Revised January 21, 1997

Steinway & Sons (A)

A Steinway is a Steinway. . . . There is no such thing as a “better” Steinway.Each and every Steinway is the best Steinway.

Theodore Steinway

The 1990s was a period of change for the music industry. Foreign competition in the mid-priceupright piano market was intense. In addition to well-entrenched players from Japan (Yamaha andKawai), two South Korean firms (Young Chang and Samick), were emerging as competitors.Moreover, Yamaha and Young Chang had already established a presence in China. Forecasts indicatedthat the future growth market for pianos will be concentrated in Asia.

This case discusses Steinway & Sons’ history, the evolution of its value system, and the currentmarket conditions facing the firm. It highlights the issues faced by Steinway & Sons as its topmanagement formulates its strategy toward the growing Chinese piano market.

COMPANY BACKGROUND

The Steinway Family Years — 1853 to 1971

Steinway & Sons was founded in 1853 by Henry E. Steinway, Sr. and his sons, Henry Jr., Charles, andWilliam. In 1854 the firm entered and won its first competition. A year later it won first prize at theAmerican Institute Fair in New York. By 1860 Steinway & Sons built a manufacturing facility at52nd Street and Fourth (now Park) Avenue, on the site now occupied by the the Seagrams Building.Here 350 men produced 30 square pianos and five grands per week. In 1864 the firm opened ashowroom on 14th Street. In 1865 sales topped $1,000,000.

From the beginning, piano building at Steinway & Sons was a family affair. Each of the Steinway sonsconcentrated on gaining expertise in a different aspect of piano manufacturing: William was a"bellyman" who installed the piano soundboards, Henry, Jr. focused on piano "finishing," and Charlesconcentrated on “voicing” the piano. By 1854 the Steinways were employers, and the familymembers had become managers. Henry Sr. was in charge overall, while Henry Jr. focused on researchand development, Charles managed the plant, and William took care of marketing.

This case was prepared by Professors Suresh Kotha (School of Business Administration, University of Washington) andRoger Dunbar (Stern School of Business, NYU) with assistance from Joseph H. Alhadeff (Stern MBA, 1995); GeraldTennenbaum (Stern MBA, 1995) and Professor Xavier Martin (Stern) as the basis for class discussion rather than toillustrate either effective or ineffective handling of an administrative situation. Copyright © 1996 Kotha and Dunbar. Allrights reserved.

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Music historians consider the competition atthe 1867 Paris Exhibition as the turning pointin the piano industry because it was there thatthe "American" system of cast-iron frames,heavier strings, solid construction, and morepowerful tone took the competitive honorsfrom European pianos. The jury report gavethe Steinway piano a slight edge over theother major US manufacturer, Chickering &Sons, due to its expression, delicate shading,and a variety of accentuations.

With this recognition, Steinway’s domesticpiano sales and exports grew rapidly, requiringgreater production capacity. In 1870, underWilliam’s leadership, the firm purchased 400acres of remote farm land in Astoria, Queenswith the idea of moving the factory fromManhattan. By 1873 the new factory wasoperating, and Steinway-sponsored employeehousing, transport, and other facilities werebuilt. Two years later, the firm opened ashowroom in London. Ten years later, to builda global presence, the firm built a factory inHamburg, Germany. Pianos manufacturedthere were marketed in Europe and exportedto the rest of the world. Today, these twofactories remain the firm’s onlymanufacturing centers.

In the 1870s, low-price piano producers were asignificant competitive threat. Conflictemerged between William and Theodoreconcerning the best way to respond. (C. F.Theodore was the fourth son of the founderand had joined the firm following his brothers’deaths in 1865.) The choice was to continueto emphasize class and high quality, as Williamfavored, or to make inexpensive models, asadvocated by Theodore. William’s view wonout. Ever since, the firm has remainedsteadfast in its focus on the high-end segmentof the market.

At the turn of the century, the publicdeveloped an interest in player pianos.Steinway & Sons, however, showed no interestin these add-on technologies. Sales of playerpianos plummeted after radio broadcastingbegan in 1920. In contrast Steinway’s salescontinued to climb. They were supported byextensive advertising and a generoussponsorship program that deployed 600Steinways to support performance tours ofartists.

Successive generations of Steinways sought tofollow the founder's advice: “We providecustomers with the highest quality instrumentand services, consistent with Steinway’sreputation for excellence, by building thefinest piano in the world and selling it at areasonable profit.” This approach wasthreatened when the US economy entered adepression in the 1930s and the firm's survivalwas at stake. To market pianos to people ofmore modest means with smaller homes,Steinway developed and introduced two newmodels, the five-feet one-inch “baby grand”and a 40-inch upright piano. At the outbreakof World War II, production was stopped.

When piano making resumed in 1946, thetelevision set was at the center of theAmerican home. The task of rebuildingSteinway & Sons fell to Henry Z. Steinway, afourth-generation Steinway, who took overthe responsibility for manufacturing. Hisbrother John took over promotions andmarketing. To help consolidate the firmfinancially, Henry Z. sold Steinway Hall on57th Street in Manhattan (the company’sshowroom) and leased back the lower twofloors.

In the 1960s new competition emerged fromAsia. Yamaha and Kawai began exportingthousands of pianos to the United States. AYamaha piano sold for about one-half theprice of the equivalent size Steinway model.By the early 1970s, the Japanese threat raisedquestions about the future of Steinway & Sonsand the entire US piano industry. Henry Z.decided to sell:

Among the active family members, none weregetting younger. And no young Steinways wereinterested in the firm. In the mid-twenties, twostockholder managers could get in a room and doanything they wanted. With the depression,shares were diluted bringing many new owners.The New York factory was located in an areahostile to manufacturing. Other piano makers hadmoved South to where they appreciatedmanufacturers. If we chose to move, we neededlots of capital.

In 1972 the firm was acquired by CBS andmerged into the CBS Musical InstrumentsDivision. Henry Z. observed:

Japan represents both an opportunity and amenace. As the largest market in the world for

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new pianos, having surpassed the US, possiblySteinway could enter that market effectively withthe aid of CBS. Conversely, free from restraintsimposed by antitrust legislation in the US, onehuge company [Yamaha] has the avowed purposeof overcoming Steinway. Why CBS and notGeneral Motors or US Steel? CBS wanted us ata price we thought right. More importantly, wethought CBS could and would handle ourproduct in the right way.

The CBS Years — 1972 to 1985

CBS increased capital spending from $100,000annually to between $1 and 2 million.Workers received the medical and retirementbenefits of other CBS employees. These werea big improvement over what had beenprovided previously. To facilitate continuity,Henry Z. remained president. Nevertheless,concerns arose. According to industry reports:

Once CBS entered upon its own period ofdecline, Steinway was plagued by bureaucraticconfusion, changing strategies and parades ofefficiency experts. There were four Steinwaypresidents in [16 years]. “Quality control”slipped. . . . There were pianists who began tosay that the Steinway was no longer a greatinstrument; the market for half-century old rebuiltSteinways boomed.1

Recalling the top management changes underCBS, Henry Z. Steinway observed:

Each new [division] president wanted to dosomething different. It was like riding a differenthorse every six months -- first it was quality,then it was volume, then it was automation. Thefirm was drifting from one program to another.Also, I got so many memos from the parentcorporation [CBS Musical Instruments Division]that after a while, I simply ignored them. I alsothought it was rather amusing that I reported tothe head of the division in California who, inturn, reported to a guy at the [CBS] headquartersjust a few blocks from our offices in Manhattan.

Further, CBS often showed little regard orunderstanding for Steinway’s establishedtraditions. Steinway tradition, for example,encouraged workers to bring their relatives towork for the firm. Steinway believed this was agood way of preserving established skills andalso encouraged loyalty and a reliable,motivated work force. Under CBS, however,

1 E. Rothstein. “To Make a Piano It Takes More ThanTools,” Smithsonian, November 1988.

such nepotism was strictly forbidden.Annoyed, Henry Z. retired from the firm in1980.

During the early 1980s, under the fourth CBSpresident, quality was reinforced and the firmintroduced a new upright. This new 52-inchpiano was aimed at institutions and musicschools. Then CBS decided to divest all of itsmusic businesses. The Smithsonian Magazinereported:

That announcement alone nearly completed whatearlier sloppiness and mismanagement could not.. . . In 1985, the year of the sale, Steinway wasearning $8 million on $60 million in revenues.The sale involving at least 18 interested parties,dragged out over a period of ten months. Therewere rumors that the factory would be sold for itsreal estate value. CBS claimed to be concernedover the future of the company, but finally itneeded cash to fend off attempts to take it over.And so CBS sold Steinway & Sons.2

This brought morale among Steinway workersto an all-time low.

