Digimarc opened at 75 and has traded as high as 90 so far Thursday, after pricing its 4 million share offering at $20 late Wednesday, at the high end of its range of $16 to $20.

Portland, Ore.-based Digimarc is a leading supplier of digital watermark technology and "smart image" applications. The company’s patented software identifies, tracks, manages and enhances digital images using invisible digital watermarks.

At first blush, Digimarc might look like a sure winner, given the company’s strong marketing partnerships. Those partners include firms that together control more than 90 percent of the professional digital-imaging market, including San Jose, Calif.-based Adobe Systems Inc. {ADBE}, Canada’s Corel Corp. {CORL}, and Micrografx Inc. {MGXI}, based in Richardson, Texas, all of which are bundling Digimarc’s watermarking software in their own image editing applications.

"They’ve nailed that piece of the equation," says Charles Rutstein, an analyst at Forrester Research, based in Cambridge, Mass.

Nonetheless, Rutstein says investors should approach Digimarc with caution. "They are still fighting an uphill battle with their technology," he says.

Rutstein says he’s no longer surprised by the companies that investment bankers take public these days. Digimarc, he says, is emblematic of that "opportunistic" trend. "But, in this case, it’s a bit more difficult to make a case for the technology."

What troubles Rutstein is what he says is the still-unproven case for the approach Digimarc is taking to address the problem of pirated digital images.

Digimarc’s software embeds invisible, digital watermarks in images. The watermarks can be read, and the ownership of images identified, with software that’s distributed freely on Digimarc’s Web site. Customers can also purchase an annual subscription, currently priced at $1,500, to Digimarc’s MarcSpider service, which automatically roams the Internet and reports details back to the owners of digital images about where and when watermarked pictures have been found.

Check out Digimarc's home page

Playboy Enterprises Inc. {PLA}, for example, is a Digimarc customer. "We welcome new technology like Digimarc that helps us protect one of our most-valuable assets, our copyrighted images," says Eileen Kent, Playboy’s vice president of new media, in a testimonial that appears on the Digimarc Web site.

The problem, though, says Peter Cassidy, is the technology is easily defeated. Cassidy, a consultant and industry analyst, is the author of a NetscapeWorld Magazine research report comparing different approaches with digital watermarking.

Look at Cassidy’s comparison of digital watermarking technologies
Click here for a list of competing watermarking technologies

Cassidy, who’s also the founder of TriArche Research, based in Cambridge, Mass., says there’s already at least one software program floating around the Internet that helps users strip Digimarc’s digital watermarks from photos.

"I haven’t seen a lot of enthusiasm about Digimarc’s scheme," Cassidy says. "In fact, I see a movement away from digital watermarking toward technologies that encapsulate images with some kind of cryptography."

Firms in that market include Menlo Park, Calif.-based docSpace Inc., Redwood City, Calif.-based Tumbleweed Communications Co. {TMWD}, and numerous others.

"Digimarc certainly isn’t alone," Cassidy says. "I don’t see what they can do that is much better than anyone else."

Even if Digimarc’s watermarks couldn’t be stripped out of photos, Rutstein says the firm’s service would still have a limited value for another critical reason. "Even the best search engines can’t keep up with the staggering growth of content on the Internet," he says.

Recent research by the NEC Research Institute, for example, determined that the best search engines cover only about 15 percent of the Web, and that all search engines combined reach only 42 percent of the Internet.

"This means that MarcSpider is not likely to find all your watermarked images, particularly when they appear on sites that are not very heavily indexed by the major directories and search engines," acknowledges Digimarc in a disclaimer recently added to the firm’s Web site. "We hope that search engine coverage of the Web will improve over time. In the meantime, we trust you will continue to find MarcSpider to be a valuable tool in your online marketing and copyright protection programs," concludes the disclaimer.

Rutstein, however, says it’s unlikely search-engine technology will soon improve to the point where it makes Digimarc’s service more useful than is currently the case. "The trend lines indicate that’s not going to happen," he says.

Todd Raker, an equity analyst at Credit Suisse First Boston in New York, won’t comment on the prospects for Digimarc’s stock. But he’s decidedly more optimistic on the future of digital watermarking technology. "I definitely see it as a key-enabling security feature into the future," he says. "It has some very powerful end uses."

Raker says his more-positive appraisal is based on the growing popularity of similar technologies used to protect commercial audio recordings.

"There’s going to be a huge use for this technology," Raker says, adding that he expects to see strong players emerge in a variety of vertical digital watermarking niche markets. "This is just beginning to be deployed. There is room for several strong players in this market. It’s too early to say, for certain, how the technology will be used."

It’s a point echoed by Kristy Holch, principal at InfoTrends Research Group, based in Boston. "The increasing availability of high bandwidth Internet connections, combined with the mass adoption of digital imaging, are creating a whole new set of emerging applications that continue to enhance business and consumer applications," Holch recently wrote.

Digimarc is trying to lead in the deployment of at least one of those new applications. It’s a move that analysts say may be, at least in part, based on a recognition of the problems facing the company’s core watermarking application.

Digimarc’s "paper as portal" product, for example, which is still in development, uses the company’s basic technology to imbed invisible Web addresses and other information in hard-copy photographs, such as those found in newspapers and magazines. The company says the technology will enable users to point their PC-connected cameras at an image and them automatically be taken to a Web site where they can get more information, or purchase, whatever items are featured in the picture.

But Cassidy isn’t impressed. "How many people are actually going to want to do that?," he asks. "The simplest thing is to just put a URL in an ad. You really have to take ideas like that with a grain of salt."

Cassidy says the idea that PC owners will soon be pointing their cameras at images to help them find Web sites related to those pictures reminds him of a promise he says famed TV newsman Walter Cronkite made in a futuristic news program that aired in the early 1960s. "Cronkite said that by 2000 all the trolleys would be flying in the air. I’m still waiting for that one, too."

Digimarc posted a loss of $824,000 on revenue of $4.18 million for the nine months ended Sept. 30, 1999, as compared with a loss of $2.32 million on sales of $691,000 for the same period last year.

One customer, an unnamed consortium of central banks that uses Digimarc’s technology to deter bank-note counterfeiting, accounted for 92 percent of Digimarc’s sales during the first three quarters of 1999.