Telecommunications: Market Developments in the Global Satellite
Services Industry and the Implementation of the ORBIT Act
(14-APR-05, GAO-05-550T).
In 2000, the Congress passed the Open-market Reorganization for
the Betterment of International Telecommunications Act (ORBIT
Act) to help promote a more competitive global satellite services
market. The ORBIT Act called for the full privatization of
INTELSAT, a former intergovernmental organization that provided
international satellite services. In this testimony, GAO
discusses (1) the impetus for the privatization of Intelsat as
competition developed in the 1990s, (2) the extent to which the
privatization steps required by the ORBIT Act have been
implemented, and (3) whether access by global satellite companies
to non-U.S. markets has improved since the enactment of the ORBIT
Act.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-05-550T
ACCNO: A21738
TITLE: Telecommunications: Market Developments in the Global
Satellite Services Industry and the Implementation of the ORBIT
Act
DATE: 04/14/2005
SUBJECT: Communication satellites
Competition
Economic analysis
Federal law
International organizations
Privatization
Telecommunication industry
******************************************************************
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GAO-05-550T
United States Government Accountability Office
GAO Testimony
Before the Subcommittee on Telecommunications and the Internet, Committee
on Energy and Commerce, House of Representatives
For Release on Delivery
Expected at 10:00 a.m. EDT TELECOMMUNICATIONS
Thursday, April 14, 2005
Market Developments in the Global Satellite Services Industry and the
Implementation of the ORBIT Act
Statement of JayEtta Z. Hecker, Director Physical Infrastructure Team
GAO-05-550T
[IMG]
April 14, 2005
TELECOMMUNICATIONS
Market Developments in the Global Satellite Services Industry and the
Implementation of the ORBIT Act
What GAO Found
When commercial satellite technology was first deployed, a worldwide
system was seen as the most efficient means to facilitate the advancement
of a fully global provider. INTELSAT was thus established as an
intergovernmental entity, originally established by 85 nations, that was
protected from competition in its provision of global satellite
communications services. By the 1980s, however, technology developments
enabled private companies to efficiently compete for global communications
services, and in 1984, President Reagan determined that it would be in the
national interest of the United States for there to be greater competition
in this market. New commercial satellite systems emerged, but soon found
that INTELSAT enjoyed advantages stemming from its intergovernmental
status and ownership by telecommunications companies in other countries
that impeded new satellite companies from effectively competing. The new
satellite companies began to call for INTESLAT to be privatized. Decision
makers within INTELSAT also determined that privatization would enable
more rapid business decisions.
Just prior to INTELSAT's privatization in July 2001, FCC determined that
INTELSAT's privatization plan was consistent with requirements of the
ORBIT Act. The Federal Communications Commission (FCC) thus authorized the
privatized Intelsat-the official name of the company after
privatization-to use its U.S. satellite licenses to provide services
within the United States pending an initial public offering (IPO) of
securities that was mandated by the ORBIT Act to occur at a later time.
New legislation was passed in 2004 that allows Intelsat to forgo an IPO if
it has achieved substantial dilution of its "signatory" ownership-that is,
dilution of ownership by those entities (mostly government-controlled
telecommunications companies) that had been the investors in INTELSAT when
it was an intergovernmental entity. Since Intelsat has recently been sold
to a consortium of four private investors, it no longer has, according to
an Intelsat official, any former signatory ownership. FCC is still
reviewing this transaction to determine whether Intelsat has met the
requirements of the ORBIT Act as amended and thus is no longer required to
hold an IPO.
Most of the stakeholders we spoke with said that access to non-U.S.
satellite markets has generally improved during the past decade. This
improvement in market access is generally attributed to global trade
agreements and privatization trends. Despite this general view, some
satellite companies expressed concerns that some market access issues
still exist. For example, some companies noted that some countries may
favor domestic satellite providers or may choose to continue obtaining
service from Intelsat because of long-term business relationships that
were forged over time. Nevertheless, Intelsat officials noted that it
seeks market access on a transparent and nondiscriminatory basis and that
Intelsat has participated with other satellite operators, through various
trade organizations, to lobby governments to open their markets.
United States Government Accountability Office
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss the privatization of INTELSAT and
the implementation of the ORBIT Act. In 2000, the Congress passed the
Open-market Reorganization for the Betterment of International
Telecommunications Act1 (ORBIT Act) to help promote a more competitive
global satellite communication services market. Today we will discuss (1)
the impetus for the privatization of INTELSAT2 as competition developed
during the 1990s, (2) the extent to which the privatization steps required
by the ORBIT Act have been implemented, and (3) whether access by global
satellite companies to non-U.S. markets has improved since the enactment
of the ORBIT Act.
