U.S. government changes its business approach with satcom vendors
A dysfunctional U.S. congress, a $16 trillion national debt, and the failure of a Super Committee to reach a budget decision. These are just some of the triggers behind the $1.2 trillion in automatic government spending cuts over the next decade (known as sequestration) that were authorized by the Budget Control Act of 2011.
Under sequestration, spending cuts are being implemented across all federal departments. The U.S. Department of Defense (DoD) is no exception, being “required to make $470 billion in cuts over 10 years,” according to Defense.gov. This fiscal year’s cuts totaled $37 billion this year, and they increase to an estimated $52 billion in 2014.
The DoD’s financial woes are trickling down to the satcom industry, impacting pricing and the demand for products and services. Some vendors are already feeling the pinch, trying to defend their business while growing their relationship with the federal government. At the same time, prices are dropping and vendors are exploring ways to add value to their existing product or service line. With more spending cuts on the way, the satcom industry is bracing itself for more competition, more change, and possibly, more pain.
Higher Efficiency, Lower Costs
At every meeting that Karl Fuchs attends, people always talk about the looming “trouble on the horizon.” As VP of technology at iDirect Government Technologies, he says his company is diligently keeping track of changes impacting the DoD’s budget.
“The DoD is being forced to do more with less,” Fuchs says, adding that the bandwidth requirements of their missions are increasing, not decreasing, mainly due to its high reliance on high-definition video applications. “The type of traffic that’s being transmitted over satellite is changing. There’s still a good amount of voice and data but the percentage of video is increasing.”
Since video is bandwidth hungry, Fuchs says there is a huge industry drive for any product or service that helps the DoD improve the spectral efficiency of its system. As an example, he says iGT recently introduced a new version of code that enables users to deliver adaptive inbound channels over the company’s time division multiple access (TDMA) system. He says it reduces the amount of bandwidth required to accomplish military missions by 25 percent.
One market that has attracted the DoD’s attention is portable devices. Years ago, Fuchs says one satellite system would service the needs of 50 to 100 soldiers. Now the DoD is pushing access to satellite communications to the individual warfighter. That need is also driving other trends like spot beam architecture or high throughput satellite constellations, which allow soldiers to use high bandwidth applications such as video with smaller terminals at potentially lower costs. Fuchs points to several that will soon be in orbit, such as Inmarsat’s Global Xpress network and Intelsat’s EpicNG network.
Furthermore, many service contracts between satcom operators and the DoD have been renewed under sequestration, according to Philip Harlow, president and COO at XTAR. But what’s changed over the past six months is that hardly any new requirements are being released.
“New task orders were being issued all the time for new requirements and services,” Harlow says. “That has slowed to a trickle. We have seen maybe one to two requirements a month compared to 10 to 15 every month [in the past].”
Another change is a new government contract vehicle designed to drive competition and cost efficiencies. Called the Future COMSATCOM Services Acquisition (FCSA), it enables many satcom vendors to have direct access to customers. Since this attracts more vendors to compete in the government space, companies are working harder to create value to generate more revenue.
“We’re trying to find where our satellites really have a competitive advantage,” says Harlow. “We’re working very hard to identify that and connect with those customers who can benefit from those advantages.”
XTAR found one such market niche – the Airborne Intelligence, Surveillance and Reconnaissance (ISR) or manned intelligence aircraft. Harlow explains that the company operates at X-band, a government-owned frequency that is not impacted by bad weather. Rain, for example, won’t degrade its high-powered, X-band signal for applications on these aircraft like it does with Ku- or Ka-bands. These ISR aircraft are also equipped with small antennas. Unlike satellites operating at Ku-band, those operating at X-band are spaced further apart, which most often eliminates the chance of interference from other satellites so the users of the small antennas can harness all of the link’s available power.
XTAR has also changed how it engages with federal agencies by being more creative in how its pricing tables are structured. It’s working hard now, Harlow says, because there will be a lot more bandwidth on the market at the end of 2014, after U.S. troops are withdrawn from Afghanistan.
“In the next three to five years, we’ll see significant erosion of [bandwidth] prices,” he says. “Demand will drop in shifts. It will change the whole dynamic between the satcom industry and government.”
Harlow believes the DoD will soon dictate contract terms for bandwidth. Fortunately, he says the demand for bandwidth from both the government and commercial vendors is cyclical and not in sync. When government demand for bandwidth drops, commercial demand typically rises and vice-versa.
During these times of low-government demand, Harlow fully expects satellite operators to focus on their commercial clients. Many will diversify their business by adopting a more commercial slant, explore niche markets where they can add value, and offer innovative products and services. But operators that have a significant amount of government business will need to focus on adding value to satellite capacity.
What satcom companies can count on is that government demand for bandwidth will rise during the next world conflict. Harlow says XTAR is identifying areas in the world that will require long-term deployment (at least 18 months) of U.S. troops. He points to Africa, Asia and South America as potential hot spots.
