December 17, 2007

VoiP Providers Push New Pricing Models

Rival telephony start-ups would put an end to monthly bills.

By Peter D. Shapiro

Residential voice telephony has become an unlikely hotbed for clever new products and new pricing models. For example, several VoIP providers are now promoting unlimited calling for one-time or low annual upfront payments, notably Ooma (www.ooma.com) and YMax’s MagicJack (www.magicjack.com).

With Ooma, once users have purchased a $399 hub device that connects to a cable or DSL modem, plus additional $39.95 units for each phone extension, they are promised unlimited local and U.S. long-distance calling for no additional charge. Ooma’s business model assumes there will be no public switched telephone network (PSTN) termination fees for Ooma calls. How so? A call originated by an Ooma user is routed via the Internet to the local calling area of the destination phone number; there, it finds another Ooma user’s hub device that completes the call via the latter user’s “backup” phone line. These lines exist because customers are advised to keep a local telco line as a backup and to retain 911 access. The terminating telco only sees a local phone call, and meanwhile there is no visible cost to the Ooma user, whose flat-rated “backup” phone line was borrowed.

The Wall Street Journal’s Walter Mossberg blessed Ooma with a laudatory review; however, in my opinion, Ooma’s basic concept has major flaws. I’m skeptical that users will go for Ooma’s high upfront payment, even for lifetime VoIP calling, given this venture’s uncertain prospects. Also, it is a stretch to assume there will be readily available backup phone lines throughout the U.S. so that Ooma’s completed calls are always local and “free.”

YMax, a CLEC with local presence in most U.S. rate centers, has a more plausible story. YMax’s MagicJack is a matchbox-size device that a user plugs into the USB port of any PC that has broadband Internet access. Any standard phone can then be connected to the MagicJack to make VoIP calls. The annual cost for unlimited local and long-distance (U.S. and Canada) calls: $39.95 the first year, $20 each subsequent year.

YMax’s CEO Donald Burns says that YMax’s net telco access costs are almost a wash since PSTN termination fees for its ISP-originated outgoing calls are largely balanced by access fees that YMax receives from other carriers for incoming calls to YMax customers. Burns says he can make money from users’ annual payments plus incremental income from ancillary features and outgoing international long distance, after covering ongoing operating costs and amortizing YMax’s $20 million investment in its CLEC network facilities. I was given a MagicJack to try out, and it works. Call quality is not PSTN level but basically OK, albeit a bit clippy. While it took several tries to get registered and to enable voice mail, such back-office teething pains will probably be resolved over time.

Unlike cable VoIP, YMax’s MagicJack is not promoted as a replacement for residential customers’ primary phone lines. However, MSOs may need to deal with customer expectations implanted by marketing mottos like MagicJack’s “Never Pay a Monthly Bill Again.”

Peter D. Shapiro is an industry veteran and principal at PDS Consulting, a cable & telecoms consultancy (www.pdsconsulting.net). He can be reached at: peter@pdsconsulting.net.