Jeez. Just when I’m getting comfortable in my hammock, Boeing goes and pulls the plug on its in-flight internet service. My wife and kids are going to laugh at me – bloggers are ridiculous people – but, dammit, I can’t let this one fly by unremarked.
Boeing’s failure is a perfect example of something I’ve called “outflying the market.” A company, or an entire industry, gets caught up in the excitement of a new technology and massively overestimates the demand for a new product or service. It finds out, after making a big investment, that most of the expected customers don’t particularly need the new offering – not enough to pay the going rate, anyway. Another great example, also from the aviation industry, is the Concorde supersonic jet, which despite being one of the great technological marvels of the last century failed to find sufficient demand in the marketplace. This kind of misjudgment about people’s desire for new technologies, or at least about the pace at which they’ll adopt new technologies, also lies at the heart of the recent dot-com bust and telecommunications meltdown.
Demand for in-flight internet access, and a successful business strategy for supplying it, will probably materialize in the future, but in the meantime Boeing has lost a load of money. When it comes to technological innovation, getting too far ahead of your customers is every bit as dangerous as falling too far behind.
By the way, this is a serious setback to companies looking to supply personal productivity software as a service over the internet. The lack of in-flight connectivity is a huge barrier to business people’s adoption of such services. As long as it exists, no meaningful segment of the market is going to abandon the copies of word processing and spreadsheet and presentation software they have installed on their laptop hard drives. So this is bad news for Google and the Web 2.0 newcomers and good news for Microsoft. As long as barriers to continuous connectivity exist, Microsoft gains time to move its huge customer base to its own on-line services. Don’t underestimate the powerful advantage of having the ability to provide a hybrid of traditional installed software and software-as-a-service.
I wouldn’t be at all surprised, in fact, if Google ultimately moves in to subsidize in-flight internet service in some way or another. It’s got a lot of capital to invest, and it seems more than happy to invest it. So why not a free Google Sky-Fi service supported by ads?
I’m not so sure that Boeing’s issue was that it outpaced technology adoption – the service seemed to be popular where it had been introduced. It simply outpaced the users’ willingness to pay and the airlines’ willingness to stick even more bits of computer hardware in their planes having fitted them out with LCD screens and skyphones already. However, a surfeit of techno-enthusiasm at the company contributed to the project’s downfall, certainly.
Boeing looks to have done the business plan for this service in reverse: had an idea for a project, worked out how much the project would cost and then calculated what it needed to charge based on that cost to achieve a medium-term payback, rather than asking what the market would pay and then calculating whether the project was economically feasible. The way that this project has gone is reminiscent of Motorola’s Iridium in that respect.
Even assuming that someday far in the future a sizable set of passengers desire connectivity, there’s also the question of future viability of the service in our terror-stricken world. Will laptops even be allowed on-board next year? Who knows. Why spend money in that environment? Boeing’s decision makes sense to me.
As far as the Concorde, its failure was a question of price vs. convenience. Nothing remarkable about that.
You wrote: “It finds out, after making a big investment, that most of the expected customers don’t particularly need the new offering – not enough to pay the going rate, anyway.”
I would argue this was a slightly different case. Boeing built the business model in the 1990s, and had commitments from all the major domestic carriers. Boeing signed expensive satellite contracts with fixed transponders. So they had an enormous cost structure on top of their R&D and installation cost structure.
Then 9/11 occurred, the domestic airlines backed off, and Boeing still had these big contracts that they would have had to write off in the middle of other problems. They managed to get into 159 planes eventually (through a lot of incentives), and finally pulled the plug at a point when they could hide the loss.
Really, they should have pulled the plug before launching with partners. The writing was on the wall in 2002. But it was better to spend money and see if they could make a go of it (with $120 to $190m in yearly costs!) than to eat the writedown during bad years.
The services that are being launched today don’t involve expensive multi-year fixed commitments. AirCell, for instance, will use ground stations after paying $30-odd million to the FCC for a decent chunk of dedicated air-to-ground spectrum. Their service will have lighter equipment on the planes, a smaller antenna, and much lower fixed costs.
