The US launch industry is in a state of rapid expansion. For the past several decades, government policies have promoted its development. In the last decade, private-sector actors have started taking on more prominent roles. As the number of launch firms grows, experts have observed the industry may be experiencing a speculative economic bubble. This poses substantial risks to the space economy. To learn more, we talked to Moon Kim, a Ph.D. candidate in policy analysis at Pardee RAND Graduate School and an assistant policy researcher at RAND Corporation who is a former resource analyst at NASA.
Disclaimer: The views and opinions expressed in this interview do not reflect the official policy or position of any organization or agency, and are based on Moon Kim’s work before his current position at RAND Corporation.
Is the launch services industry experiencing a speculative bubble?
As many experts have pointed out, an economic bubble can be called a bubble with certainty only ex-post. A significant growth of an industry, if not followed by a significant contraction, would not be designated as a bubble. To borrow the words of Dr. Eugene Fama of the University of Chicago, “Statistically, people have not come up with ways of identifying bubbles.”
Having said that, there certainly are characteristics that past bubbles share, especially the ones driven by significant technological development. Dr. Robert Shiller, a Nobel laureate in economics, identified three factors that are common in speculative bubbles that drive “irrational exuberance.” The three factors are the following:
- Precipitation factors, usually political or technological, which cause an industry to steer to a new direction
- Cultural factors, such as the media, which grasp the attention of the public, including investors
- Psychological factors, such as overconfidence and the tendency to sell products and services based on stories instead of statistical and factual information, which intensify the market
Looking back at the last two major technology-related speculative bubbles, the Telecom Crash and the Dot-com bubble, these factors are easy to identify. The telecom industry’s crash was precipitated by the Telecommunications Act of 1996, which opened up the industry to market competition. This was followed by cultural factors such as a flood of investment, especially from the debt market, causing a surge in the market value of telecom companies and countless media reports on the potential spread of the Internet (which eventually happened, but at a slower pace than the industry predicted). Lastly, psychological factors such as optimistic demand projection and fraudulent accounting practices contributed to the crash. These factors caused so much oversupply in the market that, according to a Brookings Institution report, no more than two percent of the network was being used by 2002. The oversupply eventually led to the crash of the industry.
The Dot-com bubble of 2000 exhibited similar characteristics. The spread of the Internet throughout the 1990s, which was the precipitating factor, led to the creation of numerous companies providing products and services through e-commerce. Following the successful IPOs of the likes of Yahoo and Amazon in 1996 and 1997, respectively, venture capitalists were overly excited about the e-commerce industry and bought companies left and right, hoping that these companies would be the next big thing. One venture capital exit strategy is going public. Therefore, these e-commerce companies were pushed through the IPO pipeline in 1999. For comparison, in 1996 and 1997, the number of Internet IPOs were around 25 per year. The number jumped to 272 in 1999. Most of these companies were overvalued and many went public without generating much profit. They were sold based on cool stories of amazing potentials. Furthermore, logical investment strategies were largely ignored, and Wall Street portfolio managers included these stocks in the fear of missing out. The real profitability (or lack thereof) of these companies were revealed as time passed in the equity market. Consequently, the industry collapsed, and people realized that all the excitement was just a bubble.
Going back to the launch industry, as explained above, it is difficult to say that the launch services industry is in a bubble. I really hope it isn’t. Because, if it turns out to be a bubble, much of the investor confidence that the industry is experiencing will dissipate and the launch industry may be stalled for another decade from decreased rate of capital inflow. However, there are some characteristics of the “irrational exuberance” similar to the two previous bubbles.
