Image source: Gogo. http://gogoair.mediaroom.com/image-gallery?view=category&mode=gallery&cat=2747
There was a bit of turbulence for Gogo (GOGO +0.47%) investors last week. Shares of the leading provider of in-flight Wi-Fi surrendered 17% of their value after one of its biggest customers inked a deal with a rival provider of airborne connectivity.
American Airlines Group (AAL +4.61%) announced late last week that ViaSat (NASDAQ: VIAS) will be providing satellite-powered Internet access on 100 new Boeing 737 MAX planes that will be deployed into service in the fall of next year. American Airlines had turned exclusively to Gogo in the past to fuel its passenger connectivity solutions.
It's a pretty big deal, even if we're talking about roughly 10% of the American Airlines mainline fleet. It's a warning shot to Gogo the next time that the two parties sit down to negotiate terms for future deals. Gogo has always known that it's not the only player out there, but it may have figured that American Airlines wouldn't be mixing things up with rival providers. That makes it tricky when it's trying to sell full-day or even multi-day passes across several American Airlines flights.
The move also exposes the shortcomings of Gogo's original ground-based technology.
Up in the air
Gogo began offering in-flight Wi-Fi in 2008. It was a different time. The iPad had yet to be introduced. Smartphones weren't widely owned. Going online was more about checking email than streaming video or surfing the web.
Gogo's original platform delivers 10 megabits per second of bandwidth that have to be shared among everyone on the plane. It has become a problem as more people bring Wi-Fi-tethered devices, and it's a bigger issue because folks are paying extra to go online.
ViaSat's satellite-based solution offers 12 megabits per second to every passenger. This doesn't mean that Gogo has been disrupted. It has its own satellite-based platform, and American Airlines did ink a deal for Gogo's new 2Ku offering that is 20 times faster than its original air-to-ground solution. However, the battlefield is shifting. Competition between providers may be great for the airlines as well as its passengers, but it could lead to a bumpy flight for providers as negotiations intensify in the future.
Given Gogo's history of red ink -- it's come through with 17 consecutive profitless quarters -- and decelerating revenue growth, this is a hard time for Gogo to run into competitive pressures. There's money to be made as carriers inevitably upgrade to 2Ku, but the skies are getting crowded now.
