Skip to main content

Full text of "NASA Technical Reports Server (NTRS) 19790023552: Review of pricing policy alternatives for the operational LANDSAT system"

See other formats


^ . 
is 


2 Su « 

s *= 

*2 « 
=? ^ 
^ o 

1 y 

*o s 

:§ ^ 


3^ 

^ aj 
:a ^ 

to ^ 

s j§ 

^ 5 : S 

ZJ ^ 

O "O 7 ^ 

^ St 


;^£ 3 

4 jr r? tS 

*-•-* tr^ 

c* S « 
g Sr g 

H ^ 

S S & 

*?: « «3 
'C o 

v» tx -»hs 




3J/fyf 



Baftelfe 

Columbus laboratories 


7.9 - 1 0.26 3 * 

-/J"f P v'f 


Report 



^E 79-1 02631 BEVIES OE PEICISG POXICY 
ixTEEUATIVES FOR THE OPEBATIOKAX 

SISTEH Final Report 121 

Xal3S., Ohio,) 97 p HC 105 /iIF 101 . CSCX 121 


^ ^ #4 ^ 


B79-31723 

Hnclas 

00263 


V. 



FINAL REPORT 


on 


REVIEW OF PRICING POLICY ALTERNATIVES 
FOR THE OPERATIONAL LANDSAT SYSTEM 
(Report No, BCL-OA-TFR-77-6) 

by 


R. W. Earhart, J. A. Madigan, 

W. F. Moore, and R. F. Porter 

Sponsored by 

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION 
Office of Space and Terrestrial Applications 
(Contract No. NASw-2800, Task 24) 


November 1977 


Approved by: 

A. C. Robinson, Project Manager 


0, O < 

B. W. Davis, Section Manager 
Space Systems and Applications 


BATTELLE 

Columbus Laboratories 
505 King Avenue 
Columbus, Ohio 43201 



FOREWORD 


The study reported herein was carried out by Battelle's 
Columbus Laboratories for the NASA Office of Applxcations , as a task 
under Contract No. NASw-2800. The work was done under the general 
supervision of Dr. A. C. Robinson, Battelle's manager for the contract. 
Task monitor in the Office of Space and Terrestrial Applications was 
Mr. A. Donald Goedeke, Code EK. 


i 



TABLE OF CONTENTS 


gage 

FOB-EITORD 1 

INTRODUCTION 1 

SUMMARY 2 

DISCUSSION OF RESULTS 3 

Market Analysis - Potential Demand 3 

Need for Better Understanding of Market Dynamxcs 5 

Pricing Landsat Data for Cost Recovery 8 

Demand and Prices 8 

Landsat System Cost Estimates 10 

Price, Demand and Cost Recovery 12 

Future Unit Prices and Demand 15 

Future Prices and Cost Recovery 17 

Comparison with Aerial Photography 23 

Price Analysis Conclusions 23 

Potential Pricing Policies and Their Implications 25 

Review of Federal Pricing Policies 25 

Public Interest Aspects of the Landsat Program 28 

Agricultural Crop Information ... 28 

Geophysical Exploration 30 

Use of Landsat Data by State and Local 

Governments 30 

Public Interest Justification 32 

CONCLUSIONS AND RECOMMENDATIONS 32 

Conclusions 32 

Recommendations 33 

REFERENCES 35 

BIBLIOGRAPHY 36 

APPENDIX A 

POTENTIAL MARKET DEMAND FOR AND PRICE SENSITIVITY OF LANDSAT DATA, . A-1 

APPENDIX B 

COSTS FOR THE LANDSAT FOLLOW-ON OPERATIONAL SYSTEM B-1 

APPENDIX C 

REVENUE RECOVERY ASPECTS OF POTENTIAL LANDSAT PRICING POLICIES . . . C-1 

APPENDIX D 

REVENUE-EXPENSE ANALYSIS OF LANDSAT/EARTH RESOURCES DATA SALES . . . n-i 


ii 



REVIEW OF PRICING POLICY ALTERNATIVES 
FOR THE OPERATIONAL LANDSAT SYSTEM 

by 

R^ Earhart, J* A^ Madigan, 

F. Moore, and R. F. Porter 


INTRODUCTION 


Since the late 1960 ’s, the National Aeronautics and Space 
Administration has sponsored an experimental Earth observations program* 

One of the goals of this program has been to transfer the technology 
developed by NASA to other sectors of the economy and/or government 
as part of the larger goal of providing as broad an access to space 
and space technology as possible. The Landsat Earth observation sat^r 
^lli^^ being developed under the NASA Directorate of Space 

and Terrestrial Applications ^ has reached the point where its capabili'^ 
ties are useful in a broad spectrum of governmental and commercial appli- 
cations. As the Landsat system evolves into fully operational status ^ 
an equitable pricing policy for all classes of data users will have to 
be established, according to goals set for the Landsat program. The 
pricing policy must be consistent with Federal guidelines and precedents 
and, at the same time, should encourage maximum benefit from the Landsat 
system and efficient uses of resources. 

Accordingly, NASALS Directorate of Space and Terrestrial 
Applications asked Battelle to provide information pertinent to the 
definition of an operational Landsat pricing policy. The study docu- 
mented in this report is intended to fulfill that request. Specifically, 
several pricing policy options have been considered and the implications 
of these policies have been estimated, both from the standpoint of potential 
market volume and the fiscal requirements placed upon the system operator. 

Since the market for Landsat products will vary as a function 
of use, cost, and quality of data, classical market elasticity techniques 
for predicting future market trends are uncertain. In recognition of 
this uncertainty and its impact on the fiscal requirements for the 



2 


system operator, specific recommendations for further study have been 
identified , 

The recommendation of a particular pricing policy is beyond 
the scope of this study. Instead, several alternative policies are 
examined and existing precedents within the Federal Government are 
identified. The alternative policies are characterized by the extent 
to which the costs of system operation are recovered. 


SUMMARY 


This study was conducted to examine a range of pricing policy 
options for the operational Landsat system and to provide recommendations 
for further studies to support a final selection of an operational LANDSAT 
pricing policy. 

A parametric examination of pricing policy options considered 
the precedents within the Federal Government for various policies which 
might be adopted, and the fiscal implications of various pricing options 
from the standpoint of the system operator. 

The candidate pricing policy options were characterized by the 
portion of total system costs to be recovered from the users . T he generic 
options considered were: 

(1) Full cost recovery 

(2) Operational system cost recovery 

(3) Direct average cost recovery 

(A) Direct user cost recovery. 

The major steps in this study were a market demand analysis to 
determine the expected volume of the future data requirements of users, 
and a price sensitivity analysis to examine the effect of price on market 
volume. From these, an estimate was made of the annual recovery required 
for system operation for each pricing policy alternative. 

Deficiencies in the current state of knowledge were noted in 
such key areas as the future volume and product mix (tapes vs photos) , 
and the elasticity phenomenon which will govern the price/ volume relation- 
ships. Specific recommendations for further study are suggested to pro- 
vide more complete data for a comprehensive pricing policy analysis. 



3 


With currently available information, the analysis concludes 
that it may be difficult to attain the business volume required to support 
cost recovery greater than direct user costs. Pricing policies designed 
to recover a higher level of system costs should be supported by further 
studies to demonstrate a significantly greater growth in market volume 
than is indicated by current analysis of demand for Landsat products* 

It is noted that current projections of future benefits from an operational 
Landsat system' may support a public interest approach to Landsat pricing. 


DISCUSSION OF RESULTS 


Market Analysis - Potential Demand 

An operational market demand for Landsat data was developed by 
constructing data-use scenarios for several major applications. The 
scenarios were derived primarily from existing studies which examined 
Landsat applications and associated benefits. The complete analysis of 
market demand is presented as Appendix A, together with a price elasticity 
analysis of both imagery and computer --compatible tapes (CCT) . Requirements 
by user sector, based on the scenarios of Appendix A are: 


User Sector 

Scenes /Year 

Private 

39,796 

Foreign Governments 

10,076 

U ♦ S . Government 

9,868 

Academic 

4,798 

State Governments 

816 

Total 

65,354 


Converting scenes per year to frames of imagery required results in about 
220,000 frames required annually. The mix of products in an operational 
system is projected as: 



4 


Sector 

Scenes /Year 
Imagery 

Scenes /Year 
CCT 

Equivalent 
Total Frame 

Private 

26,497 

13,299 

132,687 

Foreign 

3,978 

6,098 

36,326 

U.S. Government 

3,873 

5,995 

35,599 

Academic 

3,838 

960 

15,354 

State Government 

545 

271 

2,719 

Total 

38,731 

26,623 

222,685 


Because of the sensitivity of revenue projections to product mix 
(computer products vs imagery) , a parametric treatment of the effect of 
product mix on revenues xs presented later in the discussion of cost 
recovery. Both a highly CCT-oriented mix and a hxghly image-or rented mix 
are considered as well as the mix projected above. 

One conclusion draxm from the analysis is the requirement to 
increase the utilizatxon of computer products in order to increase Landsat 
system revenues. About 26,000 computer^ compatxble scenes will be required 
annually in an operational mode, with about 15,000 of these in agri- 
cultural applications. Tlie current market for computer-compatible tapes 
is about 2,000 tapes annually. The increase in computer-con^A^tible 
tape usage will account for the majority of the revenues from an oper- 
ational system. 

A comparison to existing market demand can be made by converting 
demand to equivalent frames of imagery (e.g., a CCT has an equivalent of 
4 frames of imagery, a color image has 3 frames). This comparison is 
shoTO below: 



Projected Frames 

Fiscal Year 

1976 Frames 

Sector 

Quantity 

percent 
by Sector 

Quantity 

Percent 
by Sector 

Private 

132,687 

59.6 

61,361 

24.0 

Foreign 

36,326 

16.3 

66,474 

26.0 

U.S. Government 

35,599 

16.0 

97,154 

38.0 

Academic 

15,354 

6.9 

28,123 

11.0 

State Governments 

2,719 

1.2 

2,557 

1.0 

Total 

222,685 

100.0 

255,669 

100.0 



5 


It should be noted that 56 percent of the U*S, Government 
purchases during FY 1976 were in support of NASA Principal Investi- 
gators (pi’s), inflating the U,S, Government share. The 38 percent shown 
for the Federal sector is distributed as follows: NASA PI, 21.3 percent; 
USGS, 11.8 percent; and other Federal agencies, 4.9 percent. It should 
also be pointed out that reliability of current market data by sector 
directly impacts comparison between future projections by sector and 
current demand. The need for more refined market information than is 
currently available is discussed below. 

Need for Better Understanding of Market Dynamics 

The potential market demand for operational Landsat data was 
derived primarily from existing studies x^hich examined Landsat applications 
and associated benefits. These included such sources of future appli- 
cations as: 

’’United States Benefits of Improved Wheat Crop Information 
From a Landsat System", EGON, Incorporated, 1976 

"Practical Applications of Space Systems", National Research 
Council, 1975 

"An Analysis of Costs and Benefits From Use of ERS Data in 
State Land Use Plannaing", Earth Satellite Corporation and 
Booze- Allen, 1974 

"Resource Sensing From Space, Prospects for Developing 
Countries", National Research Council, 1977 

"A Cost-Benefit Evaluation of the Landsat Follox^-On 
Operational System", Goddard Space Flight Center, 1977 

Studies of current Landsat applications were utilized as well, for 
example: 

"A Summary of the Users Perspective of Landsat-D and 
Reference Document of Landsat Users", NASA, 1977 

"Survey of Users of Earth Resources Remote Sensing Data", 
Battelle, 1976. 



6 


Despite the many studies performed recently, a major deficiency in the 
existing literature is a lack of a clear transitional relationship between 
current Landsat applications and data users, and future market potential. 
The studies of current users, for example, point out key problem areas 
and user needs critical to market development, but they do not consider 
the development of new technology, nor do they quantify the potential 
market demand which would come about if the market and technology were 
properly developed. The studies of future markets, on the other hand, 
assume that a certain level of Landsat utilization will be required for 
a given application, and consider the benefits and costs associated with 
that application. These studies, however, do not address the issue of 
how the market should be developed for the applications, or what the 
logical transition from current to future applications will be. 

In addition to the lack of information on the logical transition 
of current market demand into future demand, and the quantitative impact 
of supplying technology to satisfy specific user requirements to encourage 
new applications, quantitative information on current applications is not 
maintained. The existing user information system at the EROS Data Center, 
for example, provides the following type of information: 


Information by User Category 

FY 1976 Landsat 


Percent 

Percent 

of Items 

of Dollars 


Federal 

38 

35 

Foreign 

26 

25 

Industry 

17 

18 

Academic 

11 

10 

Individuals 

7 

11 

State & Local 

1 

1 


As shoxm, information is available by user category; however, no infor- 
mation is kept by application , e.g., exploration, land use planning, etc. 
Further, the existing information system had inherent deficiencies which 
could lead to misclassif ication of users, particularly non-government users. 
An example of difficulty with the existing user category system is the 



7 


university professor who purchases data for an oil company as part of 
a consulting contract. The ”end user” appears as the academic sector 
rather than the private sector. The extent of this sort of activity is 
unknown. Another example is the category "individuals”. It is not 
known whether these are school children or consultants. In the Federal 
sector, It IS not knom, for example, how much is for research purposes 
and how much is utilized in an "operational" mode. The situation makes 
market analysis difficult. 

In 1974, EROS did attempt to operate a system to keep track of 
data use by application and user category, but it became cumbersome and 
time consuming. The breakouts were delineated by department, by agency, 
and by type of industry, for example, in addition to application area. 

TI’70 key issues led EROS to abandon efforts to keep finely 
delineated data on applications and users. They indicated that: 

(1) Precise data were impossible to obtain because 

some users did not want to reveal their applications 

(2) Collection of data borders on violation of 
privacy acts. 

It has been estimated by EROS that, to properly generate the data re- 
quired for application and user category analysis, an expenditure in 
excess of $100,000 per year would be required.* A trained person who 
understood various end-data applications would probably have to contact 
each person ordering data. There are about 3500 to 4000 inquires per 
month at the EROS Data Center which result in about 2500 orders per month, 
or 30,000 orders per year. Estimated costs are $3 to $5 per order to 
obtain the information, including personal telephone costs. Further, 
there is still no guarantee that precise information could be gathered, 
since some users would not want to discuss applications. Nonetheless, 
some type of data system for Landsat application areas should be imple- 
mented in order to better understand existing marketplace dynamics. 

This is an area that x^arrants further investigation. 

The lack of market understanding goes deeper than the question 
of X'^hich sectors are purchasing x^7hat information for what applications. 


Unless otherx^?lse specified, all dollar values cited have been converted 
to 1976 dollars. 



8 


Information on user costs of using Landsat data and the economics of 
alternative data use, e.g,, aircraft data, is sketchy. The costs of 
aircraft data collection ($5 to $15 per square mile) are available, 
but costs of data use vary considerably by application. 

The interaction of the user^s budgetary process and future 
Landsat price increases is not well understood. For example, the total 
cost of producing a map from Landsat data may be $30,000, of which the 
Landsat data tape cost portion is $200. The $200 may appear as a line 
item in the user’s budget, but indirect labor may not be associated 
with the mapmaking activity as a line item. Thus, doubling the computer 
tape cost may appear to double the cost of the Landsat program, but 
actually, a $200 increase is very small compared to overall expenses 
of $30,000 or more for the map. From the example, it is apparent that 
the manner in which the user’s budget is constructed to include specific cost 
elements as line items affects the user’s reaction to price increases. 

The impact of advanced Landsat technology on future market 
demand has apparently never been studied in depth. For example, what in 
terms of market demand will happen when resolution is improved to 40 
meters, or even 10 meters'^ Will the costs of this level of imagery be 
more expensive due to a more complex technology, or less, because of 
increased market demand'^ 

The issues discussed above impact the viability of an opera- 
tional Landsat system, and deserve in-depth investigation. The basic 
question of the logical transition of the current market into the future 
in the face of user requirements and likely technological advances 
remains one of the most significant aspects of the Landsat program to 
be developed. 


Pricing Landsat Data for Cost Recovery 
Demand and Prices 


At the present time, there are three estimates of the demand 
for Landsat imagery, all standardized on the nominal 100-nmi square: 

• Our estimate of operational demand based on application 
and sector analysis: 65,354 scenes per year (Appendix A) 



9 


• The GSFC estimate of 200 multispectral scanner (MMS) 

and 100 thematxc mapper (TM) scenes per day or 

110,000 scenes per year, which is a peak rate used 

( 1 )=^ 

to size the system 

• Market history, which indicated a peak demand in 
FY 1976 at 250,000 film images and 2300 tapes 
(Appendix A) . 

Estimates of future demand are based on the use of computer compatible 
tapes (CCTs) which are required to provide high resolution and data 
frequency for many applications^ The current market demand for the tapes, 
however, is considerably less than the projected demand. If the current 
demand for film images is translated into the equivalent number of tapes on 
the basis of gross information content, the current demand is already 
at the projected future demand level. Market information suggests, 
however, that the demand for film images is highly elastic. 

The market history, moreover, suggests that saturation is 

occurring at current prices and general capabilities of the film image data, 

which are usually resolution limited. The current products available are 

film with a resolution of approximately 100 meters costing in the range of 

$7 to $15 depending upon the type of product (B&W, color, etc.), and tapes 

of the same scenes costing $200. Producing imagery from the tapes costs 

approximately $2000 more, but yields resolution of approximately 40 meters. 

