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:
- Companies serving government
- Companies serving customers on the Earth
- 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.