SpaceX: Rocket Ship - [Business Breakdowns, EP.194]

24:50Launch is getting increasingly cheap, it's brought off as a depreciation aspect which she talked about. But the incremental cost of connecting one user by a space is the cost of the user terminal, which is again a factory -based cost is a Moore's Law -based cost. It's one that scales really well and is getting cheaper and cheaper over time. And so unlike a terrestrial network, the customer acquisition cost of the cost of service So the customer is agnostic to where they are in the world and is also getting cheap and cheaper over time. So whilst it might appear to be a peripheral or a luxury product to some in the west at the moment, come back in five years time, come back in 10 years time and the service is going to be significantly more powerful, significantly more capable than anything which we're able to offer via the ground.

25:33So the address will mark it is something that grows significantly over time, both in people where there's no other option but also it becomes cost -compatitive around the fringes of cities and then slowly further in and further in etc. And all of this is funding into the flywheel of making it cheaper and cheaper for them or more of a reason to launch more satellites which is a reason to invest more in rockets to make it cheaper to launch etc etc. And so they've really thought about that from what's the incremental return like and how can we maximize that at scale? There's something to be said for us as a civilization now that scaling something is easier in space than and on land.

26:10I know there's much more that goes into that in terms of the capabilities of space, but hearing it is quite interesting. Do they release any data points about the size of that network and from a user perspective? Is there any way to gauge how big it is today, just in terms of whether there's a way that you can do back at the envelope revenue analysis or anything along those lines? It costs around about $120 per month for a subscription in the US, multiplying that by 12 gets you to roughly on a half grand per year. Multiply that by how many subscribers you want and you can roughly figure out what a revenue line might be for styling.

26:48It's hard to pass out within that, which are B2C users, which are B2B users and which are B2G users. And they're likely priced and sold in a very different basis. So might be a volume basis, so might be on a value, et cetera. SpaceX doesn't publicly provide a breakdown of the business model and how that is split between different areas. But there are some keen -eyed observers on the internet. If you go on a few Reddit forums or you're looking some of the major press et cetera, which is speculated on what it might look like, or quite a low number of millions subscribers, roughly has been quoted over the last year or two.

27:22So if you think about how many US households there are without internet connection, for example, there's 11 million of those in the US today that don't have full broadband access. The market, even in the US for a rural and uncertain, people is really huge still. But I think globally, if you look at how many potential users there are, you start getting into the hundreds of millions or maybe even the billions in terms of potential. That's just for individual human users of that network, never mind machine use cases. If it's competitive on cost, that really is the only thing that's holding these users back.

27:52It's not a feasibility issue anymore. It's a cost thing. So I think it's fair to say that Starlink is going to significantly eclipse the revenue that SpaceX makes from Falcon 9 at the moment. And that's the underlying principle of how we're going to be able to fund this ongoing technology innovation and the wide admission that the company has, Starlink and the revenues it brings in is really important to that. Satellites and lower -earth orbit, there is quite a bit of history in terms of that being the obvious space use case that having an existing economy. I think Starlink is an extension of that different, absolutely, but an extension of what was going on.

28:29Are there brand new industries being unlocked or obvious things with line of sight that open up from space economy perspective that you see either today or when I say near future you can extend that out however far you think is reasonable. A lot of these options which SpaceX has to develop brand new markets that don't exist already are a function ultimately of the cost curve. Take semiconductor manufacturing on Earth at the moment. We spend billions of dollars per fab to recreate the conditions which are readily accessible in space for free if you can get there. And so there's some point on the cost curve intersecting between the cost of building a fab and the cost of launching a fab or the equipment of a fab into orbit and operating there instead.

29:17Same can be said of pharmaceutical research, the crystallization structures which are able to happen in space are different to the ones which are able to happen under the influence of gravity. So if you think about pricing on pharmaceuticals, extending patent lives, etc. If you can move the manufacturing or the research lab for cutting edge pharmaceuticals into space, you could make high value low volume products. Something which would really make sense to do that and don't require a huge technological innovation to happen. The list can go on and on artificial organs, for example, being able to manufacture perfectly spherical lenses.

29:50There's lots and lots of things which could be made. Maybe the way to think about that is the space -based manufacturing could be the next large market for this. If the costs can continue to come down, Starship having the volume of an A380, a 747, think of the equivalent size of factory that represents, and if that can be launched every single day and recovered every single day for $10 per kilogram, that could be a really compelling way to do quite a lot of manufacturing. Incidentally, that's something that Jeff Bezos really focuses on on his vision for space as opposed to Mars per se is where we can move a lot of the heavy polluting industry off the planet.