The Birmingham Years — 1985 to 1995

CBS sold Steinway & Sons and the rest of itsmusical instruments division in December1985 to John and Robert Birmingham, twobrothers from Boston who had made theirfortune through a family-owned heating-oilbusiness. The Steinway work force which hadjust survived the uncertainty and confusion ofthe CBS years, was not predisposed to truststrangers.

Lloyd Meyers, the last CBS president, hadtried to organize a leveraged buyout. Followingthe firm’s acquisition, Myers was asked toleave, as was the chief financial officer. BruceStevens became President. The sales force,which had been managed by a two-day-a-weekmanager, was placed under Frank Mazurco, along-time Steinway district sales manager. Thenumber of US dealers was reduced from 152 to92. Bruce established a program to strengthenthe ties between Steinway & Sons and itsdealers. A formal five-day program fortechnicians was established to provide hands-on training at the New York and Germanyplants. Additionally, the firm instituted athree-year strategic planning process. To

2 Rothstein, 1988.

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instill more “discipline” into manufacturing,top management replaced the factory managerwith Daniel Koenig, a manufacturing engineerwho had spent 21 years at GE.

Under Koenig, the firm introduced state-of-the-art machines for manufacturing suchcomponents as hammers so that tolerancescould be brought within carefully establishedlimits. The whole “action-mechanism”department was reorganized and moved into asingle location. New programs, such asstatistical process control, were introduced.Engineers were hired and provided with state-of-the-art computer-aided design technology.The goal was to document the design andmanufacturing process using old Steinwaydrawings, many of which dated back to theturn of the century.

These changes were viewed as controversial bysome employees, music critics, and otherfollowers of the firm. They observed that thechanges top management had introduced toincrease quality control and efficiency wereworking to the detriment of Steinway’shistorical tradition of craftsmanship andquality. Steinway manage-ment countered byarguing that employing a modern, scientificapproach to manufacturing was not a breakwith, but a continuation of, Steinwaytraditions.

In 1991 Steinway & Sons introduced a newline--the Boston Pianos--designed to competein the mid-range piano market. This line wasdesigned by Steinway & Sons and manufacturedat Kawai’s factory in Japan. According toBruce Stevens:

Steinway dealers had suggested that a logicalstep-up strategy to a Steinway piano was needed.The availability of many competent lower-pricedpianos made making a Steinway sale to a novicepianist harder to justify. We decided that a newline of mid-priced pianos was necessary.

Steinway dealers now had a piano they couldoffer to compete against similarly pricedpianos made by Baldwin, Yamaha, YoungChang, Kawai, and Samick. Currently, theBoston line includes five grand piano modelsranging in length from 5-feet one-inch to 7-feet, 2-inches, as well as four upright modelsranging in height from 45 to 52 inches. Theline does not include a full-size concert grand.As they were originally intended strictly as an

export from Japan, Boston pianos sell for 25percent more than Japanese domestic pianos.

According to John Birmingham, perhaps themost important ingredient that the newowners brought to Steinway was their attitude.Noted John:

We did not purchase the company to move itand make a fortune in real estate, or to silk-screenSteinway t-shirts, or to go public and make akilling on the stock offering. It was our intentionto operate the Steinway piano business in avigorous and creative way. Our guiding principlehas been to guard and nurture the quality andintegrity of the Steinway piano.

During the Birminghams’ tenure, workermorale was gradually reestablished. Discussionsbetween management and workers evolved soappropriate modernization of technicalequipment occurred while respect for theunique aspects of the craft mode of productionassociated with a Steinway piano wasmaintained. In 1995 one of the firm’sharshest critics from the New York Timesacknowledged the following:

A recent tour of the Steinway’s factory in Queensshowed an apparently serious effort to improvethe instrument. The final stages of manufacturereceive more attention than they did a few yearsago. Outside technicians have also reportedimprovements in Steinways, a heartening sign.3

Enter Selmer Company, 1995

In 1995 Steinway & Sons was purchased by theSelmer Company, for nearly $100 million.This Elkhart, Indiana, firm had manufacturingfacilities in La Grange, Illinois, Cleveland,Ohio, and Monroe, North Carolina. TheSteinway & Sons management team installedby the Birminghams remained intact and incharge.

Commenting on the merger, Dana Messina, aninvestment banker and a controlling share-holder of Selmer’s parent corporation, noted:

The combination of Steinway and Selmer is anexciting opportunity for both of the companiesand their employees. Our extensive investigationhas made it clear that Steinway’s New Yorkfactory today produces excellent instruments of a

3 E. Rothstein. “Made in the USA, Once Gloriously,Now Precariously.” The New York Times, May 28,1995.

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quality unequaled in many years, and theSteinways made in the company’s Hamburgfactory continue to dominate the European andAsian concert scene. . . . We intend to continuethe mission of producing great instruments thathas been pursued by Steinway.

The new owners made an IPO stock offeringto raise $60 million in August 1996.

THE STEINWAY LEGACY

There are two fundamentals in understandingthe origins of the Steinway legacy: technicalinnovation and marketing. Around 1800 thepiano’s identity was still in a formative stage,but by the 1850s, the instrument's basicstructure had been defined. Taking the basicstructure as a given, the Steinways improvedthe piano and, ultimately, the entire industry.

Building Technical Capabilities

In 1850 producers were working to makepiano performance more reliable and louder.New piano works by romantic composers hadappeared and they demanded a broader rangeof tones. In addition, larger concert halls werebeing built. These developments served toestablish a need for pianos with a louder tone.The general objective of Steinway & Sons’efforts was to develop reliable pianos thatoffered a more powerful tone.

Experimentation at Steinway & Sons was doneprimarily by two of the founder’s sons, Henry,Jr. and Theodore. These Steinway brothersexperimented and developed theories aboutimprovements to both the design and themanufacture of pianos. In 1911 Alfred Dolgedescribed Theodore’s approach as follows:

Step by step he invaded the fields of modernscience, investigating and testing different kindsof wood in order to ascertain why one kind oranother was best adapted for piano construction,then taking up the study of metallurgy, to find aproper alloy for casting iron plates which wouldstand the tremendous strain of 75,000 pounds ofthe new concert-grand piano that was alreadyborn in his mind, calling chemistry to his aid toestablish the scientific basis for felts, glue,varnish oils, -- in short, nothing in the realm ofscience having any bearing on piano construction

was overlooked.4

Over a 50-year period starting in 1857, thefirm obtained 58 patents for variousinnovations to piano design. At internationalexhibitions in Europe, the Steinways proudlyshowed off their new methods and basked inthe resulting acclaim. One consequence wasthat their methods were copied widely,especially in Europe. By the 1870s, the“Steinway system” was well recognized and bythe end of the century it became the de factoindustry standard.

During the mid-19th century, new industrialtechnologies emerged to cause a revolution inpiano manufacturing. Steinway & Sons was atthe forefront of these developments,implementing innovative and uniqueapproaches to piano manufacturing. At theirlarge facility, opened in 1860, theystandardized various parts of the piano tofacilitate volume manufacturing, refitting andservicing. Though the firm used increasedmechanization to produce standardizedcomponents, it retained a “craft” approachfor other components and for assemblingpianos. The combination of the mechanizedtechnologies and individual craft skills quicklybecame a hallmark of the Steinway approachto piano manufacture.

Building Reputation

From the beginning, Steinway & Sons facedintense competition from rivals such asChickering & Sons and Mason & Hamlin inthe US, and Erard and Broadwood in Europe.Facing this competition, the firm sought tohighlight not only the unique construction ofthe Steinway piano but its “superior” sound.

To do this, the firm entered its pianos incontests that compared manufacturers’products. In 1854 for example, the firmexhibited a square piano at the MetropolitanFair held in Washington, D.C., and received aprize medal. A year later Steinway & Sonsentered the American Institute Fair at theCrystal Palace in New York and the judgesawarded it first prize from among 19competitors.

4 A. Dolge. Pianos and Their Makers (Covina. CA:Covina Publishing Company, 1911), p. 303.

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[Steinway & Sons’] great triumph came at thegreat fair of the American Institute in New Yorkin 1855, where their overstrung square pianowith full iron frame created a sensation in thepiano world. As a result their business expandedso rapidly that in 1859 the erection of thatmammoth factory on Fifty-Third Street andFourth Avenue, New York, became a necessity.5

To gain international recognition, Steinway &Sons, along with 130 other manufacturers,entered the International Exhibition held atthe Crystal Palace in London in 1862.Steinway & Sons was recognized as the bestAmerican manufacturer and was awarded amajor prize. The main prize went toBroadwood. In 1867 the firm entered the ParisExposition, along with 178 other firms. BothSteinway and Chickering were awarded goldmedals at this exposition.

