Telecommunications: Competition Issues in International Satellite Communications (Chapter Report, 10/11/96, GAO/RCED-97-1)
In recent years, several private companies trying to establish
international communications satellite systems have raised concerns
about competitive disadvantages that inhibit their entry into the
market. This report (1) describes the institutional framework for
providing international communications satellite services, (2) discusses
elements of the framework that may hinder competition, and (3)
identifies key options for resolving competitive issues.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-97-1
TITLE: Telecommunications: Competition Issues in International
Satellite Communications
DATE: 10/11/96
SUBJECT: Telecommunication industry
International organizations
International agreements
Radio broadcasting
Monopolies
Television broadcasting
Intergovernmental relations
Competition
Privatization
Restrictive trade practices
Communication satellite
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Cover
================================================================ COVER
Report to the Chairman, Committee on Commerce, Science and
Transportation, U.S. Senate
October 1996
TELECOMMUNICATIONS - COMPETITION
ISSUES IN INTERNATIONAL SATELLITE
COMMUNICATIONS
GAO/RCED-97-1
Competition in International Satellite Communications
(348018)
Abbreviations
=============================================================== ABBREV
ACISS - Alliance for Competitive International Satellite Services
AT&T - American Telephone and Telegraph
COMSAT - COMSAT Corporation
FCC - Federal Communications Commission
GAO - General Accounting Office
GHz - gigahertz
ICO - ICO Global Communications Limited
Inmarsat - International Mobile Satellite Organization
INTELSAT - International Telecommunications Satellite Organization
ITU - International Telecommunication Union
LEO - low-earth orbit satellite
MEO - medium-earth orbit satellite
MHz - megahertz
WTO - World Trade Organization
Letter
=============================================================== LETTER
B-271956
October 11, 1996
The Honorable Larry Pressler
Chairman, Committee on Commerce,
Science and Transportation
United States Senate
Dear Mr. Chairman:
In response to your request, this report (1) describes the
institutional framework for providing international communications
satellite services, (2) identifies elements of that framework that
appear to hinder competition, and (3) discusses some of the key
options that could resolve the competitive issues identified.
As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 21 days
after the date of this letter. At that time, we will send copies to
other congressional committees; the Chairman of the National Economic
Council; the Director of the Office of Science and Technology Policy
in the Executive Office of the President; the Secretaries of State,
Commerce, Justice, and the Treasury; the Chairman of the Federal
Communications Commission; and other interested parties. We will
also make copies available to others on request.
This work was performed under the direction of Phyllis Scheinberg,
Associate Director, who may be reached at (202) 512-9696 if you or
your staff have any questions. Other major contributors to this
report are listed in appendix III.
Sincerely yours,
John H. Anderson Jr.
Director, Transportation and
Telecommunications Issues
EXECUTIVE SUMMARY
============================================================ Chapter 0
PURPOSE
---------------------------------------------------------- Chapter 0:1
When the first manned spaceship landed on the moon on July 20, 1969,
500 million people around the world were able to watch Neil Armstrong
take "one giant leap for mankind." It was the most widely viewed
event in history as a result of the global commercial communications
satellite system completed that year with the launch of a third
satellite by the International Telecommunications Satellite
Organization (INTELSAT). That satellite system was developed and
implemented by governments that joined together in INTELSAT and
another intergovernmental organization, the International Mobile
Satellite Organization (Inmarsat), which was organized to provide
maritime communications, including services for the safety of life
and rescue at sea. The success of those systems helped foster rapid
advances in satellite technology.
In recent years, several private companies trying to establish
international communications satellite systems have expressed
concerns about the existence of competitive disadvantages that
inhibit their entry into the market. Because of his interest in
fostering competition in telecommunications, the Chairman of the
Senate Committee on Commerce, Science and Transportation asked GAO to
(1) describe the institutional framework for providing international
communications satellite services; (2) determine if any elements of
the framework may hinder competition and, if so, how; and (3)
identify some key options for resolving any competitive issues
identified.
BACKGROUND
---------------------------------------------------------- Chapter 0:2
Communicating through satellites is based on the transmission of
radio signals on specified frequencies between stations on earth and
satellites orbiting the earth. These specified frequencies, or
segments of the radio spectrum, provide for different uses of the
airwaves. Satellites receive the signals, amplify them, and return
them to one or more receiving stations on earth. Each country
regulates who can provide satellite services to, from, and within it
and thereby controls access to its telecommunications markets.
Satellites can provide any kind of telecommunications service--from
basic telephone service; to AM and FM radio and television/video
broadcasts; to computer networking; to video conferencing. As shown
by the broadcast of the moon landing in 1969, satellites are a useful
vehicle for transmitting special events, live and worldwide. The
advent of small earth stations (for example, satellite "dishes") less
than 3 feet wide has enabled affordable television/video
transmissions from satellites directly into the home. Satellites
have also fostered the development of planned international mobile
personal communications services, which aim to provide an individual
with a single telephone number for voice, data, and facsimile
transmissions worldwide.
While looking at the difference between the prices charged to
consumers and the costs that companies incur is the most appropriate
method for analyzing the degree of competition in a market, price and
cost data for satellite services are not generally available or
readily usable. Therefore, in examining competition, GAO interviewed
representatives of (1) current and potential alternative providers of
communications services and (2) the U.S. representative to and
representatives of the intergovernmental organizations. GAO also
used other information, namely, the availability of alternative
providers of services and the difficulty or ease with which new firms
could begin providing services--important indicators of competition.
GAO did not, however, do a country-by-country evaluation of
regulatory authorities' access policies for alternative satellite
systems.
RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3
With the Communications Satellite Act of 1962, the United States
initiated the creation of a framework for providing a commercial
satellite system that would serve the nations of the world. The
United States joined other countries to form the intergovernmental
organizations INTELSAT and Inmarsat and establish their respective
satellite systems for basic telecommunications services and safety at
sea. Each country names a signatory, usually a telecommunications
entity, to participate as an investor in the systems. The signatory
for the United States is COMSAT Corporation, a private corporation
that was created by the 1962 act and whose Board of Directors
includes some presidentially appointed members. Three U.S.
agencies--the State and Commerce departments and the Federal
Communications Commission (FCC)--have primary responsibility for
overseeing U.S. membership in the organizations and for instructing
the U.S. signatory in its representational role. The FCC also
regulates commercial U.S. satellite companies. At the international
level, member countries of the International Telecommunication Union
(ITU) agree to procedures to coordinate the technical compatibility
of satellites and the use of radio frequencies by satellites
worldwide.
This institutional framework creates an array of factors that may
hinder competition in the market for commercial international
satellite services. For example, many of the signatories to INTELSAT
and Inmarsat are also the regulatory authorities that decide which
satellite systems will have access to their domestic markets. At the
same time, many signatories of INTELSAT and Inmarsat believe that
their obligations to provide universal service at nondiscriminatory
prices, as well as their intergovernmental structure, hinder their
ability to compete in a rapidly changing market. GAO's analysis
showed that the development of competition differed in two primary
markets for international communications services. In the market for
international telephone service, where separate U.S. satellite
systems were largely restricted from providing service, competition
emerged primarily from an alternative medium: fiber-optic cables.
In the market for certain types of international television/video
service, such as regional broadcasting, U.S. satellite companies, as
well as other international, regional, and domestic systems, have
become viable competitors. However, for other types of
television/video service, such as transoceanic transmissions,
INTELSAT remains dominant because of its extensive network and
capacity and its access to many markets. Inmarsat is currently the
dominant provider of global mobile satellite communications services,
with 70 percent of its business providing maritime services. Some
other companies, including an Inmarsat affiliate, plan to begin
offering global "land-mobile" services in just a few years.
A variety of options for resolving the concerns about competition
have been suggested, and many are being pursued. Changes that would
eliminate the intergovernmental organizations could potentially
resolve many competitive issues but are not likely to be adopted
because such proposals lack the support of many of the signatories or
member governments. More likely are changes in the role of the
intergovernmental organizations, such as the creation of one or more
private companies, or affiliates, with little or no intergovernmental
ownership. These proposals have the potential to address many of the
concerns about competition held by both the other satellite companies
and the intergovernmental organizations, particularly with regard to
competition with the affiliates, but may only indirectly improve
market access for other satellite companies--ultimately, the key to
enhancing competition. Other international and domestic approaches,
such as pursuing multilateral trade negotiations to open markets or
using access to the U.S. market as leverage for gaining access to
others' markets, might more directly improve market access.
PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4
THE INSTITUTIONAL FRAMEWORK
FOR TELECOMMUNICATIONS
WORLDWIDE
-------------------------------------------------------- Chapter 0:4.1
The actual operation of INTELSAT's and Inmarsat's satellite systems
is the responsibility of entities designated by member governments as
their signatory to the organizations. Signatories, many of which are
wholly or partially government-owned, manage the systems, are
responsible for their financial needs, and share in the earnings.
The U.S. signatory, COMSAT, is subject to U.S. government
regulation in its responsibilities as signatory. As the U.S.
signatory, COMSAT is the only U.S. company authorized to purchase
satellite capacity directly from INTELSAT and Inmarsat for resale in
the U.S. market.
The Department of State's U.S. Coordinator for International
Communications and Information Policy, the Department of Commerce's
National Telecommunications and Information Administration, and the
FCC share key responsibility for the policies, activities, and
regulations concerning U.S. commercial international satellite
communications. These three agencies are responsible for, among
other things, issuing instructions to COMSAT in its role as the U.S.
signatory. The agencies decide together, with input from COMSAT,
what positions to pursue in the organizations' meetings and how
COMSAT should vote. The FCC also regulates U.S. companies providing
domestic and international satellite telecommunications services,
including foreign companies' access to the U.S. market.
The FCC's policies have evolved over time from ones designed to
ensure the commercial viability of INTELSAT and Inmarsat to ones in
support of worldwide competition. Through a 1984 Presidential
Determination, the United States permitted for the first time the
operation of U.S-licensed international satellite systems besides
INTELSAT's. In implementing the Presidential determination
authorizing the new systems, the FCC initially precluded other
companies from competing with INTELSAT's services that connected to a
country's public telephone network. That restriction was intended to
ensure that new companies did not cause INTELSAT significant economic
harm. As a result, companies focused on those services they were
allowed to provide, primarily international private communications
networks and international television/video service. Over time,
INTELSAT made a series of determinations that other satellite systems
providing increasing levels of services would not cause it
significant economic harm. In response to those determinations, the
executive branch revised the limitation on U.S. companies. Based on
those revisions, the FCC has been incrementally lifting the
restrictions on the services other companies may provide and,
pursuant to the U.S. executive branch's goal, plans to remove--by
January 1, 1997--all U.S. restrictions on services that connect to
the public networks.
CONCERNS ABOUT COMPETITION
IN INTERNATIONAL
COMMUNICATIONS SERVICES
-------------------------------------------------------- Chapter 0:4.2
INTELSAT and Inmarsat have enjoyed a variety of benefits deriving
from their intergovernmental status that may give them competitive
advantages; in particular, they may enjoy preferential access to
countries' markets because many signatories have governmental
ownership, and many are the regulatory authorities that decide which
satellite systems will have access to their domestic markets.
According to satellite company representatives with whom GAO spoke,
other countries' licensing authorities have imposed a variety of
restrictions, including authorizing earth stations only if they serve
INTELSAT satellites, assessing prohibitively high tariffs,
prohibiting connection to the countries' telephone system, and
denying access to necessary radio spectrum.
As intergovernmental organizations, INTELSAT and Inmarsat also enjoy
simplified application procedures for scarce satellite orbiting
locations above the earth's equator. The organizations' ownership
structure may also give them advantages in obtaining financing for
their satellite systems. Moreover, the INTELSAT and Inmarsat
agreements include provisions specifying that other satellite
companies consult with the organizations to ensure that any proposed
satellite system causes no technical interference and no significant
economic harm to the organizations--provisions that may help protect
the organizations from competition. Finally, their intergovernmental
status may bestow additional advantages such as immunities from
taxation and lawsuits.
At the same time, according to COMSAT, many signatories of INTELSAT
and Inmarsat believe that their obligations to provide universal
service at nondiscriminatory prices force them to make business
decisions that may make them less competitive than private companies
not bound by such obligations. They also believe that the
organizations are unable to respond quickly to changing markets
because of their rigid intergovernmental decision-making structures,
which frequently involve gaining consensus among numerous members
with different interests.
In the two primary markets GAO examined, competition developed
differently. In the market for international telephone service,
various policies by the FCC, INTELSAT, and other countries' licensing
authorities impeded U.S. firms from providing service. The FCC's
"separate systems" decisions implementing the executive branch's
policy originally prohibited and later limited the amount of
international telephone traffic that U.S. satellite firms could
provide. These restrictions were imposed to ensure that no
significant economic harm resulted for INTELSAT. In this market with
restrictions on alternative satellite companies, competition emerged
primarily from an alternative medium: fiber-optic cables. They
provide a higher-quality voice service because they eliminate the
echoes and time delays that are characteristic of geostationary
satellite voice service. In 1988, only 37 countries were served by
these cables, while in 1996 the number has grown to nearly 100.
In the international television/video market, the restrictions on
satellite systems were less pronounced. The FCC did not impose
significant restrictions, although regulatory authorities within
other countries applied restrictions, some of which remain in place.
In the segment of the market for regional broadcasts, competition
from alternative systems is more developed. In general,
representatives of companies that use satellite systems around the
world for regional broadcasts told GAO that they have choices in
contracting for service, and GAO identified a significant number of
systems providing such service. It is important to note, however,
that many of these systems are owned by governments or monopoly
telephone companies that are signatories and therefore may not be
fully distinct from INTELSAT. Additionally, with its excess
capacity, INTELSAT may be the preferred option for short-notice
usage.
In the segment of the market for international and/or transoceanic
broadcasts, the competition remains more limited, with fewer
providers. Several users told GAO that they are more likely to use
INTELSAT when they are transmitting a broadcast internationally, that
is, between regions and/or across oceans. INTELSAT remains dominant
in this market sector with its strong advantage over competitors, who
do not have the same satellite capacity or extensive network of earth
stations in more than 136 countries. At the present time, there is
only one U.S. company, with four satellites, that has achieved
nearly global coverage.
Currently, Inmarsat is the only global provider of mobile satellite
services. At this time, most of these are maritime services, but
Inmarsat plans to introduce land-mobile capabilities. Other
companies also plan to introduce land-mobile services in the near
future.
OPTIONS FOR ADDRESSING
ISSUES AFFECTING COMPETITION
-------------------------------------------------------- Chapter 0:4.3
A variety of options for addressing issues affecting competition in
international telecommunications have been proposed by interested
parties or considered at one time or another, and many are being
pursued today by the United States. Ultimately, gaining global
market access is the key to developing a competitive international
satellite market. Therefore, a major goal of most of the U.S.
efforts is to open access to foreign markets.
