Gogo opens up about its 5G troubles

Top executives at Gogo recently offered some insights into the difficulties the company continues to face in its four-year quest to upgrade its network to 5G. Those difficulties stretch from regulators at the FCC to fabrication companies allied with Samsung to officials at a small chip-design company based in San Jose, California.

For Gogo, the troubles seem endless. Late last month, Gogo announced another delay in the development of its 5G chipset. The company's CEO called it "the most disappointing news of the year." The financial analysts at Raymond James called it "clearly frustrating."

Partly as a result, Gogo reduced its 2023 revenue expectations to between $410 million and $420 million, down from prior guidance between $440 million and $455 million.

"While this is very disappointing, one has to understand that 5G chips are difficult to design and build," Oakleigh Thorne, Gogo's CEO, explained during the company's recent quarterly conference call, according to Seeking Alpha.

He also sought to reassure investors that Gogo's move to 5G is still important, partly to win new customers and partly to blunt the threat posed by rival SmartSky. "Their product is probably about half the speed of our 5G product," he boasted.

But Gogo now expects to launch its 5G service in the middle of next year – well past the company's initial goal to offer 5G services at the end of 2021.

How did things go so wrong?

An American 5G story

Gogo, which sells Internet services to business aircraft in the sky from cell towers on the ground, said in 2019 it would build a high-tech 5G network using equipment from a set of US-based vendors. The company named Cisco (based in California), Airspan (based in Florida) and First RF (based in Colorado) as its initial vendors.

Gogo's announcement was timely. The Trump administration was then pushing the importance of domestic 5G products, and network operators like Verizon and T-Mobile were in the early stages of launching their 5G offerings.

But Gogo's all-American 5G plans were also a reaction to the FCC's "secure and trusted communication networks" effort. Widely dubbed the "rip and replace" program, it seeks to finance the removal of Chinese equipment from US networks. US government officials believe such equipment – from vendors ZTE and Huawei – could be used for spying. The Chinese companies continue to reject those claims.

Gogo operates an air-to-ground (ATG) network spanning roughly 250 cell towers across the US and Canada. The network is still using the 3G standard (CDMA, specifically), a technology that's more than a decade old at this point.

Gogo had intended to upgrade that network to 4G LTE – and had already installed 4G equipment on at least ten towers – but had to cancel that project because it was using equipment from ZTE. Gogo subsequently entered the "rip and replace" program in order to recoup roughly $333 million in expenses.

The problem? Congress only allocated around $1.9 billion to the FCC's "rip and replace" program or around 40 percent of what companies were requesting. That has forced Gogo and other "rip and replace" participants to get by with less, hoping that Congress will allocate more money to the program.

"The overall [rip and replace] process is complex, with specific documentation requirements that may change our assumptions on reimbursement accruals in our forecasts," Gogo CFO Jessi Betjemann said during the company's recent quarterly conference call. "At a high level, we expect 2023 and 2024 free cash flow to be negatively impacted by the FCC program."

Betting on the little guys

But the FCC's "rip and replace" program is just one of Gogo's many 5G troubles. The company is also struggling to obtain suitable equipment from its suppliers. But due to technical glitches, Gogo has delayed the launch of its 5G network several times over the past few years.

"Our supplier of 5G airborne and ground station radio technology is Airspan. They in turn have a chip supplier GCT, one of a few firms focused on developing 5G chips. They in turn use Samsung to fabricate those chips. And Samsung designates a sub-design house to develop the more standard blocks of the chip outside the 5G and 4G blocks designed by GCT," explained Gogo's CEO, Thorne. "As the chip was being brought up after fabrication by Samsung, there were three issues identified in the system block of the chip. A detailed root cause analysis was conducted by GCT and it ascertained that all three issues were related to the same root cause, a software issue in the peripheral sub-block of the chip, not an issue in the 5G block."

Thorne said GCT, based in San Jose, is working to fix the chip. It's important work, he said, because 5G will increase the speeds of Gogo's inflight Internet service from around 25 Mbit/s to up to 80 Mbit/s. "The con is that we have borne some technology risk in doing so," he explained.

But he said he continues to expect that work to be finished in time for a 5G launch next year. Gogo has already upgraded all of its 250 towers with 5G equipment and just needs the chip to complete the work.

But why go with GCT and not one of the market's big, established 5G chipset providers like Qualcomm or MediaTek? "We were too small for them," Thorne said.

Meanwhile, Gogo is racing to beat SmartSky, an upstart in the inflight Internet market that has been touting the speeds on its own new ATG network. SmartSky's network runs the 4G LTE standard, but company officials argue it sports some 5G-style enhancements.

Looking to the future

According to Gogo officials, their investment will pay off. "We expect to see the payback for these investments to start in 2025 and drive substantial returns for shareholders in the latter half of the decade," Thorne explained in a release from the company.

Gogo expects 15-17 percent revenue growth and $150 million to $200 million in free cash flow by 2025. Those expectations stem from the company's 5G network as well as its plan to combine that network with satellite services from EchoStar and OneWeb.

Some analysts agree. Gogo's business aviation business is "significantly underpenetrated," according to the financial analysts at Raymond James. They calculated that there are 38,000 such aircraft in the world but just 22 percent have Internet capabilities.

But Gogo's near-term challenges remain. For example, the company is offering up to $50,000 in discounts to customers who upgrade to 5G-capable equipment early. SmartSky, meanwhile, is offering a similar discount.

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— Mike Dano, Editorial Director, 5G & Mobile Strategies, Light Reading | @mikeddano