Koss Corporation

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Koss Corporation

4129 North Port Washington Avenue
Milwaukee, Wisconsin 53212
U.S.A.
Telephone: (414) 964-5000
Fax: (414) 964-8615
Web site: http://www.koss.com

Public Company
Incorporated: 1953 as J.C. Koss Hospital Television Rental Co.
Employees: 250
Sales: $34.87 million (1999)
Stock Exchanges: OTC
Ticker Symbol: KOSS
NAIC: 33431 Audio and Video Equipment Manufacturing

Koss Corporation is the leading U.S. maker of stereo headphones. The company pioneered the stereo headphone in the 1950s. The product was invented by founder John Koss and his partner, Martin Lange. The name Koss became synonymous with quality headphones, before suffering market share loss to imported products. Koss products are manufactured in the United States, and include a complete line of headphones, from high-end equipment geared to serious audiophiles and music professionals to inexpensive gear sold at mass merchandisers such as Target and Kmart. The company also makes computer speakers under a licensing agreement, and licenses its name to several companies that sell electronic goods and speakers abroad. In recent years Koss has also moved into non-retail markets, selling its audio gear to the telecommunications industry, the aviation industry, and to the audio demonstration market. Diversification into related electronics areas in the 1980s proved disastrous for Koss, sending the company into bankruptcy. Koss emerged from Chapter 11 in 1985, and remained dedicated to its core product line. Over 80 percent of the company’s sales come from stereo headphones. Koss is publicly traded over the counter. Over half its stock is owned by management and employees.

Audio Revolution

Koss Corporation became the premier manufacturer of stereo headphones after inventing the device for consumers in 1958. The stereo headphone was conceived by company founder John Koss and his partner Martin Lange, though the pair had no idea what a breakthrough they were making. John Koss was born in Milwaukee, Wisconsin, in 1930. After graduating from high school, he played in a jazz band. He married in 1952, and cash received as a wedding gift, intended for the couple’s first sofa, became the foundation of a new business. This was the J.C. Koss Hospital Television Rental Co. Koss took the $200 gift and bought used televisions in Chicago, then rented them out to patients confined to Milwaukee hospitals. This business supported Koss and his family for several years. Koss began looking for new ideas, and eventually teamed up with Martin Lange, an engineer. They began marketing a device that allowed people to test their television tubes. Their next product was a winner, though only by accident. They came up with a new kind of compact record player and demonstrated it at a Wisconsin audio show in 1958. To attract attention to the device, the pair decided they needed a gimmick. They adapted a pair of headphones used by aviators in World War II to plug into the machine, so that buyers at the audio show could appreciate the stereo sound of the portable player. The record player did not garner many customers, but the headphones that went with it were the hit of the show. No one had previously devised a way to get a good, musical sound in stereo through a headset, and visitors to the audio show were apparently enchanted by the experience. Koss went into business manufacturing and marketing the headphones, and found eager customers nationwide. Classical music lovers appreciated the stereo effect, where the left and right ear hear different signals, just as in the concert hall. Moreover, the rock and roll era was coming into its own, and young people were listening to music louder and louder. With Koss headphones, people could turn the music up full volume, and not enrage their neighbors or bring the police.

A Profitable Niche in the 1960s and 1970s

Koss Corp. stumbled on its Stereophone more or less by accident, but the timing could not have been better. In the 1960s, the baby boom generation found headphones a necessary part of a stereo set, and sales increased rapidly. John Koss ran the company with few controls and little formal planning. The management hierarchy was simple, and Koss himself worked tirelessly to promote his product. Koss came up with clever billboards for the Milwaukee area, including the Mona Lisa in headphones. Consumer Reports magazine rated Koss headphones number one, and Koss was considered the leading name in headphones, with little serious competition. Koss stood for quality, and the company managed to squelch competition from cheap imports by offering a superior product. When a Japanese firm began selling an inexpensive $12 headphone set in the early 1960s, Koss raised its own prices, widening the gulf between the two. This worked. Koss also advertised heavily, not only with billboards but with radio and television spots. The company grew at roughly 15 to 20 percent annually in its early years, with after tax profit at around ten percent. The company went public as Koss Corp. in 1967, with sales at around $1 million. Koss built his family a luxurious home, and in 1968 started a profit-sharing program with his employees.

