Satellite Industry Frets About Future Military Business

By Sandra I. Erwin

The Pentagon spends about a billion dollars a year on satellite communications services from commercial vendors, which supply about 80 percent of the military’s demand.

The industry is worried, however, about the future of its Defense Department business, for several reasons.

Much of the demand for satellite communications, or satcom, was generated by wars that are coming to an end. The Pentagon sees its future in Asia-Pacific, but has yet to share with vendors how it plans to acquire satcom in the region. Commercial satellite providers generally detest the Defense Department’s satcom buying methods because they favor one-year leases instead of the long-term agreements that private-sector investors prefer. Suppliers also fear that the Pentagon, as budgets shrink, will pare back spending on commercial services and will rely more on military-owned satellites.

Pentagon officials insist that these concerns are unfounded. They cite projections of soaring demand for commercial satcom in the coming years to satisfy the military’s appetite for data, for global connectivity and for bandwidth-hogging drones.

Industry CEOs say they are ready to provide additional capacity, but they need more specifics on the military’s future needs and also a financial commitment by the Pentagon in order to justify the cost of building, launching and maintaining satellites.

“We need to find a way for government and industry to plan together,” says Robert Tipton “Tip” Osterthaler, president and CEO of satcom supplier SES Government Solutions.

If the Pentagon is going to need more satcom, it should inform the private sector so companies can allocate enough bandwidth for the military even as the demand from commercial users continues to grow, says Osterhaler, a retired Air Force brigadier general.

The one-year leases, which are purchased by the Defense Department on the spot market, are inefficient for both buyers and sellers, he argues. They leave the Pentagon exposed to the vagaries of the satcom trade and that can result in higher prices. Short-term deals deter satellite providers from investing in additional infrastructure in the absence of assured business, Osterhaler says during an online forum hosted by Federal News Radio. “Short-term buying practices perhaps made sense before, when demand was lower, but they make less sense if you believe commercial satcom will be part of your essential infrastructure.”

The satcom industry and its congressional supporters are ratcheting up the pressure on the Pentagon to put forth a plan for future procurement of satellite services. Following a controversial satellite lease the Pentagon signed with a Chinese supplier last year, lawmakers pounced. The fiscal year 2014 Defense Authorization Act directs the Pentagon to develop a strategy for how to use commercial satcom. The deadline is coming up next month.

Among the staunchest critics of Pentagon satcom buying methods is Rep. Mike D. Rogers, R-Ala., chairman of the House Armed Services strategic forces subcommittee. He questioned why the military a year ago signed a $10 million, one-year lease with a Chinese company to use a Thales Alenia Space satellite to provide communications for U.S. Africa Command.

Osterhaler says U.S. firms could provide those services but they need time to build capacity for the military and satisfy specific requirements that commercial buyers do not have. If more capacity is needed in Africa or in Asia, executives say, the Defense Department could work with the private sector to ensure that demand is met. “Long-term needs don't match up with short-term buying practices,” Osterhaler says. “The incentives for commercial industry to make the necessary investments are pretty weak, at best.”

Military officials often assume the industry has plenty of capacity to sell at the right price, but the reality is more complex, Osterhaler adds. As global demand for broadband swells, commercial operators rapidly are sucking up the bandwidth, leaving the Pentagon in a precarious position, says Osterhaler. “Our big strategic commercial customers understand that we're an essential infrastructure provider to them, and they behave accordingly. They're open with us about their needs, and we make investments on their behalf.” Those investments for military users, he adds, are not taking place as they are for commercial customers. In an emergency, “There may not be enough capacity available at any price.”

Disagreements within the Defense Department over how to acquire satcom services have existed for years. The Government Accountability Office called out the Pentagon in 2008 for its inefficient lease approach. The Defense Business Board, made up of private sector executives, criticized the satcom buying system in a 2012 report. It suggested the Defense Department create a “single satcom organization” to oversee procurements, versus the current fragmented system. While the secretary of defense has policy oversight, purchases are handled by the individual military services.

The Air Force Space Command is responsible for government-owned satellites. Satcom leases are managed by the Defense Information Systems Agency.

To boost competition, DISA teamed with the General Services Administration for the solicitation of satcom bids. The results have been mixed, Osterhaler says. GSA mandates that a percentage of contracts be awarded to small businesses, some of which are unqualified, he says. “In some cases asking small businesses to execute complex networks is probably not in the best interest of the users.”

