Disruption of the Space Sector Continues

Over the past few years the space industry has been undergoing a disruptive change.  This has been, and is, an interesting experience for those of us who have worked in the industry for some time. Because there is (or was) a funny paradox about the space business that while what we did in space was constantly changing and presenting new challenges and opportunities, how we did those things had not changed much in a generation.

So, the sudden appearance of “New” or “Entrepreneurial” space companies on the scene with the last decade represented a genuine disruption.  Opinions regarding this disruption varied across the spectrum from those who thought that this round of new players and new business models would follow previous promised disruptions that had generated much discussion but not  much real change, to those who confidently predicted that the days of the established players in the business were numbered and that they and their slow and wasteful ways would soon be replaced by newer and more agile players.

I have always felt that the truth was somewhere in between.  To me, this disruption was not so much the appearance of new competitors to challenge the incumbents in their existing businesses as it was the appearance of new business models that challenged the incumbent’s view of what was possible. The new business models were less a threat to existing business and more a threat to the established order.  As new space companies grew in size and reputation it forced traditional players to ask themselves whether they had lost their edge, whether they were missing out.  It forced them to question who their customers should be, and about where the money for the business of space would come from.

I stand by that analysis, but I also think that much has changed in the five years since I first made that argument.  So, I think it’s time to take another look at the “New Space Revolution.”  This is the first in a series of articles that will take a look at what that revolution has wrought, and where it is ultimately going.

Of course, the first thing to realize, is that disruptive change in the space sector is on-going.  Those that said that it would be a “flash-in-the-pan” were wrong.  The industry today is quite different than it was 10 years ago.  But, those that predicted a passing of the old guard and the rise of a new one were also wrong as well.  The traditional way of doing things in space has not been replaced wholesale with something new, although the industry as a whole looks very different today than it did a decade ago.

The disruptive influences have been durable and persistent, but they have also evolved and moderated over time.  The disruption was itself, disrupted first of all by the COVID pandemic and then by the post-COVID turmoil in the financial markets.  And, of course, many of the players have adapted to those new realities to one extent or another. 

The established players have adapted their businesses to take advantage of new opportunities arising from the New Space business models.  Governments have shifted policies and programs to support and take advantage of the New Space entrepreneurial culture.  Significantly more private capital has arrived which, of course, has attracted the attention of companies large and small, and lastly New Space companies themselves have shifted their own business models and expectations to take advantages of new sources of funding which have included opportunities to work with established players and with governments.  The lines between “Old” or traditional space and New space companies have certainly become blurrier.

The forces shaping the space sector at the moment are probably not that different than the ones that often appear when an industrial sector undergoes a disruption when barriers to entry are lowered to the point where new players suddenly appear with new ideas and new business models.  Each of these situations is different in detail, but the overall pattern is similar. It usually consists of an initial disruption, followed by a reshuffling of adaptation by the existing players which is also accompanied by proliferation and fragmentation as new players and new business models are tried.  This is followed by a wave of consolidation as the successful among the new players coalesce and expand and the unsuccessful are either acquired or disappear.

From what I see, I think we are in the fragmentation phase of this cycle.  But consolidation is definitely on the horizon.  Further, I think there is one underlying force that is both driving the fragmentation and which will ultimately drive the consolidation.  Let’s call it the “Cheap Space Effect.”  Or, I would argue we should really call it the “Cheap Space Myth.” 

By “Cheap Space Effect” I mean that, genuinely, the cost getting to, and doing work from, space has decreased dramatically.  I call it a myth because those costs have not decreased as much many believe.

The root causes of the shift to lower costs would be worth its own series of articles but let’s just summarize it by saying that it comes mostly from two developments that converged about a decade ago.  The first was the development of  technologies and expertise that allowed for miniaturisation of space craft themselves.  The second was the appearance of much more affordable options for launching those spacecraft and getting them to orbit.

The combination of these two effects means that valuable services can be provided from space with a much smaller up-front investment and with much less overall financial risk.  This, in turn, has meant that new business models are suddenly available because with much less investment required up-front to get to space, it is possible to imagine businesses that could generate an attractive rate of return on capital in a reasonable amount of time.  This, in turn, has attracted many more, and more varied, investors to the sector which, in turn, has attracted entrepreneurs with many more, and more varied, ideas about how to make use of that investment.

There is a fly in the ointment though.

While barriers to entry to space are much lower than they used to be, and much lower than they have ever been, they probably aren’t as low as they are widely perceived to be. 

It is certainly true that some aspects of spaceflight have become dramatically cheaper over the past decade.  Principle among these is, of course, launch.  The emergence of SpaceEx and other companies who either sought to emulate SpaceEx or to capitalize on the disruption it caused, has meant that the price of launch services has plummeted while the availability of launch opportunities has proliferated.  There is a widely accepted view within the community that this trend will not only continue but accelerate.  And that may well be true.

The issue, though, is that the narrative of dramatically reduced launch costs has been equated, by many, with the reduction in the overall cost of access to space itself.  This is natural since even a decade ago, the cost of launch was likely the dominant cost of access to space.  But while other costs of developing space hardware were dwarfed by the cost of launch they were not necessarily insignificant and reducing the cost of launch has not reduced those costs at all.

These costs basically stem from the unique nature of space as an environment from which to run a business.  Designing, building and operating equipment in space requires some specialized knowledge in areas as diverse as: mechanical engineering in micro gravity and at extreme temperatures; thermal engineering in a vacuum; Radiation shielding and mitigation of integrated circuits; radio frequency compatibility and susceptibility; and just plain planning how to design, test, launch and then use hardware that you will never see again even though it is the fundamental infrastructure on which your business is built.

Doing each these things well is difficult enough.  Doing all of these things time and time again, reliably enough to satisfy customers requires experience that can only be gained by having done it.  Repeatedly and often.

Because of that, the expertise and experience to design, build, test and operate spacecraft is still in relatively short supply even as the demand for that experience and expertise continues to expand.  The danger is that there is a feeling amongst some new space business founders – and amongst their investors – that this expertise has somehow become a commodity.  Meaning that there is a belief that there is a fairly wide market of providers of these services and that those providers compete with one another at least partly on the basis of price.  This is not, by and large, true.

Yet many business plans are being made and many deals are being completed that are based on this assumption.  As a corollary though, many other business plans are being made by companies who have identified this shortfall in specialised expertise and are moving to address it. In fact, I would go so far as to say that the mismatch between expectations and reality regarding this fact is probably the most significant factor that is shaping the evolution of the space economy today and which will shape in the next few years.

Over the course of the next five articles we’ll talk in more detail about that tension, where it came from, how it is shaping the industry and where it will ultimately lead.  Stay tuned.