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

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 revenue
Jonathan’s work centers with customer acquisition models to finance WiFi rather than paid WiFi
on dual principles of driv- and paid download models.
ing a better traveler ex-
perience and advancing
travel industry/company
See Part I - our original overview from January 2010
economic 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 look
visionary product and for new channels to drive living
platform strategies for room and mobile share.
global corporate travel
firms leveraging new mo- Exemplifying this, Yahoo and Star-
bile/tablet capabilities. bucks launched the Starbucks Dig-
ital Network with free WiFi and
Recognized thought lead- free in-store premium content.
ership influencing disrup-
tion of airline industry
WiFi 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 for
flight" 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 of
The Johnson School at for 3 years to outbid Bing and Google, and its the Starbucks deal
Cornell 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


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.


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.


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


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


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.


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


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

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?