Today's space race...

A recent Space.com article discusses American company SpaceX and their competitive strategic outlook.  The article isn't focused on the details or status of sending astronauts to the Moon or Mars, but on launching and deploying payloads, such as satellites, into low earth orbit.  This is the space equivalent of today's long haul truckers.  In the early 1980's, the US government was responsible for launching most commercial satellites into orbit, but has given up that position and launched only 2 of 38 during 2011 and 2012, according to the article.  

SpaceX has entered the market competing head to head with China, Russia, and Europe, hoping to be able offer a better product value, thus increasing consumer surplus above what is currently received from the competitors.  As demand continues to increase for space payloads, they are banking on the fact that they will be more efficient, provide better service, or in some way be able to gain a significant portion of the precious 20 - 25 launches per year.  As the price to launch cargo is driven downward, no doubt the demand for additional launches will increase.  If space budgets significantly change or new technology changes the need for space equipment, among other factors, anticipate the demand curve to shift.


Dave Tufte said...

Matt Walter: 100/100

NASA is a good example of a lazy monopolist. They started out as a monopolist (thanks to Defense mandates), and were able to charge a mark-up over marginal cost. A lazy monopolist then doesn't keep costs under control, and average total cost drifts upward until zero (economic) profits are reached.

In this situation, there's a niche for a private player to enter the market and be profitable. The lazy monopolist is unlikely to be able to follow suit because it has gotten attached to all the things those high costs are paying for.

Lazy monopolists tend to either leave the market (, NASA), go out of business (e.g., WordPerfect), or redefine themselves as sellers of something else (, cellphone companies like Verizon that used to be "Baby Bells" providing landline service).

Nathan said...

Theoretically speaking, if the government were to regulate the types of payloads allowed to launch into the earths atmosphere or we experience widespread public concern for the endangerment of Earth’s health by launching certain types of payloads into orbit- we would then experience an inward shift in the demand for this service. Under these circumstances, there would be a lucrative incentive for underground markets to conduct payload services at a premium and as a result would undercut the market.

Dave Tufte said...

Nathan: 47/50 (you mean earth's not earths)

I think this is interesting, but I'm not sure how it relates to this thread.

Anyway, I doubt there would be underground markets: it's too hard to hide a rocket launch. But, I do think they'd move offshore.

Ryan Horlacher said...

This is very interesting. It sounds to me like SpaceX is or will be competing directly with governments for "the precious 20 - 25 launches per year." I see this as both an opportunity and a threat. I agree with the lazy monopolist idea in that there is most likely plenty of room for improvement in an industry dominated by government run/sponsored entities, but I worry that in the face of real competition, increases in government subsidies could erode any competitive advantage that a private firm might hold.

If SpaceX does well in coming years, foreign governments will most likely have two choices. One, exit the industry or two, subsidize their satellite launching operation. If they choose to exit, SpaceX will capture a larger market share and continue to succeed. If foreign governments choose to subsidize, SpaceX may be left with nothing. SpaceX may be able to price match for a period, but will not be able to outlast its competition. I see the second scenario as more likely. Space programs are matters of national pride and nations have spent billions to develop them. Although sunk costs should not be recognized in management decisions, governments often don't follow typical business theory.

Dave Tufte said...

Ryan Horlacher: 50/50

I agree with your assertion about government subsidies. I not only see that as an issue, but as a threat. We're seeing this in big cities with the lazy monopolist cab services, asking for more protection now that they are threatened by upstarts.

Trey said...

As someone who works for a primary supplier to the rocket industry, I find this topic very interesting and related to my industry. My experience working with NASA and their suppliers has given me an opportunity to see the massive bureaucracy moving at a snail’s pace while it spends billions of taxpayer dollars on a space program riddled with red tape. Sounds to me like the byproduct of being a lazy monopolist. Personally, I welcome the competition from SpaceX and believe this is the only way we'll ever see any advancements in the United States in aerospace technology. There have been very few since the 1960’s. This competition will not just stimulate the development of new technologies but will hopefully drive prices down in a market of few players.

Dr. Tufte is right that there's a niche for a private player to enter this market and be profitable. However, with the Space Race long over and such a successful Space Shuttle program, we forget how incredibly difficult and expensive it is to launch a rocket into space. Intellectual and financial capital are two huge barriers for entering this market and being profitable. For this reason, there’s always going to be a limited number of competitors. SpaceX, on the other hand, has done an amazing job with mostly private research & development funds. As SpaceX wins more NASA contracts and diversifies with contracts with the US military, foreign governments and the private sector for launch services, the demand for their products and services will increase and drive competitor pricing down internationally. We've already seen Arianespace, an industry leader in commercial launch services considering reducing their prices.(http://spacenews.com/38331spacex-challenge-has-arianespace-rethinking-pricing-policies/)

Dave Tufte said...

Trey: 50/50

The problem with this sort of discussion is that I don't think anyone understands what the cost structure of rocket launches actually is. All the producers have been government agencies, and they're not known for being good at keeping track of costs in the same way that private firms do.

At some level, we can grouse about a perceived need for more competition. But at a higher level, we'd need to estimate marginal cost and demand to get a sense of whether or not NASA is operating efficiently or not.