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Excerpt from Brilliant Digital Entertainment's Annual Report

Read an excerpt from Brilliant Digital Entertainment's Annual Report (Form 10KSB), filed with SEC on April 1, 2002

 

Excerpt from Brilliant Digital Entertainment's Annual Report (Form 10KSB), Filed with SEC April 1, 2002

ALTNET, INC.

In February 2002, we formed Brilliant P2P, Inc., later renamed Altnet, Inc., to create a private, secure, peer-to-peer network utilizing existing, proven technology to leverage the processing, storage and distribution power of a peer-to-peer network comprised of tens of millions of users. Altnet intends to license commercially available digital rights management technology to protect against infringement of the proprietary rights of the owners of the content distributed over the Altnet network. Altnet licensed the peer-to-peer technology necessary to operate the network from Blastoise, Ltd. doing business as Joltid. Blastoise is owned and operated by the developers of the FastTrack P2P technology, the underlying technology which operates the KaZaA and Grokster P2P networks. Blastoise owns the rights to the FastTrack technology. Pursuant to our agreement, Blastoise acquired 49% of the outstanding common stock of Altnet.

CREATION OF THE ALTNET NETWORK

Peer-to-peer computing is the sharing of computer resources and services by direct exchange between computer systems, and not through a central server. Peer-to-peer computing applications include the exchange of digital files and other information, processing cycles (the cycles by which data is processed in the central processing unit of a computer), cache storage (temporary storage of files in the central processing unit of a computer), and disk storage. Peer-to-peer computing takes advantage of existing desktop computing power and networking connectivity, allowing users to access the collective power of individual computers to benefit the entire enterprise. Millions of computers are logged onto the Internet at any given time, each with excess processing power, excess storage capacity and unused bandwidth. Through Altnet, we intend to create a private peer-to-peer network to enable our clients to access and utilize this excess processing power, storage capacity and unused bandwidth for multiple applications.

To develop the Altnet private peer-to-peer network, each computer that comprises the network must be equipped with a software program. To distribute the program, we bundled it in a package, that we call ALTNET SECUREINSTALL, with our Digital Projector. Pursuant to an agreement with Sharman Networks, SecureInstall, along with the Digital Projector, is being downloaded as part of Sharman Networks KaZaA Media Desktop, which has consistently been averaging in excess of two million downloads per week since we began bundling our software in the fall, 2001. The basis of the SecureInstall is our b3d Installer technology. The Installer technology connects to file servers, P2P networks and ad servers, via "connectors", for the purpose of distributing files across the network. These "connectors" consist of small amounts of JavaScript code plus small, encrypted install scripts used by the Installer. These components help facilitate the delivery of files - ad banners, music files, documents, software files, etc. - across the network. Apart from facilitating Altnet SecureInstall connectivity, the Installer is a full-fledged software installation system, with key features including file compression, file patching and file encryption. The file compression reduces download sizes, the file patching allows software updates to be made available as 'patches' rather than full downloads, and file encryption provides protection from tampering for files on the network, even if they are on the hard drives of thousands of user's PCs connected to a P2P network.

To maximize the efficiency of the Altnet network, selected users with higher than average processing power, significant free space on their hard drives and broadband connectivity to the Internet, will first be engaged by Altnet to become main hubs on the network. We refer to each of these hubs as a qualified PC, or QPC. We intend to enter into an end user agreement with the owner of each QPC pursuant to which we will compensate the owner for access to and use of their computers while logged onto the Internet. We have yet to finalize the terms of compensation, however we anticipate it will be a combination of non-cash components, which may include gift certificates, products and/or access to video content, and we expect to initiate this process some time in Q2 2002. QPCs will also be segmented based on geographic region and functionality to balance the demands on the network, thereby spreading evenly across the network the services to be provided.

A significant feature of the Altnet network is its ability to communicate with FastTrack technology already installed on desktops worldwide. Tens of millions of search requests each day are being made on the FastTrack Network via the KaZaA Graphical User Interface (GUI). These search requests can be intercepted by Altnet and returned to the FastTrack Network and displayed in the KaZaA GUI such that secure content provided via Altnet can be made visible to KaZaA users. Altnet has reached an agreement with Sharman Networks to allow Altnet search results to propagate in the KaZaA GUI and Sharman Networks has indicated its intent to work with Altnet and Altnet's customers to highlight secure search results so as to increase the popularity of the underlying content.

