Fon Hopes Its Hotspots Will Rival Cellular

Sure, you can browse the Web from your local coffee shop, thanks to its Wi-Fi connection. But what about leaving your cell phone at home and using cafes and other Wi-Fi “hotspots” to place free or cheap Internet-based phone calls using a laptop or Wi-Fi phone? Not yet.

The problem isn’t bandwidth — Wi-Fi has enough capacity to support voice calling with software like Skype. And it’s not hardware — several cell-phone manufacturers have recently released handsets with the ability to place calls via Wi-Fi. Rather, it’s the patchy distribution of today’s Wi-Fi networks, which makes cellular-type roaming impossible.

“If making calls from hotspots were really a successful model, then where are all the pay phones?” says David Chamberlain, principal wireless analyst at In-Stat, a high-tech consultancy in Scottsdale, AZ. “The value of mobility far outweighs any cost factors,” he says, leading people to use more expensive cellular service, even if cheap, fixed options are available.

Spanish startup Fon wants to change that predilection for cellular, with a rapidly growing Wi-Fi network owned by its users, rather than a big telecommunications company, and based on shared access. In order to create a large network of hotspots, the company is encouraging network members — mostly, average consumers — to give away Wi-Fi access in exchange for getting free access at other Fon hotspots. Members can use that access, in turn, for Web browsing, e-mail, instant messaging — or Skype-like Internet phone calling.

Since its launch in late February, the startup has amassed a network of 31,000 registered users (“Foneros”), and is currently adding 200 new users each day. If each of those users were to set up special Fon Wi-Fi routers, Fon would instantly become one of the world’s largest networks of Wi-Fi hotspots. To date, though, only a minority of them have acquired Fon routers — the company won’t say exactly how many, but it expects that a large number of them will do so, given that there’s no benefit to registering without also creating a Fon hotspot.

Fon founder Martin Varsavsky has set his sights well beyond, though. “If you really want to create a ubiquitous Wi-Fi signal, being the largest network in the world is not enough,” he says. “We need maybe a million hotspots — that would be a number where you would find Fon very frequently everywhere you go.” As many as 300,000 of those hotspots would be in the United States, he projects, with the rest in Europe and China, Japan, and Korea — areas where Fon is concentrating its marketing efforts. By contrast, the largest current network of hotspots, iPass, has around 43,500 hotspots worldwide, with some 13,400 in the United States, according to JiWire, a South San Francisco, CA-based company that tracks hotspot locations worldwide.

Fon’s service provides Wi-Fi access for any application, including Web surfing, downloading music, or playing games. But the company’s ambitious plans for coverage make it especially attractive for telephoning services — that’s one reason eBay’s Skype division has invested in the company.

At the heart of Fon is a simple principle: Let me use your hotspot, and I’ll let you use mine. Fon users join the network either by purchasing special routers from Fon or by installing the company’s firmware on a compatible Wi-Fi router. Fon routers do not provide open access: all users must sign in.

Once registered, future Fon users will have a choice of participating in one of two ways (named in honor of Linux creator Linus Torvalds and Microsoft founder Bill Gates). “Linus” users’ access points will provide free access to other Fon users, and in exchange Linuses will be able to use any Fon hotspot in the world free of charge. “Bill” users, like nonmembers of Fon, will pay $2 per day for access to other people’s Fon hotspots; but, in return, they’ll be able to charge $2 per day for access to their own hotspots, a fee that Fon will split with them 50-50.

The Fon network, which is in beta testing, currently supports only Linus users. A second version of the network software, with support for Bills, will be released by the end of May, Varsavsky says.

The company also plans to let users customize their routers’ welcome pages, so that people who sign on at a Fon hotspot can see information placed there by the owner, such as a map of the neighborhood or list of favorite local cafes. “People will socialize through their Wi-Fi,” says Varsavsky. “You move to a neighborhood, nobody knows you, and then you start sending your Wi-Fi signal, and people will get to know you.”

Internet service providers (ISPs) have traditionally cast a jaundiced eye on users who allow neighbors and passers-by to share their broadband Internet access via Wi-Fi. However, Varsavsky claims that ISPs are fans of Fon, because it discourages freeloading. Fon routers are open only to other Fon users — who by definition have their own routers and broadband connections elsewhere — or to non-Fon users who are paying the $2 daily fee.

Indeed, Fon has already signed co-marketing agreements with two European ISPs, Glocalnet in Sweden and Jazztel in Spain, to sell Fon routers to their customers. (Varsavsky is also a cofounder of Jazztel.) Fon has also attracted some high-profile backers, with a $22 million investment from Sequoia Capital, Index Ventures, eBay’s Skype division, and Google.

“Fon is something that has a tremendous potential,” says William A. Stofega, a research manager at IDC, a market research company based in Framingham, MA. “The question is: Can they execute?” Telecommunications companies that also provide Internet access may prove to be nervous about Fon’s ability to support Internet-based telephony, which would rob them of long-distance minutes, Stofega says. To succeed, he says, Fon will have to scale up quickly and deliver reliable service. Furthermore, in cities rolling out citywide Wi-Fi networks, including Philadelphia and San Francisco, Fon may have trouble convincing people that it’s worthwhile to use a for-fee network.

Other experts are also reserved. “While the Fon model is not a new concept, it’s certainly the best-funded community effort of its kind to date,” says David Blumenfeld, vice president of marketing for JiWire. “Fon’s success will largely be determined by how much prime real estate [urban hotspot coverage] it’s able to secure. However, as Wi-Fi moves beyond the laptop into phones, digital cameras, and gaming devices, the market opportunity is only getting bigger.”

Varsavsky admits his company faces challenges. Still, they’ve gathered a lot of momentum in a very short time. Says Varsavsky, “The idea that you share a little bandwidth at home and in exchange roam the world for free is very appealing to people.”

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Fon Hopes Its Hotspots Will Rival Cellular