Selling Technology : EasyLink and ZapMail Fight for Acceptance

You can often lead a horse to water and make him drink gallons before you can persuade the world to accept a new technology.

That lesson has been learned by both Federal Express Corp. and Western Union Corp. since they began trying to sell two flashy products that rely on electronics to shuttle documents short or long distances. Federal Express has learned it in its efforts with ZapMail, its same-day document transmission service, while Western Union has uncovered the same truth with EasyLink, its so-called computer-mailbox product.

“The technology gurus can say when a technology’s coming, but the best of them can’t predict how long it’ll take to catch on,” says Harry Rosenthal, an analyst with the New York investment banking firm of Bear, Stearns & Co.

Although the use of new communications technology such as electronic mail has grown dramatically, profits have been elusive. The market remains relatively small, competitors are many, and obstacles to broad acceptance have been considerable.

The products of Federal Express and Western Union are vastly different, as are the stakes for the two dissimilar companies.

Could Depress Earnings

Federal Express, of Memphis, has won the admiration of Wall Street with its steady growth and its accomplishment in making overnight delivery an everyday business practice. Most analysts predict that, at worst, Federal Express will suffer a couple of years of depressed earnings from ZapMail’s unexpectedly slow start.

Western Union is in a very tough spot. Moving maladroitly to diversify from its slow-growing telex and telegram businesses, the Upper Saddle River, N.J., company has racked up three quarterly losses and piled up a Himalayan $900 million in debt.

The 134-year-old concern has eliminated dividends, cut its work force and employees’ salaries 10%, and is now holding a fire sale of subsidiaries to try to stave off disaster. A bankruptcy-court reorganization “is a possibility, though not a probability,” says one senior official, who asked to remain unidentified.

Federal Express rolled out ZapMail last July 2, amid boasts that the product would soon be used as routinely as overnight package delivery.

The idea had sizzle. Under the system introduced in July, Federal Express dispatches a courier to pick up the document and drop it off at a local Federal Express office. Or senders can drop off the documents themselves.

From the office, it is transmit-ted by facsimile machine across telephone lines to a second company office, where it is carried by courier to the office of the recipient. Federal Express says delivery will take no longer than two hours.

Part of the appeal, company officials say, is that the company’s facsimile machines, built by the Japanese Nippon Electric Co., turn out a copy on plain white bond, rather than on what they say is a less attractive thermostatic paper. Officials contend that the text, signatures and pictures are also clearer because the machine lays down ink far more densely than the common facsimile machine.

Praise for the machine’s technical capabilities did not produce the expected volume of orders, however. This month, the number of document transmissions reached a record 3,950 a day, and Daniel N. Copp, Federal Express’s vice president for communications, says confidently that the company is about to cross the 4,000-a-day threshold.

Unfortunately, analysts say, Federal Express would need to send about 27,000 documents daily just to break even. The company has invested more than $100 million in ZapMail so far, and was zapped by a $60-million pretax operating loss in the company’s second quarter, which ended last Nov. 30.

Changed Forecast

Last September, company officials predicted that it would take 12 to 18 months to break even. By January, they had seen enough to issue a new forecast that the break-even point would come “within a few years--and we haven’t said specifically what a few is,” Copp says.

Federal Express has also reduced the price of the service, to $25 from $35 for the delivery of a document of 20 pages or less.

Last month, Federal Express officials shifted gears again, saying that the more important half of ZapMail service is yet to appear. Next month, they say, the company will begin installing ZapMail facsimile machines at the offices of customers, who will be required to pay for a certain number of monthly transmissions.

The company hopes to make it a habit among employees to zap documents to other offices with ZapMail machines. The Federal Express machines cannot send to or receive documents from facsimile machines of other makes.

Federal Express says it expects that most of its ZapMail revenues ultimately will be derived from on-premises machines; one analyst estimated that as much as 90% of ZapMail revenues may come from such transmissions.

Analysts say it is difficult to draw any simple cost comparison between documents sent via ZapMail and those transmitted on other facsimile machines, since such costs depend on the number of pages sent and the distance that they are transmitted. Facsimile machines, which use telephone transmission to relay documents, are generally priced between $3,000 and $10,000.

Quality Versus Cost

The cost of standard facsimile is “a few cents per page--peanuts, really--plus phone bill,” says Craig Kloner, an analyst with Prudential-Bache Securities Inc. “ZapMail’s a great deal more, so it’s clearly for people who want a better quality of reproduction.”

Potential competitors are following the progress of ZapMail with interest. They include NetExpress, a subsidiary of DHL Worldwide Courier Express, of San Bruno, Calif.

This year, NetExpress plans to begin testing a similar “facsimile-based electronic mail” service that company officials promise will also yield high-quality copies. It will be at least two years before the product is brought to market, said Pam Laird, a marketing official with DHL Worldwide, adding, in apparent reference to ZapMail’s slow start, “it looks like we’ll have enough time.”

