Last week we heard the announcement that the new startup BoxTop would be starting a free broadband service called “FreeBand” without any government subsidies or handouts like free exclusive use of spectrum.  With sky high deficits and a bad mood against ever increasing entitlements, FreeBand sounded just like what the economists and spending watch dogs ordered.  But free broadband sounded almost a little too good to be true so I took the opportunity to have a long discussion with the company yesterday.  What I found was that my initial optimism seemed to be justified and there really might be something to this plan.

The basic idea of FreeBand is that there are certain categories of the population that simply can’t or won’t buy a computer or pay for broadband service.  From upfront and monthly cost to the complexity of computers and having to hook up modems and routers and worrying about viruses and security, the unconnected population have a laundry list of reasons why they don’t have a computer and broadband in the home.  The initial barrier to entry is simply too high to swallow for a third of the homes in the country.  That number is slowing shrinking every year but the rate of broadband growth is slowing as it becomes saturated.

The challenge for broadband providers and content/application providers is how to reach that final frontier of the unconnected.  While they would probably prefer if those 1/3 of homes will simply bite the bullet and just buy a computer and broadband connection, they understand that it isn’t so simple and that it could be a long time before they reach the last 10% or 20% of the homes in the nation.  So here comes BoxTop with their “toll free” sender pay model where the end user pays a negligible (possibly close to free) amount up front with no monthly service and all of a sudden those there’s a real possibility for quickly reaching the currently unconnected.

The challenges

But there are challenges for this model to be adopted by carriers and content/application providers.  Carriers will likely have concerns that they are potentially giving up future customers or worse, cannibalize existing paying subscribers.  Content and application providers will wonder why they should not only pay for bandwidth on their server end, but also on the client end which is more expensive bandwidth since it goes over the costly last mile rather than a simple consolidated server connection.

Now if the carriers and the providers were living in total isolation with no competition, perhaps the logical choice would be to sit still and wait for the unconnected to eventually come online.  But they don’t sit in isolation and they have competition.  The content providers will be chomping at the bit to get valuable “app” space on the main landing page of the BoxTop device on their HDTV in the living room.  And since the device will have a wired or wireless modem, we’ll see competition between DSL, Cable, Fiber, and the four wireless carriers.  Furthermore, BoxTop indicated to me that they’ve also had conversation with some of the virtual ISPs that operate over the incumbent DSL lines.  So while this might not be the type of arms race everyone is eager to get in, it looks like they’ll have no choice but to play because the race has already begun.

Revenue potential

For the content and application providers, they’ll be able to reach an audience that has never had the Internet before that will potentially be large.  All the major players will want to have some major presence on the main “app” page of the HDTV.  Depending on the level of traffic, one might conceive that these premium slot positions might pay a few dimes a month to the carrier and BoxTop (I’ll leave it to them to figure out how they split the revenue).  If there are 100 apps that reach 10o providers that pay an average of 30 cents per month, that’s $30 per month which easily covers the cost of a broadband connection.  There might be smaller sites will lesser visibility and lower usage levels that might pay a penny a month to the carrier but if there are 1000 of those small sites, that’s another $10/month.  If the service gets popular, the carrier might even come out ahead than if they had merely sold a baseline DSL package for $20/month.

Reaching new customers for a few pennies is easily worth it when one considers the fact that each eyeball is worth at least $1/month to advertisers.  And when those customers can’t just go somewhere else because they’re on a device with limited Internet access, those customers are even more valuable.  As for video or music content providers, a walled garden like this doesn’t have the potential for rampant piracy.  Paying the “shipping” cost for the bits to reach the customer is easily justified if the content is subscription fee based like Netflix or Hulu Plus.

And of course, the skin flick providers will likely be all over this since they’re usually the first to adopt new platforms and technology not to mention the fact that piracy is killing them.  [UPDATE - BoxTop has told me that they're trying to keep the device family safe so they're not considering adult content]

The hardware

The final hardware hasn’t been completed but I saw plenty of prototypes running Android OS doing things like streaming YouTube.  The thing that makes the BoxTop device unique is that BoxTop has the connectivity piece which is something lacking in devices like the PlayStation, Xbox, Wii, Roku, Apple TV, etc.  The BoxTop box will either have a wireless modem or a wired modem for cable or DSL or potentially even fiber (though I’m thinking fiber is a bit too high end).  By having the connectivity and hooking it up to the HDTV set, the FreeBand service will be similar to the Kindle 3G reader.

With embedded computers so cheap these days, the box will be sold at a very low or potentially even free price.  It can be free because the applications that are loaded on the main page will have to pay for placement.  If each placement averages $1 and there are 100 “apps”, that $100 can easily pay for the hardware.

The development kit and support

BoxTop’s developer really stressed the point that android development wasn’t easy and that Boxtop would support the application developer and ship them a box with a full kit with everything they need to get started.  I’m not qualified to be a judge of the developer kit, but it looks like BoxTop is serious about getting their platform out to the developers.

Immediate relevance in California

One thing that really stood out to me in yesterday’s meeting was their story about California’s computers for kids program.  California had apparently already bought 250,000 lower income families $300 Netbooks which works out to $75 million dollars.  Worst still is the fact that the school districts will have to pay for their broadband connections at a presumable cost of at least $20/month which would work out to another $65 million per year for just those 250,000 homes.

Now what if state didn’t have to do this and simply told those families to go get one of those nearly free BoxTop devices.  Then the school would only pay the carriers so that the students can connect to the school at pennies per month and not $20/month.  If those families want to visit other sites, those other sites can pay their own bandwidth and not expect California tax payers to pick up the entire bill.

Conclusion

From my perspective as a tax payer suffering from high taxes, I personally wish companies like this success.  If the market can solve the problem in a very efficient manner, then it should definitely be given a chance.

Update – Free Band’s Thomas Sachson posted this article on Telco 2.0.