Octel Messaging

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Octel Messaging

1001 Murphy Ranch Road
Milpitas, California 95035-7912
U.S.A.
Telephone: (408)321-2000
Fax: (408)321-2100
Web site: http://www.octel.com

Wholly Owned Division of Avaya Inc.
Founded: 1982
Employees: 3,000
Sales: $564 million (1996)
NAIC: 33421 Telephone Manufacturing Apparatus; 334418 Printed Circuit Assembly (Electronic Assembly)Manufacturing; 33429 Other Communications Equipment Manufacturing

Octel Messaging, formerly known as Octel Communications Corporation, is a voice-messaging service company that became a division of Lucent Technologies Inc. in September 1997, and was then spun off as part of Avaya Inc. in September 2000. Along with Octel’s messaging products and services, Avaya offers voice, converged voice and data, customer relationship management, multi-service networking, and structured cabling products and services. Avaya operates as a global leader in messaging and cabling systems, and holds a strong portion of the U.S. market for enterprise voice communications and call center systems. Octel, which was established in 1982, grew quickly as the voice mail market rapidly expanded during the 1980s and 1990s. In 2001, the division served over 100,000 customers in 90 countries, catering to all types of businesses, governments, education institutions, wireless service providers, and telecom vendors.

OcteVs Beginnings in the Early 1980s

Octel was founded by Robert Cohen, a product manager for a computerized instrumentation equipment company, and Peter Olson, an engineer. They met in 1981, when Cohen called Olson to fix a problem with a piece of electronic equipment that worked in the lab but not in the field. Cohen 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 was a good market niche. At the time, most voice mail systems were made by giants like International Business Machines (IBM), whose products were large, expensive, and unpopular. Some smaller companies existed, but Olson and Cohen felt that these other small companies were not geared toward dealing with businesses in a professional manner. Therefore, Olson and Cohen designed a 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 closet and to be compatible with the top ten telephone systems being used at the time. Competing voice mail systems generally worked only with the manufacturer’s telephone system, and none worked with all 80 PBX systems on the market. Therefore, 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 finished, the firm’s system took up as much room as a large suitcase and sold for $55,000. A competing system from IBM was the size of a small room and cost $250,000. Despite its small size, the Octel system was powerful; Olson had used advanced microprocessors made by Intel and Zilog.

After spending another $4 million, Octel had the system ready in early 1984. However, corporate purchasing departments usually took about a year to order new systems—something that was overlooked when Octel’s business plan was written. By fall of that year, the company had sold only about ten systems. The firm had to cut costs and raise another $7 million in venture capital. By 1985, however, 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 were essentially computers dedicated to the purpose of answering telephones and recording the human voice. Voice mail systems translated voices into digital information and then stored it. To keep file sizes small, much of the information was stripped out, which sometimes led to a tinny quality that some users found objectionable. Also, telephone answering machines were relatively new, and many people were reluctant to leave messages with machines. Voice mail, however, offered many advantages. Because the information recorded was digital, messages could be copied or manipulated like other computer data. Thus, an executive could send ten messages simultaneously or forward a message to someone else. Also, using touch-tone telephones, callers could select from menu options and route their calls without using a human operator. Octel’s system also offered options such as slowing down or speeding up a message during playback and automatic call-forwarding. Corporations were first beginning to evaluate the benefits of such systems when Octel’s system came to market, and its low price tag generated interest and orders.

Rapid Growth in the late 1980s and Early 1990s

The firm became profitable in 1986, which was considered a fast takeoff for a start-up technology firm. Then, a 1987 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 therefore Octel benefited when several decided to use its equipment in their systems.

Propelled by its sales to the Bells, Octel became the country’s largest manufacturer of voice mail systems in 1988, just four years after offering its first product. In just one year, its sales grew from $19 million in 1986 to $48 million in 1987. The voice mail market was booming, growing 50 percent a year by some estimates, to reach $270 million in 1987.

