On Feb. 6, a little-known Spanish startup called Fon made worldwide headlines because of an eye-popping equity investment. Internet giants Google (GOOG) and Skype (EBAY), a unit of eBay, along with the prestigious venture-capital firms Sequoia Capital and Index Ventures, are pumping $21.5 million into the Madrid-based company to help it take off.
The attraction? Fon is proposing a radical new telecommunications business model that encourages average Joes and Janes to give away access to their broadband Internet accounts via Wi-Fi wireless networking. In exchange for agreeing to let other people use their Internet connections, members of the Fon community -- known as Foneros -- gain free access to the Wi-Fi networks of other Fon members. The idea is to create a global mesh of Wi-Fi hot spots, providing a cheap, or even free, on-ramp to the wireless Web.
TEMPTING SCHEME. Yes -- giving bandwidth to other people constitutes a violation of the terms of usage imposed by most Internet service providers. But Fon aims to change their minds. Argentine-born CEO Martin Varsavsky -- a serial entrepreneur who also founded Spain's leading alternative telco Jazztel as well as the Internet portal Ya.com -- contends that if Fon takes off, it will encourage millions of people to sign up for broadband Net access in order to get it from other Fon members when they're out of the house or office.
It basically translates into a classic "network effect" argument: The more people who sign on, the greater the value of the interlocking mesh. Varsavsky has already lured Sweden's No. 2 ISP, Glocalnet, to his scheme, and he's in negotiations with 15 other U.S. and European ISPs that could relax restrictions on bandwidth sharing in exchange for the chance to drive greater broadband penetration.
Fon aims to make the deal even more worthwhile -- and worth money -- by charging non-Foneros a nominal fee to hop onto the networks of its members, then sharing the take with ISPs.
DIVVYING UP LOOT. Fon is a perfect storm of hot tech trends. It's about wireless, peer-to-peer networking, social networks, viral marketing -- you name it. To add even more spice, the company has come up with clever if provocative labels for its membership levels. Full-bore participants who share their own networks for free are called Linus members, an homage to Linus Torvalds, the inventor of the open-source Linux operating system and patron saint of free software.
Members who share their networks for a fee are dubbed Bill, in a nod to, ahem, a certain Mr. Gates of Microsoft (MSFT) fame. People who just want to tap into a Fon hot spot and pay as they go are called Aliens. Their access payments -- likely to add up to far less than what most people pay today for access to a Wi-Fi network in a hotel or airport -- will be split with ISPs.
Varsavsky recently spoke with Andy Reinhardt, managing editor of BusinessWeek Online Europe, about Fon and its prospects. Following are edited excerpts of their converstion:
How does Fon compare with the popular movement a few years back to offer free Wi-Fi access? There was lots of this in the past. People got Wi-Fi and left their networks open for other people to use. But it was a radical and idealistic movement, not done with the cooperation of ISPs and Internet giants. We're doing something that's a blend of idealism and pragmatism. If you pay for broadband service and share your wireless bandwidth, you get free roaming to other hot spots for free. This actually increases the value of Wi-Fi for everybody.
Besides, when the free Wi-Fi movement was in full swing, there were a lot fewer Wi-Fi devices. Now there are Centrino PCs and consumer-electronics products like music players and digital cameras and mobile phones with Wi-Fi built in. It's a much larger market.
How will you make money? From Aliens, the people who haven't contributed their bandwidth and who pay us for the right to get onto a hot spot operated by one of our Foneros. We will share that money with the ISPs, which is just extra revenue for them from users they already have.
Why would Aliens want to use Fon? Our goal is to charge really cheap rates, something on the order of $2 per day. Like the cost of a subway ticket. That's makes it superaffordable -- much less than you pay in a typical hotel or airport -- but still enough that if you use it every day, it makes more sense to sign up for your own broadband account. We're actually encouraging people to become paid ISP customers, because $2 per day works out to $60 per month, and at that rate, it's cheaper to get your own connection.
But most ISPs specifically disallow their customers from sharing network bandwidth with other people... We're not a community to share bandwidth with anybody. You still have to be an ISP customer, and then you can share. In a way, that's an incentive to sign up with an ISP for broadband. Then we pay the cost of the roaming.
We are only operating now with Linus customers. You are a client and you share bandwidth with other Foneros. There's no money exchanged. This modus operandi has not run into any problems with ISPs.
The issue comes up with the Bills when people charge for access [to their own Wi-Fi networks]. We are launching now with Glocalnet [in Sweden], and we're in negotiations with 15 other ISPs in Europe and North America.
We're not the enemies of ISPs. We're their friends.
What about problems with security? I'm not sure I would want to open up my Wi-Fi connection to strangers. Fon will let you share in a secure manner. Our software creates a firewall between your router and other Foneros. And they are not anonymous. They have to register, join the community, provide their home addresses, etc. This is not an anonymous free Wi-Fi community. You are protected, and you never share more than 50% of your bandwidth with other Foneros. You're protected from abuse. We keep log-in records. This is a safe environment for sharing Wi-Fi access.
What will you do with the capital you've raised? We want to develop software for other routers -- now, we just support Linksys. We have to develop the payment platform for Bills. And we aim to subsidize purchases of routers. We have to set up organizations in every major country. We'll spend money on marketing, developing software, and subsidizing routers.
How will this relate to the free municipal Wi-Fi networks being set up by many cities? They are very controversial. There's a lot of animosity toward these municipal Wi-Fi initiatives from the telcos. You can see why: They're making investments to build out Wi-Fi, and city governments, using taxpayer money, are competing with them with free alternatives. San Sebastian built a free network, and the government of Spain forced them to charge for it. You can understand why the telcos are annoyed.
We don't face those issues, because we're a private company. The best thing cities could do is to give citizens free or subsidized wireless routers to put in their windows, and then let them use a service like ours. It's a lot more cost-effective than building a network of outdoor Wi-Fi routers that have to be waterproof and attached to light poles and connected into the Internet.
How are you going to attract ISPs who resist the idea of giving away access? We don't need them all. We've figured out we could cover the entire island of Manhattan with 4,000 hot spots. In Sweden, we're only going to work with Glocalnet, which is the No. 2, because we don't need any others to achieve sufficient coverage.
I guess you're relying a lot on the idea of "viral marketing," where your own customers spread the word and help build the community of users? Yes. Look at T-Mobile or Boingo. They've spent four years developing networks of hot spots, and they number only in the tens of thousands. We've been in business for just three months, and we already have 3,000 hot spots. Since the news came out [about our fund-raising], we've already signed up 2,000 more in one day.
What's your target for Fon's growth? Our goal is to have 1 million Foneros by 2010. If we hit that target, we will have so much coverage!
Reinhardt is a correspondent in BusinessWeek's Paris bureau
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