12.25.11
Posted in Aeronautical, Financials, General, Services at 6:42 am by timfarrar
Gogo has finally decided to strut its stuff, by filing an S-1 with the SEC in preparation for a potential IPO early next year. However, it needs to put on a very good performance over the next couple of years if this IPO is going to be successful.
The filing reveals some interesting statistics about the company, and highlights just how wrong most analyst forecasts for the passenger communications market have been. Bizarrely, the S-1 quotes Forrester projections that “in-flight internet usage is expected to increase rapidly over the next five years, from approximately 15.6 million North American sessions in 2011 to 96.9 million by 2015″ when the company knows that the 2011 number is simply wrong – Gogo (which had over 90% of usage in 2011) had “provided more than 15 million Gogo sessions” since its inception by the end of September, and previously stated at the beginning of this year that it had reached 10 million sessions, after the success of the free promotion with Google late last year (which itself generated 3 million sessions in 6 weeks). As a result, the total number of sessions in 2011 (when there hasn’t been the same level of promotional activity) across all providers in North America is certainly well below 10 million and more likely close to half the level estimated by Forrester. In fact the total number of sessions (free and paid) might be no higher in 2011 than in 2010 because of the distorting effect of the free promotion last year.
Perhaps one reason for quoting Forrester is that the other widely cited analyst projection (by InStat in October 2011) is even further off the map (one person deeply involved in the industry said to me that he “didn’t know what they had been smoking”), with InStat noting that “take rates have increased significantly, moving from an average of 4% in 2010 up to 7% in 2011” (contradicted by Gogo’s actual numbers showing no more than ~4% take rate in 2011) and that “in-flight Wi-Fi revenue is expected to grow from about $225 million in 2011 to over $1.5 billion in 2015” (again miles away from Gogo’s passenger revenues of $58M in the first 9 months of 2011).
However, now we have the public S-1 filing, perhaps some of these erroneous forecasts will come back down to Earth. The key data in the S-1 shows that current take rates are only about 4%, with users spending an average of $10 to $10.50 per flight, implying a severe (but unsurprising) skew towards laptop use on long flights (charged at $12.95). A survey (strangely citing data from 2009) showed that the average Gogo user had taken 14.2 domestic business flights in the last 12 months, indicating exactly as Connexion-by-Boeing found in 2006, that it is frequent business travelers who pay for in-flight WiFi and rarely anyone else. Of course, only about 10%-15% of airline passengers fly this frequently on business, so it is hardly surprising that current usage levels are so low (especially once very short flights are taken into account). It is also unsurprising that the service is dominated by repeat users (15 million sessions from 4.4 million unique users – and some of these unique users may have only used the service in late 2010, when free access attracted 2 million users in 6 weeks).
What is critical for the future growth of Gogo is therefore its ability to expand usage dramatically amongst leisure travelers and more occasional business travelers. The key statistic to watch is the average revenue per passenger, which has climbed from $0.32 in 2010 to $0.41 in the first 9 months of 2011. It would be useful to see in the roadshow how much of this growth is due to new leisure users (as opposed to growing awareness after major fleetwide rollouts were completed in 2010), e.g. by looking at the trajectory on Virgin America (which had fleetwide availability very early) and by examining more recent data on the average number of annual flights taken by a Gogo user.
If the average revenue per passenger (ARPP) only grows to say $0.50, because paid usage remains limited to frequent business travelers, then it will be hard for Gogo to generate more than about $100M in EBITDA by 2015, but if ARPP grows to say $1.00, then EBITDA could grow to ~$200M, due to the nearly fixed cost base of the ground-based system (airlines receive about a 15% revenue share at present, though this payment might be on a tiered system so could increase in the future if usage is higher). Clearly, to have a successful IPO at a value not less than the $500M invested to date, Gogo therefore needs to demonstrate convincingly how its ARPP can more than double within 2-3 years, which can only happen by achieving much greater take-up amongst leisure and occasional business travelers.
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12.22.11
Posted in General, Regulatory, Spectrum at 9:15 am by timfarrar
As my article yesterday for GigaOm highlighted, the potential ripple effects of an AT&T/DISH deal are almost too numerous to mention. However, in addition to the political consequences, its also worth considering the implications of this potential industry realignment for the US spectrum market. As I’ve noted before, spectrum didn’t look like a good investment a year ago, and while the cable companies have come out OK (based mainly on their smart bidding strategy in the 2006 AWS auction), companies like Clearwire and NextWave who have bet on more speculative spectrum bands have suffered badly from a lack of buyers for the spectrum they’ve tried to sell. Even DISH faced little or no opposition from major wireless operators in its acquisition of DBSD and TerreStar’s spectrum assets.
Now, if deals between AT&T/DISH and Verizon/SpectrumCo go through, network sharing will create significant bandwidth efficiencies and with only two national LTE networks there will be even less competition in future spectrum auctions. That could well mean that incentive auctions will come to naught, because it will not be possible to generate high enough bids to persuade broadcasters to give up their spectrum (although that probably won’t prevent Congress eventually passing a bill so it can count imaginary future revenues against the deficit and/or D-block buildout).
In the near term, it also means that it will be difficult if not impossible for Clearwire to find eager bidders for the portion of its spectrum holdings it would like to sell (at anything from $0.25 to $0.75 per MHzPOP according to its recent roadshow). Indeed I’ve been told that the only offer to buy spectrum from Clearwire (during its efforts to sell spectrum earlier this year) came from Sprint, and its far from obvious that enough has changed to justify the recent speculation about new near term Clearwire partners/spectrum buyers ranging from MetroPCS to DirecTV.
