SpaceX: Rocket Ship - [Business Breakdowns, EP.194]
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Business Breakdowns is a series of conversations with investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages, and what makes it tick. We believe every business has lessons and secrets that investors and operators can learn from, and we are here to bring them to you.

To find more episodes of Breakdowns, check out joincolossus.com. All opinions expressed by hosts and podcast guests are solely their own opinions. Hosts, podcast guests, their employers, or affiliates may maintain positions in the securities discussed in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. This is Matt Russell, and today we are breaking down SpaceX.

We are always serious about the quality bar and business breakdowns, but there is especially no room for error when you cover a name like SpaceX. Luke Ward from Bailey Gifford was the perfect match for this episode. Luke and his team at Bailey Gifford first invested in SpaceX in 2018. As you'll hear, they appreciate the science, the business, and everything that goes into running this operation.

In this conversation, we covered the story of SpaceX and the scientific magic in what they're doing. But I really wanted to understand the business. And Luke exceeded all my expectations here. We really focus on the cost curve of launches, separating the manufacturing from the reusability factor. And then we get into how Starlink represents a key component in making the Starship program and the broader economic model work.

We then use our intellectually honest galaxy brains to imagine what the space economy could look like in the future. And Luke is very open and honest about the risks with such a capitally intensive mission like SpaceX. And I expect that will earn your credibility grade as it did mine. Now, please enjoy this episode on SpaceX.

Luke, we have a very special business to cover today in SpaceX. We've been talking about doing this episode for several months now. We're in November of 2024. In between that time, we saw one of the more impressive feats that I can remember in my lifetime in terms of having a rocket out to space, then catching that rocket back on Earth. Just really empathetic.

emphasizes exactly what makes SpaceX amazing as a company broadly. But I want to also talk a bit about the business itself. I think many people know the name. Few people really know what's going on under the hood of SpaceX. So maybe we could just start out with your simple overview of how you would describe the business. And then we'll get into the nitty gritty details as we go through the conversation. Thanks very much for having me.

I think the best way I would describe SpaceX or how it's misunderstood is that I think it's as much a business innovation as it is a technology innovation.

That really matters to the business, both in making a sustainable economic pursuit, but also being able to fund additional technology innovation to grow the size of the market, to grow the capability of what the rockets and the satellites are able to do. So I think it's really important at the outset to say I think it's both of those aspects which are exciting about SpaceX.

Maybe just some history from you in terms of you and Bailey Gifford, your involvement with this business. I think you originally funded or had an investment in 2018. But can you just talk about your experience getting to know the company and getting to look at this opportunity? My background is from engineering originally. And so SpaceX and the sort of Musk engineering companies were definitely on the radar many years before we had the opportunity to make an investment.

This was an entity that was always held out as a really aspirational place for people to go and work once they graduated, if they could, sitting on the frontier of what's possible in aerospace.

So it had been something which within the engineering community had been reasonably familiar with in terms of name recognition. But at that time, I think few people were thinking of it as an economic pursuit. This was perceived as one man in particular's vision to realize a childhood ambition of making Star Wars and Star Trek, et cetera, possible, expanding human civilization. People weren't necessarily thinking of it as this is a really high returning way to make a financial profit for investors.

In the lead up to the investment, we started taking this seriously a couple of years before we actually did that. I think the first challenge which I had was to convince my colleagues that this wasn't just about technology, this was about business and investment for clients as well. Thankfully, with a long-term approach, we have over that 10-year plus period to think about companies that did fall within the ballpark of the kind of periods that SpaceX was looking at. And so that gave us a bit more license to engage, I guess, more so than others at the time were able to. We

We made the first investment in 2018, but I'd say we got to know the company directly in about 2016. So we made efforts to reach out to them directly, to go and visit them. Gwynne Schottel was speaking at conferences. We went to see her. Going and stopping by the headquarters in Hawthorne, off the back of other investment trips, which we'd be making out to Los Angeles.

Trying to establish a relationship with the computer themselves, as most private companies get to choose their investors rather than the investors choosing them. It's important to demonstrate how you can be somewhat value add as an investor on their cap table and support a combined mission, which both parties are trying to achieve.

It definitely helped on that perspective. Bailey Gifford being a large investor in Tesla and a longstanding investor in Tesla, and I think one which had been reasonably supportive when they were going through some tricky times as well. So they went back and did the homework to try and figure out who exactly these Brits are who've come over saying that they agree with this as an economic proposition, but what the proof points we have around them. So the brand and that history really helped us get through the door and get to a point where they were willing to take our client's capital on board.

Very interesting when there's a courting involved, I think from the public side, so many investors just think about what's on the screen and you can essentially click a few buttons and be an owner. And the private market is much different and particularly a name like this. Before we get further into the business, I do want to cover some of the history here. I've read some of your work. I think you cover a lot of this really well and capture the moments or the phases in the space market and what has happened. So maybe you can talk about the

the period after version one of the space revolution, NASA missions, making it to the moon, what happened where this died out? And what would you highlight over that time period where in the early 90s, I was growing up, and I can remember there was still this idea of being an astronaut. And then by the time I was a teenager, that really just went away. It was not a thing. So walk us through a little bit of that time period and how you would highlight what happened.

The reason why we have a space industry to begin with is because of a competition between the US and the Soviet Union back in the 50s, 60s, etc. The main driver for growth in this market initially was government non-economic strategic reasons rather than a pursuit of economic return.

When the US achieved that with the moon landings, that was the tick box done. There wasn't necessarily a need to carry on funding greater innovation because the Soviet Union went in a competitive position. One argument says that their own space program was a large reason in that going bankrupt in the 70s, 80s. So there wasn't a natural forcing function to make it cheaper, to make it more affordable. There was no reason. Satellites which were being launched by large telecoms companies or the military were

We're really expensive, billion-dollar pieces of kit. So if you came to them and said, this is great, we can launch a satellite. We're going to put it on this new rocket, which we've come up with, which we're not quite sure how risky it is, but trust us, it's great because it's half the cost. The customers freak out at that because they don't want to take any risk with their billion-dollar satellite. Again, from the customers, perversely, there isn't this incentive to make launch cheaper.

