Unified messaging, once the great white hope of the added value services market, failed to take off in 2001. Industry players discovered that the jump from voice mailboxes to the new service was too great for both consumers and communications operators. The new system, which was supposed to combine the two most popular services of recent years – e-mail and voice mailboxes – failed at the adoption stage. CTI², founded on the principle of unified messaging, has located the root of the problem and is now redeploying simpler services designed to bridge the new world of unified messaging with the old world of voice mailboxes.

IBM (NYSE:IBM) and CTI² recently announced a cooperation agreement that is expected to change the industry map and better position CTI² among the industry giants in the value added services market.

In recent years, IBM has expanded its basket of products. No longer a company that sells only computers, IBM now sells services through its IBM Global Services division, now the world’s largest integrative group. Under the agreement with CTI², the division is responsible for integration, project development, installation and support of CTI²’s systems worldwide. IBM is also one of the world’s largest outsourcing services companies, including the sale, consultancy and implementation of scores of hosting centers. The division has an international presence in the US, Europe and the Far East.

“If CTI² rode a scooter until now,” said an industry source, “it is now riding a rocket. IBM has immense marketing power, and works with the world’s largest and most important companies.”

The product at the center of the cooperation agreement is no longer a unified messaging product, but a unified communications product. This is not merely a change in positioning. A glance at the added value service market reveals a real revolution.

It all began in 2001. The concept “unified messaging” was the hottest thing in the industry and every major communications operator, including T-Mobile, BellSouth (NYSE:BLS), SBC Communications (NYSE:SBC), published tenders. The sense of the market was that voice mailboxes had had their day, and now was the moment for the next generation. The logic behind the feeling asserted that after several years of two killer applications – e-mail and voice mailboxes – their integration would create a product at least as successful, and probably even more so.

But the optimism did not last, and it soon became apparent that their vision had exceeded consumers’ capacity to adopt. The new product hit a wall of consumer indifference in 2001, especially among individuals. Demand failed to meet expectations and communications providers, including those who had published tenders, decided to delay implementation to 2002.

The postponement had two parallel consequences: major communications providers discovered technical problems with unified messaging services. And adoption by consumers, who did not understand the advantages of the service, was very slow.

Simultaneously, the communications providers discovered that their business model did not meet expectations either. The operators initially thought that if they supplied next generation unified messaging services, they only had to buy the systems, which would be immediately followed by demand and increased revenue. This attitude was largely driven by marketers’ optimism, which exceeded even that of the analysts. They anticipated a multi-billion dollar market. The reality was that the unified messaging market totaled only $200 million at the end of 2001, including services given over the Internet for free, at large enterprises and to private customers of communications providers.

Then the telecom crisis hit. Operators faced financial difficulties, and reconsidered the launch of new products. Furthermore, third generation cellular, which was supposed to drive the revolution, will enter the market only in 2003, according to the more optimistic forecasts. The unified messaging service breakthrough has been postponed for now.

“Globes”: What now?

CTI² president and CEO Erez Marom: “The concept behind unified messaging held that the initial and natural target audience were the users of voice mailboxes and e-mail, the two most popular services of the past five years. But it didn’t happen, and there is no use arguing with the facts. The moment we realized it would not happen, we sat down and analyzed the situation in an attempt to understand why it didn’t happen, and what did happen.

“The lines of analysis were based on several figures: first, cellular operators and telecoms slashed their operating budgets; second, their warehouses were full of boxes they had played with for four years, but were now useless; and third, the last thing they needed were more boxes. It was obvious to us that we had to prove they could earn money from the product.

“We realized that communications providers wanted simple services that did not require a Ph.D. to use and comprehend. We went back to the technology and broke the product down. Instead of a single large product, we developed small packages, each of which was designed for a limited market segment, with fewer features. We also realized that the advantage of each service for each target audience had to be absolutely clear.

“After we re-evaluated the needs of the target audiences, we realized the most important thing of all: users of voice mailboxes and e-mail do not necessarily have the same profile. There are people who can't live without e-mail, and there are people who suffer withdrawal if they don't have a telephone in their ear every ten seconds, and there are users who want both services.

“We then defined several target audiences, headed by individual-householder users and individual-business users. These two target audiences are completely different. High-tech business-persons, for example, wake up in a different country every week, and from the moment they open their eyes, they must be linked to information. By contrast, home users gets most of their information from the Internet. Another target audience is the business sector, which can buy systems, or receive outsourcing services from the communications provider. We then made services-based definitions, which showed that each type of user needed a different kind of unified messaging system.

