SRS Labs Inc. is plunging head first into the Internet with plans to license its sound processing technology to web site operators and cash in on the escalating popularity of online multimedia, moves that appear to be music to investors’ ears.
The 6-year-old Santa Ana company , which is headed by AST co-founder Tom Yuen and counts among its investors Kingston Technology co-founder John Tu and e*Offering founder Walter Cruttenden , makes embedded software used on sound card chips and audio components to enrich their sound quality.
Hit Hard in ’99
SRS has been hit hard over the last year with a slumping Asian market and lower-cost PCs that eschew frills such as fancy sound cards. Officials won’t break out revenue for specific divisions, but they acknowledge that the PC market made up a significant chunk of its revenue and that the segment has been in decline, falling 37% for the first nine months of the year compared with the same period a year earlier.
Though the company was recently recognized by Deloitte & Touche as the No. 63 fastest-growing company in the nation and the No. 2 in Orange County, behind Broadcom Corp., it has struggled to turn a profit: after losing $1.4 million for its first quarter this year and breaking even its second, the company posted modest earnings, $310,422 for the third.
Officials hope to build momentum with a new Internet and software division, launched a few weeks ago in a flurry of announcements outlining its online strategy. The division employs less than 10 people, about one-tenth of its total workforce, but the company won’t say how much money is being invested into the effort.
“With the phenomenon of MP3 (downloadable music), PCs are suddenly being recognized as an entertainment platform,” said Jennifer Dresher, who heads the venture’s marketing efforts. “Cable modems and broadband are becoming more popular and there’s going to be a huge market for audio. But if people’s PCs have tiny little speakers, you’re still going to have a problem.”
The Internet business formally began in September, when SRS began online sales of its “WOW Thing,” a translucent box about the size of a Walkman that improves a computer’s native sound, adding bass and ambient details to the tiniest of speakers. The $30 device has won praise from several national news outlets, including PC magazine and ZD Net, and is designed to be the first step in SRS’s plan to leverage the convergence of music and the Internet.
The company is giving away a software version of the technology through a mini-program that works with Winamp, a popular application that plays music in the MP3 format. The free add-on is designed to promote the company’s WOW brand while giving Internet users a taste of enhanced sound. Though downloaded music has become a mainstream application, low connection speeds and the sub-standard speakers included with computers often limit sound quality.
So far, the technology has been promoted though what Dresher calls “viral marketing,” or word-of-mouth recommendations over the Internet and trade publications.
The moves came on the heels of a separate announcement that SRS plans a public offering of its recently purchased Valence Technology Inc., a Hong Kong-based operation that makes application-specific integrated circuits (single-purpose chips used in sound cards and other devices) and has managed to remain profitable in a sagging market. Unlike SRS’s U.S.-based operations, which licenses patented sound-processing techniques, Valence designs the actual chips. SRS will retain a 75% stake in Valence after the offering.
The subsidiary will concentrate on the Chinese market, where competing technologies such as Dolby surround sound and THX are not yet firmly established. SRS officials are touting their system as less expensive to implement because it doesn’t need special encoding equipment, only SRS’s playback technology.
So far, investors like what they hear; over the course of about a month, the stock has nearly doubled to about $6.
SRS plans to formally launch its Internet content site, SRSWOWcast.com, at Las Vegas’ annual consumer electronics show in January. According to the Internet venture’s vice president and general manager, Chuck Cotright, he and other officials are negotiating with entertainment powerhouses such as Sony and Time Warner to offer music and video downloads that will use the company’s sound-enhancement software.
In addition to running its own music clearinghouse, SRS plans to license its technology to other music-oriented web sites that would play music for visitors using a special sound player. Such a deal has already been inked with online broadcaster WWW.COM.
Licensing Plans
Dresher said the company sees the Internet as a way to recover some of the licensing revenue it has lost over the last year and to showcase its music and voice-enhancement technologies. The division also plans to license software directly to PC makers, providing a way to improve sound on the bargain-basement speakers that usually come with them. Although the per-unit revenue will likely fall short of what the company had been earning for similar technology included on sound cards, Dresher said it had a good chance of seeing far higher volume because the software is far less expensive to install than the equivalent hardware.
The company is working on software versions of its other voice-enhancement technology, designed to boost sound quality for IP telephony and voice recognition applications, and a two-speaker surround-sound technology called TruSurround. All will eventually be incorporated into Internet-centered technologies, Cotright said.
In the meantime, the site will feature music and video downloads and allow users to chat with one another using cartoon representations of themselves in realistic backdrops such as a bar or concert stage.
Cotright said he hopes to develop a “colony” of musical artists and fans around the site to provide much of the content and community feel.
The company hopes the site can make money through advertising and online sales of music, software and its sound-enhancement hardware. n
