Star Tribune from Minneapolis, Minnesota on November 23, 1997 · Page 57
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Star Tribune from Minneapolis, Minnesota · Page 57

Minneapolis, Minnesota
Issue Date:
Sunday, November 23, 1997
Page 57
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SUNDAY, NOVEMBER 23 1997 Sunday Business STAR TRIBUNE PAGE D3 DickYoungblood Digital River Inc. turns into rapids on the Web Edina company offers tens of thousands of software items from 700 developers It is with a diskfiil of trepidation that I'm venturing into the arcane mists of cyberspace this morning to introduce you to a veteran techie-named Joel Ronning. Ronning, 41, is co-founder with Japan's Fujitsu Ltd. of an Edina outfit called Digital River Inc., the name of which has no inherent meaning beyond the fact that Ronning, an outdoorsy type, liked the sound of it. Whatever you call it, the business is complicated enough to send the Young-blood Bewilderment Index, that renowned mathematical measure of the accelerating flow of baffling technological news, into a tizzy. Let's take it from the top: Ronning, an entrepreneurial veteran in these parts, started out in 1992 simply to develop an encryption system to protect the private data supplied by customers buying software on the Internet, as well as via CD-ROMs, hard and floppy disks. But almost immediately he began to recognize that the opportunities offered by the World Wide Web went far beyond the issue of security to encompass such services as data storage, distribution and other back-office chores involved with electronic transactions. Three years of research and 12 patents-pending later, Ronning is up to his gigabytes in the emerging field of electronic commerce. Virtual warehouse What Digital River has created is an enormous virtual warehouse containing tens of thousands of software products offered by hundreds of developers and retailers through their individual Web sites. In simple terms, the system gives customers the ability to download their software choices with a minimum of fuss and a maximum of security for the credit card numbers and other personal data required for the transaction. I like to think of the operation as sort of the Supervalu of electronic software wholesaling. Whether Digital River can thrive in the increasingly competitive arena of online commerce is a question, of course, but the initial response to Ronning's initiative has been fairly impressive. Consider: It wasn't until August 1996 that the first software developer agreed to distribute its online sales through the Digital River system. By the beginning of '97 the list was up to just 35 developers. But by the end of October, more than 700 software developers had given Digital River the right to distribute about 1 10,000 software products via the Internet, including industry leaders such as Corel, Symantec and Lotus. In addition, about 50 software retailers also have joined the network. Potential software buyers access the Digital River system through the developers' and retailers' individual Web sites, each of which is supplied with a directory of software available. If it's a developer site, the directory lists that company's products; if it's a retailer site, the products of many or all of the developers might be included. Fee is 20 percent In return for its services, Digital River collects 20 percent of the revenues handled by its distribution system. The upshot: Ronning estimated that 1997 sales through the company's virtual warehouse will reach $2.5 million, of which Digital River would keep $500,000. But sales are ramping up, Ronning said, with the September volume approaching $300,000 and the October total nearing $400,000. That's a small part of the potential, however, said Piper Jaffray securities analyst Bill Burnham, who specializes in the field of electronic commerce. Software sales via the Internet exceeded $500 million in 1996, Burnham said, and with consumer interest in online transactions rising apace, that segment of the business is expanding at an annual rate of 50 percent or more. The question is, why are so many software companies willing to fork over 20 percent of their Internet proceeds to use Ronning's system? The answer is the cost of storage capacity and the technology through which Digital River provides the security, processes the orders, collects the payments and provides updates, accounting and auditing services. It would be much more expensive for those software companies to add such capabilities to each of their Web sites, Ronning said. But Digital River has a roster of 750 clients across which to spread the cost of three years of research and development and the more than $1 mil lion it has invested so far in a server system to store all the software products. Before Digital River Ronning is no stranger to the world of high-tech entrepreneurship: During the 1980s he was a partner in a software firm and the CEO of a partnership that manufactured Macintosh peripherals. In 1990, as the desktop publishing phenomenon headed skyward, he started Tech Squared Inc. as a direct marketer of Macintosh equipment and software. Within four years, thanks in part to a manufacturing operation that peddled private-label peripherals to mass merchants, he built the company to a revenue peak of $46 million. But the market power of the mass merchants erased the profit margins, forcing Tech Squared out of the private-label business. Then Windows 95, the Microsoft operating system, knocked the wind out of the Macintosh business. Revenues sank to $37 million in 1996 and losses in 1995-96 totaled $1.8 million, forcing Ronning to scramble to shift his focus to the PCWindows market. The good news is that, while 1997 revenues will fall to about $36 million, Tech Squared will produce its first small profit in three years, Ronning said. The even better news at least potentially is that Ronning has turned over his 37 percent interest