TO ALL NEWBIES. Here is a terrific report put together by KeefBones. If you want to know about Wave, this is a good place to start. Thanks Keef
Snackman
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Wave Systems
PART I
Several big problems with e-commerce as it exists now:
* metering and collection of ecommerce
* Piracy of digitized product
* Mistrust on the part of consumers who don't want to give out their credit card numbers
>From Wave's web site
For any commerce to be successful, there needs to be trust between the
consumer and the manufacturer (content provider)...it needs to flow both ways.
Security and privacy continue to be primary inhibitors to the growth of the global digital economy. Consumers and businesses need to trust that their transactions are secure and private, and vendors must be assured that their content and services are protected and available only if paid for by authorized transactions.
Understanding these current limitations, Wave Systems and VerSecure, a
Hewlett-Packard Company, have created a new technology that brings trust and security to individual PCs in an embedded trusted client system.
Embassy
Only hardware encryption provides maximum protection to the end user. This is what Wave Systems embassy brings to the table, with a patented
hardware/software solution and 128 bit encryption. Embassy is a client side solution, so ecommerce transactions can take place without being connected to the web.
Content is stored on the local machine (PC, STB, etc) and then the user decides based on the terms of purchase or rental whether they want the content. Content can, of course, still be purchased on-line.
The unique feature of Embassy is its ability to meter content. This makes it so you can use content (independently from the net) for as much or as little as you want. You may want to use AutoCad for 2 hours, and not feel that shelling out $5000 is really what you had in mind. With the Wavemeter/Embassy you could use a WaveEnabled version of Autocad for just 2 hours and pay for just that. This whole transaction occurs at your machine and is net independent (cybercash etc require net tethering, etc.) This opens up new markets and methods for content distribution and slams the door on piracy. Data, video, graphic software… anything that can be digitally transmitted. Wave stores your information where it cannot be hacked.
End to End encryption with smart card keys allows B-B ecommerce with digital signatures and limited accessing across virtual private networks.
Content security
Wave's approach to content security is to ‘broadcast' the content in an encrypted format containing price and licensing information and use the trusted client to decrypt and purchase. Using this methodology, content can be sent over any kind of network including traditional broadcast, digital broadcast, Internet, or CD/DVD delivery. Since the content is protected, any distribution method can be used for the transport, disassociating the pipe from the content — without loss of revenue.
Content Protection is Persistent
Digital content in a wave-enabled .SMO stays encrypted. It is decrypted by the Embassy chip each time it is used, and only if the right to decrypt it has been paid for. This model permits "super-distribution" i.e. you can send the content to who ever you please for free, but they have to use their own Embassy to open it. There is no practical way around this protection in the digital domain. Of course, if you have the right equipment, you can make a
new digital copy of analog audio or video playback. The only way to prevent this is to put the decoder in the speakers or the monitor, but few people will be interested in such elaborate forms of theft, especially if content is appropriately priced. Similarly, you can print out text and then make a new digital image of it as an Acrobat file, but few would bother.
Other Security
A secure boot… without verifying user's identity, the device cannot be
started. This is one reason why PC-Free is using Wave's money chip in its "free PC's." If the customer doesn't pay, the machine can be made
inoperable, which is impossible with a software-based system.
Another benefit of this is in laptops. Laptops are notorious targets for thieves for obvious reasons. The loss/theft of information on laptops is a major concern of major corporations. With EMBASSY, the machine would be completely useless without verifying identity. It could not be started and none of the potential confidential information therein could be compromised.
Hacking
The significant data (and cash) is stored on the client side, not the server side. One or 2 credit card numbers on the client side vs. hundreds/thousands contained in a server. It is not worth the effort to hack the client side.
Wave is a hardware (not software) solution. The encryption is triple DES - better than SSL. The encryption key is built in to the hardware. It's also triple DES. The record for a triple DES hack is around 40 hours… not worth the effort for one credit card number.
