FieldNotes: Upstarts

COMPANY: .Comfax Inc.


FOUNDER: Ben Feder, 33 CAPITAL: $1.8-million private placement

KEY COMPETITION: WorldCom's UUNet, several competing start-ups

COMPETITIVE STRATEGY: Market to small businesses a global Internet fax network promising cheaper, encrypted, efficient transmissions, sold through Internet service providers and other resellers

Westergaard Online Systems Inc., a 10-person publisher of investment information and analysis based in New York City, spends $5,000 a month sending promotional faxes around the country. No wonder the company was an easy sell for .Comfax Inc. (pronounced dot-com-fax).

A service devised by .Comfax sends faxes via the Internet, bypassing long-distance telephone carriers like AT&T and MCI. The on-line publisher spends 10¢ a minute for the fax service instead of the 15¢ to 20¢ it used to pay, which CEO John Westergaard says he finds "very attractive from a financial point of view."

In telephone-industry jargon, that's known as toll savings. Founded in December 1996 by Ben Feder, a Harvard M.B.A. and former executive at Rupert Murdoch's News Corp., .Comfax is offering toll-savings fax service particularly to small businesses. That's a large slice of the estimated $5-billion Internet fax market. "For small businesses, every dollar counts, so the Internet fax movement might be of more immediate appeal. Phone costs do matter to them," says James Rafferty, an Internet fax expert at the International Telecommunications Union (ITU).

Feder hatched the .Comfax idea in early 1996 after a stint at News Corp.'s Delphi Internet Services Corp. He had heard about a product prototype for an autodialer--which Feder, in his casual lingo, calls a "box"--that could reroute international fax calls over the cheapest available phone lines. "It dawned on me that international traffic amounted to 1% to 4% of all traffic," he says. "They were letting the rest of the traffic go."

Bingo, Feder thought. Why not create a box for domestic as well as international traffic? Instead of directing the transmission over the cheapest long-distance line, he envisioned sending it digitally over the Internet. That approach allows for compressing the message and accelerating it by a high-speed modem, thus improving efficiency.

Feder eventually hired Silicon Valley engineers to build him a product, now dubbed Net Dispatcher (a patent is pending), that electronically prepares a fax transmission for the Internet. The size of a videocassette, Feder's device connects to a fax machine. It retails for about $350.

Before .Comfax had earned a penny, it had raised $1.8 million from a star-studded gallery of private investors including Steven Rattner, deputy CEO of Lazard Frères & Co.; Strauss Zelnick, president and CEO of BMG Entertainment; and Seagram liquor heir Matthew Bronfman. "People were thoroughly impressed with the business plan and with the underlying idea," says Zelnick.

Persuading customers to buy the box and subscribe to .Comfax's Internet-relay service is Feder's next challenge. "We're getting in on time," he says, "with a highly differentiated product." Translation: he's aiming to be first in the market with a service that is user-friendly to small businesses and saves them money.

Of course, .Comfax will face competition. Rivals such as FaxSav Inc. (#131 on the 1996 Inc. 500) permit faxing over the Internet from a personal computer, as does a .Comfax service. And UUNet Technologies, a division of giant WorldCom, is rushing into the market. If the .Comfax box catches on, those companies will surely develop similar devices of their own.

Farther out, still larger threats loom. Big fax makers like Pitney Bowes may well integrate Internet-link technology into the next generation of fax machines, experts say. (Feder's strategy would then be to pitch his service to buyers of other companies' hardware.) And as E-mail becomes increasingly sophisticated, it may supplant fax communications altogether.

Still untested, too, is Feder's core premise: that many small businesses like Westergaard Online will want to buy his fax wizardry. "The vendors are convinced that they have a great product," says ITU's Rafferty. "Now they have to go out and convince customers."

Feder admits to no such doubts: "I like to think of a business as a cube. It has to look right from all six sides. This is the first one I've seen that, no matter how you turn it, it still looks right."