Strategies for market entry by private international satellite systems

Strategies for market entry by private international satellite systems

Rob Frieden

lntelaat satisfies the International satellite requirements of most nations, but alnce 1984 the US government has endorsed quallfled market entry by lnternatlonal satellite systems separate from the Intelsat global cooperative. This policy lnltlally met wlth substantial oDmsltlon. but lntelsat did eventually ai>brove ihe operatlonal plans dr PanAmSat. The PanAmSat model for separate system market entry emphasizes provocatlon and the threat of lltlgatlon and congressional Intervention, but as new separate systems appear on the horizon other strategies have become avallable. Thls article explores separate system models with an eye to ldentlfylng whether and how lntematlonal satellite competltlon can enhance consumer welfare. Rob Frieden is a telecommunications attorney and consultant. In the autumn he will become an Associate Professor in the School of Communications at The Pennsylvania State University, 201 Carnegie Building, University Park, PA 16602, USA.

‘The Federal Communications Commission (FCC) believes its pro-competitive, open-entry policies will foster ‘an improved international communications system with more choices for consumers, more diverse service offerings and lower rates’: American Telephone & Telegraph Co, 75 FCC 2d 288, 288 (1980) (removal of restriction on the use of international telephone lines for data applications), aff’d sub nom Western Union Int’l Y FCC, 673 F2d 539 (DC Cir 1982).

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Most international telecommunications and trade policy initiatives in the USA and other nations result from interest in broader global market access, and the belief that enhanced domestic consumer welfare from deregulation can apply international1y.l However, international telecommunications and trade matters simply are not symmetrical with any one nation’s domestic policies. Domestic deregulation does not necessarily jibe with the traditional P’IT model, or any current liberalization initiative. Furthermore the multilateral, cooperative nature of international telecommunications and trade policy militates against extrapolation from one nation’s view. Accordingly the pace of international liberalization may lack the speed US deregulators and entrepreneurs would prefer. This article will examine initiatives to promote conditional international satellite competition with an eye towards predicting which types of satellite systems and strategies for market access will succeed. Satellite systems, separate from the Intelsat and Inmarsat global cooperatives, have embraced different profiles and degrees of visibility as they devise methods to present users with a mix of service innovations and price cuts while avoiding legal and regulatory barriers to market access. At one extreme, an operating system has embraced a provocative, trendsetting posture that has achieved success, but perhaps only because the substantial weight of the US government was behind the initiative. Another system, with plans to locate numerous satellites in the Pacific Rim, lacks governmental weight, but no shortage of ambition. At the other extreme, a number of systems deliberately seek a low profile in a high-volume market. Midway lie regional market players and innovators who seek lucrative niche markets.

Governmental

philosophy and satellite competition

In the USA the mandate of the Federal Communications Commission (FCC) to serve the public interest increasingly points that agency towards deregulation. Other nations’ public interest assessments evi-

0308-5961/92/040354-10 @ 1992 Butterworth-Heinemann Ltd

Strategies for private international

satellite systems

2The FCC adopted an equipment registration programme that limited restrictions on interconnection of equipment to those aimed at protecting the telephone network from technical harm. See Interstate and Foreign Message Toll Telephone, First Report and Order, 56 FCC 2d 593, modified on reconsideration, 58 FCC 2d 716 (1976); Second Report and Order, 58 FCC 2d 736 (1976), aff’b sub nom North Carolina Util Comm’n v FCC, 522 F2d 1036 (4th Cir), cerf den, 434 US 874 (1977).

