How Dr. Dre Made $300 Headphones a Must-Have Accessory

Beats by Dre

Just a few years ago, spending $300 on headphones was something only a handful of artists, music producers, and audiophiles would even consider. But that was before a hip-hop legend got involved. These days, headphones — specifically ones that cost hundreds of dollars — are one of the fastest growing categories in the consumer electronics industry. And musicians who aren’t sticking their name on a pair are starting to seem tone deaf.

At last week’s Consumer Electronics Show, rapper 50 Cent made an appearance. So did LL Cool J, Lemmy from Motorhead, and Ro Marley, son of late reggae musician Bob Marley. Even the “Jersey Shore’s” Snooki and New York Jets quarterback Tim Tebow stopped by. And all of them were hawking really expensive headphones.

Over the last several years, the premium headphone market has exploded. According to retail analyst firm NPD Group, U.S. sales of headphones that cost $100 or more increased 73% year-over-year in 2012, far outpacing sales in the headphone market overall. Premium headphones now make up 43% of all headphone sales, and consumers who make the leap to high-end headphones don’t seem to be regretting the decision: Those who own premium headphones have an average of 2.3 pairs, according to NPD.

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The biggest player in this market is Beats by Dre, the company founded by Dr. Dre, co-founder of the seminal hip-hop group N.W.A., and music producer Jimmy Iovine. The company captured 64% of the $100-and-up headphone market in 2012 (as Dre earned a reported $110 million, thanks mostly to Beats) by ushering in a new way of thinking about music marketing and consumer preferences. But back in 2008, when Beats released its first pair of headphones, it was far from certain that consumers would bite. “People thought we were crazy,” says Beats by Dre CEO Luke Wood. “They said the marketplace would never support a $300 headphone.”

Industry analyst Ben Arnold, of NPD Group, says that the premium headphone market is being driven in large part by the rise of smartphones and tablets. As more consumers shift toward listening to music on mobile devices, high-end headphones — essentially mobile hi-fi speaker systems — are a logical hardware extension for most users. In the early days of this transformation, Beats’ founders had realized that low-fi MP3s, often played through laptop speakers or inexpensive “earbuds,” were becoming the standard mode of consuming music — and that the resulting sound quality was often sub-par and certainly not the way artists, producers, or music lovers wanted their music to be heard.

At the same time, everything else in the tech world was improving: TVs were going high-definition, phones were getting smarter, laptops and eventually tablets were becoming more powerful. Sound, however, was being left behind. “Audio was completely ostracized as graphics cards got better, processing power got better, screens got better,” says Wood. “Audio was put on the back of the bus.” Before the big legacy brands even realized what was happening, Beats was there to fill the void.

It’s unlikely Beats would have come to dominate the category based on sound quality alone, however. Beats by Dre headphones have generally been praised for their audio quality and design (even if some consumers are turned off by the notoriously bass-heavy sound). But the company’s greatest innovation may have been its success at making headphones as much fashion accessories as they are listening devices. “If you’re wearing a pair of Beats, it says, ‘Music’s really important in my life,’ says Wood. “I’ve seen people wearing them at parties with hundreds of people, and they’ve got their Beats around their neck. It’s no different than somebody wearing a Run DMC T-shirt and Adidas shoes, or the guy who always wears a Metallica T-shirt.”

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It helped that the company’s headphones have shown up in countless music videos, including Lady Gaga’s hit “Poker Face,” and in NBA locker rooms, including around LeBron James’s neck. That was another of Beats’ business coups, says Arnold: “They tried something new with the artist endorsement model.” Beats quickly began seeing triple-digit sales growth as Justin Bieber, Lady Gaga, and James all lent their names to headphone models made by Beats.

The question now appears to be whether Beats can maintain its market dominance, the company’s successful formula having spawned the next generation of competitors. Rappers Jay-Z and Ludacris each have their own line of headphones through Skullcandy and Soul, respectively. In September, former “American Idol” judge and “X Factor” creator Simon Cowell released branded headphones made by Sony. Monster has teamed up with rapper Nick Cannon and Noel Lee of Earth, Wind & Fire, and also sells a Miles Davis Trumpet headphone. Just this month rapper 50 Cent announced a new headphone partnership with Timbaland.

Even non-musicians are getting involved. While Beats has created Powerbeats headphones for LeBron James, Soul’s Tim Tebow and Usain Bolt headphones both debuted at last week’s Consumer Electronics Show. And of course Snooki was on hand to hawk headphones at CES. Believe it or not, though, the onslaught of cross-branded premium headphones may be just beginning. Monster recently launched a line of EA Sports-branded headphones for sports video gamers, as well as a pair in partnership with luggage brand Tumi. Denon has released four types of high-end headphones geared toward different lifestyles, including one for exercising.

Meanwhile, Beats isn’t standing still — and doesn’t want to be considered merely a headphone company. It recently expanded into audio systems for cars, computers, and smartphones, and in October released several stand-alone products, including a $200 Bluetooth-enabled wireless speaker called the Beats Pill.

Are there any more big hits in pipeline? CEO Woods won’t say what’s next. “In the music business, you put out a record when it’s done,” he demurs. “And that’s kind of how we look at our product.”

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Josh Sanburn is a Time.com reporter and producer.