Our longer-term goal is for Altnet, through multiple client relationships, to be the next advancement in distributed bandwidth, storage and computing. Currently, distributed storage and computing companies, such as Akamai, operate as content delivery network service providers, whereby their services improve the speed, quality, reliability and scalability of Websites by delivering the Web content and applications of their customers, through a distributed worldwide network of servers, to a server geographically closer to end users. Altnet intends to go the next step, which is directly to the end user in a private, peer-to-peer network.

ALTNET SERVICES

We intend to market Altnet's peer-to-peer services in three main areas:
Network Services, Distributed Storage and Distributed Processing.

NETWORK SERVICES - Altnet's Network Services will be marketed as money saving, enterprise solutions to companies that spend significant amounts on Internet bandwidth and infrastructure for the following applications:

  • File downloads from web sites or servers;

  • Content distribution, including "push" (where content such as music, movies, news, sports or weather, is automatically "pushed" to the user) and cached on their PC;

  • Ad serving;

  • Content backup; and

  • Video messaging/conferencing.

An example of Network Services is ad serving. When a user opens a new Web page, and the banner ad which appears on that page is delivered by a third party ad serving company, such as DoubleClick, the third party ad serving company incurs infrastructure, management, bandwidth and processing costs for every single banner ad which gets served. Often times, the same ad gets "served" millions of times each month. Using Altnet's proposed solutions, all of those ads could be delivered to the users via the Altnet network, thereby saving costs for third party ad serving companies.

Users of the network will benefit because QPCs, acting as hubs, will reduce latency and increase processing performance by having the files requested by one user delivered by another user who (a) already has the file, and (b) is geographically located close to the requesting user. Similar to companies that have a worldwide, distributed network of servers, we intend to utilize intelligent load balancing traffic management instructions to spread the file distribution demands on the network and not overload any one particular region. Additionally, the network will utilize commercially available digital rights management (DRM) software (software which provides the means of protecting audio and video files by encrypting the files and only allowing users to play the files after they have obtained a license key) to enhance the safety, security and legitimacy of Altnet's users. Copyright and trademark protection will be central to the Altnet service and we will not launch the network for commercial purposes until the DRM software we choose is satisfactory to our users and fully protects the rights of the file owners.

DISTRIBUTED STORAGE - Distributed storage services include the storage, management, protection and sharing of electronic information used for electronic commerce, data warehousing and transaction processing. Altnet's Distributed Storage services will be marketed to companies that are currently servicing these markets. Altnet does not intend to develop the expertise to compete with companies in these sectors, rather Altnet will focus its efforts on servicing companies that have a requirement to access P2P networks in order to carry out their storage applications. Some of the better-known companies in this industry are Scale Eight, Zambeel, EMC, Brocade and X-Drive. Other more advanced projects like "Ocean Store" point to particular solutions based around Nomadic Data concepts that reflect a potentially promising future for massively scaleable redundant networks like Altnet. By leveraging the excess storage capacity on the Altnet network, we believe, in certain storage market segments, Altnet can generate significant storage cost savings for its clients, a portion of which may be earned by Altnet as consideration for its services.

DISTRIBUTED PROCESSING - Distributed processing services work by taking large tasks and dividing them into many smaller tasks, all of which are disseminated to many computers running simultaneously via a network such as a private corporate network, or the Internet. After the tasks are processed via individual computers, the data is transmitted back to a central server, which assembles the results. Altnet's Distributed Processing services will be marketed to companies currently in the high performance computing field, as well as the performance testing/measurement areas. Altnet does not intend to develop the expertise to compete with companies in these sectors, rather Altnet will focus its efforts on servicing companies that have a requirement to access P2P networks in order to carry out their services. The leaders in this space are IBM, Parabon and United Devices. Similar to Altnet's Distributed Storage business, Altnet intends to earn a portion of the cost savings realized by its customers as consideration for its Distributed Processing services.

