How I Think About The Space Industry (UPDATED VERSION)
Updated Aug. 31st, 2023
Space is becoming more important to the world’s economy every day.
However, space is unusual because many people interact daily with products that are only possible because of space, such as GPS, but don’t work in the industry itself.
I’m writing this post to help explain how I think about the space industry, since I don’t think it’s terribly difficult to understand how the industry works. (The technical details are another matter, but those are for other posts.)
First, when you think of the space industry, don’t think of Star Trek, think of digital infrastructure. The vast majority of why investors value the space industry in the hundreds of billions of dollars comes from satellites providing GPS and internet, along with some imaging capabilities. (Although most businesses outside of national security efforts don’t need satellite imaging most of the time.)
This happened because for so long the dominating term in the equation of
Revenue - (Expenses of getting into orbit + Expenses of making the thing that you put into orbit) = Profit
was the expenses of getting into orbit.
Every object you put into space had to be capable of generating millions in value, and the only way to do so was through creating digital value that could provide margins and scale in ways making widgets couldn’t.
This is a good start for understanding the space industry, but to get more nuance we’ll need some history.
Let’s go back to October 4th, 1957, when the world’s first satellite, Sputnik, was launched by the Soviet Union.
Sputnik’s launch was what started the “space race”, as during this time the United States and the Soviet Union were bitter rivals that each wanted to become the dominant global superpower.
The Soviet Union launching the first satellite, and thus showing off better technology than the United States, was seen as a major threat to the legitimacy of the United States being a global superpower.
Whoever leads in technology leads the world.
As a result, NASA (National Aeronautics and Space Administration) and DARPA (Defense Advanced Research Projects Agency) were formed to get the United States up to speed.
What follows from this is well-known: The Apollo mission to put the first man on the moon was born, and America was successful in putting the first man on the moon.
Hooray, we won; end of story, right?
While the euphoria of beating the Soviets was there for a short while, many in the nation returned to a line of criticism that there wasn’t any economic reason to be in space (which was an ongoing debate throughout the Apollo) project, and they were right. In 1970, the research that formed what we now call GPS hadn’t even started yet and the internet was just a bunch of nerds (sorry, *distinguished computer scientists) on the ARPANET.
The Apollo mission, while technically successful, was unsustainable.
Despite this the public perception of space was still very positive, as many children dreamed of being an astronaut and NASA was good for jobs.
However, if space couldn’t stand on its own, then it could be subject to the whims of government funding, which can be fickle if it isn’t aligned with policymakers being re-elected.
This all brewed for about 15 years until the most tragic event in the history of the space industry occurred: The Challenger Disaster.
The space shuttle Challenger was a mission designed by NASA to take the first teacher, Christa McAuliffe, into space, and as such was watched by millions of schoolchildren and eager adults around the United States.
However, the shuttle exploded 73 seconds after liftoff on January 28, 1986.
This was a mechanical failure that you can read up on in extensive detail here from Richard Feynman, but the gist was that NASA wasn’t careful in testing an O-ring (oxidizer ring) for one of its engines. This O-Ring shrunk more in cold temperatures than expected and, since the morning of the Challenger launch was cold, weakened the part.
This was the first fatal accident involving an American spacecraft while in flight, and resulted in the shuttle program being halted for 36 months.
Now, this slowing in progress was not entirely bad.
Engineering ethics are incredibly important, but the blowback from the Challenger disaster left the space launch industry stagnating for the next 20 years, and so left it ripe for disruption.
This leads us into the modern part of the story, which many people call “New Space”, where Space became flooded by private companies instead of national agencies. Leading this New Space revolution is none other than SpaceX, which started by building their famous Falcon 1 rocket, as detailed in the great book Liftoff, before going into bigger and better launch vehicles.
This is well tread ground, so I’m going to cover an aspect that doesn’t get talked about enough: SpaceX was able to succeed because there were now economically viable reasons to be in space.
The global positioning system (GPS) had started online, and with the rise of the internet in the 90s, communication satellites were now valuable enough for governments and corporations to put up despite the difficulties of doing anything in space.
This led to SpaceX being able to win government contracts from smaller governments such as Malaysia and early adopting companies that needed to get their value-generating spacecraft into orbit ASAP.
The Space Flywheel of economically valuable satellites being able to pay for SpaceX to decrease launch costs in order to send up even more economically viable satellites was beginning to work.
The Space Flywheel
An additional trend that resulted from this flywheel was that as the number of launches increased, the cost to make satellites decreased, and thus made starting a satellite startup viable. Skybox Imaging and Planet Labs, both incredibly successful, were started around the early days of the Falcon 9 as a result.
Furthermore, since SpaceX had started to mature as a company, some of its employees began to leave to start their own companies, similar to the PayPal mafia. These employees valuable skills gained from making the impossible happen could potentially translate into billion-dollar startups.
These two trends collided, resulting in the space flywheel further accelerating and caused a boom in space startups, from making “drugs in space” (Varda) to “3D-printing entire rockets” (Relativity Space, although they’re not doing full 3D-printing as much anymore).
These trends will only further accelerate, and to cap off this post, I want to share some of my own predictions about the coming years of the space industry.
Starship will be really, really important. There are some concerns about whether Starship coming online will actually mean drops in launch prices, but Musk and other SpaceX executives have repeated that Starship is intended to drop launch costs by an order of magnitude or more. This allows for activities in space that aren’t as high margin as digital infrastructure to start happening, such as utilizing solar power at night.
Investment in space will continue to be primarily driven by communication satellites. Astranis’s plans to deploy a satellite to the Philippines next year, along with Starlink picking up steam, show that there’s no slowing down. Large satellite businesses (which include SpaceX) have the “scaffolding” to survive billions of dollars of further investment. Furthermore, the communications industry is LARGE and likely has a bottomless level of demand. (Who doesn’t want a good internet connection everywhere they go?)
The next wave of space startups will be picks and shovels businesses. Small launchers are unlikely to be able to compete with a fully online Starship, but the capabilities of Starship mean that companies which previously had never thought about space could want to do more. This is already seen with K2Space, Shield Capital, and Impulse Space, all companies that were founded by ex-SpaceX employees.
The moon will once again become the scene for a space race, with funding dramatically increasing. Why? Varda received 60 million dollars for the development of its hypersonic re-entry platform, which I detailed in this post, and funding for defense startups is through the roof. Tensions with China are only getting worse and shows of technological dominance will be how the superpower of the mid 21st century will be chosen. Whoever leads in technology leads the world.
Space will stop feeling so far away. Will Bruey, CEO of Varda Space, made an apt comment that oil rigs feel “closer” to us than space because they’re more economically relevant to us, even though space is only 100 miles away or so. The trend of things that used to “seem” far away becoming closer is very 21st century, and if (when?) point number 4 happens, then space will really stop feeling so far away.