UNITED STATES PATENT AND TRADEMARK OFFICE
`______________
`
`BEFORE THE PATENT TRIAL AND APPEAL BOARD
`______________
`
`APPLE INC.
`
`Petitioner
`
`v.
`
`SIGHTSOUND TECHNOLOGIES, LLC
`Patent Owner
`______________
`
`Case CBM2013-00023
`Patent 5,966,440
`______________
`
`Before the Honorable MICHAEL P. TIERNEY, JUSTIN T. ARBES, and
`
`GEORGIANNA W. BRADEN,
`
`Administrative Patent Judges.
`
`
`
`DECLARATION OF LAWRENCE KENSWIL
`CONFIDENTIAL—FILED UNDER SEAL
`
`
`
`
`
`
`
`
`
`Apple Exhibit 4414
`Apple v. SightSound Technologies
`CBM2013-00023
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`I, Lawrence Kenswil, hereby declare under penalty of perjury:
`
`1.
`
`I have been retained by Apple Inc. (“Apple”) in this action to serve as an
`
`expert witness.
`
`2.
`
`I offer this declaration in support of Apple in connection with U.S.
`
`Patent Nos. 5,966,440 (“the ’440 Patent”), which I understand SightSound
`
`Technologies, LLC (“SightSound”)1 asserts that it owns.
`
`3.
`
`If asked to testify at a deposition or other proceeding, I will provide
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`testimony on these subjects. I reserve the right to supplement or amend the opinions
`
`I have expressed or to respond to any opinions of other experts in this matter.
`
`I.
`
`INTRODUCTION
`
`4.
`
`I understand that the ’440 Patent generally relates to the electronic sale
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`of digital audio and/or video through telephone or telecommunication lines.
`
`II. QUALIFICATIONS
`
`5.
`
`I graduated in 1972 from Cornell University with a Bachelors of Arts in
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`Theatre Arts. In 1977, I received a Masters of Science degree in Communications
`
`from Boston University. In 1980, I graduated with a J.D. degree from Georgetown
`
`University’s Law Center.
`
`
`1 Although SightSound has done business under various names, I will use the term
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`SightSound to refer to each of these entities in this declaration for the sake of
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`simplicity except where noted otherwise.
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`A. My Career in the Music Industry
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`6.
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`Following graduation from law school, I moved to Hollywood where I
`
`joined Mitchell, Silberberg & Knupp as a litigation associate, focusing my practice on
`
`entertainment law.
`
`7.
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`In 1983, I left Mitchell, Silberberg to join the Universal Music Group
`
`(“UMG”) (then known as MCA, which had been a client of Mitchell, Silberberg).
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`From 1983 to 1991, I was a business and legal affairs attorney, starting as an Associate
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`Director for MCA Records and rising to Senior Vice President for the MCA Music
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`Entertainment Group, which centrally managed MCA’s music related businesses such
`
`as record labels, music publishing, and concert promotion. During this time, I
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`negotiated and drafted agreements, including artists deals, label deals, publishing
`
`agreements, live venue agreements, and merchandising and sales agreements. I also
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`drafted and negotiated agreements related to corporate acquisitions and mergers.
`
`8.
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`In 1991, I became Executive Vice President for Business and Legal
`
`Affairs and was the chief legal officer for UMG globally. In that position, I
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`supervised all deal-making activities and legal matters for the various group businesses.
`
`9.
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`In 1998, I founded and ran UMG’s eLabs as eLabs’s President. eLabs
`
`was UMG’s internal unit dedicated to exploring, developing, and evolving global
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`business and new technology strategies to expand the role of music in consumers’
`
`lives. During my time at UMG, I was always following new technologies, became one
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`of the first executives at UMG to have a personal computer, and evangelized within
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`the company regarding the effect of technological changes on business strategies,
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`practices, and marketing.
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`10. As President of eLabs, I supervised a team of business, legal, and
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`technical professionals devoted to developing, implementing, and operating new
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`music products, programming and digital distribution initiatives across all emerging
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`technology and convergence platforms, including Internet, mobile, physical, kiosk,
`
`home networking and set-top box systems. I was familiar with some of the
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`technological issues with implementing a system for the electronic sale of digital
`
`audio/video, including bandwidth limitations and the need for robust compression
`
`technologies and standards. By 2000, eLabs had approximately 50 employees in New
`
`York, Los Angeles and London. Several engineers, with degrees in electrical
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`engineering and/or computer science, reported to me during my time at eLabs.
