Testimony of Jack Gleason on International Satellite Reform

TESTIMONY OF JACK GLEASON
ACTING ASSOCIATE ADMINISTRATOR, OFFICE OF INTERNATIONAL AFFAIRS
NATIONAL TELECOMMUNICATIONS AND INFORMATION ADMINISTRATION
U.S. DEPARTMENT OF COMMERCE
ON

INTERNATIONAL SATELLITE REFORM

BEFORE THE SUBCOMMITTEE ON COMMUNICATIONS
COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE

JULY 30, 1997

Executive Summary

Testimony of Jack Gleason

National Telecommunications and Information Administration

The success of INTELSAT and Inmarsat has led to the need to examine the
future and the overall structure of these organizations. This success was not expected
when those organizations were established. The structure designed for these
intergovernmental satellite organizations (ISOs) recognized the need to spread the
financial risk associated with global satellite communications. Indeed, at the time of the
ISOs' creation the telecommunications sector was dominated by national monopolies.
Thus, the structure created for the ISOs conformed to that framework.

That structure, today, has become difficult to sustain. New, and for the most part,
private enterprises are able and willing to provide those services traditionally offered by
INTELSAT and Inmarsat. Thus, we are in the midst of attempting to accommodate the
need for change -- the shift to a more competitive marketplace -- without overnight
discarding a structure that has served many countries over the past 25 years.

Today, global satellite communications services are expanding and changing at a
dramatic rate. New technologies and enterprises are changing the marketplace. These
new systems, together with traffic now carried by submarine cables, have been deemed,
by the ISOs, as a sufficient threat to their future that the ISOs are examining options for
restructuring.

This year, it is expected that a total of 76 commercial satellites will be launched.
In 1998, that number should rise to approximately 125 satellites. Over the next ten years
about 1,000 new satellites will have been launched, three-fourths of them for commercial
use. By the end of this century, it is expected that companies will spend about $50
billion to build and launch new systems. The related technology, antennae, telephone
handsets, switches and other equipment may well double that figure.

The increased level of investment provides extraordinary economic opportunities.
Moreover, it will bring access to communications to those who now have none -- half the
world's population. In the Asia Pacific region most countries today have fewer than two
telephone lines per 100 people; more than 2.8 billion people have access to barely 25
million lines. Worldwide, 80 percent of the households do not have a telephone.
Indeed, there are more phone lines in Manhattan than in all of Africa between the
Sahara and South Africa.

To fulfill these opportunities and to achieve their potential, new satellite systems
must, however, be able to operate in a global, competitive marketplace. Increasingly,
those who hope to succeed must embrace the principles of global competition and
market access. Implementation of the WTO agreement on basic telecommunications will
be important to ensuring market access for the satellite service industry. Opportunities
for satellite systems will also grow through the legitimate pressures brought on by global
deregulation of financial markets -- rewarding efficiency with new and additional capital
investment and financially punishing inefficient monopolies.

In this context, the United States has approached the restructuring of the ISOs
with a commitment that any restructuring must increase competition -- not diminish it.
This, unfortunately, is not an easy task. Many ISO participants operate in a monopoly
environment, both at home and in international markets. Many are unfamiliar or
uncomfortable with the concept of competition in telecommunications. Many ISO
participants simply like things the way the are. The old order gives way slowly. But it
will give way, and in its place competition will produce economic benefits across the
globe that will fulfill the expectations of the Information Age.

In its prepared text, NTIA has detailed the background and status of our
negotiations on restructuring INTELSAT and Inmarsat. Those negotiations have not
moved swiftly or smoothly. We would not expect quick and easy negotiations where
fundamental values such as marketplace competition are at stake.

International Satellite Communications and the
International Satellite Organizations, INTELSAT and Inmarsat

Introduction

This is a time of tremendous growth and entrepreneurial achievement in the field
of international satellite communications. In 1997, an estimated 76 commercial
satellites will be launched, and an additional 100 are expected to be launched in 1998.
Over the next ten years, approximately 1,000 new satellites are proposed to be launched,
three-fourths for commercial use. By the turn of the century, satellite companies are
expected to spend as much as $50 billion to build and launch new satellites -- and twice
that amount for antennae, phones, switches, and other related equipment.

Part of the role of the National Telecommunications and Information
Administration (NTIA) and the Department of Commerce is to see that U.S. companies
have the opportunity to compete fairly, to help vendors of equipment and services find
new markets and new applications, and ultimately, to help consumers worldwide gain
access to the products and services of U.S. telecommunications companies. We believe
that a global market that encourages growth in satellite communications will help narrow
the information infrastructure gap. Satellites can provide greater access to basic
telephone service to the half of the worldþs population that lacks this service today.
Satellites can also provide low-cost access to the Internet and can open the doors to
other new communications media. Similarly, growth of national telecommunications
infrastructure has a multiplier effect in a domestic economy and makes the conduct of all
business more efficient and productive, thereby making foreign investment more
attractive and more likely to succeed.

One of the keys to the growth in satellite services will be increasing market
access. The World Trade Organization Agreement on Basic Telecommunications
(WTO/GBT) was a vital first step in working towards the goal of global market access
for satellite services. Effective implementation of the GBT, signed 69 nations, will be
essential to ensuring global market access.

The Administration will continue to advocate fair competition and global market
access for satellite service providers. In pursuit of this goal, we are continuing our
efforts to achieve a pro-competitive restructuring of both international satellite
organizations -- the International Telecommunications Satellite Organization
(INTELSAT) and the International Mobile (formerly Maritime) Satellite Organization
(Inmarsat).

Background of INTELSAT and Inmarsat

During the 1960s the United States led discussions leading to the creation of
INTELSAT as a treaty-based international cooperative to enhance global
communications and to serve as a counterweight to the Soviet Union's then dominance
in space technology. The creation of INTELSAT also served to spread the risks of
creating a global satellite system across telephone operating companies from many
countries. By 1979, following on the success of INTELSAT, the need for better maritime
communications led to the creation of Inmarsat. The fundamental reason for Inmarsat's
creation was to improve the global maritime distress and safety system (GMDSS) without
cost to participating governments.

INTELSAT, today, has 141 participating member nations and Inmarsat has 80
participating member nations. Both organizations operate as cooperative rather than
commercial ventures. INTELSAT provides fixed services including voice, video and
data. Inmarsat provides maritime, aeronautical and land mobile services.

Each member nation, or Party, to INTELSAT and Inmarsat (ISOs) designates a
Signatory to invest in the organization and to serve as the organizations' domestic
operating company. The United States, pursuant to the Communications Satellite Act of
1962, designated the Communications Satellite Corporation (Comsat), a corporation
created by statute, as the United States Signatory to both INTELSAT and Inmarsat. In
the United States, Comsat has exclusive access to the ISOs' space segments. Comsat is
the largest single user of both ISOs, and is therefore the largest single "owner," of both
INTELSAT (in which it owns 18 percent) and Inmarsat (in which it owns 23 percent).
"Ownership," in this context, relates mainly to system utilization and investment and, in
turn, to Signatory voting shares in certain ISO organs. There is, however, no legal basis
of ownership expressed in the ISOs' constituting documents.

