Convergence of Hollywood and Microsoft

Confidential

The Digital Home Theater

The Digital Home Theater Confidential

(c) Copyright 2004 AiLibrary, Inc. May 31, 2004

Executive Summary

What is Digital Home Theater?

The Digital Home Theater is a high-end home/office theater customized for HD video as well as a seamless integration with Broad Band Internet data access. Its unique features include the use of WiFi components to make it easy to decorate with in the home or office, and a web based interface (AiHome™) allowing the use of the best components currently available with an easy way to control them. The video and other large amounts of user data are quickly accessed via a server system optimized for high bandwidth video manipulation with RAID storage allowing increments of 3.5 Terabytes of user disk space.

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 1

Why is it needed?

The Digital Home Theater is designed to fill what is believed to be a unique new market opportunity. The huge consumer demand for HDTV and Home Theater is converging with the equally huge demand for Broadband Internet access. The result is a new consumer need to be able to enjoy all the technologies in one usable environment. Our solution is the Digital Home Theater.

In Section One of the Digital Home Theater White Paper, a detailed and insightful analysis is presented that shows how this new market opportunity came about. It also shows how a firm with expertise in home video equipment is uniquely situated to take full advantage of this lucrative new market.

In Section Two, the Digital Home Theater White Paper provides a good description of the components, both hardware and software, needed to produce the product. The product is actually an integration of off-the-shelf software and hardware, carefully chosen to be the best for their purposes, and controlled with an innovative web based user interface that allows for maximum ease of use and capabilities. Finally, a Demo Digital Home Theater is described. It serves to attract customers and also demonstrate its capabilities.

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 2

White Paper The Digital Home Theater

Author: Gordon Kraft Revised: Gordon Kraft, Daniel Delgado

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 3

White Paper The Digital Home Theater

-Table of Contents-

Section One: Introduction Section Two: The Opportunity Section Three: The Product Section Four: Conclusion

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 4

Section One: Introduction

The fundamental purpose of this white paper is to show how a retail chain can increase its cash flow. To do so requires progressively larger monthly sales - such is the nature of business. This white paper shows a path that leads to a way to increase both the number of potential customers and the volume of sales. This path is possible because of one of those new, swift, and certain changes in the marketplace that has opened up a lucrative new customer base.

This paper describes how the current technology markets for both HDTV and home video theaters are combining with that of broadband Internet data access. It examines how current marketing and product efforts from Microsoft and Apple, such as Windows XP Media Center, XBOX, and the Digital Media Hub (Apple) are taking over capabilities traditionally done by the audiovisual industry.

The result is an opportunity for a new product using a carefully chosen ensemble of components available now for high-end home/office theaters. These are packaged into one system using an innovative Web based user interface, AiHome™, described in this paper. The resultant product will contain network gaming capabilities (XBOX), and wireless (WiFi) control of HDTV displays, Internet browsers, and sound systems. The result is a "Value Added" product that leverages into a new marketplace dealing with the control and display of massive amounts of digital information from broadband Internet media, video feeds, and HDTV sources.

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 5

Section Two: The Opportunity

The future of Home Theater will be that of a Digital Theater, and it will be controlled by Microsoft and Apple. Crestron and the rest of the audiovisual industry will follow. TIVO and Phillips already are inline.

The Future of Home Theater We know the convergence of the PC with the AV industries has begun. Home Theater equipment is now sold by low-end, mass-sales retailers such as Gateway, Fry’s, Circuit City, and Best Buy, to name a few. Consider that they also sell the XBOX. XBOX for HDTV The XBOX (also on cover) will be a major factor to consider because it will have an effect on home theater sales and products designs today. It is Microsoft’s connection to their conception of a Digital Home Theater. Consequently they worked hard with the audiovisual industry to control basic standards so as to put Media Player 9.0 as the video gateway into your home from the Internet. Microsoft now has Microsoft Home Magazine, Microsoft TV, Microsoft MSNBC, Microsoft XBOX, and Microsoft Longhorn (the next OS after XP and it contains software like Apples iLife Media Hub software).

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 6

Microsoft Home Media Center More, much more is coming. Retailers such as Gateway and Fry's Electronics sell both PC and AV product, and their interconnection has now begun with the recent introduction of Microsoft's Home Media Center feature of Windows XP.

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 7

As the Microsoft PC shipments with the newest Home Media Center flow into homes in high quantity, and the software industry follows up with applications growing from this option, the Home Theater industry can expect these PC’s to begin taking away the marketplace of traditional AV Control Systems such as currently enjoyed by Crestron.

