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Kiss your phone bill good-bye

Disruptors: Silicon Valley startup Ooma wants to help you connect your home electronics for cheap - starting with your phone.

By Michael V. Copeland, senior writer
Last Updated: December 9, 2008: 3:37 PM ET

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The $249 Ooma Hub

NEW YORK (Fortune) -- The concept of connecting your home computer to your music library to your mobile phone is no longer as exotic as it was a few years ago. These days just about everyone with high-speed Internet, or broadband, service has some sort of home network set up.

If the idea is no longer novel, the execution is. Most home networks are fairly rudimentary and require separate systems for connecting, say, your television to your PC and songs to your TV. What's more, the services that connect your devices don't always work well.

Enter Ooma. In 2004 the Palo Alto, Calif.-based startup set out to build a box, really a computer itself, based on the Linux open-source operating system. The box would sit between a broadband connection - your DSL or cable modem - and the rest of your home network. So instead of needing multiple boxes, you'd need just one. Having one central system that could talk to every device in your home could potentially save you a lot of hassle, not to mention money.

Ooma's technical team built the uber-box of its dreams. Called the Ooma Hub, it's sold - for now - as an alternative to your home phone service.

The Ooma service uses so-called Voice over Internet Protocol (or VOIP) technology to deliver calls to your existing phone using a broadband connection. Consumers need only to buy a $249 Ooma Hub (it was a hefty $399 when the service launched last year); all domestic calls are free. (Ooma charges a few pennies a minute for international calls to landlines and 20 to 30 cents a minute for overseas calls to mobile phones. Calls from Ooma box to Ooma box are free.)

Buy the hardware and never pay a phone bill again. That's the value proposition Ooma is currently selling - and one that more consumers are buying. The Ooma Hub is now sold through Best Buy (BBY, Fortune 500), Fry's Electronics and other physical stores in addition to online sales through sites like Amazon.com (AMZN, Fortune 500) and Costco.com (COST, Fortune 500).

Make no mistake: Ooma has a long way to go before it upends the phone business. Tens of thousands of Ooma Hubs have been sold so far, which isn't all that much (it wouldn't hurt to drop the price further). But the early adopter crowd has raved, including Tech Crunch's notoriously cranky Michael Arrington, about the Ooma Hub's easy setup and sound quality compared to other VOIP services like Vonage (VG), which charges a $25 monthly fee for unlimited calls in the United States.

In our brief test, where we pulled an Ooma box apart and then hooked it up at the Ooma CEO's house, the Ooma gear worked flawlessly.

A grand plan

Replacing your phone service is, of course, just the start for Ooma. In some ways, calling is the Trojan horse to get the box in your house and then figure out other services to sell, like enhanced network security or kid-safe Web surfing.

Another potential revenue stream is bandwidth metering. As high-speed Internet use has soared in recent years, phone and cable companies have started charging heavy bandwidth users higher fees. The Ooma Hub could help video-download happy families monitor their usage to keep their broadband bills in check.

The problem is, consumers aren't yet demanding bandwidth metering or other services Ooma hopes to offer. That's expected to change as home networks become more advanced and awareness of their potential grows.

So while the future that Ooma is mapping out is not yet on the horizon for most people, their monthly phone bill is.

"Not writing a check to the phone company for phone service is a concept people get immediately," said Rich Buchanan, Ooma's CEO. "And let's face it. No one wants to give up their broadband. That's why we're starting there."

Ooma can't get rid of your phone or cable bill completely: you still need a Web connection. But the company is set on becoming the central hub for your home network - and providing a range of services faster and at a deep discount to what phone or cable companies can offer.

Ooma is already charging $99 a year for some enhanced voice features like instant second lines and call forwarding to your mobile phone. Because these services are software-based, Ooma can install them automatically with the click of a computer mouse and bundle them for a lower price than traditional phone companies.

Ooma's core technical team came from Cisco (CSCO, Fortune 500), so they know a bit about moving data of all kinds around a network. Ooma's CEO, Rich Buchanan, and the marketing team came recently from Sling Media, maker of the popular TV-streaming Slingbox, so they know a lot about Ooma's biggest challenge right now: selling seemingly exotic electronic gear to consumers. Ooma has reportedly raised $42 million from Draper Fisher Jurvetson and other venture capitalists.

For now, selling phone calls keeps the company focused and the message to consumers clear. But when people start clamoring for other broadband-enabled services, Ooma plans to be ready.  To top of page

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