**Before the**

**Federal Communications Commission**

**Washington, D.C. 20554**

)

In re )

)

)

KaStar 73 Acquisition, LLC, and KaStar 109.2 ) File Nos.

Acquisition, LLC, Applications for Consent to ) SAT-T/C-19990629-00071

Transfer of Control ) SAT-T/C-19990629-00072

)

)

)

**MEMORANDUM OPINION AND ORDER**

**Adopted: December 17, 1999 Released: December 17, 1999**

By the Chief, International Bureau:

I. Introduction

1\. By this Order, we grant KaStar 73 Acquisition, LLC, (\"KaStar 73\")
and KaStar 109.2 Acquisition, LLC (\"KaStar 109.2\"), authority to
transfer control of their licenses from Televerde Communications, L.P.
(\"Televerde\") to the shareholders of KaSTAR Satellite Communications
Corporation (\"KaSTAR\").[^1] We find that grant of these applications
will facilitate rapid deployment and competition in the provision of
advanced broadband services using the KaSTAR satellite system.

II\. Background

2\. KaSTAR, through its wholly owned subsidiaries, KaStar 73 and KaStar
109.2, holds licenses to implement two of a new generation of
fixed-satellite service (\"FSS\") systems in the Ka-band.[^2] These
systems will provide a variety of broadband interactive digital services
around the world.[^3] At the time it received its space station
authorizations in May 1997, Televerde held 93 percent of the issued and
outstanding stock of KaSTAR.[^4] Subsequently, several additional
investors obtained an interest in KaSTAR. Specifically, Kleiner,
Perkins, Caufield & Byers (\"KPCB\"), through a nominee, KPCB Holdings,
acquired voting shares from KaSTAR and Televerde. In addition, DirectCom
Networks, Inc., (\"DirectCom\") a debt holder, converted its debt
instruments into stock.[^5] As a result, Televerde presently holds a
48.886 percent interest in voting stock, and proxies to vote 1.193
percent of shares held by two other stockholders, for a total
controlling interest of 50.079 percent. Televerde also has the right to
appoint three of five members of its board of directors. The other
shareholders with 10 percent or more outstanding voting stock are KPCB
Holdings with 20.821 percent and DirectCom with a 20.468 percent
interest.

3\. On June 29, 1999, KaStar 73 and KaStar 109.2 applied for authority
to transfer control of their licenses from Televerde to the shareholders
of KaSTAR. As set forth in the applications, KPCB Holdings seeks to
acquire additional stock in KaSTAR that would increase its holdings to
21.73 percent.[^6] Televerde, in turn, would have a 48.33 percent
interest, with the proxies expiring upon consummation of the
transaction. DirectCom\'s share would be 20.23 percent. As a result,
Televerde\'s controlling interest will be transferred to the
shareholders of KaSTAR.[^7] In support of the applications, KaStar 73
and KaStar 109.2 state that the transfer will enable KaSTAR to become a
well-financed competitor in the fixed-satellite market, furthering the
Commission\'s efforts to promote competition generally and new entrants
in particular. Subsequent to consummation of the proposed transaction,
the applications note that Televerde will liquidate itself and
distribute its shares to its principals, David Drucker ("Drucker"), who
is Chairman of KaSTAR, and Walter Segaloff. Drucker then intends to sell
2 percent of his interests to DirectCom, which would increase its
holdings to 22.98 percent.

4\. Pegasus Development Corporation (\"Pegasus\"), an applicant in the
second Ka-band processing round, filed a petition to deny or defer
KaSTAR's applications. According to Pegasus, the applications fail to
provide enough information to determine whether the transaction complies
with the Commission\'s anti-trafficking rules, and therefore they should
be dismissed or denied. In addition, Pegasus asserts that KaSTAR\'s
licensed orbital locations should be attributed to DirectCom, also an
applicant in the second Ka-band processing round. Both KaSTAR and
DirectCom filed responses to the Petition, to which Pegasus filed a
reply.

