PART I
FORWARD LOOKING STATEMENTS
The information in this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, including statements regarding Destiny Media's capital needs, business strategy and expectations. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "intend", "anticipate", "believe", "estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology. Actual events or results may differ materially. In evaluating these statements, you should consider various factors, including the risks outlined below, and, from time to time, in other reports Destiny Media files with the SEC. These factors may cause Destiny Media's actual results to differ materially from any forward-looking statements. Destiny Media disclaims any obligation to publicly update these statements, or disclose any difference between its actual results and those reflected in these statements. The information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
CURRENCY
All dollar amounts in this Annual Report on Form 10-K are presented in United States dollars unless otherwise indicated.
ITEM 1. BUSINESS
OVERVIEW AND CORPORATE BACKGROUND
Destiny Media Technologies, Inc. was incorporated in August 1998 under the laws of the State of Colorado. We carry out our business operations through our wholly owned subsidiary, Destiny Software Productions Inc., a British Columbia company that was incorporated in 1992, MPE Distribution, Inc. a Nevada company that was incorporated in 2007 and Sonox Digital Inc incorporated under the Canada Business Corporations Act in 2012. The “Company”, “Destiny” or “we” refers to the consolidated activities of all three companies.
Our principal executive office is located at Suite 750, PO Box 11527, 650 West Georgia Street, Vancouver, British Columbia V6B 4N7. Our telephone number is (604) 609-7736 and our facsimile number is (604) 609-0611.
Our common stock trades on TSX Venture Exchange in Canada under the symbol “DSY”, on the OTCBB and OTCQX under the symbol “DSNY”, and on various German exchanges (Frankfurt, Berlin, Stuttgart and Xetra) under the symbol DME, WKN 935 410.
Our corporate website is located at http://www.dsny.com.
OUR PRODUCTS AND SERVICES
Destiny develops and markets services that enable the secure distribution of digital media content over the internet. Destiny services are based around proprietary security, watermarking and playerless streaming media technologies.
Currently, more than 95% of the Company’s revenues come from the Play MPE® digital distribution service, which the recording industry uses to distribute new pre-release music and music videos to trusted recipients before that content is generally available for sale to the public.
The remaining 5% of revenue is generated from legacy sales of Clipstream®, a playerless streaming video solution first launched in 1999. The bulk of these revenues are generated by services provided to the market research industry, which has adopted our solution because of the higher “play rates” and the higher level of security in our offering. Clipstream® powered videos are integrated into video questionnaires for use in market research surveys. The market research industry prefers our solution because the successful view rates are higher and because the security is more mature than other solutions. Videos can be secured to play only from authorized URL's and they actively block “screenscraping” programs that might try to download the video locally. In addition, videos are watermarked, so the source of unauthorized content can be identified.
This legacy technology relies on a plugin from Oracle to be bundled into the browser and the install rate of this plugin has declined significantly since launch thirteen years ago. This first generation of Clipstream® generally does not work at all on smart phones and other devices.
The introduction of new browsers supporting HTML 5 has created a new opportunity. The Company is actively developing a second generation version of Clipstream®, which works natively on almost all modern browsers. We believe this new technology is disruptive to existing paradigms as streaming video encoded in this format can be hosted from any brand of web page server and it will play directly across desktops, laptops, smart phones, tablets, e-book readers, internet enabled TV's and other devices, including future devices still under development. As the streams are served by HTTP progressive download, they can be reused potentially reducing the bandwidth and hardware infrastructure required at the source. Clipstream® G2 is cross platform which results in savings from the elimination of costs associated with re-encoding videos into multiple formats (transcoding) and costs of the extra storage, power, air conditioning, staff and facility space required by competitive offerings. The solution is playerless and does not rely on third party plug-ins.
