THE MARKET
`Test Marketing
`
`This diagram illustrates our products in a typpical customer appiication.
`
`Wo
`(Fast-RIT)
`
`rkstations
`(Sec-RIT)
`
`Aircraft Platform
`(ATR-RIT)
`
`Image Conferencing
`(Ima e-Bridge)
`
`Government
`Satellite
`Network
`
`Mobile Platform
`(ATR-RIT)
`
`r/
`
`Briefcase
`(FIELD-RIT)
`
`Shipboard Platform
`(ATR-RIT)
`
`Image Database
`(Image-Base)
`
`PHOTO'WFELESSI-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2011
`
`

`
`THE MARKET
`Test Marketing
`
`success with one group could lead to requirements for new groups to have compatible
`equipment.
`
`We also concluded that our marketing success depended on working through a
`triangular relationship of policy makers, user groups, and contracting officers or
`acquisition groups. Understanding the overall direction of government programs and
`gaining the support of the policy makers allows us to select key user groups to
`address. Placing evaluation, or "seed" units in these groups gains us influence in the
`development of specifications for future volume contracts. Finally, working through the
`acquisition groups to win major contracts for our products can create substantial
`barriers to future competition.
`
`In short, we had found a market niche that had immediate requirements, had funds
`available to spend, and could be successfully penetrated by a small, aggressive
`company that could be more responsive to user needs than the established
`government contractors.
`
`During the test marketing project we demonstrated our products to over thirty user
`groups who have an application which they are interested in pursuing. These groups
`form the basis for our 1987 forecast, which is detailed in the Marketing section that
`follows.
`
`Announcement
`In May of 1986, PHOTOTELESIS announced the Sec-RIT and Com-RIT product lines,
`as well as future directions in portable and TEMPEST qualified units. The products
`were announced at a major military trade show known as AFCEA (Armed Forces
`Communications and Electronics Association). There was strong user interest at the
`show, resulting in over fifty qualified leads for future business. Press releases were
`published in magazines targeted at both defense and communications audiences
`which have to date resulted in over 250 leads for Com-RIT and Sec-RIT products.
`Copies of our press releases may be found in the Appendix.
`
`PHOTO7EL E3.0-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2012
`
`

`
`THE MARKET
`Market Statistics
`
`Introduction
`During the test marketing campaign, we concluded that additional data should be
`gathered on the size of the markets we were interested in, and on major policy
`directions in the Department of Defense that were influencing the market and might be
`advantageous to us in the future. Since no research.reports on image communications
`equipment in the military was readily available to us, we began to collect statistics
`through a variety of sources, including books, articles, newspaper stories and personal
`interviews with highly placed individuals in the military.
`
`Our primary focus remained the C31 market: Command, Control, Communications and
`Intelligence. Within that umbrella term for all D.O.D. communications programs, we
`identified three major government programs that were relevant to our market thrust:
`
`* TEMPEST qualified products
`
`* STU-III Secure Telephone Units
`
`* Mobile Subscriber Equipment
`
`Each of these programs is described on the following pages, including forecasts of
`future market opportunity. Then we will draw conclusions about their importance to our
`marketing direction.
`
`PHOTO
`
`BJE O96-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2013
`
`

`
`THE MARKET
`Market Statistics
`
`Command, Control, Communications and Intelligence (C3!)
`Programs that involve D.O.D secure communications in all branches of the Military are
`grouped into this classification for administrative control. The Assistant Secretary for
`C31 reports to the Secretary of Defense, and oversees all policies and budgets
`regarding agencies, programs, and acquisitions of equipment.
`
`Deployment is accomplished through the Joint Chiefs of Staff to all Military service
`Command, Control, Communications and Intelligence branches through their
`world-wide organizational structure composed of CINC's (Commanders in Chief)
`representing regional and strategic commands. Departments of Army, Navy, Air Force,
`and Marines may have individual programs, but C31 seeks to ensure inter-service and
`NATO compatibility.
`
`The growth of budgets for C31 programs provides a broad market opportunity for
`adding our secure image communications products to D.O.D.secure communications
`systems.
`
`FY
`
`'86 C31 Budgets ($14.298)
`
`FY
`
`'87 C31 Budgets ($17.406)
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10 11 12 13 14 15 16 17 18
`
`Billions of Dollars
`
`Source: C31 Handbook, P. 262, Defense Electronics, 1986.
`
`PHOTOVEL 898-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2014
`
`

