Nimbus CD International, Inc.

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Nimbus CD International, Inc.

State Route 629
Guildford Farm
Ruckersville, Virginia 22968
U.S.A.
(804) 985-1100
Fax: (804) 985-2893

Public Company
Founded: 1982
Sales: $118.2 million (1996)
Employees: 871
Stock Exchanges: NASDAQ
SICs: 3695 Blank Computer Software Tapes and Disks; Blank Recording Compact Discs; Blank Optical Disks and Digital Video Disks (DVDs); 3652 Prerecorded Records and Tapes

In the mid-1990s Nimbus CD International, Inc. ranked as one of the largest independent manufacturers of compact discs (CDs) and CD-ROMs in the world. It was the fourth-largest independent CD-audio manufacturer in 1995 and the third-largest CD-ROM manufacturer in North America. With more than 1,500 customers and production facilities in Utah, Virginia, Wales (United Kingdom), and Luxembourg capable of producing about 200 million CDs a year, Nimbus’s CDs were purchased primarily by independent record labels and by multimedia software developers in North America, the United Kingdom, and continental Europe.

In the 1990s, Nimbus—an offshoot of the classical recording label Nimbus Records Ltd.—diversified its product line by producing “Enhanced CDs” (CDs with both audio and video content) and by introducing holographic CD label imaging for antipiracy and specialized CD design uses. In addition to CDs, in the mid-1990s Nimbus was one of the first two companies in the world to manufacture digital video discs (DVDs), which were expected to begin replacing the CD and the VHS videocassette in the late 1990s. Besides manufacturing CDs and DVDs, Nimbus also offers premastering and mastering services, disk replication, antipiracy holographic equipment, and complete “turnkey” services including packaging design consultation, materials procurement services, packaging assembly, and order fulfillment.

Records for the Count: 1957-69

The son of a Russian aristocrat who emigrated to France during the Russian Revolution, Count Alexander Numa Labin-sky was raised in Birmingham, England, where his father had settled to run a jewelry business. When his twin brother died at age seven, Labinsky suddenly discovered he had a talent for singing and during the years of World War II he cultivated it by studying at the Birmingham Rep and giving evening recitals under the professional name Shura Gehrman. After the war, Labinsky briefly studied music in Paris, was regularly featured on the BBC, and performed with some of the major talents of his day. He also recorded songs by Schubert, Fauré, and other composers but soon concluded that the existing techniques for recording music were too crude to express the subtleties of his own voice.

In 1951 Labinsky thus formed a partnership with Michael and Gerald Reynolds that culminated in the establishment of Nimbus Records Ltd. in 1957. The company’s mission, Labinsky declared, was to “record material of a specialist nature that was of excellent quality” and, moreover, was priced lower than the products of the major record labels. Labinsky decided to locate the company in a renovated 19th-century country house on the River Wye in Cwmbran, Wales. From this bucolic Welsh setting, Labinsky began recording the music he liked, and by the mid-1990s Nimbus’s collection encompassed some five hundred recordings, from classical orchestral and chamber music pieces to “World Music” artists and a series of digital transfers of old 78-rpm vocal records and piano-roll music. The Nimbus stable would come to include the music of such artists as Shostakovich, Schubert, Haydn, and Shura Cherkassky as well as the Hanover Band, the Kansas City Chorale, native Brazilian musicians, Irish folk players, and many others.

“Ambisonics” and the Nimbus Sound: 1970-82

Labinsky was a demanding, mercurial figure, and he ran Nimbus Records to suit his own tastes rather than the dictates of the bottom line. A colleague later recalled to Forbes magazine that “Numa always wanted perfection. He drove everybody to achieve perfection and nearly drove them mad doing it.” Part of this perfectionism was the conviction that Nimbus should design and build its own equipment and cut its own records. By relying on their own designs rather than the conventional technology of the day, Nimbus’s engineers struck out in new technological directions, which at the same time helped hold down the company’s equipment costs. Labinsky’s perfectionism also manifested itself in his conviction that each Nimbus recording should recreate as closely as possible the distinctive essence of the musical performance it captured. The performances heard on Nimbus’s records consequently displayed few signs of editing, and Nimbus’s “natural sound” recording philosophy led it in the 1970s to embrace a new “surround-sound” recording technique known as “Ambisonics.”

Developed by a group of British academics, Ambisonics sought to expand the two-dimensionality of stereo recordings to a three-dimensional level by eliminating the “distortion” that occurs when the human ear detects the difference between sound as it originates in real life—that is, from every direction—and the narrower experience of the audiophile listening to a symphony from the stereo system in his or her living room. Nimbus had made strides toward this ideal of “sonic actuality” by using direct-to-disc record mastering techniques, which eliminated the impurities introduced when a mastering tape was created during the transfer of recorded music to the vinyl disc. Ambisonics seemed to offer even greater possibilities for “real-life” recorded sound by overcoming stereo’s “directional distortion” through the strategic placement of a variety of microphones, audio channels, and loudspeakers during the recording process.

