Beats By Dre: The Secrets Behind a Headphone Empire
Beats By Dre: The Secrets Behind a Headphone Empire

Other manufacturers have since rushed to match the strategy. Skullcandy in June released its Aviator line of high-end over-the-ear headphones developed in partnership with Jay-Z's Roc Nation. Iconic producer Quincy Jones in September teamed with AKG to develop a line of in-ear and over-the-ear headphones ranging from $100 to $500.

But both Monster's Lee and Iovine continue to stress Beats' audio prowess.

"You have to have a stunning product," Iovine says. "Because when you hand it to a LeBron James, they have to go, 'Wow.' If they don't go 'wow,' they take it and put it in a drawer."

"We're not sure that you can just slap a name on a product, which our competitors are doing," Lee adds. "It's not just about Dre. The name association is good for really hardcore fans of that artist, but it has to go beyond that. If you're just going to rest on that person's music, you're only as good as the last album that person did. It may not last, so we as the manufacturer have to be cautious."

LET'S DO AMAZING

So, do Beats by Dre really sound as good as they look? Reviews by and large have been positive, if not glowing.

"It's not like they're miraculous, but they're not pieces of junk that they're passing off as nice headphones," Butterworth says. "It is a quality product. Maybe a little bass-heavy for me. But bass sells."

Dre and Iovine had total control over the way Beats sound. They developed what Iovine calls the "Beats curve," a sound profile that serves as the baseline for all Beats products, and essentially tunes the headphones much like a studio would be tuned before work begins on a record. Dre used 50 Cent's "In Da Club" as his sounding board, while Iovine stuck with the Tom Petty & the Heartbreakers album "Damn the Torpedoes," which he produced more than 30 years ago.

Lee says Monster created 70-80 iterations of the initial product, of which about a dozen made it to Dre and Iovine for feedback, until the final version was complete.

And the Beats effort doesn't stop at headphones. Last year, Beats struck a deal with computer manufacturer HP to tune its new line of premium computers with the same Beats sound, which is now included in all HP Envy, TouchSmart and DV7 units shipped worldwide. In October, Beats also expanded into the market for iPod docking stations with the Beats Beatbox. Iovine says he'd like Beats to start working with the mobile phone industry as well.

It's a smart strategy, because the headphones market is starting to flatten. According to data from the Consumer Electronics Assn., the market for headphones spiked from 59 million units sold and $490 million in revenue at the end of 2008-the year Beats by Dre launched-to 68.7 million units sold and revenue of $648 million the following year. For 2010, the CEA expects a slight increase to 70.8 million units sold with $670 million in revenue, forecast to grow incrementally next year to 73.6 million units sold and $681 million in revenue.

The good news for Beats, says Chris Koller, VP/merchant lead for Best Buy's portable electronics solutions group, is that the growth is coming from the more expensive, better-sounding devices.

"As people are able to hear what their music can sound like," he says, "that's what's driving the market."

More recently, Iovine has come full circle in his pursuit to elevate audio performance. He's begun working internally within the music industry to improve the quality of files that labels send to digital retailers. Labels today largely provide 16-bit files to such stores as iTunes, while the music is recorded in 24-bit files. Iovine is the champion of this effort within Universal Music Group, and he's recruited Columbia Records co-president Rick Rubin to do the same at Sony.

Iovine insists that what he and Dre are doing with Beats is far more than a side business designed to make an extra buck at a time when music sales are down. While Iovine stops short of making this connection himself, improving how music sounds just may be the missing element needed to convince young fans that music is worth paying for again.

"We're not an artist branding company and we're not just in the headphones business. We're in the music transmission business," Iovine says. "I just want people to enjoy it more. Whether they buy it . . . or borrow it."