Space for Private Investment: Entrepreneurs of the Final Frontier

On May 25, 2012 Space Exploration Technologies Corp. (commonly referred to as “SpaceX”) made history, with its Dragon capsule becoming the first private spacecraft to dock with and supply the International Space Station (ISS).[i] Though the capsule was unmanned, the event marked an important milestone in human spaceflight. Since then, SpaceX has made two more flights to the ISS as part of its Commercial Resupply Services (CRS) contract with NASA.[ii] On September 29, 2013, Orbital Sciences Corporation (“Orbital”) docked its Cygnus spacecraft with the ISS, becoming the second private company to do so.[iii] Like SpaceX, Orbital will make additional supply flights to the space station in connection with the CRS program.[iv] Despite accomplishing a similar task as a part of the same program, the two companies represent vastly different approaches. While Orbital represents a more traditional approach in the space industry, SpaceX provides a vision for future entrepreneurship.

Government Contracts

From the earliest days of the space race, government contracts played a central role. The first rocket to carry an American into space in 1961 was built on contract by the Chrysler Corporation. [v] More than 50 years later, the U.S. Government continues to contract with private companies to accomplish its goals in space, though in the past decade, its approach has evolved to allow more private innovation.[vi] In spite of this evolution, companies are still bound by the heavily regulated government contracts process.

The Federal Acquisition  Regulation (FAR), 48 C.F.R. Chapter 1, governs almost all government contracts, including contracts with NASA.[vii] The process begins when the agency identifies a need or requirement that it must satisfy.[viii] For example, in the 1960s, NASA began to see a need for a reusable launch vehicle that could carry payloads and service future space stations and satellites. [ix] This idea would later become the Space Shuttle, but it would only take shape after NASA solicited designs from aerospace companies like Lockheed, McDonnell Douglas, General Dynamics, and North American Rockwell. [x] For the Space Shuttle design, NASA issued a Request For Proposals (RFP)[xi], which is a type of solicitation used in the Competitive Negotiation method of contracting[xii]. In contrast to the other competitive contracting method, Sealed Bidding, Competitive Negotiation has less specific requirements and allows communication between the agency and the potential contractors. [xiii] Under the FAR, an RFP is required to state the following: (1) the agency’s need, (2) the contract’s anticipated terms and conditions, (3) information the contractor must include in its proposal, and (4) factors the agency will consider in awarding the contract.[xiv]

On April 14, 2008, NASA released an RFP for the Commercial Resupply Services contract, which would award the winners with the task of sending needed cargo to the International Space Station after the retirement of the Space Shuttle.[xv] Orbital and SpaceX were awarded contracts in the amount of $1.9 billion and $1.6 billion, respectively, to each send 20 metric tons of cargo to the ISS.[xvi] The contract was a major boon to SpaceX, which had previously been almost entirely privately funded. For Orbital, it was an important success, but in many ways, it was business as usual.

Different Approaches

Though they’ve competed for some of the same contracts, SpaceX and Orbital are very different companies.

Orbital in many respects resembles the old paradigm for the space industry. The company was incorporated in Delaware as “Space Systems Corporation” in 1982 after its founders, David Thompson, Bruce Ferguson, and Scott Webster, worked together on a NASA-funded study of commercial space applications while attending Harvard Business School. [xvii] Its first source of revenue was a NASA contract in 1983.[xviii] Thereafter, the company began to expand in size and revenues through its contracts with NASA and the Department of Defense.[xix] In the ten years after its creation, Orbital diversified its business. In 1988, it was awarded a contract with the Defense Advanced Research Project Agency (DARPA) to build Pegasus, an orbital rocket launched from a converted commercial jet.[xx] In 1989, the company was awarded another multi-million dollar contract by DARPA, this time for a ground-based rocket called Taurus. In 1990, the company went public (NYSE: ORB), and since then has expanded its product portfolio to include three more launch vehicles, numerous satellites, and ballistic missile defense systems.[xxi]  In buildings its various systems, Orbital uses a number of subcontractors for the different components. For example, two different companies supplied the engines for the Antares rocket[xxii] which carries the Cygnus spacecraft to orbit, and six different subcontractors were used to build the Cygnus.[xxiii] Since its inception, Orbital has been, first and foremost, a government contractor and it has profited from this arrangement. In 2012, Orbital earned $1.4 billion in total revenue with $61 million in net profits.[xxiv]

SpaceX represents a force for innovation in the private space industry. Founded in 2002 by Elon Musk, co-founder of PayPal and CEO of Tesla Motors, the company began building rockets before it ever saw any money from the U.S. Government. [xxv] In the company’s early years, it was funded entirely through private capital, including a $100 million injection of Musk’s own money.[xxvi] In contrast with Orbital, SpaceX has designed and built the vast majority of the components used in its launch vehicles and spacecraft, including the Merlin engines and the Dragon capsule.[xxvii] SpaceX is also currently a privately held corporation. [xxviii] As a result of its in-house component production and privately-held status, the company is able to take more risks in pursuit of its goals. Building components in-house also reduces overhead costs and time delays related to subcontracting, such as contract negotiations. [xxix] These cost savings can be passed on to SpaceX’s customers, whether that be the government or private entities. [xxx] As a result, SpaceX can offer competitive launch prices which are 40-60% lower than its competitors. [xxxi] As of November 2013, SpaceX has more than 40 contracts for future launches with its Falcon 9 and Falcon Heavy launch vehicles, representing both government and private customers. [xxxii] With the revenue generated from these launches, Musk has an ambitious goal: making travel to Mars routine and economically viable. [xxxiii] The company continues to push forward with technology development that will make this possible. [xxxiv]

Public Policy

The rise of SpaceX points to a future where private companies take on more of a role in space travel and space exploration. In an era where government spending is in decline and budget cuts affect all areas of government, SpaceX stands as a testament to what is possible with private investment in this previously government-dominated field. To be sure, government contracts still represent a major revenue source, even for startups like SpaceX, but as the company has shown, it does not necessarily have to be the main source of revenue like it is for companies like Orbital. The major test for SpaceX and other private space companies will be to send manned spacecraft into orbit. In 2007, the FAA laid the groundwork for future manned private spaceflight by enacting new regulations concerning, among other things, public safety, launch safety, and informed consent by passengers.[xxxv] Spaceflight is still an inherently risky activity. Rockets carry large quantities of highly energetic fuel, and accidents can happen, like the July 1, 2013 crash of a Russian Proton launch vehicle.[xxxvi] Congress and the Executive Branch should work together to lower barriers to private investment in human spaceflight, while balancing important safety concerns. By lowering these barriers and working with companies, government can usher in a new, more open, more innovative space age.