Telcotrash

FON Economics and thoughts on strategy

The German news magazin "Der Spiegel" has published an interview with Martin Varsavsky (blog), founder and CEO of FON, the company that calls itself the world's largest WiFi community. FON sells WLAN routers for a mere 5 Euro; in exchange for this heavily subsidized offer, FON users ("Foneros") have to make their WiFi network accessible for free to other Foneros. As I write these lines, there are 83,469 Foneros signed up.

FON is backed with some $22 Mio. in venture funding by Google, Skype, Sequoia Capital and Index Ventures. WiFi wizard Glenn Fleishman had some doubts on FON's business model back in February 2006 when the funding was announced.

Here are the main take-aways from the interview:

• FON's only revenue source for now are the so-called "Aliens": These are folks who do not offer a FON hotspot, but who purchase a pass to go online through the FON network. Passes are available for 3 Euro/24 hours or in a bundle of five such day-passes for 10 Euro.
• As of September 2006, FON has signed up some 5000 Aliens.
• FON is spending 500,000 Euro per month more than they generate in revenues.
• Break-even is assumed to occur at 500,000 FON hotspots, based on 1 Euro monthly revenue per hotspot.
• Varsavky predicts that the FON network will reach the 500,000 hotspot-mark by the end of 2007.
• FON plans to bring a Skype/FON phone to the market in November 2006. The phone automatically connects with any FON hotspot. The price for the phone will be around 150 Euro.
• For December 2007, the "FON Liberator" is planned, which principally is a router with a USB interface and sufficient internal memory to store music and videos.

So at their current cash burn rate, FON probably has money for some three years. That would give a comfortable cushion of one and a half years compared to December 2007 when break-even is planned.

In the meantime, Varsavsky can hope to benefit from the momentum of a generally growing market for WiFi equipment and services (via Andy), which could have to effects: prices for equipment might further be driven down, so the cost of subsidizing the routers would decrease, but more importantly the number of people who are familiar with the use of WiFi will grow significantly, a fundamental success factor in FON's business model. As it can be seen from the subscriber figures, only the very early innovators are using FON right now.

One logical step to take would be to target the Skype user base. With Skype online users fluctuating somewhere between 4-6 Mio., the 500,000 mark could be reached with a 10% penetration of these users.

To reach a broader audience, another possible channel would be to sell the router and the Skype/Fon device over Ebay. Package it with discounted Skype-Out minutes, feature it on ebay.com with an ad, have Ebay offer free shipping and purchase the right AdWords on Google (no such thing as of now...) to get even more eye-balls. The only cash expense would be the free shipping, everything else should come for free, as Skype (and hence I would assume Ebay) and Google are among FON's backers.

Skype and Warner Sign Ringtone Deal

The online edition of the Wall Street Journal (requires subscription) this morning reports that Skype and Warner are expected to announce a licensing agreement that will allow Skype to sell ringtones of songs from artists who are under contract with Warner. Warner is the world's fourth largest music company by revenue. Skype is expected to sell the ringtones at $1.50 each, and initially Madonna will be promoted as a "featured artist". I guess Madonna's latest song "Hung Up" inspired them.

Product review: uConnect VoIP box

Andy recently reported on VoIP memory sticks. Here is another one, the Firebox uConnect VoIP box, reviewed by Pocket-lint. And how else could it be, they used Skype with the stick....

Skype/Ebay integration pilot

I haven't seen this anywhere else, but nobody seems to have picked up on the comment left by D&G on one of Jeff's post on the Ebay/Skype deal. Dutch Ebay offspring marktplaats.nl integrated Skype into its website shortly after the deal. It's pretty much only about explaining how Skype works and how a seller can use Skype to get in touch with potential buyers, but maybe we will see more pilots on this site as Ebay uses Skype to take friction out of its business.

Some screenshots...

Ebay/Skype discussion on investor discussion boards

The Ebay/Skype deal is being vividly discussed on Motley Fool's Ebay discussion board, and there is some really good analysis going on there. Check this link, you might have to register before being able to read it. The thread is called "Ebay paid way too much for Skype.." and was started on September 21.

One thing that is discussed there are the network effects (Metcalfe's Law...) that potentially favour Ebay and Skype in their business models. In that context,  Andrew Odlyzko's paper on network effects is a must read for the academically interested reader (pdf).

Ebay to acquire Skype?

The online version of the German news-magazine "Der Spiegel" has a story on Ebay being in negotiations with Skype for a potential acquisition. The original scoop comes from The Wall Street Journal, and in fact there is a headline on the Journal's website (link - requires subscription):

"Ebay is in talks to acquire Internet-telephony company Skype for $2 billion to $3 billion, in a deal that would represent a dramatic shift in strategy for the world's largest online auction site."

