November 5, 1999
Robertson Stephens
Network Stocks Weekly, Vol. 1, No. 25 visit networkstocks.com
E-MAIL - GETTING THE MESSAGE
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John F. Powers (415)693-3314, e-mail: JP@rsco.com
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E-mail is the most popular Internet application. E-mail volumes grow exponentially and dependence on e-mail for both business and personal communication grows accordingly. As a result, scalability, system availability and reliability are becoming critical factors for service providers, messaging outsourcers and corporations as the number of subscribers they serve and the number of different services they offer grow rapidly. They need reliable, flexible e-mail software that scales to millions of users.
This week, we would like to focus on e-mail software as a beginning to a series of newsletters on Internet and wireless messaging software infrastructure.
OVERVIEW
E-mail is the most popular Internet application. It has grown from a simple messaging tool to a widely used form of communication for both business and personal use. It is one of the cheapest, easiest and quickest ways for individuals to communicate globally.
E-mail volumes are increasing exponentially. IDC estimates that the number of electronic mailboxes will grow from approximately 240 million in 1998 to more than 540 million by 2002. IDC also projects that the number of e-mail messages sent per day in the U.S. will grow from approximately 2.1 billion in 1998 to 7.9 billion in 2002. In addition, messages are growing in size and complexity, including file attachments and multimedia. This trend allows e-mail to become a more functional communications tool for both personal and business use.
Scalability, system availability and reliability are becoming critical factors for service providers, messaging outsourcers and corporations as the number of subscribers they serve and the number of different services they offer grow rapidly. The market for e-mail service is characterized by (1) in-house solutions, (2) purchases of e-mail software from a software vendor and administering it in-house, and (3) outsourcing arrangements for e-mail services. The market for e-mail software vendors can further be divided into enterprise software and carrier-scale e-mail software. Enterprise e-mail software (such as Microsoft Exchange and Lotus Notes) is for business e-mailboxes and is used by corporations of all sizes. Carrier-scale software (such as Software.com InterMail and Netscape Messenger) is used by service providers and messaging outsourcers for consumer mailboxes to provide service for millions of users.
MESSAGING SOFTWARE MARKET OPPORTUNITY EXPANDS QUICKLY AS THE NUMBER OF E-MAILBOXES GROWS
The market opportunity is enormous as the number of Internet users continues to grow rapidly and almost every Internet user has at least one e-mailbox. IDC estimates that there were approximately 159 million Internet users at the end of 1998 and that the number of users will grow to approximately 410 million by the end of 2002. We believe that virtually every Internet user will have an e-mailbox. In fact, individual users are increasing the number of e-mailboxes they have - we are seeing individuals using multiple e-mailboxes more frequently. Many users are opting to have one address for business communication and another for personal. The messaging software market opportunity expands quickly as the number of e-mailboxes grows.
ENTERPRISE E-MAIL SOFTWARE VERUS CARRIER-SCALE E-MAIL SOFTWARE
As we mentioned above, the market for e-mail software vendors can be divided into enterprise software and carrier-scale e-mail software. Enterprise e-mail software (such as Microsoft Exchange and Lotus Notes) is for business e-mailboxes and is used by corporations of all sizes, scaling to thousands of users. Carrier-scale software (such as Software.com InterMail and Netscape Messenger) is used by service providers and messaging outsourcers for consumer mailboxes to provide service for millions of users.
Carrier-Scale Market
The Internet's explosive growth, in our view, creates tremendous market opportunities for service providers that connect people and businesses to the Internet, provide applications for these users or distribute content over the Internet. These companies include traditional telecommunications carriers, Internet service providers and wholesalers, cable-based Internet access providers, competitive local exchange carriers, and Internet destination sites or portals. Many of these service providers have experienced rapid growth as businesses and consumers increasingly rely on the Internet for their communication needs.
