Analysts: Musk’s Response to Launch Price Doubt Reveals Clues to SpaceX’s Business Strategy

[Satellite News 05-05-11] Speaking through an interpreter at the Space Symposium in Colorado last month, China Aerospace Science and Technology Corp. (CAST) Vice President Lei Fanpei hinted that Chinese space officials are skeptical of SpaceX’s set launch prices and admitted that they are too low for China Great Wall Industry’s Long March rocket to match.
    “I believe the China and U.S. space cooperation, once initiated, will certainly bring immediate results to the two countries’ space industries, providing more choices for customers from different countries all over the world. I believe that if we all learn from SpaceX, maybe soon China will outsource from the United States,” said Fanpei, referring to statements from unnamed officials over SpaceX’s LEO payload launch rates.
    The statement drew a response from SpaceX Founder, CEO and CTO Elon Musk, who took to his company’s blog to defend and outline his business model. “I recognize that our prices shatter the historical cost models of government-led developments, but these prices are not arbitrary, premised on capturing a dominant share of the market, or ‘teaser’ rates meant to lure in an eager market only to be increased later. These prices are based on known costs and a demonstrated track record, and they exemplify the potential of America’s commercial space industry,” Musk said.
    China Great Wall, which functions as the marketing arm of CAST, is currently developing plans to open a Washington D.C. office this summer to promote Chinese space products and solar arrays. China has long hoped to revive bilateral space relations after a U.S. policy shift in 1999 prohibited the United States from trading space-related technology with China.
    Musk said that Fanpei’s statement only validated the United States’ advantages over China’s space sector. “China has the fastest growing economy in the world. But the American free enterprise system, which allows anyone with a better mouse-trap to compete, is what will ensure that the United States remains the world’s greatest superpower of innovation.”
    According to Musk and additional information provided on SpaceX’s website, the price of a standard flight on a Falcon 9 rocket is $54 million. The average price of a full-up NASA Dragon cargo mission to the International Space Station is $133 million including inflation, or about $115 million considering the current U.S. dollar value. SpaceX maintains that the company has been profitable every year since 2007, with more than 40 flights on its manifest representing over $3 billion in revenues.
    “Because SpaceX is so vertically integrated, we know and can control the overwhelming majority of our costs. This is why I am so confident that our performance will increase and our prices will decline over time, as is the case with every other technology,” said Musk. “We have a firm, fixed price contract with NASA for 12 missions. This price includes the costs of the Falcon 9 launch, the Dragon spacecraft, all operations, maintenance and overhead, and all of the work required to integrate with the Space Station. If there are cost overruns, SpaceX will cover the difference. This concept may be foreign to some traditional government space contractors that seem to believe that cost overruns should be the responsibility of the taxpayer.”
    Beyond China, SpaceX has had its fair share of both international and domestic detractors. Libertarian think tank Lexington Institute Author Loren Thompson harshly criticized Musk’s post in his own response issued May 5, alleging that the launch industry entrepreneur is often “long on opinion and short on detail.”
    “NASA can’t seem to get enough of SpaceX, shelling out $2 billion to get its launch vehicles to a point where they can begin lifting payloads into orbit to support the Space Station and other missions,” wrote Thompson. “Musk and his investors have only put about one-tenth of that amount into SpaceX, even though they present the company as an entrepreneurial, market-driven undertaking. The stodgy traditional suppliers that Musk thinks are being left behind by history — Boeing, Lockheed Martin and their ilk —have managed to invest $4 billion of their own money in developing new launch vehicles, which is a lot more money than the government put into their projects. So who’s really taking risks here, and who is just relying on taxpayer dollars to build a business?”
    One industry analyst, who asked not to be named for this story, told Satellite News that some may take Musk’s statement that his prices are verified by independent sources as a sign that the company has conducted its own audits. “SpaceX has gone on the record that the company might consider an IPO late in 2012. The language here tells me that plan is underway. If it can maintain its relationship with NASA through the COTS investments and continue to establish trust with the Merlin engine, it should cut down the number of its critics,” the analyst said.
    Musk said he has become a veteran of criticism. “Whenever someone proposes to do something that has never been done before, there will always be skeptics. So when I started SpaceX, it was not surprising when people said we wouldn’t succeed. But now that we’ve successfully proven Falcon 1, Falcon 9 and Dragon, there’s been a steady stream of misinformation and doubt expressed about SpaceX’s actual launch costs and prices … SpaceX intends to make far more dramatic reductions in price in the long-term when full launch vehicle reusability is achieved. We will not be satisfied with our progress until we have achieved this long sought goal of the space industry.”