As time goes on, that ossified the industry. There wasn't any improvement really in the cost of getting to space. The space shuttle, in fact, was more expensive per kilogram than the Saturn V rocket. So Neil deGrasse Tyson's got a really good quote about this is, the space race makes more sense if you play it backwards rather than forwards. We've become less and less ambitious over time, particularly in the 90s. Even with the end of the Cold War, there was barely any reason to do anything from an economic point of view in space. And I think that is...

That sort of emotional thing which you talk about there about dreaming about an astronaut is what got a lot of engineering entrepreneurs excited about creating businesses in the 80s and 90s, realized they couldn't do it in space and went off and founded dot-com companies, Jeff Bezos, Elon Musk.

Richard Branson, you got Paul Allen at Microsoft, etc. All space fanboys that wanted to do something like that, but went into something which was more economically sensible way of developing a business. But then when they'd made enough money that they didn't have to think about that, their thoughts ran back to, well, actually, can we make inroads into space? Why hasn't there been the level of disruption in space, which you've seen in semiconductors or biotechnology or software, etc.? What are the actual first principles that are making that hard to develop further?

Taking the mindsets from Silicon Valley of move fast and break things, which was an anathema to the traditional industry. But having a checkbook big enough to fund that level of development meant that they're able to short circuit the economic disincentive for investing in better rockets.

And so they set out to construct businesses which said, we're going to make launch 10 times cheaper, 100 times cheaper. And if we can do that, then the price elasticity means there might actually be a business-led rather than a government-led economy or market there, which is able to fund that. And if we can do that, this thing all of a sudden becomes self-sustaining. And then there was a reason why increased efficiency, increased performance is rewarded in dollar terms rather than just in strategic terms. You had this great,

data point in your write-up on space about every additional kilogram of cargo requires 20 kilograms of plumbing and propellant, which really captures the physics problem with a lot of this. And you solve that via disposable sections of a rocket and as part of the launch. But by definition, that just makes something disposable, one-time use. So it's this short-term economic solve that is not reoccurring in nature.

And I think it parlays well into the conversation about what some of these space businesses or space companies are now trying to do. I do want to capture before SpaceX, Blue Origin, some of the

newest wave of space companies were launched, there was a period of time where you had others try to move into this market and it was just a graveyard of companies. So what was missing during that time period? It might just be that I don't know the names like I know these names today. And there's deep pockets with the players that have been involved. But do you think there's anything else you would point to that was missing that was really captured, particularly by SpaceX and to a lesser extent by the others? Two factors there.

I think the first one is the focus on reusability.

which for reasons previously in the 80s, 90s was technologically a lot more difficult. As with all companies or technological innovations, they tend to stand on the shoulder of giants. And so since that period in the 80s and 90s, there's been an awful lot of development in many associated industries around precision manufacturing or simulation, etc., all of which have reduced the development costs, which weren't available in that interim period for others to enjoy.

There's a company called Teledesic around the dot-com bubble, which is Bill Gates' ladder associated with to try and do satellite internet. But again, there was no innovation in rocketry to go along with that. And there was arguably not a huge amount of innovation within the satellites as well. It was more a case of

maybe a rational exuberance, but there was an awful lot of excitement around data and connectivity and the internet, et cetera, which means, okay, well, now I can see there's a big enough market for it. If we can expend all this cost, then maybe we can break even on that. And that's the way to do it.

But missing out that larger point around the costs really need to come down by orders of magnitude for that to be a sustainable enterprise long term. Musk likes to quote the number of times he's been told that the easiest way to become a millionaire is to be a billionaire and start a space business. I think that has been the case in lots of instances. The financial innovation, particularly on cost, is what was missing and having a feedback loop within your business between the technology and the economics.

We usually transition into the business or the economics by focusing first on the top line, but cost is so important here. And you mentioned earlier bringing the cost of launch down by 90%. Can you break that up a little bit? You have the components in terms of what you're building, but then you also have the reusability factor, which I think is so key and so important. And is there any way to differentiate those two? How much of the...

savings or the change in cost structure is dependent on that reusability and a certain amount of times that these rockets can be used versus how much is based on the components and parts that have gone into it. So if we take the CapEx part of that first, NASA estimated that the cost to develop the Falcon 9 from scratch would be about $4 billion, but SpaceX ended up doing it for about a tenth of that price. So to begin with, that's an order of magnitude improvement in the level of investment required. This

SpaceX gave you the prices for launches on their website. So $70 million per launch of a Falcon 9 flight, that's already 20 times cheaper than the space shuttle was per kilogram into orbit. But the real kicker, as you point out, is the operating leverage that comes from having partial reusability. By taking something that was disposable and making it depreciable, you can start spreading the R&D and the manufacturing costs over multiple launches.

Again, on the website, you can see that Falcon 9 has flown about 400 times in total. About 320 of those launches have been reflights of the booster hardware. So on average, the booster cost is being spread over about five missions rather than one. Now, each time you still have to factor in the variable costs of fuel and maintenance and replacing the disposable upper stage. But ultimately, that model is geared into helping unlock a better launch rate for customers.

and for SpaceX themselves. That's incredible. I mean, from a CapEx perspective, where that's a huge, meaningful delta, but then also seeing it there and just the precedent for reusability is really interesting. In your mind, is that the right way to think about things in terms of whether it's 10 launches, 15 launches, maybe upwards of 20? We think about aeronautics,

aircrafts and it comes down to miles more than anything. But oftentimes you could see them being 30 years and they're still in the air. Is there a framework that you have in your own mind in terms of a rocket's useful life? Yeah, it's a bit of an open question still, to be honest. So there are some Falcon 9 boosters at the moment which have been reused over 20 times. So rather than five times, that cost is being spread across 20 launches. They're still going strong. Now, the maintenance costs will increase slightly over time as things get older, but we're

We haven't quite found that limit yet. Now, if SpaceX were a traditional company, they would probably just take that capability and try to sweat the asset as much as possible, really max out on the incremental economics. But why bother pushing the capabilities even further than that if you've already got the industry's leading product? SpaceX is different. They're driven by this mission to get to Mars and make humans a multi-planetary species. They know that that's going to require a much more powerful rocket and innovations which can bring the costs down even further.

