Prices, Demand, and SpaceX


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For the past three days there has been a very lively debate by readers of Behind the Black, attempting to figure out the actual cost of launching payload to low Earth orbit by various rockets, including SpaceX, the space shuttle, and the NASA-built Space Launch System.

Three stories published today add some new information to this debate.

First there is this article from Space News: “SES launch order adds to SpaceX backlog.” Though the story has a lot of good information about the increasing competition of the launch industry, this quote is especially telling, coming as it does from one of SpaceX’s chief competitors:

Frank McKenna, president of International Launch Services (ILS) of Reston, Va. — a veteran launch service provider and a principal SpaceX competitor — said he has calculated that SpaceX is, on average, just under 50 percent less expensive than ILS, Arianespace of France and other established launch service providers.

So, we can argue till the cows come home, but the President of ILS has admitted that SpaceX is able to put payloads into orbit for half the price of anyone else. No wonder satellite companies like SES are flocking to SpaceX.

Then there is this quote:

A half-dozen industry officials interviewed here during the World Satellite Business Week conference organized by Euroconsult said they have never seen the commercial market book so much business on a rocket with so little flight heritage.

What this tells us is that the established launch industry has for decades been sitting on its hands, unwilling to compete to lower prices. Because of this, many customers have been shut out of space, eager to launch their payloads but unable to do so because they couldn’t afford it. Then SpaceX comes along, offering the services at a much lower price. It is not surprising that a lot of new and old customers immediately jump at the chance. They couldn’t get into orbit before because of price. Now they can at least afford to buy a ticket from SpaceX, even if that means they are taking a chance on a new rocket.

In fact, this is exactly what Elon Musk expected when he started SpaceX. Back in the early 2000s I attended a COMSTAC conference in Washington in which Elon Musk was one of the speakers. (I can’t find my notes so I don’t know the exact date. It was after Musk had announced the Falcon 1 but before any launches.) There he explained how it came to be that he was now a rocket builder.

After he had sold Paypal he had lots of cash and could do whatever he wanted. And what he wanted to do was launch a private unmanned science mission to Mars. After much research, however, he found he could build the spacecraft but could not get it into space. The launch costs were too high.

Then a light bulb went off in his brain. He looked at the launch industry and realized that there was plenty of room to lower costs. He could build that rocket himself, easily charge less than everyone else, and still make a profit.

And that is where we are today. SpaceX is on the verge of doing exactly what the space shuttle had been especially designed to do but was a miserable failure at doing: lowering the cost of getting payload into orbit. And Musk is doing it by following the simple laws of economics and capitalism, competing on the open market and beating his competitors at their game.

Meanwhile, the two other stories today, both from Aviation Week, illustrate why the space shuttle failed at its task, even though these stories have nothing to do with the shuttle itself. Instead, the stories are about the government-built Space Launch System (SLS).

Both stories describe comments this week by NASA contractors and officials. Both illustrate how a government agency tries to manipulate Congress and the public to keep the money flowing for as long as possible, even if they aren’t building anything.

The first story describes how NASA contractors can’t meet the schedule set for building SLS’s rocket. There appears to be a shortage of radiation-hardened electronics. (They don’t say why, but my guess is that demand has gone way up (see above).) It thus acts to prepare Congress and everyone else to the expected delays in the construction of SLS.

The second story is part of this charade, as it contradicts the first story entirely. In an interview with Aviation Week NASA manager Bill Gerstenmaier explains that NASA is now thinking of accelerating the flight test program of Orion and its rocket.

If the first story is true, however, then the second is impossible. So why did Gerstenmaier give this interview at this time? He did it to distract attention from the first story, to keep people excited about SLS, and to convince Congress and the public that the program is serious and is going to accomplish its goals. Pay no attention to the projected delays, we plan to do great things any minute!

In the past, the second story, because of its cool nature, would have overridden any interest in the first, and Congress would have kept the money spigots open. This is what happened with the space shuttle and many other past NASA projects. The costs rose, the schedule got delayed, but because there was no competition and NASA was the only way we could accomplish these cool things, the money got allocated.

