HTC's Beats deal: Hear no evil?

HTC's acquisition of a majority stake in Beats Electronics amounts to nothing but a lot of white noise.

The Taiwanese smartphone maker said yesterday that it would acquire a majority stake in the famed headphone manufacturer--best known for its partnership with Dr. Dre--for $300 million. Sources told CNET's Greg Sandoval that the deal could eventually be worth more than $500 million.

HTC Chief Executive Peter Chou and Beats Chairman Jimmy Iovine touted the opportunity to integrate Beats' sound technology into HTC's mobile devices. But HTC, typically savvy when appealing to its customers' needs, may be missing the mark with the Beats deal. Of all things a customer looks at when purchasing a phone--price, design, user interface--sound isn't a high priority. In fact, audio quality hasn't been a major selling point since the old days when the Razr was the marquee phone.

"Although audio quality does need to be improved in mobile devices, it will be difficult to make it a core differentiator to the mass market," said Hugues de la Vergne, an analyst at Gartner. " Most consumers are more interested in display quality than audio."

Iovine, however, pointed out that critics dismissed Beats when it launched, saying there was minimal opportunity for quality headphones in the market.

"When we started Beats, everyone told us headphones were a commodity," he said on a conference call today. "What we were told was this new generation didn't care about sound."

Iovine said he proved the doubters wrong, and is now looking to bring the same quality to the mobile world. He said within the next three months, phone vendors will be upgrading their sound and equipment, adding HTC would be the first.

Chou, meanwhile, said the deal represented a good opportunity for HTC to differentiate itself. Sure, Hewlett-Packard already has a deal to integrate Beats into its PCs and TouchPad tablet, but HTC's stake in Beats ensured a unique and closer partnership beyond a licensing agreement.

"I think this partnership is viewed on a core belief that amazing audio is the key to mobile phone experience," he said on the call. "We think this is a very good opportunity to continue to differentiate."

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Chou added that with the cool-appeal of the Beats brand, HTC can build its own brand in the U.S. and abroad. HTC has spent the last several years pumping marketing dollars into making itself into a household name with its "Quietly Brilliant" campaign.

The deal has some wondering if HTC may look to unseat Apple's throne in the music world. It likely won't. Beyond audio quality, Apple has an entire music store and an established base of customers. HTC has only recently begun to ramp up its content.

"The mobile device industry has seen multiple partnerships with audio companies and most did not drive significant sales volume," said de la Vergne. "This partnership will not cause Apple to lose sales to HTC."

That's okay for Iovine. His mission appears to be a broader one: to improve audio quality and bring music back to the mobile phone, which he said is the only thing that will get the record industry back on its feet.

"We're on a mission to fix digital sounds everywhere," he said.

Beats represents just the latest in a string of deals by HTC, which is flush with cash after churning out one solid smartphone after another. The company's recent deals, including Dashwire and its cloud service, improve its customer experience, while mobile video company Saffron Digital and online music service KKBOX shore up its content.

But only two of its deals, the $300 million acquisition of S3 Graphics and the $75 million purchase of patents from ADC, address the underlying concern facing HTC: the ongoing intellectual property dispute with Apple.

HTC made the typical technology company mistake by overhyping its announcement. The company yesterday sent out a notice preparing reporters and analysts for the release of "major news."

With a lot of eyes on HTC's legal issues, many speculated on another deal to shore up its patent position, or even a settlement with Apple. Instead, HTC unveiled the Beats deal.

Current Analysis consumer electronics guru Avi Greengart tweeted yesterday that he was "a bit underwhelmed by HTC's 'big news.'"