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Offworlding, Part II: Old Space, NewSpace, and RealSpace(TM) November 21, 2007

Posted by shubber in Uncategorized.
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During a recent email discussion between myself, other Cynics, and those involved in putting together the Space Investment Summit (SIS-3), the topic of Old Space and NewSpace was raised in the context of the Space Assets Protocol – specifically, that the Protocol would create a new international legal regime for the secured finance of satellites and other space assets that had the potential to in some way would boost investment in space projects.

Such a protocol already exists in the aviation environment, allowing for the financing of assets across nations by securing the rights of creditors to reclaim unpaid for items from borrowers, thus providing a level of comfort for the ultimate lenders and insurers that provide the capital and risk coverage. Without this, it would be difficult for an aircraft leasing company, for example, to provide an affordable aircraft to, say, Air Zimbabwe, because the act of repoing an airplane is a bit harder than going to get a car back from a deadbeat in, say, Los Angeles. (You’re less likely to find a pine-tree air freshener in the cockpit, too…)

Such a protocol in the space context, it is reasoned, would do wonders for investment in NewSpace companies, by providing the added security for lenders that they could take claim on an asset – even in space – if the borrower were to default. There are a few problems with this theory, though:

  • For NewSpace companies working on unique technology platforms, such as a new launch vehicle, they lack the basic concept of fungibility of the product, which makes the assets being financed much less attractive as an inherent guarantee for the lenders, because they can’t simply resell the unfinished rocket, for example, to another company, except maybe for a few components that might be transferable.
  • Even worse, unlike airplanes (which have a well-established market globally and thus can easily be re-leased to another carrier or user) many launch vehicles that are being marketed as reusable are not yet proven to be – especially in the case of early flight test articles, there may be nothing left (such as in the case of an accident) which again makes this an unattractive candidate for traditional financing.  And while airplanes, too, can have accidents, the failure rate in the much more experimental rocket business is orders of magnitude greater than in commercial aircraft, as the insurers and bankers will no doubt point out.

Which leads me to the term RealSpace (not actually trademarked, but you did hear it here first, folks!). Despite the hype of the alt.space community and their painting of space as some sort of David and Goliath endeavor where it’s either the big bad national space agencies and their bureaucratic wasting of billions of tax dollars or the scrappy little startups that are just about to break space wide open…. if only they had a few more dollars…. the truth is that there is a VERY successful, multibillion dollar COMMERCIAL space industry that quietly makes money, day in and day out, operating hundreds of satellites and piping fresh hot content to your computers, TVs, and even car navigation devices (oh, and power grids and timing networks and construction equipment and agriculture and… you get the idea). These are companies operating in the RealSpace economy – and, quite frankly, they are doing just fine thank you very much.

Would they benefit from a more streamlined regulatory environment (ITU anyone?) or a more friendly tax structure (Zero-G/Zero-Tax, for instance)? Of course they would. But, as with the expensive expendable launch vehicles that commercial satellite operators use today, these are costs they have factored into their businesses – businesses which are built and survive upon customer/consumer demand for the services that these RealSpace companies provide, and many (most?) of the customers don’t know or care that somewhere in the value chain of the product getting to them “space” was somehow involved

Just as I don’t really give a damn that the flash memory chips in my iPhone may have been manufactured in Taiwan.

it’s your life… use it well. November 19, 2007

Posted by shubber in public service announcement, smack talk, space, space tourism, thanksgiving, Uncategorized, Wasting Money.
1 comment so far

A recent discussion in the comments section led to this entry in the Space Cynics blog. Specifically, a guest appeared to take pity on me for my lack of, um, vision, I guess, because I don’t subscribe to the kool-aid vision of STS, ISS, VSE, you name it as just being around the corner and the best use of anyone’s (read: my) time.

