Business Models That Are Out Of This World

A Small Step for a Man, and a Leap Forward for the Space Industry

The space industry has evolved significantly since the first space program was founded in 1957. The technology used to launch rockets has advanced from intercontinental ballistic missiles to the International Space Station (ISS), advanced satellites and reusable rockets. Although the technological advancement that has occurred over time is impressive, there has also been a remarkable fundamental shift in the entities who are launching rockets, their philosophies, and their visions.

The original space programs were born out of World War II when Nazi Germany created the first long-range missile, and the Soviet Union and the United States formed their own missile programs in response. By 2018 a total of 72 governmental space agencies were actively researching and developing space technology, and 14 of them have the ability to independently launch rockets. The vision of these agencies was no longer to demonstrate their nation’s technological prowess, but rather to contribute to the international effort to explore what exists beyond the earth’s atmosphere. In recent years a more fundamental shift has taken place in the space industry as the era of “New Space” has emerged. New Space can be defined as a cultural and philosophical shift toward greater privatization of space exploration businesses and activities. It is based on 3 concepts: lower prices, shorter development, and increasingly flexible methodologies. The New Space age has a fast paced, agile approach to technological development and has adopted some of its philosophies and methodologies from ideas that were born in Silicon Valley.

This cultural and philosophical shift was not a natural evolution initiated by governmental space agencies. Rather, it was brought on by private companies entering the market. Companies like SpaceX and Blue Origin had the capital resources to challenge the efforts of government space agencies and sparked a wave of new innovation within the industry. Following the lead of SpaceX and Blue Origin, many other private companies have entered the space industry, promising to deliver higher value results for a lower cost. These companies, regardless of size, typically focus on any one aspect of the space industry which could include direct exploration and colonization efforts, development of technology to decrease cost and increase the efficiency of space travel, or delivering services such as telecommunications and data collection.

Although the recent rapid innovation within the space industry is encouraging, the private companies operating in the space industry face a critical challenge. Unlike government agencies, they do not have access to low stakes, exploration-based funding - instead, they have investors to answer to and are expected to one day turn a profit. This raises the question of where private space companies should focus their time and efforts in order to build a profitable and sustainable business, while still satisfying the goal of commercializing space travel and colonization.

Affordability of a Space Vacation

In June of 2019, NASA released a price list of what it would cost to vacation on the ISS. Although the prices shocked civilians who dream of one day visiting outer space, it also surprised many of the participants in the New Space age. Governmental space agencies have traditionally held the stance that space travel should be reserved for exploration and research purposes only, which directly opposes Space-X’s and Blue Origin’s mission to commercialize and colonize space travel. By releasing a price list, NASA indicated to the world that they have shifted their stance and are opening their hospitality to the general public. However, the opposition of governmental space agencies is not the only obstacle that civilian’s face when trying to vacation in outer space. Space travel is expensive, and all of the costs fall on the customer who wants to visit space. NASA has said that it would cost $35,000 a night to stay on the ISS, but that is only after paying $50 million for the flight there (Elburn, 2019). Virgin Galactic projects that it will take more than 700 paying customers on their suborbital space flights (which reach an altitude of at least 80 km) in 2021, with a single ticket currently costing $250,000 (Davenport, 2019). However, Virgin Galactic has also said that this price is likely to rise.

The prices listed by NASA and Virgin Galactic make it clear that commercialized space travel is not going to be accessible to everyone. By estimating a discretionary income allocation of 20%, only people who earn above $850,000 would have the means to purchase Virgin Galactic’s tickets for a short flight outside of the atmosphere. According to income statistics provided by the Wall Street Journal, only 1% of the American population can afford these tickets. This raises the question of how lucrative and successful the business model will be, since the product is only accessible to a small portion of the overall population. Although there are many products and services that are priced outside of the general population’s budget, such as exotic cars, the companies that produce these products have carefully priced them such that they have significant profit margins, which average about 40% of the sales price (Im, 2018). In the case of space travel, making 40% on a flight to the ISS which costs NASA $50 million would cost the consumer $70 million. The high overhead costs of space travel not only shrinks the total addressable market to include a fraction of the 1%, but also forces companies in the space industry to keep their margins low until their costs can be decreased.

