Rocket Billionaires

by Tim Fernholz

  Still, there was an evident divide among defense officials about whether introducing more competition would cut costs or destabilize the whole launch business. In exchange for the government’s largesse, ULA was reliably delivering the launches provided. Few wanted to risk a change in policy that could sabotage the ability of the United States to maintain its advantage in space. Complacency may have been setting in as well, with officials unwilling to challenge their long-standing industry counterparts. And even if officials were inclined to seek a more efficient option, ULA—and its parents, Boeing and Lockheed Martin—enjoyed significant political clout. They also had plenty of reasons to protect their investments: in 2011, Boeing and Lockheed pulled more than $200 million from ULA, a fairly typical haul. While the joint venture spent just $120,000 on lobbying that year, its two parents together spent more than $30 million to gain the support of lawmakers and federal officials. By contrast, SpaceX’s lobbying expenses that year were below the $5,000 threshold for disclosure.

  A condition of the government antitrust watchdogs who had approved the ULA monopoly had been that the US Air Force could allow qualified competitors to compete, should any ever appear. In 2010, SpaceX had the Falcon 9 flying. But the Air Force had yet to issue its official requirements for competing with ULA. SpaceX executives knew their rocket could do the job, but they couldn’t prove it until the Air Force told them how. This delay was a big problem for the company, because it had planned on the Air Force following through on its promise to open bidding on its launches.

  Musk’s company, in true start-up style, had bet on rapid growth into existing markets to amortize the costs of its development program. The longer SpaceX took to win the Air Force’s business, the more risk began to mount on the company’s balance sheet. This took the form of delays to the company’s work on a heavy rocket and its Martian projects. By 2011, SpaceX was extremely concerned about the prospect of the block buy being made before it was certified to bid. Because the deal was so large—designed, in effect, to subsidize ULA and its suppliers over the medium term—missing a chance to break in now would lock SpaceX out of the market for seven or eight years, a potential loss of hundreds of millions of dollars in revenue.

  But the surge in ULA’s price—and the commensurate scrutiny and delay—gave SpaceX breathing room. One observer told me that the company was “blessed by a broken status quo.” Quite simply, had EELV delivered on its promises, SpaceX would not have had a chance to finish building its rockets in time to compete. “When they formed the joint venture, the bad part was there wasn’t competition—how were we going to break into that market?” Shotwell said to me later. “The good part was, a monopoly is never helpful to the community that they serve. Ever. We knew that if they formed, they would end up being very expensive, prices would go up, innovation would ratchet down.”

  Throughout 2012, government auditors picked over the incumbent’s supply chains and worked to understand its convoluted dual-contract system, which one examiner called “misleading” and “remarkable.” At the conclusion of the process, in late 2012, the key procurement official at the time, Undersecretary of Defense Frank Kendall, issued a new set of orders to the Air Force that required the service to bring in new competitors. SpaceX, whose rocket was still not powerful enough to lift the largest spy satellites into space, was expected to win a mission or two. The incumbents were not fretting publicly. “I’m hugely pleased with 66 in a row from ULA, and I don’t know the record of SpaceX yet,” the chairman and CEO of Lockheed mused at a public event. “Two in a row?”

  SpaceX’s employees took Kendall’s announcement at face value—they would be able to show their stuff. The company at last received the final requirements to launch national security satellites and prepared to undergo three “certification” launches—essentially, routine launches that the Air Force would carefully scrutinize for any signs of trouble. In September 2013, SpaceX launched the Cassiope satellite, and in December it flew SES-8, its first-ever launch of a satellite into high orbit. The company would complete its third certifying launch in January 2014, concluding a successful five-month sprint to give it a shot at the national security business.

