Free Newsletter
The ooma conspiracy -- or why Vonage is ultimately doomed
Free newsletter via e-mail
Tools
Yesterday, I was on the phone with Rich Buchanan, ooma's CMO. It started off as a simple conversation about how the company added on support for Google Voice in relatively short order and ended up into a deep dive conversation which should have everyone in consumer VoIP, home phones, and landlines rethinking their business models.
Buchanan called in from a Best Buy event in LA; ooma was being feted for being one of Best Buy's hot products since showing up on retail shelves in time for the Christmas season. Ooma has sold "north" of 20,000 units to date, but the recent surge in demand has gone crazy. "I can't make product fast enough to satisfy demand," he said.
The simple--yet game changing--business concept for ooma is that you end up paying for your phone calls up front with the CPE. You pay $250 for the initial customer gear and get "free phone calls forever" in the United States, but what does that mean, exactly?
I'm skeptical of free, but Rich walked me through the numbers. Cost to terminate a VoIP phone call from ooma to the PSTN ranges from 0.2 to 0.5 cents per minute, so worst-case, you're paying a half-penny per minute with a national carrier. Average minutes for ooma usage are around 300 to 350 minutes per month--remember, landline minutes are going down with the ascendance of mobile usage, so worst case you're paying $1.75 per month for phone calls to the continental U.S. Or, $21 a year.
(Yes, we're ignoring some cost overhead in the core, but I'll get to that shortly).
Assuming a five year plan for the hardware, that runs out to $105 on the typical lifetime of the device with the worst-case cost termination scenarios. So there's $145 for the CPE (Ok, less what you pay Best Buy for stocking and selling), but this is no ordinary CPE. The current ooma device has a 450 Mhz ARM processor onboard running Linux, a derivative version of Asterisk and a routing algorithm to pick the least-cost route for the phone call, be it another ooma (free), a regional carrier, or the best national carrier rate of the day. Route processing is happening at the device--not the core--so there's no need for big iron and expensive solutions.
And the back-of-the-envelope calculation above doesn't take into account 1) The cost of VoIP termination is likely to nudge downward from half a cent a minute on the high end and 2) You can stick the money in the bank in nice comfy CDs and earn interest on it.
Bottom line: ooma is at break-even and/or making money on each unit it sells. Add on about $13 a month for the premium features--software downloads and some core processing. Buchanan says he has been surprised at the 25 percent take rate for premium. And they're making money off of international long distance--since it is already IP, ooma can charge Skype-like rates and still come out ahead.
But that's not enough my friends, no, no, no: Ooma is doing hardware refreshes every 2 to 2.5 years, so when current ooma users upgrade to new hardware with the latest features, the "clock" gets reset and that money on the old ‘ware goes into the bottom line.
What does this all mean? Buchanan says that between marketing and network overhead, Vonage is $400 in the hole per customer over two years, so they don't start making money unless the customer sticks around at least that long. With customer churn at around 3 percent per month, Vonage is running a losing battle even if it does manage to reduce the marketing expense of around $230-250 per customer because it still has all that overhead for routing and core infrastructure.
Ooma's business model also provides interesting insight into the Verizon Hub and other VoIP carriers (i.e. the cable companies). If it costs as little as $1.75 per month for up to 350 minutes per month of voice, it is a short step for carriers large and small to invert the traditional voice model and simply bundle in service as the cost of buying the equipment, pocketing any leftovers when people upgrade. - Doug
Comments
Posted by Peter_TechBanker | March 19, 2009 - 2:09pm
Doug,
Nice analysis. However, you forgot one other potentially important source of revenue, voice termination revenue.
If Ooma is terminating inbound calls, they can charge the PSTN (or whomever is delivering the call) termination fees.
If their users also recieve 300 minutes a month in phone calls, then much of the monthly cost will get netted out.
Posted by Peter Radizeski | March 19, 2009 - 3:11pm
I don't buy it. There are more costs involved. And being in a big box retailer is expensive - to the tune of $100K per SKU per store.
I think ooma is seeing an uptick like MagicJack is because everyone wants something free, but once we pick behind the curtain, well, the wizard isn't what we thought.
Posted by Doug Mohney | March 19, 2009 - 3:23pm
Help me out here; where are you getting 100K per SKU per store?
Best Buy has over 1,300 stores so the math there based on 100K per SKU per store would be .. $1.3 billion...?
Posted by Peter Radizeski | March 20, 2009 - 11:44am
In the grocery biz, P&G will pay per SKU per store to have its product available. The last number I heard in 1997 was that it amounts to about $100K per SKU per store. It isn't all cash - it can be rebate, co-marketing dollars, couponing, free product, labor, etc.
