Telecommunications: Competitive Impact of Restructuring the International
Satellite Organizations (Letter Report, 07/08/96, GAO/RCED-96-204).

GAO provided information on the potential competitive impact of
restructuring the international satellite organizations, focusing on:
(1) possible alternative approaches to enhance market access; (2) the
affiliate created by the International Maritime Satellite Organization
(Inmarsat) to provide new services; and (3) proposals for restructuring
the International Telecommunications Satellite Organization (INTELSAT).

GAO found that: (1) there is widespread belief that changes are
necessary in the structure and functions of INTELSAT and Inmarsat; (2)
many satellite companies believe that private competitors already offer
or will offer better global services at lower rates to the developing
world; (3) most member governments and signatories in developing
countries are concerned that their access to certain basic
telecommunications services may be threatened without the presence of
treaty organizations; (4) although most of the options for restructuring
the organizations favor enhancing competition by dismantling the
organizations or creating affiliates, the competitive impact of these
options depends on how these organizations are structured, the number of
entities created, and the degree of parent organization ownership; (5)
the new Inmarsat affiliate may have competitive advantages over other
potential competitors; (6) although the United States originally
supported the creation of the Inmarsat affiliate, the United States and
its signatory are pursuing action to ensure that it adheres to certain
principles that favor competition; (7) restructuring INTELSAT into two
entities and limiting the amount of signatory ownership in those
entities to 20 percent could improve the competitiveness of the global
telecommunications market; (8) another proposal supported by a coalition
of U.S. satellite firms favors establishing two new private companies in
addition to a scaled-down parent organization; (9) the effect on
competition of either proposal depends on whether INTELSAT market
dominance can be reduced and new companies are allowed to gain entrance
into foreign telecommunications markets; and (10) changing the present
structure of the treaty organizations would likely depend on reaching a
consensus among world member nations that have broad perspectives and
interests.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-96-204
     TITLE:  Telecommunications: Competitive Impact of Restructuring the 
             International Satellite Organizations
      DATE:  07/08/96
   SUBJECT:  Communications satellites
             Telecommunications operations
             Economic analysis
             Competition
             Developing countries
             International organizations
             International relations
             Monopolies
             Privatization
             Restrictive trade practices

             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Report to the Chairman, Committee on Commerce, House of
Representatives

July 1996

TELECOMMUNICATIONS - COMPETITIVE
IMPACT OF RESTRUCTURING THE
INTERNATIONAL SATELLITE
ORGANIZATIONS

GAO/RCED-96-204

International Satellite Organizations

(348019)


Abbreviations
=============================================================== ABBREV

  ACISS - Alliance for Competitive International Satellite Services
  COMSAT - Communications Satellite Corporation
  FCC - Federal Communications Commission
  GAO - General Accounting Office
  ICO - ICO Global Communications Limited
  INTELSAT - International Telecommunications Satellite Organization
  ITU - International Telecommunications Union

Letter
=============================================================== LETTER


B-272095

July 8, 1996

The Honorable Thomas J.  Bliley, Jr.
Chairman, Committee on Commerce
House of Representatives

Dear Mr.  Chairman: 

Several decades ago, when satellites emerged as vehicles for
commercial international telecommunications, the technology was under
development and, thus, both risky and expensive.  At that time,
worldwide organizations were considered the best means for providing
satellite-based services, such as basic telephone service, to all
nations.  One objective of the United States, as stated in the
Communications Satellite Act of 1962, was to contribute to world
peace and understanding through the development of a worldwide
satellite communications system established in conjunction and in
cooperation with other countries.  At the initiative of the United
States, the International Telecommunications Satellite Organization
(INTELSAT) was begun in 1964 to provide mainly telephone and data
services, and the International Maritime Satellite Organization
(Inmarsat)\1 was formed in 1979 to provide maritime communications,
including services related to safety and rescue at sea.  These treaty
organizations faced little, if any, competition for many years after
their establishment. 

Now, technological advances such as enhancements in satellite
capacity and capabilities, as well as new applications and increases
in demand, have made it economically feasible for private companies
to provide satellite-based services and have expanded the services
that can be offered, including new video broadcast and mobile
telephone services.  Interest in changing the treaty organizations
has arisen among both members of the organizations and potential
competitors.  While some believe the organizations have achieved
their missions and may no longer be needed, others believe that the
organizations are still necessary in some form to guarantee safety at
sea and services such as telephone and data transmission, especially
for developing countries. 

Because of your concern that any changes be made in a way that
promotes competition, we agreed with your office to describe the
potential competitive impact of (1) possible alternative approaches
to reforming the organizations; (2) an Inmarsat affiliate company,
formed in 1994 to provide new services; and (3) proposals for
restructuring INTELSAT.\2


--------------------
\1 In 1994, Inmarsat's full name was changed to International Mobile
Satellite Organization. 

\2 We will issue a broader review of issues surrounding international
communications satellites later this year. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Options for restructuring the treaty organizations range from
dismantling them to creating one or more affiliates with varying
degrees of ownership by the parent organization.  The competitive
impact of any alternative approach depends on how the resulting
organizations are structured, particularly regarding the number of
separate entities created and the degree to which they are owned by
the parent organization, or its owners, in its present or a new form. 
In particular, the more entities that are created and the lower the
proportion of ownership by the parent organization or its owners, the
more likely it is that the restructuring will improve competition. 

In forming a separate affiliate to provide new services, Inmarsat
took a step that could give the affiliate a competitive edge over
potential competitors.  Under the terms of its organization, at least
70 percent of the affiliate will be owned by Inmarsat and some of
Inmarsat's signatories (owners).  With their ownership interest in
the affiliate, these signatories may have the incentive to grant
access to their markets to the affiliate and to preclude or inhibit
access to other competitors, even though the competitors might offer
services at lower prices.  The United States supported creation of
the affiliate on the condition that its structure include certain
principles that favor competition, such as open market access, and
Inmarsat accepted many of these principles.  The United States and
its signatory are currently pursuing action to ensure that the
affiliate is bound by the Inmarsat-approved principles. 

