SOUND INVESTMENT\Business honing in on own piece of audio market.

Byline: Yardena Arar Daily News Staff Writer

As a recording engineer for the Beach Boys and other bands, Stephen Desper experimented with all sorts of sound technology. Now he's hoping to cash in on some good vibrations he developed on his own.

Desper's patented Spatializer process takes conventional analog or stereo recordings and creates the illusion of multi-channel sound - the kind generated by Dolby Pro Logic, for example - using only two conventional speakers.

Introduced to the professional recording industry a few years ago, Spatializer was used for Michael Jackson's "HIStory" and the Eagles' "Hell Freezes Over" CDs, the Grammy and Tony award telecasts, and the films "The Lion King" and "Crimson Tide." Now the technology is poised to enter the consumer arena with a variety of audio products, from computers, sound cards and multimedia games to VCRs, speakers and stereos.

Most of these are produced by third-party licensees - about 20 so far, including such familiar names as Matsushita, Compaq, Sharp, Labtec and Samsung. "Stonekeep," an Interplay game featuring Spatializer sound, was recently released to strong reviews, and a Panasonic boom box featuring Spatializer is already a best seller in Japan.

But Spatializer Audio Laboratories Inc. of Woodland Hills has just launched its own line of consumer products starting with a $250 processor positioned as a budget alternative to expensive home-theater audio setups.

Spatializer has yet to show a profit as it emerges from its development phase. The company's most recent financial statement, in November, reported losses of $849,822 or 8 cents per share, a slight improvement over the 10 cent per share loss reported a year earlier.

But despite intense competition from privately held SRS Sound Inc. of Santa Ana, QSound Labs Inc. of Calgary and several other companies, these are heady times for Desper and Spatializer chairman Steven Gershick, a former entertainment business manager who was introduced to Desper by Beach Boy Carl Wilson.

"He said, 'He's (Desper) got something for you to listen to,' " Gershick recalled, seated in Spatializer's corporate headquarters on Ventura Boulevard.

That was more than 10 years ago, when Desper was looking for financing for a process he had filed to patent in October 1982. Desper's career focus had previously shifted from rock recording to acoustical design, and he developed Spatializer using the knowledge he gained studying psychoacoustics, the science of human sound perception.

3-D sound technology in general is based on the principle that the ear can be fooled by the use of certain audio cues. Sound emanating from a pair of speakers seem enveloping, as though it were coming from other locations. The effect is usually best appreciated in a so-called "sweet spot" equidistant from the speakers.

Spatializer is a single-ended process, meaning that it can be incorporated into either hardware or software. If used in recording, it does not require special playback equipment, but Spatializer-equipped hardware can enhance the sound of conventional recordings. Desper's patent, which was granted in May, also includes a Double Detect feature that prevents Spatializer playback equipment from modifying an already-Spatialized recording.

It took a decade of convincing people that a market existed for it, but in July 1992 Spatializer had its IPO on the Vancouver Stock Exchange. It took three years to migrate south of the border, but in August the company began trading on NASDAQ, where it has fluctuated between about $3 and $6 a share. On Friday, Spatializer closed at $4.50, down 1/8.

"I've never gotten involved in something so big before," said Desper, a Tujunga resident who was interviewed by phone at Spatializer's research facility in Natick, Mass. The company's 28 employees are scattered between the Woodland Hills and Natick sites and smaller offices in Mountain View and Tokyo.

Gershick and Desper said Spatializer's strategy has been to establish a reputation with the professional recording community with its PRO Spatializer technology and then expand into the consumer marketplace with its companion Spatializer 3D process.

"Usually with these kind of technologies, whether it's compression or graphic equalizers or even stereo itself, any major improvement is a trickle-up process," Desper said.

"It starts in the professional aspect and finds its way into consumerland after the public has been educated and develops an ear to hear. Stereo started in motion pictures and went into records." Observers say Spatializer does have a definite edge in the recording arena.

"Spatializer excels pretty strongly in terms of degree of control it offers the professional," said Brent Hurtig, a contributing editor to NewMedia magazine and a frequent reviewer of audio and recording technology products.

But Stephen V. Sedmak, president of SRS Labs - which with 50 licensees including Sony, Kenwood, Pioneer and Packard Bell is moving aggressively ahead in the consumer field - pointed out that Spatializer has yet to make money on recording revenues.

"That's not a profitable business," said Sedmak, touting SRS for having been developed for the consumer audio market as opposed to Spatializer's recording industry roots.

Will Strauss, president of the Phoenix-based multimedia consulting firm Forward Concepts, agrees that the consumer market is where the money is for 3D sound technology.

"Everybody likes to tout that they've got 3-D audio added to their sound card," Strauss said. "It adds glitz to the marketing message."

Spatializer's Gershick doesn't disagree. But he points out that with 92 products incorporating Spatializer technology expected to be in stores by the end of the year (some from companies that also have agreements with Spatializer competitors), the company is fully prepared to compete in the consumer marketplace.

From the consumer's perspective, Hurtig said, none of the currently available 3-D sound technologies is markedly superior to the others.

In fact, QSound and Spatializer are locked in patent dispute over their technologies.

"With almost any of these processes it's a kind of hit-or-miss proposition which depends on two things - where you're sitting in relation to the speakers and the type of material you're listening to," Hurtig said.

Tom Brown of Ablum, Brown & Co., the Newport Beach investment banking company that works with Spatializer, said he believes the company could begin showing a profit by the second quarter of calendar 1996.

But Gershick just hopes that the Spatializer logo will become as familiar as, say, the Dolby double-D."I hope that in 1997, you won't be able to buy a product without it," he said.

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Photo (Color) Steve Gerslick, chairman of Spatializer Audio Laboratories Inc. of Woodland Hills, thinks the company's move into products for the home will pay off. David Crane/Daily News Chart SPATIALIZER SHARES Daily News