Look at Vonage's deal at telephonyonline dot com. And later Vonage kept sweetening the deal till you ended up getting the first year for a $75 rebate. That's right - you got paid $75 for the first year.
Posted by Anonymous | March 20, 2009 - 12:31pm
Not that I understand the $100K/store, but 1,300 stores * $100K/store = $130,000K = $130M, not $1.3B.
Posted by Doug Mohney | March 20, 2009 - 1:16pm
Ahhh... someone is paying attention...
I realized I had done the math on this wrong on the Metro ride home.
Regardless, I don't think ooma ponied up $130 million up front to get their product onto Best Buy shelves.
I'm also not sure you can draw a direct analogy between the scarcity of supermarket shelf space -- where I could see a premium being charged on goods given that people go there on a daily basis to buy milk and bread -- verses the consumer electronics Big Box stories.
Competition in the grocery arena is just plain brutal....
Posted by Anonymous | March 19, 2009 - 11:55pm
Folks use more than 300-350 minutes of phone service a month! ESPECIALLY if the minutes are free!
On the other hand, if landline minutes are "going down" as the author suggests, then why get an oomabox at all?!
Posted by Doug Mohney | March 20, 2009 - 9:11am
The cell phone is not the be-all and end-all within the home environment, unless you've got a femtocell jacked in.
Currently, price on femtocell service is, shall we say, non-optimal.
So, ooma has a role, abet in a shrinking market.
Posted by Anonymous | March 26, 2009 - 12:44pm
Best Buy is describing this product on their shelves as "unlimited" and "forever". I wonder what their customers are going to say when they find out that it is neither.
Posted by E L | April 1, 2009 - 1:08am
I agree that there are other costs. Ooma is also paying for a DID (phone number) for the customer, plus E-911. Then there is support and G&A. And why exactly would we expect Ooma's marketing cost to be lower than Vonage's $230-250 per customer?
I think a lot of people are hoping they can make it work, but it sounds razor thin.
Posted by Doug Mohney | April 1, 2009 - 6:52am
Vonage spent/spends an incredible amount of money on direct mail, television ads, and various other forms of promotions. At one point, Vonage was inserting into *both* of the mailer coupons services coming to my household -- an overlap of excess.
Posted by E L | April 2, 2009 - 9:24pm
Hey, if ooma is built on Linux and Asterisk, aren't they compelled by the GPL to release source code?
Posted by Rob Welbourn | April 15, 2009 - 12:15pm
Yes, they are. However, if they have any special sauce for call routing, they may have firewalled that off into a separate application so that it is not 'contaminated' by the GPL.
Posted by Anonymous | May 19, 2009 - 12:40pm
After a spectrum review of the conundrum relating to cost and unknown future business model change by OOMA, one must ask: Is OOMA really going to keep the free service promised to consumers and FCC ? Or, will it change when the competition force it to spend more to keep customers and attract more for their device. Maybe, one of these big telcos will end up buying it out of the market place and charge customers their regular monthly service fees - because they may at some point see OOMA scooping their customers and make OOMA such an offer it cannot reject or get hostilely swallowed. This is just my 2cents to this issue.
Posted by bt | September 12, 2009 - 4:30am
None of these 2 things(an offer it cannot reject or get hostilely swallowed) are likely to happen as OOMA is Privately held at the moment!
Posted by Anonymous | June 1, 2009 - 5:00pm
Have you tried the customer service or tech support? You know the adage, you get what you pay for.
Posted by Anonymous | June 17, 2009 - 7:17am
First time I called OOMA's customer service I was greeted by a professional gentlemen in about 2 minutes. I quite explained clearly how I whould get 'dry loop dsl' once I decide to port my number. He was very patient with me and had no problem explaining all that to me. The support is there without a doubt. One thing is for sure, that with things being free, people still want to rather pay for it... now thats retard!
Posted by Edex | August 27, 2009 - 12:52pm
Ooma has 3,000 minutes limit per month, not 300.
That's more than 1 hour of talking time per day. It's worth the investment and pays off after 8 months figuring your paying $30/month on your landline. You hope the company doesn't go under within a year or you end up with a useless device.
Posted by Anonymous Coward | September 3, 2009 - 2:17pm
Ooma looks like a great solution and likely to be in business long enough to get the initial investment back. Reminds me of wondering if buying lifetime Tivo service was worth it back in 2000.
The thing that is stopping me is I want to replace my landline and keep the number. But what happens to that number if ooma goes under. I bet one day the devices stop working and if the business closes their doors there would be no way to get those numbers transferred to another carrier.
I think i'll be looking at either getting Ooma and reducing my landline plan using ooma for outgoing only or looking again at the GV/asterix solution and port my number to google once they put that in place which is reportedly in the next few months.
