PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
Sorry, Napster fans. Even in a digital world where making high-quality copies is easy as pie, companies that exist to sell music, movies, and written materials will find a way to protect their copyrights. "People with valuable digital content have the right to protect that," says Paul Saunders, an analyst with Wit Soundview. "Just because the Internet came along doesn't mean those rights go out the window."
The way they will protect their rights is through a fledgling technology called digital-rights management. At this early stage, the apparent leader in this new field is InterTrust Technologies (
ITRU)
Its system includes what it calls a "DigiBox," which effectively wraps content in a secure container that can be opened by consumers only if they meet preset requirements -- such as entering a credit-card number. InterTrust collects a fee for licensing its software to content-selling companies, but it hopes to really cash in by getting a 0.6% cut of transactions.
As a stock, InterTrust, which debuted last October at $18 a share and soared from the start, has in the end had a disappointing early history. It rocketed to $60 by the close of its first day of trading and hit a high of $100 by mid-February. But as the Nasdaq crumbled and the music industry continued to drag its feet in adopting DRM technology, InterTrust plummeted, reaching a low of $12 3/4 on Aug. 1.
EXPERIMENTING. Its decline wasn't due to any problems at the company. Rather it was typical of "concept stocks with a low amount of revenue in relation to their market cap," says Chuck Jones, an analyst at Salomon Smith Barney who has a "buy" recommendation and a $35 price target on InterTrust. For its second quarter, InterTrust reported a scant $1.7 million in revenues (a 24% gain over the prior quarter) and a net loss of $11 million, or 13 cents a share.
But the popularity of Napster and competing free sites such as Gnutella and Freenet is finally forcing the music industry to start experimenting with charging for downloaded music (see BW Cover Story, Aug. 14, "Inside Napster"). "It is now glaringly obvious to them that they have to do something and do something soon," says Saunders, who rates InterTrust a "strong buy." Talal Shamoon, InterTrust's vice-president for media, agrees Napster has given the industry a push. "Napster framed the context in an uncanny fashion," he says.
Universal Music Group (
UMG), which announced on Aug. 1 that it will begin charging for downloaded music using InterTrust technology, is the first to step up to the plate. Its pilot project will make music from a few Universal artists available on a handful of partner Web sites for a steep $1.99 a track. (The tracks come with "enhanced multimedia content," and UMG also provides customers with $4 in a "digital wallet.") The day after the announcement, InterTrust rose $2 7/16, or 18%, to $15 3/4. "I wouldn't read a whole lot into what [UMG's] initial offering is," says Saunders. "The key point is that digital music is now available legally on the Internet, and it will evolve over time."
"BEST CHANCE". Another major record label, BMG, will follow that lead, says Shamoon. "Over the next six months there will be a tremendous ramp-up in the deployment of content," he promises. But getting record companies to adopt the InterTrust system is just part of the equation. Consumers must be persuaded to use the software, which they must download and activate. InterTrust has the potential to become like Adobe or RealNetworks, brands for so-called plug-ins that computer users trust and often employ without being aware they're using the technology, says Jones. "InterTrust, if anybody, has the best chance of succeeding," he says, but admits that "the acceptance by end users will be the major question."
That's why a deal with America Online, announced on June 27, was a real coup. Not only will InterTrust be a technology partner for AOL's digital offerings but InterTrust's software will be included on promotional CDs containing AOL version 6.0, to be released later this year. That will get its DRM software out to millions of new users. Seeing big names like AOL and Universal partner with InterTrust could induce "fence sitters" to do deals as well, says Jones.
Given the current mood of the market though, deals might not be enough to bring investors on board. To prove that its business model is working -- and justify its $1.2 billion market cap -- InterTrust will have to produce serious revenues from transactions. "We're at the very early stages of that," Saunders estimates. "Significant revenues won't happen until 2001."
BEYOND THE MUSIC. Furthermore, InterTrust's technology will need to spread to digital downloads of more than music, such as videos, books, and magazines. "If I see it's far and away the leader in music, then the next step is how successful will it be penetrating other markets," says Michael Florin, an analyst with Gerard Klauer Mattison & Co., who rates the stock "neutral."
InterTrust faces growing competition in the DRM space from large software companies such as Microsoft as well as pure-plays like Preview Systems (
PRVW). "I would argue that InterTrust probably has the best technology among DRM players," says Florin. "But their prospects really depend on how quickly digital distribution evolves and how many competing solutions there are in the marketplace." A major risk is that another company's technology could become the standard for DRM.
Thanks to raising $130 million in its initial public offering and an additional $90 million in April, InterTrust has enough cash to carry it to when profitability is expected -- if its business model works. It's just the kind of speculative stock that many investors were willing to bet on when the Nasdaq was sizzling but are wary of now. Yet InterTrust bears watching as consumers get a chance to try out its system. There are still plenty of unanswered questions about the adoption of DRM, but if InterTrust turns out to have the technology of choice for helping companies protect their digital rights, investors could be hearing very sweet music.
Stone is an associate editor of Business Week Online Edited by Beth Belton
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
