Telecommunications: Market Developments in the Global Satellite Services Industry and the Implementation of the ORBIT Act
Published: 2005-04-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 2000, the Congress passed the Open-market Reorganization for the Betterment of International Telecommunications Act (ORBIT Act) to help promote a more competitive global satellite services market. The ORBIT Act called for the full privatization of INTELSAT, a former intergovernmental organization that provided international satellite services. In this testimony, GAO discusses (1) the impetus for the privatization of Intelsat as competition developed in the 1990s, (2) the extent to which the privatization steps required by the ORBIT Act have been implemented, and (3) whether access by global satellite companies to non-U.S. markets has improved since the enactment of the ORBIT Act.
section_title: What GAO Found
paragraphs: When commercial satellite technology was first deployed, a worldwide system was seen as the most efficient means to facilitate the advancement of a fully global provider. INTELSAT was thus established as an intergovernmental entity, originally established by 85 nations, that was protected from competition in its provision of global satellite communications services. By the 1980s, however, technology developments enabled private companies to efficiently compete for global communications services, and in 1984, President Reagan determined that it would be in the national interest of the United States for there to be greater competition in this market. New commercial satellite systems emerged, but soon found that INTELSAT enjoyed advantages stemming from its intergovernmental status and ownership by telecommunications companies in other countries that impeded new satellite companies from effectively competing. The new satellite companies began to call for INTESLAT to be privatized. Decision makers within INTELSAT also determined that privatization would enable more rapid business decisions. Just prior to INTELSAT's privatization in July 2001, FCC determined that INTELSAT's privatization plan was consistent with requirements of the ORBIT Act. The Federal Communications Commission (FCC) thus authorized the privatized Intelsat--the official name of the company after privatization--to use its U.S. satellite licenses to provide services within the United States pending an initial public offering (IPO) of securities that was mandated by the ORBIT Act to occur at a later time. New legislation was passed in 2004 that allows Intelsat to forgo an IPO if it has achieved substantial dilution of its "signatory" ownership--that is, dilution of ownership by those entities (mostly government-controlled telecommunications companies) that had been the investors in INTELSAT when it was an intergovernmental entity. Since Intelsat has recently been sold to a consortium of four private investors, it no longer has, according to an Intelsat official, any former signatory ownership. FCC is still reviewing this transaction to determine whether Intelsat has met the requirements of the ORBIT Act as amended and thus is no longer required to hold an IPO. Most of the stakeholders we spoke with said that access to non-U.S. satellite markets has generally improved during the past decade. This improvement in market access is generally attributed to global trade agreements and privatization trends. Despite this general view, some satellite companies expressed concerns that some market access issues still exist. For example, some companies noted that some countries may favor domestic satellite providers or may choose to continue obtaining service from Intelsat because of long-term business relationships that were forged over time. Nevertheless, Intelsat officials noted that it seeks market access on a transparent and nondiscriminatory basis and that Intelsat has participated with other satellite operators, through various trade organizations, to lobby governments to open their markets.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the privatization of INTELSAT  and the implementation of the ORBIT Act. In 2000, the Congress passed  the Open-market Reorganization for the Betterment of International  Telecommunications Act (ORBIT Act) to help promote a more  competitive global satellite communication services market. Today we will  discuss (1) the impetus for the privatization of INTELSAT as competition  developed during the 1990s, (2) the extent to which the privatization steps  required by the ORBIT Act have been implemented, and (3) whether  access by global satellite companies to non-U.S. markets has improved  since the enactment of the ORBIT Act.
To address these issues, we have drawn upon our previous work on the  international satellite market and the ORBIT act. We issued two reports on  the international satellite market in 1996. In addition, we issued two  reports in September 2004, one of which focused on the implementation of  the ORBIT Act; see appendix I for a list of related GAO products. For the  latter report, we conducted semistructured interviews with satellite  service providers and experts. Additionally, we interviewed officials from  the Federal Communications Commission (FCC), the United States Trade  Representative; the Department of State; and the National  Telecommunications and Information Administration of the Department of  Commerce. We conducted our work for the September 2004 report from  February through June 2004 in accordance with generally accepted  government auditing standards.
Following is a summary of our findings:    When commercial satellite technology was first deployed, a worldwide  system was seen as the most efficient means to facilitate the advancement  of a fully global provider. INTELSAT was thus established as an  intergovernmental entity that was protected from competition in its  provision of global satellite communications services. By the 1980s,  however, technology developments enabled private companies to  efficiently compete for global communications services, and in 1984,  President Reagan determined that it would be in the national interest of  the United States for there to be greater competition in this market. New  commercial satellite systems emerged, but within a few years, these  providers became concerned that INTELSAT enjoyed certain advantages  stemming from its intergovernmental status that impeded others from  effectively competing. The new satellite companies began to argue that the  marketplace would not become fully competitive unless INTELSAT  became a private company that no longer enjoyed such advantages. At  about the same time, decision makers within INTELSAT decided to  privatize the organization because of the difficulties of making business  decisions within an intergovernmental entity.
