Chief, International Bureau, Federal Communications Commission

• During the unfortunate negotiations in which the USG asked Intelsat temporarily to swap slots with Columbia, a member of Intelsat's senior management said: "you want us to be a good citizen, why should we do that?"

• I've reviewed notes of the Intelsat Board meetings where the Columbia situation was discussed. I assure you, the "public interest" was not the Board's concern.

• The Board was concerned only with Intelsat's best interests -- the interests of its monopolist owners, like Deutsch Telekom.

• The Columbia incident demonstrates the current moral bankruptcy of an organization that had been designed, in perhaps a more innocent time, to act in the best interests of all the citizens of the world.

• I want to make one brief aside. My comments should NOT be taken as a criticism of Comsat. All throughout the Columbia episode, Comsat representatives worked closely with representatives of the USG to achieve a proper result.
  II.

• As a reminder, INTELSAT created by the United States in the early sixties to use satellite technology to create a global communications network in cooperation with other countries.

• At the dawn of the space age it was reasonably believed that this laudable goal could not be achieved by the private sector.

• The creation of a global communication network, for the benefit of the whole globe, was reasonably thought to be a function for governments acting together in the best interests of mankind.

• Thus INTELSAT was an early beneficiary of millions of dollars of U.S. taxpayer-sponsored research done through NASA.

• It was crafted to have governmental privileges and immunities, safe and secure from the regulatory policies and legal regimes of the governments which created it, and were supposed to control it.

• And for decades the FCC designed policies designed to assure the commercial success of INTELSAT [required U.S. carriers to place a certain amount of traffic over INTELSAT (ended 1988); intensive regulatory review of U.S. carrier submarine cable applications (ended late 1980's) and restrictions on the carriage of PSN traffic over competing separate satellite systems (to end 1997)].

• The result has been the creation of a global satellite system having more than 20 satellites, thousands of earth stations, annual operating revenues of over $700 million and billions in assets.

• But Intelsat has now been hijacked by its owners, who care not about the goals for which it was designed, but who care about only their investments -- and maximizing their return on that investment.

• Intelsat is a noble idea gone sour.

• Should we care about what happens to Intelsat. If so, what should we do about it?

• First: we should care.

• We should care because INTELSAT is a United States creation and the U.S. government bears a special responsibility to its future.

• More importantly, we should also care because competition in satellite communications is a later United States creation and remains the touchstone of U.S. policy.

• The success of competition cannot be divorced from the future of INTELSAT.

• If we do nothing -- INTELSAT will wither and die of its own inefficiency, or it will use intergovernmental status to crush the competition.

• We cannot afford to be indifferent. Our interest in competition demands it.
  III.

• So if we must care, what should we do.

• To be fair, INTELSAT does one important thing, it indeed provide global connectivity.

• For many countries, particularly developing countries, it is still only system available for transmission of international communications.

• Eighty countries are connected to the United States only by satellite and primarily by INTELSAT.

• Yet INTELSAT is clearly an impediment to competition.

• Don't let them fool you by talking about market share v. undersea cables.

• There is a distinct market for satellite services.

• Intelsat's sheer size makes it the dominant player in the global satellite market and gives it the opportunity to cross-subsidize between its PSN services and digital and video delivery services.

• For years, competitors have alleged cross-subsidies. We have no idea if its true, because INTELSAT is not directly subject to FCC regulatory authority -- we don't have the data.

• Its intergovernmental status and the nature of most of its members (government owned monopolists) make it difficult for competitors to enter foreign markets .

• INTELSAT also has available a process that the old Bell System could not imagine in its wildest dreams -- the Article 14(d) process that requires a would-be competitor to come to INTELSAT to assure that its international operations will not cause economic or technical harm to the INTELSAT system.

• Imagine the result in the 1970's if MCI had to get permission to compete from the AT&T Board of Directors?

• This what happened to Columbia.

• 14(d) is an abomination

• Intelsat also games the technical coordination process. My staff can attest to the countless hours negotiating technical coordination with INTELSAT on behalf of competing systems -- occasionally only to be able to achieve an acceptable result after high level U.S. government intervention.

• INTELSAT does not, in the words of its own management, feel the need to be a "good citizen." Even where obligated to do so by international law.

• To make matters worse, INTELSAT insists that a competitor coordinate, not just with INTELSAT satellites actually operating or planned for a particular orbital location, but also with every type of satellite in the system to preserve INTELSAT's operational flexibility.

