Conference Roundup: 29th Annual National Space Symposium

7/30/2019 Conference Roundup: 29th Annual National Space Symposium

1/7

SPECIALISTS IN SATELLITE, TELECOM AND AEROSPACE INVESTMENT BANKING

Conference Roundup: 29th Annual National Space Symposium

Back in September 2009, First of all, congratulations to the SpaceFoundation for pulling off a very productive and enjoyable NationalSpace Symposium despite the challenges of sequestration. Militaryattendance was certainly far below normal levels and NASA wastotally absent, but the event easily shifted to a very worthwhileindustry-to-industry focused networking opportunity.

Innovation, Resiliency and AffordabilityIf there was a theme to this years Symposium it had to be the onelaid out convincingly by General Shelton, Commander of Air Force

Space Command. In his opening keynote speech, General Sheltonintroduced a new aerospace/defense procurement world to bedriven by Innovation, Resiliency and Affordability. This themecarried throughout the week and was firmly secured intoconsciousness at the Acquisition Lunch by Brig. General Teague,Director, Strategic Plans, Programs and Analyses, Air Force SpaceCommand. I think I lost count at six uses of the phrase Innovation,Resiliency and Affordability message clearly delivered, goingdown a new path, no more business as usual, money is tight.

Having attended the Symposium on and off for over a decade, I can

attest to the fact that Defense and Civil procurement has alwaysbeen a hot topic of discussion. That all parties agree the process isbroken and unsustainable has become as common knowledge asthe lack of easy solutions. This time seems different. There isnothing like staring into a decade of declining Defense budgets tofocus ones attention on actually solving the problem. Of course, weshould retain a high degree of skepticism. Plans are one thing,execution another, but this is not the faster, better, cheaper pipedream of a few years ago. That never had a chance. This actuallysounds like a new and smarter approach to acquisition. Thanks tonumerous advancements in technology, the new options available

to us might even allow this strategy to work.

But what does Innovation, Resiliency and Affordability reallymean? I think we can assume, at the very least, that it means thenormal practice of maximum performance at any cost and zero risk,or as one aerospace CEO described their goal, perfect productdelivery, is no longer the guiding principle. Apparently, perfectionis no longer affordable, and apparently not that resilient or flexible

I think I lost countat six uses of the

phraseInnovation,Resiliency and

Affordability

Of course, weshould retain ahigh degree ofskepticism. Plansare one thing,

execution another,but this is not thefaster, better,cheaper pipedream of a fewyears ago


2/7


either. I do not, however, think this means a whole new level of risktolerance by the government customer. Mission assurance is stillof paramount concern, just not at any cost and on any time frame.

Instead, the idea appears to be to use technological innovationand new system architectures to achieve sufficient performance atstill very low levels of mission risk and to perhaps even achievelower levels of risk through higher system level resiliency. Kind oflike faster, good enough to get the job done, cheaper.Generals Shelton and Teague stated that this would mean adisaggregation of capabilities, utilizing fractionalized satellitenetworks based on smaller satellite buses or payloads. It was alsosaid to mean more hosted payloads, fewer dedicated systems anda greater use of commercial services. It sounds like the era of

billion dollar super complex satellites that are simply too big to failor lose on launch may have peaked as perhaps have the multi-billion dollar programs like AEHF and SBIRS that have routinelyexperienced large cost overruns. In its place, is envisioned an eraof smaller, more single purpose space hardware, but with manymore points of presence. More and smaller is hoped to equal lessimpact from single unit failures and therefore greater systemresiliency. Smaller may also mean simpler manufacturing andtesting processes, quicker and lower cost deployment and moreflexible response. More importantly, it is hoped to meanaccomplishing missions at lower cost. We do not think this new

procurement strategy suggests an abrupt sea change nor a totalabandonment of large scale satellite procurements, but rather agradual shift toward smaller where larger has not worked. Forinstance, successful programs such as WGS may be safe as wellas certain national security programs where there may simply be nosubstitute for size and complexity laws of physics being neutralon the whole budgeting issue.

It is, of course, very hard to tell at this stage if this new strategy willall work out as hoped. In the commercial satellite communicationindustry there is still a trend toward bigger is better, with high

throughput satellites in high demand. Larger and hybrid satelliteshave meant not only more broadcast power and more frequencybands to exploit at a given orbital slot, but also lower average costper transponder from sharing a common satellite bus and onelaunch vehicle. Apparently, this same dynamic is not working aswell in a national security environment where design requirementsare far tougher, oversight more bureaucratic and costly andproduction volumes far lower. Thus the push to disaggregation and

It sounds like theera of billion dollarsuper complexsatellites that aresimply too big tofail or lose onlaunch may havepeaked

Thus the push to

disaggregation andsmaller size:simplerrequirements,easier oversightand highervolumes


3/7


smaller size: simpler requirements, easier oversight and highervolumes.

