“Fuck sneakers. Let’s sell speakers.”
This infamous remark sparked the epiphany behind building Beats Electronics. Music mogul Jimmy Iovine simply took a stroll down a California beach one day and serendipitously bumped into Dr. Dre several years ago. Dr. Dre discussed with Iovine that his lawyer stressed to him to consider giving his likeness for a branded franchise of Adidas sneakers. That’s what prompted Iovine to say those words next–forget about the long history of failed rapper and footwear partnerships and the illogical idea to position Dr. Dre, himself, a producer, as a fashionista.
A year prior to this ominous event, though, will.i.am first planted the seeds to such a concept to Iovine. They went back and forth on how in shambles the music industry was–still is–and why hardware, will.i.am insisted, would be an essential pivot point to make. Iovine couldn’t completely come to grips with this potential reality then, albeit certainly plausible.
“Will, you know why they call it hardware? It’s hard,” Iovine rebuffed him.
Back in 2005, the signs of a shift taking place were subtly evident across the music landscape.
Even though Apple’s iTunes Music Store held 60 percent market share of legal digital music sales, there was still close to a billion illegal music files readily accessible for users to download over peer-to-peer networks, regardless of broadband surge, per Arts Technica. The 420 million single tracks downloaded globally then would soon collide forces with the rise of subscription platforms, including Napster’s foothold of nearly three million. Disruption penetrated faster than the labels, artists, or Apple, itself, could appropriately respond to.
Meanwhile, headphones represented a ripe opportunity to capitalize on.
Based off the lack of quality–or perception as such, rather–among Apple’s earbuds, the initial societal status symbol would fade away. This consumer emotion reflected the iPods and iPhones connected to them, not the accessory on its own. Headphones prices and total sales escalated. The average cost at $21.30 and an overall 67 percent increase to $322 million in stereo headphones sales set records, per Ad Age. There instantly became a market for the $100-plus, noise-canceling segment that Apple couldn’t match the requisite cost to manufacture them–let alone tinker and drive up the price points of their own products.
The timing couldn’t have aligned any better. Beats launched three years afterwards. They realized that headphones have been commoditized. The invariable design likened to medical equipment had depreciated the value, while compressed digital files altered the quality of the recordings. There wasn’t anything out there that matched and complimented Apple’s music players, be it aesthetically or disposition.
To compound this further, the very marketing dedicated to headphones paled in comparison to other consumer products through time, especially electronics. Manufacturers typically focused on the technical features they possessed, such as frequency response or optimum impedance. This messaging just spoke to the niche, audiophiles connoisseurs. The approach, in it by itself, couldn’t commercialize headphones to reach mainstream adoption. They failed to tap into larger, present-day trends that would create any kind of lasting halo effect among users.
“What Beats did was dramatically expand the market and make the price premium acceptable, as much as for the design and the brand as for the audio quality,” NDP Group’s Executive Director of Industry Analysis, Ross Rubin, told The New York Times.
Central to the strong brand identification fan-boys have with Beats were sports. They mastered selling the principles of hardware similar to Apple. The cross-cultural connection needed to elevate themselves transpired through a gamut of strategic sports activations. In turn, sports served as an ideal vehicle to promote headphones in a way that’s never been done previously. This synergy spearheaded significant mass appeal and legitimized its cool factor.
The most instrumental, first step into conveying these headphones to the public at large was to enlist LeBron James as an early adopter and influencer. Iovine gave a prototype pair to his manager, Maverick Carter, who then relayed them to James. Carter came back to Iovine and demanded 15 of them–despite not being out in the market yet. The intention was to gift every member of the 2008 Olympic “Redeem Team” while they were out in China that summer.
“Now that’s marketing,” Iovine told Inc. with regards to this instance.
According to Carter, he informed James to pass the Beats to his teammates when they boarded their flight. He later gave a brief speech to shed on light on the path they’re taking and how these headphones distill the genuine “commitment to put team goals ahead of individual ones.” The entire group wore this product as they exited the plane to the awaiting Chinese press and fans. Little did any of these players know that their visibility and image with these headphones worn throughout the Games would jumpstart its popularity. None of them even bothered to consult with their respective business partners to determine personal fiscal benefits.
The magnitude of this brilliant product placement was invaluable. It was as if Beats were donned by the original Dream Team, except taken place in Asia during the startup stages of social networks and second-screen ploys. These Olympics drew the largest global TV audience at the time, with 4.7 billion viewers or 70 percent of Earth’s population, per Nielsen. Domestically, it topped as the most-watched TV programming of all-time, which garnered 211 million people and a daily average of 27 million. More granular, though, the gold medal game produced an average viewership of 6 million, per Forbes.
