Who Pays for "Free" Net Calls?\n\n<[URL]http://www.businessweek.com/technology/content/sep2007/[/URL]\ntc2007095_791938.htm>\n[URL]http://tinyurl.com/3cu5az[/URL]\n\nFor now, ooma isn't paying big carriers to use their networks, but\nthat could change if business takes off\n\nSeptember 6, 2007, 12:01AM EST\nby Stephen H. Wildstrom\n\nThe staggering variety of free stuff available on the Internet\nsometimes seems to have repealed the first law of economics: There's\nno such thing as a free lunch. But as so often happens, the dismal\nscience actually has it right. When it looks like you're getting\nsomething for nothing, somebody is paying, and it's often instructive\nto know who that is.\n\nI've been testing a new phone service called ooma that provides an\ninteresting case in point. Once you pay 9 up front for a box called\nthe ooma Hub and connect it to your phone and the Internet via your\nhome network, you are promised free, unlimited phone calls over two\nlines, plus voice mail. Boxes called Scouts let you plug in additional\nphones for a one-time payment of each. The system works fine and\nis simple to set up.\n\nHow It Works\n\nWhen a voice-over-Internet call has to go to a regular phone number, a\nservice such as ooma usually has to pay a "termination fee" to a\ncarrier such as Verizon. Skype (EBAY), for example, charges 2¢ per\nminute for calls outside the Skype network. But ooma avoids this by\nusing some of its customers-those who have kept regular phone lines-to\nserve as gateways onto the local phone network at no charge. To make\nsure this would work from the beginning, ooma launched by giving away\nfree Hubs to 1,500 testers who agreed to maintain landlines.\n\nWhen you want to call outside the ooma network, the call moves from\nyour Hub over the Internet to a second landline-connected Hub within\nthe destination's local calling area. The Hub dials the target number\nand patches the call through. In effect, ooma customers with landlines\npay to keep the whole system going. You don't even notice if your\nlandline is being used because your own phone calls go out over your\nbroadband connection, with your flat-rate monthly phone bill covering\nthe ooma traffic. In fact, this improves the efficiency of the phone\nsystem by putting idle lines to work. But if ooma ever gains real\ntraction, I expect a legal assault from big phone companies, which are\nlosing income from termination fees.\n\nNothing New\n\nWeb services do take advantage of genuine economies. The phone network\nis more expensive than the Net. And a carrier like Vonage (VG),\npromising a "best effort" to provide service, has lower costs than an\nAT&T (T), which is committed to 99.999% uptime.\n\nLots of Net players build on these advantages. Skype relies on\nselected users who act, often without their knowledge, as "supernodes"\nto manage the system. FreeConference.com provides calls by taking\nadvantage of regulatory quirks-namely, the stiff termination fees long-\ndistance carriers must pay to certain rural phone companies that\nhandle calls into their territory. FreeConference puts its equipment\nin rural Iowa. Then, when calls come in over AT&T, Verizon\nCommunications (VZ), or Qwest Communications (Q) circuits, these\ncarriers must pay the local phone companies, who share the money with\nFreeConference. In effect, the free conferences are subsidized by\ncustomers and shareholders of the long-distance carriers.\n\nNot all free Net services game the system. Many sites make money by\nselling premium services such as photo printing. Then there's the time-\nhonored method of giving away your product while burning through your\ninvestors' cash. When outfits that do that finally have to make money,\nthey often face resistance from customers. (It's still not clear how\nGoogle (GOOG) or Yahoo! (YHOO) plan to use the oceans of personal data\nthey archive-a concern for some free Gmail and Yahoo! Mail users.)\n\nYou may as well enjoy free calls while you can. But it's always a good\nidea to read the fine print. If it isn't obvious who's paying for a\nfree service, it might well be you.\n\nWildstrom is Technology & You columnist for BusinessWeek.