When we're thinking about longer term valuation and analysis of that cost base, what's really going to matter for the future is the economics of Starship. This is the new enormous rocket that we're currently testing in Texas. Starship is designed to be fully and rapidly reusable. So unlike Falcon 9, which is only partial, but also able to fly multiple times every day.

It's going to have a payload capacity that's about 100 tons to orbit at the beginning, but probably rising to closer to 200 tons to orbit over time. And Musk has suggested that a variable cost of around $10 million per launch is the ballpark figure which they'd be aiming for at scale in a steady state. Ambitiously, maybe even falling to $2 million as a figure which has been touted.

If you believe those kinds of performance levels are feasible, that gets the cost down to around $10 per kilogram. That's over 100 times cheaper than the Falcon 9 we're talking about at the moment. And that would have a dramatic effect on what's economically feasible for humanity to do in space.

The framing of kilogram cost, can you put some context around what that actually means for the Falcon program and launching into lower Earth orbit, which I would think of as a lot of satellites are out there? Can you put a number in terms of what those might weigh, how many you could fit, and just contextualize that around how that could differ between the two different body types in terms of what they're looking to do?

If we take the company's Starlink satellites as a guide for that, you can fit around 60 of these satellites in a single Falcon 9 launch. With Starship having a payload bay that's double the diameter, I think over double the height of the Falcon 9, you'd be looking at hundreds of satellites per launch for a fraction of the cost. So a real step up in volumes there. Alternatively, if you could look at making individual satellites much bigger and

and more powerful than they are today so launching the same number of satellites but have them with far greater capabilities than they do at present time either option would have a transformational effect on the overall economics and the availability of the satellite communication services in fact you could probably justify a lot of the starship development cost purely on that benefit alone with falcon 9 the focus is going to remain on satellites though in terms of launching the starlink network particularly because of the growth synergy there with falcon 9 but you

But you're absolutely right, the dual improvement in capacity and cost gives Starship the ability to open up new use cases beyond satellites when it's fully operational. If we take the International Space Station as an example of this, that orbiting laboratory took about 10 years to build. It took about 36 space shuttle flights to build and assemble it. That makes it a really useful piece of real estate, but a really, really expensive facility to operate. So right now, NASA uses the Falcon 9 to ferry astronauts and cargo to and from the space station.

With Starship's cargo bay, which is coming, it's going to be big enough to launch something the same size as the International Space Station in a single afternoon and potentially for less than 0.1% of the cost. So think about launching entire space stations rather than launching individual astronauts and recovering them as well from orbit, being able to take them out of orbit and back to the Earth. That might become a regular fixture in the 2030s. We're

We're going to get a really good trailer for that, I think, sooner though. So NASA's planning to use Starship to return astronauts to the moon for, again, a fraction of the cost. Artemis astronauts, which is the new nomenclature, whereas we had Apollo astronauts in the past, Artemis astronauts are going to be able to land on the lunar surface with an entire skyscraper full of cargo and living space, whereas the Apollo astronauts arrived in this cramped tin can and could spend a couple of hours on the surface. So it's really going to be comparative luxury for the next generation of explorers.

I remember looking at the partial businesses and the idea of dimensional weight rather than just traditional weight. You have to capture the size of whatever is being shipped. And to the extent that you have wider cargo capacity, that opens up a lot of possibilities. When we think about what SpaceX is actually launching, you mentioned two-thirds of this is Starlink. At the moment, two-thirds of the capacity goes to that.

Are there other things that they're doing with that capacity and other obvious markets? So there's a couple of business lines at SpaceX for the rocket side of the business. Broadly speaking, their internal program for Starlink, which is the largest in terms of number, you have government, civil, government defense, and then you have some of the human programs and some of the stuff like the Polaris program with Jared Isaacman from Shift4Payments paying for a couple of launches on the back of that. The bulk of where...

The volume is focused on Starlink, but I think the government side of the business is growing really well. Particularly, there's announcements of programs with the NRO, the National Reconnaissance Office. And so military or defense versions of Starlink are being launched as well. But the majority of the volume, again, is their own internal Starlink program for launching the communication satellites. And that's two-thirds of launch. It's probably going to be an even greater share of launch next year and so on and so forth, because that's really the...

Most useful thing which the rocket can do at the moment is deploy greater capacity for satellite internet. I would imagine that the Starlink launches are actually quite economically viable for the business and can fund...

some of the innovation that's going on with the launches. So to your point, there is a feedback loop here. Is that a lot of what is driving the capacity that they are using versus potentially working with others? Another way of asking this is, if they opened up that demand elsewhere, do you think that would be immediately filled with third parties? Yes. So a lot of the demand internally at SpaceX is what's driving the launch rate for Falcon 9 at the moment.

So the rockets are going to launch as quickly as they can manufacture satellites to go on them. But the overall launch industry itself, I think, is still supply constrained, which on the face of it sounds like a daft thing to say. But there really is starting to be a clamor to get more access to launch, particularly as it's getting cheaper and cheaper to manufacture satellites to go into orbit. So there are lots of other companies, Amazon, for example, and their Kuiper constellation,

There's Apple, which has made an investment in Global Star recently. There is OneWeb, which is trying to launch a similar low Earth orbit constellation. There are lots of other competitors starting to get interested in operating in this space. I think SpaceX are very aware of this, and they do open the platform up to that because it helps introduce the operating leverage into their own business model. So they like it because it can keep that flywheel going.

It's not as hard to offer that excess volume today as it was five years ago, for example. But I think for their own purposes, where they can really get the attractive returns and the ability to fund longer term vision for them, it's all about can they launch Starlink at greater and greater scale. It's an interesting almost capital allocation dynamic in terms of it's not quite that, but

but similar in terms of how you think about it strategically. Just to get into Starlink a bit more, can you give some overview of what that is? I think it's increasingly popular to people around the world in terms of what it is. But if you could just sketch out what Starlink is as a business and some reference to the size and scale of it today. Starlink is SpaceX's internal version of delivering satellite communications.

So it's a constellation of, I think, around about 6,000 satellites in orbit at the moment, which are flying in this mesh around the world in low Earth orbit and delivering satellite connectivity to a user terminal, which is about the size of a standard laptop, and delivering high-speed internet of the equivalent that you would get from a fiber optic cable or something like that.

