Unified messaging: The killer app for Net communications

"Integration into (the) existing email infrastructure is the key. The email client is becoming the preferred way to access messages."
--Jonathan Taylor, chief technology officer, MediaGate

The Internet has opened a valuable new medium of communication through which people can easily connect to content and individuals. Email was the Internet's first interactive application and has become a vital component for both consumers and businesses.

We estimate that the number of email boxes will grow from 213 million in 1998 to more than 750 million in 2003 (29 percent compound annual growth rate), assuming an average of 1.5 mailboxes for each Internet user.

With the Internet's explosive growth, multiple messaging technologies are being integrated into a standard, interoperable environment using the Internet messaging Protocol (IP). The decreasing cost of digital storage capacity and the advent of universal connectivity to systems over the Internet have given rise to the idea of unified messaging. With the increasing reliance on email, unified messaging has the foundation and market viability to alter the methods by which we communicate.

Unified messaging is a single point of storage and access for all message types, including email, voice mail and faxes. With cheap storage, large quantities of digital content can be kept regardless of origin or format. And with the Internet's capacity for communication, this content can be made easily accessible regardless of where a person logs on.

Unified messaging is more than just the amalgamation of information from several sources to a desktop, laptop or handheld device, however. Instead, it can be an integral business and personal communications function, particularly when it is enabled for wireless access. Take the cell phone away from someone who has been using one for years, and he'll feel handicapped without it. Unified messaging software will allow communications to reach a new level, making email, voice mail and faxes available with a quick touch of the button on a cell phone or personal digital assistant.

As our wireless analyst, Mark McKechnie, has espoused, the wireless market is in its nascent stages but is poised to explode. We anticipate an inflection point will come sometime in the next two years, similar to the way the introduction of the Mosaic browser launched the Internet. We expect the number of global wireless subscribers to exceed 1 billion at some point in 2002, and beginning in 2001 we will begin to see explosive growth in the number of wireless Internet data subscribers.

With its leading technology, Software.com* (SWCM, $148.50, buy) is positioned to be a primary beneficiary of this opportunity long term. Software.com is the leading provider of carrier-class email software, with an estimated 65 percent of the market. The company recently announced the acquisition of @Mobile.com, which will enable it to provide wireless instant messaging in addition to its traditional Internet email software.

The messaging marketplace is quickly expanding beyond email. There soon will be rapid growth in other technologies, including IP voice mail and wireless short messaging, as bandwidth availability continues to increase and technology improves to meet customer demand. The total market for unified messaging should reach $3.7 million in 2003, growing at a 36 percent compound annual growth rate from 1998.

With its leading position in the market for Internet email, Software.com will be able to extend its expertise into adjacent markets for ancillary services, such as digital fax delivery, voice mail and other unified messaging services.

Unified messaging addressable market (millions)
	1998	1999	2000	2001	2002	2003	Growth rate
Total email accounts	213.3	294.2	384.6	491	597.9	753.6	29%
Consumer	$170.64	$235.3	$338.5	$441.9	$550.1	$723.5	33%
Business	$639.9	$882.5	$1,292.3	$1,767.4	$2,295.9	$2,984.3	36%
Market opportunity	$810.5	$1,117.8	$1,630.7	$2,209.3	$2,846	$3,707.7	36%
Source: BAS

The penetration of this market is still in its infancy. Management at Software.com has targeted 150 Tier-1 global telephone companies and 60 wireless access providers, with only 50 of the 210 total signed to date. To further highlight the market potential, we believe penetration into the 50 accounts may be less than 20 percent with an expanding market opportunity, as Software.com adds additional modules and premium services to its platform.

Software.com is the clear leader for carrier-class email applications and the emerging leader for the nascent market of Internet messaging products. We initiated coverage of the company Feb. 25 and have a price target of $180 based on the long-term potential of the market.

(*Banc of America Securities maintains a market in this stock.)