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This past Tuesday, September 16th marked a historic day for the commercial space industry. Boeing and SpaceX were awarded a contract by NASA to be the next manufacturers of the country’s rockets and spacecraft that will put American astronauts back on the map in terms of space exploration, returning astronauts to space with missions to the International Space Station (ISS) beginning in 2017. This is ¬†huge change in the US space program, as prior to Tuesday NASA was the only company/agency that led the US effort into space. From the launch of the very first US astronaut into space in the 1960s to the end of the space shuttle program in 2011, it was NASA that was behind every aspect of those manned missions to Earth orbit and to the moon. What has always been a government-dominated market has now turned into one where commercial companies now have a stake. Boeing and SpaceX were able to enter into one of the most difficult technological markets in the country to bring new opportunities to the space program.

Space exploration is a time-consuming, costly, and risky endeavor. Developing the rockets and vehicles necessary for humans to travel into space can take decades and the costs often run up into the billions of US dollars. Even after years and years of developments and billions of dollars on research and testing, problems can still happen. Designing a vehicle with more than 2 million moving parts and getting all those parts to work together and work synchronously with one another is one of the most challenging aspects of the industry. Every single part must be designed soundly, built with almost perfect precision, and then integrated into the overall system exactly as planned. Thousands of engineers may work on only one project their entire career because of the immense challenges that must be faced. Rockets have to be designed and tested, fuels must be made, new materials invented, risk assessments performed, and every component must be tested. Even something as simple as a fuel pipe valve may take years to develop. The complexity of the overall vehicle poses a daunting task to companies that may potentially enter the space industry. Immense resources, both material and financial, must be available consistently for years if the project is to succeed. As each spacecraft is custom-made, there are no machines available to put it together. Everything must be custom-made, which adds large overhead costs to the project. Finally, each launch is observed by thousands of people at the launch site and hundreds of thousands more via television, the internet, and news. Any large failure puts the space industry and the company in a bad light. Accidents are inevitable, and the two fatal space shuttle missions were contributing factors to the cancellation of the program. 2 out of 135 missions failed, or 1.5%, and the risk per astronaut was even less than that. While the accidents were tragic, it is incredible that they did not occur more frequently, given the complexity of the space shuttle, which is to date the most complex vehicle ever built in the history of the world. Regardless, the space industry is under great scrutiny and funding is often partially withdrawn after an accident. All of these factors are barriers for new companies to enter the market.

The transition of the space industry from a purely government industry to one where government and commercial companies work together is a major development in the space industry network. To visualize this development, imagine a bipartite graph with primary contractors for manned space missions on the left and manned space missions on the right. Add more nodes on the left representing companies that were subcontractors with NASA. Prior to Tuesday, the only connection between the left and right sides would be through NASA. There would be a distinct group of companies on the right and missions on the left with no connection other than through NASA, making NASA somewhat of a “bridge”. However, with this new contract there are now three times as many connections between the two groups, with Boeing and SpaceX joining NASA as companies that will put astronauts into space. This has drastically changed the structure of the graph, with so many new ties now connecting the two groups.

This space industry graph has changed significantly with the signing of this contract, but an interesting question to ask is why no commercial companies were able to enter the market before today. One of the major factors for this is that the payoffs are both very low and very unstable. With Congress holding much of the funding, the availability of money to fund major space exploration projects is dependent upon who is in office, their personal opinions, and the personal opinions of their constituents. This contributes to the instability of the payoffs for a company looking to enter the market. Not entering the market essentially has a payoff of zero, since nothing is lost and nothing is gained. However, entering the market does not necessarily have a positive payoff. Not only is it dependent upon the views of Congress, but it is also subject to change once the project has begun. While a company may get a large payoff from entering the space industry at the beginning, technological challenges, project delays, and cost overruns can cause that payoff to go from a positive to negative value. Given all of these factors, it is likely that many companies have chosen to stay away from the space industry since the risk for a loss is comparable with the risk of a win. Given each company’s value of a given space-related project and the level of risk they are willing to take, it may be the case where the dominant strategy is not to enter the market. If there is a 50% chance of winning if they enter the market, then it may not be worth the risk. Unless the chance of winning is at or above the company’s value, they shouldn’t enter the market. The decision to enter the space industry is a complex one, almost as complex as the vehicle that will go there, with risk, reward, market value, funding, payoffs, and strategy all playing into whether a company gets a contract. It is therefore interesting to think about, from the viewpoint of a student in this class, the economic challenges associated with space exploration. There is more than just the technical challenges that goes into making a decision about a major project, and theories like graph theory and game theory can be applied to this market as well, even though it is a small one. Boeing and SpaceX are two of what in the future may be dozens of companies that have devised a strategy to enter a market and seen the payoffs as profitable to them, enough so to take on the challenge of sending humans back into space.

 

Link: Houston Chronicle Article

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