This piece is an exclusive excerpt from Zack’s new book, 3 KINGS: Diddy, Dr. Dre, Jay-Z and Hip-Hop’s Multibillion-Dollar Rise, 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 sky lobby dining room of the Marriott Marquis in Times Square on a gold Segway accented with flames and then settles into a banquette beneath a towering waterfall in the center of the room.
Lee sports a navy blazer and a black T-shirt bearing the logo of his company, Monster Cable, which he founded in 1979 after working as both a professional drummer and a laser-fusion design engineer for a nuclear weapons research outfit. There, according to Lee, he was exposed to toxic doses of radiation that led to the development of a nerve disorder that prevents him from walking—hence the Segway, which he prefers to a wheelchair. The greatest breakthrough of his career came when, frustrated that most stereo systems were wired with the same cables used for household lamps, he designed a high-performance cable that enabled crisper, stronger sound.
Monster still peddles these trademark cables along with speakers and headphones. The company does not disclose its financial performance, but Lee says he expects annual revenue to top $1 billion within the next five years. Most recently, he’s teamed up to create a range of products, including Monster DNA with Swizz Beatz, ROC headphones and speakers (no relation to Jay-Z’s Roc Nation) with soccer star Cristiano Ronaldo, and, most famously, Beats by Dr. Dre. These experiences have taught Lee lessons he never could have learned in engineering school.
“What is popular in hip-hop is popular for every white kid in suburbia and every Korean kid doing a rap ... and all corners of the world,” he says. “It affects the vernacular of how you speak, so the word ‘motherf***er’ means ‘good,’ or it could be bad. That’s what I learned.”
Lee is just getting started.
“Guys like Dre and Jay, they’ve extended beyond their time ... Diddy, too, but not in the musical sense,” he says. “Let’s take Dre ... How does somebody 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 from Lee, as I learned the afternoon when I first met them in 2011. A small group of reporters gathered at an airy loft in midtown Manhattan to cover the launch of Beats’ latest offering, and Iovine gave some opening remarks. With Dre at his side, he explained the genesis of Beats: he and Dre were walking along 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.
“F*** sneakers,” said Iovine. “Let’s sell speakers!”
It’s a great Hollywood line from a great Hollywood story. But as is often the case with such tales, there’s quite a bit more to it—namely, the extensive involvement of Lee. His son, Kevin, who initially turned him on to hip-hop (and later went on to found his own Sol Republic headphone line), was the one who suggested sitting down with his future Beats partners. “Dad, we’ve got to hook up with Jimmy and Dre,” Kevin said. Lee’s response: “Jimmy who? What does he do? And Dre—isn’t he done?” But Kevin prevailed and helped set up a meeting. According to Lee, Iovine was indeed convinced at first that speakers were the way to go.
“Jimmy,” said Lee. “Nobody buys speakers anymore.”
“What do you mean, ‘Nobody buys speakers’?”
“Big speakers—you can’t take it with you. Everything is portable,” Lee replied. “Kids don’t listen to speakers. You got to do headphones.”
Iovine quickly came around and Dre became the face of the product (through various spokespeople, the former did not respond to requests for comment and the latter declined to be interviewed for 3 KINGS). Lee agreed to have his company design, engineer, manufacture, and distribute the headphones; he’d pay a royalty to Iovine, Dre, and Interscope, who would collectively provide marketing and own the brand. Iovine and Dre held the lion’s share of equity, with Interscope parent Universal possessing a large chunk as well. Lee eventually negotiated a 5 percent stake in Beats. Smaller pieces went to artist Will.i.am and NBA star LeBron James, both of whom would go on to play a key role in Beats’ development.
Of course, the entertainer who contributed the most to the project was the one who gave it his name. Dre actually came up with the Beats by 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 beat,” as he once rapped. “Apple was selling $400 iPods with $1 earbuds,” Iovine later recalled. “Dre told me, ‘Man, it’s one thing that people steal my music. It’s another thing to destroy the feeling of what I’ve worked on.’”
Lee developed nearly one hundred prototypes before passing a dozen or so to Dre and Iovine for their input. Dre used 50 Cent’s “In da Club” to test different iterations, eventually settling on a bass-heavy version that made Beats the first headphones truly designed for hip-hop. He and Iovine envisioned the “Beats curve,” a thumpy sound profile that would extend across all the products they’d build together.
“It was the first time anybody had heard that bass—Sennheiser didn’t do it, Bose didn’t do it, Sony didn’t do it,” says Lee. “They were still doing studio or orchestral stuff, but they weren’t doing hip-hop. ... The kids, when they listen to music, they want to hear it like they hear it in the club.”