To address these issues, we have drawn upon our previous work on the
international satellite market and the ORBIT act. We issued two reports on
the international satellite market in 1996.3 In addition, we issued two
reports in September 2004, one of which focused on the implementation of
the ORBIT Act;4 see appendix I for a list of related GAO products. For the
latter report, we conducted semistructured interviews with satellite
service providers and experts. Additionally, we interviewed officials from
the Federal Communications Commission (FCC), the United States Trade
Representative; the Department of State; and the National
Telecommunications and Information Administration of the Department of
Commerce. We conducted our work for the September 2004 report from
February through June 2004 in accordance with generally accepted
government auditing standards.
Following is a summary of our findings:
1Pub. L. 106-180, 114 Stat. 48 (2000).
2The official name of the intergovernmental organization was INTELSAT-all
capital letters. After privatization, the privatized company is known as
Intelsat. We make this distinction throughout this report.
3See GAO, Telecommunications: Competitive Impact of Restructuring of the
International Satellite Organizations, GAO/RCED-96-204 (Washington, D.C.:
July 8, 1996); and GAO, Telecommunications: Competition Issues in
International Satellite Communications, GAO/RCED-97-1 (Washington, D.C.:
Oct. 11, 1996).
4See GAO, Telecommunications: Intelsat Privatization and the
Implementation of the Orbit Act, GAO-04-891 (Washington, D.C.: Sept. 13,
2004); and GAO, Tax Policy: Historical Tax Treatment of INTELSAT and
Current Tax Rules for Satellite Corporations, GAO-04-994 (Washington,
D.C.: Sept. 13, 2004).
o When commercial satellite technology was first deployed, a worldwide
system was seen as the most efficient means to facilitate the advancement
of a fully global provider. INTELSAT was thus established as an
intergovernmental entity that was protected from competition in its
provision of global satellite communications services. By the 1980s,
however, technology developments enabled private companies to efficiently
compete for global communications services, and in 1984, President Reagan
determined that it would be in the national interest of the United States
for there to be greater competition in this market. New commercial
satellite systems emerged, but within a few years, these providers became
concerned that INTELSAT enjoyed certain advantages stemming from its
intergovernmental status that impeded others from effectively competing.
The new satellite companies began to argue that the marketplace would not
become fully competitive unless INTELSAT became a private company that no
longer enjoyed such advantages. At about the same time, decision makers
within INTELSAT decided to privatize the organization because of the
difficulties of making business decisions within an intergovernmental
entity.
o Just prior to INTELSAT's privatization in July 2001, FCC determined
that INTELSAT's privatization plan was consistent with requirements of the
ORBIT Act. FCC thus authorized Intelsat, LLC-the U.S. subsidiary of the
privatized entity Intelsat Ltd.-to use its U.S. satellite licenses to
provide services within the United States pending an initial public
offering (IPO) of securities that was mandated by the ORBIT Act to occur
at a later time. In 2004, however, new legislation allowed Intelsat to
forgo an IPO if it achieved substantial dilution of its "signatory"
ownership-or dilution of ownership by those entities that had been the
signatories to INTELSAT when it was an intergovernmental entity. Since
Intelsat has recently been sold to a consortium of four private investors,
it no longer has, according to an Intelsat official, any former signatory
ownership. FCC is still reviewing this transaction to determine whether
Intelsat has met the requirements of the ORBIT Act as amended and thus no
longer is required to hold an IPO.
o Most of the stakeholders we spoke with said that access to non-U.S.
satellite markets has generally improved during the past decade. This
improvement in market access is generally attributed to global trade
agreements and privatization trends. Despite this general view, some
satellite companies expressed concerns that some market access issues
still exist. These remaining market access problems were attributed to
foreign government policies that may limit or slow satellite competitors'
access to certain markets. For example, some companies noted that some
countries may favor domestic satellite providers or may choose to
Background
continue obtaining service from Intelsat because of long-term business
relationships that were forged over time. Nevertheless, Intelsat officials
noted that it seeks market access on a transparent and nondiscriminatory
basis and that Intelsat has participated with other satellite operators,
through various trade organizations, to lobby governments to open their
markets.