dence greater appreciation for a businesslike approach, and more likely consideration of non-government alternatives in narrowly defined, non-essential market niches. But no other nation, with the possible exception of New Zealand, currently believes that private enterprise alone can make telecommunications facilities, services and equipment markets competitive and supportive of previously articulated social objectives. Over the course of 25 years the FCC has unbundled telecommunications equipment from service,’ permitted tariff flexibility and reduced 31ntemationa/ Competilive Carrier, 102 carriers’ regulatory duties,3 and shown increasing reluctance to impose FCC 2d 812 (19851. recon den. 60 Rad structural requirements for guarding against anticompetitive practices.4 Reg 2d (P&F)‘1435’i1986). However, forIt has dismantled a variety of regulatory policies that segmented the eign owned or controlled carriers providing international services from the USA are market into domestic/internationa1,5 voice/record,6 satellite/cable,7 considered ‘dominant carriers’, because of dominant/non-dominant carrier,8 and gateway/non-gateway factions.’ their potential to leverage bottleneck conBut indigenous foreign markets may lack the size and potential for such trol at home to secure concessions from US carriers. The FCC requires such carreliance on open entry and competition. riers to bear greater administrative and Many of the US policy initiatives, if embraced internationally, could substantive filing requirements. In Decemresult in stranded investment and wasteful duplication of facilities. For ber 1991 the Commission refined its policy by proposing that dominant carrier status example, the US domestic ‘open skies’ policy” promoting market entry apply on a route-by-route basis as a funcby private satellite operators would result in severe overcrowding of the tion of whether the carrier has the ability to of satellites would geosynchronous orbital arc. The proliferation discriminate against other non-affiliated US carriers through control of bottleneck threaten the ability of the International Telecommunication Union to facilities and services at foreign locations: resolve interference problems, and would support the claims of developRegulation of International Common Caring nations that developed countries are locking up too much of a rier Services. CC Docket No 91-360, Notice of Proposed Rulemaking, 7 FC6 limited and shared global resource. Red 577 (1992). The Commission conThe profusion of satellites does not necessarily guarantee that the tinues to require all US international carmarket will absorb all additional transponder capacity without signifiriers to file for authorization under Section 214 of the Communications Act. Under the cant price cutting. Should the market not clear out all inventory, then new rules all Section 214 applicants would have to certify whether they control, or are questions exist whether an open skies policy promotes resource and under control of, a provider of Felecom- technical efficiency, and whether society benefits from more satellite munication services in a foreign market options that are sparsely loaded. One critic’s view of international they seek to serve. carrier collusion and anticompetitive practices is another pundit’s %f Comsat Study- Implementation of Set observation that international telecommunications policy requires col505 of the lntemafional Maritime Satellite Telecommunications Act, 77 FCC 2d 564 laboration even to the point of coordinated deployment and use of (1980), and Changes in the Corporate facilities and services. StrucWre and Operation of the ComNations have begun to join the USA in supporting private alternatives munications Sateke Corp, 90 FCC 2d 1159 (19821. Second Memorandum Oointo incumbent carriers’ submarine cable consortia and satellite ion and Order, 97 FCC 2d 145 (1684) But the general global view remains that competition cooperatives. l1 (analysis of Cornsat’s corporate structure between international cable and satellite transmission facilities - sowith an eye to segregating competitive ventures from regulated activities) with the called intermodal competition - is not so robust as to support competing Third Computer Inquiry, Report and Order, consortia or joint ventures, or a laissez-faire regulatory attitude towards 104 FCC 2d 958 (1986), mod on recon 2 how carriers should load such facilities with traffic. FCC Red 3035 (1987), further recon den 3 FCC Red 1150 (1988), partially reversed The PTAT-1 cable in the North Atlantic’* and the North Pacific and remanded sub nom California v FCC, Cable13 demonstrate that transmission facility alternatives need not 905 F2d 1217 (9th Cir 1990). result in destructive competition and price wars that might prevent ‘See, eg, Int’l Record Carriers’ Scope of Operations (Gateways), 76 FCC 2d 115 carriers from providing essential, non-competitive services. Indeed, the (1980), aff’d sub nom Western Union Tel Co v FCC, 665 F2d 1126 (DC Cir 1981) very carriers that make up traditional submarine cable investment and (expanding domestic locations where in- operational consortia have acquired capacity in private cable alternaternational record carriers could accept tives, realizing faster and cheaper circuit restoration options and some traffic). facility cost savings as well. %quity into Policy fo be Followed in FuCost savings, circuit redundancy and enhanced circuit restoration ture Authorization of Overseas Service, Notice of Inquiry, 36 FCC 2d 605 (1972), options notwithstanding, many nations refrain from supporting altemaReport and Order, 57 FCC 2d 705 (1976), tive carrier and transmission facility options. New US carriers, which reviewed sub nom ITT World Comms, Inc lack the common-carrier status, do not have a regulatory agency’s continued on page 356

