Brian Kenny: In the Bond movie “Moonraker”, his name was Hugo Drax. In the blockbuster “Avatar”, it was Parker Selfridge. And who could forget the villainous Dr. Evil of “Austin Powers”? In Hollywood, the characters depicting business moguls are only interested in intergalactic domination. But in reality, entrepreneurs like Elon Musk and Jeff Bezos are tapping into their vast personal wealth driven by a passion to accelerate space exploration. And in the process, they're revitalizing a listless national space program.
Today we'll hear from Professor Matt Weinzierl about his case entitled “Blue Origin, NASA, and New Space”. I'm your host, Brian Kenny, and you're listening to Cold Call.
Professor Weinzierl is an expert in optimal taxation and economic policy, and the creator of an elective course at Harvard Business School entitled The Role of Government in Market Economies. Recently, he launched a new set of research projects focused on the commercialization of the space sector, and that is what pertains to this case today.
Matt, thanks for joining me.
Matt Weinzierl: It's great to be here. Thanks for having me, Brian.
BK: I loved this case. I loved the opening. Can you set up the opening for us, just describe what happens in the beginning of the case?
MW: Sure. Jeff Bezos is a fascinating character in many ways. He fell in love with space when he was five years old, as I think many people of his generation did, when he saw Armstrong walk on the moon. He carried that passion with him his whole life. He was always trying to make money to invest in going to space.
The remarkable thing is that in 2001, just several years after founding Amazon (when Amazon was actually getting a lot of criticism from investors about its sustainability), he founded this secretive, nondescript space company with some of the money he'd made from Amazon, and nurtured it over the next decade or more into what has now turned out to be one of the most prominent participants in the space sector.
BK: And we're going to talk about this new space sector in a bit. I'm curious, how does a guy who's an economic and tax expert come to write about space exploration?
MW: The course that I teach, called The Role of Government in Market Economies, is all about this intersection between the public and private sectors. When does the market fail us in either efficiency or distributional ways where we might want to get the government involved, and then what are the risks of getting the government involved? It's all about that interaction. I had been searching for an industry where I thought that that intersection was particularly rich, where I might be able to find some avenues into talking about some really interesting topics in a sustained way in one industry.
It turns out, space is that industry. There are just amazing questions that are raised by the tectonic shift that's happening in how we use space, how we think about space these days.
BK: The case does a great job of laying out the evolution of NASA. Maybe you can just give our listeners a sense for the ups and downs of NASA over the years, and what brought us to this point.
MW: It's a really remarkable story. I think it's very important to emphasize that NASA does amazing things, but NASA does have a history of ups and downs, or I would say maybe one giant up, and then sort of a steady stagnation.
The Apollo program, of course, we all know in response to Sputnik, a huge surge of optimism and engineering wizardry getting us to the Moon in 1969. At that point, NASA's budget was 5 percent of the US federal budget. It's now one-tenth that, so now it's 0.5 percent of the US federal budget. The case has some really startling data on how right after we got to the moon, public enthusiasm for spending that kind of money fell off a cliff. NASA has struggled ever since, in the 40-some years since then, to reinvigorate the passion that the national security threat from the Soviet Union originally inspired. Finding that replacement inspiration has been a challenge.
In the '70s, right after the Apollo program, there were some remarkable visions of what would be next for NASA. NASA even held conferences on this, where they drew up plans for these spinning space colonies of tens of thousands of people, with waterfalls and schools and fields. It was really a remarkable vision that they were thinking, well, we went to the Moon in ten years, what can we do in the next hundred years? Of course none of that happened, right? We chose something much different, which is sometimes referred to as sort of a space taxi, which was the space shuttle. Again, a marvel of engineering, but not quite the same power to inspire.
BK: And a couple of very bad events that surrounded that.
MW: Exactly, a couple of tragic events as well. Then the really striking thing, that I did not realize until I started researching this case, is that partly due to those shuttle tragedies, the shuttle program was cancelled, was scheduled to be retired around 2010. At that point, the United States had no way to put a person in space. That really, I think, was the point at which the existing model that NASA had been working with just lost its credibility with people. They felt like we needed something different. NASA itself, I think, felt like it was time to try something different, and that's really how New Space got its kick-start.
BK: Describe New Space. What does that mean? That's not a company.
MW: It's not. It's a sector, I guess you'd say? It's a group of companies. It's basically this collection of firms, many of which are funded and led by tech entrepreneurs like Bezos or Musk, or Paul Allen, or Richard Branson, who are hoping to disrupt this model of how we use space.