PART II
ECONOMIC IMPLICATIONS
Reducing Costs to consumers
It costs virtually nothing to duplicate, transport and distribute over the Internet to the consumer. Since digitized products are magnitudes cheaper to make and transport...costs will come way down. And that savings can either be added to the content provider's profits...or shared with WAVX and its partners...or shared with the
consumer...making the price of the digital product actually cheaper to the consumer.
In addition to lower fixed costs, the merchandising ability is also
significantly enhanced with pay-per use and rental features. Wave offers greater copyright protection, instant delivery, and has had little trouble signing on major content deals. Conventional selling over the web still involves costs for FedEx or UPS. Wave is the low cost, fast, secure way to buy and distribute digital content.
Example 1
Hard products (software, videotapes, cd's, DVD, movies) vs. digitized
products (these same products turned into digital information).
With conventional manufacturing, duplicating the music onto millions of cds adds cost. With conventional distribution, transporting them to retail outlets adds cost. With conventional retailing, 20% to 50% of the retail price goes to the retailer.
Digitized information costs nothing to manufacture, transport and distribute over the Internet.
A consumer wants a movie. The movie is first digitized. It then costs
nothing to duplicate, transport and distribute over the Internet to the consumer.
The end results are lower production, transportation, distribution and
wholesaling costs.
Example 2
Using WAVX's technology, a $40 game would cost the consumer $40 (to buy or to rent to own)...or it could cost him less. The consumer won't have to go to the store to buy the game, he won't have to buy it through a catalog or through the Internet. He won't have to wait for delivery and he won't have to pay shipping and handling.
He can buy it instantaneously from the comfort of his own home. And if he wasn't sure he'd really like the game...he could decide to try it once for, say $.50. And if he wanted, he could keep on trying it for $.50... until he's spent $40.00, at which point he'd own the game.
If DOOM costs $40.00 retail, then the company that makes DOOM does NOT get $40. A large chunk of that $40 goes to CompUSA, who is selling that copy of DOOM in its store.
The cut of WAVX and its partners will replace CompUSA's cut...because
CompUSA isn't part of the digital transaction. The cut of WAVX and its
partners probably won't be bigger than CompUSA's cut...it could easily be smaller…thus reducing the cost to the consumer.
Distribution and who makes money
Wave offers a complete digital distribution service: content security,
multiple marketing venues (CDs, Broadband, etc…these marketing venues are not available without the content security), payment services, content metering, secure identity, privacy, parental control etc.
As has been clearly indicated by the company, the Wave split is ideally set at 25%.
WAVX's technology and its partners will be replacing the retail middlemen. We have lower fixed cost than other sales channels, and the cut for WAVX and its partners will be replacing the large cut of today's retail, hard goods, middlemen...it won't be added in addition... Wavx's technology is replacing the existing retail cut.
If distribution suddenly goes broadband there are going to be new winners and new losers. Instead of truck drivers, warehouses, superstores, security guards, bar code readers (and Visa) etc. all getting a cut of the revenue pie it is going to be satellite companies, OEMS and digital security service providers and payment system providers getting a cut of the pie.
Middlemen who add no value are being cut out. Economies in packaging,
distribution, rights management, record control, and piracy-prevention
capture savings that translate directly to the bottom line. Even with Wave and the platform and the crypto partners taking an aggregate of some 44% (25 points of which is Wave's), the content provider nets more than under the status quo. (And, for Visa, if the buyer's Wave Account is capitalized through Visa, they get their little vig, too.)
Winners: Wave, consumer, content provider, oems Losers: Retailers, Delivery Systems, Middlemen
The old rules for distributing books, magazines, music, games and video will apply less and less over the next few years. The reason is simple and the case is compelling: economics. Publication, distribution, storage, and physical sale of these items is expensive and slows down time to market.
No need for boxes, shipping or returns -- great for mfg -- And don't forget billing and receivables.
