Start-ups promise to lower cost of phone calls

Times Staff Writer

Nationwide calling from your regular home phone is getting closer to being free.

Two new companies are trying to attract the average consumer to Internet telephony by bypassing the local phone and cable TV giants to provide free calls on standard-issue phone handsets.

The free calls come at a price, of course -- either one-time hardware costs or low annual membership fees.

Still, analysts say the surge of inexpensive alternatives for making calls is likely to drive down prices for traditional phone plans.


Ooma Inc. has captured the attention of tech enthusiasts with its call-routing device, while arousing the curiosity of celebrity-watchers with its creative director, actor Ashton Kutcher.

The Palo Alto start-up today will start selling the $399 device, which plugs into a home network router to connect calls over the Internet. After that initial expense, phone service throughout the nation is free for life.

On Sept. 27, another start-up, MagicJack, plans to start selling a small device that plugs into a computer’s USB port. At the other end of the device, which resembles a flash drive, is a jack that connects to a regular phone.

MagicJack will charge $40 for the device and a year of service for all calls in the U.S. and Canada, then $20 for each additional year. Unlike Ooma, the MagicJack will work only with when its host computer is turned on, but it does have an advantage: The device works overseas, so travelers can take it with them and, after finding a computer to plug it into, call home for free.


The two services are the latest efforts to lure everyday folks to the technology known as voice over Internet protocol, or VOIP. They’re all trying to take the pioneering efforts of EBay Inc.'s Skype Technologies, the world’s most-used Internet calling program, beyond the geek level.

“Free voice is popping off everywhere,” said Patrick Monaghan, an industry analyst at Yankee Group research firm.

Yankee Group expects the Internet calling market, which is dominated mainly by big cable TV companies, to triple by 2011 to $27 billion. Most revenue, especially for smaller firms, will come not from selling voice minutes but from advertising and added services.

“As more and more of these companies drive voice prices to zero, with companies like Skype and Ooma leading the charge, there’s less room for the major phone carriers to charge more for the same minutes,” Monaghan said.

That’s just fine with Stuart West of Menlo Park, Calif., who has been testing Ooma for six months. After an unexpected $250 mobile phone bill one month, he and his technology-averse wife began using their Ooma service for most calls.

“We had a baby a few months ago and spent a lot of time on the phone telling aunts and uncles and friends around the country all about our daughter,” West said.

“Ooma worked flawlessly. The voice quality was great, and nobody knew we were using anything other than a regular phone line.”

The Wests kept their land line, paying only for local service, mainly for its reliable 911 emergency calling, although Ooma also offers an enhanced 911 service similar to other VOIP providers. Their phone bill dropped by as much as $30 a month.


“It’s nice to save a little bit of money,” West said.

Andrew Frame, Ooma’s founder and chief executive, said his company was trying to make the process simple and easy to understand, much as Skype did for those making their first Internet calls from computer headsets four years ago.

“There’s a complexity barrier preventing people from going to VOIP,” Frame said.

Analysts agree that even uncomplicated tasks, such as downloading Skype software or connecting ethernet cables and power cords required to use the service offered by Vonage, can be intimidating to many people.

Ooma may change that. All software is included in the hardware and it updates itself automatically.

“They’ve done a good job with packaging and instructions,” analyst Monaghan said.

The company also provides plenty of bells and whistles in its effort to best the features that a regular land line offers.

It has voice mail that can deliver messages to an e-mail account, a “do not disturb” feature that routes all calls to voice mail, and an instant second line that allows someone else in the home to pick up an extension phone to receive or make a call. (A device to hook that extension into the Ooma system costs $40.)


But the price for the main hub is a major drawback, analysts say, and the company is expected to raise it to $599 next year.

“For a product that’s supposed to save people money, it’s expensive,” said Stephan Beckert, research director at TeleGeography Inc., a research and consulting firm.

Ooma has some unique advantages, analyst Elroy Jopling at Gartner Inc. says, but the price will have to come down.

“It may seem like you can recoup that in six months or a year,” he said. “But will the consumer pay for it?”

Monaghan believes that Ooma can come up with ways to make the device affordable, such as leasing it with an option to buy, stretching out payments over several months.

Jopling, however, pointed to other concerns. He said it was hard to compete with phone giants such as AT&T; Inc. and cable players such as Time Warner Cable Inc. that offer bundles of services -- pay television, Internet access, cellphones and land lines -- on one bill. Some European broadband providers, he said, already are giving away phone service with sales of Internet service.

“Bundling is the thing that is most detrimental to VOIP companies,” Jopling said.

And paying a big amount upfront to fledgling companies can end up making customers unsecured creditors if the companies go under. VOIP provider SunRocket Inc. closed its doors without notice in July, leaving 200,000 customers scrambling to find phone service.

Consumer concerns over Ooma’s upfront cost could make MagicJack, a unit of phone company YMax Corp., based in West Palm Beach, Fla., a safer bet.

Its small USB stick holds the software and hardware to provide many of the same services, including voice mail. It works on any personal computer without leaving behind a trace. That’s because all programs, contact lists, and other features and information stay in the USB device.

That means a user can take it anywhere there is an Internet-connected computer, even overseas, and still make and get calls free throughout the U.S. and Canada. An international calling plan is in the works.

YMax Chairman Don Burns said the company planned to generate revenue from a combination of MagicJack sales, software licensing and wholesale leases of its national network to other retail phone companies.

“The combination of these assets and revenue streams amply meet all of our earnings objectives,” he said.

Neither Ooma nor MagicJack plans to spend much money on advertising, instead developing ways for word to spread online much as it did with Skype.

Ooma and Skype also share another trait. Two of Skype’s early investors -- Silicon Valley venture capital firms Draper Fisher Jurvetson and Draper Richards -- were among backers that put $27 million into Ooma.

And, as far as Monaghan is concerned, Ooma is “the only VOIP device out there that has really differentiated itself.”