Cambridge SoundWorks, Inc.

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Cambridge SoundWorks, Inc.

100 Brickstone Square
Andover, Massachusetts 01810
U.S.A.
Telephone: (978) 475-3608
Toll Free: (877) 937-4434
Fax: (978) 475-7265
Web site: http://www.cambridgesoundworks.com

Wholly Owned Subsidiary of Creative Technology, Inc.
Incorporated: 1988
Employees: 250 (est.)
Sales: $50 million (1997)
NAIC: 334310 Audio and Video Equipment Manufacturing

Located outside of Boston, Massachusetts, Cambridge SoundWorks, Inc. is a subsidiary of Creative Technology and manufactures a wide range of speaker systems for home stereo, home theater, car audio, and personal computers. Products are sold through 24 retail locations, with 12 located in Massachusetts, seven in California, three in New Hampshire, and two in Maine. Cambridge SoundWorks sells to the New York market through an exclusive distribution deal with J&R Music and Computer World, a major electronic retailer in the city. In addition, the company sells through its own catalog and a sister Web site, hifi.com, and Creative Labs distributes its multimedia speakers around the world.

Early Life and Career of Henry Kloss

Legendary audio engineer Henry Kloss was born in Altoona, Pennsylvania, in 1929 and raised in the area. As a boy, he was a precocious builder, adding rooms and bathroom fixtures to the cabin he shared with his mother and two sisters. To support his studies at the Massachusetts Institute of Technology (MIT), which he entered in 1948, Kloss worked part-time for a contractor. He purchased woodworking tools in order to make furniture for his apartment, but instead became involved in audio, building enclosures for a speaker system designed by an MIT professor and his student to improve the sound of live FM broadcasts of the Boston Symphony Orchestra. Drafted into the service during the Korean War, Kloss dropped out of MIT and would never complete his degree. While stationed in New Jersey, however, he a took a night course in high fidelity at New York University. His teacher, Edgar Villchur, had an idea for a new loudspeaker, and after Kloss was discharged from the service he teamed up with Villchur in 1953 to found Acoustic Research to develop and manufacture it. Two other partners, Malcolm Lowe and J. Anton Hoffman, provided $5,000 in seed money, and Kloss supplied the facility, an abandoned furniture factory in East Cambridge where he was already operating a cabinet and speaker-assembly shop.

Developing Villchur’s idea, Kloss designed the first acoustic-suspension loudspeaker, the AR-1, which used air in a sealed cabinet to better produce sound than any product before it. The system was exceptionally good with low frequency sounds, which were crucial in the reproduction of classical music, yet it did not sacrifice quality in the rest of the frequency range. Until that time, in order to realize good-sounding bass, audio designers would have had to resort to building speakers the size of a refrigerator. The AR-1 was so far ahead of its time that early demonstrations to retailers were met with suspicion. Surely some kind of trickery was involved, because everyone knew that good bass could never emerge from such small, bookshelf speakers. Once the dealers became believers, the AR-1 forever changed the hi-fi industry.

Although Kloss was a gifted designer, much of his success was a triumph of perspiration over inspiration. What truly separated him from others, however, was his ear. Kloss simply knew what sounded good. Unconcerned with a strict adherence to accepted design specifications, he was committed to producing a broad, smooth, clean sound that would become recognized by audiophiles as the “Boston sound.” Moreover, he was devoted to producing affordable products, more interested in making quality audio components available to ordinary people than in amassing wealth. Like an artist, or perhaps a prophet, Kloss began to develop a cult-like following for his work.

After three years with Acoustic Research, Kloss was frustrated with Villchur, who continued to live in Woodstock, New York, and contributed little to the running of the business. In 1957, Kloss, Lowe, and Hoffman started a new company, KLH, which took its name from the first letter of their last names. Not only did Kloss design more speakers, he made other important contributions to the audio industry, especially in his pioneering use of the transistor. In 1960, he introduced the Model Eight, the first high-end tabletop FM radio (and now a valuable collector’s item). Although monaural, it produced a quality sound and was marked by its “high selectivity,” the ability to tune in a station from a crowded bandwidth. In 1961, KLH brought out the Model Eleven, the first mass-produced portable stereo system. Essentially contained in a suitcase, the Model Eleven was perfect for dormitories and small apartments and was a key factor in the rapid rise of rock music.

