Policies, Incentives, and Growth in the NewSpace Industry

Transcription

1 Policies, Incentives, and Growth in the NewSpace Industry Lauren Culver Laura Escudero Abraham Grindle Michael Hamilton Jesse Sowell December 12 th, 2007 Note: This is a working paper; all rights reserved by authors. ESD.10 Space 1/94

2 Executive Summary Background Space flight is a technically challenging, expensive and risky endeavor. As such, for decades conventional thought has held that it can only be done by governments and large corporations. This notion has been reinforced by the domination of the two major space markets - government contracts and commercial satellites - by large government-dependent contractors such as Boeing and Lockheed Martin. In recent years the industry has witnessed the emergence of a leaner, more agile business model capable of surviving and innovating in a competitive private market. The numerous small startup companies that subscribe to this model have been labeled NewSpace. Many are targeting the budding space tourism market, but several are also working to capture a major share of the existing launch services market through radical technological, process, and business-model innovations. Additional market segments related to lunar exploration, commercial space stations, and suborbital point-to-point flights are also being explored to varying degrees. A number of stakeholders - including federal and regional governments, the National Aeronautics and Space Administration (NASA), private individuals, and many others have reason to support these NewSpace firms. Consequently, a variety of policies have been used as catalysts that lower market entry barriers or as sustainers that facilitate continued company growth. These policies function by creating incentives for NewSpace companies: opportunities to gain credibility and publicity, limitations on liability exposure in the nascent market, varying degrees of financial support, a somewhat defined and stable investment environment, and the construction of supporting infrastructure. The efficacy of such policies may be critical to the ultimate viability of the NewSpace industry. Four Policy Categories Several of the most significant policy mechanisms used to support NewSpace can be grouped into four topical categories: prizes, institutional framework, contracts, and infrastructure. Prizes Inducement prizes such as the Ansari X PRIZE are awarded in various competition formats. When carefully conceived, they are very effective policy tools that act as catalysts in the NewSpace industry; they can accelerate the pace of innovation and technological development, reinvigorate a market or open a new market segment, and cause paradigm shifts in popular thinking. Prizes accomplish this by providing NewSpace companies with an opportunity to demonstrate their capabilities and technology and thus gain significant credibility with potential customers and/or investors. Prizes also can marshal significant external resources to a particular problem, and enable the participation of a more diverse range of companies/teams/individuals and approaches than traditional procurement or development efforts. Institutional Framework Institutional framework is defined as the body of public policies that define regulatory powers and liability structures affecting the NewSpace industry. This framework can facilitate or retard growth in any industry, but holds particular power here given the high-risk nature of NewSpace. In the past, conflicting laws and regulations related to commercial space flight caused delays that ESD.10 Space 2/94

3 were costly and time-consuming, but the 1998 consolidation of authority to the FAA-AST 1 and various provisions of the Commercial Space Launch Amendments Act of 2004 dramatically improved this situation in the United States. Currently, the federal government s policy of providing liability indemnification for this sector acts as a catalyst to NewSpace companies; this indemnification reduces insurance costs and requirements for this immature industry to a manageable level, thus lowering an important market entry barrier. Furthermore, the current industry-sensitive and flexible regulatory policy acts as a sustainer, while the liability indemnification policy acts as a catalyst for NewSpace companies. Contracts Contracts can serve two distinct policy roles with regard to NewSpace companies. Technology development and demonstration contracts such as NASA s COTS 2 Phase I or SBIR/STTR 3 contracts - can be used as catalysts to facilitate market entry and initial growth, while standard procurement contracts such as COTS Phase II - can be used as sustainers to further strengthen and maintain a robust industry. The most important effect of contracts is their creation of a market for a particular technology, company, and/or business plan. Experience with COTS Phase I has demonstrated, however, that given the NewSpace industry s current immaturity, the perceived certainty of the created market can potentially have a major impact on the efficacy of the contracting policy. Infrastructure Finally, as the NewSpace industry matures there is an increasing need for policies to develop supporting infrastructure, including spaceports and their accompanying aerospace industry cluster. Stakeholders affected by these sustaining policies are diverse but highly interconnected, resulting in a complex exchange of incentives. The spaceport and/or local region offer incentives such as tax breaks and a favorable operating environment in order to attract NewSpace companies. The spaceport and local region 4, in turn, are incentivized to do this by the industry and service cluster that NewSpace companies will bring with them. Benefits of this cluster include job creation, technology transfer, tourism (both space and terrestrial), commercial space transportation, manufacturing and operations supporting core NewSpace technologies and spaceport construction, and the resulting increase in tax revenue. Recommendations To continue the growth and development of the NewSpace industry, a combination of catalytic and sustaining policies are recommended. Policies to offer prizes, technology development and demonstration contracts, and liability indemnification should be utilized as catalysts to maintain low entry barriers to the commercial space flight market for the near-future. Prizes and development contracts will work to continue to push the envelope of innovation and bring in new players and ideas. Liability indemnification is required until the industry builds a sufficient track record and the required financial resources to enable the assumption of full responsibility for liability losses. 1 Federal Aviation Administration - Office of the Associate Administrator for Commercial Space Transportation 2 Commercial Orbital Transportation System 3 Small Business Innovation Research / Small Business Technology Transfer 4 Often located in rural, underdeveloped areas ESD.10 Space 3/94

4 Policies to offer procurement contracts, a flexible and industry-friendly regulatory framework, and the development of spaceports and other infrastructure are the sustainers necessary for a robust and mature NewSpace industry. Procurement contracts provide the major market, and the regulatory framework and infrastructure provide the permissive operating environment. The long-term viability and health of the NewSpace industry is closely tied to the judicious use of these four categories of policies as catalysts and sustainers. ESD.10 Space 4/94

5 Table of Contents EXECUTIVE SUMMARY... 2 TABLE OF CONTENTS... 5 LIST OF TABLES... 7 LIST OF FIGURES INTRODUCTION... 8 MOTIVATION... 8 WHAT IS NEWSPACE?... 9 NEWSPACE MARKETS Space Tourism Orbital Launch Vehicles STAKEHOLDERS IN THE NEWSPACE INDUSTRY ANALYSIS FRAMEWORK ACKNOWLEDGMENT OF PRIOR WORK PRIZES INTRODUCTION DEFINITIONS EXPLORATION OF INDUCEMENT PRIZES Historical Prizes Modern Prizes in Space flight Cheap Access to Space (CATS) Prize Ansari X PRIZE NASA s Centennial Challenges Lunar Lander Challenge America s Space Prize Google Lunar X PRIZE V-Prize ANALYSIS Incentives from Prizes Limitations & Keys to Success CONCLUSIONS & RECOMMENDATIONS INSTITUTIONAL FRAMEWORK: A REDUCTION OF BARRIERS A HISTORY OF INSTITUTIONAL FRAMEWORK IN THE U.S Regulatory Framework : Regulation in the Early Days of Commercial Space Present: A History of Liability Limitations CURRENT INSTITUTIONAL FRAMEWORK Experimental Permitting Launch Licensing Safety Standards Liability Framework CONCLUSIONS AND RECOMMENDATIONS Experimental Permitting Simplified Launch Licensing Minimal Safety Standards Liability Limitations CONTRACTS INTRODUCTION ESD.10 Space 5/94

6 NASA SPACE ACT AGREEMENTS NASA s Commercial Orbital Transportation System Background Response COTS Case Study: Space Exploration Technologies COTS Case Study: Rocketplane Kistler Reopening COTS Phase I Uncertainty Surrounding COTS NASA s Stated Motivation Detractors Supporters SBIR / STTR CONTRACTS Background SBIR Case Study: XCOR Aerospace, Inc PRIVATE CONTRACTS: BIGELOW AEROSPACE COMPARING CONTRACTS CONCLUSIONS AND RECOMMENDATIONS SPACEPORTS AND INFRASTRUCTURE OLDSPACEPORTS AND NEWSPACEPORTS INCENTIVES AND INDUSTRY CLUSTERS Regional Economic Development and Industry Clusters Virgin Galactic, New Mexico, and Spaceport America A Generalized View of NewSpaceport Stakeholders Space Florida CONCLUSIONS AND RECOMMENDATIONS EUROPEAN NEWSPACE ACTIVITY INTRODUCTION PRIZES INSTITUTIONAL FRAMEWORK CONTRACTS SPACEPORTS AND INFRASTRUCTURE CONCLUSIONS AND RECOMMENDATIONS GENERAL CONCLUSIONS AND RECOMMENDATIONS CATALYSTS: POLICIES THAT LOWER MARKET ENTRY BARRIERS SUSTAINERS: POLICIES NECESSARY IN A MATURE NEWSPACE INDUSTRY MOVING FORWARD APPENDICES COMPANY INFORMATION SpaceDev PlanetSpace Space Exploration Technologies (SpaceX) Rocketplane Limited, Inc XCOR DETAILS OF COTS CONTRACT AND PROPOSALS ACKNOWLEDGEMENTS AUTHOR BIOGRAPHIES Lauren Culver Laura Escudero Abraham T. Grindle Michael Hamilton Jesse Sowell ANNOTATED BIBLIOGRAPHY ESD.10 Space 6/94

7 List of Tables 1.1 Stakeholders in the NewSpace industry 2.1 Summary of Past NASA Centennial Challenges 2.2 Summary of Current NASA Centennial Challenges 2.3 Conclusions for Prize Policy 3.1 Conclusions for Experimental Permit Policy 3.2 Conclusions for Simplified Launch Licensing Policy 3.3 Conclusions for Minimal Safety Standards Policy 3.4 Conclusions for Liability Limitations Policy 4.1 Comparing Incentives from Contracts 4.2 Conclusions for Contract Policy 5.1 Contrasting characteristics of NewSpaceports and OldSpaceports 5.2 Description of NewSpaceport characteristics and performance measures 5.3 Conclusions for Infrastructure Policy List of Figures 4.1 SBIR Funding Breakdown 4.2 STTR Funding Breakdown 5.1 Virgin Galactic-Spaceport America Incentives and Relationships 5.2 Artist s rendition of Spaceport America 5.3 New Mexico Industry Cluster Pyramid 5.4 Generalized Stakeholders, Incentives, and Relationships 5.5 Space Florida Vehicle Assembly Plan ESD.10 Space 7/94

8 1. Introduction The term NewSpace refers to a relatively new group of small companies pursuing business models in markets such as space tourism and orbital launch services. These companies are developing new technologies and infrastructure to take advantage of these markets. Our study evaluates an array of policy tools that intend to foster the growth of NewSpace companies and an expanded and sustainable commercial space industry. These policies fall into four distinct categories: prizes, institutional frameworks, contracts, and infrastructure. After an analysis of the policies and the incentives they create, we classify the policies and incentives as having one of two effects. The first effect is that of a catalyst 5, which serves to lower entry barriers and foster innovation. The second effect is that of a sustainer, an ongoing incentive that acts to maintain growth under normal market conditions. Using these classifications, recommendations for continued NewSpace growth are presented. Motivation Among all high-technology fields, space flight is historically considered to be one of the most technically challenging, risky and expensive. Consequently, when NASA or other customers are awarding grants or contracts and must predict which company and approach is most likely to succeed, there is strong pressure to select a proven company that uses a tried-and-true approach. Such an environment makes it very difficult for new companies especially small, entrepreneurial firms to establish a foothold in existing markets. Furthermore, until the emergence of space tourism in a limited fashion 6 in the early 2000 s, the only two serious space markets were government contracts or commercial satellites, and these were dominated by the major aerospace firms 7. Limited markets combined with the inherent technical challenges and high entry barriers to cause a deep reluctance 8 on the part of private investors to support NewSpace-type firms (Lee, 2007b). For all these reasons, at least up until the last year or two 9 of the Ansari X PRIZE competition, one can reasonably speculate that the vast majority of the general public (not to mention investors and government) would have agreed with the statement, Small companies simply cannot do space flight. As a result of all this, the pace of innovation and new-market development in the space industry has remained sluggish for decades. However, the four types of policy tools mentioned above have already achieved some success in overcoming these entry barriers and encouraging industry growth. 5 In chemistry, a catalyst is defined as a substance that lowers the activation energy for required for a chemical reaction. 6 Space tourism in these years consisted of a couple flights by private citizens to the International Space Station on the Russian Soyuz spacecraft. These flights cost roughly $20 million each, and were arranged by Space Adventures, Ltd. 7 Particularly Boeing and Lockheed-Martin. 8 In fact, according to Burton Lee (Managing Director and Co-founder of the Space Angels Network), in a 2007 survey asking investors Which industry is a good investment today? space ranked second-to-last (Lee, 2007, SpaceVision). 9 The Ansari X PRIZE was captured in October of ESD.10 Space 8/94

9 What is NewSpace? According to The Space Review, NewSpace is the body of [e]ntrepreneurial efforts by startups and new businesses to exploit new opportunities, technologies and business models to bring about the private use and commercialization of space (Persaud, 2007). In order to better explain this, we must first describe what we will call OldSpace. In the United States, OldSpace refers to NASA and its large prime contractors 10 that evolved out of the era of government-dependant space flight produced by the Space Race of the Cold War. NASA is a large federal agency that wields considerable control over the design, construction, and operations of space flight ventures, but uses only a handful of major subcontractors to execute the majority of its work. Other countries also generally follow this OldSpace model; in Europe there is a similar structure consisting of the European Space Agency (ESA) and its main contractors EADS and ThalesAleniaSpace. OldSpace firms are characterized by their size (>1000 employees) and large intake of federal funds. These firms dominate the major existing space markets, including (government) human space flight, satellites, and launch services. NewSpace companies, on the other hand, are small firms and startups with a low-cost focus and the long-term goal of an independent business model that is sustainable without government support. Additional qualities used to help identify NewSpace organizations in this report include (1) their investment in core commercial space flight technologies and infrastructure and (2) their business process and strategy characteristics. Their investments in core space flight technologies and infrastructure include development efforts in one or more of the following areas: Human-rated spacecraft Low-cost launch vehicles Commercial spaceport infrastructure In terms of business process and strategy characteristics, NewSpace organizations typically intend to: Substantially reduce investment costs and increase long-term payoffs; Develop innovative operations geared towards small, dedicated teams; Focus on making commercial human space flight commonplace. NewSpace companies are targeting markets in which OldSpace firms have little interest, are unable to fill, or can be undercut. Commercial human space flight (CHSF) is one NewSpace market with segments such as suborbital space flight, space tourism, and commercial space stations. A second market targeted by NewSpace is orbital launch services; NewSpace companies pursuing this market plan to provide launch services at a much lower cost than traditional OldSpace providers. The NASA COTS program is related to the development of this market. To accommodate these new ventures, the infrastructure and institutional framework necessary to support NewSpace commercial launches have been put into place or are under construction. 10 Boeing, Lockheed-Martin, etc. ESD.10 Space 9/94

