Imagery shakeout, fallout

Rocky Mountain News

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Too many companies for too few deals jolt satellite-imaging industry
By Roger Fillion, Rocky Mountain News
August 8, 2005

The Pentagon official who telephoned the Dulles, Va., headquarters of
Orbimage Inc. last September had big news for the commercial spy
satellite company.

It was news that would send shock waves through the offices of another
company, one in Colorado.

The official delivered the message to the three Orbimage executives
anxiously awaiting word: The company had won a $500 million contract to
build and operate a next-generation commercial spy satellite.

Orbimage - which had emerged from bankruptcy less than a year earlier -
had beaten larger rival Space Imaging Inc. of Thornton. After the call,
the elated Orbimage executives slapped high-fives to celebrate.

The news marked a turning point in the nation's fledgling spy satellite
industry: A shakeout had begun.

Today, Orbimage and DigitalGlobe Inc. of Longmont are emerging as
future leaders. Both beat Space Imaging for separate $500 million
Pentagon awards to deploy satellites that can photograph objects 1 to 2
feet across in size.

Space Imaging drew the short straw, unable to build a new satellite to
replace an aging "bird" now orbiting Earth. The company is for sale.

"There's a natural shaking out going on here," said professor Joanne
Gabrynowicz, head of the National Remote Sensing and Space Law Center
at the University of Mississippi.

"There are only two government contracts and three companies," she
added, noting the commercial spy satellite business remains dependent
on Uncle Sam's deep pockets. "That's the main client."

The Pentagon, in particular, is the big client. It has, for example,
used commercial photos to hunt for weapons of mass destruction in Iraq
and to wage war there.

A deal to sell Space Imaging could be signed by summer's end. But that
isn't assured. Speculation is rife that DigitalGlobe and Orbimage are
among the interested buyers. Both declined to comment. Space Imaging
wouldn't comment for this story.

Alternatively, owners Lockheed Martin Corp. and Raytheon Co. may not
sell Space Imaging, whose existing satellite is expected to work until
at least mid-2008.

Space Imaging had been the odds-on favorite to land one of the $500
million Pentagon contracts, dubbed NextView. But officials at the
Pentagon's National Geospatial-Intelligence Agency, which doled out the
awards, thought otherwise.

"The winners were selected based on the bidding criteria and the best
value to the government," said NGA spokesman Dave Burpee.

Fallout in Colorado

Space Imaging losses hit Colorado. It's an open question whether the
state - as home to DigitalGlobe and Space Imaging - can still claim
bragging rights as the hub for the commercial spy satellite industry.
Virginia can point to Orbimage.

What caused this turn of events, with Space Imaging getting bested by
two smaller rivals in pursuit of the NextView deals? In yet another
case, the company failed to nail down a NextView contract when it
negotiated with the NGA in the absence of competitors.

"Space Imaging lost this at different times for different reasons,"
said analyst Edward Jurkevics of Chesapeake Analytics in Arlington, Va.

Industry experts and officials cite various factors:

=B7 Owners Lockheed and Raytheon made clear in late 2002 they weren't
prepared to sink another dime into Space Imaging.

With its financial options limited, Space Imaging was forced to put
conditions on the bids it placed with the NGA - terms that cut the
proposals' competitiveness.

=B7 As Pentagon contractors less accustomed to live-or-die competition,
Lockheed and Raytheon injected a more traditional, white-collar culture
into Space Imaging. It wasn't one always focused on camaraderie
throughout the ranks - or serving a key customer, the NGA.

DigitalGlobe and Orbimage, in contrast, showed more entrepreneurial
zeal focused on serving the customer's needs - such as delivering a
satellite within the time frame stipulated by Uncle Sam.

=B7 Having Lockheed and Raytheon as owners limited Space Imaging's
ability to shop around among suppliers. Lockheed would make the
company's satellites and Raytheon the ground system.

=B7 Commercial demand for high-resolution satellite imagery has been
slow to materialize and by itself can't support the industry.

"It's obvious there is not a commercial market for it," said John Pike,
director of GlobalSecurity.org.

"The challenge is how do you make this thing work without a contract
from the NGA," he added, referring to the Pentagon agency.

Some commercial success

There have been successes.

Google Inc.'s online mapping product uses imagery from DigitalGlobe and
others to allow users to zero in on spots around the globe.

Similarly, Microsoft Corp.'s own Web service uses aerial photography
and satellite images to pinpoint places on Earth. Orbimage struck an
exclusive deal to supply high-resolution satellite images.

Other commercial users include the oil and gas industries, local
governments and power companies.

For Space Imaging, its owners have played a big role in the company's
fate. Lockheed and Raytheon together hold a 77 percent stake in the
private company.

Space Imaging has experienced a roller-coaster ride. It's first
high-resolution satellite was destroyed in a rocket failure in 1999.
But the company deployed a replacement later that year, beating rivals
to the punch. It marked the start of the high-resolution commercial
remote sensing industry. Previously, Uncle Sam had a monopoly.

