”Anyone setting up a high tech company in Israel is crazy.” BackWeb founder, CEO, and president Eli Barkat chose this pessimistic way to conclude his interview. Barkat thereby reached the practically inevitable finale of every conversation with a venture capital man or high tech company CEO, referring to the legislative and tax regime, which most of them say strangles every initiative and drives talented entrepreneurs to set up their companies overseas, at least from a legal standpoint.
As has been said many times before, Barkat noted, “The State investigative committee can be set up either now or in another five years, after the disaster occurs and the Israeli high tech industry vanishes.” When he reaches the operative level, however – how to change the situation before it is too late – Barkat refrains from discussing radical steps.
BackWeb develops infrastructure technologies that “push” information to users, mostly within enterprises, but also outside them. The users can be sales personnel, maintenance crews, or ordinary purchasers.
The analysts currently forecast that BackWeb, the Cinderella of Israeli push technology, will reach the break-even point in the next quarter, and Barkat confirms that the company communicated this intention to its shareholders. BackWeb posted revenues of $11.7 million in the third quarter, and the analysts estimate that its revenues for 2000 will total $74.5 million. These analysts claim that compared with other players in the field of applications and infrastructures for Internet companies, BackWeb enjoys an attractive valuation. The analysts also believe that BackWeb leads in push technology, but are not convinced that this is a “must have” technology.
When asked to explain the reason for the existence of the company he founded, Barkat went into overdrive. In his opinion, the passivity of the Internet is a problem that only push technology can solve. One hundred dot.com companies recently died. “What was the problem with their model?”, Barkat asked, and answered, “They couldn’t continue paying the money necessary to bring people to their web site. The passive model has proven itself to be not viable.”
Fear of Sun
Barkat is very voluble in explaining the business rationale of BackWeb, which got underway in 1995. “People spent millions and tens of millions in building sites, and no one came. The content did not return the value. These are the people coming to BackWeb. They reached the conclusion that the right information for the right people isn’t enough. It has to come at the right time.”
”Globes”: But even if we assume that BackWeb has essential technology…
Barkat: ”It will become essential.”
What guarantee do you have that some gorilla won’t enter and do what you yourselves are doing, or acquire one of your competitors?
”Competitors are a danger in every valuable technology. We are in a comfortable situation. All the stories about, “push is dead” anesthetized the world concerning us, so no one developed anything in this field. We have been developing the technology for four years with a feeling of awful isolation. We developed a very large mass of infrastructure technology. We estimate that we have at least an 18-month lead over any other player, including Microsoft and the others.”
In its original meaning, push is a technology that pushes information to the user, according to certain criteria. Barkat says that it is a fatal blow to the normal way information is transmitted on the Internet, and others agree with him. The Internet is built on the assumption that various people will transmit various bits of information at different times. In this way, no unusual peaks in data network segments are created. In its original meaning, however, push requires transmission of identical information at a given moment to a large number of destinations. Networks do not like this; it makes them collapse. The companies in the field were forced to change their approach.
Nevertheless, what happens when corporations like Microsoft want to work with this technology?
”Microsoft works with e-mail, at least to the best of my knowledge, and they are our partners. They aren’t usually communications players. They are desktop players, dealing in servers. Every time they try to work in several fields, like communications or consumers, they fail. That doesn’t mean they will fail in the future.”
A check with Microsoft revealed that it has not yet decided between two alternatives – retrieval or push. It appears that Microsoft, at least, is not convinced that push is an essential technology; it simply has not yet decided.
Barkat, however, is less worried about the Microsoft threat. He mentions IBM and Sun Microsystems among the gorillas of the computer world. Since IBM is BackWeb’s partner, he claims that he is less concerned about it. “I think Sun Microsystems is more worrying on this issue, but they have their own beliefs – they work on a specific platform – and I don’t know anything about what they are doing.”