WiFi versus Crestron Obviously, Crestron is aware of this threat and is taking product-planning paths to coexist. But when the majority of audio entertainment products like Sony, Phillips, Pioneer, etc. begin bringing out remote network interfaces, then your PC or Mac will have the ability to take over control of your television, just like in the show Outer Limits.

TIVO (via the TIVO Home Media Control System) gives you that capability right now with WiFi. It has a USB port that you can simply plug in a LinkSYS 802.11b WiFi tiny antenna. Think how you can now use the WiFi connectivity to use your MP3 Music Library (iTunes) and your Photo Album (iPhoto) residing on your PC/Mac. Yes, you now The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 8

can display your High Definition slide show with background music of your choice. The interconnectivity demonstrated with a TIVO will certainly characterize most if not all of future technology innovations designed for home entertainment. The home environment requires it, and the customers, who for the most part will be PC literate, already expect that they will be in control.

The result is a tremendous amount of versatility that simply will not be controlled by traditional AV companies like Crestron. Imagine the possibilities‌ MPEG4 Streaming HD Video over the Internet The introduction of MPEG4 has allowed products that can stream full screen HD Videos over DSL to the home. Now the Internet Connected Digital Home Theater can display HD Photos in a slide show with MP3/MP4 Audio background music on your Krell THX2 Audio System in full surround sound. You can watch not only home movies in QuickTime or DVD formats from your PC/Mac on your new HDTV, but also watch the Internet Broadband connection MPEG4 PPV movies. Currently, the new MPEG4 streaming movie market is growing slowly because of the high bandwidth required. This limitation, of course, disappears with a broadband connection. The hardware is available now, for example the XBOX WiFi option runs at 54mbs with 802.11g and outputs component video to the HDTV, and Digital Audio.

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 9

What does this emergence of the PC industry mean to you?

It means that the beginning of the convergence of the traditional audiovisual industry and the massive PC industry are beginning to merge with control of, and the distribution of content material. The winner will undoubtedly be the PC who will emerge as the dominant leader who dictates the direction of the new audiovisual technology and interconnection and control interfaces. This years NAB show in Las Vegas has clearly shown that the creation, post-production and distribution of the content will be digital, and it will be HD. The Apple Factor Apple had the largest booth we have ever seen at NAB. It was to introduce its complete Digital HD Video system, allowing for the creation, edit, and post production of HD content with the massive disk storage systems necessary to handle the extreme size and data rates necessary to run and edit HD in real time. The software, called "FinalCut Pro HD" is a consumer software product that is also used by Hollywood post-production studios. The software and hardware together serve as an ideal package to use as the heart of the Digital Home Theater.

A company can enter this market with the standard software and PCs and evolve into a high-end/professional level store.

A niche market as an Apple VAR We believe that the retail Apple vendors will sell their basic products, but that high-end retail stores would be needed for the professional level product sales. This would include selling massive disk storage systems and UNIX MAC OSX software, which happens to The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 10

be the easiest to run and manage, as well as products from the entire PC industry. A company will also be able to sell the related medium/high range HD DVCAM Video Cameras, the associated software, plus the typical DV cameras.

Currently, there are few true real high-end Home Theater Stores in the USA, maybe one or two per large city in this top-level retail group (please see the addendum regarding Best Buy and Magnolia). The next level down is the more electronics/computer type store style like Best Buy and Circuit City, and they are selling substantial quantity of Plasma TV’s and THX 5.1 Dolby Audio Systems. In business it is the profitability of the sale that determines the long-term growth, and these large electronic chains operate on small margins and high volume. The high-end retailers sell for much higher profit margins and much of it is in the addition of installation and service and the associated wiring, programming, etc. This group has both the infrastructure and the customers necessary to build a profitable product like the Digital Home.

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 11

Section Three: The Product The Digital Home Theater is a high-end home/office theater customized for HD video as well as a seamless integration with Broad Band Internet data access. Its unique features include the use of WIFI components to make it easy to decorate with in the home or office, and a web based interface (AiHome™) allowing the use of the best components currently available with an easy way to control them. The video and other large amounts of user data are quickly accessed via a server system optimized for high bandwidth video.

ANY technology and/or product that displays on a HD Screen is to be considered as possible part of the Digital Home Theater. For it is the SCREEN that captivates the buyer. And the more they can do with the SCREEN, the more valuable the Home Theater is. The current configuration is made up of the most effective hardware/software products to allow for the best display and ease of use.

The Hardware The basic hardware consists of the new Apple new high-end video server (Xserve, Xsan) combined with RAID storage allowing increments of 3.5 Terabytes. This server is preferred because of its optimization for video manipulation (see the topic: Software regarding Final Cut Pro). The other hardware consist of WiFi controllable home theater components such as the HDTV display and Internet displays such as on an attached workstation or wireless laptop.

