A quickly saturated market, pressure on prices, Japanese competition, changing musical tastes, and the vagaries of the instrument business all added to Arp's woes. "Whether or not a product catches on is largely a matter of how well you can get in the front door to see Stevie Wonder," explains Friend. "You rise or fall with each new product."
Over the years, Arp created enough winners to hold the odds at bay. Its Model 2500 synthesizer proved popular with universities and recording studios, and its 2600, Soloist, and Odyssey delighted performers. The company's all-time bestseller was the Omni, introduced in 1975. One of the first polyphonic instruments, it could serve up horns, vibes, electric piano, and a variety of other sounds, and was known for its silky strings, resonant bass, and punchy brass. About 4,000 units (1980 price, $2,450) were sold.
Annual sales climbed from about $865,000 in 1971 to a peak of $7 million in 1977, with net earnings running a lean $232,000. When it had loss years, Arp managed to snap back.
Robert Moog, the founder and president of R. A. Moog, recalls that Arp had problems with quality control and excessive cost of sales (as high as 20%). "The killer, for me, with Arp was that, two or three years after they began, they had a negative net worth of $400,000," says Moog. "I thought I was a rotten businessman -- I was undercapitalized, and I didn't manage things properly. But the worst we ever had was a negative net worth of $11,000."
Pearlman's company not only managed to perpetuate its precarious balancing act, but it generally made the performance look like an inspired success. "Arp was a movie-star company," notes Mancuso, "and Pearlman had the time of his life -- he was donating Arps to the Metropolitan Museum, his name was in the paper, Diana Ross was dropping by. These three guys loved the glamour of running the company, but they weren't doing it in a businesslike way."
When he joined Arp's board in 1976, Mancuso promptly made several elementary management suggestions. The company had done cost-plus pricing, but when it introduced the Omni, Mancuso suggested seeing what the market would bear. With a price tag $1,000 higher, the instrument sold better. Mancuso also recommended that higher-margin domestic orders be filled more quickly than overseas sales, a move that bolstered the company's cash flow. "Mancuso had a lot of good ideas," concedes Pearlman.
In 1977, income and profit soared -- the company had record sales of $7 million, an amazing recovery from the $33,000, 84-a-share, loss it had suffered in 1974. As a result, Arp management grew more expansive. New Chevrolet Blazers were passed out to members of management, and board meetings were followed, on at least one occasion, by an elaborate dinner party. "Each bottle of wine cost about $60," recalls Mancuso.
But the problems that had plagued Arp remained and, in several cases, grew worse. Disco loomed on the horizon -- ready to replace live performers and their instruments with records -- and the Pearlman, Pollock, and Friend combination became even more problematic. Each man pursued his own vision for the company, aligning himself with others to further his own ideas and interests. Memos show Pearlman increasingly alienated from his own company, Friend jockeying for the presidency, and Pollock insisting that Arp perform as a sane company.
In a July 21, 1976, memo to the directors, Pearlman groused that he was being kept in the dark about a guitar synthesizer that was being developed. "I may be oversensitive," he wrote, suspecting "that Dave Friend and [engineer] Tim Gillette were laying down a smokescreen of concealment for fear that I would prematurely criticize their efforts."
At about the same time, in a memo to Pearlman, Friend said, "I believe Lew [Pollock] is exhibiting the classic Freudian behavior of a parent who sees his child emerging as an independent adult. . . . Lew feels that he is in control of Arp now and views my acquiring the title of president as diluting that control."
And, in a July 13, 1977, memo to the executive committee, Pollock insisted: "The company is a rather mature company, and for it to be considered a growth kind of opportunity for investors, acquisitions, etc., the company must, must, have about a 10% pretax earnings. Waiting for next year is no longer excusable." "It was difficult to tell who was running the company," comments Mancuso. "They were doing what I would call management by turns -- 'Pollock is away a week, I'll run it'; 'Friend is away a week, 1'11 run it.' And Pearlman would run it by default when the two of them were away."
Mancuso saw no solution to the strong ambitions and intransigent positions; none of the men was willing to yield power, either to one another or to a CEO who might have been brought in. At one point, as he watched his own authority evaporate, Pearlman considered waging a proxy battle to regain control but -- advised against it by his own attorney -- resigned himself to the status quo. "I didn't know how to fight," he concedes.
Mancuso recommended selling the company, a suggestion that fell on deaf ears. "They were just making money and having fun and thought 1 was crazy," he explains.
Instead, Arp embarked on the most ambitious and dangerous product-development project it had ever undertaken, one that intensified and underscored the rivalry within the executive committee. After having spent eight years accumulating keyboard expertise, Arp decided to create a guitar synthesizer, the Avatar, reasoning that there were four times as many guitarists as there were keyboard players. Whether those guitarists were willing to pay nearly $3,000 for a synthesizer was a question that was never answered by market research.
The 1977 business plan written by Friend called for a research and development commitment so major that a polyphonic keyboard synthesizer under development -- the next step for Arp -- had to be shelved. As far as Pearlman was concerned, it was like "dropping the bird in the hand and going for the bird in the bush." In a memo to the board, he declared, "This project is the riskiest one we have ever undertaken. . . . There are formidable technical problems of sound analysis, as well as synthesis, and we have an unknown amount of R&D" to produce an acceptable working model.
By that time, though, Pearlman had virtually lost his voice at Arp. At one point, he actually feared the board might dismiss him. "It became a political party -- the guitar party," he explains. "It was blasphemy to question anything about it." Friend, who had been largely responsible for several of the company's major successes, including the Omni, and whose standing at Arp prospered as a result, was the driving force behind the Avatar. "Pearlman was opposed to the Avatar," Friend concedes, "but several of our best sellers had been developed over his objections." Aligning himself with Pollock, Friend obtained approval to proceed. The executive committee voted to fund the project, a move the board supported. "Everybody thought it was going to be the hottest thing since the wheel," notes Friend.
