Yet, for whatever reason, Diddy just didn’t go all-in on the earbuds. “You have to live it,” Lee explains. “You have to wear it around your neck all the time. It has to be part of your lifestyle, and it wasn’t for him.”50
Diddy had his eye on a different sort of product: Cîroc vodka (more on this later), which commanded his attention on a constant basis and would be nearly as rewarding for him as Beats was for Dre.
As Dre prepared for the launch of his Beats streaming service, his headphone line had gobbled up two-thirds of the hundred-dollars-and-up market, simultaneously dwarfing and lifting brands like Bose and Sennheiser.
“It didn’t just cannibalize sales and elbow other guys out; it grew the whole category,” says Dunn, who saw the effects of Beats firsthand at Best Buy. “All of a sudden, headphones were much more than just these little earbuds.”51
The effects of such dominance showed up on Beats’ balance sheet. By 2013, the company zoomed toward $1.2 billion in annual revenues. This helped to lure yet another massive investment, this time from the Carlyle Group, one of the world’s largest private equity companies, which poured $500 million into Beats in September.52 (A spokesperson for the firm declined to make an executive available for comment.)53
The size of the stake Carlyle had purchased wasn’t publicly revealed, though most reports at the time said that the agreement gave the firm less than half of the company, valuing Beats at more than $1 billion. By Lee’s math, though, the deal gave Carlyle about one-third of the company, implying a $1.5 billion valuation.54 The infusion also allowed Beats to buy out HTC’s remaining 25 percent stake and repay a $150 million note held by the handset maker, whose primary business had faltered in the face of challenges by competitors like Samsung.55
A report by the research firm PrivCo later suggested that Beats was also having a bumpy time—much more than anyone on the outside ever realized—despite its gaudy revenue numbers. Apparently, after taking manufacturing in-house, Beats experienced a cash crunch and teetered just days from bankruptcy before coming up with a nine-figure loan. “By 2013, Beats Electronics was a distressed business by any standard,” said the late PrivCo chief Sam Hamadeh. “The company was in a corner until Carlyle stepped in.”56
The Carlyle investment also gave Beats the funds it needed to keep expanding. That was especially important given the focus on its new streaming service. Beats Music celebrated its official launch in January 2014 with a concert at the Belasco Theater in Los Angeles, fronted by Dre, Diddy, Eminem, Nas, and Ice Cube. Inside, superstars from Drake to Pink mingled with label chiefs and talent agency executives at the oversubscribed show.57
There were no reports of Apple executives in the crowd, but the computer giant was clearly watching. On May 8, the Financial Times reported that Apple had agreed to purchase Beats for $3.2 billion; that night, the grainy YouTube video of Dr. Dre’s impromptu celebration lit up the Internet. As the end of the month neared, though, the deal still hadn’t been completed—and Beats’ founders worried that Dre’s public actions had spooked the secretive tech giant. “I thought the deal could blow,” Iovine admitted in the HBO documentary The Defiant Ones, in which Dre called the episode one of the most embarrassing moments of his life. Says Lee: “I could see [Apple CEO] Tim Cook going, ‘What’s this guy doing?’”58
Three weeks later, though, the deal went through—for a final price of $3 billion. “No traditional valuation measure applied to Beats as a business justifies the price,” wrote PrivCo’s Hamadeh. “We must assume Apple and Tim Cook have grand plans that we’re not privy to.”59
A clue can be found in Apple’s annual report from 2014. According to the document, the Beats buyout included $2.6 billion in cash and about $400 million in stock that “will vest over time based on continued employment with Apple.”60 In other words, the tech giant structured the deal to include a centimillion-dollar carrot to keep Beats’ founders in its fold. And that’s perhaps the most fascinating part of the purchase. Though many experts believe that the existing business of Beats headphones and the potential of its nascent streaming service were enough to justify the deal on Apple’s end,61 others think that the company mainly wanted to get Beats’ founders onto its executive roster.