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 12

The Digital Home Theater Server: The Final Cut Pro HD Video Editing System from Apple

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 13

The Software AiHome™ is the creation of AiLibrary, Inc.; it is a Web based Digital Home Theater User Interface (UI) that simply and transparently handles the process of hooking the home up to the Internet as well as connecting the electronics in the home. The software, being Web based, can allow the user to control his home anywhere he can access a browser, including from his laptop or even a smart cell phone. The AiHome™ software runs on the Digital Home Theater Server. Since a large amount of the user data will be HD video, another important piece of software is "FinalCut Pro HD", a consumer based HD video editing package made by Apple and packaged with the server.

The Capabilities The main purpose of the Digital Home Theater is straightforward. The user relaxes in his/her Digital Home Theater and uses it to watch videos/multimedia and have access to a Broadband Internet. The video may not necessarily be an entertainment film or a home video. The Digital Home Theater is also ideal as a corporate presentation room, so the user could be watching a corporate training or multimedia presentation. Regardless, the function itself is simply to allow the user of the Digital Home Theater to interact with the information in an efficient, convenient, and comfortable manner.

Simplicity is difficult to design, as many user interface designers have painfully learned.

However such interfaces can be found, many on well-cited Internet Web sites. The Digital Home Theater uses a proven but innovative Web style interface, called AiHome™ that allows the simplicity that the user finds so critical for comfort. The Web interface incorporates a QuickTime VR wraparound theme (which can be customized by the user) which graphically represent the components of the Digital Home Theater and

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 14

allows their control via familiar hot spot navigation, such as done when surfing the Internet.

Because the Digital Home Theater software (AiHome™) is Web-based and the displays are WiFi addressable, the possibilities for user ease and control are great. The next section, The Digital Home Demo Theater, describes the in detail. However, note that the Web interface coupled with Internet addressable components allows for some interesting scenarios as to how useful and capable that combination can be.

For example in the home, as users build continually more impressive Digital Home Theaters, the family will come together in the new "family room" (if it was not already designed for that purpose). The family room in most new homes is more of the extended eating area with another large screen television. With a connected home and two HDTVs just think of the family gaming possibilities. You could even add a few remote friends in multi-player gaming applications via the broadband Internet connection Now as the PC continues to encroach on the traditional TV in the home, the users will become used to having several display screens throughout the home. The home eventually will know which room the user is in, and changes the content on the screen to what the user was watching, if desired. The Eye Toy is an example of cheap new camera technology that can do this, via visual user input to the display screen and a resulting reaction from the content (game, dancing, boxing) on the screen. This means that the user will be able to view multiple content streams simultaneously displayed on the screen.

This is the convergence, the convergence of diverse information where you are at in the home or office, or even on the road.

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 15

The Digital Home Demo Theater The Digital Home Theater is envisioned as a new and exciting live Internet connected Home Digital Theater demo room. It is described in this white paper both as a specification of a useful sales tool for company marketing Digital Home Theaters, and also as a way of describing the current specifications. Its capabilities should awaken the high-end buyer's interest after seeing the multitude of applications that the Digital Home Theater can grow into as his/her Internet connected home theater.

A Digital Home Theater Demo will have the following: Home Video Security Systems with home web cam images transmitted via the Internet to the owners cell phone or PDA or WiFi Laptop while at Starbucks, or his company computer.

Personal Photo Albums viewable over the Internet, with Slideshow capability to the Digital Home Theater HD screen or any video screen or PC screen in the house, as well as home chat capability.

Personal/Corporate Video Albums viewable over the Internet, with streaming video capability in the Digital Home Theater HD screen or any video screen or PC screen in the house.

Personal MP3 Music Library that plays via your Digital Home Theater sound system.

The Digital Home Theater Digital Media Hub with full scan, fire wire or WiFi connection, edit software, and even a DVD burner that plays on any DVD player in the house or elsewhere.

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 16

A Digital Home Theater makes use of WiFi Why? Because of simplicity The new WiFi wireless IP connected products reduce the need for the wiring jobs currently needed for theater installations, and in fact will allow the user to install their own Digital Home Theater. This ease in installation coupled with its efficiency (The speed of the new WiFi network is typically running a 11 MB 802.11b with a new 54 MB 802.11g now available in wireless form) will facilitate increased sales for most Digital Home Theater vendors.

