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INNOVATION: Dynamic Duo Create Expanding Line of Portable Audio Products

DIGITAL GROUP AUDIO INC.

President: Erik Groset.

Product sales: About $2 million since the first product, Livespeakr, was launched in 2009.

No. of local employees: 10.

Investors: Undisclosed angel investors have contributed nearly $1 million.

Headquarters: Carlsbad.

Year founded: 2007.

What makes the company innovative: Digital Group Audio seeks to mesh fashion with function in their portable audio products.

Key factors for success: The popularity of the iPhone and iPod help propel sales of audio accessories.

Self-proclaimed gadget geek Erik Groset fell in love the moment he set eyes on his brand new iPhone in 2007. Luckily for Groset, his love wasn’t blind — he immediately noticed a flaw.

“Erik called me and said this product is going to be huge,” said Rob DeFay, a former professional poker player who had been friends with Groset ever since they attended middle school together in Poway. “But he said the speakers were terrible. We were right at the point in our lives where we were looking to get into a business, and we saw an opportunity.”

With financial backing from angel investors, the duo quickly formed their Carlsbad business, Digital Group Audio Inc., and began working on sketches for ultra-portable speakers with a cradle that rotates to accommodate an iPhone in both portrait and landscape modes. They called their product Livespeakr.

By 2008 they were visiting factories in China to iron out a manufacturing agreement. “We didn’t want to get into business with anyone we hadn’t met and checked out,” Groset said. “It was really important to find someplace that has good quality control and people we can trust.”

Thanks in large part to Amazon.com featuring Livespeakr as a suggested holiday gift on the “Black Friday” after Thanksgiving in 2009, the company sold a total 25,000 units, bringing in about $1 million in sales through 2010.

“Livespeakr was received very well online and built a very dedicated fan base,” said Groset, president of Digital Group Audio, noting that specialty retailers like Urban Outfitters also sold the mini speakers in its stores. But the product, priced at $69.99, could have been even more successful if it had been picked up by a major retailer, such as Best Buy or Target, he said.

Reason to Diversify“We learned that it’s hard to be taken seriously by the big guys when you only have one product,” Groset said. “They don’t want a one-trick pony. They want to know you’ll have other products to fill their shelves.”

Big retail chains must be very selective because they incur overhead costs and take on other risks whenever they take on a new supplier, noted consumer technology expert Phil Baker, principal of Solana Beach-based Techsperts Inc. Also, for companies like Digital Group Audio, there’s a much greater return on time-consuming sales efforts with big retailers when there’s a larger line of products to potentially get on the shelves, he said.

These market realities inspired Groset and Vice President DeFay in 2009 to brainstorm additional portable audio products — an effort that led to their unusual-looking earphones called Zipbuds.

“We see it as a fashionable way to solve the tangled cables problem,” DeFay said. The earphone cables are embedded on zippers that come in an array of colors.

Zipbuds, commercially launched in November 2010, are sold online and in retail stores in Scandinavia and Japan, Groset said. Priced at just under $40, they’ve so far brought in roughly $1 million in sales, he said. With the holiday shopping season just ahead, and with positive buzz already from The Wall Street Journal’s gadget blog, Digital expects increased sales.

“Accessories are a huge, huge business,” said Baker, who has been involved in all facets of tech product development during the past 35 years. “But at the same time, it’s a very tough environment. Most companies fail on the distribution end.”

Digital Group Audio’s 27-year-old founders are optimistic about reaching major distribution agreements in the next six months. In the meantime, they’re updating the Livespeakr and developing “three to five new products” that they’ll unleash in January at the 2012 International Consumer Electronics Show in Las Vegas.

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