PictureTel Corp. History

Address:

100 Minuteman Road
Andover, Massachusetts 01810
U.S.A.

Telephone: (978) 292-5000
Toll Free: 800-716-6000
Fax: (978) 292-3300

Public Company
Incorporated: 1984 as PicTel Corp.
Employees: 1,544
Sales: $466.4 million
Stock Exchanges: NASDAQ
Ticker Symbol: PCTL
SICs: 3669 Communications Equipment, Not Elsewhere Classified; 7372 Prepackaged Software

Company Perspectives:

The Mission of PictureTel is to be the worldwide leader in providing high-quality visual collaboration solutions that enable our customers to meet and work effectively and productively at a distance--anywhere, anytime.

Company History:

PictureTel Corp. is the world's leading manufacturer of video communications systems for use over conventional or high-speed telephone lines. The company offers several systems, including relatively inexpensive models that provide audio/visual surveillance, more complex models that enable personal computer (PC) users to view each other on their computer screens, and complex multipoint systems that allow people in several locations to communicate at once.

Origins

The concept of video communications emerged during the 1960s, when American Telephone and Telegraph Company (AT&T) developed a telephone capable of sending a series of snapshots simulating motion over its lines, which were then displayed on an accompanying video screen. The device originally was intended for use in residential markets, but when market research indicated that users were uncomfortable with the idea of being seen during telephone conversations, plans to continue with the development of the "picture telephone" were stalled.

Video communications would later have more practical applications in the business community, which welcomed less costly and time-consuming alternatives to the travel involved in corporate meetings. In the 1970s AT&T again tried to exploit its video network by establishing studios in major cities, where video communications were made available to businesses for a rental fee. The costs involved in operating the system, reflected in the rental fees, proved exorbitant, however, discouraging demand for the service. Opportunities for companies other than AT&T to develop and manufacture video communications systems were limited during this time, as the Federal Communications Commission (FCC) imposed regulations and specifications for equipment that interconnected with the public telephone network. In 1984, however, with the divestiture of AT&T, barriers to entry in the telephone equipment market came down.

Improvements in video communications were also contingent on modifications to the country's telephone network system. Designed only for voice communication, conventional telephone lines had an extremely limited bandwidth that provided only a narrow frequency range; for proper transmission, video images required enormous bandwidths. The development of digital electronics technology helped overcome this problem. Digital electronics created more data transmission space by using algorithms to replace repetitive or superfluous signals with simpler, shorter codes, a process known as data compression.

Two experts in this technology were Brian L. Hinman and Jeffrey G. Bernstein, long-time friends and colleagues in the electrical engineering graduate studies program at the Massachusetts Institute of Technology during the 1970s. At MIT, Hinman and Bernstein focused on the science of image processing through visual data compression, gaining valuable technological guidance from their faculty advisor, Dr. David Staelin. The three conceived of a plan to develop and market a line of video communication devices based on a 56-kilobit per second translating interface, or "codec," they had assembled. This system would allow images to be sent over telephone wires.

Hinman, Bernstein, and Staelin gained financial backing from Robert Sterling, an entrepreneur specializing in high-technology ventures, and the PicTel Corporation was formed on August 13, 1984. PicTel established a corporate office and laboratory in Peabody, Massachusetts, where work commenced on software and hardware for the 56-kilobit per second codec.

The company drew its management team from some of the country's most prominent corporations. Robert Bernardi and Dr. Norman Gaut were recruited from companies in Massachusetts' high-tech industrial corridor. Dr. Ronald Posner, former head of the Harris Corporation's satellite division, became president and CEO, and Thomas Spaulding, formerly of Multilink, Inc., became chief financial officer.

Before it had even developed a product, the company went public on November 8, 1984, selling 2.2 million shares at $2 per share. On December 4, the company's underwriter, S.D. Cohn & Company, purchased 330,000 shares, reflecting growing confidence in PicTel's project. Product development continued through 1985 without a single sale. Early in 1986, however, PicTel developed its MCT algorithm, which reduced the bandwidth necessary for transmission of an acceptable video image from 768 kilobits per second to just 224.

Further Technological Developments in the Late 1980s

In July the company introduced its first product based on the MCT algorithm, a software-based codec called C-2000. Although the device's applications were limited, few other companies were as far along with this technology as PicTel, and work continued on improvements in the product through 1987. During this time, the company changed its name to PictureTel to better reflect its focus on picture transmission and to distinguish its name from the technical term "pixel," which referred to the picture elements in a video image.

