chapter 8 commercialization of space technology

Chapter 8

COMMERCIALIZATION OFSPACE TECHNOLOGY

Contents

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Process of lndustrial Innovation in Space . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Product, Process, and Service Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Satellite Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Remote Sensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Space Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Materials Processing in Space . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Government Encouragement of Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . .Aeronautics . . . . . . . . . . . . . . . . . . . . . . .Communications Satellites . . . . . . . . . . .The Joint Endeavor Agreement . . . . . . .

Other Space-Related Commercial ActivitiesFinancing Space Ventures. . . . . . . . . . . . .Insurance . . . . . . . . . . . . . . . . . . . . . . . . . .Hardware Sales . . . . . . . . . . . . . . . . . . . . .

The Aerospace InNew Markets . .Ground Support

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Chapter 8

COMMERCIALIZATION OF SPACE TECHNOLOGY

INTRODUCTION

A commercial activity is generally understoodto be one undertaken for profit in the public mar-ketplace; “commercialization” then implies thetransfer of technology from a research and devel-opment (R&D) and/or federally supported opera-tions stage to a for-profit stage, usually underprivate sector ownership and control. It is difficultto give a precise definition for commercializationbecause the term assumes a variety of specificmeanings depending on the context in which itis used. For example, aerospace companies earna profit on the aircraft they manufacture for themilitary, but military aircraft are generally not con-sidered to be commercial products, except inso-far as they are sold to other countries. Civilianaircraft, on the other hand, are considered thor-oughly commercial, in that they are designed,developed, and sold to make a profit in a com-petitive marketplace. Nonetheless, such aircraftdepend partly on technology developed by theFederal Government, either for military use, orin a Government research program.

Though the desired result of all efforts towardcommercialization may be similar (i. e., to earn

a profit in a competitive environment), the proc-esses necessary to achieve this result and thesources of the technologies involved are oftenquite different. Such differences become signifi-cant in a context such as the U.S. space program,in which commercialization of space technologyis encouraged as a matter of policy. The purposesof this chapter will be to: 1 ) identify some of theproblems involved in trying to commercializespecific space technologies; 2) examine privatesector attitudes towards commercialization; and3) describe some of the current Government pro-grams implemented to encourage commerciali-zation.

This chapter begins with a discussion of the spe-cial factors that space introduces to the processof industrial innovation. New product, process,and service innovations are analyzed along withthe barriers and inducements to their commer-cialization. The remainder of this chapter dis-cusses several of the current space-related, prof-itmaking activities and indicates areas in whichthe private sector may invest in the future.

PROCESS OF INDUSTRIAL INNOVATION IN SPACE

Overview

In most areas of business opportunity, FederalR&D funds support or supplement larger privateR&D investment. Public funds are generallythought to be justified for basic research into high-risk pursuits with long payback times, or for tech-nologies having obvious social benefits. With re-spect to space, and with the notable exceptionof some communications applications, the privatesector has invested relatively little in R&D explor-ing new business possibilities. This puts the Fed-eral Government in the position of pushing tech-nological opportunities in an area without sub-stantial business interest beyond the aerospacecommunity or an established or integrated mar-

ket. The purpose of this section will be to explorethe Government’s recent emphasis on commer-cializing space technology and the reasonsbehind the reluctance of the private sector to in-vest capital in space research.

Although the basic characteristics of the inno-vative process (see app. H) can be applied to anyindustry, innovation in space technology raisesseveral unique problems. Among the specialcharacteristics of space-based innovation, thefollowing stand out:

● Entry costs are extremely high. No form ofground-based research, development, anddemonstration can do away with the require-

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ment for testing of systems in space beforea new business using space-based technol-ogy can apply it commercially. Access toorbit is very expensive, and will continue tobe expensive even in the shuttle era, particu-larly if compared with the costs required todevelop and demonstrate the commercialviability of most Earth-based innovations.Even with the less stringent design re-quirements of the shuttle payload bay, spacesystems are more expensive to design thantheir Earth-bound equivalents. The cost ofusing the shuttle as a laboratory to verify ordevelop potential innovations may discour-age many potential developers. This addi-tional expenditure, incurred well beforecommercial feasibility has been established,is a radical departure from normal productdevelopment on Earth.

Ž Government controls the means ot accessto space. Until some entrepreneur is capableof operating a reliable space launch system,access to space will be through launchers de-veloped and operated by the Government,In few other business sectors is an essentialelement of the innovative process totallyunder Government control. Access tolaunches, launch assurances,. availability ofsupport facilities, and the cost of spacetransportation may all be influenced by non-business considerations such as changes inan administration’s space policy, nationalsecurity constraints, or fluctuations in con-gressional and public support. If the neces-sary space facilities are not available whenneeded, the resulting costly delays could befatal to a new commercial program.

● The markets for space industrialization areundeveloped. Unlike innovations thatemerge from an existing or clearly possiblemarket opportunity, some space-based busi-nesses will be based on totally new capabil-ities that will have to create new markets.Communications satellites, the often citedexample of successfully commercializedspace technology, were a more efficientsubstitute for existing means of long-distancecommunication. This interchangeability oftechnologies is not characteristic of many of

the other space-based business opportunitieswhich have been identified to date.

● Public interests dominate space activities.There are few areas of space applications inwhich one or more of the following publicconcerns—national security, internationaleconomic competition, return to the publicfrom the investment of Government funds,improving the quality of public services pro-vided by Government—are not influential.As a result, it is difficult to disentangle spaceapplications from their public-sector origins.For the foreseeable future, it is difficult tounderstand how space systems will be devel-oped and operated as totally private ventureswithout some form of Government oversightor involvement.

Product, Process, and Service Innovation

Much of the current discussion concerningspace industrialization has focused on the uniquecharacteristics of the space environment and thenew product, process, and service innovationsthat may result from the use of this environment.There is a tendency in such discussions to regardspace industrialization as an undifferentiated setof activities, each offering equal opportunities forinvestment and commercialization. Importantdistinctions concerning the sophistication andreliability of the relevant technologies and thepresence or absence of a market for the proposedinnovation are often overlooked. Consequently,space activities that have pregent commercial po-tential are often confused with those that mere-ly offer productive avenues for basic research.It is important to review a few of the current andproposed space activities in order to understandhow their many individual differences affect theirpotential for successful commercialization. Thefollowing section will take a brief look at satellitecommunications, remote sensing and space trans-piration, with a more detailed examination of thecommercial prospects for materials processing inspace.

Satellite Communications

To understand how communications satellitesfit into the overall scheme of space industrializa-

Ch. 8—Commercialization of Space Technology Ž 221

tion, it is necessary to view this technology in anhistorical perspective and to disregard for themoment its present complex manifestations. I nthe late 1950’s in the United States there was agreat deal of Government and private interest insatellite communications. The private sector, not-ably AT&T, was keenly aware of the commercialpotential of such systems and was proceedingwith its-own research while keeping a close watchon the progress of both the National Aeronauticsand Space Administration (NASA) and the De-partment of Defense. The research of AT&T even-tually resulted in the design and construction ofTelstar, the U.S. first civilian active repeatersatellite. 1

The fact that AT&T initiated and funded its ownsatellite research program without first obtainingfrom NASA a guarantee for financial or technicalassistance is a point that deserves some scrutiny.Corporate investment in new product devel-opment is generally undertaken only after acritical appraisal of the relevant technology, theanticipated development cost and anticipatedreturn, and the market demand. AT&T’s decisionto extend its communications network into spacewas no exception to this general rule.

From the technological point of view, commu-nications satellites had three distinct advantagesover many of the space projects that are presentlyunder consideration. First, a communications sat-ellite is, or rather can be, a very simple device.All that is required is the proper placement abovea specific Earth point and the ability to reflecteither radio or microwaves to another Earthpoint.2

Secondly, much of the research and testing ofa communications satellite could be done on theground. This meant that development time wouldbe faster and research costs would be lower andmore predictable.