`
`11. During my tenure at eLabs, the unit commenced and oversaw a multi-
`
`million dollar project to digitize and catalog its music and associated artwork.
`
`12.
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`From the mid-1990s through 2008, I was a Board Member of the
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`Recording Industry Association of America (“RIAA”) and a member of its
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`Technology Steering Committee—a committee consisting of representatives from the
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`major label recording companies—from the time it was founded through 2008. The
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`Committee was involved, among other things, in developing the industry lobbying
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`positions with Congress regarding legislation such as the Digital Millennium
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`Copyright Act. This committee helped develop identifiers within the metadata of a
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`song to assist with tracking intellectual property rights. I was the lead representative
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`for my company (by then renamed the Universal Music Group) in setting industry
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`standards, such as DVD-Audio, Super Audio CD (“SACD”), and the Strategic Digital
`
`Music Initiative (“SDMI”).
`
`13.
`
`In 2007, I was again promoted at UMG and became the Executive Vice
`
`President for Business Strategy. In this position, I formulated UMG’s policy for
`
`emerging products, technology and distribution methods. I negotiated major deals
`
`and supervised industry-wide negotiations, including compulsory license arbitrations
`
`for webcasting, satellite radio, and mechanical licensing. In addition, I supervised the
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`global anti-piracy unit.
`
`14. All told, I spent twenty-five years at UMG, focusing on emerging
`
`technologies during my last ten years there.
`
`15.
`
`In addition to this experience at UMG and RIAA, I was a Board
`
`Member for the International Federation of Phonographic Industry (“ifpi”) from
`
`1998-2002. And, I was a Board Member of SoundExchange from 2005-2008.
`
`B.
`
`After Leaving UMG
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`16. After I left UMG in 2008, I became Of Counsel for Loeb & Loeb. I
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`remained at Loeb & Loeb until 2011.
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`17.
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`I am now semi-retired, but I own a small private practice, focusing on
`
`assisting companies in obtaining licenses from major record labels.
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`18. A copy of my curriculum vitae is attached as Exhibit A to this declaration.
`
`I have spoken many times at industry events and conferences, including several
`
`keynote speeches and have coordinated panels. I have also been extensively profiled
`
`in industry publications, including Billboard Magazine, in which I was named the third
`
`most powerful person in the digital music industry in 2005 (trailing Steve Jobs and a
`
`corporate CEO on the list). I have not previously testified as an expert.
`
`III. MATERIALS CONSIDERED
`
`19.
`
`In preparing my declaration, I considered certain documents, including
`
`the Hair patents, materials describing prior art and the state of the art at the time of
`
`the alleged invention, and other materials cited herein. I also have considered
`
`materials in connection with the opinions expressed herein, including the Declaration
`
`of John Snell In Support of Patent Owner SightSound Technologies, LLC’s Response
`
`To Petition (“the Snell Declaration”), SightSound Technologies, LLC’s Response to
`
`Petition (Paper 38, “SightSound’s Reply”) and the other materials cited herein. I have
`
`also had a conversation with Dr. Kelly, who I understand is also submitting a
`
`declaration on March 21, 2014.
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`20.
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`I reserve the right to consider any additional materials I deem
`
`appropriate in conjunction with any additional declaration I may file or otherwise. I
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`also reserve the right to consider and/or to rely upon other declarations that may be
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`submitted in this matter, and any further testimony of fact or expert witnesses at a
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`deposition or other proceeding.
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`IV. COMPENSATION
`
`21.
`
`For my services as an expert in this proceeding I am being compensated
`
`at my normal rate of $525 per hour. My compensation is not contingent upon the
`
`outcome of this proceeding.
`
`V.
`
`BACKGROUND
`
`22.
`
`I understand that on May 6, 2013, Petitioner Apple Inc. filed in this
`
`proceeding a petition seeking covered business method (“CBM”) review of claims 1,
`
`64, and 95 of the ’440 Patent (“Challenged Claims”).
