Beyond Cost Tools: Spacecraft Net Present Value and the
Hosted Payload Paradigm
Fan Geng, Robert Herd, Andy Tien, Joseph H. Saleh
School of Aerospace Engineering
Georgia Institute of Technology
270 Ferst Drive
Atlanta, GA 30332-0150
jsaleh@gatech.edu
Abstract This work is at the intersection of and integrates
two broad considerations in the space industry, namely the
emergence of the hosted payload paradigm on the one hand,
and the increased emphasis for the acquisition of space systems
to be value-driven on the other hand. Spacecraft, and hosted
payloads, are value delivery artifacts; their value derives from
the flow of service they provide to different stakeholders. Their
design and acquisition should be value-centric or at a
minimum value-informed.
In this work, we first provide a value model and analysis for
a spacecraft, which includes its lifecycle cost as well as its
revenue model. The revenue model accounts for the services
provided by the primary payload and their lease price, the
loading dynamics, and various provisions for its obsolescence.
When integrated, these two models allow us to calculate the
spacecraft Net Present Value (NPV) and its return on
investment. A sensitivity analysis helps us to identify the
effectiveness of the different value levers of a spacecraft.
Second, after a brief review of the hosted payload paradigm,
and having developed a baseline spacecraft NPV model, we
integrate considerations of the hosted payload into the value
analysis, and in the process, we develop a pricing standard
(and model) for hosted payloads. For the hosted payload
business model to be sustainable, both main stakeholders in the
transaction, the owner of the spacecraft (host) and that of the
hosted payload (guest), have to see a net value in the hosting
arrangement. We propose that the pricing of the hosted
payload should be at a minimum NPV neutral. This condition
helps us calculate the lower bound for either an upfront
payment from the guest, an annuity or rent-like payment, or a
combination of both. We developed the analytics for this
condition and the three payment options, and we extended it
beyond the NPV neutral baseline to include an X%
incremental return on the hosted payload. We conclude with a
general reflection on value considerations in space systems and
a series of analytical questions raised in this work and left as a
fruitful venues for future work.
1
978-1-4799-5380-6/15/$31.00 2015 IEEE
1
TABLE OF CONTENTS
1. INTRODUCTION..............................................1
2. COST, REVENUE, AND VALUE MODELS FOR
COMMUNICATION SATELLITES.....3
3. INTRODUCTION TO THE HOSTED PAYLOAD
PARADIGM.9
4. HOSTED PAYLOAD, INCREMENTAL NPV,
AND PRICING MODEL..12
5. CONCLUSION....16
REFERENCES17
BIOGRAPHY.18
1. INTRODUCTION
Spacecraft are value delivery artifacts; their value derives
from the flow of service they provide to different
stakeholders. This is a central idea for the design and
acquisition of space systems, and it is the conceptual pillar
upon which this work rests. This idea and its implications
are often misunderstood or not properly executed upon as
we briefly note hereafter. The notion of value builds on and
extends beyond that of cost, total cost of ownership, or
lifecycle cost, important notions that prevail in many
contexts especially in institutional markets (NASA and
DoD).
Following the performance-centric mindset that prevailed
during the heydays of the Apollo program and the cold war
(performance at all costs), a cost-centric mindset was
ushered in and it brought in its wake some fiscal
responsibility (Saleh, 2008; Brathwaite and Saleh, 2009)
([1], [2]). Cost was no longer subordinate to system
performance, and increasingly in the current economic
environment, cost is becoming the dominant metric in
system acquisition. Significant efforts are expanded by both
manufacturers and their customers to compress acquisition
and lifecycle costs. While this is laudable outcome, the shift
from a performance to a cost-centric mindset, and cost-plus
contract structure, was not without its drawbacks
(Brathwaite and Saleh, 2009) [2]. One important conceptual
problem with this shift is the promotion and
institutionalization of a myopic perspective on space
systems, which emphasizes their cost at the detriment of
their value1.
Why is emphasizing cost at the detriment of value myopic?
Investments in space systems are substantial, and as with
any investment-related decision, they ought to be guided
and justified by the value of asset under consideration, or
more specifically, by the return on investment in said asset.
Assessing an investment or deciding whether to proceed
with it or not based solely on its cost is both myopic and
meaningless. This observation points to the need to examine
and quantify the benefit side of space systems with the
same diligence as that expanded to quantify their costs, and
it raises the question of how to assess the value of an asset
such as a spacecraft.
The value of an asset integrates in ways we will examine in
Section 2 information about the (lifecycle) cost of the
system and its (lifecycle) benefits. Cost is a characteristic
that is intrinsic to the system alone, independent of the
environment in which it will operate, whereas the benefits
and consequently the value of a system are networked
measures that characterize the system in its environment.
This is an important distinction and it deserves some careful
thought to appreciate its significance.
While analytical cost models abound for satellites, satellite
subsystems, and payloadsthe reader is likely familiar with
some of these modelsthere is a dearth of revenue and
value models for space systems. This state of affairs has
some unfortunate consequences, and it reflects a lack of
economic and analytical maturity with respect to valuation
issues in the space industryin contrast for example with
the airline industry, which is more sophisticated in its
analytical valuation tools for the design, acquisition, and
service models of aircraft and engines.
The analytic valuation of spacecraft offers many
opportunities for better guiding investment in such systems
and better justifying their acquisition. But how can we
assess the value of a spacecraft? There are two broad
categories to consider:
1. Commercial spacecraft providing services that are
priced in a given market. An example of this is a
communication satellite providing fixed satellite
services (FSS) and whose transponders are rented
or leased. The lease price of the transponder, the
size of the payload (e.g., number of transponders),
and its loading dynamics after launch, as well as a
few other parameters which will be examined in
detail later, are then used with traditional
discounted cash flow techniques, along with the
system lifecycle cost, to calculate for example the
satellite Net Present Value (NPV).
2. Non-commercial spacecraft, scientific or military
space systems for example whose services are
2
1
unpriced, that is they generate no cash inflow,
and as a result, an NPV calculation is meaningless
since it does not include benefits quantified in a
manner commensurate with cost. In this case, the
value of the system can be assessed by the value
of information they provide. This idea was first
proposed in Brathwaite and Saleh (2013). The
authors conceived of a non-commercial spacecraft
as an information source and its stakeholders as
information recipients. Information has value to
stakeholders as it helps update their beliefs,
enabling them to make [better] decisions that can
yield higher expected pay-offs than in the absence
of information. This increase in expected payoffs
is then ascribed to the value of the system. This is
conceptually the process by which the value of
information can be assessed, and consequently the
value of spacecraft with unpriced services.
In this work, we focus on the first categories of spacecraft,
namely the commercial ones with priced services for the
reason discussed next. This work is at the intersection of
and it integrates two broad considerations in the space
industry, namely the emergence of the hosted payload
paradigm on the one hand, and the increased emphasis for
the acquisition of space systems to be value-driven or at a
minimum value-informed on the other hand. Hosted
payloads are meant to be carried on commercial spacecraft,
and as such NPV calculations (and related metrics) are
going to be main financial criteria for deciding whether to
commit to such a paradigm and how much to charge the
hosted payload for the arrangement between the host and
the guest to be agreeable (more details on this in the next
sections).
The objective of this work is to provide a value analysis
framework for spacecraft in the context of hosted payloads,
and to develop a decision analytic tool for assessing the
NPV of a satellite, as well as the return on investment in the
system, for the operators. Once the value benchmark of the
satellite NPV is established without the hosted payload, we
then propose a general principle for pricing hosted
payloadshow much to charge the guest for the ride and
how (annuity versus down payment and a host of hybrid
options in between). We argue that the pricing ought to be
value-based and driven by the incremental NPV of the
hosted payload: given the (lifecycle) costs incurred to test,
integrate, and modify the spacecraft if needs be to
accommodate the host, and later to operate it, the pricing or
lease of that real estate on board the spacecraft should be
such that it results at a minimum in a NPV neutral situation
(with respect to the benchmark NPV; other options
including different incremental returns for the hosted
payload will also be examined). In other words, the value
analysis will provide a lower bound on the Present Value of
the lease price to charge the hosted payload. This Present
1
Another drawback is the cost risk borne by the acquirer,
but this subject is beyond the scope of the present work.
Value in turn can be broken down into two components, a
down payment and an annuity or on-going rent-like
payment. The proper combination between these two
components can then be negotiated by the two stakeholders,
and it will be a function of their particular circumstances or
constraints, their financial standing, and their risk aversion.
The remainder of this work is organized as follows: Section
2 provides the value analysis framework, tools, and results
for communication satellites without hosted payload. This
will represent the benchmark NPV against which the
inclusion of the hosted payload will be compared to in
Section 4, and which in turn will drive the pricing model. In
Section 2, we also analyze the time-to-break-even (and time
to X% return on investment) for a satellite as a function of
different parameters. We conduct a sensitivity analysis and
identify key driving parameters of the satellite NPV. Section
3 provides a brief qualitative review of the hosted payload
paradigm. Section 4 integrates hosted payloads into the
value model, examines its incremental NPV, and develops
the pricing model noted previously. Section 5 concludes this
work.
2. COST, REVENUE, AND VALUE MODELS FOR
COMMUNICATION SATELLITES
In this section we provide the benchmark value model of a
communication satellite noted previously and against which
the incremental NPV of the hosted payload will be
compared in Section 4. To build a value model, we need to
establish first the cost and revenue models of the satellite,
and this is undertaken next. The following models build on
and extend previous results by Brathwaite and Saleh (2009)
[2].
Acquisition cost model
There are various components for the lifecycle cost of a
spacecraft. These are broken down into several categories;
the first includes all the costs incurred up to the delivery of
the spacecraft on orbit. This is known as the Cost to Initial
Operational Capability or Cost to IOC, and it includes the
spacecraft acquisition cost2, launch cost, and insurance cost.
The other component is the on-going cost to operate the
spacecraft for the duration of its life on orbit. When properly
discounted, the cost of operation and the cost to IOC add up
to the present value of the lifecycle cost of the spacecraft.
Figure 1 shows the breakdown and buildup of this lifecycle
cost.
System design parameters can then be taken into account to
develop a (statistical) spacecraft acquisition cost model.
Several such cost models exist in the literature and they
typically use spacecraft mass and/or power to estimate the
2
This in turn includes the Systems Engineering, Integration,
Test, and Program Management (SEIT/PM) cost, as well as
the Research Development Test & Evaluation (RDT&E)
cost and the production cost.
3
(Present$Value$of)$
S/C$lifecycle$cost$
Cost$to$IOC$
S/C$$ Launch$ Insurance$ (Discounted)$
acquisi+on$cost$ cost$ cost$ cost$of$s/c$
opera+on$
Figure 1. Breakdown and buildup of the present value
of the lifecycle cost of a spacecraft
spacecraft acquisition cost or cost to IOC. We preferred for
the purpose of this work to use another independent variable,
namely the size of the payload as measured by the number
of 36-MHz equivalent transponders carried on board the
spacecraft. The reason for this choice will be evident when
we discuss the spacecraft revenue modelfor the time
being, we simply note that the transponder is the revenue-
generating unit on board the spacecraft, and as such, for the
cost and revenue models to be commensurate with each
other (for the purpose of their integration in the NPV model),
we needed a cost model that scales with the size of the
payload.
Our model is adapted from Brathwaite and Saleh (2009) [2]
but with one important difference: the current model is a
cost of acquisition instead of cost to IOC, is given by Eq. 1
(in $ million):
For T Life = 15 years :
C acq = 63.1 ln(N ) 166.3 (1)
R 2 = 0.89
N : number of 36 - MHz equivalent transponders (24 N 92)
The launch cost was left out as an independent variable for
the user to input into the model, for added flexibility given
the changing landscape in the launch industry (and changing
launch costs).
In addition to the size of the payload, the model also
accounts for the marginal cost of durability () of the
spacecraft. This reflects the incremental cost incurred to
design the spacecraft for one addition year (Saleh, 2008) [3].
This parameter is also left as an available input to the user.
Typically values of this marginal cost of durability vary
between 1% and 5%.
Since the model in Eq. 1 was developed for a design
lifetime (TLife) of 15 years, it is adjusted according to Eq. 2
to account for spacecraft with different design lifetimes:
 63.1 ln(N ) 166.3 i. A time delay T between the time when the
For T Life 15 : C acq =
(1 + )15 T Life
acquisition cost is incurred and the time when

