The May 31 successful splashdown of the Dragon capsule, the first private spacecraft to make a trip to the International Space Station, was a major milestone in the entry of private companies into the business of space exploration. The Dragon, built and launched by PayPal co-founder Elon Musk's Space Exploration Technologies Corporation, dramatically demonstrated that private enterprises will now be critical players in space at a time when governments around the globe face fiscal pressures that are forcing them to rethink their galactic ambitions. These firms are pouring money into developing new spacecraft for everything from transporting cargo to asteroid mining, creating new industries that offer tremendous opportunity - and tremendous risk.

This shift “opens space development to anyone with resources who wants to contribute – commercially or philanthropically – to the process,” notes Michael Tomczyk, managing director of Mack Center for Technological Innovation. “It is an exciting and welcome form of ‘open innovation’ applied to space.”

In the near term, the role of private companies will be primarily that of “taxis in space,” ferrying equipment and people. Wharton professor of operations and information management Christian Terwiesch says those jobs are ideally suited for commercial firms. “We are talking about reaching lower orbit, so the bar is lower in terms of the minimum efficient scale needed,” he notes. “The technology has become a lot cheaper, and we have benefitted from years and years of commercial aviation and previous experiences in space travel.”

Wharton management professor Karl Ulrich agrees that the time is right for commercial firms to take a more prominent role in space. “The space program in the last half of the 20th century required both huge investments and had uncertain and ill-defined payoffs,” he says. “As a result, NASA was an appropriate institution for exploring outer space. Those two preconditions for government investment are less relevant in aerospace today. For instance, Boeing was able to coordinate the investment of tens of billions of dollars to develop and commercialize the Boeing 787 Dreamliner [the replacement for the 767, which went into commercial service in 2011]. Motorola was able to deploy about $5 billion to the development and launch of the Iridium satellite constellation in the 1990s. Very few ventures require investments of more than several billion dollars, and private capital markets have proven capable of responding to opportunities of that size.”

The expansion of the commercial role in space reflects an ongoing drive across the federal government to more fully tap private sector creativity. Terwiesch says the push by the federal government to offer inducement prizes – dollar rewards for solving certain technical problems – is a powerful tool in driving innovation. “The government should be open to letting multiple solutions to problems develop, because the government is not good at picking winners,” he points out. That mindset is clearly at work now in the opening of the space sector to more private sector participation. “They are looking at this rationally and want to see more solutions.”

Beyond the Moon
At the same time, the push also reflects tough budget realities in Washington. The hope is that by handing more work off to the private sector – and taking advantage of the efficiencies private companies can bring to the space business – NASA will be able to focus on more audacious goals. “The space shuttle was pretty expensive, and the private sector is promising to do [the transport work] for substantially less,” says Peter Hughes, chief technologist at NASA’s Goddard Space Flight Center in Greenbelt, Md. “That frees up resources for advanced technologies so we can plan for going beyond the moon.” Hughes notes that those resources can be directed toward exciting work in areas like radiation protection and navigation using pulsars – research that could ultimately enable NASA to send manned missions to nearby asteroids or planets. “Shuttling people and cargo back and forth to low earth orbit is the perfect place for commercial companies,” notes Robert Bishop, dean of the College of Engineering at Marquette University. “The big science – going to Mars or Jupiter – is the government’s role.”

Of course, the private sector still has to prove that it can take humans into space and return them safely to earth. After retiring the space shuttle, the U.S. has been dependent on the Russian space program for sending astronauts to the ISS. But a number of companies, including SpaceX, Boeing and Blue Origin, a Kent, Wash.-based company backed by Amazon founder Jeff Bezos, are developing spacecraft in the hopes of winning the job of transporting Americans to the space station. “We know NASA pays about $63 million to the Russians to send someone to the ISS,” says John Roth, vice-president of business development at Sierra Nevada Corporation in Sparks, Nev., which is developing a vehicle for transporting people to space. “We have to show we can do it cheaper than that.” He adds that aside from NASA, Sierra Nevada hopes to win business from countries in Europe and from Japan.

Despite the conventional wisdom that they should stick to running a taxi service to the ISS, some entrepreneurs have more ambitious goals. SpaceX founder Elon Musk, for example, has said he envisions developing aircraft to take people to Mars. Planetary Resources, a Seattle-based startup backed by wealthy tech pioneers like Google co-founder Larry Page and former Microsoft software architect Charles Simonyi, aims to develop robotic spacecraft to mine asteroids for rare metals like platinum. And Bigelow Aerospace in Las Vegas is developing space modules that will orbit the earth and be leased to governments or private groups for a variety of uses, including biotech research.

