Magic Jack

I really have to wonder how long Magic Jack is going to be around.

For those who haven't seen the omnipresent ads on TV, Magic Jack is this USB dongle that you pop into your internet-connected computer, and then plug your ordinary telephone into that dongle (dongle is a funny word). Your phone then acts as it normally would, and the whole deal costs you $40 for the dongle, then $20 per year.

How can they possibly charge only $20 per year for nationwide coverage? Simple. It's a scam! Not for the consumer, mind you, instead it scams the telephone companies themselves. It's a regulatory arbitrage scam. Long story short, back when the feds broke up AT&T in the early 1980's, they ended up with a number of very small local carriers located in lightly-populated, rural areas. These carriers argued (the truth of their argument is an entirely different argument) that they could never be profitable by themselves, so the government included a subsidy for them.

Here's how it works. Carriers aren't allowed to pick and choose to whom they will connect. If I am using Verizon in Boston and make a call to Washington, they are legally required to connect the call to Qwest. Qwest is legally required to accept the call. The major carriers suffer a great number of charges associated with these connections, but since they have such large populations, and each network is suffering equally, the numbers sort of equal out.

The small rural carriers, on the other hand, while still not allowed to pick and choose connections, are allowed to charge termination fees. Essentially, if I use Verizon to call some rural network in Nowhere, Wyoming, the phone company there charges Verizon a lot of money to complete the call. Verizon is legally obligated to pay these fees. Likewise, if those rural networks make a call, Verizon must connect the call and, again, pay the rural carrier money.

Magic Jack exploits this ridiculous, bureaucratic train wreck by having all of the calls you make beam across the internet to Magic Jack HQ, which has a deal with one of these rural carriers (known as CLECs). Your call is then rerouted through this rural carrier to wherever you're making the call. They incur long-distance fees to make these connections, but the termination fees that they're allowed to charge the telephone companies are so absurdly high that they cover all of the long distance and still allow for profit. This is a business model that exists purely because of stupid government fiddling. If we get rid of the subsidy, Magic Jack would disappear in less than a day.

P.S.

In case you needed further proof that Magic Jack is run by scumbags, they offer no contact info on their home page. Their "parent" company, YMAX, which plays the role of the CLEC, is based out of a P.O. Box.

Can A Phone Service Provider Block Calls To Numbers It Doesn't Like? (TechDirt) Read the comments. The inventor of MagicJack weighs in.