As an aside I also find it hard to see how DirecTV’s involvement in a 2.6GHz TD-LTE venture in Brazil, which is focused on fixed wireless broadband in residential suburbs, just like Clearwire’s original fixed WiMAX business plan, has much relevance to Clearwire’s current small cell mobile data roaming plan in core urban hotspots. In theory DirecTV could buy Clearwire spectrum to deploy its own separate fixed wireless broadband network in the US, with a completely different cell spacing than a mobile network would require, but that hardly seems a productive use of capital when the US has vastly better fixed broadband infrastructure than Brazil and we’ve just seen the ignominious collapse of Open Range, which was trying to execute such a plan in rural areas, with subsidized loans from the USDA. As I’ve said before, fixed broadband is by far the best way to go for almost all in-home data delivery, and so I think that ultimately DirecTV will have to reach some agreement to use AT&T’s wireline infrastructure, completing the alignment of AT&T with the satellite TV companies against Verizon and the cable companies.
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06.13.11
Posted in General, Regulatory, Spectrum at 10:31 am by timfarrar
If the paradigm shift for the telecom industry in the 1990s was the Death of Distance and in the 2000s was Cutting the Cord, then what might the new paradigm be for the next decade? I’d venture to suggest that one of the most important trends will be data offloading from mobile to fixed networks. As a result, you will need that fixed wire (or cable or fiber) into your home more in a decade’s time than you do today.
The simple reason for this is that the cost of data delivery on a fixed network (at around 2-5 cents per Gbyte) is nearly two orders of magnitude lower than on wireless networks. Similarly, monthly usage per subscriber, despite dramatic increases in wireless usage over the last few years, is also about 100 times greater on wireline networks (15Gbytes per month compared to a few hundred Mbytes on wireless). This ratio is unlikely to change significantly over the next decade, given expected improvements in both wireline and wireless technologies.
What that means is if you want to watch streaming video on your tablet or smartphone, you will be very strongly incentivized (by price) to offload that traffic to a WiFi hotspot and onto a wireline network. For example, at ~2Gbyte per hour for streaming HD video (at 4-5Mbps) to a tablet, you would have to pay $20 per hour at current wireless prices of $10/Gbyte. Even in 5 years time the price will undoubtedly be dollars per hour, not pennies per hour. Unsurprisingly, consumers are already taking these pricing signals onboard and turning to WiFi. However, the impact of this switch is dramatically underestimated in Cisco’s forecasts, which project that in the US only 30% of smartphone and tablet traffic will be offloaded in 2015. Even today, this ludicrously underestimates the amount of tablet offloading, given that the majority of iPads are WiFi-only.
Ironically, the spectrum that might therefore be in greatest demand in the future is unlicensed spectrum, for short range wireless access. That’s why there is considerable pressure from Microsoft and Google to ensure that white spaces are protected in any future broadcast spectrum auction, and why a study for Ofcom on future UK spectrum requirements predicted that there would be more near term demand for incremental unlicensed spectrum than licensed spectrum.
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09.08.08
Posted in Financials, General at 8:23 pm by timfarrar
This isn’t really an MSS topic, but having worked for several years in the late 1990s on the Teledesic project and with fond memories of evaluating the market for broadband in developing countries, I thought the emergence of O3b Networks with reportedly $60M of investment from Liberty Global, Google and others, merited a comment.
Some of the commentaries appear to conflate O3b’s satellite backhaul business plan with the satellite access services offered by Wildblue and HughesNet in the US. O3b can’t offer services to the end user (except the largest corporates) since customers will require expensive terminals which track their Low Earth Orbit satellites. As Teledesic found out in the late 1990s (and as is still true today) you either need a couple of moving dishes (to ensure seamless handover) or an electronic steered antenna – both are well beyond realistic consumer prices (not to mention their installation difficulties compared to fixed geostationary terminals).
Instead O3b will offer backhaul for ISPs operating in countries without fiber links, so they can obtain connectivity to the Internet backbone. That’s a fairly well established and highly competitive market (valued at several hundred million dollars a year), with Intelsat and other FSS players competing intensively on price. Characteristically the market grows as Internet take-up and usage expands within a country, then collapses almost to zero within 12-18 months of fiber’s entry. There’s absolutely no reason for O3b to change this equation – satellite is at least two and in some cases closer to three orders of magnitude more expensive than large fiber connections for this backhaul service, and fiber continues to decline rapidly in price.
A second market is for cellular backhaul within a country, when fiber isn’t deployed outside the major cities. Again this market is somewhat transitory: terrestrial microwave links become a good option when the cellular coverage is sufficiently contiguous for daisy chaining links from one tower to another, but the satellite opportunity is longer lasting than ISP backhaul in major cities. The opportunity here for O3b will also be affected by how much more expensive its terminals are than standard VSATs, since somewhat more limited amounts of capacity are required. However, O3b’s low latency may be helpful for this voice-oriented traffic.
Thus O3b is simply a bet that quite a few countries, particularly in Africa, won’t get fiber any time soon. Even though its been (very) slow to get going, I’d rather put my money on EASSY, an African fiber project with many of the telcos in the region as signatories (as well as credible international players), which has just entered the construction phase and is hoping to be operational in 2010, well before O3b could expect to be up and running.
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08.14.08
Posted in General at 9:04 am by timfarrar
This blog is intended to reflect brief comments on current issues in Mobile Satellite Services, highlighting market developments, and new data on the industry.
It will also provide a forum to provide feedback on longer articles on our website www.tmfassociates.com/articles and to suggest topics for coverage in our MSS information service
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