PART III
THE BIG PICTURE
Disruptive Technology
One of George Gilder's core ideas is that networks will become "dumb," with intelligence moving to the periphery of the network. Right now networks have a large amount of complexity from all of the switching that is necessary to segregate information and direct it to the correct recipient. Internet Protocol is an initial step in the ‘dumbing' down of networks, because thebits have your address and can arrive by any route that is convenient. There are problems with sending time critical applications like voice and streaming video over IP, and buffering of the data cannot fully address these problems. Increases in bandwidth and various prioritization schemes that do not require the data to be separately switched will likely ameliorate these problems. In the Gilder paradigm, the network is a mere
conduit for the transmission of content. Complex switching schemes, private networks, and proprietary content which is only available to some users all introduce inefficiencies in transmitting bits from point A to point B.
Enter Wave. In one inexpensive device, it moves a lot of the intelligence from the middle to the periphery of the network. Any user can provide content, and any user can consume it. All transactions take place at the recipient client device. Any content can be safely made available to all. The need for private networks is eliminated by the ability to encrypt communications and positively identify each secure client and each authorized user.
But Wave also has a SECOND disruptive technology. Another part of the Gilder paradigm is that as bandwidth becomes cheap you can waste bandwidth to reduce network complexity. How does this work? Well, with Internet Protocol content must be sent separately to every user. This requires banks of servers to send out the same thing over and over again. There really is no such thing as an IP "broadcast." Yet. What if you had such a big pipe that you could afford to send reams of premium data to everyone? Only one server would be needed. Those who wanted certain types of content could simply filter it from the larger data stream. The needed bandwidth for this approach has now arrived in the form of local digital TV and digital satellite. And Wave is the majority partner in InTelecast, the first new venture created to fully exploit this disruptive technology.
Wave may not control the broadcast technology itself, but it does control the most practical way to charge for content distributed by digital broadcast. Anyone who wants to broadcast encrypted content and unlock it at the client device will need to talk to Wave, and Wave will say, "Sure, we'll be glad to give you a license to our datacasting patent, as long as you include an Embassy chip in each of your client devices."
Enter Intelecast:
Intelicast is a joint venture between Wave, Sarnoff and Fantastic. This new company has the ability to revolutionize data broadcasting.
The power of inTelecast is that content will be broadcast to the client side via the airwaves in available bandwidth. The user configures their client-side device as to what content is to be stored for evaluation/purchase. The content becomes available when embassy is used to unlock the content. InTelecast begins trials soon, and fully deploys Q1 2000.
Once wavx is able to deploy a sufficiently large network of meters, and provide premium content via inTelecast and other partnerships, server side solutions will really have a tough time.
inTelecast is often thought of as a satellite technology. But the big impact that people forget is that inTelecast is targeted to help broadcasters deliver profitable content over cable networks too. According to David Ihrie, head of satellite systems and communications applications at Sarnoff, "The plan calls for inTelecast to transmit web content, by satellite, to local TV stations, which then will use an inTelecast server to embed local and national web content into the HDTV signal for over-the-air broadcast.” He added, “Signals also could be transmitted across cable networks.”
Wave president Steven Sprague has said that the broadcasters were
salivating -- Wave has had to turn down offers for equity investments.
Datacasting Patents
The transmission>caching>decryption>paying for digital content is patented by Wave. VISA can't do it if they want to. The indications are that AOL and Hughes (Direct TV) are very aware of the fact that if they want to maximize the opportunity for broadband content distribution they need to talk to Wave because of the datacasting patents. United States Patent 5,671,283.
Sarnoff's hardware and systems contribution and Fantastic's software
contribution together provide the guts of the system that will allow you to reliably receive content at home, as well as in such inherently
communications unfriendly environments as mobile applications (laptops, cell phones, etc.).
