High-tech

Due Diligence: Anthropics

By The Chilli analysts

Introduction

Anthropics is a UK-based, post-R1 software startup, founded in 1998, as a spinout from CREATEC, the digital media research laboratory of the National Film and Television school.

Anthropics has developed an automatic visual messaging technology that enables 'talking heads' video to be created by a user simply talking into a suitably enabled mobile phone. After trials against competitor products, the technology has already been taken up by Nokia, who have launched the software on a 'try before you buy basis' on their higher end handsets. The software has also recently been in trials with 4 major mobile operators, 3 of which, according to the company, will shortly be launching services based on the Anthropics 'FaceWave' technology.

Vital statistics

Value proposition

Competition

The Chilli perspective

Vital statistics

The CEO is Andrew Berend, previously co-founder and CTO of Cambridge Animation, and the founding director of CREATEC. Mark Williams (formerly of CREATEC, Cambridge Animation, Spaceward Research and Philips Research Labs) is senior VP of engineering and CTO. The CFO is Alison Sparshatt, formerly of NetBenefit and Ernst & Young.

Anthropics was initially funded by an S2 round of angel investment of £700K in 1998 and government grants, followed by an S3 angel round of £1m in 2000 from two private investors. The company received R1 funding of £5.7m at the end of 2001, from Quester, Sky Ventures and Skandia Ventures, the latter two now combined to form SMI Media Invest. The company has claimed and received R&D tax credits for 2002 and 2003.

The board consists of the CEO, CFO, CTO, as well as Nick Stinton of Quester, Jez San of Argonaut, and John Ziemniak, formerly of BT & GPT Network Systems, as non-executive chairman.

Anthropics has grown from 12 staff at the end of 2001 to 20, with 14 in R & D, 1 in sales, 2 admin and 3 executives, all based at the Ealing Film Studios in West London.

The company has extensive relationships with numerous university labs and business schools, including Cambridge, Glasgow, Manchester and Oxford universities, and London Business School, Said Business School, part of Oxford University.

The company has filed key patents around its core technology of storing and transmitting photo-realistic images using very low bandwidth and memory footprint.

Value proposition

Anthropics claim that its core technology, FaceWave, allows it to animate human faces near-realistically using far less data and less computer power than has been possible before. The faces can then be animated with either text or audio, in lip-sync fashion. According to Berend, 'We explored several market areas, including TV, CRM, PDAs, but we narrowed our focus onto mobile communications, as we believe that's where we add the most value. Our USP over competitor products is the greater efficiency and quality of our animation technology. This allows us to create realistic and emotionally convincing animation actually on the mobile handset, with major benefits to both the user and the network operator. This efficiency is the reason that Nokia and now a number of key opinion forming network operators have selected our technology.'

Anthropics has animation solutions for both text and speech, running on servers in the text to animation scenario and on the handset in the speech to animation scenario. 'Our original emphasis was on text-to-speech, but this required a server-based solution, costly and complex for MNOs and, because it lacked emotional content, was less popular with consumers. Because of this we set about developing a speech-based system that could run on Symbian and Java handsets', comments Berend.

Anthropics FaceWave Messaging enables users to send and receive animated video messages, using just a single image and a voice recording. The user can select a face on their picture phone, be it of themselves or a cartoon character, record a voice message into the handset, and send it, as an MMS (multimedia message service) message to other mobile users or to an email address.

The selected face then 'speaks' the message to the recipient, with the sender's actual voice. The video is in the industry standard 3GP video file format, based on MPEG4 and standardised by the 3GPP standards setting body for 3G, which means that no special software is required to receive a FaceWave message; the user simply has to have a handset capable of receiving video MMS messages.

MMS (multimedia message service) is the latest evolution of SMS (short message service) and EMS (enhanced message service, for transmitting icons, sounds, etc). MMS allows still images, text, voice/audio clips, video clips and presentation information to be sent as a single entity, and was standardised by 3GPP, WAP Forum and OMA. An example of MMS is picture messaging using mobile phones with cameras.

Anthropics have developed further applications to allow content providers to develop video-enabled messages for marketing programmes, and video-enabled voicemails. The latest development from Anthropics allows users of FaceWave Messaging to create their own image, using a picture-phone, which is then animated and lip-synced to the user's voice recording, providing a totally personalised experience.

