Virtela Takes a Soft Approach to Fiber-Optic Networks.

December 6, 2001

AFTER USING hardware to help build two of the five major Internet backbones, the cofounders of Virtela Communications figured, for their next network, it was time to turn to software.

On the surface, Virtela, a two-year-old startup in Greenwood Village, Colorado, appears to be yet another developer of virtual private networks (VPNs), which connect two points over public networks in a secure manner. It links companies’ branch offices and headquarters over any type of network–frame relay, x25, DSL, or T-1. But the company distinguishes itself by offering additional services on its virtual network, like video on demand, virtual security, and voice over IP.

The cost of building networks has sent companies like 360networks and PSINet into bankruptcy. Instead of building an expensive fiber-optic network, Virtela leases bandwidth from network owners like Qwest Communications. It uses software to connect its networks’ Internet access points (points of presence) to emulate the performance of an optical network. The company only pays for the bandwidth it uses, and its virtual pipe expands and contracts as demand fluctuates.

“In the IP world, the models that will succeed will be the ones which do not throw billions of dollars at the problem,” says Vab Goel, the chairman and CEO of Virtela, and one of the original architects of the Sprint and Qwest networks. He says Virtela spends about $3 million per year to maintain its virtual network; a comparable physical network would cost about $50 million annually.

Virtela officials say that their network can provide television-quality videoconferencing at about 750 Kbps, and the company is offering unlimited videoconferencing services for $4,000 a month. By comparison, an ISDN-based videoconference can cost $800 for about 30 minutes. Videoconferencing may be more appealing in the wake of the September 11 terrorist attacks, as companies use it as a substitute for business travel.

But Virtela’s most promising product may be its voice-over-IP technology, which lets companies connect phone systems in disparate offices. By routing all voice calls over an inexpensive IP backbone, companies can save–in some cases between 50 and 80 percent–on long-distance telephone calls, says Mr. Goel.

Virtela has impressed a stellar lineup of investors. Among those that have pumped a total of $75 million into the company in two rounds are New Enterprise Associates, Norwest Venture Partners, Palomar Ventures, RSA Ventures, Symantec, and Juniper Networks, all of which are heartened that the company has a dozen paying customers.