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Ride the wave of the future, my man!
Buy this future giant now for 260% gains in the next year
by Briton Ryle
"there is no reason anybody would want a computer in the home."
— Ken Olson, founder and president of Digital Equipment Corp., 1977
"this 'telephone' has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us."
— Western Union internal memo, 1876
Predicting the future is a tough business. Notwithstanding the sentiments of my esteemed colleagues in the Reckoning business, human beings have an amazing ability to adapt to, and even embrace, change. For the investor, accurately predicting change is not nearly as important as recognizing that change will occur.
We'd all like to say that we had the foresight to buy Microsoft in 1987. Or Apple on IPO day. But the fact of the matter is, we probably wouldn't have.
'too speculative," "unproven technology," 'too expensive to gain popularity" — any number of excuses could have kept your money 'safe." Of course, if you'd put all your money in Microsoft back then, you'd be filthy rich. But that also would have been a stupid investment. Greed makes us do stupid things (like thinking about how much one would have made investing in Microsoft).
Speculating for dollars
On the other hand, a couple grand still would've made you a small fortune, and actually would have been a very prescient move. With that in mind, I'd like to introduce you to Wave Systems (WAVX – NASDAQ). Wave Systems is a perfect example of stock that could multiply a couple thousand times over the next five years; or it could go the way of jet-packs and nuclear ovens. I think we're going to be hearing a lot more from this Massachusetts company.
Wave has developed a secure payment system for digital content, like games, music, pay per view movies and so on. The Wave System is a completely new way of doing e-commerce. Like any totally new technology, there are some hurdles to get over before it becomes the giant I expect.
E-commerce is already a dinosaur
What's wrong with the present system, you ask. Well, right now, each time you buy something on-line, a separate, unique transaction has to be completed. Only after your credit card has been approved can you gain access to the material you want.
It's a pain. It takes time to fill out the forms. And every time you buy on-line, you take a leap of faith that the vendor's server that stores your credit card information is truly secure. All it takes is one hacker getting into Amazon.com's database and tens of thousands of credit card numbers are laid bare. Call me crazy, but the fewer people that have access to my credit card number the better.
The Wave System offers an easier, less intrusive way to gain access to digital content. It's called the 'trusted client platform" and it moves the transaction from the vendor to the consumer. The transaction takes place inside the PC, set-top box or PDA.
The Embassy (EMBedded Application Security SYstem) e-commerce system is based on a flexible, programmable chip set built into whatever device you use to access and download Wave-Enabled content. Each chip has a unique number assigned to it, and the capability to meter whatever content you want to purchase. It works essentially like a secure debit card in your machine.
When you go to use downloaded Wave-Enabled content, the Embassy device processes the transaction locally and gives you access to the content. The terms of the transaction are recorded in the Embassy chip. At certain intervals, Wave goes into the chip and uploads the stored transaction information. Wave Systems then debits your account and pays whoever is owed, less its fees, of course.
For example, you can sample a few songs from a CD to see if you like it. But even better, you'll have access to a huge library of music and only pay for what you actually listen to. Once you've spent the equivalent of the purchase price for any particular CD, it becomes yours. The music would be stored digitally at your home.
Disruptive technology
The first question is why. Why go through so much trouble to handle an e-commerce transaction? Two reasons. The first is cost to the companies that provide digital content.
E-commerce software and infrastructure is expensive. Memberships expire, passwords get passed around, membership terms change, and it costs money to deal with all of this. You have to buy and maintain a massive database to process, store and route all the transactions. Not to mention the investment in network hardware and services.
Each transaction at Amazon requires a secure direct line between consumer and vendor. That's expensive, too. And server based e-commerce can only handle a limited number of connections at a given time. So not only does it take a massive investment to process e-commerce transactions, the current method may actually cost Amazon and other e-tailers money because only so many people can fit in the store at a time.
I don't know about you, but if there's a line coming out of one book store, I'll go down the street to the empty one. I don't care if it costs me an extra buck. And switching book stores on the Internet is as easy as typing barnesandnoble.
Securing the Internet
The second reason vendors will take to the Embassy system is security. Customers now access content by using a password. There's no way to prevent one person from signing up and then giving the password to all his friends.
Also, it's very common for hackers to gain illegal access to a website and steal passwords. In fact, there's a bunch of websites that give away passwords to supposedly secure sites (mostly porn). And software for cracking passwords is readily available, just check out pwcrack.com or alpinesnow.com.
Today, the password is the weakest link in the Internet security chain. The Wave system solves the problem because each user has a unique identity by virtue of the number embedded in the Embassy chip.
