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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

September 2011: 

Telecommunications: 

Competition, Capacity, and Costs in the Fixed Satellite Services 
Industry: 

GAO-11-777: 

GAO Highlights: 

Highlights of GAO-11-777, a report to congressional requesters. 

Why GAO Did This Study: 

Commercial satellites are used by the U.S. government to provide a 
variety of fixed satellite services, such as military communications. 
However, the number of satellite operators providing such service has 
declined since 2000. Further, until recently, three vendors, known as 
satellite service providers, had sole authority to contract with the 
Department of Defense (DOD) under its primary satellite contract. 

Among other things, GAO was asked to describe (1) changes that have 
occurred in the fixed satellite services industry since 2000 and the 
effects these changes could have on the relationship between satellite 
operators and service providers; (2) the technological, regulatory, 
and other factors that affect competition in the fixed satellite 
services industry; and (3) how costs for DOD to acquire fixed 
satellite services have changed since 2000 and contracting officials’ 
views on the effects of changes in the industry and contracts on 
costs. To address these objectives, GAO reviewed demand and capacity 
data, economic literature, and international regulations; analyzed DOD 
commercial satellite procurement data; and interviewed satellite 
industry stakeholders. 

The Federal Communications Commission, DOD, General Services 
Administration, and the Departments of Justice and State reviewed a 
draft of this report. The agencies provided technical comments that 
GAO incorporated into the report as appropriate. 

What GAO Found: 

Since 2000, integration in the fixed satellite services industry has 
occurred, altering the relationships between satellite operators 
(owners of satellites) and service providers (resellers of satellite 
services). Mergers within the industry have resulted in two primary 
operators—-Intelsat and SES—-providing service to the United States. 
In addition, these two satellite operators also acquired U.S. 
subsidiaries, allowing them to compete against the service providers 
for government contracts. According to service providers, this change 
could result in an operator charging a higher price for capacity to 
the service provider than to its subsidiary, placing the service 
provider at a competitive disadvantage. Alternatively, the operator 
may be able to provide capacity more efficiently and at a lower cost 
than if the customer, such as the U.S. government, acquired the 
capacity indirectly through a service provider. 

A limited number of orbital locations and enforcement mechanisms in 
international regulations constrain entry into the fixed satellite 
services industry. A finite number of orbital locations limit the 
number of satellites in orbit. International regulations have 
processes in place to promote equitable and efficient access to 
orbital resources, but the International Telecommunication Union, a 
United Nations specialized agency, does not have the ability to 
monitor and enforce these regulations. As a result, administrations 
(countries) file numerous applications for orbital locations that may 
not result in the launch of a satellite, preventing other operators 
from entering the industry due to limited overall slots. 

DOD’s costs to acquire fixed satellite services have increased 
significantly since 2003, but contracting officials expect a new 
contract to increase competition. According to GAO’s analysis of DOD 
data, the real cost per megahertz of bandwidth was 30 percent lower in 
fiscal year 2003, and lower in all intervening years, than in fiscal 
year 2010. Contracting officials attribute the higher costs to market 
factors, such as demand and availability of bandwidth, and expect a 
new government contract to increase competition, which may exert 
downward pressure on the government’s costs. 

Figure: Estimated Real Cost per Megahertz of Bandwidth for DOD Task 
Orders as a Percentage of Estimated Costs for Fiscal Year 2010: 

[Refer to PDF for image: vertical bar graph] 

Fiscal year 2003: 70%. 

Fiscal year 2004: 74.4%. 

Fiscal year 2005: 77.4%. 

Fiscal year 2006: 80.3%. 

Fiscal year 2007: 77.9%. 

Fiscal year 2008: 83.4%. 

Fiscal year 2009: 89.6%. 

Fiscal year 2010: 100%. 

Fiscal year 2011: 100.1%. 

Source: GAO analysis of DOD data. 

Note: GAO derived these estimates from a regression model using data 
from 2001 through March 2011. Data for 2001, 2002, and 2011 were 
omitted from this figure as the estimates were not statistically 
significant at the 5 percent confidence level. 

[End of figure] 

View [hyperlink, http://www.gao.gov/products/GAO-11-777] or key 
components. For more information, contact Mark Goldstein at (202) 512-
2834 or goldsteinm@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Global Satellite Capacity Is Sufficient to Meet Current and Forecasted 
Demand: 

Integration in the Fixed Satellite Services Industry Has Altered 
Relationships between Operators and Service Providers: 

Limited Orbital Locations and Enforcement Mechanisms within 
International Regulations Constrain New Entry into the Industry: 

DOD's Fixed Satellite Service Costs Have Increased, but Contracting 
Officials Expect New Contract Vehicles to Increase Competition: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Regression Model and Analysis of the Costs DOD Incurs to 
Acquire Fixed Satellite Services: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: DSTS-G and FCSA Eligible Vendors as of July 1, 2011: 

Table 2: Descriptive Statistics: 

Table 3: Regression Results--Dependent Variable Logarithm of the Real 
Cost per Megahertz of Bandwidth: 

Figures: 

Figure 1: Illustration of a Point-to-Multipoint Fixed Satellite 
Transmission Operating in Geostationary Orbit: 

Figure 2: Common and Emerging Uses of Fixed Satellite Services 
Bandwidth: 

Figure 3: Customer Options for Acquiring Fixed Satellite Services 
Bandwidth: 

