• Executive Summary
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  PPM Bridge Loan
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• Netmovies.com
  Netmovies.com (V.1) Netmovies.com (V.2)
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NetMovies, Inc. (“NetMovies” or the “Company”) is an enterprised focused on enabling, delivering, and distributing multimedia entertainment to consumers, and providing a platform for the converged control of and optimal distribution of content among consumer’s entertainment choices in a single platform.   Started in 2001 by John Fanning, founding Chairman and CEO of Napster, Inc., NetMovies’ has, since its inception, targeted inefficiencies in distribution networks.  Just as Napster was designed as a broker of consumer-owned files, providing liquidity in file sharing networks that pioneered the field of multimedia file sharing, paving the way not only for peer-to-peer networks such as Bittorrent, but also proving the fundamental business model that fuels YouTube, and establishing the internet as a venue for music that inspired the resurgence of Apple and forays into the space by leaders such as Microsoft and Dell.  With NetMovies, Mr. Fanning has applied his vision to broadband media, identifying inefficiencies in the network.  Initially expanding on peer-to-peer technology developed at Napster, this line was spun out to Boston-based PermissionTV, allowing NetMovies to target the one factor most limiting to internet media: the challenges associated with bringing the video from the lean-forward internet to the lean-back television.  NetMovies first product will be a device to wirelessly transmit full-HD signals along with broadband internet across short distances and across longer distances within the home using existing cabling infrastructure and without requiring any effort on the part of the consumer beyond connecting existing cables.  Simultaneously, the company will be integrating its existing content distribution infrastructure into the device, offering both the ability to distribute content and multi-media advertisements attached to content delivered by the Company or others on the internet.

• Multimedia hardware – NetMovies has concepts and preliminary designs for a revolutionary device that will deliver wireless HDMI and HDMI over standard home wiring – allowing for longer distances and traversal of signal-blocking structures. Wireless and wired dongles will attach to televisions and A/V equipment minimizing the footprint and eliminating the need for additional components, while control of the system will via AJAX-enabled wireless web accessed via a NetMovies mobile device or any third-party wifi or cellular device with a browser.
  
  
• Formal and Informal Content – Connecting both traditional and internet entertainment sources, users of NetMovies devices will have access to television, DVD, or cable and additionally, pending agreements where necessary, formal and informal content available on-line, allowing access to not just such mainstream internet content as Google’s YouTube and Amazon’s Unbox, but also fringe content available on sites such as John to fill in or even BitTorrent. Beyond this, the NetMovies CDN offers the capacity to store and deliver such content desired but unavailable elsewhere.
  
  
  
• Advertising Revenue Streams – Integral in the NetMovies devices will be the ability to insert pre-roll, mid-roll, or post-roll advertisements delivered via the NetMovies CDN. These ads will be centrally managed, able to be delivered on a global, regional, or individualized basis, and, because the NetMovies are conceived around full-screen entertainment, will be able to be delivered seamlessly with third-party content sources.
  
  
• Top Tier Strategic Partnerships – NetMovies is pursuing relationships with strategic partners relevant to all aspects of its business—hardware, networking, content, consumer electronics, and distributors. For example, [Blockbuster Inc.] (“Blockbuster”) was a start-up investor in NetMovies and has been instrumental in establishing early relationships between NetMovies and content providers, as well as representing a potential distribution and marketing partnership.

The key to the NetMovies model is to exploit the opportunity created by parallel media consumption. Various sources report an almost doubling of the trend of simultaneous consumption of multiple media sources, typically realized in the form of browsing web sites with the television playing in the background. Using the NetMovies device, this parallel consumption can be integrated. For example, a browser plug-in could shunt a web page to the television, automatically displacing the existing television programming with new multimedia content from the web. Achieving the once science fiction goal of seamless connections, NetMovies is exploring such user interface models as, for example, connecting the top of a screen device with a television, allowing digital content to be pushed off the top of the screen to appear on another connected device. Dating back to the original Napster, this integrated entertainment model has always been Mr. Fanning’s vision, and only now has the technology arrived and become mainstream enough for it to be realized.

