Telecommunications: Competitive Impact of Restructuring the International Satellite Organizations
Released: 1996-08-06T00:00:00

Letter

Background

Under the Communications Satellite Act of 1962, the United States created the Communications Satellite Corporation (now known as COMSAT) to develop, alone or in conjunction with foreign entities, a commercial communications satellite system. Subsequently two treaty organizations were created to provide such services. INTELSAT now comprises 139 member countries and operates 24 satellites providing voice, data, and video communications. Inmarsat was established to provide global maritime communications; since 1985, its services have expanded to the aeronautical sector. Inmarsat operates a global system of eight satellites—four of them operational and four spares. In 1994, Inmarsat established as an affiliate a separate company, ICO Global Communications Limited (ICO), to implement a global system to serve handheld mobile telephones. ICO, which is likely to compete with companies that plan to enter the market, is expected to begin operations by the year 2000.

Structure of the Treaty Organizations

As treaty organizations, INTELSAT and Inmarsat are made up of parties and signatories. Parties are the national governments that have signed the international agreement. The signatories—the organizations’ owners—are typically government agencies or government-sanctioned monopolistic telecommunications companies. These entities usually control or influence access to telecommunications services within their countries. The signatories are responsible for financing INTELSAT and Inmarsat and have a financial interest in their operations. COMSAT is the signatory for the United States to both organizations and operates as a private corporation subject to U.S. government regulations. COMSAT holds the largest single investment share in each organization—19 percent of INTELSAT and 23 percent of Inmarsat. The signatories, including COMSAT, generally provide a retail—or marketing—function for the organizations within their domestic markets. For example, figure 1 shows how one type of service—a basic telephone call between the United States and France—would be provided through INTELSAT’s satellite system. According to COMSAT, INTELSAT and Inmarsat typically operate by consensus, which depends on reaching agreement among member nations worldwide with different perspectives and interests.

INTELSAT and Inmarsat May Have Some Competitive Advantages

INTELSAT’s and Inmarsat’s ownership structures may provide them with important competitive advantages that could pose barriers to potential competitors. To provide service within a particular country, a satellite system must gain permission from domestic licensing authorities for, among other things, the right to use the necessary spectrum (radio frequencies), the right to establish necessary ground stations to receive satellite signals, and permission to interconnect on the ground with the domestic telephone system. Because many of these licensing authorities or dominant telecommunications companies are the signatories that own the organizations, they may have a financial incentive to favor INTELSAT and Inmarsat, or their affiliates, over other firms when determining who may do business within their countries. A recent analysis has found that the signatories, in addition to receiving a rate of return on their investments, also generally charge large markups on INTELSAT and Inmarsat services, which may be evidence that they have benefited from these competitive advantages.

The organizations’ treaty status also provides certain privileges and immunities. Exemption from taxation and immunity from lawsuits give these organizations a financial advantage over other competitors. Immunity from lawsuits, for example, may allow them to act in the market in ways that their competitors cannot under U.S. antitrust laws. INTELSAT and Inmarsat also have easier access to locations in space where satellites can be placed (known as orbital slots) and to spectrum. Because these slots and spectrum are scarce resources, easier access to them is an important advantage. In addition, private satellite firms that want to compete with INTELSAT or Inmarsat have been required, under the treaty agreements, to coordinate their business plans with the organizations to ensure that they do the organizations no significant economic harm and cause no technical interference with them. This requirement has meant that the firms have had to share potentially sensitive and proprietary business information with the organizations. According to several agency officials, the tests for economic harm are being phased out, but the tests for technical coordination remain.

Both treaty organizations also have relatively easy access to financial capital because they can request it from their signatories as well as through the capital markets. In addition, commercial investors may view these organizations as good risks because of the signatories’ ties to their governments in most countries.

According to COMSAT, however, these various factors do not necessarily translate into unfair competitive advantages in the marketplace. In particular, COMSAT believes that while the treaty organizations have some advantages, they also bear responsibilities, such as providing global services at nondiscriminatory rates.

U.S. Efforts to Enhance Market Access

Because of concerns about market access to foreign countries by U.S. telecommunications companies, including new satellite competitors, the United States is engaged in several efforts to encourage other countries to open their markets to new entrants. For example, within the World Trade Organization, the United States is participating in negotiations for basic telecommunications services to open access to foreign markets. In addition, the Federal Communications Commission (FCC), in its efforts to promote competition in international telecommunications, recently proposed formal rules for foreign-licensed satellite companies to serve the United States only if, among other things, an acceptable level of openness was provided in the foreign-licensed companies’ home markets.Furthermore, the United States has been developing a proposal to restructure INTELSAT and a position paper on Inmarsat, both of which the United States believes will promote competition.