SALES AND MARKETING OF ALTNET'S SERVICES

We currently intend to market Altnet's services by first engaging consultants to approach current providers of network services whom we have targeted as potential clients. Revenue may be derived from several key areas, with the initial focus on companies wishing to distribute files to large volumes of people at very low bandwidth costs. These customers include content owners using the Internet to promote movies (trailers), samplers and demo or freeware products. In addition, potential clients include ad serving companies, such as DoubleClick, and companies that specialize in providing streaming and caching services, such as Akamai and Inktomi Corporation. The same consultants will ultimately approach a target list of clients in the distributed processing and distributed storage markets such as Scale Eight, Zambeel, Data Synapse, United Devices, X-Drive and Brocade. Our overall sales and marketing strategy is to approach the leaders in their respective industries and promote Altnet as a potential money saving service. Provided we have success with using consultants, we intend to recruit and hire a small, dedicated sales staff.

COMPETITION FOR ALTNET'S SERVICES

There are a number of peer-to-peer, file sharing companies in existence, and several have either launched or are planning to launch business competitive with the services to be offered by Altnet, however widespread distribution remains a significant barrier to success. These companies include Red Swoosh, Blue Falcon, Kontiki, Evernet, Uprizer and numerous others. Additionally in the file sharing market, StreamCast Networks, iMesh, Bear Share, Lime Wire, Grokster and KaZaA are all potential competitors to the services Altnet plans to introduce. Further, there are a number of companies in the distributed computing market, many which are well known and well capitalized. Specifically, in the ad serving sector of Network Services, DoubleClick, Inc. and 24/7 Real Media provide ad serving services, have a much longer operating history than Altnet and each have sufficient capital to continue operating. Companies in the streaming/caching industry include Inktomi and Akamai, both of which have longer operating histories than Altnet and adequate capital to continue operating. In the Distributed Processing services industry, the leader is IBM, the well-known, blue-chip corporation. Others include United Devices, Data Synapse and Parabon. In the Distributed Storage field, the most notable competitors may be EMC and Brocade. In the event that Altnet is successful in its initial efforts, we anticipate that some or all of these companies will increase their respective capital development expenditures to protect their position in their respective industries. Each of these companies either has adequate capital reserves or access to the capital markets to fund an expansion or initiative that would protect its position. Additionally, industry consolidation is expected. As such, if one or more of these companies were to merge, their collective resources would significantly exceed Altnet's and would allow them to pursue positions, which may be to the detriment of Altnet.

ALTNET'S COMPETITIVE ADVANTAGE

We believe that Altnet is well positioned to compete effectively with companies currently providing distributed computing services. The software necessary to operate Altnet's peer-to-peer network has been installed on tens of millions of computers worldwide, and additional computers are added with each successive download of the KaZaA Media Desktop, providing a competitive advantage over other P2P competitors that have not achieved similar success in mass distribution of their software application. Altnet intends to "turn on" the network by first engaging, through end user licensing agreements, a critical mass of users who will act as QPCs, then engaging other users with lesser performing computers, ultimately accessing tens of millions of users. Altnet's ability to communicate with FastTrack technology already installed on desktops worldwide also presents a significant advantage by allowing content owners the opportunity to associate their secure content with tens of millions of search requests made each day via the KaZaA GUI.

ALTNET'S UNPROVEN BUSINESS MODEL AND FINANCIAL RISKS

Altnet is a new business that we are pursuing based upon our perceived market opportunity; yet its business model is unproven. There are no guarantees that the model will be successful. Its success will depend, in part, on the following:

  • our ability to establish relationships to formalize end user agreements with enough QPC owners to allow the network to work efficiently and effectively;

  • acceptance by corporate customers of our services;

  • the technical viability of the commercially available DRM software we employ to protect the proprietary content that will pass through the Altnet network and will reside on network computers;

  • our underlying peer-to-peer technology; and

  • our ability to raise the funding necessary to support the sales, marketing, research and development necessary to establish the business of Altnet.
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