Well, let’s see if I can clarify this:

The development of manned space has been stuck in 1st gear, engaging in endless do-overs of the same essential function it’s been doing since the days of Gagarin – sending very small payloads for limited periods into low Earth orbit while patting ourselves on the back for (usually) not killing any astronauts or blowing up overpriced long in the tooth Space Shuttles, and occasionally improvising a MacGyver like solution to a stuck solar panel on ISS. Meanwhile, the masses on Earth could not be any less interested in the goings on in the government manned space world, and even the antics of paying space tourists – who shell out (contrary to the claims of the early days of space tourism boosterism) ever higher prices to spend a few weeks in the massively subsidized space hotel known as ISS – hold less interest for them each time a new one goes up.

Remind me, again, for those of you who were so bent out of shape when I Cynically commented on the long-term impact of Anousheh’s trip to space (besides making me jealous, personally, because it IS something I’d love to do) – just what WAS that long term impact..? How many of her “inspired” blog commenters have since moved on to other things like Kid Nation to capture their ever shortening attention spans…?

So in the spirit of the Thanksgiving holiday (for Cynic readers from overseas, this is the week in the US when we engage in massive overconsumption of food and drink, watch many sport programs on television, engage in a ridiculous shopping blaze in the “black friday” rush, and if we remember, give thanks for all the good things in our lives…) I would like to provide this little bit of my own Thanksgiving:

I am thankful for many things – my family, my soon to be spouse, my friends, the many amazing experiences I’ve had in my life (both good, and bad), the opportunities I’ve had (even the ones I’ve squandered), and many more things which are too numerous to write here (and you probably don’t really want to read the list any more than I like to listen to Actors with their thank yous at the Oscars..!).

I am also thankful, though, for all of you – the readers, commentors, critics, and supporters, of this blog.  And of course for my occasional co-authors, Tom, Dave, and last but NOT least, John.  You have all helped to provide me with a forum to present the Cynical point of view, giving me a way to both inject contrarian commentary into the alt.space and general space arenas, but also to have a bit of fun (and snark) doing it.  So Thank You all.

Your time is truly the only thing of value that you own – money can always be made, lost, and made again.  But time is the one thing you will NEVER get back.  This is, at the core, perhaps one of the most important reasons I started this blog – if I can, through critique, mockery, or just straight numerical analysis, help someone to avoid going down a path that will waste their lives because it is paved with kool-aid, then I feel I’ve done my bit to help.

If not, don’t say you weren’t warned…. :-)

Happy Thanksgiving!

They laughed at Columbus, they laughed at Fulton, they laughed at the Wright brothers.

But they also laughed at Bozo the Clown.

-Carl Sagan (R.I.P.)

Terror Alert Level Raised to “Zune Brown” November 8, 2007

Posted by shubber in Congress, distracting PR, hot air, NASA, Wasting Money.
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Are you scared yet?

If you aren’t, then either you aren’t paying attention, or, more likely, you have at least 3 functioning brain cells.

No, I’m not referring to the latest “keep America safe” campaign out of Homeland Security designed to deprive you of your toiletries when flying.

Rather, I’m writing about the comically pathetic theater that passes for government representatives these days, specifically the recent US House hearings on NASA funding for NEO detection – as in, near Earth Objects, not looking for Mr. Anderson from the Matrix….

NASA penny-pinching risks exposing humankind to a planetary catastrophe if a big enough asteroid evades detection and slams into Earth, US lawmakers warned Thursday.

“We’re talking about minimal expense compared to the cost of having to absorb this type of damage,” Republican Congressman Dana Rohrabacher said.

“After all, it may be the entire planet that is destroyed!”

- source: Space Daily

Ahem. Ok, let’s cut Congressman Cheech Rohrabacher’s weekly ration of whatever surfer special he seems to be smokin, since the hyperbole machine appears to be run amok. (“Hey, man, I mean, like, that would be a total bummer, although I think I might catch a great wave if it hits in the Pacific…. maybe during the August recess when I’m able to get some time in on my board….”)

Seriously, though – one wonders how much the Congresscritters worry about the ACTUAL threats to our national infrastructure, the damage that DOES occur when parts of it fail for lack of basic maintenance funding, and how our dear Congressmen voted on those appropriations in the past? Such as a bridge in the northern Midwest that recently killed a whole lot of Americans, or a failed levee in K-Town? Or did funding those programs when they needed funding offend the “small government, limited spending” line that is usually trotted out when one doesn’t want to fund infrastructure?

