[Senate Hearing 106-1099]
[From the U.S. Government Publishing Office]
S. Hrg. 106-1099
S. 376, OPEN-MARKET REORGANIZATION FOR THE BETTERMENT OF INTERNATIONAL
TELECOMMUNICATIONS ACT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON COMMUNICATIONS
of the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
MARCH 25, 1999
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington JOHN D. ROCKEFELLER IV, West
TRENT LOTT, Mississippi Virginia
KAY BAILEY HUTCHISON, Texas JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan RON WYDEN, Oregon
SAM BROWNBACK, Kansas MAX CLELAND, Georgia
Mark Buse, Staff Director
Martha P. Allbright, General Counsel
Ivan A. Schlager, Democratic Chief Counsel and Staff Director
Keven D. Kayes, Democratic General Counsel
------
Subcommittee on Communications
CONRAD BURNS, Montana, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South Carolina
SLADE GORTON, Washington DANIEL K. INOUYE, Hawaii
TRENT LOTT, Mississippi JOHN F. KERRY, Massachusetts
JOHN ASHCROFT, Missouri JOHN B. BREAUX, Louisiana
KAY BAILEY HUTCHISON, Texas JOHN D. ROCKEFELLER IV, West
SPENCER ABRAHAM, Michigan Virginia
BILL FRIST, Tennessee BYRON L. DORGAN, North Dakota
SAM BROWNBACK, Kansas RON WYDEN, Oregon
MAX CLELAND, Georgia
C O N T E N T S
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Page
Hearing held March 25, 1999...................................... 1
Statement of Senator Breaux...................................... 48
Statement of Senator Burns....................................... 1
Prepared statement........................................... 1
Statement of Senator Cleland..................................... 22
Statement of Senator Gorton...................................... 70
Prepared statement of Senator Hollings....................... 77
Prepared statement of Senator Lott........................... 76
Statement of Senator McCain...................................... 2
Prepared statement........................................... 3
Statement of Senator Rockefeller................................. 9
Prepared statement........................................... 10
Prepared statement of Senator Stevens........................ 76
Witnesses
Alewine, Betty C., President and Chief Executive Officer, COMSAT
Corporation.................................................... 28
Prepared statement........................................... 30
Cuminale, James W., Senior Vice President and General Counsel,
PanAmSat Corporation........................................... 24
Prepared statement........................................... 26
Kullman, Conny, Director General and Chief Executive Officer,
INTELSAT....................................................... 54
Prepared statement........................................... 56
McCann, Vonya B., Ambassador, United States Coordinator,
International Communications and Information Policy, U.S.
Department of State............................................ 5
Prepared statement........................................... 6
Porter, Roderick Kelvin, Acting Chief, International Bureau,
Federal Communications Commission.............................. 11
Prepared statement........................................... 12
Letter dated April 20, 1999 to Hon. John D. Rockefeller IV... 20
Sponyoe, John, Chief Executive Officer, Lockheed Martin Global
Telecommunications............................................. 49
Prepared statement........................................... 51
Appendix
Porter, Roderick Kelvin, Acting Chief, Federal Communications
Commission, letter dated April 22, 1999 to Hon. Conrad Burns... 79
Tuttle, F. Thomas, Vice President and General Counsel, Iridium
LLC, prepared statement........................................ 84
Vos, Richard, Head of International Satellite Consortia for
British Telecommunications plc, written testimony.............. 81
S. 376, OPEN-MARKET REORGANIZATION FOR THE BETTERMENT OF INTERNATIONAL
TELECOMMUNICATIONS ACT
----------
THURSDAY, MARCH 25, 1999
U.S. Senate,
Subcommittee on Communications,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The subcommittee met, pursuant to notice, at 2 p.m., in
room SR-253, Russell Senate Office Building, Hon. Conrad Burns,
chairman of the subcommittee, presiding.
Staff members assigned to this hearing: Maureen McLaughlin,
Republican counsel; Paula Ford, Democratic senior counsel; and
Al Mottur, Democratic counsel.
STATEMENT OF HON. CONRAD BURNS,
U.S. SENATOR FROM MONTANA
Senator Burns. We will call the Subcommittee together and
we will get started. It is a pretty heavy afternoon. There are
several Senators who want to participate in a briefing later on
this afternoon, so there is quite a lot of activity.
I am going to withhold my statement because it is great to
have the chairman of the full committee here, Senator McCain.
He, too, is on one of those break-neck kind of schedules. I
appreciate him coming and I appreciate all of the witnesses
coming today. This is a very important hearing. This may be the
hearing that we really need before we go to markup on this
piece of legislation.
So, I will withhold my comments. Senator McCain, thank you
for coming today, and we look forward to your statement.
[The prepared statement of Senator Burns follows:]
Prepared Statement of Hon. Conrad Burns, U.S. Senator from Montana
I want to welcome everyone to this hearing on international
satellite communications reform.
Our efforts on satellite reform this year have been marked by a
spirit of bipartisanship that has resulted in the ORBIT bill gaining
widespread support. In fact, I am pleased to announce that the ORBIT
bill is now cosponsored by a majority of the Commerce Committee. I want
to thank Chairman McCain and Senators Brownback, Dorgan, Bryan, Wyden,
Ashcroft, Rockefeller, Hutchison, Abraham, Frist and Cleland for
cosponsoring my legislation to ensure the rapid privatization of
INTELSAT.
When I decided to take on the important challenge of encouraging
competition through deregulatory measures in the rapidly evolving
international satellite communications industry, I declared five basic
principles that would serve as the foundation for this effort:
(1) The legislation must enhance competion in the global satellite
communications market
(2) The legislation must be consistent with the United States'
existing treaty obligations
(3) The legislation must enhance global satellite connectivity to
all areas, including remote and rural
(4) The legislation must ultimately increase consumers' choices,
enable technological innovation and lower costs
(5) The legislation cannot impose any unnecessary new regulatory
schemes on this vibrant global industry.
These principles are incorporated into the ORBIT bill which I
introduced on February 4. One of my highest priorities for 1999 is to
see international satellite reform legislation enacted this year. S.
376 reflects my commitment to working with my friend, the distinguished
House Commerce Committee Chairman Mr. Bliley, to achieve that goal as
quickly as possible this year.
The ORBIT bill does the following:
establishes defining criteria for INTELSAT privatization,
including a new date certain of 2002
eliminates INTELSAT's and COMSAT's privileges and immunities
creates a level competitive playing field for satellite
systems
creatively uses market access as an incentive fopr a prompt,
pro-competitive privatization of INTELSAT
eliminates the antiquated ownership restrictions on the U.S.
Signatory to INTELSAT
ends the role of the U.S. government in the commercial
satellite operations
It is my main objective that INTELSAT privatization will lead to
enhanced competion in telecommunications services, resulting in real
consumer benefits of more choices, lower prices and new services. I am
very interested in the views of all of the witnesses on my bill. I look
forward to hearing your thoughts on how to best encourage competition
in the global satellite market.
I especially want to thank the witnesses today for taking time out
of their very busy schedules to testify before this Subcommittee. I
look forward to your insights on the issues before us.
STATEMENT OF HON. JOHN McCAIN,
U.S. SENATOR FROM ARIZONA
The Chairman. Thank you, Mr. Chairman. It is obvious that
there is great interest in this hearing, Mr. Chairman.
I think our witnesses and others should know that, with the
Kosovo situation, there is a briefing this afternoon, which may
cause some of our members to not be here who otherwise would be
here. This is a very important issue to this committee and to
the entire Congress and to the American people. I would like to
thank all of the witnesses who are appearing today. I would
especially like to thank Chairman Burns for convening this
subcommittee hearing on the important issue of international
satellite reform.
Over 35 years ago, the Communications Satellite Act of 1962
helped create a framework for providing a commercial satellite
system to serve the nations of the world. Through this Act, the
United States joined with other countries to form INTELSAT, an
Intergovernmental Organization that provided basic
telecommunications services.
The success of INTELSAT has helped foster advances in
satellite technology. However, in the 37 years since the
enactment of the Act, the landscape, as would be expected due
to the inevitable march of advancing technology, changed.
Commercial satellite systems now offer telecommunications
services to many countries. Soon, in the not-too-distant
future, these commercial satellite systems will be providing
broadband and other advanced telecommunications services around
the globe.
INTELSAT management itself has recognized that these
changes warrant privatization in order for INTELSAT to compete
in this growing global market. Mr. Chairman, it is time to
adapt our regulatory framework to conform to this new world. In
recognition of that, I am pleased and proud to cosponsor
Senator Burns's ORBIT bill. I strongly believe that Congress
must pass fair and effective satellite reform legislation this
session. I commit to my colleagues that I will make it a
priority to do so.
Once again, I want to commend Senator Burns on his
leadership in this very complex and difficult area. The Burns's
bill provides a principled basis for examining this complex and
important issue. I recognize that there are different
perspectives and viewpoints on international satellite reform.
We will need to work out these differences. I personally have
some concerns, but I am confident we will work all these issues
out.
Again, I thank Senator Burns, and I look forward to hearing
our witnesses' views. Thank you, Mr. Chairman.
[The prepared statement of Senator McCain follows:]
Prepared Statement of Hon. John McCain, U.S. Senator from Arizona
Good Afternoon. I would like to thank all of our witnesses for
appearing today, and I commend Chairman Burns for convening this
subcommitee hearing on the important issue of international satellite
reform.
Over thirty-five years ago, the Communications Satellite Act of
1962 helped create a framework for providing a commercial satellite
system to serve the nations of the world. Through this Act, the United
States joined with other countries to form INTELSAT, an
intergovernmental organization that provided basic telecommunications
services. The success of INTELSAT has helped foster advances in
satellite technology.
However, in the 37 years since we enacted the Satellite Act, the
landscape has, as would be expected, due to the inevitable march of
advancing technology--changed. Commercial satellite systems now offer
telecommunications services to many countries. Soon, in the not too
distant future, these commercial satellite systems will be providing
broadband and other advanced telecommunications services around the
globe. INTELSAT management itself has recognized that these changes
warrant privatization in order for INTELSAT to compete in this growing
global market.
It is time to adapt our regulatory framework to conform to this new
world. In recognition of that fact, I am pleased to cosponsor Senator
Burns's ORBIT Bill. I strongly believe that Congress must pass fair and
effective satellite reform legislation this session. And I commit to my
colleagues that I will make it a priority to do so.
Once again, I commend Senator Burns on his leadership in this
complex area. The Burns's bill provides a principled basis for
examining this complex and important issue. I recognize that there are
different perspectives and viewpoints on international satellite
reform, and we will need to work out those differences. I personally
have some concerns, but I am confident we will work all these issues
out. Again, I thank Senator Burns and I look forward to hearing our
witnesses' views.
Senator Burns. Thank you, Mr. Chairman. We appreciate that.
We have way too many chairmen here; I can see that right now.
[Laughter.]
The Chairman. We have another chairman just show up.
Senator Burns. Another one just did. He is probably the
most important one.
The Chairman. True.
Senator Burns. Do you have a statement?
Senator Stevens. I have no statement. I am here to
congratulate you for holding the hearing and to listen.
Senator Burns. Well, that is different in this town.
[Laughter.]
I want to welcome everyone to this hearing this afternoon
on the international satellite communications reform. Our
efforts on satellite reform this year has been marked by a
spirit of bipartisanship that has resulted in the ORBIT bill
gaining widespread support. In fact, I am pleased to announce
that the ORBIT bill is now cosponsored by the majority of the
Commerce Committee. I want to thank Chairman McCain and
Senators Brownback, Dorgan, Bryan, Wyden, Ashcroft,
Rockefeller, Hutchison, Abraham, Frist, and Cleland for
cosponsoring the legislation to ensure rapid privatization of
INTELSAT.
When I decided to take on this important challenge of
encouraging competition through deregulatory measures in a
rapidly evolving international satellite communications
industry, I declared five principles that would serve as the
foundation for this effort:
The legislation must enhance competition in the global
satellite communications market. The legislation must be
consistent with the United States' existing treaty obligations.
The legislation must enhance global satellite connectivity to
all areas, including remote and rural areas. The legislation
must ultimately increase consumer choices, enable technological
innovation, and lower cost. The legislation cannot impose any
unnecessary new regulatory schemes on this vibrant, global
industry.
These principles are incorporated in the ORBIT bill, which
I introduced on February the 4th. One of my highest priorities
for 1999 is to see the international satellite reform
legislation enacted this year. S. 376 reflects my commitment to
working with my friend and the distinguished House Commerce
Committee Chairman,
Mr. Bliley, to achieve that goal as quickly as possible this
year.
The ORBIT bill does the following: It establishes defining
criteria for INTELSAT privatization, including a new date
certain of 2002. It eliminates INTELSAT's and COMSAT's
privileges and immunities. It creates a level, competitive
playing field for satellite systems, creativity or use market
access and incentive for prompt, pro-competitive privatization
of INTELSAT. It eliminates the antiquated ownership
restrictions on U.S. signatory to INTELSAT. It ends the role of
the U.S. Government in commercial satellite operations. It is
my main objective that INTELSAT privatization will lead to
enhanced competition in telecommunications services, resulting
in real consumer benefits of more choices, lower prices and new
services.
I am very interested in the views of all the witnesses on
this bill today. I look forward to hearing your thoughts on how
best to encourage competition in the global satellite market. I
especially want to thank the witnesses today for taking time
out of their busy schedules to testify before this
subcommittee. I look forward to your insights on the issues
before us.
Today we have on the first panel the Hon. Vonya McCann,
U.S. Coordinator for International Communications and
Information Policy, from the Department of State, here in
Washington, D.C.; and Mr. Roderick Porter, Acting Bureau Chief,
International Bureau, Federal Communications Commission. I
would ask Ms. McCann to offer your testimony at this time. I
would tell you that if you want to summate your testimony, your
entire testimony will be made part of the record. Thank you for
coming today.
STATEMENT OF HON. VONYA B. McCANN, UNITED STATES
COORDINATOR, INTERNATIONAL COMMUNICATIONS AND
INFORMATION POLICY, U. S. DEPARTMENT OF STATE
Ambassador McCann. Thank you, Mr. Chairman.
We appreciate the opportunity to present the
Administration's views on the privatization of INTELSAT and
your proposed legislation, S. 376. The Administration, in
partnership with Congress, has worked tirelessly for more than
5 years to bring about the restructuring and privatization of
the intergovernmental satellite organizations--the ISOs--
INTELSAT and Inmarsat. These efforts have borne fruit. Next
month, Inmarsat will complete the privatization of its
remaining business operations. INTELSAT's new Director-General,
who was elected on a privatization platform, has stated
unequivocally his commitment to achieve full privatization by
2001.
The Administration does not believe that any legislation is
necessary to ensure a successful outcome to our international
negotiations or to protect the U.S. market from harm if
INTELSAT's or Inmarsat's privatization goes astray. By
negotiating constructively with the 143 INTELSAT member
governments and the 86 Inmarsat member governments, we have
made steady, if sometimes slow, progress toward our goals of a
more competitive satellite market and a level playing field.
The Administration will continue to be aggressive in
ensuring that the plans to restructure and privatize the ISOs
are pro-competitive. Following ISO privatization, the FCC and
the Antitrust Division of the Justice Department will have
ample authority under existing law to protect U.S. interests.
Nevertheless, if Congress does choose to address ISO
privatization in legislation, we believe the legislation should
reflect three key principles:
First, Congress should be careful not to limit access by
INTELSAT to the U.S. market in a way that harms American
consumers, particularly in the fast-growing areas of high-speed
data transmission, Internet access and video. Second,
privatization must create a level playing field between
INTELSAT and its commercial competitors, both U.S. and foreign.
Third, any legislation must be consistent with our
international obligations.
With respect to S. 376, the Administration strongly
supports the objective of the bill to promote competition by
encouraging the privatization of INTELSAT. Moreover, we are
quite pleased that the bill includes provisions to allow the
United States to maintain its membership in the residual
intergovernmental organization following privatization of
Inmarsat's business operations next month.
Although we believe S. 376 is a very positive contribution
to the debate over ISO privatization, we would like to see
several provisions modified or eliminated, in keeping with the
three principles I noted above. Section 603(b) prohibits
INTELSAT from providing certain services in the U.S. market
prior to privatization. Although this provision probably will
not have any practical effect, in principle, we oppose
inflexible statutory service restrictions because they would
limit competition and resulting choices for U.S. consumers.
Section 613 requires the President, following a decision by
INTELSAT's members to privatize, to certify that the
privatization is pro-competitive. This provision is
unnecessary. The Administration will follow a rigorous review
process to ensure that INTELSAT's privatization is pro-
competitive before the United States agrees to support it
within INTELSAT.
Section 614 requires that the FCC be bound by the
President's certification under Section 613. This section
should be modified to make clear that it would not reduce
existing FCC authority.
Finally, let me address the topic of direct access to
INTELSAT, which your bill would effectively prohibit. Direct
access to INTELSAT, broadly speaking, is a pro-competitive
policy that has benefited consumers in countries that have
implemented it. However, direct access in this country at this
time probably will produce only modest benefits for U.S.
consumers of satellite services.
First, the savings from bypassing COMSAT are less than
those from bypassing other INTELSAT signatories that are, or
were, vertically integrated telecommunications monopolies.
Second, INTELSAT privatization is in sight, and once INTELSAT
becomes a private provider, anyone should be able to access it
directly. The issue of direct access will become moot.
Moreover, we would urge that any direct access scheme be
implemented in a way so as to avoid a policy of ``fresh look.''
The Federal Government should not overturn privately negotiated
contracts. In addition, COMSAT should be reimbursed for its
true costs of providing INTELSAT services, which are not
entirely captured by the INTELSAT utilization charge.
In closing, let me express my gratitude for the committee's
interest in these issues, and the close cooperation we have
enjoyed with the staffs from both sides of the aisle. I request
that my full written statement be part of the record. Thank
you.
[The prepared statement of Ambassador McCann follows:]
Prepared Statement of Hon. Vonya B. McCann, United States
Coordinator, International Communications and Information Policy,
U.S. Department of State
Thank you for the opportunity to present the Administration's view
on the privatization of INTELSAT and on your proposed legislation, S.
376, the ``Open-market Reorganization for the Betterment of
International Telecommunications Act.'' The international satellite
services industry is increasingly important. Privatization and
demonopolization of national telecom operators around the world,
combined with the Administration's successful conclusion in 1997 of the
WTO agreement on basic telecommunications services, mean that new
markets are opening up at an unprecedented rate. And because of recent
strides in technology, satellites now offer cost-effective global links
for direct-to-home digital TV, advanced data services, Internet access
and hand-held wireless phones usable anywhere in the world, in addition
to traditional telephone calls and television feeds. Privatization of
INTELSAT, properly carried out, will contribute significantly to the
dynamism of this exciting industry, benefiting satellite services
users, providers and investors in the United States and throughout the
world.
The Administration, in partnership with the Congress, has worked
tirelessly for more than five years to bring about the restructuring
and privatization of the intergovernmental satellite organizations
(ISOs), INTELSAT and Inmarsat. These efforts have borne fruit. Four
years ago, Inmarsat's members spun off a significant portion of its
growth business into a commercial stock corporation, ICO Global
Communications Ltd., in which Hughes and TRW (as well as Comsat) have
substantial investments. In March 1998, INTELSAT's member governments
agree to spin off growth business segments of that organization into a
new company, New Skies Satellites, N.V., with plans for public trading
of shares by the end of 1999. Like ICO, New Skies has no
intergovernmental status nor any privileges and immunities, and it is
subject to the laws of the jurisdictions in which it will do business,
including the United States. The Administration negotiated competition-
safeguard provisions as part of these multilateral actions. These two
spinoffs were important first steps in the ongoing transition of
Inmarsat and INTELSAT to commercial status. Significantly, they have
demonstrated to the member countries, especially those reluctant to
undertake these steps, that private entities in an open market will
compete to meet their telecommunications needs.
As a result, full privatization of the ISOs is now in sight. Next
month, Inmarsat will complete the privatization of its remaining
business operations. INTELSAT's Director General has stated
unequivocally his commitment to achieve privatization by 2001, and
discussions within the INTELSAT Board of Governors on privatization are
progressing favorably. The United States will continue to play a
leadership role within the international community, to get a pro-
competitive transition plan and an aggressive timetable for full
privatization of INTELSAT.
At this time, the Administration does not believe any legislation
is necessary to ensure that the privatization of INTELSAT and Inmarsat
does not harm competition in the U.S. market (although legislation is
necessary for other purposes, as discussed below). The Federal
Communications Commission (FCC) and the Antitrust Division of the
Department of Justice have ample authority to protect U.S. interests,
and the Administration has been aggressive in ensuring that plans to
restructure and privatize the ISOs are pro-competitive.
To elaborate, prior to supporting the ISO decisions to create New
Skies and to privatize Inmarsat, the Administration conducted a
rigorous process to ensure that competition would be helped, not
harmed, by these changes. This process included: extensive outreach to
U.S. industry to identify issues of concern; substantive review of
restructuring/privatization plans and documents by authorities from the
FCC and the Antitrust Division, among other agencies; and lengthy
negotiations with the ISO member governments and competition
authorities from the European Union and Canada to establish the
appropriate competition safeguards. Our competition authorities were
satisfied that the final restructuring/privatization plans represented
an improvement over the status quo in terms of competition. Had they
not been, the United States would have ``disassociated'' from the ISO
decisions and taken the necessary steps to block access to our market.
Moreover, the FCC retains the authority to block such access if these
plans are implemented in a way that it believes would harm U.S.
competition.
In sum, the Administration has made clear its commitment to ensure
that INTELSAT and Inmarsat privatizations do not harm U.S. competition,
and our competition authorities have ample opportunity under existing
law to do that. Nevertheless, we recognize that Congress was
instrumental in establishing INTELSAT and Inmarsat and that it may want
to address ISO privatization in legislation. If so, the Administration
believes that such legislation should reflect three key principles:
First, Congress should be careful not to limit access by INTELSAT
to the U.S. market in a way the harms American consumers--particularly
in the fast-growing areas of high-speed data transmission, Internet
access and video. Thus, legislation should avoid requiring INTELSAT to
meet a fixed deadline or conditions for privatization that are
infeasible or unrealistic. Two key attributes of the international
satellite services industry make INTELSAT access to our market a major
concern. First, the industry is dominated by a small number of
relatively large providers--one of them INTELSAT--and the industry is
likely to remain concentrated, because fixed costs are very high and
there are significant economies of scale. Thus, restrictions on
INTELSAT's access to the U.S. market could significantly reduce
competition. Second, U.S. consumers account for nearly half of all
consumption of global satellite services, and consumption is forecast
to nearly triple in the next few years. Thus, U.S. consumers would be
hurt disproportionately by restrictions on INTELSAT or any other major
services provider.
Principle two is that privatization must create a level playing
field between INTELSAT and its commercial competitors, both U.S. and
foreign. This means that the privatized INTELSAT should:
be located in a jurisdiction with effective
competition laws and regulatory oversight and that has made
open-market satellite commitments under the WTO agreement on
basic telecommunications;
not retain any privilege, immunity or other regulatory
advantage resulting from its former intergovernmental status or
that is not readily or meaningfully available to other
satellite competitors;
compete free of relationships of ownership or control
with former signatories that confer a competitive advantage in
providing new services or that provide an incentive for any
purchaser of the privatized INTELSAT's services to discriminate
anti-competitively in its favor;
move rapidly toward public trading of shares on
internationally traded stock exchanges; and
obtain no unfair advantage from ``warehoused'' orbital
slots obtained during its operation as an intergovernmental
organization.
The third principle is that any legislation must be consistent with
the United States' international obligations, including the Fourth
Protocol to the World Trade organization General Agreement on Trade in
Services (the WTO basic telecommunications services agreement). In
addition to raising possible WTO questions, legislation that is seen as
a means of favoring U.S. satellite services firms may provoke
retaliation from U.S. trading partners and undermine U.S. efforts to
accelerate the privatization of INTELSAT. At present, the FCC, in
consultation with the Executive Branch, has the flexibility to issue or
condition a license in a manner that is consistent with U.S.
international obligations; that flexibility should be retained.
S. 376
The Administration strongly supports the objective of S. 376 to
promote competition in domestic and international satellite
communications services by encouraging the full privatization of
INTELSAT and reforming the framework for regulating Comsat. Moreover,
we are pleased that the bill includes provisions to allow the United
States to maintain membership in the residual Inmarsat
intergovernmental organization following privatization of Inmarsat's
business operations next month. The Administration requested these
provisions to protect the interests of U.S. maritime users,
particularly the Coast Guard, in residual intergovernmental
organization, which will oversee the global maritime distress and
safety system. Finally, without expressing any view on the proposed
acquisition of Comsat by Lockheed Martin, which the Justice Department
is still reviewing, we believe the provision to lift the cap on
individual ownership of Comsat is desirable. The cap was put in place
to ensure Comsat's independence, particularly from the U.S. long-
distance and international telecom monopolies, at a time when the
nascent satellite services industry was itself considered a natural
monopoly. However, the U.S. no longer has long-distance and
international telecom monopolies, and the satellite services industry
now has competition as well.
Although we believe S. 376 is a very positive contribution to the
debate over ISO privatization, we would like to see several provisions
in S. 376 modified or eliminated, in keeping with the three principles
described above:
Sec. 603(b) prohibits the FCC from authorizing
INTELSAT to provide certain services (DTH, DBS, DAR and Ka-
Band) in the U.S. market prior to privatization. This section
should be eliminated. INTELSAT is unlikely to offer any of
these services in the U.S. prior to privatization; hence this
section would have little practical effect. Nevertheless, in
principle, we oppose inflexible statutory service restrictions,
because they would limit competition and resulting choices for
U.S. consumers, as discussed above.
Sec. 613 requires the President, following the
decision by INTELSAT's members to privatize, to certify that
the privatization is pro-competitive and will not distort
competition in the U.S. market. This provision is unnecessary.
As noted above, the Administration will follow a rigorous
review process to ensure that INTELSAT's privatization plan is
pro-competitive before the United States agrees to support it
within INTELSAT, and the FCC and Justice's Antitrust Division
have ample opportunity to review the implementation of this
plan. At a minimum, the provision should be modified so as to
require that the certification process take place prior to
INTELSAT's transition to a private structure.
Sec. 614 requires that the FCC be bound by the
President's certification under Sec. 613. This section should
be modified to clarify that it would in no way reduce existing
FCC authority.
Since INTELSAT's beginning, Comsat has served in the
congressionally chartered role of U.S. Signatory, subject to
the ``instructional authority'' of the U.S. Government. The
bill should explicitly continue this authority for as long as
INTELSAT remains an intergovernmental organization and Comsat
remains the U.S. Signatory.
Direct Access. Sec 603(a) effectively would prohibit direct access
to INTELSAT by its U.S. customers. Although direct access is a highly
controversial issue in the debate over INTELSAT privatization, the
rhetoric on both sides may well be inflated. Direct access to INTELSAT,
broadly speaking, is a pro-competitive policy that has been implemented
in 90+ countries to the benefit of consumers. However, direct access in
this country, at this time, probably will produce only modest benefits
for U.S. consumers of satellite services. But if the benefits will not
be significant, neither will the harm to Comsat, at least if direct
access is properly implemented. Two possible effects of direct access--
on competition and resulting economic efficiency an on the
privatization process--merit discussion.
Direct access to INTELSAT, properly implemented, probably would
yield only modest benefits to U.S. users through greater competition
and efficiency. First, unlike most INTELSAT signatories at the time
that direct access was adopted in their home markets, Comsat is not a
vertically integrated telecom monopoly. To elaborate, many foreign
countries adopted direct access as part of structural reforms to reduce
the power of monopoly telecom providers that were also signatories to
INTELSAT. But because Comsat's sole function is to sell INTELSAT space
segment, the ability to bypass Comsat through direct access is far less
significant. Second, benefits to U.S. users from direct access will be
limited because INTELSAT privatization is in sight. Once INTELSAT
becomes a private provider, any user should be able to access it
directly, and the issue will be moot.
``Proper implementation'' of direct access refers to two things.
First, it should not include a policy of ``fresh look,'' which would
allow Comsat customers to renegotiate their contracts. The contracts
were negotiated by private parties in an environment that offered some
competitive alternatives. Moreover, Comsat has made long-term
commitments to INTELSAT based on the contracts. It would be
inappropriate for the federal government to overturn such contracts.
Second, Comsat should be reimbursed for its true costs of providing
INTELSAT services. Although the INTELSAT utilization charge (IUC) is
often thought to be the wholesale cost of providing INTELSAT services,
it is actually an internal accounting convention that excludes some of
Comsat's legitimate costs. If Comsat customers and direct access users
(some of whom compete with Comsat) paid only the IUC under a direct
access regime, the implicit subsidy from Comsat to these customers/
direct access users would distort competition.
In addition to competition/efficiency effects, a second broad
consideration is the effect of direct access on INTELSAT privatization.
Parts of the executive branch have in the past expressed concern that
allowing direct access would remove a significant incentive for certain
signatories to support privatization, because they could bypass Comsat
and deal directly with U.S. customers without first privatizing. And,
in fact, several signatories have expressed the view that if they got
direct access to the U.S. market, privatization might be less urgent.
However, the momentum for privatization is growing and the potential
savings to users from bypassing Comsat are modest, as noted above. Thus
we believe the overall risk to privatization is small.
Senator Burns. Thank you very much, Ms. McCann.
We have been joined now by one of the cosponsors on the
bill, Senator Rockefeller. If you have a statement, before we
hear from Mr. Porter, we would certainly welcome it at this
time.
STATEMENT OF HON. JOHN D. ROCKEFELLER IV,
U.S. SENATOR FROM WEST VIRGINIA
Senator Rockefeller. It is so brief, and you will be so
pleased. I will submit my full statement.
Senator Burns. How do we define ``brief''? [Laughter.]
Senator Rockefeller. My statement that I will submit my
full statement, with your permission.
Senator Burns. Wonderful. Without objection.
Senator Rockefeller. Thank you.
Obviously, I thank Senator Burns very much for this. He has
been a driving force on it. I am a cosponsor of the bill. There
are, I think, 11 of us on the committee who are. I believe that
it is in the consumer interest to have a private INTELSAT. I
come from a State where 4 percent of the land, Senator Burns,
if you can imagine this, is flat, and 96 percent is not. It is
up and down. I really think that the whole concept of satellite
services is the way that West Virginia, essentially, and States
like that, of which there are many--or parts of States--that is
where their future is, because of mountainous terrain and the
high cost of providing traditional telecommunications services.
INTELSAT has a history of serving all parts of the world.
They appear to have done so at reasonable prices. We have an
interest in making sure that all parts of the world are part of
the global information structure. That is one of the advantages
of something that is floating around in the sky. Whether it is
high or low, it serves a lot more area. This bill will allow a
privatized INTELSAT to continue to serve these areas and still
survive in the face of competition with other countries.
I am going to continue to work on this bill with,
obviously, our chairman and Senator Hollings and Senator
Breaux. It is a good bill, and I am proud to be a part of it.
Now, was that satisfactory?
[The prepared statement of Senator Rockefeller follows:]
Prepared Statement of Hon. John D. Rockefeller IV,
U.S. Senator from West Virginia
First I want to thank Mr. Burns for holding this important hearing.
International satellite reform is critical to consumers across the
United States.
Yesterday I agreed to become a cosponsor of this bill--along with
Mr. Burns, McCain, Bryan, Brownback, Cleland, Frist and Dorgan. I
support Mr. Burns' bill because I believe that it is in the consumer
interest to have a private INTELSAT. Such a competitive entity will
lead to lower prices, better service, and more efficiency across the
globe.
