How did SpaceX establish its business model based on first principles, without relying on the traditional NASA contract model?

Okay, let's talk about this topic.

Imagine that before Elon Musk, the general approach to building rockets was basically "copying a template." NASA would say a rocket should look like this, use these parts, and follow this process, and contractors (like Boeing, Lockheed Martin) would just do it. This was "analogy thinking" – "everyone has always done it this way, so we'll do it this way too."

Under this model, NASA bore almost all the risk, and contracts were "cost-plus." This meant that whatever the contractors spent building the rocket, NASA reimbursed entirely, plus a fixed profit. Think about it: if you were the contractor, what would you do? You'd have no incentive to innovate or save money, because the more you spent, the more profit you might get proportionally, and since NASA was footing the bill anyway, why risk using new technology? The result was rockets becoming incredibly expensive, with extremely long development cycles.

Musk and SpaceX operate completely differently; they use "First Principles" thinking.

First Principles is not some profound physics theory; it's a way of thinking that involves "breaking things down to their fundamental essence."

Musk didn't ask, "How can we build a cheaper rocket?" Instead, he asked several more fundamental questions:

1. What is the essence of a rocket? It's simply a transportation tool that can send things into space.
2. What are the most basic materials needed to build a rocket? Industrial goods like aluminum alloys, titanium, copper, and carbon fiber.
3. How much do these materials cost on the market? Musk calculated that the cost of buying all the raw materials needed to build a rocket accounted for only about 2% of the total price of a rocket at the time.

This was the crucial "Aha!" moment.

If raw materials only account for 2%, where did the other 98% of the cost go? The answer: complex supply chains, lengthy manufacturing processes, extensive labor, and most critically – it was single-use!

This is like flying from Beijing to Shanghai on a brand new Boeing 747, but after landing, instead of refueling and returning, the plane plunges into the sea and is scrapped. How much would that ticket cost? It would be astronomical.

So, based on a First Principles analysis, SpaceX arrived at a disruptive conclusion: to fundamentally reduce the cost of spaceflight, the only way is to reuse rockets.

This conclusion was considered a pipe dream at the time because no one had ever succeeded; it was too difficult. But from the fundamental perspective of physics and logic, it was the only correct path.

Thus, SpaceX's business model naturally emerged:

1. Vertical integration, doing everything in-house. Since traditional supply chains were expensive and slow, "I'll build my own engines, my own rocket bodies, write my own software..." mastering all core technologies myself. This not only controls costs but also allows for rapid iteration and improvement. While others take years for an upgrade, SpaceX can do it in months.

2. Treating rockets as a business, not a national engineering project. SpaceX offers "launch services" to customers with clear pricing. For example, sending your satellite into space costs a flat $60 million. What rocket I use, how I launch it, and what my costs are, that's my business. This shifted the risk from customers (including NASA's new commercial contracts) to themselves, forcing them to lower costs and increase reliability, or they would lose money.

3. Creating new markets with low costs. When launch costs dropped from hundreds of millions of dollars to tens of millions, many previously unimaginable businesses became possible. The most prominent example is Starlink. Without reusable, inexpensive rockets, launching tens of thousands of satellites to form a global internet constellation would be economically completely unfeasible. But now, SpaceX uses its own rockets to launch its own satellites, not only finding a stable major customer for its rocket business but also opening up a brand new, continuously cash-generating internet service business.

In summary:

SpaceX's business model wasn't conjured out of thin air; it was a logical and inevitable outcome derived from the First Principle that "the raw material cost of rockets is actually very low."

• Core Insight: The biggest chunk of rocket cost comes from "single-use."
• Core Technological Solution: Achieving vertical landing and reusability of rockets.
• Core Business Model: Achieving extremely low launch prices through technological breakthroughs, then using this advantage to disrupt the traditional market and create new markets like Starlink.

In essence, they weren't just running faster on the existing track; they switched to a completely new, shorter track.