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Interview with Anthony Bay, MOD Systems

A few weeks ago, MOD Systems (www.modsystems.com) announced a big venture capital raise--the firm's first--for the company's retail systems for selling music and videos. To get some insight into the firm, we spoke with Anthony Bay, the firm's Vice-Chairman and co-founder, to learn more.

For those who aren't familiar with MOD Systems, tell us about your products?

Anthony Bay: MOD Systems was created to enable the retail distribution of content, in digital form, in the same way that the content distribution networks have evolved on the Internet to distribute content. In order to distribute content in retail, you need a network that can protect all of the content, from end to end. Our business makes the presumption that retailers--and that's broadly defined as stores ranging from physical retailers, to airports, malls, big stores, and little stores--will remain a very important part of any future distribution of content. If you look at the business, overall, 95 percent of the video business is delivered through retail, and not downloaded, and in the music business, even though digital is much higher at around 25 percent, retail is still the biggest single component. Today, the challenge for retailers, is to move from a prepackaged content world to digital, where you have more selection, and if you will, more granularity. Retailers don't have a way to participate in that. MOD Systems has designed a turnkey system that enables retailers to be in the business of digital content.

With all the focus on Internet downloads, are you bucking the trend by going for the retail market?

Anthony Bay: It's a great question. We're not bucking the trend. The trend is going towards digital, of which direct download to the home is just one piece. Let me ask you--do you shop online? How much of what you buy in life--including food and clothing--is online? It's a small fraction. You go to stores, to the drugstore, to restaurants, to big box retailers, and department stores. People do both. Unless you live as a hermit, you're out and about. There are good statistics that show that 75 percent of content and movie purchases are done on impulse. Retailers also use content to drive traffic to their stores. If you look at why Walmart and Target sell lots of content, it's to get people into the store, and increases things they buy. That's why you can rent a movie in the back of the grocery store for $1.00, and if you try to get it on Comcast or iTunes it's $3.00. The reason for that is the grocery store purchase is a marginal purchase. The regular store doesn't have to make all their money on that one transaction. Target, Walmart, Best Buy, and others are looking at your whole transaction. Buying online is one transaction. Therefore, content is priced at very little margin and sometimes at a loss for retailers, who want to get you into the store. That's good for consumers. We're an arms merchant, and we allow Best Buy and Walmart to compete. There's a lot of data on consumer behavior, and be believe retail will remain important for a very long time, at least until we're in the Matrix.

There's the issue of having to buy and install hardware--how do you handle that?

Anthony Bay: There are different models. Essentially, there is a server in every store. The economics will vary based on customer need. We have a data center, where we get content directly from the music labels, studios, and independent movie companies, where we ingest the content into our database. Every store has a server, in order to deliver a fast customer experience, as well as for security. Then, there is one, or many screens in the store that are used to browse and purchase. In a sense, it's like a store with a photo kiosk. There are some screens, a printer--it's conceptually the same think. The idea is that there are some screens so that a retailer that wants to make a DVD or CD can allow a consumer to get it digitally. Depending on the deal, either the retailer will buy the hardware themselves, and we run the system, or we have a relationship with NCR, that uses different business models they use with retailers, and which we will work technically.

How did you decide to start MOD?

Anthony Bay: Mark, my other co-founder, and CEO and CTO for the company, have known each other for probably ten years. When I was Microsoft, he was the CTO of a company that did some outsourced engineering work for us. He was the CTO of Fullplay Media in Bellevue, when I was on board, where he was working on sampling and merchandising, as well as retail home jukeboxes. We talked for about three and a half years about starting a company together. We both have lots of experience in digital media, and both of us had been doing it for over ten years. We looked at retail and said--everyone is focused on direct delivery to home, or on mobile. For whatever reason, no one had an emphasis on how important this was to retailers. We thought it would be a good opportunity to build a system for retailers, to enable retailers to participate in digital media. We're not trying to build a Vudu or iTunes, we're not trying to build a MOD brand of service--we'll let the retailer continue to maintain their consumer relationship. It's something that helps retailers, and is also good for the content business, and rides the train. There are three legs on the stool--download to home, download directly to phone, and the third is about getting digitally from a retailer of some kind. We found our first customer, and put money in ourselves and launched the company.

You recently raised a big round of funding, what are you going to use that for?

Anthony Bay: Scaling the company, and content acquisition. One of our core values is the content library that we build. We are not a very capital intensive model, in terms that the retailer owns the hardware in the store. So, the focus for us is rights expansion, engineering, as well as a global footprint. We have a number of country markets we are in discussions to expand into.

What's the interest of electronics manufacturers in your firm--Toshiba and NCR are investors?

Anthony Bay: We very deliberately looked for potential investors who would be strategic, and would have a broader ability to add value to our company, as well as companies where we would solve strategic problems for. Two of the companies are Toshiba and NCR. With Toshiba, their corporate strategy in consumer electronics is to build great products, to move beyond optical disks to digital. They're the founder of the SD Card Alliance. They're the dominant processor company and flash memory company in Japan, and they are one of the largest manufacturers of HDTVs, laptops, and everything else. Their strategy is to embrace portable digital storage, both hard disks at home and SD cards for portable media. If you look at the history of content until iTunes and the iPod, the content you bought, you could play it in something else. If you'd like to buy a cassette, CD, or DVD, you could play it in anything. The idea was that the content was portable, and devices were compatible. The world worked pretty well. What's happened with digital, is for the most part, the migration to digital has slowed down. Although Apple has done a great job of making products, what they've created is a business model where the content is stuck on devices. If you buy something from Apple, you can only play it on Apple. If you buy something from Microsoft, you can only play on Microsoft devices. You buy from Vudu, you can only play on Vudu. With Comcast, you're stuck on the cable box. The consumer doesn't get the benefit of digital content, unless all their technology is from one single company. Although that's possible, it's still not likely. Most people have a mix of things.

How do you think about a world where digital content is connected to portable storage, as opposed to being bound to a device? To do that, you need a widely adopted standard, with security that content owners like, and accept, and which makes sense for consumers. The obvious candidates are SD cards and USB drives. They're cheap, portable, and getting cheaper and bigger all the time. With SD cards there is built in security, and thousands of companies in the SD association. Any company that wants to can have a compatbile device. For Toshiba, which is a great big manufacturer, and a big player in Flash and SD, they want SD to work--and to do so, you can't just copy content at home, and you need to get commercial content--so you have to fill up at retail. For them to realize their strategy of portable media and SD, you have to go to the store and get SD, and you need a system like MOD. We've been working with Toshiba for over a year, designing devices, and building support around SD cards. When Toshiba bets on a format, it's very different than a Vudu box. Everyone can bet that there is significant weight behind an open standard, and anyone can participate.

On the retail side, although MOD has very good technolgoy, we're a little company. To scale up at retailers, we needed a partner with global footprint with retailers, a trusted relationship to deploy into stores, and who could support them. That was NCR. They're the number one global company for self service, number one in ATMs, number one on airline check-in, and number one or two in point of sale. The next major vertical they've been talking for a year about is entertainment. There's a big opportunity to automate the DVD as well as digital. It's a combination of their footprint with Toshiba's credibility with consumers and retailers. It made sense for all three of us.

Thanks!


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