Creating a Corporate Videoconference Market

Computer products that allow audio and visual presentations on desktops have captured the imaginations of consumers, but information systems managers at businesses have been loath to create the applications for corporate users. And analysts and industry experts are divided on whether that will change within the next few years.

There have been various incarnations of desktop systems, but there is no significant market right now, said Tom Pincince, a senior analyst with Forrester Research, Cambridge, Mass. Companies cannot conceive of a set of business applications with a compelling need for desktop videoconferencing, he said.

Those in the videoconferencing industry may have more than obvious reasons to promote the technology. Intel Corp., which sells the most desktop videoconferencing units according to Gartner Group, wants to promote demand for increasingly powerful computer chips. Network providers like the idea of increased bandwidth requirements, which would lead to more revenue. "That's why companies like AT&ampT have been in the forefront of videoconferencing for 40 years," said Neil Starkey, executive vice president and chief technology officer for DataBeam Corp., a videoconferencing technology company.

DataBeam does not have the public recognition of Netscape Communications Corp., but it does have the potential to be just as influential as the World Wide Web browser manufacturer. DataBeam, based in Lexington, Ky., has licensed its videoconferencing technology to more than 35 companies -- and those are just the publicly announced deals. The firm's clients include technology giants Sun Microsystems Inc., Intel Corp., Picturetel Corp., AT&ampT and Netscape.

The private company was started in 1983 when its founders saw the need to electronically share information in a real-time format. The company originally focused on room-based videoconferencing systems, and even won a contract to support the Star Wars missile defense program. In 1992, the company started work on its PC version, which was completed in 1993.

Applications can be broken into two groups: those that are for the Internet and those that aren't, said Al Lill, vice president and research director with Gartner Group, Stamford, Conn. Internet applications are touted by "the cognoscenti and dweebs," but businesses aren't picking them up, Lill said.

Firms are interested in non-Internet desktop videoconferencing capabilities, he asserted. This year, projections indicate that 100,000 to 120,000 desktop videoconferencing units will be sold. There will be a major market explosion by late 1997 or early 1998 that will cause that number to quadruple, estimated Lill.

Several factors will combine to generate such explosive growth. First, Intel will introduce its new MMX technology, which is built into its Pentium technology to allow better processing of audio, video and graphics. This eliminates the end-user cost. Second, the cost of a camera will drop to about $50. Finally, local and wide area networks will have gone through their next major upgrade and will be able to handle the increased requirements, Lill said.

Networks might be able to handle two to 20 users, but most company networks, as configured today, would blow up if they had to handle 50 to 100 users, Lill asserted. The network concern is more a question of quality than an issue of bandwidth, he said. Audio and video are very time-sensitive -- a millisecond delay could destroy the integrity of the audio or video stream. For example, imagine hearing the following if the underlined spaces represent places where the audio stream cut off: "the _ual_ty is a_solu_ely c_itical." Words would be chopped into unintelligible syllables. The sentence should read "the quality is absolutely critical."

And the quality of today's desktop systems, according to Forrester's Pincince, is like a "really, really bad Godzilla movie" -- for video it's 10 frames a second, not real movie quality.

Intel recently announced that its ProShare line of systems will allow up to 24 users of desktop systems to link together, presenting a marketing challenge to makers of room-based systems and network managers.

But even before videoconferencing becomes an issue, network managers must increase capabilities to handle data conferencing. The International Telecommunications Union, Geneva, last month passed the T.120 standard for data conferencing.

Microsoft has already announced plans to follow the standard and include the data-sharing capabilities in its next generation of Windows NT and Windows 95. Sun Microsystems will add the same capabilities to its UNIX platforms and Apple also will add data conferencing capabilities to its operating system.

Everyone in the industry agrees that data is essential to the success of desktop videoconferencing, said DataBeam's Starkey. People don't attend face-to-face meetings without expecting to see a slide presentation or receive paper handouts. They have the same expectations for videoconferencing, he said.

One of the impediments to the success of desktop videoconferencing will be the rise of data conferencing. Businesses can see the value of sharing documents and data, but why do people need to see each other to work together, pondered Pincince.

Still, others argue that by including the capabilities in the operating systems of multimedia computers, there will be no additional consumer cost -- videoconferencing effectively will be a zero dollar purchase. Applications included in the operating system may not be the most robust, but it gives people the opportunity to try the technology, said Starkey.

Instead of developing a market by starting pilots in test markets, companies are trying to get as many people as possible interested in the technology in the shortest time. Companies are hoping that as people become used to the technology at home, they will start to demand the same capabilities at work.

Machines oriented toward home users should be in the store by this fall, just in time for the Christmas retail season. Analysts are anticipating that people will be able to purchase home PCs fully equipped for videoconferencing -- including a camera -- for $1,600 to $2,000.

Whether consumers will buy the new machines, dubbed "Grandma phones," remains to be seen, but industry experts share a positive outlook. Theoretically, the home market is bigger than the business market, but it will be years before the revenue is greater, said Kevin Flanagan, marketing manager for Picturetel, based in Danvers, Mass. A month ago, Picturetel announced that it is working with PC manufacturers and modem manufacturers to bundle its technology with their equipment.

No matter what a person does during the day, at night they turn into a consumer, said Flanagan.

Picturetel, according to Gartner, sells less units than Intel, but earns more revenue. The company sells a full line of videoconferencing products, from low-priced desktop systems that retail for $1,500 to top-of-the-line room systems starting at $20,000. Desktop systems account for 75 percent of Picturetel sales, but only 10 percent of its profit.

Companies earn razor-thin margins on computer equipment and desktop videoconferencing equipment is really a PC peripheral, so profits are much lower, Flanagan said. Picturetel's revenue has grown at a rate of 30 percent to 40 percent a year, Flanagan said.

Total revenues for 1995 were $346.8 million, compared to $255.2 million in 1994 -- a 36 percent increase. Net income for 1995 was $19.6 million compared to $4.6 million for 1994, nearly a four-fold increase.

In May, Intel had announced that it would work with manufacturers to include its ProShare technology in home-based machines with the caveat that they be Pentium systems. The company is marketing it as a way for distant families to stay in touch. Motion video quality would range from four to 12 frames per second, and only one phone line is required.

Even if the consumer market takes off as expected, it may be quite a while before business use becomes "as ubiquitous as fax machines [are] today," said Starkey.

In the past, defense and financial were the biggest markets, but now no one industry segment comprises more than 12 percent of the desktop video conferencing market, said Lill.

Depending on what measures are used, it took five to 10 years for the fax machine to become pervasive in the business world, Starkey said. Companies first moved to fax machines to gain a competitive advantage, then it became a competitive disadvantage if you did not have one. The same will hold true with desktop videoconferencing.

Some DataBeam Partners:

Apple Computer

AT&ampT

British Telecom

Cisco Systems

Intel

Microsoft

MCI

Motorola

Netscape

Picturetel

Sony

Sun Microsystems

For a full list, visit the company's home page at http://www.databeam.com

Picturetel Revenue Highlights:

(in millions)

1995$346.8

1994$255.2

1993$176.2

1992$141.4

1991$78

1990$37