Changes in the intergovernmental status of INTELSAT and Inmarsat
could potentially resolve many of the competitive issues, although
some options are less likely to be achievable than others.
Eliminating the organizations and selling off their assets or
creating multiple private companies without retaining an
intergovernmental structure are options that would alleviate most of
the concerns about competition held by both potential competitors and
members of the organizations. But none of these approaches appears
to have enough support within either organization to be adopted,
according to U.S. officials and COMSAT representatives. According
to a State Department official, virtually all members of the
organizations are interested in preserving some intergovernmental
structure, primarily to guarantee the services the organizations were
established to provide.
Options that involve restructuring the organizations by creating
private companies that provide some services and retaining an
intergovernmental structure appear to have more support among members
than other options. The United States has proposed retaining a
smaller INTELSAT, while creating a single affiliate that would not
have intergovernmental status and that would be expected to
concentrate on providing newer services rather than basic telephone
service. For companies competing against the affiliate, such a
restructuring could address many of the disadvantages they may face
but may only indirectly encourage countries to open their markets to
competing satellite systems. The proposal is designed to reduce
signatories' financial incentive, as the telecommunications
authorities in their own countries, to favor INTELSAT's affiliate
over other new entrants when making decisions about access to their
domestic markets. This restructuring could also alleviate some of
the burdens the intergovernmental organizations see as hampering
their efforts to respond to rapidly changing markets. However, the
ownership of the proposed affiliate during the transition might
provide an incentive for signatories to favor INTELSAT's affiliate
over other companies at a critical development period for new
systems. A coalition of private companies has proposed creating more
than one affiliate with ownership structures intended to encourage
greater market access. However, this proposal is not formally under
consideration by INTELSAT.
The United States has also filed a position paper on Inmarsat's
restructuring for consideration by the organization. The principles
supported in the U.S. position paper, such as the importance of
external investment and nondiscriminatory market access, could
potentially resolve many of the competitive issues, but the U.S.
suggestions have not met with much support among other members of the
organization. Competitors are concerned that Inmarsat's access to
spectrum and markets will be transferred to an existing Inmarsat
affiliate largely owned by Inmarsat and its signatories.
To the extent that restructuring retains intergovernmental
organizations that provide services directly, any competitive
advantages associated with the intergovernmental structure will
likely remain for companies competing with them; any disadvantages
the organizations experience will also likely remain. Pending
several decisions by both organizations on the nature of any
restructuring, the impact on competition is uncertain. Both
organizations hope to adopt restructuring plans in 1997.
Market access may be addressed more directly through negotiations
with other countries to remove impediments or through unilateral
control over access to the U.S. market. The United States is
currently engaged in multilateral negotiations through the World
Trade Organization (WTO), an international forum for addressing
issues on trade, to remove barriers to trade in basic
telecommunications services. The United States has offered to open
most of its basic telecommunications markets. The deadline for
agreement has now been extended to February 15, 1997, because other
countries participating in the negotiations have offered only limited
market access. According to an FCC official, with multiple
negotiations ongoing within the WTO and for restructuring the
intergovernmental organizations, the results of one may affect the
results of the others.
Unilateral action is also an option from the vantage point of using
access to the U.S. market as leverage for encouraging access to
other countries' markets. The FCC has proposed regulatory changes
that would base the authorization of a non-U.S.-licensed company to
serve the U.S. market on the extent to which U.S.-licensed systems
are allowed to serve the applicant's home market and some or all of
its other markets.
RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5
This report makes no recommendations.
AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6
GAO provided a draft of this report for review and comment to the
National Economic Council and the Office of Science and Technology
Policy in the Executive Office of the President; the departments of
State, Commerce, Justice, and the Treasury; the FCC, COMSAT, and the
Alliance for Competitive International Satellite Services (ACISS).
The executive branch, the FCC, and ACISS generally agreed with the
report's findings and balance. They provided several clarifications
and more current information, which GAO has incorporated in the
report as appropriate. ACISS commended the report for its balanced
and thorough treatment of the complex issues surrounding the proposed
privatization of INTELSAT and Inmarsat. Comments from ACISS appear
in appendix I.
COMSAT commented that the report accurately describes the importance
and challenge to all new entrants of obtaining market access, the
potential benefits associated with the U.S. proposal for
restructuring INTELSAT, and the indications of competition in certain
segments of the international telecommunications marketplace.
However, COMSAT took issue with and questioned several of the factors
cited in the report as creating competitive advantages and asserted
that the information companies provide in the consultation process
does not contain proprietary data that could benefit INTELSAT as a
competitor. COMSAT was troubled by the report's discussion of (1)
the potential impact of common ownership of satellite systems on
competition and (2) the possibility of cross-subsidization between
Inmarsat and its affiliate, ICO Global Communications Limited (ICO).
In addition, COMSAT questioned the report's characterization of (1)
the relative importance of creating more than one affiliate of
INTELSAT and Inmarsat and (2) the potential impact of successful WTO
negotiations on the U.S. influence in negotiations about
restructuring the intergovernmental organizations.
GAO believes that the report's discussion of likely competitive
advantages accurately reflects the potential impact of attributes of
the institutional framework for providing international satellite
services and that the discussion of selected satellite markets
provides an accurate overview of competition in those areas. The
report acknowledges that COMSAT does not believe that the factors GAO
mentions lead to competitive advantages for the intergovernmental
organizations. GAO has added data from the FCC showing that a
majority of signatories are in a position to influence decisions
about market access. Satellite companies that have undergone
INTELSAT's and Inmarsat's consultation processes told GAO that they
consider the information they had to submit for these processes to be
sensitive and proprietary. Furthermore, empirical studies have found
that ownership ties between competitors can inhibit full competition
between them. With regard to the potential for cross-subsidization,
the departments of State and Commerce have also raised similar
concerns that cross-subsidization between Inmarsat and ICO might
create a financial opportunity not available to investors of
competing systems.
GAO revised its discussion of the potential effect of creating more
than one affiliate to reflect that the developing competition in two
markets that were examined may imply that the marginal benefit of a
second affiliate may not be great. GAO also revised its discussion
of the WTO negotiations to reflect the FCC's clarification that
because a number of different negotiations are ongoing, the results
of one may affect the outcome of others. COMSAT's comments are
addressed in chapters 3 and 4. The complete text of the comments and
GAO's detailed evaluation of them are presented in appendix II.
INTRODUCTION
============================================================ Chapter 1
When the first manned spaceship landed on the moon on July 20, 1969,
500 million people around the world were able to watch Neil Armstrong
take "one giant leap for mankind." It was the most widely viewed
event in history owing to the global commercial communications
satellite system completed that year with the launch of a third
satellite by the International Telecommunications Satellite
Organization (INTELSAT). That satellite system and one to provide
safety and rescue at sea were developed and implemented by
governments that joined together to form INTELSAT and the
International Mobile Satellite Organization (Inmarsat). The success
of these systems helped foster rapid technological advances that
enhanced private companies' ability to successfully construct,
launch, and operate commercial communications satellite systems of
their own.
BASIC CONCEPTS OF SATELLITE
COMMUNICATIONS SYSTEMS
---------------------------------------------------------- Chapter 1:1
The world-famous physicist and science fiction author Arthur C.
Clarke is credited with conceptualizing, in 1945, plans that showed
how three objects orbiting the earth at different locations 22,300
miles above the equator could distribute radio signals that could
reach anywhere on earth. A dozen years later, in the Cold War
environment of the 1950s, the Soviet Union launched Sputnik I, to the
amazement and concern of much of the rest of the world. Although the
United States soon successfully launched its own first
satellite--Explorer I, on January 31, 1958--it was not until the
1960s that establishing worldwide satellite communications became a
major U.S. goal.
The process for communicating through a satellite is based on the
transmission of radio signals on specified frequencies from a station
on earth to a satellite orbiting the earth. These specified
frequencies, or segments of the radio spectrum, are designated for
different uses of the airwaves. The satellite receives the signal,
amplifies it, and returns it to one or more receiving stations on
earth. The sending and receiving earth stations may be fixed or
mobile.
Satellites rotate around the earth at different heights and in
different orbiting patterns. The most widely used practice today for
commercial satellite communications is a geostationary orbit. (See
fig. 1.1.) At a height of 22,300 miles and at a location above the
earth's equator, a geostationary satellite orbits the earth at a rate
that makes it appear stationary over the same location on the earth's
surface; this positioning allows a ground station antenna to remain
pointed at one location in the sky, and the satellite can be tuned
into the same earth stations all the time. Current technology
enables about 120 to 180 geostationary satellites to orbit the earth
using the same radio frequency without being too close to one another
to cause technical interference.\1
Figure 1.1: Geostationary
Satellite in Orbit Above the
Earth's Equator
(See figure in printed
edition.)
Satellites enjoy some important advantages in comparison to other
means of communicating. Because satellites do not rely on the use of
land-based wire, cable, or microwave facilities, earth stations can
be placed almost anywhere. Furthermore, the cost of satellite
communications is the same regardless of distance--whether the
transmission covers 200 or 10,000 miles. Another important
characteristic of satellite communications is that one satellite can
send signals to many different locations on earth at the same time;
one geostationary satellite, for example, can send signals to as much
as a third of the earth's surface all at once. This is particularly
useful in television/video service.
However, satellites also have some disadvantages. For example, voice
transmissions from a geostationary satellite are delayed about a
half-second because of the distance the radio signals must travel.
These delays may also produce an echo. Furthermore, the orbital
slots and the radio frequencies available for different kinds of
satellite services are limited. International coordination of the
use of these resources is required to prevent technical interference
among different satellites operating in the same frequency band.
Finally, some risk is involved in achieving a successful launch and
orbit.
--------------------
\1 Some proposed new systems will use satellites that rotate the
earth at considerably lower levels than geostationary satellites and
on a variety of rotation paths. "Low-earth orbit" and "medium-earth
orbit" satellites (LEO and MEO) will orbit at about 400 to 800 miles
and 6,000 miles, respectively, above the earth. Both LEOs and MEOs
are generally referred to as "big LEOs."
INTERNATIONAL
TELECOMMUNICATIONS SERVICES
---------------------------------------------------------- Chapter 1:2
Satellites can provide any kind of telecommunications service--from
basic telephone service and mobile telephone service; to AM and FM
radio and television broadcasts; to computer networking. They have
played a significant role in video conferencing and private
communications networks for multinational companies. As shown by the
broadcast of the moon landing in 1969, satellites are a useful
vehicle for transmitting special events and news stories, live and
worldwide. The advent of small portable earth stations (for example,
satellite "dishes") less than 3 feet wide has enabled affordable
television transmissions from satellites directly into the home.
Satellites have also fostered the development of planned mobile
personal communications services. As with other satellite services,
recent technological developments have reduced the size and cost of
the mobile handsets and thereby increased their convenience and
desirability. Personal communications service, which is similar to
cellular phone service but has a global service area, aims to provide
an individual with a single telephone number for voice, data, and
facsimile transmissions worldwide.
While underwater cables have always competed against satellites in
providing international telephone service, advances in the capacity
and capabilities of fiber-optic cables in the 1980s have made this
method of transmission increasingly more important. Fiber-optic
cables, where available, have become the medium of choice for
international telephone service because they provide, relative to
satellites, a higher-quality voice service. Over the last decade,
there has been a massive increase in the amount and capacity of
transoceanic fiber-optic cables. Satellites, however, currently can
provide certain kinds of services not currently available with
fiber-optic cables.
THE CONTINUUM FROM GOVERNMENT
REGULATION TO COMPETITION IN
TELECOMMUNICATIONS
---------------------------------------------------------- Chapter 1:3
As telephone service developed in most countries, governments either
operated the phone company or, as was the case in the United States,
authorized one highly regulated firm to provide most domestic and
international service. Because telecommunications was traditionally
so closely aligned with governments, it was used as a vehicle for
promoting a variety of social goals in many, if not most, countries.
For example, in the United States and elsewhere, certain aspects of
telephone service, such as long-distance service, were priced higher
than the cost of producing them in order to price others, such as
basic local service, below cost. Furthermore, in many countries,
revenues from telephone service have been used to subsidize the
postal service.
When INTELSAT and Inmarsat were established, the member governments
put in place a number of protections to encourage the development of
their satellite systems. In essence, the intergovernmental
organizations were created as international monopolies, though
domestic and other systems were allowed under certain conditions.
Such an arrangement is unlike a competitive market, which typically
involves a significant number of firms providing a product, prices
based on costs, easy entry by new firms, and a lack of collusion
among firms. Even when there are few firms operating in a market,
the ideal competitive outcomes can be achieved if new firms can
enter--or threaten to enter--easily.
The tight control of telecommunications by national governments has
been easing in some cases. U.S. policymakers, for example,
determined some time ago, that not all aspects of telephone service
were best provided by one producer, so some markets were opened up to
competitors. Recently, some other countries, too, began privatizing
their telecommunications markets. However, there are still many
countries, particularly in the developing world, that retain tight
control over telecommunications.
In the United States, recent efforts to promote domestic
telecommunications services include the enactment of major
legislation that, according to the Federal Communications Commission
(FCC), will lessen regulation in order to reduce prices, increase the
quality of services, and encourage the rapid deployment of new
technologies through more competition. The Telecommunications Act of
1996 (P.L. 104-104, Feb. 8, 1996) makes sweeping changes affecting
all consumers and telecommunications service providers. The law aims
to ultimately open all domestic telecommunications markets to
competition.
OBJECTIVES, SCOPE, AND
METHODOLOGY
---------------------------------------------------------- Chapter 1:4
Interested in fostering competition in not only domestic but also
international telecommunications, the Chairman of the Senate
Committee on Commerce, Science and Transportation asked us to (1)
describe the institutional framework for providing international
communications satellite services; (2) determine if any elements of
the framework may hinder competition and, if so, how; and (3)
identify some key options for resolving any competitive issues
identified.
To meet our objectives, we reviewed the relevant statutes,
regulations, and intergovernmental agreements. We obtained
additional documentation and information from representatives of the
National Economic Council, the Office of Science and Technology
Policy, the Council of Economic Advisors--all of which are in the
Executive Office of the President; the FCC, the departments of State,
Commerce, Justice, and the Treasury; COMSAT Corporation (COMSAT);
INTELSAT; and Inmarsat. In addition, we reviewed the relevant
literature on the history, institutional operations, legal aspects,
and economic issues. We also obtained information from the industry
coalition Alliance for Competitive International Satellite Services
(ACISS),\2 as well as representatives of several other satellite
companies operating, licensed to operate, or applying for licensing
to establish their own satellite systems.
