Six months after Mog was acquired by Beats Electronics, founder and CEO David Hyman's departure marks the beginning of the Beats era of the music-subscription service.
Several sources tell Billboard.biz that Hyman was "never expected to be on for the long haul," as the company gets ready for a relaunch in 2013. His exit was "very amicable," one person added.
After protracted negotiations (during which Hyman publicly denied that the company was for sale), Beats agreed to purchase Mog in July for less than $10 million, a fraction of the recent $3 billion valuation received by its competitor Spotify in its current attempt to raise additional financing.
As a part-owner of Mog, Hyman received a portion of proceeds of the sale. In addition, the sale documents specified that he would remain as a paid "advisor" to the company should he leave his post as Mog's chief executive, according to a person with knowledge of the contract. But the haggling strained relations between Hyman and Beats executives. As a result, Hyman's departure did not surprise people within the company, an executive said.
The Beats era at Mog appears to be off to a good start: One insider says subscriptions are up 33% in the six months since the acquisition, however, exactly how many subscribers Mog had six months ago is unknown. The last public figure Mog gave was 160,000 monthly active users back in November 2011, a number that included both paying subscribers and non-paying listeners. In any case, Mog is known to lag well behind Rhapsody, Spotify and Muve Music in number of paying subscribers in the U.S. and elsewhere.
For now, Beats is spending very little to recruit new customers for Mog -- that's because the company plans to eliminate the Mog brand, and competition will heat up in 2013. Beats is planning to roll out an entirely re-branded service that will be tightly integrated with its high-end audio gear sometime next year, a source who was not authorized to speak on behalf of Beats told Billboard.biz.
The vision, held by Beats founders Jimmy Iovine and Dr. Dre and its president Luke Wood, is to create a seamless experience between the hardware and the service, the source said: "Jimmy is doubling down on streaming as part of the industry's future," something he hinted at during a press conference in New York last month.
Iovine, who is also chairman and CEO of Interscope Geffen A&M, and other senior executives at Beats believe that part of the reason on-demand subscription services haven't been able to turn a profit because they're poorly marketed.
Mog -- or whatever the music service will become -- stands to benefit from Beats' marketing abilities. A name change alone could give it a lift. The Mog name, which lacks the recognition of Pandora or Spotify, will be replaced.
"Beats bought the technology, not the service that David built on top of that technology," said the executive.
Founded in 2006, Beats is known for creating a lucrative high-end niche within the headphone business, which had suffered more than a decade of spiraling prices and margins as listeners flocked to MP3 players with lower-quality audio. By recruiting top hip-hop artists to wear its signature black and red headphones before they even hit store shelves, Beats drove sales among consumers who craved to be part of that scene.
Beats' marketing strategy has paid off. Taiwanese smartphone manufacturer HTC paid $309 million for a 51% stake in Beats in 2011. However, HTC sold back half of that investment in August for $150 million.
Beats could be helped by a partnership with HTC, a rare smartphone company without much of a music strategy. The downside is that HTC has been struggling financially. The company missed forecasts in the third quarter and its net profit fell 79%. According to an analysis by Asymco, HTC captured only 1% of the world's smartphone operating profits in the first quarter of the year (Apple had 73% and Samsung had 26%).
For now, it remains unclear whether Iovine and his crew at Beats can recreate the same mojo with a rebranded and redesigned music streaming service. Beats' first foray into digital music follows a trail littered with disappointments, and the category is well outside the company's core competency, headphones. But if history is any guide, consumers will hear a great of noise about the service well before it launches.