and the cost to launch them has also decreased by 30% (Wharton, 2019). Additionally, the audience that has a need for, and can afford the services provided by a CubeSat is much broader. Farmers use satellite images to plan and monitor their crops, and commercial retailers like Walmart can also use imagery to gain insight into their own foot traffic, and the foot traffic of their competitors. Our daily processes on earth are increasingly driven by data, and space has the opportunity to provide us with more of it at a lower cost. One of the crop monitoring solutions currently available to farmers is IOT devices which are placed in soil and can cost hundreds of dollars per acre. For example, the leading American IOT brand is Phytech, and their solution costs $500 per acre. However, Farmers also have the option to pay approximately $1.62 per acre of land to monitor their crops via satellite, and studies have shown that satellite monitoring services decrease water and energy consumption by 10%, which has an equivalent economic benefit of $25.14 - $62.85 per acre, per year (Vuolo et al., 2015). When comparing the economics of the two solutions, the future of satellite monitoring looks the most promising.

When comparing the potential market of commercialized space travel and space-based services, it becomes clear that space-based services have the potential to address a larger market, provide economic benefits to other industries, and have larger profit margins by utilizing cheaper technologies and mass production. Although commercialized space travel has an adventurous appeal, space-based services can act as the bread and butter for companies participating in the New Space age, and allow them to fund further research, exploration and commercial space travel.

Applying Space Technology in Other Industries

Companies that focus on the commercialization of space travel also face financial challenges that are caused by the limited size of their total addressable market, and extended time to market. As previously discussed, the total addressable market for commercialized space travel is small, and when this challenge is paired with an extended time to market it becomes extremely difficult for companies to become profitable in an amount of time that investors would deem to be viable. The development of commercialized space travel involves an expensive research and development phase, as well as extensive testing, both of which create a long and costly time to market, and a period where companies incur significant losses. For example, Virgin Galactic reported a net loss of $63 million in the second quarter of 2020, and a net loss of $60 million in the first quarter of 2020 (Virgin Galactic, 2020). These losses are a result of the development and testing of their suborbital flight program, as they are currently in the testing and refinement phase.

Compared to business models that focus on commercializing activities in space, service based business models sit in a unique position where their direct total addressable market is much larger. They also have the ability to be more agile with their technology and apply it in other industries, which in turn increases their potential to generate revenue and creates a shorter time horizon to profitability as a result. NASA was able to demonstrate this approach with the development of cameras used on CubeSats. Eric Fossum, a NASA scientist, carried out extensive research to minimize the size of cameras. As a result, he developed CMOS active pixel sensors which have revolutionized the digital imaging industry. The pixel sensors have been used in various smartphone cameras, as well as the GoPro camera brand. Developing this technology not only helped to advance the camera technology used for satellite imaging, but also created an alternative revenue stream through licensing and commercial development of the camera technology. NASA was able to licence this technology long before its CubeSats were deployed, and thus were able to generate revenue before their core product was launched. Other examples of technology that was developed for outer space, but also generated revenue from other applications include LADARVision 4000 used in LASIK eye surgery, and microalgae nutritional supplements which are used in products made by Minute Maid, Horizon Organic, Kellogg and Yoplait (Space Foundation, 2020).

Ultimately the ability to apply technology in multiple sectors allows companies who focus on space-based services to build working capital at a faster rate and diversify their sources of income. This creates room to pivot, research and explore their niche in the space industry at a slower pace, as they are not completely relying on their singular product to drive them towards profitability. Although companies who are focused on the commercialization of space travel participate in research and development in order to decrease their operational costs, increase efficiency and improve safety, their progress has not been as widely applicable compared to service-based research. In each of the last 5 years, over 75% of the inductees to the Space Technology Hall of Fame have been the product of a service-based development, or advancement in the health of professional astronauts (Space Foundation, 2020).

The Need for an Ecosystem Approach

Companies that focus on the commercialization of space travel face the challenges of high costs, extended time to market, and limited ability to generate revenue through alternative technological applications. These characteristics limit their ability to capture outside funding, and decrease their probability of success. However, when taking a step back and viewing the space industry as a whole, the answer to these challenges appears to exist within the industry already. Service-based business models are able to achieve the low time to market, and early revenue streams that companies focused on the commercialization of space travel are looking for. In this situation, the application of an ecosystem approach could create mutual benefits for both service-based and commercialization focused businesses, and allow the future of commercialized travel to look more promising.

