Headphone Maker’s Comeback Loud and Clear

The timing was perfect when John Koss Sr. and a partner invented stereo headphones using two tiny speakers, chamois pads from old flight helmets and red tubing that looked like licorice.

It was 1958, the stereo business was taking off, America would soon meet the Beatles and parents were looking for an escape from their children’s blaring rock ‘n’ roll.

“They would just go nuts with the phones, because you’ve got to remember this was something that was never heard before,” says Koss, chairman of the Milwaukee-based Koss Corp., which this year celebrates the 40th anniversary of the invention.

“Little did we know we were going to create an industry.”

And little did he know the ups and downs in store for his business, which would file for Chapter 11 bankruptcy protection in the 1980s and see industry giant Sony take over the top spot in stereo headphones.

“It’s hard to think about it once in a while. I’d just as soon not have gone through it,” the 68-year-old Koss says. “But it was all a learning experience.”

Son Michael, now president and chief executive officer, took in a lot of those lessons while sitting at the family dinner table and while working his way through the company, pushing a broom and laboring on the assembly line.

Lesson No. 1?

“Shun conventional wisdom,” says Michael Koss, 43, a vegetarian who wears a bow tie and suspenders on the job. “We always try to color outside the lines.”

With Michael Koss at the helm since 1991, the company has seen its stock quadruple to $10 a share on the Nasdaq exchange. Last year, Koss had record sales of $39.6 million and record profits of $3.6 million.

Although Sony sells more of them, Koss still leads U.S.-based companies in headphone sales.

“I think there’s plenty of business to go around,” says Michael’s brother, John Jr., vice president of sales. “We would really like to continue to be the only other source for stereophones.”

Analyst David Leibowitz, a managing director of Burnham Securities, says Koss is poised to remain a dominant player in the headphone market.

“In the past, there were occasions where they have had difficulty in maintaining their leadership position, but more often than not they have very successfully defended their home turf,” Leibowitz says.

The years after the first stereo headphones were exciting times for Koss.

Tony Bennett and Dizzy Gillespie were among early disciples of the headphones who would call and visit John Koss. Michael Koss remembers bringing his Dad’s old trumpet to jazzman Bobby Hackett and asking, “Can you teach me to play this thing?”

Bolstered by success, Koss diversified into other consumer electronics, with poor results.

In the 1960s, Koss bought a maker of manual turntables--just as automatic record changers were taking over the market. In the 1980s, the company tried to take on Sony’s Walkman and ended up millions in debt. Koss, which has been publicly traded since 1966, eventually filed for Chapter 11 bankruptcy protection.

“We didn’t diversify, we ‘deworsified’ the business,” Michael Koss says.

Koss has returned mainly to headphones, a specialty it should have stuck with from the start, said Alan Lofft, senior editor of Audio magazine.

“When you have a dominant technology that’s superior and you’re good at it, it’s probably unwise to expand too much,” Lofft says.

While the company was restructuring, Michael helped lead what he now calls Operation Clean Sweep, cutting the salaried staff from 90 to 45. The company also liquidated excess inventory and closed European operations.

“It was a lot like boot camp,” he says. “You learn a lot, but you don’t want to go twice.”

The company, which today tries to keep its work force at 200 to 250 employees, pulled itself out of bankruptcy protection. Michael Koss, who studied art and anthropology in college after his father told him to learn about people rather than business, became president in 1987 and chief executive in 1991.

He brought unconventional ideas to the business. Koss scrapped the old assembly line that he used to work on during summers in college and instituted a more efficient “cell” format, in which small groups of workers build a product from start to finish.

Around the same time, when a valued employee moved to Texas, Koss didn’t let her go. She now does her job by telephone and fax, and she travels to Milwaukee a couple of times a month.

“Five years ago, this was unheard of,” says Sue Sachdeva, vice president of finance, who started with the company as a temporary employee. “I’m sure he caught a lot of flak for doing this in the beginning.”

The company’s finances remain solid. Profits for the first nine months of the current fiscal year were $3.15 million, ahead of last year’s record income.

Revenue is down slightly, but in keeping with the 40th anniversary of Koss headphones, the company is pushing to surpass $40 million in sales for the first time, Michael Koss says.

“That would be especially nice,” he says.