  A month before its final flight, SpaceX’s Washington team was shocked and dismayed to learn that ULA had been awarded a thirty-six-launch contract over five years, worth $19 billion, without any public competition. The buy was pitched as a cost-saving measure to take advantage of economies of scale, but the actual savings were fairly small, with the cost of a launch falling from $376 million to $366 million between 2012 and 2014. In protest, SpaceX said it could deliver the same missions for just $90 million a pop, and didn’t understand why it couldn’t bid on launches expected to take place years in the future. Defense officials, however, were under pressure to keep a supply of rockets on hand, and ULA was telling them that anything short of a multiyear commitment would threaten their business.

  The importance of space access to the United States was reinforced soon after by a dark turn in geopolitics in Europe. This wouldn’t be a space story without little green men, but the verdant invaders in question weren’t alien. Instead, these were Russian soldiers, wearing camouflage uniforms without any official insignia, who suddenly began appearing in Ukraine in early 2014. Ukraine’s pro-Russian government had fallen to a wave of popular protests urging the former Soviet state to develop tighter bonds with the European Union. Fearing a destabilizing influence on his border, Russia’s authoritarian leader, Vladimir Putin, launched a secret war. Exploiting divisions among ethnic Russians in the country to confuse the world, he sent Russian troops into eastern Ukraine and Crimea. Putin would formally annex the latter to Russia in March 2014.

  This asymmetrical warfare relied on propaganda, deception, and total disregard for international law—but also on sophisticated space-based capabilities. The Russians demonstrated GPS-jamming and spoofing technology during the Crimean conflict that would make it more difficult for US missiles to hit their targets, and potentially send airplanes and naval ships dangerously off course. The open aggression from Russia on Europe’s doorstep put recent tests of Russian anti-satellite weapons, whether ground-launched missiles or maneuvering orbital interceptors, in a frightening new light. The United States could not afford to be without launch capabilities if it needed to upgrade its satellites to rapidly address new threats.

  A brewing conflict with Russia could have been the necessary edge that ULA needed to seal the deal on its favored relationship with the government: getting paid huge amounts of money to be the exclusive guarantor of space access. That was the fundamental dynamic of all the attempts to save the EELV program, up to the combination that resulted in ULA.

  Yet one quirk of space engineering made all of this untenable and, in effect, impossible: the Atlas V rocket, the medium-lift workhorse of ULA’s fleet, was powered by a Russian rocket engine, the RD-180. That engine was considered more efficient and powerful than anything else available on the market. (One ULA engineer told me that the Russian methodology for perfecting the engine was very much like SpaceX’s ethos: “They get the engine designed to the point where they could build something, go out onto the test stand, and test and test and test and tweak and tweak and tweak until the thing is honed.”) And buying the RD-180 in bulk was a fine way of keeping Russia’s industrial base focused on putting satellites in space instead of warheads in your backyard. Facing a potential direct conflict, it looked as though the United States had put into Russian hands not just its ability to go to the International Space Station, but much of its ability to launch satellites as well.

  All of these threads—the exploding costs of ULA’s rockets, the competitive demands of SpaceX, and the clarity of national security threats from another global power—came together during a contentious hearing before the Senate committee charged with appropriating funds to buy rockets in March 2014.

  It was Musk’s first time testifying before Congress, and he didn’t come to pull punches. Sitting right next
to the CEO of ULA, Michael Gass, Musk waited for him to finish delivering an opening statement that noted ULA’s service record and all the hard work it had done in the past two years trying to explain its accounting to the government. Musk listened as Gass, a bullet-headed executive with a gravelly voice who had led ULA for eight years, pointedly noted that his company produced “the only rockets that fully meet the unique and specialized needs of the national security community.” The lesson of the ULA’s merger was that “market demand was insufficient to sustain two companies,” so why play a losing game again?

  Then it was Musk’s turn. His testimony was far blunter than that of the more experienced space executive as he spoke to the concerns of the lawmakers in the room.

  “The Air Force and other agencies are simply paying too high a price for launch,” he said. “The impacts of relying on a monopoly provider since 2006 were predictable, and they have been borne out. Space launch innovation stagnated. Competition has been stifled. And prices have risen to levels that [Air Force Space Command leader] General Shelton has himself called ‘unsustainable.’”