Still, owners Lockheed and Raytheon didn't see a big enough future in
the business.

In late 2002, Lockheed wrote off a $163 million investment in Space
Imaging and told its shareholders it wasn't prepared to invest more
cash. Raytheon did the same, writing off $175 million.

"It just wasn't core to the pursuit of opportunities in our growth
markets of defense, homeland security, government IT and intelligence,"
said Lockheed spokesman Thomas Greer. Raytheon spokesman Steve Brecken
declined to comment.

Industry experts say that decision made it tougher for Space Imaging to
persuade the NGA to award the company one of the two $500 million
contracts that were separately up for grabs in 2003 and 2004.

Assigning blame

At rival DigitalGlobe, CEO Herb Satterlee is outspoken in assigning
blame for Space Imaging's loss last year to Orbimage.

"That wasn't Space Imaging's fault. Space Imaging didn't have the
support of their ownership," said Satterlee. "That was tragic."

How so? Space Imaging had to attach conditions to bids it submitted to
the NGA, once called the National Imagery and Mapping Agency.

In 2003, when DigitalGlobe won, Space Imaging said it would round up
loans to finance its share of building a new satellite - provided the
company got the contract, which would be used to secure the loans.

In early 2004, Space Imaging got the opportunity to negotiate one-
on-one with the NGA for a NextView deal after DigitalGlobe's victory.
But owners Lockheed and Raytheon - reluctant to be on the hook for more
money - insisted Space Imaging get the right to scrap any deal if
satellite-construction funding couldn't be raised within a certain
time. NGA officials ended talks.

Later in 2004, when Orbimage won, Space Imaging's bid included the
condition that if it won, owners Lockheed and Raytheon would sell the
company to a consortium led by financially viable L-3 Communications
Holdings Inc.

However, NGA officials clearly were uneasy with conditions written into
the offer.

So the NGA tapped Orbimage, which had lined up funding to pay its share
of satellite construction.

"We got commitments from our investors," said Orbimage Senior Vice
President Timothy Puckorius.

Another factor that hampered Space Imaging: A decision to propose
delivering a next-generation satellite after the date stipulated by the
government.

While DigitalGlobe promised to adhere to the timing, Space Imaging and
satellite supplier Lockheed proposed a later date.

"The proposal that Space Imaging turned in didn't recognize that
requirement as being important," said one former employee.

(DigitalGlobe had to delay deployment of its new satellite because the
supplier providing the camera encountered snags. The company still
plans to launch it by 2006.)

Corporate culture

Other factors were at play at the time - such as corporate culture.
DigitalGlobe employees wore jeans and sneakers, much like at a startup.
CEO Satterlee even wore shorts.

Space Imaging was more formal. Executives wore ties and suits, more in
line with the culture at Lockheed and Raytheon. Current CEO Bob Dalal
has Lockheed roots. The previous CEO was a Raytheon veteran.

"It was run like an aerospace company," another former Space Imaging
employee said of the company. "It couldn't run fast and light."

Attempts to loosen the atmosphere and build camaraderie didn't always
sit well with top brass.

For example, a keg of beer occasionally was brought to the company's
back parking lot for people to enjoy. Top executives, however, were
unenthusiastic about management joining the festivities.

"They didn't want to see the managers out there," said one of the
former employees.

Back in 2003, the industry's chief rivalry was centered in Colorado.
Space Imaging and DigitalGlobe had established, operating
high-resolution satellites.

And while DigitalGlobe had won the first NextView deal that year, Space
Imaging was determined to nail down its own award next time. Orbimage,
by contrast, had only launched its first high-resolution satellite in
June 2003.

Once Orbimage captured the second NextView contract last year, however,
the DigitalGlobe-Space Imaging rivalry changed.

"That ended any rivalry," said Orbimage's Puckorius.

But DigitalGlobe's Satterlee says Orbimage isn't on his radar screen.

"Space Imaging has been our competitor. And today in the marketplace I
do not see them," the CEO said of Orbimage. But he added, "They will be
there."

Imagery's impact

While the Pentagon has been a big buyer of high-resolution satellite
photos, businesses and local governments also are purchasing the photos
and using them in ways that can affect ordinary citizens. Here's a look
at how the imagery can be - and is - used:

=B7 Farmers: Checking crops for disease.

=B7 Timber companies: Managing their stands of trees.

=B7 Oil and gas companies: Keeping an eye out for pipeline leaks or
determining where to sink a well.

=B7 Local governments: Mapping boundaries.

=B7 Google and Microsoft: Providing Web-based services that allow users
to zero in on spots around the globe.

=B7 Power companies: Eyeing transmission lines to see whether trees may
need to be trimmed.

Space Imaging Inc.

=B7 Headquarters: Thornton

=B7 Employees: About 175

=B7 Ownership: Lockheed Martin and Raytheon majority owners

=B7 Status: One orbiting high-resolution satellite; company for sale

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