Kloss Founds Advent in 1967

Kloss left KLH in 1967, after the business was sold to Singer for $4 million, to found yet another company, Advent. He not only produced one of the most popular speakers of the era, he made a number of other contributions during his decade with the company. He was instrumental in convincing Ray Dolby to adapt his noise reduction technology for audio tape to consumer products. In 1968, Kloss produced the first tape recorder, Model 40, with Dolby B noise reduction. He then added the chromium dioxide cassette to the mix, which, combined with the Dolby system, transformed tape into a medium suitable for music. In 1971, Kloss introduced the Advent 200/201, the first high-fidelity cassette deck.

It was also during his years at Advent that Kloss became a pioneer in television, developing a passion that would all but ruin him financially yet ultimately lead to his comeback with the creation of Cambridge SoundWorks. Despite his general distaste for television, which at one point he denounced as “that demeaning little box,” he enjoyed movies. Decades before the commercialization of the home theater idea, Kloss decided to replicate the movie theater experience in the living room. Reportedly, he claimed to have never watched television before deciding to build one. He combined known technologies to produce the first large screen, projection color television, the Advent VideoBeam 1000, launched in 1972. Convinced that the projection television market was on the verge of tremendous growth, he invested heavily in its development, while paying scant attention to the stereo business. Although the demand for Advent speakers was tremendously high, Kloss kept the price so low that the company enjoyed little benefit from its success. By 1975, Advent had invested $2 million into projection television but had only managed to sell a limited number of the expensive sets, which were generally bought by bars and bowling alleys to show sporting events rather than by consumers to watch movies at home. The result was that Advent posted a loss in 1975, and the company’s lenders along with the chairman of the board excluded Kloss from future decisions on product determination.

While Advent struggled to right itself, Kloss left in 1977 to co-found Kloss Video Corp. to continue pursuing his dream for big screen television combined with high-quality sound. He soon achieved a breakthrough, one that elicited a proud response to the press: “For the first time in my life, I had an invention.” That invention was the Novatron projection tube, which used mirror optics to create a brighter picture while also significantly lowering manufacturing costs. For an entire decade, Kloss sought to make a success of his projection television, but in the end he lost out to Japanese competitors. Unlike his system, which employed a projector and a separate screen, the Japanese units were self-contained and less expensive. By 1988, Kloss was forced to sell the business and was in such poor straits financially that according to Fortune he could not pay his own living expenses.

Cambridge SoundWorks: 1988 Comeback Bid

Kloss decided to return his attention to audio equipment, and in order to fund a new venture he appealed to an old friend, Henry Morgan, who had made money investing in earlier Kloss ventures. Morgan instantly cut a check for $250,000 in a handshake deal. Kloss and Tom DeVesto, who held senior management positions at both Advent and Kloss Video, then co-founded Cambridge SoundWorks in 1988. A year later they had a product to sell, Ensemble, and Kloss had yet another notable achievement: the first dial-subwoofer/satellite speaker system. The surround sound system used two sub-woofer suitcase-size boxes, which could be hidden under the couch or behind drapes because the human ear is generally incapable of detecting the location of very low frequency sounds, combined with two book-size satellite speakers. Aside from the technical achievement, Ensemble was also noteworthy because of the manner in which Kloss and DeVesto chose to sell the product. Kloss had always insisted that his stereo equipment be sold through reputable dealers so that customers would receive any necessary technical support. Because the marketplace was so crowded, with hundreds of speaker companies offering entire lines, retailers opted to focus on three or four manufacturers. Narrowing the choices for consumers not only eliminated confusion, it lowered inventory costs. Although Kloss’ reputation would be useful in establishing the Cambridge SoundWorks brand with retailers, Kloss and DeVesto elected to leverage the Kloss name in a direct marketing effort, based on the belief that customers would be willing to buy Kloss-designed speakers without hearing them first, provided they were given a liberal return policy. Selling direct had other advantages as well. By cutting out the middleman, Cambridge SoundWorks could maintain lower prices, which had always been a prime consideration for Kloss, and also provided a competitive edge. Moreover, the company would be paid immediately, eliminating the need for a credit department or sales reps in the field, as well as the expense of courting dealers at trade shows. In turn, cash was freed up for marketing and product development. Advertising in both national publications and local media, the company was able to sell 8,000 sets of speakers and turn a profit of $4 million in its first year.

Company Perspectives:

We believe in every product we sell. In fact, we don’t sell anything we wouldn’t recommend to our very best friends or own ourselves.

