[American Institute of Aeronautics and Astronautics Space 2006 - San Jose, California ()] Space 2006...

American Institute of Aeronautics and Astronautics1

SPACE: THE FINAL BUSINESS FRONTIER

Dan J. Coughlin1 and Mbwana Alliy2

Stanford University, Graduate School of Business, Stanford, CA, 94305

Dr. Scott Hubbard3

Stanford University, Electrical Engineering Dept., Stanford, CA 94305

Maxim Edelman, Samantha Foster, Laurent Meynier, Gabe Post and Lior Ron4

Stanford University, Graduate School of Business, Stanford, CA, 94305

The following paper is a business case study of the emerging entrepreneurialspace industry in the U.S. The purpose of this paper is to provide a marketoverview; primarily targeted to new investors unfamiliar with this industry, seekingan independent, consolidated evaluation. A traditional market analysis frameworkis employed to explore the attraction of equity investment for a 5-8 year timehorizon. While the general market is investigated, specific companies, bothtraditional aerospace and emerging firms, are highlighted to provided context to themarket. Primary and first-tier entrepreneurial suppliers of human and cargolaunch capabilities and on-orbit services are introduced for consideration. Relevanthistorical large-scale transportation system development projects are provided aspotential models for growth of this maturing space industry. Barriers-to-entry,governmental, policy, foreign and non-market (advocacy/anti-space groups)influences will be discussed as risk factors surrounding this investment opportunity.To develop this study, the team drew from information available in the publicdomain and conducted interviews of key industry leaders from the emerging andtraditional aerospace companies, venture capital and investment firms, as well asthose from government regulatory and legislative entities.

I. BackgroundSince the 1950s, U.S. human and cargo spaceflight has been dominated by various government entities.

Most launch vehicles in the U.S. were derivatives of the Intercontinental Ballistic Missiles (ICBMs)developed in the mid-20th century by defense contractors. Tremendous technology advances were made inthe 1960s as civil and military government spending increased for the ‘SpaceRace’ with the Soviet Union. However, private satellites (payloads) began flyingin the 1960s and the demand for their services (communications, remote sensing)has since increased slowly but steadily. Government payloads have represented amajority of the demand for launch services.

In the 1970s, NASA began development of the Space Transportation System(STS), or the Space Shuttle, with the intent of reducing the cost of space accessthrough reusability and a high flight rate. The Space Shuttle was to beoperationally efficient and serve as a launch platform for government andcommercial payloads. Due to technical, and programmatic issues, this goal neverbecame a reality. NASA spends approximately $4 billion annually on the SpaceShuttle with a flight rate capability of perhaps 4-5 flights per year. Following theChallenger Accident in 1986, no military or commercial payloads have been

1 Sloan Fellow, Stanford University, Graduate School of Business, AIAA Student Member.2 MBA Candidate, Stanford University, Graduate School of Business, Non-member.3 Visiting Scholar, Stanford University, Electrical Engineering Department, AIAA Fellow.4 MBA Candidates, Stanford University, Graduate School of Business, Non-members.

Space 200619 - 21 September 2006, San Jose, California

AIAA 2006-7524

Copyright © 2006 by Stanford University. Published by the American Institute of Aeronautics and Astronautics, Inc., with permission.


delivered leaving that service mostly to traditional military aerospace contractors: The Boeing Company,the Lockheed-Martin Corporation, Orbital Sciences Corporation and others. The majority of the mediumand high weight U.S. payloads are delivered by the Delta II, Delta IV and the Atlas V systems, with launchcosts typically on the order of $100 million.

The space launch industry’s current state of technology offers moderate reliability and low operationalefficiency. This in turn drives high insurance premiums for both launch service providers and satellitecustomers. Because of the high cost of space access, satellite manufacturers are driven to develop long-lifepayloads with redundant systems, and expensive components offering long service lives. These too drivecosts upward. Due to the high cost of satellite development, customers are demanding performance,reliability and availability from the launch service providers.

Even in this highly government-dominated environment, competition in thelaunch market is global. Currently there exists an over-supply in the launchmarket and existing launch suppliers are making marginal returns. In 2005,there were only 55 orbital launch attempts. This was the lowest count since1965; a time which launches were motivated by the cold war. Foreigncompetition is a risk factor as most overseas suppliers are subsidized by theirgovernments.

In 2004, the world witnessed the first privately-developed human-flownspacecraft breach 100 km altitude for the second time and win the $10 millionAnsari X-Prize. This event crystallized the possibility of space tourism andhelped spark new entrants into that field. Space tourism is in its infancy with anumber of players now entering the market.

Only in the past few years has U.S. private investment in space exceededthat of the government spending. An industry expert predicts that privatesector space R&D will exceed that of the government in less than 15 years1.

The team found the hub of space entrepreneurship resides primarily in the U.S. Los Angeles isemerging as the ‘Silicon Valley’ of the space business.

A. Historical AnalogiesSeveral models of potentially relevant emerging markets related to large-scale transportation systemdevelopment provide context by which to view the emerging space industry. In considering the enormoustask of building an infrastructure for the commercialization of space, historical analogies abound. Withinthe last 150 years, there have been several examples of technological complexes in which society has beenforced to restructure itself in many ways to accommodate growth.

While a common thread of all major infrastructure projects is the promise of altering and improvingworld economic patterns, in most cases, another common aspect has been the presence of a non-traditionalgovernment/business structure. In the development of large-scale transportation system development, therisk is often greater than any single private entity can bear. The government often funds the initial researchand development of capabilities. Depending on the maturity of these capabilities, governments have takenthe roles ranging from being the primary developer to simply serving as an anchor tenant or guaranteedcustomer. Unique partnerships between the government and private industry are not uncommon.

It is important to note early on that historical analogy is often abused due to many situational(environmental and historical) differences. The intent here is to simply provide insights into possible futurepaths. Of particular interest are the following three historical analogies that may provide insight to spacecommercialization: the trans-continental railroad, the interstatehighway system, and commercial aviation.

Trans-continental RailroadIn the 1860s, the U.S. population resided primarily east of St.

Louis. Transportation to the rural west coast required a grueling20-week wagon or a month-long trip on a steam ship around SouthAmerica. At the time, the U.S. could not protect its westernborder. In an effort to improve land values and provide access tonew markets, in the early- and mid-1800’s, state and localgovernments began investing heavily in building local, short-haul


railroad transportation systems. Government involvement increased as continued pressure from farmersand industrialists prompted additional growth. The plan for a transcontinental railroad system waspresented to Congress by Asa Whitney in 1845 and funds were appropriated in 1853. Construction took 6years and a few additional lines were added over the next 30 years.

The role of government in the creation of the transcontinental railroad was critical, often granting powerof eminent domain, monopoly, tax exemptions, subsidies, and loans. For example, federal land grants of10 alternate sections per mile on both sides of the track and 30-year government loans for each mile of thetrack constructed were given to the two companies who built the rail system, Union Pacific and CentralPacific. The resulting competition spurred innovation and efficiencies never seen in railroad development.

The transcontinental railroad was extremely profitable for its investors and aided immeasurably thesettling of the Western U.S. It brought rapid economical growth in mining, farming, and cattle-raisingalong its routes. The transport of military personnel and supplies relied heavily on the rail system fordecades.

Interstate Highway SystemIn the 1920s and 1930s, as the automobile emerged as a

viable vehicle for ground passenger and freighttransportation, planning began for a system ofsuperhighways throughout the United States. The interstatesystem was initially designed for use in military and civildefense operations within the U.S. to move military troopsand serve for the emergency evacuation of the nation’scities. It was heavily lobbied for by major U.S. automobilemanufacturers. Upon the success of early private and localgovernment models in New York City and Pennsylvania,Congress authorized the interstate system in 1944. The

final “yellow book” design was proposed to Congress in 1955, and through the Federal-Aid Highway Act,the design was authorized and construction began in 1956. The interstate highway system was completedas planned 35 years later, at a total cost of $114 billion—over four times the budgeted amount.

Undertaking an infrastructure development project on the scale of the interstate highway systemrequired substantial government involvement for funding, nation-wide standards, and operationalmanagement. Greater than half of construction and maintenance costs were funded by gasoline fuel taxesand toll roads and bridges. The rest of funds came out of federal budget, an act often criticized as a subsidyto promote and maintain automobile-oriented development. Government involvement ensured nation-widestandards for naming conventions and physical characteristics. The roads themselves are owned, built, andoperated by the states in which they are located.

The interstate highway system, as the largest public works project in history, has had an enormousimpact on the nation. It has positively influenced economic growth, reduced traffic deaths and injuries,provided substantial time and convenience benefits to users, and has been a crucial factor in nationaldefense. The interstate highway system has democratized mobility in the United States, providing virtuallyall Americans with the ability to move quickly and inexpensively to any destination throughout the nation.

Commercial AviationPerhaps the most analogous infrastructure development story to space commercialization is the

commercialization of air travel. We begin in 1898, when Samuel Langley, secretary of the SmithsonianInstitution, was funded by the military to provide literature about aeronautics which was thought to play arole in future warfare. Early institutionalization of government activity resulted in a lack of initialinvolvement by government, leaving entrepreneurs, explorative scientists, and adventurers to make majoradvances.