The $2000 provides an initial press run of 100 copies and more copies can 

( 2 ) 

be run from the same plates at 45 cents each. The comparable incremental 
cost for a film image provided by the EROS Center is approximately 25 cents. 
Thus, the major costs currently experienced by the serious users are in the 
area of processing and applying the data. While tape or other direct data 
products are considered to be the major growth product, there is also 
expected to be a significant demand for the photographic products, as 
they now exist. In addition to technical applications where the users 
will wish to check a scene for suitability for their purposes, there will 
be an educational, cultural and scientific demand for the coarser scale 
data which is probably best supplied by the unenhanced data in an in- 
expensive film format. 


Superscript numbers denote references, which are at the end of the text. 



10 


Landsat System Cost Estimates 

System costs have been determined from the peak demand estimate 

of 200 MSS and 100 TM scenes per day. The user subsystems are sized to 

produce the benefits determined in the GSFC benefit and cost analysis. 

Historical information used to determine sunk costs was taken from the 

(3) ( 1 ) 

General Accounting Office report and the GSFC analysis . A stream 
of historical and projected costs was used to derive the annual average 
cost estimate presented in Table 1. The detailed cost stream-related 
information is presented in Appendix B. There are some differences between 
the costs quoted here and those in the referenced publication. The 
differences relate chiefly to differences in methodology rather than 
differences in physical costs. The GSFC analysis is directed toward 
estimating initial and subsequent investments and operations expenses 
adequate to produce a benefit stream and assumes only replacement of 
physically worn-out equipment. This study examines implications of many 
pricing policies. Some of these policies require recovery on a basis of 
conventional accounting techniques such as depreciation over the expected 
technologically useful life rather than the potential physical life. The 
effects of these considerations as well as the phasing of growth in demand 
on funding requirements are examined in Appendicies G and D, 

This study is directed at determining the implications of 
pricing policies for the data and/or data services supplied to the public 
both directly and indirectly through other Government agencies. The 
goal, under current management directives, is to recover some or all of 
the system costs through user charges. A problem in recovering the total 
cost is that the Federal Government, through various agencies, is one 
of the major customers. Thus, unless these user agencies can pass on 
the charges for the data as part of their charges for their service, 
there will be no net recovery to the Government. The question of net 
recovery is not addressed in determining specific prices. It is impli- 
citly assumed that the price paid for the data by a Government agency 
will be recovered. Another problem is that institution of a total cost 
recovery policy at the initial stages of the system will prevent or 
inhibit energence and growth of new and innovative uses of the data, 
as will be shown later. 



TABLE 1. CATEGORIZATION OF LANDSAT ANNUAL ONGOING COSTS AND 
AMORTIZATION* (CONSTANT 1976 DOLLARS IN MILLIONS) 


COST CA 


(/) 

00 

O 

O 


oc 

UJ 

o 

o 

UJ 

ai 


00 

h“ 

CO 

o 

o 


OO 

>- 

OO 


2: 

o 


<c 

UJ 

CL, 

o 


>- 

cx: 


o 

o 

UJ 


OO 

h- 

00 

o 

o 


CD 

< 


<c 


o 

UJ 

D:: 

HH 

a 


EGORIES 


o 

UJ 

al 

I — I 

O 


USER PROCESSING 

DEPRECIATION OF EQUIPMENT 
DATA CENTERS OPERATIONS COSTS 


TRACKING AND DATA ACQUISITION PROCESSING 
T&DA 

DATA MANAGEMENT 
CIVIL SERVICE 

OPERATIONS COSTS - CIVIL SERVICE 
SPACE TRANSPORTATION (1/2 STS/3 YRS) 

REFURBISHMENT OF SPACECRAFT (30% OF INITIAL COST) 


ANNUAL 

COST 


2.5 

23.5 


1 .5 
8.2 
7,5 
0.9 
3.3 
4.7 


CUMULATIVE 

ANNUAL 

COST 

RECOVERY 


26.0 


52.1 


ONGOING R&D IN SUPPORT OF OPERATIONS** 

12 YEARS AMORTIZATION OF INITIAL INVESTMENT IN 
SPACECRAFT (LANDSAT D AND LATER) 


5.0 


11.5 


68.6 


INTEREST ON SUNK COST OF $400M @ 6% 23.9 

20 YEAR AMORTIZATION OF SUNK COSTS (LANDSAT A, B, C) 20.0 


112.5 


* NASA/GSFC AND 0MB INFORMATION (COST ASSUMED FIXED REGARDLESS 
OF VOLUME OR PRODUCT MIX) 

** BCL ESTIMATE 



12 


Price, Demand and Cost Recovery 


Under the assumptxon that the demand estimate of 65,354 scenes 
per year is realized in the form of computer products, cost recovery, 
in a gross sense, can be accomplished by charges for tapes xn the range 
of $397-$1721, This represents recovery of costs ranging from direct 
annual costs to recovery of all costs including sunk costs and interest 
thereon* The charges are not extreme in relation to the current charge of 
$200 for a tape or a nominal $2000 spent on processing the tape for an 
enhanced image. These gross charges, however, do not consider any 
effect of increased price on the potential demand. 

From market information to date, it appears that the market 
for imagery will be highly sensitive to the price charged for photo- 
graphic products. The market data from 1973 to the present are shown 
graphically in Figure 1. Until 1975, the market had characteristics 
which indicated market start*-up with rapidly growing volume in face of 
slowly rising prices. In the last two years, however, the price-demand 
relationship suggests that the market for images has become very sensitive 
to price. This could be due either to saturation as the result of user 
requirements being satisfied under current Landsat capabilities or to 
shortage of user funds available for imagery. The price-volume curve 
which would be achieved if the users had a fixed budget available for 
Landsat imagery is also indicated in Figure 1 as the constant budget 
line. While the information covers only two years, the price-volume 
relationship suggests that, collectively, the users have a constant 
total budget of $1.2 million for Landsat imagery. 

Market information on Landsat data tapes, as shown in Figure 2, 
indicates that the market for data tapes may be nearing saturation at 
the current capabilities offered by Landsat. The price of tape sets has 
remained constant at $200 over most of the history of the program, and 
volume grew significantly until the last two years. The volume peaked 
in 1976 at about 2300 tapes, and appears to be slacking off to a rate 
which indicates that approximately 2000 tapes will be sold in FY 1977. 
^fliile the current imagery volume approximates that which is indicated 
in the forecast of demand, the current demand for tapes is only 3 percent 



PRICE/FRAME ($, 1976) 



FIGURE 1. HISTORICAL DEMAND FOR LANDSAT 
EROS DATA CENTER 





PRICE/TAPE (CURRENT YEAR DOLLARS) 



NUMBER OF TAPES SOLD 

FIGURE 2. HISTORICAL DEMAND FOR LANDSAT DATA TAPES VERSUS PRICE, 
EROS DATA CENTER 



15 


of that which j based on projections, might be expected for an operational 
system, and there is no dxrect indxcation of how the demand may be affected 
by changes in prxce. 

Future Unxt Prices and Demand > From the hypothesis that future 
users of Landsat data may be on a budget, as is tentatively indicated in 
the data for imagery, a price-volume relationship for computer products 
(tapes) was derived xn Appendix A. The assumption used in the derxvation is 

that users will have a limited budget for both processing and data* A 
current price for commercial processing is approximately $2000 for a 
100-nmi-square scene, and the data cost $200* This suggests that the 
volume may vary as the ratio of the current total price, $2200, to the 

2200 

new total price for processing and data as V = f 2000 ~ P * 

2200 

V = Vq 2000 + P * ^ parameter which adjusts for the estimate 

of volume at the current tape price of $200. After limited discussions 
with private users, we feel that, within some nominal price range such 
as S200 to $600, demand will be insensitive to price. We have chosen 
$400 as a nominal CCT price since it is in the middle of this range 
and will support recovery of direct user costs at the forecast of 65,354 
tapes per year. The effect of this hypothetical price-volume relationship 
on tape demand is shown in Figure 3 for the current tape volume of 2000 
per year and the forecast of 65,354 scenes per year, where that demand 
for scenes is expressed in a demand for tapes. The hypothetical rela- 
tionship is only slightly elastic at low tape prices, ^ - 0.1, where 

P = $200 to $400, but becomes more elastic at higher tape prices 
(- 0.7 at P = $5000). The effect of the shift from $200 to $400 is also 
shown. While there are few market data to support the relationship, it 
appears reasonable in that the market would be only slightly changed at 
nominal price changes from the current level but would drop off signi- 
ficantly at very high prices. The relationship is used later to estimate 
cost recovery' which might be achieved under various pricing policies. 

In an analogous manner, a price-volume relationship for future, 
higher resolution Landsat imagery was determined. Based on the fact that 
the latest price increase at the EROS Center will result in prices in the 
range of $12 to $15 per photo for most of the products, it is likel^’^ that 



UNIT PRICE OF TAPES ($. THOUSANDS) 


5000 



FIGURE 3. LANDSAT DATA TAPE PRICE AND VOLUME RELATIONSHIPS 



17 


new applications available with the higher quality data will enable the 
forecast of 222,685 film frames to be in demand at an average price of 
$15 per frame. If the users are then operating under a constant budget, 
as appears from current market information, this would imply a constant 
budget of $3.34 million. This price-volume relationship is indicated 
in Figure 4, together with an extrapolation of the current market data. 
The possibility that, if imagery were the only product to be offered 
in the future, an inelastic demand might appear is also considered 
in Figure 4. A possible future relationship with a constant elasticity 
of - 0.1 corresponding to the initial low elasticity of the hypothetical 
tape price-volume relationship is also indicated, as is the inelastic 
case. 


Future Prices and Cost Recovery . As mentioned in the intro- 
duction to this section, cost recovery levels ranging from direct user 
costs to total cost recovery at the forecast volume of 65,354 scenes 
per year can be achieved from prices in the range of $397 to $1721 per 
scene. These levels of recovery can aslo be achieved by higher prices 
and lower volumes, as shown in Figure 5. The curves of Figure 5, however, 
show only a range of cost recovery possibilities and do not address 
either the product mix or the effect of increased prices on demand. In 
this discussion, it is assumed that the projected demand by scenes 
appears as a demand for tapes rather than a demand for photographs, 
because a cost recovery requirement of $400 per scene can be supported 
by tapes, but not by imagery. In Figure 6, alternative potential efforts 
of price elasticity on demand are shoi-m with an ititial price of $400 
and an initial volume of 65, 354 scenes (tapes). Available information 
suggests that if the price were doubled from the current $200 to $400, 
there would be no significant change in demand and, at the forecasted 
demand of 65,354 scenes, recovery would meet direct user costs. As 
prices were further increased, it is likely that demand would fall off. 
Four potential ways in which this might occur are shown: 

(1) If the users were operating on a constant budget 
for data purchases, it is expected that demand 
would follow the lowest curve and fall off rapidly 
as prices were increased. 



UNIT PRICE OF PHOTOGRAPHS (DOLLARS) 


50 


45 


40 


35 


30 


25 


20 


15 


10 


5 


0 



0 50K lOOK 150K 200K 250K 300K 


ANNUAL VOLUME OF PHOTOGRAPHS 


00 


FIGURE 4. LANDSAT IMAGERY PRICE AND VOLUME RELATIONSHIP 
(CURRENT AND HYPOTHESIZED) 





21 


(2) If the users were operating on a constant budget 
for data plus direct costs of processing, it is 
expected that the demand would follow the next 
highest curve* Here, it is assumed that the cost 

(3) If the demand were slightly elastic, such that 
as the price is doubled, volume x^rould decline by 
10 percent, then the price-volume relation would 
folloxiT the third curve. 

(4) If demand were totally inelastic, the tapes would 
be purchased without regard to price. This is 
represented by the vertical line. 

If the potential demand for scenes materializes, it is expected 
that the price-volume relationship may be somexAere between the constant 
budget plus processing curve and the slightly elastic demand curve, repre- 
sented in Figure 6 by the shaded region. This shift in the price-volume 
relation is expected because users x^ill become locked into Landsat data 
usage for operational purposes, while at the present time they are still 
learning to use the data. 

X^hen these sets of cost recovery and price-volume relationships 
are combined as in Figure 7 , a set of prices for recovering specified 
levels of costs can be found. These range from $400 for direct user costs 
to $5400 for the recovery of total costs under the constant budget 
(including enhancement) assumption. Under each cost recovery assumption, 
the demand that must occur at different price levels is shoxm. From the 
price sensitivity analysis, we estimate that the most probable region for 
the price-demand curve is the shaded region of Figure 7 . 

The cost-demand-price analysis, is however, a solution of 
formal equations. Demand at prices significantly higher (>$1500) than 
those currently charged is not known and can only be surmised. If the 
assumed applications are developed and primary reliance is placed on tapes. 
It is very likely that direct user cost recovery will be feasible. If, 
however, recovery of more than direct user costs is desired, further 
knowledge and analysis of potential user operations is required. Knox^l- 
edge of the user's operations and their costs and returns permits a 
judgment of the amount of price increase x^hich can be tolerated. XThen 
users are directly asked about price sensitivity, the ansx^ers are usually 




23 


assertions that only minor cost increases can be absorbed without radical 
changes in either the structure or recovery from the operation. Analysis 
of the potential effects of price Increases on demand is presented in 
Appendix C. Several alternative forecasts of the rate of growth and its 
effects on revenue and cost recovery for the data dissemination center are 
made in Appendix D. 

Comparison With Aerial Photography 

Landsat data prices considered range from $15 per photograph 
to $10,000 for a tape. The equivalent charges on a per-square-mile basis 
with the assumption of a lOO-^sq. mi. scene range from $0.0015 to $1.00 
per sq. mi. Processing to a rectified, color-corrected image from tape 
would add $2000 to the cost basis, resulting in a nominal upper bound cost 
of $1.20 per sq. mi. All charges considered compare favorably with new 
aerial photography which costs from $5.00 per sq. mi. for high-altitude 
work to $14.00 per sq. mi. for low-altitude work, While this cost 
comparison is quite favorable even at extreme charges for tapes and pro- 
cessing, Landsat data lack the flexibility of aerial photography and must 
offer either a cost advantage or a marked technical advantage to the user 
to capture a significant market share. Since any technical advantages are 
still in the early stages of development, there is some doubt that demand 
would develop at very high charges. A comparison of Landsat and new aerial 
photography is presented in Figure 8, which illustrates trade-offs at 
various levels of Landsat data tape charges under the assumption that 
Landsat data and aerial photos are equally acceptable to the user with 
respect to technical parameters such as spectral bands and especially 
resolution. At high tape charges (greater than $2000) , both low- and 
high-altitude photography are still competitive for moderately sized 
areas such as a county (20 x 40 mi. = 800 sq. mi.), and would still 
be attractive to users with interest in a specific metropolitan area or 
even for small-scale regional planning. 

Price Analysis Conclusions 


The major analytical, as opposed to policy, conclusion dra^m 
from this analysis is that, whatever pricing policy is selected, it should 
encourage use of data tapes and outside processing over photographic 
products. Current market information suggests that the demand for tapes 



TOTAL COST OF IMAGERY, DOLLARS 


28,000 n 



FIGURE 8. TOTAL COST COMPARISON OF AERIAL PHOTOGRAPHY AND LANDSAT IMAGERY 



25 


xs not very elastic, particularly in comparison with photographic products* 
The current market volume for tapes is so small, however, that very high 
charges for tapes may tend to inhibit the development of applications which 
would increase the volume. 

Potential Pricing Policies and Their Implications 


Review of Federal Pricing Policies 

Federal pricing policies usually have as a goal the recovery 
of some or all of the costs of providing the good or service. The range 
of policies is indicated in Table 2. Some policies recover, or attempt 
to recover, more than commercial operations are charging for the same 
service. At the other extreme are Federal information services such as 
the agricultural information in books and pamphlets sold through the 
Government Printing Office. In this case, the charge is made only for 
the costs of printing and distributing the information; no charge is made 
for the information itself, or advertising its availability. This policy 
is perhaps the closest to the current policy of charges for Landsat products. 

TABLE 2. PRICING POLICY PRECEDENTS 


o NOAA Weather Service 
“ No charge 

• Government Printing Office 

~ Average cost of distribution 

• Panama Canal 

- Total operational cost plus interest on investment 

a Tennessee Valley Authority (Electricity) 

- Total cost recovery 

9 Government Helium Production 

- Total cost recovery 

0 Launch Vehicles 

- Expendable 

- Current average cost 

- STS 

- Average cost 

- Amortization of investment 

“• R&D sunk cost is not recovered 

“ Incentives (small payload & exceptional payload) 





26 


Another example of a charge policy for information is the weather forecasting 
services- For weather forecasts there is no charge whatsoever, and immedi- 
ate recipients pay only their costs, if any, for communications- The 
reports are also broadcast over the airwaves as a public service. This 
free Government service is also in competition with commercial weather 
services which provide special-purpose forecasts. There are many other 
information services x^yithin the Federal Government which also provide 
information at no cost or only charge for the dissemination costs. Law 
enforcement activities, mapping and geodetic services, and the National 
Technical Information System (NTIS) are examples. Clearly there are 
precedents for charging only for dissemination costs when the Federal 
Government is releasing information to the public and the public has 
already financed the collection of that information. 

