Commercialization of space — the investment opportunities

Reports •

Government agencies will take steps to assure fair international competition in outer space. • Current practices to increase private sector awareness of space opportunities will be expanded and increased industry investment in high technology, space-based R and D will be encouraged. • Various initiatives to implement national policy on the commercial use of space will be taken, such as increasing public awareness about the commercial opportunities in space and developing a plan for privatization of additional government space activities (beyond land remote sensing and ELVs). • High-level national focus for commercial space issues will be sought and implemented through the White House Working Group on the Commercial Use of Space. (The Working Group, to be chaired by the Department of Commerce, will consist of all in-

terested department and agencies within the US government, including NASA and the Departments of State, Defense, Treasury and Justice.)

important to keep a careful eye on the present for short-term benefits, it is also important to cast our vision forward and attempt to divine what the future could be. Both kinds of vision are necessary for developing privatc The above array of initiatives, and investment and also for instituting others that may be taken in the future, government incentives and policies. reflect a firm determination on the The level of private investment in part of the Reagan administration to space will be driven by the amount of encourage and promote commercial investment in government programouter space activities in order to bemes as well as by policy incentives. A nefit the domestic economy and rerelatively high commitment from govduce unnecessary government exernment will naturally result in higher penditures. private sector interest m new space ventures. Investment will also depend Harry R. Marshall Jr directly on the technological developPrincipal Deputy Assistant ments that are achieved by governSecretary merit programmcs, eg the Shuttlc, Bureau of Oceans and International new propulsion systems, spacc sta. Environmental and Scientific Affairs tions etc. Department of State The length of the list of private Washington, DC, USA space ventures and the size of thc individual investments will also de. Note Whe enacted legislation encompassed the pend on the extent of internatiomfl cooperation and the number of joint essential elements of the bill. ventures that are instituted to exploit the space environment. It is likely that a higher degree of international cooperation will be attempted, both by governments and by private industry because of thc extremely high cost attached to developing space systems. This report by Ray Williamson of the US Office of Technology Assessment, One area that looks promising for looks at the prospects for commercialization of space into the 21st century and international cooperation between discusses the relative benefits of private v government investment. The report corporations in the research stages, at is taken from a revised version of an article originally appearing in the October least, is materials processing in space. Table 1 presents the major opportu1982 issue of Futures. A fully updated paper will appear in Michiel Schwarz and Paul Stares (eds), 'The Exploitation of Space: Policy Trends in the Military and nities for industrial involvement in space systems before AD 2000. 4 Since Commercial Uses of Space' (Butterworths, Guildford, UK, 1985). most systems will continue to be depower satellite (SPS) system have veloped, owned and operated bv the What prospects are there for private often argued that we could have the government, this list does not repre investment and involvement in space? first component of a system in place sent the full range of possible space The list varies greatly depending on before the end of this century. ~ development, in this list, the dependthe interests of the list-maker and how Perhaps we could, but it would require ence on the Shuttle and associated much of a visionary he is. However, it pulling out all the financial and tech- components is strong. can generally be divided into those Table 2 extends the list of opportunical stops to get there. However, the products and services that would be nities into the early part of the 21st development of an SPS, if a system is available before the end of the century ever built, will necessarily depend on century. Here, there is much greater and those that would be developed after AD 2000. Because visionaries our experience with the Shuttle, with dependence on large, unmanned and space stations, with new materials, manned space platforms, since I have often confuse the prospects for the and with many other technologies that assumed that by the 21st century, long term with the more immediate are either under development or have there will be space platforms and ones, it is important to bear in mind not yet been started. 2 These first have space stations operated by several that what we are able and willing to do to be tried and proved and then countries. in the next century will depend directIt is also likely that there will be a experience gathered before the next ly on what technologies we develop second-generation Shuttle of higher step is taken. between now and then. On the other hand, although it is capacity and greater efficiency to For example, proponents of a solar

Commercialization of space- the investment opportunities

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Reports transport more mass to orbit at cheaper unit cost. Certainly, the further out in time we attempt to see, the cloudier our vision becomes. These lists represent a deliberately conservative view since I have attempted to separate the probable from the possible developments of space technology.

