We hope people
will recognize what we’ve done in terms of sound with the Beats
products,” Lee says.
     Meanwhile, Beats is moving on. The company’s sound
technology is already in many computers made by Hewlett-Packard,
the Chrysler 300 S sedan, and smartphones created by HTC, which
took a 51 percent stake in Beats last year for $300 million.
Beats also wants to expand into TVs and specialized audio gear
for athletes. “We have very big ambitions for Beats beyond
headphones,” says Iovine. “Music has got to succeed on the phone
or else the record industry will never thrive.” He’s not
particularly worried about the competition from other high-end
headphone makers, such as Philips Electronics and Bose, or his
former partner. “You never get anywhere if you’re always looking
left and right,” he says. “They’re doing their thing, and we’re
doing ours.”

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