10 NewSpace Markets Space Tourism In recent years, due partly to the Ansari X PRIZE and several NewSpace companies specializing in commercial space flight, a sustainable market for space tourism is emerging. One can break space tourism into two categories, distinguished by the inherent technical difficulty and the length of time spent in-space. The first type of space tourism consists of suborbital space flights. A suborbital flight would follow a parabolic trajectory through the atmosphere to the boundary of space 11, where the participants would experience about 5 minutes of weightlessness and see the curvature of the Earth. A report by the Futron Corporation in 2002, updated in 2006, was the first major attempt to quantify a potential market for suborbital space tourism. The major conclusion was that the demand for suborbital space flights by 2021 would be approximately 13,000 participants per year based on a ticket price of $200,000 (Pelton, 2007, p.53). This represents potential yearly revenues of $676 million, which could be large enough to support an industry (Futron Corporation, 2006, p.4). Virgin Galactic, Rocketplane Limited, and SpaceDev are just a few of the NewSpace companies involved in the suborbital market. If successful, this market may generate an important spinoff in the near future the use of suborbital space flights for ultra-rapid point-to-point terrestrial transport, far quicker than can be achieved by any current airplane. The second type of space tourism is orbital space tourism. Space Adventures is one company that currently specializes in orbital space tourism, arranging for a customer to spend several days in Low Earth Orbit (LEO) at the International Space Station (ISS). Dennis Tito became the first space tourist in 2001, paying a reported $20 million to board a Russian Soyuz launch vehicle and visit the ISS. The 2002 Futron Corporation report predicts the demand for orbital space tourism to be approximately 60 participants per year by 2021, representing annual revenues in excess of $300 million (Futron Corporation, 2006, p.3). Future orbital space tourists may stay in a commercial space station such as that under development by Bigelow Aerospace. Orbital Launch Vehicles Another potential market for NewSpace is orbital launch services. Some NewSpace companies are developing lower-cost vehicles that if successful - would dramatically undercut the traditional OldSpace providers. NASA is very interested in divesting the function of resupplying the ISS, in order to concentrate on pushing the envelope of space exploration and scientific research. Consequently, NASA might serve as a stable customer for resupply launch services; Michael Griffin, the NASA administrator, stated in 2005 that: When technology reaches a point that an activity can become profitable [...] the activity should be performed by private industry. The government should develop and provide services and capabilities for the common good, where the market cannot. For NASA this means that we explore space, conduct scientific research, and develop technologies that improve our ability to utilize air and space. (2005b) He continues in a speech later that year: 11 Defined to be 100 km altitude. ESD.10 Space 10/94

11 The collapse of the hoped-for commercial launch market, and consequently higher launch prices for the remaining government customers, [were] due not to the need for new technologies, as some have said, but for a stable market. With the completion of the International Space Station, NASA can for the first time offer such a market (2005a). This indicates the potential for increased demand for commercial launch services. NewSpace companies can thus build a business plan based on providing these services at lower costs than traditional OldSpace providers. For example, a launch using the Boeing Delta IV rocket costs roughly $138 million (2004$), but a NewSpace company called Space Exploration Technologies Corporation (SpaceX) hopes to provide a similar launch service with their Falcon 9 rocket at a cost of $35 million (2007$) (Musk, 2007; Covault, 2004). Although still under development, SpaceX s Falcon 9 launch service represents a tremendous potential savings for customers including NASA, the Department of Defense, and the commercial satellite industry. In addition, Bigelow Aerospace is planning to build a commercial space station that will need orbital launch services. This increase in demand coupled with lower-cost orbital launch services could result in a very healthy profit margin for NewSpace companies such as SpaceX. Stakeholders in the NewSpace Industry Our study will consider the stakeholders described in Table 1.1 in our analysis framework throughout the report. Table 1.1 Stakeholders in the NewSpace Industry Stakeholder Details and Examples NewSpace Companies New, small companies involved in either suborbital space flight, commercial human space flight (CHSF) or orbital launch services Virgin Galactic, SpaceX, etc. Investment Community Capital investment community venture capitalists, angel investors, banks, hedge funds, etc. US Public US Citizens and Legal Residents that are usually represented by Government Policymakers/Regulators Government Policymakers/Regulators Representative and regulatory bodies working in the interest of the U.S. Public U.S. Congress, the White House, FAA-AST, etc Government Space All government agencies currently organizing space activity - NASA, Defense Organizations, etc Educators Teachers and education administrators interested in promoting math and science through space activity Space Advocacy Groups Organizations interested in supporting all space activity National Space Society, Planetary Society, etc. Spaceports Spaceport organizations interested in attracting NewSpace commercial space flight activity Spaceport America, Mid-Atlantic Regional Spaceport, etc. Regional Government City, county, and state government organizations interested in regional economic development New Mexico Department of Economic Development, etc. Analysis Framework Above we have discussed several potential markets for NewSpace companies and a number of stakeholders who have a vested interest in NewSpace. For example, some government policymakers believe that NewSpace may have residual benefits for U.S. citizens and thus should be supported (Boehlert, 2004, p.3). Our approach is to look at various public and private ESD.10 Space 11/94

12 policies that affect NewSpace to determine how these policies create incentives for NewSpace growth. We will define which stakeholder is providing the policy and for whom, which incentives are created by the policy, and how these incentives affect both the recipients and other related stakeholders. Finally, we identify limitations, keys for success, and make recommendations regarding the future use of such policies as either catalysts or sustainers. This generic analysis framework shall be applied to four policy categories: Prizes contests such as the X PRIZE, in which monetary rewards combine with the chance to gain credibility and legitimacy to lower entry barriers and incentivize technological development Institutional Framework the body of public policies related to regulation and liability structures that can be either enabling incentives or industry killers Contracts - contracts from private or government stakeholders can be an incentive for NewSpace company to develop a technology or service Infrastructure - the physical requirements and ancillary services required for space vehicle launches and landings, usually at a spaceport, can be an enabling incentive for NewSpace companies to locate in a specific area We chose to explore these four policy categories because they represent action by different stakeholders and are appropriate at different stages of NewSpace development. We will also provide a comparative summary of NewSpace activity and incentives in Europe. After examining each of the four categories and the international situation, we will synthesize conclusions from each and classify the policies as either catalysts - supporting the early stages of market entry and development - or sustainers - supporting the NewSpace industry permanently in normal market operations. Recommendations for the future will be based upon these two classifications. Acknowledgment of Prior Work This study approaches the NewSpace industry using a new analysis framework as articulated above, but much is owed to previous works that inspired and informed our exploration of these issues. Three such works particularly stand out. One study is entitled Space Planes and Space Tourism: The Industry and the Regulation of its Safety by Dr. Joseph N. Pelton, the Director of the Space and Advanced Communications Research Institute at George Washington University. This study gives a comprehensive look at the origins of markets for NewSpace, the relevant U.S. and international law impacting NewSpace, and summarizes the U.S. NewSpace industry as well as international activity. The second major work is the 2002 report entitled Space Tourism Market Study by the Futron Corporation with lead authors S. Suzette Beard and Janice Starzyk. This Futron report was the first major attempt to quantify potential market demand for space tourism. The Futron update on suborbital space tourism in 2006 entitled Suborbital Space Tourism Revisited was also important motivation for our study. The final work is entitled The Golden Age of Spaceflight by Gregg Maryniak in Space Policy The essay frames the historical context of commercial human space flight, gives an excellent summary of early aviation prizes, discusses the use of prizes for modern space flight, and paints an optimistic view of the future of NewSpace. ESD.10 Space 12/94

13 2. Prizes Introduction Inducement Prizes have been used throughout human history, particularly in the nascent stages of the commercial aviation industry in the early twentieth century. Since the 1930 s, their use has been in decline. However, the last several years have witnessed a resurgence of interest in prizes as catalysts - policy tools to lower entry barriers and thus accelerate innovation and the development of new markets and technologies - particularly in light of the success of the Ansari X PRIZE. A chief application for these modern prizes has been the NewSpace industry. In accordance with this renewed interest, many recent authors have touched upon the use of prizes as spurs of innovation. The National Academy of Engineering (1999) and National Research Council (2007) have issued reports summarizing the history of inducement prizes and recommending their incorporation into the wider toolbox of federal procurement and technology development strategies. Davidian (2005) also provides a historical overview of major prizes since the 1700 s, and goes on to draw out key lessons for success to be applied to NASA s Centennial Challenges prize program. Maryniak (2005) discusses in detail the effects of prizes in the early aviation industry, and argues that they are needed in the space industry today. Pelton (2007) briefly describes the application of prizes in the space tourism industry. This chapter attempts to draw upon these and many other sources, combined with the latest industry news and insights, to understand the role of inducement prizes as a policy tool to promote the growth and development of the NewSpace industry. Particular focus is paid to the incentives that result from prizes in this context, the effects of these incentives, the motivations of stakeholders, the keys to a successful prize, and the limitations of prizes. Significant historical prizes and modern space prizes are used to illustrate these points. Finally, recommendations are made regarding the future use of prizes in the NewSpace industry. Definitions In the context of this paper, the word prize is used to describe a reward for some accomplishment. Prizes can generally be divided into two categories recognition prizes and inducement prizes. Recognition prizes, such as the Nobel Prizes and the Charles Stark Draper Prize, are designed to honor some past accomplishment based on outside nominations and somewhat subjective judging criteria. Generally speaking, recognition prizes are not actively pursued; people do not adjust their efforts in order to win this type of prize. An inducement prize, on the other hand, is set up as a reward for the winner of a competitive contest such as the Orteig Prize 12 or the Ansari X PRIZE. The winner is determined according to publiclyannounced, relatively objective judging criteria and rules that are specified at the start of the contest. In contrast to recognition prizes, inducement prizes regularly inspire active pursuit, and thus have been employed as spurs of innovation since at least the 1700 s (NAE, 1999, p. 4). All prizes discussed in this paper are inducement prizes. It is generally recognized that there are two distinct types of inducement prizes the National Research Council describes these as first- 12 $25,000 for the first nonstop flight between New York and Paris; won by Charles Lindbergh in ESD.10 Space 13/94

14 past-the-post and best-in-class. A first-past-the-post prize (such as the Ansari X PRIZE) is awarded to the first team to accomplish the contest objective; a best-in-class prize (such as the DARPA Grand Challenge) is awarded to the team that most exceeds some minimum performance threshold (NRC, 2007, p. 5; Davidian, 2006, p. 3). Exploration of Inducement Prizes Given these definitions, we will next explore the usefulness of prizes as a policy tool through a brief survey of historical prizes combined with a more detailed study of the modern space prizes. This will serve as the basis for our analysis of prizes in the context of NewSpace and commercial space flight. Historical Prizes For hundreds of years, governments, organizations, and interested individuals have turned to inducement prizes to accelerate the development of a wide variety of technologies. In the 1714, the British Board of Longitude announced a prize of 10,000 20,000 British pounds for the first device to accurately determine longitude at sea (the exact amount of the prize depended on the accuracy of the device). In 1783, the Acadẻmie des Sciences of France offered the 12,000 Alkali Prize to expand domestic soda production. In 1795, Napoleon Bonaparte established a 12,000 FFF prize for the development of a technique to preserve food for long military campaigns. Each challenge was successfully completed, although the Longitude Prize was won with a mechanical solution (a very precise clock), as opposed to the astronomical solution which all the experts anticipated (Davidian, 2005, p. 1; Davidian, 2007a). The early twentieth century witnessed a virtual explosion of prizes offered and won in the nascent aviation industry. These prizes were largely targeted at objectives that common wisdom at the time held as impossible to achieve. Maryniak relates an anecdote from Villard that illustrates this point: Nobody had believed, two years earlier in 1908, that the biggest prize of all, the Daily Mail s dazzling offer of 10,000 for a flight from London to Manchester - within 24 h would ever be won. It was in fact openly mocked by the rival Star: Our own offer of 10,000,000 to the flying machine of any description that flies five miles from London and back to the point of departure still holds good. One offer is as safe as the other. The magazine Punch joined in the laughter with an offer of 10,000 to the first aeronaut to fly to Mars and back within a week (Villard, 1968, p. 92). Between 1901 and 1913, at least 51 aviation prizes were offered; in 1911 alone it is estimated that over $1,000,000 worth of awards were active (Maryniak, 2005, pp ). Many of these awards were local to Europe, and although aviation in the United States continued to develop in 1911, the pace of innovation was nothing compared to that on the other side of the Atlantic; by the end of that year, all the significant aviation records were held by European flyers (Villard, 1968, p. 135 and p. 141). World War I caused a significant increase in the number of aircraft and pilots in both Europe and North America. However, this surge was followed by a dramatic decline after the war s conclusion; out of 3,000 aircraft in the United States Air Service in 1921, only 754 were still in commission in Flying was still quite risky in the mid 1920s, only nine of the 40 original ESD.10 Space 14/94

15 pilots for the U.S. airmail service survived one year of operations. Consequently, the general public continued to consider aviation an unreliable and dangerous form of transportation, not to mention a foolish foundation for a business (Maryniak, 2005, p. 115). In 1927, a single event would turn that perception on its head. New York hotel-owner Raymond Orteig had offered a $25,000 prize in 1919 for the first nonstop flight between Paris and New York. This prize induced nine contestants to spend a combined total of 16 times the purse in their pursuit of the objective. Charles Lindbergh was the one to win the prize, completing the flight in May of 1927 to international acclaim. Maryniak points to the following statistics as evidence of the dramatic paradigm shift that occurred because of Lindbergh s flight, in which the business world and the general public both came to see aviation in a new - and much more credible - light (Maryniak, 2005, pp. 115, 117): The Spirit of St. Louis aircraft was personally viewed by a quarter of all Americans within a year of Lindbergh s 1927 flight. The number of U.S. airline passengers flown went from 5782 in 1926 to in US air cargo flown went from lbs in 1927 to lbs in US air mail increased from lbs in April to lbs in September There was a 300% increase in applications for pilot s licenses in the USA in There was an increase of more than 400% in the number of licensed aircraft in the USA in The number of airports in the USA doubled within 3 years of Lindbergh s feat (Maryniak, 2005, p. 117). Modern Prizes in Space flight The long and successful history of inducement prizes led a number of individuals, organizations, and eventually even the United States Government to establish prizes related to space flight over the last several years. The aggregate goals of these various prizes were/are to reinvigorate the commercial space market and open up new market segments, accelerate innovation in space flight technology, and prove that small, private, entrepreneurial (NewSpace) companies can indeed do space flight. Cheap Access to Space (CATS) Prize In 1997, the Cheap Access to Space (CATS) Prize 13 was announced, with the objective of launching a two-kilogram payload to 200 km altitude. Fifteen privately-funded teams registered to compete, but in the end only a handful attempted launches. All of these attempts fell short, and both the $250,000 grand prize and $50,000 secondary prize (offered for any flight to 120 km altitude) went unclaimed as the contest expired in This contest did not receive anywhere near the publicity of subsequent prizes such as the Ansari X PRIZE; perhaps the lack of interest was due to the less-than-compelling objective. Further, it was unclear that a follow-on market existed for the technology demonstrated by the prize. Nonetheless, a number of the companies who entered this competition are still in business today, including High Altitude Research Corporation (HARC), Interorbital Systems, Microcosm Inc., and JP Aerospace (Bridges, 2000). Both HARC and Interorbital Systems also registered for the Ansari X PRIZE competition (Ansari, 2004). Another result of the CATS prize was a renewed wave of attention and discussion related to FAA regulations governing private experimental space launches in the 13 administered by the Space Frontier Foundation ESD.10 Space 15/94