(2) operation costs begin to accrue. This is needed to
capture the possibility of a launch delay for example
(which can occur for a variety of reasons);
T Life 15
For T Life > 15 : C acq = [63.1 ln(N ) 166.3] (1 + )

ii. An initial operation cost (Cops,0) the year T after the

Costs associated with the hosted payload (HoP) will be acquisition cost were incurred;
discussed in Section 4. Finally the insurance premium is
typically based on the acquisition and launch cost. It is also iii. An annual cost growth (or decline) of the operation
left as an independent input for the user in our model.
costs (), which can capture either inflation or
Insurance rates (IR) typically vary between 10% and 20%.
improved operational efficiency;
The cost to IOC is given by Eq. 3, and in this section, the
costs associated with the hosted payload are set to zero.
iv. A discount rate, r, which is typically set as the
companys weighted average cost of capital
C IOC = (C acq + C HoP + C launch ) (1 + IR ) (3)
(WACC).
Figure 2 shows one type of output of this cost model, Given these parameters, the present value of all future
namely the scaling of the cost to IOC as a function of the operation costs is given by3:
size of the payload and the influence of the marginal cost of
durability. The launch cost for this figure was set at $100 m, i 1
T service
Cops,0 (1 + )
the insurance rate at 15%, and the marginal cost of PV (Cops ) = (1 + r ) ( 4)
i + T
durability at 2%. i =1

275#
Finally, the present value of the spacecraft lifecycle costs is
250# the sum of the cost to IOC and the present value of the
operation costs:
Cost%to%IOC%($%million)%

225#

PV (LCC ) = C IOC + PV (C ops )

200#
(5)
175#
T_Life=15#
150#
T_Life10#
Revenue model of the spacecraft
125# T_Life5# The revenue model has a more complex texture than the
100# cost model, and it includes a larger number of degrees of
20# 25# 30# 35# 40# 45# 50# 55# 60# 65# 70# 75# 80# 85# 90# 95# 100#
Number%of%Transponders
freedom or parameters for the user to input or adjust. These
degrees of freedom provide the ability to model and capture
Figure 2. Cost to IOC as a function of payload size realistic conditions in different markets as will be discussed
(number of 36-MHz equivalent transponders). shortly. Some parameters are common between the cost and
revenue model, for example, the time delay T between the
time when the acquisition cost is incurred and the time when
Figure 2 reads as follows. For example, consider a revenues start accruing, and the discount rate r.
spacecraft designed for a 15-year lifetime. With a 60-
transponder payload, its cost to IOC is estimated at $221 The revenue model includes several parameters related to
million. This cost scales up to $242 million if the payload the load factor and loading dynamics of the spacecraft. The
size increased to 80 transponders. Similarly, if the design load factor of a satellite, L(t), can evolve in time, and it is
lifetime was dialed down, from say 15 years to 10 years, the the percent of transponders on board the spacecraft that are
model estimates the cost to IOC of the spacecraft with a 60- leased. The first part of the revenue model therefore
transponder payload to drop slightly from $221 million to includes the following expression:
$211 million.
0 for t T
Cost of operation and present value of lifecycle cost