Proposals for restructuring INTELSAT could improve the
competitiveness of the market.  A joint proposal by the U.S. 
government and U.S.  signatory (U.S.  proposal) suggests splitting
INTELSAT into two entities by scaling back the INTELSAT parent to
roughly one-half its current size and creating one affiliate company
that would be, at a maximum, 20-percent owned by INTELSAT's current
signatories.  Twenty percent ownership is considered an important
upper limit to ensure that INTELSAT and its signatories have minimal
influence on any new entities created.  Another proposal, which is
supported by a coalition of U.S.  satellite firms, favors
establishing two new private companies in addition to a scaled-down
parent organization.  The effect on competition of either proposal
depends on the degree to which it can reduce the market dominance
that INTELSAT enjoys in certain markets and encourage countries to
open their telecommunications markets to new entrants. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Under the Communications Satellite Act of 1962, the United States
created the Communications Satellite Corporation (now known as
COMSAT) to develop, alone or in conjunction with foreign entities, a
commercial communications satellite system.  Subsequently two treaty
organizations were created to provide such services.\3 INTELSAT now
comprises 139 member countries and operates 24 satellites providing
voice, data, and video communications.  Inmarsat was established to
provide global maritime communications; since 1985, its services have
expanded to the aeronautical sector.\4 Inmarsat operates a global
system of eight satellites--four of them operational and four spares. 
In 1994, Inmarsat established as an affiliate a separate company, ICO
Global Communications Limited (ICO), to implement a global system to
serve handheld mobile telephones.  ICO, which is likely to compete
with companies that plan to enter the market, is expected to begin
operations by the year 2000. 


--------------------
\3 According to an official of the U.S.  Department of State, the
United States has entered these organizations under congressionally
authorized executive agreements. 

\4 More recent amendments, initially approved in 1989 but still
awaiting final ratification by a sufficient number of member
governments, would extend Inmarsat's mission to include mobile
communications services on land, such as worldwide telephone service
using portable telephones. 


      STRUCTURE OF THE TREATY
      ORGANIZATIONS
---------------------------------------------------------- Letter :2.1

As treaty organizations, INTELSAT and Inmarsat are made up of parties
and signatories.  Parties are the national governments that have
signed the international agreement.  The signatories--the
organizations' owners--are typically government agencies or
government-sanctioned monopolistic telecommunications companies. 
These entities usually control or influence access to
telecommunications services within their countries.  The signatories
are responsible for financing INTELSAT and Inmarsat and have a
financial interest in their operations.  COMSAT is the signatory for
the United States to both organizations and operates as a private
corporation subject to U.S.  government regulations.  COMSAT holds
the largest single investment share in each organization--19 percent
of INTELSAT and 23 percent of Inmarsat.  The signatories, including
COMSAT, generally provide a retail--or marketing--function for the
organizations within their domestic markets.  For example, figure 1
shows how one type of service--a basic telephone call between the
United States and France--would be provided through INTELSAT's
satellite system.  According to COMSAT, INTELSAT and Inmarsat
typically operate by consensus, which depends on reaching agreement
among member nations worldwide with different perspectives and
interests. 

   Figure 1:  Transactions in a
   Satellite-Based Telephone Call
   Between the United States and
   France

   (See figure in printed
   edition.)


      INTELSAT AND INMARSAT MAY
      HAVE SOME COMPETITIVE
      ADVANTAGES
---------------------------------------------------------- Letter :2.2

INTELSAT's and Inmarsat's ownership structures may provide them with
important competitive advantages that could pose barriers to
potential competitors.  To provide service within a particular
country, a satellite system must gain permission from domestic
licensing authorities for, among other things, the right to use the
necessary spectrum (radio frequencies), the right to establish
necessary ground stations to receive satellite signals, and
permission to interconnect on the ground with the domestic telephone
system.\5 Because many of these licensing authorities or dominant
telecommunications companies are the signatories that own the
organizations, they may have a financial incentive to favor INTELSAT
and Inmarsat, or their affiliates, over other firms when determining
who may do business within their countries.  A recent analysis has
found that the signatories, in addition to receiving a rate of return
on their investments, also generally charge large markups on INTELSAT
and Inmarsat services, which may be evidence that they have benefited
from these competitive advantages. 

The organizations' treaty status also provides certain privileges and
immunities.  Exemption from taxation and immunity from lawsuits give
these organizations a financial advantage over other competitors. 
Immunity from lawsuits, for example, may allow them to act in the
market in ways that their competitors cannot under U.S.  antitrust
laws.  INTELSAT and Inmarsat also have easier access to locations in
space where satellites can be placed (known as orbital slots) and to
spectrum.  Because these slots and spectrum are scarce resources,
easier access to them is an important advantage.  In addition,
private satellite firms that want to compete with INTELSAT or
Inmarsat have been required, under the treaty agreements, to
coordinate their business plans with the organizations to ensure that
they do the organizations no significant economic harm and cause no
technical interference with them.  This requirement has meant that
the firms have had to share potentially sensitive and proprietary
business information with the organizations.  According to several
agency officials, the tests for economic harm are being phased out,
but the tests for technical coordination remain. 

Both treaty organizations also have relatively easy access to
financial capital because they can request it from their signatories
as well as through the capital markets.  In addition, commercial
investors may view these organizations as good risks because of the
signatories' ties to their governments in most countries. 

According to COMSAT, however, these various factors do not
necessarily translate into unfair competitive advantages in the
marketplace.  In particular, COMSAT believes that while the treaty
organizations have some advantages, they also bear responsibilities,
such as providing global services at nondiscriminatory rates. 


--------------------
\5 While the Federal Communications Commission is the licensing
authority in the United States, it is not a provider of
telecommunications services.  In many other countries, the licensing
authority is the monopoly provider of postal and telecommunications
services. 


      U.S.  EFFORTS TO ENHANCE
      MARKET ACCESS
---------------------------------------------------------- Letter :2.3

Because of concerns about market access to foreign countries by U.S. 
telecommunications companies, including new satellite competitors,
the United States is engaged in several efforts to encourage other
countries to open their markets to new entrants.  For example, within
the World Trade Organization, the United States is participating in
negotiations for basic telecommunications services to open access to
foreign markets.\6 In addition, the Federal Communications Commission
(FCC), in its efforts to promote competition in international
telecommunications, recently proposed formal rules for
foreign-licensed satellite companies to serve the United States only
if, among other things, an acceptable level of openness was provided
in the foreign-licensed companies' home markets.\7 Furthermore, the
United States has been developing a proposal to restructure INTELSAT
and a position paper on Inmarsat, both of which the United States
believes will promote competition.\8


--------------------
\6 In April 1994, as a result of the Uruguay Round agreement that
established the World Trade Organization, a group was formed to
conclude negotiations on basic telecommunications services.  These
negotiations, which were to expire on April 30, 1996, have been
extended to February 15, 1997, to allow time for more countries to
come forward with better offers to open their markets. 

