Ruminations on Russia

DRM & File Sharing

Coincidence?  Fred posts, I go to visit a company that moves in the same area.  I think that it has great applications in the Adult movie / online pron business – at least as a starter.

Back in 1997, some friends showed me a deal called Reciprocal.

Actually in 1997, the company wasn't even called Reciprocal, but that's what it became. The idea was great. Reciprocal had licensed some core technology called Digital Rights Management (DRM) from a company called InterTrust and was building an entire system around the InterTrust technology that would allow content owners to make their content available on the internet without having to worry about illegal file sharing and copyright violations. The Reciprocal solution would insure that whatever rules the content owner wanted to create around the consumption of their content would be enforced. The system even allowed for "superdistribution" which is the concept that everyone who passes on a file to another person can be rewarded for doing that when the ultimate recipient pays for the content.

I liked the idea, saw that it was a necessary building block for internet commerce, and made an investment in January of 1998.

Things didn't work out too well for Reciprocal. The big problem is that the dogs didn't eat the dog food. The system worked pretty well, but the Company couldn't convince the big content owners to adopt their system. Everyone was looking for a "standard" to emerge, but none did.

Microsoft was a big investor in Reciprocal and even their considerable support couldn't get the various content owners to move. The Company ran out of money in the fall of 2001 and Microsoft took over the business as a result of a bridge loan it had made to the Company.

Fast forward to 2004. DRM is in the news in a big way all of sudden.

Intertrust, which went public and struggled for the same reasons, was taken private by Sony and Phillips in a transaction that is reminiscint of the way that Microsoft took over Reciprocal.

But InterTrust had its patents, the same ones that Reciprocal had licensed back in 1997. They had sued Microsoft for patent infringement in 2001. Last week Microsoft paid InterTrust $440 million to license the InterTrust patents and settle the long standing legal battle.

And also last week Rob Glaser sent the now infamous email to Steve Jobs looking for a partnership to team up against the newly strengthened Microsoft. Real has to pick a DRM standard. Rob's head is telling him to go with Microsoft, but his heart is telling him to work with Apple. Sadly for Rob, Steve doesn't seem interested.

So even with all the progress made in the past year, the market is still looking for a "standard". Will it be Microsoft's WMA which includes the Reciprocal technology and a valid license to the InterTrust patents? Or will it be Apple's Fairplay which is by far the most user friendly DRM system i have seen? Can the market continue to develop with competing DRM systems?

I don't know the answers to all these questions and i am not sure Glaser, Jobs, and Gates do either. But i hope that they get them figured out because i still believe DRM is a critical foundation technology for internet commerce and i wouldn't want to see Real or Apple go the way of Reciprocal and InterTrust.

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[A VC]