Additionally, removing ownership restrictions on COMSAT will help
to bring new services to American consumers. I believe that broadband
satellite services will a very important role in West Virginia's
future, and this bill will lead to further deployment of these services
by lifting the ownership restriction on COMCAST. I am excited by the
possibility of a new competitor in domestic satellite services, and the
resulting advances in these satellite services. Our mountainous terrain
and the high cost of providing traditional telecommunications services
make satellite services particularly important to West Virginia.
Furthermore, INTELSAT has a history of serving all parts of the
world at reasonable prices. We have an interest in making sure that
developing nations are part of the global information infrastructure. I
will work to make sure that this bill will allow a privatized INTELSAT
to continue to serve these areas at reasonable prices.
I must state, however, that while I support this bill, we are still
in the middle of the legislative process. I am eager to continue
working with Mr. Hollings, Breaux, and other Senators who are working
important ideas with great promise. I want to stress that while I agree
that this bill is the right platform for international satellite
reform, I intend to keep working hard on this issue.
Senator Burns. Wonderful. Thank you, Senator Rockefeller. I
appreciate your cosponsorship. We have had a good working
relationship for a long time. We have served on different
committees, and it is always a pleasure to work with you and
your staff. So, we appreciate that very much.
Mr. Porter, I am looking forward to your statement. Thank
you for coming today.
STATEMENT OF RODERICK KELVIN PORTER, ACTING CHIEF,
INTERNATIONAL BUREAU, FEDERAL COMMUNICATIONS COMMISSION
Mr. Porter. Thank you, Mr. Chairman, Senator Rockefeller. I
am pleased to have the opportunity to appear before you today.
We support new legislation to articulate a national
satellite policy based on pro-competitive principles. We agree
with principles upon which legislation should be based, as
jointly stated by yourself and Chairman Bliley. The ultimate
goal of satellite reform legislation will be to benefit
consumers through the encouragement of a truly competitive
market. Privatization of INTELSAT and INMARSAT would help
promote competition in the commercial satellite communications
market, and thereby benefit the consumer.
Thirty-seven years ago, Congress adopted the Communications
Satellite Act of 1962. It was well-conceived, and tailored to
the times. It established a policy that led to the creation of
INTELSAT and INMARSAT. INTELSAT was created with the goal of
developing a satellite system that would provide global
connectivity. INMARSAT was formed for the purpose of improving
maritime commercial and safety communications.
The landscape of the communications satellite industry has
changed markedly over the past 37 years. The international
satellite organizations are faced with competition from private
companies through satellite, submarine fiber optic cables and
other technologies. U.S. policy since the mid-1980's focused on
promoting this competition as a means of expanding customer
choice and achieving lower rates.
The 1962 Satellite Act, however, has undergone little
change during these developments. INTELSAT and INMARSAT have
been concerned that their current intergovernmental structure,
entailing unlimited liability for investors and a slow
decisionmaking process, inhibits their ability to respond to
competition. Competitors are concerned about the potential for
competitive harm from INTELSAT's and INMARSAT's global access
to markets, special privileges and immunities, and control over
substantial satellite capacity and choice orbital spectrum.
Competitors also are concerned that some investors in the
intergovernmental organizations may be able to restrict
overseas market access for new entrants. Both INTELSAT and
INMARSAT have been taking steps to restructure themselves in
response to competitive pressures. INMARSAT created a private
affiliate to provide hand-held mobile satellite services in
1995. It will itself privatize on or about April 15 of this
year.
INTELSAT created a private affiliate last year to provide
video and multimedia services. INTELSAT now is considering
additional restructuring options, including privatization.
The United States has been a strong proponent of
privatization of the intergovernmental organizations, both to
improve their competitiveness and to eliminate the potential
for market distortion that flows from their intergovernmental
status. The issue is not the goal of privatization, but,
rather, how to achieve it.
We recognize that even though privatization of INTELSAT
will be the result of international negotiation, Congress has
an active and independent role in the process. In fact, it was
congressional leadership in the 1960's, and U.S. policy
established by the 1962 Act, that led to the creation of
INTELSAT.
Congress is in the position to have the same degree of
influence in the 1990's for INTELSAT's transformation into a
true market player. Satellite reform legislation would be an
appropriate means to establish policy guidelines for U.S.
efforts to privatize INTELSAT. Legislation also could provide
an opportunity to immediately eliminate provisions of the 1962
Act no longer necessary or relevant to achieving a pro-
competitive privatization of INTELSAT.
The Commission has taken important actions in the last 3
years to deregulate COMSAT in view of changing market
conditions resulting from competition. Upon privatization, the
overlay of government oversight of COMSAT that exists as a
result of COMSAT's special role in INTELSAT and INMARSAT should
be eliminated.
My prepared statement contains specific comments on
provisions of S. 376. Mr. Chairman, we commend you and members
of the subcommittee in moving forward with satellite reform
legislation, and look forward to working with you on this
important initiative. Thank you.
[The prepared statement of Mr. Porter follows:]
Prepared Statement of Roderick Kelvin Porter, Acting Chief,
International Bureau, Federal Communications Commission
executive summary
Thirty-seven years ago, Congress adopted the Communications
Satellite Act of 1962. It was well conceived and it was tailored to the
times. It established a policy that led to the creation of INTELSAT and
Inmarsat. INTELSAT was created with the goal of developing a satellite
system that would provide global connectivity, and Inmarsat was formed
for the purpose of improving maritime communications and communications
for the safety of life at sea.
The landscape of the communications satellite industry has changed
markedly over the past 37 years. The international satellite
organizations are faced with competition from private companies through
both satellite and submarine fiber optic cables. U.S. policy since the
mid-1980's has focused on promoting this competition as a means of
expanding customer choice and achieving lower rates. The 1962 Satellite
Act, however, has undergone little change during this period of change
in the industry.
INTELSAT and Inmarsat have been concerned that their current
intergovernmental structure entailing unlimited liability for investors
and a slow decision-making process inhibit their ability to respond to
competition. Competitors are concerned about potential anticompetitive
conduct by INTELSAT and Inmarsat, and have focussed particularly on
INTELSAT's and Inmarsat's global access to markets, special privileges
and immunities, control over significant satellite capacity and orbital
locations, and the potential for some investors in these
intergovernmental organizations to restrict overseas market access for
new entrants.
Both INTELSAT and Inmarsat have been taking steps to restructure
themselves in response to competitive pressures. In 1995, Inmarsat
created a private affiliate to provide hand-held services and plans to
privatize itself on or about April 15 of this year. Last year, INTELSAT
created a private affiliate, New Skies, to provide video and multi-
media services. INTELSAT now is considering additional restructuring
options, including privatization.
We agree that the ultimate goal of legislation and regulation in
satellite communications is to benefit consumers through the
encouragement of a truly competitive market. We support Congress's
determination that the time is ripe for reform of the statutes that
govern the rapidly changing satellite communications market.
Privatization of INTELSAT and Inmarsat would help promote competition
in the commercial satellite communications market, and thereby benefit
consumers.
The United States has been a strong proponent of privatization of
the intergovernmental organizations--both to improve their
competitiveness and to eliminate the potential for market distortion
that flows from their intergovernmental status. INTELSAT must be
privatized in a way that allows it to remain viable in the world market
while preserving our commitment to global satellite connectivity. At
the same time, however, we need to ensure that its legacy as an
intergovernmental organization does not impede the ability of private
competitors to enter the market.
We recognize that, even though privatization of INTELSAT will be
the result of international negotiation, Congress has an independent
and active role in the process. In fact, it was Congressional
leadership in the 1960s and U.S. policy established by the 1962 Act
that lead to the creation of INTELSAT. Congress is in the position to
have the same degree of influence in the 1990s for INTELSAT's
transformation into a true market player.
We support legislation to articulate a national satellite policy
based on pro-competitive principles. We agree with the principles
jointly stated by Chairman Burns and Chairman Bliley in their letter to
Chairman Kennard. In keeping with these principles, we believe that
legislative criteria for privatization of INTELSAT might usefully
entail: (1) conversion to a publicly held corporation listed and traded
on public exchange; (2) opportunity for participation in the private
company by entities other than current signatories; (3) elimination of
all privileges and immunities; (4) location in a jurisdiction with
effective competition laws and regulatory oversight; (5) availability
of non-exclusive access and distribution arrangements that serve
customer needs; and (6) continued provision of services to developing
countries by INTELSAT.
We also support satellite reform legislation that would eliminate
those provisions of the 1962 Act that are no longer necessary or
relevant to achieving a pro-competitive privatization of those
organizations. Comsat ultimately should evolve into a company with no
special Congressional charter or privileges or obligations. The
Commission has taken several important actions in the last three years
to deregulate Comsat in an effort to help it achieve a market position
that is no more hindered or protected by regulation than that of its
competitors. The overlay of government oversight of Comsat that exists
as a result of Comsat's special role in INTELSAT and Inmarsat should be
eliminated upon privatization.
S. 376 is designed to achieve these goals. Moving forward with
legislation of this nature would both be timely and helpful to U.S.
efforts to promote a robust and competitive satellite communications
market globally. We look forward to working with you on these critical
issues.
Mr. Chairman and members of the Subcommittee, thank you for giving
me an opportunity to appear before you today to discuss the Open-market
Reorganization for the Betterment of International Telecommunications
Act (S. 376). We agree that the ultimate goal of legislation and
regulation in satellite communications is to benefit consumers through
the encouragement of a truly competitive market. We will take all steps
necessary in support of Congress's determination that the time is ripe
for reform of the statutes that govern the rapidly changing satellite
communications market. Privatization of INTELSAT and Inmarsat would
help promote competition in the commercial satellite communications
market, and thereby benefit consumers. Achieving privatization is and
will continue to be both challenging and promising. It is challenging
because other countries that are members of these international
organizations must be convinced that a solution that promotes
competition is in their interests. It is promising because successful
privatization of these organizations may bring new market opportunities
for satellite service providers throughout the world and increased
choice for consumers here at home.
Legislation that both establishes U.S. policy on privatization of
INTELSAT and Inmarsat and promotes further competition in the
commercial satellite market is both timely and appropriate. We
appreciate the opportunity to work with you to reform the U.S.
legislative framework governing satellite services and to implement
pro-competitive and deregulatory measures.
the communications satellite act of 1962
The Communications Satellite Act of 1962 was written when the
primary goal of U.S. satellite policy was the successful deployment of
a global satellite system that would provide world-wide telephone
connectivity and video coverage. To a large degree, the 1962 Satellite
Act assumed the existence of economies of scale calling for
establishment of a single global satellite system. The Act created
Comsat as a publicly-traded private corporation to achieve this goal by
developing and investing in the INTELSAT system. At the same time,
Congress established extensive government oversight of Comsat. In 1979,
Congress expanded Comsat's role, making it the U.S. investor in
Inmarsat. Today, Comsat is traded on three U.S. exchanges, with 1998
revenues of more than a half billion dollars. The company has
restructured itself to focus its business on international satellite
and digital networking services. The challenge for COMSAT will be to
adapt to the fundamental changes that are taking place in INTELSAT and
Inmarsat as a result of competitive challenges to those organizations.
deregulation of comsat
The goal of a competitive market that benefits consumers is
furthered by the existence of a level playing field. Thus, the
Commission has taken several important actions in the last three years
to deregulate Comsat in an effort to help it achieve a market position
that is no more hindered or protected by regulation than that of its
competitors. In 1996, the Commission waived its dominant carrier
tariffing rules and permitted Comsat to file tariffs for switched voice
and private line service with 14 days notice and without cost support.
In 1997, the Commission waived its dominant carrier tariffing rules and
permitted Comsat, as do its competitors, to file tariffs for full time
video and occasional use video on a streamlined basis.
The Commission granted Comsat significant additional regulatory
relief in 1998. Specifically, the Commission found Comsat non-dominant
in the provision of switched voice, private line, and occasional use
video in competitive markets, and in the provision of full time video
and earth station services in all geographic markets. Together, these
markets account for over 92% of Comsat's INTELSAT revenues. The
Commission also found, however, that Comsat is still dominant in the
provision of switched voice, private line, and occasional use video
service in non-competitive geographic markets. Most recently, in
February of this year, the Commission established an incentive based
form of regulation in lieu of burdensome rate of return regulation for
service in which Comsat remains dominant. In addition to these actions,
the Commission has eliminated requirements for Comsat to (1) obtain FCC
approval to invest in INTELSAT satellites; and (2) file certain yearly
reports to the FCC normally required of rate regulated carriers.
intelsat and inmarsat
The U.S. effort in creating the global satellite system envisioned
by the 1962 Satellite Act was a complete success. Today, INTELSAT has
143 members and operates a fleet of 19 satellites accessed by thousands
of earth stations. INTELSAT provides services to hundreds of customers
in over 200 countries. INTELSAT has revenues of approximately $1
billion and it has assets worth over $3 billion. The connectivity
provided by the INTELSAT system makes possible the delivery of voice,
data, and video communications anywhere on the globe.
Based on the INTELSAT Intergovernmental Organization (IGO) model,
Inmarsat was established as an IGO in 1979 to improve maritime
communications, particularly communications for distress and safety of
life at sea. Inmarsat has 84 members and operates eight satellites
providing global maritime, aeronautical, and land mobile
communications. More than 140,000 terminals of various types are in
use. Inmarsat revenues for 1999 are projected to be about $450 million.
INTELSAT and Inmarsat own and operate satellites and the associated
facilities while signatories and other entities own and operate ground
facilities accessing the satellites. Each IGO is made up of parties and
signatories. Parties represent governments' interest in the
organization through the Assembly of Parties that meets bi-annually.
Signatories are the investors in the satellite system. Some signatories
are private entities, but many are wholly or partially owned by foreign
governments. Investment is tied to the amount of traffic a signatory
carries over the system. The largest signatories are represented on the
INTELSAT Board of Governors and the Inmarsat Council. These bodies make
the major commercial decisions for each organization. It is important
to note that each signatory represents its own interests and does not
have a fiduciary obligation to the entire organization. Comsat is the
U.S. signatory to both INTELSAT and Inmarsat.
In 1962, when INTELSAT was formed, the world's telecommunications
infrastructure was quite different than it is today. In the early days,
most private entities considered the use of satellites for
telecommunications services to be very risky and expensive. Advances in
technology as well as increased satellite capacity have made it
feasible for new entities to enter the global telecommunications
market. INTELSAT now faces competition from private systems. Since
1962, application of satellite technology to communications has
resulted in new and varied options to consumers and has become the
province of private companies competing to satisfy consumer needs.
United States policy evolved in the 1980's to introduce competition to
INTELSAT. The authorization of competing U.S. systems required a
presidential determination that such competition was, under the 1962
Satellite Act, in the national interest. Following that determination,
the FCC began the licensing process for competing U.S. systems. Today,
private industry provides satellite services for telephony, direct-to-
home television, other video and data services as well as maritime,
aeronautical and land-mobile services. In the near future private
companies will introduce services such as broadband internet, expanded
video services and hand-held global mobile communications. In the
broadband video market and mobile satellite services markets private
companies plan to invest billions just to start operations.
Growth in global telecommunications has not been limited to
satellite-delivered services. Over the last decade the capacity of
transoceanic fiber optic cables has dramatically increased.
Consequently, INTELSAT's share of the market for international
telephone service has fallen. Although public switched telephony is
still its largest revenue source, the percentage of INTELSAT's revenue
stream from public switched service has fallen and the revenues from
certain new services are growing. Today, close to half of INTELSAT's
total revenues are derived from public switched telephone service, down
from 76 percent in 1988. In addition, INTELSAT's share of the public
switched service market is expected to continue to decline largely due
to competition from fiber optic undersea cables. In response to the
changing market, INTELSAT has expanded into new areas, including the
market for broadcast video where it faces competition from new
satellite-based companies.
INTELSAT has taken steps to react to the changing marketplace and
the advent of competition. Last year, it created New Skies Satellite,
N.V., a private commercial affiliate Netherlands company, to provide
video and multimedia services on a global basis. New Skies is now
operating as a wholly-owned affiliate of INTELSAT and INTELSAT's
signatories. Five satellites have been transferred from INTELSAT to New
Skies and a sixth satellite is scheduled to be launched this year. Over
90 earth stations in the United States currently are operating with New
Skies on a special temporary authority basis pending Commission
consideration of their applications for permanent authority to operate
with New Skies.
INTELSAT itself recognizes the need to become a more efficient
organization and is considering restructuring options, including
privatization. Privatization will lead to operational flexibility,
speedier decision-making by a management responsive to a fiduciary
board of directors, limited liability by investors, and better access
to capital through public and strategic investors
Unlike INTELSAT, Inmarsat's revenue stream has maintained itself
steadily over the years without significant change. Competition for
Inmarsat, however, is starting to develop. Inmarsat now competes with
private consortia largely composed of U.S. firms such as Motorola,
Loral and American Mobile Satellite Corporation. In anticipation of the
development of competition, Inmarsat has undertaken efforts to
restructure its operations. In January 1995, Inmarsat created an
affiliated private company, ICO Global Communications Ltd., to provide
global mobile hand-held communications services. Inmarsat will
privatize on or about April 15 of this year. Inmarsat's decision to
privatize was based on the recognition that the organization could not
effectively compete with private systems under an intergovernmental
structure that conferred unlimited liability on its investors and
involved an inefficient decision-making mechanism slow to react to
competitive challenges.
Under the privatization, Inmarsat will transfer its assets
(satellites, associated facilities, headquarters building, etc.) to a
newly created private company incorporated in the United Kingdom.
Existing Inmarsat signatories will be allowed shares in the corporation
in proportion to their investment shares in Inmarsat. The newly created
company will own and operate the satellites previously owned and
operated by Inmarsat and will provide existing commercial and safety
services. It will not have the privileges and immunities bestowed on
the current intergovernmental organization. Current Inmarsat contracts
will be novated to the corporation. Existing land earth station
operators will distribute the services of the corporation pursuant to a
Land Earth Station (LES) Operator Agreement with the company. The newly
created company will retain the name ``Inmarsat''. An Initial Public
Offering (IPO) is anticipated within two years. A residual
intergovernmental organization consisting of a small directorate will
be created to ensure that the new company continues to provide GMDSS
(Global Maritime Distress and Safety Services) under a Public Services
Agreement with the IGO. The IGO will not have any control over the
operations or facilities of the new Inmarsat. Instead the IGO will have
an agreement with the new Inmarsat whereby the IGO will have the
ability to ensure that Inmarsat meets its obligations to provide GMDSS.
considerations for a new legislative framework
The Communications Satellite Act of 1962 was enacted to achieve a
goal long since accomplished. The focus of U.S. policy has been, since
the mid-1980's, the development of competition. The Communications
Satellite Act, however, has undergone little change. We believe that
new legislation could seize on a present opportunity to articulate
current U.S. national policy based on pro-competitive principles.
We believe that privatization will help promote greater competition
in the satellite communications market and will make INTELSAT a more
effective competitor. INTELSAT's current and potential competitors are
concerned about their ability to compete with INTELSAT due to
INTELSAT's global access to markets, control over significant satellite
capacity, and special privileges and immunities as well as the
potential ability of some signatories to keep competitors out of their
home markets. In the countries that have not yet privatized their
communications systems, the government and the telecom provider acting
as signatory are the same entity. As a result, some INTELSAT
signatories may be in a position to affect their government's market
access decisions, and could impede entry by competitors of INTELSAT.
Significant steps were taken in 1997 to address the market access
question. The World Trade Organization (WTO) Agreement on Basic
Telecommunication Services provides for commitments by 72 countries to
open their markets for basic telecommunications services, and 49 of
these countries have made commitments for satellite services. In
addition, 55 of the parties to the WTO agreement also signed the
Reference Paper on Pro-Competitive Regulatory Principles. The Reference
Paper contains a binding set of competition rules and calls for
separation of a country's telecommunications regulator from its
national telecommunications service provider. Many INTELSAT members,
however, have not made WTO commitments. Privatization eliminating
INTELSAT's intergovernmental imprimatur and permitting diverse
ownership in the privatized organization would be an effective means of
further promoting greater market access.
We recognize that even though privatization of INTELSAT will be the
result of international negotiation, Congress has an independent and
active role in the process. In fact, it was Congressional leadership in
the 1960s and U.S. policy established by the 1962 Act that lead to the
creation of INTELSAT. Congress is in the position to have the same
degree of influence in the 1990s for INTELSAT's transformation into a
true market player.
We agree that Satellite reform legislation is an appropriate tool
by which to establish policy guidelines for U.S. efforts to privatize
INTELSAT. Legislation also provides the opportunity to eliminate
provisions of the 1962 Satellite Act no longer necessary or relevant to
achieving a pro-competitive privatization. Upon INTELSAT's
privatization, all remaining provisions of the 1962 legislation could
then be eliminated. Comsat would then evolve into a company with no
special Congressional charter or privileges or obligations. The overlay
of government oversight and regulation of Comsat that exists as a
result of Comsat's special role in INTELSAT and Inmarsat would be
eliminated upon privatization.
In a letter to Chairman Kennard, Chairman Burns and Chairman Bliley
stated the following principles upon which to base legislation: (1)
privatizing INTELSAT by a date certain; (2) enabling the United States
to participate in a restructured Inmarsat through legislation; (3) a
pro-competitive privatization of INTELSAT and Inmarsat, eliminating IGO
and Comsat's derivative privileges and immunities and their potential
ability to possibly warehouse orbital locations; (4) non-discriminatory
competition; (5) use of market access as an incentive for a pro-
competitive privatization; and (6) elimination of ownership
restrictions on Comsat and other deregulation ending the role of the
U.S. government in commercial satellite operations. These principles
support our stated policy objectives and we agree that satellite reform
legislation based on these principles would establish a clear policy
framework for pursuit of pro-competitive privatization of INTELSAT that
will result in benefits for U.S. consumers.
In keeping with these principles, we believe that legislative
criteria for privatization of INTELSAT might usefully entail: (1)
conversion to a publicly held corporation listed and traded on public
exchanges; (2) opportunity for ownership and participation in the
private company by entities other than current signatories; (3)
elimination of all privileges and immunities; (4) location in a
jurisdiction with effective competition laws and regulatory oversight;
(5) availability of non-exclusive access and distribution arrangements
that serve customer needs; and (6) continued provision of services to
developing countries by INTELSAT. S. 376 is designed to achieve these
goals. Moving forward with legislation of this nature would both be
timely and helpful to U.S. efforts to privatize INTELSAT. In that
spirit we suggest several comments for the Subcommittee's consideration
on certain provisions of the bill.
Legislation has the potential to provide effective incentives for
INTELSAT to privatize in a pro-competitive manner. The availability of
the U.S. market certainly would create such an incentive. We note,
however, that S. 376 would determine the availability of the U.S.
market to INTELSAT through a Presidential certification process that
apparently would be undertaken prior to completion of negotiation of
the details of the privatization. The bill provides for a Presidential
certification that entry by a privatized INTELSAT into the U.S. market
will not harm competition to be made upon an INTELSAT Assembly of
Parties decision creating the ``legal structure and characteristics''
of a privatized INTELSAT. The FCC would be bound by this determination
in its licensing process. It has been our experience in recent
negotiations involving the Inmarsat privatization and the creation of
New Skies by INTELSAT that Assembly decisions on legal structure and
characteristics are made with negotiations on important details and
documents on implementation yet to be completed. Typically, these
details and documents have been finalized by later meetings of the
INTELSAT Board of Governors or Inmarsat Council.\1\ Thus, under S. 376,
a Presidential certification binding the FCC would be made absent the
availability of the final details of the privatization.
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\1\ See Report of the Twelfth Session of the Inmarsat Assembly of
Parties, Assembly/12/Report (May 1998). See also Assembly/13 Report
(October 8 (1998). The Inmarsat Assembly of Parties determined to
decide upon the legal structure and characteristics of Inmarsat's
privatization, but left final decision on the details and documents
associated with the privatization to subsequent meetings of the
Inmarsat Council held over a five month period. Most implementation
documents were in draft stages when the Assembly made its decision to
privatize. Similarly, a number of documents implementing the creation
of New Skies were finalized by the INTELSAT Board of Governors after
the INTELSAT Assembly decided to create New Skies. Certain key
documents underwent extensive changes and are subject to Commission
review in connection with applications before it to operate New Skies
in the United States.
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We recommend that the Subcommittee consider preserving the
independent regulatory review of the effects on competition by a
privatized INTELSAT's entry into the U.S. market in any legislation.
Presidential certification as to the outcome of Assembly of Parties
decisions would then be based on a national interest standard and other
traditional Executive branch standards.\2\ Subsequent Commission action
through the licensing process would involve consideration of the full
results of the privatization based on a public record with
accountability to the courts. It would provide a means of maintaining
U.S. leverage in the final stages of the negotiating process and
assuring that the principles that the United States agreed to at the
Assembly have been achieved through implementation.\3\
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\2\ There is precedent for action on a satellite policy issue
whereby there is first a Presidential determination based on national
interest considerations and then, following that, FCC licensing actions
based on the Commission's public interest standard that implemented the
policy determination. In 1983, the Commission received several
applications to operate separate satellite systems in competition with
INTELSAT. The Commission withheld action on the applications at request
of the Executive branch pending a decision under Section 102(d) of the
1962 Satellite Act that competing systems were in the national
interest. The President made this determination in 1984. Presidential
Determination No. 85-2 of November 28, 1984 49 Fed. Reg. 46937
(November 30, 1984). The Commission conducted a rulemaking and issued
conditional licenses in 1985. See Permissible Services of U.S. Systems
Separate from the International Telecommunications Satellite
Organization (INTELSAT). 101 FCC 2d 1046 (1985); On recon, 61 RR 649
(1986); further recon, 1 FCC Rcd 439 (1986). In establishing a
regulatory framework for considering applications for competing
systems, the Commission considered competition and related issues in
connection with the applications.
\3\ The Executive branch has previously asked the Commission to
utilize its licensing process to assure that results of negotiations in
connection with Inmarsat's creation of ICO Communications were in fact
properly implemented. See Comsat Authority to Participate in
Procurement of the Facilities of the ICO Global Communications System;
FCC 99-21 (released February 25, 1999). In testimony before this
subcommittee last September, the Administration stated that any
legislation should ``recognize and incorporate the existing flexible
authority of the FCC and the Department of Justice to protect
competition and promote the public interest in the rapidly changing
telecommunications market''.
---------------------------------------------------------------------------
This approach also would continue the distinction the Commission
has drawn between WTO-covered and non-covered satellite services in
establishing a licensing policy to implement the WTO Agreement.\4\
---------------------------------------------------------------------------
\4\ The United States excluded from its scheduled WTO coverage one-
way satellite transmission of DTH, DBS, and DARS, and submitted an MFN
exception for those services. Communication from the United States,
List of Article II (MFN) Exemptions. The FCC decided to apply an
``effective competitive opportunities'' test to applications to provide
these services through all foreign satellite systems, whether or not
they are systems of WTO Members. Non-U.S. Licensed Satellites providing
Domestic and International Service in the United States, 12 FCC Rcd
24094, 24146 (1997) (DISCO II Order). S.376 would have the effect of
exempting a privatized INTELSAT from this test.
---------------------------------------------------------------------------
S. 376 identifies two means by which the availability of the U.S.
market would be used as incentives for a pro-competitive privatization
of INTELSAT: (1) withholding the availability of direct access in the
United States; and (2) prohibiting INTELSAT's provision of Ka-band,
DTH, DBS and DARS. INTELSAT does not currently provide Ka-band, DTH,
DBS and DARS services, but has been considering doing so with the U.S.
market potentially playing a role in business plans. INTELSAT already
provides through Comsat a variety of C-band and Ku-band services in the
United States. These services are available in over 90 countries on a
direct access basis--that is, directly from INTELSAT rather than only
through the signatories. Upon the urging of major U.S. users of
INTELSAT services, the FCC initiated a proceeding to consider the
merits of requiring direct access in the United States. The FCC made no
tentative conclusions on whether to permit direct access and the
proceeding is pending.
S. 376 repeals various provisions of the 1962 Satellite Act upon
the date of enactment. We believe that all provisions of the original
1962 Act will be unnecessary upon privatization of INTELSAT and,
therefore, their repeal could safely take effect at that time. Pending
privatization, however, we believe that, in view of the substantial
responsibility placed on Comsat as the U.S. signatory in carrying out
U.S. policy, it would be beneficial to retain certain provisions
providing for Executive branch and FCC oversight of Comsat.\5\ We agree
that other provisions in the 1962 Act might then be repealed
immediately upon enactment of new legislation. These would include
those provisions of the 1962 Act that place limitations on the
ownership of Comsat. They also would include current requirements that
Comsat obtain FCC approval to raise debt or issue stock. These
restrictions do not appear to have a valid purpose for 1999 and serve
to restrict unnecessarily Comsat's ability to remain competitive in an
industry requiring extensive and sustained capital investment.
---------------------------------------------------------------------------
\5\ We recommend that pending privatization of INTELSAT, Section
201(a) and (c)(1)(2)(11) and Section 403 be retained in the 1962 Act.
---------------------------------------------------------------------------
Finally, we suggest that the Subcommittee consider the significance
of retaining a privatized INTELSAT in the United States. Retention of
the INTELSAT organization in the United States may prove beneficial to
the United States in light of the historical role of the United States
in creating the INTELSAT system and the ongoing role of the United
States as a leader in global satellite communications.
conclusion
Legislation, such as S. 376, based on pro-competition principles
and on the current and projected state of satellite telecommunications
in the world is important. The 1962 Satellite Act was created to
achieve global communications connectivity via a then-developing
technology and to satisfy U.S. national interest goals. Today's
concerns are different from those that guided policymakers in 1962. The
WTO Agreement and the accompanying Reference Paper signal that the days
of state-sponsored service providers are numbered. We look forward to
working together to ensure that any future privatization efforts
promote the parallel goals of universal access and competition in
satellite services for users everywhere. Both of these goals are
achievable and we are eager to implement such legislation once your
efforts have been completed.
Privatization of INTELSAT and Inmarsat is critical to bringing
about real competition in international satellite communications,
particularly in the developing world. As Chairman Burns aptly stated,
``We need to ensure that satellite technology will continue to provide
quality service, and we need to spur innovation. The best way to
accomplish both of these goals is privatization. The private sector has
always spearheaded technological leaps and I think our first steps into
the next century should be quantum leaps deeper into the Information
Age.''
Your efforts, as well as the changes underway in the INTELSAT and
Inmarsat, not only will greatly impact the future of the treaty-based
organizations, but will set the stage for further liberalization in
countries around the world. Congressional action will help promote an
open, competitive marketplace.
We look forward to continuing working with you on these important
satellite policy issues.
Senator Burns. Thank you very much, Mr. Porter.
I will begin by asking a few questions. We have already
heard from your testimony, Ms. McCann, your position on the
ORBIT bill. You have also been very, very clear in the proper
role of the executive branch in reviewing this privatization of
INTELSAT. You have also given us some idea of ``fresh look.''
If you could iterate the view of ``fresh look'' as we have not
provided that in our legislation, and we would be interested in
what you thought of that.
Ambassador McCann. The Administration does not support a
policy of ``fresh look.'' We believe that the contracts
negotiated betweeny Comsat and its customers were negotiated by
private parties in an environment where some competitive
alternatives existed. In addition, Comsat has made long-term
commitments to INTELSAT based upon those contracts. We believe
it would be inappropriate for the Federal Government to
overturn such contracts.
Senator Burns. Given the existence of New Skies and the
prospect of a privatized INTELSAT, does the administration
believe that INTELSAT must be broken up, maybe even into
smaller units or pieces?
