Intel's Chips Are on VoIP

Intel Capital's investment in Fonality shows how the chip giant and others see phone-PC technology thriving in the small-business market

Last year, chip giant Intel was the largest U.S. corporate venture capitalist to fund startup companies, pouring some $1 billion to spread the use of high-speed WiMAX technology throughout the nation. This year, Intel is backing another communications technology it hopes will proliferate—voice-over-Internet protocol (VoIP).

On Feb. 7, VoIP startup Fonality disclosed that Intel Capital, the chip maker's venture capital arm, is the lead investor in its $7 million round of venture funding. While that amount is small, analysts point out that through a steady flow of similar investments in emerging companies, Intel helped put wireless broadband technology Wi-Fi on the map.

Big Payoff

This time, Intel (INTC) is betting that Fonality, which requires Intel-based PCs to run its phone software, will help it boost chip sales and capture a larger share of the small- to medium-size business market. "Ultimately, you want the SMB segment to consume more computing resources," says Venu Pemmaraju, a senior investment manager at Intel Capital. "If you look at the segment Fonality is going after, that's a market we need. Those are the types of things that SMBs are looking for, and they run on Intel servers."

Intel and others are hoping this is the year VoIP adoption by businesses hits the accelerator. Startups like Fonality and TalkSwitch, as well as telecom and tech-industry giants, including eBay's (EBAY) Skype, Vonage (VG), Cisco (CSCO), Nortel (NT), and Microsoft (MSFT), are redoubling their efforts to use VoIP to penetrate the small-business market. "The lines between the phones and the PC have begun to blur. PCs are becoming the phone systems," says Fonality CEO Chris Lyman.

The payoff: More than 3 million American businesspeople will use VoIP services by 2010, up from 400,000 today, as that market grows nearly tenfold, to reach $2 billion in revenue, according to consultancy In-Stat. Sales of equipment, such as boxes made by Fonality and others, will actually top that sales amount, predicts David Lemelin, an analyst with In-Stat.

Much Easier to Use

What's driving the growth of Internet phone systems? Small-business customers are seeing a big reward. Last spring, Brian Thompson, chief information officer at Portland (Ore.)-based property-management firm PREM Group, sank about $20,000 into a new VoIP phone system for his 60 employees. The gear, made by Fonality and using the Web to send calls on the cheap, cut the business's phone bills by 40%, or $300 a month. While such VoIP systems have been available for some years, "now, the cost savings are substantially more," says Thompson.

The Web-calling equipment is also significantly easier to use and install than only a few years ago. As a result, "small businesses are adopting a lot more technology," says Peter Alexander, vice-president of worldwide commercial marketing at Cisco. "We are trying to make these technologies available to companies of smaller and smaller size." Later this year, the networking giant plans to release a new phone system that's less expensive and easier for small businesses to set up.

Cisco is going to have plenty of company. Brian Roberts, CEO of cable heavyweight Comcast (CMCSA), recently talked about how small businesses—employing some 52% of U.S. workers—could potentially prove to be a $25 billion annual revenue opportunity.

That's a market his company will go after big time this year: Comcast plans to unveil special small-business bundles, including video, high-speed Internet access, and voice calling. Plus, it will spend $250 million on extending its network to reach small businesses like pizza parlors and doctors' offices this year, according to the company.

Jonathan Schildkraut, a telecom analyst at Jefferies & Co., believes that in 2007 business VoIP will become the new battleground between cable companies and traditional telcos like AT&T (T). These outfits have been fighting it out over residential subscribers for years.

Dialing the BlackBerry Crowd

The competition in VoIP is shifting from serving individual consumers to going after small businesses. The reason: The payoff is higher. Small-business users spend three to four times more than consumers, according to VoIP service Jajah, whose investors include Sequoia Capital. On Feb. 7, Jajah unveiled a new service for smartphones like the Treo and BlackBerry, which are popular among business travelers. Previously, these users had to download special software onto their mobile phones to take advantage of the Web to make calls for mere pennies. Now, they can make calls without any downloads, simply by going to a special Jajah Web site.

Using the Web browser on their phones to click on contacts in their address book, such users can make phone calls. The startup is counting on this feature to grow its community of business users from 15% to up to 30% of total users by yearend, says Jajah co-founder Roman Scharf. "To push into the business market is one of our big goals for 2007," he says.

Other companies, such as Internet-calling provider Vonage, have come out with new devices that especially appeal to business travelers. Vonage's V-phone is a tiny memory card on a keychain that turns into a Web phone when inserted into a laptop (see, 2/5/07, "Vonage's Peculiar V-Phone").

Beefing Up Security

Not only ease of use, but also enhanced security features, are key to attracting business customers. Take Skype, whose Web-calling service is already used for conducting business by 33% of its 171 million customers. On Feb. 6, Skype announced that Instant Messaging security provider FaceTime released special software that will allow information technology administrators to control how Skype is being used on their networks.

Now, for example, they can disallow the use of Skype's file-sharing features by a certain person, a department, or by the entire company, says Kurt Sauer, chief security officer at Skype (see, 1/7/07, "eBay Pressured to Move on Skype").

Skype's hope is to encourage more small businesses to use Web calling. And, increasingly, small companies see the sense in that.

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