Competitive Impact of Restructuring Depends Largely on Two Factors

Currently, there is a wide belief among those that favor more competition, such as private satellite companies, and those that favor more flexibility for the treaty organizations, such as some signatories, that changes are necessary in the structure and functioning of INTELSAT and Inmarsat. Some satellite companies, for example, have questioned the continuing need for the two organizations and point out that some private competitors currently offer or will offer global coverage and provide significant services to the developing world. However, according to officials in the U.S. Department of State, most of the member governments and signatories, especially in the developing countries, are concerned that without the treaty organizations, their access to certain basic telecommunications services—including telephone and data services at reasonable rates—may be threatened. Most of the options for enhancing competition have focused on ways to reduce the barriers posed by the structure of INTELSAT and Inmarsat, while preserving some intergovernmental treaty structure. Key factors in developing options to promote competition are the number of new entities that are created and the extent of their ties to the parent organization or its owners.

Some Changes May Be Warranted in the Way INTELSAT and Inmarsat Function

When INTELSAT was formed, satellites were an efficient way to provide basic telephone services worldwide. However, since the mid-1980s, there has been a dramatic increase in the capacity and capabilities of transoceanic fiber optic cables, which can transmit telephone calls.INTELSAT’s share of international telephone service, traditionally the organization’s prime service, has fallen significantly in places where such cables are now available. In response, INTELSAT has focused more intensely on providing other, more technologically advanced services, such as broadcast video. In these growing markets, it faces some competition from new satellite-based companies as well as from many domestic and regional satellite systems that provide services in specific areas. Some of these current providers, and others who hope to enter the market, believe change is needed. They allege that their ability to thrive in the market and to bring more services and lower prices to consumers is limited because INTELSAT continues to dominate the market in some areas. A recent analysis by the U.S. Department of Justice found that in certain areas, INTELSAT currently dominates the market as a result of its large share of transoceanic satellite capacity and its signatories’ ability to keep other competitors out of their domestic markets. COMSAT, in contrast, believes that because of the cumulative effect of increased competition from fiber optic cables and regional and domestic satellite systems, as well as private satellite companies, INTELSAT no longer has substantial market dominance.

Some of INTELSAT’s signatories believe that INTELSAT, with its lengthy decision-making process, is not well suited to adapt to new technologies and changing market conditions. As a result, these signatories are also interested in some restructuring of the organization.

In a desire to expand into new markets, Inmarsat chose to establish ICO to develop and provide satellite services for handheld mobile telephones because, according to U.S. State Department officials, some members believed that an affiliate unencumbered by the structure of a treaty organization could respond to the changing market more effectively. Several U.S. firms have been licensed by the FCC to provide similar services and are seeking access to foreign countries’ markets and the licenses necessary to provide these services globally. But these potential competitors are concerned that Inmarsat’s close relationship to ICO could hinder the development of competition.

Some Have Questioned the Continuing Need for the Treaty Organizations, While Others Prefer the Status Quo

Because of advances in technology since INTELSAT and Inmarsat were formed and an increase in demand, the private market is capable of and willing to provide many of these services, such as video, data, and mobile telephone services. Many privately financed companies have begun to or would like to provide traditional and advanced services at lower prices. Many companies told us that these services will be available globally and that some companies are particularly targeting their marketing of mobile services to developing countries, which are less likely to have established traditional telephone services. Furthermore, they note that some INTELSAT competitors are currently providing services to the developing world. As a result, some industry and other policy analysts have questioned the continuing need for INTELSAT and Inmarsat.

Despite the emergence of private competitors, however, some of the member nations believe that at least some aspects of the treaty organizations continue to be needed. According to officials in the U.S. Department of State, many nations believe that it may be desirable to retain some residual form of Inmarsat or another intergovernmental mechanism to ensure that services related to safety and rescue at sea continue to be provided. While the private market is more likely to be capable of providing all the services offered by INTELSAT, a State Department official told us that retaining some residual form of INTELSAT is important, at least for the foreseeable future. In particular, some of the developing countries, which consider that the treaty organizations have provided them with essential services, often do not believe that the private market would provide them with these services. These countries tend to be the most resistant to changing the function or structure of INTELSAT and Inmarsat. A Treasury Department official noted, however, that no country, including a developing country, has ever been refused service by a private company and that each country has the choice of permitting or not permitting service by private companies as well as by the treaty organizations.