\^en the Federal Government provides goods or services other 
than information, the policies tend toward recovery of either average 
annual costs or these costs plus amortization of the capital investment. 
Examples are: (1) launch vehicles, where the government recovers the 
pro-rata share of annual costs plus depreciation of launch facilities, 
and (2) the Panama Canal, x^here all costs, including those of the Canal 
Government, are recovered as well as 6 percent interest on the initial 
investment in the Canal. The Federal Government also has a monopoly 
in the recovery of helium from natural gas in Oklahoma. That monopoly 
was established whe^n there x^as little commercial interest in helium, and 
the natural gas field was the only knoxjn supply of any significance in 
the x^orld. A significant capital investment was made in processing and 
storage facilities and a pricing policy xsras established to recover the 
current costs as x^ell as amortization of the facilities. The gas companies 

operating from this field later installed their o\m separation facilities 
using newer equipment and technology and are selling helium to commercial 
users at prices significantly below those of the Government. Because 
the demand is low in relation to the currently available supply and 
storage facilities are limited, much of the helium is not being separated 
from the gas before it is released to pipelines. The Federal Government 
and its contractors are the largest customers for the Government's 
helium, x^hile commercial users are using the lower priced non-Governraent 
gas. The Government is, accordingly, not meeting its goal of cost 
recovery . 



27 


As has been xndicated, there is such a variety of Federal 
pricing policies, that it is possible to find a precedent for almost any 
policy* Current laws and policies also require cost recovery from direct 
users or beneficiaries of Federal goods or services so that taxpayers 
do not unduly subsidize any one segment of the population. Pricing 
policies, however, are usually selected on the basis of optimizing one 
or more criteria or objectives in addition to meeting the minimum 
requirements of laws and directives. For governmental activities, some 
of these criteria are: 

• Efficient use of resources 

9 Equitable treatment of different users 

9 Maximization of benefits (including 
intangible benefits) 

o Maximization of cost recovery 

• Minimization of loss. 

It should be noted that minimization of loss is complementary to, but not 
equivalent to, maximization of recovery. If the price is raised to such a 
high level that demand drops off more than proportionally, recovery will 
be reduced and the loss will increase. 

In the non-Government sector , there are also other optimization 
criteria such as minimizing risk of loss and maximizing profit. It should 
be recognized that none of these goals is absolute; for example, profit- 
oriented companies will frequently sacrifice immediate profits to achieve 
a larger market share. 

Behind any decision to select a pricing policy should be 
recognition of the criteria to be optimized. In this report, most of the 
policies discussed are presented in terms of various levels of cost recovery 
since some level of recovery is specified in laws and directives. When 
considering this range of recovery policies, attention will be directed 
toward the effect of the specific level of recovery on the optimization 
criteria/objectives. In general, policies which achieve high recovery 
do so at the expense of other objectives such as maximization of benefits, 
especially intangible benefits. Further, since demand at significantly 
higher prices than currently charged is not well determined, establishing 
prices in an attempt to maximize recovery may cause a loss of sales volume 
sufficient to create a larger loss than might be sustained at lower prices. 



28 


Public Interest Aspects of the Landsat Program 

In considering revenue recovery for the Landsat program, it is 
necessary to form some judgment on the degree to which the public interest 
is involved, as opposed to private interest* If the future seems to lie 
largely with the private sector, then it is reasonable to expect that the 
program should be transferred, at an appropriate time, to a private 
organization with a minimum of subsidy. If the applications lie primarily 
in the public domain, however, it would be reasonable to envision Govern^ 
ment operation and funding of an operational system. In general terms, 
there are two principal issues raised in considering public involvement 
in an operational C^s opposed to a research) Landsat program. First, 
there is the question of the degree to which Landsat will be used to 
carry out or to expand activities which are traditionally in the public 
sector. Second, there is the matter of cost/benefit relationships: 

Landsat may be found to be a meritorious system, but the benefits may be so 
diffused through the economy that it is technically difficult to charge 
each of the beneficiaries a fair share of the system costs ^ To consider 
the issue of public interest involvement it is necessary to examine the 
key applications which have been postulated for Landsat. 

A very large number of uses have been suggested for Landsat 
data. Quantitative estimation of benefits has been carried out for what 
currently appear to be the major applications. The uses which have been 
analyzed embody the most significant economic impacts of Landsat, at least 
for the next few years. One set of benefit estimates is given in Table 3. 
There is some degree of public interest involvement in all these appli- 
cations, as discussed below. 

Agricultural Crop Information . There are two separate aspects 
to this application: the domestic benefits to the U.S., and the benefits 
to other nations and to international organizations. Considering the 
domestic questions first, it can be observed that agriculture is the area 
offering the largest Landsat-derived benefits to the U.S. economy. The 
Large Area Crop Inventory Experiment (LACIE) is the first step in R&D to 
determine feasibility of crop yield forecasts for wheat. As sufficient 
experience is gained, new sensors, techniques, and institutional arrangements 



29 


TABLE 3, MAJOR LANDSAT APPLICATIONS AND PROJECTED BENEFITS 


Application 

Benefit Range 
(millions of 1976 
dollars/year) 

Agricultural Crop Information 

294 - 581 

Geophysical Exploration 

90 

Land Use Planning and Monitoring 

15 - 48 

Hydrologic Land Use 

22 

Water Respurces Management 

13 - 41 

Forestry 

7 

Soil Management 

5-9 


may allow for such applicatxons as drought and plant disease monitoring, 
soil monitoring, crop yield forecasts worldwide for major food crops, and 
possibly even farm management information in areas such as crop selection, 
irrigation, fertilization, and insect and disease control. The R&D 
investment to develop applications such as these is significant, but 
estimates show that benefits would be orders of magnitude greater. The 
question of who is the direct recipient of these benefits is difficult. 
Certainly it is not USDA alone, or only the farming industry that reaps 
the benefits. They share in the benefits that indirectly, in the case 
of world agriculutre, affect the well’-being of the entire world. It 
x^ould be impossible to assign to each beneficiary a fair share of R&D, 
capital investment, and recovery of operating costs. Further, an attempt 
to recover all costs from current users would limit the technology to 
applications for which there were proven "markets” and "users", ^^ile 
uses such as cartography and geoexploration might thrive, higher risk 
applications would not be attempted, and uses with significant social 
and economic impact, such as agriculture, would never come about. 

Turning to the international aspects, it seems clear that in 
combination, the benefits of crop forecasting to various foreign countries 
would be greater than those projected for the U.S. (although the U.S. 
forecast is significant, as indicated in Table 3). In the U.S. case, 
there is an efficient domestic crop forecasting system in operation 
already. The principal Landsat benefits come from forecasting foreign 
crops, and hence forecasting the prices and markets for U.S, agricultural 



30 


products. Other nations, and particularly developing nations, have 
relatively poor means for domestic crop forecasting, geophysical explora- 
tion, etc* Also, various organizations interested in promoting development 
of the emergxng nations could use Landsat information to assist in their 
operatxons . 

It is clear that U*S* forexgn policy is xntimately involved in 
such applxcations, certainly a tradxtional function of the Federal 
Government * 

Geophysical Exploration . Geoexploratxon is one example in 
whxch Landsat technology does appear to directly benefit a specifxc 
group. There are substantial savxngs xn exploration costs because of 
the ability to rapidly survey large areas for signs of potential deposxts. 
Costly exploratxon activities can be limited to geographic areas which 
xndicate high promise. Thxs seemingly direct application,^ however, has 
dxffuse benefits reachxng the entxre population. It is difficult to deny 
that increasing the likelihood of fxnding new oxl and gas deposxts would 
impact the economy signxf icantly . The question of who should bear the 
burden of the costs associated with this benefxt to the oil companies 
becomes difficult in the framework of the direct and xndxrect benefits 
whxch accrue to several sectors of the economy as well as to -the oil 
industry itself. 

Use of Landsat Data by State and Local Governments . In the 
past few years, state, regional and local governments have partxcipated 
in experimental programs which have substantiated the tremendous poten- 
tial xmpact of Landsat in applications such as land use planning, environ- 
ment, and resource management. Conventional data to support these functions 
is a costly burden, and new responsxbilxtxes are contxnually escalating 
the data demand and eroding the effxciency of state and local governments 
to effectxvely address them. In satisfying these responsibilities, the 
state and local governments face a growing need for large amounts of 
varied and repet xtxve data, a challenge which they have expressed will be 

hopefully met by advancxng Landsat technology. In addition to the resource 
activitxes of state government xn forestry, water resources, agrxculture, 
fish, and wxldlxfe, increasing demands are being placed on the state in 



31 


areas such as surface minings power plant siting, coastal zone management, 
critical area programs, and other land use planning. Further, no less 
than 17 Federal acts and programs have been identified which place data 
collection burdens on the state. These include, for example, the Water 
Pollution Control Act of 1972, the National Envirnomental Policy Act of 
1969, the Forest and Rangeland Renewable Resources Planning Act of 1974, 
the Clean Air Act of 1970, and several others. No less than 13 similar 
Federal acts are currently pending which would require still more data 
collection and handling. 

Letters of testimony from nearly every state in the Union 
have shown, after 4 years of various state, regional, and local govern- 
ment involvement in Landsat applications, that Landsat is regarded as 
a necessary tool to provide a cost-effective and accurate solution to 
increasing data collection and handling needs. Even at the present level 
of development, Landsat has been shoTra to be cost effective when compared with 
existing data collection techniques. Almost every state supports further 
development of the system to achieve resolutions which will support addi- 
tional data requirements and allow more effective conduct of their 
responsibilities . 

Within state and local governments, the application of Landsat 
data to more effectively discharge responsibilities ultimately leads to 
diffuse economic and social benefits which accrue to the entire population. 

It would be difficult to determine the extent of total benefits, in 
economic and social terms, reaching each citizen of a particular state, 
and sharing the cost of the system among the various states in relationship 
to these benefits. In a very real sense, programs such as pollution 
control undertaken in one state may benefit a neighboring state more 
than the state which was conducting the program. The algorithm for cost 
sharing would be impossibly complex. The nature of state use of Landsat 
data and the resulting diffuse and interdependent benefits strongly 
suggest a Federal obligation in the development and operation of a Landsat 

system. This becomes increasingly evident when the experimental nature 
of the system is considered. The benefits depend on a high level of 

R&D and indicate a major Federal Government responsibility in the program. 



32 


Public Interest Justification . Landsat applications fall 
primarily in areas which are traditionally in the public domain. A 
high degree of public interest is involved, and it is difficult to recover 
costs through a fee structure* This suggests that, if the Landsat 
program has economic merit (and the cost-benefit studies indicate that 
It does), public support may be warranted. 

It appears that of the major uses for Landsat data, there is 
at least one x^hich has a major private sector application: geophysical 
exploration* Exploration users could reasonably be expected to pay for 
the Landsat products they receive at a fully burdened rate* Even here, 
though, encouragement of exploration is very much in the national interest. 

An analysis of the potential effects of price increases on 
demand in the context of alternative pricing policies is presented in 
Appendix C. 

CONCLUSIONS AND RECOMMENDATIONS 
Conclusions 

The following conclusions are draxm as a result of thi s study: 

(1) A comprehensive analysis of the impact of Landsat 
operational pricing policy will require more complete 
knowledge than currently exists regarding: 

(a) Potential usage and market demand 

(b) Expected product mix (visual imagery 
vs CCT) 

(c) Price elasticity relationships. 

(2) The pricing policies currently in effect among the 
Federal agencies vary widely x^ith regard to the 
portion of total cost xizhich is recovered from users. 
Precedents may be found for virtually any policy 
from full cost recoverj’* to free service. 

(3) The Landsat operational system appears to have 
public service characteristics more in common 
Xi7ith Federal information service activities [NOAA 
(weather) and the Government Printing Office] than 



33 


with other Federal activities providing goods and 
services on a cost recovery basis* 

(4) Current knowledge of future market requirements 
and demand strongly suggest that there will not 
be sufficient revenue to recover direct user 
costs without substantial increase in CCT 
sales volume. If NASA x^ishes to justify the 
Landsat operational system as a Federal infer*- 
mation facility, there are several precedents. 

Recommendations 


Although the recommendation of a particular pricing policy is 
beyond the scope of this study, the analysis indicates that the opera- 
tional pricing policy should be structured, in general, to stimulate 
the use of computer-compatible tapes (CCTs) * The CCTs have the potential 
of aiding the development of nex7 applications because of the higher quality 
of the product, and x^ill probably result in higher revenue generation. 

To provide a firm rationale for the development of an operational 
Landsat pricing policy, more comprehensive information is needed in several 
areas to refine the current estimates of future market volume and product 
mix. Specifically, further studies are recommended to provide more com- 
plete information with respect to: 

(1) The actual application of Landsat data by end users 

(2) The total costs of using Landsat data in various 
applications, and the user's budget structure 

(3) The compatibility of projected Landsat technology 
with user requirements in each application area, 
and alternative data sources 

(4) The future price/volume relationships for 
computer-compatible Landsat products 

(5) The pricing and user service mechanisms 
for building the market to a size that x^^ill 
support an operational system. 



34 


If NASA intends to compare the operational Landsat to other 
Federal public service activities, further efforts should be directed 
toxjard demonstration that the benefits of Landsat are large and diffuse, 
and that cost recovery from the immediate user xjill be difficult and 
will tend to inhibit broader use of the system. 

If NASA wishes to pursue cost recovery policies which will 
recover significantly more than direct user costs, further work must 
be directed toward demonstration of sxgnif iciantly larger volume 
which will be required to make the system self-supporting. 



35 


REFERENCES 


(1) "A Cost-Benefit Evaluation of the Landsat Follow-On Operational 
System", Goddard Space Flight Center (March 1977), pp 2-6. 

(2) Telephone conversation with Howard Brister of Seiscom-Delta 
Corporation, Houston, Texas, September 1977. Seiscom-Delta is 

a geophysical exploration company which has developed proprietary 
software for processing Landsat data tapes. 

(3) "Landsat ’s Role In An Earth Resources Information System", Report 
to the Congress by the Comptroller General of the United States 
(June 10, 1977). 

(4) "Earth Resources Survey Benefit-Cost Study, Appendix 5, An Analysis 
of Costs and Benefits from Use of ERS Data in state Land Use 
Planning", Earth Satellite Corporation and Booze-Allen Applied 
Research Corporation for the U.S. Department of the Interior/ 
Geological Service (November 22, 1974), p 114. 

(5) "Outside User Cost Reimbursement Policies of Selected Federal 
Agencies", R. F. Porter and R. W. Earhart, Battelle Columbus 
Laboratories, BMI-NLVP-IM-74-9 (September 26, 1974). 


Additional references supporting the market analysis are located in 
Appendix A. 



36 


BIBLIOGRAPHY 


Goedeke, A* Donald, and Tuyahov, Alexander J,, ^’A Summary of the Users 
Perspective of Landsat-D and Reference Document of Landsat Users”, 
Prepared by the Office of User Affairs, Office of Applications, National 
Aeronautics and Space Administration (January 31, 1977). 

Food and Agriculture , A Scientific American Book, W. H. Freeman and 
Company, San Francisco (1976). 

"Landsat Role In An Earth Resources Information System", Report to 
the Congress by the Comptroller General of the United States (June 10, 
1977) . 


Resource Sensing from Space: Prospects for Developing Countries , Report 
of the Ad Hoc Committee on Remote Sensing for Development Board on Science 
and Technology for International Development, Commission on International 
Relations, National Research Council, National Academy of Sciences, 
Washington , D . C . (1977 ) . 

"United States Benefits of Improved Worldwide Wheat Crop Information 
from a Landsat System", Final Report from Econ, Incorporated to the 
National Aeronautics and Space Administration, Office of Applications, 
(Revised January 31, 1976). 

Wolf, C., Jr., Harris, W. R., Klitgaard, R. E., Nelson, J. R., and 
Stein, J. P., "Pricing and Recoupment Policies for Commercially Useful 
Technology Resulting from NASA Programs", from Rand to National Aero- 
nautics and Space Administration (January 1975) . 


Practical Applications of Space Systems , The Report to the Space Appli- 
cations Board of the Assembly of Engineering National Research Council, 
National Academy of Sciences, Washington, D.C. (1975). 

"Supporting Paper 3: Land Use Planning" 

"Supporting Paper 4: Agriculture, Forest, and Range" 

"Supporting Paper 5: Inland Water Resources" 

"Supporting Paper 6: Estractable Resources" 

"Supporting Paper 7: Environmental Quality". 


"An Assessment of Private Sector Aerial Survey Capabilities", from 
Applications Aircraft Support Program Office to National Aeronautics 
and Space Administration, Ames Research Center (February 1974) . 



^7 


APPENDIX A 


POTENTIAL MARKET DEMAND FOR AM) PRICE 
SENSITIVITY OE LANDSAT DATA 




APPENDIX A 


POTENTIAL MARKET DEMAND FOR AND PRICE 
SENSITIVITY OF LANDS AT DATA 


The potential market for Landsat was developed for several 
major applications and end users by constructing data-use scenarios to 
determine future data requirements. The applications investigated included 
geology and mineral exploration, agriculture, state land use planning, 
foreign government cartography, U.S. Federal Government cartography, and 
an all other uses category. Information was collected from recent studies 
contracted for by Federal agencies, and by personal contact with various 
end users, data centers, equipment suppliers, and others active in the 
remote sensing community. 