Direction and governance of the ISOs is conducted through Signatory
representation on INTELSAT's Board of Governors and Inmarsat's Council. Voting at
both the Board of Governors and Council is weighted based on a Signatory's investment
share which is based, in turn, on a Signatory's utilization of the system. Government, or
Party, interests are conducted through the Assembly of Parties. Under the INTELSAT
Agreement and Inmarsat Convention, the Assembly of Parties has ultimate policy control
over each organization. Each Party has one vote in the Assembly. Because many
Signatories are state-owned monopolies, they may retain a direct voice in Assembly
deliberations. Both ISOs have created joint Signatory-Party working groups to conduct
restructuring deliberations. While each ISO's Signatories meet as a group at least four
or five times a year, each ISO's Assembly of Parties is generally held only every-other
year. Day-to-day management of the ISOs is conducted by a Directorate staff headed by
a Director General.

Pursuant to the Communications Satellite Act, as amended, the National
Telecommunications and Information Administration Authorization of 1992 and
Executive Order 12046, the President exercises supervision over and may issue
instructions to Comsat in relation to its activities with foreign governments, foreign
entities, and INTELSAT and Inmarsat. This authority is exercised through NTIA at the
Department of Commerce and the Communications and Information Policy deputate of
the Economic and Business Affairs Bureau at the Department of State. The Federal
Communications Commission (FCC) participates in the issuance of instructions to
Comsat and, by statute, is authorized to regulate Comsat's participation in procurement
of satellites by INTELSAT and Inmarsat and Comsat's provision of services via those
organizations.

INTELSAT and Inmarsat are both "carrier's carriers." They provide space
segment¹ to Signatories, charging the Signatories for that space segment which is then
sold by Signatories to operators or to end users. Pricing to end users is determined by
Signatories and national regulatory authorities.

Signatories are responsible to the ISOs for making capital contributions in
proportion to their individual investment share. Thus, the ISOs themselves operate by
selling space segment to Signatories but acquire the necessary assets through capital calls
on Signatories. The ISOs reimburse the Signatories' for their capital contributions from
space segment utilization charges above those necessary for the ISOs operations and
further compensate the Signatories with an increment added to reflect the world rate of
money and for the risk undertaken by the Signatories.

The ISOs, by virtue of their intergovernmental nature, are driven by consensus in
making investment and management decisions. Important decisions are often reached
only through a time-consuming, politicized process frequently spread across several
meetings, weeks or months apart. Moreover, each ISO has been assigned public service
obligations which some ISO participants believe distort what might otherwise be purely
commercial decisions.

The intergovernmental model used by INTELSAT and Inmarsat was replicated
for creation of regional satellite systems such as Eutelsat and Arabsat. Participants in
these other intergovernmental organizations are often the same as those participating in
the ISOs, which some believe reinforces incentives to discourage competition in satellite
communications.

Evolution of the ISOs and Relevant Policies

By the mid-1970's satellite communications had become financially viable. During
the same time and after considerable debate, the United States established its "open
skies" policy for domestic satellite communications. This policy successfully created
competition in satellite communications within the United States. By contrast, the vast
majority of INTELSAT Parties designated their national monopoly operators as
Signatories, effectively maintaining a closed circle for global satellite services. Similarly,
most Signatories to Inmarsat were, and remain, domestic monopolies.

Despite steady growth in demand for satellite services and given the dominance of
INTELSAT by national monopolies, there was hostility at INTELSAT when the United
States Government announced support for separate satellite systems to compete with
INTELSAT. As part of a 1984 Presidential Determination articulating this new policy,
however, the separate systems were strictly limited in the amount of international
switched basic voice traffic they could carry. This limitation was imposed to meet
INTELSAT's "economic harm requirements" found in Article XIV(d) of the INTELSAT
Agreement, a requirement based on U.S. interventions during negotiations throughout
the 1960's-early 1970's establishing INTELSAT. It was eliminated from the U.S.
regulatory structure in 1997 and the INTELSAT Assembly of Parties removed it from
intersystem coordination consideration in April 1997.

Until April 1997, any U.S. separate system seeking to put more than 8000 64 kbps
circuits on a satellite had to consult with INTELSAT to demonstrate no economic harm
to the INTELSAT system. The limits on public switched network (PSN)
interconnectivity for basic voice service had the effect of encouraging separate systems to
pursue rapid development of video transmission and the non-PSN business
communications markets.

With the emergence of separate and competitive systems, INTELSAT sought ways
to adapt. It took a series of decisions allowing entities authorized by, but separate from
Signatories, to have "direct access" to INTELSAT's capacity, in any of four ways: 1)
operational/technical; 2) commercial/service matter (tariffs, services terms and
conditions); 3) contractual matters (direct ordering, earth station applications); and 4)
investment access (direct investment). The United Kingdom (Cable & Wireless) and
Chile (Chilesat) are examples of the most direct means - investment. The United
Kingdom also advocated minor changes, approved by the Assembly in 1995 but not yet
ratified, allowing Multiple Signatories per Party, on a voluntary basis. In 1996, there
were over fifty customers, directly accessing INTELSAT capacity on the third level -
contractual matters.

As a matter of current U.S. domestic regulation and legislation, however, direct
access to INTELSAT or Inmarsat from the United States is not permitted. Rather, the
United States Government's preferred approach is to improve competitive supply of
satellite capacity and to work within the INTELSAT and Inmarsat restructuring
processes while simultaneously encouraging the growth of separate systems.

The Growth of Competition

As the market for international satellite capacity exploded, submarine cable also
experienced enormous growth, providing more capacity at lower cost. For instance, in
1965, the then-new TAT-4 serving the North Atlantic added 138 voice paths at a cost of
$365,000 per voice path. In 1988, TAT-8 added 37,800 paths and the cost per path fell
to $3,600. TAT-12/13 adds another 600,000 paths at a cost of approximately $1,000 per
path.² Between 1997-2000, it is estimated that submarine cable will have a total
capacity in the North Atlantic of 1,274,000 voice paths. Satellite capacity is expected to
grow from 78,000 voice paths in 1986 to 737,500 paths in the 1997-2000 period.

With the emergence of this intermodal competition, the United States
Government rescinded its international circuit distribution policy in 1988. The purpose
of circuit distribution guidelines was to ensure adequate use of the INTELSAT system by
U.S. carriers also investing in submarine cables. The policy was ended to encourage
INTELSAT to adapt to a competitive environment by no longer guaranteeing traffic and
to allow U.S. carriers to make their own facility decisions absent regulatory interference.

The growth of submarine fiber cables is often cited as an example of competition
to the ISOs, as fiber cables have significant advantages in point-to-point communications
(e.g. basic telephony). Submarine cable, however, cannot easily or inexpensively enhance
service to rural or remote areas nor are they efficient for point-to-multipoint
transmissions (e.g. television broadcasting). While the economic situation and the
possible efficiencies will change in the future, 73 nations are not presently connected to
any fiber optic system. Thus, for some services, satellites may have a durable advantage.

