Competitive VPN players benefit from consolidation

Consolidation has dramatically reshaped the independent market for virtual data services in recent months, as two major players have been acquired and two others have merged.

The result may be a smaller number of more vigorous competitors, however.

The announcement this week that Netifice and MegaPath will merge follows the acquisition of GoRemote by iPass and EarthLink Communications’ announced plans to buy New Edge Networks. The four companies – Netifice, MegaPath, GoRemote and New Edge – had survived the competitive service provider bust by providing data services to small and mid-sized businesses.

EarthLink officials said Thursday that they plan to pump significant resources into New Edge, particularly in sales and marketing, to grow sales to SMBs on its national network. Meanwhile, Netifice and MegaPath executives believe their combined company will have the scale it requires to succeed.

“SMB has been step child,” admitted EarthLink CEO Garry Better. “But it also has been a very profitable business for us, selling Web Hosting and single lines to very small businesses. The size of the business never was big enough to get the investment, and the pending acquisition of New Edge changes that.”

EarthLink has been focused at the low end, selling single lines to SoHos and single-site businesses, said Bill Hayes, president of the value and SMB businesses for EarthLink. With New Edge, the company moves upmarket to serve multi-site businesses.

“We will lay on top the Web hosting, security, and business-class VoIP services,” he said. “Plus, NewEdge has 300 installers – we can use them to go into professional services for things small businesses would like to have.”

NewEdge didn’t have the financial resources to pay for advertising and marketing to grow its business, Hayes said, but with EarthLink’s backing, should be able to do just that, using the national footprint it has already established for its BigFoot network. The company’s sales growth went from single digits to double digits in the wake of the merger announcement, he noted.

“Some customers who liked the company had been concerned that they might not stay in business,” Hayes said.

The Netifice-MegaPath combination will create a new company, as yet unnamed, that will have $35 million in new investment dollars from existing investors of both companies. The company combines the strengths of both operations and will have VPN, dedicated access, VoIP and managed security offerings as well, said Craig Young, chairman and CEO of Netifice, who will run the new firm as well.

“We felt the synergies and the scale of the combined company will help us both,” he said. “When we shared the idea with our boards and our investors, they were very excited.”

While both companies sell VPNs, MegaPath brings a strong direct Internet access business and a newly developed security offering as well, while Netifice is developing a VoIP offering that will be complementary to MegaPath’s Internet business, he said.

“We operate in the same space but we didn’t compete that much,” said MegaPath CEO Brian Service, who is leaving the company after the deal close, which is expected in April. “That was also part of the attractiveness. There were things we did that they didn’t do.”

One of the first steps post-merger will be to create a single network from the two networks currently in operation, including MegaPath’s 10 Points of Presence on Level 3 Communications’ national network and Netifice’s 30-PoP private net.

“There will be some network consolidation, because part of this attraction was going to get new revenues but also synergies to reduce cost, and get to cash flow break-even in early 07,” he said.