Space Entrepreneurs

Their business is rockets. Their dream is space. Their bane is NASA.

Gary Hudson needs $100 million, maybe $200 million. He needs the money to fulfill a dream: he wants to build a spaceship. If he succeeds, he is certain that he will make a fortune—and that anyone who backs him will, too. But first, he needs $100 million, maybe $200 million.

Hudson is one among a number of entrepreneurs who have been trying to develop "launch vehicles" for transporting things into space—satellites, people, manufacturing facilities, whatever. These entrepreneurs and their efforts to develop low-cost alternatives to government-funded and government-controlled space transportation systems have caught the imagination of documentary filmmakers and the mainstream media, from Esquire to the Wall Street Journal.

They are a colorful lot, and they've had their small successes. But the story of the conquest of space by private enterprise can't be written yet. And upon investigation, it appears unlikely that that story will be written for some years to come.

The roaring, enthusiastic energy that was associated only several years ago with the beginnings of the free-enterprise launch business has taken on a bitter edge. The groups of mostly young entrepreneurs and engineers are running up against a major obstacle to their dreams of space exploration and financial success. That obstacle is not a lack of energy or talent or ideas. Ironically, it is the National Aeronautics and Space Administration, the very organization that has fueled so many Americans' fascination with space.

The problem is that NASA is a taxpayer-funded monopolist of space transportation—a bureaucratic empire, with a budget of billions, that presents its Space Shuttle as the best, the most economical—the only—way to get into space. Its current, on-the-record, official line is one of encouraging "the commercialization of space." But behind the scenes there are NASA policies, actions, and attitudes reflecting a dogged determination to keep space transportation a government monopoly.

Yet for people like Gary Hudson and others who are trying to develop low-cost space transportation, NASA's monopolistic stance amounts to a war against those efforts. This investigation has turned up evidence that at a high level NASA has even resorted to "hardball" pressure tactics in an attempt to deliberately stifle the development of a private space transportation industry (see sidebar, page 27). But for the most part NASA's war against space entrepreneurs is a subtle war; the obstacle it poses can be traced to its very existence.

There are at least two ways to think about space. From one perspective, space is a commercial frontier, a place where generations of entrepreneurs will build businesses and fortunes, in communications, manufacturing, mining—even tourism.

Already, there is a successful and rapidly growing communications-satellite business, providing telecommunications at the speed of light all over the world. Gold prices, telephone calls, and reruns of I Love Lucy are bouncing around the geosynchronous orbit, 22,300 miles overhead, at this very instant.

Navigational radio services are available to anybody with the right receivers. Satellite imaging services relay pictures of the Earth and its atmosphere to geologists, shipping lines, and others, although the best stuff is reserved for the military. Weather satellites are providing three-dimensional images of myriad meteorological phenomena from pole to pole.

In the not-too-distant future, there are even more spectacular developments. The processing of materials in space, where there is little gravitational force, promises cheaper, purer, and more-exotic pharmaceuticals. The first astronaut sent into space aboard the Space Shuttle by a private firm (McDonnell Douglas) monitored the manufacture of a secret substance for Johnson & Johnson—a substance that reportedly can be produced 500 times faster in the microgravity of space than on Earth. And John Deere, the farm-equipment maker, has performed metallurgical research in space that may lead to the manufacture of better and cheaper alloys on Earth.

Space, too, provides the ideal waste-disposal site—intensely hot suns, giant incinerators in the heavens above. Our own sun provides a source of energy, bounced to Earth from orbiting solar plants, that could someday make fossil and nuclear fuels obsolete. Conditions in space could also provide help for people with medical problems that cannot be treated effectively on Earth. Even asteroid mining is foreseen. And only time will reveal wonders that are as yet unimagined.

There is another way to look at space, a romantic one. A generation ago, children played at cowboys and Indians. Television and film were filled with the Old West, reflecting a longing affection for the frontier that almost seems programmed into Americans' chromosomes. But now there is the Star Trek generation. Cowboys are out, Han Solo, Luke Skywalker, and E.T. are in.

Space has become a symbol of freedom and adventure for the generation that broke all TV-viewing records one summer day in 1969, when the space vessel Eagle landed on the moon. I remember that day much better than the usual "Do you remember what you were doing when?" day, the day that President John F. Kennedy was shot. Indeed, Kennedy may one day be remembered mainly as the president who rose to the Soviets' Sputnik challenge, sent Americans into space, and thus inaugurated a new era of exploration.

When Neil Armstrong set foot on the moon on July 20, 1969, and flubbed his line, we the American people were not so much excited by the advances of nation or science—we were excited by the potential for us, each one of us. The implications were personal. We saw ourselves taking that giant step—not for mankind, but for ourselves, individually.

But whatever the cause that sets pioneers in search of promised lands, they cannot accomplish anything without transportation. From the Phoenicians to the Vikings to Christopher Columbus, shipping was a vital ingredient of their varied successes. Hannibal conquered Rome with elephants. The Arabs beat all comers with camels. The Spanish took the Americas with ships and horses. In the United States, the railroad joined the East to the West. The automobile followed, reshaping the continent; then the airplane, reshaping the globe.

I belabor the obvious for a reason: transportation is the key to space. Nothing of historical importance ever happens until people get there. And nothing really important happens until people can transport more than national flags. Transportation links the practical side of space exploration with the romantic dreams.