Until then, Harlow anticipates that, overall, demand for bandwidth will flatten out as U.S. troops withdraw from Afghanistan. “It may take some time to reach an equilibrium when we understand what the new world order is going to be,” he says. Meanwhile, Harlow says XTAR is part of an industry group of satcom operators that have suggested ways for the government to be more effective and efficient at buying bandwidth.
On May 9, the DoD launched a 90-day Commercial Satellite Communications (COMSATCOM) Assessment “to develop a plan of action to better leverage, integrate and acquire COMSATCOM for the department’s future needs,” says Lt. Col. Damien Pickart, U.S. defense press officer, office of the secretary of defense, public affairs. Led by Katrina McFarland, assistant secretary of defense for acquisition and Teri Takai, DoD chief information officer, Damien explains that the steering group “aims to recommend changes to contracting and business approaches, acquisition strategies and existing statutes, regulations and processes as necessary.”
Unpredictable Future
Some satcom companies are more concerned about the next few years, wondering about the impact of the next round of DoD budget cuts. Rebecca Cowen-Hirsch, senior vice president, government strategy and policy at Inmarsat, says one of her biggest concerns is the “unintended consequences” of sequestration. “We all want to ensure that the capabilities that the warfighter requires are provided at a best value price,” says Cowen-Hirsch, adding that uncertainty exists in the entire value chain from satellite operators and value-added resellers to equipment manufacturers. “Budget cuts are driving down prices but, at the same time, not maintaining or increasing the value or capability that the warfighter needs.”
In the past, she explains, the DoD mainly focused on the requirements needed to execute missions. But now, contracts are frequently awarded to companies applying the contracting strategy of the lowest price technically acceptable (LPTA). Although a legitimate approach, Cowen-Hirsch says sometimes this has resulted in a commoditization of pricing for bandwidth, often sacrificing value-added services, applications and key capabilities for lower prices. She believes there is a disconnect between how the government procures capabilities, how the warfighter needs to consume them, and how the industry is positioning these new value propositions.
To overcome these obstacles, Inmarsat continues to tailor its capabilities to meet government requirements. For example, its BGAN Converge supports various fixed and mobile platforms and does not require changing any existing equipment. In addition, Inmarsat’s L-TAC solution provides a “UHF-like” tactical satellite capability enabling militaries to exercise command and control through existing tactical radios and offering global coverage for soldiers on the ground, independent of local infrastructure or terrain.
Beginning in late 2013 and through the next year, Inmarsat will deploy a new wideband constellation called Global Xpress designed to meet many of DoD’s mobility requirements without any type of advanced commitment or investment from the department. Global Xpress will be the first global Ka-band network, delivering secure, end-to-end wideband connectivity for seamless airborne, naval and land operations. Using contiguous commercial spectrum, it will provide global reach and additional capacity for those with existing military Ka-band networks, and peer capabilities for those without.
“You simply cannot look at the wide array of capable SATCOM solutions as a commodity like you would buy pencils or paper from a supply store,” Cowen-Hirsch says.
Nor can satcom vendors expect to sign DoD contracts that are guaranteed for more than one year, adds Tim Farrar, president at TMF Association, a consulting and research firm focused on satellite and wireless communication. The government’s accounting rules under sequestration make obtaining long-term contracts difficult, largely due to DoD’s uncertain budget.
Farrar says the DoD is under a lot of pressure to make better use of the Air Force’s Wideband Global Satcom (WGS) system, including the sixth spacecraft that was launched in August. Its goal is to expand wideband satcom for U.S. defense forces and international partners, including Australia, which split the cost of the spacecraft, according to Air Force Space Command
“WGS has got more capacity than any previous generation of government-owned system,” says Farrar. “That will have a big effect on the degree of DoD’s commercial spending in the next few years.”
So will attempts to build customized payloads. Farrar says XTAR built a commercial X-band capacity payload, hoping to attract the DoD’s business. Nearly five years later, he says the government “woke up” and started buying capacity. Another scenario occurred with Intelsat’s IS27. Although the satellite was launched earlier this year, he says the DoD refused to buy capacity because it would compete with services offered by its own satellites.
“The government has made it difficult for the industry to try innovative things,” says Farrar. “There’s always this inevitable conflict between using commercial stuff, which may be cheaper, and the people whose job it is to operate the government’s own satellites, who don’t really want the competition from commercial vendors.”
However, he believes that the government will purchase the next generation of WGS, called VGS, from a commercial operator that can launch the system into orbit much quicker and cheaper.
Vendors can also count on the DoD to scrutinize every line item in its budget, Farrar says, to distinguish between efficient and valued-added services from those that aren’t. The harder the DoD looks, he says, the more services it will cut back.