Table 1. Potential for private Investment before AD 2000. Applications

Systems/services

Notes

Transportation

Expendable launchers

before 1990; Ariane now in service

Shuffle Ground operations Marketing Ownership Upper stages

Incentives for attracting private capital The most attractive future investments will be those for which an assured market exists, and for which, in addition, likely profits are high. As noted, it is these reasons that were responsible for the relative ease with which investment capital was obtained for the first geosynchronous satellites. A similar condition exists for certain h i g h v a l u e p h a r m a c e u t i c a l s or catalysts. A ready market exists for such products. If it can be shown that

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before 1985 after 1990 now being marketed and developed

Communications

30/20 GHz System Large communications platforms Remote servicing

c 1988 after 1990 after 1995

Remote sensing

General land remote sensing

1985 (SPOT), later for US systems

Special purpose platforms for minerals exploration, land use planning, crop assessment Weather (special purpose warning systems)

after 1985

Furnaces, processing modules

1985 now being developed

Small multipurpose platforms for manufacturing, testing (LEO) 1

now being developed

GEO2 platform (communications, remote sensing)

after 1990

Small photovoltaic systems Large photovoltaic systems Thermal-electric systems

today

Small, special purpose system

1990

Barriers to private investment The course of technology innovation from R & D to the marketplace generally includes barriers related to the technical and economic uncertainties of a new process or product. Innovations in space technology face additional barriers related to the expense and technical difficulty of placing humans and equipment into orbit. Table 3 lists the most important of these barriers, including those that are specific to the environment of space. It is these barriers to which incentives should be directed. Lowering the bartiers reduces the economic risk. The importance of any particular barrier will, of course, differ from technology to technology. For satellite communications, for example, the market existing in the early 1960s, though unknown in detail, was sufficiently strong to encourage investment; the greatest uncertainty lay in the technical operation of the system. For the early land remote-sensing system, by contrast, both the operation of new satellite systems and the market for data were uncertain. Today, the technology for a multispectral scanner or even more advanced systems is well understood, but the market remains highly uncertain. 5

before 1985

(active and passive)

after 1990

Materials

Processing in space New materials for space structures Structures

Space power

Navigation

1995 1995

Notes: 1LEO = Low earth orbit 2GEO = Geosynchronous orbit

Table 2. Potential for prlvste Investment AD2000-2020. Applications

Systems/uses

Notes

Transportation

2nd generation Shuttle, marketing, ground operations, ownership, upper stages

c 2000

Orbital transfer vehicles Solar sails

c2000 c2010

Communications

2nd/3rd generation, 30/20 GHs systems

c2000

Remote sensing

Geostationary platforms

c2000

Materials

Large scale construction in space Lunar-based mining/processing

c2010 c2020

Structures

Large space structures

c2010

Space power

Advanced photovoltaic systems Advanced thermal, nuclear systems

c2000 c 2010

they or other low mass, high value products can be manufactured in space more economically than on earth, they too will constitute attractive investments. Many different successful incentives for overcoming the barriers shown in Table 3, and for reducing the risk of the private sector, have been used. Most of these incentives are in some way appropriate for space technology. The following discussion presents some possible ones. It is necessarily a partial list, and focuses on the most

important incentives for space technology. Because this report is written from the perspective of US policy, the discussion necessarily emphasizes the particular needs and problems of the US private sector. The private sector in other countries has related concerns, but has available somewhat d i f f e r e n t i n s t i t u t i o n a l m e a n s to address them.

Industry~government R&D In a sense, any N A S A or other governmental programmes that contract

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Reports Table 3. Barriers to investment in space. Technological Uncertain technology

Systems tend to be complex Uncertainty of space environment ~

Economic High cost to reach space ~ Market risks uncertain High cost of technology development

Regulatory/policy Government controls access ~ Status of civilian space programme uncertain ~ Note: Unique to space environment

with industry to develop new technologies for g o v e r n m e n t use act to reduce the barriers to innovation, since many of these products also find extensive use in commercial applications. H o w e v e r , although such work may aid some companies, the spinoffs are accidental and generally not under the control of the corporation. O n e way of ensuring that industry has a genuine stake and early involvement in technological innovation is to design and fund R & D p r o g r a m m e s in which government and industry work together on projects of mutual interest. The particular form that gove r n m e n t e n c o u r a g e m e n t of industry participation in a given project or technology would take depends directly on the structure of the industry and the amount of capital available to undertake long-term projects. A l t h o u g h satellite communications have been predominantly a private sector activity nearly since the space age began, in the last few years some have questioned the industry's capacity to pursue R & D on advanced communications systems, or its ability to compete with new foreign K a - b a n d (30/20 G H z ) systems. 6 In the case of satellite communications, the greatest potential profits of a new technology are likely to be reaped by the firms leasing satellite transponder time (ie the broadcast firms) rather than by the satellite builders. H e n c e , the future expected profits accruing to the satellite manufacturers may not be sufficient to allow them to pursue advanced communications research independently.

