P-Cube wants to save the ISPs

P-Cube invited us to a meeting, since it plans to make several "important" announcements in the near future, and the company wanted "Globes" readers to be introduced to P-Cube and learn about what it does. P-Cube deals in a field in which there is currently no competition. Naturally, "important" announcement is a subjective term. At the same time, we believed it might be worthwhile to pay attention to a company whose founders include Pentacom, VocalTec Communications (Nasdaq: VOCL) and InfoGear , and which still believes it will be given a higher valuation than the $160 million it reached in its second round of financing.

P-Cube was set up by three people, and two of them had very close ties with Cisco, which has spent hundreds of millions of dollars on P-Cube's products in the past. P-Cube CEO Yuval Shahar was development manager of VocalTec Communications (Nasdaq: VOCL), which at the time pioneered the concept of talking on the telephone via the Internet. Later, Shahar was an executive at InfoGear, acquired in March 2000 by Cisco for $301 million. Incidentally, Shahar has already announced he will not sell P-Cube to Cisco. We'll wait and see.

Another founder is Benny Shnaider, a co-founder of Pentacom, which was also acquired by Cisco in April for $118 million. The third founder is P-Cube President Dr. Giora Yaron, Ph.D., a former president of Indigo NV (Nasdaq: INDG), general manager of Tower Semiconductor (Nasdaq: TSEM)’s chip fab in Migdal Ha-Emek, general manager of National Semiconductor (Israel), and chairman of Comsys.

P-Cube's Israeli operations are currently managed by Raphi Hess, who was a director of 3Com Israel (formerly NiceCom) for eight years.

The idea for founding P-Cube came as a result of examining the profit line in ISPs' financial reports. An absolute majority of the ISPs were losing money or, at best, were breaking even. P-Cube offers them the ability to provide additional services for a fee, bringing them much needed dollars that help make them profitable.In other words, P-Cube is interested in doing for ISPs what additional services did for telephone companies. The additional services P-Cube allows ISPs to provide include voice mail, digital fax, conference calls, and call waiting, which telephone companies managed to turn into a huge profit-maker. P-Cube also enables ISPs to offer Internet services including VoIP, Quality of Service, conference calls and others.

The company's platform is built like a box and made from hardware, and added to the ISP's infrastructure. It monitors the traffic and analyzes events at any given moment. The box costs several tens of thousands of dollars and an ISP needs one box for every POP. Despite the relatively high price of the box, Hess says it is easy to show that the ROI (return on investment) is high. Even if only a small percentage of ISP customers enjoy additional services, and each pays a few dollars for them, the investment can be recouped.

Not stuck in a niche

P-Cube is one of a group of companies currently trying to help ISPs change the concept that the fee for Internet access should be based on the amount of bandwidth.. The bottom line in ISPs' financial reports shows that this model does not work, due to quality problems and lack of proper exploitation of resources. Today, ISPs are trying to change their business model to enable them to charge customers according to the type and size of their Internet use.

In contrast to others in the field, P-Cube deals with the matter from the customer's viewpoint, instead of trying to improve ISPs’ bottom line by providing a service that will cut the suppliers’ expenses. P-Cube is trying to make the customer want to pay more for additional services."Many people will want to pay for additional Internet services," Hess says confidently, after receiving feedback from the ISPs, investors, and analysts."Consumers have gotten used to the idea that Internet connectivity is a commodity, but they have not been persuaded to pay more for upgrading to broadband. However, the moment they are offered additional services for a fee, they will gladly pay.”

Hess knows that in order to beat the competition and get ISPs' business, P-Cube needs to show it has cooperation agreements with companies that can integrate its platform, such as the agreement it recently signed with billing company Portal.

The company is scheduled to make several announcements relating to cooperation agreements with various companies. These, however, do not include agreements with competitors. "We're producing something that still doesn't have a name," Hess says. P-Cube named the solution it developed Service Engineering, since it is capable of engineering the services that ISPs provide to their customers. "The solution is quite comprehensive", he says."We're capable of providing an overall solution that adapts itself to customers' demands.”

P-Cube has raised $30 million so far.In the last (second) round, held in October 2000, the company was valued at $160 million.The first round of financing raised $10 million and closed in November 1999. Accel Partners Fund, Communication Venture Fund, TDF Management, and Israeli funds Evergreen International Investments and Microdent invested in the round.The second round raised $20 million and Singapore Telecom, European investment company Sandoz Foundation, and European media company Interoute Telecommunications joined the previous investors.

"At the moment, we're a well financed start-up," Hess says."However, it doesn't mean we are guaranteed money indefinitely." Hess gives the credit for the successful rounds, held just before the stock exchange plunges last October, to Shahar. Hess forecasts the company's valuation will continue to grow, but he is also aware that no-one will talk with him in terms of a company valuation of $1 billion, as was the case until recently.

Hess predicts that P-Cube will post some revenue this year, after its beta installations become fully operational. He is also confident the company’s growth rate will continue to be satisfactory. He says that despite the slowdown in the technology market, P-Cube will continue to recruit employees. The goal, he adds, is to increase the company's workforce 30-40% this year.

Published by Israel's Business Arena - April 2, 2001.