Commentary: Satcom Reboot

A lot has been written about cost overruns and schedule delays on large U.S. government satellite acquisition programs, but an equally serious problem has received little attention: the escalating cost and dwindling availability of commercial broadband satellite capacity needed to support U.S. operations.

If this problem isn’t solved, the U.S. risks losing a crucial advantage on the modern battlefield: the ability to leverage superior space capabilities. The U.S. must do a better job of managing the acquisition of space-based communications, or the nation’s advantages will soon become unaffordable and planners will have to decide what they are going to live without. This would be an enormous setback.

Since World War II, one of the constants of U.S. defense strategy has been to rely on the ingenuity of our society to field technically superior forces rather than simply relying on mass to overwhelm adversaries. Others are catching up, and our advantage is no longer a given.

Here are some background facts: First, the stakes are enormous when one looks at the government’s relationship with the commercial satellite industry. About 80 percent of American military satellite broadband communications traffic is carried on commercial satellites as opposed to government-owned satellites, and that includes a lot of mission critical information. In places like Afghanistan, the number is even higher.

Second, there are only a few companies that buy and fly the large geosynchronous satellites that support the most demanding government needs. Two of these Fixed Satellite Service owner-operators together provide almost half of the total capacity the government relies on. One of them is my company, SES Government Solutions. Behind the two largest providers are two regional operators who provide about another quarter of global capacity.

Finally, each of these enterprises is predominantly commercial in focus, meaning none of them depends primarily on the U.S. government for their livelihoods. This means they have a choice about who they do business with.

Also, future capacity must be carefully planned out because it cannot be added quickly. A commercial geosynchronous communications satellite on average takes about three years to build and costs around $300 million by the time it arrives at its fixed operating location 22,000 miles above the equator. At $300 million per satellite, the replacement cost of the largest two owner-operator satellite fleets would be more than $30 billion. While that might not sound like too much when compared to individual government satellites that can cost from three to 10 times as much as commercial spacecraft, commercial satellites are developed exclusively with private sector capital.

Regardless of the ownership structure of each of these companies, one of their primary measures of financial viability and ultimate survival is the financial return they generate on these large investments. In fact, these enterprises are among the most transparent businesses one could ever hope to see. They deploy an enormous amount of capital, and their goal is straightforward: Generate enough revenue to cover their operating costs and compensate their investors.

Cost of Comms

Compared to most commercial enterprises with which the government does business, the satellite owner-operators are an open book, yet we often hear government complaints that our services “cost too much.” Let’s examine that argument.

For starters, contracting for satellite communications services is no different from any other buying problem in the sense that competition leads to lower prices. Unfortunately, the methodology used by the government to buy commercial capacity makes it very hard for providers to compete based on price. Government end users of commercial satellite capacity do not really care about costs, although they frequently cite it as a reason to be uncomfortable about their reliance on commercial capacity. They care most about performance and availability, and they are not incentivized to make value tradeoffs or change suppliers even when they could save money by doing so.

Why is that? Because the officials who buy capacity for end users are usually from a different agency within the government. While they do care about costs, they have little authority to relax overly restrictive language that limits competition. Those who say commercial satellite capacity costs too much are right, but the government could change that if it wanted to.

Lack of competition isn’t the only impediment to lower prices, however. Another problem is that the government insists on buying capacity in the short term, which requires paying premium prices. Sometimes government officials say they don’t know what they might need several years in the future, so they are unwilling to buy long term.

In the commercial world, it is common practice to manage such risks by negotiating termination clauses. The government could do this if it chose to. Sometimes, the reason for short-term contracts is that the government finds it hard to commit money in future years. However, it’s not impossible, and it’s worth the effort to do multiyear contracts or at least longer-term contracts with extended base periods and multiple options if it reduces costs.

Today, even though it buys capacity in huge quantities each year, the government pays more for each unit of bandwidth than commercial buyers of comparable size. Yes, there are a number of commercial customers who buy quantities similar to those of the government.

These are not trivial issues, but they are solvable. When the government really runs out of money, it will find ways to enter into longer-term contracts that cost less.

Another way to address the “it costs too much” argument is to ask, “as opposed to what?” Consider the Defense Department’s own constellation of communication satellites called the Wideband Global SATCOM System or WGS, which it continues to launch. A comparative cost study was not conducted years ago when the U.S. started buying these satellites, and it still has not been done. A cynic might say, “Having made the decision without doing the analysis, we don’t really want to know the answer.” A more likely explanation is that no one in the government knows what it costs to build, launch and operate things like WGS. To understand how that can be true, it’s necessary to think about a key difference between the government’s economic reality and the private sector’s.

In the private sector, investment opportunities are structured as projects and evaluated based primarily on their projected return on investment. That means there must be an expected business result to justify an investment, and both costs and revenues must be projected and tracked.

