Over a year ago, Bill Smith, chief financial officer at Ursus Productions Inc., a small nature-film company based in Waterville, Me., watched in dismay as his company's long-distance bills ballooned to $700 a month. The bills were killers for a new company with just 10 employees, but Smith couldn't find a long-distance carrier that would give him better rates. The comparison shopping alone was a nightmare.

A few months later, he got a call from MediaCom Inc., a startup in Bedford, Mass., that was selling a package of technology and long-distance services. The long-distance component consisted of simultaneous subscriptions to various discount carriers, arranged through MediaCom. The technology, which was still in test form at the time, was a blue plastic box called MegaMiserSP that connected to a PC and Ursus' phone lines. It automatically scanned the carriers' offerings and routed each call to the one with the best rate at that moment. In just one month, Smith says his monthly long-distance charges dropped to $150. "Attempting to understand telephone rates today is a full-time job," Smith says. "Our long-distance rates went from 35 cents a minute to 8 cents."

MegaMiser, designed for small businesses with more than one phone line, is based on a long-distance telephone technology called "least-cost routing." The assumption is that a long-distance phone company may offer steals on calls to some places at certain times but then recoups with higher rates on other calls. That's fine for consumers who mainly call, say, family back in Mexico. But for businesses with clients all over the U.S. or abroad, the more expensive tolls add up in a big way, as Ursus found.

Larger businesses have had breaks on phone costs for years in the form of bulk discounts or via software in companies' private branch exchanges (PBX), the internal phone networks that route calls to the cheapest carriers. Small businesses were stuck with the offerings of a single company.

Now, the confluence of an increasingly competitive phone market and recent innovations in technology are channeling better deals to small companies. "This is really just creating an efficient market for small businesses," says Bill Hills, a senior analyst for the Aberdeen Group in Boston, commenting on MegaMiser. "This is a kind of benefit or service that is enjoyed by larger corporations, and they get better long-distance rates to begin with."

Not all of MegaMiser's customers see such dramatic savings as Bill Smith. Tony Jermyn, president of Connections Unlimited Inc. in Chelmsford, Mass., a reseller of telecom systems, paid about $900 for his MegaMiser system. He says his savings are closer to 15% to 18% a month. He gets additional value from the software's accounting capacity, which allows him to track and bill accurately his phone consultations with clients. Plus it spares him the struggle of keeping one step ahead of ever-mutating long-distance plans.

MediaCom was founded in 1995 by Bob Pokress, a veteran of Bell Labs, and his son, Matt Pokress. Besides MegaMiser, its small-business offering, MediaCom sells two products for consumers or sole proprietors. MediaCom's original package, the $20 PhoneMiser works for only one line. Download its software into a PC. Then plug the phone into the device, which connects to your PC's parallel port. The recently released PhoneGenie, which retails for between $150 and $190, has built-in software and plugs directly into a telephone jack. It also works for only one line but can handle all the phones and devices on the line, such as faxes, modems, and cordless phones. Phonegenie costs so much more, says a company spokesman, because it doesn't require a PC or other equipment.

MegaMiser, the small-business product, costs $200 per "trunk" of roughly 10 lines and can handle up to 24 trunks, says Bob Pokress. The device connects to the PBX or other telephone system and requires software that runs on a PC with Windows NT.

Each month, MediaCom transmits updates of the carrier rates automatically to the devices on its clients' lines. "We are constantly negotiating rate packages with carriers, and as we are able to find better rates, we make them available to our customers," says Bob Pokress. The company also regularly adds new long-distance services -- all small carriers or resellers of capacity leased from long-distance giants, such as MCI or Sprint, but not AT&T. MediaCom gets a commission on each call it routes to a given carrier. It currently has about 15 on its roster, which includes Telegroup Inc., Opex, TCAST Communications, and InterTel.

Customers get bills directly from each of the companies whose service they actually use in a given month. MediaCom signs them up for a selection that the company deems the best deal for their region. MediaCom also gives its clients detailed reports of their calls, with the savings per call compared with their old long-distance plans. Small-business owners can configure the software so it will show calls by department and extension. They can also block calls to certain places -- overseas, for instance. Smith of Ursus finds the oversight capability useful. "You can check on sales managers and see who they are calling on a timely basis, who are they marketing too," he says, adding that he does tell staff that he scrutinizes the bills.

MediaCom isn't the only company selling least-cost routing to small business. A competitor is CallManage Inc. of Stamford, Conn. It also signs its clients up with a selection of carriers. However, CallManage doesn't sell its technology directly. It installs it on phones or fax machines, which are sold through dealers. It also takes a percentage of the customer savings and gets a commission from the carriers. Telecom equipment makers Lucent Technologies and Nortel sell PBXs for small businesses with least-cost routing, but they're more expensive than MediaCom's equipment. Businesses that use PBXs have to purchase the entire phone system, and they have to research which long-distance carriers they want to use as options for routing. Lucent says its small-business PBX costs between $500 and $1,000 per "trunk."

What do the big boys of the long-distance world think of this pipsqueak? AT&T, Sprint, and MCI claim they're unfazed. "The long-distance market has been highly competitive, and that is good for consumers," says Barbara Gibson, an MCI spokeswoman who adds that she has never heard of MediaCom. Sprint, based in Kansas City, Mo., says it's looking into the possibilities of least-cost routing for consumers. "We don't consider it a competitive challenge," says spokeswoman Eileen Gaffen.

Technology like MediaCom's has the potential to affect telecom rates on a broader scale if it comes into wide use. Ken Hoexter, a vice-president at Goldman, Sachs & Co. in New York and a telecom analyst, says that by cutting small business a better deal, businesses like MediaCom are helping smaller, more competitive carriers, which presumably will keep pressure on the big companies to lower their rates. "I see it as an advantage for competitive carriers to provide their customers with the best service," Hoexter says. "It highlights the level of competition we are seeing in the telecommunications market, and it comes from all angles" -- even a plastic box that you attach to your phone line and a PC.

By Jeremy Quittner in New York
Jeremy_Quittner@businessweek.com