Winning by Not Competing. At the majormanufacturers’ competition held in Vienna in1873, around two-thirds of the pianos exhibit-ed were built according to the Steinwaysystem. Steinway & Sons itself did notcompete, however, having reached anagreement with Chickering not to do to avoidcontinuation of the shrill accusations that hadarisen between the two rivals after the ParisExposition.6 With the competition over,however, the judges issued a statementregretting that “Steinway & Sons, thecelebrated inaugurators of the new piano-making system, had chosen not to exhibit.”From the standpoint of enhancing itsreputation for making a superior piano,Steinway & Sons “won” in Vienna by notcompeting.

Industry rivalries also persuaded Steinway &Sons and 15 other piano-making firms fromthe eastern US to boycott the 1893 World’sFair held in Chicago. As expected, W. W.Kimball, a Chicago piano manufacturer wonthe highest award. At the time, however,Steinway & Sons was promoting a US tour of 5 Dolge, p. 302.6 Both Chickering and Steinway attempted to depict theresults of the Paris Exposition as confirming they (nottheir rival) were the leading US piano manufacturer. Thiscompetition escalated into a notorious series of claimsand counterclaims as each firm claimed additionalendorsements and awards in their efforts to convince thepublic that it was they who had “really won” in Paris.

the Polish virtuoso, Ignance Jan Paderewsky.Paderewsky was invited to play at theexhibition’s inauguration, but only if he wouldplay on a piano entered in the competition.Paderewsky countered that he could only playon a piano he was used to playing. Theorganizers relented and Paderewsky played hisSteinway. Again, unfolding events enabledSteinway & Sons to enhance their reputationby not competing.

A Steinway Is a Steinway. Steinway & Sonsalways sought to establish a reputation foritself as the firm that built the best piano formusicians, especially concert artists. It alsosought to establish itself as being a contributor,supporter, and leader in the cultural arts. AsDolge noted:

They never relaxed in letting the public knowthat they manufactured a fine piano. WilliamSteinway, with far-seeing judgment, was notsatisfied only to use printer’s ink with tellingeffect, but he also began to educate the public toappreciate good music. Steinway Hall waserected, the Theodore Thomas orchestragenerously supported and the greatest pianovirtuosos from Rubinstein to Joseffy engaged forconcerts, not only in New York but in all largecities of the United States and Canada.7

Steinway Hall, designed and built by WilliamSteinway in 1866, was the largest concert hallin New York City. Notes Dolge:

The opening of this hall was the inauguration ofa new era in the musical life of America. AntonRubinstein, Annette Essipoff, Teresa Carreno,Fannie Bloomfield-Zeisler, Rafael Joseffy,Eugene D’Albert, Leopold Damrosch and AntoSeidl made their bows to select audiences fromthe platform of Steinway Hall. William Steinwayknew that the American people needed musicaleducation. He provided it.8

Concert artist endorsements was anothermethod used by Steinway & Sons to convincethe public that their pianos were superior.Initially, the effort at Steinway & Sons waslargely opportunistic and informal. But thebenefits of more large-scale efforts wererecognized as a result of the 215-concert UStour in 1872 by the virtuoso AntonRubinstein, who was sponsored by Steinway &

7 Dolge, p. 174.8 Dolge, p. 309.

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Sons. Rubinstein and his Steinway dazzledaudiences. In 1891 the Steinway-sponsoredconcert tour of Ignance Jan Paderewsky wasalso a great success. Paderewsky cleared anunprecedented $200,000 from his tour, andthe promotional value to Steinway & Sons wasimmeasurable.

These concerts, the artists involved, and thesponsor all received extensive press coverageand acclaim. In 1912 Charles Steinway, thepresident of Steinway & Sons, observed: “Itwas without doubt the most effective of alladvertising methods we employed, since it notonly made the piano and its maker widelyknown, but assisted in laying the foundationfor a broad national culture.”

Though Steinway & Sons never offered toreduce the price of its pianos, it soughtendorsements from New York’s social elite.9

To this and other groups, the firm presenteditself as offering a high-quality product worthyof a high price. Today, the Steinway pianosare priced the highest in the industry. Oftenthis price is nearly double that of an equivalentYamaha, the firm’s most competitive rival inthe United States.

Steinway & Sons has consistently emphasizedits commitment to the cultural enrichment ofthe nation and the world. The firm’spromotions argue, for example, that the act ofbuying a piano is not the same as the act ofbuying a Steinway. Buying a Steinway isdepicted as an indication of appreciation forhigh cultural taste and, hence, was a sign ofhigh achievement. The firm also built upon itsinternational presence. Dolge noted:

Having established the fame of his piano inAmerica beyond dispute, William [Steinway]looked for other worlds to conquer, and opened abranch house in the city of London about theyear 1875. Steinway Hall in London wasformally opened in 1876. In 1880 Hamburgfactories were started, to supply the ever-growingEuropean Trade.10

9 As judges, newspaper proprietors, music publishers,teachers, clergy, music critics or others prominent inNew York social or cultural circles indicated they’d liketo buy a Steinway, the firm offered them generous creditterms to encourage the purchase. By having a Steinwayin influential New York homes, Steinway & Sonscalculated its status by association tended to grow.10 Dolge, p. 309.

The Hamburg facility was established primarilyto challenge the domination of Europeanpiano markets by companies such asBechstein, Bluthner, and Ibach. At the time,the firm was the only piano-maker that servedall well-known concert artists in every majorcity in America and in Europe. According toD. W. Fostle, an author, “A Steinway pianosoon became recognized as an admired culturalicon in any refined home, a necessary elementon any prominent concert stage, and part ofthe necessary baggage of any prominentpianist.”11

Building a Marketing Approach

Like its competitors, Steinway & Sonsoriginally sought out and paid forendorsements from prominent concert artists.Over time, however, Steinway and other firmsceased paying for endorsements. Concertartists, however, still chose to endorse theSteinway piano over others. Today, more than95 percent of all classical music concertsfeaturing a piano soloist are performed on aSteinway concert grand piano.12 This endorse-ment has remained stable for many decades.Music schools and conservatories such asJuilliard, Oberlin, and Indiana University havealways showed a great fondness for Steinways.

Steinway & Sons sought to be associated withhigh culture, style, status, and class. In 1855the firm started advertising daily in the NewYork Times. Gradually, Steinway & Sonsmoved to much more extensive advertisingcampaigns.

To the astonishment and chagrin of the older andmore conservative houses in the piano trade,William [Steinway] started an aggressive andheretofore unheard-of advertising campaign. As acompetent judge he knew that his factories turnedout the best pianos that could possibly be made,and he was bent not only on letting the worldknow it, but on making the world believe it, as

11 D. W. Fostle, The Steinway Saga (New York:Scribner, 1995).12 Currently, the Concert Artists’ Department maintainsa bank of 330 Steinway concert-grand pianos spreadabout 160 cities. Once an artist achieves sufficientstature to be considered eligible by Steinway & Sons toreceive concert service, he or she is offered theopportunity to use Steinway pianos for all performances.The only expense to the artist is the cost of hauling thepiano to the recital hall.

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he did. This was revolutionary, even shocking,but William persisted until he carried hispoint.13

Steinway as an Investment. In 1900Steinway & Sons hired N. W. Ayer & Son, theoldest full-service advertising agency in thecountry, to promote Steinway pianos. Ayer &Son emphasized that many potential Steinwaybuyers were not only interested in music butwere greatly interested in class and status.Their interest in owning a Steinway wouldincrease if the class and status associated withthe Steinway name was emphasized.

Systematically, the firm broadened themessage in its promotions. The firm’sadvertising emphasized, for example, that onedid not “buy” but “invested” in a Steinway,that there was no such thing as a betterSteinway for a Steinway was the best, thatowning a Steinway was more important thanbeing able to play it, and that a Steinway pianowas always made just a little bit better than wasnecessary. Steinway advertising was targeted toemphasize family values, the contributions toart and music of Steinway & Sons, Steinway’stechnical excellence, or some combination ofthese. Forging a link with the art community,the firm commissioned paintings showingfamous artists and composers, past andpresent, linked to the Steinway piano. The“timeless” excellence of a Steinway wasemphasized.

The commission and use of modern art inSteinway ads of the 1920s was an extension ofthe advertising style that the New York firm hademployed for decades. . . . [W]ith Steinway theassociation was natural. However much anotherproduct’s image was improved by its proximityto art, it remained a mere product. The Steinwayitself became art.14

In the 1920s the program to make sure thatall outstanding concert artists used a Steinwaygrew to include more than 600 concert artists.With a consistent and overwhelmingadvertising message and its US competition inretreat, the firm convinced the public that a

13 Dolge, p. 309.14 C. H. Roell. The Piano in America, 1890-1940(Chapel Hill: The University of North Carolina Press,1989), p. 180.