30:26And why don't we turn Earth into this perfect nature reserve and all these polluting aspects of manufacturing can go into orbit, which again is very compelling. Probably needs a lot more innovation to do with communications from orbit. But I'd say it's maybe an inevitability if the cost gets to a low enough point. You think how much solar energy is available without the atmosphere their attenuation. For example, you know, 24 -7. There's lots of compelling reasons why, if it's cheap enough at some point, a lot of these things probably should happen, not just could happen. The solar energy point, great example of something that is an entirely different dynamic in space than on Earth.

31:02What would the other things be just out of curiosity when you mentioned semiconductors or pharmaceuticals? Is it just purely gravity or are there other things that are happening in space or not happening in space that happen on earth that would drive that difference. There's the vacuum condition so there isn't an atmosphere so the level of impurities which you need to get rid of or if they put a position machine for example you don't have the same kind of challenges there of having to have this deep vacuum there's arguably in space because you don't have gravity you can construct which larger structures there rather than construct them on the ground and then launch them so again that volume constraint, which we were talking about earlier in terms of how big your payload is.

31:41If you're able to get enough stuff up there and sell it in spaces with the International Space Station, things can be much, much larger given the payload bay of a Starship that we could with the Space Shuttle. When you think about lower Earth orbit versus geospatial orbit versus something like Mars, which I think was the original vision with Elon and SpaceX, how much does that change the economics when you extend out. Is it orders of magnitude where it's an exponential cost curve to go further out, even just if we focus on the launch and use a satellite, for an example, before we get into all the manufacturing dynamics.

32:18Is there any way to contextualize that from a cost perspective? The really good news here is that gravitational force decreases with the square of distance. So the biggest challenge is getting off the surface and into orbit. Once you're there, from an energy point of view, it's a lot easier to go anywhere else in the solar system. So if you were to take Falcon 9 again as the example, for the same price, it can place 20 tons into low Earth orbit, or it can place 4 tons into Martian orbit, that's despite the latter being over a million times further away. Now this feeds into what I think is probably the biggest misconception about SpaceX and its Mars ambitions.

32:54I'd say for most people, the idea of a commercial entity pursuing exploration is naive at best, but I'd argue that long -term investors should be absolutely ecstatic about SpaceX having this mission as a forcing function. Firstly, it's the key to getting the best people in the world to come and work for the organization and allow it to innovate in a manner and speed that other simply can't match. That's a huge competitive advantage. Secondly, the way to get more cargo to Mars is actually about figuring out how to get more cargo into orbit around Earth, because that's where Hust has all concentrated.

33:27It's all in that first initial leap off the surface of our planet. So rather than framing Starship as a system that makes it possible to get to the planets, think about it instead being a system that could make it enormously more profitable to operate a business in Earth orbit and unlock brand new commercial use cases there as well. You're going to the same Starship, which launches fuel for all astronauts one day, is going to be launching satellites or space stations the other 365 days of the year. That's going to be a huge capability advantage. I think that's why Gwynn shot well it starts to talk about longer term starship potentially being even more valuable to the business than Starlink.

34:04We've gotten so far into the conversation and we've barely referenced Elon and Gwynn shot well. There's been a couple of references, but for your average SpaceX conversation, it's been quite low. I do want to talk about the management team, the quality and caliber of people within SpaceX. you mentioned in the very beginning of the conversation. There was this noticeable trend of the best, most impressive people going there. Can you just talk about your experience with the company and culture within the business? There's books out there that you can read, but your first -hand experience and what that's been like?

34:39Our clients are ultimately invested in the business and all that that comes with. So that's equal parts, the engineers on the shop floor. That's equal parts, the founder, the technologies that supply us, etc. etc. It's either all very important pieces of a much wider entity. That said, it's hard to get away from how important Musk has been not just a space expert to many other companies, which he's founded. This company was on the brink of bankruptcy if he happened through sheer force of will selling lots of assets, got it to another launch of Falcon 1, we would not be here to benefit from it.

