Exclusive-Pentagon spars with SpaceX over Starlink price hike during Iran war

NEW YORK, May 26 : As U.S. kamikaze drones guided by Elon Musk’s Starlink network began to make visible gains in the war against Iran, senior SpaceX officials reached a conclusion: The Pentagon should be paying more for access to their satellite Wi-Fi network. Within weeks of the United States launching its bombing campaign, SpaceX executives met Pentagon officials and argued the military had been paying about $5,000 for connection per terminal while effectively using a higher tier of service worth closer to $25,000, according to two sources familiar with the matter and Pentagon documents reviewed by Reuters.  The disagreement over Starlink’s use on LUCAS suicide drones - a cheap U.S. model comparable to Iran’s Shahed that can circle over a target area before diving to detonate on impact - is part of increasing tensions between SpaceX and the Pentagon over Starlink pricing in recent months, according to interviews with five people familiar with the matter and the documents.  The Pentagon, which is seeking to help Iranian citizens bypass government-imposed communications blackouts, has also been at odds with SpaceX over pricing for a plan to provide the populace direct-to-cell connections with Starlink akin to 5G service, two of the sources said. The ongoing disputes, which have not previously been reported, underscore how the Pentagon’s growing reliance on SpaceX is handing Musk greater leverage over a critical layer of U.S. national security – at a time when SpaceX is seeking to boost revenue ahead of an IPO next month that could be among the biggest in history. Unlike consumer Starlink terminals available at stores including Walmart, SpaceX sells a military-specific version called Starshield to the Pentagon under a 2023 agreement. Starshield terminals can connect to both commercial Starlink satellites and a separate, more secure constellation, also called Starshield, according to a person familiar with the matter.  SpaceX argued the LUCAS drones were operating under conditions that aligned more closely with its aviation tier subscription rather than a lower priced land or mobility service. Pentagon officials argued that the $25,000 price tag - a monthly fee - was designed for aircraft, not kamikaze drones that used Starlink connection for a matter of minutes or hours, according to one of the sources. The Pentagon, which was ramping up strikes on Iran, ultimately agreed to pay SpaceX’s proposed price increase, almost doubling the cost of each LUCAS drone. The Pentagon was initially paying about $30,000 per unit. SpaceX didn't respond to a comment request. The Pentagon declined to comment on Reuters reporting that SpaceX increased its pricing, its decision to pay, or the plan to provide Iranian citizens with Starlink cell service. In a statement, a Pentagon official said the office responsible for acquiring the terminals, the Commercial Satellite Communications Office, is working to find other competitors. But no other company provides a comparable alternative to Starlink, which has become an increasingly critical tool in modern warfare since Russia’s invasion of Ukraine in 2022. The satellite network provides global coverage, enabling battlefield communications and precision targeting even in remote areas. SpaceX's constellation of roughly 10,000 satellites accounts for more than 60 per cent of those in orbit - dwarfing the constellations being built by other companies, including OneWeb and Amazon Leo.  The risks of reliance on Starlink were first thrown into sharp focus during the Ukraine war, when Musk ordered Starlink service switched off in parts of the country in 2022 as Ukrainian forces advanced on Russian positions, disrupting a key counteroffensive, Reuters previously reported. More recently, U.S. Navy tests were disrupted last summer when a global Starlink outage cut off connection to unmanned military boats, leaving them bobbing in the ocean. SPACEX HAS U.S. GOVERNMENT 'OVER A BARREL' Unlike traditional defense contractors, SpaceX holds greater leverage over the Pentagon because it also has a large commercial market for Starlink, alongside its rocket launch and artificial intelligence businesses, said Clayton Swope, a senior fellow at the Center for Strategic and International Studies, a national security-focused think tank. SpaceX generates about 20 per cent of its total revenue from the U.S. government, according to an SEC filing.  SpaceX “certainly has the U.S. government over the barrel," Swope said. At the outset of the Iran war, Starlink was already a core part of U.S. military operations. In testing and early deployments, it supported a range of systems, from aerial attack drones such as the LUCAS to unmanned surface vessels used for maritime surveillance and strike missions. When the U.S. launched its bombing campaign, Starshield terminals were being used across more than a dozen drone systems, according to a source familiar with the matter. But tensions between the Pentagon and SpaceX emerged quickly after the U.S. launched its February 28 assault on Iran. On March 1, SpaceX chief Elon Musk responded on X to a user's post featuring an image of the LUCAS drone that said it “appears to have an integrated Starlink” terminal.  “It is a violation of commercial Starlink terms of service to use the terminal for weapon systems. This applies to all users and is shut down when discovered,” Musk posted. “There is a separate network called Starshield, which is operated by the US government." The Pentagon official, in a statement to Reuters, denied any violation of its agreement with SpaceX. In the days that followed, SpaceX executives met Pentagon officials and argued the military was underpaying for the service, two sources familiar with the matter said. Although the Pentagon initially agreed to the higher fee for satellite Wi-Fi connections used by attack drones, senior officials including Deputy Secretary of Defense Steve Feinberg remained uneasy about the arrangement, one of the sources said. Pentagon officials, during an April ceasefire, met to revisit the pricing with Terrence O’Shaughnessy, a retired four-star Air Force general who now leads SpaceX’s defense business. Still, the Pentagon is currently considering an additional purchase of more than 3,500 Starshield terminal subscriptions, including 100 with the higher-priced aviation tier, according to Pentagon documents reviewed by Reuters. The deal could generate hundreds of millions of dollars in annual revenue for SpaceX, though Reuters could not determine whether an agreement has been finalized, or what price is being discussed. SPACEX PRICES IRK PENTAGON Starlink has also proved crucial to other operations. After Iran cracked down on protests in January, killing thousands of people, the Trump administration smuggled in more than 6,000 Starlink terminals to provide internet access to citizens, the Wall Street Journal previously reported.  As the war intensified, however, Iranian authorities confiscated the terminals and deployed jamming devices across major cities to disrupt connections, according to a source familiar with the matter. Within a week of the conflict beginning, Pentagon officials began discussions with SpaceX about deploying direct-to-cell service that could bypass those disruptions, two people familiar with the matter said. The capability, similar to a 5G connection, would allow users to connect without terminals on the ground. SpaceX, which generated $11.4 billion in revenue from Starlink in 2025, proposed charging as much as $500 million to launch the capability, along with a $100 million monthly fee to operate it, according to one of the people and Pentagon documents - prompting alarm from defense officials over the price. Reuters could not determine whether an agreement has been reached.