ZACKS RESEARCH ON EDIG - (Part 2)
Digital Recording, Related Mobile Devices and Mobile Enterprise Markets
The consumer electronics market is undergoing a major technology convergence in
ever smaller products which combine multiple functions. Palm-type computers are
tiny PCs that allow users to access their e-mail from remote locations. Cellular
phones are incorporating PC features and pagers are combining with cellular
phones and voice-mail systems. Consumer electronic manufacturers are integrating
functions and devices at an extremely fast pace, and technology consumers are
eager to take advantage of "convergence" products.
The older analog dictation products market is evolving to fully digital
dictation systems interfacing with computers and the text-to-voice and emerging
voice-to-text technology markets. The mobile enterprise industry is focused on
integrating voice and voice processing into mobile devices and corporate
enterprise solution software. The Company believes these movements will impact
all types of portable and mobile products and technologies.
The Internet is impacting business and technology in unparalleled ways. Voice
and text mail is burgeoning. Music, data and audio can be downloaded through the
Internet to the personal computer creating a market for portable devices that
can interface digitally. Portable storage media prices are dropping improving
the outlook for portable devices that employ such memory. These moves along with
lower voltage storage media and improved battery technology are expected to
expand the market for portable and mobile devices.
The worldwide electronics industry is quickly evolving to provide more
electronic content to consumer items, including portable devices. The fast-paced
electronics industry presents challenges for developers of electronic products,
where time-to-market, cost, performance, quality, reliability, size and the need
for product diversity become the focus in a volatile industry.
The recently formed Voice Technology Initiative for Mobile Enterprise Solutions
(VoiceTIMES) alliance plans to establish standards for mobile speech technology
in corporate environments. Its membership is engaged in targeted research
studies to identify enterprise solutions where mobile devices can change the way
companies do business by providing plug and play compatible mobile devices. The
initial areas of research include the medical industry, law enforcement,
insurance, services, field sales and ERP systems. The Company believes, as an
inaugural member of VoiceTIMES, that it will benefit from this research which
will provide a range of marketing and sales opportunities. The Company is
focusing research and development activities towards these product markets.
Digital Music and the Internet
Music is one of the most popular forms of entertainment in the world. Music is
also big business. According to the Recording Industry Association of America,
or RIAA, worldwide sales of recorded music were $38.7 billion in 1998. Five
major global record companies--BMG Entertainment, EMI Music, Sony Corporation,
Universal Music Group and Warner Communications Inc.--and their numerous
affiliated labels account for more than 80% of all recorded music sales
worldwide. The recorded music industry has operated under the same basic
business model for many years. Typically, record companies sign artists to
exclusive contracts under which the record companies develop and promote their
music. The companies then sell this recorded music through wholesale and retail
distribution channels to consumers. In addition, there are millions of amateur
musicians who do not have access to distribution through traditional channels.
The Internet presents a significant opportunity for the rapid and cost-effective
distribution, promotion and sale of recorded music. Music is one of the most
popular topics on the Internet as reflected by the increasing number of
music-related websites and the growth of online sales of compact discs. To date,
online recorded music sales have occurred primarily through the purchase of
compact discs through online retailers. The popularity of online buying is
forcing traditional retailers to sell recorded music using the Internet, either
through their own websites, Internet portals and other sites or in the future
through in-store kiosks.
In recent years, consumers have increasingly used their computers to play music.
Dataquest estimates that in 1998, 30% of U.S. households had multimedia PCs with
a sound card, speakers and either a CD-ROM or DVD-ROM drive. Consumers can now
play CDs on their computers with the ease and fidelity formerly associated only
with stereo systems. However, music files can be very large. For example, a
three minute song can occupy more than thirty megabytes of storage. Storing and
transferring audio files can be expensive and slow. To address this problem
compression formats have been developed and consumers are employing faster
Internet connections. Many consumers have upgraded from a 28.8 Kbps modem to a
cable, xDSL or ISDN modem. According to Jupiter Communications, the number of
subscribers using cable, xDSL or ISDN modems is projected to increase from one
million in 1998 to 10.5 million in 2002. Music consumers increasingly want to
hear recorded music in real time on their computers and store these recordings for
later playback on portable devices as well as computers.
Advances in digital compression technologies now allow the transmission of
near-compact disc quality audio over the Internet. Several compression formats
are currently used, including Lucent's EPAC (Enhanced Perceptual Audio Coder),
Dolby Laboratories AC3, Microsoft's Windows Media 4.0 (MSA4.0) format and mp3
(an open digitally encoded audio standard arising from the Motion Picture
Experts Group). Companies offering audio compression formats include Lucent
Technologies Inc., AT&T Corp., IBM Corporation, Liquid Audio, Inc., Microsoft
Corporation and RealNetworks, Inc. among others. To date, recorded music sales
delivered through digital transmission have been minimal, but are expected to
reach 7% of all United States recorded music sales by 2003, according to
Forrester Research.
