Dell's Fonality Partnership: Cause for Concern for Microsoft, Cisco

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Includes: CSCO, DELL, MSFT
by: Joe Panettieri

Dell (NASDAQ:DELL) shares are trading at a 52-week low. Most PC industry pundits are worried about the economy. Yet Michael Dell continues to plant some strategic seeds that could generate serious revenue for his company in the years ahead.

The latest example: Dell has quietly inked a partnership with Fonality, a start-up that develops voice-over-IP phone systems for small business. Great move, Michael. Through the Fonality partnership, Dell has managed to push deeper into three hot markets (open source, VoIP and managed services) seemingly overnight.

Fonality's secret sauce is called Asterisk, an open source platform that handles voice-over-IP calls. Dell plans to promote Fonality to businesses with between 5 and 150 employees (Dell will evangelize Nortel phone systems for slightly larger settings).

Demand for VoIP in the small business market should continue to boom. The reason: Fonality's phone systems are generally less expensive than traditional phones. Plus, the Dell-Fonality relationship involves more than desktop phones. It should also push "soft phone" technology onto Dell's laptops and PCs. (Lenovo and Avaya announced a similar soft phone relationship earlier this week at IBM's Lotusphere event.)

While most people are zigging, Michael Dell continues to zag. Dell could have inked a VoIP deal with Cisco (NASDAQ:CSCO), ShoreTel (NASDAQ:SHOR), 3Com (COMS) or any other SMB networking specialist. And in the open source space, a more obvious target partner was Digium (Number 2 on my list of top 10 open source companies to watch in 2008.)

Fonality should not be underestimated. The company has been growing 10 percent per month on average and achieved profitability in 2006, according to Fonality's Web site. Early Fonality investors include Intel Capital.

The Fonality deal may also help Dell to push deeper into managed services. The reason: Many high-tech consulting firms (known as Value-Added Resellers) are testing or deploying Asterisk as a hosted phone service.

Looking ahead, it's easy to envision those customers deploying Dell/Asterisk servers in their data centers and Asterisk phones at customer sites. In fact, Dell is pursuing that very model by offering Fonality in a "hybrid-hosted" configuration (part on premises, part hosted).

Naturally, Fonality's CEO is thrilled about the Dell deal. But this is a smart move by Dell as well. Michael has had mixed results in the networking industry, where its SMB efforts are overshadowed by established players like Cisco, Linksys and Hewlett-Packard's (NYSE:HPQ) ProCurve brand.

But this time around, Dell is ahead of the curve. Asterisk is wildly popular within open source circles. And it is the hidden foundation of many low-cost SMB phone systems. For Dell partners and customers alike, Fonality could be the perfect extension to Dell desktops, servers and notebooks. In fact, Fonality's CEO notes that his company's software already runs well on Dell servers.

Dell has made quite a move here. It's the type of move that should keep Microsoft (NASDAQ:MSFT) and Cisco Systems up at night. The SMB phone market is up for grabs. And Fonality has answered Michael's call for help.

Disclosure: None

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