Self-Importance--With Some Justification
There is a recurring tendency to conflate what a person believes the industry to be with reality in the space industry. Investors do this. CEO’s do this as well. Journalists and bloggers do this.
When that belief puts a person’s career and organization at the center of industry activities, then that belief should be scrutinized. This is the case with the U.S. Space Force (USSF), which inherited space assets and missions from the U.S. Air Force (USAF). Unfortunately, the USAF also passed the self-perceived influence and importance of space operations to the fledgling space operations group.
Some of the pride can be justified. For example, space operators operating satellites with sensors, such as those on the Space Based Infrared System (SBIRS), do much more than uploading element sets and monitoring satellite health telemetry. The SBIRS mission requires situational awareness of activity on Earth (knowing the chances of a launch from occurring), knowing orbital mechanics in a way that’s second nature to them (not just system engineering theory), constant vigilance and testing, and much more. There are very few space operations billets in the space force like the ones for SBIRS inside the military and out in the commercial sector.
While conducting a military mission using expensive satellites indicates inherent knowledge of space systems, that knowledge doesn’t translate to the space industry’s history and commercial mechanisms (I am not sure I have a grasp of them). But, especially since the rise of USSF, the operators try to explain both.
Is Hype the Reality?
For example, General Jay Raymond, Chief of Space Operations in the U.S. Space Force, was quoted during a chat with Neil deGrasse Tyson during the Air Force Association’s Aerospace Warfare Symposium. The quote had to do with how the USSF’s missions created commercial opportunities. From Defense News:
“If you look at historically what has been commercially viable in space, it was commercial launch and large communications satellites,” said Raymond. But now, “almost every mission that we do in space has a commercially viable path.”
To be clear, the largest share of global commercial space revenues for over the past decade has gone to communications satellite operators, such as Echostar, SES, and the like. Russian launch service provider ILS and France’s Arianespace aggressively courted those satellite operators and launched their satellites. But commercial U.S. launch service providers, who are probably the “commercial launch” Raymond refers to, overwhelmingly launched government and military satellites.
That was the case until SpaceX and Rocket Lab started launching. The fact that ULA, the company the U.S. Department of Defense supported the most on its path to commercial viability, has chosen to serve the government instead of competing on commercial markets makes Raymond’s second claim appear less accurate. Add to that the fact that SpaceX had to sue the government to get involved in launching DoD payloads, instead of the DoD welcoming SpaceX to help it find a “commercially viable path,” and his statement almost sounds revisionist.
That last claim also ties in with previous DoD statements about commercial space companies’ place in the U.S. In “Help/Hindrance–U.S. Government is here to Help Commercial Launch “Market,”” I provided the analysis for why National Security Space Launch (NSSL) is not the commercial germination fertilizer the DoD would have us believe it is:
This is why NSSL is not beneficial to the U.S. launch market as a whole–certainly not for the commercial part: it’s meant to capture what is good today but benefits very few in the process. The stability is a snapshot in time, freezing capabilities to shun risk, which excludes development of new capabilities and businesses. No matter what a space acquisitions program publicly states as its goal, if the words “security” or “stability” are part of it, then the words “development,” “cutting-edge,” and even “best” mean nothing.
We saw this with EELV–there were stable DoD launches annually. These launches grew progressively expensive and provided great launch reliability. There were also, however, very few commercial launches from the U.S. from 2003 until SpaceX came on the stage.
Based on that analysis, the DoD’s narrative is undoubtedly fertilizer, likely from a bull. The numbers from that analysis show suppression of the U.S. commercial satellite launch business. U.S. commercial launches even disappeared for a few years before SpaceX started launching for less.