An ecosystem perspective is defined as extending the traditional view of an industry and aligning parts of the industry that may interact in order for value to materialize. A common example of an ecosystem approach is the Ferrari brand. Although they produce a luxury vehicle, they have also recognized that their brand has a following of passionate fans. They were able to align the Ferrari brand and the Ferrari Formula One team with their fan’s passion to produce a line of merchandise which produces an additional $2.5 billion in sales each year. Their merchandise revenue actually exceeds the revenue produced by selling vehicles (Robertson, 2020). In the space industry, applying an ecosystem perspective would mean identifying ways in which the service-based businesses and commercialization focused businesses could interact, and finding ways to generate value from those interactions. Although technology plays an important role in the space industry, it is not the only way these two business models can interact - the generation and flow of information and cash are also possible interactions. By using an ecosystem approach to couple the service-based and commercialization business models under one roof, companies who are participating in the New Space age and currently focusing solely on commercialization would be able to balance their time to market and generate multiple revenue streams, which in turn creates a quicker path to profitability. The company would be able to generate early revenues through the services they provide and alternative applications, which could then be used to fund the development of commercialized space travel. The technology developed for the service sector of the business may also be applicable to the commercialized travel sector, which allows the company to generate additional revenue from a single technology.

The ecosystem perspective recommends creating vertical silos within a development effort in order to better identify and organize technological advancements. The silos help to identify commonalities between different sectors of a business - in the case of space, this would be across services, commercialization and alternative applications. This would allow for investors, managers and employees to directly see where technology advancements exist across the combined business and identify other industries where the technology can be applied more easily. An example of a vertical silo is fuel development. Spacecraft to launch satellites and transport humans need large amounts of fuel, and New Space companies could partner with other companies in the energy sector to focus on developing renewable and alternative fuels. The fuel technology developed in this silo would not only benefit the space industry, but also the energy industry.

If companies were to adopt an ecosystem perspective and subsequently change their business model to include sectors focused on services and commercialized travel, they could also create the opportunity for a new source of funding. NASA and other government space agencies are still playing a critical role in scientific advancement and research in outer space. However, they do not have the operational agility that private space companies like SpaceX do. In order to decrease their costs and keep up with the industry’s rapid evolution, NASA has contracted private companies to provide them with technology and services. A recent example of this is NASA’s contract with SpaceX to launch a satellite which will make the first-ever global survey of Earth’s surface water (Heiney, 2020). This contract provides SpaceX with additional revenue to fund their eventual goal of colonizing Mars. However, including both service and commercialization sectors within their business model would allow government agencies the opportunity to not only fund them through the procurement of their rockets, but through satellites, data and other services too.

The Future of Business in Space

The New Space age encompasses new technology, philosophies and actors in the market as it is driven by a fundamental shift towards privatization. However, private companies do not have the exploration-driven funding that government space agencies do, and need to find a balance between innovation, and generating profits and long term sustainability. Building a private space company where the model solely focuses on commercializing space travel faces the challenges of a limited total addressable market, and a long and costly time to market.

In comparison to a $250,000 per space flight ticket, the service-based sector appears to be more grounded and realizable in the near future. The service-based sector is able to overcome the challenges faced by the commerilized travel sector as its services appeal to a wide array of other industries, some of which include agriculture and telecommunications. Space-based services also have a quicker time to market, as they not only bypass the extensive safety testing that the commercialized travel sector must perform, but they are able to generate alternative revenue streams by extrapolating and licencing technology to other industries.

Comparing the commercialization and service based space sectors side by side leads to the realization that they complement one another. The service based industry is able to address a large market and provide revenue stream early on, while commercialized travel appears to be a big-ticket item of the future. By combining these two sectors within their business model, companies participating in the New Space age can generate the revenue required immediately to build and grow their business using services, and look to establish themselves as a long term competitor by developing commercialization technology and strategies. Using an ecosystem approach to do this will allow space companies to silo their overlapping efforts in services and commercialization. Siloing will allow them to better understand where they can generate value now, and where value may emerge in the future. An additional consideration for companies participating in the New Space age is the potential that lies on collaborating with government space agencies. The complementary resources and knowledge will serve long-term benefits for the business in addition to helping private companies to strengthen their position among intense competition. NASA and SpaceX is a great example that sets a precedent in the merging of the public and private sector. The space industry has evolved significantly since the first ballistic missiles in WWII, and will continue to move forward at a rapid pace. Private companies in the New Space age will need to decide where to focus their efforts in order to generate the revenue they need to survive, while also advancing space technology. Applying an ecosystem perspective to merge the service and commercialization sectors into one model will offer businesses the cash flow they require both now and in the long term, help them to contribute to the advancement of technology through innovation within the space industry and through cross-industry extrapolation. An ecosystem perspective would allow them to establish themselves as a long term competitor who provides services to those who need them on earth, and those who wish to travel beyond the atmosphere.