Musicrypt Inc. (MCT)
Interview with: John Heaven, President and CEO
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and Information on the Digital Media Distribution System (DMDS)™ a unique approach for the distribution of new music releases by record companies  to radio stations via the Internet.

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Musicrypt Inc. is offering a unique approach for dealing with the problems of physical distribution of new releases from studios to record companies to radio stations with its Digital Media Distribution System (DMDS)



Technology
Digital Media Distribution System™
(MCT – TSX Venture)

Musicrypt Inc.
225 East Beaver Creek Rd. – Ste. 300
Richmond Hill, ON, Canada L4B 3P4
Phone: 905-763-3553



John Heaven
President and
Chief Executive Officer

Interview conducted by:
Lynn Fosse
Senior Editor

CEOCFOinterviews.com
June 2003

BIO:
Mr. Heaven is the President and C.E.O. and a director of Musicrypt.  Mr. Heaven is a technology sector entrepreneur and co-founded Coesyl Ltd., a software company, in 1981.   He subsequently joined start-up Telepanel Systems Inc., helping it to become a NASDAQ and TSE listed company, from 1984 to 1998, in positions as Chief Financial Officer, Corporate Secretary and Director.  Mr. Heaven earned a Bachelor of Commerce degree (magna cum laude) at McMaster University in Hamilton, Ontario, a Master of Business Administration degree from the University of Toronto, and qualified as a Chartered Accountant at Clarkson, Gordon (now Ernst & Young LLP).

Company Profile:
Musicrypt Inc. (TSX Venture: MCT) is offering a unique approach for the distribution of new music releases by record companies from the studio, internally, and to radio stations with their software and Internet technology. Musicrypt's Digital Media Distribution System (DMDS)™ enables user-friendly and secure distribution of media via the Internet. DMDS™ is a secure, web-based content delivery system that pioneers secure digital file management by incorporating biometrics. The first application of DMDS™ replaces the physical distribution of new musical recordings by record companies from the studio, internally, and to radio stations with more secure, more effective and less costly digital distribution via the Internet. DMDS delivers broadcast quality media from the sender securely and on time to authorized recipients. DMDS delivers the content person-to-person rather than machine-to-machine.

CEOCFOinterviews: Mr. Heaven, please give us a little background on Musicrypt.

Mr. Heaven: “Our background stems from our focus on enabling both user-friendly and secure distribution of media via the Internet. Our perspective is that we view the Internet as a public highway and if individuals want to use that to transport their valuable property, then we have to have a method for them to protect it. On the roadways, you can see the Brinks trucks making deliveries, and essentially, what we are doing is providing an electronic Brinks truck. Our first application of our Biometric Rights Management technology platform, is called “Digital Media Distribution System” or DMDS™, and that is focused on helping record labels deliver new releases to radio stations electronically rather than by the physical distribution method they currently use.

Our Biometric Rights Management platform is a unique approach in that we have combined the features of biometrics with high-value encryption and digital rights management. The advantage of this approach is that we can provide individuals portable access to content they are authorized to use while ensuring only authorized individuals access the content. The benefit of this with distributing new single releases to radio stations to record labels is that we can identify the authorized recipients by our Digital Media Distribution System’s use of Biometrica Rights Management. We assign radio stations the ability to access the track by merely typing in a user name and password, but a password alone is not secure enough because it can be shared with others. We use a biometric technology to identify users by their unique typing pattern. This method of identifying individual has proved to be almost 99% effective by Stanford Research Institute International.

We have in DMDS™ an application that enables record labels to upload new single tracks, select which radio stations are to receive them and send them in minutes, right from their desktop. Currently the traditional physical distribution method entails a record label pressing CD singles (“CD-Pro’s”) at a plant; these are put in sleeves, labeled and put in a protective envelope, addressed and couriered to several hundred radio stations. This process can take a week to two weeks, which is expensive and very insecure. The last two years has seen leaks of new releases before they make it to radio; one recent example is a Radiohead album and in 2002 both a Britney Spears single and the Lenny Kravitz single were leaked to illicit services before the airdate.   Premature release of a track can undermine the promotional activity and marketing launch of a new single. A lot of money time and effort goes into preparing those launches.”

CEOCFOinterviews: Has the industry tried other digital methods to accomplish this?

Mr. Heaven: “A few have tried things like e-mailing MP3s, but we have gone much further that, in that we have developed an application that meets the needs of both the record labels and radio stations in securely delivering and managing new releases from creation at the studio to air play. The radio station needs a broadcast quality file, and an MP3 is not of a sufficient quality for broadcast. What we are doing is providing a broadcast quality file as well as a way to conveniently review and manage the new releases in a safe environment.. MP3s are convenient and a lot of consumers use them because they compress music that tends to be in very large thirty or forty megabyte files in the original format. Typically with MP3’s this is compressed down into three to four megabytes. With higher quality the files are much larger than that, making it impractical for e-mail purposes. Our clients from their desktop, can take a track that it has been transferred from the studio and enter the details of the tracks, and the date it will be available for download, and send it to the radio station by selecting the radio stations that are enabled with DMDS from a list.

Our system encrypts the track with the equivalent of one million encryption that is provided by our encryption partner Meganet Corporation. Their virtual encryption has been adopted by the Department of Labor and the U.S. government.  DMDS sends notifications out to radio stations and they can log on and preview the track. When record labels send out a track often they don’t want it played on the air until a particular time and date. Our system allows them to set a particular time and date, at which time they can download that track. Prior to that time, our system allows them to log on to stream the track and view the track details. The program director can add it to a play list for future consideration or download. It makes it convenient for the record label’s promotion people to get the track out to radio and it makes it simple for radio to review new releases. Radio is inundated with new releases. Radio is dealing with a tidal wave of CD-Pro’s coming in the door in courier packages with printed material attached. It is a difficult task keeping all of that organized. Our system is just log in and play a sample, and if they wish, download a track instantly.”

