Amazon: The Ascent To Space
By: Amirbek Satimov
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
A Snapshot Into the Galaxy
A new space race is heating up this decade – this time, between corporations instead of nations. Key runners include Elon Musk’s SpaceX and Jeff Bezos’s Blue Origin as they compete in a variety of markets within the broader space industry. By way of background, SpaceX operates within the launch services industry which provides rocket launch capabilities to companies and governments. In addition, SpaceX has set up its Starlink program to provide satellite internet service, which will serve as a new major revenue source. Blue Origin, owned by Jeff Bezos, is a newcomer in the space and aims to compete directly with SpaceX on launch services. However, Blue Origin has not been able to launch any satellites into orbit for commercial or government clients and its only operating line of business is sub-orbital flights offered to high net worth individuals. Amazon, owned largely by Bezos, recently launched a new program, named Project Kuiper, to compete as a satellite internet provider alongside SpaceX’s Starlink.
Amazon has good reason to pursue Project Kuiper as there is a strong business case for becoming an internet satellite provider. Through the Starlink program, SpaceX aims to achieve $12 billion in revenue and $7 billion in annual operating profits. Since Project Kuiper was launched a few years later than Starlink, the program significantly lags behind Starlink’s progress. To shine a light on this difference, Project Kuiper has only put two satellites into orbit – paling in comparison to the 5,000+ Starlink satellites currently in orbit as of November 2023. If Project Kuiper hopes to compete alongside Starlink, Amazon must recognize they are entering a market with an established player and need to present a compelling value proposition for users to switch service providers and discover strategic synergies with Amazon’s broader business model.
Key Developments Across the Universe
Satellites that provide internet connectivity are not a novel concept. Providers have existed for decades, however, Project Kuiper and Starlink are disrupting traditional satellite internet by launching thousands of satellites as part of a constellation to provide near-complete coverage around the globe. Project Kuiper and Starlink launch these satellites into Low Earth Orbit (LEO) which has an altitude of approximately 550km, similar to the altitude of the International Space Station. Putting satellites into LEO allows for higher-speed internet compared to existing internet satellite providers, which are in geostationary orbit, and operate at altitudes of around 35,800km. This lower altitude requires that Project Kuiper and Starlink launch tens of thousands of satellites to build out its constellation, whereas geostationary satellites only need a few to cover the entire surface of Earth. Satellite internet traditionally targets potential customers who are located in remote areas or areas that do not have land-based internet infrastructure, but this technology can also be used on airplanes and ships. Some additional applications include military use cases, as seen by SpaceX’s military product line titled “Starshield” and its extensive utilization in the Russia-Ukraine war. Notably, Amazon and SpaceX are not the sole players in the industry, as other companies like Britain’s OneWeb and China’s Hongyan network also aiming to launch their networks.
Case Study: SpaceX and Starlink
As mentioned before, Starlink is far ahead of Project Kuiper, given Amazon only recently launched its first two test satellites on November 16, 2023. Conversely, there are already over 5,000 operational Starlink satellites in orbit. Elon Musk also recently claimed through X (formerly known as Twitter) that Starlink has achieved breakeven cash flow. Given the market is relatively new, Starlink heavily benefits from being a first-mover. SpaceX has had time to refine, test, and expand applicable uses of Starlink. This includes introducing multiple variations, expanding access for airplanes and boats, and direct-to-cellphone service. They have also acquired the U.S. military as a major client through a $70 million contract. As a first-mover, SpaceX also benefits from the associated switching costs for its clients, whether they be governmental organizations or individuals, providing an additional layer of barriers to entry on top of the sky-high capital costs and regulatory hurdles required to compete in the industry. Analogously, high switching costs are also a key market dynamic in how land-based internet providers compete. These switching costs, coupled with the expensive purchase of a satellite dish required for use, decrease the likelihood that consumers will switch to Project Kuiper from Starlink unless large price discounts are applied or there is a differentiated offering.
Ready for Liftoff!
To overcome the gap in progress between Project Kuiper and Starlink, Amazon must overhaul its current strategy. First, Amazon should acquire United Launch Alliance (ULA) to bring in the necessary expertise and equipment to boost launch cadence, ensuring that Amazon can launch as frequently as SpaceX. Next, Amazon should invest in the mass manufacturing of satellites to reach cost parity with SpaceX’s already state-of-the-art processes. Finally, Amazon should develop synergies along its Amazon Web Service’s (AWS) business line to help subsidize subscription costs for potential customers.
