There's Plenty of Room at the Top

8/7/2019 There's Plenty of Room at the Top

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SPECIALISTS IN SATELLITE, TELECOM AND AEROSPACE INVESTMENT BANKING

Theres Plenty of Room at the Top

Surely and steadily, commercial space activities have crept furtheralong in both their development and their public prominence. Everyfew weeks brings a new headline to the news about a newaccomplishment by Virgin Galactic or SpaceX or any of the manyother ventures planning to do things no commercial company hasdone before. These are exciting times and it is equally exciting tohave a front row seat for these developments and be able to seethings as they get started. 2010 has been a great year and 2011promises to hold more progress to come.

For casual viewers, this narrative has been that of startups andentrepreneurs stepping up to offer services that have long been theexclusive domain of government. This is not entirely accurate, asmany commercial entities vying to participate in this market are alsovery established, large companies that are now offering servicesthat are more in keeping with the newer, fixed-price commercialprocurement practices that NASA is seeking to adopt.

However, there is another, more subtle, misconception about thisnew industry. At first glance, the ecosystem appears dividedbetween aerospace firms providing systems and engineering

services (e.g. Boeing, Lockheed Martin, Raytheon and so forth);and operators which seek to provide commercial services onplatforms which they intend to develop (e.g. SpaceX, Orbital, VirginGalactic and others). This duality entirely ignores many players, likesatellite operators or payload integrators, which dont fit into eithercategory, but which we think will also play a large role in theevolution of this industry.

We would like to highlight some of these companies to give a largerpicture of the kind of activities we will start seeing in the next fewyears as many new space companies enter commercial operation.

This list certainly isnt and isnt meant to be comprehensive and weare probably leaving out many others of importance, but we thinkits a good start.

United Launch AllianceWhen the United Launch Alliance was formed, it produced manyhowls from industry observers. After all, its formation representedthe merger of the principal launch businesses of both Boeing (with

Does this meanboom times areahead or are we

just reachinganother temporarypeak?

First and foremost,what does AT&Thave in mind forthis new toy of

theirs?

manycommercialentities vying toparticipate in this

market are alsovery established,large companies

a larger picture ofthe kind ofactivities we willstart seeing in thenext few years asmany new spacecompanies entercommercialoperation


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Delta IV) and Lockheed Martin (with Atlas V), both of whom loomvery large on the US aerospace stage. Although it eliminatedcompetition, it was likely necessary due to the dropoff in launch

demand in the first half of the 2000s. It was also just as well foroperators, since the two launchers have not been particularlycompetitive on price, but not so good for US taxpayers, who aremostly captive to the ULA for their government launches, for exactlythe same reasons.

Change is arriving at ULA. It couldnt hurt that space module mogulRobert Bigelow came to visit their facilities in Decatur, Alabama totalk about his plans for 24 launches per year. Nice if that happens,but we wouldnt expect ULA to be counting on that just yet. A littlebetter and slightly nearer are NASAs plans to support commercial

crew transport. With SpaceX having not enough launches of theFalcon 9 under their belt to alleviate reliability concerns, the ULA isfilling the breech and NASA CCDev-2 participants are taking noticeby including ULA rockets in almost all their proposals. Andspeaking of SpaceX a little domestic competition is keeping ULAon its toes. In a recent Space News, one article reported that ULAwas cutting costs and reviewing processes in pursuit of lowerlaunch prices. We like where this is headed. It gets taxpayers abetter deal while bringing sorely-needed competition and launchprice pressure. In the meanwhile, demand from traditional defensecustomers and science missions is picking up, leaving ULA rather

busy. The true test of ULA will come when competition forDelta/Atlas class DoD launches is opened up to other U.S. launchservice providers such as SpaceX and Orbital.

Space Systems / LoralFrom a distance, Space Systems / Loral looks a lot like a typicalaerospace company. In reality, it is a most rare and possibly uniquebeast in the space ecosystem a prime contractor with a customerbase almost exclusively commercial. Actually, we can take thateven one step further, as many of SS/Ls customers arethemselves almost exclusively consumer oriented, such as those

for DirecTV and Sirius XM, delinking themselves from the year-to-year swings in government spending. Having over sixty of itsspacecraft on orbit, with more joining every year, certainly makesthem a premier example of a commercial space company and one

just as different from the traditional large aerospace companies asemerging NewSpace-type ventures are.

