Orbital Access Cat Skinning Methodologies

In order to discuss the business, finance, and policy approaches for creating low cost and reliable space transportation, it helps to have an understanding of the underlying technology, in order to provide context for those discussions. It also happens to be a lot easier for one trained primarily as an engineer (and whose business experience mostly comes from a couple of classes that I was able to sneak in during my formal schooling, listening to people who know more than I do, and a little bit of firsthand experience at the whole entrepreneurism thing) to discuss the technological part of the problem.

Last week, I was asked to do a remote guest lecture for a university course on space development (being run by Dr Livingston). It was somewhat flattering to be grouped in the same category as much more experienced space technologists, pundits, and businessmen such as Dennis Wingo, Michael Kelly, Jeff Foust, and others. As part of the presentation on developing reusable orbital transportation, I discussed a short list of orbital space transportation approaches that I felt were the most promising directions for development.

So, over the next several weeks, I want to take a little bit of time to introduce and discuss some of those proposed approaches for reusable orbital transportation. Now, a lot of this may be a boring rehash for fellow engineers and technologists, but hopefully I can provide some useful discussion for those coming to this industry from non-engineering backgrounds. I'm planning on discussing the basic concept behind each approach, the potential pros and cons, the unknowns that need resolving for said approaches, and some thoughts on incremental development methods for resolving those unknowns. I may also go into some of the other topics I discussed such as my ideas on reusable transportation markets.

My goal is to provide a basic understanding of where we are, what we think some potential solutions might look like, and an understanding of some of the more probable paths that could take us from here to there (technologically). With that information as a background, it will hopefully make it easier to discuss how business, financing, and government policy issues tie in with the technological situation.

Hopefully I'm not biting off more than I can chew.

I For One Welcome Our New, Scaly Overlords...

Well, it looks like Rand and Clark and Jeff are too busy blogging about the New Space conference to start synthesizing things yet, so I'll just make some comments on the big news from yesterday. In case you don't read Space Transport News every morning like most of the rest of us, it was announced yesterday that Northrop Grumman is buying out Scaled Composites. Unbeknownst to much of the alt.space world, Northrop has actually owned 40% of Scaled for some time now, possibly several years, so this move isn't quite as surprising to me as to some others.

Now, while some of the comments I've seen about the acquisition seem to "get it" (particularly comments from Nathan and Ferris over on Hobbyspace, and surprisingly enough, Mark Whittington as well), there still seems to be a lot of people who are worried that this will become a case of a "big dinosaur company gobbling up a plucky alt.space mammal." On the contrary, I would argue that not only is this acquisition likely to be a net win for Scaled, but in fact it may be one of the most important events this year for the future of commercial space development. Here's some thoughts on why:

Northrop's Skunkworks
First off, lets talk about why this particular deal is likely going to be win-win for both Northrop Grumman and Scaled Composites. Unlike Lockheed Martin, who has Skunk Works, and Boeing that has Phantom Works, Northrop Grumman really doesn't have an lean-and-mean R&D shop of the same caliber. Scaled comes with a reputation in that area that compares well with Northrop Grumman's competitors' secret projects shops, has the capability of doing important work very quietly, and has a longstanding relationship with Northrop.

With the size of Scaled's existing revenue streams, I wouldn't be surprised if the buyout was worth over $100M. Northrop isn't about to screw with a system that works so well that it's worth that kind of money, especially with how much Northrop would benefit from continuing to run Scaled the way it has been run.

The reality of Scaled is that Burt Rutan is eventually going to retire. Using Esther Dyson's meme of startups being either "toys" or "children", it is apparent that Burt is smart enough to realize that if he runs Scaled like his own personal toy, it won't outlast him. He's taking the probably painful step of letting his child grow up. By taking steps now, there's a good chance that Scaled will continue on long past his retirement as one of the world's premier aviation prototype shops.

I'm sure having a huge infusion of capital won't hurt Burt's aviation or space projects very much either.

Now, there are some real risks involved in such an acquisition process. Things don't always go smoothly, and there are bound to be some clashes of corporate culture even if Northrop tries to take a very liberal approach with Scaled. Things may yet get botched, but if they do, it will be because the execution was botched, not that the deal was a bad idea from the start.