• Finally INTELSAT is spectrum inefficient. It has resisted 2o spacing for its satellites, and it registers with the ITU more orbital slots than it needs, hoarding slots.

• Last month, Intelsat registered 10 orbital locations in the Ka band to pursue possible later opportunities in multimedia markets. Anyone want to explain the reason an IGO needs to provide Ka band multimedia services?
  IV.

• Where does this leave us?

• Arguably, we could conclude that INTELSAT should simply be eliminated. And many of its competitors do.

• Let's say, I'm sympathetic to this view.

• But, ultimately, I am not persuaded.

• First, our policy options are constrained by international politics, and we must acknowledge that. We simply can't change INTELSAT alone.

• Simply to withdraw would create enmity among many nations in the world, who rely on Intelsat and otherwise support the US in international fora.

• Their concerns can't just be dismissed.

• It would also do irreparable damage to Comsat and its shareholders who, after all, have done nothing other than to carry out obligations imposed by Congress.

• Our task should be to recreate INTELSAT as a potential, and fair, competitor.

• That is ultimately the philosophy behind USG policy toward the future structure of INTELSAT: a policy I completely support (not surprising, since I must acknowledge some small role in crafting).

• The position of the USG in the restructuring process is that INTELSAT should be broken in two -- with half the assets moving to a totally privatized affiliate neither owned nor controlled by Intelsat.

• No one in USG started out thinking that a commercial subsidiary of INTELSAT was the ideal solution.

• But simply breaking it up, as advocated by some, is a non-starter with the rest of the world. The US would simply be marginalized and the process would go on without us.

• On the other hand, turning INTELSAT into INTELSAT, Inc. would do nothing to diminish INTELSAT's imbedded advantages, or to prevent the access-inhibiting effect of its monopoly owners.

• The US proposal addresses anxiety in developing countries that rely on INTELSAT for global connectivity by retaining an intergovernmental entity for that purpose, while at the same time allowing a wholly private, independent affiliate into new services.

• But it has raised the anxiety of INTELSAT's competitors by proposing creation of the private entity -- an affiliate that will be strong in the market from its inception.

• However, it will immediately have half the market power of the existing entity.

• Moreover, the overall U.S. position has been clear -- the U.S. will only support streamlining and restructuring options that will enhance competition and not diminish it.

• To enhance competition, INTELSAT must not be permitted to leverage its current market position to gain unfair competitive advantages over private industry.

• I believe that the specific requirements to be imposed on the commercial affiliate will ensure fair competition.

  - No cross subsidies between INTELSAT and the affiliate;

  - No privileges and immunities accruing to the affiliate;

  - Subjecting the affiliate to competition laws wherever it operates, and a transparent and effective regulatory regime for purposes of ITU registration and coordination;

  - Requiring arm's-length dealings on any transactions permitted between INTELSAT and its affiliate;

  - Open market access to the affiliate's competitors.

• More important are the arrangements for ownership and control of any affiliate that is created.

• The critical element to the U.S. proposal is that there be substantial external investment in any affiliate so that no single group of investors controls both INTELSAT and the affiliate. This will be achieved through IPO that would bring external investment to 80%.

• The U.S. proposal provides a basis for change and conversion of other governments around the world to our vision of free markets for all satellite services.

• The US proposal is the only one on the table that both promotes competition, and addresses the concerns of the developing world.

• It has a good chance of succeeding.
  V.

• But more must be done.

• In particular, the FCC should develop regulatory policies that will assure that operation of any INTELSAT affiliate in the United States is based on competitive criteria.

• We should assure that the operation of non-U.S. licensed systems in the United States -- including an INTELSAT affiliate -- does not distort competition because it has market opportunities not available to U.S. systems. Access to our market should be contingent on open markets overseas.

• We also should use our licensing authority to ensure that the affiliate is structured and operates in accordance with U.S. government policy. Again, access on our market should be contingent on an appropriate structure.

• Such policies should dissuade the affiliate from benefiting from its INTELSAT origins to gain exclusive access to markets for competitive services.

• Should also assure that an Intelsat affiliate does not have an advantageous position in the market.
  VI.

• What happens if the rest of the world simply does not accept the US proposal for reforming Intelsat.

• If the political realities within INTELSAT do not permit change consistent with competition, we should "just say no".

• Acceptance of restructuring arrangement that falls short of U.S. goals would be worse than no restructuring.

• Our partners at Intelsat should know that if they restructure in a way that would hinder competition -- any affiliate will have to survive without access to our market, and that our continued participation in Intelsat cannot be taken for granted.