Implications of deregulating satellite communications

Comment Implications of deregulating satellite communications Lee McKnight

Following the divestiture of AT&T, US policy makers have focused attention on means of increasing competition in international telecommunications markets. Several policy changes have been made by the FCC to deregulate international satellite communications. International concern has been aroused by the Reagan administration approval of alternative international satellite systems. INTELSAT and PTTs fear the systems will permit multinational corporations to bypass them, shifting the cost burden onto individual users and developing nations. While there are risks to be avoided, the potential effects of the private international satellite systems have been exaggerated by supporters and opponents.

Lee McKnight is a Research Assistant for and Doctoral Candidate in the Massachusetts Institute of Technology’s Research Program on Communications Policy, Cambridge, MA 02139, USA; and is an independent consultant. This article is an edited version of a presentation to the Fachbeirat (Academic Advisory Board) of the Max Planck Institute of Foreign and International Private Law, Hamburg, Federal Republic of Germany, 25 April 1985, where the author was a Fellow in 1984-85. The presentation was based upon two earlier articles: ‘The deregulation of international satellite communications: US policy and the INTELSAT response’, and ‘The deregulation of international satellite communications’ (see Ref 1).

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US communications policy has been transformed in the past decade. Until recently, the impact of these changes was restricted largely to the domestic market. However, in 1983 and 1984. five private firms in the USA requested permission from the Federal Communications Commission (FCC) to establish international communications satellite systems. President Ronald determined in Reagan November 1984 that additional international communications satellite systems are in the national interest. He recommended that the FCC approve qualified applicants, subject to certain restrictions (discussed below). The FCC granted construction permits to RCA American Communications, Inc. International Satellite, Inc. and the Pan American Satellite Corporation in July 1985. Action on the applications of Orion Satellite Corporation and Cygnus Satellite Corporation was deferred. as these applications were deemed by the FCC to conflict with international technical standards. The satellite systems intend to establish additional communications links between Western Europe, North Africa. Latin America and North America. The proposed systems have aroused the concern and interest of the International Telecommunications Satellite Organization (INTELSAT). various Post. Telephone and Telegraph (PIT) administrations, as well as that of other users and providers of international communications services around the world. Are the alternative satellite systems the harbingers of chaos for interna-

tional communications, as INTELSAT and many PITS fear? Or will the systems increase the diversity of service offerings and lower rates, for the benefit of multinational corporations and developing countries alike. as the applicants claim? Both the supporters and opponents have exaggerated the significance of private international satellite systems. The international communications environment is undergoing significant change. However, other changes in technology and policy (eg. submarine fibre optic cable systems) are likely to have a far greater influence on the future development of international telecommunications than the proposed satellite systems will.

Technological

change

The policy changes discussed below have been driven by technological change and the deregulation philosophy promoted by the US government. The two phenomena are not necessarily related; for example, deregulation of the US trucking and airline industries had little to do with technological change. It is also important to note that the lessening of government oversight of industrial activity implied by deregulation in no way means that all government supervision is abandoned. Government involvement may in fact increase in particular areas, such as the international settlement of accounts between telecommunications administrations. Although this is sometimes referred to as ‘reregulation’, it is inherent to the operation of competitive markets that the govern-

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ment will establish,

‘Justifications for monopolies in telecommunications are no longer valid’

and enforce,

the

rules of the game. Be that as it may. deregulatory policy goals and the convergence of the telecommunication and computer industries combined to convince the FCC that the technical and economic justifications for monopolies in telecommunications are no longer valid. The FCC (with the support of the White House. Congress, State Department, Department of Justice and other executive agencies) has reduced regulatory barriers to entry and oversight of investment in telecommunications equipment and services. It is assumed that this serves the public interest by promoting technological and service innovation and rate competition. The breakup of AT&T and other measures have followed from these assumptions. INTELSAT, the Communications Satellite Corporation (COMSAT, the US representative in INTELSAT), and P’ITs from some developed as well as from many developing nations are concerned that the extension of deregulation to international telecommunications will:

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raise communications costs for the average consumer in developed nations, and for developing nations as a whole; cause significant economic harm to INTELSAT; adversely affect the equitable distribution of the radio frequency spectrum and geostationary orbit; threaten PTI’ monopolies; and reduce the technical and economic efficiency of international communications.