A significant opportunity exists to provide multi-screen integrated entertainment beyond the single-screen convergence model currently being explored by such vendors as Apple, Tivo, and Microsoft. NetMovies believes it can capitalize on this opportunity and address the shortcomings of its competitors by utilizing a revolutionary technological framework to integrate a range of services and content:

• Wireless and waveguided HDMI technology is now, for the first time, making existing home data infrastructure able to satisfy the requirements to achieve this integration;
  
  
• Moore’s law and miniaturization make possible the deployment of multi-purpose, muti-capability systems able to fit into a package small enough to fit in a dongle;
  
  
• New chip technology enables datapath convergence and multi-format decompression to be pushed downstream.
  
  
• Diverse revenues
  
  
• Hardware sales
  
  
• Advertising distribution
  
  
• Partner fees
  
  
• Premium content
  
  
• Range of Content
  
  
• With few limitations, any and all content distributable in any medium will be able to be pushed to a television screen;

Going forward, NetMovies is establishing and building relationships with strategic partners in all segments of its business—hardware, networking, content production, consumer electronics, and distributors. These partnerships would create substantial growth opportunities in the near future, allowing NetMovies to expand into markets outside the home including mobile and professional markets.

Corporate Information
The Company was incorporated under the laws of the State of Delaware in December 1999. The Company’s principal executive offices are located at 165 Nantasket Avenue, Hull, Massachusetts 02045, and its telephone number is (781) 925-1700. The Company maintains a corporate website at www.NetMovies.com.

RISK FACTORS
The shares of Common Stock offered hereby are speculative and involve a high degree of risk.  Prospective purchasers should carefully consider, among other things, the following risk factors concerning the business of the Company and this Offering prior to making an investment decision.

The Company has no significant operating history upon which prospective investors can evaluate its performance.

The Company was incorporated and commenced operations in December 1999, and has no significant operating history upon which prospective investors can evaluate its performance.  The Company will be unable to commence significant commercial operations if this Offering or a subsequent offering is unsuccessful.  As a new business, the Company is subject to all of the risks inherent in the establishment of a new business enterprise.  The likelihood of the success of the Company must be considered in light of the problems, unanticipated expenses, difficulties, complications and delays frequently encountered in connection with building a business, scaling-up operations and the rapidly changing and competitive environment in which the Company operates.

The Company needs the proceeds of this Offering, and potentially of subsequent funding, and any such proceeds may not be sufficient to complete the Company’s business plan.

The proceeds of this Offering are needed to finance the continued operation of the Company, the development of its service offerings and its proposed marketing and sales activities, including corporate overhead and salaries.  The Company anticipates that the proceeds of this Offering at the maximum level will be sufficient to fund the Company’s operations for at least 24 months.  No assurance can be given that the Company will generate funds from operations once it has expended the proceeds of this Offering or that the Company will not require additional financing in the future.  There can be no assurance that additional financing from other sources will be available on acceptable terms, or at all.  Investors in this Offering may be requested to fund additional amounts to the Company in the future, although they will not be obligated to do so.  The Company has no current commitments or arrangements for additional financing after this Offering has been completed.  See “Use of Proceeds.”

The Company may not realize significant benefits from its strategic relationship with Blockbuster.
Blockbuster has relationships with other companies that are competitors to NetMovies, such as CinemaNow, and its investment in NetMovies is small relative to Blockbuster’s size.  Although, there have been frequent discussions with Blockbuster management regarding joint marketing plans these discussions may not produce the desired results.   There can be no assurance that NetMovies will continue to have a positive and fruitful relationship with Blockbuster and Blockbuster is under no legal obligation to help NetMovies.

The Company faces uncertainty as to the commercial viability and market acceptance of its technology among consumers.
The Company’s technology is in the development stage and has not been implemented on a commercial basis in any significant manner.  There can be no assurance that the Company will be able to achieve sufficient acceptance of its technology to make it commercially viable.  The value of the Company’s offerings will be dependent to a significant degree upon the Company’s ability to attract clients in the face of competition.  There can be no assurance that such market acceptance will be sufficient to attract enough revenue for the Company to cover its substantial development and operating costs.

The Company depends on the Internet to conduct its business.
The success of the Company will depend to a significant degree on growth in the usage of the Internet by consumers for online entertainment.  The evolving nature of the Internet creates numerous uncertainties concerning matters such as the future speed and information carrying capacity of the Internet and the nature of future access to the Internet by consumers and businesses, as well as the future popularity of various uses of the Internet.

