Is MagicJack the new Skype?

By Peter Svensson

updated 7:17 p.m. ET June 16, 2008

NEW YORK - What's the fastest-growing fixed-line phone company in the United States?

It's not Verizon Communications Inc. or AT&T Inc. — they're losing lines. What about cable company Comcast Corp., which is raking in subscribers for its phone service? Even that company is being beaten by a small Palm Beach, Florida, company called YMax Corp., judging by its own figures.

YMax may not be well-known but the company has been running TV ads for its product, the MagicJack, which works with a broadband connection.

It's about the size of a matchbox and plugs into a PC. After plugging a regular phone into the MagicJack, the user can make and receive calls much like using a regular landline.

In January, just after the broad advertising campaign started, YMax was selling a few hundred MagicJacks per day, said Jim Donlon, its chief marketing officer. Now, it's selling 8,000 to 9,000 per day, and the company is on track to have half a million subscribers by the end of June.

That's a meteoric trajectory in the phone business, propelled by the pricing: The MagicJack costs $39.95, including one year of free calls in the United States and Canada. Another year of service costs $19.95.

"It's extremely low-risk. Most people I know are willing to gamble on 40 bucks," said TeleGeography analyst Stephan Beckert, who follows voice-over-Internet providers.

Unlike most voice-over-Internet Protocol — or VoIP — providers, YMax is licensed as a phone company in the continental United States and operates a wide network of servers to carry its calls. VoIP providers generally outsource that side of the business.

Comcast, the fastest-growing cable voice provider, signed up a net average of 7,100 customers per day in the first quarter, ending with 5.1 million on March 31. Vonage Corp., the leading independent provider of VoIP that works with regular phones was averaging 334 per day, for a total of 2.6 million.

YMax's subscriber numbers are "significant," Beckert said, but he noted that its revenue is much lower than that of competing providers because it charges about as much for a year of service as its rivals do for a month. Even eBay Inc.'s Skype, which uses computers for calling, charges significantly more.

It's unclear what effect the MagicJack is having on competitors.

YMax Chief Executive Don Burns said many customers buy a MagicJack as a complement to a cell phone, compensating for poor cell coverage at home. When the computer is off, the service can be set to forward incoming calls to a cell phone.

Burns and inventor Dan Borislow founded the company, financing it largely themselves. They're telecom industry veterans — Borislow pioneered selling long-distance service to AOL subscribers in the 90s and Burns was the CEO of Telco Communications Group, which provided discount long-distance calls.

Burns says YMax's structure helps keeps cost low and call quality high. In the future, the company plans to sell advertising that shows up on the PC screen while calls are being placed. It would use its knowledge of the customer's location to display relevant ads.

Even so, Beckert is skeptical of the business model. Like YMax, Vonage has recruited customers by TV advertising for years. But Vonage has consistently lost money.

"I'm still not sure how you make money at $20 a year," Beckert.

MagicJack's next moves are to get on the shopping channel QVC and possibly expand sales beyond the Web and call centers.

"We have big-box retailers jumping at this," Donlon said.

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