MagicJack and TANSTAAFL

June 27th, 2008 by · 3 Comments

A commenter asked me about the product Magic Jack, so I did a little looking.  Essentially it is a USB dongle, you plug one end into your computer, and then plug a phone into the other and bingo it works.  You get your own phone number - no local number portability just yet, but they say it is coming.  So what is novel about this solution?  Well, there was already the Packet8/Vonage solution with an ATA that hooks your existing phones into a router, and there was also the Skype/softphone solution where you use your computer with headphones and a microphone.  This is sort of a hybrid:  no ATA but you still use your existing phones.  That adds some ease to the process I guess, but nothing really revolutionary.  But it is the pricing that drives the product:  $40 for the device plus 1 year service, $20/year thereafter for unlimited calling pretty much anywhere anytime - not per month, per year.  E911?  Free.  411?  Free.  Lots of free stuff, lots of marketing - and I do mean lots.  Frankly, it raises the hair on the back of my neck.

Remember Sunrocket?  Just $200/year for phone service with an ATA solution, even a *lifetime* plan for $340 or something similar.  They spent a couple years touting their breakthrough pricing and how everything was just peachy until *poof* they were just gone - so much for that lifetime service.  Now just one year later we have MagicJack.  It has a USB dongle rather than an ATA, and it costs 90% LESS.  How can it do this?  The price to terminate calls hasn't changed much, the price for telephone numbers, for E911, for 411, etc - they don't cost any different either.  MagicJack is certainly using a voip wholesaler for these services, e.g. Level 3 (LVLT) or Global Crossing (GLBC) or XO (XOHO), and one has to actually pay for those services - no invention can get you past that.  On paper, the business model just doesn't add up anymore than Sunrocket's did.

Heinliein used the acronym TANSTAAFL:  'There Ain't No Such Thing AS A Free Lunch' and it applies here.  Someone is paying somewhere, and because I don't know who that is I am very wary of such products.  To be clear, I don't doubt the product's technical capabilities - only the likelihood that the business will be around long unless there is something we don't know about.   If I were going to try this product, I'd have to do it expecting that it will just leave me high and dry someday unless someone can tell me what it is that I am missing.

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Categories: VoIP

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3 Comments So Far


  • Frank A. Coluccio says:

    Your surest best in assessing the company’s viability, or that of any other VoIP play, it’s come to seem, would be to wait a few months and see if the company is slapped with a patent infringement suit, no matter whether the grounds of such a suit be real or conveniently imagined.

  • Ike Elliott says:

    Rob,
    I did a post on Magic Jack earlier this month. It looks like they are planning to subsidize their subscriber revenue with a combination of advertising revenue and reciprocal compensation. I am guessing they have reciprocal compensation sharing deals with some of the marginal CLECs and they may supplement that with their own CLEC facilities and their own CLEC agreements in some regions. More at http://ikeelliott.typepad.com/telecosm/2008/06/cheap-voip-opti.html
    and at
    http://ikeelliott.typepad.com/telecosm/2008/06/more-on-magic-j.html

  • Rob Powell says:

    Sorry Ike, I missed those posts of yours at the time I guess.

    First thought is that this product is aimed at outgoing calls perhaps more than incoming ones – at the very least it’s a wash, and it would seem to me that the net recip comp here would be neutral or net negative for the ISP – so what is there to share? I remember United Online tried a free incoming number in order to arbitrage that and got nowhere, but they could do it for free because the ISP was getting net positive recip comp due to the one way nature of the calls.

    Second thought is that advertising just isn’t enough and will cut into the popularity of the product. They are charging 10% of what sunrocket charged, and I don’t see the other 90% being made up by ads they haven’t even tried yet.

    The business model is insane, it has too many hallmarks of a marketing shell game to me.

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