Michael Griffin's presentation to the Georgia Tech School of Aerospace Engineering, 2/22/16. Uploaded by verbal permission given to Stephen Fleming, academicvc.com

1. Opportunities and Roadblocks for the
Development of Commercial Space
Enterprises
Michael D. Griffin
CEO,
Schafer Corporation
Seminar
Georgia Institute of Technology
22 February 2016

2. Introductory Observations
• Space development ca. 1950-2010 – military and civil –“all government, all the time”.
o Few exceptions: comsat industry, more recently (and less robustly) commercial
imaging, most recently ISS cargo resupply (2008).
o Space exploration and development are primarily an element of national strategy.
 Both “hard” and “soft” power, and including scientific and economic influence.
o Consequences as expected from government/prime contractor monopoly:
 Slow development tempo, high cost, risk aversion, reduced innovation as
compared with railroad, automotive, aviation, consumer electronics and information
technology industries.
 But: “space” really is hard; quite possibly more like early open-ocean maritime
experience than any of the above examples.
 Strong “pushback” for > 30 years from nascent “commercial” entities claiming
ability to perform “routine” space launch and operations tasks more efficiently.
 Not so far supported by the evidence; i.e., “what’s stopping you?”
 If you can’t beat a government enterprise, should taxpayers support you?

3. Observations (cont.)
• But even if “space is hard”, space development could (would) benefit enormously from
give-and-take of competitive forces.
o Greater long-term societal benefit seems likely.
o Market discipline forces greater pace and quality than government oversight.
o But – market incentives and government policy objectives must be aligned.
o A “government sponsored commercial market” is a contradiction in terms.
 When a commercial product is not ready to emerge, government cannot force it;
when it is ready, government cannot stop it.
• Yet, history offers numerous examples where sponsorship of public enterprises has
led to the creation of new commercial markets.
o Maritime, rail, automotive, air transportation; power grid, water supply, satellite
navigation.
• Key space policy question for the 21st
Century: how can public policy decisions most
effectively spur collateral private developments in space?
o Must first consider why private development has not already occurred.

4. “Commercial Space” and the Market
• Free market structure, expectations, and constraints are not well aligned with the
structure of space development programs.
o Inflation averaged 3.1-3.2% from 1926-2010.
o US Treasury Bills – 2.5% annual return, relative stable in recent decades.
o High-grade corporate bonds – 5.5% from 1926-2010; real-dollar payback ≅ 30
years.
o Equity Markets (70% US, 30% International) – 10% from 1926-2010; real-dollar
payback ≅ 12 years.
• Riskier investments must offer smaller commitments, greater return, quicker payback.
o Venture Capital – > 40% return, 5-yr payback, < $5 M.
o Angel investors – > 1000% return, 5-yr payback, < $1 M.
• Space investments generally do not fit these profiles.
o Large front-end commitments, risky enterprises, lengthy payback times.
 Few investors seek such endeavors, and those who do aren’t in it for money.

5. Communications Satellite Business Example
• Assumptions
o High-end communications satellite – 56 transponders.
o Investment NPV at beginning of Year 1 – US$0.5 billion.
o Three-year development – equal real-dollar revenues in Year 4-18 (15-year life).
 Out-year revenues inflated at June 2011 3.6% US Consumer Price Index.
o Average $1.5 M/yr annual revenue for each 36 MHz equivalent transponder (current
spot market price $1-2 M/yr depending on terms and conditions).
 $84 M/yr total annual revenue.
• Results
o IRR 13.0% (9.4% real-dollar return)
o Payback in Year 13 at 10% discount rate (i.e., cost of capital is the opportunity
cost of the long-term equity market return: 10% from 1926-2010, or 6.8% real
return).
• Comsat business case is consistent with market treatment of investment with
modest additional risk as compared to equity market index fund.

6. ISS Cargo & Crew Market
• Assumptions
o Anchor market is total US commitment to ISS: 15,000 kg/yr, 8 seats/yr (2 flights).
o ISS remains in operation through Year 20 (16-year cargo market, 15 years for crew).
o Company develops launch vehicle, launch facility, ISS-compatible cargo vehicle,
crew vehicle.
o Crew vehicle is a human-rated variant of the cargo vehicle, with additional
investments for crew systems.
 Investments in cargo vehicle apply to crew vehicle also.
o Best-commercial-practice, four-year development program: cargo revenue in Year
5, crew revenue in Year 6.
 Year 1 NPV of non-recurring costs for major system elements:
Launch Vehicle – $350 M
Launch Facility – 50 M
ISS Cargo Vehicle – 200 M
Crew System Upgrades – 100 M
Total Expenditures – $700 M

