Satellite Wars

ony George has gotten used to anxious calls at odd hours of the night.

George is a vice president at Artel Inc., a Reston, Va., telecommunications services firm. Artel is one of three companies the Defense Department hired in 2001 to procure satellite communications services for the military services. Satellites are an indispensable component of the American war machine, and lately Artel's business has blossomed.

During recent military operations, an Artel manager's pager sounded one evening after business hours. An "emergency situation" had developed, George says, and the military-he won't say which branch-needed a satellite link into its area of battle immediately.

Artel pieces together airborne links between two points on the globe-for instance, from a command center in Florida to troops in Baghdad. An information stream, video feed perhaps, beams up from Earth, shuttles through a few of the approximately 250 communications satellites that circle the globe like a necklace and beams down to another point on the ground. It's the digital version of two cans connected by a string, and sometimes Artel has to make the connection at a moment's notice.

The nighttime page sent George's team running. They called satellite company executives at home, rousing some based in Europe from slumber. Satellites are covered with transponders that relay finite amounts of data. George's group needed to know which transponders were available for the military to use. Within two hours, Artel got the Pentagon an answer. The connection satisfied the commanders, so Artel made the buy. The military forbids George from saying which satellites he used or where they pointed, but Artel likely was assisting operations in Afghanistan or Iraq.

The military services have a ravenous appetite for satellite capacity-which is measured in terms of bandwidth, the amount of data a satellite can transmit-that has exploded during the past decade. New warfighting technologies are useless without satellites. Unmanned aerial drones broadcasting live battlefield video and communications gear that lets a commander hear and see from a soldier's point of view, thousands of miles away, rely largely on privately owned satellites.

The military purchases between 70 percent and 80 percent of the satellite time it needs from the private sector, spending upwards of $500 million annually-but it doesn't buy direct. Instead, the Pentagon relies on a process involving Artel and two other small businesses as intermediaries. The Defense Department places an order, and the three companies compete by putting together packages using satellites operated by other companies. Those vendors-there are about six major firms in the market-also compete aggressively. The goal is to provide customers with more bandwidth options and lower prices. The bandwidth packaging companies, such as Artel, often combine portions of bandwidth using different companies' satellites, something they say the satellite firms wouldn't do if they sold directly to the military.

But now satellite operators want to get rid of middlemen such as Artel, which, they say, cut into their business. In recent years, satellite companies spent billions building an infrastructure that is underused due to the downturn in the commercial telecom market in the late 1990s. Demand for services such as satellite television and telephones has been lackluster since.

Now satellite companies are looking to the government market to make up their lost revenue. Defense Department consumption of bandwidth has increased tenfold in the past decade, according to military estimates. Civilian agencies also use satellites, and that demand is expected to rise. For example, new homeland security initiatives require remote communications and response capabilities that satellites can provide.

Satellite operators also want the Defense Department to sign multi-year contracts, just as big commercial customers such as CNN do. Long-term contracts guarantee satellite companies income and enable them to better plan how to allocate satellites. The contracts also could keep operators from having to scramble to make satellites available when the military calls in the middle of the night.

Buying in bulk would save the government millions of dollars, industry sources agree. Yet Defense officials are reluctant to sign up for the long haul. They fear another telecom bust-if satellite companies went out of business, then the military would be left in the lurch. Military planners also shy away from long-term contracts because they simply don't know where forces might have to be quickly deployed. They'd rather have the flexibility of buying bandwidth at a moment's notice only where they need it. Changing the procurement system also could knock intermediary contractors such as Artel out of the game.

The Defense Department's growing appetite for on-call satellite bandwidth has made it the linchpin in a multimillion-dollar business. And for the companies involved, the stakes rarely have been higher.

WAR VIA SATELLITE

The military's love affair with communications satellites began in Iraq in 1991. Operation Desert Storm was the first space war. Satellites enabled the quick devastation of Iraq's armed forces. They let commanders transmit attack orders instantly through space directly to troops on the ground or pilots in the air. Traditionally, orders were radioed or transmitted electronically, then transcribed or printed out on paper, which was delivered by hand or fax. Satellites created a network that moved information at the speed of light.

