Boston Acoustics, Inc. History

Address:

300 Jubilee Dr.
Peabody, Massachusetts 01961-6015
U.S.A.

Telephone: (978) 538-5000
Fax: (978) 538-5100

Website: www.bostonacoustics.com

Public Company
Incorporated: 1979
Employees: 295
Sales: $50.3 million (1997)
Stock Exchanges: NASDAQ
SICs: 3651 Household Audio & Video Equipment

Company Perspectives:

The philosophy of Boston Acoustics is a simple one: Build the best sounding speaker possible at any given price.

Company History:

Operating within the fiercely contested market for stereo speakers, Boston Acoustics, Inc. has managed to build a solid niche for itself alongside such competitors as Bose, JBL, and Infinity. It has done so through a strategy of careful growth and virtually debt-free operation, coupled with a strong product base and a network of independent dealers rather than large retailers. Little-known outside the world of audiophiles and stereo enthusiasts, Boston Acoustics had by the 1990s begun to attract some attention from Wall Street with its remarkably high profit margins.

The Cofounders Join Forces

In 1968, 28-year-old Andy Kotsatos was working as credit manager for the research and development division of KLH, a speaker manufacturer. There he met assistant sales manager Frank Reed, seven years his senior. The two men's personalities meshed both professionally and personally, and within a year both had left KLH to join Advent Corporation.

At Advent, Reed moved up to a position as vice-president of sales and marketing while Kotsatos moved laterally into a technical position, working on speaker design. In that capacity, he became closely involved with the creation of the Advent Loudspeaker, which at that time represented the cutting edge in stereo speaker equipment.

The two men worked at Advent for nearly a decade, and throughout much of that time they were developing the concepts that would form the foundation of Boston Acoustics. Their vision started with a product: high-quality speakers which they would market for a competitive price. But low prices would not be as important as quality, both in the speakers themselves and in the level of service customers received from the distributor who sold them. Even at this early stage, the distributor network--eventually to become a bedrock component of Boston Acoustics--was vital to Kotsatos and Reed's business plan.

In 1978, both men left Advent, and a year later, they established Boston Acoustics in Lynnfield, Massachusetts. Eventually their most high-end series of products, the Lynnfield speaker line, would carry the name of their company's hometown. Meanwhile Kotsatos and Reed began to imprint all aspects of their business--marketing, finances, distribution--with their own philosophies of growth and operations.

Developing "The Boston Sound"

Both Kotsatos and Reed believed in tight, conservative money management, and therefore they never had a hard time raising operating capital, even at the beginning. In fact, bankers were downright eager to lend them cash, but the two entrepreneurs refused to give in to the temptation to run up debt. All loans were short-term, paid off by the end of each fiscal year in March, so that they started again on April 1 with a clean slate.

With the company's bottom line relatively secure, Boston Acoustics began to establish itself as a maker of quality speaker equipment for both the home and auto markets. That required a focus on research and development.

The stereo speaker market has traditionally been a fragmented one, where no single company holds anything approaching a dominant position. Instead, a number of strong competitors battle each other fiercely, and this is especially true among the high-end audiophile makers, which manufacture products for stereo enthusiasts willing to spend thousands of dollars on a pair of speakers. Hence it is important for a competitor in such a market to maintain technological viability by constant improvements on its product line.

This continues to be the case, and it certainly was so in 1979, when the world was on the cusp of explosive growth in the realm of electronics-based consumer products. The founders of Boston Acoustics, recognizing the value of putting money into research and development, began as a matter of course to spend about five cents of every sales dollar on design and engineering work.

The company used the term "the Boston Sound" to describe the special performance quality of its speakers, especially their tonal balance and the natural sound they delivered. To ensure that the Boston Sound was more than just hype, design and engineering teams continually tinkered with Boston Acoustics' products, working toward the ideal described in the company's own literature as "the precise reproduction of sound."

High-quality speakers are three-way components, consisting of a woofer, which delivers bass notes and very low tones; a tweeter, for high-pitched sounds; and the midrange, which covers the middle of the sound spectrum. At Boston Acoustics from the beginning, research and development were like the woofer--low not in importance, but in visibility--whereas the distribution force was like the tweeter: high-profile, out in front, the public's first line of contact with the company. The product could be the best available in its price range, but without the proper distribution network, sales would flag.