5\. KaSTAR then amended its pending applications. [^8] The amendment
states that on October 19, 1999, KaSTAR issued convertible debt to its
present shareholders, Televerde, KPCB Holdings, and DirectCom. Liberty
KaSTAR Corporation ("Liberty KaSTAR"), a subsidiary of Liberty Media
Corporation, was also issued convertible debt. According to KaSTAR, the
debt issued in this transaction does not include any voting rights and
cannot be converted to equity until the underlying transfer of control
applications are granted. Thereafter, if and when the transfer of
control is granted, the investors will convert the debt to KaSTAR stock
and make a further investment to acquire additional stock from KaSTAR.
As part of this transaction, KaSTAR's board of directors will increase
to seven members. Mr. Drucker, however, will remain Chairman of KaSTAR,
and Televerde will have the right to nominate two board members. The
amendment also states that all of the proceeds from the convertible debt
will go to KaSTAR for the continuing development of its satellite
system. According to KaSTAR, this investment will enable it to expedite
its acquisition of a satellite and launch services.[^9] After the
proposed transactions, the resulting holdings of KaSTAR will be:
Televerde, 35.25 percent; KPCB Holdings, 20.44 percent; DirectCom, 19.10
percent; and Liberty, 18.76 percent.

6\. On October 25, 1999, in response to the staff's request, KaSTAR
submitted additional information regarding Mr. Drucker's plans regarding
the sale of his stock to DirectCom.[^10] As noted, KaSTAR's initial
application indicates that Mr. Drucker intended to sell an additional
two percent of his holdings after the initial transfer of controlling
interest to the KaSTAR shareholders. According to KaSTAR, Mr. Drucker
will receive \$1 per share or \$2 million for this transaction, which is
greater than Mr. Drucker's initial investment but "less than the value
at which KaSTAR is currently selling its shares."[^11] KaSTAR also notes
that Mr. Drucker intends to sell an additional 1 percent or 1 million
shares, for \$1 million to certain principals of Daniels and Associates,
an investment banking firm providing services to KaSTAR. Other than
these transactions, KaSTAR states that Mr. Drucker has "no present
intention" of selling any further shares of KaSTAR before the launch of
KaSTAR's first satellite. Pegasus filed oppositions to both the amended
application and KaSTAR's supplemental filing.[^12]

II. III\. Discussion

7\. *Legal Standard*. Our review of the proposed transaction requires a
finding that grant of the applications will serve the public interest,
convenience and necessity.[^13] To make this finding we must weigh any
potential public interest harms against any potential public interest
benefits, considering competitive effects and other public interest
factors such as rapid delivery of service to the public.[^14] In
addition to these competitive effects, we address the issues raised by
Pegasus in our public interest determination.

8\. *Effect on Competition*. KaSTAR's satellite system will provide
broadband services such as electronic messaging and mailboxes, database
access, multimedia bridging, software distribution and voice
communications. Upon approval of the proposed transactions, AT&T will
acquire an indirect minority ownership in KaSTAR through its ownership
of Liberty Media, which in turn has an ownership interest in DirectCom
and Liberty KaSTAR. AT&T is the largest U.S. provider of interstate
telephone service and the largest U.S. provider of international
messaging telephone service. The Commission recently approved AT&T's
acquisition of Tele-Communications, Inc., the largest U.S. cable
company.[^15] Nevertheless, for the reasons discussed below, we are not,
at this time, concerned about AT&T's minority interest in KaSTAR.

9\. In providing broadband services, KaSTAR will be competing with
numerous other licensees in the Ka-band, such as Hughes Communications
Galaxy, Inc., Visionstar, Inc., and GE American Communications, Inc.
Such services are also provided in the C and Ku-band, and will be
provided in the future by licensees in the V-band. In addition, KaSTAR
will be competing with terrestrial suppliers who provide broadband
services using fiber optic cable. Therefore, we do not expect any
possible adverse competitive effects from these transactions.