The rapid increase in demand for Internet access has led to intense competition among service providers to attract and retain subscribers. Service providers developing large, capital-intensive communications networks require large subscriber bases in order to leverage their network investments. Other service providers, such as Internet portals, are seeking to attract as many users as possible in order to establish mass Internet communities for the purpose of disseminating services and collecting advertising revenue. In addition, many consumers and businesses are beginning to utilize the Internet, instead of traditional voice networks, for voice and fax transmissions, leading to further growth in Internet traffic and increased competition for users among service providers.
As a result, service providers are increasingly focusing on providing applications and services that help attract and retain customers such as Internet e-mail. Internet e-mail is the most popular Internet application and, therefore, a compelling application to attract subscribers. IDC estimates that the number of consumer mailboxes hosted by service providers in the United States will grow from 18 million in 1996 to 109 million in 2002. Internet e-mail is also a key application for retaining subscribers, because once a user gives out his or her unique e-mail address to friends and colleagues, changing to a new service provider means switching addresses and accounts and reconnecting with these people.
The growth in the use of Internet e-mail has also attracted businesses, as e-mail has become a routine method of communicating between employees and with customers, suppliers, and partners. IDC estimates that the number of business e-mail users will grow from 142 million in 1998 to 281 million worldwide in 2002. Historically, businesses have deployed on-premise software applications for their e-mail systems, meaning that the businesses have bought both the e-mail software and hardware necessary to support their e-mail system and have operated the system themselves (see below for enterprise market software). As a cost-effective alternative to deploying and running an on-premise solution, many businesses are increasingly evaluating outsourced, or "managed," messaging in which a service provider operates the e-mail system for a business. ISPs are more frequently being called in to provide e-mail to businesses, not just consumers, because businesses are realizing the need for 24 hours a day, 7 days a week e-mail availability. As service providers seek to differentiate offerings to attract more business users, service providers are expanding basic e-mail service to create new and innovative Internet messaging services and new types of integrated messaging services such as faxmail and voicemail.
For example, Software.com has designed a Business Advantage Edition and a Standard Edition of its InterMail product. The Business Advantage Edition, designed for service providers offering managed messaging to businesses provides fully functional business mailboxes. It provides a full range of advanced features, including the advanced Internet protocol for delivery and retrieval of messages known as IMAP4, enhanced message encryption, delegated administration and customer self-care tools. In comparison, The Standard Edition, designed for consumer e-mail offerings, provides a standard post office protocol or POP3 mailbox and interfaces with commonly used desktop e-mail clients such as Microsoft Outlook and Outlook Express, Netscape Navigator and QUALCOMM Eudora.
Once a business selects an e-mail provider, the costs of switching are high due to the difficulty of moving the data stored on the service provider's system.
HIGH SCALABILITY, HIGH SYSTEM AVAILABILITY AND RELIABILITY ARE KEY, IN OUR VIEW
As ISPs consolidate, their user bases increase in number dramatically. To handle these large numbers of customers, ISPs need highly scalable solutions and are increasingly likely to switch from inferior products to high-end solutions. In addition, as the number of users online increases and the number of messages sent per day by each user also trends upward, ISPs and portals are demanding highly scalable e-mail solutions. As a result of the enormous growth of e-mail and messaging users on the Internet, ISPs and portals need scalable messaging solutions to handle the large volume of users. IDC estimates that the number of e-mail messages sent in the United States has grown from an average of 683 million per day in 1996 to 2.1 billion per day in 1998 and projects that the number will grow to 7.9 billion per day in 2002. Service providers must provide systems that can grow to accommodate hundreds of thousands, or even millions, of users and the rapidly increasing number of messages being sent by their larger user bases.
The dependence of Internet users on e-mail has created a need for highly reliable solutions. As our economy and individual businesses have become increasingly dependent on reliable electronic communication, downtime from e-mail servers is increasingly less tolerated. Carriers are willing to pay premium pricing for solutions that are very reliable to prevent losing customers to competitors. Service outages or the loss of messages can lead to adverse publicity for service providers and can result in the loss of substantial numbers of subscribers.
