Financial Models and Economic Analysis for

Small Satellites Systems

Henry Hertzfeld and Joseph N. Pelton

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Demand for New Space Products and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Demand for Money (Financing) for New Space Products and Services . . . . . . . . . . . . . . . . . . . 6
Risk and Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Supply Side: Innovation and New Technological Developments . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Supply Side: Costs of Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Life Cycle Cost Analyses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Hosted Payloads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Matching Supply and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Shared Support Systems and Associated Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Looking Ahead: Demand and Supply in the Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Regulatory Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
The Reshaped World of Commercial Satellite Services and the NewSpace Launch Services
Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
International Trends in “NewSpace” Service Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Cross-References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

H. Hertzfeld (*)
Director, Space Policy Institute, Elliott School of International Affairs, George Washington
University, Washington, DC, USA
Executive Board, International Association for the Advancement of Space Safety, Arlington,
VA, USA
e-mail: hrh@gwu.edu
J. N. Pelton
Executive Board, International Association for the Advancement of Space Safety, Arlington,
VA, USA
e-mail: joepelton@verizon.net

© Springer Nature Switzerland AG 2020 1

J. Pelton (ed.), Handbook of Small Satellites,
https://doi.org/10.1007/978-3-030-20707-6_69-1
2 H. Hertzfeld and J. N. Pelton

Abstract
The well-established terrestrial satellite applications markets have been generat-
ing revenues and producing very substantial earnings in the billions of dollars for
many decades. These major markets include the telecommunications and broad-
casting services: fixed satellite services, mobile satellite services, and broadcast-
ing satellite services and the Earth observation/remote sensing/meteorological
satellite services. Also very important to commercial customers is the global
navigation satellite services (GNSS) also known as precision navigation and
timing services. In the case of GNSS, at least in the United States where the
actual satellite system is government-owned, most of the revenues come from the
manufacture and sales of user equipment and services rather from operation of the
satellite systems themselves.
There have been profitable businesses associated with the development and
manufacturing of satellites. These include the manufacturing of satellites, ground
antennas that support these various space-based applications, the launch services
industry that launches these systems into orbit, and the space insurance industry
that can safeguard companies against risks associated with the launch of the
satellites, possible liability claims, and even the loss of revenue from satellites or
from in-orbit failures.
The status and nature of these well-established space systems are currently in a
state of upheaval and change. One of these changes in satellite telecommunica-
tions is that new quite efficient high-throughput satellites (HTS) are challenging
less efficient satellites that operate at lower speeds and are much less cost-
efficient. There is also rapid technological innovation of new more cost-efficient
launcher systems, applications satellites, and ground systems that will increase
the competitiveness of all commercial uses of space.
Major technological innovations and cost-reducing trends provide a stimulus
to all sorts of space-based services. However, they also create a sense of confu-
sion in understanding the economic and financial impacts that come from the so-
called “NewSpace,” “Space 2.0,” and “small satellite” revolution. In actuality, not
only are “small satellites” cheaper to manufacture and launch, but also the large
geosynchronous high-throughput, high-efficiency satellites can, and are, being
designed, built, and launched more efficiently as well in terms of net cost per rate
of digital throughput for data, voice service, or video channels.
Current economic analyses have generally concluded that it is too early to
measure the economic performance of small satellite constellations in relation to
new high-efficiency geosynchronous satellite networks. Further the economics
and design innovations are different for remote sensing satellites than satellites
that are providing communications services, making any comparisons more
difficult. And there are many risks in space systems that are different from
terrestrial operations and need to be understood better. Despite these market
analysis limitations, this chapter seeks to assess the relative economics of small
satellite systems deployed in LEO and MEO orbits, versus the most efficient of
GEO applications satellites.
Financial Models and Economic Analysis for Small Satellites Systems 3

Keywords
Artificial intelligence · Big data · Bleeding edge technology · Cash flow ·
Competitive modeling · Component parts · Commercial off-the-shelf (COTS) ·
Constellation expansion strategies · Crowdsourcing · Data analytics as a space
market · Hosted payloads · Investment capital · Investment rounds · Kickstarter ·
Landing licensing requirements · Launch arrangements · Launch costs ·
NewSpace industries · Phased expansion of constellations · Risk · Start-up
companies · Self-insurance · Sparing philosophy · Supply and demand ·
Suppliers as investors · Technology innovation · World Trade Organization

Introduction

Regardless of which part of the commercial space industry is being analyzed today,
they are all characterized by continuous and dramatic change. There are new satellite
applications products and services, launcher options, types of ground systems, and
antenna designs that are designed, manufactured, and sold incorporating technolog-
ical innovation, manufacturing process changes, and speed of design and production.
Much of these innovations are associated with the companies and entities involved in
“NewSpace,” “Space 2.0,” and the world of small satellite innovation coupled with
new launch vehicles providing access to low Earth orbits.
It should be clearly noted that there is nothing really “new” in “NewSpace”. All
companies, whether new or traditional, have market and technology innovation and
making a profit as prime motivators. All successful corporations must seek innova-
tion to survive and to introduce new products and/or services to sustain themselves.
In the United States, the government space agencies have relied on the private sector
to manufacture most space equipment from beginning of the space era in the mid-
1950s. Some of the more recent changes, however, are the aggressive initiatives of
the government to stimulate private innovation and new entries from the computer,
digital services, social media, investment banking and venture capital firms, and
especially entrepreneurial start-ups.
However the rise of a multitude of new companies does not mean that the
conventional space system manufacturers, service providers, and launch providers
are going to fail in light of these changes (Rapp et al. 2015). They will face
increasing competition. Indeed these industries are already quickly adapting to this
new world of more rapid innovation. And the more traditional aerospace companies
have adopted new practices that have come from rapid prototyping and new
manufacturing techniques such as additive manufacturing and use of advanced
analytics and artificial intelligence being used across the spectrum of the aerospace
industry. These innovations are stimulated by continued public and private research
and development as well as a growth in consumer demand.
The current small satellite revolution has also broken down some of the barriers to
starting a new space enterprise. New types of initial capital formation such as small
start-up funding through crowdsourcing and other Internet programs as well as large
4 H. Hertzfeld and J. N. Pelton

