The sun is shining on a March morning in London, and Martin Varsavsky appears relaxed in jeans, a white shirt and a navy blue jacket, as though he’s heading to the beach near his Menorca home.
Varsavsky’s dress sense is low-key, but his business style isn’t.
As one of the most accomplished entrepreneurs to come to prominence during two decades of European telecoms liberalisation, Varsavsky, 51, has spent the past six years doing something that many industry analysts describe as either pointless or impossible: he is attempting to build a global Wi-Fi network from the bottom up. Varsavsky says his company, Fon, was always intended as a network that would “build itself”. By this, he means that Fon always wanted to avoid the “huge capital expenditures” involved in laying cables under streets or placing base stations atop buildings.
Today, Fon has more than four million street-level access points through which users can log on to the internet. This makes it the world’s largest Wi-Fi hotspot operator. The company is essentially building a business on millions of underused Wi-Fi routers that largely stand idle in millions of studies around the world. As Varsavsky puts it, Fon is based on the “discovery” that “all the Wi-Fi signals were already there”.
Building a telecoms network out of thin air is an enormous task. Niklas Zennström, the cofounder of Skype, invested in Fon six years ago. “The road to changing a market,” Zennström says, “is rarely a straight highway. There are a lot of turns. You have to not quite reinvent yourself, but figure out along the way how to get there.”
At Fon’s headquarters in Madrid, pragmatism has replaced idealism, and corporate near-death has been followed by resurrection. Much of the credit must be given to the founder’s sheer persistence. Last year, after years of struggle to move the needle, Varsavsky’s brainchild turned a profit for the first time, delivering €28 million (£25 million). Looking ahead, the Spanish-Argentinian entrepreneur foresees revenues of “hundreds of millions”.
Fon and Wi-Fi are coming of age together, Varsavsky argues. Both, he says, will play a major role in shoring up mobile networks that are creaking beneath the huge volumes of data traffic generated by more than 600 million smartphones.
Only a few years ago, most mobile-industry executives would have bet against the notion that Wi-Fi could help to make the mobile web fit for purpose. Today, the idea remains controversial, but seems less unlikely. As Ben Evans of Enders Analysis puts it, mobile operators “have started to get Wi-Fi religion”.
Just like the six other companies and three non-profit foundations Varsavsky has launched, Fon is driven by its founder’s commitment to the cause. “I always build companies around ideas that fascinate me,” he says.
The idea for Fon came to Varsavsky one afternoon in 2005, while he was wandering the streets of Le Marais, in Paris, searching for a Wi-Fi connection.
“I had a wireless modem and I was being killed by these roaming charges,” he says. “Everywhere I looked, there was lots of Wi-Fi but it was all locked. It was three o’clock in the afternoon. All of these people were out at work. I thought: what a waste.”
He wondered whether Parisians could be persuaded to share their Wi-Fi if the favour was returned when they travelled through Europe and visited Madrid or London. Thus was born what Varsavsky calls “a global federation of routers”. At first, Varsavsky says, he “couldn’t see a business model” in his idea. “But I thought it could be a great thing. I thought, ‘I’m going to develop some firmware that people can download into their router.'”
By November 2005, Fon’s firmware was ready. Users could install it on the hack-friendly Linksys WRT54G router, which was built around Linux. Subsequently, Fon developed the Fonera, its own low-cost router custom-built for sharing. Varsavsky decided to give away the first routers to seed the market. After that, he would sell them at, or around, cost. In an early blog post from December 2005, Varsavsky guessed that Fon would need an installed base of one million units to generate what he called “a global Wi-Fi signal”. All of this could be achieved, he reckoned, for little or no cost.
Varsavsky had significant experience of the enormous investments required to build networks in the traditional way. Starting out with $200,000 in 1991 (the equivalent of about £200,000 today), he built Viatel into an independent telecoms operator with a $50 million turnover. It made its debut on Nasdaq in 1996, attracting investors such as George Soros along the way. By the end of the decade, Viatel was ploughing $1 billion of high-risk junkbond finance into an 8,700km-long fibre-optic network that connected more than 40 cities across Europe. Yet this was the telecom-bubble era. Viatel collapsed into chapter 11 bankruptcy proceedings in May 2001, three years after Varsavsky’s departure, leaving investors nursing losses of at least $1.5 billion.
In 1998, Varsavsky started work on Jazztel, a telecoms and data-transmission operator that (in his words) “dug up the streets of Spain” in order to challenge the might of Telefonica. Today, Jazztel remains the nation’s second-largest quoted telco.
