A Sound Investment?

HTC Hopes to Hit the Right Notes by Buying a Stake in Audio Company Beats

Earlier this week, smartphone maker HTC announced it had acquired a majority stake in Beats Electronics. It will pay about $300 million for a 51 percent stake in Beats, which specialises in high-end sound products, most noticeably headphones that bear the name of music producer, Dr Dre. As you’d expect, HTC’s plans have met mixed reactions.

On the one hand, this could be a shrewd and very strategic move for HTC. Sound quality is something that’s always been lacking on phones, and leaves a lot to be desired on many mobile devices. HTC’s already improved the quality of more-important features like the screen, camera and casing on its devices, giving it the freedom to focus on the audio element. A deal with Beats presents a simple approach to solving another piece in the jigsaw of hardware design.

With few other manufacturers enhancing or promoting the sound aspect of their handsets, this is a chance for HTC to differentiate itself. It can use the Beats brand to augment its image and reach out to younger buyers. Thanks to celebrity endorsements, Beats headphones are becoming more and more popular. Combining this popularity with HTC’s strengthening presence in the smartphone market could be a good move, especially given the importance people attach to music on their phones. Our report on Mobile Internet Usage in Europe and the US revealed listening to music as the most common activity on phones in almost every country surveyed; we also found high levels of demand for unlimited streaming music services.

Taking a more critical view of the deal, it involves a huge level of investment that might be hard to justify. Acquiring a majority stake is surely not as cost effective as a partnership would have been. In addition, Beats products are positioned at the high end of the market, making it more likely that adding them to an HTC device will push up the price. Will people be willing to pay a premium for a phone with improved sound? Our survey suggests some might do so, but many are already happy to use a phone as their main music device, despite the less than outstanding audio quality.

Commenting on the growing success of the Beats brand, chairman Jimmy Iovine said “What we were told was this new generation didn’t care about sound.” The company has disproved this with its range of headphones and speakers, and I’m cautiously optimistic there are enough audiophiles out there to vindicate HTC’s investment. However, it would take a revolutionary improvement in the listening experience to make a considerable difference to the market.