These concerns are to a certain extent exaggerated. unwarranted. or misdirected. PTT fears of loss of revenue and power are, at least in part, justified. How extensive these lessons might be has yet to be determined. PTTs and national governments, like the US government, are not without means to defend their ‘national interest’. Deregulation The FCC established in the early 1970s the ‘Open Skies’ policy, en-

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couraging entry by private corporations into the market for domestic satellite communications services. In combination with the FCC’s 1977 decision to deregulate television receiveonly earth stations, this has led to rapid growth and competitive prices for satellite services in the USA. Following the breakup of AT&T. the attention of the FCC and other government agencies has been focused on means of introducing increased competition to the international telecommunications market. Until recently. this market had been controlled by mutually supportive monopolies or oligopolies. In the USA, AT&T dominated the voice market. Domestic telex was monopolized by Western Union, while an oligopoly of international record carriers (IRCs) (such as RCA and TRT) controlled the international telex market. International voice and record traffic was transmitted via COMSAT (which by virtue of the 1962 Communications Satellite Act enjoyed monopoly access to INTELSAT) to INTELSAT space segment. Alternatively, traffic might be carried by undersea cables controlled jointly by AT&T and the IRCs, and foreign PTTs. At the other end of the line from the USA, of course, was a PIT monopoly. This system succeeded in providing most of the world with the benefits of satellite communications. At present, two-thirds of international telephone traffic is carried by INTELSAT. The number of countries and territories making use of INTELSAT has grown steadily and the USSR is expected to join the 109 member nations in late 1985 or 1986. The number of earth stations in the INTELSAT system has grown exponentially. Rapid growth should continue. as recently introduced INTELSAT business, video, domestic and thin-route rural communications services become established. INTELSAT usage charges have fallen dramatically over the years owing to advances in satellite technology and growth in demand. In constant dollars, the cost is now 5% of what it was when INTELSAT began operations in 1965. A piece of American folk wisdom,

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‘Now any company may operate an international earth station’

‘A more detailed analysis of these cases, with complete references, can be found in the author’s previous articles on this subject: ‘The deregulation of international satellite communications: US policy and the INTELSAT response’, Space Communication and Broadcasting, Vol 3, No 1, March 1985, pp 39-59; and ‘The deregulation of international satellite communications’, in P. Dewiide and C.A. May, eds, Links for the Future, North Holland, Amsterdam, 1984, pp 1348-1351.

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‘If it ain’t broke, don’t fix it’, was often cited by opponents of the breakup of AT&T. Similarly, if the international communications system with INTELSAT as its central link - a rare example of successful international cooperation - has worked so well, why should it be ‘fixed’ through the entry of competitive systems? It has become common to note that the convergence of telecommunications and computer technologies has dissolved the old distinctions between voice and record services, between domestic and international communications, and between monopoly and competitive markets. Creamproviders of specialized skimmers, communications services such as value-added networks, and others have been encouraged to enter the market by the lowering of technological and regulatory barriers to entry. Where the new lines will be drawn, and whether the new international communications systems will serve the public interest as well as the old one did, are unanswered questions. For INTELSAT and the PTTs, the good old days are gone; creative responses to the challenges of the future are required. The US regulatory response has been to assume that free-market competition will best serve the public interest in the new age of international communications. Faced with the continued dominance of PTTs in international communications markets, the USA has attempted to export its deregulatory philosophy to other nations. The reason that the private international satellite systems have attracted such widespread attention is because of their perceived potential to reinforce the presures for change and undermine the position of PITS and INTELSAT. The FCC has made a number of decisions since 1982 which have changed the structure of the international communications market in the USA. The direct effect is restricted to the USA, but the indirect effect of US telecommunications deregulation can be seen in the privatization and partial deregulation of telecommunications taking place in Japan, the UK, and other nations. The FCC’s COMSAT

