This piece is an exclusive excerpt from Zack’s new book, 3 Kings: Diddy, Dr. dre, jay-z and the billionaire rise of hip-hop, published earlier this week by little, brown. order your copy here.
noel lee is a man who knows how to make an entrance. Accompanied by an entourage of a half-dozen or so, he rolls into the lobby dining room of the Marriott Marquis at Times Square on a flame-accented gold Segway, then settles on a banquette beneath a towering waterfall in the center of the room. .
Reading: Dr dre headphone deal
Lee wears a navy blue blazer and black T-shirt emblazoned with the logo of his company, Monster Cable, which he founded in 1979 after working as a professional drummer and laser fusion design engineer for a nuclear weapons research team. There, he reads, he was exposed to toxic doses of radiation that led him to develop a nerve disorder that prevents him from walking, hence the segway, which he prefers to a wheelchair. His biggest career breakthrough came when, frustrated that most stereo systems were wired with the same cables used for household lamps, he designed a high-performance cable that allowed for cleaner, louder sound.
monster still sells these proprietary cables along with speakers and headphones. The company doesn’t disclose its financial performance, but Lee says he expects annual revenue to exceed $1 billion in the next five years. More recently, they teamed up to create a range of products, including Monster DNA featuring Swizz Beatz, Roc headphones and speakers (no relation to Jay-Z’s Roc Nation) featuring soccer star Cristiano Ronaldo and, most famously, Beats by Dr. dre. These experiences have taught him lessons that he could never have learned in engineering school.
“What’s popular in hip-hop is popular to all the white kids in the suburbs and all the Korean kids who rap…and in every corner of the world,” he says. “It affects the vernacular of how you speak, so the word ‘son of a bitch’ means ‘good,’ or it could be bad. that’s what I learned.”
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“guys like dre and jay, they’ve stretched beyond their time… diddy too, but not in the musical sense,” he says. “let’s take dre…how does someone who doesn’t put out music become the [third] richest hip-hop artist? well guess what? noel lee put that in the driver’s seat for him.”
dr. dre and jimmy iovine see things a little differently than lee, as i learned the afternoon i first met them in 2011. a small group of reporters gathered in a spacious loft in downtown manhattan to cover the launch of the latest beats offer, and iovine gave some opening remarks. With Dre at his side, he explained the genesis of the Beats: He and Dre were walking across the Pacific Ocean one day in 2006 when the latter said he wanted to start a shoe line; he even had an offer on the table from a major brand.
“fucking slippers,” said iovine. “let’s sell speakers!”
is a great hollywood line from a great hollywood story. But as is often the case with such tales, there is much more to it, namely Lee’s extensive involvement. His son Kevin, who initially introduced him to hip-hop (and later founded his own line of Sol Republic headphones), was the one who suggested sitting down with his future beatmates. “Dad, we have to hang out with Jimmy and Dre,” Kevin said. lee’s response: “jimmy who? what does he do? and dre, isn’t he finished? But Kevin prevailed and helped set up a meeting. as he reads, iovine was really convinced early on that speakers were the way to go.
“jimmy,” lee said. “no one buys speakers anymore.”
“what do you mean ‘nobody buys speakers’?”
“big speakers, you can’t take them with you.” everything is portable,” replied lee. “Children don’t listen to speakers. you have to make headphones.”
iovine quickly came along and dre became the face of the product (through various spokespersons, the former not responding to requests for comment and the latter declining to be interviewed for 3 kings). Lee agreed to let his company design, engineer, manufacture and distribute the headphones; He would pay a royalty to Iovine, Dre, and Interscope, who would collectively provide marketing and own the brand. Iovine and Dre had the lion’s share of the capital, and the Universal Interscope Matrix also had a big chunk. Lee eventually negotiated a 5 percent stake in Beats. smaller pieces went to artist will.i.am and nba star lebron james, who would play key roles in developing beats.
