Ingot Tree

Amar Bose: Bose
From the Sep. 2004 Issue of FSB
By Brian Dumaine

Bose is known for high-end audio equipment and dedication to research. Founder Amar Bose, who still owns most of the $1.7 billion company, reinvests all its earnings into R&D. That approach has created cultlike fans and innovative products—its wildly successful Wave radio took 14 years to create. Now Bose has a new product that could shake up the car industry. (Hint: It's not stereo equipment.)

When I was 12 years old, in 1943, I bought a radio kit, and in building it I learned how to read schematic diagrams and repair radios. My father, an immigrant from India who used to sell imported mats and rugs, would go around to the hardware stores where he used to sell them and talk them into letting me repair the radios that their customers would bring in. It was a good business—no one was making new radios because of the war effort, and many of the radio repairmen had been drafted. As the business grew, I was working nights and all day Saturday and Sunday. I even hired a couple of employees.

In 1956, when I was at MIT finishing my doctorate, I bought my first hi-fi system based on the best specifications. I brought it home and played some violin records, and I couldn't believe it. The sound wasn't right (I had played violin growing up), but it should have been right based on everything I had been taught about engineering. So either the manufacturer was cheating on the specs, or the specs were not meaningful. It turned out it was both, by the way. So I started working in the MIT acoustics lab to find a solution.

My first product didn't come out until 1965. It was a speaker in the shape of an eighth of a sphere, which fit in a corner and reflected sound all around the room instead of in a direct beam as with conventional speakers. I was a professor and didn't know anything about business. I projected we'd sell $1 million worth of speakers our first year. We ended up making 60 units and sold 40. That sphere-shaped speaker eventually evolved into our 901 system, which we launched in 1968 and which was the product that really built the company. It was much different from anything that existed—I was able to patent it—but it was a hard sell at first. The 901 had no woofers and no tweeters, which every speaker was supposed to have. It was very small compared with the steamer trunk-sized things that were on the market at the time. When you hear live music, very little of it comes to you directly; most of it bounces off walls and ceilings first. A traditional speaker just blasts the sound directly at you. Like a live performance, the 901 blended both direct and reflected sound.

When we first launched the 901, it was a total disaster. None of the retailers had any idea how to demonstrate the product. One dealer in Santa Barbara loved the sound and put the 901 out in the middle of his showroom floor. One time, however, I was out visiting him and couldn't find the Bose speaker, so I asked him about it. He pointed up to a high shelf, and there it was in a corner, practically out of sight and not even connected. He said, "Look, I love your speaker but I cannot sell it because it makes me lose all my credibility as a salesman. I can't explain to anyone why the 901 doesn't have any woofers or tweeters. A man came in and saw the small size, and he started looking in the drawers for the speaker cabinets. I walked over to him, and he said, 'Where are you hiding the woofer?' I said to him, 'There is no woofer'. So he said, 'You're a goddamn liar,' and he walked out."

When I got back to Bose, I created a seven-minute audio demonstration to help dealers explain to customers how the 901 worked, and that really helped spur sales. [Editor's note: Bose doesn't release any figures, but the NPD Group, a market information firm in Port Washington, N.Y., says that Bose today is No. 1 in home speakers, with a 12.6% market share; its 901 speakers are still sold.]

The biggest crisis I ever faced at Bose hit in the early 1980s, when interest rates rose to 22% or so. Technology companies everywhere were going down, and banks were panicked, putting all sorts of restrictions on their loans. We were in the thick of developing our new car audio system for GM. The situation was pretty scary because it could have forced us to go public to raise capital, something I vowed I would never do. Going public for me would have been the equivalent of losing the company. My real interest is research—that's the excitement—and I wouldn't have been able to do long-term projects with Wall Street breathing down my neck.

How did we hang on? I told GM how our bank—it had given us a $14 million loan—was trying to constrain us. A couple of weeks later I got a call from Ed Czapor, who was head of GM's Delco Electronics. He asked me to fly out to Detroit. When I met him, all he said was, "I'd like to introduce you to our CFO." He walked me up to the 14th floor of the GM headquarters, introduced me to the CFO, and walked out. The finance fellow had heard our new audio system and loved it. He said, "I understand you have a financial problem." I told him about how our bank wanted to make us cut costs that would force us to wind down our R&D spending. The next day the CFO called up a bank he dealt with in Boston and told it to assume the loan from our bank with no constraints—just like that. That's what saved us. People just would not believe that a company as large as GM would do such a thing.