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Strategies for private international satellite systems continued from page 355 v FCC, 555 F2d 1125 (2d Cir 19771, policy applied, 75 FCC 2d 682 (1980), &d sub nom Western UnionInt’lv FCC. 873 F2d 539 (DCCir 1982) (allowingATaT to provide data services); Western Union Int’l, Inc, 76 FCC 2d 166 (1980) (lifting restrictions on voice services provided by record carriers); Overseas Communications Services, 92 FCC 2d 641 (1982) (authorizing AT&T’s entry into the international record services market). ‘See Policy for the Distribution of United States international Carrier Circuits Among Available Facilities During the Post 7988 Period, CC Docket No 87-67, Notice of Proposed Rulemaking, 2 FCC Red 2109 /19871. Reoorf and Order. 3 FCC Red i156 ‘(1986) (abandoning circuit distribution guidelines); Policy to be Followed in Future Licensing of Facilities For Overseas Communications, 30 FCC 2d 571 (1971) (setting forth policies for licensing transmission facilities in the North Atlantic region during the 1970s); Inquiry into the Policies to be Followed in Future Licensing of Facilities for Overseas Communications, 62 FCC 2d 451 (1976) (planning up to 1965). For a detailed history of the FCC’s loading policies, see Inquiry into the Policies to be Followed in the Authorization of Common Carrier Facilities to Meet North-Atlantic Telecommunications Needs During the 7985-7995 Period, Third Notice of Inquiry, 98 FCC 2d 1166 (19841: see also Policies to be Followed ‘in the Authorization of Common Carrier Facilities to Meet Pacific Telecommunications Needs During the Period 1981-1985 (POR Planning), 102 FCC 2d 353 (1986). The Commission traditionally used its public interest mandate to review Section 214 applications in terms of demand, costs, media and route diversity, restoration, intramodal and intermodal competition, technological innovations and international comity. -See, eg, American Telephone & Teleoraoh Co et al. 4 FCC Red ‘1129, 1131 (1586) (TAT-9 Abthorization). But in American Telephone & Telegraph Co et al, 4 FCC Red 8042 (1989) (TPC-4 Authorization) the Commission concluded that the Communications Act of 1934 did not require it to undertake a facilities planning process before considering an application to construct a submarine cable system. %t’/ Cimpetitive Carrier, 102 FCC 2d 812 (1985), recon den, 60 Rad Reg 2d (P&F) 1935 (1986). ‘See Modification of Policy on Ownership and Ooeration of US Earth Stations That Operaie With the INTELSAT Global Communications System, 100 FCC 2d 250 (1984) (authorizing Earth station own&ship inbependeni of a Comsat-led consortium): Licensino Under Title III of the Comm&cations kt of 1934, as Amended of Private TransmiVReceive Earth Stations Operating with the INTELSAT Global Cbmmu&ations Satellite System, 3 FCC Red 1585 (1988). aff’d sub nom TRT Telecontinued on page 357

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certification that foreign carriers expect. Such private carriers are perceived as lacking the proper bona fides, the commitment to longterm service availability, circuit restoration options and reliability. Notwithstanding attractive prices, a private carrier such as Private Trans-Atlantic Telecommunications System had difficulty in attracting carriers to end users until a certificated international carrier subsidiary of US Sprint acquired the company, thereby conferring greater credibility and legitimacy.

International

satellite competition

In 1984 a Presidential Determination stated that international satellite systems, separate from the Intelsat cooperative, ‘are required in the national interest’.14 This one-paragraph document set into motion an extensive policy-making process and foreign relations campaign to establish a workable blend of pro-competitive initiative and adequate safeguards for Intelsat. On the one hand, prevailing political and economic policies in the USA as applied to international telecommunications favour extending domestic pro-competitive policies that have generated consumer and producer benefits. On the other hand, the international telecommunications marketplace involves pervasive government involvement, including policies that have the effect of stifling private ventures and market entry. The International Telecommunications Satellite Organization (Intelsat) represents how global cooperation has achieved ubiquitous satellite service at rates reflecting favourable economies of scale. The USA has executed a treaty-level document that requires a degree of forbearance from national satellite initiatives in favour of the cooperative approach.15 Article XIV of the Intelsat Agreement requires parties to the agreement, ie governments and their signatories who provide international services, to consult with Intelsat prior to using or operating a separate satellite system to ‘ensure technical compatibility of such facilities . . . and to avoid significant economic harm to the global system of Intelsat’.16 Notwithstanding its Intelsat Agreement obligations, the US government, through the Executive Branch and the FCC, implemented the Presidential Determination. In a joint ‘White Paper on new international satellite systems’, the Departments of Commerce and State articulated how US international separate systems could operate without harming Intelsat.17 The White Paper proposed criteria, which the FCC subsequently incorporated as conditions to licensure,l* establishing limits on the scope of direct competition with Intelsat. The White Paper proposed that US separate systems must: 0 0 0

not interconnect with the public switched telecommunications network in either the USA or any foreign locale; establish long-term contracts for the sale or lease of capacity; and secure a foreign operating agreement and complete the Intelsat consultation process before commencing service.