Posted by Anonymous | October 28, 2009 - 4:29pm
I had SunRocket when they went under and I was still able to port my number out of SunRocket to my new carrier (Verizon). I'll be switching to ooma as soon as my contract is up with Verizon.
Posted by Jay Smith | October 3, 2009 - 2:40am
I have Ooma (for 5 months now). Have to tell you, i wish i would have gotten it sooner. AT&T have been raping me for years $35 per month, get our of here!!!! Customer service is better grate!!! Set up the box in less then 10min and have had no problems for 5 months and no bills. In about 3 more months i will brake even and then who cares if ooma flips (I personaly dont think so), but if they do it would not make any difference. However, if they dont i will be saving lot's of $$$.
P.S. Best Buy is not the only place you can find Ooma.
P.S.S. You get 5,000 minutes/month.
Posted by Anonymous | October 3, 2009 - 3:06am
I have Ooma (for 5 months now). Have to tell you, i wish i would have gotten it sooner. AT&T have been raping me for years $35 per month, get our of here!!!! Customer service is better grate!!! Set up the box in less then 10min and have had no problems for 5 months and no bills. In about 3 more months i will brake even
Read more: http://www.fiercevoip.com/story/ooma-conspiracy-or-why-vonage-ultimately-doomed/2009-03-19#comment-1223#ixzz0Sr1DnBH0
Posted by Anonymous | October 4, 2009 - 1:20pm
will ooma hardware upgrades be costly, and will they be required to continue service - or optional if you want the new features included with the new hardware?
Posted by Andrei | October 9, 2009 - 11:19am
I've been a customer for over a year and also purchased one for my Mom for Christmas last year. The key point for me even over cost savings is call quality and Ooma is superb! I had AT&T CallVantage VoIP for about 3 years before I got Ooma and I can easily say that Ooma is a better product with better phone quality.
I hear concerns about how long Ooma will last. I still have them but I am happy to see the progress so far. The business model does have sort of a built-in pyramid scheme in that profits on the $250 entry pays for a short period, the first couple or three years and Ooma is counting for additional purchases to keep them afloat.
But the business model is one that has a solution for when the last person in the US buys the last Ooma which is what a puramid scheme lacks. A pyramid scheme crumbles in the end but Ooma has a solution for when they reach critical mass. The solution is that calls between Ooma units are free, or very, very cheap. And the cost that may exist for support and central servers and so on is offset by the cost charged for Premium service features.
If you think about it over time, there will not be any phone land lines, they are to be replaced by the internet. This translates into much cheaper phone service with a model that is free for basic users who are supported by those who care for Premium features. Honestly, I would not mind paying $5 a month or something like that for the Basic service. With the advent of the Internet, the Phone service costs should go down.
I remember paying like $50 a month just for the phone. Now I have the internet and phone for $40 (counting the cost of internet from Comcast) and with the Internet I get a heck of a lot more. Now I am digressing.
In summary, first and foremost they must have a good quality product. No half-ass Skype type of things that don't work ( I tried many). It must work as well as or better than a traditional land line and Ooma does achieve that.
Then there is the interesting business model which I think is interesting and hope it works out in the end.
Posted by VK | October 23, 2009 - 1:46pm
This feels like a pyramid scheme to me. You have an ever increasing base of users who eat up your profits with their usage and you have a constant (if not shrinking) set of new HW buyers. Feels like something between Bernie Madoff's Acot Partners and Medicare
Posted by al | November 24, 2009 - 5:42pm
Glad to read the cost analysis side of the ooma consideration which is important.
I have read only two remarks about voice quality.
I left vonage because of delays in speaking, tunnel sounds and other poor quality voice issies.
Can some one tell me they are finding as good quality voice as on a land line?
Posted by JT - Milwaukee | November 27, 2009 - 11:59am
The comparison to MagicJack or other cheapy setups is off. The USB phone types requrie your computer to be on to work and this does. So if your computer crashes or you don't leave it on all day then the phone stops working.
The fear of cost for the company shouldn't be an issue. The hardware is each unit allows the units to communicate for FREE. Because your internet connection is already active your data is paid for throug your IP. Not through Ooma. So the larger their network grows, the cheaper their service costs are per person. If you read the business plan they use active customers to turn a long distance call into a local as well. A call from the East Coast to the West Coast may route through an Ooma device in each area and then connect via a local call to desired number. Your unit becomes somewhat of a pass through for their data.
I've heard great things about quality of sound and I'm looking forward to picking one up in the next few months.
Posted by Anonymous | December 5, 2009 - 6:46pm
If this is true about the devices being used as a pass thru do you think there would be a security issue with someone getting on my Lan and do you think it would affect broadband load or speed ?
