Anatomy of a Hosted VoIP Business

“Phone systems suck,” said Dan Hoffman, CEO of New York City-based VoIP provider, M5 Networks, in a keynote address at last month’s ISPCON in Orlando. Instead of a PBX, his company sells a powerful hosted service that we covered in more detail a couple of months ago (see Hoffman’s M5nifesto).

As a regional and focused voice provider, he sees other regional voice providers as his competition (such as San Francisco-based Call Tower, Louisville, Ky.-based Smoothstone, and Herndon, Va.-based Cisco specialist PingTone). In fact, Smoothstone calls its service “Converged Communications as a Service” which is a more accurate description but a worse acronym than VaaS (i.e., “Voice as a Service,” a term Hoffman has used).

Hoffman likes to compare his voice offering to Covad’s. “Covad’s in 70 cities. It’s spending $15 million on marketing. It has too many products.”

Hoffman said that his company has ignored business opportunities that would have lured the company away from offering a purely hosted service. “We ignored opportunities such as on-premises phones, trunking hybrids, large enterprise customers, residential and SOHO customers, wholesaling, new markets (we stayed in New York City and now Chicago), Exchange hosting and other products, and offering full call centers. We don’t control the LAN. We don’t solve printer problems.”

The company focuses on small and mid-size businesses. It emphasizes building trust in business relationships (as opposed to being the first to offer a new technology). “For example, when we’re asked how long it will take to provision a T-1 line, we say that, honestly, 80 percent of the time it takes four to six weeks, but some installs are early and some are late.”

Hoffman said that companies buy a new phone system every seven years. So the company cultivates its prospects for the long term. “We want to always be at the table when that decision is made. But we hold our price. We are not cut rate. We do not use price to differentiate our service.”

Asked about wireless, Hoffman said that his company does not yet support a wireless phone, and he also feels that voice calls on FMC (Fixed/Mobile Converged) systems are not yet up to M5’s standards.

Asked who owns the equipment, Hoffman replied, “the router is ours. If you’re a customer, you do not have a password, but you can buy another router for yourself. The customer buys the phones direct or from our VAR.”

He believes that voice prices will be stable as bandwidth prices decline. “People are used to negotiating on telecom, but we believe that’s about to end.”

In summary, selling a service is good and profitable. If you’re just selling bits, be prepared to lower your prices now and every year in the future.

Adapted from an article originally published on

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