investments from wealthy individuals and venture capital companies have led to a
renaissance in space industry innovation.
None of these providers of new funding guarantees any assurance of eventual
economic success in the market place. The bottom line is that space enterprise is an
attractive yet risky type of business that will be characterized by some significant
new economic successes but can also lead to a significant rate of business failures.
The SpaceX Ansari Prize contest from the early 1990s to 2004, which had the aim to
create a viable space plane prototype, produced only one winner. Along the way
there were close to two dozen start-up ventures that ultimately failed as ongoing
business ventures. Today, challenges from both government and private initiatives
have produced parallel results. What is important is that investors now view space as
more than government missions and are willing to invest in space ventures. And,
some government agencies themselves view space, particularly in low Earth orbit, as
an opportunity for economic development and are providing significant incentives,
both financial and regulatory, to these new private ventures. This has been particu-
larly true in the United States, Luxembourg, New Zealand, the United Arab Emir-
ates, France, and even somewhat unlikely locations such as China, Denmark, etc.
Over the past two decades, GEO system operators and space insurance companies
have been developing a large storehouse of knowledge about how to deal with the
unique aspects of risk and insurance coverage for space assets and applications.
Newer companies that are operators of LEO small sat constellations do not have the
same knowledge base and history. This creates new challenges for these companies,
but in some cases it allows for more innovative concepts and new industrial and
technology processes to flourish.
In summary, commercial space systems, particularly those in low Earth orbit, are
rapidly evolving and changing. New associated challenges and risks are yet to be
solved. During this transition phase, there will be winners and losers; neither can be
easily predicted. But what is clear is that the role of private space actors is growing
and the future rewards are likely to be very lucrative for those that survive and thrive
matching the market demand for existing and new services to the regulatory,
production, and global sales challenges that will be inevitable.

The Demand for New Space Products and Services

The rise of the large successful aerospace enterprise was stimulated in the United
States by the post-World War II “Cold War.” The result was a very large military-
industrial development funded by the US government and built and operated in close
association with private companies. The companies were therefore dependent on the
multimillion dollar government contracts generated by defense-related demand.
These organizations were awarded contracts to carry out research and to develop
weapons systems and the underlying related technology that supported weapons
systems. It should be noted that many scientific and engineering breakthroughs were
created from that research that enabled mission success with improved
Financial Models and Economic Analysis for Small Satellites Systems 5

manufacturing productivity, new materials, and new products and services for
business and consumers.
Space capabilities were one direct objective of this government investment, and
today’s space capabilities are a legacy of the era of the 1950s and 1960s. Along with
those space successes and terrestrial applications were the dominance in the industry
of very large firms with close government connections on both the civil and security
side.
Of course, this large government investment was the major source of market
demand for space applications. Unlike normal consumer goods like food, clothing,
housing, travel, etc., where the price of the product is the market signaling mecha-
nism for economic choices, government purchase decisions are often made for other
reasons such as security, defense, and social welfare. Normal economic models do
not account very well to those non-price-based purchases, and other non-market
factors such as the oligopolistic structure of the aerospace industry also separate
traditional space supply and demand from most other free-market industries.
Many space applications are now transitioning from government purchases for
government use to consumer purchases with the government buying services along-
side at prices determined by market forces. As barriers and disincentives to these
previously “closed” markets begin to deteriorate, the space sector and its commer-
cialization will also begin to be more price-sensitive and more “mainstream” in
terms of industrial organization. The real test is in the future and will be driven by
more traditional capitalist decisions. An open question is whether and how fast the
large traditional space companies can and will adjust to these changes.
It should be noted that the telecommunications market is the oldest commercial
space service, dating back to the 1970s. It was then a heavily regulated industry and
government space telecommunications satellites, although built and operated pri-
vately, were dominant. By the 1990s the trends were clear and slowly private, and
competitive telecommunications satellites were permitted, and by the early 2000s,
with the privatization of Intelsat, the transition was fully in progress. Today, it is a
regulated market because of limited spectrum availability, but relatively open to
price competition both domestically and internationally. No other space application
is both as open and as lucrative as are telecommunication and direct radio and TV
broadcasting.
New markets for telecommunications and other space services are developing and
growing. How fast and how effective they will be is yet to be fully determined, but
the prospects for a growing market are stimulating innovation and investment in
space applications. It should also be noted that there is no real demand for launch
vehicles themselves. That demand is fully dependent on how we find uses for space
and therefore launch vehicles is the transportation artery for those uses rather than a
“use” of space themselves.
No longer does one have to be a multibillion dollar aerospace industry such as
Boeing, Lockheed Martin, Airbus, Thales Alenia, NEC, Mitsubishi, CAST of China,
etc. to enter and prosper in the world of space hardware manufacturing, space
application services, or space launch services. But, the barriers to entry remain
relatively high, and the ultimate road to success remains difficult. Many new
6 H. Hertzfeld and J. N. Pelton

ventures falter if they cannot find or generate the demand for their products or
services, or cannot generate enough progress to support a second or third round of
equity funding. Sometimes they will be rescued by strategic mergers. Other ventures
will find incentives to get started, but also within a year or two, the most likely
outcome will be organizational breakdown, discontinued support from a start-up
incubator, bankruptcy, or acquisition, Only a few will accomplish the long shot
success of continued rounds of funding to finance the growth needed to reach finan-
cial viability. The road has been paved with numerous companies that no longer exist
and with others that have been extremely successful.

