On January 6th, Monster, LLC (the maker of, among other things, those overpriced gold-plated guitar cables) and its CEO Noel Lee, filed a lawsuit against Beats Electronics, Dr. Dre, Jimmy Iovine, and various other parties related to the Beats empire, in Superior Court in San Mateo, California, for conspiracy and for course of conduct to “improperly control” the engineering, marketing, distribution, and sales of the absurdly successful Beats by Dr. Dre headphone line.
We’ve located the complaint, which you can view here, but to summarize, Monster is alleging fraud, breach of trust, breach of fiduciary duty, unfair competition, and more against Iovine, Dre and Beats individually and collectively. The background is that in January 2008, Iovine and Dre entered into a partnership with Monster to develop and promote a line of headphones. They work together in a still-unspecified capacity for a few years before in mid-2011, everything falls apart. According to then-confidential marketing plans, engineering schematics, and product designs obtained from Monster, Monster spent a hefty amount of cash and time developing ideas central to what would become a multi-billion dollar headphone company. This included promoting the headphones as a gadget-status symbol, creating custom headphones in collaboration with big-name artists, and quite literally the designs that Beats ended up using (see below, via Gizmodo):
In this new lawsuit, Monster claims that Dre and Iovine orchestrated a “sham” deal with smartphone maker HTC, a Beats investor, in 2011, that would lead to termination of the Monster partnership, that Lee was prompted to lower his stake in the company and sell it off, and that ultimately, Lee and Monster’s role in the creation and design of the headphones has been publicly shamed and squashed.
Although details are still emerging about what happened behind-the-scenes during the fallout between Iovine, Dre, and the Lee family in 2011, it seems as though somewhere in the mix is a debacle from Noel’s son Kevin, who was spearheading talks on Monster’s end, boggled contract negotiations with Interscope and Iovine in 2008. Kevin appears to have been under immense pressure during the time, having built up the “entire electronics product line” that would become Beats By Dre before any deal with Dre was inked. The end result was that Monster basically signed the business over to Iovine and Dr. Dre, according to the Gizmodo report:
Monster solidified an agreement that got Beats Electronics alive and shipping headphones, but not without gigantic forfeit: Jimmy and Dre’s side of Beats would retain permanent ownership of everything that Monster developed. Every headphone, every headband, every cup, every driver, every remote control—if there was a piece of metal or plastic associated with Beats By Dre, Noel and Kevin Lee surrendered it to Jimmy and Dre. Monster would also be entirely responsible for manufacturing the products—a hugely expensive corner of the deal—as well as distributing them. The heavy lifting. “I was a little intimidated by Dr. Dre,” Kevin Lee admits over a child-sized portion of chicken noodle soup. Noel sits beside him without a word.
The rest of the report is well worth reading – a cautionary scissors-beat-paper tale that we don’t often hear about in the music industry, since there are so few big fish left these days. Over the course of this lawsuit, as testimonies and facts uncovered in discovery emerge into the public realm, we may learn more about the naive Lee family vs. predatory business acumen of Jimmy Iovine/Interscope narrative, but in the meantime, the fallout between Monster and Beats is still unclear.
Despite what you and I feel about the quality of audio pulsing through their units, the Beats headphones have become an iconic audio and fashion brand. As of 2013, Beats Electronics, LLC was taking in $1.5 billion in revenue. And of course, this past May, Apple bought the company for $3 billion, acquiring not only their product line and streaming service, but also the talent and images of Iovine and Dr. Dre. Which, in the big-money music world, is like if during the preaseason, the entire 2007 New England Patriots were traded to the Miami Dolphins – Tom Brady and Randy Moss included, who also acquired Fox and CBS.
Although the complaint doesn’t specify how much Monster is seeking in damages, we have some idea about how badly Monster was hit by this debacle. Lee sold his shares in Beats for $5.5 million in 2013, which is no small chunk of change – but following the Apple deal and growth of the company, Lee’s original 5% stake in Beats Electronics would probably be worth somewhere in the area of $150 million today. Whew.
What’s most interesting in this situation, however, is that Beats is now owned by Apple, a company who has historically been highly protective of its intellectual property. Since 2013, Apple has been more active in buying companies than at any other point in its history – basically besides Disney, it is a financial empire built almost entirely by itself rather than through acquiring others’ products – and Beats is its largest acquisition yet. As of April 2014, Apple had nearly $160 billion cash-on-hand (that’s not counting assets, inventory, property – that’s cash), more in their reserves than a whole lot of countries. I wouldn’t be surprised if Beats reached some sort of settlement out of court, so that Apple can get rid of the Lee family forever, rendering them a footnote in the history that they would like to write, in which they re-seize control of the digital music distribution market that has been slipping away from them over the last few years.