Alex Miller: Hello and welcome to the Viasat podcast. I'm Alex Miller with Corporate Communications, and with me today is Simon Kuo, vice president of corporate quality at Viasat. So thanks for being on the podcast today, Simon.
Simon Kuo: Oh, it's my pleasure.
Alex Miller: So earlier this year, Viasat announced a partnership with China Satcom to provide in-flight connectivity to airlines in China using China Satcom satellites and Viasat ground segment technology. So I wanted to start by asking just to give us the broad strokes about how that arrangement with China Satcom is structured.
Simon Kuo: So, Alex, as you mentioned, this partnership leverages China's Satcom's Ka-band satellite currently covering the eastern part of China, and Viasat is putting in part of the cloud infrastructure that enables in-flight connectivity. We're also working directly with Chinese airlines to put Viasat in-flight connectivity system onboard in order for passengers to experience broadband internet while flying in China. This really sounds interesting. So we're really happy about the opportunity to do this. So China Satcom is the official service provider for the in-flight connectivity service in China per the Chinese telecom regulations. And then they would share the connectivity revenue with Viasat. This agreement also extends Viasat in-flight connectivity coverage into China, which then allows Viasat airline customers to have internet connectivity while flying over China.
Alex Miller: All right. Well, that sounds really interesting. So why is Viasat entering the Chinese market in this manner? It's a little, little different than how we usually operate.
Simon Kuo: First, just structurally, from how I described the broad arrangement with China Satcom, structurally, using China Satcom's satellite along with Viasat's infrastructure and partnering with them as the official service provider, meets all the regulatory requirements for providing telecommunication services in China, as well as the export regulatory requirements for Viasat equipment from the United States government. So that's one reason we're doing this, entering the Chinese market in this way. And second, timing is also a great reason this partnership couldn't come at a better time because China Satcom already has a satellite capable of providing connectivity over China, and Chinese airlines are ready for this large scale deployment of high speed, high usage connectivity. This partnership allows us to explore that market right now. So those are the main reasons why we're entering the Chinese market in this matter.
Alex Miller: Okay, well, let's talk about that market. It's a very large market. So can you speak to the opportunity that this partnership represents for Viasat? I mean, how many airlines or aircraft are potentially involved?
Simon Kuo: You're right. Chinese aviation market is an extremely large market. It's currently the second largest commercial aviation market in the world next to the United States. And it's also the fastest growing there are, I think, at least 40 Chinese airlines now. And the combination of over 3000 aircrafts, and out of the current fleet of aircraft, fewer than 200 are currently outfitted with in-flight connectivity. These numbers represent a very large market, as you pointed out. Of course, the other part of that equation is whether passengers in China are receptive to having connectivity onboard.
Alex Miller: Wow. Yeah, that is an enormous opportunity. So as far as how much demand there is, I mean, what do we know about the appetite for in-flight connectivity among Chinese airlines, their crews and the passengers?
Simon Kuo: That's a great question. Generally, the Chinese internet usage is extremely high. Having traveled there multiple times, I can definitely attest to this, that Chinese Internet usage heavily utilizes mobile devices to stay connected. So we can see this through published data on mobile phone usage as well as consumer usage on platforms for social media like WeChat or mobile payments like Alipay and e-commerce. We believe Chinese aviation passengers would like to extend their connectivity lifestyle to the air using these digital platforms on the plane as they do on the ground. So this partnership will definitely allow Viasat and China Satcom to work together to bring connectivity to aviation passengers who have strong desire to stay connected while flying onboard an aircraft. So the partnership would also be exploring other opportunities to bring other value-added services to the Chinese airlines and to their passengers.
Alex Miller: Ok. Well, that sounds great and it sounds like they're already primed to, you know, walk onto the plane and be connected just like they are on the ground. And that's something that I know Viasat has found true in pretty much the aviation markets around the world, right?
Simon Kuo: Correct. Correct. And Chinese aviation market definitely is no exception.
Alex Miller: So along with the Chinese airlines, this partnership will potentially benefit other Viasat aviation customers when their aircraft are flying into out of and over China. So how does that work?
Simon Kuo: Right, Alex. So this partnership not only would benefit the Chinese airlines while flying in China, it would also allow these Chinese aircraft when they're flying outside of China to be connected to Viasat's global network, including the ViaSat-3 terabit capacity satellites when they're deployed.
Alex Miller: And that'll be probably years before they're over the Asia-Pacific region, but sometime in the not too distant future.
Simon Kuo: Correct. And it's definitely also available to them to these Chinese aircraft is the current established networks we already have around the world, over North America, over Europe, over Australia. Additionally, Viasat's aviation customers from outside of China can also be connected when they fly into China using the network that we're establishing in China. So it's kind of like extending Viasat's current network to also exist in China. So there is no additional equipment to deploy on these aircraft from outside of China to allow them to have this connectivity while they fly into China.
Alex Miller: Ok. Well, that's fascinating the way that's that's all going to fit together. So one thing I want to ask you about, Simon, was that, you know, China Satcom recently had a setback when their ChinaSat-18 satellite failed to deploy after its launch last August. So that satellite was meant to be part of the network for the Viasat partnership to work over. So how has the loss of that satellite going to impact this partnership?
