Beats Electronics

Beats Electronics LLC
Formerly
Beats by Dr. Dre
Subsidiary
Industry
Founded2006; 13 years ago (2006)
FoundersDr. Dre
Jimmy Iovine
Headquarters
Area served
Worldwide
Key people
Luke Wood (President)
Matthew Costello (COO)[1]
will.i.am (partner)[2]
Noel Lee (Investor)[3]
Products
RevenueUS$1.5 billion (2013)[4]
Number of employees
700 (As of 2014)
Parentwww.beatsbydre.com

Beats Electronics LLC (also known as Beats by Dr. Dre, or simply Beats by Dre) is a subsidiary of Apple Inc. that produces audio products. Headquartered in Culver City, California,[5][third-party source needed] the company was founded by music producer and rapper Dr. Dre and Interscope Records co-founder[6][full citation needed] Jimmy Iovine.

The subsidiary's product line is primarily focused on headphones and speakers. The company's original product line was manufactured in partnership with the AV equipment company Monster Cable Products. Following the end of its contract with the company, Beats took further development of its products in-house. In 2014, the company expanded into the online music market with the launch of its subscription-based streaming service, Beats Music.

In 2011, NPD Group reported that Beats' market share was 64% in the U.S. for headphones priced higher than US$100, and the brand was valued at US$1 billion in September 2013.[7][8]

For a period, the company was majority-owned by Taiwanese smartphone maker HTC. The company reduced its stake to 25% in 2012, and sold its remaining stake back to the company in 2013. Concurrently, Carlyle Group replaced HTC as a minority shareholder, alongside Dr. Dre and Iovine in late 2013. On August 1, 2014, Apple Inc. acquired Beats for US$3 billion in a cash and stock deal, the largest acquisition in Apple's history.

History

Formation

Dr. Dre (seen in 2012), company co-founder
Jimmy Iovine and David Guetta

The company was formally established in 2006,[9] a time when Iovine perceived two key problems in the music industry: the impact of piracy on music sales and the substandard audio quality provided by Apple's plastic earbuds. Iovine later recalled that Dre said to him: "Man, it's one thing that people steal my music. It's another thing to destroy the feeling of what I've worked on." Iovine sought the opinions of musicians with "great taste", such as M.I.A., Pharrell Williams, will.i.am, and Gwen Stefani during the early developmental stage.[10] Beats initially partnered with Monster Cable, an audio and video component manufacturer based in Brisbane, California, to manufacture and develop the first Beats-branded products, and debuted its first product, Beats by Dr. Dre Studio headphones, on July 25, 2008.

To promote its products, Beats primarily relied on endorsements by pop and hip-hop music performers, including product placement within music videos, and partnering with musicians and other celebrities to develop co-branded products.[10][11][12][13] Beats' use of endorsements by musicians helped the company aggressively target the young adult demographics.[14]

HTC purchase and non-renewal of Monster contract

In August 2010, mobile phone manufacturer HTC acquired a 50.1% majority share in Beats for US$309 million. The purchase was intended to allow HTC to compete with other cellphone makers by associating themselves with the Beats brand,[15] as the purchase also granted HTC exclusive rights to manufacture smartphones with Beats-branded audio systems.[16] Despite its majority acquisition, HTC allowed Beats to operate as an autonomous company.[16] Luke Wood, President of Beats in May 2014, joined the company in January 2010, when the company was a "licensing business". Wood had previously worked under Iovine at Interscope Records.[1]

On January 19, 2012, BusinessWeek reported that Beats and Monster would not renew their production contract and their partnership ceased at the end of 2012. Dre and Iovine subsequently decided to oversee the entire operation of the company, from manufacturing to R&D,[1] and aimed to double its workforce to around 300 employees. Monster would ultimately begin marketing its own competing line of premium headphones aimed towards an older demographic.[11] At the time, neither Dre, Iovine or Wood were experienced in the operation of a company at such a grand level, but Nani Wood explained in 2014:

I didn't have manufacturing experience, but I had experience of building something from scratch … Every time we put out an album, it was basically like building a new business--a unique cast of characters, unique challenges and opportunities, and trying to figure out a unique path to market.[1]

In October 2012, Beats unveiled its first two self-developed products, "Beats Executive" headphones and "Beats Pill" wireless speakers—Iovine believed that the company would now have to "control [its] own destiny" in order to continue its growth. Iovine also commented on how other headphone makers had attempted to emulate Beats' celebrity endorsement business model (including Monster themselves, who unveiled Earth, Wind and Fire and Miles Davis-themed headphones at the 2012 Consumer Electronics Show),[11] stating that "some of our competitors are cheap engineers who have never been to a recording studio. You can't just stick someone's name on a headphone that doesn't know anything about sound."[11][17][18] Following the decision to transform Beats into an autonomous entity, the company's revenues reached the US$1-billion mark, according to Iovine.[1]

HTC sale and Beats Music

In July 2012, HTC sold back half of its stake in Beats for US$150 million, remaining the largest shareholder with 25.1 percent.[19] The sale was intended to provide "flexibility for global expansion while maintaining HTC’s major stake and commercial exclusivity in mobile."[15] In August 2013, reports surfaced that Beats' founders planned to buy back HTC's remaining minority stake in the company, and pursue a new, unspecified partner for a future investment.[20][21]