Just prior to INTELSAT’s privatization in July 2001, FCC determined that  INTELSAT’s privatization plan was consistent with requirements of the  ORBIT Act. FCC thus authorized Intelsat, LLC—the U.S. subsidiary of the  privatized entity Intelsat Ltd.—to use its U.S. satellite licenses to provide  services within the United States pending an initial public offering (IPO) of  securities that was mandated by the ORBIT Act to occur at a later time. In  2004, however, new legislation allowed Intelsat to forgo an IPO if it  achieved substantial dilution of its “signatory” ownership—or dilution of  ownership by those entities that had been the signatories to INTELSAT  when it was an intergovernmental entity. Since Intelsat has recently been  sold to a consortium of four private investors, it no longer has, according  to an Intelsat official, any former signatory ownership. FCC is still  reviewing this transaction to determine whether Intelsat has met the  requirements of the ORBIT Act as amended and thus no longer is required  to hold an IPO.
Most of the stakeholders we spoke with said that access to non-U.S.  satellite markets has generally improved during the past decade. This  improvement in market access is generally attributed to global trade  agreements and privatization trends. Despite this general view, some  satellite companies expressed concerns that some market access issues  still exist. These remaining market access problems were attributed to  foreign government policies that may limit or slow satellite competitors’  access to certain markets. For example, some companies noted that some  countries may favor domestic satellite providers or may choose to  continue obtaining service from Intelsat because of long-term business  relationships that were forged over time. Nevertheless, Intelsat officials  noted that it seeks market access on a transparent and nondiscriminatory  basis and that Intelsat has participated with other satellite operators,  through various trade organizations, to lobby governments to open their  markets.
subsections: section_title: Background
paragraphs: The Congress passed the Communications Satellite Act of 1962 to promote  the creation of a global satellite communications system. As a result of this  legislation, the United States joined with 84 other nations in establishing  the International Telecommunications Satellite Organization—more  commonly known as INTELSAT—roughly 10 years later. Each member  nation designated a single telecommunications company to represent its  country in the management and financing of INTELSAT. These companies  were called “signatories” to INTELSAT and were typically government- owned telecommunications companies, such as France Telecom, that  provided satellite communications services as well as other domestic  communications services. Unlike any of the other nations that originally  formed INTELSAT, the United States designated a private company,  Comsat Corporation, to serve as its signatory to INTELSAT.
The ORBIT Act, enacted by the Congress in March 2000, was designed to  promote a competitive global satellite communication services market.  The act did so primarily by calling for the privatization of INTELSAT after  about three decades of operation as an intergovernmental entity. The  ORBIT Act required, for example, that INTELSAT be transformed into a  privately held, for-profit corporation with a board of directors that would  be largely independent of former INTELSAT signatories. Moreover, the act  required that the newly privatized Intelsat retain no privileges or other  benefits from governments that had previously owned or controlled it. To  ensure that this transformation occurred, the Congress imposed certain  restrictions on the granting of licenses that allow Intelsat to provide  services within the United States. The Congress coupled the issuance of  licenses granted by FCC to INTELSAT’s successful privatization under the  ORBIT Act. That is, FCC was told to consider compliance with provisions  of the ORBIT Act as it made decisions about licensing Intelsat’s domestic  operations in the United States. Moreover, FCC was empowered to restrict  any satellite operator’s provision of certain new services from the United  States to any country that limited market access exclusively to that  satellite operator.
section_title: Concerns That INTELSAT Enjoyed Competitive Advantages Provided Impetus for Its Privatization
paragraphs: When satellite technology first emerged as a vehicle for commercial  international communications, deploying a global satellite system was  both risky and expensive. Worldwide organizations were considered the  best means for providing satellite-based services throughout the world.  When INTELSAT was established, the member governments put in place a  number of protections to encourage its development. In essence,  INTELSAT was created as an international monopoly—with little  competition to its international services allowed by other satellite systems,  although domestic and other satellite systems were allowed under certain  conditions. As such, during the 1970s and early 1980s, INTELSAT was the  only wholesale provider of certain types of global satellite  communications services such as international telephone calls and relay of  television signals internationally.
