Gogo’s IPO – questions investors should consider

Gogo is pricing its IPO today (Update: it launches at $17 per share) after shelving its original plans.

Since I introduced new potential passenger experience and IFEC economic models in late 2009 that could capitalize on the coming growth in digital media and mobile technology, leverage the “60-hour cycle” of passenger engagement opportunity, and encourage airlines to “think outside the flight”, about 70 airlines and others with vested IFEC interests (Gogo, Panasonic, Amazon, etc) have talked with us or viewed them to inform their own strategies.

What can digital entertainment mean for airlines Jan 2010 cover

Progress has been good, and credit airlines and Gogo for improving a previously customer-challenged experience (when’s the last time you saw SkyMall online?) The “Think outside the flight” ecosystem has improved as well, with iPads at airport gates, food-ordering capability, etc.

But financial investors should consider a few key things:

1) Gogo’s penetration strategy in cutting deals with most domestic airlines has worked brilliantly, but the model is still based on paid WiFi, countering larger consumer trends toward free WiFi.

2) Employers may still be showing willingness to pay, but what is the elasticity of that pricing and demand?

3) How much of Gogo’s revenue growth is result of increased passenger demand per flight, or just additional plane installs?

4) Gogo’s product does not provide capacity for what passengers really want – streaming video and uninterrupted internet service

5) This is caused by constraints inherent in Gogo’s ATG model, which airlines adopted primarily because installation took only one night and cost half of Row 44’s satellite install cost (even though Gogo financed much of it).

6) Raising capital to upgrade to larger-bandwidth satellite connectivity and more global coverage is a great product idea…Gogo economic model challenges 2

7) However, investors should consider when the continuous capital investment cycle will ever allow the product to command pricing necessary to deliver a healthy marginal profit, or whether it will result in a marginal loss (see graph to right)

8) Is IPO capital actually going to fund capital investment for an unproven long-term profitability model or return capital to earlier equity investors and management?

9) In conjunction, since Gogo also just took out a $11o+ Million line of credit, it will be prudent to watch its capital structure over time

10) Will product suppliers – namely entertainment industry content owners – will provide attractive enough margins given the battles they’re engaging in with Netflix, Amazon, etc? My original model suggested customer acquisition relationships with the new digital media firms as they compete for share, so going it alone in dealing with Hollywood may not work

11) Will (or When will) the consolidated airlines, if Gogo’s profitability becomes attractive enough, decide to take a larger piece for themselves?

So it’s certainly interesting, and Gogo and its partner airlines have done a great job trying to deliver a better passenger experience, but the investor viewpoint may require a different lens.


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