Ambassador McCann. The Administration does not support
breaking up or divesting INTELSAT into multiple pieces,
primarily because it is not a sellable position within the
intergovernmental organization. We have raised this issue and
discussed it with other member governments and signatories, and
there is absolutely no support for it.
Senator Burns. In the view of the Administration, how soon
would INTELSAT reach complete privatization if Congress did
nothing or failed to pass this bill this year?
Ambassador McCann. We believe the privatization
negotiations are proceeding favorably, and we would anticipate
closure on the privatization within a couple of years.
Senator Burns. In other words, you think that this is a
stepping stone. Will this accelerate it?
Ambassador McCann. I am not sure that it will accelerate
it, because, as I said, the negotiations, the discussions, are
well underway.
There is some concern, based on comments some of the member
governments have made to me and others of the U.S. Government,
that legislative attempts to negotiate the outcome of the
privatization might be negatively viewed by those governments.
Senator Burns. Mr. Porter, could we have your assessment of
the success of the spinoff of New Skies?
Mr. Porter. Senator, I am not prepared to answer that
question. I do not want to give you an incorrect answer. I
would be happy to provide the answer to that in a written
statement.
Senator Burns. You can be just like us Senator Stevens. I
would say ``I do not know.'' [Laughter.]
Senator Burns. You know what? That is acceptable, too.
Because the longer I am around here, there is more things I do
not know than I do.
In the opinion of the FCC, is INTELSAT's own plan for
privatization moving too fast? Is it moving too slow? Or do you
like the pace?
Mr. Porter. Well, the position of the FCC, Mr. Chairman, is
that we believe that legislation in this area would serve the
purpose of encouraging INTELSAT to move at an even faster pace
toward privatization. We support your efforts in that regard.
We are not prepared to say that we believe the progress of the
privatization of INTELSAT at this point is sufficient that,
absent legislation, such privatization will take place at a
rapid pace.
Senator Burns. Senator Rockefeller.
Senator Rockefeller. Thank you, Senator Burns.
How is privatization, Mr. Porter, going to help consumers,
and, most specifically, rural consumers?
Mr. Porter. Well, privatization, we believe, will allow for
competitors to have access to satellite services on a more
equal footing. We believe that that will have a direct benefit
to consumers in terms of both offering of services and offering
of services at a price which is more affordable to consumers.
Senator Rockefeller. That does not answer my rural
question.
Mr. Porter. As to rural communities, generally, to the
extent that markets are open to greater competition, we believe
that there would be----
Senator Rockefeller. We do not have competition in rural
communities, Mr. Porter.
Mr. Porter. To the extent that there is privatization, and
the objectives of the bill are to increase consumer choice, we
would hope that there would be incentives on the part of some
operators to provide service to those markets that do not
currently receive service.
Senator Rockefeller. Yes. I think I need probably a written
response from you, too. Because what you need to understand is
that rural areas do not get competition. The history of rural
areas, as our chairman knows very well, is deregulation leads
to no service. That can be railroads, that can be
telecommunications, that can be airplanes. I mean deregulation
basically means New York, Los Angeles, here we come;
Charleston, West Virginia, Beckley, bye-bye.
So, I am for the bill, and you are, too. We agree on that.
But the FCC needs to give me a better answer on why it is
convinced that this is going to help rural West Virginia and
rural America, whether there are mountains or whether there are
not mountains. We need to know that.
[The information referred to follows:]
Federal Communications Commission,
Washington, DC, April 20, 1999.
Hon. John D. Rockefeller IV,
United States Senate,
Washington, DC.
Dear Senator Rockefeller:
As you requested, I am writing to follow up on the questions you
asked during the March 25th hearing before the Senate Subcommittee on
Communications on the ``Open-market Reorganization for the Betterment
of International Telecommunications Act'' (S. 376). I appreciate the
opportunity to provide these responses.
You asked for supplemental responses on two questions. First, you
asked what effect the prospective privatization of INTELSAT might have
on global international connectivity. Second, you asked what impact S.
376 would have on provision of telecommunications services to rural
areas, particularly rural areas of West Virginia.
INTELSAT is in the process of considering restructuring options,
including privatization. As to your first question, the FCC shares your
concern that lifeline services and universal connectivity must continue
to be provided by a privatized entity. In my written testimony I
suggest that one of the legislative criteria for privatization that any
legislation should address would be continued provision of services to
developing countries.
In its current deliberations on privatization, INTELSAT has
identified global connectivity and lifeline services as a core
principle for any future restructuring. INTELSAT is considering two
approaches to assure that a privatized entity would continue to provide
global connectivity and lifeline services to countries that must rely
upon the INTELSAT system. One approach is to create a small
intergovernmental organization to monitor and ensure that the
privatized entity continues to provide these services. The other
approach is to include in the corporate documents of the private entity
the obligations and commitments to continue these services. It is too
early in the process to determine which approach may be taken by
INTELSAT.
As to your second question, our response is two part. To the extent
that S. 376 focuses on the privatization of INTELSAT, there is not a
direct and explicit relationship to the provision of services in rural
areas of the United States. INTELSAT, through Comsat, provides space
segment capacity for use by U.S. service providers such as U.S.
international carriers for the provision of international
telecommunications. INTELSAT does provide domestic services to other
countries--including providing leased transponder service and assisting
in developing VSAT (very small aperture terminals) based services in
rural areas. Should INTELSAT privatize, and should it enter the
domestic U.S. satellite services market, it would, of course, have the
capability to provide services that could be used for telecommunication
services in rural areas in the United States--just as domestic
satellite service providers do today. Whether relevant services at
appropriate prices become available to rural customers, however, will
be a matter for the companies that provide the ground segment and the
rural telecommunications service providers who might purchase satellite
capacity either from INTELSAT or a distributor of INTELSAT services.
Additionally, potential benefits to rural consumers of a Comsat/
Lockheed Martin merger would have to be a result of service offerings
by the new company to local telecommunication providers. The
applications filed by Lockheed Martin and Comsat with the Commission to
approve the first phase of the merger do not specify a commitment to
providing services to U.S. rural areas. I cannot at this time comment
further in view of the pendency of those applications.
You can be assured that we agree with you on the importance of
supporting service to unserved, rural, and economically isolated areas.
As we recently stated in our proceeding for establishing services rules
for mobile satellite services in the 2GHz frequency band, the
Commission is committed to encouraging delivery of telecommunications
services, including satellites services, to unserved and high-cost
communities and seeking to develop cost-effective incentives for such
services.
Again, I appreciate this opportunity to expand upon my responses.
Sincerely,
Roderick Kelvin Porter,
Acting Chief.
Senator Rockefeller. The second question would be in terms
of privatization and the whole question of global satellite
connectivity, which becomes very important and which Ms. McCann
brought up. There are potentially some dangers for global
satellite connectivity as you privatize. Can you speculate on
what those might be?
Mr. Porter. The dangers that I would anticipate, Senator,
would be dangers that flow from a lack of competition. Beyond
that, I am not sure I can comment.
Senator Rockefeller. OK, thank you.
Thank you, Mr. Chairman.
Senator Burns. We have been joined by Senator Cleland, from
Georgia. Nice to see you this afternoon, Senator. If you have
an opening statement, we would sure take that statement at this
time. If you would like to question our witnesses, you may do
that also.
STATEMENT OF HON. MAX CLELAND, U.S. SENATOR FROM GEORGIA
Senator Cleland. Well, thank you very much, Mr. Chairman.
Let me just say, to get on the right side of you, ``I do not
know.'' [Laughter.]
Senator Cleland. Let me just say I appreciate you, Mr.
Chairman, for your leadership on INTELSAT privatization
legislation. As the newest member of this committee, I do look
forward to working with you and my colleagues on the committee
on satellite reform.
As an original cosponsor of ORBIT, I believe that the time
has come for us to concentrate on passing a satellite reform
bill that can be enacted into law this year. The current
INTELSAT arrangement was established by the Communications
Satellite Act of 1962. The world of 1962 was one of a raging
cold war and the need for a Western response to the Soviet-
built Sputnik. INTELSAT was that response, with COMSAT being
the United States signatory to the INTELSAT Treaty.
However, today is a radically market than that of the
1960's. The cold war is no more, and governments are not the
only entities with access to the means to launch a satellite.
Many private companies compete with each other for access to
the skies. I believe that it is time to extend this same
competitive ability to COMSAT and INTELSAT.
From the outset, it is important to recognize that much has
changed since last year, when both the House and Senate
considered radically different plans to encourage the
privatization of INTELSAT. However, I understand that this year
there already is an ongoing dialog, Mr. Chairman, between
members of the House and the members of the Senate Commerce
Committee here to reach a consensus on this legislation.
I look forward to participating actively in such
discussions as the legislative process moves forward. I think
it is important to note that this year we have a new player in
the debate over INTELSAT's privatization. Of course I am
talking about Lockheed Martin. I would like to thank Mr. John
Sponyoe, of Lockheed Martin, for joining us today as a witness.
I believe that Lockheed Martin can provide us with a really
fresh and new perspective on what is really happening in the
satellite communications market today, particularly on the
issue of competition.
It is no secret that ORBIT would change the statutory
ownership restrictions on COMSAT, thereby paving the way for
Lockheed Martin's proposed acquisition of COMSAT. I will be
interested in hearing from our witnesses on how this proposed
merger will affect competition in the satellite communications
industry. Along with the rapid privatization of INTELSAT, I
believe that Lockheed Martin's interest to the satellite
communications industry will enhance the already vigorous
competition.
Mr. Chairman, just let me conclude my opening remarks by
saying I look forward to hearing the testimony of all of our
witnesses, and it is my sincere hope that we can work together
to move our laws governing the operation of INTELSAT and COMSAT
out of the 1960's and into the 21st century.
Thank you, Mr. Chairman.
Senator Burns. Thank you, Senator. Do you have any
questions for the present panel? You may continue on.
Senator Cleland. Yes, sir. Thank you very much.
Let me just mention one or two things. One provision of
this legislation provides the President with the authority to
certify whether INTELSAT has privatized in a pro-competitive
manner before INTELSAT may have direct access to American
markets. Either one of you can comment on this. Do you believe
that this authority is best managed by the Office of the
President? Is that an opinion that you share one way or the
other?
Mr. Porter, your judgment?
Mr. Porter. We believe that there has to be some provision
for the independent regulatory agency to make some assessment
in unusual situations. Just to give you an example, in the case
today, of WTO countries that automatically get market entry, we
still have the ability to examine the extent to which there is
a high risk to competition. To the extent that we have a new
scenario, where there is no ability on the part of the
independent agency to make an assessment in unusual situations
about significant risk to competition, we believe that there
may be a problem.
So, we would say that there needs to be a provision to
ensure that the agency continues to have that ability.
Senator Cleland. I thank you very much.
Ms. McCann, you are shaking your head yes?
Ambassador McCann. I would just like to add that the
President, as you know, has the authority to negotiate
international agreements. We would not agree to a privatization
of INTELSAT--that is, the Administration would not agree to a
privatization of INTELSAT--that we believed was not pro-
competitive. So we do not actually believe that the
certification requirement is necessary, because we would not
agree to privatization unless it was pro-competitive.
Senator Cleland. Thank you.
Either one of you can respond to this, if you like. Mr.
Porter, you mentioned competition and privatization. Several
large, multifaceted corporations have entered the satellite
communications market, bringing forth new ideas and innovation
for the benefit of consumers. Some of these commercial entities
include GM/Hughes, Motorola and Boeing. Do you believe that new
market entrants like Lockheed Martin will be one way to ensure
more vigorous competition in the satellite communications
industry?
Mr. Porter.
Mr. Porter. Yes, we do, Senator. We believe that one of the
benefits of legislation that would open the market to other
entrants is to permit for greater consumer and greater customer
choices. We believe that that is a positive objective.
Senator Cleland. Thank you. Ms. McCann, you are shaking
your head yes?
Ambassador McCann. I agree.
Senator Cleland. All right. Well, thank you very much for
being here today.
Thank you very much, Mr. Chairman.
Senator Burns. Do you have any other questions, Senator
Rockefeller? Any questions?
Senator Rockefeller. No, Mr. Chairman.
Senator Burns. I know there have been a couple of Senators
that have indicated that they want to submit some questions. We
will get those to you. Just like I say, it is a busy afternoon
this afternoon. We will get those to you. If you could respond
to the Senators and the committee, I would certainly appreciate
that.
Senator Burns. I thank you for coming this afternoon. You
are excused. We will move to panel two.
Ambassador McCann. Thank you, Mr. Chairman.
Mr. Porter. Thank you.
Senator Burns. On the second panel this afternoon will be
Mr. Jim Cuminale, General Counsel of PanAmSat Corporation; Ms.
Betty Alewine, President and CEO of COMSAT; Mr. John Sponyoe,
CEO, Lockheed Martin; and Mr. Conny Kullman, Director and CEO
of INTELSAT.
We welcome you here this afternoon to a discussion which
would enlighten all of us. Again, I am sure there will be other
questions from other Senators that are not here today.
Mr. Cuminale, of PanAmSat, we welcome your testimony at
this time.
STATEMENT OF JAMES W. CUMINALE, SENIOR VICE PRESIDENT AND
GENERAL COUNSEL, PANAMSAT CORPORATION
Mr. Cuminale. Thank you, Mr. Chairman, and good afternoon.
Senator Burns. Nice to see you again, by the way.
Mr. Cuminale. The same here. It is becoming a habit.
Senator Burns. You are going to be in that chair long
enough that you will be able to vote one of these days.
Mr. Cuminale. Thank you for extending the opportunity to me
today to speak to you on this very important issue. Before I
get into my comments, I want to thank you, Mr. Chairman and
Senators, for taking up what PanAmSat has long believed was an
issue that needed to be addressed. It is of critical importance
to us, but, more importantly, we think to a very important
marketplace and to a very important service industry.
The other witnesses today, unless I am absolutely
surprised, are going to tell you that there is no monopoly. I
am here today to tell you there is, in over half the world by
population and geography. That is what the FCC found in the
COMSAT Nom Dom proceeding, which had to be one of the most
hotly contested proceedings in which I have ever been involved,
in which pleadings and economic studies were filed by the
pound, not the page. That is what the GAO found, in multiple
reports it has rendered to the Congress. That is what virtually
every other satellite operator and major customer for satellite
services will tell you over and over again.
The problem of satellite monopoly manifests itself both in
the U.S. domestic market, with respect to international
services, and of course abroad. Now, the one thing I want to
try to convince you of today is that if you let that monopoly,
which is today an Intergovernmental Organization with
affiliates called signatories, simply go private, then you have
failed, as have we. Because what you have got is that monopoly
privatized and unregulated, which is probably the worst of all
possible worlds.
Now, on the U.S. side of the formula, the monopoly is in
the form of COMSAT's control over the bottleneck facility
INTELSAT. Since there is no other way for the customer to get
to the destination, the U.S., by law, has effectively given
COMSAT a tollbooth on the information highway. The FCC has
found that this toll amounts to an average of 68 percent over
COMSAT's INTELSAT costs, paid by the U.S. consumer, and the
customers will tell you that toll is charged for no added
value, for the most part, in services or facilities. If you
eliminate that tollbooth, you create the opportunity for
competition here, which means reduced rates for the U.S.
consumer immediately.
Lockheed and COMSAT are suggesting, and S. 376 would allow,
this toll booth be sold for their benefit, to the detriment of
U.S. consumers. The question we ask you is, how can the U.S.
encourage, let alone demand, that other countries eliminate
bottleneck access to their markets when we maintain that
monopoly here?
On the international side, other witnesses will tell you
that we cannot dictate competitive policies to other countries.
We are telling you that governance of the U.S. market is
entirely within your control, and that is the way to obtain a
pro-competitive privatization. There is absolutely nothing
wrong with requiring that this international enterprise, that
was formed for the public good, serve that good by fostering
competition and rejecting exclusivity and monopoly as a
condition to providing broad, commercial communication services
in the U.S.
We have suggested that the solution is the division of
today's INTELSAT into two roughly equal competing companies.
This is a pro-competitive privatization. It would leave each
market with two competitors who have been in that market ready
to compete with one another. It would not assure us of the
ability to get into the market, but we believe, once
competition is introduced, that is a natural outflow.
We are open to any other solution that will assure that
unlimited access to the U.S. market will not be available to
any privatized INTELSAT that has retained the monopoly market
access that is a throwback to the days of an intergovernmental
entity. That notion, by the way, is entirely consistent with
FCC policy that applies to all U.S. licensed operators. None of
us is permitted to accept exclusive market access anywhere in
the world.
Pro-competitive privatization will not happen overnight.
So, INTELSAT's conduct between now and then is critically
important. That is why we need to ensure that INTELSAT cannot
expand its privileged position prior to privatization. Those
are the so-called stand-still provisions that we promote.
Our principal concern with S. 376 is that it suggests and
encourages, but does not demand or require. Experience and
logic show that market dominance must be wrested away, not
requested away. Congress is in a position to do that.
Now, in the limited time available to me, I cannot take you
through our comments to the bill, but we have submitted a
markup of S. 376. We also have a short list of comments that
are in plain English. Additionally, I would just like to inform
you that a number of companies, which include GE/Americom,
Iridium, Teledesic, Alypso, MCI-WorldComm, AT&T, Motorola,
Final Analysis, Hughes, and of course ourselves, have worked
together to draft a bill that all of us can support. We would
be more than happy to provide that bill to you so you can see
in detail what our interests would indicate.
Thank you again, Mr. Chairman, for the opportunity to speak
to you today.
[The prepared statement of Mr. Cuminale follows:]
Prepared Statement of James W. Cuminale, Senior Vice President and
General Counsel, PanAmSat Corporation
My name is James W. Cuminale. I am the Senior Vice-President and
General Counsel of PanAmSat Corporation. I have testified before this
committee twice, the last time in September 1998 regarding S. 2365. I
said then that S. 2365 admirably stated the policy objectives of
creating a competitive marketplace for international satellite
communications, but was very short on practical implementation of these
objectives. Ironically, the current bill, S. 376, is better in stating
the pro-competitive objectives, but even less practical in implementing
them. Because S. 376 takes a step backward, I would like to use my time
today to be very clear as to what is at stake here.
Let's start by drawing a line between what are U.S. domestic
problems, which the Congress can solve without bringing along 140 other
countries, and what are international problems, as to which Congress
can motivate other countries to help solve. One pressing domestic
problem is that, unlike most other advanced nations, including the 93
who permit direct access, the U.S. is content to leave in place a
private monopoly on access to Intelsat: A private monopoly that
provides no products or services, but merely exacts a toll on all U.S.
access to the Intelsat satellite system.
Our other domestic problem is that we continue to countenance the
provision of commercial satellite services by an inter-governmental,
treaty-immune satellite cartel; we even have given the Intelsat cartel
a tax-haven home in the District of Columbia to compete with private
satellite companies. This is not only unfair to the competitors, it is
unfair to D.C. taxpayers. Let's begin with the tollbooth and--
eliminate the private monopoly tax on satellite access
In the Communications Satellite Act of 1962, Congress created a
private monopoly in Comsat--a monopoly that allows it to collect a
tollbooth tax on all transmissions to or from Intelsat satellites
providing service to and from the United States. By law Comsat collects
this private tax even though it does not own or operate the wires and
dishes used to reach those satellites, it does not provide any service
to carriers in connection with use of those satellites, or allocate any
U.S. bound traffic among carriers using those satellites. Today,
customers must write Comsat a check, including a surcharge of up to 68
percent over Intelsat rates, each time they use an Intelsat satellite.
This private tax comes right out of the pockets of U.S. consumers.
This law makes no sense here in the U.S. and it is an embarrassment
around the world because it makes it more difficult for us to argue for
the end of access monopolies overseas. The law granting Comsat a
private monopoly to tax U.S. consumers should be repealed immediately,
as part of the legislation that allows Lockheed is permitted to acquire
Comsat.
When Lockheed Martin urges you to amend the `62 Act to let it buy
100 percent of Comsat, they are really saying is ``let us buy Comsat's
private monopoly tollbooth.'' It is an absurdity that the tollbooth
exists at all. It would be unconscionable if it is permitted to be
sold.
Repeal of the private monopoly will not put Comsat out of business
or take anything away from Lockheed. Comsat, and after the sale,
Lockheed, would still be the largest shareholder in Intelsat's 20 plus
global satellites. In fact, Comsat itself is currently the largest
shareholder in New Skies, last year's private spin-off from Intelsat,
which operates six former Intelsat satellites for which Comsat now has
no right to charge a private tax on access. Obviously, Comsat felt that
the revenue generated from use of the satellites alone was sufficient
for it to support investment in New Skies. The same result applies to
Intelsat--it is a sound investment for Comsat, and Lockheed, even
without the monopoly tollbooth tax. Another thing we can do, taking
both domestic and international actions, is--
terminate the u.s.--sanctioned cartel providing commercial satellite
service
The Intelsat satellite cartel was established decades ago when
global commercial satellite service was simply too risky for any one
company to undertake. In addition, at that time there generally was
only one large telecommunications provider, usually a government
ministry or corporation, operating in each country. As a result, at the
urging of the United States, an international cartel composed of one
monopoly telecommunications provider from each country was formed to
provide global satellite service. The United States agreed to host the
headquarters of this new cartel tax free in the District of Columbia,
leasing them valuable land on Connecticut Avenue for the sum of one
dollar per year.
Today private companies have established global and regional
satellite networks that provide commercial service. In many countries,
national laws have changed and there are numerous telecommunications
providers competing in the marketplace. Yet the cartel still exists and
it has priority access to satellite slots and below commercial market
financing. Monopoly national telecommunications providers still meet
today in the rent free headquarters on Connecticut Avenue, courtesy of
the United States, to set prices and work against open market access by
other satellite providers.
Competitive satellite providers seek an end to this injustice.
Domestically, the United States should repeal the headquarters
agreement that provides diplomatic immunity, tax protection, and free
rent to this international satellite cartel. Internationally, we
actively should seek to terminate Intelsat by spinning off its
remaining satellite assets to two new private companies, in addition to
last year's New Skies spin-off. This is what a pro-competitive
privatization is all about. Termination of Intelsat through
privatization will not result in the loss of the satellite assets or
financial investment by those who built the Intelsat system. As New
Skies will demonstrate, the Intelsat satellite assets can be used to
provide competitive services without diplomatic immunity. When there is
a pro-competitive privatization and there is no more intergovernmental
entity, the private successors to Intelsat will be treated the same as
all other private regional and global satellite systems.
The end of Intelsat as an intergovernmental entity also does not
mean the end of Comsat. As I've said, Comsat is the largest single
shareholder in Intelsat and the New Skies spin-off. All of the revenue
stream from Comsat's investment in New Skies six, and Intelsat's 20
plus satellites will remain. Moreover, Comsat has been working hand in
glove with the world's key telecom companies for over 30 years; surely
they can use these contacts and Intelsat's former satellites to develop
a successful business.
Finally, ending Intelsat will not result in the loss of satellite
services to any nation currently receiving such service. Nor will it
prevent service to any country that seeks satellite services. Private
companies will provide these services, because, unlike undersea cables,
satellite coverage is cost-effective throughout broad areas of the
earth's surface. And if there's any doubt about the capacity of private
companies to serve poor countries, the United States unilaterally can
assure global satellite service. All the FCC has to do is require that,
as a condition for access to the U.S. market, every private satellite
operator must provide service upon request to any country that is
within the coverage area of its satellites and has the necessary
facilities and infrastructure to send and receive satellite service.
Another international problem posed by the Intelsat system is that
it makes it more difficult for private competitors to get market access
to countries that are Intelsat members. Therefore--
the united states should act to ensure fair market access
One of the greatest problems posed by the continued existence of
Intelsat as a government-sanctioned cartel providing commercial
services is that the members of the cartel, the national
telecommunications providers, have a direct financial interest in
requiring use of the Intelsat system. As a result, these national
providers work through Intelsat to block access to their countries by
services using competing private satellite services.
To ensure that the privatized entities created through the
termination of Intelsat do not impede market access, the United States
should use access to the U.S. market as leverage to assure that U.S.
companies have access to foreign markets. This leverage should be
applied to the privatized spin-offs from Intelsat. The FCC should allow
access to the United States market by a privatized spin-off only if it:
(1) is incorporated as a private company in a country which
has signed the World Trade Organization Basic Agreement on
Telecommunications Services;
(2) does not have any employees, directors, officers, or
assets in common with other privatized Intelsat spin-offs or
ownership by monopoly telecom companies that control access to
their home markets; and
(3) has not obtained satellite slots, or contracted for
satellites after
January 1, 1999, other than by using the same satellite
registration process and financial terms available to all other
private commercial satellite service providers.
some comments on s. 376
Measured against these goals, S. 376 simply does not go far enough.
It not only keeps the private monopoly tollbooth, it permits Lockheed
Martin to buy Comsat's right to tax U.S. consumers. It does nothing to
end Intelsat's tax-free status in the District of Columbia or its other
legal immunities in the U.S. The bill doesn't end Intelsat, it merely
threatens the end of U.S. participation in Intelsat, while still
creating many back-end exceptions for continuing U.S. participation.
The bill ousts the FCC from any meaningful determination as to what is
a pro-competitive privatization, improperly substituting the President
for the independent licensing agency. And the bill does not use the
leverage of U.S. market access to open up markets overseas--access that
is blocked by Intelsat members with the active support of Intelsat.
For over a decade, PanAmSat has been calling for the Congress to
step in and correct the legislative framework for the international
satellite industry. The time is now.
Senator Burns. Thank you.
Next we will hear from Ms. Betty Alewine, President and CEO
of COMSAT.
STATEMENT OF BETTY C. ALEWINE, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, COMSAT CORPORATION
Ms. Alewine. Thank you, Mr. Chairman and members of the
subcommittee. On behalf of COMSAT Corporation, it is a
privilege to appear again and present our views this time on S.
376.
Let me begin by saying that we believe that this bill is a
balanced and constructive proposal that should serve as the
basis for revision of the 1962 Satellite Act.
Now, having said that, Mr. Chairman, when I was growing up
in Mississippi, I heard a lot of stories about fish that were
this big. These days, I hear a lot of stories about COMSAT and
how we are this big. Unfortunately, those stories are just
about as truthful as the fish stories that I used to hear. Of
course, it is easy to exaggerate when you are talking about the
fish that got away. But in COMSAT's case, you can measure us
and you can weigh us. Whenever policymakers do that based on
fact, they usually realize that the whoppers people are telling
are just about as phony as those fish stories.
Now, what these whoppers have in common is the claim that
COMSAT is a monopoly. In fact, our market share is less than 20
percent for voice and data, and less than 35 percent for video.
Where I come from, you are not a monopolist if 80 percent of
the market is served by your competitors. But you do not have
to take my word for it, because last April, almost a year ago,
after looking at the issue for a full year, the FCC ruled that
COMSAT had no monopoly power in any major market.
Now, our opponents try to spin that FCC finding by claiming
that COMSAT still charges monopoly rates for traffic to
countries where there are no competitive choices to INTELSAT,
the so-called thin routes. They go on and on about how many
thin route countries there are. But what they do not tell you
is that these countries account for only 7 percent of our
traffic, and less than 2 percent of all of the circuits used by
U.S. carriers for their international traffic.
Last year, COMSAT's total revenue from thin route traffic
was less than $19 million. This is in an industry where total
U.S. revenues are about $19 billion. For occasional use
television, where we supposedly have a monopoly in 142
countries, our thin route revenue was $500,000. Our prices on
thin routes are the same as in the most competitive markets. We
serve thin routes. We go to the rural areas of the world to
meet our Universal Service obligations, not to earn monopoly
profits.
Yet our competitors claim that this tiny, tiny portion of
our business poses such an anti-competitive threat that the
Congress of the United States should impose service
restrictions that will kick us out of the entire market.
Another whopper you often hear is that COMSAT collects a
68-percent markup over the rates that it pays to INTELSAT. In
fact, both the FCC and the National Economic Council have
stated that the 68-percent figure is misleading, because it
does not include all the costs that COMSAT incurs in providing
service. Our actual margin is about the same as our
competitors. There is nothing monopolistic about that.
Still another whopper is that COMSAT has monopoly access to
INTELSAT. It is true that COMSAT is the exclusive service
provider on the INTELSAT capacity that we own. But providing
service over the facilities that we paid for does not give us a
monopoly. The truth is that consumers right now have more
choices than ever. We face intense competition from fiber cable
operators, from other satellite systems, and even from other
INTELSAT signatories.
Another story that you have heard is that COMSAT's
customers should be able to nullify our contracts because they
are anti-competitive. The nice name given to this idea is
``fresh look.'' In fact, it is standard industry practice for
customers to agree to long-term contracts in order to obtain
lower rates. No different than many of us do every day with
everything from health club memberships to magazine
subscriptions.
Both the FCC and a U.S. district court looked at COMSAT's
long-term contracts and found that they do not impede
competition. The FCC noted that these contracts do not lock up
the market, because they cover less than 20 percent of the
traffic. We applaud
S. 376 for expressly rejecting this egregious idea.
The last whopper that I want to address is that COMSAT
wants to sell its monopoly to Lockheed Martin. All I can say is
that when a company with no market share buys a company with
less than 20 percent market share, that is no threat to
competition. COMSAT's merger with Lockheed Martin will increase
competition, and that is exactly why our competitors want to
stop it. They hope to dominate the market themselves, and
afraid that this merger will upset their plans.
The reason for all of these fish stories is simple: If
there is no monopoly, there is no basis for the punitive
legislation that our competitors favor, no basis for service
restrictions for direct access, for nullifying our contracts,
or for blocking our merger with Lockheed Martin. That is why we
are pleased that S. 376 is based on reality in the market today
versus rhetoric.
S. 376 creates a very powerful incentive to expedite the
INTELSAT privatization. It modernizes the Satellite Act and it
looks forward based on the actual market conditions that exist
today, rather than looking backward at conditions that no
longer exist.
Mr. Chairman, a much more detailed discussion of COMSAT's
views on S. 376 is contained in my written testimony, which has
been submitted for the record. I would like to thank you and
each of the members of the committee today for holding this
hearing, and I would be pleased to answer your questions. Thank
you.
[The prepared statement of Ms. Alewine follows:]
Prepared Statement of Betty C. Alewine, President and CEO COMSAT
Corporation
Mr. Chairman, and members of the Subcommittee: On behalf of COMSAT
Corporation (``COMSAT''), it is a privilege to appear today and present
COMSAT's views on S. 376, the ``Open-market Reorganization for the
Betterment of International Telecommunications Act'' (``ORBIT''), which
amends the Communications Satellite Act of 1962 (the ``Satellite
Act''). I last testified before this Subcommittee seven months ago and
urged that Congress revise the Satellite Act promptly. Since then, the
need for legislation has become even greater for three principal
reasons.
First, the full privatization of the business operations of
Inmarsat is set for next month. However, a change in the law is
required for the U.S. government to continue its participation in
overseeing the provision of vital Global Maritime Distress and Safety
Services (``GMDSS'') by Inmarsat.
Second, the INTELSAT Assembly of Parties is scheduled to meet in
October 1999, to consider various privatization proposals. Enactment of
legislation before then will provide U.S. negotiators with clear
guidelines and objectives for a pro-competitive outcome; and entering
into that international meeting with a unified position will enhance
U.S. prospects considerably.
Third, the approval process at both the Justice Department and the
FCC for Lockheed Martin Corporation's (``Lockheed Martin'') proposed
acquisition of COMSAT is underway and could be finished in a few
months. However, the obsolete provisions in the Satellite Act that
limit ownership of COMSAT stock must be removed to complete the
transaction.