That is attractive because it doesn't matter where the user terminal is on the planet, it still gets the same degree of service. And so there are many areas of the globe which don't have access to traditional legacy infrastructure, 5G towers, fiber optic cable, etc., where they want to have the same benefits of broadband but physically aren't able to purchase them, or in a market where there's one provider and they have monopoly pricing, etc., even if it is regulated to a degree.

And so SpaceX has got a really good opportunity of providing a service where it's really needed and there aren't many other options to get access to that. Fundamentally, what is the advantage here or what is the edge? If you think about scaling a ground-based network, the incremental costs to providing or connecting another user are traditionally civil engineering based. It's can we dig up a road and find a cable that goes all the way to a property or farm or something like that?

The revenue which you'll be able to generate from that one location does not warrant the amount of capex which you have to put in. And so the network size is typically limited at the fringe. When you go to a satellite-based constellation, there's a fixed factory-based cost where a lot of the components for incremental growth or for the infrastructure are a function of Moore's law. The semiconductor components are the main input cost to the satellites. Launch is getting increasingly cheap. It's brought up as a depreciation aspect, which you talked about.

But the incremental cost of connecting one user by a space is the cost of the user terminal, which is again, a factory-based cost as a Moore's law-based cost is one that scales really well and it's getting cheaper and cheaper over time. And so unlike a terrestrial network, the customer acquisition cost or the cost of service against customer is agnostic to where they are in the world and is also getting cheaper and cheaper over time. So whilst it might appear to be a peripheral or a luxury product to some in the West at the moment,

Come back in five years' time, come back in 10 years' time, and the service is going to be significantly more powerful, significantly more capable than anything which we're able to offer via the ground. So the addressable market is something that grows significantly over time, both in people where there's no other option, but also it becomes cost competitive around the fringes of cities and then slowly further in and further in, etc.,

And all of this is funding into the flywheel of making it cheaper and cheaper for them or more of a reason to launch more satellites, which is a reason to invest more in rockets to make it cheaper to launch, et cetera, et cetera. And so they've really thought about that from what's the incremental return like and how can we maximize that at scale?

There's something to be said for us as a civilization now that scaling something is easier in space than on land. I know there's much more that goes into that in terms of the capabilities of space, but hearing it is quite interesting. Do they release any data points about the size of that network? And from a user perspective, is there any way to gauge how big it is today just in terms of whether

whether there's a way that you can do back of the envelope revenue analysis or anything along those lines? It costs around about $120 per month for a subscription in the US. Multiplying that by 12 gets you to roughly one and a half grand per year. Multiply that by how many subscribers you want, and you can roughly figure out what a revenue line might be for Starlink.

It's hard to pass out within that which are B2C users, which are B2B users, and which are B2G users. And they're likely priced and sold on a very different basis. Some might be on a volume basis, some might be on a value, etc. SpaceX doesn't publicly provide a breakdown of the business model and how that is split between different areas. But there are some keen-eyed observers on the internet. If

If you go on a few Reddit forums or you look in some of the major press, etc., which is speculated on what it might look like, Ballpark Low number of million subscribers roughly has been quoted over the last year or two. So if you think about how many US households there are without internet connection, for example, there's 11 million of those in the US today that don't have full broadband access. The market, even in the US for rural and unserved people, is really huge still. But I think globally, if you look at how many potential users there are,

you start getting into the hundreds of millions or maybe even the billions in terms of potential. That's just for individual human users of that network, never mind machine use cases. If it's competitive on cost, that really is the only thing that's holding these users back. It's not a feasibility issue anymore. It's a cost thing. So I think it's fair to say that Starlink is going to significantly eclipse the revenue that SpaceX makes from Falcon 9 at the moment. And that's the underlying principle of how we're going to be able to fund this ongoing technology innovation.

and the wider mission that the company has. Starlink and the revenues it brings in is really important to that. Satellites in lower Earth orbit, there is quite a bit of history in terms of that being the obvious space use case, that having an existing economy. I think Starlink is an extension of that. Different, absolutely, but an extension of what was going on. Are there

brand new industries being unlocked or obvious things with line of sight that open up from a space economy perspective that you see either today or when I say near future, you could extend that out however far you think is reasonable. A lot of these options which SpaceX has to develop brand new markets that don't exist already are a function ultimately of the cost curve. Take semiconductor manufacturing on Earth at the moment. We're

We spend billions of dollars per fab to recreate the conditions which are readily accessible in space for free if you can get there. And so there's some point on the cost curve intersecting between the cost of building a fab and the cost of launching a fab or the equipment of a fab into orbit and operating there instead.

Same can be said of pharmaceutical research, the crystallization structures which are able to happen in space are different to the ones which are able to happen under the influence of gravity. So if you think about pricing on pharmaceuticals, extending patent lives, et cetera, if you can move the manufacturing or the research lab for cutting edge pharmaceuticals into space, you could make high value, low volume products, something which would really make sense to do there and don't require a huge technological innovation to happen.

The list can go on and on. Artificial organs, for example, being able to manufacture perfectly spherical lenses. There's lots and lots of things which could be made. Maybe the way to think about that is the space-based manufacturing could be the next large market for this if the costs can continue to come down.

Starship having the volume of an A380, a 747, think of the equivalent size of factory that represents. And if that can be launched every single day and recovered every single day for $10 per kilogram, that could be a really compelling way to do quite a lot of manufacturing. Incidentally, that's something that Jeff Bezos really focuses on, on his vision for space as opposed to Mars per se, is where we can move a lot of the heavy polluting industry off the planet

And why don't we turn Earth into this perfect nature reserve and all these polluting aspects of manufacturing can go into orbit, which again is very compelling. Probably needs a lot more innovation to deliver communications from orbit. But I'd say it's maybe an inevitability if the cost gets to a low enough point. You think how much solar energy is available without the atmosphere attenuation, for example, 24-7. There's lots of compelling reasons why if it's cheap enough at some point, a lot of these things probably should happen, not just could happen.

The solar energy point, great example of something that is an entirely different dynamic in space than on Earth. What would the other things be, just out of curiosity, when you mentioned semiconductors or pharmaceuticals? Is it just purely gravity? Are there other things that are happening in space or not happening in space that happen on Earth that would drive that difference?

