The idea of receiving text messages and checking voicemail while flying may be nirvana (or hell) to business travelers, but the Gogo partnership with T-Mobile proves that the aviation internet service provider has potential as a third-party platform and may ultimately be acquired by a wireless carrier.
Gogo CEO Michael Small said the T-Mobile deal shows how the company can "engage the entire plane with some form of connectivity" and diversify its revenue base a bit. T-Mobile gets to extend its network 30,000 feet or so.
Analysts say the economics are likely to be good for Gogo.
First, texting takes up little bandwidth. Second, Gogo's wholesale deal with T-Mobile will flow to the bottom line excluding the revenue share that airlines will get. Meanwhile, Gogo's deal with T-Mobile means other carriers will likely want to partner. AT&T may not be interested since it's planning its own in-flight service.
Evercore analyst Jonathan Schildkraut said in a research note:
"Though the economics of the agreement were not disclosed - historically, sponsored deals have been structured to be profitable for GOGO applying a flat rate charge based on expected usage. Additionally, Gogo can benefit from breakage (failure for customers to hit expected usage levels). In the case of text, the bandwidth costs associated with the service are very low — implying a fairly high margin service."
The broader theme here is that aviation connectivity could be seen as an extension of the data plans you already pay for. The catch is that there's only so many planes, spectrum and infrastructure to go around. T-Mobile went the partner route with Gogo, but rumors started circulating a few weeks ago that Verizon may buy the aviation internet provider. The rumors started swirling after an article in Runway Girl, which follows aviation.
Well Fargo analyst Andrew Spinola noted that Gogo's spectrum alone may be worth an acquisition for Verizon. Verizon has noted that it isn't interested in aviation service, but stranger deals have happened.
Gogo last month reported a second quarter net loss of $18.7 million, or 22 cents a share, on revenue of $99.5 million, up 25 percent from a year ago.