16 United States (Bridges, 2000); this result shall be discussed further in the Institutional Frameworks chapter. Ansari X PRIZE In 1996, Dr. Peter H. Diamandis 14 announced a $10 million award for the first private team to fly a 3-person vehicle to the boundary of space (100 km altitude), return it safely to Earth, and repeat the flight with the same vehicle no more than two weeks later (Maryniak, 2005, p. 118). This award, which would come to be known as the Ansari X PRIZE, was established to accelerate the development of the private space sector and demonstrate that governments and government-funded contractors were not the only ones capable of reaching space. The goal was also to jump-start the commercial space flight market, according to Will Pomerantz 15, and the guiding principle in determining the prize objective was to offer teams a way of demonstrating a capability that [could] be turned into a commercial endeavor (Pomerantz, 2007b). The market targeted by the X PRIZE Foundation was space tourism; this led the Foundation to specify that the spacecraft must be reusable and hold more than one person 16 (Diamandis, 2004, p. 54). In October of 2004, the vehicle dubbed SpaceShipOne the entry of the Mojave Aerospace Ventures team, designed and built by Burt Rutan and his small aerospace engineering firm, Scaled Composites, and financed by Microsoft s Paul Allen captured the Ansari X PRIZE. This feat demonstrated that a small private company could indeed handle the challenges of space flight, even human space flight. Maryniak describes how this paradigm shift captured the imagination of the whole world: The X Prize generated more than 5 billion media impressions and was telecast and webcast to a global audience with the support of NASA, America Online, the Discovery Channel and others. The flights of SpaceShipOne were reported on the front pages of newspapers around the world (Maryniak, 2005, p. 118). Such free publicity certainly did not harm the Mojave group or any of the other teams that featured prominently in media accounts of the competition. In fact, this publicity and the instant credibility afforded the winning team had far-reaching consequences. Both Virgin Galactic 17 and Spaceport America 18 trace their origins directly through the prize and its winning team. George Whitesides 19 notes that Virgin was interested in space before Burt Rutan's vehicle, but the success of SpaceShipOne was what convinced Virgin that a real business could be built (Whitesides, 2007). Similarly, Rick Homans 20 maintains that the state of New Mexico would not have initiated the $100 million Spaceport America if not for the credibility that Branson and Virgin brought to the venture: New Mexico would not be doing what they are doing except for Branson and Virgin Galactic. Virgin Galactic would not have happened if not for SpaceShipOne, and SpaceShipOne would not have happened without the X PRIZE. It was a catalyst (Homans, 2007). 14 Founder, Chairman and CEO of the X PRIZE Foundation, originator of the Ansari X PRIZE. 15 X PRIZE Foundation Director of Space Projects 16 One person is needed to pilot the vehicle. 17 Sir Richard Branson s new space tourism company 18 The world s first commercial spaceport constructed explicitly for that function, built by the State of New Mexico. 19 Executive Director of the National Space Society and Senior Advisor to Virgin Galactic 20 New Mexico s Secretary of Economic Development from ESD.10 Space 16/94

17 As predicted by past inducement prize experience, this well-designed award attracted a large and diverse set of competitors (26 teams from 7 countries officially registered). Between them, the entrants explored a vast array of possible approaches to the problem, some fairly standard but others quite radical; space launches from sea, air, land, balloons, and horizontal and vertical positions were all examined (Pomerantz, 2007c). The prize also served to bring together key individuals and organizations with an interest in the industry according to Whitesides, both Rutan and Allen had an interest in commercial space flight previously, but the Ansari X PRIZE was the catalyst that led to their joint venture (Whitesides, 2007). In addition, the prize generated considerable investment in the private space flight market. It is estimated that the Mojave Aerospace Ventures team spent some $27 million on their effort, and that all teams combined spent between $100 million (Pomerantz, 2007c) and $400 million (Aldridge, 2004, p. 34). It is interesting to note that NASA and USAF cost models estimated a SpaceShipOne-type development project to cost between $600 million and $1 billion (Pomerantz, 2007c). Finally, the publicity from the prize helped encourage the government to clarify and reform the regulatory structure related to private space launches (Pomerantz, 2007c). As one former X PRIZE official remarked, [the] X PRIZE was definitely pushing the FAA to get their act in gear, to deal with all these people who wanted to fly their rockets. NASA s Centennial Challenges In 2004, the National Aeronautics and Space Administration established its own set of aerospace-related prizes. These prizes, termed Centennial Challenges as a nod to the 100 th anniversary of the Wright Brothers flight, were the culmination of several influences. Ken Davidian, current director of the program, points to five key documents that guided its initial conception and development (Davidian, 2005, p. 4): o 1999 Concerning Federally Sponsored Inducement Prizes in Engineering and Science 21 o 2003 The Space Architect Study 22 o 2004 (Jan) A Renewed Spirit of Discovery The President s Vision for U.S. Space Exploration 23 o 2004 (Feb) The Vision for Space Exploration 24 o 2004 (Jun) A Journey to Inspire, Innovate, and Discover 25 Significantly, the Ansari X PRIZE is mentioned several times in these documents. For example, in its final report the Aldridge Commission writes: The Commission heard testimony from a variety of sources commenting on the value of prizes for the achievement of technology breakthroughs. Examples of the success of such an approach 21 A National Academy of Engineering report 22 An internal NASA effort facilitated by Peter Diamandis and Gregg Maryniak (Executive Director, X PRIZE Foundatoin) to interview NASA personnel and identify possible prize objectives 23 A policy report issued by the Office of the President; 24 NASA document which provided specific programmatic responses to the President s initiative; 25 The report of the Aldridge Commission, an independent panel charged with providing recommendations for the implementation of the new space policy ESD.10 Space 17/94

18 include the Orteig Prize, collected by Charles Lindbergh for his solo flight to Europe, and the current X PRIZE for human suborbital flight. It is estimated that over $400 million has been invested in developing technology by the X PRIZE competitors that will vie for a $10 million prize a 40 to 1 payoff for technology. The Commission strongly supports the Centennial Challenge program recently established by NASA (Aldridge, 2004, p. 34). Congress affirmed its support for the program in December of 2005, explicitly including Prize Authority in the National Aeronautics and Space Administration Authorization Act of The Senate Report describing the legislation states that, the bill would authorize the use of competitive prize awards modeled, in part, on the Ansari X PRIZE. The Senate statement of purpose for the program can be summarized into four points: a) to increase opportunities for diverse commercial participation in NASA activities; b) to accelerate the pace of technological innovation related to NASA activities; c) promote science and technology education; d) increase public interest in NASA activities (Sen. Hutchinson, 2005) Since its inception, 18 challenges (some with multiple prizes) have been offered through the Centennial program. Purses range from $2 million for the Northrop Grumman Lunar Lander Challenge to $10,000 for the Top Speed Second Prize in the 2007 Personal Air Vehicle Challenge. Past and current challenges are summarized in the Table 2.1 and Table 2.2 below. Table 2.1: Summary of Past Centennial Challenges (Davidian, 2007b) PAST CHALLENGES Challenge Date Challenge Name Winner/Purse Allied Organization Oct 13-21, Beam Power Challenge None/$500K The Spaceward Foundation (non-nasa link) October 20, Tether Challenge None/$500K The Spaceward Foundation (non-nasa link) Oct 27-28, 2007 Lunar Lander Challenge None/$2M The X PRIZE Foundation (non-nasa link) Aug 4-11, Personal Air Vehicle Challenge Vance Turner/$100K Vantage Prize Dave & Diane Anders/$50K Noise Prize John Rehn/$25K Handling Qualities Vance Turner/$25K Shortest Runway Prize Vance Turner/$25K Efficiency Prize Dave & Diane Anders/$15K Top Speed First Prize Vance Turner/$10K Top Speed Second Prize Comparative Aircraft Flight Efficiency (CAFE) Foundation May 11-12, Regolith Excavation Challenge None/$250K California Space Education & Workforce Institute (CSEWI) May 2-3, Astronaut Glove Challenge Peter Homer/$200K Volanz Aerospace Inc./Spaceflight America Oct 20-21, Beam Power Challenge None/$200K The Spaceward Foundation Oct 20-21, Tether Challenge None/$200K The Spaceward Foundation Oct 20-21, Lunar Lander Challenge None/$2M The X PRIZE Foundation Oct 21-23, Beam Power Challenge None/$50K The Spaceward Foundation Oct 21-23, Tether Challenge None/$50K The Spaceward Foundation ESD.10 Space 18/94

19 Table 2.2: Summary of Current Centennial Challenges (Davidian, 2007b) CURRENT CHALLENGES Challenge Date Challenge Name Purse Allied Organization 2008 (Date TBD) 2008 Regolith Excavation Challenge California Space Education & Workforce $750K Institute (CSEWI) 2008 (Date TBD) 2008 Personal Air Vehicle Challenge Comparative Aircraft Flight Efficiency $300K (CAFE) Foundation Expires Jun 1, 2009 Moon Regolith Oxygen Extraction (MoonROx) Challenge $1M California Space Education & Workforce Institute (CSEWI) 2008 (Date TBD) 2008 Beam Power Challenge $900K The Spaceward Foundation 2008 (Date TBD) 2008 Tether Challenge $900K The Spaceward Foundation 2008 (Date TBD) 2008 Astronaut Glove Challenge $400K Volanz Aerospace Inc./Spaceflight America 2008 (Date TBD) Lunar Lander Challenge $2M The X PRIZE Foundation Abbreviations: CAFÉ = Comparative Aircraft Flight Efficiency Foundation; CSEWI = California Space Education and Workforce Institute; MoonROx = Moon Regolith Oxygen While a number of the challenges have not yet been won, they have indeed successfully accomplished certain objectives of various stakeholders. Teams, individuals, and ideas which might never otherwise have become involved in these challenges have been engaged, reaching a source of innovation that you don t normally reach according to Davidian (2007a). For example, a spectator at one of the Tether Challenge competitions took a team of MIT students under her wing, showing them how to spin a stronger tether on the spinning wheel in her RV in the parking lot (Davidian, 2007a). Peter Homer, a Stanford-trained engineer, won the 2007 Astronaut Glove Challenge while working as a school-bus driver in rural Maine, using materials obtained from Home Depot and ebay and a sewing machine donated by his mother-in-law (Anderson, 2007). Davidian also points out that, importantly to NASA, in addition to developing new technology, the program has also increased public awareness of science and technology and helped to [make] science popular. He notes that, the stories are compelling because you re talking about individual teams and individual people a guy trying to put together a glove on his kitchen table using a 1950 s sewing machine (Davidian, 2007a). Lunar Lander Challenge To date, one of the most significant prizes in the Centennial Challenges portfolio is the Northrop Grumman Lunar Lander Challenge. This on-going contest is designed to accelerate the technological developments required for NASA s next-generation Lunar Lander. To capture the $1.5 million grand prize, a team s vehicle must ascend to an altitude of 150 feet, hover for 180 seconds, land on a crater- and boulder-strewn surface designed to simulate that of the Moon and then repeat the flight in reverse within 2.5 hours. A $500,000 prize is offered for a similar flight of 90 seconds duration that lands on a smooth pad (Northrop Grumman, 2007). This prize, competed twice to date at the annual Wirefly X PRIZE Cup, has not yet resulted in a winner. Nonetheless, the prize has generated more than $5 million and 42,000 person hours of ESD.10 Space 19/94

20 combined investment by its eight registered teams. Using a reasonable figure of $120 per person-hour, this equates to roughly $10 million of research and development in efforts to win a $2 million prize (Pomerantz, 2007d). The prize has also generated four of the first five Experimental Permits ever granted by the FAA (Pomerantz, 2007c) and helped attract some 85,000 spectators to the most recent Wirefly X PRIZE Cup event in only its third year of operation (Armadillo, 2007). Furthermore, in the 2006 competition, leading contender Armadillo Aerospace impressed observers enough 26 that it was approached by three companies and two space agencies including NASA regarding its lander. These contacts resulted in Armadillo receiving seed funding from NASA. Currently, the agency plans to use the Armadillo design as an atmospheric flight test model for its own future lunar lander (Davidian, 2007a). America s Space Prize Another modern space prize is the America s Space Prize, offered by hotel magnate Robert Bigelow, who is also President and founder of Bigelow Aerospace. This award, announced just weeks after the successful completion of the Ansari X PRIZE in 2004, offers $50 million to the first privately-funded American spacecraft that - by January 10 th, can ferry five passengers to a 400 km altitude orbit, complete two full orbits at that altitude, return safely to Earth, and then repeat this task using the same vehicle within 60 days. The craft must also demonstrate the ability to dock with the inflatable habitat designed and launched by Bigelow Aerospace, and remain docked on-orbit for up to six months (David, 2004). This contest represents a far more daunting challenge than any of the other modern space prizes. Essentially, it asks a team to build a higher-capacity Soyuz launch vehicle and capsule by January of While the magnitude of the purse also surpasses any other offered in history, it seems that it may not be sufficient to motivate effective participation given the timeframe and degree of technical difficulty 27. This trouble is reflected in a 2006 interview with Jeff Foust of The Space Review, in which Bigelow noted that the response to the prize had been disappointing; We had forty-some different groups contact us regarding that prize, and during those contacts it was pretty obvious that while they were interested in the prize, they lacked entirely the wherewithal financially to go after that prize (2006a). Today, the situation appears relatively unchanged. In fact, indications are that Bigelow may be ready to abandon the prize in favor of another strategy. Reports state that the entrepreneur will soon announce a plan to sign a contract with whomever, worth $760 million, for eight launches to his inflatable orbital facility, with the first slated for sometime in 2010 (Shiga, 2007). This potential offer will be further detailed in the Contracts chapter of this report. Google Lunar X PRIZE The most recent of the active modern space prizes is the Google Lunar X PRIZE. Announced in September of 2007, this award offers a team the chance to earn up to $25 million (including $5 million in performance bonuses) for being the first to land a privately-funded unmanned rover on 26 Armadillo s lander did not successfully complete the challenge, nor did any other team. 27 For reference, one must consider that in 2006 NASA agreed to pay $43.6 million for one round-trip flight aboard the Soyuz to the international space station (Staff Writers, 2006). ESD.10 Space 20/94

21 the lunar surface, traverse several hundred meters, and beam back to Earth a certain amount of high-definition video and other data before the end of A second-place prize worth $5 million is also being offered (David, 2007c). Thus far, the prize has generated enormous interest; in the three months since its announcement, 347 requests for registration have been received from teams in at least 39 different countries (David, 2007a). Furthermore, in this same time period at least nine teams have submitted official Letters of Intent along with the registration fee, and one team has already completed the registration process (Pomerantz, 2007c). This competition is designed with carefully- and clearly-written rules, an exciting objective, and a follow-on market in mind. Both Pomerantz and various team leaders cite several potential markets (Pomerantz, 2007a; David, 2007a) for the technology and products that will be demonstrated by this prize. These markets include: Government: Team could potentially sell their project to governments as a stand-alone mission or risk-assurance / technology test-bed. Also, there are suggestions that NASA is seriously considering a COTS-style contract to set up lunar communication and navigation networks. Heritage Lunar Hardware: Teams will most likely choose to purchase and modify offthe-shelf hardware, such as a camera system, for several thousand dollars, rather than pay the millions commanded by today s proven space-camera makers. If the camera or other hardware is successfully demonstrated on the Moon, the team will have dramatically undercut the prices of existing vendors. Entertainment: It s not uncommon to see lunar images or video used in today s media, be it for advertisements, movies, TV, video games, etc, even though all of that footage is of relatively low quality by modern standards. It seems that there could be significant demand for the HD video and images to be collected by a winning Lunar X PRIZE team. Research/Education: One or more universities or private research companies might be willing to spend a few million dollars to send a small payload to the surface of the Moon. Individuals: There is also the potential that one or more individuals might pay to send personal items to the Moon (Pomerantz, 2007a). V-Prize One final development among modern space prizes that deserves mention is a concept called the V-Prize that is under consideration in the state of Virginia. This prize would be a contest to develop and demonstrate point-to-point suborbital space flight 28. Virginia s principle interest in the concept is to use the prize to attract NewSpace-like ventures to that state; therefore, it is likely that either the origin or destination of the flight would be required to be at Virginia s Mid- Atlantic Regional Spaceport (Lee, 2007). 28 This concept is to use suborbital flight as a means of ultra-rapid, long-distance transport, in lieu of a more traditional aviation solution such as the Concorde or a supersonic business jet. ESD.10 Space 21/94

