Ooma vs. Valleywag - Andrew Frame fired or not?

Monday, December 1, 2008

I've lost track of how many times the VoIP community has written off Ooma and I don't know what Valleywag has against the company or its founder, Andrew Frame, but man, they have hit Ooma hard since day one.

Now Valleywag declares Ooma dead - again

Their latest Ooma story, How Ashton Kutcher killed a startup guy's Hollywood dream, cites an unnamed "tipster" claiming that Frame has been fired by the board. A board member disputes this claim and there have been no official announcements.

People have lost bets over their predictions of the company's demise. Valleywag and these other VoIP pundits must be discouraged by how long Ooma has hung around (a little over a year since the initial public launch). But there are many signs that the business model is struggling. For the holiday season, they are now selling the "core Ooma system" for 199 bucks, down from the original target price of $599. At that price, it's less than the Sunrocket "annual $199 unlimited" plan, often cited as a contributing factor to that company's crash and burn in 2007.

There can't be much gross profit left over for Ooma at a $200 retail end-user price. Bestbuy et al will be taking 30% for sure, leaving $140. Of that, much will go to marketing fees (end caps, and other such), leaving maybe $100-$120 per "core system" in revenue to Ooma. So what are the real COGs of that system? It would be hard to believe they are less than $75 - there is a fair bit of hardware there and Ooma is not big enough to produce in large enough volumes to get their cost down to anything like Linksys levels. So let's say there is $50 in gross profit for Ooma on the $200 sale (I would bet that it is much less than that, if not negative). And we have not factored in any G&A, salaries, operations, support, telephony costs, or other overhead yet. Nor have we factored in other real world costs of selling at retail, like the cost of money, breakage, etc.

How far will that $50 go? It certainly won't pay for much marketing. Vonage spends $250 to acquire each customer. What about the actual cost of providing the service? Ooma is obligated to provide the customer "unlimited" domestic calling (limited to 3000 minutes per month) with no further revenue. What percentage of Ooma hubs are connected to landlines (i.e. can be used to deliver calls)? What is the overall percentage of minutes terminated via another Ooma hub vs. calls terminated at Ooma's expense? Even calls delivered via a hub are not "free" to Ooma - they still have to fund the infrastructure, support, billing, pay for the phone numbers they give customers, etc. If Ooma's original math said they needed to sell the hardware at $500 to make money, it must be hard to make the business work selling it for just $200.

Who knows. Maybe Ooma will prove all its detractors wrong again, although it is hard to see how. But they've done it so far, even with so many pundits lined up against them.

Ooma quietly adds a 3,000 minutes per month limit on their "unlimited" calling

I didn't see any announcements of this, but it was recently pointed out to me that the Ooma terms of use now includes a limit on "unlimited" calls of 3,000 minutes per month:

In addition you agree that any usage of more than 3,000 minutes per month will be deemed dispositive proof of Prohibited Use. In the event you engage in Prohibited Use, ooma reserves the right to terminate service without notice or, at ooma's sole discretion, to charge you at a rate specified on our Web site for calls that exceed the 3,000-minute per month limitation. This rate may be modified on our Web site from time to time.

That's probably more minutes than most people use. But if you're using less than 3,000 minutes per month, maybe you don't want an unlimited plan at all. You might be better off with a cheap pay as you go, per minute plan, depending on how long you think the Ooma box will last (service is for the life of the box, not the life of the purchaser). Most people will spend less than $20 per month, often far less, paying only for the calls they make. Think about how many calls you make on your cell phone instead your home phone - Ooma won't help you there. Or there are always annual plans like those from Skype and Magicjack to think about ($20-$40 per year - and also have similar monthly usage limits). Such plans equate to 8-10 years of Ooma service, and you don't have to pay so much up front. Will the Ooma hardware (and the company) last 8-10 years? Maybe, but it's something to think about, especially with these new 3000 minute per month limitations.