Selling out to "The Man"
One of the comments I've seen many make is that Northrop is just buying Scaled to squash the competition. This meme of big, bad dinosaurs trying to maliciously destroy their mammalian competition needs to die. But this meme is even sillier in this particular case. I mean, what business exactly is Northrop supposed to be protecting by squashing Scaled? In fact, if we're talking about manned suborbital flight, none of the dinosaurs really have much to lose, because none of them are involved in that market.

More to the point, I'm not sure I'd even be worried about things if Boeing or Lockheed were the ones doing the acquisition. There may have been a time in the past where it was in the economic self-interest of some of the "dinosaurs" to squish their "mammal" competitors, but if there ever actually was such a time in the past, it doesn't appear to be the case any more. I mean, it should be an eye opener when the head of Exploration Systems for a dinosaur company is singing the praises of a launch vehicle being developed by one of their competitors. More to the point, and I think this is going to be a theme to be developed over the course of many blog posts in the future, I think that most of the big aerospace companies are starting to see New Space companies not as threats to be beaten, but as opportunities for collaboration. I truly believe that we'll see many examples over the next decade of alt.space and big.space companies working together to achieve things that would've been impossible to achieve alone. Heck, even some small parts of NASA are showing some positive trends in that regard.

Once again, the caveat has to be said that sometimes mammals can be squished accidentally even when the dinosaurs are trying to play nice with them. When you have firms of drastically different size working together like that, things have to be thought through carefully, because there are many ways the collaboration can be screwed up. But even with that caveat, I think that more often then not it is worth the risks to both sides to try and collaborate where common ground can be found.

But more on that at a future date.

Liquidity Events and "The Netscape Moment"
The last point I want to make about this deal, and the one that I think will be by far its most important impact, is what it means for investment in this industry. Investors typically don't risk large amounts of money investing in startups with the intention to just hold the resulting stock indefinitely. As one investor put it, if they wanted dividends, they'd buy utilities, not invest in startups. What investors want is a realistic exit strategy--basically an exit strategy is some way that down the road they can get their money back out with a severalfold increase. Since most of these startups are privately held companies, in order for investors to be able to "exit", there has to be some sort of "liquidity event." Due to both SEC restrictions, and the typical form of resulting stock agreements for privately held companies, it is very hard to actually sell stock held in a privately held company. In order to easily convert that stock back into liquid assets, the easiest way is if the company's stock becomes public. Which leads to the two main types of liquidity events that I've heard discussed for alt.space type companies: acquisitions by publicly held companies, and IPOs. Acquisitions being by far the most likely type of liquidity event for most alt.space companies.

Basically, as I understand it, when a private company gets bought out by a publicly traded company, the publicly traded company will usually buy the startup out using stock instead of cash. If an investor owns 10% of the privately held company after money, he'd get 10% of the stock in the public company doing the acquisition. That investor can then turn around and sell those stock to get his money back out to reinvest in other projects. [Note: if Steven or any other of the more investment savvy people are reading this and would like to provide clarification, I'd love to have your comments].

What this transaction shows investors is that there really is a realistic exit strategy for successful alt.space firms. When investors start realizing that they can put money into a promising alt.space startup, and that if all goes reasonably well the company has a good chance of getting bought up by a big, publicly traded aerospace company a few years down the road, you'll start seeing more investors willing to make the plunge. When people start seeing that it really is possible for them to turn a small fortune into a bigger one in this industry (instead of the other way around as the joke usually goes), you'll start seeing a lot more of them becoming interested. As it is, without valid examples of good exit strategies in and industry, its hard to attract much investment even if you have a rock solid business case and a top-notch team.

Now, I think this particular deal isn't like our industry's "Netscape Moment", I think we're definitely getting closer. I also doubt that this acquisition is going to lead in the immediate near term to wholesale buyouts of alt.space companies by big.space companies. However, I wouldn't be surprised to find out several years down the road that this event led to several big.space companies starting to make small strategic investments in the more promising alt.space companies, opening the door for future acquisitions.

So, if a couple of months or years down the road you hear about XCOR or Masten or Armadillo or even SpaceX "selling out to The Man", it might be worth reserving judgment for a while. You never know what might come of it.

Some Launch Economics

A commenter on my post about Soyuz launches from Kourou raised the question of whether launch prices would really drop with an increase in flight rate. This question may be due to discussions about a report prepared for NASA by a Dr Hertzfeld of GWU that was discussed on the Space Show last year. I've been meaning to discuss the topic of launch economics for a while, since it was raised during my Space Show, and also because its a rather important question to answer for the emerging space industry as a whole.