Around the same time, GM delivered $700,000 worth of production equipment to our factory in Massachusetts. I called Ed and said, "Seven hundred thousand dollars of equipment just arrived at our factory, and I didn't order it and I can't pay for it." Ed said, "Look, everyone comes to us with a widget in his hand and says, 'Here's my widget, and here's how much money I want.' You've been working with us for almost a year now, and you've never asked for a cent. You've gone your mile a long time ago; it's time we go our mile." Can you imagine this? Without GM's help, we might not be here at all.

Our latest product is a new car suspension system, which has been in development for nearly a quarter of a century. I first got interested in suspensions as a young man. In Paris in the 1950s I saw a sleek Citroen DS-19 C and immediately thought, "Oh, my God, I've got to buy one." Which I did when I returned to the States. The Citroen had a novel hydropneumatic suspension system that made you feel you were floating along the highway. Over the years I remained intrigued by it. In fact, I used to give my MIT students quizzes on it. In 1980 I started looking into the subject and realized that conventional suspensions, made with springs and shocks, acted differently for luxury and sports cars. Make the damper and springs stiffer, and you've got a sports car. Make them softer, and you've got a luxury car. But the slow roll of a luxury car can make you seasick, and the stiff ride of the sports car makes you want a chiropractor.

At this time people were looking to hydraulics for solutions, but they weren't getting anywhere. So we decided to start from scratch and throw out the old system entirely. After five years of working out some complex mathematical algorithms, we found we could get huge improvements on paper, but we didn't know what the hardware would be. What we ended up with is an electromagnetic motor installed at each wheel. When power is applied, the motor retracts and extends. One of the key advantages of an electromagnetic system is speed. The motor responds to conditions in the road quickly enough to counter the effects of bumps and potholes, maintaining a comfortable ride. The motor is also strong enough to put out enough force to prevent the car from rolling and pitching during an aggressive maneuver.

We've worked on this system and tested it for 24 years now, and are finally ready to show it to the auto companies. It will probably take several years before they adopt it; they'll want to do some of their own testing, but we've designed it so that it can bolt right onto the chassis of current production cars—they won't have to do expensive retooling to make this technology work. We'll probably first see it as an option in luxury cars—we don't know exactly how much it will cost, but as the suspension gets more widely adopted, the price will come down, and we'll probably see it in all but the most inexpensive cars, which is how ABS brakes developed. Oh, and the potential size of the market? We really have no idea. We just know that we have a technology that's so different and so much better that many people will want it.

Maglica's life story would make a great movie. He was born in New York City in 1930, but the Depression forced him and his mother back to their native Croatia. During World War II they suffered such poverty that his mother had to pull her gold tooth to buy food. Returning to the U.S. in 1950, Maglica began making machine parts in a garage in Los Angeles, and in 1979 he simplified his business to a single product: flashlights that would hold up to the rigors of police work, yet be attractive enough that civilians would buy them too. Last year Mag Instrument took in more than $100 million in revenue. At 73, Maglica still works 18-hour days, often defending his intellectual property from competitors.

In the 1950s I got a job at a machine shop in East Los Angeles. It was while I was working there that I learned my foreman had a little side business in his garage making hydraulic fittings. I figured that I could do that, so I went down to Santa Fe Avenue and found a simple Logan metal-turning lathe that would fit in my garage. It cost $1,000, and I didn't have that kind of money. But the guy selling it agreed to take the $125 I had as a down payment and let me pay every month. To hook the machine up, I had to disconnect the stove and run 50 feet of cable to the garage. I worked the night shift at my job, because that shift paid better, and worked on this little lathe in my garage during the day. It was job-shop work, very competitive, and the hardest part was getting paid. I've always had to be economical. Even when my business began to get successful, I didn't have an air-conditioned room and expensive machines. I modified the machines I had.

I knew someone in the 1970s named Don Keller, who later came to work for me, and still does. He had been a policeman, and he knew cops who had problems with their flashlights. The flashlights were flimsy, made of plastic, and if you dropped them, they would break. Keller said that if someone could make these out of metal, they wouldn't break.

He and his friend tried making one out of the metal shaft of a fence post. They packed it with rags and the guts of a regular flashlight. Then they took the design to a tool-and-die shop, but those places don't do high-production. They do ten, 20, 50 pieces at a time. So the flashlights were too expensive. They farmed the work out to me, because I could do higher production, but I couldn't get them to pay me. I also made flashlight parts for another company, but that had problems too. The second company gave me a purchase order for 10,000 lights, so I tooled up, invested all this money, and started making them. They said, stop, slow down, you're making too many. We can't sell these flashlights. They wanted me to make them but only give them to them as they needed, which didn't work for me. I almost got into a lawsuit with them to get them to pay me, but they finally did.

