`INFORMATION SUBJECT TO PROTECTIVE ORDER
`
`IN THE UNITED STATES DISTRICT COURT
`FOR THE WESTERN DISTRICT OF PENNSYLVANIA
`
`
`
`
`
`Defendant
`
`
`
`EXPERT REPORT OF MARK M. GLEASON, CPA/ABV/CFF, CVA, CLP
`
`
`
`
`
`On behalf of SightSound Technologies LLC, I hereby submit the following Expert
`Report pursuant to Fed. R. Civ. P. 26(a)(2)(B).
`
`
`
`
`
`
`
`
`
`Civil Action No. 2:11-cv-01292-DWA
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`
`
`
`SIGHTSOUND TECHNOLOGIES LLC,
`
`Plaintiffs
`
` v.
`
`APPLE INC.,
`
`Apple Exhibit 1222 Page 00001
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`PREJUDGMENT INTEREST ........................................................................................ 165
`SUPPLEMENTATION AND REBUTTAL ................................................................... 167
`
`
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`
`
`XI.
`XII.
`
`
`I.
`
`QUALIFICATIONS
`
`1.
`
`I am the President and a Managing Director of Gleason IP, a division of Gleason
`
`& Associates, P.C. (“Gleason”). Gleason is an accounting and consulting firm I started in 1988
`
`which provides services primarily in the areas of Intellectual Property, Valuation, Litigation
`
`Support, and Forensic Accounting and Financial Reorganization. Prior to starting Gleason, I
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`worked for the global accounting firm of PriceWaterhouseCoopers and was the Chief Financial
`
`Officer of a construction and manufacturing company. I have experience in the areas of
`
`accounting, finance, and economics in various roles at corporations and public accounting firms.
`
`A complete listing of my work experience is attached as Appendix 1 to this report.
`
`2.
`
`I graduated from the University of Pittsburgh in 1972 with a Bachelor of Arts
`
`Degree in Economics. I received a Masters Degree in Business Administration from the
`
`University of Pittsburgh in 1973. I am a Certified Public Accountant (“CPA”) licensed to
`
`practice in the Commonwealth of Pennsylvania. I am also Accredited in Business Valuation
`
`(“ABV”) and Certified in Financial Forensics (“CFF”) by the American Institute of Certified
`
`Public Accountants (“AICPA”). I have been designated as a Certified Valuation Analyst
`
`(“CVA”) by the National Association of Certified Valuators and Analysts (“NACVA”) and a
`
`Certified Licensing Professional (“CLP”) by the Licensing Executives Society (“LES”). I have
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`been a continuing education speaker on numerous occasions on a variety of financial, economic,
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`accounting and valuation topics. I have presented to various bar associations and organizations
`6
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`on the issues of damages determination, valuation, intellectual property matters, financial
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`reorganization, and other topics.
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`3.
`
`I have extensive knowledge and experience in analyzing and quantifying damages
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`in patent infringement litigation. My intellectual property experience includes determining
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`damages (including lost profits and reasonable royalty analyses in patent infringement matters)
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`valuing intellectual property, analyzing secondary considerations of nonobviousness, and
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`performing market analyses involving success drivers. Particularly relevant to this matter, I have
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`performed numerous reasonable royalty analyses using all information produced through
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`discovery, independent research, and the Georgia-Pacific Factors in determining reasonable
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`royalty rates and damages. I have experience in a broad range of industries including
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`technology, manufacturing, pharmaceutical, healthcare, telecommunications, construction, and
`
`other industries.
`
`4.
`
`I also have extensive experience in analyzing, calculating, and determining
`
`damages in various dispute settings. I have been designated as a testifying expert in federal and
`
`state courts, chancery court, and by various domestic and international arbitration panels. I have
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`analyzed damages involving breach of contract claims, intellectual property disputes, alleged
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`fraud and forensic investigations, shareholder disputes, insurance recovery matters, professional
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`liability disputes, class action suits, and other commercial disputes.
`
`II.
`
`PRIOR TESTIMONY AND FEES
`
`5.
`
`Gleason is being compensated for the work performed on this engagement based
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`on the time incurred by me at a rate of $525 per hour and by other Gleason personnel (under my
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`direct supervision) at rates ranging from $80 to $375 per hour. Our compensation is not affected
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`
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`7
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`by the outcome of this case. Attached as Appendix 1 is a copy of my curriculum vitae. I have
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`not authored any articles in the past ten years. Appendix 2 contains a list of the cases in which I
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`have provided expert testimony, either through deposition or at trial, during the last four years.
