For the Satellite Industry, Lines Blur Between Military and Commercial Markets

By Sandra Erwin
NDIA

The U.S. military’s hunger for bandwidth usually means guaranteed big profits for the satellite communications industry.

But times are changing. Military customers are demanding more services at lower costs. Competition is driving down prices. And commercial space companies are coming up with “disruptive” technologies that may threaten status quo incumbents.

The Pentagon plans to spend tens of billions of dollars in the next five years on space programs, but there are not many new satellite procurements, said Stephen O’Neill, president of Boeing Satellite Systems International. “That causes many of us here to focus on where the revenue will come next,” he said last week during a panel discussion at the Satellite 2011 annual conference and exhibition in Washington, D.C.

While military suppliers such as Boeing are eyeing more opportunities in the non-defense sector to make up for declining government sales, commercial firms are chasing Pentagon contracts. As a result, the industry increasingly will see the lines blending between government and commercial markets, executives on the panel said.

“The differences between the two sectors are not that big,” said Evert Dudok, CEO of EADS Astrium.

The government is becoming a bigger buyer of commercial services, while non-defense customers are demanding more advanced technology. For satellite makers, the business is evolving into a “hybrid market,” said O’Neill. “You have to figure out how to give value to all. It’s not easy.”

Also complicating the picture for satellite suppliers is the emergence of new players who are challenging the establishment. Some companies are developing robotic refueling technologies that, potentially, could dampen sales of new satellites by extending the useful service life of spacecraft three to five years beyond what was expected.

A key customer of satellite producers, Intelsat, announced recently that it would spend $280 million to purchase 1,000 kilograms of fuel as part of a joint venture with MDA Corp. to replenish its geosynchronous earth orbit (GEO) communications satellites. MDA said it would start servicing Intelsat’s spacecraft as early as 2015. A robotic refueling-and-repair service craft would dock with the satellite, similarly to the way the International Space Station is maintained and supplied today.

ATK, a major aerospace and defense contractor, also is venturing into the satellite resupply business. It teamed with U.S. Space LLC and created a joint venture called ViviSat. The company said it plans to provide in-orbit life-extension services for GEO satellites. The plan is to deploy a “mission extension vehicle” that will rendezvous with the satellite and, by supplying additional power, will allow the craft to function beyond its expected lifespan.

In-orbit refueling technology has been around for decades, and has been applied in niche areas. As a routine method for servicing satellites, however, spacecraft manufacturers have dismissed refueling robots as a Flash Gordon fantasy.

Jeff Foust, senior analyst at Futron Corp., an aerospace consulting firm, said it is too early for satellite manufacturers to panic, but they do have cause for concern. The demand for new satellites is headed for a downturn once the current backlog orders are met. If satellite operators begin to extend the life of their spacecraft, even if it is for two to four years, it could further depress or delay future demand, Foust said in an interview.

When asked about the threat this technology might pose to their business, the panel of industry CEOs downplayed its potential impact. “I don’t see it likely that this will emerge as an operational approach in the next couple of years. Perhaps at some point it will,” said David W. Thompson, chairman and CEO of Orbital Sciences Corp. “It would appear that the cost and risk of developing and demonstrating a system may be too high.” For most customers, he said, the price tag would be prohibitive. “When we looked at it, we haven’t been able to make it work economically,” Thompson said.

In-orbit servicing by 2015 is “overly optimistic,” said Reynald Seznec, CEO of Thales Alenia Space. The company developed the “automatic transfer vehicle” that services the International Space Station. “Whether it’s docking with satellites or with the International Space Station, it’s not trivial,” he said. It cost a billion euros to develop the ATV. Seznec also questioned the business case. “Will we find customers who want to refuel a satellite in orbit that is 10 years old?” he asked. “It will have limited applications, in my view, because of the enormous cost.”

“It’s a very nice idea,” said Seznec. “We need this kind of innovation. But the innovation is not technical, it’s in the business model.” O’Neill said he only sees in-orbit services as a viable application for emergencies, not for routine refueling. Thomson agreed. “I still think fundamentally the obstacle is economics,” he said. “On a time horizon of perhaps 10 years this service may take hold.”

In contrast to their skeptical attitude about refueling technologies, the executives sounded positively enthused about business opportunities in the area of “hosted payloads” for government customers.

A hosted payload is a secondary payload that is added usually to a commercial satellite, and used to perform a separate mission. It is viewed as an efficient way to use up excess satellite capacity and it saves agencies the huge cost of buying or leasing an entire spacecraft.

The Air Force forecasts increase use of hosted payloads, said Gregory L. Schulte, deputy assistant secretary of defense for space policy. Speaking at a House Armed Services Committee strategic forces subcommittee March 16, Schulte said a military infrared sensor payload is set to launch probably this summer on a commercial communications satellite. “That infrared payload will help us with the next generation of our missile warning satellites in determining whether or not that’s the right technology we want to use,” he said.

Defense agencies have been working with hosted payloads for many years, he said. The problem is that the development pace of new payloads can’t always keep up with the commercial industry’s launch plans “So it’s a thing that we’re exploring,” Schulte said. “We’ll see how this works out with this first one and we’ll continue to explore opportunities.”

The Federal Aviation Administration also has been a consumer of hosted payloads to augment its air-traffic navigation system. Companies see a growing market in the Defense Department and NASA, which may be looking at deploying additional transponders or science payloads.

Government agencies and satellite suppliers are still trying to figure out how to make this work, said Foust.
“There’s a little bit of a learning curve from both sides,” he said. The biggest issues is trying to synchronize the schedules so that companies that build payloads have them ready to go at the same time that a new satellite is set to launch.

Boeing is going to be aggressively courting this market, said O’Neill. The company already has been involved in several hosted payload programs over the last 15 years, he said. A huge opportunity is coming up in four years when Iridium is expected to begin launching 72 new satellites to replace its current constellation. These will be bigger satellites, O’Neill said. “Each has volume, mass, communications capacity set aside for hosted payloads. … We feel confident that before the Iridium train starts leaving the station four years from now that we can fill up a reasonable fraction of the hosted payload capacity on the satellites.”

Craig Cooning, CEO of Boeing Satellite Systems International, hailed hosted payloads as the answer to the military’s communications bandwidth shortage. The U.S. government’s current demand for military satellite bandwidth is estimated to be 20 gigabytes per second, which is twice the amount of what is available, Cooning said in a keynote speech at Satellite 2011. By 2019 the demand will reach 50 gigabytes per second, and only 60 percent of that will be met.

The rapid expansion military unmanned aircraft has been a major factor is the shortage of satellite capacity. Air Force pilots operate UAVs over Afghanistan, for instance, from bases in the United States. These two-way links require enormous amounts of bandwidth.

“This is a problem for the war fighter, but it’s also a great opportunity for our industry,” Cooning said. “One of Boeing’s key recommendations to address this shortfall is a hosted payload. … We believe that a hosted payload can help the U.S. government with its bandwidth needs, and also the commercial satellite services provider, which benefits from a second source of revenue.”

Boeing recently formed a new commercial satellite services division to tackle this portion of the market.
“Literally any satellite service – in any frequency band – can be provided through a hosted payload,” Cooning said. “That includes weather monitoring; surveillance; protected military communications; mobile communications; and business communications.”

Boeing’s foray into the commercial business is viewed as a sign that the company expects the military business to soften, Foust said. “Boeing had been on the sidelines in the commercial satellite business for several years.” Now, they are entering the sector in a big way.