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Xacct sees $21 million on IP meter reading
Imagine if the electric company had no way of accurately measuring the
amount of juice you use each month, or if your local waitress didn't jot
down what you ordered. Believe it or not, network service providers (NSPs)
are just now learning how to track and bill Internet protocol (IP) traffic,
courtesy of Xacct Technologies.
Fourteen of the top NSPs have turned to Xacct for help, and chances are the
rest won't be far behind. "Once these guys start kneeling down, you can
expect the others to see it as proof of concept," says Sam Alunni, president
of technology consultancy Sterling Research.
Venture capitalists are equally enthusiastic, tossing $21 million to the
company this week in a third round of funding. Technology Crossover
Ventures, Deutsche Bank, and Nissho Iwai joined the round, in addition to
prior investors Trident Capital, Israel Seed Partners, Eucalyptus Ventures
(a Hambrecht & Quist [NYSE: HQ] fund), and Ampal-American Israel (Amex:
AIS), which had contributed $11 million last year.
The story sounds so good, it would appear that the company would try to cash
in with an IPO. Its execs say they definitely plan to go public, but won't
reveal when.
METER READER
"It's an opportunity for NSPs to increase their ultimate margins and offer a
better pricing package that better approximates the cost of usage," says
Todd Springer, managing director at Trident Capital and a director of Xacct.
It sounds like a simple idea, but the reality is that NSPs and Internet
service providers have been grappling with how to price IP traffic on
voice-and-data converged networks. Most carriers have been billing on a
flat-rate basis, typically charging $20 per month for unlimited service,
which often results in unpredictable quality of service. As use of IP
networks has grown and diversified, customers' use of networks has gone from
simple file transfers and Telnet email to more bandwidth-hungry activities
like video downloads, videoconferencing, and Internet telephony. Such
services can cost an ISP up to one hundred times as much as simple Web
surfing, according to Internet Telephony magazine.
The beauty of the Xacct software is that it gives NSPs flexibility in how
they charge customers. For example, they can take a page from phone
companies, which used to charge based on time of day and distance, but have
realized greater profits since introducing promotions like special
evening-and-weekend calling plans. NSPs can offer similar packages to
business customers, such as offering discounts for all file transfers done
after midnight in order to free up bandwidth during the day. "The ability to
offer different services and charge for them is critical," says Eric Gries,
chief executive of Xacct.
LEADER OF THE PACK
The closest any company has come to Xacct's billing vendor-neutral package
is Hewlett-Packard (NYSE: HWP), whose Smart Internet Usage product is
offered to clients of its professional services division. However, HP's
system only works with its billing system. Xacct says its software works
with any billing system.
Xacct was one of the first companies to move into the young IP mediation
space, a market that only accounted for about $100 million in revenues in
1998, according to telecom market researcher Insight Research. However, the
firm projects that the market will top several billion dollars in revenues
by 2004.
In such a young industry, Xacct is doing double-duty, acting as a
traditional vendor as well as a teacher. "Service providers haven't been
able to use the type of rate structures that Xacct enables them to do now,"
says Jennifer Kula, an analyst with telecom consultancy Telechoice. "The
providers need to better understand the market." Educating service providers
about flexible pricing models is a double-edged sword, requiring extra work
from Xacct but putting them in the front-runner position when providers
realize they need a better billing method.
Even though it's blazing a new trail, Xacct doesn't believe it will end up
with arrows in its back like other pioneers. Analysts generally agree that
it would be difficult for another company to duplicate Xacct's technology
and overtake the company. One key reason is that Xacct has partnerships with
40 of the major billing vendors, including Kenan Systems (acquired by Lucent
Technologies [NYSE: LU] in March). These partners also act as resellers by
integrating Xacct's software into their own customer care and billing
systems for NSPs, giving Xacct's sales force far greater reach.
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