`
`23.
`
`I understand that on October 8, 2013, the Patent Trial and Appeal Board
`
`(“PTAB”) determined to institute a covered business method review of the ’440
`
`Patent after finding that Apple made a threshold showing that the Challenged Claims
`
`are anticipated under 35 U.S.C. § 102 and unpatentable under 35 U.S.C. § 103.
`
`24.
`
`I understand that in arguing against the obviousness of its patent,
`
`SightSound stated that “the evidence of secondary considerations provides substantial
`
`insight into the merits of the ’440 Patent at the relevant time.”2 For the reasons
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`discussed below in paragraphs 32-98, I disagree.
`
`
`2 SightSound’s Reply at 67.
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`25.
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`In the context of secondary considerations, I understand that
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`commercial success includes achieving profitability and sales that represent a
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`substantial quantity in the relevant market.
`
`26.
`
`I understand that in the context of commercial success, “nexus” means
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`that the commercial success of the product is due to the claimed, novel features of the
`
`patented invention (i.e., the sales were a direct result of the unique characteristics of
`
`the claimed invention). There is no nexus where the commercial success is due to an
`
`unclaimed feature of the product or a feature that was known in the prior art.
`
`27.
`
`I understand that evidence of commercial success is not relevant in this
`
`context if no nexus exists between the claimed invention and the proffered
`
`commercial success.
`
`28.
`
`I understand that a method or product is “coextensive” in the context of
`
`secondary considerations (or indicia) of non-obviousness when that product or
`
`method is the invention disclosed and claimed in the patent. However, when the
`
`patented invention is only a component of a commercially successful machine or
`
`process, then that machine or process is not “coextensive” with the invention.
`
`29. As I discuss below, there are many important aspects of the iTunes
`
`Music Store (iTMS) that are unrelated to the ’440 Patent. Therefore, contrary to
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`SightSound’s assertion, even if iTMS were assumed to practice the ’440 Patent (and I
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`understand that is an issue disputed in a separate litigation), it would not be
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`coextensive with it. See, e.g., ¶¶66 -87. See also ¶¶88-97.
`
`30.
`
` SightSound contends that there is a nexus between the commercial
`
`success of iTMS and the ’440 Patent’s claimed invention. As described in detail below
`
`(¶¶ 66-98), I disagree that there is a nexus between any alleged merits of the claimed
`
`invention and the commercial success of iTMS.
`
`31.
`
`I understand from Dr. Kelly that iTMS does not embody the ’440 Patent
`
`claims. However, even if iTMS did embody the ’440 Patent claims, the commercial
`
`success of iTMS is not attributable to the alleged invention of the ’440 Patent, but
`
`rather to features not covered by the ’440 Patent.
`
`VI. SIGHTSOUND’S OWN FAILURE IS EVIDENCE THAT DIGITAL
`DOWNLOADS IN GENERAL HAVE NOT BEEN
`COMMERCIALLY SUCCESSFUL
`
`32.
`
`SightSound asserts that digital download businesses in general have been
`
`commercially successful.3 I disagree. Some have succeeded, but many have failed.
`
`That the ’440 Patent was not the driver of a successful business for the distribution of
`
`digital audio/video is evidenced by the failed attempts of SightSound and others to
`
`launch a successful system for the distribution of digital audio/video through
`
`telecommunication lines. For instance, in addition to SightSound’s own failure, many
`
`other companies who have attempted to sell digital audio over the internet have failed.
`
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`3 See, e.g., SightSound’s Reply at 68-76; Ex. 2353 ¶ 82.
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`For instance, Walmart attempted to sell digital music over the internet, and ultimately
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`closed its Walmart MP3 Downloads business.4 Virgin Digital, which included services
`
`for both streaming and download of content, closed in 2007.5 Liquid Audio was
`
`both a technology company and a full service solution for audio downloads. Founded
`
`in 1996, it failed to gain commercial traction and was sold in 2003, with its new
`
`owners focusing on middleman services. It closed in 2011. 6 A2B Music was a
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`technology venture launched by AT&T in 1997, focusing both on proprietary
`
`technology and sales of digital downloads. 7 Like Liquid Audio, it failed to gain
`
`traction, with its senior management leaving the company in 1999, after which it
`
`ceased its retail operations. 8
`
`33.
