Revolutionizing the DVD Supply Chain

Frank LoVerme

Senior VP of Business Development

Kestrel Wireless, Inc.

Service provider of network authentication, activation and reconciliation

• Expertise– RF chip/antenna design – Disc manufacturing – Electro-optic films– High-volume transaction processing

• Extensive IP

• Operations in Emeryville (SF Bay Area), San Diego, Tucson, Los Angeles

• Working with NCR, Philips, Toshiba, replicators, National Renewable Energy Laboratories

Kestrel Wireless

Radio Frequency Activation: RFA

RFATM prevents theft of consumer electronics, appliances, power tools and DVDs, CDs and video games.

RFA Agenda

• Impact of theft • How RFA works• Returns “Kill Switch”• Financial effects

Theft Costs Everyone

• US economy: $100 billion per year• Retailer losses

• Up to 50% of net profits• Up to 18% of gross sales

• Costs– Theft prevention measures

– Packaging – Freight, insurance, inventory financing– Employee morale/retention– Customer satisfaction

Theft Impacts DVD P&Ls

• Theft prevention measures

– EAS tags

– Behind counter cages ($2.00 / item sold)

– Security personnel

• Packaging

– Long boxes, keeper cases

– Security tape, blister packs

• 5% to 6% of all DVDs

• 10% to 18% of new release games and movies

• Limits DVD’s touch points

We Need a New Approach Theft

• Works on a wide-range of products• Cannot be economically hacked• Does not depend on “trust” of channel participants• Does not require any effort on the part of

consumers

Not more security.

People don’t steal products that they know don’t work.

Remember car stereos?

RFA is Simple

• Products are disabled before they leave the factory

• They stay disabled through the entire supply chain

• They are enabled (activated) at the POS

Products are activated at the POS using standard RFID/NFC readers

The Basic Elements of RFA

• RFA IC– RFID EPCglobal or NFC compatible – RFA’s custom extensions are

consistent with specifications– EPC or NFC IC cost = + <10%

• Antenna• “Switch”

– Product appropriate– Manufacturer selected– Embedded in product

• Kestrel Network Service

Pro

duct

Ena

blin

g

RFA for Optical Media

• RFA IC and Antenna– Substrate with IC, antenna

and contacts for connecting to an electrochromic film

• Electrochromic film (“switch”)– “Optical shutter”:

• Disrupts the laser’s ability to read the start-up files

– Bi-stable < 2µ thick– Small surface

RFA for Optical Media

Enabled stateDisabled State

Optical Shutter

RFA for Consumer Electronics

• Challenge – Switch coupled to RFA IC must be inside (security)– Antenna placed outside (RF communication)

• Kestrel Solution– Removable, low cost antenna subsystem connected to RFA IC

inside product via existing ports/jacks– Reduces cost and time to integrate RFA (or RFID) into CEs– Solves consumer privacy concerns

Kestrel’s RFA Network

• Kestrel touches products at only two points - the point of manufacturing and the point-of-sale

• Products are protected from theft as they pass through the entire supply chain

• Network activation < 1 second

Manufacturing Point of Sale

Kestrel Network Service

• Each item must be individually hacked (no risk of class failure)

• Network service – Distributed and replicated– Scaled rapidly for growth

• Options – A stand-alone, drop-shipped wireless device for

locations without reliable real-time WAN connections (e.g. quick-service-restaurants) or as reader backup.

The Security Model

Manufacturer

Kestrel Activation Center

Reader

Cash Register

Product

Decrypted (plain text) Key

ID & Encrypted

Key

LAN

ID

ID plus Encrypted and Plain Text Keys

Public Keyfor

Encryption

Retail Point of Sale

Manufacturer

Kestrel Activation Center

Reader

Cash Register

Product

Decrypted (plain text) Key

ID & Encrypted

Key

LAN

ID

ID plus Encrypted and Plain Text Keys

Public Keyfor

Encryption

Retail Point of Sale

Kestrel

How Kestrel Supports the Retail Ecosystem

Replicators &Manufacturers

IC Mfg.s SystemIntegrators

Merchants

• Gets rid of plastic• Recyclable, disposable• DVD packaging that’s supposed to be opened

like a book• Multiple panels for screen shots

New Approach. New Opportunities.

Book Style Packaging

RFA’s Kill Switch

• RFA “Kill Switch” – Permanently disables

discs– Initiated by retailer

• Network services– 100% accurate

reporting– Consignment – Financial settlement

Reducing DVD Returns

• Eliminates – Administration– Handling – Freight– Receiving– Storage– Eventual disposal

Returns Processing is at an Inflection Point

• Numerous touches, friction• 20%, 30%, 60% return rates• Processing costs $1.00 to $1.50 per unit• Falls more on the retailer • ½ will never be used• Mfg COGs declining: $.50

Why bring returns back at all?

Near Field Communications (NFC) will Create New DVD

Opps

Mobile Activation • Wireless technology for smart credit cards• Low cost alternative to EPC systems• 400 million cell phones in 2010• Moves the POS to your phone• RFA activation of DVDs is a key application• New channels will need RFA’s Kill Switch

When You Eliminate Theft and Returns

• 700,000 multi-product retailers • 150,000 fast food stores• Low cost NFC terminals• Not set up for returns • RFA’s Kill Switch provides 100% accurate

reports

New Retail Channels

Kestrel Countdown to Launch

• Soft launch with CE pilots in 2006• Kestrel announces at CES 2007• Kestrel DVD pilots in Q1 - 2007

• Commercial launch Q3 - 2007

RFA is Inevitable - -

It’s Not Just About DVD• Product-specific RFID is being mandated• Chip costs are plunging• RFA is RFID’s “Killer App”• NFC cell phone DVD activations• Changing retailing rules are challenging studios and supply chains for new solutions

RFA is Inevitable - -

It’s Not Just About DVD• RFID is being mandated• Chip costs are plunging• RFA is RFID’s “Killer App”• NFC cell phone DVD activations• Changing retailing rules are challenging studios and supply chains for new solutions

Embrace Change for Profit

Thank you

Kestrel Wireless, Inc.2000 Powell Street, Suite 830Emeryville, CA, 94608-1804

© Kestrel Wireless, Inc. 2006

Paul AtkinsonPresident & CEO619.318.6900paul.atkinson@kestrelwireless.com

John ReaganExecutive Vice President310.393.4263 john.reagan@kestrelwireless.com

Chuck WhiteChief Technology Officer510.653.2998 chuck.white@kestrelwireless.com

Rick MarquardtPresident Optical Disc Group570.586.0490rick.marquardt@kestrelwireless.com

Frank LoVermeSenior VP Business Development818-402-9935 frank.loverme@kestrelwireless.com

Kate HalkettVice President Marketing213-361-7596kate.halkett@kestrelwireless.com