Methinks the grandstanding on Capitol Hill was nothing more than a waste of NASA’s time and resources. Perhaps Congress might just consider either (a) giving NASA the additional funds they need if they’re so worked up about tracking tiny NEOs, (b) actually examine other parts of NASA’s budget (hint hint: kill manned space and you’ll have money coming out your ears for the NEO program!), or (c) just shutting the hell up.

Having just watched an afternoon of the “grilling” of Fed Chairman “Helicopter” Ben Bernake by our elected officials, which consisted of a whole lot of nothing, I suppose they just like to hear themselves talk, and maybe while they are doing that they* can’t actually f-up our country any more than they already have.

* note – when I say “they” I mean it in the bipartisan spirit – both Republicans AND Democrats.

Outsourcing – > Offshoring – > Off-worlding? November 3, 2007

Posted by shubber in CRATS, investment, offworlding, space, Uncategorized.
10 comments

My fiancee works as a human resources executive for a large global call-center outsourcing business. As a result, I get to hear great stories of life in the outsourcing world (having “worked” briefly in call center ops myself when I was at Capital One – our group was responsible in part for the call centers they ran for all of those late payers out there – I can empathize with her pain to some extent…).

We were recently having a discussion of space and my upcoming “state of the industry” talk at the Space Investment Summit in San Jose in December. I was attempting to explain to her why I don’t like to refer to space as an industry – because space is just a medium, a place, somewhere to do something. There are lots of industries and companies that are involved in the use of space in some way – from the usual suspects (launch companies, satellite builders, satellite television and data relay companies, terrestrial navigation companies that leverage a free signal from space, imagery companies, etc) and the not-so-usual but in many ways equally important suspects (financial banking institutions, legal, regulatory, PR, and other “support” businesses that may serve some clients who utilize space but hardly consider themselves a “space” business).

One of the things that has bothered me about the whole NewSpace ™ movement is this belief that, aside from government, not much has happened in space in the almost 40 years since Apollo, and that the magical hockey stick (or is it hokey stick..?) is just on the horizon now that the billionaires are playing in the sandbox and a few tourists have flown to ISS.  Leave aside for the moment that the price for an ISS holiday, counter to the loud claims being made when Tito first flew that this was the foot in the door, and that space was becoming more affordable…. until someone quietly pointed out that the price has been going UP.  That pesky economics and supply/demand law keeps getting in the way.  Damn that invisible hand.

The reality is that space as an industry is over $100 billion and growing.  In 1997, while I was at KPMG, we published the State of the Space Industry: 1997 Outlook report, which segmented and quantified the industry into various areas including telecommunications, GIS/Remote Sensing, Navigation, Launch, Ground Systems, and a few others.  What we found at the time was unsurprising, at least to us – that the “industry” was vibrant, growing, and consisted primarily of three groups:

  1. Companies serving government
  2. Companies serving customers on the Earth
  3. Companies serving the two categories of companies listed above

Category 1 is not terribly interesting, because government is a fickle and oft-considered lousy customer.  Purchase cycles can drag out for years, programs can get killed for fiscal reasons, and, frankly, the profit margins while good in the slow years aren’t necessarily comparable to what you can get in the private sector when demand is high.

Category 3 represents all those service providers mentioned higher up in this essay (finance, legal, etc) but also those companies such as launch providers who exist solely to get the assets of companies in Categories 1 & 2 into orbit where they can do whatever it is they were designed to do.

Category 2 – this is the steak to the sizzle of NewSpace ™.  The companies in this category collectively generate tens of billions in economic activity by serving customers – be it for satellite television services, providing in-car navigation capabilities, delivering digital radio (a channel for every possible genre!), taking high-resolution photos, you name it.