The FCC’s 1985 decision implemented the Executive Branch’s recommendations, and started the process for initial confrontation with, and subsequent accommodation by, Intelsat. After authorizing the Pan American Satellite System to provide international satellite service,*’ the FCC had to ensure that the sole US signatory to Intelsat would fairly

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Strategies for private international satellite systems continued from page 356 communications Coro v FCC, 878 F2d 135 (DC Cir 1989) (authorizing end users to operate international transmit/receive Earth stations independently of the carrier providing the space segment). ‘OSee Domestic Communications Satellite Facilities, 35 FCC 2d 844, 849 (1968). “See, eg, Toward Europe-wide Systems and Services - Green Paper on a Common Approach in the Field of Satellite Communications in the European Community, COM (90) 490 final, 20 November 1990 (proposal for substantial liberalization in satellite Earth station ownership and access to satellite capacity). ’ * TeCOptik Ltd, 100 FCC 2d 1033 (1985). 13Pacific Telecom Cable, Inc, 2 FCC Red 2688 (1987) (conditional authorization), 4 FCC Red 8061 (1989) (final authorization). %onald Reagan, Presidential Determinatii No 85-2, 49 Fed Reg 46, 987 (28 November 1984) implemented in EstabMment of Satellite. Systems Providing International Communications, 101 FCC 2d 1046 (1985), on recon 61 Rad Reg 2d (P&F) 649 (1986), on recon, 1 FCC Red 439 (1986). ‘*Agreement Relating to the International Telecommunications Satellite Organization, opened for sianature at Washinaton, 20 ‘August 1971, entered into force 12 Februarv 1973. 23 UST 3813. TIAS No 7532 (hereinafter cited as lntekat Agreement); see also Operating Agreement Relaiing to the International Telecommunications Satellite Organization, opened for signature at Washington, 20 August 1971, entered into force 12 February 1973, 23 UST 4091, TIAS No 7532 (Intelsat Operating Agreement); Agreement Establishing Interim Arrangements for a Global Commercial Communications Satellite System, opened for signature at Washington, and entered into force, 20 August 1964, 15 UST 1705, TIAS No 5646 (Intelsat Interim Agreement). ‘%telsat Agreement, Art XIV(d). “Senior Interagency Group on International Communication and Information Policy, A White Paper on New International Skeltite Systems February 1985. 18Establishment of Satellite Svstems ProMing International Communikations, 101 FCC 2d 1048 (1985) on recon 61 Rad Reg 2d (P&F) 649 (1986), further recon 1 FCC Red 429 (1986). “Pan American Satellite, Inc 101 FCC 2d 1318 (1985) (conditional authorization), 2 FCC Red 7011 (1987) (final C-band authorization), 3 FCC Red 677 (1988) (final Ku-band authorization). “Communications Satellite Act of 1962, as amended, Pub L No 870624, Set 191 et sep, 76 Stat 419 codified at 47 USC Set 701 (a) (1990). *‘Transborder, international services of domestic US satellites required consultation with lntelsat and addressed many of the economic harm questions raised by separate systems. See Transborder Video continued on page 358

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perform its task as emissary in the consultation process. The Communications Satellite Corporation (Comsat), incorporated by an Act of Congress,20 must serve the public interest as articulated by the US government and pursue the best interests of its shareholders. Prior to the onset of separate systems, Comsat enjoyed a de facto monopoly in international satellite service to and from the USA with the exception of domestic satellites, authorized to provide transborder services taking advantage of the fact that their footprints traverse nearby nations. Because Comsat must comply with official instructions of the US government when exercising its 25% ownership vote in Intelsat it must occasionally work against its business interest and that of its shareholders, as occurred when instructed by the FCC, State Department and the National Telecommunications and Information Administration (NTIA) to push for a favourable outcome to consultation on the subject of separate systems. Comsat had to lobby its fellow signatories to act in a manner which sanctions intramodal competition, ie two types of satellite facility competitors. While most signatories hedge their Intelsat investment by participating in submarine cable ventures, such intermodal competition has been deemed acceptable. The concept of direct satellite competition, however, was difficult to accept. The FCC licenses Comsat as a ‘Carrier’s Carrier’, in effect enabling it to serve as a middleman between Intelsat and US international service carriers. As a common carrier, subject to Title II and III of the Communications Act of 1934, in addition to the Communications Satellite Act of 1962, Comsat cannot discriminate or engage in unreasonable practices. Its sole signatory status requires it to adhere to government-issued instructions on how to vote and what to say on matters involving the public, as opposed to Comsat’s private interest. By favouring international separate systems, the US government assumed the task of directing Comsat that its licensee and public interest obligations obliged it to advocate forcefully to the members of Intelsat the need for a favourable separate system consultation. Prior to Pan American Satellite (PanAmSat), the first US separate system up for consultation, Intelsat had favourably passed judgement on a number of domestic transborder and regional systems. These include dozens of US domestic satellites providing services to Canada, the Caribbean, Central America and parts of South America.21 Additionally, Intelsat had favourably consulted on the subject of major regional systems operating in Europe, Southeast Asia, India, Brazil, the Middle East and elsewhere.

