TELECOM Digest OnLine - Sorted: Telecom Shows Sparkles Of Life

Telecom Shows Sparkles Of Life

Marcus Didius Falco (
Wed, 17 Nov 2004 00:51:28 -0500

Wireless, Security Firms Lead Rebound

By Yuki Noguchi
Washington Post Staff Writer

Five years ago, Cable & Wireless USA Inc. promised to link businesses
through ribbons of fiber-optic cable connecting every major point on
the globe. E.spire Communications Inc. vowed to build its own network
from scratch to bypass the local phone giants. Corvis Corp. pledged
its equipment would widen the Internet into a massive data

All were launched in the Washington area in the 1990s. All are gone
today. Now, a new generation of companies -- smaller, with more
modest goals -- is surfacing to take their place.

Frederick's Qovia Inc. is helping business clients install and manage
voice-over-Internet phone systems. Bluefire Security Technologies of
Baltimore designs software to protect wireless devices from hackers.
Software from Fairfax-based Nexus Innovative Systems Co. audits
companies' telecommunications bills.

After four years of painful decline, the area's telecommunications
business is starting to come back. The newer telecom companies are
largely focused on such growth areas as wireless communications and
security software. Many are small. And most get by without the dollars
that used to flow from venture capital funds or from going public.

Washington will continue to be a major center for telecommunications,
analysts and investors say. The area is rich in technologists,
lawyers, venture capitalists, skilled workers and the federal
regulators of the telecommunications industry.

But the telecommunications industry won't be the local economic driver
it was during the 1990s, analysts say. Local employment in the
industry hit 50,200 in March 2001, and venture investments in local
telecommunications topped $1 billion in 2000. At last report, 33,700
people were working in the local telecommunications sector as of
September, according to the Bureau of Labor Statistics. The area's
venture investment in telecommunications dropped to $81.7 million last
year, according to data from the MoneyTree survey conducted by
PricewaterhouseCoopers/Venture Economics/National Venture Capital

"I see promising players, but if you're looking for the next Google, I
don't know that we know what that is yet for this area," said Charlie
Thomas, former chief executive of Net2000 Communications and founder
of investment firm Claris Capital. But, he added, some companies
clearly will be driving the next generation of work because they have
developed strong expertise in niches that will be important in the
communications industry.

Thomas singled out Reston's Nextel Communications Inc., and the
District's XM Satellite Radio Holdings Inc. -- the latter not a
communications company, but one with expertise in the use of

It was satellite technology that launched Washington's
telecommunications sector back in the 1960s, when Comsat Corp. and
Intelsat Ltd. were created.

Comsat was chartered in 1962 as the government's representative on
Intelsat, an international satellite partnership. For decades Intelsat
was the only U.S. satellite link to the rest of the world, and the
effort spawned a rich pool of telecommunications experts in
Washington, who went off to start or staff other companies.

In 1972, William G. McGowan relocated his company, MCI Inc., to 17th
Street NW in Washington, realizing a key part of MCI's success would
be lobbying Congress and regulators to open long-distance calling to
competition. In 1984, a court-ordered breakup of AT&T Corp.'s phone
monopoly took effect, allowing MCI and others to compete head-on.

The area continued to draw scrappy competitors in the 1990s. Nextel
set up shop in Reston. Ciena Corp. started its business in
Linthicum. But the region's true telecom boom came after the federal
Telecommunications Act of 1996, which allowed new companies to compete
against the regional Bell phone companies in the local phone
market. The rich talent pool and proximity to the FCC attracted
companies at the same time investors were willing to pour money into
telecom and technology companies.

"A couple of years ago, Washington D.C. was the major location nationwide,
and just about every one of the competitive players were here," said
Tom Koutsky, a Washington-based lawyer who has worked in the industry
since 1994.

In the spring of 2000, the stock market collapsed under the weight of
massive overbuilding and overspending. When the market reversed
course, Washington's telecom sector fared badly. One by one, familiar
local names like Net2000 , Teligent Inc., PSINet Inc. and Winstar LLC,
and smaller companies such as CityNet Telecommunications Inc. and
Velocita Corp. shut down.

The losers even included such former stalwarts as MCI and XO
Communications Inc. Both weathered a trip through bankruptcy court to
emerge diminished.

