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Licensing for Legitimacy

Kaleidescape CEO, Michael Malcolm, describes the essential process of technology licensing.

Much has been written about the high-end Kaleidescape DVD server product line since its introduction last fall at CEDIA EXPO. With a combination of proprietary patent-pending hardware, software and services, Kaleidescape’s devices are designed to enrich the movie viewing experience while providing whole-house video distribution.

During nearly two years of research and development, Kaleidescape’s team took great care to ensure that product performance was a primary focus of their work. Just as critical to establishing the product’s legitimacy, however, was the new company’s quest to obtain proper licensing for its technology. In a recent conversation with Residential Systems editor Jeremy Glowacki, Kaleidescape founder, chairman and CEO Michael Malcolm, described this essential process.

Jeremy Glowacki: How did you begin the task of obtaining the proper licensing for your product?

Michael Malcolm: First, we spent a lot of time researching the required licensing agreements and copyright acts. We did a lot of research, retained some very good copyright attorneys and read mountains of license agreements. We finally found a way to thread the needle and were able to design and build a legal movie server for DVD movies.

Were there things that you had envisioned wanting to do with the server that as a result of your due diligence process you said, “Well, that we can do and that we can’t do?”

Yes, there were a lot of things that would be very reasonable things to do or at least things that customers would really want to be able to do that are precluded by the licensing agreements.

Can you recall of a specific example?

I can think of lots of them. Let’s just talk about some of the outputs. The DVD CCA is the organization that licenses the technology for removing the CSS protection. You must be able to remove the CSS encryption in order to play a DVD. It’s actually a criminal offense if you remove it without a license, because of the Digital Millennium Copyright Act. When you sign the licensing agreement you agree to follow the rules, and the rules control a lot of things. One big area is the type of outputs that you can have from any device that you play it with. You cannot, for example, have an RGB output. You can have component, but you cannot have RGB. You cannot have a digital output, except for ones that are approved, and the only approved ones are the DVI with HDCP or HDMI, which is basically the same thing. All other digital outputs are forbidden. There are a lot of high-end home theaters that use SDI, but you can’t have an SDI output.

Are these attempts at keeping the quality from being at the highest level and enabling high-quality pirated copies to be made?

Yes, I think their fear is if they have an unprotected digital output, it would make it easy for people to steal the “golden bits.” I think that some of those fears are misplaced. I don’t think there’s ever been a case of an uncompressed movie being stolen; it’s such a huge amount of data that just doing anything with it is impractical. That’s neither here nor there, but the rules are the rules.

But, aren’t there some rules that are regularly broken by manufacturers?

Yes, there are some that seem to widely ignored by DVD player manufacturers, in particular. One of them is the region control rule, which states that a device can only be set for one region, and you have a very limited number of times that you can reset the region on the player.

What does that mean, exactly?

The world is broken up into seven or eight regions. North America is Region One, Europe is Region Two and Japan may be Region Five. I think that the original concept is that motion pictures were released in a staged fashion; first in North America and then Europe. It took millions of dollars to make the reels of film and to ship them around the world. This made a worldwide release a very expensive and impractical thing to do. So they didn’t want people overseas being able to get their DVDs from, say, the United States early and then ruining the market for a movie over there. Now, I think this region control is something that the studios probably don’t care about that much, because they are doing a lot more worldwide releases these days. Therefore, a lot of the manufacturers make their DVD players region-free. We don’t, because it’s still a requirement in the DVD CCA license agreement.

Does that create any problems for you as a manufacturer?

It makes it more expensive for people to watch more than one region movie. They can still put more than one region on the server, but they have to have different readers to do so; it’s the reader where the region control is.

What other compromises did you have to make with the product because of legal requirements?

Well, when a customer has multiple homes and he wants to have the same movies on his Kaleidescape in his homes, the first question we’re often asked is “Can we just have them sync over the Internet?” So a little bit of arithmetic shows that this is just an enormous amount of data that you’re trying to send out of your house on the Internet. So, even if we could do that it would not be practical for most people the ever attempt. We will also have a dealer who’s doing three homes for one customer at the same time, and they’ll ask if they can just build them all up in the same staging area and load them once and just run them. Well, you could but that may very well violate the DVD CCA agreement. But even if it doesn’t, it raises some copyright issues. Thus far we’re just not supporting that capability. It would be very easy for us to write the software to do it but we just don’t want to do anything that would run afoul of the DVD CCA agreement or the laws of the land. The thing that makes our product work is that it’s a closed system between the reader, the server and the players in the home.

And yet the system is tied to the Internet for certain reasons, right?

You can get information from the Kaleidescape over the Internet, depending on how your own firewall is set up, but you can’t get video data. You could control the system, for example, examine logs or do remote debugging. The systems do provide quite a bit of diagnostic information over the Internet to Kaleidescape so that we’re able to solve problems when they come up. Most of the systems are connected full-time to the Internet, so they can download metadata about the movies and get new software updates.

Do you have an approximate number of how many licenses were required of the system to make it all legal?

I don’t know how many license agreements there are. It’s somewhere in the neighborhood of eight or 10. Some of them are for large pools of patents. There are around 2,000 patents that you have to license, but they’re under three or four license pools, but there’s one that has over a thousand.

How often do these have to be renewed?

Usually they require quarterly license payments.

Are we talking about substantial amounts of money?

Actually no. They’re not that substantial, because they’re designed for commodity DVD players. If you buy a $79 DVD player, that manufacturer still had to pay royalty fees. There have been some postings on forums on the Internet, speculating that the reason our system is so expensive is because we had to pay Hollywood a lot of license fees. That’s not true. We have to pay license fees for intellectual property, but it’s a not a very large percentage of cost.

You obviously took great care in bringing your system to market, and you went through all the proper licensing processes. Is there anything in hindsight that you learned that you wished you would have done differently?

I’m sure that we could have saved six months to a year if we would have had a better idea of what we were going with the product and if we’d known more about copyright law and how this industry works. We spent a lot of time just trying to figure out how it works and whom you license things from. It’s pretty bewildering for newcomers.

Jeremy J. Glowacki is editor of Residential Systems in New York City.