New Space – Smaller, Faster, Cheaper

This is the second in a series of articles about the on-going disruption in the space sector. The first article introduced the idea that the initial wave of disruption has settled to some extent and the sector is now in a period of adaptation and fragmentation as all of the players, old and new, look for ways to survive and thrive in a market that has undergone significant shifts over the last decade. In order to set the stage for a discussion of that new reality, I think it's worth reviewing how we got here. In this installment, then, I want to talk about the rise of New Space - where it came from and what drives it. First of all, it's important to realize that over the sixty years that we have been going to space there have actually been remarkably few genuine "revolutions in business affairs." Initially, going to space was a purely public sector funded affair. But early on - even in the early 1960's - the private sector realized the commercial potential of operating from space. The first applications were focussed on telecommunications. The first purely commercial telecommunications satellite was launched in 1965 and even by the time of the 1968 Olympics the term "live via satellite" had entered the lexicon. The private telecommunications revolution really got going in the mid 1970's with the advent of the first truly modern communications satellites. The first of these was, arguably, Hermes, the Canadian Communications Technology Satellite which launched in 1976. In truth, the next real major commercial breakthrough in the space business was probably the rise of "location based services" arising from the unlocking of the civilian GPS signal starting in 2000. But, really, that has pretty much been it as far as "revolutions" in the business of space. This is not to say that there has not been a gradual movement from purely public sector funded activities toward more commercial uses of space. But, I would argue that most of these have been evolutions rather than revolutions. More critically, those evolutions had not fundamentally altered the way spacecraft were designed, built, and launched. Until well into the 21st century spacecraft were, mostly, large, heavy, complex, sophisticated and expensive. This, in part, was because getting them into space required access to launch capacity that was expensive and limited. Since launch was expensive, it made sense to pack as much functionality as possible into every satellite. In effect, the economics of space pushed the sector toward a model of launching fewer, larger, more capable satellites. Since the cost of getting to orbit was likely to rival the cost of actually building the satellite, it made no economic sense to launch many small, less expensive satellites instead a few (or one) large expensive one. As a result the space business was the domain of large, often public facing, organizations. Organizations with deep pockets. These organizations, whether they were militaries, government agencies, or private organizations that derived significant funding from governments, tended to be averse to risks - especially to reputational risk. These customers wanted contractors who could ensure that projects did not fail in ways that attracted negative media scrutiny and public attention. The space contractor community, therefore, came to be dominated by companies that were good at serving these customers. These contractors were experienced and process oriented. They could give their customers confidence that they would discover and trap errors long before they became catastrophic failures - even if that added to cost and schedule. They were also adept at developing long-term relationships with their customers based on owning and controlling exquisite niche technologies. The key to success was to continually update and adapt this core technology over time to provide new and novel functionality to their customers. However, since that new functionality was always an evolution on the current generation their customers knew and trusted it and it provided a built in "moat" against competitors. This basic ecosystem developed and thrived for almost 50 years from the dawn of the space-age until the early days of the new millennium. It was a system that, not surprisingly, was dominated by companies that were also prominent suppliers of military aerospace technology since the space industry resembled the defense industry in many ways. And again, it is important to realize that this business model stemmed almost entirely from the fact that the economics of launching spacecraft meant that it was just more cost-effective to launch a few large spacecraft than to launch many small ones. This fact not only shaped how the problem was approached, but also what types of problems could be solved from space. But, starting in the early 2000's and then accelerating into the second decade of the millennium those economics started to change. The first change, broadly, was that miniaturization of electronics - and particularly of battery technology - meant that it was possible to conceive of much smaller satellites that could offer a significant fraction of the functionality of large satellites - at a very small faction of the size, weight and overall complexity. The second change was the disruption to the launch industry which saw new players - particularly SpaceX - and new business models that sought to offer not only less expensive launch options, but more of them. These options were more tailored to smaller payloads and were also less dependent on public funding and therefore less constrained by public procurement regulations. The net effect was that it suddenly became possible to conceive of a satellite - or constellation of satellites - that could be designed, built and launched for a fraction of what had become the norm. Not only that, but because these satellites required far less up-front cost to get into operation, it was possible to build a business model around providing services from such satellites to a much wider, less exclusive, more price conscious market while still being able to recover the capital cost of deploying those satellites. Once the capital demands fell low enough and the market potential expanded far enough, going to space took on a whole new character and it starting attracting a whole new cast of characters. Suddenly, it was possible for entrepreneurs to create a vision of an enterprise that could take an accessible amount of capital and promise a significant return on that capital within a reasonable time frame. Space had not previously been much of a home for entrepreneurs. Now it was. And where there are entrepreneurs there are private equity and venture capital firms. Who were also, by and large, players new to the space business. Once a line had been crossed a whole New Space industry began to develop. But it's important to remember, I think, that this was not a new approach to the existing space business as much as it was a brand new business sector. The business models of these entrepreneurial space companies differed dramatically from the existing players. Where the "legacy" space companies were focussed on their customers and driven by the need to develop and protect increasingly sophisticated proprietary technology, the new space companies were focussed on raising funds from investors and were driven by the needs of the market they were attempting to serve. This naturally made this new breed of companies simultaneously less risk averse and far more focussed on efficiency both in time and in money. Whereas legacy space companies found success in long-term customer relationships through developing a reputation for careful, complex engineering and management, the new breed found success by developing a public reputation for innovation and efficiency. In contrast to legacy space companies for whom any hint of failure was anathema, for some new space companies, failure, especially very public failures became, in a way, a signature of their entrepreneurial approach. A certain amount of public mishaps became a signal that these companies were not afraid to push the envelope and "fail early, fail often" on their way to eventual success. Thus, such failures actually increased their profile both with the public that comprised their eventual market and with investors who were the source of their funding. Much has been written about this shift in philosophy. The contrast in the two approaches to business and engineering could not have been more stark. Proponents on both sides were quick to point out the advantages of their favoured approach and, occasionally, to say or imply unkind things about the other approach. But such comparisons were, and are, unfair to some extent. The key to understand why is to recognize that the two approaches to building and launching spacecraft were actually driven by the fundamental business models. These business models were, and are, fundamentally different. In short, the new space sector was not finding "A Better Way To Do Space" they were finding another way to do business from space. This is not to say that just because these new companies were not competing for existing space customers, at least not in their current form, that they did not represent a significant disruption to the space sector. They definitely did. As evidence of that you only need to look at the amount of digital ink that has been spilled talking about it. In the next episode of this series we'll take a look at the disruptive effects of these new business models and how the space "ecosystem" has responded. -- Part 1 - Disruption of the Space Sector Continues