Start-ups race to rent out telephony services

Several start-ups hope to grab a piece of the competitive but lucrative communications market by renting out and managing Net-based telephony services to businesses and emerging service providers. TalkingNets, AccessLine Communications, ShareMedia and other start-ups have built and installed their own telephony networks, so corporations and service providers don't have to.

Though largely unproven, the emerging niche underscores just how dramatic the shift toward Internet-based technologies and strategies has been in the communications industry. Time will tell how these start-ups do--telecommunications companies basing their businesses on cheaper Net-driven businesses are already having to morph their plans while more traditional rivals are quickly altering course.

Companies like TalkingNets are the latest in the growing number of software makers, communications providers and hardware giants that have jumped into the emerging application service provider (ASP) business--a much-hyped industry that hosts software and services so customers don't have to install and run applications themselves.

In this case, businesses needing phone services, such as regular voice mail, can rent them from the start-ups rather than buying and installing the phone systems themselves. Similarly, service providers--which want to offer new Net-based phone features to their business customers, such as the ability to send faxes over email--can rent the offerings from the start-ups, then resell them to their customers.

Analysts say that while the telephony start-ups have the potential to be successful, they face stiff competition and obstacles.

"They have huge hurdles to overcome," said analyst Tom Jenkins of consulting firm TeleChoice. "Initially, this is a niche. But long term, you'll see in two to three years a lot of small and medium-sized businesses will be interested."

Like other ASPs, the telephony start-ups' biggest advantage lies in cost savings: It's cheaper to rent than to buy and install software yourself. Jenkins estimates that the companies and service providers can save up to 30 percent to 50 percent in costs by renting from the telephony start-ups.

But the start-ups are competing against traditional phone companies, as well as Net-based phone companies such as Net2Phone and Deltathree, which have recently begun to target their Net-based offerings to businesses and other service providers.

Jenkins said one big challenge the companies face is convincing potential customers to feel comfortable renting their services because businesses and service providers have the natural tendency to build and install their own networks.

Another challenge is convincing companies to use Net-based phone services that merge a company's data network with its phone system. Internet telephony, or phone calls over the Net, has long been touted, but the rate of adoption has been slower than expected.

TalkingNets, a 1-year-old start-up, is offering local and long-distance Net-based phone service to high-speed Internet service providers that want to offer voice services to their small and midsized business customers.

The company, which has built its own private Net-based network, will also offer phone services ranging from traditional voice mail to unified messaging, to the ability to retrieve voice mail, faxes and email from a single device.

TalkingNets, which received an additional $20 million in funding last week, just launched its services with service providers in Denver and Cleveland. The company plans to expand to a total of 25 cities in the next year, said Mark Cortner, TalkingNets' vice president of marketing.

While TalkingNets is offering local and long-distance phone service, its rivals, AccessLine and ShareMedia, are focusing strictly on phone-based features, such as voice mail, unified messaging and call forwarding, the typical offerings of traditional phone-based systems, called "PBXs."

TalkingNets and ShareMedia are catering only to service providers, while AccessLine is targeting both service providers and businesses.

AccessLine chief executive Ian Widger said business customers can continue to use its local and long-distance phone service. But AccessLine, based in Bellevue, Wash., will manage its customers' other telephony needs, such as adding new phone lines, forwarding calls to employees' cell phones, and sending voice mail to employees' email programs, he said.

Analysts believe the best targets for the telephony start-ups are small and medium-sized businesses that don't have the staff or money to manage and build phone systems. But Widger's company, which received an investment from Sun Microsystems this summer, is going after midsized and large corporations.

"It's counter to the thinking that the market is in (small) companies looking to buy their first PBX," Widger said. "But our view is the large corporations are spending a lot of money on telecommunications...and they stand the most to gain from outsourcing their communications."

To thrive in the competitive communications market, the new telephony start-ups will have to offer new phone features and services that traditional carriers don't offer, analysts say.

"To keep (profit) margins high, these players will have to constantly innovate," said Mike Jude, of Enterprise Management Associates. "They have a chance to succeed, but it's not a market you can stand still in."