in Digital River to Tech Squared. His rationale: Ronning owns about 70 percent of the publicly held Tech Squared, so he stands to benefit significantly if Digital River fulfills its potential. ESTATE from Dl Death, taxes are problems that planner must consider Our conversation covered the documents you need if you become seriously ill, and the documents you need when you die. In particular Advance medical directives. Although the formats differ somewhat in each state, medical directives generally include the elements of a "living will" and a "health care power of attorney." The latter allows you to appoint a relative or friend as your agent to make your health and medical care decisions when you can no longer make them on your own. Sara and I have seen that happen when people we know suffered a stroke or were afflicted with Alzheimer's disease. Minnesota has separate living will and health care power of attorney documents. However, a group of health care and legal professionals are trying to get the state to adopt an integrated form that would allow a person to appoint a guardian and outline their medical wishes, i The living will allows you to state your preferences about how you want to be treated in the event of terminal illness and when you can no longer communicate. Often, it is used to declare you do not want your life extended by the use of life-support machines or other artificial means. Durable power of attorney. This document allows you to appoint your spouse or another person to act for you in the event you no longer can make your own financial and legal decisions. This is an important document if you should suddenly become incapacitated. Macdonald noted that such documents become effective immediately when you sign them not just when you become ill. So you should have a high level of trust in the person you appoint. Minnesota has separate power of attorney documents for health care and financialestate responsibilites. Wills and trusts. Macdonald said married couples often come to her with "sweetheart" wills. That's the kind of will in which the husband leaves everything to his wife and the wife leaves everything to her husband. While it's romantic, it won't keep the tax man from taking a big bite after the second spouse dies. Nor will it avoid the expense and delays of going through probate court. Macdonald said the best way to accomplish both goals avoiding estate taxes and probate is to create a "revocable living trust," which includes a "bypass trust" for each spouse. The couple still would need wills, but all of the heavy lifting meaning the detailed instructions about who gets what and when would be in the trust documents. By creating two bypass trusts, a couple can take advantage of an important tax exemption. It provides that, during their lifetimes, a couple can each transfer $600,000 or a total of $ 1 .2 million to children or other beneficiaries, without incurring gift or estate taxes. Minnesota has the same $600,000 limit before assessing state taxes. If the husband dies first, the bypass trust shelters his $600,000 from estate taxes and from probate. When his wife dies, the trust shelters her $600,000 from estate taxes and probate. That allows a total of $1.2 million in assets to be distributed to their beneficiaries. By comparison, Macdonald said, having only a "sweetheart" will can be expensive for a couple with a large estate. When the husband dies, everything goes to his wife tax-free. The tax problem arises when the wife dies. If a couple has $1.2 million in assets, their estate would have to pay $235,000 in federal estate taxes. If that sounds like a lot, it's because the estate tax ranges from 37 percent to 55 percent. Transfer into trusts To avoid probate, a couple must transfer their assets into their trusts. The transfers of money or property involve a process called "retitling." The idea is to divide the assets as equally as possible into the two trusts. For instance, a joint brokerage account that reads "John and Mary Jones" would be divided and changed to "John Jones Revocable Trust" and "Mary Jones Revocable Trust" thus shifting those assets into two trusts. The deed for a house that is owned jointly also would be revised, Macdonald said, so the house could be put into the trust of the spouse with the lesser amount of total assets. But both spouses would retain the same ' rights to use the house, or even sell the house, as before. While trusts make a lot of sense, they have drawbacks. Typically, it costs $2,000 to $3,000 to have an estate-planning lawyer set up trusts for a married couple and do some of the legal work that goes with it. The job of retitling assets can be complicated and time-consuming. And it may make some people feel that they've lost control of their assets, even though they haven't. Also, one of the main arguments for creating a trust is to avoid the time and expense of probate, which can cost at least $2,000. But many states now have adopted a fast-track system for probate, especially for small estates, and that has made the process easier. In Minnesota, the probate system can be informal with no hearings. But if the deceased has more than $20,000 in his or her name, the matter will go through probate. Would it be worthwhile for you to create a bypass trust? That depends on the size of your estate. The magic number is $600,000. If you're close to it, or over it, then the trust would be useful. If you have much less, it may not be worth it. Check with an estate planner to make sure. It should be noted that under the 1997 tax law, the $600,000-per-person exemption will be increased gradually to $1 million by the year 2006. Nevertheless, estate taxes still will be due on any assets that aren't sheltered. Staff writer Melissa Levy contributed to this report. Technology Using the Net can save money on fax, phone Internet telephony is considered the fastest-growing type of service New York Times Daniel Briere, an