Steinway was the only “artistic” piano.15

According to Forbes , a Steinway pianooutperforms Mercedes-Benz auto-mobiles,power boats, wine, and gold as luxury items forinvestment. A Steinway created between 1929and 1958 is now worth nearly six times itsoriginal cost; for those dating from 1959 to1978 the factor of appreciation currentlystands at nearly three times. Piano rebuildersare known to scour the world in search of oldSteinways because regardless of its age orneglect, a Steinway grand can often be restoredto its original magnificence.

The 1970s and 1980s saw new competitionemerge from Asian competitors. Of particularinterest was Yamaha’s announced intention toovertake the status associated with a Steinway.Yamaha’s president claimed this would be doneby promoting Yamaha’s sound quality andtone along with the status and class associatedwith the Yamaha name. Despite Yamaha’savowed threat to overtake the status ofSteinway & Sons, the firm’s reputation asproducer of the best sounding piano hasremained pretty much intact. In 1991 Dolgenoted:

Just as a most masterful copy of a Raphael orCorreggio will ever be only a copy and far fromthe original, so it has proved impossible toproduce a piano equal to the Steinway piano,even though the Steinways were copied to theminutest detail. No art product can be duplicatedby copying.

MANUFACTURING STEINWAYS

Manufacturing a Steinway piano is a laborintensive and time consuming process. ASteinway concert grand piano is one of theworld’s most complex pieces of hand-builtmachinery. It consists of over 12,000 partsand requires about a year to complete.Approximately 300 craftspeople have a handin its development.

The 440,000 square-foot manufacturing 15 The firm’s ads necessarily were--and are--devoted tomaintaining an appeal to a minority audience of highculture that has not been swept into mass society. Hencethe promotion of Steinway as art. According to theclassical pianist Jose Feghali: “Steinways are a work ofart; if they weren’t, we wouldn’t be playing them. . . .You can walk into a room with 10 pianos and it’s likeplaying 10 different instruments.”

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facility manufactured about 67 percent ofSteinway pianos sold in 1995. This facilityconsists of many linked buildings that housethe factory and Steinway’s offices. In 1985260 direct workers and 61 nondirect workerswere involved in manufacturing pianos. Theproduction workers are represented by Local102 of the United Furniture Workers, a smalltwo-company local that has bargained withSteinway management for decades. In 1996wages averaged approximately $13 per hour($17 including fringes). Throughout thefactory, there are workers who representfamilies that have been with the firm forgenerations. Currently, the work force has amultinational cast of first-generationimmigrants. Over 17 languages are spoken inthe factory.

The factory is part lumber mill, part fine-cabinet works, part manual-crafts assemblyline, and part studio for industrial craftsmenand women working an art acquired throughmany years of apprenticeship. Although thebuildings have undergone significant changesover the years, the piano-making operationshave hardly changed in the last century.

The Lumber Mill. The mill, the factory’slumber yard, carries approximately 1.5 millionboard-feet of select woods (costingapproximately $2 million) such as hard rockmaple and sitka spruce. Twice a year, thefirm’s wood technologist, Warren Albrecht,goes to Canada and the American Northwestto identify wood of sufficient quality and grainto be used by Steinway. These woods are air-dried in the open for about 18 months andthen kiln-dried using recently installedcomputer-controlled equipment. Reduction ofthe wood’s moisture content through drying isessential for the instrument’s acoustics.Through years of trial and error, the firm hasmanaged to establish ideal moisture contentand drying times for each of the instrument’svarious wooden components. It is here, viathe world’s finest woods, that the foundationof what eventually becomes a Steinway pianobegins.

Rim-Bending Operations. This operationfocuses on the piano’s rim (the curvedsideboard giving grand pianos their shape andsupport). A concert grand’s rim requires a 22-foot-long, three-and-one-half-inch wide board

of hard rock maple. Because boards of thislength rarely occurred in nature, thin slats ofmaple laminates (18-layers thick) are gluedtogether to form the piece. When bent, thiswooden piece forms the piano’s familiar outerand the hidden inner rim that extends belowthe sound board and frame. Steinway’sprocesses for bending the inner and outerboard remains unique in the industry.According to Henry Z. Steinway, it is thisprocess that provides the instrument withgreater strength and durability.

The rim-bending room consists of eightpiano-shaped forms of steel presses whoseperimeters are fitted with screws and clamps(see Figure 1). With the glue holding the 18layers of laminates still wet, the piece ismanually pressed against the form and securedby iron pinions.16 The bent rim is then heatedby high-frequency radio waves. Although therim is technically ready in minutes for thenext process, it remains in the iron form for24 hours. Once removed, the piece is stackedin a humidity-controlled environment for aminimum of 10 weeks. This curing periodensures that the rim retains its bent form.Following the waiting period, the rim isplaned, sanded, and cross braced and then thekey-bed and pin-block are inserted. Slowly therim is transformed into a unitary piano case.

The Sound Board Assembly. In anotherpart of the factory, highly skilledwoodworkers create the piano’s sound board.The sound board consists of 20 spruce boards,selected from the same lot of wood,meticulously cleared of any imperfections.These boards are matched for grain and colorand glued along their lengths. Once glued, theboard is thinned in certain places and taperedtoward the ends. By the application of supportribs to its underside, the board is also slightlycrowned. Then a bridge, the clef-shapedsupport for the strings, is affixed.

The Action Mechanism. The “guts” of thepiano consists of the keys and the action.

16To prevent damage and facilitate conductivity, a brassstrap equal to the length of the piece, is placed on theexterior side. The wet glue, along with the wood’sslightly elevated moisture content, permits the laminatesthat formed the wooden piece to slide against each otherjust enough to permit bending.

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Together, they constitute the mechanism bywhich the act of depressing the key causes thecorresponding hammer to strike the string andreturn to its original resting place.17 Onceassembled, the actions are mated with thepiano’s keys and the entire “key-actionassembly” mechanism is regulated to ensureproper movement. After being regulated, thekey-action assembly is moved to another partof the factory where the keys are weighted toensure they provide the appropriate touch andrecoil. Proper touch and recoil results in thepiano’s “even feel”, an important trait of thelegendary Steinway experience. Themechanism is then fitted into a piano case.The foundation that supports the key-actionassembly is the spruce key bed.

The Final Assembly. The joining of thepiano case and an iron-plate to support thestrings is carried out in the factory’s “belly”room. The bellying process involves attachingthe iron plate and the sound board to the innerrim of the piano case. This process takes up toeight hours over the course of two days.During this process, the sound board is securelyaffixed to the piano case using a special hotglue that ensures a good seal between the boardand the piano case. The board installationprocess is critical for the proper resonance ofthe strings and multiple measurements aretaken to ensure a proper fit.

Once the hot glue sets and the clamps holdingthe board in place are removed, the cast iron-plate is lowered into the case. Accurateinstallation of the plate ensures the properbearing of the bridge, which then helpsmaintain the right pressure on the piano’sstrings. Too little or too much pressure resultsin an instrument that sounds weak or muffled.With the sound board and iron plateinstallation complete, the piano is ready for

17 The piano key covers are made from a mock ivorypolymer, in deference to the ban on ivory imports. Theaction consists of 17 different wooden parts includingmachined wooden parts, Brazilian deer hide, felt-coveredmaple hammers, metal pins, and Teflon impregnated woolbushings. The components of the action are milled on thethird floor and then assembled on the second floor. Thedesign of the actions, much like the rest of the piano,only work if all of the milled parts fit together perfectly.Employees are trained in determining the exact fit and,also, to spot problems through visual and physicalinspection of the action components.

stringing.

The stringing process involves the hammeringof pins into a pin-block underneath the ironplate and the insertion of about 243 strings.After the instrument is strung, it passesthrough a “banger” which mechanicallypounds every key about 8,000 times within a45-minute period. This “aging” processensures that the sound notes emanating fromthe instrument are stable. The instrument isthen regulated to ensure its moving parts (thekey-action mechanism) interact properly.

The Steinway piano comes in flat and glossyfinishes. The flat finish is the trademark ofthe Queens factory and the glossy finish istypical of the Hamburg factory. Each pianoreceives five coats of lacquer prior to theinsertion of the sound board and iron plate, butis not truly finished until the time ofshipment. Once assembled, pianos are polishedand rubbed in a manually intensive process.

The Tone Regulating Department. Manyof the sound-related operations are carried outin the tone regulation department by a groupconsidered to include Steinway’s most skilledtechnicians. Highly skilled artisans (as the firmprefers to call them) optimize the final toneof the piano and do all the fine-tuning. For theconcert grands, this process can take as long asa week per piano.

