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"Leaky PBX" lives!

Fred Goodwin, CMA
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Who Pays for "Free" Net Calls?


For now, ooma isn't paying big carriers to use their networks, but
that could change if business takes off

September 6, 2007, 12:01AM EST
by Stephen H. Wildstrom

The staggering variety of free stuff available on the Internet
sometimes seems to have repealed the first law of economics: There's
no such thing as a free lunch. But as so often happens, the dismal
science actually has it right. When it looks like you're getting
something for nothing, somebody is paying, and it's often instructive
to know who that is.

I've been testing a new phone service called ooma that provides an
interesting case in point. Once you pay $399 up front for a box called
the ooma Hub and connect it to your phone and the Internet via your
home network, you are promised free, unlimited phone calls over two
lines, plus voice mail. Boxes called Scouts let you plug in additional
phones for a one-time payment of $40 each. The system works fine and
is simple to set up.

How It Works

When a voice-over-Internet call has to go to a regular phone number, a
service such as ooma usually has to pay a "termination fee" to a
carrier such as Verizon. Skype (EBAY), for example, charges 2 per
minute for calls outside the Skype network. But ooma avoids this by
using some of its customers-those who have kept regular phone lines-to
serve as gateways onto the local phone network at no charge. To make
sure this would work from the beginning, ooma launched by giving away
free Hubs to 1,500 testers who agreed to maintain landlines.

When you want to call outside the ooma network, the call moves from
your Hub over the Internet to a second landline-connected Hub within
the destination's local calling area. The Hub dials the target number
and patches the call through. In effect, ooma customers with landlines
pay to keep the whole system going. You don't even notice if your
landline is being used because your own phone calls go out over your
broadband connection, with your flat-rate monthly phone bill covering
the ooma traffic. In fact, this improves the efficiency of the phone
system by putting idle lines to work. But if ooma ever gains real
traction, I expect a legal assault from big phone companies, which are
losing income from termination fees.

Nothing New

Web services do take advantage of genuine economies. The phone network
is more expensive than the Net. And a carrier like Vonage (VG),
promising a "best effort" to provide service, has lower costs than an
AT&T (T), which is committed to 99.999% uptime.

Lots of Net players build on these advantages. Skype relies on
selected users who act, often without their knowledge, as "supernodes"
to manage the system. provides calls by taking
advantage of regulatory quirks-namely, the stiff termination fees long-
distance carriers must pay to certain rural phone companies that
handle calls into their territory. FreeConference puts its equipment
in rural Iowa. Then, when calls come in over AT&T, Verizon
Communications (VZ), or Qwest Communications (Q) circuits, these
carriers must pay the local phone companies, who share the money with
FreeConference. In effect, the free conferences are subsidized by
customers and shareholders of the long-distance carriers.

Not all free Net services game the system. Many sites make money by
selling premium services such as photo printing. Then there's the time-
honored method of giving away your product while burning through your
investors' cash. When outfits that do that finally have to make money,
they often face resistance from customers. (It's still not clear how
Google (GOOG) or Yahoo! (YHOO) plan to use the oceans of personal data
they archive-a concern for some free Gmail and Yahoo! Mail users.)

You may as well enjoy free calls while you can. But it's always a good
idea to read the fine print. If it isn't obvious who's paying for a
free service, it might well be you.

Wildstrom is Technology & You columnist for BusinessWeek.

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