The second component of the spacecraft lifecycle cost is the
L(t ) = (6a)
on-going cost to operate the spacecraft for the duration of its t T


life on orbit. This cost is incurred cumulatively over the life L0 1 e for t > T
of the spacecraft on orbit, and as such, it should be

discounted to yield the present value of all future operation
costs. This part of the lifecycle cost model has four degrees 3
of freedom, which can be set by the user: In this expression, the yearly costs of operations are
assumed to be incurred at the end of each year.
4
 The average revenue per year per service (audio, data, and
L0 is the steady-state load factor (e.g., 80% over a given video) is given by Eq. 8a, and the total revenues generated
market), and is the time constant associated with the per year is given by Eq. 8b:
loading dynamics. This time constant provides us with the
time response at 95% for example, that is, the time it takes
after launch and initial operational capability for the ui (t ) = N L (t ) si (t ) Pi (t ) (8a)

spacecraft to have 95% of its steady-state load factor leased:

utotal (t ) = N L (t ) si (t ) Pi (t ) (8b)
t 95% = 3 i = a, d , v

Note that while only three branches are shown in Figure 3,
with (7) in reality the revenue model can include at least as many
branches as the number of transponders on board the
spacecraft, and each transponder can be leased at a different
L(t 95% ) = 0.95 L0 price point given the particular circumstances and

sa"(t)"

Pa(t)" ua(t)&

N" L(t)" sd(t)" Pd(t)" ud(t)&

sv(t)" Pv(t)" uv(t)&

Size&of&the&payload:&& Satellite&load&factor& Service&mix:&percentage& Market&lease&price&of&a& Revenue&generated&per&

total&number&of&36:MHz& (average&per&year)& uBlizaBon&of&load&factor& transponder&per&service& service&(average&per&
equivalent&transponders& for&audio,&data,&and&video& (average&per&year)& year)&
respecBvely&
(average&per&year)&

Figure 3: Structure of the revenue model

commitments of its customer (e.g., long term lease

This time constant allows us to model different approaches
to the marketing and sales of on orbit capacity. For example,
a highly aggressive operator may lease the entire payload of
its spacecraft before its launch, in which case L0 = 100%
and = 0. Conversely for a sluggish operator, or if
conditions are highly competitive in a given market, it may
take a few years, say three to lease and reach 95% of the
steady-state load factor, in which case = 1 year.
The loading model (Eq. 6a) will be modified shortly with
considerations of obsolescence. But we first note that the
load factor of the spacecraft is next broken down into
different types of services the transponders are leased for
(audio, data, and video), and these in turn, have different
lease prices in a given market. As a result, the revenues
generated by the spacecraft is the sum over all the revenues
of the leased (load factor times payload size), multiplied by
the respective service mix and lease price of the particular
service each transponder is providing. This is graphically
shown in Figure 3.
agreements are typically discounted). In section 4, a hosted
payload revenue stream will be added to this revenue model.
Two additional parameters are provided as degrees of
freedom for the user to modify the load factor, and
consequently the revenue model:
i. The time of onset of obsolescence, Tobs, or time
when new and better transponders are available on-
orbit in other spacecraft (covering the same
geographic region), and customers begin to switch
to these newer offerings. Some anecdotal evidence
suggest this may indeed be the case (see for
example Saleh et al, 2006 for spacecraft loading
dynamics data) [4].
ii. The intensity of the decay or the switching to other
spacecraft (obs). In the present model, we used a
linear decay with obs capturing the percentage
points lost per year in the spacecraft load factor
after Tobs.

5
 some $481 million after 12 years on orbit. Figure 5 also
The previous loading dynamics model (Eq. 6a) is therefore shows the effect of having a smaller size payload. For
extended for t > Tobs as follows: example, after 6 years on orbit, a spacecraft with 50

700"

Present'Value'of'Revenue'($'million)
600"
0 for t T

500"
t T


L(t ) = L0 1 e for T < t < Tobs (6b) 400"


300"

T obs T
N=60,"T_Life=15"
L0 1 e t for t Tobs 200"

obs N=50,"T_Life=15"

100" N=40,"T_Life=15"

0"
The different parameters of the loading model are shown in 0" 2" 4" 6" 8" 10" 12" 14" 16" 18" 20"
Year'of'opera7on'
Figure 4.
Figure 5. Present Value of revenue generated as a
L(t)%
function of time after initial operational capability (L0 =
80%, = 0.5 years, r = 10%, transponder lease identical
L0"
across the service and equal to $1.5 m/year; no effect of
obs"
obsolescence)

transponders is expected to generate a Present Value of

1/"
$253 million instead of the $303 million of the larger
spacecraft, all else being equal. The difference between
Tobs" !me$
Present Values of larger and smaller spacecraft amplifies
T" with time on orbit if obsolescence effects do not kick in.

Figure 4. Parameters of the spacecraft loading model Net Present Value of the spacecraft
The cost and revenue models in the previous sections can
The Present Value of the revenues generated by all the now be integrated to calculate the Net Present Value (NPV)
leased transponders across the different services over the of the spacecraft. This financial cash-flow-based metric is
life of the spacecraft is given by Eq. 9. computed as the Present Value of all revenue streams minus
the present value of the lifecycle costs incurred, and it is
T serv ic e
utotal (t ) given by Eq. 10:
PV = (1 + r ) i
i =1
NPV = PV PV (LCC )

with (9) T Life + T
u (t )
NPV = (1 + r ) {C
i =1
total
i IOC + PV (C ops )} (10)

utotal (t ) = N L (t ) s (t ) P (t )
i i
i = a, d , v T Life + T i 1
u total (t ) T serv ic e
C ops , 0 (1 + )
One illustrative result of this revenue model is shown in NPV = (1 + r ) i
C IOC + i + T
i =1 i =1 (1 + r )
Figure 5.

Figure 5 reads as follows. For a spacecraft with 60
transponders for example, and given the values of the
parameters provided in the caption, the Present Value of the
revenues generated after 6 years after initial operational
capability amount to $304 million. The Present Value scales
up, albeit at a slower pace given the discounting effect, to
Figure 6 shows one typical output of this spacecraft NPV
model. The same parameters noted previously are used here
as well. Initial cost of operation is set at $10 million with an
annual growth rate of 3%.

6
 400.%
10 to 15 percentage points. It is therefore important to be
cautious before getting too excited about cheaper rides; their
300.%
value advantage is contingent on their track record of
reliability.
Net$Present$Value$($$million)

200.%

100.%

400$
0.%
N=60$with$LC=$$$80$million$
N=60,%T_Life=15% 300$
!100.% N=60$with$LC=$$$100$million$
N=50,%T_Life=15%