35:09And so it's hard to disentangle that point along with many others along the journey of having this vision to say that the mission is what's important. and we were talking earlier about because you could just do Falcon 9 and just live off that revenue, but because you have Musk continually pushing for engineering excellence, reaching through an X -Core, et cetera, taking it from a purely financially motivated point of view, that has been a very beneficial thing to have in a lot of these enterprises. So I think they've done a really good job of trying to figure out what everyone's good at and let people specialize.

35:41Elon Musk has got a really good grasp of all the detail on this company. It's quite terrifying. find them out of information which you can hold his head, but he doesn't have to do an awful lot of the day -to -day operational side of things because Quince Shotwell, who's the president and the COO, is the one who takes a lot of that burden. She is much more of a person who's interacting with customers, interacting with government, interacting with employees, running in the organization day -to -day, which is absolutely an really important person, how she's been there for over a decade, a long -standing person.

36:09So there's a really good layer of management just below you, I must see a phone, Johnston as well, he's been there for an awful long time. It's a really good delegation of responsibilities that you can focus the organization, and specialize within the organization without having to run everything, which tens of thousands of employees would end up dwarfing your day. Lots of people wonder how you know, I must can do a lot of these things. I think it's because he's got a really excellent team behind him that enables him to function as Pete can do these things that he's well known for. He's an incredible magnet for that type too.

36:40When you think about SpaceX and the importance of the US government, how important are they to the business today when you factor in what you mentioned around satellites? I know with Space Station maintenance, they've been helping out with some important recon missions, things like that. Is it a substantial, concentrated percentage of the business? Staling is still the main focus of SpaceX from a financial point of view. Ultimately, the consumer in the business market is going to be far larger than the government market. And so, longer term, that is definitely going to be the case. The proportions will move around over time, et cetera.

37:14At the start, it will be more government. As the cost curve comes down up in more business, as the cost curve comes down again, it will be more consumer. And so, it's going to evolve significantly over time. Where it's going to be most significant is the closer it can get to business and consumers, the volumes there are just going to be enormous. I think one example of that would be the Starlink network, I think it's next year or it might have started in some locations already It's going to be able to directly connect to your cell phone or directly connect to an IoT device Without any changes to any of the hardware, every Samsung every Apple, etc.

37:46It's going to be able to connect to the internet for initially calls or SMS messages But there's going to be no dead zones for a phone signal anymore in a year or two globally you will have a phone signal wherever you are enabled by this network. If you think about how many IoT devices there are in the world connected IoT devices, I think that probably about 30 billion by 2030, I think is the estimate. You think how much functionality and value you could embed into lots of everyday products if you're able to cheaply connect them to the internet without having to worry if there's a 5G signal there, by your RRVNST or the other one where you're mowed.

38:19So one of the really interesting examples there is if you think about where autonomy and robotics can have the biggest economic impact. It's probably at the fringes of the economy. It's in the primary and the secondary markets, farming and mining and drilling, all these kind of remote activities, which typically take place away from a 5G signal, an area of high bandwidth. That is where robotics or automation can have the biggest economic impact, either by making things more efficient or making things which are dangerous and what plausible, etc. So you look at things which John Deere doing at the moment they've made a partnership at the SpaceX.

38:56Starlink is now going to be directly connected to all their vehicles. You could introduce self -driving tractors, you could be able to do bots that survey crops, 24 -7 plug in all the sensors back to main agriculture hub that is monitoring all these different sites as they are able to effectively deploy resources as and when it needs. So the efficiency of some of these things which are traditionally very low margin could all of a sudden see a really significant increase which more than pays for the installation of it. But no one is going to make that leap to start making this level of connectivity, unless the infrastructure is there.

39:30And so I think one of the big shifts which we're going to see over the next five to 10 years is that business really getting on board with this and thinking how many products could be sold in a razor razor blade model. You look at their way that Rolls Royce makes the most of its money. It's not on selling the actual engine hard or it's selling the maintenance contracts and the monitoring of these engines as they're flying around. That is because they've got a direct data connection via a legacy satellite. Like if it's cheap enough for anyone who's making a piece of hardware to embed that into whatever hardware it is and for them to enable an aftermarket to exist, fundamentally changes the business model in so many industries in a way that could add better value for the end consumer, but could also be either sticky of the business or it could be higher margin or it could be more recurring, etc.

40:13This is where we start getting really excited when we're investors in many other areas of thinking not just what can space exist in a book, what is the impact going to be on so many other portfolio companies and so many other industries because we have insights on SpaceX and so much private companies. This could be really meaningful in a couple of years time. It's a great point just in terms of what that opens up. I can think about the number of times that I've considered Starlink for when I am in remote areas and my cell phone can't represent a hotspot, so I've been looking for it, but I hadn't considered much of the industrial things that run the economy.

