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BUSINESS WEEK ONLINE
June 18, 1998
STREET WISE by Sam Jaffe
TIME TO CATCH WAVE SYSTEMS'
E-COMMERCE CHIP?
Imagine that you could "test drive" software for a nominal fee before deciding to
buy it. Or that you could use a specialized spreadsheet program for one hour,
and pay for only that hour's worth of use. Well, Wave Systems (WAVX), a San
Jose (Calif.) technology company, has developed an intriguing chip aimed at
metering the usage of electronic content, and it may be on the verge of getting at
least some computer makers to adopt it.
The heart of Wave's technology is a chip that's designed to be embedded into
the PCI/O chipset on the motherboard of a personal computer. The PCI/O
(which stands for personal computer input/output) is the main communications
center between the computer and the outside world. It controlsdevices used to
input or send out information, such as the keyboard, a hard drive, or an output
jack. Once installed, Wave's chip serves as a metering and billing device for
electronic content.
Take Joe Sixpack, for example. He wants to download "Guzzle," the hot new
drinking game from the Web site of a software maker. But Joe has never played
Guzzle before and is hesitant to plunk down $60 for it without first getting a taste
of it. Thanks to the Wave chip on his computer's motherboard, he can
download the game and pay only a small fee to try it out for a few hours. The
Wave chip will keep track of how long he plays and can shut off his access
when the trial period is over, or it could allow him to buy new time increments
for using the game."It's like a taxi meter inside your computer that takes credit
cards," says Wave's Chief Operating Officer Steven Sprague. In exchange for
providing the meter, Wave wants a percentage of every dollar that flows through
its chip.
The beauty of the Wave chip -- at least, according to Wave -- is that it offers
something for everyone. The software industry can shift to a much more
profitable rent-to-own model of distribution rather than rely on an off-the-shelf
sales model. Indeed, on June 16, Wave Systems announced that Interactive
Magic, a game maker, will start selling its software via the Wave chip. In
addition, Wave Systems is nearing a similar agreement with an entertainment and
educational software manufacturer, according to sources close to the company.
The consumer also gets something from the Wave-enabled computer: A
low-cost way to try a product -- with an option to keep trying it on a per-use
basis or to buy it outright. In addition, the chip can store credit-card information
in a piece of hardware on the computer that should be far more secure than
software encryption.
The Wave chip also allows PC makers, as well as Wave, to share in the
revenue stream that would flow through the chip, giving them a reason to build it
into their boxes. "The technology is so terrific," says Jim Melcher, who manages
money for Balestra Capital Management and has been buying Wave Systems
shares for the past year. "It gives you the ability at the press of the button to
send cash and download software with total security. There's a huge need for
it."
Wave Systems faces one big hurdle, though, before its chip becomes a
moneymaker. It has to persuade PC manufacturers to spend the $5 it takes to
install a Wave chip on a motherboard. No major PC manufacturer has yet
ordered motherboards with the chip built into them. But the company recently
signed a contract with Standard Microsystems (SMSC), which controls 35% of
the PCI/O market, that will allow SMSC to fulfill orders from PC manufacturers
that want the Wave chip built into their PCI/Os. National Semiconductor, which
owns an additional 50% of the PCI/O market, has yet to sign such a contract.
But the fact that Wave Systems' CEO Peter Sprague is a former chairman of
National Semiconductor might help in gaining access to executives there.
Perhaps more significant than the SMSC contract, in May Wave Systems and
IBM signed a deal that spelled out how the PC maker would split with Wave
any royalties earned from use of the chip, a ratio that they aren't publicly
revealing. Sprague says Wave has been in contact with other PC makers, and
that new agreements could come between now and the end of the year.
If you're willing to bet that this technology has the potential to become widely
used, now may be the time to buy shares in Wave Systems, which was founded
in 1988 and went public in 1994. Its stock, which reached $5.50 in May, has
settled back to $3.75. The company lost $2 million in the first quarter of 1998
and doesn't expect to make money this year. And if its technology doesn't gain
acceptance, its prospects would become decidedly less promising.
But if computer makers start to install its chips into their PCs, the stock could
soar. "There's no reason for this company to not be given a market value of $1
billion if a couple of other PC makers join in with IBM," says Melcher."And if
everybody uses it, there is no end to its revenue potential. It will be making
money off of every electronic-commerce transaction. People will be writing
articles reminiscing about when you could buy Wave Systems for $3."
Before Wave is crowned the next Microsoft, though, investors should watch
carefully between now and the first quarter of 1999. That's when initial reports
will start filtering in about how many orders PC makers are placing for Wave
chips. That'll make it clear whether Wave Systems is the next hot stock -- or
just another example of Internet hype.
Sam Jaffe writes about the markets for Business Week Online
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