The markets for Internet products and services are characterized by rapidly changing technology, evolving industry standards, frequent new product and service introductions, shifting distribution channels and changing customer demands and expectations, all of which can have the effect of making large investments in hardware and software obsolete in a relatively short period of time.  The Company’s success or failure will depend in large part upon its ability to adapt to and compete in this fluid marketplace.  Changes in the legal environment governing the Internet relating to such matters as user privacy, libel and slander, new government regulation and access charges could also impact the Company’s business and the growth of the Internet generally.

The Company faces competition from a number of extremely large, established companies.

The Company faces competition from a number of companies, notably other providers of internet-convergence entertainment system components.  The Company’s competitors include Apple, Dell, Vudu, NetFlix, CAC Media, and a number of other established companies that offer similar convergence products.  If any or all of these competitors acquire additional market share, this could result in NetMovies losing market share, which would have a material adverse effect on the Company’s business.  If the Company is unable to respond effectively to its competitors, many of which have greater financial resources, its business and results of operations will be materially adversely affected.

Unauthorized use of credit cards and bank accounts could expose the Company to substantial losses.  If the Company were unable to detect and prevent unauthorized use of cards and bank accounts, its business would suffer.

As one component of NetMovies revenue depends on on-line subscription fees for premium content, and another component relies on on-line sales of advertisements, it could be a target for fraud.  In configuring the NetMovies service offerings, the Company faces an inherent trade-off between customer convenience and security.  Identity thieves and those committing fraud using stolen credit card or bank account numbers, often in bulk and in conjunction with automated mechanisms of online communication, potentially can unlawfully access the NetMovies services.  The Company expects that technically knowledgeable criminals will continue to attempt to circumvent its anti-fraud systems, and if successful, the Company’s business and results of operations will be materially adversely affected.

Security and privacy breaches in the Company’s electronic transactions may expose it to additional liability and result in the loss of customers, either of which events could harm the Company’s business.

Any inability on the Company’s part to protect the security and privacy of its electronic transactions could have a material adverse effect on its business and results of operations.  A security or privacy breach could:

• expose the Company to additional liability,
  
  
• Increase the Company’s expenses relating to resolution of these breaches, and
  
  
• deter customers from using NetMovies services.

The Company cannot assure you that its use of applications designed for data security will effectively counter evolving security risks or address the security and privacy concerns of existing and potential customers.  Any failures in the Company’s security and privacy measures could have a material adverse effect on its business, financial condition and results of operations.

If the Company were found to be subject to or in violation of any laws or regulations governing money transmitters, it could be subject to liability and forced to change its business practices.
Although there have been no definitive interpretations to date, the Company assumes that its services are subject to the Electronic Fund Transfer Act and Regulation E of the Federal Reserve Board.  As a result, among other things, the company must provide advanced disclosure of changes to its products and services, follow specified error resolution procedures, and absorb losses from transactions not authorized by the consumer.  In addition, the Company is subject to the financial privacy provisions of the Gramm-Leach-Bliley Act and related regulations.  As a result, some customer financial information that the Company receives is subject to limitations on reuse and disclosure under the Gramm-Leach-Bliley Act and related regulations.  Additionally, pending legislation at the state and federal levels may restrict further the Company’s information gathering and disclosure practices.  Existing and potential future privacy laws may limit the Company’s ability to develop new products and services that make use of data gathered through its products and services.  The provisions of these laws and related regulations are complicated, and the Company does not have extensive experience in complying with these laws and related regulations.  Even technical violations of these laws can result in penalties of up to $1,000 assessed for each non-compliant transaction.

We may experience breakdowns in our online system that could damage customer relations and expose us to liability.

A system outage or data loss could have a material adverse effect on our business, financial condition and results of operations. To operate our business successfully, we must protect our payment processing and other systems from interruption by events beyond our control. Events that could cause system interruptions include:

• fire
  
  
• earthquake
  
  
• terrorist attacks
  
  
• natural disasters
  
  
• computer viruses
  
  
• unauthorized entry
  
  
• telecommunications failure
  
  
• power loss

We depend on third parties for co-location of our data servers and cannot guarantee the security of our servers. Our primary servers currently reside in facilities in North Carolina. Currently these facilities do not provide the ability to switch instantly to another back-up site in the event of failure of the main server site. This means that an outage at one facility could result in our system being unavailable for at least several hours. This downtime could result in increased costs and lost revenues which would be detrimental to our business.