\7 Amendment of the Commission's Regulatory Policies to Allow
Non-U.S.-Licensed Space Stations to Provide Domestic and
International Satellite Service in the United States, Notice of
Proposed Rulemaking, FCC 96-210 (May 14, 1996)
(Domestic-International Satellite Consolidation Order (DISCO 2)). 

\8 According to the FCC, an INTELSAT committee reviewing
restructuring proposals is currently scheduled to meet in September
and December 1996 and is considering meeting in October 1996. 
INTELSAT's member governments currently expect to review the
committee's recommendations on restructuring at an April 1997
meeting.  An Inmarsat committee reviewing restructuring proposals is
meeting in early July 1996 and is expected to schedule additional
meetings, while the Inmarsat signatories are scheduled to meet to
discuss restructuring in July and November of 1996 and February of
1997.  Inmarsat's member governments expect to meet in March or April
1997 to consider the committee's recommendations on restructuring. 


   COMPETITIVE IMPACT OF
   RESTRUCTURING DEPENDS LARGELY
   ON TWO FACTORS
------------------------------------------------------------ Letter :3

Currently, there is a wide belief among those that favor more
competition, such as private satellite companies, and those that
favor more flexibility for the treaty organizations, such as some
signatories, that changes are necessary in the structure and
functioning of INTELSAT and Inmarsat.  Some satellite companies, for
example, have questioned the continuing need for the two
organizations and point out that some private competitors currently
offer or will offer global coverage and provide significant services
to the developing world.  However, according to officials in the U.S. 
Department of State, most of the member governments and signatories,
especially in the developing countries, are concerned that without
the treaty organizations, their access to certain basic
telecommunications services--including telephone and data services at
reasonable rates--may be threatened.  Most of the options for
enhancing competition have focused on ways to reduce the barriers
posed by the structure of INTELSAT and Inmarsat, while preserving
some intergovernmental treaty structure.  Key factors in developing
options to promote competition are the number of new entities that
are created and the extent of their ties to the parent organization
or its owners. 


      SOME CHANGES MAY BE
      WARRANTED IN THE WAY
      INTELSAT AND INMARSAT
      FUNCTION
---------------------------------------------------------- Letter :3.1

When INTELSAT was formed, satellites were an efficient way to provide
basic telephone services worldwide.  However, since the mid-1980s,
there has been a dramatic increase in the capacity and capabilities
of transoceanic fiber optic cables, which can transmit telephone
calls.\9 INTELSAT's share of international telephone service,
traditionally the organization's prime service, has fallen
significantly in places where such cables are now available.  In
response, INTELSAT has focused more intensely on providing other,
more technologically advanced services, such as broadcast video.  In
these growing markets, it faces some competition from new
satellite-based companies as well as from many domestic and regional
satellite systems that provide services in specific areas.\10 Some of
these current providers, and others who hope to enter the market,
believe change is needed.  They allege that their ability to thrive
in the market and to bring more services and lower prices to
consumers is limited because INTELSAT continues to dominate the
market in some areas.  A recent analysis by the U.S.  Department of
Justice found that in certain areas, INTELSAT currently dominates the
market as a result of its large share of transoceanic satellite
capacity and its signatories' ability to keep other competitors out
of their domestic markets.\11

COMSAT, in contrast, believes that because of the cumulative effect
of increased competition from fiber optic cables and regional and
domestic satellite systems, as well as private satellite companies,
INTELSAT no longer has substantial market dominance. 

Some of INTELSAT's signatories believe that INTELSAT, with its
lengthy decision-making process, is not well suited to adapt to new
technologies and changing market conditions.  As a result, these
signatories are also interested in some restructuring of the
organization. 

In a desire to expand into new markets, Inmarsat chose to establish
ICO to develop and provide satellite services for handheld mobile
telephones because, according to U.S.  State Department officials,
some members believed that an affiliate unencumbered by the structure
of a treaty organization could respond to the changing market more
effectively.  Several U.S.  firms have been licensed by the FCC to
provide similar services and are seeking access to foreign countries'
markets and the licenses necessary to provide these services
globally.  But these potential competitors are concerned that
Inmarsat's close relationship to ICO could hinder the development of
competition. 


--------------------
\9 Many of the treaty organizations' signatories may also be part
owners of the fiber optic cables that serve their countries. 

\10 In 1984, the United States authorized private companies to
establish their own satellite systems to compete directly with
INTELSAT and Inmarsat.  One such company, PanAmSat, is providing
near-global coverage with four satellites.  In addition, several
regional and domestic satellite systems provide some competition
within their own service areas.  In 1996, the FCC adopted a policy
that permits all U.S.-licensed satellite systems to offer both
domestic and international services. 

\11 In particular, the Department of Justice found that INTELSAT
currently possesses market power in basic telephone and private-line
services between countries that are not well served by fiber optic
cables or private satellite providers, as well as in markets for
video and audio broadcast services.  In this analysis, the Department
of Justice did not consider regional and domestic systems as
competitors because such systems do not currently serve the U.S. 
market.  The draft analysis, dated December 15, 1995, was intended
for government use only; according to a Department of Justice
official, it contains confidential business information and is
therefore not public. 


      SOME HAVE QUESTIONED THE
      CONTINUING NEED FOR THE
      TREATY ORGANIZATIONS, WHILE
      OTHERS PREFER THE STATUS QUO
---------------------------------------------------------- Letter :3.2

Because of advances in technology since INTELSAT and Inmarsat were
formed and an increase in demand, the private market is capable of
and willing to provide many of these services, such as video, data,
and mobile telephone services.  Many privately financed companies
have begun to or would like to provide traditional and advanced
services at lower prices.  Many companies told us that these services
will be available globally and that some companies are particularly
targeting their marketing of mobile services to developing countries,
which are less likely to have established traditional telephone
services.  Furthermore, they note that some INTELSAT competitors are
currently providing services to the developing world.  As a result,
some industry and other policy analysts have questioned the
continuing need for INTELSAT and Inmarsat. 

Despite the emergence of private competitors, however, some of the
member nations believe that at least some aspects of the treaty
organizations continue to be needed.  According to officials in the
U.S.  Department of State, many nations believe that it may be
desirable to retain some residual form of Inmarsat or another
intergovernmental mechanism to ensure that services related to safety
and rescue at sea continue to be provided.  While the private market
is more likely to be capable of providing all the services offered by
INTELSAT, a State Department official told us that retaining some
residual form of INTELSAT is important, at least for the foreseeable
future.  In particular, some of the developing countries, which
consider that the treaty organizations have provided them with
essential services, often do not believe that the private market
would provide them with these services.  These countries tend to be
the most resistant to changing the function or structure of INTELSAT
and Inmarsat.  A Treasury Department official noted, however, that no
country, including a developing country, has ever been refused
service by a private company and that each country has the choice of
permitting or not permitting service by private companies as well as
by the treaty organizations. 

