The Space Version of ‘Too Big to Fail’
In columns during the last four years, we have looked at the effects of the recession on the satellite and space sector. We decried bailouts of the financial services and automobile industries under the justification of being ‘too big to fail’ because of the ‘moral hazard’ those bailouts created, noting that the message sent to those enterprises was to become as big as possible and to take the most heedless risks possible, because only under the circumstances in which an enterprise had become so big that its failure would pose systemic risks to the macro economy and in which it had taken risks so unwise that its very existence, as opposed to marginal profitability, was threatened, would public bailouts be forthcoming. We also decried the effects of bailouts on the ‘creative destruction’ that is as critical as moral hazard to healthy capitalism. When you prop up a rotting tree instead of cutting it down, a new sapling cannot grow in its place. Had those enterprises not been bailed out, entrepreneurs would have triaged their assets in bankruptcy or otherwise distressed sales, accurately valuing them in the process, and newer, stronger, leaner enterprises would have sprung up to replace the ones that vanished.
These two nuclear forces of our economic system, moral hazard and creative destruction, were bypassed in the name of political expediency during the recession, and the result is predictable: ever fewer, bigger, more concentrated enterprises in the industries that were bailed out, guaranteeing a next round of recession. This is not to say that there are no comparative success stories, but the cost of comparative success is rarely taken into account, and what would have happened without intervention never is.
It is interesting to note in this context the increasing concentration and government dependency of the satellite and space sector, as well as the dependency of government upon it. In commercial launch services, it is true, the emergence into the market of [new] Sea Launch, SpaceX and Long March, among others, breathes some competition into a sector that was becoming nearly a duopoly of Arianespace and ILS. However, global FSS operators have consolidated to four, and arguably two of those are really more regional than global. MSS and earth imaging operators are each small sectors; notwithstanding how they are categorized in the industry, each company rarely truly competes against more than three or four others. Satellite manufacturing is also a highly consolidated industry, with the same five or six large bus manufacturers that existed a decade ago, and a few smallsat makers.
The consolidation that produced this state of affairs was a natural outgrowth of the overcapacity across all verticals and thin margins that characterized the space sector in the first years of the new century. However, it has come at a cost not often discussed. What would be the necessary role of government be if an Intelsat, a GeoEye, an Iridium, a SpaceX or a United Launch Alliance was threatened in its existence? Government and military depend on their services, and that dependency is increasing in the era of the Augustine Report, hosted payloads and outsourcing. Beyond government, are any of these companies so critical to the infrastructure of communications and media, navigation, cartography, meteorology or other disciplines that their loss could not be tolerated? In short, are any companies in the satellite and space sector “too big to fail?”
If so, the available solutions, when we eventually wake up to the situation, are troubling. As with the industries that went before, there are only three real responses: do nothing, or almost nothing, as we have done with financial industry reform, and hope for the best; regulate the industry to the point that systemically critical enterprises are not in danger and cannot be in danger; and finally, decide that “too big to fail” means “too big to exist,” and force divestitures, whether the spun-off companies are independently viable or not. It is not a great set of choices, but, on the bright side, it is a set of choices we have not bothered to examine yet.
Owen D. Kurtin is a practicing attorney in New York City and a founder and principal of private investment firm The Vinland Group LLC. He may be reached at email@example.com.