In 1903 the Wright brothers took to flight, proving the concept of air transportation. Several years later,Airmail contracts from the Post Office spurred development of civil aviation. In 1917, the governmentfunded a postal program intended to serve as a model for commercial air travel. With the help of the Army,an intercity airmail route was initiated in 1918. Following legislation in 1924, the Post Office begancontracting with private companies, the first step in a changing government role from operations to


infrastructure development and regulatory support. In 1926, the Air Commerce Act was enacted to regulatecivil air safety, navigation, and control.

Throughout the 1920s, parallel to the development of civil aviation models, adventurers like CharlesLindbergh were given incentives to push the limits of aviation with prize money. Such incentives werecritical to the accelerated advancement of air transportation. Military-sponsored R&D during World War IIalso had a major impact on the emerging commercial air transport industry.

As the government’s involvement shifted toinfrastructure development, in 1946, a federal airportprogram was initiated to promote the development of civilairports. Over the next 60 years, organizationalrestructuring for regulatory and specialized bodies tookplace with the creation of organizations such as the FederalAviation Administration (FAA), National Aeronautics andSpace Administration (NASA), the Department ofTransportation (DOT) and most recently, the TransportationSecurity Administration (TSA).

B. Historical Analogy FrameworkFrom the examples of the transcontinental railroad, interstate highway system, and commercial aviation,

we can distill a general framework for the logical flow of events through each timeline and define thedegree to which government interaction is necessary.

Idea/ConceptThe first stage of infrastructure development requires minimal government involvement, as it would

likely disenable or slow the development of new ideas and concepts. In the examples cited, this stage takesabout 10-20 years, and involves idea generation and proof of concept. Idea generation, or the seed of theconcept, often occurs through private individuals or groups and leading firms with a vision of the future ora hunger to explore. Once the idea exists, it is common for incentivized teams/individuals/firms orlocalized governments to support a proof of concept, where a small-scale implementation serves as a modelfor a large-scale infrastructure implementation.

Plan/DesignAs the idea evolves, governments become increasingly engaged as a case is made for wide-scale use. In

the planning/design phase, the government is closely involved in the preparation of a project they intend toauthorize and fund. Given the grand scale of the infrastructure project, the planning process can takeanywhere from 5-10 years or more. Lobbying is often observed by companies interested in the project forboth construction and future use.

Funding/Government AuthorizationOnce plans are finalized, government authorization is granted to initiate the project. Given the

extremely high capital requirements, historically government involvement for funding has been absolutelycritical. Similarly, special gifts such as property rights and tax breaks are granted to ease the developmentprocess. Securing government authorization and funding can take up to 5 years or more.

ImplementationImplementation of infrastructure often involves the participation of private companies. The role of

government throughout the implementation phase has come in the form of generous treatments to stretchthe rules to accomplish the project. Government is also concerned with alignment of the project goals withthose performing the implementation tasks. Such alignment is critical to avoid mediocre work due to the

Plan/Design Funding/Authorization Implementation RegulationIdea/Concept


abuse of privileged circumstances. Depending on the complexity of implementation, the building processcan take from a few years to a few decades.

RegulationOnce construction is complete, government involvement shifts to regulating the use and maintenance of

the existing infrastructure. Continued growth is typically turned over to private and public markets, wherenew ideas are generated, and the cycle continues for both incremental change and future infrastructures.

II. TRADITIONAL PLAYERS IN THE SPACE INDUSTRY

A. Emerging from Government DependenceThe space industry emerged from the military intercontinental ballistic missile build-up and space race

between the U.S. and the Soviet Union in the early 1960s. The organizations that emerged continued topredominately serve government markets. Hence, it is difficult to separate the story of the space industryfrom that of the larger aerospace and defense contractors. Shrinking aerospace government outlays in the1980s lead to consolidation of firms. Two of the largest companies that have emerged are The BoeingCompany and Lockheed Martin, who continue to constitute a majority of space industry revenues. With asmuch as 95% of Lockheed Martin’s revenues coming from the military and other government entities,these companies are now culturally inclined to serve and focus primarily on these customers. The highlyregulated acquisition rules and often-used government cost-plus contracts are frequently cited as inadequatein providing incentive for these companies to innovate or focus on cost-reduction.

Historically, these companies were subsidized by the government to expand infrastructure and R&D,but as the cold war tensions began to ease in the 1980s, defense budgets began to decline sharply. Figure 1shows the U.S. defense investment funding cut by almost 50% in the decade between 1987 and 1997. Inturn, this impacted investments on procurement, research, development, testing and evaluation (RDT&E).At the same time, NASA’s budget also came under pressure and further exacerbating the situation fortraditional aerospace companies.

Consolidation of the aerospace industry was inevitable. Throughout the 1990s, further Governmentcutbacks left aerospace companies with excess manufacturing capacity and capital investment declinedsubstantially, leading to older and more obsolete equipment and capabilities. Consolidations also pushedcompanies to streamline operations and expand into commercial markets. RDT&E investment continued tosuffer.

Figure 1. U.S. Defense Investment (2001 dollars), 1987-19972

In 1994, Boeing and Lockheed were selected by the U.S. Air Force for the Evolved Expandable LaunchVehicle (EELV) Program. The driving force behind this competitive program was to ensure space accesssave the U.S. Air force up to 25-50% on space launch cost. This would be accomplished by using a family


of expendable launch vehicles over a significant period of time for medium and heavy lift payloads usingexisting proven technologies.

The trend of partnerships continued. The United Space Alliance (USA), a joint venture between Boeingand Lockheed, was established to serve NASA’s specific STS needs as well as to reduce costs and offerflexibility. Most recently, the United Launch Alliance has formed in an attempt to serve yet anotherspecific need- the U.S. Air force’s requirement for ‘assured space access’.

Figure 2. Orbital Space launches 1990-2005

There has been a steady decreasing trend of space launches over the last 15 years. Figure 2 shows thenumber of world wide orbital launches decline by 50% in the 15 year period between 1990 and 2005. Thisis explained in part by satellite manufacturers placing larger transponders into satellites and hence requiringfewer launches. Satellite revenues have been increasing. Vehicle accidents/failures have also adverselyimpacted the entire industry. The launch industry has hence been in over-supply for a long time, proppedup by large subsidized defense contractors.

B. New Opportunities in Commercial SpaceDuring the 1990s, there was a strategic emphasis for the companies to pursue commercial opportunities

rather than exclusively rely on low margin cost-plus government contracts. Between 1996-2000, industrywas increasingly being driven by commercial space orders in areas of space launch services, satellitecommunications, and remote sensing. While the demand for launch services did not reach projections, ithelped offset declines in military spending and declining civil aircraft sales.

This expected growth attracted new entrants that challenged the U.S. dominance in launch services.Table 1 provides a list of new aerospace companies and the private capital they raised. U.S. companiesfaced increasing competition from abroad including the French’s Arianespace and Russian-made Soyuzrockets in the Starsem venture. This also led to innovative ideas and partnerships that sought to addresshigh launch costs and differing mission requirements for satellite payloads. For instance, the Boeing-ledSea Launch partnership used a mobile sea platform for launches. Lockheed also established InternationalLaunch Services (ILS) as a partnership with Russian launch companies. Although the space industry wasbecoming global in nature, it was hampered by restrictions in transfer of goods and technology (ITAR –International Traffic in Arms Regulations) to safeguard U.S. security and foreign policy interests. Thisincreased the costs of doing business and proved to be an additional barrier to entry for potential start-ups.

Policy also drove new industries. For instance from 1994 the U.S. issued new policy to allowcommercial firms to collect and sell high-resolution images of the Earth from space. This quickly led to theadvancement of the remote sensing industry resulting in $173 million revenues in 2000 (14% growth rate).

In the late 1990s, the Internet was a mixed blessing for the aerospace industry. It spurred demand forcommunications bandwidth infrastructure through commercial satellite orders but also competedeffectively for investment dollars that may have otherwise gone to space ventures. Internet companiesboasted much larger returns and shorter payback periods with less risk.


Company Amount Raised InvestorsHughes $1.5 billion America OnlineSpaceway $1.4 billion HughesAstrolink $1.3 billion Lockheed Martin, Telespazio Media and

TRW

ICO Global Comm. $1.2 billion Eagle River InvestmentsEchostar $1 billion Private placementXM Satellite Radio $865 million Debt offering, public stock offerings,

General Motors, Clear Channel, DirectTV,Columbia Capital

Sirius Satellite Radio $700 million Blackstone Group, DaimlerChysler,Apollo Management, convertiblesubordinated notes, common stockofferings

Thuraya $600 million Consortium of BanksGilat $400 million Private notes offering, MicrosoftLoral Space $400 million Private sale of stockSky $250 million Liberty Media and othersEarthwatch $199 million Subordinated discount ratesGlobalstar $150 million Convertible preferred stockFinal Analysis $130 million General Dynamics, RaytheonTeledesic $121 million Abu Dhabi Investment Co.OrbImage $75 million Private notes placement

Table 1. Space Investments3

In the mid-to-late 1990s, there was a significant interest in commercial reusable launch vehicles(RLVs), with several companies entering with their own concepts including VentureStar (LockheedMartin), K1 (Kistler Aerospace), and Roton C-9 (Rotary Rocket). This increased activity was in response tostrong growth in projected demand by Low Earth Orbit (LEO) telecommunication satellite launches.Expectations for the LEO market have since dampened in the wake of business model failures ofcompanies such as Iridium.