Figure 4: Forecasted Percentage Annual Growth in Demand for Fixed 
Satellite Services for Higher Growth Services (2009 to 2019): 

Figure 5: Timeline of Mergers among Satellite Operators Providing 
Fixed Satellite Services to the United States since 2000: 

Figure 6: Estimated Real Costs per MHz of Bandwidth for DSTS-G Task 
Orders as a Percentage of Estimated Costs for Fiscal Year 2010: 

Figure 7: Average Transponder Equivalent Costs of DSTS-G Task Orders 
Active in Fiscal Year 2009 by Award Year: 

Abbreviations: 

DISA: Defense Information Systems Agency: 

DOD: Department of Defense: 

DOJ: Department of Justice: 

DSTS-G: Defense Information Systems Network Satellite Transmission 
Services-Global: 

FCC: Federal Communications Commission: 

FCSA: Future Commercial Satellite Communications Services Acquisition 
program: 

GSA: General Services Administration: 

HDTV: high-definition television: 

ITU: International Telecommunication Union: 

MHz: megahertz: 

ORBIT: Open-market Reorganization for the Betterment of International 
Telecommunications: 

SATCOM-II: Satellite Communications II: 

TPE: transponder equivalents: 

USSTRATCOM: United States Strategic Command: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

September 7, 2011: 

The Honorable Mark Pryor:
The Honorable John Thune:
The Honorable David Vitter:
The Honorable Mark Warner:
United States Senate: 

The Honorable Gerry Connolly:
House of Representatives: 

Commercial satellites are used to provide a variety of fixed satellite 
services, ranging from consumer satellite television and broadband to 
military communications in remote regions.[Footnote 1] According to 
the Satellite Industry Association, revenues in the satellite services 
sector, which includes fixed satellite services, increased 9 percent 
from 2009 to 2010, from $93 billion to $101.3 billion.[Footnote 2] 
Revenues from fixed satellite services increased from $14.4 billion to 
$15 billion from 2009 to 2010. The majority of these revenues are from 
transponder agreements, in which customers lease bandwidth capacity 
directly or indirectly from a satellite operator.[Footnote 3] 
Commercial users, such as broadcast networks, are the largest 
consumers of fixed satellite bandwidth. However, the U.S. government 
also uses commercial satellites for military operations, satellite 
imagery, distance learning programs, and disaster recovery response 
efforts, among other things. 

Within the federal government, the Department of Defense (DOD) is the 
largest user of commercial satellite bandwidth. The department is 
increasingly relying on commercial satellites to meet demand unable to 
be met by its military communications satellites, particularly in 
support of ongoing operations in the Middle East. According to DOD, 
its use of commercial fixed satellite bandwidth in the Middle East and 
Africa increased by more than 180 percent from 2003 through 2009, and 
the region accounted for over half of DOD's overall bandwidth usage in 
fiscal year 2009.[Footnote 4] At the same time, bandwidth expenditures 
in the region increased by more than 170 percent. DOD expects its use 
of commercial satellite bandwidth to increase, particularly to support 
an increased demand for airborne intelligence, surveillance, and 
reconnaissance assets.[Footnote 5] 

As DOD relies more on commercial satellites to support its operations, 
the availability and affordability of commercial satellite bandwidth 
will be important in allowing DOD to continue to meet its global 
communications needs. Until recently, three vendors, known as 
satellite service providers, held the primary contract DOD used to 
meet its commercial bandwidth needs; the Defense Information Systems 
Network Satellite Transmission Services-Global (DSTS-G) contract was 
the primary contract used by DOD to acquire fixed satellite services 
and was a total set-aside for competition restricted to small business 
concerns. Now, satellite operators, which own the satellites, are also 
eligible to supply bandwidth directly to the department. However, the 
number of satellite operators providing service globally and to the 
United States has declined since 2000 because of mergers and 
acquisitions. Today, there are four major satellite operators, two of 
which primarily provide bandwidth capacity to the United States. With 
fewer operators providing global coverage, concerns have arisen about 
the availability and affordability of commercial bandwidth capacity 
for the government to continue to meet its global communications needs. 

Congress passed the Open-market Reorganization for the Betterment of 
International Telecommunications (ORBIT) Act in 2000 to promote a more 
competitive global satellite services market.[Footnote 6] Because the 
government's reliance on commercial satellites has increased since the 
ORBIT Act was passed, you asked us to assess the state of competition 
in the fixed satellite services industry. Accordingly, this report 
describes (1) how current satellite capacity compares to current and 
forecasted demand; (2) the changes that have occurred in the fixed 
satellite services industry since 2000 and the effects these changes 
could have on the relationship between satellite operators and service 
providers; (3) technological, regulatory, and other factors that 
affect competition in the fixed satellite services industry; and (4) 
how costs for DOD to acquire fixed satellite services have changed 
since 2000 and contracting officials' views on the effects of changes 
in the industry and contracts on costs. 