Additionally, some U.S. companies have expressed concern that a restructuring that does not address barriers to competition could result in worse conditions for potential new competitors. Conditions could worsen, for example, if any new affiliates of the treaty organizations gain the flexibility to become strong competitors while barriers to competition by other firms remain in place. Some firms have stated that they would prefer to leave the treaty organizations as they are rather than restructure them in a way that does not correct the barriers to competition they impose under the current system.

Options for Restructuring to Enhance Competition

As an alternative to abolishing INTELSAT and Inmarsat, other changes could be made to enhance competition while preserving some of the treaty organizations’ structure. For example, some portion of the satellite facilities of each of the two organizations could be privatized. For any option to enhance competition by reducing some of the barriers to competition, it must address the fundamental competitive problems of the present structure, such as (1) the incentives for the signatories to favor any newly created affiliates, in which they have an ownership interest, over other potential competitors for access to their domestic markets; (2) the potential dominance of the market by either a residual treaty organization or any resulting new entities; and (3) the advantages, such as tax privileges, immunity from lawsuits, and easier access to orbital slots and spectrum, currently enjoyed by INTELSAT and Inmarsat.

Key to restructuring the treaty organizations with a view to enhancing competition are the number of new entities created and the degree to which they maintain economic ties with the remaining parent organization or its owners. According to economic principles, creating the largest feasible number of new entities may be best from the standpoint of encouraging competition, particularly if domestic and regional satellite systems do not provide adequate competition to INTELSAT in the global market. Additionally, because INTELSAT, in particular, has benefited from its advantages for many years and dominates some markets, restructuring would optimally remove enough of this organization’s assets, such as satellites and associated facilities, to reduce its dominance and to ensure that any newly created entities would not dominate the market. However, the costs of satellite technology may require that a firm have a significant amount of assets in order to be efficient and survive. Although there is no clear agreement on the smallest size a global satellite firm can be and remain efficient, the number of new entities that can be created and sustained is limited by these size considerations.

The second important factor in restructuring concerns the economic and cultural ties between the residual treaty organization and any new affiliates. Economic principles suggest that to encourage competition, it would be best to minimize the relationship between these entities. If the economic ties between a residual treaty organization and the entities that are spun off from it are strong, the barriers to competition could be exacerbated. Thus, restructuring would likely result in more competition if the treaty organization or its signatories (1) have little, if any, financial stake in or continuing business relationship with any new entities and (2) have no mutual members of the boards of directors.

Also, competition is more likely to be enhanced if the parent organization and its signatories have minimal control during any transition period from the current status to a new status. Among other things, if control is kept at a minimum, the member governments and signatories would have little incentive to favor the new entities over other competitors in their domestic markets. Even if the economic relationship between the parent and any affiliates is appropriately broken, there is concern that it could take some time for governments and signatories to provide open access to their markets because they are used to dealing mostly with the treaty organizations and may continue to wish to do so.

Inmarsat’s Owners May Have Incentives to Aid ICO

When Inmarsat created ICO, it provided an example of how a treaty organization could restructure by forming a single affiliate whose ownership was primarily restricted to the parent organization and its signatories. That approach to restructuring may not enhance competition because of the shared ownership arrangement between the parent and affiliate. Inmarsat and its signatories have both the incentives and the ability to provide ICO with market advantages over its potential competitors. These advantages may include access to member countries’ markets and financial benefits, such as more readily available financing.

The United States supported the formation of ICO on condition that its structure include certain principles that favor competition. Inmarsat’s member countries agreed to many of these principles. Some U.S. officials have been concerned that ICO’s organizing documents do not incorporate the Inmarsat-approved principles in a way that binds ICO to applying them, and they are working toward ensuring that those principles are incorporated. Also, Inmarsat is considering a restructuring proposal that raises concerns among potential competitors about the competitive impact of the relationship of a privatized Inmarsat to ICO.

