Share this story
Close X
Switch to Desktop Site

Commercial satellite owners look to condominium twist

Communications companies are hoping to go into the ''condo'' business - not in America's cities, but 22,300 miles above them. These enterprises are trying to persuade the government to allow them to sell portions of their domestic satellites.

Until now, such satellite-making companies as RCA Corporation and Western Union Corporation have leased channels on domestic communications satellites. But as these satellites become increasingly important in day-to-day communications, the companies that develop, build, and launch them figure they can make more money selling the same facilities.

About these ads

After three years of moderate growth and regulation by the Federal Communications Commission, the satellite industry push for space ''condos'' urges a move away from government regulation. The condominium method is now under study by the FCC, and a ruling is expected by early July.

There are at present 15 strictly domestic satellites in orbit serving US corporations, telephone companies, and cable television companies. By taking messages received from earth stations and bouncing them off a single piece of machinery, called a transponder, on a satellite, domestic communications satellites can beam a message over the entire United States. The satellite manufacturers say this method is relatively cheaper than sending messages by microwave signals - a method that cannot cover a huge area at once but relies on earth-based, station-to-station transmissions.

The satellite industry is less than a decade old. The commercial development of satellites in the 1970s made the cable television industry feasible throughout the US, and the subsequent cable television boom eventually helped make the satellite industry profitable in 1979. Until recently, most satellite company revenues came as a result of transponder leasing rates, regulated by the FCC.

With the proposed ''condos,'' all that may change.

What is at stake is the FCC's present system of requiring satellite companies to charge the same price in leasing each of the 24 transponders on a satellite. The FCC maintains that the same price must be charged for the same service.

The commission is looking into the question of whether transponders should be allocated by a price mechanism. The current regulation protects against discriminatory pricing.

If the FCC allows operators to sell the transponders to companies, the operators would then be able to make private deals with the companies, shaking free of the present cost-based pricing system in favor of a demand-based system. It is expected that this shift would increase the cost of gaining access to a transponder, and some companies are arguing that it would price them out of the game.

About these ads

Andrew F. Inglis, president of RCA American Communications Inc., a subsidiary of RCA Corporation and the largest domestic satellite company, says RCA favors allowing the ownership option. ''We believe it's in the interest of the industry to provide variety,'' he says. He notes that RCA has already signed ownership agreements with five companies on its Satcom-4 satellite, which was launched in January and began service April 1.

Mr. Inglis is hopeful the FCC will allow the deals to stand.

So are his competitors at Western Union. They were the first to sell a transponder, and have since sold nine transponders on the Westar-5, launched June 9.

''We're fairly confident that we are going to be able to continue what we're doing,'' says Fred Knipp, senior director of satellite planning at Western Union.

In addition to RCA and Western Union, the two other major commercial satellite common carriers - Hughes Communications, a division of Hughes Aircraft Company, and Southern Pacific Communications Company - are actively seeking potential buyers of transponders in anticipation of deregulation by the FCC.

These common carriers argue that ''condo'' and other free-market arrangements enable them to recoup some of their long-term investments in satellite technology, development, and construction as well as help boost profits possibly even before satellite launching.

''We've lost a lot of money,'' Mr. Knipp says. ''We did not turn the satellite business profitable until five or six years after we launched our first satellite.'' He adds that selling ownership interests ''assured us of having some of the capital we needed during that long construction period.''

It costs $80 million to $90 million to design, construct, and launch a domestic satellite. Under FCC leasing regulations, common carriers in the past have signed multi-year leasing arrangements. But the payments are made monthly. This further delays any return common carriers receive on their investment.

''You don't start getting any money back until the satellite is up there, and in the meantime you have all this money invested in it,'' says Joseph Harcarufka , chief engineer at the FCC.

The primary advantage for RCA and Western Union, however, is that the sale of ownership interests shifts the risk from their shoulders to those of the transponder purchasers.

''All this is an effort to reduce costs and spread risk without going the traditional regulated way,'' a Wall Street telecommunications analyst says.

He adds, ''The problem is that this is an enormously risky business and if one of these birds fails to go up, you're sure the guy who sent it up blows $100 million or $130 million. More than that, the guys counting on it will lose a heck of a lot.''

But for potential buyers the advantages might outweigh the risks. Buyers could qualify for both investment tax credits and accelerated depreciation. In addition, ownership - because it includes a more significant initial payment - guarantees there will be no unforeseen rate increases.

In an effort to get back some of its investment earlier in the leasing process, RCA in November held an auction in New York for seven available transponders on Satcom-4. They were auctioned at prices ranging from $10.7 million to $14.4 million. The auction resulted in total revenues for RCA of $90. 1 million. The FCC, however, overturned the auction, charging that RCA had levied differing prices for the same service. The commission ordered RCA to find a different means of allocating the transponders.

RCA came back a few months later and offered one rate for all the transponders - $13 million. Only three companies decided to take out leases.

RCA's Mr. Inglis says he is not concerned. '' . . . . If we leased them all we would have felt the price was too low. So we think we hit it just right,'' he says.

Some industry observers point to this as an indication of a glut of transponders. Others say the users are simply waiting to see the FCC's response before committing any money.

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.