A Cheap Route to Wi-Fi

— June 28, 2006

FON, based in Spain, is a startup company that wants to provide cheap Wi-Fi access to the world by selling a million routers, which usually cost about $60, for $5 plus shipping. But major Internet service providers such as Verizon , AT&T , and Comcast may have something to say about that, if they perceive FON as a threat to their own businesses.

And they might, since this isn't just some flighty idea from a crackpot company. FON raised $21.7 million from heavyweights such as Google, Sequoia Capital, Index Ventures, and eBay 's Skype to get this plan off the ground. If the FON venture succeeds, there will not only be a strong return on investment, but also a new marketing channel for Google and Skype services.

Let's look at how this works. The Linksys or Buffalo router you receive from FON lets you share your broadband Internet connection with other Foneros, as members are called. You become kind of like your local Starbucks - you create a "hot spot" for Internet access. Once you become a Fonero, you can access the Internet for free from others in the network. If you don't become a Fonero within 30 days of getting your router, you pay $3 a day for continued access. But if you do become a member, you get a cut of the $3 that others within your service area pay.

Meanwhile, keep in mind that major ISPs often include clauses in their contracts that forbid their broadband customers from sharing Internet access. If a million users start sharing broadband access because of FON's cheap routers, that's likely to eat away at the revenues for the major ISPs. So wouldn't it be in their best interests to enforce these customer agreements with legal action or the threat of legal action?

Craig Settles, an expert on Wi-Fi and author of the book Fighting the Good Fight for Municipal Wireless , told me, "If FON starts picking up steam, I think you'll see the larger ISPs band together and, similar to the recording industry, sue the blazes out of FON. There will undoubtedly be bad press in the short term for the ISPs, particularly as community groups wrap the argument in terms of digital inclusion. [But] whether FON is in the clear or not, that $21 million pot of [venture capital] money starts to get a little shallow if you have to fight legal battles on multiple fronts."

Of course, lawsuits are not a cure-all. Just look at the recording industry. Despite its successful litigation campaign that crushed the likes of MP3.com and the original Napster , the industry has nonetheless continued to suffer from an erosion of its revenues. Setting up a file-sharing site, after all, is fairly easy.

ISPs, in contrast, control the necessary infrastructure to deliver broadband. So while FON appears to have some disruptive technology in its hands, it still requires a considerable amount of capital -- enough to, say, hand out cheap routers - to make that technology pervasive. So shareholders of deep-pocketed companies with ISP operations shouldn't expect the cash flows to dry up anytime soon.

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