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June 28, 2006

Price – The Great FON Experiment

FON is a commercial/cooperative worldwide WiFi access network. Huh? Actually it’s an interesting idea and a great laboratory for pricing models.

Linus_alien_bill

Foneros are members who’ve agreed to share their Internet access through their WiFi routers.  If you’re a Fonero, you can be a Linus and allow other Linuses to use your access free in return for free use of all FON hotspots.  Or you can be a Bill and charge nonLinuses for use of your access. Currently the rate is 3 Euro/day.  The Bill keeps half and FON keeps the rest.

(For my readers who are not up on blogosphere ingroup jokes: “Linus” refers to Linus Torvalds who started development of Linux, the open source operating system; “Bill” is Bill Gates who charges for his operating system – and puts the resulting profits to good use.)

You become a Linus or a Bill by installing special sharing software on your existing Linksys (subsidiary of Cisco) WiFi router.  To encourage growth of the network, FON is offering special Linksys routers – they call them “social routers” - with sharing software preinstalled for $5 in the US and 5 Euro in Europe (not available elsewhere).  Shipping and VAT are extra ($8 to US).  There is a penalty if you don’t add your new router to the network to discourage freeloaders from taking advantage of the subsidized router offer.

Aliens are members like me who are not sharing a router.  We aliens always have to pay the 3 Euro/day fee for access to hotspots.  If we sign on to a Linus hotspot, FON gets all of our fee.  If we sign on to a Bill hotspot, the Bill gets half.  So FON itself has a real business model although one that has yet to be proven.

I am going to become a Linus as soon as my social router arrives.  Then other Linuses can share my Internet access free and I can log on free at any FON hotspot, even those that belong to Bills.

Here’s where the pricing gets interesting.  Remember, I can choose to be either a Bill or a Linus.  In my case the choice is easy.  My location is isolated and few people will use my connection.  But I travel so free access to other connections is valuable to me.  If I lived in a more urban setting, I might have decided to be a Bill and see if my revenue offset the roaming charges which I would have to pay as a non-sharer.  If you don’t ever travel with a WiFi equipped PC or other device, you clearly want to be a Bill.

Originally FON only offered the Linus model.  Don’t know if the Bill model was always planned.  But making both choices available and allowing Aliens with no routers at all to access the network may help this network get to critical mass.  I am member #63277 so clearly there’s a long way to go before the network reaches the density it needs to be useful in most of the world.  On the other hand, Skype is one of the investors in FON and they do know something about growing networks to critical mass.

FON is a great illustration of why free is sometimes the right price.  It makes more sense for me to make my access free than to charge explicitly for it.  I do get value in return – free roaming – so I’m not being charitable in doing this.  I’m just making a business decision that cooperative behavior is better for this transaction than explicit charging.  Perhaps I’m a network freeloader since almost no one will ever get to use the access I’m sharing.  On the other hand, access of any kind is hardest to get where I’m providing it so I do fill a network hole.

Note: FON will ignite a huge debate about Internet access if it is successful.  Ed Whitacre of at&t will almost certainly say that the access his customers are sharing is actually “his” access.  The terms of service for many ISPs explicitly prohibit resale – not sure what this means to the Linus model but pretty clear for the Bill model.  FON itself reaches out to ISPs and is trying to negotiate deals in which the access revenue is shared with them.  FON also points out to ISPs that roaming adds vale for their subscribers at no cost to the ISP.  However, no deal with ISPs have been announced in the US yet.

The previous post in this series on price is about the cost of complexity.

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