ICO’s Owners Control Essential Access to Markets

Inmarsat and those signatories that chose to invest directly in ICO hold a majority interest and thus have a significant vested interest in the organization’s financial success because they share in ICO’s profits. The initial sale of ICO’s shares, which was open only to Inmarsat and its signatories, raised a total of $1.4 billion. Inmarsat’s portion of that total amounts to about 10.6 percent of the voting shares. Nearly 60 percent of Inmarsat’s 79 signatories took advantage of the opportunity to invest directly in ICO and collectively hold well over 70 percent of ICO’s voting shares. A public offering may occur in the future, but external investment, which is authorized only at the discretion of ICO’s Board of Directors, is limited to 30 percent of the voting shares. As of June 1996, there was one external investor—the builder of new satellites for ICO—who currently holds a very small percentage of ICO’s shares.

As noted earlier, Inmarsat’s signatories are typically the government authorities or dominant telecommunications providers that control or influence access to their domestic telecommunications markets. Market access is essential for the success of any provider of global satellite services. With their ownership interest in ICO, these signatories may have the incentive to grant such access to ICO and to preclude or inhibit access to other competitors, even though the competitors might offer services at lower prices. Moreover, as an official of the U.S. Department of Commerce noted, Inmarsat’s signatories had an incentive to invest through ICO because of the 17-percent rate of return they would earn on their investment, even though ICO has not yet generated revenues.

ICO’s Ownership Structure May Confer Financial Advantages

ICO’s shared ownership with Inmarsat may make financing more readily available to ICO than it is to competitors. It has also raised concerns that prohibited cross-subsidies may occur.

Ownership by Inmarsat and its signatories may give ICO financial benefits in the form of more readily available financing than potential competitors are likely to enjoy. For example, ICO could find it easier to obtain future commercial financing than other satellite companies do because of the implicit government backing associated with its ownership. Furthermore, since the signatories are typically government agencies or government-sanctioned monopolies, they may have financial assets readily available for investment in ICO.

Cross-subsidies could give ICO a financial advantage in competing with other companies by allowing ICO to offer lower prices than it could otherwise afford. Although cross-subsidization was prohibited when Inmarsat’s member countries authorized the formation of ICO, the shared ownership of Inmarsat and ICO raises the risk that cross-subsidies could occur. For example, the U.S. Departments of State and Commerce, in a September 1995 letter to the FCC, expressed concerns about whether contractual arrangements between Inmarsat and ICO were conducted with sufficient independence to ensure that there was no cross-subsidization.

Because of Inmarsat’s protected status as an international treaty organization, the existence of cross-subsidies might be difficult to confirm because Inmarsat has immunity from prosecution under antitrust complaints and other lawsuits. However, it is not clear whether any of the protections Inmarsat enjoys would apply to its business transactions with ICO.

U.S. Approval of ICO Was Conditional

The United States agreed to the formation of ICO on condition that several principles of structural separation be met to promote fair competition for both ICO and the other companies that want to offer the same kinds of services. Those principles included (1) nondiscriminatory access to the countries’ domestic markets for all mobile satellite communications networks, (2) no transfer of spectrum or orbital slots from Inmarsat to ICO, (3) no cross-subsidies from Inmarsat, and (4) no transfer of treaty-based privileges and immunities to ICO. In December 1994, Inmarsat’s member governments agreed to the formation of ICO if certain conditions were met; those conditions incorporated many but not all of the principles the United States had sought to include in order to ensure structural separation.

In their September 1995 letter to the FCC, the Departments of State and Commerce concluded that ICO’s organizing documents did not fully incorporate the conditions that Inmarsat’s members had agreed to. State and Commerce asked the FCC to delay authorization of COMSAT’s share of Inmarsat’s investment in ICO until it is clear that ICO is bound by the principles Inmarsat adopted. They also requested that COMSAT (1) state on the record that ICO is bound by the principles approved by Inmarsat and (2) provide supporting documentation. In its comments on a draft of this report, COMSAT said that it had reported to the relevant U.S. government agencies in late May 1996 that at ICO’s annual meeting on May 28, 1996, the shareholders approved an amendment to ICO’s organizing documents that fully incorporates these principles. COMSAT stated that it expects to provide the supporting documentation in the near future.

Inmarsat’s Restructuring Raises Concerns About Future Relationship With ICO

Inmarsat is reviewing proposals to restructure so that it may respond to commercial opportunities more readily than its members feel its treaty structure now allows. Under one proposal, Inmarsat would be devolved into a privately owned international public corporation. According to Inmarsat officials, the current version of that proposal would transfer all of Inmarsat’s satellites to the new corporation, while a smaller intergovernmental organization with more limited responsibilities would be retained to ensure the provision of services related to safety and rescue at sea.