The history of space transportation is not a long one. The first US rockets were launched into space by the Defense Department in the 1950s, using technology derived from military missiles. The military's immediate objective was to launch "spy" satellites: essentially, a satellite equipped with a camera and transmitter was put atop a big, unarmed missile and fired into space. The satellite, high enough to escape Earth's gravity, coasted into orbit. The missile itself, the "launch vehicle," fell away during the spaceward flight (in "stages," or segments) and disintegrated during its descent or dropped into the ocean, broke up, and sank. Because such a rocket can be used only once, it is called an "expendable launch vehicle," or ELV.

NASA was created by Congress in 1958 to research and develop space technology for peaceful purposes. It joined the military in producing ELVs of several different designs. These vehicles differ among one another primarily in size and power—that is, in how heavy a payload the rocket can boost how far into space. Observational satellites, which relay pictures of the planet and its atmosphere back to Earth, are launched to low earth orbit (LEO), roughly 100 to 200 miles above Earth. Communications satellites—the "birds" that relay phone calls, TV signals, and a variety of other electronic stuff—are deposited in geostationary, or geosynchronous, orbit (GEO), 22,300 miles above Earth. In that orbit, satellites move synchronously with Earth, so that they appear from the ground to be fixed in the sky.

By the mid-1960s, the government's rockets had proven themselves reliable, paving the way for commercial uses of the ELVs, and the first commercial communications satellites were spun into orbit—aboard NASA rockets. Space entrepreneurs were a phenomenon of the future. Even had dreamers perceived the potential for a launch business, though, they would have run into a massive wall of "national security" concerns. During this early period of space-flight development and the Cold War environment in which it occurred, much of the launch technology now commonly available was highly restricted.

When NASA had completed its first major mission in 1969—beating the Russians in sending a human to the moon—it turned to its next challenge: the development of a manned "space truck," a fully reusable spaceship that could ferry people and cargo between Earth and space. Like the cost of an airplane, the shuttle's cost could be spread over a great number of users, making the journey to outer space economically feasible. The expensive, disposable ELVs—the original workhorse rockets—would be replaced with an economical alternative, and the high frontier would at last be opened to development. So the vision went.

The reality was that NASA's Space Shuttle, finally operational in 1981, turned out to cost three times more to develop than originally projected. Likewise, its cost of operation keeps escalating. Yet NASA determinedly promotes the Shuttle as a low-cost space vehicle, setting a low price for commercial users and making up the difference out of the taxpayers' kitty.

Meanwhile, in 1983 the Reagan administration directed NASA and the military to turn over their expendable launch vehicles—primarily NASA's Delta and Atlas launchers and the Air Force's Titan rocket—to private operators. So major aerospace corporations are now poised to compete with the Shuttle in getting satellites and such into space. It's a situation that makes NASA very testy.

Joining NASA and the private ELV operators in the space-transportation scene is a third element: the entrepreneurs. They see a growing market for launch services and, typically, think they can do it for less than either NASA's Shuttle or the privatized ELVs.

It was just two years ago that the barrier to a free-enterprise launch industry appeared to have finally been breached. On September 9, 1982, Space Services, Inc. (SSI), a Houston-based firm headed by Texas real-estate millionaire David Hannah and former astronaut Donald Slayton, launched its $2.5-million Conestoga I rocket from Matagorda Island, off the Texas coast, 196 miles into the sky. Only little more than a year before, Hannah's group (Slayton was not yet part of it) had seen $1.5 million and months of development work go up in smoke when their Percheron rocket blew up on the Matagorda pad during a launch attempt.

The Conestoga I was actually a surplus NASA "sounding," or research, rocket incapable of delivering a commercial payload into orbit. But its successful launch was funded and carried out from start to finish by a private company. Among entrepreneurs, enthusiasm ran high: the big money would now come their way, because at last investors had seen that a private company could do what till then only government had done. But investors didn't reach for their checkbooks.

Even for SSI, the launch firm that some observers consider the most likely to succeed, disappointment was in store. Following its Conestoga I launch in 1982, the firm started developing what would be its operational rocket, the Conestoga II, and hoped to sign up customers. Space Vector, a small California aerospace firm that executed the first launch under contract to SSI, was hired to work on development of Conestoga II.

By the beginning of 1984, SSI decided to no longer fund work on the project, and Space Vector struck out to develop its own commercial rocket, the LEO 3. Two years after the Conestoga I launch, Hannah and company are still seeking their first customer, and they've hired another firm, Space Data, to develop the Conestoga II. They're also interested in acquiring rights to market NASA's Scout, a sounding rocket that can deliver small payloads to low earth orbit.

Another high point for entrepreneurs came in August 1984, when Starstruck, Inc., launched its sounding rocket, the Dolphin, from the Pacific Ocean, off the Southern California coast. It was the young firm's fourth try—and first success—at launching the Dolphin.

But that up was immediately followed by a down. Just a few weeks after the August 3 Dolphin launch, Starstruck president Michael Scott—who in 1982 had left his position as chairman and chief executive officer at Apple Computer to head Starstruck—laid off nearly all of Starstruck's 50 employees. The apparent austerity move touched off a reorganization of Starstruck's management; the firm's board of directors was reconstituted, and Starstruck cofounder Tucker Thompson replaced Scott as president. Thompson put together a skeletal staff to keep operations going, and the firm plans to continue developing its operational rocket, the Constellation.

Gary Hudson's career, too, resembles something of a roller-coaster ride. Hudson got his chance to realize a long-time dream when, with David Hannah's backing, he designed the Percheron rocket. After the Percheron met its explosive fate in July 1981, Hudson and Hannah's partnership ended. But Hudson formed Pacific American Launch Systems, which is now developing his new dream vehicle, the Phoenix.