10\. *Trafficking*. Pegasus, an applicant in the second Ka-band
processing round, asserts that the applications do not provide
sufficient information to determine compliance with Section 25.145(d) of
the Commission\'s rules, which prohibits trafficking of bare
licenses.[^16] Specifically, Pegasus states that while KaSTAR
acknowledges that equity interests have changed since it was awarded its
license, it does not adequately explain these changes. [^17] Pegasus
also states that the applications fail to indicate the consideration to
be paid to KaSTAR or Televerde. Pegasus is concerned that the original
shareholders of KaSTAR have realized a substantial gain based on its
unbuilt license, but that KaSTAR has failed to disclose information
necessary to determine whether it constitutes trafficking. In addition,
Pegasus asserts in general, that a "number" of Ka-band licenses are in
"danger of lapsing," providing an incentive for licensees to transfer
their licenses.[^18] Pegasus also states that the Ka-band locations with
the greatest service potential were licensed in the first processing
round, including KaSTAR's assignment at 109.2° W.L., and therefore,
"purchasing" these locations is a more practical option than
participating in the Commission's application process. Consequently,
Pegasus asserts that the Commission's enforcement of its
anti-trafficking rules is critical.[^19]

11\. KaSTAR responds that the Commission\'s anti-trafficking policy is
designed to prevent speculation by requiring applicants to have a bona
fide intent to construct communications facilities, and is not
\"intended to prevent the infusion of capital by either debt or equity
financing.\"[^20] In addition, the Commission\'s milestone requirements
and no-trafficking rule for Ka-band licenses reduce the likelihood of
applicants filing for speculative purposes. KaSTAR notes that it, along
with Televerde, has consistently demonstrated its intent to design,
construct, launch and operate a state-of-the-art satellite system.
KaSTAR also states that its license is not in danger of lapsing and that
grant of its applications will ensure that a valuable public resource
will be put to productive use in the most expeditious manner.[^21]

Contrary to Pegasus's assertions regarding its equity ownership, KaSTAR
states that the proposed transactions are designed to raise capital for
the company. The corresponding effect is that Televerde's interest is
diluted from 48.33 percent to 35.25 percent, an "unavoidable result" of
attracting the investment necessary to fund a satellite system.[^22]

12\. Trafficking is defined as "speculation, barter or trade in
licenses."[^23] In the *Ka-band Service Rules Order*, the Commission
stated it would prohibit any \"Ka-band licensee from selling a bare
license for profit.\"[^24] The Commission\'s anti-trafficking rule was
designed to discourage speculators and prevent the unjust enrichment of
those who do not implement their proposed systems.[^25] It was not
intended, as KaSTAR notes, to prevent capital investments. We are aware
of the enormous capital required to construct, launch, and operate a
satellite system. In this case, we find that the proposed ownership
changes serve a legitimate business purpose of securing the financing
necessary to facilitate the implementation of KaSTAR's Ka-band system.
Further, KaStar states that all of the proceeds from transactions
described in the amended application will go directly to KaSTAR to
provide funds for the acquisition and launch of a satellite.[^26] The
record also reflects KaSTAR\'s and Televerde\'s commitment to developing
the KaSTAR system. Televerde will continue to hold the largest
percentage of stock, and Mr. Drucker will continue to serve as Chairman.
While we note that subsequent to the transfer of control Mr. Drucker
will sell KaSTAR stock for a greater amount per share than his initial
per share investment, the amount of stock at issue is only three
percent. Further, once the transfer is approved, Televerde will be
investing more than \$2.5 million in KaSTAR, at share prices greater
than those received by Mr. Drucker for his sale to DirectCom and Daniels
& Associates. [^27] Consequently, we find that no trafficking is
involved in the proposed transactions. In addition, the transactions
will improve the likelihood that KaSTAR will become a robust competitor
in the satellite communications market, which we believe will further
the overall public interest by increasing competitive alternatives for
broadband satellite services.[^28]

13\. Nonetheless, we remain concerned that after the transfer of
control, Mr. Drucker may sell his remaining interest in KaSTAR before
the launch of KaSTAR's first satellite. Although transfers of
non-majority shares generally do not require Commission approval, a
subsequent sale of all of Mr. Drucker's remaining shares, either at once
or in stages, could constitute trafficking and would contravene the
Commission's policy of discouraging parties from speculating in Ka-band
licenses.[^29] Further, it would be unfair to second round applicants
complying with our rules if first round licensees were permitted to sell
their licenses to second round applicants. Therefore, we condition this
grant to require KaSTAR to notify the Commission, in writing, of any
further transactions involving the sale of KaSTAR shares from either
Televerde, Mr. Drucker or Walter Segaloff prior to the launch of their
first satellite, no later than 30 days after the transaction.

