The Rise and Fall of ARP InstrumentsBy Craig R. Waters with Jim Aikin
The following article is being reprinted with permission from Keyboard Magazine, April, 1983 (pictures of Alan R. Pearlman, David Friend, and Philip Dodds have been removed at the photographer's request). It details the history of ARP Instruments, which designed the Chroma but went bankrupt before it could be commercially produced. The design was sold to CBS/Fender after ARP went out of business.
Back in 1975, when the first issue of Keyboard hit the stands, there were only a handful of companies making synthesizers. The first polyphonic instruments had just appeared, and programmability was still several years in the future. The leaders of this fledgling industry were Moog Music and ARP Instruments, both of which were named after their founders -- Bob Moog and Alan R. Pearlman. Over the years, ARP produced a number of keyboards that were eagerly embraced by musicians, including the Odyssey, the Pro-Soloist, and the Omni, and one -- the 2600 -- that remains a classic. Today, however, ARP no longer exists.
What happened? To some extent, changes in technology caught up with ARP. A major part of the company's design philosophy was explicitly to recycle existing circuit boards into new instruments, which left plenty of room for newcomers in the industry, unencumbered by outmoded components and concepts, to take advantage of developments such as microprocessors. In addition, outside observers often noted that ARP seemed hypnotized by the idea that they had to design things differently from Moog. They ignored some good, usable ideas -- notably the pitch-bend wheel -- for no better reason than that Moog was using them. Allowing somebody else to define your products' identity in a negative sense is bound to be risky, especially in an expanding industry where there are fewer and fewer good ideas left unused.
Nevertheless, ARP built good products, and they sold well. The major problems that developed in the company were due less to design flaws than to corporate mismanagement. These problems were detailed in an article in the November 1982 issue of Inc., a magazine for business management. Realizing that few of our readers would be likely to run into this issue of Inc., we arranged to reprint the article in the pages of Keyboard. The facts and figures below were marshalled by Craig R. Waters, a senior staff writer at Inc., and appear here unchanged except for the abridgement of a few passages and the correction of some minor technical inaccuracies having to do with synthesizers. We also spoke to Philip Dodds, formerly the vice-president of engineering at ARP, who was able to rescue his entire engineering team and the nearly completed Chroma synthesizer from the ashes of ARP and give them a new home at CBS Musical Instruments, where they joined the Rhodes piano division and re-christened ARP's last project the Rhodes Chroma. Dodds' comments add another perspective to the article that Inc. called "Raiders Of The Lost ARP."
Alan R. Pearlman never really understood the world of rock music; for him, it was groupies, drugs, and inarticulate musicians. Pearlman, 57, an engineer who had been weaned on classical piano and had spent five years designing amplifiers for the Apollo and Gemini space programs, found pop musicians inexplicable at best and flabbergasting at worst. Yet the company he founded in the late '60s quickly became one of the premier manufacturers of the synthesizers used by such people. From its inception, ARP was on the cutting edge of technology, and by the mid-'70s it enjoyed preeminence in the marketplace. It had 40% of the $25 million [synthesizer] market, surpassing Moog Music, whose predecessor, R.A. Moog, Inc., had created the first well-known synthesizers. But by 1981, Pearlman's Lexington, Mass., company was dead, the victim of miscalculation and the worst form of management: no management at all.
Pearlman is now attempting to recover face, fortune, and his faith in free enterprise with Selva Systems, Inc., a microcomputer software company. As chief executive officer of Selva, he sits in a small office one flight up from a store that sells electronics kits in Wellesley, Mass. -- only 10 miles from the site of ARP's luxurious 50,000-square foot plant. "We still have a roof over our heads, and if this company goes, we'll keep it; if it doesn't, we won't," notes Pearlman, who lost $1 million in paper assets and, for a while, his peace of mind, because of what happened at ARP.
A brilliant engineer, Pearlman co-founded Nexus Research Laboratory Inc., a maker of solid-state analog modules (precision circuits used in amplifiers and test equipment, for example), and nurtured it to a solid $4 million sales status before selling out to Teledyne in 1967. Aroused a year later by Switched-On Bach, the first major recording done on synthesizer, he returned to an earlier interest, electronic music. In 1948, as a student at Worcester Polytechnic Institute, he had written a paper on the subject, saying, "The electronic instrument's value is chiefly as a novelty. With greater attention on the part of the engineer to the needs of the musician, the day may not be too remote when the electronic instrument may take its place ... as a versatile, powerful, and expressive instrument."
Twenty years later, Pearlman made the leap from speculation to reality. "I went into the basement," he says, "and did some playing around." His tinkering yielded promising sounds and, shortly, a new company. With $100,000 of his own money and $100,000 from a small group of investors, he set up ARP Instruments in 1969, and in 1970 the company unveiled its first instrument, the ARP 2500.