`
`SightSound asserts that it owns the ’440 Patent and that it was the first
`
`company to practice it with a commercial embodiments. Nevertheless, SightSound’s
`
`arguments regarding commercial success ignore the fact that it was unable to launch a
`
`successful business on the strength of the “invention” of the ’440 Patent. Unlike
`
`SightSound, however, Apple has been successful in its endeavors to commercialize its
`
`
`4 Ex. 4352.
`
`5 Ex. 4350.
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`6 Ex. 4379; Ex. 4417.
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`7 Ex. 4412.
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`8 See Ex. 4466.
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`system. In my opinion, SightSound’s failure (as described in paragraphs 34-50 below),
`
`when compared to Apple’s success, shows that contrary to SightSound’s own
`
`assertion, the commercial success of iTMS is not attributable to the ’440 Patent, but
`
`rather to other features not covered by the patent.
`
`(a)
`
`SightSound Focuses On Signing Previously Unknown
`Artists Within The Music Industry
`
`34.
`
`SightSound’s first business strategy to commercialize the SightSound
`
`patents, including the ’440 Patent, focused on selling digital music of previously
`
`unsigned artists.
`
`35. Of its initial strategy to commercialize the idea of the Hair patents,
`
`including the ’440 Patent, by targeting previously unknown artists, SightSound
`
`reported:
`
`The company initially attempted to sign artists to agreements whereby the
`company would distribute the artist’s music directly over the Internet. This
`did not prove successful since the only bands likely to enter such an
`agreement are bands that are not under contract with a record label. Successful
`artists are unlikely to distribute music directly to consumers since the traditional
`promotion and distribution clout offered by the recording industry is still very
`much valued and clearly needed to become a successful artist. 9
`
`
`
`36. This first embodiment of SS.com sold only one song.10
`
`(b)
`
`SightSound’s Shift In Strategy To Trying To Sign The
`Major Record Labels
`
`
`9 Ex. 4361 at 2-3 (emphasis added).
`
`10 Ex. 4307 at 81:16-21. See also Ex. 4359 at 12.
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`37. By August 1997, SightSound’s focus had shifted from discovering
`
`unknown bands and signing them to trying to provide its services to the major record
`
`labels. In a Prospectus dated August 15, 1997, SightSound reported that it was:
`
`currently concentrating its efforts on servicing the $12 billion United
`States recorded music [sic] which is dominated by Warner Brothers,
`Sony, PolyGram, BMG, Universal, and EMI. The Company is actively
`proposing Entertainment E-Commerce services to potential record label
`Clients whereby the Company proposes to electronically warehouse and
`electronically sell the Clients’ music via the Internet. 11
`
`
`
`38. This second strategy, however, also failed. There were a variety of
`
`reasons that the major record labels declined SightSound’s offer, including
`
`SightSound’s lack of experience and credibility. It was also important that SightSound
`
`could not ensure the copy protection of the music distributed electronically. Indeed,
`
`SightSound itself reported:
`
`The company approached record labels about outsourcing their Internet
`distribution strategy by permitting SightSound.com to sell music digitally
`in exchange for a thirty percent royalty. Alternatively, the company
`offered the labels a license on the use of the company’s intellectual
`property. Some labels seriously considered the offer but ultimately
`rejected the notion to have their content digitally distributed for several
`reasons. First, the labels were afraid that encryption would be
`hacked resulting in the free distribution of illegal copies. Secondly,
`the companies did not believe that SightSound.com’s patent was valid.
`Third, the record labels prefer to distribute music without using a third
`party service provider.12
`
`
`
`
`11 Ex. 4364 at 11 (emphasis added)
`
`12 Ex. 4361 at 2-3 (emphasis added).
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`39. Other factors, including technological and logistical constraints and
`
`SightSound’s demonstrated inability to launch a successful business, as set forth
`
`herein, further caused the record labels to reject offers by SightSound to distribute
`
`their content electronically.