`
`THE MARKET
`Market Statistics
`
`TEMPEST
`TEMPEST is the Federal government's word for the countermeasures taken on
`electronic and data processing equipment to prevent them from emitting electronic
`signals that can be detected by unauthorized persons. TEMPEST requirements are
`quite common in the Federal government, thus creating an opportunity for TEMPEST
`qualified image transmission systems.
`
`TEMPEST equipment is required in many office environments in the U.S. Federal
`government which deal with classified information, and for almost all non-tactical
`applications outside the U.S. TEMPEST-qualified products command a high price
`premium in the market compared to comparable commercial versions.
`
`"Government and industry officials are forecasting a steady demand for TEMPEST
`equipment and services over the next five to ten years.
`
`Current expenditures are $350 million, a number that might easily double or triple by
`the end of the decade."
`
`We will provide TEMPEST-compatible desktop and portable Remote Image
`Transceivers to take advantage of the tremendous growth in this market area.
`
`I$350
`
`1990
`
`875
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`- 9
`
`Millions of Dollars
`Source: C31 Handbook, Pp 181-200, Defense Electronics, 1986.
`
`PHOTO 1ELEBOO-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2015
`
`

`
`THE MARKET
`Market Statistics
`
`Secure Telephone Units
`STU-III is the acronym for the third-generation Secure Telephone Unit program. This
`program extends to all Federal agencies and contractors, creating a tremendous
`market opportunity for encryption-compatible desktop image transceivers.
`
`Special Secure Telephone Units (STU's) are being developed and produced under a
`National Security Agency sponsored program. Initial contracts let in 1986 worth $190
`million will allow the secure telephone market to expand from the current STU-ll's to up
`to 50,000 new STU-lll's. Ten thousand units will be produced per month and will sell
`for around $2000. Initial contracts were let to RCA ($84.7M), AT&T ($55.2M) and
`Motorola ($50.1 M). Industry estimates forecast a market size of $500 million by 1990,
`resulting in an installed base of up to 500,000 units over the next ten years.
`
`Our Sec-RIT product is designed for compatibility with STU-III, opening a vast new
`market for us as these telephone systems come into use. For example, if five
`percent of the expected STU-III desktops are candidates for image
`transmission, that represents a total available market of 25,000 units over
`the next ten years.
`
`Contracts in Place and Future Growth
`
`1986
`
`$190
`
`11990$500
`
`1
`
`2
`
`3
`
`4
`
`5
`
`Millions of Dollars
`
`Source: The NewYork Times, Tuesday, July 8, 1986
`Defense Electronics, March, 1987.
`
`PHOTO 4ELES0,-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2016
`
`

`
`THE MARKET
`Market Statistics
`
`Mobile Subscriber Equipment
`The Mobile Subscriber Equipment (MSE) program is a new U.S. Army program which
`provides vehicular and man-portable communications equipment.
`
`The largest procurement of tactical communications equipment in history, MSE is often
`described as "the Army's Cellular System". With initial operation scheduled for 1988,
`the program will provide a worldwide secure switched network for voice, data, teletype,
`and facsimile communications for digital radio telephone users, switched system
`subscribers, information processing facilities, and combat-net radio users. This
`program is slated for expenditures of $1.0 billion in Fiscal 1988 and $995 million in
`Fiscal 1989. Total program expenditures are expected to top $4.5 billion.
`
`Our ATR-RIT and briefcase product families will be compatible with these new cellular
`systems. If the market for image transmission is only one percent the size
`of the totoal MSE market, it represents a $10 million opportunity for us in
`1988 alone.
`
`MSE Program Expenditures
`
`1988
`
`1989
`
`Program
`
`$1.0
`
`$.995
`
`$4.5
`
`1
`
`2
`
`3
`
`4
`
`5
`
`Billions of Dollars
`
`Source: C31 Handbook, P.119, Defense Electronics,
`1986; Microwave Journal, February1987.
`
`PHOTO ElL 818-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2017
`
`

