The Brancatelli File



June 29, 2006 -- There is a fine line between high-tech and highway robbery and Verizon and Boeing have learned that bitter lesson this week.

As you may have heard, Verizon is throwing in the towel on Airfone, the in-flight phone system it inherited when it bought GTE in 2000. The 20-year-old service will be shut down by the end of the year. It's a humiliating crash landing for Verizon when you consider that Airfones were once installed in almost two-thirds of the nation's commercial jet fleet.

As for Boeing, it has all but given up on Connexion, the in-flight Internet service currently available on about 150 flights worldwide. Boeing says "the market has not developed satisfactorily" and forced "the company [to] accelerate the evaluation of options for the future." That, of course, is corporate speak for we're gonna sell or shut this puppy as soon as we can figure out what is least embarrassing.

Considering how much frequent flyers depend on the Internet and the ferocity of the debate over whether we should allow travelers to use personal mobile phones in flight, it may seem odd that Verizon and Boeing are giving up the high-tech ghosts. You can be forgiven for wondering aloud: How can anyone not make money selling on-the-road phone services and Internet access to business travelers?

That's where the highway robbery part comes in.

If you haven't used Airfone lately--and who has?--Verizon charges a $3.99 "connection fee" and $4.99 a minute for domestic calls. International calls cost $5.99 for the connection and $5.99 a minute. If you've never had the chance to use Connexion--and who has?--Boeing charges $9.95 an hour or $26.95 a flight. Those are the open rates, of course, and both firms do offer some pricing deals. But like the Big Six airlines, who continue to insist that business travelers will pay any price for walk-up fares, Verizon and Boeing have been arrogant and they priced their products out of the realm of acceptability.

Let's take Verizon first because Airfone has been around much longer and failed more spectacularly for a much longer period of time.

Originally created by John Goeken, the man who founded MCI, Airfone had to fight an uphill battle for approval. And by the time Airfone finally went into commercial service in the mid-1980s, it was as if travelers no longer cared. Goeken eventually sold Airfone to GTE and briefly ran a competitive in-flight phone system. When Verizon got its hands on Airfone, the service was sputtering. Southwest Airlines, in fact, had already decided to remove the phones from its fleet. But Verizon never seemed to care much about Airfone, and, except for a brief, post-9/11 promotion that cut prices, didn't try to stimulate usage. Verizon's attempt to convince travelers to use Airfone handsets as in-flight computer modems was equally lame: Transmission rates were painfully slow and the prices were obscenely high.

On the other hand, Connexion has been a victim of bad timing as well as bad pricing. The service was first announced with great fanfare in April, 2000, and Boeing had powerful partners: American, United and Delta airlines. Boeing confidently suggested that the in-flight Internet access market would be worth $25 billion a year by 2005.

But progress was slow and expensive--even now it costs an estimated $500,000 to equip an aircraft for the satellite-based Connexion service--and then came 9/11. All three U.S. carriers bailed. It took until early 2003 before Boeing was even able to test the service on a few Lufthansa and British Airways transatlantic flights.

I was lucky enough to be invited along on an early BA test flight and Connexion performed superbly. Connecting to the Interet from BA's business class was a breeze as long as you knew how to use an RJ-45 cable and the RJ-45 jack installed in the seats. (Some of the others along for the test ride didn't and Boeing wisely turned Connexion into an in-flight Wi-Fi service.)

But the quality of Connexion was never an issue. It was always the price. I was also lucky enough to spend two hours in a cab with several top Connexion executives on that trip and I remember making what I thought was a compelling case: Don't ask frequent flyers who've just paid $8,000 for a business-class flight to kick in $30 more for an Internet connection. It was a nickel-and-dime tactic, I said. I further pointed out that BA was happily pouring out marvelous Champagne and top-notch wines for its premium-class customers. Why was the $70-a-bottle bubbly part of the cost of the ticket, but not Internet access, I asked.

The Connexion folks listened politely--What choice did they have, stuck in London traffic as we were?--but stuck to their pricing assumptions. When Connexion finally rolled out officially in the spring of 2004, the price was $29.95 a flight. Acceptance by airlines was slow--even BA passed--and usage rates on Connexion-equipped flights was appallingly low. More than two years later, only ten carriers have Connexion-equipped flights and Lufthansa alone accounts for about half of all the routes worldwide. Even a slight price reduction earlier this year hasn't bumped up airline acceptance or passenger usage rates.

For its part, Lufthansa has made it clear that it wants to continue to offer in-flight Internet access and Boeing may find a buyer for Connexion at a distressed price. And I suppose a miracle could happen: After hemorrhaging on the bleeding edge with Connexion, Boeing might look at its $1 billion investment and decide to revive its sales effort and slash prices for both airlines and business travelers.

But if not, in-flight Internet service remains inevitable. Last month, Verizon lost the rights to most of the in-flight communications spectrum it was using. In a government-run auction, the spectrum was divided up by a division of JetBlue Airways and a company called AirCell.

JetBlue will probably integrate E-mail or Internet service into its existing at-seat television system. And AirCell is promising an air-to-ground version of in-flight Internet next year. Unlike Boeing's satellite-based system, an air-to-ground network as envisioned by AirCell would be much cheaper for airlines to install and certainly cheaper for business travelers to use.

We definitely won't miss Airfone. And if Boeing bails, Connexion might be a footnote to the history of in-flight Internet. But a new generation will bring the best of the Web--and maybe in-flight voice calling--to the skies.

That's because good high-tech ideas, especially the ones that make us more productive in the air, have a sense of inevitability about them. And highway robbery is almost always punished, even in the skies.

Copyright 1993-2006 by Joe Brancatelli. All rights reserved.