Why Gogo's IPO is Struggling to Take Off (GOGO)

On Friday, in-flight Wi-Fi provider Gogo GOGO IPO-ed at $17 per share, but in just two trading days the stock has shed more than 16 percent of its value, closing at $14.27 Monday.

Why are investors selling the stock after only two days on the market?

First, we have to be fair and remember that the overall market has forced selling in the majority of equities but Monday’s drop represented more than 10 percent of lost value—much more than the overall market so there must be something else going on.

There is, and is has to do with the business model. First, Americans expect Wi-Fi to be free. If they can’t get it for free, they won’t pay much for it. It’s true that Wi-Fi is essential in most consumers’ lives but that hardly means that they can’t survive a couple of hours without it.

Tim Farrar, president of TMF Associates, a California-based research firm, said, “People have an expectation, and it’s grown over the past few years, that Wi-Fi should be free.”

If we’re flying, we can use our laptops to work offline, we can listen to music already downloaded and there’s always the movies and other video that were already on our tablets from a previous flight or the one we downloaded in the airport waiting to board. Then there’s all of the games.

The point is that for a business traveler, Wi-Fi might be a little more essential, but for the everyday family flying to Orlando to see Mickey Mouse, they can do without Wi-Fi for a few hours.

It’s also too expensive. Business travelers might accept the $14 daily pass or $42 monthly pass (that’s good on any airline) but that’s not going to fly with the individuals. It’s simply not that important.

This is why less than six percent of flyers are using Gogo’s service; the rest use data plans or consider the wireless Internet non-essential. The company has never had a profitable quarter and its average revenue per user was $9.74. This is a capital intensive business that relies on retrofitting aircraft, cell towers and satellites.

Last week’s FAA announcement that it may relax its rules on mobile devices below 10,000 feet has to excite Gogo somewhat, but whether that will make the service more attractive is uncertain.

Finally, as Businessweek pointed out, even Gogo isn’t certain of its business. “Our future success depends upon growing demand for in-flight broadband internet access services, which is inherently uncertain.” Thanks for the honesty but who wants to invest in a stock that even the company doesn’t fully stand behind?

Gogo’s success may rest on a change to its business model that makes the service more affordable to the population of flyers who don’t have a company footing the bill.

Disclosure: At the time of this writing, Tim Parker had no position in the equities mentioned.