Prediction: Amazon.com will lose money on Project Kuiper

In 2019 Amazon.com (AMZN 1.16%) announced his next big business idea. Amazon would follow in the footsteps of SpaceX founder Elon Musk and his Starlink satellite internet system and create a competing satellite internet business: Project Kuiper.

The plan calls for the deployment of 3,236 satellites, requiring 92 separate rocket launches to put them into orbit. However, this massive undertaking will actually be smaller in scale than Starlink, which will eventually have 12,000 satellites and will need to launch more than 100 times a year just to refresh its constellation as old satellites fall out of orbit. Still, Amazon initially estimated that the cost of Project Kuiper would be roughly equivalent to the $10 billion that Musk said it would cost SpaceX to create Starlink.

There’s just one problem: it turns out that Amazon may have been wrong. Deploying the Kuiper constellation could cost up to twice that amount.

Quilty raises the alarm about the cost of the Kuiper project

In a report titled “Amazon Project Kuiper…A Quilty Space Deep Dive,” space business intelligence firm Quilty Space warned last month that “Costs for Project Kuiper are exploding” and predicted it would be completed between June 16 and 2021 .5 and 20 billion US dollars would cost to deploy the first generation of the constellation.

Granted, with $89 billion in cash and equivalents on its books and annual free cash flow of more than $48 billion (according to data from S&P Global Market Intelligence), Amazon can easily handle these higher expenses if necessary. But the higher the initial costs, the harder it will be for Amazon to make a profit on Project Kuiper. And the more money Amazon loses as a result, the more this venture will weigh on the company’s profits – and the more investors may regret it.

Why is Project Kuiper likely to cost so much more than Amazon originally expected? It’s hard to be sure since the company maintains silence. However, there are a few options available.

First and most obvious is the fact that Amazon is an e-commerce company – not a rocket company. Unlike SpaceX, which builds its own satellites and its own rockets to launch them (at a price rounded down to “free”), Amazon must purchase its rocket vehicles on the open market. So far it has signed a contract with everyone Boeing To Lockheed Martin To airbus to Amazon founder Jeff Bezos’ own rocket company, Blue Origin. Since Amazon was pressed for time to get its satellites into orbit within a deadline set by regulators, it even bought some Falcon 9 launches from SpaceX.

A second factor, perhaps less known to the public, may lie in the Kuiper project itself.

As space journalist Eric Berger notes in his recent book: Reentry: SpaceX, Elon Musk, and the reusable rockets that sparked a second space ageAmazon has hired former SpaceX Starlink boss Rajeev Badyal to lead Project Kuiper.

But as Berger also reports, Badyal “clashed” with Musk back when he was working for SpaceX. Badyal was “too cautious,” Berger wrote, and “wanted to continue tinkering with the design of the Starlink satellite,” while Musk is notorious for having done everything yesterday. Finally, Musk fired Badyal in June 2018.

At Amazon, if SpaceX’s second-tier Starlink team is leading Project Kuiper, it makes sense that it would take longer to deploy and end up costing more than Starlink. Furthermore, as Quilty points out in its recent report, it’s not a good sign that “Amazon has placed Kuiper in its struggling Devices & Services division rather than its rockstar Web Services division.”

Given Amazon’s “shaky” track record in consumer devices and demonstrated willingness to abandon loss-making projects, this almost seems like deliberate foreshadowing.

What this means for Amazon

Could Project Kuiper end up costing twice as much as originally planned?

I wouldn’t be surprised if it were. Most of the companies Amazon contracts with to launch its satellites charge far more than SpaceX does for rocket launches – $100 million or more. At these prices, the cost of launching 92 times alone could easily exceed Amazon’s $10 billion budget. And that’s before taking into account the costs of building the 3,236 satellites.

At Quilty’s estimated cost of $1.5 million to $2 million each, the satellites alone could cost Amazon $6.5 billion.

That’s a huge start-up cost that Amazon will have to pay back as it begins putting its satellites into orbit and acquiring customers. Yes, begins. So far, Amazon has only launched a pair of test satellites. Operational satellite launches are not expected to begin until later this year – and the constellation must be completed by July 2026 or Amazon will be violating the terms of its Federal Communications Commission license.

In a best-case scenario, Quilty’s report estimates that if Amazon could eventually attract 100 million paying customers for, say, $30 a month, Project Kuiper would generate $36 billion in annual revenue – about as much Amazon’s revenue from annual subscriptions is today. But it’s a long way from zero subscribers and two satellites to 100 million subscribers and 3,236 satellites.

Amazon will continue to make losses on this project for a long time.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions on Amazon and recommends them. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.