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Old 18th June 2004, 06:30   #1
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Quentin Hardy, 06.17.04, 3:00 PM ET

SILICON VALLEY - Most Wi-Fi hot spots offering wireless high-speed Internet connections have failed to find a sustainable business model, since it's hard to make people pay for something they often get for free. Fee-based Wi-Fi on airplanes, however, looks like it is taking off.

Last month, German carrier Lufthansa began offering on-board Wi-Fi on flights between Munich and Los Angeles, charging $30 for a connection lasting the duration of the flight. Asian destinations are to be added soon. Boeing (nyse: BA - news - people ), which installed the gear and runs the service, thinks it can eventually put the service on 4,500 of the world's 13,500 commercial jets.

"We believe we can generate business of $500,000 per airplane per year, for revenues of about $2 billion," says Scott Carson, chief executive of Connexion by Boeing, the aerospace giant's in-flight Internet group. Carson says Boeing plans to charge $30 for flights longer than six hours, $19.95 for flights of four to six hours, $14.95 for shorter flights and $9.95 for a 30-minute trial.

No one gets prices like that on the ground, of course. Two days after Lufthansa initiated its service, Cometa Networks, a national purveyor of Wi-Fi hot spots, shut down, citing insufficient investor returns. Cometa had been formed in December 2002 by a group including AT&T (nyse: T - news - people ), IBM (nyse: IBM - news - people ) and Intel (nasdaq: INTC - news - people ). Cometa's partners included McDonald's (nyse: MCD - news - people ), which offered a free hour of Wi-Fi for the price of a meal, and book retailer Barnes & Noble ( BKS) , which charged $11.95 a month.

The onboard connection is not as fast as a land hot spot, either. Boeing figures it delivers 20 megabits a second from the ground to the aircraft, and one megabit a second back to the ground. Since the service is shared, individuals get about 100 kilobits a second each.

A long plane flight full of anxious business travelers, however, is a very different marketplace from McDonald's. "People on planes want full Internet access--not just e-mail--and they're willing to pay for it," says Henry Harteveldt, travel analyst at Forrester Research. "Airlines, which pay probably $500,000 a plane to get Wi-Fi, won't do this if only 2% of people will pay. Our research shows something like 38% of frequent travelers will pay for this." For its part, Boeing anticipates running a profitable business on an uptake rate of 6% of total travelers.

For Boeing, running a consumer service company is a break from tradition as well. Discounting the brief period after World War II when underutilized machine shops turned out bedroom furniture, this is Boeing's first consumer business. Carson says Boeing contracted out virtually all the hardware--the onboard antennas linking the plane to a satellite, which then feeds data back and forth with a terrestrial server, comes from Japan's Mitsubishi Electric, and the internal Wi-Fi gear is from Cisco Systems (nasdaq: CSCO - news - people ). Boeing wrote software, managed the project and interacted with some 22 airlines, most of which Carson expects to sign up over time.

"The airlines asked us to charge the customers," he says. "They said, 'If we have it ourselves, we'll find a way to charge nothing.'"

Users are already employing onboard Wi-Fi to make Internet phone calls, likely killing the modest returns from the expensive onboard phones. Carson expects Verizon Communications (nyse: VZ - news - people ) to move its onboard phone service to Wi-Fi.

In addition to consumer use, the airlines are planning to use Wi-Fi for onboard medical diagnostics, weather updates, and in-flight equipment monitoring, so ground mechanics arrive at a flight knowing what needs to be serviced.

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