Fon was a threat of different order. From the start, the telcos feared the sort of challenge that peer-to-peer networks such asNapster and Kazaa had brought to the music industry. As Zennström puts it, telcos started to worry that Fon users “would start sharing access with their neighbours”. And it seemed to challenge mobile operators, too. As early as 2001, a London-based Nomura telecoms analyst called Keith Woolcock described Wi-Fi evangelists as the “barbarians at the gate” who might prevent mobile operators from earning a return on 3G spectrum acquired for €110 billion during government auctions in 2000 and 2001. If free Wi-Fi flooded the world’s cities, 3G might start to look like an expensive luxury.
Varsavsky didn’t discourage the notion that he was hell-bent on stirring up trouble. Indeed, his early blog posts on Fon’s website read like brusque communiqués from a revolutionary’s HQ. Today, he smiles at the thought: “It’s true. I was on a mission. In the beginning we were against the telcos. People were saying we were the peer-to-peer of Wi-Fi.”
When Fon exhibited at an IT trade show in Madrid in late 2005, its stand was plastered with the iconography of the leftist Spanish republic for which George Orwell fought in the 30s. Like an insurgency, Fon recruited “Fonero leaders” who agreed to popularise Varsavsky’s plan around the world. Varsavsky also did everything he could to align Fon with the explosion of user-generated innovation that had started to transform the tech industry. In San Francisco in 2004, Tim O’Reilly and John Battelle gave a conference opening speech using the expression “Web 2.0” to describe applications built on top of the web, rather than for desktops. Blogging, too, had emerged as a web-native phenomenon that threatened professional journalism. When Varsavsky launched Fon in France in early December 2005, he did so at Les Blogs, the annual blogger conference organised by Six Apart.
The parallels between Fon and these disruptive currents were more than skin-deep. Like Web 2.0, Fon represented an effort to expand the internet’s sphere of influence — to place it at the centre of all connectivity.
Fon’s agitprop identity was underpinned by Varsavsky’s politics. He was born in 1960, and his childhood was defined by Argentina’s military dictatorship, which waged one of the dirtiest of Latin America’s dirty wars against all forms of opposition.
When Varsavsky was 16, his 17-year-old cousin, David, was murdered by paramilitaries. Varsavsky’s father, a Harvard-trained astrophysicist, promptly secured asylum for the family in the US. When asked about his politics, Varsavsky’s answer covers a lot of ground. “In the UK, I would be Labour,” he says. “In the US, I am a Democrat.” He is, he says, “left” on social issues and “green” on the environment. But he is also “more conservative” on economics, where he prefers “less government intervention, more liberal freethinking”.
The common thread in all of this is freedom. “I grew up hating the military, hating fascist dictatorships,” he says. He adds that he has “always been for openness against monopolies”. Predictably, perhaps, Varsavsky went on to spend 20 years chafing against the top-down management style of the telecoms industry. After Viatel and Jazztel, Fon was Varsavsky’s third attempt to overturn the established order.
It didn’t take long for the non-profit ethos to evaporate at Fon. The manufacturing contract for Foneras was burning cash. Time-consuming efforts to squeeze Fon’s firmware on too many different routers cost money. It was time to generate some revenue.
Varsavsky finally found his inspiration in Skype, the internet telephony startup founded by Zennström and Janus Friis. On Skype, it costs nothing to call another user across the internet, but calling a number on a telecoms network incurs a charge. Skype, recently bought by Microsoft for more than £5 billion, uses this revenue to pay the telcos, while keeping a tiny cut. In similar fashion, Varsavsky decided to charge “aliens” — individuals who don’t share their Wi-Fi at home — for connecting to the wireless hotspots created by Fon users who has allowed access to their routers.
With a revenue model, Varsavsky started looking for backers. Zennström invested, as did Sequoia Capital, Index Ventures andGoogle. Fon raised $18 million, and then, in February 2006, Varsavasky took his Fon service global. But the company struggled to make an impact. Varsavsky describes the business model for the first iteration of Fon as “a strategy that didn’t work”.
Users were reluctant to buy Fon’s routers. The alternative — reflashing your own router, and installing Fon’s firmware — was daunting for most. Fon users in the suburbs, where there was little demand, proved happier to open up their Wi-Fi; but in city centres far fewer shared their connections. In the major cities that Fon hoped to turn into a riot of bandwidth, it was hard to find a hotspot.
