The most fateful product test of Noel Lee’s career took place in 2007 on a sunny day in Santa Monica, California.
Starting in a suburban San Francisco garage, Mr Lee had built a successful company called Monster that made and sold high-end speaker cables. Then he decided consumers would probably part with a few hundred dollars for a more stylish set of headphones.
After burning through millions of R&D dollars, Mr Lee finally got a meeting with the producer and self-styled entertainment magnate Jimmy Iovine, co-founder of Interscope Records. Joining Mr Iovine was his business partner Andre Young, better known as Dr Dre, the rap pioneer and a mogul in his own right. It would be difficult to identify a duo whose influence on popular culture in the 1990s exceeded that of Mr Iovine, collaborator with everyone from U2 to Eminem, and Dr Dre, a member of the seminal hip-hop group NWA, known for black-anger raps.
A large man with a shaved head, Dr Dre put on Mr Lee’s headphones. He turned up the volume on 50 Cent’s bass-heavy In Da Club. “That’s the s---,” he exclaimed.
Beats by Dr Dre, the headphones built by Monster and backed by Dr Dre and Mr Iovine, reshaped the audio marketplace almost from their debut in January 2008. Lady Gaga, Justin Bieber, Sean “Diddy” Combs – all wore their signature branded Beats models. LeBron James and Serena Williams favoured Beats; so did David Beckham and Apple co-founder (and long-time Iovine friend) Steve Jobs. The candy-coloured headphones became required accessories not only for celebrities but also for subway riders and mall rats everywhere.
For several years, Mr Lee lived an entrepreneur’s dream. “Dre is an icon,” he says. “He is the pinnacle of pop music. Jimmy Iovine is a legend. And I [was] in business with them.”
But in May 2014, when Apple agreed to buy Beats by Dr Dre and a co-branded streaming music service for $3 billion, Mr Lee got nothing. “We designed, built, and marketed the headphones, and we were getting none of the credit,” he says. In January he filed a lawsuit in California state court, accusing Dre and Mr Iovine of stealing the design, manufacturing, and distribution rights to Beats. Mr Lee alleges the duo achieved this “corporate betrayal” by shuffling ownership of Beats and triggering a contractual provision that cut him out of the action.
For their part, Apple’s lawyers claim that Mr “Lee apparently regrets his business decisions and now asks that he and Monster be excused from as many of their contractual obligations as possible, but regret is insufficient”.
Mr Lee is a classic low-tech geek who grew up taking appliances apart and putting them back together. He loves the virtuoso guitarists of a few generations back, such as George Benson and Carlos Santana. He is an obsessive fan who got to know some of his music heroes, and prominently displays autographed photos and guitars to prove it.
Mr Lee gets around pedestrian areas on a chrome-plated Segway electric scooter, necessary because of nerve damage he attributes to his work in the 1970s as a junior nuclear technician at the Lawrence Livermore National Laboratory. Workplace protections were not what they should have been, he says, and employees unwittingly exposed themselves to heavy doses of radiation, the effects of which were not immediately understood. He suffered spinal problems that made it difficult, and then impossible, for him to walk. All the same, he never sued the government, because, he says, “it didn’t seem worth the trouble”.
In 1979, having left his government job, Mr Lee launched Monster based on the insight that serious music fans would pay more for heavier copper speaker wire that conveyed “more dynamic sound”. Until then, hi-fi cable had been an afterthought. Consumers began forking over $50 for his more expensive product. Performers from the Guns N’Roses guitarist Slash to Keith Richards of the Rolling Stones became loyal Monster Cable users.
Over the years, Mr Lee applied the same strategy to other audio accessories. He got consumers to trade up from a $10 power strip to a $150 Monster Power device that promised both surge protection and “sound filtration” for a clearer musical tone. His version of a $2 bottle of spray cleaner was a $20 product suitable for wiping dust from a gigantic plasma TV.
It was not a huge leap in Mr Lee’s mind to persuade mobile device listeners to graduate from cheap earbuds to high-priced headphones. In 2005 he introduced the padded over-ear Monster Turbine Pro. At $400, the Turbine did not fly off the shelves. At the same time, the company was looking for business partners for high-definition audio software that Mr Lee had developed to remix and remaster two-channel recordings for “surround-sound” play.
The cable entrepreneur sent his son, Kevin, then a Monster employee, to Los Angeles to look for partners for the new audio software. Kevin Lee got an audience with Mr Iovine, then at Universal Music Group. Mr Iovine wanted to talk about headphones. That meeting, according to the Lees, led to Mr Iovine and Dr Dre paying a call.
“We gave Dre and Jimmy an education in sound,” Mr Lee says. “They were talking about building a better speaker, and I said ‘headphones are the new speakers ... let’s make headphones together’. And that’s where Beats came from.”
Mr Iovine and Dr Dre tell a different creation myth. Their story begins on Santa Monica beach next to the Pacific Ocean. The two old friends bumped into each other while exercising in 2005. They fell into conversation about the next steps in their professional lives.
Mr Iovine had begun as a recording engineer in the 1970s for John Lennon and Bruce Springsteen, and later produced records for Tom Petty, Stevie Nicks and U2. In the 1990s, he turned Interscope into one of the most successful labels by selling hard-edged black rap to white suburban teenagers.