`
`III. OBJECTIVE OF THE ENGAGEMENT
`
`6.
`
`The objective of this engagement was to determine, with a reasonable degree of
`
`accounting and professional certainty, the amount of financial damages experienced by
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`SightSound Technologies LLC (“SightSound”)1 as a result of the alleged infringement of U.S.
`
`Patent No. 5,191,573 (the “ ‘573 Patent”) and U.S. Patent No. 5,966,440 (the “ ‘440 Patent”)
`
`(collectively the “Patents-in-Suit”) by Apple Inc. (“Apple”).
`
`7.
`
`In patent infringement litigation, the claimant’s damages, if proven, shall be
`
`adequate to compensate for the infringement but in no event shall the damages be less than a
`
`reasonable royalty.2 The owner of an infringed patent may seek recovery of either lost profits, a
`
`reasonable royalty, or in certain circumstances, some combination of both lost profits and
`
`reasonable royalty related to the infringing sales.3 I understand from counsel that SightSound is
`
`not seeking damages in the form of lost profits in this matter. Therefore, I have prepared an
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`analysis of reasonable royalty damages experienced by to SightSound for the infringement of the
`
`Patents-in-Suit by Apple. I have assumed that a hypothetical negotiation for a reasonable royalty
`
`between SightSound and Apple would take place on April 28, 2003, the date Apple launched its
`
`
`1 Unless otherwise noted, “SightSound” refers to the Plaintiff in this action as well as all corporate predecessors-in-
`interest.
`2 See 35 U.S.C. §284.
`3 Litigation Services Handbook (Fifth Edition), Chapter 19, p.18. Also, see State Industries, Inc., v. Mor-Flo
`Industries, Inc. decision from the U.S. Court of Appeals for the Federal Circuit.
`
`
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`8
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`iTunes Store.4 I understand from counsel that damages in this matter are limited to the six years
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`preceding the commencement of a cause of action for infringement.5 While my damages
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`calculation begins on October 10, 2005, this limitation on damages does not change the date of
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`the hypothetical negotiation of April 28, 2003, the date of first infringement.6 I have calculated
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`damages through December 29, 2012, using the most recent financial information provided by
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`Apple. I reserve the right to update my analysis of damages as additional financial information
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`is provided by Apple.
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`8.
`
`I understand from counsel that SightSound may also be entitled to recover other
`
`damages including prejudgment interest, punitive damages, legal fees, and expenses. While I
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`have not calculated the amount of these additional potential categories of damages, I reserve the
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`right to amend or supplement this report for these potential damages.
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`9.
`
`My analysis is based upon the assumption that there will be a finding of liability
`
`against Apple as a result of its infringement of the Patents-in-Suit. The merits of SightSound’s
`
`position on these liability issues are beyond the scope of this engagement.
`
`IV.
`
`TASKED PERFORMED AND INFORMATION REVIEWED
`
`10.
`
`To accomplish the objective of this engagement, I7 have performed the following
`
`tasks:
`
`
`4 At launch, Apple’s online music store was named the iTunes Music Store and is often referred to as iTMS. The
`store was subsequently renamed the iTunes Store. Throughout the remainder of this report, I will refer to it as the
`iTunes Store.
`5 See 35 U.S.C. §286.
`6 Litigation Services Handbook (Fifth Edition), Chapter 19, p.21. Also, see LaserDynamics, Inc., v. Quanta
`Computer, Inc. et al., 694 F.3d 51 (Fed. Cir. 2012).
`7 I, referred to throughout this report, represents myself and other Gleason personnel. All work performed was
`either done by myself or others under my direct supervision.
`
`
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`9
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`a. Met with counsel to understand the background of the case and the
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`objective of the engagement.
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`b. Held discussions with Mr. Snell, SightSound’s technical expert, regarding
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`the Patents-in-Suit.
`
`c. Held discussions with Jeffrey Inman, Ph.D., SightSound’s survey expert.
`
`d. Reviewed the expert reports of Mr. Snell and Dr. Inman, both dated April
`
`22, 2013.
`
`e. Conducted interviews with SightSound management including:
`
`i. Scott Sander, President, Chief Executive Officer and Co-Founder
`
`ii. Alex LePore, Chief Financial Officer, Treasurer, and Secretary
`
`f. Researched and reviewed information regarding SightSound’s business
`
`and technology, as listed in Appendix 3 to this report.
`
`g. Researched and reviewed information regarding Apple’s business and
`
`technology, as listed in Appendix 3 to this report.