Demand was problematic, too. “There were just not enough people walking around cities, carrying laptops, trying to “connect to the internet,” Varsavsky says.
There was only one way out of the impasse. Varsavsky set about transforming Fon from his original revolutionary upstart into an establishment player.
“I realised I had to sleep with the enemy,” he says “I had to help them work with us in a model that at first looked dubious to them.
In June 2006, Varsavsky took to the stage at Google’s Zeitgeist conference in Hertfordshire. Sitting opposite him was Ian Livingston, the (at that time) 41-year-old former Freeserve executive who, a year earlier, had been appointed to run BT’s sprawling retail operations.
Google had lined up the two men for a debate on the future of telecoms. “He was the big corporate guy and I was the up-and-comer with an idea that would be potentially harmful for the telcos,” Varsavsky says. “Ian had probably never heard of Fon, or knew very little about us, but he was very open-minded.”
The conversation continued off stage. Varsavsky pitched to Livingston by drawing a parallel with the music business. Fon, he argued, was the kind of peer-to-peer network that could encourage customers “to sell music to one another on the labels’ behalf “.
Livingston, who became chief executive of BT two years later, says he found Varsavsky “enthusiastic, committed and entrepreneurial”. He adds: “I had no instinctive reaction against Fon at all. We weren’t blinded by mobile as the only answer. We’d known all along that Wi-Fi had a lot of potential.”
Yet according to some analysts, BT Openzone, the company’s network of commercial hotspots, was proving expensive to build and generating fewer revenues than anticipated. If this was the case, BT wasn’t alone.
By 2006, an American ISP called EarthLink was trying to deliver on its own ambitious plans to build municipal Wi-Fi networks. Google had partnered with EarthLink to install free Wi-Fi across San Francisco. Soon after Varsavsky met with Livingston, it became clear that these efforts were heading for the rocks. Inlate 2007, the city authorities in San Francisco scrapped Google’s city-wide Wi-Fi plan.
From the start, Varsavsky had argued against Wi-Fi networks such as these. “Municipal Wi-Fi comes from the street to the home,” he says. “It only occasionally sneaks indoors. Our model is more useful, much better. The physics of Wi-Fi means it’s much easier to go from indoors to outdoors than the other way around.”
Fon was also much cheaper to deploy than BT Openzone or municipal Wi-Fi, which was costing EarthLink — by Varsavsky’s estimate — $1,000 for each Wi-Fi-enabled lamp post. Like EarthLink, Varsavsky says, BT needed “an affordable” alternative.
Livingston dismisses as “complete nonsense” the suggestions that problems with BT Openzone opened the way for a deal with Fon. But Livingston could see value in Varsavsky’s argument that giving Fon to BT Broadband customers would make them more loyal. The broad outlines of a deal emerged quickly. BT would introduce Fon to the mass market by integrating its software into the telco’s routers. In return, as the telecoms analyst Dean Bubley argues, Fon would “make BT Openzone’s footprint look a lot bigger”. Exhaustive analysis conducted by BT would ultimately prove that Varsavsky was right about Fon’s effects on reducing churn.
Varsavsky won’t discuss the financials of the deal. It seems likely, however, that Fon offered its services to BT for little or nothing. This, Varsavsky doubtless hoped, would result in plenty of coverage, which Fon would exploit by selling much more Wi-Fi access to “aliens”. Varsavsky says the resulting revenues have always been “shared” by BT and Fon.
The details were refined when the two men met at the World Cup Final in July 2006. Long before Zinedine Zidane headbutted Marco Materazzi, Fon had formally agreed its first partnership with a major telco. “We ironed out the deal before the game,” Varsavsky says, adding that the change of strategy was necessary. “We could have stuck to the original strategy and totally gone under.
“BT was super important for us,” he adds. “They made us — they believed in us first.” Yet in a bravura conclusion that Ian Livingston might find awkward, Varsavsky adds: “The idea was the same. But we made our rivals part of the global movement. The carriers joined the movement.”
Of course, the deal changed Fon, too. Today, the company’s home page carries a picture of a conservatively dressed male working on a laptop. He’s surrounded by faux-naif sketches of tourist landmarks such as the EiffelTower and Big Ben. The copy offers a straightforward bargain: “Free access to over four million Fon Spots worldwide”.
Varsavsky acknowledges the change. “First, you’re a revolutionary,” he says, “and you want to spread the word everywhere. You want a small group of fanatics, people who speak for you. Then you have to get the rest of the population to like you. They don’t need to fall in love. They just need to find you useful.”