As satellite technology advanced, it became economically more feasible  for private companies to develop global satellite systems. This occurred in  part because of growing demand for communications services as well as  falling costs for satellite system equipment. In particular, some domestic  systems that were already in operation expressed interest in expanding  into global markets. By the mid-1980s, the United States began  encouraging the development of commercial satellite communications  systems that would compete with INTELSAT. To do so under the  INTELSAT treaty agreements, President Reagan determined that  competing international satellite systems were required in the national  interest of the United States. After that determination, domestic  purchasers of international satellite communications services were  allowed to use systems other than INTELSAT. In 1988, PanAmSat was the  first commercial company to begin launching satellites in an effort to  develop a global satellite system. Within a decade after PanAmSat first  entered the market, INTELSAT faced other global satellite competitors.  Moreover, intermodal competition emerged during the 1980s and 1990s as  fiber optic networks were widely deployed on the ground and underwater  to provide international communications services.
As competition to INTELSAT grew throughout the 1990s, commercial  satellite companies became concerned that INTELSAT enjoyed certain  advantages stemming from its intergovernmental status. In particular, the  new satellite companies noted that INTELSAT enjoyed immunity from  legal liability and was often not taxed in the various countries it served.  Additionally, new competitors noted that the signatories to INTELSAT in  many countries were typically government-owned telecommunications  companies, and many were the regulatory authorities that made decisions  on satellite access to their respective domestic markets. As such, new  satellite companies were concerned that those entities, because of their  ownership stake in INTELSAT as signatories, might favor INTELSAT and  thus render entry for other satellite companies more difficult. Because of  these concerns, competitors began to argue that the satellite marketplace  would not become fully competitive unless INTELSAT became a private  company that operated like any other company and no longer enjoyed any  advantages.
During the same time frame, some of the signatories to INTELSAT came to  believe that certain of INTELSAT’s obligations as an intergovernmental  entity impeded its own market competitiveness. For example, decision- makers within INTELSAT became concerned that the cumbersome nature  of the intergovernmental decision-making process left the company unable  to rapidly respond to changing market conditions—a disadvantage in  comparison with competing private satellite providers. In 1999, INTELSAT  announced its decision to become a private corporation, but to leave in  place a residual intergovernmental organization that would monitor the  privatized Intelsat’s remaining public service obligations.
section_title: FCC Believes INTELSAT’s Privatization Was Consistent with the ORBIT Act’s Requirements
paragraphs: On July 18, 2001, INTELSAT transferred virtually all of its financial assets  and liabilities to a private company called Intelsat, Ltd., a holding company  incorporated in Bermuda. Intelsat, Ltd. has several subsidiaries, including  a U.S.-incorporated indirect subsidiary called Intelsat LLC. Upon their  execution of privatization, INTELSAT signatories received shares of  Intelsat, Ltd. in proportion to their investment in the intergovernmental  INTELSAT. Two months before the privatization, FCC determined that  INTELSAT’s privatization plan was consistent with the requirements of the  ORBIT Act for a variety of reasons, including the following:  Intelsat, Ltd.’s Shareholders’ Agreement provided sufficient evidence that  the company would conduct an initial public offering (IPO).
Intelsat, Ltd. no longer enjoyed the legal privileges or immunities of the  intergovernmental INTELSAT.
Both Intelsat, Ltd. and Intelsat LLC are incorporated in countries that are  signatories to the World Trade Organization (WTO) and have laws that  secure competition in telecommunications services.
Intelsat, Ltd. converted into a stock corporation with a fiduciary board of  directors.
Measures were taken to ensure that a majority of the members of Intelsat,  Ltd.’s Board of Directors were not directors, employees, officers,  managers, or representatives of any signatory or former signatory of the  intergovernmental INTELSAT.
Intelsat, Ltd. and its subsidiaries had only arms-length business  relationships with certain other entities that obtained INTELSAT’s assets.
In light of these findings, FCC conditionally authorized Intelsat LLC to use  its U.S. satellite licenses to provide services within the United States.  However, FCC conditioned this authorization on Intelsat, Ltd. conducting  an IPO of securities as mandated by the ORBIT Act. In the past year,  however, several changes have occurred that alter the circumstances and  requirements associated with Intelsat’s IPO. On August 16, 2004, Intelsat,  Ltd. announced that its Board of Directors approved the sale of the  company to a consortium of four private investors. According to an  Intelsat official, this transaction, which was completed on January 28,  2005, eliminates former signatories’ ownership in Intelsat. Additionally, on  October 25, 2004, the President signed legislation modifying the  requirements for privatization in the ORBIT Act. Specifically, Intelsat, Ltd.  may forgo an IPO under certain conditions, including, among other things,  certifying to FCC that it has achieved substantial dilution of the aggregate  amount of signatory or former signatory financial interest in the  company. FCC is still reviewing this transaction to determine whether  Intelsat has met the requirements of the ORBIT Act as amended and thus  is no longer required to hold an IPO.