Net$Present$Value$($$million)
200$
!200.% N=40,%T_Life=15%

100$
!300.%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

0$
Year$of$opera6on$ 0$ 2$ 4$ 6$ 8$ 10$ 12$ 14$ 16$ 18$ 20$

Figure 6. Net Present Value of a spacecraft as a !100$

Year$of$opera6on

function of time (same parameter settings as in Figure !200$

5, with launch cost of $100 m and initial cost of

!300$
operation of $10 m/year and a cost increase of 3%)
Figure 7. Spacecraft NPV for two launch costs (all else
Figure 6 reads as follows. For example, after 8 years on being equal and same parameter settings as in the
orbit, a spacecraft with 60 transponders will generate an previous examples)
NPV around $95 million (given the values of the input
parameters, the most important ones in this case are the The previous illustration of how launch cost affects the
launch cost of $100 million, the average lease price of a NPV raises the broader question of what are the different
transponder of $1.5 million/year, and the steady-state load value levers of a spacecraft, and how effective is each one in
factor of 80%). The value of this spacecraft, as measured modifying the spacecraft value. The purpose of examining
here by its NPV, increases to roughly $230 million after 15 the sensitivity of the spacecraft value to changes in the
years of service. The smaller spacecraft with 50 different model inputs or value levers is to identify where
transponders will generate $46 million at the 8-year mark the proverbial bang for the buck occurs, and consequently
instead of $95 million of the larger spacecraft. Figure 6 where to focus attention and resources to reap the most
brings out an important time characteristic for the value increments. Figure 8 provides an illustration of the
investment in space systems, namely their time to break- types of impacts that result from pulling on the value levers.
even or when the value build-up crosses the zero threshold, The value levers are grouped into three categories: (1) a
NPV(tbreak) = 0. For example, the time to break-even for the cost-based category, which includes the launch cost, the
60-transponder spacecraft is approximately 5 years, whereas spacecraft acquisition cost, the operation costs, and the
that of the smaller 50-transponder spacecraft is 6 years (all insurance rate; (2) a revenue-based category, which includes
else being equal). the steady-state load factor, the loading dynamics, the
average transponder lease price, and the obsolescence
Figure 7 shows the NPV of two identical spacecraft with 60 parameters; and (3) a design-based category, which includes
transponders each but with a launch cost of $100 million the payload size and the spacecraft design lifetime.
and $80 million. The NPV curve is shifted upward by $23
million for the spacecraft that hitched a ride on the cheaper There are two general ways for increasing value, and in our
launch vehicle, assuming the insurance rate is the same for case increasing a spacecraft NPV: (1) compressing cost, and
both vehicles (r = 15% in these calculations). Similarly, the (2) increasing revenues, either by increasing a combination
time to break even is shorter for the spacecraft with the of load factor and lease price (and shift toward higher
cheaper access to space, about 4 years and 5 months instead revenue-generating services), or by adding new revenue
of the previous 5 years. It is interesting to note however that streams, which is what the Hosted Payload paradigm will
this incremental NPV advantage provided by the cheaper provide, as discussed in the next two sections.
launch all but disappears if the insurance rate increases by

7
 Launch'cost'

Cost%based%value%levers%
NPV%
Spacecra:'
acquisi0on'cost'

Opera0on'costs'

Insurance'rate'

Steady'state'load'
Revenue1based%value%levers% factor'

Impact'of'value'levers'
(when'pulled'in'the'
Loading'dynamics'
right'direc0on)'

Transponder'lease' Not'independent' 2me%

price'

Obsolescence'
parameters'
Design1based%
value%levers%

Payload'size'

Design'life0me'

Figure 8. Value levers and how they affect the spacecraft NPV (not meant to be exhaustive)

To assess the effect of each input parameter on the setting and initial values (r = 15%, and = 0.5
spacecraft NPV, we conduct a sensitivity analysis (Eq. 11) years) have the least impact on spacecraft NPV.
and provide in Figure 9 select results for a 10% increase in This suggests that unless their actual values are
each individual input xi. The benchmark or initial value of significantly off from our default settings, these
the parameters and the NPV are the same as those used parameters are not worth much effort to compress
previously and shown in Figure 6). or fight over (least bang for the buck).

NPV

NPVinitial '13.0%& Discount&Rate
xi = (11)
x
Input'parameters'changed'(10%)

'7.6%& Launch&Cost
xinitial
'6.0%& Ini;al&Annual&Opera;on&Cost

Figure 9 identifies three tiers of parameters given their '1.8%& Insurance&Rate

impact on spacecraft NPV:
'1.3%& Loading&Dynamics

Tier 1 parameters major impact: lease price and Lease&Price 29.7%&

steady-state load factor have the highest impact on
spacecraft NPV (sustained revenue streams). The Steady'State&Loading
29.7%&
results show for instance that a 10% increase in any
'20.0%& '10.0%& 0.0%& 10.0%& 20.0%& 30.0%& 40.0%& 50.0%&
of these parameters has the most impact on Percent'change'in'NPV'
spacecraft NPV, increasing it by almost 30% over a
15-year life; Figure 9. NPV sensitivity analysis (initial parameters set
Tier 2 parameters average impact: Discount rate, to previous values provided in Figure 6 and the text)
launch cost, and cost of operations have an average
impact on spacecraft NPV. It is interesting to note Although not included here for readability purposes, the
that changes to the launch cost have a small effect sensitivity analysis for a spacecraft with a shorter design
on spacecraft NPV: a 10% change in launch cost in lifetime (TLife = 10 years) shows a higher sensitivity for all
one direction will result in less than 8% change in the parameters examined in Figure 9 (e.g., 43% for the lease
NPV in the opposite direction. These results price, and 14% for the launch cost). The obsolescence
indicate that the revenue side is a more powerful parameters (Tobs and obs) have an interesting and important
value lever than compressing the cost side, and influence on the spacecraft NPV. Their particular effect
resources can be prioritized accordingly; however is beyond the scope of the present work (see for
Tier 3 parameters minor impact: changes to the example Saleh, 2008) [1], and it deserves careful
insurance rate and loading dynamics, given our examination in a dedicated future work.

8

For a company with a given cost of capital (WACC), any
investment with a positive NPV is worth considering. For a
single investment, and given a set of resources, investments
with higher relative returns are preferable to lower ones4. To
this effect, we define a cash flow equivalent metric of the
accounting Return On Invested Capital (ROIC) as follows:
* NPV
ROIC = (Eq.12)
PV (LCC )
Equation 9 is the ratio of Net Present Value of the spacecraft
and the Present Value of its lifecycle costs. As such, it can
be termed the return on present value of invested capital,
and we refer to it simply as ROIC*. Figure 10 shows this
metric evolving in time after launch for three different
spacecraft.
Figure 10 reads as follows: for example for a 60-transponder
spacecraft, the return after 10 years of service is around 50%,
and it increases to over 70% after 15 years of service. The
returns are about 20 percentage points lower for a smaller
spacecraft with 50 transponders, all else being equal. Figure
12 also allows us to identify the time to break even (return
of 0%) and more generally the time for a pre-set level of
return. For example, for a 60-transponder spacecraft, the
time to return 40% on the present value of the invested
capital in the spacecraft is about 9 years. The time drops
slightly below 7 years for a 20% return. These time
estimates can be useful in a variety of ways, for example in
managing partnerships or joint ownership of spacecraft and
deciding when to sell a (used) spacecraft in a secondary
market after a target return has been achieved. The results in
Figures 6 and 10 can also help assess the residual value of a
spacecraft (or residual return) after x years of service on
orbit, which in turn can be used as a guide for pricing a
spacecraft in a secondary market.
All the previous analyses were conducted with a given lease
price set point ($1.5 million/year) and a fixed steady-state
load factor (L0 = 80%). We can now relax this constraint
and examine the time to break even and time for an X%
return for an entire range transponder lease price and load
factor. The results for a 60-transponder spacecraft are shown
in Figure 11.
The x-axis is the product of steady-state load factor and
average transponder lease price since these parameters are
interchangeable for 0% < L0 100%. Figure 11 reads as
follows. For example, when the steady-sate load factor is
80% and the average transponder lease price is $1.5
million/year, their product is $1.2million/year and the time
to break even for a 60-transponder spacecraft is 5 years.
4
This statement does not apply unconditionally when
considering a portfolio of investments (e.g., multiple
projects or acquisitions) and with different risk profiles.
These considerations however are not applicable in our case.
9
100%&
80%&
60%&
40%&
20%&
0%&
ROIC*
!20%&
!40%& ROIC(N=50,&T_Life=15)&
!60%&
ROIC(N=60,&T_Life=15)&
!80%&
ROIC(N=40,&T_Life=15)&
!100%&
!120%&
0& 2& 4& 6& 8& 10& 12& 14& 16& 18& 20&
Year*of*opera.on
Figure 10. Return in present value of invested capital
(ROIC*) for spacecraft with 40, 50, and 60
transponders (same parameters setting as in the
previous examples: launch cost = $100 million; L0 =
80%; = 0.5 years; r = 10%; transponder lease
identical across the service and equal to $1.5 m/year;
no effect of obsolescence)
Similarly, the times to 20% and 40% returns for this
spacecraft are 6.6 and 8.8 years respectively. Now consider
a 60-transponder spacecraft fully loaded (L0 = 100%) and
operating in a market where the average transponder lease
price is $2million/year, the time to break even drop to 2.5
years, and the times to 20% and 40% returns are 3.2 and 3.9
years respectively. The time to X% return decreases
monotonically with the product L0LP. For a bigger
spacecraft (more transponders), all else being equal, same
load factor and average transponder lease price, the curves
in Figure 11 shift downward and the time to X% return are
reached sooner than for a smaller spacecraft.
A few conclusions can be drawn from these results. For
example in a highly competitive market, if transponder lease
price times steady-state load factor drops below 0.8
million/year, the time to break even exceeds 10 years. This
may not be appealing for investors. Furthermore, if the time
to break even is comparable to the design lifetime of the
spacecraft, one may want to consider not investing in a
spacecraft for that market in the first place. The results in
Figure 11 can also be used in a different way. For example
if the spacecraft is not fully loaded, L0 < 100%, the operator
should carefully examine the price elasticity of demand
before deciding whether to pull on the transponder lease
price lever or not: only if the marginal increase in L0
(over)compensates for the decrease in lease price should this
lever be pulled.