The Intelsat consultation

process

The Intelsat Executive Organ, based in Washington, DC, provides the cooperative with expert analysis on the extent of separate system technical interference and prospective traffic and revenue diversion. The Executive Organ staff advises the Board of Governors that serves as the cooperative’s Board of Directors and is comprised of signatory representatives from nations with the highest single investment interest and groups of signatories whose collective investment share qualifies on quantitative or geographical diversity grounds. The Board of Governors then advises the Assembly of Parties, which is comprised of government representatives from all nations associated with Intelsat. The final

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Strategies for private international satellite systems

continued from page 357 Services, 88 FCC 2d 258 (1981); Hughes Communications Galaxy Corp, 8 FCC Red 297 (CCB 1991). *Orion Satellite Carp, 101 FCC 2d 1302 (1985) (conditional authorization), 5 FCC Red 4937 (1990) (granting final authority to construct, launch and operate). ‘qhe lntelsat Board of Governors did not expressly propose that the Orion Satellite system should be favourably consulted. Instead it reported to the Assembly of Parties that it had received adequate assurances from the USA and other nations interested in supporting separate system market entry that they would not oppose efforts on the part of lntelsat to survive in an increasingly competitive environment. This apparently means that Intelsat has the implicit approval to deaverage rates selectively to meet competition from separate systems. 24See, eg, Communications Satellite Corp, 5 FCC Red 753 (1990) (approving Comsat’s financial participation in Intelsat’s procurement of additional satellites that would expand the number of operational satellites in orbit to meet higher demand).

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document issued by the Assembly of Parties to the party proposing the consultation respects national sovereignty and is styled as a recommendation. Nevertheless the pursuit of separate system plans in the face of a negative recommendation would violate the spirit of the Intelsat Agreement, and would probably result in no other nation conferring an operating agreement. While Intelsat was initially faced with as many as five large-capacity US separate systems, only PanAmSat and Columbia Communications, using capacity on two NASA tracking and data relay satellites, have become operational. Another separate system with significant financial backing, Orion Satellite Corporation, has received final FCC authorization and plans a satellite launch in 1993.22 Still, the cooperative has legitimate concerns over its ability to provide ubiquitous satellite service at globally averaged rates.23 Global averaging means that rates for high-volume routes such as between the USA and the UK are generally priced the same as service on less dense routes such as from Nigeria to Thailand. To safeguard its ability to average rates over a large global network and perhaps in deference to more parochial concerns about losing its near monopoly, Intelsat uses a ‘worst case’ analysis of technical and economic harm. This has meant that Intelsat will attempt to safeguard non-existent but possible future satellites from interference, through the use of technical criteria far more rigorous than typically used by the ITU’s International Frequency Registration Board. On the economic front, Intelsat has vigorously objected to a separate system at the same time that it alleges that robust traffic demand necessitates additional satellite capacity.24 Such a dichotomy called into question the legitimacy of the Intelsat Executive Organ’s analysis particularly because it appeared to assume that it would carry any traffic handled by a separate system. In effect Intelsat assumes one-for-one traffic diversion, thereby completely ignoring the possibility of market growth and demand stimulation by separate systems. It is quite possible that consumers’ demand elasticities and risk-tolerance profiles might limit the extent of direct competition between Intelsat and separate systems. The latter might serve extremely price sensitive users who otherwise might use air couriers or less immediate delivery options in the absence of a one-satellite carrier offering significant price reductions to what was previously available. The Intelsat Executive Organ’s initial findings on PanAmSat, as had been the case with other separate systems, pointed to peril and adverse impact. Many nations had expressly articulated their opposition to US separate systems, despite the fact that they had participated in other separate satellite ventures and their international carriers regularly invested in transoceanic cables that in effect compete with Intelsat and have no consultation obligation. PanAmSat and other US separate systems threatened to exceed an unofficial 10% revenue diversion figure that served as Intelsat’s threshold point for separate system economic harm. The figure represented a running total of all previously consulted separate systems, making it increasingly difficult for new systems to pass muster. However, both PanAmSat and Orion Satellite have achieved favourable consultations with Intelsat, and the cooperative recently streamlined the consultation process for systems of less than 30 transponders with less than 100 voice-grade circuits that access the public switched

