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

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

Comments»

1. Professor L - November 4, 2007

Shubber, excellent comments. Thursday, Nov. 1, I did an evening Space Show with Dr. Burton Lee of the newly formed Space Angels Network. I would urge readers to hear how his associates and he define space. Working to be very clear for listeners, I asked him about space businesses with applications here on Earth. For example, would his network find interesting a start-up that could use GPS somewhat differently for a tractor and agriculture than how it is already used. He said absolutely, that is the type of application that makes sense to this investment group. Using space for a terrestrial opportunity with a large market that can make money. This is 180 from if we just get up into space, the market will be there perspective. Here is the direct link to the program with Dr. Lee for those interested in a superb financial discussion of how their group plans on investing and making money where space is concerned: http://archived.thespaceshow.com/shows/824-BWB-2007-11-01.mp3.

2. Monte Davis - November 7, 2007

Predictions about the magical hockey stick usually conceals an unstated premise: that what matters is manned spaceflight. If that’s your starting point, 40+ years of steady, unspectacular money-making in commsats, remote sensing, and navsats can’t provide useful lessons, because they don’t really count.

At this point the discussion usually veers off into windy declarations about the eternal questing human spirit… about how a geologist on Mars could do in a day what takes the rovers months… and “yeah, you probably would have told Columbus to send robots, too, eh?”

Eventually people will do important and profitable things in space — but as you say, only when launch costs come down enough that we can routinely afford the mass penalties associated with keeping them alive and bringing them back alive.

3. Jonathan Goff - November 7, 2007

Shubber,
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?

Am I getting you right, does this mean that at least some space tourism projects would meet your criteria? After all, they’re serving part of an existing market here on earth (adventure travel, adrenalin junkies, exotic vacationers, etc), that are made better for some people by taking place in space, and at least some of them can make a decent profit in a decent timeframe?

~Jon

4. shubber - November 7, 2007

Am I getting you right, does this mean that at least some space tourism projects would meet your criteria? After all, they’re serving part of an existing market here on earth (adventure travel, adrenalin junkies, exotic vacationers, etc), that are made better for some people by taking place in space,

Close, but not quite. The comparison would be a better fit if the actual travel experience were fungible – i.e., that in the mind of the consumer a trip to everest vs a trip to orbit were essentially the same so they didn’t care which one they did (interchangeable). In essence, that’s how the existing space-based but earth-serving businesses work – you don’t care if your TV program on your screen came through coaxial cable or beamed to a dish, as long as you get your program that you want. Then it’s an issue of price, reliability, and the actual programming you prefer (some channels are ONLY available via satellite, for instance). But even in that case, the consumer isn’t buying because it is “space” but rather because it is the PRODUCT they want (a video content channel) that is only deliverable via a space segment.

An adventure traveler or adrenaline junkie would have to consider a suborbital joyride to be as interesting as an alternative trip (say to India or diving the barrier reef, or maybe taking a submersible to the Titanic) given the price points.

and at least some of them can make a decent profit in a decent timeframe?

First some of them have to have a working vehicle… :-)

5. Jonathan Goff - November 7, 2007

Shubber,
So in other words you’re saying that to be a good space business, the space part of it has to be irrelevant to the end customer? That if the customer is actually more interested in it because of where it takes place that that automatically makes the business less realistic? Or am I misunderstanding you?

First some of them have to have a working vehicle… :-)

Oh, I fullheartedly agree that the ball is in the courts of the space tourism launch developers at the moment. I do think though that at least one of them, and quite possibly two will have something flying in revenue service within say 4-5 years.

On a related topic, what is your opinion about businesses that existing space businesses that service existing terrestrial customers? I’m thinking of companies like Ecliptic, Orbital Recovery, etc. If the space business that the business is trying to serve already exists, does that make the proposed servicing project legit?

~Jon

6. shubber - November 7, 2007

So in other words you’re saying that to be a good space business, the space part of it has to be irrelevant to the end customer?

No. What I’m saying is that if you look at the businesses that HAVE been successful in the “space sector”, their millions of customers are, at the end of the day, buying a service (TV, radio, navigation, whatever) that they want here on Earth. That the signal comes from SPACE is irrelevant to them (or, if you’re a true believer nitpicker, 99.9% of them).

That if the customer is actually more interested in it because of where it takes place that that automatically makes the business less realistic? Or am I misunderstanding you?

I think you’re misunderstanding. If the business model is predicated on the customer having to care that it is a “space-based” signal/service, then it’s a flawed business model. It is no more relevant than if the signal comes from Wichita. What matters is the ACTUAL service that the customer is consuming – a TV program, a baseball game on the radio, or directions to a destination. THIS is what customers care about, and what the business had better be based upon.

If the signal gets bounced through space because it is more economical to do so, then that’s what the company should/would do. But if it’s not more economical, then it doesn’t make good business sense.

