Headphone Market Has Legs, But Shakeout Seen Looming

A headphone market shakeout is looming even as more manufacturers are planning to enter the business, hoping to grab share from an $828 million-and-growing annual business, according to CEA projections. Personal media devices including smartphones and tablets are expanding a market propelled by the iPod, which makes tracking the market a challenge due to the diverse range of use cases and types. When we plugged in “headphone” during a recent Amazon search, it returned 160,631 options.

"The market is insane,” said Petro Shimonishi, category manager for headphones at D&M Holdings, which is revamping and expanding its headphone offerings under the Denon brand for introduction in April. “Every manufacturer is trying to get into this market, and if you look at the numbers, why wouldn’t you?” Shimonishi told us. D&M wouldn’t comment on whether it’s expanding its headphones offerings beyond Denon to the Marantz and Boston Acoustics brands.

Monster head Noel Lee, who calls headphones “the new loudspeaker,” said the headphone market is thriving but not all companies will be successful. Lee takes credit for “opening the box where you have headphones that sound as good as the best loudspeakers.” Monster also helped propel the market for celebrity-endorsed headphones with its licensing deal for the Beats by Dr. Dre line that includes models stamped by Lady Gaga, Diddy, Justin Bieber and LeBron James. For its part, Monster has products endorsed by the estates of Miles Davis and Bob Marley. Now, Lee noted, “Everybody is chasing that model.”

The celebrity-branded headphone model is expensive due to licensing fees, especially for companies that don’t understand it, Lee said. “You can spend a lot of money but not get adequate return,” he said. The fervor created by celebrity headphones has been good for the market, “but that will burn out,” he said. “You need great marketing and great products that are sustainable,” he said. “Lots of people are paying for relationships and that’s going to be transparent as time goes on,” he said, when artists asked to promote a brand “are not genuinely enthused."

Celebrity branding can be tricky, said a manufacturer who asked not to be identified. “The artist endorsement does suck up more of the cost of the product, and the reason why many companies haven’t been successful with the artist endorsement is that the artist isn’t relevant,” she said. “The artist has to have skin in the game and be willing to promote it."

Having proved there’s a market for high-priced headphones, Monster plans to capitalize more on it this year. “We were instrumental in raising the average price of headphones at a time when a lot of retailers didn’t think you could sell headphones for over $130-$150,” he said. Consumers can reserve a model in Monster’s Inspiration line, coming out later this year, for $279. Lee believes price points can go higher than the $300-$500 the high-end Beats phones command. “If you're used to spending $1,000 for speakers, there are opportunities to make higher priced headphones,” he said. Audiophile brand JH Audio recently introduced $1,748 earphones that come with their own amplifier. Users send the company a mold of their ear canals for the perfect fit.

NPD tracks roughly 132 headphone brands, said analyst Ben Arnold, and most growth is in the $100-and-up segment, which grew by a million units and $225 million in revenue from 2010-2011. Celebrity-backed headphones have driven a lot of the premium headphone sales, but that market has just about “maxed out,” Arnold said. While there’s “not a ton” of room for more artist-endorsed phones, the formula has worked well for Dr. Dre and a few others, including 50 Cent, he said, and still others are jumping on the bandwagon. Hip hop artist Ludacris launched a $99 in-ear model and a $299 on-ear noise-canceling model at CES. The celebrity endorsement has been useful in lending credibility to a product that “for the most part consumers can’t try out in stores,” Arnold said.

Even seasoned brands with audio cred have tested the celebrity waters to varying levels. Loudspeaker company Polk Audio, late to the headphone party, launched its first earphones last summer with sport earphone models endorsed, although not branded, by athletes from the NBA, the U.S. Women’s Olympic Soccer team and men’s lacrosse.

Skullcandy Entry

Iconoclastic headphone brand Skullcandy jumped into the headphone market doing its own thing in 2005, creating a niche unserved by traditional headphone makers, said Nate Morley, marketing director. Skullcandy founder Rick Alden devised a headphone that would allow users -- in the days before the iPhone -- to connect their iPods and their phones with one headphone “so you could use them seamlessly,” Morley told us. It was an opportunity that traditional headphone companies either didn’t see or ignored, he said. “The big CE players’ products were stale,” Morley said. “There was a lot of black and no form, personality or style.”

Skullcandy launched in snow and ski shops, bringing “personality and culture” to a demographic hungry for good sound outdoors. The brand has expanded from the endorsements of athletes in snowboarding, skiing, skateboarding, motocross and biking to NBA starts including Kevin Durant and Derrick Rose. Broader-based retail followed for Skullcandy, the brand now also entrenched in Best Buy and Apple stores. Despite the endorsements from celebrities, “we're not their biggest check,” Morley said. “They want to associate with Skullcandy because it’s a way for them to express what they like."

As more headphones hit stores, companies with an audio story to tell will have to find a way to have their product heard. Sound quality is a big part of the Skullcandy story, Morley said, and the company is developing a demo program called Supreme Sound so that customers can hear its “unique sound profile,” Morley said. Skullcandy partnered with acoustic engineers to develop a “sound flavor” that’s different from any other headphone, he said. “It’s not Sennheiser tuning or Bose tuning … that’s not our consumer,” he said. “Ours is for youth culture and people who appreciate being tuned to that.” Starting in stores this spring, consumers will be able to compare “non-Supreme Sound” with Supreme Sound, he said. The kiosks will be across distribution in CE, big box and specialty stores, he said.

Sol Republic is “working heavily” on listening kiosks so consumers can hear the difference between the phones they currently use and the Sol Republic models, Scott Hix, president of Sol Republic, told us. Headphones lend themselves well to auditions and comparison tests because customers bring in their devices and phones and “do their own testing,” he said.

