Starkey: A Generational Opportunity in the OTC Market
By: Ewan Chapman & Nathan Ha
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Starkey: Hear Our Aid
Starkey Hearing Technologies (Starkey) is a privately held American hearing aid manufacturer headquartered in Eden Prairie, Minnesota. The company distributes its products strictly through audiologists and prescriptions and sells to patients internationally with 28 facilities worldwide. Starkey is coined as one of the Big Five hearing aid manufacturers, alongside major competitors Sonova, William Demant, GN Store Nord, and WS Audiology. Collectively, the Big Five control over 90 percent of the industry. Starkey, the only American-based company within the Big Five, controls roughly 4 percent market share of the global industry. The company is widely accepted as an industry leader in artificial intelligence technologies and innovative applications of hearing aids including, for example, devices that track fitness and translate foreign languages.
Aid Has Been Long Out of Reach
Historically, the hearing aid market within America has faced two primary issues; price and accessibility. Typically, a pair of hearing aids sell for $4,000-$6,000 and, in the United States, there is only one audiologist for every 9,000 eligible hearing aid consumers. These factors have left hearing aids out of reach for the average American consumer. While the future seems bleak, a historic ruling was passed by the FDA in August 2022 which attempts to address these concerns. Following a final rule issued by the FDA, a law was enacted that creates a new vertical of hearing aids for over-the-counter (OTC) distribution targeting individuals with mild to moderate hearing loss. The ruling aims to increase competition within the market, which will drive lower prices and increase accessibility for consumers.
OTC: A Generational Opportunity
An estimated 25.4 million and 10.7 million residents aged 12 years or older have mild and moderate hearing loss in the United States, respectively. This yields a total addressable American market size of 36.1 million consumers for OTC hearing aids. Conservatively assuming that 25 percent of these consumers would be interested in OTC hearing products (due to general ignorance, social or financial constraints, already possessing hearing aids, etc.) and assuming an average selling price of $1,000 per pair, there is an approximate $9 billion potential market size within the United States. Thus, this market poses a significant opportunity that is expected to expand for the foreseeable future.
Numerous tailwinds are driving the high growth expectations of the new OTC market. The total number of seniors (aged 65+) is growing at an annual rate of approximately 3.2 percent compared to 0.8 percent for the total world population. Moreover, seniors are the wealthiest demographic in the global economy, spending trillions of dollars annually. With an increasing proportion of the world's population and wealth to be controlled by seniors, significant investment in improving life expectancy and the overall welfare of those in late life is anticipated. While hearing aid usage has faced barriers due to a long-held stigma, this is expected to diminish through the shift to OTC due to an increasingly subtle consumer-based product design, furthered education around the benefits of hearing aids, and the increasing prevalence and acceptance of hearing aids. This shift isn't only relevant to seniors, however, as young adults are more than ever using listening devices such as headphones and speakers at unsafe volumes for extended periods of time. The World Health Organization (WHO) now estimates that over 1 billion young adults are at risk of permanent avoidable hearing loss due to unsafe listening practices. Therefore, it is estimated that increased hearing loss in both young adult and senior demographics will result in higher demand for hearing aids that provide mild to moderate relief and assistance. Finally, the push for OTC in the United States represents a significant opportunity internationally. Many countries are expected to follow behind America concerning OTC legalization, with Canada expected to be at the forefront of this trend.
Starkey’s Shortcomings
Starkey has been reluctant to adapt to recent market developments, as evident by the following quote from Starkey’s CEO, Brandon Sawalich:
“Personally, I don't believe in OTCs; it's a way of getting around audiologists. All ears are different. Only a specialist can adapt a hearing aid to the specific needs of each patient, whether it is the size of the mould, the settings etc…”
Sawalich's views may have been incentivized by a desire to continue operating on a hugely profitable oligopoly market structure, as evident through Starkey’s increased lobbying efforts against the recent FDA rulings. On the other hand, the company may genuinely believe that the OTC market prospects are bleak. Regardless, considering the changing industry, it is imperative that the company reassures consumers that Starkey is committed to increasing accessibility to those who bear the burden of sky-high prices and unreasonable wait times. As the market for OTC hearing aids continues to grow, Starkey risks losing market share to companies more willing to adapt their product offering to the demands of the public. Competitors have already made strides in anticipating this growth, announcing strategic partnerships for their OTC products with big-box retailers and consumer headphone manufacturers such as Best Buy, Walmart, Sony, and Bose.
Starkey does currently have plans to release an OTC model marketed under a separate brand name called "Start Hearing One", which plans to avoid big-box retailers and keep distribution limited to healthcare clinics. The product is expected to cost $899, and Sawalich has emphasized the company’s reluctance to market this product heavily within the United States. Moreover, by marketing the product under a separate brand name, Starkey is not optimizing the strong reputation the company has spent years accumulating and sends a strong negative message to consumers. These decisions will significantly limit Starkey’s product reach and ability to compete with more accessible and well-known competitors. This stance reflects Starkey’s unwillingness to invest in OTCs, and without a strategic shift in their OTC rollout, the company’s position as a leader in the hearing aid industry may suffer. The consumer and healthcare hearing markets are converging, consequently allowing for greater access and lower prices. Starkey has severely limited its product reach by restricting OTC distribution to healthcare clinics, refusing to attach the company's brand name, and taking a conflicting public stance. With increased competition, Starkey will require rapid adaptation to its current strategy to maintain its market position. Known as a leader in technological innovation, Starkey should be well poised to take advantage of this generational opportunity available through the OTC market. If the company acts fast and shifts its strategy, it is possible Starkey can establish itself as a leader.