`
`(c)
`
`SightSound Further Shifts Its Strategy To Promote Its
`MicroShows
`
`40. By 1998, SightSound’s strategy had again shifted. Not surprisingly, this
`
`third strategy was also a failure, as SightSound reported:
`
`The last strategy the company pursued was to “produce” special music
`content, such as its Microshows®. Again, the company was not able to
`win the timely cooperation of the record labels or individual artists to
`successfully launch the strategy.13
`
`
`(d)
`
`SightSound’s Strategy Shifts Again To Focus On The
`Motion Picture Industry
`
`41.
`
`I understand that SightSound recommenced operations in 1998 with a
`
`new business strategy.14 This time SightSound focused on the motion picture
`
`industry.15
`
`42. Not surprisingly, the major motion picture companies, like the major
`
`record labels, were unwilling to license to SightSound their content in any significant
`
`way.16
`
`13 Id. at 3.
`
`14 Ex. 4307 at 76:17-24.
`
`15 Ex. 4361 at 4.
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`43.
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`SightSound’s renewed strategy to commercialize the Hair patents
`
`(including the ’440 Patent) idea through motion picture distribution was also a failure,
`
`generating a little over $3,000 in gross revenue from September through December
`
`1999.17
`
`44. As of February 1, 2000, SightSound reportedly had 135 films, primarily
`
`from small studios, and only 40 different CD offerings.18 The largest number of
`
`albums that were ever available at any given time was approximately 100.19
`
`45. By 2002, I understand that SightSound again had suspended efforts to
`
`commercialize its own system.20
`
`B.
`
`SightSound Was A Financial Failure Despite Ownership Of The
`Hair Patents, Including the ’440 Patent
`
`46.
`
`SightSound’s arguments regarding commercial success of the ’440 Patent
`
`entirely ignore its own failures in selling content and making a profit through its
`
`attempted commercialization of the ’440 Patent.
`
`
`16 Id. at 4-5 (acknowledging “[t]he setback [SightSound] had suffered in not securing
`
`distribution or license agreements in the music industry”).
`
`17 Id. at 5.
`
`18 Ex. 4361 at 2, 9.
`
`19 Ex. 4308 at 110:16-21.
`
`20 Id. at 76:17-24.
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`47.
`
`SightSound itself reported that:
`
`[f]rom March 1996 through March 1998 the company raised equity from
`a number of individual investors through a Private Placement Offering.
`The investments ranged from $0.11 a share to $0.15 a share. It was clear
`over this period that the company’s value did not change dramatically. In
`fact, the company attempted to launch several different music
`distribution strategies from 1995 to 1998 only to realize less than
`$600 in gross revenue for the entire three-year period.21
`
`48. Two years later, the financial picture for SightSound was no better. By
`
`August 15, 1997, SightSound reported that it had “incurred substantial net losses
`
`in each fiscal period since its inception.”22 SightSound further reported:
`
`As of July 31, 1997, the Company had an accumulated deficit of about
`$489,058. In addition, the Company currently intends to increase its
`capital expenditures and operating expenses in order to expand its
`operations in existing and future markets and to market and provide the
`Company’s services to a growing number of potential Clients and
`Customers. As a result, the Company expects to incur additional
`substantial operating and net losses for the foreseeable future. The
`profit potential of the Company’s business model is unproven, and, to
`be successful, the Company must, among other things, develop and
`market products and services that are widely accepted by Customers and
`Clients at prices that will yield a profit. The Company’s service is
`expected to be launched in the first quarter of 1998, and there can be no
`assurance that it will achieve broad Customer or Client acceptance.
`Because of the foregoing factors, among others, the Company is
`unable to forecast its revenues or the rate at which it will add new
`Customers or Clients with any degree of accuracy. There can be no
`assurance that the Company will be able to increase its Customers or
`Client base in accordance with its internal forecasts or the forecasts of
`industry analysts or to a level that meets the expectations of the Investor
`
`
`21 Ex. 4361 at 2 (emphasis added).
`
`22 Ex. 4364at 4 (emphasis added); see also Ex. 4358 at 7 (reporting same).
`
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`or other investors. There can also be no assurance that the
`Company will ever achieve favorable operating results or
`profitability.23
`
`
`
`49.