The failures of companies such as Iridium were in part due to new ‘down-to-earth’ technology andbusiness models that were superior and more cost effective than the grander satellite based mobiletelephony and data services. The increased coverage of terrestrial cellular networks and the use of roamingagreements between cellular providers proved to be fierce competition.

As of 2000, Satellite communications remained the largest and fastest growing commercial spaceactivity. Companies such as XM Satellite Radio and Sirius, despite a growing subscriber base also havelarge marketing costs. On top of the cost of space launch and operations to get the service operational, XMsatellite spent almost $200 million (about $100 per subscribed user) in marketing costs on 2005, an 82%increase from the previous year4. XM Satellite Radio continues to show losses, highlighting the longpayback period associated with these types of space ventures. Furthermore, there is a high degree of riskthat these satellite based radio services will be unable to successfully compete and retain consumers whomay prefer more down to earth technologies such as internet radio stations, particularly with the growingubiquity of disruptive wireless broadband internet technologies such as Wi-Fi and Wi-Max.

C. Commercial Space Industry StructureThe commercial space industry can be subdivided into 1) Launch Vehicle Manufacturing & Services; 2)

Ground Equipment manufacturing; 3) Satellite manufacturing); 4) Satellite services (subscription servicesand transponder leasing services) 5) Remote Sensing; 6) Education and Exploration Research. The first 4areas are included in the Satellite Industry chart by Futron below (Figure 3).


Figure 3. Total Global Satellite Revenues by Sector5

Satellite services continue to represent a greater proportion of the industry’s revenues while those fromlaunch services are decreasing in both magnitude and proportion. This points to a shift to largertransponders onto larger satellite payloads catering for larger bandwidth and greater power for servicessuch as Direct Broadcast Services (DBS). These include Direct Home TV services as well as highbandwidth internet for internet/data broadband links.

D. Challenges & Opportunities for the Traditional Space CompaniesThe traditional companies have built an expertise and capability in serving predominantly government

customers, particularly in dealing with medium to heavy satellite payload launches as well as some spaceoperations capabilities. Currently, launch services around the world are generally in oversupply, withnational governments providing subsidies to keep launch vehicle builders in business. There may be anemerging niche market for small payload launches.

Traditional companies are not accustomed to serving customers in which cost and time to market arebecoming increasingly important. There is little if no incentive for the established players to enter thesmaller payload segment.

The traditional players are a force in the commercial markets, serving the customer segment requiringvery high success rates and a demonstrated track record only gained through experience. Although cost oflaunch is important, it may be considered secondary when compared to the risk of losing the satellitepayload.

At the same time, human orbital flights also fall into the realm of traditional player, since safety andreliability are of utmost importance. The government and private industry are becoming more aggressivein seeking low cost launches with the use of prize incentives to spur competition.

During a downturn in the commercial launch market, small start-up companies in the expendablemarket will have a difficult time surviving compared to the traditional players, who have significantresources. Large contractors can retain key employees and preserve a talent pool until the market returns. Ifnew launch vehicle companies are to survive, they will need a thriving commercial market.

What is the price elasticity of launch services? In other words, will a significant drop in launch prices,holding all else constant, lead to a substantial growth in demand for launch services? Studies have shownthat the market is flat and lower cost results in the overall value of the market falling6. Hence lower costsmay not actually expand the space markets. This is in part because customers & investors do not havesufficient confidence in these business plans, or are seeking factors in the business other than lower costs.For instance, the promise of pharmaceutical and biotech companies to engage in space R&D, or forsemiconductor manufacturers to engage in space manufacturing is more reliant on the time-to-market andspace launch reliabilities criteria rather than just the cost of launch.

The traditional EELV space market can essentially be characterized as an Oligopoly/Oligopsony; amarket form with very few buyers and few sellers, leading to imperfect competition, where firms in the


market utilize non-price competition factors mentioned above: reliability, flexibility, and technicalexpertise to differentiate themselves. This market form may continue to dominate in the near future, asbarriers to entry will remain high, and the market will continue to be characterized with very few andconcentrated government customers.

III. Regulatory Environment

A. Moderate space regulation neededSpace is a public good. Its use has potential to affect many parties throughout the world. Virtually all

space activities are global in nature, so there is a need for agreements and understanding between nationsregarding its use. Additionally, one needs to travel through airspace to get to outer space and this impliessome coordination with current air traffic regulation institutions.

Space regulation also makes sense in today’s security and defense environment. This applies for bothgovernment and commercial purposes. However, space is increasingly a lucrative environment forcommercial activities, and the regulatory environment needs to include efforts to encourage private sectorinvolvement in a way that considers national security, foreign policy interests and safeguards public safety.Although space activities have long been dominated by the U.S., other nations have begun to participate byoffering less regulatory barriers in the promise of expanding their economies and strengthening their spaceprograms.

B. History: Outer Space Treaty & Space LawIn 1967, the ‘Treaty on Principles Governing the Activities of States in the Exploration and Use of

Outer Space, including the Moon and Other Celestial Bodies’ was established, otherwise known as theOuter Space Treaty. The treaty sets the basic legal framework for international space law. Some of the mostrelevant laws include:

• States shall not place nuclear or other weapons of mass destruction in orbit around the earth oron the moon or any other celestial body; this includes installing military bases and weaponstesting facilities.

• States shall not lay claim to a celestial resource such as the moon or planet.• States shall be liable for damage caused by their space objects.• States shall avoid harmful contamination of space and celestial bodies.

As of January 2005, the U.S. and 97 other countries have ratified, and 27 others have signed the treaty.The follow-on ‘Moon Treaty’ of 1979 was intended to give the international community jurisdiction of themoon and all heavenly bodies. Due to disagreements regarding property rights, no country with a humanspace program has ratified this treaty.

It is important to note that the Outer Space Treaty was primarily written to attain a balance between thetwo super powers of that time (USA and USSR). Since the USSR has since collapsed, the traditional east-west conflict has ceased to exist and more nations now have access to space (inc. emerging powers Chinaand India). The treaty as a result has many loopholes. There may be a need to update the treaty to reflectrapid technological developments and to address the increasing number of private/commercial entities thatare participating in space activities. A significant weakness in the treaty is that it only refers to states asactors in space; this is may not be adequate to reflect the future commercialization of space.

C. U.S. Space RegulationWithin the U.S., the Office of the Associate Administrator for Commercial Space Transportation (AST)

was established in 1984 and then later transferred to the FAA in November 1995. This office was createdto address the U.S. private sector capabilities of developing and providing satellite services from launching,reentry and associated services. But it was also purposely set up to be located outside the NASAorganizational structure to give the organization greater incentive to engage with commercial companies.

The AST was set up to encourage private sector participation in the space industry and to ensure thatthe U.S. complies with its international obligations (Outer Space treaties) as well ensuring the protection ofthe public, U.S. national security and foreign policy interests. The AST faces an inherent tension betweenbalancing these two initiatives. The AST’s main responsibility is in the licensing launch operations, but it


also acts as an integrator of space launch activities into a space and air traffic management under the FAA.It should be noted that the AST advisory committee contain numerous space entrepreneurs.

D. Orbital Debris7

“Space Junk” is a growing concern for government and private operators of orbiting spacecraft andsatellites. Due to the energy associated with orbital speed, an impact by a small piece of space debris couldcause tremendous damage to a spacecraft or satellite. The Department of Defense and NASA recentlydeveloped the U.S. Government Orbital Debris Mitigation Standard Practices, The guidelines are directedtoward all U.S. government agencies with authority over space activities.

From the investor’s standpoint, this is less of a technical risk than a programmatic and/or financial risk.The probability of orbital debris impacting a spacecraft and causing damage is still very low. However, foran entrepreneur seeking the federal government as a customer for a spacecraft or satellite, he/she will besubject to an increasing level of regulation regarding the minimization of orbital debris and post-missiondisposal (either atmospheric reentry or a predetermined parking orbit) of the craft.

E. LicensingAs part of the process of issuing the license for launch operations (including approving applications,

developing and monitoring license terms and conditions), the AST also determines the insurance and otherfinancial responsibility requirements for commercial launch service providers.

The AST’s launch and reentry licensing process includes a pre-application consultation and anapplication evaluation period made up of policy review, payload review, safety evaluation, financialresponsibility determination (insurance and indemnification) and environmental review.

F. IndemnificationOne of the main requirements in obtaining a launch license from the AST is to ensure financial

responsibility with regard to liability. This requirement originates directly from the Outer Space Treaty,which holds states liable for third party damage. The AST must determine that the launch vehicle is able tocover through insurance the maximum probable loss to third parties in the event of an accident.

G. Second Party insurance for tourism8

For vehicle operators hoping to have tourists, specifically passengers on RLVs, there is an additionalsecond party insurance which can be prohibitively costly under traditional indemnification. Second partyinsurance for passengers can be as much as 100-300% of the ticket prices, i.e. the premiums paid are largerthan the revenues anticipated, stopping any RLV tourism business plan in its tracks.