To address these objectives, we reviewed and analyzed Federal 
Communications Commission (FCC) reports on the ORBIT Act and 
competition in the satellite industry. We also interviewed satellite 
industry stakeholders, including satellite operators and service 
providers, as well as government officials from DOD, FCC, the General 
Services Administration (GSA), the Department of Justice (DOJ), and 
the Department of State. To determine how current satellite capacity 
compares to current and forecasted demand for fixed satellite 
services, we used data from Futron Corporation, a research firm with 
expertise in the satellite industry, on forecasted satellite demand; 
we examined the procedures and controls that Futron used to gather and 
report its data and determined that the data were sufficiently 
reliable for the purposes of our report. We also analyzed satellite 
operators' annual financial reports and interviewed financial analysts 
that track the satellite industry. To determine the changes that have 
occurred in the industry since 2000 and the effects these changes 
could have on the relationship between satellite operators and service 
providers, we reviewed comments filed for FCC reports, analyzed 
economic literature on competition, and interviewed economists with 
expertise in horizontal and vertical integration, including officials 
from DOJ's Antitrust Division. To determine the technological, 
regulatory, and other factors that affect competition in the fixed 
satellite services industry, we reviewed International 
Telecommunication Union (ITU) regulations and interviewed ITU and 
State Department officials as well as industry officials with 
regulatory expertise. To determine how DOD's costs to acquire fixed 
satellite services have changed since 2000 and contracting officials' 
views on the effects of changes in the industry and contracts on 
costs, we analyzed DOD data on bandwidth costs under DOD's primary 
contract from 2001 through March 2011 and reviewed DOD reports on the 
department's usage of and expenditures for commercial satellite 
communications services; we also examined DOD's processes to ensure 
the reliability of its data and determined that the data were 
sufficiently reliable for our report. Finally, we interviewed 
officials from DOD and GSA regarding the effects of changes in the 
industry and contracts on the cost to acquire satellite service. 

We conducted our work from September 2010 to September 2011 in 
accordance with all sections of GAO's Quality Assurance Framework that 
are relevant to our objectives. The framework requires that we plan 
and perform the engagement to obtain sufficient and appropriate 
evidence to meet our stated objectives and to discuss any limitations 
in our work. We believe that the information and data obtained, and 
the analysis conducted, provide a reasonable basis for any findings 
and conclusions. 

Background: 

Most fixed satellite service satellites operate in geostationary orbit 
more than 22,000 miles above the equator.[Footnote 7] From this 
position, a satellite appears stationary over a location on the earth 
and can theoretically provide coverage to about one-third of the 
earth's surface. Fixed satellite service satellites communicate with 
ground infrastructure by receiving signals from earth stations or 
antennas and retransmitting the signals to other locations on the 
earth's surface through transponders on the satellite.[Footnote 8] A 
typical satellite has 24 to 72 transponders. Satellites can transmit 
signals in a variety of configurations. A common configuration 
supported by fixed satellite service satellites is a point-to- 
multipoint configuration, in which a signal from a single earth 
station is sent to a satellite and then retransmitted from the 
satellite to multiple sites. For example, a signal from a broadcast 
network is transmitted to the satellite and then retransmitted to 
individual broadcast stations. Figure 1 illustrates the basic 
functions of a satellite operating in geostationary orbit. 

Figure 1: Illustration of a Point-to-Multipoint Fixed Satellite 
Transmission Operating in Geostationary Orbit: 

[Refer to PDF for image: illustration] 

Fixed satellite service satellites maintain geostationary orbits, 
where the satellite receives signals broadcast from earth and 
retransmits them to other locations on the earth's surface. A typical 
fixed satellite can provide coverage to about one third of the earth. 

Depicted on the illustration: 

Original signal transmitted to satellite: 
Fixed satellite service satellite; 
Retransmitted signal. 

Source: GAO. 

[End of figure] 

The transponders on a fixed satellite service satellite transmit radio 
signals to the earth using radio spectrum, in assigned frequency 
bands. Given their stationary position and ability to provide coverage 
to a large geographic area, fixed satellite service satellites are 
commonly used to provide a variety of communications services. Four 
frequency bands--C, Ku, Ka, and X--are most commonly associated with 
fixed satellite services. Each of these frequency bands has certain 
advantages and disadvantages for various applications. For example, 
transponders operating at lower C-band frequencies are useful to 
broadcast television networks distributing video content to local 
broadcast stations; C-band frequencies are less susceptible to 
degradation from precipitation than other bands.[Footnote 9] By 
contrast, Ku-band transponders operate at higher frequencies than C- 
band transponders and can therefore communicate with smaller dishes 
and offer more flexibility for customers.[Footnote 10] The military 
primarily uses Ku-band satellites because the dishes offer more 
mobility than C-band satellite dishes. The Ku-band is also used for 
satellite news gathering, television network distribution, and 
corporate enterprise networks, including those used for point-of-sale 
retail transactions, through what are known as Very Small Aperture 
Terminals, or VSAT, networks.[Footnote 11] Portions of this band are 
used exclusively for satellite television to provide service through 
designated broadcast satellites.[Footnote 12] The still-higher- 
frequency Ka-band has recently begun to play a role in the fixed 
satellite services industry. Ka-band satellites can transmit more data 
than C-and Ku-band satellites and are capable of having a large number 
of beams focused on the earth's surface.[Footnote 13] However, while 
Ka-band satellites can provide services to smaller dishes, their 
signals are more susceptible to degradation from rain than satellites 
that use lower frequency bands. Currently being used to provide 
consumer broadband service and television to the home, Ka-band 
satellites are also planned for use by the maritime and oil and gas 
industries. In the United States, the X-band is specifically 
designated for use by the U.S. government and the North Atlantic 
Treaty Organization. Figure 2 highlights some of the common and 
emerging uses of fixed satellite services bandwidth. 