Satellite Internet only made sense when money was flowing like water. Boeing got caught up in that. There’s a good piece in today’s Seattle Times about how Connexion was one of multiple satellite-based digital ventures Boeing launched, all of which are now dead.
Thanks a lot for the background, Glenn. Fascinating case. I’m sure you’re right that
“Really, they should have pulled the plug before launching with partners. The writing was on the wall in 2002.”
The article about the Concorde that I linked to tells a similar tale of a company being unable to read the writing on the wall. It seems to be a pretty common corporate affliction.
Of course, if sufficient demand had been there, there wouldn’t have been the problem.
I’m going to follow your trail and do some more research on this one.
Nick, the US is the biggest single market for tech products. Heck offshore firms make 60 to 70^ of their revs from the US, SAP almost 40% etc etc. Boeing was not counting on zero revenues from the US market. Our incredibly waak airline industry is the culprit. It is shameful that we keep propping up the old airlines. If they are allowed to die, Jetblue, and others would likely step up and invest in more technology (as it has with satellite TV). Or we should let foregin airlines like Lufthansa and Singapore fly here (there is a statute from long ago which defines air as a strategic industry which restricts domestic flights by foreign airlines…priced right – say $ 10 a flight I would sign up for web service each flight…
It still comes down to the demand for the service at a price point that would justify the necessary capital investment. The US airlines would love the extra cash from a money-making on-board service.
At this point in time, the necessary demand just isn’t there.
Is that chicken or egg? Some of the best – and most profitable – arilines in the world -Lufthansa, Singapore, Emirates, SAS, Japan -offered it. Lufthansa had so much success it was going to completely WI-FI its fleet. In 2000, Delta, American and United all had signed up then cancelled post 9/11/2001. On a long domestic flight, many business people would avail of it. I can bet my teenage daughter would make me pay up for her to have access. Jetblue’s second most attractive feature and reason for success is live TV (after fares). You bet web access would be just as popular in the air in keeping with on-ground trends of digital media growing faster than broadcast media…US consumers are being deprived of a number of perks including WI FI by old, unhealthy airlines we continue to keep alive…
From Times of London report:
At some point, the economics will likely work, even if only a small fraction of customers use the service. But the economics didn’t work with the Boeing service because of high costs and a lack of sufficient end-user demand. Once again, the pioneer takes the arrow.
Nick, let’s scenario this out.
there are 1571 airports around world now with WI-FI hot spots – see link below . Is it a reasonable assumption that 10-15% of the miIlions who use hotspots daily before their flight would also use it on a flight? if Lufthansa sold 40 passengers on a flight at an average fee of $ 25, it sold more in WI-FI dollars than it did duty free items on that flight…and till the recent security changes, more people were traveling with WI FI enabled laptops each quarter
I travel almost every week. I pay T-Mobile 30 a month and at least one or two airports a month I end up having to buy roaming at $ 5 to 10 for 30 mniutes before the flight. If I knew I could buy WI-FI on most flights, I would shift my dollars to that service…plenty of bankers, lawyers, consultants, accoutants would do it without thinking twice…
A third of global airports with WI-FI are in the US, where our airlines do not give us the choice in the air – that lack of access to the biggest consumer market to me doomed Boeing’s plans…
http://jiwire.com/hotspots-hot-spot-airport-directory-browse-by-country.htm
I disagree with your contention that this will put a dent into online application companies. The TSA is doing what it can to make business travel obsolete. Almost makes me wonder if it is a cabal of those companies.
Not to mention that even before this latest round of safety fetishes, most business travel was superflous already. Why waste all this time to attend a meeting with 15min content that gets stretched out to 1h to “make it worth the trip”? About time to shake up this silliness.
Gregor, Yes, but people have been saying the same thing for at least ten years, and still business travel booms. We’ll see if anything changes now. Nick
As much as some people would like for a good video chat session to replace in-person meetings, it just isn’t likely. The dynamics of an actual meeting are hard to replace. Business travel is still terribly important.
I was saddened to hear about Boeing’s about-face, but it’s probably a good thing. Innovators pay a high price for market share.
Look to several other companies and technologies to fill in the gaps and, perhaps, tackle the short-haul market. This is, perhaps, where the big money is – people traveling half or all the way across the US instead of to Europe or Asia.
Interesting link.