Other private launch initiatives include Len Cormier's Third Millennium. Cormier envisions a "Space Van," a Shuttle-like manned spacecraft launched in midair from atop a jumbo jet. He is reportedly trying to set up a public stock offering to get funding for the project, but as yet no stock has been put on the block.

Robert Truax's Truax Engineering, meanwhile, has plans to develop two very large and powerful launch vehicles, the Excalibur and Sea Dragon rockets. But to publicize his company's efforts in order to attract investors, Truax is pursuing his Project Private Enterprise—a plan to launch a person into a brief suborbital flight aboard a small rocket. He has constructed most of the rocket and conducted several engine test firings for the press. According to Tom Brosz, the editor of Commercial Space Report, Truax needs about another $1 million "to polish off the project."

And there's OTRAG, a West German firm that for several years appeared to be gathering momentum in developing a rocket, from a base of operations in Libya. OTRAG has ended the Libyan connection but is reportedly continuing with its plans to develop a commercial rocket.

One of the revealing features of these private launch initiatives is that they do not share a single approach to space transportation. Some, like Space Services with its Conestoga, or Space Vector with its LEO 3, aim to develop a more or less conventional expendable rocket. Others—Starstruck, for example—are adding unconventional twists to otherwise conventional rocket designs.

Starstruck's Dolphin uses a hybrid engine that incorporates a liquid oxidizer and a solid fuel, a revival of technology that the Air Force developed and then abandoned. The hybrid engine is said to offer certain performance advantages over an all-solid engine (like that of SSI's Conestoga II, for example) and greater safety than a liquid-fuel system such as the Titan's. The Dolphin, appropriate to its name, is launched from in the sea, rather than from a launch pad on land. Starstruck not only is spared the expense of building launch pads but also will have great flexibility in choosing a launch site. In addition, Starstruck's idea is to develop modular rocket units that can be put together in various numbers to create more-powerful launchers.

Hudson's Phoenix, too, is a quite different approach to designing a launch vehicle. The way to radically bring down launch costs, says Hudson, is to create a reusable vehicle. If a rocket is used only once, the price charged—by a private firm, anyway—must cover the vehicle's full production costs as well as development and operating costs. But if a single vehicle gets used over and over again, each user pays only a portion of its production cost. The more users, the lower the cost to each user, all other things being equal. Hudson is placing his bet on a reusable rocket.

Unlike Len Cormier's Space Van (and NASA's Shuttle), Hudson's Phoenix is not a winged vehicle—it is a ballistic, or missile-like, vehicle. This design, says Hudson, results in much less stress and heat build-up, especially during reentry into Earth's atmosphere. Hudson's explanation of his design criteria is lucid, and his logic seems quite solid. Yet major investors don't want any part of it. Why they don't requires a lot of digging into the way NASA goes about its business.

Mention "Shuttle pricing" to a space entrepreneur, and he's likely to turn purple. It's one of the subtle ways NASA sits athwart the private road to space, and it's probably the most important.

Ever since the Space Shuttle's much-applauded maiden flight in the spring of 1981, it's been ferrying things into orbit for private firms (and, dramatically, fixing or fetching some). NASA charges users of the Shuttle, of course, just as users have been paying for launches via government-operated ELVs. But NASA undercharges commercial users, according to outsiders—pricing launches at half their actual cost and perhaps even at a quarter of their cost.

Phillip Salin, a cofounder of the firm Starstruck, is an outsider who has looked closely at NASA's Shuttle pricing. In February 1984, he was invited by Rep. Harold Volkmer (D–Mo.), head of the House Subcommittee on Space Science and Applications, to testify on the economics of Shuttle pricing.

Salin, who has a background in economics, spent two weeks tracking down financial information about the Shuttle. His job was not easy: there are no balance sheets for the Shuttle, it being a commercial venture of an agency that is manned by scientists instead of business people. And to judge from what Salin discovered, it is possible that had standard accounting practices been applied to Shuttle pricing policies, space development might have taken a quite different course in the last few years.

On February 28, 1984, Salin walked into the Rayburn Office Building of the US House. Four congressmen and 100-odd interested parties in the audience were there to hear his testimony. Subcommittee chair Harold Volkmer ran the show. Salin was nervous, because even he was surprised at the numbers he had uncovered in his marathon "audit" of NASA.

According to the space agency's own projections of costs, budgets, and an expected 53 launches from October 1985 to October 1988, Salin declared, the average cost per Shuttle launch during those three years will be approximately $250 million. That figure, he noted, includes apportioned ongoing costs for maintaining, operating, and improving the Shuttle.

The $250-million-per-launch estimate does not include some $20 billion in "sunk costs" for the Shuttle: $10 billion on R&D, $3 billion to construct orbiters, $2 billion to construct facilities, and $5 billion to conduct the first eight launches. A private company would somehow have to cover these costs, but Salin didn't add them in, he says, because of the difficulty in comparing government R&D mandated by "national interest" considerations and a private enterprise's R&D.

Even excluding that $20 billion, Salin noted in his testimony, NASA's proposed pricing policy is not based on full-cost recovery, on average annual cost recovery, on average per-launch cost recovery, or on any other methodology comparable to the way a business firm would have to set charges. Instead, NASA's pricing policy for the Shuttle is based on a cost concept of its own devising, which it calls "out-of-pocket costs." Significantly, Salin charged, the taxpayers end up paying at least half of the actual costs of sending satellites into orbit for profitable corporations such as RCA and AT&T and for various foreign governments.