New opportunities
Digital distribution is significantly cheaper and much faster to market. The percentage of a sale to be given up by the content provider or aggregator is probably about the same as in the current, physical delivery model, but the delivery will be more secure and less exposed to fraud of all kinds. Equally importantly, the total market will expand, because consumers will be more likely to buy smaller increments that aren't worth selling in the current model.
Consumers will be able to buy all kinds of digital content for under $5 that is simply not available today. They will be able to buy it from sources that don't exist today because the cost of entry into the physical distribution business is too great (packaging, profit margins, etc).
Enter MyPublish
MyPublish Community commerce by Wave is an easy-to-use e-commerce service for selling "digital stuff" on the Web. MyPublish is the e-commerce partner for the aspiring entrepreneur—where publishing creativity and making a profit live in harmony on the Web.
PART IV
ALLIANCES
Wavx has alliances with HAUP, ATMEL, IBM, HP, NEC, CPQ, AOL/HNS, and many others.
AOL
AOL needs to license (use) Wave technology for their new venture with Hughes in which they are investing 1.3 Billion. AOL is a known investor in Wave.
IBM
IBM is leading the charge with several large PC OEM's to establish Wave's technology the "trusted-client" as the industry standard.
HP
Doug McGowan, the Director of VerSecure at HP touted the Wave solution for metering and pay as you go at the RSA conference last January. He indicated in his slide and presentation several times that this Wave technology was crucial to the future success of HP's e-commerce technology.
Java Card Platform & Sun Microsystems:
"The Java Card platform is the established standard for smart card
applications. EMBASSY is a perfect platform for incorporating secure Java Card capability in the PC and other devices, extending an integrated, multi-platform infrastructure for e-commerce," said Patrice Peyret, Director, Consumer and Embedded Systems Division of Sun Microsystems. "We are also delighted about the potential of having the EMBASSY-based trusted client system with Java Card deployed in a wide range of devices from home networks, to business oriented virtual private networks."
Atmel
One of the premier flash memory manufacturers in the world. They have
decided to include Embassy in their product line.
Actiontec
A large peripheral manufacturer that has agreed to include Embassy in its modems. It is likely that they did their homework on Wave.
N*able
The VCs behind N*able, which includes Chase Capital Partners, decided to sell out their investment in N*Able for WAVX stock. (wave bought then) N*Able has already struck a deal with Compaq to include their devices in Compaq equipment.
PART V
Deployment
The first implementation of the trusted-client technology will be in Wave Systems' EMBASSY E-Commerce solution. This implementation of the
trusted-client system will be included on motherboard chip sets from leading PC component suppliers, SMSC and ITE. NEC Computer Systems Division (CSD), a leading manufacturer of computer products and solutions, has selected the EMBASSY E-Commerce System to provide the trusted-client capability for inclusion in select 1999 models.
Hauppauge Digital is presently selling TV tuner cards with a wave chip
installed.
Network
Wave is building a network of millions of nodes -- each of which can be a continuing customer; this allows an oem (like compaq) to continually generate revenue after they sell a computer.
Assumptions and an example…
1) 1/3 of all meters deployed will be activated for wavx accounts
2) Each wavx account will generate $5 per month
Q2 1999 - The quarter just ended. Probably 10K meters deployed – no HAUP numbers yet. 3000 wavx accounts * $5 = $15,000 in revenue for the quarter
Q3 1999 - 100K meters deployed. 30,000 wavx accounts * $5 = $150,000 in revenue for the quarter.
Q4 1999 - 1 million meters deployed. 300,000 wavx accounts * $5 = 1.5
million in revenue for the quarter.
Year 2000 - 4-20 million meters deployed.
Now, as premium content has not been rolled out yet, the earlier part of this curve may be lighter. The tail end of the curve should be realistic if wavx can deploy as expected and provide the content. This is the information, which has been given to the institutions. Each node in the ecommerce network generates on average $5 per month. Wavx has most of the large hardware vendors lined up, and we're waiting to hear about the content.
