Commercial providers

The commercial space industry divides into a handful of segments with different economics. A company’s position is determined less by its technology than by which segment it occupies and whether it controls its own demand.

The segments

The value chain runs left to right from capital intensity toward margin. Manufacturing hardware is expensive and yields commodity margins; selling an answer derived from that hardware yields software margins. This is why Earth observation companies consistently describe themselves as data companies, and why several have moved away from selling imagery toward selling analytics. See Markets and applications.

Launch providers

The segment is described in The launch market. What distinguishes providers commercially is less vehicle performance than three structural factors.

Cadence. Fixed costs dominate, so flight rate determines cost per flight more than vehicle design does.

Reuse. Whether the vehicle recovers, and whether refurbishment is genuinely cheap rather than nominally possible.

Captive demand. Whether the provider also operates satellites that need launching, which supplies cadence independent of the external market.

A provider with all three is in a structurally different position from one with none, regardless of relative vehicle quality.

Satellite manufacturers

The traditional model built each satellite as a bespoke system around a customer’s payload, over three to five years, at a cost of $150M to$400M for a large geostationary platform. Margins were reasonable, volumes were single digits per year, and every satellite was substantially unique.

Constellations broke that model, because a manufacturer asked to build hundreds of identical satellites at a few hundred thousand dollars each is running a production line, not an engineering programme.

The two models require different companies. Manufacturers built around the first have generally struggled to compete in the second, because the capabilities that make them good at bespoke engineering are the ones that make them expensive at volume. Several constellation operators concluded that no supplier could meet their cost target and built the satellites themselves.

Vertical integration

The industry’s most consequential structural question is how much of the chain a company should own.

The case for integration

Control over cost, schedule and design. A supplier optimises for its own margin, not for the system. Where a component is on the critical path and no supplier will meet the target, building it is the only option.

The case against

Enormous capital requirement, and every function must be world-class. A company that builds everything competes with specialists in every segment simultaneously.

What determines the answer

Whether a competitive merchant supply exists. Integration is a response to supplier failure as much as a strategy.

The strongest position

A vertically integrated company whose internal demand supports the fixed costs of each stage. That is rare and is the structure of the industry leader.

The historical pattern is that integration follows from frustration. Companies integrate when suppliers cannot meet cost or schedule, then discover that internal supply gives them a cost advantage they can extend to external customers, at which point they compete with the suppliers they replaced.

The counterexample is that specialists survive where the product requires deep domain expertise and low volume: precision optics, atomic clocks, certain detectors, and radiation-hardened components. These have not been integrated because the volume does not justify it and the expertise is not transferable.

Ground and data

The ground segment shifted from infrastructure each operator built to a utility purchased by the minute. Ground station as a service providers removed a large fixed cost and a multi-year lead time from starting a satellite operation, which changed who could plausibly start one. See Ground segment.

The data layer is where value has concentrated. A company that operates satellites and sells raw imagery competes on price per square kilometre. A company that sells a monitoring service with a defined refresh rate and accuracy competes on the value of the decision it informs, which is a different and better business.

The strategic risk in the data layer is that it does not require owning satellites. An analytics company can buy imagery from multiple providers, which means the satellite operators are suppliers to a business capturing more of the margin than they do.

What determines position

Across all segments, a few factors recur.

The government anchor customer deserves emphasis because it is frequently understated in commercial narratives. Most successful commercial space companies were sustained through their development years by agency or defence contracts, and several would not exist without them. The commercial market usually arrives after the capability has been paid for by a government customer.

References

• Bryce Tech, State of the Satellite Industry Report and Start-Up Space, published annually.
• Weinzierl, M. “Space, the Final Economic Frontier”, Journal of Economic Perspectives, 32:173, 2018.
• OECD, The Space Economy in Figures, periodic.
• Company user guides, annual reports and regulatory filings, which are the primary sources for anything quantitative in this field.