A new app called Onavo claims to be able to shrink your iPhone 3GS or iPhone 4’s data consumption. The app works by compressing the data usage from other apps, web browsing sessions and even email; which allows users to double or even triple the usage of their existing data plans. The app works while at home and abroad according to Guy Rosen, one of the app’s co-founders.

“Mobile data doesn’t come for free,” said Rosen, co-founder and chief executive, Onavo. “At home and abroad iPhone users must put up with capped or metered data plans. Travellers are hit the hardest, with data roaming costs effectively turning most smartphones into dumb phones. Onavo gives you the confidence to use your iPhone without being held back by data costs. It’s a no brainer – it simply saves you money. We believe Onavo will become a must-have travel and utility app for any iPhone user.”

Once installed, the app connects your iPhone to a cloud-based technology which Onavo has dubbed, “The Magical Shrinking Machine”. Once setup, the app works in the background on your iPhone 3GS or iPhone 4 and compresses the data that you actually download to your device. The app also provides a detailed monthly data report allowing users to see which apps are consuming the most data.

The free app will only work with downloaded data at this stage and does not support streaming services such as YouTube  or VoIP; but it is working on that. The app has already won the Best Mobile Start-Up and the People Choice awards at The NextWeb Startup Rally 2011.

BlackBerry makers RIM have long touted the data compression technology of their NOC-based system as a competitive advantage when users have capped plans, and browsers like Opera Mini have likewise used proxy, cache, and compression technology as a way to market themselves to the data starved.

According to Onavo, they're accomplishing this without violating any Apple private-API or background rules.

After installing Onavo you are prompted to install a configuration profile which allows the data to be redirected through Onavo's servers (hosted on Amazon EC2, currently in the United States - more locations to come). Once the data is streamed through our servers we are able show you insights into your data usage, and (if you choose to), compress the data, thus sending much less data back to the operator, causing the user to pay less for his or her data usage.

There are also configuration tips, see the Onavo link below. Would you consider using an app like this? Are privacy concerns an issue when your internet traffic is delivered via a third party server? Let us know what you think in the comments!

[Free - iTunes link, via The Telegraph,  Onavo]

Update: Here's a statement from Onavo on how they work:

Who is Onavo? Onavo is a VC-backed startup, aimed at helping users take back control of their phone's data usage, understanding what's costing them and helping to reign in these costs. Onavo is currently available for iPhone 3GS, iPhone 4, iPad 1 3G, and iPad 2 3G. A list of supported devices & operators is available on our forum. At the moment, we do not support Verizon.

How does the app work? After downloading Onavo from the App Store, you are prompted to install a configuration profile (proxy) which allows the data to be redirected through Onavo's servers (hosted on Amazon EC2, currently in the United States - more locations to come). Once the data is streamed through our servers we are able show you insights into your data usage, and (if you choose to), compress the data, thus sending much less data to the operator, resulting in a lower data consumption from the user, and lower costs of course. One of the compression techniques we're using across all apps (among other things) is decreasing image quality, which can be controlled by the user.

Privacy and security We take our user's privacy very seriously so we store only the bare minimum necessary to support the service. Onavo acts similarly to any router/operator on the internet which your data passes through. Only metadata (types of applications, etc...) of the traffic, aggregated and anonymized, is stored for two purposes:

-Showing the user his/her data usage and savings statistics - Generating aggregated data in order to improve the service

Onavo currently supports downloaded HTTP traffic, meaning no encrypted, sensitive information (SSL) is passed through our servers, nor VoIP/Video services such as YouTube/Hulu or Skype. One exception is Exchange Mail traffic, which requires the user's explicit approval.

To avoid any doubt, Onavo does not store any content of the data. A user can always request to delete all of his/her data from our servers.

Business model Onavo is free for a time-limited offer, following our launch on April 29th. In the future, the app will come at a cost. As Onavo helps users save money we are confident that it will be justified to ask for a small fee in exchange for use of the service (that will be low enough that you still save overall). We will not sell the data or introduce ads to Onavo.