Worldwide
Wireless Web
Nightmare scenerio for telcos as experts tinker with a dream: "A telephone company built by the people." IHT.
May 26, 2008

By John Markoff.
Menorca, Spain - Sitting on the porch at Finca Torrenova, his 800-acre retreat on this Mediterranean island, Martin Varsavsky ticks off the credentials of the group of Internet entrepreneurs finishing lunch at a nearby table.

"He has 40 million uniques, he has 50 million, and he has 8 million," Varsavsky says, referring to the number of visitors to Web sites owned by his guests ? many of whom are also business associates and have joined him for several days of brainstorming about the digital future.

These days, commercial victory on the Internet is all about scale, and Varsavsky, a 48-year-old from Argentina, can be forgiven for speaking longingly and in detail about his peers' achievements.

No stranger to success - he has had a tidy crop of new media and telecommunications hits since the 1990s - he is still struggling to bring his newest Internet venture to fruition.

Three years ago, aiming to create a global wireless network, he founded FON, a company based in Madrid that wants to unlock the potential power of the social Internet.

FON's gamble is that Internet users will share a portion of their wireless connection with strangers in exchange for access to wireless hotspots controlled by others.

The swaps, in theory, would allow "Foneros" to have ubiquitous, global wireless access while traveling for business or pleasure.

But despite US$55.2 million in backing from such corporate heavyweights as Google and BT, the former British Telecom, as well as newer enterprises like Skype and a handful of venture capital firms, FON and Varsavsky are still missing a crucial ingredient: scale.

At the moment, there are just 830,000 registered Foneros around the world, and only 340,000 active Wi-Fi hotspots run FON software. Because it's built upon the concept of sharing Wi-Fi access, FON works well only if there are Foneros everywhere.

And as he struggles to expand the FON network, Varsavsky faces particular hurdles now that the Internet's commercial side has reached a crossroads.

Born a few decades ago as an anarchic, digital version of a barn-raising, the wireless Internet is now a battleground between two giant technology consortiums seeking to rein in the Web's chaotic openness in favor of creating uniform, global access built upon wireless data networks.

The two camps, known as WiMax and LTE, for "long-term evolution," are both top-down, highly structured approaches that will cost billions of dollars to build and may close a door on some of the architectural openness that led to the rapid growth of the Internet.

But their potential advantage is that closed standards can encourage the kind of growth that offers more access to mainstream consumers and business users, as occurred when Microsoft imposed a measure of conformity on software development.

For his part, Varsavsky hopes that FON can offer a middle ground ? deploying the original, bottom-up strengths of the early Internet movement and at the same time wedding them to a more formal, corporate approach to expansion.

Although FON faces huge obstacles in realizing those ambitions, the company also has a growing number of devotees.

"The wireless Internet market today is fragmented and complex - it can be accessed through 3G operators, through WiMax, through private hotspots, through paid hotspots and through corporate networks," said Michael Jackson, a partner at Mangrove Capital in London and a former FON board member. "In summary, it is a nightmare for a consumer. FON can and will change this."

But others have their doubts.

"I know that the people at Google like this idea," said John Saw, the chief technology officer at Clearwire, the WiMax start-up of Craig McCaw, which recently announced a US$14.5b joint venture to build a nationwide WiMax network with Sprint, Google, Intel, Comcast and others. "But we're skeptical."

Undeterred, Varsavsky says that what he currently lacks in scale he can make up for in huge cost savings, particularly because FON avoids the expensive proposition of having to build a worldwide network of cellular towers and Wi-Fi nodes from scratch.

"Our army of Foneros is a much more efficient way of distributing a signal," he says. "We believe WiMax operators will be happy to have some customers use their services for free and save billions in infrastructure deployment."

Varsavsky has worked overtime trying to line up more high-profile partners for FON. To that end, he traveled to Cupertino, California, last fall to meet with Steve Jobs, the chief executive of Apple.

During that 90-minute meeting, Varsavsky says, the two men discussed why a partnership might make sense.