The emergence of competition from separate systems and submarine cable
provided an incentive for the ISOs to examine their future roles and structures. In
addition, just as fiber optics made submarine cables more efficient, new satellite
technology enhancing global, mobile telephony posed a potential competitive threat to
Inmarsat. Thus, by the mid-1990s both ISOs were well into the process of identifying
options for structural change.

Public Service Obligations

The ISOs, in addition to providing commercial communications, fulfill certain
public service obligations.

Inmarsat's provision of space segment capacity to the International Maritime
Organization's (IMO) GMDSS is an example of such a public service obligation.
GMDSS is a service that has merited special attention in the United States proposal for
Inmarsat restructuring, because of treaty obligations under the International Convention
on the Safety of Life at Sea. GMDSS is the basis for all ship safety related
telecommunications. Competitors, however, claim that Inmarsat uses this obligation to
its commercial advantage by relying on it to project to the marketplace Inmarsat's special
status. Inmarsat's refusal to forego use of the Inmarsat name and logo in its creation of
its commercial affiliate, ICO Global Communications (ICO), is viewed by some as an
example of Inmarsat's using this special status to its commercial advantage.

The United States has proposed that oversight of Inmarsat's GMDSS public
service obligation be maintained by a small residual intergovernmental Inmarsat entity,
the IMO, or other appropriate non-commercial body. The United States proposal would
require that GMDSS be provided, under contract, by the privatized Inmarsat unless or
until other mobile systems are also able or required to provide GMDSS space segment
capacity. Inmarsat's latest generation of satellites is being launched this year and will
have a useful life of 13 to 15 years. Thus, there is no threat to GMDSS for the
foreseeable future.

INTELSAT's public service obligations are less precise. As defined in Article III
of the INTELSAT Convention, INTELSAT's core mission is that "...INTELSAT shall
have as its prime objective the provision, on a commercial basis, of the space segment
required for international telecommunications services of high quality and reliability to
be available on a non-discriminatory basis to all areas of the world." This obligation is
often referred to as "lifeline service" or "universal service" and is generally perceived in
that manner, especially by developing economies. INTELSAT itself, however, has no
ability to enhance domestic telephone penetration rates (although in special cases,
INTELSAT capacity is used to serve domestic markets, particularly in lesser-developed
economies). Consequently, INTELSAT's public service role as a provider of "universal
service" or "lifeline service" is muted. Indeed, some assert that INTELSAT has gone far
beyond any mandate for global interconnectivity by providing or planning to provide
sophisticated business services and/or "luxury" video services such as direct-to-home
(DTH) television to high-end markets.

In April of this year, Dr. Waverman completed an analysis of INTELSAT's
"universal service" obligation. His summary of conclusions made the following
observations:

1. There are substitutes for all but the minority of INTELSAT links;

2. Of the 209 members of the ITU, and the 139 members of INTELSAT,
only 73 countries currently rely solely on satellites for connections to other
countries and at the turn of the century at most 50 will. All of the
countries for whom satellites are the "lifeline" to the rest of the world are
developing countries, the majority of which are in Africa. Sixty-six of
INTELSAT's member countries have cable connections with other
countries and this number is growing;

3. Of the 139 member country Signatories of INTELSAT, the vast majority
are government-owned firms and the Signatories of all the 73 "lifeline"
developing countries are government-owned telecom monopolies;

4. INTELSAT provides service to member countries' Signatories rather
than to end users within those countries. End users in developing countries
do not necessarily benefit from whatever "nondiscriminatory" pricing that
may exist at the INTELSAT level. There is no mechanism to translate
INTELSAT's "wholesale" rates into low "retail" rates for international calls.
In fact many of the Signatories who are said to benefit from INTELSAT's
"nondiscriminatory" pricing have the highest retail rates for international
calling;

5. The direct beneficiaries of INTELSAT's "non-discriminatory" prices,
therefore, are the government-monopoly INTELSAT Signatories not "end
users." In essence, INTELSAT's "low cost" service is being provided to
monopolies who then extract monopoly rents for this service;

6. The state of domestic telecommunications generally in many of the
"lifeline" countries is what one would expect when all telecom services are
provided by a government monopoly. That is, the prices for connection,
monthly subscription, and calling are high especially relative to GNP per
capita. Moreover, telephone penetration rates in many of these countries
have not expanded at a significant rate in the last two decades, which may
mean that "universal service" for "end users" may not be a key goal in these
countries, notwithstanding INTELSAT's stated universal service goals;

7. Ultimately, the factor that reliably leads to affordable rates for end
users is not INTELSAT's "non-discriminatory" pricing, but the presence of
competition in both the international and domestic telecommunications
markets of the developing countries. To the extent that continuation of
INTELSAT in its present form adds to the profits of the 50 - 73
Signatories in the "lifeline" countries and reduces their incentive to permit
such competition, the continuation of INTELSAT works against the
interests of end users in developing countries and against development
itself.³ Actual implementation of INTELSAT's obligation to ensure non-discriminatory
pricing is difficult to validate. A review of this matter by Commissioner Varney of the
Federal Trade Commission (FTC) in November 1995 cites numerous efforts, including
one by INTELSAT itself, which failed to identify existence of cross-subsidies (from thick
route to thin route traffic) which would presumably exist to ensure non-discriminatory
pricing across the globe. In part, the FTC observed:

To the extent that a subsidy is necessary to attain a network of efficient
size, one could perhaps justify a set of cross-subsidies. But some analysts
have in fact questioned whether INTELSAT is providing a net subsidy to
Third World countries. Hahn and Krozner, for example, claim that
numerous studies of INTELSAT's pricing behavior (including one
commissioned by INTELSAT itself) have failed to demonstrate the
existence of this subsidy...Perhaps more compelling is that one of
INTELSAT's principal privately-owned rivals -- PanAmSat -- entered not
by serving dense (and presumably highly profitable) North Atlantic routes,
as is predicted by the standard creamskimming argument, but rather by
establishing service between the United States and South America.⁴It is worth noting, however, that PanAmSat, in the late 1980s, entered a region and
market (video distribution) not then widely served by INTELSAT rather than attempting
to challenge INTELSAT and Comsat in the North Atlantic market. PanAmSat's strategy
was presumably influenced by the limitations imposed on the amount of voice traffic
separate systems were allowed to carry.

The lack of data on cross subsidies was borne out by a 1995 Rand Corporation
paper on INTELSAT restructuring presented to the INTELSAT Working Party. The
Rand paper acknowledges the absence of data about INTELSAT pricing:

Although little is known about the extent to which there are cross subsidies
among routes, potential "cream-skimming" by competitors is likely to make
it difficult to retain averaged rates.⁵While the Rand study raises the traditional threat of cream-skimming, there is little
evidence to support this concern. Indeed, were creamskimming a genuine threat, it is
logical to assume that underseas cable would have already had this effect, thereby
making evidence of cross subsidies obvious.