“Apple’s Beats Deal Is Happening, and It’s a Dre Acquihire,” blared a headline on TechCrunch. “They want Jimmy and they want Dre,” a source told the publication. “He’s got fashion and culture completely locked up.”62 Some went as far as to suggest that Cook saw the duo as a partial replacement for Steve Jobs, who’d passed away in 2011. “He’s saying, ‘I’ll try to replace [Jobs] with five people,’” U2 front man and venture capitalist Bono told the New York Times. “It explains the acquisition of Beats.”63
Indeed, Iovine had befriended Jobs—who believed that people would always want to own their music rather than stream it64—a decade or so before the Apple founder’s passing. Jobs helped persuade the Interscope chief to allow unbundled songs to be sold in the iTunes Store, a crucial step in Apple’s insertion into music’s ecosystem. In 2015, Iovine told Wired that when he and Dre founded Beats, he hoped to someday be acquired by Jobs. “Apple got the best people in pop culture,” Iovine said. “Whether it succeeds or not, it’s the beginning of what the future should look like.”65
Other reactions filtered in from Beats’ early team. Lee, who’d sold his stake in Beats for barely twenty cents on the dollar just months earlier, began the painful process of digesting the multibillion-dollar transaction. He believed that Apple did the deal so that the company could tie the headphones to iPhones and iPads, perhaps replacing the headphone jack on the products with its Lightning connector and producing Beats products exclusively for that type of hardware.66 On the other end of the spectrum, Will.i.am got a multimillion-dollar payout—likely in the low to mid eight figures—and mused on the social impact of Dre’s deal.
“It’s not just good for the company; it’s good for the culture,” he said. “You have to look at it like… kids in inner cities not only dream about being athletes and musicians, but now entrepreneurs, and bringers of new, disruptive, cool lifestyle products. A whole new spirit just popped from this one announcement.”67
The Apple buyout also underscored the value of Iovine’s advice to Dre—to reject that sneaker deal—so many years earlier. Amazingly, the best way to do battle with Nike’s Air Jordan for consumer dollars turned out not to be launching a shoe line, but creating a revolutionary brand of headphones.
As far as Lee is concerned, the Beats deal is one that should be held up as an example for young entrepreneurs—but not in the way Will.i.am suggested.
“I call it Beware of the Sharks, because when you’re not successful, nobody will touch you,” he says as we wrap up our interview. “When you’re successful, everybody comes out of the water, and Monster was a very successful company before Beats.”68
Lee arrived at this conclusion several months after the completion of the Apple deal, he says, reflecting on his role in creating Beats. As he saw it, he’d paid the company some $200 million in royalties over the years for headphones he’d manufactured; rather than partnering with Jimmy and Dre, he could have simply used that money to hire entertainers to shill for his own products.
Going back through the timeline, he fixated on what happened when he negotiated his 5 percent stake in Beats, before HTC bought 51 percent of the company. Lee claims the contract that gave him equity also had a change of control provision that would require Monster to forfeit its intellectual property rights to the headphones and all its dealer lists—an event that he insists the HTC investment triggered. Says Lee: “When I looked at all of the happenings, and the business that occurred, and the time they occurred, I said, ‘I think we’ve been scammed.’”
And so, in January 2014, Lee filed a lawsuit in California alleging, among other things, fraud and deceit, breach of duty of trust and confidence, unfair competition, breach of fiduciary duty, and violations of the California corporations code. The
suit demanded a jury trial and unspecified damages.69
Lee believes that the entire HTC deal was “a sham transaction” designed to cut Monster out of the picture, and that Beats had a deal in place with Apple long before 2014—he insists that Carlyle knew about a planned Apple pact before investing in Beats in 2013. “We had put all our eggs into building that Beats basket,” says Lee. “We got screwed on that deal… We had to lay off people, close factories, all that kind of stuff.”70
The authorities weren’t swayed. A few months after our meeting, Los Angeles Superior Court judge William Fahey dismissed the main claims in Lee’s suit. Fahey ruled that Beats’ actions were permissible under the contracts they’d signed with Monster as sophisticated investors.71
But even before losing the case, Lee was already plotting his next moves, telling me of a new business model—“Beats on steroids”—and speaking of plans to team up with other artists and athletes to create future products. Above all, though disappointed with the way the Beats scenario had turned out, he clearly hasn’t lost his taste for doing business with centimillionaire rappers.
“I would love to help Jay-Z,” he says. “I’m the business guy. I’m the retail guy. I’m the one who has the connections for mass markets.”72
Jay-Z, though, already has such connections—not just in the headphone business, but in the spirits world, where he and Diddy turned their attentions while Dre bolstered Beats.