Additionally, some U.S.  companies have expressed concern that a
restructuring that does not address barriers to competition could
result in worse conditions for potential new competitors.  Conditions
could worsen, for example, if any new affiliates of the treaty
organizations gain the flexibility to become strong competitors while
barriers to competition by other firms remain in place.  Some firms
have stated that they would prefer to leave the treaty organizations
as they are rather than restructure them in a way that does not
correct the barriers to competition they impose under the current
system. 


      OPTIONS FOR RESTRUCTURING TO
      ENHANCE COMPETITION
---------------------------------------------------------- Letter :3.3

As an alternative to abolishing INTELSAT and Inmarsat, other changes
could be made to enhance competition while preserving some of the
treaty organizations' structure.  For example, some portion of the
satellite facilities of each of the two organizations could be
privatized.  For any option to enhance competition by reducing some
of the barriers to competition, it must address the fundamental
competitive problems of the present structure, such as (1) the
incentives for the signatories to favor any newly created affiliates,
in which they have an ownership interest, over other potential
competitors for access to their domestic markets; (2) the potential
dominance of the market by either a residual treaty organization or
any resulting new entities; and (3) the advantages, such as tax
privileges, immunity from lawsuits, and easier access to orbital
slots and spectrum, currently enjoyed by INTELSAT and Inmarsat. 

Key to restructuring the treaty organizations with a view to
enhancing competition are the number of new entities created and the
degree to which they maintain economic ties with the remaining parent
organization or its owners.  According to economic principles,
creating the largest feasible number of new entities may be best from
the standpoint of encouraging competition, particularly if domestic
and regional satellite systems do not provide adequate competition to
INTELSAT in the global market.  Additionally, because INTELSAT, in
particular, has benefited from its advantages for many years and
dominates some markets, restructuring would optimally remove enough
of this organization's assets, such as satellites and associated
facilities, to reduce its dominance and to ensure that any newly
created entities would not dominate the market.  However, the costs
of satellite technology may require that a firm have a significant
amount of assets in order to be efficient and survive.\12 Although
there is no clear agreement on the smallest size a global satellite
firm can be and remain efficient, the number of new entities that can
be created and sustained is limited by these size considerations. 

The second important factor in restructuring concerns the economic
and cultural ties between the residual treaty organization and any
new affiliates.  Economic principles suggest that to encourage
competition, it would be best to minimize the relationship between
these entities.  If the economic ties between a residual treaty
organization and the entities that are spun off from it are strong,
the barriers to competition could be exacerbated.  Thus,
restructuring would likely result in more competition if the treaty
organization or its signatories (1) have little, if any, financial
stake in or continuing business relationship with any new entities
and (2) have no mutual members of the boards of directors. 

Also, competition is more likely to be enhanced if the parent
organization and its signatories have minimal control during any
transition period from the current status to a new status.  Among
other things, if control is kept at a minimum, the member governments
and signatories would have little incentive to favor the new entities
over other competitors in their domestic markets.  Even if the
economic relationship between the parent and any affiliates is
appropriately broken, there is concern that it could take some time
for governments and signatories to provide open access to their
markets because they are used to dealing mostly with the treaty
organizations and may continue to wish to do so. 


--------------------
\12 One recent econometric study suggests that a global satellite
firm needs at least seven or eight satellites to reach a minimally
efficient scale of operations.  See Leonard Waverman, "The Political
Economy of International Telecommunications Organizations:  Breaking
Up Is Hard To Do," in the forthcoming Global Speak, American
Enterprise Institute Publications (cited by permission).  Other
analysts we spoke with also suggested that the smallest viable firm
would need approximately this number of satellites.  This number may
suggest that INTELSAT's assets could support three viable firms. 


   INMARSAT'S OWNERS MAY HAVE
   INCENTIVES TO AID ICO
------------------------------------------------------------ Letter :4

When Inmarsat created ICO, it provided an example of how a treaty
organization could restructure by forming a single affiliate whose
ownership was primarily restricted to the parent organization and its
signatories.  That approach to restructuring may not enhance
competition because of the shared ownership arrangement between the
parent and affiliate.  Inmarsat and its signatories have both the
incentives and the ability to provide ICO with market advantages over
its potential competitors.  These advantages may include access to
member countries' markets and financial benefits, such as more
readily available financing.  The United States supported the
formation of ICO on condition that its structure include certain
principles that favor competition.  Inmarsat's member countries
agreed to many of these principles.  Some U.S.  officials have been
concerned that ICO's organizing documents do not incorporate the
Inmarsat-approved principles in a way that binds ICO to applying
them, and they are working toward ensuring that those principles are
incorporated.  Also, Inmarsat is considering a restructuring proposal
that raises concerns among potential competitors about the
competitive impact of the relationship of a privatized Inmarsat to
ICO. 


      ICO'S OWNERS CONTROL
      ESSENTIAL ACCESS TO MARKETS
---------------------------------------------------------- Letter :4.1

Inmarsat and those signatories that chose to invest directly in ICO
hold a majority interest and thus have a significant vested interest
in the organization's financial success because they share in ICO's
profits.  The initial sale of ICO's shares, which was open only to
Inmarsat and its signatories,\13 raised a total of $1.4 billion. 
Inmarsat's portion of that total amounts to about 10.6 percent of the
voting shares.  Nearly 60 percent of Inmarsat's 79 signatories took
advantage of the opportunity to invest directly in ICO and
collectively hold well over 70 percent of ICO's voting shares.  A
public offering may occur in the future, but external investment,
which is authorized only at the discretion of ICO's Board of
Directors, is limited to 30 percent of the voting shares.  As of June
1996, there was one external investor--the builder of new satellites
for ICO--who currently holds a very small percentage of ICO's
shares.\14

As noted earlier, Inmarsat's signatories are typically the government
authorities or dominant telecommunications providers that control or
influence access to their domestic telecommunications markets. 
Market access is essential for the success of any provider of global
satellite services.  With their ownership interest in ICO, these
signatories may have the incentive to grant such access to ICO and to
preclude or inhibit access to other competitors, even though the
competitors might offer services at lower prices.\15 Moreover, as an
official of the U.S.  Department of Commerce noted, Inmarsat's
signatories had an incentive to invest through ICO because of the
17-percent rate of return they would earn on their investment, even
though ICO has not yet generated revenues. 


--------------------
\13 The initial investors also included a signatory-led consortium of
private investors. 