The most direct way of determining if a market is competitive is to
look at the relationship between the prices that a firm charges its
customers and the firm's costs, to determine if the company is
charging large markups. Because price and cost data for satellite
services are not generally available or readily usable, we used other
important indicators of the competitiveness of this market, such as
the number of firms providing the services and the difficulty or ease
with which new firms can begin providing services. As a result,
while we cannot firmly conclude that any particular market in which
INTELSAT provides services is or is not competitive, we can offer
indications of the degree of competition.\3 Still, that information
must be augmented by other important information, such as the degree
to which owners of INTELSAT are also owners of some alternative
systems.
In examining competition, we analyzed data, including ownership
information, on domestic, regional, and other satellite systems,
which we obtained from (1) Dailink Satcoms, Ltd., in Virginia, and
(2) Design Publishers, Inc., in California. We also relied on
discussions with a selection of U.S.-based companies that use
international communications satellite services, including
broadcasters and multinational corporate users. We did not, however,
do a country-by-country evaluation of regulatory authorities' access
policies for alternative satellite systems, and we did not talk with
signatories who are users or with users licensed by other countries'
signatories.
We provided a draft of this report for review and comment to the
National Economic Council and the Office of Science and Technology
Policy in the Executive Office of the President; the departments of
State, Commerce, Justice, and the Treasury; the FCC; COMSAT; and
ACISS. COMSAT's complete comments and our responses to them are
presented in appendix II.
We conducted our review from November 1995 through September 1996 in
accordance with generally accepted government auditing standards.
--------------------
\2 ACISS comprises Columbia Communications Corporation, Motorola
Inc., Odyssey Worldwide Services, Orbital Communications Corporation,
Orion Network Systems, PanAmSat Corporation, and TRW Inc.
\3 Inmarsat currently faces no competition in global mobile satellite
services, though other providers are expected to enter the market
starting in about 2 years.
THE INSTITUTIONAL FRAMEWORK FOR
SATELLITE COMMUNICATIONS WORLDWIDE
============================================================ Chapter 2
Spurred on by technological advances and Cold War pressures, the
United States enacted the Communications Satellite Act of 1962 to
establish a commercial communications satellite system that would
serve the nations of the world. The risks involved in the untested
technology encouraged many nations to join together first through
INTELSAT and second through Inmarsat to implement global systems that
would provide services on land, and for safety and rescue at sea,
respectively. The actual operation of the satellite systems is the
responsibility of entities designated by member governments as their
signatory to the organizations. Signatories manage the systems, are
responsible for their financial needs, and share in the earnings.
The U.S. signatory, the private corporation COMSAT, is subject to
U.S. government regulation in its responsibilities in this capacity.
As the U.S. signatory, COMSAT is the only U.S. company authorized
to purchase INTELSAT and Inmarsat satellite capacity directly for
resale to the U.S. market. U.S. regulations have evolved from
protecting and nourishing the intergovernmental organizations to
increasing support of competition from separate satellite systems.
Through another international organization--the International
Telecommunication Union (ITU)--members coordinate the technical
compatibility of satellites around the world and the allocation of
radio frequencies for different kinds of satellite services.
INTERGOVERNMENTAL AND
REGULATORY FRAMEWORK FOR A
GLOBAL SYSTEM
---------------------------------------------------------- Chapter 2:1
With passage of the Communications Satellite Act of 1962, the United
States set a goal for the nation, and the world, to create a
commercial communications satellite system that would, among other
things, "serve the communications needs of the United States and
other countries and . . . contribute to world peace and
understanding." To implement this goal, the act created the
Communications Satellite Corporation (COMSAT),\1 a private,
profit-seeking corporation subject to U.S. government regulation of
its responsibilities under the 1962 act. The act gave COMSAT broad
responsibility for planning, developing, implementing, and
managing--alone or in conjunction with foreign entities--a commercial
communications satellite system. COMSAT was further authorized to
market the system's capacity and own and operate licensed stations on
the ground.
--------------------
\1 On June 1, 1993, the Communications Satellite Corporation changed
its name to COMSAT Corporation.
INTELSAT
-------------------------------------------------------- Chapter 2:1.1
When the 1962 act was passed, the technology for providing global
satellite communications was still under development and considered
by many too risky for a private company to pursue alone. It appeared
at that time that the most effective way to develop, implement, and
operate a commercial communications satellite system that could serve
all nations of the world would be through a consortium of nations
joined together in an intergovernmental organization. Therefore, at
the initiative of the United States and COMSAT, INTELSAT was
established, first through an interim agreement in 1964 and finally,
in 1973, by an intergovernmental agreement with other countries.
Under the 1973 agreement, INTELSAT's purpose is to design, develop,
implement, and operate a global commercial communications satellite
system. Its prime objective is to provide international commercial
satellite communications on a nondiscriminatory basis to all areas of
the world. INTELSAT's rates are nondiscriminatory in the sense that
for a given service, they are the same no matter where they are
provided across the world. However, a given service may have a
series of rates that vary depending on the amount of the service
purchased or the length of the contract. Therefore, INTELSAT
generally does charge lower rates to larger and more permanent
customers.
Currently, INTELSAT has 139 member countries and operates 24
satellites that provide voice, data, and video communications.
INTELSAT holds 31 orbital slots for geostationary satellites and has
applications for 10 more pending within the ITU, an international
organization within which governments and the private sector
coordinate global telecommunications networks and services.
INTELSAT includes three decision-making bodies, which aim for
consensus in their decision-making, and a management staff that
handles day-to-day business activities, as shown in figure 2.1. The
Assembly of Parties is composed of representatives of the member
nations and, as the principal governing body of the organization, is
supposed to meet once every 2 years to consider issues of general
policy and long-term objectives. Each member government appoints a
signatory, usually a telecommunications agency or company with
government ownership; the signatories are the investors in and the
agents for the satellite system. Users within each country purchase
INTELSAT satellite capacity from their country's signatory; although
more than 70 countries now allow direct purchase and direct billing
from INTELSAT, they may allow this kind of access only to designated
companies, according to an INTELSAT representative. As the U.S.
signatory, COMSAT is the only entity authorized to purchase INTELSAT
satellite capacity directly and resell it to the U.S. market. All
signatories participate in the Meeting of Signatories, which meets
annually, to consider financial, technical, and operational issues.
The Board of Governors is composed of signatories and has the direct
responsibility for designing, developing, establishing, operating,
and maintaining the satellite system. While voting within the
Assembly of Parties and the Meeting of Signatories is one vote per
member, voting on the Board of Governors is based on a signatory's
investment share. Each signatory's investment share, in turn, is
based on its share of INTELSAT's total sales of satellite services.
For example, COMSAT currently holds a 19-percent share of the
investment in INTELSAT and thus holds 19 percent of the voting shares
within the Board of Governors.
Not all signatories sit on the Board of Governors. Membership is
based primarily on a signatory's or group of signatories' investment
share in INTELSAT, with an additional maximum of five signatories
that can be chosen to represent regional groupings of members
regardless of their investment share. As of June 1996, there were 27
members of the Board, but total membership can vary slightly because
of changes in investment shares or regional representations. The
day-to-day management of INTELSAT is handled by a Director General,
in Washington, D.C., who reports directly to the Board of Governors.
The signatories are responsible for financing INTELSAT. Each
signatory is responsible for contributions, in proportion to its
share of the satellite system's use, for capital expenditures to
cover the costs of INTELSAT's operations as well as the direct and
indirect costs for designing, developing, and operating the system.
INTELSAT's profits are distributed to the signatories on the basis of
their investment shares.
Figure 2.1: The Organization
and Services of INTELSAT
(See figure in printed
edition.)
Note: COMSAT, with its 19-percent investment share, is the largest
investor in INTELSAT. COMSAT is also the largest user of the
satellite system.
INMARSAT
-------------------------------------------------------- Chapter 2:1.2
In similar fashion, but for different services, the United States and
COMSAT joined with other nations in July 1979 to form the
International Maritime Satellite Organization, later renamed the
International Mobile Satellite Organization, or Inmarsat, in order to
provide satellite services for improving maritime communications,
especially for maritime distress and safety at sea. Inmarsat's
mandate was later expanded to include aeronautical services, and
additional amendments to the Inmarsat agreement that would allow
members to provide mobile services on land are pending.
As figure 2.2 shows, Inmarsat, like INTELSAT, is composed of member
governments and their signatories, with similar governing and
financial responsibilities. Currently, Inmarsat has 79 member
countries and operates a global system of eight satellites, with four
operational and the other four used as backups. As with INTELSAT,
COMSAT is the U.S. signatory and, as such, the only entity
authorized to purchase Inmarsat satellite capacity directly for
resale to the U.S. market. Member governments meet every 2 years in
the Assembly, where each has one vote. The Council, which is
responsible for developing and operating Inmarsat's satellite system,
is composed of a maximum of 22 signatories, some of which may
represent a group of signatories. Membership is based on
signatories' investment shares and a guarantee of geographical
representation. Voting in the Council is weighted on the basis of
investment shares. Both the Assembly and the Council aim for
decisions by consensus. Reporting to the Council, the Directorate,
which is headquartered in London, manages Inmarsat's daily business
activities.
Figure 2.2: The Organization
and Services of Inmarsat
(See figure in printed
edition.)
Note: COMSAT, with a 23-percent ownership share, is the largest
investor in Inmarsat. COMSAT is also the largest user of the
satellite system.
THE ESTABLISHMENT OF OTHER
SATELLITE SYSTEMS UNDER THE
INTELSAT AND INMARSAT
AGREEMENTS
-------------------------------------------------------- Chapter 2:1.3
When the intergovernmental organizations were established, member
nations of both INTELSAT and Inmarsat agreed to consult with one
another when either they or anyone in their country wants to
establish or use an international satellite system other than the
ones established by the organizations. Under the INTELSAT agreement,
anyone wanting to establish an international satellite communications
system must provide INTELSAT with information that enables it to
evaluate the system in order to ensure that
-- the system will not cause technical interference to INTELSAT's
system and
-- the system avoids causing significant economic harm to INTELSAT.
The Inmarsat agreement has similar provisions, although the test
concerning economic harm applies for maritime communications, as
opposed to safety services.
RESPONSIBILITIES OF U.S.
AGENCIES
-------------------------------------------------------- Chapter 2:1.4
Three U.S. federal agencies share key responsibility for the
policies, activities, and regulations concerning U.S. international
satellite communications: the Department of State's U.S.
Coordinator for International Communications and Information Policy,
the Department of Commerce's National Telecommunications and
Information Administration, and the FCC. These three agencies are
responsible for, among other things, issuing instructions to COMSAT
in its role as the U.S. signatory to the intergovernmental
organizations. The agencies decide together, with input from COMSAT,
what position to pursue in the organizations' meetings and how COMSAT
should vote. The FCC also regulates U.S. companies providing
domestic and international telecommunications services. In this
regard, the FCC approves COMSAT's funding of INTELSAT and Inmarsat.
The FCC also regulates the prices COMSAT charges its customers and
its rate of return on its investment in the intergovernmental
organizations. Other agencies, such as the departments of Justice
and Treasury and offices within the Executive Office of the
President, participate in formulating U.S. policy on INTELSAT and
Inmarsat through an interagency coordinating committee that includes
the State and Commerce departments and the FCC.
The FCC's regulatory policies affecting international satellite
communications are evolving over time from ones designed to ensure
the commercial viability of INTELSAT and Inmarsat to ones in support
of worldwide competition. For many years, the United States did not
authorize the use of any other U.S. satellite systems besides
INTELSAT's and Inmarsat's to provide commercial international
satellite communications--although under the 1962 act, the creation
of other systems was not precluded if required to meet unique
governmental needs or if deemed to be in the national interest. In
early 1981, the FCC authorized use of U.S., Canadian, and Mexican
domestic satellites for transborder communications within guidelines
established by the executive branch. In 1983, several companies
filed applications with the FCC to establish satellite systems to
compete with INTELSAT's. In response, in 1984 President Reagan
issued Presidential Determination No. 85-2, which stated that the
President had determined that separate international communications
satellite systems were required in the national interest. Two
conditions were placed on the proposed satellite systems by the
executive branch: (1) that the companies not be permitted to provide
services that interconnected with the public networks and (2) that
they consult with INTELSAT pursuant to obligations under the
intergovernmental agreement. The latter provision required the
companies to provide INTELSAT with information about their business
plans in order to clear the consultation process.
In implementing the President's decision, the FCC issued regulations
that initially precluded other companies from competing with
INTELSAT's service that connected to a country's public
networks--principally international telephone service. That
restriction was intended to ensure that new companies did not cause
INTELSAT significant economic harm, thereby safeguarding INTELSAT's
financial integrity. According to an FCC official, such a
restriction was deemed necessary to gain approval from INTELSAT,
which was actively opposing competition. As a result, companies
focused on services they were allowed to provide, primarily
international private communications networks and international
television/video service. Over time, INTELSAT made a series of
determinations that separate satellite systems providing increasing
levels of services would not cause it significant economic harm.
According to a State Department official, INTELSAT's changes resulted
from U.S. pressure. In response to those changes, the FCC has been
incrementally lifting the restrictions on the services other
companies may provide and, pursuant to the executive branch's goal,
plans to remove by January 1, 1997, all restrictions on international
satellite services that connect to the public networks.
Similarly, to help INTELSAT flourish, even in the face of competition
from transoceanic cables, in 1971 the FCC issued a guideline that
required reasonable parity in the use of cables and satellites by
AT&T (American Telephone and Telegraph) on its transatlantic routes.
Later, in 1988, that policy was eliminated, in part because INTELSAT
no longer needed the guaranteed level of use of its satellites.
Likewise, in 1966, earth stations located in the United States that
were serving INTELSAT's system were required to be owned half by
COMSAT. In 1984, the FCC removed that restriction in order to
benefit users by increasing their options and creating competitive
pressures on rates. The FCC also required COMSAT to price its
satellite and earth station services separately to help foster
competition in the operation of earth stations.
Most recently, the FCC's policies have been designed primarily to
assist U.S. companies competing to establish their own satellite
systems serving the international market. As described in chapter 4,
proposed regulations are being considered to facilitate market access
here and abroad for competing companies.
Table 2.1 lists how many companies have been licensed by the FCC, are
operational, and are applying for licenses to establish their own
satellite systems.
Table 2.1
U.S. Companies Licensed, Operational,
and With Applications Pending to Provide
International Satellite Communications
Services
Number of companies
----------------------------------------
Unlicensed,
with
applications
Type of satellite system Licensed Operational pending
---------------------------- ------------ ------------ ------------
Geostationary\a 4 4 0
Big LEO\b 3 0 3
Little LEO\c 3 1 6
Broadcasting satellite 0 0 1
services\d
28 GHz frequency or higher\e 0 0 11
----------------------------------------------------------------------
\a These satellite systems are operating in the C band of the
spectrum (the 4 and 6 gigahertz [GHz] portion of the spectrum) and
the Ku band (12 and 14 GHz); hertz and GHz (1 billion hertz) are
standard measures of radio frequency.