14\. *Attribution*. In the event the Commission does not find
trafficking, Pegasus requests that KaSTAR\'s licensed first round
orbital locations be attributed to DirectCom, an applicant in the second
processing round.[^30] Pegasus makes this request based on DirectCom's
19.10 percent interest in KaSTAR after the proposed transactions.
Accordingly, Pegasus asserts that KaStar and DirectCom should be treated
as affiliates for purposes of establishing priority for new entrants
among second-round applicants for full-CONUS orbital locations.

15\. In response, KaStar states first, that DirectCom\'s interest will
decrease as a result of the proposed transaction, and second, this issue
has been raised and fully briefed in the second Ka-band

processing round.[^31] DirectCom also notes that this matter has been
raised in the second processing round and is irrelevant to this
proceeding.[^32]

16\. We find that this proceeding is not the proper forum to resolve
Pegasus\'s claim that KaSTAR's licensed orbital locations should be
attributed to DirectCom, nor is it necessary to resolve this issue to
authorize the transfer of control. Although the Ka-band service rules
limit the number of orbit locations that may be initially assigned to
licensees, this rule was waived in the first processing round.[^33] The
issue regarding attributable interests for the purposes of applying this
rule has been fully briefed in the second processing round and the
outcome may affect more than one applicant.[^34] It would be premature
to resolve the issue before addressing the second round orbit location
assignments and associated service rules. These applications are granted
without prejudice to any action that the Commission may take with
respect to the second Ka-band processing round.

IV\. Conclusion

17\. The Ka-band satellite market has the potential to stimulate
significant economic growth in the United States and abroad.[^35] The
applicants have clearly articulated a defined and legitimate business
purpose for this transaction, which is to create a strong and viable a
corporate structure by strengthening KaStar's financial and business
resources. This transaction will, in turn, enhance KaSTAR\'s ability to
bring new and improved satellite services to U.S. consumers. Therefore,
we find that grant of the transfer of control applications, as
conditioned herein, will serve the public interest.

V. Ordering Clauses

18\. Accordingly, pursuant to Section 0.261 of the Commission\'s rules,
47 C.F.R. § 0.261, IT IS ORDERED, that the application to transfer
control filed by KaStar 109.2 Acquisition, LLC, as amended, File No.
SAT-T/C-19990629-00071 IS GRANTED. IT IS FURTHER ORDERED, that the
application to transfer control filed by KaStar 73 Acquisition, LLC, as
amended, File No. SAT-T/C-19990629-00072, IS GRANTED.

19\. IT IS FURTHER ORDERED, that the Petition to Deny or Defer of
Pegasus Development Corporation filed August 23, 1999, is DENIED.

20\. IT IS FURTHER ORDERED, that these transactions shall be completed
within 60 days from the date of this Order. Within 30 days of
consummation, the Applicants shall notify the

Commission in writing of the date of consummation and the file numbers
of the applications involved in the transaction. 47 C.F.R. § 25.119(f).

21\. IT IS FURTHER ORDERED, that KaSTAR must notify the Commission, in
writing, of any further transactions involving the sale of KaSTAR shares
from either Televerde, Mr. Drucker or Walter Segaloff prior to the
launch of its first satellite, no later than 30 days after the
transaction.