While Inmarsat's GMDSS obligation is a readily identifiable public service
obligation, INTELSAT's public service obligations are less clear and raise questions
about the number of satellites necessary to fulfill these obligations. Regardless,
INTELSAT restructuring proposals reflect concerns by developing economies that
INTELSAT survive -- as an intergovernmental organization -- to maintain what the
developing economies perceive as INTELSAT's role as a "lifeline service" provider.

Privileges and Immunities

To implement these public service obligations and as a part of the ISOs' unique
treaty status, both organizations benefit from certain privileges and immunities. Under
their Agreements, the ISOs are generally immune from suit, including private or public
prosecution on antitrust charges, and neither ISO pays taxes on revenues (although
Signatories are subject to national taxes). In addition, it has been argued that some
Signatories receive special treatment from regulatory authorities for spectrum, orbital
location assignments at the International Telecommunication Union (ITU), and to satisfy
licensing needs of the ISOs. On the other hand, the ISOs are subject to
intergovernmental oversight through the Assembly of Parties and, in addition, some
Signatories are subject to oversight by their governments, as in the United States, which
can be seen as limiting Comsat's freedom of action.

In either case, competitors frequently cite the privileges and immunities as
conferring unfair market advantages on the ISOs.

Investment/Utilization Linkage

Another factor encouraging ISO restructuring -- particularly for larger Signatories
-- is the linkage between system utilization and investment. Currently, Signatories invest
in the ISOs through capital calls in proportion to their use of the systems. This process
tends to encourage some Signatories to overestimate the ISOs future capital needs, safe
in the knowledge that their actual investment share will be relatively small whereas
Comsat, for instance, will be required to contribute between 18 and 23 percent of the
required capital for any asset acquisition.

In addition to the exposure to substantial capital calls, larger Signatories have
little opportunity to achieve liquidity from their investments in the ISOs. This has led
some larger Signatories, to advocate delinkage of investment and utilization in any future
structure.

ISO Financial Status and Access to Capital

While the ISOs attract significant national and international policy attention they
represent a relatively small portion of the global telecommunications marketplace. They
are, nonetheless, in strong financial condition. INTELSAT's recent financial data reflect
healthy returns:

Figures for INTELSAT in US $ in Thousands⁶ 1996 1994
Telecom Revenue 911,361 706,250

Operating Expenses,
including depreciation 477,371 401,436

Revenues over Expenses 341,401 280.921

Inmarsat does equally well on a "net income" basis:

Figures for Inmarsat in US $ in Thousands⁷ 1996 1995
Revenue 368,968 340,162

Operating Costs 87,711 76,431

Excess of Revenue Over Costs
after amortization and lease
interest 137,041 133,789

Given these results, it is not surprising that the ISOs have been able to access
global capital markets on favorable terms. In January 1993, INTELSAT issued $150
million of notes due in 2000 bearing an interest rate of 6 and three quarters percent.
Seven months later, during a time when interest rates were drifting downward,
PanAmSat issued $175 million of senior secured notes which bore an interest rate of 9
and three quarters percent. PanAmSat also issued $460 million of senior subordinated
discount notes with an interest rate of 11 and three eighths percent. In June 1994,
Echostar Communications, a then prospective domestic Direct Broadcast Satellite service
provider, filed a debt offering for $624 million of senior secured discount notes due in
2004 with warrants attached for 3.7 million shares of common stock. The notes bore an
interest rate of 12 and seven-eighths percent.

PanAmSat and other ISO competitors often argue that they are at a disadvantage
in global money markets when competing against intergovernmental organizations for
money and, thus, less able to compete with the ISOs in the telecommunications
marketplace. INTELSAT's treatment in the debt markets could be an appropriate
determination by investment bankers of INTELSAT's long and profitable operating
history -- especially vis a vis a start-up venture -- or there could be an implicit sense,
perhaps reinforced by the perceived nature of an intergovernmental organization, that
INTELSAT has a special status and should, therefore, be accorded favorable rates.

By accessing global debt markets the ISOs relieve Signatories of their obligation
to respond to capital calls while still ensuring Signatories the opportunity to capture
significant returns on their capital contributions through space segment utilization.
Ironically, in the early 1990s, the ISOs' use of debt markets also contributed to the
generation of so-called "accumulated excess compensation" or revenue payable to
Signatories above their set rate of compensation for use of Signatories capital (now set in
the 15 percent to 20 percent range despite INTELSAT's evident ability to borrow well
below that rate). To prevent the possibility of additional accumulated excess
compensation sums, the ISOs simply increased the rate of return due to Signatories.

Prices to End Users

The financial picture for the ISOs is further muddied by their role as a "carriers'
carrier." The incentives to increase system utilization can be distorted downward by
Signatories who seek extraordinary return from their charges to end users. This charging
system provides Signatories which are private monopolies, state-owned monopolies, or
dominant carriers with incentives different from a more competitive enterprise. Thus, as
Comsat noted in 1994, its charge for 10 minutes of occasional use television, including
earth station uplinks, would cost an end user $236. By contrast, Indonesia charged
$1,700 for the same 10 minutes and Pakistan charged $1,000.

Similarly, Waverman has shown that, for 1992, annual charges escalated in the
following fashion:

o Cost of one telephone circuit grade at INTELSAT $1000;

o INTELSAT's charge to Signatories for that circuit $3300;

o Comsat's charge to U.S. operators - $12,000;

o U.S. end user payment to operators - $37,512.

This cost escalation was dramatically worse in Europe where Waverman estimates that
the end user paid $73,428 to the national operator.⁸ Whatever these figures may imply as to efficient system utilization, there is also
the possibility that the ISO-to-operator "price floors" may act as "price ceilings" for
separate systems or regional satellite communications enterprises, thereby creating
artificially high pricing practices throughout the satellite communications sector. Specific
system price data is not available to address this concern.

Supply/Demand Imbalances

It should also be noted that INTELSAT currently operates with what appears to
be a relatively low rate of capacity utilization of about 65 percent to 70 percent. The
Rand Corporation, in undertaking its study for the INTELSAT Working Party (IWP),
noted, "System capacity utilization has persistently fallen short of forecasts and is
currently low, reflecting a durable mismatch between supply and demand."⁹ Because
comparable figures for other systems are not generally available, it is difficult to put
INTELSAT's capacity utilization in context. However, with 24 satellites in orbit and 6
more satellites on order by INTELSAT there would appear to be an inefficient
relationship between supply and demand.

Creation of ICO

In 1989, the Inmarsat Assembly of Parties adopted amendments to the Inmarsat
Convention and Operating Agreement permitting it to enter the land mobile market.
The land mobile amendments were ratified by Parties in February 1997.

