In this episode of the Viasat Podcast, we talk to Kevin Harkenrider, Senior Vice President and President of Broadband Systems, about the company’s global expansion.
Kevin Harkenrider
As head of Broadband Systems, Harkenrider oversees the company’s residential, business, aviation and maritime services, among others. In the next few years, with Viasat planning to launch a global constellation of satellites (ViaSat-3) aimed at connecting much of the earth, Harkenrider will be engaged in helping transition the company into a global internet service provider.
In this interview with Alex Miller in Viasat corporate communications, Harkenrider addresses some of the opportunities and challenges ahead:
Determining what types of products and services are good fits for a variety of different countries.
Negotiating the various rules and regulations for dozens of countries
The promise of bringing connectivity to many areas of the world that are unserved or underserved today
What factors will go into determining whether Viasat partners with existing entities in a country or offers the service ourselves
How Viasat will scale its workforce as it grows globally
Transcript
Alex Miller: Hello and welcome to the Viasat podcast. I’m Alex Miller with Corporate Communications. And today, we’re visiting with Kevin Harkenrider, senior vice president and president - Broadband Systems here at Viasat. So in this capacity, Kevin, you have oversight over all of our residential, enterprise and business internet services as well as aviation, maritime and a few others. So basically everything but government and space systems, is that right?
Kevin Harkenrider: Pretty much, Alex.
Alex Miller: All right. So we wanted to talk with you today about Viasat’s global expansion plans. So in the next few years, we’ll launch service on the ViaSat-3 constellation, which is three satellites that will offer global connectivity and potentially make Viasat the world’s first global ISP. So I just wanted to start out on the technical side and talk about ... what are some of the milestones we need to achieve to make this happen?
Kevin Harkenrider: Alex, when you have a project that’s probably close to -- it’s hundreds of millions of dollars of expend as well as complexity -- there are four major threads that have to come together in the right sequence, and the right time. The most important for this particular satellite is a payload that Viasat is building itself for the first time. A payload of a satellite -- think of it as the human body. You’ve got a brain that’s payload and then the spinal cord and the rest is the skeletal system is what Boeing is doing for the remainder of the structure. So the payload, the brain, we’re doing ourselves. Right now, we’re in the qualification phase of the various modules that goes into the brain. You’ll think of a number of different key modules and they’d almost be qualified for making sure they can handle, A, the rigor of a launch as well as a long-term duration of what happens to a unit in space. We are still in the building phase of those things and qualification phase for many of those. Some have passed and are completed. The others, many of them are still underway. So that is the primary longest pull. And it’s something new. We haven’t done it before. Hence it’s likely the most critical part for this particular one. There’s also the second part on the terminal. In each household that we put service in -- most people in the satellite industry know our business -- but there’s an antenna on the roof as well as something in the house. We have some changes to handle our new satellite that had to be done. That’s another development project underway, number two. Number three is we have a number of ground stations where we take the satellite signal back to Earth and connect it to fiber. As we’ve publicly disclosed there are more of those locations than before, hence the real estate and those type of things that go into getting those things set up is also a piece that has to be done. And lastly there’s a system software that ties everything together. That’s the very large developmental piece. So all four technically have milestones for various phases. The one we’re focused most on is a critical path like any large multimillion dollar project, and that’s building the payload and getting through the qualification phase.
Alex Miller: And that’s primarily happening at our facility in Tempe, Arizona?
Kevin Harkenrider: In Tempe, as well as we have a number of contract manufacturers building some of those modules for us. And we’ve announced some delays with some, one of the contract manufacturers in terms of producing the units we need to get through the qualification. They’re still underway and occurring later than we originally anticipated, which has driven some of the delays in the announced launch date for the first satellite, which we’re now forecasting, the first half of 2021 calendar year.
Alex Miller: 2021 for the first one, which will cover North and South America.
Kevin Harkenrider: Correct.
Alex Miller: And then the second will be over Europe, Middle East to Africa, and then the third over Pacific.
Kevin Harkenrider: That’s right Alex.
Alex Miller: Right. So let’s talk a little bit about what all that technology is going to get. Satellite has the potential to reach billions of people who currently have very little access to the internet in many places, or some not at all. So what does that opportunity look like for the satellite industry in general and for Viasat specifically?
