Making sense of Magic Jack's math

Wireless substitution may be a lot less prevalent than many believe, if the Magic Jack voice-over-IP (VoIP) service is actually succeeding as its founder claims, said Bernstein Research analyst Craig Moffett. Moffett, known for diving into data and making sense of the numbers, has been focused on the residential access line loss numbers of AT&T and Verizon but last week turned his attention to Magic Jack, the consumer VoIP product sold through late-night infomercials.

(See what Magic Jack founder Dan Borislow had to say about Moffett’s reports)

In his report, Moffett cited published reports of Borislow’s contention at the recent Consumer Electronics Show that his company has sold 2 million units during its first 11 months and is now selling at a rate of 250,000 per month. In a phone interview, Moffett said he isn’t disputing Borislow’s numbers -- only pointing out how they fit into a bigger picture.

Those numbers amount to 28% of the telecommunications industry’s line losses last year, Moffett points out. Many of those lines were commonly assumed to have been lost to wireless substitution, which to this point has been measured by the difference between telco line losses and cable voice line acquisition, he said. But if Magic Jack users are actually using that service to replace their home phone lines, wireless substitution rates are much lower than the industry is assuming.

The other explanation is that Magic Jack buyers aren’t actually using the low-cost service or they are using it for some calls but keeping their existing wired phone as well, Moffett said. “It could be what we are seeing is a lot of second-line usage. It could be that there are people who have gotten Magic Jack and haven’t plugged it in yet or are just using it for some calls. It’s hard to imagine that more than a quarter of all access line losses are going to one company and a late-night direct marketer at that.”

Moffett admitted that, from the telco perspective, line losses are line losses, and this is “cold comfort for the telcos for whom the reason for line losses may not matter much,” but adds that it’s “important for any serious student of consumer behavior in the telecom sector.”

Magic Jack launched service in the fall of 2007, promising consumers who connected its device to their phone line that they could have phone service for $19.95 per year. The company has continued to expand – as have some complaints about the lack of customer service.

But Moffett is not examining the quality of Magic Jack’s service, only looking at its market success. He chronicles Magic Jack founder Dan Borislow’s history in telecom, which includes founding long-distance reseller Tele-Save, which once struck a $100-million deal with AOL but later faced hard times and, at one point, a securities fraud suit which was settled. Borislow had left the company before its stock plummeted and became a horse breeder at one point.

Borislow’s genius is as a marketer, Moffett said. While Vonage and other consumer VoIP services tanked shortly after the cable industry swept in with its “digital voice” version of VoIP, Borislow has found a way to get consumers to see VoIP in a new light.