The relationship that ICO will have to a restructured Inmarsat is of concern to some potential competitors. Inmarsat is on record as being interested in the possibility of a future merger of ICO with a restructured Inmarsat. However, COMSAT, the U.S. signatory, stated that it has recently confirmed to the executive branch of the U.S. government that it does not support such a merger in any foreseeable time frame and that it considers such a merger highly unlikely because the business plans of ICO and a restructured Inmarsat differ.

Ownership ties between ICO and a largely privatized Inmarsat could create a company with significant advantages in the market that would be free of any of the decision-making or operational burdens imposed by an intergovernmental structure. Such ownership ties might reinforce the incentives of Inmarsat’s signatories to open their domestic markets to ICO and the reorganized Inmarsat but not necessarily to potential competitors.

Recent Proposals for Restructuring INTELSAT

Two proposals for restructuring INTELSAT provide examples of options that retain a residual treaty organization while distributing portions of INTELSAT’s assets to one or more entities that are able to compete more freely in the market. Other countries have also made suggestions for change.

To help ensure that any restructuring of INTELSAT would improve competition, the U.S. government has developed a proposal that would separate INTELSAT into two entities—a residual intergovernmental entity and a new affiliate. The affiliate would focus on providing more advanced services and would be owned primarily by private investors. Another proposal, which has been supported by a coalition of several U.S. satellite companies, calls for separating INTELSAT into at least three entities: a residual intergovernmental entity and at least two affiliates. The degree to which either of these proposals can help to enhance competition depends largely on whether it can (1) encourage other countries to open their markets to new entrants and (2) diminish the large share of transoceanic capacity that INTELSAT currently holds.

The United States Has Proposed Restructuring INTELSAT

With Inmarsat’s establishment of ICO as a backdrop, the United States has developed a proposal to restructure INTELSAT in order to ensure continued services worldwide at nondiscriminatory prices and to provide a more competitive marketplace. The key features of the proposal, aimed at reducing INTELSAT’s dominant market position and reducing the signatories’ incentive to favor the newly created affiliate over other companies in their domestic markets, include the following: INTELSAT would be separated into two companies, each of which would receive about half of the satellites. The residual INTELSAT is intended to focus on traditional services, such as basic telephone service, while the affiliate is intended to focus on newer services, such as video broadcast.

After a transition period of about 2-3 years, fully 80 percent of the affiliate would be owned by interests other than INTELSAT or its signatories.

The proposal requires that (1) the affiliate not have any privileges and immunities, (2) business transactions between the two companies take place as if the entities had no economic relationship, (3) the affiliate be subject to competition laws in the countries in which it operates, and (4) no special access to orbital slots be available to the affiliate.

From a competitive standpoint, separating INTELSAT into two companies is designed, in part, to reduce the size of the resulting entities relative to other competitors. Currently, INTELSAT has 24 satellites in space and 7 empty orbital slots. The affiliate, with which other competitors would most directly compete, would have about half of the INTELSAT satellites. In comparison, one private competitor, PanAmSat, plans to grow to an eight-satellite operation within a few years. Moreover, since INTELSAT’s signatories would be able to own, together, only 20 percent of the affiliate, the proposal is designed to reduce their 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.

Officials of several of the federal agencies that helped develop this proposal acknowledged that other options might have done more to promote competition, but they did not believe that other countries would have supported such options. In particular, State Department officials told us that INTELSAT members were unlikely to accept an option that resulted in the formation of more than one new affiliate or an affiliate with ownership by the signatories of less than 20 percent. They also said that because of these concerns, the proposal they put forth is likely to be the most competitively oriented proposal acceptable to INTELSAT’s member governments and signatories.

U.S. Satellite Coalition Has Suggested an Alternative Restructuring Design

A coalition of several U.S. satellite companies that had expressed interest in privatizing the treaty organizations entirely has more recently put forth a proposal for an alternative restructuring design. As with the U.S. proposal on INTELSAT, this proposal requires that any new affiliate gain no privileges or immunities or any other economic benefits from its relationship with INTELSAT. Under the proposal, INTELSAT would be separated into at least three parts, including at least two affiliates that are each owned at least 50 percent by entities other than INTELSAT or its signatories. Additionally, each signatory would be able to invest in one or the other affiliate, but not in both.