Today however there is competition to NASA, and that private competition — unlike a government agency — has incentives to keep costs down. Moreover, we have an ungodly federal debt, and a shortage of cash. The money spigots are running dry. As a result, Gerstenmaier’s sales job doesn’t carry the pr impact it once did. If SLS gets delayed and the costs continue to rise, this program will get shut down. Congress will simply buy the product from someone else, for less money.

One final thought. We can argue endlessly about whether SpaceX’s fees are really less than the space shuttle or SLS, but that really is beside the point. Even if SpaceX is right now more expensive than SLS, it is still the right way to go. A government-built rocket has no incentive to lower cost. Whatever price they predict now is certainly not going to shrink with time.

A private company, competing on the open market, however, has to work to lower costs. If it doesn’t it loses customers and goes out of business. Thus, if we focus our energies on having as many competing private companies as possible, the costs will drop, and will eventually be far cheaper than any government-built system.

That is how the U.S. did it in the past. And that is how it will be done in the future, regardless of whether it is the U.S. that does it. Freedom, capitalism, and competition always work. We just have to have faith in them.

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21 comments

  • Joe

    Robert,

    A truly interesting post. However if I might be allowed a few questions.

    The rather continuous discussion to which you refer dealt with the relative cost of the Space X/Orbital Sciences Cargo contracts to the ISS as opposed to the (now defunct) Space Shuttle Program that they are intended to replace. You post four links which you say should help clarify the situation.

    (1) Your first link makes the following references:
    – “Luxembourg-based SES, which was the first major commercial satellite operator to book Falcon 9 — the SES-8 satellite is scheduled for launch in the second half of 2013 — announced Sept. 12 it had contracted for three more satellites to launch on Falcon 9 or the future Falcon Heavy rocket starting in 2015”

    Forgive me but I have never heard of a firm contract for a launch being let when what rocket it would be launched on (including the Falcon Heavy that does not yet exist) had not yet been established.

    – “While some of these companies, including SES, have easy exits to other vehicles if SpaceX does not perform, this is not true of all SpaceX customers.”

    “Easy Exits” – yes that makes it all seem really nailed down. These are not contracts; they are the equivalent of Memos of Agreement. For the uninitiated that is a pact to attempt to negotiate an actual contract should certain interim events occur.

    How does this relate to the relative cost of Space X cargo deliveries to the ISS?

    (2) Your second link is a set to a set of links that apparently took place a long time ago and you “can’t find my notes so I don’t know the exact date. It was after Musk had announced the Falcon 1 but before any launches”. That would be the same Falcon 1 that Space X has now discontinued.

    Again how does this relate to the relative cost of Space X cargo deliveries to the ISS?

    (3) Your third link is to an article that talks about a shortage of radiation hardened components that may be slowing down development of BEO hardware.

    – Are you suggesting that Space X is developing its own hardware of this type and would not be subject to the same shortages? If so please supply supporting link.

    – Are you suggesting that LEO Hardware does not need this type of hardware? If so please supply supporting link.

    In any case how does this relate to the relative cost of Space X cargo deliveries to the ISS?

    (4) Your forth link is to an article saying NASA is considering accelerating (at least in some aspects) its BEO program. You assert that this is contradicted by the story in you third link. You may (or may not – depending on the details) be correct.

    But, how does this relate to the relative cost of Space X cargo deliveries to the ISS?

  • Coastal Ron

    The implication from the AW article on supply chain was that suppliers were not investing enough time or money to solve the supply chain lead-time issues. That could be because the parts are custom made, and they may see that the prospects for additional orders is pretty low (they may doubt the long-term funding of the SLS and MPCV). I would suspect that their suppliers are hand building some of these components in their prototype/engineering facilities, and usually that is difficult to accelerate.

    Nevertheless, that does seem to contradict what Gerstenmaier said about accelerating the schedules, and you may be right – his statement was made to deflect attention from program issues. I have no doubt that they are looking at accelerating the schedules, but he didn’t say they were doing that because the program was not only on schedule, but possibly ahead of schedule. A little subterfuge that is not a lie, but more a matter of “playing the game”.

    Regardless what Gerstenmaier says, “events on the ground” – the actual SLS & MPCV schedules – will start coming into clearer focus, as will the inevitable budget increases that they will both need, and that will ultimately be the downfall of at least the $30B+ SLS program. I think the MPCV will survive regardless, and can be launched on a Delta IV Heavy with no crew.

