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April 26, 2004

Keys to the Media Kingdom

Keys to the Media Kingdom

Not too many years ago, one of the major buzz hives spanning Silicon and Silicone Valleys emanated around a small company called InterTrust Technologies. InterTrust was said to have, in its vast patent portfolio, the keys to the kingdom when it came to the critical issue of controlling, securing and merchandising digital content across cyberspace. In time, InterTrust, which did an IPO and reached a market value of $6 billion came to be in sequence one of the shiniest and most tarnished poster children of the Tech Boom and Bust cycle.

InterTrust had literally invented, in depth, the concept of digital rights management or DRM. Long before Hollywood ever imagined it would be worrying about networks like Kazaa, Victor Shear, the inventor-founder of InterTrust, was burning the midnight oil anticipating what might happen in a world equipped with an ubiquitous digital distribution system (that came to be known as the Internet) and digital technologies that would make massive reproduction of published media, music and movies as easy as clicking a mouse.

The first patent applications were filed back in the late 80's, a tad before other entrepreneurs like Peter Sprague, the founder of Wave Technologies, also began to pursue the issue. But whereas Sprague concentrated on a hardware solution and the security side --his background was National Semiconductor-- after all, Shear and colleagues pursued another vision that inevitably led them to envision a hybrid network in which servers and clients and other clients and other servers all became critical nodes in the wholesale and retail distribution chain and consumers in the digital world might begin to behave more or less like consumers in the molecular world always had.

In that world, consumers might rent, borrow, buy, trade or just carry with them the things they paid for and assumed they had rights to. Traditional copyright law and customs regarding plagiarizing were the controlling factors and different communities worked about different usages for the various stakeholders, such as the hallowed concept of "fair rights" in the US.

InterTrust would go on to painstakingly patent, from a number of angles, the concept that different devices, in a peer to peer or server based environment would, for any real efficiency, need to handle and negotiate rights on an automated basis. In other words, as the owner of a piece of music, you wouldn't have to ask anyone permission to bring it into your car and play it there or even trade it with a friend for another piece. Fluid rights, embedded in various places within the network would be checked, updated and negotiated machine to machine.

InterTrust, the company founded by Shear, and the holder of the patent portfolio, quite naturally engaged in serious conversations with all the great players in the media and technology world and many of them were ready to pay it close attention. But there were also many problems involved in the implementation of a network to support trusted digital commerce as proposed by InterTrust. For one thing, on the business side, there was the concept of a toll or tax that would have to be paid by everyone to InterTrust each time a commercial event took place on the system. Most companies, and unfortunately, all too successfully, resist paying the Feds a tax and certainly the idea of cutting one company into their take was perceived by the moguls, the way they might perceive a virus designed to feast on their very DNA.

The technical problems were just as daunting, if not greater by several magnitudes. In a network and operating system world as riddled as the state of Nebraska with swinging barn doors, only wide open gaps of a technical nature, how in the world was InterTrust going to succeed in its quest to build a truly trusted system?.....trusted like the dial tone, as the folks from Santa Clara were wont to say.

So in the end, while there were many who listened and more than a few, like Nokia, Bertelsmann and Price-Waterhouse-Cooper that dabbled, only one company really, truly paid attention and that was Microsoft. It is also widely said that InterTrust and Microsoft came within a hair of closing a deal that would have greatly enriched the major stockholders of the company. That deal, much to the chagrin of the negotiators and knowledgable stakeholders, fell through and Microsoft went home to begin seriously architecting their .Net Framework to match what they might have learned during the due diligence phase of the negotiations.

They knew that technology adoption occurs over a gradual path and that the courts represent a very slow avenue when it comes to patent infringements and, further, from experience, that litigation can be extremely expensive and daunting business strategy for any company to follow, especially when it's against Microsoft. And so, a fair interpretation might be, that they just plain left InterTrust out to hang and dry.

And turn to near dust it did. The world was nowhere near ready for DRM and the major media companies knew they were better off waiting for the technology wars to show winners and losers before placing their bets. And so the InterTrust braintrust, with no real way to generate cash flow and who had placed all their bets on the notion that the great media companies would actively resist letting Microsoft into their business, were forced to eat their own dog food.

By the time the tailspin had taken its own toll, InterTrust, its stock now trading for a hundredth of its peak price, had got rid of its original people and shrunk itself to a core group of patent sitters. Eventually, the company was picked up in a bargain by a company primarily owned by Sony and Philips and brought private, leaving most stock and option holders high and dry.

This brings us to a little over a week ago when InterTrust and Microsoft announced that the patent suit had been settled and that Microsoft would pay InterTrust $440 million dollars for unlimited rights to its patents.

Even though the deal went nearly unnoticed by even the most knowledgeable media outlets, this was, without any exaggeration a cyberspace-shattering deal for the media world and the first repercussions came almost immediately as Real Media and Apple announced their own plans to work more closely together.