Creating notes electronically rather than mechanically had been achieved within a few years of the invention of the vacuum tube in 1904, and the first viable ancestor of today's synthesizers, the Ondes Martenot, made its debut in 1929. But the idea of voltage control wasn't applied to musical instruments until 1964, when the first commercially available instruments, built by Moog on the East Coast and Don Buchla on the West Coast, appeared. By 1969, in part because the instrument used on Switched-On Bach was a Moog, Moog owned the market.
[Perhaps because Moog and Buchla were using patch cords, Pearlman elected to do signal-routing in the 2500 with a matrix switching panel, a criss-crossing grid of horizontal and vertical lines into which pins were inserted to make electrical connections. With this system, some users reported excessive cross-talk between theoretically independent signal paths -- which might under some circumstances be musically useful but would more likely cause problems.] The 2500, however, enjoyed one distinct advantage. The oscillators used by Moog tended to drift in pitch, which necessitated frequent retuning and made live performance difficult. "We were better at analog electronics," explains Pearlman. [Bob Moog unhesitatingly confirms the superiority of the early ARP instruments in this respect.]
ARP 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.]
Over 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.
In a July 21, 1976, memo to the directors, Pearlman groused that he was being kept in the dark about a guitar synthesizer that was being developed. "I may be oversensitive," he wrote, suspecting "that Dave Friend and [engineer] Tim Gillette were laying down a smokescreen of concealment for fear that I would prematurely criticize their efforts."
At about the same time, in a memo to Pearlman, Friend said, "I believe Lew [Pollock] is exhibiting a classic Freudian behavior of a parent who sees his child emerging as an independent adult. ... Lew feels that he is in control of ARP now and views my acquiring the title of president as diluting that control."
And in a July 13, 1997, memo to the executive committee, Pollock insisted: "The company is a rather mature company, and for it to be considered a growth kind of opportunity for investors, acquisitions, etc., the company must, must, have about a 10% pretax earnings. Waiting for next year is no longer excusable."
"It was difficult to tell who was running the company," comments Mancuso. "They were doing what I would call management by turns -- 'Pollock is away a week, I'll run it': 'Friend is away a week, I'll run it.' And Pearlman would run it by default when the two of them were away."
Mancuso saw no solution to the strong ambitions and intransigent positions; none of the men was willing to yield power, either to one of the others or to a chief executive officer who might have been brought in. At one point, as he watched his own authority evaporate, Pearlman considered waging a proxy battle to regain control, but -- advised against it by his own attorney -- he resigned himself to the status quo. "I didn't know how to fight," he concedes.
Instead, ARP embarked on the most ambitious and dangerous product-development project it had ever undertaken, one that intensified and underscored the rivalry within the executive committee. After having spent eight years acquiring expertise in building keyboard instruments, ARP undertook to create a guitar synthesizer, the Avatar. The reasoning was that there were four times as many guitarists active in rock bands as keyboard players. Whether those guitarists were willing to pay nearly $3,000 for a synthesizer was a question that was never answered by market research.
The 1977 business plan written by Friend called for a research and development commitment so major that a polyphonic keyboard synthesizer under development had to be shelved. [The project that was shelved was the ARP Centaur, a polyphonic synthesizer that was originally intended to have both guitar and keyboard incarnations. According to Philip Dodds, "The Centaur was the biggest boondoggle you've ever seen. There were 115 PC [printed circuit] boards in that unit. It was to be the polyphonic guitar synthesizer that would do it all. I agreed to get involved in the project provided that it would parallel the keyboard version, since that was our forte. But Dave Friend killed the keyboard version and put all his money on the Centaur. During all the dissention, Al Pearlman did a failure analysis on the unit and determined that the average time between breakdowns was about two hours. It was a brute force approach to polyphonic synthesis, with everything implemented using available technology, and as a result it would probably have retailed for between $15,000 and $20,000 -- if you could keep it running."]
As far as Pearlman was concerned, throwing the company into the Avatar project was "dropping the bird in the hand and going for the bird in the bush." In a memo to the board, he declared, "This project is the riskiest one we have ever undertaken. ... There are formidable technical problems of sound analysis, as well as synthesis, and we have an unknown amount of R&D" to produce an acceptable working model. [The problems of sound analysis concerned the performance of the pitch-to-voltage converters that sensed the vibrations of the guitar strings and turned them into DC voltages the synthesizer could work with. The R&D on the synthesizer part of the instrument was less complex, because the Avatar used the same oscillator and filter boards found n the ARP Odyssey.] By the time of this memo, though, Pearlman had virtually lost his voice at ARP. At one point, he actually feared the board might dismiss him. "It became a political party -- the guitar party," he explains. "It was blasphemy to question anything about it."