  • Coastal Ron

    Joe said:

    Forgive me but I have never heard of a firm contract for a launch being let when what rocket it would be launched on (including the Falcon Heavy that does not yet exist) had not yet been established.

    If it’s not your area of expertise (and apparently it isn’t), then why are you surprised you haven’t heard of this? Companies take risks all the time, especially when they can save $Millions, which is why they have exit clauses in their contracts and backup plans. And that brings us to another comment you made:

    These are not contracts; they are the equivalent of Memos of Agreement.

    No, they are contracts – read the article Joe. The contracts have performance metrics that the supplier has to meet, otherwise the customer can cancel the contract. That’s pretty typical in contracts for many industries, so it’s not something unusual just because it involves your favorite company SpaceX. For example, SES said the following about a launch contract they have with ILS:

    There are obviously too many failures” happening at ILS, Bausch said. “Even one failure is too many. We have a clause in our multilaunch agreement that allows us to step out of the contract if the number of failures exceeds a ceiling. We are not there yet, but we are getting closer.

    So here we have an exit clause with a launch provider that has been in business for a long time. Companies have to safeguard their businesses, so structuring their contracts to mitigate risk is just normal business.

  • Fred Willett

    re Joe’s 3rd point. i.e. electronics.
    SpaceX has always done the bulk of their electronics in house.
    See
    http://www.spacex.com/updates_archive.php?page=0604-0704
    towards the bottom of this page from the SpaceX updates (June-July 1994) is a nice photo of all the F1 avionics. All manufactured in house.

  • The radiation hardened CPU may be the bottleneck. vxWorks is the OS, but I’m not sure what chip they use (although I can’t find it, I think it’s a variation of the rad750.)

    They don’t need that many chips. Only one for the green board I would think. Perhaps all the red boards need one as well?

  • How does this relate to the relative cost of Space X cargo deliveries to the ISS?

    Because arguing the numbers when unknown begins an endless debate our host has answered in the only way possible.

    Even if SpaceX is right now more expensive than SLS, it is still the right way to go. A government-built rocket has no incentive to lower cost. Whatever price they predict now is certainly not going to shrink with time.

    Whereas competition always improves the quality of products and services.

  • Kelly Starks

    >..Frank McKenna, president of International Launch Services (ILS) of Reston, Va. — a veteran
    > launch service provider and a principal SpaceX competitor — said he has calculated that SpaceX
    > is, on average, just under 50 percent less expensive than ILS, Arianespace of France and other
    > established launch service providers…

    I’ld be curious about how they calculate that given the customers have generally report SpaceX cost as “competitive” or “higher then” their previous services.

    Could be the”early adopters like Biggelow, and NASA pretty well ate all the overhead costs, and SpaceX is planing to market additional flights at closer to margin costs — or it could be the actualy costs will include extra costs in addition.

    >..Even if SpaceX is right now more expensive than SLS, it is still the right way to go. A
    > government-built rocket has no incentive to lower cost. Whatever price they predict now
    > is certainly not going to shrink with time…

    How is Falcon less “government-built” then Atlas or Delta? Certainly Falcon has less commercial money in its development then D or A did.

    As to costs lowering, thats being driven up by reduced markets as the scale of commercial and civilian space operations drops. Adding more providers in a declining market with legendary high fixed costs, will (as it has in the past) increase costs to the consumer.

  • Coastal Ron

    Kelly Starks said:

    Could be the”early adopters like Biggelow, and NASA pretty well ate all the overhead costs

    That would be the case for any new company.

    However SpaceX has been far less expensive than their competitors since the beginning, so that doesn’t completely explain what’s going on. For instance, SpaceX has been offering Falcon 9 for less than $60M during it’s whole product history, which is likely at least $40M less than it’s competitors.

    Another factor to consider is that SpaceX is owned by just a few people and entities, and they seem to be plowing their revenue back into expanding the company rather than taking it out in earnings. That let’s them ramp up their company fast, and mature their pricing faster.