The emerging market for global, mobile hand-held telephony provided an impetus
for restructuring deliberations. Those deliberations were further enhanced by
announcements that other firms, commonly referred to as Big LEOs,¹⁰ were
contemplating entry into this market. It was perceived that unless Inmarsat acted quickly
it could lose a significant opportunity to compete in this market. Inmarsat's broad
restructuring deliberations were eventually set aside so that the Council, the
Intercessional Working Group (IWG) and the Assembly of Parties could focus
exclusively on entering the global, mobile hand-held market.

Inmarsat's plans to enter the global, mobile handheld market did not proceed
smoothly. Early in the process, six large Signatories, including Comsat, proposed that the
new enterprise be formed wholly independent of Inmarsat. This approach met with
strong opposition from many of the smaller Signatories. Faced with the seemingly
undesirable outcome of a wholly separate company or an affiliate, smaller Signatories
became more open to change and the process evolved, through compromise, to establish
what is now known as ICO, the Inmarsat affiliate.

ICO was formed as a private limited liability company owned principally by
Inmarsat and Inmarsat Signatories.¹¹ Inmarsat may own up to 15 percent of ICO and
presently maintains approximately a 10.41 percent share of ICO. As long as Inmarsat
maintains a minimum 10 percent ownership share, it will receive weighted voting rights
of 15 percent, the right to act as Global Services Wholesaler for maritime and
aeronautical services provided to non-handheld terminals, and the right to appoint two
directors to the thirteen member ICO Board. Further, Inmarsat Signatories will receive
from Inmarsat a return on their investment in ICO prior to ICO realizing a profit or
even entering into service. ICO management projects that ICO will begin providing
service in 1999.

The United States Party established principles and elements of structural
separation relevant to the creation of ICO. These elements were designed to promote
fair competition, to allow ICO to participate in the global, mobile handheld
telecommunications market in competition with private service providers, and to ensure
that ICO would not receive an unfairly advantageous position in that market. United
States support for ICO was conditioned upon these elements:

1) There shall be no cross-subsidization between Inmarsat and the new affiliate;
this shall be ensured through the establishment of fully separated accounting
standards, the use of commercially acceptable accounting standards and the use of
contracts negotiated at arm's length for any equipment, facilities or services to be
provided to the affiliate by Inmarsat;

2) The affiliate shall not make use of the Inmarsat name and logo, and Inmarsat
shall not conduct advertising or marketing for the affiliate provided, however, that
Inmarsat and the affiliate may engage in cooperative advertising pursuant to
contracts negotiated at arm's length;

3) Inmarsat shall not seek on behalf of the affiliate, or transfer to the affiliate,
any spectrum frequency or orbital slots;

4) Inmarsat shall have no officers or employees in common with the affiliate. A
controlling percentage of the affiliate's directors shall not also be Inmarsat
Governors;

5) The external auditors of Inmarsat and of its affiliate shall individually and
separately undertake an annual review, in conjunction with routine audits, to
assure implementation by Inmarsat and its affiliate of the terms and conditions of
structural separation outlined herein;

6) The affiliate shall not avail itself of any of Inmarsat's treaty-based privileges
and immunities;

7) The affiliate shall not incur debt in a manner that would permit a creditor to
have recourse to the assets or income of Inmarsat;

8) Aside from its shareholder interest, Inmarsat shall not own any operating
property in common with the affiliate;

9) A fair and competitive environment and a "level playing field" shall be
established and maintained for all mobile satellite communications networks,
including non-discriminatory access to national markets for all mobile satellite
communications networks, subject to spectrum coordination and availability. The
affiliate shall promote these principles and shall not seek exclusive authorization
to provide satellite services in any country;

10) Inmarsat shall not perform hiring or training of personnel on behalf of the
affiliate except pursuant to contracts negotiated at arm's length;

11) Ownership of the affiliate should be broad and open; arrangements for the
provision of services to national markets shall be consistent with domestic
regulatory requirements.

The Inmarsat Council and the 10th Assembly of Parties took these principles into
consideration and approved creation of ICO so long as: (a) Inmarsat's ability to carry out
its purpose, including its public service obligations is not endangered; (b) there be no
cross-subsidization between Inmarsat and the affiliate; (c) the confidential character of
any commercially sensitive information held by Inmarsat be protected; and (d) Inmarsat
be free to choose whether to invest in new technologies and new services. The Assembly
also decided that its decisions regarding the affiliate and "the principles and
recommendations of the IWG and responses of the [Inmarsat] Council thereto ... shall be
included in the appropriate Organizing Documents of the Inmarsat-P Affiliate."¹²

The IWG and Council principles and recommendations, including those listed
above, provide that: 1) subject to applicable competition laws, a mechanism for
harmonization be put in place to reduce conflicts of interest; 2) there be broad and open
ownership of the affiliate; 3) consideration be given to a mechanism that brings
developing countries into the decision-making process of the affiliate; 4) there be non-
discriminatory access to national markets for all mobile satellite communications
networks, subject to spectrum coordination and availability; and 5) Council will submit
proposals to the IWG considering the possibility of convergence between Inmarsat and
the affiliate.¹³ It is the view of the Executive Branch that the Assembly intended to
bind ICO to the Inmarsat principles through ICO's organizing documents.

The Executive Branch conducted an extensive review of the final affiliate
agreement, and on September 29, 1995, outlined its concerns in a letter to Reed Hundt,
Chairman of the FCC, in connection with its consideration of a Comsat application to
invest in ICO through Inmarsat. The Executive Branch suggested specific remedial steps
that Comsat and ICO should undertake prior to FCC approval of Comsat's participation
in the Inmarsat procurement of ICO facilities: (1) Comsat should establish that the
Services Contract between ICO and Inmarsat was negotiated at arm's length, and the
costs set forth in the Services Contract are reasonable; and, (2) that ICO is bound,
through ICO Organizing Documents, by the Inmarsat Principles established by the Tenth
Inmarsat Assembly.

The Executive Branch also informed the FCC that it will continue to review
affiliate-related developments and expressed several concerns regarding the affiliate.
These include: possible cross-subsidization of ICO by Inmarsat; and that ICO will reap
financial benefits from Inmarsat's privileged status; and that ownership of ICO is largely
limited to Inmarsat and its Signatories. The Executive Branch is also concerned about
the establishment of a fair and fully competitive marketplace with non-discriminatory
global market access for all handheld mobile service providers. The Executive Branch
recommended that Comsat not be permitted to use the Inmarsat name and logo when
marketing ICO services in the United States. In its letter, the Executive Branch also
noted that the land mobile amendments to the Inmarsat Convention had not yet entered
into force and that it would be prudent for these amendments to be in force before
initiation of service by ICO. The matter is still pending before the FCC.¹⁴

Inmarsat Restructuring

Inmarsat's creation of ICO slowed the momentum for further restructuring. This
changed when two larger Signatories indicated that they were not prepared to invest in
another (fourth) generation of satellites through Inmarsat. Inmarsat began launching its
third generation of satellites during 1996, and in June 1997, successfully launched the
fourth satellite of this generation. A fifth and final spare satellite will be launched later
this year. The life expectancy of this generation of satellites is 13 years with the
possibility that each satellite may last as many as 15-20 years.