`
`In sum, “the music industry opportunity never materialized,” as
`
`SightSound reported.24
`
`50. Over the years, SightSound Technologies Holdings, LLC spent
`
`approximately $46 million from its investors.25 Despite these numerous investments,
`
`SightSound was unable to build a successful business practicing the ’440 Patent.
`
`VII. SOLUTIONS TO BANDWIDTH, COMPRESSION, MEMORY SIZE,
`AND CONSUMER ACCESS LIMITATIONS WERE REQUIRED TO
`PERMIT PROFITABLE ELECTRONIC DISTRIBUTION OF
`DIGITAL AUDIO AND VIDEO OVER TELECOMMUNICATION
`LINES
`
`51.
`
`SightSound argues that Apple cannot point to “other general
`
`technological advances, e.g., storage systems or faster download speeds” to show there
`
`is no nexus between iTMS’ commercial success and the ’440 Patent.26 I disagree, as
`
`discussed below in paragraphs 52-65.
`
`52. Despite the fact that many in the industry, including those having a
`
`bachelor’s degree or equivalent in computer engineering or computer science and
`
`
`23 Ex. 4364 at 4 (emphasis added); see also Ex. 4358 at 7.
`
`24 Ex. 4361 at 4.
`
`25 Ex. 4308 at 122:12-124:15.
`
`26 SightSound’s Reply at 74.
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`approximately two years of experience in developing software and hardware that
`
`transmit and receive files over a network,27 often discussed and recognized the
`
`advantages and desirability of selling and distributing digital audio and digital video
`
`over telephone lines, there were a number of technical/logistical constraints prior to
`
`June 13, 1988, that prevented the realization of a profitable business on this idea.28
`
`53.
`
`For example, there were several constraints associated with digitally
`
`mastering recordings. In 1988, the vast majority of record label content was stored in
`
`analog form. There was no electronic vault from which the label could transfer its
`
`catalog to a retailer. It took many years and tens of millions of dollars of investment
`
`by each major label to build the systems for servicing stores such as iTMS.
`
`54. Bandwidth constraints, which led to slow transfer, were another issue.
`
`Furthermore, storage of digital data and memory capacity at the time presented
`
`additional constraints. Digital audio files required significant space to store.
`
`
`27 It is my understanding that such individuals are considered persons of ordinary skill
`
`in the art.
`
`28 See also, e.g., Ex. 4306 at 420 (“I see the time down the road, probably 10 years,
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`when you’ll be able to dial a series of numbers on your telephone and get a digital
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`album over the phone line into your incoder [sic] in your home. In five minutes, you
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`can have a new album. It’s on your telephone bill or it’s on your credit card or
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`whatever”).
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`Case CBM2013-00023
`Patent 5,966,440
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`55. The Board of Patent Appeals and Interferences’ Decision on Appeal in
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`the reexaminations of the Hair patents recognizes that the “invention” claimed in the
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`Hair patents does nothing to address the “quality,” “size” and “bandwidth” challenges
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`that needed to be overcome before electronically selling digital video and/or digital
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`audio could be commercially viable:
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`While the Examiner emphasizes that, circa 1988, devices capable of
`decoding and playing back digital video, storage for the same, and
`distribution channels of adequate bandwidth did not exist, we find more
`compelling Appellant’s arguments that the Examiner is importing
`aspects into the claims (Reply Br. 10-15). Appellant argues correctly that
`the claims do not specify quality, size or bandwidth required for the
`video signals, and assuming the same to show inadequacy of disclosure is
`improper.29
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`56.
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`SightSound’s documentation acknowledges that encryption and
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`copyright protection were a significant concern for the record labels: “the labels were
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`afraid that the encryption would be hacked, resulting in the free distribution of illegal
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`copies.”30 But as discussed in more detail below, SightSound’s ’440 Patent offered no
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`solution for the challenges associated with protecting the copyrighted material
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`through encryption. SightSound’s documentation further details how SightSound
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`29 Ex. 4306 at 1462 (’573 Reexamination File History, dated 09/04/09); See also Ex.