Barkat claims that BackWeb has converted its technological advantage into a business advantage. He mentions the company’s agreements with SAP and Compaq. In the case of SAP, BackWeb’s technology is included in every CRM package, while in Compaq’s case, the technology is installed in every PC. BackWeb has a similar agreement with Packard Bell.
BackWeb’s business model is based on two main instruments. One is providing services, which currently accounts for 22% of total revenues (maintenance, software updating, consultation, and training). A large proportion of revenues is produced from licensing the technology, as in the case of SAP. In the case of corporate customers, the company is paid according to the number of users.
In more consumer-oriented partnerships, the company receives a fixed share of e-commerce transactions. For example, Real Networks installed BackWeb’s technology in its media player in order to push music to its subscribers. BackWeb receives royalties on the revenues that Real Networks produces from service, advertising, or subscription fees (“I can’t say how much, but it is a nice share”, Barkat notes”). BackWeb is also supposed to receive a portion of every deal closed by Packard Bell through an e-commerce channel based on its push technology.
Barkat is a realist, however, concerning the potential of the e-commerce instrument. “Most of our revenues this year and next will come from existing business. I think the commerce model is not dead. I think it will return in more sophisticated and profitable forms. We strongly believe that push will be an integral part of the broad push model.”
Marimba takes it on the chin
Marimba is mentioned many times as BackWeb’s closest competitor in the push field. Marimba was also founded in the wonderful days of push hype, a period when another company flourished – Pointcast, which has since disappeared.
Marimba took a terrible blow at the beginning of October, after publishing a profit warning for the third quarter. It has not recovered since, being mired at a low of about $3 per share. The company attributed its profit warning to sales that were not closed and marketing problems outside the US.
What tripped up Marimba? How about a little gossip?
”I don’t like to gossip about anybody. Marimba and BackWeb made completely different strategic decisions three years ago, and each one will be tested according to its decision.”
What did Marimba do?
”Marimba also concluded that push is ahead of its time, so they decided to go after the information technology (IT) field, saying, ‘We will be the platform for software updating.’ Their market was much bigger at the time, and their sales in the first year were really much larger than ours.
”I think that what happened to Marimba reflected market developments and the need for this software in the field they chose. We deal in a completely different field and completely different things. There are separate journals for each one – it’s not the same market.”
Many claim that BackWeb is surrounded by tangential and partially overlapping companies. Barkat attempts to distinguish: there are two areas, “One, what should be pushed; the other, how to push it. Companies like Inktomi, BroadVision, and Vignette deal with what should be pushed, helping to select it. That’s not our field.
”We deal in a different field – the minute a certain selection is made, we deal with the interaction between the server with the content and the user, who must receive it in a world in which this information is critical.”
Money in the bank
BackWeb has made two acquisitions to date, one of a small Canadian company, before becoming a public company, and the other of Israeli company Mobix for $16 million in June of this year. Mobix developed technology for wireless data communications.
The most recent estimates are that you have $70 million in the bank. Are you planning acquisitions?
”There are many company’s whose growth strategy is acquisition. With us, it’s a tactic, not a strategy. If we identify an area in which it will take us too long to develop and fill up holes, we’ll make an acquisition.”
What piece is lacking in the puzzle?
”The more we focus on infrastructures, the more our customers want to connect us to as many information sources as possible. One of the fields that interest us is connectivity. There are all sorts of companies that have developed the ability to connect and retrieve information easily from various sources. There are certainly dozens of companies doing it, and we are interested in those possessing tools to produce connectivity.
”Players in the wireless field also interest us, mostly those with a presence inside the device. The ability to make use of the down times of the cellular network is important. In some cases, the announcement may take five minutes to arrive, if it does at all – when 500 CEOs leave a US conference, there is no chance whatsoever of getting a line.”
Will you be going to the acquisitions supermarket in the coming months on a shopping spree?
”We have people visit the supermarket regularly. If we find something interesting, we’ll buy.
Published by Israel's Business Arena on January 3, 2001