    Something else you have to wonder is why no one else so inexpensive? Rockets are pretty mature technology, but Ariane 5 and ULA’s Atlas V & Delta IV are exceedingly expensive. ESA & CNES, who make Ariane 5, have admitted that it costs so much because they manufacture it based on political factors, not low-cost decisions. ULA has focused on U.S. government needs almost exclusively, which means they can charge higher prices because they have held a monopoly.

    It’s also not easy to lower the price of a rocket that is already in production, since by that time you have already determined it’s cost structure. That means that the only way to compete with Falcon 9 is to develop new rocket designs and manufacturing processes. That is something ESA & CNES are talking about doing, but it is expensive and time consuming.

    How is Falcon less “government-built” then Atlas or Delta? Certainly Falcon has less commercial money in its development then D or A did.

    This gets into the debate about what “commercial” means. In this case, when comparing Falcon 9 to the SLS, it means that SpaceX is responsible for designing, marketing and operation of Falcon 9, not NASA. That makes Falcon 9 commercial, regardless how they generated their revenue. If having a government buyer makes a product more “government-built”, then the iPhone surely must be classified as being “government-built” too, since the government buys lots and lots of iPhones. Same with pencils and copy paper. But they are not, and neither is Falcon 9.

  • Joe

    Hi Fred,

    Thanks for the link. I read it as carefully as I am capable and did a key word search as well, but I could find no reference to radiation hardened electronics components. I am not saying I could not have missed them, only asking for a pointer to where that was addressed.

    Thanks.

  • Joe

    Hi Kelly,

    Good points, but not likely to make much headway around here.

    “Even if SpaceX is right now more expensive than SLS, it is still the right way to go. A government-built rocket has no incentive to lower cost. Whatever price they predict now is certainly not going to shrink with time…”

    Robert,

    I had intended to stay away from this point, but since several people have brought it up I will ask.

    How is this different than the Obama Administration position that even if coal, oil, natural gas, and nuclear fission (etc.) are less expensive than ground based solar power as of now we should do things like fund Solyndra?

    I hope you will believe this is not intended as a “gottha” question. I would really like to hear your reasoning on this issue.

  • Kelly Starks

    > However SpaceX has been far less expensive than their competitors since the beginning, ==

    Thats not what their customers have been saying. They say they are offering it for $54 a lunch, much lower then the others, but NASA was showing closer to $400, and Friday at the AIAA conf, they were talking about offering new customers about $88 million per launch, not the spaceX websites $54.m

    > Another factor to consider is that SpaceX is owned by just a few people and entities,
    > and they seem to be plowing their revenue back into expanding the company ==

    About all their “revenue” was NASA grants (which they had to put to R&D), and that covered their R&D. They never got enough investment to cover more then the restof their costs.

    > Something else you have to wonder is why no one else so inexpensive? ==

    Well the Russians did offer far lower launch price at the end of the cold war. just anit.

    >==Rockets are pretty mature technology, but Ariane 5 and ULA’s Atlas V & Delta IV are
    > exceedingly expensive. ==

    Not really. Their dev cost is less then a long range commercial aircraft of that cargo capacity. But given you sell hundreds of the planes (each flying dozens to hundreds of flights a year) and only tens of the rockets. No surprised your eaten alive in overhead costs per flight.

    >> “How is Falcon less “government-built” then Atlas or Delta? Certainly Falcon has
    >> less commercial money in its development then D or A did.”

    > This gets into the debate about what “commercial” means. In this case, when
    > comparing Falcon 9 to the SLS, ===

    Which we wern’t.

    >== it means that SpaceX is responsible for designing, marketing and operation of Falcon 9, not NASA. ==

    But given NASA paid for al their dev costs, supported their dev, and is paying for half their paying flights — thats not real commercial.

    As to the SLS, which was designed for deep space exploration (which folks say NASA should be developing things for) and theres no other market for space exploration systems – theres a good reason to not concider it commercial — course its developed by a commercial firm for one potential customer (NASA) pretty much like SpaceX systems are.

    And as for the Falcons prime competitors Atlas and Delta, they are more commercial then the Falcons given your criteria.

  • Kelly Starks

    >Hi Kelly,

    Hi Joe

    > Good points, but not likely to make much headway around here.