Figure 11. For a 60-transponder spacecraft, times to
break even and time to X% return as a function of L0LP
(shown here are X= 20% and 40%; same parameters as
in the previous examples)
3. INTRODUCTION TO THE HOSTED PAYLOAD
PARADIGM
In this section, we provide a brief introduction to the hosted
payload paradigm in the space industry. We first define this
concept, provide some examples, and briefly note the
advantages it offers to different stakeholders as well as the
challenges it faces for a broader adoption. We also weave
into this section a short guide to the emerging literature on
the subject. The purpose of this section is to introduce to the
reader who may be unfamiliar with the subject to the idea of
hosted payloads, and to serve as a link between the previous
section on spacecraft value analysis and the next section in
which hosted payload will be integrated into the spacecraft
and a modified value analysis developed.
Definition
The United States Office of Space Commerce (USOC)
defines a hosted payload as the utilization of available
10
capacity on commercial satellites to accommodate
additional transponders, instruments, or other space-bound
items from another organization than the main owner of the
spacecraft who is flying the primary mission (USOSC,
2013) [5]. A similar definition is adopted by the European
space Agency (ESA, 2011) [6]. Other definitions exist and
they offer small variations on the USOSC definition. For
example, Bernie et al (2014) define a hosted payload as [an
instrument], a subsystem, or equipment that is not part of
the primary mission and is accommodated, flown, and
operated using a commercial satellite (referred to as the
host) and ground segment capabilities [7].
The hosted payload paradigm therefore involves
negotiations between different stakeholders; the two most
important partners for our purposes are the host or the
organization that owns the spacecraft, and the guest or the
organization that owns the secondary payload to. There are
two pre-requisites or control gates for the negotiation
between host and guest to proceed, and they can
roughly be expressed as follows: (1) does the payload to be
hosted share or can operate within the same orbital
parameters as the primary instruments (e.g., orbit altitude,
inclination, eccentricity, and if in GEO longitude)? And (2)
is excess capacity available on board the spacecraft to
accommodate the guest? Excess capacity is a broad term
that includes excess real estate on board the spacecraft
(mass and volume), excess power, excess attitude control
authority and thermal management capability, and excess
data handling and storage capacity. Should these two
conditions be satisfied, the negotiation can then proceed to
address detailed technical and programmatic issues between
the two (often more) stakeholders. Hosted payloads can
have varying degrees of technology maturity: for example
they can be technology demonstration, flight qualification
units, or operational sensors (Andraschko et al., 2010) [8].
The Hosted Payload Alliance, a multi-organization that
seeks to raise awareness of the benefits of hosted payloads
among stakeholders in the space industry (HPA, 2011)
provides a list of 29 hosted payloads flown since 1976 (or
planned for), the majority of which have been contracted in
the last decade [9]. This provides a good indication of the
size of this market to date. Some of the more recent hosted
payloads are listed in Table 1. It is likely that an increase in
the number of hosted payloads contracted in the coming
years will occur for reasons examined next.
DODs space system acquisitions have
experienced problems over the past several
decades that have driven up costs by hundreds of
millions, even billions, of dollars; stretched
schedules by years; and increased performance
risks. In some cases, capabilities have not been
delivered to the warfighter after decades of
development (GAO 2006).
It is in part in response to this chronic programmatic under-

Table 1. Examples of recent hosted payloads (Data source: [1], [4], [6], [7], and [8])

Operation
Government Satellite Bus Cost
Hosted payload Operator Mass Duration
Partner Manufacturer (BY13$M)
(years)
Commercially Hosted
GeoStar
Infrared Payload (CHIRP)
U.S. Air Force SES (Orbital 115 75.4 2
Flight Demonstration
Sciences)
Program
U.S. IP Router in Space (IRIS)
1300 (SS
Department of Joint Capability Technology Intelsat 90 14.4 0.25
LORAL)
Defense Demonstration
Nationwide Automatic
U.S. Coast
Identification System Orbcomm Sterkh (Polyot) 3 10.2 1
Guard
(NAIS) Project
Geostar
Wide Area Augmentation Intelsat,
FAA (Orbital - - -
System (WAAS) Telesat
Sciences)
Australian Specialized UHF 702MP
Intelsat 450 188 15
Defence Force communications payload (Boeing)
European
European Geostationary
GNSS 1300 (SS
Navigation Overlay Service SES - - -
Supervisory LORAL)
(EGNOS)
Authority
European
Sentinel-4 EUMETSAT Astrobus L 250 150 92.1 8.5
Space Agency
Laser Communications
1300 (SS
NASA Relay Demonstration SS Loral 175 155.6 2
LORAL)
Program (LCRD)

performance that the 2010 National Space Policy

Why hosted payloads?
Cost growth and schedule slippages continue to plague the
U.S. space industry, as reflected in the months and
sometimes years of delay experienced by several military
and civilian space programs, and by the millions of dollars
of cost overruns (Dubos and Saleh, 2011) [13]. The
Department of Defense (DOD) in particular has repeatedly
struggled to keep the development of its new space
capabilities on schedule. The United States Government
Accountability Office (GAO) has often noted the difficulties
encountered by the DOD in keeping its acquisition of space
systems on schedule and within budget (GAO, 2003; GAO,
2006) ([14], [15]):
recommended that federal agencies actively explore the use
of inventive nontraditional arrangements for acquiring
commercial space goods and services [] including []
hosting government capabilities on commercial spacecraft
[16]. Both NASA and DoD have taken steps to begin the
implementation of this policy. For example, NASA has
announced an option of a hosted payload on some of its
recent Announcement of Opportunity (Andraschko et al.,
2012) [17] and the U.S Air Force awarded in June 2014
contracts to 14 space companies for a total value of up to
$500 million to help place DOD payloads on board
commercial satellites. In short, there is institutional
commitment to explore the hosted payload concept, and this
will likely translate into a higher adoption rate in the near
future than what has been seen in the previous decade.

