The Guardian

Posted September 2, 2014

The New Space Race


On the Web site of Virgin Galactic, Richard Branson’s new “spaceline,” one can book a ticket on the company’s spacecraft. It’s unclear when the first flight will take off, but in the interim, ticket holders get access to exclusive events, like a view of the spaceship being built in California, zero-gravity parabolic flights and an invitation to Branson’s private Caribbean island, his game reserve in South Africa, his chalet in the Swiss Alps or his estate in the Atlas Mountains in Morocco. The ticket price? Two hundred and fifty thousand dollars. Floating weightless like an astronaut? Priceless.

Branson’s project has a similar profile to a lot of space projects these days: It’s really expensive, really risky and really long term, but if all goes well, it’s likely to be really lucrative. And all of that is why space has been captivating some of the world’s wealthiest individuals over the last five years. Some 70 ultra-high-net-worth investors, with a combined wealth of over $200 billion, have invested in space-related projects, from rocket ships to asteroid mining, according to London-based wealth consulting firm Knight Frank.

“Some of the technology they’re developing is far into the future, and some of it is realistic and happening now,” says Liam Bailey, head of research at Knight Frank.

The list of investors reads like a Who’s Who of the world’s rich and smartest. On the space tourism front, there’s Branson, who hopes to not just take passengers into space but to one day fly through suborbital space to speed up cross-global travel. Virgin Galactic expects to have its first test flights this year, with the first commercial flights to and from suborbital space starting next year. Over the next decade, the company hopes to be flying passengers from one point on Earth to another using a suborbital route. That would cut the 10,500-mile flight from London to Sydney, for example, from nearly a day to about two and a half hours.

Then there are the launching companies, which are trying to build rockets and spacecraft that are cheaper, more reliable and more technologically advanced. The most well-known is SpaceX, founded by former PayPal entrepreneur and Tesla Motors CEO Elon Musk. A space transport services company, SpaceX hopes to bring people to the International Space Station.

XCOR Aerospace in Mojave, Calif., has raised its money from individuals like Esther Dyson and Pete Ricketts, co-owner of the Chicago Cubs, and a number of Silicon Valley entrepreneurs. XCOR is designing a spaceship that will operate like a normal aircraft, making flights several times a day from a normal runway. The ship would accept passengers, space experiments and small satellites for deployment, though it would charge far less than Virgin: about $95,000 a seat.

Amazon founder Jeff Bezos launched Blue Origin, which is developing spacecraft to transport humans into suborbital and orbital space. Microsoft co-founder Paul Allen and entrepreneur Burt Rutan have formed Stratolaunch Systems, which is developing a gigantic aircraft that will launch a rocket and passengers into space. And Las Vegas-based hotel and real estate magnate Bob Bigelow has two test modules in orbit right now for his commercial space stations and lunar base modules.

A third group of companies hopes to mine asteroids for precious metals. Google co-founders Larry Page and Sergey Brin, as well as company chairman Eric Schmidt, filmmaker James Cameron, former Microsoft chief architect Charles Simonyi and Ross Perot Jr., are backing Planetary Resources, based in Bellevue, Wash. Houston-based Deep Space Industries (DSI) doesn’t have the star power of Planetary Resources, but it hopes to fund its operations through investors, through “progress payments” from government customers and through payments from commercial customers. While both Planetary Resources and DSI plan to mine asteroids for precious metals, their interim plan is to process asteroid materials into fuel and parts that can extend the lives of satellites.

Other companies are building satellites—trying to make them cheaper, make them last longer and get them to take better photos. San Francisco-based Planet Labs announced plans last year to launch 28 mini-satellites in a ring around Earth to provide frequent snapshots of the planet. Users will be able to track changes in everything from traffic jams to deforestation, in almost real time. Current commercial satellites tend to photograph in high resolution, which can take a long time to download. Government satellites photograph in even higher resolution, with broader areas of detail. Planet Labs’ satellites will use moderate resolution and will be able to make out objects 3 meters to 5 meters wide. Another Silicon Valley company, Skybox Imaging, aims to launch at least 24 satellites that will be able to take high-definition video of any spot on Earth and capture details just 1 meter across.

“The common thing we see with all these companies, with the exception of Branson, is that a lot of the movers and shakers have come from the tech sector. They’ve made their money in the Internet to one degree or another,” says Bailey of Knight Frank.

These are not your typical return-on-equity plays. It’s a very passionate, emotional kind of sell that attracts a different kind of investor, says Marco Rubin, founder of Exoventure, a Falls Church, Va.-based venture capital firm.

“It’s a person who may have had a touch point in the aerospace field, or they’re very wealthy individuals who don’t mind losing it all,” he says.

