Midbar Tech: Musical lifeguard

The fight against CD piracy is taking a step forward with CD protection Cactus systems developed by Tel Aviv-based Midbar Tech, a provider of solutions to ease the terribe problem of CD piracy that is costing record companies billions of dollars a year.

According to IFPI (International Federation of Phonographic Industry) for copyright protection, five billion CDs are manufactured every year, including one billion forgeries. The pirate market totals 18% of the entire music industry, a market with $7 billion annual sales.

”Cactus is a protective system that closes all the loopholes in manufacturing CDs,” Midbar Tech founder and CEO Ran Alcalay says. The problem is the constant development of new appliances with new loopholes this market produces.

”As an ongoing concern, we’re required to find solutions as we go ahead. Our activity focuses on the five major manufacturers in the sector, with whom we have conducted several field tests. Our goal is to assimilate the technology in the companies based on the specific needs of each manufacturer.”

The five major recording companies are EMI, Warner Music, BMG, Sony and Universal. They operate IFPI, aimed at reducing the amount of piracy and protect the copyrights of this flourishing sector.

The need to fight piracy is in the interests of the global music industry since the entire food chain of singers, producers and musicians is built on royalties, paid according to the number of copies sold. Distribution of forged CDs has taken on pandemic proportions in the past two years as Internet use has spread.

In addition to the plants forging CDs, operating underground throughout the world, millions of Internet surfers, who do not regard it as a violation of the law, are managing to copy CDs through simple, easy and readily available means.

IFPI’s frustration is even greater in light of the fact that there is no law enforcement in this area and no statistics. The major companies fear total loss of control in a situation in which the number of forgeries is interminable.

Alcalay says, “The revolution inherent in protecting copyright through technology is still at the beginning. It will bring protective tools to the content industry. Intellectual property is their sole asset and our solution enables CDs to be manufactured with protection against copying, while maintaining sound quality.”

Founded in 1998, Midbar Tech is trying to develop solutions for CDs and DVDs protecting them against illegal copying and digital formatting for distribution over the Internet. The initial version of the product, tested by the five leading recording companies in the past year, earned a great deal of interest.

”Alongside the major companies, which account for 80% of the music industry, we expect independent music companies that have been harmed by piracy to adopt our system,” Alcalay says.

Independent companies’, known as “indie” in the industry’s jargon, share of the market recently increased, thanks to online distribution of music (Napster, for example) and the reluctance of established performers to hand over their copyright to major companies.

At the end of January, Midbar Tech will take part in the music world’s leading professional exhibition, taking place in Cannes and Alcalay is optimistic about its outcome.

Alcalay says that the European music industry leads the US industry in copyright. The setting up of an office in Brussels will facilitate the system’s assimilation in leading European companies – EMI and BMG - which have already bought the technology and plan to manufacture new CDs in 2001 with the master recording being manufactured using Midbar’s product. It will be impossible to listen to these CDs on PCs and consequently, impossible to produce the majority of forgeries.

Other technologies aimed against piracy exist in the music industry, two of them developed by Macrovision and Sony. Kfar Sava-based company TTR also developed a system that mints an undeletable digital signature to prevent forgeries from being heard.

Asked how this sort of technology can be priced, Vertex venture capital fund partner Dr. Gideon Shichman, who led the start-up’s latest financing round, said, “The only way to price this technology is by joining the industry’s food chain and receive royalties for every CD produced.”

“Globes”: When will the meter start running?

Shichman: “As early as this year, since two European companies, EMI and BMG, will start manufacturing in the coming months.”

Does this mean only new recordings being released or also existing ones?

”The five major companies with whom we are in contact plan to produce their entire catalog using Cactus. The nice thing about it is that we’re talking about a huge market that keeps growing and we can assume that the other major companies will follow the initial two.”

Shichman and Alcalay decline to quote any sales figures for the coming year, but these are estimated at $8-10 million in 2001.

What about a public issue?

”Every fund naturally wants to see its start-up publicly issued. It’s premature to talk of it now, but I assume it will take place within two to three years.”

Midbar Tech raised $5.5 million in May 2000 at a company value of $22 million, after money, from Vertex ($3 million), Templeton ($1.5 million), Numora JAFCO ($500,000) and additional investors, including Israelis.

Technoplast Technologies invested in Midbar Tech in 1998, at a company value of $1 million and has today a 14.5% stake in the company.

Midbar Tech is currently recruiting staff. It plans to add another 15 to its 22 strong workforce in the next few weeks.

Published by Israel's Business Arena on 22 January, 2001