In February 1988 Octel went public, raising $7 million by selling 15 percent of the company. The firm was looked over carefully by the financial community because it was one of the first high-technology companies 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. 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 two voice mail systems: Aspen systems were designed for large businesses and could contain up to 7,500 mailboxes; the VPC 100, which was engineered for smaller customers, contained up to 100 mailboxes.

In 1990, Cohen resigned as Octel’s chief executive officer, citing the need to spend more time with his family. He remained on Octel’s board, however. Douglas Chance, a 24-year veteran of Hewlett-Packard who had previously served on Octel’s board, became the company’s new CEO. Octel earned $18 million on sales of $160 million for 1990; voice mail sales for its nearest competitor—industry giant 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 also beginning to use 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. The system also carried caller data throughout the call so that information—an identification number, for instance—did not have to be reentered.

The Tigon Purchase: 1992

By 1992, Octel not only held a 20 percent share of the voice mail market, but also had 36 percent of the market for voice-information services (in which telephone service providers buy voice mail systems, then rent voice mail services to 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 voice information services sales. The firm had installed 6,500 voice-mail machines, many at Fortune 500 companies. The firm also 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.

Company Perspectives:

Avaya’s Octel Messaging Division is committed to connecting people throughout the world via messaging, freeing them to communicate unconstrained by time, place, and space.

Later that year, Octel bought Tigon, Ameritech Corp.’s Dallas-based voice messaging subsidiary. Ameritech had bought Tigon in 1988, but could not operate it to achieve a big enough profit to make it a worthwhile holding. Following the sale of Tigon to Octel, Ameritech agreed to buy voice-processing services from Tigon. Octel made Tigon a wholly owned subsidiary and renamed it Octel Network Services. 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 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 one of the most important clients 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 of new customers joining up every month.

Acquisitions and International Growth in the Mid-1990s

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. Also in 1993, Robert Cohen rejoined the firm as president and CEO, to fill what the company had come to feel was a gap in its management. 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.

In early 1994, Octel took over the industry’s first voice mail company when it merged with VMX Inc. in a stock swap valued at about $150 million. Octel’s first move was to write software allowing the two systems to network and to port VMXworks, a software application, to Octel’s systems. Several VMX vice-presidents took similar titles in related areas at Octel.

Octel now possessed the two most popular user interfaces for voice mail. Analysts expected the acquisition to help Octel as voice processing became based less on the telephone and more on the personal computer. The purchase also brought with it VMX’s Rhetorex subsidiary, which designed and manufactured voice-processing components.

At that point, 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 use Octel’s voice-processing 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 a system using Octel’s VMX 200/300 voice mail system. Octel believed that voice mail would likely be provided on local area networks as they became more powerful and considered the moves an important way to prepare for future market changes.

In 1995, Octel demonstrated add-ons for Microsoft’s Exchange messaging server that 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.

OcteLink, a network service that could integrate messages from any voice-mail system, was also developed in 1995. By the following year, both Bell Canada and Inland Steel Company and its subsidiaries had signed on for its services. In 1996, Octel also teamed up with Qualcomm Inc. in a marketing agreement that would allow Qualcomm to sell Octel’s Sierra voice processing platform and applications to global wireless customers. Octel’s PC division also launched Smooth Operator Ultra Lite, a product that was attractive to the small office market because of its lower price point and diverse capabilities.

Octel also continued to expand internationally, and in November of 1996, Brazil’s Telesp—the largest telephone company in the country—began using Octel’s Sierra product. Octel also signed contracts worth over $28 million in Japan and China.

Key Dates:

1982:: Robert Cohen and Peter Olsen establish Octel.
1986:: The firm records its first profit.
1988:: Octel goes public and becomes the largest manufacturer of voice mail systems.
1992:: Octel acquires Tigon Corporation and becomes the world’s largest voice mail outsourcing company.
1994:: Company merges with VMX Inc. and new corporate headquarters are established in Milpitas, California.
1996:: Octel forms partnerships with Qualcomm Inc. and Brooks Fiber Communications.
1997:: Lucent Technologies acquires the firm.
1998:: Company signs a multi-million dollar contract with Ameritech Services Inc.
2000:: Octel becomes part of Lucent’s spin-off, Avaya Inc.

