Octel Communications Corp. - Company Profile, Information, Business Description, History, Background Information on Octel Communications Corp.

1001 Murphy Ranch Road
Milpitas, California 95035-7912

History of Octel Communications Corp.

Octel Communications Corporation was the leading manufacturer and provider of voice-mail products and services. The firm grew enormously during its 15 year history as the voice-mail market expanded dramatically.

Octel was founded by Robert Cohn, a product manager for a computerized instrumentation equipment company, and Peter Olson, an engineer. They met in 1981 when Cohn called Olson to fix a problem with a piece of electronic equipment that worked in the lab but not in the field. Cohn was so impressed with Olson's abilities that he suggested they start a company together.

The duo drew up a list of possible areas of specialization in the technology field and settled on voice mail because they thought it a good market niche. At the time, most voice-mail systems were made by giants like International Business Machines, whose products were large, expensive, and unpopular. Some smaller companies existed, but Olson and Cohn felt that they were not geared toward dealing with businesses in a professional manner. Olson and Cohn designed a business and product to fit this niche. Their business plan called for a voice-mail machine that would cost $10,000 to make and $50,000 to sell. They wanted it to take up no more space than a two-drawer filing cabinet and to be compatible with the major telephone systems then being used. Other than Octel, no voice mail system made by an independent company "integrated" with any PBX. No voice mail system offered by a PBX company actually integrated with its own PBX except for ROLM Corporation. Integration meant that the voice mail system could answer someone's phone with a personal greeting and light message waiting lights. Eventually, some of the major PBX manufacturers integrated their voice mail systems with their PBX, but only their brand. That is, competing voice-mail systems generally worked only with the manufacturer's telephone system, and none worked with all 80 PBX systems on the market. So whereas AT&T could sell its voice-mail system only to businesses owning an AT&T phone system, the Octel system could be sold to anybody.

With this business plan, Octel raised about $2 million in venture capital, effectively selling half of the company to various investors in the process. When the first product was finished, the Octel system took up was the size of a two-drawer filing cabinet and sold for $55,000. A competing system from IBM was the size of a small room and cost $250,000. The VMX system was even larger and sold for $500,000. Despite its small size, the Octel system was powerful: Olson had used advanced microprocessors made by Intel and Zilog and wired them to run in parallel.

After spending another $2 million, Octel had the system ready in early 1984. However, corporate purchasing departments usually took about a year to order new systems, a fact that was underestimated in Octel's business plan. By fall of that year the company had sold only about 10 systems. The firm changed its sales strategy, increased its marketing efforts, replaced the head of sales, cut costs and it raised another $7 million in venture capital. It only used $1 million of that money before the company generated its own cash. By 1985, orders for Octel's system began arriving. Voice mail was becoming more popular in corporate America, and thanks to its universal compatibility the Octel system sold very well for a first product by a new company.

Voice-mail machines (initially called "voice messaging" systems) essentially are computers dedicated to the purpose of exchanging messages in human voice. They were first used to solve the problem of intra-corporate communications delays because people could not reach others in the company across time zones because people were on the phone, in meetings, or the offices were closed. They are also able to answer phones and take messages, but for the first several years these systems were used more as message exchange devices than telephone answering systems. Voice-mail systems translate voices into digital information and store it. In the early stages, telephone answering machines were relatively new and many people were reluctant to leave messages with machines. However, voice mail offered many advantages. Because information is digital, messages can be copied or manipulated like other computer data. Thus an executive can send ten messages simultaneously or forward a message to someone else. Using touch-tone telephones, callers can select from menu options and route their calls without using a human operator. Octel's system also offered options such as playback controls (slowing down or speeding up a message during playback, pause, instant rewind), store, forward, reply, personalized greetings, the ability to pick up messages from any phone in the world, high security, and high quality voice recordings, Corporations were first beginning to evaluate the benefits of such systems when Octel's system came to market, and its high quality, rich feature content, very friendly user-interface and low price tag generated interest and orders. Besides the feature content, Octel was the only firm which offered a range of size of system (from small to very high capacity) and could network hundreds of systems together so they could form a worldwide virtual private message network within a company. Octel's systems were the most reliable on the market and could integrate with every major brand of PBX manufactured worldwide.

The firm became profitable in 1986, considered a fast takeoff for a start-up technology firm. A 1988 ruling court ruling changed telecommunications regulations to allow the regional Bell telephone companies to begin offering telecommunications services like voice mail. They were, however, not allowed to manufacture their own equipment, and several decided to use Octel's equipment in their systems.