Tuning involves adjusting the piano strings toget the proper tonal quality and “voicing”entails final adjustments to the shape of thehammer, the feel of the felt, and themovement and position of actions. With thepersonality or voice of the piano exposed,final adjustments are completed to optimizethe instrument’s sound qualities. The timetaken to complete this process varies fromeight to 24 hours. Variations in the productionprocess are accomodated during the tuning andvoicing processes and contribute to thedistinctive sound of each Steinway piano.Given the nature of the craft productionprocess, each step is contingent upon thesuccess of the previous steps and there is littleroom for error. Each piano sounds and feelsdifferent. The firm encourages prospectivebuyers to play several pianos and then to pickthe one they think sounds best.

By the time a piano is assembled, strung,

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tuned, and voiced, it has gone through 25 to30 quality checkpoints. The workersresponsible for sound board placement,stringing, and tone adjustment and other bigjobs often signed their work. According to oneSteinway tuner, “It’s an aspiration ofeverybody to be immortal, and so, like anartist who signs his painting, I sign the piano. Iput into the piano the best of myself.”18 I nthe 1980s John Steinway observed:

A Steinway is a Steinway only because we don’tcut any corners. My great-grandfather started that135 years ago. I often say we’re probably thick-headed and stubborn; we stick to our principles.But it works.19

Arthur Loesser has chronicled the history ofthe piano and describes the sound of theSteinway concert grand piano most eloquently:

The end result of the Steinway effort was a tone-producing tool of matchless strength andsensitiveness. . . . It was a marvelous kind ofsound for the music that people loved then:thick, thundering piles of chord, boomingbatteries of octaves, and sizzling double jets ofarpeggios. But the single Steinway tone, struckgently and held, also worked its ineffable spell,taking an endless, yearning time to die.20

The firm produced 2,698 pianos in 1994.

Historically grand pianos have accounted forthe bulk of Steinway’s production. Steinwayoffers eight models of the grand pianos thatrange in length from five-feet, one-inch for ababy grand to nine feet for the largest concert-style piano (see Figure 2). Grand pianos areat the premium end of the piano market interms of quality and price, with the Steinwaygrands dominating the high end of the market.Retail prices in 1996 range from $27,600 to$101,200 in the United States.

THE MARKET AND COMPETITION

According to a 1990 survey conducted by theGallup Organization for the American MusicConference, slightly more than four in 10 (43percent) US households contained at least one

18 “Steinway’s Key. . . One at a time,” AssociatedPress International, 1985.19 ibid.20 Quoted in R. V. Ratcliffe. Steinway & Sons (SanFrancisco: Chronicle Books, 1985), p. 102.

amateur instrumental musician. The surveyreported that about 42 million music-makinghouseholds exist in the United States.However, the proportion of households withone or more amateur musicians dropped from46 percent in 1985 to 43 percent in 1990.About 44 percent of piano players were maleand 56 percent were female.

Generally, players were under the age of 35(the median age was 28). Among musicalinstruments, piano and the guitar topped thesurvey’s list with about 40 percent of playerschoosing the piano and 17 percent the guitar.Amateur musicians came from households thathad a higher median income level ($45,860)than the total population ($37,640) and wereheaded by an adult with more than a highschool education.21

Domestic Competition

In the 1960s US piano manufacturers werefirst confronted with Japanese piano imports.The Japanese firms offered consistent-qualitypianos at a much lower price than USmanufacturers. By 1968 two Japanese firms,Yamaha and Kawai, were selling 10,000 unitsannually. Together they captured 5 percent ofUS upright piano sales and 28 percent of USgrand piano sales.

The 1980s saw further significant change inthe US piano market. Yamaha introduced thefirst all-digital synthesizer, which couldeffectively produce a range of high-qualitysounds. Yamaha’s introduction of thesynthesizer effectively undercut the low-endacoustic piano market. In fact sales of acousticpianos declined from a high of 233,000 peryear at the beginning of the 1980s to 50,000units annually in 1994. As sales of uprightpianos decline, the number of grand pianossold have increased (see Exhibits 1 and 2).

Although Japan and Korea held 11 percent ofthe US market in 1980, they held 38 percentof it by 1985. Several US firms have closed,and currently, only two major US firms,Steinway & Sons and Baldwin, continue tomake pianos. Several foreign firms now haveUS manufacturing facilities: Kawai operates aplant in North Carolina and Samick has a

21 American Music Conference, Music USA, 1991, p.21-23.

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manufacturing facility in California. Currently,the high-volume producers are located inJapan, Korea, China, and the Soviet Union.Total US production is in third place -- atabout the same level as that of South Korea.

US Piano Market in 1995. In 1995 themusical instrument industry in the USgenerated retail sales of approximately $5.5billion. The acoustic piano segment, whichrepresents approximately 11 percent of thetotal musical instrument industry, had retailsales of $598 million in 1995, up 7 percentfrom 1994.22 This included an 11 percentincrease for grand pianos over five feet inlength. During the period from 1991 to 1995,total dollar sales of grand pianos increased atan average annual rate of over 7 percent from$288 million to $372 million. Upright pianodollar sales, in contrast, increased at anaverage rate of only 1.5 percent during thesame period.

Steinway’s domestic market share of the grandpiano units was approximately 7 percent in1995. Approximately 90 percent of Steinwayunit sales were made on a wholesale basis, withthe remaining 10 percent sold directly bySteinway at one of its five company-ownedretail locations. Steinway & Sons operates fiveretail stores in New York, New Jersey,London, Hamburg, and Berlin. The West 57thStreet store in New York City, known asSteinway Hall, is one of the largest and mostfamous piano stores in the world. Steinwaypianos are sold by dealers in 45 states acrossthe country. The firm’s leading markets are inand around major metropolitan areas. The twolargest regions in terms of sales are Californiaand New York, which together accounted forapproximately 20 percent of domesticrevenues in 1995 (see Exhibit 3). Theinstitutional segment of the US piano market,which includes music schools, conservatories,and universities, represented less than 10

22 The US acoustic piano market consisted of twoimportant segments -- grands and uprights. Grandpianos are larger and give a louder, more resonantsound. The grands were more expensive and themarket for such pianos was generally smaller thanthat for uprights, and fewer firms were involved intheir manufacture.

percent of Steinway’s domestic sales.23

Steinway’s largest dealer accounted forapproximately 8 percent of sales in 1995,while the top 15 accounts represented 28percent of sales.

In 1994 the firm sold 2,698 grand pianosworldwide (see Exhibit 4 for a history ofSteinway grand piano sales). During this sameyear, the firm reported a net income of $3.1million on sales of $101 million (see Exhibit5). Approximately 50 percent of Steinway’stotal sales were in the US, 37 percent were inEurope, and the remaining 13 percent were inAsia. Steinway’s Japanese and Korean marketshares (in units) combined is less than 1percent. Germany, Switzerland, France, theUnited Kingdom, and Italy accounted for thegreatest percentage of sales outside theAmericas. Steinway’s largest Europeanmarkets were Germany and Switzerland.

Steinway pianos are primarily purchased byaffluent individuals highly skilled in pianoswith incomes over $100,000 per year. Thetypical customer is over 45 years old and has aserious interest in music. Steinway’s corecustomer base consists of professional artistsand amateur pianists, as well as institutionssuch as concert halls, conservatories, colleges,universities, and music schools. Customerspurchase Steinway pianos either through oneof the firm’s five retail stores or throughindependently owned dealerships. Over 90percent of the firm’s piano sales in the US areto individuals. In other countries, sales toindividuals are a smaller percentage of thetotal sales.

Baldwin. In 1862 Dwight H. Baldwin, a musicteacher, founded this firm as a retail pianobusiness in Cincinnati, Ohio. In 1865 Baldwinhired Lucien Wulsin as a bookkeeper and madehim a partner in 1870. Until his death in1912, Wulsin shaped the firm’s development.

23 Steinway provides restoration services and sellspiano parts from its New York, London, Berlin, andHamburg locations. It also provides tuning andregulating services. Restoration, repair, tuning andregulating services are important because they lead topotential new customers. In 1995 restoration servicesand piano parts accounted for approximately 7 percentof revenue, with gross margins of approximately 29percent.

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Branch stores were opened in Indianapolis,Indiana, Louisville, Kentucky, and other townsin Ohio. In 1887 when M. Steinert &Company, a Steinway franchisee, opened aretail store in Cincinnati, the Steinwayscanceled Baldwin’s Steinway franchise. Wulsinresponded by planning Baldwin’s firstmanufacturing facilities, and productionstarted in Chicago in 1889. To sell Baldwinpianos, Wulsin introduced a dealerconsignment program whereby the dealer onlypaid for the piano after it sold. The companyalso experimented with installment salescontracts. This combination of consignmentselling and installment contracts led to thefirm’s rapid growth at the turn of the century.Baldwin’s successful approach was copied bymost other piano manufacturers.