CHAPTER 9
Grape Expectations
Lower Manhattan is home to the center of the financial universe, the fifty-dollar truffle-topped personal pizza, and Lyle Fass, a man who knows more about the business of alcohol than anyone I’ve ever met.
Fass got his start working at liquor stores before becoming a personal wine buyer for megawealthy clients. Through his company, Fass Selections, he now makes his living selling reds and whites to thousands of loyal buyers who’ve signed up for his email list. Twice a year, he places orders with European producers and brokers; the bottles are shipped to a warehouse in California, and then directly to customers. It’s a good setup for Fass, who never has to touch the product, and for his clients, who get biannual deliveries of top-tier wine for well below retail price.1
“It’s like Christmas for adults,” he explains after greeting me at the door of his financial district home-office in sweats and a T-shirt, sporting a salt-and-pepper beard and black glasses. Despite Fass’s enological inclinations, his walls are lined not with bottles but with sneakers. Shoe boxes are stacked floor to ceiling in some places, and wire racks blossom with brightly hued pairs of kicks from Nike to New Balance, Diadora to Le Coq Sportif. Old-school hip-hop blares in the background.
But tonight we are here to talk spirits—not sneakers—specifically, Cîroc, the vodka for which Diddy has shilled to the tune of hundreds of millions of dollars over the past decade, and D’Ussé, the cognac peddled by Jay-Z more recently. I’ve brought Fass a medium-size bottle of the latter—in addition to talking, there will be some tasting. He opens it up, takes a sniff, and crinkles his nose. “Going to have to save that for later, or it will ruin our palates,” he says. Also on the menu: a selection of eight different Cîroc flavors in fifty-milliliter containers.
“The terminology is called ‘nips,’” says Fass. “I worked on the counter of many stores that sell such small bottles like this. You are getting a person that literally needs to open that right as they’re walking out the door of your liquor store.”
Fass is not one of these people. He’s got experience peddling all sorts of spirits but tends to look down on any beverage with alcohol content over 14 percent. He is as opinionated as he is irreverent. “Wine is the only truth,” he says. “Everyone’s like, ‘Oh, I’m a hard liquor connoisseur.’ I’m just like, ‘You’re a fucking drunk.’” I tend to agree, which is partly why I decided to interview him for this chapter. (His grape expertise is especially relevant given the beverage portfolios of Jay-Z and Diddy; we’ll get into that shortly.)2
In any case, Fass insists on lining up the flavors as he would at a wine tasting, starting with lighter options and moving toward heavier. He places Cîroc’s flagship Snap Frost variant first, and then the fruit flavors, finishing with Cîroc Amaretto. He also warns that, as with marathon wine tastings, it’s best to spit out the product once it’s been sampled, lest the taster become too incapacitated to judge the next offering. He cracks open the Snap Frost and pours two glasses, swirling his aggressively, as if whisking an egg, before taking a sniff.
“It definitely smells like something you’d put on a wound,” he says. Then he takes a sip, swishes it around in his mouth for a moment, and spits. “Lots of alcohol, but bitter on the finish. There’s like this brief hint of biting into a piece of gum for one-tenth of one-tenth of a second. That’s probably the flavor.”3
Indeed, Cîroc’s offerings are potent. The flavors sit at 35 percent alcohol and Snap Frost runs at 40 percent, as vodkas are wont to. Today Cîroc, a partnership between Diddy and Diageo—the beverage giant behind brands including Guinness, Tanqueray, and Johnnie Walker—moves some two million cases per year, roughly even with Ketel One and trailing only Grey Goose (2.7 million) in the premium vodka category.4 Cîroc has earned its share of critical acclaim as well, receiving honors like the double gold medal in the vodka category at the San Francisco World Spirits Competition and the Spirits Brand of the Year Award from wine and liquor trade publication Market Watch.5
“When I’m talking strictly vodka, it’s less offensive than Tito’s… or Belvedere, or Ketel One,” Fass admits. “I can’t drink those straight. I think those are disgusting.”6
I ask what he prefers about Cîroc.
“The only advantage is texture,” he says. “Vodka is watery. Vodka made from grapes, my conclusion, is not watery. It’s more textured. The flavor is a gimmick. That is my professional opinion.”
