A Guide to Lowering Your Phone Costs with VOIP

We switched from a traditional land phone line to Vonage VOIP in January 2005 because Vonage is 1/3 the cost and offers better features. Vonage costs us $19 per month and the call quality is pretty good; worse than a landline but better than a cell phone.

Since then, we've had a few months where the call quality got frustratingly bad, most recently in September and October. Frustrated and suspecting that the VOIP industry had matured enough in three years to offer a better deal elsewhere, we began shopping around.

Here are some options:
1. Go cellular. Ditch the landline completely and use a cell phone for all your calls. Cons: Cell phone subscription plans are almost as pricey as a landline. You're irradiating your noggin. Still, maybe a prepaid plan like T-Mobile's (about $8-10/month) is cheap enough to compensate for the copay on your future brain surgery.
2. Use Skype. It used to be the case that Skype could only call other computers. Now you can buy a "normal" phone number and make and receive calls from traditional phones. And it used to be the case that you needed to have a computer on to use Skype. There are now several phone + router combos that have Skype embedded and which don't require a computer to make and take calls. But they cost at least $160, plus roughly $36/year for a Skype phone number.
3. Use Gizmo5. It's basically Skype, but with less expensive hardware. The call quality is noticeable worse than other VOIP services.

We just discovered a new option through a paid product placement on Amazon. Ooma, a VOIP startup launched in 2007, is offering totally free phone calls. The catch? You have to pay up front for the Ooma device, which is not cheap.

As with all startups, there's a risk to getting involved. Though Michael Arrington has been using Ooma since 2007 and said its call quality is better than Vonage, he's also concerned about the company's future. The company has a few problems:

1. When it first launched, the Ooma device was $400. This price was too high and consumers didn't bite (despite the fact that consumers will wait in line to buy an iPhone and then pay exorbitant monthly fees for the data plan that makes the thing useful). The bottom line is that consumers don't understand marginal cost: subscription plans are always overpriced for all but the heaviest users. For fixed-price goods, costs decline over time, especially if they replace a subscription fee. Ooma responded by reducing its price to $250.

2. This is very likely the first you've heard of Ooma. Few people know about this thing. In fact, few people under 40 know about Skype, either, despite that Skype has over 8 million people online at any given moment.

3. Consumers aren't spending money right now (except us, apparently!). That's bad news for startups struggling to reach critical mass with an expensive product because of a botched launch.

So I can't believe we just coughed up $193.51 at Costco.com, which is offering $50 off the device through December 7. I hope Arrington's right about the call quality, and I hope Ooma can stay in business for just 10 more months, which is how long it will take for our device to pay for itself relative to Vonage.