The Rise and Fall of Skullcandy Headphones Skullcandy. You’ve either heard of them
before and have a strong opinion about their products or you have no idea what I’m talking
about. You might infer that Skullcandy is some sort of sugar-filled confectionary treat
by a guess of its name, but Skullcandy is actually a company that sells headphones and
audio gear. The Company ballooned from just an idea into a stunning success by turning
their brand into a lifestyle - adorning their headphones in bright, bold colors and designs,
having endorsements by DJ’s, artists, and athletes, and by building a cool brand that
stands for the young generation. In this video, I’ll deep dive into the rapid
rise of Skullcandy and give you the Company Insight - how the Company rose to greatness,
declined and now even faces a questionable future ahead. But before we begin, if you
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Skullcandy Company History To begin, Skullcandy was established in 2003
in Park City, Utah. Interestingly, Skullcandy was the brainchild of Rick Alden, an avid
snowboarding enthusiast, who was reportedly taking a phone call with one ear while listening
to music with the other ear and wanted to do both at the same time. The result was their
first product called the Link System. It is interesting how Skullcandy was born out of
necessity, right? As Plato once said, “Necessity is the mother of all inventions.” Who would’ve
known this would be the start of a Company that would eventually be worth over $500 million.
Rick sold his first Skullcandy products to an action sports retail shop in Utah and within
no time he pioneered this unique distribution channel whereby by targeting specialty retailers,
the company was able to reach influencers that helped establish credibility for the
brand. It is because of that, the company was even named the world’s coolest earbuds
by Fortune Magazine in 2008. The Skullcandy Secrets to Success
So what led to Skullcandy’s huge success? Today I’ll go over 5 key items which I believe
lead to them dominating the market for nearly a decade.
Secret to Success #1 - Starting Small with a Niche
The most difficult part of doing business is not about having an idea or producing a
product. It’s all about marketing and sales. One thing I know for sure is that businesses
always grapple with the difficulty of finding customers and developing a strong market niche.
Fortunately, this is the area where Skullcandy really excelled. Skullcandy was able to stay
ahead of the game by maintaining a tight focus on a niche market. Some people believe that
a niche market is a small market. However, this belief is not necessarily true all the
time. Rather, it is all about having deep insights into a group of customers. In this
case, Skullcandy started out by focusing on the niche of snowboarders. When he started,
Rick organized snowboarding events and competitions. He went as far as designing and marketing
fastenings for snowboards to sell headphones! Skullcandy built on its strengths and network
of customers that were well-defined and ones they understood. As a result, the snowboarders
became an established strong base of evangelists for the brand which became a foundation for
the company’s success.
To see how quickly the company grew, just look at its yearly revenue graph from the
year it was founded in 2003 to its peak in 2012. Revenue grew from $1mn all the way to
$298 million! Wow! And that’s just by selling headphones!
Secret to Success #2 – Building a Brand When consumers think Skullcandy, they’re
not thinking of headphones – they’re thinking of what the brand represents. With Skullcandy,
Rick created an authentic lifestyle brand. If you have used Skullcandy products before,
you realize that this company fuses music, fashion, and action sports that reflect the
youth culture. Skullcandy built a powerful brand that enabled its market penetration
to become so big. Consumers felt the high authenticity of the brand. People who love
action sports realized that Skullcandy was one of the prominent sponsors of athletes,
musicians and DJs. Rather than going mainstream, Skullcandy was highly involved in indie and
hip-hop music genres. With that, Skullcandy came out of nowhere and completely dominated
the market. By 2011, they held the #1 and #2 positions in the market for overall unit
volumes of headphones sold in the United States. Secret to Success #3 - Innovation
The third secret, Skullcandy's proven track record of innovative product designs also
contributed to its success. As known to many, the company was founded on innovation. It
leveraged different technologies and processes to design and develop products that met the
target market needs. Skullcandy fused bold color schemes, unique materials, and highly
creative packaging with modern technologies and innovative functionalities to develop
iconic products that differentiated it from competitors. One thing that impressed me about
Skullcandy was its ability to design a product and bring it to market so quickly. This rapid
innovation led to the development from just one model of headphones in 2003 to over 20
models of different headphones with 1,200 different colors and designs by 2010. With
this innovation, they caught the wave of the Apple iPod. The standard classic white and
round design headphones that came with all iPhones and iPods back in the day were terrible.