Summary of Market Requirements and Product Mix 

Table A-1 summarizes the potential market requirements by 
user sector. Potential demands for major Landsat applications are developed 
individually later in this Appendix. 

TABLE A-1. REQUIREMENTS 

BY SECTOR 


Sector 

Scenes /Year 

Private 

39,796 

Foreign Governments 

10,076 

U.S. Government 

9,868 

Academic 

4,798 

State Government 

816 


65,354 


The product mix for the applications investigated x^^ill be 
more heavily oriented toward computer-compatible products or enhanced 
imagery than the current EROS Data Center mix, x<?hich is oriented tox^ard 
visual images. Both visual and CCT (computer compatible tape) products 



A-2 


will remain significant to specific markets. The CCT scene is derived 
directly from the high-density Landsat source data tape, and represents 
a significantly higher quality level than the visual imagery reconstructed 
from the source data tape, made into a master, then recopied. Because of 
the much higher spectral quality of the CCT, a typical geological explore-- 
tion use of Landsat data is to purchase black and white transparencies 
(which have higher specral quality than the comparable color composite) 
in three of the four Landsat bands, examine the transparencies for linea- 
ments and other features, and then order CCT data of particular scenes 
of interest to obtain greater detail, if required. 

The cost of an enhanced CCT image available through a geo-- 
exploration consulting firm is approximately $2000* per scene. The 
capital investment required to produce enhanced imagery from CCTs is 
about $250,000, plus the support of a highly skilled staff. It is, 
therefore, likely that the major exploration users would invest in equip- 
ment and staff to perform CCT enhancement in house, while the smaller 
users would probably turn to consultants to obtain the required enhanced 
imagery. Both situations indicate increased use of computer data products. 
The EROS Data Center at Sioux Falls, South Dakota, is planning to offer 
enhanced imagery shortly as part of the standard product line. The product 
mix will, at that time, consist of visual imagery, CCT, and enhanced CCT 
in either visual or computer -us able format, 

A 15,000 scene per year projection for agriculture use will 
almost certainly be computer compatible because of both the volume of data 
to be handled and the timeliness of data required in crop forecasting. 

The system envisioned in agricultural applications would utilize direct 
computer input to perform the required analysis of crop yield, disease, 
drought, and other factors automatically without visual intervention. 
Cartographic applications may make use of either visual or 
automated data. Automated imagery, however, will achieve cost advantages 
in Level I and Level II applications (1:63,500 scale and smaller) because 
certain labor intensive cartographic applications required in developing 
land use maps can be automated. The projection in land use planning and 
cartographic application indicates a mix of automated and visual products . 


* All dollar values in this Appendix have been converted to 1976 dollars. 



Ub 

A-3 


Other uses will grow as improved Land sat products become 
available (e,g*, higher resolution). These applications may be based 
at least initially on visual imagery, but computerization is likely in 
some applications. Plant site location studies and environmental moni- 
toring are examples of this category of use. 

Estimates of product mix for the various user sectors are 
presented in Table A-2. Because of the effect of product mix on revenues, 
it IS important to emphasize that the direction and needs of each particular 
market sector, the developing base of user technology, the projected 
advances in the Landsat operational system and data center capabilities 
all impact the product mix as well as the overall market size. Exhaustive 
treatment of these variables is outside the scope of the current study, 
but deserves further attention in future efforts. In order to determine 
effects of the product mix on revenue projections, the mix projected in 
Table A-2 is examined in the report as well as both extreme cases of a 

highly CCT-loaded mix and a highly image-loaded mix. The analysis pre- 
sented in the report indicates the relative sensitivity of mix on 
revenue projections. 


TABLE A-2- PRODUCT MIX PROJECTIONS 



Sector 

Scenes /Year 
Imagery 

Scenes /Year 
CCT 


Private 

26,497 

13,299 

Foreign 

3,978 

6,098 

U.S. Government 

3,873 

5,995 

Academic 

3,838 

960 

State Government 

545 

271 

Total 

38,731 

26,623 


The mix of Landsat imagery from the EROS Data Center has averaged 
20 percent color products, and 80 percent black and white products. To 
cover a scene in three spectral bands requires one color frame, or three 
black and white frames. Applications such as geoexploration heavily 
utilize the black and white single spectral band product to obtain a 



A-4 


greater degree of spectral resolutxon than is available with the color 
composite > with typical purchases being three black and white frames (spectral 
bands) per scene. Applying this to the above market projections yields: 

Imagery Type Frames Required Annually 

Color Landsat 7,746 

B 6f W Landsat 92,954 

Computer Products 26,623 

In order to compare this with the existing market for Landsat products, 
adjustments are required. Computer products must be converted to equivalent 
frames (at four frames, or bands, per CCT scene), and the color products 
must be converted to equivalent frames (at three frames per color scene) . 

With these adjustments, the demand in equivalent frames shown in Table A-3 
can be expressed* 


TABLE A-3* DEMAND PROJECTION IN EQUIVALENT FRAMES 



Scenes /Year 
Sector Imagery 

Scenes/Year 

CCT 

Equivalent 
Total Frames 


Private 

26,497 

13,299 

132,687 

Foreign 

3,978 

6,098 

36,326 

U.S* Government 

3,873 

5,995 

35,599 

Academic 

3,838 

960 

15,354 

State Government 

545 

271 

2,719 

Total 

38,731 

26,623 

222,685 


The projection in Table A-3 is compared to 1976 demand in 
Table A-4. The computer tapes sold during FY 1976 are converted to 
frames at the rate of four frames per tape, as a basis of comparison. 



iji 'I' 

A-5 


TABLE A-4. PROJECTION COMPARED 

WITH EXISTING DEMAND 



Projected 

Frames 

Fiscal Year 

1976 Frames 

Sector 

Quantity 

Percent 
by Sector 

Quantity 

Percent 
by Sector 


Private 

132,687 

59.6 

61,361 

24.0 

Foreign 

36,326 

16.3 

66,474 

26.0 

U . S . Government 

35,599 

16.0 

97,154 

38.0 

Academic 

15,354 

6.9 

28,123 

11.0 

State Government 

2,719 

1.2 

2,557 

1.0 

Total 

222,685 

100,0 

255,669 

100.0 


One conclusion to be dra^m from the analysxs is that a dramatic 
increase in Landsat imagery sales is not indicated for the operational appli- 
cations studied, but an increase in quality level of desired products should 
occur, resulting in increased revenues as the market converts to a more 
expensive product mix, as discussed in the revenue projections below* 


Requirements by Application 

— y 

Geology - Petroleum And Mineral Exploration 

The geological exploration community has made significant use 
of Landsat data during the short time the data have been available, having, for 

/a *1 \ j- 

example, purchased an estimated $800,000 ^ ^ worth of imagery in the 

form of visual data and computer compatible tapes during 1976, The 

information is valued in the community because of the synoptic view 

afforded in its small-scale imagery (1:3,369,000 and 1:1,000,000) which 

(A-2) 

allows the detection of certain geological features. A recent study 
has indicated benefits to the exploration community of the order of 
$91 million annually, based on cost savings in geological and geophysical 
exploration operations afforded by the Landsat information. 


* References, denoted by superscript numbers, are at end of Appendix A. 



A-6 


To bound the market for geological exploration, it is reasonable 
to consider the land area of the Earth as an upper limit on desired area 
of coverage, together with the continental shelf areas of the x 7 orld, 
considering the recent increase in offshore drilling activity. The land 
area is about 57.5 million square miles, and the shelf area (to a total 
depth of about 600 feet) is about 5 percent of the total world surface 
or about 9.6 million square miles. Geologists have expressed the need for 
multiple views of the same area for seasonal (especially foliage variation) 
analysis, and sun angle variations which provide additional geological 
information. Assuming two seasonal coverages with two varied sun angles 
(or four seasons, which may also provide the varied sun angle coverage), 
the equivalent area to be sensed would be 67.1 million square miles x 
4 exposures, or an equivalent 268.4 million square miles. 

Once complete coverage of this equivalent area is obtained by 
a geological user, no further requirement would exist until improved 
coverage became available (e.g., different spectral bands, stereo views, 
better resolution, and so on). Assuming that a given spacecraft would 
last 10 years in an operational configuration, new equipment and capa- 
bilities would be added at 10-year intervals. The 268.4 million square 
miles would be re-imaged at 10-year intervals with the new capability. 

An average of 26.8 million square miles of imagery per year would 
be purchased by a user during the 10-year interval under this scenario. 
With a Landsat scene representing a nominal 100 x 100 square miles, the 

number of scenes purchased would be 2680 annually. An estimated eight 
(A-4) 

companies , currently using Landsat data, represent potential users 

of this volume of information, based on the scope of their exploration 
operations. The total annual market for these companies is about 21,400 
scenes. In addition to the major companies, an estimated 5,400 scenes 
would be purchased by smaller companies and exploration consultants, 
bringing the total market to 26,800 scenes annually. 

Wheat Crop and Corn Crop Forecasting 


The implementation of a worldwide crop-forecasting system has 
been the subject of various studies in recent years. Based on a study 



A-7 


released in March 1977, by Goddard Space Flight Center the annual 

benefits occurring from agrxcultural crop information would minimally 
be $294 million on the basis of monitoring worldwide wheat and corn 
crops alone. The analysis presented below concentrates on the imagery 
required on an annual basis to accomplish these benefits, with resultant 
market projections for Landsat data. 

It should be emphasized that the market projections assume the 
existence of a technology which is within the resolution and data 
frequency requirements of end users, and which has been successfully 
applied to crop identification, disease monitoring, yield projections, 
and related applications critical to the data users. 

Total planted acreage of wheat and corn worldwide (1969- 

1971 average) is: 


Area (Millions 

Crop of Hectares) 

Wheat 214,4 

Corn 109.5 

Expressed as square miles, the total planted area is: 

2 

323.9 million hectares x .00386 mi /hectare = 1,250,254 square miles 

This represents the area, from a worldwide consideration, that would be 
useful to monitor during the growing season. 

(A-7) 

The above crops have an average growing season of 5-6 months ^ ^ 

If Landsat imagery were obtained for each complete Landsat cycle, about 
once every 2 weeks, then coverage would be obtained 12 times during the 
growing season. The total effective square mileage to be covered equals 
12 X 1,25 million square miles, or 15 million square miles annually. 

Assuming an efficiency factor of 30 percent in desired area per 
scene to total area covered for agricultural purposes, total data require- 
ments would be 5,000 scenes per year, based on a nominal 10,000 square 
mile scene. The data rate for the required system would average about 
14 scenes per day, and would not exceed 28 scenes per day even if the 
total world average were planted simultaneously, say, for example, 
near the end of the northern hemisphere growing season, and the beginning 



L\h 

A -^8 


of the southern hemisphere growing season. This is within the bounds 
of the system required to deliver the benefits described in the Goddard 
study, which was sized to accommodate 80 scenes per day. 

Considering the market for agricultural imagery, one complete 
set would be acquired by USDA, and one set would probably be acquired by 
the various countries of the world in combination (each country purchasing 
data on at least its agricultural conditions). It is apparent that, 
with substantial monies tied up in the commodity markets, at least 
one other full set would likely be purchased by the private sector to 
provide proprietary forecasted commodity information. Overall, the market 
for Landsat frames in agricultural use is on the order of 3 x 5000 scenes, 
or 15,000 scenes per year. 

State Governments - Land Use Planning 

A 1974 study performed under contract to the U.S. Geological 
Survey projected aerial data acquisition by state governments at 3.4 million 
square miles per year during the period 1977-1986.^'^ The projection 
is based on a mix of spacecraft and aircraft data to fill state land use 
planning data requirements. 

State data requirements for land use planning can be grouped into 
three scale ranges; coarse (1:500,000 scale), moderate (1:125,000 scale), 
and fine (1:24,000 scale). The most compatible scales for spacecraft data 
products are coarse and moderate, with fine-scale data needs satisfied by 
aircraft surveys. Some overlap of spacecraft and aircraft data acquisition 
will occur both in utilization of spacecraft to obtain a broad perspective 
of which parts are re-acquired with larger scale aircraft imagery, and in 
the utilization of aircraft data to provide truthing for the spacecraft 
imagery . 

Different states have varying mixes of data requirements on 

(A-9) 

the basis of percent of data acquired in coarse, moderate, and fine scale 
Further analysis of the U.S. Geological Survey study results shows the 
3,4 million square mile data acquisition projection to be divided 
into 1.6 million square miles (47 percent) of fine scale imagery, and 
1.8 million square miles (53 percent) of moderate and coarse scale imagery 
annually. Landsat data would be acquired primarily to meet coarse , and 



A-9 


wxth some aircraft assistance, moderate scale requirements. The fine 
scale imagery would be flown primarily by aircraft at an altitude of 
12,000 feet. Projecting the 1.8 million square miles as primarily 
spacecraft compatible, the market for Landsat data is 180 scenes annually, 
each scene covering a nominal 100 x 100 mile area* Assuming a 50 percent 
efficiency in area per scene to desired area of coverage, the state 
government Landsat requirement is 360 scenes annually for the period 
1977 through 1986. 

The unit cost of data acquisition depends on the scale of the 
imagery. Three categories of data have the following costs per square 

Aircraft Data Landsat Imagery Landsat CCT 
14 . 65 

5.27 1.62 1,72 

4.94 0.30 0.79 


mile: 


(A-10)* 


Scale 

1:24,000 

1:125,000 

1:500,000 


The costs include all operations from data acquisition through development 

of a usable product from the raw data. In the case of aircraft data, 

standard cartographic operations are included. In the case of Landsat 

computer-compatible tape data, fieldwork, data acquisition, reformat, 

computer rectification, and classification are included as well as 

cartography. The data in the tabulation presented above, therefore, 

represent the complete cost of generating the end product, and provide a 

basis for comparing various products. Since the current study addresses 

primarily the market for Landsat products, and resultant price sensitivity, 

it is useful to examine the Landsat data component of the above costs of 

(A-ID* 

data acquisition. These costs are shown below : 


Scale 


Information 

Cost/Mi^ 


Landsat Data 
Data Type Cost/Mi~ 


Data Cost/ 
Information Cost 
(Percent) 


1:250,000 $1,622 

1:500,000 $0,298 

1:250,000 $1.72 

1:500,000 $0.79 


Imagery 

Imagery 

CCT 

CCT 


$ 0,001 

$0,001 

$ 0.02 

$ 0.02 


0.1 

0.3 

1.2 

2.5 


* Cost data from References (A-10) and (A- 11) are assumed to be in 1974 dollars. 



A-10 

These data refer to developing products which are equivalent to Anderson 
(1972) Level I and Level II products, for application in state land use 
planning ♦ The data provide a guideline for price sensitivity of the 
Landsat data cost to total information acquisition cost. As an example, 
in the case of a 1:500,000 CCT product, the data cost is 2.5 percent of 
the Anderson Level I product cost* Therefore, if the Landsat CCT price 
were to be increased 100 percent, the overall product cost would be 
increased 2.5 percent* In the discussion on price sensitivity, below, 
this relationship is applied to develop elasticity considerations. 

Foreign Governments - Cartography 

In 1974, annual expenditures worldwide on surveying and mapping 
were $4*2 billion or about 0.1 percent of world GNP.^^ Excluding the 

U.S., world national cartogrpahic agencies spent about $243 million on 
base maps, including aerial photography and geodetic extension. 
Expenditures x<rere distributed by region as follows: 

Expenditure 
(Thousands of 

Region 1976 Dollars) 


Africa 

$ 12,123 

North America (Excluding U.S.) 

33,412 

South America 

11,952 

Europe 

140,933 

Asia 

6,860 

Oceania 

37,779 

Total Foreign 

$243,059 


Primary data acquisition is estimated to be 15 percent of these 

expenditures, or approximately $36.5 million* In the U.S., primary data 

acquisition was an estimated $10 million of which about $5.7 million was 

(A-14) 

spent on aerial photography. Applying this ratio to the foreign sector 

yields expenditures on aerial photography of approximately S20.8 million. 


U.S. expenditures estimated at $67 million. 



A~ll 


Of the covered area, approximately 58 percent was mapped at 

scales smaller than 1:50,000* Assuming that imagery of future Landsat 
systems can attain resolutions suitable for small-scale mapping (e.g., 
an improvement to 1:100,000 over the current 1:1,000,000), this would 
represent the maximum share of the aerial photography market available 
to Landsat* Thus, the small-scale foreign market available to Landsat 
scales of 1:50,000 and smaller is about 58 percent of the expenditures 
on aerial photography, or about $12*1 million per year. 

In 1970, the annual rate of aerial photography coverage was 
4.4 percent, while the rate of new or updated mapping during the period 
1968-1974 grew at an annual rate of 1.3 percent . Mapmaking activity 

is not currently data- input limited, but is limited by geodesy, cartog- 
raphy, reproduction, and other related activities. With this, it appears 
unlikely that the market for primary data such as aerial photography x^ill 
increase significantly unless the rate of mapmaking activity, a function 
of economic development and population growth, increases considerably. 

