Ear Today, Phone Tomorrow
How does Plantronics dominate the headset market? It's all about finding the right fit.
By Daniel Del Re

(Business 2.0) – 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-100s, 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."

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 centers--which by then accounted for roughly 80 percent of Plantronics'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 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, Caddes'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. If 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

While 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 accounted 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.