Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:02:08} In terms of the HolyGrail project but more so getting Digimarc established in the recycling use case in Europe, how important is it to get the TOMRA and Pellenc camera systems in place because it seems like a chicken and egg problem; do you get the brands or the cameras?

{audio:0:03:00} I know Pellenc but never worked with them, and it is a lot more recent. There was initially an exclusivity agreement with TOMRA as they did most of the research, so they had a period where no other competitor had access to the technology. Due to the massive appeal this had for CPGs and other companies, it was clear they needed to bring more manufacturers to the table because TOMRA would not be able to cover the whole market. Pellenc is important in France and other countries, which is why they were added afterwards. They already had substantial investments in optical equipment for their existing machines, because they were trying to improve with all the artificial intelligence processing. They took more pictures to improve the rate of positive identification, independent of digital watermarks. 

{audio:0:05:07} Most of the effort has been done in combining, not only the optical capabilities of the cameras but also the near infra-red detection which, combined with watermarks, helps improved the overall rate of detection. It was critical they made that investment to achieve acceptable results for all stakeholders. 100% is almost impossible but everybody dreams about getting close, and that could only be achieved by combining different technologies from TOMRA and Pellenc.

{audio:0:06:50} Do you think it's necessary to have the cameras in place before CPGs would be willing to adopt digital watermarks, or would they go ahead and do it on proof that it works and allow the recycling cameras to follow?

{audio:0:07:21} I was at the early tests which showed promising results, which is why engagement from CPGs increased, and they also specified more requirements. CPGs will ultimately be held accountable for the recyclability of their packaging, and they will have a lot of pressure to either reduce their footprint or ensure their packaging contains elements to allow for optimal recyclability and sorting. They will get even more pressure than they have today, so if they adopt the technology, they need to ensure that things will work downstream, that watermarks will be properly and efficiently detected. 

{audio:0:09:18} In order for them to make the decision to invest, it was necessary for a road map of improvement of detection to bring it to acceptable rates. The results in Copenhagen have shown these goals are being met, getting above 95% readability. That is a sufficiently strong incentive for them to start adoption, whereas if the results were below those marks, I doubt the CPGs would be acting as the tractors of the technology. They have been slightly more reactive instead of leading the way, with the exception of Proctor & Gamble who has have pushed for this and made their products available for tests. There is a clear strategy and understanding that this technology would likely succeed where others failed. They have been evangelizing and trying to attract others but the results dragged people along. The latest results will probably prompt other countries to launch their programs. 

{audio:0:11:34} Once you see that everything is working fine, your risk is lower. You are in the investment industry and know how that works, and the guys who did all the hard work also took all the risks and invested the money. Considering the way these tests have been performed in Germany and Copenhagen, it's really exciting for the technology because it shows that it can scale well and can be rolled out to any other country in Europe. Perhaps other places are more complex because the waste mix is different. Some countries might have a predominance of other type of materials in the packaging which make it harder to get those results, or they could have an increased rate.

{audio:0:13:27} If TOMRA had initial exclusivity, why has Pellenc ended up doing the phase 2 demonstrations first, and when will TOMRA do their phase 2 demonstrations?

{audio:0:13:55} My direct experience was with TOMRA; I had no exposure to Pellenc at Digimarc. I have been following Pellenc's announcements, and I understand they are dominant in France and Spain. It might be that their technology was sufficiently advanced to implement Digimarc and TOMRA still needs to tweak their environment. It is not only about the optical equipment, but also the processing, which requires a redesign of fundamental things in the system which takes longer. Pellenc might already have sufficient power within their systems and architecture which was more adequately designed to accommodate a technology like Digimarc's. 

{audio:0:16:06} I don't think it was a contractual issue, because TOMRA had this exclusivity deal from the beginning because they were part of the HolyGrail project. Historically, there was an early task called REFLEX, which evolved into HolyGrail, and TOMRA has been part of both. They were the only one in REFLEX and the only one in HolyGrail phase 1.0. Only in HolyGrail 2.0 was the decision made to open it, which is why Pellenc started. I don't think there's a contractual limitation on TOMRA to not go ahead with phase 2; it is probably just a technology evolution.

{audio:0:17:34} Watching one of the phase 2 demonstrations, it seemed there were issues with flexible packaging. I'm not going to put the word issue in your mouth, but the sort rates were lower with flexible packaging and I was curious to hear your take on what was going on there and if that is a problem or if it has been solved?

