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OpenReach targets the enterprise

OpenReach's all-software VPN seems to be the first credible replacement for expensive Frame Relay links.

San Francisco -- Mark Tuomenoksa, chairman and CEO of OpenReach, has pulled off the enviable feat of a $31m second funding round in one of the most depressed markets in recent memory. The business that Lehman Brothers, Sofinnova Ventures, IDG Ventures and OpenReach's existing investors are backing was originally aimed at small and medium-sized ventures, but it has turned out to have huge appeal to the Fortune 100. Put simply, OpenReach's all-software virtual private network (VPN) seems to be the first credible replacement for expensive frame relay links.

"It's not just a box," Tuomenoksa told the451. "We see a category emerging doing VPN as an overlay service, not part of the network." That's one reason that big ? or at least multinational ? companies need the product as much or more than their smaller brethren. The cost of international connections is a lot higher than domestic links ? unless you piggyback those links over the Net.

"They can use existing Net connections, which are themselves cheaper than frame relay or private lines," Tuomenoksa said, "and they can drop the software on existing Pentium machines." It's a formula calculated to appeal to hard-working enterprises, which is lucky, because smaller companies are becoming more and more reluctant to sign checks. "We're really targeting, as we move upmarket, companies with about 100 locations," Tuomenoksa said.

The cost varies, depending on the size and number of locations, but a good deal for OpenReach runs to about $500,000 a year. Of the company's 100 customers, about 10% are in that range ? the most recent being the Four Seasons hotel chain, which after a successful 25-site pilot will deploy OpenReach in all its locations.

"Larger companies make decisions more slowly, but you make more money per customer," Tuomenoksa pointed out. Besides hospitality, key industries for OpenReach's services include manufacturing, where supply chain management and product design chew up international bandwidth, and financial services, which are getting more security-conscious every day. "Banks are not trusting traditional data networks anymore," Tuomenoksa claimed. "They were only ever assumed to be secure because ATT or WorldCom said they were. They have no encryption or authentication."

To address that growing image problem, one network provider ? Asia Global Crossing ? has selected OpenReach as its co-branded VPN service, offered whether or not the customer has subscribed to the physical network. Prescient, a systems integrator based in Chicago, is another partner. "Previously, they've made a lot of money selling hardware," Tuomenoksa explained. "Now margins are dropping as vendors start to compete with resellers. We're able to come in along with Prescient and allow them to offer new services. Besides the one-time revenue for design and installation, they get an annuity stream from the VPN service."

You'd think it would be easy to sign up partners for deals like these, but Tuomenoksa admits that it's not. "One of the problems we have is that everything we're doing is so new. It takes a long time before people feel comfortable with it. For us to be successful in the long term, we need continued relationships with reference customers. Once we get reference accounts out there, there's going to be a pull. The main thing is to get the word out about what we do."

Can the tiny company succeed? Tuomenoksa believes it might. "We now have $51m, good backers and good customers," he pointed out. "That said, we've also got a big bull's-eye painted on us." AT&T and WorldCom, in particular, have taken to marketing defensively against OpenReach, and they're not the only ones. "Cisco's marketing is so strong, they've convinced everyone you can't do this in software."

Yet Tuomenoksa remains optimistic: "I'd love to take this thing public. I want this to be the next Microsoft or Cisco. It's just so much fun working on something so disruptive. We are going to draw a lot of fire from the incumbent companies, and they have a lot of firepower, but we have good responses on hand for different claims that might get thrown our way. And it's kind of a double-edged thing. When customers hear AT&T talking about OpenReach before they've brought us up, they start to wonder!"


the451 (www.the451.com) is an analyst firm that provides timely, detailed and independent analysis of news in technology, communications and media. To evaluate the service click here.

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