The true test ofULA will comewhen competitionfor Delta/Atlasclass DoD

launches isopened up to otherU.S. launchservice providers

leveraging thecommonalitiesbetweencommercialtelecom satellitesystems and othertypes of spacecraft


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So far, SS/L has been below the radar in its support of commercialspace outside of its core telecom satellite manufacturing business.However, we find the few steps its taken outside of that business

most intriguing. Early in 2010, SS/L was awarded a contract byNASA Ames to develop the propulsion system for LADEE, a lunarscience mission. This followed SS/Ls provision of a Ka-bandantenna for NASAs Solar Dynamics Observatory, leveraging thecommonalities between commercial telecom satellite systems andother types of spacecraft. We hope this work will continue andalthough we think that all satellite manufacturers (including Boeing,Lockheed, Orbital and the European manufacturers) will have a roleto play, we think that the combination of SS/Ls technical heritage,experience and prowess and its unique commercial orientationcould be a powerful asset in the years to come.

The Satellite OperatorsBeing frequent attendees of both space and satellite conferences,we are sometimes taken aback by how separate their worlds oftenare. On closer consideration, this shouldnt be too surprising. Thesatellite industry is focused on telecom and broadcast marketswhile space is focused on aerospace systems and services; twodifferent industries which happen to connect in some key areas. But

just because the operators are focused on telecom markets,doesnt mean they cant play a role in other areas. For instance,weve covered the hosted payload phenomenon here before (See

article in August 2009s newsletter Bumming a Ride to Orbit). Itsgotten a lot of attention by Intelsat, SES, Iridium and others and willcertainly continue to play a role in their business plans. Theirsatellites are convenient platforms for technology demonstration,earth observation and space situational awareness. Civil spaceagencies and commercial entities just cant ignore such aconvenient new route to orbit.

Operators may also be eventual adopters and beneficiaries of in-orbit services, such as refueling, refurbishing and relocationservices provided by robotic vehicles while benefiting from the

renewed focus on debris removal and mitigation. Operators willalso be a source of institutional knowledge, providing expertise onoperations and procurement of commercial spacecraft. Finally,operators will continue to push the limits of the capabilities of theirspacecraft, demanding greater power, more bandwidth, greaterfrequency agility, even pushing the limits of satellite propulsionsystems and other bus components. Although pursued by satellite

Operators mayalso be eventual

adopters andbeneficiaries of in-orbit services,such as refueling,refurbishing andrelocation services


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operators for the benefit of their customers, these improvementswill benefit all.

Universal Space Network and TelesatWhen the space age was getting started, everything had to be builtfrom scratch. Not only did this include building the satellite itself, butoften very costly ground systems to monitor, track and control thesatellite wherever it was in the sky. In many cases, these systemsare a large portion of the costs. But it doesnt really make economicsense for each operator to have dedicated ground systems. Groundsystems are just the type of business that yearns for a provider ofshared services.

Although a number of satellite operators and aerospace firms offer

outsourced engineering services, we highlight Universal SpaceNetwork (along with its partner and parent company, SwedishSpace Corporation) and operator Telesat as being particularlyprominent in providing full end-to-end satellite control, monitoringand operations services to a wide variety of both large and smallclients. USN and SSC operates a worldwide network of groundstations, already providing services for a wide variety of civil,commercial and defense satellites. Telesat leverages its existingnetwork used for its own satellites to take care of others, and itdoes it very well. Even the largest of operators, like Echostar andDirecTV use outsourced services nowadays and it is in no small

measure due to the technical competency and range of servicesthese companies offer.

Except in the case of unique constellations or systems, or in thecase of sensitive national assets, we think outsourcing groundsystems operations just makes sense. With remote presence nowavailable essentially anywhere in the world and the cost of settingup a monitoring terminal little more than that of a home computer,many users will be able to benefit from the economies of scale andreduced capital expenditure. In a new commercial space market,this area should see lots of growth. Although there are other

participants in this area (such as SES, SED Calian) and room fornew entrants, we think these two are positioned particularly well.