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network.*’ While initial US separate systems became the subject of vigorous lobbying by both Comsat and the US government, as well as the politically savvy leadership in Intelsat, recent consultations have become more perfunctory and less contentious. Having itself waged a vicious informational campaign, including advocacy before the US Congress, the Intelsat leadership has grown to realize that the USA is intent on seeing its separate system policy implemented, even in the face of a negative Assembly of Parties recommendation. Intelsat was faced with the prospect of a confrontation, or the necessity of having to moderate its economic harm findings. On several prior occasions Intelsat has identified ways to avoid findings of economic harm, primarily by deeming Intelsat not significantly affected by the services provided by a particular separate system. In the case of US-Canadian transborder service Intelsat concluded that domestic satellites would augment existing terrestrial facilities. In the case of Eutelsat, a regional system with service throughout Europe, Intelsat reduced its preliminary finding of 10% economic harm from that one system to less than a 1% impact, on a new-found recognition that Eutelsat would augment existing terrestrial options. Even where such terrestrial options were at best skimpy, and at worst non-existent, as was the case with Arabsat in the Middle East, Intelsat displayed political wisdom in opting not to confront. US separate systems aiming to serve dense transoceanic routes present Intelsat with a threat that cannot go unchallenged. There is a justifiable concern that a number of US separate systems can skim the cream of profitable dense routing, leaving Intelsat as the carrier of last resort for less attractive routes, particularly to less developed nations. Even the prospect of such harm and proliferation of satellite options has the effect of presenting foreign policy and national security concerns. The prospect of Intelsat retaliation through procurement of non-US satellites and launch vehicles has made the separate system policy all the more risky. On the other hand, the US separate system restrictions have rendered fully 80% of Intelsat services off limits. Intelsat has been able retain a policy of averaging costs for switched services over all routes without fear of substantial traffic diversion. Separate systems have concentrated on customized, non-switched offerings like video that have experienced quite robust growth. Accordingly the few US separate systems which actually enter the marketplace can be considered niche players in no position to threaten Intelsat, impair spectrum or orbital slot management, harm developing nations, threaten national security concerns or hinder the US balance of trade. The potential for enhanced consumer welfare, service diversity, some downward rate pressure and innovation is too good to pass up merely on a quite unscientific, internal Intelsat analysis. *5See, eg, Pan American Satellite, Mem Oo Order & Auth. 6 FCC Red 4610 119911 (iranting 100 64 kbps-equivalent &c& for services interconnected with the public switched telephone network between the USA, the Dominican Republic, Eastern European countries not members of Intelsat, Costa Rica, the Bahamas and the UK): IOk Communidations Group, 6 FCC Rdc 2932 (1991) (use of Intersputnik for services not interconnected with the public switched telephone network).

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Rethinking the US separate system policy Over the course of several years many nations have been associated with the Intelsat consultations on US separate systems. Rather than incur any semblance of economic harm, Intelsat has experienced absolute capacity shortages in the North Atlantic region and has pursued programmes to expedite the deployment or lease of additional capacity. What was once characterized as a threat to Intelsat’s very survival has

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Strategies for private international satellite system.9

26Pan American Satellite Corp, Petition for

Rulemaking to Modit) Commission Policies Established in CC Docket No 84-1299 Relating to Separate Satellite Systems, RM-7562 (filed 16 July 1990). 27Letter from Secretaw of Commerce Robert Mosbacher and Secretary of State James A. Baker, III. to FCC Chairman AHAl; Sikes (27 November 1991). 29Permissible Services of US Licensed International Communications Satellite Systems Separate from the International Telecommunications Satellite Organization (Intelsat), Order, FCC 92-95, Mimeo No 36356 at 3, 7 4 (rel 6 April 1992).

3olbid. 31Ibid.

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become a relatively insignificant matter, resolved in many instances by expedited and streamlined procedures to free the cooperative to attend to more pressing matters. Intelsat has now become less preoccupied with separate system competition and more involved in the business at hand: arranging for more capacity and deploying it in ways that make it attractive to users with fibre-optic cable options. The fragile peace between Intelsat and separate systems was challenged in 1991 with the proposal by PanAmSat that the FCC abandon the public switched telephone network access restriction.26 The vast majority of commenters favoured such abandonment, but the Commission initially chose to confer with the Executive Branch before unilaterally acting to change the separate system policy that resulted from interagency coordination. The lobbying campaigns and policy debates returned, and new concerns about national security were raised on the ability of the intelligence community to monitor all international switched traffic. In November 1991 the Secretaries of Commerce and State announced a major revision to the Executive Branch’s position on separate systems in a letter to FCC Chairman Alfred Sikes.27 Having reviewed the current separate system policy, the Executive Branch ‘established the goal of the complete elimination of the restrictions on interconnection of international satellite systems with the public switched networks by January 1997’.28 The Executive Branch policy also determined that separate systems should now have the opportunity to provide private line circuits interconnected with public switched networks, subject to the ongoing Intelsat consultation obligation. On 8 April 1992 the FCC issued an order incorporating the Executive Branch ‘determinations’ as part of its regulatory and licensing policy.2g The Commission concluded that ‘immediate changes in the regulatory limits placed on separate systems are warranted and appropriate: [Elxpanding the permissible offerings of separate satellite systems should yield significant public interest benefits by broadening customer choice, encouraging competition and more cost-based charges, fostering innovation, and providing new job and investment opportunities.“’ The Commission readily dismissed concerns about Intelsat’s financial viability and the need to safeguard the cooperative’s core switched services. While previously willing to protect Intelsat from competition, the FCC now ‘dispels any concern about [such a] . . . need’31 by noting that Intelsat itself views international telecommunications as a growth market, the cooperative has experienced spot shortages of capacity, and the demand for separate system capacity has grown. Not too long ago both Comsat and Intelsat would have resumed a vigorous policy debate to pre-empt or stall liberalization of the US separate system policy. Now both organizations appear to welcome the end of a distracting and confrontational process, and the opportunity to concentrate on the intermodal competitive threat of fibre-optic cables as well as the intramodal competition generated by separate systems. Types