Salin's testimony put NASA in a tizzy. Within days the agency had circulated a memo to every remotely interested party in Washington, attempting to rebut his analysis. The memo, dated March 7, 1984, charged that "Mr. Salin had a basic misunderstanding of both the Shuttle cost structure and the principles underlying the pricing policies for commercial and foreign customers." The six-page attack on Salin's analysis ended with the assertion that "it is the commercial and foreign customer who is subsidizing the cost of Government launches and not the opposite."

That the document's author did not sign the memo has probably spared the unknown bureaucrat much embarrassment. Only five months later, NASA chief James Beggs testified before a congressional subcommittee that each Shuttle launch actually costs $150 million to $200 million. NASA was apparently not so misunderstood by Salin as the agency had charged.

Yet three months after Beggs testified on Shuttle costs, when the head of NASA'S Office for Commercial Programs, Isaac T. Gillam, was interviewed for this article, he called Salin's cost estimates "preposterous." Gillam admits that Salin took pains to get all available cost data from NASA, but he contends that Salin's analysis was seriously flawed—essentially because Salin included Shuttle expenses that shouldn't, by NASA's lights, be counted as costs of a commercial launch.

What is at stake is evident from a quick review of Shuttle pricing (all in 1982 dollars). NASA currently charges only $35 million to take a full cargo bay load into low earth orbit (cargo that doesn't take up the whole bay is prorated). In late 1985 the charge is to go up to $71 million. But from October 1988 on, President Reagan has told NASA, it must charge commercial Shuttle users a full-cost-recovery price.

So NASA has analyzed its costs and projected business and submitted to the White House a post-1988 pricing proposal. NASA's "full cost recovery" price: $87 million! It's no wonder that the agency has been so eager to dismiss Salin's cost figures.

For his part, Salin concedes that some of NASA's criticisms may be valid. But he doesn't see how the average cost could be gotten below $200 million per launch. And that leaves a huge tab for taxpayers—and gives NASA a tremendous leg up on the potential competition in the space transportation business.

Against the highly subsidized Shuttle, then, private ELV operators cannot compete on price. Without its huge subsidies, the Shuttle would be a hands-down loser. But since taxpayers pick up somewhere between half and three-quarters of the actual cost of a commercial Shuttle launch, the Shuttle beats ELVs in price by a significant margin.

And, figures the astute venture capitalist, yet-to-be-proven alternatives couldn't compete either. And so investment funds for alternative vehicles remain scarce. That is precisely the problem that smacks entrepreneurs like Gary Hudson in the face. The Shuttle's artificially low price is freezing out the competition.

Of course, NASA has a benign view of its pricing policy. As Chris Kraft, former director of NASA's Johnson Space Center in Houston, told an Esquire reporter recently, "Until you capture the market, you've got to subsidize it." Eventually, with lots of users over which to spread its fixed costs, taxpayers won't have to subsidize Shuttle users. The nation's space agency will thus have made good on its promise to provide low-cost space transportation.

At best, that thinking is desperate. In the mid-1970s, NASA projected nearly 600 launches in the first 12 years of Shuttle operation. That figure was later lowered to less than 500, and in 1982 the projection was again lowered, to less than 250. In 1984, the Shuttle's fourth year of operation, it made only 5 of 10 planned launches, and observers say that NASA's goal of a launch a month in 1985 looks doubtful.

Moreover, suppose the present average cost per launch is, as Phil Salin found out and NASA now concedes, something between $150 million and $250 million. Even the most elastic imagination is tested by NASA's supposition that it can increase its volume, price, and operational efficiency enough to recover its costs, especially if the agency's record on cost overruns holds into the future. In 1982, the General Accounting Office, the federal government's internal auditor, found that NASA's projected average Shuttle launch cost increased 73 percent between 1976 and 1980.

Consider, too, that for a single launch, the fuel, external tank, and engines that are expended cost $25 million or so. And NASA employs 12,000 to 14,000 people to carry out a Shuttle launch from start to finish. How much personnel cost to attribute to the cost of a single Shuttle launch is not easy to calculate, but the magnitude at issue is clear.

Officials at NASA say that as they learn more with each Shuttle mission, they will rapidly achieve efficiencies. But NASA's descent on the "learning curve" would have to be precipitous—especially for a government bureaucracy that has little incentive to reduce costs—in order to achieve the kind of reduction it suggests.

For NASA officials, then, getting all the customers they can is their only hope for keeping up the Shuttle's facade as an inexpensive vehicle. And that means keeping competitors at bay—whether with subsidized pricing or by other means.

NASA's machinations to scuttle a private launch industry extend at least as far back as 1975. In January of that year, NASA employee Tenney Johnson sent a memo to his colleague Jerome Patterson about a Boeing proposal to develop the Minuteman 3 missile, a military rocket, as a commercial launch vehicle. Boeing was nearing the end of a production run on the missile and was looking for a way to keep up manufacture.

"Private rocket launchings, unregulated, would interfere with NASA's program, as the agency responsible for the space activities of the United States," Johnson wrote in his memo. But he speculated that the agency "would have the authority to regulate private launchings, not only to insure safety but to further the goals of the National Aeronautics and Space Administration" (emphasis added).