Structure decision of 1982 separated COMSAT’s monopoly businesses with INTELSAT and INMARSAT (the International Maritime Satellite Organization) - in which COMSAT acts as the official representative of the US - from its competitive government activities.’ The FCC also decided in 1982 in the Authorized User II case to permit COMSAT to offer retail services, and no longer to be restricted to being the ‘carrier’s carrier’, as it had been. More importantly, Authorized User II abolished access restrictions to COMSAT and, hence. to INTELSAT. Now any US company may purchase half-circuits from COMSAT. The company must reach agreement with operating authorities (PTTs) in other nations, to provide a full link. Following a court challenge. this decision has been upheld. The oligopoly/ monopoly of the IRCs and AT&T for international telecommunications has been broken. The FCC’s Earth Statiotl Ownership docket considered alternatives to the existing structure. whereby COMSAT managed the large international gateway earth stations used by AT&T and the IRCs to obtain access to INTELSAT satellites. Now. any company may operate an international earth station. COMSAT has ‘unbundled’ its charges for earth station services from its charges for the INTELSAT space segment. Up to 90% of the cost of an international link is accounted for by earth station charges and the charge for transmitting the message from the earth station terrestrially to the customer’s location. By constructing smaller earth stations either on customer premises or for shared use by businesses in a city, it is hoped to lower these costs. Already, 25 companies have applied to the FCC for authorization to erect international earth stations. mostly for INTELSAT’s video or business services. Construction permits for such earth sta-

tions are now granted routinely. However, larger general-purpose earth stations will still be subject to stricter FCC oversight. Another FCC proceeding, on Direct Access to INTELSAT for carriers other than COMSAT, was not acted upon by the FCC. The FCC concluded

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that the changes described above were sufficient to ensure that competitive conditions would prevail in INTELSAT-related telecommunications services markets. However, Executive Branch and Congressional support for ‘direct access’ may revive the FCC’s consideration of this subject in the future. A further diminishing of COMSAT’s role by attacking its last bastion of monopoly power (control of INTELSAT space segment prices) would not be surprising. None of these decisions has attracted the attention, nor aroused the concern, which the international satellite system proposals aroused. This is due in the first instance to the limited effect of these changes on foreign PITS and INTELSAT. On the contrary, INTELSAT is hopeful that these changes will stimulate the market for INTELSAT-provided telecommunications services in the USA. PTTs might also benefit, although some have expressed concern about the costs incurred through the need to interconnect additional carriers. Changes in the structure of COMSAT, in authorized user regulations for access to COMSAT and INTELSAT, and in the ownership of intemational earth stations do not directly challenge PIT control of telecommunications within their national territory. Alternative international satellite systems might. User-owned earth stations in the USA, transmitting to user-owned satellite transponders on the private international satellite systems. to a user-owned earth station in another country, would bypass not only AT&T, COMSAT. and INTELSAT, but the PIT as well. The high charges for international services, used by most PITS to crosssubsidize domestic services, might not be sustainable in this environment. It is not preordained that P’ITs must permit private earth station ownership. But as the examples of the USA, Canada, the UK and West Germany show, once satellite systems are in place, pressure mounts to liberalize earth station ownership regulations. In all cases, cable TV and satellite master antenna television (SMATV) wee the first applications for which the PTTs were faced with

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such pressure. It appears to be only a question of time before pressure from business mounts for unencumbered access to small and micro earth stations for domestic and international telephony, data communication and videoconferencing services.

Defence of INTELSAT As long as INTELSAT is the dominant international carrier. PITS may hope to resist such pressure. INTELSAT’s 109 signatory nations. including the USA, are obliged to abide by the conditions of the INTELSAT Agreement. Article XIV(d) of that agreement concerns the authorization of alternative international satellite systems and networks. The number of networks requesting coordination from INTELSAT under Article XIV(d) has grown significantly in the past few years. Most of the requests in 1984 and 1985 were from US and Canadian private satellite network operators. The networks intend to extend service to ‘spill-over’ areas in each other’s country, as well as to the Caribbean and Latin America. Article XIV(d) requires such networks to: 0

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ensure technical compatibility with, and avoid harmful interference to, INTELSAT satellites and earth stations: avoid significant economic harm to INTELSAT; and preserve the global connectivity achieved through the INTELSAT system.