of private international satellite systems

ProvocateurlTrendsetter

The Provocateur/Trendsetter model involves a proactive system willing to challenge the status quo even at the risk of creating the perception that it is a threat to PTT revenues and incumbent satellite systems. For TELECOMMUNICATIONS

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any nation’s separate system policy to result in actual market entry, at least one satellite system applicant, typically the first or most entrepreneurial, must take an aggressive posture, promising users new and cheaper service opportunities. In the domestic US interexchange telephone market MCI Telecommunications, Inc, fits the Provocateur/ Trendsetter model, and in the international satellite arena the label belongs to Pan American Satellite. The mere threat of competition forced incumbent carriers like Intelsat and Inmarsat to embrace a more businesslike approach to service. But, at least initially, it fostered a siege mentality that stimulated thinking on ways to thwart and delay market entry. The consultation requirements, International Frequency Registration Board coordination process and regulatory oversight became vehicles to frustrate the Provocateur/Trendsetter. These administrative delays, in conjunction with the fact that the system would initially involve only one in-orbit satellite, works to abate the advantage of early entry and the potential to capture a larger market share than latecomers. On the other hand, real or perceived opposition by incumbent satellite operators and the telephone companies, which must confer operating agreements to accept and hand off traffic, fuels the perception that the Provacateur/ Trendsetter is an iconoclast and innovator who must overcome unfair obstacles to serving the public. The ProvocateutYTrendsetter will generate a lot of publicity in its search for a market. But such press coverage will have a mixed message. Depending on the sympathies of reporter and reader, the satellite system will provide the benefits of competition, or create trouble not worth the extra effort users and carriers might have to exert for the privilege of receiving and offering service. This type of system appears to savour the battle for initial market access, and later for elimination of any impediment or service barrier, eg services that access the public switched telephone network. Low Profiler The Low Profiler model capitalizes on the market development efforts of Provocateur/Trendsetters while deploying additional ‘plain vanilla’ capacity. Carriers of this sort, such as Columbia Communications, Orion and Unicorn, seek to ride the coattails of others with an eye towards capturing market share with less expensive travail. They enter the market later, after others have fought policy battles, and secure market share when the risk of P’IT retaliation or non-cooperation has abated. What the Low Profiler loses in terms of an untapped market, it presumably gains in the ability to sell or lease capacity with few if any challenges to legitimacy. Over time the Low Profiler may have to sacrifice fewer markets and refrain from fewer ‘provocative’ practices as the concept of separate systems becomes more palatable to PTTs. The Low Profiler can easily lease capacity to users when incumbents face a shortfall or lack the specific type of facility or service desired. And this type of separate system may provide services that access the public switched telephone network without the fallout previously encountered by earlier market entrants. On the other hand, when incumbents have ample capacity and fear lost market share, even the Low Profiler constitutes a competitive threat. Irrespective of whether it will take away market share from incum-

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Strategies for private international satellite system.9

bents, the Low Profiler may experience the same difficulties in securing operating agreements with P’ITs as the ProvocateutYTrendsetter. The marketplace prospects for newcomers are handicapped by consumers’ perception that it has nothing new to provide. The possibility of a less attractive orbital slot and look angle to the separate system satellite exacerbates this perception. Innovator

