Sony, Philips to buy InterTrust for $453m

Sony Corp and Royal Philips Electronics NV are to jointly acquire InterTrust Technologies Corp for $453m, in an effort to protect future revenue streams under threat from the rise in web piracy, writes Tom Jowitt.

However, there has been immediate speculation that Microsoft Corp would step in with a counter bid, which was first mooted during InterTrust's restructuring in May. InterTrust has repeatedly pummeled the software giant with patent infringement lawsuits and these lawsuits were expanded to include both .NET and the Xbox. Now pretty much every piece of Microsoft platform software is a part of the lawsuit.

The crucial hearing, in which the judge determines the meaning of the patents, will happen early 2003. However, statements from Sony and Philips seem to indicate they may be more interested in licensing out the technology "on a fair and reasonable basis" than in continuing to pursue the lawsuit.

InterTrust develops software that prevents the unauthorized copying of digital content (such as music or films). It enables an operating system to authenticate software components and allows them to run based on certain rules. It also allows for the secure delivery of digital content, either business-to-business, or business-to-consumer. This type of technology is now recognized as vital for most media organizations that wish to protect their digital content in this post-Napster environment.

For the acquisition, Sony and Philips used the name of Fidelio Acquisition Company, LLC, a company formed by Sony Corporation of America (a subsidiary of Sony Corp), Royal Philips Electronics and certain other investors. It will pay $4.25 a share, a 26 per cent premium on Tuesday's closing price of $3.37 in Nasdaq trading.

InterTrust's board of directors have unanimously approved the acquisition, and have agreed to tender all their shares of InterTrust common stock, representing approximately 20 per cent of the outstanding common stock, in favor of the transaction. The acquisition, which is subject to customary closing conditions, including regulatory approvals, is expected to close in early 2003.

Both Sony and Philips were keen to stress that the acquisition will allow wider access to InterTrust's key DRM intellectual property, and will allow them to offer a range of new services to consumers and businesses.

Until May 2002, InterTrust was a down-on-its-luck digital video software company that used to employ nearly 300 people. It then decided to become an intellectual property licensing company, and ditched new sales of its digital rights management products and laid off 70 per cent of its employees, leaving it with just 39 employees. In May, Sony agreed to pay InterTrust $28.5m plus royalties for its technology.

The Santa Clara, California-based company is a leading holder of intellectual property in Digital Rights Management (DRM), holding 26 US patents, with approximately 85 patent applications pending worldwide. Its patent portfolio covers software and hardware technologies that can be implemented in a broad range of products that use DRM, including digital media platforms, web services and enterprise infrastructure.

Web piracy is behind an expected 7 per cent fall in recorded music sales around the world this year. CD sales are expected to drop 5.4 percent, with cassette and LP sales declining even faster. In a recent music industry report, sales are expected to bottom out at £18bn ($28.5bn) in 2004 before growing again in 2005 when the industry adopts tougher controls on copying CDs and online file sharing. The report states that while the decline is not irreversible, urgent action is needed to limit the downloading and copying of music.

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