This piece is part of our Forging the Path series in which CASIS experts share knowledge and insight from their experience managing a national lab in space.
Sven Eenmaa is a Director of Investment and Economic Analysis at the ISS National Lab, where he leads the organization’s economic analysis and investor engagement.
During the recent weeks, the International Space Station (ISS) National Laboratory has participated in several discussions at the Silicon Valley Space Week in Mountain View, California, and the Global Satellite Servicing Forum in Arlington, Virginia. As always, these events provided a rich set of data points, which we have highlighted for our entrepreneur and investor communities below.
The events pointed to several positive end-market and innovation signals for the space industry, but also to significant uncertainties in terms of capital access. On the positive side, we can point to the Apple iPhone 14 direct-to-handset announcement, the adoption of Starlink services, the signs of agtech and ESG demand. We can also point to the demonstrated value of new commercial technologies in geopolitical conflicts, the continued elevation of space domain in national security strategies, the demand for space tourism and interest in research and manufacturing platforms, as well as regulatory actions such the deorbting rule from the FCC in response to the space environment sustainability concerns.
However, the current constrained and very selective funding environment poses risks for those with an imminent need to raise capital, with a possible knock-on impact more broadly to industry value chains. It is difficult to gauge the duration of the current volatility—a lot hinges on policy decisions, which can evolve fast. Markets tend to over-correct in both directions, and it is fair to state that we saw fewer investors at these two conferences than we had expected. Furthermore, the prospects of broadly slower economic growth tend to affect the pace of private-sector technology adoption. Therefore, unlocking and scaling sizable commercial markets for several less-mature space applications may see some delays and may require near-term support from government and defense demand to sustain and spur innovation.
It is important to remember that many of the secular drivers that both facilitate the current technology innovation and support various drivers of demand for the space industry will last well beyond the current economic cycle. As the post-SPAC financial markets settle, risk/return profiles get reassessed, and some of the capacity consolidates, we expect to see a return to healthy capital deployments in the industry.
Direct-to-Handset Tailwinds
Apple’s recent announcement of partnership with Globalstar to provide satellite-based emergency communications capabilities to iPhone 14 gained significant attention during the Silicon Valley Space Week. This should not come as a surprise, given the potentially transformative impact of direct-to-unmodified handset communications in opening an increased market opportunity for satellite service providers on the global telecom markets. Per some of the conference presenters, the impact here could be expansion of the current single billion-dollar satellite mobile communications and IoT market. The total addressable opportunity could reach hundreds of billions of dollars globally as various mobile network operators look to address underserved users in their respective footprints.
There are already a number of market participants beyond Apple and Globalstar looking to address this opportunity. We at the ISS National Lab have worked with Lynk on several flight projects toward successful demonstration of direct-to-handset communications. AST SpaceMobile, with several MNO partnerships and technology progress, recently launched its BlueWalker 3 satellite, which is expected to deploy its phased array antenna over the coming weeks. In addition, there have been several recent announcements, ranging from the SpaceX Starlink and T-Mobile partnership to Iridium, eSat Global, and others. It is important to note that the initial capability here is limited functionality text messaging. The technology and constellation demands—as well as related business economics and capital requirements to deliver the eventually needed quality of service and range of applications to address this targeted multi-billion-dollar opportunity—are yet to play out.
Launch Market Update
Per panel discussions at the Satellite Innovation conference, the launch demand picture for 2022 and into 2023 looked healthy. Arianespace cited year-to-date 2022, the total number of satellites launched was 2,000, which is higher than the 2021 total of 1,849 satellites. BryceTech’s 3Q 2022 data indicate similar growth dynamics on the smallsat front, led by SpaceX’s deployment of Starlink that has now more than 3,100 operational satellites on orbit.
Source: BryceTech data
SpaceX commentary implied that its rideshare is already sold out through 2023, and the company is seeing demand from existing constellation upgrades as well as demonstrations and deployments by companies that recently raised capital. Several sizable constellations, such as Project Kuiper and SDA’s (Space development Agency’s) multi-tranche deployment, are yet to launch. The government remains as a high-value market providing very important backing for the industry, and conference presenters discussed increasing focus on tactically responsive launch, rapid turnaround capabilities, launch with weather resistance, multiple inclinations, etc.
Pricing in the industry is always a source of lively discussion when it comes to launch. During the Satellite Innovation conference, SpaceX announced that the company is reducing its rideshare booking minimums to accommodate 50 kg class spacecraft (at a price as low as $275k to SSO). This announcement has raised questions on whether this will disintermediate some of the payload aggregators, and SpaceX pricing was (not surprisingly) voiced as challenging for closing the business case by some of the competitors. Such complaints are likely to get louder as Starship materializes. There were also questions on the future of market segments such as OTV (orbital transfer vehicles), and space mobility more broadly, and whether these market opportunities will support long-term, stand-alone businesses or whether they will they be addressed as part of vertical integration by various launch providers.
In terms of supply of launch capacity, discussions pointed to a lack of sufficient demand to support the multitude of small launch vehicles. We have seen a very limited number of operational systems on the market so far, although there are several others still looking to emerge. At the same time, there were mentions of current supply constraints on the large launch vehicle side, as well as reiterated interest of market entry into the large vehicle class. Given the consolidation among the satellite service providers, funding constraints for some of the emerging constellation developers, and progress toward Starship, it is unclear how sustained this large vehicle supply constraint will be. At the same time, AE Industrial Partners’ recent majority stake investment in York Space Systems and Lockheed Martin’s investment in Terran Orbital can be viewed as signs of confidence in satellite manufacturing demand.
