Opportunities and Roadblocks for the
Development of Commercial Space
Michael D. Griffin
Georgia Institute of Technology
22 February 2016
• Space development ca. 1950-2010 – military and civil –“all government, all the time”.
o Few exceptions: comsat industry, more recently (and less robustly) commercial
imaging, most recently ISS cargo resupply (2008).
o Space exploration and development are primarily an element of national strategy.
Both “hard” and “soft” power, and including scientific and economic influence.
o Consequences as expected from government/prime contractor monopoly:
Slow development tempo, high cost, risk aversion, reduced innovation as
compared with railroad, automotive, aviation, consumer electronics and information
But: “space” really is hard; quite possibly more like early open-ocean maritime
experience than any of the above examples.
Strong “pushback” for > 30 years from nascent “commercial” entities claiming
ability to perform “routine” space launch and operations tasks more efficiently.
Not so far supported by the evidence; i.e., “what’s stopping you?”
If you can’t beat a government enterprise, should taxpayers support you?
• But even if “space is hard”, space development could (would) benefit enormously from
give-and-take of competitive forces.
o Greater long-term societal benefit seems likely.
o Market discipline forces greater pace and quality than government oversight.
o But – market incentives and government policy objectives must be aligned.
o A “government sponsored commercial market” is a contradiction in terms.
When a commercial product is not ready to emerge, government cannot force it;
when it is ready, government cannot stop it.
• Yet, history offers numerous examples where sponsorship of public enterprises has
led to the creation of new commercial markets.
o Maritime, rail, automotive, air transportation; power grid, water supply, satellite
• Key space policy question for the 21st
Century: how can public policy decisions most
effectively spur collateral private developments in space?
o Must first consider why private development has not already occurred.
“Commercial Space” and the Market
• Free market structure, expectations, and constraints are not well aligned with the
structure of space development programs.
o Inflation averaged 3.1-3.2% from 1926-2010.
o US Treasury Bills – 2.5% annual return, relative stable in recent decades.
o High-grade corporate bonds – 5.5% from 1926-2010; real-dollar payback ≅ 30
o Equity Markets (70% US, 30% International) – 10% from 1926-2010; real-dollar
payback ≅ 12 years.
• Riskier investments must offer smaller commitments, greater return, quicker payback.
o Venture Capital – > 40% return, 5-yr payback, < $5 M.
o Angel investors – > 1000% return, 5-yr payback, < $1 M.
• Space investments generally do not fit these profiles.
o Large front-end commitments, risky enterprises, lengthy payback times.
Few investors seek such endeavors, and those who do aren’t in it for money.
Communications Satellite Business Example
o High-end communications satellite – 56 transponders.
o Investment NPV at beginning of Year 1 – US$0.5 billion.
o Three-year development – equal real-dollar revenues in Year 4-18 (15-year life).
Out-year revenues inflated at June 2011 3.6% US Consumer Price Index.
o Average $1.5 M/yr annual revenue for each 36 MHz equivalent transponder (current
spot market price $1-2 M/yr depending on terms and conditions).
$84 M/yr total annual revenue.
o IRR 13.0% (9.4% real-dollar return)
o Payback in Year 13 at 10% discount rate (i.e., cost of capital is the opportunity
cost of the long-term equity market return: 10% from 1926-2010, or 6.8% real
• Comsat business case is consistent with market treatment of investment with
modest additional risk as compared to equity market index fund.
ISS Cargo & Crew Market
o Anchor market is total US commitment to ISS: 15,000 kg/yr, 8 seats/yr (2 flights).
o ISS remains in operation through Year 20 (16-year cargo market, 15 years for crew).
o Company develops launch vehicle, launch facility, ISS-compatible cargo vehicle,
o Crew vehicle is a human-rated variant of the cargo vehicle, with additional
investments for crew systems.
Investments in cargo vehicle apply to crew vehicle also.
o Best-commercial-practice, four-year development program: cargo revenue in Year
5, crew revenue in Year 6.
Year 1 NPV of non-recurring costs for major system elements:
Launch Vehicle – $350 M
Launch Facility – 50 M
ISS Cargo Vehicle – 200 M
Crew System Upgrades – 100 M
Total Expenditures – $700 M
ISS Cargo & Crew Market (cont.)
o The company captures half of the US ISS market.
o December 2008 NASA Commercial Resupply Service (CRS) ISS cargo contract
pricing of $59K/kg assumed when service begins in Year 5, inflated at the June
2011 3.6% CPI in out-years.
o Crew transportation is priced at $125 M/seat in Year 6 (double the average price of
Russian Soyuz in 2014-16); inflated at 3.6% in out-years.
o Launch service also offered in non-ISS market; $150 M/launch assumed in Year 5,
inflated at 3.6% per year thereafter.
o 4 non-ISS launches in Year 5, 2 additional launches per year to 12 in Year 9,
Steady-state launch rate for all customers at least 14 per year.
