The U.S government’s decision to award a combined $7.3 billion in two 10-year contracts with two commercial satellite imaging companies was made only after ensuring that both firms had the financial strength to survive and that the contracts would not unduly tip the balance of the Earth observation business, one of the government’s chief negotiators said Sept. 10.

Karyn Hayes-Ryan, director of the commercial imagery, data and programs group at the National Geospatial-Intelligence Agency (NGA), also said “several” other companies competed for 10-year contracts under the EnhancedView program. The contracts, awarded to GeoEye Inc. of Dulles, Va., and Longmont, Colo.-based DigitalGlobe, were announced in August.

The EnhancedView contracts give both companies a predictable revenue stream assuming they make good on the volume, quality and timeliness of imagery for a decade. In addition, they provide several hundred million dollars to both companies to offset investments they will make on behalf of the customer.

For GeoEye, the investment is in a new high-resolution satellite, called GeoEye-2.

For DigitalGlobe, the NGA cash investment will mainly be to enhance the company’s ground infrastructure for capturing and delivering satellite imagery. That will be especially necessary since NGA is asking DigitalGlobe to lower its WorldView-2 satellite’s orbit from 770 kilometers to 680 kilometers by mid-2011, with an option to order a further orbit lowering, to 496 kilometers, starting in October 2013.

Lowering the satellite’s orbit sharpens its image-taking ability but reduces its field of view.

The management of GeoEye and DigitalGlobe, and their investors, were ecstatic at the news that the long-expected contracts had been awarded. Hayes-Ryan confirmed in a Sept. 10 interview that there had been times during the government’s internal discussions that many agencies questioned the size of the program, especially during a difficult budget cycle.

The two companies’ competitors are less enthusiastic. The biggest competitor is Astrium Services of Europe, which owns the Spot Image optical and Infoterra radar imaging companies and has been told by the French government that two must-have Earth-observing spacecraft called Spot 6 and Spot 7 will not be given any French government financial backing. Astrium officials have estimated the cost of the two satellites, including their launch, at 300 million euros ($400 million).

That is not far from the $337 million that NGA is injecting into GeoEye to help offset the estimated cost of the GeoEye-2 satellite under construction by Lockheed Martin Space Systems. Matthew O’Connell, chief executive of GeoEye, estimated that GeoEye-2 will cost between $750 million to $800 million including launch and insurance.

Eric Beranger, chief executive of Astrium Services, said Sept. 10 that a $7.3 billion investment by NGA in two commercial companies shows how dependent parts of the industry are on government support. Beranger stopped short of criticizing the French government’s refusal to invest in Spot 6 and 7 the government has paid for the previous five Spot satellites but wondered aloud whether the industry is ready to walk without a government crutch.

“Can this industry live without government?” he said. “The question is one of timing. The idea is to have a gradual shift from the government to the private sector. This shift is occurring, but we also see a huge flow of money coming from [the U.S.] government. The future will tell us how fast the shift happens.”

In a Sept. 10 interview during the World Satellite Business Week conference here organized by Euroconsult, Hayes-Ryan said NGA took special care to ensure it was getting imagery at a rate that would be considered “very competitive” compared with commercial rates.

While the NGA’spurchasing volume dwarfs that of any other customer for commercial Earth imagery, Hayes-Ryan said the agency worked hard to ensure that any market distortion was minimal. The NGA reserves the right to share DigitalGlobe and GeoEye imagery with its partners without paying a second time for the data, but the agency takes seriously the idea that certain classes of data should be reserved for commercial sales, she said.

NGA hired the Aerospace Corp. to perform financial due diligence on both companies to ensure that they were on solid ground and could deliver on the contract without problems.

Early in the EnhancedView negotiations, NGA took the position that if either company wanted the government to co-invest in new satellite capacity, the company would need to file a letter of credit, backed by cash, in the amount of the requested co-financing.

“The idea was to insure us against the possibility that we would be left holding the bag if something went wrong,” Hayes-Ryan said. “Someone drops a mirror, or a launch fails, or the company goes bankrupt and in those cases the government is the last to be reimbursed. They could say, of course, that they will reimburse us once the new satellite is launched, but here you are talking about a four-year delay. So it was really an effort to protect ourselves.”

To secure its letter of credit, GeoEye was forced to take on a new equity investor.

The requirement was subsequently dropped, meaning NGA will be co-financing GeoEye-2 without requiring a guarantee.

“It turned out that this would have ended up driving up the cost of the system by a substantial amount,” Hayes-Ryan said, adding that the agency nonetheless has hedged its bets somewhat. She said NGA’s payments to GeoEye are tied to milestones in GeoEye-2’s construction, with the payments to increase after the satellite’s commissioning.

While the time from the EnhancedView request for proposals to contract signing was less than a year, it took NGA longer than expected to formulate the bid solicitation. 

“The issues had to do with challenges with the oversight processes,” Hayes-Ryan said. “In the case of EnhancedView, we had both the intelligence community and the defense community involved and that means having to take account of the needs of a lot of people, and to explain things in detail. We also had a budget crisis in the middle of it all, and this slowed things down and required us to explain what we were doing. ‘Why is this so expensive? Why does it have to be so big?’ These questions came up a lot, and we had to be able to respond.”

DigitalGlobe has said it will be expanding its ground segment, with NGA co-investment, but Hayes-Ryan said that while the EnhancedView contracts require the companies to include a direct-downlink capability to operating theaters worldwide on their future satellites, there is no requirement for mobile Earth stations.

“We have a requirement for where data has to be available, and how often. But there was no requirement in EnhancedView for mobile stations,” she said. “We concluded that a requirement calling for mobile stations would not be workable because it would mean a fairly large and costly infrastructure being stationed in places where we don’t necessarily want to have such equipment. For the smaller stations, you get to where the first couple of images are easily obtained, but volume production is difficult.”

She also said the NGA has not received requests from its user community for commercial radar satellite data under the EnhancedView program. “We do purchase SAR [radar] imagery from several foreign sources as there is not a U.S source for this at present,” she said. “We have no problem with this.”

Peter B. de Selding was the Paris bureau chief for SpaceNews.