How will the [telephony] convergence make money?
A managed IP service platform is an integrated box that consists of processors, networking hardware, and IP applications. The idea is that this new box, which sits in the carrier's central office...
redherring.com
By R. Scott Raynovich
Redherring.com
June 10, 1999
Among the thousands of new competitive local exchange carriers (CLECs) and ISPs to emerge from telecom deregulation, competition is intense.
A number of startups think they have the answer for such competition. Basic voice and data services, these startups say, are outmoded commodities that will add little to the bottom line.
NEW BLOOD
Enter companies such as Shasta Networks, Spring Tide Networks, and CoSine Communications, all of which hope to provide a new computing and networking platform to provide such services. The business has no overwhelming buzzword, so let's coin it now: managed IP (ManIP) service platforms.
A managed IP service platform is an integrated box that consists of processors, networking hardware, and IP applications. The idea is that this new box, which sits in the carrier's central office, can be used to offload processing from traditional networking equipment such as routers and switches, allowing carriers and service providers to quickly implement IP-based applications and services without adversely affecting network performance or installing new hardware on the customer site.
CoSine, Spring Tide, and Shasta have all focused on outsourcing network security, which is expected to be a big cash cow for carriers because corporations do not want to support these applications internally.
Is ManIP hot? You might want to look at the case of Shasta. Founded in December of last year, it took in less than $10 million in VC financing before it was sold to Nortel Networks (NYSE: NT) last month for $340 million. Not a bad return for a company that was four months old.
It's a sky-high valuation, but many in the investment banking business believe it's warranted.
"On the valuation side, these companies are not being valued on a level that's rational, but there is a lot of long-term potential," says Mark Zanoli, managing director of Hambrecht & Quist's communications services banking group. "There is huge interest in these types of companies, both in an investment perspective and an acquisition perspective."
CATCHING A WAVE
CoSine is the latest ManIP equipment manufacturer to enter the fray. The company was officially launched last month, but it has been in development for over a year. Dean Hamilton, president and CEO of CoSine, says he wanted to launch the company once its products were being tested by carriers, rather than presenting "slideware." Mr. Hamilton is the former general manager of carrier signaling systems at Ascend Communications (Nasdaq: ASND), which is now owned by Lucent (NYSE: LU). He ended up at Ascend after it acquired the company he founded, SubSpace Communications.
"I saw this idea at Ascend, when carriers were turning on value-added features -- such as multicast -- on the Cisco (Nasdaq: CSCO) routers," says Mr. Hamilton. "The complaint was always the same: when you turn on those features, the performance of the router drops precipitously."
"There's not a lot of money to be made in selling ten-cents-a-minute phone calls," continues Mr. Hamilton. "You make money with value-added services. For example, MCI WorldCom (Nasdaq: WCOM) charges $2,000 per month for a suite of basic firewall services."
If there is some hubris in the ManIP landscape, it's probably because of Shasta's recent windfall. Mr. Hamilton boasted of the investment banker interest in his company -- representatives from CIBC World Markets, U.S. Bank's (NYSE: USB) U.S. Bancorp Piper Jaffray, and Hambrecht & Quist were all allegedly sniffing around.
CoSine has pulled in a total of $34.5 million in three rounds of financing. Some of the VC investors include Communications Ventures, Lucent Venture Capital, Kleiner Perkins Caufield & Byers, and Norwest Venture Capital.
These companies aren't shy about the way in which they address the massive telecom services market. For example, one of CoSine's marketing slogans is that its IPSX 9000 switch is an "IP revenue starter kit" for the carriers.
Over at the Shasta booth, they seemed to share the regard for the CLEC industry. "The dirty little secret is that service providers aren't making money," said Nortel's Shasta unit spokesman, Tim Feldhousen.
THE DREADED TRUCK ROLL
Officials from both Shasta and CoSine mentioned the cost of the carrier "truck roll," in which a service provider must deliver bulky and expensive equipment to the customer site to deploy new services. Truck rolls also cost the carriers time in terms of the deployment of such services, since they take upwards of two months to schedule.
Indeed, Mr. Zanoli agreed that this equipment will help many of the carriers -- especially startup CLECs -- quickly deploy managed IP services that can help them compete with the larger carriers. The new model of hosting the equipment at the central office, without requiring site visits or more expensive equipment investment, is appealing.
"Some companies like Covad (Nasdaq: COVD) and NorthPoint (Nasdaq: NPNT) paid a $22 tariff for each copper line installed. They've got to turn that copper into revenue, so you've got to get these IP services out as fast as you can," says Mr. Zanoli.
As long as such a frenzy in the CLEC community continues, companies such as CoSine and Spring Tide are likely to follow Shasta's route to success. |