Nimbus was among the first companies to embrace the new technology and over the years established itself as Ambisonics’s principal licensee, producing hundreds of CDs employing the technique from the 1970s through the 1990s. The promise of Ambisonics as an industry standard faded, however, because no broad-based effort was made to market it to the entire recording industry. Nimbus thus eventually won the exclusive license for Ambisonics, which became a company trademark. A long-time supporter of the Ambisonics idea, Nimbus’s company secretary, Stuart Garman, in turn marketed the technology to Japanese manufacturers who were seeking new ways to provide “surround-sound” audio effects. The first to bite was Mitsubishi, who declared their intention to record all their Home Theater System albums using a variation of Nimbus’s single-microphone Ambisonic method.

By the late 1970s Nimbus had established itself not only as a premier independent record label but as an innovator of new recording technologies. In 1977 it established a vinyl record production plant at its Wales location, and in 1979 the Nimbus brain trust of Labinsky and the two Reynolds brothers was expanded to include Adrian Farmer, who joined the company as the company’s director of music and deputy chairman. Two years later, Dr. Jonathan Halliday joined the four, eventually lending his name to Nimbus’s proprietary mastering technology, the Nimbus-Halliday Laser Mastering System.

The Compact Disc and Robert Maxwell: 1982-91

Just as Count Labinsky had entered the recording business when the “Long-Playing” 33^]/3 vinyl record was cementing its place as the replacement for the prewar recording standard, the shellac 78-rpm record, in the early 1980s a new medium—the CD—emerged to consign the vinyl LP to oblivion. Originally developed by Philips and Sony, the CD made it possible to record music digitally by encoding the musical “data” in microscopic grooves, which were “read” by an infrared laser beam striking the disc. Able to hold 75 minutes of music (the length of Beethoven’s Ninth Symphony —the designers’ benchmark), the CD was not only more durable than the vinyl record (it was estimated to have a life span of eight years), it also offered crisper, brighter sound. Labinsky and his Nimbus brain trust saw the revolutionary potential of the medium and in 1982 Nimbus became one of only three companies in the world to produce CDs through a license granted by Philips Electronics. Nimbus refused to purchase Philips’s CD mastering system, however, and to hold down costs Gerald Reynolds and Jonathan Halliday built Nimbus’s own mastering lathe from scratch in 10 months’ time. Incorporating a traditional analog design rather than a strictly digital approach, their CD mastering system allowed them to use smaller track pitches on their CDs than was common at the time. This innovation gave Nimbus the enviable potential of being able to make CDs with double and even quadruple the density, or data storage capacity, of other makers’ CDs. From square one, then, Nimbus technology pointed the company toward the high-data-density CDs and DVDs it began to roll out in the 1990s. Despite the introduction of the first playable CD from Nimbus labs in May 1984 and the unveiling of a large-scale CD pressing operation the same year, by 1985 CD sales worldwide still amounted to only $3 million of the multimillion-dollar audio recording market. But in a little more than a decade, the number of audio CD players in the United States and Europe alone would grow from a few million to a staggering 250 million.

Company Perspectives:

Nimbus is committed to offering the most cutting-edge technology available. The introduction of DVD production capability allows us to get in on the ground floor of the market of this exciting “next generation’’ compact disc. Our upgrades will ensure that Nimbus remains a leading supplier of compact discs to the entertainment, recording, and software industries.

As the audio CD began its long assault on the LP-oriented habits of the music-buying public, however, Labinsky continued to channel Nimbus’s CD manufacturing profits into his record label. As a Nimbus executive later recalled, Labinsky “and his partners’ great interest was in classical music, and they were quite happy to bleed everything else dry to get better classical records.” In anticipation of the worldwide introduction of CD-ROM technology in 1987 (which enabled users to store large amounts of data on a single disc), Nimbus began pressing CD-ROMs in 1986. The demand for audio CDs grew sevenfold between 1984 and 1986 alone, and in March 1986 Nimbus’s management closed its vinyl LP manufacturing operation and transferred those workers to its CD plants.

The CD-ROM was officially unveiled in 1987, opening another lucrative new niche for Nimbus’s production lines. After searching the Eastern Seaboard for a U.S. manufacturing site, in 1987 Labinsky opened a production facility on the grounds of an 18th-century manor in Ruckersville, Virginia, which became Nimbus CD’s headquarters. Despite sales of $43 million in 1987, Nimbus managed to lose $8 million, largely because of Labinsky’s preoccupation with developing Nimbus Records. Nimbus’s board of directors grew increasingly anxious over Labinsky’s apparent intention to drain the company’s new CD cash cow and began casting about for a bottom-line-oriented executive to turn the company’s fortunes around. They eventually recruited Peter Laister, an engineer and chairman of Britain’s Thorn EMI recording company, who began looking for new sources of capital to keep Nimbus afloat. Laister had once been considered for an executive position by British media mogul Robert Maxwell, so he naturally turned to Maxwell as a potential investor in Nimbus’s future.

