In October of 1998 Bill McMullin, President and CEO of InfoInterActive, was again thinking about strategy. The high tech Bedford, Nova Scotia, firm had succeeded in using its patented flagship product, Internet Call Manager, to build alliances with some of North America’s largest telephone companies. Now, eighteen months after the first alliance was formed, subscription rates to Internet Call Manager were lower than expected, McMullin wondered what he should do next in order to realise InfoInterActive’s potential.
The Founders
Bill McMullin was already an entrepreneur when he attended Sydney Academy, a high school in Sydney, Nova Scotia. In an environment that is frequently described as ‘an employee culture’, McMullin stood out. By grade eleven, he had developed a business idea and at his own expense traveled to Montreal. While there he negotiated a contract with a firm that would design special packaging for his new product. Eventually, he lost a little money on that venture but he gained a lot of experience and he certainly wasn't ready to quit. The year before he graduated from university he formed a company that specialized in marketing cellular phones. Four years later he sold the very successful Rolling Phones to a competitor.
In 1994, he joined forces with another entrepreneur, Donald Chisholm and formed Interactive Telecom. The two complemented each other. McMullin easily assumed the role of articulate spokesman for the company, he knew marketing and promotion and was familiar with the communications industry. Chisholm had technical expertise, he knew the telecommunications industry from the 'technical side' and he knew how to link the telephone network to the Internet. In 1995, they developed a new product called Internet Call Manager (ICM). In January of 1996 InfoInterActive Inc. ( formed and acquired Interactive Telecom.
Internet Call Manager
Although less than three years old, by the third quarter of 1998 InfoInterActivehad undergone significant changes. In its earliest stages, the company developed a suite of other products including PhonePay, Weather Watcher, E-Mail to Paging, On-Line Paging, and Name that Number. However, it soon became apparent that Internet Call Manager would be InfoInterActive’s flagship product. Subscribers to Internet Call Manager could monitor their incoming telephone calls while on the Internet. Normally, in single-phone-line households, there is no way of knowing that someone is trying to call you while you browse the Internet. Internet Call Manager not only notifies you of the incoming call, it also tells you who the caller is and provides you with several ways of responding to that caller - all without losing your Internet connection. Figure 1 shows {simplistically} how Internet Call Manager works.
InfoInterActive began to market Internet Call Manager to end-users reaching potential customers through Internet service providers. The initiative placed considerable pressure on the small company. But McMullin and Chisholm turned this pressure to their advantage. Buyers of Internet Call Manager expected and needed fairly sophisticated customer service and InfoInterActive needed procedures for billing customers and collecting receivables. To do all of this efficiently, McMullin and Chisholm developed software systems for each of the customer service functions. Other decisions about hardware selection and pricing the service were made. The pair managed to develop a system of software that could field a wide range of customer inquiries and maintain good records of customer accounts. Now they had a promising product, and they also had a sophisticated means of customer support that could be easily expanded to meet a growing customer base. Early in 1996, the company applied for a U.S. Patent on the Internet Call Manager system.
The Potential
On May 6, 1998 InfoInterActive announced that it had received a notice of Allowance from the United States Patent & Trademark Office advising that a patent[1] would be granted its Internet Call Manager. The company also received a positive PCT Examination Report from the European Patent Office, which cleared the way for InfoInterActive to proceed with national filings in eighty countries worldwide under the Patent Cooperation Treaty. It is worth noting that about this time Northern Telcom Limited had developed a similar product called Internet Call Waiting and Ericsson Communications Canada Inc. had announced two new internet connection products: Phone Doubler and Home Internet Solution. Cable television companies were also working on ways to provide high speed Internet access to their home based customers.
The potential for Internet Call Manager appeared to be enormous. Figure 2 shows recent and projected growth in home-based Internet use. Over the period 1995 to 1998 the number of Internet households increased annually at a growth rate of between 40% and 50%. Growth in other developed countries was similar. In North America, it was estimated that there were 110,000,000 phone lines and 30,000,000 of these made use of the Internet. As McMullin had put it, "the Internet has become a mass-market household 'product'".
Other studies suggested that Internet households were staying connected longer. Between 1996 and 1997 the “average hours online” had almost doubled increasing from just over six hours per week to just over twelve hours per week (see figure 3). Not only were the numbers of home-based Internet users growing but the average hours of Internet use per week was also on the rise. This form of growth also increased the home-based Internet users' need for a service like Internet Call Manager. A monthly subscription to Internet Call Manager (at about $7) was much less than the cost of an additional phone line (at about $20). For most home based Internet users the service satisfied a need at a sensible price.