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`4303 at 1765 (’440 Reexamination File History, dated 08/14/09 containing a virtually
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`identical quote about the ’440 Patent).
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`30 Ex. 4361 at 3.
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`didn’t develop its own encryption and compression technologies, but instead relied on
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`compression and encryption technology provided long after the priority date by a
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`third party.31 Additionally, Arthur Hair admitted that SightSound’s 1995 embodiment
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`of its patented “invention” did not have the ability to electronically code songs to
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`prevent unauthorized reproduction because that functionality was not available at the
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`time.32 Without adequate encryption the record labels then would not agree to release
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`their content, a necessary step for an electronic record store to be profitable.33
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`57.
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`Further, it would have been challenging to profitably run an “electronic
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`record store” at the time, given the then-current state of technology. For example, in
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`a home computer-based model for such a store, not all homes had a home computer,
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`and not all of the homes with a home computer had access to data transfer via
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`31 Ex. 4358 at 5 (asserting that Microsoft’s Windows Rights Manager and Windows
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`Media Technologies “enables the Company to compress and encrypt audio and video
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`files”).
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`32 Ex. 4307 at 88:16-89:9.
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`33 Ex. 4361 at 2-3 (“without an agreement to distribute music for the major labels the
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`company concluded that its ability to be successful was severely limited”); Ex. 4364 at
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`6 (“The Company’s success is dependent on its ability to motivate the major owners
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`of audio and video recordings to purchase the Company’s E-Warehousing and E-
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`Distribution services.”).
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`telephone lines, much less high-speed data transfer that would have facilitated prompt
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`transfer of larger files, such as digital audio and video. While other options, such as
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`cable lines, may have provided faster transfer speeds given their greater bandwidth,
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`using those lines for an electronic record store would have required cooperation from
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`the cable companies. Additionally, the cost of storage for digital audio and digital
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`video, as well as the relatively small storage capacity available on home computers at
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`that time, meant even fewer potential sales, even within the subset of available
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`consumers. Further, I understand that SightSound contends that its claims require
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`non-removable media such as non-removable hard disks specifically, yet hard disks
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`were a prime example of the high cost of storage at the time. These factors all limited
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`the potential customer base, particularly as compared to traditional physical delivery
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`of digital audio and video signals at that time.
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`58. The ’440 Patent provides no solutions to these constraints. Until
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`solutions existed for these known problems, the sale of music was not a profitable
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`alternative to distribution of CDs.
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`59. Even as of the mid-1990s, SightSound itself recognized that Internet
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`availability and technological constraints were an issue. A SightSound Business Plan
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`from that time period explained:
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`Three key components are essential for the financial success of
`Digital Sight/Sound: 1) massive bandwidth, 2) robust digital
`compression, and 3) substantial hard memory possessed by the
`customer. First, the bandwidth [the speed which digital information
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`flows] to the customer must be robust. . . . Second, a robust digital
`compression algorithm such as HARC-C, a product recently announced
`by the Houston Advanced Research Center. HARC-C compresses
`digital audio recordings at a 6:1 compression ratio, and such a product is
`essential to reduce transmission times and to decrease the customer’s
`hard memory requirements. Third, and in addition to robust digital
`compression, the customer will be required to possess much more
`computer hard memory than was customary in 1995. Using a robust
`digital compression algorithm, the customer will be able to store 55
`digitized albums on only 6 Gigabytes of hard memory. Historically,
`major corporations and government agencies constituted the market for
`such massive hard memory requirements. Prices for hard memory in
`general have consistently dropped over the past decade, and the recent
`surge of demand for multi-Gigabyte hard memory devices by small
`business and residential computer owners will further accelerate the
`price reduction of hard memory.34
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`
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`60. Two years later, bandwidth problems continued to foil the
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`implementation of the ’440 Patent. In its August 1997 Prospectus, SightSound
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`explained:
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`The potential of the Internet as a medium for communication, education,
`entertainment and commerce remains unfulfilled due to problems with
`its performance and reliability. The Internet’s performance limitations
`stem from its basic architecture, which is not optimized for distribution
`of data-intensive multimedia content. A limitation associated with any
`element in the system, whether it is the “last mile” connection to the
`user (the “local loop”), the infra