Maxwell had turned raw ambition, native intellect, and a background in military intelligence into a position of great wealth and power in Britain’s publishing industry. At Laister’s urging he agreed to invest in Nimbus, acquiring 75 percent of the company in exchange for an influx of much needed cash and the assumption of Nimbus’s debt. Through Laister’s management and Maxwell’s capital, by 1991 Nimbus had achieved profitability. While vacationing on his yacht off the Canary Islands in November 1991, however, Maxwell mysteriously drowned, throwing his company, Maxwell Communication Corporation, and Nimbus’s future plans into disarray. While Maxwell’s family suspected murder, experts later suggested he had committed suicide over the financial chaos that resulted from shady financial tactics he had employed to keep his empire afloat. When Maxwell’s businesses came under government scrutiny after his death, Nimbus found itself facing the British equivalent of bankruptcy.

Nimbus U.S.A. and Nimbus CD International: 1992-94

As eager potential buyers lined up to stake their claim in the company’s increasingly lucrative—and now available—CD business, Laister fought to keep Nimbus independent. In late 1992, however, Donaldson, Lufkin and Jenrette Securities Corp. (DLJ), a New York investment firm, bought Nimbus’s disc manufacturing and distribution operations from Maxwell Communication for $13 million, gaining a 90 percent stake in Nimbus. The remaining 10 percent was given to Nimbus’s former management, and Count Labinsky was allowed to keep Nimbus Records and Nimbus’s technical business. “We were happy to let him keep his label,” Thompson Dean, a DLJ managing partner, told reporters. The Nimbus CD manufacturing business was reincorporated in the United States as Nimbus U.S.A. and Lyndon Faulkner, a 31-year-old company executive, was made CEO.

DLJ began pumping money into its new business, paying down Nimbus USA’s debt and priming it for future expansion through acquisitions. Nimbus ramped up its CD-ROM operations to meet the steady growth in demand. Rapid improvements in computer processing power had made it feasible for consumers to run data-heavy game programs like Doom or Myst from the CD-ROM drives of their PCs, and while only 25 million CD-ROMs were sold in the United States in 1992, by 1996 that number would explode to more than a half billion. Between 1991 and 1994 alone, Nimbus’s CD-ROM sales grew from only 10 percent of total sales to 30 percent. By the end of its 1991-92 fiscal year, Nimbus was posting net sales of $63.59 million.

In 1992 electronics giants Sony and Philips began working on the compact disc’s replacement—the DVD or digital video (or versatile) disc. The goal was a new medium that in one fell swoop would replace the video cassette tape and laser disc, the audio CD, the video game cassette, and the CD-ROM. First known as the “multimedia CD,” this multipurpose mega-disk technology would allow a disc the size of a CD but with seven times its storage capacity to hold an entire movie without worry over rewinding, tape misfeeds, blurry images, or dull sound. Moreover, consumers would be able to play a DVD video game, a DVD audio disk, a DVD movie, or even an old-fashioned CD from multipurpose DVD players. As the electronics industry’s major players developed and finalized the technology and began negotiating a single cross-industry double-sided DVD standard, Nimbus’s annual production of CDs at its Virginia plant alone reached 30 million, and Nimbus’s 1992-93 sales topped $69 million. In early 1994, Nimbus mourned the death of its founder, Count Labinsky, and officially changed its name to Nimbus CD International.

In April 1994 Nimbus acquired Damont Audio, a British record and CD producer and, more importantly, announced that Chicago-based R. R. Donnelley & Sons—the world’s largest printer and a supplier of CD-ROMs to software giant Microsoft—would agree to order all its CD-ROMs (at least 23 million a year) from Nimbus in exchange for an equity stake in the CD maker. Part of the landmark alliance (christened Stream International) called for Donnelley and Nimbus to establish a CD-ROM manufacturing operation near Donnelley’s software services facility in Provo, Utah. With a capacity of 37.5 million units a year, the Provo plant opened in early 1995, doubling Nimbus’s U.S. CD manufacturing capacity.

Going Public and Launching DVD: 1995-97

The Donnelley deal enhanced Nimbus’s cachet in the corporate mergers-and-acquisitions market, and beginning in March 1995 DLJ began to cash in on its Nimbus stake by selling 80 percent of its shares, for $69 million, to McCown De Leeuw & Co., a California-based venture capital firm. By the spring Nimbus was scouting for a site on the West Coast for its fourth CD manufacturing facility and in the summer it announced that a Sunnyvale, California, site had been chosen because of its proximity to Nimbus’s Silicon Valley customers. Riding the continuing boom in CD-ROM-based software sales, Nimbus’s net sales leapt nearly 23 percent between 1994 and 1995, to nearly $86 million.