No Escape from Reality
This week, during a different interview with the New York Times’ Kara Swisher, Raymond provided a glimpse of what he may have had in mind as a commercially viable path. Swisher stated that the USSF needed SpaceX’s and the other new companies’ innovation. He elaborated on that sentiment:
We need their innovation. And it has reduced costs. It has allowed us to launch significantly more rockets. That’s just on the launch side. You’ll hear this term “proliferated LEO.” That’s smaller satellites in much greater numbers in low Earth orbit. We think there’s great advantage there. All of our satellites today are really big satellites that are very expensive. They take years to build. And so what happens is if you have a satellite that’s really nationally critical, that’s really expensive, you put a lot of mission assurance on it to make sure it will survive launch and work. And that is a different business model than if you’re popping them off an assembly line that says, you know what, if this one doesn’t work tomorrow, it doesn’t matter because another one’s coming off the next day. And so what we see is probably a hybrid architecture developing where there’ll be a mixture. But we really see significant advantage and innovation and lower costs in distributing our capabilities to be more defendable.
Considering how much money the DoD spends on space programs annually ($25+ billion), it’s disheartening to have confirmation that none of it appears to result in “innovative” systems. Instead, as most industry observers already know, most of it goes into the same old programs for the same types of systems, enriching legacy defense contractors along the way.
By “us,” Raymond refers to DoD-focused launches, exposing an optimistic data mismatch from history through today. At a glance (from Gunter’s Space Page) of 24 U.S. launches in 2009, 10 were for DoD purposes. By 2018, the DoD had launched eight missions (according to the Space Foundation’s “The Space Report 2019: Q2”). Last year, the DoD launched nine--less than a quarter of all U.S. launches in 2020.
While the U.S. launch service providers are launching more than in 2009, the DoD-focused missions stay about even. This is no surprise, given the balancing act that DoD acquisitions goes through. It does this using its National Security Space Launch program, ensuring no single launch service provider gets too many more launches than the other. This type of balancing ensures some stability for everyone involved, but not growth. I explain why there’s not much of a market (yet) in this analysis:
What we might be seeing, then, is a commercial launch market problem…there doesn’t appear to be a healthy one in the United States…yet. Two of the three U.S. large rocket launch services are dependent on government-sponsored missions. SpaceX isn’t dependent (although it gladly takes government money when the opportunity arises) but appears to be a victim of its success. While the company moved quickly to market with an inexpensive and reusable launch vehicle, the potential commercial customers–especially in the U.S.–weren’t able to move as quickly. Some are unwilling to move quickly.
The First Step is to Admit You Have a Problem
Raymond mentions the “proliferated LEO” concept, noting how large and expensive DoD satellites are and how satellite expenses snowball because of their initial costs. If this sounds familiar, it’s because General Hyten complained about this issue too. Expensive DoD satellites are the core of my “Seeing Infrared” series of articles, and their continued existence is due to incentives based on the DoD’s “commercial market path” fallacy. The following explanation was the paragraph immediately after the one above from the same analysis:
U.S. satellite manufacturing companies like Ball, Boeing, or Lockheed Martin design and build satellites in years. One of their biggest and most profitable customers, the U.S. government, appears very comfortable with that pace (and ULA and NG are happy to accommodate). Their commercial customers are also satisfied with the slow pacing, but whether this is because of low schedule expectations is unclear. This situation makes it pretty clear not to expect shifts to lower-cost and faster satellite manufacturing from the legacy companies, even though their interests are served in catering to a larger commercial market.
Raymond’s allusion to a satellite assembly line scratches at the crux of my last sentence. He describes a beautiful factory that will crank out satellites, Model-T-style. The problem is, there aren’t many of those types of factories around. And the companies operating those types of factories, SpaceX and OneWeb, are busily cranking out their LEO broadband satellites. This scenario exposes more of the weakness in Raymond’s earlier claim about the military being the path to commercial viability.
Both SpaceX and OneWeb raised those factories for their businesses, LEO broadband, first. They didn’t build them for military reasons. While the DoD wants satellites, it will likely never need as many satellites as each company requires for itself. This is one of the significant issues with Raymond’s claim about “paths to commercial viability”--military missions will always be too small to build a commercial industry around.