Proponents of this proposal believe that such an option would reduce concerns about market domination more than the U.S. proposal does because each resulting entity would be smaller than it would under the U.S. proposal. Moreover, some market observers have suggested that under this option, countries’ telecommunications authorities may align themselves with one of the affiliates. Signatories may find that to do business with certain other countries, they may have to allow both affiliates to serve their domestic markets.

Competition Would Be Enhanced by More Affiliates and Reduced Ownership by INTELSAT’s Signatories

The degree to which either of these proposals can help to enhance competition depends largely on whether it can encourage other countries to open their markets to new entrants. As discussed earlier, competition can be enhanced by creating more entities out of INTELSAT as long as each is technically and economically viable on its own. In this regard, the industry’s proposal may be more likely to reduce the potential for INTELSAT or the new affiliates to dominate the market because each entity would be smaller in size. Having more affiliates may also help to reduce the incentive that countries’ telecommunications authorities may have to favor INTELSAT over other competitors. Some analysts believe that if countries open their markets to the two competitors envisioned under the proposal, those countries may then be more likely to open their markets to private competitors.

As noted earlier, it is best for competition for the treaty organization and its owners to have little, if any, financial stake in, or continuing business relationship with any new entities. The U.S. proposal may come closer to reaching this goal because it allows the signatories to own only 20 percent of the new entity, while the industry’s proposal allows the signatories to own up to 50 percent of one of the new entities. However, another aspect of the industry’s proposal mitigates the effects of the higher level of ownership by the signatories: that is, the requirement that each signatory invest in only one or the other new affiliate. 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, and the need to allow both affiliates into their markets may induce countries to widen access to other entrants.

Even the lower 20-percent ownership level proposed by the United States may not be enough to ensure that INTELSAT’s signatories have little influence over the new affiliate. Several U.S. regulations regarding ownership levels indicate that potential control or significant influence may occur at lower levels of ownership, such as 10-20 percent. As such, the group that developed the U.S. proposal stated that the 20-percent limit on the amount of the affiliate that the signatories could own was an important upper limit to ensure that INTELSAT and its signatories have minimal influence on any new entities created.

Conclusions

The treaty organizations have benefited from their intergovernmental status and a variety of advantages designed to help ensure their success in achieving worldwide satellite communications. However, advances in technology and increases in demand have transformed the industry into one that may provide profitable business opportunities for private firms. Having achieved their original missions, the treaty organizations, as structured, may now be impeding the flourishing of a private market and the benefits it can bring to consumers.

Making changes to the present structure of the treaty organizations could be difficult because doing so would likely depend on achieving consensus among member nations around the world that have a broad range of perspectives and interests. Along with a goal of ensuring continued global service, a primary interest of the United States is the promotion of competition, which could provide many new options for international satellite services. Many other members of the treaty organizations are concerned about guaranteeing the availability of the basic services now provided by each of the treaty organizations and thus may not be supportive of the kinds of changes that would most advance competition. Over time, however, consumers worldwide would benefit from increased competition in the marketplace.

Agency Comments

We provided copies of 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; COMSAT, the U.S. signatory to the treaty organizations, through the U.S. Department of State; the FCC; and the Alliance for Competitive International Satellite Services (ACISS), a coalition of private satellite providers. The draft was also reviewed by a representative of the Council of Economic Advisors.

Executive Branch, FCC, and ACISS representatives generally agreed with the report’s findings and balance and provided us with several clarifications and more current information, which we have incorporated as appropriate. In written comments, which are presented in full in appendix I, ACISS commended the report for its balanced and thorough treatment of the complex issues surrounding the proposed privatization of Inmarsat and INTELSAT.

COMSAT also provided written comments on our draft report. COMSAT officials were concerned that they had provided us with a variety of information that we did not include in our report. They also stated that we did not accurately characterize the nature of the competition facing INTELSAT in the international communications market and that we had focused our discussion of certain restructuring proposals solely on their competitive effect, to the exclusion of other important issues.

We used documents obtained from COMSAT and a variety of other sources as background information in the preparation of this report. Because this report is an overview of issues related to the competitive structure of the international satellite market, we did not think that all of the documents provided by COMSAT contained information necessary for the report. Our report also clearly discusses the nature of the competition facing INTELSAT. COMSAT is correct in saying that this report focuses on the potential competitive impacts of various approaches for restructuring the treaty organizations; that is a goal of the U.S. proposal and is the issue we were requested to review. In response to COMSAT’s concern, we have noted other goals of the U.S. proposal in the report. COMSAT’s complete comments and our detailed responses to them are presented in appendix II.