“Bottom line, we suddenly realized that unification is not always the best solution, and the platform’s multiplicity of programs had created an incomprehensible monster that no one understood how to use.”

What was the solution?

“The solution was to return to the KISS strategy – Keep It Simple, Stupid. We concluded that selling unified messaging today was like selling satellites to individuals by telling them, ‘You need this’. The average user would practically have to have an academic degree to understand what the unified messaging product could give him. No one knew what to do with it. Not the users, and not the communications providers.

“We decided to concede our 15-year headstart, and offer users something where they understood the reason why they should use it, and operators understood how they could make money. The solution is service packages that all run on an open and selective platform. The platform can provide many packages offering very focused and simple services to each market segment. The operator can provide all the services to each user profile, using the same platform.

“The operators don’t have to gamble on what the services of the future will be. They can start out with an improved voice mailbox, and then go on to advanced services. The new concept holds that it is necessary to offer a broad spectrum of applications and service packages, each of which will have a 10% to 40-50% adoption level. Compare this to unified messaging, the adoption of which is not expected to exceed 5% in the first stage, and that only to the business sector.”

CTI² VP marketing Boaz Gruener says, “Basically, we're offering a bridge between the simple and popular voice mailbox, and advanced services. The service packages offer an improved voice mailbox with additional capabilities, such as Internet access, transferring messages to an organization’s e-mail, computer access to voice messages at home or on a cellular telephone, combined fax and e-mail at an organization, etc. We expect that this bridge will increase demand for the product.”

How does your cooperation agreement with IBM fit it?

CTI² director of channel and partners David Zeldin: “The purpose of the cooperation agreement is to create a joint position for CTI² and IBM, among other things. Together, we will provide a comprehensive solution with marketing consultancy designed to tech customers how to market the product, how to make money from it, and how to obtain more added value from it.

“The joint product will include CTI²’s platform with IBM’s hardware and software components, including IBM’s mobile portal, UNIX servers, storage and operating systems. Tier-1 communications companies do not look for supplier-customer relations. They do look for people to buy their products. They look for long-term partners who will help them, advise, them, contribute to them, teach them, and sell to them.”

What advantages does the cooperation agreement give you?

Marom: First, CTI² will no longer come to a customer alone, but together with IBM. A communications company will see a financially solid company that can support complex solutions for years. A second advantage is IBM’s huge sales system that will be at CTI²’s disposal. IBM has relations with all the world’s telecom companies. The third advantage lies in IBM’s hardware-software solution that will allow CTI², a software company, for the first time to challenge competitors whose products also contain hardware.”

What is your market potential?

“The global added value services market, including voice mailboxes, amounts to several billion dollars now, and is forecast to reach $7 billion within five years. Most of the revenue will be derived from value added services that will be added to voice mailboxes.”

What are the most difficult hurdles the value added services sector currently face?

“There are several problems. Firstly, there were several new technologies, beginning with 3G cellular, that were supposed to generate considerable revenue for infrastructure manufacturers and service providers. As you know, that didn’t happen, and no one knows when it will.

“Secondly, there were several technologies that were launched with high hopes, such as WAP, which ended in equally great disappointments. Meanwhile, the profitability of existing basic services is falling, due to intensifying competition.

“The current situation is that there are technologies which have not yet been realized, technologies in use that have not met expectations, and services that no longer generate revenue. Consequently, most communications providers are baffled, and are asking themselves, ‘what next’?”

So what’s next?

“We are offering operators a platform built like Lego. Any type of desired service can be defined and connected. More blocks can be added quickly, simply and easily. The platform can handle link-ups and adaptations to all communications environments (cellular, fixed-line, Internet, etc.). It is open and easy to interface with other companies' systems, such as those developing mobile portals, information services, located based services, network entertainment, etc. The platform allows for changes and adjustments.

“This capability is the critical element that affects the time to market of new services. All communications operators are now trying to guess what will be the killer application in the next 1-4 years. They need to know that can redesign and redefine their services on the platform they are buying now, or in the near or distant future. They want clay that they can model any way they want.

“In conclusion, our technology allows communications providers to decide which services they will offer on the platform tomorrow morning, while being able to change or replace them later, without having to change the platform. They don’t have to guess everything now, because they can provide any killer application they want on the new platform.”

CTI² has raised $21.5 million to date in three financing rounds at a company value of $165 million. Shareholders include Chase Manhattan Bank (15%), Pitango Venture Capital (10%), Dovrat Shrem (10%), Aurum SBC Ventures (3%), Amdocs (NYSE: DOX) (1.5%), US Bancorp Piper Jaffray (1%), Yossi Vardi (5.5%), and the rest held by the founders and employees.