The Future of Digital Content Distribution…enabling the controlled distribution of digital content

An SAIC Company

Stan MoyerExecutive Director

Applied ResearchTelcordia Technologies, Inc.One Telcordia Drive 1A-361Piscataway, NJ 08854Voice: +1 732 699 2966Fax: +1 732 336 7014

E-mail: stanm@research.telcordia.com

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Talk Outline

Background dataThe problem with current content distribution offeringsThe Digital Content Mediator solutionAlternative business modelsSummary

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Current State…

In October, 2004, content became the leading U.S. online activityNetwork operators would like to monetize both illegal and legal digital content trafficAmount of (legal and illegal) digital content traffic is expected to increase much more — includes music, movies, games, ringtones, photos/image, software, …*

*Multiple sources**Source: Nielsen/NetRatings

Oct. 200316.5%

45.2%

35.3%

3.0%

CommerceCommunicationsContentSearch

Oct. 200415.8%

39.8%

40.2%

4.2%

CommerceCommunicationsContentSearch

Share of Time SpentOnline in the U.S.**

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$224$556

$945$1,314

$1,826

$2,538

$3,528

$-$500.0

$1,000.0$1,500.0$2,000.0$2,500.0$3,000.0$3,500.0$4,000.0

mill

ions

2003 2004 2005 2006 2007 2008 2009

U.S. Online Music Market

Online Music Market DataMusic download market:

US online music market expected to grow 148% to $556M and 70% to $945M in 2004 and 2005*EMI predicts 39% CAGR in digital download market and 32% net growth in consumption from online music**Digital download music market expected to be $2B by 2008***$359.1M worldwide market in 2003 expected to be $14.7B by 2009†

*PiperJaffray, Sept. 1, 2004**Bear Stearns, July 19, 2004***London Financial Times, Nov. 20, 2004 (also Forrester)†WinterGreen Research, May 2004

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Music Downloads Usage

0

1

2

3

4

5

6

7M

illio

ns

Aug Se

pO

ctN

ov Dec Jan

Feb

Mar

Apr

May Jun

Jul

P2PLegal

Households with a member downloading music

Source: NPD Group, Inc., Oct. 13, 2004

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Peer-to-Peer “Market” Information

*Bear Stearns, July 19, 2004

Source: http://www.cachelogic.com/research/index.php

Peer-to-peer traffic– single largest consumer of data on ISP

networks — varies from 55% in Europe to over 80% in Asia

– continuing to increase — contrary to some reports

– consists of mostly “illegal” content downloads — one study shows six times as many peer-to-peer music downloaders vs. legal music downloaders

At any given instant, 7M people are using P2P networks in the U.S.“iTunes 100m downloads is paltry compared to 1 billion files available through file-sharing-networks”*

– P2P executives argued that the music industry needs to embrace P2P networks and monetize them*

The problem with current content Distribution Offerings…

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Today’s Limitations

CustomerCustomer

ContentRights

Holders

ContentRights

Holders

99¢

65¢

contentcontent

Operating Cost: 35¢Profit: nil

Operating Cost: 35¢Profit: nilcontentcontent

ContentDistributorContent

Distributor

P2P UserP2P User P2P UserP2P Usercontentcontent

0¢

0¢

• Content distributors not making (much, if any) money• Network operators not receiving revenue from digital content distribution over their network

• Content rights holders and distributors receive no income from peer-to-peer file sharing

Source: NY Times, Dec. 2003

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Store-front

DCM Overview and SummaryEnables network operators and service providers to enter the content distribution business without having to host large volumes of content or provide large amounts of access bandwidth

– “Mediates” the exchange of digital content between two parties

– Does not get involved in the actual content transfer or any DRM steps

ContentContentInfoInfo

Billing/Payment

ContentTransfer

Authenticate

Verify

Source Info

Authorize/Bill

UserUser

DCMDCM

DRM Server(optional)

