What's the Issue?

Need To Privatize Now

The current structure of the international satellite market, which has been in place since 1962, needs to be changed now. Procompetitive privatization of the intergovernmental satellite organizations ("IGOs") that dominate international satellite communications is needed to promote a robustly competitive satellite communications market. Recent attempts by an IGO spin-off, New Skies to obtain FCC approval for permanent access to the U.S. market underscore the importance of access to the U.S. satellite market as an incentive to the IGOs to privatize in a manner that fosters competition.

Congress is aware of the need for satellite reform now.  On November 10, 1999, the U.S. House of Representatives overwhelmingly approved, under suspension of the rules (a procedure under which non-controversial legislation is frequently considered in order to expedite business), H.R. 3261, the "Communications Satellite Competition and Privatization Act of 1999". The bill introduced by the Chairman of the House Commerce Committee, Rep. Tom Bliley (R-VA) and 21 co-sponsors to reform the international satellite communications industry and to grant direct access to Intelsat for all communications service providers and users, without having to go through Comsat Corporation, is virtually identical to last yearĖs bill, H.R. 1872, which passed the House by a vote of 403-16. On July 1, 1999, the Senate passed S. 376, the "Open-Market Reorganization for the Betterment of International Telecommunications Act" ("ORBIT"), with significant changes resulting from committee amendment and a floor managerĖs amendment.  Several Senators expressed their concerns about the serious deficiencies remaining in the bill as passed and the need to address these issues in conference. The Satellite Coalition, comprised of satellite service providers and customers, also expressed concern with the bill as passed. A House-Senate Conference Committee will resolve differences between the two bills.

Background On The International Satellite Industry

In 1962, Congress passed the Communications Satellite Act ("the 1962 Act"), creating a new organization, the Communications Satellite Corporation ("Comsat") (www.satellitereform.org/contents/resources/), with the specific charter of forming a consortium to operate an international commercial satellite communications system. As a result, Comsat, and subsequently, the International Telecommunications Satellite Organization ("Intelsat"), were established with the assistance of a partnership of nations in Europe, North America, and developing areas of the world. In 1973, Intelsat was converted into an international treaty, organization. At the time of the 1962 Act's passage, it was believed that private companies were not capable, in those early days of satellite technology, of bearing the financial risk of constructing and operating a global satellite communications system.

Today, Intelsat, a global communications satellite cooperative with 142 member countries, currently operates 20 satellites and is the dominant provider of international "fixed" satellite services, (e.g., transoceanic telephone calls, video feeds). Now Intelsat is seeking to expand into a wide array of advanced services, such as high-speed data for Internet connections.

In 1978, Congress amended the 1962 Act to provide for U.S. participation in a sister organization to Intelsat, the International Maritime Satellite Organization ("Inmarsat"), Inmarsat was intended to provide distress, safety, and communications service to vessels at sea, but has since expand to provide general telephone service and other "mobile" satellite services. Inmarsat has 82 member countries and operates eight satellites.

Governments and telecommunications carriers, both government-owned and private companies, participate in Intelsat and Inmarsat: the governments as "Parties" and the telecommunications carriers as "Signatories." The majority of Signatories are government-owned or controlled telecommunications monopolies in their own countries. Comsat is the U.S. signatory to Intelsat and, as a result of its prior status as Inmarsat signatory, has the largest ownership share in each entity, currently 20% of Intelsat and 23% of Inmarsat.

Today Comsat enjoys the sole right of access to Intelsat in the United States. A recent FCC order (6.6MB PDF) grants users direct access to Intelsat effective December 1999. H.R. 3261 definitively ends ComsatĖs exclusive access to Intelsat. S. 376 prohibits direct access by users until Intelsat privatizes, or by July 1, 2001, and prohibits direct investment in Intelsat by any user other than the U.S. signatory to Intelsat.

Normalization Of Comsat

The privatization of the IGOs should go hand-in-hand with the normalization of Comsat, which is a unique hybrid: a private commercial company that, nonetheless, is given public tasks and responsibilities, has three Presidentially-appointed directors (out of 15), has legally-conferred monopoly on access to the Intelsat and Inmarsat global systems in the United States. Until the recently issued FCC direct access order becomes effective, any U.S. carrier or customer wishing to use IntelsatĖs satellites for transmissions to or from the United States must purchase satellite capacity through Comsat, instead of having direct access, as they do in almost 100 other countries.  Comsat adds a surcharge on the Intelsat charges, which ComsatĖs major customers would like to avoid, since Comsat provides no value added service in exchange for this surcharge.  The FCC direct access order would require users choosing to directly access Intelsat to pay Comsat a surcharge of almost six percent.