  Musk lambasted ULA’s budget-busting rockets. He noted SpaceX’s successful flights for private industry and NASA, and for US Air Force certification. He pointed out that his rockets cost four times less than ULA’s. He demanded the end of ULA’s billion-dollar-a-year mission assurance subsidies, which “create an extremely unequal playing field.” And then he issued his coup de grâce: “In light of Russia’s de facto annexation of the Ukraine’s Crimea region . . . the Atlas V cannot possibly be described as providing ‘assured access to space’ for our nation when supply of the main engine depends on President Putin’s permission.”

  Gass tried to fire back, recalling the crisis of cost that had led to Boeing and Lockheed’s creating the ULA joint venture in the first place, and the responsible people whose “careers ended and we changed the acquisition strategy.” He denied that the mission assurance contract was a subsidy and suggested that SpaceX’s work for NASA was the cozier corporate arrangement. This is comparing apples and oranges; NASA’s Space Act Agreements did come with fewer accounting strings attached, but they were also fixed-price deals that could be canceled if the company didn’t meet its milestones, rather than guaranteeing cost plus profit.

  Senators came and went during the hearing, stopping to ask questions that effectively telegraphed their positions. Senator Dianne Feinstein of California, noting that “all of these companies are in California in one way or another,” pointed out ULA’s huge cost overages. She asked Musk if SpaceX would be certified by the Air Force in a timely fashion, to which he said yes.

  Senator Richard Shelby, whose home state of Alabama includes significant ULA facilities, asked Musk if he was trying to exempt SpaceX from auditing and accounting rules that apply to ULA, to which he said no. Then Shelby asked Musk if he would concede that his competitor ULA had a great launch record. The stubborn entrepreneur would not, noting a failed Delta IV launch and a misplaced satellite on an Atlas V flight that marred the company’s record. Gass said that if ULA’s customers call the mission a success, it’s a success. Then Shelby asked Musk about the secondary satellite that hadn’t made it to orbit during SpaceX’s first operational mission to the ISS, when one of the Falcon’s nine engines had gone out. Musk said it wasn’t a failure because the customers were satisfied, and Gass jumped back in to say that this was in fact a failure. Shelby, Musk, and Gass squabbled, talking over one another about the qualifications of their respective rockets. Boys and their toys.

  Despite ULA’s record, Gass was in a tight spot. He suggested that SpaceX couldn’t meet certain Air Force launch requirements that he could not discuss publicly, since they were classified. He said the prices quoted by Musk and government auditors were incorrect, but he had no figures at hand to contradict them with. Later, ULA would release the cost of its rockets, calculated without including the annual subsidy, but those prices—$164 million for an Atlas V and $350 million for a heavy-lift Delta IV—were still far higher than what SpaceX offered. In managing ULA through its challenging birth, Gass had successfully delivered a reliable service, but his company had never been able to do so frugally. Only access mattered.

  By contrast, SpaceX had completely changed the calculus for rocket companies, very much according to the same pattern that epitomized the classic Silicon Valley disruption narrative. ULA’s rockets are IBM’s mainframe computers: they made the biggest, most expensive tech tools, used by blue-chip brands. This was a sufficient strategy until the dawn of the personal computer—or the Falcon 9 rocket—which at first weren’t quite as capable as their progenitors but were far cheaper.

  The hearing ended with the chairman, Senator Dick Durbin of Illinois, putting to each CEO the best arguments of its competitor. Musk was asked what would happen if satellite demand slackened again, as it had before. His answer was to point to stable launch demand from the US Air Force and the National Reconnaissance Office, which had flown an average of seven missions a year since ULA formed. Gass was forced to concede that competition could lower prices, so long as there was a “fair and open playing field and everybody has to have the same requirements.”

