Geo Interactive personnel could stand proudly this past month, after honestly proving their right to say "We told you so." Armed with infinite stubbornness and deep belief in the justice of their cause, Geo leaders succeeded in breaking the entry code to the members club when they crossed the great divine between promise and realization. After a prolonged period of frontal attack and doomsday prophecies, they are being aggressively courted by the local and global media.
The interview with general manager Shai Schiller, 37, and deputy general manager for marketing and founder Eli Reifman, 29, was held in a rare two hour session in which they were in Israel together. With a successful flotation behind them, shares at record prices and a flourishing number of deals falling into their lap one after the other, they can now afford to smile.
They will, however, never forget in a lifetime the past eighteen months. It all started in June 1998 when they were forced to watch how promises of revenues and profitability slipped through their fingers. Within two months, the market favorite turned into a punch bag.
For more than a year, the small Givatayim-based company had a problematic relationship with the Israeli media. Geo was called a hot-air balloon, a bluff, all words and no action, and that its final demise was said to be merely a matter of time.
Even after international giant Samsung accorded Geo royalty rights to all its mobile phones sold worldwide last November, the detractors were not satisfied. Investors, on the other hand, thought otherwise. After signing contracts with large companies willing to invest a great deal of money in the product, it seemed as though the big promise was about to be fulfilled. In one fell swoop, the share price zoomed from Stg 0.22 to Stg 20.0 and a company value of $4.5 billion. The detractors said it was very nice, but its demise was just around the corner.
They were forced to eat their hats at the end of January. After the share skyrocketed 7,500% within fourteen months, the company held a private placement for institutional investors such as the German Dresdner and Deutsche banks, the Schroeder investment house and the Fidelity, Mercury and Janus funds. The placements was successful and Geo raised more than $400 million in cash (after deducting for the underwriters, Geo remained with $360 million).
"Globes": Did you take offense at being called a bluff in Israel?
Reifman: "We had a problem with the fact that in Israel of all places we were cut to pieces. However, we knew all along that we were on the right track. Anyway, the international press was supportive and constantly praised us. We even received several important prizes."
Marathon of 96 hours with Energys team
Geo's Emblaze system enables video and voice to be transmitted over IP, without the need for special software, using the computer, mobile phone and electronic appliances such as Palm Pilot, organizers, etc.
Samsung discovered Emblaze's capabilities at an exhibition in Geneva in September 1999. "Our booth was visited by a team of 25, none of whom spoke English, rushing toward our mobile phones and gesturing to see the prototype," Reifman relates. "They have a Hebrew speaking representative in Israel, who mediated the deal most effectively."
The negotiations carried on for three months, with each side holding a war of attrition against the other. Eventually, Geo received $5 million and partnership in revenues from the broadcasting systems, plus royalties on every mobile handset sold worldwide.
The deal with Plannet's parent company Energys started with company general manager at the time Naftali Shani, now chairman of the board of directors.
At the end of a four-day marathon, when the contract was printed and bound, all the participants went off to a restaurant to celebrate the signing of the agreement. The Energys general manager, instead of signing, told the Geo team, "I like you guys, and I've decided to acquire a stake in Geo for another $12 million." The signing of the agreement was conditional to the acquisition. All three remained in London and started the process of getting permits from the British stock exchange. Energys currently has a 5.3% stake in Geo.
That's all very nice, but third generation mobile phones will shortly arrive on the market which will offer video transmission. All the handset manufacturers are already tied up with contracts with companies for upgrading. Doesn't this leave you with a too short window of opportunity?
Schiller: "We're not worried, since it will take another three to four years for third generation handsets to be completely commercially operational, and this gives us a large enough window. In our business, it's a lifetime.
"Until then, we plan to grasp a sufficiently significant share of the market in telephones, servers and content. Moreover, our development team is already working on the next generations of Emblaze, which will have functions that third generation telephones won't have."
The big money comes from user fees
How does your business model work?
Reifman: "We are paid for the license to sell and operate the system, and in addition, for half the sales proceeds from the system and the services it provides. Plannet, for example, paid us $12.5 million for the license to use our system. It also transfers to us 50% of the price of each system it sells, and monthly royalties of 50% of user fees it charges for broadband services and storage. Plannet provides its services throughout Europe, and the big money comes mainly from monthly user fees.
"The monthly royalties don't necessarily have to be a percentage of the service. They can also be in the form of a fixed payment for each user. A cellular operator, for example, purchasing the system to serve a certain number of subscribers can pay per subscriber."
Who are your biggest customers expected to be?
"We assess that the industries which will be willing to spend large sums of up to millions of dollars a system will be gambling, porno, cellular operators, ISPs (Internet Service Providers), news channels and others. We're convinced that, just like CNN cannot afford to exist without a site, it won't be able to exist without telephone broadcasting."
