When Mike Horton first pitched his University of California, Berkeley, graduate research project to venture capital firms in the fall of 1997, the battery-sized sensors were a hard sell. Eight years later, his sensor network company, Crossbow, has more than $16 million in annual revenue and two consecutive years of profitability under its belt.

Mr. Horton eventually convinced investors that Crossbow’s microelectromechanical systems (MEMS) sensors—which monitor information like air quality, barometric pressure in bridges, office buildings, or even oil tanker engines—were a good bet. An initial $13 million in venture funding from the likes of Intel Capital and Morgenthaler Ventures was enough to get Crossbow off the ground, and for years, the San Jose, California, company enjoyed its status as a groundbreaker in the market for its sensors.

But as Crossbow matured, so did the market for its products. A string of wireless sensor network (WSN) startups has popped up to provide a formidable challenge to Mr. Horton and his company, but he believes Crossbow’s comprehensive package sets his products apart. While many competitors focus on niche markets or specific technologies in WSN—such as home automation or the network—Crossbow aims to dominate by selling a vast array of customers everything they need.

“We provide the end-to-end system, and none of our competitors can make that claim,” says Mr. Horton. “Sensors, networking, gateway, software to manage the network—that’s what customers want.”

Crossbow’s technology depends on penny-sized wireless devices, called smart dust motes, which can be placed in dangerous industrial areas where humans and wires cannot tread. Motes can monitor virtually anything without wires and with minimal hardware—at low cost.

Because the WSN market is still emerging, analysts hesitate to pinpoint specific figures. But Crossbow and similar businesses sold about 2 million networked sensors in 2004, according to estimates by wireless research firm ON World and consulting firm ARC Advisory Group. That suggests total annual sales in the ballpark of $200 million, and analysts say the market could reach billions within the next several years.

Crossbow has already amassed an impressive list of more than 1300 customers, including several blue chip companies like BP and partner/investor Intel, whose affiliation has the potential to make Crossbow the WNS standard.

While Mr. Horton launched Crossbow as a hardware company focused on sensors, it has since expanded into the networking realm, creating software that allows motes to communicate with each other in a mesh network without a central node, sending data to each other and back to external monitoring applications.

“Their real value is their applications and their knowledge about the software side, especially networking software,” says Charlie Chi, a senior analyst at ON World.

Coming From Behind

Even before Crossbow snagged its first round of venture funding in 1997, other VCs were looking to make their own investments in the wireless sensor space.

“We were well aware of the work those guys [at Crossbow] were doing,” says Paul Koontz, a general partner at Foundation Capital. Foundation invested in Dust Networks’ Series A round last year; Mr. Koontz now sits on the company board. “They were clearly breaking ground, and it’s typical for us to learn the lessons of early pioneers to improve the decisions we make a little later on.”

Now, competitors—including Dust Networks, based in Berkeley, California, Boston’s Ember, and Millennial Net of Burlington, Massachusetts—have painted a target on Crossbow’s back, and the company must continually update its technology to stay among the market leaders.

All of the wireless sensor companies are building proprietary software around the Zigbee standard, which is similar to Wi-Fi, except it requires a lower power and bandwidth, and therefore a lower cost per unit. While hedging their bets and adding Zigbee compatibility, Crossbow’s motes are based around the open-source TinyOS operating system. Mr. Horton claims this gives customers a greater sense of security and flexibility, but TinyOS was developed for the academic arena, and open source remains unproven in the wireless market.

“The commercial world, especially in this kind of a space, is not used to working in open source,” says Harry Forbes, a senior analyst at ARC Advisory Group. “Zigbee may turn out to be the commercial version of a platform like TinyOS.”

Yet no one is writing off TinyOS as a potential dominant force—with over 1000 groups already using and contributing to the system, Mr. Horton says it’s the de facto standard. Dust Networks is Crossbow’s major competitor in complex, systems-level wireless sensor networks, and the main difference between the two product lines comes down to what technology approach customers prefer.

Pick Your Market

Overall, though, technology is not the key differentiator among Crossbow and its competitors, because they were developed, for the most part, out of the same government and military programs.

“Though they each have their different approaches and strengths, they’re all fairly comparable in the eyes of customers,” says John Williams of The FocalPoint Group, a technology consulting and research firm. “At the core, these companies have similar architectural biases in how they use their technology.”

What happens in the wireless sensor network market may be decided largely by what kinds of customers the companies focus on and how quickly they can establish a presence to increase sales. Crossbow and Dust Networks have focused on industrial customers and homeland security and defense. Crossbow’s biggest order is a 10,000-node installation for an undisclosed defense application, and Dust CTO Kris Pister’s DARPA contacts give his company access to contracts that other companies may not even be aware of. In the less-sophisticated building automation and the still-emerging home automation market, Ember and Millennial Net seem to have the lead, according to Mr. Chi of ON World.

In the market as a whole, all of the companies see tremendous room for expansion. “We’re focused on some markets, others are focused on other markets,” says Joy Weiss, CEO of Dust Networks. “I strongly believe this is a monstrously large space.”

With a decade of experience and a 24-country distribution channel, Crossbow has a head start in sales against its younger competitors. The Intel partnership also helps with brand-building and marketing, although Intel is not as powerful in the wireless sensor market as it is with computer or even handset chips.If a security specialist like Honeywell chose Crossbow or a competitor for an exclusive partnership, that could severely alter the landscape of the wireless sensor market, says FocalPoint’s Mr. Williams.

Mr. Horton predicts that Crossbow’s revenues will double over the next two years in this largely untapped space. “Our industry’s level of market penetration is only two to three percent of the way there,” says Mr. Horton. “Sensory networks have just scratched the surface.”