Independent evaluations of Internet Call Manager gave it high scores both as a quality product and as a timely innovation with significant market potential. In spite of these achievements, InfoInterActive was still facing major challenges, especially a rate of customer growth that was less than spectacular. With the development of their customer service software, InfoInterActive had become more than just a product innovator. The company was now in a position to meet the complex needs of its customers. With the addition of this new dimension, McMullin and Chisholm were convinced that they were in a position to attract and keep customers. InfoInterActive assumed that it should be able to achieve 10% market penetration.
However, as they headed into 1997 their customer base was, at best, modest (about 2,000 subscribers). Revenues were not offsetting expenses. McMullin reported that the costs of customer acquisition in the early stages of deployment were higher than expected. Nor had the company yet achieved efficiencies in its advertising programs. InfoInterActive recorded losses in the first nine months of 1996 of $445,966 on revenues of $63,609. By the end of 1996 losses had climbed to $614,647 on revenues of $96,105.
It takes a great deal of money to develop products of the quality of Internet Call Manager. Most expenditures are related to salaries, advertising and research & development. Usually small innovative companies like InfoInterActive have rather limited assets to offer as collateral. As a result, lenders were hesitant. If the required funds could not be borrowed, then McMullin would have to persuade equity investors of the firm's potential earnings as current revenues were unable to cover current expenses. Not only would investors have to be convinced that the product had considerable potential for profits, they would also have to be persuaded that McMullin and his team of people were capable of bringing it off. That is, investors would have to be convinced that the company had the potential to manage growth.
McMullin needed to attract smart money and he needed to quickly gain access to potential Internet Call Manager customers.
Strategic Alliances
McMullin began to seek alliances, expanding InfoInterActive’s strategy beyond the current approach of direct selling through Internet Service Providers. In March of 1997 InfoInterActive announced that it had reached agreement with Maritime Tel and Tel ( a Halifax-based company. The participation of MT&T[2] was the first result of InfoInterActive’s new strategy.
MT&T's involvement in InfoInterActive was quite complex. InfoInterActive’s web site described MT&T as a service partner, an investor and a joint development partner. Phil Hartling, Director of Marketing at MT&T described things this way:
- A year ago we dramatically reduced our staff and fundamentally reorganized around our customers. We knew that we had to get new ideas to market faster and at lower cost. We feel we have accomplished both these goals with InfoInterActive and the Internet Call Manager product launch.
With help from MT&T, McMullin sought out other partners. The new strategy was to gain access to large clusters of the market by forging alliances withmajor telephone companies who were already in direct contact with InfoInterActive’s potential customers.In May of 1998 InfoInterActive announced that Cincinnati Bell, the twelfth largest telephone company in the United States, was launching full commercial service of InfoInterActive’s Internet Call Manager. Mike O'Brien Senior Vice President of Cincinnati Bell described the product this way:
- We looked at over 700 new product ideas in 1997, searching for real needs our customers would pay to see filled. Internet Call Manager is one of only six that we chose to explore in depth. When we investigated InfoInterActive and Internet Call Manager we were impressed to find a complete turnkey service solution. This made the decision to partner much simpler and quicker.
Cincinnati Bell had over 1,000,000 telephone lines and annual revenues of almost $2 billion. Cincinnati Bell would also help to market the service to other major telephone companies across North America. Through its subsidiaries, Cincinnati Bell was the world's largest provider of out-sourced billing and customer care services, counting AT&T among its customers. InfoInterActive made similar alliances with the Regional Bell Telephone Company another large player in the U.S. market. At the same time McMullin sought to expand further into the Canadian market. By mid 1998 Internet Call Manager was available to 80% of the Canadian market either in partnership with regional phone companies like M.T&T, BC Tel and Telus, or as a service offered independently by InfoInterActive.
The arrangements with each partner varied. In some cases InfoInterActive provided a complete array of services and personnel, in others ICM was redesigned to appear as if the service was provided entirely by the large partner. McMullin used the analogy of a soft drink can with InfoInteractive as the maker of the aluminum can. In some cases InfoInterActive’s partners want to use their labels on the can. Each of these large partners would promote the Internet Call Manager system (or some customized version of ICM) through its billing mail outs to its customers. The large partners would then share the resulting subscription revenues with the small Bedford based firm.
Although InfoInterActive had devoted much of its energy to forming alliances it also continued approaching customers directly. Where no partnership existed, InfoInterActive could still offer its services to resident customers through Internet service providers - provided the regional telephone company co-operated. Internet Call Manager will only work if the regional phone company agrees to direct the Internet users' incoming calls to InfoInterActive’s server using the call-forward-when-busy feature of the phone service.