Exclusive of the United States, the world land mass covers 
about 54 million square miles. With a data acquisition rate of the 
current annual 4.4 percent, about 2.4 million square miles are covered 
each year. A nominal 100 x 100-mile Landsat scene covers 10,000 square 
miles. Assuming an efficiency of 50 percent in area covered by a given 
scene to desired viex^ing area, the total foreign market for mapping 
activities would be approximately 480 scenes per year. It is recognized, 
however, that 42 percent of the mapmaking activity is directed at scales 
larger than 1:50,000. Assuming that resolutions are developed which will 
allow Landsat to be used in cartogrpahic activities involving scales of 
1:50,000 and smaller, Landsat could compete for about 58 percent of the 
market, or about 278 scenes per year. It is unlikely that ERTS data will 
ever replace aircraft data in applications larger than 1:50,000 scale. 

U.5. Federal Government - Cartography 

In 1972, Federal agencies spent S5.7 million on aerial 
photography to support mapping and interpretation of about 600,000 


hi- -7, mr 



50 

A-12 

square miles, The expenditures do not include some $2.8 million 

expended by NASA to support Earth observation activities. The majority 
of data was obtained by the Government, under contract with private 
aerial survey firms, with the exception of the Corps of Engineers, 
the Forest Service, and the National Ocean Survey, which utilize their 
own aircraft. 

Total Federal expenditures in 1972 on mapping, charting, and 

geodesy were $419 million, with an additional $196 million spent on geologic 

investigations related to mapping and geodesy. Expenditures for mapping, 

('A-19) 

charting, and geodesy by agency are as follows: 


Agency 

Expenditure 
(Millions of 
1976 Dollars) 

Percent of Total 
by Agency 

Department of Defense 

$126 

30.1 

Department of Interior 

105 

25.1 

Department of Agriculture 

28 

6 . 6 

Department of Commerce 

63 

15.0 

Department of Transportation 

23 

5.5 

Department of HUD 

23 

5.5 

Other Agencies 

51 

12.2 

Total 

$419 

100.0 


Expenditures on aerial photography can be assumed to be proportional. 

Almost all of the data collected were acquired at altitudes of 
5,000 feet to 40,000 feet, indicating a maximum scale of 1:50,000. It 
should he noted that Landsat resolutions are currently generally compatible 
with map scales typically no larger than 1:500,000 though improved 

resolution of future Landsat systems is assumed for purposes of this 
analysis to be acceptable for the small scale (1:50,000 and smaller) 
portion of the market currently serviced by aerial photography. Assuming 
a similar pattern to world photographic coverage, the market for 1:50,000 
scale and smaller is about 58 percent of the total market for all scales, 
indicating about a $3.3 million U.S. Federal market for Landsat products. 
Landsat imagery is not expected to compete in scale ranges larger than 
1:50,000. To support Federal mapping and interpretation activities, 



A-13 


Landsat could be expected to satisfy requirements for no more than 
58 percent of the current 600 ^ 000-square mile annual demand, since about 
42 percent of the mapping activity requires scales larger than 1:50,000. 
This would indicate a total Federal Government market for cartographic 
applications of 348,000 square miles, or 35 Landsat scenes annually. 
Assuming that each scene provided 50 percent of the area required for 
data acquisition, the market would be about 70 scenes per year. 


Other Remotely Sensed Data Applications 


The markets discussed above are currently the major projected 
users of Landsat. There are many smaller projected uses of spacecraft 
data which, taken together, represent a significant Landsat market. 
These uses include many additional applications in the government and 
private sectors. 

Applications undertaken by Federal agencies include: 


• Agriculture 

o Hydrology 

6 Environmental/ 
Ecology 

9 Oceanography 


- Forest and soil classification, inventories 
and mapping; and forest range and grassland 
management 

- Water quality; reservoir mapping and monitor- 
ing; snowfall and runoff estimates; flood 
damage assessments; and irrigation management 

- Wildlife habitat; surface mining monitoring; 
coastal zone, and critical areas 

- Ocean current monitoring; iceberg and sea 
ice monitoring; and ocean resources. 


Applications in state and local governments in addition to land 


use planning and agriculture include: 

• Strip Mine Monitoring 

• Water Monitoring System and 
Wetland Inventories 

9 Other Hydrological Studies and 
Irrigation Studies 

e Soil Association Maps 

Water Quality Monitoring 

Coast and Near-Shore Process 
Studies 


• Ice Monitoring 

• Wildlife Habitat and Rangeland 
Studies 

• Geothermal Source Locations 

• Mineral Exploration 

• Tectonic Studies . 


Q 



Indus trxal users of Landsat data, in addition to geology and 
agriculture, include applications in the following areas: 

• Power plant sitings 
0 Timber monitoring 

• Land use inventories 

• Construction activities, 
such as soil mapping. 

Foreign governments, in addition to applications in agriculture, 
geology, and cartography, have indicated interest in other Landsat appli- 
cations such as snow melting, grassland monitoring, coastal zone pollution 
monitoring, and flood damage assessment. 

A recent Battelle study addressing current user markets indicated 

relative discipline interest of all classes of users as 65 percent in a.gri- 

(A-22) 

culture, land use, and geology, and about 35 percent in other uses. 
Extrapolating this relationship to the agriculture, land use, and geology 
markets pro3ected in the above discussion indicates an all-other-use 
market of about 22,846 scenes per year. 

Requirements by Sector 

The majority of the projected applications discussed above are 
associated with specific market sectors, as indicated in Table A-5. 


TABLE A-5. ASSOCIATION OF APPLICATION WITH 
SPECIFIC SECTOR 


Scenes per Year for Indicated Sector 

Foreign U.S. State 

Application Private Govt. Govt. Govt. Academic 


Geology - Exploration 

26,800 

— 

— 

— 

— 

Agriculture 

5,000 

5,000 

5,000 

— 

— 

State Land Use Planning 

— 

— 

— 

360 

— 

Foreign Cartogrpahy 

— 

278 

— 

— 

— 

U.S. Federal Cartography 

— 

— 

70 

— 

— 

Total (Less ”Other”) 

31,800 

5,278 

5,070 

360 

0 



A-15 


Using the Battelle survey results to allocate the all -other category to 
various tnarket sectors, the followxng results are obtained: 



Sector 

Private 

Foreign 

Govt. 

U.S. 

Govt . 

State 
Govt . 

Academic 

Total 

(Less Other) 

31,800 

5,278 

5,070 

360 

0 

Other 


7,996 

4,798 

4,798 

456 

4,798 

Total 


39,796 

10,076 

9,868 

816 

4,798 


Price Sensitivity of Landsat Data 

Historical Price/Quantity of Data Sales-ERQS Data Center 

Review of EROS Data Center published price information for the 
period 1971 through 1977 indicates the following pricing history: 


Price Per Published Price Sheet 



Product 

Dec . 6 , 
1971 

May 1, 
1973 

Sept. 1, 
1974 

Aug. 1, 
1975 

Jan. 1 
1977 

1:3,369,000 

Film Positive, B&W 

$2.50 

$2.50 

$2.00 

$3.00 

$8.00 

1:3,369,000 

Film Negative, B&W 

2.50 

2.50 

2.00 

4.00 

10.00 

1:1,000,000 

Paper, B&W 

1.75 

1.75 

2.00 

3.00 

8.00 

1:1,000,000 

Paper, Color 

7.00 

7.00 

7.00 

7.00 

12.00 

1:1,000,000 

Film Positive, B&W 

3.00 

3.00 

3.00 

5.00 

10.00 

1:1,000,000 

Film Positive, Color 

7.00 

10.00 

12.00 

12.00 

15.00 

1:1,000,000 

Film Negative, B&W 

3.00 

3.00 

3.00 

6.00 

10.00 

Computer Compatible Tapes 


160.00 

200.00 

200,00 

200.00 


The dollar volume 

of Landsat 

imagery 

sales at the 

data center 


during the period Fiscal 1973 through 1977 is shown in .the following table 
together with the number of frames of imagery sold: 


Fiscal Year 

Transition '77 

'73 '74 '75 '76 Quarter (Pro.j ected) 


Landsat Imagery 

Frames 81,071 157,178 195,125 246,449 50,804 150,000 

Dollars 

(Current Year) $228,042 $528,514 $760,263 $1,237,862 


$274,229 


$1,161,000 



Converting this to an average price per frame in 1976 constant dollars 
yields ; 


Fiscal Year 

Transition 



'73 

'74 

'75 

'76 

Quarter 

'77 

Average Price /Frame 

$2,81 

$3.36 

$3.89 

$5.02 

$5.39 

$7.74 

Constant 1976 Dollars 

$3.62 

$3.89 

$4.12 

$5.02 

$5.39 

$7.35 


The average prices indicate the effect of product mix and price 
in effect which historically has been about 20 percent color imagery to 
80 percent black and white imagery. Average prices are useful in pro- 
jecting price/volume considerations, since they represent the average 
price in effect of the particular mix of products sold each year, and also 
average product prices as a result of price sheet changes during the year. 

Price Sensitivity of Imagery 

Plotting constant dollar average prices against number of images 
sold yields the relationship shown in Figure A-1. 

Generally, definite conclusions on price elasticity cannot be 
dram for a product until the market has achieved a steady-state condition. 
The early years of Landsat data sales through 1975 do not yield representa- 
tive price-demand relationships, since the market was too immature to 
achieve the steady-state volume indicated at the specific price levels 
in effect. By late 1975, it is hypothesized that the market began to 
gam sufficient experience with Landsat imagery to determine relative 
value of the products offered with respect to applications. Through 
1976, demand began to equalize, and has followed the curve postulated in 
Figure A-1 through 1977, Supporting the theory that the data since 1976 
represent an elasticity phenomenon, is the proximity to which the price/ 
volume relationship for imagery approaches a constant budget line. To 
the extent that users continue to follow the particular relationship 
sho™ in Figure A-1, revenues from Landsat imagery should remain relatively 
stable showing little growth or decline within the price range indicated 
in Figure A-1. As new applications for imagery are developed, the curve 
should shift to the right, indicating a greater demand for products at 
a specific price level. Similarly, as higher quality products become 



Price/ Frame ($1976) 






available (better resolution, spectral quality, enhancements, and so 
on) , the curve will shift upward to reflect the increased value of such 
products. 

The extent to which the data from 1976 on represent an elasticity 
phenomenon is dependent on several factors requiring further study. It 
is possible, for example, that the price- volume relationship indicated 
in Figure A-1 is not causal in nature. Volume may, as an example, have 
fallen since 1976 solely as a result of market saturation for imagery, as 
in the case of geologists already having purchased required data on major 
areas of interest before 1976. Concurrent with this, EROS Data Center has 
been adjusting prices to reflect costs, per 0MB directives. The combina- 
tion of events yields the relationship of Figure A-1, but does not represent 
an elasticity phenomenon. Current users may not have reacted to price, 
they simply may not have needed more data, regardless of price. An up to 
date survey of two or three principal markets for Landsat data would be 
necessary to provide further insight into existing relationships between 
price, volume, and product utility. 

Price Sensitivity of Computer-Compatible Products 


A discussion with a private geoexploration consultant showed 
the following relationship between cost elements in generating an enhanced 
image on a 100 x 100-mile scene from a computer-compatible .Landsat 
tape (CCT) : 


$ 200 
100 
440 
'550 
880 
1100 
28 


Landsat data tape 
Set-up charge for Landsat tape 
100 meter"^ 


80 meter 
50 meter 
40 meter 
Color correction 


> Enhancement charge 


35 /hundred - Tape record charges; 1900 required 
for 100 X 100-mile scene 

120 - 8^’ X 10” 1 

325 - 24" X 32" 



57 

A-19 


Discussxons with major firms in the remote sensing service 
industry support these figures. Typical fees are $2200 for a 100 x 100- 
mile Landsat scene converted to an enhanced apparent 40-meter-resolution 
visual product. 

Assuming a constant budget for enhanced product expenditures, 
users would purchase 50 percent less if the price of the enhanced image 
doubled. Since the Landsat data represents about 10 percent of the cost 
of generating enhanced products, the sensitivity to volume on the basis 
of computerized Landsat data cost can be represented as: 


where 


V 


V 

o 


2200 \ 





= (2000 + C) , 


or 


where 

V = the volume of enhancements sold 
(or demand for input CCT data) 
at price Pl 

1 

P = the price of the enhancement 

V = the volume of enhancements sold 

^ at $2200 per image 

C = the cost of a Landsat data tape, 
currently $200, 


V = V 


2200 


C + 2000 


Illustrating the sensitivity of volume to input data tape cost, 

JL = 2200 

V 2000 + C 
o 

If C were raised by a factor of 10, demand would decrease 45 percent. 
Tabulating this relationship yields: 


Data Tape Cost 

Demand V/V 
(Percent) ^ 

$ 0 

no 

200 

100 

500 

88 

1000 

73 

2000 

55 

2500 

49 



A-20 

These results are treated parametrically in revenue projectxons below. 

The data and relationships derived above are based on analysis 
of one Landsat data application, the generation of enhanced visual 
products from raw computer*^compatible tapes. Further, the constant 
budget assumption of market behavior is limited, due to the scope of 
the current study. It is felt, however, that the relationships developed 
illustrate that the CCT is only one element of cost in generating the 
end product, and that similarly, most applications of computerized data 
will involve significant expenditures to obtain the desired product 
over and above the cost of the raw data. The end result is that computer- 
compatible product demand has much lower sensitivity to price than 
visual products. Further efforts should be directed toward identifying 
and analyzing specific computer-compatible products applications within 
several market areas to quantify the relationship between CCT cost and 
overall cost of data preparation and utilization. Relative benefits 
derived from the use of the information and the relative value of com- 
peting sources of information and complementary data inputs also require 
additional study. 

Price Sensitivity for State Land Use Applications 

In June of 1977, testimony was given by Joe D. Tanner, Comm- 
issioner of the Georgia Department of Natural Resources, to the Subcomm- 
ittee on Space, Science and Applications of the House Committee on Science 
and Technology, 

The subject of the testimony was Georgia’s experience in the 
Landsat Technology Transfer Project with NASA. Two phases were involved. 

(1) Phase I, completed in 1976, was to determine the 
feasibility of using satellite-derived land cover 
information for management applications, using 
NASA computers at no cost to the state 

(2) Phase II, in progress, was to transfer the software 
and technology to Georgia and acquire the necessary 
capabilities and techniques. 



5 ‘^ 

k-21 

Georgia, with 60,000 square miles, found that Landsat data 
provided a new capability in repetitive, accurate data which was valuable 
to statewide programs and planning ♦ The Phase II effort was launched 
with the computer resources of the Georgia Institute of Technology, and 
involves the following Federal, state, and local agencies: 

• Division of Natural Resources 

- Water Pollution Branch - non-point source 

» pollution studies 

- Land Protection Branch - solid waste disposal 
site studies 

- Game and Fish Division 

• USDA Soil Conservation Service - land cover trends 

• U.S. Army Corps of Engineers - wetlands studies 

• Office of Planning and Budget - land use studies 

• Georgia Department of Natural Resources 

- Inventory of lakes and ponds 

- Distribution of mines and quarries 

- Fault and lineation studies 

- Sediment plumes 

- Other studies. 

Both imagery and computer products have been utilized, by Georgia, in 
these applications. For purposes of the existing study, cost data on 
the computer products applications are the most significant part of the 
testimony. 

Table A— 6, taken from the testimony, presents four cases of Landsat 
computer tape data to produce maps. The two first cases cover 13,165- 
square-mile areas. The second two cases cover 5, 000- square-mile areas. 

A mix of rectification, ground referencing, and classification schemes 
IS utilized in the examples, with a resulting price-per- square-mile range 
of between $.93 for a fully rectified and maximum likelihood map to $.53 
for an unrectified table-lookup map. The data cost (CCT from EROS Data 
Center) is $.015 per square mile in the first two cases (13,165 square 
miles) and $.04 per square mile in the last two cases. Tabulating 
the data cost of the four cases shoim in Table A-6 yields: 



TABLE A-6, 


y>0 

k-12 

SAMPLE CASES - STATE OF GEORGIA 


(1) 

1 SCENE (A) 

Rectified 

Setup 

$ 700 





Training Sample Selection 

1,984 



(B) 

Maximum Likelihood 

Rectification 

3,970 





Maximum Likelihood 

5,290 



(C) 

Film Writer Output 

1 Map 

300 






$12,244 





or 

$.93/Sq. 

Mile 

(2) 

1 SCENE (A) 

Rectified 

Setup 

$ 700 





Training Sample Selection 

1,984 



(B) 

Table Lookup 

Table Lookup 

3,970 



(c) 

Film Writer 

1 Map 

300 






$ 6,954 





or 

$.53/Sq. 

Mile 

(3) 

5000 Sq^ Miles 





(A) 

Unrectified 

Setup 

$ 700 





Training Sample Selection 

750 



(B) 

Maximum Likelihood 

Maximum Likelihood 

2,000 



(C) 

Color Coded 

1 Map 

200 




Printer /Plotter 


$ 3,650 





or 

$.73 Sq. 

Mile 

(4) 

5000 Sq* Miles 





(A) 

Unrectified 

Setup 

S 700 





Training Sample Selection 

750 



(B) 

Table Lookup 

Table Lookup 

1,500 



(C) 

Color Coded 

1 Map 

200 




Printer/Plotter Map 


$ 3,150 





or 

$.63/Sq. 

