U.S. government and Department of Defense procurement of commercial satellite services is handled by the U.S. Defense Information Systems Agency (DISA) under a regime called the Defense Information Systems Network Satellite Transmission Services-Global (DSTSG) contract. Three companies, Cap Rock Government Solutions (formerly Arrowhead), Artel and Finnmeccanica (formerly Spacelink), were awarded DSTSG contracts in 2001 to compete for U.S. military business as intermediaries — or integrators — between the Pentagon and the satellite operators.

Until DSTSG, the commercial operators sold services directly to the government. Upon the awarding of the three contracts, probably neither DISA nor the satellite operators envisioned the post-2001 explosive growth of government/Pentagon use of commercial satellite services, now amounting to about $500 million per year. As the stakes have grown, controversy has developed between the integrators and operators such as Intelsat and SES Americom.

The operators contend that the integrators add little value to the sale of bandwidth and that their added value is at the margins of end-to-end network solutions, such as installation and operation of teleports and military-oriented technical support. They also claim that DSTSG never gave the government good pricing on satellite service, and it is critical for operators to be in direct relationship with their end user, both to optimize service and capacity and to be able to invest rationally in fleet capacity for future needs. In particular, Pentagon security concerns need to be addressed in new satellite architecture. Operators will need direct capacity commitments from the government to plan their fleet investment. Finally, the operators contend that they cannot through an intermediary bring full creativity and flexibility in fleet design, deployment and redundancy to bear on customer needs.

The integrators contend that the operators unfairly disparage their added value, which is far beyond bandwidth resale and, in the provision of customized turnkey network solutions optimized for Pentagon use, is something the operators do not and cannot provide. Cap Rock, for example, contends that it provides not just in-theatre teleport operation but secure portal access, optimized mission-critical military turnaround on a full-time basis and service level commitments, such as capacity interference. The intermediaries consider themselves not only integrators but also aggregators of communities of interest for a specialized customer that operators are not equipped fully to serve.

DSTSG is set to expire in 2011. In the lobbying over the successor regime, we will find out which of these positions makes sense to DISA. One thing seems likely: the Pentagon and other government requirements for commercial satellite service will not go away or become less stringent. A new procurement model probably will be optimized for a minimum number of players. To the extent requirements are broader, for example, a single contract for fixed and mobile satellite service, equipment, training and a focus on turnkey end-to-end solutions, the integrators/aggregators may be well positioned to maintain their niche. To the extent fixed satellite service bandwidth for data and video remains the core of procurement, the integrators/aggregators will have a higher hurdle to prove their added value and avoid marginalization as channel partners.