Funding Outlook Fuels Speculation about DigitalGlobe, GeoEye

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PARIS — The two companies providing commercial satellite imagery to the U.S. government under a 10-year program are facing a combined $50 million in lost revenue this year and more-substantial reductions in 2013 as Congress and the White House look for further budget cuts, industry officials said.

The U.S. National Geospatial-Intelligence Agency (NGA), which is managing the 10-year EnhancedView program, has been unable to determine where the cuts will be made despite having more than a month to decide the issue since the U.S. government’s fiscal 2012 budget was signed into law, officials said.

The $50 million reduction represents slightly more than 10 percent of the revenue that DigitalGlobe of Longmont, Colo., and GeoEye of Herndon, Va., had expected to receive from NGA in calendar year 2012 under EnhancedView.

The two companies are dividing EnhancedView’s scheduled $7.3 billion in revenue over 10 years starting when the contract took effect in mid-2010. EnhancedView’s long-term perspective permitted both companies to invest in new satellites and ground infrastructure that NGA said would be needed under the program.

The total investment that GeoEye and DigitalGlobe are making in their GeoEye 2 and WorldView 3 satellites, respectively, is about $1 billion including expansion and upgrade of the companies’ ground infrastructure. Additional funding for that hardware is being provided by NGA.

But while the satellites and infrastructure represent multiyear investments, EnhancedView is structured as a one-year contract with nine one-year renewals.

NGA officials for months have known that EnhancedView was likely to take a hit as the U.S. Defense Department confronts mandatory budget reductions.

How deep the EnhancedView cuts will be in the coming years remains a topic of intense speculation. In the absence of hard data, industry speculation has run rampant, especially as both companies are traded on the U.S. stock market. Officials said that if the cuts reach a certain level, questions will be raised over whether GeoEye and DigitalGlobe will be able to survive as separate companies.

Any scenario involving a merger of the two “would raise industrial-base concerns and yes that is part of the discussion now,” said an official familiar with the discussions.

Retired U.S. Navy Vice Adm. Robert B. Murrett, who was director of NGA for four years ending at the time the EnhancedView contract was signed in mid-2010, said he is confident that whatever emerges from the budget negotiations will reflect the value of commercial imagery.

In a Feb. 1 interview, Murrett cautioned that he had not performed an assessment of the consequences of a merger of DigitalGlobe and GeoEye. But “competition is always good,” he said, adding that the government authorities now reviewing EnhancedView “have a full appreciation” of industrial-base consequences of budget reductions.

The U.S. government’s 2012 budget is the first concrete blow. NGA’s budget is classified, but officials with knowledge of it said a cut of $50 million is what emerged in the omnibus spending measure President Barack Obama signed into law in December.

These officials said it is up to NGA to apportion the $50 million reduction between DigitalGlobe and GeoEye, and to advise each company on what part of its EnhancedView activity should be affected.

DigitalGlobe and GeoEye provide three kinds of services to NGA under EnhancedView.

The first is what is called a Service-Level Agreement (SLA), which calls for monthly deliveries of imagery, with payments made or deferred depending on whether imagery quality and quantity milestones are met.

The second is value-added services beyond the SLA.

The third type of service is related to building next-generation satellites to satisfy EnhancedView’s future requirements. DigitalGlobe and GeoEye have both contracted for new satellites and their launches based on EnhancedView’s expected demand. The companies’ enhancements to ground infrastructure, including imagery reception stations, are part of that investment and will trigger higher payments by NGA.

“For both these companies the problem is that the $50 million in cuts may hit one company harder than the other, and NGA may decide to apply the cuts only to the SLA or not,” said one industry official familiar with the situation. “They are both in a complete fog about what to expect.”

NGA declined to discuss the 2012 budget. In response to Space News inquiries Jan. 31, the agency said only: “NGA supports commercial imagery as a vital part of geospatial intelligence, and EnhancedView as part of the commercial imagery program.”

The president’s proposed budget for 2013 is slated for release Feb. 13 and faces months of negotiations in Congress.

The White House Office of Management and Budget is overseeing a study of the cost and value of commercial satellite imagery and is expected to produce its conclusions in April following inputs from the Office of the Director of National Intelligence and the Office of the Undersecretary of Defense for Intelligence.

Whether this study will have much impact on the 2013 budget is unclear, but officials said Obama’s budget proposal is likely to call for cuts that are much more substantial than what has been agreed to for the current fiscal year.

U.S. National Intelligence Director James R. Clapper told the Geoint symposium in October in San Antonio that budget cuts would be severe for some programs, and that he would not proceed with a minor trimming of multiple programs to achieve the desired budget result.

Addressing a Jan. 27 conference at Washington’s Center for Strategic and International Studies, Clapper said he remains a believer in the value of commercial imagery to U.S. government agencies, but that even valuable programs are not sacrosanct in the current budget environment.

Commercial imagery “has the benefit of course of being unclassified and that is great for sharing both with coalitions overseas and certainly domestically,” Clapper said. “I think there’s always going to be a substantial need for commercial imagery within the intelligence community and for many other purposes.”

Of the commercial imagery study ordered by the White House, he said: “[I]t’s just a relook at the utility and applicability of commercial imagery, but that’s not to say that in this era of budget cutting that commercial imagery is [not] to be considered in that situation as well.”