The Next Dimension in Audio Sales : Music: A handful of electronics firms are battling to market three-dimensional recordings. Is this a sound idea or a gimmick?

Decades after the novelty of three-dimensional visual effects helped draw audiences to some 1950s Hollywood horror films, a flock of U.S. electronics companies are betting that so-called 3-D sound effects can boost the fortunes of the $6.5-billion record industry.

More than half a dozen firms--most based in California--are offering a new generation of sound processors that trick the ear into perceiving that sound is coming from different parts of the room and not just from the stereo speakers. Unlike the unsuccessful quadraphonic technology of the early 1970s, which tried to achieve the same effect using four speakers, 3-D sound is supposed to work with just two speakers.

The technology has drawn skepticism from experts who say some 3-D units simply sound bad while others work effectively only for listeners situated directly in front of the two speakers. What’s more, although 3-D sound has been warmly received by several record company executives, some recording artists--who have the final say--may oppose using it in the studio. Engineers suggest that folk singers and other musicians who traditionally shy away from electronics will consider 3-D unneeded gimmickry.

Still, supporters believe that 3-D sound could become the biggest innovation since the introduction of stereo records in 1958.

“If these companies can deliver real 3-D sound, it will be a real breakthrough, as significant as the CD,” said Stanley Trilling, an analyst with Paine Webber in Los Angeles. “But the risk you run is that it could become a gimmick that dies quickly.”

The introduction of 3-D audio comes at an important juncture for the recording and consumer electronics industries.

Before the introduction of the first compact disc players in 1983, record sales were flat and purchases of audio components--CD players, receivers, tuners, amplifiers, loudspeakers, tape decks and turntables--were soft. Frustrated with slow sales, many consumer electronics companies in the 1980s shifted their attention to the nascent video industry, which was enjoying booming VCR sales.

But today, in the wake of consumer acceptance of the high-quality digital sound of compact discs, audio innovation has become big business. In recent years, manufacturers have introduced stereo television, “surround-sound” technology in movie theaters and vastly improved car audio systems. They also are working with broadcasters to develop digital cable radio and digital over-the-air broadcasts for better radio reception.

“Since the advent of CD, the consumer is much more discriminating and much more knowledgeable about what he or she expects to get from a consumer audio product,” said Sylvio J. Pennucci, director of business development for Gamma Electronic Systems, a Santa Monica company that markets a 3-D audio device. “Now that sound is so much improved, we think 3-D audio is the next step.”

Marketers of the technology have scrambled to capitalize on audio’s higher profile:

* Two weeks ago, Polygram Records signed a five-year licensing agreement with a Canadian firm, Archer Communications, to use its QSound 3-D recording system on about 20 albums. Archer also has a $3-million, six-year agreement with video game maker Nintendo and with Coca-Cola, which used QSound in a Coke television commercial.

* BBE Sound Inc. in Huntington Beach is offering a $200 unit for consumers that is said to create a 3-D sound effect when plugged into a stereo system. A professional version is already being used in some recording studios and at Los Angeles radio stations KZLA-FM and KTWV-FM, the company says. Meanwhile, the Japanese recording unit of NV Philips of Holland released a line of CDs and cassettes recorded with the BBE technology.

* Gamma Electronic’s 3-D sound effects can be heard in a hurricane scene in the movie “The Little Mermaid.” A music video by Motley Crue as well as more than a dozen current albums were also recorded using the company’s so-called BASE system.

* For the past year, Sony Corp. has offered Hughes Microelectronic Systems’ 3-D sound retrieval system on many of its 27” and larger television sets. Hughes said it is negotiating agreements with other equipment manufacturers.

Makers claim to create the illusion of greater depth and space in music by encoding an audio signal with special cues to fool the listener’s brain into placing sound all around him, not just between the two stereo speakers. Most companies say they achieve that result by altering the timing, frequency, loudness or other characteristics of the recording.

But manufacturers’ efforts “do not necessarily match the claimed results,” reported Mix, an Emeryville, Calif.-based industry trade magazine that tested eight of the 3-D audio systems.

The magazine said only the QSound system “actually produced a three-dimensional image from two speakers.”

Other experts, such as Daniel Gravereaux, past president of the Audio Engineering Society and now head of his own consulting firm, have misgivings about QSound because its technical underpinnings have not been disclosed. But Gravereaux said he is impressed with Hughes’ SRS system, which “knocked my socks off!”

QSound inventor Dan Lowe acknowledged that his 3-D audio invention has limitations and that listeners can hear the effect only in a small spot directly in front of two speakers. “That is an ongoing development problem that we are working on, “ he said.

Wall Street is similarly confounded over 3-D audio.

After soaring to a market value of nearly $200 million earlier this year on high investor expectations for QSound, the stock of Archer Communications lost about 10% of its market value in three days this month after investors soured on the news of the company’s five-year deal with Polygram Records.

Archer President Lawrence G. Ryckman said his company would earn a royalty of 11 cents an album from Polygram. Thus, even if all 20 Polygram albums sell 2 million copies each during the next 18 months (and no record label in recent memory has had that many double-platinum albums in an 18-month period), Archer would earn $4.4 million--far less than many investors had hoped for.

But Ryckman said investor support for the company continues to be strong despite the drop in share value. He said the agreement with Polygram was “a major step” in setting a standard audio format.

“This is the first time, in my personal opinion, that a major technological advance has come out with no extra cost to the consumer,” he said.

A Polygram spokeswoman in London, however, said the company has not yet decided if it will raise the retail price of albums recorded in QSound. “This is something the (Polygram) artists wanted,” she said. “We hope it will help” record sales.

For Archer competitor Gamma Electronic, 3-D audio has not produced a bonanza either. The company, which was founded in 1987 by inventor John Bedini, has spent more than $3.5 million on research and development but has drawn little business so far.

With its financial muscle, Hughes Microelectronics--a General Motors subsidiary--has been somewhat more successful marketing its 3-D sound retrieval system to enhance television audio. Meanwhile, scores of competitors are scrambling not only to improve 3-D audio but to expand its applications.

San Jose-based PM Products, for example, has patented 3-D audio technology that could give pilots aural directional cues to reduce their visual overload in the cockpit. Such a system, company officials contend, could indicate the location of enemy missiles and aircraft without forcing the pilot to watch a radar screen.

The 3-D audio companies might need warning systems themselves to escape the shakeout that many analysts expect in the market.

“The true winner of the 3-D battle is going to be the company that comes out with the best product at the lowest cost,” said Gamma’s Pennucci. “When producers and record companies spend all that time getting the sound just right, they don’t want to spoil it with some gimmick that makes the music sound bad.”