Figure 2: Common and Emerging Uses of Fixed Satellite Services 
Bandwidth: 

[Refer to PDF for image: illustration] 

Uses depicted: 

Oil platform; 
Internet access in rural and remote areas; 
On location reporting; 
Direct to home; 
Maritime communications; 
Point-of-sale transactions; 
Military operations. 

Sources: GAO and Map Resources (Map). 

[End of figure] 

Geostationary satellites are operated in particular orbital locations 
in the geostationary arc. The use of the geostationary arc is 
coordinated by ITU members using a process overseen by ITU. That is, 
for the location of a satellite to obtain international recognition, 
its orbital location and frequency assignment must be registered with 
ITU. ITU is the United Nations specialized agency for information and 
communication technologies and has 192 member administrations 
(countries). ITU was founded to promote international cooperation and 
develop consensus positions within the telecommunications and 
information technology industries. The Radiocommunication Bureau 
within ITU manages the coordination and recording procedures for 
satellite systems and earth stations by publishing data and recording 
frequency assignments in the Master International Frequency Register 
(master register). According to ITU, its Radio Regulations is a treaty 
that provides for the rational, efficient, and equitable use of 
orbital locations and frequencies as agreed to by the member 
administrations. 

Once a satellite has been launched into orbit, users of fixed 
satellite services acquire bandwidth capacity either directly from a 
satellite operator or indirectly through a satellite service provider. 
Satellite operators own and operate satellites and lease bandwidth 
capacity to customers on a wholesale basis. Satellite operators also 
occasionally provide other services, such as access to teleports, 
which connect terrestrial networks with satellite transponders in 
orbit, or other infrastructure, to customers, as requested. Other 
users may acquire needed bandwidth capacity through a third-party 
satellite service provider. For example, a customer may obtain its 
capacity through a reseller, which purchases the capacity from the 
satellite operator and then resells the capacity to the end customer. 
Alternatively, integrators purchase satellite capacity from satellite 
operators and then resell this capacity to the end customer along with 
other value-added services. Figure 3 illustrates the ways in which 
customers typically acquire fixed satellite services bandwidth 
capacity. 

Figure 3: Customer Options for Acquiring Fixed Satellite Services 
Bandwidth: 

[Refer to PDF for image: illustration] 

Satellite operators: 
* Own and operate satellites; 
* Lease bandwidth capacity to customers; 
* Occasionally provide other services, such as access to ground-based 
infrastructure. 

Resellers: 
* Purchase bandwidth capacity from satellite operators; 
* Resell capacity to end customers. 

Integrators: 
* Purchase bandwidth capacity from satellite operators; 
* Resell capacity to end customers along with other value-added retail 
services. 

Customers. 

Source: GAO. 

[End of figure] 

The federal government acquires satellite capacity through various 
contracts. The two primary contracts are the Satellite Communications 
II (SATCOM-II) contract administered by GSA and the DSTS-G contract 
administered by the Defense Information Systems Agency (DISA) within 
DOD. In order to provide a common marketplace for the government to 
procure fixed satellite services, DISA and GSA recently formed a 
partnership to develop new contracting vehicles through the Future 
Commercial Satellite Communications Services Acquisition (FCSA) 
program. The FCSA program consists of a comprehensive set of 
acquisition activities intended to replace the existing GSA and DISA 
contracts[Footnote 14] and will allow the government to procure 
satellite services in three categories--transponded capacity, 
subscription services, and end-to-end solutions.[Footnote 15] Vendors 
may be continuously added to the list of qualified contractors that 
are able to compete to provide services in the transponded capacity 
and subscription service categories. As of July 1, 2011, 10 vendors 
had been approved to compete in the transponded capacity category and 
12 vendors had been approved to compete in the subscription services 
category. GSA and DOD expect the contract for end-to-end solutions to 
be available in the first quarter of fiscal year 2012. 

Congress passed the ORBIT Act in 2000 to promote a more competitive 
global satellite services marketplace. Specifically, the ORBIT Act 
provided a U.S. regulatory framework for the privatization of 
INTELSAT, an intergovernmental organization that provided satellite 
services. INTELSAT transferred its assets and operating 
responsibilities to Intelsat, a private company.[Footnote 16] At the 
time of its privatization, commercial satellite companies were 
concerned that INTELSAT enjoyed certain advantages stemming from its 
previous intergovernmental status that limited the competitiveness of 
the global satellite marketplace; for example, these companies cited 
immunity from legal liability as an advantage INTELSAT enjoyed. 
[Footnote 17] FCC is required to report annually to Congress on the 
status of privatization[Footnote 18] as well as the state of 
competition in the fixed satellite services industry.[Footnote 19] 

Global Satellite Capacity Is Sufficient to Meet Current and Forecasted 
Demand: 

Current Capacity and Demand: 

Current fixed satellite capacity is sufficient to meet existing demand 
on a global basis. According to estimates by Futron, global demand for 
fixed satellite services is expected to be about 79 percent of 
available capacity in 2011.[Footnote 20] Similarly, based on our 
review of the financial reports for the four major satellite 
operators, about 82 percent of the capacity on their satellite fleets 
is currently being used.[Footnote 21] Three of the satellite operators 
we interviewed told us that it is important to maximize the 
utilization of their satellite fleets to maintain a reasonable return 
on investment. However, satellite operators also cited other factors 
that are taken into consideration, for example, the desire to have 
some reserve capacity available if a satellite malfunction occurs or 
having capacity available to accommodate any increases in fixed 
satellite services demand from existing or new customers. 