In-Space Assembly and Manufacturing Discussions
Both the Global Satellite Servicing Forum and Silicon Valley Space Week highlighted various aspects of the emerging in-space services, assembly, and manufacturing (ISAM) opportunities, ranging from GEO satellite life extension to infrastructure monitoring, servicing and logistics, refueling, and space debris. While in-space servicing and related robotics efforts have been around for a while, Northrop Grumman’s MEV-1 and MEV-2 have clearly demonstrated the feasibility of GEO satellite life extension, and the company is now working on its MEP platform to improve the economics of the value proposition to various service providers. BryceTech’s presentation pointed to more than 100 companies working on various ISAM discussions/opportunity areas.
There is clearly encouraging technology progress in this sector, and we have seen strong early-stage support from Orbital Prime that has triggered broad interest. We have seen interest from DIU and SDA, as well as some initial revenue traction in satellite life extension, new FCC deorbiting rules, and pilot projects toward active debris removal. At the same time, the questions around the timing of scale up of industry revenues and business economics remain, which in turn affects the pace and extent of private capital engagement. Government demand is likely to be essential here in the early years of the industry development, and it was encouraging to hear that Space Force is targeting a related program of record by FY 2025. There are additional efforts to spur the industry ecosystem by NASA via CoSMIC (Consortium for Space Mobility and ISAM Capabilities). From one commercial service provider perspective, Inmarsat’s presentation pointed to expectations of in-orbit services, such as GEO life extensions and LEO active debris removal, progressing from the current design and demo stages to commercial-scale markets in the 2030s. The company’s expectations also appeared to be for in-orbit manufacturing and recycling to reach commercial scale in the 2040s.
Government and Defense Demand
Given the geopolitical trends requiring accelerated innovation in the U.S. relative to its adversaries, and the pace at which progress is being made in the commercial sector, the demand signals from the defense complex to the commercial space industry continue to be positive. While the government has been a significant demand driver for the space industry over the years, the current environment points to the continued need for commercial innovation engagement. Investor views on the relative desirability of government contracts have changed for the better as well, particularly in the context of actual achieved versus expected commercial market penetration in several market segments over the recent years.
When it comes to Earth observation and remote sensing, government and defense has been by far the largest demand driver for a long time. The war in Ukraine has provided operational proof-of-use cases for additional commercial Earth observation data and analytics capabilities as well as commercial LEO communications platforms. But this increased engagement of commercial constellation data requires commercial providers to also develop necessary capabilities to deliver interoperability as well as timely insights and analytics at the point of decision. With the government need for redundancy and resiliency, there are also prospects that a broader supplier base could be sustained than the commercial segment alone could carry.
Various conference discussions highlighted the positive impact that SDA’s aggressive acquisition and deployment timelines and commitment to schedule are having on the commercial segment. The government’s role in driving launch market demand, albeit with often higher performance requirements, remains significant. As discussed previously, Orbital Prime has made great progress in supporting ISAM innovation. There are clearly encouraging developments by the organizations such as DIU and InQTel, and the innovation ecosystem and funding mechanisms in the defense complex have expanded significantly over recent years, with a path from the initial SBIR grants to subsequent STRATFI-TACFI funding and beyond. But achieving material-scale government market penetration for a startup is still very challenging. The access to an actual programs-of-record and related revenue commitments is still very challenging and contracting process demanding.
Financial Market Conditions
Per Pitchbook and NVCA’s reported data, the overall U.S. venture capital investment activity declined 40% quarter-over-quarter and 52% year-over-year in the third quarter of 2022. Later-stage funding access faced steeper declines than earlier stages, which were materially lower as well. Macroeconomic and geopolitical conditions have changed, and the Federal Reserve’s interest rate hikes are raising the cost of capital for investors, making delayed payout and higher risk, moonshot-type businesses more expensive to fund. While there clearly is “dry powder” from recent years’ venture capital and private equity fund capital raising activity, these is no rush of deployment in the current environment where pricing has yet to bottom.
Source: NVCA
Per Space Capital data, the space economy funding for infrastructure and distribution segment startups declined 41% y/y in the September quarter as well. However, if we look at the data excluding SpaceX, OneWeb, Orbcomm, and last year’s SPAC PIPEs, the conditions look even softer with 3Q 2022 totals down 59% from year-ago levels, and quarterly run rate back to levels comparable to the 2019 pre-pandemic period.
Source: Space Capital data, ISS National Laboratory Analysis
From the investor dialogue within the ISS National Lab ecosystem, we see continued interest and willingness to assess new investment opportunities; however, as we have previously discussed, the investment criteria have tightened significantly. We are also seeing strategic investors remaining engaged, and in some cases increasing commitment levels, but the actual deployment of capital is likely to be driven by the merits of specific innovation rather than overall lower market valuation levels.
As an additional overhang, media reports indicate a need to access additional funding by deSPACed space companies in light of high cash burn rates. It is unclear what the eventual outcome here will be under the current market conditions in terms of access to desired funding versus needing to pursue other alternatives. The consolidation and acquisition trends in the industry were discussed at various occasions, and we have seen already significant announcements among some of the larger service providers, as well as in supply chains. There appear to be expectations for acceleration of M&A activity over the next year or so as well. It is fair to assume that the recent years’ innovation investment has led to the development of some differentiated capabilities that will be viewed as attractive if the price is right. We have seen such portfolio expansion acquisitions already. However, it is important to note that private equity buyers are affected by constrained access to financial leverage as well.