Play MPE® is a digital delivery service for securely moving broadcast quality audio, video, images, promotional information and other digital content securely through the internet. The system is currently used by the recording industry for transferring pre-release broadcast quality music, radio shows, and music videos to trusted recipients such as radio stations, media reviewers, VIP's, DJ's, film and TV personnel, sports stadiums and retailers. The system replaces the physical distribution (mail, courier or hand delivery) of CD's. The financial model is transaction based, where the price per delivery varies with the number of songs and videos in the package.
More than 1,000 record labels, including all four major labels (Universal Music Group, Warner Music Group, EMI and Sony), are regularly using Play MPE® to deliver their content to radio.
Each distribution is initiated by our customers, who "encode" the content and enter the appropriate data. Our software has a tiered permissions based access allowing our clients to assign varying rights, capabilities and responsibilities to different members of their staff. For example, some customer staff may manage assets (album cover imagery, music videos, the raw music, promotional information and other meta data), while others manage hierarchical permission based lists of recipients. Larger labels are normally structured into label groups, each with their own labels with varying access (permissions) to various subsets of the master recipient lists.
The release dates for music can be dependent on the territory and, where administrative settings permit, local promotions staff will generate a localized distribution of the song with modified marketing information in the local language. Local staff will select pre-existing assets from the system and combine them together with local recipient lists to form a "send". Our customers also choose the level of access for the recipients assigned to the release by designating whether the release can be streamed, downloaded, exported into an unlocked digital format or burned to a CD.
While many clients are set up to manage and upload recipient lists, most rely on the proprietary Play MPE® network, which is quickly becoming a valuable asset to the industry. Destiny staff manage lists of recipients in various formats and those lists are available in the encoder to be selected. The Play MPE® system provides Play MPE® staff with the feedback and resources necessary to manage and maintain this network of recipients which is not available with physical distribution or smaller competitors.
Staff who "encode" each release choose the access rights, whether the system should automatically generate a template driven marketing email alert, whether the song should be locked to the recipient computer and which partner sites should have access to the content.
On the impact date, the "send" appears in the "available tracks" section of the user's account. Recipients can access through proprietary iPhone, Mac and Windows based players, through a Direct to Web browser interface supporting playerless streaming and download or through partner sites, including integration into reporting systems such as Mediabase, radio automation systems such as Nexgen or Selector or through custom direct integration into the backend server systems at the radio chains. Destiny's proprietary applications offer popular features, such as the ability to drag and drop to build and burn playlists to CD's for music meetings, the ability to convert and export into a wide variety of formats from the iTunes AAC format to the popular MP3 format and to export meta data automatically into third party applications.
The system generates an unbranded Clipstream® format playerless streaming audio clip for previewing and two broadcast quality versions of the downloadable audio. The recipient can choose to receive a lossless compressed exact copy of the original file at up to four times regular download speed or a variable bitrate compressed version, indistinguishable to the human ear, at up to fifteen times regular download speed. Recipients receive a custom library of available tracks and are able to repeat the download if music is lost.
All exported songs are marked in real time with Destiny's patent pending watermark technology. Songs that appear on the internet are scanned by the International Federation of the Phonographic Industry's ("IFPI") for our watermark. Headquartered in London, UK, the IFPI is the organization that represents the interests of the recording industry worldwide and one of its missions is to safeguard the rights of record producers. IFPI web crawlers visit torrents, peer to peer networks and websites searching for unauthorized content. When problem files are identified, the IFPI software looks for Destiny's watermark in the content to identify the originating source. If a mark is found, Destiny's server and the originating label are automatically contacted so that recipient can be disabled from the system and appropriate action can be taken against the individual to hold that recipient accountable for the unauthorized distribution.
After the content is released, all activity by the recipient is logged in real time, providing record labels and promotions staff real time detail on which songs are accessed, streamed, downloaded and exported. This contrast directly with physical distribution where they are unsure whether the courier package went to the correct individual or whether it was opened. This information provides invaluable feedback in real time to marketing and promotions staff who can cater their programs appropriately.