While it may be useful to begin design and planning for a fourth satellite
generation sooner rather than later, not all Signatories or Parties share a sense of
urgency to either plan for the next satellite system or aggressively pursue restructuring
today. To the contrary, a large group of Parties and Signatories appear bent on tightly
limiting any restructuring to a form that would essentially strengthen the
intergovernmental nature of Inmarsat. Efforts by the United States to have further study
of a complete privatization model were rejected at Inmarsat's February 1996 Assembly of
Parties. The Assembly of Parties, voting by a significant number in opposition to the
United States proposal, insisted that an "essential element" of any Inmarsat restructuring
would be that the organization retain its status as an intergovernmental entity.

Nevertheless, in July 1996, faced with anticompetitive restructuring proposals from
Inmarsat management and some Signatories, the United States presented a joint Party-
Signatory proposal including, inter alia, the basic elements listed here:

1. Continued Provision of GMDSS. Continued provision of space segment
capacity to the GMDSS by means of a contract between a residual
Inmarsat and the privatized successor entity. This contract would remain
in place unless/until other mobile service providers were willing or
required to provide space segment capacity for GMDSS.

2. Non-Discriminatory Market Access. A commitment, similar to the
elements outlined by Inmarsat's 10th Assembly of Parties, to open and non-
discriminatory market access for all global, mobile systems.

3. External, Open Ownership. A high level of external ownership to be
established through an initial public offering (IPO).

4. Relationship Between "Privatized" Inmarsat and ICO. Consideration of
mechanisms that would prevent any merger of interests or activities
between "privatized" Inmarsat and ICO. More specifically, any such
mechanism might include a requirement that Inmarsat transfer its current
interest in ICO to another entity or entities and/or that there be an
agreement forbidding merger or other convergence of interest between the
two for some period of time.

5. Use of the Inmarsat Name and Logo. Prohibition against "privatized"
Inmarsat from using the Inmarsat name and logo.

6. Jurisdiction. Location of "privatized" Inmarsat in a country which
affords it commercial opportunities as well as providing adequate
regulatory oversight both for purposes of ITU regulations and for purposes
of competition law.

The joint position also outlined the United States' opposition to proposals for use
of a "golden share" to implement GMDSS obligations and to proposals that would limit
the amount of ownership that might be held by any one company or investor. Comsat
and the United States Government have not agreed, as yet, on some details -- for
instance, what percentage of the new enterprise should be offered to outside investors
through an IPO.

The restructuring model ultimately developed by some Council members, referred
to as New Inmarsat, would convert Inmarsat into a public unlisted corporation that
would continue the commercial functions of Inmarsat. "New Inmarsat" would be owned
primarily by current Signatories, with only a small number of external investors possible.
A smaller, residual IGO would oversee, through a golden share, continued provision of
GMDSS which would be provided by the privatized "New Inmarsat."

Some Signatories, particularly those of developing countries, prefer revitalizing
and even strengthening the current treaty-based Inmarsat structure. At the Council in
May 1997, it was unclear that a consensus supporting any restructuring model existed.
Thus, the matter was forced to a vote. The Council voted on: a) the "New Inmarsat"
transition to IPO subject to Board approval; b) transition to IPO subject to shareholder
approval; and c) an immediate IPO (couched as the U.S. approach). None of these
options received the 66 percent vote required for approval. The "New Inmarsat" option
received slightly more than 50 percent and the joint United States Party/Signatory option
received slightly more than 33 percent.

As a result of the Council's failure to attain a consensus on a restructuring model,
the Council and IWG cannot move forward with the proposed amendments to the
Inmarsat Convention and Operating Agreement. Accordingly, it is likely that the
Extraordinary Assembly, scheduled for October 1997 to grant final approval to the
amendments, will be cancelled. The next regularly-scheduled Assembly will be in
February 1998. It is possible that the Council will make efforts to conclude the
restructuring process in time to submit amendments to the February Assembly.

There will be Inmarsat IWG and Council meetings in early July to discuss next
steps in the restructuring process. The United States continues to support the elements
proposed in its submission to the February 1996 Assembly and detailed in its July 1996
proposal. INTELSAT Restructuring

INTELSAT has considered a variety of options for restructuring. These options
have included the creation of an INTELSAT-owned commercial affiliate; INTELSAT
wholesale sales of space segment through a commercial affiliate; and creation of an
enterprise somewhat more independent of INTELSAT. Similarly, the United States
Government has considered a variety of options including the full and immediate
privatization of INTELSAT, and the divestiture of about two-thirds of INTELSAT's
assets to create two or three global, competing firms with a downsized residual
INTELSAT to ensure the continued availability of "lifeline" service for developing
countries were met. Instead, in 1996, the Administration developed a proposal that
offered a procompetitive outcome with a good chance of success in an international
setting where many of the interested Parties lack our enthusiasm for competition.

In simplified form, the Administration's 1996 proposal called for creation of a new
entity (INC) which would acquire approximately 50 percent of INTELSAT's existing
assets. The residual intergovernmental INTELSAT (IGO) would have been downsized
moderately but still fully capable of ensuring basic global interconnectivity. INC, by
virtue of its acquisition of newer satellite assets, would concentrate on such "new"
businesses as DTH, Satellite News Gathering, and multimedia/Internet-based services.
This proposal was submitted in March 1996 to the INTELSAT Board.

The Administration proposed that INC would issue an IPO covering 60 percent of
its ownership within the first year of its incorporation. A secondary offering would be
issued within two years of the IPO. Thus, at least 80 percent of INC would be held by
external investors within three years of INC's creation. The intent of seeking this level
of outside ownership was to minimize the risk of collusion between INC and IGO and,
instead, encourage a more competitive global framework. In addition, INC would have
no intergovernmental status, nor INTELSAT's privileges and immunities. Any
transactions between IGO and INC would be at arm's length and at fair market value.

During the IWP meetings, most attention centered on a model similar to the
United States proposal but left unresolved several important issues: 1) the extent of
INC's responsibility to assure member-countries that they will have continued access to
capacity to meet essential communications needs (ensured capacity rights or ECRs); 2)
the extent to which INTELSAT's existing satellite assets, registered orbital slots and
radio frequency assignments would be transferred to the affiliate; 3) the level of
mandatory external investment in the affiliate; 4) the ground rules for transactions
between IGO and INC; 5) the permissible level, if any, of IGO direct investment in INC;
and 6) the permissible level, if any, of the amount of ownership any individual entity
could hold.

The matter of asset allocation between IGO and INC will likely be governed, in
part, by the services to be provided by INC and the satellites capable of providing such
services. It will also likely be determined by the amount of assets Signatories wish to be
sold -- a somewhat "political" decision and one influenced by enhancing the attractiveness
of INC to potential investors. In the event, it now appears that no more than 4 to 6
satellites will be transferred from INTELSAT to INC.