As downloading music from the Internet has become increasingly popular, music
content copyright owners, including the major record companies, have expressed
concerns about unauthorized copying or "pirating" of copyrighted sound
recordings. For example, many compression technologies, including the basic mp3
standard specification, lack copyright protection. This can result in the
unauthorized downloading and replication of digital music. The major recording
industry association, the Recording Industry Association of America (RIAA), has
formed a committee, the Secure Digital Music Initiative (SDMI), to propose a
standard for the secure digital distribution and use of recorded music. SDMI
compliant devices are expected to be on the market by the end of 1999 and in the
future will limit the transmission of "pirated" music.
The e-commerce market for downloadable recorded music is just emerging and there
is limited availability of digital music on the Internet. The major record
companies to date have engaged in limited efforts to sell recorded music through
digital transmission. But the explosive growth of the Internet, emergence of
compression technologies, copy protection systems and the SDMI standard setting
process is causing rapid changes in the music industry. Recently there have been
rapid developments in the digital music field with a large number of
announcements by artists, global record companies, compression and security
firms, consumer product companies and others announcing various alliances and
ventures to provide music over the Internet. e.Digital believes these industry
forces will drive demand for portable devices capable of playing various music
compression and security formats.
e.DIGITAL'S STRATEGY
The Company offers OEM customers core technology and experienced design and
development services to rapidly implement digital solutions in the portable
device marketplace. The Company believes it was selected by Lanier, Intel and
Lucent for state-of-the-art projects due to the combination of this technology
and its experience in implementing solutions For simple memory interfaces many
OEMs develop simple file management code, however in more complex memory
management requirements the Company believes it offers a superior solution. As
portable devices become more robust and provide multiple functions, the Company
believes there will be expanded market opportunities for its file management
system. The Company's objective is to have MicroOS become a leading file
management system in a growing digital market for portable devices.
e.Digital's MicroOS provides a flexible software solution for portable digital
music players. The Company also has substantial experience in adapting MicroOS
to leverage the strengths of various Digital Signal Processors (DSPs). DSP
processors are a key electronic component employed in portable digital devices
to manipulate digitized signals. The Company is also experienced in adapting
compression algorithms to DSP processors. This experience and the Company's
abilities position it as a leader in providing hardware and software solutions
to developers of portable digital devices.
The Company's strategy in the digital music field is to leverage its
relationship with Lucent and others in focusing its development efforts on the
EPAC compression scheme being promoted by Lucent. EPAC stands for Enhanced
Perceptual Audio Coder and is the core technology being promoted by Lucent's New
Venture Group as a secure high-quality solution for Internet music delivery. At
128 kilobits per second, EPAC offers CD-transparent stereo sound. EPAC is fully
compliant with RealNetworks G2 player, the industry's most recognized system for
streaming media. RealNetwork's recent introduction of the RealJukeBox music
management software further demonstrated the capabilities of digital music. EPAC
is 30-50% faster to download than mp3 and uses 30-50% less storage space. Unlike
mp3, EPAC can be downloaded with a selected song rather than in a separate
technical step. EPAC uses psychoacoustic modeling to compress music in a way
that is not noticeable to the ear. Music compressed at a rate of 11 to 1 retains
its fidelity. EPAC's variable bit rates and high audio quality allow it to be
used in multiple bandwidth applications.
e.Digital is also retaining flexibility in its designs to provide portable
digital music player designs that will also use other audio compression formats
or respond to multiple compression, digital watermarking and encryption schemes.
e.Digital's strategy is to build upon its proprietary technology to develop
long-term strategic relationships with key manufacturers in various industries.
The Company believes it has the expertise and experience to offer a turnkey
solution to major OEMs seeking to implement portable digital sound processing.
The Company offers a total solution from product design through development and
manufacturing.
The Company actively seeks licensing, private label, and OEM opportunities in
the digital sound processing market. The Company's efforts include:
1. Expanding its business by developing custom products for additional
OEM customers The Company seeks to expand its business through sales and
marketing targeted at obtaining additional product development
opportunities with existing customers and new OEM customers.
2. Developing brand name recognition with OEM customers - The Company
has limited brand name recognition but seeks to position e.Digital's
MicroOS as a market leader in the portable file management software
field. This strategy is being pursued through participation in industry
alliances, professional articles and attaching its names along with OEM
products to the extent possible.
3. Expanding the technology base through continued enhancements of the
MicroOS technology and new inventions - The Company develops in-house
proprietary designs, products, features or technologies that may be
private labeled or licensed to one or more OEMs. The Company's
engineering team continues to enhance and update the MicroOS software
and related technology. The Company also devotes resources to expanding
the technology to new applications. In addition to improved music and
voice processing, management believes the Company's technology may have
applications in a wide range of products including voice pagers,
answering machines, cellular phones, computers and for the storage of
pictures and video images.