I think what's so interesting about New Space, and something of a misconception about how space activities have worked over these last forty years—I thought when I got started in this research that NASA basically did everything: built all their rockets, built the space shuttle, went up to the space station. That's really never how it's worked. NASA has always built comparatively little of its own stuff. It contracts out to the big aerospace engineering firms, Northrup Grumman or Boeing or Lockheed.
New Space has its own goals. New Space companies have their own goals for these technologies, whether it's space tourism, or the colonization of Mars, or the launching of commercial satellite systems for telecommunications or Earth imaging. They have their own reasons to go to space, and then NASA is trying to leverage what they can do, what the private companies can do, to better achieve its own goals. It's really about not so much a shift in the scale of commercial activities in space but a shift in the nature of the relationship between the public and private sector.
BK: This is part of the tension that exists, right? It's that drive of commerce pushing things forward, but at the same time questions about motives. I look at Bezos and Musk. Are they modern-day Carnegies and Mellons, or are they driven by something more intrinsic? And do you know? I mean, you may not know.
MW: I don't know. It's a great question. People in the space industry say they're so lucky to happen to be born and working in this industry at a time when it just so happens that our billionaires are passionate about space. What are the chances that they would get this huge infusion of money into an area that hasn't really been about profit, per se, in the past?
Now, Bezos is a fascinating story. He's obviously always been deeply passionate about this just as a person. His high school valedictorian speech was about the imperative of colonizing space.
BK: Wow.
MW: Right, so he's always been there. On the other hand, why is he famous? It's because he had an incredibly long-term vision for what Amazon could be, even just from a commercial perspective. Amazon changed the world in non-commercial ways, but it also made a lot of money. It's making a lot of money.
How does he think about Blue Origin? Is it purely, as some of his critics say, kind of a rich man's hobby, or he has non-economic goals for society, or for the preservation of the human species, which is one reason why many New Space entrepreneurs say that they think we need to colonize other planets—whether that's because of climate change or nuclear war or whatever—we need a backup planet, so to speak? Or is it more of a commercial motive? I mean he has very explicitly developed some of their technology to cater to the tourist market, for sending people up into space for a brief period of time, and that could be an enormous market. It could be a trillion dollar market.
BK: You talk about that in the case. What are some of the modifications that he's made to their space vehicles?
MW: There are various people who have been interested in sending humans up into space for a few minutes to get weightlessness. It's supposed to be quite an experience. Then to see the curvature of Earth, which astronauts typically describe as one of those life-changing moments, when you really see the planet. There's been a lot of interest in tapping into that market.
As we mention in the case, the way that Blue Origin has tried to develop that product has been very customer-focused, just like the Amazon experience is very customer-focused. The clearest indication of this is that the windows are just enormous in the capsule that would hold the people. You'd go up on this rocket, this capsule would be released and would float in space for a bit, and each person in the pod would have their own window.
BK: Everybody gets a window seat.
MW: Exactly. It's supposed to be sort of an airplane-level of transparency. It promises to be a remarkable experience for the actual passenger. Of course we're still probably a few years away from that actually happening, but the progress has been remarkable. If you run back of the envelope calculations in terms of how many people might be willing to spend how much for that once-in-a-lifetime experience, you can get to some pretty big numbers.
BK: Blue Origin has had some success, and you talk about it in the case. They've been able to get closer to that holy grail of a reusable machine, something that can take off and land and be reused, but now they're faced with this pretty difficult question. NASA has found a way to accommodate working with New Space companies by changing their procurement process. They've made changes on their end, and that opens the door for Blue Origin to bid on a project that would change the nature of the relationship with NASA.
MW: That really is the decision point of the case. That's really the heart of the case study that we do in the classroom, which is NASA in the early 2000s, as they saw the need for a new vision or for a new model, started this program called the COTS program: the Commercial Orbital Transportation Services program. That was this idea that instead of NASA contracting with traditional contractors to resupply the
International Space Station, it would have a new model of contracting with these new space companies, where specifically instead of doing a cost-plus contract, which tended to raise costs quite a bit, it would do a fixed price, where NASA's just another customer kind of model, with these new space companies to resupply the space station. That worked very well. It is generally viewed as a huge success, and there has been now commercial resupply of the space station by SpaceX and by Orbital ATK.
The next step in that was to think not just about transporting food and supplies to the space station on commercial spacecraft, but actually astronauts. That was the Commercial Crew Development program, which is the focus of the case, or CCDev, as it's called. As one of the case protagonists says in the case, crew changes everything. Once you think about putting actual people on these vehicles, it's a whole new ball game.