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The increasing crowding of slots in the geostationary orbit for the current C - b a n d (6/4 G H z ) and K u - b a n d (14/ 12 G H z ) satellites (especially over the Western Hemisphere) may make high capacity K a - b a n d satellites profitable in the late 19g0s or early 1990s. Hence, it may be appropriate for N A S A and the satellite builders to team up to mount a demonstration project. Such an arrangement would have the advantage of reducing government costs in providing R & D and demonstration to an entire industry. N A S A ' s A d v a n c e d Communications Technology Satellite ( A C T S ) programme is designed to inw~lve industry in the development of a 3l)/21) G H z satellite system.;

Designated entity O n e way to involve the private sector in using space technology is to designate a single entity to commercialize technology developed by the government or with government funding. The d e v e l o p m e n t of satellite communications by C O M S A T is an important e x a m p l e of this m e c h a n i s m H o w e v e r , as a 1982 O T A report argues: s There is no singlc best model for commercializing space applications technologies. The particular series of steps that led to thc C O M S A T Corporation, for cxamplc, though effective m promoting satellite communications, will not necessarily scrvc as a paradigm for other technologies. Commercialization of other space technologies requircs that the special circumstances and different requirements of cach be considered in determining whether and to what extent a particular system shonld be privately owned. For example, the recently enacted Public Law 98-365 authorizes the Department of C o m m e r c e to designate a private firm to market data collected by the g o v e r n m e n t - o w n e d and operated L A N D S A T land remote sensing system, and to contract for a follow-on system to L A N D S A T 5. This plan allows the private sector to attempt to build a market for data while the L A N D S A T system continues to be operated by the federal government. Later in the process, if the marketing effort is successful, the private firm would have a larger market in which

to begin to sell data products from its own satellite system. '~ Such a scheme was not considered necessary for communications satellites. In another example, although US private corporations are beginning to offer launch services which arc expendable, it may be appropriate fo.the federal government to own and operate the launch facilities and tracking and data relay systems until such time as they also become commercially viable enterprises. I,

Tax benefits It may be possible to involve the private sector in the development and operation of new space systems by altering the tax laws. Three of the main incentives in the present US tax systems are depreciation allowances, investment tax credits, and the ability to deduct R & D outlays. By tailoring these incentives to apply more generously to research on particular space systems, the private sector may bc encouraged to participate in research that might otherwise revolve too high a degree of risk. One of the main advantages of nsmg tax benefits rather than alternative devices to stimulate R & D is that they inw)lve less direct government control. 1I

Encouraging industrial consortia An obvious alternative to the more c o m m o n case of projects directed by a single firm is to encourage research .joint ventures or industrial consortia. Such a joint venture would be a formal means to pool resources (financial. technical and physical) and liabilities among the participating firms. The joint venture could be established by manufacturers with other manufacturers or with subcontractors to do adw anced research in space systems. More than a score of the largest US computer manufacturers and their semiconductor suppliers have formed such a consortium under the Semiconductor Industrial Association to conduct advanced electronics research. S P O T IMA G E and Arianespace are good examples of E u r o p e a n efforts to use thi~ technique. H o w e v e r , the US antitrust la~s may present certain barriers to such a plan W h e t h e r or not a joint v e n t u r e

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Reports violates the current antitrust laws is a function of its design and the circumstances under which it is established. Although US antitrust laws may not present strong barriers to consortia there is a perception in US industry that they do. The articulation of a clear US government policy encouraging consortia and clarifying their position with respect to the antitrust laws would greatly facilitate their use.

