Five years ago, Elon Musk had a dream.

Rather than just build space rockets to carry other companies' satellites into orbit -- leaving SpaceX's business dependent upon the demand of third parties -- SpaceX would also build its own satellites, for its own purposes, and become its own best customer.

Even better, the satellites would be communications satellites, and SpaceX could use them to sell broadband Internet service from space, creating an entirely new revenue stream. With this revenue in hand, SpaceX would become profitable and get a new Starlink subsidiary that it could IPO.

Even Elon probably didn't expect his satellite broadband project would turn SpaceX into a bona fide defense contractor.

United States Space Force Logo with Earth, stars, and a satellite in the background

Image source: United States Space Force.

SpaceX enlists in the military

But that's just what happened last week. For years, the U.S. military has used SpaceX rockets to supplement launches completed by its usual launch provider, United Launch Alliance. Now, after seeing how much progress SpaceX has made in building a civilian satellite construction business, the military is going to hire SpaceX to build military satellites as well.

The announcement descended to Earth from the Pentagon's Space Development Agency (SDA -- which will become an official part of the Space Force in 2022). In twin awards, the SDA hired both SpaceX and L3Harris (LHX 0.67%) to build four satellites each for its new "Tracking Layer" project. These Wide Field of View (WFOV) satellites will supplement Missile Defense Agency Medium Field of View (MFOV) satellites in their mission to track hypersonic and ballistic missile launches on Earth.   

The initial contract awards are small (in Defense Department terms): $193.5 million for L3Harris, and just $149.2 million for SpaceX (which thus appears to have submitted the lower bid). These amounts, however, refer only to the "on-time delivery of space vehicles and optical wide field of view payloads" -- i.e. building the satellites. Presumably, there will be additional monies allocated for launching the satellites to space -- and because L3Harris doesn't have any rockets for this task, but SpaceX does, it stands to reason that SpaceX would get that extra money.

And that isn't even all.

A booming market for military satellites?

As points out, the SDA is looking to build a "potentially much larger constellation of sensor satellites" than just the eight satellites covered in these first two contracts. How much larger? At least "28 more" WFOV satellites will be added to the "Tracking Layer" of sats, says SpaceNews, along with "one or two" MFOV satellites. (Separately, Lockheed Martin and privately-held York Space Systems have been contracted to build a total of 20 "Transport Layer" satellites that will assist in getting the tracking satellites to talk to each other and relaying data back to Earth.) 

Granted, a constellation of 36 WFOV satellites is larger than one of just eight -- but I'm not sure it qualifies as "much" larger. At this point, it has not been revealed whether the SDA will be looking to expand its missile detection constellation even more. What is clear, however, is this:

To date, SpaceX has built and orbited more than 700 Starlink communications satellites. It has plans to manufacture as many as 12,000 in total -- some SpaceX communications suggest as many as 42,000 -- and this speaks to massive economies of scale in production, beyond anything that any other satellite manufacturer on Earth can currently claim!

SpaceX is already in the process of beta testing its Starlink communication satellites, and proving the technical capability of the satellites it is building. Additionally, we are now seeing evidence that the economies of scale that SpaceX commands may permit it to undercut more established defense contractors such as L3Harris on the price of satellites -- just as it has undercut the prices of more established space launch providers such as ULA on rockets. 

This suggests to me that SpaceX's business of building satellites -- for itself, for the U.S. military, and perhaps for commercial customers as well -- has only just begun.