22 Analysis Incentives from Prizes Of the inducement prizes offered over the last decade to the private space industry, several have enjoyed considerable success, particularly the Ansari X PRIZE. These prizes have worked to a) accelerate the pace of innovation in - and development of - space flight technology, including increasing the opportunity for radical innovation (SpaceShipOne, Armadillo s Lunar Lander); b) reinvigorate existing space markets (space tourism) or open new market segments (proven lunar hardware and multimedia); and c) bring about paradigm shifts in popular thinking (small companies can do space flight). These results were produced by the incentives for NewSpace which flow from prizes; a number of external stakeholders support these prizes for a variety of motivations. Some of the NewSpace incentives and stakeholder motivations include: The financial reward for the winner(s) of prize competitions, which can cover part (or all) of the developmental costs incurred by the competitor(s). The chance for winning and well-performing teams to establish their credibility by demonstrating their capabilities in a public arena (Pomerantz, 2007b). The opportunity for winning and well-performing teams to receive free publicity, thus increasing their name recognition and also perhaps drawing attention to institutional barriers that are impeding the industry (Pomerantz, 2007b). The ability for sponsors to leverage external investment and thus multiply their resources devoted to a particular problem (Pomerantz, 2007b). The potential for low-risk and low-cost technology development and/or procurement for sponsors, with no payment required until the technology is successfully demonstrated (Diamandis, 2004). The chance to bring new companies, individuals and ideas into the space industry that might never otherwise get involved; to bring people together and encourage unconventional partnerships (Davidian, 2007a). The opportunity to capture the public s imagination, generate excitement, and increase awareness of science, technology, and space, in the process perhaps improving support for space causes and stimulating student interest in science and engineering (Davidian, 2007a). The potential to rewrite conventional wisdom and dramatically alter popular preconceptions; this can include redefining what we think is possible and who can do it, as well as reevaluating our acceptance of the status-quo (Diamandis, 2004). Limitations & Keys to Success Prizes are certainly not without their flaws and limitations. Solutions can take very different forms than anticipated, which can be either a positive or negative result (Davidian, 2007a). The playing field is not entirely level, as a team led by an individual with significant personal wealth 29 enjoys an advantage over those that need to spend time and resources to recruit and maintain external investors (Muncy, 2007). The incentives (prize money, credibility, and publicity) are uncertain at best for those teams who compete but do not win. Finally, as Diamandis points out, the goal for the technology resulting from competition is not to put them 29 Such as the Mojave Aerospace Ventures team, winners of the Ansari X PRIZE and funded / co-directed by Paul Allen ESD.10 Space 22/94

23 directly into production or use, it is to explore new approaches or ways of thinking. The idea is to invent the transistor not to perfect the process leading to a Pentium Chip (Diamandis, 2004, p. 59). Many factors affect whether or not a prize is successful. At this time, no comprehensive understanding exists of all these factors, but a few seem especially important. One such factor is the matching of the pursue size and duration of the prize with the technical difficulty of the objective (Pomerantz, 2007c). Diamandis mentions three additional characteristics wellwritten rules, an exciting objective, and a potential follow-on market (2004, pp. 58 & 60). The link between these criteria and the fate of a prize is partially illustrated by the CATS Prize and America s Space Prize, two modern space prizes that have enjoyed less success than others. The CATS prize arguably lacked the exciting objective and a follow-on market; America s Space Prize failed to match the purse and timeframe with the degree of difficulty. Conclusions & Recommendations In general, Prizes have been used to: 1. Accelerate the pace of innovation and technological development. 2. Reinvigorate a market or open a new market segment. 3. Cause paradigm shifts in popular thinking. The key characteristics of inducement prizes used as a policy tool the incentives they generate for NewSpace and the effects of those incentives, the motivations and interests of various stakeholders who sponsor or are affected by prizes, the limitations of prizes and keys to success, and the recommended future uses of prizes - are all summarized in Table 2.3 below. ESD.10 Space 23/94

24 Table 2.3: Conclusions for Prize Policy Stakeholders Incentives Effects of Incentives Limitations / Drawbacks Financial (for winners) (Partial) Reimbursement of development c NewSpace Companies Credibility Publicity Chance to demonstrate capabilities and thus reduce perceived risk for Investors / Customers Promote company name & capabilities; Draw attention to institutional barriers (i.e., regulatory structure) Uncertain benefits for non-winners; Teams must have/find funding in order to compete Stakeholders Stakeholder Motivations Limitations / Drawbacks Gov't / Public / Private Companies Accelerate pace of innovation, possibly radically, and thus potential for low-risk / low-cost technology development by: Solutions can take very different forms a) Leveraging External Investment than anticipated; Teams must have/find b) Engaging New Companies / Ideas funding in order to compete c) Encouraging Coalition-Building; Bringing People/Resources Together (i.e., Burt Rutan & Paul Allen) Space Advocacy Groups / Educators Generate public excitement; Improve "image" and increase public awareness of space, science & engineering; Create support for space causes; Stimulate student interest in science & engineering Effects uncertain; Hard to predict / quantify All Extent of change depends on individual Revise "conventional wisdom" / popular perceptions; Redefines our situation, especially the degree of thinking about what is possible and who can do it; Changes our approach breakthrough and the history of and attitude regarding acceptance of the status-quo innovation (or lack thereof) Keys for Success: Purse size & contest time correspond to degree of difficulty; Clear, carefully-designed, simple, objective rules; Follow-on market exists; Exciting objective Recommended Uses: Use to continue to "push the envelope" of the industry (see Google Lunar X-Prize); Accelerate the pace of innovation and/or development of a market; Especially useful to "jump-start" a new market or open a new market segment. Has the potential to cause dramatic shifts in popular thinking. Prizes have served as a catalyst. They have lowered entry barriers to the market and thus enabled the participation of a much more diverse range of players than historically seen in the space industry. Many bold new ideas and ways of doing business have been tested, and some have thrived. The need for regulatory reform has been brought into the public eye and subsequently implemented. New supporting infrastructure is rapidly developing across the nation. Additional prizes have been created. Most importantly, however, the private space market and a number of the small companies attempting to exploit it have gained invaluable publicity and credibility in the eyes of the public, government leaders, and the business and investment community. All these factors will help to support continued growth of these NewSpace companies. Looking to the future, prizes can help maintain growth in the NewSpace industry by continuing to serve as catalysts in the commercial space flight market. Prizes can be best used to lower entry barriers in new market segments, and thereby encourage companies and individuals to continue to push the envelope of technologies, markets, and conventional wisdom. It is recommended that efforts be focused on scales both small and large. For example, future prizes could aim to develop a new spacesuit or manned lunar roving vehicle, to design and demonstrate a completely closed-circuit water system for a manned lunar or orbital facility, or to send a spacecraft to map or return resources from a Near-Earth Object (comet or asteroid). Finally, ESD.10 Space 24/94

25 from the perspective of prize sponsors, this policy tool should also be explored as a tool to attract NewSpace-like firms to their particular region, state, or nation. ESD.10 Space 25/94

26 3. Institutional Framework: A Reduction of Barriers In this study, institutional framework is defined as the body of public policies that define regulatory powers and liability structures that affects the NewSpace industry. This institutional framework governs all of commercial spaceflight activity. Both regulatory and liability limitation policies can support or dramatically restrict the NewSpace industry. In the past, conflicting laws and regulations caused delays that were costly and time-consuming. Thus a more efficient regulatory structure could facilitate growth in this new industry. Conversely, overly-constricting regulations could devastate a nascent industry by stifling innovation and risktaking. Similarly, liability limitations can be an effective incentive for a high-risk industry such as commercial human space flight (CHSF). We will examine the positive and negative effects of government indemnification of risk for the NewSpace industry. Through a look at the history of government involvement in commercial space flight, we analyze the regulatory and liability policies currently governing NewSpace and recommend future policies that can provide effective incentives for industry. Two main conclusions have been reached: 1. An industry-sensitive and flexible regulatory policy can create a stable investment environment and supportive innovation framework for a sustainable NewSpace industry. 2. Liability limits for NewSpace are a catalyst that can reduce business risk and lower insurance costs. A History of Institutional Framework in the U.S. Regulatory Framework The U.S. Federal government has a large role in the regulation of commercial space enterprise for all stages of commerce from experimental permitting to ensuring a minimum level of safety for future space tourism ventures. To properly understand the current structure of regulations governing the commercial human space flight industry, the history of the subject should be understood first : Regulation in the Early Days of Commercial Space During the early years of the U.S. space program, all space launches were funded directly through NASA, so there was no urgent need to set up a regulatory and licensing framework for commercial launches. The Federal Aviation Administration (FAA) was, however, given authority to regulate commercial air travel in 1958 in the National Aeronautics and Space Act (Harvard, 2004, p.620). At that time, no one envisioned what form commercial space flight would take. In 1982 the commercial satellite launch industry was beginning to take shape; the lack of effective regulatory structure became apparent when the launch licensing for Conestoga I caused regulatory confusion over jurisdiction and imposed high costs (estimated at $250,000) (Hudgens, 2002, p.70). The Commercial Space Launch Act of 1984 consolidated the regulation of commercial space flight under the Department of Transportation s Office of Commercial Space Transportation (OCST). This consolidation eliminated many of the regulatory conflicts from the previous administrative regime and paved the way for a large number of commercial launches for the satellite industry in the 1980 s and 1990 s. ESD.10 Space 26/94

27 Even with the creation of the OCST, there exists a cumbersome and complex system of regulatory powers that affects space enterprise to this day (Hudgens, 2002, p.71). In 1995 the OCST was brought under the FAA and was renamed the Office of the Associate Administrator for Commercial Space Transportation (AST). In response to some of the first proposals for the return of a private space vehicle from space, the Commercial Space Act of 1998 was passed (Harvard, 2004, p.626). This Act granted full authority to the FAA to regulate commercial space launches and landings. Prior to the Act it would have been illegal for a commercial vehicle launched from U.S. soil to land in the U.S. (Hudgens, 2002, p.71). Allowing for commercial development of reusable launch vehicles became an important basis for the new commercial human spaceflight industry. The permission to land is an extremely important step for the NewSpace industry, where RLVs are an integral part of many companies business models. As of 1998, the AST was responsible for the licensing of launches, landings, spaceports, and launch sites for commercial space activity, as well as the regulation of public health and environmental effects arising from these launches and landings. As an illustration of the complexity of conducting a commercial launch in 1998, the following list shows a portion of the complex approval process for such a launch: Financial responsibility requirements for licensed launch and reentry activities Commercial space transportation licensing regulations Reusable launch and reentry vehicle system safety process guidelines Expected casualty calculations for commercial space launch and reentry missions Agreement of Waiver of Claims and Assumption of Responsibility Environmental licensing requirements to comply with the National Environmental Policy Act (NEPA) Required environmental documentation, including environmental impacts studies (Hudgens, 2002, pp.71-2) This list illustrates the jurisdictional issues that arise from the licensing scheme. It is clear that the environmental regulations such as NEPA requirements would have to be confirmed by either the AST or another office like the EPA. This issue existed until the late 1990 s (Hudgens, 2002, p.72). Only a large company spending millions of dollars on each launch could fulfill such requirements. For instance, in the 1980 s and 1990 s commercial satellite launches used rockets that are so expensive that the millions of dollars required for licensing are not prohibitive because such expenses constitute a sufficiently small fraction of the total cost (Harvard, 2004, p.626). J.P. Aerospace s (JPA) attempt to compete for the CATS (Cheap Access To Space) contest in 2000, discussed in the Prizes chapter, provides an instance of the cumbersome delays of the AST s former regulatory process. JPA was leading the contest and was likely to win, but they were denied the opportunity to launch by the AST. JPA submitted applications in May of 2000 and were notified of denial in September of The contest deadline was November 8 th, After trying to apply for a launch license waiver from the AST, JPA was left with no options and dropped out of the competition (p.73). While JPA may have been rightly denied the permit, the large regulatory delay between May and September of 2000 may have cost JPA the prize. The ESD.10 Space 27/94

28 result of the regulatory delay was counter to the prize incentive, and exemplifies the possibility of regulation as a disincentive for NewSpace companies Present: The announcement of the X PRIZE in 1996 heralded the concept of suborbital commercial human space flight. This prize improved the prospects of a sustainable commercial spaceflight industry but regulatory issues still remained. With a large push by the X PRIZE, the AST was finally instructed to regulate CHSF in 2004 (Davidian, 2007b). Spearheaded by Rep. Dana Rohrabacher, the Commercial Space Launch Amendments Act of 2004 (CSLAA) strived to solve many unanswered questions for the commercial spaceflight industry. The CSLAA defined the AST s jurisdiction over and support of this nascent commercial spaceflight industry. The stated purpose of the CSLAA is to put in place a clear and balanced regulatory regime that promotes the development of the emerging commercial human space flight industry, while protecting the public health and safety (Boehlert, 2004, p.2). The CSLAA is very limited in its regulatory detail, such that more detail and rigor shall be added as the industry emerges. The federal government s regulation of the new commercial space flight industry is an attempt to protect public health and safety, while supporting a burgeoning industry. A History of Liability Limitations Prior to the development of a commercial space flight industry in the 1980s, there was no need for any government regulation of liability in this area. The liability for government-sponsored space activity of OldSpace were covered by the U.S. government; NASA, the Air Force, and OldSpace contractors were not required to have any additional insurance. In 1983, the Reagan administration established insurance requirements for commercial space for the first time. These provisions established insurance requirements against damages to both third-parties and government property; they were codified in the Commercial Space Launch Act of 1984 (Vedda, 2006, p.3). The Act provided no protection of commercial space launch providers, and held them responsible for the maximum loss that could occur in an accident. Foreign competitors, such as Arianespace in France, began to cap the insurance requirements for their commercial space activities. As a result, the U.S. commercial space industry slowed in comparison to other countries such as France and Russia (p.4). In 1984, in recognition of this uneven playing field in the global launch market, the Commercial Space Launch Act Amendments included a government risk-sharing regime for commercial space transportation in the U.S. (p.4). Vedda describes the congressional discussion during that time as one of a reconciliation of the government s supposed support for commercial space with the intolerable risk of unlimited liability imposed upon the commercial space transportation industry (p.5). In the end, several new practices were codified in 1988, which will be detailed in the Current Institutional Framework section. During these negotiations, two justifications for government risk-sharing became apparent: (1) risk-sharing was intended to help a nascent industry get started and become self-sustaining and (2) government risk-sharing should be a permanent business fixture for the commercial space launch industry, since the U.S. interests are in sustaining a commercial space launch industry. The rationale of the first view was that the commercial space industry would grow enough that it would be able to obtain private market insurance without government protection. Due to this ESD.10 Space 28/94

