Pelago, the startup that has taken a contrary approach to packet-based telephony equipment, has concluded a trial with Telecom Italia Labs to certify some of its claims as a precursor to courting incumbent telecom equipment vendors for an OEM deal.
Flush with cash from a venture capital infusion in April, the company has rolled out its first product for delivering enterprise converged services. The next step is finding customers, and Pelago hopes incumbent vendors like Siemens, Alcatel and Lucent will help out in that realm.
Pelago in April closed a $32 million funding round to support bringing its products to market. The company has so far raised $49 million in two rounds. Advent International led the second round, and existing investors Charles River Ventures, Columbia Capital, Bessemer Venture Partners and Brooktrout also participated. Dominion Ventures and Silicon Valley Bank provided debt financing. The Brooktrout connection extends to Pelago's cofounders -- CEO Jean Dubois and VP of marketing Emre Onder. Dubois was the VP of engineering at Shiva, the VPN router and gateway maker acquired by Intel in 2000. Onder was VP of marketing for Brooktrout's IP telephony products.
Of Pelago 's 80 employees, about 60 are involved in R&D. Pelago's strategy of integrating a media gateway, switch router and application server in a single box runs contrary to the industry vogue of a 'decomposed model,' or discrete network elements handling functions like media, processing, call control and signaling. Pelago argues that an integrated box bypasses many of the management issues of a decomposed model, and avoids creating too much complexity. Plus, straddling the public switched telephone network (PSTN) and IP allows carriers to take their time upgrading the core networks to packet-based gear from circuit switches.
Pelago has a 'hybrid' business model, Onder told the451. The company plans to sell directly to service providers -- primarily competitive local exchange carriers that remain viable, such as Allegiance Telecom and Century -- and woo incumbent equipment providers for OEM deals.
An OEM deal is definitely a cost-effective alternative to building a direct sales team to target incumbent carriers, and solves the pressing problem of distribution. Pelago reckons there will be interest from the 'Big 7' voice equipment vendors -- Siemens, Alcatel, Ericsson, Nokia, Nortel, Lucent and Telecom Italia -- for its equipment since it is complementary to their existing portfolios. Also, cash flow problems means that R&D resources are scare, so few have the option of internally developing a similar product.
Most have sold advanced intelligent network (AIN) gear to carriers, which don't want to rip it out and are resistant to being forced to replace their core infrastructure. AIN is a telephone network architecture that separates service logic from switching equipment, allowing new services to be added without having to redesign switches to support them. Pelago has engineered its product to support AIN interfaces, but has used next-generation network processors in its switch fabric that can be configured, depending on what software stack the application is using, to handle ATM cells or IP packets.
Pelago is also tapping into a growing trend. OEM agreements are becoming more common, precisely because few incumbent vendors can afford to support parallel development efforts. OEM agreements allow them to leverage technology that has been developed using VC funding. There's also an identifiable need at carriers for the Pelago gear. PBXs have won the war against Centrex services, so carriers need equipment in their networks that can provide Centex services at lower costs than PBXs and outsourced management. At the same time, few are willing to make the investment in their core networks for IP-based services by replacing existing Class 5 switches.
Because Pelago has taken what could be seen as a contrary approach, combining a packet backplane with support for legacy AIN gear, it has no direct competitors. But that doesn't mean its competitive landscape isn't crowded. Incumbent vendors sell PBXs, which are a technology substitute for the Centrex services its boxes deliver. There's a host of players advocating the decomposed model, which is a network architectural alternative offered by softswitch vendors like Sonus, Telica and Cisco, media server makers such as Convedia, IP Unity, SnowShore, and even Nortel, which has both an enterprise and service provider version. Application server vendors such as Broadsoft are also going after the market in conjunction with media gateway vendors.
Pelago's box supports voice VPNs, enhanced call routing and forwarding and one-number 'follow me' services. The Voice VPN application allows companies to build a private-number dialing plan with end points from mobile phones to SIP phones. Also, enterprises and service providers can customize applications using Pelago's service creation environment software. PBXs can't replicate those features, Onder noted. Pelago's offerings augment existing services at enterprises, but provide them at lower costs. Pelago anticipates the products will be generally available in the third quarter, and it's holding out for initial revenues by the end of the year.
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