We cannot assure you that our infrastructure could handle a larger volume of customer transactions. Any failure to accommodate volume could impair customer satisfaction, lead to a loss of customers, impair our ability to add customers or increase our costs, all of which would harm our business.

Because our customers may use our products for critical transactions, any errors, defects or other infrastructure problems could result in damage to our customers' businesses. These customers could seek significant compensation from us for their losses. Even if unsuccessful, this type of claim likely would be time consuming and costly for us to address.

Our product features may infringe claims of third-party patents and copyrights, which could affect our business and financial condition adversely.

We are aware of various patents and copyrights held by third parties in the area of movie download systems. The holders of rights under these patents and copyrights might assert that we are infringing them. We cannot assure you that our product features do not infringe on patents held by others or that they will not in the future. If any party asserts claims against us, litigation may have a material adverse effect on us even if we defend ourselves successfully. In lieu of expensive litigation, we may seek a patent license but we cannot assure you that we could secure a license on reasonable terms.

The Company’s status under banking or financial services laws or other laws in countries outside the United States is unclear.  The cost of obtaining any required licenses or regulatory approvals in these countries could affect the Company’s financial condition.

The Company intends to offer its services to customers outside the United States.  The status of the Company as a regulated business in these countries is unclear.  If the Company is found to be subject to and in violation of any foreign laws or regulations, it could be subject to liability, forced to change its business practices or forced to suspend operations in one or more countries.  Alternatively, it could be required to obtain licenses or regulatory approvals that could impose a substantial cost on it.

The Company is subject to U.S. and foreign government regulation of the Internet, the impact of which is difficult to predict.  The Company could be exposed to significant liabilities and expenses if it is required to comply with new or additional regulations.

There are currently few laws or regulations that apply specifically to the sale of goods and services on the Internet.  The application to the Company of existing laws and regulations relating to issues such as currency exchange, pricing, taxation, quality of services, electronic contracting, consumer protection, privacy, and intellectual property ownership and infringement is unclear.  In addition, the Company may become subject to new laws and regulations directly applicable to the Internet or its activities.  Any existing or new legislation applicable to the Company could expose it to substantial liability, including significant expenses necessary to comply with these laws and regulations, and reduce use of the Internet on which it depends.

Customer complaints or negative publicity could affect use of the Company’s service and, as a result, its business could suffer.

Customer complaints or negative publicity about the Company’s customer service could diminish severely consumer confidence in and use of its service.  Breaches of customers' privacy or the Company’s security measures could have the same effect.  Measures the Company could take to combat risks of fraud and breaches of privacy and security, such as freezing customer accounts, can damage relations with its customers.  These measures heighten the need for prompt and accurate customer service to resolve irregularities and disputes.

The Company needs to retain its senior management and recruit key personnel in sales and technology.

The Company’s success will depend to a significant extent upon the abilities of members of the Company’s senior management including John Fanning, its Founder, Chairman and Chief Technology Officer, and Jonathan Lang, Chief Operating Officer. The loss of the services of either individual for any reason could have a materially adverse effect upon the Company’s business.  The Company’s future success and growth also largely depends upon its ability to attract, motivate and retain additional highly competent technical, management, sales and marketing personnel.  Competition for such qualified individuals is highly competitive in the market, and the Company cannot guarantee that it will be successful in attracting and retaining such personnel.  Departure and additions of key personnel may be disruptive to and detrimentally affect the Company’s business, operating results and financial condition. 

The Company faces uncertain future funding of its capital requirements; new investors face possible future dilution.

The Company’s future capital requirements will depend on many factors, including the extent to which the Company’s product gains market acceptance, progress of the Company’s sales and marketing programs, the success of competing companies, general economic conditions and the extent and duration of operating losses.  The Company will require additional capital resources to continue its operations and pursue its business plan.  There can be no assurance such capital will be available in the amounts required, on terms acceptable to the Company or at all. Any such future capital requirements could result in the issuance of securities that would be dilutive to existing equity holders, including purchasers of the shares of Common Stock offered hereby.  The Company does not currently have any contractual restrictions on its ability to incur debt and, accordingly, the Company could incur significant amounts of indebtedness to finance its operations.  Any such indebtedness could contain covenants that would restrict the Company’s operations.  If adequate funds are not available or are not available on acceptable terms, the Company may not be able to fund its expansion, take advantage of market opportunities, develop or enhance services or products or respond to competitive pressures.

