ceo cast interview

November 16, 2000

This is Ken [?] with CEO Cast. My guest today is Steven Sprague who is the Chief Executive Officer of Wave Systems Corporation. Wave is a NASDAQ company trading under the symbol WAVX. Steven, thank you so much for joining us today.

SKS: Thank you for having me on.

CC: I [?] your company is to build a world wide network of users.

SKS: Very much so. What we're trying to do is build the platform on which all security and commerce can run. Not so much that we deliver all those services, but that we enable that platform for everyone to use.

CC: Isn't there a lot of competition for something like that?

SKS: There's a lot of competition in the applications, but we have not found a lot of competition in building a platform yet. The challenge has been that this is not easy to do and in order to get very high volumes of deployment. As a result Wave is in a very unique position today. We've built the right technology. And it's at the right time. It's basically a chip that goes into client devices that's fully programmable. So like your PC it can anything that anyone writes a program for it. The difference is, is that this is a trusted environment for computing where you can't actually see the operations or the secrets that are stored within one of these devices.

CC: Are these devices similar to smart devices, or totally different?

SKS: The security is very similar to smart cards. So that a smart card can hide and store and process secrets. You know keep your identity or keep track of how many pay for view movies that you watch. The difference is that a smart card only typically supports a single application or only works with a single vendor. In the case of Embassy we've designed it to be completely programmable so that any application or vendor can deploy their program to run on Embassy, and we'll provide the security infrastructure for them.

CC: So Embassy is your platform?

SKS: That's correct.

You're out at Comdex as we speak and you're actually showcasing that?

SKS: Yes we are. We have a booth on the floor of Comdex and we're showing the full functionality of our Embassy 2 chip. It's a fully programmable platform. We're showing the loading and unloading of applications in it. We're also showing a number of services that Wave and Wave partners are offering that are compatible with that chip.

CC: Compaq is one of your partners?

SKS: Yes. We're building a keyboard with Compaq that's being provided currently to the French banking infrastructure through a company called CyberComm which owned by the nine largest French banks.

CC: What is it about a French bank that would choose you, rather than a German bank or an American bank?

SKS: The French banks have been very aggressive on the deployment of security. They were one of the first infrastructures to adopt smart cards over fifteen years ago. They have over 30 plus million smart card in deployment. They recognized a couple years that they had some significant challenges in doing internet transactions. So they set a number of things in motion in order to go build the tools for consumers to do secure transactions. They formed a company, CyberComm. CyberComm has set a technology standard for which we're a preferred vendor for CyberComm. Because we cannot only meet the banking standard, we can also bring a full range of other services like secure content distribution or music or video or different types of shopping membership programs with the same chip that supports their application for banking.

CC: Is one of your goals to let even outside the firewall a sense of security as if we had a firewall?

SKS: Our view is that once you create security at the edge of the network or in client devices, what it makes possible is the communication between machines, or between machines and other appliances like printers or other peripherals. So that it's possible now to share resources out on the network with out having a firewall which sort of lets you in. Each one of the resources can have its own security and it own access control list. So we think that by moving security to the edge of the network it will dramatically help simplify the management of security on the network. Today what we try to do as organizations is put a firewall up and try and filter who is allowed in and who's not allowed in. And so it becomes very complex if you have thousands of resources on the other side of that firewall to keep it all organized.

CC: Now, is it always another business who is your customer?

SKS: Pretty much. We do not want to put devices in boxes and try to sell them to consumers directly. Most businesses are selling to other businesses. There are very few people who are retail outlets. In our case we want to provide an infrastructure, so for example recently announced a relationship with a company, BIZ, and together we've put together a deal with EDS. So we're providing components to BIZ, packaging them together with other technologies and offering them as a set of tools to EDS to build solutions for their customers. In the case of a more consumer application, we're building infrastructure to go into a PC, which is then taken by a company like Compaq or HP or any of the major branded PC companies to their customers to show here's a secure PC vs here's a regular PC.

CC: Other than being at Comdex, what other elements are there to your marketing strategy?