"It's like the catechism," Frank Reed, by then CEO and chairman, told Barron's in 1995. Referring to the Christian statement of faith, which maintains that humanity was created "in the image and likeness" of God, Reed said, "If you're a Boston Acoustics dealer, then no one else is going to a dealer who is not in the image and likeness of you." The company made a point of avoiding mass retailers, and instead distributed its product through a network of authorized distributors, most of whom ran small, privately owned stores.

This encouraged customer identification of the product with the dealer, emphasizing the idea of face-to-face contact and building the notion of a lifetime relationship with the company. It also gave Boston Acoustics greater control over the manner in which its products were presented and sold, and the company established guidelines for dealers' technical expertise regarding its product line. Thus the business which sold the speakers would most likely be the one to service them if necessary.

In line with its more person-to-person approach, Boston Acoustics did not put a significant proportion of its money into television or print advertising. Rather, much like a direct-marketing network, it concentrated its efforts on promoting itself to dealers, who would in turn promote it by word of mouth. Eighteen years after its founding, the company had developed $50 million in annual sales this way.

Between the product development end, virtually invisible to the public, and the high-profile distributor network was the company's midrange: its core of financial management principles developed by Kotsatos and Reed. These would guide its steady growth in the 1980s and its cautious expansion in the following decade.

Steady, Conservative Growth

Low-key in its marketing efforts, Boston Acoustics has seldom attracted much media attention outside of product ratings in magazines for audiophiles and other consumers. Hence the tone of a rare company profile, from Barron's in late 1995, resembled that of a reporter in search of the celebrated recluse played by Orson Welles in Citizen Kane: "Intrigued, we buzzed Boston Acoustics last week, keen on discovering how it earns money in a field littered with companies that don't."

Naturally the answers, as delivered by Kotsatos and Reed, were simple but far from easy. Kotsatos attributed their success to their high-quality line of speakers, but a number of companies make excellent products without generating the kinds of profits that draw attention from investors on Wall Street. Boston Acoustics, on the other hand, managed to grow steadily throughout the 1980s. And its profit margins were high, rising to some 14 cents on every dollar by the early 1990s.

What neither man said, though the fact is obvious from any close look at their company, is that they have consistently avoided the seductive appeal of growth for growth's sake. Reed, when asked if Boston Acoustics planned to acquire another company (which it did in 1996), indicated that they would not venture far from the realm of speakers: "I wouldn't take on a company I know nothing about."

Nor did he appear eager to heed the urging of some on Wall Street who would have had him take an aggressive sales strategy revolving around discounted pricing. In the speaker industry, he said, it would be a mistake to offer deep discounts, because consumers would then always expect such price reduction. Since one buys only a limited number of speakers in one's lifetime, an audiophile who had bought his or her old speakers on sale might wait a long time before purchasing new ones, hoping for the sale to come around again.

"If I grow the company at the expense of profits," Reed said, "I'll never get margins back again." And profit margins, rather than sales figures themselves, were always primary in Reed's interests.

Thus it must have come as a surprise to some in the financial industry when he and Kotsatos took the company public in 1986, after just seven years in business. Boston Acoustics began trading on the NASDAQ, and as Barron's noted, a $2 share purchased following the 1987 crash would have been worth $23 in 1991. This was impressive growth by any standard.

Meanwhile the company began to expand internationally. In March 1989 it formed an offshore subsidiary, Boston Acoustics Export Sales Corporation, located in the U.S. Virgin Islands. Within a few years, it had also established an Italian subsidiary, and it had authorized dealers in Canada, South America, Europe, and the Far East.

Growing Pains in the 1990s

Though cautious in the area of growth, the company continued to make strides in improving its products to keep pace with the ongoing technological revolution of the 1980s and the 1990s. Technology, Reed said, was one area "where I allow myself to be a little excessive." By the mid-1990s, Boston Acoustics' Peabody, Massachusetts plant (the company moved in 1995) was "as automated as any speaker company in North America."

