Other, Pentagon

Proposed imagery cuts may trigger industry consolidation

On Friday commercial remote sensing company GeoEye surprised many in the space field when it announced an unsolicited offer to acquire its chief rival, DigitalGlobe. GeoEye is offering $17 per share in cash and stock, valuing DigitalGlobe at $792 million, a 26% premium compared to DigitalGlobe’s stock price at the close of trade Thursday. (DigitalGlobe stock soared in trading Friday, closing at $16.44 a share.) DigitalGlobe has not formally responded to the offer, although executives of the two companies have apparently been discussing a potential merger, as GeoEye notes in its letter to DigitalGlobe included in the press release. (Update: Sunday afternoon DigitalGlobe formally rejected the offer, saying it undervalued the company.)

While not explicitly stated in the announcement, a key factor driving the proposed deal are cuts in the Defense Department’s budget to acquire commercial satellite imagery. Both companies have “EnhancedView” contracts with the National Geospatial-Intelligence Agency (NGA). The contracts, awarded in August 2010, are valued at a combined $7.3 billion over 10 years. However, the proposed fiscal year 2013 budget would cut spending on those contracts significantly: from $540 million to $250 million, according to a recent Reuters report. (The details of the NGA budget request are classified.)

“Given this uncertain political and fiscal climate, we believe it is in our mutual interest to provide our customers with creative solutions to problems rather than passively speculate on one or another outcome,” GeoEye president CEO Matt O’Connell wrote to his counterpart at DigitalGlobe, Jeffrey Tarr, in a letter proposing the acquisition.

A week before the proposed merger, executives in the commercial remote sensing industry, along with some of its commercial customers and even government officials, raised concerns about the proposed EnhancedView cuts during a forum on Capitol Hill organized by the Space Enterprise Council. Their concern was that the proposed cuts were putting industry in a corner, since they were already making large investments in developing new satellites to meet the demand of the EnhancedView contracts, only to have that major source of revenue threatened.

“You can’t tell industry that we need you to bring these novel approaches forward, we need you to invest along with us, we need you to share the risk with us, and then, six months into a ten-year program, propose cuts,” said Kyle Schmackpfeffer of ITT Exelis, a company that has developed imaging systems for both DigitalGlobe and GeoEye. (The “six months” he cited referred to an earlier, smaller budget cut in EnhancedView proposed for fiscal year 2012.)

Others warned that the proposed cuts could sour the financial community on this industry, jeopardizing future private investment at a time when other countries are closing the gap in the capabilities currently offered by US commercial satellites. “EnhancedView was a really good idea at the time by having a public private partnership. Wall Street was involved, and there was a lot of support,” said Eve Douglas of the Department of Commerce’s Office of Space Commercialization. If the proposed cuts go through, she warned, Wall Street was unlikely to invest in this industry again.

What wasn’t discussed during that earlier forum was the possibility that the two companies might merge, combining their resources and consolidating their contracts. That, though, may be the solution the companies have to adopt in response to reduced spending from their biggest customer.

31 comments to Proposed imagery cuts may trigger industry consolidation

  • Googaw

    It’s another example of “commercial” providers that are closely linked to a government monopsony (i.e. government as their their main or only customer for their most important products). As a result they’ve skewed and distorted their business out of all recognition to private sector needs in order to meet the needs of their dominant customer. Thus, as with any other undiversified government contractor, deep cuts in the government budget strike terror in their poor little hearts:

    “..Wall Street was unlikely to invest in this industry again.”

    Typical apocalyptic overstatement, unless by “this industry” they mean specifically the business of contracting with the government in this “commercial” manner and _not_ either traditional LockMart contracting or the actually commercial (private sector customers) space geodata business.

    Wall Street is happy to invest at the smaller scale and for the kinds of data that private customers can actually support on their own. They are also happy to invest in government contractors who straightforwardly call themselves government contractors and understand that business. What investors will be skeptical of, what they already should long ago have been skeptical of, is companies that tie themselves to the apron strings of a dominant customer that can pull the rug out from under them at any time, and pretend they can fall back on or even expand in a puratively similar but in fact radically different private sector business.

    Government contracting is a special business all its own It requires skills that are very different from satisfying the needs of private customers. Government contractors can certainly be worth investing in, but companies whose revenues are dominated by government contracts and yet frraudulently tout themselves as “commercial”, as if the private sector customers that their marcomm fantasizes about will materialize out the transporter any moment now, are given a wide berth by wise investors.