Johnson acknowledged that "since NASA is not a regulatory agency, it could not promulgate rules prohibiting private launchings." Other means came to mind. "NASA could oppose an application for a radio license for such a rocket before the FCC [Federal Communications Commission] or, in cooperation with the Administrator of the FAA [Federal Aviation Administration], formulate a policy which could be effected through the regulatory authority of the FAA." The memo pointedly noted that "no one would wish to project a rocket into outer space if he could not communicate with it through the use of radio. In order to do this, he must have a license.…Thus, the withholding of a license would effectively prevent the private launching of rockets."

In the event, NASA did not have to employ such tactics. Boeing's proposal involved a foreign launching site, but that was nixed by the State Department on the grounds that Boeing would be "exporting sensitive technology." The issue of government authority over private launches, meanwhile, remained in limbo until the Reagan administration settled on the Department of Transportation.

Despite its abundant subsidies, however, NASA is still worried about competition from the private sector. That concern was well in the forefront of NASA chief James Beggs's mind when he pegged the Shuttle's per launch cost at $150–$200 million in congressional testimony last July. Beggs had a sticky dilemma for Congress to puzzle over: through cost reductions and price increases, Shuttle operations could be made self-sustaining by 1990, he claimed—if the Department of Defense doesn't go elsewhere for its substantial launch services.

In fact, NASA worries a lot about the military's loyalty as a Shuttle patron. The Defense Department isn't as crazy about the Shuttle as it once was—it complains about the frequent delays and long preparation time, questions aspects of the Shuttle's reliability, and has other, strategic reservations about using the Shuttle for all military missions. Consequently, the Pentagon now urges the importance of an expendable launch vehicle capability, and the Air Force even plans to purchase 10 ELVs over the next several years. "This kind of thing," confides a close observer of the NASA-Pentagon feud over ELVs, "makes NASA go absolutely berserk."

"If it had cost $2 million to send a man across the Atlantic," Phil Salin suggests, "imagine how long it would have taken to explore, settle, and develop America." Salin, a cofounder of Starstruck, uses this thought experiment to drive home a main point: a dramatic reduction in the cost of getting there is the key to developing space for human use. And people at NASA would agree with this axiom as readily as would, say, Gary Hudson. NASA, after all, bet its future on the Space Shuttle, and for more than a decade poured all its resources and energy into the Shuttle, as a low-cost alternative to expendable launch vehicles.

As a government bureaucracy, however, NASA in fact has little if any reason to develop cheap space transportation. Though this claim might sound paradoxical at first—isn't it in the agency's interest to get the most out of its budget?—it becomes evident once one understands the specific incentives that NASA officials face.

Consider, first, the fundamental difference between how entrepreneurs are rewarded in the marketplace and how government bureaucrats are rewarded in the public sector. The potential for entrepreneurs' personal gain—for profit—increases as they decrease the costs of their operations. So minimizing costs is their fundamental incentive.

Public-sector managers, by contrast, are generally rewarded in accordance with the size and scope of their programs—they stand to gain no profits by cutting costs. So their incentive is to expand existing programs and create new programs—to increase their budget, that is.

At NASA, that incentive historically has led the agency to go all out for manned, rather than unmanned, systems. There is high publicity value in the glamour of astronauts, and this is an important element in an agency's bid for funds from Congress. And manned systems, requiring a far higher degree of reliability than unmanned systems, are more costly, too.

Phil Salin and many others argue that at this stage in our technological development, a manned reusable vehicle is a seriously mistaken approach to achieving economical space transportation. The Shuttle may be useful for certain types of advanced research, concedes Salin, but for the business of launching satellites, unmanned rockets—"big dumb boosters," as they are sometimes affectionately called—make the most economic sense right now.

Other entrepreneurs would not agree with Salin on this. Len Cormier of Third Millennium, for instance, is trying to develop a manned, Shuttle-like "Space Van." Salin's response to this: "Let each entrepreneur test his idea in the marketplace—without taxpayer subsidies."

Reinforcing NASA's incentive to inflate costs are the contractors who do the actual manufacturing on NASA projects. Because their fortunes rise and fall as NASA's programs expand and contract, it is in their interest, too, to promote high-cost approaches to space projects and to continually push new, more-advanced technology.

NASA's costs are also driven up by its need to satisfy politically influential constituencies. This often means making decisions based on criteria other than what is most economically rational. A prime example is the way in which the Shuttle's design had to be modified and remodified to satisfy demands from powerful quarters.

When the Nixon administration wouldn't fund NASA's plans for a manned space station, interests backing the station forced NASA to incorporate aspects of a space station, such as extended habitation in the vehicle, into the Shuttle. This significantly raised the Shuttle's cost beyond that of building a simple space truck. The truck became a mobile home.

Then, in order to win the Air Force's support, NASA again modified the design to accommodate larger military payloads and greater maneuverability. These changes led to a redesigned, complex wing and required the use of the infamous, troublesome heat-shield tiles, causing long delays and major cost increases. The Shuttle had become a paramilitary mobile home.

Finally, due to cuts in NASA's development funds, the original concept of total reusability had to be abandoned, thereby leading to higher operating costs. Some observers say the idea of a fully reusable vehicle was a questionable one, anyway, based on the premise that somewhat higher development costs would be offset by lower operating costs. But by changing horses midstream, the Shuttle ended up costing much more both to develop and to operate than purely expendable vehicles.

Risk, too, is handled by government bureaucrats in a way that inflates costs. Public-sector managers have Congress looking over their shoulders. They have little to gain if they take a risk and succeed—a cost-cutting breakthrough will not bring them profits. But if they fail, Congress may cancel their program. Understandably, NASA managers have a risk-avoidance mindset.

