Deep Dive Launch & Satellites

The fourth session of the Course on “The Business and Economics of Space” was on Monday, Nov 15. This session was a Deep Dive into the launch and satellite markets. You can find my earlier posts on the first three sessions here, here and here.

The key takeaways were in the following areas
– Launch is hard . Only a handful of NewSpace companies have successfully launched to orbit
– Launch is a Supply Chain Driven market that is highly competitive
– Satellite market is driven by Demand Side
– Satellite use cases like EO are not (yet) scalable and do not follow SaaS investment models

Launch is always the sexy part of space. Who doesn’t get a thrill watching a rocket blast off into space ! We are seeing to two forms of Disruption happening concurrently in the NewSpace model;

  • Businesses that are taking on the activities that NASA used to do
  • Businesses that are taking on the activities that the primes are currently doing

Launch is a good example of the second form.

Boeing is the poster child of the Prime that lost its way. A storied engineering and manufacturing company that after a leadership change ended up being run by MBAs and financial types who were more focussed on cost optimization. They decided to farm out all hardware, components, parts, assemblies and sub-systems to suppliers as a financial decision. Their focus was just on the system level integration. The number of companies manufacturing those 100,000 precision parts declined through consolidation led by Precision Castparts. PCC realized that these niche manufacturers had little competition. They could buy them and raise prices, and new entrants would be kept at bay by quality and regulatory barriers.

Old Space launch prices rose to the point the US government begged to use EU and Russian launch vehicles. Lockheed and Boeing convinced the government to bless a merger called United Launch Alliance (ULA) to reverse their losses. The government could maintain American launch capability (at far above market prices) for national security launches and ULA wold keep both the Atlas and Delta families of rockets. It was a bloated system with no innovation and high costs, all at the expense of the American taxpayer.

Boeing and Lockheed have both kept their in-house space businesses that feasted on cost-plus government contracts. Their lack of competitiveness became exposed in the new environment of fixed cost contracts in the COTS environment. The Boeing Space Launch System (SLS) is a good example of this. It is years overdue and billions over budget.

Competition to the primes is coming from NewSpace Launch providers, like SpaceX. SpaceX decided early on to vertically integrate. They make as many of the parts and components in-house as possible to be able to control the total supply chain. It not only reduces the costs dramatically, it also means the process is resilient and robust. Rockets can be classified by their Payload Capacity to LEO. The chart below shows the differences between four classes of rockets with examples such as SpaceX Falcon 9 and RocketLab’s Electron.

Vertical Integration is one factor but what if you could also horizontally integrate ? What if you not only provide launch services but can control your own launch manifest and cadence by increasing demand with your own satellites ? Let’s look at the demand side for launches, which mainly come from the satellite industry.

Satellites are classified by the orbit that they operate in. Geosynchronous orbit (GEO) is 36,000 km above the surface of the Earth. At this altitude a satellite appears stationary to someone looking up from Earth. This is where legacy communications satellites used to be parked. You could cover the whole surface of the Earth (outside of the polar regions) with only 3 sats. It is a great spot to beam down TV signals from, but it has drawbacks for communications purposes (ever try to talk over a satellite connection and experience the delay ?). Lower orbits like Medium (MEO) and Low-Earth Orbit (LEO) take a lot more satellites to provide global coverage, but have a lot of advantages as outlined in the chart below.

Often in NewSpace S1 documents filed with the SEC before they go public, you read a variation on this quote; “Over the past decade, launch costs have been lowered by an order of magnitude, thus laying the foundation for the emergence of a new, expansive space economy. But is it true ?

On average the real cost to launch to GEO has dropped by 30% in the last 3 decades, while the price to launch to LEO has dropped by 50% in the same time period. The rollout of the SpaceX Falcon 9 and its aggressive pricing policy has been responsible for most of this decline. But has cheaper prices led to a boom in demand ? That issue is still being debated by economists since much of the increase in satellites being launched have come from SpaceX Starlink satellites ; the aforementioned horizontal integration. They are creating their own demand, with almost weekly launches in the first half of 2021.

That demand is being led by consumers, the classic “serving the underserved” or “connecting the unconnected” business case. This is the market that Starlink and OneWeb are trying to serve. It is also one that has historically led to bankruptcy for those that tried it (Teledesic, Globalstar & Iridium back 20 years ago, LeoSat and even OneWeb last March !) It is not because of lower launch prices.

If we look at the next biggest use case for satellite constellations, Earth Observation (EO), it is still difficult to see a business case. The commercial demand for EO is not nearly as robust as for SatCom. The government and lettered agencies (NASA, NOAA, DoD, CIA, etc) are the primary market for EO data still. We are waiting for clear commercial customer demand to emerge. Typical EO is not yet scalable and doesn’t follow the SaaS investment model, regardless of what their SPAC investment decks purport !

The speakers for the second half were Josh Brost, VP of Relativity Space and Rei Goffer, Co-Founder of Tomorrow.io . Both had interesting comments and insights into the launch and satellite markets respectively.

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