Is Bose up to a challenge from Apple?
hen Apple announces it is entering your business, it’s a bad day for any executive.
For Bob Maresca, president of Bose Corp., the largest consumer electronics company in Massachusetts, that day came on May 28. Apple said it would pay $3 billion to acquire Beats Electronics, a maker of headphones, speakers, and a music streaming service headquartered near Los Angeles.
Maresca’s response was to sue Beats, filing a patent infringement lawsuit and a complaint with the International Trade Commission last month. It’s a defensive gambit that offers tremendous insight into Bose’s challenges today, and one that will shape the future of the company, which turns 50 this year. (Its founder, Amar Bose, regarded by some as the Steve Jobs of the audio world, died last summer at 83.)
Bose and Apple were once pals. When the California company first introduced the iPod in 2004, it collaborated with Bose on the SoundDock speaker system that transformed the device from a personal music player into a home stereo. Apple’s 431 retail stores — a new one opens this weekend in China — always carried an array of other Bose products, like its line of QuietComfort noise-canceling headphones.
But step into the flagship Apple store in Boston’s Back Bay, and headphones made by Beats now outnumber those from Bose, both on the shelves and on demo tables. Partly, that’s a reflection of consumer tastes: Beats pockets 62 percent of all money spent on premium headphones, and Bose gets 22 percent, according to Benjamin Arnold, an analyst at market research firm NPD Group.
That’s pretty incredible for a company that only started selling a product in 2008. Beats’ annual revenue has been estimated at $1.5 billion; Bose’s figure is about $3.3 billion.
“Bose is not the cultural phenomenon that Beats is, with tremendous buzz and celebrities wearing the headphones,” says Arnold.
Bose was founded by an MIT professor; Maresca is one of his former students. Beats was founded by the rapper Dr. Dre and a record producer and executive, Jimmy Iovine. The company’s chief creative officer is Trent Reznor, lead singer of the band Nine Inch Nails.
One of Beats’ recent advertising spots featured cameos by a host of World Cup soccer stars as well as celebs like singer Nicki Minaj and LeBron James; it has been seen 23 million times on YouTube. Bose ads feature anonymous commuters or runners.
Bose creates its advertising in-house; an executive, Sean Garrett, told me in 2010 that “we want to make sure that our advertising is educational, and makes it clear to people why there’s a benefit in buying our product.” (Neither Bose nor Beats would make executives available for interviews.)
Beats collaborated recently with design firm Snarkitecture on a pair of $600, pure white headphones that look like something from the final sequence of “2001: A Space Odyssey.” Bose recently began selling headphones with zany colors (turquoise!) and crazy stripes on them; the effect is similar to your CPA showing up to a party wearing ripped jeans.
On Twitter, Bose has 19,000 followers, and says things like, “As a research-based company, Bose is constantly at work developing new products. . . ” Beats has more than 500,000 followers, and tweets photos of Mike Tyson and DJ Mia Moretti using its products.
So the lawsuit filed by Bose, which alleges that several Beats headphone models infringe on Bose patents for technologies that block ambient noise, feels a bit like a rearguard action. And why was it filed now?
With Apple acquiring Beats — the deal closed Friday — the transaction could create an incentive for Apple to settle, rather than face a long legal battle and possible damages, says consumer electronics analyst Ross Rubin of Reticle Research.
Even more interesting: Federal courts can award damages based on up to six years of past sales of an infringing product, says Cambridge patent attorney Greg Sieczkiewicz. So there’s some incentive to wait until a rival’s revenues grow.
One of Bose’s hopes in filing an International Trade Commission complaint is that the agency may bar Beats from importing certain products from China, where they’re manufactured. So, in a best-case scenario, Bose could force Beats and its new parent Apple to stop selling the noise-canceling headphones, and to pay Bose damages on past sales.
But in a worst-case scenario, a court could rule against Bose. The company began working on the technology in the late 1970s, and introduced a first product for pilots in 1989. Patents last only 20 years, and Bose’s original noise-canceling patents were granted in 1984.
The court could conclude that “they’re getting these new patents on incremental improvements to the technology, yet they’re trying to keep the entire market out of the noise-canceling headphone business,” Sieczkiewicz says.
Bose, incidentally, has never licensed its patents to other companies, preferring to use them to differentiate its own products.
Whatever the outcome of the patent suit, it emphasizes the challenge Bose faces in competing with Apple once Beats is part of the tech giant, the most valuable US public company. Bose’s tagline has long been “better sound through research.” But Apple is no slouch when it comes to research, product development, and smart acquisitions.
And in today’s world, design, celebrity endorsements, clever marketing, and social media buzz count for so much. Is Bose happy speaking to the over-35 demographic, and leaving everyone under 35 to Apple and Beats?
Bob Maresca previously ran the noise-canceling headphone business at Bose, and turned it from a money-loser into a profit engine. Now, he may have the toughest job in Massachusetts tech.
Correction: An earlier version of this article said that Bose alleges that several Beats headphone models infringe on Bose patents for technologies that block ambient noise. Bose alleges that two models infringe patents.