Legislative relief has come to the aid of the sub-orbital RLV industry. In 2004, the Commercial SpaceLaunch Amendments Act (HR 3752), has several provisions, most importantly, one that eliminates the needfor second party insurance and establishes that passengers fly at their own risk. Passengers will be legallyrequired to waive any liability claims against the launch service provider, and accept the risks of spaceflightlike any other dangerous sport or endeavor. However this may not be feasible as space tourism expandssignificantly and an operator can still be liable if they have shown negligence under traditional tort law.

H. International Traffic in Arms Regulation (ITAR)ITAR is a set of U.S. regulations under the jurisdiction of the Department of State that controls the

export and import of defense related material and services. The objective in enforcing ITAR is to advancenational strategic objectives and U.S. foreign policy via the trade controls.

ITAR is a significant regulatory burden on the U.S. space industry as it encompasses all technologyitems related to satellite and launch vehicle manufacturing. There has been open debate between theDepartment of State and the industries regulated by ITAR concerning how harmful the regulationrestrictions are for business. The effects include stifling U.S. trade and weakening the U.S. industry’sability to compete internationally. European companies have used this to their advantage in promoting theirITAR free satellites. Compliance to ITAR is time consuming and costly. While large defense contractorscan bear this, start-up companies find this a significant barrier; this is made worse through the StateDepartment’s lack of resources and technical know-how of space activities.


I. Privately Financed Launch VehiclesThe AST has brought some certainty to a variety of regulatory issues involved in privately financed

launch vehicles and launch services. In early 2003, as Scaled Composites revealed their SpaceShipOneReusable Launch Vehicle (RLV) on its way to winning the X-Prize, a concern at the time was the projectedcommercial service certification cost of $100-300 million. AST, as previously outlined, does not certifyspace vehicles, but rather it licenses them.

J. Global Space Regulatory EnvironmentThe very global nature of space activities has prompted some companies to consider launching their

activities through other countries which allow a much faster time to market. In 2005, United Arab Emirates(UAE) partnered with the U.S. based company Space Adventures to develop a spaceport at a cost of $265million. UAE is keen to expand its economy through tourism, and through the partnership with SpaceAdventures, plans to operate a commercial suborbital tourism business.

K. NASA’s plansNASA was chartered in 2004 to develop the systems necessary to establish a human presence on the

moon and Mars. The ‘Vision for Space Exploration (VSE)’ provides guidance for the Agency to return theShuttle to flight and complete the construction of the space station by 2010. The International SpaceStation (ISS) will be utilized to perform research in support of the VSE. In addition, NASA will design andbuild two new launch systems and a Crew Exploration Vehicle (CEV). The space shuttle fleet will beretired in 2010. The new systems are expected to be available in early next decade, leaving a gap in U.S.human space flight. Unless an alternative comes on-line, the Russian Soyuz will be used to transferastronauts and supplies to and from the Space Station. Recently, NASA released the Commercial OrbitalTransportation System (COTS) competition. This effort is intended to encourage the private sector toprovide pressurized, non-pressurized cargo to the ISS and to perform ‘down-mass’ (return of scienceexperiments and waste) capability. Approximately $500 million is available for this effort.

In addition, NASA’s Centennial Challenges9 program is a set of “prize contests to stimulate innovationand competition in solar system exploration and ongoing NASA mission areas”. This growing programcontains prize purses between $50,000 and $2.5 million.

Last, NASA is proposing a Venture Capital fund. The “Red Planet” Capital Fund, modeled after theCIA’s In-Q-Tel fund, is an investment vehicle aimed at advancing dual-use technologies – those that mayhelp NASA achieve its mission and for commercial use. Funding is expected to be $11-$20 millionannually.

IV. Foreign Competition in the Traditional Launch MarketPotential investors of U.S. space-related companies should naturally be aware of the influence of

foreign entities on the world market. Space ventures in the U.S. and abroad are often non-traditionalgovernment/private arrangements and the market is not necessarily subject to the macroeconomic rules ofsupply and demand. National defense and national pride drive government funding and, in large part,direction of this capital-intensive business. Government-funded infrastructure and intellectual property areregularly used in commercial ventures. The resulting non-free market combined with restrictions on capitalflow overseas results in subsidized pricing on the world stage.

Also noteworthy to potential investors is the loss of the technological lead traditional in the U.S. spaceindustry. Those assuming a domestic competitive advantage should be aware that overseas satellitemanufacturers and launch service providers are as sophisticated, technologically advanced and business-savvy as U.S. firms. The increasing market share of international firms that provide these products andservices evidences this.

The Chinese Long March rocket entered the international market in 1985 and has since launched dozensof foreign payloads into orbit. With a lift capacity in the same category as the U.S. EELV systems and over40 consecutive successful launches, the Long March will prove to be a formidable competitor in theinternational launch market. China’s ambitions for space have grown with two successful Shenzhou humanearth-orbiting missions. China plans to develop an earth-orbiting space station and send astronauts to themoon late next decade. As in the U.S., these government ventures will certainly spur technologicalinnovation and economic advancement in their space industry.


India has the capability to design, build, launch and operate commercial and scientific satellites. TheU.S. and Indian civil space programs have recently seen increasing collaboration. In addition, the currentadministration has taken steps to increase commercial space cooperation through modification of U.S.export licensing policies. The proliferation of key launch vehicle technologies remains a concern and hasproven to hinder commercial joint ventures between the U.S. and India. India maintains a stable ofcommercial launch vehicles available on the open market. A recent failure of the GSLV GeosynchronousLaunch Vehicle will likely deter potential customers until India demonstrates greater launch reliability.

The European Space Agency (ESA) is a conglomeration of 17 European countries. With an annualbudget approximately one quarter that of NASA’s, ESA engages in both scientific and commercial spaceactivities. In the 1990s ESA became the global market leader in commercial space launches. ESA employsthe Ariane 5 rocket for commercial and government payloads. The launch vehicle, in service since 1997, iscapable of 6-10 metric tons to geosynchronous transfer orbit, similar to that of the U.S. Delta IV and Atlas5. ESA has partnered with NASA in the ISS program as well as space and planetary probe programs. Inaddition, many European countries also maintain their own commercial and civil space programs.Europe’s Alcatel Space is the world’s third leading satellite manufacturer.

Roskosmos, or RKA, is the Russian government entity responsible for the country’s civil and privatespace activities. Based out of Moscow, the company provides launch services and space tourismopportunities. Space Adventures Ltd. contracted with RKA for three tourist flights to the ISS. The RussianSoyuz, Zenit, and Proton rockets are among the most reliable in the world. Russia has partnered withBoeing in the Sea Launch venture to provide launch services from a floating platform, providing thepayload customer flexibility to launch to various orbital inclinations. Also, Russia recently launched apayload for American entrepreneur, Robert Bigelow, aboard its Dnepr rocket. European and Russian spaceagencies are in discussions for potential collaboration in human space flight. Last, China and Russia areconsidering a joint Phobos (Mars moon) sample return mission.

V. The Emerging Structure & Players of the Entrepreneurial Space Industry

Over the last several years the entrepreneurial activity around space exploration has seen a tremendousamount of progress. Spurred on by very wealthy individuals, X Prize contests, NASA’s COTS, andDARPA funding, these entities have all approached the opportunities from various directions but with onecommon goal: getting into outer space through the efforts of commercial companies.

These companies are pursuing differing models, which is creating a sub-segment market withpotentially different business dynamics affecting the separate opportunities. Elements such as competition,funding requirements, regulation hurdles and financial opportunity will all differ.

The clearest way to segment the emerging players is in three categories:• Sub-orbital Space Tourism• Extended Stays & Platform• Payload Delivery Services

Players planning to offer short sub-orbital trips into space represent the first category. This includesboth the actual service providers such as Zero-Gravity Corp or Richard Branson’s Virgin Galactic as wellas the designer/manufacturer of the vehicles such as Scaled Composites. This category is more akin to avery high-end service and extreme sports such as a bungee jumping installation. The focus of thesecompanies is producing a low cost ($200,000 or less), unique, repeatable, safe, experience that targets alarger audience. The second segment is focused on extended stays in orbit; this includes everything fromvisits to ISS, to space hotels and entertainment arenas. Providers in this segment include Bigelow, BlueOrigin and Space Island Group. The third segment is about launching payloads into orbit – ranging frommicro satellites to humans. The goal of this segment is to lower the cost of launch to the point where itdramatically opens up new opportunities. Providers here include SpaceX and AirLaunch.

Table 2 below highlights some of the emerging players:


SUB ORBITAL URL Founder/CEO &founding Date

Value proposition/CurrentPoint of Differentiation

Location

Scaled CompositesLLC

www.scaled.com Burt Rutan/Paul Allen,1982, 2003(SpaceShipOne)

Design’s and manufacturer’s sub-orbital space vehicles

Mojave, CA

Virgin Galactic www.virgingalactic.com Richard Branson, 2004 “Spaceliner”- Transport/touroperator

Mojave, CA

Zero GravityCorporation

www.gozerog.com Dr Diamandis & Dr.Byron, mid 1990s

Focuses on weightlessnessexperience using a Boeing 727

Danian Beach,FL

EXTENDEDSTAY &PLATFORM

URL Founder/CEO &founding Date

Value proposition /CurrentPoint of Differentiation

Location

Bigelow Aerospace www.bigelowaerospace.com

Bob Bigelow, 1999 Create space habitat/hotel fortouristsFly small personal objects intospace

Las Vegas, NV

Blue Origin LLC www.blueorigin.com Jeff Bezos, 2000 Develop Space vehicles & relatedtechnologies. Vertical landingvehicle with passenger abortcapability

Seattle, WA

Space AdventuresLimited

www.spaceadventures.com

Founded 1998 Space Tourism, entertainment,event production activities

Vienna, VA

Space Island Group www.spaceisland.com Gene Meyers Commerce, research andmanufacturing and space tourism

West Covina, CA

PAYLOAD &DELIVERYSERVICES

URL Founder/ CEO &founding Date

Value proposition /CurrentPoint of Differentiation

Location

AirLaunch LLC www.airlaunchllc.com Bevin McKinney & GaryHudson, 2003

Use of Air launch techniques toprovides innovative low cost andlow risk space launches,predominately for the Government.