Addendum:

I guess work kept me from reading between the lines: James had already blogged this. And of course, Andy as well.

OECD Communications Outlook 2005 - Skype Data

As mentioned in my previous post, the OECD Communications Outlook is fresh out, and Skype got some particular attention - I took a screenshot of the two boxes which are dedicated to Skype, you can find them on pages 130 and 131 of the report. The stats will probably be nothing new to folks who regularly follow James' Eurotelcoblog (e.g. here) and Skype Journal (e.g. here) or the facts & figures page of skype.com itself. Just figured it would help those who were curious. Don't know where else Skype got mentioned, as I haven't yet read the whole report (327 pages...)

Intel and Skype

Skype Journal cites a Silicon.com story on Intel and Skype cooperating. Now that would be a boost for Skype, with Intel backing it. It seems that it's only a cooperation on research and development level without any funding by Intel or Intel Capital for Skype.

Quality measurement for Skype - a next step for tapping into wireless?

This one really got me excited this morning: Argogroup adds Skype quality of service testing and monitoring to its offering. Argogroup is a start-up company that produces software for mobile operators and handset manufacturers to test and measure quality of service.

QoS is a very important feature for mobile operators (equally true for network, applications and handsets), as it is a) one criteria for large corporate customers and governmental organizations when giving away their mobile communications budget (consider that governmental organizations sometimes assign a weight of up to 20% to commited QoS in their RFQs) and b) one key driver for customer care operations: the worse your QoS gets, the more complains call centers receive, with all the follow-up trouble in an operator's internal organization: resources get tied-up, and in a worst case with consistently below-average QoS, customer care operations have to be scaled up, while your customers will still churn away over the long term (positive example: T-Mobile in the US).

One main setback of Skype is that it's "only" near QoS - some people argue that that is more than sufficient, especially with respect to the fact that it comes along for free. For a mobile operator however, it's deadly. People e.g. get pissed off when it takes the network more than 4 seconds to set up a mobile call. To monitor such KPIs, operators need to extract the respective information from their networks and prepare the according reports (SAS is one big player in that business). Such systems are commonly known as OSS - operating support systems. And that's exactly where Argogroup is getting into the game: Built upon the Skype API, Argogroup has incorporated Skype interfaces into one of its products, called Monitor Master, allowing

"handset manufacturers and mobile operators to test Skype services including both voice calling and instant messaging (IM)."

So in principle this is a big step forward to eventually see Skype as part of a mobile operator's service portfolio (given that Argogroup's software works, that is), and not just an application that is running on a smartphone which also happens to have a SIM card. It would require the operator to integrate Skype into its systems and business processes - something that most of us might agree is still in the far future. In theory though it would be one building block to enable a mobile operator to capitalize on any revenue sources arising from Skype.

However, Argogroup is backed by Apax Partners and 3i - and while 3i is only in the fixed business with its investment in Vonage, Apax acquired Greek operator TIM Hellas in April 2005 from Telecom Italia Mobile, so Apax is paying the music and can hence tell the folks in Greece what music to play. Apax partnered with Texas Pacific Group to acquire TIM Hellas, and TPG also owns a 27,3% stake in German mobile service provider Mobilcom (bought from France Télécom), and they certainly would also be interested in some services that could drive user up-take and revenues. So I wonder if the private equity funds will play safe and just turn theses businesses into lean but dumb cash machines (deals like Telfort in the Netherlands might be too tempting), or if they are ready to do something more adventurous (read: sink your current business model).

Skype Goes Mainstream

Sooner or later it had to happen: Skype as the topic of a major consultancy's publication (pure egoistic self-promotion: I believe to have been there first, admittingly though not in our inhouse publication). Booz Allen Hamilton's "strategy + business" is writing about Skype's Challenge (pdf). James is mentioned in the article (and funnily enough also myself in an indirect way), and his blog was actually my source.

The article doesn't really say anything new, but it has its point: Only two months ago, I talked to a rather highly-ranked manager of a major European mobile phone operator, and at that time he hadn't heard about Skype, and neither did any of his subordinates. While this is anectodal evidence, I am pretty sure that also many of his peers at other operators don't know what is going to hit them soon. So Skype might actually be going mainstream very soon if the consultants start using it as their burning platform. T-Mobile has already dropped its walled garden approach and is setting its preset home page for its phones to Google, so who knows what's next for Skype - a partnership deal with one of the major CellCos?

By the way, the manager is now enthusiastically using Skype himself and promoting it among his friends.

UPDATE: James has more details on the T-Mobile announcement, he explicitly asked T-Mobile CEO René Obermann about the impact of mobile VoIP.