Defense: First Mover Advantages in Zero Gravity

Morgan Stanley 4th Annual Space Summit

We are pleased to announce that the Morgan Stanley 4th Annual Space Summit will take place in New York City on Tuesday, December 7, 2021. The summit will bring together experts from Morgan Stanley, public and private companies, Government, and the investor community, as well as other key stakeholders. Please contact your Morgan Stanley representative with any questions.

Space: Why Now?

Space is all the rage lately. We’ve seen a host of space companies de-SPAC this quarter, occupying various nodes up and down the space value chain. This de-SPACing trend was preceded by a summer of dueling billionaire spaceflights, only to be followed by the first all-civilian launch to reach orbit. Understandably, we’ve fielding an influx of questions from investors around the sustainability of trends in the space sector. In this note, we offer our view on the sector’s trajectory and attempt to frame the opportunities ahead.

First Mover Advantages in Space

The opportunity set in space is vast and we see different drivers fueling commercial and government activity. That said, it is clear to us that commercial and government entities alike see key first mover advantages in space and are resultantly racing to establish their positions. This is true on the commercial front, where broadband providers are launching rival mega-constellations in Low Earth Orbit (LEO) and commercial space travel companies are rushing to mint fresh classes of ultra-high-net-worth astronauts. The Pentagon’s recent recognition that space is now a warfighting domain has elevated space to one of the fastest growing segments of the Defense Department’s budget as the U.S. government tries to bolster the defensibility of its most critical space assets. 

The Race for Broadband Infrastructure

The race to secure first mover advantages in space is perhaps most evident with respect to satellite internet constellations and the demand for broadband. Of the 1,282 satellites launched in 2020, at least 937 (73%) were part of mega-constellations designed to provide global internet access. These include SpaceX’s Starlink and the OneWeb constellation. Starlink has launched over 1,700 satellites to date and the total constellation size could reach 42,000 satellites. OneWeb is planning a constellation of 900 spacecraft. Amazon (covered by Brian Nowak) is also rolling out a satellite internet network through Project Kuiper and is planning a constellation of ~3,236 satellites.

Breaking Ground on Commercial Space Travel

Interest in commercial space travel is also climbing, in part due to a trio of billionaire space launches so far in 2021. Virgin Galactic and Blue Origin both sent their billionaire founders to suborbital space this year. SpaceX launched Inspiration4 last month, sending four private citizens to space for three days, which represented the first all-civilian launch to reach orbit (see: Inspiration4 Inspires). With these flights, Virgin Galactic, Blue Origin and SpaceX are collectively proving out the technical feasibility of commercial space tourism. Viability is another matter. Commercial space tourism companies now face the challenge of building out capacity while lowering ticket costs. We are still a long distance away from democratizing space travel, but these companies are inching us closer.

More Accessible to Private Companies

Today, the space race is no longer between nation-states with the support of millions of people, but instead between companies racing to bring commercial space travel and exploration closer to reality. Human spaceflight was first made possible 60 years ago by the national efforts of the U.S. and Soviet Union, fueled by intense Cold War competition. Less than a month after the Soviet Union’s Yuri Gagarin became the first human to reach space, America’s Alan Shepard followed suit with a suborbital flight in May 1961. Six piloted flights, including Shepard’s, flew under Project Mercury between 1961 and 1963 at an average cost of ~$550mn per flight in today’s dollars. All told, over 2mn people were involved in Project Mercury. In comparison, SpaceX, Blue Origin and Virgin Galactic have ~10,000, ~3,500 and ~800 employees, respectively.

The Militarization of Space

The U.S. military and intelligence community has grown increasingly reliant on Space-based capabilities including communications, navigation, missile warning and surveillance. Few, if any, U.S. military missions today are conducted without the aid of satellites.

Once a U.S. Military Safe Haven

Beginning with the end of the Cold War, space was an uncontested domain to which the U.S. migrated various critical capabilities. During the Gulf War, the U.S. reliance on space was on full display, as were the advantages of satellite-enabled networks, overhead surveillance and GPS precision targeting. By the 2000s, many critical capabilities were reliant on a relatively small number of satellites, which created an obvious vulnerability. Adversaries took note, resulting in space becoming an Achilles heel for the U.S.