The Demand for Money (Financing) for New Space Products and
Services

The world of digital innovation that grew up in Silicon Valley and elsewhere led to
increases in available capital for new enterprises. Venture capital firms and other
investors worked with research universities, inventors, and others with bright ideas.
Thus, coupled with the growth of the Internet and social media, a number of new
financing mechanisms evolved such as crowdsourcing and Kickstarter, along with
traditional funding from banks, investment houses, and friends and families. These
were responsible for getting the new ventures off the ground sufficiently to later
obtain larger rounds of subsequent financing.
The financial evolution and roadmap to true large-scale viability of the SPIRE
system, in some ways, might be considered an ultimate roadmap that other start-up
organizations might follow in years to come. The SPIRE constellation has now
launched over 100 satellites into orbit and is providing data analytics to a growing
range of customers (Howell 2019). It started small, but its ultimately leap forward
came when it concluded a multibillion dollar 25-year contractual arrangement with
the European Union/European Space Agency’s Galileo system for predictive
weather analysis and future space-based analytic services (Michael and CNBC
News n.d.). (See Fig. 1 of a SPIRE cubesat.)
A key strategy has now emerged in terms of financing new small satellite
constellations by raising capital funds through contractors that were willing to invest
in the project. This has been particularly successful in the case of the One Web large-
scale small satellite constellation. In lieu of payment, or at least in lieu of some
portion of the payment, the suppliers have become investors and partial owners of
the One Web system. Airbus, which is the main supplier of the satellites for the
constellation, is a partial owner of the system. Although the One Web satellites with
a mass of 150 kg are about a hundred times more massive than a SPIRE cubesat, they
are nevertheless still considered to be “minisats.” (See Fig. 2.)
Similar arrangements have been made with Arianespace and Virgin Galactic as
launch service providers that also become capital investors in the new LEO constel-
lation. Qualcomm, which is another indirect supplier, is another investor. Most
striking of all is the investment in the new LEO system by GEO satellite operator
Intelsat. (At one point Intelsat and One Web were to go a step beyond with a merger
Financial Models and Economic Analysis for Small Satellites Systems 7

Fig. 1 The latest generation

of SPIRE cubesat shown next
to an apple to demonstrate
scale. (Graphic courtesy of
SPIRE)

Fig. 2 One of 650 One Web satellites that will be in this LEO small sat constellation that may
eventually expand to 4000. (Graphic courtesy of One Web)

of the two systems that would have been financed by SoftBank of Japan. These
arrangements were never finalized.) Currently, three rounds of investments, which
have been led by SoftBank of Japan, have raised $3.4 billion in investments. Of all
the new large-scale constellations, this project has come closest to completing the
full financing for their system. This new One Web system will be first of the new
8 H. Hertzfeld and J. N. Pelton

large-scale systems to be deployed and will be the first to deploy what can be
described as a new 5G ready satellite network for global networking services
(Henry 2019).
This type of financing arrangement, which is based on the supplier also becoming
an investor, has the potential to be applied for much smaller scale small satellite
constellations. At least in theory, this would be result in less costly manufacturing
and launch costs for potentially cash-starved new entrants into the industry.
In concept such arrangements create incentives for all of the suppliers to work
with extra zeal for the success of the new enterprise. A final dimension of such an
arrangement is to have the bank that is providing the financing for the new system to
likewise become an investor in the project. Indeed, in the case of One Web, it was the
initial investment made by SoftBank that led to the other investments that followed.
In the case of an investment bank direct involvement in a new small satellite
constellation, there are multiple options that might apply such as reduced financing
rates, deferred loan repayments, or pledging future streams of revenues to the
financial bank. The arrangements for the One Web supplier as investment arrange-
ments are confidential, but the basic types of bartering arrangements are rather
straightforward.

Risk and Financing

One possible concern is that a supplier that offers “bartered services” for an
investment in a satellite system but continues to be a supplier to other competitive
or potentially competitive satellite services could be subject to conflicts of interest
charges, particularly if some unlikely misadventure should occur. For example, an
organization such as Arianespace that offers launch services to a large number of
satellite operators might make special contract arrangements against a liability claim.
In any event all such suppliers should be well advised to set up entirely blocked lines
of communications between the part of the organization that holds the investment in
a company where they are supplying a service and the part that is actually delivering
the satellite or the launch service. In theory these should be completely separate
divisions.
The traditionally engineering GEO satellites for telecommunications such as
those operated by Intelsat, Via Sat, Echostar/HNS, Telesat, and Eutelsat are today
quite large, multi-ton spacecraft that may cost upward of a quarter of a billion
dollars (US) each. Since it takes only a few of these satellites in order to serve the
entire globe, in-orbit spares are also deployed to back up the operational capabilities.
Although there might be incremental revenues derived from this type of spacecraft
that provide these backup services that may be subject to interruptions from
preemption options, this provision of in-orbit spares is quite expensive for GEO-
based communications and broadcast satellite services. The same high
expense applies to providing on-orbit spares for GEO-based Earth observation and
meteorological satellites. In the case of full size remote sensing satellites in sun-
Financial Models and Economic Analysis for Small Satellites Systems 9

