Beats Electronics Is Breaking Up with Monster

The popular headphone line parts ways with its manufacturing partner

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 (AAPL) 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 (HPQ), 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 (PHG) 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.”

The bottom line: Monster is rolling out eight lines of headphones to compete with its former partner, Beats, in the $1 billion market.

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