CCDev was a multi-stage program. The first two stages were pretty small-scale, a little seed funding for different space companies to develop technologies. Blue Origin participated in both of those rounds and everyone thought they were great. Win-win for Blue and NASA. Then this third round that you just spoke of came to the fore, and that was for essentially a soup-to-nuts proposal for how to get the astronaut from the ground to the ISS and back again.
For Blue, at that point in its development (this is around 2012) that would have required a pretty dramatic change in the company. The president mentioned that for them at the time—Rob Meyerson, the president of Blue, said that that would have more than doubled the company they had. It not only would have meant scaling up the firm quite dramatically…they had the funding, Bezos is fully funding the firm. It's not so much a question of money. It's partly a question of management, but it was also a question of priorities, and I think this gets to your previous question about why is Bezos so interested in this.
From a strategic perspective, for the students, one of the questions to think about is: if you're running Blue Origin and you know that you have these goals, whatever Jeff Bezos' goals are about—he wants to help millions of people live and work in space, he wants to follow his vision for how to get there. Then NASA comes to you with this opportunity, which is quite attractive in many ways. There's going to be a lot of money on the table, but also you'd retain your position at sort of the center of the space ecosystem by participating. How do you make that trade-off? How would you decide whether to stand aside and try to chart your own path versus stay as a central part of that mix?
BK: How do students react to this case in the classroom?
MW: You know, it was extremely satisfying. I taught this case and then a second case on the New Space sector, which is about this Singaporean startup called Astroscale that's trying to solve a problem most people don't spend much time thinking about, which is space debris. It turns out Low Earth Orbit is very congested with lots of pieces of metal flying at incredible speed.
BK: We've found a way to pollute even off the planet.
MW: It's amazing, in just a few short decades. Which was dramatized, if you've seen the movie “Gravity”, with the piece of metal hitting their spacecraft. There's a lot of debate about how huge a problem it is and so on. The student response to these two cases, which we did back to back, I can honestly say I've never had more enthusiasm from the students, coming up afterwards saying this is just fantastic, it's so interesting, thank you for writing cases on this sector.
I think it's time for a sort of more concerted effort to build up a little bit of a suite of cases on this industry that students who are really deeply interested in can engage with.
BK: It sounds like you may be inspiring a new generation of MBAs who look at this as a career option, right?
MW: I would love that. I'd love nothing more. I started my course for students who see themselves as leading institutions of some systemic importance, maybe having a role in the policy-making process, and so the students who come to my class tend to be naturally very interested in this intersection between the public and private sectors. Those students are also perfectly positioned to go into the space industry going forward because you have to care about policy, you have to be an intelligent and subtle thinker about the role of government to do well, I think, in the space sector.
BK: One more question for you. Is there any concern (concern might be a strong word) about a brain-drain coming from NASA flowing into the New Space companies?
MW: That's a great question. Yeah, I think that's certainly true. In fact, that was one of the first questions I asked the people in the industry, which is: where do the young hotshot aerospace engineers want to work? Do they want to work at NASA or at these companies? I would say that there is a bit of a shortage of talent in this industry, just because it's growing so fast. Everyone's chasing a lot of the same people. NASA is still incredibly well-respected for its technical expertise. I didn't really meet a single person who had anything but the highest praise for the cutting edge work that they do at NASA, and I think they still have many of the very best minds doing that research. The criticism of NASA actually ends up almost always being a criticism of Congress, which is that it's the political process that hamstrings NASA from doing what it would want to do. Of course that's a risk.
I think the related risk, which is part of what we discuss in class, is space is hard, as people say. We've built up what some people call a legacy system with the big contractors over time. It obviously has its disadvantages, but also it's achieved some remarkable things. Think about the Mars Rovers, or you think about the space shuttle or the International Space Station. Some amazing achievements. The Pluto orbiter. It was built up that way for some reasons, right? There's a lot of risk, there are a lot of fixed costs, there's a lot of delicate relationship management that has to be done. If we move too quickly into a new model and we suck a lot of the talent and the energy and the capital into a new model without kind of preserving some of the infrastructure that's already been built up, if the new model doesn't work out perfectly, do we risk what we already had?
These are really important questions for how the industry evolves going forward, and questions I hope to consider even in more depth.
BK: Matt, thanks so much for joining me.
MW: It's a pleasure, Brian. Thank you.
BK: You can find this case, along with thousands of others, in the Harvard Business School case collection at hbr.org. I'm Brian Kenny. Thanks for listening to Cold Call, the official podcast of Harvard Business School.