11.10.13

The cost of inflight connectivity…

Posted in Aeronautical, Services at 12:29 pm by timfarrar

An interesting debate has ensued about whether the cost of inflight connectivity services will increase if airlines can provide service from gate to gate rather than being restricted to operating above 10,000ft. Obviously on a short flight the extra time might be quite substantial as a proportion of the total flight length, although even if the increased availability is as much as 30%-75% more time (which I think is a little on the high side), the increase in data consumption per user will be far lower, because:

a) longer flights see much greater usage (especially when its paid-for) – the figure quoted by Delta was that take rates for Gogo service were 4 times higher on flights of more than 1500 miles, and

b) laptops consume a lot more data than tablets and phones, and laptops will not be able to be used during take off and landing (because they are too heavy to be safe in the event of an incident).

As a ballpark number, I’d suggest the actual increase in bandwidth consumption per paying passenger might be at most 10%-15% for Row44, given its exposure to Southwest, and much less for Panasonic and Gogo’s Ku-band service, given their different mix of customers. Note that total bandwidth consumption might increase more, because increased availability will stimulate higher take-up, but that’s a good problem to have, because more customers means more revenues as well.

I was quoted in the article offering a cost estimate of “10-20 cents per Mbyte” for traditional Ku-band services (while LiveTV’s Ka-band service will be “single digit cents” – that statement was not referring to GX). I’ve received considerable pushback from one Ku provider that my cost estimate for Ku is far too high and that the number for LiveTV/ViaSat’s Ka-band service is far too low.

I’d note that the retail rate for ViaSat’s consumer broadband service is $5-$7 per Gbyte (i.e. 0.5 to 0.7 cents per Mbyte), so it hardly seems implausible that the number for mobility services (which have a less efficient antenna and bandwidth utilization) would be a few cents. Last time I saw it, LiveTV’s customer pitch said 3 cents.

In terms of Ku-band, I derived my estimate from the cost of Ku-band transponders and the average likely utilization. Row44′s average cost of buying capacity from Hughes is about $2M p.a. for a 36MHz transponder, although that figure might be a bit lower for Panasonic and Gogo when they buy direct from a satellite operator (though there are teleport and backhaul costs to add onto raw transponder lease costs). Then you need to consider the number of bits you get from each Hz of satellite capacity. I assumed around 0.75 bits/Hz for a relatively small aero antenna, though that could go up if you have a very asymmetric usage profile (the aero antenna is far less efficient on the uplink than the downlink) and will certainly improve for High Throughput Satellites which offer a more powerful signal in their small spot beams. Then you look at the peak to average ratio – i.e. how much capacity you need for peak traffic. I assumed usage for around 10 hours per day and 5 days a week, due to the concentration of flights at peak times, the focus on business travelers and the lack of usage on overnight flights, giving a peak to average ratio of 3.36:1 (24/10*7/5). Providers might squash that peak a bit, but only at the cost of increased customer dissatisfaction when their service slows to a crawl (not an infrequent occurrence, implying providers probably do that at the moment).

That means that the underlying cost of capacity, if you had perfectly efficient capacity purchases, is around 6.3 cents. However, to provide global coverage, you need to lease a lot of transponders you don’t use very efficiently, especially at the moment when there are only a few aircraft flying on numerous different long haul routes. At best the efficiency (i.e. usage of purchased capacity) is likely to be no more than 50% today, though perhaps that will get a bit better in the future. So if you’re a provider, you could offer a reasonable service at cost to an airline at around 12.6 cents a Mbyte. And if you actually want to make a profit, then you ought to charge something closer to 20 cents per Mbyte.

Of course that’s not what providers do charge right now: Row44′s service revenues are only about half what it pays for capacity, and I doubt Panasonic’s revenue to capacity cost ratio is much better. So put another way, Row44 is probably getting paid about half of its per Mbyte cost (estimated as 12.6 cents per Mbyte above) or 6 cents per Mbyte, rather than the 20 cents it needs to have a decent business. Does that mean my 10-20 cent estimate is wrong? I think it really means that the current business plan is unsustainable.

3 Comments »

  1. Wandering Aramean said,

    November 11, 2013 at 12:23 pm

    Yes, the take rate is higher on longer flights. But much of that is due to the fact that consumers aren’t willing to pay for the service when they only get 30-40 minutes online. As that time online window grows – a 500 mile flight now potentially has 60-90 minutes rather than 30-45 – it becomes quite a bit more compelling for customers to consider buying. A 1500 mile flight would have ~150 minutes online. With the new rules (and assuming G-t-G WiFi) a 1000 mile flight now has that same online window. More people are going to see value in the buy at that point.

    I certainly don’t see it as a linear increase in data consumption (and I was pretty clear about that in my post, I think) but I do think that consumption will increase notably, both in terms of the take rates and the consumption per passenger as the time online grows per flight.

  2. timfarrar said,

    November 13, 2013 at 9:08 am

    I agree that there will start to be more use in the 1000-1500 mile flight category as more people see the value. But if 33% of devices accessing the Gogo network are laptops (http://blog.apex.aero/ife/infographic-apple-devices-reign-supreme-clouds/) then very likely >50% of usage is from laptops, which will be largely unaffected. That might be a bit less on Row44 (because of more leisure travelers and shorter flights on Southwest).

    If you get a bunch more paying customers then that’s a good thing. If existing customers use more data and pay the same or you offer service for free and get a higher take rate then that’s a bad thing, unless there really is a worthwhile boost to customer satisfaction, or a competitive differentiator for the airline with satellite connectivity vs competitors using ATG.

  3. Airlines eyeing whether complementary inflight Wi-Fi is feasible | Runway GirlRunway Girl said,

    May 2, 2014 at 7:47 am

    [...] does not provide pricing details, which leaves the market open to speculation. Industry analyst Tim Farrar, for instance, has suggested that Panasonic’s costs are somewhere in the 12 cents/megab…. And speaking about Bruner’s most recent claims Farrar was somewhat skeptical. He believes that [...]

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