CUTe Systems: Catering to the low-end cellular market

With 20 patents, 10 Ph.D.s, and 2 potential competitors, CUTe Systems survives by avoiding fights with gorillas. CUTe decided to avoid directly competing against Emblaze and PacketVideo, and directed its efforts to the low-end market, which isn't worth its competitors' while.

The core founders of Israeli start-up CUTe Systems include 10 Ph.D.s and professors from various technology fields. To date, they have registered 10 patents in cellular video broadcasting, and arepreparing 10 more.

An ordinary man might assume that such combined brain-power working together to develop a technological product would develop one of the best products ever. However, one should remember that other, no less important factors are at work in the business world, besides the quality of the product. One only has to look at the case of computer operating systems.

The industry giants also know about these important factors. Emblaze Systems (LSE: BLZ) and PacketVideo already cover the high-end cellular multimedia market, through a series of cooperation agreements

CUTe therefore decided to avoid directly competing against Emblaze and PacketVideo, and directed its efforts to the low-end market,which isn't worth its competitors' while.

CUTe Systems CEO Dr. Meir Ariel says Emblaze and PacketVideo will not enter the low-end market because if they offer a $100,000 product, no-one would buy their $1 million dollar products.

How is CUTe able to develop a cheaper, similar product? CUTe does not offer components such as billing and user identification, but a limited system, and allows interested customers touse the simplerproduct before buying the bigger system that is under development.

In order to cut costs, CUTe has developed its system on an inexpensive, standard Pentium platform. CUTe's system is therefore compatiblewith the products of small and medium cellular operators that cannot afford to invest in expensive systems, but want to offer next-generation video services.

"The market is not yet mature," says Ariel. "Customers are examining solutions from various sources, and it's convenient for them to examine a comprehensive, low-end product."

Multimedia streaming over wireless is another matter entirely. Wireless networks are much more hostile, becausemore information is lost on wireless systems, while the bandwidth is unstable and indeterminate, and can change quickly during a conversation. Noise and errors are also problems. Ariel says that CUTe's advantage compared with its competitors is that its technologyproduces stable and fixed service quality that is virtually independent of the cellular network's condition.

"In order to provide reasonable quality, it's necessary to use compatible technology, and that's where our advantage lies," says Ariel. "We can provide fixed and stable quality over any network, virtually independently of the cellular network's conditions. If you're travelling or in an elevator, you'll get regular video streaming that appears stable and fixed to the human eye. Even if 30% of the information is lost, our product allows full playback of the lost information, without having to rebroadcast it, even during streaming."

"Globes": Why did you choose the cellular multimedia marker?

Ariel: "We looked for a field where we could express our experience and talents. This field isn't an easy one; it requires expertise in wireless communications. It also requires expertise in information theory, and an understanding of picture, voice, and video processing. The combination of expertise in all these fields is rare. The team members are specialists in wireless communications and voice and picture processing. The combination might lead to a product, which in contrast to streaming over regular Internet, can provide stable quality underhostile communications conditions."

Was your decision to provide a low-end product strictly based on business considerations?

"It was strictly business. After all, we have no problem offering a high-end product. If the company grows, we'll try to expand into the high-end. Another solution would be to find strategic partners and integrators that would make the system components thatare outside our expertise."

CUTe's system is currently being installed for testing by more than ten European cellular operators, including Mobilkom Austria, Hutchison 3G UK, Motorola GTSS, and MIRS Communications in Israel.

Burning cash slowly

The more interesting story at CUTe is its personnel. In 18 months of operations, it has recruited only one additional employee. As for the company till, CUTe has learned a lesson or two about burning cash, and has managed with less than $2 million since its founding, having raised $1.75 million at a company value of $7 million, before money, from Ampal - American Israel Corporation (Nasdaq: AMPL).

"We're striving toobtain revenue and delay the need for financing rounds,"Ariel says,explaining this unusual phenomenon. "Besides, we have Ampal's safety net."

Ariel is not interested in wasting his time running after funds, preferring the enjoyment of accelerated product development and visiting customers. He thinks CUTe can survive another few months, and believes that enough funds and groupsare aware of and interestedin the company.

How can tiny CUTe with 11 employees compete against giants like Emblaze and PacketVideo?

"We can compete because of a combination of factors. On one hand, our strategy is different, and we appeal to the low-end market. On the other hand, our product has technological advantages that aren't present in (the offerings of) other companies. In order to create a technological advantage, you don't need 400 people and $400 million."

"In later stages, a company can be a development core for(another) company interested in entering the market. Our main efforts are devoted to finding strategic partners interested in our team, technology and product - the type of partners whodon'tconsider the partnership solely on a financial basis, but on technological synergy."

"Our product is designed to give the operator user loyalty. We don't focus on better resolution or stereophonic music. Our technology focuses on customer loyalty, which is why no operator worldwide has refused to meet us and install the system. For the same investment in infrastructure and bandwidth, we promise to increase the number of users, becauseusers save bandwidth (with our product). We also promise that the quality will at least be tolerable, which the others cannot. The system doesn't have many components, but the product has an acceptable level of quality. No current solutions provide acceptable quality."

What is the current great fear of the cellular multimedia market?

"The fear of all cellular multimedia companies is that Microsoft and RealNetworks will control the market with some copyright of their own for compressing multimedia, unlike MPEG4, which is an open code."

Name: CUTe Systems

Founded: April 2000

Founders: CEO Dr. Meir Ariel, CTO Dr. Ofer Amrani , VP R&D Dr. Jacob Goldberger, Zohar Markfeld and Dr. Michael Margaliot.

Product: Multimedia streaming for 2.5 and third generation cellular

Financing rounds: $1.75 million from Ampal-American Israel Corporation

Ownership: Founders, employees and Ampal-American

Employees: 11

Competitors: Emblaze Systems, VideoPacket, Microsoft, RealNetworks


Published by Israel's Business Arena on 19 November 2001

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