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The Denver Post May 25, 2004

Lofty hopes unfulfilled

Contract push may be last chance for Space Imaging

By Greg Griffin

When Space Imaging launched the world's first commercial spy satellite in September 1999, it appeared poised to dominate a billion-dollar industry.

Space Imaging was backed by industry giants Lockheed Martin Corp. and Raytheon Co. Its nearest rival was two years away from placing its first satellite into orbit, allowing the Thornton-based company to build a strong customer base.

But today, only five years later, the future is uncertain for Space Imaging and its 300 employees. The company's survival appears to hinge on a $500 million government contract that has so far eluded it.

Without the contract, under the National Geospatial-Intelligence Agency's NextView program, Space Imaging may be unable to launch a second satellite. Its first, Ikonos, is expected to lose effectiveness beginning in 2007 or 2008.

"It is integral to our business plan," Robert Dalal, the company's chief executive, said of the contract. "It's very, very important."

"It is pretty intense, and it will be until (the proposal's deadline on) June 1," Dalal said. "I don't want to relax even one bit. I want a razor-sharp focus on the fact that we have to bid for and win the NextView program. I want that to be felt by everyone in the organization, including myself."

How did Space Imaging's fortunes change so dramatically in such a short time? Company officials and outside observers blame it on a combination of factors - including slow movement by the U.S. government to support a nascent industry and disappointing demand from commercial customers.

In short, the market hasn't grown as quickly as imagined in the 1990s. Industry experts predicted that spending on commercial, high-resolution satellite images would quickly reach $1 billion in the United States. Today it's estimated at less than $400 million.

Space Imaging is the biggest in that sector with $200 million in annual revenues. Its business model is considered the strongest because it sells access to its satellite to owners of 13 ground stations throughout the world. That gives Space Imaging a broader customer base than its competitors.

But that may not matter if the company can't win the big contract.

"It's a pretty rough business to be in, in the sense that it's a brand-new line of work," said John Pike, director of GlobalSecurity.org, a defense policy think tank in Alexandria, Va. "It's not clear who the customers are; it's not clear what the customers want and how much they'll pay for it."

To be sure, Space Imaging has had its own problems. Lockheed Martin and Raytheon wrote off more than $300 million in losses on their investments last year and refuse to put more money into the company.

That may have tied Space Imaging's hands last year when it vied against rival DigitalGlobe for the first $500 million NextView contract. The government awarded it to DigitalGlobe, allowing the Longmont company to begin work on its second satellite.

Space Imaging then entered negotiations for a second NextView contract, but those talks broke off this year after no agreement was reached on financial terms. Now the government will put the contract out to bid.

"First, they lost the proposal to DigitalGlobe. Then they had a second chance at it, and they lost it to nobody," said Edward Jurkevics, principal at Chesapeake Analytics in Arlington, Va. "If you did that, what would your boss say to you?"

Space Imaging was unable to line up additional financing to close the deal because Lockheed Martin and Raytheon were unwilling to guarantee the loans.

That could change in the next bidding round, however. Space Imaging is thought to be restructuring its finances and seeking one or more new investment partners.

Meanwhile, another competitor has emerged.

Orbimage of Dulles, Va., which launched a high-resolution satellite in June and received a $27.5 million government contract in March, also is expected to bid for NextView.

Orbimage, a spinoff of Orbital Sciences Corp., is considered Space Imaging's main rival for the contract.

DigitalGlobe has been barred from bidding as a prime contractor, but it could bid as a subcontractor.

Analysts expect government spending on commercial satellite images to grow considerably in the future. There's talk that the National Geospatial-Intelligence Agency, a division of the Department of Defense, could award another NextView contract within a few years.

Commercial sales also should increase, although they're unlikely to amount to more than about 20 percent of total industry revenue, Jurkevics said.

He said he expects total industry sales to reach $500 million to $800 million by 2008 - enough to support two to three companies with a total of six to eight satellites.

Space Imaging's Dalal said the company has options if it loses the NextView contract, although he would not discuss those. He bristled at the notion that DigitalGlobe has stolen Space Imaging's position as the industry leader.

"By any measure, DigitalGlobe has not passed us by - not even close. Yes, they do have a better balance sheet. Yes, they did get the first award of NextView. ... But they don't own 43 percent of the market worldwide," he said. "News of our demise has been greatly exaggerated."

Ikonos facts

Facts: World's first commercial high-resolution Earth imaging satellite; telescope and camera built by Eastman Kodak

Launch: Into sun-synchronous orbit on Sept. 24, 1999, from Vandenberg Air Force Base in California

Weight: 1,600 pounds

Orbit: Makes 14 trips per day, 423 miles above Earth at 17,000 mph (4 miles per second). Goes from the northern tip of Canada to the southern tip of Mexico in 10 minutes.

Function: Takes 1,100 digital images daily at 1-meter resolution, meaning it can see something 1 meter in size or larger. Can see the same place on Earth every three days.


Copyright 2004, The Denver Post