Although, on a global basis, fixed satellite capacity is sufficient to 
meet existing demand, satellite capacity has not always been 
sufficient to meet DOD's demand in the Middle East, particularly in 
Iraq and Afghanistan where troops operating in remote regions rely on 
satellite communications. DOD officials told us that some of their 
bandwidth requirements have not been met because of capacity 
constraints, and satellite service providers noted a lack of available 
satellites in the region that are able to meet DOD's requirements. 
FCC, in its most recent report on competition in the fixed satellite 
services industry, analyzed data from 2002 through 2007 for the Middle 
East and Africa combined, and reported that the two regions together 
had less available capacity than other regions, such as North and 
South America, Asia, and Western Europe.[Footnote 22] DOD officials 
said that this regional supply constraint is further exacerbated by 
the fact that the Department does not lease capacity from all possible 
global operators, given geopolitical concerns. 

Future Capacity and Demand: 

A variety of factors are contributing to increasing demand for fixed 
satellite services. We identified four factors that are expected to 
increase demand and two that are expected to decrease demand for fixed 
satellite services, with demand increasing overall. The factors 
expected to increase demand now and in the future include: 

* Increasing use of satellites for broadband Internet access. Industry 
officials we spoke with stressed that consumers are increasingly 
demanding high-speed (broadband) Internet access that can best be 
provided in remote areas by satellite. Satellite operators are 
launching new satellites to meet this demand. For example, one major 
satellite operator launched a new satellite in December 2010, and a 
satellite product and services company plans to launch a new satellite 
later in 2011 offering high-speed satellite Internet service. 

* Growth in corporate enterprise networks. All four of the major 
satellite operators we spoke with provide satellite services for 
corporate enterprise networks, and their financial reports indicate 
continued growth in this market. For example, one major satellite 
operator reported a 10 percent increase in the number of sites using 
its VSAT services in just 1 year, due in part to demand from 
developing markets as well as from government customers. 

* Increase in satellite television and high-definition television 
(HDTV) channels. Industry officials that we spoke with told us that 
demand for HDTV via satellite is growing in developed and emerging 
markets; HDTV requires greater bandwidth than standard definition 
format television. A report by the Satellite Industry Association 
found that the number of HDTV channels worldwide nearly tripled from 
May 2008 through May 2011 (from 1,353 channels to 3,853 channels). 
[Footnote 23] In addition, incremental demand for standard definition 
format television is expected to continue growing in some emerging 
markets. 

* Increase in satellite support for military operations. DOD expects 
increased demand for satellite capacity to support airborne 
intelligence, surveillance, and reconnaissance assets. Government and 
satellite industry officials told us that satellite communication 
links to ground troops and unmanned aerial vehicles for military 
operations in Iraq and Afghanistan have increased demand for satellite 
services in the Middle East. DOD recently requested an increase in the 
number of combat air patrols for the Air Force's Predator and Reaper 
unmanned aerial vehicle programs to 50 by fiscal year 2011, an 
increase of nearly 300 percent since fiscal year 2007. 

While the preceding factors increase demand, the following factors can 
lead to a decrease in fixed satellite services demand: 

* Growth in fiber optic cable capacity. Competing telecommunications 
providers are continually installing new fiber-optic cable between 
continents, eliminating the need for some existing satellite capacity. 
Officials from three of the major satellite operators said that they 
are seeing some demand for satellite services erode with the 
installation of terrestrial and undersea fiber-optic cables. In its 
latest competition report, FCC also said that satellite users 
substitute new fiber-optic transmission cables for satellite services. 
[Footnote 24] 

* Improvements in video compression technologies. Industry officials 
told us that more efficient video compression technologies allow video 
to be transmitted with less bandwidth, decreasing overall satellite 
capacity demand. For example, one network broadcaster told us that 
more efficient video compression technologies require significantly 
less satellite capacity than earlier technologies without compression. 

According to an estimate by Futron, global demand for fixed satellite 
services will continue to grow, increasing at an average rate of about 
4 percent annually from 2010 through 2019 (from about 7,000 to nearly 
10,000 transponder equivalents (TPE)).[Footnote 25] Consistent with 
our findings on factors increasing demand for fixed satellite 
services, Futron projects that, from 2009 through 2019, demand for 
satellite-based Internet access, enterprise networks, satellite 
television, and military satellite services will grow faster than the 
projected industrywide average demand growth rate of 4 percent per 
year. Specifically, demand is forecasted to grow at rates ranging from 
4.7 percent for military satellite services to 10.8 percent for direct 
satellite-based Internet access services (see figure 4). 

Figure 4: Forecasted Percentage Annual Growth in Demand for Fixed 
Satellite Services for Higher Growth Services (2009 to 2019): 

[Refer to PDF for image: horizontal bar graph] 

Service: Industry average: 4%. 

Service: Military: 4.7%. 

Service: Satellite television: 5.2%. 

Service: Enterprise networks: 6.4%. 

Service: Direct internet access: 10.8%. 

Source: Futron. 