Case Study: Sony & WS Audiology
As previously mentioned, many of the Big Five hearing aid manufacturers have begun to partner with large consumer headphone brands to expand into the direct-to-consumer market – namely, a recent partnership between WS Audiology and Sony. The goal of this strategic partnership is to leverage the respective technological and medical expertise of each company with the consumer brand name Sony has to offer. Specifically, the companies expect to realize synergies through Sony’s product miniaturization technologies, brand awareness, and broad distribution power in the consumer market in conjunction with WS Audiology's hearing aid technologies and distribution power in the professional market. The duo’s first product has been released under the Sony brand, called the “Sony Self-Fitting CRE-C10”, which is retailing for $999.99 at Best Buy. The hearing aids are to be used in combination with a smartphone app developed by Sony to self-fit and adjust the aid on an ad-hoc basis. Thus far, the partnership has established the two respective powerhouses as first movers and is expected to be one of Starkey’s main competitors in the OTC market.
Hear Our Aid!
Starkey must revamp its entry strategy into the OTC market. Three main strategic verticals must be addressed to succeed; product development, marketing, and distribution.
Product Development Strategy
JBL, a subsidiary of Samsung Electronics, represents an attractive partner for Starkey due to the company’s leading position in the consumer listening market, controlling a market share of approximately 11 percent in the United States. JBL would take on a major role in the product development and manufacturing component of Starkey’s new Start Hearing One product, bringing their manufacturing infrastructure and technology know-how to aid Starkey in creating a superior product at a low price. There is also ample opportunity for technological integration across the OTC hearing aids and Samsung’s robust line of products, specifically as it relates to smartphones and software connectivity. JBL’s existing product line demonstrates this capability, with the JBL Pro Connect incorporating Bluetooth low-energy technology and extensive firmware compatibility features. JBL will similarly benefit from this partnership – Sony and Bose, its main two competitors, announced their own strategic partnerships with leading hearing aid manufacturers. JBL will be looking to defend its market position and capitalize on the OTC opportunity, diversifying its product offering and boosting its bottom line. JBL requires a partner with a medical profile and strong credibility within the professional hearing aid industry, a role that Starkey should be happy to fill.
Marketing Strategy
A partnership with JBL also helps Starkey on the marketing front. Brands such as Sony and Bose benefit from having direct contact with consumers, as well as strategically placed retail locations attracting foot traffic on a daily basis. Moreover, these companies have developed strong brand recognition, allowing products offered in these retail locations to leverage the existing trust of consumers. To gain the confidence of consumers who may lack knowledge of the hearing aid industry, partnering with a well-established headphone brand will allow Starkey to penetrate the market. Additionally, Starkey should shift their public stance on OTC hearing aids and convey to consumers that the company is dedicated to increasing hearing aid accessibility for all. Through the CEO’s lack of acceptance of the OTC industry and marketing its own OTC product under the separate brand name "Start Hearing One", Starkey has failed to properly signal to consumers its expansion and commitment. Therefore, a switch of the brand name to “Starkey-JBL Hearing One” as well as continuous investments on the marketing front of Starkey’s OTC line will demonstrate to consumers Starkey’s dedication to improving access to the general public. This demonstration, with aid from Starkey’s solidified brand name, will help to drive consumer awareness and acceptance of the new OTC line.
Distribution Strategy
A final advantage to this partnership is the access it will give Starkey to big-box distribution channels. JBL’s products are currently sold through a significant number of in-store retailers including Walmart, Best Buy, and Walgreens. By capitalizing on JBL’s pre-established big-box relationships, Starkey will be able to easily integrate products through this distribution channel. A big-box distribution strategy will be critical in generating sales, as the vast majority of media coverage on the OTC market points consumers directly toward these locations. Considering Starkey’s strategy of limiting distribution to clinics, which does not expand the company’s consumer exposure beyond traditional means, the addition of this lucrative distribution network will be a substantial tailwind for Starkey’s top line.
Starkey should additionally begin to sell OTC products through e-commerce. Currently, the company does not sell direct-to-consumer through its website as all products require a preliminary visit to an audiologist. However, selling through e-commerce will allow Starkey to capture a broader market share across the United States, thereby preparing them to capitalize on the inevitable OTC expansion to new geographies and furthering the ease of access consumers will have to Starkey’s products.
The Hearing Aid Revolution
There is a hearing aid revolution upon us. Never before have hearing aids reached the levels of accessibility and affordability seen today, and the hearing aid manufacturing battleground is likely to revolve around who can most aptly cater to these factors.
Through a strategic partnership with JBL, Starkey will be able to reaffirm its dedication to consumer access and broaden its distribution channels in order to dominate the OTC market. As the OTC market continues to develop, this partnership will serve as the cornerstone for Starkey’s future success, boosting its profitability and helping Americans gain access to the hearing aids that they deserve.