29 rationale, the 1988 legislation included a 5-year sunset provision on the government indemnification provision (Vedda, 2006, p.6). Since 1988 the actual policy decisions over government indemnification of commercial space transportation have supported the second view, with the rationale that these indemnification provisions would need to become a permanent fixture in the commercial space industry. In 1992, the sunset provision was extended to 1999; in 1999, it was extended to 2000; in 2000, it was extended to 2004, and most recently in 2004, the sunset provisions were extended until 2009 (Vedda, 2006, p.4). In each extension, various arguments have been made that the industry is not mature enough, and that overturning the indemnification would doom the industry to failure (p.4). Though in 2004 the commercial satellite launch market still dominates commercial space transportation, the possibilities of NewSpace consisting of new, entrepreneurial players in commercial space transportation may have provided the necessary justification for Congress to extend the indemnification. More recently, individual U.S. states are seeking to pass their own legislation related to spaceflight liability. In support of Virginia s Mid-Atlantic Regional Spaceport, the Spaceflight Liability and Immunity Act was passed in Spring The bill requires space flight participants to sign a waiver essentially removing all civil responsibility from space flight companies against potential harms that this participant could face during a space flight mission; this is basically an extension of the informed consent provisions already mandated at the federal level in the CSLAA of Current Institutional Framework The current U.S. federal law regarding commercial space flight can be found in two different places: Code of Federal Regulations (CFR) - Title 14 Aeronautics and Space - Chapter III Parts Commercial Space Transportation U.S. Code Title 49 Subtitle IX Chapter 701 Commercial Space Launch Activities Until 2004, the federal code for commercial space flight was primarily concerned with ELVs for satellite launches, and had little to do with CHSF and other NewSpace interests. The CSLAA represents a minimalist, hands-off approach to regulation of CHSF; this approach is a key part of the dual regulation and support role that the AST is now instructed to fulfill. While not new to the code, the liability limitations have been extended in the CSLAA. With the implementation of the CSLAA, there were several aspects of the federal code that were changed or added to both regulate safety and change the licensing and permitting structures related to the commercial space flight. This section will highlight the important policies in the federal code that we consider incentives for the NewSpace industry. Experimental Permitting One of the major aspects of the CSLAA was the creation of a permit structure for the testing of experimental space vehicles. This Experimental Permit would be valid for all crewed space launches up to the point of the first ticketed flight carrying a paying passenger. The USC 49.IX a covers the issuance of experimental permits by the AST. The AST has 120 days to review and make a decision on the permit. The company seeking to test a new vehicle must ESD.10 Space 29/94

30 only submit basic design information to be issued a permit allowing research and development for new equipment, research pursuant to a license, and crew training (USC 49.IX a 2007). The basis for this permitting process was modeled after the experimental permitting of aircraft by the Aircraft Certification and Regulations Office (AVR) (Boehlert 2004, p.10). Launch Licensing In the CSLAA, the AST was instructed to undertake a bottom-up review of the existing launch licensing regulations in place for the entire commercial space industry (Boehlert 2004, p.10). No actual changes to the launch licensing code have been made yet, with the exception of the experimental permitting policy described above. Safety Standards The AST can request safety approvals of [...] personnel (including approval procedures for the purpose of protecting the health and safety of crews and space flight participants) ( 70105(a)(2)). This regulation applies directly to commercial human space flight and was new with the CSLAA. The launch may take place only when the crew receives training and satisfies medical standards, is notified that U.S. government does not certify the safety of launch vehicles, and complies with all other U.S. laws ( 70105(b)(4)). Until 2007, the space participants undertook a generic appropriate physical examination, but now AST has issued additional regulations setting reasonable requirements for space flight participants, including medical and training requirements ( 70105(b)(6)). The AST may regulate to protect the health and safety of crew and space flight participants only when design features or operating practices have resulted in a serious or fatal injury [...] to crew or space flight participants or contributed to an unplanned event or series of events that posed a high risk of causing a serious or fatal injury to crew or space flight participants during a licensed or permitted commercial human space flight ( 70105(c)). In 2012, after there is presumably some industry experience, the AST can add additional safety standards in consideration the evolving standards of safety in the commercial space flight industry ( 70105(c)(3)). This law concerning safety regulations is an example of the hands-off approach the designers of the CSLAA intended to take with respect to the budding commercial human space flight industry. There is very broad language concerning the safety standards for crew and space participants. The lack of details may be seen by some as a serious oversight, but the discretion of the AST can be used at every point of the law such that any serious industry mistakes or trends can be considered and acted upon quickly. By setting minimum requirements of informed consent and physical examination, a commercial space launch is subject to similar standards as other high-risk activities such as skydiving. With the mandatory update of the safety provisions in 2012, it is assumed that industry experience will inform the direction of what new regulations are needed; this is a flexible point that a new industry appreciates but also respects since it could lead to much stronger restrictions if justified by poor practices in the industry over the next few years. Up until now AST seems to have shared the excitement of the space policy world [...] in seeing a new industry being born. These relatively lax safety regulations show the delicate balance of trust and concern the AST must have for the NewSpace companies (Horsley, 2004). ESD.10 Space 30/94

31 Liability Framework The current federal liability framework governing commercial space transportation is the same statute that was set up in 1988, as described in the history discussion above. Provisions of this liability framework are as follows: cross-waivers between launch stakeholders were now required, where each party each participant accepts its own risk of property damage or loss and agrees to be responsible for injury, damage, or loss suffered by its employees. Insurance for third-party claims would be required up to the maximum probable loss (MPL) of a given space launch; MPL would be capped at $500 million Insurance against government property damage claims would be required up to $100 million U.S government indemnification of third-party claims above the MPL with a cap of $1.5 million Claims above the maximums determined by the combination of the above provisions would hold the liable party financially responsible Note: In 1988USD, to be adjusted for inflation. (Vedda, 2006, pp.1-2) There are also several provisions about informed consent law in the CSLAA and in Virginia state legislation. As directed by the CSLAA, informed consent about all potential risks is required for space flight participants. Specifically, the paying space participant must be notified in writing by the launch company and the AST about all risks and probable losses, notified that the U.S. government does certify the safety of launch vehicles, and required to sign an informed consent waiver acknowledging these points (USC 49.IX (b)(5)). The space flight companies would thus be released from claims of responsibility for any damages occurring as a result of the space flight activity. Similarly, but more succinctly, the Virginia state law passed as the Spaceflight Liability and Immunity Act uses informed consent requirements to insulate space flight companies from liability for damages to space flight participants until 2013 (State of Virginia HB 3184). Conclusions and Recommendations Based on the regulatory and liability limitation policy structures as presented above, several incentives for the NewSpace industry and the investment community are identified. We then discuss the interests of affected stakeholders and the limitations of each incentive. Finally several recommendations will be made about how each policy can be either an effective catalyst or sustainer for the future NewSpace industry. Experimental Permitting FAA experimental permitting has been a large incentive for NewSpace companies in three ways. These incentives, and further conclusions are shown in Table 3.1 below. A first incentive is that the permitting reduces the time and cost requirements for test launches as compared to the full launch license requirement. The basic requirements for an experimental permit are much less restrictive than the pre-cslaa where a full launch license had to be obtained before any flight testing was performed. Under the previous regime, a launcher [would have to] meet all, or at least most, of the costly and time-consuming licensing guidelines just to test its new vehicle ESD.10 Space 31/94

32 (Horsely, 2004). This extra time and money translates to cost savings, and the potential for increased profits. A second major incentive is that experimental permits allow early-stage testing, which will give firms more flexibility in innovation and testing of new technology. NewSpace Companies Table 3.1. Conclusions for Experimental Permit Policy. Stakeholders Incentives Effects of Incentives Limitations / Drawbacks Reduces Time/Costs over Frees capital for other purposes / can launch license requirements increase profit Investment community Allows early-stage testing Reduces regulatory undertainty Enable NewSpace firms to innovate and invent May have higher confidence to invest in NewSpace One accident-> stricter permitting Stakeholders Stakeholder Motivations Limitations / Drawbacks Gov't / Public Encourage new/experimental private space ventures; Accelerate innovation, support development of commercial spaceflight industry Keys for Success: Low requirements for permit; Industry must prevent accidents and build trust with AST regulators Recommended Uses: Use in early stages of flight testing to test vehicle and components, and train crew Could receive blame in event of fatal accident Experimental permits also provide an incentive for investment community through reductions in regulatory uncertainty. Since these new space ventures will be capital-intensive, a stable and predictable regulatory structure would be conducive to private investment. Prior to 2004, there was uncertainty about whether testing of commercial human space flight vehicles would be permitted by the FAA s rules for traditional aircraft, which fully certify aircraft before commercial flight, or whether a less-costly and more flexible model of vehicle permitting would be adopted. A study at Harvard University about space law warned that if not changed, the current federal law could prove prohibitively expensive for the commercial human space flight industry (Harvard, 2004, p.627). This opinion is exemplified by Dennis Tito, the first space tourist, when he testified before a U.S. House committee that he would quite possibly invest in a reusable launch vehicle company, but added that excessive government regulation could make investment undesirable (Boerlert, 2004, p.4). In conclusion, the presence of effective regulations is an incentive for investment to this new industry. One limitation to the effectiveness of incentives from experimental permits is the flexible language of the statute. In the event of fatal vehicle accident during testing, due to public pressure, AST could tighten its policy on experimental permits, and the effectiveness of the above incentives could be reduced. The government, representing the U.S. public, will enjoy the effects of these incentives since it is U.S. policy to support a commercial space flight industry. These incentives align with the U.S. goals to accelerate innovation and support development of more robust and capable commercial spaceflight industry. ESD.10 Space 32/94

33 The key to success of this incentive is in maintaining the flexible and minimal requirements for the issuance of an experimental permit, which can be maintained by industry avoiding a potentially serious fatal vehicle accident. Simplified Launch Licensing AST has been instructed to review the entire system of launch licensing requirements, to identify inefficiencies and redundancies. Removing unnecessary and redundant requirements could streamline the licensing process, potentially creating an incentive for NewSpace development as a result of reduced licensing cost burdens. This incentive and further conclusion are shown below in Table 3.2. Lower cost-burdens per launch license could yield more competition in the NewSpace industry. Proof of these potential cost reductions would only be available if and when the AST does restructure the launch license permitting process. One limitation to this policy is that the magnitude of the potential cost reductions is uncertain since the review is still underway. Table 3.2. Conclusions for Simplified Launch Licensing Policy. Stakeholders Incentives Effects of Incentives Limitations / Drawbacks NewSpace Companies Simplifies Launch Licensing Process Frees capital for other purposes / can increase profit Uncertain cost reductions versus previous regime Stakeholders Stakeholder Motivations Limitations / Drawbacks Gov't / Public Encourage new/experimental private space ventures; Accelerate innovation, support development of commercial spaceflight industry ESD.10 Space 33/94 None Keys for Success: A truly simplified launch licensing process would take less time and involve less work for the firm. Recommended Uses: Use to lower market entry barriers for NewSpace. May allow smaller businesses to afford launch licensing The government, representing the U.S. public, is interested in this incentive since it is U.S. policy to support a commercial space flight industry. Increasing the efficiency of the launch licensing process aligns with U.S. goals to accelerate innovation and support development of a more robust and capable commercial spaceflight industry. The key to the success of this policy would be the creation of a truly simplified launch licensing process that takes less time and involves less work for the firm. We recommend a simplified launch licensing process as a sustaining incentive for NewSpace companies that would lower market entry barriers and may allow smaller businesses to afford launch licensing in the future. Minimal Safety Standards The new safety standards governing CHSF provide strong incentives for NewSpace companies in two ways. These incentives and associated conclusion are shown in Table 3.3 below. First, these standards could potentially reduce insurance costs. Although the requirements are minimal, crew training, crew and space flight participant education, and physical examination requirements should decrease the probability of an accident during space flight. These should also decrease insurance costs. A second incentive is that these safety requirements are minimal,

34 not demanding the same rigorous testing and verification requirements used in the aviation industry. This allows for lower design costs for NewSpace companies, through less time spent on the design and testing phases of spacecraft development. Table 3.3. Conclusions for Minimal Safety Standards Policy Stakeholders Incentives Effects of Incentives Limitations / Drawbacks Frees capital for other purposes / can Reduces Insurance Costs NewSpace increase profit One accident-> stricter Companies Enable NewSpace firms to innovate Allows more flexible design regulations; Moral Hazard and invent issues Investment Reduces Regulatory May have higher confidence to invest community Uncertainty in NewSpace Stakeholders Stakeholder Motivations Limitations / Drawbacks Gov't / Public Encourage new/experimental private space ventures; Accelerate innovation, support development of commercial spaceflight Moral hazard issues industry Keys for Success: Industry must prevent accidents and build trust with AST regulators Recommended Uses: Use in early stages of high-tech, high-risk markets when reliability and expected safety record is unknown New safety standards also provide incentives for the NewSpace investment community. With regard to the investment community, these safety standards have led to a reduction in regulatory uncertainty about the NewSpace industry. As such, the investment community may have more confidence to invest in NewSpace. Government regulations "lowers the uncertainty and risk, and the perception of risk in the marketplace; [regulations also] help encourage market growth because they reduce the perception of risk and the actual risk itself" (Lee, 2007b). There are two limitations to these incentives. Similar to the experimental permitting policy, these safety standards shall only continue in their current state in the absence of a fatal vehicle accident during testing, which would signal the AST to tighten its policy on safety standards prematurely since the law mandates they do not need to issue further safety standards until A second limitation is the potential moral hazard issues associated with these minimalist safety regulations. There could be more risks taken in vehicle design under this incentive, than in a stricter safety standard regime. In the event of an accident, the vehicle design firm may claim moral hazard on account of the AST s regulations. The key to success of this incentive relies on the industry avoiding a fatal vehicle accident, which would lead to stricter safety regulations, as explained above. Based on an analysis of the rocketplane experiments of the 1950s and 1960s, Jeff Bell of Space Daily expresses a rather pessimistic view of the minimalist tone that the CSLAA brought: Tourist rocketplanes will operate in the kind of regulatory vacuum that existed in the barnstorming era of aviation. The promoters seem to have forgotten about the huge number of people killed in that era, and the numerous airlines that failed financially or were taken over by governments (2007). ESD.10 Space 34/94

35 Another key to the success of the NewSpace industry is maintaining good relations with the AST, so that emerging safety standards in the industry can be communicated to the regulators. This will ensure that post-2012 safety regulations will not be overly restrictive of the NewSpace industry. The government, representing the U.S. public, has implemented minimal safety standards since it is U.S. policy to support a commercial space flight industry. These incentives align with U.S. goals to accelerate innovation and support development of more robust and capable commercial spaceflight industry. However, in the event of a fatal accident, the AST could be accused of exercising moral hazard or providing a perverse incentive for vehicle development. Minimalist safety standards should be most effective when a market is in the early stage of technological development and when the reliability and safety records of the technology are unknown or expected to change. Liability Limitations Continuance of the federal liability indemnification regime has been an important incentive for NewSpace companies in two ways. These incentives and associated conclusions are shown below in Table 3.4. First, this government risk-sharing scheme has kept insurance affordable for risky space launches Although both OldSpace missions, one quickly remembers the two U.S. Space Shuttle failures and the European Ariane 5 rocket failure that used technology not vastly different from that of some NewSpace companies. After 20 years of this liability indemnification regime, there remains a lack of full coverage for commercial space ventures from private insurance firms (Vedda, 2006, p.6). Table 3.4. Conclusions for Liability Limitations Policy. Stakeholders Incentives Effects of Incentives Limitations / Drawbacks Frees capital for other purposes / can Uncertain magnitude of Reduces Insurance Costs NewSpace increase profits positive effect; possible Companies Investors are more willing to invest dependency; unknown legal Reduces Investment Risk in NewSpace Companies effectiveness Stakeholders Stakeholder Motivations Limitations / Drawbacks Gov't / Public Encourage new/experimental private space ventures; Accelerate innovation, support development of commercial spaceflight industry Puts gov't at liability risk; moral hazard issues Keys for Success: Any liability indemnification regime would be successful in providing these incentives depending on the the amount and structure of the code. Recommended Uses: A continuation of the current indemnification regime is recommended to support the NewSpace industry. This would allow industry to further develop by keeping insurance costs managable until a sustainable private market for space flight insurance exists. A second incentive for NewSpace companies is the reduction of investment risk associated with lower insurance requirements. Potential investors in commercial space would shy away from NewSpace if they faced unlimited risk from third party liability. Dr. Burton Lee, Managing Director and Co-founder of the Space Angels Network, notes that: The most important ESD.10 Space 35/94