Kevin Harkenrider: So the satellite industry has certain advantages over -- typically look at cable and fiber, the terrestrial, the classical terrestial ways of giving someone access to broadband internet. Satellite, first of all, can handle a mobile customer. And the primary one we use a lot of are military and commercial aircraft. That has been a very attractive growing market for us and satellite is unique to handle that market. The other thing satellite has an advantage is, in the cable and fiber industry, they use a metric -- some version of dollars per home reached. What does it take you to get to a home in that metric we refer to as our cost per our gross add? Satellite has an inherent advantage for homes or businesses which are located further from a core central urban area, because we can get our dollars per home reached -- or dollars per business reached -- is much lower overall than what a cable or fiber provider. That’s why you’ll see us typically compete in the non-urban core area. We have an advantage as you get further away from a fiber plant, cable plant, those type of locations. That’s where we focus, and we have an inherent economic advantage. In the satellite industry you’ve heard recently SpaceX, Amazon, OneWeb -- all of these companies are doing these LEO satellites because satellite has this advantage. They have a different technology than what we use, but it’s still based on the satellite economic advantage per-home reach for business reached is inherently better than cable or fiber or even high-speed DSL in many areas of the world.
Alex Miller: As we look at all these different places where we might bring our service, what sort of factors drive our decisions about which countries to enter once we have coverage over them?
Kevin Harkenrider: Whenever you have a business, you address it: How much revenue can I get, and what’s the profitability of the revenue? In our case, we need customers and customers are proportional to population. That’s the first metric. Secondly is the ability to pay. Think of it as perhaps per-capita income times population equals market attractiveness. Then the next iteration you do is what I covered earlier: How well populated is it in an urban core where there is a cable or fiber provider already, where there’s a lot of people still, but there’s not in an urban core, hence you have plenty of customers -- would be the primary ones you look at times per capita income equals a market desirability index on a rough scale. So when you look at where we are today, the United States has a very high per capita income. It has a high population, millions of homes that don’t have access to the cable or fiber in the core. That’s an attractive market. Hence, we are in business there. As you get in other areas of the world, you get other areas that have high population, but the per capita income will vary and you need to be sure you look at where they are located, those homes or businesses relative to where the urban has cable and fiber. The other pieces are mobility traffic where airlines fly. Do they have a current provider of broadband internet? Many have something inferior … but still have an entrenched franchise, let’s say, in terms of what system they’re using. So those are already entrenched. They’ve spent the money, they may not be attractive to someone who has nothing, who’s more of a green field airline looking for it. If they have a lot of planes, i.e. a lot of market potential, a lot of passengers, therefore, people use internet and they don’t have a provider, they’d be an ideal one to use globally. When you put a three-satellite constellation of ViaSat-3 together, if you happen to get an airline that flies across all those places, would you like to have one system to tie all their passengers, one internet provider -- that’s an ideal customer. Of course there’s not too many of those. So what we look at is a combination of for the residential market or the community Wi-Fi market or the enterprise market. How many businesses or homes are there that aren’t in a cable fiber footprint in the urban core? How many are further from it? What’s the population? What’s the income? Therefore, what’s a market that we can reach? And the more desirable they are, the more likely we’ll break them on our hierarchy of where we’d like to be.
Alex Miller: Ok, so it sounds like there’s quite a bit of research that’s going to go into trying to figure out where we’re going.
Kevin Harkenrider: Yep, some you can do it in books. Some you can do in your own research. Some you do have to do it on the ground. We have to do all those.
Alex Miller: So following from that, we have a variety of different products today in different areas. We have the community Wi-Fi service, residential, business internet, commercial, business aviation, which we’ve talked about. So how do we decide which products we offer in which countries?
Kevin Harkenrider: We have finite capacity. With ViaSat-3, we’ll still be finite, not infinite capacity. So how do you use your capacity where you get the best return? Where you get the best return is typically where the revenue per installed dollar of incremental investment is the lowest. And where you can get the best return typically in a mobile market, because satellite has a unique value proposition of being the only alternative – no cable or fiber – therefore you have satellites. Our satellites have an inherent economic advantage, the way they’ve been designed. And therefore in the mobile market we’re the fastest growing provider of broadband internet in an aviation market. So we look for that to be the first thing to look at it. That alone is not enough to use the capacity we have. So we look at, I’ll call it the hierarchy of desires going down a list. The next one we look at is more enterprise or businesses. Let me put governments at the top. Typically, governments have very unique applications, have various need for security. They have special needs. But the cost, let’s say per bit, the price per bit will be higher. Then you can see commercial aviation. Then you get to maybe an enterprise, a business, that has a small, let’s say, some finite number of locations they want to tie together. And those will cross typically both an urban area and a less urban area. So a single provider can’t service them. Satellite can be an attractive proposition for those. And then next would be a residential home. That market in the United States is very strong. Other countries in the world it’s not as strong because per capita income is much lower and the affordability may not be enough. So those we’re offering a Community Wi-Fi solution where in essence we’re sharing a single terminal with hundreds, some cases thousands of individual subscribers, who will pay by the drink or pay by the number of usage bytes or something to allow a much larger population using a little bit of internet when they truly need it because they can’t afford to have it all the time. It’s too prohibitive for the amount of income they have where they live.
