Timely article from New York Times on Intertrust and SDMI
www10.nytimes.com
December 6, 1999
Enforcer for the Electronic Marketplace
By SARA ROBINSON
he market for selling merchandise over the Internet -- everything from books and CDs to groceries and Pokemon toys -- is already well established as "e-tailers" head into what is expected to be a pivotal holiday season.
But many analysts expect that 2000 will see huge growth in another kind of electronic commerce -- all-digital products like documents, recorded music and videos that exist only as computer files and are delivered directly from a Web site to the consumer's hard drive.
Thor Swift for The New York Times
Victor Shear, InterTrust chief executive, says the company's patents will enable it to dominate what could be a very competitive market.
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J.P. Morgan Securities, for one, predicts that the market for digital content will reach $275 billion by 2003.
One company well positioned to capitalize on that market is InterTrust Technologies Corp. of Santa Clara, Calif., whose initial public offering in October was one of the year's hot Internet issues. The company specializes in technology that protects the copyrights of digital content by preventing illegal copying. It also tracks the material's distribution and manages the finances involved in buying and selling it.
Although InterTrust's products are still in the testing phase, the company already has deals with media heavyweights like the largest record company, Seagram's Universal Music Group, and the storage media division of Bertelsmann AG, which manufactures CDs. Both have agreed to use InterTrust software to protect various kinds of digital material from being illegally copied.
And its deals with content providers have led to complementary agreements with companies like MusicMatch, Diamond Multimedia and Creative Labs that sell technology for playing music on computerized devices.
Initially, much of the demand for InterTrust's products has been driven by the recording industry, whose urgent concerns about music piracy on the Internet led to the formation early this year of the Secure Digital Music Initiative. SDMI aims to produce universal standards for preventing the pirating of digital music, and it says it will not endorse any single proprietary technology. Even so, InterTrust is an active member of SDMI, and its technology is widely expected to play a leading role in the music industry.
Still, InterTrust faces stiff competition. The company's activities in the digital music market, for example, put it on a collision course with other popular music-management technologies, including Liquid Audio, and with Microsoft's Windows Media Audio compression format.
In the document-publishing market, InterTrust will be bumping up against giants like Xerox, which has introduced a digital-rights management system based on Java, and Hewlett-Packard, which plans its own document-management effort. And several niche companies have developed their own protection schemes.
But Victor Shear, InterTrust's chief executive, predicts that his company's broad array of patents, coupled with its focus solely on digital-rights management, will enable it to take on all comers.
"It is an area that requires a huge amount of single-minded focus," Shear said. "Having it as a side project or add-ons or dependent on other agendas will not allow for an efficient system."
Moreover, InterTrust derives power from its partnerships, as indicated by the contracts with Bertelsmann and Universal. Each company has promised to designate InterTrust's products as its preferred digital-rights management technology and to promote its adoption by other companies.
Those deals "put it in position to dominate the digital distribution space for the major labels," Aram Sinnreich, an analyst at Jupiter Communications, said.
Such prospects might seem unusual, given that InterTrust's products have yet to be tested in the marketplace. But InterTrust's partners say its technology is particularly attractive.
"What InterTrust does is facilitate business models we find very advantageous as a content company," said Larry Kenswil, president of global commerce and advanced technology at Universal. "What we've liked about them from the beginning is that they thought long and hard about how people do business."
Johann Butting, chief executive of Bertelsman's unit for digital rights management, praised InterTrust technology for working across all the company's media products. "We will go to great lengths to have as few platforms as possible," he said, "and will try to get our clients to use InterTrust. For a big media company, it doesn't make sense to go with systems that work with just one vertical market."
Bertelsmann is also one of the world's leading publishers of books and magazines, and its record label, BMG, is second only to Universal in market share. The BMG division has not yet signed a deal with InterTrust, but analysts and industry executives say a deal may be imminent, given Intertrust's relationship with Bertelsmann.
On the manufacturing side, InterTrust recently signed a deal with Cirrus Logic to build security directly into chips for portable music players, cell phones, hand-held devices and home stereos.
InterTrust's digital commerce system, known as the MetaTrust Utility, packages content with rules governing its usage in encrypted files known as DigiBoxes, which can be downloaded from Web sites or passed among friends. To open a DigiBox file, a user must install InterTrust's InterRights Point Software, to be distributed by content companies.
The user's credit card information is locked into the software, and payments, specified by the usage rules of the DigiBox, are automatically deducted.
Managing payments and tracking usage falls to third-party clearinghouse companies. NatWest, Mitsubishi and Reciprocal are among the companies that have signed on as clearinghouses.
One of InterTrust's major challenges will be to maintain the security of its system. InterTrust executives acknowledge that like any such system, their security is not perfect. But they expect it to be robust enough to deter most attempts by hackers to break the code.
Currently, InterTrust earns revenue only from licensing fees. But in the future, the company expects that its main revenue will come from a fee ranging from 0.6 percent to 2 percent for each transaction using InterTrust technology.
InterTrust shares closed at $149.6875 on Friday, more than eight times its initial offering price of $18 in October.
In the quarter that ended Sept. 30 the company had revenue of just $363,000 and an operating loss of 25 cents a share. J.P. Morgan, which lists the stock as a "buy," expects Intertrust's total revenue for 1999 to be $1.4 million and that it will become profitable in late 2001.
One potential hazard is growing concern about online abuses of consumer privacy. InterTrust's technology enables publishers to collect usage data on protected content. While InterTrust does not collect this data directly, it does collect fees each time one of its partners sells demographic information.
"If they want to collect information for sale, our only requirement is that they say what they're doing," David Van Wie, InterTrust's chairman, said.
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