Kirkland, WA

ArmadilloAerospace

www.armadilloaersospace.com

John Carmack, 2000 Develop Space vehicles & relatedtechnologies

Mesquite, TX

Rocketplane Kistler(consisting ofKistler Aerospace &Rocketplane Inc)

www.kistleraerospace.com

George French,2001/2002

Catering for Re-usable launchvehicle market with K1 reusableRecently teamed up withRocketplane Inc of Oklahoma, whoplan to operate a reusablespaceplane for space tourism

Vienna, VA

Space ExplorationTechnologies Group

www.spacex.com Elon Musk, 2002 Family of low cost reusable FalconLaunch Vehicles, predominatelyserving NASA COTs initiative andmilitary payloads.

El Segundo, CA

Space Dev Inc. www.spacedev.com Jim Benson, 1997 A Space technology publicallytraded company-Design manufacturing, marketingand operations of micro-satellites

Poway, CA

Orbital Sciences www.orbital.com David Thompson, 1982 Small satellite payloads. LaunchServices

Dulles, VA

Table 2. Emerging Space Players

We foresee the opportunities developing very differently for each of these segments. There arepotentially several customer segments that could theoretically support a launch business: commercial andresearch payloads, government satellites, re-supply of ISS and passenger service. Each of these marketsoffers different dynamics and complexities to vendors attempting to service them. The small satellitepayload business is an attractive segment. Fundamentally most of the funding to small satellites can bedirectly or indirectly traced back to government spending. Although government contracts can be lucrative,a business reliant on them may be difficult to build. Issues like reliability, long-term launch contracts and


full-service offerings are likely to impede the progress of the emerging launch companies. The price pointthese vendors are targeting is so dramatically lower than what is offered today that customers of theseservices will have no choice but to consider these alternatives.

The most interesting near term opportunity involves sub-orbital tourism, both for the service providerand the vehicle producer. These opportunities do not rely on government spending and, priced at $100,000-$200,000, are likely to produce a sustainable business. Investors interested in this segment should payattention to developments occurring at international space ports, particularly in Dubai and Singapore.

This entrepreneurial segment is developing in a rather interesting way and after many interviews someof the general observations are:

• Lack of collaboration between players• Similar problems being approached from dramatically different aspects• Market has a winner take all perception• High capital costs and risks require high returns• Contractual environment does not foster cooperation• Predatorial activity between the start-ups• Some vendors independent from the government while others highly dependent on government

funding or contracts.For investors looking for opportunities within this sector one of the most important elements to consider

is the company’s dependency on the government for funding and development. The government as afunding source or as a customer can help subsidize and offset financial risks but the associated overheadand unstable funding environment should be considered.

A. Space TourismCurrently, SpaceAdventures, Inc. is the only full service space tourism company. It offers services from

Space Shuttle launch tours to Russian Soyuz flights to the Space Station. This company helped arrangeDennis Tito's 2001 Soyuz flight to the ISS and later the Mark Shuttleworth and Greg Olsen flights as well.The company also offers reservations on sub-orbital flights that will be available within a few years. Thepredicted price point is approximately $100k. Greater than 100 people have either placed deposits of a fewthousand dollars or paid the full amount. In August of 2005, the company announced that it had arrangedwith the Russian space agency for the development of a system to fly two passengers around the Moon for$100M.

On October 4th, 2004, the human piloted SpaceShipOne, built by Burt Rutan’s company, ScaledComposites, Inc. breached the 62 mile altitude mark for the 2nd time to win the $10 M Ansari X-Prize. Thiswas a significant step for the space industry as the world witnessedthe success of a private company in the building and flying of areusable spacecraft. The dream of space tourism on a large scalebecame a real possibility as Burt Rutan, Paul Allen of Microsoft,and Sir Richard Branson of the Virgin Group then begancollaborating on a venture to develop the SpaceShipTwo craft forroutine suborbital launches for paying customers. The spacecraftis currently in development and Virgin Galactic recently signed a20-year lease for space at New Mexico’s planned $225 Mspaceport. Future passengers have paid full-fare or substantialdeposits for flights beginning in 2008.

The Zero-Gravity Corporation offers parabolic flights aboard its two 727s. For $4000, the customer canfeel the same effect of zero gravity that one would experience in space. The company is based out ofKennedy Space Center and has flown over 65 flights and 2000 customers. The company plans to add aplane based out of Vegas and reach a rate of 10,000 customers per year.

Jeff Bezos, founder of Amazon.com, has recently announced plans to begin offering space tourismservices from a privately-owned spaceport in west Texas. His company, Blue Origin LLC, is developingthe New Shepard Reusable Launch Vehicle, a vertical landing craft capable of reaching over 300,000 ft.and featuring passenger abort capability. Commercial operations are expected to begin in 2010 with aflight rate of 52 flights per year.


Sub- Orbital Models Payload Services, ExtendedStays/Platforms

Capital Requirements Moderate when compared totraditional aerospace ortransportation related businesses(development costs as low as $25million).

Extremely high (greater than $200million per company).

Regulations Civil aviation and space relatedregulations will apply

Space regulations

Time to Market Fairly rapid- on the launch side,prototypes already exist. Next step isdealing with regulations, approvalsand passenger insurance. Servicecomponent of the business wellunderstood.

Very long, currently in prototypephase. Long way from productionvehicle/platform.

Timeline- Financial Return At 3 years until business in operatingposition.

Currently no foreseeable returns- thiscan change rapidly with commercial& government contracts

Competition None for now, as no one offers thistype of service. There is potential forgreater competition later on, unlesscompanies evolve with differentvalue propositions.

Large existing multinationals, withlong-term contracts, full serviceofferings and strong reputations.

Issues Individual life insurance, liabilityprotection, progress fromexperimental craft to approved,uncertainty on jurisdiction.

ITAR regulations impede takingadvantage of global market. Marketstructure of oligopoly/oligospony(small no. of buyers and sellers) doesnot encourage price competition.

Table 3. Market segments; general information

B. Extended StaysThe Bigelow Aerospace Corporation successfully launched and deployed its ‘Genesis 1’ inflatable

structure as a step toward the vision of commercial inflatable orbiting hotels and other space platforms. Inaddition, Robert Bigelow is co-sponsoring a $50 M “America’s Space Prize”: a race to develop a vehiclecapable of delivering 7 passengers to an orbital outpost.

SpaceHab Incorporated is a space services company serving government and private customers. In1990s, it provided pressurized research and cargo modules for space shuttle missions and continues toprovide services for the ISS. The company is currently searching for an additional customer base.

C. Payload Delivery & ServicesNASA recently selected SpaceX and Rocketplane-Kistler for the COTS (Commercial Orbital

Transportation Services) phase 1 contract. COTS is a competition intended to shift ISS human and cargodelivery to the private sector and help free the Agency to better pursue human exploration of space, scienceand research. Phase 1 includes the demonstration of pressurized and unpressurized cargo delivery anddisposal and return:

Space Exploration Technologies Corporation (SpaceX) is a company founded by Elon Musk,billionaire and co-founder of PayPal. The company seeks to lower the cost and increase thereliability of payload delivery to orbit. His Falcon 1 rocket is under development in El Segundo,California and is soon expected to perform its second test flight. A derivative, the Falcon 9, is onthe drawing boards to fulfill the requirements under the COTS program.

Rocketplane-Kistler, LLC, owned by space entrepreneur George French, will continuedevelopment of the K-1 reusable launch vehicle for use in the COTS competition. The K-1 wasoriginally developed by Kistler Aerospace before the company was acquired by George French, afounding investor in the company.


AirLaunch LLC, based in Kirkland, Washington, is developing the QuickReach™ Small LaunchVehicle (SLV) concept under a contract with DARPA/U.S. Air Force Falcon Small Launch Vehicle (SLV)program. The system will be capable of 24 hr readiness, delivering 1000 lbs to LEO and is expected to costless than $5 M per launch. AirLaunch's rocket will be launched from a C-17A or other large cargo aircraft.

Table 3 provides general summary regarding the three segments discussed above.

VI. Sizing the Space Industry

Traditionally, government and the private space industry has been focused in four key segments:• Satellite communications• Global positioning system• Space transportation• Remote sensing

In addition to these traditional sectors, space tourism is getting progressively more attention,particularly after the X-Prize competition. Other sectors, such as the demand for biotech experiments inspace, are further out, and given their high price elasticity, their success will depend on achieving a lowerlaunch cost per pound and higher flight rate than that of today.

