Some new kids on the telecommunications block are taking on the Baby Bells by offering businesses Net connections that are both faster and cheaper than services from old-line telecom providers.
Yipes, Telseon and other start-ups are building networks in metropolitan areas to offer businesses more than twice the speed at about half the cost of similar services from traditional phone companies, such as Pacific Bell and Verizon Communications. Analysts say the start-ups could take a substantial bite out of the traditional phone companies' profits if they can convince businesses to take a chance on relatively unknown carriers.
"This could be a threat to traditional telcos because the start-ups are essentially offering twice the bandwidth at half the price," said John Armstrong, an analyst with Dataquest. "The phone companies will have to respond to this. They can't just lay there and play dead."
While the traditional phone companies offer Net connections through their older data networks, the new start-ups are using Ethernet networking technology to connect businesses and service providers to high-speed optical networks in metropolitan areas. They partner with long-distance carriers, such as Qwest Communications International, to connect their local networks to the Internet.
For example, a phone company that offers a T3 connection, which runs at 45 megabits per second (mbps), typically charges between $3,500 to $15,000 a month. But the new start-ups charge between about $1,000 to $3,000 a month for a 100-mbps connection, said Tom Jenkins, an analyst at telecommunications consulting firm TeleChoice.
"These guys have a good shot at succeeding," Jenkins said. "It's the land rush now. There is a real opportunity to really just attract customers left and right."
The start-ups can offer cheaper prices because they have lower operational costs, and can build their networks with less expensive equipment, while the phone companies use more expensive equipment for their traditional networks, said Paula Reinman, Yipes' vice president of marketing strategies.
In addition to lower prices and faster speeds, analysts said the start-ups have two key advantages over traditional carriers: The networks are easier to install and manage because the start-ups are using Ethernet--the most popular networking technology used to link PCs together in an office--to connect to the Internet. Many off-the-shelf, Ethernet-based management tools already exist.
Another advantage the start-ups have is the ability to offer increased network bandwidth, from 1 mbps to 1 gbps (gigabits per second) within minutes if a business needs it, analysts said. If a music Web site holds a live concert and expects an increase in the number of visitors, it can ask Yipes for more bandwidth during the concert. By contrast, traditional phone companies take 30 to 60 days to be able to increase bandwidth.
Representatives from phone companies SBC Communications and Qwest, which recently merged with USWest, could not be reached for comment. But a Verizon spokesman said the company is not surprised that new competition is cropping up.
"There's a tremendous amount of competition for business services with a variety of technologies, and Verizon fully intends to continue to upgrade our networks," said Verizon spokesman Dave Frail. "We are focused on increasing capacity and flexibility of our networks."
Analysts say Yipes and Telseon are the two biggest players in the market to provide Ethernet-based Net connections to businesses, and they expect a healthy dose of new competitors, such as Cogent Communications, to enter the emerging market.
Both Yipes and Telseon, which have raised about $100 million in venture capital, are racing to build networks throughout the United States and expect to offer services to 20 cities by the end of the year. Customers range from universities to law firms, the companies say.
Yipes offers service in Boston, Chicago, San Francisco and Washington, D.C, and it launched its service in San Diego yesterday. The San Francisco-based company hopes to expand to 58 cities in the next few years.
Yipes and Telseon have different business models, however. Yipes is focused on offering Net services directly to businesses, but it also caters to service providers that use Yipes' network to offer Ethernet-based connections.
Telseon offers its services mostly to Internet service providers, such as Verio and PSINet, and to co-location firms, such as Colo.com. Co-location firms build facilities that serve as neutral places for service providers and Web hosting firms to locate their servers and equipment. They allows them to link their networks together.
Forrester Research analyst Charles Rutstein said the market for Yipes, Telseon and others is still emerging but could change the competitive landscape in the coming years. Yipes, for example, plans to offer phone calls over the Net next year to compete directly against the phone companies.
The traditional phone companies eventually will have to respond to the young start-ups, either by buying them or by building similar networks themselves, Rutstein said.
"We're so early in the market, but this is one of those massive, fundamental shifts that come along every several years--the shift being the move from very complex, old networking technologies to much simpler and much cheaper networking technologies," Rutstein said. "The traditional telcos will most likely continue to ignore this for a while. It all depends on how fast this takes off for the telcos to wake up."