Alt.Space – The Thinkers and the Lunatic Fringe October 25, 2008Posted by shubber in CRATS, gauntlet being dropped, hot air, investment, NASA, public service announcement, smack talk, space, space tourism, suborbital tourism, venture capital, Wasting Money.
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(this post is from the Old Space Cadet)
On October 13, 2008, The Space Review carried my article The commercial suborbital sounding rocket market: a role for RLVs? http://www.thespacereview.com/article/1228/1 .
This article provoked some interesting commentary (and a lot that wasn’t so interesting). For convenience of the reader, I am reproducing the text of the article below and am then following with some comments and my responses:
The commercial suborbital sounding rocket market: a role for RLVs?
by John M. Jurist Monday, October 13, 2008
The current total US market for high altitude sounding rockets with payloads in the 50 to 200 kilogram range and apogees in excess of 100 kilometers is roughly 100 launches annually. At an average of one million dollars charged per launch, one might conclude that a real market exists for RLVs filling this niche.
At present, this market is essentially filled by solid-fuelled ELVs. What is the potential for market entry by a newcomer with the proverbial bright idea conceived in a garage?
The RLV concept
Developing an RLV might look attractive since the vehicle can be reused and operating costs might potentially approach propellant costs per flight. If it isn’t trashed after a few flights, the manufacturing cost can be spread over a number of flights. However, developing an RLV with investment capital for this existing market makes no investment sense.
An accepted rule of thumb for high risk speculative investments is that they should return at least 18 percent annually on capital (Ref. 1). Based on a few startups that have considered this field, a total optimistic investment of perhaps $5 million might result in a workable prototype vehicle. Personally, I believe this figure to be low by some integer multiple, but we will use that development cost anyway. A return of 18 percent would require that at least $900,000 annually return to the investors from the ongoing revenue stream.
Remember that dividends are paid from corporate after tax dollars. If foreign sales are involved, ITAR and other assorted export controls become a potential issue and legal costs for regulatory compliance escalate accordingly.
The estimates given above suggest that the total revenue from the US suborbital sounding rocket market is roughly $100 million annually. At least one RLV startup is offering future flights to 100 kilometers at $250 per kilogram (Ref. 2). A 200-kg payload would result in $50,000 revenues for the flight by this startup. If the entire US market were to be captured at this admittedly attractive price, 100 flights would result in revenues of $5 million annually.
Our required after tax return of $900,000 divides out to $9,000 per flight. We assume that the hypothetical RLV operations involve a full-time team of five employees averaging $75,000 fully burdened annual salaries each (well below market averages), and we might assume $1,000 per flight for propellants. Fixed costs could be converted to a per flight basis by dividing annual costs by 100. Look at the following set of estimated expenses per flight:
RLV flight costs at 100 per year
Area Flight Cost
Investor Profit on sunk R&D $9,000
Federal Corporate Taxes (ignoring NOL carried forward) 12,300
Range and Spaceport Fees 1,000
Launch Insurance 1,000
RLV Operations Staff 3,750
Plant (with utilities) 240
R&D for Future Development 1,000
Lost Vehicle Sinking Fund 500
Support Staff 1,000
Regulatory Compliance 500
Catchall (Including Margin) 28,810
Total Expenses Charged Against Revenues 50,000
If you don’t like my numbers, use your own. Range and spaceport fees are probably wildly underestimated in this table.
Killers in this model include R&D overruns for vehicle development, time to market (which also runs up personnel costs), failure to capture 100 percent of the market, and others. For example, if R&D costs are doubled (most R&D costs more and takes longer than anticipated), the expected minimum investor return jumps by another $9,000 per flight. If market share is only 50 percent rather than 100 percent, revenues per flight are reduced to $25,000, which eats into the “margin” substantially.
The table shown above ignores interest costs, state and local taxes of all types, and numerous other expense categories. The table also seriously underestimates payroll and regulatory compliance costs.
How can we make this work with better odds of success?
Raise prices: Rather than $50,000 per flight, competition might be possible with revenues in the $500,000 per flight range. This is an exercise in price cutting competition against existing suppliers and an established market and is critically sensitive to range and insurance costs.
