Business Week On TTRE
INSIDE WALL STREET ONLINE
By Gene Marcial
TTR's Antipiracy Technology Could Be Music to the Labels' Ears
This Israel company has an intriguing way of preventing digital audio from being copied onto optical media or into the popular MP3 format
Gene Marcial is Business Week's Inside Wall Street columnist
TTR Technologies, a little-known company whose stock trades on the Nasdaq but is headquartered in Israel, expects to be a major beneficiary of piracy. Far from being a bootlegger, TTR ( TTRE ) has developed antipiracy technologies -- digital solutions that prevent illegal copying of audio content onto optical media, such as CD-ROMs or digital video disks (DVDs). The need for such technology is urgent: In the music industry alone, some analysts estimate that piracy cost some $5 billion in 1998.
Ashish R. Thadhani, an analyst at New York investment firm Brean Murray, notes that content piracy has been exacerbated by two recent developments: The increasing use of MP3 compression technology to transmit illegal recordings via the Internet and the sharp drop in the price of CD recording equipment, called CD burners, which are now commmonly bundled with desktop PCs or can be purchased separately for around $180.
"To our knowledge, there's no technology currently available that provides copy protection for audio CDs other than TTR's," says Thadhani. So the music industry, dominated by such major recording labels as Universal, Sony, EMI, Warner, and Bertelsman Music Group, has been desperate to find a solution to the problem.
A SING ALONG? One big investor close to TTR says at least one of these big studios is poised to sign a licensing agreement with the Israeli company to integrate its antipiracy technology into its music CDs and audio products. Thadhani believes that adoption of TTR's technology by any one of these major companies could prompt the others to follow suit, since recording artists will tend to favor a label that protects their royalty fees.
So what is TTR's solution? Its chief product, called MusicGuard, inhibits illegal replication of CDs without affecting music quality, and it doesn't require any changes in the recording studio. The basic patented technology is embedded on the glass master in CD production facilities. Simple modifications to an encoder, explains Thadhani, allow insertion of subtle distortions across CD tracks that render copies unusable.
So attempts to duplicate a MusicGuard-protected CD either abort or produce unacceptable audio quality, says Thadhani. Any attempt to produce MP3 files from protected CDs also fail, he adds. Another plus, he says, is that the TTR technology isn't vulnerable to attacks by hackers, unlike software-based techniques that seek to protect music.
"HIGHLY INTERESTED." TTR has successfully completed field trials of the product in 850 households in Britain, according to Emanuel Kronitz, the company's chief operating officer. "The major recording studios are highly interested in our technology," says Kronitz. The recording company that is said to be ready to ink a licensing agreement with TTR has been monitoring these tests.
In another sign that TTR could be the real thing, Macrovision ( MVSN ), the world leader in marketing copy-protection and rights-management technolgies, has acquired an 11% stake in TTR. In a pact signed last year with TTR, Macrovision agreed to jointly develop and market copy-protection products that will prevent duplication of audio content on CDs, DVDs, and other optical media. TTR also granted Macrovision a 10-year licensing pact to use TTR's proprietary technology in exchange for royalty fees.
Macrovision is a giant compared with TTR. The former has a market capitalization of $2.4 billion, with its stock now trading at 60 a share. It posted sales of $37.3 million last year and earned $7.2 million, or 19 cents a share. TTR, on the other hand, trades at 6 1/2 a share and has a market value of just $103 million. It has yet to make a penny.
EARNINGS NEXT YEAR. Analyst Steve Loewengart of BlueStone Capital, who rates TTR a buy, has a price target for the stock of 12 1/2 for the intermediate term, and 16 for the long-term. "We base our rating on the superior perfornmance characteristics of MusiGuard, the competitive significance of TTR's marketing alliance with Macrovision, and TTR's royalty-based business model and low operating-cost structure," says Loewengart.
The analyst figures TTR will start making money next year, with estimated earnings of about $4.4 million, or 25 cents a share, on revenues of $12.2 million. The following year will produce much bigger numbers, he says. He sees TTR earning $29.5 million, or $1.53 a share, on revenues of $39 million. If the antipiracy business lives up to its potential, TTR has a chance of duplicating that growth for years to come.
Marcial is Business Week's Inside Wall Street columnist |