Vulnerability on Display

In 2007, China successfully conducted an anti-satellite (ASAT) missile test, intercepting a failing weather satellite in LEO. This event marked the beginning of the end for space as a safe haven. Since that time, media reports have outlined various ASAT capabilities – both kinetic and non-kinetic emanating from China and Russia. In 2019, for example, a Russian surveillance satellite birthed a second satellite while on orbit and the duo later began surveilling a U.S. reconnaissance satellite. While China and Russia today present the most serious challenges to U.S. interests in space, other nations such as North Korea and Iran are also reportedly developing ASAT capabilities.

DoD Space Spending in Response

Space has quickly become a top priority for the DoD given the combination of U.S. reliance and emerging threats. Growing military interest in the space domain means that space is now among the fastest growing areas of the Pentagon’s budget. Unclassified DoD funding for space-based systems, which represents only a portion of total Pentagon space-related spending, has grown at a 15% CAGR since FY16 to $17bn, compared to total DoD budget growth of 3.5% over the same period. We expect this trend in budget growth and allocation to continue for the foreseeable future.

New Emphasis on Defensibility

The U.S. government is currently rethinking its approach to s
pace systems and the overall architecture of satellite constellations. Recognizing that large exquisite satellites are sitting ducks and make for easy targets, the Pentagon is now embracing proliferated architectures of lower-cost satellites in LEO. One example of this approach is the Space Development Agency’s National Defense Space Architecture – a planned LEO constellation of hundreds of satellites to support military sensing and data relay. The Pentagon has also emphasized the need for responsive launch or the ability to replace downed systems in space in a timely manner.

Innovations Reducing Barriers to Space

Underpinning the race to secure first mover advantages in space is the domain’s increasing accessibility. As accessibility grows, so too does the ferocity of competition as new entrants emerge and capital flows to newly-viable projects. We see the barriers to space access continuing to fall given recent innovations in miniaturization, processing power and launch efficiencies.

Falling Capability Costs

Improvements in processing power and miniaturization have enabled smaller satellites to now rival the capability, function and performance of older, larger satellites. This has fueled the trend toward smaller, less expensive satellites that are easier to replenish. The average spacecraft mass has fallen from 2997kg in 2011 to 432kg in 2020 (-19% CAGR). Meanwhile, the number of smallsats (defined here as >600kg) launched per year has grown from 39 in 2011 to 1,202 in 2020 (46% CAGR), driven primarily by the growth in LEO constellations like OneWeb and SpaceX’s Starlink. Smallsats represented 43% of the total upmass sent to space in 2020, compared to just 1% in 2011.

Reduction in Launch Costs

Launch costs have also fallen. The cost to launch one kilogram of payload to orbit under NASA’s Space Shuttle program in the early 1980s was ~$54,000. Today, SpaceX’s Falcon 9 rocket can launch payloads to LEO at ~$2,720 per kilogram and Falcon Heavy lowers the cost further to ~$1,400 per kilogram. Small launch providers have also reduced the cost of space access on an absolute basis. For instance, Rocket Lab’s Electron rocket, the second most-utilized U.S. launch vehicle behind Falcon 9, currently costs ~$5.5mn per rocket. Rideshare options have further increased affordability, with SpaceX offering rideshares for as little as $1mn.

Grand Visions of Colonization

Establishing a permanent presence on the Moon and Mars, though far into the future, is no longer merely the stuff of science fiction. Akin to discoveries after landing in the New World, we are just now learning of the riches that await humanity in space. According to NASA, “the benefits that await us as direct or incidental byproducts of space colonization could include advances in architectural design, alternative fuel production, 3D printing and low-gravity manufacturing to name but a few.”. NASA’s Artemis program aims to return astronauts to the Moon’s surface by 2024. Private companies are also already breaking ground on tapping into the benefits of deep space exploration.

How’s the Air Up There?

The early explorers were met with a number of unfamiliar sights when they first landed in the New World, but the air in the Americas was still breathable and gravity still weighed them down. The Moon and Mars are very different environments than Earth. Supporting a sustained human presence beyond Earth will first require significant infrastructure investments. We expect advanced robotics, which can operate more freely in the harsh environment of space, to be leveraged in laying the foundation for eventual human arrival. 

Global Space Industry Growth

The Satellite Industry Association (SIA) estimated the size of the Global Space Industry in 2020 to be ~$370bn (~40 bps of global GDP), which has grown at a ~12% CAGR over the past five years (~$208bn in 2015). 1,282 satellites were launched in 2020, representing more than 2x the total number launches in any prior year. As of 2020, there were 3,371 operational satellites on orbit, up from 958 a decade ago.