Ear Today, Phone Tomorrow

How does Plantronics dominate the headset market? It's about finding the right fit. BY DANIEL D E L R E

Walter Elly, a software developer in Tampa, Fla., used to store separate headsets for his cell phone and iPod in a backpack, but the wires often became tangled. So when he came across the Plantronics MX-IOOs, a headset that connects to both iPods and cell phones, he was overjoyed.

"It's such a simple thing, but no other manufacturer was paying attention," he says. Common wisdom says that for stuff as straightforward as electronics peripherals,

it's hard to differentiate on attributes other than price. Yet Plantronics headsets like the Bluetooth-compatible Explorer 320 for mobile phones and the CS50 for office use have become must-have gadgets. Publicly traded Plantronics had a rough first quarter, with its stock trading near its 52-week low largely because European headset use grew more slowly than expected, according to company reports. Nevertheless, by investing in ergonomics, wireless technology, and sound quality, Plantronics is still dominating its market segment. Based in Santa Cruz, Calif, the company spends nearly 10 cents of every revenue dollar—roughly twice as much as its closest competitor, GN Netcom—on re­search and development, resulting in a leading 39 percent share of professional-use head­set sales and an above-industry-average 21 percent operating margin. "Some investors expect that headsets would be completely commoditized," says Robert Tango, VP for equity research at Lazard Capital Markets. "But the level of audio expertise, along with the quality of the designs, has proven very effective for Plantronics."

AURAL FIXATION Kannappan has grown Plantronics sales 18 percent annually by investing heavily in R&D.

Necessity was the mother of the company's innovation-led strategy. Founded in 1961 by NASA engineer Keith Larkin, Plantronics got its start supply­ing headsets for air traffic con­trollers, military operators, and astronauts. (No discussion of Plantronics would be complete without mentioning that Neil Armstrong delivered his "one small step for man" transmission through one of its headsets) Lat­er, the company took advantage of growing demand from tele­marketers and phone-based cus­tomer service operations.

But in 2002, CEO Ken Kan­nappan started hearing static. Layoffs at corporate call cen-

311 ters—which by then accounted for roughly 80 percent of Plan-tronics's business—squeezed

revenue 20 percent to $311 million. Earn­ings tumbled 50 percent. Faced with this shortfall in business-to-business demand, Kannappan had to find a new avenue for growth. Luckily, the timing couldn't have been better. With cell phones and video­games finding their way into the heart of mainstream society, Plantronics could aim at a burgeoning new class of headset-hungry consumers. But first it would have to find a way to make them take notice.

Headsets That Go Vroom KANNAPPAN'S PLAN TO WIN THE HEARTS and ears of this new market started with the hiring of Darrin Caddes, a former BMW motorcycle designer, as VP for corporate design. Paralyzed from the waist down after a motorcycle accident, Caddes was

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WHAT WORKS

From Moon Walk to Mobile Talk 1960s SPENCOM Carried Neil Armstrong's "one small step for man" trans­mission from the lunar surface.

1980s LITESET Comfortable over-the-ear alternative to traditional over-the-head models.

2000s VOYAGER 510 Wireless headset with collapsible earpiece and Bluetooth technology.

J adjusting to life in a wheelchair when Plantronics called. "A headset became a ne­cessity for me," he says, "so I developed an appreciation for them." Caddes sees motor­bikes as extensions of the body and thinks about headsets the same way. "Both should make you feel better, faster, stronger," he says.

Before brainstorming new designs, Cad-des's team videotapes headset-wearing vol­unteers as they go about their everyday lives. This approach uncovers patterns that would not emerge from interviews or focus groups. For example, Caddes says, "when someone has a cell phone in one hand and a headset in the other, how do they open a door? Do they put the headset in their pocket, or un­der their arm?" Asking such questions led to a collapsible earpiece and a belt-clip pouch for the new $99 Voyager 510, a wireless, Bluetooth-enabled headset that has cus­tomers raving about its superior fit. On oth­er models, Plantronics has installed retrac­tors to prevent cords from getting caught on doorknobs and zippers.

Superior sound quality is another way Plantronics keeps its edge. Experimentation with digital systems, for example, helped the company develop microphones so sensitive that they need not extend further than the cheekbone. Testing in a soundproof cham­ber allowed Plantronics engineers to prove how well the device picks up a user's voice and differentiates between consonants and vowels. The Plantronics M3500, a $140 head­set that uses the new microphone, debuted in January 2004 and has been a hot seller, ac­cording to Plantronics's distributors. " I get a lot of feedback from customers saying the voice pickup and sound quality is excellent," says Bryan Cohen, senior telephony engi­neer for tech retailer CDW

Resellers also say consumers notice the comfort of Plantronics headsets. The com­pany tests prototypes on its "wall of ears"— 100 or so silicone molds, modeled mostly from employees. I f a prototype fits 80 per­cent of the ears on the wall, it's ready for test­ing on people. CDW's Cohen says such at­tention to design is what makes Plantronics's newest products—especially wireless head­sets that automatically switch between Blue­tooth-enabled office phones, laptops, and cell phones—so popular.

Hearing the Call W H I L E CALL CENTERS AND CORPORATE clients still generated 65 percent of Plantron­ics's fiscal 2005 sales of $560 million, mo­bile devices for on-the-go individuals ac­

counted for 22 percent—double their 2001 contribution. Of course, competitors are also aiming for new ways to connect aural­ly with consumers. Sony, for instance, is giv­ing Plantronics a run for its money with a range of new infrared cordless digital sur­round-sound headsets, and Motorola has embedded Bluetooth-enabled headsets in Burton snow jackets and Oakley sunglasses.

But such wizardry is probably far ahead of consumer demand. "We're always try­ing to make sure that we understand our customers' most important problems," Plantronics's Kannappan says. Even if it's just keeping one's cords untangled. •

Daniel Del Re is a freelance writer Hying in New Jersey.

Sound Performance Since focusing on consumer headsets in 2002, Plantronics has increased profits while keeping the lead in its core market. Net sales (in millions) $600

Net income (in millions) Market Share of Office

and Call-Center Headsets (market size = $900 million)

1. Plantronics

2. GN Netcom

31% 3. Others

0 $20 2001 2002 2003 2004 2005

Source: Plantronics Source: RW Baird

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