The Defense Business Board predicts that as the demand for service increases in the future, the cost of satellite communications purchased by DISA will skyrocket. One solution is to change the procurement methods, the panel said. “Existing contracting procedures and DoD’s culture make partnerships with the private sector difficult.”

The Aerospace Industries Association, too, has recommended that the Pentagon consider greater use of hosted payloads on commercial spacecraft to reduce costs and improve service.

Like other satcom executives, Osterhaler would like to see the Pentagon adopt the “civil reserve air fleet” approach to satellite services. Under the CRAF program, the Air Force pays commercial airlines to keep a certain number of aircraft available for military contingencies. “In the space industry, we think it has potential. It would give the Defense Department access to a large amount of capacity for unanticipated needs.”

The Pentagon’s top buyer, Undersecretary for Acquisition, Technology and Logistics Frank Kendall, directed his staff in March 2013 to begin a 90-day study of military satcom needs and how the Pentagon could tap the commercial market. A year later, the status of the report is unknown. Defense Chief Information Officer Teri Takai told executives at a recent satellite industry trade show that the study is almost completed but offered no details.  

Douglas Loverro, assistant secretary of defense for space policy, says the Air Force has launched several pilot programs to gauge the market. One option is to buy on-orbit transponders from unused commercial satellites. “It's an experiment,” Loverro says. He admits the Pentagon is having a tough time deciding which direction to go. While it is normal for the military to plan major purchases years or decades in advance, “we're not used to doing it for satcom,” he says. Another idea under consideration is a straight long-term lease, although Loverro warns that might be too expensive.  

Lt. Gen. Ellen Pawlikowski, commander of the Air Force Space and Missile Systems Center, spent the past two years surveying the private sector for money-saving ideas. She found that there are many opportunities to save money in the commercial space sector, but to take advantage of those deals, the Defense Department needs to revamp its buying methods.

A transition to a commercial-based model would have to be made within the next decade, before the Pentagon’s communications satellites — the Advanced Extremely High Frequency (AEHF), the Mobile User Objective System Satellite (MUOS) and the Wideband Global Satcom (WGS) — run out of service life. Officials have said the Pentagon most likely will be paring back future purchases of military-unique satellites, which cost a billion dollars apiece.

The U.S. Space Command has floated the idea of a new “space architecture” that includes a mix of low-cost military satellites and commercial payloads. That approach, which the military calls “disaggregation,” is a departure from the traditional practice of building large, complex satellites.

Loverro says the question is not if but how the Pentagon will tap commercial systems. A single commercial satellite can offer up to 150 gigabits per second of data throughput, he points out. “Our most capable military satellite can only carry 3 gigabits per second.”

A concern for vendors is the Pentagon’s satcom requirement for unmanned aerial vehicles, which demand dedicated pipes.

Loverro defends the Chinese satellite lease as necessary to fill commanders’ requests. The Pentagon will not renew the lease when it expires in May, he says. “It shouldn't have happened in the first place,” and it was the result of a “lack of planning,” says Loverro. “We need to work better with the commercial world.”

Industry executives agree. “The Defense Department thinks of us as money grabbers. We need them to see us as trusted partners,” says Philip Harlow, president and chief operating officer of XTAR, which supplies satcom services to the U.S. government.

Companies are becoming impatient with the Pentagon dithering on a satcom procurement strategy, Harlow says in an interview. The Pentagon wants to pivot to Asia, but hasn’t yet recognized that the satcom industry is “less prepared for an Asia-Pacific engagement than it was for an engagement in Iraq or Afghanistan,” says Harlow. “That's simply a function of where companies invest dollars: Where they have paying customers, mostly in populations centers. And that is not always where conflicts are fought.”

The industry needs the Defense Department to “tell us what is going to be needed,” he says.

The government’s stalling tactics are understandable, though. “The Defense Department doesn't want to be put into a corner,” he says. “Going into an environment where they don't control everything is uncomfortable.”

In the private sector, he says, “We need to see commitment from the Defense Department to change. … Some quarters of the commercial industry see the Defense Department as trying to kick the can down the road until they get more money and go back to business as usual.”

Topics: Procurement, Acquisition Reform, Defense Department, Space

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