11
As noted previously, the hosted payload paradigm involves
negotiations between different stakeholders, and the two
most important partners for our purposes are the host or
the organization that owns the spacecraft, and the guest or
the organization that owns the secondary payload. For the
hosted payload business model to pick up momentum, it is
important for these two stakeholders, the host and the guest
for short, to see a net value in such an arrangement from
their own perspective. We briefly discuss next some of the
advantages of the hosted payload arrangement from both
perspectives.
From the perspective of the guestThere are two
immediate benefits for the guest: significant cost saving
compared with flying a dedicated spacecraft, and schedule
compression. For example the recent Commercially Hosted
Infra-Red Payload or CHIRP was hosted on board an SES
spacecraft for the Air Forces Space and Missile Command
(Simonds and Sullivan, 2012) [18]. The payload launched
for less than $80 million and within roughly 3 years from
the start of the contracts (Pang et al., 2012) [19]. It is
estimated that a dedicated spacecraft would have cost on the
order of $500 million (Morring Jr. and Taverna, 2011), and
as such, it is likely that CHIRP would not have flown had it
not been as a hosted payload [20]. In sharing the
infrastructure of a spacecraft on which excess capacity is
available, the guest saves the cost of developing the
dedicated housekeeping functions of a complete spacecraft,
and instead pays (i) a rent for accessing these functions on
board the owners spacecraft and (ii) a share of the cost for
access to orbit or launch cost. Moreover, in the current
budgetary environment, it is likely that several space
programs might be cancelled or not initiated for lack of
funds; the hosted payload option improves the chances of
flying sensors by significantly lowering their cost to orbit
and total lifecycle cost.
The schedule compression and timelier placement of a
new capability on orbit (faster access to space) is another
appealing aspect of the hosted payload model. The reasons
for this are regulatory and beyond the scope of the present
work, but suffice to say that for the government to contract
for a hosted payload, the acquisition will be governed by
FAR Part 12 (Federal Acquisition RegulationAcquisition
of Commercial Items), which has a shorter timeframe than
regulations governing the acquisition of a whole spacecraft
(FAR Part 15Contracting by Negotiation). Several years
can be shaved off and sensors delivered on orbit faster if
contracted as a hosted payload (24 years) instead of flying
on a dedicated government-owned spacecraft (510 years).
There are other related advantages for the hosted payloads
from the perspective of the guest. These include advancing
TRLs [Technology Readiness Level], or proving
[technology] concepts at a lower cost and risk, increasing
space technology refresh rate, and providing more resilient
or less vulnerable space architecture than the current large
monolith spacecraft 5 in an increasingly congested and
5
By distributing sensors across multiple platforms (hosts)
12
contest space (Simonds and Sullivan 2012) [18].
From the perspective of the hostThe immediate benefit
for the owner of the spacecraft is the additional revenue
stream that hosting a payload provides. This revenue stream
can be provided as a down payment upfront prior to launch,
in which case it provides a cash flow advantage in offsetting
some of the upfront costs incurred by the owner, or as a
combination of an annuity and a down payment (we will
examine these options in Section 4). In diversifying its
revenue streams, the owner can also limits its exposure to
market volatility for the services the main payload of the
(commercial) spacecraft provides. In doing so, the owner
reduces its financial risk with one guaranteed (or pre-paid)
revenue stream from the guest (hosted payload).
In short, a hosted payload arrangement increases the value
of an orbital slot6, and it provides the host and the guest with
significant tangible benefits. These in turn have to be
weighed against the risks and additional challenges raised
by such an arrangement. We briefly mention some of these
challenges next.
Challenges of the hosted payload model
Negotiating and executing a hosted payload arrangement
raises several distinctive challenges. These have been
carefully examined in the literature, and lessons learned
from recent programs have been published. The reader is
referred to the excellent works on the subject by Pang et al.,
2012, Andraschko et al., 2010, and Bernie et al., 2014 ([19],
[8], [7]). The challenges are mostly programmatic and legal.
For example in committing to hosting a secondary payload,
the spacecraft owner is exposed to a new schedule risk: a
payload not delivered on time for example. While schedule
delays may be a (minor) nuisance to government
organizations that own and operate spacecraft, they are
significantly disrupting for commercial organizations. As
such, expectations have to be clearly adjusted between the
different partners (government and commercial), risk
governance has to be agreed upon, and liabilities have to be
clarified upfront (e.g., what happens in the event of payload
delivery delay, or launch delay, etc.). Similarly, the partners
have to decide early on how to prioritize the allocation of
the spacecraft resources on orbit, and how to resolve issues
such as the owner changing the spacecraft orbital
parameters or location after launch. More generally, it
emerges from the different works noted previously that
establishing a template contract for hosted payloads can be
helpful in facilitating the broader adoption of this business
model. Other challenges have been identified in handling
security issues (for example hosting a classified payload on
a commercial spacecraft), or hosting a U.S. government
payload on a spacecraft to be launched on a foreign launch
vehicle. These are important topics to explore, but they are
instead of co-locating them on a single platform.
6
Especially in GEO where most of the commercial satellites
arethe likely hosts of secondary payloads.
beyond the scope of the present work.
One important challenge this business model raises is the
development of a pricing model, or pricing standard, for
hosted payloads. Davidson et al., (2012) [21] explored this
subject and proposed pricing models that revolve around a
pay-per-mass principle, or a pay-per-spacecraft-resource-
utilized principle. Andraschko et al., (2010) [8] explained
that the final goal of [their] study was to develop a cost
estimation model based on actual commercial contracts
[and] to estimate costs and payment schedules for future
hosted payload contracts. The authors do not provide the
actual cost data (since it is sensitive to the commercial
entities involved in the programs).7
In the next section, we integrate hosted payloads into the
spacecraft value model developed in Section 2, and we
develop a pricing standard and model for hosted payloads.
The standard, as we discuss next, can serve both as a
starting point for clarifying expectations and as the basis for
the negotiation and setting between the two partners, the
host and the guest.
4. HOSTED PAYLOAD, INCREMENTAL NPV, AND
PRICING MODEL
In this section we integrate considerations of the hosted
payload into the value model developed previously. In the
process, we develop a pricing standard (and model) for
hosted payloads. Since our work is anchored in value
considerations, we propose that for the hosted payload
business model to be sustainable, both main stakeholders,
the host and the guest, have to see a net value in the hosting
arrangement. This condition can be expressed as follows:
NPV HoP, host 0
and (13)
NPV
HoP , guest 0
The benchmark or baseline for the host is the NPV of the
spacecraft without the hosted payload (Eq. 14):
NPVHoP, host = NPVS / C + HoP NPVS / C (14)
The first inequality in Eq. 13 along with Eq. 14 will lead to
the pricing model and standard for hosted payloads, and it is
the focus of this section. We will explore three pricing
options: (1) an upfront payment that ensures the first
inequality in Eq. 13 before launch; (2) an annuity or on-
going rent-like payment; and (3) a combination of a down
payment and annuity. Each option may be better suited for
different stakeholders, and it will be a function of their
7
The quality of the model cannot be assessed. Publically
available data indicates that the cost model proposed may be
inaccurate for hosted payload with masses larger than 15 kg.
13
particular circumstances or constraints, their financial
standing, and their risk aversion.
The second inequality in Eq. 13 requires a definition of a
baseline from the perspective of the guest to assess the
incremental value of the hosted payload arrangement. This
baseline can be taken as a dedicated spacecraft to the
payload, or more appropriately (if the services of the hosted
payload are not priced in a given market, as will likely be
case for NASA or DOD payloads), by assessing the value of
information provided by the instrument on orbit, and
benchmarking it against the lease price the guest is being
charged. This is a similar idea to the one discussed in the
Introduction under non-commercial spacecraft and further
developed in Brathwaite and Saleh, 2013 [2], except in this
case the analysis is restricted to the hosted payload instead
of the entire spacecraft. While this is an important topic (the
second inequality in Eq. 13), its examination is left as a
fruitful venue for future work.
Cost considerations of the hosted payload and incremental
Net Present Value
The costs incurred due to the hosted payload fall into
different categories, and when aggregated and discounted
appropriately, they constitute the (Present Value of the)
lifecycle cost of the hosted payload. The categories include:
(1) design related costs, and they include the cost to test and
integrate the hosted payload into the spacecraft, and the cost
to modify the spacecraft if needs be; (2) the systems
engineering and management overhead; and (3) the costs
associated with operating the hosted payload once it reaches
orbit. It may be necessary to account for additional costs, for
example if the hosted payload bumps the spacecraft into a
larger launch vehicle (unlikely) or to subtract the operation
cost if for example the guest uses dedicated ground facilities
(for uplinks and downlinks) and bears these costs directly
instead of going through the host ground facilities.
The structure and parameters of our hosted payload lifecycle
cost model are shown in Figure 12. We include parameters
similar to the ones used for the operation of the spacecraft,
e.g., insurance rate (which can be contracted jointly or
separately), and a discount rate. The design lifetime of the
hosted payload or its intended duration of operation is
separate from that of the spacecraft, and this provides
additional flexibility for the user. It will also have an
important consequence on the pricing model, as we will see
shortly.
T + T
Cops, HoP,0 (1 + HoP )
life , HoP
i 1
PV (C HoP ) = [CT & I + Cmod + CoverHD ] (1 + IR) + i + T
(15)
i =1 (1 + r )
 Before%Launch%