40:49I've been to many drilling sites and there was one consistent thing. I didn't have a cell phone signal. You laid it out quite interestingly there. When you think about that opportunity set, is there an extension into SpaceX and what's possible for that business? Is this just going to remain a subscription model? My brain can go in a lot of different directions in terms of what's possible. But do you think beyond that you have your launches, which could be potentially one time you have your subscription related to the satellites. But if it's relying on that network, we've seen Apple iOS and things that they have done.

41:22Is there anything that comes to mind with that? When we talk to SpaceX, they're still very much focused on the here and now in the next couple of years. They have ambitions for things which they could do, but the focus is very much on the core business, serving the core customers, serving Starlink, getting Starship to launch status, we'll deal with the next things next. They've got so many things which they could be doing at the moment. When we come to this, a lot of this is a hypothesizing of how that could evolve beyond information which they've given us. The trend which you've seen of them to be vertical integrators, it could be quite informative.

41:54It might be that they end up being the ones who are commercializing a lot of these other services rather than having a customer paying them for it. It's substantial scale. It would make more sense for them to do it. Could you start seeing some of these aspects if they get into space -based manufacturing, for example? Could that be priced on a value added basis rather than a subscription basis or a volume basis, certainly seems possible. If you start running data centers in space because it's easier to power or cool, that makes that trick, could you start offering data storage and machine learning alongside the styling connectivity.

42:25The further you look out, the more and more wacky it can get, but it's also potentially financially plausible as well. You maybe have to take a bit of inspiration from science fiction here, but it's quite a common trope in some of these movies of these large mega corporations, the whale and jutani corporation from the alien movies, or the resource development agency from the Avatar films, where one mega corporation was able to dominate access to space early on and then ends up controlling the entire extra solar economy because of the advantages it had at that really early stage. Maybe that's possible, where might something the size of the Dutch East India company plausibly exist the end from a financial point of view, pioneering a new universe of the economy.

43:08How much of the global economy could shift off the planet into the solar system? Again, we're talking decades ahead here, but if companies like SpaceX and others maintain their point of adding the most value to customers and providing the highest level of scale, there's reasons to think that this business could last a multi -decade, multi -century potential. And if it can be launched there as the main provider, then it might not be unreasonable to hypothesize that these things could be possible. That doesn't really feed into our day -to -day DCF, but it's interesting as an academic sort of thing.

43:39Oh, we did come back in 20 years. There might still be the same level of growth opportunity that we can sort of see today for the next 10 years. I typically will avoid the galaxy brain ideas in these episodes, but if there's one company to lean into galaxy brain ideas, it's this one. And to your point on science fiction, when you were describing before the idea of a daily starship shuttle back and forth to space. That was giving me major sci -fi story vibes that stuck out. So they're starting to blend the ideas of what was previously fiction and making it a reality. The human space flight at the moment definitely has been the preserve of the rich and famous, but at scale that becomes cheaper and cheaper.

44:19And if we are talking about launching starship, it could be used as much for sending cargo and people to other points on the planet rather than points in space and so one option that the government's looking into is this notion of rocket cargo delivery. Starship would be able to deliver up 200 ,000 kilograms anywhere on the planet within 40 minutes. What does that do for sort of a rapid reaction force? What does that do for next day delivery? At some stage it's going to be feasible to put a lot of astronauts or paying passengers on something like that and it would be a quicker and potentially more efficient way to do long distance travel.

44:51These things really could get quite wild, but it could be plausible at some stage. Again, that's not the reason to invest in the company today. That's not the basis of what they're doing, and it's a lot of people getting excited about things. But come back in 10 years. I'd be disappointed if you were right. We weren't able to go into space at some point in our lifetime for the cost of a premium economy ticket. Something like that. Bearing back to more of the in the moment. Yeah, things like the worth. Yes, on the military defense geopolitical side of things, it's one of the more interesting things that I think that weapons manufacturers or just people in that industry can sell, not just to the US, can sell elsewhere.