\14 A second potential external investor--the builder of the system's
ground segment--is expected, but details of the agreement had not
been finalized as of mid-June 1996. 

\15 Some signatories have also invested in the U.S.  companies that
will compete directly with ICO for mobile services.  None of the
three major potential competitors to ICO has more than one signatory
investor. 


      ICO'S OWNERSHIP STRUCTURE
      MAY CONFER FINANCIAL
      ADVANTAGES
---------------------------------------------------------- Letter :4.2

ICO's shared ownership with Inmarsat may make financing more readily
available to ICO than it is to competitors.  It has also raised
concerns that prohibited cross-subsidies\16 may occur. 

Ownership by Inmarsat and its signatories may give ICO financial
benefits in the form of more readily available financing than
potential competitors are likely to enjoy.  For example, ICO could
find it easier to obtain future commercial financing than other
satellite companies do because of the implicit government backing
associated with its ownership.  Furthermore, since the signatories
are typically government agencies or government-sanctioned
monopolies, they may have financial assets readily available for
investment in ICO. 

Cross-subsidies could give ICO a financial advantage in competing
with other companies by allowing ICO to offer lower prices than it
could otherwise afford.  Although cross-subsidization was prohibited
when Inmarsat's member countries authorized the formation of ICO, the
shared ownership of Inmarsat and ICO raises the risk that
cross-subsidies could occur.  For example, the U.S.  Departments of
State and Commerce, in a September 1995 letter to the FCC, expressed
concerns about whether contractual arrangements between Inmarsat and
ICO were conducted with sufficient independence to ensure that there
was no cross-subsidization.\17

Because of Inmarsat's protected status as an international treaty
organization, the existence of cross-subsidies might be difficult to
confirm because Inmarsat has immunity from prosecution under
antitrust complaints and other lawsuits.  However, it is not clear
whether any of the protections Inmarsat enjoys would apply to its
business transactions with ICO. 


--------------------
\16 A cross-subsidy occurs if the costs of producing one service are
paid for by consumers of a different service.  For example, many
analysts believe that prior to the divestiture of AT&T, long-distance
rates were set higher than the fully allocated costs of providing
this service because regulators wanted to be able to keep residential
rates low.  Thus, long-distance service cross-subsidized local
residential rates. 

\17 ICO has contracted with Inmarsat to provide services such as
system planning, operations, and support for spectrum and standards. 
Inmarsat was also contracted to provide other accounting, financial
planning, procurement, contracts management and administration, and
human resources services through the end of 1995. 


      U.S.  APPROVAL OF ICO WAS
      CONDITIONAL
---------------------------------------------------------- Letter :4.3

The United States agreed to the formation of ICO on condition that
several principles of structural separation be met to promote fair
competition for both ICO and the other companies that want to offer
the same kinds of services.  Those principles included (1)
nondiscriminatory access to the countries' domestic markets for all
mobile satellite communications networks, (2) no transfer of spectrum
or orbital slots from Inmarsat to ICO, (3) no cross-subsidies from
Inmarsat, and (4) no transfer of treaty-based privileges and
immunities to ICO.  In December 1994, Inmarsat's member governments
agreed to the formation of ICO if certain conditions were met; those
conditions incorporated many but not all of the principles the United
States had sought to include in order to ensure structural
separation. 

In their September 1995 letter to the FCC, the Departments of State
and Commerce concluded that ICO's organizing documents did not fully
incorporate the conditions that Inmarsat's members had agreed to. 
State and Commerce asked the FCC to delay authorization of COMSAT's
share of Inmarsat's investment in ICO until it is clear that ICO is
bound by the principles Inmarsat adopted.  They also requested that
COMSAT (1) state on the record that ICO is bound by the principles
approved by Inmarsat and (2) provide supporting documentation.  In
its comments on a draft of this report, COMSAT said that it had
reported to the relevant U.S.  government agencies in late May 1996
that at ICO's annual meeting on May 28, 1996, the shareholders
approved an amendment to ICO's organizing documents that fully
incorporates these principles.  COMSAT stated that it expects to
provide the supporting documentation in the near future. 


      INMARSAT'S RESTRUCTURING
      RAISES CONCERNS ABOUT FUTURE
      RELATIONSHIP WITH ICO
---------------------------------------------------------- Letter :4.4

Inmarsat is reviewing proposals to restructure so that it may respond
to commercial opportunities more readily than its members feel its
treaty structure now allows.\18 Under one proposal, Inmarsat would be
devolved into a privately owned international public corporation. 
According to Inmarsat officials, the current version of that proposal
would transfer all of Inmarsat's satellites to the new corporation,
while a smaller intergovernmental organization with more limited
responsibilities would be retained to ensure the provision of
services related to safety and rescue at sea. 

The relationship that ICO will have to a restructured Inmarsat is of
concern to some potential competitors.  Inmarsat is on record as
being interested in the possibility of a future merger of ICO with a
restructured Inmarsat.  However, COMSAT, the U.S.  signatory, stated
that it has recently confirmed to the executive branch of the U.S. 
government that it does not support such a merger in any foreseeable
time frame and that it considers such a merger highly unlikely
because the business plans of ICO and a restructured Inmarsat differ. 

Ownership ties between ICO and a largely privatized Inmarsat could
create a company with significant advantages in the market that would
be free of any of the decision-making or operational burdens imposed
by an intergovernmental structure.  Such ownership ties might
reinforce the incentives of Inmarsat's signatories to open their
domestic markets to ICO and the reorganized Inmarsat but not
necessarily to potential competitors. 


--------------------
\18 As noted above, the United States is developing a position paper
on the restructuring of Inmarsat. 


   RECENT PROPOSALS FOR
   RESTRUCTURING INTELSAT
------------------------------------------------------------ Letter :5

Two proposals for restructuring INTELSAT provide examples of options
that retain a residual treaty organization while distributing
portions of INTELSAT's assets to one or more entities that are able
to compete more freely in the market.\19 Other countries have also
made suggestions for change.\20

To help ensure that any restructuring of INTELSAT would improve
competition, the U.S.  government has developed a proposal that would
separate INTELSAT into two entities--a residual intergovernmental
entity and a new affiliate.  The affiliate would focus on providing
more advanced services and would be owned primarily by private
investors.  Another proposal, which has been supported by a coalition
of several U.S.  satellite companies,\21 calls for separating
INTELSAT into at least three entities:  a residual intergovernmental
entity and at least two affiliates.  The degree to which either of
these proposals can help to enhance competition depends largely on
whether it can (1) encourage other countries to open their markets to
new entrants and (2) diminish the large share of transoceanic
capacity that INTELSAT currently holds. 


