Best Buy and Dre's Beats planning new collaboration

And the Beats live on at Best Buy.

The Richfield-based consumer electronics giant is once again collaborating with Beats, the high-flying premium headphone maker founded by rap mogul Dr. Dre and record executive Jimmy Iovine, said two sources with knowledge of the project. Best Buy and Beats previously worked together to sell disc jockey equipment.

Best Buy officials declined to offer any details and Beats spokesperson did not respond to a request for comment. But analysts say a partnership could range from high-profile merchandise displays to the retailer exclusively selling a new Beats product. A store-within-a-store concept is another possibility, though analysts say Beat's limited product assortments makes that idea unlikely.

"I'm not sure [premium] headphones justify breaking out a lot of store space," said Stephen Baker, an analyst with market research firm NPD.

In any case, such an alliance fits nicely with CEO Hubert Joly's strategy of devoting store space to products and experiences that drive traffic and increase revenue per square foot. Over the past two years, Best Buy has been struggling to grow same-store sales as consumers increasingly migrate toward the Internet.

The company, however, seems to have stabilized its performance in the past two quarters. And Best Buy recently struck deals with Samsung and Microsoft to create stores-within-stores to push sales of laptops, computers and mobile devices. Such partnerships have helped boost Best Buy stock price in recent months.

Founded in 2008, Beats Electronics, based in Santa Monica, Calif., pioneered the category of premium headphones. Endorsed by celebrities like LeBron James, Justin Bieber and Lady Gaga, the $300 headphones, the company claims, can transmit high quality audio similar to what singers and musicians hear in recording studios. The stylish devices, known for a large "B" printed on the sides, have become hugely popular, spawning a number of competitors in the once sleepy personal audio market.

For the first three months of 2013, unit sales for premium stereo headphones ($100 or more) grew 25 percent compared to the same period a year ago and accounted for 95 percent of the revenue growth for the total headphone market, according to NPD data.

This would be the second time Best Buy has teamed up with Dre and Iovine, the chairman of Interscope Geffen A&M Records. In 2009, Best Buy launched Club Beats, a special store section devoted to DJ equipment, at 300 stores across the country. At the time, Best Buy had hoped Club Beats would offer customers a natural complement to its musical instruments department.

With the new venture, Best Buy could be looking to create another special section for Beats merchandise. But for Best Buy to devote the same amount of space to Beats as it does to its Samsung and Microsoft stores-within-a-store would be impractical because of the relatively small market for premium headphones, analysts say.

Nevertheless, Beats offers some intriguing possibilities. Although Beats primarily makes headphones, the company has been expanding into other markets, such as speakers and earphones. In addition, Beats enjoys alliances with Hewlett-Packard, HTC and Chrysler to install Beats audio technology in laptops, mobile devices and cars.

Ben Arnold, director of industry analysis for NPD, says the headphone market is larger than one thinks because people prefer high-quality audio when consuming content on their mobile devices, such as video games, movies and music. While Beats products carry a high price tag, Best Buy has also been stocking more of its shelves with premium products, such as high-end appliances and $15,000 televisions.

And while installing a Beats store in all 1,000 Best Buy stores doesn't make much financial sense, the retailer could at least test a concept at some stores in major markets like Los Angeles or New York. Beats operates one store in the United States on Greene Street in New York City.

Thomas Lee • 612-673-4113