02.16.16

Mayday, mayday…

Posted in Aeronautical, Financials, Services at 12:18 pm by timfarrar

As I predicted back in January, American Airlines has now selected ViaSat over Gogo to equip its next batch of 200 new 737 aircraft. However, Gogo rejected American’s notification that “ViaSat offers an in-flight connectivity system that materially improves on Gogo’s air-to-ground system” which led American to file a petition for declaratory judgment to enforce its rights under the contract with Gogo.

The clause in dispute is 13.5.2 which reads as follows (with certain confidential information redacted):

With respect to each of the Fleet Types, if at any time after the [***] of the Trigger Date for such Fleet Type (A) an in-flight connectivity services provider other than Aircell offers a connectivity service (B) that provides a material improvement in connectivity functionality [***] (C) such that American reasonably believes that failing to offer such service to passengers on such Fleet Type would likely cause competitive harm to American by [***], (D) such competitive system is installed and in commercial operation on [***], and (E) American has completed sourcing processes with respect to the competitive offering sufficiently rigorous such that American can validate the technology, functionality and feasibility of the competitive offering and provide objective system performance and functionality criteria to Aircell for its use in determining whether it wishes to submit a proposal as contemplated below, then American may provide written notice thereof (including such criteria) to Aircell. In such event, Aircell will have the opportunity to submit a proposal to provide such service to American, which proposal will include, without limitation, proposed terms regarding pricing, system functionality and implementation dates, within [***] after receipt of such notice, and if Aircell timely submits such proposal then American will in good faith consider such proposal. If American reasonably determines that Aircell’s proposal is at least as favorable as the competitor’s offering, this Agreement will be amended to incorporate such additional or replacement offering or functionality and the agreed upon terms. If Aircell declines or fails to submit a proposal to American within such [***], or if American reasonably determines that Aircell’s proposal is not as favorable as the competitor’s offering, then American may elect to termination this Agreement with respect to such Fleet Type. Such election must be made by providing at least [***] advance notice thereof to Gogo, and in such event this Agreement will terminate as and to the extent and otherwise in accordance with American’s termination notice. Notwithstanding anything to the contrary contained herein, American shall not be required to provide to Aircell any information that American may not disclose pursuant to confidentiality obligations to any third party.

It seems that Gogo could only have based its rejection of American’s notice on an assertion that either ViaSat’s service is not a “material improvement” (over basic ATG!) or that it is not in “commercial operation” but neither rationale appears likely to hold up in court. Moreover, the competition to equip American’s next gen 737 fleet has been going on for the last six months or more and Gogo has already offered 2Ku to American in this competition. In fact, according to Runway Girl Network, American told Gogo some time ago to stop working on the STCs needed to install 2Ku on American’s new planes.

UPDATE (2/18): According to Runway Girl Network (although not specified in Gogo’s public filings), the suit “covers approximately 200 of the carrier’s 737 aircraft known as the ‘pre-Apollo’ fleet”, which are older aircraft (delivered before 2009) “flying with ATG today and no in-seat IFE screens.” A key difference between these older aircraft and American’s decision to desire to use ViaSat on future deliveries, is that Clause 13.5.2 references a different “Trigger Date” for each “Fleet Type” and so it seems likely that the time period, after which a termination notice can be issued for the new aircraft deliveries, has not yet expired, and American may therefore not have the right to terminate the Agreement in respect of its new aircraft fleet at this point in time. Conversely, American certainly has the right to terminate the older aircraft even though for some of them, with limited remaining lifespan, it may not be economic to retrofit with satellite communications.

So I’m forced to conclude that in reality, Gogo is simply trying to delay American’s decision to select ViaSat for future aircraft, probably threatening litigation as it initiated (and lost) against Southwest when it purchased AirTran and switched that fleet of Gogo-equipped aircraft to Global Eagle (Delta ultimately purchased 88 of the 128 aircraft which remained on Gogo). And in response, American seems to have decided that it would go nuclear by issuing a termination notice on older aircraft, and a public lawsuit, in order to force Gogo’s hand. However, Gogo made a further filing on Tuesday Feb 17, stating that it had rescinded its prior letter which had questioned American’s termination notice (on the grounds of “system performance and functionality of the competitive technology”), and claimed that as a result American’s suit was now “moot,” presumably in an effort to limit the public airing of the two companies’ disagreements.

After all, if American did not exercise its rights under Clause 13.5.2 of the agreement, it appears that it would have to use Clause 13.5.1, which contemplates a payment to Gogo apparently equal to at least a year’s revenue per plane:

American will have the right to terminate this Agreement at any time on or after the [***] of the Trigger Date for the last retrofitted Fleet Type, by giving [***] written notice and paying Aircell an amount equal to the amount obtained by multiplying (A) [***] by (B) Aircell’s [***] from Connectivity Revenues earned by Aircell in the year ending on the applicable anniversary of the Trigger Date.