Finally, details of the transaction are fed to the billing servers for generation of automated monthly billing summaries for invoicing.
Real time usage statistics for Play MPE® are available at: http://tinyurl.com/2dyb7ao
The Play MPE® solution is protected by three granted and seven pending patents.
Clipstream® Legacy
Clipstream® is an innovative "instant play" solution for playback of streaming audio and streaming video. Unlike Flash, Windows Media Player or Quicktime, Clipstream requires no installed player to play back the content. The Clipstream® software suite enables audio or video content to be "streamed" so that the media plays instantly and automatically when the user initiates playback. Creating streaming video content with other technologies can be a complicated process and in many cases, users are required to purchase and maintain streaming servers. With Clipstream®, content owners simply encode the content into the Clipstream® format, then upload to an existing website.
Clipstream® encoded content plays instantly in most cases, without requiring the user to download CODECS or player software. This results in a much higher play rate for site owners and because there is no player executable, users are not exposed to viruses, trojan horses or unstable code that could crash their computer or spy on them.
Market research professionals often use videos and imagery to describe a product or to preview a potential movie trailer or advertisement that may or may not air. Often, the content of the video is sensitive or confidential. Destiny offers a solution that secures the content so that it will only play from an authorized domain, blocks screenscraper programs (programs which are able copy screen displays) and and can dynamically watermark the content with the viewer's identity therefore protecting the content from being recorded and leaked by that viewer. Destiny's clips are incorporated into online surveys where the high penetration and play rate ensure the maximum number of high value survey participants are able to view the video.
The Clipstream® survey solution (http://www.surveyclip.com/ ) is well suited to the market research vertical. Market research companies have embraced the technology for internet based video surveys and Destiny has become a long time member and sponsor of CASRO (http://www.casro.org/).
Clipstream® Generation 2
During the year, the company released a working prototype of a new disruptive second generation streaming video technology. The Company is continuing development with a goal of launching this product commercially in fiscal 2013.
We launched our first streaming product in 1995 and the first generation of Clipstream® in 1999 and have come to understand the needs of our customers and this solution is expected to address all of those needs. One of the most challenging aspects of serving video is that with streaming servers, each viewer typically gets their own dedicated stream, which uses up hardware and bandwidth resources. Most large providers outsource this hosting to content delivery networks. An Accustream 2012 report estimates current annual spending on content delivery networks at $3 billion. Another challenge is that there is no standard format for streaming video on the net, so customers are required to convert the videos (transcode) and store multiple copies of each video. A 2007 report by Frost and Sullivan estimated that the annual transcoding spend would be $1.6 billion by 2014. A third concern expressed by publishers is that for player based solutions, it is common for up to 15% of the customers to not be able to see the video, because their player plug-ins are configured incorrectly or are not the latest version. Finally, competing solutions, such as HTML 5 video, support only unencrypted video playback, making it difficult for content owners to secure and monetize their content.
Our new solution addresses all four of these concerns directly, using internet standards:
The solution is protected by seven pending US patents, drawing on a priority date of August 2011. The Company intends to file analogous patents in all major jurisdictions.
BUSINESS DEVELOPMENT
In August 2011, the Company received approval for its shares to trade on the OTC market’s OTCQX tier.
In 2012, annual revenue was $3,983,789 with over 95% of our revenue from Play MPE®.
At the request of the major record labels, we have been developing a new suite of player software to replace our existing player solutions. A team of developers began development on this major initiative in 2010, with a goal to expand usage. Demand for the new player suite was driven by a need to better accommodate new geographies and new recipient types, such as press. This new suite of players was designed with the cloud concept in mind to reflect the way our users are accessing the system. Whether at their main PC, on the road, at their home office or using one of the Play MPE® mobile apps, their experience will be consistent. Account-wide features like flags, notes, streaming playlist and usage history have been introduced. Some of the other new features are: improved player controls, one-click playback from alert emails and one-step downloading, improved and expanded account settings and the ability to choose themed skins.