Keep in mind also that the “Bluetooth� wireless communication architecture has found its way into our new refrigerators, cell phones, and PDAs as a way to interconnect and control the emerging PCAV technology. The development of additional new interconnected products for this technology will cause a greater customer demand, because no matter how simple it gets, people want it turnkey. In this respect the Digital Home Theater Demo will identify and select recommended new PC and Mac products to sell with the above mentioned WiFi series of products, and also develop software products to learn to demo these new products at the store.

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 17

Section Four: Conclusion

The constantly changing technical marketplace has created a new opportunity for filling a new customer need. The number of users of home theater equipment just expanded dramatically with the inclusion of broadband PC Internet users. Due to the marketing strategies of major PC players like Microsoft and Apple, those multitude of PC users are now potential customers of a product that helps them enjoy and manage the HD and high bandwidth content they find on today's super speed Internet.

This product is a Digital Home Theater, one that allows users to comfortably view HD video and also control and access HD broadband content found while using the Internet.

A high-end home entertainment retail chain is ideally suited to take advantage of the situation and provide the Digital Home Theater as a Value Added Reseller (VAR).

This white paper supplies the rationale and hardware/software specifications for the Digital Home Theater. The product is really an integration of the best components and software suited for the task. As such it involves little development except that needed for the versatility of the user interface, as done with AiHome™. This interface is designed to be a Web-based customized control with good human factors and ease of use in mind.

The opportunity is here now, the timing is critical, and this white paper provides the path to a new lucrative market based on that precious opportunity. The vehicle of success is the innovation of the Digital Home Library.

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 18

Addendum

The following section contains various concepts and strategies that were not needed for a concise and direct proposal concerning the Digital Home Theaters. However they are valid, and serve to illustrate the depth of the analyses done to support this white paper.

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 19

Addendum: AiHome™ Technology Center (ATC)

The center will advance the technology with an innovative research and development series of projects. It will promote the technology by demonstrating and educating the public as to the new possibilities offered by a broadband Internet (Bi). The Technology Center will use a constant flow of the latest PC and Audio/Video equipment and systems.

The ATC will be built inside of a typical Home Digital Theater Demo Room . The construction will be that of a partial house with easy to visualize Smart House wiring and controlled by AiLibrary’s Smart Home Control System (AiHome™). This configuration will allow the ATC to serve as a retail store, a live development lab, and a classroom.

AiHome™ Technology Center - Why is it needed?

The Center is needed for one primary reason - to sell profitable future Digital AV. systems that are Internet connected. The Center will be an environment designed to quickly introduce new products and technologies. It takes advantage of the fact that advances in broadband technology will soon turn the Internet into a high bandwidth network to the home. These changes will open the door for a host of previously impossible applications. The Center solves the problem of how to create these different applications and it also determines if they will be profitable. It does this by building an environment where an Internet user can use the new applications in a meaningful and productive way, and where at the same time, we can assess their usefulness and profitability. The Digital Home Theater environment should be available to its customers online via a support web site.

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 20

Addendum: Apple Digital Hub

From Apple’s latest Annual Report: Apple is committed to bringing the best possible personal computing experience to students, educators, creative professionals, businesses and consumers around the world through its innovative hardware, software, peripherals, and Internet offerings, including .Mac and the iTunes Music Store.

The company believes that the personal computing has entered a new era in which the personal computer functions for both professionals and consumers as the digital hub for advanced new digital devices such as the Company’s new iPod digital music players, and other electronic devices. The attributes of the personal computer including its ability to run complex applications, posses a high quality user interface, contain large and relatively inexpensive storage, and easily connect to the Internet in multiple ways and at varying speeds, can individually add value to these devices and interconnect then as well.

Apple provides innovative industrial design intuitive ease-of-use, and built-in networking, graphics, and multimedia capabilities. The Company is uniquely positioned to offer digital hub products and solutions.

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 21

Addendum: Comparison Home Theater Chain

Best Buy has purchased a 22 store chain called Magnolia. This type of store, which sells high-end home theater components, is ideally suited to enter the new marketplace for Home Digital Theaters.

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 22

Addendum: Digital Library Idea

Libraries were the passion of Andrew Carnegie, and it is one of the writers of this white paper (Gordon Kraft). AiLibrary, Inc. wants to change the way the world learns by Internet research via teaching software the “search and correlation of stuff”... The correlation for AiLibrary, is to work towards access of the massive library called the “Internet”, and to display it on a Home Theater HDTV, a Home Digital Library, in addition to normal command and control applications of a Smart Home. AiLibrary, Inc. calls their Smart Home Software AiHome™.

The Digital Home Theater

(c) Copyright 2004 AiLibrary, Inc. Confidential 23