Note: Some of the fixed satellite services with zero or negative 
forecasted growth include video distribution and contribution as well 
as Internet backhaul. Video distribution is the transmission of 
entertainment and news content, such as a broadcast network's 
transmission of video to affiliated stations and cable operators. 
Video contribution offers point-to-point capacity to providers of 
media services, such as for video transmission of a news event for 
later broadcast. Backhaul refers to the transmission of information--
or data--from any of a company's aggregation points to an Internet 
backbone provider that will then transmit the data to any point on the 
Internet. The growth rates reported above are compounded annually. 

[End of figure] 

According to our interviews with industry stakeholders, demand for 
fixed satellite services is expected to vary and grow at a faster rate 
in emerging markets with higher rates of economic growth, such as 
South America and Asia, than in other markets. Futron also forecasts 
that demand for fixed satellite services in regions with emerging 
economies will grow as a portion of overall global demand for fixed 
satellite services from 2009 through 2019. Specifically, Futron 
expects increases in the share of global demand for fixed satellite 
services of 5 percentage points for South America, 2 percentage points 
for South Asia, and 1 percentage point for Sub-Saharan Africa. In 
contrast, North America's share of worldwide demand for fixed 
satellite services is projected to decline by 4 percentage points and 
Western Europe's share is projected to decline by 2 percentage points 
from 2009 through 2019. 

Although expected to grow, according to Futron's estimates, global 
demand for fixed satellite services will not exceed global fixed 
satellite capacity, which is also expected to continue growing until 
2014. Futron officials told us that capacity forecasts beyond 3 years 
are difficult to estimate because satellite operators announce 
satellites expected to be launched only 3 years into the future. 
Futron said that their estimates beyond 2014 include capacity from new 
satellites that it expects are likely to replace satellites that are 
currently in heavy use and nearing the end of their useful lives, but 
the Futron forecast does not assume the replacement of all satellites 
currently in orbit. Even given these conservative assumptions, global 
demand is not expected to exceed global capacity, according to 
Futron's estimates. 

Satellite operators have in the past met and may in the future meet 
anticipated demand using a variety of strategies.[Footnote 26] Based 
on our interviews with stakeholders, the following strategies can be 
used to increase capacity globally or in specific regions: 

* Launch additional satellite capacity. As existing satellites reach 
the end of their useful lives, new satellites have to be launched to 
replace them and to provide additional capacity to meet any growth in 
demand for fixed satellite services. Satellite operators told us that 
they have increased the capacity of their satellite fleets by building 
and launching satellites with more transponders. According to the 
Federal Aviation Administration's 2011 commercial space transportation 
forecast, the average number of transponders on each satellite has 
increased from 27 in 1993 to 48 in 2011.[Footnote 27] 

* Move satellites. Satellite operators told us that they can respond 
to higher demand and increase capacity in one region by moving 
existing satellites from another region. For example, two major 
satellite operators told us that they have moved satellites from one 
orbital position to another to meet growing demand in other regions. 

* Use hosted payloads. A hosted payload allows users, such as the 
government, to add transponders or other equipment to a commercial 
satellite already scheduled for launch, reducing the time and cost 
needed to meet demand for satellite capacity, particularly in the 
short term, assuming resources for hosted payloads can be aligned with 
satellite manufacturing and launch schedules. Satellite operators said 
that they are seeing more demand for military use of commercial 
satellites and hosted payloads as well as increasing demand for hosted 
payloads from civilian government customers.[Footnote 28] 

Integration in the Fixed Satellite Services Industry Has Altered 
Relationships between Operators and Service Providers: 

Industry Integration since 2000: 

Since 2000, some fixed satellite operators have merged, and therefore 
the number of satellite operators providing service to the United 
States has decreased. Two companies--Intelsat and SES--have emerged as 
the primary operators of fixed satellite services for the U.S. market, 
compared with six companies that previously served this market. 
[Footnote 29] As figure 5 shows, Intelsat acquired Loral's North 
American satellites, Comsat General Corporation, and PanAmSat; SES 
acquired GE Americom, Columbia Communications Corporation, and New 
Skies. These mergers not only increased the number of satellites in 
Intelsat's and SES's fleets, but also gave the companies access to the 
U.S. domestic fixed satellite services market. For example, Intelsat's 
acquisition of Loral's North American satellites in 2004 gave Intelsat 
access to U.S. video distribution and corporate data markets; 
previously, Intelsat offered virtually no U.S. domestic services. 
[Footnote 30] Similarly, SES's acquisition of GE Americom, Columbia 
Communications Corporation, and New Skies combined a predominantly 
international fixed satellite service operator with domestic satellite 
providers and allowed SES to enter the U.S. fixed satellite services 
industry. In some instances, such as Intelsat's acquisition of 
PanAmSat, the mergers involved satellite operators that served 
overlapping geographic areas (a form of horizontal integration). 

Figure 5: Timeline of Mergers among Satellite Operators Providing 
Fixed Satellite Services to the United States since 2000: 

[Refer to PDF for image: timeline] 

2000: 
Lockheed Martin Corporation acquisition of Comsat Corporation; 
GE Americom acquisition of Columbia Communications Corporation. 

2001: 
SES Global acquisitions of GE Americom and Columbia Communications 
Corporation. 

2004: 
Intelsat acquisitions of Loral’s North American satellites and Comsat 
General Corporation. 

2006: 
SES Global acquisition of New Skies; 
Intelsat acquisition of PanAmSat. 

Source: GAO analysis of Federal Communications Commission reports. 

