An unusual VoIP provider

* A look at relative VoIP newcomer magicJack

With some stand-alone VoIP services like Vonage stagnant and others like Verizon's VoiceWing and AT&T's CallVantage dead or dying, we decided to check in on a company called magicJack, an unusual VoIP provider. We were surprised with what we found out when we talked with Dan Borislow, the inventor of the technology and co-foundeder of the company. The biggest surprise? MagicJack has over 3 million customers and is adding 250,000 new customers a month, according to Borislow.

With some stand-alone VoIP services like Vonage stagnant and others like Verizon's VoiceWing and AT&T's CallVantage dead or dying, we decided to check in on a company called magicJack, an unusual VoIP provider. We were surprised with what we found out when we talked with Dan Borislow, the inventor of the technology and co-founder of the company. The biggest surprise? MagicJack has over 3 million customers and is adding 250,000 new customers a month, according to Borislow.

Our second surprise was that magicJack owns its VoIP network that includes servers, gateways, softswitches, and session border controllers. Because of growing demands, the company has had to increase its network capacity 400% in the last 30 days. Like other VoIP providers, magicJack uses the Internet to provide access to its private IP network.

MagicJack is also a registered Competitive Local Exchange Carrier (CLEC) in all 50 states. As a CLEC, the company owns phone numbers and has the right to connect as a peer to the PSTN, helping the company keep costs down and also allowing it to control call quality since doesn’t rely on a third-party wholesale IP provider for network management. Although considered a VoIP service from a regulatory perspective, magicJack does offer E-911 support using both user registration and (as a back-up) a GSM radio that can use cellular phone networks to pinpoint user locations.

The magicJack price is no surprise to anyone who watched late night television - the advertised price is $39.95 plus shipping and handling for the USB drive that enables the VoIP service. Users plug the USB drive into their broadband attached computer and a phone connection into the USB drive; the pre-installed computer software and USB provide power and a gateway for the user’s phone. The initial magicJack fee also pays for the first year of unlimited domestic calls; subsequent years of service are $19.95. By contrast, Skype offers unlimited outbound domestic calling within the U. S. and Canada for €1.95 a month and an inbound service and €50 for a full year. (Using a current promotional rate, inbound Skype subscribers can get up to 50% off with the purchase of a monthly subscription.)

MagicJack has kept its costs down by using its own hardware and software developers, by using a pre-paid service with no monthly billing, and by offering only online customer service. When we asked about reports of support problems when the company launched, Borislow noted that the customer service has improved dramatically since its introduction a year ago. He also said that the USB device is on its third iteration of chipset technology, which has eliminated some of the technical glitches discovered at launch and enabled other features that will be added soon.

Our observation: While we aren’t sure magicJack will put the phone companies out of business, the very low price will clearly continue to attract more customers - especially those who might want to use magicJack to make International calls back to the U.S. We think the biggest threat will be to Vonage, as evidenced by the fact that magicJack has eclipsed Vonage for total VoIP market share and continues to grow at a rate that is over 10 times faster. We also think that like Skype, magicJack will continue to add features and functionality in the future, so we will watch with interest as this relative VoIP newcomer disrupts most VoIP business models.

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Copyright © 2009 IDG Communications, Inc.

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