Cost%of%Integra-on%
and%Tes-ng%
Design%end%of%% Insurance%%
CHoP% Rate%
Cost%of%%
Modica-on%

Systems%engineering%&%
management%overhead% Lifecycle(cost((
of(HoP(

Discount%%
Rate%

Opera-on%end%of% Ini-al%COPS%of%the%
CHoP% Hop%
Growth%%
Rate%

HoP%design%%
Life-me%%

AGer%Launch%

Figure 12. Structure and parameters for the hosted payload lifecycle cost

400.0% 0$
Dierence(in(Net(Present(Value(($(million)

NPV%without%HoP%
300.0%
NPV%with%HoP%
Net$Present$Value$($$million)

!5$
200.0%

100.0% !10$

0.0%
!15$
!100.0%
!20$
!200.0%

!300.0% !25$
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 0$ 2$ 4$ 6$ 8$ 10$ 12$ 14$ 16$ 18$ 20$
Year(of(opera9on
Year$of$opera6on

Figure 13. Effects of the hosted payload costs on the baseline spacecraft NPV. The right panel shows only the NPV
for readability purposes

CT&I is the cost to test and integrate the hosted payload, Cmod and a small hosted payload of the class of IRIS (see Table 1),
the cost to modify the spacecraft, and CoverHD is the cost of with pre-launch costs of $10 million and on-going operation
overhead. The remaining parameters are similar to the ones costs of $1 million per year, and an annual operation growth
in Eq. 4. It is worth pointing out that if the host is not the rate of 3%.
satellite manufacturer, then the incremental costs the
manufacturer incurs because of the hosted payload will be The pricing of the hosted payload is driven by these results.
passed on to the owner with a profit margin.. The hosted payload provides an additional revenue stream
for the host (compared with those shown in Figure 3). The
When Eq. 15 is integrated into the spacecraft value model present value of these revenues, along with the lifecycle cost
(Eq. 10), we obtain the effects of the lifecycle costs of the hosted payload (Eq. 15), provides another expression
associated with the hosted payload on the spacecraft Net for the incremental Net Present Value of the hosted payload,
Present Value, and the NPV penalty they produce with as seen by the host:
respect to the baseline NPV. Figure 13 provides one
example of these results (the model can accommodate NPVHoP , host = PV (R HoP ) PV (C HoP ) (16)
multiple hosted payload from different guests). A spacecraft
with 60 transponders is used as the baseline with the same RHoP are the revenues the host generates from the payload.
parameters from subsection 2.4 (and shown in Figure 6),
14
To determine how much to charge the guest, and how, the 20% and 40% ROIC*. For example, to achieve a 40%
pricing of the hosted payload should be at a minimum return, the guest would charge $21.7 million for the same 5-
NPV neutral, which was expressed previously in Eq. 13 as year payload. This pricing model of a one-time payment is
NPVHoP,guest 0. This condition in turn will help determine suited for a guest who, for example, cannot commit to on-
the lower bound for either an upfront payment from the going payments over several years (the duration of
guest, an annuity or rent-like payment for the duration of operation of the hosted payload), or for whom the upfront
operation of the hosted payload, or a combination of both. lump sum is not financially challenging. As noted
We examine these options next. Similarly, a (discounted previously, this pricing model can be quite appealing for the
cash flow) profit margin can be added to the pricing of the owner since it provides a considerable cash inflow prior to
hosted payload to ensure an incremental return of X%. We launch, and in so doing it offsets some of the costs incurred
refer to this metric as the incremental return on the present by the owner early on. As a result, this pricing model
value of invested capital in the hosted payload, and it is shortens the most the time to break even of the spacecraft.
given in Eq. 17:
It is worth pointing out that the host may charge a premium
* NPVHoP, host for an increased risk profile of the primary mission brought
ROICHoP , host = (17) about by the hosted payload, or because of heightened
PV (CHoP ) demand for a ride to the particular orbit and within the
launch timeframe of the main mission, or because of lost
Pricing modeloption 1: the one-time upfront payment revenues from the main mission due to resource diversion to
The first pricing option requires the guest to pay upfront a the hosted payload (Bernie et al., 2014) [7]. As such,
down payment that will offset the entire present value of the positive ROIC* are to be expected in a free market
costs associated with the hosted payload (Eq. 15). Since economy.
there are costs associated with the operation of the hosted
payload on orbit (Cops, HoP), the intended duration of Pricing modeloption 2: annuity with no down payment
operation of the payload is an important parameter to When the host is capable of making commitment for on-
consider. Figure 14 shows the results of this pricing option going annual payments (rent-like), a second pricing option
for the same hosted payload used previously. Included in is available, namely a yearly payment for the duration of
Figure 14 are also the results for an ROIC* of 20% and 40% operation of the hosted payload to offset its lifecycle cost.
on the hosted payload alone.
For a constant annual payment (AP), the incremental net
35"
present value of the hosted payload is given by Eq. 18:
30"
One$%me'upfron'payment'($'million)

Tlife , HoP + T
AP
25"
NPVHoP, host = (1 + r ) i + T
PV (C HoP ) (18)
i =1

20"
The present value of the lifecycle costs of the hosted
15" payload is given by Eq. 15. These two equations allow us to
10"
40%"ROIC" solve for AP for a given ROIC*. The results for our
20%"ROIC" previous hosted payload are shown in Figure 15. Payments
5" 0%"ROIC" are assumed to begin at the end of the first year on orbit.
0"
0" 2" 4" 6" 8" 10" 12" 14" 16" 18" 20" 20.00#

Intended'dura%on'of'opera%on'of'the'HoP'(years) 18.00# 40%#ROIC#

16.00# 20%#ROIC#
Annual&Payment&($&million/year)