`
`h. Reviewed and analyzed documents, correspondence, pleadings and other
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`information produced in this matter, as cited throughout this report and
`
`listed in Appendix 3 to this report.
`
`i. Reviewed and analyzed various deposition transcripts from this matter and
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`the prior litigation regarding the Patents-in-Suit, as listed in Appendix 3 to
`
`this report.
`
`j. Analyzed reasonable royalty damages due to SightSound from Apple
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`through the construction of a hypothetical negotiation between the parties.
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`k. Summarized my analysis and findings in this report.
`
`10
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`26.
`
`To calculate reasonable royalty damages associated with the infringing sales of
`
`
`
`content from the iTunes Store, I determined the royalty base to be
`
` percent of the revenues of
`
`the infringing sales of content. While consideration of the EMVR is relevant when the patented
`
`feature is a component of the product in suit, this is not the case with the sale of digital audio and
`
`video signals from the iTunes Store. I have concluded that the technology covered by the
`
`Patents-in-Suit is the ability to sell this content digitally itself, and is not a component of a larger
`
`saleable product. Therefore, I have applied the reasonable royalty rate of
`
` percent to the sale
`
`of audio and video signals from the iTunes Store, excluding content not covered by the patent
`
`claims, such as sales of digital books. Based upon this analysis, I calculated reasonable royalty
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`damages on infringing sales of content from the iTunes Store from October 10, 2005 through
`
` as follows:13
`
`27.
`
`To summarize, I have determined that SightSound and Apple would enter into a
`
`hypothetical negotiation immediately preceding the launch of the iTunes Store on April 28,
`
`13 See a detailed calculation of the reasonable royalty damages on infringing sales of content from the iTunes at
`Exhibit J.1 and Exhibit J.2. See also Exhibit C.3 for iTunes Store Infringing Sales during the damages periods.
`As shown in the chart there is a gap in damages after March 2, 2010, when the ‘573 Patent expired, until July 27,
`2010, when the ‘440 Patent was reissued. I have not calculated damages for this period of time.
`
`
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`19
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`1999 through the merger of these two related entities. In December 2000, Sightsound.com
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`changed its name to SightSound Technologies, Inc. and later became SightSound Technologies
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`LLC after it was acquired by an entity wholly indirectly owned by General Electric
`
`(“GE”).14,15,16
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`1.
`
`30.
`
`SightSound’s Patent Portfolio
`
`The ‘573 Patent, entitled “Method for Transmitting a Desired Digital Video or
`
`Audio Signal,” was issued on March 2, 1993 and expired on March 2, 2010. U.S. Patent No.
`
`5,675,734 (the “ ‘734 Patent”), entitled “System for Transmitting Desired Digital Video or Audio
`
`Signals,” was issued on October 7, 1997 and expired on June 13, 2008.17 The ‘440 Patent,
`
`entitled “System and Method for Transmitting Desired Digital Video or Digital Audio Signals”
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`was issued on October 12, 1999, reissued on July 27, 2010, and expires on October 12, 2016.
`
`All three patents were issued to Arthur Hair and either assigned or transferred to SightSound.18 I
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`understand from counsel that fundamental aspects of the sale of digital audio and video signals
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`over telecommunications lines, including the Internet, is covered by the Patents-in-Suit and the
`
`’734 Patent.
`
`
`14 Information in this paragraph was obtained from SightSound’s Form S-1, dated April 20, 2000 at SST-021439-
`021519 and http://www.bizjournals.com/pittsburgh/stories/2000/12/04/story7.html?page=all.
`15 Throughout this report I will refer to the various SightSound entities as SightSound, unless there is a specific
`reason to distinguish amongst the named entities.
`16 I understand from counsel that SightSound Technologies, Inc. subsequently merged into SightSound Technologies
`Holdings, LLC. SightSound Technologies Holdings, LLC and DMT Licensing, LLC (an entity wholly indirectly
`owned by GE) subsequently formed and became members of SightSound Technologies LLC, the plaintiff in this
`case.
`17 I understand from counsel that SightSound is not proceeding in this litigation upon the claims of the ‘734 Patent.
`18 Information in this paragraph was obtained from the ‘573 Patent, ‘734 Patent and the ‘440 Patent. Expiration
`dates of the Patents were provided by counsel.
`
`
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`21
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`31.
