The Empire Strikes Back – The New Space Revolution

This is the third in a series of articles about the current state of the space industry. If you haven't read the first two articles in our New Space Revolution, you may want to do so, as this article builds on the arguments that were made there. In the last article, we took a look at the rise of the "New Space" sector and that fact that it was a genuinely new kind of business - rather than a new way of doing the existing business of space. But we also noted that while it did not mean new competition for old customers, it did bring with it a significant amount of disruption. Now because this article is scheduled to be released on or near May the 4th, I couldn't resist calling it "The Empire Strikes Back" - because it is about how the established space industry responded to the disruption from the rise of the Entrepreneurial space sector. But really, that's not a very good description of what actually happened. Because, in point of fact, it was less about established companies crushing "The Revolution" and more about how they joined it and turned at least part of it to their advantage. As I noted in the last article the disruption caused by New Space was a little different than might be typical when new players enter and disrupt an existing market. That's because the new players were not competing for the incumbents' customers. In fact, it might be more fair to say that that the new players actually brought new customers with them. But the growing entrepreneurial space sector did pose a threat. Rather than a threat to existing market share it was, instead, a threat to the established order of things. In many business sectors that might not be that important but in an industry that still derives much of its funding directly or indirectly from the public purse it actually matters a great deal. That is because traditionally the space industry has been dominated by customers who are mostly public facing institutions. Or, at the very least, they are organizations whose funding is, one way or another, related to public perception. Thus, the public perception generated by the rise of New Space - that those organizations, and their principal contractors were, essentially, inefficient and complacent was actually a serious threat to the source of their funding. Most directly, Governments began to wonder if there were smaller, faster, and cheaper ways to accomplish what they were accomplishing with their money. More indirectly, governments began to wonder if some of their supporting programs and policies should be redesigned and reprogrammed to take this new sector into account. So while the new entrepreneurial culture was not a threat to existing programs it did start to add some friction to the planning of new programs - which were and are - central to the business planning in the large primes who specialize in doing business with the government. In addition to threatening the revenue base of the incumbents by "diluting" government funding with programs aimed at new players. The perception of an "aging" industry that was seen to be "out of touch" with the modern marketplace also represented a serious threat to legacy space companies ability to continue to attract and retain talent at all levels from technical staff to engineers to business professionals. This effect should not be underestimated. In fact, even before the advent of entrepreneurial space the space industry had been concerned for years about its ability to compete with other tech oriented sectors for talent. Actually, this was mostly a recognition of the fact that, increasingly the space sector actually HAD to compete for talent. Through much of it's history the cachet of working in space had meant that space companies did not have to work very hard to attract top talent. By 2010 that was no longer true. Many other "tech sectors" were becoming as attractive to new professionals and space companies were struggling to respond to that competition. Now, the new breed of space companies represented not only competition for those same new graduates but also potential destinations for existing employees - especially those that might be drawn to working in a less structured environment - or even starting their own business. All in all, then, the rise of New Space was not something that incumbents in the space business could really afford to ignore. But responding to the challenge was not straightforward. In part, this was because the challenge was not direct. If new players had entered the market and tried to take existing customers from the incumbents, even on the basis of efficiency and cost-effectiveness, the response would have been easier than trying to deal with a threat the disrupted the perception of the space business as a whole. Responding to this disruption was not a matter of "sharpening the pencil" - of gaining incremental efficiency - or of speeding up the development cycle of the next round of technology development. Responding to the challenge of New Space required some sort of pivot to a new business model. This was (and is) a non-trivial challenge. It is tempting to believe that because legacy space companies are large and because they do a lot of business with government that they are "fat-dumb-and happy" to use the colloquial expression. Actually, they aren't. They, generally, are fiercely competitive companies who have built significant and complex business working for very demanding customers. They are good at what they do. If they were not, they would not be in business any longer. Anyone who thinks that the aerospace and defense sector is not competitive has never worked in it. But, in order to be competitive in that business, the incumbents have designed, built and tuned their operations and their business cultures for that business. Retuning and retooling to go from that low-volume, high-value, process oriented model to the high-volume, low-cost, high efficiency model typical of entrepreneurial space was not easy. It was also not simple. It was not simple to decide if it was worth it. It was to simple to decide how to make the pivot and with which part of the organization. It was not simple to decide how much time, energy and resources to devote to the shift. All of which is why it may have seemed that the established industry was not responding to the New Space disruption for quite some time. In truth, the incumbents were responding long before it was obvious. That's because they were thinking. Thinking, and analysing. Thinking, analyzing and planning. At the heart of this analysis and these plans was how to make a pivot to the a new form of business - and do it profitably. Because that is one crucial difference between new entrepreneurial businesses and established businesses that is, maybe, not always appreciated. Entrepreneurial businesses that are supported by venture capital can afford to defer profits - often for an extended period of time - while they focus on growth. Established companies - especially publicly traded ones - do not have this luxury. By and large the investors who invest in large aerospace and defence companies expect profitable operations - uninterrupted profitable operations. So, I can imagine that deciding how to respond to the emerging disruption of an entrepreneurial space sector was not a trivial question at all. Now I really don't have any specific details, and if I tried to guess at any of the details, I would probably be wrong. But, from a distance I do see a pattern to the aggregate response of the established space players. As I see it, what happened was that the established companies searched for and, in various ways, found a segment of the market they could address accessibly by evolving their businesses rather than re-inventing them. This segment of the market consisted, essentially, of fairly large projects - usually large constellations of small satellites. These kinds of project were certainly part of the new space economy because they were predicated on launching dramatically larger numbers of dramatically less expensive satellites - taking advantage of dramatically decreased cost of launch. But these were also the kinds of projects that the large established companies could take on successfully for a few reasons. First of all, even though the satellites themselves were much less expensive than the primes were used to, the value of the whole projects came in chunks that were quite large and, in fact, similar to the primes existing business. Also, the projects were high profile enough that they attracted the attention of governments who - on the lookout for ways to support New Space endeavours - were willing to provide subsidies and incentives. Which meant that the projects, overall, were fairly large, high value, complex and involved government as a stakeholder if not a customer. Which, again, meant that these kinds of project were in many ways familiar to the established companies, and , in fact, played to a lot of their strengths. The net effect of this shift is that what had been a "bi-level" market has become a bit "fuzzier." With the high end suppliers moving down towards projects where the satellites were simpler and cheaper, but the projects themselves were large and complex. At the same time some of the larger New Space customers started moving up from purely private sector funding of the lowest-cost solutions towards projects that were supported with some public money and which took advantage of the established players management experience and processes which added expense, but lowered risk. I would argue that the result is that now the space sector no longer divides so much based on New vs Old or Government vs Commercial, but more on the basis of size. Size of the projects being undertaken and size of the companies leading those efforts. The effect of that re-arrangement has some ramifications that might not be obvious at first, and so we will talk about those in the next installment of this series.