Dre tested out other genres on the headphones, too, listening to everything from Sade to Kraftwerk to make sure that both soul and electronic music sounded right. Yet Lee worried that they’d turned up the bass too far (many audio purists would later agree with that assessment) and sought the counsel of Will.i.am. “Will, I’m not quite happy with the bass,” Lee remembers saying. The artist’s response: “Don’t touch it. You’ve got magic.”
Getting retailers to sign on wasn’t quite so easy. Beats debuted in the middle of the great recession — not exactly the best time to be selling $300 headphones. Dealers didn’t believe that 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 the chief executive of Best Buy, that Beats would be not just the next big product but the next big category.
Dunn was an unlikely ally. He started out at Best Buy in 1985, selling televisions in Minnesota to make some money over the holidays, but when VCR technology hit, he found himself in the middle of a consumer electronics industry revolution and stayed on with the retailer. He worked his way up the ladder, running a store, then a district, and then a region; he eventually ascended to the rank of COO and took over as Best Buy’s chief executive in 2009.
By that point, Dunn had heard of both Lee and Iovine, and when the former reached out to discuss Beats, he listened eagerly. Dunn remembers going to Lee’s Bay Area office, replete with curtains and couches reminiscent of a Moroccan casbah, and wrapping a Beats prototype around his ears. It took one session to hook Dunn. Shortly thereafter, Lee brought him into a meeting with Dre and Iovine. Dunn had been involved in his share of celebrity meet and greets by this point. But as Iovine articulated his vision for marketing the headphones while Dre obsessed over sound and fashion, Dunn realized that he’d stumbled upon something different.
“Dre talked about what it was going to mean, how the industry would get behind it,” Dunn recalls. “Talked about, ‘People pay a lot of money for Nikes; they’re going to pay money for great headphones that have a great sound, that have some cachet to them.’”
Best Buy became the first big retailer to stock Beats, but before the headphones could really take off, sales associates had to learn just what they were selling. Lee and his team went in to explain that they needed to know their competition for consumer dollars—and, as Dre had advised Dunn, it wasn’t Sennheiser or Bose.
“Do I buy the Beats or the Air Jordans?” says Dunn. “That’s the consideration set.”
It makes sense that, of all three kings, Dre launched a headphone line that truly resonated with people. Diddy was the flashy impresario and Jay-Z the brainy lyricist. Dre, on the other hand, had carved a niche for himself as the quiet perfectionist so obsessed with sound quality that he’d released only two solo studio albums by that point in what was already a quarter-century career.
Dre’s stamp of approval helped Beats headphones get off the ground despite continued lukewarm reviews from audiophiles unenthused by the product’s sometimes-overwhelming bass and hefty price tag. But the audiophiles weren’t his target. Beats aimed to attract young music fans who’d never bought fancy headphones before, serving up the product with a side of sex appeal.
In 2008, Beats adorned the ears of LeBron James and his U.S. teammates at the Beijing Olympics and started popping up in every Interscope music video—hundreds of them—on or around the bodies of artists including Lady Gaga, Justin Bieber, Britney Spears, Will.i.am, Miley Cyrus, and Nicki Minaj. Some musicians got their own headphone lines (most notably Bieber’s JustBeats and Gaga’s HeartBeats). According to Noel Lee, acts allowed the headphones to be placed in their videos without receiving additional compensation, let alone equity. “You did a video with Interscope, you got the headphones,” he says. “[Artists] would say, ‘What are these?’” The response: “Don’t ask. Just put them in the video.”
The broader headphone business soon came to reflect the success of its newest entrant. From 2008 to 2009, industrywide sales surged from 59 million units at $490 million to 68.7 million units at $648 million, marking a 32 percent jump in revenues. The average unit price also increased by 14 percent, from $8.30 to $9.43. That might not seem like a lot, but it was quite a feat year over year, especially given that it occurred during the depths of the great recession. Boosted by all the free product placement, Beats suddenly accounted for nearly one-third of the market, racking up revenues of $180 million in 2009.
Dre obsessed over keeping Beats cool, weighing in on everything from commercials to font styles, generally relying on his gut and vetoing anything “corny” or “cheesy.” His dismissals would come in short, simple bursts: “I’m not feeling that.” But Iovine recognized the value of the company’s “cultural barometer,” as one colleague called Dre. “Once you try to describe cool, you run the risk of going perpetually to noncool hell,” said Iovine. “The whole premise is not to talk about it.”
Just as Nikes were as much a fashion statement as 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 a part of lifestyle,” says Lee. “It established headphones, where it’s cool to wear headphones around the neck even though they may not be plugged in.” Adds Dunn: “It’s not about the sound, solely; it’s about the fashion.”
