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When Rocket Companies Become More Than Rocket Companies

There’s an interesting trend taking place amongst rocket companies in the space industry. They’re starting to look a lot less like… just rocket companies. It’s increasingly common that the organizations that were founded for the purpose of providing launch services are having much broader ambitions.

It begs the question, why don’t these organizations focus solely on building rockets? Why do they opt to also compete in markets for satellite buses, lunar landers, satellite constellations, and more?

These are some of the topics we’ll explore in today’s newsletter. We’ll also consider another important question. What will it mean when many companies providing in-space products and services also happen to own the launch access, and how do other organizations compete?

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Now let's dive in.

SpaceX as Precedent

In the New Space era, it seems to me that this trend of launch companies pursuing additional space-enabled products/services was led by, who else but, SpaceX. After first providing a decade of launch services, SpaceX seeks to offer global broadband internet services through the implementation of a LEO satellite constellation named Starlink.

SpaceX has consistently emphasized that their Starlink broadband internet service has a much larger addressable market than their launch business. Specifically, the launch market seems to max out at around $3B while they project Starlink’s addressable market to be closer to $30B-$40B.

If Starlink is ultimately successful at the scale that they hope, the value of SpaceX as a corporation will be almost entirely due to the Starlink business. SpaceX has been favorably rewarded for its Starlink project so far, with the company’s valuation reaching $100B in its most recent secondary market offering. Without the Starlink business, SpaceX simply could not continue to grow aggressively by only providing launch services, which have peaked somewhere around 10-15 launches per year for commercial and government customers.

Starlink user terminal. Source: starlink.com

The Small Launch Companies Taking Note

In the small launch market, the first company to take the step in expanding beyond their launch product was Rocket Lab. They did so by introducing their Space Systems business, starting with their satellite product, Photon. Photon is intended as a turnkey satellite solution to meet various potential mission requirements for customers. These include planetary exploration, weather monitoring, earth observations, satellite communications, and others.

Rendering of a Photon satellite approaching Venus. Source: Rocket Lab

Given that RocketLab is now a publicly-traded company, we can see how the introduction of a Space Systems business is playing out. The organization’s public reporting illustrates an interesting dynamic.

In September 2021, RocketLab shared its first half of 2021 performance. In the document, they reported gross margins for the entire company as 13% and margins for their Space Systems business in particular as 65%. The majority of Rocket Lab’s income comes from launch, so we can see that launch margins are less than 13%.

I’m not pointing out these numbers to pick on Rocket Lab, but rather to note that they are actually ahead of the curve in adapting to a challenging, but not widely discussed reality. Launch is a low-margin business. Rocket Lab has recognized this and is investing heavily into their Space Systems business. A business which they are aiming to ramp up quickly, with revenue increasing 12x from the first half of 2020 to the first half of 2021.

Furthermore, companies like Rocket Lab have noticed the impact the projected revenues for SpaceX’s Starlink program have had in boosting SpaceX’s valuation from around $20B to now up to $100B. These companies are obviously always looking for ways to provide growth for investors and new business lines are necessary for doing so.

We are seeing other small launch leadership be more open about the limitations of the launch business as well. In a recent CNBC article1, Firefly CEO Tom Markusic stated that “The rocket gives you the keys to space. It’s critically important, but the big revenue is doing things in space.” He made it clear that Firefly’s major revenue growth is for in-space services. In the near term, this focus is towards the company’s lunar lander system Blue Ghost. “Blue Ghost, fully loaded with payload, can generate about $150 million of revenue for the company,” continued Markusic. That is compared to about $15M in revenue per launch for its Alpha rocket.

Competing For Space Services Against Companies With Their Own Launch Programs

The consequences of launch companies offering in-space services are broad. These factors become impactful for the competing organizations that exclusively offer in-space products and do not have their own rockets. Launch is a gatekeeping element to operating a business in space. Having easy and affordable access to launch not only allows you to test and deploy your systems more cheaply, but it can accelerate your development timelines by years. This is no more evident right now than in the competition to provide LEO broadband internet.

OneWeb, founded in 2012, was the first company of the past decade to begin the development of a LEO broadband internet system. While they have made significant strides in deploying their satellite constellation, with 358 out of 648 of its original satellite constellation already in orbit, OneWeb has been greatly outpaced in their deployment by Starlink. SpaceX, with its Falcon 9 rocket, already has 1,646 Starlink satellites in orbit. Furthermore, the costs of paying third-party launch providers, likely at about $150M per launch, was a contributing factor to Oneweb going through Chapter 11 bankruptcy in 2020. SpaceX’s marginal cost per Falcon 9 launch on the other hand is likely closer to $20M, $120M less per launch than Oneweb.

Best Spacex Satellite Internet GIFs | Gfycat

Batch of Starlink satellites being deployed from a Falcon 9 rocket.

Consequently, it seems reasonable that for any in-space product or service in which launch constitutes a significant portion of the associated costs, a company with an in-house launch capability would have an inherent competitive advantage.

So What ?

Well, first of all this doesn’t mean that launch companies are going to take over every market in space. In fact, being a launch company means that you’re likely operating at a scale that makes most in-space markets too small to be worth pursuing. However, for markets that require large numbers of satellites to be deployed and where those satellites need to be refreshed with a high frequency, it would be a difficult prospect to compete with a company that can launch those satellites themselves.

As a result, I would expect that all of the launch companies will be introducing other space capabilities in the near term. Furthermore, I would not be surprised if we see an increasing rate of partnerships, mergers, or acquisitions between launch companies and organizations providing in-space services. We are seeing this with organizations that are choosing to enter new markets by acquiring the capabilities rather than building them entirely in-house. Examples include Astra acquiring Apollo Fusion, a satellite propulsion provider, or Rocket Lab acquiring Sinclair, a satellite component manufacturer.

I ultimately think this is going to be how small launch companies can attempt to avoid a broader consolidation in that market. There seemingly isn’t enough demand for them all to survive simply as small launchers. However, if they can each leverage launch as a competitive advantage towards their own in-space product/services markets, then maybe there won’t be as many failed small launch companies as was always anticipated.

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