In 1988 PictureTel developed a new image coding system, called hierarchical vector quantizing, which required a bandwidth of only 112 kilobits per second, a rapid rate made possible by the system's ability to weed out redundant image transmissions, or those that reflected little or no movement. The company also introduced two new products that year: the C-3000 video codec and the V-2100 videoconferencing system. The C-3000 was compatible with the C-2000 and performed as well as any competing system on the market, at half the price and half the size. The V-2100 system was enclosed in a wheeled cabinet that enabled users to set up a video conference from any room that was properly wired.

In January 1989, AT&T chose PictureTel as the equipment vendor for an international video conference it held. The demonstration provided two-way, full-motion voice and video connection between PictureTel headquarters and an AT&T office in Paris. Other PictureTel demonstrations followed, including one for its remote-control V-3100 videoconferencing system and another that featured the Px64, which allowed PictureTel systems to be connected to those developed by other manufacturers. By the close of 1989, PictureTel had shipped more than 70 percent of the videoconference systems in use throughout the world. While the company's revenues tripled between 1987 and 1988, to $18.6 million, PictureTel had yet to turn a profit.

Several other product extensions were introduced in 1990, incorporating larger monitors and more rugged construction. PictureTel developed a one-way transmission system for surveillance use, enabling security groups to monitor remote locations through inexpensive, simple telephone connections. The company's Software Generation 3 system provided better picture quality and seven kilohertz of audio bandwidth at the same 112-kilobit per second switched data rate. By marketing entire video systems, rather than just the codec devices, PictureTel reaped a larger margin on each system sale. Shipments of videoconferencing systems increased by 40 percent over 1989, to 770 units. Revenues increased a further 99 percent over the previous year, to $37 million.

In January 1991, PictureTel introduced a new family of videoconferencing systems under the System 4000 name. The line included four models, ranging from small consoles to large conference room devices. System 4000 included a proprietary audio technology called Integrated Dynamic Echo Cancellation (IDEC), which helped prevent feedback that could produce annoying echoes. The System 4000 became PictureTel's flagship product line. At two-thirds the cost of competing systems, it also had considerable demand.

PictureTel's primary customer base consisted of large corporations with offices in multiple locations. These customers laid out in excess of $20,000 for each system and also paid for the special switched data links necessary to form a network. Although a substantial investment, the PictureTel videoconferencing system could pay for itself in as little as a year. Executives who formerly convened in person, incurring substantial airline and hotel costs, could now meet in the comfort and convenience of their own offices.

1991: Partnership with North Supply

By 1991, however, PictureTel had nearly exhausted its market among the large Fortune 500 companies that could afford such a system, and the company began making efforts to boost sales of videoconferencing equipment to smaller companies. Key to this effort was a marketing partnership with North Supply. Under the terms of the agreement, PictureTel products were sold through North Supply dealerships. The company soon introduced a new low-cost product line, which could be used by companies of modest means or added to enhance existing networks.

In April 1991, with investor enthusiasm in the company running high, PictureTel issued another 2.3 million shares, raising more than $40 million in equity capital. In September, PictureTel introduced its M-8000 multipoint bridge, a device that enabled users to conduct as many as eight simultaneous videoconferences among 16 users.

Although PictureTel led the industry in videoconferencing technologies, it remained a small company with limited marketing resources. To increase its capital, PictureTel established a joint marketing agreement with IBM, which welcomed the opportunity to leverage PictureTel's products into its own flagging line of computer products. As an IBM "multimedia business partner," PictureTel provided full-motion color video technologies that enhanced IBM's personal computers, allowing videoconferences to be conducted from individual work stations. PictureTel ended the year with record earnings, due primarily to the success of the System 4000 product line. Reporting a profit for each quarter, the company's revenues grew to $78 million and net income reached $6 million.

PictureTel sealed another series of important joint marketing agreements in January 1992. In one agreement, AT&T agreed to handle sales and service of an AT&T videoconferencing product based on PictureTel technology. A separate arrangement was established under which Bell Atlantic's seven telephone companies would directly handle sales and service of PictureTel products. The company also established a Japanese subsidiary to handle sales of videoconferencing products in Japan. A month later, the company finalized similar agreements with Mercury Communications in the United Kingdom, as well as with the U.S. telecommunications corporation Sprint. PictureTel videoconferencing technologies also were marketed as part of the Lotus Notes software application.

Total revenue for 1992 exceeded $141 million, net income grew to $10.7 million, and shipments numbered more than 2,850 units, marking a second year of profitable operation for PictureTel. With such success in the marketplace, however, PictureTel showed signs of vulnerability to price competition from such rivals as Vtel Corporation and Compression Labs. To prevent losses, PictureTel reduced prices on its System 4000 family by 20 percent and introduced an entry level product called the Model 150E. Priced at $18,500, the system could be leased for only $500 per month, making videoconferencing affordable for even the smallest and lowest margin businesses. Other low-cost videoconferencing products included the new PictureTel LIVE, PCS 100 desktop, and System 1000 lines, all of which were compatible with international standards and, therefore, operable with any standard-based system.

