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Is it time to short space?

by Ronald van der Breggen, CEO, Route206 b.v.

It’s often said that “people have short memories’ when speaking about the economy. It means that somehow, we seem unable to keep a cool head when stock markets are rallying, and the economy is in a bull run. When money seems to be thrown at everything that moves, the fear of missing out (FOMO) keeps people from asking tough questions and sometimes seems to destroy common sense all together. People then put their money in all sorts of exotic ventures, just to be part of it. To be fair, during these times there are also those who are convinced the market is just about to crash, causing havoc and mayhem just like during the financial crisis in ‘08 and the burst of the ‘dot com’ bubble in ‘01. Great topic for discussion for anywhere from the boardroom to the watercooler – everyone is right until they’re wrong.

Our financial system, the economy and money itself is based on trust. That has always been the case and for as long as it is the case, there will be emotions, disagreements and discussions surrounding the state of the economy, what makes sense and what doesn’t. That is inherent to the trust-based system that our economy is.

In that context it is really no issue that people have short memories. After all, it’s said that a bad memory is the key to a happy marriage (also trust-based). Therefore, a short memory may just be the key to a resilient and thriving economy that always bounces back, finding new ways to grow and succeed. For those that disagree and are of the opinion that ‘everything that goes up must come down’, take a look at Apple’s stock price since its introduction in 1981.

Markets do not crash simply because it is time for them to do so. It has nothing to do with time. Markets crash when trust has been broken and consequently, markets start bouncing back when trust has been restored. 

Trust but verify

Trust alone is not enough however. As the saying goes: “Trust but verify” and a very bad case where this went terribly wrong is Enron. In 1992 they announced the building of a 3B$ natural-gas power plant in Dabhol, India. Up until the very end, Enron’s well trusted CEO and Wall Street darling Jeff Skilling, continued to promise the plant would come in at a whopping 25% IRR. There was however something fundamentally wrong with Dabhol: There were no customers! The Indian GDP was such that no-one could afford to buy that energy. Unbelievable as it may sound, trust prevented people to ask the simple, yet fundamental question: Who’s going to pay for this? Meanwhile Jeff & Co. had already put future(!) revenues for Dabhol and many other projects in the books using mark to market (MTM) accounting. Their accountant Arthur Andersen gave it their thumbs up and Wall Street went along until it was too late. The rest is history. Enron disintegrated almost overnight and took Arthur Andersen with them. Jeff Skilling ended up in Federal prison for 12 years, only to be released right before the Corona lockdowns started. Life is funny that way.

If trust can get in the way of verification to a point that even accountants end up in la-la land, what can we do to prevent this from happening in our industry, one that is characterized by even bigger projects than Dabhol? The answer is in the business plan.

In the space industry we have some cool and highly trusted industry icons of our own. Take Elon Musk. Let me start by saying that we have a lot to thank Elon for: He single handedly slashed our launch costs in half, and then some. I am still in awe every time I see his Falcon rocket return to earth, ready to be used for a next launch. I am however not impressed by SpaceX’s StarLink project. Sure, its technology may be revolutionary, but its objective to become a 30 billion dollar gateway-based ISP within 5 years, through 99$/m subscriptions is too farfetched. Outgrowing a global telecom operator like BT within 5 years is already hard to believe, but doing so with revenues that come from rural broadband is simply absurd. Facing this harsh reality, and just like O3b and OneWeb who had similar lofty plans in ’09 and ‘15 respectively, SpaceX is now also focusing on government segments. Lucky for them they have also secured 1B$ in RDOF funding, also allowing them to somewhat move away from its impossible task to find 2MM subs and keep them. Meanwhile the business plans of O3b and OneWeb are still to come to fruition and the signs aren’t great: SES – O3b’s current owner – is yet to issue a press release that O3b is finally turning a profit and pre-revenue OneWeb has already gone through a bankruptcy!

Dig deeper than 3F

With that, we should have learned that a business plan cannot be about: ‘making the world a better place while generating lofty revenues by offering satellite Internet access using disruptive technology‘. For a commercial enterprise in a free market, a business plan should be about solving big problems in a unique, yet efficacious way and for which customers have money set aside. To use disruptive technology is great, but it better be well-tested. The latter, uninspiring statement may seem like a real downer, and it is indeed much less exciting, but if it ensures a company’s success and potentially prevents an industry from collapsing, then that’s a very small price to pay.

We can all agree that at this moment our industry is in the middle of executing a series of high-stake business plans, with SpaceX’s StarLink clearly as the leader of the pack. Trust in our leaders evidently is very high and potentially overleveraged from an industry perspective. This means that if one of the big bets fail, it will have serious consequences for the entire space ecosystem. While shorting space stocks might be a tad too early, it is now more important than ever to reduce some of that trust-leverage. For that we need to pay very close attention to the business plans of new and existing space companies, certainly those that aspire to become operators. Are they targeting a customer base that has enough money? Are they solving real and expensive problems? Can they afford to ask for premium pricing? Has the technology been proven or at least thoroughly tested? Is there potential for partnerships in support of scalability and market development? Over time and long term these issues are more important than the short term 3Fs we focus on today: Is there a Fancy story with a spectrum Filing and some Financing?

Conclusion

Our industry is in the middle of getting some high-stake ventures off the ground and trust is highly leveraged. While it is too early to conclude our money is at risk, we should pay closer attention to the space business plans. Any new venture, certainly an aspiring satellite operator, is well advised to present a business plan that appeals to common sense, providing long term solutions and sustainable profits, rather than mere new technology in a price competitive market. <>