By Gerry Blackwell

January 27, 2006

The unique business model of Fon depends on tech-minded members and ISPs to create a grassroots, pay-as-you-go worldwide hotspot network.

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If Spanish Internet entrepreneur Martin Varsavsky hits the bull’s eye again with his latest venture, we may all be operating our own Wi-Fi hotspots before long. You decide if his aim is good.

Varsavsky, founder of Spain’s Jazztel, the country’s second largest ISP, is the brains behind Fon, a startup that aspires to be a grassroots movement for making broadband Wi-Fi Internet access ubiquitous. Fon jumped the Atlantic this week with its North American launch at the O’Reilly Emerging Telephony Conference in San Francisco.

The Fon concept is intriguing. The company provides members, which it calls Foneros, with free software that turns their Wi-Fi routers into thin clients in the Fon hotspot network. The software, written in Linux, only works on a few select models from Linksys, including the popular WRT54GS. That router comes in various editions, some that sell for as little as $34.Not all of the WRT54GS editions run Linux, but Fon’s new software written in VxWorks, which controls the more recent models, will be available in March. The March release of both Linux and VxWorks client software will let Foneros set how much time they’re willing to share. It will also be able to detect how much bandwidth a Fonero has available and configure the router for use as a hotspot accordingly. Having the software installed will let Fon perform centralized authentication, authorization and accounting functions for Fonero hotspots over the Net.

There will be two types of Foneros: Linuses and Bills. Linuses, named after Linus Torvalds, the Linux pioneer, provide Internet access through their hotspots for free. When they roam, they get free access in return from other Foneros. Bills, named for Bill Gates, charge for access and must pay for access at other Foneros’ hotspots. Aliens are Fon hotspot users who are not Foneros. They always pay, even on a Linus’ network. Aliens will provide the bulk of the revenue that fuels Fon.

“The first 2,000 or so registered Foneros have downloaded the software,” Varsavsky said in mid-January. “We’re already in 53 countries and we only launched a month ago. It looks very much like it’s shaping up to be a global network.” That may be wishful thinking or spin doctoring, though. There were in fact only 200 to 300 active Fon hotspots at that point. It typically takes Foneros 60 days to get up and running, Varsavsky said.

For now, only Linuses are active. Fon doesn’t have the back-office software in place yet – or even fully developed – to support Bills and Aliens. The company expects to have it in place for a March commercial launch. “Anything that involves money is always more complicated,” Varsavsky said of the next phase in his master plan. “We want to make sure we do the right thing.”

The problem: Fon will not only be encouraging others to share their ISP bandwidth, they’ll actually be charging for it in some cases. Some ISPs have explicitly forbidden customers sharing access, even if they’re giving it away. At least one ISP has actually cut access to customers caught sharing. Other ISPs have said nothing explicit about sharing. A very few have encouraged it. “We’re telling people now to check with their ISPs,” Varsavsky said.

Fon is trying to convince ISPs to not just turn a blind eye, but to participate with Fon, including selling customers Fon-ready Wi-Fi routers. Why would ISPs want to do this? Herein lies either the genius of Varsavsky’s idea, or its fatal flaw. Time will tell which it is.

He claims ISPs should want to participate with Fon for two reasons. First, a fully built out Fon network will enhance the value proposition of the ISP’s broadband access service. With Fon, they’ll be able to offer customers both local and roaming access, and the roaming access will cost the ISP nothing to provide. Fon is undertaking all the development work and network management. It will even provide routers for ISPs to sell with software already loaded. So instead of the customer paying $40 a month for home or business broadband access only, he’ll be paying the same for access everywhere – well, once the Fon network is fully built out.

Reason two: Fon will share revenues it receives from Aliens. When Bills provide the service, they get half the revenues, Fon the other half. When Linuses provide the service, the company gets it all. It will share some of its portion with ISP partners. “ISPs will get a different percentage of our half, depending on what kind of commitment they make to Fon,” Varsavsky explained.

Will ISPs buy in? Two already have – Jazztel and Glocalnet, a Swedish provider. Varsavsky said in January that the company was in discussions with 10 ISPs in Europe and North America. It is targeting 50 of the biggest, and has two employees working full-time on hammering out partnership agreements. “We think we have a good deal for ISPs,” he said. “They’re in heavy price wars. We’ll bring in additional revenues for them, and it’s a way to offer more for the same cost to customers.”

Pricing will be crucial to convincing the ISPs to play, Varsavsky believes. Fon will charge Aliens less for casual service – by the hour or the day – than commercial hotspot operators, but it will only offer Aliens monthly service for a fee higher than they might pay an ISP for fixed service. This is to allay ISPs’ fears of users “freeloading” – never paying for ISP service and only using free or heavily discounted Fon hotspots. “We’re encouraging everybody to be Foneros,” Varsavsky said. “We intend to make money out of daily casual use.”

But wait a minute. If everybody becomes a Fonero, there won’t be any Aliens. In the end, Varsavsky suggested, the only Aliens will be those people who are “so global they don’t really have a home.” Aliens indeed! Of course, it will never come to that. Even if Fon manages to get airborne, it could never expect to attract even 50 percent of the broadband-connected population.

Bringing ISPs onside is not just important for removing the legal obstacles to the Fon model. The company also sees ISPs as crucial marketing partners. In a recent blog entry, Varsavsky noted that the two companies Fon has already signed combined sell over 3,000 new DSL Wi-Fi connections per day – “which means that many new Fon hotspots per day launched.”

Fon would like to be the next Skype – who wouldn’t? – but obviously has a long way to go. The question is, will a critical mass of broadband-connected consumers embrace the slightly scary notion of sharing bandwidth with strangers? Fon argues that Wi-Fi access points running its software are infinitely more secure than APs left wide open – as many residential and business Wi-Fi nets currently are. “Security,” as Varsavsky says, “is relative.”

Two factors could put the skids on Fon’s idealistic aspirations. One: consumers simply won’t buy into the whole notion of sharing – just as they haven’t yet bought in en masse to the freenet movement that espouses a similar ethos, without the commercial overtones. Two: consumers aren’t all geeks, and the majority probably won’t be willing to go through the techno-geek hoops required to turn their Wi-Fi routers into Fon hotspots. In that case, it’s up to the ISPs to back Fon and send out the hardware pre-configured.