Most service providers, however, in our view, have neither the products and services in place nor the existing internal technical capabilities to address this enormous growth. To date, most service providers have built their own basic e-mail services by making proprietary modifications to a free, public domain e-mail program called Sendmail.
As an alternative to Sendmail, some service providers have tried using enterprise products such as Microsoft Exchange and Lotus Notes for their offerings. However, these products cannot scale to the large number of mailboxes and users that service providers typically support. These products typically support a maximum of 2,000 users on a single server.
Another alternative for a service provider is to contract with an e-mail service wholesaler to run its e-mail service, while the service provider resells e-mail to its individual and business customers.
SO, WHO HAS THE SOLUTION?
Software.com, Netscape and Sun Microsystems are currently the major players offering e-mail products directly to ISPs, Web hosting companies and Web portals.
We believe that Software.com's ubiquity as a carrier-class messaging software provider makes it one of the most attractive companies in this sector. The company's messaging solutions include products that support e-mail, faxmail, voicemail and cell phone short messaging. Software.com provides software to ISPs and Internet portals to implement their e-mail systems. We believe Software.com is the market leader in providing highly scalable, highly dependable e-mail solutions, and we believe it is also a leader in the quantity of mailboxes licensed, having licensed more than 56 million mailboxes. In fact, according to a study by the Radicati Group, which specializes in messaging market research, Software.com has 62% market share among consumer service providers.
Enterprise Market
Enterprise e-mail software such as Microsoft Exchange and Lotus Notes is designed specifically for corporations and is used by corporations of all sizes. The software scales to couple of thousands of users and usually includes the client and the server piece such as Microsoft Exchange Server and its client, Microsoft Outlook. Critical factors that enterprises consider include compatibility with company's network systems, scalability, cost per user, performance, and robustness.
WEBMAIL
Webmail is an e-mail service that lets users access their e-mail accounts using any Web browser from any PC. The largest Web-based e-mail service is MSN Hotmail, and it is free. The advantages of Webmail are (1) users can access their accounts from anywhere in the world with any Web browser and (2) it is free. The disadvantages of Webmail are sometimes poor service, slowdowns during peak hours, poor security features, simplistic filters and even outages.
The heating up of the portal wars has increased the need for Internet portals to provide Webmail to users, in our view. In addition, as many portals give away free e-mail accounts when you sign up to use the site, there are many accounts that are not being used, but which have been licensed. Since, in our opinion, portals are more concerned with the number of users than expenses, we believe they are unlikely to close many of these mailboxes since that would lower their user counts.
As the number of mailboxes per user expands, companies providing messaging software should see more need for their software. For example, Software.com has designed a specialized version of its generic InterMail product for this market called InterMail Web Edition. This software lets users read and write e-mails using a standard Web browser.
OUTSOURCED MESSAGING SERVICES
Organizations that do not have the resources to support the expense and expertise required to maintain a reliable e-mail system are increasingly seeking to outsource their e-mail systems. Critical Path, USA.NET, and mail.com are some of the companies that focus on providing outsourced messaging services. These services provide cost savings over in-house solutions by relieving customers of expenses associated with acquiring, maintaining and administering hardware and software. Gartner estimates by the end of 2000, at least 40% of enterprises will outsource at least 20% of their e-mail budgets.
CONCLUSION
We believe that software that enables communication on the Internet is important foundation technology. In a world that is pervasively connected, new platforms are rapidly being developed to allow messages and content to be delivered to rich client environments like laptops, PDAs and cell phones. In our opinion, the companies that will win in this space will be long-term, franchise companies offering the flexibility to expand into wireless markets and deliver messages regardless of the client device.
This week, we also welcome Connie Pon to our team; you will be hearing from her in upcoming newsletters.
We hope that you have found our thoughts on e-mail software helpful, and we look forward to hearing your feedback at jp@rsco.com. As always, we enjoy hearing from you and we do our best to personally answer all of our reader mail. Please write to let us know what interests you and what you'd like to see us cover in future newsletters. Have a great weekend!
Thanks for your interest,
John Powers, Evren Dogan, Joy Nazzari, Connie Pon |
