Sony, Philips Snap Up InterTrust

Music and consumer electronic giants Sony Entertainment and
Royal Philips Electronics on Wednesday announced a $453
million acquisition of DRM specialists InterTrust.

The purchase — done through Fidelio Acquisition Company (owned by Sony,
Philips and other unnamed investors — comes at a crucial time for Sony,
which is in the midst of the ambitious Movielink paid subscription service.

Movielink already has deals in
with both Microsoft and RealNetworks for digital rights management
(DRM) technology but, with Wednesday’s buy of InterTrust , Sony’s direction is clear.

InterTrust already has a lucrative pact to provide anti-piracy technology to Sony. That $28.5 million
deal called for Sony to use InterTrust’s DRM software and had the potential
to be much higher in value since InterTrust would be collecting royalties
for future Sony products and services that integrate its patents.

Under terms of Wednesday’s acquisition, Sony/Philips-owned Fidelio purchased
all of the outstanding stock of InterTrust for about $453 million (or $4.25
per share).

“The most important objective of the transaction is to enable secure
distribution of digital content by providing wider access to InterTrust’s
key Digital Rights Management (DRM) intellectual property on a fair and
reasonable basis,” the companies announced.

InterTrust holds 26 U.S. patents and has approximately 85 patent
applications pending worldwide. The company’s patent portfolio covers
software and hardware technologies that can be implemented in products that
use DRM, including digital media platforms, web services and enterprise

Industry watchers see the acquisition as part of Sony’s ambitious strategy to turn PlayStation consoles into a fully-networked device capable of distributing digital content.

InterTrust already has a legal fight on its hands with Redmond-based Microsoft over DRM patent rights and this move by Sony and Philips is yet another attempt to block the software giant from completely controlling the lucrative digital rights market. There is no word on the future of InterTrust’s lawsuit against Microsoft, which was filed last April.

For Seattle-based RealNetworks , the InterTrust sale could potentially put a squeeze on its operations. Sony and Philips have made it clear it would use the InterTrust technology to secure digital media distribution over the Internet — from online music to pay-per-view streams of full-length movies.

Sony and Philips, which pioneered the compact disk (CD) format almost two decades ago, plans to set up an open licensing program to resell the DRM technology to third-party firms looking to protect digital content.

While the potential for this deal resonates around the industry, many believe Sony stands to gain enormous benefits for its strategy to turn its PlayStation consoles into a full-fledged entertainment device.

The company’s PlayStation 3 game console, due to hit the market in 2005, is planned as a complete operating system common to various home appliances, allowing them to run game programs. With DRM technology slotted into the devices, the ability to deliver digital media — like audio and video content — is obvious.

It is a strategy already adopted by Microsoft in the game console space. The two powerhouse firms are betting that game consoles will evolve beyond being just game boxes to become the central hubs of home entertainment systems.

PlayStation devices already allow playback of CDs and DVDs and by extending these capabilities to the Internet to enable Web surfing and e-mail/IM delivery, the next step would be to add video-on-demand and digital music sales directly to consoles, making the InterTrust purchase a no-brainer.

Sony has deals in place with AOL Time Warner , RealNetworks and Cisco Systems to provide the current PlayStation consoles with access to a Web browser, instant messaging client, e-mail client, RealPlayer 8 technology and an IPv4/IPv6 dual protocol stack.

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