Can the contents of the black box really be worth $200 million?
That's the big question for "QSound," a three-dimensional sound technology being developed by a tiny Canadian firm called Archer Communications. Although the company has yet to ship a product or record revenues, it has attracted prominent Hollywood investors and its stock has soared to a market value of about $200 million.
The investors include Hollywood's most powerful talent agency, Creative Artists Agency Inc., and a respected post-production firm, Todd-AO Corp., as well as individuals such as movie producer George Folsey Jr. and record producer Jimmy Iovine. Folsey and Iovine have accepted corporate titles at Archer, which maintains a Los Angeles office although most of its 30 employees are in Calgary, Alberta.
The high-flying stock has also attracted the scrutiny of Canadian and U.S. regulators. At its current price, Archer is one of the most highly capitalized firms on the Vancouver Stock Exchange, which is known for "chicanery," as Forbes magazine recently observed. A number of traders have taken "short" positions, betting that the price of the stock will tumble.
If QSound works, and works on a cost-effective basis, it will enable engineers to "place" sound wherever they choose when a master is in the final stages of preparation for a movie, television show or recorded music. There are other sound-placement systems, but Archer claims that QSound is unique because the listener won't need to sit in a predetermined location or to use special equipment to hear the resulting effects. Any set of conventional stereo speakers should do.
The premise has been received cautiously in some scientific circles, because no independent evaluation has been allowed. Eyebrows shot up when Archer sought introductions through a Hollywood talent agency instead of the scientific community. Even sympathetic technologists warn that while QSound may prove to be brilliant, there is no assurance that tough-minded record companies and movie studios will pay license fees and royalties large enough to assure Archer of big profits.
Unless Archer can persuade such companies that its technology will boost sales significantly, "I don't know if anybody is going to pay anything," says Bob Buziak, president of the RCA Records label.
Twelve days ago, Archer scored its first tentative deal with a video game manufacturer when it announced that Nintendo signed an agreement to license QSound if certain conditions are met in 90 days. Nintendo also said it would invest about $5 million in exchange for Archer stock as part of the deal. Neither the conditions nor the licensing terms were disclosed, however, and since the announcement, Archer shares have declined $2.125, closing Friday at $17.25 in over-the-counter trading in the United States.
Meanwhile, some scientists continue to say they're perplexed by descriptions of QSound.
"I don't know how this can be done, from what we everyday scientists know about how people hear and how sound propagates in a room," said Floyd E. Toole, senior research officer of the division of physics at Canada's National Research Council.
"The history of audio is just littered with gimmicks. It remains to be seen whether this is a breakthrough," said Toole, who, like Buziak, says he has not heard a QSound demonstration.
Some Are Enthralled
Daniel Gravereaux, who spent 23 years at the CBS Technology Center and is a past president of the Audio Engineering Society, questions how far QSound "can really get in the marketplace" when he recalls the resistance of artists and companies to earlier technological advances. "The sad thing is some of these things sound really great," Gravereaux says, before noting that he, too, has not seen any QSound data.
But some of the Hollywood producers and engineers who have heard QSound are enthralled. Two who may be staking their professional reputations on its potential applications are Iovine, the producer for artists such as U2, the Pretenders and Stevie Nicks, and Todd-AO Senior Vice President Christopher D. Jenkins, who with several co-workers won an Oscar for the sound in the movie "Out of Africa."
Iovine and Jenkins readily admit they haven't had a hands-on experience with the system, but each has made numerous trips to Calgary to see the work in progress.
"I don't like hype," Iovine says, but "I feel that this system does a lot more for the recording industry than the compact disc."
Iovine, who recently became Archer's vice president of music, shrugs off the decision not to solicit academic or scientific opinions. "This is not a cure for some sickness that we have to give to the scientific community," he says.
At Todd-AO's post-production facility, Jenkins calls QSound "a tremendous breakthrough in audio." Jenkins, who first heard QSound two years ago, influenced Todd-AO's decision to invest $2 million (Canadian) in Archer last year. This year, Todd-AO exercised warrants priced at $3.57 to raise its total investment to $4.5 million (Canadian), for a 10.2% stake.
Even the company's New York patent attorney has joined the bandwagon. Lewis H. Eslinger, who notes that he has also represented Sony Corp. for 29 years, says he bought Archer stock earlier this year when shares were trading at $15 in the United States. "I think it's a fabulous company," Eslinger says. "Archer is a patent attorney's dream. . . . It's a major breakthrough, the kind of breakthrough that Polaroid made in cameras." (Archer says U.S. and worldwide patents are pending for QSound technology.)
But Archer has missed several self-imposed deadlines for introducing QSound, and apparently won't meet its third-quarter promise to deliver a unit for testing at Todd-AO. Jenkins seems unperturbed over the delay, saying he expects to have access to QSound in time to use it in the post-production work on a movie for a summer release.
"There's no firm date on it," the Todd-AO executive says. "I firmly believe that it's still at the end of a development process. There's been some problems as to converting the analog system (to digital)."
In Calgary, one of the system's inventors confirmed that there have been some snags, but 37-year-old John W. Lees expresses confidence that a "real-time" system will be ready for use in the Calgary lab "in the next month or two."
"The process is working, but it's in non-real-time processing at the moment," Lees says, explaining that at the rate the computer processor is functioning, if you put "one minute of material in, it will take you upwards of 40 minutes to get it out." The company expects to be able to reduce that delay to a matter of milliseconds, he says.
Lees says the technology being licensed to Nintendo is a simpler, cruder version of the hardware and software package called "QSystem" that is intended for professional sound recording studios, but he predicts that consumers may hear QSound on a recording or in a movie even sooner than QSound video games may appear on the market.