Posted by Anonymous | December 6, 2009 - 4:02am
As far as broadband load or speed, no. You barely use what's there. Let me put it in terms you can understand, my LAN connection router runs at 100GigaBit/sec. Way faster than what I get from my broadband provider which is only (7 megaBit/sec download and 5 megabit/sec upload).
Now I use a wireless connection to my router in the house, and it is 54GigaBit/sec. I can watch streaming video, talk on skype at the same time, and my little sister can do that too simultaneously on my wireless connection. Now remember my effective speed is the slowest link in my chain, which is the misery 7 Megabit/sec I get from cable company. It still handles all this without any noticeable delay. What this means is I can add 10 Ooomas, to my router, and it would barely be noticed by any of my hardware. The pipe they are all sharing and drinking from barely gets affected at all. As far as effects on my house side hardware, none existent. My wireless connection alone is so fast that 10 of my setups would not come within a 10th of its capabilities.
cableCompany --5Mbs-->MyHouseLAN--100Gbs-->WirelessRouterConnection--54Gbs-->MyDevices/Computer/Etc
As you can see, my cable company is quite the slow dog here. Anyhow they can increase the bandwidth 1000x before I even come close to equaling available capacity in my wireless connection. So I can perpertually get faster and faster internet and everything else I have hooked to it would be able to run faster. We also know cable companies will provide faster and faster internet as their value proposition, from where I am, buy whatever and just add it to your collection you will be fine. 5yrs from now your cable company will give you triple or more the speed they give you today for same price. Bottom line, I like where this is all headed!
Posted by Al | December 10, 2009 - 8:30pm
I had Packet8 (8x8 Inc) for about 5 years. In the past, I had looked for cheaper voip solutions and even signed up with Sunrocket but they went belly up a month after I got their service. Luckily, my balance for the year was refunded. I recently signed up with Ooma and got their older hub with Ooma Scout.
So far, I have been very pleased with their service. Here are a few points other than the obvious free service:
1. Amazon had a special promotion and I got the Ooma hardware for around $200 with a free iPod!
2. Installation was very easy and I was up and running in 10 minutes!
3. One advantage over Packet8 is that since I live in a townhouse, I was not able to connect my phones to the regular phone outlets. Now, with Ooma Scout, I am able to connect my upstairs phone to the wall outlet.
4. Another *HUGE* advantage over Packet8 and possibly other VoIP carriers is that with Ooma, my Tivo (yes I have an old model that dials out to the mothership to download program data) as well as my fax machine now both work (with Packet8, neither of them worked).
5. The call quality, in my opinion, is slightly harsher than Packet8's but not by much. Otherwise, call quality is great.
6. I ported my number over from Packet8 without any problems (took about 2 weeks-- they had quoted 3 - 4 weeks).
7. Called up customer service once and the person was professional and knowledgeable.
In summary, Ooma is great so far and I'll break even in about 10 months even if they go belly up!
Posted by Anonymous | December 12, 2009 - 7:34pm
My biggest concern is getting our ported number back if they do go belly up.
Posted by Anonymous | December 22, 2009 - 6:38pm
I still don't quite understand how this thing works after buying the ooma. To whom, other than my internet provider, am I paying fees to if the ooma is free to use and I don't add additional services, just the basic ooma.
Posted by Mark Schu | December 26, 2009 - 11:46am
I am currently a Vonage customer and have been for going on 2 1/2 years. I would like to switch to Ooma but need to know EXACTLY what the monthly bill is, if you receive one at all. I assume you do? This is for free service not the Ooma premier. Would someone who has the service please respond? Thank you.
Posted by Anonymous | December 26, 2009 - 2:30pm
Vonage has free worldwide service to over 60 countries (landline and Mibile) in addition to the US and Canada. Does Ooma match that? I've been with Vonage almost 8 years and am happy with their service. Had tried something called SUNROCKET a couple of years ago. They went kaput 4 months after I bought their 2 year contract. No way am I going to fall for that again.
Posted by TaDA | December 29, 2009 - 7:11pm
I think ooma is also banking on people signing up for the premier service. For $10 a month you get a lot of extra features including a 2nd line. Compared to what you're paying for a landline with all the bells and whistles, that $10 isn't a bad deal. They give you 60 days of premier for free when you sign up to get you hooked on the extra features. That $10 is easy money for ooma each month. Also, they recently said they'd be charging $11-something/year for "fees" so they're passing that along to you. Still, a good deal.
Posted by Anonymous | January 2, 2010 - 4:05pm
to respond to some of these last questions:
you don't get a monthly bill from ooma, if you choose premier, your credit card is charged $10 each month.
ooma currently has an international calling bundle of 500 minutes for $5/month to 70 countries (http://www.ooma.com/premier/international-bundle). They will be coming out with an unlimited bundle for $10/month.
Comments (38) | Post a comment