Finally, corporate developers had the assuranceof knowing that when their product was finished

1 D. Smith, Communications Via Sate//ife, 1976, p. 82.‘Using this basic concept, the U.S. Army Signal Corp, in 1945,

undertook project Diana, which was an attempt to use the Moonas a passive reflector of radio signals. This research led to the devel-opment, in 1959, of a two-way transmission system between Wash-ington and Hawaii. Ibid., p. 30.

it would provide them with three distinct advan-tages over ground-based communication sys-tems. These advantages are insensitivity todistance, broadcast ability, and flexible routing.Distance insensitivity means that the cost of com-municating between two points remains the sameno matter how far they are apart. This mustbe contrasted with communications by cable,where the cost is nearly proportional to the lengthof the cable. A satellite is also capable of broad-casting simultaneously to several Earth points,whereas a cable can carry communications onlybetween two specific locations. Flexible routingmeans that a satellite’s circuits can be switchedto different routes as traffic patterns change. Ter-restrial circuits, on the other hand, must be plen-tiful enough to meet peak demands on specificfixed routes,

Another important factor that went into AT&T’sdecision to invest in satellite communications wasits dominant market position. In addition to itslarge domestic telephone market, by the timeEarly Bird was launched in 1965, AT&T owneda majority interest in all the transatlantic cablesconnecting North America and Europe. Unlikethe firms which today may be considering sometype of enterprise in space, AT&T had a stronghold over the market it was about to enter. Ina similar vein, Western Union’s development of“Westar,” the first domestic satellite system,should be viewed in light of Western Union’sposition as the sole domestic telegraph carrier.Its decision to offer domestic satellite service pro-ceeded in large part from its evaluation that amarket for this specialized service existed.

In the early 1960’s, communications satelliteswere also attractive from a financial point of view.A Rand Corp. report published at this time hadestimated that a low-altitude satellite systemwould cost approximately $8,500 a year perchannel, compared with $27,000 for a new un-derwater cable system.4 Though these projectionswere not entirely accurate, the commercial re-sults of the use of communications satellites arereflected in the history of transatlantic telephonecharges. In 1966, immediately after the first com-

3h4. Kins]ey, Outer Space and /nner Sanctums, 1976, P. 131.4D. Smith, op. cit., p. 67.

222 Ž Civilian Space Policy and Applications

munications satellite went into operation, month-ly charges for transatlantic phone circuitsdropped sharply and have continued to fall sincethat times This reduction in price reflects the factthat satellites are a cheaper, more efficient meansby which to accomplish long-distance terrestrialcommunications.

Remote Sensing

Remote sensing of the Earth from space is thesecond of the space applications with near-termcommercial potential. (For a more detailed dis-cussion of this subject see ch. 3.) When Landsat1 was launched in July of 1972, the U.S. Govern-ment owned and operated, through NASA, boththe space and ground segments of the system.6

Recently, responsibility for the operation of acivilian remote sensing system has been as-signed to the Commerce Department’s NationalOceanic and Atmospheric Administration(NOAA). Eventually NOAA will take over theoperation of the Landsat spacecraft now operatedby NASA with the ultimate goal of transferringboth the space and ground segments of the sys-tem to the private sector.

Though there is a considerable amount of inter-est in remote sensing, it is unclear whether theprivate sector can accept the full responsibilityfor a complete Earth resource system. There arethree main reasons for this reluctance.7 The firstis that, unlike satellite communications, the mar-ket for remote sensing is quite new. Though itis potentially strong, it is now too undefined toallow accurate projections of return on invest-ment. The second problem is that the Govern-ment is now and will probably remain the largestuser of remotely sensed data. The success of pri-vate enterprise in this area will depend on wheth-er or not the Government decides to satisfy itscivilian remote sensing data requirements froma private operator, the price it will pay for suchservices and whether the Government will agreenot to compete with the private sector. The third

Sj. E. Schnee, “inventory of Space Activities (Economic), ” pre-sented at the Symposium on Space Activities and Implications, insti-tute of Air and Space Law, McGill University, October 1980.

bFor a brief history of the Landsat program and technology see:National Academy of Sciences, Resource Sensing From Space, 1977.

7See generally: An Interagency Task Force “Private Sector involve-ment in Civil Remote Sensing, ” June 15, 1979.

problem is that the prices now charged for datawill not support systems costs. Up until this timethe costs of data have reflected only the marginalcost of reproduction. This has been possible be-cause NASA, during the R&D phase of its remotesensing program, subsidized all of the operation-al costs. In the near future the French and Japa-nese may be operating government-subsidizedremote sensing satellites. If this is the case, U.S.firms, whose price structures must reflect the totalcosts of operations, may not be able to competein the world market.

As a result of these factors, it is unlikely thatthe private sector will be interested in owning theremote sensing system as presently configureduntil investors perceive that the probable returnon investment is at least comparable to thatavailable from other risk-investment opportuni-ties. It should be noted that Landsat may not bean appropriate model by which to gage the costsof a commercial remote sensing system. BecauseLandsat is an R&D system, it is encumbered withmany costs and inefficiencies that could be elim-inated in a commercial system developed to meetspecific user needs with appropriate and cost-effective technology.

At this time corporations are involved only indi-rectly in remote sensing from space. In additionto the products and services developed and man-ufactured by the aerospace industry for the vari-ous Federal programs, the private sector has alsodeveloped and provided analytical hardware,software and services to private and Governmentusers.

presently, there are over 50 organizations in theUnited States involved in the analysis of remote-ly sensed data on a commercial basis. These orga-nizations use the imagery acquired from spaceto evaluate areas of the Earth’s surface for suchvaried purposes as hydrocarbon resource poten-tial, estimating crop production and land usesurveys. Several firms are also selling hardwaredesigned to process remotely sensed data.

[n the near future, it would appear that privateinvolvement in remote sensing will be limited toproviding the above mentioned hardware salesand “value-added” services. Only when the mar-kets are sufficiently large, with data prices reflect-

,


ing the true costs of acquisition, can the privatesector be expected to own and operate remotesensing systems.

Space Transportation

Recently there has been considerable discus-sion concerning the possibility of establishing pri-vately owned launch systems. This discussion hasfocused on three alternatives: 1) commercializa-tion of the U.S. present expendable launch ve-hicles; 2) transfer of shuttle ownership and/oroperation to the private sector; and 3) privatedevelopment of a new generation of low-cost ex-pendable launch vehicles. At present, theabsence of a comprehensive Government policywhich favors and encourages the participation ofthe private sector in launch system ownership hasinhibited such developments.

The present expendable launch vehicles (ELVS),such as the McDonnell Douglas Delta and theGeneral Dynamics Atlas-Centaur, are alreadyoperated on a quasi-commercial basis. Thesevehicles are commonly purchased through NASAby communications companies for communica-tions satellite launches. Although the vehicle islaunched by the Government, its cost and andthose related ground services are borne by theprivate sector purchaser. The transition from thequasi-commercial provision of launch services toa purely commercial system may be difficult toaccomplish. Because the Government has his-torically developed and operated launch vehiclesand presently owns all of the sophisticated U.S.launch facilities, some form of Government-in-dustry cooperation would seem to be a necess-ity. This, in itself, should not be a cause of con-cern because, as the aeronautics industry proves,Government and industry can work together tothe mutual benefit of each. The problem thatdoes arise, however, is that in certain instancesthe goals of the Government are not those ofindustry.

For example, the present Government commit-ment to the shuttle entails several costs whichNASA, at present, does not intend to recoverfrom shuttle users. This type of subsidy allows theshuttle (and likewise the Ariane launch vehicleof the European Space Agency (ESA)) to be priced

in a manner that does not reflect the true costsof operations. From NASA’s standpoint as anR&D agency this subsidy may be desirable be-cause it encourages the use of a newly developedsystem. However, the shuttle price then becomesthe price the private sector must match in orderto compete for commercial payloads. Becausea commercial operation must not only meet itscosts but also generate a profit, it is questionablewhether proven technology such as the U.S. ELVScan be commercially competitive in the absenceof some form of Government assistance. Suchassistance couId come in the form of a promiseof a certain number of government launches, ac-cess to government launch facilities or more tradi-tional incentives such as tax breaks. However,given this country’s long-term commitment to theshuttle, it seems unlikely that such assistance willbe forthcoming.