But Fon’s deal with BT, and subsequent deals with telcos in France, Portugal and Russia, weren’t enough to build a sustainable business. In 2007, Fon burned through €16.2 million of its shareholders’ cash. In 2008, post-tax losses were €6.8 million. But it’s the revenue line that jumps out of the accounts: it was flat year-on-year at less than €2 million.
Fon was still tiny and it wasn’t growing. “We had become the biggest hotspot operator in the world,” says Varsavsky. “But we were still just the tallest midget in the market.”
In the UK, Fon had plenty of coverage, but demand still lagged. “There still weren’t enough gadgets connecting to Fon,” says Varsavsky. “We were growing much more slowly than I had expected.” As 2007 drew to a close, he wondered if Fon “might not make it”.
“It was difficult, really difficult,” he says. “I wasn’t meeting the objectives. I thought maybe I was embarked upon something that nobody was interested in.”
Under pressure from his investors, Varsavsky considered shutting down Fon. In the end, however, he decided to cut its burn rate. He made half of Fon’s 100 staff redundant, contacting fellow Spanish entrepreneurs to suggest that they take on his former employees. For those who couldn’t find new jobs, he financed “a kind of trust” out of his own personal fortune, to finance retraining.
Worse was to come. In late 2008, with the global financial crisis in full swing, Varsavsky asked his investors for more funding at a board meeting. According to both Varsavsky and Zennström, who was also present, the response was a chilly silence. In Varsavsky’s words: “Everybody gave up. It was the consensus.”
For Varsavsky, this was a moment of truth. He says: “Generally, in situations like this, entrepreneurs say: ‘Fuck it, I will write off my money.’ Or they say to their investors: ‘I will carry on and dilute the hell out of you.'” Varsavsky did neither. Instead, he started to underwrite Fon’s monthly losses of €300,000 with an open-ended loan. He did so without diluting the shareholdings of his fellow investors.
“I had no idea how much this was going to cost,” Varsavsky says. He adds that he took the decision not to dilute his investors because his partners had been “fantastic”.
“It was my fault,” he says, reflecting on this period. “It was me who hadn’t made my targets.”
Fon persisted, but it was living on borrowed time. But then, out of the blue, two saviours emerged: the iPhone and Android.
The iPhone, says Varsavsky, was “a wonderful product” and, for mobile operators, “a dangerous product”. He adds: “The iPhone was sold because it was fun. But every time you tried to do something fun it would threaten your allowance. For example, it costs me £5 here in London to buy 250Mb of data from Orange. Watching an episode of Mad Men will consume 400Mb.
“The operators said to Apple that they were unwilling to see people paying for Mad Men and have their networks trashed in the process, without receiving any benefit. So the operators said to Jobs: send these downloads to Wi-Fi.”
Having carved out a space for Wi-Fi, the operators needed a strategy to fulfil demand. Varsavsky wondered whether Fon could supply it. Months after the iPhone’s debut on AT&T’s network in the US, reports circulated of bandwidth constraints. In Japan, the world’s most advanced mobile market, something similar was happening.
The iPhone took Japan by storm. “It was the desire of Japanese consumers to watch video on their smartphones that threatened to bring down the networks,” Varsavsky says.
In Tokyo in 2010, he met with Masayoshi Son, founder and CEO of SoftBank Mobile, Japan’s third-largest mobile operator. Son told Varsavsky that, since paying $15 billion to acquire Vodafone’s stuttering Japanese operations in 2006, he had invested $14bn in building out its network.
SoftBank had spent big to accommodate new subscribers attracted by aggressive pricing and star-studded marketing campaigns. “The iPhone means I’m going to have to spend a lot more,” Son said. A deal emerged: SoftBank would buy millions of Fon routers and offer them free of charge to customers who bought iPhones and Android handsets.
On the streets of Japan, Fon’s routers would create a massive community of Wi-Fi hotspots. SoftBank, meanwhile, would pre-install Fon apps on every iPhone and Android handset it sold.
SoftBank has more than 25 million mobile subscribers in Japan. Today, Fon has 900,000 user hotspots there. Most are operated by SoftBank users, many of whom get their broadband from NTT, the former state telecoms monopoly.
This, Varsavsky argues, is the shape of things to come in every other mobile market in the world.
