Th~ -1 Introd~Ction of New Tecl~10Qy Int? by Or Te1ec?~Unications C~~Tition11 1 Cooperatiort: ' the Case/Of Satellite
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, .,.... J: .... ~ ............~~_ •• _p~--'-, ..... _~ ____ -......,~ ....... -------~"'~~ , , , 1 " o 1 Th~ -1 Introd~ction of New TecL~10qy int? By or Te1ec?~unications c~~tition11_ 1 cooperatiort: ' the Case/of Satellite . communications 1 ~--------------~----------------~- , //// / ;/;' // // t , M.A.. Thesis McGi11 University • \ ( .' ' '* c: Barry, Chandler / CD Auqust 31, 1981 1 J ( ! ' __ ---..- ~ __." _____~ ____ __ i~ .... _ _______ _ ~_ .L __ ~ --------------------------- ,. .. \ ( , " COMPETITION OR COOPERATION IN , Il SATELLITE COMMUNICATIONS ) - ~'- . \' .j /1 ,/ .' . ' -'------'--- -~ -- ABSTRACT , The domestic communications satellite system, ~ - Telesat Canada, introduced in Canada at the start of the 1970's, developed in a manner progressively favouringo cooperation with the established telecommunications common t carriers. The experience in the United States is cited to show that the refusal to introduce satellite technology in compet~tion with terrestrial communications in Canada appears to have contributed to less than full development of satellite potential at the cost of higher priees and less choice for communications users. The traditional reasons for denying competition in communications, natural monopoly and cream skimming, are examined, in the context df Telesat, and rejec.tèd. , J' ABSTRAIT Le systême domestique de communications par satellite, Telesat Canada, lancé au Canada au début des ann~es soixante-d~x a ét~ d~veloppê de maniêre a favoriser '" la coopération avec les entreprises de télêcommunications êtablies. L'exp~rience des Etats-Unis y est évoquée afin de démontrer que le refus de faciliter la concurrence entre les satellites et les installations terrestres au i Canada, semble avoir attênuer le plein d~veloppement du fJ potentiel des satellites aux dépens de prix élevês et d'un i choix restreint ~our l~s clients. ILes motifs traditionnels ! l'appui dej, l'absence de concurrence dans le domaine des télêcommunications, soit le monopole et l'êcrémage, ont fait; l'objet d'un examen et sont rejetés dans le contexte de Telesat • . , ----------------_. ---~-,- ---- ---~-.... -_ ..._-----------. ------~- " , ' ) TABLE OF CONTENTS ,< , J Page l 1. 1. liNT'RODU~TION ., •••••••••••••••.••.••••••• r .· ...... ·.. 1. The Issue and the Organization of the Paper •••• l ,> " , - 2. The Technologies of Intercity Tetecammunic~~ons 5 II. THE STRUCTURE AND BEHAVIOUR OF THE 'LONG DISTANCE \. TELECOMMUNICATIONS INDUSTRY IN CANADA ••• '••••••••••• 12 / / 1. 1. Th~ Operations of the Common Carriers •••••••••• 12 1 a) ,,,!l'he Carz:iers ............................... 12 , 1 b) Transmission Faci1ities •••••••••••••••••••• 17 c) Services and Rates ......................... 17 2. The Regulation of Long Distance communications 21" III. THE EXPERIENCE WITH COMMUNICATIONS SATELLITES' IN '11IE UNITED STATES .. ••.••' ••••••••••••• 0 •• 0 0 • ' •••• 0 •• 29 1. The Oevelopment of Competition in the United ( States Long Distance Telec~unication Market 29 2. Domestic Satellite System Operations in the Uni ted States ........................ ~ ........ 33 a) RCA American Communications, Inc. • ••••••••• 36 . ( ! 1 b) The Western Un~on Telegraph Company •••••••• 39 Communications Satellite Corporation •.• ',' •• 40 ,: ~) , ! .. 1 . ' d) American Sa telli te Corporation •••••••• 10 ••• 41 ! e) Southern Pacifie Communications Company • 0 •• 43 f) Satel~i te Business Systems ••••• _ .••••••~ •• '0 . 44 1 ~ , 3. SummarV Competition in Satellite Comm\1J\ieations in the Uni'hed States ••.•. o ••••• 0 •• 00 •••• o •••••• 45 • 1 t ~,- IV. TELES AT 'AND THE REFUSAL TO COMPETE WITH THE TERRES TRIAL CARRIERS o ••• 0 •••' •••••••••• 0 • " ••• 0 ••••••• 50 1. Opérationa,l :Charaeteristics of Telesat •••••• ,••• 1 50 a) Owners and Office.rs o •••••• ' •••••••••••••• 0 ;. 50 (: b) Satellites ............. ,. ........ 1•••••••••• 51 \ \ 1 III \ , , 1 , \ --------~--~\~---~----~--~~'------------,-----~----~------~----~---~"~---- 1· \ · . 1 ~ , ,> ., , " ,j ~ " 'paqe. Earth S ta tioa.. ......... f 52 r < ~~ se~V,~.ce Off~ •••• ~ ••••••• : •••.•.•••••• \\t sj / ù /l The Orig_inal Sè~J.,ce Aqrel!1llents ••••••• ' s~ , \ ;,\ 'ii)' Tel~S\t 1 s Proposed Tar,i: ss "57 Satellitf! Utiliza1;:~ •.••••. : ., <........ • ~ . , Profitability ... : ........................ 58 '. 2. 'Early Action by TCTS to Remove Telesat as ~ . Competi tor'~ • '••• ~ ••••••••••••••••••••••••..• 1•••• 58 III 1 ~) Bac'kground to the Establishment of Telesat. 58 b) The Oraftinq of the Telesat Canada Act 61. ..