synchronous orbit, the backup and resilience costs are not as high as for the larger
GEO orbit satellites, but they are still quite substantial.
The very large-scale newer LEO orbit constellations for communications, net-
working, or remote sensing incur backup costs that are relatively modest. Constel-
lations for mobile satellite communications such as Globalstar or Iridium could work
around a single failure even with a LEO network of 50 to 70 satellites. This is
particularly the case with Iridium that have inter-satellite links. In the case of very
large networks of a 1000 or more, this problem should not prove to be an issue unless
there were a major series of collisions that trigger multiple additional satellite
conjunctions and a proliferation of space debris. In such a case, the problem then
would become a much larger space environmental issue.
Unusual sunspot activities and actual coronal ejections of ions can be quite
dangerous to satellites in orbit. Some areas of natural risks (e.g., high magnitude
solar X-Class or above flares are easier for GEO systems to manage in comparison to
MEO or LEO constellations. There are global warning systemsin place, and the
timely and very quick powering down of GEO satellites coupled with the use
of heavy-duty circuit breakers can be protective actions for a fleet of three to a
dozen GEO satellites. Protective action for constellations with as many as 7500
satellites in a global constellation may be much more complicated. Further installa-
tion of heavy-duty switches and other types of radiation hardening measures may not
be considered economically feasible in the design and engineering for constellations
of small satellites.
The bottom line is that considerations related to risk, risk management, and
insurance against loss of satellites as well as the consequent risk of lost revenues
are considerably different for those engaged in GEO-based satellite services and
those deploying large-scale small LEO satellite constellations. The management
question is whether one engineers and protects against satellite failures and provides
for in-orbit space for Geo-based systems or does a company simply provide a few
more LEO satellites in a large constellation. The assumption is that there is a
reasonable cycle of failures will be worked around until the next batch of small
satellites goes up in a non-ending renewing cycle. Some of the largest constellations
may well decide that self-insurance, either through GEO redundancy or through
replacement small sats, will make the most sense for them rather than purchasing
insurance policies that only provide a limited amount of guaranteed revenues, but
not service.
Finally another thorny issue that will increase risk is becoming apparent. New
small satellite constellations by ESA and NASA (ESA’s Swarm satellite configura-
tion of three small satellites and NASA’s MMS configuration of four small satellites)
have confirmed that the Earth’s magnetic poles are shifting with magnetic North now
slipping down to Siberia and magnetic South now moving up toward Australia
(Swarm Mission Overview 2019). (See the ESA small satellite constellation pictured
in Fig. 3.)
The Earth’s magnetic poles currently hold into shape the so-called Van Allen belts
of radiation. These belts of ionized particles actually protect Earth and especially
LEO satellites from solar storms. As this newly discovered shift occurs, satellites,
10 H. Hertzfeld and J. N. Pelton

Fig. 3 The Earth’s changing magnetosphere with the magnetic North pole moving down toward
Siberia and magnetic South moving up toward South Africa (as depicted in red). (Graphic courtesy
of ESA)

electronic grids, pipelines, and other infrastructure will be exposed to higher levels
of risk. These are new risks that satellite engineers and insurance companies will
need to take into account going forward.

The Supply Side: Innovation and New Technological

Developments

The entrepreneurial innovations that are concentrated in California’s Silicon Valley

have been generated by people with a special drive focused on all types of new
technological discoveries. Some are the result of university research, some are new
businesses built on ideas nurtured in garages or maxed out credit cards, and some are
attributed to larger companies expanding their R&D efforts. This has largely come
from the computer, telecommunications, artificial intelligence, software, and Inter-
net-based digital economy, although some have come from the world of bio-tech-
nology, medical research, or other sciences and applications.
There are today a number of new space ventures that got started by such
innovative means. The SPIRE constellation discussed elsewhere in this handbook
got started by raising funds for its first experimental test satellite via crowdsourcing.
A well-crafted appeal made via the Internet allowed this fledging enterprise to launch
its very first cubesat experimental prototype. This success led to a number of other
rounds of investment that followed a more conventional path forward of seeking
several rounds of investment by angel investors (https://www.SPIRE.com/en/
SPIRE/about-SPIRE (Last accessed June 10, 2019)). (See Fig. 1 above.)
Financial Models and Economic Analysis for Small Satellites Systems 11

Nor is the successful bootstrapping upward of a start-up to financial viability in

the case of SPIRE a unique story. The Skybox venture was started by four graduates
from Stanford University that managed to get sufficient start-up capital to get their
small refrigerator-sized 1 meter cube satellites to orbit before being bought out by
Google. Planet Labs was started by graduates of the International Space University
that based their efforts largely on the sweat equity of a number of college graduates
from Silicon Valley. Today Planet, the owner of Planet Labs, Terra Bella, and other
assets, is managing hundreds of remote sensing satellites in what is now a highly
successful business (Schingler n.d.).

The Supply Side: Costs of Production

The manufacturing of satellites and space equipment has seen major improvements,
both in quality, performance, and lower costs over time. Some of these improve-
ments can be traced to moving up the “learning curve” as companies gain experience
in production techniques. Some are traced to improved technology and components
within the satellites. And, some are the result of taking advantage of scale economies
and larger orders that are required for mega-constellations of small satellites, stan-
dardized components, and more experienced production workers. In addition,
although the manufacturing of single-unit large R&D satellites often required by
government specifications is more expensive since each satellite is unique, the
design and components often use new breakthrough technological improvements
that then spill over to the commercial satellite production arena, contributing also to
more efficient production of all satellites.
One successful innovation often leads to a chain reaction generating many new
ideas and innovations. One of the main components of the current patent and the
intellectual property system is that the technical information behind the invention is
recorded and available publically. Although the invention is protected from being
copied for a specified period and royalties or licensing fees are paid to the holder of
the intellectual property during this period of time, others can seek to extend the
knowledge and create new ideas or devices that go beyond the original invention.
Some of the entrepreneurs that have engaged in developing small satellite technol-
ogies that are now building and operating small satellite systems are downstream
beneficiaries of these earlier inventions.