Increase market size: If one believes in the “build it and they will come” philosophy, the market will increase passively. Otherwise, add a line to the above table for sales and marketing staff and another for advertising. I suspect the academic market, which is largely served by free rides manifested on existing launchers, would not enlarge much unless there are significant increases in space-related research grant funding opportunities.
ELV threat: The shift from liquid-fuelled sounding rockets to solid-fuelled vehicles was driven by at least two factors: legacy engineering from larger tactical missiles or smaller strategic missiles and by the high development cost and finicky nature of pump-fed liquid versus solid systems. At present, an alt.space startup with a largely legacy sounding rocket design is UP Aerospace (Ref. 3). This dropped their upfront development costs to the point where they can afford to enter the market. Another approach for liquid-fuelled ELVs is to use composite propellant tanks that can supply pressure-fed motors and still be low mass compared to similar strength metallic tanks. Avoiding propellant turbopumps reduces the system parts count markedly. Microcosm’s Scorpius Space Launch Company uses this approach (Ref. 4).
Get others to pay for the R&D. This was partially done by UP Aerospace as mentioned above. This also suggests a role for university-corporate partnerships in which the university side uses specific development topics for educational efforts, such as senior engineering design classes, and gives out academic credit instead of money. The university gets a piece of the corporation for its development foundation in return and rental income on some of its facilities. To some extent, this is the approach used by Garvey Spacecraft Corporation with California State University at Long Beach (Ref. 5) and by Flometrics with the San Diego State University and with the University of California at San Diego (Ref. 6). Interestingly, Garvey has flown a Microcosm composite oxidizer tank (Ref. 7).
Structures to implement a solution
An approach I favor is forming a university consortium analogous to those that design, build, and operate large cooperative research assets, such as telescopes and particle colliders. That consortium could develop a suborbital RLV or even a nanosat launcher to be used by consortium members for academic projects. Since the consortium would design and develop the vehicles, participating universities would be more likely to use them for student research under some type of cost-sharing arrangement with federal granting agencies.
Dr. Steve Harrington proposed something a bit different recently:
If you took all the money invested in alt.space projects in the last 20 years, and invested in one project, it could succeed. More underfunded projects are not what we need. The solution is for an investment and industry group to develop a business plan and get a consortium to build a vehicle. There is a lot of talent, and many people willing to work for reduced wages and invest some of their own company’s capital. Whether it is a sounding rocket, suborbital tourist vehicle or an orbit capable rocket, the final concept and go/no go decision should be made by accountants, not engineers or dreamers (Ref. 8).
I would concur with Dr. Harrington’s final remark except I would expand the decision making group to include management and business experts nominated by the consortium members with whatever technical input they needed.
- F. Eilingsfeld and D. Schaetzler: The Cost of Capital for Space Tourism Ventures. Proceedings of the 2nd ISST, Daimler-Chrysler GmbH, Berlin, German, 1999.
- Masten Space Systems, Inc. web site: http://masten-space.com/, Sept. 29, 2008.
- UP Aerospace, Inc. web site: http://www.upaerospace.com/
- Microcosm, Inc. web site: http://www.smad.com/ie/ieframessr2.html, Sept. 29, 2008.
- Garvey Spacecraft Corporation web site: http://www.garvspace.com/, Sept. 29, 2008 and John Garvey, personal communication, Aug. 13, 2008.
- Flometrics web site: http://www.flometrics.com/rockets/index.htm, Sept. 29, 2008.
- Garvey Spacecraft Corporation, loc. cit.
- Steve Harrington, Space Access Society Annual Meeting, Phoenix, AZ, Mar. 29, 2008.
In his varied and somewhat schizoid career, Dr. John Jurist has variously served as a professor of surgery (orthopedics) at the University of Wisconsin Medical School, as a professor of space science and engineering at the same university; and as a professor of medical sciences, physics, and mechanical and aerospace engineering in the Montana State University system. He is currently Adjunct Professor of Space Studies in the Odegard School of Aerospace Sciences at the University of North Dakota. As a lucky entrepreneur, he has invested in a number of small aerospace and related startups, but he is not an investor in any of the corporations mentioned above. He can be reached at JMJSpace@AOL.com.
A comment in RLV News by Bob Steinke:
I’d like to point out one flaw in the sounding rocket article.
Mr. Jurist says that the current market demand is 100 flights per year and figures the hypothetical company’s revenue based on 100 flights per year. But the right way to figure it is that the current demand is $100 million per year.