Simon Kuo: Right. Yes. China Satcom did have a setback. They had a satellite earlier this year, ChinaSat-18 that was launched, but it did not correctly deploy. The satellite would have promoted coverage over roughly the western half of China. Now, while ChinaSat-16, that was already launched and deployed provides coverage over the eastern half. Now, ChinaSat-18, the one that did not deploy correctly, provides only a small fraction of flight routes in China, as the western half is more remote, not densely populated. Now even though our partnership was structured to operate over both satellites, we are starting with bringing service online with ChinaS-16 that's already in orbit with coverage over most of the flight routes in China. We know that China Satcom has already publicly announced plans for bringing additional coverage for all of China with subsequent satellites. They are also looking at various options to bring alternative coverage online over the western half of China before these publicly announced plans for additional satellites. So we'll just have to wait and see how that all plays out in the near future.
Alex Miller: Ok. So so the satellite, even though, you know, it's definitely a setback. It was, as you said, over a lot of the more rural areas. But ChinaSat-16 is is over, the more populated areas of China and the eastern half of the country. So.
Simon Kuo: Correct.
Alex Miller: So is the current trade situation going on with China likely to impact this partnership at all?
Simon Kuo: Right, we get this question a lot, actually. So generally the trade situation between the United States and China should not negatively impact this partnership. Both Viasat and China Satcom have been committed to a long term relationship. We started these discussions long ago and we believe this partnership is in the best interests of both companies. We are working closely with regulators in both countries to make sure we are in compliance with laws of both countries and we'll continue to do that. But we both believe that this partnership is here to stay and it's going to last for decades to come.
Alex Miller: Ok. So I think one of the other things that I think people might be curious about is that, you know, there can be some security concerns for U.S. companies working with China. So how does Viasat plan to keep its own intellectual property and network secure when this joint service goes into effect?
Simon Kuo: Alex, this is a really important point and one that's pretty key in the broader trade discussions between the two countries. There are intellectual property concerns and those concerns apply to both Viasat and China Satcom because both have intellectual property invested in this partnership and both are serious about making sure that intellectual property is secure. In our partnership agreement, we defined operating procedures and interface requirements to make sure that respective intellectual property remains secure. Now we believe we have done that technically, but also we believe having the right partner who shares the same incentive to protect intellectual property is really important and vital to a long term partnership. This is a reason we have chosen to partner with China Satcomm and we think that this is also the reason why they have chosen to partner with Viasat.
Alex Miller: Simon can I ask, China Satcom -- is that a state-run operation or is it a public-private kind of thing or how does that operate?
Simon Kuo: So China Satcom is a state owned enterprise. What's classified as a state owned enterprise. They have recently just released shares to be traded on the Chinese stock exchange. So they are now at least partially privately owned. We know that a lot of their ownership is still with the Chinese government.
Alex Miller: So we talked a little bit before about how this setup differs a pretty good deal from how we typically service our airline customers with our own satellites. But do you see this partnership suggesting how other partners in the aviation space could work in a similar manner. Or is this kind of arrangement unique to China or China Satcom?
Simon Kuo: Viasat actually already has partners in other regions of the world with similar arrangements. Not exactly the same. We're currently operating in-flight connectivity services in Australia and Europe, using partner satellites. Business arrangements may be different due to regulatory differences. But the technical principles are similar. I believe, as Viasat continues to expand globally to serve additional airlines and regions, we will establish additional partnerships as appropriate to address each region. So in China, having to address the regulatory environments there, this ... arrangement is a great way for us to to do that. And we'll see that this is probably similar to how we need to address certain regions around the world.
Alex Miller: Okay. Well, looking at just kind of from a practical angle, you know, the installation of the equipment on the aircraft and the ground structures, has that process begun yet?
Simon Kuo: Yes. So as of this podcast, there's actually a team from Viasat inspiring the ground infrastructure in China and testing the various interfaces. It's a fairly large set of activities that need to be performed. We're receiving updates on that progress. I think the team is maybe even a little bit ahead of schedule right now and we are on track to provide demonstrations of functionality before the end of the calendar year.
Alex Miller: Wow. That's coming right up. Well, that's exciting. So that's puts us to the last question I was going to ask you, like, where are we at in terms of live service? What's the timeline? What's next?
Simon Kuo: Right. So we certainly expect to be able to provide live service to Chinese airlines in 2020, in the next calendar year, sometime in the next calendar year. The ground infrastructure will definitely be ready. Now, the process to certify equipment for usage in China -- I'm talking about the equipment that's going to go aboard aircraft -- to certify that equipment for usage with the appropriate regulatory authorities in China still would require some number of months. So we have already started that process, but it's going to take some time. So we believe sometime in 2020, we probably would have live service in China.
Alex Miller: And I know, you know, when you're putting the equipment on aircraft, there's, you know, the retrofit to existing airplanes and then the line fit for new planes. Do you have any sense of what the split will be there, or too soon?
Simon Kuo: I will say it's a little too soon, but I can provide this insight. And that is that Chinese airlines are purchasing a lot of aircrafts. We have a fairly good idea of the new orders for aircraft right now on order and we see the trend continuing. So it is totally conceivable what there will be many aircrafts coming up in the next few years that's going to be line fit with Viasat's equipment for the Chinese aviation market.
Alex Miller: All right. Well, that's all I had. Simon, so thanks so much for speaking with us today. It sounds like there's a lot more to come with the partnership. So I hope that we can talk to you again sometime know in the next year as things start moving forward and you've got some more updates on this exciting partnership with China Satcom.
Simon Kuo: Oh, absolutely, Alex. It's my pleasure. Really looking forward to working on this, continuing to work on this project and looking forward to providing updates sometime next year.