By then I had all this equipment in place. And I thought that I could make a better flashlight than they were making. Better quality. I designed one with a pushbutton switch instead of a slide switch, and an adjustable beam, so you could go from flood to spotlight. And contacts inside that are self-cleaning—when you push the button, the contact revolves and scrubs against the other part. It takes the oxidation off the metal, so you get a better connection. We get letters from customers all the time, with stories about the lights and what they've been through. Like someone losing a light in a lake and finding it the next year, and it still worked.

Since 1979, when we took the first Maglite product on the market, we have never raised our prices. We've increased the quality, but maintained the same price. People say, how do you do it? Maybe you charged too much money to start with. That's not the case. It's the automation and innovations we've created along the way. We've actually added value to the product. We now include batteries and replacement bulbs, things like that.

There are still so many challenges though. It can be hard to compete in this country. First I have to design a product that's better than anything else that's out there. Then I have to find the most efficient way to manufacture it. Then there's protecting your patents, once you actually get them. One patent we applied for took 14 years to get approved. Fourteen years! Ninety percent of the people in this factory don't know what new product I'm working on now. I've spent more than $70 million in litigation to defend my intellectual property rights. Can you imagine what I could have done with that $70 million? More employees, better products, a bigger company. You can't try a patent case in this country for less than $1 million.

I think we've filed more than 200 lawsuits worldwide over the years. Most of the times we settle, and we've never lost a case, but still we have litigation going on all the time. It's pretty easy to find out about products that infringe on our intellectual property. The public often helps us find out. Someone in our warranty department will get an angry letter and a returned product, and it turns out that the flashlight isn't even ours. It's a copycat. Or we see people at the trade shows. I once saw someone with a knockoff at a show, and I explained to him that I spend a lot of money on R&D. He told me, "I spend a lot too. My R&D is my attorney." I sued him and ultimately settled, but it took three years and cost me about $5 million.

We also have sales reps who go to the stores. Infringers aren't shy, and they advertise their products right next to ours. We had one situation where a company in China made a light that was the exact same shape and overall appearance as ours. They were selling it for less than what we paid to buy materials. We couldn't go to China to stop them, but we stopped them here by suing the stores that carried the lights. We've sued virtually all the mass merchandisers, companies like Kmart. They usually become our best customers. They want to sell a competitive product and a good value, and they want to buy American. Usually they get into trouble, and it isn't even their fault. They get talked into selling a product when they don't understand about the patents on mine.

I figure I'm going to have litigation forever. It's not going to stop. But I hope people are smart enough to know that I'm not going to give up, that I'm not going to let them come and take something from me.

For five generations, the men in the Koch family became brewmasters. Koch began his career as a consultant, but in 1984 he founded Boston Beer Co., maker of Samuel Adams. It's now the sixth-largest U.S. brewery, and Koch is credited with launching the microbrew craze.

I'll never forget my first sale. I'd never sold anything before. I'd always had this status and prestige of three Harvard degrees and my high-paid consulting job. This meant removing all those buffers and becoming a beer salesman. It was scary. There was no growth in the beer industry, and continuing brutal consolidation. The competitors were 100 times any size I could ever contemplate being. I had told my dad I wanted to leave my job and continue this 150-year-old family tradition, and I'd thought we were going to have a warm father-son moment. He just looked at me and said, "You've done some dumb things in your life, but this is just about the dumbest." In 1948, when he got out of brewmaster school, there were about 1,000 breweries in the U.S. When I started Boston Brewing 36 years later, it was down to maybe 30. Industry consolidation meant that jobs for brewmasters were disappearing. My dad lost his job several times.

But as I explained it to him, he began to understand I wasn't trying to compete with the big American brewers that had driven all these little breweries out of business. My company didn't need to be that big for me to be happy. So we went up to the attic and got out my great-grandfather's recipe, Louis Koch Lager, and he said, "This is really good beer." I took the recipe home and made it in my kitchen as best I could. When it was finished aging and I tasted it, I knew I had something.

To sell it, I went to all five of the distributors in Boston, and I told them my idea. They thought I was weird. Their vision of a brewery was a huge corporate matrix. Here I was, one guy. Nobody had ever heard of my beer, there was no marketing behind it, and at that time it cost 50% more than Heineken. Every one of them turned me down. So I set up my own distributorship.

The day I started selling, I walked to the first bar I saw, a place called the Dock Side. I started talking to the guy behind the bar. He was just nodding, no matter what I said. It turned out that he spoke only Spanish and didn't understand anything I was saying. Luckily the manager saw me, rescued his bar back, and listened to my story. After he tasted my beer, he said, "Kid, I like your idea, but I didn't think the beer would be this good. I'll take it." I was so excited, I forgot to ask for the order. I had to go back the next day and say, "How many cases would that be?"