Web Entrepreneur Eyes Small Launcher Market

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WASHINGTON – Elon Musk, a 31-year old Internet entrepreneur who amassed a sizable fortune during the dot.com boom, has set his sights on building a rocket.

The rocket Musk is building is a two-stage, kerosene-fueled expendable specifically designed to undercut Orbital Sciences Corp.’s air-launched Pegasus vehicle in the market for the handful of small payloads the U.S. government needs launched each year.

Musk’s pitch? Roughly speaking, 470 kilograms to low Earth orbit for less than $10 million – a price point about half of what NASA says it typically pays for a Pegasus.

“I look for three things in a business. First of all, it needs to be commercially viable. Secondly it has to be interesting and fun. And third, if it succeeds, it has to have some beneficial effect on the world.”

With hardware in production throughout the United States, Musk expects to be ready to launch the rocket, dubbed the Falcon LV in late 2003, assuming range safety and federal licensing hurdle can be cleared by then.

It would be easier to dismiss Musk as just another dreamer with more ambition than common sense if his track record did not tell a different story.

Musk dropped out of graduate school in 1995 to start Zip2 Corp., a Website-hosting company that counted among its customers the New York Times Co. and Knight Ridder before he sold out to Compaq Computer Corp. in 1999 for about $300 million. His next venture was Pay-Pal, an Internet-based payment service he took public in February and sold to the online auctioneer eBay in July for $1.5 billion

Fortune Magazine identified Musk as one of “America’s 40 Richest Under 40” in its September issue. Musk came in 23rd, right behind the Los Angeles Lakers’ Shaquille O’Neil.

“I look for three things in a business,” Musk said in an interview. “First of all, it needs to be commercially viable. Secondly it has to be interesting and fun. And third, if it succeeds, it has to have some beneficial effect on the world.”

Musk said he strongly believes that all three criteria are met by Space Exploration Technologies (Space X for short), the company he started in June to build the Falcon
A NASA official familiar with Musk’s plans said the young entrepreneur is taking a promising technical approach and his early steps would suggest Musk knows enough to avoid some of the pitfalls that have claimed other launch start-ups.

“He has a very good little team and he has deep pockets,” the NASA official said. “But does he have the staying power? I don’t know.”

One of Musk’s key early advisers was former Orbital Sciences executive Michael Griffin, who has held senior positions at NASA and the Pentagon, served as Orbital’s chief technical officer and general manager of the company’s space systems group.

Musk has since hired experienced managers away from the top U.S. aerospace firms. Musk’s vice president for propulsion development, Tom Mueller, ran the propulsion and combustion products department at TRW Space & Electronics, Redondo Beach, Calif.

Musk’s vice president for operations, Chris Thomas, came from Boeing where he managed production of the Delta 2, Delta 3 and Delta 4 rockets.

Some launch market analysts, however, questioned the business viability of any firm seeking to enter a meager commercial market already crowded with low-cost Russian rockets.

“The Russian vehicles aren’t having all that much success in part because they are not good marketers and don’t know where to look for customers,” said Marco Caceres, space analyst at the TeaI Group, Fairfax, Va. “But it is also partly because there is not much out there.”

“I think it’s better to enter markets when they are really gloomy than when they are really bright.”

Musk said he harbors no illusions about the health and well being of the market he hope to dominate with the Falcon LV.

“I think it’s better to enter markets when they are really gloomy than when they are really bright,” he said. “I guess I’m a bit of a contrarian.”

Jeff Foust, a launch industry analyst with Bethesda, Md.-based Futron Corp., said that if Musk wants to find a gloomy market, Space X is definitely looking in the right place.

“It’s going to be a tough row to hoe for them,” Foust said. “There are a lot of competitors out there and not a lot of customers.”

Foust said the technical challenge of building the kind of low-cost rocket Musk envisions pales in comparison to convincing institutional investors to put their money into new launch vehicle ventures.

“One advantage they do have is Elon Musk and his own wealth, depending how much of it he plans to put into the company,” Foust said.

While Musk said he is not the company’s sole backer, he said he is prepared to fund the development of the Falcon LV entirely out of his own pocket if he has to. He declined to say exactly how much he expects to spend developing the rocket, only that the figure will be “in the tens of millions” of dollars.

“I don’t think this launch vehicle business will be as capital intensive as PayPal.”