45:32It's one of those unique dynamics, and I know it's way more complex than that. But how much do you think about that when it relates to space? You mentioned there's a lot going on in China right now, but the potential for this to be used broadly versus this to be way more dominated with the US. Do you have any signposts or things that you monitor for how that will go in the future? Yes, somewhat depressingly, I think space, if we do have another large conflict, is more and more likely to be the place where it happens. Going back to that importance of the GPS, the importance of communications, the importance of that to national defense as well as intelligence services.

46:08All of these are traditionally space -based assets, which in the first strike would be the first things that get targeted. And so it definitely overlaps with some of those concerns, which again is one of the reasons that the government, the US in particular, but also many others, is funding more and more resources to be able to have effective early warnings to protect against that or countermeasures. Incurrigely at the moment, there is a long standing international treaty that prevents the weaponization of space, in particular banning weapons of mass destruction from space. Hopefully that holds.

46:38And with the way the international law is going at the present moment, that's definitely being tested a bit. In hindsight though, it's a really strong success story that we've managed to prevent that from happening. I'd like to think that I can continue to remain the case. The defence department in the US, though, has definitely seen the advantages of Starlink being used in Ukraine, and governments are really eager to acquire their own sovereign capabilities and they fully own control. You can take a look at the annual defence budgets to get a bit of a sense for what that means economically. The creation of Space Force and the US as another indicator of just how important it's being viewed for the future to give you one example that DOD recently increased its lower -thirteenth orbit satellite -based services program from an initial $900 million budget.

47:20It's now a projected $13 billion budget. That's on the back of surging the man's orbital connectivity from its forces out in the field. And on something like launch rates, I was under the impression for breeding, I think it was the original book about the early years of SpaceX and how challenging it was to get the launch spot and then you need the weather to be right. So there's so many variables that go into it. But just the regulatory hurdles to get there, is that a supply constrained portion of the value chain or the process? The FAA regulates all the launches. They need to get permission from them.

47:53There's environmental assessments which need to be done when you're building launch sites, when you're conducting these kind of launches, etc. Figuring out what is the appropriate level of regulation weighed against the commercial or societal or government demands there. I don't have a good answer to that, but I think it's definitely something which is factored in. It becomes a lot easier when things are operating at scale because these processes have been tried and tested. There's precedent. I think when you're developing a new vertical starship, for example, people take a conservative aspect to that your regulators job is to be conservative whereas an entrepreneur's job is to be taking calculated risks, etc.

48:30So there's a clear tension between that is trying to figure out can you have innovation within the regulation in order to enable both objectives to be met I think is a really important aspect. I think space actually really supported of trying to get the regulators more resource. And just in terms of the constraints around the actual launches themselves and where they can be, in terms of the manufacturing of the rocket and then where the launches, is it possible to manufacture in Texas and launch in Florida, do you usually want to be very close together? I'm sure that impacts the cost curve when you're talking about the size of some of these things, but how much flexibility is there from a geographic perspective to find new locations if it needs to happen?

49:12It's funny to think how many rocket dimensions are set by the height of an overpass, or the length of a flatbed trailer. Falcon 9 was driven from California to Florida to launch, and so you have practical considerations around that. With something like Starship, it's much larger, so the manufacturing site has to be where the launch site is, unless you can construct some massive barge to ship it to other places. And so I think it makes more sense again, SpaceX Speciality to be vertically integrated in that sense. But building launch pads has been historically quite a tricky thing because there are places where they're better, so you do in places where they're not, so you've got to think about the environmental impact, the noise impact, et cetera.

49:51But also, you want to be as close as to the equator as possible because then you're more fuel efficient. You can already take advantage of the Earth's rotation to get you some of that velocity, whereas a higher latitude doesn't. If you want to launch into a polar orb that you're launching north -south instead of east -west, and so that's why Vandenberg and California is really attractive because you've got a clear shot south there all the way to Antarctica so you don't have to worry about if the rocket sort of split as is going to fall on something that's inhabited, for example. So there are particular areas where it makes more sense and then from a regulatory point of view, probably easier to concentrate a lot of that in KitKnavel rather than having launch sites anywhere and everywhere in Florida.

50:27There are constraints around that. Going back to talking about the competitors, one of the gating factors is how many launch pads are available, where Canon can't be bothered to launch pad. And if all the existing ones are being used, you've got to go and build a launch pad where as the previous people didn't have to. So, almost an analysing a space business and with the space section in particular, focusing on the ground infrastructure and the scale of that is almost more important than focusing on the scale of the space infrastructure, which is a way to think about it. Is it ultimately going to be determined by what's the long trade, which they can be on the pad, and how many user terminals can be manufactured and get into people's hands?

