Musk versus Demisch

Today at the Commercial Space hearing, there was a very funny and interesting culture clash between Elon Musk, the CEO/CTO of SpaceX and Wolfgang Demisch, a veteran aerospace financial analyst.  Musk started by testifying that SpaceX was ready to launch a series of rockets that would cut the cost to orbit by about 1/5 right out of the gate and well over 1/10 over time.  Then Demisch testified that...

That commitment to space based communications however does not invalidate the painful reality that access to space remains too costly for most commercial endeavors.  At present, the price per pound to low earth orbit is in the $10,000/lb class, depending on the vehicle. It is not much changed, on an inflation adjusted basis, from the roughly $1000/lb achieved by the Saturn V booster in the 1970’s. Today’s price translates readily into the $20 million fare paid to Russia by the first space tourists, who arguably got a bargain, as their life support and training was included. NASA would have to charge several times as much to cover its costs, if the Congress were ever to encourage such a use of NASA’s fleet.

Clearly space launch costs are on a much lower productivity track than the microelectronics or computing sectors. This is so despite Congress’ solid support of cost reduction efforts, first with the reusable Space Shuttle, then with the commercially derived EELV, neither of which achieved the savings anticipated. Regrettably, I am unaware of any credible proposal to achieve the desired substantial cost reductions. The propulsion breakthrough, which would be a prerequisite for a much better cost performance, is not in sight. Hence it would seem prudent to set policy on the basis that no substantial launch cost reductions are to be expected.  (Emphasis added.)

To which Musk must have thrown up his hands, because Calvert, the chairman of the subcommittee, and Dana Rohrbacher chuckled and remarked in a friendly way about his gesticulations.  The fun starts at 2:01:00.

By way of background, Demisch is the real deal as far as financial analysts go and commands respect.  He was an aerospace analyst at Bankers Trust when I was in the aerospace industry a decade ago right out of college.  At that time, Demisch was always willing to listen when entrepreneurial ventures with which I worked wanted to talk with Wall Street.  But of course, he is a financial analyst and his evaluation necessarily involves as a starting point a cold calculation of how the industry works now, not how he wishes it would work, and not how he is going to change the way it works -- that's Musk's job to demonstrate.

(As an aside, I have talked about the launch productivity track in a previous post.)

Musk was capable in the back-and-forth.  After Demisch testified that...

While the benefits of commercial space are now so embedded in our economy that they are taken for granted by anyone who goes on a hike with a GPS, to give just one example, they have not been well rewarded in the financial arena. To highlight the problem, over the past four years, the bulk of the world’s civil communications satellite fleet has changed hands, for an aggregate price roughly equal to one year’s NASA budget. This represents a disappointing return to the industry sponsors; even without factoring in the additional losses on restructured projects such as Iridium or the costs of now quiescent launch ventures such as Beal or Kistler. (Emphasis added.)

...Musk pointed out that currently space is a highly cyclical business.  Essentially, he implied that these businesses were exchanged at artificially depressed prices versus the underlying business fundamentals.  I can buy this argument and maybe Demisch did as well.

I would love to have been part of the discussion between those two after the hearing.

Comments

[Kevin Parkin]

"Regrettably, I am unaware of any credible proposal to achieve the desired substantial cost reductions. The propulsion breakthrough, which would be a prerequisite for a much better cost performance, is not in sight"

Not in sight for him ;)

[Daniel Schmelzer]

It's a fascinating dialogue. One thing to keep in mind is that Musk isn't doing quite a typical rational entry into a working market. If he were doing so, he would price his rocket at a rate only slightly lower than the available boosters and enjoy an excedingly high profit margin.

Rather, he is trying to shift the demand curve substantially and going after a more international market. Conventional wisdom and some solid analysis indicate that Musk will not find a compensating increase in demand when the demand curve shifts.

Demisch must know this, so he may view SpaceX as a flash in the pan -- a suboptimal use of capital that will eventually be squeezed from the US market. I'm of the opinion that Musk may be able to gore everybody's ox dead in good enough time to survive with the help of some friendly billionaires, but I can't help but agree that the argument against Musk's approach is solid.

[Kevin Parkin]

Agreed, the supply demand curve favors the high prices we have today until prices can be reduced more than an order of magnitude. No Lockheed or Boeing wants to reduce their revenue by lowering prices.

But those curves ane based on civil and commercial needs I think. If you factor in the military responsive space launch needs then I think a low-priced low-cost launcher becomes favored by the economics i.e. maximizes revenue.

This is why I think it will be the military who create the conditions that finally crack the launch problem.

[Kevin Parkin]

Hehe, make that low-mass low-cost launcher :>

[Daniel Schmelzer]

That responsive launch contract is for between 8 and 16 launches over the next 5 years, I guess. That's a lot of support, and it can be enhanced in other ways (e.g., the Air Force paying for the ability to launch rather than the launch itself or the Air Force paying for demonstrations of certain capabilities), but I doubt even this makes Musk's bet with regard to demand a good one. He'll still be making a handsome profit, mind you. Just not a maximized one.

But who knows? Maybe the Air Force will think this kind of launch contract is a great deal and double up on its orders or whatever. If I were the Air Force, I would let as many contracts as Musk can accommodate reasonably -- these magnitudes are pretty much beer money for the Air Force and supply isn't limited for Musk in quite the same way as it is limited for others.