New Economy Same as Old Economy

Now that the 90s tech bubble has popped, some of the former dot-commers are learning what business is like in the real world

Their entrepreneurial spirit undaunted by the false dreams of their recent past, they're starting new businesses--ones that actually create and deliver products that people can use, rather than hype, even if those products are more mundane than the next New Thing.

Where once a sales call meant driving to a mirrored glass building in Silicon Valley to pitch clients on $250,000 software packages, Mr. Ehrmann's pitches now involve handing out little plastic cups of soup to people on the street.

"People love soup," Mr. Ehrmann said. "I say I'm building a soup company and people say, `Soup — that's cool.' It's satisfying. You're giving people something that affects them right away."

They've plummeted from a rarefied world in which unlimited money was flung at them, business clothes were eschewed, and they were worshipped as the next phase in human and industrial evolution. Now, rather than being courted by venture capitalists, they're simply scraping by on the funds borrowed from friends and relatives, rolling up their sleeves, figuring out what customers want, and working long hours to deliver it.

They're not the only class of people who will have to learn new ways in a new industry. While the government space program is by no means withering away any time soon, it no longer represents the bright future of space activities. That future lies in commercial ventures, providing services that have traditionally been far afield from aerospace, at least the "space" part of it.

Like the deflated dotcoms, the government-contracting civil space industry is a hothouse plant, sustainable only in a peculiar environment, and perhaps, ultimately, doomed to failure if it cannot adapt to the new circumstances. Over a decade after the end of the Cold War, it moves forward mostly from inertia and momentum of past relics of that era, such as the International Space Station.

Unfortunately for the major aerospace contractors (but fortunately for their smaller but more nimble competition), they're ill suited, by corporate culture and experience, to take advantage of new commercial opportunities. Over four decades of working for the government have made them too expensive to compete in a truly competitive marketplace, and they have inculcated management attitudes that will prevent them from taking the risks that may be necessary in order to stay in the forefront of the industry.

Government contractors in the space business work, for the most part, on what are called "cost-plus" contracts. That means that they are paid on the basis of time and material for the effort, plus some percentage of profit. While this may be necessary in order to get companies to bid on high-risk government programs, it doesn't encourage a culture of low cost because, perversely, the higher the cost, the more the contractor makes (within certain limitations).

As an example, I've often mentioned XCOR as an exemplar of the new way of doing space business. If the cost of their activities to date had been estimated ahead of time using a conventional aerospace industry cost model, it would almost certainly have predicted at least one, and perhaps two orders of magnitude higher cost than they've actually spent to date.

Yet despite their low costs, there are companies hungry for lower costs yet. John Carmack, the founder of Armadillo Aerospace (who also happens to be the man behind many successful video games, including Doom and Quake, and is funding Armadillo with his own fortune), recently posted on Usenet:

I did get a price quote from XCOR early on, and it just didn't make sense for us. Four or five engines from XCOR would have cost more than our entire first year of development. I think hard about all large $$$ purchases, because it is a slippery slope to get on, where you just throw money at a problem.

This exemplifies the ethos that must, and will, rule the new space age. The small mammal is dancing around the toes of the dinosaurs, and is being nipped at by a tiny rodent that has an even faster metabolism and motivation.

But it's not just the inability to run projects "lean and mean" that will hold back big aerospace. It's their attitude and approach to business.

Large public corporations, particularly ones to whom research and development is a profit center (with the government as a customer), rather than an expense of doing business, will be loathe to risk their own money on uncertain markets, even with potentially high payoff.

It involves such a radically different way of doing business that it falls well outside their comfort zone. It means identifying commercial customers, rather than selling to a single government customer, who is amenable to pressure from lobbying Congress, and providing them with something that they have to purchase with their own money, rather than that of anonymous and, for the most part, oblivious taxpayers.

Long ago, when I worked for a major aerospace contractor, I and some colleagues tried in vain to get management to consider a commercial project. The conversation went something like this:

"So, you want to put investors' money into the development of this new system that will be superior to the competition."

"That's right."

"And you propose to sell the services that it offers to the commercial market?"

"Right."

"And you'll take the profits from that, and repay the investors?"

"You got it."

"???...You people don't seem to understand anything about business--why don't you just go out and win a government contract?"

Old economy...new economy. May the best company win...

Letters

I got a few responses to my column last week on our fixation on technology as the necessary and sufficient condition for lowering launch costs.

From Ken Davidian:

Your latest column struck a chord with me, specifically the sentence: "They would put the billions of dollars currently spent on technology instead in escrow as a prize, to purchase thousands of launches from the private sector."

Have you ever heard of the X PRIZE? The private sector has already done what you suggest!

Well, not exactly, Ken. X-Prize is a one-off prize for a single accomplishment, and it's only $10 million (and the full funding hasn't been raised yet.) I'm proposing taking the billions of taxpayer dollars currently spent on space transportation, and buying thousands of flights, to orbit with them. There would be a significant difference in market incentive...

And Jay Edwards, head of the Oklahoma Space Authority, conveys his hearty agreement:

Your August 8, Fox News report was on the money. No one from Florida will admit there is a chance for a useful launch anywhere other than Florida, although to my surprise he did give a small salute to the Western Range. He nevertheless ignores the other 26 launch locations around the world, and the inland states of the National Coalition of Spaceport States that are on the prowl.

There are a number of air-launch programs on the drawing boards that do not need Florida. They can take off from any number of locations that can support heavily loaded horizontal takeoff vehicles. It's hard to give recognition to that capability because it puts the high launch costs in Florida at a disadvantage. An example of the upcoming air-launch approach is Andrews Space Technology in Washington state, plus lots of X-Prize candidates as well. We have a location for space flights right in the heartland of Oklahoma. Look us up .

We plan to be a part of the commercialization of space. There are advantages to launch locations without heavy investments in tired infrastructure and organizational structure. There is a new launch paradigm in the making. Thanks for listening.

The more, the merrier, Jay

Rand Simberg is a recovering aerospace engineer and a consultant in space commercialization, space tourism and Internet security. He offers occasionally biting commentary about infinity and beyond at his Web log, Transterrestrial Musings.

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