--Beats was established in 2006 to address the "degradation of sound" from music's shift to a digital business. --Beats is positioned to command what could be considered an "end-to-end solution" for premium music --Headphone sales priced over $100 doubled their market share from last year; Beats leads with 43% of the total dollars spent in that category. --Goal of addressing audio quality in playback devices led it to look at the smartphone market --Buys Mog online-music service to look beyond headphones. By Dan Gallagher Timing is not always everything. When Beats Electronics began shipping its first products in the fall of 2008, Lehman Brothers had just tanked, putting the national economy into a tailspin that pushed up unemployment and, presumably, cut down on the number of prospective customers able to drop more than $300 on a set of headphones. Four years later, Beats has overtaken the market for high-end headphones and built up enough muscle to go after new areas. And after a large investment by smartphone maker HTC Corp. (HTCXF, 2498.TW) last year and, now, the acquisition of Mog online-music service, Beats is positioned to command what might be considered an "end-to-end solution" for premium music--one controlled by some of the more powerful figures in the business. Beats announced its acquisition of Mog on Monday; terms weren't disclosed. Mog will continue to operate as an independent entity, with founder and CEO David Hyman reporting to Luke Wood, president and chief operating officer of Beats. In an interview, Wood said the Mog acquisition is Beats' latest effort to establish a stake in various parts of digital music including end-user listening products such as speakers and headphones, playback devices such as smartphones and PCs, and services like Mog that stream or download music. "The Mog acquisition is about Beats owning a piece in every stage of the digital-music experience," Wood said, adding that the company's main vision is to deliver high-quality music, or "the emotional thread embedded in music" through every point of consumption in the chain. The company started at the end of that chain, with a line of high-end headphones that carried the imprint of hip-hop artist and producer Dr. Dre. Dre and famed record producer Jimmy Iovine, who now runs the Interscope Geffen A&M record label, established Beats in 2006 to address the "degradation of sound" that resulted from music's shift to a digital business. In several public appearances, Iovine has colorfully described the effect of the digital revolution on music. On stage at an event sponsored by Hewlett-Packard Co. (HPQ) in 2010, Iovine criticized cheap earbuds for "taking the emotion out of music," and said the goal of the first Beats products was to re-introduce high-quality music to a generation that grew up with iPods. "We're on a mission to re-educate an entire generation about sound and emotion," he said at the event. Beats hired Robert Brunner, of the San Francisco design firm Ammunition, to design the first set of headphones, which went on sale in the fall of 2008. The brand became quickly popular among celebrities, which carried over its popularity into the consumer market despite their high price tag. Also helping the market was the explosive growth in portable media devices -- particularly the iPod and iPhone -- that have become key components in the consumption of music, movies and TV. Apple Inc. (AAPL) alone shipped more than 172 million portable media devices last year alone, and consumers are more willing to invest in higher-quality headphones to improve the experience. According to NPD Group, sales of models priced at over $100 doubled their share of the overall headphone market from 3% last year. And Beats now leads with 43% of the total dollars spent in that category in May compared to 35% of total dollars spent in the same month last year, according to NPD analyst Ben Arnold. "Headphones are definitely a growing segment, and digital content specifically has a lot to do with that," Arnold said. Beats' success also fueled competition. Several other music names, including hip-hop artists Ludacris and 50-Cent, as well as the family of the late reggae icon Bob Marley, launched their own branded headphone products last year. Established brands such as Sony, Bose and Sennheiser are also competing hard. Now Beats' goal moved far beyond the headphone market. Wood is a former record producer who worked with Iovine for years at the label before being brought in to run the Beats business last year. He has led a rapid expansion; the company now employees just under 100 employees now, from about 20 at this time last year -- not including the roughly 50 being picked up in the Mog deal. Wood said the company's goal of addressing audio quality in playback devices led it to look at the smartphone market, which led to an investment deal with HTC last August, in which the Taiwanese wireless-device maker bought a 51% ownership stake in Beats Electronics. As part of the deal, Beats audio technology has been embedded in HTC latest phones, with some bundled as well with a set of Beats earbuds. Beats also cut a deal to build its audio technology into PCs from H-P. Iovine told the crowd at the H-P event that computer makers treat sound technology as "the ass-end of their machines" with cheap technology, despite the PC's central role as a music hub in the home. The acquisition of Mog is designed to help Beats close the loop with a high-quality online music ecosystem. As a provider of a subscription-based online music streaming service, Mog competes with services such as Rhapsody and Spotify, and it's best known for its practice of streaming music at high bit-rates to ensure strong quality. It remains unclear how the brands will be integrated -- if at all. Wood said that Beats is committed to allowing Mog to operate independently and that the acquisition is a way for the company to bring a new type of talent on board. "What we brought together here was a talented management team and great engineering team and a best-in-class product," he said. "How we innovate together, we have yet to see." Write to Dan Gallagher at AskNewswires@dowjones.com