Internet consultant and author, sends dozens of hefty faxes every day from his office in Verona, N.J., some of them to far-flung locales. Yet his telephone bill for faxes once nearly $1,000 a month is only pennies. In other offices, people routinely make international calls for the price of calling across town. These may sound like fancy phone scams, but they are actually just some of the newest applications of the Internet and potentially some of its biggest revenue generators. Today, Internet telephony, as it is called, is considered the fastest-growing type of service on the Internet, and $30 million, by one estimate, is expected to be spent next year. Many experts say the question is no longer whether, but when, many consumers and businesses will start using the Internet in big numbers, particularly for faxing, in which a substantial potential for cost savings is seen. "This is the start of the next-generation telephone industry," said Jeff Pulver, an Internet analyst and chairman of a nonprofit group called the Voice on Net Coalition, an organization formed to resist phone industry attempts to regulate the use of the Internet for voice calls. Phone revolution? While the pace of development has exceeded many" people's expectations, not everyone shares Pulver's view that Internet telephony will amount to a revolution anytime soon. "We are not big believers that Internet telephony is going to take over the circuit-switch phone network," said John Sidgmore, chief executive of UUNet, a large Internet service provider owned by Worldcom Inc. If Worldcom completes its proposed merger with MCI Communications Corp., the combined company will own a huge chunk of both the traditional, or circuit-switch, telephone network and the Internet backbone. Among the problems Sidgmore and others point to is the typically poor voice quality of Internet phone calls. Because of the way in which data is sent over the Internet in digital "packets" of information, instead of the steady stream used in analog phone service conversations can sound scratchy or can even break off unexpectedly. Also, it is often still not possible for a user to call someone who uses a different Internet telephony service. Still, technical improvements have been made. As recently as two years ago, placing a call over the Internet required both parties to talk through the sound system of their PCs. But today placing such a call is almost as easy as making a conventional phone call. The caller typically picks up a normal phone, waits for a dial tone, then enters a personal identification code that has been assigned by an Internet telephony services company. The service then directs the analog call to a gateway device that converts it into digital code, which is then broken down into the packets of data. When the digital information reaches an Internet server in the destination country, it is con verted back to the sound of the voice and, typically, sent over local phone lines to the intended phone number. Corporate users Despite the glitches of Internet telephony compared with the tra ditional telephone network, an emerging crop of companies is betting aggressively that ma-ny consumers will decide the trade off is worth it. Two of the leaders are Con centric Network Corp. and IDT Corp., which are wor-king to solve some of the problems. So are Del ta Three, an Israeli company partly owned by RSL Communications, and USA Global Link, which plans to set up gateways all over the world for Internet traffic. While the market for Internet telephony is minuscule today, amounting to only about $10 million in revenues last year, spending on Internet telephony is expected to reach $2 billion by 2004, according to Forrester Research of Cambridge, Mass. Forrester estimates that in that year, consumers will save about $1 billion by not having used the traditional phone network; with the $2 billion in Internet telephony revenue, that translates to a loss of roughly $3 billion to the conventional telephone companies, or 4 percent of their projected annual revenues. For that reason, telecommunications giants are starting to take notice. Easily the most aggressive of them is Deutsche Telekom AG of Germany, which last summer paid $48 million for a 21 percent stake in Vocaltec Communications Ltd., an Israel-based maker of the gateways that are critical to Internet traffic. AT&T is also becoming involved. It has helped finance ITXC Corp., a start-up that was founded by Tom Evslin, the former head of AT&T's Worldnet Internet service. ITXC, which stands for Internet Telephony Exchange Carrier, is developing technology to provide settlement and billing services for calls routed across gateways from one carrier to another. But for the most part, the telephone industry is approaching the market cautiously, concerned in part that the new technology could eat into its revenues, analysts say. "The incumbent telephone companies are not moving very aggressively in Internet telephony yet, because they don't want to underprice themselves," said Christopher Mines, a Forrester analyst. "The question is, where is that point where they have got to be in the market because customers are going to start using it anyway?" While that day has not arrived, the indications are that it will. Initially, corporations are intrigued with the possibility of enormous savings in sending international faxes, which this year will cost them upward of $7 billion. Faxes are a natural for the Internet because the problems that affect voice conversations in Internet calls do not affect the quality of a faxed document. V I 1 h l V vvv .V Has, X. W' 1 , Return this form with your check to: AMERICAN SAVINGS, 341 Third Street, P.O. Box 221 Farmington, MN 55024 mm mm mm mm mm mm mm mm mm mm mm mm mm mm mm mm mm mm mm mm mm mm mm m Please open my 18 Month CD for the amount of $ . Name. Address Social Security Number . 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