In what follows, we will first take a look at the four main segments, and then at the space tourism. Wedecided to leave the other potential segment out, because they do not fit the time horizon of five years thatthis paper adapts.

A. Emerging Four main segmentsFigure 4 below, courtesy of Futron, shows the relative importance of the different segments. Satellite

communications is by far the largest segment, representing revenues of around $90 billion in 2002, andgrowing at 17% annually. Space transportation (the launch business) has revenues around $7 billion.Global Positioning System (GPS) has revenues at $10 billion and the highest growth at 19%. Finally,remote-sensing (GIS) has relatively small revenues of $230 million, but is also growing rapidly at 14%. Weexpect the growth in this segment to accelerate even further, given the demand fueled by recenttechnologies created by Google and other Internet players. The combined market represented some $105billion in 2002.

Figure 4. Space Market Revenues by Segments (with no. of Launches)

B. Space Tourism DemandThe public is fascinated with space. The excitement over space is evidenced by the attraction of people

of all ages to popular destination visits to NASA sites such as the Kennedy Space Center at Cape


Canaveral, Florida and Mission Control in Houston, Texas. NASA’s Mars Rover website experienced over500 million ‘hits’ in two days. In Huntsville, AL, Space Camp has allowed young students the opportunityto experience astronaut training and space shuttle flight simulations. And in April 2001, the first true spacetourist, Dennis Tito, a wealthy California investor, paid the sum of $20 million to accompany a Russianmission to the International Space Station. He was soon followed by Mark Shuttleworth and GregoryOlsen. Last, Virgin Galactic announced that it has received over 50,000 responses to its on-line request forinterest in reserving a ride on their planned SpaceShip2.

In 2002, Futron Corporation, a Maryland-based space market consulting firm, predicted that by 2021,the demand for orbital and suborbital tourism would reach 11,000 – 23,000 passenger per year (dependingon the assumed market maturity time horizon) with revenues in excess of U.S.$700 million. For the orbitalspace travel the same study forecasts that by 2021, 60 passengers may be flying annually, representingrevenues in excess of US$300 million. Due to more reliable price points in the market, revised estimates in2006 showed slightly under that amount. The study, a co-developed survey with Zogby, forecasted thedemand based on various market maturity rates and other key assumptions. The survey was issued toaffluent households to determine the size and potential growth of the space tourism market10. Figure 5below shows Futron’s more recent revenue projection as a function of ticket price. Another space tourismmarket analysis11 was performed by researchers at Tokyo University, The National Aerospace Lab, andYork University. The phone survey of U.S. and Canadian households determined the demand for a spacevacation by age group and the number of months of salary they were willing to spend. Both studies clearlyshow tremendous interest in going to space and a potentially viable, growing market for space tourism.

As stated above, the potential market demand for space tourism has been studied by many parties inseveral countries. Estimates vary widely. In a series of surveys conducted by Collins, et al, respondentswere polled for the percentage of those interested in a trip to Earth’s edge, and the percentage of theirannual salary they would be willing to pay to do so. Other studies by NASA and space entrepreneurs yieldother localized demand predictions, but due to inconsistencies in the duration of travel, level of luxury, etc,incorporating those results into a single demand curve is difficult.

Figure 5. Global Forecast Demand for Space Tourism12

C. SmallsatsSmall satellites (Smallsats) are generally classified as payloads weighing less than 1000 lbs. As

discussed earlier, satellite manufacturers typically opt for large, long-life platforms in a GeostationaryOrbit. With reduced launch costs for small payloads, the DoD and satellite users can gain operationaladvantages and overall reduced cost by developing constellations of low-cost smallsats. DARPA and theU.S. Air Force is actively investigating the use of small satellites for use in tactical situations and as test-beds for technology development. The Falcon Small Launch Vehicle program is addressing the need for


low-cost, reliable small launch vehicles while providing private enterprise the opportunity to leveragedevelopment costs.

D. Supporting Evidence of Growing Demand for SpaceHistorical models of large-scale transportation systems have shown that, prior to their development,

market sizing was imprecise and typically under-predicted. Proprietary market studies have beenperformed for the traditional and emerging aerospace companies. Given the many new entrants into thefield, the team speculates the results are favorable for both low-weight payload delivery and sub-orbitaltourism. This section will briefly point to supporting evidence of a growing demand and maturingentrepreneurial space industry.

Extreme sports as an industry has matured dramatically in the last two decades. Despite the physicalrisk associated with climbing Mt. Everest, river rafting, bungee-jumping, hang-gliding and sky-diving,customers of all ages pay large sums of money and flock to remote regions of the planet to do theseactivities. The legal infrastructure is in place to account for liability thus allowing outfits to supply theseservices with less risk of litigation and financial ruin. Sub-orbital space tourism and the associatedperceived risk will initially attract adventurists as well as wealthy individuals.

The record-breaking web hits recorded with NASA’s Mars Rovers evidences public fascination withspace. Space Camps are booked with young space enthusiasts and space-related movies do very well in thebox office. The public is generally ‘pro-space’. Historically speaking, humans yearn to explore andexpand the frontier. Space represents the last frontier and the general perception is that we’ve justscratched the surface of space exploration.

Air traffic management systems are stretched to the limit. An estimated $170 Billion13 in economiccost due to outdated infrastructure is predicted in the next decade. The associated passenger delays iscausing a rise in business jet travel and could very well support a sub-orbital point-to-point passengerservice.

Last, the University of Southern California’s Marshall School of Business recently announced a plan tobegin a degree program in space entrepreneurship. The school recognizes the current and future demand ofskilled professionals needed in the space industry and is framing a curriculum to meet that demand.

VII. Potential Disruptive Technologies for Space Access

The team investigated potential technology disruptions as risks to entrepreneurs seeking to providespace access. By disruptive, we mean any such technologies that have the potential to change the marketdynamics and basic structure with its introduction.

E. The Space ElevatorThe Space Elevator is a concept gaining credibility as the technology becomes more mature. The

elevator is envisioned to be a thin ribbon, with a cross-section area roughly half that of apencil, extending from a ship-borne anchor to a counterweight well beyond geo-synchronous orbit. The ribbon is kept taut due to the rotation of the earth (and that of thecounterweight around the earth). At its bottom, it pulls up on the anchor with a force ofabout 20 tons. Electric vehicles, called climbers, ascend the ribbon using electricitygenerated by solar panels and a ground based booster light beam.

In addition to lifting payloads from earth to orbit, the elevator could also release themdirectly into lunar-injection or earth-escape trajectories. The baseline system weighsabout 1500 tons (including counterweight) and can carry up to a 15-ton payload, easilyone per day.

The carbon nanotube composite ribbon is 62,000 miles long, about 3 feet wide, and isthinner than a sheet of paper. The climbers travel at a steady 200 kilometers per hour(120 MPH), do not undergo accelerations and vibrations, could carry large and fragilepayloads, and have no propellant stored onboard. Orbital debris is avoided by moving theanchor ship, and the ribbon itself is made resilient to local space debris damage.

Basic research is underway to answer the questions that will enable building the firstspace elevator. Current predictions14 estimate the elevator to be ready by 2018. However, current work is


being done by LiftPort to update this prediction and the more immediate goal is to formulate a go/no-godecision by 2009.

Should the estimated $40 billion space elevator concept become reality, launch systems as we nowthem now would likely become extinct. However, high-speed point-to-point passenger service would stillrequire a powered craft. It is improbable that this technology will be sufficiently mature in the next decadeto influence the market. Assuming a required ROI of 15% or fundable investment, the elevator will requirea return of $6 B/year. Assuming a demand of approximately 4.5 M lb/year, the price for payload deliverywill be approximately $7000/lb, which is comparable to current cost of payload delivery from conventionalrockets.

F. Hypersonic VehiclesTo create thrust, traditional rocket systems must carry both fuel and an oxidizer. For instance, the

Space Shuttle system uses liquid hydrogen and liquid oxygen to power the three main engines. Thesefluids are super-cooled to increase engine performance and allowgreater payload weights to orbit. However, the on-board tanks requiredto carry rocket fluids are very large and heavy. Technologydevelopment and demonstration of hypersonic air-breathing rocketengines is underway and is showing promise to compete withtraditional launch vehicles. The advantage to air-breathing rocketengines is greater payload to orbit due to less vehicle tankage requiredto hold oxidizer. In June 2005, the X-43A vehicle successfullyachieved Mach 9.6 using a scramjet (supersonic combustion ramjet)engine and a unique aerodynamic shape. The NASA/DoD programhelped encourage industry interest in the technology and there are currently a number of companiespursuing hypersonic R&D using private and government investment. DARPA’s FALCON program isfocusing on scramjet technology maturation for military use. Formidable technology gaps remainincluding engine air-flow stability and controllability and the development of materials capable ofwithstanding engine inlet and aero-heating temperatures. It is clear that air-breathing scramjet vehiclescould fundamentally alter the launch and passenger service industry but experts predict any such shift ismore than a decade away.

