Question

In 2008 , Gogo became the first company to offer Wi-Fi service on commercial aircraft. It provides the service primarily through ground-based cellular towers. Many air travelers find the \(\$ 30\) price Gogo charges on a cross- country flight to be very high because the speeds offered are too slow to stream movies or other content. Gogo faces competition from newer services that use satellites rather than ground-based towers, which enables them to offer much higher speeds at half the price Gogo charges. According to an article in the Wall Street Journal, in late 2016 , Gogo was "rolling out an advanced satellite-based network" that would allow it to offer higher speeds at a lower price. A number of airlines, though, were considering switching to competing services. a. Will copying its competitors by offering a faster, lower-priced service likely allow Gogo to recapture its market share? b. Unlike its competitors, Gogo had to spend substantial amounts to build a network of ground-based cellular towers. It has to abandon those towers as it switches to a satellite-based network. Is the cost of those towers a disadvantage to Gogo as it competes with the new firms entering the industry? Briefly explain.

Short answer

Gogo could potentially recapture its market share by offering a faster, lower-priced service, but this depends on customer perception and demand. The cost of the ground-based towers is a sunk cost and while it increases Gogo's total initial investment, it should not influence the firm's future decision to switch to a satellite-based network. Market perception and timing of the transition are also crucial for Gogo's competitive position.

Step-by-step solution

Assessing Market Share Recovery

To decide whether Gogo can recapture its market share by offering cheaper and faster services like its competitors, both product competitiveness and customer perception would be considered. Typically, offering higher-value services at lower prices can attract customers. However, the challenge might be overcoming any negative perception about Gogo's service, if it exists.

Consideration of Infrastructure Cost

Regarding the cost of the ground-based cellular towers, it could be considered a sunk cost as it has already been incurred and cannot be recovered. In business decisions, sunk costs should typically not affect future decision making. However, this significant investment could certainly increase Gogo's break-even point and could be a disadvantage compared to new entrants who can start with a more advanced and potentially economical infrastructure.

Consideration of Market Perception and Timing

The final consideration would be how the market perceives Gogo's transition and whether they were able to switch to the advanced satellite-based network in a reasonable time. If customers perceive the transition as Gogo being behind its competitors and slow to adapt, then this may create a competitive disadvantage.

Key concepts

Market Share

Understanding market share is crucial for every business aspiring to succeed in a competitive environment. It represents the percentage of an industry's sales that a particular company controls. For Gogo, regaining market share in the airline Wi-Fi market involves not simply adopting new technology but also pricing the service competitively and ensuring it meets customer expectations for speed and reliability.

Retaining or increasing market share can be achieved by innovating, improving service, and enhancing overall customer value—which in Gogo's case, may mean offering faster internet at a lower cost than before. By doing so, they could potentially attract a larger customer base from its competitors and regain its position in the market.

Sunk Cost Fallacy

The sunk cost fallacy is the misconception that money already spent should influence future business decisions. This is a fallacy because sunk costs are past costs that cannot be recovered, and therefore, should not affect any new decisions. With respect to Gogo, the company's investments in ground-based cellular towers are sunk costs.

If their decision-making process is unduly influenced by those costs, they may miss out on more profitable opportunities or strategies such as transitioning fully to a satellite-based service. It's important for businesses to recognize that sunk costs are not relevant to future decisions, which should rather be based on the potential for future returns.

Competitive Strategy

A competitive strategy defines how a company will compete in the market and differentiate itself from its competitors. For Gogo, devising a competitive strategy might include focusing on service innovation, improving service quality, and cost management. The goal is to appeal to airlines and travelers by offering a level of value that competitors cannot match, such as providing faster services at lower prices, which might be necessary for Gogo to re-establish its market position against satellite-based competitors.

Product Competitiveness

Product competitiveness refers to how well a product or service meets the demands of the market compared to the alternatives available. Regarding Gogo, increasing the product competitiveness of their in-flight Wi-Fi service means offering higher internet speeds at lower costs, while potentially introducing services that competitors do not offer.

By delivering a superior value proposition, Gogo can make their service more attractive to airlines and their passengers, thus enhancing the competitiveness of their product offering in the market.

Customer Perception

Customer perception is the impression customers form about a company and its products or services and it can significantly impact business success. For Gogo, addressing customer perception involves not only pricing and speed but also the ease of access, reliability of the connection, and overall customer experience.

If customers perceive Gogo's transition to satellite networks positively, seeing it as a sign of innovation and commitment to improvement, this could greatly benefit their competitive edge and aid in recovering lost market share.

Break-even Point

The break-even point is the moment when a company's revenue equals its costs, which means there is no net loss or gain. For Gogo, understanding the break-even point after transitioning to satellite technology is essential in determining pricing strategies and gauging the volume of sales required to cover costs.

Considering that their initial infrastructure investment in ground-based towers is sunk, Gogo must now re-evaluate their pricing to determine at what point the new satellite service will become profitable, and this calculation will be pivotal in pricing decisions for their service innovation.

Infrastructure Cost

Infrastructure cost is the capital a company invests in the physical resources needed to deliver a product or service. For Gogo, the initial infrastructure cost for the ground-based tower network was substantial. As they switch to satellite-based networks, they face the potential issue of such costs adding to the overall expense of their transition.

While these costs are sunk, Gogo will need to prudently manage and finance the new infrastructure to ensure that it does not impede their ability to offer competitively priced services.

Service Innovation

Service innovation involves introducing new or improved services to meet evolving market demands and differentiate from competitors. For Gogo, service innovation might entail investing in satellite technology to provide faster and more reliable internet connections.

Innovating could help Gogo to reconceptualize their service offerings, leading to improved customer satisfaction and a strengthened position in the competitive airline Wi-Fi service market.

Business Decision Making

Business decision making is the process of selecting the best course of action from several alternatives. Gogo's decision to switch to a satellite-based network despite the sunk costs of its ground-based infrastructure illustrates the complexity of such decisions.

The decision-making process includes weighing the pros and cons, forecasting the potential outcomes, and considering both financial and non-financial factors, all with the aim of enhancing the company's long-term competitiveness and market share.