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

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Airlines are at a distribution inflection point, with new technology enabling better merchandising and high-margin ancillary services. Already feasting on bag fees, digital media (video, eBook, ...

Airlines are at a distribution inflection point, with new technology enabling better merchandising and high-margin ancillary services. Already feasting on bag fees, digital media (video, eBook, gaming, music, LBS) is a compelling way for airlines to drive more ancillary revenue, cut old-school costs, and deliver what consumers want. We first evaluated the potential in late 2009, but as digital entertainment continues to explode in early 2011, airlines’ approach to WiFi may be missing opportunity.

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

  • Alford Strategic Part II—Can airlines power ancillary Development revenue with digital media and WiFi?December 2010 Why airlines should watch Starbucks and Yahoo In late 2009, we looked at airlines’ approach to in-flight WiFi and sug- Alford Strategic gested alternative ways to paid WiFi to drive ancillary revenue by capi- Development talizing on digital media technology, mobile, and competitive trends. The potential upshot? Gain advantage, deliver a positive traveler expe- rience, and drive more WiFi engagement and merchandising revenueJonathan’s work centers with customer acquisition models to finance WiFi rather than paid WiFion dual principles of driv- and paid download models.ing a better traveler ex-perience and advancingtravel industry/company See Part I - our original overview from January 2010economic models. Fast forward to now. WiFi installs have grown, but airlines could drive Aircell and Row 44 to a better consumer experience and more revenue. In-flight, airlines feel internet access itself is compelling, but on the ground, digital entertainment (video, eBooks, gaming, music) contin- ues to explode. Consumers are in- creasingly expecting to customize their experiences with Netflix, Hu- lu, Amazon, Xbox Live, and Apple,Focus includes creating and competitors constantly lookvisionary product and for new channels to drive livingplatform strategies for room and mobile share.global corporate travelfirms leveraging new mo- Exemplifying this, Yahoo and Star-bile/tablet capabilities. bucks launched the Starbucks Dig- ital Network with free WiFi andRecognized thought lead- free in-store premium content.ership influencing disrup-tion of airline industryWiFi and digital entertain- How is this relevant to airlines?ment, manifested in ad-vancements in both in-flight and "outside the The Starbucks network parallels some of our thoughts last year forflight" experience. consumer experience and revenue generation via customer-acquisition partnerships in airline WiFi.He is based in Seattle,WA and is a graduate of Yahoo paid an estimated $10 Million per year Yahoo’s pursuit ofThe Johnson School at for 3 years to outbid Bing and Google, and its the Starbucks dealCornell University and the pursuit demonstrates the fight to capture shows how com-University of Virginia. search and media customers in a channel of 30 petitors will fight Million in-store monthly log-ins. for audience
  • Alford Strategic Part II—Can airlines power ancillary Development revenue with digital media and WiFi? Key Takeaways Though not a direct comparison to Starbucks traffic, domestic airlines will carry ~30-35 Million monthly WiFi-enabled passengers by 2012— even more if regional jets are equipped. The Starbucks Digi- tal Network can be a To be clear, the Starbucks network may or may not work, and similar guide for airline portals have failed. Customers go to Starbucks to buy coffee, not IFEC, and Yahoo’s watch movies. pursuit of the deal shows how competi- tors will fight for au- A key difference, however, is consumer intent dience. Air travelers have always been high impulse consumers for books, print media, music, movies, and games (even crosswords). In fact, on Digital entertain- 3 recent flights, we observed 70% of travelers in the rows around us ment can generate engaged in digital movies, reading (several on Kindles), listening to ancillary revenue music, and playing digital games. itself, but also be the tip of the spear If packaged appropriately, airlines should be an attractive customer to drive WiFi usage acquisition channel for media and search partners. and other revenue. Of course there are challenges, including: 1) pushing Aircell and Row 44 to deliver a more compelling experience; 2) viewing in-flight enter- “Think outside the tainment only as in-flight; 3) only 6% to 8% of passengers are using flight” paid WiFi; 4) need for paid WiFi in the short-term; and 5) practically speaking, airlines are not aggregated. So how could these be overcome? Aircell and Row44 have strong commu- nications competen- Passengers aren’t captives, but airlines should offer a captivat- cy, but are not con- ing experience sumer internet and media companies, However, we’ve seen positive developments recently, including and airlines should “whitelisting” of WSJ content and Virgin America’s deal with People, push a more com- Google’s return sponsorship of holiday WiFi, Aircell’s “WiFi to Drive” pelling experience. referral partnership, and new Aircell and Row 44 executives with inter- net experience. Paid WiFi will de- But unfortunately, we also continue to see misinformed firms like cline, but is im- GuestLogix refer to passengers as “captive markets” for “flying malls.” portant short term to enable the mar- ket to develop and Worse, we recently experienced the worst commercial ever - SkyMall build partnerships to blaring “Shopping while you fly—it’s the fun way to buy” on a United thrive. flight at 1 AM.
