Web maverick shakes up status quo again
Skype and Kazaa pioneer Niklas Zennstrom pulls a promising new Wi-Fi startup out of his hat.
By Mark Halper, Fortune contributor

(Fortune Magazine) -- Niklas Zennstrom is a populist Web hero. The 40-year-old Swede has twice co-founded companies that rattled powerful industries by giving away important things to consumers.

Skype is shaking the telecom industry with free phone calls, and before that Kazaa, his maverick music-sharing company, sent shivers through the entertainment business. So keep an eye on a Madrid wireless Internet startup Zennstrom is helping to run called FON, which could upend both the Internet and the mobile-phone industries.

FON is building an international network of free Wi-Fi by enticing people with home Wi-Fi service to share access with fellow "foneros" when anyone in the FON club is within range.

"I'm a great believer in sharing resources to create a virtual-access network," says Zennstrom, an active board member. FON's CEO, 46-year-old serial entrepreneur Martin Varsavsky, shares that vision. "We are a user-generated infrastructure," he says, "not telco-generated."

After launching last November and receiving a $21.7 million infusion from Zennstrom, Skype, Google, venture capitalists and others, FON has signed up about 65,000 people in Europe, the U.S., and Asia.

Not all 65,000 are active, and they're not all in popular locations. But it's a good start, considering that the world's largest aggregator of Wi-Fi sites, Boingo, claims about 45,000 hot spots. FON aims to have one million hot spots by the end of next year.

So how will a free network make money? Just as Skype seeded the market with freebies and later added revenue generators, FON put a revenue stream into place only in June. It began enlisting venues like coffeeshops to provide FON-branded Wi-Fi service to paying customers. (Foneros get service free anywhere it's available.)

FON tries to distinguish itself from other commercial hot-spot operators on price. It charges as little as €2 a day in Europe, compared with a typical fee of €5 for a half-hour at competitors' sites.

But two-euro-a-day service is not going to make FON a fortune, especially since it shares the money with venue owners and Internet service providers. FON's commercial service will also be competing with its own free service, as well as with free Wi-Fi from other providers. So Varsavsky has alternative plans, which include selling ads and possibly content. He also wants to draw licensing revenue from planting FON software in Wi-Fi-enabled devices like mobile phones and MP3 players.

"The killer applications will be voice and games, and close to that will be music," says Varsavsky. In other words, he's betting that people will use Wi-Fi to make phone calls, play Quake and fetch Coldplay songs.

In Germany one retailer is already packaging a Nokia Wi-Fi phone with a FON home Wi-Fi router. And FON plans to start selling a similar package with Skype Wi-Fi phones in October.

What will really help is if FON can enlist Internet service providers to sell FON-loaded gear and encourage users to become foneros. Varsavsky has made some headway with second-tier providers.

But FON risks the ire of ISPs that object to foneros parasitically running free and paid-for services over their networks. Roger Entner, an analyst at Boston market research firm Ovum, notes that ISPs might be willing to look the other way when it comes to sharing, but "the moment someone becomes a reseller, the claws will come out."

Zennstrom's companies have seen this before, and Varsavsky doesn't seem worried. "I've built five companies in my life," Varsavsky says. "One went down; four went well." If FON can build up enough of a movement now, strength in numbers could stave off any future assault. Top of page