FEDERAL COMMUNICATIONS COMMISSION

Donald Abelson

Chief, International Bureau

[^1]:     ^?^ KaSTAR Satellite Communications Corp. is the sole member
    of KaStar 73 Acquisition, LLC, and KaStar 109.2 Acquisition, LLC. On
    October 19, 1999, KaSTAR Satellite Communications Corp. changed its
    name to *i*Sat.net, Inc. For purposes of this Order, we will
    continue to refer to the company by its original name.

[^2]: ^?^ KaSTAR Satellite Communications Corp., Application for
    Authority to Construct, Launch and Operate a Ka-band Satellite
    System in the Fixed-Satellite Service, *Order and Authorization,* 13
    FCC Rcd 1366 (1997) (\"*KaSTAR* *Authorization Order*\").

[^3]:     ^?^ The term \"Ka-band\" generally refers to the
    internationally allocated FSS (downlink) frequencies at 17.7 - 20.2
    GHz and the corresponding Earth-to-space (uplink) frequencies at
    27.5-30.0 GHz, or the \"28 GHz band.\" In May 1997, the
    International Bureau acted on the first group of applications
    proposing to provide fixed-satellite service (\"FSS\") in the
    Ka-band (\"first processing round\"). Fourteen entities filed new,
    amended, or modified applications and one letter of intent for
    service in the Ka-band for the second processing round, presently
    pending.

[^4]:     ^?^ Televerde Communications Corp., L.P. is a Virginia Limited
    Partnership ultimately controlled by David Drucker and Walter S.
    Segaloff.

[^5]:     ^?^ DirectCom is an indirect subsidiary of TV Guide, whose
    principal stockholders, either directly or through affiliates, are
    News Corporation Limited and Liberty Media Corporation.

[^6]:     ^?^ KPCB Holdings, a California corporation, would hold the
    shares of KaStar as a nominee for a number of persons and entities,
    of which Kleiner, Perkins, Caufield & Byers IX-A, L.P. holds an
    interest in excess of 10 percent.

[^7]:     ^?^ Televerde and KPCB Holdings also propose entering into a
    voting trust agreement to ensure no single stockholder has the
    ability to block approval of a major corporate transaction.

[^8]: ^?^ Letter from David M. Brown, Vice President and General Counsel
    of KaSTAR dated October 21, 1999 to Magalie Roman Salas, FCC
    ("*Amended Application*"). An erratum correcting a slight error in
    calculation was filed on October 22, 1999. The amended application
    was placed on public notice, Report No. SAT-00029, Nov. 3, 1999.

[^9]: ^?^ On October 15, 1999, and October 18, 1999, Counsel for KaSTAR
    contacted several members of the Commission's staff to request that
    the applications be expedited. KaSTAR stated expedited treatment was
    necessary because it had an opportunity to obtain a partially
    constructed satellite and that the financing to make this purchase
    was contingent on Commission approval of the underlying
    applications. *See* Notice of *Ex Parte* Communication, dated
    October 18, 1999, from William Wiltshire, Counsel for KaSTAR to
    Magalie Roman Salas, FCC.

[^10]: ^?^ Letter to Magalie Roman Salas, FCC, from David M. Brown, Vice
    President and General Counsel of KaStar, dated October 25, 1999
    ("*October 25 Letter*").

[^11]: ^?^ *Id.*

[^12]: ^?^ Pegasus, the only commenter, filed an opposition both before
    and after the amended application was placed on public notice. *See*
    Letter to Magalie Roman Salas, FCC, from Bruce D. Jacobs, Counsel
    for Pegasus, dated October 27, 1999 ("*Pegasus Oct. 27^th^
    Response*"). This letter also addressed KaSTAR's Notice of *Ex
    Parte* Communication dated October 18, 1999. *See also* Pegasus
    Development Corporation, Petition to Deny or Defer Amended
    Application, Filed November 9, 1999 ("*Pegasus's Petition to Deny
    Amended Application*").

[^13]: ^?^ 47 U.S.C. § 310(d).

[^14]: ^?^ MCI Telecommunications Corporation, *Order and
    Authorization*, FCC 99-109 (rel. May 19, 1999).

