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June 15, 2011

Is the market really looking up for commercial space?

by brainoids

A while back I published a hard look at the optimistic launch demand estimates generated by FAA’s COMSTAC annual forecast.  This year’s forecast has just been released.    In addition to the forecast, the report has for many years included a valuable and underutilized source of information, which provides a more believable and fundamental basis for optimism in the commercial launch sector.  

The Data

The data are an annual survey of satellite service providers on market, regulatory and industry factors which either promote, or inhibit, the service sector’s demand for new satellite launches.   While the data are presented each year, I have never seen them actually trended anywhere.   Doing so provides some good evidence that the market may indeed by looking up for commercial launch providers, independent of the self-referential and squirrelly launch demand forecasts.

While the sample size is small (this year, 14 companies responded), the coherence of the results trended over time indicates that there is some value to the data.   Each of these companies were asked whether various factors had “significant negative”, “some negative”, “no effect”, “some positive” or “significant positive” impact on their plans to purchase and launch satellites.   The factors included the readiness of the launch and satellite service base (launch vehicle and satellite availability and reliability), the financial and regulatory environment (economic conditions, availability of financing and insurance, and ease of securing operating and export licenses), and finally structural changes in the overall market and competitive landscape (demand for services, competition from other service providers, competition from ground-based providers, and increasing lifetime of satellites).   Note that these are my three “meta-categories”, rather than COMSTAC’s.    Trended over time (and aggregated), the results are very informative:

The schema here is that dark red, orange, yellow, light green, dark green correspond to the percent of survey responses in the corresponding “significant negative impact” to “significant positive impact” categories above.  Even with a small survey sample (with variable participants from year to year), time trends are coherent and clear.   The self-reported perception of these large providers is that overall conditions have indeed improved significantly since 2003.

The Good and the Bad

What is most interesting is which factors have improved, and which are still the sticking points.   The readiness and availability of both launch and satellite services has evolved from being a primarily “no effect” issue in 2003 to a net positive factor in 2011.  This is strongly driven by improvement on the satellite side, although slow improvement on the launch side contributes as well.  In 2011 no respondent rated launch vehicle availability or reliability as a “significant negative” impact.

Rather, the remaining key issues all line up on the “business side” of the equation.  Financial and regulatory issues were ranked a significant burden in the early 2000’s.  Since then it appears that a supportive financing, insuring and licensing infrastructure is beginning to emerge.   The limiters in this category continue to be export licensing, as well as global economic conditions (and the closely linked category of financing availability).   Should the economic environment improve, and ITAR issues be addressed, this category could evolve to be at least “neutral”.

Inside the Fight Cage

Within the category I am calling “market changes”, the most notable trend is a steady increase in overall demand for satellite services, ranked strongly as a positive or significant positive factor.   The other factors in this category are structural within the industry and market, relating to competition, consolidation and innovation.   The overall picture is one in which demand for services is high (and increasing) but the viability of any given provider’s position to provide those services within the market competitively (and from space) might fluctuate.   When combined with innovation (increasing satellite lifetime, and hence downward pressure on demand for hardware and launch), this category overall remains a mixed bag of impact for launch providers.

The data seem to provide a clear and intuitively acceptable story of evolution within the sector over the last ten years.  Unfortunately, we lack critical validation data, since the survey in its current form was initiated after the collapse of the late-1990’s commercial services-and-launch bubble.   Reference data from a comparable questionnaire during that period would have gone a long way in helping to calibrate out unfounded optimism.   The best we can point to is the fact that many of the subfactors point towards reasonably objective “externalities”, such as licensing, financing and insurance availability.   Further confidence might be found in the sheer size of the market in play, on the services side – at least two orders of magnitude larger than that of the launch industry, as per the latest annual Space Report.   The idea is to tune in to the folks with the biggest stakes in the game (the space products, services and infrastructure survey respondents):

Whatever the details of the breakout (including fine details around commercial vs non-commercial launch) it is clear that the center of gravity in the space economy is on the demand (services) side, and it is that side that should be focused upon when assessing the climate for future launch activity (instead of the supply side, i.e. launch providers themselves).

Put simplistically: if the fluctuations of an existing $189B commercial space products and services market, and an existing $86B governmental services market, have been unable to cause more than minor fluctuations in an essentially flat rate of actual launches per year, it would be imprudent to assume that fundamentally new markets predicted by emergent launch providers are likely to change the overall demand picture dramatically (or at least quickly).

Kool-Aid vs Protein Drinks

This is not to say the outlook isn’t optimistic, but the optimism should stem from much more mundane (and sustainable, and believable) factors than anticipation of self-bootstrapping “airmail miracles” of new market generation.  (There, I’ve lost 50 “Fast Company” brownie points with one simple sentence.   So be it).   The gains reported in the surveys are much, much more prosaic.   Satellites (rather than launch vehicles) have crossed a reliability/availability threshold and are now on average seen as positive factors.  The operating environment (both financial and regulatory) is increasingly supportive (or at least, much less inhibitive) of a space sector economy.   Finally, demand for services as a positive factor is improving much more rapidly than negative structural changes within the competitive environment seem to be offsetting it.   All of these point towards strong fundamental (rather than speculative) causes for mid-to-long term improvement in demand for launch services.

Postscript

A final note on forecasting: eyeballing the composite survey trends above, versus the actual launch rate data for the last decade, it looks like a regression-type actual forecast model driven by the survey, or the survey plus recent actuals, might be possible.   This would be limited by the number of available data points (currently 8, from 2003-2010) but wouldn’t have to incorporate much skill to outperform the actual COMSTAC forecast, which I think (still to validate) has less skill than a “persistence forecasts”.   Stay tuned for a future post on this topic…

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