- By John Engle
Elon Musk, CEO of electric car company Tesla (TSLA), has spent a long time cultivating his image with the press and the public. These efforts have clearly paid off. While Musk has many cheerleaders in the media, it is reporters connected on technology and popular science beats who seem most besotted with him. To hear some of them tell it, Musk is a new age "blue-eyed child of destiny" fighting to change the world, one industry at a time.
The intrinsic value of AMZN
SpaceX, Musk''s private space launch business, has certainly contributed to the reinvigoration of a moribund industry. The company and its celebrity CEO have captured the public's imagination with its ambitious -- and highly publicized -- plans to carry humans to other planets.
But fame can be a double-edged sword. Public attention means publicity when mistakes are made. Musk learned this firsthand following his appearance on The Joe Rogan Experience podcast in September. During the show, the SpaceX CEO was filmed smoking marijuana. This action resulted in an immediate media firestorm . But that was just the beginning.
Let's discuss the fallout from Musk's ill-judged toke, and how such actions could jeopardize the survival of his $25 billion company.
Golden boy of commercial spaceflight
SpaceX is just one of a growing number of contenders for the government's favor. Established aerospace firms such as Boeing (BA) and Lockheed Martin (LMT) have been working to rejuvenate their capabilities in order to capture the juicy rewards of government largesse. At the same time, a host of new companies have emerged. Blue Origin, the brainchild of Amazon Inc. (AMZN) boss Jeff Bezos, is just one well-publicized example of firms aiming to compete head-to-head with SpaceX.
SpaceX had something of a first mover advantage, being the first viable commercial space launch startup to emerge in a long time. For the several years, SpaceX was NASA's golden boy. But it is now clear that the space agency, despite its cozy relationship with Musk and his company, has no intention of letting any private firm flaunt its rules.
The podcast fiasco may seem like small potatoes in the grand scheme of things, but a company that subsists almost exclusively on government contracts cannot afford to bite the hand that feeds.
Rules are for everyone
It seems like everyone has an opinion when it comes to the legalization of cannabis. But our opinion, or that of the American public, matters little in this particular context. What matters is the strict rules governing federal contractors, which state that contractors must observe the same drug policies as apply to federal employees. That means no smoking pot -- especially when cameras are rolling.
The Air Force reportedly opened a probe within days of the podcast incident. NASA was slower to react and seemed at first to be extremely reticent about going after one of its important contractors. For a while it appeared that the agency's higher-ups might try to let the whole affair slide. This opinion was reinforced when NASA Administrator Jim Bridenstine publicly lauded SpaceX on Twitter , just days after Musk's Joe Rogan faux pas:
"Our partnership with @SpaceX is crucial for our return to launching American astronauts from American soil on American rockets. I'm looking forward to SpaceX's first @Commercial_Crew launch next year!"
NASA takes a belated stand
While it seemed NASA might be hoping for the controversy to blow over, the agency did eventually act, announcing a far-reaching safety review of SpaceX on Nov. 20. The review will also involve Boeing, the other company contracted to transport astronauts to the International Space Station.
While ostensibly a review of all safety aspects of this business, a NASA spokesman made it clear that the recent controversy was the proximate cause , stating that the review would "ensure the companies are meeting NASA's requirements for workplace safety, including the adherence to a drug-free environment."
At first, it was unclear as to who was responsible for galvanizing a meaningful aggressive response from NASA. Administrator Bridenstine seemed an unlikely prime mover, given his apparent desire to give Musk a pass. Other influential power centers in the federal government were mooted as possible sources. It was even suggested that the push might have come from mid-level employees disturbed by the potential of setting a precedent of double-standards for influential and famous contractors.
Bridenstine stands up
Surprisingly enough, it now appears that Administrator Bridenstine was indeed responsible for launching the review. The NASA administrator came out strongly on Nov. 29 to explain his decision, citing Musk's recent behavior explicitly:
"I will tell you that was not helpful, and that did not inspire confidence, and the leaders of these organizations need to take that as an example of what to do when you lead an organization that's going to launch American astronauts. I will tell you, he [Musk] is as committed to safety as anybody, and he understands that that was not appropriate behavior, and you won't be seeing that again."