Later, satellite communications played prominently in the Balkans campaign and in every step of the 2001 war in Afghanistan and last year's battles in Iraq. The technology leaves even seasoned military planners breathless. During the Iraq war, more than 900 target sets-orders indicating where bombs were to be dropped-were relayed to U.S. aircraft through a small satellite network that the Defense Department manages, says Maj. David Martinson, chief of the military satellite communications operations for the Air Force's Space Command. The total number of target sets is classified, but it's likely significantly more than 900. During the Iraq war, orders that once took days or weeks to transmit and execute took only moments. "That's amazing," Martinson says.

For example, before the U.S. "shock and awe" air assault on Baghdad in March 2003, President Bush ordered a pre-emptive strike on a house in which Saddam Hussein and his sons might have holed up. An Iraqi spying for U.S. intelligence used a satellite device to contact commanders in Florida and describe the scene on the ground. At 7:15 p.m. on March 15, the president ordered the strike. New target sets were transmitted by satellite through the chain of command and ultimately to the pilots of stealth aircraft orbiting Baghdad. The entire process, from the go-ahead order to the bombs dropping, took about two hours.

President Bush marveled at the rapid-fire sequence of events in an interview with NBC Nightly News' Tom Brokaw in April. "In the Oval Office, we were getting near-instant feedback from eyes on the ground on what [the Iraqi spy] was seeing, what he felt the conditions were like. It was an amazing moment . . . seeing, observing what was taking place inside of one of Saddam's most guarded facilities. . . . The ability to communicate has changed the nature of warfare."

Without satellites, shock and awe isn't all that shocking or awesome. Commanders conduct war the way doctors perform orthoscopic surgery, identifying malignant threats from a clinical distance, then disintegrating them. Satellite communications allow the next best thing to being there, visual and aural immediacy, and without them, says Martinson, "We don't go to war."

Satellite operators only recently have grasped that selling bandwidth to warfighters is a lucrative business. But they've been beaten to the punch.

THE DEAL MAKER

Mary Ann Elliott, who at 32 was a mother of three and recently widowed, is the embodiment of the self-made woman. She got into the telecom business in the 1970s, after being turned down for a sales position with Motorola and then writing to the chief executive officer demanding to know why the company wouldn't hire a woman. Elliott is a scrapper and a cunning strategist. But her claim to fame is the leading role she played crafting the bandwidth procurement process.

In 1991, satellite operators saw a growing market among 24-hour news broadcasters, not the military. In fact, CNN beat war planners in the race to buy bandwidth preceding Desert Storm. As one industry executive observed, the operators followed the lead of CNN founder Ted Turner, not the Pentagon. Even then, satellite operators sold to the military through resellers. But resellers provided few extra services, and Elliott saw a niche. In 1991, she founded Arrowhead Space and Telecommunications Inc. in McLean, Va., choosing the name as a tribute to her American Indian ancestry. The company distinguished itself as a full-service shop. It advised the military services on how to buy bandwidth, build ground stations and keep logistics running smoothly. Arrowhead's clients now include defense and civilian agencies such as the Federal Aviation Administration.

For the operators, "The commercial market was so much easier to deal with," Elliott says. "[Commercial customers] gave them long-term contracts." Why should the operators deal with a government customer who is cranky by nature and very demanding, Elliott asks rhetorically. She built a business smoothing relations between operators and the Defense Department, a business that logged $70 million in revenues in 2003, she says. Communications satellites are expensive to launch and place into orbit, and can be destroyed in the process. But once they're in place, "money falls off [them] . . . like a cash machine just spitting out cash," Elliott says.

In 1995, the Defense Department awarded a bandwidth procurement contract that benefited the biggest satellite operators. Comsat Corp.-now part of Lockheed Martin-won the $750 million deal and primarily used satellites owned by two large operators, Intelsat and Inmarsat, which several countries established as intergovernmental organizations to promote satellite use. Limited competition meant prices stayed high, Elliott says.

