Pixelon has updated its Web site to remove any claims that it uses a proprietary compression scheme. Since August, Reeder says, Pixelon has spent more than $1.5 million updating its encoding technology, allowing the company to generate high-quality pictures using smaller file sizes than any other competitor. Compressing the size of video files is crucial, because it could take hours or even days to deliver conventional video files using the typical Internet connection. Reeder says that Pixelon's current video technology still relies on generic, or "open," standards, but that the company has taken proprietary steps to make the files smaller than other techniques on the market can make them.
"If you look closer at it (a Pixelon file) you will notice that it's higher quality with a lower encoded rate," Reeder says.
However, two digital video experts who examined files generated by Pixelon said they were comparable to those created by competing technologies.
While Reeder would only admit that Pixelon had misrepresented its technology in isolated situations, three former employees claim that the practice was widespread during their tenure at the company. Gary Devore, who was in charge of video encoding at Pixelon from May 1999 to November of that same year, says that Pixelon had designed none of the technology he used in his job. Instead, he explains, the company told him to capture video off of a satellite feed and run it through video-encoding technology produced by FutureTel, a company based in Sunnyvale, Calif. "Every piece of video that was encoded there was encoded with an MPEG encoder from FutureTel," Devore says.
Devore, 34, currently produces a television show about fishing called Angling Adventures Magazine. He says he was fired from his Pixelon job in August after Fenne complained that Devore was not performing his duties. "When I was fired I brought all of this to the attention of Paul Ward," Devore says. Ward, Pixelon's current CEO, could not be reached for comment.
Phillip Bruce, an employee hired by the startup to encode footage from Anaheim Angels baseball games, agrees that the encoding process used no proprietary Pixelon technology. Bruce and Devore say that Pixelon built a special box to house the FutureTel device. In order to prevent employees from discovering the true contents, they say, Stanley told them that the box was equipped with a special "acid pill" that would explode if anyone removed the cover. Stanley explained to employees that he had taken this step in order to prevent reverse engineering. A third employee who worked at Pixelon for 10 months confirms the account. "From the start I knew that we didn't have our own proprietary compression codec," says the employee, who spoke on the condition of anonymity.
Devore and the anonymous source say that other technologies were doctored, too. Specifically, they say, features in the Pixelon player that were supposed to let viewers see ads targeted to their specific demographics and provide feedback to a database never worked. Before a demonstration to representatives of the Web site Cindycrawford.com, Devore says, Stanley told him to run a series of ads that would appeal to women, so it would appear that the technology was targeting users of the Crawford site. Reeder says the targeted ad feature only became functional in late November, and that he had no knowledge of the demo. "I wasn't there, but I could see how that would happen," he says.
Devore says that even before he was fired, he had suspicions that Pixelon's technology was merely a collection of off-the-shelf hardware and software made by other companies. But he was lured by Stanley's promises that the company would complete an initial public offering in April 2000 and would have a market cap rivaling that of Broadcast.com, the company Yahoo purchased last year for $5 billion. "Michael would say in meetings that everybody in this company is going to be a millionaire in a short period of time," Devore says. "It was always the possibility that by this time next year you'll have $10 million."
A principal with Advanced Equities, the Chicago brokerage that raised $28 million for Pixelon in a private placement, says that the firm had no reason to doubt the company's technology. "We brought technical people out there (to San Juan Capistrano) to look at the product," says Keith Daubenspeck, who is also a member of Pixelon's board of directors. "Not only did they confirm that they thought the product was excellent, but one of them invested $50,000 in the deal." Daubenspeck declines to identify the technical consultants by name.
Daubenspeck said Advanced Equities has helped fund several other technology companies since it was established last August, including Universal Access (UAXS) for $5.5 million, VPNet for $12 million and Shopnow.com.
Reeder acknowledges that Stanley regularly oversold Pixelon's potential to employees and investors, but says that he and other executives from the company resisted the con. "David Stanley had no compunction about stretching the truth," he says. "I have a lot of bitterness about it. I always resisted the scam portions of his directives."