There has been some discussion concerningthe possibility of converting surplus militaryrockets, such as the Polaris or Minuteman, tocommercial launch vehicles. Given that the Gov-ernment would support such a plan, the main ad-vantage to using these vehicles would be theirextremely low cost. There would, however, bea number of disadvantages. Because these vehi-cles do not have the power to carry large pay-loads to geostationary orbit, they could not beused to launch many of the newest communica-tions satellites. Furthermore, the fact that theselaunch vehicles would be surplus equipment op-erated by nongovernment personnel would makeit difficult, at least initially, to obtain launch con-tracts from companies accustomed to the securityof dealing with NASA. It would be unlikely thatcustomers would be willing to entrust valuablepayloads to an unproved private company par-ticularly if adequate launch insurance were notavailable.

Transfer of the shuttle to the private sector hasalso been considered. Such a decision would in-volve a major policy shift on the part of the Gov-ernment, with substantial institutional and finan-cial reprecussions. Important questions wouldhave to be examined: 1) what part, if any, of theshuttle development costs should the Govern-ment attempt to recoup; 2) could the national


security needs of the United States be met by aprivately owned shuttle; and 3) could a privateshuttle compete in the international arena withforeign, subsidized launch systems? None ofthese problems necessarily prevents the shuttlefrom being owned and operated by the privatesector; however, the resolution of any of theseproblems requires a substantial degree of Govern-ment involvement.

Several private firms have also consitiered thepossibility of developing a new generation of low-cost launch vehicles. However, even usingproved ELV technology, the high cost and longdevelopment time associated with such an en-deavor have so far prevented the successful de-velopment of such a vehicle. Were such a firmto be technologically successful, commercial suc-cess would still depend on a positive Governmentattitude toward such an enterprise. Questionssuch as launch safety, payload regulation, acquisi-tion of new launch facilities, and launch agree-ments with foreign governments would still re-quire resolution. The time and expense involvedin developing a private launch system combinedwith government delays and regulatory complica-tions may well create too heavy a burden for theprivate sector to carry alone.

Materials Processing in Space (MPS)

As indicated earlier in this report (see ch. 3),the unique properties of outer space, most not-ably microgravity, are amenable to a number ofindustrial processes. Some of the organic and in-organic materials that may in the future be proc-essed in space have already been mentionedabove. it should be noted, however, that the nas-cent state of MPS technology and the lack ofclearly defined markets place materials process-ing in a long-term, high-cost, high-risk categorythat is generally beyond the interest and finan-cial capabilities of most private commercial con-cerns. It is unrealistic to expect any major finan-cial commitments from the private sector untilthe technical capability and economic feasibil-ity of new space processing techniques have beendemonstrated. At least for the near future, theresponsibility for proving the technical and eco-nomic feasibility of new space technologies willrest on the Government acting, either alone or

in joint ventures with the private sector. Becauseof the emphasis NASA placed on commercializ-ing MPS technology, it is useful to examine thisspace application in some detail.

BARRIERS TO COMMERCIALIZATIONOF MPS TECHNOLOGY

Most of the products and processes presentlybeing considered for development in space are,at best, in the basic research stage of the innova-tive process. Though it would be correct to saythat the private sector will begin to invest in spaceindustry only after achieving a more sophisticatedunderstanding of how materials and processesbehave in space, such an analysis identifies onlyone aspect of its reluctance. A number of com-mercial, legal, and organizational factors mustalso be considered.

Few attractive investments.—of all the barriersto process innovation in space, the most impor-tant is that the ideas for new products and proc-esses that have been suggested simply are notvery attractive investments. Industrial R&D proj-ects are a discretionary expenditure, and there-fore must compete for corporate capital withother investment opportunities. A project’s abilityto compete is a function of the amount of riskit involves, its estimated front-end costs, and itsforeseeable rate of return.

The risks involved in space innovation are con-siderable. For example, several pharmaceuticalproducts have been identified that may be pro-duced either more cheaply or with greater easein outer space. However, before any of theseproducts could reach the market a number of sig-nificant problems would face the manufacturer.First, there would have to be a period of ground-based R&D where the techniques to be employedin space would be developed. Next, the processwould have to be verified in space. This prob-lem depends on the availability of NASA test facil-ities, such as the shuttle, which in turn dependson how the current political and economic envi-ronment affects NASA funding. Because the Gov-ernment has the right to terminate contractsunilaterally, a company that has spent millionsof dollars on R&D could find itself without ac-cess to shuttle flights. Though the Governmentmight have to reimburse a client’s costs on a con-

Ch. 8—Commercialization of Space Technology ● 225

tract it canceled, such reimbursement would notinclude the opportunity costs—that is, the costsof devoting resources to a space processing pro-gram in place of some other business opportuni-ty. If the process were verified in space, Food andDrug Administration (FDA) approval would stillbe necessary before the new pharmaceuticalproduct could be marketed, and–depending onthe complexity of the manufacturing process—new legal and regulatory agencies might benecessary.

Even if all of these R&D hurdles could becleared, the economic success of a drug manufac-tured in space would still depend on the com-pany’s ability to produce and sell large enoughspecific annual quantities of a new product. It isunlikely that the shuttle, as it is presently con-figured, could guarantee such a requirement.Long-term MPS facilities based in space and dedi-cated to commercial space processing neitherexist nor are planned for the near future.

It is by no means certain that a firm wishingto manufacture a product in space would haveto face all of the complications enumeratedabove. The results of MPS experiments under-taken over the next 2 to 5 years may reveal manycommercially attractive opportunities for prod-ucts or services that can be performed on theshuttle as presently configured. Nonetheless, therisks involved in space-based product researchdo create a substantial barrier to investment.

In addition to the technical and institutionalrisks involved in utilizing the space environment,there are also uncertainties regarding cost anddevelopment time. The present shuttle pricingschedule does not reflect the true costs of opera-tions. A recent General Accounting Office reporthas suggested that NASA should void its pricingpolicy (except for those launches that have legallybinding agreements) and charge “substantiallyhigher prices for future Iaunches."8 Uncertain-ties as to the price of future shuttle missions makeit difficult for business planners to estimate thecost of space-based product development.

Firms interested in investing in a new productmust estimate that product’s potential rate of

“’NASA Pricing Policy on the Space Transportation System,” GAOReport to Congress, Feb. 23, 1982.

return. When considering the rate of return thata space-based industry might generate, one musttake into account the development time of sucha project. Because a dollar held today has greaterbuying power than a dollar held in the future,the dollar that is anticipated in the future mustbe “discounted” to reflect its actual value intoday’s dollars. This means that the longer anyproject takes from its R&D phase to commer-cialization, the greater the profit must be whenthe project begins to make money. This is par-ticularly true during times of high inflation andhigh interest rates. The combination of technicaluncertainties and potential problems in obtain-ing the shuttle flights necessary for projectverification makes it difficult to predict thedevelopment time for space-based projects. Thecombination of high-cost, high-risk, long-paybacktime and uncertain rate of return makes it difficultfor space-based projects to compete for internallygenerated corporate capital with other, moretraditional, investment opportunities. Similarly,conventional methods of financing such as equitycapital or borrowing may not be available, andthe degree of risk involved here may also discour-age the flow of venture capital into this area. g

Uncertainties as to value of space environ-rnent.-ln addition to the view that there is littleto be done in space, there is a tendency in thebusiness community to believe that whatever canbe done in space can also be done on Earth.Though it is often stated that the microgravity ofspace is fundamentally different from Earth grav-ity and cannot be duplicated, new technologieshave been developed which do minimize the ef-fects of gravity on Earth. Examples of this fact canbe seen in recent developments in containerlessprocessing and in the manufacture of latex po-lymers.

It is believed that one of the advantages to in-space manufacturing will be that materials canbe processed without picking up impurities fromthe wall of the container that holds them. Recent-ly a U.S. firm working with NASA developed acontainerless processing system for making spe-cial glass products on Earth. 1o in this system the

gThe space industrialization Act of 1979: statement Of Russell Car-

son at hearings on H.R. 2337, before the Subcommittee on SpaceScience and Applications, 96th Cong, 1st sess., p. 1767.