Who benefits?In addition to the government and us taxpayers benefitting fromlower costs, who else should benefit from this new strategy? AsChris Quilty notes in his excellent April 15th issue of SatelliteSignals, this shift toward disaggregation would undoubtedly benefitsmall satellite specialists such as ATK, Ball Aerospace, and OrbitalSciencesalso tend to reduce the Pentagons requirement forlarge EELV-class launch vehicles in favor of medium class rocketssuch as Orbitals Antares rocket and SpaceXs Falcon 9.[Congratulations to Orbital on the inaugural launch of Antares COTS is proving to be one of the most cost efficient procurement

models ever executed. Hint, hint government, we need more COTSstyle procurement.] I would also add Sierra Nevada to that list ofU.S. satellite manufacturers, and for entirely different reasons,Space Systems/Loral who although not a government contractor orsmallsat manufacturer (currently), they know how to make smallsatellites and have decades of experience providing satellites oncommercial terms. It may prove easier for a company withcommercial best practices to go small than for a governmentfocused smallsat manufacturer to go commercial. On the launchside, there are a plethora of new small launch vehicles underdevelopment as well as the ability to deploy CubeSats and

smallsats from the International Space Station.

None of this is to suggest that the large incumbent primecontractors are in dire straits. The evolution to smaller satellites hasbeen evident for some time now. Boeing, in particular, has beenmore aggressive in preparing for this revolution. It has introducedits new Phantom Phoenix line of smallsats with options from 4kg to500kg. Lockheed and Northrop may have some catching up to doin the sub 200kg size range, but in the 200 500 kg range,Northrop has been providing its Eagle line of smallsats to NASAand Lockheed has its LM 900 bus at just under 500 kg. Of course,

the near term financial significance of this capability gap will remainunproven until the sub 200kg class proves its worth to the DefenseDepartment and becomes more widely adopted. Skybox Imagingwill soon provide an interesting test case for these new smallsatcapabilities with their first remote sensing satellite launch plannedlater this year.

It may prove easierfor a company withcommercial bestpractices to gosmall than for agovernmentfocused smallsatmanufacturer to gocommercial.


4/7


There is also the very important question of just how much can beaccomplished with the smallest of satellites (e.g. SeeMe, KestrelEye), particularly the increasingly ubiquitous CubeSats.

Miniaturization of electronics and sensors has come a long way inallowing more to be done with less, but physics does enter theequation at some point in terms of apertures/resolution and poweravailability. Swarms of satellites and inter-satellite links mayaddress some of these limitations, but the trade-offs are just nowbeing fully addressed. We should soon have a better understandingof where these CubeSats and smallsats fit into DefenseDepartments mission requirements and how best to utilize them.Regardless of the ultimate impact of CubeSat and smallsattechnologies on Defense procurement, one thing is almost certainlytrue there will be a material impact. To us, that suggests a need

for larger companies to quickly develop or acquire these newtechnologies or at least forge partnerships with the most advancedplayers so they can prevail in contract proposals. This is lookinglike an industry sector where those that develop a market lead willquickly move down the learning curve and up the efficiency curveand have a clear competitive advantage for years.

We also believe this move to innovative (small/clever), resilient andaffordable suggests a need for rapid prototyping and rapid flightqualification. If it still takes 5 10 years to field a new capability, itwill not be affordable or state-of-the art in performance. Luckily,

smaller opens up several new options such as 3D printing ofstructures and some components, assembly line production, spaceenvironmental testing at ISS with return to Earth, and launch as rideshares, hosted payloads or in large clusters on a wide variety ofnew vehicles. Providers of these services and capabilities shoulddo well in this new procurement realm.

What this may mean for those developing in space servicingcapabilities (i.e. relocation, repair, maintenance, refueling) is lessclear. We would suspect that in the long term a move to gainingresiliency through mission architecture will result in lower demand

for such services as the value of any given unit of the spacesegment is less and therefore more disposable, especially astechnical obsolescence is assumed through shorter design lives.The business case for profitably servicing these smaller satellites

just may not close. On the other hand, the new strategy could alsomean an enhanced desire to extend the lives of the current fleet ofhigh value satellites since they may not get replaced under this newstrategy. The near and medium term prospects for in space

This is looking likean industry sectorwhere those thatdevelop a marketlead will have aclear competitive

advantage foryears

We would suspectthat in the longterm a move togaining resiliency

through missionarchitecture willresult in lowerdemand for [inspace servicing]


5/7


servicing may therefore actually improve. In space servicing mayalso evolve to mean in space manufacturing through the assemblyof larger structures from smaller units. We shall see.

Lastly, if there are going to be far more satellites in orbit thenseveral other space disciplines and services should benefit: Space situational awareness Mission planning and software (e.g. Analytical Graphics) Telemetry, tracking and control (e.g. Universal SpaceNetwork) Interference detection and avoidance (e.g. Glowlink)

Government 2.0A key ingredient to the success of this new procurement strategy

will be securing sufficient funding for the early stage developmentand deployment of smallsat technologies and systems. We havealready seen strong interest from DARPA and NASA to supportinnovation, but dollar levels are still modest versus amountsrequired to field large constellations. There are a few attractiveprograms / contracts being bid, but also many competing teamsand inevitably there will be lots of underfunded entities. Meanwhile,although many mid to large aerospace firms are dipping their toesinto this market, they are rarely set up to act as venture capitalistsor to acquire early stage, negative cash flow businesses.