The Innovator model concentrates on providing greater convenience, flexibility, customer service and access to the rest of the world. Prospective low-Earth-orbiting satellite systems, which promise global or regional mobile telecommunication services via handheld terminals, represent the Innovator model. They primarily address consumer requirements rather than make strategic assessments on what profile to assume, and perhaps ignore some of the fundamental requirements such as resolving questions on spectrum availability. The Innovator seeks to provide new services to untapped markets, or to provide better service to underserved areas. Accordingly it will emphasize the ability to generate new traffic rather than divert traffic from existing carriers. To the extent that the Innovator can serve a rich untapped market, it can exploit inelastic demand and charge supracompetitive rates. But it must predict which market is worth entry and be prepared to frontload substantial investment in the face of uncertainty in terms of consumer demand, spectrum allocations at World Administrative Radio Conferences and spectrum assignment/licensing by national regulatory agencies. The Innovator expects to reap a hefty profit before other carriers match its innovations. That profit accrues only when the Innovator can attract the first run of users, so-called early adopters, willing to invest in a new terminal and other equipment needed to access the satellite. Where the Innovator proposes the use of a new frequency band, it raises spectrum allocation, regulatory, licensing and policy issues that can convert its status to Provocateur/Trendsetter in short order, particularly if its proposals are perceived as a threat to the status quo and incumbents’ frequency assignments. Regional MarketedNiche

Player

The Regional Marketer/Niche Player brings new or improved services to a specific region, often simply by employing a better satellite orbital position, beam or signal. Such a carrier can become the Intelsat for the region or concentrate on market niches, eg video and VSATs. A regional market play requires the close cooperation of investing national carriers and regulatory authorities. As such, it is more likely that the Regional Marketer/Niche Player will have secured regulatory approval well in advance of launch. Such authorization may come readily in view of the concrete benefits that accrue to the region and the absence of a financial threat to incumbent carriers. While the Regional Marketer/Niche Player may encourage others to enter the market and provide some degree of price and service competition, the more likely outcome depends on the adequacy of demand and the response of Intelsat. In the case of Arabsat, internal management problems and unwillingness to stimulate demand by authorizing diverse video products led to a less than stellar financial outcome. On the other hand, Palapa, the Indonesian satellite system, 362

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has thrived because of that nation’s dispersed island geography, the willingness of other nations in the ASEAN alliance to lease capacity for telecommunications and video service, and the disinclination or inability of Intelsat to sponsor a region-specific discount or improved spot and hemispheric beam to serve the region. AsiaSat has managed to harmonize investors from Hong Kong, China and UK while convincing various governments in the region that diversified television options - ‘television without borders’ - will enhance consumer welfare without threatening political stability. Its success may also result from superior signal strength and customer service, despite the higher transaction costs many multinational consumers incur in having to do business with more than one satellite carrier. OpportunistlExtortionist

The Opportunist/Extortionist model exploits the International Telecommunication Union procedures on satellite orbital slot registration and the desire of developing nations to become participants in the satellite-delivered information age. The Opportunist simply seeks to capture some of the benefits of satellite technology individually or collectively, even if this means cash or free transponders, by providing a ‘flag of convenience’ to a foreign satellite carrier. This designation might apply to Tonga’s Tongasat and Papua New Guinea’s Pacstar as outside entrepreneurs have provided guidance on how these nations might participate in the satellite sweepstakes. The Extortionist goes several steps further and seeks to broker freely acquired orbital slot registrations much as one might resell a New York City taxicab authorization or stock market membership. Tongasat registered a total of 31 satellites in 26 orbital slots before agreeing to narrow its Advance Publication requests with the ITU’s International Frequency Registration Board to six. 32 It has brokered its claim to one or more of these valuable orbital parking places to other systems.33 One can certainly see the intrinsic value in a bona fide orbital slot registration, but the process was not designed to establish a property interest or resale opportunities. The Opportunist/Extortionist suffers an identity crisis. Is it a legitimate player promising regional service where it is desperately needed? Or is it a front for a foreign entrepreneur seeking to provide a thick route service, or perhaps no service at all? While the possibility exists for better regional service, particularly for developing nations entitled to claim a fair portion of the shared geostationary orbital arc, it is just as likely that the Opportunist/Extortionist has nothing but a paper satellite to pitch. For the latter type of gambit, IFRB procedures will eliminate the registration in nine years while Intelsat and other incumbents have refrained from buying slots they normally can secure for nothing. Conclusion 32See ‘IFRB challenges Tongasat’s claim The diverse models of private international satellite systems demonto regional satellite status, requests govstrate that several alternatives exist for acquiring market share. The ernment of Pacific island nation specify which satellites of 31 registered will be choice of which model to adopt depends in part on the extent of risk a operated’, Telewmmunicetions Repotis, system consciously decides to embrace, in terms of both regulatory Vol56, No 46,3 December 1990, p 14. delays and competitive responsiveness by incumbents. Early market 9ee, eg, ‘Unicorn announces agreement with Tongasat to use two orbital slots entrants and high-profile-seeking systems adopt a high-risk, highclaimed by Tonga’, Telecommunications reward strategy. An equally attractive alternative involves a low profile Reports,Vol57, No 49,Q December 1991, that reduces risk, and perhaps lowers rewards as well. p41.

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