`
`THE MARKET
`Market Statistics
`
`Conclusions
`Our investigation into these major programs has yielded several important
`conclusions:
`
`First, the overall C31 market is receiving major funding for communications equipment
`and is projected to have strong future growth. We have developed direct contacts to
`policy makers in this arena who are enthusiastic supporters for our products. Moreover,
`C31 has the organizational focus across all branches to allow us to market our products
`using a top-down approach without needing a large direct sales force.
`
`Second, the market for TEMPEST equipment is growing at a rapid pace and is
`projected to continue to do so over the next five to ten years. This indicates a ready
`market for TEMPEST-compatible versions of our products, important because the
`broad market opportunities for us are in applications which demand TEMPEST
`certification.
`
`Third, the STU-III market indicates a major shift in thinking about COMSEC, or Secure
`Communications, in the Federal Government, from a few expensive units in limited
`locations to a broad deployment across all branches of the government that deal in
`classified information. Since these units are just now beginning to appear in the market
`and are being manufactured in very large quantities, we are well positioned with our
`COMSEC and future TEMPEST-compatible product line on the leading edge of an
`important new market.
`
`Fourth, the projected growth in the Mobile Subscriber Equipment market points to a
`vastly increased emphasis on world-wide military communications in the field. We are
`well positioned to take advantage of this new market with our secure mobile and
`portable products.
`
`Taken in total, we have concluded that these programs point to a major
`market being formed for products which are compatible with the new.
`generation of secure communications equipment. Our research points to
`strong growth in this market over the next five years, creating a total available market
`measured in the billions of dollars, and tens of thousands of "sockets" into which we
`can plug our products. We have already made significant strides in developing
`compatible products for this market and have focused our marketing resources on
`tracking and penetrating major contract opportunities for our image-based product line.
`
`PHOTOTELEUB-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2018
`
`

`
`Notes
`
`PHOTO7ES0-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2019
`
`

`
`Competition
`Competition
`
`Sony, Ex. 1002, p.202O
`
`Sony, Ex. 1002, p.2020
`
`

`
`COMPETITION
`Products
`
`Introduction
`A key factor in assessing the market opportunity for the PHOTOTELESIS product line is
`the presence of competition, particularlyin the areas of image transmission systems
`that offer COMSEC compatibility, can operate over existing voice communications
`facilities, and are offered in TEMPEST versions. One of our best sources of competitive
`information is our own customers, who have consistently told us that our product
`concept is unique in the market.
`
`We realize, however, that there are many communications products and systems in the
`federal government that are competing for contract dollars, even though they may
`cover a wide diversity of features and price points. This section takes a look at the
`competitive environment that currently exists and draws several conclusions that
`influence our marketing strategy.
`
`Video Conferencing Products
`Currently, video transmission in the Federal arena is primarily confined to full-motion
`(i.e. closed circuit television) systems. These systems are installed in expensive,
`custom conference rooms for use between high-level management groups. The cost
`per room is usually in the range of $100-250 thousand, and the cost per hour of use
`ranges from $250-750. Communications lines which can handle the high speed video
`information between rooms are highly specialized and in short supply. Although some
`of these rooms operate over encrypted circuits, security remains a significant problem.
`Some rooms utilize lower-cost freeze-frame equipment which can send still pictures
`over standard telephone lines, but the equipment is customized for each installation
`and, like the full-motion systems, complex to operate.
`
`Tactical Imaging Requirements
`Many groups within the Federal government deal with image-based information on a
`routine basis. Military and law enforcement groups who collect images in the field often
`record the images on video tape, which must then be delivered by courier. Alternately,
`they use conventional camera technology, which must be developed and printed
`before the images can be couriered to their destination or sent by facsimile.
`
`The advantages of video transmission are that any image, whether it be a document,
`object, person, or scene, can be captured instantly from any video camera source.
`Once captured, the image, now in digital form, is compressed and sent over a standard
`voice-grade communications circuit.
`
`PHOTOV'EtL S0-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2021
`
`

`
`COMPETITION
`Products
`
`Key factors in applying this technology are:
`
`* the resolution, or clarity, of the image received, including documents, objects,
`persons, or scenes
`
`* the speed at which an image can be transmitted
`
`* the ability of the transmission device to achieve error-free communication
`
`* the ability to use all types of voice communications circuits, including telephone,
`radio, and satellite, in both secure and non-secure modes
`
`* the ability to operate the device in fixed, mobile and portable environments
`
`* the ability to transmit classified information without risk of electronic detection
`
`* ease of use to minimize training time
`
`* low cost to acquire and operate
`
`* reliability
`
`* off-the-shelf availability
`
`Freeze-Frame Video Transmission Systems
`There are two principal vendors providing commercial video image transmission
`systems to the Federal Government: Interrand-Corportation and Colorado Video.
`There are also two main vendors providing military equipment: Dalmo-Victor (division
`of Singer), and E-Systems. Detailed comparisons of these products against the
`PHOTOTELESIS products are presented in tabular form at the end of this section. A
`few salient points are worth noting here:
`
`* The commercial products, which have been used mainly in conference room
`applications, are not known to have government-supplied encryption interface
`capabilities, operate only on standard telephone circuits, are not offered in
`TEMPEST form, and are not available in versions which can be used in mobile or
`portable applications.
`
`PHOTOVEL393-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2022
`
`

