Marantz in the Middle : Digital Recorder Dispute Puts Political Squeeze on Chatsworth Audio Firm

For a small audio concern, Marantz is making noises being heard from Washington to Tokyo.

The Chatsworth company wants to be the first to sell digital audio tape recorders, better known as DAT recorders, in the United States. The recorder, a tape version of the increasingly popular compact disk players, uses digital technology to reproduce sounds with crystal-clear quality comparable to original, master recordings.

But Marantz’s plans to introduce a DAT recorder late this year have touched off a bitter political fight that makes those plans increasingly uncertain.

On one side is the recording industry, which wants to prevent unauthorized home taping of compact disks. The group is led by the Recording Industry Assn. of America (RIAA), musicians, and a Washington group formed by industry executives and artists called “Coalition to Save America’s Music.” They argue that artists and recording companies will lose sales because owners of DAT machines can borrow compact disks and tape them for free. Home taping on conventional audiocassette recorders, they argue, already costs the industry as much as $1.5 billion a year in lost record and tape sales.

On the Other Side

On the other side of the fight is the electronics industry, which has formed its own Washington lobby group with an equally euphemistic name: the “Home Recording Rights Coalition.” Its leaders believe DAT recorders are simply a technological advance over widely available audiocassette recorders and that consumers should have the best available technology. They further argue that artists have resisted other innovations such as videocassette recorders and audiocassette recorders that have proved popular with consumers.

Federal and state lawmakers are now debating the issue. In Washington, Congress is considering a bill, primarily backed by Rep. Henry Waxman (D-Los Angeles) that would prohibit the sale of DAT recorders for one year unless they have a special encoding chip designed to prevent taping of compact disks. In Sacramento today, a select Assembly committee is scheduled to hear testimony on a bill written by Sen. Herschel Rosenthal (D-Los Angeles) which would have the same restrictions.

If nothing else, the fight has put Marantz into the public eye after years of obscurity. Marantz was acquired for $15 million in February by Dynascan, a Chicago electronics company, with 1986 sales of $147 million, that is known for its radar-detection devices.

At one time Marantz was a leader in stereo equipment, but in 1985 and 1986 it was hurt by the strengthening of the Japanese yen--it imports its equipment from Japan--and by the closure of the Pacific Stereo chain. By the time the Tushinsky family sold Marantz to Dynascan, Marantz had piled up $7.7 million in losses in 1986 on sales of $60 million.

“A lot of people are saying that they’ve heard of this poor little company, who never did before,” said Jerry Kalov, Dynascan’s chairman.

For now, little is at stake for Marantz financially. Because it will import and sell DAT machines that are made in Japan, the company has virtually no money invested in plants and design work. And, because the first DATs in the United States are expected to sell wholesale for $1,500 and retail at close to $2,000, Marantz expects sales to be negligible for at least two years.

What is at stake is a chance to be the first company to introduce the product in the United States and gain brand recognition early, before the DAT recorders are widely available and fall in price, as executives expect them to do, once other companies stampede to introduce them.

Edge for First One

“The first company in the marketplace very often commands a large share of the market for some time,” James S. Twerdahl, Marantz president, said.

Because of the uncertainty over the legislation, no one knows how big the market for DAT recorders may be. But compact disk sales totaled $930 million in 1986 in the United States, up 139% from 1985.

Stereo executives also believe the DAT could help restore Marantz as a prominent name in the stereo business.

“I see this as part of an overall campaign to resume the leadership Marantz once had,” said Wilfred Schwartz, chairman of the Federated Group chain of home-electronics stores. “It’s a well-known name, and the new management is extremely able. It’s my belief that they will rise again.”

Recording-industry representatives, however, suggest that stepping into the limelight wasn’t entirely Marantz’s decision, and that the company may have been put up to it by its Japanese suppliers, whom Marantz refuses to name.

“We’ve viewed the Marantz announcement for a long time as a trial balloon,” said Hilary Rosen, vice president of government relations for the RIAA.

Marantz executives counter that they are merely taking advantage of an opening in the market because Japanese manufacturers, such as Matsushita, Sony, Technics, Casio and JVC, are reluctant to enter the market first for fear of causing political controversy over fair trade matters.

Those manufacturers, they argue, are particularly skittish in the wake of recent battles over the dumping of computer chips in the United States and the controversy involving Toshiba, which irked U.S. officials by selling equipment to the Soviet Union that could be used to protect submarines.

Marantz executives say they will go ahead with plans to introduce the product regardless of the developments in Washington or Sacramento.

Twerdahl said the company wants to cooperate with lawmakers, but hints that the company might sue if it feels a new law is unfair. The first DAT models are expected to be sent to audio-equipment reviewers before the first of the year, he said, with DAT recorders shipped to stereo stores by early next year.

Digital audio tape recorders essentially can take some 48,000 samples of sounds a second, enabling those sounds to be played back in a seamless, distortion-free manner.

Coded Chip

But record-industry executives want the machines to have an encoding chip that would give artists and recording companies the option of protecting their works against taping.

Marantz’s Twerdahl argues that if lawmakers prevent DAT recorders from taping compact disks, it will effectively kill DAT sales because there will be no incentive to buy a DAT recorder instead of a compact disk player.

Twerdahl also said that the encoding chip may cause distortion in music being played back, although he said the developer of it, CBS, has not made the chip widely available for inspection.

Rosen, of the RIAA, argues that the chip has no effect on sound.

“We’ve played it for the golden ears of the music industry, and the consensus is that it doesn’t affect sound quality,” she said.

In many ways, the debate is similar to the controversy in the computer industry over attempts by software makers to prevent programs from being copied. For the most part, software makers have yielded to consumer pressure to remove protection, and electronics-industry officials say the same thing is likely to happen in the DAT recording business.

Electronics-industry executives argue that government has no business limiting the kinds of equipment sold.

“The recording industry simply wants to milk the compact-disk boom for all it’s worth,” said Allan Schlosser, a vice president with the Electronic Industries Assn. “But these aren’t conflicting products. One is a product that only plays back, the other has the capability of making compact-disk-quality cassettes.”

Rosen believes that Congress will eventually side with the recording industry and require Marantz and other manufacturers to put the encoding devices in the recorders.

“Congress is recognizing the need to protect intellectual property and the need to develop technological solutions to problems created by new technologies,” she said.