Your Ears Belong to Dr. Dre: That'll Be $300 (Update 1)

Updated from Jan. 11, 2013, 10 a.m. to include management of Beats' new music service.

NEW YORK ( TheStreet) -- Hip-hop star, producer and music mogul Dr. Dre is a perfectionist. He also appears to be something of a control freak. He is using those qualities to build himself a tidy little empire.

Dr. Dre, the stage name for Andre Young, helped define the West Coast genre of hip-hop known as G-funk, first through his group N.W.A., then as a solo artist, a producer of acts like Snoop Dogg, 50 Cent and Eminem, and through his work building Death Row Records and his own current organization, Aftermath Entertainment.

In December, Forbes Magazine listed Dr. Dre as the most highly paid entertainer of 2012, with $110 million in income, beating out U2 and Lady Gaga. Most of that comes not from his music but from his electronics company, Beats Electronics, the maker of the Beats by Dre line of headphones, speakers and now cellphone, computer and automobile audio technology. The company has also unveiled plans to launch a streaming music service.

As a recording artist and producer, Dr. Dre has long had a reputation for wanting everything just so. Hundreds of takes to get one instrument just right. Rumors swirl of recordings made but never released -- maybe never to be released -- because he's not completely satisfied.

He wants to control every aspect of the sound. With Beats, he can even control how it sounds after it leaves the studio, how it sounds in your ears.

But those control issues are married with great business instincts. Where another artist would sell T-shirts and crap or slap his stage name on a brand of perfume, Dre has taken merchandizing to a whole new level, creating a substantial business.

With Beats by Dre, the artist brand and the company brand work together as equal partners. It was a brilliant move and, in the process, he actually changed the face of the audio products market and set a new benchmark for other entrepreneurs.

Dr. Dre founded Beats in 2006 with Jimmy Iovine, chairman and CEO of Interscope/Geffen/A&M, ostensibly to create a listener experience comparable to the recording studio. Small, high-quality home audio systems already existed -- Bose had pioneered the space -- but widely used products that appealed to the young popular music crowd were simply absent.

Think about it: Where have you seen Bose outside of magazine ads? A coffee table or bookshelf in a well-to-do living room or bedroom. The company's products are sleek and the sound quality is remarkable but the appeal is quiet, staid and low-key.

Apart from Bose, other makers of headphones just didn't seem interested in marketing an improved audio experience, particularly not for the average pop music listener.

Beats saw the opening and took it, putting out a cool-looking line of high-quality audio headphones designed to rock the house anywhere, anytime. Colorful and packaged with trademark audio technology, they were branded with Dre's producer cred and marketed with a $200-to-$300 price point.

Beats by Dre

The result? Beats are everywhere. From a product launch in 2008, they've become a brand icon for every teenager. Walking around the streets of my hometown of Asbury Park, a large share of young people are suddenly wearing headphones -- not buds -- and those headphones, nine times out of 10, are Beats.

My own limited market research here -- OK, I asked my daughter and my niece -- is that kids are buying them both for the quality of the sound and for that modest, musical-looking "b" on the side, Dre's imprimatur.

Beats have problems. Reviewers have noted the cords break and the other materials appear to be a little cheap, plus the balance of the sound isn't always to individual tastes. If you searched, you could probably find headphones more to your liking for less money.

But on the whole, Beats have earned a solid reputation as a reliable brand with better-than-average sound quality that is cool to wear -- to be seen wearing. Quality and fashion feed into each other.

This is the same approach that propelled Apple ( AAPL) products to complete dominance, the same one Microsoft ( MSFT) can't seem to get right.

Other companies have benefited from Beats' success. Founded in 2003, Skullcandy has a wide line of headphones appealing to the exercise crowd, professionals and young people. Its lower-priced, colorful, distinctive products have wide distribution.

Recently, Skullcandy came out with its colorful Aviator headphones line, sporting a sponsorship from rapper/producer Jay-Z and touting an improved audio experience.

A Beats partner, Monster, recently split with the company and unveiled its own line at the Computer Electronics Show in Las Vegas. A showpiece is a product by an Italian designer -- maybe a little too frou-frou for a hip-hop crowd item, but building on the same theme of fashion and audio quality.

Beats has the first-mover advantage -- 51% of the $1 billion headphone market, according to Forbes. Next move: expanding its market reach, licensing its technology to partners in new sectors.

Beats didn't even bother to put up a display this week at CES. Didn't have to. Its partners did it for them, advertising like crazy.

Phonemaker HTC has a little black number with a Beats "b" on the back. Computer maker Hewlett-Packard ( HPQ) debuted a new monitor featuring built-in speakers with Beats technology and plans to include it in a complete line of computers.

Automobile maker Chrysler has installed Beats Audio systems in two car models so far, the Chrysler 300 S and the Dodge Charger. A subwoofer in the trunk comes standard.

Building further on Apple's model, Beats will take on iTunes with its first acquisition. In a deal arranged in 2012 through HTC, Beats purchased the streaming portion of music service MOG for $14 million.

Ian Rogers, founder of Topspin Media, has been hired to head MOG's relaunch as a Beats brand, with composer and Nine Inch Nails former frontman Trent Reznor as chief creative officer.

With the project Beats said it ultimately hopes to create "the first truly end-to-end music experience."

Meanwhile, Young is still out there, building the Dr. Dre brand with several high-profile recording projects and events each year, including teasers from a much-anticipated forthcoming studio album (for example, the cinematic "I Need a Doctor" video on YouTube) and 2012's headline-grabbing coup de theatre, raising Tupac Shakur from the dead as a hologram at the Coachella Valley Music and Arts Festival ( also available on YouTube.)

All of this practically guarantees Dr. Dre will make Forbes' list of most highly paid entertainers again in 2013 and 2014 and well into the future.

His is a story could serve as a model for any entrepreneur, in or out of the music business: Young takes the long view on projects, emphasizes both quality and style, puts his personal integrity on the line. Most importantly, he relentlessly analyzes his assets and builds on them.

Those practical skills are what propelled Young across another important milestone last year. Not a Hall of Fame entry or a meaningless award for his artistic genius. No footprints outside Grauman's Chinese. More to the point: The straight-out-of-Compton success story now has a tax shelter in Ireland.

-- Written by Carlton Wilkinson in Asbury Park, N.J.

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