There are a few pieces of anecdotal evidence that leads me to believe that increased flight rates typically will lead to lower prices. This doesn't mean Dr H's research was wrong, or that I'm more knowledgeable about economics than he is (because I'm not), but might mean that some people may be drawing incorrect conclusions from his paper.

I remember at one point while developing our current line of rocket engines, we had found an analytical model to help us estimate a couple of design parameters. The model (which is a fairly well-accepted one) was suggesting that our design flat out wasn't going to work, and that we were going to have to try some drastic measures to get it to work. One of my coworkers though had been looking over actual data from our system, and questioned the model. It turns out that he was right, and as far as I can tell my understanding of this model (or possibly the model itself) was off by over a factor of 3! Ever since this situation, I've tried to be a little more humble about my capacity for correctly understanding things the first time, and have been a little less willing to brush-off inconvenient facts that ruin my otherwise perfect theories.

Two of the pieces of evidence that lead me to believe that there is something wrong with the theory that increases in flight rate won't decrease price are:

1. There is a lot of evidence that when you sign an order for multiple flights, you can usually negotiate a better per-flight price than if you order them one at a time. One publicly available piece of evidence corroborating this common knowledge is shown on the SpaceX site:
   

   Pricing and Performance
   SpaceX offers open and fixed pricing that is the same for all customers, including a best price guarantee. Modest discounts are available for contractually committed, multi-launch purchases.

   I'm sure that others that have dealt with launch providers (such as Dennis Wingo) could provide additional support to this piece of evidence--that "bulk buys" of launches will almost always net you a lower price per launch. The price reduction is probably modest mostly because most such bulk buy contracts are for a relatively small amount of launches spread out over several years.


2. As part of their study to try and determine if Atlas V could be used for servicing Bigelow Aerospace's planned Sundancer station, the ULA Atlas V team investigated the business case as well as the technical requirements. According to several sources, the total per-person price for a visit to Bigelow's station (including launch price, the price of the capsule flight, and the price of spending time there at the station) is actually substantially below what the current prices of Atlas V would suggest. One online article (whose numbers jibe with several other sources I've seen) states that:
   

   So how much will a space cruise cost the Average Joe? One week on the Sundancer alone will cost $7.9 million per person, predicts Bigelow. While pricey, it's a steal compared to the $20 million that Space Adventures, another orbital flight company, charges for a week-long whirl on the International Space Station.

   Even assuming the $7.9M/seat only covered the Atlas V launch costs (and all the info I've seen says that includes Bigelow's fee and the capsule providers fee as well as the Atlas V launch price) , you're talking about less than $60M for an Atlas V 401 flight. That's more than a factor of 2 drop from the current Atlas V 401 price, and is only possible because Bigelow is talking about providing for a much higher flight rate than the measly 1-2 flights per year Atlas V has been bringing in so far. Now obviously whether they will charge that price or not depends very strongly on if they think they can get enough demand to justify it. If Bigelow only buys 2-4 flights per year from them, the price will likely be a lot higher. But if the flight rate ever reaches the 16/year that Bigelow was talking about, their case can close on the $8-10M/person price point that Bigelow has been talking about.
   

While those two examples don't conclusively prove that in all situations increases in flight rate will drop price, they do show that that is in fact the case at least some of the time. Another commenter, Habitat Hermit, I think gave a much better explanation about the fundamental idea that governs whether prices will drop or rise--profit maximization:

[T]here isn't a conflict between demand & supply elastics (what you're reacting to) and profit maximization (what you're alluding to even if you manage to contradict yourself), quote contrary the two depend upon each other (which is sort of beautiful if you think about it and its consequences).

The launch industry's publicly traded companies will always seek to maximize their profits, they're even bound by the law to do this to protect the interests of their shareholders (privately owned companies without shareholders is a different story but I don't know of any currently available launch company that is).

Now as to whether the price will increase or decrease can be simplistically illustrated by where on the supply & demand curve the company presently is and where it is moving to. You are absolutely right that increased demand does not always lead to decreased prices and both scarcity and oversupply are important factors.

