SMALL BUSINESS : Ex-Rocker Takes Big Gamble in MIDI Market

Philip Taylor Kramer dreams of building a music conglomerate. One day, he says, his company’s shares will trade on the New York Stock Exchange. But, at the moment, Kramer doesn’t even have the money to pay his public relations firm.

Welcome to the perils of small business.

Kramer, 35, is a Thousand Oaks resident and one-time member of the acid rock band Iron Butterfly, who is betting that he can use his expertise in an intriguing growth industry to make his fortune.

Kramer is part-owner of Midi City, a Los Angeles store that sells computer and music equipment. Thanks to new technology, one musician with a few thousand dollars worth of equipment can be a one-man recording studio and full orchestra. This is due, in part, to musical instrument digital interface (MIDI), a computer standard that enables a personal computer--when hooked up to speakers and, with the appropriate computer software and musical synthesizer--to give a musician access to a dictionary of thousands of sounds. A music synthesizer, for instance, can produce a library of artificial sounds that mimic real instruments.

With the MIDI technology, a musician can compose and instantly hear what it sounds like with full orchestration and swap, say, a violin for an oboe, and then ship the final package over a telephone line to another computer. Madonna, Herbie Hancock, Sting and other artists have used the new technology in their recording efforts, and such television shows as “Miami Vice” have used “artificial” scores composed with MIDI technology.

“I’ll show this stuff to an old ‘60s rocker who’s a professional and his eyes pop out of his head,” said Peter Aiello, sales manager of Hybrid Arts, a Los Angeles music software firm. “Then I show it to a 15-year-old kid who grew up with computers and he says, ‘Oh yeah, it all makes sense.’ ”

Music equipment makers such as Yamaha and Akai and computer firms such as Apple and Atari are beginning to target their products for the MIDI market. Business Week pegs the MIDI-computer hardware and software market as a $500-million business over the past couple of years.

Yet computer store chains don’t really understand music, and music stores tend not to understand computers. Kramer figures that he can bridge this gap and sell to professionals and hobbyists as well.

Two years ago, Kramer and two partners opened Midi City on Pico Boulevard, and it since has built a reputation among musicians as one of a handful of stores in the area selling state-of-the-art packages of equipment, including synthesizers ($200 and up), computer software ($60 and up) and digital drum machines with instruction in how to use them.

To get to the next step, Kramer plans to take control of STM Corp., a Woodland Hills public company, and use it as the vehicle to build his empire. STM technically exists as far as the Securities and Exchange Commission is concerned, but it has no ongoing line of business.

‘High Degree of Risk’

As the first page of the STM prospectus warns: “The shares offered hereby involve a high degree of risk to the public investors and should be purchased only by persons who can afford to lose their entire investment.”

“It’s all a house of cards until it turns into something solid,” Kramer conceded.

He faces plenty of hurdles. First, Kramer and partner Donald Steven Lee must come up with $45,000 to exercise their option to buy 90% of the current stock in STM Corp.--that’s a couple of weeks away, Kramer said. STM, meanwhile, has no ongoing business; it’s a blind pool, where investors put up their money without being certain how it will invested.

If Kramer gets control of the company, he hopes to buy--with stock--such small firms as MIDI-software companies or retail stores like Midi City and assemble a portfolio of promising companies and use them as leverage to raise $2 million or so from outside investors.

“We all know what the multiples would be in three to five years of a growth company,” Kramer said.

Lacked Management Depth

Maybe so, but one of the first companies Kramer approached turned him down.

“I told him no because they didn’t have the depth of management needed,” said Peter Alexander, owner of Alexander Publishing in Newbury Park, which publishes how-to books for the MIDI market. Alexander said his company did $250,000 in sales last year. Even though Alexander thinks Kramer’s idea in the broad sense is sound, he was put off by by the fact that Midi City has yet to turn a profit.

Indeed, Midi City, despite sales of $1.1 million last year, Kramer said, is only now breaking even because of sizable start-up costs. Yet Kramer and his partners plan to open another store in Tarzana next month.

According to the Small Business Administration, about 90% of all new businesses fail within three to four years, and one of the most common mistakes is a lack of capital to survive thin times.

But Kramer’s style is to forge ahead, although the results haven’t always turned out as he hoped. A few years ago, he helped start a small recording studio in Los Angeles called Wildcat Studio. It was grossing about $200,000 a year, Kramer said, and he planned to buy out his partner, John Ross.

Stretched Thin

But when Kramer couldn’t come up with the money, Ross sued him for $50,000 and eventually bought out Kramer for much less. Kramer complains that Ross took advantage of him at a time when he was stretched thin trying to start Midi City.

Kramer’s first exposure to the problems of a small business came during his three years as a member of Iron Butterfly. Back in 1968, Iron Butterfly had a big hit with “In-A-Gadda-Da-Vida.” (Kramer says the song, considered to be “a surrealistic chant,” in fact was entitled “In the Garden of Eden,” but one of the composers was drunk when he sang it to his partner and the slurred words sounded like “In-A-Gadda-Da-Vida.”)

Iron Butterfly disbanded in 1971. A few years later, two of the key members reformed the band and Kramer joined as bass player. The band put out two albums on MCA records and went on a six-month concert tour. But Kramer said the tour netted him “virtually nothing.”

Meanwhile, MCA, Kramer recalled, wasn’t giving the band much marketing support. Things were so bad, he said, that the MCA production line accidentally was inserting The Who’s new album, “The Who by Numbers,” inside the Iron Butterfly’s record jacket. Iron Butterfly sued its record company and its managers, but eventually the band broke up. “It was like a marriage going bad,” Kramer recalled.

Kramer then fell back on his engineering skills to land several lucrative jobs at local oil and aerospace firms; he even worked for a while at Northrop on the MX missile project. But he kept dabbling in music as a hobby until the advances in MIDI technology convinced him that there is a market out there.

He quit his engineering job and, despite the long odds, says he is putting every last penny into his would-be music conglomerate. Indeed, last winter, Iron Butterfly reformed yet again, but Kramer declined an invitation to rejoin the band. “They can’t afford me,” he joked.