When the manufacturing cost of compact discs started to drop in 1986, and manufacturing capacity became more easily available, Klaus Heymann saw an opportunity for a budget-priced CD label. Music lovers in Asia, outside of Japan, had always been used to relatively cheap LP's and cassettes which typically sold for about one third of the prices prevailing in Western Europe and the United States. However, when the CD started to take off in the rest of the world, sales stagnated in South-East Asia as CD's were selling at regular, international price levels, about three or four times the price of an LP or cassette.
Heymann's original aim was to offer his customers in South-East Asia classical CD's at the same price as LP's and when he released the first five Naxos CD's in 1987 they retailed in Hong Kong at about US$6.25 (at today's exchange rate) whereas other CD's were retailing at US$15-20.
In the beginning, Pacific Music had licensed thirty titles from a German company which had produced them, in co-operation with Opus in Bratislava in 1984, but had been unable to release them on CD due to lack of capacity and the high cost of manufacturing the CD's.
The first releases were an immediate success and Klaus Heymann's telephone started ringing with people calling from all over the world trying to find out how they could get these fantastically cheap CD's. Originally, Pacific Music had acquired the rights to these thirty master recordings only for South-East Asia but subsequently licensed them for the rest of the world as well.
However, only a few months later it turned out that the German company from which Pacific Music had obtained the rights had licensed the same recordings to many other companies in Europe and the European sales of Naxos dropped overnight. In the meantime, Klaus Heymann had recognised the enormous potential of a quality classical budget CD and, instead of giving up and withdrawing from the business, he decided to start a proper classical label, with a well-planned catalogue so as to become independent from licensed material.
Being a small, independent record label at the time, Naxos could not afford to record standard repertoire with internationally famous artists and orchestras. It was therefore decided to build the Naxos catalogue entirely with young or unknown artists and orchestras which had had no proper exposure in the world market. Because a production machinery was in place in Bratislava and Budapest, it was decided to start recording in these two places. This is why all early Naxos recordings came from Slovakia and Hungary. The first priority was to replace the licensed titles and then to build up the basic standard repertoire.
It was envisaged that the Naxos catalogue would comprise no more than fifty releases. Klaus Heymann was concerned that the major record companies operating in the classical-music field would soon enter the market and force Naxos out of business. However, it turned out that the majors misjudged the market and did not compete with Naxos in its budget price range until much later.