Dr Dre, after releasing his 1992 debut album, The Chronic, on Death Row Records, moved to Aftermath Entertainment, a division of Interscope, where he lent his Compton (California) street cred to Mr Iovine’s burgeoning business.
More recently, Dr Dre and fellow former NWA member Ice Cube share producer credits on the film Straight Outta Compton, which is due in theatres in August and recounts the group’s rise. (The film made news when another rap producer, Suge Knight, was charged with murder for running over two men on the set of a promotional video shoot. Mr Knight claims it was an accident.)
Describing their 2005 beach encounter at a New York conference last October, Mr Iovine said he had just negotiated a new contract with Universal Music that allowed him to pursue tech innovations. Dr Dre’s lawyer had proposed that he endorse trainers. Mr Iovine said he advised his friend to sell speakers instead. The conversation eventually shifted to headphones, according to Mr Iovine. Dr Dre proposed the brand Beats by Dr Dre.
In their version of events, Mr Iovine and Dr Dre selected Monster merely as their manufacturer – the company that would oversee the factories in China, among other things.
Mr Lee describes Monster as the prime mover. Monster, he says, shifted 100 of its 600 employees to the newly named Beats project and later hired Robert Brunner, a former designer for Apple, to refine the headphones’ sleek Apple-esque look. Financing the initiative, Monster built more than 30 test models, culminating in the one Mr Lee brought to the late 2007 listening session during which he says Dre issued his scatological blessing.
In January 2008, Monster signed a licensing agreement under which the company would make, market, and distribute the headphones and pay Dr Dre and Mr Iovine a 19 per cent fee for use of the Beats name and their access – the ability to get the product on to the heads of top entertainment and sports figures in videos, news conferences, and clubs.
To call the headphones a winner would be an extreme understatement. In 2007 the $100-and-up headphone segment generated less than $500 million in total sales. By 2012 the total had grown to $1.2bn, with Beats grabbing two thirds of the high-margin market.
In August 2009, Mr Lee, Dr Dre and Mr Iovine signed an amended licensing agreement that adjusted several aspects of the relationship among the parties. Beats Electronics, constituted as a separate company with a payroll of its own, now joined as a party to the amended agreement. The revised contract’s most consequential provision stated that a “change of control” of Beats Electronics would result in Monster losing all rights to manufacture, sell, and promote the brand. New owners, in other words, would not be obliged to continue to do business with Monster.
For a while the Monster-Beats venture continued to swim in cash, generating hundreds of millions of dollars in annual revenue for Monster and tens of millions a year in licensing fees for Dr Dre and Mr Iovine. Then, in August 2011, Mr Lee learnt that Mr Iovine and Dr Dre had agreed to sell 51 per cent of Beats to the Taiwanese mobile phone company HTC for $309m.
Mr Lee had acquired some stock in Beats Electronics, but his 5 per cent stake gave him no way to stop the sale, which, according to Mr Iovine and Dr Dre, triggered the change-of-control clause. HTC and Beats made clear that they intended to separate from Monster and go their own way.
Mr Lee said Monster could start over in headphones, vowing: “We can be the Apple of the headphone space, with or without Beats”. In June 2012, Beats and Monster signed a definitive separation agreement.
Less than a month later, Mr Iovine and Dr Dre again caught Mr Lee by surprise when they bought back half of the 51 per cent interest they had sold to HTC. In September 2013 the private equity firm Carlyle Group bought the rest of HTC’s stake in Beats. When the dust settled, Carlyle had acquired almost a third of Beats for $501m.
In early May last year, rumours rippled through tech and music circles that Apple planned to acquire Beats. On May 27, two of Mr Lee’s top staff, David Tognotti and Leo Lin, happened to be visiting Harvard Business School, where they ran into David Yoffie, a professor and member of HTC’s board of directors.
According to Mr Lee’s law suit, Mr Yoffie told the Monster executives they had been had. Mr Iovine and Dr Dre had orchestrated a “sham” HTC acquisition two years earlier to trigger the change-of-control provision and push out Monster, and Mr Lee, the professor supposedly said. (Mr Yoffie declined to comment for this article, citing the Monster versus Beats litigation. Neither Marcus Woo, HTC’s general counsel, nor the company’s outside lawyers responded to requests for comment.)
On May 28, 2014, Apple announced it would acquire Beats for $2.6bn, with $400m more to come. Dr Dre, who owned 20 per cent of Beats, appeared in a YouTube video boasting he had become the “first billionaire in hip-hop”. Mr Iovine, who held 25 per cent, stood to collect $750m.
Finally, the full picture became clear, as far as Mr Lee was concerned. Mr Iovine and Dr Dre had decided in 2011 or 2012 that they wanted to sell to Apple, and sought to get him out of the way first.
Today, Monster is struggling to get back into headphones; the company is in the process of dismissing 200 employees, or a third of its payroll.
Apple says the man behind Monster made a deal, and he has to live with it. Mr Lee can’t accept that. “The headphones,” he says, “were my idea.”
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