The Company’s Certificate of Incorporation authorizes the issuance of 58,700,000 shares of Common Stock.  Such issuances, if any, could adversely affect the voting power or other rights of the holders of Common Stock.  Such issuances could also be at prices that would dilute the value of the outstanding Common Stock.

The Company does not intend to pay dividends on its Common Stock for the foreseeable future.

The Company has never paid cash dividend to its stockholders since its inception and presently intends to retain all earnings, if any, for use in its business.  The Company has never generated positive net cash flow since the outset of its operations and, in light of the competitive nature of its business; it is possible that the Company may not generate positive net cash flow in the future.

The Company has no audited financial statements.

The financial projections of the Company included in this Memorandum have been prepared by the accounting staff of the Company and have not been reviewed by an independent auditor or any other independent party.  The Company has no audited financial statements.

No securities regulatory agencies have reviewed this Memorandum.

Neither the U.S. Securities and Exchange Commission nor any state or foreign securities regulatory agency has reviewed or passed upon the accuracy or adequacy of this Memorandum or passed upon or endorsed the merits or fairness of this Offering.  Accordingly, prospective investors will not enjoy the benefits or security, if any that may be derived from the registration or qualification process with respect to the accuracy or adequacy of the disclosures contained in this Memorandum, or the merits or fairness of this Offering.

Prospective investors need to conduct an independent investment analysis and due diligence review.

No independent legal, accounting or business advisors have been appointed to represent the interests of prospective investors in connection with this Offering.  Neither the Company nor any of its officers, directors, employees or agents makes any representation or expresses any opinion with respect to the merits of an investment in the shares of Common Stock offered hereby, including, without limitation, the proposed value of the Company or of the shares.  Each prospective investor is therefore encouraged to engage independent accountants, appraisers, attorneys and other advisors to (i) conduct such due diligence review as such prospective investor may deem necessary and advisable and (ii) to provide such opinions with respect to the merits of an investment in the shares offered hereby and applicable risk factors as such prospective investor may deem necessary and advisable to rely upon.  The Company will cooperate fully with any prospective investor who desires to conduct such an independent analysis, so long as the Company determines, in its sole discretion, that such cooperation is not unduly burdensome.  Each prospective investor acknowledges that he/she/it has been informed and understands that legal counsel for the Company has not “expertized” any portion of this Memorandum.

Prospective investors need to review individual tax consequences of an investment in the Company.

An investment in the shares of Common Stock will have certain tax consequences that will be unique to each investor, depending upon his/her/its personal tax situation, his/her/its nationality and/or place of domicile, and other unique personal circumstances.   The Company cannot and does not make any representations or assurances as to individual tax consequences.  Investors are encouraged to consult with their own tax advisors in connection with any investment decision with respect to the shares.

There is no public market for the Common Stock, and there will be restrictions on the resale of the shares.

The shares of Common Stock offered hereby have not been registered under the Securities Act, and may not be sold or otherwise transferred unless and until such registration has been effected or an exemption from registration is available.  There is no present public market for the Common Stock, and no such market can be expected to develop upon conclusion of this Offering.  Moreover, such shares will also be restricted securities that have not been registered under state securities laws and will not be freely transferable.  Purchasers of these shares must be prepared to bear the economic risks of investment for an indefinite period of time.

The Company is not currently subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Accordingly, purchasers of shares will not be able to avail themselves of the resale provisions of Rule 144 under the Securities Act unless and until the Company becomes a reporting company.  There can be no assurance that the Company will ever become a reporting company under the Exchange Act.  The Company currently has no plans or arrangements with respect to an initial public offering of the Company’s securities.

There may be substantial variations from the financial projections contained in the Memorandum.
The financial projections contained in this Memorandum were developed by the Company’s management, and were based on the assumptions set forth in this Memorandum and, by their nature, are not necessarily accurate forecasts of future results of the Company’s operations.  It is likely that the actual results will vary from those set forth in the projections, and such variations may be material.  As a result, the financial consequences to an investor of an investment in our company may vary materially and adversely from the projections.  Although it is believed that such estimates and assumptions are reasonable, some or all of the estimates or assumptions may not prove to be accurate, and no representation is made or should be inferred with respect to the accuracy or the completeness of the projections, the underlying assumptions or the other economic matters referred to therein.