In August 1995 Nimbus acquired HLS Duplication Inc., a vendor of turnkey software duplication services located in Nimbus’s new Sunnyvale home and later rechristened Nimbus Software Services. In the summer of 1995 Nimbus also began offering mastering and replication of so-called Enhanced CDs, a CD hybrid that contained both audio and CD-ROM content and enabled Nimbus and its customers to offer consumers DVD-type performance using conventional CD players.

More good news followed. After expanding the production capacity of its Wales plant in the summer, in September 1995 Nimbus announced an agreement with Britain’s Applied Holographies pic to license technology to produce CDs on which holographic images had been incorporated, which could be used to thwart copyright piracy and enhance CDs’ visual design. The new holographic method, named 3-D I*D, enabled a “covert” or invisible holographic image to be integrated on one entire side of the CD-ROM rather than merely applied superficially to a small portion of the disk. Optical machine readers could then be used to read the encoded authentification data in the hologram and determine if the CD was counterfeit. Nimbus and Applied would profit both from leasing the holographic equipment to CD-ROM product makers and from the royalties from each disc made using the hologram-encoding technology.

On September 15, 1995, the major DVD-developing companies announced that an agreement had been reached on a common standard for the new technology. A major hurdle had been cleared on the DVD’s path toward the consumer marketplace. Only Nimbus CD and megamedia firm Time-Warner announced unequivocally that they were ready to begin production of DVDs. While the DVD industry and Hollywood wrangled over the new encryption technologies that would make it as hard to copy a film from a DVD as from a videocas-sette, Nimbus began investing in DVD manufacturing equipment in earnest. To pay down the debt its conversion to DVD generated, in November 1995 McCown De Leeuw & Co. announced that Nimbus CD would become a public company through the sale of a third of its stake during a December initial public offering of stock.

Nimbus was now decisively committed to DVD. Robert Headrick, the president of Nimbus’s Information Systems subsidiary, told Tape/Disc Business, ”We are positioned to manufacture DVD from the get-go.... Usually, early adopters of a technology end up doing most of the volume work.” Nimbus’s R&D chief, John Town elaborated: “we feel that by getting in at this stage, we will be able to optimize production and learn all of the lessons in anticipation of early demand. At that time we will have removed enough costs from our process to become one of the manufacturing leaders.” To gauge the viability of the DVD market, Headrick and Town visited nine companies in the Japanese DVD industry and came away with their instincts reinforced: Nimbus should strike while the iron was hot. On the cusp of news that Nimbus’s 1995-96 net sales had grown a dizzying 33.5 percent to $118 million, company officials announced in March 1996 that Nimbus would be investing $25 million in DVD mastering, manufacturing, and packaging capacity and other improvements, sending Nimbus’s stock price up twofold within a month of the news. In July 1996, the DVD industry and Hollywood finally agreed on an encryption method for DVD movies, and in September 1996 Nimbus began manufacturing its first DVDs.

With Time Warner and Sony set to produce the DVDs for their own film studios, Nimbus focused on supplying DVDs to the remaining Big Six Hollywood studios—Disney, Fox, Universal, and Columbia. In late 1996 it expanded its Sunnyvale, California, plant and in January 1997 announced it would construct a new manufacturing plant in Luxembourg. DVD film titles hit video stores in seven U.S. markets in early 1997 and $500 dollar DVD players began appearing on electronics store shelves. Unexpectedly, Nimbus announced the closing of its two-year-old Sunnyvale site in early 1997, claiming that it had to consolidate its manufacturing operations to remain an efficient player in the DVD market, which was expected to begin in earnest in late 1997.

Although some observers argued that the hype surrounding DVD masked an abyss of consumer indifference, some industry analysts predicted that 900,000 DVD video players would be sold in 1997 alone and more than two million PCs with preinstalled DVD-ROM drives would reach consumers’ homes and offices. By the year 2000, moreover, they estimated that the number of DVD video players sold would reach eight million and the number of DVD-ROM drives would climb to 43 to 63 million. As Nimbus faced the great unknown of the global consumer electronics market, it took comfort in analysts’ predictions that its 1997 sales could climb as high as $150 to $160 million. Nimbus’s future hopes were bluntly summed up by Forbes magazine: “Nimbus is poised to become a major player in the next great consumer electronics rollout, the DVD.”

Principal Subsidiaries

Nimbus Manufacturing, Inc.; Nimbus Manufacturing (U.K.) Ltd.; Nimbus Information Systems, Inc.; Nimbus Software Services, Inc.; CD Manufacturing (UK) Ltd.