    True, which is why I was avoiding commenting.
    ;)

    The mind numbing (and traditional among folks wanting gov pork) assumption that money spent on competing projects are pork, but spent on their fav projects is a “investment”.
    ;)

  • Coastal Ron

    Kelly Starks said:

    Thats not what their customers have been saying. They say they are offering it for $54 a lunch, much lower then the others, but NASA was showing closer to $400, and Friday at the AIAA conf, they were talking about offering new customers about $88 million per launch, not the spaceX websites $54.m

    Where is NASA saying SpaceX is charging them $400M for a Falcon 9 payload launch? And for cargo runs to the ISS with their Dragon spacecraft, they are only charging $134M/flight. I think you are confused.

    I think you are also confused about the $88M number, since Falcon Heavy pricing starts at $83M. Intelsat has already purchased one flight. I wasn’t at the AIAA conference, so provide a link to the specific comment if you think you are right.

    About all their “revenue” was NASA grants (which they had to put to R&D)

    Nope. Where do you get that idea from? The COTS program is governed by Space Act Agreements, and payments are only made after pre-negotiated milestones are completed. That doesn’t resemble what a grant is.

    For instance, with a grant if the goals of the grant are not achieved, there are usually no significant consequences (the grant money doesn’t have to be repaid). With a contract (which is what the Space Act Agreements are), if the product or service is not delivered at the end of the contract (or intermediate milestones), there are serious legal and monetary ramifications (no payments, or in the case of RpK, contract cancellation).

    They never got enough investment to cover more then the restof their costs.

    You are ignoring the money they received from commercial contracts they signed. Those contracts required some degree of pre-payment (stated on the SpaceX website), which has been a significant source of cash for them. The NASA COTS contract helped, but they have stated they could have developed Falcon 9 without it.

    But given NASA paid for al their dev costs, supported their dev, and is paying for half their paying flights — thats not real commercial.

    Please provide an official definition of “commercial” that supports your claim, because your definition doesn’t make any sense. You are saying that since $1.00 of government money is involved, that forever forward SpaceX is not a commercial company? And not just SpaceX, but if a pencil company takes a government order, then it is no longer commercial either. That makes no sense, and is not supported by any official definition.

    SpaceX is commercial because they develop their own products, set their own prices, and can sell to government or commercial companies. That they can get customers (commercial or otherwise) to prepay for future products or services makes no difference. Apple provides prepayment to some of their supplies for future products and services – does that make their suppliers non-commercial? Weird.

  • Joe,

    A very valid question. Personally, I wish the government was not involved in any of these industries, including space. However, the difference tween space and solar power is that space is an already robust industry. NASA is buying an already proven product (rockets) from a somewhat new company that has demonstrated the ability to launch its rockets (SpaceX). The government is also only paying for that product after specific milestones have been achieved.

    In the case of the Obama administration’s solar power program, money was handed out willy-nilly to companies who had not yet built anything. Worse, the money generally went to companies that had helped Obama get elected, not to companies that had necessarily shown the best progress in the field. Moreover, the loans to the various solar power companies did not come after milestones were achieved, but right at the beginning, before they had demonstrated any ability to get the job done. Hence, most of the money was wasted.

    Finally, with space the government has a need (getting humans and cargo into space). That need is based on long term demonstrated political, historical, and national security grounds. To fulfill that need, it is perfectly reasonable for the government to buy that product from private commercial companies, like any other customer. This is the exact model being used with the commercial program. The result has been that the government has gotten that need fulfilled — with cargo — at considerable less cost than past government attempts to launch cargo into orbit. And based on present budget numbers, it will get its manned space needs fulfilled far cheaper as well. And both in far less time.

    With solar power, the situation is not as straightforward. Though there are political, environmental, and national security reasons for lowering our use of fossil fuels, it is not clear that solar power will achieve that goal. Yet, the Obama administration handed out cash everywhere to many solar companies, most of whom were completely unable to accomplish their stated goals.

    This last point is especially important. While the commercial space program at NASA has been managed very well, the solar program at EPA has been a management disaster. This fact more than anything is the biggest difference between the two, and it indicates once again how mediocre the Obama administration has been in most of what it has tried to do. To my mind, the only reason the commercial space program has worked is that it is one of the few successful programs from the Bush administration that Obama was willing to continue and expand.