7. ISS Cargo & Crew Market (cont.)
o The company captures half of the US ISS market.
o December 2008 NASA Commercial Resupply Service (CRS) ISS cargo contract
pricing of $59K/kg assumed when service begins in Year 5, inflated at the June
2011 3.6% CPI in out-years.
o Crew transportation is priced at $125 M/seat in Year 6 (double the average price of
Russian Soyuz in 2014-16); inflated at 3.6% in out-years.
o Launch service also offered in non-ISS market; $150 M/launch assumed in Year 5,
inflated at 3.6% per year thereafter.
o 4 non-ISS launches in Year 5, 2 additional launches per year to 12 in Year 9,
constant thereafter.
 Steady-state launch rate for all customers at least 14 per year.
Delta launched 12 times in 1967, 13 times in 1998 with one failure.
Atlas, Atlas-Agena launched 33 times in 1966, with 3 failures. 14 Atlas
vehicles were launched in 1967 and 1978, 12 in 1995.

8. ISS Cargo & Crew Market (cont.)
o The company operates with a net profit margin of 10% across all lines of business.
 39% higher than the 7.2% average for the aerospace and defense sector.
o No developmental failures resulting in additional expenditures or delays to the
program occur.
o No operational failures resulting in the interruption of service or additional
expenditures occur in the course of the 179 flights (per the market capture
assumptions above) in Years 5-20.
o No modifications or upgrades requiring significant additional investment are
necessary in Years 5-20.

9. ISS Cargo & Crew Market (cont.)
• Results
o Enterprise yields 20.5% IRR; well below “risky investment” expectations of 25-35%.
o At a 10% discount rate (assumed cost of capital), payback occurs end of Year 10.
 Year 6 of operations.
o At the 10% discount rate, ISS crew/cargo yield negative returns; i.e., non-ISS
launches are subsidizing the ISS business.
 IRR increases to 21.5% w/o ISS market, even if no increase in other traffic.
o Capturing the total crew market and half the cargo market yields 22.7% IRR,
payback late in Year 9.
o Capturing half the crew market and all of the cargo market yields 22.8% IRR,
payback late in Year 9.
o Entire US cargo, crew market for ISS yields 24.7% IRR, payback early in Year 9.
• Observation: this is not a good business from a financial perspective, yet carries a
high enterprise risk associated with potential human spaceflight accident(s).
Typo fixed by SRF

10. Lunar Cargo Market
• Assumptions
o An international lunar base is developed with initial logistics requirements at least
equal to ISS.
o Cargo delivery to lunar surface priced at 10X that for ISS.
 Reflects best-case “gear ratio” of cargo mass vs. lunar surface mass.
o Same private venture as before, except now for cargo delivery to a lunar base.
o Assume translunar stage and robotic lander can be developed for the same
approximate cost as assumed for the ISS cargo/crew vehicle.
 NPV of enterprise development expenditures remains $700 M.
o The company captures half the lunar logistics market: 7500 kg/yr.
 Delivered price is $590 K in the base year, inflated at 3.6% in out-years.
 Revenues begin in Year 6 due to the greater difficulty inherent in the task.
o Lunar base remains viable indefinitely.
 No growth assumed in the initial business case analysis.
o Other assumptions held constant.

11. Lunar Cargo Market (cont.)
• Results
o 27+% IRR for lunar cargo business alone.
 Can be delivered with 7 launches annually.
o Lunar base cargo delivery market should grow.
 5% annual growth for first 15 years yields 30% IRR.
 10% growth yields 33% IRR.
o 6 launches/yr remain available for other payloads.
 If sold for $150 M (as previously assumed) enterprise IRR increases to 30.5%.
o If the ISS cargo mission is undertaken, the $200 M cargo vehicle development must
be added to expenditures, and the enterprise IRR drops to 28.5%.
• Comments
o Much lunar cargo (water, food, other supplies) has relatively low intrinsic value.
 Ideal market for new space companies; penalty for failure is small, enterprise
risk is reduced, ample opportunity to refine designs through repeated use.
 USG could guarantee a market for lunar base cargo prior to human return.

12. Conclusions
• The ISS cargo/crew market by itself is insufficient to drive the development of a viable
commercial space transportation industry.
o Too small and too short-lived – cannot survive without front-end subsidies.
o Even generous assumptions regarding non-ISS traffic do not close the business case.
 Non-ISS traffic actually subsidizes the ISS business.
• Supply of low-intrinsic-value cargo to a lunar base offers a substantially more attractive
business opportunity than cargo or crew resupply of ISS.
o Significantly higher IRR, lower enterprise risk, longer term – all the things necessary to
attract investors.
o Even a small lunar base (e.g., crew of 4 rotated twice per year) generates enough
cargo demand to support at least two commercial space transportation companies.
• Establishment of a lunar base aligns important strategic goals: it facilitates U.S. and
international partners’ preeminence in cislunar space, and provides the “anchor market”
for expansion of commercial space enterprises.
o Many lunar base needs (power, comm, nav, mining) could be met via industry.