This is the fifth article in a six part series on the state (and fate) of the New Space sector. If you have not read the other articles in the series, you might want to do that since much of this article depends on the arguments made there.
So far in this series I have talked about how “New Space” arrived on the scene about a decade ago with a new business model that was more about serving new markets with products and services delivered from space. Thanks to a combination of effects including reductions in the cost of launching spacecraft as well as advances that allowed for significant reduction in the size and weight of those spacecraft, the New Space players succeeded in demonstrating the financial viability of this new model. This, in turn, attracted much more private capital to the space business and gave birth to a truly entrepreneurial culture in the space business.
Traditional space companies identified this new development as a threat in that it challenged their implicit claim that there was only one method of getting to space – which in turn threatened their monopoly on large institutional and public sector funding. They responded by moving into this new market themselves, looking for projects that were of sufficient scale to allow them to participate efficiently in this new more market driven business model.
Government, in turn, responded by developing funding programs and strategies that provided support to projects that were large enough and high impact enough to justify the use of public money to subsidize or support them.
The net result of this is that the market no longer divides strictly on the basis of the New vs Old business model but instead now divides more on the basis of size. There are a few relatively large and high profile endeavours that are being undertaken by both large traditional space companies and large companies from the original New Space cadre. These projects enjoy significant government support and subsidies and significant public profile.
These projects also employ the large majority of trained spacecraft engineers and technicians. These endeavours are developing and implementing significant innovations in spacecraft design and in business practices. But these innovations are more evolutionary than revolutionary and depend critically on scale and financial depth to be successful.
This has meant that the real opportunity to innovate is now, more than ever, centred on smaller players in the space ecosystem. The effect has been enhanced by the presence of significantly more capital available to space companies, and by the fact that the new capital is much more tolerant of risk.
Actually, that is probably an understatement. This new capital actually makes a certain amount of risk a requirement in the ventures it backs.
This is because the new investors in the space business, coming from a “venture capital” background, expect large rates of return on their investments. They do not see investing in firms that are trying to challenge the large players by being more efficient or cost-effective as a likely means of securing the level of return that they expect. Instead they expect more revolutionary ideas in terms of finding whole new ways to satisfy demand or ideas for opening new, and usually much larger, markets altogether.
This availability of “risk” capital has actually led to a significant increase in activity at the smaller end of the sector. It has also led to an explosion in new ideas. Some of these ideas involve application of new technologies, but even more often they involve trying to open new markets entirely by delivering new products or services from space or in space itself. These new business models often require technological innovations as well.
Examples of such markets include ideas such as the market for in-space services to other spacecraft – which has gone by many names including “on-orbit servicing” but has includes a range of other innovative ideas that are often now collectively known as: “In-Space Servicing Assembly and Manufacturing” or ISAM. Another new market adjacent to ISAM is the growing need for space debris removal – which is garnering a significant amount of public sector support as well. New market ideas also extend to providing new products and services for industries that have not typically been large consumers of space services such as the insurance and Fintech sectors.
They also include companies that are positioning themselves to take advantage of nascent “off-planet” economies on the Moon, Mars, and possibly asteroids. This represents a significant development because it represents the first time that there is true commercial interest in space exploration (as opposed to earth focussed technologies such as communications or earth observation) that is backed by enough private capital to have a genuine impact.
Not all of these ventures will succeed. But for now, the effect has been to generate the kind of fragmentation in the space industry that is probably typical of periods of entrepreneurial disruption as founders and their investors seek to build their ideas to critical mass before moving out into the wider market with their plans.
Now, while the presence of genuine risk capital has led to an explosion of ventures seeking to do business in and from space, the growth of these kinds of businesses has led to another kind of explosion, the rapid growth of ventures seeking to do business with these companies themselves.
This growth has, to some extent, also been catalysed by the “sequestering” of a still significant share of engineering expertise and experience within the larger players in the industry – which is the effect I discussed in the last article in this series “Size Matters.”
