Forgotten by Dre: How two Beats founders were cut out of the $3.2 billion deal

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If you’ve read Walter Isaacson’s Steve Jobs biography, you possibly know the name Ronald Wayne. That’s the investor who dropped out of Apple 12 days into its existence as a company — losing around $35 billion after selling his shares for just $800.

In the wake of a reported deal with Beats, we have a repeat of that story — courtesy of the one key party that won’t see a scratch from the rumored $3.2 billion acquisition.

Although Iovine and Dre get all the credit for Beats, it was Monster CEOs Noel and Kevin Lee who designed and developed the world’s very first pair of Beats headphones, and did the engineering and technology distribution for the company’s first five years.

Essentially the Lees were sunk by a lack of business experience, which saw them spend millions of dollars before inking a deal with Iovine and Dre. To recoup the money they’d invested, Kevin Lee then signed a complex deal giving Iovine and Dr. Dre permanent ownership of whatever Monster developed.

The story was first revealed last year by Gizmodo journalist Sam Biddle, who called it one of the “all time worst deals” in tech history. Over the weekend, however, there was a follow-up, when Business Insider spoke to Lee to get his take on the Apple deal.

“The immediate reaction was, what a deal for Jimmy and Dre!” he noted. “We’re very happy that they received such a high valuation. And I’m thinking of what that means for Monster’s valuation.”

At the same time, he’s (unsurprisingly) not that happy:

“I feel that we weren’t recognized,” he continued. “We got erased from the history of Beats. We were the founders. Most of the public has only heard a one-sided story and they’re not even aware of Monster’s participation. And they’re not aware that we’ve gone onto bigger and better things.”

As to what those “bigger and better” things are, Monster has been continuing to create headphones since being cut out of the Beats deal, now incorporating a new technology called Pure Monster Sounds.

“That technology that we designed for Beats, that Beats still uses now, it’s a little dated, in my opinion, and in the opinion of a lot of people on the internet,” Lee said. “Our latest technology takes the enjoyment of music to the next level. So I think that this deal could shine a light on that.”

And as for the plans from here? With the sounds of Apple money ringing in their ears, Monster are now thinking what they need is to reach a deal with a company like Apple.

Hmm… maybe Samsung is interested?

  • ostermalm

    In business either you eat or get eaten. They fucked up, NOW deal with it.

    • Luke Dormehl

      You eat the Apple, or you get eaten by the Apple. ;)

  • nostatic

    Correction to this story: While Mr. Lee may have negotiated a deal with Beats that now looks less than stellar, he is by no means “lacking in business experience.” He has made millions through Monster selling premium-priced mid-fi (re: mediocre quality) audio equipment and accessories that changed the consumer electronics market. Favoring style-over-substance, Monster was able to charge $125 for basic, add-on stuff like HDMI cables that you can buy for $15 at places other than Best Buy. He applied the same strategy to Beats headphones: Over-priced cans that appealed to kids, but were roundly rejected by audiophiles. My guess is Noel Lee made a lot of money off his deal with Iovine.

    • JJ

      So, what do audiophiles use for HDMI cables? LOL. Most audiophiles reject popular products no matter how good those products are. That’s something that I have noticed with so-called audiophiles. Once a very good product becomes widely popular, they would reject it over some not so popular or even unknown product, just to say that they have something different other than what’s popular.

      • nostatic

        Besides your comment being off-topic, it’s imbecilic. The examples I gave were in reference to Monster’s marketing, not audiophiles—something you clearly know nothing about.

    • PMB01

      He was lacking in business experience when he made the deal for Beats. The original story made that pretty clear.

      • nostatic

        Again, not correct. Monster has been around for decades. The Lees were very savvy businessmen way before they ever met Iovine. The author’s POV is revisionist based on the very lucky recent turn of events. Was Steve Jobs a bad businessman because he sold all his Apple stock when he left the company? Would be worth billions by now. But, back then, he was leaving a failing company. Lucky for Apple, and him, he came back and made it the massive success it is today.

      • PMB01

        So you didn’t read the original article? Got it.

      • nostatic

        Incorrect. I read the original story and it’s full of holes. While I do agree that fool son Lee may have gotten in over his head, there’s no way papa Lee didn’t know what was going on. A company the size of Monster would have shown all that R&D money missing. Glaringly. From the first monthly accounting report. Secondly, it doesn’t take “millions and millions” to build a headphone prototype. Hardly. A few thousand at most. Do you think family-owned Grado has that kind of money to throw around on its high-end products? There’s nothing innovative about Beats engineering. Just a lot of slick veneer over pumped-up bass. That’s about 10 cents worth of audio engineering. I think much of the Gawker story is exaggerated and loosely based on facts, as so much of their faux reporting is. The truth is Noel Lee is a very smart businessman (he’s made millions selling over-priced wire for decades…smart!), but made a mistake letting his son take over parts of the business. Maybe papa could have negotiated a better deal, maybe not. At the time, no one knew what Beats was going to become, and they made the deal that had to be made. (Final note: Fool son Lee spends millions secretly on the Beats prototype, but won’t spend a few grand on a lawyer to help broker the deal? Eye roll. Not buying that one either.)

      • PMB01

        Didn’t spend money on a lawyer because he was too inexperienced to know he needed one when dealing with record label vultures. And he didn’t just spend millions to make a prototype; he actually produced inventory assuming they would accept what he was pitching to them. The story is very on point and not exaggerated. Makes perfect sense to someone who’s actually dealt with Jimmy Iovine!

      • nuron

        Monster has been around since 1979! Almost three decades before making the deal for Beats!

      • PMB01

        Read the original article! it explicitly says the son was very inadequate to be making a business deal with a label executive!

  • http://heguy.tumblr.com Kuhnaydeein

    If you back out of a company before it hits the big time, when you miss out on the big pay day, it’s not the company’s fault.

    • RoboBonobo

      They didn’t back out of the company. The deal they signed gave Beats 100% ownership of everything Monster developed for them. It’s still Monster’s own fault for signing a crap deal, but my point is that they were never entitled to any share of the money from any sale of Beats. They didn’t back out of the company — they never even owned part of the company.

      • nostatic

        Exactly. They were paid consultants who received a fee/compensation for developing Beats headphones. In the audio industry this is very common. To say they were naive is like saying an architect is foolish because he doesn’t own a share of the building he designs. When it sells later for millions, he loses out. That’s how it goes.

  • JJ

    Only an ignorant person would think that Iovine and Dr Dre actually engineered those headphones. Think of it as a perfume with a celebrity’s name. They have someone make it, and then they just stamp their name on it for instant popularity.

  • http://www.pro-tools-expert.com/ Russ Hughes

    Someone actually engineered those headphones?

About the author

Luke DormehlLuke Dormehl is a UK-based journalist and author, with a background working in documentary film for Channel 4 and the BBC. He is the author of The Formula: How Algorithms Solve All Our Problems, And Create More and The Apple Revolution, both published by Penguin/Random House. His tech writing has also appeared in Wired, Fast Company, Techmeme, and other publications. He'd like you a lot if you followed him on Twitter.

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