Acquiring United Launch Alliance
A core determinant for Project Kuiper’s lack of satellite launches to date is simply the absence of Amazon’s internal capabilities, unlike SpaceX. While Blue Origin exists, it has not been able to launch any commercial cargo into space and has only launched its New Shepard rocket for space tourism purposes. Its New Glenn rocket, which is designed to launch cargo and Project Kuiper satellites, has been repeatedly delayed and is currently scheduled for its first flight in the latter half of 2024. Due to uncertainty regarding New Glenn, Amazon has signed contracts for 56 launches with European Space Agency-backed Arianespace and ULA. While a sizable procurement, Amazon will have to pay a premium to third-party launchers and will not have priority if further launches are required. Meanwhile, SpaceX has already completed 117 launches and has many more planned to complete Starlink. Therefore, if Amazon wants to achieve cost parity and ensure its access to space, the company should consider an acquisition of an existing rocket launcher. ULA, with an extensive history of successful rocket launches, poses as an ideal existing candidate. Given that the company is reportedly exploring potential buyout options, this strategic move aligns with its current objectives and could facilitate a mutually beneficial agreement. Acquiring the company, through Amazon or Blue Origin, will guarantee Amazon’s supply of launches and bring in additional revenues through the company’s existing contracts. The effect of ULA cannibalizing Blue Origin’s sales will be minimal, as the launch vehicles that the companies specialize in cater to vastly different segments of the market.
Building Out Mass Satellite Manufacturing
A large component of the capital costs required to complete a satellite constellation is the manufacturing process of the satellites themselves. SpaceX aims to have 12,000 satellites, whereas Amazon aims to have 3,200 satellites in orbit for its network. While the cost of satellite manufacturing is substantial, SpaceX has done well in minimizing its capital costs relative to industry peers. According to JP Morgan, each Starlink satellite costs approximately $500,000 while the average communications satellite exceeds $300 million. This relatively low cost to produce allows SpaceX to pass cost-savings down to their customers, improving network accessibility. Pressured to compete on cost, Project Kuiper must ensure that its operations and manufacturing are on par with Starlink. Amazon has the discretion to either acquire companies that possess the technology or internally develop mass manufacturing capabilities. While a significant investment, it is a necessary step to the long-term success of Project Kuiper.
Integration With Amazon’s Core Business
To ensure Project Kuiper is able to establish itself within the market, it should price its services at a relative discount compared to Starlink. In the long run, if Project Kuiper is to achieve profitability, Amazon will need to exploit synergies between its other business units and Project Kuiper. While Amazon has not publicly stated the synergies it aims to achieve, some assumptions on how Project Kuiper will impact the other business lines can be made. For instance, Amazon can be the first entity to onboard customers who have not yet been exposed to the Internet revolution. By being the first internet provider for these communities, individuals will be directly exposed to Amazon’s services and will be prone to use Amazon when they seek to order items online, stream movies, host websites, and more. A similar situation occurred when Google’s Android operating system helped spread mobile phone use across the world, especially in developing markets. By providing an affordable platform for mobile phone use, individuals around the world were finally able to purchase their first smartphone. From there, they began using Google Search, YouTube, and other Google services. Amazon could utilize this strategy by bundling their newly connected customer's internet service with other Amazon-based offerings, such as AWS, Audible, Amazon Prime, and other products and services offered by Amazon exclusively available to those with internet access. These synergies available to Amazon are unique – something that Starlink will not be able to replicate – providing the competitive edge Amazon desperately needs to succeed.
Racing to Orbit
The new age of internet connectivity will help democratize access to the internet irrespective of region or income. This new field has attracted fierce competition among the likes of SpaceX, Amazon, and national governments like China. If Amazon hopes to succeed with Project Kuiper it must acknowledge that they are lagging behind the current market leader which will have adverse effects on the project’s outcome. Amazon must achieve cost parity and access to space by acquiring the currently on-sale launch service provider, ULA. In preparation for the cadence of launches to pick up, Amazon should invest in facilities to mass manufacture satellites to compete with SpaceX head-on. Finally, Amazon must take advantage of Project Kuiper as a springboard to grow existing business lines by undercutting SpaceX through more affordable offerings and connecting more people around the globe.