Gogo has declared that it now plans “to submit a competing proposal to install our latest satellite technology – 2Ku – on this fleet”. However, given that American has already considered 2Ku with regard to “system functionality and implementation dates” for its newer aircraft, Gogo’s only option to improve its offer would be to reduce the pricing significantly. As I’ve noted in conference presentations, ViaSat is providing significantly better service, to 4-5 times more passengers, with a revenue per boarded passenger of around $0.50, compared to the $0.80 that Gogo currently generates from its ATG network. In other words, ViaSat’s revenue per Mbyte is something like a factor of 10 lower than Gogo generates at present (and remember Gogo has told investors that the cost of capacity for 2Ku is similar to ATG-4, albeit with future reductions expected as Ku HTS satellite capacity becomes cheaper).

It therefore seems that Gogo will lose either way: it either loses American’s old and/or new aircraft, setting the scene for a complete termination of the existing contract if ViaSat proves to offer a significantly superior service, or it wins the deal by offering dramatically lower pricing, which will reduce its revenue per boarded passenger and increase its capacity costs on these new aircraft, and would presumably provide a benchmark for a renegotiation of the deal covering the rest of the American fleet. That would be a far different trajectory from the increases to as much as $4-$5 per boarded passenger that Gogo set out as its long term objective in previous analyst days.

However, it remains to be seen how and whether American will ultimately be able to proceed with its original plan to install ViaSat on new aircraft deliveries, or whether we are set for a long and ugly stalemate between American and Gogo over how these aircraft will be equipped.

02.04.16

Cisco shoots CTIA’s hostage to fortune…

Posted in General, Regulatory, Spectrum at 10:02 am by timfarrar

Last June, I pointed out that CTIA had taken the odd (but hardly surprising) decision to run away from its own data on US mobile data traffic growth in 2014, which showed only a 26% increase, in favor of an error-strewn Brattle Group paper that used Cisco’s February 2015 mobile VNI estimates to supposedly show the “FCC’s mobile data growth projection in 2010 was remarkably accurate.”

Now Cisco has released its February 2016 mobile VNI report, CTIA’s attempt to bury its own data has backfired, because Cisco has retrospectively revised its prior estimates of North American mobile data traffic downwards by more than one third. Cisco’s estimate of EOY North American mobile data traffic in 2014 has been reduced from 562TB/mo in the Feb 2015 mobile VNI to only 360TB/mo in the new release, which makes it almost the same as the estimate of 2013 traffic in last year’s publication (345TB/mo). Similarly the estimate of 2015 traffic has been reduced from 849TB/mo in last year’s publication to only 557TB/mo this year, a loss of more than an entire year’s growth.

The chart below highlights the impact of this massive revision to Cisco’s estimates, showing that when combined with previous revisions, the latest estimate of traffic in 2014 is less than half the figure projected by Cisco back in February 2010 (which was used by the FCC as one of the traffic estimates in its infamous October 2010 paper).

Ironically, Cisco’s latest revision actually brings its estimate of US mobile data traffic for 2014 (323TB/mo at the end of the year – from the online tool, the North America figure above includes Canada) below CTIA’s own total of 4.1PB for the year as a whole (i.e. an average of 340TB/mo) meaning that in fact CTIA would have been better off using its own data. Of course that wouldn’t have had the desired effect of trying to make the FCC feel good about its hopelessly flawed 2010 paper and justify CTIA’s own attempt to disinter this methodology and use it to claim a spectrum crisis is still imminent.

UPDATE (2/4): Oddly, in a blog post Cisco asserts that the revision was so that the “2014 baseline volume adjustment now aligns with CTIA’s figures.” That’s actually wrong: the Cisco estimate represents an end-of-year figure (the first line of the report states “Global mobile data traffic reached 3.7 exabytes per month at the end of 2015“) and given that the monthly traffic is growing (one assumes relatively consistently) through the year, it is implausible for the final month of the year to have less traffic than the average for the year as a whole. However, it is certainly very ironic that Cisco has chosen to (try and) align its traffic figures with CTIA at precisely the time when CTIA wants to bury its own numbers in favor of more optimistic growth estimates.

Specifically, Cisco’s latest VNI forecast shows that the FCC’s estimate that traffic would grow by 35 times between 2009 and 2014 (a reduction from Cisco’s own estimate of 48 times growth) was actually 50% too high, because according to the latest Cisco data, North American traffic grew by only 22 times between 2009 and 2014 (unless of course Cisco has also made some undisclosed retrospective revision to its 2009 data).

As usual, Cisco has not provided any detailed explanation of this dramatic change in its numbers, though part of the cause seems to be a further increase in the assumption of offloaded traffic in 2014 and 2015: the latest forecast claims offloaded traffic on a global basis will grow from 51% in 2015 to 55% in 2020, whereas the previous version claimed growth from 45% in 2014 to 54% in 2019. However, this certainly can’t account for the scale of the change and Cisco must have revised many other individual elements of its traffic estimates in order to reduce its estimates by such a large amount.