Propelled by its sales to the Bells and enormous success selling to major corporations, Octel became the largest manufacturer of voice-mail systems in 1988, just four years after offering its first product. Its sales grew from $19 million in 1987 to $48 million in 1988. The voice-mail market was booming, growing 50 percent a year by some estimates, to reach $270 million in calendar 1987. In February 1988, Octel went public, raising $13 million by selling 16 percent of the company. The firm was looked over carefully by the financial community because it was the first high-technology company to go public after the stock market crash of October 1987. Later that year, in a sign of the growing importance of both Octel and the voice-processing industry, electronics giant Hewlett-Packard bought 10 percent of Octel for $26 million. Its new link with H-P gave the young company a marketing boost and a quick presence in Europe, where its products were to be sold under the Hewlett-Packard name. It also led to increased integration of Octel's products with Hewlett-Packard's electronic-mail and computer systems.

At the time, Octel was offering three voice-mail systems: The largest system was called Maxum and could handle up to 15,000 users. The medium sized system was called Aspen and could handle up to 2,000 mailboxes; and the Branch system, for smaller customers or branch offices contained up to a few hundred users.

In 1990 Cohn resigned as chief executive officer, wishing to spend more time with his family; he remained as Octel's Chairman and remained actively involved with the company, but not in an operating role. Douglas Chance, a 24-year veteran of Hewlett-Packard who had served on Octel's board, became CEO. Octel earned $18 million on sales of $160 million for 1990; voice-mail sales for its nearest competitor, AT&T, were $140 million.

With computer technology constantly improving, Octel's systems were rapidly becoming more sophisticated, providing the link between employees (who could be at a touch-tone telephone anywhere in the world) and their employer's computer systems. Universities were using the firm's PowerCall system for student registration. With it, the schools recorded course descriptions for students, who could then check whether a particular class was available and register for it right over the phone. In 1991 Octel introduced a device that attached to voice-processing systems and turned telephones into terminals, allowing users to interact with computers through the number pads on their telephones. The system, called the Voice Information Processing Server, let callers access databases, voice messages, and electronic mail and carried caller data throughout the call so that information--an identification number, for instance--did not have to be reentered.

By 1992 Octel not only held 20 percent of the voice-mail market but had 36 percent of the market to Service Providers (phone companies) which it called "Voice Information Services", or VIS. For this market, Octel provided very high capacity systems so cellular and wireline companies could offer voice mail to all their customers In fact, Octel was the first company to enter this business, which had exacting standards because of the high volume of calls that were processed and because the systems themselves were attached to equipment located in the central office of a telephone company. The quickly growing cellular telephone market accounted for many of the firm's sales to service providers By the end of 1992, the firm had installed 6,500 voice-mail machines, many at Fortune 500 companies.

The firm announced plans to introduce a universal mail box, a system that would collect messages from many sources: voice mail from a subscriber's business, home, and cellular telephones, as well as paper mail. It would also receive data, like faxes, to be printed out or viewed later.

In late 1992 Octel bought Tigon, Ameritech Corp.'s Dallas-based voice messaging subsidiary. Ameritech agreed to buy voice-processing services from Tigon. Octel made Tigon a wholly owned subsidiary and renamed it Octel Network Services. Ameritech had bought Tigon in 1988 but could not operate it at enough of a profit. Tigon was originally founded to provide outsourced management of large VMX systems (which had a high need for service and support) because VMX's support was lacking. At the time of Octel's purchase, Tigon had large corporate customers in most major U.S. cities, as well as some in Japan, Taiwan, Britain, Australia, and Canada. Because of the purchase, Octel recognized the need for outsourcing and shifted the focus of the company away from VMX (by replacing most of the VMX systems with large Octel systems) and providing outsourced management to large Octel customers. Outsourcing of Octel systems reduced the need for management staff on premise. Because of the economies of scale of Octel Network Services, Octel could reduce the cost of operation of its customers in a profitable manner to Octel. Octel quickly became the world's largest voice mail outsourcing company. Octel Network Services managed clients' voice-mail networks and engaged in disaster recovery, operations management, systems administration, and project management. These operations brought Octel a large source of recurring revenue to help balance the one-time profit of selling a voice-mail system.

Ameritech became an important client for Octel Network Services, which operated the voice-mail services that Ameritech offered to residential and small-business customers. By 1994 400,000 Ameritech residential customers were using the system, with thousands joining up every month.

In 1993, with the use of faxes proliferating in corporate America, Octel released three products for its Voice Information Processor: Faxagent, Faxbroadcast, and Faxstation. Each consisted of a card and software. The same year, the firm began a joint venture in Israel, hoping to gain access to some of that country's technical specialists. Meanwhile, Octel's operations were suffering under its new CEO and in November of 1993 Robert Cohn rejoined the firm as president and CEO. Total revenue for the year came to $338.5 million.

Octel saw an opportunity in operating voice-mail systems in developing countries, and by the mid-1990s it had major installations operating in Brazil and China. In these countries millions of customers wanted their own telephones but could not get them; thus many simply bought their own mailbox and checked messages from pay phones. The firm hoped this system would catch on in developing countries and become a major source of revenue. This concept was called "virtual telephones."

