Tuesday, February 07, 2006
Fon gets a round from Index, Google, etc.
Let's do a bit of deal deconstruction.
What's Index's bet? It's essentially the same as Skype - that the current economics of bandwidth are inefficient, and sharing is a way to arbitrage this inefficiency.
To make this concrete, consider a world where bandwidth is perfectly allocated - everyone gets exactly as much as they need, no more, no less. In that case, P2P can't work. Economically, P2P is a way to make the inefficiency of the bandwidth business model productive - by allocating unused resources to those who can use them more productively.
And when done right, we've all seen how much new value you can create from allocating all these tiny pockets of inefficiency - huge amounts.
Now, I have my doubts about Fon's solution - if you follow the above argument, you see that, economically, Skype is the same model, just done over software. I think there are many reasons why a software-based solution is more powerful. For starters, it's not bound nearly so much by location - the network is much more robust. I'm not sure if the market will go for a hardware based solution, which is more brittle, constrained, and more location-sensitive. There are many more criticisms I can make - here's a nice summary.
But would I still make the bet if I was Index? Absolutely - for the simple reason that (as I keep pointing out) there's a dearth of good ideas at the moment. The opportunity cost of this capital is very low.
What's Google's angle? Simple - Google will make pretty much any bet it can right now to try and commoditize bandwidth (aka vaporize the market power of telcos).
This is one such bet - Fon, if succesful, pretty obviously shifts market power to consumers at the edge, decays the core, essentially by rebalancing the value equation - making bandwidth/dollar more efficient.
"What's Google's angle? Simple - Google will make pretty much any bet it can right now to try and commoditize bandwidth (aka vaporize the market power of telcos)."
I might argue that bandwidth is already commoditized. So what�s in it for Google? They have an edge presence that cannot be turned off. I can shut down Google toolbars, I can turn off Google desktop, and any other Google desktop/web based service. I cannot or will not turn off my wireless router.
Hardware on the edge wins over software on the edge. If it takes off Google can now display ads in every web site FON users visit without sharing one penny with the publishers (I believe they pay out around 70%?) or the ISP, via a simple proxy in the router. This is Google�s $100.00 computer everyone is talking about. I don�t think FON will take off. I know I will not go for it but it�s worth a shot for Google. Free wireless access, free router/firewall/voip/etc.. for the cost of seeing ads? Hmm any takers.