There's the vacuum conditions. So there isn't an atmosphere. So the level of impurities, which you need to get rid of, or a vapor disposition machine, for example, you don't have the same kind of challenges there of having to have this deep vacuum. There's arguably in space, because you don't have gravity, you could construct much larger structures there rather than construct them on the ground and then launch them. So again, that volume constraint, which we were talking about earlier in terms of how big your payload is,

If you're able to get enough stuff up there and assemble it in space, as we did with the International Space Station, things can be much, much larger, given the payload bay of a Starship, than we could with the Space Shuttle.

When you think about lower Earth orbit versus geospatial orbit versus something like Mars, which I think was the original vision with Elon and SpaceX, how much does that change the economics when you extend out? Is it orders of magnitude where it's an exponential cost curve to go further out? Even just if we focus on the launch and use a satellite, for an example, before we get into all the manufacturing dynamics, is there any way to contextualize that from a cost perspective?

The really good news here is that gravitational force decreases with the square of distance. So the biggest challenge is getting off the surface and into orbit. Once you're there, from an energy point of view, it's a lot easier to go anywhere else in the solar system. So if you were to take Falcon 9 again as the example, for the same price, it can place 20 tons into low Earth orbit, or it can place four tons into Martian orbit. That's despite the latter being over a million times further away.

Now, this feeds into what I think is probably the biggest misconception about SpaceX and its Mars ambitions. I'd say for most people, the idea of a commercial entity pursuing exploration is naive at best. But I'd argue that long-term investors should be absolutely ecstatic about SpaceX having this mission as a forcing function. Firstly, it's the key to getting the best people in the world to come and work for the organization and allow it to innovate in a manner and speed that others simply can't match without

That's a huge competitive advantage. Secondly, the way to get more cargo to Mars is actually about figuring out how to get more cargo into orbit around Earth, because that's where the cost is all concentrated. It's all in that first initial leap off the surface of our planet. So rather than framing Starship as a system that makes it possible to get to other planets, think about it instead being a system that could make it enormously more profitable to operate a business in Earth orbit and unlock brand new commercial use cases there as well.

You don't have the same starship which launches fuel for astronauts one day. It's going to be launching satellites or space stations the other 364 days of the year.

That's going to be a huge capability advantage. I think that's why Gwynne Shotwell has started to talk about longer term Starship potentially being even more valuable to the business than Starlink. We've gotten so far into the conversation and we barely referenced Elon and Gwynne Shotwell. There's been a couple of references, but for your average SpaceX conversation, it's been quite low. I do want to talk about

The management team, the quality and caliber of people within SpaceX, you mentioned in the very beginning of the conversation, there was this noticeable trend of the best, most impressive people going there. Can you just talk about your experience with the company and culture within the business? There's books out there that you can read, but your firsthand experience and what that's been like?

our clients are ultimately invested in the business and all that that comes with. So that's equal parts of the engineers on the shop floor, that's equal parts of the founder, the technologies, the suppliers, et cetera, et cetera. And so they're all very important pieces of a much wider entity.

That said, it's hard to get away from how important Musk has been, not just to SpaceX, but to many other companies which he's founded. This company was on the brink of bankruptcy if he hadn't, through sheer force of will, selling lots of assets, got it to another launch of Falcon 1, we would not be here to benefit from it. And so it's hard to disentangle that point along with many others along the journey of having this vision to say that the mission is what's important. We were talking earlier about they could just do Falcon 9 and just live

live off that revenue, but because you have Musk continually pushing for engineering excellence, reaching for the next goal, et cetera. Taking it from a purely financially motivated point of view, that has been a very beneficial thing to have in a lot of these enterprises. So I think they've done a really good job of trying to figure out what everyone's good at and let people specialize.

Elon Musk has got a really good grasp of all the detail in this company. It's quite terrifying the amount of information which he can hold in his head. But he doesn't have to do an awful lot of the day-to-day operational side of things because Gwynne Shotwell, who's the president and the COO, is the one who takes a lot of that burden. She is much more of a person who's

interacting with customers, interacting with government, interacting with employees, running the organization day to day, which is absolutely a really important person for how she's been there for over a decade, a longstanding person. So there's a really good layer of management just below Elon Musk. CFO Brett Johnson as well, he's been there for an awful long time. It's a really good delegation of responsibilities.

that you can focus the organization and specialize within the organization without having to run everything, which tens of thousands of employees would end up dwarfing your day. Lots of people wonder how Musk can do a lot of these things. I think it's because he's got a really excellent team behind him that enables him to function at his peak and do these things that he's well known for.

He's an incredible magnet for that type too. When you think about SpaceX and the importance of the US government, how important are they to the business today when you factor in what you mentioned around satellites? I know with space station maintenance, they've been helping out with some important recon missions, things like that. Is it a substantial concentrated percentage of the business?

Starlink is still the main focus of SpaceX from a financial point of view. Ultimately, the consumer and the business market is going to be far larger than the government market.

And so longer term, that is definitely going to be the case. The proportions will move around over time, etc. At the start, it will be more government. As the cost curve comes down, it will be more business. As the cost curve comes down again, it will be more consumer. And so it's going to evolve significantly over time. Where it's going to be most significant is the closer it can get to business and consumers. The volumes there are just going to be enormous. I think one example of that would be

The Starlink network, I think it's next year or it might have started in some locations already, is going to be able to directly connect to your cell phone or directly connect to an IoT device.

Without any changes to any of the hardware, every Samsung, every Apple, etc. is going to be able to connect to the internet for initially calls or SMS messages. But there's going to be no dead zones for phone signal anymore. In a year or two globally, you'll have a phone signal wherever you are enabled by this network. If you think about how many IoT devices there are in the world, connected IoT devices, I think that probably about 30 billion by 2030, I think is the estimate. You think how much...

functionality and value you could embed into lots of everyday products if you're able to cheaply connect them to the internet without having to worry if there's a 5G signal nearby or are they on a city or are they somewhere remote. So one of the really interesting examples there is

If you think about where autonomy and robotics can have the biggest economic impact, it's probably at the fringes of the economy. It's in the primary and the secondary markets, farming and mining and drilling, all these kind of remote activities which typically take place away from a 5G signal, an area of high bandwidth.