Friend, who had been largely responsible for several of the company's major successes, including the Omni, and whose standing at ARP prospered as a result, was the driving force behind the Avatar. "Pearlman was opposed to the Avatar," Friend concedes, "but several of our best sellers had been developed over his objections." Aligning himself with Pollock, Friend obtained approval to proceed. The executive committee voted to fund the project, a move the board supported. "Everybody thought it was going to be the hottest thing since the wheel," notes Friend.
"They decided to go for $4 million in the first year," says Pearlman. "Our R&D budget was almost $500,000, and most of it went into the guitar synthesizer. Not only that, we also started to buy inventory for $4 million a year."
The notion that a $7 million company could sell $4 million worth of an as-yet-untested product struck Pearlman as rather naive. "On the basis of objective reasoning, rather than 'bandwagon emotions,'" he wrote the board, "It seems that we are planning to spend over 25% of our 1977 R&D money ... to make a product which ... is more likely to be a disaster than not."
Friend's contagious enthusiasm carried the day, but Pearlman's premonition proved more accurate. Avatar flopped. although it extended the resources of the synthesizer to guitar players, it didn't do it well enough. Players had difficulty producing a clean sound [because of the imperfections of the pitch-to-voltage converters] and disliked the high price tag. Once the lackluster sales were documented, the Avatar was marketed as a loser. "What you want to do is create a demand," Mancuso explains. "But they were begging people to buy it. If you bought two of them, you got a deal. A guy bought six, they shipped him seven -- that kind of marketing."
ARP sold only $1 million worth of Avatars in the two-year life span of the instrument. "In 1979, we had an operating loss of about $700,000 and an inventory writeoff [the cost of instruments in stock that haven't been sold] of about $300,000," Pearlman recalls. "Essentially, we blew our brains out on that instrument."
In the meantime, Mancuso had been desperately trying to peddle the company. "I was trying like hell to sell it," he says with a laugh. "I thought one day I'd slip a letter under their hands and have them sign it -- 'Ha, ha, we fooled you, it's sold!' They'd have been a lot better off." Mancuso got as far as an informal offer of $10 per share from Gulf & Western Manufacturing Co., when the stock was trading at about $4 per share. But the board remained intransigent. For his efforts, Mancuso was fired.
The same disunity and political infighting that had marked the birth of the Avatar prevented the sale of the company. Pearlman, more and more confident that insolvency awaited, was eager to explore the possibility, but he wasn't able to. The board passed a motion prohibiting any officer from talking to a prospective buyer until the offer had been cleared by ARP's law firm -- that is, by Pollock. Pearlman found himself reduced to holding an "unofficial" meeting with an interested party at Boston's Logan Airport.
Feelers from CBS Musical Instruments were accorded cool and, according to one insider, occasionally arrogant responses.
But even then, with its cash reserves depleted and time fast running out before the company went under, ARP was not without options. "We could have cut our losses," Pearlman sighs. "We could have said, 'We'll rent out half the building, we'll go very lean, we'll operate in a survival mode.' The biggest mistake was thinking we could turn it around by playing catch-up."
In 1979, ARP introduced a 16-preset electronic piano. "It was supposed to rescue us," says Pearlman. But a switch on the piano failed: "It was one of those things that went up too fast because we didn't have the time or money to do it right," he admits. "when you left the unit in, say, the back of a hot car, the Mylar insulation in the switch would melt." [Dodds comments, "The product was released well before it should have been. It was flawed in two major ways. It was terribly noisy, and the membrane switch had an inherent design flaw. I felt terribly bad about that, because it was my design. At several points I requested that manufacturing be shut down until the problems could be corrected, but the management decided that we couldn't do that or the company would be out of cash and out of business within a month. So over my protests they continued to manufacture.] The pianos began coming back in for repairs nearly as quickly as ARP shipped them out. "The company's sales plummeted, repair costs went up -- all sorts of things started going wrong at that point," Pearlman recalls. That year, the board asked Friend, who had masterminded Avatar and become president non grata in the process, to resign.
Pearlman returned as president, and another "bailout" product was developed -- the Chroma, a microprocessor-operated touch-sensitive polyphonic synthesizer that would eventually prove quite profitable for another company. [Unlike the Quadra, which was designed, under the direction of David Friend, as a "synthesizer sandwich" consisting of an Omni, an Axxe, and a couple of other synthesizers strapped together in one box under the control of a microprocessor, the Chroma was a new product from the ground up. "The Chroma marked a major departure in R&D direction for ARP," Dodds explains, "and the fact that it didn't make it in time could be considered partly my fault. There were two occasions on which I froze the project, brought it back into R&D, and said, 'It's not ready.' But one of those is what's paying off in spades now. We decided to configure the instrument so you could have individual channels under computer control. I had to stop the project and do a ground-up design to do that. The decision was a risky one, and it may have added to the company's troubles."]