The fit was bad, sound quality poor and they all looked exactly the same. Skullcandy clearly
took advantage of being the pioneer developer of unique audio products in the headphones
category while enjoying very low levels of competition in the market.
Secret to Success #4 – High Margins The fourth secret to success, Skullcandy captured
a market where the products provided extremely high profit margins. If you search online
on Alibaba or factory lists in China, you’ll see that the cost of manufacturing headphones
can be from as low as 10 cents to $10 to $15 dollars for more premium headphones. Of course,
this does not take into account R&D and prototyping costs that Skullcandy would have to spend.
However, what I’m trying to emphasize is that this is a business where gross margins
were definitely above 50%, and I believe gross margins could even be higher than 80% if the
Company had wanted to maximize their profits even further. These high margins were part
of the secret recipe that provided Skullcandy with ample cash cushion to expand, spend on
marketing and fully capture the market. Secret to Success #5 – Proper Funding
Finally, the last secret to success – and often a missed factor – is funding. Skullcandy
knew competitors would eventually be coming in the hordes and they needed a war chest.
The management team was able to successfully raise $188 million in cash from investors
in 2011 through an IPO on the Nasdaq stock exchange. Without this funding, I’m confident
to say that Skullcandy would not have been able to survive the onslaught of competitors
rushing to steal their margins. Financing and having a strong funding plan are both
critical to the success of startups and new companies. That’s why it’s important to
have a strong CFO! How Skullcandy Almost Collapsed
Loss of First Mover Advantage It is important to note that a first-mover
advantage does not last forever. This was the case for Skullcandy, which began recording
a decline in revenue from 2010 onwards as competitors began to infiltrate the market
with new and similar products. Net income margins from 2009 onwards were falling dramatically
even as revenue was increasing. This is because other market players were investing huge resources
to compete for the market share previously controlled by Skullcandy. And with that, the
company had to spend more and more on marketing and advertising. As a result, net income margins
fell from 12% before 2010 to 1% on average from 2010 to 2016, trending down. With public
investors selling their shares in droves, Skullcandy’s share price fell from $20 at
time of IPO in 2011 to just $4 in 2016, a loss of 80% for investors. Eventually, the
company was taken over by a private equity investment firm for around $6 per share. After
this deal in 2016, no more financial information was released to the public, so we can’t
tell for certain how the company is progressing now, but most likely the downtrend continued
to follow suit. Indeed, times have changed for the once high-flying electronics company.
Counterfeits To add to this issue, counterfeit products
also emerged as a big problem. This problem is not exclusive to Skullcandy as companies
all over the world have problems protecting their IP. So although, Skullcandy launched
a robust anti-counterfeiting initiative to protect its intellectual property rights,
there was little to do because at that time IP protective measures were not as strong
on the internet as they are now. Fierce Competition
If you study the current market trends, you realize that there has been a high proliferation
of audio brands because more and more manufacturers were entering the space. Beats by Dre entered
the market in 2008 and quickly started taking market share from the premium segment where
the margins are higher. Meanwhile, numerous other brands entered the mid and lower end
market. Even companies with no history or capability in developing audio products, like
iPhone accessory companies, went into the headphones market as basic headphones and
earphones became highly undifferentiated. Other companies started to imitate Skullcandy’s
color headphones. And to make matters worse, Apple improved their earbuds with a new design
in 2012 and followed by the introduction of Apple wireless AirPods in 2013 and Airpods
Pro in 2019. The quality of competitor products kept on improving and the difference in sound
quality with Skullcandy headphones continued to decrease. As a result, Skullcandy was forced
to lower prices to compete with other players and the high levels of revenue growth in previous
years then turned into losses. The Future of Skullcandy
And that brings us to today. While, Skullcandy’s story has a fairytale beginning of how a new
company built a brand and loyal following, and captured it’s core market, Skullcandy
now faces an existential threat. The quality of competitors headphones continues to improve
each year and prices keep falling. More and more competitors are coming into the market
across all segments from the premium market with the new Apple AirPods Max in December
2020 to the cheaper more economical headphones. If you were in the management team at Skullcandy,
what would you do now? I’d love to hear your thoughts. Do you think it makes sense
maybe for the brand to be licensed out, similar to what I talked about in one of my previous
videos covering Playboy? Be sure to check out that video if you haven’t already.
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