Ooma's Toll-Free Gambit: Too Good to Be True?

A new company called Ooma promises to provide free calling anywhere in the United States to customers who buy the company's $400 Hub device. The catch: The Ooma system needs a lot of folks sign up.

Ooma's $400 VoIP Hub plugs into your land line and your broadband connection.
I signed up for the beta and hooked up the Ooma Hub to my home phone line and Internet connection. The device was easy to install (the instructions were simple and explicit), and after about 15 minutes of set-up time, I was done.

One thing I liked immediately about Ooma is that the service lets me place and receive calls using my regular phone--not some funky PC-phone-mic-and-headphones setup. All the fancy VoIP stuff goes on in the background. To hook up another phone in the house, you buy a $45 Scout--a smaller version of the Hub--and connect it using the existing phone wiring in your home.

Connecting free calls from one Ooma user to another for free is straightforward enough. The call can travel from one phone to the other as a pure VoIP call via the Internet--and thus at no cost to Ooma. The challenge is in connecting calls to phones that are served only by the good old publicly switched telephone network (PSTN).

Skype, one of the largest worldwide providers of VoIP, offers a similar service called SkypeOut, which you have to pay for, at a rate of 2 cents per minute in tolls. Skype pays a regional phone carrier to connect your call on the other end. However, Ooma says it has a way to do this for free.

How It Works, in Theory

Ooma works on the principle that long-distance calls are expensive and local calls are cheap. Let's say I use Ooma to place a call from my home in San Francisco to a friend in San Jose. My call would travel long distance over the Internet to the Hub of another Ooma customer who lives in the vicinity of my friend. That second Hub would take the call off the Internet and send it the rest of the way over the PSTN as a local call.

What Ooma is doing is this: It uses the fact that most of its customers are expected to use Ooma as a second line, leaving their conventional land line in place, so most Hubs will be connected to both the PSTN and the Ooma VoIP network. In other words, Ooma uses the Internet to get calls close enough to their destination (within 12 miles) to where they can be completed as (cheap) local calls. Pretty ingenious.

Reaching Critical Mass

Problem is, the Ooma network isn't yet big enough to connect calls in that way throughout the U.S. At this writing, only about 750 people are using Ooma in beta--the service began July 19--and most of those users are in Northern California. In order for Ooma to connect most calls to major population centers around the U.S., Ooma director of product development Dennis Peng says, it must have between 50,000 and 100,000 Hubs in operation across the country.

Until Ooma can reach that critical mass of users, it will pay the long-distance fees to connect calls outside the reach of its network of Hubs. I called my parents in the Midwest and talked for 30 minutes free.

The sound of the call was the same as, or slightly clearer than, a normal circuit-switched phone call. A blue light on the Hub indicated that the Ooma service was working properly and that the call was free (to me, anyway). The next day, Ooma confirmed that it had paid for that call's long-distance trip out to the Midwest, far away from any of its Hubs.

No wonder the Ooma beta is by invite only--the company is giving away long-distance phone service. Peng says Ooma won't pass those out-of-network charges on to customers even after it has a critical mass of Ooma Hubs installed in the most populous areas of the country. It'll continue to foot the bill for calls to out-of-the-way places like Nebraska.

An Uncertain Future

So the key questions in Ooma's future are these: Can it grow its network of local Hubs fast enough to dramatically reduce the connection fees it's paying to connect calls outside its network? And will mainstream consumers lay down $400 for a piece of hardware and a promise of free calls forever? If the answer to either is no, Ooma might quickly burn through its venture capital and disappear like so many other VoIP upstarts.

But let's say that Ooma survives and prospers (I hope they do), and that the $400 Hubs begin flying off the shelves at Best Buy and Circuit City. Then the company may have another problem: Its whole business is built on using the Internet to bypass the long-distance lines owned by giants like AT&T, Qwest, and Verizon.

So how long will it be before the Big Telco lawyers figure out how to sue Ooma out of existence? (In a recent case providing a glimpse of what could happen, Verizon sued Vonage over VoIP patents.) Even Ashton Kutcher, Ooma's "Creative Director" (yes, really, the actor--the guy who gave the world "Punk'd" on MTV) won't be able to protect them from those barracudas.

Good luck, Ooma. Here's hoping you don't get "Punk'd."

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