In 2012 I wrote that once bandwidth increases substantially for inflight internet, it would eventually become free (included in ticket price). I predicted that would happen within 10 years.
Three and a half years ago I repeated that prediction. At that point JetBlue already offered it on some aircraft, now it’s across their whole fleet.
Aer Lingus has announced that starting next year coach passengers will receive 20mb of free wifi as well as free drinks.
In an era where everything seems to be unbundled (fee crazy) that seems like a strange thing for me to have said. Sponsorship is one model to fund internet. Southwest, Delta, and Alaska offer free inflight messaging. T-mobile subscribers get an hour of free Gogo internet.
More importantly speeds are improving. Delta has been rolling out robust satellite internet and American is too. You need to price internet because there hasn’t been enough bandwidth to go around so you need to limit its use to those who value it most, otherwise it would become as unusable as it is on an Emirates A380 where it’s mostly been given away free.
However once you have enough bandwidth the costs to provide access are mostly fixed, and the economics of airline fees reverses. Remember that hotels used to charge for internet and now it’s mostly free.
Bundling — like your cable company does — becomes a profit-maximizing strategy.
Here’s a simple example.
John values Disney at $100 a year and FoxNews at $10 a year; Sally has the reverse valuations. Without bundling, the cable company will offer each channel for about $99, and sell a channel to each consumer, reaping $198 in revenue (N.B.: I am assuming that the cable company has a good idea of demand in general, although it cannot identify which consumer is willing to pay how much for what.)
In lieu of this set up, sell the bundle for $109 to each consumer, reaping a greater revenue of $218. The company makes greater profit.
More importantly, aggregate welfare is higher. In this case each consumer receives two channels instead of one.
Bundling makes sense where consumers demand various levels of service, will pay different amounts for each service, and the marginal cost to provide services is low. Once the investment is made to be able to to provide the service, the key is to extract as much total revenue from all of your customers as possible. You can make more by offering a premium product than a stripped down one.
My original prediction said it would happen in 10 years. There’s 4 years left. We’re starting to see it even before I thought and I believe we’ll see it spread more within this timeframe although it’ll take longer to become largely universal.