In early 1994 Octel took over the industry's first voice-mail company when it purchased VMX Inc. in a stock swap valued at about $150 million. While the company bore the name VMX, it was actually the surviving company of a merger between Opcom, a company started by David Ladd, and VMX, one of the first companies to offer voice messaging products. VMX had been poorly run and was on its last legs when it was taken over by Opcom. The merged company retained the VMX name because VMX was public and Opcom was not, so this was an efficient way for Opcom to become public without an IPO. By the time Octel bought VMX, very little of the original VMX company remained and all the products it offered were the second generation Opcom products. Octel's first move was to write software allowing all systems from both companies to network together and to port VMXworks, a software application, to Octel's systems. Several VMX vice-presidents took similar titles in related areas at Octel including David Ladd who became the CTO of Octel. VMX was strong with smaller companies and had a good distribution channel of small telecom distributors while Octel was strong with major companies and service providers and had a well developed direct channel of distribution.

Octel now had the two most popular user interfaces for voice mail. The purchase also brought on VMX's Rhetorex subsidiary, which designed and manufactured voice-processing components which were used in PC-based voice mail systems.

Octel had an installed base of 37,000 systems including those that came with the VMX deal. With new applications like fax products the firm hoped to capitalize on this market to make secondary sales. Meanwhile, Octel continued to win customers. In 1994 data-processing giant Electronic Data Systems, which had purchased voice-mail systems from Octel in the past, chose to outsource the management of its internal network of Octel systems to Octel Network Services. The seven-year contract called for Octel to provide facilities management and services for over 100 Octel systems at Electronic Data Systems locations. Octel also signed long-term contracts with Kodak, Blockbuster Entertainment, and Texas Instruments.

In 1994 Octel finished its new corporate headquarters, a five-building complex in Milpitas, California, with 368,000 square feet of space. VMX employees also moved into the space.

With the increasing prevalence of electronic mail and the increasing power of personal computers, the creation of voice-mail products for the personal computer became more important. In 1994 Octel released Visual Mailbox, a software program that allowed users on local area networks to use personal computers to access voice mail and faxes. The computers did not need built-in multimedia support, although the software required users to be on an Octel voice-mail system. In 1995 Octel demonstrated for a new concept in voice messaging by building a server-based system which integrated with Microsoft's Exchange messaging server. This new system was called Unified Messaging and enabled users to integrate voice, fax, and e-mail. Also in 1995 Bell Atlantic signed a three-year agreement to use Octel's OptiMail, which permitted the outsourcing of voice and fax messaging services.

In the mid-1990s Octel was the leading company in its field and many industry analysts believed it was well positioned for future growth. In 1997, Octel attempted to purchase the voice messaging subsidiaries of Northern Telecom (now Nortel) and Lucent (now Avaya). While both of those major PBX suppliers offered voice mail, they were selling their systems mainly to smaller accounts and had no service provider offering. Northern's and Lucent's systems were built into the PBX. By doing so, they eliminated some duplicate circuitry which is needed in a stand-alone voice messaging system, most notably the expensive telephone line cards. By purchasing these divisions, Octel could offer the PBX supplier its popular user interface, proprietary networking protocols, access to its large array of products for high-end customers and the services of Octel Network Services. In return, Octel could gain access to the "built-in" market only available to the manufacturer of the PBX. Northern Telecom was not interested, but Lucent was. The interest level by both parties was high and the negotiations only lasted a few months. As the two parties came closer, Lucent reversed the proposal and offered to purchase Octel. In July, 1997, a definitive purchase agreement was reached and by September, 1997 Octel became a wholly owned subsidiary of Lucent Technologies. In October of 2000, Lucent spun of its Business Systems Division to Avaya. The portion of Octel which designed, manufactured and sold voice messaging systems to businesses was spun off to Avaya while the part of Octel dealing with service providers stayed with Lucent.

Principal Subsidiaries: Octel Network Services; VMX Inc.

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Further Reference

Bylinsky, Gene, "How to Shoulder Aside the Titans," Fortune, May 18, 1992, pp. 87--88.DiLorenzo, Jim, "Octel to Acquire VMX," Telephony, February 7, 1994, pp. 14--16.Edwards, Mike, "Octel Brings Phones, Computers Closer Together with Voice Processing System," Computing Canada, May 9, 1991, pp. 43, 49.Lee, Paula Munier, "Going Public After the Crash," Small Business Reports, October 1989, pp. 32--36."Octel Communications Corporation," Wall Street Transcript, July 17, 1989, p. 94, 284."Octel Communications Names New President and Chief Executive," Wall Street Journal, October 9, 1990, p. B13.Pitta, Julie, "Panic!" Forbes, October 28, 1991, pp. 102--103.Pollack, Andrew, "Hewlett-Packard Sets 10% Purchase of Octel," New York Times, August 12, 1988, p. D4.

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