Of course, the animator who contributed the most to the project was the one who gave it its name. dre actually came up with the beats for dr. dre moniker, according to lee and others close to the company. he also defined the company’s guiding principle, a pure product of his passion for “perfecting the groove,” as he once rapped. “Apple was selling $400 iPods with $1 earbuds,” iovine later recalled. “dre told me, ‘man, it’s one thing for people to steal my music. it’s another thing to destroy the feeling of what I’ve worked on.’”
lee developed nearly a hundred prototypes before passing a dozen or so to dre and iovine for their input. Dre used 50 cent’s “in da club” to try out different iterations, eventually settling on a bass-heavy version that made the beats the first truly hip-hop headphones. he and iovine envisioned the “rhythm curve,” a booming sound profile that would ripple through all the products they would create together.
“It was the first time anyone had heard that bass: Sennheiser didn’t do it, Bose didn’t do it, Sony didn’t do it,” Lee says. “They were still doing studio or orchestral stuff, but they weren’t doing hip-hop. … children, when they listen to music, they want to listen to it like they listen to it in the club.”
dre also tried other genres on the headphones, listening to everything from sade to kraftwerk to make sure both soul and electronic music sounded good. however, lee was concerned that the bass had been turned up too high (many audio purists would later agree with that assessment) and she sought will.i.am’s advice. “Will, I’m not too happy with the bass,” Lee remembers saying. the artist’s response: “don’t touch it. you have magic.”
Getting retailers to sign up wasn’t that easy. Beats debuted in the midst of the Great Recession, not exactly the best time to sell $300 headphones. Distributors didn’t think an aging rap star who hadn’t released a solo album in a decade would be enough to move the needle. So Lee went to work convincing Brian Dunn, then CEO of Best Buy, that Beats wasn’t just the next big thing, but the next big category.
dunn was an unlikely ally. It started out at Best Buy in 1985, selling televisions in Minnesota to earn some holiday money, but when VCR technology arrived, it found itself in the midst of a revolution in the consumer electronics industry and stuck with the retailer. he worked his way up the ladder, running a store, then a district, then a region; He eventually rose to the rank of COO and took over as CEO of Best Buy in 2009.
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By this time, Dunn had heard of both Lee and Iovine, and when the former came over to talk about the beats, he listened enthusiastically. Dunn recalls going to Lee’s Bay Area office, lined with curtains and sofas reminiscent of a Moroccan casbah, and wrapping prototype beats around his ears. he took a session to hook dunn. Soon after, Lee took him to a meeting with Dre and Iovine. Dunn had been involved in his share of celebrity meet and greets at this point. But when Iovine articulated his vision to market headphones while Dre was obsessed with sound and fashion, Dunn realized he had stumbled upon something different.
“Dre talked about what it was going to mean, how the industry would support it,” recalls Dunn. “We talked about, ‘People pay a lot of money for Nikes; they’re going to pay money for some great headphones that have great sound, that have some prestige to them.’”
best buy became the first major retailer to stock beats, but before headphones could really take off, sales associates had to learn exactly what they were selling. Lee and her team came in to explain that they needed to know their competition for consumer dollars, and as Dre had told Dunn, it wasn’t Sennheiser or Bose.
“Should I buy the beats or the air jordans?” Dunn says. “That’s the set of considerations.”
It makes sense that out of the three kings, dre would launch a line of headphones that really resonated with people. diddy was the flashy businessman and jay-z the smart lyricist. Dre, on the other hand, had carved a niche for himself as the quiet perfectionist so obsessed with sound quality that he had only released two solo studio albums at that point in what was already a quarter-century career. /p>
Dre’s seal of approval helped Beats headphones take off despite continued lukewarm reviews from audiophiles who were unenthusiastic about the product’s sometimes overwhelming bass and high price tag. but audiophiles were not their target. beats aimed to appeal to young music fans who had never bought fancy headphones before by presenting the product with a sex appeal side.
