I have noticeably ridiculed Fon since its hapless announcement and subsequent hype fest two months ago (Reuters, Associated Press, New York Times, Wall Street Journal, Fortune): Today, news broke that instead of a bottom-up, grassroots-driven effort to spread Wi-Fi access through individuals installing Fon's firmware on commodity gateways, this group is aiming to become a multi-hundred-million-dollar company. That's more like it.

Google, Skype, Sequoia Capital, and Index Ventures have put in nearly $22 million to spread Fon's idea, which I suspect will involve Fon installing seed nodes through the world. Fon's model, partly implemented, involves three categories of users: free operators, for-fee operators, and non-operators. The free operators, or Linuses, provide no-cost access to other Linuses; for-fee operators, or Bills, charge everyone and receive no free access; non-operators or Aliens pay for service at all locations.

Part of why I'd ridiculed Fon was because it seemed to rely on an idea already discarded in the Wi-Fi hotspot world that by providing the right software and incentives, tens of thousands of people would install hotspots, building a worthwhile network. But this is problematic because hardware and physical locality are tough sells.

Skype is useful when even two people have Skype in the entire world. Those two people, if geographically distant, save money using it and have better quality calls. With a few thousand people on Skype, it becomes viral because its value is much higher the more connections among people. A few million, and you have a multi-billion-dollar acquisition by eBay.

Fon is harder because home gateways of the type they are providing software for initially--some Linksys models with Linux embedded operating system software--can't produce much of a signal. Home users can provide service to relatively few other home users via these gateways. There's only utility in the Fon network if you're charging for service and a lot of people use a hotspot, or if you're not charging for it and a lot of Fon locations exist in the places you travel to (around town or the world) for you to also use for free.

The investment capital they've raised signals that while their network might be extended on a peer-to-peer basis, they'll be putting their money into seeding the network by putting nodes in well-trafficked areas, probably in the thousands.

They have a real ISP problem, discussed extensively in the AP and Reuters story on Fon's incoming capital, because (as the AP reporter quotes me saying) it's trivial for ISPs to track Fon operators if the ISP bans sharing an Internet connection. Fon has central authentication so even with encryption, the destination of Fon messages will be known. (Of course, if Fon uses a peer-to-peer model like Skype, they could tunnel authentication through peers making this impossible, but that's not a reliable way to run a login system.) Speakeasy and Sweden's Glocalnet have signed up, Reuters reports; Speakeasy is the only national ISP I am aware of in the U.S. that encourages sharing their connections. (Update: Speakeasy says there's no deal.)

Om Malik points out that Skype has concerns about being blocked by ISPs, so an alternate network of sorts--ISPs are still in the middle of this--benefits them, while Google is sorting out Wi-Fi business models. I argue strongly that Google will not become a Wi-Fi provider beyond San Francisco and Mountain View (at least not on any large scale) because their interest is high-margin businesses like advertising not low-margin ones like service provision.

Fon can only succeed with critical mass being achieved quickly enough to encourage the grass-roots uptake they need and with ISPs not banning them as critical mass grows. (Fon's founder said they'll subsidize the gateways so people can buy versions with Fon software installed--flashed over existing firmware--for $25, instead of $50 to $70 retail.)

And shouldn't municipal-scale networks with limited free access kind of distort the Fon model? Why use Fon when you can get 300 Kbps for fee (Google's bid for San Francisco) or two hours a day for free (many other cities)? If Google is as successful in building a business model for ISPs to run municipal wireless networks, advertising-supported service--such as what MetroFi now offers in three Bay Area cities--seems to wipe the floor with Fon.

Lest Fon be seen as entirely new and unique exclusive of the three firms mentioned before that tried this model using cheap computers and software instead of commodity gateways and firmware--Joltage, SOHONetworks, and Sputnik--remember that LessNetworks and Radiuz have been offering community authentication for a while. LessNetworks has been kicking around for a couple of years, a for-profit outgrowth of the Austin Wireless City Project that offers a gateway page, community features, and user accounts for free access for a small management fee; they donate their services to nonprofits and others, too. Radiuz is free WPA Enterprise authentication, which combines secure logins and unique WPA encryption keys with RADIUS features found in virtually all consumer and enterprise gateways. Radiuz started up a year ago.

Update: I must be naive, but thought of this as a relatively small story. I am now seeing separate accounts in practically every major newspaper and publication in the world--I suppose Skype (eBay) and Google will do that to a company. Read what Doc Searls has to say about it, and also David Weinberger, who is part of Fon's US advisory council.

Update: Fortune's article mentions that the Fon founder brought on board to that US advisory council a whole array of digerati and A-List technology bloggers.