Cheap VoIP Option: Magic Jack

My friend Michael Remacle, who now runs business development for Vail Systems, suggested I do a post on Magic Jack, one of the truly inexpensive VoIP options out there for consumers.  No, I'm not talking about Level 3 CTO Jack Waters...though I understand how you might think that!  No, Magic Jack is a separate company that sells a really cheap consumer VoIP device and service.

Here's how Magic Jack works:

1. You buy a USB "magic jack" dongle for $40, which includes all of the fees for your first year of service.
2. You plug the USB dongle into a USB port on your PC.
3. You plug your standard, traditional analog phone set into the phone jack on the USB dongle.
4. You start to make and receive unlimited VoIP calls to and from any regular telephone.
5. You also get free voice mail.

So, it's basically $40 for your first year of service (including the USB dongle), and $20 a year for every year thereafter.  This computes to about $3.34/mo in the first year and about $1.67/mo for every year thereafter.  Cheaper than chotskis at a VON conference!

I have never used the service so I can't vouch for it.  It certainly is low-cost, though!

How can anybody afford to sell VoIP service so cheap?  After all, if you assume an average of 500 minutes of long distance per user, per month, then in the second year they are basically charging $1.67/500 = $0.00333 per minute of use.  That's well below current wholesale long distance prices, let alone retail pricing, so you do have to wonder how Magic Jack is selling phone service for so little.

Here are some theories on how Magic Jack can sell so cheap:

1. They are enjoying interest on the float, since they are collecting annual fees up front.
2. They are benefiting from some breakage from folks who buy the service but end up not really using it (so the average long distance minutes used per month is actually lower than 500 minutes).
3. They are gaming the reciprocal compensation system to get paid for some of their inbound calls (more on reciprocal compensation in a future post).
4. The cost of goods on their magic jack dongle is really tiny, like less than $5.00, so if you attribute $20 of the intial $40 payment as the retail price for the jack itself, then they are making really healthy margins on the cheap hardware.  (It would have been great to have a sub-$5.00 dongle 9 years ago...this would have come in real handy when we were searching for cheap bricks back then!)

Even with these benefits, though, it's hard to see them making much money at it.  Just another example of how it's hard to compete as a consumer VoIP service provider these days.  It's a good deal for consumers, though!   

Comments

[David]

Purchased a magicjack a couple of weeks ago and experienced fairly good connection quality on outgoing. One comment I got from someone I called is that my voice sounded somewhat "tinny" compared to the quality on my vonage line but no static and clear. I am currently experiencing some issues related to dialing out to certain phone numbers and others not being able to reach me. For example someone can call me from a cellphone but not call me from a landline. I also cannot reach my magicjack phone from my cellphone so that is strange as well. These appear to be technical issues related to the connections from magicjack to other phone carriers. I suggest that whoever buys a magicjack thoroughly check incoming and outgoing connections to confirm that your phone number is recognized by other carriers. And as of today, no one at magicjack has been able to explain this problem or resolve it for me.

[bob johnson]

Why do we need a computer all time to use it. Can I put it on my ATA. It seems this is like voipbuster.com. That that give you great price but you need to be on the computer. Using you pc Mic. But with their internface, the Mic and the Speaker becomes the RJ11. Witch is pretty cool. But the fact that the computer has to be dedicated to it is bad. Also, you cannot have 2 of them on the same computer.

[sam]

Cool. Nice article!

[Robert Hagens]

This little device brings a smile and a trip down memory lane. Remember how many meetings we had at LVLT trying to design "the brick" ! That was supposed to be a standalone voip gateway that could be installed on someone's broadband Internet connection.

Now they've gone and made it the size of a dongle! What a difference a few years makes!