British-Telecom

Telecom Incest: The Fon-BT Deal Sounds Screwy

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picture-181.pngOn closer inspection, today’s deal between Fon and British Telecom sounds like it could be a costly one for Fon and its investors. GigaOm is suggesting that Fon may have agreed to pay $8 to $10 to BT for every one of its broadband customers who agrees to sign up and activate the Fon service. If that’s true, with three million broadband subs at BT, that represents a potential liability of as much as $30 million. (Update: Just got off the phone with Fon USA CEO Joanna Rees, who says she has been closely involved with the BT deal. She categorically denies that Fon is paying BT for subscribers: “I have never heard that,” she says).

Buying customers is never a good thing if you can avoid it. Fon might need to do another round of fund-raising to pay for this deal. The $35 million it’s raised so far from Google, Skype, Index Ventures, and Sequoia, among others, might not be enough, especially if it cuts more sweetheart deals with other telcos around the world.

But here’s the really screwy part: BT is also now an investor in Fon, according to founder Martin Varsavky. So at the same time that it is presumably putting money into Fon with one hand, BT is about to potentially extract millions of dollars out of Fon with the other. I say presumably because it is possible that BT did not even put any cash into Fon for its stake in the first place (terms were not disclosed). Often in these deals, as the price of admission, the telco demands not only cash from the startup but an equity stake as well. In the telecom world, some things are never free. (Update: Rees says BT did invest cash. So maybe the deal isn’t so screwy, after all.)

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