The company expanded internationally in the 1970s. By the mid-1970s, the company had an international sales office in London, a subsidiary plant in Italy, a marketing subsidiary in Canada, and a manufacturing facility in Ireland. The Koss brand controlled between 25 to 40 percent of the stereo headphone market worldwide. But international sales were sometimes troublesome for the company. Despite record sales in 1976, profits lagged because of poor exchange rates with foreign currencies. Koss eventually decided to shut down its Italian manufacturing plant because of recurring labor problems. Despite some bumps, the company continued to expand in the 1970s. In 1976 Koss began marketing its headphones through Sears, Roebuck and Co., and followed this with moves into other mass merchandisers. Previously, Koss had been an exclusively high-end product found mostly in audio stores. Koss continued to represent the higher end of the headphone market, and competed against cheaper products when it teamed with Sears.

The company had ridden the surge in youth culture and youth music in the 1960s and 1970s. But by the end of the 1970s, market conditions were not as promising. The baby boomers had grown up, and the stereo headphone market seemed to have matured. Sales in 1979 stood at $25 million. Koss Corp. was a profitable mid-sized company, one of the largest public companies in the Milwaukee area, and it had been built up by John Koss and his sons without professional management expertise. At the end of the 1970s, John Koss seemed unsure what to do with the company. He wanted it to grow and prosper, but he began to feel that he did not have the business background to steer the company to $50 million and beyond. In addition, he wanted to give up some of the day-to-day work and enjoy his success. Consequently, in 1979, Koss brought in James D. Dodson, an area executive with an air compressor manufacturer, to be president and chief operating officer. Koss knew Dodson from a Milwaukee business group. He believed that this experienced manager could lead the company to further growth through careful planning and standardized business practices, and this would be better than Koss’s off-the-cuff and instinctive leadership style.

Into and Out of Bankruptcy in the 1980s

James Dodson signed a five-year contract with Koss Corp. in 1979, and quickly implemented changes. The management style changed to a more formal system, with communication by memo and things done according to written rules. Koss Corp. had a new long-term goal, which was to diversify away from stereo headphones into several related electronics areas. The company brought the Koss brand name to a line of speakers, and bought a Florida company, Calibron, that made VCR head cleaners and other similar products. The idea was to use the company’s solid base in headphones to fund these newer ventures, and hopefully land a profitable niche in some related areas. Koss Corp. defined itself at the beginning of the 1980s as a company with three distinct business segments. The first was accessories, which included the core headphone line as well as “audio/video care products” including the VCR head cleaner. Components was the second segment, which included the company’s new line of speakers. The third segment was called “Portable Personal Listening.” This last was perhaps the most problematic for Koss Corp.

Key Dates:

1953:: Television rental business is launched by John Koss.
1958:: Koss and partner debut stereo headphones.
1967:: Koss Corp. goes public.
1979:: Company hires new president to guide future growth.
1984:: Koss Corp. files for Chapter 11 bankruptcy.
1985:: Company emerges from bankruptcy.
1991:: Michael Koss becomes CEO.
1997:: Revenues approach $40 million.

The company had come up with a portable cassette player and headphones around 1976, but decided not to produce it for fear of being undercut by cheap imports. But by 1981, Sony had put out its Walkman, which soon became virtually the generic name for portable cassette players. Koss moved quickly to get its device on the market, a portable player it called the Koss Music Box. The company contracted with a manufacturer in Taiwan to make the Music Box. The supplier ran into delays, and the Music Box did not make it onto store shelves in time for Christmas 1981. By the time Koss got the Music Box to market in February 1982, it was too late. The price of Sony’s Walkman had dropped to $60, making the $90 Koss counterpart uncompetitive, and even cheaper knock-offs at half Sony’s price were also widely available. Sales for Dodson’s first two years had been good, reaching a record in 1981 of $25.2 million. But consumer demand for headphones dropped precipitately over 1983 and 1984, declining an estimated 50 percent. With the unsellable Music Box on its hands, Koss suffered. Its share of the U.S. headphone market had at its peak been an estimated 50 percent, but in the mid-1980s it plunged to around 25 percent. In May 1984 John Koss returned to the company, and Dodson left one month later. The company gave up on the Music Box, but it had gone heavily into debt paying its manufacturer in Taiwan. Sales for 1984 stood at $20 million, with a net loss of $6 million.

