PALO ALTO, Calif. – A Silicon Valley startup wants to shake up the telecommunications industry with a $399 gizmo that provides free, unlimited domestic phone calls for homes with broadband Internet service.
Ooma Inc. will also offer a free second line, conference calling, voice mail service and an online "lounge" where users may change their preferences or get voice mail in an e-mail format.
The company will start selling the devices Thursday with an invitation-only offer to select U.S. residents.
The company — backed by $27 million in venture capital — eventually hopes to crack the home-based and small-business niches. Engineers are working on a system that forwards calls to cellular phones.
"It's nothing like anything a carrier can do currently," CEO Andrew Frame said. "Once you own the box, you don't have to pay Ooma anything in the future."
Frame and other executives assume, of course, that their company won't meet the same fate as other startups going up against telecommunication veterans.
Earlier this week, Internet phone carrier SunRocket Inc. abruptly shut down, leaving more than 200,000 customers scrambling for alternate service.
The No. 2 standalone Internet phone company after Vonage Holdings Corp. (VG), SunRocket had attracted customers with cheap plans and innovative features, but traditional phone and cable companies also lowered prices and started bundling their services.
Now SunRocket customers are out of luck. Many signed up for prepaid service plans that cost $199 a year — and it's unclear whether they'll have any recourse.
At Ooma's headquarters in Palo Alto, executives say the 43-person company will have a steady revenue stream from hardware sales and international calls.
Ooma's rates start at 1 cent per minute to Europe and 8 cents per minute to India.
Ooma, which has placed about 250,000 calls among 43 employees and 150 other "beta" testers, will compete against Voice over Internet Protocol services from companies such as eBay Inc.'s (EBAY) Skype division, which has 220 million registered users.
Unlike Skype, which works best when the caller and recipient talk through their computers, Ooma uses standard home phones. Domestic calls are free even if the recipient does not have the Ooma box.
Users plug in the so-called Hub — a white machine smaller than a macaroni-and-cheese box — to a broadband connection and primary phone.
Ooma Scouts, which cost an additional $39 each, connect to every active phone extension — in the office, kitchen or kids' rooms.
When you pick up the phone, you hear a melodic, digital dial tone. You place calls as you would normally and get voice mail by pushing a button on the Hub. You pay for international calls with a credit card online.
The technology hinges on a patent-pending call-routing algorithm called "distributed termination," similar to peer-to-peer and distributed computing ideas.
Traditional phone switches connect a local-toll or long-distance call through the public switched telephone network — but Ooma, which works with both cable and DSL, uses the Internet and P2P technology to connect the calls for free.
Ooma's architecture allows it to bypass fees that most telephone providers pay to connect calls to landlines and cell phones.
Ooma customers who maintain their landlines help enlarge the network by contributing their connections to a local calling area, allowing another Ooma customer to use it to complete a call.
Thanks to call-routing software, phone calls should not be affected if someone's line is being used by someone else.
Frame said many customers would likely keep their landlines — if only because they want reliable 911 service. (People who participate in the beta test must agree to keep their landlines.)
If a user places a call through the landline without Ooma, it would be subject to the regular charges.
But even if a great majority of customers ditch their local phone lines, Frame said, there's plenty of unused bandwidth because so few people are at home during the day making phone calls.
Patrick Monaghan, analyst for research firm Yankee Group, praised the programming-intensive approach to telecommunications, usually characterized by billion-dollar infrastructure investments and huge companies such as AT&T Inc. (T)
"Ooma is tapping into a category that is starving for a new solution," Monaghan said.
EBay President and Chief Executive Meg Whitman, who oversaw the October 2005 acquisition of Skype for $2.1 billion, said Ooma didn't threaten Skype.
The division's second-quarter revenue was $90 million — 103 percent higher than the year-ago period. Skype members surged 94 percent in the past year.
But Whitman said she's not surprised to have cross-town competition.
Silicon Valley companies ranging from Mountain View-based startup Jajah Inc. to Cupertino-based Apple Inc. (AAPL) are engineering products that make established companies such as Verizon Communications Inc. (VZ) and Motorola Inc. (MOT) take notice.
"Startups by their very nature try to launch products and services that are better for consumers — better functionality at lower cost," Whitman said, noting that eBay plans to aggressively invest in and expand Skype. "Like every startup, Skype needs our attention."