--------------------
\19 Our discussion of these proposals is not an endorsement of
either. 

\20 Other nations, including Canada, the United Kingdom, France, the
Netherlands, Venezuela, and a consortium of African countries, have
also submitted commentaries on and/or proposals for restructuring
INTELSAT that support a range of approaches, including the creation
of one or more affiliates. 

\21 The coalition--the Alliance for Competitive International
Satellite Services, or ACISS--comprises the following companies: 
Columbia Communications Corporation, Motorola, Odyssey Worldwide
Services, Orbital Communications Corporation, Orion Network Systems,
PanAmSat Corporation, and TRW Inc.  These companies are current or
potential competitors to INTELSAT or Inmarsat and any entities
created by their restructuring. 


      THE UNITED STATES HAS
      PROPOSED RESTRUCTURING
      INTELSAT
---------------------------------------------------------- Letter :5.1

With Inmarsat's establishment of ICO as a backdrop, the United States
has developed a proposal to restructure INTELSAT in order to ensure
continued services worldwide at nondiscriminatory prices and to
provide a more competitive marketplace.  The key features of the
proposal, aimed at reducing INTELSAT's dominant market position and
reducing the signatories' incentive to favor the newly created
affiliate over other companies in their domestic markets, include the
following: 

  -- INTELSAT would be separated into two companies, each of which
     would receive about half of the satellites.  The residual
     INTELSAT is intended to focus on traditional services, such as
     basic telephone service, while the affiliate is intended to
     focus on newer services, such as video broadcast. 

  -- After a transition period of about 2-3 years, fully 80 percent
     of the affiliate would be owned by interests other than INTELSAT
     or its signatories. 

The proposal requires that (1) the affiliate not have any privileges
and immunities, (2) business transactions between the two companies
take place as if the entities had no economic relationship, (3) the
affiliate be subject to competition laws in the countries in which it
operates, and (4) no special access to orbital slots be available to
the affiliate. 

From a competitive standpoint, separating INTELSAT into two companies
is designed, in part, to reduce the size of the resulting entities
relative to other competitors.  Currently, INTELSAT has 24 satellites
in space and 7 empty orbital slots.  The affiliate, with which other
competitors would most directly compete, would have about half of the
INTELSAT satellites.  In comparison, one private competitor,
PanAmSat, plans to grow to an eight-satellite operation within a few
years.\22 Moreover, since INTELSAT's signatories would be able to
own, together, only 20 percent of the affiliate, the proposal is
designed to reduce their financial incentive, as the
telecommunications authorities in their own countries, to favor
INTELSAT's affiliate over other new entrants when making decisions
about access to their domestic markets. 

Officials of several of the federal agencies that helped develop this
proposal acknowledged that other options might have done more to
promote competition, but they did not believe that other countries
would have supported such options.  In particular, State Department
officials told us that INTELSAT members were unlikely to accept an
option that resulted in the formation of more than one new affiliate
or an affiliate with ownership by the signatories of less than 20
percent.  They also said that because of these concerns, the proposal
they put forth is likely to be the most competitively oriented
proposal acceptable to INTELSAT's member governments and signatories. 


--------------------
\22 Additionally, several other major U.S.  firms have applied to
establish satellite systems with new technologies. 


      U.S.  SATELLITE COALITION
      HAS SUGGESTED AN ALTERNATIVE
      RESTRUCTURING DESIGN
---------------------------------------------------------- Letter :5.2

A coalition of several U.S.  satellite companies that had expressed
interest in privatizing the treaty organizations entirely has more
recently put forth a proposal for an alternative restructuring
design.  As with the U.S.  proposal on INTELSAT, this proposal
requires that any new affiliate gain no privileges or immunities or
any other economic benefits from its relationship with INTELSAT. 
Under the proposal, INTELSAT would be separated into at least three
parts, including at least two affiliates that are each owned at least
50 percent by entities other than INTELSAT or its signatories. 
Additionally, each signatory would be able to invest in one or the
other affiliate, but not in both. 

Proponents of this proposal believe that such an option would reduce
concerns about market domination more than the U.S.  proposal does
because each resulting entity would be smaller than it would under
the U.S.  proposal.  Moreover, some market observers have suggested
that under this option, countries' telecommunications authorities may
align themselves with one of the affiliates.  Signatories may find
that to do business with certain other countries, they may have to
allow both affiliates to serve their domestic markets. 


      COMPETITION WOULD BE
      ENHANCED BY MORE AFFILIATES
      AND REDUCED OWNERSHIP BY
      INTELSAT'S SIGNATORIES
---------------------------------------------------------- Letter :5.3

The degree to which either of these proposals can help to enhance
competition depends largely on whether it can encourage other
countries to open their markets to new entrants.  As discussed
earlier, competition can be enhanced by creating more entities out of
INTELSAT as long as each is technically and economically viable on
its own.\23 In this regard, the industry's proposal may be more
likely to reduce the potential for INTELSAT or the new affiliates to
dominate the market because each entity would be smaller in size. 
Having more affiliates may also help to reduce the incentive that
countries' telecommunications authorities may have to favor INTELSAT
over other competitors.  Some analysts believe that if countries open
their markets to the two competitors envisioned under the proposal,
those countries may then be more likely to open their markets to
private competitors. 

As noted earlier, it is best for competition for the treaty
organization and its owners to have little, if any, financial stake
in, or continuing business relationship with any new entities.  The
U.S.  proposal may come closer to reaching this goal because it
allows the signatories to own only 20 percent of the new entity,
while the industry's proposal allows the signatories to own up to 50
percent of one of the new entities.  However, another aspect of the
industry's proposal mitigates the effects of the higher level of
ownership by the signatories:  that is, the requirement that each
signatory invest in only one or the other new affiliate.  Signatories
may find that to do business with certain other countries, they will
have to allow entry into their domestic markets by the INTELSAT
affiliate in which they have not invested, and the need to allow both
affiliates into their markets may induce countries to widen access to
other entrants. 

Even the lower 20-percent ownership level proposed by the United
States may not be enough to ensure that INTELSAT's signatories have
little influence over the new affiliate.  Several U.S.  regulations
regarding ownership levels indicate that potential control or
significant influence may occur at lower levels of ownership, such as
10-20 percent.\24 As such, the group that developed the U.S. 
proposal stated that the 20-percent limit on the amount of the
affiliate that the signatories could own was an important upper limit
to ensure that INTELSAT and its signatories have minimal influence on
any new entities created. 