Apple has sold millions of its Wi-Fi routers to residential customers, and its community of Wi-Fi users who share router access would be an ideal platform for FON.

For his part, Jobs had developed an interest in Wi-Fi sharing because of the expanding number of iPhone users who are often frustrated by locked Wi-Fi access points.

But, Varsavsky says, from the moment that he and Jobs met, their discussion devolved into an argument. (Jobs did not respond to requests to comment on the meeting.)

At the outset, Varsavsky recalled, Jobs asked sharply, "Who needs your community?" and "Why should British Telecom bother to do a deal with you, and why shouldn't people just leave their routers open for sharing?"

Varsavsky says he responded, "Why should you bother to do a deal with AT&T? Shouldn't iPhones just be connected freely with any cellphone network?"

Varsavsky says he left the meeting with the uncomfortable feeling that Apple might end up as a competitor rather than as a partner. But it wasn't only because of Jobs's legendary stubbornness that the Apple meeting apparently went awry.

Varsavsky's own substantial ego also came into play - something he freely acknowledges when he talks about how he first got into business.

"My father died and my mother was saying, 'Martin, get a job, get a job,' " he recalls. "And I would go to job interviews and they would say, 'How do you see yourself in five years?' And I would say, 'Well, at least as your boss!' "

That attitude surfaced in other forums as well. In high school in Argentina during the 1970s, he says, he persuaded classmates to open their own office supply store to compete with a store across the street from their school.

He also declared his interest in left-leaning politics, which he said attracted the attention of the Argentine military junta that was purging high schools of dissidents. In the "dirty war" of 1976-83, the government killed thousands it suspected of being leftists.

An officer told the school to expel him, Varsavsky says, and he left for Brazil. Around the same time, he believes, his cousin was kidnapped and killed by the military.

The Varsavsky family fled to the United States, and Varsavsky earned his undergraduate degree in economics and philosophy at New York University in 1981.

He later attended Columbia University, where he received graduate degrees in international affairs and business administration.

Varsavsky says start-ups got into his blood during graduate school, when he made his first million in a real estate foray: renovating and reselling lofts in New York.

After moving to Spain in the 1990s, he had three big telecommunications and Internet successes.

He says that a US$200,000 investment he made to start a long-distance company, Viatel, in 1990 was worth about US$240m when he cashed in his stake in 1999; that the 5M euros he used to start Jazztel in 1997 has given him a stake now worth about 150m euros; and that the 38m euros he used to start a Spanish Internet service provider, Ya.com, in 1999 had grown to about 149m euros when he sold the company the next year.

Then, after this first round of success, Varsavsky was hit with a loss that he describes as a striking, gut-wrenching failure.

His German start-up EinsteinNet, founded in 2000 as an effort to sell software over a private fiber optic network, collapsed in 2003, leaving him with a personal loss of US$50m.

"I used the most money of my own in a company where I lost it all, and I consider it my business black eye," he recalls, saying that he also drew a valuable lesson from the misadventure: "I don't invest on my own. If other people don't want to back me, it's a sanity check."

TO that end, Varsavsky has become a tireless networker, traveLling the world to participate in a continuous parade of technology conferences and cultivating a global retinue of friends and contacts.

He has also been active on the philanthropic front, earning kudos from a onetime resident of the White House.

"Martin represents the future of entrepreneurial culture and is helping to transform the way people give," former President Bill Clinton says. "He has found different ways to use his acute business sense and creativity to improve our world and the lives of others."

This month, Varsavsky brought together more than 70 Internet business people and technologists from Europe, Asia, Latin America and the United States for a conclave on his Menorca farm.

Some guests represented the more than 20 digital enterprises in which he has a stake; others were "friends of Martin," a loose-knit group that comprises his informal business network around the world.

The four-day conclave featured several unscripted "tech talks" in which entrepreneurs described problems they faced building their businesses. Participants included Lukasz Wejchert, the chief executive of Onet, Poland's dominant Internet portal.