Rubin, who worked as an engineer at the National Aeronautics and Space Administration’s Johnson Space Center in Houston certifying astronauts to operate complex equipment while in space, says there’s been a push into space over the last five years, in part because the cost of going into orbit has come down and in part because some professional investors have put money into the sector and spurred innovation.

“In the past, this area was the province of large institutions like GTE Spacenet or General Dynamics, strategic players in the military and industrial complex. Now you have this barbell situation, with investors curious about the opportunities in space on the one side and entrepreneurs who have good ideas looking for investors,” Rubin says.

Today, through groups such as the Space Angel Network, a reasonably wealthy individual can write a check for $50,000 and buy into a space venture—though you have to be an accredited high-net-worth individual.

“What’s changed, quite frankly, is awareness, social networking, access to capital and a greater appetite for specialized investments,” Rubin says. “And there’s a certain type of daredevil investor who wants to participate in a cool, passionate idea.”

Privatization Of Space

Most see these investments as the privatization of space. Until recently, the only people to launch a satellite into space, for instance, were governmental entities such as NASA. The private sector didn’t have the capability. But that’s changed now that companies like SpaceX are sending rockets into orbit and have found a way to cut the cost.

“We are about to have fully commercial transportation to fully commercial destinations in space,” says Rick Tumlinson, chairman of Deep Space Industries, noting that companies such as SpaceX, Orbital Sciences and Blue Origin are freeing us from any dependence we had on governments to get us to and from space, and that soon we’ll have fully commercial destinations that will give us freedom from having to go to government space stations.

Private money is pushing innovation, which is pushing launch costs down, and that’s largely because companies are finding ways to save the rocket. Today, when you launch something into space, the rocket usually burns up in the atmosphere. Companies such as SpaceX and XCOR are finding ways to make the rockets reusable, and it’s likely to bring down launch costs exponentially. As that happens, investor interest is only expected to accelerate.

“The cost equation for getting to orbit—the gateway to the universe, literally—is about to shift and cross a price threshold. When it does, the number and scale of activities in space will literally skyrocket,” Tumlinson says.

Indeed, SpaceX has already sent its Falcon 9 two-stage rocket into orbit and back three times, delivering and returning cargo to the International Space Station. Falcon, along with the company’s Dragon spacecraft, was designed to deliver cargo as well as humans into space, and the company is actively working with NASA to achieve that goal.

SpaceX has taken the old way of building a rocket and modernized it, and in the process lowered the cost of launching into space by about 50%, says Andrew Nelson, chief operating officer at XCOR. It used to cost about $10,000 to $20,000 a pound to launch something into space—meaning it could cost $100 million to send a 10,000 pound geostationary satellite into space. If the first stage of the rocket can be reused, something SpaceX is experimenting with now, the price per pound may be brought down to about $2,000, bringing the cost of putting that satellite into space down to about $20 million, Nelson says.

“Eventually, there will be a whole new different generation of launchers, where the whole vehicle will be reusable. It will look more like a space plane operation, where the vehicle flies up, delivers the satellite and flies back, and be ready to launch again tomorrow. The costs will be closer to $200 per pound, and that might happen in the next 10 to 12 years,” Nelson says.

High launch costs were like a bottleneck inhibiting innovation in space systems. No one wanted to experiment with a new microprocessor in a satellite if it cost $200 million to build the satellite and another $100 million to launch it into space. The risk of failure was too great. The result is that technological progress in space has been much slower than that in, say, cell phones or laptop computers. As those launch costs come down, people won’t be skittish to try out new equipment and technologies, Nelson says.

For now, much of the activity in space is about satellites—vehicles for communication, observation and research. It’s already a $300 billion market because of government constellations like GPS and commercial systems like DirecTV. Space could easily be a multi-trillion-dollar market in 10 to 15 years, Nelson says, if the launch costs come down as hoped.

“Today, governments, the military, the civilian community, even the local weather station is buying data from satellite service providers,” he says, “but many new applications and systems will be possible when the launch costs are lower and the flight rate and safety are improved. It won’t just be about communications anymore.”

Even the asteroid mining companies will initially focus on servicing satellites with fuel and parts. While Planetary Resources and Deep Space Industries have announced various strategies for reaching asteroids in the inner solar system in order to extract metals such as iron, nickel, cobalt and platinum, both are now talking about processing asteroid materials in space to create propellants and parts and moving on to precious metal sales down the road. A mission to Mars would be cheaper, for example, if the fuel to reach it were added in space from the volatiles in asteroids. DSI will also offer a space-based 3-D printer called a MicroGravity Foundry, which would grind up asteroids, separate out the useful bits and fuse them into manufactured goods, essentially “printing out” replacements for broken parts or creating new ones.

David Gump, vice chairman of DSI, says Planetary Resources was initially all about the metals, like platinum, but the company “recently snapped back to reality and adopted our [current] approach, which is that the volatiles and metals for in-space markets is the logical way to go.”