  • John Kavanagh

    “Congress will simply buy the product from someone else, for less money.”

    Congress doesn’t want the launch product/services. They want jobs in their district, and campaign funding from the incumbents. Private launch competitors don’t necessarily deliver *that* product to congress. The status quo Apollo/Shuttle industrial complex does, however.

  • Steve Hatfield

    SpaceX has yet to make a profit and will likely raise prices soon.

  • Coastal Ron

    According to SpaceX, they have been profitable for a couple of years. What evidence do you have to dispute that?

  • Joe

    Robert,

    Thank you for the thoughtful response, as you might expect we disagree on key points.

    First there could be a discussion of how “robust” the space industry is. Certainly the technology of standard ELV’s is well established, but that defines part of the problem with the ‘commercial’ programs. None of them (with the exception of Blue Origin which was never involved in the cargo competition and has now dropped out of commercial crew) are seeking to achieve any kind of breakthrough in how payloads are launched only building new vehicles with the same operating characteristics and payload ranges as already existing launchers.

    The idea seemed to be that by better management they would achieve large savings in per unit cost for launch to LEO. The numbers that have now been established clearly show that that has not happened. Perhaps at some point in the future when (and if) the Falcon 9 has established a track record (using its government supplied ISS cargo contract) it will be able to really compete with the smaller iterations of the Delta IV and shave percentage points off their prices. All well and good but that is not the Bold, Innovative, Paradigm Shifting, Game Changing cost reductions hyped by Space X (though to its credit, not Orbital Sciences) and amplified by Space X on-line supporters.

    In my first post on the previous thread I said: “The overall cost of Space X services is lower because it delivers so much less (and does so – it is becoming clearer as actual contracts are signed – inefficiently). If you are going to have only a de-scoped/unambitious space program then I guess Space X is all you need.”

    That, at least to me is still the point that is being missed, Commercial Cargo/Crew make sense economically only if you are planning to support a much smaller program. They are (pound for pound) substantially less efficient, but if you’re HSF ambitions are limited to flying out your minimal international commitments to the ISS their total cost (assuming Space X/Orbital can deliver on their promises) will be less. Using something that has Shuttle capability or larger to do that is like using an 18-Wheeler to deliver a package that can be carried on the passenger seat of a compact car. The 18-Wheeler is definitely capable of being more efficient, but it is overkill due to the small scope of what you want to do.

    Sorry but I just do not find that kind of program worth much attention and even if you do it should be contemplated whether or not you need Space X/Orbital. If you are really interested in being frugal it might well be cheaper to simply buy the limited services required from the Russians and admit we are abandoning any real ambitions in space.

  • How is this different than the Obama Administration position that even if coal, oil, natural gas, and nuclear fission (etc.) are less expensive than ground based solar power as of now we should do things like fund Solyndra?

    Because it doesn’t involve loan guarantees to companies that favor the investor over the taxpayer, regardless of results. It involves promoting competition for services required by the government, on a contract that pays a fixed price for performance.

    I find these continuous comparisons between commercial crew and Solyndra (and other DoE loan guarantee programs) ignorant, and even stupid, because people who continue to make them have been corrected many times. But sadly, I expect it to continue.

  • How is this different…

    First you need to be able to acknowledge the difference as well as the similarities.

    Any government involvement distorts the market. This is true of both SpaceX and Solyndra.

    Solyndra was a complete waste of money (except as money laundering for political contributions.)

    SpaceX didn’t need the money. They would continue to make progress without it (if at a slower pace.)

    Arguing that SpaceX is less than commercial is stupid. SpaceX was founded on the founders money not some government grant. Government provides tax dollars all the time to many companies without anybody questioning if they are commercial.

    Solyndra was a commercial venture as well except explicitly structured to only get government money.

    What NASA does is not commercial. However, the funds they provide are no different from any other government money (taxpayer money) and no company magically becomes non commercial just because they receive some of these funds.

  • 9 is light years safer than Ares1 in every way. Ares 1 carries 3 less pelope than falcon9. Ares 1 has to be heavy lift rocket because it uses solid rocket fuel and it needs a gigantic escape system to have a remote chance of surviving a solid rocket fuel explosion. Falcon 9 does not use solid rocket fuel.

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