Today the ownership of Intellectual Property (IP) mostly by way of patents and copyrights lie at the very commercial heart of all things creative. I just read the absolutely fascinating story online this morning about the impending acquisition by Apple of Beats Electronics.

$3.2B for a trendy yet technologically mostly unimpressive piece of electronics that seems like a pretty poor value proposition. And the marriage of something faddish glossy plastic to that of something more elegant built from metal and glass is something else that seems well, unseemly.

But it is the background story that is the fascinating part. The broad strokes are: Monster (mostly an over-priced cable company) goes out into the world to sell a new hi-def surround sound vapor product and in the doing meets Jimmy Iovine (the mogul owner/entrepreneur co-founder of Interscope). Jimmy introduces Monster to Dr. Dre.

Dr. Dre wants to make electronics in the way of high end speakers. Monster says let’s build hi-end headphones; a more sensible choice given everyone’s portable music these days. It sounded like a good idea to everyone. Monster wanted to leverage Dre’s entertainment and sports contacts to take the headphones mainstream. Dre wanted to get into the electronics business. And Jimmy knew upfront that he wanted to end up owning both ends of the business.

The initial negotiations fail. Dre and Jimmy go off to try and make the headphones happen elsewhere but fail and return to Monster 6 months later. Dre and Jimmy in the meantime have formed Beats Electronics and the initial prototype that they bring back to Monster sucks; mostly because it was too big and looked stupid.

Lee (the son and co-owner with his father) decides that they needed this new headphone business and so spends several million behind his father’s back developing 40-50 prototypes. At some point he comes up with the headphones that Beat Electronics have been looking for.

Now here is where it get’s interesting. The young Lee realizes in the heavy spending that he has put the collective family jewels on the table and now needs the deal big-time. And that is a poor position to begin bargaining from.

Still he sits down at the table with Jimmy and Jimmy’s lawyers to hammer out a contract. He was so far outgunned that Beats Electronics somehow ended up with all the IP and Monster got only the crumbs: the manufacturing and distribution pieces; all the heavy lifting so to speak.

Dre and Jimmy hit the marketing trail and pimped the headphones to the point where they were in placement in just about every modern cultural context. So the headphones take off and place like Best Buy can’t keep them in stock because they were selling like hotcakes. Kids were buying them not because they had a superior sound but because it made them look cool wearing them. Go figure, right?

Then at some point the Taiwanese electronic company, HTC took a 51% interest for $300M and Monster- because it no longer owned any of the patents – essentially got shut out by the deal.

And now Apple steps in with $3.2B…

PS – So the takeaway messages are: never take a knife to a gunfight and never (ever) give up your own IP.

 

 

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