In order to advance the restructuring process while maintaining United States
Government objectives, the United States has adapted elements of numerous others'
proposals, to form the outline of a restructuring proposal with the potential of attracting
broad international support. Such an agreement would still have to achieve or preserve
U.S. procompetitive objectives. In particular, a final agreement must achieve an
independent INC and a procompetitive international satellite services market.

A new IWP met for the first time in June 1997, where agreement was reached on
the business plan and charters for both IGO and INC. The IWP also heard reports on
customer reactions to the concept of contract novations. Most Parties deferred their
vote of approval on the business plan and missions of both entities until the September
and December 1997 IWP meetings discuss, and settle the issues of ownership and assets
transfer.

During this process, the United States Government will continue: bilateral
meetings with other Parties to gain consensus on an agreement outline; outreach
meetings with the U.S. private sector; and deliberations with Congressional
representatives involved in legislation affecting INTELSAT restructuring. It now appears
that if the establishment of INC proceeds along its present timetable, INTELSAT
interests will move onto the broader issues of restructuring the residual INTELSAT/IGO
itself.

Developments in the Mobile Marketplace

Competition in the global satellite communications sector continues to expand in
both the fixed and mobile service sectors. KPMG Peat Marwick predicts that the market
for satellite-delivered global, mobile personal communications systems (GMPCS) could
reach 40 million subscribers by 2010. The Financial Times notes that, with 130 million
cellular subscribers worldwide, the annual value of the global mobile telephony market
could grow from $85 billion in 1995 to $150 billion by the year 2000.

The Big LEO participants asserted to the Executive Branch that competition to
their potential business from Inmarsat, with assured market access, posed an unfair
threat. Given the intended role of the Big LEO systems to provide ubiquitous service
across the globe, any material threat to global market access would put the entire project
and several billions of investor dollars at risk.

Three Big LEO entities are currently licensed by the FCC: Iridium, Odyssey and
Globalstar. Two other firms have applications pending before the FCC. Although these
enterprises are often characterized abroad as "U.S. firms," they are for all intents and
purposes multinational entities. Each of these companies have attracted foreign
investors. Two have attracted substantial foreign investors so that the total U.S.
investment is in the 20 to 30 percent range or roughly the equivalent of Comsat's
investment share in both ISOs.

As noted above, Inmarsat created its own entity, ICO, through which it intends to
serve the same global, mobile hand-held market. ICO remains principally owned by
current Inmarsat Signatories and by Inmarsat itself. Comsat has a direct ownership
investment of approximately 1.5 percent in ICO. In addition, Comsat owns
approximately 23 percent of Inmarsat's 10 percent investment in ICO.

In recognition of these market access concerns, the United States, at Inmarsat's
Tenth Assembly of Parties in December 1994, obtained broad international support for
inclusion of the following language in the Assembly's guidance to Inmarsat's Council as
part of the Assembly's approval of Council's decision to proceed with ICO:

The Assembly recommended that:

the Council should be aware that there should be non-discriminatory access
to national markets for all mobile satellite communications networks,
subject to national policy and spectrum coordination and availability.

The Inmarsat Council acknowledged these goals with the statement that:

The Council notes the concern expressed by Parties regarding the
importance of establishing and maintaining a fair competitive environment
for all personal satellite communications networks. Consistent with this
principle, the Council expects that the Affiliate (ICO) will not seek
exclusive authorization to provide services in any country or region.

Additionally, each of the ICO Organizing Documents was amended in July 1996,
to include the Inmarsat Principles, establishing the principles by which ICO should be
operated.¹⁵ The enforceability of the Inmarsat Principles as contained in the
Organizing Documents has never been tested.

Despite these pronouncements, competitors to ICO are very concerned about
diminished market access opportunities. These statements followed the United States'
insistence that ICO only be pursued under a framework of structural separation with no
cross-subsidies between Inmarsat and ICO. As noted above, the Executive Branch filed
comments in September 1995 with the FCC presenting concerns about the
implementation of certain elements which appeared to fall short of the United States'
objectives.

A common regime that would ensure all Big LEOs the global market access they
require has not yet been created. The WTO's Negotiating Group on Basic
Telecommunications sought to accommodate the need for a greater "critical mass" of
nations agreeing to ensure market access for satellite systems. In February 1997, the
Agreement on Basic Telecommunications Services was signed by 69 countries, of which
49 countries agreed to guarantee market access for all satellite services and facilities, 7
WTO countries committed to market access for selected services and facilities, and
another 13 WTO member countries made no commitment at all.

The successful conclusion of the WTO does not eliminate or finally resolve the
market access issue for the Big LEOs. For example, of the 69 participating WTO
countries, 40 Inmarsat member states made satellite market access commitments. Of
these 40 countries, one country (Colombia) will open its market to geostationary
satellites only, another (Brazil) established access only if the foreign satellite offers a
technical, operational and commercial benefit, and yet another (Argentina) committed to
opening its market only for mobile and non-geostationary satellites in the fixed satellite
service. In reality, 37 (of 80) Inmarsat member countries definitively committed to
market access for mobile satellite services and facilities; with 22 of these countries
committing to such market access by or before the year 1998.

The year 1998 is important because the first Big LEOs are expected to become
operational by that date. As a result, it will be necessary to ensure that prior to 1998, all
Big LEOs attain global market access and are able to compete fairly in the global
mobile handheld satellite communications market. Accordingly, we remain concerned
about the large number of Inmarsat member countries that have not made market access
commitments or that have not committed to open their satellite markets before the Big
LEOs become operational. The United States Government continues to advocate on
behalf of U.S. industry for market access for all mobile satellite service providers and to
ensure that Inmarsat Signatories, because of their Inmarsat membership and commercial
interest in ICO, do not deny market access to Big LEOs.

New Market Players

Even with a successful conclusion of the WTO/GBT other Big LEO-related issues
remain to be addressed. For instance, there are now indications that CEPT, the
European standards-setting authority, is considering spectrum assignments in Europe
which could significantly disadvantage systems already licensed by the FCC. In addition,
there is potential for further discrimination against one or more Big LEOs by imposition
of special tariffs or other charges for carrying a hand-held telephone into a given
country. The USG and our colleagues in the private sector addressed these matters at
the ITU World Telecommunications Policy Forum in October 1996 and subsequently
agreed on a Memorandum of Understanding, currently with 40 signatories, that
establishes an ongoing process for addressing many of the issues between operators and
governments.

There also has been a recent expansion of potential new global, geostationary
satellite communications systems in the fixed services. Following the 1995 World
Administrative Radio Conference, several firms began the process of filing, with the ITU,
for orbital slots and for the necessary spectrum frequencies to provide a broad range of
services from fixed, geostationary satellite platforms similar to INTELSAT. These
potential market entrants have been identified generically as Ka band service providers.