A small number of principal stockholders could control the outcome of important corporate transactions.
NetMovies’ directors and executive officers, including John Fanning and Jonathan Lang (and their respective affiliates), will beneficially own in the aggregate approximately 35% of the Company’s outstanding Common Stock after this Offering, and, if they should act together with Blockbuster, they would beneficially own in the aggregate approximately 63% of the Company’s outstanding Common Stock after this Offering.  As a result, these stockholders will have the ability, if they act in concert, to influence or control the outcome of fundamental corporate transactions requiring stockholder approval, including mergers, sales of assets and the election of the members of the Company’s Board of Directors.  Additionally, this voting concentration may have the effect of discouraging, delaying or preventing a change in control of the Company.

The purchase price for the Common Stock is arbitrary and there is no placement agent.

In the absence of a market for the shares of Common Stock, the purchase price has been determined solely by the Company based on a number of factors, including financial projections prepared by the Company, the projected capital needs of the Company and the general conditions of the securities markets at the time of the Offering.  The purchase price does not necessarily represent the current value of the Common Stock and should not be regarded as an indication of any future price for the Common Stock.  There is no placement agent or other registered broker-dealer involved in this Offering.

The proceeds from the sale of Common Stock will not be held in a formal escrow account, and the Company may immediately expend subscription proceeds.

The shares of Common Stock are being sold by the Company on a “best efforts” basis.  There is no minimum number of shares of Common Stock that must be sold before the Company will receive, and have the right to expend, the net proceeds from the sale of any shares.  The proceeds from the sale of the shares of Common Stock will not be held in escrow, and the Company, upon accepting subscriptions, at its discretion may immediately expend the subscription proceeds.

Risks Regarding Forward-Looking Statements
This Memorandum, including the Appendices hereto, contains “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical facts, included in this Memorandum that address future activities, events or developments, including such things as projections of future revenues, profits or other financial results, descriptions of the proposed features of the Company’s website, marketing plans, predictions of market acceptance or competitor responses, statements of perceived competitive advantages and other such matters are forward-looking statements.  Such statements are based upon certain assumptions and analyses made by the Company in light of its assessment of historical trends, current conditions and anticipated future developments, as well as other factors which the Company believes are appropriate to consider in the circumstances.  Many known and unknown risks, uncertainties and other factors beyond the control of the Company may cause these assumptions to prove incorrect and may cause the actual results, performance and achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  Such risks, uncertainties and other factors include, among other things, those discussed under “Risk Factors” above.  Consequently, all of the forward-looking statements in this Memorandum are qualified by reference to these “Risk Factors” and there can be no assurance that the actual results of the Company’s operations will be as predicted.

USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock offered hereby, after deduction of estimated expenses of the Offering, are estimated to be approximately $9,900,000 if a maximum of 20,000,000 shares are sold.

The Company intends to apply the net proceeds approximately as follows:

If less than 20,000,000 shares of Common Stock are sold, the use of net proceeds will be substantially as set forth above, except that the amounts to be allocated for the categories will be adjusted proportionately.

It is anticipated that the net proceeds will be sufficient to fund the Company’s operations for at least 24 months in the event the maximum of 40,000,000 shares is sold in the Offering.

Pending application of the net proceeds as described above, such proceeds will be invested in short-term, investment-grade, interest-bearing securities.

DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common Stock and does not anticipate paying any such dividends in the foreseeable future.  The Company intends to retain future earnings, if any, to fund ongoing operations and future capital requirements of its business.

BUSINESS
Introduction
Metcalfe’s law, in it’s original formulation:

Metcalfe’s law describes the value of a network.  Today’s home is replete with devices that are connected but cannot communicate.  Most people’s homes contain computers, televisions, and other A/V equipment, and these devices are commonly interconnected – cable television connects computers, televisions, and even telephones into a single network but one in which most devices cannot communicate with any other device.  Add to this a wifi network, and we can add handheld devices to the system.  The typical connected home has three to seven such devices, but none of which are connected.  Combining these devices into a single, “compatibly communicating” network would, by Metcalfe’s law, bring the value of these devices from between three and seven – the sum of each network of size one – to between nine and forty-nine, unlocking tremendous value.

