Beats Electronics LLC is looking to part ways with longtime backer HTC, though the Doctor’s company is having trouble finding a financier to replace it.
Beats Electronics LLC, maker of the popular premium headset Beats by Dre, is looking to part ways with longtime backer and financier, Taiwan’s HTC.
Currently HTC owns 25 percent of Beats Electronics. The Taiwanese electronics giant once owned 50 percent, but they were partially bought out last year at a discounted rate. In 2012 HTC also provided Beats with a one-year, $225 million loan secured by all of the company’s assets, according to HTC’s annual report.
Sources that spoke to the Wall Street Journal say the company is close to finding a new investor to buy out HTC’s share and provide the company with new capital, but no deal has been signed.
However Beats Electronics has had difficulty securing new investors. Reportedly investors walked away from a investment pitch meeting hosted by the company not feeling confident that the company’s growth was nothing more than a trend. The WSJ also reports that investors were concerned about the size of the dividend the company’s three shareholders — Dr. Dre, Jimmy Lovine and Luke Wood — would receive upon any investment.
Beats is actively trying to expand its offerings to more than just headphones. While the company is planning a launch of music streaming service in the late fall, it has been sparse on details for its other ventures which have been rumored to be car audio systems and other consumer electronics.
Monsters got balled
Earlier this year Gizmodo’s Sam Biddle published an interesting piece on the genesis of Beats, and how it was built on the backs of a father-son duo of inept businessmen at Monster Electronics — maker extraordinaire of overpriced HDMI cables.
As Biddle explains in Gizmodo, the younger of the Monsters, son Kevin Lee, was sent to Los Angeles by his father to try to hammer out a deal with Dre and co. The Lees had already demonstrated prototype headphones to the Beats trio, and they were impressed. But when Lee got to LA, he found himself outgunned by the might of Hollywood negotiators Dre had dispatched to finalize the deal.
The first iteration of the deal didn’t work out. When the two parties went back to the negotiating table, Monster gave them an offer they couldn’t refuse: complete ownership of the line’s intellectual property. Despite having designed the line from the bottom up, Monster would have a Foxconn like role of the more-or-less silent partner while Beats would be the center of attention.
The Doctor keeps investors away?
While Monster’s decision to enter into such a one sided contract with Beats was beyond foolish, when looking at the saga between the two companies and the insistence that Beats’ shareholders get the first payout in any investment deal, one might see how toxic the presence of one of the three shareholders might be to any investor.
The deal between Monster and Beats might have been done in a fair and legal fashion, but the company’s arrogance and disregard for its silent partner alienates other companies from potentially working with it — as do the payout demands by the most prominent of its shareholders.
Though the headphones are sold under Dr. Dre’s name, having the Doctor attached to the product is a deadweight. The market for Dre-licensed headphones has been exhausted, as the company’s push to diversify proves. But despite Dre’s payouts, he doesn’t add anything to the company. He’s not a superstar engineer, improving the quality or design of the product, nor channel salesman. For adding five characters to the product’s title he gets a six character payout. Any rational investor would question the return on investment he brings.