VIII. Barriers to Entry

A. Capital accessEconomic purists argue that access to financing should never be cited as a barrier to market entry. If

there is sufficient market demand to create profit, investors will provide the necessary capital. However, itis worth mentioning that after talking to a number of space industry participants, in starting their venturesone of the most common barriers cited was the availability of capital. This is understandable given the realand perceived technical risk, the market risk, and the long period for financial returns associated with mostspace ventures. This financial barrier is even more formidable for building complete new systems, such asnew rockets, whose development costs can easily run from several hundred million to billions of dollars.The cost of manufacturing and launching a routine telecommunications satellite exceeds $150 million.

Not surprisingly, there has been a limited availability of institutional capital for such ventures. Most ofthe financing has been from the private capital of wealthy investors. This has certainly limited theentrepreneurial development of the industry, given that few of these wealthy individuals are prepared tocommit the required capital in a space venture.

B. High risk / long termThe space industry combines both complex technology with highly uncertain markets and an extremely

long development and testing cycles. The technology is not only complex, but many of the pieces areunproven and contain new designs. Several high-profile failures, such as that of X-33/VentureStar,illustrate what can go wrong even with projects undertaken by experienced companies such as LockheedMartin. Markets are uncertain and are subject to fluctuations, as the significant reduction for commercialsatellite launches over the last century illustrated. Finally, the time from designing a new space technology


to actually having it commercialized is significant, and can run into tens of years, which adds to the riskfactor. As a result, both the investors and the participants in any commercial space project should have ahigh tolerance for financial and personal risk, given the nature of the business.

C. Legal / Insurance15

The Commercial Space Launch Act of 1984 specifies that launch vehicle and satellite manufacturersand operators cannot sue each other in the event of a launch or on-orbit delivery failure. In response,various members of the delivery chain obtain insurance or enter into limited warranties. The governmentprovides indemnification for 3rd party injury. Meaning, if a launch operator meets all governmentregulatory requirements, the federal government carries the liability for 3rd party damage (up to potentially$1.5B). This allowance is subject to periodic approval by the legislative branch. Despite the high cost ofinsurance, the legal environment regarding payload delivery and services is largely stable and understood.However, no such mandated liability waiver exists for human passengers on private launch vehicles. Asthe law stands now, space tourists will have the ability to sue. Providers of this service will likely seekliability waivers from their customers similar to those in extreme/adventure sports in which ordinarynegligence is covered. Also, potential passengers will find that most life insurance polices do not cover thisactivity. However, insurance companies have developed ‘Holiday Insurance’ products for extreme sportsand will likely do so for space tourism.

If a waiver is challenged, the courts could determine space tourism companies to be “CommonCarriers’, similar to aircraft, for which waivers are not observed. For space tourism operators, thelegal/insurance environment is not yet fully vetted and poses a financial risk to the industry and theinvestors.

D. ITAR (International Traffic in Arms Regulation)For an U.S. space technology firm seeking to partner or collaborate with an international entity, any

transfer of defense-related articles (hardware, software, technical data, etc.) is potentially subject toapproval by the U.S. State Department. The company may need to apply for a license, the process forwhich can take months for approval.

Large aerospace corporations have become accustomed to the ITAR regulations, understand thelicensing process, and how long it can take. Smaller companies may struggle initially to work through itand will likely need the support of a counsel familiar with this regulatory environment. All companies canbe held liable if technical articles are transferred outside of the license authority and should train theiremployees accordingly.

If a business plan includes an international element, investors should take note of whether it containsadequate budget and schedule for ITAR licensing. If the State Department determines that ITAR does notapply, a company may still be subject to the Commerce Department’s Export Administration Regulation(EAR).16

E. Cost per launch poundThis barrier to entry is specific to most businesses other than the launch business itself. It results from a

high cost of delivering goods in the orbit. In the beginning of 1990, the cost per pound was around $18,000.By the end of the century the cost came down to $10,000. However, this reduction in cost was not enoughto stimulate more launch demand. More significant reductions in cost are needed. The current commercialdevelopment of the new launch vehicles (ex: SpaceX) is targeted at addressing exactly this issue.However, until these vehicles are operational, this barrier remains discouraging to those seeking ventures inspace.

F. PolicyCongress is generally an advocate of this emerging space industry. A review of the House Science

Subcommittee on Space and Aeronautics show numerous hearings featuring prominent members of theemerging space sector. Attempts have been made to entice investment but few bills have been passedspecifically addressing the emerging space industry. The general attitude of the industry is that the Houseand Senate will not take action to prevent the advancement of private space development.

G. Human Capital


The U.S. aerospace industry is suffering from a ‘brain drain’ as many skilled engineers and scientistsapproach retirement. For instance, in 2002 NASA had three times the technicians over the age of 60compared to those under the age of 3017. In addition to past hiring freezes, consolidations and decreaseddefense spending in the industry, it has become less attractive to graduating college students and the U.S.has been rapidly losing expertise. Despite this, the entrepreneurs and other industry experts we interviewedexpressed no immediate concern with finding the proper human capital for their ventures. This may beexplained because industry experience in the space industry is highly valuable and the workforce isgenerally working longer past the traditional retirement age. However, data from Booz Allen Hamiltonstudy in 2002 (Figure 618) suggests that greater than 50% of the existing Science and Technologyworkforce is eligible for retirement in the next decade.

Figure 6. US Average Space Industry Science & Engineering Workforce Distribution- 2002

It may take some time for the industry to notice a sudden drop in experienced and talented engineersand scientists. Which, at that point it may already be too late. Within the U.S., the industry needs to ensurethere is an adequate knowledge transfer and retention policies in the short-term as well continue to engagecollege graduates to join the industry. Space start-ups as well as established players’ ability to paycompetitive high tech wages will be key factor in attracting and retaining younger talent, which will be inturn tied to the commercial viability of the industry. Emerging countries in the space industry such as Chinaand India do not face these challenges. In fact, the supply of qualified human capital may prove to be theircompetitive advantage. While the U.S. is renowned for its creative R&D, it produces far fewer scientistsand engineers in comparison to our industrialized overseas competitors19.

IX. Non-Market ForcesThis section will familiarize potential investors with past, current and possible future non-market risks

associated with the emerging space industry. Non-market forces include advocacy groups, activists, union,political, legal and media groups. Private and civil space efforts generally enjoy broad public fascinationand traditional bipartisan support. Our research found no substantial cases of activists protestingcommercialized space ventures. This is surprising given the historical precedent of anti-technologyactivists. In fact, space advocacy groups such as Space Frontier Foundation, AIAA, ProSpace, NationalSpace Society, and a host of state Space Authorities, have grown in membership and influence. Annualconferences focusing on space commercialization and privatization are common and increasingly attendedby traditional and non-traditional investors, and supporting industries such as legal, insurance and financialservices.

As new industries gain public attention, they become targets for non-market attention. The types ofissues that the commercialized space industry will likely face include quality of life, environmental,funding, litigation, and unionization.

There are historical examples from similar industries that give insight into potential non-market issues.The “Ban the Bang” campaign was an extremely effective effort to ban Concorde overflight due to thenoise pollution created by sonic booms. Concorde sales suffered because of the success of the activist, Mr.Richard Wiggs, a retired schoolteacher passionate about stopping the damage caused by the plane’s sonicboom. The Anti-Concord Project20 started by Mr. Wiggs is an excellent case study of non-market issues


for the emerging space commercialization industry. Media treatment of “Ban the Bang” movement wasfrequent, often delivered as advocacy pieces.

There is an array of issues that the emerging space industry will face, but many of the themes can befound in the history of non-market issues related to the Concorde: human health (solar radiation absorbedby passengers in the upper atmosphere), sonic boom (noise created by supersonic flight), spaceportpollution (increased noise pollution around spaceports), and atmospheric water vapor (increased watervapor in upper atmosphere from engine output), planetary mining, orbital debris and the use of nuclearpower in satellites. While science has debunked some of these issues, many remain and will rear their headsonce the industry is past its infancy.

One big question for space tourism is the safety of passengers. Will death be tolerable in experimentalflight? History has shown public tolerance of accidents in new transportation systems. However, the U.S.is highly litigious and space tourism firms may find insurance difficult to source.

X. FinancialTraditional investment houses are relatively bearish on opportunities involving space and space-relatedservices. Historically, returns have been insufficient in value and horizon to overcome the risk normallyassociated with this emerging industry. In addition, any potential venture that includes NASA and/or DoDas a source of capital is viewed as very risky due to the historic instability of government funding to theemerging space companies. Investors also communicated to us the risk of overseas competition –particularly China and Russia. An analyst predicted that space tourism will not flourish until mid-centurydue to the perceived high risk and high physical requirements for flight. The primary reason for the bearishattitude toward all space ventures is the lack of a sufficient need to be there. The traditional investmentfirms consider this market too immature and risky and typically leave the financing to the venture capitalist,equity and angel investors.

