Sensory Science Corporation

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Sensory Science Corporation

7835 East McClain Drive
Scottsdale, Arizona 85260
U.S.A.
Telephone: (480) 998-3400
Fax: (480) 951-4404
Web site: http://www.sensoryscience.com

Public Company
Incorporated: 1984 as Go-Video, Inc.
Employees: 97
Sales: $72.14 million (2000)
Stock Exchanges: American
Ticker Symbol: VCR
NAIC: 33431 Audio and Video Equipment Manufacturing

Sensory Science Corporation designs, develops, and markets electronic video and audio products, concentrating on high-performance digital televisions, DVD players, CD players, VCRs, home-theater systems, and portable MP3 players. Sensory Science’s products are sold in major retail outlets and through catalogues. Until 1999, the company operated as Go-Video, Inc., the embattled pioneer of dual-deck VCRs. Diversification into other product lines during the late 1990s prompted a change in the company’s name and led to an encouraging change in the company’s financial performance.

Origins

When a company called Go-Video, Inc. changed its name to Sensory Science in 1999, one of the most controversial business names in the consumer electronics industry made its exit. At the time of the name change, the company was celebrating its 15th year of business, but only its ninth year of actually producing a product. During the years in between, Go-Video awaited approval of patent application for a product whose potential existence drew the ire of immensely powerful forces. Fighting on the behest of Go-Video was its founder, R. Terren Dunlap. At stake in the legal battle was a $4.5 billion antitrust lawsuit, upon which Go-Video’s existence depended.

Dunlap, a native of Tucson, Arizona, who left his law practice and a part-time teaching job at Scottsdale Community College to become an entrepreneur, founded Go-Video in 1984. The formation of the company coincided with the filing of a patent application for a dual-deck videocassette recorder, the VCR-2. The implications of Go-Video’s patent application were profound, at least to the Japanese VCR manufacturers who thoroughly dominated the U.S. market. As a bloc—grouped within The Electronics Industry Association of Japan—the Japanese manufacturers had purposefully refrained from manufac-turing a dual-deck VCR that would be capable of duplicating videotapes and enabling the viewer to watch one taped program while recording another. The motivation for their stance was the powerful pressure exerted by the Motion Picture Association of America, an organization that was opposed not only to dual-deck VCRs but also to the advent of the VCR itself. Accordingly, to appease the content owners in Hollywood, The Electronics Industry Association of Japan, through a press release, declared that its members would neither produce nor supply the parts for dual-deck VCRs, thereby easing its members’ entry into the conventional, single-deck VCR market.

After filing for a patent for a dual-deck VCR, Dunlap prepared for the production of Go-Video’s prototype VCR-2, doing what he could until the U.S. Patent Office delivered its verdict. It was during this period, according to Dunlap’s allegations, that Go-Video suffered from the tacit agreement between the Japanese and Hollywood. Dunlap claimed he was unable to get access to the licenses covering the patents for basic VCR parts such as the head and drive assembly, without which he could never hope to manufacture Go-Video’s dual-deck VCR. By 1987—a year in which 13 million VCRs were sold in the United States; none manufactured by an American company— Dunlap’s frustration manifested itself in a $4.5 billion antitrust lawsuit. Fighting against what he perceived as an international cartel, Dunlap’s lawsuit named 25 leading Japanese VCR manufacturers and American entertainment companies.

The lawsuit, filed in June 1987, included some of the most powerful companies in Japan: multibillion-dollar corporations such as Sony, Toshiba, Mitsubishi, and Victor Co. of Japan, owner of the JVC brand. At the time the lawsuit was filed, Dunlap presided over a company that had yet to collect $500,000 in annual revenue. Dunlap accentuated the disparity between his tiny company and some of the largest multinational corporations in the world, doing whatever he could to keep the lawsuit in the public eye. He appeared on the television show “Today,” and proclaimed in a November 1988 interview with Inc. magazine, “We could be the last hope for the domestic consumer electronics industry.” For Go-Video, the antitrust lawsuit meant everything to the company’s survival, providing the company’s chief source of revenue and representing its sole means of gaining access to basic VCR parts. Without a settlement or the ability to market a product, the company would financially deteriorate. During its first five years in business, Go-Video registered revenues of $1.5 million, but accumulated $3.5 million in losses.

