Slaying space zombies

Sinéad O’Sullivan is a former Senior Researcher at Harvard Business School’s Institute for Strategy and Competitiveness.

The tagline of this week’s FT Investing in Space Summit was “Balancing optimism with realism” which was probably a first for the industry in recent history.

Google “space investment bubble” and you’ll find a trove of articles written since about 2012, on the over-enthusiasm of investors. Every year, apparently, has been the year the bubble just has to burst.

Well, it looks like interest rates may be nudging us closer to that realism. One of my favourite moments from the summit was the FT’s Peggy Hollinger asking the founder of Space Capital, Chad Anderson, if there was a danger that the future of the entire industry’s innovation relied on SpaceX — the launch company that holds an industry monopoly — reducing its prices.

If you haven’t looked to the stars this century, here’s what happened:

1. SpaceX was founded by Elon Musk and has since been capitalised with around $10bn from private markets

2. SpaceX created and now uses Falcon 9 (F9) to deliver mostly US Department of Defense and other smaller private sector satellites to orbit

3. SpaceX’s entire raison d’être was to create a vehicle to go to Mars, so it designed the Big Fucking Rocket Starship launch vehicle to do that

4. But SpaceX realised that Earth-to-Mars transportation created little to no short-term revenue, and as such pursued to fill the enormously huge rocket with thousands of small broadband satellites instead, attempting to create nearer-term revenue by servicing Starlink, a network of satellites providing internet access

5. Space investors are now really excited about Starship being able to, one day, provide insanely great launch capabilities for practically no cost to those companies putting satellites into orbit

The rise of SpaceX and the rise of the private sector space industry are largely one and the same. And Morgan Stanley thinks that industry is going to be worth a trillion dollars. But… is it?

If we’re going to balance optimism with realism, perhaps it’s time to revisit the legitimacy of the claims that have convinced so many investors, mostly brand-spanking-new to the industry, to allocate $10bn to space-linked private markets in 2021 alone.

These numbers, by the way, were recently referred to as Zombie Statistics by industry analyst John Holt, a term I’ll be using. Basically, as Holt tells us, a few rogue numbers were thrown into some research and — because they sounded so good — have been used ever since to engage in what has essentially become a collective space industry fantasy.

Zombie claim one: Trillion Dollar Industry!

I have to hear this claim all day, every day. It’s repeated nonstop and at every available opportunity because space investors, executives and enthusiasts want (and need?) so badly for it to be true. 

This number originally came from Morgan Stanley’s infamous sell-side research which, admittedly, has done a great job at selling the industry.

Where does the trillion-by-2040 number come from, though? As they say themselves, if you read the report: not space stuff. Instead, it is from “second order impacts”. Cloud computing. Cybersecurity. Things that are enabled by the movement of data through space. 

In fact, “satellite launch” is such a small part of this trillion dollar economy” that you have to squint to see it (in purple). Yet there are currently a whopping 133 small satellite launch startups vying for venture capital according to Tracxn. They are not built equally.

“If I was trying to kill my fund, I’d definitely stick a couple of launch vehicle startups in that portfolio!” a space investor friend, who is definitely not trying to kill capitalism from the inside, told me last week. 

Zombie claim two: SpaceX lowering launch prices has created explosive growth in the industry!

The industry is HYPERSCALING! Or at least this is the narrative du jour. SpaceX launch prices have dropped so significantly that anybody and everybody is now launching a satellite, apparently. You should invest in space launch startups! You should invest in satellite startups!

Looking at data from BryceTech, I could tell you 126 small satellites were launched in 2016, which went up to nearly 2,500 in 2022. 

It certainly seems like a huge amount of growth in a very short amount of time. But does it reflect a general boom? Or has the majority of the growth simply come from SpaceX launching its own Starlink constellation?

And the satellite launch data below speaks for itself, showing modest growth between 2014 and 2020 in an industry that is supposedly hyperscaling. In fact, this data is indicative of the fact that the majority of the launch demand is induced demand: from SpaceX, for SpaceX. The remainder, highlighted in red in the graph below, shows more modest growth.

Sure, you might say, but this is historical data. But what about future demand, which is off the charts high? Well, I’ll believe it when I see it. 

Call me cynical (no really, please do), but just as there is industry incentive to believe the trillion dollar space economy one liner, there is an industry incentive to announce mission after mission of many hundreds of thousands of satellites constellations — even if they will inevitably fail through lack of funding or a lack of competitive incentive.

Tim Farrar, an industry analyst, had this to say at the FT’s Summit about the future of Amazon’s Project Kuiper, which hopes to challenge Starlink: “Unless Starlink proves within the next 2-3 years that there’s an opportunity to connect tens of millions of subscribers, it’s hard to see an economic rationale for Amazon to complete a $10B-$20B Kuiper constellation.”

Just yesterday Mark Schmulik, an analyst at Bernstein who penned an activist letter to Amazon, had this to say about the opportunity of low-earth orbit satellite broadband: 

Capital intensive low margin utilities aren’t worth the effort, regardless of how ‘cool’ the technology may be.

Ouch.

Zombie claim three: Your company needs a space strategy. Now.

…according to Harvard Business Review. Or, “Space. The Missing Element of Your Strategy”, from McKinsey.

These papers outline the strategy version of the trillion dollar economy claim by Morgan Stanley. Basically, your company is going to use data that is from space, or that travels through space. An example used to demonstrate this is GPS, the global positioning system, and how this impacts businesses all over the world. Therefore, apparently, you need to dedicate resources to space strategy. ASAP.

Sure, I suppose at a stretch mayyyybe, but likewise I could say that the global aviation sector has an immeasurable impact on your business, and that you should have a dedicated aviation strategy too. Or that the global demographics crisis is going to impact your long-term hiring and growth strategy, so you should have a fertility strategy as well. At some point, strategising about industries so far up-stream from yours they could be on Mars is… a waste of limited executive resources. 

The frustration with the McKinseys and the Morgan Stanleys and the Harvard Business Reviews of the world entering the ‘space is hyperscaling’ conversation is that they have willingly exaggerated or misled their audiences to provide legitimacy to the space industry’s hot air when they don’t honestly discussed the industry’s real market size, and the induced demand in the system. 

I’ve seen how these three “industry expert” papers have been used countless times to promote crypto-like shilling of stocks and investment deals that can only end badly. 

So, is Chad Anderson Wrong?

Which takes me back to the FT’s Investing in Space Summit, and the conversation between Chad Anderson and Peggy Hollinger. Here’s Peggy:

Are you worried that SpaceX is not going to reduce its prices for Starship, which therefore will not create the enormous investment opportunities you’re hoping to find in the space industry?

It’s a healthy question. There is indeed a difference between the cost of launch, which is dramatically falling, and the price of launch, which SpaceX has recently increased by 8 per cent because of inflation. Or because its main customer, the US DoD, has a trillion dollar budget and no viable alternatives but to pay an increased price.

Anderson doesn’t seem too worried about this scenario, and neither do I. But for slightly different reasons.

His optimism is predicated on Elon Musk’s previous behaviour of passing along cost cuts to customers, and his stated ambition of making humans a multi-planetary species. Sure, potentially. And to be fair, Anderson has been investing in the industry for as long as I can remember, something he’s written a whole book about. He’s no crypto-meets-space bro. 

My optimism, however, has nothing to do with Musk’s volatile behaviour and inability to follow through with his promises. Instead, it has everything to do with the fact that unless SpaceX makes the price of launch significantly cheaper, it is increasingly likely that there will be no market for him to serve at all.

Further reading
— Europe’s cosmic dreams have a billionaire problem