The Rise and Fall of ARP Instruments

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arp_2ARP had a promising first product, but it was entering a volatile and risky market in which it had no expertise. "At Nexus, I had dealt for the most part with other engineers" Pearlman says wistfully. "We spoke the same language and were basically the same sort of people. The musical instrument business was alien -- I never understood the people."

The company revolved around, and was essentially shaped by, three individuals: Pearlman, chairman of the board; Lewis G. Pollock, legal counsel and chairman of the executive committee; and David Friend, who was president from 1977 to 1980. Each brought distinctive backgrounds, personalities, and goals to the project. Pearlman was the soft-spoken engineer, a man wedded to technology but seduced by business. At Nexus, he had made the daily decisions, a chore he hoped to escape at ARP. "I thought, in starting a new company, that I could get others to do it," he says. "I wanted to do long-range R&D, long-range marketing."

Pollock, who had represented Nexus in its merger with Teledyne and had a management consulting contract with ARP, was known as "the entrepreneur's lawyer" but might better have been dubbed "the entrepreneur/lawyer." although never an officer of ARP, he spent an inordinate amount of time overseeing the company's fortunes. "I'll bet if you looked at his time log, you'd find that he put in 40 hours a week at ARP," says Joseph Mancuso, the author of 14 books on business and a consultant to more than 340 companies who was an ARP director for three years. "If any one person ran ARP, and that's debatable," says another insider, "then Pollock was that person."

Friend was the whiz kid, a talented and ambitious young man with a background in engineering and music but none in business. Discovered by Pollock and recruited from graduate school at Princeton, at 21 he was the youngest member of ARP's inner circle. [Ed. Note: For a story on Friend and ARP Instruments, see Keyboard, Apr. '76.]

These three men sat on ARP's board, along with two outside directors brought in by Pollock, and made up the executive committee that ran the company. Created by the board at Pollock's suggestion, the committee -- an unusual form of management for a small business -- was entrusted with its operation. The egos and goals of the three frequently clashed, and their management skills were open to question. None had ever run a "glamour" company before. Pearlman, in his ivory tower of long-range planning, was initially blind to the severe shortcomings of his management team.

And there were other problems. From the outset, ARP was under-capitalized. In 1973, the company went public, raising $750,000 [by selling stock]. "We needed the money," says Pearlman. "There was a critical mass we had to achieve in order to pull ahead." In 1973 and 1974, ARP borrowed a total of $600,000 in the form of convertible debentures [a form of loan in which the lender has the option of taking stock in the company instead of repayment]. In addition, it had an ongoing line of credit with First National Bank of Boston, primarily to cover [the cost of building up] inventory and to finance receivables [amounts owed to the company]. "It was always a borderline company in terms of cash flow," notes Friend. "It lived from hand to mouth the entire time I was there."

A quickly saturated market, pressure on prices, Japanese competition, changing musical tastes, and the vagaries of the instrument business all added to ARP's woes. "Whether or not a product catches on," Friend argues, "is largely a matter of how well you can get in the front door to see Stevie Wonder. You rise or fall with each new product." [Artist endorsements are certainly a major factor in musical instrument marketing, but in the long run engineering is at least as important. It's doubtful whether endorsements would have helped generate widespread acceptance of such ARP blunders as the ill-fated Avatar guitar synthesizer or the PPC pitch-bending system, both of which were developed and implemented largely by Friend.]

Arp OmniOver the years, ARP created enough winners to hold the odds at bay. The 2500 proved popular with university music departments, and the 2600, Pro-Soloist, Odyssey, and Axxe became the favorite lead synthesizers of a generation of keyboard players. The company's all-time best-seller was the Omni, introduced in 1975. [Like the Polymoog, which appeared at about the same time, the Omni had a full polyphonic keyboard whose oscillators used the same top-octave divide-down scheme that had been used for years in electronic organs; this was mated to some synthesizer technology to create these first polyphonic synthesizers. Simultaneously, Tom Oberheim was developing the Oberheim Four-Voice using a different kind of polyphonicity, with four separate integrated voice modules assigned the notes played on the keyboard. The scanning system used for assigning keys to modules was developed by Dave Rossum and Scott Wedge of E-mu Systems, and it is this type of polyphonicity that has ultimately proven more useful except in inexpensive instruments.] About 4,000 Omnis (1980 price, $2,450) were sold.

Annual sales climbed from about $865,000 in 1971 to a peak of $7 million in 1977, with net earnings running a lean $232,000. When it had loss years, ARP managed to snap back. Bob Moog recalls that ARP had problems with quality control and excessive cost of sales (as high as 20%). [In other words, 20% of the company's income was used on advertising and promotion and to support a sales staff.] "The killer for me, with ARP was that, two or three years after they began, they had a negative net worth [liabilities in excess of assets] of $400,000," Moog recalls. "I thought I was a rotten businessman -- I was under-capitalized, and I didn't manage things properly. But the worst we ever had was a negative net worth of $11,000."

Pearlman's company not only managed to maintain its precarious balancing act but generally made the performance look like an inspired success. "ARP was a movie-star company," notes Mancuso, "and Pearlman had the time of his life -- he was donating ARPs to the Metropolitan Museum, his name was in the paper, [singer] Diana Ross was dropping by. These three guys loved the glamour of running the company, but they weren't doing it in a businesslike way."

When he joined ARP's board in 1976, Mancuso promptly made several elementary management suggestions. The company had done cost-plus pricing, but when it introduced the Omni, Mancuso suggested seeing what the market would bear. With a price tag $1,000 higher, the instrument sold better. Mancuso also recommended that higher-margin [more profitable] domestic orders be filled more quickly than overseas sales, a move that bolstered the company's cash flow. "Mancuso had a lot of good ideas," concedes Pearlman.

In 1977, income and profit soared -- the company had record sales of $7 million, an amazing recovery from the $33,000, 8¢-a-share loss it had suffered in 1974. As a result, ARP management grew more expansive. New Chevrolet Blazers were passed out to members of management, and board meetings were followed, on at least one occasion, by an elaborate dinner party. "Each bottle of wine cost about $60," recalls Mancuso.

But the problems that had plagued ARP remained, as the Pearlman, Pollock, Friend combination became more unwieldy. Each man pursued his own vision for the company, aligning himself with others to further his own ideas and interests. Memos show Pearlman increasingly alienated from his own company, Friend jockeying for the presidency, and Pollock insisting that ARP perform as a sane company.

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