Patent for the Dual-Deck VCR Is Approved in 1988

Go-Video’s patent application was approved in August 1988; a victory dulled somewhat by the formidable opposition the company still faced. The trial was scheduled to begin in the spring of 1989, but before the case went to court Go-Video’s opposition began to lessen. By late summer 1988, five of the defendants—companies such as Mitsubishi, Akai, and Toshiba—had settled, promising to provide Go-Video with access to some of the suppliers of the necessary parts. By November 1988, the Motion Picture Association of America had also agreed to withdraw its opposition to the VCR-2, its fears of piracy quelled by Dunlap’s promise to add a circuit that would prevent illegal copying of videotapes.

After the events of 1988, Dunlap was much closer to bringing the VCR-2 to market, but he still had a major hurdle to clear. Finding a manufacturer willing to produce the product proved a daunting task. Zenith refused Go-Video’s proposal to manufacture the dual-deck VCR domestically, presumably because of the controversial nature of the product. “What price heroism?,” a Zenith executive reportedly remarked to Dunlap, according to the November 1988 issue of Inc. One possibility was a joint venture with Mitsubishi, which had been granted limited first rights of manufacturing refusal in exchange for supplying basic parts, but the deal never materialized. Eventually, in February 1989, a deal was struck with Samsung Corporation, which agreed to manufacture Go-Video’s VCR.

After entering into manufacturing and licensing agreements with Samsung, Go-Video still had more than a year to wait before it officially ended its drawn-out development phase. Sales of the company’s revolutionary VCR, introduced as the Dual-Deck VCR, began in June 1990, formally ending six years of preparatory work. The long wait had been costly, resulting in financial losses that the company had difficulty in overcoming. To make matters worse, the long wait proved to be in vain, ending with discouraging failure. In 1991, Go-Video lost its lawsuit, sending the company’s stock price tumbling downward.

After its first full year as a company with a product on the market, Go-Video generated $12.5 million in sales, nearly $5 million of which came from litigation settlement revenues, but it was unable to turn a profit. In 1991, the company posted a $1.3 million loss and repeated the discouraging feat the following year, registering another $1.3 million loss.

Hackett Takes Over in 1993

After eight years of unprofitability, Go-Video was desperately in need of changes. Late in 1992, the company gained the individual who would be responsible for sparking a turnaround. In December 1992, Roger B. Hackett was elected to Go-Video’s board of directors. The following month, he was named president and chief operating officer, with Dunlap serving as chief executive officer and as chairman of the board. Hackett faced several fundamental tasks when he took over day-to-day control of the company in January 1993, one of which was leading GoVideo’s evolution from an entrepreneurial organization into an industrial concern. Hackett also had to try to lower the manufac-turing costs of the company’s Dual-Deck VCR. The machine retailed for approximately $650, with some models reaching $1,000, which by far eclipsed the $250 price tag for a typical single-deck VCR. Additionally, Hackett wanted to diversify the company’s product line, a move that would lessen Go-Video’s complete dependence on the Dual-Deck VCR and utilize the company’s existing distribution channels.

Company Perspectives:

We believe that a company’s intellectual capital will be a key measure of its future success, especially in our industry. Our intellectual capital can be found in our people and in our products, which combine to create the Sensory Science experience. The Sensory Science experience puts the consumer at the center of the revolution sweeping our industry by offering superior product choices at key points on the analog-to-digital spectrum. The essence of the Sensory Science experience is fingertip delivery of unparalleled performance, award-winning industrial design and world-class engineering, backed by customer support that we hope will become legendary in our business.

Progress was slow, but by the end of Hackett’s first year with the company the perennial annual losses came to a stop. Go-Video posted a modest $116,706 in profit for 1993, a level the company’s net income would hover around for the next several years. Progress with Hackett’s other objectives—reducing manufacturing costs and embarking on diversification— occurred after his control over the company increased. In March 1994, he was also named to the posts of chief executive officer and chairman, earning the trust of the board of directors and the confidence of Dunlap, who assumed the title of special projects coordinator for the company. Several months after taking on the added positions of power, Hackett steered the company toward its first product line expansion, introducing the 8mm/VHS format Dual-Deck VCR in July 1994. The machine enabled users to make copies of their 8mm tapes in VHS format, but not many consumers were interested in such capabilities. Go-Video recorded negligible success in marketing the machine and stopped producing them not long after their introduction. By the beginning of 1996, the company’s only involvement in the product line consisted of attempting to exhaust its inventory of the 8mm/VHS Dual-Deck VCRs.