That is where robotics or automation could have the biggest economic impact, either by making things more efficient or making things which are dangerous and more plausible, etc. So you look at things which John Deere are doing at the moment. They've made a partnership with SpaceX. Starlink is now going to directly connect to all their vehicles. You could introduce self-driving vehicles.

tractors. You could be able to do bots that survey crops 24-7, plug in all the sensors back to a main agriculture hub that's monitoring all these different sites as able to effectively deploy resources as and when it needs. So the efficiency of some of these things, which are traditionally very low margin, could all of a sudden see a really significant increase, which more than pays for the installation of it. But no one is going to make that leap to start making this level of connectivity unless

The infrastructure is there. And so I think one of the big shifts, which we're going to see over the next five to 10 years is the business really getting on board with this and thinking how many products could be sold on a Razor, Razorblade model. You look at the way that Rolls-Royce makes the most of its money. It's not on selling the actual engine hardware. It's selling the maintenance contracts and the monitoring of these engines as they're flying around.

That is because they've got a direct data connection via a legacy satellite. If it's cheap enough for anyone who's making a piece of hardware to embed that into whatever hardware it is, and for them to enable an aftermarket to exist, it fundamentally changes the business model in so many industries in a way that could add better value for the end consumer, but could also be either stickier for business, or it could be higher margin, or it could be more recurring, etc. This is where we start getting really excited when

when we're investors in many other areas of thinking, not just what can SpaceX deliver, but what is the impact going to be on so many other portfolio companies and so many other industries? Because we have insights on SpaceX and some of these private companies, this could be really meaningful in a couple of years' time.

It's a great point just in terms of what that opens up. I can think about the number of times that I've considered Starlink for when I am in remote areas and my cell phone can't represent a hotspot. So I've been looking for it, but I hadn't considered much of the industrial things that run the economy. I've been to many drilling sites and there was one consistent thing. I didn't have a cell phone signal. You laid it out quite interestingly there. When you think about that opportunity set, is there an

an extension into SpaceX and what's possible for that business? Is this just going to remain a subscription model? My brain can go in a lot of different directions in terms of what's possible. But do you think beyond that, you have your launches, which could be potentially one time you have your subscription related to the satellites. But if it's relying on that network, we've seen Apple iOS and things that they have done. Is there anything that comes to mind with that?

When we talk to SpaceX, they're still very much focused on the here and now in the next couple of years. They have ambitions for things which they could do, but the focus is very much on the core business serving the core customers, serving Starlink, getting Starship to launch status.

We'll deal with the next things next. They've got so many things which they could be doing at the moment. When we come to this, a lot of this is us hypothesizing of how that could evolve beyond information which they've given us. The trend which we've seen of them to be vertical integrators, it could be quite informative. It might be that they end up being the ones who are commercializing a lot of these other services rather than having a customer paying them for it. At substantial scale, it would make more sense for them to do it.

Could you start seeing some of these aspects if they get into space-based manufacturing, for example? Could that be priced on a value-added basis rather than a subscription basis or a volume basis? It certainly seems possible. If you start running data centers in space because it's easier to power or cool them, et cetera, could you start offering data storage and machine learning alongside Starlink connectivity?

The further you look out, the more and more wacky it can get, but it's also potentially financially plausible as well. You maybe have to take a bit of inspiration from science fiction here, but it's quite a common trope in some of these movies of these large mega corporations, the Whale and Jutani Corporation from the Alien movies, or the Resource Development Agency from the Avatar films, where one mega corporation was able to dominate access to space early on, and then ends up controlling the entire extrasolar economy

because of the advantages it had at that really early stage. Maybe that's possible. Where might something the size of the Dutch East India Company plausibly exist again from a financial point of view, pioneering a new universe of the economy? How much of the global economy could shift off the planet and into the solar system? Again, we're talking decades ahead here. But if companies like SpaceX and others maintain their point

point of adding the most value to customers and providing the highest level of scale, there's reasons to think that this business could last a multi-decade, multi-century potential. And if it can be lodged there as the main provider, then it might not be unreasonable to hypothesize that these things could be possible. That doesn't really feed into our day-to-day DCF, but it's interesting as an academic sort of thing. Oh, if we did come back in 20 years, there might still be the same level of growth opportunity that we can sort of see today for the next 10 years.

I typically will avoid the galaxy brain ideas in these episodes. But if there's one company to lean into galaxy brain ideas, it's this one. And to your point on science fiction, what you were describing before the idea of a daily starship shuttle back and forth to space that was giving me major sci fi story vibes that stuck out. So they're starting to blend the ideas of what was previously fiction and making it a reality.

The human spaceflight at the moment definitely has been the preserve of the rich and famous, but at scale that becomes cheaper and cheaper. And if we are talking about launching Starship, it could be used as much for sending cargo and people to other points on the planet rather than other points in space. And so one option that the government's looking into is this notion of rocket cargo delivery. Starship would be able to deliver 200,000 kilograms anywhere on the planet within 40 minutes.

What does that do for a rapid reaction force? What does that do for next day delivery? At some stage, it's going to be feasible to put a lot of astronauts or paying passengers on something like that. And it will be a quicker and potentially more efficient way to do long distance travel. These things really could get quite wild, but it could be plausible at some stage. Again, that's not the reason to invest in the company today. That's not the basis of what they're doing. And it's a lot of people getting excited about things. But come back in 10 years,

I'd be disappointed if you or I weren't able to go into space at some point in our lifetime for the cost of a premium economy ticket or something like that.

Beering back to more of the in the moment. Yes. On the military defense geopolitical side of things, it's one of the more interesting things that I think that weapons manufacturers or just people in that industry can sell, not just to the US, can sell elsewhere. It's one of those unique dynamics. And I know it's way more complex than that.

But how much do you think about that when it relates to space? You mentioned there's a lot going on in China right now. But the potential for this to be used broadly versus this to be way more dominated with the US? Do you have any signposts or things that you monitor for how that will go in the future?

Yeah, somewhat depressingly, I think space, if we do have another large conflict, is more and more likely to be the place where it happens. Going back to that importance of the GPS, the importance of communications, the importance of that to national defense, as well as intelligence services. All of these are traditionally space-based assets, which in a first strike would be the first things that get targeted.