\b Big LEOs transmit radio signals above 1 GHz. These satellite
systems will be generally used to send voice and facsimile, as well
as nonvoice (or data), transmissions.
\c Little LEOs transmit radio signals below 1 GHz on the spectrum.
These satellite systems are generally used to send only nonvoice data
transmissions.
\d The satellites of these systems are geostationary, but the systems
are licensed under a separate licensing category. They offer one-way
communications.
\e These systems, with satellites that are either geostationary ones
or LEOs, are planned to operate at or above 28 GHz on the spectrum
(the Ka and EHF bands). Services will include on-demand data or
video applications directly to the home.
INTERNATIONAL COORDINATION OF
SATELLITE OPERATIONS
---------------------------------------------------------- Chapter 2:2
The International Telecommunication Union (ITU) in Geneva,
Switzerland, is an international organization within which
governments and the private sector coordinate global
telecommunications networks and services. Founded in Paris in 1865
as the International Telegraph Union, the ITU took its present name
in 1934 and became a specialized agency in the United Nations in
1947.
Member countries of the ITU adopt international regulations and
treaties governing all land and space uses of radio frequencies as
well as the uses and allocation of the geostationary satellite
orbits. The goal of the ITU's coordination procedures is to enable
satellites and satellite systems to operate with minimal, if any,
interference.
For companies wanting to launch a satellite that orbits above the
earth's equator, a country must request use of a specific orbital
location (for example, 31\o west longitude) at a given radio
frequency. Information submitted to the ITU must be sufficient to
permit another country to ascertain whether the proposed satellite's
operation may adversely affect one of its satellites or systems. A
country has 4 months to comment on any potential interference. When
such a potential exists, countries work within the ITU forum to
resolve the issue. According to a State Department official,
countries usually work bilaterally through the ITU procedures to
resolve issues concerning potential interference. Once the final
coordination is complete, the ITU records the assignment on its
master register.
Under the INTELSAT agreement, in order to protect the organization
from technical harm, companies wanting to launch their own satellites
must consult with the organization as well as coordinate with the
ITU. Because members of INTELSAT must also belong to the ITU, this
review by INTELSAT has essentially supplanted the need for additional
coordination with INTELSAT through the ITU, according to FCC
officials. On the other hand, in Inmarsat, the coordination with the
ITU generally supplants the need for a technical consultation with
Inmarsat.
CONCERNS ABOUT COMPETITION IN
INTERNATIONAL COMMUNICATIONS
SERVICES
============================================================ Chapter 3
There are concerns that INTELSAT and Inmarsat have competitive
advantages owing to their intergovernmental status and ownership
structure. At the same time, these international satellite
organizations believe that they have certain disadvantages in
competing with private companies. Because price and cost data for
satellite services are not generally available or readily usable, in
examining competition we interviewed representatives of (1) current
and potential alternative providers of communications services and
(2) COMSAT, the U.S. signatory to the intergovernmental
organizations, and we used other information, namely, the number of
firms providing services and the difficulty or ease with which new
firms could begin providing services. We found that competition
developed differently in two primary markets for international
communications services. In the market for international telephone
service, where various policies impeded U.S. satellite firms from
providing service, competition emerged primarily from an alternative
medium: fiber-optic cables. In the international television/video
market, the restrictions on satellite systems were less pronounced.
It appears that in the segment of the market for regional broadcasts,
competition from alternative systems is somewhat more developed, but
in the segment of the market for international and/or transoceanic
broadcasts, competition remains more limited.
A VARIETY OF FACTORS MAY
INFLUENCE COMPETITION
---------------------------------------------------------- Chapter 3:1
The institutional framework that defines the market for commercial
international satellite services provides an array of factors that
may influence competition within the market. For example, the
intergovernmental organizations, INTELSAT and Inmarsat, have enjoyed
a variety of advantages deriving from their intergovernmental status;
in particular, many of the signatories are wholly or partially
government-owned and also may serve as the regulatory authorities
that make decisions about which satellite systems will have access to
their domestic markets. On the other hand, many members of INTELSAT
and Inmarsat believe that the organizations themselves are
disadvantaged because they are obligated to provide universal service
at nondiscriminatory prices and because their intergovernmental
structure can cause sluggish decision-making in a rapidly changing
market.
FACTORS THAT MAY PROVIDE
ADVANTAGES TO THE
INTERNATIONAL SATELLITE
ORGANIZATIONS
-------------------------------------------------------- Chapter 3:1.1
As we reported in July,\1 a number of factors have been cited as
providing benefits to the international satellite organizations.
--------------------
\1 See Telecommunications: Competitive Impact of Restructuring the
International Satellite Organizations (GAO/RCED-96-204, July 8,
1996).
PREFERENTIAL ACCESS TO
FOREIGN MARKETS
------------------------------------------------------ Chapter 3:1.1.1
To provide international service to a country, a satellite system
must gain permission from domestic licensing authorities for the
right to do business within the country's borders. INTELSAT,
Inmarsat, and their affiliates may enjoy an advantage in gaining
access to markets around the world because the licensing authorities
granting such permission within many countries are signatories to the
intergovernmental organizations and typically have government
ownership. For example, data from the FCC state that 71 percent of
INTELSAT's signatories are the regulatory authorities that decide on
such things as licensing, spectrum allocation, and market access.
As investors in INTELSAT or Inmarsat, signatories may have a
financial incentive to favor the organizations over other potential
competitors. According to a Treasury Department official, the
financial incentives of signatories as both investors in INTELSAT's
satellite system and as owners of the earth stations that link up
with INTELSAT's satellites, when combined with INTELSAT's excess
capacity, may create an impediment for other companies trying to
enter the market. According to representatives of alternative
satellite systems, some countries have been very restrictive in
allowing these systems to operate within their borders. These
representatives told us that countries have carried out restrictions
in a variety of ways, including (1) authorizing earth stations only
if they serve INTELSAT's satellites, (2) assessing prohibitively high
tariffs on the smaller earth stations often used by private satellite
systems, (3) prohibiting alternative systems' interconnection with
the countries' telephone network, and (4) denying or restricting
access to necessary radio spectrum within the countries for the
transmission of satellite signals.
FASTER ACCESS TO ORBITAL
POSITIONS
------------------------------------------------------ Chapter 3:1.1.2
As intergovernmental organizations, INTELSAT and Inmarsat have
enjoyed faster access to ITU's registration of scarce geostationary
satellite orbital locations. Because of provisions in the
organizations' governing documents, the host countries (the United
States for INTELSAT and the United Kingdom for Inmarsat) are required
to promptly file applications with the ITU without the interim step
of national review, as required for U.S. companies. According to
the FCC, which processes INTELSAT's applications for orbital
positions, the submission of the applications through the host
country is a formality taking just 1 or 2 days, and applications are
forwarded to the ITU automatically. The applications of private U.S.
companies, on the other hand, are not submitted to the ITU until the
FCC has reviewed them. The FCC forwards the applications to the ITU
sometime during the licensing process.\2 The FCC's licensing process
for the first two international satellite companies using
geostationary orbital locations has taken, on average, more than 5
years. For geostationary satellites originally licensed to provide
U.S. domestic services only, once the needed policies were
formulated, the licensing process has been taking about 1-1/2 years,
according to an FCC official.
Under the ITU's coordination process, timing is an important factor
in obtaining access to scarce orbital positions. The first applicant
for a location has a presumptive claim to it, and once the
applicant's satellite is in place, subsequent applicants bear, in
practice, a greater burden of ensuring that their satellites will not
cause interference. In the United States, differences in the length
of time it takes for applications from INTELSAT to go forward to the
ITU and the length of time it takes for other companies' applications
may create an advantage for the intergovernmental organizations.
--------------------
\2 The FCC's licensing process spans from the initial submission of
an application through the issuance of a license. The FCC's
forwarding of the application to the ITU occurs at some intermediate
point.
FINANCIAL ADVANTAGES
------------------------------------------------------ Chapter 3:1.1.3
The intergovernmental nature of INTELSAT and Inmarsat may provide
them with more readily available financing than potential competitors
are likely to enjoy. Both organizations have relatively favorable
access to financing because they can assess their signatories as well
as pursue financing through the debt markets. Furthermore,
commercial lending institutions are likely to view INTELSAT and
Inmarsat as desirable investments because of the signatories' ties to
their governments in most countries. On the other hand,
representatives from the Alliance for Competitive International
Satellite Services (ACISS) told us that private companies wanting to
compete with INTELSAT and Inmarsat have had difficulty in obtaining
the needed level of equity and debt financing. Moreover, when they
do obtain debt financing, they tend to have to pay considerably
higher rates. One reason that raising capital for satellite systems
is difficult may be the expense of such projects.
REQUIREMENTS FOR
TECHNICAL AND ECONOMIC
COORDINATION
------------------------------------------------------ Chapter 3:1.1.4
INTELSAT's and Inmarsat's consultation requirements may have resulted
in disadvantages to companies wanting to compete with either
organization. For example, some companies told us that they have
been harmed competitively because, as part of the consultation
process, they had to provide INTELSAT, a future competitor, with
information about their business plans, including sensitive and
proprietary business information.\3 Furthermore, in the United
States, the FCC's licensing of a new system is conditioned on a
determination from the intergovernmental organizations that the
company's plans will cause the organizations no technical
interference and no significant economic harm.
According to COMSAT representatives, however, in recent years
INTELSAT has been reforming its evaluations of technical and economic
harm. INTELSAT has determined that an increased amount of basic
telephone service can be provided by alternative satellite companies
without causing it significant economic harm. COMSAT representatives
also report that both INTELSAT and Inmarsat are close to officially
eliminating the requirement that they review a company's plans for
the economic impact on the organizations. According to an INTELSAT
official, while the requirement remains in the INTELSAT agreement,
the intergovernmental organization determined in 1992 that companies
could provide services other than basic telephone service without
causing it significant economic harm. Furthermore, COMSAT
representatives point out that while the requirement remains in the
Inmarsat agreement, 2 years ago the organization adopted a resolution
establishing a presumptive determination that no satellite system
could cause it economic harm. Competitors contend this does not
guarantee that they will not later be denied operating privileges if
competition does affect Inmarsat.
Nevertheless, the results of a recent consultation for a U.S. firm
raise new concerns because INTELSAT appears to have expanded the
criteria used to determine if a company's operation will cause
unacceptable technical interference with INTELSAT's system.
Specifically, according to FCC officials, INTELSAT added an economic
component--the value of expected revenue from a satellite placed in a
particular orbital position--as a criterion in its finding of
unacceptable technical interference.\4
--------------------
\3 COMSAT pointed out that it too provides technical and business
information in certain filings it must make with the FCC as a common
carrier. According to an FCC official, COMSAT must make those
filings in order to participate in INTELSAT's and Inmarsat's
procurements and expansion of services.
\4 The company originally was leasing a satellite for a limited
number of years, after which INTELSAT was to operate its own
satellite close enough for there to be technical interference on the
same frequency. When the life of the leased satellite was extended,
the company applied to the FCC for permission to continue operating
beyond the original deadline. After INTELSAT's finding of
unacceptable technical interference, the company filed a new
application with the FCC requesting special temporary authority to
continue to be able to offer services to customers beyond the
original deadline. Concerned that INTELSAT had put its own
commercial interest before its public interest obligations, the FCC
granted the special temporary authority. According to an FCC
official, the FCC acted to prevent the company from being forced from
the market and thus harming competition. The FCC also ordered the
company to seek a mutually acceptable resolution with INTELSAT under
the ITU's provisions and to apply for permanent authority to operate.
See Application for Special Temporary Authority to Remove Conditions
on its Existing Authorization to Operate C-Band Transponder Capacity
on the National Aeronautics and Space Administration (NASA) Tracking
and Data Relay Satellite System ("TDRSS") Space Station at 41 Degrees
West Longitude, Order and Authorization, DA 96-703 (May 6, 1996)
(Columbia Communications Corporation Decision).
SIZE AND DOMINANCE
------------------------------------------------------ Chapter 3:1.1.5
Some analysts have stated that INTELSAT, in particular, dominates the
market for international satellite communications because of its
size. The organization is considerably larger, in terms of its
capacity and volume of services, than any of the other satellite
systems throughout the world.\5 Some analysts have suggested that its
large number of satellites and extensive capacity to provide
communications services give INTELSAT an ability to dominate the
market to the detriment of other firms. Although Inmarsat is not
nearly as large in terms of assets or capacity, currently it is the
only provider of global mobile satellite services. Inmarsat plans to
augment its capacity and service offerings of global land-mobile
services through its affiliate, ICO Global Communications Limited
(ICO), in the same time frame that private competitors plan to begin
offering similar services.
--------------------
\5 As this report was being finalized, there were press reports that
GM Hughes Electronics Corporation was acquiring PanAmSat, the only
global private satellite system competing with INTELSAT. The
acquisition would create a company that combined Hughes' 10 domestic
satellites with PanAmSat's 4 and the latter's plans for about 7
additional satellites, bringing the combined total to about 20
satellites, second only to INTELSAT in the number of geostationary
satellites.
PRIVILEGES AND IMMUNITIES
------------------------------------------------------ Chapter 3:1.1.6
Under the intergovernmental agreements that members of INTELSAT and
Inmarsat signed, the organizations enjoy certain privileges and
immunities. For example, both INTELSAT and Inmarsat are exempt from
taxation on their earnings and are immune from lawsuits. The
exemption from taxation may provide the organizations with financial
advantages relative to other satellite systems, although the
signatories themselves may be subject to taxation within their home
nation on their share of the organizations' earnings, as is the case
with COMSAT. Immunity from lawsuits may allow the organizations to
act in the market in ways that their competitors cannot under U.S.
antitrust laws.\6
--------------------
\6 In 1989, the corporate predecessors of PanAmSat brought suit
alleging that COMSAT, through INTELSAT and in conjunction with other
signatories, engaged in a variety of anticompetitive practices in the
market for international commercial satellite telecommunications
services. The United Stated District Court for the Southern District
of New York dismissed the complaint on the grounds that signatories
were "representatives of the parties," that the immunity clause of
the Headquarters Agreement covering representatives therefore applied
to signatories such as COMSAT, and that the antitrust provision of
the Communications Satellite Act of 1962 did not apply to COMSAT's
actions as a signatory. The U.S. Court of Appeals for the Second
Circuit affirmed this ruling and sent the case back to the lower
court to give PanAmSat an opportunity to file its claims against
COMSAT in its role as a common carrier, and not as an immune
signatory. In a recent ruling, the U.S. District Court dismissed
the 1989 lawsuit, holding that PanAmSat failed to present sufficient
evidence to support its charges that COMSAT had violated antitrust
laws and engaged in predatory pricing. See PanAmSat v. COMSAT
Corp., Opinion and Order, 89 Civ. 5021 (S.D.N.Y.), Sept. 4, 1996.
