A Web Phone Called ooma

With its quirky version of Internet phone calls, a startup hopes to succeed in a business where others have failed

by Olga Kharif

The secret that was "ooma" is out. Over the past few years, the stealth startup had managed to raise $27 million in funding from Silicon Valley heavyweights like Draper Fisher Jurvetson and The Founders Fund—all without divulging what product or service it was developing.

And so the innovative new concept behind the hush-hush is…an Internet phone?

Ooma, whose name is meant to evoke simplicity and approachability, announced July 19 that its first product is a new device for Web-based calling. Starting this fall, ooma plans to compete head-on with the likes of Vonage (VG) and eBay's (EBAY) Skype, not to mention traditional phone and cable TV companies such as Verizon (VZ), Comcast (CMCSA), and AT&T (T).

Free Service for Life

The timing of the announcement is rather striking, coming just days after an online phone company named SunRocket flamed out of business. And that's not the only sign of darkness hanging over the business of providing phone calls using the technology known as Voice-over-Internet protocol, or VoIP. The longtime VoIP leader, Vonage, has seen its subscriber growth stumble, a slowdown that began even before the company's future was cast into doubt by a courtroom defeat in a patent dispute with Verizon (see BusinessWeek.com, 5/11/07, "Vonage Calls with Encouragement"). Vonage's customer base grew just 7% in the first quarter, compared with a 26% gain a year earlier.

To enter such a market now sounds a bit counterintuitive. Profits are elusive, as pure-play Internet phone providers are forced to compete on price against attractive bundles of phone, TV, and Internet service from the established phone and cable companies. And competition from wireless carriers, which are integrating cell phones with VoIP-based capabilities in the home, is on the rise as well (see BusinessWeek.com, 6/27/07, "T-Mobile's Triple Threat").

And yet, here's ooma, expecting customers to hand over $399 up-front for its device (most VoIP services provide equipment for free and charge a $25 monthly service fee). The pitch? Free unlimited phone service for life on all calls within the U.S. (Ooma says it will charge low, Skype-like, per-minute rates for international calls.)

Capitalizing on Rivals' Woes?

A great deal for sure, presuming ooma can guarantee it will survive a lifetime. After all, roughly 200,000 SunRocket users paid up-front for a great deal, and now they're out hundreds of dollars, looking for new phone companies. "People are going to be leery of prepaying for phone service after the SunRocket debacle," says Stephan Beckert, an analyst with consultancy TeleGeography.

But ooma may be betting the industry's woes will have exactly the opposite effect. "Vonage and SunRocket have come onto hard times, and you have subscribers looking for alternative services," says Patrick Monaghan, an analyst with consultancy the Yankee Group, which estimates the market for pure-play VoIP services will grow from 2.8 million subscribers at the end of 2006 to 6.4 million at the end of 2011.