Deals with companies like Onet will be crucial if Varsavsky is to make good on his goal of having a million FON customers on each of three continents by 2010.

The two companies recently came close to a deal, Wejchert says, but Onet decided that it was still to early for it to become an Internet service provider in Poland because the regulatory environment worked against new entrants.

That major players like Onet are beginning to find FON a potentially profitable partner is promising, and Varsavsky's formidable networking abilities with politicians and entrepreneurs are also a plus.

Ultimately, however, FON's success will hinge on its strategic soundness and operational prowess - not on Varsavsky's skills at working the cocktail circuit.

He likes to refer to FON as a "revolution," but so far his crusade has had difficulty gathering momentum because formal corporate alliances have been slow to jell.

In Varsavsky's approach, FON's business is subsidiSed by non-Foneros - passing Web surfers who buy time for access to the network - which he can then share with FON's customers.

The approach is different from that of Boingo, a Wi-Fi aggregator based in Los Angeles that charges users a monthly fee for using hotspots while they are traveLling.

Yet both FON and Boingo have faced significant resistance from Internet service providers that carefully restrict access to their customers, leaving the idea of a seamless wireless Internet based on Wi-Fi technology an unfulfilled dream so far.

Varsavsky said he initially hoped that selling $30 Wi-Fi routers embedded with FON software would be all he needed to expand the ranks of Foneros around the globe.

But this approach failed to gain traction fast enough, and he shifted gears. Now he is trying to steadily stack up distribution deals with ISP's.

While some ISP's have ignored his company, Varsavsky says FON has gained ground among ISP's that are looking for a way to attract new customers in competitive markets as well as to compete with high-speed wireless cellular networks.

FON now has a growing range of alliances, including ones with the BT Group, Neuf Cegetel in France, Livedoor (a Japanese ISP), and Time Warner in the United States, as well as a recent agreement with the city of Geneva, which is distributing hundreds of FON routers to residents.

Now strongest in Britain, France and Japan, FON has recently made progress with new agreements with two major Japanese retailers and a Taiwanese ISP And Varsavsky said he is close to major agreements in India and Russia.

FON's losses have shrunk from more than a million euros a month to less than 500,000, Varsavsky says. He also hasn't given up his belief that a coming generation of wireless Internet technology will eventually give FON an even bigger boost.

The first generation of Wi-Fi technology was limited in range, making it impractical for Foneros to share their routers widely.

But a new wireless technology, known as 802.16, which should be more widely available to consumers over the next two years, will offer far greater ranges.

This next generation of wireless communication, called WiMax by Intel and others, may allow him to complete his dream - in effect making it possible to weave together a wireless digital network in an urban area with nothing more than an army of Foneros willing to let their routers be used as micro cell towers.

"Why should anyone have to build their own towers?" he asks.

FON's future, he argues, will revolve around universal access to the wireless Internet.
In the meantime, he faces a big obstacle in one of the world's most lucrative communications markets: the US, where newer cellular networks with flat-rate pricing may prove a challenge because they will provide universal high-speed coverage.

In Europe, the Internet landscape looks more promising. The European Commission's decision last summer to place a price cap on voice calls - to make cellphones more affordable for residents traveling within the European Union - didn't include mobile data.

Recent high-speed wireless networks introduced in Europe also use per-megabyte pricing, discouraging the streaming of large files like video.

That leaves a potentially big opportunity for a widely accessible sharing solution for travelers. Yet even in Europe, there are potential roadblocks, not the least of which has been a historically inhospitable atmosphere for entrepreneurial gambits.

"Europe has a larger market than the USA, but it is culturally fragmented and risk-averse," Varsavsky says. "But the differences are narrowing, and now there are European venture capitalists and a local entrepreneurial culture."

Yet he remains undaunted when he discusses his unfinished revolution and FON's prospects.

"FON," he said, "is like a telephone company built by the people," he said.
International Heradl Tribune.

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