FACTORS THAT MAY
DISADVANTAGE THE
INTERNATIONAL SATELLITE
ORGANIZATIONS
-------------------------------------------------------- Chapter 3:1.2
According to COMSAT, the factors described above do not necessarily
translate into unfair competitive advantages in the marketplace.
COMSAT points to (1) the growth of alternative satellite systems as
evidence that the perceived advantages do not prevent entry into the
market and (2) the cumulative effect of these alternative systems and
fiber-optic cables as evidence that INTELSAT no longer has market
dominance. COMSAT also believes that while the intergovernmental
organizations have some advantages, they also bear responsibilities,
including the obligation to provide universal service at
nondiscriminatory prices, which may limit their ability to compete in
the market.
The requirement of meeting varied countries' needs for communications
has led INTELSAT to have mostly "multipurpose" satellites, rather
than ones that specialize in service for one particular segment of
the market. According to COMSAT representatives, having primarily
multipurpose satellites may degrade the quality of specific types of
services other than basic telephone service. Therefore, the
officials explain, in offering these specific services, INTELSAT must
compete against others that have more specialized technology. ACISS
officials point out, however, that some of INTELSAT's newer
satellites have been designed to focus on television/video service.
COMSAT also points out that the intergovernmental nature of the
organizations leads to slow decision-making. Discussions aim to gain
consensus among varied nations, sometimes with varied interests.
Consequently, according to COMSAT, INTELSAT and Inmarsat are impeded
in their ability to respond to a rapidly changing market. ACISS
officials contend, on the other hand, that INTELSAT and Inmarsat can
act quickly when need be, as illustrated in recent statements by
representatives of both organizations. For example, INTELSAT's
Director General stated in an April 1996 introduction to INTELSAT's
1995-96 annual report that the organization will be flexible in order
to introduce a wide range of new services that may be necessary to
enable it to compete effectively in the future. A recent press
report noted that INTELSAT expects to complete the contract process
for a new high-power satellite to provide direct-to-home television
service in the Asia-Pacific region in 3 months instead of the normal
6 to 12 months.
COMPETITION HAS DEVELOPED
DIFFERENTLY ACROSS KEY
INTERNATIONAL COMMUNICATIONS
MARKETS
---------------------------------------------------------- Chapter 3:2
It is difficult to discuss the issue of competition in the
international communications market or the international satellite
market in a general sense. Analyzing competition in the aggregate
may not be appropriate because of the varied institutional and market
characteristics surrounding the different services and the varied
geographic settings for them. Therefore, citing INTELSAT's ownership
of about one-fourth to one-third of the satellite capacity in the
world may not provide relevant information about the degree of its
dominance in all contexts. For basic telephone service between two
countries well served by fiber-optic cables, for example, INTELSAT's
overall share of satellite capacity may overstate its dominance
because the figure does not take into account the service by
fiber-optic cables. On the other hand, for television/video
broadcasts within Africa, a continent that currently does not have
many domestic or regional satellite systems, INTELSAT's market
dominance is likely understated by its overall share of satellite
capacity.\7
Because of such limitations in evaluating competition in a general
sense, we examined two distinct primary markets: the one for
international telephone service and the one for television/video
service.\8 For this second market, we considered the separate
segments for the regional distribution of broadcasts and for
international and/or transoceanic transmissions. In examining
competition in these markets, we could not rely on price and cost
data because they are not generally available or readily usable.
However, we could examine the availability of alternative providers
and the ability of firms to enter markets--important indicators of
the degree of competition.
In the market for international phone service, where policies by the
U.S. government, INTELSAT, and other countries' licensing
authorities impeded U.S. satellite firms from providing service,
competition emerged primarily from an alternative to satellites:
fiber-optic cables. In the market for television/video service, the
restrictions on satellite systems were less extensive. In the
segment of the market for regional broadcasts, a few U.S. and
foreign satellite companies have become viable competitors. However,
in the segment of the market for international and/or transoceanic
broadcasts, INTELSAT remains dominant because of its extensive
network and capacity. The competitive development of these markets
may shed light on concerns about competition in the emerging market
for international mobile personal communications, where Inmarsat
currently is the only provider.
--------------------
\7 While there are submarkets in which satellites provide services,
there is substitutability in supply across these markets. That is,
INTELSAT may currently devote a high percentage of its capacity to
international telephone service, but as changes in demand and other
market factors require less of its capacity for this service,
INTELSAT can use that capacity to provide other services. Thus,
these submarkets are distinct but linked.
\8 These are not the only markets within which satellites operate.
In particular, various business services are among the fastest
growing markets.
FIBER-OPTIC CABLES ARE AN
IMPORTANT NEW MEDIUM IN THE
MARKET FOR INTERNATIONAL
TELEPHONE SERVICE
-------------------------------------------------------- Chapter 3:2.1
Though INTELSAT's satellites have mostly been multipurpose, they have
largely focused on providing international telephone service. This
market has been INTELSAT's largest and has provided the bulk of its
revenues over the years. Other satellite systems began to emerge,
primarily in the late 1980s and early 1990s, but some of them were
restricted from providing international telephone service by policies
imposed by the FCC to prevent causing significant economic harm to
INTELSAT and by some licensing authorities within other countries.
For example, to minimize the harm that new U.S. systems would cause
INTELSAT, the FCC established a policy, known as the separate systems
policy, which originally prohibited and later limited the amount of
international telephone traffic that U.S. private satellite firms
could provide. These restrictions were imposed on separate systems
by the FCC pursuant to the 1984 Presidential Determination to ensure
that no significant economic harm resulted for INTELSAT. While the
restrictions are in the process of being phased out, they
nevertheless may have a long-lasting effect because they led
competing satellite systems to concentrate their efforts in other
markets.\9 Companies focused on those services they were allowed to
provide, primarily international private communications networks and
international television/video service. Furthermore, as described,
companies report that because of the financial incentive that
regulatory authorities in other countries have to favor INTELSAT,
many of them have kept some satellite systems from gaining access to
their markets, particularly for international telephone service.
At the same time, however, there has been a massive increase in the
amount of transoceanic fiber-optic cables and the capacity available
for international telephone service. According to a recent report by
The Brattle Group, only 37 countries were served by fiber-optic
cables in 1988, while in 1996, that number has grown to nearly 100,
or somewhat more than half of the world's countries.\10 Fiber-optic
cables are a cost-efficient means of providing international voice
services because a large amount of traffic can be amassed on each
cable. Additionally, they provide a higher-quality voice service
because they eliminate the echoes and time delays that are
characteristic of voice service using geostationary satellites. The
inroads of these cables in the international telephone market have
been significant: While international telephone service remains
INTELSAT's largest market sector and its business in this sector
continues to increase, its share of the total international traffic
is declining considerably.
A recent internal analysis by the Department of Justice found that
for international telephone service, INTELSAT does not dominate U.S.
"country-pair" markets (i.e., markets for telephone service between
the United States and other countries) well served by fiber-optic
cables or alternative satellite systems.\11 Similarly, the FCC
recently noted that for international telephone service, there is now
"substantial competition . . . [because] available transmission
capacity has dramatically increased on most routes with the
introduction of satellite and cable systems that compete with
INTELSAT."\12 While alternative providers of satellite services may
compete with INTELSAT for international telephone traffic, both the
Department of Justice and the FCC note that providers of fiber-optic
cables represent the more important factor in this market. The FCC
notes that countries not served by fiber-optic cables are less likely
to benefit from vigorous competition because "separate satellite
systems to date provide less competition than cable services" in the
international telephone market.
INTELSAT's declining market share alone does not necessarily indicate
that this market is now characterized by competitive pricing. In
particular, because many fiber-optic cables are owned by the monopoly
telephone companies within many nations (typically also the
signatories to INTELSAT) downward pressure on the pricing of
international telephone calls may not have been as significant as
would be the case if the new providers were entirely distinct from
INTELSAT and were able to gain access to markets.
--------------------
\9 According to PanAmSat, full and fair competition for U.S.
alternative providers will not be possible until the restriction on
telephone service is eliminated on January 1, 1997. However,
PanAmSat believes that because many of COMSAT's customers have
long-term contracts, COMSAT will likely remain the dominant provider
beyond then. Therefore, PanAmSat has filed a petition with the FCC
asking that any COMSAT customer for international telephone service
who has a long-term contract in effect on January 1, 1997, be
permitted to opt out without liability. COMSAT disagrees with
PanAmSat's position, stating that COMSAT's share of the international
telephone service market was about 34 percent when the contracts were
negotiated in 1987-88 and that currently that share is about 25
percent. COMSAT further points out that PanAmSat was free to seek,
and contracting companies were free to award to PanAmSat,
international telephone business contracts when COMSAT renegotiated
them in 1993-94.
\10 Hendrik S. Houthakker and The Brattle Group, "Competition in the
Market for Trans-Oceanic Facilities-Based Telecommunications
Services" (Cambridge, Mass.: June 24, 1994). This study was
prepared for COMSAT.
\11 The analysis by the Department of Justice, dated Dec. 15, 1995,
was intended for government use only; according to a Department
official, it contains confidential business information and is
therefore not available to the public.
\12 Petition for Partial Relief from the Current Regulatory Treatment
of Comsat World Systems' Switched Voice, Private Line, and Video and
Audio Services (FCC Order 96-349, Aug. 15, 1996).
DEVELOPMENT OF COMPETITION
IN INTERNATIONAL
TELEVISION/VIDEO SERVICE HAS
DIFFERED ACROSS TWO MARKET
SECTORS
-------------------------------------------------------- Chapter 3:2.2
Unlike the market for international telephone service, the market for
television/video service has had less pronounced restrictions for
alternative satellite systems. In addition, fiber-optic cables are
generally less able to provide television/video service because they
are not a cost-efficient means for transmitting from a single
location to many different locations at the same time.
We reviewed the development of competition for regional
television/video broadcasts around the world. This market is one in
which signals are more likely to be transmitted directly to end-users
(i.e., homes with satellite dishes) or to land-based television
stations or cable systems for further redistribution. This sector
seemed important to review because it is a significant growth market
for satellite providers.
We also reviewed a second sector of the international
television/video market--termed the "transoceanic television/video
market" and the market for the "relay of international television" by
the Department of Justice and the FCC, respectively, in their recent
analyses. While the agencies' market definitions were not
necessarily identical, both agencies focused on international
television markets in which the U.S. market is an endpoint of
international and/or transoceanic transmissions. For our review, we
have used the term "international television/video market" and
considered it to include international and/or transoceanic
broadcasts.
REGIONAL TELEVISION/VIDEO
MARKET
------------------------------------------------------ Chapter 3:2.2.1
Many domestic and regional systems that came on-line since the late
1980s, including U.S. satellite systems, have focused on providing
regional television/video broadcasts. It is in this area that
INTELSAT's disadvantages are most evident and its advantages less
applicable.
Unlike in the international telephone market, in the market for
regional television/video broadcasts, the FCC did not impose
significant restrictions on the provision of these services by
separate U.S. satellite systems. However, regulatory authorities
within other countries, such as in Korea, applied restrictions, some
of which remain in place--though, according to COMSAT
representatives, most restrictions within other countries were
imposed primarily on telephone service. Similarly, several U.S.
companies that use satellite systems around the world for
distributing television/video broadcasts told us that access
restrictions on alternative satellite systems did not appear to be as
much of a problem today as they were several years ago. One
representative told us that some countries encourage or require the
use of domestic satellites, as opposed to those of INTELSAT or any
other system, for broadcasts within those countries. Another
representative concurred that access to the regional television/video
market may be less restricted than access to other markets, though he
pointed out that access problems still exist on a country-by-country
basis.
In general, our interviews of representatives of companies that use
satellite systems around the world for regional television/video
broadcasts showed that they are not concerned about having to use a
particular system. Rather, they contract for the use of specific
satellites in specific locations. Several users told us that their
criterion for choosing a satellite is primarily the degree of
"coverage" the satellite can provide in terms of the number of
antennae or satellite dishes that can receive signals from it. These
users also explained that several alternative systems' satellites are
more oriented toward handling television/video broadcasts than
INTELSAT's multipurpose satellites and so are often preferred for
this use. Table 3.1 shows the systems, by region, that were
identified by users we spoke with, as well as by our own analysis, as
providing service for regional television/video broadcasts.
Table 3.1
Government and Private Satellite Systems
Providing Television/Video Services, by
Region Covered, 1996
Systems providing television/video service, by region covered
------------------------------------------------------------------------------
N.
America/
Central
America
System Middle and Australi
ownership Asia East Caribbean S. America Europe a Africa
--------- ---------- ---------- ---------- ---------- ---------- -------- --------
Governmen INTELSAT INTELSAT INTELSAT INTELSAT INTELSAT
t INTELSAT INTELSAT
or Intersputn Intersputn Intersputn Intersputn Intersputn
telephone ik ik ik ik ik Interspu Interspu
company (Russia) (Russia) (Russia) (Russia) (Russia) tnik tnik
(Russia) (Russia)
Chinasat Arabsat Solidarida Brazilsat Eutelsat
(China) (Consortiu d (Brazil) (Consortiu Arabsat
m of (Mexico) m of (Consort
Insat Middle Solidarida European ium of
(India) Eastern Hispasat d countries) Middle
countries) (Spain) (Mexico) Eastern
Arabsat Telecom countrie
(Consortiu Amos Telecom Hispasat (France) s)
m of (Israel) (France) (Spain)
Middle DFS/ Insat
Eastern Eutelsat Nahuel Nahuel Kopernicus (India)
countries) (Consortiu (Argentina (Argentina (Germany)
m of ) ) Eutelsat
Turksat European Thor (Consort
(Turkey) countries) (Norway) ium of
European
Koreasat Insat Hispasat countrie
(Korea) (India) (Spain) s)
\
Sirius Telecom
(Sweden) (France)
Turksat
(Turkey)
Arabsat
(Consortiu
m of
Middle
Eastern
countries)
Insat
(India)
Private PanAmSat PanAmSat PanAmSat PanAmSat PanAmSat
Columbia Asiasat Columbia Hughes Columbia PanAmSat PanAmSat
Apstar Orion Orion Asiasat Thaicom
Asiasat Telstar/ Asiasat Optus\a
Palapa\a AT&T Astra
JCSAT Anik\a Thaicom
Superbird Alascom
BS- Hughes-
Yuri\a Galaxy
Thaicom GE
Americom
Echostar
-----------------------------------------------------------------------------------------
Notes: The grouping of these systems by region does not imply that
each system has market access to or serves all countries within a
region.
Additionally, the systems listed may provide an array of
communications services besides regional television/video broadcasts.
