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This article by Douglas Dixon was prepared for the September 15, 2004 edition of U.S. 1 Newspaper. All rights reserved.
Video Server Solution: Small But Profitable
What’s an entrepreneurial technologist to do when the $500 million start-up that he is working at crashes and burns?
For Jesse Lerman and Jim Fredrickson of Forrestal-based Princeton Server Group, the wild ride — from the original spin-out of Sarnoff Real-Time Corporation to DIVA Systems in the fall of 1994, to DIVA’s ultimate collapse in fall 2002 — suggested a better model, not only for developing core video server technology, but also for building a company.
Especially after the dot-com bust, the approach they have taken with their new company has been to eschew venture funding and big-bang growth. Instead they are self-funding, growing slowly, and taking advantage of Princeton area connections to find staffing, support, and also customers. Their model has yet prove itself, but the contracts are beginning to roll in, expanding the company’s reach from local to regional contracts (including a big one with New Jersey Network) to national accounts.
DIVA Systems Corp. was formed in 1995 to exploit the Princeton Engine video processing computer developed at Sarnoff Corporation and then commercialized through its Sarnoff Real-Time Corporation (SRTC) spin-off. Lerman was one of the first hires into SRTC, after graduating from Princeton in 1994 with a bachelor’s degree in electrical engineering, and then served as director of software at DIVA. Fredrickson, a computer engineer from Ohio State (Class of 1984), was a Sarnoff employee already working on the video engine who became principal engineer at DIVA.
DIVA’s plan was to provide video on demand (VOD) services to cable TV companies by leveraging its proprietary video server technology. DIVA was first to market with a complete VOD service, and as of fall, 2000, had systems deployed in six cable systems in the U.S. with multiple system operators, including AT&T Broadband.
However, DIVA had an expensive custom system, and the cable companies were not enamored with DIVA’s business model, licensing servers and content, and trying to share in the VOD revenue stream, so that through 1999 and 2000 DIVA had needed to significantly revamp its business model to simply selling equipment.
According to the Los Angeles Business Journal DIVA incurred net losses of $500 million over a six-year period while collecting just $39 million in revenue, and still held only 15 percent of the VOD market. DIVA filed for bankruptcy in June, 2002. The end came in October, 2002, after Gemstar-TV Guide had originally agreed to buy the company for $40 million, and then backed out of the deal days before the closing, after effectively shutting down DIVA’s business.
With the death of DIVA, Lerman and Fredrickson also saw the end of expensive, proprietary video processing systems, due to the tremendous performance improvements of commodity personal computers. They therefore set out to build a much less expensive solution for storing and delivering video streams.
“The idea was that our system would be much more cost-effective,” says Lerman, “higher performing, rock-solid, reliable, better than all of the hardware-based platforms that are out there, and that are also very expensive — companies as big as 300 to 400 people trying to do something that we can do with a very small company.”
For instance, PSG has delivered a HDT2000 High-Definition broadcast server system to New Jersey Network to provide flexibility in broadcasting NJN’s high definition content.
‘We have specific needs when it comes to broadcasting digital video content,” says Rick Williams, assistant director of engineering, “and the folks at PSG have really filled a niche. Early last spring we were challenged with coming up with a way to record HD content from our PBS network, and they were able to come up with a cost-effective solution. As a state agency we have to go through a stringent vendor purchasing process, and they were able to meet it.”
The PSG system captures, stores, and then plays back the HD content delivered from the national PBS network. “It’s very hard to do with HD content,” says Williams, “because you have to have the HD infrastructure in place. PSG was able to come up with a system that recorded content and played it back out automatically. That really helps us; it’s a labor-saving device.” The PBS material can be aired at the station’s convenience rather than when the network delivers it. “It also gives us a venue for our own local HD content, which we can put into the PSG system.”
But why PSG? “There are a variety of manufacturers doing this,” says Williams, “but in this instance we needed somebody to help bridge the gap between where we are currently in our infrastructure build-out, and where we are going to be in the next couple of years. Ultimately, we will probably go with a much larger system, but right now they really came in at the right time and the right place.” And the right price: “You can buy these kinds of systems for hundreds of thousands of dollars,” says Williams, “and they came in at tens of thousands.”