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`In early 2005, the ‘573 Patent, ’734 Patent, and ‘440 Patent were placed into re-
`
`
`
`examination with the United States Patent and Trademark Office (“USPTO”).19 The USPTO
`
`issued Ex Parte Reexamination Certificates for the ‘573 Patent, ‘734 Patent and the ‘440 Patent
`
`on November 30, 2010, December 14, 2010, and July 27, 2010, respectively.20 I understand
`
`from counsel that no claims of the ‘573 Patent or ‘734 Patent were altered, but certain claims of
`
`the ‘440 Patent were adjusted. I understand from counsel that due to the adjusted claims from
`
`the re-examination of the ‘440 Patent, the law requires that the ‘440 Patent cannot be the basis
`
`for the assessment of damages until July 27, 2010 and that it expires on October 12, 2016. I
`
`explain the time period used in the calculation of damages in more detail below.
`
`32.
`
`Based on my discussions with Mr. Snell, one of SightSound’s technical experts, I
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`understand that the claims of the Patents-in-Suit cover the sale of digital audio and video signals
`
`via telecommunications lines, including the Internet. Prior to the sale of digital audio and video
`
`signals via telecommunication lines, music and video was distributed and sold through physical
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`media (i.e., records, cassette tapes, compact discs (“CDs”), video cassette, and digital video disks
`
`(“DVDs”)). The methods and systems described in the Patents-in-Suit provided a new form of
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`distribution and sale of audio and video signals.
`
`2.
`a)
`
`SightSound’s History
`Early online music industry and SightSound’s business
`
`33.
`
`In the mid-1990s, SightSound was working with copyright holders (i.e. artists and
`
`record labels) to license digital audio content for sale over the Internet, which until that time was
`
`
`19 Complaint dated October 10, 2011.
`20 Obtained from the Ex Parte Reexamination Certificates for the ‘573 Patent, ‘734 Patent, and the ‘440 Patent.
`
`
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`22
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`SightSound patents as well as other GE patents.94 However, no material license negotiations
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`commenced as a result of this correspondence between Apple and GE.
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`C.
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`72.
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`SightSound’s business and outlook on the digital audio and video market
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`As described above, SightSound offered the first song and first movie for sale
`
`
`
`
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`
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`
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`over the Internet.95
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`
`
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`
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`who wanted to purchase digital audio or video signals would need to purchase it from
`
`
`
` SightSound expected that anyone
`
`
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`SightSound or from an entity that licensed SightSound’s patents.
`
`
`
`
`94
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`95 See SightSound’s website discussing the first music and movie deal in 1995 and 1999, respectively at
`http://www.sightsound.com/ (accessed March 25, 2013).
`
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`39
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`technologies.191 Apple’s own expert in the Personal Audio LLC v. Apple Inc. matter concluded
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`124. Based on the patents issuing from the same application and including similar core
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`technology needed to operate the iTunes Store,
`
`
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` and Apple’s desire to have a license and protection
`
`for sales of digital audio and video signals, the hypothetical negotiation would entail a license to
`
`the entire family of patents including the Patents-in-Suit, the ‘734 Patent and any continuations-
`
`in-part (collectively the “Family of Patents”).
`
`K.
`
`Apple’s next best alternative
`
`125.
`
`In constructing the hypothetical negotiation I have considered Apple’s next best
`
`alternative to licensing the Family of Patents from SightSound. Prior to the sale of digital music,
`
`most consumers obtained music through the purchase of CDs or through the illegal distribution
`
`of digital music through on-line piracy. A potential alternative for Apple was to enter the online
`
`CD distribution business (similar to Amazon’s strategy) rather than licensing the Family of
`
`Patents. However, given the prevalence of illegal online music piracy in the late 1990’s and
`
`early 2000’s Apple was well aware of consumers’ desire to obtain online digital content.
`
`Therefore, I believe it was unlikely that Apple would have alternatively entered the online CD
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`distribution business in lieu of selling digital content through the iTunes Store.
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`191
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`126. Apple’s alternative would have been to enter the digital streaming business (both
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`
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`audio and video) or to purchase SightSound or the Family of Patents from SightSound. I discuss
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`each of these options below and consider the effect each action would have on the hypothetical
`
`negotiation between SightSound and Apple.
`
`1.
`
`Streaming digital audio and video signals
`
`127. An alternative method of providing consumers music or video content is through
`
`a streaming subscription service. Certain services such as MusicNet (a joint venture between
`
`AOL Time Warner, Real Networks, BMG and EMI Group, Ltd.), Pressplay (a joint venture
`
`between Sony and Universal), Listen.com (Rhapsody), and MusicNow (owned by Full Audio)
`
`were providing streaming subscription services for music content as of April 2003.193 The table
`
`below shows these companies and a description of their subscription-based services prior to
`
`Apple’s launch of the iTunes Store in April 2003.194
`
`
`193
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`70
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`128.
