Part II Dec 2010 - Can airlines power ancillary revenue with digital media and better WiFi platforms?

Can airlines power ancillary revenue with digital media and WiFi?December 2010 Part II—Why airlines should watch Starbucks and Yahoo In late 2009, we looked at airlines’ approach to in-flight WiFi and suggested alternative waysAbout Lenati than paid WiFi to drive ancillary revenue by capitalizing on digital media technology, mobile, and competitive trends. The potential upshot? Gain advantage, deliver a positive traveler experience, and drive more WiFi engagement and merchandising revenue with customer acquisi-Recently named one of the tion models to finance WiFi rather than paid WiFi and paid download models.―Seven Small Gems of the Con-sulting Profession‖ by Consult- See Part I - our original overview - hereing Magazine, Lenati designs,implements, and optimizes mar- Fast forward to now. WiFi installations have grown as planned, but airlines could drive Aircellketing and sales solutions for and Row 44 to deliver a better consumer experience, and in turn, drive more revenue.clients who want to buildstronger customer connection. In-flight, it seems airlines feel internet access itself is compelling, but on the ground, digitalLenati is based in Seattle, WA. entertainment growth (video, eBooks, gaming, music) continues to explode. Consumers are in- creasingly expecting to customize their experiences with Netflix, Hulu, Amazon, Xbox Live, and Apple, and competitors constantly look for new channels to drive living room and mobile share. Exemplifying this, Yahoo and Starbucks launched the Starbucks Digital Network with free WiFi and free in-store premium content. How is this relevant to airlines? The Starbucks network parallels some of our thoughts last year for consumer experience and revenue generation via customer-acquisition partnerships in the airline WiFi space. Yahoo paid an estimated $10 Million per year for 3 years to outbid Bing and Google, and itsAbout the Author pursuit demonstrates the fight to capture search and media customers in a channel of 30 Mil- lion in-store monthly log-ins.Jonathan Alford brings over 14 Though not a direct comparison to Starbucks traffic, domestic airlines will carry ~30-35 Millionyears of experience in consumer monthly WiFi-enabled passengers by 2012—even more iftravel and lifestyle business, regional jets are equipped.technology and finance. His Yahoo’s pursuit of the To be clear, the Starbucks network may or may not work,specialties include business Starbucks deal shows and similar portals have failed. Customers go to Starbucks tostrategy, online and mobile buy coffee, not watch movies. how competitors willmarketing strategy, and global fight for audience .finance. A key difference, however, is consumer intent. Air travelers have always been high impulse consumers for books, printHe is a graduate of The Johnson media, music, movies, and games (even crosswords). In fact,School at Cornell University and on 3 recent flights, we observed 70% of travelers in the rows around us engaged in digitalthe University of Virginia. movies, reading (several on Kindles), listening to music, and playing digital games. If packaged appropriately, airlines should be an attractive customer acquisition channel for media and search partners. 2825 Eastlake