The PSG system is “working well,” says Williams, “and actually is part of a continuing process of testing and enhancement. As we require changes they are able to keep up with those requests.” And the exchange is two-way: “They also provide us with new techniques. We’re doing a lot of beta testing for them.”
It took two years after DIVA folded to acquire NJN as a prestige client. “We took a grass roots approach,” says Lerman “which meant building the technology first.” By the spring of 2003 they had succeeded in developing the base technology — not just a demo or prototype, but the core implementation of a video server using off-the-shelf PC hardware.
However, “we learned pretty quickly the reality was the cable companies aren’t really going to buy from a start-up,” says Lerman.
Instead of looking for venture funding, or attempting to staff up and build a huge company overnight, Lerman and Fredrickson chose to take a step back and re-consider the market for their technology. “We did not believe there was any investment money available in the spring of 2003,” says Lerman. “We were not going to burn time trying to raise money.” Instead, “we can build some products and get customers, and really let that speak for itself.”
Princeton Server Group was formalized in July, 2003. The original founders: Jesse Lerman as president & CEO, Jim Fredrickson as chief technical officer, and Harini Subrahmanyam as principal engineer (Jim and Harini met at DIVA and are now married).
As they recognized the need to re-focus their target markets, Lerman and Fredrickson also drew on their Princeton area connections to add marketing and business expertise.
Lerman had kept in touch with John Romanowich, a former colleague at SRTC who has been active in the Princeton entrepreneurial community, and who was in the process of starting his own third company, Automated Threat Detection (U.S. 1, January 12, 2000).
“John had helped with due diligence on Princeton Power Systems for its investors,” says Lerman, referring to another start-up at the Forrestal campus founded by Princeton University graduates. “He thought with my ties to Princeton University, our start-up would be a good candidate for Ed Zschau’s technology incubator.” Zschau, a professor at Princeton, had developed the New Enterprise Lab incubator on Princeton University’s Forrestal Campus. PSG then began sharing space with Princeton Power in one of the Forrestal lab buildings.
In addition, Romanowich introduced PSG to Steven Georges, who eventually joined PSG as chief financial officer. Georges had worked in the media industry since graduating from Harvard Business School with an MBA in 1984, having earned his bachelors from Penn’s Wharton School in 1980. Georges began his career at CBS, and then joined Time Warner in 1991 to co-found and then manage the NY 1 News regional news channel. From 1994 to 1997 he was vice president of business development at Time Inc. New Media, and director of finance and administration for Time Warner’s News on Demand.
By 2003 Georges had started an independent consulting firm to provide strategic financial leadership for media, technology and nonprofit projects. “I was very tired of commuting to New York where my network was,” says Georges, “and I just put a nickel on a map around Princeton and said this is the radius I wanted to look in. I had been targeting finding a team that felt right locally. I liked Jesse: his values, his vision and creativity.”
Romanowich also had previously introduced Georges to Paul Andrews, who became PSG’s vice president of product marketing and systems engineering. Andrews graduated from the College of New Jersey with a bachelors in engineering and then joined RCA (GE) Americom in 1984. He did engineering, operations, program management, and product development for a succession of satellite companies: joining Edgix, a satellite caching start-up, in 1996, co-founding SkyEx Networks for satellite file delivery in 2001, and consulting to Loral Skynet on satellite two-way broadband until December 2003.
This group then spent the summer of 2003 getting to know each other and brainstorming on possible markets and business directions for the summer.
“It’s the longest interview I’d ever been in,” says Andrews. “Starting in July we had a Monday morning coffee club. We got together every Monday in person and talked about the potential for markets, and then it snowballed from there. We also corresponded by E-mail just about every day.”
“We were looking for which markets felt right,” says Lerman, “where we think we could make an impact quickly, and generate early revenue so we could self-fund the company.”
“We went through a whole process where we were brainstorming all sorts of ideas,” he says, “some of which were really amazing ideas and could have made a ton of money, but were really hard for a very small company to go after. We still have those ideas, and they are waiting for the right time. We are trying to grow at the right pace.”
“We started realizing there were some very interesting markets that the big players wouldn’t go after,” says Lerman, “because they were not quite big enough.”
“From my experience in the satellite industry,” says Andrews, “and the kinds of customers that came to us — schools and big television stations and small stations — I had an archive of problems that the bigger companies could not solve because there just was not enough market there, or the technology was not right.”