`
`COMPETITION
`Products
`
`* The military products are very expensive, not available off-the-shelf, do not operate in
`a network which permits multi-point briefings or remote image database retrieval, are
`difficult to use, and are not offered in compatible desktop versions.
`
`In short, although some competitive features are offered by each product, no one
`product meets all the required characteristics defined above.
`
`Facsimile Products
`Facsimile technology provides a way to electronically scan flat images, such as
`documents or photographs, and send them over ordinary telephone lines. Facsimile
`technology is capable of high resolution, or image clarity, for black and white images,
`but suffers in comparison to video techniques where the image has many intermediate
`levels of gray, such as images of objects, people, or scenes. Facsimile devices attempt
`to accomodate for this deficiency by using a technique called half-toning, which uses
`closely spaced patterns of black and white dots to simulate shades of gray.
`
`Two military facsimile devices currently in use are the Tactical Field Fax, available from
`various manufacturers under D.O.D. contract, and the MDFT, manufactured under
`federal contract by Video Masters. These devices are compared to the
`PHOTOTELESIS products in a table at the end of this section. The main conclusions of
`this comparison are as follows:
`
`* Facsimile devices are the preferred alternative for the transmission of documents
`only, where their high resolution and low cost are significant advantages.
`
`* Facsimile is poorly suited to other kinds of imagery, since the image must first be
`captured and printed by some other means before it can be fed into the facsimile
`scanner, a time-consuming process which also degrades the image. Facsimile
`transfer does not faithfully reproduce the shades of gray in an image, which is vital in
`many tactical applications including personnel identification, reconnaissance
`imagery, etc. Therefore, video techniques will be preferred when one device must be
`usable with a variety of image sources.
`
`* Facsimile protocols are sensitive to communications line quality; "drop-outs" on the
`line can cause portions of the image to be destroyed, necessitating resending the
`entire image. The PHOTOTELESIS products use a coding technique known as
`forward error correction for error-free transmission over a wide range of line quality.
`
`PHOTOVEL BO-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2023
`
`

`
`COMPETITION
`Products
`
`Desktop Products
`
`Feature
`
`Resolution
`(pixels)
`
`Speed
`(seconds)
`
`PHOTOTELESIS
`
`INTERRAND
`
`COLORADO VID.
`
`592x440x128
`
`640X480X256
`
`.......-512x480x256
`
`10-40
`
`10 for partial resolution
`80 for full resolution
`
`25
`
`no
`
`Error Correction
`
`block transmission
`forward error correction
`
`error checked
`
`Transmission
`
`telephone, radio,
`cellular, satellite
`
`telephone
`
`telephone
`
`Encryption
`Compatible
`
`Packaging
`
`yes, programmable
`
`unknown
`
`unknown
`
`desktop,mobile,
`portable
`
`desktop or console
`
`rack mount
`
`Ease of Use
`
`menu based, helps
`
`manual controls
`
`manual controls
`
`Cost
`
`$10,000-24,500
`
`$11,000-75,000
`
`Availability
`
`off-the-shelf
`
`off-the-shelf
`
`$15,000 est.
`
`off-the-shelf
`
`Note: Data sheets are included in the Appendices.
`
`PHOTOTELE8O8-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2024
`
`