36 provisions in CSLAA [2004] are liability provisions and liability caps for private companies. No companies will invest in anything if they face the potential for unlimited liability. Insurance costs [would] go through the roof (2007a). There are several potential limitations of this incentive for NewSpace companies. First, it is unclear how long and to what extent this liability indemnification will bring positive effects for the industry. In fact, there is a possibility that the industry will become dependent on the incentive--it may be very difficult to discontinue when the next sunset date arrives. A second drawback for NewSpace companies is the lack of evidence about how the indemnification provisions would hold up under legal challenge. America is a litigious society and there could be a convincing argument made that third parties harmed in a commercial space accident could sue NewSpace companies despite liability limitations governing NewSpace (Bell, 2007). From the perspective of government, this liability indemnification regime is placing the risk of commercial space on the American people, which would be responsible for payout in the event of catastrophic losses. Some government policymakers believe this is a strong argument for eliminating the indemnification. A second major drawback of such a plan is the potential moral hazard issue; companies do not face the full responsibility for their risk, and they may act with less regard to safety as a result. Nevertheless, the risk-sharing structure of the U.S. government and commercial spaceflight companies has been a basic incentive to ensure these risky space missions that would be otherwise uninsurable, and thus impossible in today s litigious legal environment. Any liability indemnification regime would be successful in providing these incentives depending on the amount and structure of the indemnification. We recommend a continuation of the current indemnification regime to support the NewSpace industry. This would allow industry to further develop by keeping insurance costs manageable until a sustainable private market for space flight insurance exists. Regardless of the current NewSpace business environment, there are several potential changes in the commercial space industry that could affect decisions made about the liability indemnification regime: 1) International competition could continue to increase. 2) The number and characteristics of domestic launch providers could change significantly. 3) Domestic launch providers could expand their operations through new technologies, new markets, or new government policies (e.g., loosening of export controls, buy American laws, or privatization of International Space Station operations). 4) A major launch accident or Katrina-like natural disaster could disrupt the liability insurance market. (Vedda, 2006) The liability indemnification provisions will be revisited in 2009, and based on our interview feedback, there is limited knowledge in the industry about this fact. We recommend NewSpace industry stakeholders as well as the FAA work to support awareness and discussion of this issue. If the liability indemnification is removed, the increased insurance costs are potentially devastating to the NewSpace industry. ESD.10 Space 36/94

37 4. Contracts Introduction Contracts are recognized as one way to encourage the growth of NewSpace companies. Contracts as a policy may take the form of funding, creation of a new market, access to facilities, or access to data and designs of other aerospace organizations. Stakeholders directly involved with space flight contracts, both manned and unmanned, include NewSpace companies, the government (NASA, U.S. military, foreign governments), and investors. Each stakeholder is involved in contracts in different ways. NewSpace companies both offer contracts and receive them. NASA and various defense organizations sponsor contracts to serve their needs and the greater needs of the public. Contracts from various stakeholders provide NewSpace companies with seed money, increased credibility, and a potential space transportation market. To understand the breadth of these policies, this paper examines four categories of contracts: NASA Space Act Agreements, the NASA s Commercial Orbital Transportation System program, Small Business Innovation Research/Small Business Technology Transfer contracts, and a potential contract from Bigelow Aerospace. Each of the four types of contracts, including those in effect and those to be signed in the near future, provide a threefold incentive to NewSpace companies. First, the contracts provide funding for the companies to develop their technologies or demonstrate technology capabilities. Second, the successful negotiation of a contract lends the NewSpace company credibility with which to secure financial support from investors. Finally, in many cases the contract opens a new market for NewSpace companies to serve. If these three incentives are unclear or uncertain because of poor policy structuring, then contracts do not lead to growth of the NewSpace industry. Without credibility or the assurance of a market it is extremely difficult for firms to secure necessary capital from investors. Without adequate funding and a market there can be no independent commercial space flight industry. When the commercial space flight industry matures, the role of contracts will evolve into what is typical of normal market operations. This chapter addresses contracts offered by NASA, other government agencies, and private industry to NewSpace companies, and attempts to identify the relationship between such contracts and NewSpace industry growth. The policies can be divided into technology development and demonstration contracts and procurement contracts. The former acts as a catalyst to allow initial growth to begin. The latter will be used to sustain the NewSpace industry. Details of contracts and participants will be explained and compared in order to draw conclusions about how contracts can be shaped as successful policies. NASA Space Act Agreements In order to meet a wide variety of mission and program objectives, NASA has been given the authority to enter into Space Act Agreements with different groups. The National Aeronautics and Space Act of 1958 (42 U.S.C et seq.), amended in 1990 and generally referred to as the Space Act, states that NASA may: ESD.10 Space 37/94

38 enter into and perform such contracts, leases, cooperative agreements, or other transactions as may be necessary in the conduct of its work and on such terms as it may deem appropriate, with any agency or instrumentality of the United States, or with any State, Territory, or possession, or with any political subdivision thereof, or with any person, firm, association, corporation, or educational institution. (42 U.S.C et seq.) Through the Space Act, Congress mandated NASA to seek and encourage, to the maximum extent possible, the fullest commercial use of space (42 U.S.C et seq.). Space Act Agreements, which fall under the heading of other transactions, are legally enforceable agreements between NASA and an agreement partner to meet one of NASA s objectives. NASA can provide resources such as personnel, funding, services, equipment, expertise, information, or facilities to the agreement partner to assist in execution of the objective (OGC, 2006). There are three types of Space Act Agreements: Funded, Reimbursable, and Nonreimbursable. The agreement is considered a funded agreement when NASA provides monies to the agreement partner to fulfill the objective. The Space Act Agreements that resulted from NASA s Commercial Orbital Transportation System (COTS) competition are examples of funded agreements. These Agreements will be discussed in detail in a later section. Reimbursable agreements require NASA s costs to be reimbursed in some percentage by the agreement partner. In Nonreimbursable agreements both NASA and the agreement partner are responsible for bearing the cost of their own participation. In 2007, NASA signed Nonreimbursable Space Act Agreements with five different space companies. Transformational Space Corp (t/space), PlanetSpace Inc., SpaceDev, SPACEHAB, and Constellation Services International (CSI), are working to build transportation systems to bring cargo and crew to the International Space Station (ISS) after the Space Shuttle is retired. The agreement provides the companies with ISS specifications that they must integrate into their design. The information will help the companies monitor their own progress in preparation for bidding to win the ISS servicing contract, which is estimated to begin in Although NASA awarded funding to two other companies to develop transportation systems for this same mission, the final contract to deliver supplies and potentially crew to the ISS will be open to all companies that can demonstrate the capability. This contract resulting from COTS Phase II will be discussed in a later section. The president of CSI sees the Nonreimbursable Agreement as a legal mechanism for NASA to give unfunded support and technical assistance and a statement of confidence in their design (Berger, 2007). Space Act Agreements may not provide funding to NewSpace companies, but they do provide limited credibility and a potential market. Companies without funding benefit from the market NASA is creating with COTS Phase II (Kathuria, 2007). The possibility of securing the COTS Phase II procurement contract allows NewSpace firms to assure investors that their business plan is viable. ESD.10 Space 38/94

39 NASA s Commercial Orbital Transportation System Background In response to the new Vision for Space Exploration, announced by President George W. Bush in 2004, the President s Commission on Implementation of U.S. Space Exploration Policy was formed. In its final report, the Commission recommended that NASA should redefine its relationship with the private low-earth orbit (LEO) sector and take action to support the commercial space industry, including the emergent NewSpace companies. The new U.S. Space Transportation Policy was signed by President George W. Bush in December of 2004, and stated, the U.S. Government shall encourage and facilitate the U.S. commercial space transportation industry to enhance the achievement of national security and civil space transportation objectives, benefit the U.S. economy, and increase the industry s international competitiveness (U.S. OSTP, 2004). In June of 2005, NASA Administrator, Mike Griffin, addressed the Space Transportation Association about the importance of engaging the engine of competition in the commercial space industry (Griffin, 2005b). The combination of these events led to the announcement of NASA s Commercial Orbital Transportation System (COTS) competition in early Announced on January 18, 2006 and amended on February 17, 2006, the COTS competition was a call to the commercial aerospace industry to demonstrate a launch system to provide supplies and ultimately crew to the International Space Station (ISS) beginning in 2010 when the Space Shuttle is decommissioned 30. Managed by Alan Lindenmoyer, the COTS program falls under the Commercial Crew/Cargo Project as part of the Exploration Systems Mission Directorate at Johnson Space Center (Lindenmoyer, 2005). The objectives of the Commercial Crew/Cargo Project are as follows: 1) Implement U.S. Space Exploration policy with an investment to stimulate commercial enterprises in space 2) Facilitate U.S. private industry demonstration of cargo and crew space transportation capabilities with the goal of achieving reliable, cost effective access to low-earth orbit 3) Create a market environment in which commercial space transportation services are available to Government and private sector customers (SAA-SpaceX, 2006, p.1) Officially, NASA stated that the purpose of COTS was to enter into agreements with private industry to develop and demonstrate the vehicles, systems, and operations needed to resupply, return cargo from, and transport crew to and from a human space facility. NASA believes that COTS will not only yield a needed service from a domestic provider at considerably less cost than NASA itself could provide, but that the program will also foster growth and competition in the commercial space industry. NASA assumes small competitive firms can achieve innovation and efficiencies presumably unattainable in the government sector. NASA intentionally shaped the performance goals of COTS to resemble what would be expected of a commercial launch services firm in hopes of stimulating a market (Lindenmoyer, 2005). The aim of the COTS competition was to negotiate Funded Space Act Agreements with multiple companies for a total dispersion of $500 million. It is important to note that this dispersion of funds, COTS Phase I, does not involve procurement of actual crew or cargo transportation services. The contract to 30 The Vision for Space Exploration requires the retirement of the Shuttle Transportation System after the completion of the International Space Station in 2010 ESD.10 Space 39/94

40 provide cargo or crew services to the ISS will occur in another round of bidding, COTS Phase II. NASA will only consider proposals from U.S. commercial providers as defined by the Commercial Space Act of In the COTS Phase I proposal each company outlined a set of technical and financial milestones to serve as the basis for continued installments of funding. The funding provided by NASA is intended to supplement the financial support of private investors. NASA s contribution will be a fixed amount and will not be increased or decreased based on the participant s ability to obtain private funding (Lindenmoyer, 2005). More details of the contract are provided in the Details of COTS Contract and Proposals Appendix Response Almost 100 companies submitted formal expressions of interest to COTS after the initial announcement of the program; twenty of these firms went on to submit full proposals. There were six finalists of COTS Phase 1 Round 1: Andrews Space, Rocketplane Kistler (RpK), SpaceDev, Space Exploration Technologies (SpaceX), SPACEHAB, and Transformational Space (t/space) (Foust, 2006b). After evaluation, discussion, and negotiation, NASA signed Funded Space Act Agreements with SpaceX and RpK for a total of $485 million. SpaceX has been successful in meeting its evaluation targets, but after failing to meet a financial and technical milestone RpK s contract was terminated by NASA in October of 2007 (McKee, 2007). The next segment of this paper will examine the impact that the funded COTS award has had on both companies. COTS Case Study: Space Exploration Technologies SpaceX, discussed in additional detail in the Company Information Appendix, was one of the winners of NASA COTS. The Funded Space Act Agreement between NASA and SpaceX - signed on June 26 and finalized on August 18 of began the development and demonstration of a crew and cargo end-to-end space transportation system for the ISS (SAA- SpaceX, 2006, p.26). SpaceX will be given a total of $278 million to complete three launch demonstrations of its system, which consists of the company s Falcon 9 booster carrying its Dragon capsule (Spacex.com, 2007). The company expects to be ready to serve the ISS by December of 2010, and estimates that its system will require eight cargo launches per year to meet the specified COTS cargo quantity requirement. If the system were to transport crew as well, this would require an additional two to three launches per year (SAA-SpaceX, 2006, p.4). SpaceX, founded in 2002, initially focused on satellite launch services. It has grown from 3 employees to almost 400 and has moved from 20,000 sq ft of space in El Segundo, CA to 550,000 sq ft in Hawthorne, CA (spacex.com, 2007; Musk, 2007). The employee growth is due to COTS and the development of a large manned vehicle (Musk, 2007). SpaceX always intended to transition to larger launch vehicles and ultimately human space transportation, so the 31 Eligibility is restricted to any entity organized under the laws of the United States or of a State, which is more than 50 percent owned by United States nationals; or a subsidiary of a foreign company approved by the Secretary of Transportation (Lindenmoyer, 2005). ESD.10 Space 40/94

41 COTS contract simply accelerated the pace of development for Falcon 1 and Falcon 9 (Musk, 2007). In SpaceX s COTS Phase I proposal they state: By itself, this technology would have developed slowly over several years as ongoing cash flow allowed and, lacking NASA as a customer, would not have conformed to NASA needs. The COTS procurement, however, provides the mechanism to accelerate the timing of this development and ensure that it is tailored to the requirements of NASA for both cargo and crew transport to the ISS (SAA-SpaceX, 2006, p.2). Musk summarized the effect of the COTS program by saying it is the most helpful thing any organization has done for SpaceX (Musk, 2007). The $278 million provided by the contract is beneficial, but perhaps an even greater driving force behind the company s participation is the expectation that NASA will buy the final product. COTS Case Study: Rocketplane Kistler Rocketplane Kistler, also discussed in the Company Information Appendix, was formed on February 27, 2006 when Rocketplane Limited, Inc. joined Kistler Aerospace to focus on a reusable launch vehicle, the K-1 (Rocketplane, 2006a). Rocketplane Kister was awarded $207 million dollars under the COTS contract. The subsequent Space Act Agreement, signed on June 15, 2006 by RpK and finalized on August 18, 2006 by NASA, outlined the financial and technical milestones RpK should meet to demonstrate cargo/crew space transportation with the K-1 rocket (SAA-RpK, 2006, p. 29). In spite of this contract, RpK still needed to secure additional funding. Before receiving the COTS contract, Kistler had already invested $600 million into the design and construction of the K-1 (Foust, 2006b). RpK needed an additional $600 million to complete their launch transportation system (Dinerman, 2007). After receiving the $207 million from COTS, RpK still needed $400 million in private investment to succeed (SAA-RpK, 2006, p.30). RpK had a number of undisclosed strategic partners and strategic investors to complement the NASA investment (SAA-RpK, 2006, p.32). In the first year they were able to raise $40 million (Gaskill, 2007). On July 24, 2006, Orbital Sciences Corp. became a strategic partner and invested $10 million, but in September of 2006, they backed out of the agreement 32. Andrews Space moved in and provided a similar investment (Foust, 2006b; Rocketplane, 2006b). RpK secured a launch location in Woomera, Australia for its spaceport, and believed that after successful demonstration launches RpK would be given unrestricted corridors to launch in any direction, any azimuth (Foust, 2006b). They hoped that they could begin servicing the ISS by On February 13, 2007, RpK announced that it had completed its Systems Requirements Review, Milestone 3 of their Space Act Agreement, six weeks ahead of schedule (Rocketplane, 2007). RpK was unable to meet its next two milestones in February and August. Milestone 4 was a financial milestone to raise some undisclosed part of the total $500 million private investment required. Milestone 5, a Pressurized Cargo Module Critical Design Review, was likely not met 32 A spokesperson from Orbital Science reported that the split was over a disagreement on some of the elements of RpK s business plan (Berger, 2006b). ESD.10 Space 41/94