[End of figure] 

Besides acquiring competitors and potential competitors, both Intelsat 
and SES have specialized U.S.-based subsidiaries in order to provide 
direct sales and marketing services to the U.S. government.[Footnote 
31] For example, Intelsat created Intelsat General Corporation through 
its acquisition of Comsat General, and SES created SES World Skies, 
U.S. Government Solutions, after it acquired GE Americom.[Footnote 32] 
The creation of these subsidiaries (a form of vertical integration), 
combined with the government's adoption of new contracting vehicles, 
has made more service options and providers available for the U.S. 
government to procure fixed satellite services bandwidth capacity. 
Specifically, the FCSA program allows satellite operators, through 
their subsidiaries, to interact directly with the U.S. government to 
provide bandwidth capacity, rather than indirectly through a satellite 
reseller or integrator. Under DOD's former primary contract, DSTS-G, 
three companies were able to contract with DOD to provide commercial 
satellite services. Therefore, if DOD needed bandwidth capacity, it 
would often go through one of these three companies, which would 
acquire the bandwidth from a satellite operator and resell it to the 
government.[Footnote 33] Under the new FCSA program, SES and Intelsat 
are able to compete through their U.S.-based subsidiaries with 
resellers and integrators for DOD task orders[Footnote 34] (see table 
1). 

Table 1: DSTS-G and FCSA Eligible Vendors as of July 1, 2011: 

DSTS-G eligible vendors: 
Artel; 
CapRock Government Solutions; 
DRS Technical Services. 

FCSA eligible vendors: 
Maritime Telecommunications Networks; 
Telecommunication Systems; 
Hughes Network Systems; 
Intelsat General Corporation; 
CapRock Government Solutions; 
Artel; 
Americom Government Services; 
DRS Technical Services; 
Segovia; 
Globecomm Systems. 

Source: GSA. 

Note: The list of eligible vendors applies only to the transponded 
capacity portion of the FCSA program and does not include eligible 
vendors for the subscription services portion of the program. 

[End of table] 

Changing Industry Structure and the Relationship between Operators and 
Service Providers: 

The horizontal and vertical integration that has occurred in the fixed 
satellite services industry has changed the structure of the industry 
and altered the relationship between satellite operators and service 
providers. Some satellite service providers assert that these 
structural changes place service providers at a competitive 
disadvantage;[Footnote 35] however, to the extent that satellite 
operators' actions pose anticompetitive concerns, those actions are 
reserved for review by DOJ and FCC and are outside the scope of this 
report. According to economic literature we reviewed, as well as 
interviews with two economists and officials from DOJ's Antitrust 
Division, these structural changes may also have implications for the 
end customer, including the U.S. government. 

Horizontal Integration: 

According to economic literature, horizontal integration can increase 
the market power of the firms remaining after a merger. In the fixed 
satellite services industry, the mergers that have occurred since 2000 
have reduced the number of satellite operators from which large 
commercial customers, such as broadcasters, and satellite service 
providers can acquire satellite capacity. To the extent that the 
satellite operators served the same geographic market, this reduction 
in the number of operators could therefore lead to increased market 
power for the remaining companies and higher prices for the customer. 
For example, one economist told us that with fewer competitors, firms 
can more easily raise prices, either collectively or individually. In 
its review of the Intelsat-PanAmSat merger, FCC noted that the 
bargaining power of a buyer of satellite capacity might be reduced as 
a result of a post-merger reduction in the number of independent, 
competing satellite operators. However, FCC also noted that, given the 
size and scale of buyers of satellite capacity, the merger was 
unlikely to induce any significant adverse effects.[Footnote 36] 
Similarly, officials from DOJ, which reviewed the merger, told us that 
although Intelsat and PanAmSat competed in the same geographic 
markets, there was insufficient evidence for the agency to prove in 
court that competitive harm would result from the merger to customers 
that relied on these companies for service. In particular, DOJ 
officials told us that at the time of the agency's review, a number of 
satellite launches were planned that would expand the amount of 
capacity available to customers. Given the number of alternatives 
available, DOJ closed its investigation and did not bring a suit in 
federal court. 

While horizontal integration can lead to greater market power and 
potentially higher prices, it can also have beneficial effects for 
both the remaining firms and their customers. For example, according 
to economic literature we reviewed, horizontal integration can lead to 
economies of scale and efficiencies for the remaining firms as well as 
lower prices for the customer. One economist also told us that 
horizontal mergers are often pro-competitive, in that the mergers 
create efficiencies. In its competition reports, FCC notes that such 
mergers are beneficial for satellite operators because they can 
broaden opportunities for achieving economies of scale and scope as 
operators increase in size. These economies of scale and scope can 
lead to lower costs for the merged company. In addition, the mergers 
allowed satellite operators to interact more directly with a broader 
range of customers and increase the amount of capacity available to 
serve their customers. For example, by acquiring Loral and PanAmSat, 
Intelsat not only increased the size of its fleet and therefore its 
bandwidth capacity serving North America, but it also gained access to 
new customer markets that it previously served indirectly. Horizontal 
integration can also benefit customers if the economies and 
efficiencies operators gain lead to cost savings that are passed on to 
customers through lower prices. 