What emerged after the SoftBank deal was a third iteration of Fon: a company that does deals with broadband providers and mobile operators. Fon mark three may have solved its growth problem. Last year, revenues rose fivefold to €28 million. It turned its first profit in September 2009, and repaid €2.7 million-worth of emergency loans.
Varsavsky still talks of his creation as a “network built by the users”. But the truth is that Fon has become an adjunct to telco business plans, a defensive offering.
But it’s a useful offering. Six years ago, Fon was a solution in search of a problem. Today, it’s helping to solve one of the defining technology challenges of our times: how to make mobile networks fit for purpose.
Fon survived long enough for technology trends to start moving in its direction. “Over half of new handsets now have Wi-Fi installed,” Enders Analysis’s James Barford says. “Today, every broadband provider throws in a wireless router for free. Most homes now have Wi-Fi, which they didn’t have five to six years ago.”
Offloading traffic from mobile networks on to broadband might take Varsavsky even further from his original dream of open Wi-Fi networks, shared for free on the streets of the world’s cities.
Evans, Barford’s colleague, points out that the peak hours for mobile data traffic occur between 10pm and 1am. “The problem doesn’t occur on the streets,” he says, “but at home, when people take their iPhones and iPads to bed, to watch video or iPlayer.”
As a result, Fon may become a developer of apps that help us to use networks efficiently — in our homes.
How far can Fon go? Varsavsky, naturally, is bullish; Zennström, one of its investors, says that Fon “has the potential to become a very big company”. He adds: “We’re looking at an explosion of demand for wireless capacity. Fon is in a very good position to take advantage of that. It’s already the winner in this category. What we don’t know yet is how much this category will ultimately be worth.”
Barford doesn’t blanch at the suggestion that Fon might become a billion-dollar-turnover company. “Quite a few small businesses can get to $1 billion turnover if they operate on a global basis,” he says. “It’s certainly possible.”
But it won’t be simple. For, as mobile networks sag beneath the strain of smartphones, Varsavsky’s startup is facing competition.
In Japan, SoftBank isn’t relying on Fon alone. Masayoshi Son is encouraging customers to plug femtocells into their routers. These devices use broadband connections to supplement mobile-phone coverage. Femtocells are effectively the Fon era’s cellular rival.
Dean Bubley, the independent telecoms analyst, notes that O2 in the UK has started talking about building its own Wi-Fi network.
Bubley also cites “a ton of technical work in the industry aimed at making Wi-Fi more offload-friendly, easier and faster”. Apple and Google are “almost certainly” working on their own initiatives, he adds. The risk for Varsavsky is that Fon gets trampled in the rush.
There will be competition too from another source: the telecom industry’s deployment of so-called 4G mobile networks, based around a cluster of technologies known collectively as Long Term Evolution, or LTE. The first deployments are already in place — in markets such as Scandinavia, Japan and Russia.
Will super-fast mobile networks kill off Fon? Varsavsky isn’t worried. “In the end,” he says, “the whole game is this: how much does it cost to pass one meg through a network? Even though 4G is orders of magnitude cheaper than 3G, Wi-Fi remains orders of magnitude cheaper than 4G.”
Not everyone is convinced. Glenn Fleishman, a US-based tech pundit who described the “hype” surrounding Fon in 2006 as “hilarious”, hasn’t changed his view.
“People don’t stand outside someone’s house to get Wi-Fi,” says Fleishman. “People want to either use a service while walking, which necessitates 3G or a [high-powered] Wi-Fi zone, or they want to be in one place, usually sitting.” The US, he says, is already awash in free Wi-Fi.
Ben Evans offers a sobering assessment. “The cynical view of Varsavsky would be this: he’s got this cool business, he talks to interesting people all day, he flies around the world. Instead of doing ocean-going racing, he’s doing Fon. But will he solve a real problem experienced by real people? I just don’t see that you can squeeze that much value out of Fon’s business model.”
If you have little or no direct competition, an old saying suggests, your business model is either brilliant or broken. Even Var- savsky has occasionally wondered if Fon was the latter.
When he brought his original idea to Google in 2005, he says, Sergey Brin liked it. But others didn’t. “I didn’t blame them,” Varsavsky says. “I had my doubts. There was an idealistic element that was too much even for some people at Google.”
Six years on, Varsavsky remains unfazed. “I love to prove people wrong in the long term,” he says.
Source: http://www.wired.co.uk/magazine/archive/2011/09/features/open-access-fon?page=all By Peter Kirwan 12 August 11