Today’s class will be discussion-based. This prompt is meant to help guide your discussion. We will convene as a class after 20-30 minutes to discuss the issues raised, beginning with a round of random seminar discussion.
In a random seminar, speakers are drawn randomly without replacement from the set of students in attendance. Each speaker has ~1 minute to say whatever they want: they can address a specific question, respond to an earlier point, raise a new question, or pass on their turn.
The year is 2005, and the National Security Space (NSS) launch market is collapsing.
Launch demand projections from the FAA and Government Accountability Office (GAO) have proven to be too optimistic. Combined with a string of expensive launch failures (three in 1998-1999 cost over $3 billion, and one led to the loss of a critical national security communications satellite), Boeing and Lockheed Martin (the two suppliers of NSS launches) are on the verge of exiting the market. When they do, there will be no US-based providers left to place classified “spy” satellites in orbit. (Integrating a payload with a rocket requires the rocket crew to handle the payload and become very familiar with its design, so nearly all workers at Boeing and Lockheed’s rocket divisions have security clearances. Using a foreign supplier is out of the question.)
How did we get here? In the early 1990s, the US space industrial base could produce a number of launch vehicles. Though launch costs were increasing and decision-makers noted operational and procurement deficiencies, there was no clear consensus over how best to proceed. So in 1994, Congress directed the development of a Space Launch Modernization Plan, which led to the introduction of the Evolved Expendable Launch Vehicle (EELV) program. The EELV program was meant to address the rising launch costs, falling reliability, and other procurement problems facing NSS launches. By 1997, launch demand projections led DoD to argue that the EELV program ought to procure launches from both Boeing and Lockheed. DoD argued that the competition was essential to controlling costs and that the market could now sustain two providers.
But it’s become clear that the market is not big enough to support two providers and there is a risk that the US will be unable to place new spy satellites in orbit. With the Afghanistan and Iraq wars ongoing, this would be a very bad outcome. This has led to two developments.
In 2004, President Bush signed National Security Policy Directive 40. NSPD-40 obliged DoD to cover annual fixed launch costs for up to two NSS launch providers until the market had matured enough to no longer require the support. The EELV program already allows for single-source procurement (i.e., DoD can award all of the contracts to a single supplier if they choose).
In 2005, Boeing and Lockheed announced their intent to merge into a single entity (50-50 stakes), the United Launch Alliance, which would be a sole supplier of NSS launches. Boeing and Lockheed argue that the merger will bring about cost efficiencies which will enable them to reduce total costs and survive in a smaller market.
The proposed merger is controversial in the defense procurement and antitrust communities. It would ensure that two proven launch vehicles, the Atlas and the Delta, stay in the market. That would give the military community the redundancy they want. But it would also create a NSS launch monopoly, potentially undermining other goals. The Federal Trade Commission (FTC) still needs to evaluate the merger on competitive grounds and decide whether it will give an antitrust clearance.
The proposed merger has also riled up a little-known American startup called “SpaceX”. SpaceX aims to use a new and unproven technology stack to produce reusable rockets. In October 2005, SpaceX filed a lawsuit to stop the merger. SpaceX alleges that Boeing and Lockheed used “strong-arm tactics to demand that the Air Force grant them exclusive long-term contracts”, disputes the Air Force’s characterization of Boeing and Lockheed as the only providers capable of meeting EELV and NSS requirements, and argues that the merger would create an illegal monopoly. Its CEO, Silicon Valley entrepreneur Elon Musk, has also claimed that by covering fixed costs the EELV contracts will “subsidize the primes, paying them for doing nothing”.
SpaceX wants to have access to the lucrative NSS launch contracts and is asking that DoD delay soliciting bids until SpaceX can compete for them. SpaceX anticipates being flight-ready in late 2006, but has never launched a rocket or even designed a rocket which was later launched successfully. SpaceX’s COO, Gwynne Shotwell, is the only person at the company with any non-engineering experience in the sector. Boeing and Lockheed executives point to SpaceX’s lack of track record or experience and note that the startup may never be successful. DoD officials are worried about the prospect of a NSS launch monopoly, but also about the prospect of losing space access while there are ongoing conflicts.
Discuss the following questions from the perspective of an analyst in 2005.