Rapid growth of the firm in the 1950s and theinadequacies of the company’s manufacturingfacilities in Cincinnati convinced the firm tomove south. Eventually five plants wereopened -- three in Arkansas and one each inMississippi and Juarez, Mexico. Baldwin’soffering included a line of high-quality grandpianos and a line of relatively inexpensiveuprights assembled in the firm’s highlyautomated Arkansas plants.

During the 1970s, the firm transformed itselfinto a conglomerate -- Baldwin-United Corp--and acquired banks, savings and loans, andinsurance companies. But the acquisitions alsoran up a sizable debt. Unable to repay thedebt, the firm filed for bankruptcy protectionin 1983. A year later, R. S. Harrison andHarold Smith led a $55 million leveragedbuyout of the company’s piano and organoperations and reestablished the firm as adedicated keyboard manufacturer.

Baldwin has over 800 dealers in the UnitedStates. Its dealership base and broad productline help attract students and other low-endusers who generally stay with a Baldwin pianoas they upgrade. In 1987 the firm sold175,000 pianos, a figure well below the282,000 units it sold a decade ago. Withexcess capacity in its Arkansas facility,Baldwin obtained a contract from Yamaha tomanufacture the Everett piano line. Actionsfor Baldwin pianos are assembled at the Juarezplant. In 1995 the firm reported a net incomeof $3.9 million on sales of $122 million (see

Exhibit 6).

Japanese Competitors

In the early part of the century, there waslittle piano manufacturing in Japan, due to alack of quality components, impoverishedcircumstances, and a work force that wasuninformed about the subtleties of instrumentdesign and construction. After the World WarII, however, two Japanese companies, Yamahaand Kawai, quickly became important pianomanufacturers. Figures for the 1980s indicatethat these two firms together made morepianos than manufacturers in any othernation. In 1954 only one percent of Japanesehomes owned a piano; currently, more than 20percent do. In contrast to Steinway & Sons,the Japanese approach to piano manufactureemphasizes automation and assembly-lineoperations.

Yamaha Corporation. Founded in 1887 asNippon Gakki, Yamaha’s main plants are nearHamamatsu. From the time of its founding,the firm has built pianos.24 It first exportedpianos to the US in 1960. By the 1970s,Yamaha had developed a strong reputation formaking high-quality pianos. In the UnitedStates, it took significant market share awayfrom US producers. The company usesinnovative engineering and automatedmanufacturing to produce its pianos. The firmmarkets its pianos world wide.

In 1987, its centenary year, Yamaha was theworld’s leading musical instrument maker. Itcommanded 30 percent of the world pianomarket, 40 percent of the organ market, and30 percent of the wind instrument market.Currently, the firm markets a line of grands,uprights, consoles, and studio pianosmanufactured in either Georgia in the UnitedStates, or Hamamatsu in Japan. These pianosare the company’s pride. Concert grands

24 In 1950 Genichi Kawakami took over the leadershipof the firm from his father. In 1953 Genichi toured theUnited States and Western Europe and was struck bythe emphasis being placed on recreational products andthe waning interest in musical instruments. He returnedhome determined to stimulate an interest in musicalinstruments in Japan and opened a chain of franchisedmusic schools, which have since graduated 4 millionstudents. There are currently 10,000 franchised schools,and many have a showroom for Yamaha instruments onthe ground floor.

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represent the measure of its aspirations.Yamaha currently commands around 55percent of the Japanese piano market.

In 1983 Genichi’s son, Hiroshi Kawakami,took over the leadership of Yamaha. Underhis direction Yamaha established several closeworking relationships with other firms in thelate 1980s and 1990s. In 1984 Yamahasubcontracted Kemble & Co. of England tomake pianos. In 1986 the firm subcontractedBaldwin to make the Everett piano line. In1988 Yamaha established Tienjin YamahaElectronic Musical Instruments for productionin China. Further it obtained an option to buy25 percent of Schimmel Pianofortefabrik inGermany. More recently, Yamaha held a 60percent ownership of a $10 million jointventure with Jiangzhu Piano, China’s largestpiano manufacturer, located in Guangzhou,China. In 1996 the joint venture startedproducing pianos at a monthly rate of 1,300units. In 1995 the firm reported a net incomeof $61.6 million on sales of over $5.5 billion(see Exhibit 7).

Kawai Musical Instruments. In 1889, whilehe was an employee of Yamaha, KoichiKawai, the founder of Kawai MusicalInstruments, began his piano research. Hedeveloped the first rudimentary assembly lineto make pianos. He was the first in Japan todesign and build a piano action. Prior to hiseffort, all Japanese manufacturers hadimported their actions from the United Statesor Germany. Kawai began the production ofupright pianos a year after building his firstpiano action. It was the cost advantage of hisdomestically produced action that gave him afoothold in the fledgling Japanese market.Soon he began building grand pianos.

In 1955 Koichi’s son, Shigeru Kawai, tookover as president and has since overseen thefirm’s growth and the introduction of moderntechnology. In 1956 the firm had one plant,546 employees, and production capacity was1,776 units. By 1996 Kawai had nine factoriesand employed over 7,000 people whoproduced about 100,000 pianos. The firm’smain manufacturing center, Ryuyo GrandPiano Facility, opened in 1980, and is knownfor the efficient methods its has developed tobuild grand pianos. Kawai emphasizes theengineering, research and development, quality

control, technological innovation and skillthat goes into its pianos. Koichi’s son,Hirotaki Kawai, is expected take overleadership of the firm.

In its advertising, Kawai emphasizes thenumber of institutions and music venues(prominent universities, symphony orchestras,opera companies, music centers, theatercompanies, churches, music studios, andhotels) around the world that have purchasedthe Kawai piano. In 1995, however, the firmreported a loss of $2 million on sales of $877million. This loss was attributed to thelingering economic recession facing firms inJapan (see Exhibit 8).

Korean Competitors

In 1964 the Korean government decided topromote musical instrument manufacture. Tosupport this effort, it passed a prohibitivetariff on imported luxury goods like pianos.Three firms immediately benefited from thisprotection. They included Samick, which hadalready established its piano manufacturingfacility, Young Chang, which formed a jointventure with Yamaha, and Sojin, a division ofDaewoo. Industry assessments state that,“despite a harsh environment and a lack ofWestern musical tradition, Young Chang andSamick made the transformation fromprimitive manufacturers to global powerhousesin record time. Over the past century, noother manufacturers have come so far sofast.”25 Recently, Hyundai also became anadditional Korean piano manufacturer. In the1990s, with growing labor and raw materialshortages, Samick and Young Chang haveshifted their production to locations witheither lower costs or better access to rawmaterials or markets.

Samick. Established in 1958 by Hyo Ick Lee,Samick has grown into the world's largestproducer of pianos, with its main plant inIchon. The firm produced 18,000 grand pianosin 1995. Samick pianos feature cabinetsdesigned by Kenneth Benson and incorporate ahigh-tension imperial-German scale. Inmaking its pianos, Samick makes extensive useof computer-controlled equipment to shapeparts and perform finishing operations.

25 The Music Trades, January, 1991.

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In 1989 Samick Music Corporation, a whollyowned subsidiary of Samick, opened a 85,000-square-foot facility in California to assembleupright pianos. In 1991 monthly productionat the facility had reached 325 units. Whilecase parts were American, all actions, backs,and hardware were imported by Samick.

Recently Samick opened parts-producingfacilities in Indonesia and China. Componentsand subassemblies from these plants are thenshipped to the firm’s main plant at Inchon forassembly. These new facilities have allowedSamick to hold costs down and minimize priceincreases. Samick offers the best warranty inthe industry -- 10 years on the piano, plus alifetime warranty on the iron plate, the soundboard, and the pin block. In 1995 the firmreported a net income of $13 million on salesof $291 million (see Exhibit 9). At the end of1996, Samick filed for bankruptcy protectiondue to financial difficulties.

Young Chang. Young Chang was founded bythree brothers. Jai-Sup Kim had studiedengineering, Jai-Young Kim had studiedfinance at New York University, and Jai-Chang Kim had studied music. In 1956 theybegan to produce pianos in a small storefrontin Seoul, South Korea. They also secureddistribution rights to Yamaha pianos in SouthKorea. In 1962 they became the first musicalinstrument manufacturer in South Korea andbuilt their first assembly plant in Seoul in1964.