In view of its unique role and monopoly privileges, the 1962 Act assured that there would be widely diverse ownership of Comsat by restricting the ownership share in Comsat that could be held by any single company. In September 1998, Lockheed Martin, proposed to merge with Comsat in a two step acquisition process that would require Congress to change Comsat's ownership restrictions as well as get approval from the Federal Communications Commission ("FCC").

On September 15, 1999 the FCC authorized Lockheed Martin to acquire up to 49 percent of ComsatĖs stock.  Lockheed Martin would like to buy Comsat with ComsatĖs monopoly intact, but others are objecting.  The Congress, therefore, is faced with this issue as it attempts to both normalize Comsat, thereby permitting its sale to Lockheed Martin, and to encourage the restructuring of the IGOs to foster competition in the international satellite marketplace.

Competition In The International Satellite Communications Market

In the early to mid 1980's, a number of applicants filed petitions with the FCC for permission to launch and operate private satellite systems that would carry international traffic in competition with Intelsat. Since the first private satellite launch in 1988, the private international satellite industry has grown slowly. The industry contends that this slow pace of growth is due to Intelsat's continued market dominance and anti-competitive practices. Today, only three separate satellite systems survive from an original eight applicants. PanAmSat, which is now largely owned by Hughes Electronics, Inc., operates nine international satellites. Orion Network Systems, which was recently purchased by Loral, currently operates one satellite. Columbia Communications, which was an original applicant and currently leases capacity on National Aeronautical and Space Administration ("NASA") satellites and operates three in-orbit international satellites, recently reached an agreement in principle with GE Americom regarding the acquisition of Columbia by GE Americom. GE Americom was not one of the original applicants, but now provides international service to a limited extent over its U.S. domestic satellite system.

Competition to Inmarsat has been equally slow. Iridium has just begun to provide service, and Teledesic and Ellipso are planning service. Inmarsat itself has now "privatized," but has not sufficiently altered its ownership structure to be considered a normalized, private company.

While the international satellite market has yet to reach its full potential, the future of international satellite services looks promising. Experts predict that more than 1,700 satellites will be launched in the next decade, an increase of almost 10 times the 200 or so commercial satellites now in orbit worldwide. Furthermore, it is estimated that revenue from satellite services will more than triple from $9 billion today to $29 billion within the next two to three years.

Barriers To Competition

Although the advances in technology should help the private sector-global satellite marketplace grow, there are significant barriers in many markets that hamper competition. These impediments are the outgrowth of the structure and operations of the IGOs, Intelsat and Inmarsat, and their relationships with their Signatories. Furthermore, Intelsat and Inmarsat have the advantage of an unmatched fleet of international satellites in key orbital locations and frequencies financed at preferential rates.

In order to compete in a particular market, a private satellite provider usually is required to receive authorization from a government ministry or a regulatory agency. Since the regulatory agency or ministry responsible for telecommunications policy in IGO Member countries often owns the Signatory, the agency or ministry with licensing authority has a disincentive to permit a private satellite provider to enter that country's market and compete against the Signatory. Market access in every nation is critically important for companies who want to compete with the worldwide service offered by Intelsat and Inmarsat.

Intelsat and Inmarsat also benefit from certain privileges and immunities, providing them with advantages. These include diplomatic status, tax exemption, antitrust immunity, and freedom from the regulatory process.

Privatization Efforts

Intelsat and Inmarsat have been considering privatization, or "restructuring," for several years, but they are pursuing privatization in a manner that will preserve their "legacy" as intergovernmental organizations and permit them to extend their dominance in core service to advanced services. As the country that has taken the lead first in creating the global international satellite structure based on IGOs and then introducing competition to the IGOs, the United States should take the lead in ending the now outmoded IGO structure and fostering a fully competitive private industry structure. Although the United States cannot dictate the new industry structure to the rest of the world, the United States, consistent with its World Trade Organization Basic Telecom Agreement ("WTO") obligations (http://www.wto.org/), can use access to the U.S. satellite market as incentive to the IGOs to privatize in a procompetitive manner. Legislation, therefore, is needed that will guide the IGO privatization process along procompetitive lines and will reward such a privatization with U.S. market access.