  This was almost the final nail in ULA’s coffin; after all, it was a lot easier to believe that SpaceX would continue to become more reliable than that ULA would suddenly reverse years of price increases. The Russia issue was becoming increasingly salient; hawkish senator John McCain of Arizona fired off letters demanding an investigation into ULA’s reliance on Russian engines after the Kremlin official and Putin crony who supervised the country’s aerospace industry, Dmitry Rogozin, became a target of punitive economic sanctions. Rogozin drove on the controversy with jokey criticism on Twitter, in a way that seemed amusing at the time but now seems to eerily foreshadow the effect of Russian propaganda on social media. The fierce nationalist threatened to end the export of the engines and the partnership flying astronauts to the ISS, mocking the sanctions by saying the United States would have to deliver astronauts to orbit on a trampoline. Ultimately, neither would be stopped; NASA and Roscosmos, its Russian counterpart, were used to keeping their heads down and working while their leaders growled at each other.

  The final straw for SpaceX came after the hearing, when its lobbyists learned that the Air Force would not put any of the missions SpaceX was qualified for up for bid, because of the existing block-buy commitment. This was after the Air Force said it would pare down the number of launches for which it expected to allow open bidding from fourteen to seven. The further restrictions were the ultimate redline for Elon Musk and the rest of SpaceX’s leadership. They had tried to play by the rules. Now they were going to take the government to court for the right to fly its satellites. They would sue the US Air Force until it agreed to consider buying a lower-price option. “We were quite upset about that,” Shotwell told me. “Fundamentally, we looked at a complete shutout, which is why we then had to file.”

  This was an awkward situation. Even as SpaceX’s lawyers faced off with the government in Washington, DC, the Air Force was spending $60 million and dedicating one hundred service-members to certifying the Falcon 9 for military use. “Generally, the person you’re going to do business with, you don’t sue them,” General Shelton told lawmakers. Senator McCain wasn’t particularly sympathetic. He noted that ULA had sued the Air Force in 2012 over a $400 million contract. The general replied that the dispute had been technical. “Oh, I see. So it’s okay if it’s over a technical payment situation,” the famously caustic McCain replied. “General Shelton, you have really diminished your stature with this committee when you decide whether people or organizations or companies should be able to sue or not.”

  Unlike in 2005, when SpaceX had inserted itself in an antitrust case to block ULA and lost, this suit was far more dangerous. While successful antitrust actions are rare, federal contracting law provides far more handholds for an experienced lawyer to grasp. SpaceX’s three certifying flights were n
ow complete, and it was flying regular missions. The 2012 directive from Undersecretary Kendall had clearly mandated competition, but it seemed none was in the offing. Even SpaceX’s attorneys were surprised by their initial success in the suit. At an early meeting with Judge Susan Braden to schedule the various phases of the litigation, a handful of SpaceX litigators arrived to see a tableful of Department of Justice attorneys representing the government, plus another tableful of counsel for ULA, which had joined the dispute to protect its contract. The visible disparity in legal resources underscored the David and Goliath nature of the suit, though SpaceX didn’t flinch in finding top-flight legal representation of its own, hiring the firm of legendary litigator David Boies. It also hired Bill Burton, President Obama’s former press secretary, to advise it on public relations.

  SpaceX’s complaint had only asked that the Air Force be forced to put its launch contracts up for competition under federal rules, and that any launches in the block buy scheduled for two years after its filing be delayed. Yet Braden started the meeting off with another question: Could the Department of Justice guarantee that none of the money paid to ULA would find its way back to sanctioned Russians like Rogozin?

  The government attorneys were prepared to talk contractual minutiae, not certify that ULA’s supply chain excluded controversial oligarchs. Circumspectly, they said as much to the judge, who then surprised everyone in the courtroom by issuing an injunction forbidding further imports of the RD-180 from Russia until such time as the government could guarantee that it wasn’t violating sanctions. Even though ULA said it had two years’ worth of engines stockpiled in the United States already, the injunction effectively put a kibosh on the controversial block buy.