Perhaps the most remarkable event in 1996, however, was the passing of the Federal Telecommunications Act of 1996, which allowed competitive local exchange carriers (CLECs) into regional markets. In order to be competitive in these markets, the CLECs had to offer customers a wide range of telecommunications services, opening up a new customer base for Octel. Sure enough, after the act was passed, Octel signed a multi-million dollar agreement with Brooks Fiber Communications, a national provider of competitive local exchange services.

The Lucent Technologies Purchase: 1997

Octel’s expertise in voice mail services and messaging systems made it attractive to telecom industry giant Lucent Technologies, a firm looking to gain market edge in the growing global messaging services industry. In September of 1997, Lucent Technologies acquired Octel for $1.8 billion—$31 per share. Bill O’Shea, president of Lucent’s business communications unit, stated in a July 1997 Telephony article, “Lucent is looking at ways to support the expansion of its core business, and Octel has the capabilities to get us where we want to be in the messaging industry.” At the time of the deal, the voice mail services industry was securing $2.3 billion in sales and was anticipated to continue growing by 20 percent per year.

In a company press release, Octel CEO Cohn stated, “the Lucent/Octel combination will allow us to do many more things for our customers. And Lucent’s commitment to messaging means that we will be an important part of its future.” The deal also brought leadership to Octel, who over the past few years had missed product deadlines, and—with the exception of Cohen—was lacking a strong executive staff.

After the acquisition, Octel operated as Lucent’s Octel Messaging Division. Just months after the integration, the division landed its largest contract in its history—a five-year multi-million deal with Ameritech Services Inc. Under the terms of the contract, Octel Messaging would manage over 1.2 million voice mailboxes for Ameritech, as well as provide its voice messaging services. The division also formed the Lucent Messaging Integrator channel, aimed at the $2 billion unified messaging market. Building upon Octel’s Unified Messenger—which was developed in 1997 and allowed a user to review, reply to, forward, and delete, voice mail and email messages using a telephone or personal computer—the channel supported the product by allowing members of the channel to sell the unified system. Members of the channel included Digital Equipment Corporation, Software Spectrum Inc., and XLConnect Solutions Inc.

The Creation of Avaya Inc

By 1999, market research firm Frost & Sullivan ranked Lucent as the leading provider of unified messaging software in the U.S., with a 24 percent share of the market. The future of the Octel division however, became uncertain as Lucent began to falter in the new millennium. In January 2000, stock fell by 30 percent after the firm announced that revenues for the period ending December 31, 1999, would fall short of expectations by $1 billion. In fact, revenues for the remainder of the year disappointed shareholders. In October, Henry Schacht, former Lucent CEO, came out of retirement to take over the firm. After drastic errors in fourth quarter reporting in 2000, stock fell by 80 percent to $13 on December 27, 2000—a $216 billion market capitalization loss.

Problems related to Lucent’s inadequate launch into the optical networking market, and its shortcomings in the packet switches market, were targeted as causes for its financial problems. In response to these issues, the company began consolidating operations and cutting jobs. In order to focus on its core businesses—optical, data, and wireless networking—Lucent spun off its microelectronics interests and enterprise networks businesses to its shareholders, creating two separate entities. Octel, which was a division of Lucent’s enterprise networks group, became part of Avaya Inc. The spin off was complete in September 2000. Avaya was comprised of Octel’s operations as well as other Lucent properties that were part of its enterprise networks group. It operated as a leading provider of communications systems and software to businesses around the world. The company provided services to nearly 80 percent of the Fortune 500 companies, and secured $7.6 billion in sales in fiscal 2000.