Component buildersTravel down the long list of components and subsystems that gointo most communications satellites and youll usually find for eachitem one or two major, sometimes exclusive, vendors. For instance,solar panels are dominated by Spectrolab (a division of Boeing)

Ground systemsare just the type ofbusiness thatyearns for aprovider of sharedservices

With remotepresence nowavailableessentially

anywhere in theworld manyusers will be ableto benefit


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and Emcore while Saft, EaglePicher and ABSL are some of theleaders in batteries. Honeywell is a very significant producer ofreaction wheels, Aerojet and AMPAC ISP dominates propulsion

systems while Harris Corporation essentially owns the market forvery large mesh antennas. A list like this can go on and on. Ourpoint isnt to highlight these vendors or their products in any waythat is bad or good (although we are certain they all make excellentproducts), only to highlight that relatively small markets for highlycomplex items naturally result in vendor concentration with highbarriers to entry. While this is good for those companies that havepositioned themselves and their wares in these privileged positions,we cant help wondering the extent this stifles technical innovationand increases costs for satellite manufacturers across the board.For up-and-coming developers of space components, getting over

subcontractor incumbency and space heritage requirements can befrustrating barriers to entry.

New markets and expanded markets have been known to shakethings up and we think this presents a distinct opportunity for newentrants. New customers and platforms needing to compete in amore aggressive commercial environment may look to adoptnewer, more cost-effective and higher performance technologies ata more rapid pace than current customers. With more opportunitiesand more avenues of gaining space heritage (through smallsatellites, suborbital platforms, upper stages or secondary

payloads), we think this may be the time to get into developing new,more agile technologies. Particularly interesting will be theproviders of cross-platform components, such as radiation-hardened electronics, solar panels, robotic mechanisms, ionpropulsion systems or new star sensors or deployable compositereflectors, although the list doesnt stop here.

The Boeing CompanyNo, we werent lying when we said wed wouldnt be looking at thelarge, traditional aerospace firms in this article. So why are wetalking about Boeing here? Well get to that soon. Early in 2010,

Boeing and its development partner, Bigelow Aerospace, unveiledthe CST-100 crew spacecraft, their entrant in the new commercialspace race and winner of NASA CCDev development money. Laterin the year, we heard of a partnership between Boeing and SpaceAdventures, the travel brokerage firm made famous for sendingcenti-millionaires to the Space Station, an announcement whichsent commentators wagging about Boeing getting into the spacepassenger business just as it would develop a new airliner. Some

Some inevitablecomments weremade aboutluggage lost inspace, but letsleave thoseaside


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inevitable comments were made about luggage lost in space, butlets leave those aside

From our usual perspective, we see Boeing as a giant defense andspace contractor, through its Defense, Space and Security (DSS)division. Were it not for the fact that we often travel by air too, wewould almost overlook the side of Boeing most of the rest of theworld knows it by, its very prominent Commercial Airplanesdivision. This dual nature of Boeing distills the very distinctdichotomy in the world of aerospace between that of governmentcontractors working on a diversity of unique defense systems, oftenon cost-plus contracts, and that of developers of commercialaircraft, which serve a worldwide market for air travel and transport.This is a fact of life in the aerospace business and makes for very

different cultures on either side of the divide.

By all accounts, the CST-100 is a project of the DSS side of Boeingand likely to remain so for some time, owing to the institutionalengineering expertise available there. But from a sales andmarketing point of view, we wonder how much the Defense side ofBoeing can learn from the Commercial Airplane side. While itll be along while before selling spacecraft is anything like selling aircraft, ifever, the fact remains that competitively offering large aerospacesystems to commercial clients around the globe is what BoeingCommercial Airplanes does best. There may even be sales

synergies. A recent leaked cable from the US embassy in Turkeyindicated that the Turkish government wanted the US government(through NASA) to send an astronaut into space in exchange forordering Boeing aircraft. It doesnt appear that anything like thatcame out of the request but with the CST-100, Boeing could offerits own rides as sales incentives. Wed like to see Airbus try tomatch that. As long as Boeing avoids the same supply chain andprocurement problems that have dogged the 787 Dreamliner,taking a commercial aircraft approach to space may be a way to go.