Mile 






Case 

Total Cost 
(square mile) 

A-23 

Data Cost 
(square mile) 

Data Cost/Total Cost 
(percent) 

1 

$-93 

$.015 

1.6 

2 

.53 

,015 

2.8 

3 

.73 

.04 

5.4 

4 

.63 

.04 

6.3 


The results are consistent with the data on enhanced imagery, 
discussed above. Since a greater degree of computer time and also 
ground truthing is involved in the state land use applications, the 
input data are an even smaller cost of the end product. On this basis, 
the state land use planning demand for imagery should show from two 
to five times less sensitivity than other demand for computer-compatible 
products . 

It is recommended that further study of state applications be 
made, with emphasis on data cost as a percent of overall cost in various 
application areas. Also, the degree to which budgetary constraints 
impact the amount of data purchased should be investigated. It is noted, 
for example, that the $200 for a computer tape may be highly visible 
as a line item in a state budget, while the other $10,000 in processing 
costs and ground truthing may be less visible. 



A-24 


Appendix A References 


(A-1) Historical sales information, EROS Data Center, Sioux Falls, 

South Dakota, 1977. 

(A-2) "A Cost-Benefit Evaluation of the Landsat Follow-On Operational 

System", Goddard Space Flight Center (March 1977), p 4-4, Table 4-1. 

(A-3) Cotter, Charles H. , The Physical Geography of the Oceans , American 
Elsevier Publishing Company, Inc., New York (1970), Chapter 1, p 25. 

(A-4) Wukelic, G. E., Stephan, J. G., Small, H. E., Landis, L., and 

Ebbert, T. F., "Survey of Users of Earth Resources Remote Sensing 
Data", Final Report from Battelle Columbus Laboratories to National 
Aeronautics and Space Administration, Office of Applications, 
Contract Number NASw-2800, Task 6 (March 31, 1976), pp 33-35. 

(A-5) Goddard Space Flight Center, op, cit,, pp 3-7. 

(A-6) Martin, John H. , Leonard, Warren H. , and Stamp, David L. , Principles 
of Field Crop Production , Third Edition, Macmillan Publishing Co., 
Inc., New York (1976), Chapter 1, p 21, Table 1-2. 

(A-7) Ibid., Chapter 2, pp 37-39. 

(A-8) "Earth Resources Survey Benefit-Cost Study, Appendix 5, An Analysis 
of Costs and Benefits from Use of ERS Data in State Land Use Plan- 
ning", Earth Satellite Corporation and the Booze-Allen Applied 
Research Corporation for the U.S. Department of the Interior/ 
Geological Survey (November 22, 1974), p 157. 

(A-9) Ibid., p 54, Table II-2, p 149, Table IV-2. 

(A-10) Ibid., p 114, Table III-9. 

(A-11) Ibid., pp 113-123, Tables III-IO, III-ll, III-14, III-15. 

(A-12) Brandenberger, A.J., "World Cartography: Study on the Status of 

World Cartography", Volume XIV, Department of Economic and Social 
Affairs, United Nations, New York (1976), p 86. 

(A-13) Ibid., p 85, Table 10. 

(A-14) "Report of the Federal Mapping Task Force on Mapping, Charting, 

Geodesy and Surveying", Executive Office of the President, Office 
of Management and Budget (July 1973), p 133. 

(A-15) Brandenberger, A. J., op. cit., p 81, Table 4. 

(A-16) Ibid,, p 72. 

(A-17) Ideal World Atlas , New Perspective Edition, Hammond Incorporated, 
Maplewood, New Jersey (1971), p 4. 



(A-18) 


k'b 

A-25 

Executive Office of the President, Office of Hanagement and 
Budget, op. cit., p 133, 


(A-19) 

Ibid,, p 

2, Table 1. 

(A-20) 

Ibid., p 

138. 

(A-21) 

Wukelic, 

G, E., op. cit., pp 36, 62, 85-87, 108-109, 119 

(A-22) 

Ibid,, p 

20. 



APPENDIX B 


COSTS FOR THE LAND SAT FOLLOW-ON 
OPERATIONAL SYSTEM 




APPENDIX B 


COSTS FOR THE LANDSAT FOLLOW-ON 
OPERATIONAL SYSTEM 


Cost estimates for an operational Landsat system are provided 

in Tables B-1 and B-2; the data used were derived from information 

published by Goddard Space Flight Center and the General Accounting 
(B-1 B-2)* 

Office. ’ These estimates are referenced to a follow-on system 

sized to process an average of 200 multispectral scanner (MSS) scenes 
and 100 thematic mapper (TM) scenes per day. The user subsystems are 
sized to produce the benefits determined in. the GSFC study. 

Historical costs and a cost stream are shown in Table B-1, 
with costs for Landsat s 1 and 2 grouped together under the years 1972 
and 1975. Landsat C costs are indicated as all occurring in 1978. 

Subsequent spacecraft are assumed to be launched every three years. 

Under the assumption of an average life before refurbishment of every 
three years, an annual average cost is determined in the last column. 

The annual average cost is recast into several categories and 
cumulated in Table B-2. These categories are equivalent to those usually 
discussed in outside user pricing policies of other Federal agencies 
when they provide goods or services for reimbursement. 

There are some differences between the total costs quoted here 
and in the referenced publications. The differences between these 
estimates relate chiefly to differences in methodology rather than to 
differences in physical costs. The GSFC cost-benefit study is directed 
toward estimating initial and subsequent investments and operating 
expenses adequate to produce a benefit stream, and assumes only replace- 
ment of physically worn-out equipment. This study is directed toward 
examining the implications of many pricing policies. 

These pricing policies will consider types of cost recovery 
from a variety of users, both in the Government and private sectors. 

In the range of potential policies, a maximum recovery policy might consider 
the recovery of all costs including the sunk costs in Landsats A, B, and C 
and interest thereon; a minimum recovery policy might consider the effects 




References, denoted by superscript numbers, are at end of Appendix B. 



TABLE B-1, LANDSAT COST STREAM -■ FUTURE PROGRAM IS BASED ON 100 TM AND 200 MSS 
FRAMES PER DAY, LANDSAT 1 AND 2 COSTS IN CURRENT YEAR DOLLARS, 

LATER LANDSAT COSTS IN CONSTANT 1976 DOLLARS IN MILLIONS 


Rescaich and Development 
OL CtipiLai Til vestment 


RefurbJ shmenL for Next S/C 

Spaced a Cl 

Payload 

MS Sc. aimer 

Ground OpeiaLlons 

Reserve 

Inst. Mgmt* System 


l.andsats 
J & 2 

1972 & L975 


188 0 


Landsat 

C‘(“) 


"1978" 


LaiidaaLs 
D & E 
J981 


2J.9 

6*8 

6*5 


25 0 
] 66*0 


5 *^ 

K7 

0 /i 

42 7 


12 


(c) 


AugmonLation 

198/i 


LaiidaaL F -f 
RcCtirbishiiient 
1987 


Annual 
OngoJ ug 
Cost & Amort 
SturcaiTi 



4 7 
]J 5 


L<nmch Vehicle Hardware 
Diiect Launili Services' ^ 

9.0 


1 

1 

6 5<‘'> 




4.0 

2.0 

1 

2 0 

2 0 

3 3 

Operations Costs 

58.0 

21.0 

3 ! 

o ^ 

70«=> 

12 0^°^ 



CJvlJ Servuc 

— 

— 

o 1 

3.3 

2.7 

2 7 

0.9 

Ongoing R&D in Suppoi i oC Opel at Iona J 








SysLeiiiU>) 


— 

1 

CO , 

— 

— 

15.0 

5 0 

'1 racking and Data Acquisitlon/Cround 
Pi ocesslng 

inct 1 

43.0 

1 

f 

1 





T^^DA 



1 

6.0 

4.5 

4 5 

1 .5 

Data ManageiiienL 



J 

30.0 

24 6 

24 6 

8.2 

Civil Set vice 



1 

4.0 

6.3 

22.5 

7.5 

Usd Processing 





1 

1 






— 

FacJlitle** oi b.itJliLles DoprecJatiori 

2.0 

— 

1 

3.0 

— 

7 5 

2 5 

EROS Data Center 

inct 'f 

13 0 

1 

48.0 

48 

48 0 

15.0 

Other Data Cenlers 

inct 'f 

12.0 

1 

1 

22 5 

23.1 

22 5 

7.5 

To L.i 1 s 

261 0 

1J8 7 

1 

I 

_ 1 

189.3 

164.7 

205 8 

63 6 

Aveiage Annual Costs 

43 5 

46 2 




68 6 

68 6 





77. 

1 Avg 




(n) UeCeiencos riOiidsaL^s Role In an Earth Resources In forma Lion System, GAO, June 10, 1977, and A Cost-8ciief IL 
Evaluation of the Latidsal Fo I Low-On Operational System. CSFG, Marcli 1977. 

(b) 8CL estimates of amounts needed to make a consistent, across-the-board cost estimate. 

(c) Division of $82M and $ICM "Mission Unique and Program Management" into amounts consistent with past 
acLivJ ties 

(d) Delta 3910 Hardware cost of $13M for two launches <llvlded between two launch years 
Ce) GSIC estimate of STS costs for WTK; leLcon 18 August 77 

(f) CST'C coLliuntc of JO pci cent rerurbJshiiient oL $47M Landsat augiiientatioii iinJt, $24H every three years 
tor 1 eCurblsliment plus transportation; Telcon 18 August 77. 



TABLE B-2. CATEGORIZATION OF LANDSAT ANNUAL ONGOING COSTS AND 
AMORTIZATION* (CONSTANT 1976 DOLLARS IN MILLIONS) 


COST CA 


EGORIES 


to 
1 — 
to 

o 

tj 


u. 

o 


>- 

q; 


o 

t_j 

Ui 

o' 


to 


00 



h- 

to 


to 

o 

C/) 

O 

o 

o 

O 


o 




Qd 

IlS 

LU 

LU 

h- 

O 

to 

to 

<c 

ID 

>“! 

QC 


to| 

LU 

H- 

1 


o 



LU 

< 


Cd 

:sz 

-U 


o 

< 

CD 

i— 1 

CD 


I— 

< 

ZZl 

72Z 


o: 

< 


LU 



CL 

K 


O 

O 



LU 


Ll. 

Od 


o 




o 





Od 



UJ 



> 



o 

1 


o 

i 


LU 




Cd 


PUBLIC INTEREST 
USER PROCESSING 

DEPRECIATION OF EQUIPMENT 

DATA CENTERS OPERATIONS COSTS 

TRACKING AND DATA ACQUISITION PROCESSING 
T&DA 

DATA MANAGEMENT 
CIVIL SERVICE 

OPERATIONS COSTS - CIVIL SERVICE 

SPACE TRANSPORTATION (1/2 STS/3 YRS) 

REFURBISHMENT OF SPACECRAFT (30% OF INITIAL COST) 

ONGOING R&D IN SUPPORT OF OPERATIONS** 

12 YEARS AMORTIZATION OF INITIAL INVESTMENT IN 
SPACECRAFT (LANDSAT D AND LATER) 

INTEREST ON SUNK COST OF $400M 0 6 % 

20 YEAR AMORTIZATION OF SUNK COSTS (LANDSAT A, B, 


C) 


ANNUAL 

COST 


2.5 

23.5 


1.5 

8.2 

7.5 
0.9 
3.3 
4.7 
5.0 

11 .5 
23.9 
20.0 


CUMULATIVE 

ANNUAL 

COST 

RECOVERY 


0 


26.0 


52.1 


68.6 


112.5 


* NASA/6SFC AND 0MB INFORMATION (COST ASSUMED FIXED REGARDLESS 
OF VOLUME OR PRODUCT MIX) 

** BCL ESTIMATE 


B-3 



bt 

B-4 

of recovering only the costs of the physical media upon which the data 
are to be recorded. Thus, the estimate of a cost does not imply that 
the user charge policy ultimately selected will recover that estimated 
cost. 

The major differences between the estimates of References (B-1) 
and B-2 and the costs derived here are: 

• For the Delta launches of Landsats D and E, there 
does not appear to be a charge for direct launch 
services in addition to that for launch vehicle 
hardware. The direct launch services for a Delta 
3910 from WTR are estimated at $2M. The STS 
charge of $10M appears to be adequate to cover 
these services if the Landsat requires 33 percent 
to 40 percent of the Shuttle bay, 

• An ongoing R&D program is considered both desir- 
able and necessary for the best use of the system, 

A level of effort of $5M per year is estimated to 
provide the technology, but not the hardware, 

for follow-on equipment and to assist in the 
optimum use of the existing equipment, 

• The initial investment in the space segment is 
amortized over 12 years. While the equipment is 
very likely to have a much longer physical life, 
the three spacecraft having been refurbished only 
once, the technology represented by the equipment 
is very likely to be obsolescent after 9 or 12 
years. This amortization period is selected on 
the basis of an estimate of technological obsol- 
escence; other periods may be more appropriate 
and might be used. 


Appendix B References 


(B-1) ”Landsat’s Role in an Earth Resources Information System", 

Report by the Comptroller General to the Congress (June 10, 1977), 

(B-2) "A Cost-Benefit Evaluation of the Landsat Follow-On Operational 
System", Goddard Space Flight Center (March 1977). 




APPENDIX C 


REVENUE RECOVERY ASPECTS OF POTENTIAL 
LANDSAT PRICING POLICIES 




APPENDIX C 


REVENUE RECOVERY ASPECTS OP POTENTIAL 
LANDSAT PRICING POLICIES 


From the discussion in the mam body of the report, it is 
apparent that the Landsat operational system has many characteristics 
of other Federal information services* A pricing policy similar to those 
of other Federal information systems is, therefore, strongly indicated 
for many of its activities. The substantial Federal use of the system 
also provides analogies to goods or services for which higher cost levels 
are recovered. This study has determined the approximate levels of charges 
when photographic products are included in sales projections and discusses 
the implications of several alternative policies. These policies are: 

• A Federal information service policy under which 
only the average costs of dissemination and 
dissemination facilities would be recovered 
9 A public good/service policy where the good/ 
service is used by both the Government and the 
public. The public would be charged the pro-rata 
share of current annual costs, as in the case of 
expendable launch vehicles . Recovery of annual 
operating costs and average annual system (including 
investment) costs are both considered 
0 A publicly o\med commodity policy where the 
good/service is used for predominately non- 
public purposes. Both Government and non- 
Government users would be charged an equivalent 
to a commercial price in the manner of the 
Panama Canal, TVA electricity, and Government 
helium. 

In all cases considered in this Appendix, it is assumed that 
photographic products essemtially similar to those currently available 
from EROS and other data centers will be available at a charge which 

recovers the direct costs of processing and distribution bnt which 
not recover any significant amount of system costs. An aver;i??p nrice 

of $15 is used for photographic products, and tape prices are calculated. For 



'll 


an all- tape case, the prices are the same as those determined in Figure 5 
in the main body of the text. The implications of selecting each of these 
policies are discussed in terms of the net cost recovery to the Government, 
the effect of implied price changes on future market demand, and other 
pertinent considerations such as different product mixes. The gross 
prices and potential deficit to the government have been calculated in 
Table C-1 for four recovery policies and three product mixes. Those 
price calsulations are parametric and are based on the assumption that 
the estimated potential demand will appear at or near current prices 
but demand will be reduced as prices are raised significantly. The product 
mixes are based on analysis of demand by sector as determined in Appendix A. 
The high photographic product mix is included to illustrate the difficulties 
of cost recovery with low unit prices on photo products. The average 
charge of $15 per photograph is used since it is likely that any signi- 
ficantly higher charge might result in creating an opportunity for a 
private firm to enter business and divide the market by copying from 
available libraries. Further, even if photographic product costs are 
doubled or tripled from the price of $15, cost recovery is not assisted 
significantly. The tape prices in Table C-1 indicate the price which 
must be charged to recover the specified level of costs if that volume 
of tapes is sold in addition to the specified volume of $15 photographs. 

The potential reduction in tape demand due to the assumed price sensitivity 
of demand is indicated. This reduction was calculated using the constant 
purchase plus processing budget price-volume curve of Figure 6, which is 
the lower bound on the shaded region. The resultant potential deficit 
is indicated in the final column. 

The major conclusion dram from these parametric calculations 
is that any significant level of actual cost recovery will be difficult 
if the product mix actually achieved has a high photographic content. 

In addition, cost recovery policies which attempt to recover a very high 
level of costs may also be self-defeating even if the demand for Landsat 
products appears predominantly as a demand for tapes. The parametric 
calculations indicate potential deficits of $20.5 million and $46.1 million 
for attempts to recover average annual operating system costs and total 
costs, respectively, even when the demand for 65,354 scenes appears as a 
demand for tapes. 



TABLE C-1. LANDSAT PRICING POLICY OPTIONS ANALYSIS 

Summary of Policy Implicatxons for Cost Recovery 
Based on a Demand for 65,354 Scenes Per Year 


CosL Ret ovory 
Po 1 1 ey 

Annuo] Cost 
To lie Recove led 

Product Mix Nominal,... 