Life Cycle Cost Analyses

The manufacturing facilities for large satellites that are very capable but few in
number do not lend itself to mass production techniques or to large-scale economies
and consequent large per unit reductions in manufacturing costs. They are designed
for long lifetimes of 15 years and beyond and do not need frequent replacement.
Further they do not generate a large demand for launches and launch services. With
12 H. Hertzfeld and J. N. Pelton

the possible near-term development of effective satellite servicing, their life may
even be extended for a longer time if such developments prove cost-effective.
The advent of swarms of large constellations of low Earth orbit satellites com-
peting with the large GEO satellites for similar terrestrial uses and services may also
be advantageous to the mass production of cheap (on a relative basis) and light-
weight satellites. One factory could conceivably produce thousands of these satel-
lites at a rate that would take advantages of scale economies and, like the revolution
in the manufacture of automobiles almost a hundred years ago, make these small
units quite inexpensively. And, since they are small and light in weight, they also
may be able to be launched on smaller and cheaper vehicles. Finally, they are easily
replaceable, and there would be no need for many, if any, spares in orbit.
That sounds like a very attractive business life cycle plan compared to the current
methods. And it is a different model for the industry. But, the conclusion that these
new techniques are better and cheaper has not been proven and may not be realized.
There are many reasons for this. First, there are still no operating systems of swarms
of satellites in space that effectively “talk to each other” and operate as one “big”
satellite. Second, for some applications such as remote sensing, they are incapable in
design of having a large aperture and producing equivalently good Earth observa-
tions. Third, the large number of satellites may also increase space environment risks
from difficulties of managing all the new “traffic” in space (Werner 2019).
On the manufacturing end, there are other questions for which there are as yet no
answers. First, these satellites will use components and materials from all over the
world. A guarantee of a continuous and constant supply chain to make them could
easily be subject to large fluctuations from political, economic, and availability
issues, not to mention export control issues. Any disruption of a supply chain can
add large costs to manufacturing and selling these satellites competitively. Second,
as these small satellites age, new ones need to be launched. There is no model at
present for a smooth production line that will keep the production line active at a
fairly constant basis over time. It is quite possible that the life cycle costs of a mega-
constellation of small satellites could end up with profit points being less than those
for the services provided by the legacy large GEO satellites.
Other questions are also unanswered. How many mega-constellations are needed
(i.e., can a terrestrial market support)? What are their vulnerabilities? Is the business
model solid? It appears that the cost and size of each small satellite is increasing due
to the desire and ability to have each one do more and more complex tasks; will this
trend continue and significantly increase the total investment and cost of the sys-
tems? It is too early to predict the outcomes. But the present time does require that
these difficult questions be posed.

Hosted Payloads

The idea of hosted payloads has evolved and also contributed to economic advan-
tages in the development of new satellites and services. Some of the operators of
Financial Models and Economic Analysis for Small Satellites Systems 13

satellite systems had technology or components that they wished to deploy on future
spacecraft that they would like to test in space. Thus they simply attached an
experimental package to one of their current generation of spacecraft for verification
testing. For example, Cisco Systems developed a new router that it wanted to test in
space. They approached and got permission from Intelsat to put this as a test package
on an Intelsat 9 spacecraft. The Inmarsat Express satellite, a multi-ton satellite in a
more recent launch, contained over 30 experimental packages.
In short, the operator of satellite systems recognized that the residual margin
between their satellite mass and the maximum lift capability of their launch rocket
had value and offered launch opportunities in the form of a “hosted payload.” The
extent of these opportunities were recognized that led to the formation of a “Hosted
Payload Alliance” that assisted in matching up those seeking a launch opportunity
for a small payload with someone who was launching a larger spacecraft. This was,
in part, the reason why the Inmarsat Express ended up with so many experimental
packages included in this launch.
In the case of small satellite constellations, the opportunities for so-called piggy-
back launches expanded in a significant way. Instead of a one-off launch of a hosted
payload attached to a single launch, the opportunity expanded to the possibility of a
hosted payload that could fly on a fully deployed satellite network and could thus
achieve in this manner a completely operational global system. The first to achieve
such a complete global network is the Aireon hosted payload network that is
deployed on all of the Iridium Next satellite system for mobile satellite communi-
cations. This Aireon package and antenna system is deployed on all 66 plus spare
satellites in the second generation of the Iridium satellites that is now fully complete
and functional. The Aireon package provides a broadcast beacon for this new space-
based Automatic Dependent Surveillance-Broadcast (ADS-B) that is sent to all
aircraft equipped with the new antenna system built by the Harris Corporation. In
this case the Aireon service is a joint venture between Iridium and Harris (Aireon
Technical Specification 2019). There are clear economic advances that come with
the ability to combine two satellite missions together on a single spacecraft, espe-
cially if this can be done on a complete constellation of satellites. (See Fig. 4.)

Matching Supply and Demand

The communications satellite industry has learned long ago that matching system
capacity supply in orbit to market demand is good for bottom line profitability. This
means not only that additional satellites are launched when demand dictates but also
that the use of the most efficient digital coding systems is a way to provide market
demands in the most efficient ways. Ten years ago transmission efficiency rates of 1
bit per Hz to 2 bits per Hz were common. Today systems typically operate a
efficiency rates of 4 bits per Hz to 6 bits per Hz. Satellite system that have gone
from 1 bit per Hz to 6 bits per Hz can thus send six times as much information
through the same satellite and thus increase efficiency up to six times.
14 H. Hertzfeld and J. N. Pelton