Some of the firms with announced plans for new fixed, Ka band global satellite
systems now include GE Americom (GE*Star), Hughes (Galaxy/Spaceway), Lockheed
Martin (Astrolink), Loral (LAHI Cyberstar) and Motorola (Millennium). In addition,
existing systems such as Orion and PanAmSat have announced plans to expand their
service and coverage. The recent merger between Hughes Electronics and PanAmSat
makes the new firm the second largest global satellite network behind INTELSAT.
Teledesic has announced its intent to create an 288 global LEO satellite system offering
a wide array of broadband services. Other firms which have stated an intention to serve
the domestic market will also have the technical ability and the approval of the FCC,
under DISCO-I, to serve large parts of both North and South America, if they obtain any
requisite authorizations from foreign governments.

The larger of the above-mentioned systems will use 10 to 20 satellite
constellations at a probable cost in excess of $2.5 billion. Other systems foresee smaller
constellations of from 5 to 10 satellites. Given that global coverage by a satellite system
can be attained with something in the range of 4 to 8 satellites (depending upon the
need for back-up capacity and technical characteristics of the satellites), most of these
systems will have capacity to deliver a variety of signals across the globe.

As with the Big LEOs, the new Ka band players will also face market access
issues because they seek to provide regional or global service. The market access issue
may not rise to the same level of urgency as with the case of the Big LEOs systems, but
denial of market access in a region or in several countries could make an investment of
$2 or $3 billion precarious.

Similarly, the potential growth of satellite-based communications as exemplified
by the new Ka band market entrants raises the prospect of finding a new or different
means of allocating increasingly scarce geostationary orbital slots. New and improved
technology may admit use of satellites with closer spacing thereby increasing the number
of orbital slots from the present consensus that only about 180 such slots exist using the
same frequency. Even if such technological improvements were on the immediate
horizon, they might not ensure that all players receive equivalent access to all regions of
the globe.Conclusion

This document has been designed to survey the issues and nuances of the global
satellite communications marketplace. Because the ISOs have been central to the
growth and development of this market, they continue to play a disproportionate role in
considerations of the market's future.

The ISOs were created in an era when the economic risks of satellite
communications were deemed too great to be undertaken by a handful of operating
companies. The evidence is now clear that many players are willing to undertake the
investment risks. Many in the United States and elsewhere argue that developing
economies will benefit from increased reliance upon competition and competitive
markets for satellite services. Greater competition would provide "lifeline" service at
lower prices and with greater access to newer technologies and services.

The ISOs and many of their Signatories still retain much of the structure and
process common to that era. Many ISO participants are reluctant to embrace
competition -- just as many in the United States were reluctant to embrace Judge
Greene's 1984 ruling divesting AT&T of its monopoly. In that sense, the restructuring
deliberations at the ISOs may seem premature. Over time, as more and more
Signatories find they can succeed in a competitive environment and as more and more
ISO participating governments find there is nothing to fear from fair competition a
framework for positive change may evolve.

For the present it is important to note that the global forces of competition, the
demand for communications and information and the deregulated global capital flows
make significant change to the ISOs necessary and inevitable. The ISOs must ride the
waves of change or risk being drowned by those waves. The dustbin of history is full of
individuals and institutions who resisted change. For our part, the Administration is fully
committed to pursuing negotiations that lead to greater global competition on a level
playing field. We hope that others will willingly join us.

Glossary of Terms and Abbreviations

Big LEOs: Term used to refer to low earth orbit or intermediate earth orbit
satellite systems that will provide global handheld mobile
communications services. Some of these companies include
Odyssey/TRW, Iridium, ICO, Globalstar, and MCHI. It is
estimated that the first Big LEO will enter into service in 1998.

CEPT: The European standard-setting authority

Comsat: Communications Satellite Corporation

DISCO I: FCC Domestic and International Satellite Consolidation Report and
Order. DISCO I eliminates the distinction between U.S. domestic
and separate international satellite systems and sets out rules
permitting U.S. satellite and earth station operators to provide
domestic and international services (geostationary fixed and mobile
services and direct broadcast service).

DTH: Direct-to-Home satellite service

ECR: Ensured capacity rights

FCC: Federal Communications Commission

FTC: Federal Trade Commission

GMDSS: Global Maritime Distress and Safety System

GMPCS: Global mobile personal communications systems

ICO: The Inmarsat affiliate established to compete in the global, mobile
communications market

IGO: The residual intergovernmental INTELSAT after restructuring

IMO: International Maritime Organization

INC: The new private, commercial entity created from a portion of
INTELSAT's existing assets

Inmarsat: International Mobile (formerly Maritime) Satellite Organization

INTELSAT: The International Telecommunications Satellite Organization

IPO: Initial public (equity) offering

ISO: International satellite organization

ITU: International Telecommunication Union

IWG: Intersessional Working Group (Inmarsat)

IWP: INTELSAT Working Party

LEO: Low earth orbit satellite system; LEO satellites orbit approximately
400 to 800 miles above the earth.

MEO: Medium earth orbit satellite; MEO satellites orbit
approximately 6,000 milesabove earth.

NTIA: National Telecommunications and Information Administration

PSN: Public switched network

SSUC: Space segment utilization charge. Cost from ISOs to Signatories for
access to and use of the ISO space segment.

WTO: World Trade Organization

WTO/GBT: The World Trade Organization Agreement on Basic
Telecommunications

^1/ The spectrum frequency between the earth stations and the satellite itself.

^2/ Leonard Waverman, Global Speak: The International Market Place for Telecommunications, Why Bilateral Relationships Dominate, and What to Do About It (Washington, D.C.: American Enterprise Institute, July 1996), Chapter 3, Table 3-1. Working Paper used with permission.

^3/ Leonard Waverman, An Analysis of the Concept of Universal Service as Applied to INTELSAT (Washington,. D.C.: Brookings Institution, April 1997), page 3 et. seq.

^4/ Christine A. Varney, Commissioner, U.S. Federal Trade Commission, "The Future of INTELSAT: A Competition Policy Perspective," November 1995, p. 19.

^5/ Walter S. Baer and Henry Ergas, Rand Corporation Paper on INTELSAT Future Structural Options, from INTELSAT's Australian Signatory (Telstra), INTELSAT 2000 Porlamar Working Party Document IPWP-2-8E, January 23, 1995.

^6/ INTELSAT, 1996 Annual Report 26 (1997).

^7/ Inmarsat, 1996 Annual Report 27 (1997).

^8/ Waverman, Global Speak, p. 28.

^9/ INTELSAT Porlamar Working Party Document IPWP-2-8E, January 23, 1995.

^10/ Term used to describe low earth orbit and medium earth orbit satellite systems that will provide global, mobile handheld communications services.

^11/ No more than 30 percent of the voting shares may be owned by non-Signatory investors.

^12/ Report of the Tenth (Extraordinary) Session of the Inmarsat Assembly, Assembly/10/18, Section C 1) and 2), December 13, 1994.

^13/ Report of the Tenth (Extraordinary) Session of the Inmarsat Assembly, Assembly/10/ 18, Annex IV (Views of the Council on the Principles Listed by the Intercessional Working Group Regarding the Formation of the Inmarsat-P Affiliate), December 13, 1994.

^14/ The land mobile amendments were ratified in February 1997 and enter into force on June 26, 1997.