Delta launched 12 times in 1967, 13 times in 1998 with one failure.
Atlas, Atlas-Agena launched 33 times in 1966, with 3 failures. 14 Atlas
vehicles were launched in 1967 and 1978, 12 in 1995.
ISS Cargo & Crew Market (cont.)
o The company operates with a net profit margin of 10% across all lines of business.
39% higher than the 7.2% average for the aerospace and defense sector.
o No developmental failures resulting in additional expenditures or delays to the
o No operational failures resulting in the interruption of service or additional
expenditures occur in the course of the 179 flights (per the market capture
assumptions above) in Years 5-20.
o No modifications or upgrades requiring significant additional investment are
necessary in Years 5-20.
ISS Cargo & Crew Market (cont.)
o Enterprise yields 20.5% IRR; well below “risky investment” expectations of 25-35%.
o At a 10% discount rate (assumed cost of capital), payback occurs end of Year 10.
Year 6 of operations.
o At the 10% discount rate, ISS crew/cargo yield negative returns; i.e., non-ISS
launches are subsidizing the ISS business.
IRR increases to 21.5% w/o ISS market, even if no increase in other traffic.
o Capturing the total crew market and half the cargo market yields 22.7% IRR,
payback late in Year 9.
o Capturing half the crew market and all of the cargo market yields 22.8% IRR,
payback late in Year 9.
o Entire US cargo, crew market for ISS yields 24.7% IRR, payback early in Year 9.
• Observation: this is not a good business from a financial perspective, yet carries a
high enterprise risk associated with potential human spaceflight accident(s).
Typo fixed by SRF
Lunar Cargo Market
o An international lunar base is developed with initial logistics requirements at least
equal to ISS.
o Cargo delivery to lunar surface priced at 10X that for ISS.
Reflects best-case “gear ratio” of cargo mass vs. lunar surface mass.
o Same private venture as before, except now for cargo delivery to a lunar base.
o Assume translunar stage and robotic lander can be developed for the same
approximate cost as assumed for the ISS cargo/crew vehicle.
NPV of enterprise development expenditures remains $700 M.
o The company captures half the lunar logistics market: 7500 kg/yr.
Delivered price is $590 K in the base year, inflated at 3.6% in out-years.
Revenues begin in Year 6 due to the greater difficulty inherent in the task.
o Lunar base remains viable indefinitely.
No growth assumed in the initial business case analysis.
o Other assumptions held constant.
Lunar Cargo Market (cont.)
o 27+% IRR for lunar cargo business alone.
Can be delivered with 7 launches annually.
o Lunar base cargo delivery market should grow.
5% annual growth for first 15 years yields 30% IRR.
10% growth yields 33% IRR.
o 6 launches/yr remain available for other payloads.
If sold for $150 M (as previously assumed) enterprise IRR increases to 30.5%.
o If the ISS cargo mission is undertaken, the $200 M cargo vehicle development must
be added to expenditures, and the enterprise IRR drops to 28.5%.
o Much lunar cargo (water, food, other supplies) has relatively low intrinsic value.
Ideal market for new space companies; penalty for failure is small, enterprise
risk is reduced, ample opportunity to refine designs through repeated use.
USG could guarantee a market for lunar base cargo prior to human return.
• The ISS cargo/crew market by itself is insufficient to drive the development of a viable
commercial space transportation industry.
o Too small and too short-lived – cannot survive without front-end subsidies.
o Even generous assumptions regarding non-ISS traffic do not close the business case.
Non-ISS traffic actually subsidizes the ISS business.
• Supply of low-intrinsic-value cargo to a lunar base offers a substantially more attractive
business opportunity than cargo or crew resupply of ISS.
o Significantly higher IRR, lower enterprise risk, longer term – all the things necessary to
o Even a small lunar base (e.g., crew of 4 rotated twice per year) generates enough
cargo demand to support at least two commercial space transportation companies.
• Establishment of a lunar base aligns important strategic goals: it facilitates U.S. and
international partners’ preeminence in cislunar space, and provides the “anchor market”
for expansion of commercial space enterprises.
o Many lunar base needs (power, comm, nav, mining) could be met via industry.