{audio:0:18:10} Flexible packaging is very challenging because of the substrates in the packaging. The metallic components combined with lighting conditions make the watermarks unreadable. Some flexible packaging is transparent and, in the early tests of the REFLEX project, which only addressed flexible packaging, we realized we needed to pick the most challenging items we could think of. We went after the plastic wraps of cigarette boxes which are completely transparent. We put the watermark there and it would work in a very controlled environment. It was static recognition and we had placed a strong watermark, meaning the amount of ink in each pixel was augmented. It had more ink than the most imperceptible watermark you see in normal packaging. In those circumstances, with no movement in the conveyor belt, it worked.

{audio:0:21:18} This was a long time ago and both the watermark and detection methods have improved, so I bet the ways flexible packaging are read today are different from how they worked years ago. It will be offset by the technological advances in the optical systems. Near infra-red will help and the watermarks are more robust. Brands will also engage into this because they see clear benefits. They will save a lot of money from potential fines they get for waste they produce, and will design their packaging to accommodate the watermark, which will be a significant milestone for Digimarc. Brands will think about the watermark first, instead of adapting their existing artwork around it. Their creative effort will take the watermark into account from the beginning, with the limitations it has in terms of totally transparent packaging. They may need to combine it with something or to avoid some colors that pose difficulties for the system. Pure black or white are two colors which have traditionally been very difficult because they lack contrast. 

{audio:0:24:20} If you put a traditional bar code or QR code on a black background, it will not be readable. The same happens with the watermark, if you have a solid background, it makes it hard, unless we make the watermark very visible by using an inverted color. In a pure white, you would end up having some grayish layer in the image and in a pure black you would have to sacrifice some of the purity to have some dots of a lighter spectrum of black. That explains a lot of the issues that flexible packaging currently has. Things will improve due to technology but design will also be critical.

{audio:0:26:08} In phase 2, did the flexible packaging detection rates concern you or not?

{audio:0:26:26} The only obvious concern is that things move slowly. When I was working on the project, I knew we had to go through different stages, but I never thought we were so far away. I thought things would have gone a lot faster. What they have published makes it clear that to slightly improve the rate of positive identification requires tremendous investment. They are very close to the next stage and I feel they have a much bigger chance of being successful. They now need to work on the business model of how to roll it out, because there are so many companies and agencies involved. 

{audio:0:28:46} Digimarc needs to appoint new partners to take on the workload this will represent. To make the impact worthwhile, you need hundreds of thousands of SKUs around the world, and to achieve that, you need to consider the amount of time required to put into each design and validate the quality control. You need well-trained partners to have this capacity spread around the world and in Europe, in particular, you need different partners to do this at scale in each market. 

{audio:0:29:57} Procter & Gamble is a global brand but the products they market in France have a different design to those from Portugal or the UK. That is different to the US where you have one design for the whole country and you can reach 300 million people. In Europe you may need 30 designs, so you will have press agencies in each country. To orchestrate this in a continent like Europe is also a challenge. Digimarc will need some help commercially to respond to the potential avalanche that this could create. The moment you prove this technology works, the European Commission will consider it a valid technology. CPGs can then adopt it if it is cost efficient for them. That would consolidate Digimarc's efforts in this industry, but it is operationally challenging because they need to multiply the number of collaborators they currently have to make this happen.

{audio:0:31:59} While we were talking, the HolyGrail consortium put out an official announcement on the results in phase 2, which include the dirtier trials at Pellenc headquarters. Maybe I could share my screen, are you able to see the detection rates?

{audio:0:32:37} The flexibles look significantly better than in the original trials.

{audio:0:32:52} I'm reading to understand the three tests, detection rate, ejection and purity. Flexibles still show lower performance than the others in ejection and purity.

{audio:0:33:32} What would you define purity as? I don't see a footnote on purity.

{audio:0:33:45} When you're sorting the material, the ejected materials go into a basket, and not everything in that basket is watermarked. When waste material is detected with a watermark, a fan pushes it out, so I suppose this is what they mean by purity.

{audio:0:35:29} In the rigids, the purity is better than the ejection rate on both PP and PE. I would imagine that something which shoots a high velocity air, with flexibles in particular, if something is detected is next to something which it is not supposed to be, they can mix together easier because they're lighter and move with the air. That would be my guess having watched and listened to the context around these demos.

