Investing in Space

In the lucrative race for US military rocket deals, Jeff Bezos' company argues to change the rules

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Key Points
  • Rocket companies ULA , SpaceX, Blue Origin and Northrop Grumman have submitted proposals for a share of lucrative U.S. military launch contracts.
  • But Blue Origin, the space company of Jeff Bezos, says the government needs to adjust its approach when buying rocket launches.
  • "The important element we're trying to highlight within ... the broader Air Force process is that there is a regular discounting of the commercial market that is a key factor in [United States] launch vehicle policy," Blue Origin CEO Bob Smith tells CNBC.
  • Blue Origin believes the Pentagon should further invest in large rockets to aid in the establishment of a fleet of U.S.-built rides to space.
Blue Origin tests one of the BE-4 rocket engines the company is developing to launch its New Glenn rocket.
Blue Origin | gif by @thesheetztweetz

WASHINGTON — Billions of dollars in contracts are at the finish line, but there's a catch: Only half of this race's runners will be allowed to cross it.

That's a quickly approaching scenario in the United States military's current rocket launch acquisition process, which features billionaires' space projects going toe-to-toe with defense contracting giants.

But it's a situation that Blue Origin, the space company founded by Jeff Bezos, wants to change. That's in part because the 19-year-old company risks losing out on valuable launch contracts, faced with stiff competition from incumbent powerhouse United Launch Alliance, the rapidly advancing SpaceX and military manufacturer Northrop Grumman. In a meeting with reporters on Tuesday, Blue Origin laid out its view of needed adjustments to the government's approach when buying rocket launches.

"The important element we're trying to highlight within ... the broader Air Force process is that there is a regular discounting of the commercial market that is a key factor in [United States] launch vehicle policy," Blue Origin CEO Bob Smith told CNBC after the briefing.

Last month, the Air Force received proposals for Launch Service Procurement from four companies. LSP represents a new method for the Air Force to dole out nearly three dozen launch contracts, each on average likely worth over $100 million, with launches scheduled over a five-year period from 2022 to 2026.

The four companies that submitted proposals — ULA , SpaceX, Blue Origin and Northrop Grumman — are building some of the largest and most powerful rockets in the world. For Blue Origin, that comes in the form of its New Glenn system, a towering rocket named after John Glenn, who was the first American to orbit the Earth.

Artist rendering of Blue Origin's New Glenn rocket.
Blue Origin

New Glenn is designed to be reused, because the rocket would land upright after a launch, making it hypothetically capable of launching quickly and cost effectively. Both were factors that Blue Origin says are understated by the military in importance.

Four big rockets but only two big winners

Blue Origin thinks the military should help further competition between rocket companies by allowing more than two companies to win the contracts. LSP would see the Air Force pick two of the four companies to launch as many as 34 national security missions, with one getting 60% of the contracts and the other getting 40%.

By choosing just two winners, the Air Force is limiting competition rather than aiding it, Blue Origin contends. Smith went so far as to use SpaceX as an example of how, when the company was allowed to compete, its bids helped lower the price of launches.

"The commercial market actually drives competition, drives innovation," Smith said. "We saw that when SpaceX began winning share of national security launches in 2014. Studies have shown that dropped pricing as much as 40%."

Blue Origin also provided a recently completed study on the market for large rockets like New Glenn, from an "independent, global management consulting firm."

Source: Blue Origin

The study looked specifically at the past decade of launches and forecast possible trajectories for the market in the decade ahead. While the base case (46 launches in the year 2030) is nearly half that of the growth case (82 launches), the study found that the strength of the commercial market for large rockets was stronger than the U.S. government currently forecasts.

"In either scenario, the forecasted size of the addressable launch market over the next decade is higher than the historical average," the study said.

Surviving without more Air Force money

Central to Blue Origin's argument for changing how LSP functions is that whoever loses will miss out on a critical part of the large rocket market. The study echoes this, saying that the current approach will essentially create "a launch duopoly for well over a decade." Blue Origin believes the Pentagon should further invest in large rockets to aid in the establishment of a fleet of U.S.-built rides to space.

More funding certainly isn't out of the question. About this time last year, the Air Force awarded three companies nearly $2.3 billion to develop these rockets: Blue Origin won $500 million, Northrop Grumman won $792 million and ULA won $967 million. Missing among those awards was SpaceX, whose founder Elon Musk said in a December meeting with the Pentagon that his company had written "a poor proposal" that had "missed the mark," according to report from the Pentagon's inspector general. However, SpaceX has since sued the Air Force, alleging that the funds were "wrongly awarded" to "three unproven rockets based on unstated metrics."

Even though it won a piece of those development funds, Bezos' company has vocalized its disagreement with the Air Force's plan for months.

"We also feel that if we don't get the funding for building infrastructure, such as at Vandenberg [Air Force Base], we won't be able to supply the unique requirements for future national security launches," Smith said.

He added that Blue Origin has already "deployed a fair amount" of the $500 million it won, although he declined to specify how much.

Blue Origin's position on more government funding for large rockets is notable because the company is almost entirely funded by Bezos, who sells portions of his stake in Amazon to inject into his space company. In August, filings revealed Bezos had recently sold about $2.8 billion of Amazon shares — proceeds largely headed to Blue Origin.

Asked whether Blue Origin would continue to fund New Glenn's development if the company doesn't win a share of the LSP awards, Smith gave an unequivocal "yes." In a thinly veiled reference to the historically defense-oriented businesses of ULA and Northrop Grumman, Smith declared that one of the military's criteria for LSP should be the requirement that any rockets bid can survive without the military's help.

"The U.S. government should really be looking at commercially viable vehicles," Smith said.

In essence, Blue Origin wants its competitors to prove that their rockets would be successful if only reliant on commercial customers.

ULA, asked if the company sees a market for its Vulcan rocket beyond military launches, said "yes."

"In fact, ULA has already sold its first seven Vulcan flights to two commercial customers, Astrobotic and Sierra Nevada Corporation," ULA spokesperson Jessica Rye said in an email response to CNBC's request for comment.

Northrop Grumman was less specific, telling CNBC that the company expects its OmegA rocket will "serve other markets" beyond just the military.

"Northrop Grumman's focus is on providing launch capability for the Air Force's national security launches," Northrop Grumman spokesperson Jennifer Bowman said in an email.

While LSP has had several delays, eventually all four companies had to turn in the proposals in August. Blue Origin, at the same time, filed a "pre-award" protest with the Government Accountability Office. The GAO has yet to rule.

Despite the challenges from SpaceX and Blue Origin, the Department of Defense has stood by the Air Force's process. Ellen Lord, the Pentagon's undersecretary of defense for acquisition and sustainment, told reporters last month that "there are no changes imminent." However, Lord noted that the Defense Department is monitoring the program's process, adding that "we will see how things go and adjust if necessary."