“The resources from asteroids will be primarily sold into markets in space, because that’s where everything is very expensive,” says Gump.

It costs about $17 million per ton to get anything from Earth up to a high orbit, Gump says. For a communications satellite about to burn out of fuel, that’s a lot of money. He estimates that these satellites earn their owners $5 million to $10 million a month, so if their lives can be extended by a year, they could earn the communications companies an additional $50 million to $100 million a year.

Gump estimates that a business in refueling those satellites would generate more than a billion a year, since 10 to 15 satellites a year are lost when they run out of fuel. If you can extract the propellant and building materials from resources already in space, it would be less expensive and more profitable than to import them from the ground, he says.

“There are many billionaires now doing great work on the cost of launch vehicles. The next thing to tackle is the cost of staying in space once you get there,” Gump says. “We’re all about addressing, ‘OK, you’re here. Now how do you begin to live off the land?’”

Aside from fuel and parts, the company plans to generate revenues by gathering data for the space agencies and testing new parts in space. If you put half a billion dollars into the launch and construction of a spacecraft, you don’t want some million-dollar component to tank your entire mission, Gump says, so you use an old, trusted component that you’re confident won’t fail you rather than something new. DSI will put new components in its robotic missions to test them out and give them so-called “heritage,” to make sure they perform exactly as predicted.

The company also plans to sell corporate sponsorships, which, like NBA box seats, will give companies access to space as a way of rewarding their best customers. For $1 million to $10 million, companies can give their customers VIP seats at mission control during launches, or customers can take photos when the ship lands on an asteroid or even selfies of themselves with the Earth in the background as the ship is in transit.

But the risks inherent in these projects are high. Furthermore, they could have unanticipated economic consequences. If a lot of platinum were found in space, for instance, it would likely drive down global platinum markets when it’s brought to Earth.

There’s little law on who can claim objects in space. The 1967 Outer Space Treaty declares space is open for exploitation, so long as “states” clean up their mess and leave no contamination or dangerous objects that could harm others. But people might still raise questions if, say, a company goes in and claims ownership of the mineral rights on an asteroid.

“I’m sure by the time company X goes up there and lands on an asteroid and company Y starts taking photos, lawyers will be wrangling about whether they have a right to do that,” says Louis Friedman, co-founder of the Planetary Society, an international organization of space enthusiasts.

There aren’t really such things as specific tax laws for profits from asteroid mining. But if the space companies are domiciled in the U.S., it does not matter where the income is earned: The profits would be taxable in the United States, regardless. Well-heeled and well-advised investors may try to save taxes by domiciling the mining company offshore, along with its operations and equipment. In such cases, the U.S. tax authorities may not be entitled to collect anything, says Bob Jason, a partner at Nigro Karlin Segal & Feldstein LLP.

“Say I set up an entity in the British Virgin Islands, which generally doesn’t impose tax, and I also keep the operations and equipment offshore,” says Jason. “The mining vehicle flies into space, collects the gold from an asteroid, and then the gold is sold to a third party. Can the U.S. tax that income? Probably not, because there is really no connection to the U.S., other than the indirect ownership of the entity.

“I think a good play in this area will involve trying to source that income to low or zero-tax jurisdictions,” adds Jason, who is not involved in any of the space-related deals.

Then there’s the risk the ship will blow up. That risk is so high that the insurance cost on these projects can be as much as 10% of the project cost—a project that might cost, say, about $200 million for the satellite and $100 million for the launch. Insurers find space projects so risky that they actually have employees oversee the construction and design.

“The greatest risk is the launch, and the highest rate of failure is during the launch and the first year,” says Ray Duffy, who has assessed the risks in space projects for insurance companies for decades.

Duffy has a hard time imagining that some of these projects, like asteroid mining, will ever reach fruition—at least in our lifetime.

“It’s a fantastic idea, but it’s the kind of stuff you find in comic books,” he says. “I’ll tell you this much: I wouldn’t invest in it.”

While the science is almost there, undertakings this large are usually the province of governments, not the private sector, says Friedman. He likens today’s space endeavors to the voyages of Christopher Columbus and Sir Francis Drake, whose explorations into the New World were funded by governments. And even with sovereign backing, it still took decades to exploit the natural resources in the new territories and commercialize them.

“Those periods of private entrepreneurship that follow up the science and discovery phase will take decades, if not longer, to have a profitable return on investment,” Friedman says.

As for space tourism, he likens it to climbing Mount Everest. People have been able to do it for some time, but the risks are still high, and about a quarter of those attempting it die in the process.

“It’s a limited market, even after 100 years of mountain-climbing expeditions,” Friedman says. “I think the current group of people will make money, because they’re finding there’s just enough customers at the very wealthy level who are willing to take the risks, but there will be setbacks like with any risky investment, and they’ll have to be prepared for that.”

Copyright 2015 Private Wealth