With a grim financial picture, Koss did all it could to cut expenses. It closed its European operations and dismissed many people domestically who were not absolutely essential. Koss got its domestic manufacturing workers to take a 30 percent pay cut, and John Koss himself cut his pay in half and sold his home. Koss negotiated a $1.2 million loan in the fall of 1984 in order to keep operating through the crucial holiday season. At the end of December, Koss filed for Chapter 11 bankruptcy protection. The company continued to operate while struggling to free itself of its $15 million in debt. The company brought in a new executive vice-president, James Dorman, to see Koss through the bankruptcy proceedings. With a much reduced staff, Koss put out a new line of headphones for the mass market, selling $10 to $20 sets at stores such as Target, Zayre, and Kmart. It also repackaged the high end of its line. The company negotiated with the banks in charge of its debt, and by the end of 1985, came up with a plan to pay off $9 million. Koss sold Calibron, the VCR head cleaner manufacturer it had bought under Dodson, as well as its Irish plant and another building. The company raised some more money through loans and, in December 1985, paid off the banks and emerged from bankruptcy.

The company recovered well from the bankruptcy, again firmly under family control, but with a stricter sense of management standards. With a smaller workforce, Koss learned to put out its products with more efficiency. The company instituted new policies, such as a goal of coming up with one new product idea or improvement of an existing product every six months. The financial goal of becoming a $50 million company seemed to have been put aside, and Koss determined to stick to its core product, headphones.

Sustaining a Niche in the 1990s and Beyond

In 1991 Michael J. Koss, son of founder John Koss, took over as president and chief executive officer. His brother Johnny Koss and his brother-in-law Michael Moore were also instrumental in leading the corporation. The company continued to focus its skills on making headphones, which it sold at prices ranging from $10 to $2,000 a pair in the early 1990s. The company came up with many innovative twists, such as headphones that changed color when exposed to light, and headphones designed specifically for use with computers by people playing computer games. Sales hovered around $25 million, reaching over $27 million in 1990, dropping to around $24 million in 1991, and then back up to $26 million in 1992. The company kept its management and workforce small, and improved its quality control system so that fewer headphones had to be scrapped or reworked at the end of the assembly process. Koss built up its brand name with mass-market outlets, while continuing to sell top-of-the-line, professional-quality equipment through audio and electronics retailers. In the early 1990s Koss also licensed its name to a Dutch company, which sold Koss brand electronics throughout North and South America.

Despite a consistent earnings record, the company did not have a big following on Wall Street, and its stock price was low in the early 1990s. Koss stock began to rise in the late 1990s. Koss had record sales in 1997 of almost $40 million, with a profit of roughly $4 million. The company had stiff competition from Sony and other Asian manufacturers, but because its products were made domestically by a relatively small workforce, it was able to respond quickly to new trends. Koss made headphones with enhanced features such as noise suppression, collapsible and cordless models, and headphones with interchangeable components. It licensed its name to makers of car speakers and stereos, and made headphone equipment for the telecommunications industry. At the same time, Koss put out a solid line of relatively low-priced headphones that gave the company strong holiday sales, as these were seen as a good gift item. At the end of the 1990s and into the 2000s, Koss seemed to have a solid base as a headphone manufacturer. Sales had reached all-time highs, and though they had dropped to less than $35 million for fiscal 1999, net income remained high. Without spreading itself into other electronics areas, the company continued to mine its niche, where it had high brand recognition and significant market share. Koss did not have plans to spread beyond headphones, and even curtailed its computer speaker business in 1998, converting it into a licensing arrangement with another maker. Its one core business line seemed likely to sustain Koss in coming years, as it responded nimbly to improved technology and found ways to sell its headphones through a wide range of retailers.