Ironically, companies building businesses around the military’s missions also run into another problem--their products/services are too focused and expensive. The government routinely overpays for those products/services as an inducement to get companies interested. Since the DoD especially doesn’t want an interruption to its defense plans, it fosters an expectation from those same companies for the government to pay as much or more for “bespoke” systems.
Space markets can work differently, though, and create more profitability than currently generated without relying on government inducements. Focusing on three familiar non-space companies in the tech sector demonstrates this “other path.”
Comparing Truly Commercial Examples to The Space Industry
For 2019, Amazon, Microsoft, and Google generated an aggregated $567 billion in revenues. That total from three companies is ~55% more than the estimated annual revenues of everything in the GLOBAL space industry. None of those three companies have done overt acts to become dependent on the U.S. federal government for contracts (the JEDI kerfuffle notwithstanding).
Searching through their annual reports reveals no references of notable attempts in pursuing government contracts. And when one of the largest, most prominent contracts, the Joint Enterprise Defense Infrastructure contract, is applied as a percentage of these companies’ annual revenues, the result is shockingly small: 0.18% (since the contract is paying $1 billion annually). While JEDI is one of the larger government contracts, I do know from experience the DoD tends to run on Microsoft’s productivity suite, so there are undoubtedly other government contracts with these companies. But not in meaningful quantities for the companies to highlight in their annual reports.
All three companies grew their businesses based on commercial market demands. They adapted their businesses and fostered expertise in running networks, networked software, and securely storing customer data. The customer-base each company is pursuing approaches a market requiring billions of installs and services (especially Google, with its Android-based smartphones). Each company offers a mind-boggling array of products and services to cater to those customers (because no customer has the same needs). It’s a natural enough business decision to cater to government needs because it is just another customer.
Compare those three companies to the Global Space Economy, with its 2019 estimated revenue total of $366-424 billion (depending on the research group). About $86-95 billion of the GSE’s estimates comes from government spending, about ~26% of the GSE revenue total for 2019. Probably more than that, because an IDA paper estimated the space economy to be much smaller than estimates from established space research firms (for 2016): ~$166 billion (about Google’s annual revenue for 2019). IDA’s government expenditures estimates are in-line with those from the research organizations, resulting in an increase in that category’s share to nearly 50%.
That estimate sounds about right.
There are fundamental differences between the Big Three’s businesses and those in the global space industry. The big three essentially invest in writing code, then replicating it for profit. And it has been very profitable for them. They’ve also invested in networking infrastructure, replicable but a bit more expensive than code. There are parts of the space industry working in similar businesses. But much of the industry is about building the hardware and operating it--the required infrastructure to do more exciting things in or from space. Their activities are equivalent to AT&T building out the telephone networks (comsats), the U.S. government laying concrete for interstates (launch services), or Texas fumbling with power generation (?).
All are capital-intensive, but they are a necessary first step to possibilities beyond military missions. The unbalanced space activity share shows why the DoD generally and Raymond specifically believe the DoD offers any sort of path to commercial success--between NASA and the DoD, the government influence (money) is very large.
True, the government is a big fish, but the numbers above show it’s a big fish in a very small pond. With so many smaller fish focused on feeding the big fish, they only make that big fish larger instead of increasing the pond’s size. With nearly 50% of annual estimated space industry activity stemming from government spending, “feeding the big fish” will be a hard habit to break. Those looking for the DoD to move away from its big fish role will be disappointed. As noted at the beginning of this analysis, both the DoD’s and Raymond’s narratives paint their space missions as the wellsprings from which all things commercial, including markets, flow.
It’s also the reason why Raymond and others are excited by the newcomers to the industry. If legacy space industry stakeholders won’t break the cycle, then the outsiders coming in might. SpaceX is known for pushing back against industry norms, with some success.
The break needs to happen if the industry wants to blow past the very modest forecasted projections. The commercially viable path does not focus on government missions nor use government as a fallback, as noted with the Big Three. One trillion dollars seems too small when compared with other tech sector businesses.
The pond needs to become an ocean.