Investors showed little interest when Richard M. Tworek started setting up Internet-based phone systems for businesses two years ago.
Now the company that Tworek founded, Qovia Inc., has $16.1 million in venture capital and 120 businesses use its software to make sure their Internet connections stay robust enough for calls to go through glitch-free. But last week the Frederick company laid off 16 of its 59 employees and retooled its business plan.
Like Qovia, most Washington area companies in the Internet phone business are relatively small and still searching for a secure and profitable niche in a fast-changing sector. They range from start-ups that provide behind-the-scenes support for the technology to alternative phone providers, such as Primus Telecommunications Group, that sell Internet calling plans directly to consumers.
Most are counting on predictions that the technology known as VoIP, or voice over Internet protocol, will take off this year. But a boom could cut both ways. The local companies could benefit from increased demand, but analysts say they also will face heightened competition from communications industry giants.
"Once the big guys come into the market, it's game over for the small guys," said Jon Arnold, a Toronto-based analyst with Frost & Sullivan, a market research firm. He predicted that a handful of carriers will dominate the consumer market. The situation may be less dire for software companies providing the technological underpinnings of VoIP systems, he said. But they will have to compete against big equipment-makers such as Cisco Systems Inc. and Nortel Networks Corp.as well as international rivals.
"There's only room for two or three vendors in each niche," Arnold said.
The number of consumers using VoIP is expected to grow to about 4 million by year-end from about 800,000 today, according to Frost & Sullivan. The growth may be driven by major communications companies such as cable giant Comcast Corp., which this month announced plans to offer Internet calling to as many as 20 million homes this year and another 20 million by the middle of 2006.
The percentage of business phone lines that make connections over the Internet is expected to grow to 13.1 percent by the end of 2006 from 7.2 percent today, the research firm said. Major corporations such as Ford Motor Co. and Boeing Co. already have traded at least part of their traditional phone system for Internet-based networks.
"Internet phones have hit the big leagues," Tworek said. But to stay in the game, Qovia last week cut its staff and changed its marketing to concentrate exclusively on businesses with 10,000 or more employees and a comparable number of phone lines, more than double the size of its average client today. Tworek, who declined to discuss the privately held company's finances, said the cost of marketing to small and mid-size businesses was too great for the payoff in revenue.
"It's like anything else in business," Tworek said. "The biggest [challenge] is trying to get in front of the right customer facing the right problems."
Sentito Networks Inc. is working to expand its small roster of clients. The Rockville company's technology helps voice traffic merge onto data networks. It now has seven providers of Internet connections as customers. Jeff Heynen, manager of product marketing, said the company, which has received $53.5 million in venture capital since its founding in 2000, is counting on testimonials from its clients to win new ones.
"It's a hyper-competitive environment," Heynen said. "The service providers thinking of offering VoIP services are getting inundated by competitors like Nortel, Cisco and others."
BroadSoft Inc. is concentrating on international markets. The Gaithersburg company sells VoIP providers desktop software that helps users program their Internet phone systems. It also makes software that routes calls to the right place.
In six years, BroadSoft has accumulated more than 90 VoIP carriers as customers. Now it's trying to sell to international carriers before competitors get to them, said Scott Wharton, BroadSoft's vice president of marketing. He said the company's goal is to take BroadSoft public in 2006.
NexTone Communications Inc., also based in Gaithersburg, makes software that helps carriers hand off calls to each other and monitor the traffic on their networks. The company, which has received $32.5 million in venture funding, is trying to win the business of large VoIP carriers but it's competing against large equipment vendors.
The Internet phone trend also has affected companies not directly involved in the field. The primary business of District-based NeuStar Inc. is maintaining the North American database of phone numbers, a service that is essential for carriers to route calls properly. NeuStar has retooled its technology to track the growing volume of calls riding over the Internet, said Jeff Ganek, chief executive of the company.
The most visible players in VoIP are the companies that provide and market the new technology directly to consumers.
The Washington area has several such companies, although they are bit players compared with the industry's biggest player so far, Vonage Holdings Corp. of Edison, N.J., which has more than 400,000 customers.
Primus Telecommunications Group Inc. of McLean has more than 30,000 customers for Lingo, its service offering local, long-distance and some international calling for $19.95 a month.
The area's biggest communications companies also are moving into Internet calling. America Online Inc. of Dulles is testing a consumer offering. MCI Inc. of Ashburn sells Internet phone service directly to businesses and offers it to consumers through cable companies. MCI declined to say how many customers it has for its Internet phone services.
Some companies are getting into Internet phone calling because they have little choice, analysts say. Companies that provided long-distance service over regular phone lines, such as MCI, AT&T Corp. and Primus, are watching long-distance rates and revenue plummet.
John Melick, co-president of Primus, said the company decided it had to offer an Internet product to attract new customers, even at the risk of taking customers from its older, shrinking long-distance business.
"We all want to pay less for phone service," Melick said. But he said customers will be willing to pay for good service and for wireless and high-speed Internet services, so Primus is investing to offer all of those.
He said the company can compete with bigger players because it already owns telecommunications networks in 150 countries and can afford to offer international calling at a lower rate than some of its rivals.
The most daring companies may be start-ups created solely to offer Internet calling to consumers, such as SunRocket Inc., a Vienna company recently launched by former MCI executives. SunRocket markets itself as a consumer-friendly alternative with "no gotchas" such as activation charges and cancellation fees charged by big phone companies. But analysts said such small players are about to face the formidable brand names and marketing budgets of companies such as Comcast.
"The name of the game is the number of customers," Arnold said. "These little guys don't have enough money. The big guys are going to be spending their brains out."