Ronald Cordes, a former NASA engineer on the Apollo program, has spoken at length on the subject. Faced with a choice between a $50-million system that is 60 percent reliable and $300-million system that is 90 percent reliable, says Cordes, NASA will choose the latter. A private firm, on the other hand, would probably go with the first option—it's simply good business.

Assume that a private firm fails in its first and second launches but succeeds on the third try. In three tries, each with a 60 percent chance of succeeding, the overall probability of success is 93.6 percent—at a total cost of $150 million. NASA's risk-averse strategy, however, has only a 90 percent chance of succeeding, and at twice the cost. But that's the approach NASA will choose, because failure on the first two 60 percent launches would be politically too risky.

So NASA's first concern is not to maximize its overall cost-effectiveness but to avoid politically risky errors that could lead Congress to cut its budget. And for NASA's contractors, too, the reflex to avoid political risks is second nature.

"This is caused not simply by individual decisions to reduce risks, regardless of cost," points out Eric Drexler of the Massachusetts Institute of Technology. "This pattern is ingrained into the structure of government-funded development organizations, into the way they operate." And Drexler drives home the point: "There need be no money-wasting devils to result in a devilish waste of money."

The upshot is that NASA's approach to space transportation is fundamentally inappropriate to the goal of getting into space cheaply. In contrast to the multiple, trial-and-error approaches of profit-seeking entrepreneurs, the government's space program is run as a centralized monopoly. After exhaustively studying the options, and after taking into account all the political aspects of the program, a committee of bureaucrats—scientists and technicians, yes; but bureaucrats nonetheless—selects what it sees as the single best approach to a problem, then massively funds it until it is made to work. Obviously, this brute-force method is likely to produce a higher-cost design. But in addition, it is exactly contrary to how innovative breakthroughs come about.

A comparison of the US computer and telephone industries provides an illuminating case in point. The entrepreneurial, decentralized computer industry had seen a tremendous rate of innovation resulting in dramatic cost decreases, while for decades the phone industry lay in a technological coma. It was not until the phone industry was deregulated—opening the way for a multitude of entrepreneurs to test their ideas—that real innovation returned to this area. The lesson is clear: it is open competition, not centralized monopolization, that fosters cost-reducing innovation.

It is not NASA that will prove or disprove the feasibility of Starstruck's hybrid-engine, sea-launched Constellation rockets; or Gary Hudson's reusable Phoenix; or Len Cormier's manned Space Van; or Space Vector's and Space Services's quick and simple rockets. Each of these approaches is based on different notions of what will work best and of what users will need.

Each approach must be tested in the market—first in the market for investment capital, then, perhaps, in the market for customers. So the entrepreneurs behind these efforts must, at each step, ask themselves, How can I get the best results in the cheapest way? NASA officials, on the other hand, don't ask that question—they don't have to.

Money. When you talk with these entrepreneurs, you soon discover that they're not getting it—at least not enough to carry their ideas to a marketable point.

At first, the situation looks familiar enough—part of what one investment expert who follows the space industry calls "the continuing dialectic between entrepreneur and investor." The entrepreneur, brimming with enthusiasm, tries to convince the investor of some profitable new idea. And the investor clings to his skepticism, looking hard for ways he might get burned. But in the field of space transportation, the entrepreneur-investor struggle is complicated by the looming presence of NASA—a huge, monopolistic government bureaucracy that provides the only model of space transportation that investors can look to.

Gary Hudson, 34 years old and with a life-long passion for space transport, has tried to tap many investors' pockets to fund his Phoenix rocket. It's still only an idea on paper. But Hudson is convinced that the Phoenix will dramatically reduce launching costs—to about $66 per pound of payload delivered into low earth orbit, assuming that the vehicle sees 100 launches. $66! The highly subsidized price of a Shuttle launch still costs a user about $1,300 per pound delivered into low earth orbit and about $4,600 a pound aboard a Delta rocket.

"Fantastic," remarked James Connor when the $66 figure was reported to him. Connor, of the investment firm First Boston Corp. in Dallas, is considered an astute analyst of the private space industry and its investment opportunities. He does not dismiss out of hand the remarkable claims of space transportation entrepreneurs like Hudson, but he wonders where such huge cost reductions are to come. The entrepreneurs' plans, notes, Connor, do not involve the application of some radically new technology that in one fell swoop will bring down the costs of space transportation several times over, as the silicon chip did for the price of computers.

Hudson has answers. Because the vehicle is reusable, with nothing but the fuel expended on a mission, the vehicle's $25-million production cost could be spread among many users, just as airlines spread the multimillion-dollar cost of a jetliner over many users, not just a single planeful.

And the operation of a launch vehicle, says Hudson, doesn't require nearly the number of people that NASA uses—some 1,200 for a single Delta launch. As evidence that fewer people are needed, he cites the military, which uses a crew about one-tenth the size of NASA's for a similar launch. Hudson expects Phoenix launches to be handled by 5-person crews. Moreover, he says, operational overhead can be cut even further by simplifying launch sites and control procedures (NASA's are extremely elaborate).

Developing his Phoenix to a commercial stage, Hudson estimates, will cost between $100 million and $200 million. But he can't get that kind of backing.

Gregg Fawkes, who heads the Space Enterprise Project of the US Chamber of Commerce's National Chamber Foundation, has polled investors about going in on start-up space transportation ventures. What he's found is universal reluctance. "The assumption among investors," says Fawkes, "is that the development costs would be at least $200 million and probably more like $500 million."