FaceWave Messaging is currently available to run under Symbian's smartphone operating system, including Nokia's Series 60 platform, which forms the basis of handsets from Nokia (3650, 7650), Panasonic, Samsung, Sendo and Siemens. Nokia is selling a version of the FaceWave application with 2 included faces included with their handsets for roughly Euro 4.50 (depending on the territory), and the application is also available from other sources at varying prices with varying number of faces. 'The application is also available on lower-cost feature-phones (camera and colour display) based on Java MIDP2, as well as Qualcomm's BREW platform in the CDMA market,' according to Berend.

An image takes up 10-15KB of memory, and including 20 seconds of audio, an MMS message of animated video would be approximately 100KB in size - the MMS maximum in many territories. A key advantage is that FaceWave runs on the handset. Competing solutions require the MNO to run a remote server to generate the animation, after the handset has captured the image, audio and transmitted it.

Competition

Anthropics is not alone in this space, which goes some way to validating that there is a market, although the size is debatable. Two key competitors are Pulse 3D of the USA and SeeStorm of Russia. Pulse 3D was founded in 1994 and is backed by AOL Time Warner, Softbank and Autodesk. The company has partnered with Image Semantics of the UK, to provide a video messaging solution for the UK MNO O2 for a talking e-card promotion.

Moscow-based SeeStorm is a subsidiary of Spirit, a vendor of software for DSP (digital signal processing) applications. Both companies rely on servers to assist in the animation generation, requiring an investment in specialist servers by the MNO, as well as handset software, increasing the deployment complexity and risk.

The Chilli perspective

Anthropics FaceWave Messaging provides an interesting user experience, as it fulfils the visual gap left by text messages. Question is, will the MNOs see enough value in it to adopt, deploy and market it as a standard feature set item? Berend believes that MNOs will see this as a way of increasing MMS ARPU (average revenue per user).

The ARPU conundrum continues to generate significant airtime as a topic in its own right. MNOs face a whole set of competing claims from many varied applications, which promises the elusive increase in ARPU. Although analysts are focused on ARPU as a key metric, we believe profit margins are a better way of examining the MNOs challenges. MNOs want to make more money per subscriber, but unless end customers put a value on those services, they won't spend more. In actual fact, customers expect prices to come down for the services they currently use, shrinking margins further. Price cuts have been used both to acquire customers and retain existing subscribers, but they don't necessarily translate into increased usage of a service. Some MNOs are in fact looking at effective price rises to distance themselves away from low-value, low ARPU customers, e.g. PAYG teenage demographic. As MNOs come under regulatory pressure to reduce call termination charges, this will act as a spur to reduce handset subsidies, as MNOs redistribute their assets to incentivise the right type of customers.

Voice still constitutes around 80% of mobile revenues, with SMS the leading non-voice service. MNOs have quietly reduced their expectations of significant data revenues, especially as the picture messaging experience has proved that while people enjoy taking snaps, they are not so keen on transmitting them. MMS still has its share of challenges to widespread adoption, including interoperability between handsets, MNOs and geographies, deployment of sufficient numbers of MMS-enabled handsets and customer education of data services & handset configuration.

The company's business strategy is at a critical stage, as it awaits the results from its pilot trials and market development, based on the nascent nature of the MMS market. According to the company, in addition to handset vendor Nokia, three of the four MNOs that Anthropics are in trials with 'have agreed to launch', according to Berend.

The company is exploring several options, including revenue sharing of MMS message revenues, licensing the application software and marketing of library images.

One of the key opportunities, which could catapult the whole MMS industry on a totally new trajectory, is the adult entertainment market. This sector was responsible for catapulting the colour TV, VCR, DVD and the Internet as well as the Asian broadband market.

Anthropics would appear to be well positioned here. It has already developed a product 'Marambo' specifically tuned to the needs of the adult chat industry. An adult content supplier has agreed to launch a pilot service based on 'Marambo', starting during May.

Although Anthropics has many options in terms of its selected market and customer base, it needs to focus on one or two segments, in order to marshal its resources, so it is riding on the right wave, when the market for MMS opens up. Video messaging and adult content should provide a solid long-term base. Meanwhile, it would be worth exploring some community, affinity based groups that could directly benefit from the FaceWave technology.

The challenge for Anthropics is to continue developing the aftermarket retail channels for mobile software, and convincing content providers to use FaceWave technology in mass-market campaigns using MMS, to generate revenue traction until person-to-person MMS has critical mass.

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© Chilli Publishing Ltd 2004

20APR2004