In 1967 they entered into a partnership withYamaha Corporation, receiving technicalassistance to acquire the production skillsnecessary to create instruments capable ofcompeting with those made in Japan, theUnited States, and Europe. In 1971 they beganexporting. In 1975 Yamaha and Young Changparted ways, and in the next year YoungChang opened its second factory in Inchon,which was expanded in the late 1980s. In 1979Young Chang America was established.

Young Chang's economies-of-scale, incombination with its advanced manufacturingprocesses, have resulted in one of the bestprice/value offerings in the market today.With an annual production capacity of200,000 pianos, Young Chang is also thelargest piano manufacturer in the world. The

firm produces around 110,000 units annually,including 13,000 grand pianos. It holds over50 percent of the expanding Korean market(around 150,000 units per year) and currentlyhas over 4,000 employees. It offers acomplete line of upright and grand pianos, aswell as guitars. The firm sees pianomanufacturing as a totally integrated activityand has facilities for making all the significantparts of a piano.

In 1990 Young Chang acquired Kurzweil, amusic key board manufacturer, for $20million. In 1993 Young Chang acquired itsown timber mill in Tacoma, Washington, for$32 million. It opened a $40 millionproduction facility in Tienjin, China, with anannual production capacity of 60,000 units in1995. As J.S. Kim observes:

In the short term, our balance sheet would lookstronger if we were to stay out of China. But it isobvious that the future for the piano industry isin China and companies not willing to make theinvestment are in great jeopardy.

The firm anticipates that the Chinese marketwill eventually be the world’s largest. In 1995the firm reported a net income of $9.6 millionon sales of $262 million (see Exhibit 10).

European Competitors

Although German piano manufacturers makehigh-quality, high-priced pianos, they havebeen severely tested by the low-priced Asiancompetitors. As a consequence of this com-petition, the number of piano makers hasfallen from several hundred to around 10. Allsurviving firms faced financial difficulties inthe 1990s. In 1995 total annual production inGermany was over 20,000 units, with 20percent being grand pianos. Bechstein Gruppe,the manufacturer of Bechstein andZimmerman pianos, had annual sales of aroundDM30 million. Recently, the group has beenworking its way out of bankruptcy protection.

Other firms included Blüthner of Leipzig,which produced about 400 pianos annuallywith 50 percent marked for export, andSchimmel in Braunschweig, which has heldaround 11 percent of the German market.Schimmel has a close relationship withYamaha, which has marketed Schimmel pianosin Japan. Steinway & Sons of Hamburgproduces around 1,000 grands and 200 uprights

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annually and exports around 300 grand pianosto Japan.

While English firms were world renown pianomanufacturers during Steinway’s formativeyears, today there is little piano making inEngland. The manufacturing that does occurinvolves subcontracting from non-Britishmakers. The most prominent is Kemble &Co., a firm that employs 100 people andmakes pianos for Yamaha (Japan) andSchiedmeyer (Germany).

In Austria, Bösendorfer continues to make alimited number of high-end concert grands andupright pianos for its parent, KimballInternational. Until recently, Kimball was aUS domestic piano maker with a single plantin Indiana. This facility, however, closed in1995.

Significant numbers of pianos are made in theformer Soviet Union. Few of these pianoshave appeared in the United States. Recently,some imports have started to appear. Perhapsthe best known brand is the Belarus pianofrom Borisov.

ISSUES FACING STEINWAY’SMANAGEMENT

Domestic grand piano sales increased 42percent from 1992 to 1995. This increasedgrowth was largely attributable to economicrecovery in the United States as well asincreased marketing efforts by the majorpiano producers.

Growing Importance of China

Industry forecasts indicate that the futuregrowth market for pianos will be concentratedin Japan, Korea, and China. Bruce Stevensacknowledged that:

Although the Steinway Piano has an excellentreputation in Asia and is the piano of choice invirtually every Japanese concert venue, Steinwayhas not historically focused significant selling ormarketing efforts in these markets.

According to Bob Dove, however, thesituation was changing:

The Boston Piano currently has around 5 percentof the Japanese market in terms of units, and ahigher percentage, about 8 percent, in terms ofvalue (since the Boston line is more expensive

than your average piano). We are optimisticabout future sales of both Boston and Steinwaypianos in Japan. We believe the Boston piano issignificantly better than that offered bycompetitors at similar prices.

The recent ownership changes and the growthof Asian markets had increased Steinway’sinterest in finding ways to find advantage inthese developing situations. Bob Dove said:

The merger of Steinway & Sons with the SelmerCompany and its woodwind and bandinstruments has introduced a number of newstrategic possibilities. The future demand for theband instruments made by Selmer is predictablefrom demographic data, peaking as larger cohortsof children enter high school. So this gives thenew company a predictable source of demand forits products. So far as growth is concerned,pianos are important and there is no doubt thatgrowth in demand for pianos will occur mainlyin Asia and so this is the current focus ofcompany attention. . . . There are also otherinstruments that have high quality standards andwhich have high sales and growth rates, e.g.guitars. These may be areas which offer newopportunities for the enlarged firm. Finally, theSteinway brand name, itself, is unsurpassed interms of its positive reputation. In the future, thistoo could be used in a number of different ways.

Additionally, the developing situation in Chinawas intriguing. Estimates indicated that theChinese domestic production of pianos hadrisen from 43,000 units in 1987 to more than100,000 units in 1994. The Chinesegovernment’s policy of one child per familyhas encouraged parents to spend more moneyon their children. This, many observersbelieve, may keep unsatisfied demand forpianos relatively high. Moreover, children inschool are being taught to appreciate musicand this will have a positive impact ondemand.

In 1994 there were four main piano-producingcenters in China, including Beijing (30,000units), Shanghai, Guangzhou (50,000 units),and Yingkuo in Liaoning Province. In 1996Tienjin in North China also became a centerof acoustic piano production when YoungChang established a plant there. Dove,however, was skeptical:

All expect that China will be the world’s largestmarket for pianos. However, since the price of

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pianos is currently set very low [the average priceof a piano in China was around $1,100] thereported levels of untapped demand there areprobably a bit illusory. Further, there are alreadylarge piano-making facilities in China such asYoung Chang’s and Yamaha’s factories. It is notclear there is a need for additional productioncapacity.

Although the demand at current prices faroutstrips supply, it is uncertain how anincrease in prices might affect demand. BobDove believes that Steinway’s currentapproach is appropriate:

Given the emphasis on culture in China, thecountry’s rapidly growing income levels, thesmall families and the interest parents have intheir children, one can expect the usualdevelopments to occur so far as piano penetrationis concerned. But this takes time and peopledon’t start off their interest in music by buying aSteinway. Rather, they work up to a Steinway.We already have an active Steinway dealership inHong Kong and this firm has opened a branch inShanghai. Currently, [therefore], we should bejust watching to see how things develop.

Moreover, he is optimistic about other Asianmarkets:

Other Southeast Asian countries like Japan,South Korea, Hong Kong, Taiwan andSingapore have already achieved higher generalwealth levels and have meaningful piano

penetration into homes. These countries,therefore, should be more immediate targets forboth the Steinway and Boston line of pianos.

Among the many proposals Steinway & Sonsis considering is the possibility of building aplant in Asia, perhaps in China. This newfacility could to help service the demand forpianos in Asian markets. Dove commented:

Ideally, because quality is such an importantissue and the desire to “do the job right” is sostrong, it would be better for all Steinways to bebuilt in one place. Perhaps standardized andmass-produced components could be suppliedfrom different sources and could reduce costs, butfor assembly and to do the other processesinvolving specialist skills, it would be better tohave the Steinway piano built in a single place.

Irrespective of the approach the firm decidesto pursue with respect to China and otherAsian markets, Dove commented that:

In considering what to do, Steinway & Sons hasto remember two things. First, the company hasbuilt up a tremendous brand name and enjoys anunsurpassed reputation for quality. So first,anything we do must be consistent with the ideathat we are the “keepers of the flame.” Second, asHenry Z. Steinway said, “capital loves growth.”To generate growth, we also have to know wherewe are adding value...

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Figure 1The Rimbending Process Employed For Steinway Concert Grands

Figure 2The Steinway Concert Grand Piano (Model D)

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Exhibit 1Historical Sales of Pianos in the United States

Exhibit 2:Sales of US Pianos by Product Type — 1992 and 1987

1992 1987

Product Type

Firms withshipments

of $100,000or more Units*

Value *(mil.)

Firms withshipments

of $100,000or more Units*

Value *(mil.)