It is important to note that the available capacity of these systems
varies considerably. For example, INTELSAT's system, the largest in
the world, has the capacity of about 1,300 transponders at 36
megahertz (MHz)--a MHz is a thousand hertz--each (not including about
300 additional transponders in satellites in "inclined orbit"), while
PanAmSat's system, the largest U.S. international system, has only
the capacity of almost 200 transponders at 36 MHz each. However, a
comparison of total transponder capacity does not necessarily measure
the amount of capacity that different systems have allocated across
various markets, such as those for international telephone or
international television/video. This table indicates the different
systems that are providing some service in the regional market
indicated and does not attempt to measure the level of different
services provided or the available capacity in different geographic
markets.
\a This system is partially owned by governments or
telecommunications companies.
Sources: GAO's interviews with companies using satellite systems for
regional television/video broadcasts and GAO's analysis of data from
Design Publishers, Inc., and Dailink SatComs, Ltd.
At the same time, some users with whom we spoke mentioned that, for
certain purposes, they are more likely to use INTELSAT's system than
others. In particular, it appears that when users have a need for
the occasional use of satellites or services for which they are
unable to plan much ahead of time, they are more likely to use
INTELSAT. Users noted that many of the alternative providers have
limited excess capacity because much of their systems is tied up in
long-term contracts, so these systems are less able to serve the
needs of occasional or short-notice users. INTELSAT's large size,
excess capacity, and extensive market access allow it to be available
for such users, giving INTELSAT a competitive advantage in arranging
short-term-use contracts with news organizations and others that
require global access. COMSAT representatives told us that the
responsibilities of the intergovernmental organizations requires them
to plan for and retain considerable capacity beyond what is actually
used.
Despite the number of systems involved in the market for regional
television/video broadcasts, it is important to note, as is shown on
table 3.1, that many of these systems are owned by governments or
monopoly telephone providers. Since some of these owners may also be
INTELSAT signatories, such ownership may indicate that the systems
are not fully distinct from the organization. In fact, according to
several users, the prices for television/video broadcast service in
Europe, where many of the systems are owned by governments or
dominant telephone companies, far exceed similar rates in most other
areas. Additionally, one analyst has suggested that even some of the
foreign privately owned systems have significant ties to governments.
As a result of such ownership and such ties to governments, the
greater number of firms in this market may not cause prices to fall
toward competitive levels. But the effect of government ownership on
pricing within the industry is not readily observable because of the
unavailability of readily usable price and cost data.
INTERNATIONAL
TELEVISION/VIDEO MARKET
------------------------------------------------------ Chapter 3:2.2.2
Several users mentioned that they are more likely to use INTELSAT
when they are transmitting a broadcast internationally, that is,
between regions and/or across oceans. For example, users such as
news programmers may need to transmit news stories from around the
world to the location where their broadcasts are produced.
Similarly, many television/video companies produce broadcasts in a
particular location and then use satellites to transmit them to
locations around the world for further distribution. Thus,
news-gathering operations, including those of the major U.S.
television networks, have a prominent need for international
television/video service.
In comparison to the market for the regional distribution of
television/video broadcasts, the market for international broadcasts
has fewer providers. As table 3.2 shows, few of the domestic and
regional systems have the capacity for transoceanic television/video
broadcasts. The FCC recently noted that INTELSAT's ubiquitous
coverage and system design give it a strong competitive advantage for
this type of service. Many of the users we spoke with told us that
while they use a variety of systems for regional distribution, they
are much more likely to use INTELSAT for transoceanic service.
Table 3.2
Satellite Systems With Transoceanic
Capacity
Transatlanti
System c Transpacific Transindian
ownership coverage coverage coverage
---------------------------- ------------ ------------ ------------
Government INTELSAT INTELSAT INTELSAT
or telephone Intersputnik Intersputnik Intersputnik
company Telecom
Private PanAmSat PanAmSat PanAmSat
Columbia Columbia Asiasat
Orion
Hispasat
----------------------------------------------------------------------
Note: It is important to note that the available capacity of these
systems varies considerably. For example, INTELSAT's system, the
largest in the world, has the capacity of about 1,300 transponders at
36 MHz each (not including about 300 additional transponders in
satellites in "inclined orbit"), while PanAmSat's system, the largest
U.S. international system, has only the capacity of almost 200
transponders at 36 MHz each. However, a comparison of total
transponder capacity does not necessarily measure the amount of
capacity that different systems have allocated across various
markets, such as those for international telephone or international
television/video. This table indicates the different systems that
are providing some service in the transoceanic market indicated and
does not attempt to measure the level of different services provided
or the available capacity in different geographic markets.
Source: GAO's interviews with companies using satellite systems for
regional television/video broadcasts and GAO's analysis of data from
Design Publishers, Inc., and Dailink SatComs, Ltd.
Both of the recent analyses by the Department of Justice and the FCC
have noted the limited competition to INTELSAT in the international
and/or transoceanic television/video market. The Department of
Justice found that INTELSAT continues to have market power in some
segments of this market. Similarly, the FCC found that for
international television/video service, especially when it is likely
to require the use of a satellite on short notice or to require
transmission to multiple receiving stations on earth at the same
time, INTELSAT has a strong competitive advantage over competitors,
who do not have the same satellite capacity or the intergovernmental
organization's extensive network of earth stations in more than 136
countries.
In contrast, the most recent analysis by the Brattle Group found that
INTELSAT's share of the market for transoceanic video service to and
from the United States is in decline--from 80 percent in 1993 to
slightly under 50 percent in 1996. This measure of market share,
however, was based on utilized capacity, which may understate
INTELSAT's dominance in this market because INTELSAT likely has
significantly more excess capacity than its competitors have for this
service.\13 Nevertheless, the direction and rapidity of change in the
measured market share may indicate that INTELSAT's dominance in this
sector has declined.
--------------------
\13 See written testimony of Johannes P. Pfeifenberger before the
Subcommittee on Telecommunications and Finance, House Committee on
Commerce (Sept. 25, 1996).
THE IMPACT OF COMPETITIVE
FACTORS CAUSES CONCERNS
ABOUT COMPETITION IN THE
EMERGING MARKET FOR MOBILE
SERVICES
-------------------------------------------------------- Chapter 3:2.3
Inmarsat is currently the dominant provider of global mobile
satellite communications services, with 70 percent of its business
providing maritime services. Some other companies, including the
Inmarsat affiliate ICO, plan to begin offering global land-mobile
services in just a few years. Competitive concerns may arise in this
emerging market for international personal mobile communications
because Inmarsat's affiliate may have advantages over other
providers. Competitive concerns include the following:
-- Market access and availability of spectrum: Because the
signatories of Inmarsat are often the dominant government-owned
telephone companies or the regulating authorities within many
countries, rival firms fear that Inmarsat's affiliate will gain
access to foreign markets that will be denied to other
competitors. Similarly, domestic licensing authorities may
grant Inmarsat's affiliate access to a requested portion of the
radio spectrum and make that portion unavailable to other
potential firms.\14
-- Financial advantages: Inmarsat may provide its affiliate with
financial advantages by providing subsidies to it.\15
While competition in the international mobile communications market
has not yet begun and these problems may be only theoretical at this
point, evidence from the international telephone market indicates
that the market entry by separate satellite systems can be
forestalled by decisions made by the signatories.
--------------------
\14 For mobile communications, the use of a specific frequency by one
satellite company precludes the use by another satellite company in
the same geographic area, according to an FCC official.
\15 The departments of State and Commerce expressed concerns in a
letter to the FCC dated September 29, 1995, that existing users of
Inmarsat might subsidize the development of ICO if signatories pass
on to their ratepayers for Inmarsat's services the costs of their
contributions to Inmarsat's investment in the affiliate. The
agencies noted that "even if the actual financial impact of inclusion
of Inmarsat's ICO capital contribution in the capital account on
which a target rate of return is paid is small," it would still
create "an opportunity which is not available to investors in
competing systems." See also the discussion in Telecommunications:
Competitive Impact of Restructuring the International Satellite
Organizations (GAO/RCED-96-204, July 8, 1996).
AGENCY COMMENTS AND OUR
EVALUATION
---------------------------------------------------------- Chapter 3:3
In commenting on our report, COMSAT took issue with and questioned
several of the factors that we cited as possibly creating competitive
advantages for the intergovernmental organizations. While
acknowledging that market access is a challenge that all new market
entrants face, COMSAT questioned the seriousness of the impact of any
financial advantages signatories may have to motivate the denial of
market access to other companies. COMSAT also attributed any delays
companies face in filing for orbital locations with the ITU to delays
in the FCC's regulatory process because the FCC is free to file for
orbital locations at any time. With regard to the consultation
process, COMSAT asserted that the information companies provide
contains no actual proprietary or market data from which INTELSAT
could benefit as a competitor. COMSAT also disagreed that INTELSAT
used any economic valuation in the recent failed technical
consultation involving a U.S. company.
COMSAT believes that the explosive growth in international telephone
service demonstrates that COMSAT has not locked up the market through
long-term contracts. COMSAT was troubled by what it characterized as
a lack of evidence to support the notion that common ownership
between INTELSAT or Inmarsat and other regional and domestic systems
may cloud the distinction between those satellite system providers.
In addition, COMSAT felt that our discussion of the possibility of
cross-subsidization between Inmarsat and ICO did not reflect an
accurate understanding of the financial flows within a cost-sharing
cooperative organization like Inmarsat.
We believe that our discussions of likely competitive advantages for
the intergovernmental organizations and selected satellite markets
accurately reflect the potential impact of attributes of the
institutional framework for providing satellite services and the
current market activity:
-- Many experts we spoke with believe that the signatories, as the
investors in INTELSAT and Inmarsat, have a financial interest in
the success of the organizations. Furthermore, data from the
FCC show that for 71 percent of INTELSAT's members, the
signatory is also the regulatory authority making decisions on
licensing, spectrum allocation, and market access and that for
another 14 percent, the signatory is separate but "related."
-- With regard to the registration of orbital locations, the
distinction we are making in the report is that, unlike for
private companies, applications from the intergovernmental
organizations are not subject to the regulatory requirements of
national jurisdictions. When INTELSAT or Inmarsat files for a
geostationary orbital location through the host country, the
application goes forward automatically.
-- While COMSAT contends that companies do not file sensitive or
proprietary information with INTELSAT during the consultation
process, satellite companies that have undergone the process
told us that they consider the information they had to submit to
be sensitive and proprietary. Our report includes their point
of view and attributes the opinion to them. With regard to the
recent failed technical consultation by a U.S. company, the FCC
order giving the company temporary authority to operate stated
that "In the end, INTELSAT viewed the [orbital location] as too
valuable from a commercial standpoint. . . ."
-- Our reference to a petition filed with the FCC regarding
COMSAT's long-term contracts was included to illustrate that at
least one company did not think that the complete lifting of
restrictions on companies' access to public networks would, in
and of itself, enable full and fair competition in that market.
We revised footnote 9 in this chapter to include COMSAT's
position on the effect of its long-term contracts on competition
and its opposition to the petition.
-- Empirical studies have found that ownership ties between
competitors can inhibit full competition between those entities.
In response to this concern, many laws and regulations have been
put into place as a check on cross-ownership.
-- In a letter to the FCC, the departments of State and Commerce
also raised the concern that Inmarsat could potentially
subsidize ICO, thereby creating a financial opportunity not
available to investors of competing systems.
OPTIONS FOR RESOLVING COMPETITIVE
ISSUES
============================================================ Chapter 4
A variety of options for resolving the competitive issues discussed
in chapter 3 have been suggested by interested parties, and many are
being pursued. Ultimately, access to all markets is the key to
enhancing competition. Depending on what changes are made and how
they are implemented, changes in the status of the intergovernmental
organizations could potentially address most of the concerns about
competition held by both the companies and the intergovernmental
organizations. Other international and domestic approaches, such as
pursuing multilateral negotiations or using access to the U.S.
market to gain access to other countries' markets, might broaden
market access more directly. Because many ongoing activities are
occurring generally within the same time frames, the deliberations
and outcome in any one forum may affect the others.
CHANGING THE INTERGOVERNMENTAL
ORGANIZATIONS
---------------------------------------------------------- Chapter 4:1
Most of the concerns about competition emanate from the
intergovernmental status of INTELSAT and Inmarsat. Ways for
resolving some of those concerns include options that range from
eliminating the organizations entirely to remodeling them.
ELIMINATING INTELSAT AND
INMARSAT
-------------------------------------------------------- Chapter 4:1.1
Many agency officials and satellite company representatives we talked
to believe that the intergovernmental organizations were needed at
the time they were formed and that they have achieved their original
objectives. However, satellite company representatives and some
experts have questioned the continued need for these organizations,
with their intergovernmental status, and their extension through
affiliates.
Because most of the competitive issues emanate from INTELSAT's and
Inmarsat's status as intergovernmental organizations, eliminating
them and selling off their assets would resolve many of the issues.
For example, without the organizations, countries would generally
lose their incentive to favor one international satellite system over
a competitor's, advantages in access to orbital positions would
disappear, as would the existence of providers with financial
advantages conferred by links to signatories and governments. There
would be no intergovernmental organizations with whom potential
competitors would be required to consult to have their plans
approved, nor ones with the advantages of market dominance or
privileges and immunities. Furthermore, there would be no
intergovernmental organizations burdened by obligations to provide
universal service at nondiscriminatory prices or hampered by an
intergovernmental structure dependent on consensus decision-making.
However, COMSAT representatives told us that eliminating the
organizations is probably not a realistic option. They point out
that many signatories strongly support not only retaining the
organizations but also expanding them into new service areas.
Developing countries are especially concerned about retaining global
service as a goal of the organizations. Despite the availability of
some other satellite systems in their region, developing countries
are particularly concerned that without intergovernmental
organizations, they could be left without the kind of coverage that
INTELSAT and Inmarsat provide. Toward this end, however, developing
countries can choose to give competing satellite systems access to
their markets.
RESTRUCTURING THE
INTERGOVERNMENTAL
ORGANIZATIONS
-------------------------------------------------------- Chapter 4:1.2
Alternatives to abolishing INTELSAT and Inmarsat include creating one
or more private companies or restructuring the organizations in a way
that preserves an intergovernmental entity in some form but also
privatize some portion of the organizations.
RESTRUCTURING INTO
PRIVATE COMPANIES
------------------------------------------------------ Chapter 4:1.2.1
Restructuring could be accomplished by eliminating the
intergovernmental structures and creating one or more private
companies out of their assets. This approach would remove the
advantages that derive from intergovernmental status, such as faster
access to orbital positions and the benefits of privileges and
immunities. Furthermore, the creation of multiple companies from
each organization could reduce the impact of the organizations' size
and dominance. The approach would also free the new companies of any
international obligations and from any hindrances posed by an
intergovernmental decision-making structure.