`
`III
`
`COMPETITION
`Products
`
`Military Products
`
`Feature
`
`Resolution
`(pixels)
`
`Speed
`(seconds)
`
`Error Correction
`
`Transmission
`
`Encryption
`Compatible
`
`Packaging
`
`PHOTOTELESIS
`
`DALMO-VICTOR
`
`E-SYSTEMS
`
`592x440x128
`
`256x256X256
`
`512X480X256
`
`10-40
`
`3-180
`
`120
`
`block transmission
`forward error correction
`
`telephone, radio,
`cellular, satellite
`
`yes, programmable
`
`desktop,mobile,
`portable
`
`none specified
`
`radio, satellite
`
`radio, satellite
`
`mobile
`
`two man portable
`
`Ease of Use
`
`menu, help screens
`
`manual controls
`
`manual controls
`
`Cost
`
`$18,500-24,500
`
`Availability
`
`off-the-shelf
`
`$50-100,000
`
`special order
`
`unknown
`
`unknown
`
`Note: Data sheets are included in the Appendices.
`
`PHOTO'4ELEBO-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2025
`
`

`
`----
`
`...
`
`.
`
`U IIIIMLm
`
`~I
`
`COMPETITION
`Products
`
`-acsimlle Procucrs
`
`PHOTOTELESIS
`
`FIELD FAX
`
`MDFT
`
`592x440 per image
`
`204x19per inch
`
`75-300 per inch
`
`128 levels
`
`Input Medium
`
`high res. camera
`
`Feature
`
`Resolution
`(pixels)
`
`Gray Scale
`
`Speed
`(seconds)
`
`Error Correction
`
`Transmission
`
`Encryption
`Compatible
`
`Packaging
`
`4-16 levels
`
`flat scanner
`
`7-15
`
`none
`
`5-33 levels
`
`flat scanner
`
`15
`
`none
`
`radio, satellite
`
`radio, satellite
`
`10-40
`
`block transmission
`forward error correction
`
`telephone, radio,
`cellular, satellite
`
`yes, programmable
`
`yes
`
`yes
`
`desktop,mobile,
`portable
`
`rack mount, 110v.
`
`two suitcase portable
`
`Ease of Use
`
`menu, help screens
`
`manual controls
`
`manual controls
`
`Cost
`
`$18,500-24,500
`
`$7800-16,800
`
`Availability
`
`off-the-shelf
`
`D.O.D. contract
`
`unknown
`
`unknown
`
`Note: Data Sheets are included in the Appendices.
`
`PHOTOVETLE6OE-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2026
`
`

`
`COMPETITION
`Conclusions
`
`We have drawn several conclusions from our analysis of the competition:
`
`First, the PHOTOTELESIS approach to image transmission is clearly different and
`superior to other solutions on the market. We believe that we uniquely meet all the
`requirements for success stated earlier:
`
`* we offer high resolution combined with full gray-scale capability that gives excellent
`image clarity with a variety of subject material
`
`* our transmission protocols achieve error-free communication even with marginal
`communications channel quality
`
`* we can send a typical image over encrypted circuits in 20-30 seconds, and over
`standard telephone lines in under 10 seconds
`
`* we use a wide variety of voice communications circuits and encryption devices
`
`* we can operate in fixed, mobile and portable environments
`
`* our TEMPEST version will permit us to transmit classified information without risk of
`electronic detection
`
`* we offer ease of use through simplified control panels and menu-based operation
`
`* our products are low cost to acquire and operate
`
`* our design has proven reliability
`
`* we offer off-the-shelf availability
`
`Second, although there are different, incompatible products available which meet
`some of the needs above, our product line meets them all in one family of
`interoperable products.
`
`PHOTO
`
`L~dE89-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2027
`
`

`
`COMPETITION
`Conclusions
`
`Third, we believe that we can minimize competitive threats from other companies with
`substantially greater resources than ours by
`
`* offering products which are tailored to meet specific user needs by providing
`compatibility with a wide range of communications systems and encryption devices
`
`* offering a range of compatible product solutions which can work together
`
`* providing products at attractive price points
`
`* concentrating on penetrating key applications early and establishing our products as
`the standard, thus locking out competition with incompatible communications
`protocols
`
`PHOT07ELEOO-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2028
`
`

`
`Notes
`
`PHOTO 'LCDO-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2029
`
`

`
`Marketing {
`Marketing
`
`%
`
`Sony, Ex. 1002, p.203O
`
`Sony, Ex. 1002, p.2030
`
`