Verticals, uprights,consoles, 37" orless in height 1 - - 3 40,900 $38.5

Verticals, uprights,consoles, more than37" in height

7 53,700** $84.1** 5 52,100 $75.1

Grand Pianos 3 5,500 $53.5 3 7700 $58.2

Source: US Bureau of Census, 1992.* No. of units shipped and value of shipments reported are for all producers in the industry, not justfor those with shipments valued at greater than $100,000.** Represents combined figures for all vertical and uprights. Figures for 37” or less are not availableseparately.

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Exhibit 3Steinway’s Top Ten U. S. Markets (1994, 000s)

City Sales

(Wholesale)

New York City $6,007

Los Angles 2643

Baltimore/Washington D.C./Virginia 2250

Dallas 1642

Phoenix 1438

Boston 1144

San Francisco 1078

Salt Lake City 848

Minneapolis/St. Paul 793

Detroit 605Source: Steinway & Sons

Exhibit 4Historical Steinway Unit Sales (1965-1994)

YearUS

GrandsForeignGrands

TotalGrands Year

USGrands

ForeignGrands

TotalGrands

1994 1,720 978 2,698 1979 1,815 1,357 3,172

1993 1,631 887 2,518 1978 1,819 1,334 3,153

1992 1,344 917 2,261 1977 1,590 1,372 2,962

1991 1,550 1,438 2,988 1976 1,908 1,241 3,149

1990 2,117 1,459 3,576 1975 1,875 1,160 3,035

1989 2,096 1,385 3,481 1974 2,001 937 2,938

1988 2,144 1,283 3,427 1973 1,919 1,131 3,050

1987 2,144 1,237 3,381 1972 1,809 1,212 3,021

1986 1,763 1,369 3,132 1971 1,540 1,173 2,713

1985 1,337 1,291 2,628 1970 1,470 1,142 2,612

1984 1,876 1,340 3,216 1969 1,806 1,163 2,969

1983 2,036 1,263 3,299 1968 1,932 1,250 3,182

1982 1,677 1,141 2,818 1967 1,603 1,043 2,646

1981 2,041 1,394 3,435 1966 1,770 1,056 2,826

1980 1,897 1,349 3,246 1965 1,659 1,259 2,918Source: Steinway & Sons

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Exhibit 5Steinway & Sons -- Income Statement And Balance Sheet (000s)

1990 1991 1992 1993 1994

Income Statement Data

Net Sales $92,037 $98,816 $89,240 $89,714 $101,896

Gross Profit 33,673 35,586 30,759 26,139 31,636

Operating Income 10,096 9,124 4,556 1,919 8,795

Income (Loss) from Continuing Operations 3,077 2,753 (2,930) (3,009) 2,847 Net Income (Loss) (1) 3,618 2,825 (10,335) (3,009) 3,115 Ratio of Earnings to Fixed Charges (6) 2 2 1 (7) 2

Other DataEBITDA (2) $13,500 $13,535 $9,591 $6,067 $13,068Nonrecurring Charges (3) 1,861 2,319 2,532 2,047 1,658Interest Expenses, Net 3,448 3,186 3,307 4,390 3,842Depreciation and Amortization (4) 1,669 2,099 2,675 2,695 2,664Capital Expenditures (5) 2,451 1,889 1,936 1,237 1,145Steinway Grand Pianos Sold (in units) 3,558 3,282 2,648 2,245 2,569

MarginsGross Profit, % 37 36 44 29 31EBITDA, % 15 14 11 7 13

Balance Sheet DataCurrent Assets $68,306 $70,120 $73,300 $56,259 $58,760Total Assets 85,701 87,832 91,784 72,677 76,019Current Liabilities 30,327 32,078 45,602 31,896 32,969Long-term Debt 31,921 29,395 28,715 26,394 25,379Redeemable Equity 3,614 4,227 1,471 1,000 270Stockholders' Equity 9,066 10,606 3,690 767 4,935

(1) Net loss for the fiscal year ended June 30, 1992 includes loss from discontinued operations of $7405 as a result of Steinway'sSeptember 14, 1992 disposition of its Gemeinhardt Company, Inc. Subsidiary

(2) EBITDA represents earnings before tax expense (benefit), adjusted to exclude certain non-recurring charges and chargesrelated to previous ownership, which are not expected to recur. While EBITDA should not be construed as a substitute foroperating income or a better indicator of liquidity than cash flow from operating activities, which are determined inaccordance with generally accepted accounting principles, it is included herein to provide additional information with respectto the ability of the Company to meet its future debt service, capital expenditure and working capital requirements. EBITDA isnot necessarily a measure of the Company's ability to fund its cash needs. See the Consolidated Statement of Cash Flows ofSelmer and Steinway and the related notes thereto included in this Prospectus. EBITDA is included herein becausemanagement believes that certain investors find it to be useful tool for measuring the ability to service debt

(3) Non-recurring charges represent certain costs and expenses primarily consisting of certain executive compensation andbenefits and office related expenses of Steinway which, as a result of the Merger, are not expected to recur.

(4) Depreciation and amortization for the fiscal year ended June 30, 1994 excludes approximately $563 of amortization ofdeferred financing costs written off pursuant to a debt refinancing effected in April 1994 (see note 6 to Steinway's financialstatements).

(5) Capital expenditures of Steinway exclude expenditures for additions to the Concert and Artist Piano Bank.

(6) For purposes of this computation, fixed charges consist of interest expense and amortization of deferred financing costs and theestimated portion of rental expense attributable to interest. Earnings consist of income (loss) before taxes plus fixed charges

(7) Earnings were inadequate to cover fixed charges by $3,065 for the year ended June 30, 1993.

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Exhibit 6BALDWIN PIANO & ORGAN COMPANY (Figures in US$, 000s)This firm is the largest domestic manufacturer of keyboard musical instruments that manufactures or distributesall major product classes of pianos and electronic organs.

1995 1994 1993

Sales $122,634 $122,347 $120,658

Net Income 3960 345 4,561

Total Assets 101,429 97,460 89,928

Stockholders’ Equity 54,114 50,154 49,892Note: The company also manufactures grandfather clocks, wooden cabinets and printed circuit boards utilized in awide variety of products outside of the music industry. Musical products and other accounted for 72% of 1995revenues; electronic contracting, 23.2% and financing services, 4.7%.Source: Compact Disclosure Database, 1996.

Exhibit 7YAMAHA CORPORATION (Figures in US$, 000s)The firm products include pianos, electronic organs, digital musical instruments, wind instruments andpercussion instruments, and audio equipment.

1995 1994 1993

Sales $5,576,860 $4,348,744 $4,210,910

Net Income 61,665 -38,854 15,913

Total Assets 5,327,507 4,518,696 4,151,752

Stockholders’ Equity 1,702,343 1,424,758 1,353,630Audio and musical instruments accounted for 61% of fiscal 1995 revenues; electronic equipment and metal products,18%; household utensils, 12% and other including sports goods and housing equipment, 9%. The company has 58consolidated subsidiaries, 26 in Japan and 32 overseas. Overseas sales accounted for 30.5% of fiscal 1995 revenues.Source: World Scope Database, 1996

Exhibit 8Kawai Musical Instruments (Figures in US$, 000s)This second largest musical instruments firm in Japan is also an OEM supplier of pianos to the Boston PianoCo., wholly-owned subsidiary of Steinway Musical Properties.

1995 1994 1993

Sales $877,742 $881,114 $899,657

Net Income (2,733) (2,200) 1,180

Total Assets - - 530,666

Stockholders’ Equity - - 235,114

Pianos accounted for 25% of fiscal 1995 revenues; electronic equipment and metal products, 8%; other includingmusical instruments, 9%; metallic parts for electronic instruments, 13%; other products, 10%; and Music Schools,35%. Overseas sales accounted for 11% of fiscal 1995 revenues.Source: Japan Company Handbook.

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Exhibit 9Samick Corporation (Figures in US$, 000s)

1995 1994 1993

Sales$291,512 $243,287 $254,125

Net Income13,350 225 14,062

Total Assets477,887 474,387 414,575

Stockholders’ Equity31,037 26,737 25,000

Pianos accounted for 54.5% of fiscal 1995 revenues; guitars, 28.5%; amplifiers, 16.8%; and other, 0.2%.

Exhibit 10YOUNG CHANG (Figures in US$, 000s)This firm produces pianos, guitars, electronic organs and other musical instruments. The company has sixsubsidiaries, two each in the United States and China, and one each in Canada and Germany.

1995 1994* 1993

Sales $262,158 $258,489 $225,716

Net Income 965 8,209 3,368

Stockholders’ Equity 131,818 135,698 126,536

Total Assets 302,437 292,172 233,889* In 1994, export sales accounted for 37% of total revenues. Acoustic and digital Pianos for 80% of fiscal 1995revenues; synthesizers, 5.5%; guitars, 2%; and other, 12.5%.Source: World Scope Database, 1996.