Fig. 4 The Iridium Next 66 satellite LEO constellation as it was in deployment

Such coding efficiencies are not possible to maintain at all times. Coding effi-
ciencies and greater dwell times may become necessary in high noise environments
and particularly in conditions such as very high rain rates and associated rain
attenuation. Efficient system design with the latest encoding systems can make
satellite much more efficient.
Those that are planning to implement large-scale constellations need to consider
the economic risks of deploying a very large number of broadband systems without
the corresponding market demand being firmly in place. There is a clear logic to the
decision by the One Web constellation to deploy only the first 600 satellites and
leave until later to launch of the next 300 or so satellites until later. Likewise is seems
reasonable to wait until this part of the system is responding to real market demand
before seeking to move to the ultimately envisioned 4000 satellite network for the
longer term.
The O3b medium Earth orbit constellation that preceded by 6 years the One Web
network was also launched a new four satellites increment in April 2019. Thus it has
gradually built this constellation in size up to 20 satellites in MEO constellation and
incrementally responded to consumer demand (O3b Satellites Roar into Space 2019).
As the next stage of this evolutionary growth, SES has now contracted to create a
new MEO constellation of seven satellites to be launched starting in 2021. This new
constellation is known as the mPower network. This constellation will have a
combined capability to create a total of 30,000 spot beams and attain a total system
throughput capacity of 10 terabits/second. Thus it would have the throughput
capacity equivalent to a very high capacity fiber optic network. These would no
longer by “small satellites,” but there is the ability in the satellite field to scale up
capability by deploying more and more satellites in a constellation or to scale up the
Financial Models and Economic Analysis for Small Satellites Systems 15

size of the satellites to increase capacity. (See Fig. 12.5 for a representation of the
SES mPower network.) (O3b mPower 2019).
It is the concern about matching in-orbit satellite capacity to established needs
that gives particular concern to the proposed SpaceX system of over 4500 satellites
followed by a network of over 7500 satellites. This now proposed volume of satellite
launches gives concerns about oversupply of satellite capacity, the SES mPower
network, and other proposed systems that are noted in the handbook that seem to
create the likelihood of a satellite service provider global “price war.” The current
spate of proposed filings of communication satellite networks in the mid to late
1990s brings back vivid recollections of past market over calculations as represented
by the Teledesic, Iridium, Globalstar, Orbcomm, and ICO networks that experienced
bankruptcies in the late 1990s. Finally it concerns about not only the deployment of
so many satellites but also the issue of how to effectively deorbit these many
satellites at end of life as well as to deploy replacement satellites, perhaps as quickly
as on a 7-year cycle.

Shared Support Systems and Associated Risks

In this way power, tracking, telemetry and command, mission control staffing costs,
and clearly launching costs can be efficiently shared. As long as both the primary
satellite and hosted payload perform as expected and all launches are successful,
then the joint project is also economically efficient. Even the end of life removal of
the satellite and the hosted payload has efficiency as long as both the system and
subsystem reach their intended lifetime and perhaps exceed it.
The downside can come, of course, if things should go wrong. Perhaps the classic
problem would be if the power systems on the Iridium satellites developed a design
flaw such that it could support the primary mission, but would not be able to provide
power for the ADS-B safety surveillance subsystem. Clearly such types of problems
should be considered carefully before such system-wide sharing of resources are
pursued. Even in a partnership arrangement, legally binding language needs to spell
out a series of “if-then” contingencies of things that might go wrong and how the
problem would be addressed. In the case of the Iridium Next and Aireon partnership,
there were serious delays due to problems with the Falcon 9 Launch services, but
currently all systems are successfully deployed, and no major issues have emerged
after the constellation was fully deployed. Of course in the future, other joint projects
and hosted payloads may not be as successful.

Looking Ahead: Demand and Supply in the Future

The concept of hosted payloads is not the only spin-off idea that has come with the
small satellite constellation and “NewSpace” revolution. Another idea that is getting
serious attention today is the idea of deploying high-altitude platform systems
16 H. Hertzfeld and J. N. Pelton

(HAPS) or so form of stratospheric platform or long-endurance aircraft that might

provide communications, remote sensing, fire detection, or other services for a
particular area such as an island country.
There has even been serious consideration of a constellation of as many as 15
HAPS that would provide telecommunications and broadcasting coverage of all of
Japan on a continuous basis. There have also been ideas that have included solar- and
battery-powered HAPS, automated jet aircraft that could stay aloft for as long as
7 days, and even beamed energy systems that could power and keep in position a
high-altitude craft. Instead of an orbited satellite, the application platform would be
the equivalent of a GEO satellite, but instead of being up at 35,870 km, it would be
stationed at about 20 or 21 km in altitude. This could provide high gain services for
communications, broadcasting, fire detection, or remote sensing with very negligible
path loss.
In this case there have been more than a half dozen initiatives that have been
seriously proposed as well as so-called aerostat projects that have been pursued but
none have as yet proved technically and financially viable.
Quite recently Facebook, which was providing funding for a HAPS projects to
support networking services, pulled out of one such project. Currently Amazon
which is now backing a small satellite constellation known as Athena was seriously
considering attaching data relay united to high-altitude meteorological balloon that
would drift around the equatorial region to support remote Internet access. This
project was known as deploying “Loons.” Perhaps one of the more serious initiatives
at this stage is the Stratobus initiative by Thales Alenia. This is a fully prototyped
system that would operate for long duration missions up to an altitude of perhaps
20–21 km. This kind of stratospheric operation that would fly up to the region
sometimes call near-space, sub-space, or Protospace is addressed elsewhere in this
handbook of small satellites.
There are also manufacturing risks that can have more severe consequences for
space equipment than terrestrial equipment. For example, a satellite series that had
used the same batch of computer chips that contained a contaminant that in time
disabled the satellites. Fortunately this problem was discovered to affect only a
limited number of satellites. If such a problem had involved contaminated chips
installed in thousands of small satellites, the economic consequences could run into
billions of dollars, and the losses in revenue for services not performed could likely
bankrupt the service providers.
Thus while risks for small satellite constellations might be minimized, and
providing spares is more easily done, there are some other high level engineering
and reliability risks for small satellite constellations. This can occur if a key
component in thousands of small satellites were found to be defective after the
satellites are placed into orbit and the result could be the cause of a catastrophic
failure. In the case of an automobile manufacturer, if there is a faulty component in
large production run, the component can be replaced in a local dealership. In the
case of thousands of satellites deployed in space, there would not be any easy
answers.
Financial Models and Economic Analysis for Small Satellites Systems 17

In summary, new mass production systems that may be developed for large
clusters of almost identical small satellites face many risks that are different from
the mass production of terrestrial equipment. They may also face other economic
risks and costs. It is not a foregone conclusion that the mass production of these
satellites is any cheaper or less risky than producing large LEO or GEO satellites that
currently serve markets that are similar to those projected for small satellite clusters.