`
`MARKETING
`Sales Process
`
`Customer Model
`We view our customers and prospects in groups which may be represented as a
`market pyramid. In an emerging market, penetration occurs at the top of the pyramid
`where there are a limited number of innovative groups who are eager to purchase
`state-of-the-art technology. Moving down the pyramid we find larger groups of users,
`but they are more risk-averse and depend on a more established market before they
`will commit to purchase. Relating this model to our own customers, we see the market
`pyramid in four broad groupings:
`
`Advocates
`Product advocates are willing to
`take standard products for Test &
`Evaluation, then upgrade to meet
`full
`requirements. Purchase
`volumes: 2 units per order.
`
`Early initiators
`These users must have encryption-compatible
`units, but do not need to meet all feature
`requirements initially. Their applications are
`limited to CONUS (Continental U.S.) operations,
`since TEMPEST qualification is
`required for
`most work off-shore. Purchase volumes: 2-6
`units per order
`
`Test bed users
`These groups must prove their products through their own testing
`and evaluation. Then they will use them in a "test bed" or
`representative tactical application. They will do their own
`TEMPEST testing if required. Purchase volumes: 6-30 units per
`order.
`
`Large groups with established requirements
`Volume orders (30-500 units) over a period of time on open contract, through
`GSA schedule, or in conjunction with a large contract for other equipment.
`Many applications will require full TEMPEST certification. Contracts are
`usually associated with a major program, e.g. STU III, MSE etc.
`
`PHOTOV fLESD-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2031
`
`

`
`MARKETING
`Sales Process
`
`The Role of Product Advocates
`The product advocates mentioned at the top of the market pyramid are extremely
`important to us as we penetrate new application areas for our products. These users
`are well known for their expertise in communications and have sufficient "clout" to
`purchase test and evaluation units. They make their reputation by being the first to use
`a product in a new area, and are eager to participate in product demonstrations to
`other user groups. They become "inside salesmen" for the product and are invaluable .
`in establishing early successes. We have developed such champions in each of the
`initial user groups we have sold into and view their role as an important element of our
`marketing strategy.
`
`Sales Process
`We have found that successful sales of our products follow this pattern:
`
`* We identify a potential user group through referrals from policy makers or other user
`groups. They might be identified by their function within a service group or their
`association with a major communications program.
`
`* Our customers must meet the following qualifications:
`
`- funds presently budgeted for imaging systems, either on a.line-item or
`discretionary basis
`- defined requirements in place which either fit our products or can be influenced
`- a high priority assigned to the project
`- active involvement of a contracting officer or acquisition group
`- a visible product advocate
`
`* After initial contact by telephone, and assuming the group meets our qualification
`criteria, we send out a letter and documentation package tailored to their application.
`
`* A follow-up call after the literature is delivered tests interest and identifies specific
`applications and requirements. A demonstration and briefing is arranged, at a
`headquarters or the customer site.
`
`* The demonstration briefing is held, with participation from key decision makers and
`their staff. The demonstration is tailored to their applications. We ask for an order for
`test and evaluation (T&E) units.
`* Based on immediate funds availability, the T&E units are purchased and used
`internally to evaluate the group's broader requirements.
`
`PHOTOVEL 81l-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2032
`
`

`
`MARKETING
`Sales Process
`
`* Based on use of the T&E units, the user groups develop written requirements and
`assign a contracting officer to develop the contract. Key issues involving contract
`type, price, quantitiy, contract options for future purchases, and options for other
`groups to purchase from the same contract are negotiated. More information about
`contract development is contained in a later section.
`
`Our strategy is to use the above process as a model for our direct marketing activities,
`tracking the progress of each account through the steps outlined above. In this way we
`plan to minimize unproductive use of our marketing resources and maximize our focus
`on accounts that can be developed into volume contracts for our products.
`
`PHOT07[E, SDO,-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2033
`
`