On a related topic, what is your opinion about businesses that existing space businesses that service existing terrestrial customers? I’m thinking of companies like Ecliptic, Orbital Recovery, etc. If the space business that the business is trying to serve already exists, does that make the proposed servicing project legit?

If I understand your question – you are asking if a space business that serves existing space businesses that have a need (satellite repair/rescue, for example) qualifies as one of these category 2 businesses?

The answer depends on a few factors, all of which are equally relevant IMHO:

1) size of market – first question, just how big is this market? It’s one thing for a large existing corporation (e.g. Boeing) to throw some IR&D money at creating a space tug on spec, quite another to convince private investors to give you money to develop a technology if the market is based on the occasional satellite deployment failure or other mishap that your new service can “fix”. While each customer “won” may be an incremental huge bump in revenue and profits for your business, if it’s 6-12 months or longer between customers, and you have to maintain a ready satellite fixer system either in orbit or on standby to launch, it may be a bad business from a cash flow point of view. On the other hand, if you can develop a better thermal management system, onboard radiation hardened processor, or whatever, maybe there’s a bigger market – but if it’s still in the tens or hundreds of units, that’s not a lot of volume to be making your money from.

As the old saying goes: Sell to the masses, dine with the classes (and, conversely, sell to the classes, dine with the masses…)

2) impact on current way of “doing things” in the business – you may have a REALLY GREAT business model or concept – such as on-orbit satellite assembly, or satellite refueling – but if the entire industry is designed around risk-avoidance and going with what works, it normally requires having a leader in the industry make the change that the rest might adopt, rather than a scrappy outsider. The problem in the space sector (think satellite manufacturing) is that the big sat builders are also risk averse, where losing a single sale can be a multi-hundred-million-dollar delta in terms of revenues. So messing with the design of an existing platform is dangerous for a manager. Perhaps that’s why you rarely see all new platforms come out – after all, how long was it from the 601 to the 702, and where’s the 803…?

From a satellite buyers’ point of view, why would they take the risk on an unproven design for a satellite, with the inherent increases in upfront cost for insurance (assuming they can get it) when all they are doing is getting the option to extend a satellite’s life 10-15 years from now? After all, the FV of the cash not spent on a “new” satellite design over the next 10 years, plus the revenues that can be made from getting to space sooner with a known platform, would more than pay for the replacement GEO when the current one dies.

3) demonstrability of the “new” technology – somewhat the other side of the coin of item (2) above. If you are trying to bring an entirely new solution to the market, it is an uphill battle because you are fighting against the “wait and see” mentality of the industry and their backers (finance, insurance, regulatory) while you prove your better widget is in fact better and more profitable for them.

As for is it “legit” – that’s up to the market to decide :-) It may work from a technical point of view, which is how I define “legit” – but it may not be accepted by enough customers to make it a successful business.

7. Monte Davis - November 7, 2007

Submarine tourism, e.g.
http://www.ussubs.com/submarines/tourist_sub_operating_locations.php3

is probably the best analogy, in that

(1) the vehicle technology was developed for military and scientiific reasons and is far from “mass” transportation economics; you don’t need to reinvent the basics, but neither an SSBN nor theAlvin is adapted to tourism

(2) there are as yet no destinations to stay at, so at first the ride itself is the point — and the environment is intrinsically hostile enough that you need considerable equipment and expertise (closer to deep diving than SCUBA) to hop out and amble around on your own

Shubber: it’s striking that your points apply with equal force to the military “market” for space over the last 75 years. What armed forces initially wanted was the PRODUCT (an explosion far away, faster and more unstoppably than bombers could provide). They then exploited the potential of orbit for remote sensing, comm, and nav, just as civilian markets did with a few years’ lag.

Beyond that… well, ever since Dyna-Soar days the techno-colonels and brigadiers who project zoomy manned applications are in the same situation as their blue-sky counterparts among planners at Boeing or at NASA. That military R&D budgets are larger doesn’t mean that they have any greater success at getting more than a white paper’s or Powerpoint briefing’s worth of it.

8. nick - November 16, 2007

These comments are true of most industries. The “electronics industry”, for example, serves an uncountable variety of consumer tastes and is united only by its “medium”, electronics. Similarly for petroleum, radio, really almost any engineering-related industry you’d care to name.

Category 1 is not terribly interesting, because government is a fickle and oft-considered lousy customer.

The biggest problem with the space agencies in particular is that what they do often bears no relation to the economic reality of commercial endeavors. Their “goals” and “visions”, based on the ability to spend billions of taxpayer dollars while recouping little or no revenue, end up gravely distorting what we think is commercially feasible or desirable in space. “Alt.space” often just seems to be an attempt to pursue NASA’s goals in the private sector. But most of NASA’s goals are commercial absurdities.

9. One Way Tranportation Logistics - November 19, 2007

Great article and really good info.

- Brad

http://onewaytransportation.com

10. Outsourcing Logo Design - November 29, 2007

An interesting post, thanks. I wonder what industries we can launch out of the atmosphere … IT Recruitment Consultants have to be a contender for first in the queue!


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