So what is the current situation?
- almost all launch companies are looking for more customers (could be interpreted as oversupply but it isn't, the correct term for this is overcapacity: the business as a whole has spare unused capacity it would like to fill to maximize its profits further)
- however it's not like the launch companies are constantly producing more launch vehicles than they have any use for (that would be real oversupply as well as the opposite of profit maximizing and if they did that the leadership would be quickly thrown out by the shareholders)
- there are plenty of available launch windows, especially for LEO (no scarcity)
- there is no lack of material or factory capacity for increasing the production of launch vehicles (no scarcity)
- most launch complexes can be easily expanded (and NASA is trying to get rid of a rather large one in an excellent location...)
- the main cost to the launch company is in maintaining the infrastructure and workforce required (fixed capital costs) and not in the launch vehicle production and launch itself (variable cost depending on units produced). Actually the fixed costs dwarf the variable costs, the two aren't remotely close.

Regarding the last point there are at least two things worth mentioning:
1. This is the explanation for why the barrier to entry into the industry is rather high unless you can evade or mitigate the huge fixed costs. A NewSpace company like SpaceX is able to attempt it because it is lead by an "angel" investor (Elon Musk) willing to spend a lot of money for little in return in order to establish the company. Another NewSpace company is attempting to evade the fixed costs by using air-launches (that would be t/Space) and thus has less of a need for money (but they're still struggling getting enough investors).
2. The second thing is that this is a very strong indication that increased production even if at a lower price would be more profitable. In other words if a somewhat lower price would bring in significantly more sales your total profit would rise (thus profit maximization).

What would cause the price of a launch for the customer to go up even though there was high demand? Scarcity in the launch industry. If the launch industry has little additional capacity and/or the fixed costs are no longer such a major cost relative to the product production and/or when investing in additional infrastructure (industry expansion) would not lead to increased profits through increased sales, then profit maximization would result in price increases to the customer (taking advantage of the oversupply of customers).

However that simply isn't the case in the immediate future and even an additional 40 Atlas launches a year would not make it so for the industry as a whole, likely not even for LM. It's also important to understand that guaranteed sales as would be the case with Bigelow Aerospace is somewhat different than one-by-one sales and makes any need for additional capital investments much more tenable (if theres should be such a need at all that is).

Might as well stop now or this is going to become very long and cumbersome. I guess any introductory textbook on microeconomics should do a better job at this than I have.

I could probably go on as well, but I think that Habitat Hermit put it very well. The ULA team will do whatever they think will lead to the most profit for their investors, as will any other publicly held company (and even most privately held ones unless they are owned and run by the sole investor--like SpaceX or Bigelow), and in many cases the best way to maximize profits will involve dropping their launch prices.

Subeconomics Resource Transformation and The Fallacy of Technological Stasis

I just read a very interesting article on the Ludwig von Mises Insitute website, that got me thinking a bit about how to better explain my thoughts about how I think lunar markets will pan out. There are a lot of good points made in this article and I'm not sure I'll get a chance to go into all of them today, but I wanted to start off discussing one interesting idea that the author, Curran Kemp, presents:

Antarctic resources have been speculated for over a hundred years, but so far, most of the resources found have proven to be subeconomic. The economic model is based upon current prices, distances to market, and current technology. If the technology changes, then it becomes economic.

In other words, a resource is "subeconomic" if the cost at this point in time of bringing it all the way to market is high enough that it wouldn't be profitable to extract. A resource could be subeconomic for a variety of reasons. It could be found in too low of a concentration, or in an inconvenient form, or in an area that is expensive to access, or it could require technology development that would cost too much at this point to be worthwhile. Or there could be a lot of lower-cost sources or competitors on the market driving the price down, or the resource might require some technology or infrastructure development to become useable. You see many of these situations with oil for instance. There are places in the world that have oil in one form or another that would cost more to develop at this instant than you could probably sell them for, or which would be marginal enough compared to other investments that nobody would put money into them.

The important point to remember though about subeconomic resources is found in the last sentance of the quote above. The "subeconomic" resource of today may very well become an "economic" resource tomorrow. Technology does not stand still. As new technologies come into existance (some from within the industry, but many from other industries), the cost associated with harvesting a given resource will go down. Also as a resource becomes more scarce (or more highly demanded), prices go up, making some subeconomic resources become economically feasible. As other technologies come into existance, they create new demand for a given resource driving the price up. Crude oil today is worth a whole lot more than it was worth before Ford built the Model T for instance. The rise of the automobile has made many previously subeconomic resources of oil quite economic.