Regulatory Concerns

When entities are first engaged in planning the deployment of a new satellite system
for telecommunications, networking, remote sensing, or other such applications, the
initial thoughts are typically focused on the space segment, i.e., all the efforts that are
directed toward the design and manufacture of the satellites, intersystem coordina-
tion of satellite spectrum usage through the International Telecommunication Union
(ITU) procedures, making arrangements for the launch services for deploying the
satellites in orbit, and controlling the network in orbit.
Besides a good assessment of market conditions, often overlooked are regulatory
procedures and national licensing and landing rights for the countries where the
satellite services are to be marketed. One of the largest single factors that led to the
bankruptcy of the Iridium mobile satellite system was a recognition of the costs and
pricing implications for their services in the countries where there services were
planned. In many countries, particularly developing countries with limited access to
hard currencies, international telecommunications is a key source of supply of key
overseas monetary resources.
The idea that an Iridium satellite, or a Globalstar or ICO satellite, might be able to
have its own “country code” and thereby allow users in their country to avoid using
national telecommunication carriers and share revenues with the country in question
was considered a very big problem indeed. Country after country demanded that cost
of a “landing license” to operate in their country was a share of the entity’s revenue
stream. The initial projected costs for the Iridium international cellular voice service
– as well as the other systems such as Globalstar and ICO – was well under a $1.00 a
minute, but when the total costs of getting landing licenses; coordinating frequen-
cies, taxes, or tariffs; sharing of revenues with local telecommunications companies
and governments; and ground equipment were all added, the actual price was much
greater ($3 to $10 a minute).
How the various new small satellite constellations relate to national regulatory
bodies is thus a very important issue. Some systems are opting to download their
remote sensing data via data relay systems. This can speed up their download
capabilities to near real time and avoid issues such as tariff fees for ground equip-
ment and perhaps other forms of taxation.
Satellite networks that are seeking to provide telecommunications and network-
ing services have more limited options. In the case of local networking and Internet
services, they might be able to make commercial arrangements with nationally
18 H. Hertzfeld and J. N. Pelton

based Internet service providers to upgrade their service capabilities. Different

countries will have different regulatory practices and legal constraints. In the age
of broadband IP-based streaming of movies and video services, radio programming,
and voice over IP, these small satellite constellations that are seeking to provide
networking services may still be required to obtaining “landing licensing” and
may very well be subject to revenue sharing arrangements. The world of telecom-
munications, broadcasting, and networking is now almost completely intertwined.
The argument that a “networking” system is not competing for telecommunications
services, either locally within a country or for international services, is unlikely to
be accepted by national telecommunications licensing authorities.
The economic effects that are associated with “NewSpace” enterprises are evident
in many different ways. Launch costs for lightweight small payloads are much less,
mainly driven by their size and capability to be launched not only on small launch
vehicles but using excess capacity on large vehicles. Companies as diverse as
SpaceX, Blue Origin, Rocket Labs, Virgin Galactic, and Vector have begun to
revolutionize the launch industry by adding such capabilities as reusable first-stage
rocket engines, vertical integration of their rocket production, new materials, lower
cost ground or air launch operations, true small launchers geared to the small satellite
markets, and more. These lower cost and more flexible launch operations have not
only made it easier to launch for small satellite enterprises. The lower cost not only
enabled the creation of new satellite constellations for established satellite applica-
tions, such as telecommunications, networking, and remote sensing, but also opened
the door to new commercial space services.
One of these new types of networks is the Hawkeye 360 system that is now
offering RF Geo-location services. This new cubesat constellation is now monitoring
frequency use on a global scale and does so with a precise identification of the RF
users and their location.
There were at least two firms that are intending to offer commercial data relay
services to support remote sensing services and rapid data analytics. These two
companies are Audacy and Theia. The Audacy effort though is currently seeking
financial support to continue operations. Nor do the new satellite services offered by
innovative small satellite ventures stop there. There are likely to be in the future a
number of firms that will seek to offer on-orbit servicing and perhaps also active
debris removal. Firms that have developed, or are seeking to develop such capabil-
ities, include McDonald-Dettwiler (MDA), Orbit Fab, SSL, Northrop Grumman
Innovation Systems, Vivasat, and Conesat (Pelton 2015).
However, there are still many problems to be resolved, particularly in the area
related to on-orbit services (OOS) and satellites that engage in so-called rendezvous
and proximity operations (RPO). There is the question of nation-state liability if such
close approach operations in space should go wrong. The resultant accident could
result in a significant amount of new debris, and major liability claims might be
created against the launching state as well as civil claims against the on-orbit
operator. National security aspects and diplomatic problems are also likely conse-
quences. No regulatory system now addresses these issues, and a new liability
regime may be needed for in-orbit activities.
Financial Models and Economic Analysis for Small Satellites Systems 19

