Connexion Failure Leaves In-Flight Broadband Up in the Air

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WASHINGTON — The commercial failure of Boeing’s Connexion in-flight Internet venture may have been more about mistakes made by the company than a general lack of a market for such a service, according to analysts.

“Broadband on airplanes absolutely has a future,” said Henry Harteveldt, a senior analyst for Forrester Research based in San Francisco. “Boeing failed in a couple of ways.”

Chicago-based Boeing announced Aug. 17 that it would be discontinuing its high-speed broadband service for airlines, a move that will cost the company a charge against earnings of $320 million. The company plans to recognize the bulk of that amount — a charge of $290 million — during the third quarter of 2006.

Boeing invested more than $1 billion in the venture, which began service in 2004. John Dern, a spokesman for Boeing, declined in a phone interview Aug. 23 to comment in detail about the troubles Connexion experienced, and stated that Boeing officials “were disappointed that the market didn’t mature as expected.”

Analysts saw a variety of issues with how Boeing handled Connexion, particularly related to its marketing.

Harteveldt pointed out that Boeing did not make its hardware small enough or light enough to be installed on narrow-bodied planes such as the 737.

“It wasn’t viable for the domestic airlines to use,” Harteveldt said.

Ken Dulaney, a San Jose, Calif.-based analyst with Gartner Inc., said part of the problems Boeing encountered with Connexion were related to the downturn in the airline industry since 2001 and the bankruptcies of several major airlines. But Dulaney said Boeing limited too much of its marketing for Connexion to passengers on long-haul international flights.

“You’re competing with sleep,” he said, noting that it might make more sense to offer it on flights from, say, San Francisco to New York.

Paul Nisbet, an analyst with JSA Research Inc. of Newport, R. I. , said timing was clearly an issue for Boeing, noting that major airlines had pulled out of deals with the company after the events of Sept. 11.

Analysts agreed that part of the problem had to do with Boeing as an equipment manufacturer being ill-equipped to market a communications service to customers.

They weren’t as quick, though, to criticize the pricing that airlines charged for the service, which some had speculated might have been a deterrent. Passengers paid approximately $26 for use of the service for an entire flight, and lesser amounts for half-hour and hour increments of service.

“It was not out of the question to pay even up to $40 to connect for a flight for six to eight hours,” Harteveldt said. “Any business person knows that the logistics and expenses on an airline are much more complex than, say, at a hotel where you’ll pay $10-15 to connect.”

The future of Connexion’s technology is uncertain. Nisbet can see another company, whether it be a satellite communications firm or media company, stepping in and picking up where Boeing left off.

“I think it will probably go forward with Boeing still offering the shareware, presuming there’s a company that is willing to pick up the pieces and provide the service,” Nisbet said.

An Aug. 17 analysis from Northern Sky Research of Cambridge, Mass., suggested another scenario — a government bailout. It floats the idea of a buyout of Connexion by the U.S. Dep artment of Defense, arguing that Connexion’s technology could be leveraged for a variety of functions by the government, such as in the development of a next-generation unmanned aerial vehicle, or for broadband on vehicular units, maritime vessels and other aircraft. Boeing plans to honor its existing contracts with the U.S. government.

In the meantime, the closure frees up the field for other competitors, which analysts agreed have a shot at capturing the market.

The remaining competitor in satellite broadband for commercial flights is OnAir, a Geneva-based joint venture between France’s Airbus and the Netherlands’ SITA, which is set to begin offering services in 2007.

George Cooper, OnAir’s chief executive officer, said in a statement issued Aug. 24 that his company and Connexion have different approaches to developing their products, including the technology and what services will be offered.

“OnAir has always worked towards meeting passengers’ stated preferences,” Cooper said in the statement. “Our model recognizes passengers’ differing requirements,” he said, saying those include BlackBerry access, email and full I nternet.

OnAir will begin by offering phone and messaging services in Western Europe during 2007, and Internet services on long-range aircraft in 2008, Cooper said in the statement.

OnAir will face the challenge of selling to airlines that have seen the Boeing venture fail and may be wary to invest in a new service, Harteveldt said.

“Airline executives are extremely conservative; this is not an industry built on taking risks,” Harteveldt said. “Boeing’s exit brightens the market for OnAir, but they have to go out and create consumer awareness, and they have to be willing to sustain some losses at the beginning.”

Meanwhile, satellite may not be the only answer for in-flight broadband. A recent Federal Communications Commission auction awarded wireless spectrum to LiveTV of Melborne, Fla., and AirCell of Louisville, Colo., for use for air-to-ground linked broadband connectivity. AirCell spokesman Tom Myers did not return calls seeking comment.

“Whether the market or broadband on an airplane in the U.S. is satellite-based or air-to-ground based, there I’m not so sure,” Harteveldt said. “There needs to be satellite hardware that is light enough to compete with air-to-ground transmission.”

Bryan Baldwin, manager of corporate communications for the U.S. airline JetBlue, said that LiveTV is in the process of developing a product that they want to offer to their customers. JetBlue of Forest Hills, N.Y., is among a group of LiveTV airline customers that includes AirTran of Orlando, Fla., WestJet of Calgary, Canada, and Virgin Blue of Spring Hill, Australia.

“We have to wait and see what product they come up with,” Baldwin said. “Once they have a product, we’ll evaluate whether it’s something we want to make available to our customers. Whether it’s wireless broadband or text messaging, those are things that we’re open to.”

Baldwin said that cost of the services to both the company and to customers will be an issue, since JetBlue is a low-cost airline. The airline provides XM Radio and television through LiveTV for passengers for free.