The deal, in sum, probably does more to open up a major source of new revenues for Microsoft than anything the company has been able to accomplish in the last 10 years and may rank in importance with Ms's browser and media player coups.

Posted by dymaxion at 11:38 AM

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January 12, 2004

Bad Times at Microsoft High


Silicon Valley Part 2

Carly Fiorina made news twice last week.  First, while announcing at a press conference that she and Craig Barrett of Intel were heading a delegation of Silicon Valley executives to Washington DC to lobby Congress for $30 billion in subsidies and --quite surprisingly and to the chagrin of a lot of their struggling Silicon Valley neighbors-- to urge Congress not to move to put barriers up against the export of decent-wage IT and R&D jobs to India and the rest of Asia.

At almost the same time, HP, Carly's company, was announcing a deal with Apple in which HP would private label the Apple Ipod, the popular digital music hard disc storage and player device. This was a departure from HP's usual way of doing business in two significant ways: first, it broke a company taboo around OEMing products manufactured by other companies and more significantly, it signaled a break from Microsoft unquestioned domination at a major MS computer manufacturer. As part of the deal, HP will also bundle software on new computers that will allow PC purchasers to easily sign up for the complementary Apple iTunes service.

There was a time not too long ago when no MS partner, major or minor, would have dared take a step away from the Redmond giant. At the same Consumer Electronics show in Las Vegas, where the Apple HP announcement was made, to underline the importance to MS of the digital music delivery industry, Bill Gates had earlier given the keynote address in which he expounded on MS's vision for the PC as central for the "intelligent home". Key to that vision, not without coincidence, is the wireless home entertainment center, which Microsoft has tried to claim outright , in part, through the forced use of its own proprietary digital music format, WMA.  The music industry generally supports the competing and technically superior AAC format, which just happens to be the format for songs sold on Apple's iTunes Service. Microsoft provides a free software based media player with Windows and that player plays WMA and not AAC. 

iTunes is the first successful bid to sell songs through a download service and comes years after a number of companies tried and failed. It was the coupling of the iPod and iTunes service that sealed the deal for Apple with its customer base, so to speak, but it was also a matter of timing.  The music industry has taken major heat from its own best consumers for its heavy handed approach to digital music sharing services that offered no copyright protection and in its eyes the outlook for negative revenue streams if something didn't happen quick.

Microsoft, through its .Net strategy and its DRM (digital rights management) capabilities that are integrated into the WMA format has been quietly positioning itself to become the sole intermediary between the entertainment (music and movie) industry and its customers thereby isolating the music companies from their customers much like it had done with computer applications companies like Netscape and Lotus.

Having seen how Microsoft had consistently crushed or at minimum subjugated nearly every industry it worked closely with, the major entertainment companies have resisted crawling into bed with Redmond.

A further bit of bad news for MS on the same front also came last week as IBM announced it was partnering with Real Networks, Microsoft's major desktop music player competitor.

Microsoft, of course, totally dominates the worldwide desktop application and operating system market for home and office PC's and has made a credible entry into the server marketplace.  This business should continue to grow incrementally as larger and larger portions of the second and third world adopt the PC as a fundamental business and home tool. 

But Microsoft's voracious appetite for revenues and business domination needs more than simple incremental growth and the prospect the entertainment industry offered with the promise of MS getting a piece of each transaction processed through its operating system and back end tools became the overweening goal that Redmond set for itself over three years ago when it laid out plans for .Net.

Of course, Microsoft's other great battle lies against Linux, an open source (freely licensed) competing Unix-based operating service that depends on the worldwide collaboration of programmers seeking to end Microsoft's domination.  In this area MS also suffered a further blow last week.  IBM, which has for a time now lent its full and highly credible support to Linux, first as an Intel-based Unix server solution competing directly with MS for domination in that area, announced that it would begin to convert its own internal corporate-wide desktop services and applications over to Linux as well, with a goal of being fully Linux-based on the desktop within two years.  The company later backed off of that quite unrealistic goal. Nonetheless, the significance for MS is enormous.

As we noted, MS's major growth --particularly if they can't make it in show business-- must happen in countries like China and India where significant portions of their enormous populations are rather rapidly moving into an electronic reality that includes PC's and vast wireless networks. Should those countries decide to standardize on a feasible Linux desktop (something that doesn't exist today) the cost to future MS profit growth would be catastrophic. The stakes are great and Microsoft sits on an enormous cash war chest that dwarfs any other company's in the world.  The question is whether that money being spread around by a company fighting for its life will overcome what could make enormous economic sense not only to developing countries building new businesses but to the major global interests that would like to see MS's ham handed strangle hold brought to bay.

We don't pretend to know that much about the future but we do have to think that investors betting that Microsoft will own home entertainment or even increase its dividend by distributing some of its cash reserves had better get another strategy.


Copyright 2003 Richard Mendel-Black All Rights Reserved

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Posted by dymaxion at 06:20 PM

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