The Congress passed the Communications Satellite Act of 1962 to promote
the creation of a global satellite communications system. As a result of
this legislation, the United States joined with 84 other nations in
establishing the International Telecommunications Satellite
Organization-more commonly known as INTELSAT-roughly 10 years later.5 Each
member nation designated a single telecommunications company to represent
its country in the management and financing of INTELSAT. These companies
were called "signatories" to INTELSAT and were typically governmentowned
telecommunications companies, such as France Telecom, that provided
satellite communications services as well as other domestic communications
services. Unlike any of the other nations that originally formed INTELSAT,
the United States designated a private company, Comsat Corporation, to
serve as its signatory to INTELSAT.
The ORBIT Act, enacted by the Congress in March 2000, was designed to
promote a competitive global satellite communication services market. The
act did so primarily by calling for the privatization of INTELSAT after
about three decades of operation as an intergovernmental entity.6 The
ORBIT Act required, for example, that INTELSAT be transformed into a
privately held, for-profit corporation with a board of directors that
would be largely independent of former INTELSAT signatories. Moreover, the
act required that the newly privatized Intelsat retain no privileges or
other benefits from governments that had previously owned or controlled
it. To ensure that this transformation occurred, the Congress imposed
certain restrictions on the granting of licenses that allow Intelsat to
provide services within the United States. The Congress coupled the
issuance of licenses granted by FCC to INTELSAT's successful privatization
under the ORBIT Act. That is, FCC was told to consider compliance with
provisions
5By the time Intelsat privatized in 2001, 148 countries had become parties
to the intergovernmental organization.
6The act also pertained to Inmarsat. A discussion of Inmarsat's
privatization is outside the scope of this testimony.
of the ORBIT Act as it made decisions about licensing Intelsat's domestic
operations in the United States. Moreover, FCC was empowered to restrict
any satellite operator's provision of certain new services from the United
States to any country7 that limited market access exclusively to that
satellite operator.8
Concerns That INTELSAT Enjoyed Competitive Advantages Provided Impetus for
Its Privatization
When satellite technology first emerged as a vehicle for commercial
international communications, deploying a global satellite system was both
risky and expensive. Worldwide organizations were considered the best
means for providing satellite-based services throughout the world. When
INTELSAT was established, the member governments put in place a number of
protections to encourage its development. In essence, INTELSAT was created
as an international monopoly-with little competition to its international
services allowed by other satellite systems, although domestic and other
satellite systems were allowed under certain conditions. As such, during
the 1970s and early 1980s, INTELSAT was the only wholesale provider of
certain types of global9 satellite communications services such as
international telephone calls and relay of television signals
internationally.10
As satellite technology advanced, it became economically more feasible for
private companies to develop global satellite systems. This occurred in
part because of growing demand for communications services as well as
falling costs for satellite system equipment. In particular, some domestic
systems that were already in operation expressed interest in expanding
into global markets. By the mid-1980s, the United States began encouraging
the development of commercial satellite communications systems that would
compete with INTELSAT. To do so under the
7This provision was limited to those countries that were not members of
the World Trade Organization.
8Additionally, once INTELSAT was privatized under provisions of the ORBIT
Act, Comsat Corporation's role as the U.S. signatory to the INTELSAT
operating agreement was ended.
9Some other satellite companies provided fixed satellite services between
some countries, but INTELSAT was the only provider at that time that could
provide service to all parts of the globe.
10While INTELSAT was the only provider at that time of what is called
global fixed satellite services-that is, services provided between fixed
points on land-another global satellite organization that was also formed
based on amendments to the Communications Satellite Act provided global
maritime satellite communications. This organization is commonly known as
Inmarsat.
INTELSAT treaty agreements, President Reagan determined that competing
international satellite systems were required in the national interest of
the United States.11 After that determination, domestic purchasers of
international satellite communications services were allowed to use
systems other than INTELSAT. In 1988, PanAmSat was the first commercial
company to begin launching satellites in an effort to develop a global
satellite system. Within a decade after PanAmSat first entered the market,
INTELSAT faced other global satellite competitors. Moreover, intermodal
competition emerged during the 1980s and 1990s as fiber optic networks
were widely deployed on the ground and underwater to provide international
communications services.
As competition to INTELSAT grew throughout the 1990s, commercial satellite
companies became concerned that INTELSAT enjoyed certain advantages
stemming from its intergovernmental status. In particular, the new
satellite companies noted that INTELSAT enjoyed immunity from legal
liability and was often not taxed in the various countries it served.
Additionally, new competitors noted that the signatories to INTELSAT in
many countries were typically government-owned telecommunications
companies, and many were the regulatory authorities that made decisions on
satellite access to their respective domestic markets. As such, new
satellite companies were concerned that those entities, because of their
ownership stake in INTELSAT as signatories, might favor INTELSAT and thus
render entry for other satellite companies more difficult. Because of
these concerns, competitors began to argue that the satellite marketplace
would not become fully competitive unless INTELSAT became a private
company that operated like any other company and no longer enjoyed any
advantages.