Subsequently, this level of exposure led to sales.
They virtually single-handedly propelled the premium headphones segment to two percent of the entire market within a year, to then almost double in a two-year span, per NDP Group. Consumers revealed that close to 30 percent of them purchase Beats based on the endorser involved. The brand and sound quality have also accounted for as factors. James and Team USA Basketball influenced these points of consideration insofar as making it acceptable and fashionable to buy at the given price point, which continues to drive Beats’ sustainability for high margins.
Conversely, user consumption trends became more pronounced within the music industry.
The reliance on digital subscription services grew in importance. Pandora, for instance, doubled their customer base to obtain 18 percent of total online users, per NDP Group. They crafted their own following as a top online radio station while traditional outlets lagged behind. Pandora complimented the parallel rise of nearly half of American teeenagers using social media to access music. Despite iTunes eclipsing Wal-Mart as the top ranked music retailer in the country, less than 60 percent of online users bought digital music downloads, close to a ten percent decline versus the previous year. Apple’s reign in the marketplace would bound to falter for not staying ahead of the curve and providing Beats the avenue to own headphones among its own users during the process.
“They’re making a beautiful white object with all the music in the world in it… I’m going to make a beautiful black object that will play it back,” said Iovine in reference to the two companies.
Beats would similarly playback their own Olympic efforts in 2012.
Rather a uniformly complicit, organic undertaking, though, the ambush marketing tactic drew the ire of the International Olympic Committee. They handed out branded British headphones to athletes like Laura Robson and Tom Daley to wear to their respective events as well as tweet out. This accordance came in light of the Americans’ protest of rule 40 of the IOC code of conduct, with regards to personal endorsements that don’t align with the Games’ stakeholders. Yet, the legalities involved with Nike’s case perhaps indirectly benefited Beats to follow-through with their plan, too. Only Panasonic, as an official consumer electronics sponsor, had arguably the most to lose through their recent $200 million extension and $70 million spent that summer.
With the attention garnered after these Olympics–in spite being blatant and intrusive to some–Beats leveraged this platform to push its product to another stratosphere. Anywhere between 15 to 20 million units have been sold by this time, while dominating the premium headphone segment to control upwards of 60 percent market share, per Fast Company. Their strategy paved the way to reach $1.5 billion in revenues by the following year. The London Games expedited nearly quadruple the income to come in, with a comprised $350 million the year prior. This punctuated the momentum they were building through their MOG acquisition, which would later be presented as Beats Music to enter the online streaming space and hopes to interconnect proprietary software to its hardware.
Moreover, the dynamics in the music industry would finally take its toll and trickle down to Apple.
The decade-long supremacy of iTunes would catch up and negatively impact them. They contributed towards the almost $5 billion music sales loss during this span, per CNN Money. The iPod or iPhone synchronization with iTunes virtually monopolized users to a unilateral approach. Apple’s dominance deterred them from establishing a streaming-equivalent property for far too long. A lot of players emerged by the time they decided to join, including Beats. They haven’t successfully converged the big data angle they once had, which, ironically, has been Beats’ strategy to conquer amongst their brand aficionados.
Fast-forward to earlier this year, and Beats’ Richard Sherman ad entitled “Hear What You Want” encapsulates everything about the brand:
Nobody could have predicted the timeliness of the campaign. It was aired hours before Sherman went off on his epic, postgame rant. The ensuing press conference reverberated a mirror image of the commercial that allowed it to take off virally; now there’s well over 2 million views on their channel. This perfect storm carried through for the next two weeks prior to the Super Bowl. The fact that the Seattle Seahawks and Sherman were victorious just served as an added bonus to it all. Beats, once again, marched to their own beat–pun intended–and marketed their headphones on the shoulders of sports giants.
Poignantly, Apple’s Steve Jobs personally told Iovine before he passed away: “You know, you’re one of the few people–if not the only person–who came out of software and made a piece of hardware successfully.”
Not only did Iovine transition between the two rather seamlessly, but tapped into the sports synergy unlike headphone manufacturer predecessors–to a tune of a $3 billion acqui-hire.
Today’s Apple Worldwide Developers Conference should simply confirm Jobs’ aforementioned omen–it may not be just updated ecosystem news.
Detox is dead. This is Dr. Dre’s next episode.