Others see a way to use space technology to transform travel in general. George Whitesides, former chief of staff at NASA and now CEO of Sir Richard Branson’s Virgin Galactics, says his company’s near-term plan is to provide suborbital flights for tourists for $200,000 each. Actor Ashton Kutcher, along with about 500 other people, has put a deposit down for the flights, which Whitesides adds may start next year. But he also sees a much larger market in using the technology that Virgin Galactic develops to deliver passengers to faraway destinations on Earth in just an hour or so. “It is hard for us to imagine going around the planet in an hour, but it is completely possible,” he notes. “That is a huge market if we can get the price down over time.”

A Market Funded by Billionaires
But the science fiction-sounding nature of some of these efforts has put off some in the investment community. “It’s not exactly the hot thing on Sand Hill Road right now,” says technology guru and angel investor Esther Dyson, referring to the mindset among venture capitalists in Silicon Valley’s Menlo Park. “This is a market that has been funded by billionaires so it wasn’t very visible.” But that may be changing. “The success of SpaceX helps a great deal,” adds Dyson, who has invested in a number of space-related startups. “I think the venture community is realizing – just as they did with the Internet 20 years ago – that this isn’t a joke.”

Originally, it was the government – through what is now called DARPA (Defense Advanced Research Projects Agency) — that helped create a network that would evolve into the Internet. Terwiesch notes that once the Internet was opened up to the private sector, business models developed in ways that were completely unexpected. When its originators created the Internet, “they were not thinking about Facebook,” he says. In the same way, he predicts, the commercial space industry will yield big surprises. “If you put your bets down now [on what businesses will develop], you will be wrong. We have no idea where it will go.”

With the commercial space business in its infancy, there are also still plenty of challenges that could dampen its growth. For one thing, the economics behind the business models are still unclear. Sierra Nevada’s Roth points out, for example, that the government is not footing the entire bill for the development of personnel carriers for space – but rather is requiring the companies bidding on the business to invest alongside the government. “We are spending out of pocket, and we don’t know how much our competitors are investing,” he says. And while Sierra Nevada is optimistic it will be one of the winners when NASA makes its final selection, Roth says the firm has a back-up plan if its vehicle is not selected. Still, “it would change [our] business prospects,” he adds.

At the same time, Wharton’s Ulrich notes that the relatively small playing field at the moment also poses a risk. “The number of players – both suppliers and purchasers – is extremely small,” he says. “And the ‘small numbers’ problem is a classic obstacle to efficient contracting, as there is the potential for one party to hold up the other as the only game in town.” Still, he points out that there are markets with just a handful of operators where that sort of problem is managed, including the commercial airframe business.

Then there are regulatory uncertainties. Ahsan Choudhuri, director of the University of Texas at El Paso NASA Center for Space Exploration and Technology Research, says that export controls in the U.S. could hamper the success of private firms looking to do business abroad. “These operations need to be globalized, but our current regulation doesn’t allow that,” he notes. “Export regulations currently are stringent and somewhat ambiguous and haven’t been updated for a while. That is a huge risk for companies.” At the heart of those controls are the rules set out by ITAR, the International Traffic in Arms Regulation, aimed at controlling technologies that are deemed crucial to U.S. national security.

The safety challenges associated with launching humans into space pose perhaps the greatest risk. “Human space flight is associated with unavoidable risks, and tragedies do occur even in government programs with multiple layers of costly oversight,” notes Mike Gruntman, professor of astronautics at the University of Southern California. “We lost two Space Shuttles (Challenger in 1986 and Columbia in 2003). Space is a dangerous business, and human lives will be lost in the future.” The real question, Gruntman adds, is how the government will respond to such an event. “Will it cause a regulatory backlash that turns human spaceflight back into an exclusively government-operated venture?”

Regardless of those risks, many argue that it is critical for the private sector and federal government to work together to push further into space. “If we keep pushing the tipping points [on Earth] for water availability and quality, greenhouse gases, use of scarce resources, destruction of ocean habitats and destruction of the rain forests, which are our oxygen factories, we put our civilization are at risk,” says Wharton’s Tomczyk. “Learning to live in space and on other planets not only gives us an escape route, but more importantly, it teaches us how to live in harsh and hostile environments, which is also something we may have to do — sooner than we think.”

This article was originally published on June, 6th 2012 by Knowledge@Wharton under the title “ The Race for Space: The Potential Payoffs – and Risks – Are Big ”. Copyright Knowledge@Wharton. All rights reserved. Translated and reprinted by permission.

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