Our client is a startup that can deliver broadband internet aboard commercial flights.The company owns a patent on a necessary technology. They want to know whether their current business model is valid.
Since this is an interviewer-led case, the interviewer should guide the candidate through the interview.
This is a market entry case. The interviewee must evaluate a new product’s feasibility within the airline industry.
Short Solution (Expand) (Collapse)
1. How big is the market for inflight broadband in long-distance?
Industry and market sizingFirst Economy Seats per plane 20 180 * load factor 0.75 0.75 = 15 135 * Business travellers (%) 100 30 = potential customers per plane 15 40.5
The interviewee should round down to 55 potential customers per flight.
Key Insight: There are 99m potential customers per year.
Using the survey’s price elasticity information (for an arbitrary number of 100 potential customers):30 users at $5 = $150/flight 25 users at $10 = $250/flight 20 users at $15 = $300/flight 10 users at $20 = $200/flight 5 users at $25 = $125/flight
Key Insight: Total revenue is maximized at $15.
Potential market size in dollars/year
The potential market size is $297m/year.
2. How many customers does the startup need to break-even?
The interviewee can brainstorm cost segments.
- The startup must pay satellite operators an annual satellite fee.
- In addition, the startup must pay the operator for every megabyte downloaded in-flight.
- The airline charges a yearly licensing fee.
- The investment costs include amortized acquisition and installation costs.
Calculated from Table 2 the fixed costs account for $150,000 per annum per plane:
We can use the following structure to calculate the breakeven number of customers per flight:
Costs = Total revenue
To break-even the startup needs 50 customers per flight.
3. What are the main risks involved?
This open-ended question is intended to analyze the candidate’s creativity.
- Competitors could enter the market with a newer technology that provides faster connection speeds.
- To compete, the startup must invest in the newer technology, thus increasing fixed costs. If these costs are passed on to customers, the startup is at a competitive disadvantage.
- If airlines agree to work with the startup, licensing fees will probably be proportional to the startup’s revenue. Thus, as revenue rises, licensing fees also rise.
- When renegotiating the contract, the satellite company could demand higher fees due to reasons such as higher utilization of capacity. This would also decrease the startup’s competitive advantage.
- If the initial service does not work well due to severe connection problems or network failures, the startup could gain a bad reputation and lose customers. The airline could also argue that since the startup failed to provide service as promised, the airline can cancel the contract and search for another in-flight broadband partner.
- Since this service relies on cutting-edge technology, the hardware probably needs to be frequently replaced in order to keep up with market trends. Old hardware could lead to competitive disadvantages that can reduce the startup’s market share.
4. What would you advise the startup?
- The business model does NOT seem promising because the number of customers required to break even is above the current market potential.
The startup should try to limit fixed costs increases because such increases will negatively affect their current business model.
- If the startup could request that the airline be responsible for investing in, operating and maintaining the equipment, the startup reduces their risk of forced unplanned hardware investments.
- To test the calculated market size and current business model, the startup should roll out the business on a small scale.
In the future, how can your client defend against competition from other in-flight broadband providers?
- Examples of market barriers to entry include economies of scale, technology patents, and government regulations. The startup’s patented technology could be a good barrier to entry.
- As soon as the startup has reached a certain size, the startup could use economies of scale to obtain discounts from Internet providers or satellite companies. They can also reduce hardware costs by ordering in bulk.
- The startup could also invest in R&D to develop new technologies that render the use of satellites unnecessary.
- The startup has first-mover advantage.
- To increase customer loyalty, it could provide incentives such as long-term subscriptions for frequent flyers.
- It could also provide perks for loyal clients such as faster connection speeds.
- Branding and advertising can help increase customer loyalty. This might allow the company to charge higher prices without losing customers.