Competitors of Western Union’s EasyLink have found that they, too, have had more breathing room than expected.

The electronic-mail, or computer mailbox, service was first offered in 1983 as Western Union’s response to the changing world of business communications. Telex provided 29% of Western Union’s $1 billion in 1983 revenues, but the increased use of word processors and personal computers has moved business communications increasingly away from the older technology.

Took the Offensive

Western Union took the offensive, designing EasyLink as a high-speed data communications network that allows customers at desk-top or larger computers and word processors to dispatch messages to each other via telephone lines and to telex machines around the world. The key is software that overcomes the incompatibility of the many different kinds of computers and word processors.

EasyLink can be used to draw information from computer databases, or to send messages printed on paper, using Western Union telegrams or mailgrams. Unlike transmission systems based on facsimile machines, computer-mailbox communications can send text but no graphic material.

Beginning last month, Western Union teamed with DHL Worldwide Courier Express to offer two-hour and overnight courier delivery of letter-quality documents originated in the EasyLink system.

Western Union poured $115 million into the system last year, including $45 million for marketing. The effort increased the number of monthly communications to 2.5 million at the end of 1984, up from 600,000 a year earlier.

Last fall, Western Union refocused its marketing to emphasize sales to “communities of interest” within an industry. For example, Western Union sales representatives have approached large aerospace and auto companies and tried to interest them in handling their frequent communications with suppliers.

Greater Immediate Interest

Such specific business uses of electronic mail may have greater immediate interest to firms than the handling of general correspondence, says Roy Andersen, national vice president for EasyLink.

One analyst, Glenn Pafumi of the Dean Witter Reynolds Inc. brokerage, estimates that Western Union has a 35% share of a market that it now shares with such competitors as MCI Communications Inc., which offers MCI Mail, and ITT Corp., which offers Dialcom service.

But other competitors, notably American Telephone & Telegraph Co., are expected to soon enter the fray, and Western Union is still far from its goal of making EasyLink its largest revenue producer. The service lost $24 million in 1984.

More ominously, some technology watchers who predicted fast growth for the business are scaling back their estimates. H. Paris Burstyn, an analyst with the Arthur D. Little Co. in Cambridge, Mass., said electronic mail was a $150-million market last year, a figure that may double in 1985.

But he said that, already, growth has been “substantially less than some have predicted.” The reason? “People just seem to like paper,” he said. “Habits are hard to break.”

Western Union’s spending on EasyLink has combined with other difficulties to precipitate crisis. The company’s slow-growing core business simply did not generate sufficient cash to easily pay for the EasyLink investments and the company’s two other start-ups, in cellular and airline telephones.

Other Problem Areas

Sales of cellular telephones made by Western Union’s E. F. Johnson Co. subsidiary have been slow, and delays last year hampered the inauguration of Airfone Inc., an aircraft-telephone venture that is half owned by Western Union. Last November, the Federal Communications Commission tentatively voted to deny crucial permanent frequencies to Airfone, but the company is operating under a temporary license that lasts until December, 1985, and it hopes to demonstrate substantial demand for the service.

Meanwhile, Western Union has been paying out large sums in severance pay as it has trimmed the work force of its largest subsidiary, Western Union Telegraph Co., by about 2,000 over the last two years. The company is $155 million short of the funding it needs to pay off expected pension payments.

On top of these problems, a board-room war erupted, in which former Chairman and Chief Executive Robert M. Flanagan was replaced last August by T. Roland Berner, who is also chairman of Curtiss-Wright Corp., a maker of aerospace parts. Analysts differ on which man bears more responsibility for Western Union’s turmoil.

Banks Cancel Loan

Berner himself stepped down last Dec. 21 in favor of Robert S. Leventhal, an outside director, but not before a consortium of banks had taken the unusual step of canceling a badly needed $100-million loan package. Western Union has sold receivables and gotten the banks to provide new short-term loans and defer interest payments, but it is still negotiating for a long-term debt restructuring.

And another black cloud hangs on the horizon. The FCC might soon decide to sharply increase rates for “special access lines”--the single-purpose telephone lines leased, for example, to link telex users to Western Union’s large switchboards.

If the commission raises them as it has proposed, Western Union could be socked with additional costs of $150 million a year. The company is fighting the proposal with the commission and in federal courts, a spokesman said.

Meanwhile, labor contracts expire in July, and it is not clear that the United Telegraph Workers Union and the Communications Workers of America will agree to pay cuts to help the company weather the storm. “We want to keep the company afloat, but we’re not going to be threatened into giving up pay,” said Charles Saunders, a union representative with United Telegraph Workers Local 15 in northern New Jersey.

Western Union officially insists that the crisis has been weathered thanks to the short-term agreements with the bank consortium. They assert that setbacks are a part of any new technology.

“It’s like the space program,” said a senior Western Union official. “We’ll see a few rockets blow up next to the gantry, but we’re going to get them into space yet.”