Wave Systems Corp.

Siemens

Sarnoff Corp.

inTelecast

Thomas Butt

Corrections or additions?

This article by Douglas Dixon was published in U.S. 1 Newspaper on June 9, 1999.

All rights reserved.

Paving the Way To Pay for Digital Content

In the glorious digital future, all content will be

just data — digital bits that can be saved to disk, shared across

a network, or transported over the Internet. The digital future is

both exciting and confusing to industry and users alike, but to content

developers it is outright frightening.

Hollywood feared television because it brought content directly to

your home. Hollywood and the broadcasters feared the VCR, because

it let you control what you saw and when you viewed it. Even worse,

VCRs let you copy content. But videotape is analog, so it’s clumsy

to copy. You have to play through a whole tape in order to copy it,

so bootleggers need to set up warehouses with banks of VCRs all wired

together in order to mass-produce copies. Distributing and selling

bootlegged tapes is also clumsy, requiring trucking around boxes of

tapes, which serve as physical, tangible evidence of a crime.

With digital content, all these physical impediments to mass copying

disappear. Making a copy is as simple as a click of the mouse, and

the copy is free. Distribution is even more frightening; one hacker

can post a copy on the Web, and thousands or even millions of people

can immediately download it.

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Wave Systems Corp.

A fast-growing company with a Princeton-based research and development

arm, Wave Systems Corp., has developed an approach to providing protected

delivery of digital content, which can be controlled at the user’s

end to permit renting or purchasing material on demand. Wave Systems

was founded in 1988 by Peter Sprague, longtime chairman of National

Semiconductor Corp. He conceived and patented the idea to "introduce

new business models which allow producers and users of electronic

information to securely distribute and purchase digital content."

However, mass distribution of content in digital formats has only

recently become feasible through the development of the Internet,

the availability of powerful home computers, and advances in video

and audio compression.

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Siemens

Wave’s corporate office is in Lee, Massachusetts, but its engineering

offices have been at Research Park for seven years; the original technology

developers came out of Siemens. Thomas Butt is Wave’s vice president

of product development and head of the Princeton office, which has

a systems engineering group, a testing group, two software groups,

and one hardware group.

Butt joined Wave in 1996, when the company was reorganized "to

focus on consumer entertainment and education as the first big product."

The original concept "was an idea way ahead of its time,"

says Butt. "With the convergence of computers, television, and

telephone, technology is key to making a business model around convergence

work." The new focus was on "client-side metering of information

and transactions, which is different from the previous niche opportunities."

Wave is delivering secure transactions to end-users, through its EMBASSY

E-commerce system, by building an inexpensive, proprietary hardware

device into PCs. Its security protocol initially can be built in PC

add-in boards, and then perhaps embedded in keyboards, and eventually

be embedded in PC motherboards. Wave hopes to develop a critical mass

of PCs with its metering hardware, through relationships with PC board

developers, peripheral manufacturers, and PC manufacturers. The hardware

can be included in add-in boards, on the motherboard, or even in the

keyboard.

While these hardware enhancements may add a few dollars to the cost

of a PC, the bet is that consumers will snap them up as eagerly as

they did the cable industry’s set-top boxes for their televisions.

Wave is also actively developing partnerships with content providers

and hardware and software security technology companies. The first

peripheral integrating Wave’s technology is expected to be Hauppauge

Digital’s WinTV tuner board, which is scheduled to ship by the end

of the second quarter of 1999. The Wave system also incorporates other

security technologies, including Hewlett-Packard’s VerSecure "trusted

client" system, among others.

Beyond the Internet, the advent of digital television (DTV) also offers

another path to deliver digital content to end-users. Digital television

promises better pictures, higher quality sound, and, of course, high-definition

large screen television. But even more, digital television offers

the possibility of broadcasting a mix of video, audio, and arbitrary

digital data, all compressed onto a single channel.

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Sarnoff Corp.

One solution to the problem of allowing digital distribution of content,

while protecting its use (and getting paid for it) was announced at

the National Association of Broadcasters (NAB) show in Las Vegas in

April by Wave Systems and Sarnoff Corp. They announced the planned

formation of a company that will provide secure data broadcast for

digital television terrestrial broadcasting to the PC. This permits

broadcast delivery of any kind of digital content to the consumer’s

PC, including computer games, music, data, and even Internet service.

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inTelecast

This new company, inTelecast, will provide content services, the network

infrastructure, and the business model to deploy the services. It

will provide plug-in servers to DTV broadcasters for transmission

of digital content, and receivers and client software for PCs that

permit user purchase of products and services through the system.

At the user’s PC, the inTelecast software and hardware capture the

content for the user. If users decide to buy or rent the content,

they can then do so through Wave’s EMBASSY trusted-client system.

Sarnoff will provide the infrastructure design to provide both national

and local distribution of content. It will also provide the design

for the DTV receiver card for the PC. Wave will provide its EMBASSY

technology to handle the payment and secure transport of copyrighted

materials. A third company, the Switzerland-based Fantastic Corp.,

will work with inTelecast to provide broadcasters with the tools to

manage, package, and distribute digital content.