By this time, it was too late for ARP. Suppliers were providing parts on a COD-only basis, First National Bank was making angry noises, and, instead of coming to grips with its destiny, management was trying to keep the show going with sleight of hand. Desperately trying to turn 1980 into a break-even year, Pearlman lent ARP $168,000 so it could ship a $1 million backlog in November and December. "In January we discovered we had created a $300,000 loss," he recounts with obvious regret.
Eventually, ARP found itself pushed beyond desperation; frantic to stay alive, it began playing games with money. Philip Dodds, who later helped First National unravel ARP's tangled finances [and arrange sale of the Chroma to CBS], explains that "we were shipping units to dealers with the promise that, if they didn't sell them, we'd take them back and credit them ... for the purpose of inflating receivables. The purpose was to generate enough cash flow to get to the point where the practice wouldn't be necessary." But when First National -- which ARP owed $1.8 million, including nearly $1 million in receivables financing -- found out, it decided to pull the plug.
The bank took ARP to court. After listening to First National and the company's other creditors, the judge appointed a trustee to oversee ARP's liquidation. On May 13, 1981, the trustee took over and on September 11 presided over the sale of all the company's tangible and intangible assets. [The sale was arranged in large part by Philip Dodds, whose memories of this period are vivid: "The first thing the trustee did was to fire all of the management except me. He then required me to operate the balance of the company, which was tricky, because the week before I had been trying to figure out how to meet the payroll. Then I didn't hear from him for weeks, and he was the only one with the power to sign checks, which made operating the company somewhat difficult.
["I did manage to get a couple of things through. I convinced him to keep the service department on, so that we could get repaired units out, and ship parts -- you know, keep ourselves ethical. But each week he asked me to cut more and more. The first department that had to be cut in its entirety was, not surprisingly, Research & Development. He had me scale the company back until there was literally no one left, except for the two service techs and one person in accounting. So for a period of three months, I came to work in an empty 50,000 square-foot building, and I spent all day on the phone looking for a buyer. I re-contacted CBS and struck a deal with them to sell only the engineering department and the Chroma, convincing them by sheer brute force, just by not leeting them alone. I called them four or five times a day for three weeks running.
["I originally tried to get them to buy the whole company, but they rejected that out of hand. A bankrupt company is a liability, not an asset. So I said, 'Well, how about the Chroma? It's a hot product.' And there was enough belief in that that they said okay, it might be worth it. So they made an offer, with the provision that I had to contact all the people in R&D who had been laid off for three months and get them to sign contracts guaranteeing that they would come to work for CBS if the deal went through. Well, I went out and did that. But when the deal was finally arranged, the trustee felt that CBS would be willing to pay more. He told me to tell CBS to go fly a kite. So I went to the bank and told the bank, 'Hey, look, your trustee is about to blow the deal.' At that point, they intervened and struck the deal with CBS. By the middle of September I had rehired the entire department, relocated ten miles north of the old factory, and we were hot and heavy back on the Chroma again."]
CBS Musical Instruments acquired ARP's inventory for $300,000, and, for an additional $50,000, picked up the manufacturing rights to the Chroma and the [four-voice] electronic piano. In its first year with the product, CBS sold more than $3 million worth of Chromas. But stockholders and creditors lost more than $4 million when ARP went under; Pearlman and members of his family lost a total of nearly $500,000 in cash.
David Friend, now chairman of Computer Pictures Corp., a Boston-based computer graphics company [as of 1999, he was with FaxNet, which was later acquired by Critical Path], maintains a studied indifference to the ARP affair. "We were in a risky business, and we made one bad move," he explains, referring to the Avatar. "On top of that, we had some lousy management that blew away what little we had -- that was the end of the ball game."
Pollock prefers to place ARP's failure in a broader context by citing "companies with larger resources, market conditions, and worldwide competition" as elements that contributed to its demise. When pressed he concedes that the Avatar was the critical factor.
Mancuso has a simpler explanation: "Among the three of them, I couldn't get one full-time chief executive officer. Alone, they're each worth about 0.4 on a scale of 1 to 10; together, they add up to about a 2. There was no reason ARP should ever have gone out of business," he concludes. "It's a sin. It's a tragedy to see a beautiful little company, and 200 jobs, go under because of bad management. All three of them should physically have to go to jail and serve six months for screwing up a beautiful thing like that."
[Philip Dodds sees things a bit differently. "One person who was very much maligned during the troubles at ARP was Al Pearlman," Dodds comments. "And he was, throughout, the one who categorically defended the correct path, or what ultimately proved to be the correct path, the one who fought the dumb decisions. And right down the line he was ridden over like a Mack truck. I don't think he's ever gotten credit for being the defender of what was ethical and what was correct. The guy definitely ought to be given a little more credit."]