51:01Those are gating functions on how much revenue can be generated in space. From an investor's perspective, how do you even begin to frame the valuation of a business like this? Obviously, it's at a certain stage of its business where There's so many factors going on, but talk a bit about your approach to that and any framing that you use or framework that you use to come to some comfort level when you think about valuation. The challenge with valuing SpaceX is how much intangible value do you associate to the flywheel between the cost curve and the price elasticity and the capex, which they're investing to get there and sustain that point of view.

51:42So it's a bit more like 3D chess than another business might be. That's where I think we have to lean a bit more on the qualitative inputs than the quantitative inputs we can see today. So there is without doubt a significant amount of risk when forecasting what might the intrinsic value of this company be and we're definitely going to get quite a lot of those wrong in the portfolio. Hopefully the ones we forget right we do really well in when we're thinking about space exits. What might a base case assumption be for this? What might that's a blue sky, 5X 10X case look like? What do we have to believe to think that that might happen?

52:17I think when we compile what the qualitative inputs around or here's how the rate of improvement in cost, which we've seen in the rockets, has gone here's how much quicker to ramp up the number of starting units they're producing, the user terminal, cost curve, etc. All these cost curves have stayed on this really good trajectory And so if you can take a risk and extrapolate out where some of these things might get to in five years time or in ten years time, look at the adoption rates we're seeing within styling users, etc. It points towards something which is looking at the trend of most large companies of getting better as it gets bigger.

52:54If there was one sort of fundamental concept of belief, I think which you have to have to invest in SpaceX, I think it's that. to date that has been the case. There's reason to suggest that that will hold, but then there's reasons to suggest that it might not. I think we're trying to take a calculated risk that this company is a special company. This company is pioneering this industry, not just existing within it. This company has got a phenomenal culture, which allows it to do things which have not been possible elsewhere. This company is accessing the last remaining frontier of engineering and in the economy, which is into space and that potentially is an unlimited economic opportunity.

53:30If I were to go back to your point in terms of the cost structure and the changes in cost structure, really underpinning everything about this, there's certain businesses where you see there's just so much demand. Here, it sounds like, and tell me if I'm phrasing this wrong, that the adjustment in cost structure and the material change there could create markets that previously weren't imagined in terms of being space economies or move economies off of the ground into space, and that's only possible from that change in cost structure. Is that a fair way to articulate it? That's exactly right. You're going to hit the nail on the head there.

54:07We've gone from the first rocket which went into orbit being a million dollars per kilogram to talking about a rocket which might be commercially active in five years' time, say, that would be priced potentially at $10 per kilogram. That's the kind of cost which the post office offers. Think of what is possible if the space lodges as cost competitive as the post office. Amazon exists in that environment, like all these retail businesses exist in that environment with fundamentally that shipping cost existing. This is a reason to be optimistic about some of these science fiction sounding things are ultimately going to be a function of how affordable they are and here is a rocket which on the face of it looks like on block three or the third generation of it could be hitting those costs.

54:52We, I think, addressed a lot of the risks throughout the conversation. You were not afraid to reference the challenges and risk associated with it. I do want to get your general approach or take on risks, but I also just wanted to ask when it comes to launches, these are historically such capital intensive things. you mentioned in the early days, Musk really had to go to all efforts to save the business just to get that next launch done. How much is at risk with each launch? Are there any really concentrated moments in time now where the business is at extremely high risk of some challenger or execution issue?

55:32Watching that boost to return the other day, returning to be caught was definitely a risk which they took. I think there was some audio leak twitch. They reported to being a second or two away from the laptop because if that thing crashes into the launch pad and destroys it, that's not a quick thing to fix. Incidentally, which is why they're building a second one next to it. But space -exas approach has always been purposefully to be taking risks with its hardware when it's in the development phase. If you're not operating at that edge, if you're on breaking things, then you're also not learning enough a lot about the system.

56:03Just look at the rate of progress with Starship previously, for example, the first flight cartwheels into an explosion a couple of minutes after takeoff, but then the fifth time it came back really calmly and was caught by a launch tower. It definitely helps to be well capitalized here of course to do those kind of things, but again it goes to the aspects we're talking about previously about the capital intensity being so much lower now. If you can lose 10 rockets for the cost of competitors to spend on one, that's a really good competitive advantage, which you can lean into at scale. When we think about risks for the business, I'd say it's more about pace than it is about an existential risk of complete failure, or as I think previously it's clearly gone through some of those in the early stage.

