Hear That? It's the Sound of Headphone Sales Erupting

IPod-Wielding Consumers Are Spending Hundreds to Get Top Sound and Style

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YORK, Pa. (AdAge.com) -- What's tethering your iPod to your ears can be as telling as the brand of watch, car or shoes you own. Are you really still wearing the hard, white, plastic earbuds that came in the box? Puhleese.
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Grado's $1,000 ear cans are hot sellers.

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Chart: Name That Headphone


The new arbiters of iCool were once unheard of outside of geek circles -- Grado, Sennheiser, Shure and Ultimate Ears -- but tiny wires are giving way to ostentatious ear cans as status symbols. Today, headphones in the $700 to $1,000 range are flying out the doors. John Lazart, national sales director at Grado, said its $1,000 headphone is on back order by 800 some pairs and the company is "shipping 80% more product today than we did a year ago." And that's without any formal marketing.

Thanks not only to a preference for customization, but increasing audio sophistication and the search for personal-listening comfort, the $417 million headphone market today is exploding, particularly on the high end.

Better than out-of-box buds
"Over the years, audio gear lost its luster with consumers. Then the iPod came along and suddenly there was a sanctuary for that thing in your life called music," said Tyll Hertsens, CEO of Headroom, which reviews and sells a wide range of headphone brands. "People bought iPods based on the cool factor or the convenience factor, but now they're discovering well-reproduced music in their lives. ... There's a trigger point that makes them want better [headphones] than they got out of the box."

Suddenly, consumers were using their ear gear more often and for longer periods of time. They began to realize the prepackaged headphones were uncomfortable, of poor quality, and, quite frankly, ugly.

"You see someone with an interesting-looking headset, so you look around, buy your own, and suddenly you discover sound you weren't hearing. And you tell your friends," said Rob Enderle, analyst with Enderle Group.

According to NPD analyst Ross Rubin, the primarily headphone category of portable audio is the "only audio category seeing significant growth in consumer electronics right now." According to NPD, stereo headphones sales in the U.S. last year jumped 30% over 2005 sales of $322 million; that's on top of an increase of 67% over 2004 sales of $249 million. The average price of headphones is also on the rise, according to NPD, hitting a high average of $23.22 for 2006, up from $21.30 and $19.37 in 2005 and 2004, respectively.

Old-new players
Glance around any plane today and you'll see heads sporting familiar audio electronics names such as Sony, Koss and Bose, but there are also volumes more "new" brands. Grado, Sennheiser, Shure and Etymotic Research have been around for decades, but were involved in corollary fields, such as making microphones and audio electronics for musicians and sound engineers (Sennheiser and Shure); phono cartridges for studio and professional sound systems (Grado); and even technologies for hearing instrumentation and the hearing-impaired (Etymotic).

"If it wasn't for the iPod and MP3 makers, none of us would be in this business today," said Katherine Riley, global advertising manager at Shure. "This category of iPod accessories didn't exist 10 years ago."

Shure began to notice something was happening five or six years ago when the company saw an increase in sales of professional in-ear headphones. After talking to customers, it discovered musicians were buying the cans for their iPods. Shure decided to jump on the opportunity and created a modified set of their professional earphones for iPod and MP3 buyers. Marketed with only a modest PR effort five years ago, sales still "took off like wildfire," Ms. Riley said.

"Old" brands such as Sony saw what was happening and began upgrading. Sony remains the overall No. 1 unit and volume seller of headphones with a product line that runs the gamut of quality and price from $6 to $700.

"Truly there's a headphone for every customer, or the reverse actually, there's a customer for every headphone," said Andrew Bubala, director-marketing for Sony's personal audio accessories group.

Sony rises
Sony began running its first campaign focused on headphones last year with a marketing push for its noise-canceling variety; new executions are due this month. The Sony work was done by Bagby and Co., Chicago, though the marketer has since changed agencies to 180 and BBDO. The effort helped Sony take the top spot at retail for noise-canceling headphones for the first time in 2006, Mr. Bubala said.

While he agreed that all segments of the headphone market are growing, the $100-plus category and noise-canceling segments are seeing the greatest activity right now, he said. "If you think back to when music players cost $40 or so, it was more appropriate to spend $10 or $20 on headphones," he said. "But now people spend $300 or $400 on a player, and they're stepping up headphone spending." So while shoppers can pick up Grado's retro-look iGrado over-the-head cans -- which use the same high-end technology as its more expensive models -- for $49, the bigger interest seems to be in the more expensive sets.

So why didn't Apple leap on that? One reason is cost. It requires extensive audio expertise to create high-quality headphones -- hence the proliferation of sound engineers in the manufacturing business. It's expensive to build from scratch or hire the right people to do it -- and doing so could have added $50 to $100 to the base iPod price.

And while some consumers get the value in better headphones, the majority, at least until recently, have willingly accepted the ear buds that come with the iPod (which, by the way, are far better then the ear gear shipped with other portable electronics, according to industry insiders).

Apple plays alone
The other option for Apple to get into the higher-end headphone market would be to partner with an existing headgear maker, but as Mr. Enderle said, "Apple doesn't partner well."

That's probably OK with the headphone makers who continue on their own to add more products and technologies to headphones. What's emerging as the next big thing? Wireless-enabled headphones that can work as both music and phone receivers.

"What will be interesting is seeing this carry over to the iPhone space," said Michael Gartenberg, Jupiter Research analyst. "Those who have or are replacing basic headphones with ones with phone capability will likely be a step ahead."
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