The Company
NetMovies, Inc. (“NetMovies” or the “Company”) is an enterprised focused on enabling, delivering, and distributing multimedia entertainment to consumers, and providing a platform for the converged control of and optimal distribution of content among consumer’s entertainment choices in a single platform.  As Metcalfe’s law explains value created in a network, value is similarly destroyed for each device that is connected to such a network and cannot intercommunicate: this describes the situation in home multimedia today.  For NetMovies customers, each device in the home network derives value from every other device, unlocking the full potential in networked devices.

Started in 2001 by John Fanning, founding Chairman and CEO of Napster, Inc., NetMovies’ has, since its inception, targeted inefficiencies in distribution networks.  Just as Napster was designed as a broker of consumer-owned files, providing liquidity in file sharing networks that pioneered the field of multimedia file sharing, paving the way not only for peer-to-peer networks such as Bittorrent, but also proving the fundamental business model that fuels YouTube, and establishing the internet as a venue for music that inspired the resurgence of Apple and forays into the space by leaders such as Microsoft and Dell.  With NetMovies, Mr. Fanning has applied his vision to broadband media, identifying inefficiencies in the network.  Initially expanding on peer-to-peer technology developed at Napster, this line was spun out to Boston-based PermissionTV, allowing NetMovies to target the one factor most limiting to internet media: the challenges associated with bringing the video from the lean-forward internet to the lean-back television.  NetMovies first product will be a device to wirelessly transmit full-HD signals along with broadband internet across short distances and across longer distances within the home using existing cabling infrastructure and without requiring any effort on the part of the consumer beyond connecting existing cables.  Simultaneously, the company will be integrating its existing content distribution infrastructure into the device, offering both the ability to distribute content and multi-media advertisements attached to content delivered by the Company or others on the internet.

Business Strategy
The NetMovies business model encompasses three key components:

• Three-screen convergence.  Based around the NetMovies home router, the NetMovies Home Control System (NHCS) is a hardware and software device that allows for the sharing and centralized control of content displayed on computer, televisions, and handheld devices using an internet browser or control software on a TCP/IP device.  Using the NHCS, a laptop computer might assign a portion of the screen as a gateway to an HDTV, allowing applications to be pushed to that device, or a right-click option in a browser might be the option to open the link on HDTV screen.  A separate iPhone or Android app, Windows or Windows-mobile application, or AJAX-enabled web page would offer remote control of any integrated viewing device, allowing selection among various traditional media (cable, satellite, DVD, etc.) or internet sources.
  
  
• A launchpad for the new model of advertising.  Providing bi-directional convergence, the NHCS will incorporate advertisements from NetMovies proprietary CDN that can be integrated into any content brokered by the NetMovies router.  Direct actions related to advertisements displayed in the browser will be simultaneously displayed in the various control appliances, allowing direct response actions in media traditionally only capable of providing impression-based ads.
  
  
• Hardware sales, advertising, partnership, and subscription revenue streams – Initially, generating revenue from the sale of innovative hardware, advertisements and fee-based strategic partnerships will be layered in to the basic model.  As partnerships with content creators expand, the NetMovies CDN will be used to distribute content not just to NHCS users but also to traditional media distributors.  End users and content distributors will be charged access and distribution fees for accessing the network. 
  
  
• Top-Tier Strategic Partnerships – NetMovies is pursuing relationships with strategic partners relevant to all aspects of its business—hardware, networking, content, consumer electronics, and distributors.  As the online content market becomes more popular, these industries are increasingly eager to capitalize on it.  A number of top-tier hardware providers, for instance, have communicated to NetMovies’ management a desire to explore strategic partnerships for manufacture or distribution.  Traditional distributors, meanwhile, are also eager to enter the online market.  Blockbuster was a start-up investor in NetMovies and has been instrumental in establishing early relationships between NetMovies and content providers, as well as representing a potential distribution and marketing partnership. 
  
  
• In 2003, NetMovies secured content deals with MGM, Warner Brothers, Columbia Pictures, and DEJ/First Look Productions.  In 2007, the Company established a relationship with Viacom.  The Company is currently in the process of updating the terms of these contracts to include earlier release dates and DVD-burning functionality.  In addition, the Company is currently in discussions with other potential partners, including Sony, Universal, AOL/TW, Fox, Paramount and Lionsgate.  The NetMovies CDN has passed technical due diligence tests and is currently discussing the terms of contracts with all of these studios, moving the Company closer to providing all of the majors’ top-end content in a viable format.