ProJccLlon tape Prlce^ ^ 

PoLentJa 1 
Demand 
Reduction 

Potent hit 

Deficit for Specified 
Policy ($, MIHIc>iis)(J) 

niiecl !Jsci 

UJLy Co<?i Recovciy 

$26 0 HJ 1 1 Ion 

65,35A Tapes 

100,700 Photos 
26,625 'Japes 

$397 

$919 

0-10% 

25% 

$2.6M 
$6 iM 



221,/|J6 Photos 
J 0,000 Tapes 

$2,268 

50% 

$U.3M 

Oiu lenL Avoiaj'C (loat Recoveiy 
(Pocler.il Hoful/Serv lrt») 





ti) Aiinuj 1 Dlret L 

$52 3 HIJ1 Ion 

65,356 ’lapes 

$797 

20% 

$10. 6H 



J 00, 700 Photos 
26,625 'lapes 

$1 ,900 

65% 

$27 8M 



221 ,/^J6 Photos 
10,000 l<ipes 

$6,877 

70% 

$36 511 

h) Average Anmini 
Ojjcrnl Ing System 

$(.8.6 HU lion 

65,356 Tapes 

$1,069 

30% 

$20 5M 



100,700 Photos 
26,625 Tapes 

$2,519 

50% 

$33,511 



221,616 Photos 
JO, 000 Tapes 

$6,527 

75% 

$51 7M 

T[)lcil (;osL Rocovoiy 

$112 •) Mil 1 Ion 

65,356 Tapes 

$1,721 

60% 

$66 JM 



100,700 Photos 
26,625 Tapes 

$6,169 

65% 

$72 911 



221,616 Photos 
10,000 Tapes 

$10,9JL7 

83% 

$93 9H 

(I) An average clunrge per 
<2) Rasetl on const aiiL user 

(J) UorfciL cstimnLe^i me 

pliolo of $ r> Is a'3siiiiicd for reasems e^tplalned In LexL 
budget for data plus direct processing. See Figure 
hascti on sj>oc 1 1 j ed t os t ret ovory po LI c i cs , 

6 and related material in main 


C-3 



C-4 


The implications of these calculations and those of the previous 
section are discussed briefly for each of the four policies selected 
for examination. All of these policies can be modified to provide price 
differentials for classes of users to support any of the non-cost goals. 

One such modification, the $15 photograph, is explicitly included. 

Direct User Cost Recovery 

This policy has the greatest probability of achieving the goal 
of recovery. The prices indicated by the forecast of demand are relatively 
close to current prices being charged by the EROS Data Center. If the forecast 
of demand is met as a demand for tapes, the indicated price of approximately 
$400 per tape is unlikely to cause any significant change in demand, and 
any shortfall in recovery is expected to be on the order of 10 percent 
of user costs of $26 million* If the predominant demand were for photo- 
graphic products, however, the deficit would very possibly rise to the order 
of 50 percent of the direct user costs. Unless photo product prices 
were highly inelastic, and there are no data to support this conjecture, 
this deficit could not be lowered significantly by raising photographic 
prices . 

A policy recovering direct user charges is also supportive of 
most of the non-cost objectives on optimization criteria. Resources 
would be used to the greatest extent, and since user charges would still 
be significant there would be little idle curiosity use (wastage) , as 
might happen if the charges were nominal. Benefits (tangible and intangi- 
ble) would also be maximized. 

Current Average Cost Recovery 

If the demand for scenes appears predominantly as a demand for 
tapes, it is probable that a pricing policy to achieve recovery of annual 
direct costs, estimated at $52.1 million per year, would be marginally 
successful. Data tape prices in the range of $797 to $1136 are indi- 
cated, with demand estimated to drop approximately 20 percent from that 
forecast. At the lower price level of $797 the potential deficit is 



n 

estimated at $10,4 million, while at the higher price level, a hypo-- 
thetical price-volume relationship indicates full recovery. At this price 
level, however, the data costs would be approximately 50 percent of current 
tape processing costs. Little direct and explicit information is avail- 
able to indicate how non-Governmental demand would be affected by an 
increase in price of this magnitude, but unless high dollar value benefits 
have already been demonstrated, It is quite possible that demand would 
stagnate. Cost recovery, if the product mix were to develop with any 
significant demand for photographic products, is very unlikely. The 
indicated deficits are greater than 50 percent. 

A current average cost recovery policy is accordingly suppor- 
tive of efficiency in the use of resources and potentially of maximizing 
recovery if demand is relatively inelastic. The prices required, however, 
are sufficiently high that applications which might be sensitive to the 
prices charged for data would be discouraged and benefits from widespread 
applications of Landsat data may not be realized. 

Average Annual Operating System Cost Recovery 

Data tape charges of the order of $1000 to $1800 per scene are 
indicated if the demand for 65,354 scenes materializes as a demand for data 
tapes. The potential deficit at the low end of this price range would be 
approximately $20 million per year. If the product mix achieved has a 
significant photographic component, the deficits could range from $33 
million to $52 million, even if tape charges xvrere raised to a range of 
S2500 to $6500 per scene. Since current costs of processing data tapes 
run approximately $2000 per tape, and should trend lower in the future, 
it is very^ doubtful that a large market for tapes would develop. Accord- 
ingly, unless it becomes certain that a high volume of data tapes will be 
demanded, a pricing policy which attempts to recover average annual operating 
system costs is very unlikely to approach that goal and would, therefore, 
probably not support either the complimentary goal of loss minimization 
or intangible goals such as maximization of benefits. 



Total Cost Recovery 


Unless demand is much higher than indicated by analysis of major 
operational Landsat applications , or other profitable uses can be demon- 
strated prior to establishing a total cost recovery policy, it is unlikely 
that the policy goals could be achieved. If the forecast of demand were 
achieved as a demand for tapes alone, a charge of $1721 per tape would be 
required. This would be close to the total user costs for processing that 
tape, and demand is likely to be reduced by 40 percent or more, resulting 
in a potential deficit $46 million. If demand reduction is considered in 
establishing the tape price, the resultant price is $7193, or approximately 
3.6 times the current cost of both purchasing and using tapes. If the 
demand achieved has a high photographic content, tape prices would have to 
rise even more and/or deficits in recovery will be even higher. 



APPENDIX D 


REVENUE-EXPENSE ANALYSIS OE LANDSAT/EARTH 


RESOURCES DATA SALES 



1 '? 

APPENDIX D 

REVENUE-EXPENSE ANALYSIS OF LANDSAT/EARTH 
RESOURCES DATA SALES 


A revenue- expense analysis of Landsat /Earth resources data 
sales has been conducted under a variety of alternatives /assumptions to 
illuminate the business aspects of Earth resources data dissemination. 

This analysis indicates the circumstances under xAich a non- government 
firm would be interested in asstuning the disseminating role. The results 
of the analysis were, in general, not encouraging, and indicate that the 
price charged for Landsat tapes will have to be doubled for a government- 
operated facility to break even and will have to be tripled to be attractive 
for a commercial operator In a non- government facility to serve as a 
dissemination center. 

This revenue- expense analysis covers the period 1977-1992 and 
uses several assumptions about ultimate volume and growth to achieve 
that volume as well as other assumptions about revenues and costs. 
Specifically: 


• The ultimate volume of sales will be 65,000 scenes 
per year. Because of uncertainties in how the data 
will be used in the applications considered, no 
distinction is drawn between scenes represented by 
data tapes and scenes represented by photographic 
products in forecasts of future demand for the data. 

• The growth to that volume of 65,000 scenes per year 
will follow one of three "S” growth curves. Such 
curves are typical of the adaption of a new capa- 
bility. 

• Revenues are assumed to be at one of three levels, 
$200 per scene (tape), $400 per scene, or $600 per 
scene. The current charge is $200 per tape. 

• The costs for the main government center (EROS 
Data Center, or EDC) were taken from the 
Goddard cost-benefit evaluation ' for future- 


year costs; current costs were provided by the 
0 ^- 2 ) 


References are at end of Appendix. 



D-2 


• The costs for a non- gov eminent data center have 
been estimated from the investment in the EROS 

center. 

• All variations or cases studied in this assessment 

are assumed to be parametric; a change in 

the price charged for a tape or scene will have 

no significant effect on the number of tapes sold 
annually. Variations considered are believed to 
fall within the range where this assumption is 
valid , 


Sales Growth 


The ultimate volume of scenes demand for currently identified 
and future uses (65,000 scenes per year) has been used in other sections 
of this report and is derived in Appendix A. The growth paths from the 
current volume of approximately 2000 tapes (scenes) are projected by 
using a family of ”S'* curves. This curve, shown abstractly in Figure D-l(a), 
represents typical growth patterns for new products without appreciable 
subsequent innovations. This growth pattern is also typical of bacterial 
population growth, human population growth, etc. The population, sales, 
etc*, start out at a very low level and exhibit a period of slow, steady 
growth, which is actually the beginning of an exponential growth curve. 

The population then continues on this exponential growth and for some 
period of time exhibits a very rapid increase. The growth then slows 
due to natural limits on that growth. In the case of population growth, 
these limits are usually geography or food supply or food supply tech- 
nology. In the use of markets, growth is usually limited by competing 
products or saturation of the market at a price which approximates the 
supplier’s cost and normal profit. The population or sales, etc., 
then exhibit a period of stability and are said to be mature, exhibiting 
a general population or volume level due to external factors. In the 
case of product sales, there tends to be a slight decline due to similar, 
competing products. When an entire industry or human populations are 
reviewed for growth, the growth pattern frequently appears to comprise 





a series of S curves staggered upon one another. The population or 
industry sales grow within natural limits and then, usually through a 
technological innovation, enter another period of growth. This is illus- 
trated in Figure D-l(b). 




a. Single Growth Curve 


b. Two Periods of Growth 


FIGURE U-1. EXAMPLES OF "S" GROWTH CURVES (ABSTRACT) 


Current Landsat data sales appear to be exhibiting maturity 
in that sales have been constant, and even declined somewhat in dollar 
volume. While this decline in volume is also associated with a price 
increase for photographic products, there has also been a slight decline 
in tape sales, for which there was no price increase. This decline is 
very likely associated with market saturation at current Landsat capa- 
bilities and prices of enhancing the data. The sales volume is unlikely 
to increase significantly until the improved resolution and other capa- 
bilities associated with Landsat D are available. Geophysical exploration 
IS the major commercial application of Landsat data tapes at the present 
time and those firms using Landsat data tapes appear to have reached a 
steady state in their ability or desire to process and interpret the 
tapes at the present time. Only if a new or greatly expanded appli- 
cation arises are the sales likely to increase significantly in the near 
future. 

Because the latest sales decline is not believed to be 
a significant fluctuation, the sales growth curves used in the revenue- 
cost analysis do not explicitly use the double growth curve of Figure D-l(b). 



D-4 


These growth curve assumptions, rather, are based on three different 
adaption periods or times to a mature or steady-state level of sales* 

As shown in Figure D-2, three different growth curves are estimated on 
the basis of growth to an annual volume of 65,000 scenes (tapes) per 
year over periods of 10, 15 and 20 years from 1972. Historical sales 
for the years 1973-1977 are indicated as the lower left tail of this 
family of curves* Thus, optimistic, expected and pessimistic cases are 
provided. Preliminary sales estimates for FY 1977 indicate that the 
optimistic case (growth to 65,354 scenes per year by 1982) is unlikely 
to be met. The preliminary estimate of $1,015 million in FY 1977 Landsat 
data sales is, however, consistent with either the expected or pessimistic 
growth assumptions of growth to 65,354 scenes per year in 15 or 20 years. 

With the introduction of Landsat D, in the next few years, data sales 
growth is expected to resume and it is considered most likely that growth 
will reach maturity by approximately 1987 rather than 1992 as sho\m in 
the pessimistic case. All sales are expressed as scenes equivalent to 
current data tapes; prices used later are based on current tape prices and 
no attempt is made to estimate the division between tape and photographic 
products. At the present time, an unenhanced color Landsat photograph is 
sold for approximately $15 while tape copies are sold for $200. Accordingly, 
the demand for photos is much greater than for tapes, but much of that demand 
is for decorative or educational uses as opposed to applications with a more 
direct use (e.g., geological exploration). These cultural or educational 
uses of photos are currently exhibiting much greater price sensitivity than 
would be expected of applications with direct economic payoffs. The price 
sensitivity in the photo sales is sufficiently great that demand has dropped 
by about one- third as the price charged has gone from approximately $8 to 
$15 for a color photo. If the earlier demand for photos had veen expressed 
as a demand for tapes, tape volume x^rould already be at approximately 65,000 
tapes per year. 

None of these sales volume growth assumptions is directly related 
to the benefit stream growth curves of the Goddard cost-benefit study 
That study assumes that applications will be ready for use of data either 
as soon as the data are available or very shortly afterr<rard and that 
the learning processes associated with the data use will be very rapid. 



50,000 


40,000 


30,000 


20,000 


10,000 



Year 


FIGURE D-2. ALTERNATIVE LANDSAT DATA SALES GROWTH PROJECTIONS 


t'l' 

D-6 


This study assumes, under the expected and pessimistic cases, that there 
will be delays in developing the applications and in transferring ability 
to use the data to those who will be processing and interpreting the data. 
The optxiTiistic case, however, is consistent with the benefit curve of the 
Goddard study. The growth periods of 15 to 20 years are also typical of 
technology transfer times in other areas of scientific and technical en- 
deavors . 


Tape/Scene Prices 

This analysis is parametric; no change in sales volume is 
considered for tape/scene charges of $200, $400 or $600. Indeed, there 
are also reasons to believe that sales will be relatively insensitive to 
charges at this level. The current charge is $200 per scene; as will be 
shown later, this will not even recover the costs of operating the data 
dissemination center. From knowledge of the costs to the user of using 
the Landsat data, it is considered likely that doubling the charge per 
tape or scene to $400 is unlikely to affect long-term demand, and this 
level of charges permits recovery of costs under the current forecasts of 
the data center operations. The charge of $600 per scene (tape) is con- 
sidered to be an upper limit of the charge which can be made without a 
severe impact on long-term demand for Landsat data. Because the nature of 
the market sensitivity to price change is not well known, it is not con- 
sidered feasible to model the probable increase in sales volume prior to 
a price increase followed by a drop immediately afterward. If a price 
increase is instituted at the time Landsat D tapes are made available, and 
applies only to the new tapes, however, there may be no discernible drop 
in volume. 


Revenue Projections 

The projected volume growth and prices are combined to yield 
nine alternating revenue streams for Landsat data sales . The revenue 
streams are presented in Table D-1 for the volume of tape/scene sales per 
year and prices of $200, $400 and $600 per tape/scene. The revenue streams 



S3 


TABLE D-1. REVENUE PROJECTIONS FOR 
LANDSAT DATA SALES 


Year 

Sales of 
Scenes 

Revenue ($, M) Revenue (S, M) 

0 $200/Scene (§ $400/Scene 

Revenue TS, M) 
0 S600/Scene 



(a) 10-Year Ad ao cion 



1977*^ 

2,000-^ 

1 0'^ 

1 

.0-^ 

1 0* 

1978 

16,000 

3 2 

6 


9 6 

1979 

38,000 

7 6 

15 

2 

22.8 

1980 

52,000 

10*4 

20 

.8 

31*2 

1981 

59,000 

11*8 

23 

6 

35*4 

1982 

65,000 

13*0 

26 

0 

39 0 

1983 

65,000 

13*0 

26 

0 

39 0 

1984 

65,000 

13*0 

26 

0 

39 0 

1985 

65,000 

13*0 

26 

0 

39.0 

1986 

65,000 

13*0 

26 

0 

39 0 

1987 

65,000 

13 0 

26 

0 

39 0 

1988 

65,000 

13 0 

26 

0 

39.0 

1989 

65,000 

13 0 

26 

0 

39*0 

1990 

65,000 

13.0 

26 

0 

39*0 

1991 

65 ,000 

13.0 

26 

0 

39 0 

1992 

65,000 

13 0 

26 

0 

39 0 

16 Year 

Totals 

S177 0 

?353 

0 

$529.0 




(b) 15-Year 

AdaoCion 


1977*^ 

2,000^ 

1 0* 

1 0^ 

1.0* 

1978 

6,000 

1 2 

2 4 

3 6 

1979 

10,000 

2.0 

4.0 

6*0 

1980 

14,000 

2*8 

5 6 

8 4 

1981 

20,000 

4.0 

8 0 

12*0 

1982 

28,000 

5,6 

11*2 

16.3 

1983 

38,000 

7 6 

15.2 

22. S 

1984 

49,000 

9.8 

19 6 

29.4 

1985 

56,000 

11.2 

22 4 

33 6 

1986 

61,000 

12.2 

24 4 

26.6 

1987 

65,000 

13.0 

26 0 

39 0 

1988 

65,000 

13*0 

26.0 

39 0 

1989 

65,000 

13 0 

26*0 

39 0 

1990 

65,000 

13*0 

26 0 

39 0 

1991 

65,000 

13 0 

26.0 

39 0 

1992 

65,000 

13.0 

26.0 

39.0 

16 Year 

Totals 

$135 4 

$269*8 

$404 2 




(c) 20-Year 

Adaption 


1977* 

2,000* 

1.0* 

1 0* 

1.0* 

1978 

5,000 

1.0 

2 0 

3.0 

1979 

6,000 

1.2 

2 4 

3 6 

1980 

8,000 

1*6 

3*2 

4.3 

1981 

9,000 

1*8 

3 6 

5*4 

1982 

12,000 

2 4 

4*8 

7 2 

1983 

15,000 

3.0 

6*0 

9 0 

1984 

19,000 

3.8 

7 6 

11 4 

1985 

24,000 

4.8 

9 6 

14.4 

1986 

30,000 

6*0 

12,0 

18.0 

1987 

39,000 

7 8 

15 6 

23 4 

1988 

43,000 

9 6 

19 2 

28 S 

1989 

54,000 

10 8 

21.6 

32.4 

1990 

58,000 

11 6 

23 2 

34 8 

1991 

62,000 

12 4 

24 8 

37.2 

1992 

65 ,000 

13 0 

>6 0 

39 0 

16 Year 

Totals 

391.8 

S182 6 

$273 4 


Volume and revenue for 1977 represanc oreliminary esrmates of results. 




