Six months into business, MagicJack is poised to take over the VoIP market

MagicJack founder, and inventor of its technology, Dan Borislow, doesn’t like the term voice-over IP (VoIP). He thinks it has a negative connotation in an industry prone to struggles. Why not call it what it is – really, really cheap phone service? With the largest network in the United States and growth on track to surpass market leaders Comcast and Vonage, MagicJack has arguably earned the right to call the service whatever it wants.

MagicJack came onto the scene last September, launching a $19.95 per year VoIP USB device that plugs directly into the PC or Mac and provides unlimited service over a broadband connection. Upon launch, the company sold about 50 a day. Today that number rests comfortably around 8,000 – a sales rate increase surpassing 25% week-over-week. Between January and March, the company exceeded the amount of phones sold in the entire four years of business for SunRocket, the now-defunct VoIP provider. MagicJack sold more than 200,000 units in March. Still, most sales have come in the last six weeks, since MagicJack launched an improved version of the device.

“How many people don’t want to pay $800 a year for a cell phone they don’t use very much in their house anymore? To me, that is 100%,” Borislow said. “How many people are willing to spend $20 a year to have the comfort of having a telephone in their house where half the time the cell phone doesn’t work? That may be 95% of the people. So 100% of people don’t want the phone anymore, and 95% of people might want us.”

The venture, funded entirely by Borislow and CEO Don Burns, owns its own next-generation voice network, including media gateways and session border controllers. The network, which took three and a half years to construct and acquire CLEC certifications for, now spans all 50 states. The company has interconnect agreements with all the Bell companies and 44 gateways along the edge of its network.

“As a VoIP company, we don’t have to pay for access charges,” he said. “Telephone companies do have to pay access charges to terminate calls to our customers. That took us three and a half years to build. The network is very important, and it makes everything work for us.”

The technology also works anywhere in the world, allowing international travelers to call home for free. Weighing in at less than an ounce, the USB port is suited for MagicJack’s travel-prone consumers. It is powered by a propriety Samsung memory chip, including 1.7 million lines of software code, what Borislow calls MagicJack’s “secret sauce.” It is the ease of use and price that get people interested, he said, and the quality of service that will keep them renewing year after year. “[With] Vonage and others, you have to take a box and hook it up to your Ethernet connection and a router and hope everything comes out okay after a 20-minute process,” he said. “With Magic Jack, you just plug it in, and within a minute’s time, you can pick any area code in the country, and you’re good to go.”

A scan of blogs will indicate that MagicJack did have several kinks to work out, a fact that Borislow willingly admits. Customer complaints centered on reliability issues and latency in the networks, complaints that have all but gone away, he said. “Every day that we are into this is 1% more as far as the life of the company,” Borislow added. “Everyday is a day to get experience for customer service reps. We are going to improve every day.”

Customer service starts with a list of frequently asked questions that Borislow said has eliminated 30% of customer concerns. The next step is a Web chat with service representatives. Right now there are no plans for a customer service number or call centers for technical issues. After all, the first question is always if the Internet connection is working. If the consumer is on a live chat session, that step can automatically be skipped, Borislow said.

Magic Jack is focusing on starting small, not only in size and service, but also in functionality. Considering they are selling everything they make, Borislow doesn’t feel pressure to innovate right now. As sales volumes continue to increase, however, he plans to expand the device’s capabilities into number porting and 911 services in which the device will take the form of a cell phone. Further down the product roadmap, MagicJack will evolve into a base station for a handset and a station for a femtocell.

“AT&T just announced that they are spending a half billion on [femtocells]. Little do they know what this little company has,” Borislow said, adding that the timeline for the femtocell is the first quarter of next year, while the 911 services will be ready to go by the summer.

Borislow said that the production and marketing of MagicJack costs the company less than what they sell the product for, making this the first time a telephone company has made rather than lost money acquiring customers.

“Fortunately, Don and I both made a lot of money before,” Borislow said. “This is six different patents, and we have five more pending. To me it is a matter of this being our second time around and proving we weren’t a fluke the first time. Making money is the other motivation. For me, it is putting my signature on something I can be proud of for the next couple of years.”