    Wall Street will cast a similarly skeptical eye on NewSpace companies that tout themselves as “commercial” but are mainly eyeing NASA (sub-) contracts, or that sacrifice or short-shrift their private customers in pursuit of the more exciting NASA projects.

    Planetary Resources being the most recent and perhaps the most preposterous example yet of a company that hypes itself as “commercial” based on a sci-fi market-of-the-future while in practice vying for mundane NASA (sub-)contracts. Their real business, if any, will be building space telescopes and probes for NASA — witnessed by the fact that they have zero people from the mining industry on either their board of directors, board of advisors, or executive staff, nor do any of their lead engineers have any mining experience. They are clearly set up to build space science devices for NASA and nothing else. But even their marcomm-only fantasy of mining the asteroids is stated by said marcomm as to be targetted at providing life support substances for NASA astronauts rather than targetting real private markets for potential space resources here on earth. They can’t get out of the government contracting mindset even when hyping their fantasy “commercial” markets.

  • Herbie Mann

    Negotiations broke down I guess. Time to call in either the hoards of zombie space lawyers … or the Borg.

  • Coastal Ron

    Googaw wrote @ May 6th, 2012 at 7:31 pm

    Wall Street is happy to invest at the smaller scale and for the kinds of data that private customers can actually support on their own.

    I don’t see that they are. Do you have any examples you’d like to provide?

  • BeanCounterfromDownunder

    Googaw wrote @ May 6th, 2012 at 7:31 pm
    Long on words, short on facts. ‘Bout normal for you.

  • vulture4

    I see a parallel with United Launch Alliance. As long as both Boeing and Lockheed were competing for commercial launches with many customers and with other competitors around the world, it made no sense for them to merge or to raise prices, because it would just force customers to non-US providers.

    But once they made the decision that the US government was their only profitable customer it made sense to merge. Commercial customers have other alternatives, but to the US government they are now a monopoly. They have only one customer left, but that customer can be forced to pay a very high price indeed.

  • amightywind

    Yet another ‘market’ comprised primarily of the government. Consolidation is the only way to strengthen pricing power in an environment of decreased spending so that the ‘industry’ can survive.

    Wall Street will cast a similarly skeptical eye on NewSpace companies that tout themselves as “commercial”

    Wall Street already does. Wall Street is happy to invest in long term government contracting (Boeing, Lockmart, Northrup, ATK). These companies are also somewhat diversified. Newspace’s business case is tentative in comparison and likely to be effected further by a transition of political power.

  • E.P. Grondine

    Hi googaw –

    I think that the Wall Street Journal reporter was the only reporter smart enough to track down John Lewis.

    My guess, and this is entirely a guess, is that your analysis of Planetary Resources is way off.
    In other words, it might look that way to you, but it isn’t.
    On the other hand, it may be my own observational bias.
    I think we can both agree that none of the firms’ founders are stupid.

  • E.P. Grondine

    Read “firm’s” for “firms’” – damned stroke.

  • Deal Finder

    I usually take a 10 percent finder’s fee. GoogleEyes. Planetary Resources.

    That should speed things up a bit.

  • Coastal Ron

    E.P. Grondine wrote @ May 7th, 2012 at 10:58 am

    Read “firm’s” for “firms’” – damned stroke.

    Unlike Windy, I’m sure you know how to spell “Northrop”, so I wouldn’t worry about punctuation. Focus on the content and we’ll ask for clarification if we need to.

  • Coastal Ron

    amightywind wrote @ May 7th, 2012 at 8:16 am

    Consolidation is the only way to strengthen pricing power in an environment of decreased spending so that the ‘industry’ can survive.

    As vulture4 points out we’ve tried that with ULA, and now they are forecasting a 15%/year increase in prices. Monopolies are pricing us out of the small space programs we’re trying to do.

    In regards to GeoEye buying DigitalGlobe, the issues that lead up to this are pretty common. The government can be a great customer when the work level is predictable, but the government can have wild demand swings just like the commercial world.

    The solutions are known too, in that the DoD needs to take steps to keep competition going, with either other commercial providers or depending on more government sources. Time will tell if they succeed.

  • Robert G. Oler

    E.P. Grondine wrote @ May 7th, 2012 at 10:58 am

    Read “firm’s” for “firms’” – damned stroke.

    I second what Coastal Ron said RGO

  • Robert G. Oler

    “Planetary Resources being the most recent and perhaps the most preposterous example yet of a company that hypes itself as “commercial” based on a sci-fi market-of-the-future while in practice vying for mundane NASA (sub-)contracts.”