First, the launch industry has both the technological and political precipitating factors. For example, we are experiencing breakthrough technological developments such as reusable launch vehicles and 3D printing of advanced materials, coupled with a series of policies in recent years to support the launch industry. A crucial piece of evidence for this is the number of companies that have registered as launch companies. According to the SpaceFund database, there are 119 launch companies in the world. Yet only 112 launches occurred in 2018 globally, and this is the first year with more than 100 launches since 1990. Many studies show that the future launch demand is not likely going to increase in dramatic numbers. This means that we could very well face an oversupply of launch vehicles. We all know what happens in a market where supply significantly exceeds demand. Second, along with the precipitating factors, cultural factors are adding to the overall exuberance. Dramatic, sensational, and controversial headlines such as “the Battle of the Billionaires”, “The New Space Race”, and “Amazon vs. Tesla” are catching the eyes of the public and making us ever more excited about the industry.
Lastly, psychological factors are evident as well. A flood of stories about the potentials of Mars colonization, the future where ultra-low-cost launch vehicles exist, and the possibilities of exploration we can achieve as humankind are reaching out to the “space cadets” in everyone’s hearts. As such, many launch companies are valued based on optimism. This stems from the admiration people generally have towards space exploration, and from companies’ seemingly true potentials, instead of from appropriate valuations of the companies. The launch industry has many characteristics that make it exceptionally difficult for accurate valuation and forecast. Because of such optimism, however, even without the proper valuation, these launch companies have been receiving significant investment. Amidst the excitement, promised launch manifests and schedules often turn out to be over-estimated (purposefully or not) and usually delayed without much criticism. As a result, the firms lack accountability.
As I said earlier, these characteristics do not necessarily mean that the launch industry is in the middle of an economic bubble. That’s something we can only confirm ex-post. However, like the other bubbles in the early 2000s, the launch industry currently exhibits characteristics that can be attributed to the factors of “irrational exuberance”. I love space and I love working in this sector, and the space-cadet in my heart is as strong as anyone else’s. However, we should be good patrons of the space industry and be cautious about how we build a robust foundation. It is common for an industry to be rushed with capital in the beginning, and then turn out to be a dud, after which investors flee and the industry loses years of development. We, as in all the players involved including the commercial world and the government, should certainly try our best to avoid such an outcome for this industry we love.
What is a promising area for growth in the space sector besides the launch services industry?
I believe the on-orbit satellite servicing industry is a strong one. Being able to extend and enhance the life of a satellite by repairing, refueling, and upgrading using robotic satellite servicing vehicles will allow much more flexibility in how we use space. Moreover, it is one of the markets that currently has real demand. There are and will always be satellites that need to be serviced and satellite operators would be inclined to use the technology as a procurement management strategy, for intermediate capabilities needs to mitigate risks due to launch or production delays, or as gap-fillers. Also, subsequent technology development from this sector would lead to more possibilities for in-space manufacturing, space debris mitigation, and other business areas. Lastly, this is an interesting field because both the commercial sector and NASA are working together to develop the technology and make it happen. NASA’s Satellite Servicing Projects Division’s Restore-L and a few commercial players have been developing these technologies in different aspects, and we should soon see this market develop.
How did you become interested in the market dynamics of the space sector?
I have a different background that might seem a bit weird to the people in the space sector. I don’t have a degree in any of the engineering nor the hard science fields. I actually have a BS in finance, which is not common in this sector and my first job out of college was at Morgan Stanley, an investment bank in the financial services industry. Through that experience, I was able to learn how capital flows in various ways and the ins and outs of the industry. After spending eight years at the bank, I decided to move to the space world because I was always interested in the idea of space commercialization. I was admitted to the master’s program at the Space Policy Institute of the George Washington University, and I started my second career. While studying and working at NASA as a resource analyst, I realized that because of my background in finance, I can provide unique perspectives for the space sector and contribute to the growth of the industry. The space sector, which includes many industries along with the launch industry, is a very dynamic and exciting industry, but also fragile. It faces many uncertainties that are very unique to the sector, but also shares many characteristics with traditional industries such as transportation and communications. Hence, we need more people with diverse sets of perspectives to make sure we build a robust commercial sector together, and I would like to believe that I am contributing along the way. Shoot for the moon!