Making sense of Magic Jack's math

“The genius of MagicJack is that Borislow has taken an inherently abstract, amorphous service concept – telecommunications connectivity – and turned it into a physical, tangible object,” Moffett wrote. “Technologically, MagicJack may be no different than Vonage or Skype and any of a host of now-failed voice-over-the-Internet services. But Borislow intuitively understood what so many had failed to grasp. He made Internet telephony service into a ‘thing.’”

In that way, Magic Jack is not unlike the Apple iPod, Moffett said, which converted digital music services that were confusing to some into a “sexy and simple little device for the masses.”

But, Moffett added, it’s not clear how Magic Jack makes money while paying for infomercials and connecting customers’ calls at so low a price.

“It’s not clear to us how MagicJack can make money, given the still relatively high costs of interconnection and termination (the company is private, so they don’t disclose much other than saying that they ‘have a relationship with a phone company that handles that for them,’” Moffett wrote. Given the current economic environment, however, Magic Jack is likely to continue attracting consumers looking for cheaper service, he said.