Senator Burns, with the early introduction of S. 376, you and the
co-sponsors of the bill are to be commended for taking the steps
necessary to address all these matters. S. 376 will ensure that, after
Inmarsat is privatized, the U.S. government has the authority to
continue its role in the provision of GMDSS services. It also will
allow the United States to be a positive and constructive participant
in the privatization of INTELSAT. In addition, it will promote
competition among U.S. satellite companies with long overdue
deregulation. All of these measures in combination will bring enormous
benefits to American consumers. Satellite legislation is now poised to
move quickly this year. Let me explain why.
We do not begin today's hearing with a blank slate. Much was
learned about the industry and the forces driving international
satellite reform during the 105th Congress. The one thing that did
emerge clearly from the last session is that the Congress and the
Administration share identical objectives--to privatize INTELSAT in a
pro-competitive manner and to update the laws regulating the U.S.
satellite industry to reflect the market conditions of today, rather
than the state of affairs that existed decades ago after the launch of
Sputnik. The ``October Sky'' of 1999 bears little resemblance to that
of 1962 when Congress passed the Satellite Act. Today, the debate
centers on the specific measures necessary to complete the
privatization of INTELSAT (a process already well underway), and on
whether COMSAT's rivals need to have Congress legislate a particular
market outcome once the Satellite Act's restrictions on COMSAT are
removed.
COMSAT submits that S. 376 strikes the right overall balance. It
creates powerful economic incentives to expedite INTELSAT
privatization, while minimizing unilateral dictation of specific terms
and conditions to other nations. At the same time, the bill ensures
that the interests of U.S. consumers are served by the restructuring
plan ultimately adopted by INTELSAT. U.S. market access is predicated
on a Presidential certification that the final privatized structure of
INTELSAT will not distort competition, as defined by factors clearly
set forth in the statute. In the event of undue delay, the bill
provides for U.S. withdrawal from INTELSAT if a final decision by its
member nations is not attained by January 1, 2002.
On the domestic side, S. 376 removes all the antiquated provisions
of the Satellite Act and makes large strides toward regulatory parity
for all competitors. The bill removes the ownership restrictions of the
1962 Satellite Act that have prevented COMSAT from merging with, or
being acquired by, others. This will permit the Lockheed Martin merger
to go forward, subject to Justice Department and FCC approvals. While
COMSAT does have concerns with certain provisions of the bill, which I
will elaborate upon, it is a sound bill. It is a pro-competitive,
market-oriented and deregulatory privatization measure. It promotes
user choice and consumer interests, protects the needs of the national
security community and advances U.S. trade interests.
For these reasons, S. 376 represents a major milestone in this
debate. Based on the Subcommittee record and recent administrative and
judicial decisions, the bill accurately reflects the current state of
competition in the international satellite industry, appropriately
relies on market forces and imposes government regulation only where
absolutely necessary. The bill recognizes, as the FCC did last year,
that COMSAT's position in the international telecommunications
marketplace is no longer dominant, and that COMSAT has no monopoly
power in any major service or geographic market it addresses. The FCC
has recently held, after extensive analysis, that these major markets,
comprising 93 percent of COMSAT's business over INTELSAT, are subject
to ``substantial competition.''
Only on the so-called ``thin routes''--that is, countries where
COMSAT carries out its universal service obligations--is the company
regulated as a dominant carrier. These thin routes in the aggregate
account for only 7 percent of COMSAT's traffic, and about $19 million
in revenue of the nearly $19 billion market for U.S. international
telecommunications services (.001 percent!). It also is important to
note that COMSAT's rates for these thin routes are the same as, or
lower than, the rates for the markets where we face the most vigorous
competition. So it can be said without equivocation that COMSAT
delivers the benefits of competition everywhere. See Attachment 1.
Some competitors attempt to mask this reality by pointing to a
large number of thin route countries for some marginal COMSAT services.
For example, one competitor frequently cites as evidence of COMSAT's
enormous monopoly that we are the exclusive provider of occasional use-
TV satellite capacity to 142 thin route countries. We have actually
never even received service requests from our customers to more than
one-third of these countries for many years. Moreover, the Subcommittee
should be aware that this enormous COMSAT ``monopoly'' generated all of
$500,000 in revenue in 1998.
COMSAT secures capacity on these thin routes in furtherance of its
universal service commitments, not because of the negligible revenue
generated. For competitors to urge the Congress to bar COMSAT from
competitive growth markets because we alone serve thin routes makes
little sense--except to competitors who search for any conceivable way
to keep COMSAT hamstrung. The sponsors of S. 376 should be commended
for rejecting this market-distorting rhetoric and crafting legislation
based on actual competitive conditions.
COMSAT's monopoly over satellite communications to and from the
United States ended in 1984, when separate satellite systems were
authorized to compete with COMSAT and INTELSAT. The international
telecommunications landscape has changed dramatically since then, and
COMSAT is now just one firm among many in a marketplace characterized
by vibrant, facilities-based competition. We face strong challenges
daily from other satellite companies such as Hughes/PanAmSat, Loral, GE
Americom, Columbia and Teleglobe Canada. In addition, customers
requiring international transmission capacity are by no means tied to
satellite technology. Over the last decade, high-capacity, undersea
fiber optic cables have actually become the dominant medium for the
provision of international voice and data services. These cables
directly connect the U.S. to over 125 countries, including every market
of significance, with more fiber cables being added on a routine basis.
For these services, COMSAT competes daily against multi-billion dollar
carriers such as AT&T, MCI WorldCom and Sprint. See Attachment 2.
Last year, AT&T generated over $8 billion in international service
revenue, and is now about to partner with British Telecom in a $10
billion global telecommunications venture. MCI Worldcom had
international service revenue of over $4 billion, and Sprint has a
multi-billion dollar international enterprise as well. To put all this
in perspective, COMSAT's entire INTELSAT service revenue in 1998 was
only $266 million. Pleas of these competitors to have Congress
legislatively nullify our non-exclusive, carrier contracts because
COMSAT wields ``monopoly power'' over them are ludicrous. These
companies have enormous bargaining power, and do not need the help of
Congress to renegotiate their contracts with COMSAT, a pattern they
have followed for years.
As described below, COMSAT's market shares have declined
dramatically in the last decade to levels as low as an average of 12
percent for voice and data services to countries with the heaviest
traffic volumes (``thick routes''), and an average of no more than 35
percent in multi-carrier international video markets. During the same
time, many of COMSAT's satellite competitors have enjoyed enormous
success. Later this year, the PanAmSat satellite fleet will surpass
INTELSAT in size by a significant margin, with 24 satellites in-orbit
compared to 19 for INTELSAT.
PanAmSat also touts to Wall Street a ``non-cancelable'' backlog of
service contracts of $6.3 billion, compared to only a $700 million
contract backlog for COMSAT. Loral, with its acquisitions of the
satellite fleets of AT&T Skynet, Orion and Satmex, is another
formidable competitor. In short, there can be no dispute that the
competitive marketplace is working. Nor can claims be taken seriously
that COMSAT has special privileges and advantages that have allowed it
to maintain a monopoly position. If we did, our competitors would not
be multiplying and flourishing at the rate that they are.
The truth of the matter is that, absent rapid privatization of
INTELSAT and modernization of the Satellite Act, competition will
diminish. INTELSAT's structure must be privatized if it is to respond
to customer demands with the simplicity and speed of its competitors.
COMSAT's investment in INTELSAT is at risk without these fundamental
changes. COMSAT itself is without the wherewithal in the long run to
stand alone against the vertically-integrated GM/Hughes/PanAmSat,
Loral/Orion/Satmex, and foreign global and regional satellite systems,
not to mention the giant cable consortia led by AT&T and MCI Worldcom.
That is the reality of today's international telecom markets.
COMSAT's announced plans to merge with Lockheed Martin are, in large
part, an effort to meet these competitive challenges. This union will
combine COMSAT's established satellite and networking business with
Lockheed Martin's space industry expertise, technology, resources and
capital to create a more effective competitor in the global
telecommunications services market. In the end, all the hue and cry
over the need to restrict COMSAT services, abrogate COMSAT's contracts,
and minimize its retail business through direct access, is nothing more
than an effort to avoid that prospect. In contrast, S. 376 will enable
American consumers to be the true beneficiaries of robust and fair
competition.
Before turning to the specific provisions of S. 376, I would like
to provide the Subcommittee with some additional relevant background on
COMSAT, and more detailed information on the industry participants
actively involved in this legislative debate. This material is
essential to address some misinformation about COMSAT and various
criticisms being raised about certain provisions in S. 376, criticisms
which simply do not withstand analysis.
COMSAT and the Communications Satellite Act of 1962
In 1962, pursuant to the Satellite Act, COMSAT was created as a
private American corporation with NO government ownership, subsidies,
or guarantees. COMSAT is owned by approximately 33,000 shareholders who
hold 53 million shares of stock traded on the New York Stock Exchange.
While its name is well known as the pioneer of commercial satellite
communications, it is actually a small company, with just over $600
million in total revenue in 1998.
COMSAT was established to carry out the national policy of creating
and operating a global satellite communications system in partnership
with other nations. That satellite system is known as INTELSAT. The
Congress decided that the United States would participate in this
global system via COMSAT through private capital invested by ordinary
Americans. In fact, the Satellite Act directed that the stock initially
offered by COMSAT ``be sold at a price not in excess of $100 for each
share and in a manner to encourage the widest distribution to the
American public.''
Working to fulfill the mandate of the Satellite Act, COMSAT has
been successful on a historic scale. COMSAT and INTELSAT today provide
universal coverage connectivity on a non-discriminatory basis to
developed and developing countries throughout the world. COMSAT and
INTELSAT are important components of America's telecommunications
infrastructure and one of the main reasons why the United States exerts
technological leadership--dispersed among many companies--in the field
of satellite communications.
The satellite facilities COMSAT invested in are vital to both the
civilian and military functions of the U.S. Government. They enable
American businesses to serve global markets and manage global
enterprises. COMSAT is also dedicated to the universal service mission
of the Satellite Act, and the company carries traffic to foreign points
that do not generate sufficient volume for international carriers to
construct their own cable facilities, and/or which other satellite
firms opt not to serve at all. Moreover, and unlike any other U.S.
satellite company, COMSAT offers non-discriminatory access at
competitive rates to its facilities to all comers, including its
competitors.
The work being done at COMSAT Laboratories further contributes to
keeping the U.S. at the forefront of space communications technology,
including applications to meet national defense requirements. COMSAT
holds hundreds of patents which are the result of the company's
investments in research and development. Those innovations have made
satellites an integral part of today's global information
infrastructure. To cite the latest example, COMSAT Labs just developed
a remarkable new technology, known as Linkway 2000TM, which
allows U.S. carriers and Internet Service Providers to transmit digital
data streams with the same speed, quality, and reliability as fiber
optic cables, using a variety of network platforms incorporated in one
device. The full potential of the Internet can now be made available to
many developing nations and remote locations lacking adequate
terrestrial infrastructure--all via COMSAT satellite technology.
State of Competition
When COMSAT launched its first satellite in 1965, it was the sole
provider of international satellite communications services. As a
monopoly, the company was subject to FCC reviews of its investments and
had a regulated rate base on which its earnings were strictly limited.
However, the days of monopoly are long gone!
In November 1984, President Reagan signed a Presidential
Determination that opened the market for international satellite
communications to alternative satellite systems. Since then, a healthy
U.S. satellite industry has developed, with strong facilities-based
rivals like Hughes/PanAmSat, Loral, Columbia, GE Americom and foreign
systems--all competing with COMSAT in the U.S. for the provision of
international satellite capacity. Space Business News reported this
February that ``more satellites have already been launched in the
1990's than in the preceding three decades combined.''
The transition of the U.S. international satellite industry from
its single system origins to today's highly competitive environment is
a remarkable success story. An article in the August 1998 edition of
Via Satellite captures the current state of competition quite well:
The United States is home to many of the world's leading
private global satellite operators. The Hughes/PanAmSat merger
has created by far the largest of such companies. GE Americom
and Loral Skynet are expanding beyond their traditional U.S.
market into Europe, Latin America and the Asia Pacific. These
companies are building fleets that rival INTELSAT's in size, at
the same time that INTELSAT is losing market share and spinning
off five of its spacecraft in a new private venture.
The facts underlying this assessment are even more revealing. For
instance, from a single satellite launched in 1988, the Hughes/PanAmSat
system is currently in the midst of a $2 billion expansion program to
increase its fleet to 24 satellites by the end of 1999, with the
company scheduled to launch a satellite every two months between now
and then. PanAmSat has a backlog of $6.3 billion in firm contract
orders and had $737 million in revenue in 1998. Today, PanAmSat alone
has a market capitalization several times larger than that of COMSAT.
In contrast, INTELSAT divested part of its fleet in 1998, thus
reducing its size from 24 to 19 satellites. Because COMSAT, in turn,
must share capacity on INTELSAT satellites with many other Signatory
owners, and because much of the INTELSAT system is devoted to non-U.S.
service (e.g., Asia--Europe), the total capacity now available to
COMSAT to serve the U.S.-international market in competition with
PanAmSat, Loral and others amounts to the equivalent of just 3--4
satellites. Moreover, COMSAT's backlog of firm contract orders is nine
times less than that of PanAmSat, and COMSAT's 1998 revenue from the
INTELSAT business was only $266 million.
As noted, Loral is another major U.S. company competing to offer
international satellite services. As a result of its $1.5 billion
acquisition of AT&T's Skynet satellites, the Orion system, and a
majority share of the Mexican Satmex satellites, Loral has 10
geostationary satellites in orbit, and is planning to expand its fleet
to 15--17 satellites by 2001. GE Americom, Teleglobe, and Columbia
Communications are also vying to carry voice, video, and data traffic
via satellite between the U.S. and overseas destinations. In fact,
Teleglobe recently announced a new partnership with EUTELSAT (a
European satellite firm with 14 satellites in-orbit) to provide
additional transatlantic satellite services to and from the United
States.
Given the state of the marketplace and the billions of dollars
being invested in competing systems (and considering COMSAT's declining
market shares), no credence can be given to the claims being made that
COMSAT has unfair advantages which are harmful to competition, or that
separate satellite systems suffer from foreign market access problems.
According to the FCC, ``PanAmSat provided full-time video service to
139 countries''--only four countries shy of the entire INTELSAT
membership. The harsh reality is that, as a member of an
intergovernmental treaty organization structured for a much earlier
era, COMSAT has limited ability to participate in the growth of this
industry. Indeed, in April 1998, when the FCC granted COMSAT non-
dominant status in 93 percent of its markets, the agency observed that
``over the last three years, PanAmSat's and Hughes' satellites have
captured 70 percent of the growth in international video traffic to and
from the U.S.''
Competition to INTELSAT and COMSAT is about to intensify even more
with a new generation of satellites that will utilize the super-high
frequency Ka-band. The FCC has authorized thirteen Ka-band systems,
comprising some 73 satellites, which will offer a variety of data and
multimedia applications. These systems are not speculative. On March
17, 1999, The Wall Street Journal reported that the Board of Directors
of General Motors Corporation--the parent of Hughes/PanAmSat--approved
the infusion of $1.4 billion to begin building the Hughes Ka-band
Spaceway Satellite System, also noting that this ``funding decision
essentially commits the satellite maker and service provider to spend a
total of $4 billion on the largest first phase of the project.'' Other
firms planning to provide similar broadband satellite services include
Loral, GE Americom, Lockheed Martin and Teledesic (backed by Motorola
and Boeing). According to the FCC, these new satellites should help
increase worldwide revenues from commercial fixed and mobile satellites
from the 1996 level of $9.4 billion to $37.7 billion in the year 2002.
Again, COMSAT's revenue from its INTELSAT operations in 1998 was just
$266 million.
Satellite capacity, however, is only part of the market for
international telecommunications services available to consumers today.
Since 1988, undersea fiber optic cables have far and away replaced
satellites as the dominant medium for international telephone and data
transmission. This dramatic increase in competition from undersea
cables resulted from the elimination in 1989 of regulatory protections
designed to promote international satellite communications, and from
extraordinary developments in fiber optic technology. The capacity and
quality of fiber optics is exponentially greater than the old copper
analog cables. The first trans-Atlantic cable, TAT-1, was laid in 1956
and had the capacity to provide only 44 voice-grade circuits. TAT-12/
13, which entered service in 1996, has the all-digital capacity to
transmit 120,000 voice conversations (or an equivalent amount of data).
That is 2\1/2\ times the capacity of the largest INTELSAT satellite,
and is already considered old technology.
Due to rapid deployment of undersea fiber cables, there is more
than enough unused international transmission capacity now available to
absorb all of COMSAT's current traffic. Today, the United States has
direct fiber connections to over 125 countries, and these cable systems
continue to proliferate and with even greater capacity. For example,
CTR Holdings L.P., is in the midst of a fiber-cable project (known as
Project Oxygen) that will have 265 landing points in 175 countries and
cost $14 billion. On March 15, 1998, the FCC licensed this private
cable company to build the first phase ``linking together a total of 78
countries and locations on all continents except Antarctica.'' Cable
installation is scheduled to begin later this year.
Another cable firm, Global Crossing, Ltd., has raised $3 billion
and is currently laying fiber links from North America to Japan,
Central America and the Caribbean. The initial installed capacity on
Global Crossing's first transatlantic cable Atlantic Crossing (AC-1)
can handle more than 480,000 simultaneous two-way conversations.
Service commenced in May 1998. By the end of 1998, Global Crossing had
already reported contract sales for capacity exceeding $1 billion. And
just last week, Global Crossing entered into an agreement to purchase
Frontier Corporation--one of the nation's largest providers of domestic
long distance service--for $11.2 billion. The combined companies will
have a market capitalization of about $30 billion and $4 billion in
revenue for 1999.
There is no question that competition from separate satellite
systems and fiber optic cables has changed the global
telecommunications marketplace beyond what could have been imagined by
the creators of the 1962 Satellite Act. In every significant market
segment that COMSAT serves via INTELSAT, the FCC has found that
COMSAT's market share has dropped well below monopoly levels. COMSAT's
share of the international switched voice and private line market has
fallen from approximately 70 percent in 1987 to less than 20 percent
today, and to less than an average of 12 percent in the most heavily
trafficked geographic and service markets. COMSAT's share of the
international video transmission market has declined from nearly 80
percent in 1993 to approximately 35 percent today. Cables and separate
satellite systems carry the majority of traffic in every major
geographic market. See Attachment 3.
Even in the low volume geographic markets (the ``thin routes''
comprising approximately 2 percent of the circuits utilized by U.S.
international carriers), U. S. consumers are not confined to COMSAT to
reach those countries using the INTELSAT system. Users can also turn to
the Canadian participant in INTELSAT, Teleglobe, which the FCC has
authorized to operate in the U.S. As a practical matter, this means
that COMSAT's $19 million thin route business is also subject to real
competition.
Teleglobe is now the world's second largest owner of fiber optic
cable capacity as well, and it recently merged with the 5th largest
U.S. long distance carrier, Excel Communications. That uncontested
merger was valued at $7 billion (compared to $2.7 billion for Lockheed
Martin-COMSAT) and will create a global, integrated service provider
with access to 240 countries. Teleglobe has opened offices in Chicago,
Miami and San Francisco, and announced in January that it ``has grown
to service more than 100 domestic carriers in the U.S., including
several Regional Bell Operating Companies,'' and that it also provides
service to U.S. television broadcasters ``including ABC, CBS, CNN and
Fox News.''
In February 1999, Teleglobe expanded its U.S. satellite operations
by entering into a capacity agreement with EUTELSAT. As reported in
Satellite International, ``EUTELSAT has secured a link to the coveted
U.S. market without having to deal with the thorny issue of obtaining a
U.S. license. Under the terms of the deal . . . EUTELSAT will be able
to offer other customers access to Teleglobe's teleports in New York,
Washington, D.C. and Montreal.'' This alliance creates yet another
satellite alternative to COMSAT for U.S. consumers to reach overseas
markets.
Deregulation
In April 1998, the FCC ruled that COMSAT is not a monopoly, but
rather a single competitor in an industry characterized by substantial,
facilities-based competition. Specifically, the Commission reclassified
COMSAT as a ``non-dominant'' carrier and found that:
Because of the unprecedented growth in the industry . . .
COMSAT is no longer the sole commercial provider of
international switched voice and video transmission services
via satellites. Today, other satellite companies effectively
compete against COMSAT and the INTELSAT satellite system . . .
. In the future, new voice, data and video services authorized
by the Commission will be available to consumers via low Earth
orbiting, non-geosynchronous satellite systems. . . . These new
services will compete against existing satellite services,
thereby providing consumers with more choice for their
international telecommunications needs. Moreover, the
transoceanic capacity and geographical coverage of fiber-optic
cables has burgeoned since 1985, and they now provide a highly
competitive transmission alternative for providers of
international switched voice and private line services. The
emergence of competitors to COMSAT has likewise increased the
supply of satellite transmission capacity for the provision of
these services.
Based on a detailed economic analysis, the FCC then determined that
COMSAT no longer has monopoly power in the product and service markets
accounting for over 90 percent of COMSAT's business on the INTELSAT
system--switched voice and private line service to thick route markets,
full-time video service in all geographic markets, and occasional-use
video service in the multiple carrier market.
Hopefully this will put to rest, once and for all, the seemingly
never-ending claims that COMSAT's exclusive access to INTELSAT creates
a monopoly. COMSAT's exclusive right to use the space segment capacity
it paid for is no different than the exclusive right enjoyed by other
satellite providers to sell services on the facilities they paid for.
That alone does not make a monopoly. The primary determining factors
are whether other suppliers offer consumers substitutable choices and
whether consumers are able to exercise those choices. There can be no
doubt that when over 80 percent of international voice traffic to and
from the U.S. is being placed on non-COMSAT facilities, and over 65
percent of international video traffic is placed on non-COMSAT
facilities, COMSAT's exclusive access to INTELSAT is not a monopoly.
See Attachment 4.
With all this facilities-based competition, in February 1999, the
FCC further extended its deregulation of COMSAT. The agency eliminated
rate of return regulation on COMSAT's thin route business, replacing it
with a far less onerous form of incentive regulation. In connection
with that decision, COMSAT pledged to charge consumers of its thin
route services the same rates we charge on the most highly competitive
routes (``thick routes''), and not to raise its prices in the future.
COMSAT also committed to annual 4 percent reductions for voice service
on those thin routes through 2002. I am aware of no other carrier
making similar commitments to its customers, and this is certainly not
the behavior of an alleged monopolist. As the FCC recognized, COMSAT's
proposal on thin route pricing was driven by the ever increasing levels
of competition in the global telecommunications markets in which it
operates.
Progress on INTELSAT Privatization
Despite the claims of its competitors, INTELSAT is not immune from
the dynamic nature of market competition. Because COMSAT is the largest
investor in INTELSAT, and a private U.S. corporation accountable to its
shareholders, we could not stand by and allow COMSAT's investment to
diminish in value as competition significantly intensified. As
mentioned, the governance and financial structure of an
intergovernmental treaty organization are simply not suitable for
today's fast-paced environment. Therefore, nothing short of full
privatization, in COMSAT's view, will suffice.
It has taken significant ramp-up time to convince 142 other nations
to proceed down this path, especially due to concerns about maintenance
of universal connectivities to less developed countries by a private,
for-profit firm. Nevertheless, major progress toward achieving this
goal has already been made. INTELSAT itself divested a quarter of its
fleet (five in-orbit satellites and one under construction) in November
1998 and created a new, independent, fully private global satellite
company, New Skies Satellites, N.V. INTELSAT's member nations also
unanimously agreed at that time that the New Skies partial
privatization would only be the ``first step'' in reforming INTELSAT.
Building on the momentum of New Skies, INTELSAT next elected a new
Director General and CEO who ran on a platform of full privatization,
and subsequently has set a goal to reach such an agreement by INTELSAT
member nations by the end of 2001.
Demands by some competitors that a pro-competitive privatization
requires yet another ``break-up'' of INTELSAT into three or four more
``successor entities'' lack any rational basis. U.S. legislation
calling for the break-up of INTELSAT will not advance the privatization
process, but is more likely to generate backlash and delay. But most
important, such a drastic measure is not necessary to promote
competition.
It bears re-emphasis that, in the aggregate, the INTELSAT capacity
devoted to serving the U.S. market amounts to the equivalent of less
than four satellites. The dismemberment of INTELSAT, as Hughes/PanAmSat
advocates, really should be seen as an effort to fragment INTELSAT into
a number of weaker systems that will not be able to compete with
Hughes/PanAmSat effectively. As noted above, the Hughes/PanAmSat global
satellite fleet will surpass all of INTELSAT in size by the end of this
year. Given this success, the vigorous efforts of Hughes/PanAmSat to
have the Congress legislate the dismantling of its major competitor
into a number of marginal systems is completely self-serving. Other
satellite competitors, like Loral and GE Americom, are quickly
approaching INTELSAT in size as well. Moreover, foreign entities, like
British Telecom, Teleglobe and EUTELSAT, are also serving the U.S.
market, not to mention the fiber cable consortia controlled by AT&T,
MCI Worldcom, and others.
There are, however, sound means for the Congress to ensure a pro-
competitive privatization, and S. 376 establishes just the right
framework. INTELSAT will not be given direct access to the U.S. retail
market unless the President of the United States determines that it has
been privatized in a pro-competitive manner. That should be a more than
adequate safeguard to protect competition in U.S. markets. Furthermore,
the service restrictions embodied in S. 376 will provide a powerful
impetus for rapid privatization, without impairing U.S. users, the
national security or U.S. trade commitments. Accordingly, the
Subcommittee is respectfully urged to reject any thinly disguised
efforts to require a restructuring that is market-distorting and anti-
competitive in effect, as Hughes/PanAmSat advocates.
While INTELSAT has partially privatized and is in the midst of
completing the process, another international satellite organization,
Inmarsat (which provides satellite services to maritime, aeronautical
and land mobile users) has moved rapidly to full privatization. COMSAT
is the largest owner of Inmarsat, and for the same reasons as with
INTELSAT, we vigorously pursued a full privatization agenda with the
other 83 member countries of that treaty organization.
COMSAT is pleased to report that on April 15, 1999, Inmarsat and
its fleet of nine mobile service satellites will convert its business
operations into a fully private, commercial company. A small
intergovernmental organization with a staff of about three people will
remain in existence to ensure that the new private firm continues to
perform its public service obligations of providing Global Maritime
Distress and Safety Services (``GMDSS''), consistent with the
international Convention on the Safety of Life at Sea (``SOLAS''), to
which the United States is a party. However, due to a recent
interpretation by the Justice Department pertaining to future U.S.
participation in Inmarsat, legislation is required to conform the 1978
Inmarsat Act (Section 5 of the Satellite Act) to this privatization,
and S. 376 contains such conforming language in Section 6.
COMSAT/Lockheed Martin Merger
To meet the challenges and opportunities created by the open,
diverse and highly competitive environment that exists today for
international telecommunications services, COMSAT wants to merge with
Lockheed Martin Corporation. The proposed merger will bring together
the two companies' complementary strengths and capabilities. Combining
Lockheed Martin's resources and space expertise with COMSAT's
established reputation and operating experience as a satellite services
provider will create a new, more vigorous competitor and enable
consumers to reap the benefits of the operating efficiencies created by
the merger.
Lockheed Martin's purchase of COMSAT will not result in an increase
in concentration or a reduction in the number of competitors, because
Lockheed Martin currently does not offer satellite communications
services to and from the United States in competition with COMSAT. With
the explosive growth in the number and capacity of service providers in
the international telecommunications market, including both satellite
and undersea fiber cable operators, the effect of the merger on
competition will be very positive. In particular, the merger will
create an international telecommunications company that has the
critical mass necessary to compete effectively against other industry
giants, like AT&T/BT, MCI Worldcom, Loral, Hughes/PanAmSat, GE Americom
and Teleglobe. This will undoubtedly promote U.S. technological
leadership, and provide valuable employment opportunities in a high-
growth sector of the economy.
The merger also will foster advanced satellite and ground segment
technologies and turnkey telecommunications solutions that promise vast
benefits to users in the United States and around the world, in both
well-served and thin route markets. With privatization, it will
complete the transformation of COMSAT into a normalized corporate
entity with no special legislative status. It will help expedite the
full privatization of INTELSAT by bringing Lockheed Martin's resources
to bear in support of the objectives of S. 376.
At present, the Satellite Act prevents any company from acquiring a
majority of COMSAT's stock. Thus, Congress must amend to the Act before
the two companies can complete the proposed merger. However, both
companies wanted Lockheed Martin to be able to obtain, as quickly as
possible, the maximum stake in COMSAT consistent with existing law.
This necessitated a two-step transaction. In step one, which is
currently before the FCC, a Lockheed Martin subsidiary is seeking
authority to acquire up to 49 percent of COMSAT as an ``authorized
carrier'' under the Satellite Act. Approval of step one is within the
FCC's jurisdiction under existing law. The full public benefits of the
transaction can only be achieved, however, upon completion of step two,
which is the merger itself. We therefore request that Congress act
swiftly on S. 376 to allow the merger to be completed.
Section-by-Section Discussion of S. 376
Chairman Burns, as stated earlier, you should be commended for
introducing legislation with firm measures to promote INTELSAT
privatization, and for undertaking the long overdue modernization of
the 1962 Satellite Act. Although efforts were attempted with H.R. 1872
(the bill passed by the House of Representatives last year), we believe
S. 376 improves upon that initial groundwork in major respects.
As this Subcommittee may recall, the Administration announced its
strong opposition to H.R. 1872 at your hearing last September, but well
after the House vote. The Administration objected to the approach taken
in H.R. 1872 for many reasons, chief among them that: (1) it would
retard, not promote privatization, by imposing ``unrealistic''
conditions; (2) it was ``likely to reduce, not increase, competition''
and raise prices to consumers; (3) it would ``have significant adverse
national security and maritime safety implications'', and (4) it could
``provoke retaliation from U.S. trading partners'' and be inconsistent
with the United States' WTO obligations.
In opposing H.R. 1872, the Administration also observed, and COMSAT
fully concurs, ``that Congress was instrumental in establishing
INTELSAT and Inmarsat and that it may want to address their
privatization in legislation.'' Moreover, legislation is essential in
order to update the 1962 Satellite Act. With that in mind, COMSAT now
offers its views on specific provisions of S. 376.
INTELSAT Access to the U.S. Market
Section 603, ``Restrictions Pending Privatization,'' will operate
to prohibit INTELSAT from entering the U.S. market directly to provide
any retail satellite communications services or space segment capacity
to carriers or end users until a pro-competitive privatization is
achieved. This provision is a major improvement to Section 641 of last
year's House legislation, which would have required direct access to
INTELSAT before privatization occurs. S. 376 appropriately uses U.S.
market access as a lever to speed INTELSAT privatization, without
harming U.S. consumers or competition in the process. COMSAT agrees
with this approach for the following reasons.
INTELSAT currently does not sell satellite services directly in the
U.S. retail market. Rather, it is a cost sharing international
cooperative whose owners, the Signatories, jointly invest in the
satellites and cover the expenses of operating the system. The
Signatories in each country then sell the capacity they own on the
system in their national retail markets. In the U.S., that investment
responsibility and sales function are performed by COMSAT, the owner of
the U.S. portion of the system.
As a U.S. corporation, COMSAT pays U.S. corporate income taxes on
the revenue it generates from its INTELSAT business. As a U.S. common
carrier, COMSAT is licensed and regulated by the FCC, and is fully
subject to the U.S. antitrust laws in its common carrier activities.