As discussed in our July 1996 report and in this report, however, the
owners of the intergovernmental organizations may have a financial
incentive to give preferential market access to the organizations and
any affiliated companies they also own because they share in the
profits of the organizations or affiliates. Therefore, if the
current owners of INTELSAT and Inmarsat were allowed to own the new
private companies created by this restructuring approach, they would
still have the financial incentive to provide preferential market
access to the new companies. Furthermore, the financial advantages
enjoyed by the owners because of their governmental affiliation would
still prevail in some capacity.
This approach, too, may be unachievable. In 1994, COMSAT advocated
what its president termed a bold proposal, a direct move to privatize
both organizations as fully commercial enterprises driven by the
market and accountable to shareholders. According to COMSAT, its
proposal met with little interest among signatories for generally the
same reasons that they resist the elimination of the organizations.
COMSAT also noted that many countries that joined INTELSAT,
especially many developing countries, were deeply concerned that
breaking up the organization into multiple private companies could
result in loss of the global interconnection of telecommunications
that INTELSAT has achieved.
RETAINING SOME FORM OF
INTERGOVERNMENTAL
ORGANIZATION
------------------------------------------------------ Chapter 4:1.2.2
INTELSAT and Inmarsat have been reviewing options for restructuring
in order for each to create a private company free of the
intergovernmental structure while preserving an intergovernmental
entity in some form that would continue to guarantee the services the
organizations were originally created to provide. As explained in
our July 1996 report, key to restructuring the intergovernmental
organizations with a view toward enhancing competition are the number
of new entities created and the degree to which they maintain
economic ties with any remaining intergovernmental organizations or
their owners. However, the developing competition in the two markets
we examined may imply that the marginal benefit of a second affiliate
is not great.
INTELSAT. Several nations have made suggestions about how INTELSAT
can best restructure to meet the challenges of a changing market.
The United States and COMSAT have proposed the creation of an
INTELSAT affiliate intended to concentrate on providing new types of
services, while a residual INTELSAT, at roughly half its current
size, would focus on ensuring basic telecommunications services.
Neither INTELSAT nor the affiliate, however, would be prohibited from
offering any kind of service it chose to offer. About half of
INTELSAT's satellites would be given to the affiliate, along with the
relevant contracts for their use. The affiliate would be
incorporated under the regulatory jurisdiction of a country.
INTELSAT would have no institutional ownership, and the signatories
collectively would be limited to owning no more than 20 percent after
a transition period.
For companies competing against the affiliate, this approach toward
restructuring could address most of the disadvantages they may face;
it could also address the disadvantages that some INTELSAT members
feel burdened by in their quest to compete. The United States'
expectation is that the relative independence of the affiliate, owing
to its 80-percent ownership by entities other than INTELSAT members,
will reduce the incentive countries have had to grant preferential
market access to INTELSAT while excluding or impeding potential
competitors. Also, because the affiliate would be a commercial
company with publicly traded shares and subject to the laws and
regulations of an individual country, it would not possess the
privileges and immunities or other benefits of an intergovernmental
organization, although the remaining immunity of the
intergovernmental organization may make enforcement difficult. It
would also be subject to the same disclosure requirements of the
consultation process that other companies must undergo. Furthermore,
an affiliate unencumbered by an intergovernmental decision-making
structure could be free of INTELSAT's obligations to provide
universal service at nondiscriminatory prices and could more readily
respond to the needs of a rapidly changing market.
Minimal ownership by signatories could reduce the incentive that
regulatory authorities have to favor any INTELSAT affiliates over
other companies. However, according to officials at the State and
Commerce departments, the FCC, and the National Economic Council and
representatives of COMSAT, INTELSAT members are unlikely to accept
the creation of more affiliates, and the United States is
encountering strong resistance to the 20-percent limit on
signatories' combined ownership.\1 A Commerce Department official
explained that while competition is an important goal of the United
States, it is not a priority with many other members of INTELSAT.
Developing countries, in particular, are concerned about maintaining
some form of INTELSAT to ensure its original mission of providing
universal service at nondiscriminatory prices. The U.S. proposal
would retain an intergovernmental organization to ensure the
fulfillment of INTELSAT's original mission.
The degree of ownership by INTELSAT and its signatories during a
transition, combined with the length of that transition, raises some
concerns about the extent to which this kind of restructuring
approach could enhance competition. Under the U.S. proposal,
INTELSAT would own the affiliate for possibly 1 or 2 years, pending
the conclusion of the first public sale of shares, during which at
least 60 percent of shares is to be sold. The initial sale of shares
would be under the auspices of an international team of underwriters,
who may judge that selling the shares during the first year may not
be a prudent business decision. They have the option of delaying the
initial sale for up to a second year. However, underwriters may have
a financial incentive to sell the shares as soon as possible.
The remaining shares would be distributed among INTELSAT's
signatories. As much as 2 years could pass before the sale of
another 20 percent of the shares would be expected. Thus, all
members of INTELSAT may continue to have an incentive to favor the
affiliate over other companies potentially for as much as 3 or 4
years, at a time when other companies are trying to enter the market
and establish themselves as viable providers.
While the United States' approach to restructuring would create an
affiliate that would neither possess the advantages of an
intergovernmental organization nor bear the burdens currently felt by
INTELSAT, the intergovernmental organization that would remain after
the creation of the affiliate presents different issues. To the
extent that a residual intergovernmental organization owns assets and
provides services, companies competing with it will still face some
of the competitive disadvantages, and the intergovernmental
organization will still retain some of its burdens.
With the private sector poised to compete, ACISS has proposed a
restructuring for INTELSAT that would allow retaining an
intergovernmental organization and would create at least two
affiliates. That proposal would restrict a signatory's investment to
only one of the affiliates, not both. ACISS members hope that this
proposal would result in additional market access for other private
companies because signatories may find that to do business with
certain other countries, they will have to allow entry into their
domestic markets by the INTELSAT affiliate in which they have not
invested; the need to allow both affiliates into their markets may
induce countries to widen access to other entrants. This proposal
has not been presented within INTELSAT for consideration. ACISS has
stated that it would prefer to leave the existing structure intact
until the option of having multiple affiliates becomes acceptable.
Until INTELSAT decides about restructuring and its particulars, the
extent to which restructuring will resolve hindrances to competition
is unclear. The organization will consider its restructuring at
meetings currently scheduled for October and December 1996, and
possibly February 1997, with the goal of adopting a restructuring
plan in April 1997, when member governments will gather for their
biannual meeting.
Inmarsat. Inmarsat has also been considering restructuring to help
it meet the challenges of a changing market. The main approach under
consideration would create a private company and retain a residual
intergovernmental organization to ensure that Inmarsat's goals of
safety and rescue at sea are met. Under discussion within Inmarsat
is whether or not to transfer all satellites to the private company,
leaving the residual intergovernmental organization not as a direct
provider but as an entity that would oversee whether the private
company met contractual obligations concerning safety and rescue and
other public service obligations. Creating a private company could
potentially resolve many of the competitive issues raised by the
structure of an intergovernmental organization, especially if all of
Inmarsat's satellites were transferred to the company rather than
retained by any intergovernmental organization and signatories'
ownership was limited. However, the benefits of creating a private
company and transferring assets to it may be reduced if the private
company were to merge with Inmarsat's existing affiliate, ICO Global
Communications Limited (ICO), because ICO is primarily owned by
Inmarsat and its signatories. And this approach may not resolve any
advantages ICO itself may have because of its ownership structure, as
discussed in our July report.
The United States recently presented to Inmarsat a position paper
setting forth changes that the United States would like to see before
it could accept the restructuring plan being considered. The United
States is seeking two fundamental goals through a restructuring of
Inmarsat: (1) guaranteeing the provision of global maritime distress
and safety services and (2) enhancing competition by ensuring fair
market access and a level playing field for all providers of mobile
satellite services. In its position paper, the United States
discussed nine areas of concern that could impair competition and
suggested remedies, including the following: (1) that contractual
arrangements with a restructured Inmarsat are the best way to
guarantee safety and rescue services, (2) that "significant" external
investment is critical to fair competition globally because of
governments' current ownership interests in many Inmarsat
signatories, and (3) that structural separation between a
restructured Inmarsat and ICO is important in order to prevent
dominance of the market by a convergence of interests between the two
entities. The United States also proposed a draft amendment to the
Inmarsat agreement that would commit all Inmarsat member governments
to provide nondiscriminatory access to their markets for all
satellite services and service providers. ACISS, too, believes that
it is critical for a restructured Inmarsat and ICO to be separate in
order to establish a competitive market.
According to FCC and Commerce Department officials, Inmarsat members
were generally uninterested in the U.S. views discussed in the
position paper and are more interested in, among other things,
greater government ownership of a restructured Inmarsat than the
United States would like to see, and less, if any, investment by
entities besides signatories. To resolve some of these differences
as Inmarsat considers restructuring options, meetings have been
scheduled for October and December 1996. Inmarsat's current goal is
to adopt a restructuring plan in 1997.
According to COMSAT representatives, ICO has just incorporated into
its organizing documents a set of competitive principals, many of
which were approved by Inmarsat in 1994 at the urging of the United
States. COMSAT believes that these competitive principles will
ensure that ICO does not inhibit competition in land-based mobile
services. ACISS stated that these competitive principles are not
binding on ICO's individual signatory owners, who frequently control
market access for their countries.
The Effect on Market Access. Although changing the intergovernmental
status of INTELSAT and Inmarsat could address most of the competitive
issues raised earlier, ultimately, the key to ensuring competition is
the ability of competing companies to obtain access to markets.
While the U.S. proposal for restructuring INTELSAT is receiving
serious consideration and while its ultimate goal is to induce
countries to open their markets, it can do so only indirectly by
lessening the incentive that countries have to grant access to
INTELSAT in lieu of potential competitors. Although the United
States supports an amendment to the Inmarsat agreement to guarantee
nondiscriminatory market access, the amendment has generated little
interest within Inmarsat.
--------------------
\1 The proposed limit on signatories' ownership is based, in part, on
several U.S. laws and policies regarding competition and ownership
control. These laws and policies set limits in the range of 10 to 20
percent. The group that developed the U.S. proposal stated that 20
percent is an important upper limit to ensure that INTELSAT and its
signatories have minimal influence on any new entities created.
OTHER OPTIONS FOR INCREASING
MARKET ACCESS
---------------------------------------------------------- Chapter 4:2
Other options for increasing market access are pursuing multilateral
negotiations and using access to the U.S. market as leverage in
getting other countries to provide access to theirs.
MULTILATERAL NEGOTIATIONS
-------------------------------------------------------- Chapter 4:2.1
One option that could focus specifically on the issue of increasing
market access around the world is direct negotiations with other
countries to remove barriers. Bilateral negotiations alone could
take a long time to produce useful results in a sufficient number of
countries to facilitate competition in international satellite
services, especially for global systems. But the United States is
currently engaged in multilateral negotiations under the aegis of the
World Trade Organization (WTO), an international forum for addressing
trade issues, including trade in services. These negotiations are
dealing with the issue of opening countries' markets in basic
telecommunications services. The United States has participated
since the talks began in 1994 and originally offered to open all of
its basic telecommunications markets except direct access to
INTELSAT's and Inmarsat's capacity and cable landing rights. When an
agreement has been reached, each country will provide to all WTO
members the market access it offered, including to members that make
no concessions at all. According to FCC officials, however, a
country may exclude a type or category of services from this general
extension of benefits.
The original deadline for reaching agreement was April 30, 1996.
However, because a sufficient number of high-quality offers from
other countries were not presented (specifically, other countries
offered only limited, if any, market access), the United States
forged a consensus to extend the deadline for agreement to February
15, 1997. Between January 15, 1997, and February 15, 1997, new
offers and changes in current offers will be allowed. The United
States hopes to encourage new and better offers from other countries
through discussions with them prior to the new deadline.
The results of the WTO negotiations, however, could affect U.S.
influence in discussions within INTELSAT and Inmarsat on
restructuring approaches, according to FCC officials, who note that
control over access to the U.S. market gives the United States some
leverage in achieving its goals in the restructuring of the
intergovernmental organizations. According to these officials, if
the WTO negotiations are successful and include satellite services
(and the United States does not except them from the general
extension of benefits), then the U.S. market will be opened for the
satellite service suppliers of all WTO members. According to those
officials, because the international satellite organizations are not
organized under the laws of any single country, they may not
necessarily gain access to a specific country's market through the
results of the WTO negotiations. However, these officials note that
the intergovernmental organizations as well as any private affiliates
may gain access to the U.S. market through the WTO negotiations if
the organizations or affiliates are considered to be organized under
the laws of their host country or the country in which they are at
least nominally incorporated. If the WTO negotiations fail or do not
include satellite services, then access to the U.S. market by
foreign-licensed satellite systems, including those of any affiliate
of INTELSAT and Inmarsat, would be governed by regulations proposed
by the FCC setting forth the conditions under which it would allow,
and could deny, access to the U.S. market, as discussed below.
Members of ACISS consider the WTO negotiations to be the most
important forum for opening foreign markets; they view them as a more
effective approach for gaining market access than any unilateral
action. Company representatives also stated that they believe forums
other than INTELSAT or Inmarsat are more likely to provide fairer
consideration of market access. COMSAT also supports U.S. efforts
in the WTO to open markets globally.\2
--------------------
\2 Some competing companies also believe that new policy forums being
inaugurated by the ITU could benefit competition in international
satellite services. The first forum, on October 21-23, 1996, will
address the issue of mobile personal communications. Although the
forums will issue only nonbinding resolutions, the industry coalition
noted that WTO representatives are expected to attend. The companies
would like to see the forums adopt principles of open market access,
which could somehow be incorporated in any agreement reached by the
WTO in February 1997.
UNILATERAL OPTION
-------------------------------------------------------- Chapter 4:2.2
Control over access to the U.S. market may be a way of inducing
broader access to other markets. The FCC has jurisdiction over
licensing foreign satellite companies' access to the U.S. market
through its authority to approve the establishment of earth stations
that service foreign satellite systems. As part of a broader review
of its regulations to enhance competition, the FCC is proposing to
permit non-U.S.-licensed companies to serve the U.S. market to the
extent that U.S.-licensed systems are allowed to serve the
applicant's home market and some or all of its other markets. The
agency's decisions would also take into account other considerations
about the public interest. The FCC hopes that a desire to gain
access to the large U.S. market will give nations sufficient
incentive to open their own markets to competition from other
systems.
In commenting on the proposed regulatory changes, COMSAT stated that
the FCC's proposed approaches for evaluating the openness of other
markets presumes them to be anticompetitive and could foster a
backlash against U.S.-licensed companies. COMSAT also noted that
with so few orbital positions available for serving the U.S. market,
there may not be enough slots open to provide an incentive to a
foreign country to abandon its own protective domestic policies.
Under the proposed regulatory changes, COMSAT, as the sole provider
of INTELSAT and Inmarsat satellite services in the U.S. market,
would lose the opportunity to provide services of any new affiliates
created by the intergovernmental organizations unless those
affiliates passed the FCC's evaluation of their home market's
openness.
