Ooma Economics: Do the savings add up?

Ooma appears to turn the Gillette form of marketing on its head. Gillette sells the consumer the shaver on the cheap, then makes its money selling you highly profitable replacement blades. Printer manufacturers have perfected this same model in the ink jet market to reap enormous profit margins on ink. Then there's Ooma, a provider of voice over IP telephone service. It is giving away telephone service to get you to make a major investment in its hardware up front -- and to sell you additional services down the road.

Buy our Ooma voice over IP hub for $249.99, the company says, and your telephone service, including local and long distance dialing anywhere in the U.S., is free forever. Sound like a good deal? It may be -- if the numbers add up for you. Here's how to tally them.

Buying the unit: $249.99

The basic Ooma package is officially priced at $249.99, although Amazon.com has sold it in recent months for as little as $200 (today Amazon's price for Ooma Core VoIP Phone System is $212.99).

The package includes an Ooma Hub, which connects to your broadband router or cable modem and acts as the telephone base station; and the Ooma Scout, which allows you to add another phone anywhere in the house where there's a telephone jack and a power outlet. The hub includes a built-in answering machine (you can also listen to your messages by logging into Ooma's Web site) and buttons for two phone lines. The Scout also has answering machine controls that access your voice mail on Ooma's Web site.

Internet access: $30-$65 per month.

To use Ooma you will need broadband Internet service. If you already have broadband there's no incremental cost to add a voice over IP service like Ooma, which rides on top of it. If you don't have broadband, however, you'll need to add that as a monthly cost of using the service.

Transfer your current phone number: $39.99

When you buy the Ooma package and register online, Ooma gives you a local telephone number at no charge. But if you want to use your existing number instead, there's a one-time fee for "porting" it over -- unless you move to Ooma Premier.

Need Ooma Premier? Add $12.99 per month

The basic Ooma service includes an embedded answering machine in the Ooma Hub and Scout devices that connect to and play messages from your online voice mail account (also Web accessible). It also includes a few bells and whistles, such as caller ID and call waiting. It supports one telephone number.

Ooma Premier includes features such as 3-way conferencing, message screening, multi-ring capability (i.e. configure it to ring incoming calls on your home, vacation home and cell phones), free number porting, and an "instant second line" that lets two people make calls from different telephone extensions at the same time.

If you want more than one telephone number you'll need to pay the monthly subscription fee for Ooma Premier. Users of Ooma Premier can have up to 10 telephone numbers, each of which can be configured (by purchasing Ooma Scouts) to ring on a different telephone in the house.

Additional telephone numbers: $4.95 per month

Need more than two telephone numbers? If so, you pay for each with an extra monthly fee of $4.95 on top of the Ooma Premier plan upcharge of $12.95 per month. 

Additional Ooma Scouts: $69.99 each

Ooma's Scout is a clever device that allows you to add telephone extensions to your Ooma service using your existing household telephone wiring. The Ooma hub plugs into a wall jack in one room. Place the Ooma Scout in another, connect it to power and a wall jack, and it uses special signals (7MHz HPNA signaling) to communicate with the hub and provide dial tone to a second telephone. The basic Ooma package includes one Scout device, but you can add more.

What's smart about the Scout is that it can work with your household telephone wiring, even if that wiring is already being used with a standard analog telephone service or for your DSL service.

On the other hand, if you don't use DSL for your broadband service and want to cancel your telephone service anyway you don't need additional Scouts. The Ooma hub can be configured to directly power every phone extension in your house. (Ooma says the unit generates 5 REN of power - enough for up to 10 extensions). You simply run a telephone patch cord between the "phone" port on the hub and a nearby wall jack. But there is one catch: You must isolate your home telephone wiring from the street by disconnecting the twisted pair wiring feed from the telephone company, which is connected to the termination box outside of your home. (Call an electrician if you're unsure about how to do this).

