The Engadget Interview returns! Veteran journalist J.D. Lasica interviewed Michael Malcolm, founder and CEO of Kaleidescape, a DVD movie jukebox that lets you save perfect copies of DVDs to a server stashed out of sight for streaming to your home theater. It recently won home entertainment awards from Sound & Vision Magazine and Popular Science. They discussed the emerging video server category, the lawsuit brought by an overprotective industry group, and why their bare-bones product costs more than J.D.'s car.

Michael Malcolm CEO Kaleidescape Give me the 30-second rundown on Kaleidescape – what do you do, where are you located, when were you founded?

We were founded four years ago this week. We're a privately held company based in Mountain View, Calif., with engineering labs in Waterloo, Ontario. We have about 45 people working for us. We originally got interested in how entertainment-quality motion pictures could be distributed to people's homes through the Internet. We looked at all the facets and filed a number of patent applications for things like overlay distribution network architecture. We finally concluded there wasn't a good a platform for delivering movies to the home and decided to focus on the high end of the market first.

Why the switch? Isn't the Internet ready for the delivery of prime-time entertainment?

It was to solve a chicken and egg problem. To do Internet delivery of movies, you need to convince the content owners to license their movies to you, and you need a large enough installed base that it's economically interesting to them. But you need people to buy the platform, and you can't get there without the movies.

That pushed us into supporting DVDs initially. We think in the long term people will want to see high definition movies delivered electronically. In the near term, the vast majority of content in digital form is available on DVD.

We also realized that DVD collection is a national pastime, and a lot of people have hundreds or thousands of DVDs. As soon as you get to 150 or 200 discs, it becomes a management problem in collecting, storing and finding what you want to watch. I was having that problem in my own home with 300 DVDs, and this was a problem that needed a solution.


So tell me about this category. You're in a different sector than DirecTV, Toshiba/TiVo or other high-def digital video recorders, right?

Right. We don't do recording off the air or off cable. We deliver movies on hard disks, and so we're able to deliver them at higher bit-rate encoding. A few of our titles come in the high-definition 1080i format, encoded at 35 megabits per second, or double the rate of broadcast HD. Many more are on the way.


Kaleidescape

Talk to me about price. Your most inexpensive model costs more than my new car.

We cater to the high end of the custom installation market. Typically you'll find they've got a large home, several plasma displays, a media room and projector, three to five viewing zones, perhaps a yacht with 10 to 50 cabins, each with a separate viewing zone. These are pretty high-end affairs, but the cost is not out of line with the chunk of change they spend on all sorts of things.

The basic unit starts at $27,000 and some go up to $100,000 for additional storage, server boxes and viewing zones. All the players are connected by a home Ethernet system.

OK, you can watch movies in a zillion rooms. What else can this baby do? Bake? Clean house?

You can browse your DVD collection in lots of ways. Sort by movie title, by genre, actor, director or running time. You can look at the details of each movie and its cover art.

You can mark your favorite scenes and locate them immediately. In addition, when you press play it starts with the movie, skipping over the FBI warning, the trailers, advertising and menu. It also sends cues to the control system by lowering the lights or setting automatic masking on your home theater system (black velvet panels that move up and down to accommodate the movie's dimensions).

You're also selling Kaleidescape Collection DVDs ranging in prince from $1,180 to $6,890. That would make a nice Valentine's Day present.


Certainly.

How are sales of the units?


Somewhat more than 300 systems have shipped. We're just at the beginning of the curve, and we're seeing a lot of interest in the marketplace.

What do you need in place to get the full effect - a home theater system?

We sell our systems exclusively through custom home system integrators, and they'll be able to feed the output into any video or audio processors in the home.

Given Hollywood's hyper-sensitivity to digital piracy, I take it these systems come with full digital rights management armament?


We've taken great precautions to ensure that the stored content is unusable outside the system and can't be uploaded or streamed onto the Internet. But we use the Internet to connect people's homes to our servers so we can provide the data about each movie.

So you're not streaming movies yet?

No.

And your units are not portable. Homeowners can't copy, share or burn a single movie, is that right?

Correct.

You obtained a license from the DVD Copy Control Association to show Hollywood movies on your system. Why are they suing Kaleidescape?

It's a head scratcher. The DVD-CCA is an industry association of three industry groups: the film industry, the consumer electronics industry and the computer manufacturers. It's not really clear who's the driving force behind this.

You'd think the studios would be happy with a system where people have to go out and buy scores of DVDs.


And that's what happens with our customers: They immediately go out and buy hundreds of DVDs. While there's some traditional resistance in Hollywood to new technologies, it may be that there are some anticompetitive aspects to the suit brought by the big CE manufacturers, who don't want to see a major competitor emerge. They're not close to coming out with a product like ours, and we've got a pretty healthy list of patents.

Their suit says that Kaleidescape must redesign its system to require the presence of the physical DVD disc in the drive during authentication and playback. That pretty much defeats the whole purpose of your company.

Exactly. I've read and our attorneys have read the DVD-CCA license specifications over and over, and nowhere does it say that. If it were true, why can't they point to a specific section of the license agreement that? They can't because it's not there.

They're afraid of what - DVD swapping?

I don't have any knowledge of that happening. It is not in our interests to be using our system to steal content. We've done everything in our power to prevent that from happening. Our rules prohibit that.

Look, today it costs $50 to $60 per DVD just for the storage space, so it's cheapter to just go buy the DVD than it would be to make a pirated copy onto the Kaleidescape system. What's actually happening is that we've heard customers tell us they had stopped buying DVDs for about two years because they had no place to store them - they were chewing up half the wine cellar.

Oh, the tragedy.

Once they got a Kaleidescape system, then they had a way to organize their digital entertainment and they'd go out and buy DVDs again.

Do you plan to file a counter-action against the DVD-CCA?

It looks that way. We have a lot of support behind us. (See Editorial: DVD CCA is an Innovation-Stifling Cartel.)

A new generation of DVDs is coming out in the next year. Will Kaleidescape support those newfangled discs?


It's yet to be seen as to what will be involved to support them. I don't know how rapidly these will take off, given the industry is divided between two different standards, Blu-ray and HD-DVD.

HD-DVD would require a new hardware device for reading them. With our system, one of the nice things about the architecture is that you just add a new input device on your Ethernet system and you're all set.

What's the next step beyond what your current system can do? Are you in the DVD playback business, or the movie viewing business?

We're in the home entertainment business. As the cost of these systems continues to go down, we'd like to add additional capabilities to our system, so you can listen to music to our system, load CDs onto it, download music from places like iTunes. By the end of this decade, it will become very practical to store hundreds of movies and other digital media on these systems.

Wake me when the price drops below $1,000.

I think we're five to seven years away from hitting the mass market.


J.D. Lasica is author of the upcoming book Darknet: Hollywood's War Against the Digital Generation.

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