Several private satellite companies that compete, or will be
competing, with INTELSAT and Inmarsat, supported the FCC's approach
to ensuring effective market access. For example, one U.S.
satellite company commented to the FCC that the proposed regulations
should lead to lower prices, better service, and enhanced access for
U.S. companies to other countries' markets. However, the company
cautioned that the proposed regulations as applied to international
satellite services alone would not facilitate access to the vast
majority of other nations' markets because few countries are in a
position to participate in the U.S. satellite market. The company
urged the FCC to extend this approach to its evaluation of foreign
telephone companies' applications to serve the U.S. market.
DECISIONS PLANNED FOR 1997
---------------------------------------------------------- Chapter 4:3
As we have noted, a number of options are being considered
concurrently, and some of those that the U.S. is pursuing may be
decided on in 1997. With many deliberations occurring concurrently,
what happens in one setting may affect what happens in another.
INTELSAT's and Inmarsat's goals for adopting restructuring plans are
currently set for the first half of 1997, though the goal for a
decision by INTELSAT's Assembly of Parties at its April 1997 meeting
appears firmer than Inmarsat's tentative plan for a decision in the
spring. The deadline for the completion of negotiations within the
WTO is February 15, 1997. There is no current deadline for the FCC's
decision on its market access policy. Table 4.1 shows the
anticipated dates for international and domestic efforts affecting
competition in international satellite communications.
Figure 4.1: Anticipated Dates
for International and Domestic
Efforts Affecting Competition
in International Satellite
Communications
(See figure in printed
edition.)
CONCLUSIONS
---------------------------------------------------------- Chapter 4:4
Most of the concerns about hindrances to competition can be resolved
by changes to INTELSAT and Inmarsat, depending of course on what the
changes are and how they are implemented. However, any option that
eliminates the intergovernmental organizations may not be achievable
because, according to many officials, many members of both INTELSAT
and Inmarsat strongly support retaining the organizations.
Ultimately, the key to the success of companies trying to become
international satellite service providers is gaining access to all
markets on a global basis. But options that restructure the
intergovernmental organizations may address market access only
indirectly. Multilateral and unilateral approaches currently ongoing
could have a more direct impact on opening markets. How effective
any of the efforts under way will be in enhancing competition is
unclear because key activities are ongoing, although the goals for
reaching agreement or adopting changes generally fall within the
first half of 1997. In this convergence of activities, the outcome
of one may affect the others.
AGENCY COMMENTS AND OUR
EVALUATION
---------------------------------------------------------- Chapter 4:5
COMSAT questioned our characterization in this report of the relative
importance of creating more than one affiliate. Also, COMSAT stated
that a key to negotiations on restructuring is to ensure that they do
not impede market access. Therefore, because successful WTO
negotiations will achieve that goal, COMSAT believes that concerns
about diminishing U.S. influence in restructuring negotiations are
not founded.
In response, we have revised our reference to the potential impact of
creating more than one affiliate to note that the developing
competition in two markets that we examined may imply that the
marginal benefit of a second affiliate may not be great. We have
also revised the discussion of the WTO negotiations to reflect the
FCC's clarification that because a number of different negotiations
are ongoing at the same time, the results of one may impact the
outcome of others.
(See figure in printed edition.)Appendix I
COMMENTS FROM ACISS
============================================================ Chapter 4
(See figure in printed edition.)
(See figure in printed edition.)Appendix II
COMMENTS FROM COMSAT
============================================================ Chapter 4
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
The following are GAO's comments on COMSAT's letter dated September
20, 1996.
GAO'S COMMENTS
---------------------------------------------------------- Chapter 4:6
1. COMSAT suggests that because we did not do a country-by-country
survey of licensing issues, we have no clear evidence that
signatories have favored INTELSAT over other providers. We did not
do such a review because it was not feasible in the time available
for our study. Nevertheless, a wide array of federal government
officials, separate satellite system representatives, and U.S. firms
that use satellite systems overseas, as well as our review of several
academic studies, indicated that signatories generally have close
ties to their governments and are thus in a position to make or
influence decisions, including decisions on access. Moreover,
economic considerations would suggest that signatories, as investors
in INTELSAT, have a financial incentive to favor it.
2. As COMSAT notes, and as we noted in our July 1996 report in
response to COMSAT's comments, separate satellite providers have been
able to gain access in many countries over a number of years.
However, one company's access to a country does not guarantee that
any other company seeking some or similar access will obtain it. Nor
does it mean that a company will obtain the same degree of access, or
access for the same types of services, in each country. Like
INTELSAT, separate satellite providers in the United States generally
want to offer global services, but these companies must negotiate on
a country-by-country basis, while INTELSAT can benefit from already
established working relationships with its 139 member countries
through its signatories. INTELSAT thus has readily available to it
extensive opportunities for access.
Moreover, even if companies may eventually gain significant access, a
continuing concern would be the time, effort, and expense involved in
achieving that level of access. PanAmSat has worked to acquire
access for more than 10 years and, on the basis of data COMSAT cites,
still does not have access to the same number of countries that are
members of INTELSAT. In addition, the number of countries, in and of
itself, does not address the issue of the nature or degree of access
that PanAmSat may have acquired in those countries. Furthermore, a
Globalstar representative told us that while it has service provider
agreements with companies in many countries, very few of those
companies have obtained licenses to serve the markets.
3. Contrary to COMSAT's assertion that the vast majority of
INTELSAT's signatories are not the licensing entities in their home
countries and do not establish national access policies, data from
the FCC show that (1) 83 percent of INTELSAT's signatories are
government-owned and another 11 percent have some government
ownership; (2) for 71 percent of INTELSAT's membership, the signatory
is also the regulatory authority making decisions on licensing,
spectrum allocation, and even market access; and (3) for another 14
percent of the members, the signatory is separate but "related" to
the licensing authority. Because of these ties to governments, the
signatories to INTELSAT are sometimes able to make licensing
decisions directly, or they are often in a position to influence
decisions. We have added these data to the report where appropriate.
4. The court found that PanAmSat had not presented sufficient
evidence to support its charges that COMSAT had violated antitrust
law and engaged in predatory pricing. However, there was no finding
that the alleged conspiracy, if true, would not have served the
conspirators' economic interests. See PanAmSat v. COMSAT Corp.,
Opinion and Order, 89 Civ. 5021, 5043 (S.D.N.Y.), September 4, 1996.
We have added a reference to the recent court ruling and the
background of the lawsuit.
5. Until July 1996, less than 60 members of WTO were participants in
the negotiations. Although 122 members are now designated as
participants, it is not clear to what extent any will make offers to
open their markets in basic telecommunications services during the
WTO negotiations. Furthermore, as of April 30, 1996, only 15
countries had offered to open their domestic and international
services and facilities by January 1, 1998, for satellite-based basic
telecommunications. Eight more countries had offered similar access
but on a phased-in basis. Another 12 countries had made limited
commitments on services and/or facilities. Of the 48 countries
making offers, 13 did not include offers on satellites. Also, if
satellite services are included in successful WTO negotiations, not
all WTO member countries need open their markets to benefit from the
offers of other member countries. Thus, it is not clear how much
market access successful WTO negotiations will produce.
We have revised our report, however, to reflect the FCC's
clarification of the current situation that with several different
negotiations ongoing, the results in one may affect the outcome of
others in an as yet unknown manner.
6. COMSAT concludes that we have contradicted ourselves by saying
that INTELSAT "remains dominant" in transoceanic video services while
noting the importance of competition from domestic and regional
firms. In fact, we are speaking of two different market sectors when
we make these points. INTELSAT appears to retain a dominant position
in the transoceanic television/video market (which we have called the
"international television/video market" in our report). On the other
hand, INTELSAT now seems to face a number of competitors in the
market for the regional distribution of television/video.
In addition, COMSAT questions how our statements in this report
relate to our statements in our July 1996 report, which noted, with
regard to the restructuring of INTELSAT, that a second affiliate
would be preferable from the standpoint of encouraging competition
but that this would be a less important issue if INTELSAT faced
meaningful competition from regional and domestic competitors. We
agree, and in our reference to the potential impact of creating more
than one affiliate, we have revised the report to state that the
developing competition in two markets we examined may imply that the
marginal benefit of a second affiliate may not be great. However,
while this report cites a number of competitors in the market for the
regional distribution of television/video, it reaches no conclusions
about the degree of the competition.
7. The report COMSAT mentions appears to base its conclusions on how
restructuring should occur from the vantage point of enhancing
INTELSAT's ability to effectively compete in the marketplace rather
than from a perspective of enhancing competition in general.
Nevertheless, we did find the report helpful for background
information and analysis.
8. We used both the 1994 Brattle report as well as the 1996 Brattle
report in our analysis. Our report cites the 1994 report regarding
the increases in fiber-optic cables to many countries. The second
Brattle report, however, does not have specific market information on
providers' shares of the transoceanic television/video market, but
rather cites data for all transoceanic services, and therefore was
not appropriate for our purposes of examining separate market
segments. The first Brattle study does report transoceanic
television/video market shares, but a recent FCC order raises
concerns about the 1994 report's findings on this market because the
report does not include occasional-use service in calculating
transoceanic television/video market shares. Including this service
would likely show that COMSAT/INTELSAT's market shares are greater
than what the report cited, although a Brattle representative told us
that occasional-use service represents a small portion of the total
market.
In a September 25, 1996, hearing held by the Subcommittee on
Telecommunications and Finance, House Committee on Commerce,
Subcommittee on Telecommunications and Finance, COMSAT provided a
more recent Brattle analysis that provides information on market
shares. We have cited this recently available data in the report.
However, the Brattle Group's methodology uses utilized capacity as a
measure of market share for television/video services. From
discussions with associates of the Brattle Group, we understand their
concern that including all capacity would overstate INTELSAT's market
share of television/video service because much of the
intergovernmental organization's capacity is devoted to telephone
services. Nevertheless, the measure of utilized capacity would
likely understate an appropriate measure of INTELSAT's dominance of
the television/video service market because INTELSAT has more excess
capacity than other systems do.
9. Our reference to PanAmSat's petition was included in the report
to illustrate that at least one company did not think that the
complete lifting of U.S. restrictions on international telephone
service will, in and of itself, enable full and fair competition. We
have added COMSAT's view on the petition to the footnote.
10. The information on INTELSAT's size and capacity is included in
the report as part of the description of the existing institutional
structure for providing international satellite services. We do not
provide equivalent numbers for the private U.S. satellite companies
because, until now, only one had reached the capacity to provide
near-global coverage. That company, PanAmSat, can now reach 98
percent of the earth's populated areas with four geostationary
satellites. However, under a January 1996 revision of the FCC's
regulatory process eliminating the distinction between domestic and
international licenses, many U.S.-licensed domestic systems are
seeking to offer international services. For example, as this report
was being finalized, there were press reports that Hughes Electronics
Corporation, originally licensed as a domestic provider, was
acquiring PanAmSat. That acquisition would create a company that
combined Hughes' 10 domestic satellites with PanAmSat's 4, and their
plans for about 7 additional satellites. We have added a reference
to this information in the report.
Our discussion of access to orbital locations does not state that
INTELSAT and Inmarsat have preferential treatment within the ITU. It
states that the organizations have faster access to the application
process. And because filing the first application for an orbital
location can provide an advantage in the coordination process, faster
access may provide the intergovernmental organizations with a
competitive advantage in registering orbital locations. COMSAT
further states that the intergovernmental organizations do not have
an advantage in registering for orbital locations with the ITU
because national administrations are free to file advanced
publication information with the ITU at any time. When INTELSAT or
Inmarsat files for a geostationary orbital location through the host
country, however, the application goes forward automatically. U.S.
companies' applications, on the other hand, are subject to the FCC's
regulation and review requirements, which can result in longer
waiting times before their applications reach the ITU. For a
discussion of our use of Brattle reports, see our comment 8.
11. Satellite companies we spoke with that have undergone the
coordination process told us that they consider the information they
had to submit to be sensitive and proprietary. Our report includes
their point of view and attributes the opinion to them. According to
an FCC official, COMSAT does, as part of its obligations as a common
carrier, provide certain technical and business information in its
"Section 214 filings" with the FCC in order to participate in
INTELSAT's and Inmarsat's procurements and expansion of services. We
have added a reference in the report to COMSAT's filing
responsibilities.
12. Our report notes that FCC officials believe that INTELSAT
appeared to apply different criteria in the failed technical
consultation than it has applied to technical consultations in the
past. Specifically, the FCC order authorizing the temporary
authority to Columbia Communications stated that "In the end,
INTELSAT viewed the 40.5 degrees W.L. as too valuable from a
commercial standpoint to relinquish for an additional four years, as
compared to other solutions under consideration." If the organization
has added a new and economic dimension to its review of technical
consultations, that may diminish the benefits of eliminating the
consultation concerning economic harm.
13. In a letter to the FCC dated September 29, 1995, the departments
of State and Commerce also raise the issue of cross-subsidy. In
particular, they were concerned that existing users of Inmarsat might
subsidize the development of ICO if Inmarsat signatories pass on to
their ratepayers for Inmarsat services the costs of the signatories'
contributions to Inmarsat's investment in the affiliate. They noted
that "even if the actual financial impact of inclusion of Inmarsat's
ICO capital contribution in the capital account on which a target
rate of return is paid is small," it would still create "an
opportunity which is not available to investors in competing
systems." We have revised footnote 10 in chapter 3 to reflect this
concern.
14. The data on prices and costs that COMSAT provided us were not in
a usable format for us to analyze market power. Moreover, analogous
data were not provided by alternative companies because they
considered price and cost data to be commercially sensitive or
proprietary information.
15. We neither stated, implied, or intended to imply that INTELSAT,
Inmarsat, or any of their signatories have engaged in collusive
activities in terms of the pricing of international communications
services because of the cross-ownership between the intergovernmental
organizations and other providers of international communications
services. However, empirical studies have found that ownership ties
between competitors can inhibit full competition between those
entities. In response to this concern, many laws and regulations
have been put into place as a check on cross-ownership.
Particularly, such laws and regulations have focused on the level of
ownership at which influence may be exerted. The recent discussions
on restructuring INTELSAT and Inmarsat have largely focused on the
issue of how much of an affiliate it is appropriate to leave in the
hands of the residual intergovernmental organizations if a primary
goal is to advance competition. Given the rich knowledge in this
area, our statements were only intended to bring out that competition
is more ensured by a market characterized by fully distinct
competitors.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III
RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION
Amy D. Abramowitz
Charles Bausell
Beverly Ann Bendekgey
Patrick Brogan
Marnie Shaul
John H. Skeen, III
John Thomson, Jr.
OFFICE OF GENERAL COUNSEL
Michael Volpe
Mindi Weisenbloom
*** End of document. ***
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