Figure 14. Results of the pricing modeloption 1: one- 14.00# Break7even#

time upfront payment for a hosted payload with pre- 12.00#

launch costs of $10 million and on-going operation costs 10.00#

of $1 million per year, and an annual operation growth 8.00#
rate of 3%. 6.00#

4.00#
Figure 14 reads as follow. For example, for a hosted
2.00#
payload designed to operate for 5 years, with the cost
0.00#
characteristics shown in the figure caption, the price to 1# 3# 5# 7# 9# 11# 13# 15# 17# 19#
charge the guest as a one-time upfront payment to ensure a Intended&dura5on&of&opera5on&of&the&HoP&(years)
NPV neutral is $15.5 million. This payment increases to
$18.4 if the hosted payload were designed to operate for 10 Figure 15. Results of the pricing modeloption 2:
years (the difference being the additional and discounted annual payment for the duration of the hosted payload
costs of operation). Figure 14 also shows the results for a operation (same parameters as in Figure 14)
15
 share of coverage of the present value of the lifecycle cost
Figure 15 reads as follows. For example for a hosted of the hosted payload (Eq. 15) can be split between the
payload designed to operate for 5 years, with the cost down payment (DP) and the present value of the annuity as
characteristics discussed previously (summarized in the follows:
caption of Figure 14), the constant annual payment to
charge the guest over 5 years is $4.1 million to ensure a DP = PV (C HoP )
NPV neutral. The annual charge drops to $3 if the hosted

payload is designed to operate for 10 years. Figure 16 also
(19)
shows the results for annual payments that will provide a Tlife , HoP + T
AP
20% and 40% ROIC*. For example, to achieve to achieve
i + T
= (1 ) PV (C HoP )
i =1 (1 + r )
a 40% return, the guest would charge $5.7 million for the
same 5-year payload.
Where is the percent share of the hosted payload lifecycle
This pricing option raises an important trade-off: requiring cost covered by the down payment. An increase in
smaller payments from the guest than the previous one-time reduces the financial risk to the host noted previously
upfront payment, but having the host exposed to a higher (pricing modeloption 2), and it reduces the annuity of the
financial risk and uncertainty (of a guest delaying or guest. Figure 16 shows the results for = 50%.
defaulting on payments, for example). This option
necessitates careful handling of contingencies (e.g., on orbit Figure 16 reads as follows. For example, for a hosted
failures) when crafting the hosted payload contract. As a payload designed to operate for 5 years, with the same cost
result, this pricing model requires a more complex contract characteristics discussed previously, the down payment
structure between the host and the guest. would be $7.75 million, and the annual payment $2.04
million/year to equally cover the hosted payload lifecycle
Pricing modeloption 3: hybrid with down payment and cost ( = 50% and ROIC* = 0%). The results for other
annuity ROIC* can also be read on Figure 16, and those for other
percent share of the down payment
The last pricing option is a hybrid between the previous two,
and it involves an upfront down payment and an annual (%) can be read in Figure 17.
payment for the duration of operation of the hosted payload
to offset its lifecycle cost. To ensure a NPV neutral, the

Figure 16. Results of the pricing modeloption 3: down payment and annuity for the duration of the
hosted payload operation with = 50% (same parameters as in Figure 13)

16
 Figure 17. Results of the pricing modeloption 3: down payment and annuity for the duration of the hosted
payload operation, with ROIC* = 20%, and different values of .
5. CONCLUSION
This work integrated two broad considerations in the space
industry, namely the emergence of the hosted payload
paradigm on the one hand, and the increased emphasis for
the acquisition of space systems to be value-driven on the
other hand.
The central pillar of this work as noted previously is that
spacecraft, and hosted payloads, are value delivery artifacts,
their value deriving from the flow of service they provide to
different stakeholders. We have argued previously that in
uncertain environments, decision-making with respect to the
design and acquisition of complex assets such as spacecraft
should be value-centric, or at a minimum value-informed.
The analytic valuation of spacecraft offers many
opportunities for better guiding investment in these systems
and better justifying their acquisition.
In this work, we first provided a value model and analysis
for a spacecraft, which included the different components of
the spacecraft lifecycle cost, as well as the spacecraft
revenue model. The revenue model accounted for the
services provided by the primary payload and their lease
price, the loading dynamics of said payload, and various
provisions for its obsolescence. When integrated and
properly discounted, these two models (lifecycle costs and
revenue) allowed us to calculate the spacecraft Net Present
Value (NPV) as a function of various parameters as well as
the return on investment in the spacecraft. This value model
enabled us to identify different value levers of a spacecraft
and how effective is each one of them in modifying the
spacecraft valuewhere the proverbial bang for the buck
occurs, and consequently where to focus attention and
17
resources to reap the most value increments.
Having developed a baseline spacecraft NPV model, we
then integrated considerations of the hosted payload into the
value analysis, and in the process, we developed a pricing
standard (and model) for hosted payloads. We started with a
brief introduction to the hosted payload paradigm and
discussed its advantages and challenges as seen from the
perspective of two main stakeholders, the host (the
organization that owns the spacecraft and its primary
mission) and the guest (the organization that owns the
payload to be hosted). Since our work is anchored in value
considerations, we proposed that for the hosted payload
business model to be sustainable, both main stakeholders,
the host and the guest, have to see a net value in the hosting
arrangement.
One immediate benefit for the owner of the spacecraft is the
additional revenue stream that hosting a payload provides.
This revenue stream can be provided as a down payment
upfront prior to launch, in which case it provides a cash
flow advantage in offsetting some of the upfront costs
incurred by the owner, or as a combination of an annuity
and a down payment. In diversifying its revenue streams,
the owner can also limits its exposure to market volatility
for the services the main payload of the (commercial)
spacecraft provides. In doing so, the owner reduces its
financial risk with one guaranteed (or pre-paid) revenue
stream from the guest.
We then examined the incremental NPV the hosted payload
provided the host with. To do so, we first acknowledged that
the costs incurred due to the hosted payload fall into
different categories, and when properly integrated, they
constitute the lifecycle cost of the hosted payload. The
categories include: (1) design related costs, and they include
the cost to test and integrate the hosted payload into the
spacecraft, and the cost to modify the spacecraft if needs be;
(2) the systems engineering and management overhead; and
(3) the costs associated with operating the hosted payload
once it reaches orbit (additional costs may have to be
accounted for and they are discussed in the text). To
determine how much to charge the guest, and how, we
proposed that the pricing of the hosted payload should be at
a minimum NPV neutral. This condition helped us
determine the lower bound for either an upfront payment
from the guest, an annuity or rent-like payment for the
duration of operation of the hosted payload, or a
combination of both. We developed the analytics for this
condition and three options, and we extended it beyond the
NPV neutral baseline to include an X% incremental return
on the hosted payload.
This work raised a number of interesting questions: for
example, how do the obsolescence parameters affect the
spacecraft NPV and modify the selection of its (optimal)
design lifetime? Or how to assess the NPV of the hosted
payload, in particular when a non-commercial instrument,
from the perspective of the guest? These and other questions
are left as a fruitful venue for future work.
Finally, to preempt one potential misunderstanding from
reading this article, we clarify that this work should not be
construed as a critique of cost models; these are important
tools for the space industry and they are a major input to the
value analysis. There is also a need to develop and refine
cost models for hosted payloads. Our motivation for this
work was the need to integrate and go a step beyond cost
models and the cost-centric mindset, and to argue for the
importance of examining and quantifying the benefit side
of space systemsand thus their valuewith the same
diligence as that expanded to quantify their costs. There is a
dearth of benefits or revenue and value models for space
systems in the literature. Focusing on cost alone is a myopic
approach to the design and acquisition of space systems. We
provided in this work a novel lens for a stereoscopic
(economic) view on space systems and hosted payloads.
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