The Big Idea at Acme Packet: Smoothing the Way for Voice and Video on the Internet

7/23/09Follow @wroush

You’re an unfunded early-stage startup and your sole venture backer sends you a check for millions of dollars. Unfortunately, it’s made out to the wrong company name, so you can’t deposit it. What do you do? You change your name, of course.

That’s how Primary Networks became Acme Packet. The Burlington, MA, maker of Internet switching equipment and software was founded in 2000 and went public in 2006—today you’ll find it on the NASDAQ exchange under the ticker symbol APKT. But when it got its first capital infusion from Menlo Ventures in Menlo Park, CA, says co-founder and CEO Andy Ory, it was still so new that it hadn’t even printed business cards.

“We’d been using the name Acme Packet in all our presentations, because we thought it was funny, but [Menlo] actually took the name seriously,” says Ory. “They sent us a $12 million check made out to Acme Packet. We changed our name that day.”

In a way, the company’s whole history is about adapting to change. The Acme part of the name may or may not refer to the fictional company that supplied Wile E. Coyote with the rockets, anvils, and other gear he used to pursue the Road Runner. (Ory won’t say, perhaps out of concern for treading on Warner Bros. trademarks.) But the “packet” part definitely refers to the packets into which all data is divided before it can cross the Internet—and Ory and his co-founder Patrick MeLampy saw early on that if the Internet were ever to become a medium for real-time communications such as voice calls and video conferencing, the way these packets travel would have to be rethought. Their big idea: If Acme could come up with faster, more reliable way to shepherd high-priority packets through the existing Internet, telecom providers would beat a path to their door.

[Editor's Note: Every startup has a "big idea" that it thinks will catapult it to success. With this story, we continue an occasional column highlighting the big ideas---and the resulting challenges---at companies in Xconomy's home cities.]

Andy Ory, CEO and co-founder of Acme PacketTraditionally, Ory explains, the thousands of Internet Protocol (IP) packets that may comprise a file such as an e-mail message, a photo, or a spreadsheet are dispersed and sent across the net along unpredictable paths before being reassembled at the destination address. Packets often get lost along the way, meaning replacements have to be sent. Engineers call this approach “best-effort” networking.

Meeting with me at the company’s headquarters last week, Ory held up a piece of paper. “If I dip this document in liquid nitrogen and break it into 10,000 packets and put them into the network like little pachinko balls, it doesn’t matter what order they arrive in—eventually the sequence gets completed, and you’ve got your e-mail. That’s great, and it usually takes less than 500 milliseconds. But now imagine you and I are doing a voice-and-video-over-IP call, and 24 times every second, a visual of me is being dipped in liquid nitrogen and shipped as packets. They can’t arrive out of order, or with more than 200 milliseconds of delay.”

Best-effort networking just isn’t good enough to handle unidirectional communication with that kind of alacrity, let alone bidirectional communications, Ory explains. So if Voice-over-IP (VoIP) telephony were every to be a reality—and back in 2000, that was still an open question—something new would be needed.

Ory and MeLampy came up with the idea of installing special boxes at the boundaries between the hundreds of privately owned networks that together make up the Internet. These boxes would act as way stations. The packets in a voice or video stream—what Ory calls “signaled media”—could still travel dispersed paths through the cores of the local networks. But at the edges, the way stations would reconstitute them, like regiments of infantry forming up for battle, before handing them off to the next network.

“What emerged was an infrastructure where end-to-end communications became network-edge-to-network-edge, where all signaled media terminate and reoriginate at the borders between networks,” Ory says. Acme labeled these way stations “session border controllers,” or SBCs—and invented an industry in the process.

SBCs turned out to be crucial components for telecom companies that wanted to help their big-business customers scrap the PBXs (private branch exchanges) connecting them to the old public circuit-switched telephone network, which managed data using a system called time division multiplexing (TDM), and replace them with cheaper, more agile communications networks based on packet switching and the Internet Protocol. At least 10 other companies sprang up between 2000 and 2005 to sell the devices. But only two or three SBC makers had the stamina or vision (or both) to survive to the present as independent companies, including Acme.

It turns out that big technological disruptions, like the change from circuit-switching to VoIP, take a lot longer to play out than entrepreneurs would like to imagine at first, Ory says. “On August 3, we’ll be nine years old, and we’re still just at the starting line,” he says. “Talk about the benefits of being naive—if you told me nine years ago that this was going to take nine years, I would have said ‘I’m doing something else.’”

But he didn’t. Which may not be surprising, given his history of perseverance in the Boston-area telecom sector. After growing up in Worcester, MA, and getting an undergraduate degree in visual arts from Harvard, Ory joined Boston Technology, an early maker of voicemail software, in 1988. (That’s where he met MeLampy, as well as colleagues who went on to found a passel of Boston tech companies, including Atria Software, ClearCase, and Art Technology Group. “There was a Boston Technology reunion recently, and it’s unbelievable what came out of there,” Ory says.) He left a couple of years later to start Priority Call Management, using his father’s life savings as capital. (Robert Ory, aged 76, is now an executive at Acme.)