Why can't Hudson and others convince investors that development costs need not be so high? Here the specter of NASA looms large.

Say an entrepreneur has worked out a concept on paper in great detail—technical, financing, and marketing aspects—and meets with a prospective investor. The investor may be impressed by the idea but has no expertise about the subject, so he gets advice from a "technical evaluator." Wanting someone who is knowledgeable about rockets and such, the investor goes to a retired aerospace-industry or NASA engineer—someone, that is, who has always operated within the environment of government bureaucracy in which cost is of little or no concern.

"There are no experts on this issue," says Starstruck cofounder Phil Salin, "because no one can answer the question the marketplace is asking: How much does it cost to develop a commercial launch vehicle? No one has ever done it, so no one really knows." Indeed, the entrepreneurs could be underestimating the development costs that face them: to achieve a quasi-successful test launch of just its prototype rocket, the Dolphin, Starstruck entrepreneurs spent four times as much money and three times as long as they had calculated.

Even if the technical evaluator judges the concept technically sound, he is almost certain to give the idea low marks on the feasibility of developing it within the cost limits the entrepreneur is suggesting. Tom Brosz, editor and publisher of Commercial Space Report, explains that the evaluator's attitude is, "if this could be done, NASA would have done it already." Adds Gary Hudson: "If the idea was obvious, the entrepreneurial opportunity wouldn't be there—Boeing or somebody would already be doing it."

And to top it off, observes banker James Connor, there is "an unspoken concern about what the government intends to do—in contrast to what official policy might be." The worry, he explains, is "whether the government will take the market for launches by underbidding" private operators, as NASA is doing with subsidized Shuttle pricing.

"The real money will flow to the entrepreneurs," Connor predicts, "when they can show that users will sign contracts for their services. But users are saying, Why should we sign up with these guys when we've already got a pretty good deal from the government?"

If there were a firm policy resolution to end subsidized government launch services, Connor predicts that investors would move into the business "reasonably quickly—there wouldn't be much reason to hesitate any longer." But as long as NASA is in the launch business, there is the impression, as Connor puts it, that "the elephants are dancing and some mice will be crushed."

Yet it's still too early for the mammoth space agency to do a dance of victory. Ultimately, there may be too many mice to trample—especially on foreign shores.

When the Shuttle was nearing operation—it first flew in the spring of 1981—NASA's announced intention was to keep ELVs only as back-ups to the Shuttle and to phase them out altogether by 1986. All looked pretty rosy for NASA, but in 1983 came President Reagan's order to privatize the ELVs. Firms bid on the commercial rights to NASA's Atlas and Delta rockets and to the Air Force's Titan. General Dynamics, maker of the Atlas for NASA, won commercial rights to it, and Martin Marietta got the rights to the Titan, which it had developed for the Air Force. McDonnell Douglas, maker of the Delta for NASA, did not bid on commercializing the rocket, and the marketing rights to it went to Transpace Carriers, Inc.

NASA wanted very much to direct the government office that would oversee the private ELV industry. But Reagan assigned that duty to the Transportation Department, which then created for the purpose an Office of Commercial Space Transportation (OCST). Observers of the politics affecting the ELV industry say that Transportation Secretary Elizabeth Dole wants to help the private launch operators get off the ground and that she is likely to urge Reagan to take a firm stance on full-cost-recovery pricing for the Shuttle when the president makes a decision, early in 1985. That may be all that's needed to get the private ELV industry going—and to loosen up investment funds for launch entrepreneurs.

How President Reagan decides the Shuttle-pricing question will be crucially important to the future of the American launch industry. NASA, of course, will be pushing hard to get Reagan's approval of its own proposal for a full-cost-recovery price: $87 million (in 1982 dollars). However, the agency may not have many allies this time around.

Also studying the pricing issue are the Department of Transportation's OCST, the Office of Management and Budget (OMB), and the Congressional Budget Office (CBO). Their studies, according to informed sources in Washington, are likely to contend that commercial use of the Shuttle costs more than NASA's analysis indicates.

Moreover, Transportation Secretary Dole, in urging true cost-based pricing for the Shuttle, may well present the issue to Reagan from the subsidization angle: why, she might ask, should taxpayers subsidize users such as RCA or AT&T, especially when taxpayers face a massive federal deficit? She may explain that her office doesn't want subsidies for private launchers—just a fair shake from government by forcing NASA to charge a true cost-based price. That argument may well appeal to the administration's fiscal conservatives, especially OMB director David Stockman.

Another twist in the situation may also put some heat on NASA. On June 1, 1984, Transpace Carriers, the firm that acquired the marketing rights to NASA's Delta rocket, filed a petition with the US Trade Representative's office to investigate "dumping" by Arianespace, the European government-backed consortium: Arianespace charges American users of its Ariane rocket a lower price than European users, thus undercutting Transpace's own prices. Arianespace responded to the charge by accusing NASA of being the most unfair price cutter of all. That squabble is bound to initiate further investigation of Shuttle pricing.

Still, NASA is a powerful force in Washington politics, with many strong supporters both in Congress and in high places within the Reagan administration itself. In addition, commercial Shuttle users do not, of course, like the prospect of having to pay a full-cost price, and they will likely lobby hard for continued subsidies. So there is a good chance that the NASA position will prevail.

But if a myopic US policy thus continues to block efforts in private space transportation, there are other sources of advance. The Europeans' Arianespace probably will not go very far, because, subsidized by Common Market governments, it has many of the same problems as NASA's Shuttle.