Additionally, as a U.S. publicly-traded corporation listed on the New
York Stock Exchange, COMSAT is subject to the disclosure and filing
requirements of U.S. securities laws.
None of this would apply to INTELSAT if it were permitted to
directly access the U.S. market at the retail level before converting
to a private corporation. As an intergovernmental international
satellite organization, INTELSAT would be entirely exempt from U.S.
taxation. Quite correctly, S. 376 recognizes that this would give
INTELSAT an unfair competitive advantage over every other satellite
operator doing business in the U.S. and paying U.S. taxes. It would
also deprive the U.S. Treasury of millions of dollars of tax revenue
now paid by COMSAT--creating, in effect, a U.S. taxpayer subsidy of
INTELSAT.
As the recipient of this subsidy, INTELSAT would have no incentive
to privatize more quickly if direct access were allowed now. It is this
avoidance of U.S. tax expense that makes immediate direct access so
attractive to the U.S. carriers. With no U.S. income, property or
payroll taxes (on non-U.S. employees) to pay, INTELSAT could offer
satellite capacity more cheaply than COMSAT, because its costs of
production (building, customer support, operations, marketing, billing,
etc.) would be lower. Is it any wonder why U.S. carriers and users find
direct access so attractive? Yes, below-cost prices are appealing to
U.S. consumers, but such ``gains'' are not attributable to any true
efficiencies derived from direct access, but are an unfair advantage
derived from INTELSAT's tax exempt status. For the Subcommittee's
benefit, attached to my testimony is a study just completed in December
1998, by Professors Jerry R. Green and Hendrik S. Houthakker of Harvard
University, and Johannes P. Pfeifenberger of The Brattle Group, which
explain these points in greater detail. See Attachment 5,* ``An
Economic Assessment of the Risks and Benefits of Direct Access to
INTELSAT in the United States'' (``Direct Access Study'').
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* [Study maintained in the Subcommittee's files.]
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But below-cost access is not the only problem with direct U.S.
retail market entry by INTELSAT prior to full privatization. INTELSAT
is also totally immune from FCC regulation and U.S. antitrust laws. The
FCC recently held in its DISCO II Order (implementing the WTO
Agreement) that privileges and immunities much narrower in scope than
those INTELSAT enjoys would distort competition and constitute grounds
for denying entry to the U.S. domestic market. The same reasoning would
apply with even greater force to direct U.S. market entry by INTELSAT.
Section 603 properly recognizes that to reward INTELSAT and foreign
signatories with direct U.S. market access now takes away much of their
economic incentive to privatize. Why? Because if these foreign PTTs are
given the right to sell INTELSAT services in the U.S. immediately and
on preferential terms (as compared to COMSAT), no reason exists for
many of those same Signatories to work hard to change the
intergovernmental nature of the organization. Direct access does
nothing to bring about change to INTELSAT's structure; instead, it
reinforces it. INTELSAT would gain expanded U.S. distribution channels,
foreign Signatories would have immediate access to the U.S. market, and
privatization would come to a grinding halt. The debate for
commercializing INTELSAT would shift to greater direct access versus
full privatization. No matter what benefits the proponents of direct
access claim, this is far too high a risk to take--especially since
COMSAT's exclusive U.S. Signatory access will end forever immediately
upon privatization anyway. As Section 603 recognizes, the quicker
INTELSAT privatizes, the sooner American consumers will realize the
true economic benefits of fair competition. Significantly, S. 376
requires INTELSAT privatization by the end of 2001.
Even before the prospects for privatization were on the near
horizon, the FCC consistently rejected direct access to INTELSAT,
finding that it would neither increase competition nor lower prices to
end users. To quote the U.S. Court of Appeals in affirming that
Commission decision:
[The FCC] concluded that direct access was not in the public
interest; it would not save users money either by increasing
efficiency [or] enhancing competition. . . . In assessing the
likelihood that direct access could lower costs, the agency
examined each category of costs on which COMSAT based its space
segment tariff. The FCC concluded that each category was
properly allocable to the tariff. . . . In the Commission's
view, direct access probably would not reduce any of these
costs; it would, rather, simply redistribute the costs among
COMSAT and the carriers. Western Union Int'l v. FCC, 804 F.2d
1280, 1285 (D.C. Cir. 1986).
Moreover, the FCC decided against direct access at a time when COMSAT
was the only international satellite company serving the U.S. Today, by
contrast, there is significant facilities-based competition--both
intermodal (undersea cable) and intramodal (separate satellite
systems). As the FCC has stated again and again, in view of this robust
competition, COMSAT's role as the U.S. provider of INTELSAT capacity
accords us neither a monopoly nor market power. Thus, the need for
direct access is even less than when it was first rejected by the FCC.
This brings us now to the issue of the infamous COMSAT ``mark-ups''
and the remedy of direct access. It is probably the most misunderstood
issue of all. COMSAT's critics attempt to demonstrate that COMSAT
engages in monopoly pricing by comparing the difference between what
COMSAT charges its customers at FCC-tariffed rates and the payments we
make to INTELSAT for capacity. Equating that to a mark-up in the
ordinary meaning of the term is simply false.
As the Administration informed the House Commerce Committee, it is
``misleading'' to use the term mark-up in this context, because the
amounts COMSAT pays to INTELSAT do not cover all of the costs of
providing the U.S. portion of the INTELSAT space segment. For example,
COMSAT is required by law to perform numerous duties on behalf of all
users as the U.S. Signatory to INTELSAT, which generate expenses
entirely separate from what INTELSAT charges COMSAT for only the
satellite capacity. In addition, COMSAT necessarily bears other costs
in providing INTELSAT satellite capacity (e.g., engineering,
operational support, transaction costs, customer billing, satellite
insurance). Those costs must obviously be taken into account before
actual margins can be calculated.
However, based on a calculation which erroneously excludes the
foregoing costs, proponents of direct access often cite a three-year-
old average mark-up figure of 68 percent. The truth is that, after
COMSAT's unavoidable and recoverable costs are properly considered,
COMSAT's actual operating margins are about 38 percent, virtually
identical to our satellite competitors.
Finally, it is often said that if 93 other countries have adopted
direct access, why should the United States lag behind? There is a very
simple answer. Direct access in other countries is used as a means to
address a problem that does not exist in the U.S.--that is, complete
control of all telecommunications by a single PTT or former PTT. Unlike
COMSAT, these PTTs provide local exchange telephone service, domestic
long distance service, and international service. Unlike COMSAT, they
own capacity in fiber optic cables and other satellite systems. Unlike
COMSAT, they control earth stations that access INTELSAT. The only way
to break that bottleneck and promote alternatives for international
services in those countries is to allow new entrants to access INTELSAT
satellite capacity directly, thus bypassing the PTT. In the United
States, we did it right initially. COMSAT was specifically created to
prevent the dominant U.S. carrier, AT&T, from controlling both
satellites and cables. Today, U.S. users do not lack for choices for
sending traffic overseas. Other countries are just trying to catch up!
A few proponents of direct access attempt to make much of the fact
that COMSAT subsidiaries operating in Argentina and the U.K. take
advantage of direct access while COMSAT opposes its implementation in
the U.S. Unlike other countries in which the Signatory is a
telecommunications service provider, the Signatory in Argentina is its
regulatory authority, an agency similar to the FCC. Thus, because the
Signatory is not a service provider, there is no other way in Argentina
to obtain space segment capacity except through direct access.
The U.K. is another aberration. In stark contrast to COMSAT, and
even though BT is the second largest owner of INTELSAT, its investment
share is only 5.7 percent compared to 18 percent for COMSAT. Unlike
COMSAT, which is an independent supplier of space segment to U.S.
carriers, BT simply uses the capacity itself as part of the retail
services it offers to end users. Moreover, BT is a $26 billion company
with a local exchange, long distance, and international business (which
is about to join with AT&T). BT also owns capacity in undersea fiber
optic cables and other satellite systems.
Given these enormous differences, for BT to assert that it should
be the model for the U.S. to follow on direct access is nonsensical and
absurd. Offering capacity that COMSAT owns on the INTELSAT system is
our company's primary business (and not a negligible investment as with
BT), and therefore, the practical consequences of direct access here in
the U.S. are not comparable to the U.K. situation at all.
Service Restrictions
Section 603(b) of S. 376 would prohibit INTELSAT and COMSAT from
providing direct-to-home satellite services, direct broadcast satellite
services, satellite digital audio radio services, and broadband
satellite communications services in the Ka-band. These are some of the
most promising new markets for the satellite industry, and many of our
competitors are already prospering in these markets.
As a general rule, efforts to exclude one firm from participating
in growth markets where that firm lacks market power are anti-consumer
and anti-competitive. In this instance, however, we believe that
Section 603 (b) is a significant improvement over the broad punitive
service restrictions contained in the House-passed bill of last year,
H.R. 1872. That bill provided that, during the transition to
privatization, COMSAT would be prohibited from providing many of its
existing services to U.S. consumers. H.R. 1872 defined those prohibited
services to include high-speed data transmission and Internet access.
COMSAT has already contracted with INTELSAT for capacity to provide
these services and is, in fact, actively providing them today. This
restriction, for example, would completely deprive consumers of
COMSAT's new Linkway 2000TM technology for Internet
applications, as described above.
The Administration squarely opposed the House bill's imposition of
service restrictions, finding that they are ``likely to reduce, not
increase, competition in the U.S. market for satellite
telecommunications services.'' In fact, in commenting on the service
restrictions that would be imposed by H.R. 1872, the Administration
noted that:
[T]he bill may effectively eliminate two important service
providers from the most rapidly growing markets for satellite
services--markets which may be served by only a small number of
firms, given the inherent structure of this industry (high
fixed costs and large economies of scale). The result: fewer
options and higher prices to U.S. consumers, including the
federal government. Although the bill includes some protections
if few alternative providers exist, they are unlikely to be
sufficient to ensure that American consumers are not harmed.
Executive Branch Leadership
S. 376 is superior to the House-passed bill because it properly
vests the leadership role for achieving a pro-competitive privatization
in the President of the United States. The President has the
Constitutional responsibility for treaty-making and for representing
the United States in international fora, and INTELSAT is a treaty-based
entity whose restructuring requires extensive ``give-and-take'' with
foreign governments.
The Executive Branch has consistently taken the lead role in
advocating and implementing U.S. policies concerning INTELSAT--from its
creation in the 1960s, to the treaty amendments in the 1970s, to the
instructional process, which the Executive Branch coordinates before
every INTELSAT Board meeting. The Executive Branch, through the
Antitrust Division of the Justice Department, also has taken an active
part in ensuring that the privatization of INTELSAT does not harm
competition. Thus, a strategy employing Presidential leadership for
handling the privatization negotiations and associated competition
issues is sensible and constitutionally sound. In fact, it has been
through the strong efforts of the Executive Branch that the successful
full privatization of Inmarsat was achieved, and the divestiture of New
Skies into a new private firm was realized.
Both S. 376 and the House-passed bill provide the FCC with
authority to condition or deny applications by a privatized INTELSAT to
provide satellite communications to and from the U.S. But again, only
S. 376 does so effectively because it clearly states that, in making
such a public interest determination, the FCC is bound by the
President's certification that entry by the privatized entity would not
distort competition in the U.S. market. This provision makes it clear
that the FCC should not be able to undermine the international
negotiating authority of the President, or to factor its views of the
negotiated results into post-privatization licensing decisions. The
Administration has also criticized the House-passed bill on the basis
of these issues. Specifically, it stated:
Provisions of [the House-passed bill] purport to require the
President to adopt specific positions on INTELSAT and Inmarsat
privatization that would make international negotiations
unwieldy and cumbersome, thus frustrating the President's
ability to conduct foreign policy effectively. The bill also
gives the FCC exclusive authority to determine if the outcome
of multilateral negotiations is suitable--a determination that
should be made by the FCC in consultation with the Executive
Branch.
Let us be absolutely clear on this point. COMSAT has no objections to
the maintenance of the FCC's traditional public interest role in the
regulation and licensing of satellite carriers doing business in the
U.S. COMSAT's concerns are over efforts to expand that role into an
area that normally is the preserve of the President of the United
States--the reformation of an international treaty organization.
Privileges and Immunities
Section 621, titled ``Elimination of Privileges and Immunities,''
provides that COMSAT shall not have any immunity in its role as the
U.S. Signatory to INTELSAT, except: (1) for those actions taken at the
direction of the U.S. Government; (2) for actions taken in fulfilling
obligations under the INTELSAT Operating Agreement; (3) for INTELSAT
Signatory activities which COMSAT does not support; and (4) in
accordance with any other exceptions made by the President of the
United States. Additionally, it provides that any liability of COMSAT
shall be limited to the portion of any judgment that corresponds to
COMSAT's percentage of responsibility. Finally, the elimination of
privileges and immunities by this section is prospective from the date
of enactment of the bill. With privatization, COMSAT's Signatory role
will end and all residual privileges and immunities will terminate.
COMSAT supports this removal of privileges and immunities. This
measure is fully responsive to those who maintain that COMSAT's
existing limited immunity as the U.S. Signatory somehow gives the
company an unfair advantage in the marketplace. As the courts have
consistently ruled, when COMSAT competes in the market with other
service providers, it has NO antitrust immunities. Moreover, when
COMSAT acts in its Signatory role within INTELSAT, three agencies of
the U.S. Government (State, Commerce and FCC) are sitting right there
with us, and possess the authority to instruct COMSAT as to how to
vote, or what position to take, on any issue. That is not a situation
conducive to anticompetitive conduct. Indeed, the enormous success of
our competitors belies the notion that COMSAT's limited immunity as the
U.S. Signatory translates into any market advantages whatsoever.
Nevertheless, COMSAT is prepared to relinquish this Signatory
immunity, subject to the reasonable safeguards enumerated in S. 376.
Obviously, COMSAT should not be held liable for following the
instructions of the U.S. Government at INTELSAT meetings. Nor would it
be fair to expose COMSAT to liability if INTELSAT takes some action
over the objections and opposing vote of COMSAT. We should only be held
responsible for our own volitional actions, and S. 376 eliminates any
possible doubts about that.
The draconian approach of the House-passed bill, H.R. 1872, which
does not contain comparable safeguards, is both unfair and unworkable.
For the reasons stated above, COMSAT supports the provisions of S. 376
clarifying that it is not immune from suit or legal process with
respect to its volitional, affirmative acts as the U.S. Signatory to
INTELSAT, pending privatization. This provision is rational and fully
consistent with the overall pro-competitive approach taken by S. 376.
Abrogation of Contracts
Section 622 of S. 376 expressly prohibits the nullification of
COMSAT's contracts that are in effect on the date of enactment of this
bill. COMSAT believes this provision is necessary and proper given the
history surrounding these contracts, as explained below.
Section 622 in S. 376 stands in stark contrast to the so-called
``fresh look'' provision of the House-passed bill, which would have the
U.S. Congress decide that COMSAT's customers should be free to walk
away from the business commitments they freely entered into with
COMSAT, all in exchange for significant COMSAT rate reductions. Based
on those contracts, COMSAT in turn made long term, non-cancelable
capacity commitments to INTELSAT to secure the lowest possible rates
for our customers (and which are reflected in the steadily declining
prices COMSAT charges under those contracts). If ``fresh look'' were
adopted, COMSAT would therefore be left bearing the cost of the
INTELSAT investment necessary to service those contracts. Under the
Fifth Amendment to the Constitution, Congress is prohibited from taking
private property without just compensation. To do so in the manner
proposed by the House bill would clearly constitute a ``taking'', and
expose the U.S. Treasury to significant damages claims.
The proponents of ``fresh look'' point to a handful of cases where
companies adjudicated to hold unlawful monopolies were required to let
other parties opt out of contracts that were being used to perpetuate
those monopolies. In this case, however, a federal court has expressly
found that COMSAT's long-term carrier contracts are not derived from an
unlawful monopoly or exercise of monopoly market power, as had been
alleged by PanAmSat. Specifically, in 1996, the U.S. District Court for
the Southern District of New York held:
[A]lthough the record does reflect that Comsat entered long-
term contracts with many common carriers, nothing in the record
suggests that Comsat secured any of the contracts by means of
any anticompetitive acts against PAS. On the contrary, the
record suggests that for their own reasons, the common carriers
elected to secure long-term deals with Comsat only after
considering and rejecting offers from PAS. (emphasis added)
The FCC reached the identical conclusion. When COMSAT petitioned
the FCC for non-dominant status in 1997, Hughes/PanAmSat again raised
the issue of COMSAT's long-term contracts, claiming they ``locked up''
the market and restricted competition. Hughes/PanAmSat and others urged
the Commission not to grant COMSAT non-dominant status without a
condition imposing ``fresh look''. The FCC disagreed, and it is worth
reading closely the reasoning behind this decision.
We agree with COMSAT for the reasons stated below. COMSAT's
long-term contracts do not impede COMSAT's customers from
switching service providers. It is true that AT&T and MCI have
entered into contracts with COMSAT that expire in 2003. The
record lacks evidence of any other long-term contracts between
COMSAT and its customers for switched voice service. COMSAT
estimates that the three contracts represent approximately 25
percent of the U.S. switched voice service market. Given the
growth rate in the switched voice service market, AT&T's and
MCI's long-term contracts are likely to represent an even
smaller share of this market today. Additionally, the contracts
only obligate AT&T and MCI to transmit part of their
international switched voice traffic using COMSAT. Based on our
review of these contracts, we conclude that the contracts
permit AT&T and MCI to use COMSAT's competitors for services.
Therefore, notwithstanding these long-term contracts, we
confirm the finding in our August 1996 Order that COMSAT's
switched voice customers are sophisticated customers possessing
significant bargaining power giving them the flexibility to
route a significant portion of their switched voice traffic to
their own transmission facilities or those of alternative
carriers as they choose (emphasis added).
In light of these findings, it would be unprecedented for Congress
to enact a statute mandating the abrogation of these very same
contracts. It would be tantamount to a Congressional determination that
COMSAT's long-term contracts are anticompetitive. However, unlike the
Courts or the FCC, Congress does not adjudicate disputes among private
parties as a matter of constitutional separation of powers. Thus, we
submit respectfully that any Congressional determination to simply
nullify these contracts by legislative act would amount to an
unconstitutional bill of attainder.
Application of ``fresh look'' in this case is unsupportable from a
policy perspective as well. COMSAT negotiated the subject long-term
contracts with the three largest long distance companies (i.e. AT&T,
MCI and Sprint) to carry international traffic using INTELSAT's
facilities. These contracts were designed to guarantee a steady stream
of traffic in the face of increased competition from other satellite
systems and fiber optic cables. In return for long-term traffic
commitments, COMSAT dropped its prices considerably. This is no
different than what happens every day in many commercial settings,
whether its lower rates for multi-year magazine subscriptions or season
tickets to sporting events. To be sure, these carriers themselves offer
their customers reduced tariff rates in exchange for longer service
commitments.
COMSAT's long-term carrier contracts, which are non-exclusive, were
renegotiated in 1993 and 1994, subsequently modified, and all at a time
when competing satellite systems were permitted to--and did--bid for
this traffic. Based on the long-term guarantee of traffic resulting
from COMSAT's carrier-contracts, COMSAT contracted with INTELSAT for
the capacity to handle that traffic and designed satellites to assure
the carrier traffic could be accommodated. COMSAT's obligations with
INTELSAT would remain in force, even if the U.S. carrier contracts that
formed the basis for the commitments we made to INTELSAT were struck
down by Congress. COMSAT's liability to INTELSAT currently exceeds $500
million over the life of those contracts, and the investments in
satellites built with capacity to accommodate the carriers would be
stranded. Under these circumstances, ``fresh look'' is completely
unjustified, and as noted above, would result in the U.S. government
being liable for substantial damages to COMSAT for taking our property
without just compensation.
Other Issues
While S. 376 is a fairly well-balanced bill, COMSAT does have
concerns with some of its provisions. First, we are concerned with the
requirement that if INTELSAT fails to privatize fully by January 1,
2002, the U.S. must withdraw as a party to the INTELSAT organization.
We believe that this is too extreme a sanction for INTELSAT's failure
to privatize fully by the stated deadline. It is key that the United
States maintain a leadership role in the pro-competitive privatization
of INTELSAT. To do so effectively, it must maintain its commitment and
active involvement throughout the entire process--even if that process
should be delayed along the way.
The withdrawal provision could actually have the perverse effect of
creating incentives for INTELSAT's satellite competitors to attempt to
find ways to delay privatization by raising frivolous--but time
consuming--issues along the way. Think about it. If the deadline is not
met, and COMSAT must withdraw from INTELSAT, what happens to all the
traffic now carried by COMSAT? It necessarily will have to be
reallocated to COMSAT's competitors, and/or flow North or South to
foreign Signatories in Canada and Mexico, respectively. U.S.
legislation to privatize INTELSAT should not include incentives to
penalize an American company for dilatory actions of foreign
Signatories.
Mandatory withdrawal at a time certain is also counterproductive.
If the Congress wants INTELSAT to privatize by a date certain, it is
necessary for U.S. negotiators to stay actively engaged in the process.
If the process slips and is not fully completed by January 1, 2002, and
the U.S. disengages, we only hurt ourselves and the U.S. consumers that
rely on the system, including national security users. COMSAT
respectfully submits that the prospect of denying U.S. retail market
access, and the restrictions on service expansion pending privatization
set forth in S. 376, are sufficient incentives to privatize without a
mandatory withdrawal provision.
COMSAT was also disappointed to observe that S. 376 does not
contain the regulatory parity provision contained in S. 2365 in the
105th Congress. It is imperative that, in a competitive marketplace,
all satellite system operators and satellite service providers compete
against each other based on a common set of rules. Contrary to claims
being made by some competitors, this would not necessarily mean more
regulation for them--just the same, equal framework applied to all. We
strongly urge that this issue be revisited during the debate on this
bill.
Finally, we have some concerns over the language used in Section
631, which is a new law intended to prevent the warehousing of orbital
slots and spectrum. COMSAT fully supports this concept. No satellite
provider should be able to reserve orbital slots with ``paper''
satellite filings or reserve spectrum not required for operation of
their systems. For example, Loral Orion has tied up an orbital slot for
14 years without any use, a problem recently brought to the FCC's
attention by another U.S. satellite competitor, Columbia
Communications. In contrast, INTELSAT has acted responsibly and de-
registered seven of its unused orbital slots in December, 1998.
Unfortunately, Section 631 is too vague to achieve its stated goal
of preventing warehousing. It states that operators must ``make
efficient and timely use'' of orbital slots and spectrum, and if such
``assurances cannot be provided'', satellite operators ``shall''
relinquish their rights to these resources. As a practical matter,
whether one makes ``efficient use'' of a slot or spectrum is far too
subjective given the penalty for non-compliance. Does efficient use
require comparisons to other providers? Does it favor operators with
earth stations employing digital compression technologies or that
employ collocation within orbital slots? Does it mean that companies
with older satellites in-orbit must relinquish a slot if another
company with newer satellites, or satellites having greater capacity,
seek the slot? Should inclined orbit satellites be required to be de-
orbited before their useful life has expired?
We respectfully submit that the vagueness of the language as
drafted in Section 631 will ultimately defeat its purpose. It needs to
be reworked to incorporate a more objective test. One approach might be
for the system operator to bear the burden of demonstrating that an
orbital slot or spectrum requirement is necessary and appropriate for
actual system operations and planning. The International
Telecommunication Union (``ITU'') is also in the midst of resolving
this issue with ``due diligence'' procedures that will prevent
warehousing. Measures being considered include a time limit on filings
and evidence of a launch service contract.
Conclusion
Mr. Chairman, I would like to thank the Subcommittee again for
holding this hearing today and for allowing COMSAT to present its views
on S. 376. We are confident that passage of this legislation will spur
the timely and pro-competitive privatization of INTELSAT, while
allowing the benefits of COMSAT's merger with Lockheed Martin to be
realized as quickly as possible. Above all, the public interest in a
deregulated and even more competitive international satellite industry
is most certainly achievable in the near term with this legislation.
[Attachments 1 to 4 are as follows:]
Attachment 1
DATE: February 26, 1999
For immediate Release
COMSAT LOWERS RATES ON THIN ROUTE SERVICES
--Telecommunications Carriers and Broadcasters
Receive 4% Rate Reduction and Guaranteed Rate Caps--
BETHESDA, Md.--COMSAT Corporation today announced it will reduce rates
on a majority of its thin route services provided over the INTELSAT
satellite system. These reductions, which take effect Wednesday, March
3, will benefit telecommunications carriers and broadcasters using
public switched telephony services on certain routes and occasional use
broadcast services.
COMSAT is reducing rates by 4 percent for public switched
telecommunications services on thin routes--countries served by COMSAT
with low volumes of telecommunications traffic to and from the United
States. The company will also cap prices for thin routes at or below
rates charged on heavily trafficked routes. In addition, COMSAT is
reducing rates by 4 percent for occasional use video services on all
routes.
``COMSAT is the only U.S. satellite service provider committed to
providing the same level of high quality service to both developed and
developing countries throughout the world,'' said John Mattingly,
president, COMSAT Satellite Services. ``These rate reductions guarantee
that our customers in developing countries will continue receiving the
same service and price benefits enjoyed by COMSAT's customers in
locations with higher service volumes.''
COMSAT Corporation (NYSE:CQ), headquartered in Bethesda, Md., is a
global provider of satellite services and digital networking services
and technology.
* * * * *
Attachment 2
Attachment 3
Attachment 4
Senator Burns. Thank you very much, Ms. Alewine.
We have been joined by Senator Breaux. Do you have an
opening statement? We have two more witnesses to hear from.
STATEMENT OF HON. JOHN B. BREAUX
U.S. SENATOR FROM LOUISIANA
Senator Breaux. No, thank you, Mr. Chairman.
Senator Burns. We have now Mr. John Sponyoe, who is CEO of
Lockheed Martin. Good afternoon, and thank you for coming
today.
Mr. Sponyoe. Good afternoon.
Senator Burns. By the way, I will tell you that your entire
statement will be made part of the record, all of you.
STATEMENT OF JOHN SPONYOE, CHIEF EXECUTIVE OFFICER, LOCKHEED
MARTIN GLOBAL TELECOMMUNICATIONS
Mr. Sponyoe. Mr. Chairman, I thank you and the other
members of the committee for the opportunity to present
Lockheed Martin's views on the ORBIT legislation.
Let me say at the outset that Lockheed Martin applauds and
supports this legislation. It is a well-reasoned, balanced and
effective blueprint for achieving critical national objectives.
This, in a market segment in which the U.S. always has
demonstrated leadership and which our country now has the
opportunity to strengthen its competitive stature.
ORBIT also will lead to another critical benefit--choices
for customers. We acknowledge that ORBIT represents the
enabling legislation for us to complete our combination with
COMSAT. But let me give you a much broader perspective on why
this combination is in the best interest of all parties. ORBIT
will allow Lockheed Martin to transition COMSAT into a viable,
dynamic presence in the world marketplace, a marketplace that
is expanding at a rate nothing short of amazing.
By marrying our technological, financial, entrepreneurial
assets with COMSAT's experience as a commercial service
provider and its ownership interest in a global satellite
fleet, we can provide new technologies and new services.
Equally important, we can deliver highly competitive services
and better value for the U.S. Government and commercial
customers. Together, we are fully confident this combination
will increase U.S. competitiveness and ultimately retain and
grow U.S. jobs.
Let me assure the committee, Lockheed Martin is not making
a significant investment in order to preserve the status quo.
Far from it. We are prepared to invest nearly $3 billion in
COMSAT, and become the U.S. INTELSAT signatory because we
believe our objectives and those of this committee and the
administration are identical. We share a belief in pro-
competitive legislation and the privatization of INTELSAT and
the global telecommunications marketplace. The INTELSAT in
which Lockheed Martin would acquire an equity position is on a
privatization path to become a viable commercial system,
operating in a manner indistinguishable from any other
commercial enterprise.
This is why we see our combination with COMSAT as a means
for achieving not only our own business objectives, but also
major U.S. policy objectives. We view your ORBIT legislation as
the right way to achieve these objectives, and we are keenly
interested in passage of this legislation early in this session
of Congress.
The INTELSAT privatization process will benefit directly
and immediately from this legislation, which will serve as a
guide and means for encouraging true, pro-competitive
privatization, using a clearly defined timetable. In our view,
this process should be completed no later than the year 2002,
and must, at a minimum, entail termination of INTELSAT's
intergovernmental status and its privileges and immunities,
such as tax exemption and antitrust immunity, and operate fully
subject to laws and regulations that apply to all other
commercial systems operators. We also support ORBIT's
requirement that the privatization process be reviewed by the
executive branch on the basis of relevant, competitive criteria
set forth in statute, with the assistance of the FCC.
Mr. Chairman, you and your committee are confronted with
two simple but vital choices: encourage the transition of
COMSAT toward becoming an integral element in the dynamic
future of commercial telecommunications, or allow COMSAT to
wither as a result of the tactics of its competitors.
A quick scan of a newspaper will tell you that the
telecommunications industry is undergoing a dramatic
consolidation. Every week, new mergers and global alliances
within our industry are redefining the marketplace. This
consolidation has, and will continue, to adversely affect
COMSAT's competitive position. COMSAT needs critical mass to
equitably compete in the global telecommunications marketplace.
COMSAT needs continued capital investment to expand its
international digital networking business. COMSAT needs freedom
from the constraints that forestall its ability to fully
commercialize its technological assets.
COMSAT's principal assets, combined with Lockheed Martin's
financial and other resources, will create a formidable new
American competitor in the global telecommunications
marketplace. Many of our competitors have greater financial
resources and global presence and are without similar statutory
ownership, governance restrictions or comparable and burdensome
regulatory oversight.
Our competitors, many with billions and billions of dollars
in annual revenues, versus COMSAT's $600 million, already have
extensive dedicated satellite systems in operation. That is why
I find it particularly ironic that our competitors voice
opposition to this merger by characterizing COMSAT as a
monopoly. Instead, this merger will be good news for conditions
in the U.S. and elsewhere. It will provide a level playing
field. It will provide customers with more choices among
suppliers. It will provide greater access to competitively
priced services.
Mr. Chairman, as you may know, I am relatively new to the
telecommunications business. Recently, I had the opportunity to
give a presentation of our business plan to a group of security
analysts in Phoenix. At the conclusion of my remarks, I was
followed on the panel by Mr. Fred Lanman, CEO of Hughes/
PanAmSat. In his opening statement, he half jokingly commented
on my presentation, saying that PanAmSat is already where
Lockheed Martin Global Telecommunications wants to be in 5
years.
Mr. Chairman, I would like to say all we are asking for
today is the opportunity to give Hughes/PanAmSat and our other
competitors a run for their money. We believe the ORBIT
legislation provides that opportunity.
Thank you for inviting me here today, and I look forward to
addressing any questions you may have. Thank you.
[The prepared statement of Mr. Sponyoe follows:]
Prepared Statement of John Sponyoe, Chief Executive Officer,
Lockheed Martin Global Telecommunications
Mr. Chairman, I would like to thank you and the other members of
the Committee for the opportunity to present Lockheed Martin's views on
the ORBIT legislation that you have introduced, and that your
colleagues, Chairman McCain and Senators Bryan, Brownback, Cleland, and
Dorgan have co-sponsored. Lockheed Martin commends the Subcommittee for
its willingness to undertake a timely and much-needed modernization of
the 1962 Satellite Act, with a view toward promoting the benefits of
privatization and increased competition in the global satellite
services marketplace. Lockheed Martin applauds and supports this
legislation--it is a well-reasoned, balanced and effective approach to
achieving critical US objectives in a marketplace in which the US
always has demonstrated leadership, and in which the US now has the
opportunity to do so again.