Priority Call Management started out selling programmable switches to telephone companies, then grew into a provider of single-number services that routed all of a person’s calls to one phone. Unfortunately, “People weren’t ready for one-number services in 1997, 1998,” Ory says. “Basically everything we did, GrandCentral did later.” (GrandCentral is now Google Voice.) So the company morphed again into a provider of pre-paid wireless calling services. That made it attractive to a company called LHS Group, which bought it in 1999 for approximately $200 million.

Ory says that after the sale of Priority Call Management, he thought he would have some time off. But in July of 2000, MeLampy called to say he wanted Ory’s help starting a business around SIP—the Session Initiation Protocol, which had just been accepted by telecom standards bodies as a way to control multimedia transmissions such as voice or video calls. (A session is any interaction requiring the creation of a semi-permanent path through the Internet to smooth communications.) “I said sure—you take the technology and engineering side and I’ll take the business and sales side,” says Ory. “Everyone showed up at my house, we put a whiteboard on the kitchen wall and some folding tables on the porch, and started inviting guys to come join us.”

They could see that new software and hardware would be needed to set up SIP-based sessions that traversed multiple private networks, and they set out to build it. This being the bubblicious days of 2000-2001, the company was able to line up the Menlo Ventures investment within only a few months. (It helped that Menlo had funded Primary Call Management and regarded Ory as a good bet.)

But then came the company’s real challenges. First, there was the “nuclear winter” of the March 2001 dot-com crash, which hit the telecom sector especially hard and sent the company into athree-year stretch of extreme cash conservation, Ory says. But just as important, the company faced what you might call the inverse network effect: Telecom companies wouldn’t want to buy session border controllers for the edges of their own networks until there were lots of session border controllers at the edges of other companies’ networks for them to hand off sessions to. Otherwise, it would be like trying to get consumers to buy telephones before there was a phone network.

Solving that problem was Ory’s main job, from the company’s creation right up to the time it went public in 2006, raising $109 million. “We proselytized,” Ory sums up. “We spoke to the 200 largest network providers in the world for five years, telling them that they were going to move from TDM to IP, and that they were going to want to adopt a technology like this. And it wasn’t just Acme, but a whole cavalry of us doing this.” The company also partnered with established telecom giants like Alcatel, Ericsson, Lucent, Motorola, Nokia, and Nortel, helping them to build gateways that made their TDM networks look like IP networks and vice-versa. Eventually, the strategies worked—and now 89 of the largest 100 Internet service providers have Acme controllers at their network edges, Ory says.

Things have been going so well that Acme was able to spend $23 million in April to purchase Maynard, MA-based Covergence, which makes software-based SBCs that are more affordable for small enterprises than Acme’s big controller boxes. And the VoIP revolution has now built up so much momentum, Ory says, that the latest recession has hardly dented Acme’s revenues, which hit $84 million in 2008.

“We’ve never been busier,” says Ory. “What seemed to happen last October is that people started realizing that the [employees] who are going to keep their jobs are the ones who figure out how to do things better, faster, and cheaper, and that means moving to IP.” To date, Acme has sold between 7,000 and 8,000 SBCs—but over the next five years, Ory thinks the company will ship 50,000 to 100,000 more. “Then you’ll see a session-oriented world emerge,” he says. “The majority of communications will be session-oriented, and the rest will be best-effort.”

In that world, Ory will no doubt be off in search of the next element in the telecommunications universe that needs fixing. Either that, or he’ll be helping other Massachusetts entrepreneurs get their own starts. He’s already active as co-chair, with Flybridge Capital Partners’ Michael Greeley, of the entrepreneurship subcommittee of Governor Deval Patrick’s IT Collaborative, which has been charged with finding ways to build on the state’s strengths in information technology. He has also volunteered to be a CEO mentor as part of Greeley’s “12 by 12 by 12 by 12 by 12” initiative, which aims to recruit 12 successful CEOs to work with 12 venture capital partners to mentor 12 young entrepreneurs and launch 12 new companies over the next 12 months.

“I feel a moral responsibility, when you create an enterprise, to create as much good as you can for all the stakeholders,” says Ory. “If you can, employ locally. Be a net exporter. Be a taxpayer. Get involved in some level of social philanthropy. Raise people’s standard of living. And help people create wealth and build value in the economy. Certainly I’m the beneficiary of a lot of folks who have created enterprises and trained a workforce in New England, and I want to be a link in the chain.”

Wade Roush is Chief Correspondent and Editor At Large at Xconomy. You can subscribe to his Google Group or e-mail him at wroush@xconomy.com. Follow @wroush

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