Only a few weeks after launching his first product, Steve Krampf realized his tiny Newton company had shown up as a blip on the radar screens of two of the biggest players in home audio: Bose Corp. and Boston Acoustics.
Two orders trickled in, one each from the two rivals, for the $499 iPod-compatible music system that Krampf's company, Chestnut Hill Sound Inc., launched last year.
Krampf wasn't surprised that other audio companies were doing some intelligence-gathering; he'd been doing the same with their products, analyzing their acoustical qualities, ease of use, and electronic innards.
"You take apart a Bose SoundDock, and you see two speakers," he says. In a conference room at Chestnut Hill Sound, competitors' products are arrayed on a table, many made by Massachusetts companies like Bose or Tivoli Audio LLC. "We decided to use five. You can see what kind of microprocessors they're using, and how efficient they were with designing things for manufacturability."
Music fans are feverishly digitizing their libraries and loading them onto iPods; more than 150 million of Apple's popular media players have been sold since they were introduced in 2001, and the iPod is becoming the nexus of the 21st century stereo system. That's creating an opportunity for start-ups like Chestnut Hill Sound to develop iPod-centric product lines from scratch, and it's forcing the established players in home audio - that have built their businesses on records, eight-track tapes, and compact discs - to churn out new products for iPod-toting consumers. Hence the intense focus on competitive intelligence.
"We own every single competitor's piece of equipment, and we do critical testing," says Rob Mainiero, general manager of Cambridge SoundWorks, based in North Andover. "We're fanatical about understanding what's out there in the marketplace."
Krampf's key insight in designing George, Chestnut Hill Sound's first product, was that iPod owners enjoyed the way the device's scroll wheel allowed them to easily navigate to a song, album, or playlist they wanted to hear. But that ability is curtailed when an iPod is connected to most music systems, since the typical remote control offers only buttons that can control volume, pause playback, and skip forward or backward through the songs. Anything more complex involves walking over to the iPod itself.
So Krampf decided to add a display screen and a twistable knob to the face of George's remote control. Information about songs stored on the iPod is transmitted across the room to the remote using a wireless protocol called ZigBee. So in demonstrating George, Krampf can dial his way to a song by Alison Krauss, or assemble new playlists on the fly. The screen on the remote displays information about the song that's playing, as well as the album and artist. (The product's name is a nod to Sir George Martin, the legendary producer who worked with the Beatles.)
"This data is like baseball stats are to a sports fan," Krampf says. "Music lovers want to know who the artist is."
Chestnut Hill also developed a "bandless" AM/FM tuner, which makes any station available along a single tuning spectrum, without having to switch modes from AM to FM.
Chestnut Hill got a license from Apple to produce an iPod-compatible product in the fall of 2004 (they pay a small royalty in return), pieced together some early financing in March 2005, and had a prototype ready by the fall. The following year, Krampf and Rob Friedman, Chestnut Hill's cofounder, were taken aback when Apple announced in February that it would sell an iPod stereo system of its own, the Hi-Fi, pricing it at $349.
"They keep their product plans secret," says Friedman. Krampf likens the company to the Vatican, in its unwillingness to share information until it is ready to share. (Luckily, Apple's product never sold well, and the company pulled it from the market in late 2007.)
Introduced at the Macworld trade show in San Francisco last year, George took home a "best in show" award. That was followed by effusive reviews in GQ, The New York Times, the gadget blog Gizmodo, and PC Magazine, which crowned it "the new king of the iPod dock mountain." A quick price cut from $599 to $499 softened some reviewers' objections about George's price tag, and helped spur sales.
But Chestnut Hill's rivals haven't been snoozing. Cambridge SoundWorks, for instance, has introduced inexpensive $99 iPod docks as well as a $499 system that includes a CD and DVD player, allowing it to serve as the hub for a home theater system. Bose recently introduced a new version of its SoundDock, the SoundDock Portable. It includes a rechargeable lithium ion battery, which allows it to perform for about three hours, even when no electrical outlet is available.
Of Bose's iPod business, executive John Roselli says, "We can't disclose revenues, but it has been a good business for us. We've been able to reach a lot of people with the benefits of the SoundDock." While Bose competitors argue that their sound is superior (George, for instance, has a subwoofer while the SoundDock does not), they acknowledge that years of successful branding campaigns have helped equate the Bose name with top-notch sound. "It's like owning a BMW - there's prestige associated with it," Mainiero says.
Wisely, Krampf decided to add a USB data connection to the back of George, which could one day allow the device to tune in to Internet radio broadcasts by linking up with a computer or Wi-Fi network. And earlier this spring, they began selling wood veneer "skins," in cherry or walnut, to spiff up George's looks.
Competing with well-established companies like Bose and Boston Acoustics hasn't been a cinch. While George is available at many of Apple's retail stores, it isn't for sale at the Boston or Cambridge outlets, and a retail test with Best Buy didn't go exactly as planned last year. Instead of showing song titles and artists, the remote control only displayed "Track 1" or "Track 2," without showing song titles - a glitch with the in-store setup.
"That was a bad demo," Friedman acknowledges, though he hints that a broader rollout with Best Buy is in the offing soon. And George will go on sale in Europe and Asia this August.
Raising money has been a challenge from the start for Chestnut Hill, though the company has banked about $4.5 million over the last three years - some of it from big-name musicians like Chuck Leavell, the keyboardist for the Rolling Stones. Discussions with local venture capital firms have been disappointing.
"Most of them say, 'We just don't do consumer products,' and that's the end of the discussions," Friedman says. The pair are still hoping to raise between $2 million and $5 million to put more marketing firepower behind George.
The good news, Friedman says, is that accepting less money from investors so far "has allowed us to keep control of the company."
"Our preference would've been to step on the gas earlier," says Krampf, "but we'll probably look at this as a blessing in disguise."
Profitability, they predict, is on the way later this year. And hitting that milestone would allow Chestnut Hill the luxury of starting to think about a second product.
Scott Kirsner can be reached at firstname.lastname@example.org.