While still expressing confidence in, and admiration for, Musk and SpaceX, Bridenstine clearly understands the responsibility of his office to uphold the rules.
Competition gets fiercer
The forthcoming comprehensive safety review will begin in the new year and promises to be highly rigorous, perhaps even invasive. But it may not be the only consequence SpaceX will suffer for the folly of its CEO.
As part of a broader federal effort to promote a viable commercial space industry, NASA is cultivating serious competition for big contracts. SpaceX's easiest days are behind it, thanks to the growing horde of hungry competitors eager for a spot at the government trough.
Elbows are liable to get a lot sharper over the next couple years and SpaceX cannot rely on its established relationship with NASA to protect it. The company can ill afford further incidents like Musk's Joe Rogan appearance.
Since October, two big government space contract were announced. Notably absent from both contracts: SpaceX.
Frozen out by the Air Force
Both contracts included big financial awards. The first, awarded on Oct. 10, was for the development of the Air Force's Evolved Expendable Launch Vehicle, or EELV. While SpaceX was viewed as the frontrunner in advance of the award announcement, it ended up getting nothing. Instead, the Air Force opted to partner with the United Launch Alliance, Northrop Grumman Innovation Systems, and Blue Origin, awarding them $967 million, $792 million, and $500 million, respectively.
But SpaceX is not be completely bereft. According to an Air Force spokesman, Musk's company will be able to compete for the role of final developer of the EELV:
"Beyond the offerors selected for award, the Air Force cannot comment on specific offeror's proposal or whether the Air Force chose not to award to a specific company. It is important to note that SpaceX is a valuable partner to the launch service community and the Phase 2 solicitation will be a full and open competition for all launch providers who have a low-risk proposal to achieve Air Force certification prior to initial launch."
While SpaceX still has a shot at the EELV when it comes to a final bid, it is not a great sign to be left on the sideline at this stage of development. While the Air Force has made no comment as to whether the decision was made in response to Musk's ill-advised podcast appearance, it is not hard to imagine that it influenced the decision to a degree.
Jilted on the way to the Moon
Last month, SpaceX was once again absent from the list of participants in a lucrative government space contract. This time was doubly surprising, given that the awarder was NASA.
NASA announced that contracts worth up to $2.6 billion over 10 years, had been divvied up between nine companies that will be developing the Commercial Lunar Payload Services program that aims to send unmanned landers and transport craft to the Moon's surface. The list of awardees included established NASA contractors, as well as a few young and promising space startups:
Deep Space Systems
Masten Space Systems
SpaceX is no stranger to this particular challenge. Indeed, it is currently supporting SpaceIL, an Israeli company that plans to send a robotic lander to the moon early next year. Yet, while SpaceX may get to the Moon by other means, not participating in this stage of NASA's program may prove problematic for it down the line. This is because the $2.6 billion moon lander contract is part of NASA's Moon to Mars Program. While SpaceX is still a major player in NASA's manned spacecraft development program, competition to lead humanity from the Moon to Mars -- a primary component of SpaceX's mission -- is liable to get increasingly fierce in the next couple years.
SpaceX has a number of remarkable achievements to its name. While it enjoyed an open field for a few years, while established aerospace giants recalibrated to a new competitive reality, the company is faced with an ever growing cast of competitors. The old school aerospace industry is back in action, investing heavily in rebuilding its old technological moat. At the same time, an explosion of new players, some of which clearly aim to make a play for the spaceflight crown, is imperilling SpaceX's current position. A proliferation of reliable launch platforms would certainly cause satellite launch prices to fall even further.
In light of all this, SpaceX cannot afford to lose focus or to alienate the federal government, which could be called something akin to the space industry's monopsonistic buyer. Musk's behavior on The Joe Rogan Experience was intolerable for the CEO of a company that lives and dies by federal contract. Obviously, SpaceX was going to survive that leadership crisis, but it can ill afford another similar incident.
Disclosure: Short Tesla via long-dated put options.
This article first appeared on GuruFocus.
The intrinsic value of AMZN