WAVX buyout possibilities
Someone asked about the possibility of a buyout or hostile takeover. Steven Sprague said, "That a hostile takeover could not occur, because of the amount of shares they own and that if a buyout EVER did occur, that the price would be such that every Wave shareholder would be delighted with management's decision.”
Smart Card Readers, etc.
When Smart Card readers are available, a person can use their visa card to deposit directly into a secure Embassy chip. Only the purchase transactions will go through Wave's system. No one can know what is in an Embassy chip, and no money goes to wave. Your money is not in an account at Wave.
PART VI
COMPETITION
Wave's competitors have a fundamentally different architectural approach. What they are doing is hardening the PC, not to make it a trusted client, but so it appears in the server model as a more-secure terminal. In this model, the only thing you can trust is that a remote PC, when it comes into a server, is who it says it is. You can prepare files to send to a server somewhere, but you can't do any independent transactions, and you can't do account balances — for that you need non-volatile memory. In this model the PC is "trusted" only when attached to the server.
Wave's trusted client architecture is possible because the EMBASSY is a self-contained secure environment that runs independently of the client processor and operating system. This allows for secure transactions to occur even when the PC is not connected a server.
Cybercash process transactions they don't distribute digital content or offer security. They process payments; Wave bundles content and Wave enables it. . Cybercash is largely concerned with hard goods shipped whereas Wave is a digital Ecommerce function.
Visa
If Visa wants to set up a Cybercash-like system, they can do it. But if they want to securely meter digital content through hardware, they're going to have to work with Wave. This is not the Battle of the Micro transaction Systems. Wave offers something unique. They can enhance any micro transaction system that anyone comes up with and make it secure in hardware. No one else has the patents to do that.
VISA is much different than the WAVE model. VISA does one thing - they help merchants get paid, for a fee. They are one little piece of the whole business model we call retail. They don't take any responsibility, they do not hold the inventory, they do not market or assist the retailer in any way...they only pay and bill. Most merchants are given great benefits from this simple relationship, and will continue it. Wavers are not talking about replacing VISA, but instead enhancing the model. There is no reason VISA can't use Wave technologies as well...and there is no reason Wave can't use VISAs services either.
Visa gets 2% for doing nothing but collecting. WAVX supplies the chip that allows the content providers to sell with a new business model: Pay per view, rent to own, free CD-ROM disks, DVD disks, that can be mailed like the AOL, MSN, Prodigy, Compuserve throw away disks.
VISA and Cybercash do not protect the content provider - Wave does.
VISA is not programmable, your credit card is not programmable, it cannot meter the use of digital content by the hour, or game level or whatever, it does not perform hardware triple DES encryption, it does not allow for the FREE distribution of PROTECTED content that can then be tried before you buy.
Visa's great.... as a magnetic strip...for purchasing hard goods. What Visa can't do (even with SET) is provide persistent copy protection or support new business models like pay per view, or rent-to-own. VISA payment processing works in conjunction with WAVE; they still get their percentage.
Intel
First - The client-side metering is a big plus for privacy, and only Wave has it.
With Intel's ID, the ID stays with the chip. If someone owns a computer that has visited a porn site, the porn site has the ID number for all time. When the computer changes hands, the ID number does not change and the new user is saddled with the baggage that the old ID accumulated.
With Embassy, the identification is programmable. The user decides when and if to allow the programmable identification. Basically, when the user wishes, that identification can be deleted, so you never can trace the identification to that particular Embassy chip. That is a very significant difference between Intel's permanent identification and Embassy's programmable ID.
Second - Wave president Steven Sprague said in Boston that Intel is at least two years away, and the PC OEMs don't want the Wave chip on Intel Processors because that would force the OEMs to use Intel as their only supplier and they want a choice.
Intel is in the hardware business. They are interested in sales of hardware. Wave, on the other hand, is in the content business. Wave would just as soon give hardware away.
