Executives Admit Pixelon Misled Investors

SAN FRANCISCO (05/15/2000) - Pixelon, the company that raised $28 million before its founder was exposed as a convicted con artist and a fugitive from the law, passed off widely available technologies as its own exclusive, proprietary software, The Standard has learned.

The San Juan Capistrano, California-based startup claimed to have developed a proprietary format of digital video that was significantly more efficient at broadcasting video over the Internet than those made by rivals Microsoft Corp.

(MSFT) or RealNetworks Inc. (RNWK) . In fact, Pixelon was using a generic format available to anyone over the Internet, according to Russell Reeder, Pixelon's VP of product development. Three former Pixelon employees have elaborated on Reeder's admission.

The revelations come a month after fugitive David Kim Stanley surrendered to the Virginia authorities who had been closing in on him. After Stanley's arrest, it became clear that he had raised millions of dollars for Pixelon under the name Michael Adam Fenne.

Reeder confirms that on several occasions Pixelon intentionally misled the public about the capabilities of its technology. One instance came in August during a demonstration held for investors. At that time, Pixelon claimed it was using proprietary technology - comprising an encoder and playback software called the Pixelon Player - to broadcast the Iowa straw poll. In fact, Reeder now says, Pixelon was relying on software made by Microsoft because Pixelon's own technology wasn't up to the job.

"The [Pixelon] Player was an adaptation of Windows Media Player because it (the video) was streamed using Windows Media as a streaming format," he says.

Reeder also acknowledges that Pixelon misrepresented its technology in press releases and white papers the company distributed to investors and the public.

"We use a revolutionary set of capturing techniques that revolve around seven proprietary sampling procedures," proclaimed a white paper that was posted on Pixelon's Web site during the second half of 1999. The company also suggested it had a proprietary "codec," or mathematical formula, for encoding files.

Reeder confirms that none of the video Pixelon was distributing at the time was using any such techniques and that, to this day, Pixelon relies on a video format that is available to anyone.

In a recent interview from jail, the 39-year-old Stanley claimed to have written the code from scratch during the several months he lived in the back seat of his car after fleeing authorities. "I knew I was on the frontier of a totally new area and I got real, real, real excited," he told The Standard. "I knew I had found the way home."

In 1989, Stanley pleaded guilty in Virginia and Tennessee to 51 counts of fraud and embezzlement. Prosecutors said Stanley had used his status as the son and grandson of preachers in the Appalachian town of Wise, Virginia, to talk fellow parishioners and neighbors into handing their money over to him so that he could invest it for them. Virginia police estimate he swindled his victims out of more than $1.5 million. Stanley was ordered to pay restitution and serve eight years in prison, but he fled in 1996 with restitution only partially paid. Using the alias Michael Fenne, he founded Pixelon in 1998. Pixelon has vowed to conduct a financial audit to ensure that Stanley did not pocket Pixelon funds.

Pixelon showed signs of trouble almost from the beginning. According to a prospectus that was provided to potential investors, Pixelon spent $16 million on a launch party held last October that featured a reunion by the Who and performances by other top artists including the Dixie Chicks, Chely Wright, Faith Hill, Kiss and Tony Bennett. Company executives justified the outlandish price tag at the time by saying that the event would allow Pixelon to showcase its unique ability to broadcast live, full-screen video at 30 frames per second. Pixelon's technology was unable to broadcast the event live, however, except to a handful of viewers who had exceptionally fast broadband connections.

That's because Pixelon's technology is based on the open standard MPEG 1, a video format that is known for producing enormous files. The format was popular in the days when CD-ROMs were the primary medium for digital video distribution. MPEG 1 has fallen out of vogue, however, because the increasing use of the Internet to deliver video has placed a premium on files that are small enough to be transmitted quickly.

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