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September 24, 2007

Rent vs. Buy – ooma

A company called ooma offers a clear alternative for buying domestic phone service rather than renting it. For an introductory price of just $399 you can buy a box which you attach to your Internet connection and, optionally, any phone line you may have. You plug your regular house phones into the box.  Forever after, says the company, you can make “free” calls to anyone with a US phone number.

How can ooma offer free unlimited calls to ordinary US phones? A previous post in Fractals of Change points out that companies like Skype and Vonage have to pay local phone monopolies per minute of connection to their subscribers. That’s why Skype only allows free calls when both parties are connected through the Internet and charges SkypeOut rates to call ordinary phones; that’s why Vonage must charge a fixed amount per month.

Nope, ooma’s not ad-supported.

Ooma gets around the toll booths of the local phone companies (are Verizon and at&t really local?) by making all calls local and taking advantage of the fact that most local calls in the US are free of tolls. If you have an ooma device which is also attached to the local phone system, you are helping out by being a GATEWAY (remember that word) which fellow ooma owners use to call local numbers in your neighborhood; you are relaying their calls into the local phone network. Here’s how ooma explains it all in their FAQs:

“ooma's patent-pending call-routing algorithm—Distributed Termination—uses the internet to connect local calling areas throughout the United States for free instead of relying primarily on traditional phone switches, known as the PSTN (Public Switched Telephone Network). As a result, each ooma customer who maintains their landline helps grow the ooma network. ooma’s call-routing technology ensures a completely transparent experience so that the ability to make and receive phone calls is not impacted when their line is in use by another ooma caller.

As an example: Let's say you want to call “Claire” in Boston. You simply pick up the phone and dial. The ooma call is routed via the internet to an ooma customer with a landline in the 617 area code (let's call her “Cassy”). Cassy's ooma device (in Boston) completes the call by acting as a gateway and routes the call from her broadband to her landline, which is used to place a free call to your friend Claire. All this is done without any interruption to Cassy's phone service. In fact, Cassy doesn’t even know her landline is in use and shall still be able to make and take phone calls.”

Gateways have been around as long as VoIP. My old company ITXC installed gateways at telephone companies and alternative telcos around the world. Often these enabled us to deliver international calls at domestic termination rates instead of having to pay artificially high international tolls. Companies like Skype and Vonage use gateways directly or indirectly for exactly the same reason  - the gateways let them sell cheaper international calls than they would be able to do if they had to pay international PSTN tolls.

But the gateways which carriers like ITXC, Skype, and Vonage use are massive and switch hundreds of calls at a time. They are usually interconnected to telco switches. Ooma is using one call at a time gateways distributed among box owners and connected to single phone lines. They are bypassing the billing side of the telco switches.

This is an interesting idea but not as unique as ooma claims (I’m not commenting on their patent since I haven’t read it). Ham radio operators provided local bridges for each other into phone systems even in pre-Internet days. VoIP pioneer Jeff Pulver, probably building on his ham radio background, supported gateways in the 1990s version of FreeWorldDialup (note: FreeWorldDialup is now FWD International and I’m an investor in and board member of that along with Jeff but I was not associated with the original company).


  • One way or another, phone calls will become as free of incremental charges as email is today.

  • The carriers will take legal action to block ooma service. They will claim that customers are not allowed to provide this kind of bridging and that ooma is disguising “long distance” calls as local calls. Make no mistake, success by ooma and/or others lke them would leave a big hole in the domestic termination revenues which at&t and Verizon and other last mile telco providers receive and domestic termination is very lucrative.

This series on rent vs. buy starts here.

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