In 2008, beats graced the ears of LeBron James and his U.S. teammates at the beijing olympics and began appearing in every interscope music video, hundreds of them, on or around the bodies of artists like lady gaga, justin bieber, britney spears, will.i.am, miley cyrus and nicki minaj. Some musicians got their own lines of headphones (most notably Bieber’s Justbeats and Gaga’s Heartbeats). According to Noel Lee, the acts allowed the headphones to be placed in their videos without additional compensation, let alone equity. “You made a video with interscope, you have the headphones,” she says. “[The artists] said, ‘what are these?’” The answer: “don’t ask. just put them in the video.”
The broader headphone business soon mirrored the success of its new entrant. from 2008 to 2009, industry-wide sales increased from 59 million units at $490 million to 68.7 million units at $648 million, marking a 32 percent increase in revenue. the average unit price also increased by 14 percent, from $8.30 to $9.43. It may not sound like much, but it was quite the feat year after year, especially given that it happened during the depths of the Great Recession. Fueled by all the free product placement, beats suddenly accounted for nearly a third of the market, amassing $180 million in revenue in 2009.
dre was obsessed with keeping the beats calm, weighing everything from commercials to font styles, generally trusting his gut and vetoing anything “cheesy” or “cheesy”. The dismissals from him would come in short, simple bursts: “I’m not feeling that.” But Iovine recognized the value of the company’s “cultural barometer,” as a colleague told Dre. “Once you try to describe cool, you run the risk of perpetually going to not-cool hell,” iovine said. “The whole premise is not to talk about it.”
Just as nikes were both a fashion statement and an athletic necessity, beats, with its flagship studio line available in a rainbow of colors, soon became equal parts accessory and audio device. “We changed the way headphones are part of the lifestyle,” she says. “established headphones, where it’s cool to wear headphones around your neck even though they’re not plugged in.” She adds Dunn: “It’s not just about the sound; it’s about fashion.”
In August 2011, when Beats’ annual revenue skyrocketed to $500 million, the company received an incredible infusion: mobile phone maker HTC paid $300 million for a 51% stake. With the new cash came new products—for example, the understated Beats Executive headphones and the Beats Pill, a modern take on the boombox—and brand extensions galore. There were HTC cell phones with Beats Audio, HP Beats-branded laptops, and even a deal with Chrysler to put Beats speakers in a new edition of their charger-powered sports sedan.
“what dre did was smart,” says michael “mc serch” berrin, who lives in detroit and has worked in the auto industry. “dre is seen as an audio guy. … putting beats audio on computers, expanding the beats brand, that makes sense. I don’t know if you’ve heard the audio throbbing on the dodge charger. that shit crashes.”
By mid-2012, a year in which Beats would make $57 million in profits on $860 million in revenue, Dre and his partners had become rich enough to buy back HTC’s half stake. they also decided to eliminate monster as the manufacturer and distributor of the product, taking over the reins themselves. Lee was surprised. “They didn’t know anything about manufacturing,” he says. “they didn’t know anything about engineering…dre is not that kind of engineer.”
Beats moved forward aggressively, buying streaming service Mog for $14 million that year and raising $60 million to transform it into what would become Beats Music in 2013. The cash came from a list of investors, including billionaire Len Blavatnik, owner of warner music group; By the time Beats Music was launched, industry insiders believed that streaming had already overtaken MP3s as the dominant music medium. With Blavatnik on board and Universal holding a sizable stake in Beats, the company’s fledgling service had the purchase of two of the three major record labels. placed iovine and dre tantalizingly close to completing a trifecta that would allow the service access to an all-you-can-eat music menu.
lee didn’t think beats would be able to accomplish anything without monster’s experience; a new streaming service wasn’t enough to change his mind. at this point his stake had been diluted to 3 percent and he decided to sell it back to his partners for about $20 million. His message: “You don’t have an exit strategy.”
at least that’s how lee frames it. Some experts say his son Kevin was responsible for giving up Monster’s involvement with Beats. Lee strenuously denies this: “it had nothing to do with my giving up my shares.” Regardless of whose election it was, the measure would end up costing Lee approximately $70 million in pre-tax earnings.