To date, the INTELSAT Board of Governors never has rejected a request for coordination under Article XIV(d). Given the vehement opposition expressed by INTELSAT and most PITS to the private satellite systems, this record may not continue. However, the Executive Branch of the US government suggested, and President Reagan endorsed, imposing limitations on the new systems so as to avoid violating Article XIV(d) conditions. The most important restrictions are: 0

the systems may not carry switched telephone services; that is POTS (plain old telephone ser-

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‘The USA might authorize new systems without INTELSAT approval’

‘The Executive Summary of the study, ‘The impact of national and regional communications satellite systems on INTELSAT’, prepared for the Office of Telecommunications Policy, Washington, DC, February 1978, by Future Systems, inc. Gaithersburg, MD,.is reproduced in S. Hrg. 98-483, International Communications and Information Policy, Hearings Before the Subcommittee on Arms Control, Oceans, International Operations, and Environment of the Committee on Foreign Relations, United States Senate, 98th Conaress. First Session, 19 and 31 October 1983, Washington, DC, US Government Printing Office, 1983, pp 214-216.

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vice), 85% of INTELSAT’s traffic base, is exempted from competitive entry; the USA will not request coordination of a system with INTELSAT without another operating authority (PTT) having first agreed to authorize the use of the satellite for services between that nation and the USA.

At the same time, the USA issued a warning to INTELSAT and foreign PTTs: if a system meets these conditions and is still rejected by INTELSAT despite the effort in good faith to coordinate with INTELSAT, the USA might authorize the system anyway. Article XIV(d) coordinations are not legally binding on the participants. Such a course of action, while violating the spirit of the INTELSAT Agreement, would not violate US treaty obligations. Alternative international satellite systems are not new. The European Telecommunications Satellite Organization (EUTELSAT). PALAPA of Indonesia. INMARSAT for maritime communications, and ARABSAT are perhaps the most prominent examples. However none of those systems are in the hands of private operators. and they do not compete on the North Atlantic route with INTELSAT. as most of the private proposals intend to do. This route is argued plausibly by INTELSAT to provide a cross-subsidy to the thin-traffic routes for developing countries. A 1978 study of ‘The impact of national and regional communications satellite systems on INTELSAT’ concluded:’ We must rcmemhcr that INTELSAT’s business decisions are made by its Board of Governors. and the same individuals also represent their own regional and national systems interests. In a competitive environment it is clear that in the long run the national interests of each Governor and Signatory will have priority over the interests of the INTELSAT System. Eventually the INTELSAT System will he managed hy its competitors and be unable to compete If regional satellite communications systems are permitted to proliferate. INTELSAT will probably cease to be a significant factor in tclccommunications If regional systems absorb most of INTELSAT’s functions. they will be

able, like INTELSAT. to provide high quality satellite communications at low cost. There is no assurance. however, that truly global communications would be provided on a non-discriminatory basis. as is required of INTELSAT Furthermore. unless a single global entity coordinates the development of regional systems. there is no assurance that uniform standards will be used, thus making interconnection more difficult and costly. It is also expected that the frequency spectrum and orbital arc will be used less efficiently than if a single entity would perform overall planning.

The study went on to estimate that. if INTELSAT were faced with unlimited competition, INTELSAT would lose 96.9% of its traffic. and circuit prices would be 1001% higher than otherwise by the year 2003. There is reason to be less pessimistic about the impact of competitive systems. First. one may point to the numerous regional and national communications satellite systems planned or already in service. These systems do not appear to have had a deleterious effect on INTELSAT. On the contrary, the systems are a demonstration of the costeffectiveness of satellite communications for an increasing range of applications. INTELSAT itself will participate in many of these markets. Second, the Reagan administration’s restrictions on the private systems prevent ‘unlimited competition’ with INTELSAT. Third. faced with these restrictions. it is doubtful that all of the proposed systems will ever be launched. Banks will hesitate to fisuch nance speculative projects. Perhaps most importantly. submarine fibre optic technology, already acknowledged by INTELSAT to be its potentially most dangerous competitor, is advancing rapidly. In the face of this competition, the private systems will have to select their markets carefully or withdraw perhaps altogether. PITS and INTELSAT will have to adapt to a more competitive environment in the late 1980s. Chaos will hopefully be avoided for international telecommunications, while at the same

time

innovative

services

and

more reasonable prices for these services should be available to corporate and individual users, in developed and developing nations alike.

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