Most current customers are government and educational institutions that have a certain budget and they are going to spend their entire budget regardless. So even if you assume no demand growth the current customers will spend the same amount and if prices are lower they will buy more flights.
There’s no shortage of scientists who would like to send payloads. The limitation is the budgets of the funding agencies, and you can count on the budgets of government agencies to stay pretty much the same regerdless [sic] of what they get for their money.
So a company that sells flights for $50,000 and captures the entire $100,000,000 per year market could sell 2000 flights.
The bad economy and federal deficits might reduce the current market, or there may be market growth from new customers when prices go down. But if you are going to do an analysis of current markets assuming no demand change you should measure deman [sic] in dollars, not flights.
The Old Space Cadet responds:
Your point is well taken, but I actually divided the postulated total market demand by number of flights to get the per flight revenue. Also, you are assuming that the launch demand is elastic and based on the size of the money pool rather than on the total mass of the payload pool. A company working under that assumption would be betting the farm until and unless the postulated increase in demand was extremely rapid. The assumption that the entire market or some large fraction could be captured is questionable. I did use that assumption in my paper, of course, in order to overstate the case for RLVs. I would also expect that entities such as MARS would respond by flooding the academic launch “market” with surplus solid-fuelled missile motors for use at their facilities. Finally, costs that are firmly tied to flight numbers would reduce the percentage margin as flight numbers increased if the market is fixed in dollars. Thank you for your comment.
An interesting comment in Transterrestrial Musings by David Summers:
Um, some comments on his accounting (or lack thereof) in the section “RLV flight costs at 100 per year”:
- Federal Corporate Taxes: 12,300 – note, if you are operating at a loss, there are no taxes…
- R&D for Future Development: 1,000 – future development is charged against future profits, not current operations. Treat future stuff like the separate investment that it is.
- Catchall (Including Margin): 28,810 – um, look, if half your numbers are in the “other” category, you aren’t presenting any data.
And look – if you subtract out those numbers, the $50,000 cost per flight becomes closer to $8,000… which is pretty darn close to the “required” $9,000 per flight. And, duh, they should raise prices if the presented scenario was even close to correct.
But it isn’t correct – to my knowledge, there is not a $100M market for suborbital flights right now. (see http://www.faa.gov/about/office_org/headquarters_offices/ast/media/3Q2008%20Quarterly%20Report.pdIf anything, there are a bunch of people willing to sink $1M of their money in order to fly there own rocket… so not only would this be a dumb idea because capitalism beats a command economy, but it wouldn’t even address anyone’s needs!
The Old Space Cadet responds:
- If you are operating at a loss, there are no taxes, but my article assumed an 18% minimum annual return to investors. That return comes from profits and profits are taxable. Dividends are not deductible as a business expense so they are essentially paid from after tax dollars. If the company is operating at a loss, there is no return for investors (unless it is a Subchapter S Corporation passing the losses to the shareholders).
- R&D should be charged against future profits for accrual accounting, but suppliers and subcontractors like to be paid for their services. Since the company can’t print money like Barney Frank, Chrisopher Cox, Barack Obama and their ilk, those payments have to come from somewhere – either the net revenue stream, liquid capital, or a line of credit. Given current economic conditions, how would you rank a line of credit as a source of R&D funding? Also, how often have we heard the mantra that revenues from some space-related activity could be used to fund future development – such as orbital tourism from suborbital tourism revenues?
- I was wondering if anyone would catch that one. Congratulations. However, remember range fees, integration costs, and insurance. UP Aerospace, using a solid-fuelled expendable sounding rocket that is essentially a legacy design, charges roughly $200K per flight. How that is distributed against range, integration, insurance, and EBITA is not public, but I bet the terms range fees and insurance could account for a lot of that “Catchall” term instead of the $1,000 each I used in my paper. Now consider insurance. The formula presented in the paper: J. M. Jurist, S. Dinkin, D. Livingston: When physics, economics, and reality collide: The challenge of cheap orbital access, American Institute of Aeronautics and Astronautics, AIAA-2005-6620 (Sept 05) by Dr. Sam Dinkin (a Ph.D. economist and insurance expert) when coupled with the insurance costs for Falcon-1 released by Elon Musk on a per pound GLOW basis for MPL suggest that a 98 percent reliable RLV would cost roughly $75,000 per flight for risk-based insurance. Oops, there goes the “Catchall” and then some.