However, in a budget-driven environment, the government does not generate revenue or any other measurable output, and it does not keep track of costs the way the private sector does. Even when a program is delivered on time and on budget, the government may not have actually acquired the capability it was seeking. Programs are defined by detailed statements of work that specify what is being bought. Often, that is quite different from buying a capability to do something.

For example, the cost of buying a government satellite rarely includes the cost of developing and fielding the terminals needed to talk to it, yet the satellite has little utility without those things. In addition, there are many other costs that are routinely picked up by other activities or agencies — factors such as requirements development, feasibility studies, acquisition support and even operating costs once the system is deployed.

To make matters worse, there is little incentive to save money in a budget environment where “under-executing” a budget can often have worse consequences than over-running it. The bottom line on government satellites is: No one really knows what it costs to communicate over a government-owned satellite. We only know what it costs to build the spacecraft itself.

On the other hand, if a customer leases bandwidth on a commercial platform, it is getting a turnkey capability to communicate via satellite, and the commercial company covers all of the costs associated with building, launching and operating the spacecraft. Absent a thorough economic analysis by a competent and unbiased entity, we simply do not know if it is cheaper for the government to lease capacity or design, build and operate its own communications satellites. Given the budget pressures, one would think the time has come to better understand when it is best to purchase or lease services from commercial entities and when it is best to buy entire satellite systems.

The government in most cases is paying far more than it needs to because of the way it buys commercial satellite services, and it really does not know how much it costs to own and operate its own communication satellites.

Poor Relationship

What is certain is that the demand for commercial capacity is likely to remain strong. That reality is a serious challenge for the government because commercial satellite owner-operators are obligated to provide the best possible financial results for their owners/shareholders, and doing business with the government can be at odds with this responsibility.

Here’s why: The government does not behave at all like the large, strategic commercial customers the owner-operators deal with — customers like the major media networks, for example.

For them, satellite companies are essential partners without whom they are unable to distribute their products to their customers. For the owner-operators, the media companies are predictable buyers who openly share with the satellite companies their plans and needs, engaging in a collaborative and open dialogue that builds mutual confidence and results in the satellite companies being highly sensitive and responsive, routinely making investments in special capabilities for specific customers. Even when there are no contractually binding obligations in force, both sides understand that the long-term relationship matters, and both behave accordingly.

Compare this relationship with several recent examples having to do with government customers. With little or no advance dialogue, the government has said it will dramatically cut back its planned purchases of commercial satellite imagery through the Enhanced View program, despite what has been a mutually beneficial relationship with two commercial companies.

In another case, an agency established “mission assurance” standards for commercial owner-operators, promising to provide contracting advantages to those who made the necessary investments. But then it put compliance so low on the priority list as to be meaningless in the competition. The same agency also shared commercial satellite demand data that later proved to be wildly inaccurate, but never updated or corrected the information even when it was obvious that it had changed.

So what does this all mean? First, the U.S. government, and particularly the Defense Department, is heavily dependent on the capabilities provided by a small number of commercial satellite companies. Second, because of the way the government buys capacity from these providers, it pays premium prices — much higher than other large customers pay. And third, the satellite industry cannot accurately estimate future government needs, so they listen and react to other customers instead. It’s as if the government were leasing apartments built for other tenants and paying month-to-month prices, oblivious to the fact that there is no long-term assurance that they will always be there.

So what can and should be done? First, there must be a deep and ongoing dialogue between the government and the owner-operators, as opposed to an occasional high-level, one-way presentation by the government to industry. Industry does not need signed contracts to make investment decisions, but it does need enough specific and reliable information to evaluate risks and potential rewards.

Second, the government must redouble its efforts to reap the benefits of competition by pushing back more forcefully on users who establish unnecessarily inflexible requirements. To those who say, “These are the operational requirements,” someone else needs to say, “Then which of these operational requirements are you prepared to give up when we run out of money?”

It should be clear by now that we can and must do a better job of leveraging the enormous investments of the private sector in satellite communications. If we continue on the course we are on, within the next few years, we will find that we no longer have the space-based communication capabilities that we depend upon, because they are either not affordable or not available. At this moment, owner-operators are looking at the U.S. government’s buying practices and asking themselves whether it makes sense to respond to their constantly changing and poorly communicated needs. Wouldn’t it make more sense to just sell whatever excess capacity they have at the highest possible prices and not worry about what the government may not need tomorrow?

Such an outcome is clearly not in the interest of the government, but if the country does not change the way it buys commercial satellite capacity, it is almost certain to happen.

Retired U.S. Air Force Brig. Gen. Tip Osterthaler is president and CEO of SES Government Solutions, a Washington, D.C.-based subsidiary of SES.