In 1990, Cambridge SoundWorks introduced a more compact version of Ensemble, which it called Model Eleven, a tribute to Kloss’s portable stereo system of the 1960s. Also in 1990, the company began to sell high-end audio products from other companies that would be compatible with its speaker systems and opened a factory outlet store in West Newton, Massachusetts. A year later, Cambridge SoundWorks launched a catalog to supplement its advertising efforts. By the end of 1993, the company was generating more than $14 million in annual sales, 40 percent of which came from the factory outlet. In order to expand its retail operations, in both New England and northern California, where sales were particularly strong, the company decided to raise money through an initial public offering (IPO) in 1994. After conducting an expensive and grueling road show of breakfast and lunch meetings with prospective investors, DeVesto and the IPO team were faced with a suddenly skittish stock market. Already a high number of initial offerings had been cancelled because of the poor economic climate. Cambridge SoundWorks had hoped to price its shares at $10 but in the end had to settle for $8, in the process netting almost $10 million. With the proceeds, the company opened seven stores in New England and six in California in 1994. The following year, it opened seven more in New England and two in California, followed in 1996 by an additional three units in New England and two in California. Moreover, the company began selling a small volume of products internationally through distributors, mostly in the Far East. Of more importance was an agreement struck in 1995 with the Best Buy retail chain to sell Cambridge SoundWorks products in its 220 stores.

In 1994, Cambridge SoundWorks became involved in a flap with another Boston-area audio company, Bose, which sued it, claiming patent infringement and false advertising. The company claimed that the subwoofers in the Ensemble systems employed technology protected by patents issued to Bose. It also objected to newspaper ads that maintained Ensemble was “Better than Bose at Half the Price.” Cambridge SoundWorks countersued, but only a few months later the two parties decided to abandon the fight and came to a non-monetary settlement. Although Cambridge SoundWorks was allowed to continue to use its advertising claim, it chose not to continue the campaign.

In December 1995, Cambridge SoundWorks created a multimedia division in order to market SoundWorks, a speaker system for the personal computer that had received strong reviews and was set to be shown at the important Consumer Electronics Show in Las Vegas early in 1996. As with Ensemble, SoundWorks relied on a subwoofer and satellite speaker system. Despite a number of successes, especially in the critical acceptance of its products, Cambridge SoundWorks was not doing particularly well financially. Profits fell to little more than $200,000 in 1994, followed by a loss of more than $771,000 in 1995, and the price of its stock languished in the $4 range. In April 1996, Kloss retired as director of product development, although he announced that he would remain as a consultant to the company and continue to serve on the board. Several months later, Kloss decided to resign from the board of directors and the Boston Herald reported that his departure from the company was not without some bitterness. According to a source, “Henry’s ego was bruised and there were some hard feelings, but he didn’t put up a big fight to stay. He and Tom weren’t getting along for a couple of years, which is one reason why Henry kept his office on California street when Tom moved to the new headquarters on Needham street.” In addition, other senior and mid-level managers were terminated, which another source described as housecleaning intended to “purge the company of the last guard of the Kloss era.”

DeVesto introduced a number of changes to help improve the fortunes of Cambridge SoundWorks. He decided to move a number of retail stores located in strip malls to higher-end shopping malls. He also signed a development deal with another well-know loudspeaker designer, Roy Allison, to add even more luster to the Cambridge SoundWorks product lines. In 1997, Creative Technology, a Singapore-based maker of popular computer Sound Blaster sound card and other multimedia computer products, agreed to purchase a 20 percent stake in Cambridge SoundWorks, which would develop a line of multimedia speakers for exclusive distribution by Creative Technology. Within months, Creative Technology was pleased enough with the arrangement that it made a tender offer for the company. In late October 1997, a price of $10.68 per share was settled upon, and on October 30 the merger agreement was executed. For Cambridge SoundWorks, life under Creative Technology promised greater opportunities for expansion. For the parent corporation, the acquisition was to some extent a way to hedge its bets because the future of internal sound cards was uncertain, as audio device manufacturers might opt to take advantage of the external Universal Serial Bus (USB) that was becoming available on home computers.

Cambridge SoundWork’s connection to its founders came to an end in May 1998 when DeVesto resigned, the result of what observers characterized as a clash of cultures. He and Kloss agreed to work together again in 2000 when Kloss produced a new radio for DeVesto’s company, Tivoli Audio. In February 2002, at the age of 72, Kloss died of natural causes. In the meantime, Cambridge SoundWorks, the last of the companies that he helped to found, expanded its product lines and broadened its distribution channels. Although under the auspices of a large corporate parent, many of the products manufactured by Cambridge SoundWorks continued to be a testament to a man who made some of the most significant contributions to the audio industry in the second half of the 20th century.