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Nielson - new cop on the block

Back in July I wrote a post that investigated whether companies with the most patents ended up with the best stock performance. It turned out that the answer was "no" but in looking at some of the companies in our sample set, we came across Digimarc (DMRC). The company is in the news again today as Nielson announced a partnership with Digimarc to implement what amounts to a DRM system on Internet video.

An excerpt from the announcement Nielson made today follows:

"The Nielsen Company and Digimarc Corporation (NASDAQ: DMRC) today announced a new service - Nielsen Digital Media Manager - that will enable media companies, social networks, peer-to-peer services and user generated content sites to monitor and manage the distribution of media content across the Internet.

Nielsen Digital Media Manager will use digital watermarking and fingerprinting to establish an industry-wide rules-based solution to copyright security and to assure copyright compliance. By providing a more reliable way to track content, the service will help clients realize the value of their digital content, promote the expansion of Internet-distributed media and facilitate a number of revenue streams, including ad-pairing, e-commerce, royalty reporting and others."

(Click here to read the entire company news release)

It is no surprise to see Nielson attempt to wade into this contentious area. While restrictions have been in place on music files in the form Digital Rights Management or DRM for some time now, there hasn't been a corresponding industry-wide movement in the realm of Internet video. Nielson says it already encodes 95% of national television programming so it has a leg up on competitors. As Viacom sues YouTube, it can be said that there are definitely customers out there waiting for a service such as Nielson plans to offer. Expectations are that the system will be available in mid-2008.

Naturally, I have a few comments on these developments.

First, it appears that no one has learned from the experiences of the music industry. Consumers have developed tremendous antipathy to various DRM schemes interfering with usage of digital music content. One has only to look at the falling sales volume of (often DRM-protected) CDs to see that consumers are happier with soft copies (MP3s) and that they demand the right to share content they have legally purchased. It appears that the Nielsen Digital Media Manager will allow digital video content owners to hound consumers in much the same way that the RIAA has done to music consumers.

Second, Nielson makes a point of using several interesting phrases including "ad-pairing, e-commerce, royalty reporting." After the initial police-the-Internet approach runs into consumer resistance and backlash, the revenue-related aspects of Nielson's system may assume greater importance. And here is where Nielson may really have a significant concept to exploit. If Nielson can actually provide ad-relevancy to video, that would be a major step forward. As Google has proved, relevancy is one of the most important predictors of ad effectiveness. Simplification of copyright issues related to legal file streaming or file downloading would also be a benefit to the industry for both content creators and content distributors. Unfortunately, these aspects of the system will not be available initially.

What about Digimarc?

The result of all this should be positive for Digimarc. It raises their profile and provides needed revenue. Financial terms have not been disclosed, but Digimarc said the contract "is expected to significantly contribute" to the company's financial performance in 2008. This couldn't come at a better time. Digimarc CEO Bruce Davis just presided over an earnings announcement where he delivered the bad news that the company would not be profitable in 2007 and that 2008 could be a difficult year due to uncertainty around the government's Real ID identification program. If the Nielson Digital Media Management system runs into resistance it could be a tough year for Digimarc.

Disclosure: author owns no shares of DMRC

Comments

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Anonymous said…
Digimarc 10-K 2008 - is Davis telling us everything?

I find it odd that Digimarc CEO Bruse Davis painted a rosy picture for FY08 while just two months back he dumped 20,000 of his own shares in the firm?

Is Bruce Davis providing stockholders the full picture and outlook for DMRC? No mention was made to the fact that in the last several weeks they have lost contracts in New Hampshire, Massachussetts, Virginia and are poised to lose the California DMV contract to their major competitor. What other states are we about to lose? Is this why the CEO is selling his own shares?

Digimarc has a major share in the US driver license business but it's shrinking and has been for quite a while. It seems to have accelerated now though? With a track record like that it's no wonder Davis is dumping his shares while he can. At $8 a share in the early part of 08 he'll get more than the $2 per that DMRC will be expecting to fetch by the same time next year (Q1 09).

How many contracts are we (DMRC) holding onto by means of procurment protest? Keeping our clients from awarding to our competitors can't make long term business sense?

Another question for Davis - Where are DMRC on the federal front? The major competitors are scoring long-term hundred million dollar contracts and we don't even see Digimarc in the hunt (L1 win WHTI Passport Card Award from DOS).

I don't think we get the whole story from Davis. It's time for him to go, but I think he'll beat us to firing him.

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