Managed Telecom Grows Amid Telco Rubble

Amid the rubble that is the telecommunications landscape these days, a
sub-sector of companies has sprouted and appears to be thriving.

They call themselves managed telecom service providers: companies that buy
voice and data services from wholesalers and deliver it in bundled services
over an Internet connection.

Just don’t call them Voice over IP providers, or IP PBX “We do much more than that,” says Daniel Hoffman, the founder and CEO of M5, a New York-based
managed telecom service. Launched in 2000, M5 provides long-distance and
local phone service, T-1 Internet lines and all the bells and whistles of
call features one expects.

Hoffman says he and his buddies created M5 out of their experiences running
one of the original ISPs in New York, Interport Communications, which they
later sold. “At Interport, we spent $15,000 on a Toshiba PBX system, then
another $70,000 to upgrade it over the next four years as the company grew
from 10 to 70 employees. We specifically designed MTS so that businesses
could avoid this kind of expense for soon-to-be obsolete traditional phone
systems.”

These days, his pitch to small businesses goes something like this: given
the telecom providers that have filed for bankruptcy, leaving smaller
customers in the lurch for voice and/or data services, why not go with a
managed telecom provider which purchases services from all the major providers
such as Verizon, AT&T and Sprint?

“That way, we make sure they’re not exposed to one major provider that may
have failed.”

How it Works
A standard M5 package includes a T1 Internet access line, a back-up ISDN
line, managed router, flat-rate call plan with local and long distance and
all the bells and whistles one expects in voice systems (direct dial phone
numbers, conference calling), voice mailboxes, auto-attendants, forwarding
off-net to mobile or home phones, transferring, caller ID, intercom, call
lots, hold music, call accounting and do-not-disturb, to name a few.

M5 connects clients to a shared-tenant, hosted PBX over private IP
connections. You might call M5 and other providers such as Dallas-based Red Gap Cisco shops. Both deliver the
services with Cisco networking equipment and the Cisco 7960 IP phones (which
the customer can buy or rent).

In M5’s case, the hosted IP/PBX software is provided by Vocaldata and the
the point-to-point T1 lines are from Verizon as well as either ISDN or DSL
back-up. M5 manages connectivity to the PSTN on behalf of its
clients.

The customer pays anywhere between $10 to $135 per seat each month. Hoffman
maintains that the company saves customers about 23 percent a year compared
to what they pay for the same services separately. Already, the company is
closing in on its 100th customer and is preparing to expand beyond the five
boroughs to New Jersey.

Other companies providing similar bundles include Pingtone Communications of Virgina, Kancharla of Alabama and
CeriStar.

“What they do is integrate a number of platforms together: the local data,
features, transfers, call forwarding, all the PBX features,” says Christine
Hartman, a research director Tele-focused research firm Probe Research. The voice-over-packet
expert says she sees managed telecom services as a little more than a
healthy niche thus far.

But one key aspect of these bundled services, she adds, is long-distance
plans that are priced, similar to cell phone plans, by minutes.

“That’s the advantage that companies like M5 can leverage to their
advantage. If a customer decides not to outsource, to instead buy a PBX
system, that means they have to negotiate long distance with somebody else.”

Stealing the Provider’s Customers?

Despite its potential savings and the simplicity it offers, M5’s business
model bears an eerie resemblance to bankrupt CLECs (competitive local
exchange carriers), the start-ups borne of the 1996 Telecommunications Act
that eventually met their downfall when they had to compete with their
suppliers such as Verizon (an incumbent local exchange carrier).

But M5’s Hoffman prefers to look at the arrangement another way: Every
customer that M5 signs up represents incremental revenue to the suppliers
such as Verizon. “We’re actually competing with phone system providers such
as Panasonic and Avaya. And that’s a market that Verizon would love to get
into. By using their lines and volume, we’re bringing customers to
Verizon.”

Meanwhile, Verizon is also getting its feet wet in the managed telecom
service game, albeit outside the baby bell’s dominant regulatory region in
the northeast. In an alliance with Dallas-based GoBeam, Verizon has begun offering
wholesale bundled voice/data services called Verizon Voice Over Broadband in
the Chicago market.

“We believe in our relationship with Verizon,” Hoffman says. “We’re a
partner, and we’re pleased to see them reaffirming the validity of our model
(with the Chicago trial). We could compete with them eventually, but we’re
also a close partner of theirs.”

Nice Idea, But Still a Niche

David Willis, a vice president of global networking and strategies with tech research
firm META Group, says the marketplace for buying these bundled services is
still a few years off. Still, he sees niches to fill in the meantime.

“Local T1s are starting to increase in price and ILECs can charge more
because there’s no more competition,” he says. Plus, hosted PBX platforms
can help businesses reduce the number of access circuits they need, which
can be pricey.

But there are also other says to reduce those costs, he adds, such as
multiplexing, statistical multiplexes, ATM
and voice-over-frame relay.

“It’s just that Internet protocols win out because it reaches everyone you
want to reach easily,” he adds.

Another consideration with these new bundled services, he adds, is that
already-installed PBX systems that M5 and other providers such as Red Gap
want to replace have depreciation cycles of about seven years. “It takes a
while to wash (old technology) out of a system.”

In addition, META Group conducted a survey of most of the major corporations
last year and found that 45 percent were not ready to support voice and data
technology on one platform. The bottom line: they would need to invest on
the data side in order to be prepared to add a voice system to it.

For that reason among others, Willis says the market for these services is
still early. “We see this with an average install base of about 100 seats in
a small company, with maybe a few big companies giving the technology a try
in certain workgroups.”

Probe Research’s Hartford agrees.

“I believe the transition to voice-over-packets is a 20-year transition. And
most of that work will be done on the edge of the network. That’s where M5
is making the economics work. That’s not to say it won’t be powerful in the
long run.”

“But it’s also basically an outsourcing decision for many of these companies
and how much companies want to outsource. And right now, a lot of companies
are fed up with technology. This way may solve (their problems) faster.”