section_title: While Market Access Has Improved, Some Companies Say That Certain Market Access Challenges Remain
paragraphs: According to most stakeholders and experts we spoke with, access to non- U.S. satellite markets has generally improved during the past decade,  which they generally attribute to global trade agreements and privatization  trends. In particular, global satellite companies appear less likely now than  they were in the past to encounter government restraints or business  practices that limit their ability to provide service in non-U.S. markets.  Satellite companies and experts we spoke with generally indicated that  access to non-U.S. satellite markets has improved. Additionally, most  stakeholders attributed this improved access to global trade agreements  that helped to open telecommunications markets around the world, as  well as to the trend toward privatization in the global telecommunications  industry. At the same time, many stakeholders noted that the ORBIT Act  had little to no impact on improving market access. According to several  stakeholders, market access was already improving when the ORBIT Act  was passed.
Despite the general view that market access has improved, some satellite  companies and experts expressed concerns that market access issues still  exist. These remaining market access problems were attributed to foreign  government policies that limit or slow satellite competitors’ access to  certain markets. For example:    Some companies and experts we spoke with said that some countries have  policies that favor domestic satellite providers over other satellite systems  and that this can make it difficult for nondomestic companies to provide  services in these countries.
Some companies and one expert we spoke with said that because some  countries carefully control and monitor the content that is provided within  their borders, the country’s policies may limit certain satellite companies’  access to their market.
Several companies and an expert we interviewed said that many countries  have time-consuming or costly approval processes for satellite  companies.
In addition to these government policies, some stakeholders believe that  Intelsat may benefit from legacy business relationships. Since INTELSAT  was the dominant provider of global satellite services for approximately 30  years, several stakeholders noted that Intelsat may benefit from the long- term business relationships that were forged over time, as  telecommunications companies in many countries may feel comfortable  continuing to do business with Intelsat as they have for years.  Additionally, two stakeholders noted that because companies have plant  and equipment as well as proprietary satellite technology in place to  receive satellite services from Intelsat, it might cost a significant amount  of money for companies to replace equipment in order to use satellite  services from a different provider. Alternatively, representatives of  Intelsat, Ltd. told us that Intelsat seeks market access on a transparent and  nondiscriminatory basis and that Intelsat has participated with other  satellite operators, through various trade organizations, to lobby  governments to open their markets. Further, some companies and many of  the experts we interviewed told us that, in their view, Intelsat does not  have preferential access to non-U.S. satellite markets and that they have  no knowledge that Intelsat in any way seeks or accepts exclusive market  access arrangements or attempts to block competitors’ access to non-U.S.  satellite markets.
Finally, some of the companies we spoke with believe that FCC should  take a more proactive role in improving access for satellite companies in  non-U.S. markets. For example, one satellite company said that section  648 of the ORBIT Act, which prohibits any satellite operator from  acquiring or enjoying an exclusive arrangement for service to or from the  United States, provides a vehicle for FCC to investigate the status of  access for satellite companies to other countries’ markets. Conversely,  FCC officials told us they do not believe that FCC should undertake  investigations of market access concerns without specific evidence of  violations of section 648 of the ORBIT Act. While some comments filed  with FCC in proceedings on Intelsat’s licensing and for FCC’s annual  report on the ORBIT Act raise concerns about market access, FCC has  stated that these filings amount only to general allegations and fall short of  alleging any specific statutory violation that would form a basis sufficient  to trigger an FCC enforcement action.
Mr. Chairman, this concludes my prepared statement. I would be happy to  respond to any questions you or other Members of the Subcommittee may  have at this time.
section_title: GAO Contacts and Staff Acknowledgments
paragraphs: For questions regarding this testimony and the report on which it is based,  please contact JayEtta Z. Hecker at (202) 512-2834 or heckerj@gao.gov, or  Mark L. Goldstein at (202) 512-2834 or goldsteinm@gao.gov. Individuals  making key contributions to this testimony included Amy Abramowitz,  Michael Clements, Emil Friberg, Bert Japikse, Logan Kleier, Richard  Seldin, and Juan Tapia-Videla.
section_title: Related GAO Products
paragraphs: Tax Policy: Historical Tax Treatment of INTELSAT and Current Tax  Rules for Satellite Corporations. GAO-04-994. Washington, D.C.:  September 13, 2004.
Telecommunications: Intelsat Privatization and the Implementation of  the ORBIT Act. GAO-04-891. Washington, D.C.: September 13, 2004.
Telecommunications: Competition Issues in International Satellite  Communications. GAO/RCED-97-1. Washington, D.C.: October 11, 1996.
Telecommunications: Competitive Impact of Restructuring the  International Satellite Organizations. GAO/RCED-96-204. Washington,  D.C.: July 8, 1996.
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