On September 27, 2013, HTC confirmed that it would sell its remaining 24.84% stake in Beats back to the company for US$265 million. Concurrently, Beats announced that the Carlyle Group would make a US$500 million minority investment in the company.[22][23] The overall deal valued Beats Electronics at US$1 billion[7] and helped HTC turn a net profit of US$10.3 million for the fourth quarter of 2013, following HTC's first quarterly loss in company history.[24]

The appointment of a new chief operating officer (COO), a role previously filled by Wood,[1] was announced in early November 2013. Matthew Costello, formerly of IKEA and HTC, was formally appointed into the role in May 2014.[25][26]

On January 21, 2014, the company launched Beats Music, a subscription-based online music streaming service.[27] Prior to the launch of the service, Beats stated that it intends to provide a different type of streaming experience to what was available on the market at the time. Additionally, the service would only be available to consumers in the U.S. at inception.[28] Chief executive of Beats at the time, Ian Rogers, said:

We wanted to build a music service that combined the freedom of an on-demand subscription service—unlimited, uninterrupted streaming and downloads of tens of millions of songs – but layer on top features that would give you that feeling only music that moves you can give. The right song at the right time will give you a chill. Make you pull someone close. Nod your head. Sing in the mirror. Roll down the car window and crank the volume to the right.[28]

Product of Apple (2014–present)

On May 8, 2014, the Financial Times reported that Apple was in negotiations with Beats to purchase the company for US$3.2 billion—the largest purchase in Apple's history, ahead of its US$429 million purchase of NeXT in 1996.[29] The impending deal was prematurely and indirectly revealed in a photo and YouTube video posted to Facebook by Tyrese Gibson on May 8, 2014; the video documented a celebration in which Gibson and Dr. Dre made boasting remarks about the acquisition, with Dre declaring himself the "first billionaire in hip hop", while Gibson declared that the "Forbes list" had changed. Both the photo and video were removed from Facebook the following morning, but both remain on Gibson's YouTube channel.[1][30] Indeed, analysts estimated that the rumored deal would make Dr. Dre the first billionaire in the hip-hop music industry in terms of net worth, assuming that he held at least 15% ownership in the company prior to the deal. Dr. Dre was listed with a net worth of US$550 million on Forbes' The World's Billionaires 2014 list. It was also estimated that the Carlyle Group would receive a profit of US$1 billion from its minority stake in the company.[22][31][32]

On May 28, 2014, Apple officially announced its intention to acquire Beats Electronics for US$3 billion—with $400 million to be paid in Apple stock and the remainder in cash. Some reports suggested that the reduction in value may have been a result of lower-than-expected subscriber numbers for the Beats Music service.[1] Iovine felt that Beats had always "belonged" with Apple, as the company modeled itself after Apple's "unmatched ability to marry culture and technology." In regard to the deal, Apple CEO Tim Cook stated that "Music is such an important part of all of our lives and holds a special place within our hearts at Apple. That’s why we have kept investing in music and are bringing together these extraordinary teams so we can continue to create the most innovative music products and services in the world." Beyond stocking Beats products at its retail outlets, Apple did not provide any further indications over how Beats would be integrated into its product line at the time, and whether Beats Music, which competed with Apple's own iTunes Radio service, would continue to operate after the finalization of the acquisition.[33][34][35]

The acquisition closed on August 1, 2014; to eliminate redundancy, Apple planned to lay off 200 workers from Beats' workforce of around 700.[36][37] Beats Music was discontinued effective immediately with the launch of Apple Music on June 30, 2015.[38][39]

Bose lawsuit

In July 2014, Bose Corporation sued Beats Electronics, alleging that its "Studio" line incorporated noise cancellation technology that infringed five patents held by the company. Bose has also sought an injunction which would ban the infringing products from being imported or sold in the United States.[40][41] The lawsuit was settled out of court. Apple pulled all Bose products from its retail outlets, although it is unclear whether it was in response to the lawsuit, an ambush marketing conflict involving Beats and the NFL (which had recently named Bose as one of its official sponsors, and thus fined a player for displaying the Beats logo during an official activity), or as a result of Apple's acquisition of Beats.[42] However, two months later, Bose products returned to the shelves of Apple Stores. The companies settled in October 2014: details were not disclosed.[43]

Monster lawsuit

In January 2015, Monster Inc. sued Beats for fraud, alleging that the company had used illicit tactics to force Monster out of the venture whilst retaining rights to the technologies and products that it had co-developed, and engaged in collusion to harm Monster's own audio products business. Monster argued that the acquisition of Beats by HTC and its founders' subsequent buyback was a "sham" to take control of Monster's stake in the company—which could have been valued at over $100 million in the Apple purchase, that the company had "concealed" the role of Monster and its CEO Noel Lee in the design and engineering of its products, and that "had the partnership expired on its own terms, there would have been no transfer of Monster's years of work [onto the company]." Monster also alleged that Beats had partaken in anti-competitive practices with retailers to force those offering Beats products to not offer Monster's competing products.[44][45][46]

In June 2015, the Wall Street Journal reported that in retaliation for the lawsuit, Apple Inc. revoked Monster's membership in the MFi Program on May 5, 2015, meaning that Monster can no longer manufacture licensed accessories for iPhone, iPod and iPad products, and must cease the sale of existing licensed products that contain the certification or technology licensed through the program by September 2015.[47]

The case was dismissed in August 2016, with a Supreme Court ruling that Beats "had the right to terminate the agreement as of January 7th, 2013 or when there was a transaction resulting in a change of control of Beats", and that Monster "did not obtain the right to approve the change of control. Nor did the agreement require that any change of control had to be objectively reasonable".[48]

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