Simulation, Gaming Sector Plagued by Fiscal Challenges

Restrictions on the travel of government officials gutted the Defense GameTech Users Conference held during April in Orlando, Fla. Total attendance at the conference, which aims to increase the use of serious games by the Defense Department, dropped to a third of the previous year’s show. 

The few military attendees, who had taken personal time off work, wore pink ribbons on their badges that stated, “I’m not really here.”

The state of the GameTech conference illustrates how simulation companies are facing many of the same challenges as other defense contractors. Even as military officials assert that the need for simulation tools has only increased, the industry is contending with funding delays, consolidation and increased competition over fewer contracts.

With the fiscal climate looking “pretty bleak,” the simulation industry should not depend on the U.S. military as its sole source of business, said Frank C. DiGiovanni, Defense Department director of training, readiness and strategy, during a keynote speech at the conference.

“You’ve got to look for surrogates in other sectors. So what are the sectors that could use your capabilities?” he asked a crowd of industry officials. “I really encourage you to think about the business model you are using.”

Not all of the discourse was so negative.  At the Interservice/Industry Training, Simulation and Education Conference in December 2012, military officials said simulations would be vital to training troops during the budget crunch because they are cheaper than live training.

“We have a moral obligation as leaders to make sure that those soldiers, sailors, airmen and Marines that we send forward are ready,” said Marine Corps Maj. Gen. Glenn Walters, then the commanding general of the 2nd Marine Aircraft Wing. Simulation “is the one key to get us there at the best bang for the buck, no doubt in my mind.”

But just because military officials see the value of simulators and serious games doesn’t mean that money is available to buy them. Budget cuts have delayed work on contracts for the Army’s Program Executive Office for Simulation, Training and Instrumentation, for example, and likely will be a problem for some time.

“We have a large list of gaming requirements that have been awaiting funding. Given our current level of funding, many will be on the waiting list for a while,” said Kristen McCullough, spokeswoman for PEO-STRI. This includes both new games as well as contract modifications, she added.

An award for the flagship simulation of the Army’s Games for Training program was due to be announced in May. PEO-STRI was able to secure funding for the platform, but the announcement will now be made at least a month late, McCullough said.

Budget cuts have also delayed some of Alion Science and Technology Corp.’s contracts with the military, said retired Rear Adm. Gary Jones, vice president and manager of the company’s advanced modeling, simulation and training operation.

“I did have some slowdowns in some of the work I was doing for the Army in the area of providing them services for some of their sim centers,” said Jones, who is also the former commander of the Navy’s Training and Education Command. He declined to provide specifics.

The simulation industry recognizes the impact of budget cuts, but DiGiovanni’s remarks were “a little too restrictive,” said Tom Baptiste, executive director of the National Center of Simulation and a former Air Force pilot.

Baptiste said he disagrees with the assertion that the overall market for military simulations is decreasing, but allowed that there will be some negative effects on industry.

Consolidation, especially of smaller businesses, is likely on the horizon, he said. “Some of the little guys are going to get acquired by big corporations that want to enhance their portfolio. Others will not be able to compete and will disappear. I think those are all realities.”

While consolidation isn’t a threat to the simulation industry as a whole, there is risk of losing some of the innovation small businesses bring to the table, he added.

Small businesses are “the ones that can be agile enough to do some of the really, really cutting edge kinds of things that we see on the horizon … whereas the big guys — you know it’s difficult to steer that big, old ship,” Baptiste said.

The marketplace for simulation companies is crowded, Jones said. And while use of simulation by the military will probably increase, the Defense Department may choose to wring more out of current simulators rather than buy new ones.

Yet another issue is that there are fewer big opportunities on the horizon, especially for expensive flight simulators. With contracts for the F-35 Joint Strike Fighter and KC-46 tanker simulators already awarded, prime contractors will likely bully small businesses out of remaining contracts, Baptiste said.

“Can a small company compete against the … business development power of a Lockheed Martin?” he asked. “You know, it might be tough.”

The Pentagon’s increased need for simulation technologies and its need to save cash are not mutually exclusive, said Andrew Tosh, president and founder of GameSim, an Orlando-based software engineering company. Industry must be able to deliver both in order to stay relevant, he said.