  • Alford Strategic Part II—Can airlines power ancillary Development revenue with digital media and WiFi? Consider where a traveler can choose between two airlines: All else equal – fare, schedule, cabin, $25 bag fee, $40 “premium” seat — which choice seems most likely? Airline A: free WiFi, free movie or e-book financed by business models with popular brands – Hulu, Netflix, Barnes & Noble, Smashwords – and trip services Airline B: $8 WiFi, $7 GoGo movies similar to cost of a full month of Netflix, and a walled gar- den featuring SkyMall and HSN 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). Netflix subscribers might try Hulu in return for a free movie. Would Barnes & Noble offer an airline-exclusive 2-for-1 eBooks to compete Aircell and Row44 with Amazon and Google? are not experienced consumer internet Could Smashwords be a great differentiator instead? Could Whrrl in and media compa- -flight “societies” specific to every flight be fun and deliver qualified nies, and airlines destination deals? Would Bing, spending hundreds of millions to should push for a gain even a little search share, take the opportunity to lock com- more compelling ex- petitors out? perience Certainly, passengers could bypass “on-deck” partners, but if mar- keted well, the opportunity to acquire new customers or steal them should be attractive. All this seems plausible, and there is still too much growth left in digital media to assume eve- ryone already has an iPad and a Netflix or iTunes subscription. Passengers are the airlines’ customers, so shouldn’t airlines get a piece? But here’s the rub Aircell and Row 44 have strong core competencies in communications technology, which is en- tirely different than consumer merchandising and internet competency. Can they manage 3,000 additional plane installs, focus 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 expertise to shape the traveler’s experience.
  • Alford Strategic Part II—Can airlines power ancillary Development revenue with digital media and WiFi? Think outside-the-flight in the “60-hour Cycle” At conversion estimates for paid WiFi of 6% to 8%, that’s only about 2 to 3 Million monthly passengers (“pax”). Similar to traffic of a medium web site, but a blip to partners like Netflix, Hulu, Bing, and others. Another problem - the passengers we observed downloaded content prior to the flight, and if airlines wait until they’re on board, travelers may skip WiFi (and IFE systems) entirely. In other words, paid WiFi caps the market, and downloading before the flight shrinks it further. To attract strong partners, passen- To combat this, airlines might market in-flight content proactively gers can be pack- “outside the flight”. aged effectively by thinking outside Not just GoGo, but specific, compelling merchandising in the booking the flight. path and “60-hour cycle” (Figure 1) we highlighted last year. Marketing in the booking path isn’t new, of course, but multiple mo- bile touch points create tremendous opportunity to 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 opportunities
  • Alford Strategic Part II—Can airlines power ancillary Development revenue with digital media and WiFi? The goal? Increase potential reach Extend IFE reach (Figure 2) beyond current in-flight markets by capturing consumers before they download their own content. In turn, drive WiFi usage, increase 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 paths and pre-flight communications – as could TripIt, AMEX, and any others who own the itinerary. Potential in-flight reach  6% paid conversion creates only 2 M round-trip pax, or 4 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 inbound Potential “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 Figure 2 - Current vs Potential Reach In-flight Outside the flight
  • Alford Strategic Part II—Can airlines power ancillary Development revenue with digital media and WiFi? The short-term need for paid WiFi In our prior report, we asserted that paid WiFi, especially for leisure travelers, is likely not sustainable, and general consensus continues to grow. On the other hand, we do recognize the short-term need of WiFi providers to offset capital costs, enable airlines to “pay back” in- stall costs, and generate cash to augment private equity. However, what we may see is that as WiFi prices are pushed down as con- Figure 3 - Potential economic evolution sumers resist paying, even though in- stall costs will drop when fleets are completed and data costs decrease over time, more marginal revenue needs to be driven from alternative models to cover the cost bases (Figure 3). We do suspect there will always be a place for paid WiFi in corporate travel, but believe it shrouds the potential of free WiFi, alternative revenue models, and marketing outside the flight. Finally, a point on passenger aggregation Starbucks claims 30 Million monthly customer log-ins. Assuming an average customer logs-in 4 times per month, that’s 7.5 Million “UV’s”. Remember, Yahoo paid roughly $10 Million per year in either cash and / or services for the privilege. Air passengers, of course, are not consolidated across individual airlines. However, Aircell and Row 44 do bring a degree of passenger aggregation, particularly Aircell given that it has im- pressively signed most major airlines, though the Southwest-Row 44 partnership is sizeable, and United is now testing Row 44 as well. Though it’s not a single channel, airlines could work with the two WiFi providers to package the passenger base in and outside the flight while also taking care to differentiate their own deals where possible and ensure a positive customer experience.
  • Alford Strategic Part II—Can airlines power ancillary Development revenue with digital media and WiFi? Summary This is not as easy as charging $25 for bags, which of course, customers don’t like. Develop- ment of technology to unbundle product and merchandise it through other channels will be a boon, and other ancillary cabin revenue initiatives such as food orders 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, with product Paid WiFi will decline, travelers have always consumed, on their own devices. As well as but is important an opportunity to cut costs. That is—do we really need super- short term to enable expensive IFE systems in coach (that often seem to break) if trav- the market to devel- elers use their own devices? op and to build part- nerships needed to If airlines and the WiFi providers can leverage the larger opportu- thrive nities outside the flight and aggressively work to create a more compelling offering to passengers, then ultimately, we believe it can drive WiFi conversion, revenue, and a positive consumer expe- rience – a win-win-win-win for airlines, air passengers, airline WiFi providers, and digital me- dia partners. FOR MORE INFORMATION To learn about our travel and consumer lifestyle solutions: Please contact Jonathan Alford at jalford88@gmail.com
  • Alford Strategic Part II—Can airlines power ancillary Development revenue with digital media and WiFi? Appendix - Digital content and Search competition intensifies Digital media competition continues to be cutthroat. The following is just a brief sample of re- cent developments; see our original overview for a detailed overview of digital entertain- ment 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 rapid- ly expanding 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 Hulu Netflix’s 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  Driving mobile platforms and iPad Apple  Trying to stay relevant to consumers Yahoo