{audio:0:36:09} Yes, that could explain it.

{audio:0:36:16} It looks pretty promising, wouldn't you say?

{audio:0:36:19} It is really impressive to see 99% almost across the board; I was not expecting this. I understood that 95% was the promised land but 99% is impressive in a test this size. This confirms the suspicion I had; I was expecting the results to be positive, but not so good.

{audio:0:37:11} They took lessons from the Copenhagen trials and improved the detection and ejection rates, especially on flexibles, clearly making some effective changes. Do you know what those changes were and are there opportunities to improve?

{audio:0:37:54} I don't know how you can improve the detection rate, but the ejection and purity have some room for improvement. That falls more on the side of Pellenc and TOMRA because the important part for Digimarc is positive detection of the watermark. I would have loved being present at the test and seeing it myself. Was this published today?

{audio:0:39:21} This was published 10 minutes ago.

{audio:0:39:32} It confirms the technology is at a maturity point to allow everybody to jump in.

{audio:0:39:46} I put both the Digimarc and consortium's press release in the chat so you could have the links to them and find it easily.

{audio:0:40:00} Perfect. This almost makes me cry because, back when we did these tests at a flexible packaging company in the North of England in 2014, it felt like an impossible task. Seeing these results really excites me and too bad I didn't see the tests live. This is a good day for Digimarc and everybody involved, especially with all the internal resistance in the beginning. You asked me about what Bruce was like as a CEO the last time, and we had discussions about the HolyGrail and, in the beginning, it was getting the echo I thought the project deserved. There was also noise from Filigrade but then they embraced the project and have worked very hard to make it happen so I am happy they did. 

{audio:0:42:16} I also think about Gian DeBelder at Procter & Gamble who has led this effort and has a lot of skin in the game. He should be proud of his achievements. I don't know what road blocks are down the road, but with these partial results we see today, they have the ingredients to convince more people to start testing it in different countries and more CPGs to start working on it and looking at the watermarks. It is not done; now you need to build the business around it and orchestrate all these things which takes time. They originally planned to have this in the main street by 2025, but I now see this happening earlier.

{audio:0:44:07} I cannot congratulate you enough and I know how instrumental you were. It is very specific that Pellenc is the one mentioned and TOMRAs name isn't. Is there something wrong there and, on a related note, why do you think TOMRA got to semi-industrial trials with chemical tracers before watermarks?

{audio:0:44:39} Do they mention Pellenc only and not TOMRA?

{audio:0:44:55} It is surprising that Pellenc produced these results as they joined the game later. I would be surprised if TOMRA did not participate in this program. The last time I saw, they were still shown on the website of the HolyGrail project.

{audio:0:46:04} Yes, we had on our calendar that TOMRA would do watermark tests in Mülheim-Kärlich in March at the latest, but that doesn't seem to have happened.

{audio:0:46:28} Yes, I don't know; I cannot tell you.

{audio:0:46:35} Should we investigate that further?

{audio:0:46:39} I am surprised TOMRA are not acknowledged for their efforts in this press release. If the results are obtained, it has to be explained, because of all the work they did before, so I would definitely try to understand why they're not mentioned and what their role is today in HolyGrail. They have a strong market share in sorting so they are a very important player.

{audio:0:47:36} How would pricing work with licensing Digimarc technology for identification to TOMRA or Pellenc systems?

{audio:0:47:57} This has been a joint effort and TOMRA were not paying – nor do I believe Pellenc are – for any license. When we discussed the business model the last time we spoke, I told you it still needs to be defined and there were different alternatives. The easiest way was about the price per watermark paid to Digimarc, but who pays TOMRA needs to be decided by the consortium. However you compensate, this will probably have to do with the way TOMRA and Pellenc are currently paid. They usually sell their equipment to the organizations who are in charge of sorting in each country, and those machines cost up to $2 million each. This is an important investment for these agencies and they are the ones paying for the machines, so they would probably charge extra for having digital watermark readability, but it will become a basic feature of the equipment once the industry as a whole decides to adopt this solution. 

{audio:0:50:25} That means an increase in the pricing and maintenance fees because there is more to update. There is a new generation funds in Europe that will be given to countries who transition to a more green and digital economy, so these funds could be allocated to TOMRA and Pellenc who are critical links in the chain. They will have avenues of revenues but, for me, it is speculation. There will be a public announcement of how this system will work, and it has to be fair to all the companies providing the technology, as well as those who will pay for it, which are the CPGs, incentivized by public funds.