~ 3. The Connecting Aqreement with TCTS and the Final 'Removal of Telesat. as a-Compl!titor. •••••• 66. a) ,Background to the Connecting Aqreement, •••• ~"Z b) The Provisions of the Connecting Agreement. '71 i) Space and Earth Segment Ag~eements •••• 72~ ii) Financial Arrangements •••••••••••••••• 73" "'1 iii) System Comtnitments ••••••••••••.••••••• 7~ 1 1 iv) Provisions of' Appendix A •••••••• '•••••• 7~- 4. ~ summàry and Analysis of the Elimination of . Telesat as a Competitive Force in '1 Teleconununica tions ••. r •.••••••••••••••• '••••••• 74 Œb , , V. A COMPARISON OF SATELLITE SYSTEM PERFORMANCE: " COMPETITION VS COOPERATION ...•••••••.••••••••••••• 85 Natural Monopoly .............................. 8'6 a) Economies of Scale' ...•••••• ~ ••••••• ~ •••••• 86 b) Economies of S~ope ........................ 91 2 • Cream. Skimminq .•........•. .' .••....•. ft ••••••••• 94 3. A Comparison of the U.S. and ~anadian Satellite Systems ~ Performance •••••.•• '•••.••••••.••••••• 91 1 t •__ "_" "__ L,. _____ _ . ~---------------------"------~--------------~--------------------------~------------~~--~~ , Rates , , Piie , , .... ,. .. ,..... ~. ·· ... · · ....... ·· · · . ( _Service's .............. .,.\ ............. .. 100 1" i) ~ video ...•.... ., .. ~ ............. 101 • , ii) Voiee ................. ~. .. 102 , • i1i) Data ... _\' . ~ ~ ......•........... ~ 103 /,,' ~ c) \,Te'chno1ogical Developments.: .••..•' .. '~ 'd) The Roie of Compei:ition ip Exp1aining -. Differences in the Canàdian -and U.S. , Satellite systems' Performanqe ••...• 106. ~ i ' APPENDIX TO CHAPTER V THE VALIDITY OF TELESAT' S "EXPLANATION OF A COST ADVANTAGE TO U.S. SATELLITE FIRMS............... 109 VI. SUMMARY AND RECOMMENDATIONS ••••••••••' •••••• 118 BIBLIOGRAPHY •••.•••...•••••••••...••••• I{J. • • • • • • • 121 5 , -. - - ;0-.>1 ........ - .. ' .. _~_ ....-- ...... _ ...-.":~--'-- " " . , ft f i "-"'-. \ (. *" 0 "" TABLES Page ~< .. "./ 1-1 Major Dimensions of Intelsat Satellites, " 1965-79 .....•...•..................• ta •••• •.••• Facing 8 11-1 Operatinq Revenues of the,Ten Largest • , J Telecommunications Carrie sand Telesat, C in Order of Size, 1969-78 : •••••••••••••• ~ •.••• 15 , > • 1 1I-2 Long Distance Telephone Ra~es in Canada an~ b the United States,!1979 •• r.................. 19 1I-3 Revenues and Market sharesl in the Canadian Telecommunications Industry, 1976 ..•• 4 ••••••• 21, I1I-1 Representative U.S. Oomestic Tariffs, February 1975 ....•... 1•.............•........ 35 1- 1V-1 pro~~~çiMc;.>ntlrly Rate ,?ptions For Full.;, Per~od RF Channel Serv1ce .•.•••••••••...•••.• Facing.56 IV~elesat Satellite Capacity Utilization by RF Channel, 1973 .. 80 .......................... 57 ( IV-3 Telesat Annual Net Earninqs & Return on Equity., 1973-80 ..........................•... 5'S V-1 Monthly Rates, Full Period Space Segment Service, Telesat, Western Union, RCA'~ericom, Effective May 9, 1980 ••...•••. Facing 99 ---------- ( - , ( r' ----~--~- ~-~~_ .. , -1- fi' CHAPTER l IN'rRODUCTION l. The Issue and the Organization of the paeer Ca~ada and the United States have adoptèd different 1 - approaches to the introduction of satellite·technolonog~yr-------------~~- irito telecommunications. In the United States, satellite ftrms are_an important feature of a com~titive environment ,for the delivery of domestic long distance communications services' . Competition exists in an intra-modal form between satellite firms rand also between terrestrial carriers) and in an inter-modal forro between satellite firms and terrestrial carriers. In Canada, o~ly one firm, Telesat Canada, has been" given authority to operate a domestic communiCâtions sa telli te system, and this has been ca-rr1ë-Ci.- out in cooperation with the established (terrestrial) tele- • communications carriers. ( competitio:h;nt:::i:n~:e:h~:a:::e:a~sp~:;:di:~:::::~:~tory 1 role in what appears to be the superior performance of U.S~ ___ ---------~------ satellite companies compared to Telesat Canada. The performance criteria considered in the cornparison are of the type traditionally applied in industrial organization economics, . that is, technological progressiveness, the choice of services, 1 "and the level of rates. Without considering other, possible criteria, the recommendation which is made at the conclusion of' the yaper i5, that serious consideration should be given 1 to encouraging Telesat to sever its links with the terrestrial -~- ------ carriers and compete with them in the delivery of domestic -----\-- u telecommunications services. The remainder of the paper documents this case in the following manner: Chapter II provides background infor mation on the structure and behaviourqof the Canadian long distance communications market. Chapter III reviews the ---------, ..,.-~.,,- .... ~"f ... = .... '---''-'''~'''' .. ~ ........ ___~_~_ ---~--~--________________ ~,........_...." \ , , -2- ( recent history of increasing competition in U.5. long , , distance conununications and the experience with competing satellite conununication