To cut costs for its government customers, GameSim’s strategy is to repurpose technologies coming out of the entertainment industry for use in military simulation, Tosh said.

The military and commercial industry is similar in terms of the technology it needs, Tosh said. Military officials want their simulations and serious games to look like the video games their children play even though they are produced with less money.

“The better answer to that person is that we need to use the same technology as games, and then bring it over to the military,” he said. “The only cost-effective way to do that is to make the government a customer, not the [only] customer.”

It’s always good advice to tell a business to diversify its portfolio, Baptiste said. But for the average government contractor, it’s not as easy as flipping a switch and selling products commercially.

“They don’t have a big sales force. They don’t have a marketing team. They don’t do the things necessary to sell 10,000 of these things that they produce like a commercial company might be able to,” he said.

Contracting with the government is “a totally different animal” than selling products commercially, Tosh noted. For GameSim — which splits its business between military and commercial sales — challenges include ensuring that the company’s accounting system is compliant with rules and regulations for defense contractors, and making sure that the cost burden isn’t unfairly put on the commercial side.

Baptiste believes there are opportunities for companies to expand to the medical and transportation sectors. Partnering with commercial vendors could help interested military contractors spin off their products to a non-defense market, he said.

Repurposing military simulations for other industries is another way companies can grow their business.

That is what Alion is trying to do with its measure of total integrated system survivability software, which allows Navy engineers to redesign ships and then test their survivability with simulated explosions. Alion is redeveloping the system for use in the oil industry.

“We’ve done some pilot studies already where we’ve seen that it’s successful and we’re in discussions with several customers,” said Peter Jacobs, the company’s director of communications.

Many military simulators can also be used by or reworked for Department of Homeland Security personnel, local law enforcement and first responders, Baptiste said.

“Training first responders for [the Federal Emergency Management Agency] is not much different than training soldiers. You change the scenario from force-on-force combat to an earthquake or a tidal wave or a hurricane, but the command-and-control required to control a wide, expansive natural disaster is no different than a theater of war,” he said. “You can use computer-based, constructive simulation to train battle staffs that work for FEMA just like you train a battle staff that’s conducting combat operations in Iraq.”

Simulation companies also see big opportunities in foreign military sales.

The Army in May awarded a $21 million contract to Cubic Corp. to provide its Engagement Skills Trainer 2000 for small arms training to an unnamed foreign country. Systems, weapons and in-country support by a subcontractor are also included in the contract.

But breaking into international sales is difficult, especially for smaller companies that have little experience working with the State Department and no legal experts who can help parse regulations, Baptiste said.

For larger contractors, increased aircraft sales to foreign countries will present an opportunity to sell corresponding simulators, he continued. “When we sell Black Hawks to the United Arab Emirates, you know they’re probably going to want a simulator to go with it.”

The Navy has expanded its use of Alion’s Navy continuous training environment — which can virtually bring together disparate parts of a strike group for simulated war games — to allied and coalition partners. Such hands-on experience shows foreign countries the benefits of virtual training, Jones said.

However, the high up-front cost of simulations is a barrier to potential foreign customers interested in buying their own systems, he continued. “What we have to do is to articulate, ‘For this amount of investment, here are the savings you can achieve.’”

But it’s not all bad news for the simulation industry. That venture capital firms are interested in acquiring smaller serious gaming and simulation companies is a sign of the health of the industry, Baptiste said.

A New-York based private equity firm in January bought Bohemia Interactive Simulation, an Australian company best known for creating the Virtual Battlespace games used by the Army. Bohemia in April acquired TerraSim, which produces software for mapping and creating virtual terrain.

Baptiste predicts budget cuts ultimately will drive simulation to become a larger part of training, and that companies should see them as a challenge to become more innovative.

“We are going to have to rely even more heavily” on simulation, he said. “I think what you will see is a calculated response to the austere budget by each of the services to relook at the balance of live versus simulated training.”

Topics: Defense Department, DOD Budget, DOD Policy, Simulation Modeling Wargaming and Training, Videogames