`
` More recently, companies such as Pandora and Spotify offer a streaming
`
`
`
`subscription-based service model as an alternative to the purchase of music content.195 The
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`primary disadvantage to the streaming model of music content is that the consumer never owns
`
`the content. In fact, when Mr. Cue was asked if Apple was aware of other streaming services
`
`that existed in 2002, Mr. Cue responded,
`
`
`
`
`
`
`
` Further,
`
`the popularity and success of the iTunes Store (as compared to a streaming subscription model)
`
`demonstrates consumers’ strong preference to own content rather than to stream it. As such, I
`
`don’t believe that a streaming subscription model would have been an effective alternative to
`
`obtaining a license for the Family of Patents in April 2003. Furthermore, at the hypothetical
`
`negotiation date in April 2003, the iPod had been in the market for approximately a year and a
`
`half, and Apple had devoted a substantial portion of its business to selling the iPod, a device
`
`based on storing and playing digital audio signals. Because Apple had already committed to
`
`selling digital signals for download, changing to a subscription model was an unlikely choice.
`
`Indeed, Apple had explicitly ruled out a streaming model for selling music.
`
`2.
`
`Potential purchase of SightSound or the Family of Patents
`
`129. The other potential alternative to licensing the Family of Patents would have been
`
`for Apple to purchase SightSound (including the Family of Patents) or to directly purchase the
`
`
`
`Family of Patents from SightSound.
`
`
`195 https://www.spotify.com/us/ and http://www.pandora.com/about (accessed on April 4, 2013).
`
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`The utility advantages of the patent property over the old modes or devices,
`9.
`if any, that had been used for working out similar results.
`
`193. As discussed previously and as noted by Mr. Snell, prior to the invention, music
`
`and video were distributed in physical media which has certain inefficiencies and limitations. I
`
`understand from Mr. Snell that at the time of the hypothetical negotiation there was no way to
`
`purchase digital music for download over telecommunications lines, including the Internet that
`
`would not infringe the Patents-in-Suit. Certain advantages over the old modes (physical media)
`
`were as follows:
`
`• A customer purchasing digital music online could purchase at any time of the day
`
`without going anywhere and could begin downloading the content immediately.
`
`• Consumers could purchase individual songs instead of an entire album.
`
`• Consumers could more easily transfer their music to a digital media player or
`
`burn it to a CD.
`
`• Digital downloads do not take up the same amount of space as the physical media.
`
`194. While other methods existed for a consumer to gain access to digital audio or
`
`
`
`video over the Internet, including streaming, the consumer could not own the song or video.
`
`
`
`195. At the time of the hypothetical negotiation in April 2003, most of the obstacles
`
`that SightSound dealt with in the late 1990s and early 2000s were no longer an issue. These
`
`obstacles included limited broadband penetration, sufficient content primarily due to the
`
`restrictions on personal use rights by copyright holders, limited available devices to use with
`
`
`283
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`111
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`INFORJIIA TIONSUBJECT TO PROTECTIVE ORDER
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`XII.
`
`SUPPLEMENTATION AND REBUTTAL
`
`284.
`
`This report summarizes the results of our analysis to date. All of the work
`
`conducted in preparing this report and the related analyses was performed by me or others
`
`working under my direct supervision. The opinions and conclusions stated in this report are
`
`expressed with a reasonable degree of professional certainty.
`
`In the event additional data or
`
`testimony is made available, I may find it appropriate to revise or supplement my opinions.
`
`285.
`
`I expect
`
`that
`
`I may use graphics or other demonstrative exhibits, enlarged,
`
`colored, or otherwise adapted to illustrate or to help explain any testimony at trial.
`
`286.
`
`I reserve the right to testify and express opinions on related issues or matters (i)
`
`arising from discovery that is ongoing, (ii) raised on cross-examination; (iii) necessary to rebut
`
`any matters testified to by Defendant’s experts or opinions expressed by Defendant’s experts in
`
`expert reports or depositions; and/or (iv) otherwise raised at trial, by counsel or the Court in
`
`relation to matters expressed or incorporated herein, including any issues or matters raised in this
`
`litigation.
`
`Dated: April 22, 2013
`
`MMG/amm
`
`Appendices and Exhibits
`
`/
`
`g7
`/ it
`v 4»
`p
`/5”‘
`‘V
`,."
`'
`///,,///U
`
`.
`.
`V
`-,
`»
`Mark M. Gleason, CPA/ABV/CFF, CVA, CLP
`
`~
`
`
`
`4
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`167
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`Page 00015
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