Add a surge suppressor or UPS: $35 - $200

With plain old telephone service you don't have to worry about power surges or outages taking down your telephone service. Voice over IP services like Ooma are a different story.

If you're spending $249 for an Ooma appliance you want to make sure that it lasts long enough for you to get the "free" service that you're really paying for up front. While the Ooma hub and Scout include a one year warranty, that doesn't cover damage from surges, brownouts or other power issues.

If you don't have one already, plan on spending at least $25 for a surge suppressor. Be sure to get one like APC's Home/Office surge protector units, which have coaxial cable and telephone connectors to protect your incoming broadband connection as well. Since Ooma depends on the availability of broadband service, you'll need to protect those devices as well. In my situation I have three points of failure that must be protected to keep my dial tone up: a cable modem, wireless router and the Ooma box.

If you want to keep the unit online during a power outage you'll need a UPS. A UPS that gives you an hour or two of backup power and covers your PC and other office equipment will run  several hundred dollars. But if you're just trying to protect your phone service a small UPS will do the job. The Ooma hub, router, cable modem, and the AC-powered phone consume less than 50 Watts. An APC Back-UPS 1200 ($199.99) would easily keep those devices up for more than 2 hours.

So what happens if you skip the surge suppressor and UPS and the Ooma hardware breaks? It's covered by a warranty for one year (for defects, not damage). After that you must buy a new one. Rich Buchanan, chief marketing officer, says Ooma offers an extended warranty option as well as discounts on replacement hardware for out of warranty units. (My extended warranty experience with other products should warn you away from wasting your money on that idea).

The Ooma hub and Scout units, he says, are expected to last for five years.

Calculating the payback

You'll have to do the math to see if the Ooma unit makes sense for you. In my case there are hidden costs to consider - and there may be for you as well. Pull out your pencil.

To get started I'd need to buy the basic Ooma unit for $249.99 and I'd want my telephone number transferred for $39.99. I don't need Ooma Premier - an option which Ooma claims one in four customers uses. I'd forgo the UPS and stick with this surge suppressor for $35. Total up front cost: $324.98 ($297.98 if I bought the Ooma unit from Amazon today).

I have two scenarios to consider.

Scenario 1: I have DSL and local phone service and a third party long distance provider. Total cost: About $30 per month for telephone service and long distance (we use cell phones for most long distance calls). But beware: When you debundle services the a la carte price for broadband tends to go up. In my case, if I cancel phone service the carrier will increase the cost of Internet service by $8, from $35.99 to $43.99. My net savings come to $22 per month. I would recoup my initial investment with Ooma in about 13 1/2 months.

Fortunately, I live in an area with choices for broadband. If I dump DSL and my analog phone service and switch to the cable company for my broadband I can get faster service for $30 per month. That would boost my monthly savings to $30 per month. In that case the pay back would be about 10 months.

Scenario 2: My local and long distance service with the phone company at our second home was running about $40-$45 per month. At that rate of savings, I would recoup my initial investment with Ooma in about 7 - 8 months.

However, I have since changed to Comcast's triple play (cable TV/Internet/Digital Voice) service. The total cost for that service is $117.99. If I remove digital phone service the price only drops to $106.15, saving me $11.84 per month. At that rate it would take just over two years (25 - 27 months) to recoup my investment.

How long a pay back period are you willing to accept? Ooma is a small company that's still getting established in a cutthroat market and has stumbled in the past. While the company has lowered its prices, improved the service and now expects to hit $20 million in sales this year, that's still small potatoes next to competitors like Comcast, Verizon - or even Vonage. In such a fast-changing market, it's entirely possible that Ooma might not be around in two years. Given that, my recommendation would be to look for a pay back of 12 months or less.

For most people, Ooma's $249.99 initial cost represents a substantial up front investment - one that can go higher if you need any of Ooma's add-on products and services. And montly savings may not be quite as high as you might think.

Money is tight these days. Before you commit, do your homework to make sure that your investment will pay off quickly enough to make that investment worthwhile.

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