As dre geared up to launch its streaming beat service, its line of headphones had gobbled up two-thirds of the hundred-dollar-and-up market, while dwarfing and elevating brands like bose and sennheiser.
“He not only cannibalized sales and alienated others; it grew the whole category,” says dunn, who saw the effects of beats firsthand at best buy. “Suddenly, headphones were so much more than these little headphones.”
The effects of such dominance appeared in the balance of beats. in 2013, the company reached $1.2 billion in annual revenue. This helped attract another massive investment, this time from the Carlyle Group, one of the world’s largest private equity companies, which poured $500 million into Beats in September. (A company spokesman declined to allow an executive to comment.)
The size of the stake Carlyle had purchased was not publicly disclosed, although most reports at the time said the deal gave the company less than half of the company, valued at more than $1 billion. Dollars. However, according to Lee’s math, the deal gave Carlyle about a third of the company, implying a valuation of $1.5 billion. The infusion also allowed Beats to buy the remaining 25 percent of HTC and pay a $150 million promissory note held by the mobile phone maker, whose core business had faltered in the face of challenges from competitors such as Samsung.
A report from the research firm privco later suggested that beats was also having a tough time, much harder than anyone on the outside realised, despite its eye-popping revenue figures. Apparently, after taking manufacturing in-house, Beats experienced a cash crunch and teetered just days from bankruptcy before securing a nine-figure loan. “In 2013, Beats Electronics was a struggling business from every point of view,” said the late head of Privco Sam Hamadeh. “The company was in a corner until Carlyle stepped in.”
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carlyle’s investment also gave beats the funds it needed to continue expanding. that was especially important given the focus on its new streaming service. Beats Music celebrated its official launch in January 2014 with a concert at the Belasco Theater in Los Angeles, headlined by Dre, Diddy, Eminem, Nas and Ice Cube. Inside, superstars from Drake to Pink mingled with record label bosses and talent agency executives at the oversubscribed show.
There were no reports of Apple executives in the crowd, but the computer giant was clearly watching. On May 8, the Financial Times reported that Apple had agreed to buy Beats for $3.2 billion; that night, the grainy youtube video of dr. Dre’s impromptu celebration lit up the internet. however, as the end of the month approached, the deal was still not complete, and beats’ founders worried that dre’s public actions had spooked the secretive tech giant.
“I thought the deal might fall through,” Iovine admitted on the HBO documentary The Defiant Ones, in which Dre called the episode one of the most embarrassing moments of his life. Says Lee: “I could see [Apple CEO] Tim Cook saying, ‘What is this guy doing?'”
Three weeks later, however, the deal was closed, for a final price of $3 billion. “no traditional valuation measure applied to beats as a business justifies the price,” privco’s hamadeh wrote. “we must assume that apple and tim cook have big plans that we are not aware of.”
A clue can be found in Apple’s 2014 annual report. According to the document, the Beats purchase included $2.6 billion in cash and about $400 million in stock that “will vest over time based on continued employment at apple.”
In other words, the tech giant structured the deal to include a hundred-billion-dollar carrot to keep beats founders in their fold (the shares, now worth 50% more than in 2014, will win this summer ). and that is perhaps the most fascinating part of the purchase. Although many experts believe that the existing Beats headphone business and the potential of its fledgling streaming service were enough to justify Apple’s deal, others think that the company primarily wanted to include the Beats founders on its list of executives. .
“apple beats deal happening, and it’s a terrible takeover,” read a headline on techcrunch. “They love Jimmy and they love Dre,” a source told the publication. “It has fashion and culture completely locked in.” Some went so far as to suggest that Cook saw the duo as a partial replacement for Steve Jobs, who passed away in 2011. “He’s saying, ‘I’ll try to replace [Jobs] with five people,'” says U2. Bono, a man and a venture capitalist, told the New York Times. “explains the acquisition of beats.”