Musk also insists that he is no stranger to running a capital-intensive enterprise. PayPal, he said, burned through almost $240 million before it achieved a positive cashflow.

“I don’t think this launch vehicle business will be as capital intensive as PayPal,” he said. “I don’t think it will take us a quarter of a billion [dollars] to achieve a positive cash flow.”

If Musk’s projected development costs seem modest, they appear to be in line with his initial expectations for the business.

Musk hopes to launch the Falcon two or three times a year early on. Later, assuming government and commercial markets begin to move in response to the availability of a low-cost launcher, Musk envisions ramping up to five or six launches a year, a volume he says would enable Space X to offer the Falcon for $6 million a shot.

Futron’s Foust said winning one or two U.S. government launches
a year would require Falcon to take business away from Pegasus, a solid-fuel rocket that has hit its mark 17 times in a row for a combined record of 28 successes and three failures since its 1990 debut.

Orbital spokesman Barron Beneski declined to comment on Space X or its plans to compete with Pegasus.

NASA, by far the biggest customer for Pegasus, anticipates launching one or two Pegasus-class payloads a year for the foreseeable future, according toKaren Poniatowski, NASA’s assistant associate administrator for launch services.

“I don’t have a large demand for small payloads,” she said.

Officials from NASA’s Earth Sciences and Space Science enterprises, which generate the bulk of NASA’s demand for launch services, said they still see potential for small satellites and are always interested in lower launch costs. They pointed out that NASA has shut down small satellite programs such as the University-class Explorer program and the Student Explorer Demonstration Initiative due in part to the mismatch between program budgets and launch costs.

Anticipated U.S. Air Force demand for small launchers, meanwhile, is no better than NASA’s.

The military has called on the Pegasus just three times since 1997. Joseph Davidson, a spokesman for the Air Force’s Space and Missile Systems Center in Los Angeles, said that the service would be interested in a launcher that could lift 450 kilograms to low Earth orbit for $10 million or less. But current budgets, he said, would only permit the purchase of one such launch service every two years. He said Air Force officials plan to meet with Space X in the near future.

Teal Group’s Caceres said winning contracts from customers as risk-averse as the U.S. government will not be easy.

“If you don’t have a vehicle that’s successully launched a couple of times, I don’t think you are going to get any NASA business,” he said. “They have other options.”

NASA’s Poniatowski said she currently has no payloads in the queue that are considered low enough priority to launch on an unproven vehicle. However, NASA policy does permit its smaller, experimental satellites – so-called Category Two payloads – to launch on vehicles with as few as one successul instrument flight.

Gwynne Gurevich, Space X vice president of business development, said the company intends to conduct a couple successful demonstration flights before setting its sights on NASA.

She said she hopes to entice early customers to trust their payloads to the unproven Falcon by offering steep discounts for the first launch.

“Our expectations here are not grand. We are not entering this business with the expectation of making large quantities of money from day one.”

“I’m looking everywhere for someone who has a hangar queen [needing to fly],” Gurevich said. “We are also offering an inexpensive way for a commercial entity to test out an untested spacecraft bus.”

Musk said he is prepared to fight hard for a foothold in the market, offering early customers deep dlscounts if necessary.

“Our expectations here are not grand,” he said. “We are not entering this business with the expectation of making large quantities of money from day one.”

Musk plans to keep his team small. Space X has just 14 employees including Musk, who serves as president of the El Segundo, Calif.-based company. By the time the vehicle debuts, Musk expects to have hired maybe a dozen more full-time staffers. But with development under way, money is already flowing.

The design, test, and integration of the Falcon LV and its first and second stage engines are being handled as an in-house affair, with the fabrication of all hardware outsourced to established aerospace subcontractors.

The turbo pump for the Falcon’s main engine is in production at Arvada, Colo.-based Bar- ber-Nichols, Inc. The rocket’s fuel tanks and primary structure are under contract and in production at Spincraft, New Berlin, Wisc. Other rocket components are being fabricated at Citation Corp., a Birmingham, Ala.-based manufacturer of cast, forged and machined components.

SpaceX is shooting for a first main engine test-firing this winter. The Falcon’s ambitious schedule calls for having the vehicle fully assembled by June.

Musk and his team have been making the rounds of official Washington in recent months, meeting with potential customers at NASA and getting up to speed on the regulatory hurdles they will encounter.