Can airlines power ancillary revenue with digital media and WiFi? Lenati Point Of ViewKey Takeaways Of course there are challenges, including: 1) pushing Aircell and Row 44 to deliver a more compelling experience; 2) viewing in-flight entertainment only as in-flight; 3) only 6% to 8% of passengers are using paid WiFi; 4) need for paid WiFi in the short-term; and 5) practically speaking,The Starbucks Digital airlines are not aggregated.Network can be a guidefor airline IFEC, and Ya- So how could these be overcome?hoo’s pursuit of the dealshows how digital media Passengers aren’t captives, but airlines should offer a captivating experiencecompanies will fight foraudience. We have seen positive developments in the last year, including ―whitelisting‖ of Wall Street Jour- nal and Frommer’s content and Virgin America’s deal with People.com, Google’s return sponsor- ship of holiday WiFi, Aircell’s ―WiFi to Drive‖ referral partnership, and new Aircell and Row 44 executives with internet commerce experience.Digital entertainment can But unfortunately, we also continue to see passengers referred to as a ―captive market‖ forgenerate ancillary reve- ―flying malls‖ and recently had to experience a quite grating SkyMall commercial toutingnue itself, but also be the ―Shopping while you fly—it’s the fun way to buy‖ on United at 1 AM.tip of the spear to driveWiFi usage and otherrevenue streams. Consider where a traveler can choose between two airlines: all else equal – airfare, flight sched- ule, cabin, $25 bag fee, $40 for a ―premium‖ coach seat.—which choice seems most likely? Airline A: free WiFi and free movie or e-book financed by business models with popular brands – Hulu, Netflix, Barnes & Noble, Smashwords, etc – and relevant trip servicesTo attract strong part-ners, passenger markets Airline B: $8 WiFi, $7 GoGo movies similar to cost of a full month of Netflix, and a walled gardencan be reached more featuring SkyMall and HSNeffectively by thinkingoutside the flight. So, can the experience improve beyond ―Skytown Center‖ and tired brands like SkyMall? We think so. Intense competition in the digital media space could facilitate it, and airlines and WiFi partners should make more money (see our original overview).Aircell and Row44 have Netflix subscribers might try Hulu in return for a free movie. Would Blockbuster like a shot?strong communications Would Barnes & Noble offer an airline-exclusive 2-for-1 eBooks to compete with Amazon and Google? Could Smashwords be a great differentiator instead? Could Whrrl in-flight ―societies‖competencies, but they specific to every flight be fun and deliver qualified destination deals? Would Bing, spending hun-are not experienced con- dreds of millions to gain even a little search share, take the opportunity to lock competitors out?sumer internet and mediacompanies, and airlines Certainly, passengers could bypass ―on-deck‖ partners forshould push for a more their own services, but if marketed well, the opportunity to Aircell and Row44 are notcompelling experience. acquire new customers or steal them should be attractive. experienced consumer All this seems plausible, and there is still too much growth internet and media com- left in digital media to assume everyone already has an iPad panies, and airlines should and a Netflix or iTunes subscription. Passengers are the air- push for a more compel-Paid WiFi will decline, but lines’ customers, so shouldn’t airlines get a piece? ling experienceis important in the shortterm to enable the mar- But here’s the rub: Aircell and Row 44 have strong core competencies in communications technology, which is entirelyket to develop and build different than consumer merchandising and internet core competency.partnerships to thrive. Can they manage 3,000 additional plane installs, expend energy on unlikely IPO’s, develop world- class partnerships, architect great web sites, and deliver great experiences? This is a monumental task even for organizations with financial resources AND consumer experience, and we hope airlines engage the expertise to shape the traveler’s experience. 2825 Eastlake Ave E | #210, Seattle, WA 98102 (800) 848-1449 | www.lenati.com

Can airlines power ancillary revenue with digital media and WiFi? Lenati Point Of ViewThink outside-the-flightAt conversion estimates for paid WiFi of 6% to 8%, that’s only about 2 to 3 Million monthly passengers (―pax‖). Similar totraffic of a medium web site, but a blip to partners like Netflix, Hulu, Bing, and others. An-other problem - the passengers we observed downloaded content prior to the flight, and ifairlines wait until they’re on board, travelers may skip WiFi (and IFE systems) entirely. To attract strong partners, passengers canIn other words, paid WiFi caps the market, and downloading before the flight shrinks it fur-ther. be packaged more ef- fectively by thinkingTo combat this, airlines might find it interesting to see the impact of more proactive mar- outside the flight.keting outside the flight. Not just GoGo, but specific, compelling merchandising in the book-ing path and ―60-hour cycle‖ (Figure 1) we highlighted last year. Marketing in the bookingpath isn’t new, of course, but multiple mobile touch points create tremendous opportunityto deliver what travelers want when they want it, especially if it’s an exclusive deal passengers they can’t get anywhere else. Figure 1 - “60-hour cycle” of merchandising opportunitiesThe goal? Increase potential reach (Figure 2) well beyond current in-flight markets by capturing consumers before theydownload their own content. In turn, drive WiFi usage, increase the reach for a more attractive market, enable more compel-ling content to drive ancillary revenue, and drive greater WiFi engagement to deliver ads and search traffic.But beware - Redbox and MOD Systems threaten to steal customers at the gate, and OTA’s can merchandise booking pathsand pre-flight communications – as could TripIt, AMEX, and any others who know the itinerary.Potential in-flight reach Figure 2 - Current vs Potential Reach 6% paid conversion creates only 2 M round-trip pax, or 4 In-flight Outside the flight M each-way trips If WiFi is free and conversion increases to 20%, reach is 14 M each-way trips 35 M WiFi-enabled pax creates potential reach of 70 M outbound and inboundPotential “outside the flight” reach ~37% of pax book direct online, a potential booking path reach of 23 M ~70% of pax check in online (or kiosks), a reach of 70 M outbound and inbound 2825 Eastlake Ave E | #210, Seattle, WA 98102 (800) 848-1449 | www.lenati.com