During the same time frame, some of the signatories to INTELSAT came to
believe that certain of INTELSAT's obligations as an intergovernmental
entity impeded its own market competitiveness. For example, decisionmakers
within INTELSAT became concerned that the cumbersome nature of the
intergovernmental decision-making process left the company unable to
rapidly respond to changing market conditions-a disadvantage in comparison
with competing private satellite providers. In 1999, INTELSAT announced
its decision to become a private corporation, but to leave in
11See Presidential Determination Number 85-2.
FCC Believes INTELSAT's Privatization Was Consistent with the ORBIT Act's
Requirements
place a residual intergovernmental organization that would monitor the
privatized Intelsat's remaining public service obligations.12
On July 18, 2001, INTELSAT transferred virtually all of its financial
assets and liabilities to a private company called Intelsat, Ltd., a
holding company incorporated in Bermuda. Intelsat, Ltd. has several
subsidiaries, including a U.S.-incorporated indirect subsidiary called
Intelsat LLC. Upon their execution of privatization, INTELSAT signatories
received shares of Intelsat, Ltd. in proportion to their investment in the
intergovernmental INTELSAT.13 Two months before the privatization, FCC
determined that INTELSAT's privatization plan was consistent with the
requirements of the ORBIT Act for a variety of reasons, including the
following:
o Intelsat, Ltd.'s Shareholders' Agreement provided sufficient evidence
that the company would conduct an initial public offering (IPO).
o Intelsat, Ltd. no longer enjoyed the legal privileges or immunities of
the intergovernmental INTELSAT.
o Both Intelsat, Ltd. and Intelsat LLC are incorporated in countries
that are signatories to the World Trade Organization (WTO) and have laws
that secure competition in telecommunications services.
o Intelsat, Ltd. converted into a stock corporation with a fiduciary
board of directors.
o Measures were taken to ensure that a majority of the members of
Intelsat, Ltd.'s Board of Directors were not directors, employees,
officers, managers, or representatives of any signatory or former
signatory of the intergovernmental INTELSAT.
12The residual intergovernmental organization is known as the
International Telecommunications Satellite Organization (ITSO).
13In addition, some portion of the intergovernmental Intelsat was owned by
nonsignatory- or "investing"-entities, which also received pro rata shares
in the new Intelsat, Ltd.
o Intelsat, Ltd. and its subsidiaries had only arms-length business
relationships with certain other entities that obtained INTELSAT's
assets.14
In light of these findings, FCC conditionally authorized Intelsat LLC to
use its U.S. satellite licenses to provide services within the United
States.15 However, FCC conditioned this authorization on Intelsat, Ltd.
conducting an IPO of securities as mandated by the ORBIT Act. In the past
year, however, several changes have occurred that alter the circumstances
and requirements associated with Intelsat's IPO. On August 16, 2004,
Intelsat, Ltd. announced that its Board of Directors approved the sale of
the company to a consortium of four private investors. According to an
Intelsat official, this transaction, which was completed on January 28,
2005, eliminates former signatories' ownership in Intelsat. Additionally,
on October 25, 2004, the President signed legislation modifying the
requirements for privatization in the ORBIT Act. Specifically, Intelsat,
Ltd. may forgo an IPO under certain conditions, including, among other
things, certifying to FCC that it has achieved substantial dilution of the
aggregate amount of signatory or former signatory financial interest in
the company.16 FCC is still reviewing this transaction to determine
whether Intelsat has met the requirements of the ORBIT Act as amended and
thus is no longer required to hold an IPO.
14These entities include New Skies Satellites N.V., a spin-off company
created approximately 1 year before the privatization of Intelsat that
received some of INTELSAT's satellites, and the International
Telecommunications Satellite Organization, the ongoing intergovernmental
organization responsible for monitoring Intelsat, Ltd.'s continuing
"lifeline" obligations, which received start-up funding from INTELSAT when
it was privatized.
15In its required annual reports to the Congress on the ORBIT Act, FCC has
continued to report that Intelsat has complied with ORBIT Act provisions.
16In the law, significant dilution means that a majority of the financial
interests in Intelsat is no longer held or controlled, directly or
indirectly, by signatories or former signatories.
