Convedia Bets on IP-Only Servers

A Frost & Sullivan report, titled the “2004 World VoIP Equipment Update,” earlier this month heralded Convedia Corp. as No. 1 in the IP media server space with a 62 percent market share.

So what's it all mean? The report points to a growing division in the market -- between those that provide pure "IP only" media servers, versus others that still support legacy systems. Convedia is hoping service providers will move quickly to VOIP, so that it can hold onto its lead in the small but burgeoning space.

IP media servers are IP call processing devices that combine the functions of traditional announcement servers, audio and video conference bridges, interactive voice response units (IVR/VRU), and messaging onto a single IP platform.

The Frost & Sullivan report’s chief architect, analyst Jon Arnold, says Convedia is the only player in the space that focuses solely on IP media servers, with the rest of the field providing other products such as softswitches and media gateways.

“They’re doing IP media servers as a pure play, and they’re betting everything on it,” Arnold says. “Until a year ago they were nobodies. They said, ‘This is all we do and we want to be the best.' "

The fact that Convedia's server does not even interface with traditional TDM-based systems marks a major strategic difference between Convedia and the other players in the space.

For example, Excel Switching Corp., a Cape Cod-based Lucent Technologies Inc. (NYSE: LU) spinoff, has produced TDM-programmable switches and media servers since 1987. Three years ago it added IP compatibility to its media server products. Excel is betting that its media servers’ ability to talk to TDM and IP systems will make more sense to service providers.

“We have seen a swing in [service providers] looking to use their embedded TDM network and gradually convert to IP,” says Excel Switching VP of sales Mike Twomey. “People are saying, ‘I don’t want to throw out what I’ve got.’ ”

Twomey said service providers want to get their investment out of their legacy systems; and while he believes a conversion to total IP will eventually happen it will be an evolution, not a revolution. “It’s not going to be a flash cut going from TDM to pure IP."

But Convedia gains an important strategic advantage from marketing a pure IP-based product. Because its media servers don’t make a physical connection to TDM-based legacy systems, the same product can be sold in any market around the world.

This is one reason Convedia has been able to make headway in an Asian market that is moving more quickly than the rest of the world toward VOIP service offerings. "About 40 percent of our revenue comes from Asia," notes Convedia co-founder and VP of marketing, Grant Henderson. "It has proven to be one of the hottest markets in the world for VOIP."

Even though Frost & Sullivan touts Convedia as a "leader," it's leadership comes in a small market (less than $100 million a year is now spent on media servers worldwide). The question is how quickly the IP-only server market will develop.

“This is a space that is nascent,” Arnold says. “It only became attractive in the last year and a half as carriers begin to do real live V over IP.” The real test lies in the speed at which service providers convert their networks to IP-only.

Today Convedia is a small company (fewer than 100 employees) operating on venture capital money. It has not seen a profitable quarter. “We are very close to profitability; it is a quarter away,” promises Henderson. “We’ve been flirting with it for the last two quarters.”

Arnold expects the media server market to exceed $400 million by 2007 as VOIP comes to be seen in the industry as a least-cost alternative, not just a reasonable facsimile of PSTN.

As market grows, so will the fight for share. Arnold believes small, agile players such as AudioCodes Ltd. and Excel are gaining momentum and will give Convedia “a good run.”

— Mark Sullivan, Reporter, Light Reading

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