4. Leverage strategic and industry relationships - e.Digital has
established important strategic or industry relationships with a number
of partners including Lucent, Intel, IBM, SanDisk and other music
oriented companies. The Company seeks to leverage these relationships to
achieve the strategies outlined above by expanding its business and
solidifying its position as a technology leader in the field of voice,
music and data processing.
ACCOMPLISHMENTS TO DATE
e.Digital innovated the use of flash memory in a handheld digital voice
recording device, using removable digital recording media in a handheld device,
interfacing a portable digital voice recorder with a personal computer and the
Internet and employing CompactFlash in the recording and playback of
near-compact disc (CD) quality music in a portable device. These innovations
have positioned the Company with industry leaders in providing digital recording
and digital music solutions to consumers. Management believes the following
accomplishments have aided the Company's industry positioning:
o The Company recently commenced shipments of a highly advanced
mobile digital recorder and docking station to Lanier against $3
million of initial production orders.
o The Company is designing and developing an advanced digital
voice recorder under contract to Intel. Intel is paying
non-recurring engineering fees for design and development of
prototypes.
o e.Digital has completed a second-generation digital music player
in cooperation with Lucent and both parties are demonstrating
the technology to prospective customers.
o The Company has established strategic or industry relationships
with major companies in the digital music and portable device
market.
o e.Digital was selected by IBM to be an inaugural member of the
VoiceTIMES alliance to develop standards for voice technologies
and handheld mobile devices.
o The Company was selected by Lucent to be its technical advisor
at SDMI meetings to help establish standards for digital music.
o e.Digital has been granted U.S. patents on its core technology,
the MicroOS file management system.
STRATEGIC AND INDUSTRY RELATIONSHIPS
The Company has established strategic and industry relationships primarily in
the fields of digital music and advanced digital recorders.
Digital Music Relationships - e.Digital plans to continue to develop and build
strategic relationships with key third parties in the digital music field that
are engaged in the compression, component, copy protection and product
development segments of digital music distribution. e.Digital believes these
relationships enhance its ability to participate in this explosive new field of
business.
Lucent Technologies Inc. - e.Digital is collaborating with Lucent to
jointly offer OEMs a reference design and a new handheld solid-state
music player. The new SDMI compliant music player features the MicroOS
file management system and plays music stored in Lucent's EPAC audio
compression format which offers high security and excellent sound
quality. Initial designs incorporate a 32 megabyte CompactFlash card
produced by SanDisk. Lucent and e.Digital are collaborating on the marketing of
this product design to a wide range of participants in the digital music industry. Lucent
designs, builds and delivers a wide range of network, communications and
technology solutions.
Texas Instruments - e.Digital's EPAC music player uses a new class of
Digital Signal Processor manufactured by Texas Instruments. e.Digital is
serving as the DSP engineering specialist to port (configure software to
operate on a new processor) EPAC software to a new class of Texas
Instrument DSPs. Texas Instruments is a global semiconductor company and
a leading designer and supplier of digital signal processing solutions.
SanDisk Corporation - e.Digital is working with SanDisk to incorporate
CompactFlash into the e.Digital EPAC music player. SanDisk specializes
in designing, manufacturing and marketing flash memory data storage
products.
Cognicity, Inc. - The Company is working with Cognicity and Lucent to
use Cognicity's AudioKey as a security feature to watermark digital
music content providing a means for copyright protection. A watermark is
an embedded digital tag on a CD or digital music file providing a means
of tracking its source and use. Cognicity is a provider of content
management tools to help customers protect, extend and manage their
digital assets.
Celestial Technologies, Inc. - The current demonstrations of the EPAC
player use Celestial's Audio Library software to manage digital music on
the PC, function as a personal music server (jukebox) and manage the
transfer of digital music to the portable EPAC player.
Through SDMI members and others the Company is also developing relationships
with additional digital music industry participants including other compression
and protection technology providers.
Advanced Digital Recorders and Mobile Devices - e.Digital's experience and
expertise in developing advanced digital recorders with computer and Internet
interface has positioned the Company as a technology leader in this field. The
Company believes the introduction of the Lanier recorder with its highly
advanced features further positions the Company as a technical leader in this
field. e.Digital believes that this reputation was the reason it was selected as
one of seven inaugural members of the VoiceTIMES alliance targeted to provide
standards for the integration of mobile devices in corporate environments. The
Company is working with the following companies in these fields:
Intel Corporation - e.Digital is working with Intel to design and
develop an advanced digital voice recorder with text-to-speech and
speech-to-text technologies that interfaces with the computer and
Internet. Intel is also an inaugural member of the VoiceTIMES alliance.
Intel is a world leader in designing, manufacturing and marketing
microcomputer components and related products.
IBM - IBM is leading the VoiceTIMES alliance and e.Digital is working to
expand its relationship with IBM through this and other activities. IBM
is a worldwide provider of advanced information technology.
The Company believes its experience in producing the Lanier recorder, its
contract with Intel and its participation in the VoiceTIMES alliance will expand
its opportunities to develop additional advanced digital recorders and related
mobile devices.
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