While Market Access Has Improved, Some Companies Say That Certain Market
Access Challenges Remain
According to most stakeholders and experts we spoke with, access to
non-U.S. satellite markets has generally improved during the past decade,
which they generally attribute to global trade agreements and
privatization trends. In particular, global satellite companies appear
less likely now than they were in the past to encounter government
restraints or business practices that limit their ability to provide
service in non-U.S. markets. Satellite companies and experts we spoke with
generally indicated that access to non-U.S. satellite markets has
improved. Additionally, most stakeholders attributed this improved access
to global trade agreements that helped to open telecommunications markets
around the world, as well as to the trend toward privatization in the
global telecommunications industry. At the same time, many stakeholders
noted that the ORBIT Act had little to no impact on improving market
access. According to several stakeholders, market access was already
improving when the ORBIT Act was passed.
Despite the general view that market access has improved, some satellite
companies and experts expressed concerns that market access issues still
exist. These remaining market access problems were attributed to foreign
government policies that limit or slow satellite competitors' access to
certain markets. For example:
o Some companies and experts we spoke with said that some countries have
policies that favor domestic satellite providers over other satellite
systems and that this can make it difficult for nondomestic companies to
provide services in these countries.
o Some companies and one expert we spoke with said that because some
countries carefully control and monitor the content that is provided
within their borders, the country's policies may limit certain satellite
companies' access to their market.
o Several companies and an expert we interviewed said that many
countries have time-consuming or costly approval processes for satellite
companies.17
In addition to these government policies, some stakeholders believe that
Intelsat may benefit from legacy business relationships. Since INTELSAT
17Some stakeholders we spoke with who made this point also noted that the
same countries may have bureaucratic and costly processes for any foreign
company-not just satellite or telecommunications companies-that wants to
do business in their country.
was the dominant provider of global satellite services for approximately
30 years, several stakeholders noted that Intelsat may benefit from the
longterm business relationships that were forged over time, as
telecommunications companies in many countries may feel comfortable
continuing to do business with Intelsat as they have for years.
Additionally, two stakeholders noted that because companies have plant and
equipment as well as proprietary satellite technology in place to receive
satellite services from Intelsat, it might cost a significant amount of
money for companies to replace equipment in order to use satellite
services from a different provider. Alternatively, representatives of
Intelsat, Ltd. told us that Intelsat seeks market access on a transparent
and nondiscriminatory basis and that Intelsat has participated with other
satellite operators, through various trade organizations, to lobby
governments to open their markets. Further, some companies and many of the
experts we interviewed told us that, in their view, Intelsat does not have
preferential access to non-U.S. satellite markets and that they have no
knowledge that Intelsat in any way seeks or accepts exclusive market
access arrangements or attempts to block competitors' access to non-U.S.
satellite markets.
Finally, some of the companies we spoke with believe that FCC should take
a more proactive role in improving access for satellite companies in
non-U.S. markets. For example, one satellite company said that section 648
of the ORBIT Act, which prohibits any satellite operator from acquiring or
enjoying an exclusive arrangement for service to or from the United
States, provides a vehicle for FCC to investigate the status of access for
satellite companies to other countries' markets. Conversely, FCC officials
told us they do not believe that FCC should undertake investigations of
market access concerns without specific evidence of violations of section
648 of the ORBIT Act. While some comments filed with FCC in proceedings on
Intelsat's licensing and for FCC's annual report on the ORBIT Act raise
concerns about market access, FCC has stated that these filings amount
only to general allegations and fall short of alleging any specific
statutory violation that would form a basis sufficient to trigger an FCC
enforcement action.
Mr. Chairman, this concludes my prepared statement. I would be happy to
respond to any questions you or other Members of the Subcommittee may have
at this time.
GAO Contacts and For questions regarding this testimony and the report on
which it is based,
please contact JayEtta Z. Hecker at (202) 512-2834 or [email protected],
orStaff Mark L. Goldstein at (202) 512-2834 or [email protected].
Individuals Acknowledgments making key contributions to this testimony
included Amy Abramowitz,
Michael Clements, Emil Friberg, Bert Japikse, Logan Kleier, Richard
Seldin, and Juan Tapia-Videla.
Related GAO Products
Tax Policy: Historical Tax Treatment of INTELSAT and Current Tax Rules for
Satellite Corporations. GAO-04-994. Washington, D.C.: September 13, 2004.
Telecommunications: Intelsat Privatization and the Implementation of the
ORBIT Act. GAO-04-891. Washington, D.C.: September 13, 2004.
Telecommunications: Competition Issues in International Satellite
Communications. GAO/RCED-97-1. Washington, D.C.: October 11, 1996.
Telecommunications: Competitive Impact of Restructuring the International
Satellite Organizations. GAO/RCED-96-204. Washington, D.C.: July 8, 1996.
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