!Olndustry Week, Mar. 3, 1980, P. 90.


glass is suspended within a chamber by soundbeams in a process called acoustic levitation.Another example of an Earth-based advance thathas a space counterpart is the manufacture oflatex polymers. It is believed that, in space, latexpolymers could be enlarged to as much as 40 mi-crons. Although it had been assumed that thegravity on Earth would limit the expansion ofthese materials to 2 microns, Norwegian scien-tists using new chemical techniques have in-creased the size of latex polymers to 10 mi-crons. 11 Though neither process functions as effi-ciently as would similar space-based processes,they are accomplished without the enormous ex-pense and administrative complexity of space-based manufacturing. Industry will be hesitant toinvest in space as long as there is at least somehope that Earth-based manufacturing techniquescan accomplish similiar results.

Prior investment in Earth technology.–Even ifindustry could be sure of the commercial viabilityof some of the projects that have been proposed,its prior investment in Earth-based technologymay make it reluctant to pursue new innovationsin space. Radical innovation, whether in spaceor on the Earth, usually means discarding expen-sive equipment before a company has had timefully to depreciate it. For example, it has beensuggested that the U.S. auto industry’s enormousinvestment in automating the manufacture of castiron brake drums probably delayed by more than5 years its transition to disc brakes.12 Some com-panies prefer safer methods of maximizing prof-it, such as advertising, market research, andautomation, rather than risking investment in newproducts and processes. The majority of industrialproduct and process development is directed atreducing costs and increasing profits in the shortrun. For this reason it is more common for in-dustry to seek new methods of making existingproducts more cheaply or marketing them moreeffectively than to develop new products.

This is not the first time that this conflictbetween old technology and new has been anissue in the space debate. In the early 1960’s,

‘ 1 Ibid.IZRobert H. Hayes and William j. Abernathy, “Managing Our WaY

to Economic Decline” Harvard Business Review, july and August1980, p. 70.

when Congress was trying to fashion an insti-tutional structure and a method of ownershipfor the Communications Satellite Corporation(COMSAT), there were serious reservations aboutallowing the existing international communica-tions carriers to invest in the corporation. It wasassumed that companies with large investmentsin existing facilities would be reluctant to takespeedy action to implement new satellite systemsthat would make their existing facilities obsolete.To some extent, a similar concern may be raisedregarding companies that could benefit fromspace-based manufacturing techniques. Even ifthe product that could be produced in space isbetter or more efficient than its Earth-man-ufactured equivalent, a corporation’s prior in-vestments may prohibit it from pursuing this newtechnology.

Intellectual property. -Another potential bar-rier to process innovation in space is the fact thata large portion of the private sector has no expe-rience in dealing with the Federal Governmentother than as an occasional vendor of suppliesand materials. In the normal course of events, afirm working for the Government is required tosubmit periodic reports detailing the progress ofits work. Such requirements are at odds with theusual desire of industry to protect its investmentsin R&D by refusing to disclose details or resultsof current research. Industry is also concernedthat a business relationship with the Governmentcould result in the loss of certain intellectual prop-erty rights.

The Freedom of Information Act13 raises a num-ber of problems concerning the protection of dataand proprietary rights. It requires the disclosureof “Government records” upon request, unlessthe records fit into one of the narrow exceptionsto the act. Information obtained under a guaran-tee of confidentiality may be protected and“trade secrets” are a recognized exception to theact. A company working with NASA must careful-ly screen that which may become a “Govern-ment record” and be sure that if sensitive infor-mation becomes “Government record” it qual-ifies as one of the exceptions to the disclosurerequirements.

135 us. 552.

Ch. 8—Commercialization of Space Technology . 227

Several legal issues may inhibit the private sec-tor’s involvement in the innovative process inspace. The first concerns the question of owner-ship of the patent rights to new products andprocesses discovered during the course of a jointendeavor with NASA. Section 305 of the 1958NAS Act states that “whenever any invention ismade in the performance of any work under anycontract of [NASA], such invention becomes theexclusive property of the United States unless[NASA] waives rights thereto . . . "14 A strictreading of this section would vest in NASA theownership of all inventions discovered whileworking for, or in a joint venture with NASA.Over the last two decades NASA has limited theapplication of section 305 to activities performedfor NASA which have as their main purpose thedevelopment of some new product or process.With regard to joint ventures, it has been NASA’sposition that neither party assumes any obliga-tion to perform inventive work for the other, andaccordingly each party retains the rights to anyinvention that may be made in the course of theventure. 15

International Law. –I n the area of internationallaw, the private sector seems to be troubled bythe growing use in international treaties of “com-mon interest” clauses such as the Common Heri-tage of Mankind principle which has been dis-cussed at the Law of the Sea Convention and ap-pears in the proposed Moon Treaty.l6 Simplystated, these clauses assert that certain resources,such as the minerals on the ocean floor and onthe Moon and the “slots” in geostationary orbit,are presently under the jurisdiction and controlof no sovereign power; these resources, beingfinite and exhaustible, should not be allocatedto the developed countries on a first-come, first-served basis, but rather, should be made to bene-fit all nations. Although these “common interest”clauses have found their way into all the majorspace treaties, there is considerable uncertaintyas to their status within the body of international

T 442 u .s, c. 2451, et. seq.I Jspace Industrializatio n Act of 1979: statement of Robert A.

Frosch at hearings on H.R. 2337, before the Subcommittee on SpaceScience and Applications of the House Committee on Science andTechnology, 96 Cong. 1st sess., 1979.16Agreement coverning the Activities of States on the Moon andOther Celestial Bodies, U.N. doc. A1341664.

law. Some writers have suggested that theseclauses are merely pragmatic principles withoutlegal force.l7 Others regard them as binding prin-ciples which obligate states to be responsive insome form to the interests of developing coun-tries. l8

The use of “common interest” clauses in inter-national treaties has brought about strong opposi-tion from the private sector. The most commonargument heard in this regard is that the conceptof equitable sharing is inconsistent with the con-cept of profit, and in the absence of the profitmotive private enterprise cannot be expected torisk capital on space investments. At this stageof space industrialization such considerationshave had only a minimal effect on the privatedecisions whether or not to invest in space.

INDUCEMENTS TO PROCESS INNOVATIONIN SPACE

Profit potential. –Though there are substantialphysical, economic, and psychological barriersto process innovation in space, certain in-ducements do exist which may encourage privatesector participation in this area. Probably themost important incentive to the private sector isthe potential for making a profit. At the presenttime only two product areas seem to offer thecombination of technical feasibility and marketpotential that are necessary for a profitable ven-ture. The first of these product areas is pharma-ceuticals.

McDonnell Douglas together with Ortho Phar-maceutical Corp. has investigated the commercialcial potential of several pharmaceutical products,which could be processed by electrophoresis inspace, and has entered into a joint agreementwith NASA to test this technology. This projecthas been described by McDonnell Douglas as an“aggressive, well-ordered commercial businessventure” in which the combined investment ofthe pat-ties will be measured in terms of millionsof dollars. Clearly McDonnell Douglas and Ortho

1 ZC. Q. Christol, “The Legal Common Heritage of Mankind: Cap-turing an Illusive Concept and Applying It to World Needs, ” XVIII,Colloquium on the Law of Outer Space, 1976, p. 42.

15. Gorove, “Limitations on the Principle of Freedom of Explora-tion and Use of Outer Space,” X111, Colloquium on the Law of OuterSpace, 1973, p. 74, et. seq.


believe that there is a profit to be made in devel-oping this technology.