42 because of the lack of funding (Gaskill, 2007). These two milestones would have provided $7.5 million and $5 million of NASA funding, respectively (SAA-RpK, 2006, p ). On September 7, 2006 NASA notified RpK, according to requirements of the SAA, that the contract had been breached, but gave RpK additional time to meet the milestones (Gaskill, 2007). However, on October 18, 2007, NASA officially terminated the agreement (McKee, 2007). In all, RpK received $32 million of its $207 million allocation, thus forfeiting $175 million. These funds will be redistributed under COTS Phase I Round 2, discussed later. There may be several factors that contributed to RpK s inability to secure private investment. For instance, the stipulations of the COTS competition limit investment from foreign sources (Gaskill, 2007). Another problem is that the COTS Phase I contract does not guarantee that NASA will purchase the technology developed even if it is successful. COTS Phase I winners will still compete with the Russians, domestic firms, and NASA itself for ISS cargo and crew resupply contracts. Despite the frustrations of some, NASA is investing considerably more money to develop their own system, 33 which will be capable of serving the ISS. The Orion crew capsule and Ares rocket are not scheduled to be available until 2015 (McKee, 2007), which still leaves a gap between the end of the Shuttle Program and the first Ares launch. To add to the uncertainty of RpK s potential investors, in April of 2007 NASA extended its current contract with Roscosmos through Roscomos, a Russian company, will be paid $719 million to serve the cargo and crew transportation needs for the next three years. Another complication is NASA s release of the COTS Phase II Request for Information, which solicits proposals from competing domestic commercial firms for the Phase II contract (Gaskill, 2007). These tough market conditions and confusing signals from NASA did not provide a stable investment environment, and thus may have contributed to RpK s failure to meet its financial milestone. When Elon Musk, CEO of competing SpaceX, was asked about the causes of RpK s termination he cited other reasons that may have damaged RpK s investment potential. Musk felt that RpK had not demonstrated that their design could generate customers other than NASA, which was not a guaranteed customer under the COTS Phase I agreement. He believed some technical details were risky, including insufficient payload capacity and land recovery in a foreign country subject to the requirements of International Traffic and Arms Regulation. Even more risk was introduced because the RpK business plan relied upon the reusability of the spacecraft. A single accident would place enormous financial strain on the business. Overall, funding rockets is simply outside of a venture capitalist s comfort zone and RpK could not offer sufficient reductions in investor risk (Musk, 2007). Reopening COTS Phase I In October of 2007, NASA issued a request for new COTS proposals to fill the void left by RpK; $174 million will be available to the winning company(s). The objective of the effort is still to stimulate the commercial space transportation market to help develop safe, reliable, and cost effective access to and from low-earth orbit, and the mission requirements between the two releases remain unchanged (JSC-COTS-2, 2007). This time, however, NASA is stressing that 33 NASA is developing the Constellation Program composed of the Ares rocket and Orion crew module. ESD.10 Space 42/94

43 the contract money should be considered in the overall financial strategy of the proposing company, and clarified what financial and business plan information must be provided in the proposal (JSC-COTS-2, 2007). For example, even though resource requests of NASA centers must be made through separate Space Act Agreements, the cost of such resources should be included in this round of proposals. NASA also streamlined the evaluation screening and due diligence process. The proposals are due in late November of 2007, and a winner will be selected in February of 2008 (JSC-COTS-2, 2007). Uncertainty Surrounding COTS NASA s Stated Motivation NASA has stated several times that their objective with the COTS program is to encourage a commercial space market. If private industry can successfully perform these tasks at reduced costs, NASA can concentrate its budget and effort on conducting work best performed by government, like space exploration (Griffin, 2005a). SpaceWorks Engineering, Inc., an aerospace consulting firm, has developed the Nodal Economic Space Commerce model 34 to see if a company can be profitable serving the ISS. The model has shown that both a cargo-delivery and a crewed launch vehicle would be profitable, and that the market created would save the government on the order of billions of dollars (SpaceWorks, 2007b). Shana Dale, NASA Deputy Administrator, has said that, at its heart, COTS is an investment intended to spur innovation through competition, and it enables NASA to provide seed money that private industry can compete for, encouraging collaborative competition and sharing the risks of this highly challenging endeavor (SpaceWorks, 2007b). In addition to providing money NASA has stated its intentions to purchase transportation services competitively in Phase II of COTS, creating a new market for the industry (NASA, 2006). NASA has said it sincerely hopes that a low-cost access-to-leo market will emerge as such a market can support biotechnology, microgravity research, industrial parks in space, manufacturing, [and] tourism (NASA, 2006). The CEO of unsuccessful COTS Phase I bidder Constellation Services International (CSI), Charles Miller, noted that when choosing the six finalists it was apparent that NASA s goals were more than cargo delivery to the ISS, but COTS was instead a U.S. industrial development program (Foust, 2006c). Detractors Despite NASA s persistent claims of sincerity, there is a split in the space community as to NASA s true intentions. The detractors of COTS claim that $500 million is not a large enough investment for real results. NASA is investing much more money into the development of its own next-generation transportation system, the Constellation Program, which will also be able to deliver crew and cargo to the ISS. NASA argues that it would be irresponsible not to have a backup plan for the ISS in case the COTS program does not deliver adequate results. However, they have stated that if a commercial option, likely lower-cost, is available that they will use commercial partners in spite of their own ability to carry out the mission themselves (Space Frontier Foundation, 2006, p.12). 34 Model is described as a dynamic space market simulation and financial engineering tool that uses Agent-based Modeling (SpaceWorks, 2007a). ESD.10 Space 43/94

44 Nevertheless, some skeptics remain. Unsatisfied with either the claim that (1) the gap between the date of the Constellation Program s first operations and the conclusion of the Shuttle Program make NASA s need real, or (2) NASA s insistence that they would rather focus their attention to exploration of the moon and Mars, doubters call for NASA to guarantee that if a company meets the COTS requirements, then that company will be awarded the ISS resupply contract (SpaceWorks, 2007b). Supporters Even with all of the suspicions that surround COTS, there are many who believe that the COTS program has and will continue to do what is best for the emerging industry. Lon Levin, chief strategic officer of Transformational Space LLC (t/space), believes in the soundness of the COTS concept regardless of the ultimate success of the winners. He said, I have come to believe that the COTS program is the template for how we will commercialize space now and in the future (Foust, 2007b). The target audience was reached; small firms who already had plans for space vehicles for tourism, satellite launch, or other markets responded to the competition (Foust, 2006c). Furthermore, even without receiving COTS funding, companies continue to work towards demonstrating the COTS requirements. The potential of the market seems to be a sufficient driver for many involved. Examining the positive and negative aspects of COTS reveals the importance of the incentives created by contracts. Despite the debate over NASA s intentions, COTS has been successful in promoting a LEO industry. The money given to SpaceX worked to financially support their emerging space transportation system. Additionally, it lent them credibility. COTS s major shortcoming is the ambiguity of a market. Without the assurance of a market RpK s credibility was weakened, possibly contributing to a lack of outside investment. SBIR / STTR Contracts Background Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) contracts are provided to develop and commercialize the technologies of small companies in order to strengthen the U.S. military and economy. The money to fund SBIR ($1.14 billion in FY 2007) and STTR ($131 million in FY2007) comes from a small portion of the budget of the Army, Navy, Air Force, Missile Defense Agency, Defense Advanced Research Projects Agency, Chemical Biological Defense, Special Operations Command, Defense Threat Reduction Agency, National Geospatial- Intelligence Agency, Defense Logistics Agency, Defense Microelectronics Activity, and the Office of Secretary of Defense (U.S. DoD, 2007). The Figure 4.1. SBIR Funding Breakdown (US DoD, 2007) Figure 4.2. STTR Funding Breakdown (US DoD, 2007) ESD.10 Space 44/94

45 contributions of these agencies are shown in Figure 4.1 and Figure 4.2. SBIR contracts go to small technology companies doing early-stage research and development. They are designed to (1) stimulate technological innovation, (2) increase private sector commercialization of federal R&D, (3) increase small business participation in federally funded R&D, and (4) foster participation by minority and disadvantaged firms in technological innovation (U.S. DoD, 2007). STTR contracts are similar except that a small business and a research institution such as a university or federally-funded R&D center work together on the project (U.S. DoD, 2007). NASA has its own SBIR/STTR program. It is important to emphasize that SBIRs/STTRs differ from NASA COTS as they provide money to develop technology rather than to perform commercial demonstrations. The contract is divided into three phases: Phase I: Awards of up to $100,000 for approximately 6 months support to determine project feasibility. Phase II: Awards of up to $750,000, for as many as 2 years to do product development and evaluate the commercialization potential. Phase III: Commercialization of technology without SBIR/STTR funding using funding from the private sector (U.S. DoD, 2007). SBIR Case Study: XCOR Aerospace, Inc. Funding, credibility, and a potential market emerge from an SBIR contract in the XCOR Aerospace, Inc. example. In April of 2007, XCOR was awarded an SBIR Phase I contract by the Air Force Research Laboratory to design and analyze a reusable launch vehicle, which will achieve an altitude of 200,000 ft and supersonic speeds (XCOR, 2007). Later in the year, XCOR received backing from the Boston Harbor Angels. The SBIR facilitated the Angel investment because it mitigated risk (Lee, 2007a). Andrew Nelson of the Boston Harbor Angels said the SBIR grant helped with the decision because it showed a track record of receiving and performing on government contracts (2007). XCOR hopes this vote of confidence will inspire other more traditional investors and other angel investors to follow the Boston Harbor Angels example (Foust, 2007a). The Air Force s interest in XCOR s technology signals a potential market. Rich Pournelle of XCOR says, XCOR seeks contracts where the customer and XCOR have need for the technology (2007). Similar to the COTS contract, NewSpace companies can potentially benefit from the increase in both funding and credibility of their operations when they are awarded an SBIR/STTR contract. SBIR/STTR contracts suggest a potential market, as the technologies selected have been screened for usefulness to the U.S. military or economic growth. Private Contracts: Bigelow Aerospace The most recent development in the area of contracts for manned LEO vehicles is news that Bigelow Aerospace is considering offering a $760 million agreement for eight launches, including an up-front investment of $100 million (Shiga, 2007). Bigelow is in the business of inflatable space stations. The company has set a 2010 launch date for their inflatable habitats, and is eager to find transportation services to deliver their customers to the space station (Shiga, ESD.10 Space 45/94

46 2007). Bigelow intends to finalize its contract plans by the end of This news has generated much excitement in the industry. One journalist reacted by writing, This is a tremendous announcement for the entrepreneurial space industry. One of the chief criticisms about NASA's COTS program is that it does not make any guarantees to COTS participants about purchases of transportation services by NASA. Bigelow has taken the opposite, and much more meaningful, approach by guaranteeing a customer for any company that can offer these transportation services! (SpaceWorks, 2007a). Bigelow s contract would function as both a catalyst and a source of sustainability to the industry. The $100 million of seed money would help a NewSpace company develop and demonstrate the ability to transport passengers to the commercial space station. The $760 million procurement contract would define a sustainable market for whichever NewSpace company wins the contract. A contract like this would also strengthen the credibility of the NewSpace winner. Comparing Contracts The NewSpace industry has been profoundly affected by contracts and the funding, credibility, and potential markets they create. Alan Marty, an investment consultant to NASA during the formulation of the COTS program, believes the contribution of COTS is a temporary decrease in entry barriers, creating an artificial window to the market (Foust, 2007c). The COTS contracts, SBIR/STTR, and a potential Bigelow contract can all be viewed as artificial windows and as such as catalysts. In each case a NewSpace company is given a small amount of money and confidence, two things it is very difficult for them to obtain in this industry. With this financial and moral support, companies have seen growth in their workforce numbers and in the perceived credibility of their operation. Table 4.1 summarizes the stakeholders involved in issuing the contracts discussed in this chapter and compares the incentives created by each contract. By comparing COTS with SBIR and with SAAs, one can see that seed-money may not be the most important role of contracts, perhaps because of its short-term nature. What may be more beneficial to NewSpace companies over the long run is an increase in credibility after securing a contract. The SBIR contract given to XCOR led the Boston Harbor Angels to invest. With the confidence of a few investors it becomes more likely that additional investors will join and the project will have a better-funded chance at success. It is very difficult to raise the tens to hundreds of millions of dollars necessary to sustain a commercial space flight firm in its initial development (Foust, 2006e). Since money from development and demonstration contracts is often not continued or large enough on its own, the credibility to attract more funding is critical. Table 4.1. Comparing Incentives from Contracts Incentives "Unfunded" NASA Space Act Agreements Funding (in millions) Increased Credibility Potential for a Market Players 0 X Numerous ESD.10 Space 46/94

47 NASA Commercial Orbital Transportation System (COTS) Phase I $278 and $207* X SpaceX, Rocketplane Kistler NASA COTS- Phase II? X X? Small Business Innovation Research (SBIR) less than $1 X X XCOR Bigelow Aerospace $760 + $100 X X? *Forfeited funds from Rocketplane Kistler will be redistributed in COTS Phase I Round 2 Lessons from COTS suggest that market formation is an important incentive for two reasons. First, market formation gives the NewSpace company a long-term potential customer. Second, market formation reduces long-term risk and may reassure potential investors. The mixed signals from NASA may have contributed to Rocketplane Kistler s difficulty in attracting investors. Commercial contracts, such as the one from Bigelow, have the same opportunity to create a long-term sustainable market through investment and procurement. The NASA Space Act Agreements, COTS, SBIR/STTR, and a potential Bigelow contract all create incentives for NewSpace firms to develop technology and services, and to reassure investors that NewSpace is a viable investment. NewSpace companies benefit from the funding, credibility, and market formation created by contracts. Conclusions and Recommendations Drawing from lessons learned by comparing the effectiveness of various contract policies it is clear that funding, credibility, and a potential market are the operating incentives for NewSpace created through contracts. Table 4.2 provides a summary of the conclusions that are drawn from the comparison. Table 4.2. Conclusions for Contract Policy Stakeholders Incentives Effects of Incentives Limitations / Drawbacks Financial Accelerate pace of innovation Funding offered is not Reduce perceived risk for investors sufficient on its own; Credibility Ambiguity of final market NewSpace Companies and customers repels investors; Does not Provides customers to serve; may Potential Market guarantee that commercial assure investors technology will be successful Stakeholders Stakeholder Motivation Limitations / Drawbacks Government Commercial Space Sector New Space Investors Allow government to focus on space exploration; Low cost access to space; Meet technology needs; Stimulate commercial activity in space Low cost access to space; Meet technology needs; Stimulate commercial activity in space Make a healthy return on investment Does not guarantee that commercial technology will be successful; Forced to develop their own technology simultaneously Does not guarantee that commercial technology will be successful; Forced to develop their own technology simultaneously Does not guarantee that risk is reduced sufficiently ESD.10 Space 47/94