56:46So in terms of milestones for the rockets, let's say, we need to demonstrate that we can also catch the ship as well as the booster. We need to demonstrate that we can refuel and orbit to allow Starship to be able to reach the moon and the Mars. we need to demonstrate that the risk has been decreased to a level where it's safe as it can be to put astronauts onto the platform. But then you also have to do all these things at scale as well and that's where designing the machine that builds the machine which must quite talk about really comes in. So the equivalent here is star based in Texas. This enormous manufacturing facility they have at the launch complex.

57:22This needs to be able to crank out a whole fleet of rockets and hundreds or thousands of the most advanced rocket engines that we as a species have ever conceived of. There's no precedent for ever doing that, and so I'm sure there are going to be some unexpected issues at scale. But there are a lot of similarities here with learnings, I think they can take from the experience with Tesla and the Model 3, that production how they went through to scale up production. It's very easy to build one of something. It's a lot harder to build a thousand or a million of something. So when we look out into the future, I think those are going to be the kind of challenges which we have because time is money now.

58:00If Starship isn't ready to launch your incremental Starlink satellite, it's not going to be generating revenue as soon as it is. The Starlink alignment with the Starship pace and why it can be so important to the financial profile of the business. That's just a really, really interesting point. Makes my brain explode a little bit. mixing rocket science with satellite science, trying to dole track these things at the same time. It was a fair representation of all the risks, which when you're dealing with space, there are many things to consider. This has just been a fascinating conversation, as you've probably heard through my voice throughout the conversation.

58:36We close it out, just talking about lessons that you can take away from the business and potentially apply elsewhere as an investor. This one's a little tricky. It's one of one in many ways. But what would you say are lessons that you've taken away from looking at SpaceX as an investor? I guess a couple of things we've probably touched on quite a few of them indirectly in the conversation to go back to that integration of business innovation with technology innovation. Technology for its own, so it gets great, but something needs to be cheaper as well as better. Otherwise, it's not going to get adoption.

59:08And we exist in this capital system. That's the reality of the world in which we live. And so I think one area where we often get lots of companies coming to us with a really savvy or really cool tech innovation, but without thinking about longer term sustainability or how are we going to finance this without having to keep coming back to investors or keep coming back to capital markets and make this something which can stand on its own two feet. I think that's a genius of Musk. Many of his businesses have been able to line those things up. So when I'm looking at other companies or other industries, trying to figure out where those things are going to overlap.

59:41They're the most exciting ones. How companies can innovate in a regulated space is another learning from this. There's a lot of precedent for how this industry existed before SpaceX and how it's regulated and it's looking quite different now and it's because SpaceX is innovated in a way that can still hit the underlying principles of what regulators are trying to achieve or what the industry is trying to achieve but just do it in a more savvy way. One of the things that reminds me of is the nuclear industry, which has got a very similar history to space. There was a lot of enthusiasm about it.

1:00:1350s or 60s, energy is going to be free. And then you had three mile island, then you had Chernobyl, etc. and all of a sudden the demand and the build out of the scale of Earth, it goes away. Whereas now today we're seeing a reemergence of these companies because there's been a lot of innovation that's happened in those preceding years. On a first principles basis, thinking of, okay, the regulations are really important here, but how can we innovate and make a product that fits in with that, whilst still achieves better and cheaper goals. So I think a lot of the innovation or the style of innovation, which we've seen SpaceX pioneer, is increasingly being used in other industries, which on the face of them are very capital intensive, highly regulatory, but they're now creating business models, which take into account of that and think about how can they subsidize the technology within that.

1:00:59There's quite a lot of other of traditionally hard capital intensive industries, where there's a lot more business innovation going on. And that's really important because that is going to empower the technological innovation. For such a long period of time, we've seen technology, digital innovation, software, and those business models can be so attractive. Once you get into capital intensive, hard asset things, it becomes a more difficult equation, but a very great example here of what's possible. This has been a fascinating conversation again, Luke. Thank you so much for sharing the knowledge.

1:01:32I appreciate you joining us. Sure, thank you, man. To find more episodes of Breakdowns, ranging from Costco to Visa to Moderna, or to sign up for our weekly summary, check out JoinKalases .com. That's J -O -I -N -C -O -L -O -S -S -U -S .com.

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