Channel Partners

New businesses and platforms dont exist in a vacuum. Ifsuccessful, they cultivate an ecosystem of brokers, agents, valueadded resellers and other components of a mature sales channel.In the satellite industry, this has meant the employment oftransponder brokers and exchanges and bundling of specializedmanaged networking and teleporting services as the needs of usersdemand. For something like Virgin Galactic, it means engagingtravel agents to include once-in-a-lifetime vacations to beyond the

competitivelyoffering largeaerospacesystems tocommercial clientsaround the globe iswhat BoeingCommercialAirplanes doesbest

If we are going tostart gettingcommercialspacecraft itwont be longbefore someonecomes up with a

way to make goodeconomic use ofspare capacity.


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upper atmosphere as part of their portfolio of destinations. If we aregoing to start getting commercial spacecraft with government as aninitial anchor tenant and user, it wont be long before someone

comes up with a way to make good economic use of sparecapacity.

While the passenger partnership between Boeing and SpaceAdventure got a lot of press, we think there are lots of opportunitieson the payload side. SpaceX is looking for clients of its freeflyingDragonLab vehicle and Bigelows potential sovereign clients willwant to find favorite-son users of whatever modules they lease.Businesses can surely be made on the back of providing end-to-end turnkey integration and payload management services - thekind of things NASA didnt and couldnt offer to users because of its

role as a government agency. A good start would be to make betteruse of the International Space Station, which is sorely underutilizedand is yearning for the right operations and the right economicincentives to start producing the kinds of results that it is nowuniquely able and positioned to do. One firm, NanoRacks, hasalready entered this space and already has dedicated rack spaceon ISS from which it is marketing micro-gravity research services.

UsersCommercial infrastructure and services are nothing without users,customer demand and markets. The space and satellite industries

have long rested on two major pillars of economic demand anduser communities. One pillar has been telecom and broadcast,which has been responsible for much of the commercial satelliteindustry. The other pillar has been government, which has providedthe demand for a multitude of activities, from science andexploration of the universe, to communications, surveillance,navigation and intelligence in pursuit of national security. A newcommercial spaceflight industry, while initially government-dominated, will eventually need to open into new markets andsectors of the civil economy, much as satellite telecom has largelydone and how satellite imaging is now on its way to accomplishing.

Much has been made of the new travel and leisure side ofspaceflight; that is, providing avenues for tourists to experiencespace travel. This market exists now but we wonder how big thiswill be in the short term. On the other hand, we are intrigued at theopening up of other markets, particularly those that use the uniquezero-gravity environment for R&D into materials science andbiotechnology. No doubt this is still in its infancy, but it is enticing to

we are intrigued atthe opening up ofother markets,particularly thosethat use the uniquezero-gravityenvironment forR&D into materialsscience andbiotechnology


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look at the tens of billions of dollars spent in the R&D budgets ofJohnson & Johnson, 3M, Pfizer, Amgen, GlaxoSmithKline andmany other very large organizations. The space agencies of the

world have laid the scientific groundwork for much of this over thedecades - now its time for applied researchers to pick up the balland run with it. While our expertise is in telecom and aerospace,and thus dont feel its our perogative to make any analysis of whatdemand from biotech and pharma could look like, it would seems tous that the discovery of significant value through commercialapplied micro-gravity research could open the floodgates to a wholenew user community. Whatever the scale and nature of thisdemand, assisting and servicing this user base may well be asignificant ongoing opportunity for commercial providers able todeliver efficient and useful turnkey operational platforms. If those

are successful and economically sustainable, who knows where wecan go next. We all know theres plenty of room at the top.

By Ian FichtenbaumNear Earth LLC

the discovery ofsignificant value

throughcommercialapplied micro-gravity researchcould open thefloodgates to awhole new usercommunity


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