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Orbit of change for satellite firms

Pared-down industry gets set to launch new-era technology

Roger Fillion, Rocky Mountain News

Published January 9, 2006 at midnight

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The new year is ushering in big changes for the U.S. commercial spy satellite industry, as it prepares to deploy a new generation of high-resolution satellites.

The number of rival companies is poised to shrink to two from three, now that Virginia-based Orbimage Inc. is set to close on its $58.5 million purchase of Thornton-based Space Imaging Inc. Most, but not all, Space Imaging employees are being offered jobs with the combined company, which will get a new name.

And for the first time, CEOs with pure business backgrounds - vs. aerospace types - will be in charge of the maturing U.S. spy satellite business.

Orbimage's Matthew O'Connell has a Wall Street, legal and corporate finance history. DigitalGlobe's new CEO, Jill Smith, has a high-tech background and boasts a master's degree from MIT's Sloan School of Management.

"I welcome the fact that both of these organizations are run by non- aerospace people," said analyst Edward Jurkevics of Chesapeake Analytics in Arlington, Va.

He said business-oriented CEOs are more adept at controlling costs and running tighter ships.

Having each won $500 million Pentagon contracts, both companies are building and preparing to launch new satellites capable of snapping Earth-based objects 1 to 2 feet across in size.

"Aerospace companies are charging everything over to the government," said Jurkevics. "They're cost-plus organizations."

Former DigitalGlobe CEO Herb Satterlee, who remains as chairman, has Boeing Co. roots.

And Space Imaging CEO Robert Dalal has Lockheed Martin Corp. roots. He won't be joining the merged company following the Orbimage acquisition.

According to an Orbimage Web site that offers information about the purchase, "a large majority" of Space Imaging's 170 employees will be offered a position with the new entity.

More than 80 percent are expected to be asked to stay on board. People in finance, human resources and other headquarters functions are among those not getting brought into the merged company.

In addition, the "vast majority" of Space Imaging employees who come to the new company will stay in their current locale, according to Orbimage.

Whatever its ultimate name, publicly traded Orbimage will go head- to-head with a private company undergoing its own transition.

Jill Smith came aboard DigitalGlobe as CEO in November. She previously was CEO of software maker eDial, which was sold to the Paris- based broadband equipment company Alcatel. She also served as CEO at Gomez Inc., a Waltham, Mass., firm that tracks Web site performance.

Smith wasted little time implementing a reorganization at DigitalGlobe, which included streamlining operations and customer support.

In e-mailed responses to questions from the Rocky Mountain News, Smith said there "have been minor staff reductions in the past month" because of the restructuring.

But she added: "At the same time, we are investing in several new hires across all levels of the organization to strengthen our team."

Smith's arrival and her early moves have raised speculation that DigitalGlobe may be positioning itself to sell stock to the public, perhaps later this year.

Smith said there are "no definitive plans . . . at this time" to make an initial public offering. But she left the door open, saying, "We are looking at a number of paths to continue to fund the company's growth and generate a return for our investors."

Asked what the Orbimage-Space Imaging merger means for DigitalGlobe, Smith replied: "It leaves two stronger companies to compete for government and commercial contracts, while also allowing these competitors to work together to service customers and meet industry needs."

Analysts said the industry's shrinkage was inevitable, after Space Imaging in 2004 lost out to Orbimage for one of the $500 million Pentagon awards. There was too little business to go around, given that the commercial market for high-resolution satellite photos hasn't lived up to its expectations.

"The consolidation in the industry is something you typically see when there's not enough demand and too many suppliers," said analyst Loren Thompson of the Lexington Institute in Arlington.

"With only two players left, the likelihood that either one can make a profit is increased."

But even fewer players won't ensure the U.S. commercial spy satellite industry will thrive, said analysts. Much of the business has been dependent on Uncle Sam, which has been bankrolling new satellites and buying the photos for intelligence purposes.

"The industry remains heavily dependent on the government as a customer," said Thompson. "In the end, the federal government has the ability to make or break the business."

The imagery has been used to wage war in Iraq and hunt for weapons of mass destruction there.

But more recently the government has used the images for hurricane relief and other disaster-related efforts in this county and abroad. In the case of Hurricane Katrina, for example, the Pentagon's National Geospatial-Intelligence Agency passed along the commercial imagery it purchased from the U.S. satellite companies to the Federal Emergency Management Agency.

"There were hundreds of requests for images and products from -FEMA. And we satisfied those," said NGA spokesman Dave Burpee.

While the government remains the chief customer for the U.S. industry, there have been commercial coups.

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.

But will it be enough to promote a robust business?

Professor Joanne Gabrynowicz, head of the National Remote Sensing and Space Law Center at the University of Mississippi, isn't sure.

"Whether it's going to be a vibrant industry with lots of participants is far from clear," she said.

Revolution

The new makeup of the U.S. spy satellite industry

• DigitalGlobe Inc.

Headquarters: Longmont

Number of employees: More than 300

Ownership: Ball Aerospace & Technologies, Hitachi, Morgan Stanley and Telespazio S.P.A/Eurimage Investment

Satellite status: One orbiting high-resolution satellite. Building next-generation satellite for deployment later this year, having won $500 million Pentagon contract.

Recent news: Company announced plans in October to build and deploy a third next-generation satellite no later than 2008. Jill Smith was named CEO in November, replacing Herb Satterlee, who stays on as chairman.

• Orbimage Inc.

Headquarters: Dulles, Va.

Number of employees: 174

Ownership: Publicly held

Satellite status: One orbiting high-resolution satellite. Now building next-generation satellite for deployment in 2007, having won $500 million Pentagon contract.

Recent news: Company agreed in September to buy Thornton-based Space Imaging for $58.5 million. Deal expected to close shortly and includes Space Imaging's existing high-resolution satellite. Merged company expected to take on new name. A "large majority" of Space Imaging's 170 employees are being offered employment with the new company.

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