In fact, Iovine had befriended Jobs, who believed people would always want to own their music rather than stream it, a decade before the Apple founder’s death. Jobs helped persuade the head of Interscope to allow the sale of unbundled songs on the iTunes Store, a crucial step in Apple’s insertion into the music ecosystem. In 2015, Iovine told Cable that when he and Dre founded Beats, he hoped one day to be acquired for jobs. “apple got the best people in pop culture,” iovine said. “Whether it succeeds or not, it’s the beginning of what the future should look like.”
Other reactions from the first beats team leaked. Lee, who had sold his stake in Beats for just twenty cents on the dollar just a few months earlier, began the painful process of digesting the multimillion-dollar transaction. He believed that Apple made the deal so the company could connect headphones to iPhones and iPads, perhaps replacing the headphone jack on the products with its Lightning connector and producing Beats products exclusively for that type of hardware. At the other end of the spectrum, will.i.am earned a multi-million dollar payout, probably in the low to mid eight figures, and pondered the social impact of the dre deal.
“It’s not just good for the company; it’s good for the culture,” she said. “you have to see it as… inner city kids not only dream of being athletes and musicians, but now entrepreneurs and carriers of cool, disruptive, new lifestyle products. a whole new spirit has just emerged from this announcement.”
The Apple purchase also underscored the value of the advice Iovine gave Dre—turning down the sneaker deal—so many years earlier. surprisingly, the best way to fight nike air jordans for consumer dollars turned out not to launch a line of shoes, but to create a revolutionary brand of headphones.
as far as lee is concerned, the beats deal should set an example for young entrepreneurs, but not in the way will.i.am suggested.
“I call it watch out for sharks, because when you don’t succeed, no one will touch you,” he says as we wrap up our interview. “When you’re successful, everyone jumps out of the water, and monster was a very successful company before beats.”
lee came to this conclusion several months after the apple deal ended, he says, reflecting on his role in creating beats. As he saw it, he had paid the company some $200 million in royalties over the years for the headphones he had made; Instead of partnering with Jimmy and Dre, he could have simply used that money to hire artists to sell his own wares.
going back to the timeline, he obsessed over what happened when he traded his 5 percent stake in beats, before htc bought 51 percent of the company. Lee claims the contract that gave him shares also included a change of control provision that would require Monster to relinquish its intellectual property rights to the headset and all of its dealer lists, an event he insists triggered the investment in HTC. Says Lee: “When I looked at all the events, and the business that happened, and the timing of it, I said, ‘I think we’ve been ripped off.'”
And so, in January 2014, Lee led a lawsuit in California alleging, among other things, fraud and deception, breach of duty of trust, unfair competition, breach of fiduciary duty, and violations of the California Corporation Code. the lawsuit demanded a jury trial and unspecified damages.
lee believes the entire htc deal was “a fictitious transaction” designed to remove the monsters from the picture, and that beats had a deal with apple well before 2014; She insists that Carlyle knew about a planned Apple deal before. Investing in Beats in 2013. “We had put all our eggs into building that basket of Beats,” says Lee. “They screwed us on that deal. … we had to lay off people, close factories, all that sort of thing.”
The authorities were not influenced. A few months after our meeting, Los Angeles Superior Court Judge William Fahey dismissed the main claims in Lee’s lawsuit. Fahey ruled that Beats’ stock was permitted under the contracts they had signed with Monster as sophisticated investors.
But even before he lost the case, Lee was already planning his next moves, telling me about a new business model, “beats on steroids,” and talking about plans to partner with other artists and athletes to create future products. Above all, while disappointed with the way the beats scene had turned out, he clearly hasn’t lost his taste for doing business with rappers who are billionaires.
says lee: “i’d love to help jay-z.”
The above piece is adapted from Zack’s new book, 3 Kings: Diddy, Dr. dre, jay-z, and the billionaire rise of hip-hop, published earlier this week by little, brown.
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