Magic Jack: Secrets Of Success?

Some time ago in a informal VUC post-call session Karl Fife brought up Magic Jack as a topic of discussion. He felt at the time that they were very possibly doomed to failure by their business model. I doubt that this is the case, and laid forth the logic of my belief. Well, earlier a recent thread over at BroadbandReports.com hinted at support for my theory.

It helps to start out understanding Magic Jack and their business model. Simply put, you pay $40 in the first year to establish an account and get the Magic Jack device. Thereafter you can make calls over your broadband by plugging a traditional phone into the MJ dongle, and the dongle into your PC.

The Magic Jack device is actually kinda cool. It’s a USB dongle that includes an audio interface terminated in an FXS port and some flash memory. In that flash space it has loaded the Magic Jack software, which is an evolved variant of SJPhone. Magic Jack bought SJLabs some time ago.

You might well compare the MJ dongle to a common USB audio interface like the one that Phoneboy blogged about recently. I’ve used these myself. They cost well under $10 in single unit quantities. Imagine what they cost when ordered 10,000 at a time? Very cheap to say the least. Let’s just guess that they cost MJ about $3 each.

OK, for $40 in that first year you get the hardware and now you can make as many calls as you like to the US & Canada. Moving beyond the first year you pay $20/yr to continue using the service. Unlimited domestic calling for effectively $20-40/year. To the great masses of public it’s an unbelievable deal.

So how do they do it? I can’t say that I know for sure, but I’m willing to make an educated guess.

I’d guess that there are a number of factors at play. My first supposition is that they play a sort of law of averages game. In that first year we have about $37 in funds available after paying for the USB device. If we presume that, being owned by a CLEC,  they can typically terminate domestic calls for around 0.5 cent/minute, that amounts to 7400 minutes/year, or 600 min/month. We can quibble about the exact rate, but the principle is sound.

Most users are going to use substantially less that this, so they make out ok. Like health clubs selling memberships at Christmas-time they know that the vast majority of people who buy the service will use it very little. Extremely few of their users are going to run up thousands of minutes a month. So in those rare cases, they eat the loss.

Unlike companies like Vonage, Magic Jack doesn’t pitch itself as a replacement for POTS service. Also unlike Vonage, they get paid for a year up front so they don’t need to hold a customer for long to bring that account into profitability. They’re essentially profitable immediately upon sign-up of a new account.

It also means that they can play their churn to their advantage. The thread I’m referencing at DSLReports.com is an example of this phenomenon:

“I had MJ, that stopped working last year. I tried to fix it but could not. I did not need a VOIP line at that time, so did not bother.”

The customer paid for the initial year and used it some, then just stopped. This is a best case scenario for Magic Jack. They got paid for the year, then only had to provide the service for a portion of the time. Since the service costs so little users don’t think too much about simply walking away from it.

The user goes on to say that they’ve had trouble with the service:

“Now I needed one, so I paid one year subsciption and connected it again. Now it will make calls and receive calls but there is no audio on either end. I can hear it ringing when I call MJ but no audio when I talk. I cannot hear anything from other side.When I make calls from MJ, I can hear the other phone (landline or cell in the next room) ringing but again no audio at either end. I tried everything but nothing works. So I got a Teleblend unit…”

He’s clearly having some sort of SIP vs NAT audio problems with the RTP streams. However, he’s not badgering Magic Jack support. He’s using a public forum, and trying a hardware ATA device on another service.

I’d wager that in many cases when people have real trouble with the service and it can’t be resolved immediately, they just walk away from it. They supoport only one end-point device, which they must ship already provisioned, making the support task very managable. If Magic Jack provides even modest access to support staff they will satisfy that small number of people who want to pursue a problem to it’s solution.

If a problem does arise it’s easy to see how many people would try a couple of things then just give up. And in doing so they transfer the burden of responsibility for the problem to themselves. ” I had some trouble making it work so I just set it aside.” So the companies reputation remains untarnished in their minds.

It seems to me that the secret is to make the annual fee low enough that people can walk away from it without feeling buyers remorse. Of course, there will be a very small group that will insist upon the service being delivered as promised forever, but that will be a very small group.

In fact, there’s a very small group that has gone to great lengths to make their Magic Jack device accessible without requiring their PC to be turned on all the time. These folks have found that a hacked version of the HP T-5700 series thin clients running Windows XPe can host the MJ device 24/7, all the while consuming <10 watts of power. Someone is even selling the thin clients ready-to-roll for MJ.

The basics of business also apply. The company must keep its costs under control. They clearly don’t spend on marketing & advertising the way that Vonage has in the past. Their TV ads are extremely basic, and run on cable channels where the ad rates are dirt cheap. One gets a sense that their cost of customer acquisition is suitably low, again unlike Vonage.

Let me be very clear that all of this is 100% conjecture on my part. I have not had any contact with the company, nor do I have any interest in actually using Magic Jack. I have noted that a few posts relating to Magic Jack generate considerable and ongoing traffic to this blog. So maybe this is just pandering to that crowd, or my own idle curiousity.