What the SPAC?

A biased opinion on the state of Earth Observation

Hey team,

I’m the worst investor. This is not investment advice.

I had the great pleasure of talking with Wilfred Waters from @TheGeospatialIndex this morning. In amongst my rambling, I was trying to make a point about a gap in the Earth Observation value chain. For clarity’s sake, I wanted to express my opinion in words.

The premise of Wil’s question was that a number of space SPAC’s had seen a dramatic loss in value. While some of the SPACs are launch or space tourism-oriented, many are engaged in Earth Observation (EO.) One could argue that space is an overtly charismatic vertical and attracts a great deal of upfront optimism, which subsequently peters out. This would support the general space SPAC plunge. But I feel, in terms of the EO sector, there is a deeper reason for the drop in value, but also a reason to be long-term optimistic.

Products and Pixels

I believe we are witnessing a problem of pixels vs products. Traditionally, the EO sector has predominantly sold pixels to organizations that have geospatial or GIS teams with deep expertise in the use of imagery and mapping products. In addition, the basic products have been related to situational awareness or mapping. For both these products, the pixels provide excellent service. The image in itself is the product. This has been the case and remains the case for numerous “situational awareness” use cases. However, the promise EO has made to the commercial and enterprise sector is far beyond pixels. I have genuinely heard CEOs pitching me on EO as a solution to climate change. Now, that is obviously ridiculous, but as a monitoring capability, I can get on board. Thankfully, most EO leaders are a bit more circumspect than this. But most EO companies imply a lot more about analytics than is typically possible, leaving much of the analytic labour to the customer.

The problem is that pixels don’t tell this story in and of themselves. In fact, pixels don’t tell a story; in the case of situational awareness, the human interpreter does. But unfortunately, humans don’t scale that well, and we’re really expensive. Think of pixels like assembly language: really useful, but need interpretation, especially at scale.

Here is the problem: besides governments, major natural resource companies, agricultural giants and the occasional insurance data company, very few commercial companies have geospatial teams. This means that to realize the commercial possibilities of EO, intermediaries must exist. Those intermediaries will provide analytic bridges between pixels and products for specific domain verticals.

On the other side of the market, where landscapes change, and humans move, there is value. While these changes have always been measured by people in some way, EO provides a capability which is enormously scalable. Not all landscape problems need scalability, but many do, or many could.

If ESG is to become a major financial concern (and the jury is still deliberating this), then measuring climate risk on and of assets will be a critical component of the process. The tools to measure and audit these reporting mechanisms haven’t been built yet, but they will be driven by EO-derived metrics.

A note on unit economics

Until recently, price per image has been a barrier, but the imagery has become commoditized to some extent and will continue to be so. Now, we see published price lists (Satelloigic and Umbra) which, astonishingly, is a new thing. The price argument is diminishing as the unit economics of commercial remote sensing becomes more favourable. We can praise the commercialization of space for this evolution. Cheaper launches have supported a bigger satellite manufacturing industry, creating a virtuous cycle. Because, in commercial applications, price and scalability matter deeply.

Downstream or drown stream

So we have a capability, and there is a demand. What is missing is the analytic bridge between pixels and products. The EO sector has relied on human eyes to supply this service in traditional customer spaces. To move beyond those, commercial partnerships must be built. These will be risky at first and involve a deep trust between technical experts, domain experts, and data capture companies. But these partnerships can and will develop. Clearly, the opportunity for those who do solve this pattern will be enormous.

This downstream component of the EO value chain is presently extremely unstructured. In effect, we have built an oil and gas sector, but no one has invented the combustion engine yet… But when they do…?

So, returning to the original question: what the SPAC is going on? I think this is a question of expectation and revenue. The market expected there would be a bigger commercial adoption of EO technology. It turns out that with regard to EO applications, it’s complicated, and pixels are not a panacea to climate change without expert analytic interpretation.

If I were running an EO operation today, I would be highly motivated to build commercial partnerships that will create future royalty channels: accelerator programs, open data programs, salons, and even investment in open-source tooling for exploitation. Building environments to encourage virtuous collisions between people, ideas, data, and technology. Create an environment that nurtures intermediaries.

Sounds expensive? It’s cheaper than being delisted.