The result of the brainstorming in summer 2003 was a clear strategy for PSG to focus on developing on-demand services for the kinds of customers that previously could not afford high-end proprietary solutions, such as corporations, universities, nonprofits and communities.
“PSG has ‘big time’ experience with digital media technology and business,” says Lerman, “including cable VOD, satellite, NY1 News, Sarnoff, and DIVA. Our technology approach (a pure software media server engine that leverages standard PC platforms and IT technology) allows us to drastically lower cost, go to market quickly with new features, and simplify digital media systems. This has allowed us to solve problems for niche markets that could not previously afford or easily leverage digital media technology.”
“We started realizing there are a lot of opportunities that are community-based,” says Lerman. PSG is currently working with several local organizations as its first customers. It is deploying classroom video on demand systems for education (including the Princeton and Hopewell high schools), program storage and scheduling servers for community broadcast stations (including Princeton’s TV30, a community cable station), video distribution edge servers for education and emergency management (including NJN’s Digital Classroom), as well as high-definition broadcast servers for PBS affiliates (including NJN).
TV30, Princeton Community Television, went on air with the PSG B1000 broadcast server in late July. This kind of public-access broadcast station is known as PEG, for Public access, Educational, and Government.
By storing programs on a server as digital video files, the PSG server allows PEG stations to conveniently manage and schedule their entire broadcast day, instead of having to juggle analog video tapes and switch sources among a group of analog video recorders. “One of the things we were looking for was to get away from proprietary boxes and tape decks,” says Serge Suarez, technical director at TV30, “and just go entirely over to basing our program schedule on a generic PC and using MPEG-2 [digital video] files as the content vehicle.
One key advantage for Suarez is the standard PC platform: “Since the product is based on a generic architecture, you don’t have to worry about shipping a box back to the factory to get a part fixed. If you need a bigger disk or a higher network bandwidth card, you can just open the box and slap it in there and you are done.”
Even better, the PSG server uses a standard Web interface, so the system can be controlled remotely. “It allows us to manage it much more efficiently,” says Suarez. “We can do all of our program setups from home or wherever you happen to be at the moment.”
Remote management is a particular blessing for station managers in bad weather or emergency situations. “One person we spoke to would guess whether school was canceled or not before going home,” says Georges, “and then he would get up at 3 a.m., and if he was right he’d go back to sleep, but if he was wrong he would have to drive in and change it.”
The PSG broadcast server system for PEG stations is priced at $4,950. It includes 500 gigabytes of storage, enough to hold approximately 250 hours of DVD-quality digital video. It stores and manages the program material, and then plays it out to the cable system according to the preset schedule. The server simply appears as a shared storage resource on the network, so it is easy to access: you can just drag and drop files to it. “This is network-attached broadcasting,” says Andrews, “it looks like a storage server, and you can use it for archiving.”
The PSG approach also allows a growth path for TV30. “It’s open ended because of the way they designed the software and the hardware platform,” says Suarez. “Down the road we are going to be adding a video capture card that will allow us to capture analog inputs under schedule control,” such as the current live monthly broadcast from the Princeton Arts Council.
PSG also offers a separate storage server so that stations can archive and access their libraries of material. “PEG stations have a huge problem with storage because VHS tapes are big,” says Andrews. “They’re starting now to archive to DVD because discs are easier to store, but they still have the problem of accessing it.” The PSG S1000 and S2000 servers provide terabytes of storage and up to 2 gigabits per second of throughput for simultaneous video streams for prices in the range of $5,000 to $10,000 to $20,000, depending on the storage capacity. These systems also offer dual power supplies and RAID disk drives to provide protected storage.
“We’re basically running our station with it,” says Suarez. “We have a handful of volunteers, and a very limited budget, so we have to get something that basically runs by itself and doesn’t require a lot of tending.”
“We’re quite happy with it,” he says. “It’s exactly what we wanted.”
Broadcast stations are a good market for PSG. “We look for markets that have a lot of need,” says Andrews. “New Jersey is nice because it is densely populated state with a lot of cable systems, and PEG channels (90 in the state). Some are run by schools, which intersects with another market: classroom video on demand.”