The Reshaped World of Commercial Satellite Services and the

NewSpace Launch Services Industry

The world of commercial space is continuing to be reshaped in almost every

dimension. There has been a major reshaping of design processes, innovation, and
manufacturing cycles for satellites, and in many cases the size and mass needed for
the satellites to perform many of their missions have decreased in major ways.
Likewise the design and cost efficiency of launcher have also dramatically changed.
There are many new start-up companies in the world of commercial space. There
tends to be a whole new cost structure that relates to many aspects of space
operations and services. These relate to not only “NewSpace” commercial opera-
tions, but the impact is increasingly broad in terms of military and governmental
satellite activities and in terms of the business practices and operations of well-
established aerospace corporations.
It is no longer governmental space agencies and military ministries that are
dominating space-related procurements. The dominant role of the “military-indus-
trial complex” where procurements, especially in the United States, Canada, Europe,
Australia, and Japan, largely came from governmental or defense agencies and
largely went to the largest and longest established space agencies is tending to
change. Commercial organizations rather than governmental and defense agencies
dominate procurements. Contracts are less likely to be cost-plus arrangements with
specific design specifications. Instead contracts are likely to set performance stan-
dards and establish a fixed price and delivery schedule for space-based equipment
and systems.
So-called NewSpace practices have rippled through government space agencies
and defense agencies and large aerospace corporations. Space agencies are spon-
soring commercial competitions. Defense and governmental agencies are commis-
sioning small satellites for many projects. Large aerospace companies are
acquiring innovative start-up companies. Boeing is building cubesats for the US
Air Force. Air Bus has purchased Surrey Space Technology Ltd. and building
small satellites for One Web. Northrop Grumman has acquired Orbital ATK. But
some of the scale start-ups such as Sierra Nevada, Planet, Via Sat, SpaceX, Blue
Origin, and SPIRE have become truly major aerospace corporations. Everywhere
there is change and innovative design, and new corporate practices will evolve
from many sources.

International Trends in “NewSpace” Service Industries

Many people attribute the so-called “NewSpace” revolution to the growing world
of computers and digital systems. The idea of seeking 50% or 100% improve-
ments in efficiency, design, or process rather than a 5% or 10% improvement is
clearly what “Silicon Valley” innovation has been all about as new generations of
products or systems have forged ahead with remarkable speed. Moore’s law of a
doubling of performance every 18 months has characterized the world of digital
20 H. Hertzfeld and J. N. Pelton

innovation for decades, but now the aerospace world is seeking to innovate in this
fast pace way as well, even as the digital improvements may be increasing at a
slower pace now.
The source of this type of “NewSpace” thinking may have come in part from
Silicon Valley, but it has certainly spread worldwide. The world of cubesats,
commercial launch vehicle design, and new aerospace innovation is now global in
scope. There are more than a dozen new Chinese commercial launch vehicle
companies and space satellite designers and manufacturers. The many companies
that are designing and manufacturing new launchers, small satellites, and new flat
panel antennas and starting new space-based service companies may still be pre-
dominantly in the United States, but there are a growing number of these innovators
that are located in scores of countries around the world. Canada is also a powerhouse
of new initiatives. Innovations are coming from countries like India, China, Taiwan,
Australia, New Zealand, Luxembourg, Russia, Ukraine, Spain, Denmark, Italy, the
United Kingdom, South Africa, South Korea, the Malaysia, United Arab Emirates,
Chile, Brazil, and many other sources as well.

Conclusion

The purpose of this chapter was not to compare and contrast conventional
designers and operators of large GEO satellite networks with small satellite
networks in MEO or LEO orbit in precise terms of economic efficiency or market
viability. This is much too early in the deployment process for small sat LEO
constellations to reach any definite conclusions. The nature of these competitive
systems and the evolution of related technology in terms of satellite design, new
ground equipment design, new market demand, and new launcher systems will sort
themselves out in the coming decade. Successes and failures for both types of
systems seem likely to occur.
It may become apparent that the number of new systems is much limited by the
expected amount of new types of demand for space-based services fueled by
broadband Internet to rural and remote areas, 5G backhaul, and M2M messaging
services associated with interactive IoT units. It is also quite possible that new
innovative land-based systems may also compete with space services. It is thus not
possible to predict the longer-term future, but it is clear that there are economic
factors that encourage new and more efficient space systems just as there will always
be competition from innovative non-space systems.
This chapter instead was oriented toward examining the economic consequences
and trends that are inherent in all markets where there is rapid rate of technological
change. Clearly there is alteration in space business models that are being driven by
all of the new LEO and MEO small satellite constellations that are now planned with
perhaps up to 20,000 satellites now planned for deployment. Nor are all the forces of
change entirely market or technology driven. The vulnerabilities that could come
from orbital debris collisions, small satellite deployment or defunct satellite removal,
or even a gigantic solar storm that disables a large number of these new types of
Financial Models and Economic Analysis for Small Satellites Systems 21

satellites – either high-throughput satellites in GEO orbit or small satellites in LEO

or MEO – could have huge economic and market impacts that could affect the
viability of many companies providing commercial space services.
The practices of governmental agencies, defense ministries, start-ups, and con-
ventional aerospace companies are all changing, both in the United States and across
the world. This chapter has examined how the developments of the past decade have
enabled the creation of new types of space services, especially in telecommunica-
tions, remote sensing, and Earth observation, but also have spurred innovation in all
sectors of the space industry with these broader effects being seen on in the years and
perhaps even decades in the future.

Cross-References

▶ Capital Financing for New Small Satellite Ventures

▶ De-orbit Requirements and Adoption of New End of Life Standards
▶ Legal Issues Related to the Future Advent of Small Satellite Constellations
▶ Long Term Sustainability of Space and Sustainability Requirements
▶ Obtaining Landing Licenses and Permission to Operate Small Satellite Constel-
lations on a Global Basis
▶ Requirements for Obtaining Spectrum and of Orbital Approvals for Small Satellite
Constellations
▶ ‘Rules of the Road’ for Launch and Operation of Small Satellites and Related
Issues
▶ Space Traffic Management and Control
▶ The Legal Status of MegaLEO constellations and concerns about Appropriation of
Large Swaths of Earth Orbit

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