Market maker panics
In June 1998, armed with optimistic analysts' forecasts on expected revenues and profits, Geo held a second flotation on the AIMS stock exchange, raising $37 million at a company value of $250 million. A few days later, Geo announced it would not meet analysts' expectations, as the standard had changed. "We're discontinuing marketing in order to adapt products to the new standard," Reifman announced. The share price crashed the same day from Stg 1.86 to Stg 0.16.
"The halt in marketing hurt the company for several months, but with hindsight, it became clear the decision was a correct one," says Schiller.
With or without a change in direction, it's impossible to ignore the fact that you announced a profit warning which caused the share to crash.
"That's exactly where the fateful mistake is made. A profit warning means the company is continuing to sell products according to an original plan, and continuing with marketing, advertising and distribution expenses, but revenues from ongoing activities are lower than anticipated, and profits are therefore lower.
"Our situation was different. We announced a halt in activity and a six month postponement in launching new products, in order to adapt the product to MPEG4. All of the $42 million raised in the second financing round designated for marketing didn't disappear, it remained in the company."
Just the same, the share crashed.
"Only due to a misunderstanding, stemming from the market maker not bothering to pick up the phone and check into what was going on. In contrast to the Nasdaq, where share prices are determined solely according to market forces, in Britain, companies that are not British are barred from being traded on the computerized system. They are traded by market makers. The law allows them to determine a share price based on their discretion, irrespective of supply and demand.
"The day we notified the stock exchange of the postponement in marketing, the market maker of Panmure Gordon Bank mistakenly thought it was a profit warning, and was sure he would be flooded with supply. It is customary to contact a company under these circumstances to find out what is going on. The market maker panicked, however, and without contacting the company, he slashed the price by 90%.
"The bank's underwriting department was no less furious with him than we were. We submitted a complaint to the British securities authorities and a long investigation was conducted. The reply we ultimately received stated 'Despite the fact that what took place was very much not according to normal procedure, it did not fall under the category of illegal action.'"
For six weeks after the share crashed, Reifman traipsed crazily from one investor to the next. We traveled throughout the world, and met with investors (the ones who had acquired shares in the financing rounds) and explained the situation. "They were calm, they all knew what was going on and were waiting," he says.
Eyes on Nasdaq
In your previous financing round, a European underwriter led the flotation. This time, you decided to use Lehman Brothers, a US investment bank, 99% of whose business is done on Nasdaq. Why did you change underwriters, and if you decided on a US underwriter, why did you hold a private placement instead of issuing on Nasdaq?
"The decision to transfer to Lehman stemmed from several reasons," Schiller says. "It's a step in the direction of Wall Street, and the market expects us to issue on Nasdaq this year. We've had the feeling for a long time that the share is being traded lower than it could, and we believe Nasdaq can give it its true value."
Turning the ship around without stopping
How do you change direction so drastically while fighting for your market?
Schiller: "We held some long, deep brainstorming sessions. The conclusion was that we have to stop operating in the consumer and PC oriented market, and switch to the business market, and focus on providers of media and telecom services.
"In March 1999, we started cutting back several product lines and closing departments that were incompatible with company focus. We were obliged to fire seventy employees (who had specialized in the consumer products market), and we hired 120 new sales persons, product and project managers with experience in the system and in B2B (business to business). In the third quarter of 1999, we started marketing pilots and at the same time we upgraded the technology and integrated software into the hardware."
What advantages does your applications have?
"Our applications are based on efficient use of bandwidth," Schiller explains. "On the same bandwidth which other companies can use for one-way broadcasting, we can provide two-way broadcasting and an image within an image. These two elements together will enable us to provide e-commerce applications.
"Media companies purchasing Emblaze, for example, will be able to offer mobile phone owners the ability to view 'coming soon' movie clips. Thanks to the capability of seeing an image within an image, they will be able to open a small window at the side of the screen, to check on viewing times and order tickets. Television channels buying the system will be able to offer mobile phone owners the ability to watch TV programs via the handset.
"For ISPs, the system offers messaging applications. One such application is video photographed and recorded e-mail (instead of written mail). Al Gore's election campaign managers, for example, use the Emblaze system to send messages to voters, and pay us for each message."
Analysts forecast that Geo will end this year with $6.3 million sales, and will end 2001 with $23 million sales.
Will you meet expectations this time?
Schiller: "The deals we signed in the fourth quarter of 1999 show that we will."
What are your plans for the future?
Reifman: "In the space of three to five years from now, we plan to be among the leading five companies in the world for video and audio solutions over IP. We hope to see Emblaze systems installed at a sizable number of international telecom, cable media and other commercial companies. "
Published by Israel's Business Arena on 21 February, 2000