Using robotics technology in its manufacturing of woofers, Boston Acoustics produced speakers tested to −1 dB (decibel) tolerance, as compared to −3 dB for most of the industry. Whether built at the Peabody plant or outsourced to other manufacturers, all speaker systems were constructed according to designs created by the Boston Acoustics engineering department.

In 1997, the company had four basic product categories. At the high end were the Lynnfield series, a premium line which retailed for up to $5,000 per pair. The home series, on the other hand, ran the entire gamut from solid but inexpensive speakers for $150 to those verging on the premium range at $1,400. Likewise the automotive series had a wide spectrum of products, from basic $50 speakers to a $650 pair. Finally, there was the designer series, made to be flush-mounted into walls, ceilings, or floors, a line which priced anywhere from $130 to $500 a pair.

While Boston Acoustics speakers won awards at the International Consumer Electronics Show, and from magazines such as Car Stereo Review, the company received honors as well. In 1990, Forbes magazine named it one of the 200 best small companies in America, and later Business Week put Boston Acoustics on its own list of 100 such companies.

In the mid-1990s, the company had two minor setbacks in its bottom line, and both ironically were byproducts of growth--thus perhaps reinforcing the wisdom of its founders' cautious strategy. After moving from Lynnfield to Peabody in 1995, the company had 150,000 square feet on 11 acres of land, but in the process its usually impressive profit margins slipped just a bit. More serious, though hardly catastrophic, were the growing pains that came from Boston Acoustics' first major acquisition.

On June 21, 1996, Reed announced the completion of a deal to acquire Snell Acoustics, another manufacturer of high-end speaker systems in nearby Haverhill, Massachusetts. Reed appointed Ira Friedman, Boston Acoustics' vice-president of marketing, as president of the new subsidiary, which Kotsatos said would operate autonomously. ("We expect it to be a vigorous competitor to us, as well as others in the industry.") By the end of its fiscal year on March 29, 1997, the parent company reported a decline in profits despite an increase in sales, which it attributed to losses at Snell.

In those nine months, something even more significant happened. Frank Reed, only 63 years old, died of a heart attack on November 19, 1996, in Lynnfield. Kotsatos, who at age 56 was already president and COO, became chairman, CEO, and treasurer on December 3. For the next four months he served in those capacities until board member Fred E. Faulkner became president and COO on March 25, 1997.

Reed's wife, Dorothy, passed away not long after he did, in January 1997. On June 13, the board bought back some 898,000 shares of its stock from the Reed family estate, for almost $24 million. Paul F. Reed, son of Frank and Dorothy, continued as the company's vice-president for administrative services.

Gateway to the Future

In November 1995, Barron's had written that Boston Acoustics' stock had never risen above an October 1991 high of $23. But starting in January 1997, the company's stocks began to climb, and they jumped after a February 17 announcement of a preliminary agreement to supply speakers to a distributor of multimedia computers.

On May 7, 1997, the company announced the finalization of that agreement, with South Dakota-based Gateway 2000. As Kotsatos stated, "multimedia is now an integral part of computing," and therefore the agreement to supply its MicroMedia speakers with Gateway 2000's multimedia packages was a huge marketing boost.

In the late 1990s, an era when the electronics equipment industry as a whole was growing, the consumer electronics segment--which included stereo manufacturers--had fallen into a slump. This was due in part to consumers' uncertainties about their financial futures and thus the availability of disposable income, but also to the lack of new major products that would cause a splash in the way that compact discs, for instance, had in the late 1980s.

Yet Boston Acoustics defied the trend, and the backdrop of a slow-growing market only served to heighten its modest but steady success. Ironically, by pursuing carefully controlled growth, the company's founders ensured that their company would continue to expand while more overtly aggressive competitors stood still. Marveling at the company's profit margins of up to 15 cents on the dollar, stock analyst Tim Curro told Barron's, "that's about as good as it gets."

Principal Subsidiaries: Snell Acoustics; Boston Acoustics Foreign Sales Corporation (U.S. Virgin Islands); Boston Acoustics Securities Corp.; BA Acquisition Corp.; Boston Acoustics Italia, s.r.l. (Italy).

Boston Acoustics, Inc. History

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