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Wi-Fi dogfight: ViaSat's air battle with Gogo intensifies

Nicole Sinclair
Markets Correspondent

Since pioneering the in-flight Internet business that got approval from the Federal Communications Commission in 2006, Gogo Inc. (GOGO) has dominated the industry, commanding about 80% of the market.

But Gogo has hit a patch of turbulence: Last week, investors learned that American Airlines (AAL) threatened to terminate its contract with the company. In a legal filing, American said Gogo had rejected its termination notice and is disputing the airline’s contractual rights to switch to a Wi-Fi service that is materially better. American withdrew its suit this week, but the initial threat to end its contracts presents a vulnerability for Gogo: It’s no longer the only game in town. And this has given a glimmer of hope to competitor ViaSat (VSAT).

ViaSat launched in commercial aircraft in 2012 and has relationships with with JetBlue, United, and Virgin America. CEO Mark Dankberg says the company has a lot of opportunity to win over the airlines that have been with Gogo.

“We are engaged with almost every airline company,” he said. “All of the airlines want to figure why our service is different and better. It’s an exciting time for us.”

Reports have highlighted consumer dissatisfaction with Gogo’s speed and service. Only 7% of passengers on an average flight use Gogo, according to the company.  The company has traditionally used an air-to-ground system that functions like a cell service but with very low speed times because of remote towers. And the signal is shared among passengers, so the more people using it, the slower it is. While Gogo has highlighted its new satellite-based service, called 2Ku, some say it’s too little, too late.

Despite reported dissatisfaction among consumers, two things have maintained Gogo’s dominance: A near-monopoly with airlines, which allowed it to continue raising prices, and long-term contracts with airlines that have kept the Gogo naysayers at bay. But based on the recent threat from American Airlines, it’s possible long-term contracts may not provide the safety blanket many thought they would.

Gogo’s airline contracts contain a provision that allows airlines to terminate their contracts with Gogo if there is an alternative that “materially improves” on Gogo’s offering.

ViaSat sees Wi-Fi as a service, charging airlines a direct upfront fee. From there, the airline either offers the service as a perk or can choose to charge a fee, which it would collect directly. Gogo, on the other hand, charges nothing for the installation of its services but charges a fee for its service directly to consumers for during their flight and retains 80% of Wi-Fi revenue collected.

Airlines, which are becoming ever-more competitive in trying to lure customers with better offerings, are offering Wi-Fi as an important perk. “Providing superior Wi-Fi options to passengers is critical, as American competes for travelers who increasingly demand a Wi-Fi experience in the air that is on par with their wired Internet connections at home or work,” American said in its filing against Gogo. The airline cited a survey showing 1 in 5 passengers switched their preferred airline to another with better Wi-Fi.

While Gogo still reigns supreme, ViaSat is a formidable adversary to watch in the year ahead.