In an effort to enhance its existing product line, PictureTel acquired KA Teletech, a Baltimore-based developer of scheduling, reservation, accounting, and network management software for the videoconferencing industry. The enterprise was relocated subsequently to PictureTel headquarters in Danvers, Massachusetts.

During this time, PictureTel launched its first national advertising campaign, featuring such taglines as: "Over 70 percent of dial-up videoconferences are PictureTel. Get the Picture?"; "This isn't an ad for videoconferencing. It's a wake-up call"; and "We don't move people, we move ideas. And ideas are what move companies."

1993: PC-Based Videoconferencing

At the close of 1993, PictureTel unveiled a new product that converted PCs into videophones. Regarded as substantially higher in quality than a competing system from AT&T, the PictureTel product sold for $6,000, or $1,000 more than the AT&T model. The year 1993 also saw the company ship its 10,000th group videoconferencing system. PictureTel was ranked the 11th fastest growing company in the United States by Fortune magazine, up from 14th on the list the year before.

In 1994 the company continued to add new products and cut prices. It slashed the price of its PC-based desktop videoconferencing system almost in half to compete with Intel's ProShare line. PictureTel expected to come out on top in sales, as its system offered noticeably better picture quality. The company also announced new strategic alliances with a number of major corporations, including Compaq. Sales for the year were $255 million.

PictureTel reached several milestones in 1995, including conducting, in April, the world's largest multipoint, global dial-up videoconference. Conducted from New York's Hudson Theater, more than 50 sites dialed in for the hour-long demonstration. The company used the opportunity to unveil two new group videoconferencing systems and a new network server. The cost of renting phone lines for the event was $4,400, as compared with $160,000 for satellite linkup costs that other types of systems would have required. PictureTel's stock price was fluctuating wildly during this time, reaching $45 in April and $73 in November, with several ups and downs along the way. The company announced plans to move its headquarters from Danvers to Andover, Massachusetts, consolidating most of its operations under one roof.

Sales Slump in the Late 1990s

Competition from a number of different companies, particularly Intel, were eroding PictureTel's profits, however, as the company was forced to continually lower prices to compete. With 15 to 20 percent of the company's revenues now coming from its desktop systems, PictureTel's stock began to slip, even as the company posted record revenues and profits for 1996, as investors became wary of "Intel overhang." In 1997 the company began to see sales and earnings drop, and it went through a restructuring to eliminate unprofitable operations. The company reported earnings of $466 million with a net loss of $39 million. To compound this bad news, figures for 1996 had required downward revision, as significant errors in the accounting of sales and lease payments were discovered. A number of shareholder lawsuits resulted.

Despite these problems, PictureTel announced the acquisition of Andover-based audioconferencing pioneer MultiLink, Inc., as well as an expansion of the company's Japanese partnership with Nippon Telegraph and Telephone Corp. The company still held a majority of the global market in both the large "boardroom size" and smaller desktop videoconferencing systems.

Sales were still down in early 1998, and PictureTel announced layoffs in January. The company's stock was now trading at less than $10 a share. PictureTel had seen a number of top executives depart in the previous year, and in March CEO Norman Gaut left, to be replaced by Bruce Bond. Bond began immediately to take measures to right the ship. In July the company announced the acquisition of Starlight Networks, Inc., a streaming media technology company. Streaming media systems were used to send audio and video feeds over the Internet to multiple recipients. PictureTel was moving toward more Internet-based products, including "on-demand" services, which offered recorded programs that could be accessed from a central server when needed.

In January of 1999, PictureTel announced a major deal with Intel, in which the company would collaborate with its rival to jointly develop and distribute products. The chip maker invested $30.5 million in PictureTel, making it a ten percent owner of the company. In making this deal PictureTel was finally getting a leg up to the stability and growth that it had been seeking. It was still likely to remain a bumpy road because of the rapidly changing technology and competitive marketplace, but the combination of PictureTel's inherent strengths and the clout of industry giant Intel was a potent one. As the new century dawned, PictureTel appeared to be in its strongest position to date.

Principal Subsidiaries: Multilink, Inc.; Picturetel Securities Corp.; PictureTel AG (Switzerland); PictureTel Japan K.K. (Japan); PictureTel GmbH (Germany); PictureTel UK Ltd. (United Kingdom).

PictureTel Corp. History

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