Telecom giants hooking into start-ups' Web services

Investments in messaging start-up Tornado Development underline the willingness of telecommunications giants to take bets on new technologies and companies with short track records.

3 min read
Intel and Global Crossing are expected next week to announce investments in Tornado Development, a unified messaging firm focused on business customers.

Tornado is a small company in a market that has yet to break into mainstream consciousness. But the deal underlines the growing willingness of giant telecommunications companies to take bets on new technologies, new markets and companies without long track records.

The multimillion-dollar third round of funding in Tornado, a 5-year-old Los Angeles-area company, also will include stakes from several venture capital firms, according to sources familiar with the plans.

Global Crossing, an international communications service provider with a penchant for new technology, already has a stake in Tornado's future. It signed a deal last month that lets it use Tornado's systems to offer unified messaging services to its customers.

Unified messaging allows consumers to gain access to a variety of messages, such as voice mail, email, faxes and paging services, via a single phone call or Web page.

The equity stakes should bolster Tornado's prospects, but also further signal that communications carriers are beginning to recognize the value of new, integrated Internet and voice technologies that start-ups are creating. AT&T, for example, recently invested in Net2Phone and TellMe. The carriers, which are held to far higher reliability standards than online companies, are overcoming their reluctance to trust their tightly guarded reputations to nascent Web technology.

Analysts say it's about time.

"The bottom line is if carriers don't offer it, customers will go elsewhere for it," said Dana Thorat, a senior research analyst at market watcher IDC. "We're starting to see a lot of free services and many of these (start-up) companies are going directly to consumers."

The pace of deals between giant communications companies and tiny technology start-ups has picked up in recent months, as the large companies begin moving more quickly to add Net-like services to their traditional voice portfolios.

Baby Bell local phone companies Pacific Bell and Bell Atlantic have signed deals with Internet messaging firms to use products such as FollowMe, Webley and Linx Communications' Wildfire. Similarly, Phone.com's unified messaging unit, OneBox, said it was close to a deal with Canadian wireless company Telus.

More deals will follow as consumers begin catching on to these services' potential, and as competition between the carriers heats up, analysts predict.

"The carriers are looking for these differentiating services," Thorat said. "In order to be quick to market, (the carriers) have to do this. They don't have time to build these things."

The investments and partnerships give more than just simple access to technology, analysts add. A foot in the door can ease the way to a future acquisition--a strategy that the communications giants have shown they're certainly willing to pursue if the technologies prove valuable enough.

"As far as taking equity positions, unified messaging and voice-mail services are a good market; gross margins are pretty high. It could be a good investment, and it may be strategic if (the carriers) want to buy these guys out," said Stephen Wing, a communications equity research analyst at American Fronteer, a Denver-based broker-dealer and investment bank.

"Eventually you're probably going to see some merger and acquisition activity once some of these smaller players get some critical mass," Wing said.

At the heart of the carriers' recent trend toward partnering with or investing in smaller Internet communications start-ups is the need to attract high-end customers, such as mobile professionals or other so-called power users. These subscribers use the network more frequently than ordinary customers and are willing to pay for enhanced services.

"You want to increase network traffic and minutes of usage, and a lot of these services do that," Thorat said.

Others agree, saying unified messaging can link many services together and make customers more likely to use a full package of communications products.

"The carriers have a lot of bandwidth that they want to fill up. Once you have a relationship with the customer, hopefully you can get them to use other services," Wing said.

But analysts say the carriers, which expect nearly flawless network reliability, will face challenges in managing and maintaining their solid records of service once they begin widely offering Web-based voice mail, chats and message retrieval.

Global Crossing did not comment on the pending investment. However, it previously said it had put Tornado through a "rigorous evaluation" and was satisfied with the company's performance.