D-8 


provided are considered to represent the extreme range of potential future 
revenues under the assumption that Landsat data are adapted for uses outlined 
in the benefit^cost study in time spans typical of technological trans- 
fer in other areas. 


Costs and Other Revenue 


Costs and other non-Land sat revenues for the data center have 
come from two sources. Current costs and revenue experience were provided 
by EDC in a telephone conversation^^ Costs for the expanded capa- 

bilities required to support the Landsat follow-on program were taken 
from the Goddard cost-benefit study , The current and forecast 
expenses and non-Landsat revenues are presented in Table D-2. The 
current EDC budget for operating expenses is approximately $12 million 
per year, $8 million of which is covered by an appropriation while the re- 

million comes from other sources • Amons these other sources 
is $2.6 million in product sales of all types (54 to 65 percent Landsat 

products), $400,000 in reimbursement for training activities, and a 
$1 million transfer payment from the appropriation for the National 
Cartographic Information Center (NCIC). This transfer payment compen- 
sates the EDC for maintaining their image records in such a manner that 
the NCIC can locate either an aircraft or Landsat image of a scene by 
geographic coordinates so that the images can be used by the NCIC 
rapidly. At the present time the EDC maintains an archive of approxi- 
mately 5 million aircraft images in comparison with approximately 1 million 

T ^ 

Landsat images. 

Future costs for EDC are estimated to be $16 million in 
operations expenses starting in 1981. In addition, a capital expenditure 
of $13 million over 1978-1980 will be required for computers and other 
processing equipment. The transition between the current Landsat 

system and the follow-on system is estimated by an annual increase of 
$1 million per year in operations during the capital procurement phase 
from 1978 to 1980. 

Costs of the data centers (e.g., for agriculture) are not included 
in this analysis as they are considered to reflect the cost of applying 
the data rather than disseminating the data. The costs of the NASA data 



9B 

D--9 


TABLE D-2. LANDSAT/EROS DATA CENTER COSTS 
AND MISCELLANEOUS REVENUE 


Year 

Costs, $ in 

millions 

Revenues from Other Activities, 
i $ in millions 

Aircraft Training 

Images Activities 

NCIC^^^ 

Operations 

Capital 

1977 

12.0* 


0.381* 0.400* 

1.0* 

1978 

13. Of 

1.0 

0.8 

1.0 

1979 

14. Ot 

6.0 

0.8 

1.0 

1980 

15. Ot 

6.0 

0.8 

1.0 

1981 

16.0 

~ 

0.8 

1.0 

1982 

16.0 

- 

0.8 

1.0 

1983 

16.0 

- 

0.8 

1.0 

1984 

16.0 

- 

0.8 

1.0 

1985 

16.0 

- 

0,8 

1.0 

1986 

16.0 

- 

0.8 

1.0 

1987 

16.0 

- 

0.8 

1.0 

1988 

16.0 

- 

0.8 

1.0 

1989 

16.0 

- 

0.8 

1.0 

1990 

16.0 

5.0 

0.8 

1.0 

1991 

16.0 

4.2 

0.8 

1.0 

1992 

16.0 

- 

0.8 

1.0 

16 Year 





Total 

$246.0 

$22.2 

$12.8 

$16.0 


(a) 1977 represents current costs (Reference D^-2) ; t represents transi- 
tion costs; follow-on costs are taken from Reference D-1* 

(b) As taken from Reference D-1* 

(c) NCIC = National Cartographic Information Center* 

* Preliminary estimate of 1977 costs and revenues, 
t Estimated transition requirements. 


management system are similarly considered to be part of the space- to- 
ground link and also not included in this analysis. 


Costs for a Potential Commercial Operator 


This analysis also considers the potential that a non-government 
or commercial operator may provide the data d is, semination service function 
Three alternative methods of commercial operation are considered: a con- 
tractor would operate the existing EROS Data Center using government- 



D-'IO 


furnished equipment (GOCO) , or the contractor would provide a turnkey 
operation using contractor-furnished facilities and equipment, or the 
operator would be given the EROS Center as an incentive to operate. 

In the case of a GOCO operator, it is considered that the current 
estimates of the EROS Data Center would be very close to those of the GOCO 
operator. The current mode of operation uses only 55 to 60 civil servants 
with total employment of about 350^^ While the operator might be able to 

achieve some economies through a different mix of labor than is currently 
being used by the EDC, the operator will see additional costs not experienced 
by the government in tbe budget for the center. Among these costs are the 
employer's contribution to the Social Security Syatem 6 percent) and 
other payroll taxes such as workmen's and unemployment compensation. 

In addition to payroll levies, the employer would very likely also have 
a benefits package including employer contributions to retirement and 
medical insurance funds. The contractor will also be receiving a fee 
over and above these costs- Thus, any economies of using a different 
labor or wage mix are expected to be offset by other costs as indicated. 

In the alternative case of a commercial operator using its 
own facility, the costs are expected to be higher by the recovery of the 
operator's investment and profit on that investment. The investment in 
the EROS Data Center since 1973 approximates S20 million on a replacement 
basis. The main building cost $6 million and a smaller maintenance/ 
facilities support building cost $500,000. The investment in laboratory 
equipment and computers was in the range of $10 million to $14 million. 

If the commercial operator is to take over the archive of approximately 
five million aircraft photos and one million Landsat photos currently 
on hand and add to this archive and provide equivalent facilities and 
access to the data, it is very likely that the operator x-7ill have a 
similar investment. The operator will expect to recover physical 
depreciation over a period of 5 to 10 years on the laboratory and computer 
equipment and 20 to 30 years on the buildings. In addition, the operator 
will have to pay property taxes and insurance. The operator will also 
expect a profit on the investment equivalent to the higher range of 
quality private debt securities. In this analysis, the cost of a non- 
government facility is modeled through amortization of the estimated 
S20 million investment required at 20 percent per year. The resultant 



D-11 


charge of $4 million per year includes an allowance for profit and taxes 
on that profit as well as physical depreciation over reasonable lifetimes 
of equipment (5 to 10 years)* This amortization charge is, however, 
based on an assessment at a distance and does not reflect the item-by- 
item assessment that a commercial operator would make before bidding upon 
such a venture* The earliest time a private operator could reasonably be 
in operation in such a facility is 1981 or 1982. This implies a total cost 
of $44 million over the eleven years remaining in the time frame of the 
analysis (1972-92) . 

The third case for this analysis can be formed by considering the 
implications of turning over the EROS Center to a private operator as an 
incentive to operate the Center without government support other than payment 
for its data products at the standard rates* If the facilities are donated 
under the restriction that the data dissemination function must be performed 
over the life of the facility, the effect of the donation on the operator's 
income is to provide a depreciation charge which shelters income from taxation. 
In this situation, the private operator would be receiving buildings worth 
approximately $6*5 million with a useful physical life of approximately 
20 years without major renovation and approximately $10 to $14 million 
worth of equipment with a maximum useful working life of approximately 
10 years, and which may, in fact, have a shorter working life. New equipment 
for landsat D will cost $13 million and also has a useful life of approximately 
10 years. The operator, as a first approximation, would consider the facili- 
ties and equipment depreciation account to be a subsidy of approximately 
$2*8 million per year, based upon their life expectancy for income tax 
depreciation purposes. This amounts to a subsidy of $30.8 million over the 11 
years, 1982-1992. Since the operator would still be experiencing the ongoing 
operations costs of $12 million (currently) to $16 million (forecast) and 
would have to make some further capital investments, any operator would have 
to be certain of the revenue projections before committing to accept the task. 
Since current revenues are likely to be at the level of $2.5 to $3*5 million at 
least until Landsat D products become available, it is unlikely that any 
commercial operator will undertake the data dissemination task without a 
guaranteed subsidy. Comsat Corporation appears to have been interested in this 
task and made two separate investigations of the business aspects of the 



0 

D-12 


operation with the cooperation and assistance of the EROS Center. 

Comsat appears uninterested in pursuing the matter further at the precent time* 

Thus, for the three alternatives, the costs of operation by a 
commercial operator are assessed as: 

• Government-CKraed, Contractor-Operated (GOCO) current 

facility: same as government operated 

• Privately owned and operated facility: cost increases 

$4.0 million per year 

e Private operator of government -donated facility: subsidy 

equivalent to $2.8 million per year. 

These costs or equivalent subsidies are approximate and are 
unlikely to represent sufficient assurance to a commercial operator to 
enter an agreement with the Government without additional guarantees 
as will be sho\m in the following section. 

Revenue-Expense Analysis 

The revenue-expense analysis is conducted with the data from 
Tables C~1 and C-2 and the estimates of private operator costs/subsidies 
of the previous section. The results of an undiscounted cash flow analysis 
are presented in Table C-3 for the cases involving a government-operated 
and/or GOCO facility. It is considered that government-operated and 
government-OTmed , contractor-operated (GOCO) facilities will be approxi- 
mately the same. 

This analysis strongly indicates that the operation of the 
dissemination center will not break even unless the charge per scene 
(tape) is increased from the current level of $200 to at least $400 
and the adaption of Landsat data occurs relatively rapidly. If the 
price remains at $200 per tape or scene or the adaption period is much 
greater than 15 years, the dissemination center is unlikely to be able 
to cover the projected level of costs. 

Current market data indicate that Landsat adaption is unlikely 
to follow the 10-year adaption period. It will not be possible to decide 
whether the 15- or 20-year adaption period forecast is being followed 
until 1 or 2 years of Landsat D operational results are available. From 
investigation of the total costs of processing and interpreting data 



D-13 


tapes, it appears that the current price of the tapes ($200) is 10 to 
20 percent of the current cost of processing and using the tapes ($1000- 
$2000). Thus, while some customers may be lost by raising the tape price 
to $400 to $600, demand is unlikely to be reduced significantly in the 
long run. 


TABLE C-3. GASH-FLOW RESULTS FOR A GOVERNMENT OPERATED OR GOVERNMENT- 
OOTED, CONTRACTOR-OPERATED LANDSAT DATA DISSEMINATION 
FACILITY OVER THE PERIOD 1977-1992 


Millions of dollars, except for 


Price Per 
Scene or Tape 


tape/scene prices 



Total 
Land sat 
Revenues 

Total 

Other 

Revenues 

Total 

Expenses 

Net 

Revenue 

Breakeven 

Year 



10-Year Adaption 



$200 

117.0 

28.8 

268.2 

-62.4 


$400 

353.0 

28.8 

268,2 

+113.6 

1981 

$600 

529.0 

28.8 

268.2 

+289.6 

1982 



15-Year Adaption 



$200 

135.4 

28.8 

268.2 

-104.0 

— 

$400 

369.8 

28.8 

268.2 

+30.4 

1983 

$600 

404.2 

28.8 

268.2 

+164 . 8 

1982 



20-Year Adaption 



$200 

91.8 

28.8 

268.2 

-147 . 6 

— 

S400 

182.6 

28.8 

268.2 

-56.8 

- 

$600 

273.4 

28.8 

268.2 

+34.0 

1986 

tape price to 

$400 to $600, 

demand is 

unlikely to 

be reduced 

Significantly 


in the long run. 


The net revenue computations for both government and private 
operators are summarized in Table D-4, using the additional costs or 
implicit subsidies estimated for a commercial operator in the previous 
section. 


The influence of the demand realized and the price per scene 
overwhelms considerations of additional costs or subsidies for privately 
purchased or donated facilities. There are only two cases where the 



TABLE D-4. CASH FLOW RESULTS FOR A LANDSAT DATA DISSEMINATION CENTER UNDER A VARIETY 
OF OWNERSHIP ASSUMPTIONS FOR 1977-1992 





Millions of Dollars 



Price Per 
Scene or Tape 

Net Revenue, 
Gov^t. or GOCO 
Facility 

Cost for 

Private Facility 

Net Revenue, 
Private Facility 

Implicit 
Subsidy for 
Donated Facility 

Net Revenue, 
Donated 
Facility 



10-Year Adaption 



$200 

-62.4 

-44.0 

-106.4 

+30.8 

-31.6 

$400 

+113 . 6 

-44.0 

+69 . 6 

+30.8 

+114 .4 

$600 

+289.6 

-44.0 

+245.6 

+30.8 

+320.4 



15-Year 

Adaption 



$200 

-104.0 

o 

1 

-148.0 

+30.8 

-73.2 

$400 

+30.4 

-44.0 

-13.6* 

+30.8 

+17.2 

$600 

+164 . 8 

-44.0 

+120.8 

+30.8 

+195.6 



20-Year Adaption 



$200 

-147.6 

-44.0 

-191.6 

+30.8 

-116.8 

$400 

-56.8 

-44.0 

-100.8 

+30.8 

-26.0 

$600 

+34.0 

-44 • 0 

-10.0* 

+30 . 8 

+64.8 


* The only cases examined where the cash flow changes significantly. 



D-15 


spectrum of forecast cash flows changes from positive to negative, as is 
indicated by an asterisk in the table. 

Thus, the ability to achieve a positive cash flow (become 
profitable in private-sector terms) is approximately independent of the 
mode of operating the data dissemination facility. The major problem 
in achieving a positive cash flow during the period examined is the level 
of sales volume and prices received. The volume is not expected to increase 
dramatically until Landsat D data are available, and unless Landsat D data 
are significantly more widely used than previous imagery, the costs of 
operating any center will exceed revenues at unit prices which will not 
severely impact sales volume. Unless a commercial operator is satisfied 
that sales will lead to a profitable business, the operator will require 
a subsidy or guarantee to undertake the dissemination role. 

The estimated levels of annual subsidies required to break even 
under the assumption of a 15-year adaption period are presented in Table D-5. 
They are calculated as 5-year averages and as an average over the period 
from 1978 to 1992. Positive cash flows or returns are indicated by 
parentheses. 


TABLE D-5. ESTIMATES OF THE RANGE OF ANNUAL SUBSIDIES REQUIRED 
FOR THE DATA DISSEMINATION CENTER DURING 1978-1992 
IF LANDSAT DATA ACHIEVE ADAPTION WITHIN 15 YEARS 


Price Per 
Scene or Tape 


Millions of Dollars 


Average 

Subsidy 

1978-1982 

Average 

Subsidy 

1983-1987 

Average 

Subsidy 

1988-1992 

Average 

Subsidy 

1978-1992 


Government Operation or GOCO Operation 


$200 

12.5 

3.4 

3.0 

6.3 

$400 

9.3 

C7.3)* 

(10.0) 

(2.6) 

$600 

6.2 

(18.0) 

(23.0) 

(11.6) 


Private Operator in Private Facility 


$200 

16.5 

7.4 

7.0 

9.3 

$400 

13.3 

(3.3) 

(6.0) 

0.9 

$600 

10.2 

(14.0) 

(19.0) 

(8.0) 




Parentheses indicate a net recovery; no subsidy is needed. 



D-16 


The subsidies required are substantial in the first 5 years of 
any but the most optimistic scenarios. For the expected demand forecast 
and a reasonable unit price (e,g,, $400 to $600), however, a subsidy is 
not required after the first 5 years since there is expected to be a net 
recovery. 

The case of a conmiercial operator in the donated EROS facility 
has not been displayed in Table 0-5 because the benefit of owning the 
facility, and thus being able to claim depreciation against revenues, is 
of value to the commercial operator only if the net revenue is positive. 
An operator is very likely to require a subsidy in the early part of the 
program which would be equivalent to that required of the government 
operation and the effect of the donated facility would be realized only 
after the revenue picture improves. 

Conclusions of the Revenue-Expense Analysis 

Unless demand for data greatly exceeds current forecasts, 
data charges will have to be raised from the current level of $200 
per scene to at least $400 to provide cost recovery for the dissem- 
ination center. 

If data demand is not adversely affected by this modest 
increase in charges, it is reasonable to expect the data dissemination 
center to break even in the long run and not require a high level of 
subsidy beyond the first few years. 

Commercially omed or contractor-operated dissemination 
facilities appear feasible if an initial subsidy is provided. The 
major problem lies in convincing potential operators that the business 
volume will appear. To date, this volume is more than an order of 
magnitude below that needed to sustain a commercially operated facility 
on a self-supporting basis. 



References 


(D-1) "A Cost-Benefit Evaluation of the Landsat Follow-On Operational 
System", Goddard Space Flight Center, Greenbelt, Maryland, 

March 1977. 

(D-2) Telephone Conversation between Gary Metz of the EROS Data Center, 
Sioux Falls, South Dakota, and R. W, Earhart, Battelle's Columbus 
Laboratories, November 1977. 

(D-3) Battelle's Columbus Laboratories; "Science, Technology and Inno- 
vations", February 1973, Sponsored by NSF under Contract NSF-C667. 



Baffeiie 

Columbus Laboratories 
505 King Avenue 
Columbus, Ohio 43201 
Telephone (614) 424-6424