Applying the Free Market to the Space Race (Intro)
Rather than going to another state to see an eclipse, in 20 years you might be checking it out from the moon. Unfortunately since the time of the Space Race between, the whole space enterprise has been only affordable to world powers. Since the time of the USSR, interest in going to space only declined as did the amount of capital and thought put into it until in recent decades, Space, the final frontier, re-emerged as the ultimate prize. But this time instead of countries, the competitors are tech billionaires. So as today’s moguls fight for top positions in technology, rockets have also become a source of competition to the titans of industry but we all stands to profit.
The two leading players you've probably heard of Elon Musk of Tesla, backing SpaceX and Jeff Bezos Amazon founder, backing Blue Origin. They're are both interested in sending you to the moon. In addition to Musk and Bezos there is now an ecosystem of startups forming around the increasing interest and demand for space capabilities. Recently Paul Allen of Microsoft has showed interest in launching rockets and Virgin Galactic continues promising customers a zero G experience. Along with an increasing demand for satellites, SpaceX's influence has already opened up a new market that other startups are pursuing. As tech crunch puts it, “SpaceX and Blue Origin are nearly engaged in a new space race albeit one without dire consequences. The two American companies are racing towards similar goals of sustainable space flight through the reuse of rockets that can be landed... Now both companies are reportedly aiming for the moon. This isn’t a zero-sum game; humanity wins if both companies win.”
Disrupting the Rocket Launch Industry
SpaceX’s pioneering efforts has been disruptive innovation to a long dormant industry. As Clayton Christensen originally described disruptive innovation, its “a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, displacing established competitors.” Following this process SpaceX is displacing large entrenched government contractors like United Launch Alliance and its owners, Boeing and Lockheed as well as Orbital ATK. SpaceX's launch attempts have been more lean, building with discarded launch equipment. They have been better able to harness the creative, cost sensitive free market to push the rocket development, making them more efficient and flexible than any prior attempts. This has opened up new approaches to the process like landing reusable rockets, reusable space planes, sub-orbital flights, motor-like rockets and electric propulsion.
Other major industry players tend to follow government contract mentality and are also mainly involved in weapons systems, like Orbital ATK formed from the merger of Orbital Sciences Corp. and the Aerospace and Defense groups of Alliant Techsystems Inc. (ATK) and United Launch Alliance (ULA) forming as a joint venture of Lockheed and Boeing. SpaceX is uniquely focused on rockets for transportation, "doing it all themselves, where Orbital tends to either contract for a subsystem or acquire an existing aerospace company." SpaceX builds their own liquid boosters with their own engines while the big aerospace companies buy Russian engines getting them into political trouble. Orbital ATK and ULA are consequently getting less lucrative launch contracts and have been forced to cut costs and produce better rockets capable of competing with SpaceX.
Igniting competition with Jeff Bezos
Although they might be the first billionaires vying for space, I find insightful to remember that Elon Musk and Jeff Bezos are only picking up the North-South rivalry started by Steve Jobs and Bill Gates pushing the bounds of technology.
It follows that Bezos like Gates tends to be less creative more business-oriented, methodical and plodding in his progress not making dramatic leaps into the future. He builds more slowly, progressively unlike their Southern rivals, step by step dutifully taking advantage of emerging technology. Bezos, like Gates, tends to apply sound management rather than pursue technology for its own sake. Financially, Bezos is more conservative, using his resources to build his financial base of Amazon. Shortly after recently becoming 2nd richest person in the world he promptly sold off $1 Billion worth of shares which is a much smaller portion of his wealth than Elon Musk has staked on SpaceX and thus will be able to support Blue Origin on the side long into the future.
To deepen the comparison, both Gates and Bezos have more orderly personal lives having remained with the same women compared to the more dramatic personal lives of Jobs and Musk. Although no one could've predicted Job's untimely death, Musk's profligate stream of love interests and other enterprises does not bode well for continued focus on SpaceX. Musk, like Jobs is a more impassioned visionary. They are both driven by their dreams occasionally to extremes and taking more risky, creative and expensive leaps into the future. They both combine exciting sexy ideas into highly functional products pushing the outer boundaries of what is possible making things functional yet beautiful.
Musk has committed more of his wealth, time and resources, to the future space and space transportation. This has resulted in tremendous breakthroughs like the vertical landing but also more catastrophic failures like the Falcon 9 exploding near takeoff. Musk is the more creative genius pushing towards the lofty prospect of a brighter future for humanity. In pursuing so determinedly his dream Musk has centered himself at the heart of pioneering the disruptive technology that Bezos and other space companies are either forced to compete with or benefit from.
My takeaway is that although Musk and SpaceX are making the most staggering breakthroughs, their larger impact will be forcing the industry to adapt. Betting on which company will end up being more profitable and sustainable is difficult, but with a $21 Billion price tag, SpaceX is currently growing the quickest.
For those reasons my main takeaway from SpaceX's disruptive innovation is to avoid Orbital ATK (OA) stock long term even at their current lowered prices. Flight systems (responsible for launching rockets) for Orbital ATK make up a third of their revenue and Orbital is becoming more dependent on this segment while overall revenue decreased in 2016. The SpaceX disruption will also lower space profitability for other entrenched industry players like United Launch Alliance and its co-owners Lockheed (LMT) and Boeing (BA) although Lockheed's Space interests is about 18% their revenue and Boeing's are only about 8%. At the same time look for industries surrounding SpaceX like to grow while waiting for a SpaceX or even Blue Origin to eventually IPO.
The current general market attitude towards technology and space during this bull market seem to harken back the the optimistic bravado seen during roaring 20’s of last century when the US thought their lives would be forever improved because of technology. Although I watch in awe at what is being achieved, when the market turns less optimistic I would expect Blue Origin more likely to be around to put together the pieces as SpaceX has done with the leftovers from the Space race of last century. So looking towards space during the recent eclipse lets not forget how close we might actually be to getting there.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.