In the educational market, PSG can offer the same kind of centralized archiving and administration of digital media on servers, but deliver the video over the local area network to set-top decoder boxes in the classrooms. “Schools have invested in digital networks,” says Georges, “and they want rich media, because kids learn visually. But when they bring media into the classroom they’re wheeling in a VCR.” This is a nice match to PSG’s original focus in video on demand: “These are customers that could not afford a classical VOD system,” says Andrews, “and don’t need all of the other things you need to run a VOD system like billing.”
The schools have already entered the digital media age, with network connections and media departments. “Schools create a lot of content internally,” says Andrews, “all the baseball and soccer games, and it typically gets lost. It goes on a videotape in a locker somewhere; it’s lost institutional memory. It’s valuable stuff, since the way people learn is building on the efforts of previous generations. If you are a kid actor trying to learn your part in a ‘Man of La Mancha,’ wouldn’t it be great if you could go back and see how it was done in previous years.”
The system also needs to be easy to use. “We provide set-top boxes in every classroom,” says Lerman, “and the centralized storage server in the data center. The teachers can point at the set-top box with the remote control, just like Comcast, except all the content on the server would be material that the school district has deemed important.” Teachers also can pull out selections from the stored material as pre-stored play lists to then be used to augment the classroom curriculum.
Storing the content on-site not only provides more convenient access for locally-generated material, but it also avoids the bottleneck of the Internet connection. “People are trying to put a library of content out on the Internet,” says Lerman. “This will be completely unusable — you can’t have 25 or 100 classrooms all trying to access the Internet at once. We’re bringing the cache inside the school so you now have high-quality instant access.”
Since the PSG system is compatible with off-the shelf set-top boxes, the cost to equip each classroom rides consumer pricing, now down to around $100 to $200 per unit. Similarly, by using standard disk drives, the PSG systems can grow in capacity with new technology. “Schools have an archive of existing video tapes that they are able to ingest into our server,” says Andrews. “Our archive servers are multiple terabytes with twelve or more hard drives. Early next year you could have over 10 terabytes.”
PSG is deploying classroom VOD systems this summer for use in the new school year, for the Princeton Regional School District, the Hopewell Regional School District, and for the Arizona State University-West media studies department. PSG is also developing a digital multimedia system for the Numina Art Gallery at Princeton High School for installation this fall.
“Princeton Server Group has taken an ‘old fashioned’ approach to growing a business,” says Lerman, “starting in the community, building practical solutions, and growing through word of mouth. For example, Peter Thomson from Princeton Regional Schools is an early adopter of PSG’s Classroom VOD suite. He recommended we speak to TV30, Princeton’s community PEG-TV station. TV30 recommended us to stations in Saddle Brook and Woodbridge. Woodbridge introduced us to Edison and Metuchen.”
And the growth continues: In mid-August, PSG delivered broadcast and archive servers for the community station in Saddle Brook and for the PEG station in the town of Keizer, Oregon.
“We’re self-financed, and cash-flow positive,” says Georges, “a little bit of money is going a long way. We really believe in it. We like the idea of bootstrapping. It’s like just in time; it lets you see where the problems are quickly.”
“It’s easier growing this ourselves,” says Lerman, “going after the markets that may not offer the big fast reward. The technology itself is suitable for the other bigger environments, and as we grow we’ll pursue those other markets.” For now, however, “we’re really happy about these markets and we feel we are contributing a lot to the community. It’s exciting to see a PEG broadcaster who is getting the first taste of a digital playout — seeing how easy this stuff is — and they’re just so thrilled.”
“PSG just happens to be in our backyard,” says Serge Suarez at TV30, “and they obviously have a lot of experience given where they came from. Their philosophy and their offering is basically just what we are looking for. When you call them, the entire office has very qualified and very savvy people.”
“It’s nice knowing that there’s a New Jersey company, a local company, that can help us out,” adds Williams at NJN, “and they’ve been able to provide that niche. They’re a small group of guys who have a very productive output.”
Princeton Server Group, 501 Forrestal Road, Suite 219, Princeton 08540. Jesse Lerman, president & CEO. 609-258-8098. Www.princetonservergroup.com
Doug Dixon’s Manifest Technology website (www.manifest-tech.com) has reviews and commentary on computers and computer technology.
For the complete calendar events in central New Jersey, go to www.princetoninfo.com/us1evts.htm
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