CEOCFOinterviews: What is the revenue model?

Mr. Heaven: “Our revenue model is similar to the cost model the record labels presently have for distributing all their new releases. We get paid on a per-use basis.”

CEOCFOinterviews: Where are you in the development process?

Mr. Heaven: “We are in the middle of doing a trial for a band called “Jersey” that EMI Music is getting ready to release. We had demonstrated our capabilities for delivering new releases from record companies to radio stations. They then asked us if we can adapt it for internal distribution, because prior to the distribution to radio, new releases will be distributed to many people within the record label itself. That internal distribution can be international or national. Typically, that type of distribution was done by having single-track CDs made and distributed throughout the company by inter-company mail or by courier.  That was a source of potential leaks as well. We have now done internal distribution and the next step they wanted was to be able to do that from the studio as well, to make the entire process occur within a secure digital realm. We can transfer the track mixes from the studio to the record label where it is reviewed. EMI is currently scheduling the time for the new release, which we will distribute to about two dozen radio stations.”

CEOCFOinterviews:   Do you provide software to your customers?

Mr. Heaven: “It is a combination of client software as well as web services. When our users log on to DMDS, they are using a web-based portion of the application as well as a locally based portion of the application.”

CEOCFOinterviews: Eventually will you be having long-term contracts?

Mr. Heaven: “We will do an agreement with the record labels to use our system.”

CEOCFOinterviews: Why did you go public when you did, and please tell us about the funding of the company?

Mr. Heaven: “We were planning to go public in 2001. We executed an underwriting agreement on August 30, 2001, and that was derailed by the horrible events of 9/11. From there, we went back to private financing, which was very hard to find post 9-11, and we decided we needed public financing to help us launch the business. We had a lot of positive comments that we were able to do the IPO with the difficulty in the market conditions related to Enron, WorldCom, the Dow hitting a five-year low in September and impending war in Iraq. It was good to get it done and get liquidity for our earlier investors, and raise the money that enabled us to launch the business.”

CEOCFOinterviews: Do you have patented technology?

Mr. Heaven: “We have filed patents on the Biometric Rights Management platform and the Digital Media Distribution System and another patent. We have three patents pending on our solutions.”

CEOCFOinterviews: Do you see other applications for your technology down the road?

Mr. Heaven: “We initially focused on music because of the pressing need the music industry has for solutions and our team has unique expertise in the industry. One of our founders has spent his career as an artist manager and a publisher. He has been dealing with both artists and record labels throughout his career. Our Vice President of Technology was formerly the Director of New Media at EMI, and our Vice President of Sales was formerly the Vice President of National Promotion at EMI. One of our directors is the retired Chairman and CEO of PolyGram Group/A&M Records of Canada. One of our key competitive advantages is that our team has an in-depth understanding of the needs of our customers; the record labels, the users in the radio business, and what they are looking for to help them manage new releases.

There are other digital media, which has a need for security and quick efficient transfer to authorized recipients and its potential for us. There are other industries could benefit from what we are doing. It is a sizeable business for us to service and offers a great opportunity. We are focused on providing our solution to the music business; that is where the pressing need is at the moment. The music business has been in the press constantly over the last few years because of security issues. They need our help now and we can help them, we are not the total solution for all their problems, but I think we offer a way for them to truly benefit from the advancement of technology.”

CEOCFOinterviews: What about the security issue?

Mr. Heaven: “The new tracks are encrypted so if they are intercepted, the tracks are useless because it is encrypted data. The virtual matrix encryption that we use is not susceptible to brute force attack in that if anybody did decrypt it all they would get are a number of data pointers. Essentially what the data pointers do is point to a series of zeros and ones in a file that both the user receiver and sender have. That is how the message is composed rather than sending the message itself. On top of that, we are employing our SSL technology to communicate between the record label and our secure server. When radio stations download the tracks, they are encrypted. At the time and date that the record label specified as the air date that the radio stations can download and play the track over the air; at that point, it is in public domain. I won’t say that all security is 100% but certainly for music we offer a solution that goes more than far enough to help improve security over new releases being sent to radio.”

CEOCFOinterviews: What are the challenges that you see going forward?

Mr. Heaven: “The challenges that I see are the demanding growth for the product and rolling it out internationally. In our dealings with the record labels, we find they are interested on a global basis, pending successful trials. We would be looking at very rapid international expansion to support a rollout of a record label on a global basis. It would be a nice challenge to have.”

CEOCFOinterviews: In closing, what would you like to say to potential investors?

Mr. Heaven: “I think for potential investors our unique value offering is that we have an unrivaled approach for dealing with this problem of physical distribution of new releases to radio, and that we do it faster, more efficiently and more securely. It is a win-win situation for our customers as well as radio. It makes their work that much easier and less problem prone. As soon as the record labels start using our system, they will save money. It is almost a found money situation for them. In terms of the Musicrypt itself, its’ team is very familiar with the needs of the music and radio business because of their past experience in dealing within those industries. To date, we just had an overwhelmingly positive response from those constituencies as well as the key advisors to those industries. . We offer a potential for returns that I believe more than compensates for the risks. I would also like investors to know that they can view a flash presentation on our website, that describes how our Digital Media Distribution System functions. Our website is www.musicrypt.com. Our shares trade on the TSX Venture Exchange under the symbol MCT.”

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