Convergence Device Industry Overview
Overall, the market for three-screen convergence has experienced significant growth over the last few years.  Infrastructure investments to support this broader vision by cable companies has fueled a billion-dollar industry expected to grow to $2.1 billion by 2010.  The majority of this market is based around service delivery platforms (SDP), infrastructure to facility essentially the concept of the media stylesheet, thereby tailoring multimedia content to the specific device to which it is being sent in real-time, allowing high-bandwidth distribution to an HDTV while substantially reduced bandwidth is delivered to a cellular phone accessing the same source material.

Entertainment convergence is happening.  OPA reports that 25% of Americans view video online at least weekly; accordingly, entertainment content overtook personal and dating content as the largest paid category of internet content in 2005.  The Keyser Foundation reports that, increasingly, this on-line video is being accessed with a television on simultaneously.  Video downloads already make up over 35% of total Internet bandwidth usage—with this segment poised for explosive growth, the Company believes that figure will only increase.

Movie and video delivery in theatrical release and the DVD, rental, broadcast and cable markets is increasingly being eroded by on-line delivery. Each of the traditional segments generates multi-billion dollar revenue streams for content distributors (e.g. major studios, broadcast and cable networks).  At the same time, each segment has come under stress from the growing share of leisure time among entertainment consumers devoted to Internet-based activities.  Combined with the conversion to digital television, the prevalence of broadband connections, the mass adoption of home networking and multiple computer, game consoles, and video appliances in the home, these recent developments in the market all support the growing importance of digital delivery modes.  NetMovies’ strategic partnership with Blockbuster, digital delivery modes launched by major retailers such as Amazon.com, and DVD rental company Netflix’s Watch Now feature underscore the anticipated growth in digital delivery.

At the same time that strong growth is expected in the market for online content, industry experts recognize the shortcomings of current techniques for in home integration.  Tivo’s partnership with Amazon, Xbox Live video, the Roku netflix streaming device, Apple’s AppleTV, and Vudu’s HD downloader have yet to move the needle.  Netflix’s watch now is vastly more popular among the laptop set then it is for home computer integration. Many players are entering the digital video space and each is focusing on a proprietary solution for moving content to the television.  There is clearly an opportunity for an integrator: a solution that makes all these option available – and competitive – in a single device.

Competitive Landscape
NetMovies’ hardware device is poised to out-perform its competitors.  Unlike all its competitors, the NHCS is a convergence solution, rather than a new, unintegrated device offering an isolated point solution to one of the consumer’s media devices. The current providers, including Microsoft, Roku, Apple, and Vudu, could serve as inputs to the NetMovies media router, controlled through the NHCS server via browser or handheld device.  Microsoft’s complex and arcane Media Center PC’s place powerful computers in the living room, offering no benefits in control (they typically come with a fairly pedestrian remote, connect with standard (and unwieldy) bundles of cables, and the power required to operate the inefficient Windows operating system and drive the television typically requires powerful and noisy cooling fans.

The Market Opportunity – The NetMovies Solution

There is a significant opportunity to provide a video distribution platform that leverages the existing modes of internet video distribution.  NetMovies believes it can capitalize on this opportunity and address the shortcomings of its competitors.  Combining its wireless HDMI, its networking over home wiring, and it’s CDN for advertisements, it builds on Mr. Fanning’s business and technological successes at Napster to exponentially drive the value of existing entertainment infrastructure while using its proprietary content network to drive advertising revenue.  As the NetMovies customer base grows, so do the ability to capitalize on the advertising opportunity, enabling loss-leading distribution of hardware to further grow the installed base.  At massive scale, the Company believes that it can deliver on the holy grail of advertising: by integrating the lean-back television and lean-forward computer, NetMovies can deliver consumer response ads in the browser in conjunction with visually spectacular impression ads displayed on the television.

In addition to its advanced technology, NetMovies out-performs its competitors through the multitude of its services and the range of content options it enables.  In addition to its internet content delivery, the NetMovies home router has inputs for DVD and Blu-ray players, game consoles, and cable or satellite broadcasts.  Connecting each of these devices to as many display devices as desired, the home router delivers addition Metcalfe-law based benefits: a consumer can load his DVD in one player, watch half the movie on the big screen in his living room, press pause on his handheld, adj