There's more to Beats Electronics than those ubiquitous headphones. The increasingly diversified company grew last week when the company announced it had acquired music subscription service Mog. Terms of the deal have not been disclosed but reports put the price tag around $14 million.
Some skeptics have scoffed at the thought that today's music consumer cares about audio quality, but Beats has built a small empire around the proposition that better audio quality adds value to a wide range of products. Started by Jimmy Iovine and Dr. Dre, Beats Electronics is now involved in smartphones -- via last year's $300 million investment by HTC -- as well as personal computers, automobiles and portable speakers.
Now Beats has a subscription service that has always positioned itself as a leader in audio quality. Luke Wood, who became Beats Electronics' president and chief operating officer in February 2011 after a long career at Universal Music Group, spoke with Billboard.biz about the acquisition and how the streaming service fits into its overall strategy.
Billboard.biz: What attracted Beats to the Mog subscription service?
Luke Wood: First and foremost, I think it's fair to say Jimmy, Dre and myself are music fans. In using multiple services in the environment, Mog was the one that, for us as fans and consumers, really stuck. It was a really a combination of three things. One was a profound dedication to sound quality. As you know, they were the first to offer up their catalog in 320 kpbs format. They were the first to offer variable bitrate streaming based on your IP connectivity. We also felt they had a really good sense of editorial. And the third piece was the general [user interface] of the product itself. It felt like it was the most musical of the services.
Why a subscription service and not a download service or store?
I think that going forward it's going to be -- just like it has historically -- multiple formats and multiple experiences from a user consumption standpoint. The idea there will be one winner and it will be cloud streaming or downloads or whatever format, it's going to be a slow evolution and transition in business model. But as you can tell by the deal we did with HTC, we're very focused on where we see the business going -- which is toward mobility and toward the smartphone being the center of your content universe. The best experience in that environment is streaming. In terms of depth of catalog, discovery, user experience, things that excite us and why we're in the music business -- we all got in the music business because we were those kids at 14 who wanted to turn on all our friends onto that Clash record. At least that's the way I was. And so discovery is still at the forefront of our imagination.
How will Mog be integrated into the Beats line of products? Have you sorted that out yet?
That's a great question. We have not sorted that out. What we know is this: when we look at the musical landscape, we kind of look at it like it's a three-mile race and Beats really started with the third mile. What I mean by that is you have the consumption of the content, you have the playback device and then you have the speaker. And by consumption I'm talking about the purchase decision, the acquisition and discovery. The next phase is the playback device, whether it's your car head unit or your PC, your MP3 player, your smartphone or your tablet. The third is the actual driver or speaker and the hardware that surrounds it to play your music back. Being kind of studio rats, we look at all three being equally important.
Talk about the Beats Audio brand and what you're trying to communicate to consumers. Because it's not just headphones.
We try to start out with an understanding of the problem. When we talk about the decimation of audio, we're really talking about what happens as a combination of poor quality audio sound files, particularly torrented MP3s, which unfortunately for many people on their terabyte hard drives is the foundation of the music collection. Then you go to playback devices, specifically phones, smartphones, feature phones, PCs, tablets. In the case of the PC, it's a dominant playback device for most people, that was really made for Word and Excel. These devices were never made to play back music. They suddenly became, because of the ubiquity of content, a primary source for playback of music.
The last is the explosion of mobile devices starting with the iPod. The consumer electronics manufacturers felt the need to put a headphone in for instant gratification -- they were never meant for long-term listening. Now we have around 450 million iPods in the world, which is an incredible sounding playback devices, with heavily commodified white earbuds that absolutely distort the music. What that created was a tremendous amount of tension in the listening experience. The idea of Beats in general was to go back and bring back authentic sound and the sound we hear in the studio and the emotion that's lost in the transmission of that sound. We knew music is all about emotion. If the music sounds better, the emotion is better.
What's the current state of over-the-ear headphones? Has it run its course, or is there more innovation there?
That's a great question. There's a lot more innovation. It's interesting, when you think about the display world -- I was just looking yesterday at the new MacBook Pro and the retina display. There's unbelievable innovation and experience around display, and audio is the complete bastard stepchild. It's been completely ignored. As a matter of fact, especially in the case of TVs, it's been subjugated to the far corners of the edge [of the TV] which are barely visible. For sound, you need drivers, you need space. So we think as we get better and start to get a clear understanding of the product development process and the opportunities in the marketplace, we're working hard on a lot of innovative, new technologies. Specifically, if you think about all the use cases of music and sound, we have a long path ahead of us.
What comes after headphones, portable speakers, smartphones, the automobile? What's the next frontier for you?
First, fundamentally the two ecosystems you articulate there, Beats Audio is what we're doing with OEMs on the actual playback side. And there's tremendous opportunity in use case, scale and partners. We value greatly what we've done with HP, but we ultimately believe the user experience around audio should be incredible on any computer. We really want the opportunity to reach out and scale what we do with Beats Audio. I think the same can be said in the headphone space and the speaker space. Our work has really just begun. If you look at the Beats brand, we feel very proud of the products we have in the marketplace but we look to innovate on the core technology and also expand our user base.