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Scrambling For a Slice Of Internet Phone Pie

Small Firms in Area Search for a Niche

By Yuki Noguchi
Washington Post Staff Writer
Monday, January 24, 2005; Page E01

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.

BroadSoft sells voice over Internet protocol providers desktop software that helps users program phone systems.

Internet Calls Some of the Washington area businesses selling VoIP phone systems or software to run them.
_____All About VoIP_____
Convergence Emergence (washingtonpost.com, Dec 14, 2004)
Let's Talk About VoIP (washingtonpost.com, Dec 14, 2004)
Live Free or Buy (washingtonpost.com, Dec 14, 2004)

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."

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