The bankruptcies, sales and restructurings have left Washington's
telecommunications industry much smaller. And if the Federal
Communications Commission maintains its more hands-off approach to
oversight and=20 regulation, it may reduce the incentive of telecom
companies to be based in the Washington area, said Jeff Kagan, an
independent industry analyst based in Atlanta.

The local telecom companies that survived and those that have recently
rebounded are focused -- like companies nationwide -- on the areas
expected to be big sectors of growth in the coming years, including
wireless technologies and phone service over the Internet.

The Washington region boasts few industry-leading players in these
fields but rather has numerous smaller companies trying to develop
business in niches that big companies have ignored.

In the wireless field, Nextel is the biggest local player, with more
than 15 million customers. It is the smallest of the five national
wireless carriers, but it is popular because of its "push-to-talk"
walkie-talkie service. The company, with a network that was cobbled
together from walkie-talkie licenses bought from taxi-cab dispatch
operators, continues to develop new technologies and grow.

In addition, Nextel and other telecommunications companies, like MCI,
have become a breeding ground for a new generation of local

"I think you've got multiple telecommunications companies in addition
to Nextel, all of whom have spun off or graduated people who are able
to address the shortcomings that big companies aren't nimble enough to
address," said Michael Riemer, a former Nextel executive who left two
years ago to work at Trust Digital in Tysons Corner.

Trust Digital, which recently received $3.1 million in funding from
Core Capital Partners LP, a Washington investment company, makes
software to protect wireless phones from hackers and viruses. Bluefire
Security is developing similar technology in Baltimore. It recently
received an undisclosed amount of funding from Motorola Inc., Nextel's
biggest supplier of phones.

Columbia's Sourcefire Inc. sells customized software that detects
potential intruders trying to break into private corporate
databases. LCC International Inc. of McLean builds and maintains
wireless networks. And TeleCommunication Systems Inc. of Annapolis
provides instant messaging service for wireless telephones. Inphonic
Inc., a Washington company, is an online reseller of wireless phones.

In addition, a small cluster of WiFi companies, which offer wireless
Internet connections, has appeared in the Washington
area. District-based DC Access, Baltimore-based Oneder LLC, and
Germantown-based RapidDSL & Wireless all offer some flavor of the
service, which is aimed at giving small business or residential
customers access to a high-speed wireless Internet connection without
going through a traditional cable or phone company. Others cater to a
narrower audience. Reston-based LinkSpot Networks Inc. offers wireless
connections in RV parks around the country. Most of those are small
companies that have yet to generate a profit but they say their
subscriber base is growing.

Another area expected to experience rapid growth is phone service over
the Internet. That field is now dominated by Vonage Holdings Corp., a
New Jersey company. Many of the big phone companies, including MCI,
Verizon Communications Inc., and AT&T, are also moving into the
Internet phone business, as are cable giants like Cox Communications
Inc. and Comcast Corp.

But some local companies are also making an aggressive play for this
business. McLean-based Primus Telecommunications Group Inc. offers
Internet phone service. Qovia sells products that monitor Internet
phone systems. And Vienna's SunRocket Inc., started by former MCI
executives, was recently launched to offer consumers Internet phone

Many other companies have been carving out smaller niches. For
instance, Nexus Innovative Systems, Rivermine Software and Vibrant
Solutions Inc., all based in Fairfax, sell software to help businesses
audit and manage their telecommunications bills.

Others, like Reston-based XO Communications and Talk America Holdings
Inc., sell local and long-distance service in competition with the
large phone companies. MCI, even in its diminished state, continues to
be a major player.

One of the biggest drivers of the local telecommunications industry
today is the surge in federal dollars to telecommunications firms for
writing communications software and designing networks. This money has
gone, not only to giant defense contractors like Northrop Grumman
Corp. and Lockheed Martin Corp., but also to hundreds of smaller
companies, like Apogen Technologies in McLean.

"Around the [Capital] Beltway there are at least 500 companies that are
doing some work with the government, doing telecom," said Thomas, of Claris
Capital. That has helped cushion the blow caused by the telecom bust.

As some companies, such as MCI, continue to struggle with massive
losses, others like LCCI, have started to make a comeback.

"If you asked me what happened to telecommunications in the area, I'd
say that it's regrouping," said John Siegel, a partner at
Alexandria-based Columbia Capital. "You have a lot of extremely
talented people in this market. That's why I think there's an
opportunity here."

Copyright 2004 The Washington Post Company

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