WorldCity Business Magazine

Getting the groove back

by Richard Westlund

For a quick history of The Singing Machine Co., just pick up a karaoke microphone and sing along to the Frank Sinatra classic, “That’s Life.” Each time I find myself flat on my face, I pick myself up and get back in the race.

In the 23 years since its founding, the Coconut Creek-based karaoke manufacturer has been through steady expansion (1980s), a bankruptcy filing (1997), a sudden growth spurt (2000-2002), a dramatic drop in sales (2003-2005) and, now, a promising comeback under the leadership of a turn-around specialist.

“Difficult times are a true test of your capabilities,” said Yi Ping Chan, who was called in to rescue the company two years ago and now serves as interim CEO, chief operating officer and director at the company. “Today, we’re definitely moving The Singing Machine in the right direction.”

The South Florida company not only is one of the leading players in the U.S. karaoke market, it is largely responsible for bringing karaoke to the country, according to Ernie Taylor, president of Trax Distributors in California.

“We’ve known the company since they started in the early 1980s, selling units that used eight-track tape cartridges,” said Taylor, who has been distributing the company’s higher-end models for 17 years. “They were the first to offer a machine with a built-in TV. The company was also the first the do co-licensing with MTV, Nickelodeon and Motown and those products sell very well.”

In homes around the country, family and friends pick up microphones connected to one of The Singing Machine’s systems and belt out amplified lyrics to well-known songs while the karaoke machine supplies the musical accompaniment.

The karaoke craze has been the subject of good-natured humor. In 2004, the spoof Ig Nobel awards, which “celebrate the unusual” and “honor the imaginative,” included a peace prize to Japanese entertainer Daisuke Inoue for inventing karaoke. Inoue was lauded for “providing an entirely new way for people to learn to tolerate each other.” Inoue attended the ceremony and was serenaded by real Nobel laureates.

But the karaoke business is nothing to laugh at. Growth in the industry has been fueled by the introduction of more technologically sophisticated karaoke machines, as well as in-roads in new markets. Karaoke clubs are springing up in China. And Britain’s dot-com icon Martha Lane Fox, the founder of lastminute.com travel company, recently opened the first of what is expected to be a chain of upscale karaoke bars in London.

“Karaoke is a relatively small but rapidly growing segment of the music-production business,” said Fort Lauderdale musician and record producer Will Connelly. In a recent article in Electronic Musician, Connelly noted that the global karaoke industry sales including hardware, software and recordings is estimated to have grown to $15 billion in 2003 from $1 billion in 2000.

Last year, machine and equipment sales generated more than $38 million in revenue for The Singing Machine.

The Singing Machine’s products are manufactured in China then shipped to the West Coast for retail distribution throughout North America. The Coconut Creek office is engaged primarily in market research and design. Its forte: home karaoke machines, which are less expensive than professional equipment designed for clubs and studios. Major retailers like Best Buy, Circuit City and Costco, as well as online stores, market home-karaoke models priced under $200 from The Singing Machine and its leading competitors, Craig Electronics and Memcorp (Memorex).

About 75 percent of The Singing Machine’s sales come from North America. Another 20 percent are from Europe and the balance from Australia and other countries. The company has no market presence in Japan, which invented karaoke in the 1970s, because most Japanese homes and apartments are too small to store a home-karaoke system, according to Chan. In Japan, virtually all karaoke-equipment sales are to commercial customers.

Unlike most South Florida multinationals, The Singing Machine does not have a significant Latin American market, although that could change. The company’s products are now distributed in Puerto Rico and some Central American nations. “Our software products are mainly in English now, but we plan to expand to Spanish and other languages in the future,” Chan said. “Latin America could be very important to us, but we would enter through a partnership or joint venture. You have to understand the local cultures to succeed.”

In the late 1990s, the company entered the fledgling home karaoke market. It quickly saw its revenue grow to nearly $100 million, and Business Week named it the No. 1 “Hot Growth Company” for 2002. But the competition heated up as other manufacturers jumped into the home market and The Singing Machine couldn’t sustain its momentum.

“We grew too fast without the infrastructure or management in place to support that growth,” said Chan. “We needed to go back and rebuild this time from a good foundation.”

In fiscal 2004, the company posted a net loss of $22.7 million, and there were concerns about its survival. That’s when, according to Chan, he took control of the financial operations to “stop the bleeding.” He started signing every check and authorizing only must-have purchases.

Then he took a look at the staff. “A large company like IBM has systems in place, so you can carry on even if half your people leave,” Chan said. “But with a smaller company … you really have to think things through before making moves on the personnel side.”

Chan pared the Coconut Creek staff to 15. Three years earlier, it had been 50. Overall, the company now has about 45 employees, including its manufacturing representatives in China and warehousing team in California.

Despite those cost-saving steps, Chan has not stinted on research and development. “Higher sales begin with great products,” he explained. “The Singing Machine has been known for innovation, so we are not cutting back on R&D product development.”

Although The Singing Machine’s shares were recently trading at $0.38, the company appears to have weathered its latest storm. “We have positioned The Singing Machine for what we currently expect will be a year of improved financial results in fiscal 2006,” Chan told stockholders in a comprehensive financial-disclosure report dated Aug. 15. He added that gross margin a crucial figure for the company has risen to 25 percent. Two years ago it was 3 percent.

In August, the company also filed a plan aimed at keeping it from being delisted on the American Stock Exchange while it straightens out its financial situation. The company has fallen below its capital requirements.

Chan’s goal is to introduce products that appeal to customers while bringing higher margins for the company. For starters, The Singing Machine is introducing a karaoke model with a 13-inch TV, DVD player, microphone, camera and MP3 player designed to retail for under $200. “It has everything you would want for the home, and it’s a great value for the money,” Chan said.

Although more than 80 percent of the company’s business is karaoke machines, Chan is also planning to expand the software and music side, including specially produced graphics-enhanced (CD+G) discs that display song lyrics on a screen for karaoke singers. The company licenses music under brand names The Singing Machine, MTV, Nickelodeon, Hard Rock Academy, Motown and Care Bears for a range of songs that appeal to everyone from preschoolers to baby boomers.

The music industry in general has suffered a slowdown due to consumer downloading of tunes, but Chain said that hasn’t been a problem for The Singing Machine because its graphics-enhanced CDs contain extremely large digital files. “Up to this point, downloads of our music haven’t been a problem,” he said. However, The Singing Machine is one of a half dozen defendants named in a lawsuit filed by Sybersound Records, a California-based producer of home-market karaoke software. The lawsuit, claiming the companies engaged in unfair trade practices, alleges among other things that The Singing Machine underreported sales to music publishers.

“We believe the entire suit is without merit,” Chan said. “This suit has cost us some legal fees, but has had no impact on the market place.”

The kind of tune The Singing Machine will be humming in 2006 may well be determined by the upcoming holiday season. About 80 percent of karaoke sales occur from July to December, with a peak before Christmas. Chan declined to provide sales projections.

The CEO uses a hospital scenario to describe where the company is now on its turnaround path. In early 2003, it was “in the emergency room without much hope of survival. After negotiating new financing in 2004, we were upgraded to the intensive care unit, then a regular recovery room,” the executive said. “Now, The Singing Machine is coming out of the hospital. We’re like a patient who can walk by himself, but isn’t back to full strength. But we’ll get there.”