{audio:0:53:07} If you are not recyclable by 2025, there will be government fines and fees. How likely are those and when will they get kicked in?

{audio:0:53:32} The new generation funds have started being allocated, and they will help some countries more than others, depending on how hard they've been hit by the pandemic. These funds will probably be more relevant in Spain than Holland. I had a meeting with the European Commissioner for the Environment two and a half years ago, as I wanted to introduce him to the project, to see if they could somehow support the technology once it was slightly more mature. They told me it was strategic because it had all the elements which were critical for Europe. It has an impact on sustainability, but when you add a digital gateway to physical products, it has implications for tracking, product recalls, consumer communications and quality control. 

{audio:0:56:14} It was not a funded project when I was there but they had some European funds for the agents in the project. Digimarc did not get any of those funds but it was due to underlying projects in cooperation with TOMRA and Procter & Gamble. Also, the funds were minimal. This would probably have to be done in two ways; at a European level working directly with the European Commission, and at the national level. These funds will require you to organize a consortium in your country with the people who commit to adopt the technology. One of the good things of the results they have just shown is that this would help organize these consortiums to apply for funds and to support the commercial adoption. Next generation funds would be available for at least four years, so it could be a way to incentivize earlier adoption of the technology.

{audio:0:58:07} We read about parts of Europe thinking about enacting, by 2025, a fee to each CPG company for every item they make which is not recyclable and sortable. How likely do you think that policy is to come into place?

{audio:0:58:41} Dealing with policy is hard, but despite all the challenges that's a strategic line for the European Commission. They will push hard, not as radical as Californian plastic straws but the reduction of plastics is a clear objective. The reduction of the overall packaging footprint still needs some work and specifications. Companies who are engaged with HolyGrail are very outspoken about the benefit of plastic to avoid food waste. The European Commission needs to adapt the messaging they've been giving out regarding the policy to the actual reality, because there has been some controversy there. 

{audio:1:00:29} It has been some time since I looked at the most recent developments in this, but they will be a lot tougher than before. It is far cheaper for companies to violate the regulations and pay fines than change the way they work to comply with regulations. Tougher measures and stricter deadlines will serve as an incentive for companies to accelerate their pace of adoption. I am not an expert in regulation, which is done at a national level in Europe. Germany and Spain are tougher than the stipulated directives. 

{audio:1:03:24} I would say it is a perfect storm for this technology; they have proven an efficient way to do it which is cost efficient for the adopters and there is commitment from European institutions to sustainability which is all about reducing waste. This will make things move quickly because the money is also there. They have allocated 400 billion for digitization and sustainability and it needs to be spent.

{audio:1:04:50} That has to be $400 million instead of $400 billion?

{audio:1:05:03} The EPRs are supposed to raise 7.5 billion.

{audio:1:05:09} Next generation funds in Spain has been increased actually to €750 billion, to be spent in four years, and Spain will receive a large chunk of that money.

{audio:1:05:42} I see what you mean, is that $400 billion spread over 20 years?

{audio:1:05:50} Not 20 years; I think this budget was for five or six years.

{audio:1:06:02} Does that money come from the taxing authority of the EU?

{audio:1:06:09} Yes, it's the European funds.

{audio:1:06:25} I found a good link on this and you're absolutely right on the number. That is wild; I didn't realize the magnitude of this.

{audio:1:06:34} It is huge and why it is so important. There's a lot of information available on the European Commission websites, but a lot of these funds go to sustainability and digitization and they want to go after projects which have a big impact. I honestly think the HolyGrail goes to the heart of the issue, so I suspect it would be an initiative which gets access to more funds. There is an initiative to fund electric grids to improve access to electric car charging stations, but packaging has been cited as an area of improvement. I am sure they are already working on a way to access these funds and build the proper incentives for all involved players.

{audio:1:08:51} This was incredibly informative; I'm excited we got good news during it too.

{audio:1:08:59} Yes, I will read it more carefully now.

{audio:1:09:09} Congratulations, that has to feel so good in your seat.

{audio:1:09:13} I can't wait to read it and congratulate some of the people who are there now. I will remember this call all my life.

{audio:1:09:31} I'm glad we could play a very small part of it, but thank you so much.

Digimarc: Holy Grail 2.0 Developments

Former Director at Digimarc

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