Skepticism
"In order for [WAVX] to be successful, it has to deploy a critical mass of "flawless" chips in a limited timeframe."
1. Wave doesn't have to deploy a critical mass all at once to make revenues. Wave just started getting its chips into the marketplace about 6 weeks ago...and has just started getting its first real revenues from them. As more and more chips get into the marketplace...Wave will be receiving more and more revenue. It's not necessary for Wave to get 1 million or 5 million or 10 million chips into the market place before it makes ANY revenues. Revenues have already started, and will continue to grow as the amounts of chips grow.
2. The limited timeframe: why is there a limited timeframe? There isn't. As you know, Wave has the only hardware (v. software) technology that will solve many of the problems that affect ecommerce. (Wave just bought the only other company that had any hardware technology...N ABLE). So we are the first to market with an advanced technology and processes to solve some major e-commerce problems. We
have started to grab market share in this new "digital metering" market sector...and will continue to do so as we get more and more chips out there. We will also be grabbing market share in the established e-commerce security sector. If another company comes along at some point to start competing with WAVX in the digital metering sector...then we compete. WAVX will still have a chunk of this market...and its stock price will still be higher than it is today. So where is the limited timetable...thelimited window of opportunity that you and others talk about? There is no limited timetable. We are way out in front (as you know)
3. You (and others) also argue that, because consumers won't buy, rent or rent to own digitized movies, music, video games, print material, and other stuff through a WAVX chip until there are millions and millions of chips out there…another bogus assumption. A number of content providers have already signed up with WAVX now, AT THE BEGINNING OF DEPLOYMENT...and many more are following. If a consumer has the WAVX capability, and wants to buy a movie he wants, he's not going to say "No, I won't do it...because there aren't enough Wave chips out there."
As an example of your bogus assumption...VHS videotapes were a new
distribution method for movies. Do you think consumers wouldn't buy a movie on VHS until there were 5 million VHS tapes out there? No. As we all know, the early adopters start buying right away...then more and more people...and so on.
4. Another bogus assumption that you set up is that the chips and the system have to work “flawlessly"...or its doomsday for WAVX. There could be some problems. But have you ever heard of AOL and the problems it had back in 96 or 97...or E-TRADE and other online brokers and the problems they've had recently? These problems can have a short-term effect on the price of a stock...but they don't NECESSARILY lead to doomsday for a company...as AOL, E-TRADE and others have proved.
5. "I never pay in advance for anything. Money talks, the rest walks.”
That being said, how do you get through modern life without any of these?
- cable TV
- magazine/newspaper subscriptions
- sent a check for anything by mail order
- seasons pass for amusement park, zoo, museum etc.
- concert/sports event tickets
- homeowners insurance
- apartment rent
- life insurance
- groceries
- local telephone service
- payroll taxes
- medical insurance
- legal expenses
Furthermore, if you add to your Wave account with a credit card and use that credit balance to by digital content before you pay for your credit card bill (up to 59 days later) you actually are not paying in advance with no finance charges.
Just FYI: WAVX Encryption Power
As for the power of WAVX's encryption...one of the leading encryption
experts in the world, Bruce Schneier, the President of Counterpane Systems of Minneapolis, MN, developed an encryption algorithm that has yet to be cracked, and is the author of the standard book on electronic encryption (published by Wiley). He did some consulting work with WAVX...and took his payment in WAVX shares.
Finally:
The notion that the internet is going to continue to be a free and painless forum for piracy is a classic example of not seeing a paradigm shift before it occurs. The internet is going to transit into a pay-per-use utility, and Wave will meter the content that that utility provides.
The notion that the content providers would be hesitant is just not born out by the facts. Content providers have even indicated they would be willing to generate Wave-Exclusive content, hardly an indication of reluctance. The content providers are eager to protect their content, which is exactly what Embassy does. Technology that protects digital content is worth more money to a content provider than a payment solution alone.
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