Other potentially profitable products that canbe manufactured in space are the starting materialfor electronic devices such as large-diameter crys-tals. Like pharmaceuticals, these crystals have ahigh market value per unit mass. The facilitiesneeded to manufacture the basic materials arealso small, so that the total orbital mass is low,even for very high production rates. The econom-ic advantage of manufacturing the starting mate-rials for electronic devices in space is less surethan for pharmaceuticals and no one has madea major investment in this technology.l9 It shouldbe noted that the Earth-manufactured electronicdevices presently enjoy a sales level of about $16billion per year with an estimated growth rate of10 to 15 percent annually for the next 10 years.Such a healthy market is conducive to innova-tion and may eventually provide the incentive forthe private sector to invest in space-based manu-facturing techniques.

In addition to products, it is possible that theprivate sector may find it profitable to offer cer-tain space-based services. The GTI Joint EndeavorAgreement with NASA (discussed below) is basedon this assumption. GTI is developing a metal-lurgical furnace which it hopes to rent to partiesinterested in the effects of solidification in micro-gravity. As experience is gained in MPS research,it is likely that other space-based services will beoffered by the private sector.

Scientific knowdedge. –Another reason that theprivate sector may wish to invest in process inno-vation in space is to gain a better understandingof present Earth-based manufacturing techniques.For example, methods now used for the commer-cial growth of large crystals have been developedempirically with little theoretical understandingof what occurs at the microlevel during growth.It is possible that significant improvements inEarth-based crystal growth could result if low-gravity experiments were to provide a better the-oretical understanding of the growth process. Ina similar vein, the John Deere Corp. has entered

lgMaterials processing in Space, report of the Committee on Scien-tific and Technological Aspects of Materials Processing in Space,National Research Council, 1978, p. 40.

into an agreement with NASA to study the solidi-fication of cast iron. The purpose of this researchwill be to gain a better understanding of how thegraphite formation of cast iron influences themetal’s properties. It is expected that low-gravityexperiments will provide insights into this ques-tion which, though obtained in space, will havepractical use on Earth.

Institutional incentives. — In order to encourageprivate involvement, NASA has established theCommercial Applications Office in its MPS pro-gram. This office forms a bridge between NASAand the private sector which provides assistanceto the industrial user and suggestions to NASAon how the commercial growth of MPS might beadvanced. Joint projects between industry andNASA are “no exchange of funds” agreementsto cooperate in a given area with each partyassigned specific tasks to accomplish. The Com-mercial Applications Office has developed threebasic levels of working relationships with privateorgan izations:

Technical exchange agreement (TEA) .–Forcompanies interested in applying microgravitytechnology, but not ready to commit to a specificspace flight experiment or venture, NASA hasdeveloped TEA. Under a TEA, NASA and a com-pany agree to exchange technical informationand cooperate in the conduct and analysis ofground-based research programs. In this agree-ment, a firm can become familiar with micrograv-ity technology and its applicability to the com-pany product line at minimal expense. UnderTEA, the private company funds its own participa-tion, and derives direct access to and results fromNASA facilities and research, with NASA gainingthe support and expertise of the private com-pany’s industrial research capability.

Industrial guest investigators (lGl).–ln an IGIagreement, NASA and industry share sufficientmutual scientific interest that a company arrangesfor one of its scientists to collaborate (at companyexpense) with a NASA-sponsored principal inves-tigator on a space flight MPS experiment. Oncethe parties agree to the contribution to be madeto the objectives of the experiment, the IGIbecomes a member of the investigation team,thus adding industrial expertise and insight to theexperiment.

.


Joint endeavor agreement (JEA)-JEA is a co-operative arrangement in which private partici-pants and NASA share common program objec-tives, program responsibilities, and financial risk.The objective of a JEA is to encourage early spaceventures and demonstrate the usefulness of spacetechnology to meet marketplace needs. A JEA isa legal agreement between equal partners, andis not a procurement action; no funds are ex-changed between NASA and the industrial part-ner. A private participant selects an experimentand/or technology demonstration for a jointendeavor which complies with MPS program ob-jectives, conducts the necessary ground investiga-tion, and develops flight hardware at companyexpense. As incentive for this investment, NASAagrees to provide free shuttle flights for projectswhich meet certain basic criteria, such as tech-nical merit, contribution to innovation, and ac-ceptable business arrangements. As further incen-tive, the participant is allowed to retain certainproprietary rights to the results, particularly thenon patentable information that yields a compet-itive edge in marketing products based on MPSresults. However, NASA receives sufficient datato evaluate the significance of the results, and re-quires that any promising technologies be appliedcommercially on a timely basis, or published.

NASA has developed these three types of work-ing relationships in order to attract private-sectorinterest at varying investment levels. It hopes thatfirms with limited funds and cautious R&D pol-icies may start out with a TEA or an IGI and, ifin-space experimentation appears valuable,upgrade their cooperative efforts to a JEA.

Another interesting method for attracting andmaintaining the interest of private enterprise inspace-based manufacturing is the proposed SpaceIndustrialization Corporation (SIC) .20

The bill which proposed SIC declares thatit is a finding of Congress that “space activitieshave matured to the point where the attributesof space are generally understood” and a “num-ber of potential uses of the properties of the spaceenvironment are already known to have commer-cial applications. ” In light of these findings, the

‘“’’ The Space Industrialization Act of 1979,” H.R. 2337.

bill proposed the creation of a mixed-ownershipcorporation funded initially by Congress to “pro-mote, encourage, and assist in the developmentof new products, processes, services, and indus-tries using the properties of the space environ-merit. ”

As a mixed-ownership corporation, SIC wouldbe managed by a Board of Directors appointedby the President, consisting of a chairman, threequalified members of the executive branch, andeight members from the private sector. Thefinancing of SIC would take the form of a “SpaceIndustrialization Trust Fund.” Congress wouldprovide this fund with $50 million per year forthe first 2 fiscal years and then additional sumsas might be necessary.

When the Board of Directors determined thatthe corporation was operating “successfully, ef-fectively, and profitably,” then it would takesteps to transfer SIC from a mixed-ownership cor-poration to pure public ownership. As a public-ly held corporation, the financing for SIC wouldderive from issuing capital stock and selling non-voting securities and bonds.

One would assume, in light of the financial diffi-culties involved in private sector participation inmaterials processing in space, that a proposalsuch as SIC would meet with general approval.This, however, has not been the case. Many havehastened to point out that though the proposedSIC is a step in the right direction, the idea in itspresent form contains some serious problems.The problems most often cited by those oppos-ing SIC in its present form are: 1 ) that such a pro-posal is premature in that the attributes of spaceare not generally understood; and 2) that it mayinterfere with the activities of NASA, particular-ly its MPS program.21

Government Encouragementof Innovation

Government involvement in the process of in-novation raises important questions as to the ap-propriate roles of the public and private sectors

21The Space Industrialization Act of 1979, op. cit., P. 64.


in the development and operation of new tech-nology. Ordinarily, the private sector bears thetotal responsibility for funding R&D intended tobe incorporated into commercial systems. How-ever, over the past several decades the Govern-ment has provided significant support, not onlyfor basic research but also for applied research,technology and systems development, and evendemonstration projects in the aerospace industry.In each of these instances, the Government rolein the process of innovation was determined bythe complex interaction of such variables as: thesophistication of the technology involved, itsperceived importance to national goals, the struc-ture of the market to which the technology is ad-dressed, the level of industry interest, and theability of the private sector to develop the rele-vant technology without Government support.

The following section presents three differentexamples of how Government intervention hasbeen used to direct and encourage technologicalinnovation.