Fass also has a professional opinion about Cîroc’s effect on Diddy.
“I understand why he’s not putting out any more albums or anything,” he says. “This stuff is a goddamned gold mine.”
Given hip-hop’s success marketing soft drinks like Sprite, alcoholic beverages were a logical next step. The trend began in the early 1990s with malt liquor St. Ides, which brought in rappers including Ice Cube, Snoop Dogg, and the Wu-Tang Clan to record commercials and extended jingles. Dr. Dre jumped on the beer bandwagon in 2002 with a Coors Light commercial that finds him on a darkened airplane, working on a beat while enjoying a cold one. The tagline: “Can’t stop the flow.”
Jay-Z actually preceded Diddy into the spirits business, acquiring the U.S. distribution rights for Scotland-based Armadale Vodka that same year with his Roc-A-Fella Records cofounders. They employed a strategy similar to the one rolled out for Rocawear: feature the product in songs and videos and hope the free advertising turns into sales.7 But Armadale never really had a chance. Jay-Z split with his partners shortly after acquiring the brand, which meant that promoting Armadale would call for sharing the spoils with his erstwhile associates; he didn’t mention the vodka in any of his songs after 2003. By the time I wrote my Jay-Z biography, Empire State of Mind, in 2011, the United States Patent and Trademark Office had marked the brand “DEAD.”8 Jay-Z didn’t bother to buy out his partners as he’d done with Rocawear. Indeed, he seems to have been thinking of a better proposition: starting something new and keeping a greater portion of the spoils for himself.
Soon Jay-Z had some extra motivation to get back into the booze business. In May 2006, Frédéric Rouzaud, the managing director of the company behind Cristal champagne, the brand historically preferred by Russian tsars—and rappers, after Branson Belchie introduced the pricey bubbly to the hip-hop world in the early 1990s—made a mistake that would cost his employer millions of dollars’ worth of free advertising. A reporter from The Economist asked Rouzaud if the rap world’s preference for Cristal had tarnished the brand’s image. “What can we do?” he said. “We can’t forbid people from buying
it.” Perhaps Rouzaud thought rappers didn’t read The Economist. He was wrong.9
“That was like a slap in the face,” wrote Jay-Z. “You can argue all you want about Rouzaud’s statements and try to justify them or whatever, but the tone is clear… I felt like this was the bullshit I’d been dealing with forever, this kind of offhanded, patronizing disrespect for the culture of hip-hop.”10 So Jay-Z immediately issued a release stating that he’d never drink Cristal again, and that he’d banned it from his clubs as well. He temporarily changed his preference to Dom Pérignon and Krug. But in typical Jay-Z fashion, a more profitable plan was fermenting in his brain.
In the fall of 2006, Jay-Z released the video for his song “Show Me What You Got,” which featured him zooming around Monte Carlo in a Ferrari with Dale Earnhardt Jr. and then racing Danica Patrick in a Pagani Zonda roadster before joining model Jarah Mariano for a game of blackjack at a party on a private island. But the star of the video is the mysterious gold bottle of champagne that Jay-Z accepts after waving off a Cristal delivery: Armand de Brignac—introduced in the song by its nickname, Ace of Spades—a brand produced by a French company called Champagne Cattier.
“He discovered our champagne by pure coincidence in a wine shop and a few months later came to Monaco,” explained Cattier’s Philippe Bienvenu when I visited France while reporting Empire State of Mind. “He ordered a few cases that we shipped to his hotel there… We just thought that he wanted to enjoy our champagne during his stay.”11
Bienvenu said Armand de Brignac was a dormant brand that Cattier had recently resuscitated, but he couldn’t name the New York wine shop in which Jay-Z had supposedly unearthed it. I later discovered the reason for this: according to the United States Patent and Trademark Office, the Armand de Brignac name was first used for commerce in America in November 2006, meaning that Jay-Z couldn’t possibly have found the champagne in a Big Apple store in time for the video shoot, which had taken place that summer. When I confronted the Cattier team about this inconsistency, a spokesperson admitted that Jay-Z had met with Sovereign Brands, Armand de Brignac’s importer, and that they’d had discussions about forming some sort of relationship.12 From my conversations with industry sources, it seemed that Jay-Z, Sovereign, and Cattier all owned a piece of Armand de Brignac by the time it became available to New York vintners.
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