XI. Conclusions/Recommendations• In the U.S., the federal government and traditional defense contractors largely dominated space

activities. These contractors will remain in the space business serving traditionalmanufacturing of large scale launch systems, satellites, and operating orbital launch services aslong as it continues to deliver synergies with parts of their businesses. Threats from newentrants remains low, due to the large capital investments, technical experience and the savvyrequired to navigate the regulatory environment and the high success rate required for highvalue commercial and defense customers.One negative consequence of the traditional aerospace contractor continuing to dominate thismarket is that incentive for cost reduction is not great as long as customer mix remains largelygovernment (on cost plus contracts). The U.S. government has recently shown a desire tochanges this by relaxing the contracting rules and offering incentive payments for operationalimprovements and cost reduction achievements. Partnerships and state and federal incentivesencouraging entrepreneurship are increasing. New companies seeking these partnerships canoften offset their risks with government funding or revenue but should be cautious of theassociated overhead and funding instability

• Due to the required large capital outlay and high risk, the emerging commercial space industryhas required a non-traditional government/private enterprise environment. The industry isslowly emerging from this environment into a purely private and sustainable marketplace.Indications include the fact that private spending on space-related activities has now surpassedthat of the government. However, the high cost and high risk, low operational flexibility oflaunching a payload to orbit remains one of the greatest barriers for an expanding commercialspace market. Currently, there exists a global oversupply of launch services. Legacy launchvehicles have been upgraded to offer greater reliability but are still based on technologydeveloped in the middle of last century. Competition between the suppliers reduce the launchcosts but not to the point of attracting many new users. It is not immediately apparent whatthis threshold cost would need to be to trigger a wave of new users for space services.


• Low cost in the launch services industry is not the sole distinguishing metric for most customersegments. Safety, reliability, availability, operational flexibility, reputation and responsivenessare also important criteria that matter to customers.

• Non-traditional investors are entering the industry. These tend to be high net worth individualswho are not solely driven by profit incentive, but also by personal interest, altruism, and adesire to challenge the establishment and make a difference in the industry.

• Multiple players are pursuing the sub-orbital tourism market and are creating similar valueproposition offerings for customers. There is a high degree of demand uncertainty as to thenumber of passengers and at what price point will drive the industry. These companies willhave to do a fair amount of demand generation through advertising and PR campaigns tocarefully craft the value proposition for affluent consumers. They will also have to maintainthe highest level of trust, safety and reliability. Liability waivers are being pursued as a meansto navigate the passenger liability issue. It is uncertain for how long these companies willavoid being subjected to ‘common carrier’ laws and face traditional airline insurance andliability costs. There are significant regulatory and legal hurdles that have yet to be overcome.Progress is being made on these issues and as the environment becomes more mature andstable, will allow space tourism to establish itself as a credible industry.

• Space ventures enjoy public fascination and bipartisan support. This should continue to bestrong as space tourism industry ramps up. Non-market risks are minimal and manageable.

• Traditional investment houses are bearish due to high risk, low margins, long payoff horizonand availability of more lucrative land-based investments. Business plans involving agovernment budget backdrop should be considered high risk due to fickle government fundingstability.

• The U.S. government maintains a restrictive policy regarding the transfer of knowledge andtechnology to overseas partners. Navigating through the ITAR regulations is a daunting taskfor start-ups. The emerging space industry largely considers these export control lawsrestrictive and a deterrent to progress. Unfortunately, with greater global security threats,policy reform will become increasingly unlikely.

• Historical models of large-scale transportation system development show poor initial costestimation as well as under-predicted demand. Development of the underlying infrastructure iscostly and often needed the support of governments but the commercial opportunities that wererealized by the masses drove the respective transportation systems to spin off viablecommercial businesses.

• Disruptions to current launch technologies are unlikely to occur in the next decade. However,there could be technology disruptions that curb attractiveness of satellite-based marketsegments. Businesses based on space-based assets for creating and exploiting communicationsand data infrastructures (radio, satellite television, internet services) have enjoyed moderategrowth but are always under threat from ground based disruptive technologies (high-speedcellular data networks, wi-fi, wi-max etc). Services that can only be effectively delivered via asatellite based approach, such as geo-mapping and positioning, direct line of sitecommunications, offer the most promise as robust business immune from ground baseddisruptive technologies.

• Investors should look for opportunities to fund space ‘ecosystem’ businesses. These 1st tiercompanies supply technology and services to multiple space organizations thus spreading therisk and creating stable revenue streams. Without new technology, investors are unlikely tofind returns of acceptable risk in launch operations. This is due to the current globaloversupply and large capital outlay typically required of this business.

• Foreign competition in launch services and satellite manufacturing is formidable. Regulatoryrestrictions inhibit U.S. partnerships with foreign entities. Space entrepreneurship residespredominately in the U.S. and is centered largely in southern California. However, U.S. firmsare not necessarily technically dominant.

• As always, potential investors should scrutinize a proposed business plan for well-communicated technical and programmatic risks, credible market research, and realisticrevenue and cost projections. Cost estimates and schedules for projects with new technologydevelopment should have adequate margin for the ‘unknown-unknowns’.


• Table 4 below is a subjective rating of investment risk of the space segments discussed in thispaper. It is intended as a quick guide to investors in their evaluation of the attractiveness of aspace-related company. The risk rating is for profitability assessment based on a 5-8 year timeinvestment horizon.

Risk Category

Sub-OrbitalSpace Tourism

Space assetderived services

(e.g. satelliteradio & TV)

CommercialSpace R&D(e.g. biotech)

Orbital LaunchServices/EELV/

Payload &Extended Stays

SpaceEcosystem

partner Services(e.g. rocket cam)

Market structure,Investment levelrequired & barriersto entry

Moderate High High High Low

Technology maturity& reliability(success/failure rate)

Moderate Low High Moderate Varies

Level ofGovernmentsubsidization orincentives

Moderate Moderate High Low Moderate

RegulatoryApproval Risks

High Moderate Moderate Moderate Low

Maturity ofLegal/LiabilityEnvironment

High Low Moderate Low Low

Near term Risk fromdisruptivetechnology orsubstitutes

Moderate High Moderate Moderate Moderate

Directly benefitsmass consumers(mass marketpotential)

Low Low Low High Moderate

Near termrecurring revenuepotential

Low Low Moderate Moderate Moderate

Long termProfitability

Moderate Moderate High High Moderate

TOTAL RISK Moderate Low High High Very Low

Table 4. Space Industry Investor’s Risk Matrix for a 5-8 Year Investment Horizon


XII. List of Interviewees

Name Title Company/Organization

Jim Benson Chairman and CTO SpaceDev

George French CEO & President Rocketplane Limited, Inc.

Debra Lepore CEO Air Launch

Elon Musk Chairman & CEO SPACE X Space ExplorationTechnologies

Elliot Pulham President & CEO Space Foundation

Rex Ridenoure CEO Ecliptic Enterprises

Joseph Rothenberg President Universal Space Network

Robert S Walker Chairman Wexler & Walker, PublicPolicy Associates

Heidi Wood Senior Analyst Morgan Stanley

Brewster H. Shaw VP NASA Systems for IDS The Boeing Company

John Logsdon Director of the Space PolicyInstitute

George WashingtonUniversity’s Elliott School ofInternational Affairs

Alex Tai Director of Operations Virgin Galactic

Kerry T. Scarlott International Trade Attorney Sheehan, Phinney, Bass

Tracey Knutson Sports Defense Counsel Knutson & Associates

Pamela Meredith Co-Chair Space Law Practice Group

Tom Nugent Research Director Liftport

Table 5. List of Interviewees

AcknowledgmentsThis paper was developed as a business case under the guidance of Dr. Scott Hubbard, visiting scholar,

Electrical Engineering Department, Stanford University and Dr. Baba Shiv, Professor of Marketing,Graduate School of Business, Stanford University.


References

1 Comments by Burt Rutan, 25th Annual International Space Development Conference, Los Angeles, CAMay 4, 20062 2002 Market Opportunities in Space: The near term roadmap. DFI International3 Aviation Week and Space Technology, 3 July 2000, p.S22.4 Static at XM Satellite Radiohttp://www.businessweek.com/technology/content/feb2006/tc20060217_233673.htm5 State of the Satellite Industry 2005. Futron Corporation6 http://www.thespacereview.com/article/587/17 Orbital Debris Mitigation: Regulatory Challenges and Market Opportunities. Futron Corporation WhitePaper. March 15, 20068 http://www.thespacereview.com/article/139/29 NASA’s Centennial Challenges website: http://exploration.nasa.gov/centennialchallenge/cc_index.html10 Space Tourism Market Study. Futron Corporation, October, 2002.11 R Stockmans, P Collins & M Maita, 1995, "Demand for Space Tourism in America and Japan, and itsImplications for Future Space Activities", AAS paper no AAS 95-605, AAS Vol 91, pp 601-61012 Suborbital Space Tourism Demand Revisited, Futron Corporation, August 200613 The Final Report of the Commission on the Future of the United States Aerospace Industry. November18, 2002.14 http://www.liftport.com/ - countdown clock15 Interviews with Tracey Knutson, Adventure Sports Defense Counsel, Knutson & Associates and PamelaMeredith, Co-Chair, Space Law Practice Group: Zuckert Scoutt & Rasenberger, L.L.P.16 Interview with Kerry T. Scarlott, international trade attorney with Sheehan Phinney Bass.17 The Final Report of the Commission on the Future of the United States Aerospace Industry. November18, 2002.18 2002 Market Opportunities in Space: The near term roadmap. DFI International (Booz Allen HamiltonData).19 Rising Above The Gathering Storm: Energizing and Employing America for a Brighter EconomicFuture. National Academies Report. August 2005.20 http://www.warwick.ac.uk/services/library/mrc/ead/032col.htm#N1167 As of June 1, 2006. A full history

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