AeronauticsAn often-cited example of Government success

in moving new technology out of its own con-trol and into the private sector, is NASA’s aero-nautical research program. This effort began asa direct outgrowth of the program of the NationalAdvisory Council on Aeronautics (NACA), in-itiated in the mid-1920’s and formalized in March1946 by the National Aeronautical Research Pol-icy. This policy, promulgated to clarify the rela-tionship of NACA with other R&D agencies,charged NACA with the responsibility for con-ducting “research in the aeronautical sciences.”By comparison, the policy assigned to industrythe responsibility for the “application of researchresults in the design and development of im-proved aircraft equipment.” In other words, theGovernment agreed to assume the responsibil-ity of early applied research but product develop-ment would remain the responsibility of the pri-vate sector. This approach seems to have workedrather well, inasmuch as the history of U.S. ci-vilian aviation is crowded with examples of tech-nology which found its way into commercial useafter initial, early research at government ex-pense. For example, super critical airfoils, the

high bypass tubofan jet engine, the microwaveLanding system, the turboprop engine, and manyothers were all introduced for commercial ex-ploitation in the American market after years offundamental R&D work by NACA and later byNASA.22

In its generally successful efforts to launch gov-ernment-developed aviation technology into theprivate sector, NASA exploys two concepts foridentifying at what point the development of agiven technology should become the responsibil-ity of the private sector. These two concepts are“technology validation” and its logical followup,“technology readiness. "23 The former describesthe state of a technique, still under investigation,when its essential performance characteristicshave been proved but before there is confidencein the level of costs associated with fabricationof that device or technique under investigation.The latter term, “technology readiness” is em-ployed to describe a technology that has beendemonstrated to have a reasonably high proba-bility of resulting in a commercially manageablefabrication process. Note that NASA does not ac-tually design a fabrication process, but only “cer-tifies” in an informal way that the road seemsclear for a private firm to do so. In this sense thetechnology is “ready” for the private sector.NASA has performed the generic R&D that is nec-essary to prove the worth of a new applicationof engineering science to aviation technology. Itdoes this both for the particular technology inquestion and also, if the success of the first stageswarrants, for the fabrication or manufacturingtechnology necessary to produce the innovation.If at this point industry wishes to shoulder the riskof further specific R&D (which is usually muchmore expensive than the preliminary, genericR&D) based on its judgment of level of expectedreturn on its investment, it may do so with a muchgreater degree of confidence than if it were tostart a technology validating process from scratch.Essentially, this process is one of lowering thethreshold of risk for private investment in a newand promising technical development. Doing soat public expense is justifiable so long as there

ZZNMW, The High Speed Frontier: Case Histories of Four NACAPrograms (1980).

20f%ce of Technology Assessment, Impact of Advanced Air Trans-port Tmhno/ogy, Part 1; pp. 10, 34, 1979.

.


are significant public as well as private benefitsto be exploited in the innovative product, serv-ice, or process. It should be pointed out, inrespect to this last notion, that in order for NASAto be confident of the existence of a “significantpublic benefit” to be had from its generic tech-nology development efforts, a well-developedmarket for civilian aviation services was an im-portant given condition. The importance of awell-developed market and its effect on Govern-ment R&D is examined in greater detail in thefollowing discussion of communications satellitesand materials processing in space.

Communications Satellites

Communications satellite technology from itsinception was pursued with enthusiasm by theprivate sector. The initial Government positionarticulated during the Eisenhower administrationwas that NASA should “take the lead within theexecutive branch both to advance the needed re-search and development and to encourage pri-vate industry to apply its resources toward theearliest practicable utilization of space technologyfor commercial civil communications require-ments . . . "24 At this time AT&T’s position as thesole U.S. international telephone carrier and itsfinancial ability and willingness to commit fundsto the development of communication satellitesmade it the obvious industry partner for NASAefforts. By September 1960, AT&T was ready torequest that NASA clarify its policies concerningaid to companies working to develop communi-cations satellites25 and had already contacted theGovernments of France, Britain, and Germanyabout plans for low-altitude satellites to providetransatlantic telephone and television service.26

Hughes Aircraft had also contacted NASA to ex-press its interest in, and ideas for, communica-tions satellites.

Had the Eisenhower administration’s policybeen continued, it is almost certain that the pri-vate sector would have undertaken the commer-cialization of satellite communications. WithNASA supplying technical assistance and FCCregulating such communication under traditional

Z4D. Smith, p. 70.Zslbid. at 70.Z61bid.

guidelines, it is probable that the developmentof this technology would have proceeded withoutthe creation of an organization such as COMSAT.

COMSAT was the product of public policy con-siderations and not of the marketplace. With theKennedy administration came a strong commit-ment to the space program as a means to en-hance U.S. prestige and security. It was felt thatsatellite communications could be one area ofearly U.S. competence. As a result an additional$10 million was added to the 1961 NASA budgetfor communications development.

The addition of these funds had several effectson the communications satellite innovative proc-ess. The most obvious effect was that NASA hadthe funds and the mandate to “push” com-munications technology to maintain U.S. leader-ship in this field. A peripheral, though seeming-ly intended result was a postponement of privatesector investment in this technology. This devel-opment reflected the decision of the Kennedy ad-ministration to assess the policy implicationsbefore placing the development of communica-tions satellites in private hands. It was also consist-ent with the administration’s desire to keep satel-lite communications responsive to Governmentpolicy and its cautious approach to what seemedan imminent AT&T monopoly in internationalcommunications.

In a curious inversion of the normal chain ofevents, the Government used its ability to sub-sidize innovation to retard the process of com-mercialization rather than to speed it. The Gov-ernment wished to ensure that any transfer oftechnology occurred under conditions that wouldbe responsive to foreign policy considerations.This desire was accomplished by the statutorycreation of the unique public/private COMSAT.27

COMSAT is a private corporation with a mo-nopoly in the business of international satellitecommunications. The Communication SatelliteAct of 1962 provided that ownership and financ-ing of the corporation would be accomplishedthrough the issuance of capital stock. The act orig-inally reserved 50 percent of the stock for pur-chase by communications common carriers au-

Zzcommunication satellite Act of 1962, 47 U.S. C. 721.


thorized by FCC. The act also initially providedthat the Board of Directors was to be composedof six members elected by the common carrierstockholders, six elected by the rest of the stock-holders, and three appointed by the Presidentwith the advice and consent of the Senate. 28 Inthis manner Congress sought to insure that theGovernment retained some degree of internalcontrol over the organization.

The COMSAT Act also provides certain exter-nal controls which allow the Government to reg-ulate and direct COMSAT’S activities. Section201 (a) of the act grants the President the author-ity to undertake such activities as aiding the plan-ning and development of the system, reviewingall phases of development and operation, super-vising the relationship of the corporation with for-eign governments, and insuring foreign participa-tion in the system. Further, the act gives FCC thepower, among other things, to ensure competi-tion in the procurement of equipment and serv-ice, to regulate technical compatibility betweensatellites and ground stations, to set ratemakingprocedures, and to approve technical character-istics of the system.

The Government’s support of innovation incommunications satellite technology benefitedCOMSAT in two ways. First, the technology even-tually transferred to the new corporation wasmore advanced than that which would otherwisehave been available for commercialization in theearly 1960’s; second, this technology was devel-oped at the public expense. The complicating fac-tor is that because COMSAT was not solely acommercial venture founded in response to mar-ket demands but rather a hybrid organizationdesigned to implement public policy, the respon-sibility for innovation in satellite technology hasnever been clear. After COMSAT was established,there was considerable disagreement as to whatrole NASA should play in further communicationssatellite research and development. Many felt thatCOMSAT, as a private entity, should take the ini-

zeThe Communication Satellite Act was amended in 1969. Sec.303 (a) now states that if the shares of voting stock held by the com-munications common carriers is less than 8 percent, the commoncarriers are not allowed to elect directors separately (47 U.S.C. 733(a)), Presently, the common carriers hold less than one-fourth of1 percent of the total shares outstanding.

tiative and the risks associated with the evolutionof the communications satellite. Others believedthat NASA should continue its R&D role becausethe NAS Act of 1958 mandated it to ensure U.S.leadership in space technology. NASA’s positionin the mid-1 960’s was that it should be allowedto continue research in advanced technology,whereas COMSAT’S R&D would be directed toestablishing the initial operating systems.

Using this and similar arguments, NASA con-tinued to receive funding and to do communica-tions satellite R&D until January 1973. At thistime, the combination of NASA budget limitationsand the success of commercial satellites for bothinternational and domestic service led NASA tophase out its work on advanced communicationsystems.

The Joint Endeavor Agreement

The primary method by which the Governmentis seeking to encourage private sector participa-tion in MPS research is through innovative NASA/industry relationships such as the Technical Ex-change Agreement (TEA), the Industrial Guest in-vestigation Agreement (IGIA) and the joint En-deavor Agreement (JEA). Since JEA requires thegreatest commitment on the part of NASA andthe private sector participant, it is useful to ex-amine this arrangement, its problems, and itspotential for success.

