Fon’s New Cycle

The WiFi Revolt!screamed a 2006 headline on the cover story of a Silicon Valley magazine, “Google plus Skype team up with radical start-up to overturn the telecom industry.” The story was about Fon, a Madrid-based start-up that offers a global WiFi sharing service created by serial entrepreneur Martin Varsavsky. Times have changed.  Varsavsky, once feared as a foe, is thriving by positioning himself as the operators’ new best friend.

Varsavsky, who started half a dozen companies before he turned 40, specializes in disrupting the telecom industry. The native Argentinean pioneered callback services when he launched Viatel in 1991, exploiting loopholes in EU regulations to challenge the continent’s dominant phone companies. Since then, he built Spanish Internet company Ya.com which famously lured away 25 of incumbent Telefonica's executives in a single day was sold in 2001 to T-Online International Deutsche Telekom’s internet subsidiary for €550 million. He also founded Jazztel, one of Spain’s largest public telecom companies and a continuous thorn in Telefònica’sside.

So, when Fon got backing from Skype, Google and venture capital firms Sequoia and Index Ventures to start spreading ubiquitous wireless broadband access, telecom industry executives were worried.  At the time WiFi was seen as a service that would replace traditional cellular technology by besting it in both performance and price.

WiFi is now seen as a compliment, rather than as an alternative, to traditional mobile carriers’ network. And Fon, which came close to closing its doors in 2008, is back in the black, ending 2010 with revenues of  €28 million, up from €5 million the year before. The company sold 1.9 million routers in 2010 and expanded its business into Asia, thanks in part to a groundbreaking deal last October with Japan’s Softbank.

The Softbank Japan deal represents a new business cycle for Fon and a major industry trend. More and more people are buying smartphones and tablets and using them to download bandwidth-hogging services like video. Mobile operators are desperate to offload the fifty-fold increase in data traffic that consumers are expected to generate by 2015 because their current networks can’t handle it.

Fon is one of a whole host of young venture-backed companies that are offering ways for operators better cope with the surge.  That help is badly needed. Consider the beating that AT&T took on Comedy Central’s Daily Show in January, when one of its comedians made fun of the bad quality of video calls on the Apple iPhone over AT&T’s network, joking that it cost him $400 to send every SMS because he had to send an iPhone to the recipient in order to make sure the message was received.

To avoid bad customer experience and the resulting churn, Japan’s Softbank now gives every purchaser of an iPhone a Fon router and configures the phone in the store to connect to WiFi for faster mobile data services. Fon is looking to do more of these kinds of deals. “We don’t just help consumers, we help telcos,” says Varsavsky. “When an operator adds Fon into the mix it improves the quality of service, saves on capex and reduces churn.”

On February 1 Fon announced that it had surpassed three million hotspots worldwide, growing by more than 200 percent year-on-year, and increasing its lead with Boingo, a WiFi aggregator that currently hosts 211,000 hotspots. Varsavsky boasts that not only are revenues on the upswing, the company is now six times larger than the Boingo, iPass and T-Mobile Wi-Fi networks combined.

 Fon, which plans to meet with mobile and fixed operators at the Mobile World Congress in Barcelona, February 14-17, is actively looking for partners in the US, Germany and Latin America. In the UK its services have been integrated into set-top boxes distributed to consumers by BT for the last three years. Fon’s service is also available via hotspots.

The principle is crowdsourced WiFi: as a member of the Fon community consumers agree to share some of their WiFi at home, and get free roaming at Fon Spots worldwide in return.To deal with security issues, Fon produces routers that when connected to ADSL/broadband make it possible to broadcast two powerful, dedicated WiFi signals. One signal is encrypted and private. The other signal is public and accessible via password to registered members of the Fon community. Options include becoming a member by buying a  router once or by opting in to the Fon service for free, courtesy of a telco partner.  Outside of the UK telco partners include MTS (Comstar-UTS) Russia, SFR France and ZON Portugal.

 After BT, the pace of partnerships with other telcos stalled, and it took awhile to get the hardware right, but Varsavsky says he believes so strongly in Fon that he put some of his own money in without diluting the shares of financial backers. Then gizmos like the iPhone and the iPad came along and business started picking up. With the serious strain being put on operators’ networks by mobile data traffic, Varsavsky's hunch appears to have been right. This cycle of the telecom business appears to be in Fon’s favour.

This story appeared in a print publication Informilo produced in partnership with Raconteur Media, which was distributed at The Mobile World Congress in Barcelona February 14-17 and in a regular issue of the Times in the UK. The print publication is the second in a series  on innovation and technology that Informilo and Raconteur Media have produced.

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