    Curious about the group opinion here…I am skeptical that PR can actually make a go of it in terms of dealing with “off world” resources…anyone else want to agree or disagree and why? (Please try and avoid “they are great” or “they are evil”) RGO

  • amightywind

    As vulture4 points out we’ve tried that with ULA, and now they are forecasting a 15%/year increase in prices.

    Let me clear up some misconceptions about ULA and EELV. The EELV was created to assure the military and intelligence services assured access to space. Cost and schedule considerations were secondary. EELV’s are not cheap but they are highly reliable and still cheaper and more capable than their predecessors. I’ll remind you that SpaceX must go a long way to convince the Air Force that they can do the job lofting the nation’s most important payloads. Their launch manifest consists of, shall we say? Bottom feeders. And SpaceX costs rise every day as they attempt to converge on EELV’s capability.

  • Googaw

    E.P. Grondine,

    I agree they aren’t stupid, IQ-wise. To what extent they just have a clever setup to win NASA contracts for space telescopes and science probes (which they do have the expertise to do well), and to what extent they naively take seriously their own marketing hype about “asteroid mining”, who knows, but the lack of any actual mining expertise on their team quite gives away the game.

    The more interesting thing going on in the asteroid area is the Keck (Caltech) proposal to move a small asteroid/meteoroid into lunar orbit by putting it in a bag and towing it back with solar electric propulsion and lunar gravity assists. They claim they can do this with just one Atlas V launch, delivering 28 times the mass in asteroidal material to lunar orbit compared to the mass Atlas V launched into LEO. That by itself doesn’t get us asteroid mining (the mining equipment itself is the hard part, and contrary to the hype these kinds of NEAs, being well within the “ice line”, are unlikely to contain practically extractable volatiles). Nor is radiation shielding for astronauts, however much that might benefit the cult, even close to being the most important benefit here. Nor the science, as useful as that will be. Far more more important than any other benefit, it brings interesting bulk materials within a rocket’s breath of GEO, for more than an order of magnitude less than the costs of launching it from earth. And that is extremely interesting indeed.

    After GEO, the most strategically important orbit in future (post-2030) near-earth space is likely to be whatever orbits these mini-asteroids end up in around the moon.

    Or such is the best current guess. The Keck breakthrough shows again why we can’t plan very far into the future. We discover much smaller asteroids than heretofore known, and then some geniuses from Caltech take advantage of that to figure out a much more practical way to deliver asteroidal material into orbit around the earth (via orbit around the moon). And all of a sudden our previously dogmas about how we are convinced space development will proceed look like so much clever rubbish.

  • vulture4

    Having attended a number of presentations early in the EELV program, I can tell you in no uncertain terms that DOD believed it was essential to require the two companies to bid competitively on each block of launches. However when Boeing was caught with proprietary Lockheed data long after the contract was awarded, Boeing was penalized, not with a fine but with the loss of most of their actual launches. With so few launches Boeing could not make a go of it and the two companies were able to persuade the government to let them merge. Boeing also had two losses on the Delta III (which used an early version of the Delta IV upper stage). Atlas V had only one failure I am aware of. But so much for “experienced” companies being 100% reliable.

  • BeanCounterfromDownunder

    amightywind wrote @ May 7th, 2012 at 4:58 pm
    ‘Cost and schedule considerations were secondary’.

    Yes until recently that is. Spending reductons by DoD are inevitable as they find price increasing substantially hence the bogus cost saving block buy bs. ULA is an inefficient organisation due to the lack of competitors and no longer has the ability to respond appropriately IMO. Given a bit of time and continued success with both F9 and FH, SpaceX will eliminate ULA from the business.

  • BeanCounterfromDownunder

    cont’d

    ..unless political protection continues.

  • Vladislaw

    Windy wrote:

    “I’ll remind you that SpaceX must go a long way to convince the Air Force that they can do the job lofting the nation’s most important payloads. “

    Ya … when SpaceX gets a couple hundred million and Boeing / Lockheed are getting BILLIONS I guess it might make it a TAD harder for SpaceX.

    http://www.globalsecurity.org/space/systems/eelv-program.htm

    “By mid-2004 program costs had increased over the approved 2002 program baseline estimate of $18.8 billion, resulting from the failure of the commercial market to materialize, additional access to space and mission assurance initiatives, and several other factors such as incorrect inflation assumptions and satellite weight growth. The original set of EELV launch prices were established at a time when both companies were planning on a very strong commercial marketplace, which would allow unit reductions in price. By that time the realities had changed. The commercial launch market was not robust and there was very little success in the commercial marketplace. In response to the reality by the contractors the costs for the program increased.