This kind of system is potentially very good news for the broadcast

industry. The FCC is requiring that all broadcasters provide digital

broadcasts by the year 2003, and the larger stations were scheduled

to go on the air this May. While the use of these airwaves is free

to the broadcasters, they will incur significant costs for converting

over to digital broadcast equipment, so the possibility of this kind

of significant new revenue stream is very exciting to them.

Current approaches to selling content depend on server-side authorization.

You can buy access to cable or satellite television channels by the

month or order specific movies or events. This typically requires

phoning in to the master server to perform the transaction, which

then communicates with your cable box to permit you to view the material.

The same approach is used by the Divx system for renting DVD video

discs.

Buying digital material over the Internet works the same way. Typically,

you enter your credit card number into a Web form, and send it to

a master server, which then permits you to download the product. This

same approach is used whether you are buying computer program, or

information, or a song. In another common approach, you download a

trial version of a program, which expires after a month or so unless

you buy a secret code number.

Once you have bought the material, however, the content provider still

has the risk that you will copy it and share it with others. This

has led to a variety of software and hardware-based copy protection

schemes. These require modifying the program to check whether it is

a legal copy. It can do this by having you enter a secret code which

has something to do with your system configuration, or by writing

secret files on your disk, or by checking to see if a special hardware

device — a so-called "dongle box" — attached to your

system.

The problem with these approaches, whether for television or computers,

is that they are monolithic, all-or-nothing operations. Since they

are based on server-side authorization, you need to buy the whole

thing in one block, and your use is then tied to the specific client

system where you carried out the transaction. The problem for content

sellers, especially on such an open system as the PC platform, is

that the copy protection is ultimately software-based, leaving it

opened to attack by hackers. In fact, "broken" versions of

many commercial products are posted on "Warez" hacker sites

throughout the world.

The Wave approach addresses these problems with more powerful hardware

security, which permits smaller client-side transactions. The Wave

approach "provides the ability to do financial transactions in

conjunction with copyright protection, at the client,", says Butt.

"It is like a set-top box; you can buy the movie locally, and

the system will eventually bill you. However, it works with any form

of digital content." This means that it can protect not just computer

programs, but also access to data and other media like audio and video.

Wave believes that digital commerce of this type requires security

at the client. The Wave hardware goes beyond software-based protection,

and simple hardware dongles, to act more like a programmable smart

card. It can store value (a credit balance or payment due), has a

small processor to permit more secure transactions through hand-shaking

protocols, and even has a clock.

The Wave system also permits you to perform transactions without being

connected to a server. "You can download a movie to a PC, and

buy it and watch it on an airplane, without the need to be connected,"

says Butt. "It also supports micro-transactions, purchases with

a very low dollar amount, in a cost-effective way, down to hundreds

of a cent."

"Wave has been a great experience," says Butt, "very dynamic,

quick on the feet, and not an ounce of bureaucracy. We have hired

lots of people, 30 to 35, and are growing as fast as we can."

Top Of Page
Thomas Butt

Butt, the son of an accountant and credit manager who

encouraged his interest in technology and engineering. High school

physics, Butt says, made him realize that physics was a "foundation

field" that helped foster "a clear, organized way of thinking.

Physics was hard, so it seemed that everything else would then be

easier." He received his BS in physics in 1981 from St. Joseph’s

University in Philadelphia.

Butt had graduated from college "without ever logging into a computer,"

but then immediately bought a Radio Shack PC and became interested

in programming. He studied electrical and computer engineering at

RPI, and transitioned into computer-related work on the job. "It

became fascinating to me." He then switched fields to work with

G.E. Aerospace on government and commercial satellites in Valley Forge,

and continued taking courses at Villanova. He finally moved up to

Princeton with Astro Space, and transitioned through the corporate

changes to Martin Marietta and Lockheed Martin, before moving to Wave.

The Wave Systems engineering group is located across from the Princeton

Airport. With approximately 45 people in 6,400 square feet of space,

Wave is "bursting at the seams" and actively looking for new

space. Butt expects that the new inTelecast company will be located

in Princeton, because of his success in building Wave’s engineering

organization here.

"Princeton is the best area in the country," says Butt. Other

locations have lower living costs and lower salaries, but the right

kinds of people are not available. Silicon Valley has lots of engineers,

with high living costs and with high demand driving high salaries.

"Princeton is a very good compromise between these extremes,"

says Butt. "It has lots of high-tech companies and universities

and a large base of talent. It is about as good as it can get."

Butt has worked hard to hire quality people, doing "lots of leg

work," and using a staffing consultant three days a week. So far

he has not had to pay relocation costs for a new hire.

One obvious attraction for potential employees is Wave’s position

as an existing company that can act like a start-up, but one that

offers stock options in publicly-traded securities. Wave is still

a "development stage corporation," and reported a net loss

to common stockholders of $12.7 million for 1998. It completed a $23

million private placement at the end of March, and its stock price

then increased from under $15 to $26, before recently settling in

the high teens. Wave is continuing to develop partnerships to "expand

the number and type of platforms and services" they support, says

Butt. "Our ability to pursue them is based on bringing in good

players and doing a good job of developing strategic partners."

Wave Systems Corp. (WAVX), 202 Wall Street, Princeton

08540, 609-683-9226; fax, 609-683-4822. Thomas Butt, VP, product development.

Home page: http://www.wave.com.

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