Elliott believed prices would fall if all operators had to compete for the military's business. Years later, Elliott got her wish. In February 2001, the Pentagon awarded a reseller contract to Arrowhead, Artel and Spacelink International of Dulles, Va. The Defense Satellite Transmission Service-Global contract (DSTS-G), which has spawned a new era of competition, has a potential value of $2.2 billion.

Now the government has satellite operators' attention. During the past year, several have set up government-focused business units headed by industry veterans. And they're all asking why-when their companies own, launch and manage hundreds of satellites the military cannot live without-they should have to deal with resellers.

GIANTS COME LATELY

The U.S. offices of Intelsat, the world's dominant satellite operator, consume almost 1 million square feet of space in a residential neighborhood of Washington. The company has ruled the satellite industry since its inception.

In one of three lobbies in Intelsat's office, replicas of nine generations of Intelsat satellites dating from the early 1960s hang from the ceilings. Also on display is one of six extant manuscripts of the prophetic 1945 article by science-fiction writer Arthur C. Clarke, in which he first envisioned using multiple, high orbit devices to beam data anywhere on Earth. (The 22,300-mile-high path at which most communications satellites travel is known as the Clarke Orbit.)

Intelsat was formed as an intergovernmental satellite organization and had more than 140 nations as signatories. But in its nearly 40-year history, the group never had a unit focused exclusively on the federal government. In 2002, a year after Intelsat became a private company, executives discovered that government sales accounted for more than 10 percent of annual revenues, or nearly $100 million. That got the board of directors' attention, says Susan Miller, who was tapped to head the new government group shortly thereafter.

Like all satellite operators, Intelsat contends that it has the experience and the resources to deal with the military one-on-one. Indeed, the company's massive Washington facility, from which it monitors a satellite's every tick and turn, closely resembles Mission Control at NASA. Intelsat and its competitors say they don't really need intermediaries.

Richard DalBello, the president of the Satellite Industry Association, the operators' advocacy group, says operators might have neglected their now prized customer, but their newfound commitment should be recognized. "They've gone through the expense" of starting government divisions, he says, "They've hired the people . . . . And they don't think they need a middleman."

Privately, critics of the bandwidth contract contend that it's not only outmoded, but also was politically conceived. The Defense Department reserved the DSTS-G contract for small and disadvantaged businesses. But at $2.2 billion, it was the biggest small business set-aside in government history. Defense had to meet its annual small business goals, and the contract "certainly filled the bill," says Artel's Tony George.

When asked whether the DSTS-G contract was meant to placate small businesses, a spokeswoman for the Defense Information Systems Agency, which awarded the contract, said, "[This] award emphasizes our commitment" to meeting "the small business goal." Arrowhead's Elliott has a simpler explanation for DISA's decision to make the contract a small business set-aside. "They did it because I lobbied them," she says.

Satellite operators may feel politically and financially aggrieved, but in mid-December, the General Accounting Office determined that the reseller contract is competitive and fair to all companies. Satellite companies "have had ample and fair chances to create solutions and to compete for and win" work, GAO found. In fact, six operators examined "had very similar percentages of winning proposals," the report noted (GAO-04-206).

GAO, however, blasted DISA, which collects the military's bandwidth requirements and delivers them to the resellers, for weak management that had cost the government money and wasted time. DISA takes 79 days, on average, to process paperwork before contacting the resellers, GAO determined. That's more than a month longer than DISA tells customers it takes. GAO found some customers were bypassing DISA, the contract and resellers by signing agreements directly with satellite operators. The Navy saved nearly $5 million over five years by doing so.

DISA refused to comment on GAO's findings, issuing only a brief statement in response: "An ongoing study will determine if process changes are required to satisfy [Defense Department] commercial satellite requirements in the most effective and affordable fashion."

Elliott, whose efforts paved the way for the reseller contract, is lobbying again to keep the satellite services contract reserved for small businesses. She admits that, thanks largely to the satellite contract, Arrowhead's revenues now are so high it wouldn't qualify as a small business.

Satellite companies have mounted a public relations campaign, but haven't made noticeable headway with Defense decision-makers. Though they think the contracting system is broken, none of the satellite companies expects it to change soon. "They shouldn't," says Elliott.