It is the Japanese who could eventually dominate space transportation. They are not known for new technologies, but they don't need them to get into space. The tools are already available, and the Japanese have already begun to develop a launch capability. NASA may be able to throw its weight around in the US space industry, squeezing out private operators and entrepreneurs. It will not similarly be able to lean on the Japanese.

Without question, space will be developed. Also without question, Americans will be involved in some way—whether or not their efforts originate from American soil. In the really long run, space represents more than something American or Japanese—it is the domain of individualists, people with political, cultural, and economic claustrophobia. The bureaucratic barriers are therefore destined to fall. The question now is how soon. A lot of us can't quite give up hope that it will happen in time for us to help shape those vast promised lands above.

Patrick Cox is a free-lance writer. This article is a project of the Reason Foundation Investigative Journalism Fund. Research assistance for this article was provided by Eric Marti.

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How NASA Plays Hardball

A REASON investigation has found substantial confirmation of claims that the National Aeronautics and Space Administration exerted behind-the-scenes pressure on government contractors in an attempt to block development of a private satellite-launching industry in the United States. According to sources close to the US aerospace industry, high-level executives at the Martin Marietta Corporation and at General Dynamics were warned by a NASA official in 1983 that if they pursued plans to compete with NASA's Space Shuttle, their future as NASA contractors would be jeopardized.

Several sources close to the incidents identified Maj. Gen. James Abrahamson, who was the head of the Space Shuttle program at the time, as a NASA official who applied pressure to government contractors. Abrahamson, who left NASA in early 1984 and now heads the Pentagon's Strategic Defense Initiative, would not make himself available for comment on the information obtained by REASON.

REASON encountered stories about NASA pressure tactics in the course of checking facts for the accompanying article on space entrepreneurs. These entrepreneurs' efforts to develop new launch vehicles do not pose an immediate threat to NASA's monopoly on US space transportation.

But in 1983 the Reagan administration ordered NASA and the military to turn over their expendable launch vehicles (ELVs) to private operators. It is competition from these that NASA evidently fears and, according to reports circulating among space-industry observers, was trying to forestall.

In an effort to determine whether there is any substance to these reports, REASON spoke to a number of individuals, including several well-placed government officials. None of these sources are willing to be identified because of the confidentiality of their information and because of fear of reprisal from NASA. As one source put it, expressing a universal assessment, "I have to get along with NASA in order to continue to do what I'm doing."

REASON learned from several sources that the Martin Marietta Corporation is one of the potential competitors pressured by NASA. The company has acquired exclusive commercial rights to the Titan ELV, which it had produced for the Air Force under contract.

In the spring of 1983, Martin Marietta was preparing to bid on launching two satellites for Intelsat, the international telecommunications consortium. NASA was also bidding the Shuttle for this launch, and a NASA official reportedly told Martin Marietta that if the company pursued the Intelsat launch it would be locked out of future NASA contracts.

Martin Marietta currently has a half-billion-dollar contract with the agency to manufacture the Space Shuttle's external tank. And it is one of the major aerospace corporations bidding on participation in NASA's projected $8-billion space station program.

When REASON asked Caleb B. Hurtt, president of Martin Marietta Aerospace, to comment on the information it had obtained, Hurtt denied that he or any other Martin Marietta executive had been pressured against commercialization of the Titan vehicle. Yet REASON's sources gained their information directly from Martin Marietta executives.

As REASON pursued this investigation, it also learned that General Dynamics was under pressure from NASA. In the spring of 1983 General Dynamics formed a division to market the Atlas ELV as a commercial launch vehicle.

In mid-1983, REASON was told, the company's vice-president for space programs, William Rector, was warned by a high-level NASA official that General Dynamics' contracts with the agency would be reopened to bidding if the firm did not drop its plans to compete with the Shuttle. Under a NASA contract worth $500 million, General Dynamics currently produces an expendable upper-stage booster for the Shuttle and is extensively involved in NASA's space station project.

A General Dynamics spokesman told REASON that Rector was "unaware" of any such pressure by NASA. REASON had confirmed the incident with a source who learned of it directly from a General Dynamics executive. Telephone calls to Rector were routed to the firm's public affairs office, and Rector did not respond to a telegram offering him an opportunity to comment on this matter.

It is not at all clear that any attempts by NASA to block the emergence of a private launch industry in this way were successful. General Dynamics signed up its first customer for an Atlas launch in the summer of 1984. And Martin Marietta did submit a bid on the Intelsat launch but lost to Ariane-space, the partially subsidized European launch service.

Martin Marietta president Caleb Hurtt told REASON that the firm has not pursued the commercialization of the Titan any further because "the current structure of the international market" makes it unprofitable. Space industry analysts note that the major factor in the launch market is NASA's cut-rate, taxpayer-subsidized Shuttle launch price (see accompanying article).

REASON has learned that subsidized Shuttle pricing was the subject of a critical letter to the White House written by Oliver Boileau, president of General Dynamics, in 1983. The letter was part of the firm's contribution to a White House task force on space commercialization. In the letter, according to REASON sources, Boileau criticized the policy of subsidized Shuttle pricing and emphasized the importance of an expendable launch vehicle (ELV) capability in addition to the government's Shuttle.

It is probably the case that Shuttle pricing policy has more power to affect private operators than any pressure by NASA officials. Both show NASA's determination to keep its hold on US space transportation.

—The Editors