PictureTel Stock Plummets

<B> PictureTel Stock Plummets</B>
<I>Videoconference Software Seeks Solutions</I>

By Chris Davis

While travel and meeting managers have heard for years that videoconferencing is on the verge of becoming an alternative to corporate travel, it's never happened to any significant degree. But the financial beating endured by PictureTel Corp. in the first quarter of 1999 might just show why, eventually, videoconferencing technology finally will gain wide acceptance.

Andover, Mass.-based PictureTel last month announced that its stock lost 68 cents per share in the first quarter, a figure well above the 9-cent loss expected by Wall Street. The company attributed the financial hit to the recall of all SwiftSite II videoconferencing units, which company executives acknowledged didn't have all the bugs worked out when they hit the market, and the subsequent reversal of all recorded sales of that unit.

But the troubles of high-end, high-priced videoconferencing equipment may show the companies that their focus in the future should be on less-expensive desktop systems that can link together over the Internet or through increasingly less expensive cable or telephone lines.

The chief reasons more companies have not adopted videoconferencing, said industry analyst Jim Stone of Preferred Capital Markets in San Francisco, are the technology's price and their own fear of change.

"Corporations need time to acclimate to the idea of conferencing, but that process is nearly mature now," Stone said. "The technology is there, but somebody needs to see the value of the service and price elasticity and then promote it. Declines in price still need to occur. The terminals' prices have dropped, and now we are waiting for the transmission costs to drop further."

PictureTel vice president and CFO Art Fatum said the company hopes to turn a profit by the fourth quarter, and predicted that the greater technological capabilities many corporations now are building will lead to an increased acceptance of videoconferencing.

"There's always been this promise of a great breakthrough--that suddenly, videoconferencing will be as common as using the phone," Fatum said. "One of the biggest reasons that hasn't happened is that videoconferencing uses a lot of bandwidth. Traditionally, the only way to send compressed video and audio signals with any kind of quality is through an ISDN line."

The price of ISDN lines, like all technology, has been dropping and availability has been increasing. More companies have ISDN lines and are building local-area or wide-area fiber optic networks that connect offices around the country. "All of a sudden, we're seeing a huge shift in the amount of bandwidth available," Fatum said. "Companies have got lots of capacity and they need applications to run on that capacity."

The resistance to desktop videoconferencing, due primarily to its poor quality, will fade as ISDN lines become more commonplace, he predicted.

Still, building such networks is an expensive proposition and companies surely will wait to make sure the development will meet their needs. "It's an expensive problem to rectify if the wrong decision is made," Stone said.

He pointed to videoconferencing manufacturer and PictureTel competitor Polycom Inc. of San Jose, Calif., as an indicator of where the industry is headed, noting that "the $30,000-class market is declining rapidly as users are willing to settle for the $8,000-class Polycom equipment."

Polycom officials agreed that the lack of buyer interest in the high-priced equipment is not a temporary trend. "We have already seen a huge shift in the market away from high-priced conferencing systems to sub-$10,000 units," said product manager Jennifer Sigmund. "Polycom and other vendors have been able to provide higher quality audio and video, with equal or better functionality, at a substantially lower cost due to the advances in technology during the past two years."

Videoconferencing manufacturers also have made using their product less cumbersome. Sigmund noted that "systems in the past have been too difficult to install and to even use. Placing a call was a formidable task. Today, though, the interface is graphical, and placing a video call is just like placing a phone call."

The videoconferencing industry itself also has matured, allowing for the easy interface of equipment from different manufacturers, said Glenn Adamo, vice president of Sony Electronics' San Jose, Calif.-based videoconferencing division. Early videoconference systems were usually proprietary technology, and "unless the send and receive units were from the same manufacturer, it was impossible to communicate with other devices. But the development and adoption of standards-based technology should help to ease the acceptance of videoconferencing and move the focus away from technology-oriented issues to those of usage and benefits."

All that said, buyers could be forgiven for skepticism, considering that they've heard the videoconferencing-is-coming news for years, with little to show for it. This time, though, "if transmission prices drop in half or by a third, I believe the market will really explode," Stone said. "I see a future where videoconferencing is ubiquitous."

The future of videoconferencing also relates to the Internet. As the Internet matures and become more essential to the fabric of day-to-day business, and as the industry develops more Web-based products and interfaces, "lots of people will buy lots of end-point equipment and videoconferencing will finally become part of companies' strategic fabrics," Fatum said. "The full range of video-enabled activities, including streaming media and broadcast TV, are still kind of hard to use today. But they will rapidly become simpler and Web-based."

PictureTel plans later this year to announce new products and partnerships that will allow it to get involved in every aspect of the videoconferencing process, from the equipment itself to streaming-media services that will allow users to store the content of a videoconference and replay it later.

"We're revamping our whole product line," Fatum said. "We see a whole range of everything from low-end and low-cost videoconferencing equipment to high-end conference systems, providing services over the Web and working with partners to take advantage of store-and-deliver content.