Mr. Chairman, Lockheed Martin has been a prominent player in the
satellite industry for as long as there has been an industry--we have
developed, built, and launched more satellites than any other company
in the world. But both the downturn in post-Cold War defense spending
and the explosive growth in global telecommunications and information
markets, have combined to create a strong impetus for LM to evolve even
more quickly into a new competitive provider of commercial satellite
and telecommunication services. This commercial objective is very
important for us and advances the Department of Defense's policy on
diversification of its contractor base. At the same time, our
government customers are themselves becoming increasingly reliant upon
commercial communications systems and services to meet national
security needs. Thus, the question for us is clearly not whether to
enter the commercial telecommunications services market, but how best
to do it?
Lockheed Martin began its commercial satellite services initiative
3\1/2\ years ago when we filed an FCC application for authorization to
build and operate Astrolink--a satellite system that will make cost-
efficient, advanced, broadband communications readily accessible to
consumers regardless of location--urban or rural, populated or under-
served remote areas. We also have moved quickly to pursue other
business opportunities with partners in the US and abroad (LMI, GE
Satco, AceS). Several months ago, our Corporation formed a separate
Global Telecommunications subsidiary for the specific purpose of
focusing our business efforts in the commercial telecom services area.
Soon thereafter we announced our intention to acquire Comsat
Corporation, a publicly-traded US company. The rationale for this
acquisition is very straightforward--to marry our own technological and
entrepreneurial assets with Comsat's 37 years of experience as a
provider of satellite services.
Mr. Chairman, you may be tempted to ask, given the challenges that
confront us, why Lockheed Martin has chosen to pursue a business plan
that requires an enabling act of Congress in addition to the normal
regulatory approvals. The answer is simple: the Lockheed Martin/COMSAT
combination is good for our two companies--and very good for market
competition more broadly. Within the next five years, we intend to be a
leading provider of worldwide telecommunications services via both
satellite and terrestrial infrastructures. As a consequence, our
support for satellite reform legislation is driven by two major
considerations: First, we are poised to make a $2.7 billion investment
in COMSAT. Let me assure the Committee that we are not pursuing this
investment for the purpose of preserving the status quo at COMSAT--far
from it. We want to buy COMSAT, transform it into a normal US
commercial business operation, and integrate it into LMGT to form a
strong new competitive entrant in the global telecommunications
services marketplace.
Second, the Comsat combination will also give us a significant
interest in INTELSAT. Mr. Chairman, I can assure you that, as a
businessman, we have no intention of buying COMSAT to acquire an 18%
share either in a ``mini-United Nations'' or of a diminishing asset.
With all due respect to my colleagues seated with me today, whatever
perceived advantages INTELSAT may or may not have in its current
incarnation, these advantages are certainly not reflected in its
steadily decreasing market share. By the end of this year, the GM/
Hughes/PAS satellite fleet will be far larger than INTELSAT, and far
better positioned to compete in commercial telecom growth markets.
Indeed, INTELSAT's current position in the US-international market vis-
a-vis other satellite and terrestrial competitors is so far from
anything that could be accurately termed ``dominant'' that I have to
wonder whether its current structure might not pose a greater threat to
itself than to its competitors. The INTELSAT Lockheed Martin wants to
be part of is one that can soon be a viable commercial system that
operates in a manner indistinguishable from any other commercial
system. That's what this committee and the Administration want as well
and are pursuing. This is why we see our combination with COMSAT as a
means for achieving not only our own business objectives, but major US
policy objectives as well.
We view your ORBIT bill as an ideal way to achieve our mutual
objectives and as a result, Lockheed Martin is keenly interested in the
passage of this legislation early in this session of Congress. We need
congressional action in order to acquire and reshape COMSAT, enabling
the emergence of a vibrant competitor. ORBIT legislation appropriately
removes outdated ownership caps and governance provisions upon
enactment, and similarly prohibits government intrusion into COMSAT's
competitively won contracts with its corporate customers.
Congress is faced with some fairly simple, but important, choices:
you can enhance competition by allowing COMSAT to be acquired and
repositioned so that it can move away from its static past and play a
key role in the dynamic future of the commercial satellite industry; or
you can diminish competition by allowing COMSAT to languish as a result
of the delaying tactics of its competitors--companies, such as Hughes,
a subsidiary of General Motors and itself a parent corporation to
several satellite systems including PanAmSat, DirecTV, and--if they
continue to consolidate-USSB and PrimeStar/Tempo. These companies dwarf
COMSAT in size [Note: Both GM and GE are larger companies than LMC],
have greater financial resources, considerable global presence, no
statutory ownership or governance restrictions, and no comparable and
burdensome regulatory oversight. Moreover, they and others already have
extensive, dedicated satellite systems in operation--COMSAT does not
and neither does Lockheed Martin. Thus, the Lockheed Martin/ COMSAT
combination--if allowed to proceed--can only enhance healthy
competition in the global marketplace: That may not be good news for
the established players, but--Mr. Chairman--it is good news for
consumers in this country and elsewhere. They will have more choices
among suppliers, and greater access to competitively-priced services,
which I know lies at the heart of your satellite reform legislative
efforts.
We also firmly believe that the INTELSAT privatization process can
benefit directly from legislation that defines the US view of what
constitutes a pro-competitive INTELSAT privatization. Congress also has
the opportunity to act quickly and send a firm but reasonable signal to
our the US's partners in INTELSAT about US determination to see the
organization thoroughly and quickly privatized. The privatization
process is already taking shape and Congress has a unique opportunity
to have a positive impact on it. For years, some critics have
maintained that INTELSAT's intergovernmental character gives it an
unfair advantage in the global marketplace. ORBIT recognizes this by
appropriately withholding further expansion of INTELSAT in the US
marketplace until it sheds its intergovernmental status through a pro-
competitive privatization--ORBIT uses expanded access to the US market
as the proverbial carrot to INTELSAT. At the same time, INTELSAT
management and some many Signatories understand that these very same
intergovernmental attributes are now a handicap (particularly in
getting Signatories to make the necessary capital investment
commitments) in a dynamic and increasingly competitive global market.
As a result, there is pressure from within and without INTELSAT to
evolve quickly from an inter-governmental treaty-based organization
into a true commercial company, one that is indistinguishable from
other competitors in the global satellite services market. I firmly
believe that the marketplace imperatives that compel this
transformation are well understood by INTELSAT management and its
leading Signatories. The vision of privatization set forth in the Orbit
legislation also is in the US interest in that it ensures continued
competition among global satellite systems--rather than market
dominance by any single system--not INTELSAT, GM/Hughes / PAS, GE,
Loral or anyone else. One of the most effective ways to promote long-
term facilities-based competition in the international satellite
telecommunications market is to put an end to the conditions that both
insulate and handicap INTELSAT by spurring the pro-competitive
privatization of INTELSAT.
Legislation, such as ORBIT, would serve as an effective, but
appropriate, means for encouraging a bona fide privatization.
Specifically, we support the bill's clearly defined timetable for
privatization: the process should be completed by no later than, but
preferably prior to, 2002. Speed is not the only goal, however.
Privatization must transform the this politicized and bureaucratic
organization in a pro-competitive manner. In Lockheed Martin's view,
pro-competitive privatization must entail both termination of
INTELSAT's intergovernmental status and its privileges and immunities,
such as tax exemption and anti-trust immunity, and operation in the
marketplace fully subject to the laws and regulations applicable to
other commercial satellite system operators. Why do we believe this?
Because only upon its fully fledged privatization will INTELSAT--and
its owners--be genuinely subjected to the positive discipline of the
marketplace. And this, we believe, will make the organization more
efficient and ultimately more profitable. INTELSAT would also be
required, as a condition of access to the US, to not enter into any
arrangement to secure exclusive access to any national telecom market.
The privatized post-INTELSAT entity would then be permitted, subject to
the same FCC regulatory approval as its competitors, to expand its
access to the US market in terms of customers and service offerings.
Lockheed Martin is committed to using its prospective role as an
INTELSAT stakeholder to vigorously support and advance the US
objectives for rapid and complete privatization of the organization.
Quite frankly, our business plans only entail a future relationship
with a fully privatized INTELSAT, and we will, by virtue of our $2.7
billion investment in COMSAT, probably be the most highly motivated
entity--in either the public or private sectors--to bring about such a
result as quickly and as thoroughly as possible.
However, all of us in this debate--private and public sector
participants--must carefully address the best way for the US Government
to exercise a constructive role in a multinational, intergovernmental
setting like INTELSAT. The US, as you fully know, played a key role in
the formation of INTELSAT, and it was in furtherance of important US
foreign policy goals that our Government worked to have so many
countries join in this US-led satellite communications initiative. As a
consequence of the US's historic role, the US needs to remain mindful
of the multilateral nature of INTELSAT privatization, and The US
Government must be especially attentive to the concerns of developing
countries that do not view their small telecom service requirements nor
those of their consumers as being of any great commercial interest to
INTELSAT's commercial competitors. INTELSAT's treaty commitment to
serving all countries, rich and poor alike, providing universal access
under a regime of non-discriminatory pricing--for both lucrative and
uneconomical routes--has led many of INTELSAT's less developed member
countries to rely on INTELSAT as not only a carrier of last resort but
as their only link to the world.
On the other hand, we also understand that there are long-standing
concerns about market access to foreign markets by US providers of
commercial satellite services. We share these concerns. With respect to
satellite market access issues linked to the investment of government-
owned telecom entities in INTELSAT, it is clear that, as a result of
market incentives and the persistent market opening efforts of the US
Government over many years, there is an irreversible trend toward
market liberalization and privatization around the world. In fact,
approximately 75% of INTELSAT is owned today by telecommunication
entities that are privatized to some degree or committed to
privatization. To the extent that satellite market access issues have
been linked to the role of INTELSAT itself, I would point out that as
of February 1997, of the 52 countries that made WTO market access
commitments for fixed satellite services, 50 of them are INTELSAT
member countries--demonstrating that there is nothing inherent about
INTELSAT's investment structure that impedes a country from opening its
market to competition. And, while the privatization process should
result unqualifiedly in an INTELSAT that does not have the ability to
compete unfairly with other commercial satellite operators, the
INTELSAT privatization process is not the appropriate mechanism for
addressing broader satellite service market access and trade concerns.
These concerns should be addressed through either the WTO or, perhaps
more effectively--through a focused US program of bilateral trade
negotiations with ``problem'' governments.
We also support the bill's requirement that the privatization
process be reviewed by the Executive Branch on the basis of relevant
criteria set forth in statute, and that a determination be made
concerning whether the privatization process either is or is not pro-
competitive. On the basis of this review, the FCC would then be able to
accept and process applications for or by the privatized INTELSAT in
the same way it deals with other satellite-related applications--
applying the FCC's current DISCO II standard and its traditional public
interest test. We believe that this is the appropriate ``division of
labor'' within the government--one that ensures that all issues raised
by the privatization process of an intergovernmental organization are
reviewed by the competent agencies, and that licensing related to the
privatized INTELSAT can move forward quickly. Mr. Chairman--your bill
is, appropriately, ``de-regulatory''--consistent with what the US quite
literally ``preaches'' to the rest of the world. Perhaps as a
relatively new player we take US rhetoric about the importance of
minimal regulation too seriously. But I have to admit that we have been
taken aback by other proposals in this area that would involve
elaborate rulemaking proceedings that would go on for years, and page
after page of detailed licensing requirements. An overly complicated
regulatory process--and the protracted delay that would result from the
procedural gamesmanship such a process would encourage--do not serve
the goals of either privatization or enhanced competition. It would
only serve to advantage INTELSAT's competitors. A fully privatized
INTELSAT is an important prerequisite to establishing a level
competitive playing field. Congress should not allow itself or this
legislation to be used by one set of competitors to mis-use the
regulatory process for the purpose of delaying or precluding the
privatized INTELSAT from being a full participant in the marketplace.
Nor should a properly privatized INTELSAT be subject to an ongoing,
special regulatory regime unique to it alone--or be made to bear
regulatory burdens to which no other industry player is subject.
Mr. Chairman--the ORBIT bill recognizes that enhanced competition
is not something that can be micro-managed into existence by
legislators or regulators, but must instead arise freely out of the
pursuit by commercial adversaries of customers under laws and
regulations that apply equally to each. ORBIT will promote just such a
competitive environment,--a level playing field--and the Lockheed
Martin-COMSAT transaction is exactly the type of market-driven
combination that is the logical and beneficial outcome of such an
environment. Should Congress enact legislation embodying these
principles this year, the winners will be the consumers of
international telecommunications services. Enactment of ORBIT
legislation will make those consumers--from populated urban centers to
remote and rural areas--the beneficiaries of enhanced competition,
technological innovation and the availability of advanced
communications services at competitive prices. ORBIT also will
strengthen the U.S. position in the global marketplace and preserve and
grow jobs in an important economic sector. Accordingly, Lockheed Martin
urges the Senate to help make this reform of the competitive
marketplace a reality by enacting ORBIT as expeditiously as possible.
Thank you for inviting me this morning and for listening to my
brief presentation. I look forward to addressing any questions that you
may have about Lockheed Martin's support for the ORBIT bill or matters
related to our proposed acquisition of COMSAT.
Senator Burns. Thank you very much.
We will hear from Mr. Conny Kullman, Director and CEO of
INTELSAT. Thank you for coming today.
STATEMENT OF CONNY KULLMAN, DIRECTOR GENERAL AND CHIEF
EXECUTIVE OFFICER, INTELSAT
Mr. Kullman. Good afternoon, Mr. Chairman and members of
the subcommittee. It is a pleasure for me to be here again. I
had the opportunity to be here in September on the same
subject, and it is a pleasure to be here again today.
This afternoon I would like to address three points. I will
begin by updating you on the significant progress that INTELSAT
has made toward further privatization and commercialization
since I appeared before you in September. Next I will identify
several factors which influenced how our members proceed with
this effort--the INTELSAT members. Finally, I will provide
INTELSAT's views on your bill, S. 376.
First, a word on our progress, Mr. Chairman. I am pleased
to report that on the 30th of November, last year, we
transferred one-quarter of our satellite assets to the new
company, New Skies Satellites. It is a private company, based
in the Netherlands. New Skies is now in business, competing
against INTELSAT and all the other satellite operators in the
business.
New Skies may seem modest in size, but its significance to
the privatization process is considerable. New Skies was the
first real test of whether INTELSAT signatories and parties
would be willing to start down the path toward privatization.
The answer was yes, by unanimous consent.
I can assure you, therefore, that creating New Skies was
just the first step. I was selected the INTELSAT Chief
Executive Officer on a platform that emphasized
commercialization and privatization for clear business reasons.
I take that mandate very seriously. However, we must bear in
mind that, as an organization with 143 member nations, INTELSAT
can achieve privatization only by consensus reached through
multilateral negotiations.
Indeed, I recently travelled four continents in an effort
to forge a consensus on privatization among our members. During
my trip, I met with around 50 party and signatory
representatives. I do not recommend that you travel that many
time zones in that short timeframe as I did, but I made this
trip because I believe strongly that privatization is necessary
for INTELSAT survival.
In today's global marketplace, INTELSAT faces intense
competition from other geostationary satellite systems, and
also from the emerging low-earth-orbit satellites, the LEO's,
and also from the massive build-out of the transoceanic cables.
Mr. Chairman, it is the global market forces that are driving
the privatization of INTELSAT, not the will of any one member
country, including the United States.
Let me now bring you completely up to date by reporting on
the Board of Governors meeting that was held last week here in
Washington. Restructuring and privatization not only led, but
dominated, the agenda. The Board instructed INTELSAT management
to immediately develop business plans for implementing the most
aggressive privatization options.
Mr. Chairman, this brings me to my second point. While the
U.S. advocates privatization, the U.S. regulatory and
legislative environment is making it difficult for us to
achieve a consensus. On the regulatory front, I am not here to
speak for New Skies, but it is clear that the INTELSAT members
view the regulatory treatment of New Skies as a barometer for
how a privatized INTELSAT will fare. What they see in the
United States is frankly quite disturbing. Let me elaborate.
Your FCC has permitted those U.S. earth stations, formerly
serviced by INTELSAT capacity, to connect with New Skies only
on a temporary basis, in the FCC's own words, ``at their own
risk.'' Further, the FCC has thus far refused to act on
applications filed by potential new customers of New Skies.
Such impediments, which could jeopardize the New Skies IPO, and
further diversity in ownership, send the wrong message to the
international community. Will the United States allow a
privatized INTELSAT to compete on a level playing field, or
will it erect roadblocks similar to the ones faced by New
Skies? Our members need to know as they decide the future of
the organization.
On the legislation front, it is essential that the FCC's
negative message not be echoed by the U.S. Congress. It would
be ironic and unfortunate if U.S. legislation intended to
foster INTELSAT privatization in fact did just the opposite. I
am confident, Mr. Chairman, that this is not the message you
intend to send.
Last, I would like to address the proposed legislation. I
want to emphasize that INTELSAT agrees with the U.S.
administration's positions set forth last September by
Ambassador McCann, and also today, that no legislation is
necessary to ensure that INTELSAT privatizes pro-competitively.
If Congress does choose to legislate, however, we endorse your
overall approach of recognizing that the United States should
work constructively with its international partners and with
INTELSAT.
Nevertheless, we do have concerns about several aspects of
S. 376 which differ significantly from the bill you introduced
last year, Mr. Chairman. For example, last year's bill
specified goals and objectives for the U.S. to advance within
the framework of INTELSAT agreements. In contrast, the present
bill prescribes precise criteria for privatization, and imposes
penalties if these criteria are not met.
Further, last year's bill did not limit INTELSAT's access
to the U.S. market. In contrast, the present bill would violate
U.S. international obligations by imposing an immediate freeze
on INTELSAT services.
Entirely separate from your proposed bill, Mr. Chairman, I
would like to identify three elements that our members would
find objectionable in any legislation passed by any country.
One, no national legislation should require INTELSAT to produce
more piecemeal spinoffs. Rather, further privatization must
encompass the entire organization. Breaking up INTELSAT might
be good for our competitors, but definitely not good for
competition and the consumers.
Two, no national legislation should bar INTELSAT's current
owners from holding an interest in any privatized entity.
Three, the international community is squarely opposed to
any legislation that would require one INTELSAT party to
retaliate against another party simply because they do not
share the same privatization agenda. I do recognize that your
bill would not do so, Mr. Chairman, but I mention these points
because the prior House bill had taken such an approach and
included these three elements.
In closing, I look forward to working with you as INTELSAT
takes further steps toward privatization. Thank you.
[The prepared statement of Mr. Kullman follows:]
Prepared Statement of Conny Kullman, Director General and Chief
Executive Officer, INTELSAT
Good afternoon Mr. Chairman, and Members of the Subcommittee. I am
Conny Kullman, Director General and CEO of the International
Telecommunications Satellite Organization--``INTELSAT.'' I appeared
before this Subcommittee last September to discuss the international
telecommunications market and the role of INTELSAT in that competitive
market. Today, four months into my tenure as Director General and CEO,
I appreciate this additional opportunity to update you on developments
in the international telecommunications market and INTELSAT's
privatization effort. I would also like to offer some observations on
the satellite reform legislation you are considering and highlight some
very real concerns our Members have about the U.S. treatment of a
future privatized INTELSAT. These concerns have been heightened by the
regulatory experience of New Skies Satellites.
Since I appeared before you last September, INTELSAT has taken
significant steps toward privatization. Specifically, the transfer to
the INTELSAT spin-off, New Skies Satellites N.V., of five operating
satellites and one under construction was completed last December. New
Skies is a totally separate Netherlands-based company. It is a new
competitor in the global satellite market, capable of competing with
INTELSAT and everyone else. While New Skies may seem modest in size,
its significance to the privatization process is considerable. New
Skies was the first real test of whether the Signatories and Parties
that comprise INTELSAT would be willing to start down the path towards
privatization. The answer was yes, by unanimous consent.
I can assure you, therefore, that creating New Skies was just the
first step. I was elected to the office of Director General on a
platform that emphasized commercialization and privatization, and I
take that mandate seriously. Privatization lead the agenda at the
INTELSAT Board of Governors meeting held last week in Washington.
Indeed, at that meeting, the Board agreed to examine a number of
specific options for operating INTELSAT as a private business
enterprise. But, in doing so, we must protect the interests of all our
current users, including those lifeline users in developing nations
that rely on INTELSAT as their sole connection to the rest of the
world. And we must bear in mind that, as a 143-member nation
organization, INTELSAT can achieve privatization only by consensus
forged from multilateral negotiation. I am committed to using our
multilateral consensus-building process to achieve the privatization of
INTELSAT as quickly as possible.
Mr. Chairman, with all due respect, it is global market forces that
compel the commercialization and privatization of INTELSAT, not the
will of any one Member, including the United States. In short,
privatization should go forward because it is necessary for INTELSAT's
survival in the increasingly competitive market that we face. But
change, however necessary, cannot be achieved by the fiat of a single
country, regardless of how well-intentioned that effort might be. As a
result, legislation by any one country that seeks to mandate change to
the INTELSAT organization will not facilitate change or accelerate the
process. To the contrary, it would likely be counterproductive. It
could cause the privatization efforts to be delayed or, worse,
derailed.
INTELSAT's Position in the Dynamic and Competitive Satellite Market
During my last appearance, I tried to dispel the myth promulgated
by our competitors that INTELSAT is a monolithic power that dominates
the international satellite market. Far from thwarting competition, we
welcome it. We want to fight our battles in the marketplace and not in
the regulatory arena or the halls of the U.S. Congress. Mr. Chairman,
recent events further underscore INTELSAT's non-dominant position:
INTELSAT is not a cartel: INTELSAT neither restricts the volume nor
controls the prices of services that Signatories sell to others, nor do
we prevent Signatories from investing in or using competing
international facilities. In fact, the recent actions of our New
Zealand Signatory, Telecom Corporation of New Zealand Ltd., bear this
out. Telecom New Zealand is the leading investor in the $1.2 billion
Southern Cross Cable, which will soon connect New Zealand with
Australia, Fiji, Hawaii, and the mainland United States. It will be the
first direct fiber optic link between the Pacific Rim and the United
States. No cartel would permit one of its members to spearhead a
venture which would pose such significant competition to the
organization.
INTELSAT is not a monopoly: The events of the past few months have
further discredited any notion that INTELSAT exerts monopoly power in
any market. For example, Hughes/PanAmSat (our leading competitor) told
you last September that INTELSAT should be disbanded by legislative
fiat because it possessed the largest single fleet of Western-built
commercial geostationary communications satellites. In reality, both
Hughes/PanAmSat and INTELSAT currently operate fleets consisting of 19
satellites. Later this year, however, when Hughes/PanAmSat launches the
Galaxy XI, it will own the world's largest commercial fleet. Indeed,
Hughes/PanAmSat is likely to hold its leading position for some time.
INTELSAT has no new launches scheduled before mid-2000, by which time
Hughes/PanAmSat plans to deploy even more new satellites. Already,
Hughes/PanAmSat boasts on its Web site to customers and investors that
its global system provides ``unparalleled coverage of the Americas,
Europe, Africa, the Middle East and Asia.''
INTELSAT Exercises No Market Power Even on Thin Routes: In
September, I emphasized that the FCC had recently found that INTELSAT
enjoys no market power on any major international communications route
to or from the United States. At that time, the FCC had not yet
examined the so-called ``thin routes,'' where no other satellite
carrier is willing to provide service. On these routes, INTELSAT's
prime objective of ensuring global interconnectivity obligates it to
provide communications services on a non-discriminatory basis. Our
leading competitor, Hughes/PanAmSat, had suggested that these thin
routes, which account for only 8% of INTELSAT's U.S. revenues, provide
INTELSAT with a lucrative monopoly. Just last month, however, the FCC
issued an order determining that our U.S. Signatory's uniform pricing
commitment--and the U.S. Signatory's commitment to lower its tariffs by
four percent annually until at least 2002--together prevent it from
exercising market power or distorting prices even on the thin routes.
Thus, the FCC has in effect concluded that INTELSAT enjoys no market
power on any route to or from the United States--major or minor.
INTELSAT Faces Increasing Competition From Fiber Optic Cables:
Since the last hearing, the TAT-14 transoceanic submarine cable
connecting the United States and Europe has nearly been completed. At a
cost of $1.5 billion, the TAT-14 will soon be able to carry more than
7.7 million simultaneous telephone calls when it enters onto service
next year. And it will be owned and used by a consortium of more than
50 telecommunications operators, many of them INTELSAT Signatories.
But TAT-14 was only the beginning of the global buildout in modern
fiber optic transoceanic submarine cables that will compete against
INTELSAT and other satellite carriers. Several submarine cable projects
even larger than TAT-14 have recently been launched. The billion dollar
FLAG Atlantic-1 Cable, will link the USA, the UK and France and will be
capable of carrying nearly fifteen million simultaneous telephone calls
on each of two transatlantic cables. When it is completed next year,
the FLAG Atlantic-1 will have the largest capacity of any submarine
cable system in the world. But it will not have the longest cable. That
honor will belong to the 29,000-kilometer Southern Cross Cable Network
currently under construction. With enough capacity to carry 1.5 million
simultaneous telephone calls, this $1.2 billion dollar cable will be
the first direct fiber optic link between the Pacific Rim and the
United States. And, as I have already noted, the lead investor in the
Southern Cross Cable is the INTELSAT Signatory for New Zealand.
The reign of the Flag Atlantic-1 and the Southern Cross as the
world's biggest and longest submarine cables may be short-lived. Even
as we speak, a ship called the Long Line is slowly crossing the Pacific
Ocean, en route from California to China, unspooling the $1.2-billion
China-U.S. Cable. This cable will be able to carry nearly 5 million
calls at once--or all the programming of all the U.S. cable television
networks. And the most ambitious undersea cable plan to date is
``Project Oxygen,'' an initiative to connect 78 countries and locations
with over 150,000 kilometers of undersea cable, at a projected cost of
$15 billion dollars. Earlier this month, the FCC authorized Project
Oxygen to land in the United States. By the time Project Oxygen is
completed in 2003, it promises to compete vigorously against INTELSAT
and other satellite and cable providers.
Historically, INTELSAT's international public switched network
operations have been an essential component of its business. The
proliferation of cable competition has steadily eroded INTELSAT's share
of this carriage. Indeed, INTELSAT has had to substantially reduce its
IPSN business projections. The disproportionate build-out of
transoceanic cables to and from the U.S. has significantly reduced
American usage of INTELSAT space segment. In contrast, other countries
with fewer cable options have become heavier users of INTELSAT space
segment and are understandably concerned about its future.
In sum, INTELSAT faces a world of competition that it never faced
before. This is in addition to the competition that INTELSAT has long
faced from other geostationary satellite systems, and from low earth
orbit satellites, or ``LEOs,'' that can provide many similar services.
The speed of technological innovation ensures that INTELSAT will
continue to face competition from a myriad of sources. I have attached
some charts that illustrate these trends.
Proposed Legislation
With this background, let me now comment on the Chairman's proposed
legislation.
First, we commend your bill for recognizing that the United States
must ``work constructively with its international partners, and with
INTELSAT itself.'' As a treaty-based organization, each of our member
nations has a voice in our operations, present and future.
We also understand that, given the dramatic technological changes
that have reshaped global satellite communications during the past
several decades, the United States and other countries may wish to
update their own national laws and regulations. Of course, this is the
sole prerogative of individual INTELSAT parties, and INTELSAT takes no
position on domestic aspects of the proposed legislation. Mr. Chairman,
the issue of direct access has been raised in your proposed
legislation. With all due respect to you and other Members of this
panel, I want to make it clear that this is an issue for the United
States and not for INTELSAT.
Turning to the international aspects of the legislation, INTELSAT
Members are well aware of the United States' strong policy favoring
privatization. This position has been vigorously advocated by both the
U.S. Party and its Signatory throughout the privatization process. And
INTELSAT understands that the Congress may wish to establish through
legislation the goals and objectives to be pursued by the U.S. Party
and Signatory. In this regard, Mr. Chairman, INTELSAT supported the
overall approach of the bill you introduced last year, which would have
established such goals and objectives. But it is neither necessary nor
helpful for the United States to unilaterally legislate mandates and
benchmarks for INTELSAT's privatization.
Indeed, in the highly competitive and dynamic marketplace that I
have described for you, there is no pressing need for legislation and
certainly no justification for employing punitive and anticompetitive
sanctions and restrictions ostensibly to hasten INTELSAT's
privatization. Such sanctions, though good for INTELSAT's competitors,
would not be good for competition or consumers.
For example, the bill requires that the United States withdraw from
INTELSAT if certain timetables are not met. If this ultimate sanction
were applied, INTELSAT would be forced to stop serving the U.S. market.
With one less provider and significantly less satellite capacity
available, both competition and space segment supply would be
diminished, and prices likely would increase. Though our competitors
would benefit, U.S. consumers and service providers would not.
Further, INTELSAT has serious reservations about the ``carrot and
stick'' approach employed throughout S. 376. In some instances, these
provisions would improperly restrict INTELSAT's treaty-based rights to
serve U.S. international markets. For example, Section 603(b) would in
effect freeze existing services provided via the INTELSAT system
pending privatization. This restriction would conflict with U.S.
obligations under the INTELSAT Agreement, which prohibit any Party from
restricting global connectivity via the INTELSAT system. Indeed, after
frank discussions between INTELSAT and the Argentine government,
Argentina recently lifted similar constraints on INTELSAT's ability to
operate to and from its territory.
The bill also prescribes various criteria that must be met by the
privatized INTELSAT in order to avoid sanctions under the bill. We do
not believe that the U.S. or any other INTELSAT member can or should
attempt to mandate the precise outcome of the privatization process by
restricting the ability of INTELSAT or its successors to compete.
Successful reform is achieved through vigorous negotiation, respect for
the framework already established by international agreement, and
broad-based consensus-building among Member nations--not through
restrictive mandates and unilateral sanctions. Indeed, the process of
privatization would be brought to a crashing halt were multiple Members
to lock themselves into rigid positions on outcome. For the past two
weeks, I have engaged in discussions with our member governments and
Signatories around the world on the future structure of INTELSAT. In
all parts of the globe--Africa, Asia or Europe--the Parties and
Signatories have all expressed their concerns that the U.S. could enact
punitive legislation that would seek to preempt the continuing process
of INTELSAT's privatization.
Finally, the bill specifies factors for the FCC to apply in
granting access to the U.S. market by New Skies that essentially codify
the FCC rule in DISCO II for IGO spin-offs. INTELSAT and other
interested parties (including the U.S. government) took great pains to
structure New Skies in a manner that is consistent with the
requirements of DISCO II. However, we believe it is inappropriate to
codify the DISCO II criteria only for IGO spin-offs. Indeed, locking
criteria into law forecloses necessary flexibility in the regulatory
process. For example, this provision would prevent the FCC from ever
leveling the playing field for IGO spin-offs with regard to market
entry.
We would also like to bring to your attention that the pro-
privatization message coming from the U.S. Congress and Administration
is being undercut by U.S. regulatory treatment of New Skies. Indeed,
our Parties' and Signatories' experience in the New Skies matter has
given them cause for concern with regard to further privatization. Let
me be more specific.
To date, twenty U.S. companies holding licenses to operate over 90
earth stations have applied to transfer their existing operating
authority from INTELSAT satellites to New Skies satellites. Rather than
granting the applications, however, your FCC has permitted these earth
stations to operate only on a temporary basis. These U.S. earth
stations are, in the words of the FCC, operating ``at their own risk.''