In August 2011, with Beats’ annual revenues rocketing toward $500 million, the company got an incredible infusion: handset maker HTC paid $300 million for a 51 percent stake. With new cash came new products—for example, the understated Beats Executive headphones and the Beats Pill, a modern take on the boom box—and brand extensions galore. There were HTC cell phones with Beats Audio, Beats-branded laptops from HP, and even a deal with Chrysler to put Beats speakers in a new edition of its sporty Charger sedan.
“What Dre did was smart,” says Michael "MC Serch" Berrin, who lives in Detroit and has done some work in the auto industry. “Dre is seen as an audio guy. ... Putting the Beats Audio into computers, expanding the Beats brand—that makes sense. I don’t know if you’ve heard that Beats Audio in the Dodge Charger. That sh*t bumps.”
By the middle of 2012—a year in which Beats would clear $57 million in profit on $860 million in revenue—Dre and his partners had grown rich enough to buy back half of HTC’s stake. They also decided to cut out Monster as the product’s manufacturer and distributor, taking the reins themselves. Lee was shocked. “They knew nothing about manufacturing,” he says. “They knew nothing about engineering ... Dre is not that kind of an engineer.”
Beats plowed 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, the owner of Warner Music Group; by the time Beats Music 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 buy-in from two of the three major record labels. It 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 believe that Beats would be able to achieve anything without Monster’s expertise; a new streaming service wasn’t enough to change his mind. At this point, his stake had been diluted down to 3 percent, and he decided to sell it back to his partners for about $20 million. His message: “You guys got no exit strategy.”
At least that’s how Lee frames it. Some insiders say that his son, Kevin, was the one responsible for giving up Monster’s stake in Beats. Lee strenuously denies this: “He had nothing to do with me giving up my shares.” Regardless of whose choice it was, the move would end up costing Lee roughly $70 million in pretax profits.
As Dre prepared for the launch of his Beats streaming service, his headphone line had gobbled up two-thirds of the hundred-dollars-and-up market, simultaneously dwarfing and lifting brands like Bose and Sennheiser.
“It didn’t just cannibalize sales and elbow other guys out; it grew the whole category,” says Dunn, who saw the effects of Beats first-hand at Best Buy. “All of a sudden, headphones were much more than just these little earbuds.”
The effects of such dominance showed up on Beats’ balance sheet. By 2013, the company zoomed toward $1.2 billion in annual revenues. This helped to lure yet 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 spokesperson for the firm declined to make an executive available for comment.)
The size of the stake Carlyle had purchased wasn’t publicly revealed, though most reports at the time said that the agreement gave the firm less than half of the company, valuing Beats at more than $1 billion. By Lee’s math, though, the deal gave Carlyle about one-third of the company, implying a $1.5 billion valuation. The infusion also allowed Beats to buy out HTC’s remaining 25 percent stake and repay a $150 million note held by the handset maker, whose primary business had faltered in the face of challenges by competitors like Samsung.
A report by the research firm PrivCo later suggested that Beats was also having a bumpy time—much more than anyone on the outside ever realized—despite its gaudy revenue numbers. Apparently, after taking manufacturing in-house, Beats experienced a cash crunch and teetered just days from bankruptcy before coming up with a nine-figure loan. “By 2013, Beats Electronics was a distressed business by any standard,” said the late PrivCo chief Sam Hamadeh. “The company was in a corner until Carlyle stepped in.”
The Carlyle investment also gave Beats the funds it needed to keep 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, fronted by Dre, Diddy, Eminem, Nas, and Ice Cube. Inside, superstars from Drake to Pink mingled with label chiefs 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 purchase Beats for $3.2 billion; that night, the grainy YouTube video of Dr. Dre’s impromptu celebration lit up the Internet. As the end of the month neared, though, the deal still hadn’t been completed—and Beats’ founders worried that Dre’s public actions had spooked the secretive tech giant.
“I thought the deal could blow,” Iovine admitted in 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 going, ‘What’s this guy doing?’"
Three weeks later, though, the deal went through—for a final price of $3 billion. “No traditional valuation measure applied to Beats as a business justifies the price,” wrote PrivCo’s Hamadeh. “We must assume Apple and Tim Cook have grand plans that we’re not privy to.”
A clue can be found in Apple’s annual report from 2014. According to the document, the Beats buyout included $2.6 billion in cash and about $400 million in stock that “will vest over time based on continued employment with Apple.”