Scope and Methodology

This report is based on our analysis and our review of documents and other information obtained from the National Economic Council and the Office of Science and Technology Policy in the Executive Office of the President; the FCC; the Departments of State, Commerce, Justice, and the Treasury; COMSAT; INTELSAT; and Inmarsat. We also obtained information from experts from the Council of Economic Advisors and from ACISS as well as from representatives of several companies operating, licensed to operate, or applying for licensing to establish their own satellite systems. We conducted our work from May through June 1996 in accordance with generally accepted government auditing standards.

As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to interested congressional committees; the Chairman of the National Economic Council; the Director of the Office of Science and Technology Policy; the Chairman of the FCC; the Secretaries of State, Commerce, Justice, and the Treasury; and the Chairman of the Board of COMSAT. We will also make copies available to others upon request.

Please call me at (202) 512-2834 if you or your staff have any questions. Major contributors to this report are listed in appendix III.

Comments From ACISS

Comments From COMSAT

The following are GAO’s comments on COMSAT’s letter dated June 27, 1996.

GAO’s Comments

1. We believe that our report provides a broad overview of the establishment of INTELSAT. As our report notes, the Communications Satellite Act of 1962 states that a policy of the United States was to establish a global system in conjunction and in cooperation with other countries, and one of the objectives for such a system was to contribute to world peace and understanding. The statute also authorized COMSAT to “plan, initiate, construct, own, manage, and operate itself or in conjunction with foreign governments or business entities a commercial communications satellite system . . . .” 2. Our description of the types of services that INTELSAT was formed to provide does not imply that INTELSAT was precluded from providing other kinds of services including video broadcast. At the time the treaty organization was formed, however, the bulk of the services provided could be expected to be basic telephone and data services. 3. The U.S. proposal for the restructuring of INTELSAT has several objectives, and we have added references to other objectives to clarify that point. However, we were asked to review only the potential competitive impact of different kinds of restructuring approaches. In that context, we reviewed the U.S. proposal as one example of the various ways in which restructuring could occur. 4. Other than quoting COMSAT, our report makes no reference to unfair competitive advantage in the marketplace. Our discussion of possible competitive advantages focuses on the treaty organizations, not the signatories. Furthermore, we state only that these factors may be, or may contribute to, potential competitive advantages. 5. We have clarified the issue of the treaty organizations’ access to scarce orbital slots and spectrum by explaining in our report their comparative ease of access rather than characterizing their access as preferential. The treaty organizations, like private companies, must coordinate access to fixed orbital locations and spectrum through the International Telecommunications Union (ITU). However, according to the Federal Communications Commission (FCC), which processes INTELSAT’s applications, submission of the applications through the host country is a formality, and applications are forwarded to the ITU automatically. (INTELSAT is headquartered in the United States; Inmarsat’s applications are processed through the United Kingdom, where that organization is headquartered.) The applications of private U.S. companies, on the other hand, are subject to FCC’s review and approval before being submitted to the ITU. 6. We agree that INTELSAT is changing its coordination requirements and will ultimately eliminate the requirement for economic coordination set out in Article XIV(d) of the treaty agreement, and we have added a discussion of that issue in the report. However, the treaty agreement has not yet been amended to eliminate this requirement. Furthermore, not only is there no effort to eliminate the requirement for technical coordination, but, according to FCC officials, a recent INTELSAT vote to deny a U.S. company successful technical coordination was based on criteria not previously applied to technical coordinations. Also, satellite companies we spoke with that have undergone the coordination processes told us that they consider the information they had to submit for this process to be sensitive and proprietary. 7. Our report clearly points out that INTELSAT has faced increasing competition from fiber optic cables. However, fiber cables are not available to all countries, nor are they able to provide certain types of services. Moreover, because other signatories (not COMSAT) to INTELSAT and Inmarsat are often part owners of fiber cables, INTELSAT’s reduced market share in the markets where it competes with fiber may not necessarily imply that strong price competition has emerged. 8. COMSAT has concerns about our characterization of competition for advanced services as “limited” and points out that there are many domestic and regional satellite systems providing services within their coverage area. We agree that there are domestic and regional satellite competitors and have so noted in our report. There is some disagreement among analysts regarding the degree to which these systems provide meaningful competition on a global basis. In particular, some of these systems are owned by signatories to INTELSAT, reducing the likelihood that they would provide significant pressure on pricing. We have deleted the word “limited” from that section of the report. We believe that in time there will be more fully global providers. For example, currently Orion and Columbia are less than global providers, but these firms plan to expand their systems’ coverage. Additionally, several U.S. domestic satellite providers are expected to expand their systems’ coverage globally in the future. 