DigitalContent

PeerPeeror

Browse/FindContent

Content Acquisition Steps:1.User searches for and

locates content2.DCM authenticates user

and verifies authenticity of content source

3.DCM provides encryption key for content source

4.User downloads content5.DCM verifies downloaded

content is authentic, bills user, and provides decryption key

6.User decrypts and accesses downloaded content

Content Acquisition Steps:1.User searches for and

locates content2.DCM authenticates user

and verifies authenticity of content source

3.DCM provides encryption key for content source

4.User downloads content5.DCM verifies downloaded

content is authentic, bills user, and provides decryption key

6.User decrypts and accesses downloaded content

GUI

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DCM Overview — Key Attributes

Balances the rights of the content owner with the demands of the consumer — e.g., enables a legal peer-to-peer content sharing network that is attractive to all stakeholdersOpen and flexible architecture that simultaneously supports different:

– Payment models (e.g,. Prepay, postpay, micropay, 3rd party pay) as a modular, back-end option

– DRM schemes– End devices and applications– Content transfer networks

Ability to prove condition of the content elementProvides the ability to offer incentives for onward forwarding of contentSystem is “select” — i.e. people not in the system can not receive the same benefits as those who are in the system

– Encourages people to “stay in the system”

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Digital Content Mediator SolutionCentralized Distribution Model

CustomerCustomer

verifies

ContentRights

Holders

ContentRights

Holders

contentcontent

88¢

65¢OperatorOperator

3¢

Operating Cost: 15¢Profit: 5¢

Operating Cost: 15¢Profit: 5¢ Operating Cost: 1.5¢

Profit: 1.5¢ Operating Cost: 1.5¢Profit: 1.5¢

DCMDCM

• Enables network operators to offer digital content services• Reduces operating costs for content distributors

Network Operatorw/DCM solution

CustomerCustomercontent

contentcontent

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Ntwk. Op.NtwkNtwk. Op.. Op.

Digital Content Mediator SolutionPeer-to-Peer Distribution Model

ContentRights

Holders

ContentRights

Holders

65¢

OperatorOperator3¢

Operating Cost: 2¢Profit: 5¢

Operating Cost: 2¢Profit: 5¢

Operating Cost: 1.5¢Profit: 1.5¢

Operating Cost: 1.5¢Profit: 1.5¢

DCMDCMDCM

P2P UserP2P User P2P UserP2P Usercontentcontent

verifies 85¢

• Enables revenue generation from P2P transactions(for network operators, rights holders, and distributors)

10¢

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DCM Value Proposition Content Distributors

– Won’t have to anticipate demand for titles, manage massive server farms, or pay for them and their associated bandwidth

– Can use choice of any DRM scheme or none, as believe customers will accept them

Rights holders —additional revenues– Will get paid (and have tracking reports) for peer-to-peer content

transfers– Can get paid for niche or back catalog material distributed over

P2P that is not profitable in other distribution channels Consumers/Users

– Downloaders — cheaper content and better qualityP2P content that is known to be authenticPotential benefits: restoration of collections if hard drives failGreater variety at lower cost than the I-tunes model can provide

– Uploaders — incentive to stay “in the system”Converts a legally risky activity into a potentially profitable business

Network Operators — new revenue stream– Participate in content distribution, not just transport– Ability to offer a service beyond their physical footprint– Analogous to PSTN 800 and 900-type services

Alternative Business Models…

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Subscription Business Model

Many in the digital music industry are advocating a subscription model for online music (as opposed to the pay-per-download approach)

– E.g., User pays $15-20/month for unlimited downloads– User value proposition is compelling — e.g., it would cost

~$10k to fill an iPod with music with pay-per-download, but would only cost $15-20/month with a subscription model

– User does not “own” the music anymore — i.e., when they stop paying the subscription, they “lose” the music

– Microsoft’s Janus DRM that supports portable subscriptions should increase the popularity of the subscription model

It’s likely that multiple business models will exist and will need to be supported

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Summary

The digital content wave is just beginningNow is the time to create and deploy the necessary technological solutionsWe need to re-evaluate what’s been done to date — e.g.,

– Do we need DRM– What business models need to be supported

All stakeholders in the value chain need to be flexible during this evolution