Luckily for the sector, a few venture funds (e.g. Khosla Ventures)are starting to focus on a new investment theme some in SiliconValley are calling Government 2.0. Basically, there seems to be agrowing belief among investors that government budgets will bestrained for such a long time into the future, that Federal, State andlocal governments will all have to find new ways to use innovationto lower the cost to taxpayers of the services they provide notfewer services, but more affordable delivery.

This belief is starting to attract money from investors previouslyvery shy about risking capital on government-dependent

businesses either because governments have proven to be ficklecustomers, or expected growth opportunities have beenuninspiring. Now, they see an entire multi-trillion dollar ecosystemthat needs rebuilding and lots of opportunity to bring commercialbest practices to bear.

Unfortunately, in many cases, more than $100 million will berequired to get a constellation into orbit. Venture funds are

a few venturefunds are startingto focus on a newinvestment themesome in Silicon

Valley are callingGovernment 2.0

Now, they see anentire multi-trillion

dollar ecosystemthat needsrebuilding and lotsof opportunity tobring commercialbest practices tobear.


6/7


frequently good for tens of millions and can join forces for largeramounts, but are much less willing to hit nine figure territory,especially if the total amount required begins with a numeral

greater than 1. From where will these larger amounts come? It isunlikely the public equity market or private equity firms will backthese ventures unless there are large and stable governmentcontracts to support the investments or a multi-year successfultrack record of commercial revenue growth and profitability. Thatmay eventually develop once these new technologies have proventheir worth, but for the next few years we suspect most of the largedollars will need to flow from government to the innovators andoften through trusted prime contractors.

This dynamic may create an interesting balance of power between

those with the long standing government relationships and thosewith the new business models and technologies. As power neverlikes to be in balance, we suspect there will be two outcomes.Those companies with applications relying solely or heavily on thegovernment customer to reach break-even will most likely end uppartnering with the primes as subcontractors or being acquired bythe more commercially minded and nimble aerospace firms. Thesecompanies will tend to either sell dedicated systems to thegovernment or own and operate systems under strong governmentanchor tenancy. On the other hand, companies focused onapplications with strong commercial, international or consumer

demand may be able to break out on their own and eventuallyacquire government contracts directly. The determining factors willbe the mix of business and the business plans scalability. The goodthing about small is it tends to be scalable. The bad thing aboutsmall is the size of the market is not yet proven. If the innovationis powerful enough and the markets do develop, this age ofInnovation, Resiliency and Affordability may actually happen. Asa tax payer, that sounds pretty good. As a supporter of Americaninnovators and entrepreneurs, it sounds even better.

.

By Hoyt DavidsonNear Earth LLC

The good thingabout small is ittends to bescalable. The bad

thing about smallis the size of themarket is not yetproven


7/7


IMPORTANT DISCLOSURES AND INFORMATION ABOUT THE USE OF THISDOCUMENT:Near Earth, LLC ("Near Earth") has published this report solely for informationalpurposes. The report is aimed at institutional investors and investment professionals,and satellite, media and telecom industry professionals. This report is not to beconstrued as a recommendation or solicitation to buy or sell securities. The report waswritten without regard for the investment objectives, financial situation, or particularneeds of any specific recipient, and it should not be regarded by recipients as asubstitute for the exercise of their own judgment. The content contained herein is basedon information obtained from sources believed to be reliable, but is not guaranteed asbeing accurate, nor is it a complete statement or summary of any of the markets ordevelopments mentioned.

The authors of this report are employees of Near Earth, LLC, which is a member ofFINRA. The opinions expressed in this report accurately reflect the personal views of theauthors but do not necessarily reflect the opinions of Near Earth itself or its otherofficers, directors, or employees.

The portions of this report produced by non-Near Earth employees are provided simplyas an accommodation to readers. Near Earth is under no obligation to confirm theaccuracy of statements written by others and reproduced within this report.

Near Earth and/or its directors, officers and employees may have, or have had, interestsin the securities or other investment opportunities related to the companies or industriesdiscussed herein. Employees and/or directors of Near Earth may serve or have served

as officers or directors of companies mentioned in the report. Near Earth does, andseeks to do, business with companies mentioned in this report. As a result, Near Earthmay have conflicts of interest that could affect the objectivity of this report.

This report is subject to change without notice and Near Earth assumes no responsibilityto update or keep current the information contained herein.

Near Earth accepts no liability whatsoever for any loss or damage of any kind arising outof the use of all or any part of this report.

No part of this report may be reproduced or distributed in any manner, via the Internet orotherwise, without the specific written permission of Near Earth. Near Earth accepts no

liability whatsoever for the actions of third parties in this respect.

Documents

Conference Roundup: 29th Annual National Space Symposium