And so it definitely overlaps with some of those concerns, which again is one of the reasons that the government, the US in particular, but also many others, is funding more and more resources to be able to have effective early warnings to protect against that or countermeasures. Encouragingly at the moment, there is a longstanding international treaty that prevents the weaponization of space, in particular banning weapons of mass destruction from space. Hopefully that holds with the way the international order is going at the present moment. That's definitely being tested a bit in

In hindsight, though, it's a really strong success story there. We've managed to prevent that from happening. I'd like to think that I can continue to remain the case. The Defense Department in the US, though, has definitely seen the advantages of Starlink being used in Ukraine. Governments are really eager to acquire their own sovereign capabilities there. They fully own and control. You can take a look at the annual defense budgets to get a bit of a sense for what that means economically. The creation of Space Force in the US is another indicator of just how important it's being viewed for the future.

To give you one example, the DoD recently increased its low Earth orbit satellite-based services program from an initial $900 million budget to now a projected $13 billion budget. That's on the back of surging demand for orbital connectivity from its forces out in the field. And on something like launch rates, I was under the impression from reading, I think it was the original book, about the early years of SpaceX and how challenging it was to get the launch spot

And then you need the weather to be right. So there's so many variables that go into it. But just the regulatory hurdles to get there, is that a supply-constrained portion of the value chain or the process? The FAA regulates all the launches. They need to get permission from them. There's environmental assessments which need to be done when you're building launch sites, when you're conducting these kind of launches, etc. Figuring out what is the appropriate level of regulation weighed against the

commercial or societal or government demands there. I don't have a good answer to that, but I think it's definitely something which is factored in. It becomes a lot easier when things are operating at scale because these processes have been tried and tested. There's precedent. I think when you're developing a new vehicle,

Starship, for example, people take a conservative aspect to that your regulator's job is to be conservative, whereas an entrepreneur's job is to be taking calculated risks, etc. So there's a clear tension between that. It's trying to figure out, can you have innovation within the regulation in order to enable both objectives to be met, I think is a really important aspect. I think SpaceX are really supportive of trying to get the regulators more resources. And just in terms of the constraints around the actual launches themselves and where they can be,

In terms of the manufacturing of the rocket and then where the launch is, is it possible to manufacture in Texas and launch in Florida? Do you usually want to be very close together? I'm sure that impacts the cost curve when you're talking about the size of some of these things. But how much flexibility is there from a geographic perspective to find new locations if it needs to happen?

It's funny to think how many rocket dimensions are set by the height of an overpass or the length of a flatbed trailer. Falcon 9 was driven from California to Florida to launch. And so you have practical considerations around that. With something like Starship, it's much larger. So the manufacturing site has to be where the launch site is, unless you can construct some massive barge to ship it to other places. And so I think it makes more sense, again, SpaceX speciality to be vertically integrated in that sense.

Building launch pads has been historically quite a tricky thing because there are places where they're better suited to and places where they're not. So you've got to think about

the environmental impact, the noise impact, et cetera. But also you want to be as close to the equator as possible because then you're more fuel efficient. You can already take advantage of the Earth's rotation to get you some of that velocity, whereas a higher latitude doesn't. If you want to launch into a polar orbit, you're launching north-south instead of east-west. And so that's why Vandenberg in California is really attractive because you've got a clear shot south there all the way to Antarctica. So you don't have to worry about if the rocket sort of splitters, is it going to fall on something that's inhabited, for example.

So there are particular areas where it makes more sense. And then from a regulatory point of view, probably easier to concentrate a lot of that in Cape Canaveral rather than having launch sites anywhere and everywhere in Florida. There are constraints around that. Going back to talking about the competitors, one of the gating factors is how many launchpads are available. Where can and can't you build a launchpad? And if all the existing ones are being used, you've got to go and build a launchpad, whereas the previous people didn't have to. So almost

Almost in analyzing a space business, and with SpaceX in particular, focusing on the ground infrastructure and the scalability of that is almost more important than focusing on the scalability of the space infrastructure, which is a weird way to think about it. Is it ultimately going to be determined by what's the launch rate, which they can get on the pad, and how many user terminals can they manufacture and get into people's hands? Those are gating functions on how much revenue can be generated in space. From an investor's perspective...

How do you even begin to frame the valuation of a business like this? Obviously, it's at a certain stage of its business where there's so many factors going on. But talk a bit about your approach to that and any framing that you use or framework that you use to come to some comfort level when you think about valuation. The challenge with valuing SpaceX is how much intangible value do you associate to the flywheel between...

the cost curve and the price elasticity and the capex which they're investing to get there and sustain that point of view. So it's a bit more like 3D chess than another business might be. That's where I think we have to lean a bit more on the qualitative inputs than the quantitative inputs we can see today. So there is, without doubt, a significant amount of risk when forecasting what might the intrinsic value of this company be. And we're definitely going to get quite a lot of those wrong in the portfolio. Hopefully, the ones which we get right, we do really well.

really well in. When we're thinking about SpaceX, it's what might a base case assumption be for this? What might that sort of blue sky 5X, 10X case look like? What do we have to believe to think that that might happen?

I think when we compile a lot of the qualitative inputs around, well, here's how the rate of improvement in cost, which we've seen in the rockets has gone. Here's how much quicker they were able to ramp up the number of Starlink units they're producing, the user terminal cost curve, et cetera. All these cost curves have stayed on this really good trajectory.

And so if you can take a risk and extrapolate out where some of these things might get to in five years' time or in 10 years' time, look at the adoption rates we're seeing within Starlink users, et cetera. It points towards something which is bucking the trend of most large companies of getting better as it gets bigger. If there was one sort of fundamental

concept of belief, I think, which you have to have to invest in SpaceX. I think it's that to date that has been the case. There's reason to suggest that that will hold, but then there's reasons to suggest that it might not. I think we're trying to take a calculated risk that this company is a special company. This company is pioneering this industry, not just existing within it. This company has got a phenomenal culture, which allows it to do things which have not been possible elsewhere. This company is accessing the last remaining frontier of

of engineering and the economy, which is interspace and that potentially is an unlimited economic opportunity.