The agency's refusal to grant existing or new earth stations
permanent authority to communicate with New Skies' satellites has
created uncertainty. Because of the FCC's delay, New Skies cannot offer
any new services or obtain any new customers. At the same time, the FCC
has recently streamlined its application processes for the
international submarine cables that compete against satellite carriers.
Under the new procedures, companies seeking to land submarine cables in
the United States face essentially no regulatory delay.
These regulatory hurdles have created uncertainties for New Skies
and, if not resolved promptly, could jeopardize New Skies' Initial
Public Offering and its ability to further diversify its ownership. Yet
early diminution of the percentage of Signatory ownership of New Skies
was a major U.S. objective.
Such impediments hinder INTELSAT's privatization by sending the
wrong message to the international community. Mr. Chairman, as I have
found in my recent travels, such actions not only send conflicting
messages about the U.S. direction on privatization, but could also
influence the ultimate location and regulation of a privatized
INTELSAT.
Conclusion
In closing, INTELSAT urges this Committee to ensure that U.S. laws
and policies adhere to the following basic principles: (1) The United
States should respect its international commitments embodied in the
INTELSAT Agreements; (2) The United States should continue to encourage
privatization of INTELSAT through good faith negotiation and respect
for the interests of all Members and not by the unilateral actions of
one Member; and (3) the U.S. regulatory authority should treat
privatized entities in a fair and equitable manner that allows them to
compete on a level-playing field. We look forward to working with you
to achieve these ends.
Senator Burns. Thank you, Mr. Kullman. Senator Breaux, if
you want to offer an opening statement.
Senator Breaux. I will just make some comments when I ask
questions.
Senator Burns. Mr. Cuminale, we have heard quite a lot
about size and fishing today. How does the size of your
satellite fleet compare to those of your competitors, and will
the size of your fleet increase by the year 2000?
Mr. Cuminale. Sure. As a matter of fact, I am glad you
asked that question, because our fish is not so big. What we
have for you, Mr. Chairman, and I will leave it with you
today----
Senator Burns. It is not big enough for bragging rights?
Mr. Cuminale. Well, we brag plenty, but I think it has been
suggested that what PanAmSat is looking to do is actually
diminish INTELSAT so that we would end up bigger than any other
international satellite company in the world, and we have two
responses to that.
One is, I have got two charts here that I will give you
that demonstrate that both at the end of 1998 and at the end of
1999, when you take all of our satellites and compare them to
INTELSAT, and you compare all of our satellite capacity to all
of the capacity that INTELSAT has in 36 MHz equivalent
transponders, which is the way things get measured, we are
substantially less than and will be substantially less than
half the size of INTELSAT when you compare the satellites that
we use to compete with them in the international market.
The second chart I have for you, because we basically serve
two markets, U.S. domestic, which is a noninternational market,
which essentially involves services entirely within the United
States, and then international, on the U.S. domestic side, we
have basically compared for you the capacity that PanAmSat has
versus all of our other competitors, and essentially--actually,
not all our competitors. Telstar and GE, who are the two major
competitors in the U.S. domestic market.
Now, the fact is that you can say we are going to have 24
satellites, INTELSAT is going to have 24 satellites, but that
is not going to give you a sense of competition between the two
of us, because the satellites that we have devoted entirely to
domestic service do not compete with the INTELSAT satellites,
entirely different service, entirely different market, so I
will leave that with you.
But the answer is, are we a robust company with a great
business? Absolutely. Does Fred Lanman brag about it, yes, and
he should, but the reality is that the fleet that we have and
the fleet that we are going to have to compete with the
INTELSAT business does not come up to the size of INTELSAT and
will not and would not even if INTELSAT were cut into two
pieces, and so I will leave that for you today, Mr. Chairman.
We will make sure copies get circulated to the members.
Senator Burns. I guess we could also talk fleet size, but
how about capacity size?
Mr. Cuminale. When you look at capacity on 36 MHz
transponders at the end of 1999 we will have, in terms of
transponders in orbit internationally, 469 transponders in 36
MHz equivalents compared to 1,328 for INTELSAT, and that
excludes the new skies capacity of 296 transponders, so that
clearly they are looking at not quite a 3 to 1 advantage on the
U.S. side at the end of 2000 we are showing Telstar with 240,
GE with 410, and PanAmSat with 427, which makes PanAmSat the
leader, having a 39.6 share of the capacity in orbit, followed
right by GE with 38.1 percent and Telstar with 22.3 percent, so
that is how the markets break up for the two of us. As I say,
we have these charts here for you.
Senator Burns. Well, we thank you for that. Do you agree
that direct access not only provides carriers with access to
INTELSAT without having to go through COMSAT but also provides
INTELSAT with direct access to the largest and most lucrative
market in the world, and that is the U.S. market? Why would
INTELSAT agree to privatize if it already is given one of its
principal business objectives?
Mr. Cuminale. Another very good question, Mr. Chairman.
We agree that if it is unencumbered access, direct access
by INTELSAT or by customers to INTELSAT does equate to direct
access by INTELSAT to the U.S. market, which is the very thing
we are saying you should use in your bill.
The position we have developed, however, on direct access,
is simply this, that for the core services for which INTELSAT
was formed, INTELSAT should be allowed to deal directly with
the carriers. We have been persuaded that that will save the
consumers money and we have been persuaded that a couple of
other things may follow from it.
First, one of the conditions that we would place on that
direct access is that INTELSAT would waive its privileges and
immunities with respect to new contracts for those services, so
things beyond what is currently being provided today would
require some waiver, which as you know is a real hot button for
us and for all the competitors. We would like to see those go
away and, frankly, we would like to induce them to be waived.
Second, and probably more importantly, is the fact that if
the market access is limited in terms of the scope of services
for which direct access can be provided, you still have the big
hunk of the carrot to give away, and we think that that is the
part of the carrot that ought to be used to induce INTELSAT to
want to move forward into complete direct access into the U.S.
market, so what we see this limited direct access as providing
is a taste of the carrot for INTELSAT, a possibility for seeing
some waivers of privileges and immunities, and an immediate
reduction of costs for the consumer in the U.S.
Senator Burns. Senator Rockefeller.
Senator Rockefeller. Thank you, Mr. Chairman. This question
would be to both John Sponyoe and also Betty Alewine. You argue
that lifting the ownership cap on COMSAT will lead to more
competition in satellite services.
Now, occasionally I am capable of being parochial. When it
comes to satellite services and particularly broadband
satellite services, how does what you see in this benefit a
State, a rural State like West Virginia?
Mr. Sponyoe. As we had, I think this discussion in your
office sometime ago, we really feel that broadband is the wave
of the future. In fact, it is one of the things that is being
discussed as being withheld on the carrot and stick approach
with INTELSAT.
We believe that satellites do an excellent job of providing
the coverage you talked about earlier, and we look not only in
West Virginia but around the world in areas that are
underserved or unserved today. We believe without that
infrastructure that will not be there for years, if ever. We
can provide that service.
I think that as we put up--we are bidding on a thing called
Astrolink in the not too distant future. That will provide a
beam that goes all the way from Washington, D.C. and covers the
entire West Virginia State. We believe that would give you the
capability for small businesses and homeowners to provide that
coverage for high speed Internet connection E-commerce, et
cetera, within your State and other rural States within the
United States.
We cannot close, as you know, without this bill being
amended, and close in terms of purchase of COMSAT. We really
believe, if we take a look at where we are today and the need
to have their experience over the last 30-some years in this
business, that will give a very, very powerful, capable
competitor, and one which will get those capabilities out to
your State and many others.
Thank you.
Ms. Alewine. I would agree with all of that. I would just
like to add a couple of things. As I had mentioned in my oral
remarks at the beginning, when we are accused of having a
monopoly on the thin routes, that is--part of our mission,
Senator, is on a nondiscriminatory basis, to offer
nondiscriminatory pricing to the big and the little as well as
the developed and the developing.
We are used to providing universal service. One of the
things that the merger with Lockheed Martin and COMSAT does, we
are a very, very, very small company. We have $600 million a
year in revenue, and of that $600 million only $250 million of
it comes from the INTELSAT business.
In order for us to grow and serve our customers better, who
serve right now the State of West Virginia, we need critical
mass to thrive, to grow, to develop new service offerings, and
to serve our customers, so the merger in that regard is in the
public interest.
You know, I listened to Mr. Cuminale read that very
impressive list of big companies that are against this merger
and I ask myself, with our size, it is usually the small guy
that is coming and complaining about the large guy. In this
one, it is just the reverse. It is the large guys complaining
about the small guys. It is a little bit like Goliath trying to
kill David, and you know, right now we are precluded from
providing service ourselves domestically in the U.S.
If the Satellite Act is changed, if the 10-percent cap is
lifted, if Lockheed Martin and COMSAT are able to merge, it
will be a very vibrant and very strong competitor. The size of
the list that was read to you--that will add a competitor to
the playing field, will add another choice for the consumer,
and that has got to benefit your rural users, too, because then
we can do things together in terms of pricing that COMSAT
cannot do alone.
Thank you.
Senator Rockefeller. Mr. Chairman, later on this afternoon,
as I told Senator Breaux, I am going to be visited by the
chairman of Mobil Oil Corporation, which is fairly large, and
used to belong to something called Standard Oil, and what they
are proposing is to merge with Exxon, which as I recall, if I
think about it carefully, used to be a part of Standard Oil,
also.
Senator Burns. Are you thinking about writing a book?
[Laughter.]
Senator Rockefeller. No. I was just thinking about thanking
him for putting the old business back together again.
[Laughter.]
Senator Rockefeller. But it is very interesting, what
mergers are doing, and we will now go to basically three oil
companies, and that is an entirely nother subject.
But Mr. Cuminale, I will not ask it of you, but you have
talked about an interest in serving the so-called thin route
countries, and you may or may not face some barriers in doing
that. I would like you to discuss that, but I would also like
you to discuss whether or not, in offering that service, you
will do that at a price that these countries are able to
afford, and that global interconnectivity has to be a bottom
line to all of this.
To be able to do it is one thing. To be able to do it at a
price that they can afford is another. How do you answer?
Mr. Cuminale. First, in terms of our willingness to provide
service in the thin route countries, I think we have said on
the record more than once, and I think it goes back all the way
to Fred Lanman, that we will provide service in any country in
any part of the world where we physically can, and I think we
have demonstrated a commitment to doing that in terms of trying
to obtain licensing in virtually any country that will let us
do it to provide services.
I will tell you that we went to an extreme effort to be
allowed to provide domestic service in the country of Pakistan
when they opened up their market for domestic services, even
though they indicated that if they ever launched their own
satellite they would want to be able to kick us out.
In terms of pricing, the thing that I think is most
important to understand about satellites and is critical about
competition is that there is no additional cost for us to
provide a circuit to Zimbabwe over the cost of providing a
circuit into New York City. It is exactly the same cost because
of the nature of the satellite and the nature of its geographic
coverage.
We have built satellites that have whole beams over parts
of the world that we still cannot get access to for vast
numbers of services, but we have done it on the hope of being
able to provide those services and to recover our cost with,
obviously a profit.
Examples of that are most recently Australia. We had an
Australian beam on our PASS-4 satellite that we knew we could
not use when we launched it back in 1995. We were not allowed
to use it until 1998, and we still think it was a smart move
for us to build it. In terms of whether we can provide those
services at competitive rates, all I can tell you is that when
we are allowed market access, and when we offer our product and
services, those products and services get taken up, and they
get taken up because they are competitive and they do provide a
quality service.
We believe in the power of competition, always have, and we
believe that if we are afforded the opportunity to provide
service we can do it and will do it at effective rates.
Senator Rockefeller. So you are saying that the satellite
service provides no price differentiation in terms of the area
that it covers, but then you indicate that if you were allowed
to provide access, and that was the first part of my question.
Mr. Cuminale. That is the nub of the issue, Senator, of
this bill, which is that there are large parts of the world
where INTELSAT really is the only company that can provide
services.
I had one of our sales organizations just last week come to
me and tell me they wanted to do a VSAT system in 15 countries.
It happened to be covering a market that we are pretty good at.
It is Latin America. The amount of time, and it was a 5 MHz
circuit, which in the world of satellites represents--well, of
a 36 MHz transponder, you can do the math, it represents less
than a quarter, less than a sixth.
We loaded up all of our regulatory people and went out and
got the licensing necessary to do the first six countries and
we are committed to doing I think another 11 countries, but
that is the kind of effort we have to do to be able to provide
that service.
I will tell you that INTELSAT could provide that service
tomorrow without a blink, and they make a real point of that in
the marketplace, so that for us to provide a relatively simple
circuit to a customer that had a need in 17 countries, we are
going to have to jump through all sorts of regulatory hoops to
get there, and that is really the issue here.
Senator Rockefeller. Maybe I am showing my ignorance here,
but you are saying that, I mean, a satellite, when you beam
something up, and then it comes down over a broad area, that is
a completed transaction insofar as the beaming down begins.
You are either suggesting one of two things. One is that
your satellite beamed down is blocked, is denied access to
whatever Latin American countries, or you are suggesting that
the FCC says that you have the satellite up there and that then
the beam is able to be beamed down but they are not letting you
do it, and I do not understand the technological answer to
either of those questions.
Mr. Cuminale. A very good question, Senator. Let me
explain. PanAmSat's business, if you look at it, is almost 80
percent video, which if you think about it, we beam up a video
signal and it rains down in the footprint of the satellite. For
the most part, all around the world receive only television,
TVRO, TV receive only is allowed. That service can be provided
in virtually any country in the world, and it is one of the
reasons why it is 80 percent of our business.
The communications services that are so integral to
developing our business and to really competing are services
that require not only the uplink and the downlink and the in-
country, but also the ability to uplink the signal from that
country to our satellite and downlink it back to the U.S. or
wherever.
The uplinking activity is the activity----
Senator Rockefeller. That is where you get stopped.
Mr. Cuminale. Yes, and that is the problem, so when you
hear us say that we cannot do VSAT services, and VSAT stands
for very small aperture terminal, but what it is, it is a
network service. If you look at your mobile station, since you
are going to be seeing mobile later on top of the station, you
see that satellite dish. What is happening with that dish is,
they are receiving information from corporate headquarters, and
they are transmitting information back on sales.
That uplinking and downlinking, that kind of network has a
higher regulatory hurdle, and it is that kind of business from
which we have been precluded in vast areas of the world.
Senator Rockefeller. Mr. Kullman, how would you respond to
that, sir?
Mr. Kullman. There is a couple of statements Mr. Cuminale
has done that I would like to address, starting at the end with
the market access. We have a principle that is called matching,
so if a certain use or a certain customer wants to set up in 15
markets we have to go out and work with those 15 countries to
get their matching to that service.
If they do not agree to that service, they will not match,
and we cannot provide the service, so in many cases we face
similar obstacles to set up a service of this nature, and
taking South America as an example we fought for 1\1/2\ years
to get international access to Argentina in Ku band services.
They stopped us from doing those services in that country, and
so these types of difficulties are really not only our
competition's, they are also our problems in a number of
situations.
The second issue I wanted to address, and here I will
probably shock you, but I will agree with Mr. Cuminale that in
terms of rural services we provide a lot of services today to
developing countries, to remote areas of countries, domestic
services for those countries, and we do not differentiate that
cost.
That is one of the principles we have, equal pricing for
equal services, and we do not subsidize these services, we run
them the same profits coming out of serving a remote area as an
urban areas, and that is the beauty of the satellite systems.
You get these coverages really for free.
The cable operators, the terrestrial operators, they would
have to pull cables to each of these points, and there fore
they would incur extra cost, but for us it is really a good
market to be in. It is a type of telecommunications business
where satellites function really, really well.
The last issue I wanted to address is the size of PanAmSat
versus the size of us. Mr. Cuminale omitted to tell you that he
has also a very attractive satellite fleet serving the U.S.
market, a market that we today cannot address for domestic
services, and he said he has 469 transponders, or 36 MHz units
versus our 1,328, if I remember the numbers right. That also
gives me another reflection.
Today, PanAmSat, more than 50 percent of their satellites
are for the international market, and so just scaling these
numbers would mean that he would be on the order of 9, perhaps
1,000 units in total for his services. He will surpass us in
revenue for this year. We have 1,328. He has roughly 1,036 MHz
units. Our revenues are about the same, so that would give you
an indication of who has the lower prices and who sells at the
best prices to the consumers.
So I think that numbers have to be correct, and it is
extremely inappropriate to exclude the U.S. domestic market
segment from the numbers that PanAmSat is quoting. If you
started to do that, we should also strip out everything we do
that has to do with domestic services. Many of the smaller
countries around the world, and also quite some substantial
countries, use the INTELSAT capacity also to serve the domestic
markets.
So I think the most fair comparison is to look at the
overall number of satellites, look at the overall capacity, and
the overall revenues for these companies, and when you do that
you will find that they have the same number of satellites as
we have today. Their revenues, according to their own
announcement, will surpass us this year.
If we look to the year 2001, and using the Wall Street data
from DLJ, PanAmSat will have revenue of around $1.8 billion,
and 24 satellites. INTELSAT, with the projections we have in
place right now, will be around $1.04 billion with 22
satellites, and so these companies are really starting to be in
the same size today, and you can also draw your own conclusion
from those numbers when it comes to the pricing of the
services.
I also want to take the opportunity to correct something I
said. I forgot a little important word in my presentation, the
word not. My staff in the back reminded me that I might have
jumped that one, and so I wanted to again restate what I
intended to say about breaking up INTELSAT, and that is that
breaking up INTELSAT may be good for our competitors, but
definitely not good for competition.
Mr. Cuminale. I liked it better before. [Laughter.]
Ms. Alewine. Mr. Chairman, may I just add something,
please?
Senator Rockefeller. Actually, I had a question that I was
going to give Mr. Cuminale a chance.
Mr. Cuminale. If I may, I will be very, very brief. I think
in terms of revenues--Conny, I am sorry to hear you had such a
bad year, but as I recall, last year, 1997, INTELSAT did $900
million in revenue, and I know this year--I have not seen your
numbers for this year, but I know our numbers are more like 780
for 1998, which means you had a real bad year in 1998, because
you do surpass us.
The other thing I would like to point out to you is,
remember that PanAmSat sells to the end user. INTELSAT sells to
the signatory who sells to the end user and there is indeed a
markup there of some sort, and we can argue about how much of
it goes to the cost of the service provider and how much does
not, but if you want to consider INTELSAT's revenue, I am using
1997's revenue, because that is the only number I have, but it
was around $1 billion.
If you figure that the customer that receives the service
of INTELSAT, the end customer pays roughly the same markup for
all the capacity that COMSAT charges overall, and I am not
saying it is all profit, I am just trying to get you to a gross
number, that gets you to about $1.6 billion in terms of total
revenue from end consumers for satellite capacity. Ours is 750,
so keep that in mind.
The other thing I just want to point out is, I did mention
our domestic fleet, but when you talk about competition you
have to talk about assets that you put in competition with one
another. The fact is that I also mentioned to you we provide
domestic services in Pakistan. Our international capacity is
used for both international services and domestic services
abroad. We use it for anything we can, and we think all of our
international capacity is at competition with INTELSAT, but to
suggest that our domestic capacity competes with them, well, it
clearly does talk about our financial strength, and I will not
argue that issue.
I agree with Mr. Kullman, we are a very strong company, and
we have about $3/4 billion in revenues, but I will argue that
we do not compete with him using those assets, and there are
other companies abroad that are like that also. Astra, for
example, is purely domestic in Europe. We do not consider them
a competitor of ours. We do not do that business, and we are
not competitors with them, and I think it is very important
that when you do look at numbers you parse them in a way that
makes some sense, and I argue our way does.
Senator Burns. Did you want to comment? I am going to move
to Senator Breaux.
Ms. Alewine. I sure would like to, and I will be as brief
as I can, but this is in response to a couple of Senator
Rockefeller's questions. The first one was about--and I think
Mr. Cuminale has left the committee with perhaps a wrong
impression that in the countries where they cannot offer
service right now, that it is INTELSAT that would either be
able to approve that or is standing in their way.
I would agree with Mr. Cuminale on one thing. We
wholeheartedly support open and free competition, but in those
countries that is a Government issue, and we would encourage
our Government, our party to work on a bilateral basis to help
open those markets for any and all comers. That is not an
INTELSAT responsibility. It is not INTELSAT that is standing in
the way in those markets.
I thank you, Mr. Chairman. I just wanted to clear that up.
The only other thing I wanted to say, when Mr. Cuminale was
talking transponders, you can throw numbers around fairly
freely, but what I would rather do is simply quote PanAmSat's
new CEO, Mr. Kahn, who was not able to be here. I was looking
forward to meeting him, but he was in New York on Monday of
this week, and he did address the Morgan Stanley
Telecommunications Conference, and these are direct quotes from
the new CEO of PanAmSat.
``We are the market leader in both video and
telecommunications. 70 percent of U.S. VSAT's communicate over
PanAmSat. We reach 98 percent of the world's population with 19
satellites.''
Now, this goes to the transponder issue. ``By mid-2000 we
expect to have 16 percent of the market based on transponders,
with INTELSAT at 13 percent.''
When Mr. Kahn was asked why he joined PanAmSat and came
into this position, he said because ``Hughes PanAmSat is the
industry leader, with phenomenal space segment access.''
Thank you.
Mr. Kullman. Mr. Chairman, I also want to----
Senator Burns. Let's hold the phone here. I do not know,
you can take a nap if you like. [Laughter.]
Mr. Sponyoe. Just very briefly, I do not want to be left
out on this. I do not know who originally coined the term
voodoo economics, but I have heard it for the first time here,
first-hand. PanAmSat is a private corporation making a
determination where they want to make their investment. The
fact that they are choosing to invest in satellites over the
U.S. is their choice. I agree 100 percent with INTELSAT in
terms of their valuation.
Second, as we speak today, I have people in the
Philippines, I have people in Thailand, I have people in India,
all struggling to get licenses that have nothing to do
whatsoever with INTELSAT. I would suggest to you that is what
the market is out there, and we all have to live with it.
Thank you.
Mr. Kullman. Fifteen seconds, please, just to comment on
the numbers. 1997 is not a good comparison. We should compare
numbers in 1999, after we have spun off the satellites to New
Skies, and this year our run rate in terms of revenue will be
equal.
Thank you, Mr. Chairman.
Senator Burns. Senator Breaux.
Senator Breaux. Well, than how, Mr. Chairman. Let me
congratulate you for your efforts in trying to look at
telecommunications beyond just the old arguments that this
committee has always dealt in about long distance versus local
service, and the things that have been in the past.
I mean, this is really looking at the future of
telecommunications and what we need to be talking about, and
the issues like the use of the international spectrum and
allocation interference issues, and proper privatizing of
INTELSAT is also part of that.
I mean, this is where the next generation and of
congressional efforts I think is going to be headed, and I
congratulate you for it and the effort that you have put into
putting together a bill that regulates this.
After listening to all of this, you almost make Medicare
sound simple. [Laughter.]
Senator Breaux. That is saying an awful lot, I want you to
know, because this is certainly something that after it
eventually gets out of this committee, I mean, it is just a
huge amount of education that is going to be necessary for most
Members of Congress who have almost--who are limited to no idea
of all of the conflicts, and the things we are trying to do
here.
We are basically trying to establish a framework that makes
sense for private competition in this business, and it has been
very, very difficult, but I think the chairman is moving in the
right direction, and I hope to be able to join him in the
package when it comes out of this committee.
Let me ask Jim Cuminale, one of the concerns that I have is
that the bill does not seem to recognize the fact that when you
had a private company that is competing against other private
companies in this business and is going to be sort of sitting
at the table making some of the decisions about how
privatization is to occur, that it seems like the bill in this
area is fairly vague about protections for everybody.
When COMSAT, or Lockheed acquires COMSAT, and then we are
going to be talking about privatization of INTELSAT, I mean, is
that handled properly as far as the bill is concerned, and then
I will get Mr. Sponyoe to comment too.
Mr. Cuminale. Thank you, Senator. I think we have gone on
the record as saying that it is not--insofar as the ability of
that company, privatized, to enter the U.S. market is not as
restricted as it could be, and the criteria for determining
whether it has met the standard, as it were, is also not as
sharp as it could be.
I heard earlier criticism about the way New Skies has been
treated in the U.S. market and, frankly, we filed with respect
to New Skies entry, but we proposed that New Skies be allowed
to enter until it can prove that it has met the criteria,
because it is a brand new company. It did inherit this
business, and we did not want to see service get shut off, but
the fact of the matter is, even the limited criteria that the
FCC adopted in DISCO-2 are not met by New Skies at this time,
and they have been afforded opportunity to do business in the
U.S.
Senator Breaux. My point is, on the chairman's bill. Is it
adequate, the way it is set up, or can it be improved?
Mr. Cuminale. We think it can be improved.
Senator Breaux. How?
Mr. Cuminale. We have submitted a markup, Senator, we would
be happy to share with you, but fundamentally what we think is
that the criteria for determining whether the private company
is pro-competitive is somewhat soft, and that they are
suggestive as opposed to required.
Senator Breaux. Mr. Sponyoe, do you agree with that?
Mr. Sponyoe. No. As a matter of fact, I think it is a very
balanced bill, and I submit my rationale with the fact that
Conny calls me about every 3 days complaining about the bill. I
do not think we ought to give INTELSAT a free ride in the
United States. They have immunities today, as I mentioned
earlier, to antitrust, to taxation, and so I think there ought
to be a carrot and stick. I think you have a corporation called
COMSAT today paying taxes.
As we have talked about before, I do not think we have been
able to develop a good balance, as opposed to Mr. Cuminale's
suggestion that we put some kind of a noose around INTELSAT's
neck, and so I support it very strongly.
Senator Breaux. What about the objection that it is fairly
vague?
Mr. Sponyoe. Well, if it is fairly vague, I would like to
understand where it is fairly vague. I think there has been a
lot of time spent on it. We spent a lot of time on it. We
believe it is very specific in the areas of importance where it
spells out the requirements in terms of the metrics that are
going to be utilized in order to make a determination of
whether or not they truly have met those objectives of
privatization.
Senator Breaux. Well, I clearly do not understand, and Mr.
Cuminale, what is your response to that?
Mr. Cuminale. Well, obviously we have a disagreement about
how specific the criteria should be.
I think the other thing we feel very strongly about is that
the FCC ought to have a real voice in the execution of the bill
and particularly in the granting of market access, which is
clearly not the case under the current bill, and I want to
point out that while we make that recommendation the FCC has
not always ruled in our favor on these issues. We do, however,
believe that the process they go through, and the rules that
they apply, assure fairness, and we think that they should have
a very prominent role in the bill.
Senator Breaux. It is always very, very difficult. We have
got multimillion-dollar industries. We try and establish a
level playing field. I mean, I am a big believer in the
marketplace, but in this area we have to have some guidelines
and parameters. The bill attempts to do that, and my main goal
is just doing it right.
We should not be in the business of picking winners and
losers. That is something the marketplace should do. But our
job is to try and establish a level playing field, and I want
to work with the chairman to help do that, and hope everybody
succeeds.
Thank you.
Senator Burns. Thank you very much, Senator Breaux.
Senator Gorton.
STATEMENT OF HON. SLADE GORTON,
U.S. SENATOR FROM WASHINGTON
Senator Gorton. Mr. Chairman, I think Senator Breaux has
hit the nail right on the head. We are here in an attempt to
come up with an appropriate public policy with a goal toward
seeing to it that there is vigorous competition in this field,
and that the users interests be met to the maximum possible
extent. It leads me to suggest that Mr. Chairman, that either
we ought to have another hearing, or some less formal way in
listening to users, the customers, and seeing what they think
is likely to promote competition and a valid pricing system to
the maximum possible extent.
It seems that we have three different points of view
presented here today, two of which at least enthusiastically
say that their position best advances competition, and the
other, the present INTELSAT gives lip service to it, but I am
not certain whether it really believes in it or not.
Senator Breaux said something else that was very important,
and that I am afraid may have been a shortcoming in some of the
things this committee has done.
We here on this committee should try to work this out in a
way that has broad agreement among members of this committee,
because these issues are so technical, and if we do something
on a divided basis here, we almost guarantee that we are not
going to be successful overall on the floor, and so it is
important for us to try to work this out.
We have to ask ourselves this question, Mr. Chairman. Who
benefits if we do nothing, who benefits if we do not get this
job done at all, and then we should look, I think, somewhat
askance at the views of whatever interest that is.
I would be a lot more comfortable, I tell you, if the two
real competitors here have been more or less at each other's--
PanAmSat and COMSAT were able to reach a greater degree of
accommodation than they have so far, because I rather suspect
that the two of them are not going to be benefited by doing
nothing in any particular fashion.
But if they cannot, we should, and we should do it in a way
that binds together most of the members of this committee with
a degree of confidence that will allow us to pass a bill and
move on to the next generation in a field in which our
predecessors 35 years ago did a magnificent job, given what
they had in front of them at that time, but the technology is
so different now that we need to do the job over again.
I am told that PanAmSat says that it has worked with a
number of other people, including one of my constituents, with
some, either a different bill or alternatives to this bill. We
have not seen it. If they want it considered, we had better see
it pretty soon, it seems to me, but even more important than
that, I will say very bluntly, is that the two of you sitting
in the middle of the table and your allies, see whether or not
you cannot settle some of your differences and give the
Congress a real opportunity to move forward.
Senator Burns. Senator Gorton, I think you bring a good
point up on users, and to hear something from users, and we are
prepared to have another hearing with regard to that. I think
you make a good suggestion, and we had talked about this, and I
think that is a good suggestion to hear from the users, and we
will do that rather quickly before we go to a markup.
I want to ask one more question. Did you want to respond?
Mr. Sponyoe. Mr. Chairman, if I might, to the Senator's
question regarding who is harmed if we do not pass the bill. We
and Lockheed Martin, of course, cannot close the transaction
without the bill being adopted, and I think that would be a
terrible tragedy not to be able to do this today, because I
think COMSAT, as I said in my earlier remarks, is not going to
be able to compete on a level playing field in the environment
that exists to day in the global telecommunications
marketplace.
Senator Gorton. Well, that gives you a heck of an incentive
to see whether or not you cannot reach a consensus.
Mr. Sponyoe. It certainly does, sir.
Senator Burns. I want to ask one other question, because
where we still--the ongoing dialog, Ms. Alewine, is in the area
of Fresh Look, and I would just like for the record your
opinion on Fresh Look, and would have other comments from other
members of the panel with regard to that particular issue.
Ms. Alewine. Thank you, Mr. Chairman, and I would welcome
the opportunity to give the committee my comment on Fresh Look.
There is no requirement for Fresh Look. The FCC and the
U.S. courts have looked at that very issue and have each
individually ruled on that. Those contracts were won
competitively. They have been updated, amended. The people who
signed them have considered PanAmSat, and when they signed on
with us and the amendments to the contract and there is
absolutely no reason for fresh look.
The state of play of competition in this country is so
significant, which means that the playing field is so very
competitive now, that if we do not offer competitive prices and
services, our customers have so many options.
If I might take just 10 seconds of the committee's time, 30
seconds maybe, I do not think I can do it in 10, one of the
things in preparing for today's hearing was, we hear so many
times, and that is why I addressed it in my oral remarks, that
we are a monopoly.
If I could, because a picture communicates--you know, it is
worth 1,000 words, and I know I do not have 1,000 words left in
terms of time, but if I could be allowed to show the committee
what I mean by the state of play now in international
competition,
Mr. Chairman, with your permission, and I apologize to the
people sitting behind me. We only have one copy of this. This
was the state of play in 1984.
What you see below the map of the United States are 12
INTELSAT satellites, and 15 years ago, ladies and gentlemen,
that is the picture of a monopoly. Almost all of the
communications that were going in and out of the United States
internationally were going over one of those 12 INTELSAT
satellites or copper cables.