[^15]: ^?^ In re Applications for Consent to the Transfer and Control of
    Licenses and Authorization from Tele-Communications, Inc. to AT&T
    Corp., *Memorandum Opinion and Order*, 14 FCC Rcd 3160 (1999).

[^16]: ^?^ 47 C.F.R. § 25.145(d).

[^17]: ^?^ *Pegasus Oct. 27^th^ Response* at 2.

[^18]: ^?^ *Pegasus' Petition to Deny Amended Application* at 4.

[^19]: ^?^ *Id*.

[^20]:     ^?^ Opposition of KaSTAR Satellite Communications Corp. to
    the Petition to Deny or Defer of Pegasus Development Corporation,
    filed September 7, 1999, at 8 (citations omitted) ("*KaSTAR
    Opposition to Petition to Deny*").

[^21]: ^?^ KaSTAR Response to Pegasus' Petition to Deny Amended
    Application, filed Nov. 12, 1999, at 3.

[^22]: ^?^ *Id*. at 2.

[^23]: ^?^ 1998 Biennial Regulatory Review -- Streamlining of Mass Media
    Applications, Rules, and Processes, *Notice of* *Proposed Rule
    Making*, 13 FCC Rcd 11349, 11359 n. 50 (1998) (citation omitted).

[^24]: ^?^ Rulemaking to Amend Parts 1, 2, 21 and 25 of the
    Commission\'s Rules to Redesignate the 27.5-29.5 GHz Frequency Band
    to Establish Rules and Policies for Local Multipoint Distribution
    Service and for Fixed Satellite Services, *Third Report and Order*,
    12 FCC Rcd 22310, 22339 (1997) (\"*Ka-band Service Rules Order*\").

[^25]: ^?^ KaSTAR correctly notes that Section 145(d) of our rules
    refers only to non-geostationary satellite facilities. 47 C.F.R. §
    145(d). While we intend to correct this oversight, it does not
    affect our findings in this Order.

[^26]: ^?^ *Amended Application*, p. 2.

[^27]: ^?^ *October 25* *Letter* from David M. Brown. Televerde's
    liquidation will occur only after consummation of all of the noted
    transactions. *See also* November 22, 1999, Letter from William
    Wiltshire, counsel for KaSTAR, advising that Drucker's share of
    Televerde's investment will be \$1 million dollars and that his
    purchase of KaSTAR stock will be for a price higher than the per
    share price of his sale to DirectCom and Daniels & Associates.
    Pegasus responded to this letter on November 29, 1999. Pegasus
    raises no new issues but claims the filing provides further evidence
    of trafficking and that if the applications are not denied they
    should be designated for hearing. *See* Letter to Magalie Roman
    Salas, FCC, from Bruce D. Jacobs, Counsel for Pegasus Development
    Corporation, dated November 29, 1999.

[^28]: ^?^ *See* MCI Communications Corp., *Memorandum Opinion and
    Order*, 13 FCC Rcd 18025, 18030 (1998) (the broad aims of the
    Communications Act include "the implementation of Congress\'
    pro-competitive, de-regulatory national policy framework designed to
    \... open\[\] all telecommunications markets to competition\")
    (citations omitted).

[^29]: ^?^ *See* 47 C.F.R. § 25.119 and *Ka-Band Service Rules Order*,
    12 FCC Rcd at 22339.

[^30]: ^?^ Petition to Deny or Defer of Pegasus Development Corporation,
    filed August 23, 1999, at 6; *Pegasus Oct. 27^th^ Response* at 3.

[^31]: ^?^ *KaSTAR Opposition to Petition to Deny*, at 10.

[^32]: ^?^ Opposition of DirectCom Networks, Inc., filed September 7,
    1999 at 2.

[^33]: ^?^ 47 C.F.R. § 25.140(f). *See Ka-band Service Rules Order*, 12
    FCC Rcd at 22320.

[^34]: ^?^ *See* Comments filed in response to Public Notice, Report No.
    SAT-00012 (rel. March 16, 1999).

[^35]: ^?^ *Ka-Band Service Rules Order*, 13 FCC Rcd at 22312.