The competitive service provider industry has largely been divided into two camps: the companies that built their own facilities and those that counted on cheap wholesale access to incumbent facilities.

One of New York City’s more successful service providers is building a business buying retail. M5 Networks is succeeding as a managed services provider which provide hosted VoIP services to businesses small and large.

M5 Networks President and CEO Dan Hoffman says his firm can claim 70% of the hosted market in New York City.

“We actually one of the largest nationwide – most of the other managed service providers serve a lot of different markets, but we’re focused here,” he said.

To Verizon, M5 looks like a large customer, and that’s the way Hoffman likes it.

“We look like Goldman Sachs to them with 20 T-1s going up every month,” he said. “We buy type-2 circuits from Verizon and we pay retail for them, so we get good service.”

Rather than register as a CLEC, M5 operates as a managed service provider, operating two high-end data centers and redundant network facilities. It uses Cisco Systems data gear and a voice softswitch from VocalData – now part of Tekelec – that the company used to pioneer VoIP offerings beginning in 2000.

But the secret to M5’s success is the ability to provide host VoIP applications that give small to mid-sized businesses the benefits of VoIP without the complexity and cost, according to The Yankee Group. In a report authored by Eileen Eastman, senior vice president at Yankee, M5 is cited for “a focused marketing and packaging strategy aimed at professional services organizations such as legal offices, real estate agencies and financial services organizations based exclusively within the New York Metropolitan Area.”

“When you talk to CTOs and CIOs in mid-sized businesses, they are overwhelmed with projects,” Hoffman said. “They would love to outsource the phones because they have more strategic projects to work on. The problem is finding a provider that they can trust. That’s our pitch – we try to make life very easy for them.”

Most of its customers, which range in size from 10 seats to 800, are looking for help with the complexity of service offerings and turn to M5 for the features specific to their industry needs.

“We think in terms of industries when we design an offer,” Hoffman said. “A lot of the offers are targeted to vertical segments. For example, there are companies like Coldwell Banker, Sotheby’s and Century 21 -- business intelligence is a very powerful solution for them. Real estate brokers do so much of their activity on the phones but they are not call centers. They haven’t been able to tell how their property ads are going or how brokers are doing.”

M5 designed a solution with Coldwell Banker that tells them how many unique phone calls they are getting with each specific ad, Hoffman said, and helped the company develop a business intelligence solution that uses database technology to track brokers, properties and time spent. Similar products were designed for the legal and financial verticals.

In addition to vertical solutions, M5 has horizontal applications such as remote access for telecommuters and business continuity services.

The privately funded company tracks its success with its growth but also with a poll of its customers, every six months, to ask them if they would comfortably provide a reference for M5 Networks to other companies.

“That stat right now is 93% to 94% and that’s huge for us,” Hoffman said.

He would actually welcome some competition in the VoIP applications arena because that could actually help expand the overall market by making more businesses comfortable with VoIP. But M5 is finding more businesses are at least aware of its potential.

“Five years ago, the conversation was more about that (VoIP) and a lot of the time, they didn’t care, or if they did care, some of them were scared,” Hoffman said. “That’s totally changed. VoIP equals new technology for businesses. They seem to understand the platform has changed.”

What M5 isn’t doing is offering less expensive service – since it starts with a retail offering from Verizon and builds from there, the company isn’t competing on price.

“Telecom has become so inexpensive for businesses,” Hoffman said. “But at the same time, their tolerance for Internet connections going down, phones going down, staff not being able to make conference call, even caller ID being broadcast wrong, has become less and less. For most of my customers, saving an extra $50 a month isn’t worth it. They are willing to pay me for the quality of service.”