Sources: HTC did not meet financial obligations to Beats

Leading up to selling back part of its stake in Beats, HTC couldn't or wouldn't fulfill its financial commitments to the audio company founded by rapper Dr. Dre.

Greg Sandoval/CNET

HTC's abrupt change in course on Beats Electronics is more about HTC's internal troubles than anything involving the audio company, sources close to the negotiations told CNET.

Last August, Beats, a maker of popular headphones that was co-founded by rapper and music producer Dr. Dre and music impresario Jimmy Iovine, sold 50.1 percent of the company to the Taiwanese manufacturer of smartphones and tablets for $300 million. On Saturday, HTC said in a prepared statement that it was selling half of that stake back for $150 million.

But in the year since taking majority control of the company, HTC has seen a management shakeup, dwindling market share, and a falling stock price. During the same period, HTC also wasn't meeting all of the financial commitments it had made to Beats as part of the acquisition deal, multiple sources close to the companies said.

It was against this backdrop that executives from both companies decided a partial Beats buyback of the company was the best way to proceed, the sources said. Beats Electronics now owns roughly 75 percent of the company and HTC 25 percent.

On Saturday, HTC said the reason for the sale was "to provide Beats with operational flexibility for global expansion." A representative of the handset maker declined to provide any additional comment for this story. A Beats spokeswoman also declined to comment.

Leading up to the deal with HTC, Beats was on a roll. The company was searching looking for investment to help it fund expansion into new markets and product categories. But Beats locked arms with a partner that was headed for trouble.

The Taipai Times wrote today that Goldman Sachs expects "HTC's shipments to drop by 68 percent from last year to 6.7 million units in North America and by 38 percent to 5.8 million units in Europe." For 2012, analysts estimate that HTC will see a 28 percent drop in total shipments.

In April, Winston Yung, the HTC executive who was credited with pushing the acquisition of Beats, was moved out as chief financial officer. HTC struggled initially making the most of Beats but that was the least of Yung's troubles.

During Yung's year-long tenure as CFO, the company's revenue went from trending up to spiraling down. When Yung was replaced as CFO, HTC CEO Peter Chou said the move was not related to the Beats investment. Chou also said that HTC remained committed to Beats.

One of the ways HTC bungled the Beats integration into HTC was an attempt to bundle Beats headphones with some of the HTC's handsets, including the Rezound and Sensation XL. The reception by the public was at best tepid.

"An accessory like the headphone doesn't factor in when someone is buying a smartphone," Martin Fichter , an HTC product executive, told CNET in April. "If they want a Beats headphone, they'll buy it directly."

But Beats remains a cultural force and the company has big plans.

Iovine and other Beats execs the company's goal is to provide a premium music listening experience in the digital era, pushing the Beats branded audio equipment in cars, mobile devices, home-stereo speakers and of course headphones.

The Los Angeles-based company just recently acquired online subscription music service MOG . According to music industry sources, Beats intends to use MOG to sell music as well as a host of other products.

According to NPD, Beats make up 28.7 of the overall headphone category and among headphones that cost $100 or more, Beats owns a 54 percent market share.

 

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