48 Keys for Success: Unambiguous objectives; Assurance of a market Recommended Uses: Accelerate the pace of innovation and/or development of technologies; Transition from government depended development to an independent, market-driven industry Funding from contracts may be aimed at developing a technology, demonstrating its use, or serving a market need. A contract intended to produce development or demonstration of a new technology acts as a catalyst to lower entry barriers to a market that may emerge from those technologies. A procurement contract, which is standard in any mature market, acts as a NewSpace sustainer. Funding from a contract does not necessarily initiate action, but it can alleviate some of the pressure to secure money from investors. Unfortunately, because of the large amounts of money needed by NewSpace firms, contract funding is not sufficient to support NewSpace operations unless the money comes from a procurement contract, like Bigelow or COTS Phase II. Increased credibility serves to reduce NewSpace investor s perceived risk in investing in NewSpace operations. The investor money is critical to the progress of NewSpace companies because of the large costs associated with space flight. However, the benefit of credibility is easily undermined if there is uncertainty surrounding the emergence of a final market. The creation of a market is the most important incentive because it provides customers to serve and makes NewSpace a profitable investment. A contract that clearly outlines what is to be gained by serving a government or private investors is the most compelling motivation for NewSpace participation. The limitations of a contract, however, are that just because a potential market is clearly proposed does not guarantee that a NewSpace company will be able to fill the role. Government is interested in offering contracts to NewSpace so that government can focus on activities for the public good that cannot be offered by a market. For example, if NewSpace can successfully resupply the International Space Station then NASA can focus on cutting-edge space exploration. Government would also benefit from receiving low-cost access to space and the creation of an entirely new, revenue-generating industry. However, because contracts do not guarantee that NewSpace will be able to deliver the agreed upon results, government is still forced to develop their own methods to meet their needs. Similarly, the commercial space sector is offering contracts to gain low-cost access to space and to stimulate further commercial activity in space. Again, without the guarantee that NewSpace will be able to meet their technology needs the commercial space sector is forced to wait or develop their own technology. If government or private industry wishes to ensure the successful break off of a commercial space flight industry, properly constructed contracts are an important policy tool. A key to successfully creating a market where NewSpace can provide space flight services to government and private industry is stakeholders clearly defining their interests and manifesting that interest in unambiguous contracts. The more transparent and certain the contract, the greater the stability ESD.10 Space 48/94

49 lent to the NewSpace firm. Contracts can continue to act as catalysts to stimulate the development and demonstration of critical technologies, but ultimately, for contracts to create a sustainable commercial space flight industry they must create a viable market. ESD.10 Space 49/94

50 5. Spaceports and Infrastructure As noted in earlier chapters, a key to NewSpace growth is to establish markets for NewSpace companies and services. Like many other transportation industries, an efficient, cost-effective NewSpace industry benefits from policies that create infrastructure that reduces costs for stakeholders. The value of infrastructure is that it comprises shared services that companies can take advantage of to lower individual costs. Of the three core NewSpace components (spacecraft, launch vehicles, and infrastructure), spaceports comprise a large portion of the infrastructure necessary to the ongoing development of the NewSpace industry. On the surface, spaceports can be described in terms of their necessary components: launch pads, support services, coordination services, and the corresponding operations and administration. Although these are the necessary conditions for a functional spaceport, there are two additional requirements for a spaceport to be economically feasible. The first is a market for that spaceport s services. The second is a manufacturing and services base supporting this spaceport s operations and customers. This manufacturing and services base is referred to as an industry cluster and will be elaborated in subsequent sections. Such an industry cluster is closely tied to spaceport infrastructure both logically and spatially. The presence of such a cluster and the commensurate infrastructure is one of the major economic incentives for a region to invest in a spaceport, and, by proxy, the NewSpace industry. As such, spaceports and the accompanying NewSpace industry clusters (henceforth simply NewSpace clusters) provide supporting operations, manufacturing, and a supply base for the NewSpace industry. The first step in analyzing NewSpace clusters is to understand the characteristics of their core, NewSpace spaceports (NewSpaceports). In general, NewSpaceports are characterized by the qualities of NewSpace companies in general: flexible (support multiple launch vehicle types,) and focused on efficient operations with quick mission turnaround times and high levels of operational transparency 35. In contrast, OldSpaceports are inflexible (dedicated to one or two launch vehicles), have very slow mission turnaround times, and have little operational transparency, making them less accessible to commercial clients needs (Gormel, 2002, pp ). NewSpaceports also differ from OldSpaceports in that NewSpaceports are generally market dependent, whereas OldSpaceports are government dependent. These two types of spaceports also differ in their business models and operations criteria. The following section articulates the NewSpaceports operations criteria and contrasts them with that of OldSpaceports. Given these criteria, the next step to understand how NewSpaceports contribute to NewSpace growth is to examine the variety of policies and incentives that contribute to concurrent development of NewSpaceports and NewSpace clusters. To this end, this discussion introduces these relationships in the context of the Virgin Galactic-Spaceport America relationship and then generalizes this to a framework that describes more generalized stakeholders, policies, and incentives. OldSpaceports and NewSpaceports As the name implies, a spaceport is essentially a launch facility for spacecraft. Although spaceports have existed since the 1960 s, up until the late 1990 s spaceports have primarily been 35 Gormel describes what is referred to here as transparency as seamless authorization and making the business of space customer friendly, not customer confusing (Gormel, 2002, p. 1195). ESD.10 Space 50/94

51 federal launch sites such as those at Cape Canaveral/Kennedy Space Center and Vandenburg Air Force Base. The defining technical characteristic of the OldSpace infrastructure is support for vertical launch sites historically dedicated to expendable launch vehicles (ELVs) (Pelton, 2007, pp ; Maryniak, 2005). Organizationally, OldSpaceports are characterized by infrequent launches, a lack of operational transparency, low availability of services to customers, and high launch costs (Gormel, 2002, pp ; Schuilling, 2003). In contrast, NewSpaceports invest in supporting the core technologies and business structures that characterize NewSpace as a whole. According to Schuilling, NewSpaceports comprise [t]he functions and assets and resources required to prepare space vehicles and their payloads (including crew and passengers) for departure, arrival, and re-flight preparations as applicable (2003, p. 327). On the organizational side, NewSpaceports are dedicated to developing operations whose consistency and regularity mirror that of airports (Gormel, 2002; Brown, 2001; Edwards, 2003), providing substantial transparency to customers. Also, by virtue of shared infrastructure and economies of scale, they serve to reduce costs of services visited upon NewSpace companies and commercial users. As will be discussed in subsequent stations, such shared infrastructure and low costs act as incentives for NewSpace companies to locate near or collaborate closely with Spaceports. Table 5.1 clarifies the differences between OldSpaceports (From column) and NewSpaceports (To column) (Schuilling, p. 330, 2003). Table 5.1. Contrasting characteristics of NewSpaceports and OldSpaceports Characteristic From (OldSpaceports) To (NewSpaceports) Level of Inter-operability Low, unique High Ease of use Non-user friendly User-Friendly Flexibility None Full Evolve-ability Static Dynamic Safety cost High Low Safety Level Low High Concurrent Departure Landing One Many Concurrent Operation Processing One Many Turnaround Ability Lengthy Rapid To better quantify these characterizations, Schuilling also provides descriptions of and criteria for evaluating these characteristics (p. 331). These are provided in Table 5.2. Table 5.2. Description of NewSpaceport characteristics and performance measures Characteristic Description Performance Measure Inter-operability Standardization, modular components, and interfaces Increased % of standardized, modular components and interfaces Decreased cost to operate Ease of use Consistent and easy to use interfaces Flexibility Ability to support multiple Increase number and different vehicle types types of vehicles supported Evolve-ability Adaptive over time Decreased cost to improve or change. Decreased cost and time to ensure infrastructure meets current, and adapts to future requirements ESD.10 Space 51/94

52 Characteristic Description Performance Measure Safety Ensure safe operations Increase levels of safety while decreasing costs Multiple and concurrent operations Capacity or ability to support multiple vehicles within userdriven schedule Increase number and different types of vehicles supported Cost effective Improve cost effectiveness Decrease cost while increasing return on investments Turnaround Ability to quickly adjust to meet Decrease time to turnaround next mission spaceport systems for next Flight rate Improve number of flights supported mission Increase number of flights that can be successfully supported in given time These descriptions and criteria reinforce the idea that NewSpaceports operate more like airports, and clearly identify how the NewSpace business model in particular operations optimization along the lines of efficiency, service level, and concurrency is manifest in NewSpaceports. Implicit in these criteria, especially those related to economies of scale, is the assumption that there is a market that requires higher services levels and the efficiencies provided by NewSpaceports. Incentives and Industry Clusters The development of a spaceport is a substantial infrastructure investment, requiring cooperation amongst a number of NewSpace stakeholders and the exchange of mutually beneficial incentives. The following sections better define industry clusters as they apply to NewSpace and examine the exchange of benefits and incentives between these stakeholders that serve to make both NewSpaceports and NewSpace clusters a reality. To this end, the next section - Regional Economic Development and Industry Clusters - formally defines the concept of an industry cluster and its benefits. To examine how incentives arise in the development of NewSpaceports and NewSpace clusters, the Virgin Galactic-Spaceport America story is then presented. This story is used to identify the incentives and benefits exchanged to facilitate the investment in the infrastructure (Spaceport America) necessary to (1) serve both Virgin Galactic s technical and operational needs as well as (2) serve the space tourism market. Next, with this narrative in hand, the stakeholders, benefits, incentives, and relationships are generalized. As a second analysis, the general framework is then finally applied to another nascent NewSpace cluster, Space Florida. Through these narratives, the complex interdependencies amongst NewSpaceport stakeholders are depicted and generalized, focusing on the policies and incentives that foster industry growth. Regional Economic Development and Industry Clusters Economic growth is a major incentive for a region to invest in NewSpace. The vehicle for this growth is the subsequent development of a NewSpace cluster. In general, an industry cluster involves the concentrated production in specialized commodities and merchandise products or services (Stimson & Stough & Roberts, 2006, p. 237). Another aspect of industry clusters relevant to NewSpace is articulated by Humphrey: [C]lusters of predominantly small firms can gain economies of scale and scope and increased flexibility through specialization and inter-firm cooperation. If they cluster they can be as ESD.10 Space 52/94

53 competitive or more competitive than small firms (1995, p. 1). The idea of an industry cluster is appealing to governments and regional planners because it can be used to clearly identify, categorize, and quantify the economic effects of introducing an industry to an area. In the case of NewSpaceports, the spaceport itself is the center of the industry cluster. As will be described in more detail in the subsequent sections, the two major classes of participants in the NewSpace industry cluster are (1) NewSpace companies (in the next section, Virgin Galactic) and the ancillary industry that supports these and (2) the industry and services that support the services provided by the NewSpaceport itself (such as operations, maintenance, construction, lodging, food services, etc.). One of the key factors to establishing an industry cluster is demand for a product or service. In the case of NewSpace, one demand considered very promising is sub-orbital and orbital space tourism (Futron, 2005; Futron, 2006). In the following section we see how the expectation of a growing, economically feasible space tourism market - along with the expected availability of a feasible vehicle (SpaceShipTwo) - contributed to the development of Spaceport America. Virgin Galactic, New Mexico, and Spaceport America As also noted in the Prizes section, Rick Homans 36 summarizes the chain of events that led to Spaceport America as follows: New Mexico would not be [building Spaceport America] except for Branson & Virgin Galactic. Virgin Galactic would not have happened if not for SpaceShipOne, and SpaceShipOne would not have happened without the X PRIZE. [The X PRIZE] was a catalyst (2007). This quote illustrates incentive structures that arise in NewSpace. In this instance, the relevant stakeholders are Virgin Galactic, New Mexico, and Spaceport America (depicted in the Figure 5.1). Figure 5.1 Virgin Galactic-Spaceport America Incentives and Relationships 36 New Mexico s former Secretary of Economic Development ESD.10 Space 53/94

54 In Figure 5.1 the origin of an arrow is a NewSpace stakeholder that provides an incentive; the target is a stakeholder that benefits from that incentive. As such, the arcs in the graph represent incentives involved in the Virgin Galactic-Spaceport America story. These arcs also depict how the stakeholders in NewSpace infrastructure are functionally related and how incentives manifest in these relationships 37. In the Virgin Galactic-Spaceport America story, the primary catalyst is Virgin Galactic s plans to become, as they describe themselves, the first spaceliner. The objective is to combine Virgin s experience in the luxury airline business with a cutting-edge spaceship design (via Scaled Composites experience with SpaceShipOne) to provide a one-of-a-kind experience in suborbital space flight 38. In terms of creating an industry cluster, Virgin s credibility in the luxury airline business contributes to the first half of a viable case that the space tourism market could support a NewSpaceport. The second half necessary to make the case that space tourism has arrived is a robust, reusable vehicle. As related by Homans quote, SpaceshipOne s performance in the X PRIZE led to Virgin Galactic buying the license to the design of SpaceshipOne and collaborating with Scaled Composites to build SpaceshipTwo (Homans, 2007). With these two factors coming together, the stage was set to begin developing a NewSpaceport intended to take advantage of potential space tourism markets. 37 As a final note on this diagram (Figure 5.1) and its sequel (Figure 5.4), the numbers in the text on each arc are intended as quick in-text labels and do not indicate any ordering of incentives. ESD.10 Space 54/94

55 Figure 5.2 Artist s Rendition of Spaceport America From Virgin s perspective, they had a market and vehicle in hand, but needed to establish a base of operations and acquire access to the infrastructure necessary to run their commercial spaceliner. In particular, Virgin was looking for a cost-effective spaceport that provided the NewSpaceport operations capabilities described in Tables 5.1 and 5.2. At approximately the same time, the convergence of the two factors mentioned above also led New Mexico to begin planning Spaceport America, then referred to as the Southwest Regional Spaceport. In terms of NewSpace assets, New Mexico has some of the most ideal launch conditions in the United States, which makes it a great location for a NewSpaceport and attracted the attention of Virgin Galactic. As per George Whitesides, Though the Virgin Group had made its commitment to the Galactic project before partnering with New Mexico, the New Mexico spaceport locked in excellent weather and an unencumbered airspace. These characteristics will be very important to the business plans of future suborbital operators. (Whitesides, 2007) Setting the details of the actual negotiations aside, the result of these mutually beneficial NewSpace aspirations is the symbiotic relationship between New Mexico and Virgin Galactic to, as indicated by Homans, make Spaceport America a viable reality. The following elaborates the relationships depicted in Figure 5.1 in terms of how these stakeholders create the incentives that ultimately contributed to (incentive 1) the ongoing construction of Spaceport America and (incentive 2) the anticipated NewSpace cluster intended ESD.10 Space 55/94

56 for Spaceport America. In a subsequent section, the growth of clusters will be generalized to contributing to the growth of the NewSpace industry as a whole. The relationships between New Mexico and Virgin Galactic illustrate how each provides catalysts that facilitate the other s pursuit of their respective NewSpace related objectives. As noted above, Virgin Galactic s entry into New Mexico (incentive 1) brings with it the space tourism market necessary to justify investing in the operational efficiencies of a NewSpaceport (incentive 3). Another incentive is the agreement to base Virgin Galactic s operational headquarters at Spaceport America, which is expected to bring with it the ancillary NewSpace industry (incentive 5). As an additional inducement, New Mexico provided a number of incentives for Virgin to set up operations, including a 10% tax break on wages and benefits, 5% reimbursement for capital expenditures, and reimbursement for additional training necessary for local employees (incentive 2) (NMSiteSearch.com, 2007). Moreover, these benefits are not exclusive to Virgin Galactic, but extend to all NewSpace companies. An excellent illustration of New Mexico s intended NewSpace cluster is drawn from Futron Corporation s analysis of New Mexico s potential commercial space industry (New Mexico) and is included here as Figure 5.3. In terms of the incentives in the Virgin Galactic-Spaceport America story, the following discussion describes the NewSpace cluster that results from incentives 4 and 5 in Figure 5.1. Figure 5.3 New Mexico Industry Cluster Pyramid At the top of the pyramid is the primary market to be served by Spaceport America: space tourism and transport. The second level, labeled as primary near-term industrial development can be translated to leading firms (Virgin Galactic in the case of New Mexico) that will provide the primary services described in the first tier. The third tier represents the portion of the cluster that has the most long-term impacts for a region: the influx of high technology manufacturing jobs. This is illustrated by the types of technologies that contribute to the three segments of the ESD.10 Space 56/94