SKS: Our marketing strategy today is focused today on really three major thrusts. One is in banking and authentication, where we want to provide a general e-commerce terminal in the home that will work with any of the banking infrastructures. The second is to provide the infrastructure for security in the PC space, where we're working with AMD and showing reference designs here at Comdex with AMD on motherboards, and working with their customers. So that we're jointly marketing with AMD to both PC motherboard manufacturers, a lot of off shore companies as well as to the major PC OEMs to help create the platform a secure PC that will help us as consumers take advantage of security to make our life easier and to make it more secure online. And, the third thrust is media distributions where we have a range of projects, ranging from signing up companies to, companies like Havas and others in the entertainment and educational software space to offer their software on a rental basis all the way through to participation through one of our joint venture companies into the deliver of broadband media over data broadcast. So what we're trying to do is bring a platform that can bring real value day one, offer a consumer very simple applications that they can use when they get it in their home and build complexity over time. So if I can help a consumer manage their banking transactions, their simple shopping transactions, over time I think we will make it possible for a very broad range of security services deployed off of PCs or set top boxes.

CC: Will your biggest share of market be gained through OEMs?

SKS: We think so. The PC OEMs are a very important business for us. Bringing somebody like EDS as a major systems integrator on board to say this is cool technology, helps to say that we've got both the consumer play and an enterprise play in the marketplace today. It's also very important to us that the technology is not just the PC security technology. And so we've clearly articulated to the market that one of our targets over the next six months is to bring in a player in the set top box space to say that they would like to adopt this technology in that space as well.

CC: So the creation of strategic alliances is crucial to your success?

SKS: Very much so. At this point in time I think the best way to measure the value of Wave is to look at the partnerships that we build and the companies that we're doing business with and say are these the companies that can help us to achieve mass adoption of our technology in the marketplace. Are we getting the right type of validation from players in the markets, companies who're leaders in their category and who can help us create volume deployment.

CC: If your strategy is dependent upon strategic alliances than securing OEMs, does that make your scalability model somewhat uncertain?

SKS: The issue, the difference between scalability and how fast does adoption take place. I would actual argue that having a business relationship builds on companies that already have distribution creates a much higher level of certainty, if you have exposure to the quality of the relationship. So, it's uncertain until you're able to establish a relationship with somebody like AMD to show motherboard reference designs, a company who can influence 30 to 40 million PCs a year. It's uncertain until you can show relationship with someone like Compaq who's many millions of devices a year. So I think that while it certainly starts with a high level of uncertainty as you work down the path of building strategic relationships with companies, we're able to put that certainty in place. And so we avoid the ultimate uncertainty which is if I put a product in front of a consumer, is it something that we can explain to them, is it something that we can show the value of having that technology in their home, and something that they have value in using. So that is the final step, once you create distribution, how much do consumers use this platform. We think that, and certainly the research that we've done in the market is that there's huge demand for this type of technology. If you ask the average consumer, would you buy a secure PC over a regular PC, there is a very correlation of people saying Yes, I want to buy a PC, even though they don't necessarily know, what it's going to do for them day one.

CC: Do we know what the pass through costs will be to the consumer for this?

SKS: The economic model that we're pursuing with the OEMs, we have a pass through cost of zero. The research shows that consumers would more than happily pay some amount for it, 25, 30, 40 dollars, for additional security, even for just a single application like banking. So our objective is a zero cost of goods addition to the PC OEMs and the reason that we can do that, is not because Wave is subsidizing the model, but because there are many companies that are interested in a more secure and stronger relationship with their customer and who want to leverage Embassy's technology to accomplish that, so we're able to have them help subsidize the deployment of the platform.

CC: To close our discussion Steven, 2001 is almost upon us, what are the top two or three priorities that you've set for the organization?

SKS: Our top priorities for 2001 are continued development with PC OEMs, having their commitment to when actual shipments start. As I mentioned before, we'd love to show, exposure to a major set top box play that we are not only a PC technology. I think that will put very solid long term protections in. Continued relationship building to show that the technology brings real world value to the consumers, whether through authentication or shopping or banking or content distribution. I think it's really a continued progression showing that they're new and exciting services that you can only get if you have an Embassy enabled computer.

CC: Steven, thanks so much for being with us today.

SKS: Thank you for your time.