Let us fast forward to year end, 1998. That is the picture
of a full field of competition. What you have in blue are the
INTELSAT satellites, 12 of them. What you have in pink are the
Hughes PanAmSat satellites. What you have in yellow are the
other 41 satellites providing international communications in
and out of the United States. Below the line in red are the
ones that are planned to be launched and operational by the
year 2000, and that is only half of the story.
At the top on the map are all of the fiber optic cables
that now offer service, voice, video, and data in and out of
the United States.
That is a fully competitive playing field. What has been
the impact on COMSAT? Why do we need critical mass, and why do
we need to partner with another company where we can thrive and
survive and offer services to the future, and to our customers
today?
In 1984, no doubt about it, that is the picture of a
monopoly. We had 99 percent of the video business. We had 70
percent of the voice business, the market share for
international coming in and out of this country.
In 1998, 15 years later, we have 35 percent of the video
business, and that is including New Skies, the New Skies number
would have to separated out of that, and we have 20 percent of
the voice and data business.
Who would be hurt if INTELSAT is not privatized, if this
merger is not allowed to go forward? The U.S. consumer and the
state of play for competition, because it would take another
competitor off the field.
Thank you.
Mr. Sponyoe. I will start off by saying I never met a
customer who does not want a better price, so I guess with that
premise it comes down to a question of fairness.
Is Betty right in suggesting that these contracts were
awarded in a competitive environment and we should be required
to prove that?
The one thing I find slightly hypocritical on the part of
the customers, though, is during the dialog on Fresh Look it
was suggested that the bill also include making certain that
those savings go back to the end customer. The suggestion was
that that is better left to the regulators as opposed to the
legislators.
Thank you.
Mr. Kullman. Mr. Chairman, I would like for you to let me
ask a question of Senator Gorton regarding the issue of
INTELSAT paying lip service to these issues. If he could help
me clarify that, what he means by that, it would help me.
Senator Gorton. It simply seems to me that your interest in
changing the present system is not overwhelming.
Mr. Kullman. The only thing I can say to that is that I was
elected to this job on a platform of privatizing INTELSAT, and
my management team and I are totally 110 percent dedicated to
making sure that happens. There is no future for INTELSAT
unless it privatizes. It is going to go down the tubes.
So we see a growth rate today of 4 percent per year. Our
aggregate compounded aggregate growth rate of the competitors
is on the order of 17 to 19 percent. We have to work
differently, and the only way for us to do that is to work in a
different structure, a privatized structure, so I can only
assure you that it is our 100 percent intent to make sure that
privatization happens.
Now, we have 143 member nations, and we need to convince
them to move forward, and you know how difficult it is in this
room and down in the Senate to get agreement. We have to get
those types of agreements from 143 different nations, and we
have to move that process forward in a multilateral,
multinational discussion and negotiation environment, and that
takes a lot of effort on our part, and also on the part of
everyone who is a member of this organization.
Thank you, Mr. Chairman.
Ms. Alewine. Mr. Chairman, if I might add one quick thing,
when you asked the question of the Government representative,
Ambassador McCann today, and she responded about Fresh Look,
that they did not support it, I would like to tell the
committee that one of the reasons that I believe they do not
support it is because a year ago at this time, when the FCC
granted us non-dominant status based on the fact that we had no
market power in any of our markets, what they said in that
order, and I would like to read these two sentences, is that
``COMSAT's long-term contracts do not impede COMSAT's customers
from switching service providers.''
``COMSAT's switched voice customers are sophisticated
customers, possessing significant bargaining power giving them
the flexibility to route a significant portion of their
switched voice traffic to their own transmission facilities or
those of alternative carriers at any time, as they choose.''
This also has been looked at by the Federal courts and in
their written decision they said, ``nothing in the record
suggests that COMSAT secured any of the contracts by means of
any anticompetitive act against''--and in this particular
instance we had been sued by PanAmSat--``against PanAmSat.''
``On the contrary, the record suggests that for their own
reasons the common carriers elected to secure long-term deals
with COMSAT only after considering and rejecting offers from
PanAmSat.'' Those contracts should not be overturned. That is a
taking of a private, publicly traded U.S. company's property.
Thank you.
Senator Burns. Thank you. A little bit on Senator Gorton's
question. With 143 countries that makes up your INTELSAT, can
you privatize by January 1, 2002?
Mr. Kullman. We are on a schedule where we will approach
the Governments in October of this year and we will work very
hard to get the decision in principle in that meeting that we
are heading down the right path. It is our internal work
schedule then to convince the Governments and the signatories
for the final solution within a year's period after that date,
which would take us to the year 2000.
Senator Burns. What will happen to INTELSAT should the U.S.
pass legislation calling for COMSAT withdrawal should INTELSAT
not privatize by date certain and COMSAT does, in fact,
withdraw?
Mr. Kullman. That is a hypothetical question.
Senator Burns. I know it is hypothetical. That is what we
were dealing in a while ago.
Mr. Kullman. It would be very unfortunate, obviously. If
that happened I would think INTELSAT would still continue to
exist and serve the rest of the world.
Senator Burns. Mr. Cuminale.
Mr. Cuminale. Mr. Chairman, could I take us back to direct
access and Fresh Look, because while it is not our issue, and I
would encourage you when you have your hearing or discussions
with users to raise it with them, because they are passionate
about it, so much so that they have convinced us that direct
access along the lines I testified as to earlier makes good
sense for the U.S. consumer and we should not argue against it,
which historically PanAmSat did.
Their argument essentially is that when they made the
contracts they made with COMSAT they did not have competitive
choices, and that those contracts therefore are contracts that
were obtained at a time of monopoly, and I suppose there will
be some debate as to where on that spectrum we saw on those
charts they were when those contracts were entered into.
Their feeling is, with direct access they should have Fresh
Look, because without Fresh Look direct access makes no sense,
and more importantly, without Fresh Look--of course, Fresh Look
makes no sense without direct access.
They go so far as to say, because one of the things COMSAT
has said is, fine, have direct access, fine, let them have
Fresh Look. They cannot get satellite capacity, because we are
the ones who are holding it, so one of the things they want to
talk to you about is portability of the capacity if they do
Fresh Look and if they do compete those contracts
competitively.
It is an interesting notion, because if they are so
interested in the portability of the capacity, I think one of
the things they figure is, where they are probably going to end
up is on a direct access deal with INTELSAT, not with PanAmSat,
and not on the cable systems, otherwise they would not be
interested in that portability.
But I would suggest to you that you inquire of them,
because it truly is their issue and not ours.
Ms. Alewine. Mr. Chairman, if I might respond to direct
access, and I know this is beginning to sound like he-said,
she-said, and I apologize for that.
Senator Burns. Well, at least it is in public. [Laughter.]
Ms. Alewine. I do not know where Mr. Cuminale gets his
quotes from that we said this or we said that. I know where I
get mine. I get mine from public meetings. To the best of my
knowledge, no one in my corporation has ever said, fine, let
them have direct access, fine, let them have Fresh Look, we
have tied up all the capacity. I have never heard that before.
But let us talk about that capacity, and let us talk about
direct access, because a lot of people say that we want direct
access to your assets. Well, we happen to own the U.S. portion
of the INTELSAT system. Everybody talks about facilities-based
competition. Those are, ladies and gentlemen, our facilities.
Yes, we were created by an act of Congress, but we have never
had one penny of Government funding, one penny of a taxpayer
dollar in the creation or our investments in INTELSAT.
This corporation, COMSAT Corporation, was created by an
initial public offering of $200 million. It has had shareholder
money in it from the get-go, and those are our facilities that
we have invested in.
Now, as I said earlier, there is this big brouhaha about
all of the big guys attacking, trying to take the little guy's
revenue.
Remember the number that I quoted to you? We get $250
million a year of revenue from our INTELSAT business. It is in
public documents, so I know this number is correct, and that is
just a little more than one of the companies that is on Mr.
Cuminale's large company impressive list spent on their ad
budget in 1998. Iridium spent $200 million for advertising.
I am having a real hard time, Mr. Chairman, understanding
why all of these very big companies now have focused on taking
our facilities, taking our assets. Yes, we control access to
them, but that does not make us a monopoly. It is just as
PanAmSat controls access to their Hughes satellites.
I am having a really hard time, unless you connect the
dots, and you say they do not want INTELSAT privatized, they
want all of this delayed and tied up in legislation, and COMSAT
and Lockheed Martin tied up in knots. They do not want this
merger to go through, because in fact they do not want another
strong competitor. They would like to keep us at $250 million a
year in an intergovernmental organization that cannot take
decisions quickly.
That is not procompetitive, and that is not in the U.S.
public consumers' best interest.
Thank you.
Mr. Sponyoe. Which I believe is the short or long form,
depending upon your perspective, of Senator Gorton's question.
Mr. Kullman. Let me just make one comment on direct access,
Mr. Chairman. It is not really an issue for INTELSAT. Direct
access is a national--it is a domestic issue, regulatory issue
for each individual country to decide on, but I also want to
make clear that we do not see direct access as our carrot. We
really see the issue of direct access and privatization as two
separate issues. What is important for us is to privatize for
business reasons and get on with it as fast as we can.
Senator Burns. Just about all the questions that I have had
today have been covered in the give-and-take and the rhetoric
today, and I appreciate that.
I will insert Senator Stevens' statement for the record.
[The prepared statement of Senator Stevens follows:]
Prepared Statement of Hon. Ted Stevens, U.S. Senator from Alaska
I want to congratulate Senator Burns for holding this hearing and
for championing this issue in the Senate.
Reforming and bringing true privatization to the international
satellite world is a true challenge.
I would argue it is even more ambitious than reforming our domestic
telecommunications industry. At least by 1996, Judge Greene had showed
us the way by breaking up AT&T.
I've met with Senator Burns on this issue and am convinced that his
goal is to privatize INTELSAT and to ultimately level the playing field
in the satellite industry.
Based on that conviction, I am committed to helping him get a bill
to take to conference with Chairman Bliley.
I hope that sometime this summer, I can stand on the floor of the
Senate and rename S. 376 the Burns-Bliley bill.
Is this bill perfect? No. But I believe Senator Burns is definitely
on the right track.
We need true privatization, we need free market access to all
carriers, and we need to discourage monopolistic behavior.
I'm convinced Sen. Burns wants these things too, and I look forward
to helping him achieve these goals.
Senator Burns. We also have a statement by the Majority
Leader, Senator Lott, who is supporting our efforts.
[The prepared statement of Senator Lott follows:]
Prepared Statement of Hon. Trent Lott, U.S. Senator from Mississippi
Let me first thank my friend Senator Burns, the distinguished
Chairman of the Communications Subcommittee, for holding this hearing
to build upon past discussions to privatize international satellite
operations.
I am grateful for his leadership in moving ahead on this much-
needed reform of a 35-year old policy.
The issues are both complex and important in this global
marketplace America finds itself in.
Senator Burns has taken the bull by the horns, and I appreciate his
willingness and tenacity to tackle this issue.
I am here today to add my personal support to the Chairman's
efforts to ensure that customers benefit from whatever approach is
finally taken in the international satellite field . . . a field that
just a few decades ago was dominated by intergovernmental
organizations.
Today's international marketplace is different from the one found
in 1962 when all this began. And Senator Burns is right--today's policy
solutions must reflect the realities of 1999 and be flexible enough to
reach into the next century.
Congress was right in 1962, even visionary, to establish an
international cartel--INTELSAT--to blaze the trail of a global
communications network. The private sector did not have the capability
to do a commercial satellite system.
COMSAT, as INTELSAT's U.S. signatory, has done an excellent job for
over 3 decades in carrying out its Congressional charter to fulfill our
national policy of global communications. COMSAT has laid a solid
foundation.
However, commercial satellite service has come of age. Today, it is
a viable opportunity and a real option.
In fact, numerous private companies have established global and
regional satellite networks that provide workable commercial services.
And these services are growing in demand.
Yes, strides have been made by these intergovernmental entities to
privatize. This is good, but this is not enough.
Congress needs to take this opportunity to both encourage and
ensure that the new public policy for the next century will provide
competition in the new satellite community.
Congress should enact a pro-competitive bill because American
customers deserve the benefits.
Congress also needs to look past the surface debate of which
organization will provide the services and focus on the ultimate
consumer.
Congress also needs to factor in our domestic market as it relates
to markets around the globe.
Conrad, you've got a great catchy title for your bill--the Open-
Market Reorganization for the Betterment of International
Telecommunications Act--or ``ORBIT.''
You have changed it from your original approach in the last
Congress. This is good.
This new bill already enjoys broad bipartisan support from several
members of this Committee. This is good.
I am encouraged because the stage is now set for an open debate.
I know that Senator Breaux has some concerns about market access,
and other remaining issues may need to be ironed out before a unified
Senate position can be achieved . . . but I believe we can.
I have on several occasions spoken with Chairman Bliley about this
matter. As most of you know, Chairman Bliley has for years been the
champion for satellite privatization in the House.
Chairman Bliley indicated his continued interest and willingness to
work together on a bill that can pass both chambers this year. This is
good.
Mr. Chairman, it is my understanding that today's hearing is the
1st of a 2 part series, and the next hearing will be for the customers.
This is crucial because their needs are the reason why Congress is
advancing the competition and choice aspects. Hearing their
perspectives will be useful.
I want to thank today's witnesses for their time and insights as we
move forward on the debate.
I see some familiar faces.
At this time I do not want to ask questions, but I would like to
reserve the right to submit questions at a later date for the record.
I look forward to bringing a consensus bill onto the floor soon for
the full Senate's consideration.
Again, Mr. Chairman, thank you for holding this hearing.
Senator Burns. Any questions that might be directed to you
by anybody else on the committee, I would appreciate a response
to them and to the committee. All of your testimony will be
made a part of the record, and I am sure that we will keep the
record open for comments as we continue the dialog on this.
Senator Hollings also has his statement that he wants to
enter into the record today, and without objection we will do
all of that.
[The prepared statement of Senator Hollings follows:]
Prepared Statement of Hon. Ernest F. Hollings,
U.S. Senator from South Carolina
INTELSAT and COMSAT were initially established when there was no
global satellite service. Both organizations have successfully
fulfilled their mission in linking the United States and countries
around the world by satellite communications. Since their inception,
however, the marketplace has changed. Today, there are a number of
satellite systems providing a wide variety of services and many more
preparing to implement service. Recognizing these changes, INTELSAT is
working to become a private company.
While it is critical for INTELSAT to privatize, it is also
important that it does so in a pro-competitive manner. The fact is that
privitization of INTELSAT in a non-competitive manner, will enable it
to distort competition in the U.S. market thereby potentially adversely
impacting the ability of U.S. systems to enter foreign markets.
Once INTELSAT is privatized, the role of COMSAT will change. In
addition, there has been on-going speculation about the purchase of
COMSAT by Lockheed Martin. Before that can occur, however, the
statutory ownership restrictions on COMSAT must be lifted. In light of
Lockheed's proposal and the privatization of INTELSAT, COMSAT will
ultimately has to transition from a signatory to a non-signatory role.
Senator Burns introduced last year as he has again this year,
legislation concerning the privatization of INTELSAT. This hearing
presents a good opportunity to examine the provisions of Senator Burns'
bill--in particular, the provision that addresses the Administration's
certification of INTELSAT's privatization. This provision places the
Administration in the role of the FCC in reviewing the entry of
INTELSAT into the U.S. market.
Thus, I welcome the witnesses and look forward to hearing their
testimony. I thank Senator Burns for having this hearing.
Senator Burns. I appreciate your time today. It has been a
long afternoon, very busy, but as we make our way down the
trail on this I am satisfied we can come up with a piece of
legislation that will do what we want to do and also what you
want to do.
Thank you for coming today. These hearings are closed.
[Whereupon, at 4 p.m., the subcommittee adjourned.]
A P P E N D I X
Federal Communications Commission,
Washington, DC, April 22, 1999.
Hon. Conrad Burns
United States Senate
Washington, DC
Dear Mr. Chairman,
With this letter, I am providing a written follow up to a question
you asked in the March 25th hearings on the Open-market Reorganization
for the Betterment of International Telecommunications Act before the
Senate Subcommittee on Communications (S. 376). I appreciate the
opportunity to provide these responses.
You asked for my assessment of the recently created spinoff of
INTELSAT, New Skies Satellites, N.V. (New Skies). New Skies was created
as a result of a
March 31, 1998 Assembly of Parties decision to form a private satellite
company incorporated in the Netherlands to provide various video and
broadband services.\1\ The United States associated provisionally with
the Assembly decision in creating New Skies because it believed there
was continuing uncertainty as to whether true separation and
independence of New Skies from INTELSAT could be effected.\2\
---------------------------------------------------------------------------
\1\ INTELSAT Assembly of Parties, Record of Decisions of the
Twenty-Second (Extraordinary) Meeting. (AP-22-3E) Salvador, Brazil,
March 31, 1998.
\2\ See Statement of the United States appended to the Assembly of
parties, Record of Decisions of the Twenty-Second (Extraordinary)
Meeting (AP-22-3E) Salvador, Brazil, March 31, 1998.
---------------------------------------------------------------------------
On November 30, 1998, INTELSAT transferred to New Skies five
operating satellites and one satellite under construction. New Skies
then began operations. At that time, in order to assure continuity of
services to U.S. customers already using the satellites transferred
from INTELSAT to New Skies, the International Bureau authorized
temporary operation of 90 earth stations to operate with New Skies
satellites pending Commission action on applications filed by the earth
station operators for permanent authority.\3\ The authorizations permit
licensees to add new customers pending Commission action on the
applications of the earth station operators.
---------------------------------------------------------------------------
\3\ Requests for Special Temporary Authority to Operate INTELSAT
Satellites Transferring to New Skies Satellites, N.V., Report and
Order, DA 98-2431, November 30, 1998, (STA Order).
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In reviewing applications to operate with New Skies, the Commission
will apply the standard implementing the WTO Agreement on Basic
Telecommunications Services (DISCO II Order) \4\ for affiliates or
spinoffs of INTELSAT or Inmarsat to provide service in the United
States. In the DISCO II Order, the Commission adopted a presumption in
favor of entry for space stations licensed by WTO members. However, the
Commission reserved the right to attach conditions to the grant of
authority, or in the exceptional case in which an application would
pose a very high risk to competition in the U.S. satellite market, to
deny the application. The DISCO II presumption in favor of entry will
apply to New Skies because New Skies' satellites will be authorized by
the Netherlands, a WTO member.
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\4\ Non-U.S. Licensed Satellites Providing Domestic and
International Service in the United States, Report and Order, 12 FCC
Red 24094 (Nov. 26, 1997)(DISCO II Order).
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In the DISCO II Order the FCC also set forth criteria that apply to
New Skies. These criteria are reflected in S. 376 which would in
effecting codify the FCC's approach to considering INTELSAT and
Inmarsat spinoff entry into the U.S. market. In determining whether an
application to serve the U.S. market by an INTELSAT spinoff raises the
potential for competitive harm, the FCC will consider any potential
anti-competitive or market distorting consequences of continued
relationships or connections between INTELSAT and New Skies,
particularly the risk or likelihood of collusive behavior or cross-
subsidization. Specifically, the Commission will evaluate the ownership
structure of New Skies, including its affiliation with INTELSAT and the
effect of INTELSAT and signatory ownership; whether New Skies can
directly or indirectly benefit from INTELSAT's privileges and
immunities; the extent to which there is arms length conditions
governing the relationship between INTELSAT and New Skies. The FCC will
consider the extent to which there are separate directors, officers,
employees, accounting systems as well as fair market valuing for
permissible business transactions that is verifiable by an independent
audit and consistent with normal commercial practice; whether there is
common marketing or recourse to INTELSAT assets for credit or capital;
and whether INTELSAT will register or coordinate spectrum or orbital
locations on behalf of New Skies.
In applying the DISCO II standards the Commission will assess
progress being made toward independence of New Skies from INTELSAT and
whether New Skies is unfairly benefitting from its unique INTELSAT
heritage to the detriment of its competitors. The Commission will apply
DISCO II standards to the facts contained in the record. For example,
New Skies currently is 100 percent owned by INTELSAT and its
signatories. (INTELSAT has a ten percent ownership in a nonvoting trust
and the signatories have the remaining 90% share). New Skies has
entered into various time-limited services agreements with INTELSAT
that involve INTELSAT in operation of important aspects of New Skies
satellites. In addition, customers inherited by New Skies from INTELSAT
continue to look to INTELSAT as a guarantor of service either because
contracts have been assigned rather than novated, or the customers are
served under ``lease back'' arrangements.
The FCC staff is reviewing petitions and comments filed in response
to the applications, as well as documents submitted by New Skies in
February 1999 that reflect INTELSAT and New Skies implementation of
March, 1998 Assembly of Parties decision. The staff also has been in
discussions with New Skies representative regarding these documents.
The staff has requested and is awaiting information from New Skies as
to whether New Skies will begin public trading of shares by the end of
1999.\5\ We are hopeful of submitting recommendations to the Commission
for consideration in the near future.
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\5\ See Testimony of Ambassador Vonya B. McCann before the
Subcommittee on Communications, Senate Committee on Commerce, Science,
and Transportation, September 10, 1998.
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Thank you again for the opportunity to testify at the March 25
hearing and to expand upon my responses in this letter. If you or your
staff have further questions, please feel free to contact me.
Sincerely,
Roderick Kelvin Porter,
Acting Bureau Chief.
______
______
Prepared Statement of F. Thomas Tuttle, Vice President and General
Counsel, Iridium LLC
introduction
Iridium LLC, a Washington, DC-based, global mobile satellite
telephone company, appreciates the opportunity to submit testimony for
today's hearing. Iridium is pleased that the Subcommittee is
considering legislation that addresses the privatization of the
intergovernmental satellite organizations (IGOs), a goal Iridium fully
supports.
Congress authorized U.S. participation in the IGOs, INTELSAT and
Inmarsat, and guided the initial development of the commercial
satellite services market by passing the Communications Satellite Act
in 1962 and the International Maritime Satellite Telecommunications Act
in 1978. It is appropriate that Congress is now turning its attention
to the impressive growth of the commercial satellite services market,
the major and increasing role of private industry in that market, the
resulting need for privatization of the IGOs, and the potential impact
such privatization will have on competition in the market for
international satellite services.
Satellite legislation dealing with competition in the global
marketplace comes around once in a generation. The legislation that
will be enacted is likely to be the most significant (if not the only)
legislation addressing competition in the international satellite
services for many years to come. Iridium is concerned, therefore, that
there is nothing in S. 376 that addresses the consequences of
Inmarsat's privatization or the effect such privatization will have on
market access and competition in the mobile satellite services. Without
addressing the privatization of Inmarsat, S. 376 is incomplete. It may
address the impact of the privatization of an IGO on the market for
fixed satellite services, but it does nothing to promote a fully
competitive domestic and international market for mobile satellite
services.
Inmarsat was created in 1979 and began providing service in 1982.
As Inmarsat's current Internet web site explains,
``When Inmarsat began service in 1982, its remit was to
provide communications for commercial, distress and safety
applications for ships at sea.
Inmarsat's name is an acronym of its original full title, the
International Maritime Satellite Organization, and, while it
has branched out into other, non-maritime markets and changed
its name to the International Mobile Satellite Organization,
the acronym has remained.
Inmarsat grew out of an initiative of the then International
Maritime Consultative Organization. At the time, mobile
satellite communication was an unexplored technology and the
industry an embryonic, untested one.
So it was decided that Inmarsat should be a joint co-
operative venture of governments, with their signatories--
nominee organizations, in most cases the country's post and
telecommunications provider (PTT)--contributing the capital and
bearing the high risk involved.''
Inmarsat's web site also explains that,
``[Inmarsat] has since expanded into land, mobile and
aeronautical communications, so that users now include
thousands of people who work in remote areas without reliable
terrestrial networks, or travellers anywhere.
In addition to maritime customers, today's typical users
include journalists and broadcasters, health teams and disaster
relief workers, land transport fleet operators, airlines,
airline passengers and air traffic controllers, government
workers, national emergency and civil defence agencies, and
heads of state.''
At the time the IGOs were created, there were no privately owned
international satellite systems. Satellite technology was still being
developed, making satellite-based services both risky and very
expensive. As a result of technological advances over the last four
decades, it is now economically possible for private companies to
provide increased satellite based services with competitive benefits
such as lower costs to consumers and expanded services to meet new
demand. The convergence of technologies in which the US is preeminent--
telecommunications network design, computer-based communications
applications, micro-miniaturization of electronic components, and
Earth-orbiting satellites--has provided unparalleled access to the
advantages to modern telephone and data infrastructures around the
globe.
On November 1, 1998, the Iridium system commenced commercial
operations, providing mobile satellite services (MSS)--the types of
services provided by Inmarsat, but from a constellation of low Earth
orbiting (LEO) satellites. The 66-orbiting satellites in the Iridium
system function as cellular towers in the sky, providing for the first
time a completely global telephone and messaging network that can be
used on land, on sea, or in the air.
The Iridium system is not the only MSS system that will provide
mobile satellite telecommunications services within the next few years.
US-based (LEO) systems such as Globalstar, Ellipso, and Constellation,
are at various stages of design, development, and deployment, with
Globalstar expected to follow Iridium as the second to market in 1999.
There are also regional geostationary mobile satellite systems under
development all over the world, including the already operational AMSC
system in the U.S. All of these systems will be competing with each
other and with Inmarsat and its ``privatized'' affiliate, ICO Global
Communications (ICO). The European-based ICO was established by
Inmarsat in 1995. ICO and Inmarsat have substantial common ownership
and control. The ICO system is expected to begin services in the year
2000.
In September 1998, Inmarsat's Assembly of member governments
reached an agreement to privatize Inmarsat in April 1999.
privatization, competition and s. 376
Iridium fully supports Inmarsat privatization. Iridium is
concerned, however, that S. 376 does not recognize and address the
consequences of Inmarsat's privatization.
When the privatized Inmarsat begins operations as a ``private''
entity, it will still (at least for another two years) have the same
owners (many of which are government-controlled entities) that give it
extraordinary access to global spectrum and foreign markets. It will
retain the same assets, including the satellites and the huge amount of
spectrum it received and controlled as an IGO. No mobile satellite
operator that is truly private controls anywhere near that amount of
spectrum today or is likely to in the future. No U.S. company can match
this incredible competitive advantage.
Inmarsat should not be permitted, through privatization, to
transform spectrum from public to private use to the disadvantage of
consumers and competition. There is no regulatory relief or remedy
available to the mobile satellite services industry to rectify the
mobile satellite spectrum inequity.
With S. 376's focus on INTELSAT and fixed satellite services, the
mobile satellite services sector is left without any opportunity for
competition issues to be addressed in this legislation. S. 376 states
that the purpose of the Act is to promote a fully competitive domestic
and international market for satellite communications services for the
benefit of consumers and providers of satellite services by fully
encouraging the privatization of the intergovernmental satellite
organizations, INTELSAT and Inmarsat, and reforming the regulatory
framework of COMSAT Corporation.
Yet S. 376 fails to meet this purpose in at least two respects.
First, it fails to provide competitive benefits to the consumers of
mobile satellite services by failing to give the US the ability to use
incentives, restrictions, penalties and regulatory benefits necessary
to ensure a level-playing field for all competitors in the market for
mobile satellite services. Second, it facilitates access to the US
market for a privatized Inmarsat that has an unreasonable amount of
spectrum globally without addressing the issue of how this impacts
competition in the mobile satellite communications market.
The exclusion of Inmarsat from any review of competitive harm
ignores the impact of Inmarsat's privatization on consumers and the
mobile satellite industry and is inconsistent with the treatment of
INTELSAT in the bill. While it is true that privatization of Inmarsat
is apparently ahead of the privatization of INTELSAT, since Inmarsat is
scheduled to establish the private company next month, it must be
recognized that privatization is not complete on the day that the IGO
establishes the new, private company. Privatization is a process that
includes a transition phase that begins the day the IGO transfers its
assets to a private company and ends after completion of the initial
public offering (IPO). Inmarsat is not currently scheduled to issue its
IPO until at least another two years after the ``private'' company is
created and the IGO assets transferred to it.
As a matter of US policy, the privatization of Inmarsat should be
conducted in a way that meets the same competitive requirements as the
privatization of INTELSAT. The provisions of S. 376 on access to the US
market, certification, review of license applications, and efficient
use of spectrum resources should apply to Inmarsat until it has
completed an IPO.
There are other issues that need to be addressed in this
legislation to ensure a fully competitive global market for satellite
communications. Most importantly,
S. 376 should prohibit any merger or exclusive arrangements between the
privatized Inmarsat and ICO, the first ``privatized'' spin-off of
Inmarsat.
market access and spectrum dominance
The greatest challenge that Iridium and other privately owned MSS
companies face as they prepare to introduce competitive services in the
global marketplace is obtaining access to spectrum and markets world-
wide. That challenge is made more difficult when their government-owned
competitors have the ability to exert influence and/or control over
access to markets and spectrum. Iridium has experienced first hand this
particular difficulty, which is why it is so concerned about the
absence of provisions that address market access for the privatized
Inmarsat in S. 376.
The General Accounting Office (GAO), in its July 1996 report,
Competitive Impact of Restructuring the International Satellite
Organizations (GAO Report), raised concern about the competitive edge a
newly created affiliate would have over competitors when a large
percentage of the affiliate is owned by Inmarsat's signatories. GAO
noted that signatories have the incentive to grant access to their
markets and preclude or inhibit access to other competitors, even
though the competitors might offer services at lower prices.
GAO wrote that ``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. ``Inmarsat and its signatories have
both the incentives and the ability to provide ICO with market
advantages over its potential competitors.'' GAO Report at 10.
GAO addressed industry concern about an ICO and restructured
Inmarsat relationship, especially since Inmarsat is on record as having
an interest in the possibility of a future merger of ICO with a
restructured Inmarsat. The GAO noted that ``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.''
GAO Report at 14.
Inmarsat and ICO together currently control access to 75% of the
spectrum that can be used for global MSS systems through the year 2005.
If Inmarsat and ICO are permitted to reunite, the mobile satellite
industry will be dealt a devastating blow and the hope of a competitive
mobile services market will be unlikely due to the impossibility of
other MSS providers obtaining the necessary spectrum to provide global
services.
summary
S. 376 can offer the incentive that will encourage other countries
to open access to spectrum and markets. Access to the US market is the
only way the US can create a level playing field. Congress can send a
very important message to Inmarsat and its owners that access to the US
market will be dependent on equitable allocation of MSS spectrum
globally. The Commission and the United States government will
incorporate the intent of Congress in their decisions on access to the
US market.
The privately financed US mobile satellite industry has struggled
against crushing financial odds, technical challenges, and barriers to
access to spectrum to provide services unheard of fifteen years ago.
For this industry to grow and develop and effectively compete, Congress
must sweep away the last vestiges of state-supported monopolies and
allow the free-market to work. Iridium and other US satellite companies
seek a fully competitive market--an equal opportunity to compete for
spectrum and customers--not protection from competition.
Pioneering companies like Iridium should not be competitively
disadvantaged while Inmarsat begins its transition to a privatized
commercial entity with tremendous assets gained at public expense. We
urge the Senate to adopt aggressive and forward-looking legislation
that ensures that true privatization will occur without harm to US
mobile satellite service providers.
We urge the Senate to expand the scope of S. 376 in order to
fulfill genuinely the goal of the legislation to promote a fully
competitive domestic and international market for satellite
communications services for the benefit of consumers and providers of
fixed and mobile satellite services.