Pretty nifty so far. And it should be. Wave has been working on the system for over a decade. But the biggest hurdle for mass acceptance is getting the Embassy chip deployed on a mass scale and then getting the consumer to use it. Convenience and security will help. But there's still not enough digital content available for download to make adoption viable. The breakthrough that will make or break Wave Systems is digital TV.
Future prediction
Digital TV represents the convergence of entertainment and the Internet. And the FCC has mandated that TV stations offer digital broadcasting by 2003. It will take a couple of years for digital downloads to take the place of buying CDs and renting videos. But I don't think it's a wild prediction to say it's inevitable.
The home entertainment system of the future is likely to be a one unit combo — a computer/DVD/television/video game/stereo. Instead of buying a CD in a store, you'll simply download and store the digital information on your system. Same thing goes for movies and video games.
My wife and I constantly return movies we haven't watched to avoid the late fee. With Wave, you only pay after you've watched the video. No more late fees. To give you an idea of the benefit to consumers, Blockbuster took in nearly US$700 million in late fees in 1999 alone.
Why buy a video game when you can pay only for the time you actually spend playing it?
I think you're starting to see how the Wave trusted client platform empowers both the consumer and the vendor.
Wave Systems entered into a partnership with the Sarnoff Corporation, called WaveXpress, to take advantage of opportunities in the digital TV area. WaveXpress uses the Embassy system to deliver digital TV and broadcast content to the PC. An inexpensive digital TV tuner card is the only hardware needed. Digital TV content can be broadcast to the PC at a rate of 19 megs a second. I believe WaveXpress is Wave's meal ticket.
Getting it done
I know what you're thinking. How is this system going to be distributed? It's fine to have such cool technology, but how's it getting into the home? Alliances, my friend, alliances. And Wave's got a ton of 'em.
Applied Micro Devices (AMD) has a motherboard design that incorporates the Embassy chip set. The Embassy system chip set can be added to a computer board for as little as US$5. NEC Corporation is expected to include the chip set in some of their computers before the year is out.
Hauppage is testing the system in their set top boxes. The Sinclair Broadcast Group, a huge broadcasting company that reaches 25% of US households, is currently testing the WaveExpress Digital TV system. Hewlett-Packard is a security partner, as is RSA Security, Alladin Knowledge Systems and Verisign.
Panasonic is demonstrating WaveXpress in its digital broadcast hardware, as is Teralogic and Pinnacle Systems. Other partners include Compaq, Sun Systems, Cyber-Comm, Pollex Technology, IBM, Intertrust, Philips, TheGlobe.com, and InterVU.
Wave Systems holds several patents for its technology, which will be important as other companies attempt to move in on their turf. I mean, do you really think Microsoft will stand idly by while another company becomes a giant in the e-commerce space?
Standardized Wave
Right now, a consortium of bigwigs called the TCPA (Trusted Computing Platform Alliance) is attempting to establish some standards for secure computing. The TCPA was formed in October 1999 by IBM, Microsoft, Intel, Hewlett-Packard and Compaq. Its mission is to 'develop a specification that delivers an enhanced hardware and OS based trusted computing platform." Sounds an awful lot like the Embassy system, doesn't it?
The TCPA is expected to come out with its specifications sometime this summer. You'll definitely want to have a position in Wave by then.
But the really scary part is, I've only told you about a couple aspects of the business. There are more, which I really don't have space to explain in detail. One that bears mention involves the Cyber-Comm alliance. Cyber-Comm is an alliance of French banks and other companies seeking to establish a secure electronic banking system for France.
What you should do
Buy it. But remember: despite how good it sounds, this is a speculative investment. Since 1996, Wave has managed to generate a whopping US$262,075 in revenues. (Yes, that's thousands and no, you didn't read it wrong). On the upside, Wave just completed a US$122 million dollar round of financing at US$34 a share, which gives you some idea what the Wall Street institutional crowd thinks the company is worth. And with only 42 million shares outstanding, Wave has managed to avoid serious dilution in its funding efforts.
Only one analyst follows this company. He estimates 17 million Wave-enabled users by year-end 2003. Based on this, projected revenues for 2003 are US$633 million. If Wave is successful, these projections are extremely conservative.
As with investing in Microsoft in 1987, I don't think a large position is advisable. I also want to warn against chasing this stock. As a speculative, development-stage company, it will be among the hardest hit during corrections. I recommend taking a position in Wave Systems under US$25. I'm looking for a US$90 price tag by the end of 2000. Investor relations are handled by David Collins of Jaffoni & Collins, 212-835-8500. You can e-mail Mr. Collins at WAVX@jcir.com.
Read some updates to previous Future Files picks.
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