FON: the future of the business model May 25, 2006
The FON movement has converted 39.000 people into foneros so far. One day, it might be as much as 1 million forming a real ubiquitous WiFi network. Linuses and Aliens will be able to roam in larger cities and at points of interest worldwide. We foneros appreciate such a scenario very much but let's not forget that Fon is not only a movement, it's a business, too. Now, let's do the maths and see where the business model could be in:
Today the only hardware business lies in the sales of the Linksys router which clearly is not making any money, in fact Martin Varsavsky claims FON looses $25 per unit. With their own router (coming shortly) they will probably make a margin which I assume should be at least around 20% of sales in the long run (direct to consumer model and learning curve effect provided). Let's simplify and only note down the best case scenario: 1.000.000 x $25 x 20% = $5.000.000 gross margin. Good, but not good enough I guess given the VC put into FON (+ $20 Mil).
2. Basic Service
The most obvious source of income is the revenues generated thru Aliens. As it is pretty easy to avoid monthly charges for heavy users by simply purchasing a router (less than 1 month of service) and become a Linus, the Aliens model is only interesting for those who do not have broadband at home and travel a lot. T-Mobile has had 450.000 log-ins per quarter with 4.500 hotspots. That's 400 log-ins per hotspot and year but obviously these hotspot are only located at places with enough traffic. However, in a scenario of 1 Million hotspots one could assume there are at least 5% that can attract enough Aliens to generate revenues. I know, this is going to be a Web 1.0 business plan calculation but let's play: 1.000.000 x 5% = 50.000 hotspots. We said, there are Linuses and Aliens using the hotspot i.e. not everyone is paying. Let's say there are 25% Aliens using these high-traffic hotspots (in total there might be fewer aliens of course). Then: 50.000 hsp x 400 log-ins = 20 Mill. x 25% x $2 (min. charge) = $10.000.000 gross margin. Not bad as this is per year.
3. Value Added Services
Once you built a network like this and everyone is online wirelessly anytime and anyplace, demands for services even increases. Because all foneros log-on via a hotspot everyone will need to pass the log-in portal which is thus an ideal marketplace for added value services. Cheap Voice-over-IP calls could be another source of income and actually also be convenient for foneros if offered thru FON as they don't need to sign-up to another service. A French WiFi company in Marseilles is doing exactly this and charges €5 per month for unlimited calls. To calculate the revenues from value added services is really getting difficult but just for fun, let's assume this: only 1% are using value added services at, say $5 per month and you have 100.000 x $5 x 12 months = $6.000.000 per year.
The key of success is of course, to create a really large user base. This is true for almost every Web 2.0 company but is even more important in this case as the attraction and the beauty of FON lies in the ubiquitous network. In other words, a sporadic accumulation of access points won't work on the long run, a close meshed network, however, will be both a great user experience for many and a great success for FON.
DISCLAIMER: the above calculation is fictitious and describes a scenario I would call "best case".