    Furthermore, these cost increases triggered a requirement requiring the Secretary of Defense to certify that the EELV Program was critical to national security and that revised program cost estimates were reasonable. The certification process was completed on April 26, 2004, after the Secretary of Defense’s certification group identified a potential cost increase of up to $13.2 billion. That figure differed from the $13.3 billion previously reported by the EELV System Program Office because it included some overlapping costs addressed in prior DoD acquisition reports and additional unrecognized costs such as the launch providers’ infrastructure costs that would be incurred in FY05.”

    So lets put them on a level playing field, toss a few billion at SpaceX and see what they can do with it.

  • Coastal Ron

    amightywind wrote @ May 7th, 2012 at 4:58 pm

    The EELV was created to assure the military and intelligence services assured access to space. Cost and schedule considerations were secondary.

    Cost has never been secondary – it was one of the two primary reasons for the EELV program. Even ULA states that cost is a primary consideration on their website (i.e. “reliable, cost-efficient access to space”).

    I know you have a hard time identifying the consequences of your opinions, but try imagining what will happen to our ability to do anything in space if ULA keeps raising prices by 15% EVERY YEAR. Keep in mind that the current rate of inflation is less than 3%, so what the heck is driving it?

    I’ll remind you that SpaceX must go a long way to convince the Air Force that they can do the job lofting the nation’s most important payloads.

    This has nothing to do with potential new suppliers, and everything to do with the downsides of monopolies.

    But since your brought it up, I wouldn’t be too smug. If SpaceX gets their Falcon Heavy certified for the DoD/NRO, it will end up saving them ~$300M every time they use Falcon Heavy instead of Delta IV Heavy. It doesn’t take long before that strategy starts paying off.

    You don’t think the DoD/NRO want to have more money to use for payloads instead of disposable rockets?

  • Fred Willett

    @ RGO
    I’ve got a lot of respect for your opinions, so I’ll try an make the case as I see it.
    The problem is how do you bootstrap from where we are to a real space economy.
    First Point.
    Well if you take the long view it seems to happen all most instantly.
    Around 1400 there were no Europeans anywhere outside Europe.
    A couple of hundred years later there were Europeans all over the place. By the 1770s the colonies in the US were around 2.5million peoples.
    I doubt at any time during this peroid someone in Europe stopped, looked around and said “Hey there’s a real revolution going on here.”
    So if we look at what’s happening in space the pace seems glacial at best.
    But use the lens of history and things are rocketing along.
    First man in space 1961
    First communication sat 1962
    First man on the moon 1969
    GPS 1994
    Dennis Tito 2001
    And so on. I’m sure you could add a lot of other milestones. The point is there ARE milestones. Things that have been achieved. Little points of interest along the path to the future that we can look back at and say, “Wow, we are making progress.”
    Second Point.
    There are forcing points we will encounter which will, well, literally force space development. Like orbital debris. Somethings got to be done to clean it up and someone will. As soon as they work out a viable business plan.
    Geostationary Orbital congestion is another big problem. It’s a very limited resource. It won’t be long before something like the orbital relay stations Arthur C Clarke originally envisioned becomes a necessity. Or at least recovering and repurposing some of that abandoned hardware.
    At some point it’s going to become cheaper to get resources in space rather than pay a premium to bring them up from Earth. Then asteroid and lunar mining takes off, and so on.
    Along the way the business case is going to gradually close for all those things we can see the need for, but not quite yet close a business case for.
    There will be tugs and depots and habitats and landers and whatever.
    The point being that each new business in space creates more demand and more opportunities which creates further demand and further opportunities. Look at Altius Space Machines who is building a business case for sticky boom and their orbital package delivery system.
    The first business in the new world was not a Taxi service, and it was ages before you could get a decent latte.
    Point the third. (and last)
    A flood of money is coming.
    The space economy stands at about $300B a year. Compare this to NASA’s paltry $18B a year.
    Worse NASA is likely to contract while the Space Economy just keeps growing. And not just a little bit. It’s growing north of 10% p.a. and grew right through the GFC while much of the rest of the global economy contracted.
    It’s common for the pesimists here to knock commercial space and say Wall Street will never back it, but that’s simply not true. Half of SpaceX is held by angel investors. Some very smart money is behind Planetary Resources just to name two companies. Those who invest know the scene for space investment is changing. Personally I suspect SpaceX’s IPO is going to be the Netscape moment everyone has been looking for in the space economy.
    I could go on, but that’s enuf 4 now.