Which leads to the connection to outsourcing.  The trend today (actually, throughout the decade) in outsourcing has been not simply to package up a high-fixed cost, low value add operational element and hire a contract firm to do it for you – but to hire that firm in an emerging economy or third world country (call centres in Bangalore being the most notorious example for some) in order to reduce costs and get a nice bonus for management in the Christmas stocking.  I won’t get into the damage it does to the employment base in the country – that’s the subject of an entirely different discussion.  But this latest trend, “offshoring”, is not terribly different to what was done in the manufacturing sector over the past 40-50 years.

In the real old days of corporate America, manufacturers would make things in the US and sell them to consumers in the US – primarily because in the post WWII world there were few other economies that could generate consumer demand (and the currency to pay for it) other than our own US economy (something about winning a war, having a huge now-underutilized industrial base and workforce, oh, and not having the crap bombed out of your infrastructure base during that war).

When you’re faced with the problem of customers in other countries not being able to buy your goods because they were too expensive (US labor costs PLUS the strong dollar didn’t make it easy), the simple solution for a manufacturer is to build a factory in the third world and make knock-offs using local labor for the local market. Sure, quality may not be quite as good, but it has the American brand on it and it’s still better than the local equivalent (perception or reality, or a bit of both, depending on the product…).  I’m ignoring this first step in offshoring as there is no real “space locals” market out there to serve more cheaply by making things in space than sending them up from the ground.  We’ll return to this part in 100 years or so.

Now, over time, as inflation in wages kicked in, workplace safety standards and regulations became more demanding, and international transportation logistics improved, American manufacturers (ever looking for a way to cut costs and reduce red tape) began to offshore production of high quality goods to factories set up in places that were more conducive to their ways of doing business. Initially, these products were still destined primarily for the home country – prices didn’t necessarily drop, but rather profits improved because the cost of goods went down while the consumer continued to pay the same (or nearly the same) price.  Companies were then being referred to as “multinational corporations” or MNCs.  Think about the last time you heard that expression…

Over time, of course, as other national economies improved, the quality of goods manufactured improved, and the prices came down (competition being a great leveling force in the market – huzzah for the invisible hand!) these overseas factories began exporting in quantity to other markets besides the home country, as well as continuing to sell back to the US – exploiting an economic advantage in production that US factories simply couldn’t match when labor costs were a key component of the total cost of goods sold.  MNCs morphed into “global” corporations, reflective of the grander scope of what they were doing.

Returning to the concept of the $100+ billion  space “industry” and, specifically, those category 2 companies – I would suggest that the commercial space sector today is in engaged in the equivalent of offshoring, or, perhaps more aptly: Off-worlding.  If you look at the companies operating in this business – be it XM Satellite Radio, Digital Globe, Direct TV, SES, Intelsat, or their brethren, what you will find is that they are not space businesses, but rather businesses that serve traditional consumers on the ground more effectively by using space as the medium through which they operate their services.  After all, when you are listening to radio in your car, it doesn’t really matter (beyond maybe 0.003 milliseconds of “wow, cool, this is coming from a satellite”) where the signal that you pay $10/month for comes from- because XM is serving a demand that already exists (audio content to engage you while you drive) but did it in a different and compelling way so as to convince people to pay for that which they previously received for free (just as people now pay up to $100/month or more for 500 channels of crap on TV instead of getting 3-10 free-to-air crap channels in the old day).

Commercial space (category 2) is still in the MNC phase of corporate development – and it is not until we have truly cheap reliable reusable access to space that we’ll get to the “global” phase (manufacturing/operating in space to serve customers in space).

So, when looking at a the potential prospects for a “space” company, ask yourself this: do they serve an existing market here on Terra Firma, in some uniquely, competitively, better way that allows them to make a decent profit and in a reasonable timeframe? If the answer is yes, then they probably have a decent shot at success, and may be a good investment opportunity.  But if the answer is no – you may want to think twice, and then a third time, just to be safe.  Serving customers that are in themselves dependent on demand from another customer set, which may also be dependent on demand from their own customers in turn, is a recipe for disaster.  Or for really bad launch forecasting (as we saw in the late 90s).

But that’s worthy of a separate blog post in itself.

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