`
`MARKETING
`Pricing
`
`Pricing Strategy
`We have set our product pricing based on a value-added premium to the commercial
`PHOTOPHONE product offered by Image Data Corporation, and our analysis of the
`competition in our market segment. Our goal is to achieve high product gross margins
`while offering our products at a substantial price advantage to present competition. Our
`ability to achieve these opposing goals of high margins and price leadership reflects
`our belief that we have developed and can defend a market niche that has very
`attractive potential profitability.
`
`Our financial model assumes that our pricing declines by 10% in the second year after
`product introduction, and 5% per year thereafter, to account for the effects of emerging
`competition and continued price reductions in the commercial market. We believe that
`our gross margins will not be eroded by this price reduction due to manufacturing cost
`efficiencies as our shipment volumes increase.
`
`Commercial Product
`
`Our Fast-RIT product is priced competitively with the PHOTOPHONE at $10,000,
`including high-resolution solid state camera and shipping case.
`
`Secure Desktop Products
`
`Our Sec-RIT product is priced at $18,500. We do not offer the secure interface as an
`optional upgrade to the Fast-RIT since the price premium is greater than the market
`would bear for an encryption interface alone. We estimate that the TEMPEST Sec-RIT,
`when introduced in 1988, will have a list price of $28,000, reflecting the substantial
`premium that TEMPEST products command in the marketplace.
`
`Mobile Products
`
`The ATR Sec-RIT carries a.list price of $24,480. Although a high margin
`product, this price is much lower than anything presently offered in today's market.
`
`Briefcase Products
`
`We estimate that the Field Sec-RIT, when introduced in 1988, will have a list price of
`$18,500, slightly higher than the 1988 price for the Sec-RIT of $16,650. We believe that
`offering this product at only a slight price premium to our desktop product, while
`providing substantial additional functionality, will serve to stimulate this new segment
`
`PHOT04ELE80-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2034
`
`

`
`MARKETING
`Pricing
`
`of our market. This product will be introduced in a TEMPEST version in 1989 for
`$28,000.
`
`Options and Spare Parts
`
`Each of our products are offered with optional features such as encryption interface
`cables and video printers. Many of our customers also require on-site quantities of
`spare parts. While these contribute to our revenues and profitability, our financial
`model does not include them.
`
`Discounting
`
`Our published pricing does not include discounts for volume purchases. We anticipate
`that all volume purchases of our units will be by contract, and prefer to negotiate these
`on a case-by-case basis. We believe we can minimize volume discounting in the initial
`years due to the lack of substantial direct competition and the relatively small size of
`anticipated purchase contracts during the Test and Evaluation and Test Bed phases of
`our market development.
`
`Price and Gross Margin Summary
`
`Product
`
`Fast-RIT
`
`Sec-RIT
`
`ATR Sec-RIT
`
`List Price
`
`Gross Margin %
`
`$10,000
`
`$18,500
`
`$24,480
`
`41
`
`67
`
`81
`
`Field Sec-RIT
`
`$18,500 (est.)
`
`TEMPEST
`Sec-RIT
`
`TEMPEST
`Field Sec-RIT
`
`$28,000 (est.)
`
`$28,000 (est.)
`
`PHOTOTi ELE38-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2035
`
`

`
`MARKETING
`Sales Status
`
`Background
`During our test marketing project we demonstrated our products to a number of user
`groups, some of whom became customers or placed orders in 1986. We started 1987
`with a sales backlog and a growing list of groups who are interested in purchasing our
`products now that they have reached production status. We also have a list of groups
`who are interested in our products and are waiting for a product demonstration.
`Additional prospects have been identified who have received our literature, read a
`press release, or seen us at a conference. We are well positioned as our marketing
`activities expand in 1987 with an exisiting customer base and a database of qualified
`prospects to address.
`
`This is our sales status as of the end of March, .1987:
`
`Current Customers
`We have three customer accounts presently in our target markets.
`
`Groups with Orders Pending
`A total of five customers have orders presently in progress, one of which is presently
`booked.
`
`Qualified Prospects
`We have demonstrated our products to 42 user groups who have applications for and
`interest in our products.
`
`Target Organizations
`Our database contains over 70 organizations in our target market known to have
`applications for imaging products. We believe that many of these organizations will
`yield multiple interested user groups as we address them.
`
`Press Release Responses
`We presently have 67 responses from our Sec-RIT press release to pursue.
`
`PHOTOVELE8D6-CONFIDENTIAL
`
`Sony, Ex. 1002, p.2036
`
`

`
`MARKETING
`Forecasts
`
`Introduction
`In this section we will discuss our model of the sales cycle for our products, how we
`develop our forecasts from this model, the prospect list we are targeting, and our
`detailed -forecasts. We will present our a monthly forecast by product for 1987 and
`yearly for 1988-1991.
`
`Sales Cycle Model
`Purchasing practices in the Federal Government market differ substantially from the
`commercial market. We have already described the sales process in a previous
`section. The sales cycle model takes each step of this process and maps it against an
`approximate timeframe to complete each step. This model has been tested against our
`experience over the last year and by consultation with individuals who are
`experienced w