Wi-Fi at 30,000 Feet

Gogo's Problem: Inflight Wi-Fi Is Expensive, and No One Uses It


Gogo's Problem: Inflight Wi-Fi Is Expensive, and No One Uses It

Photograph by Getty Images

Fasten your seatbelts. The public offering for Gogo (GOGO), the largest U.S. provider of inflight Wi-Fi, is giving investors a chance to prepare for plenty of turbulence (and aviation clichés) as its business faces an array of punishing headwinds. The company raised $187 million selling shares at $17 each on Friday. The price has since fallen about 15 percent.

The immediate problem for Gogo is that most travelers don’t pay for Wi-Fi access when they fly. Only about 6 percent of fliers on Gogo-enabled flights used the service in the first quarter, the company says. So it raised its prices, looking for profit from a smaller base of business travelers who can pass that cost along to their employers. Surfing the Web at 38,000 feet is now a premium product.

Gogo charges $14 for a daily pass, $34 monthly for a specific airline, and $42 for a monthly pass on any airline with its equipment; service sold onboard is higher. Part of the pricing Gogo sets is also designed to help negotiate the tricky issue that current technologies don’t allow 200 people on a plane all to connect wirelessly, due to bandwidth constraints. The company has also been beset by complaints of snail-slow service on its network of 176 cell towers, which handle the data.

“People have an expectation, and it’s grown over the past few years, that Wi-Fi should be free,” says Tim Farrar, president of TMF Associates, a research firm in Menlo Park, Calif. The ability to log in at the airport for free in many cities also diminishes Gogo’s attractiveness.

The price increase did have the intended effect for Gogo, raising 2012 revenue to $233.5 million from $160.2 million in 2011. Still, the company has never had a profitable quarter; its average revenue per user was $9.74 last year. Gogo shelved an earlier IPO in late 2011, turning to private sources to borrow more than $200 million. Moreover, Gogo faces increasing capital expenditures as it expands to international, satellite-based service, starting with a 170-jet international fleet at Delta Air Lines (DAL). The company also plans to put its Gogo Vision video service on 1,550 planes by year’s end.

Amid all the financial doom and gloom, Gogo is quick to extol the infancy of inflight Web connectivity and its room to grow. Fewer than a third of the commercial planes in North America are connected–and only 12 percent globally, according to the company, which is based in suburban Chicago. And given the corporate credo to work more, more, more, it’s reasonable to expect that road warriors who don’t crack their laptop when flying will, over time, feel more pressure to do so.

“To some degree, there’s an insatiable demand among people for connectivity, and particularly the business traveler who wants to get some work done while they’re flying, and do their e-mails,” Gogo Chief Executive Michael Small said in an interview on Bloomberg Television.

Still, even if federal regulators relax the current ban on using such devices as tablets, e-book readers, and portable video consoles, it’s unlikely that hordes of airline passengers will flock to sign up with Gogo, whose service is optimized for altitudes above 10,000 feet. As the company expressed succinctly in its stock registration: “Our future success depends upon growing demand for in-flight broadband internet access services, which is inherently uncertain.”

Bachman is an associate editor for Businessweek.com.

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Companies Mentioned

  • GOGO
    (Gogo Inc)
    • $16.53 USD
    • 0.05
    • 0.3%
  • DAL
    (Delta Air Lines Inc)
    • $48.39 USD
    • 0.34
    • 0.7%
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