Alex Miller: Right. And so when you think about some of those higher dollar or higher revenue uses, like aviation and government, that helps kind of offset some of that community Wi-Fi service?
Kevin Harkenrider: Here’s how I view it, Alex: We have a finite capacity and there are not enough airlines -- if every single airline used Viasat’s constellation alone we would still have excess capacity. Since we have an economic advantage, as I said earlier, you now still can get nice profit, but it may not be as much profitability, but still strong profitability. When you have a need to share capacity, you make a decision as to how to allocate it. But we have a lot of capacity and much of it will be available to allocate to all those five different uses I just described in many areas of the world.
Alex Miller: Thinking about the third of the ViaSat-3 satellites that’ll be over Asia Pacific. China is a big kind of question mark there. How is that going to look different from the other two over the rest of the world?
Kevin Harkenrider: So I talked about how you look at population times per capita income as a market size indicator. China does not allow any other country to have landing rights, i.e. put a satellite coverage over their country and India is the same way. So the two largest populations in the world are off limits at the moment to satellite. India, never know. It possibly could change in several years, but right now we assume they will not. So in that case, you shut out two of the very large markets, so you must go elsewhere. So you can’t do it the way I describe it. So you’d exclude China and India. That would affect mobility and our commercial aviation. We don’t have the way. So in those countries, the only solution to those, let’s say you have United Airlines wants to fly from San Francisco to Shanghai. They won’t be able to use our ViaSat-3 service once they reach Chinese airspace. Therefore, we’ll have to have some capacity sharing agreement with a Chinese satellite provider. With the deal that we’ve announced with ChinaSat allows us that ability, but you won’t be able to use ViaSat-3 for all those. Same thing in India. We don’t have the right to use capacity over the country. We’ll have to negotiate landing rights or usage on other satellites in those countries. That takes us ... discusses the mobile application, which I said was our most attractive application. We have to have sharing arrangements. Therefore, we’ll have to go do that. For the rest of our applications, you look for other populous countries. Indonesia comes to mind, the fourth largest population in the world, also is in the Asia PAC region. So that would be an area both its millions of subscribers you look for as a natural place to put business and residential, and Community Wi-Fi service there. You would focus more capacity over that as a result.
Alex Miller: Okay. So my next question had to do with government regulations, which kind of follows from that. That’s a whole patchwork that we’ve got to figure out. How do you get started trying to figure out, you know, landing rights and all that?
Kevin Harkenrider: The landing rights are an issue I just described -- so in some cases it precludes what you want to go do. Let’s say there’s many factors internationally. There are tax, very complicated tax structures that affect how you value the service, the cost of providing a service, the cost of the equipment of importing into the country. We’ve learned in Brazil, for example, that there’s many, many taxes on the service which affect your ultimate profitability. So it’s very important they become knowledgeable of the tax, the legal, many of the accounting treatments we deal with in those countries. The landing rights I talked about in there for having IP licenses, all those things come together. You must do the research ahead of time. We’ve had -- in the countries we’ve entered, mainly in Central America and also Brazil -- we’ve had a lot of learning we’ve been doing on those. In general, I’d say the complexity is beyond what we previously experienced where we offer internet service today in the United States. It’s much more complex and therefore the cost to implement going in the country is higher. Therefore, your profitability can be impaired if you don’t recognize that ahead of time. So it’s very important you do the research. We typically use consultants, outside legal agencies. We hire a number of those experts to assist us before we launch the country so the economic picture of what we’ll be incurring for costs are known. So we can determine if the revenue we’re going to receive makes a good investment for our shareholders. You’ll find many countries, the capacity or the per-capita income times the population is too small. We will not offer a residential service, for example, there, because going into as an entity, it will not be profitable for us. We will then wholesale the service. We’ll offer bandwidth, but a local distributor there would be the person that sells to a customer that provides the internet service and is the entity that will represent the sale of the Viasat internet service in those smaller countries. There are many more countries in the world where we will only wholesale and not be the in-country provider. So we do not have to have a legal entity and we don’t have to worry about many of these tax and other legal considerations I just talked about.