Despite the ill-fated venture, Hackett was able to convince Go-Video’s board of directors to approve a more adventurous diversifying move. The decision led to the company’s first acquisition, the purchase of Dublin Companies in April 1995. Dublin, under the Private Eye label, was a distributor of home and business video security and surveillance products. The acquisition led to the formation of Go-Video’s security products division, which competed within the closed-circuit television market. The division marketed products such as black-and-white cameras, time-lapse VCRs, monitors, and related items designed to be used in commercial and residential settings.

Diversification represented an important part of Hackett’s plan to reshape Go-Video, but arguably a greater achievement followed the acquisition of Dublin Companies. For years, Hackett had been trying to lower the manufacturing costs of the company’s signature dual-deck VCRs, an arrangement he had been unable to broker with the company’s sole manufacturer, Samsung. In January 1996, however, he reached a manufacturing agreement with a second supplier, Shintom Company Ltd. and Talk Corporation. The agreement led to the introduction of the GV60xx series of dual-deck VCRs, a product line that debuted in June 1996 with significantly lower manufacturing costs than the models manufactured by Samsung.

Following the new manufacturing agreement, Go-Video began to flesh out its presence in the consumer electronics industry. In 1997, the company entered a development, marketing, and distribution agreement with Loewe Opta GmbH, a German manufacturer of televisions and home audio consumer electronics. Under the terms of the agreement, Loewe and Go-Video began developing a line of high-performance televisions to be distributed in North America by Go-Video. Also in 1997, Go-Video collaborated with Prolux Corporation and began developing a prototype LCD (liquid crystal display) projection television. Go-Video anticipated launching the distribution of the projection televisions in 1997, the same year distribution of the Loewe televisions was expected to begin.

The next addition to the company’s growing roster of consumer electronics product lines arrived in 1998. In April, Go-Video acquired California Audio Labs, a designer, manufacturer, marketer, and distributor of high-performance audio, video, and projection television products. The acquisition greatly increased Go-Video’s product line in the home entertainment segment, adding DVD players, CD players, and front projection television products to the company’s product lines.

With the diversification and expansion of 1997 and 1998, Go-Video represented a much more broadly-based consumer electronics company. The changes to the company’s profile were dramatic, taking a company dependent on one main product line and reshaping it into a multifaceted concern capable of churning out dozens of new products each year. Although the Go-Video name would remain a brand name, the company decided a new corporate title was needed to signify the profound changes that were occurring. In March 1999, Go-Video changed its name to Sensory Science Corporation, the same month the company decided to focus its efforts exclusively on the consumer electronics market. The decision meant the end of the company’s involvement with security and surveillance products, leading to the closure of the security products division. More in line with the company’s focus was a new business area it entered in July 1999, when it introduced the first in a line of Internet audio (mp3) players, which were used to download, store, and replay music from the Internet. Sales of mp3 players were expected to increase from one million units in 1999 to 8.5 million units by 2002.

As the company exited the 1990s, evidence of its product diversity was on display. Dual-deck VCRs, which historically had accounted for 98 percent of the company’s sales, were joined by 30 new products, all introduced in 1999. As a result of the product line expansion, the percentage of total sales derived from dual-deck VCRs fell to 81 in 2000, a decline that was expected to continue as Sensory Science broadened and strengthened its product lines, particularly in digital televisions. “This has been a total renaissance for this company, a rebirth,” Hackett remarked in a February 28, 2000 interview with Knight-Ridder/Tribune Business News. The transformation appeared to be working, producing 25 percent annual revenue growth and freeing the company from utter dependence on a single product line.

In the fall of 2000, the company introduced the DVR5000, a combination DVD/VCR player that plays DVDs, CDs, including those with mp3 files as well as videocassettes. Retailers have been unable to keep the DVR5000 in stock.

As Hackett prepared for the future, he hoped to continue building on the favorable trends established in the late 1990s and to secure a future of financial consistency in the digital age.

Key Dates:

1984:: Patent application for a dual-deck VCR is filed by Go-Video.
1987:: Go-Video files a $4.5 billion lawsuit naming 25 Japanese manufacturers and U.S. entertainment companies.
1988:: Go-Video’s patent application is approved.
1989:: First manufacturing contract is signed with Sam-sung Corporation.
1991:: Go-Video loses its lawsuit.
1993:: Roger B. Hackett takes over day-to-day management of Go-Video.
1995:: Acquisition of Dublin Companies leads to formation of security products division.
1996:: Manufacturing agreement with Shintom Company and Talk Corporation is reached.
1997:: Development, marketing, and distribution agreement is reached with Loewe Opta GmbH.
1998:: Acquisition of California Audio Labs.
1999:: Sensory Science Corporation adopted as new corporate title, security products division dissolved, MP3 players introduced.