Tesla has continually made it into the headlines lately. The revolution that electric cars might bring has fascinated many, and business people, politicians and environmentalist alike can’t stop thinking about how the world might be about to change even more drastically.
Nevertheless, another revolution led by Elon Musk is already delivering astonishing results. On February 6, the new Falcon Heavy rocket successfully launched, something remarkable for a first attempt since this truly is rocket science. SpaceX was also able to recover two of the three boosters of the rocket, thanks to their mesmerizing synchronized landing back in the launch area in Cape Canaveral. But how significant really is this milestone?
Since its inception, SpaceX has achieved a massive and historical reduction in the cost of access to space. According to Business Insider, Saturn V rockets (the ones used in the Apollo missions to the Moon in the 1960s) had a cost of around $1.2B per launch in 2016 dollars. A Delta IV rocket—which entered service in the 2000s and still is the main vehicle to launch US military satellites—has a current list price of $350-400M, as reported by the manufacturer, but also a quarter of the payload of the Saturn V. Overall, therefore, the price per pound of launching into space has not changed much in the last 50 years.
SpaceX, however, has managed to reduce costs by around 50 percent even before reutilizing rockets, and another 50 percent drop is expected once reutilization is fully implemented (Mr. Musk tweets confirm that a Falcon Heavy rocket sells for $150M, or $90M if reutilized, with an even higher payload than a Delta IV rocket). That means that it has only taken Musk and SpaceX 15 years to cut the price by a revolutionary 75 percent. As a consequence, industry sources estimate that SpaceX has already captured more than 60 percent of the commercial launch market, from zero market share in 2012, and it is likely to see further increases if their new project, the enormous BFR rocket, delivers the further promised cuts in price per pound launched.
This is very relevant since rockets, just as commercial aviation, are an enabler for many economic activities. According to Bryce, a space consulting firm, while the launch market is worth $5.5B per year, satellite services represent a $128B market. The market is still inelastic, but that is already changing, and new opportunities will arise for those with the vision to exploit them. Indeed, Elon wants to develop Starlink, a network of 4,000 satellites to provide worldwide coverage, by 2024 and Blue Origin, a competitor, is targeting space tourism. Both are enabled by the reduced costs of access to space.
None of the established competitors have so far been able to match SpaceX’s economics. NASA says it will spend $1B just to build the launch platform for their new SLS rocket (the total bill is close to $10B), while SpaceX was able to develop its new Falcon Heavy for $0.5B. How is this even possible?
Many key elements of SpaceX’s success look familiar, as they are widely used by entrepreneurs considering their business and operating models.
- Simplicity: Musk decided to use kerosene rockets, which are not as powerful as liquid hydrogen ones, but are significantly cheaper and easier to design.
- Vertical integration: SpaceX makes 80 percent of the rocket in-house, reducing the number of suppliers – who usually charge extremely high prices. This in turn allows for faster processes and more interaction in the design stages, ensuring the best compromise solution is achieved between the different teams.
- Scale: By standardizing and using modularity (the Falcon Heavy is basically three Falcon 9 rockets put together), SpaceX can achieve greater economies of scale.
- Continuous improvement: Musk’s company has produced eight different versions of its Falcon 9 rocket in the last eight years, improving each step.
- Resilience: Each rocket has at least nine engines (more economies of scale) of which up to two can fail without compromising the mission, which reduces the amount of reliability needed, which is expensive to achieve.
- Strong focus on innovation: While SpaceX was able to leverage NASA’s knowledge, it still had to develop new manufacturing processes and technologies – such as supersonic retropropulsion, key for landing on Mars and for reutilization – which not even NASA has yet developed.
- Reutilization: SpaceX realized that a rocket’s mass is over 90 percent fuel, but that fuel only costs $200,000 whereas the rocket is worth $60M. Therefore, by recovering the rockets, refurbishing them and launching again, they could achieve significant savings. SpaceX expect to use each rocket 10 times before a major overhaul and 100 times in total, with turnaround times of 24 hours, which would lead to very high utilization.
Elon has achieved all of this, avoiding the cost-plus structure that the space industry usually used when contracting with governments, and therefore saving taxpayers millions. In addition, the threat of new competitors, such as Blue Origin, funded by Amazon’s CEO Jeff Bezos, may put pressure on SpaceX to transfer the expected savings from reutilization to customers.
The fact that space companies are starting to look like technology companies, with investors also joining in – such as Joseph Landon (MBA ‘07), Managing Partner at Space Angels Venture Fund and CFO at Planetary Resources – should lead us to think that there are significant opportunities for MBA graduates in the sector. Matthew Weinzierl, an HBS professor who has written several cases on the space industry and organized the Afternoon in Space session, bringing together students and industry experts, recognizes that space companies increasingly want to hire MBA students, particularly if they also have an engineering background. Other HBS alumni in the sector include Ariane Cornell (MBA ‘14), Head of Astronaut Strategy at Blue Origin. MIT is another stronghold with its New Space Age conference that took place in March as well as its dual MSc in Engineering and MBA program.
For many, the space industry might still look too risky, too complex and too ambitious. Elon Musk had the courage to overcome those fears, and by applying well-known and developed business techniques, has started a revolution. So if you think you have a great idea but still feel doubtful, please remember that nanosatellites’ cost of manufacturing and launch have already dropped below $100,000. That might be even lower than your MBA debt.
Sergio Porres (MBA ’19) is from Spain and an enthusiast about the aerospace industry. Professionally, he has experience in the industry having worked at Airbus, the European aircraft manufacturer, and Iberia, the Spanish flagship airline. He also spent two years at Bain & Company both in Spain and in the Middle East. Sergio graduated in 2014 in Aerospace Engineering from UPM.