As of January 31, 1982, there were two jEAsin effect. The first of these agreements, referredto earlier, was with McDonnell Douglas Astro-nautics Co. (MDAC) and the second is with theGTI Corp.

The subject matter of MDAC/JEA is a processcalled continuous flow electrophoresis (C-F-E).This process separates materials in solution bysubjecting them to an electrical field as they flowcontinuously through a chamber. The McDon-nell Douglas C-F-E experiment will use the shut-tle, at NASA’s expense, to develop and demon-strate the applicability of that process to the crea-tion of marketable quantities of pharmaceuticalproducts. Ortho Pharmaceutical Corp. has beenselected by McDonnell Douglas as a partner inits materials processing business venture. Orthohas completed a detailed market analysis on thefirst C-F-E candidate product to be produced in


space. The corporation is now developing a de-tailed animal test program for the product, to befollowed by a clinical test program. “Substantialsums of money” (in the tens of millions of dollars)have been and will continue to be invested byboth parties in the venture. According to MDAC,optimization of C-F-E ground units has been com-pleted, and fabrication of apparatus for spaceflight demonstration onboard the shuttle in 1982is now under way.

In addition, the conceptual design of a precom-mercial space flight pilot plant has been initiated.Present plans call for pilot plant demonstrationin 1985/1 986, and maintaining this scheduleshould result in commercial operation by 1986or 1987.

The subject of the JEA with GTI Corp. is ametallurgical furnace. GTI’s furnace is a 200-lbcomputer-controlled chamber that will be flownin the cargo bay of the shuttle. The furnace willhave 37 compartments for the melting and reso-lidification of some 220 alloy samples. Should thisJEA prove the technical and commercial feasibilityof this furnace, GTI will market its ability tomanage metallurgical experiments in microgravityto interested public and private sector researchorganizations.

The JEA requires GTI to develop this furnaceand NASA to test it on four shuttle flights. Thefirst flight is presently scheduled for the thirdquarter of 1984.

Because MDAC/JEA has, and probably will con-tinue to serve as a model for future JEAs, andsince the industry/Government relationship estab-lished in this agreement differs drastically fromthe Government’s relationship to COMSAT, it isuseful to scrutinize the structure and purpose ofthis agreement.

To create a climate suitable for commercializa-tion in the MDAC case, the first JEA had to ad-dress the following issues:

● ExcLusivity. — I n return for MDAC’s prom i seto make results of the work available to theU.S. public on reasonable terms and condi-tions, NASA agrees to refrain from enteringinto similar joint endeavors or internationalcooperative agreements directly related to

●

●

●

It

the development of processes that wouldcompete with those resulting from theMDAC endeavor. NASA is not precluded,however, from selling flight time on the shut-tle to any other organizations wanting toconduct the same or similar experiments.Patent and data rights.–NASA will not ac-quire rights in inventions made by MDAC orits associates in the course of the joint en-deavor, unless MDAC fails to exploit the in-ventions or terminates the agreement, or un-less the NASA Administrator determines thata national emergency exists involving a seri-ous threat to the public health.

In the event that inventions or improve-ments are made during the joint endeavor,MDAC need not report these to the Govern-ment. Records will be retained by MDACand, if requested by NASA, the company willprovide a brief description of the invention.Such description is protected as data or atrade secret if appropriate.Confidentiality. –The JEA requires that datasupplied by MDAC shall not be related out-side the Government, except after notice tothe originator and agreement by the recipi-ent to protect it from unauthorized use anddisclosure.Recoupment. —Lastly, to provide the finan-cial incentive for MDAC’S investment, thejEA explicitly recognizes MDAC’S right to a“fair return on investment.” Coupled withpatent and data rights provisions of the JEA,a “fair return on investment” is to bemeasured by what is obtained in the appro-priate industry, including such factors as thehigh-risk, long-term nature of the invest-ment.

is apparent from this brief review that theGovernment role in MPS is significantly differentfrom its role in the development of aviation andcommunications satellite technologies. In partthis can be attributed to the fact that the marketsand technology for MPS are still in an embryonicstage. In addition, research in communicationssatellites and civilian aviation can be conductedwith only minimal recourse to Government fa-cilities and the commercial operation of thesetechnologies can be accomplished with little

—. .-—


Government oversight. MPS research and prod- tions could proceed without close Governmentuct development, on the other hand, are still cooperation. For the near future, the JEA appearshighly dependent on Government facilities. to bean important tool for continuing the uniqueShould such research result in a marketable prod- Government/industry relationship which is essen-uct, it is unclear how commercial MPS opera- tial to the development of a mature MPS industry.

OTHER SPACE-RELATED COMMERCIAL ACTIVITIES

Although this chapter has focused primarily onthe private sector’s involvement in fields of com-munications and materials processing, with a lessdetailed look at remote sensing and space trans-portation, it should be noted that the private sec-tor has several other opportunities for space-ori-ented, profitmaking activities. Some of the moreimportant of these activities are discussed below.

Financing Space Ventures

Private banking institutions may have a role toplay in the future financing of both governmen-tal and nongovernmental space programs. Be-cause the Government has played the lead rolein developing space systems, the involvement ofprivate financial institutions has been rather lim-ited. This is particularly true in the United States,and it seems unlikely that any significant changeswill occur in the near future. The situation inEurope is slightly different, in that, though thespace projects are primarily funded by the gov-ernments, European banks have been involvedin these projects as shareholders and as a sourceof loan capital .29

Financial institutions have generally been reluc-tant to invest large sums of money in high-risk,long-term space projects of the private sector. Asnew products are refined and their value as in-vestments proved, financing of private space ac-tivities will become more common. Recently, forexample, financial institutions have been willingto fund the purchase of satellite transponders be-cause communications satellites have come to beregarded as relatively safe and attractive in-vestments. The cost of transponders (approxi-mately $10 million to $15 million) is a relatively

29G. Mazowita, “Space Industrialization, Programs, Policy, andPrivate Enterprise, ” Center for Research of Air and Space Law,McGill University, June 1981, p. 60.

small part of the cost of the satellite, and in-surance covering both interruption of service andbusiness loss can be purchased to protect this in-vestment. In addition, by using sale/leasebackarrangements, the tax benefits that accrue fromtransponder ownership can be sold to a thirdparty.

Presumably, other space technologies will fol-low the path that communications satellites havefollowed over the last two decades. As thesetechnologies become more reliable and new fi-nancial arrangements allow the burden of theircost to be spread out among more investors, itis certain that the role that private financial insti-tutions play in the commercialization of thesetechnologies will increase.

Though private financial institutions have beenreluctant to participate in space ventures, it ispossible that innovative financial arrangementssuch as the R&D limited partnership may providefunds in this area.30 Basically stated, an R&Dlimited partnership is a partnership formed for aspecific purpose, such as the development of anew product. This arrangement provides impor-tant tax advantages, in particular that participantsmay offset their investment in the R&D limitedpartnership against their current income, even ifthe latter was derived from an unrelated source.GTI intends to rely heavily on this mechanism tofinance its JEA with NASA. Should the GTI expe-rience be favorable, there is no reason why theR&D limited partnership could not be used tofinance other private space ventures.

.

30’’ Limited Partnerships: Protits and Danger, ” cornm~ities, Vll(March/April 1978), 46; “Tax Classification of Limited Partnerships,”/-/arvarc/ Law Review XC (1975), 745-762; “Tax Classification of Lim-ited Partnerships: The IRS Bombards the Tax Shelter, ” New YorkUniversity Law Review Lll, 2, May 1977, 408-441.


