Managed Telecom Grows Amid Telco Rubble
Erin Joyce
[Aug 16, 2002]

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."

About M5

Incorporated May 2000, M5 is a privately funded outsourced communications provider serving corporate customers. The M5 management team co-founded and built Interport Communications, one of the first and eventually largest commercial ISPs in NYC, before selling it to RCN in 1998. M5's strategic industry partners include Cisco, AboveNet, Verizon, VocalData and Focal Communications.

Fully funded and not venture-backed, M5 isn't pushed to take risks for aggressive market share growth. M5 needs no additional capital and runs current operations at a profit. Replicating the Interport model, M5 grows the company one happy customer at a time. Extensive demand for M5 services elevated M5 to financial stability fast. That's your best guarantee - a profitable company is a safe bet.