Alex Miller: Sure, that makes a lot of sense that. You know, you reference ChinaSat. That’s one kind of unique situation. And in Brazil, Telebras has their own satellite and so we’ve partnered with them on that as well. So we’ve learned a lot there, I assume.
Kevin Harkenrider: Yes. Yes. And those are two perfect examples of how using our satellite for that area and those that will lend it. Eutelsat’s another one where we also over Europe, we don’t have coverage today. We will several years from now. But in the interim, we use Eutelsat satellite coverage for the mobility aircraft we have today that fly SAS and FinnAir and EL AL. They use that coverage when they’re over that space, when they enter ViaSat-1 or ViaSat-2 coverage, we use our satellites.
Alex Miller: So switching gears a little bit, I wanted to talk about the structure of Viasat as it changes from a mostly U.S. based company to more of a global player. So I’ve heard you speak before about the need to be very efficient so that we don’t have to duplicate services with each country and keeping the staff from getting enormous. How do you plan for that? Can you expand on how we even do that?
Kevin Harkenrider: Generally, think of each country and because of the complexity of A, doing business there, and B, having some local presence that’s necessary. Whereas in the U.S., we might have in our enterprise business a call center we use in City A, we may have a sales distribution center in City B we may have, oh let’s say marketing team that helps us with the advertising locally in another city. For each line of business, usually we tend to have maybe more than one entity that helps us. These countries are too small. We will be necessary to share the resources, including the management team of Viasat. We’ll have fewer people by market. We’ll have more country experts. So we’ll have fewer people. They’ll be more jack-of-all-trades on the management side and on the support side, because the amount of revenue you’ll be able to obtain will not be as high as the US. Therefore, the costs need be lower. How do you do it? You should have people who do functionally organized who will be doing more collective duties than we do here, where we organize classically by some function. We will be more broader in these countries because the overall costs we can afford must be less and therefore we may have fewer people do more broader assignments. And secondly, we won’t have so many providers. We’ll have fewer subcontractors in terms of companies we work with because the scale that’s required to get them down lower and we won’t have enough business to keep as many businesses to reach a scale of profitability for them or for us. So we’ll have to be more selective in how we do it. In the U.S. because the market’s been so large, it has not been a requirement to be to do so because there’s a lot of money for everybody. In these smaller countries, many of them will have to be different about that.
Alex Miller: Kevin, we just learned that to Viasat was named to Fortune magazine’s annual Changing the World list, which is focused ... It’s given to companies that are creating positive social impact around the world, but also being, you know, making money and being profitable while they’re doing it. It’s important that we make internet available to all these billions of people that maybe don’t have any access right now. At the same time, we’re also a for-profit business. How do you how do you balance those two things?
Kevin Harkenrider: The way I look at it, any business is a table with three legs. It’s supported by its employees, by its customers and by its investors. If any one of the legs is broken, you don’t have a business. So the employee standpoint, they need to feel coming to work at Viasat, being the employer of choice that I want to make good for myself and Viasat -- if I don’t satisfy the employees, I won’t be able to produce for customers or investors. Investors are important because they fund us. Customers are also important, of course, because if we don’t have customers, I don’t have a job. Companies don’t create jobs. Customers do. Investors are ... the investors in our case, we are borrowing money to build a network of satellites. So all three must be satisfied. So that’s making profit is a part of it, one of my three legs. And we’re unique in satellite because with our three ViaSat-3 satellites, we will serve the world with satellite broadband. And that world is ... there’s an estimate 7 billion people don’t have access today. Satellite has an inherent economic advantage to get to every person in the world that the other technologies do not. So have a unique, being in the satellite business to be able to reach the 7 billion. We have an inherent economic advantage to do so, how we do it. And as a for-profit company looking for those three things. Customers mean the 7 billion, and the investors and the employees. I think the two are aligned perfectly. We happen to be a business, though, that has the economic advantage of serving those billions of people so we can do good for them while we also do good for our shareholders and our employees. And I say that’s why I like working.
Alex Miller: Ok. All right. That sounds great. So is there anything about Viasat’s global expansion that we haven’t discussed that you’d like to touch on before we close?
Kevin Harkenrider: Well, been pretty comprehensive. So at the moment, I say no.
Alex Miller: All right. The succinct Kevin Harkenrider. All right. Well, thanks a lot for being on the podcast today. Kevin, we appreciate you taking the time to talk about all of this with us.
Kevin Harkenrider: Alex, thank you for having me on your program and I appreciate the time with you.