The company had also developed other versions of Internet Call Manager such as ICM for Business and ICM High Speed. These products were aimed at small businesses and users of high-speed networks. By the fall of 1998 InfoInterActive had a stable of large distribution partners: MT&T, Telus, BC Tel, Cincinnati Bell, Atlantic and Ameritech. Several others were about to be signed on. In combination these companies represented more than 69 million phone lines.
InfoInterActive’s ability to attract equity investment also improved with the establishment of these alliances. Table 1 shows a summary of the company’s investment history up to the third quarter of 1998.
Operating Results
In spite of these successes, sales revenue in 1997 dropped to $77,800 and losses for that year were $1,398,428 or ($0.16) per share versus ($0.11) per share in the previous year. The losses were attributed to substantial research and development costs and to sales and marketing expenses. In 1997, the company had eight full-time and four part-time employees. Table 1 shows the operating results for InfoInterActive from its inception up to and including the first nine months of 1998. These figures are based on information provided on the company's web site.
Personnel Changes
In terms of personnel, McMullin’s company grew abruptly; early in 1997 they had twelve employees by the third quarter of 1998 they had at least thirty employees (see Table 3). InfoInterActive’s new personnel fell into two broad functional areas: Marketing and R&D. Among those hired was Mr. Michael D. Smith who was appointed as Executive Vice-President and General Manager. Smith had previously held marketing and investment positions with MT&T and Proctor & Gamble. More recently, InfoInterActive has been successful in attracting some very talented computer programmers.According to McMullin,InfoInterActive’s reputation as a successful company made it possible to recruit highly qualified people. This was especially true for highly skilled technical people.
McMullin recognized that he was able to make some unique contributions to the business. "There are some things that I like to do that others would find very difficult to do," he says. As they expanded their staff, the extra resources freed McMullin to work on the business. These developments gave him the chance to re-focus his own efforts. McMullin described himself as the CSO, Chief Strategy Officer.
With the additional personnel, InfoInterActive had a much stronger team, both in terms of its marketing and R&D capabilities. The company also enjoyed a strong cash position because of its successes in attracting investment. But as McMullin would say, "Philosophy and strategy are easy to come-by but execution is not."
The life of an entrepreneur
While it is not uncommon to hear of entrepreneurs working excessively long (70+) hours per week, McMullin does not fit this mold. Of course, he works very hard but he also works efficiently and he insists on devoting time to his young family. His family home is within a few minutes of his office. Typically he spends thirty-five hours a week in his Bedford office and he usually works at home for a couple of hours each evening after the children are asleep. He travels regularly and spends about one and a half days each week away from home. McMullin’s energy is directed toward a variety of concerns including: publicity (about 15% of his time), technical issues that involve regular discussions with his programmers (about 10%), forging new partnerships and strategic business deals (about 25%), developing strategy (about 10%). The remainder of his time is devoted to issues of: communication with InfoInterActive’s partners, finance, personnel, administration and leadership.
In October 1998, as he sat in a Bedford coffee shop considering various courses of action, he wondered about the best way to channel his own talent and energy in the coming months. McMullin needed to re-evaluate the opportunity that ICM now represented and set a course for InfoInterActive that would realise the full potential of this company.
Appendix
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Table 1 History of Investment
1994 / 1995 / 1996 / 1997 / First nine months of 1998Equity Investment / $228,000 / $10,000 / $724,906 / $898,608 / $3,234,920
Cumulative Equity Investment / $228,000 / $238,000 / $962,906 / $1,852,514 / $5,087,434
Table 2 RESULTS OF OPERATIONS
1994 / 1995 / 1996 / 1997 / First nine months of 1998Operating Losses / $5,495 / $54,677 / $614,647 / $1,398,428 / $1,419,614
Cumulative Operating Losses / $5,495 / $60,172 / $674,819 / $2,073,247 / $3,492,860
Table 3 Rapid Changes Occurring in InfoInterActive
1997 / 1998Subscribers / 2,000 / 20,000
Revenue to Dec 31,1998 / $77,800 / $1,656,297[3]
Cash Position / $97,477 / $97,477
Patent / No / Yes
Distribution Partners / 2 / 6
Stock Price / $0.3 / $2.5
Employees / 12 / 30
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[1]US Patent # 5,809,128
[2] MT&T has since been renamed MTT
[3]This is composed of interest revenue $41,247(1997 = $nil), ICM subscription revenues $440,230 (1997 = $20,938), Sales revenue from other InfoInterActive products such as Name that Number and Weather Watcher $221,569 (1997 = $56,863), customization fees related to customizing ICM for GTE-Internetworking $994,498 (1997 = $nil).