QSound's development began in 1981, when rock guitarist-turned-producer Dan D. Lowe began experimenting with acoustics. The Calgary-born Lowe teamed up with Lees, an electronics technologist who had worked a five-year stint with Northern Telecom, to pursue his idea. In 1986, the two inventors sought financing from Lawrence G. Ryckman, a Calgary entrepreneur. Today, the three men control about 42% of the company's 11.5 million shares outstanding.
Ryckman, now 35, is the son of a successful Toronto businessman who skipped college to seek his fortune first in Calgary's real estate market and oil and gas properties, and later began dabbling in show business. He was an investor in the 1979 film "Meatballs." Ryckman then produced three feature films--"Virgin Queen of St. Francis High," "Satan's Room" and "Slaughterhouse" ("all profitable," he says). Despite the lurid titles, Ryckman describes two of the films as family adventures; only "Slaughterhouse" had a "teen-age slasher" theme.
Ryckman says he invested $350,000 (Canadian) in QSound and set about helping the inventors incorporate QSound Ltd. as a California firm in September, 1986. But the three men were soon frustrated by the hurdles that they faced in taking the company public in the United States, so they turned to the Vancouver Stock Exchange for a "shell" company that could acquire QSound in a so-called reverse merger.
By mid-February, 1987, QSound had struck a deal to be acquired by Archer International Developments Ltd., a dormant mining concern that had also abandoned its idea of building a swank hotel in Beijing.
The day after the announcement, Archer's price jumped 70%--to close at 85 cents on the Vancouver Stock Exchange. By Jan. 20, 1989, when Archer began trading through NASDAQ, its Vancouver price was $11.125 and, by June, it had climbed to a high of $25.625.
That same month, Vancouver exchange officials issued a most uncharacteristic warning about the highly speculative nature of the stock, and the Securities and Exchange Commission sent questionnaires to some shareholders asking how they had heard of Archer.
Ryckman says he actively promoted Archer stock after the 1987 market crash. After he became president in mid-1988, he says, the company began toning down its promotional style.
Ryckman says Archer has avoided showing off its QSound product to the scientific community in part because it doesn't want to hype the stock. "The only reason we might want to allay (skeptics' concerns) is for promotional reasons, and that's not what this company is about." For a similar reason, Archer's investment banker and broker in New York says the company hasn't wasted time or manpower on updating its 2-year-old demo tape, which he says "demonstrates some 20% of its technology's potential." The stock "hardly needs any more . . . promotion," observed W. Samuel Kerlin in a report published six weeks ago by the Douglas Stewart Inc. firm.
In the same report, however, Kerlin described theatrical films, arcade video games, television programming, commercials, theme parks and computer simulators as "damsels waiting in agony for QSound's services" and predicted that if Archer collects licensing fees equal to even 1% on "a small fraction of this potential, the stock's value will increase dramatically."
Archer has not disclosed the range of fees that it expects to receive from Nintendo if its agreement is finalized for video game use, other than Ryckman's disclosure that the royalty would be in the "medium price range" of 10 cents to $1.25 per unit.
Royalty Figure Questioned
For recorded music, Ryckman says, the company might receive royalties of anywhere from 5 to 50 cents per unit.
Eslinger, the patent attorney, points out that no QSound royalties have been negotiated with record companies, but he admits that Archer executives are aiming for the higher figure: "They think enough value has been added to think in terms of 50 cents a record."
The notion of such large royalties draws derisive hoots from some recording industry veterans who can recall how record companies fought paying 3-cent royalties to compact disc patent holders even though the technology spurred sales in the 1980s.
Buziak, the RCA Records label president, says that he thinks any industry resists the idea of paying new royalties for technology unless it can be convinced that sales will increase dramatically. "You're really adding an extra cost on top of an existing base," he points out.
On the West Coast, a former record company president also expresses skepticism about the likelihood of negotiating significant royalties, although he asks not to be identified, saying he doesn't need to offend the powerful Creative Artists agency, which has thrown its weight behind the project.
In an unprecedented move for the agency, Creative Artists signed an agreement last December to represent the QSound technology in exchange for stock warrants and a percentage of the firm's revenue over the next 25 years. The deal allows Creative Artists to pull out of the agreement at any time during the first year, but a spokesman says: "We believe in the product and the company, and our commitment to them is long term."
The agreement--filed in documents at the SEC--calls for the personal involvement of two of the agency's founders, Michael S. Ovitz and William M. Haber. Two other CAA executives, Sandy Climan and Michael Marcus, were named likely candidates for the Archer board, although no CAA representative has been named a director.
According to the filing, CAA would be entitled to 4% of QSound's first $50 million (U.S.) in revenue, then 5% of the next $50 million, with the percentage eventually tapering off to 3%.
Folsey, a genial, second-generation film maker long associated with John Landis ("Coming to America," "Trading Places" and "Schlock"), brought QSound to the attention of Creative Artists in October, 1988, and in less than two months, the deal was signed.
Folsey's involvement with the technology dates to a demonstration in 1987. The invitation came from a lawyer friend shortly after Folsey and Landis were acquitted of involuntary manslaughter in the deaths of actor Vic Morrow and two children on the set of the movie "Twilight Zone." Folsey says he recalls thinking at the time, "Gee, someone wants to talk to me. This is nice."
Folsey brought two Todd-AO executives with him to the first demonstration, and later recruited his personal attorney and agent. Folsey eventually accepted the job of board chairman, and he says he is devoting about 90% of his time to Archer business.
"Hey," Folsey says of his efforts on Archer's behalf. "If this (technology) doesn't work, they're going to run me out of town on a rail."