Joint Endeavor Agreement The N A S A Joint Endeavor A g r e e ment (JEA) seems a particularly effective tool of government policy towards private investment in space. ~2 Designed by N A S A to encourage US private firms to risk R & D capital experimenting in space with materials and materials processing, the J E A makes possible a high degree of cooperation between government and industry. Both parties risk capital and other resources to test new processes in space. N A S A provides the transportation and considerable experience in working in space. The company develops the necessary equipment, does the initial ground testing and theoretical research. The experiment must meet the criteria of technical and economic merit and must contribute to innovation. In order to make the arrangement attractive, N A S A allows the company to retain certain proprietary rights to the results, particularly those that lead to a competitive edge in marketing products of the space-based process. The latter is an important, perhaps essential, concession on the part of N A S A to the business community. N A S A has the power to retain the results of work done under contract to N A S A as public property held in trust by NASA. By allowing some restricted sets of data to be designated as proprietary information, NASA allows the company entering the Agreement to retain a necessary commercial advantage over competitors. To date, only a few companies have signed JEAs with NASA. For example, in the oldest J E A , N A S A and McDonnell-Douglas will use the capabilities of the Shuttle to investigate continuous flow electrophoresis in

SPACE POLICY May 1985

space. In a subsidiary agreement, O r t h o Pharmaceutical has joined McDonnell-Douglas to explore the ability of the process to produce large enough quantities of high value, low mass pharmaceuticals to show a profit on the process. McDonnell-Douglas hope to market their first product manufactured in space by 1987. For at least a few companies, the J E A is a strong incentive for investing in research in space. They are committing research funds for the express purpose of making a profit on the processes so tested and are trying out specific, narrowly defined experiments. Other corporations interested in different aspects of experimenting in space may also join N A S A in JEAs as they become more familiar with the prospects and problems of working in space. Several have expressed interest, and a few have signed lesser agreements such as the Technical Exchange Agreement and the Industrial Guest Investigator's Agreement to share information, personnel and expertise. As it stands, some industrial critics complain that the J E A is structured in such a way that a company must be able to commit a substantial investment to the Agreement in order to enter into it. They must also be willing to do the marketing, financing, and hardware development. However, by encouraging different companies to take on different tasks, each committing itself to only part of the total investment, more companies might be able to enter the field. N A S A in turn would be able to strengthen an already powerful tool.

Extending the JEA The concept of the J E A has so far been applied only to materials processing. Can it be extended to other profit-making activities in space? Two arrangements suggested by O T A , seem worth exploring.13 (1) Shuttle experiments. For predefined areas of research with potential to meet national needs, the offer of free transportation for testing an experimental process or a piece of equipment would be a powerful incentive in other technologies as well. It could be used to test new equipment in space:

sensors, r o b o t devices, cameras. However, for the smaller experiments, a formal agreement such as the J E A is much too expensive. If N A S A were to make a small percentage of the Shuttle payload available for industrial experimentation at a reduced charge, more companies could become involved for relatively little investment. N A S A ' s Getaway Special experimental packages already satisfy part of this need. However, each of the experiments must be completely self-contained and have no access to power from the Shuttle. Thus, only a limited range of experiments can be carried out under these circumstances. In order to test sensors or any other equipment that need access to space or onboard power sources, a wider range of experimental possibilities is necessary. It should be noted that such an incentive, together with other demand for transportation services, may require more total Shuttle capacity than is presently available on the four current Shuttle vehicles. Therefore, this or other incentives that require higher transportation capacity would also require either a fifth Shuttle or additional expendable launchers. In order for strong private markets for space technology to develop, a sufficient transportation capacity must be available. (2) Public service. Because of the maturity of satellite communications technology, and the low earth orbit of the Shuttle, widespread testing of communications devices on the Shuttle would be of little use. However, it should be possible to construct suitable arrangements for using a specified percentage of a new communication satellite's transponders for public service (eg rural telecommunications for health and education) in return for transporting it to space. Operations and maintenance costs for the transponders could be borne by the public users. This arrangement would have the advantage of reducing the risk for the corporation and providing a long-term service for the public good. It the satellite were successful, all would benefit. The corporation that designed

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Reports and flew the satellite would earn a viable return from the balance of the satellite's capacity and, in effect, it would be paying for the launch service over a very long period, If the satellite failed, each would have lost only a portion of the total investment. In the past, NASA has used the opportunity provided by satellite system demonstration projects to provide experimental public services. The foreign and domestic experiments with public broadcasting and voice transmission on the NASA Applications Technology Satellite Series are excellent examples of this practice. Such experiments have served the public well by demonstrating the utility of satellites for providing health care and educational services, disaster assessment and relief, and emergency medical services to remote locations. An arrangement with private industry to provide similar public services in return for the launch o.f a new satellite could provide new and expanded public service opportunities and could also eventually provide new markets for the communications industry. (3) Royalty arrangements. Another arrangement that has been suggested H for making Shuttle operations profitable, and incidentally encouraging the private sector to consider investing in space, is to provide free launch services in return for a royalty payment on the net profit from a space endeavour. This would have the effect of providing a substantial income for the Shuttle from highly profitable ventures and at the same time not unduly penalizing corporations whose enterprises do not work out as well. Such a plan might also have the effect of reducing total government investment in Shuttle and provide valuable experience for eventual transfer of the Shuttle to the private sector. Although some combination of the above incentives may be necessary to spur private investment in space, they are not sufficient in the absence of clear and consistent broad goals and specific strategies for the government space programme. In the USA, the