In other words, the tech giant structured the deal to include a centimillion-dollar carrot to keep Beats’ founders in its fold (the stock, now worth about 50% more than it was in 2014, is set to vest this summer). And that’s perhaps the most fascinating part of the purchase. Though many experts believe that the existing business of Beats headphones and the potential of its nascent streaming service were enough to justify the deal on Apple’s end, others think that the company mainly wanted to get Beats’ founders onto its executive roster.
“Apple’s Beats Deal Is Happening, and It’s a Dre Acquihire,” blared a headline on TechCrunch. “They want Jimmy and they want Dre,” a source told the publication. “He’s got fashion and culture completely locked up.” Some went as far as to suggest that Cook saw the duo as a partial replacement for Steve Jobs, who’d passed away in 2011. “He’s saying, ‘I’ll try to replace [Jobs] with five people,’” U2 front man and venture capitalist Bono told the New York Times. “It explains the acquisition of Beats.”
Indeed, Iovine had befriended Jobs—who believed that people would always want to own their music rather than stream it—a decade or so before the Apple founder’s passing. Jobs helped persuade the Interscope chief to allow unbundled songs to be sold in the iTunes Store, a crucial step in Apple’s insertion into music’s ecosystem. In 2015, Iovine told Wired that when he and Dre founded Beats, he hoped to someday be acquired by 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 filtered in from Beats’ early team. Lee, who’d sold his stake in Beats for barely twenty cents on the dollar just months earlier, began the painful process of digesting the multibillion-dollar transaction. He believed that Apple did the deal so that the company could tie the 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. On the other end of the spectrum, Will.i.am got a multimillion-dollar payout—likely in the low to mid eight figures—and mused on the social impact of Dre’s deal.
“It’s not just good for the company; it’s good for the culture,” he said. “You have to look at it like ... kids in inner cities not only dream about being athletes and musicians, but now entrepreneurs, and bringers of new, disruptive, cool lifestyle products. A whole new spirit just popped from this one announcement.”
The Apple buyout also underscored the value of Iovine’s advice to Dre—to reject that sneaker deal—so many years earlier. Amazingly, the best way to do battle with Nike’s Air Jordan for consumer dollars turned out not to be launching a shoe line, but creating a revolutionary brand of headphones.
As far as Lee is concerned, the Beats deal is one that should be held up as an example for young entrepreneurs—but not in the way Will.i.am suggested.
“I call it Beware of the Sharks, because when you’re not successful, nobody will touch you,” he says as we wrap up our interview. “When you’re successful, everybody comes out of the water, and Monster was a very successful company before Beats.”
Lee arrived at this conclusion several months after the completion of the Apple deal, he says, reflecting on his role in creating Beats. As he saw it, he’d paid the company some $200 million in royalties over the years for headphones he’d manufactured; rather than partnering with Jimmy and Dre, he could have simply used that money to hire entertainers to shill for his own products.
Going back through the timeline, he fixated on what happened when he negotiated his 5 percent stake in Beats, before HTC bought 51 percent of the company. Lee claims the contract that gave him equity also had a change of control provision that would require Monster to forfeit its intellectual property rights to the headphones and all its dealer lists—an event that he insists the HTC investment triggered. Says Lee: “When I looked at all of the happenings, and the business that occurred, and the time they occurred, I said, ‘I think we’ve been scammed.’”
And so, in January 2014, Lee led a lawsuit in California alleging, among other things, fraud and deceit, breach of duty of trust and confidence, unfair competition, breach of fiduciary duty, and violations of the California corporations code. The suit demanded a jury trial and unspecified damages.
Lee believes that the entire HTC deal was “a sham transaction” designed to cut Monster out of the picture, and that Beats had a deal in place with Apple long before 2014—he insists that Carlyle knew about a planned Apple pact before investing in Beats in 2013. “We had put all our eggs into building that Beats basket,” says Lee. “We got screwed on that deal. ... We had to lay off people, close factories, all that kind of stuff.”
The authorities weren’t swayed. A few months after our meeting, Los Angeles Superior Court judge William Fahey dismissed the main claims in Lee’s suit. Fahey ruled that Beats’ actions were permissible under the contracts they’d signed with Monster as sophisticated investors.
But even before losing the case, Lee was already plotting his next moves, telling me of a new business model—“Beats on steroids”—and speaking of plans to team up with other artists and athletes to create future products. Above all, though disappointed with the way the Beats scenario had turned out, he clearly hasn’t lost his taste for doing business with centimillionaire rappers.
Says Lee: “I would love to help Jay-Z.”
The above piece is adapted from Zack’s new book, 3 KINGS: Diddy, Dr. Dre, Jay-Z and Hip-Hop’s Multibillion-Dollar Rise, published earlier this week by Little, Brown.