Just as the headphone opportunity escaped most CE manufacturers, it also flew by independent retailers used to selling products on the basis of sound quality. Now everybody wants a piece of the action. At last week’s Home Entertainment Source Summit 2012 in Orlando, Executive Vice President Jim Ristow urged the group’s 550 independent retailers to take advantage of the fat margins in the surging headphone market. He called headphones a “replacement business,” which, unlike loudspeakers, “consumers don’t keep for 10 years."

HES dealer Bjorn Dybdahl, of Bjorn’s in San Antonio, Tex., told us that despite his roots as a specialty audio dealer, “We totally blew it on headphones last year.” Now, he said, “We need to really be in the headphone business” and his store “is being pitched by everybody.” Even electronics manufacturers never in headphones before approached Dybdahl at the Summit and said, “leave space for us later this year,” he said. Dybdahl plans to “play it safe” with Monster, Sennheiser, Sony and “maybe one or two others,” he said. “They all can’t survive, it’s that simple,” he said. “A lot will drop by the wayside."

The competition puts retailers in a buyer’s market, one retailer told us, and it’s a refreshing position to be in for some independent AV dealers. “We're looking at whoever can drive customers into our store with their brand,” he said, citing Sol Republic as one manufacturer that has “done its homework” with displays that show how good-quality headphones are important to completing the tablet and smartphone experience. Independent dealers used to complain that only the big box stores could afford the kind of displays that would draw customers in for Beats by Dr. Dre phones, the retailer said. “A couple of years ago the buy-in was outrageous to get a display,” he said. “Now companies are offering them for free."

Companies with even the most peripheral relationship to the personal audio market are taking aim at the booming headphone market. AV furniture and accessories company Bell'Oggetti, which launched a headphone line at CES, sees the category as a “natural progression that reinforces Bell'O’s mission to improve all facets of the audio and video experience,” CEO Marc Sculler told us. “There was a niche in the market not being served for headphones that make a stylish statement, deliver superior sound quality and are competitively priced,” Sculler said. Bell'O’s headphones will retail for $9.99 to $39.99 when they hit retail floors in May, he said. Also at CES, car audio company Rockford-Fosgate introduced a headphone line and Logic3 showed a Ferrari-branded line of highly styled earphones due this summer.

'Natural’ Extension for Velodyne

Subwoofer company Velodyne entered the headphone market late last year, citing a “natural” extension of the company’s work with miniature devices through its LiDAR division. In addition to drawing on its audio expertise to deliver “better sound than our competitors,” CEO David Hall said, Velodyne headphones will also be made “in very creative designs to serve as a fashion statement.” Regarding how the company will make it in a very crowded market, Hall said “it’s not that crowded with quality products."

Fashion has become a big driver of headphone sales for men and for women. Sony’s $40 2012 earbuds are available in blue, black, purple, red, and white, and its MDR-MA90 over-the-ear phones are black with red piping or gray with orange piping. Sports fashion is big as companies including iHip and Skullcandy offer models with NFL, NBA and MLB logos for individual teams.

Monster spin-off Sol Republic is selling the idea of “tracks,” interchangeable headbands that users can swap out when they want to change their look. “Product innovation and differentiation” are what’s required to stand out in what is a commodity category, said Hix. Sol Republic is the only headphone brand, for now, to let consumers customize headphones with interchangeable bands, he said, and the company will use social media to market around the coming of a new color band. With the Facebook generation, “when a brand is hot, consumers instantly tell their friends,” Hix said. Sol Republic has also aligned itself with the DJ channel and markets its headphones at DJ parties and events. Leveraging the Monster roots, Sol Republic is sold across big box stores and specialty, niche retailers, Hix said, with the message that “sound matters."

Audio-Technica, which had shifted focus to its professional headphone line when home audio sales trailed off years ago, readjusted its mix 4 years ago to address the growing consumer market, said Crystal Griffith, consumer marketing manager. Audio-Technica’s first category was noise-cancellation headphones, and the company recently installed demo stations to let consumers hear its noise-canceling headphones at Office Max stores, Griffiths said. Those demo stations now also carry Audio-Technica’s Bloom line of “Fashion Fidelity” headphones to address the female segment that’s looking for “more than a black headphone with a skull on it, without downplaying the audio,” she said.

Using social media, Audio-Technica is succeeding “without the huge ad budget you see from Dr Dre or Sony or the bigger ones, Griffith said. “These days it’s definitely necessary to be unique and innovative and to speak to markets specifically.” Although the company does have one generic line, it is trying to be more targeted in its marketing, “with noise canceling, fashion and bass-centric sound,” he said. “We're trying to pick out those markets you can talk directly to,” she said.

At 40 points and higher for better quality models, margins in headphones are healthy, but that could change as the market becomes more saturated, sources told us. One manufacturer who asked to remain anonymous told us: “We're an industry where we eat our young, and that’s been a big problem for everybody. We keep innovating and keep trickling the price down,” she said, citing Blu-ray and DVD sales. So far headphone prices have remained stable, and that’s been driven mostly by people using cell phones for music, she said.

With smartphones and tablet sales soaring, manufacturers are hoping consumers will want headphones to complete the personal AV experience, along with other sets for different uses. For a smartphone, users want headphones with an integrated microphone “to talk through on your ear buds as well,” said John Lostroscio, vice president for merchandising and consumer electronics at Radio Shack. High-end music buffs want to spend “a few hundred” on high-quality over-the-ear types, he said, and less for an around-the-ear type for the gym. Radio Shack’s headphone SKU list tops 100 models to meet the different use cases, he said. Lostroscio’s challenge is to have the core products covered and to “take advantage of trend products” as they come available, he said. “Things in tech change so rapidly.” The headphone category will be a “good business for a while,” he said, “but it might change and evolve. Maybe the next trend will be wireless.”