In a move that pertains directly to PeakStocks.com portfolio recommendation GeoEye, Inc. (NASDAQ: GEOY), and their only U.S. rival DigitalGlobe (NYSE: DGI), the Pentagon and the head of U.S. intelligence signed an agreement on August 15th to buy and jointly manage two imagery satellites, a move Pentagon acquisition chief John Young last month warned was inconsistent with a presidential directive to maximize commercial imagery.

The two commercial satellites would cost about $1.7 billion and would be launched around 2012.

According to a Reuters news report, the satellites, launch vehicles and associated ground-based command and control equipment would be purchased by the National Reconnaissance Office (NRO) using military intelligence funds.

So what does this mean for GeoEye and DigitalGlobe? How will the government’s entrance into the commercial satellite imagery space impact this already nascent field?

New to the GeoEye story?

GeoEye provides space-based, and aerial imagery and geospatial information through high-resolution and low-resolution imagery, imagery-derived products, and image processing services to customers worldwide.

This capability benefits a broad array of industries including national defense and intelligence, online mapping, state and local governments, environmental monitoring and land use management, oil and gas, utilities, disaster management, insurance and others.

Want more?

• Read my initial buy recommendation here.
• or listen to my EXCLUSIVE interview with GeoEye’s management team here.

Haven’t We Seen This Before?

US government already failed at building their own satellites

Let’s start at the beginning.

In 2005, after many years of bumbling and stumbling, the government canceled a project called the Future Imagery Architecture (FIA), after indecision over what kind of capabilities it should have, skyrocketing costs, constant delays and general incompetence by the government and their building partners.

The project was canceled even before a single satellite was launched, wasting billions of dollars.

In fact, the primary contractor, Boeing (NYSE: BA), ran into technical problems developing the satellite and spent nearly $10 billion, blowing its budget by $3 billion to $5 billion before the Pentagon pulled the plug.

The decision to move ahead with the government’s Broad Area Space-based Imagery Collector (BASIC) program and build and operate these two government owned satellites, caps months of wrangling between the Air Force, the National Reconnaissance Office, the National Intelligence Directors Office and the Office of the Secretary of Defense over whether to buy and operate commercial satellites, or to pump the money into buying dramatically more imagery from the commercial companies that already have similar satellites in orbit such as GeoEye and DigitalGlobe.

According to a New York Times (NYSE: NYT) piece, Alden V. Munsun Jr. the deputy director of national intelligence for acquisition was quoted as saying that: “FIA was a catastrophe.”

When talking however about the current planned project he stated that the BASIC program and the FIA fiasco did not resemble each-other at all, and that “…this project is like going down to the Chevy dealer to buy a Chevy.”

Last I checked, there were no “Chevy” dealers for satellites that cost $500 million to create and take 4 years from conception to launch to procure.

There’s a reason there are only two commercial satellite providers in the U.S.

The business of building, running, and getting the specs just right on something so delicate should be handled by those that already poses that expertise, not a less proven and potentially incompetent branch of the U.S. government.

In fact there is already grumbling taking place as to whether or not the National Reconnaissance Office, which was in charge of the last failed satellite project, should again be put in charge of overseeing the purchase of these new satellites, as is now planned.

Further reports indicated that there has been mounting friction between these competing branches over the project, its parameters, outcomes, and who should run the show.

If there is already this sort of bickering going on, I would argue that things already don’t bode well for the BASIC program going any better than the FIA did a few years back.

So Now What?

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