Can airlines power ancillary revenue with digital media and WiFi? Lenati Point Of ViewThe short-term need for paid WiFiIn our prior report, we asserted that paid WiFi, especially for leisure travelers, is likely not sustainable, and general consen-sus continues to grow. On the other hand, we do recognize the short-term need of WiFi providers to offset capital costs, ena-ble airlines to ―pay back‖ install costs, and generate cash to augment private equity.However, what we may see is that as WiFi prices are pushed down as consumers resist Paid WiFi will decline, butpaying, even though install costs will drop when fleets are completed and data costs is important short term todecrease over time, more marginal revenue needs to be driven from alternative modelsto cover the cost bases (Figure 3). enable the market to develop and to build partner-We do suspect there will always be a place for paid WiFi in corporate travel, but believe ships needed to thriveit shrouds the potential of free WiFi, alternative revenue models, and marketing outsidethe flight.Finally, a point on passenger aggregationStarbucks claims 30 Million monthly customer log-ins. Assuming an Figure 3 - Potential economic evolutionaverage customer logs-in 4 times per month, that’s 7.5 Million―UV’s‖. Remember, Yahoo paid roughly $10 Million per year in eithercash and / or services for the privilege.Air passengers, of course, are not consolidated across individual air-lines. However, Aircell and Row 44 do bring a degree of passengeraggregation, particularly Aircell given that it has impressively signedmost major airlines, though the Southwest-Row 44 partnership issizeable, and United is now testing Row 44 as well.Though it’s not a single channel, airlines could work with the two WiFiproviders to package the passenger base in and outside the flightwhile also taking care to differentiate their own deals where possibleand ensure a positive customer experience.SummaryThis is not as easy as charging $25 for bags, which of course, customers don’t like. Development of technology to unbundleproduct and merchandise it through other channels will be a boon, and other ancillary cabin revenue initiatives such as foodorders via IFE systems and on-board credit card processing will also generate some income.But digital media constitutes an opportunity to deliver a better customer experience on-board and outside the flight, withproduct travelers have always consumed, on their own devices. As well as an opportunity to cut costs. That is—do we reallyneed super-expensive IFE systems in coach (that often seem to break) if travelers use their own devices?If airlines and the WiFi providers can leverage the larger opportunities outside the flight and aggressively work to create amore compelling offering to passengers, then ultimately, we believe it can drive WiFi conversion, revenue, and a positiveconsumer experience – a win-win-win-win for airlines, air passengers, airline WiFi providers, and digital media partners.FOR MORE INFORMATIONTo discuss this POV or learn about our travel and consumer lifestyle solutions:Please contact Jonathan Alford at jalford@lenati.com 2825 Eastlake Ave E | #210, Seattle, WA 98102 (800) 848-1449 | www.lenati.com

Can airlines power ancillary revenue with digital media and WiFi? Lenati Point Of ViewAppendix - Digital content and Search competition intensifiesDigital media competition continues to be cutthroat. The following is just a brief sample of recent developments; see ouroriginal overview for a detailed overview of digital entertainment markets and competitive landscapes:  Subscriber growth to 17 Million continues to outpace expectations and is a primary valuation driver and leverage point to access content from studios Netflix  Free trials originating from channels such as internet TV’s and DVD players, Xbox Live, etc are a primary growth engine  Allegedly changing its video model. Paid downloads have not gained traction and Amazon is constantly rumored to be eyeing an acquisition of Netflix Amazon  Launched a new Kindle to compete with Barnes & Noble’s new color Nook and rapidly expand- ing Kindle experiences to other platforms – even Apple’s.  Expects 5 million Kinects to sell during the holidays, helping drive penetration of Xbox Live digital content services Microsoft  Merged search operations and sales with Yahoo to compete with Google  Constantly seeking channels for Bing. Online Services lost $400 Million in Q1  Backed by networks, now launching a paid service, Hulu Plus, as a growing threat to Netflix’s Hulu streaming model  Pushing VOD heavily Cable firms and Studios  Studios with cable interests threatening to restrict Netflix content  Driving Android and search Google  Just launched new Google e-Book store to compete with Amazon Apple  Driving mobile platforms and iPad Yahoo  Trying to stay relevant to consumersFOR MORE INFORMATIONTo discuss this POV or learn about our travel and consumer lifestyle solutions:Please contact Jonathan Alford at jalford@lenati.com 2825 Eastlake Ave E | #210, Seattle, WA 98102 (800) 848-1449 | www.lenati.com

http://maketravelbetter.com	724
http://jonathanalford.wordpress.com	257
http://www.slideshare.net	1

Part II Dec 2010 - Can airlines power ancillary revenue with digital media and better WiFi platforms?

by Jonathan Alford on Jan 03, 2011

Accessibility

Categories

Tags

Upload Details

Usage Rights

3 Embeds 982

Statistics

Part II Dec 2010 - Can airlines power ancillary revenue with digital media and better WiFi platforms? — Document Transcript