What would it take for SoftBank to invest in SpaceX?

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This op-ed originally appeared in the March 12, 2018 issue of SpaceNews magazine.

SoftBank CEO Masayoshi Son (left) and SpaceX CEO Elon Musk (right) are both worth roughly $20 billion on paper, but Masa’s telecom ventures generate massive amounts of cash while Musk’s biggest company, Tesla, is still losing money. Credit: Flickr.com
SoftBank CEO Masayoshi Son (left) and SpaceX CEO Elon Musk (right) are both worth roughly $20 billion on paper, but Masa’s telecom ventures generate massive amounts of cash while Musk’s biggest company, Tesla, is still losing money. Credit: Flickr.com

The public has become more aware of space over the past several weeks.

The awareness has been brought about by the masterful publicity of Elon Musk and SpaceX, with the company having recently performed its first launch of a Falcon Heavy rocket—their largest rocket to date—carrying a test payload of Musk’s red Tesla Roadster with a dummy in the driver’s seat and David Bowie playing on the car stereo.

Musk’s long-term ambitions for SpaceX are lofty; he wants to colonize Mars.

However, there is a somewhat less lofty, but equally important vision for SpaceX in the nearer-term: providing global Internet access via thousands of satellites, launched by SpaceX rockets. This plan, according to Musk, will help to fund the company’s Mars ambition.

Competing with SpaceX in this goal of global internet via satellite are a handful of companies. The most noteworthy of these companies by far is OneWeb, which itself has raised well over $1 billion in funding, largely from the SoftBank Vision Fund, a $93 billion tech fund.

SoftBank’s ambitions for OneWeb are likewise greater than just satellite internet, with the company intent on building out a global Internet of Things (IoT) infrastructure that connects billions of devices to a central location, bringing about an artificial intelligence (AI) revolution of sorts that the company refers to as “Singularity.”

Other companies looking to address this market, albeit with less funding and a narrower business model, include startup satellite operator LeoSat, established geostationary operator Telesat, and China’s state-owned space industry.

The proposed global satellite internet constellations are expensive propositions, with SpaceX’s proposed constellation expected to cost on the order of $10 billion or more, and OneWeb expecting to spend $3 billion. The actual cost could ultimately be higher for several reasons, as will be discussed below.

These projects are being funded by the two main players in different ways. OneWeb has raised in the neighborhood of $2 billion across several funding rounds from SoftBank, Qualcomm, Coca-Cola, Bharti Airtel and others.

SpaceX, on the other hand, is counting on proceeds from its launch business, as well as Musk’s personal wealth. If LEO broadband proves to be anything like the ride-hailing economy where Uber’s ubiquity hasn’t translated into profitability, there will be billions of dollars spent in the coming several years getting these businesses—literally and figuratively—off the ground. This is where it gets interesting.

A business built on burning cash is often a battle of who has the deepest pockets. On a totally level playing field, Musk and SoftBank CEO Masayoshi Son (Masa, for short) have roughly the same sized pockets; both are worth $20 billion, give or take. But this is not an even playing field. Both Masa and Musk have other companies and other ambitions.

Musk’s biggest company to this point is Tesla, which lost $770 million in the final three months of 2017. Tesla, at heart, is a technology company in super-fast growth phase. The all-electric cars don’t guzzle fuel, but the company that builds them is burning plenty of cash. Whether or not Tesla is ultimately hugely successful is irrelevant in the here and now. Today, the company is losing roughly $50 million per week.

Masa, conversely, controls several highly leveraged telecom ventures in mature markets that produce massive amounts of cash, namely SoftBank Telecom and Sprint. The the SoftBank group saw net income in the range of $3-5 billion over the past few years, with a spike $12 billion spike in 2016. Beyond this, Masa sits at the helm of the Vision Fund which still has tens of billions of dollars in capital that can be deployed on relatively fast notice. Might Masa invest some of this money into SpaceX?

This proposal is not as crazy as it may first seem. Masa has pulled a similar trick in the ride-hailing industry, with investments in all the major ride-hailing companies, and a subsequent push towards consolidation and cooperation, rather than competition.

If SpaceX pulls out ahead of OneWeb in the LEO broadband game—or if both companies start to rapidly acquire subscribers and there appears to be a very long, drawn-out, expensive fight in the cards—it might very well make sense for Masa to try to invest in SpaceX, or for the companies to cooperate in some other way.

Such a move could certainly be exacerbated by a cash crunch at any of Musk’s other companies. If Tesla continues to miss production deadlines and starts to see customers ask for refunds on their Model 3 deposits, for instance, or if various governments start to taper off subsidy programs that have up to this point made Tesla’s more affordable in some, this could trigger a cash crunch.

Likewise, while SpaceX is believed to be cash-flow positive at this point, and is fast-becoming a leader in its industry, the launch business is notoriously tricky, and the company has not been without its launch failures. A few unlucky launches could trigger an adverse reaction from existing customers, and with each launch costing in the tens of millions of dollars, even a few canceled launches would make a dent.

Ultimately, for a SpaceX/OneWeb tie-up to occur, several things would need to happen, probably in tandem:

1. Both would likely need to have some initial traction on their business models, including getting satellites into orbit, securing landing rights, and actually getting subscribers onto their network.

2. SpaceX would need to experience a cash crunch of some kind, which could be caused by internal or external factors.

3. The industry would likely need to turn to a subsidy business model. If, for example, OneWeb and SpaceX started subsidizing cheap satellite ground equipment in an attempt to win market share and subscribers, this would significantly increase the rate of cash burn. Rather than going for a war of attrition where both companies lose billions, Masa and Musk may decide to call a truce.

4. There would likely need to be some apparent division among the two companies’ core markets. Didi and Uber, the world’s two biggest ride-hailing companies by a wide margin, both list SoftBank as a significant shareholder. The two companies have clearly divided markets: Uber controls the U.S. market, Didi controls the China market. In Southesat Asia, it’s GrabTaxi, which is partially owned by Didi and SoftBank. In Brazil, it’s Didi-owned 99. And in India, it’s Ola Cabs, part of the SoftBank group. The biggest reason for this clear demarcation of battle lines is the fact that SoftBank owns a stake in all of these companies.

The global satellite internet market is still in its infancy, with no constellations in orbit now, and with large question marks surrounding the business models that will. The only real certainty now is that these businesses are going to cost billions of dollars just to roll out, and are fighting it out in an industry that may involve massive subsidies and thus billions more in spend just to win market share. In a battle of who has the deepest pockets, it’s always hard to go against the man with the nearly 12-figure tech fund, even if his opponent is basically Iron Man.

Blaine Curcio is an independent consultant specializing in the space and satellite telecommunications industries. He spent five years with industry consultancy Northern Sky Research, where he headed the satellite finance practice.