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lack of consensus about the goals, and strategies to achieve them ~5 has led to considerable uncertainty in the private sector about its possible role in space activities. In every country, the government is the largest investor in space technology. Even in the USA, with its strong emphasis on private sector involvement, this state of affairs is likely to continue for some time. ~6Thus abrupt changes in government policy and of funding of government programmes can have a significant effect on private investment in space. In addition, the government controls private access to space through control of the launchers and launching facilities. If private investment in space is to be encouraged, it will be essential to establish clear and workable policies and regulations for private launchers, satellite and other space technologies. For space technology, as for few other areas of high technology, the role of the international community is very great. Thus, these policies will have to take into account the policies and agreements within the international community as well as domestic needs. ~7

Ray A. Williamson Office of Technology Assessment Washington DC, USA Notes and references ~High Frontier, Heritage Foundation Report, Washington, DC, 1981. 2Solar Power Satellites, Office of Technology Assessment, OTA-E-144, August 1981. 3R. DalBello and S. Finer, 'Prospects for international cooperation in materials processing technologies', 33rd International Astronautical Congress, Paris, September 1982. 4My selections are taken from R.F. Brodsky and B.G. Morals, 'Space 2020: technology, the missions likely 20-40 years from now', Aeronautics and Astronautics, Vol 20, No 5, 1982, pp 54-73.

5Remote Sensing and the Private Sector: Issues for Discussion, Office of Technology Assessment, US Congress, OTA-TMISC-20, 1984. The plan of PL 98-365 is based on the recognition that the private sector is better equipped than the government to market remotely sensed data. Since the market for such data is currently

extremely weak, these marketing efforts will be essential to develop sufficient market for data to support a self-sufficient commercial business. 6'NASA space communications programme', Hearings before the Subcommittee on Space Science and Applications of the Committee on Science and Technology, US House of Representatives, 8 and 9 July 1981. 7The ACTS programme demonstrates the difficulty of reaching agreement on the terms of joint government/industry R&D projects. There is no unanimity in the satellite communications industry or in the government over the need for 30/20 GHz research. The Reagan administration has tried to cut the ACTS programme by cutting the budget drastically, but the Congress has restored those funds, citing the need to keep US industry at the forefront of satellite communications innovation. Hughes Aircraft Corp has recently filed with the Federal Communications Commission to launch two 30/20 GHz satellites in the late 1980s. Though not as advanced as the planned ACTS demon-. stration system, Hughes argues that its satellites will serve the needs of the market better than the ACTS system.

8Civilian Space Policy and Applications, Office of Technology Assessment, US Congress, OTA-STI, 1982, p 10. 9See Remote Sensing and the Private Sector: Issues for Discussion, op cit, Ref 5, for a comprehensive treatment of the issues surrounding commercialization or privatization of land remote sensing.

1°Civilian Space Policy and Applications, op cit, Ref 8, pp 288-291. 11On 20 July 1984, the 15th anniversary of the Apollo II landing on the Moon, the Reagan administration announced a space commercialization programme whose primary thrust is to provide incentives to industry through alterations in the US tax laws. See, for example, Space Enterprise Today, Vol 1, No 4, pp 1-2.

12Civilian Space Policy and Applications. op cit, Ref 8, pp 67-73. 13Ray A. Williamson, 'Civilian space policy and applications', Statement for the Record, Hearings before the US House of Representatives, Committee on Science and Technology, Subcommittee on Space Science and Applications, 2 March 1982 ~4j. Grey, 'NASA's struggle for survival', Aeronautics and Astronautics. Vol 20, No 1, 1982, pp 19-21.

15Civilian Space Policy and Applications, op cit, Ref 8, p 273. ~61nternational Cooperation and Compebtion in Civilian Space Activities, Executive Summary, Office of Technology Assessment, US Congress, OTA-ISC-240, July 1984.

~TCivilian Space Policy and Applications, op cit, Ref 8, Chapter 10.

S P A C E POLICY May 1985