Internap Network Services Corp. (Nasdaq: INAP) announced on Monday that it plans to acquire not one IP Route Optimization startup, but two (see Internap Closes NetVmg Acqusition).

Last June, the Internet service provider announced its intent to purchase startup netVmg Inc. On Monday, it announced that it had closed the deal. In the same release, it also announced that it would be buying NetVmg’s key competitor, Sockeye Networks.

IP route optimization was a hot topic a few years ago when startups like NetVmg and Sockeye first emerged. These companies developed products that monitored IP networks and BGP streams to figure out the fastest and most cost-effective path for traffic to go through the network. NetVmg offers a stand-alone product, while Sockeye offers a product and a managed service (see NetVmg: A Bandwidth Cost Cop and Sockeye Spawns Service).

Internap, which provides a service for optimizing traffic over Internet backbones, ended up getting both startups at bargain-basement prices. In fact, NetVmg investors, which poured more than $57 million into the company, ended up paying Internap.

According to the terms of the NetVmg agreement, Internap issued 345,000 shares of Series A convertible preferred stock to NetVmg shareholders. Each preferred share converts into 33.68 common shares, making the acquisition worth about $17.5 million based on Internap's current share price.

As part of the acquisition agreement signed several months ago, NetVmg shareholders infused approximately $3.9 million of new capital into the company to eliminate selected liabilities prior to the acquisition. At the date of the close, another 1.5 million shares of common stock was issued to NetVmg shareholders, but these warrants are exercisable only if the NetVmg shareholders invest an amount no less than $4.4 million in any future private placement.

The Sockeye deal was also a stock transaction that doesn't appear to have made anybody rich. Sockeye, which had raised a total of $40 million in two rounds, was sold for about $1.75 million in stock.

David Abrahamson, chief marketing officer and vice president of sales for Internap, says the sticker prices weren’t the only reasons for the move. He says that both companies have technology and expertise that will help Internap address new markets and expand its market opportunity.

“Through our assessment, NetVmg and Sockeye are the two leading players in this market,” he says. “And we believe that through these acquisitions, we will own all the interesting patents or pending patents in this space. So we view this as a very strategic move.”

Internap is no stranger to the IP route optimization market. As an Internet service provider, the company provides guaranteed service-level agreements for mission-critical traffic traversing the Internet. Because the company has agreements and connections with almost every major Internet backbone provider in the world, it can monitor those networks and choose the best path for traffic, allowing it to offer guaranteed performance to customers. The company has a list of marquee customers, including J.P. Morgan Chase & Co. and Travelocity.

But Abrahamson says the firm has been missing the customer access piece that would allow it to deliver end-to-end service guarantees. With technology from NetVmg and Sockeye, Internap will be able to address this market.

Abrahamson envisions the company selling the combined offering both as a managed service and as an appliance.

But judging from the outcome of NetVMG and Sockeye investments, it's hard to see the market as being the next big thing. Analysts point to the business as a disappointment.

Jennifer Liscom, an analyst with Gartner Inc., says the overall IP route optimization market is relatively small. In fact, her firm hasn't actually sized the market, because quarterly revenues haven't met the minimum requirements necessary to commission a report.

Another startup in the market, RouteScience Technologies Inc. is rumored to be on its last legs, and Opnix Inc., another small IP route optimizing service provider, is said to have changed strategy.

But there are still a few companies around, like Proficient Networks Inc. (see Proficient Adds Load Balancing). There’s even a chance that monitoring and reporting companies like Packet Design Inc. and Ipsum Networks Inc. might get into the action.

And then there are the hardware vendors. Some Layers 4-7 switch vendors are also trying to get into route optimization. Companies like F5 Networks Inc. (Nasdaq: FFIV), Nortel Networks Corp. (NYSE/Toronto: NT), and Radware Ltd. (Nasdaq: RDWR) offer switching products that balance traffic on access links on a packet-by-packet basis.

Light Reading will examine this topic in more depth on November 7th during a Webinar entitled, Route Optimizers: The IP Pathfinders.

— Marguerite Reardon, Senior Editor, Light Reading