--------------------
\23 The number of new entities created is less important if domestic
and regional firms provide meaningful competition to INTELSAT. 

\24 The 20-percent limit on ownership by INTELSAT and its signatories
is based, in part, on several U.S.  laws and policies regarding
competition and ownership control.  For example, the
Hart-Scott-Rodino Act (15 U.S.C.  18a) requires notification before a
merger takes place if the acquiring person would hold 15 percent or
more of voting securities or assets (or an aggregate total amount of
the voting securities and assets in excess of $15,000,000) and
certain minimum monetary thresholds are met.  Several other laws and
policies also set limits in the 10- to 20-percent range. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

The treaty organizations have benefited from their intergovernmental
status and a variety of advantages designed to help ensure their
success in achieving worldwide satellite communications.  However,
advances in technology and increases in demand have transformed the
industry into one that may provide profitable business opportunities
for private firms.  Having achieved their original missions, the
treaty organizations, as structured, may now be impeding the
flourishing of a private market and the benefits it can bring to
consumers. 

Making changes to the present structure of the treaty organizations
could be difficult because doing so would likely depend on achieving
consensus among member nations around the world that have a broad
range of perspectives and interests.  Along with a goal of ensuring
continued global service, a primary interest of the United States is
the promotion of competition, which could provide many new options
for international satellite services.  Many other members of the
treaty organizations are concerned about guaranteeing the
availability of the basic services now provided by each of the treaty
organizations and thus may not be supportive of the kinds of changes
that would most advance competition.  Over time, however, consumers
worldwide would benefit from increased competition in the
marketplace. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

We provided copies of a draft of this report for review and comment
to the National Economic Council and the Office of Science and
Technology Policy in the Executive Office of the President; the
Departments of State, Commerce, Justice, and the Treasury; COMSAT,
the U.S.  signatory to the treaty organizations, through the U.S. 
Department of State; the FCC; and the Alliance for Competitive
International Satellite Services (ACISS), a coalition of private
satellite providers.  The draft was also reviewed by a representative
of the Council of Economic Advisors. 

Executive Branch, FCC, and ACISS representatives generally agreed
with the report's findings and balance and provided us with several
clarifications and more current information, which we have
incorporated as appropriate.  In written comments, which are
presented in full in appendix I, ACISS commended the report for its
balanced and thorough treatment of the complex issues surrounding the
proposed privatization of Inmarsat and INTELSAT. 

COMSAT also provided written comments on our draft report.  COMSAT
officials were concerned that they had provided us with a variety of
information that we did not include in our report.  They also stated
that we did not accurately characterize the nature of the competition
facing INTELSAT in the international communications market and that
we had focused our discussion of certain restructuring proposals
solely on their competitive effect, to the exclusion of other
important issues. 

We used documents obtained from COMSAT and a variety of other sources
as background information in the preparation of this report.  Because
this report is an overview of issues related to the competitive
structure of the international satellite market, we did not think
that all of the documents provided by COMSAT contained information
necessary for the report.  Our report also clearly discusses the
nature of the competition facing INTELSAT.  COMSAT is correct in
saying that this report focuses on the potential competitive impacts
of various approaches for restructuring the treaty organizations;
that is a goal of the U.S.  proposal and is the issue we were
requested to review.  In response to COMSAT's concern, we have noted
other goals of the U.S.  proposal in the report.  COMSAT's complete
comments and our detailed responses to them are presented in appendix
II. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

This report is based on our analysis and our review of documents and
other information obtained from the National Economic Council and the
Office of Science and Technology Policy in the Executive Office of
the President; the FCC; the Departments of State, Commerce, Justice,
and the Treasury; COMSAT; INTELSAT; and Inmarsat.  We also obtained
information from experts from the Council of Economic Advisors and
from ACISS as well as from representatives of several companies
operating, licensed to operate, or applying for licensing to
establish their own satellite systems.  We conducted our work from
May through June 1996 in accordance with generally accepted
government auditing standards. 


---------------------------------------------------------- Letter :8.1

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from the date of this letter.  At that time, we will send copies to
interested congressional committees; the Chairman of the National
Economic Council; the Director of the Office of Science and
Technology Policy; the Chairman of the FCC; the Secretaries of State,
Commerce, Justice, and the Treasury; and the Chairman of the Board of
COMSAT.  We will also make copies available to others upon request. 

Please call me at (202) 512-2834 if you or your staff have any
questions.  Major contributors to this report are listed in appendix
III. 

Sincerely yours,

John H.  Anderson, Jr.
Director, Transportation and
 Telecommunications Issues




(See figure in printed edition.)Appendix I
COMMENTS FROM ACISS
============================================================== Letter 



(See figure in printed edition.)




(See figure in printed edition.)Appendix II
COMMENTS FROM COMSAT
============================================================== Letter 



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on COMSAT's letter dated June 27,
1996. 


   GAO'S COMMENTS
------------------------------------------------------------ Letter :9

1.  We believe that our report provides a broad overview of the
establishment of INTELSAT.  As our report notes, the Communications
Satellite Act of 1962 states that a policy of the United States was
to establish a global system in conjunction and in cooperation with
other countries, and one of the objectives for such a system was to
contribute to world peace and understanding.  The statute also
authorized COMSAT to "plan, initiate, construct, own, manage, and
operate itself or in conjunction with foreign governments or business
entities a commercial communications satellite system .  .  .  ."
[Emphasis added.]

2.  Our description of the types of services that INTELSAT was formed
to provide does not imply that INTELSAT was precluded from providing
other kinds of services including video broadcast.  At the time the
treaty organization was formed, however, the bulk of the services
provided could be expected to be basic telephone and data services. 

3.  The U.S.  proposal for the restructuring of INTELSAT has several
objectives, and we have added references to other objectives to
clarify that point.  However, we were asked to review only the
potential competitive impact of different kinds of restructuring
approaches.  In that context, we reviewed the U.S.  proposal as one
example of the various ways in which restructuring could occur. 

4.  Other than quoting COMSAT, our report makes no reference to
unfair competitive advantage in the marketplace.  Our discussion of
possible competitive advantages focuses on the treaty organizations,
not the signatories.  Furthermore, we state only that these factors
may be, or may contribute to, potential competitive advantages. 