  • DCSCA

    @Robert G. Oler wrote @ May 7th, 2012 at 3:42 pm

    Cameron’s got an interest and his egocentism is legendary in media circles with a tendancy to drive aawy partners. Je likes to be ‘king of the world’ — or at least his worlds. And w/projects he’s taken an interest in, all things eventually involve and revolve around him.

  • byeman

    “. Given a bit of time and continued success with both F9 and FH, SpaceX will eliminate ULA from the business.”

    Totally unsubstantiated and nothing but nuspace fanboi spewing.

  • BRC

    DCSCA wrote @ May 8th, 2012 at 6:10 am
    ” Cameron’s got an interest and his egocentism is legendary … And w/projects he’s taken an interest in, all things eventually involve and revolve around him.”

    You’re pretty right about the guy. But you gotta admit, when he puts his money in it, some really nice products roll out for others to eventually use. Case in point his $$ (and his person, of course), went into that DeepSea Challenger. So who cares, if in these early dives, we wound up also seeing every pore on his face & pondered the frightful depths of his nostrils, during the resulting NatGeo documentary?

    As a result, we now have technology that can go 7+ miles down, and eventually marine scientists & engineers will fix those operating bugs, expand its envelop for new missions get down to some for-real exploration, including discovering new resources (for exPLOITation).

  • @byeman
    “Totally unsubstantiated and nothing but nuspace fanboi spewing.”
    As much as I admire SpaceX and I anticipate great success for them, I have to agree with you on this one. More likely what we will see is ULA adjusting to compete with SpaceX.

  • Vladislaw

    “Around 1400 there were no Europeans anywhere outside Europe.”

    I think you may be combining two aspects. Marco Polo and Vikings were exploring outside Europe. There was also trade going on in limited terms. A roman ship was discovered off the coast of Brazil and a roman coin was found in a native american burial site that was dated at about 1600 years ago.

    I believe humans across the planet have always explored past boundries that our generation have erected and said they never went past them.

    When you talk about the flood of people following the explorers and traders you are more talking about migrations. It looks like when mass migrations voluntarally take place ( not moved by disaster or war) they expect something at the end of the rainbow. Historicially this has mean’t free land and the resources on that land.

    Personally I do not see migrations to space until property rights are established and people can claim the land on the moon with ice, PMG, etc. for free or relatively free.

  • Coastal Ron

    Rick Boozer wrote @ May 8th, 2012 at 1:18 pm

    More likely what we will see is ULA adjusting to compete with SpaceX.

    So far all of their price adjustments have been to dramatically INCREASE prices, not decrease them.

    It appears that their strategy is to 1) hope that no other companies become certified to compete with them, and 2) to maximize their profits while they still hold a monopoly. That’s fine as like as #1 doesn’t change, but if it does, they are setting themselves up for a big fall.

    Sad. Real sad.

  • @Coastal Ron
    “So far all of their price adjustments have been to dramatically INCREASE prices, not decrease them.”
    Yes, I know that. But at some point they may feel forced to do something different out of necessity. The question is will they do it in time to save themselves.

  • pathfinder_01

    “So far all of their price adjustments have been to dramatically INCREASE prices, not decrease them.”

    At the moment Space X isn’t much of a competitor. Falcon 9 lifts a little less than Atlas. FH is the only thing that threatens ULA at the moment and FH won’t be ready till about 2013 or 2014. DOD certification would come later. Basically they don’t have to worry about lowering prices until maybe 2016 or so. That is how long it will take for FH to prove itself a reliable launcher. Falcon 9 is replaces the Delta II, which is a rocket they are(or have) phased out.

    ULA has completion on the small end for it’s Athena rockets with both Space X and Orbital, but their meat and butter rockets Atlas and Delta heavy, nope.

  • pathfinder_01

    Anyway ULA right now ULA is doing some interesting work towards cost savings. I think they are just milking the situation as long as possible. They are working towards replacing the venerable RL-10 and they could in theory drop the delta line.

  • Coastal Ron

    pathfinder_01 wrote @ May 8th, 2012 at 5:59 pm

    Anyway ULA right now ULA is doing some interesting work towards cost savings. I think they are just milking the situation as long as possible.

    Yep. Milking the taxpayers.

    They are working towards replacing the venerable RL-10 and they could in theory drop the delta line.

    They would have to bring Atlas V Heavy online before doing that, if they want to keep the DoD/NRO business. That would be a pretty expensive undertaking, and the Air Force would likely not be inclined to help pay for that. I’m not so sure about that.

    Regarding the RL-10, I think that replacement would help, but not significantly. But I hope XCOR succeeds, since that will provide a standard LH2/LO2 engine for everyone else, with ULA to thank for the development.

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