This effect on the industry is often characterized by the “California Gold Rush” analogy. This line of argument holds that in the late 19th century during the boom caused by the California Gold Rush, that it was not the gold miners themselves – other than a few notable examples – that profited most from the presence of “gold in them hills” it was actually the entrepreneurs who moved west and set up the businesses providing infrastructure and services to the miners who became the durable success stories.
In effect, it was the providers of not only picks, shovels, tents and other basic provisions – but also everything from alcohol to financial services that really became successful, transcended the gold rush period and became the heart of the economy in California and beyond. This is sometimes, in fact, referred to as “The Levi-Strauss Effect” because, the story goes, the famous clothing company got their start providing their now ubiquitous product to miners in search of cheap, durable pants.
The analogy extends to the space sector in that all of the new small companies that are seeking to develop technology and business models for space don’t have experience in accomplishing some tasks that are central to building successful spacecraft, but which are not actually central to their particular business models.
To extend the gold rush analogy – these companies need experienced and competent spacecraft engineers and technicians to help them master the basics of living and working in their new environment so they can get on with finding the gold they are certain is there.
At one point, it might have been imagined that this experience and expertise might come from the established companies in the space business. That, effectively, the large primes – or their principal suppliers – would adapt their business models to provide engineering services and support to the mass of new entrepreneurial companies. That somehow the flow would reverse -from the primes employing small companies as suppliers – to becoming their suppliers instead.
This hasn’t really happened. At least it has not happened at the small end of the market. The primes have shifted roles from “prime contractor” to “principal supplier” but really only for larger scale projects rather than as true service providers to the wider market.
Again – to stretch the Gold Rush analogy even further. The big, established suppliers have stayed on the East Coast – supplying expeditions to the gold fields, but they haven’t really “come west” and set up shop to provide a local source of supply.
So that leaves the way open for the new Levi-Strauss’s of the space sector. Essentially the need that exists – and is being filled – is for companies that can provide the essential enabling engineering services and products that will allow the new space-based businesses to focus on their innovations – rather than on developing their own internal expertise in areas that are not central to their value proposition.
To be clear, though, companies that wish to provide these kinds of enabling services must also innovate because they need to provide those services in much more cost-effective ways than has ever been possible before.
The essential value proposition argument goes something like this. A company that decides to specialize in some aspect of spacecraft engineering – say Radio Frequency testing – can develop its expertise by working at scale because it serves many customers – this scale means that such a company has the chance to develop their expertise and experience by applying it frequently and often.
New companies focused on developing a new kind of satellite – or a new instrument or payload for a satellite – will not have the chance to develop this same depth of experience because they will have limited chances to practice it. And, it will never be central to their development plans. As a result if they try to use “in-house” capacity to perform this function they will necessarily be much less proficient and much less efficient at performing it.
To go back the Gold Rush one last time (I promise) – while a miner might be able to make their own pants – they will never be as good at it as someone who does it for a living and, in the end, it will cost them more to do it themselves than to buy the pants from someone whose business is making pants.
It is this effect that has led to what I would call “The Second Wave New Space Revolution.” In other words the first wave consisted of ventures who found new business models working in and from space. The second wave of this revolution now consists of companies who are finding ways to support the first wave with innovative products and services that enable them to focus on their strengths while still being able to master the environment of space. Because as I discussed in the last article, space is still an environment which poses some unique challenges that cannot be ignored, or met and overcome without the right kind of expertise and experience.
And so we come back to the argument I made in the first of these articles and that is the “Cheap Space Effect” or maybe the “Cheap Space Myth.” This is the myth that, because the cost of launching spacecraft and, to some extent the cost of the components from which spacecraft are made have become much less expensive, that going to space has become a commodity where suppliers are plentiful and competition on the basis of price is fierce.
Clearly this is not true. In this article, I have discussed how the fact that it is not true has been a source of opportunity for a whole new brand of space entrepreneurs, their companies and their investors.
In the next article, though, we need to take a look at the threat posed by over reliance on this “Cheap Space” assumption and how, ultimately, it may end up driving the consolidation that almost invariably follows the kind of fragmentation experienced by the space sector at the moment.