U.S. military rebounding as a commercial satellite customer

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The sighting of a nightingale is no proof that spring has arrived. But what about four of them?

Satellite fleet operators Inmarsat, Intelsat, SES and Eutelsat all say the long-awaited rebound in U.S. government (translation: mainly the U.S. Department of Defense) demand for bandwidth now looks to be underway.

There’s nothing dramatic so far, and the numbers for these companies’ most recent financial quarters still show figures that are mediocre at best. But backlog is building, and in the current market for satellite bandwidth sales, any hint of a recovery is a good thing.

Commercial satellite operators have flung themselves at the Pentagon for years trying for increased business. For the fixed satellite services operators, one of the main arguments has been: We can save you money if you’ll agree to longer-term contracts.

That has proved a rough sell for lots of reasons, as has the idea that the military should place a payload on just about every Intelsat, Eutelsat or SES satellite being launched. The fizzling of the hosted-payload idea has been especially disappointing to these companies.

Meanwhile, the Pentagon’s use of Overseas Contingency Operations funding as a way to buy satellite bandwidth “off the books” has become more tricky as this budget line shrinks.

What’s left is the nuts-and-bolts business of the government buying capacity under short-term contracts.

Inmarsat adds Ka- band to L-band, and a side order of Ku-band 

For mobile operator Inmarsat, the situation is more complicated. Inmarsat has sold a five-year, $200 million-plus take-or-pay contract to Boeing, leaving Boeing with the responsibility of selling Inmarsat’s Ka-band Global Xpress service to government users.

“Take-or-pay” means what it says, and there’s no way of assessing Boeing’s ability to close deals with military customers for Global Xpress. Suffice it to say that Boeing is fully incentivized to pitch Global Xpress to the U.S. military.

Global Xpress is now operational worldwide, with three spacecraft in orbit. A fourth is set to launch in early 2017. Boeing’s payments to Inmarsat surpassed $10 million for the three months ending Sept. 30 for the first time. They will increase slightly from there, to between $40 million and $50 million a year, for the next couple of years before trending down.

Inmarsat and Boeing, which built the satellites, are relying on Global Xpress as a gapfiller for the military’s Wideband Global System of Ka-band spacecraft. Boeing built those, too, and Global Xpress is interoperable with the WGS fleet.

The ultimate success of Global Xpress will depending on whether Inmarsat is correct in its assessment that the Pentagon will gradually move most of its mobile platforms from Ku- to Ka-band.

For the three months ending Sept. 30, Inmarsat reported $84.8 million in government revenue, up nearly 10 percent from a year ago, saying the growth came from the U.S. and non-U.S. militaries.

Inmarsat’s desire for more U.S. government work was obvious in the recent Commercial Satellite Broadband Program (CSBP) contract for the U.S. Navy. It’s mainly Ku-band, which Inmarsat doesn’t sell. Inmarsat won the contract from incumbent Intelsat with a bid that was remarkably low-priced, especially given that it will mainly rely on third-party providers for capacity.

The good news for Inmarsat is that wide-beam Ku-band prices in most parts of the world are coming down on a per-megahertz basis.

Intelsat: Few new DoD programs, but demand stabilizing

Intelsat’s government-focused subsidiary Intelsat General Corp. has seen declining sales with the reduction in U.S. military commitments and the lack of new contract proposals from the U.S. Defense Department.

But in its most recent earnings statement, it reported a two-percent growth in government revenue, to $97 million for the three months ending Sept. 30.

The company reported “extremely high” renewal rates among its government customers, but did not specify specific renewal-contract volumes or whether the transponder prices inside them were stable or declining.

Intelsat said 59 percent of its government business is “on-network,” meaning it is derived from capacity on Intelsat’s fleet. The remaining 41 percent is lower-profitability revenue from capacity that Intelsat books on other operators’ fleets as part of a bundled contract to government customers.

Intelsat said the CSBP contract, which it lost to Inmarsat, has been extended and will end Dec. 31, apparently to give Inmarsat time to prepare to assume the work.

SES: Government backlog up, O3b added into the mix

On the face of it, Luxembourg-based SES’s Government revenue performance of 176.6 million euros ($195 million) for the nine months ending Sept. 30, down 10 percent from a year ago, is not impressive.

But SES Government Solutions reported a 10-percent increase in its backlog since Jan. 1, and the company’s recently purchased O3b Networks constellation of Ka-band broadband satellites in medium-Earth orbit offers the hope of growth to come.

SES took over O3b on the assumption that it could capture business by offering lower-latency broadband in O3b’s coverage area, a band from around 45 degrees north to 45 degree south latitude.

For the nine months ending Sept. 30, O3b booked government revenue of 11.6 million euros, up 650 percent from a year ago for a service that is still debuting to military customers.

The addition of O3b puts SES on both sides of the Ku- vs. Ka-band debate regarding the future of U.S. military platforms seeking broadband connectivity. Most of SES’s current 50-satellite fleet in geostationary orbit uses Ku-band.

Eutelsat: Fall 2016 renewals much better than last spring

Given how much of its fleet is over the Middle East, Central Asia and Africa, Paris-based Eutelsat in recent years has been one of the major beneficiaries of the U.S. military’s use of commercial-satellite capacity.

Eutelsat rode the business up in the Afganistan and Iraq deployments, and has ridden it down since then.

Mirroring SES, Eutelsat’s most recent quarterly performance is not good on the revenue side. It was down more than 10 percent, to 47 million euros, compared to a year ago.

But as Eutelsat Deputy Chief Executive Michel Azibert drilled down into the numbers, it became clear that the most recent renewal cycle with the U.S. military — they happen twice a year, in the spring and fall — was much better than previous renewals.

Military demand, as expressed in contracts renegotiated in the fall, showed a renewal rate of around 95 percent, with stable volumes and prices that showed only “modest softening,” Azibert said. That compares to a renewal rate of just 65 percent during last spring’s renewals, where per-megahertz prices were down 22 percent.

In addition to this, Eutelsat reported that the U.S. military added two new 72-megahertz transponders to its existing Eutelsat capacity.

“The situation is improving a lot,” Azibert said.

As for the rest of the world…

If satellite operators’ wishes were horses, then nearly all of the world’s militaries would ride the U.S. trend toward increased use of commercial satellite capacity. In fact, there are tentative indications that this might be happening.

Inmarsat, Eutelsat and SES  all took pains to report that when they say “Government,” it’s not always a code for “U.S. Defense Department.”

Other governments do appear to be waking up to the potential of the commercial sector, even if the United States will remain the majority customer for some time.

In the U.S., the big question is how the military will proceed with a successor generation of several major systems.

Craig R. Cooning, who in October retired as head of Boeing’s Network and Space Systems division, in September pointed to what he said was a remarkably low level of research and development work now going on to prepare for the coming recapitalization of the current portfolio of military space assets.

A former satellite industry executive used to tell military audiences: “Commercial satellite operators don’t wake up each morning thinking about what they can do for the U.S. military.”

True enough, but they likely give it a thought with the morning coffee.