5.  We have clarified the issue of the treaty organizations' access
to scarce orbital slots and spectrum by explaining in our report
their comparative ease of access rather than characterizing their
access as preferential.  The treaty organizations, like private
companies, must coordinate access to fixed orbital locations and
spectrum through the International Telecommunications Union (ITU). 
However, according to the Federal Communications Commission (FCC),
which processes INTELSAT's applications, submission of the
applications through the host country is a formality, and
applications are forwarded to the ITU automatically.  (INTELSAT is
headquartered in the United States; Inmarsat's applications are
processed through the United Kingdom, where that organization is
headquartered.) The applications of private U.S.  companies, on the
other hand, are subject to FCC's review and approval before being
submitted to the ITU. 

6.  We agree that INTELSAT is changing its coordination requirements
and will ultimately eliminate the requirement for economic
coordination set out in Article XIV(d) of the treaty agreement, and
we have added a discussion of that issue in the report.  However, the
treaty agreement has not yet been amended to eliminate this
requirement.  Furthermore, not only is there no effort to eliminate
the requirement for technical coordination, but, according to FCC
officials, a recent INTELSAT vote to deny a U.S.  company successful
technical coordination was based on criteria not previously applied
to technical coordinations.  Also, satellite companies we spoke with
that have undergone the coordination processes told us that they
consider the information they had to submit for this process to be
sensitive and proprietary. 

7.  Our report clearly points out that INTELSAT has faced increasing
competition from fiber optic cables.  However, fiber cables are not
available to all countries, nor are they able to provide certain
types of services.  Moreover, because other signatories (not COMSAT)
to INTELSAT and Inmarsat are often part owners of fiber cables,
INTELSAT's reduced market share in the markets where it competes with
fiber may not necessarily imply that strong price competition has
emerged. 

8.  COMSAT has concerns about our characterization of competition for
advanced services as "limited" and points out that there are many
domestic and regional satellite systems providing services within
their coverage area.  We agree that there are domestic and regional
satellite competitors and have so noted in our report.  There is some
disagreement among analysts regarding the degree to which these
systems provide meaningful competition on a global basis.  In
particular, some of these systems are owned by signatories to
INTELSAT, reducing the likelihood that they would provide significant
pressure on pricing.  We have deleted the word "limited" from that
section of the report.  We believe that in time there will be more
fully global providers.  For example, currently Orion and Columbia
are less than global providers, but these firms plan to expand their
systems' coverage.  Additionally, several U.S.  domestic satellite
providers are expected to expand their systems' coverage globally in
the future. 

9.  COMSAT's point that the signatories to INTELSAT often are
part-owners of regional or domestic systems would seem to reinforce
our belief that such systems may not represent additional
competition, since their overlapping ownership may reduce the
likelihood that they would compete significantly against one another. 

10.  Our report does point out some of the difficulties that INTELSAT
faces that its competitors do not have.  For example, our report
notes that according to U.S.  agency officials, some members of
INTELSAT believe it may not be able to respond easily to changes in
the market as a result of the difficult decision-making process
entailed in the intergovernmental structure. 

11.  While restructuring these organizations may not solve all of the
problems of market access, restructuring in a way that lessens the
incentives of foreign governments to favor the treaty organizations
may have an impact on market access.  Moreover, as we note in the
report, the United States is engaged in a number of activities aimed
at encouraging open access. 

12.  As COMSAT notes, separate satellite providers such as PanAmSat
have been able to get access in many countries.  However, to be a
full global provider, a company may need to gain access into nearly
all countries to provide many different types of services.  Companies
told us that they want to provide global coverage, and some are
closer to gaining the necessary access than others.  Some of the
companies that COMSAT mentions as having gained access to many
countries are not yet providing services, and it is not clear what
level of access they will achieve.  Since some countries do limit
entry, particularly regarding the provision of certain types of
services (most notably basic telephone service), concerns about
access remain.  Moreover, even if a company may eventually gain
significant access, a continuing concern would be the time, effort,
and expense that it may take that company to do so. 

13.  We acknowledge the receipt of new information on ICO's recent
efforts to work cooperatively with U.S.  Big LEO (low-earth orbiting
satellite systems, which are emerging to provide mobile services)
companies on cooperation on creating a competitive regulatory
environment.  We believe that this recent development is ancillary to
the focus of restructuring the treaty organizations and therefore
have not added this information to our report. 

14.  In discussing the options for restructuring, our report speaks
generally about certain issues and specifically about two proposals. 
As agreed with our requester, we focused on the U.S.  and the
industry proposals and did not attempt to provide a census of the
array of proposals for restructuring INTELSAT. 

15.  Our request was to examine issues related to restructuring with
regard to how competition would be affected.  Nevertheless, we have
clarified in the report that the U.S.  proposal has additional goals. 

16.  We have revised the report to read that the affiliate will have
roughly half of the INTELSAT satellites. 

17.  The draft named the companies that are part of the coalition in
a footnote. 

18.  With regard to access to capital, both INTELSAT and Inmarsat
contain provisions in their operating agreements requiring the
signatories to provide capital as decided by the respective signatory
decision-making bodies within the treaty organizations.  Furthermore,
as noted in our report, the affiliation of the treaty organizations
with governments may make any public financing they seek easier to
get than similar public investment in companies that cannot provide
implicit governmental support.  While COMSAT states that two
potential competitors have now acquired portions of their needed
funding, according to a representative of the industry coalition,
companies that want to compete with INTELSAT and Inmarsat, including
the two cited by COMSAT, have had difficulty in obtaining the needed
level of financing through both public offerings and efforts to
secure debt financing. 

19.  With regard to the incorporation of U.S.-proposed principles
into ICO's formation, the Departments of State and Commerce said in
their September 1995 letter to the FCC that the principles accepted
by Inmarsat's member governments included "incorporation of many but
not all of the U.S.  Party's principles and structural separation
elements." State and Commerce concluded in that letter that ICO's
organizing documents did not fully conform with the requirements of
Inmarsat's member governments and recommended that the FCC not
approve COMSAT's application until COMSAT states on the record that
ICO is also bound by these principles and provides supporting
documentation.  We have updated our report to reflect recent
developments on this issue.  As COMSAT notes, however, the supporting
documentation has yet to be provided to the Executive Branch of the
U.S.  government. 

20.  We have updated our report to include information on events that
occurred after our draft report had been distributed for review and
comment, including COMSAT's confirmation to the Executive Branch of
the U.S.  government that it does not support a merger between ICO
and a restructured Inmarsat in any foreseeable time frame. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION

Amy D.  Abramowitz
Charles Bausell
Beverly Ann Bendekgey
Phyllis Scheinberg
Marnie Shaul
John Thomson
Phyllis Turner

OFFICE OF THE GENERAL COUNSEL

Michael Volpe
Mindi Weisenbloom

OFFICE OF THE CHIEF ECONOMIST

Joseph Kile


*** End of document. ***