Insurance

The industrialization of space will open up anew market for the insurance industry. As thenumber and variety of space activities increase,new methods of insuring against unforeseenlosses will be needed. If such developments areforthcoming, they will help to make investmentin space more predictable and therefore more at-tractive to the private sector.31

Presently, there are four basic categories of sat-ellite insurance available:

●

●

●

●

Ground insurance covers the satellite,launch vehicle, and related launch equip-ment until launch attempt or lift-off.Launch failure insurance commences imme-diately after lift-off and remains in effect un-til the satellite achieves a successful orbit.Satellite life insurance commences whenlaunch failure insurance coverage termi-nates. Satellite life insurance protects againstfinancial damage caused by loss of orbit orpower, or by some technical malfunction.This insurance can be used to cover the re-placement costs of the satellite and for eco-nomic losses arising from disruption of serv-ice.Liability insurance is used to compensatethird parties for bodily injury or propertydamage caused by the satellite or the launchvehicle.

The types of insurance mentioned above weredeveloped primarily with expendable launchvehicles in mind. The introduction of the shuttleas an operational launch vehicle will presentsubstantial challenges to the insurance industry.On the one hand, the shuttle should increase thenumber of insurable payloads launched per year,thereby providing a wider base over which tospread risk. This should result in lower insurancecosts and increased participation by U.S. and for-eign underwriters. On the other hand, the factthat the shuttle can carry several payloads on oneflight raises serious questions about the effect thatthe loss of an entire shuttle might have on under-writers and insurance premiums. Potential liability

3’Satellite Communications, “Condo Satellites: Can We InsureThem?” August 1981, p. 45.

in such a situation could be as high as $100 mil-lion to payload owner and an additional $500 mil-lion for third-party claimants.32 The shuttle, there-fore, introduces costs at a level and of a complex-ity unprecedented in the era of single payloadsflown on ELVs. Whether the relatively smallgroup of underwriters who insure ELVs will beable to handle the entire liability for space shut-tle operations is an open question.

Hardware sales

Aerospace Industry

The aerospace industry has been the principalprivate sector participant in commercial space ac-tivities. The reasons for this are rather simple. Theaerospace industry has the most complete under-standing of the advantages and limitations of thespace environment and employs large numbersof people who are knowledgeable in space-re-lated technology. Industries that may profit con-siderably from space technology, such as phar-maceuticals, electronics, and metallurgy, arereluctant to invest in R&D projects that requireknowledge, personnel, and support facilities thatthey do not have.

Another major advantage held by the aero-space industry is its traditionally close relation-ship with Government. This relationship has hadtwo important consequences. The first, whichwas mentioned above, is that the industry, oftenworking under Government contract, has beenable to develop the expertise to deal with thespace environment. The second is that the Gov-ernment, particularly the military, and the aero-space industry are accustomed to cooperatingand relying on one another. Most other indus-tries, however, have little contact with the Gov-ernment, except in its role as regulator and taxer.Furthermore, normal Government procurementpractices, in which the aerospace industry is well-versed, are complex and raise numerous prob-lems regarding the retention of intellectualproperty.

The structure of the aerospace industry alsoprovides some substantive advantages for devel-

qZAViatiOn week and Space Technology, Apr. 30, 1979, P. 148;Contact, “Insurance Coverage in Outer Space, ” December 1977,p. 5.


oping technologies such as MPS. This industry iscomposed of a few large and essentially non-diversified companies. This structure is a conse-quence of an environment where competition islimited and funds are available to engage in largebut uncertain research projects. The aerospaceindustry has frequently been involved in long-term projects starting with basic scientific researchand resulting ’in innovative new products. This“long-range” perspective which will be necessaryfor MPS development is not characteristic ofmany other industries.

New Markets

Until recently, the efforts of the private sectorhave been directed primarily to supplying theGovernment’s needs for launch vehicles, satel-lites, and related space hardware. As the usercommunity for such hardware gradually broad-ens, it can be assumed that an increasingly greaterproportion of industry revenues will be derivedfrom nongovernment sales.

The first nongovernment aerospace market tobe developed was that of communications satel-lites. The private sector revenues from this marketare on the order of billions of dollars, and esti-mates for future demand suggest even greater re-turns. Other opportunities for private sector aero-space sales will flow from the development of theBoeing inertial upper stage and the McDonnellDouglas spinning solid upper stage. These twoupper stages will be used to transfer private-sectorpayloads from the shuttle to the geostationaryorbit. Yet another area of potential private-sectorrevenue will be the sale and lease of multiuserinstrumentation designed for MPS research on theshuttle (discussed above in ch. 4). Examples ofsuch instrumentation include the materials exper-iment assembly (MEA), developed by NASA, andthe metallurgical furnace being developed by GTICorp. in a JEA with NASA. This last type of pri-vate-sector involvement may prove to be quitesignificant. When NASA began the developmentof the MEA, it anticipated that private institutionsmight wish to lease this device to conduct theirown experiments. Similarly, GTI’s developmentefforts are predicated on the assumption that asubstantial market exists for relatively inexpen-sive space-based research facilities.

A recent marketing strategy report, writtenunder contract for NASA, found that most firmsare unwilling to undertake alone the substantialexpense involved in the product identification,financing, hardware development and marketingnecessary to commercialize space technology .33The report suggested that NASA should attemptto disaggregate this process in order to facilitateprivate sector participation in MPS. There is someindication that this process of disaggregation willoccur as a matter of course, as experience withMPS grows. The JEA entered into between NASAand GTI tends to support this assumption. GTI’swillingness to accept the financial responsibilityfor one aspect of the commercialization process(in this instance, the provision of a valuableresearch tool), may provide the incentive forother firms to invest research dollars in this area.Small firms, universities, and research organiza-tions generally do not have the capital necessaryto undertake independent research in space.However, if the facilities were available at arelatively low cost, then a broad range of other-wise unaffordable research might be undertaken.

Ground Support Services

Space technology requires a rather elaboratenetwork of ground support services and facilities.As this industry continues to expand, the privatesector will almost certainly play a dispropor-tionately large part in the provision of such serv-ices. A few early examples of this trend have al-ready begun to appear.

The initial placement and subsequent mainte-nance of a satellite in its proper orbit requires anelaborate tracking, telemetry, and control net-work. NASA has previously provided these serv-ices, but as space activities become more com-mon, commercial firms could provide them.COMSAT has already begun to do so. In 1979,COMSAT established the first commercial facil-ity for satellite tracking, telemetry, and controlservices. 34 The COMSAT Launch Control Center(LCC) takes control of the spacecraft after lift-off

JJPrepared by students of the “Creative Marketing Strategy”course, Harvard Business School, “Materials Processing in Space:A Marketing Strategy,” June 1981.

Jdcommunications Satellite Corp. Magazine, No. 1, 1980, PP. 26and 33; No. 5, 1981, pp. 9 and 38.


and injection into the transfer orbit, oversees theinsertion of the satellite into its proper orbital slot,and then performs the functional checkout. Fol-lowing verification of proper operation, controlof the satellite is then handed over to the owner/operator for further verification, testing, and ulti-mately, operations. The LCC was used for the firsttime with the launch of SBS-1 in November 1980.

Another area in which the private sector willcertainly play an increasingly important role willbe in the provision of postflight processing of theshuttle. Currently, NASA, using more than 25 in-dividual contractors, is responsible for shuttleprocessing; it has, however, recently invited in-dustry to bid on a contract to perform this func-tion.35 The company chosen would be responsi-

JSAViatlOn week ancf Space Technology, “Shuttle Contracts TO

Be Let to Industry,” Nov. 2, 1981, p. 51; Aviation Week and SpaceTechnology, “Processing Efficiencies of Shuttle Studied,” Nov. 30,1981, p. 18.

ble for refurbishment of orbiters after flight forsubsequent missions, checkout and assembly ofthe solid rocket boosters, external tanks, andother shuttle elements, and for support opera-tions and materials, including maintenance andfacilities operations.

The transfer of shuttle processing to the privatesector is an important step toward commercializ-ing the entire space shuttle program. As has beenmentioned many times before, industry is reluc-tant to invest in the shuttle, or any new spacetechnology, because it cannot accurately assessthe risks and the potential return. As industrybecomes familiar with the shuttle, or other newspace technologies, it will be in a better positionto make the kind of financial assessments whichmust precede any major commercial investment.

chapter 8 commercialization of space technology

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