If I were to go back to your point in terms of the cost structure and the changes in cost structure really underpinning everything about this, there are certain businesses where you see there's just so much demand. Here, it sounds like, and tell me if I'm phrasing this wrong, that the adjustment in cost structure and the material change there could create markets that previously weren't imagined in terms of being space economies or move economies off of the ground into space, and that's only possible

possible from that change in cost structure. Is that a fair way to articulate it? That's exactly right. You're going to hit the nail on the head there. We've gone from the first rocket which went into orbit being a million dollars per kilogram to talking about a rocket which might be commercially active in five years time, say, that would be priced potentially at $10 per kilogram.

That's the kind of cost which the post office offers. Think of what is possible if the space launches as cost competitive as the postal office. Amazon exists in that environment. All these retail businesses exist in that environment with fundamentally that shipping cost existing.

This is a reason to be optimistic about some of these science fiction sounding things are ultimately going to be a function of how affordable they are. And here is a rocket, which on the face of it looks like on block three or the third generation of it could be hitting those costs.

We, I think, addressed a lot of the risks throughout the conversation. You were not afraid to reference the challenges and risks associated with it. I do want to get your just general approach or take on risks. But I also just wanted to ask, when it comes to launches, these are historically such capital intensive things you mentioned in the early days, Musk really had to

go to all efforts to save the business just to get that next launch done. How much is at risk with each launch? Are there any really concentrated moments in time now where the business is at extremely high risk of some challenge or execution issue?

Watching that booster return the other day, returning to be caught was definitely a risk which they took. I think there was some audio leaked, which they reported to being a second or two away from an abort there. Because if that thing crashes into the launch pad and destroys it, that's not a quick thing to fix. Incidentally, which is why they're building a second one next to it. But SpaceX's approach has always been purposefully to be taking risks with its hardware when it's in the development phase. If you

If you're not operating at that edge, if you aren't breaking things, then you're also not learning an awful lot about the system. Just look at the rate of progress with Starship previously, for example. The first flight cartwheeled into an explosion a couple of minutes after takeoff, but then the fifth time it came back really calmly and was caught by a launch tower. It definitely helps to be well capitalized here, of course, to do those kinds of things. But again, it goes to the aspects we were talking about previously about the capital intensity being so much lower now.

If you can lose 10 rockets for the cost a competitor has to spend on one, that's a really good competitive advantage, which you can lean into at scale. When we think about risks for the business, I'd say it's more about pace than it is about an existential risk of complete failure. Whereas previously, it's clearly gone through some of those in the early stage. So in terms of milestones for the rockets, let's say, we need to think about the cost of the rocket.

We need to demonstrate that we can also catch the ship as well as the booster. We need to demonstrate that we can refuel in orbit to allow Starship to be able to reach the moon and to Mars. We need to demonstrate that the risk has been decreased to a level where it's safe as it can be to put astronauts onto the platform. But then you also have to do all these things at scale as well. And that's where designing the machine that builds the machine, which Musk liked to talk about,

really comes in. So the equivalent here is Starbase in Texas, this enormous manufacturing facility they have at the launch complex. This needs to be able to crank out a whole fleet of rockets and hundreds or thousands of the most advanced rocket engines that we as a species have ever conceived of. There's no precedent for ever doing that. And so I'm sure there are going to be some unexpected issues at scale. But there are a lot of similarities here with learnings I think they can take from the experience with Tesla

and the Model 3, that production hell they went through to scale up production. It's very easy to build one of something. It's a lot harder to build a thousand or a million of something. So when we look out into the future, I think those are going to be the kinds of challenges which we have because time is money now. If Starship isn't ready to launch your incremental Starlink satellite, it's not going to be generating revenue as soon as it is.

The Starlink alignment with the Starship pace and why it can be so important to the financial profile of the business. That's just a really, really interesting point. It makes my brain explode a little bit, mixing rocket science with satellite science, trying to dual track these things at the same time. It was a fair representation of all of the risks, which when you're dealing with space, there are many things to consider. This has just been a fascinating conversation, as you've probably

probably heard through my voice throughout the conversation. We close it out just talking about lessons that you can take away from the business and potentially apply elsewhere as an investor. This one's a little tricky. It's one of one in many ways. But what would you say are lessons that you've taken away from looking at SpaceX as an investor? I guess a couple of things. We've probably touched on quite a few of them indirectly in the conversation to go back to that integration of

business innovation with a technology innovation. Technology for its own sake is great, but something needs to be cheaper as well as better. Otherwise, it's not going to get adoption. We exist in this capitalist system. That's the reality of the world in which we live. And so I think one area where we often get lots of companies coming to us with a really savvy or really cool tech innovation is

But without thinking about longer-term sustainability or how are we going to finance this without having to keep coming back to investors or keep coming to come back to capital markets and make this something which can stand on its own two feet. I think that's the genius of Musk. Many of his businesses have been able to line those things up. So when I'm looking at other companies or other industries, trying to figure out where those things are going to overlap, they're the most exciting ones. How companies can innovate in a regulated space

is another learning from this. There's a lot of precedent for how this industry existed before SpaceX and how it was regulated. And it's looking quite different now. And it's because SpaceX has innovated in a way that can still hit the underlying principles of what regulators are trying to achieve or what the industry is trying to achieve, but just do it in a more savvy way. One of the things that reminds me of is the nuclear industry, which has got a very similar history to space. There was a lot of enthusiasm about it. The 50s and 60s, energy

Energy is going to be free. And then you had Three Mile Island, then you had Chernobyl, et cetera. And all of a sudden, the demand and the build out and scalability goes away. Whereas now today, we're seeing a reemergence of these companies because there's been a lot of innovation that's happened in those preceding years.

on a first principles basis, thinking of, okay, the regulation is really important here, but how can we innovate and make a product that fits in with that while still achieves better and cheaper goals? So I think a lot of the innovation or the style of innovation, which we've seen SpaceX pioneer, is increasingly being used in other industries, which on the face of them are very capital intensive, highly regulatory, but they're now creating business models, which take into account of that and think about how can they subsidize the technology within that.

There's quite a lot of other traditionally hard capital intense industries where there's a lot more business innovation going on. And that's really important because that is going to empower the technological innovation.

For such a long period of time, we've seen technology, digital innovation, software, and those business models can be so attractive. Once you get into capital intensive hard asset things, it becomes a more difficult equation, but a very great example here of what's possible. This has been a fascinating conversation again, Luke. Thank you so much for sharing the knowledge. Appreciate you joining us. Sure. Thank you for having me.

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