- You are right about market size. There is not a $100 million suborbital sounding rocket market. It is much less than that. That strengthens my argument about the lack of market capable of recapturing the additional expense of an RLV vs. legacy ELVs. That also reduces margin. The underlying and unstated issue is a narrow academic need. A lot of intangible factors are addressed by such a consortium arrangement.
Thank you for your comments.
A fascinating comment in Transterrestrial Musings by Stephen Fleming:
And we can all eat at Taco Bell forever. Since it’s the only restaurant to survive the Franchise Wars of 2032.
The Old Space Cadet responds: ??
A bizarre comment in Transterrestrial Musings by Adam Greenwood:
Please, all my Great Depression warning lights are blinking anyway . . . and now we have folks talking about the inefficiencies of competition and the need to form industry wide trusts run by experts. AAAAH! What’s next, anti-semitism? Oh, wait.
The Old Space Cadet responds sadly:
This comment needs no response by me.
The other dozen or so comments in Transterrestrial Musings about socialism, socialized medicine, STS, etc.:
The Old Space Cadet responds again:
What does any of this have to do with a proposed university consortium generating a reusable sounding rocket design for academic use? What does it have to do with university corporate partnerships? There are several university consortia on the space payload side, but there isn’t one on the launch side (yet).
Anybody who knows me knows that I am anything but a socialist (especially when socialized medicine comes up for discussion). Are these comments representative of alt.space thinking? If so, I weep for our spacefaring future.
What Would Warren Say? April 6, 2008Posted by shubber in CRATS, gauntlet being dropped, investment, public service announcement, PYMWYMI, smack talk, space tourism, suborbital tourism, venture capital, Wasting Money.
(NOTE: this post courtesy of the Old Space Cadet)
When I was a wee young lad in the mid 1960s I bought some stock because of my confidence in the company’s principal. His name was Warren Buffett. Since then, I have made a point of treating the annual reports of Berkshire Hathaway the same way many people treat outstanding textbooks. The latest is no exception. Substitute any of the terms alt.space, space tourism, new space, or suborbital tourism for the term airline in the following Buffet comments from the Berkshire Hathaway Inc. 2007 Annual Report, (Page 8):
The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.
The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it. And I, to my shame, participated in this foolishness when I had Berkshire buy U.S. Air preferred stock in 1989. As the ink was drying on our check, the company went into a tailspin, and before long our preferred dividend was no longer being paid. But then we got very lucky. In one of the recurrent, but always misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain. In the decade following our sale, the company went bankrupt. Twice.
Given the regulatory environment, economic volatility, and gigantic entry barriers associated with alt.space, and given the frequent demands of the alt.spacers for “airline-like” operations for their fantasy spaceships, could Warren Buffet possibly be making a valid observation? If we are truly not quite into the DC-3 era of space flight, perhaps now is the time to think things through very carefully.
Rise of Space Cynicism December 11, 2007Posted by Robin in angel investing, hot air, investment, smack talk, venture capital.
(Note: this is a guest post from a sometime cynic, sometimes tragic…)
Nosy Reporter encounters leading Space Cynic and other cautious Advocates of the spacefaring thing at Space Investment Summit 3:
Such blue-sky imaginings drove investor Shubber Ali crazy.
“They’re smoking crack,” said Ali
Space Investment Summit – Silicon Valley October 18, 2007Posted by shubber in angel investing, gauntlet being dropped, investment, PYMWYMI, space, space tourism, suborbital tourism, venture capital.
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Ok, for those of you with entrepreneurial space aspirations, who think that your plan isn’t just another flavor of kool-aid, it’s time to step up and represent (so to speak).
The third in a series of Space Investment Summits, otherwise known as SIS-3 (clever, no?) is being held this December in Silicon Valley, offering would be future space titans of industry the opportunity to present to well-heeled investor types (angels and VCs). You must, of course, prequalify – the application process is on the event website:
So now’s your chance… let’s see who can make the cut, and potentially get some megabucks to get their venture on the path to stardom (sorry, couldn’t resist).
And yes, yours truly will be kicking off the event with an overview presentation of the Space Industry for the attendees, so you can’t say you weren’t warned.