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Monday, January 23, 2006 - Page updated at 12:00 AM

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Rival emerges to Boeing's in-flight broadband

Seattle Times aerospace reporter

Connexion, the in-flight broadband service on which Boeing has spent hundreds of millions of dollars, is facing a potentially serious competitive threat from a new air-to-ground technology that could provide connectivity to airplanes over North America by mid-2007.

This month, the Federal Communications Commission (FCC) announced an auction of key airwave spectrum that will provide in-flight broadband access. The technology works via base stations on the ground similar to cellphone towers, and it is much cheaper to deploy than Boeing's satellite-based Connexion system.

Giving airline passengers live Internet access could become a big business; an FCC report said Boeing in 2004 pegged the future potential revenue of its Connexion service worldwide at $500,000 per airplane per year, for an annual total of $2 billion.

But the alternative channel now being opened by the FCC could enable a rival to undercut Boeing's service, which still has few customers.

Boeing executives have previously hinted the company likely will bid for the spectrum, but last week they were still considering their options. Boeing has until about mid-March to decide whether to bid in the May auction.

Wireless phone giant Verizon has already thrown its hat in the ring and has the advantage of an existing ground network. Boeing would not only need to outbid Verizon, it would then need to commit more money to create a network of more than 100 base stations or lease space on another ground network.

The new terrestrial broadband service won't connect to airplanes over the ocean; coverage will be limited to flights over North America. Still, that's a sizable potential market — almost half the world's business travel, according to Verizon, that will have a cheaper alternative to Connexion.

"We will take these new technologies very seriously," said Beverly Wyse, director of business development and strategy at Connexion. "We'll look at them carefully and make our investment decision."

"The airlines have given us very positive feedback," said Bill Pallone, president of Verizon's Airfone, the unit that will bid for the spectrum. "Verizon is a pretty formidable company. I like our chances."

Back in the summer of 2001, Boeing saw North America as a key market for Connexion and signed preliminary agreements with American, Delta and United Airlines. All three pulled out after the 9/11 attacks prompted a prolonged aviation slump.

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Since then, Connexion has struggled to gather customers. It is still losing money, with revenue undisclosed but clearly not yet significant.

Connexion serves just nine airlines, all non-U.S., on 170 flights. Brownlee Thomas, a telecom analyst with Forrester Research, said Connexion's business plan focuses on long-haul flights by wide-body aircraft and doesn't include significant North American domestic traffic.

Deal predicted

Thomas said that if Verizon wins control of the air-to-ground channel, she'd expect Boeing to cut a deal with the wireless company so that its Connexion customers could use the Verizon network aboard aircraft flying domestically and not equipped with the satellite system.

That would leave Boeing tiny profit margins for service on those domestic flights, but at least would provide full coverage so that Connexion wouldn't lose customers.

While Boeing considers its decision on whether to make a move, Verizon is gung-ho.

Pallone said Verizon aims to begin service just a year after it wins the license. He said the company can use its cell towers as sites for the ground stations.

Verizon plans to partner with other wireless companies so that passengers can access the service through their own providers. Pallone said Verizon will be able to offer passengers rates comparable to hotel Internet rates, which he cited as $11 to $15 a day. Connexion charges $27 for a day.

All major U.S. carriers have expressed interest in the Verizon system, Pallone said, including prospective Connexion customers who want to integrate the two systems — using Connexion for transoceanic flight and air-to-ground domestically.

No one really knows how high the auction bids will go because the air-to-ground airwaves will service a niche market of uncertain size.

The FCC does not pin a value on the airwaves. But Roy Knowles, senior wireless telecom auctions analyst with the FCC, said that spectrum auctions typically fetch a price about five times the pre-set minimum opening bid. Based on that rule of thumb, the bidding for the key air-to-ground airwaves could go to around $15 million.

But that's only the beginning of the required investment. Whoever wins must then build ground infrastructure, court airline customers, install equipment on airplanes and market to passengers.

"The spectrum is only one piece of the puzzle in establishing a business plan, and probably the smallest portion," said another auctions analyst at the FCC, Jeff Crooks.

Robert Syputa, an analyst with Montreal-based telecom consultancy Maravedis, views Connexion as a technology dinosaur. Because Boeing is so invested in the current satellite system, he said, it's in a poor position to respond to newly emerging wireless technologies.

"Basically obsolete"

"It's now basically obsolete as far as terrestrial applications are concerned," he said, "Maybe Boeing was jumping in too soon. Right now it looks like a mistake, because they are not able to migrate easily to anything else."

Connexion's Wyse insisted Boeing's system can evolve along with the fast-changing wireless telecom sector.

"There are going to be technology evolutions, like WiMax in the terrestrial world," Wyse said. "Part of our heritage as a technology company is to continue to watch those evolutions and make sure we are there snapping them up if they are the right ones."

Most aircraft in the air are single-aisle jets. For an airplane of that size, the cost of installing the current Connexion antenna is prohibitive. Is terrestrial broadband the solution?

An article in the May 2005 issue of the Boeing in-house magazine Frontiers on the upcoming auction touted the U.S. air-to-ground service as complementing Connexion's international business.

"It's a more likely way for Boeing to enter the North American field than with satellites," said Forrester wireless analyst Henry Harteveldt. "It means Connexion may not be based on a single technology."

So will Boeing go after the air-to-ground spectrum in May?

"It's not that clear," said Wyse. "This is a major decision."

Dominic Gates: 206-464-2963 or dgates@seattletimes.com.

Seattle Times reporter Tricia Duryee

contributed to this report.

Copyright © 2006 The Seattle Times Company

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