Preview Systems intraday stock performance

The initial public offering's stated range was between $16 and $18 a share.

The Cupertino, Calif., company gives investors another chance to bet on the burgeoning market created by the sale and transmission of digital goods over the Internet.

"They are in the business of delivering digital goods to the desktop, and that’s not going away anytime soon," says Susan Aldrich, an analyst at Patricia Seybold Group, based in Boston.

Preview Systems makes software that helps companies reduce piracy and other unauthorized uses whenever their products are sold over the Internet. Preview’s technology, called ZipLock, also renders digital goods inoperable if customers don’t pay for them after a pre-designated trial period.

"Preview’s protection for producers can substantially reduce piracy, and it is coupled with protection for buyers who want what they paid for," Aldrich wrote in a recent research report on the company. "ZipLock should really take off."

"What makes Preview unique is their multichannel distribution," says Edmund Ha, an analyst with the Giga Information Group, based in Boston.

Multichannel distribution, Ha explains, allows various entities, such as publishers, retailers or other distributors, to use Preview’s technology to distribute products, a feature that preserves and extends existing sales channels. "Preview works on the back end so the brand doesn’t get confused and the customer doesn’t get confused."

Preview gets paid each time one of its customers sells a digital product. "That’s where everything is going," Ha says. "Their revenues are based on success. They benefit when their customers benefit."

Online sales of software constitute the firm’s current primary line of business. It’s an extremely crowded market segment that’s projected to grow to $14.9 billion by 2003, up from $351 million last year, according to International Data Corp., based in San Jose, Calif.

Critical to the firm’s success, Preview’s business plan also calls for using the same basic technology to safeguard online sales of other digital goods in the future, such as audio and video recordings. Sales of digitally distributed music are expected to fetch about $150 million by 2003, up from just $500,000 this year, according to Jupiter Research, based in New York.

Those modest sales numbers could skyrocket, however, when more consumers have access to the higher bandwidth Internet connections needed to make online sales of audio and video recordings more practical. "The winners will come home with some serious goods," says Aram Sinnreich, an analyst at Jupiter Research.

Several other companies, including Redwood City, Calif.-based Liquid Audio Inc. {LQID} and Sunnyvale, Calif.-based InterTrust Technologies Corp. {ITRU}, both of which recently went public, are also jockeying for a piece of that pie.

Sinnreich says it’s impossible to say with any certainty which company will eventually emerge as the winner in the fight over the potentially lucrative market for online distribution and digital rights management of music and video.

Two big record labels, Universal and BMG, have deals with InterTrust, while another, EMI, has a deal with Liquid Audio. The uncertainty over the future direction of the market is reflected in the volatile stock prices of both InterTrust and Liquid Audio since both companies went public.

LQID Post-IPO Stock Performance

ITRU Post-IPO Stock Performance

Preview also has some big-name accounts, including Sony Corp. {SNE}, in its pocket.

Sony accounted for 45 percent of Preview’s revenue in 1998. Sony also owns the exclusive rights to resell Preview’s products to other companies in Japan. "That’s the kind of deal that is going to create an environment for longevity," Sinnreich says.

Nonetheless, Sinnreich says Preview is seen as having arrived late to the digital rights management party, where competitors Liquid Audio and InterTrust enjoy a significant headstart. 

Warner Music, another major record label, has deals with several digital rights management firms but is likely to follow Sony’s lead due to its close relationship with the Japanese consumer electronics and entertainment giant, Sinnreich says.

At the same time, all five major record labels are also taking part in a pilot-project organized by IBM {IBM} to address the identical market opportunity.

Several other major companies, including Microsoft Corp. {MSFT}, are also developing, or have already developed, similar products. "The industry right now is all about strange bedfellows," Sinnreich says. "It’s a high-stakes game of chance where the winner takes all and the loser goes home weeping."

As a result, several analysts say they would not be the least bit surprised to see current Preview customers become competitors.

Take Microsoft, for example, a current Preview Systems’ customer. "Preview’s solution ensures fast development of digital goods for our customers, helping them maximize return on investment with minimum effort," says Michael Pinckney, Microsoft’s industry marketing manager for e-commerce, in a testimonial that appears on Preview’s Web site.

So, could Microsoft dump Preview, come in and capture the market?

"Absolutely," Aldrich says.

It’s a point Preview doesn’t gloss over. "If distribution-channel participants favor Microsoft’s existing or future solution for electronic distribution of digital goods, we may be unable to increase our revenues or become profitable," the firm warned in its S-1, its official pre-IPO filing with the SEC.

The analysts say such competitive dynamics make Preview a good bet for investors willing to take big risks for potentially big rewards.

"Preview has a very good chance to be successful," Ha says. "But there are a lot of other companies they’ll have to contend with."

Preview posted a loss of $11.5 million on sales of $2.3 million for the nine months ended Sept. 30, 1999, compared with a loss of $7.9 million on sales of $230,000 for the same period one year earlier.