9. COMSAT’s point that the signatories to INTELSAT often are part-owners of regional or domestic systems would seem to reinforce our belief that such systems may not represent additional competition, since their overlapping ownership may reduce the likelihood that they would compete significantly against one another. 10. Our report does point out some of the difficulties that INTELSAT faces that its competitors do not have. For example, our report notes that according to U.S. agency officials, some members of INTELSAT believe it may not be able to respond easily to changes in the market as a result of the difficult decision-making process entailed in the intergovernmental structure. 11. While restructuring these organizations may not solve all of the problems of market access, restructuring in a way that lessens the incentives of foreign governments to favor the treaty organizations may have an impact on market access. Moreover, as we note in the report, the United States is engaged in a number of activities aimed at encouraging open access. 12. As COMSAT notes, separate satellite providers such as PanAmSat have been able to get access in many countries. However, to be a full global provider, a company may need to gain access into nearly all countries to provide many different types of services. Companies told us that they want to provide global coverage, and some are closer to gaining the necessary access than others. Some of the companies that COMSAT mentions as having gained access to many countries are not yet providing services, and it is not clear what level of access they will achieve. Since some countries do limit entry, particularly regarding the provision of certain types of services (most notably basic telephone service), concerns about access remain. Moreover, even if a company may eventually gain significant access, a continuing concern would be the time, effort, and expense that it may take that company to do so. 13. We acknowledge the receipt of new information on ICO’s recent efforts to work cooperatively with U.S. Big LEO (low-earth orbiting satellite systems, which are emerging to provide mobile services) companies on cooperation on creating a competitive regulatory environment. We believe that this recent development is ancillary to the focus of restructuring the treaty organizations and therefore have not added this information to our report. 14. In discussing the options for restructuring, our report speaks generally about certain issues and specifically about two proposals. As agreed with our requester, we focused on the U.S. and the industry proposals and did not attempt to provide a census of the array of proposals for restructuring INTELSAT. 15. Our request was to examine issues related to restructuring with regard to how competition would be affected. Nevertheless, we have clarified in the report that the U.S. proposal has additional goals. 16. We have revised the report to read that the affiliate will have roughly half of the INTELSAT satellites. 17. The draft named the companies that are part of the coalition in a footnote. 18. With regard to access to capital, both INTELSAT and Inmarsat contain provisions in their operating agreements requiring the signatories to provide capital as decided by the respective signatory decision-making bodies within the treaty organizations. Furthermore, as noted in our report, the affiliation of the treaty organizations with governments may make any public financing they seek easier to get than similar public investment in companies that cannot provide implicit governmental support. While COMSAT states that two potential competitors have now acquired portions of their needed funding, according to a representative of the industry coalition, companies that want to compete with INTELSAT and Inmarsat, including the two cited by COMSAT, have had difficulty in obtaining the needed level of financing through both public offerings and efforts to secure debt financing. 19. With regard to the incorporation of U.S.-proposed principles into ICO’s formation, the Departments of State and Commerce said in their September 1995 letter to the FCC that the principles accepted by Inmarsat’s member governments included “incorporation of many but not all of the U.S. Party’s principles and structural separation elements.” State and Commerce concluded in that letter that ICO’s organizing documents did not fully conform with the requirements of Inmarsat’s member governments and recommended that the FCC not approve COMSAT’s application until COMSAT states on the record that ICO is also bound by these principles and provides supporting documentation. We have updated our report to reflect recent developments on this issue. As COMSAT notes, however, the supporting documentation has yet to be provided to the Executive Branch of the U.S. government. 20. We have updated our report to include information on events that occurred after our draft report had been distributed for review and comment, including COMSAT’s confirmation to the Executive Branch of the U.S. government that it does not support a merger between ICO and a restructured Inmarsat in any foreseeable time frame.

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