Fiberless long-distance: PointOne wholesales over a managed IP network

As fiber network builders count their route-miles and wait to configure end-to-end voice over IP, some emerging long-distance carriers are turning up their noses at fiber and quickly laying out transport-agnostic business plans. In the process, they hope to replicate the networks of the big fellas cheaply - but not cheaply enough to endanger quality of service.

Austin-based PointOne Telecommunications is one such hopeful. A 2 1/2-year-old classic garage start-up, PointOne's mission is to offer packet-switched voice services nationwide using a toll-grade, privately managed network. The company has 60 points of presence operational so far (see figure) and has raised $58.8 million in equity investments from the likes of Soros Private Equity Partners and J.&W. Seligman & Co. It also has an additional $110 million in equipment financing from Lucent Technologies.

PointOne launched service in early 1999 and carried almost a quarter of a billion minutes of voice traffic in its first year of operation. "It's a packet network traversing on an ATM backbone," said Steve Braasch, vice president of marketing for PointOne. "We manage the entire network with no Internet circuits - it looks like the legacy telephone network."

But without all the expense. Instead of paying a few million dollars for a Class 4 switch, PointOne can enter a marketplace with a Lucent access switch that costs between $200,000 and $1 million, depending on capacity, which can vary from two T-1s in a very small market up to OC-48. In place of older Lucent switching technology, PointOne plans to deploy Lucent's APX8000 access switches, a denser switch that provides similar carrier-class IP capabilities.

PointOne doesn't see the value proposition in owning fiber, and Braasch claims only 3% to 5% of fiber capacity available currently is being used industrywide. "The cost of fiber has dropped continually; we are indifferent to the mode of transportation," Braasch said.

Instead of spending its venture capital money installing fiber, PointOne focuses on software tools to integrate its hardware solutions and homegrown network management tools to handle QOS guarantees. "It enables the customer or carrier to have features and benefits notavailable in a legacy environment such as burstable bandwidth and the tracking of call flow through a Web customer interface," Braasch said. In addition, instead of forklift upgrades, PointOne can enhance its network with software-based upgrades, so enhancements will be easier to implement.

So far, PointOne is treading rather lightly when it comes to the customers it's targeting. The company is getting its feet wet in the wholesale marketplace - Tier 2 and Tier 3 carriers with a regional presence. "They don't have a lot of carrier options. Typically, we can price our network 10% to 15% below what they are paying," Braasch said. "It's given us a chance to acquire traffic on a regional basis as we grow the network. We will go after Tier 1 carriers after our network is [fully] deployed."

Global IP telephony will hit $8.5 billion by the end of 2000, swelling to $24 billion by 2002, according to IDC. Wholesale IP telephony minutes will increase 300% by the end of the year, jumping from 600 million minutes in 1999 to 2.4 billion minutes by the end of 2000.

Recent management additions echo the wholesale focus. Paget Alves, a former president of sales and support for Sprint's business services group, who also held executive positions in Sprint's wholesale services group, joined PointOne as CEO in June. Co-founder Richard Sorenson remains on board as chairman. Ron Harden, PointOne's chief operating officer, was marketing wholesale services for Williams Communications Group. PointOne is expected to soon appoint a well-known former CEO of a national next generation carrier to its board of directors.

How's the business plan doing so far? While the privately held company would not divulge past financial performance, PointOne does project $40 million in revenue this year, Braasch said. The customer list doesn't include any marquee names, but dial-around providers such as VarTec Telecom and prepaid service providers are signing on in hopes of saving 10% to 15% on their leased capacity costs.

"We're really excited about the growth prospects for this company," said Jim Kozlowski, a partner at PointOne VC investor Texas Growth Fund. "Now the question is, can we execute? We have a lot of confidence this management team can do that."

Although PointOne's Web site maintains that the company will keep a "core focus" on the wholesale market, the real gravy for carriers such as PointOne will lie in enhanced services - such as unified messaging, groupware and real-time video - offered to enterprises that will move their traffic onto a single communications network. "The game plan long term is to capitalize on the convergence of services with a single pipe technology to carry voice, data and video," Braasch said. "We will pick markets to beta test the enterprise offerings and then do a more national rollout."