For an example of the transformation of a subeconomic resource to an economic one, imagine trying to make a business case for extracting oil from the North Slope of Alaska back in the '20s. People would've laughed you to scorn. "There's no way", they'd have said, "that could ever become economical". They might bring up the fact that there's no way you could extract and ship the stuff for even a fraction of what oil cost on the world market at that point. They might go into how difficult the environment to work in is or how the deep cold is more difficult than almost any other environment that's ever been worked in. They'd have been right. Artic Oil was subeconomic in 1920. However, in 2006, the situation is obviously no longer the same. Artic oil is definitely an economic resource now even though it wasn't previously.

Lets now look at a lunar example. Let's take the example of lunar Platinum Group Metals. In order to mine PGMs on the moon, you're probably going to need humans present, you're going to need to know where they are, and you're going to need lots of custom designed mining equipment. In order to get humans there starting from where we are, right this instant, you'll need a launcher, some sort of passenger vehicle/capsule, a lunar transfer vehicle, and a lander. With platinum running about $16k/lb here on earth, and about a 10:1 IMLEO to return payload ratio, you're also going to need to include development costs for a high-flight-rate RLV to get the transportation costs low enough to even have a chance. Factor in all the uncertainties, risks, time involved, etc, and it all adds up to Lunar PGMs being currently subeconomic. The total cost of developing all the hardware necessary and operating the system is currently more than the expected future profits, especially when you start factoring the time-value of money in.

However, reevaluate things 5 years from now. Bigelow flies Genesis 2 in a few months, decides to play it safe and do one more iteration before Sundancer, but Sundancer is in orbit by 2010, with Nautilus just getting there in early 2011. At least one of the three main vieing human orbital spaceflight providers (LM with Human-Rated Atlas, or the two COTS winners, SpaceX with Falcon IX/Dragon, and Kistler with K-1) is now flying people to orbit, with the total expected demand for flights between ISS and Bigelow being over 20 flights to LEO per year at a ticket price of about $10M per person. Lockheed has found a customer that wanted to use the Lunar Mission Centaur to put a much bigger payload in lunar orbit than could've been done otherwise, proving out the technology. Boeing has flown a lunar lander and rover as part of the Lunar Precursor and Robotic Program. LRO has flown as has the Indian probe, and the Chinese one. Using some clever techniques, a company thinks they've found good evidence between mascons and radar/IR data for a potentially large Ni-Fe meteorite impact site on the Moon with a large intact core.

If you reevaluate the costs at this point, there are now many of the items you would've needed that are either off-the-shelf, or at least you have some proven hardware that you can base your designs on. That slashes the development costs and timeframe substantially. Now you only need to fund development for a manned lander, the RLV, on-orbit propellant transfer, and all the lunar surface equipment. The risks are much lower, the timeframe closer, but the up-front costs are still high. Probably still subeconomic.

Take a look 5 more years down the road. Some commercial company has developed a business selling translunar flights using orbitally refueled Lunar Mission Centaur stages as the transfer system. Between demand for translunar tourism, and increased demand for Bigelow's second Nautilus station, some enterprising company is able to raise enough money to build a smaller, higher flight rate RLV for fueling, personel launch, and light cargo. Another company is in final development with Boeing or Lockheed on a manned lunar lander that they're planning on selling lunar tourism flights with. Bigelow announces that he's going to be putting a Sundancer station in at Earth-Moon L2 to support the various commercial and public lunar programs that are coming on-line in the near future.

Reevaluate costs then. Now the situation has changed enough that the lunar platinum may very well be nearing "economic". Some initial speculative money for follow-up, "ground truth" prospecting missions might now make sense.

Anyhow, ignore the specific timelines mentioned here. They're 100% speculative, and I can gaurantee that the future will not look exactly like what I'm talking about. I don't have a crystal ball anymore than the next guy. My point though is that resources that are entirely subeconomic now will not always be so. And that more importantly as technology and other business ventures progress, little by little new ventures will become economically feasible, and eventually those "completely economically unrealistic markets" may very well cease to be unrealistic at all.

Another important conclusion to draw is that lunar markets are going to develop organically if they develop at all. Communist style 5 or 20-year plans that try to determine all the things that need to happen for a market and then make them so are doomed to failure. The first bar of lunar platinum that gets sold on earth is going to be excavated by a different company than built the lander, which will have been built for a different market entirely, flown on a launcher provided by someone else and developed for something else, etc. You can't "plan" this stuff that far ahead. What you can do is try and figure out what the next steps are for a given project, and try and guage the market for when the right time to jump in is. It's business, it's risky, it's uncertain, it's messy, but that's how entrepreneurism works.

And it'll still probably get us back to the moon before our Glorious National Space Program does.