Vertical Integration: 

The acquisition of subsidiaries by Intelsat and SES has altered the 
operators' relationship with satellite service providers in that the 
subsidiaries are now competing directly with Intelsat's and SES's 
customers, the service providers, for government contracts. According 
to one economist, this could allow the operator to favor its 
subsidiary by charging the satellite service provider a higher price 
for capacity than it charges its subsidiary. In competing for 
government task orders, the subsidiary might then be able to submit a 
lower bid than the service provider, which could place the service 
provider at a competitive disadvantage. Service providers we spoke 
with also expressed concern that competing against the subsidiaries of 
satellite operators could create an uneven playing field in competing 
for government contracts if the satellite operator charges them a 
higher price for bandwidth than it charges its own subsidiary. 
However, if a service provider can acquire capacity from another 
satellite operator or a terrestrial fiber company, the ability of the 
satellite operator to disadvantage the service provider is reduced, 
according to one economist. Additionally, the service provider may be 
able to compete with the subsidiary on factors other than price. For 
example, according to satellite operators we spoke with, if a 
satellite service provider can provide value-added services to the 
government, it will continue to win task orders, even if the satellite 
operator can potentially provide lower prices. 

In some instances, vertical integration can have beneficial effects 
for the firms and consumers. According to economic literature we 
reviewed, a vertically integrated company might be able to provide 
more attractive service at a lower cost than two firms. Similarly, as 
DOJ officials noted, a wholesale (or upstream) business moving into 
the retail (or downstream) business may be able to provide a service 
more efficiently than two nonintegrated companies providing the same 
service, and the greater efficiency could ultimately lead to lower 
prices for the end customer. For this reason, one economist told us, 
vertical integration may be the best structure for the fixed satellite 
services industry. In addition, if firms in both the upstream and 
downstream segments of an industry possess market power, the firms 
have an incentive to vertically integrate and charge a lower price to 
the end-user customer. Consistent with this position, one economist 
noted that higher consumer prices should not result from vertical 
integration in the fixed satellite services industry; rather, the 
important concern is maintaining competition at the wholesale, or 
satellite operator, level. In fact, DOJ officials stated that an 
industry is generally no more competitive than the least competitive 
component of the vertical chain. For example, if the industry consists 
of 10 resellers and 2 operators, the industry's competitiveness is 
ultimately driven by the competitiveness at the operator level. 

Limited Orbital Locations and Enforcement Mechanisms within 
International Regulations Constrain New Entry into the Industry: 

Limited Orbital Locations: 

The number of fixed satellite service satellites operating in 
geostationary orbit is limited by the availability of orbital 
locations and the frequencies in which the satellites operate. 
Although satellites operating at different frequency bands can occupy 
nearly the same orbital location, roughly 2 degrees of separation is 
needed between satellites providing coverage in the same geographic 
area and operating in the same frequency band to avoid interference 
from neighboring satellites.[Footnote 37] Certain portions of the 
geostationary arc are crowded, particularly in the C-and Ku-frequency 
bands serving certain regions, limiting the potential for new 
satellites to be launched to serve those regions. For example, 
portions of the geostationary arc over North America in these 
frequency bands are largely occupied, according to ITU and satellite 
stakeholders. Furthermore, once a satellite operator has access to an 
orbital location, it is unlikely to relinquish that location for use 
by another operator unless the orbital location is no longer needed to 
meet demand. According to DOJ officials, the largest constraint for 
new entry in the fixed satellite services industry is the limited 
number of satellites that can exist in orbit. Many orbital locations 
are already taken by existing operators, making it unlikely that other 
large global satellite operators will enter the industry. 

In addition to space and frequency limitations, fixed satellite 
service satellites are often designed to serve a particular market, 
service application, or region, which limits their ability to provide 
service to some customers and may also deter new entrants from serving 
a particular customer market. That is, although a particular satellite 
may be capable of serving multiple regions or operating in multiple 
frequencies, the satellite may direct its signals to serve only a 
portion of the satellite's overall footprint or the satellite may be 
operating in only one of its frequency bands. For example, some 
satellites are launched exclusively to provide satellite television 
service to the home, and any available capacity on the satellite is 
usually not leased for other purposes. In addition, an industry 
official with regulatory expertise told us that satellite operators 
may not use all the frequencies on their satellites because they 
choose to reserve capacity. According to a satellite industry 
consultant, although a new entrant could technically launch a 
satellite in the same orbital location as an existing satellite to 
provide coverage in an area or frequency that is not currently being 
provided, it is unlikely to do so given the high cost of launching a 
new satellite that could potentially interfere with another operator's 
satellite in the future. 

Regulation and Enforcement: 

ITU coordinates the use of orbital resources--both orbital locations 
and frequency assignments--and its Radio Regulations were established 
and agreed to by member administrations (countries) to ensure 
equitable and efficient access to these limited resources. As defined 
in the Radio Regulations, administrations have 7 years from filing an 
advanced publication to bring a satellite into use.[Footnote 38] 
During the 7-year period, administrations must complete a three-stage 
process: 

* Advanced Publication Information: An administration must provide a 
general description of the planned satellite system in order for other 
administrations to determine the potential effect of this system on 
already existing systems or other planned systems. This stage triggers 
the 7-year time frame for bringing a satellite into use and must be 
completed within 2 years.[Footnote 39] 

* Coordination: No earlier than 6 months after providing the 
information for advanced publication, an administration is required to 
initiate a coordination procedure, which is a formal regulatory 
obligation both for the administration seeking a frequency assignment 
to its satellite network and for the administration whose existing or 
planned system may be affected by that assignment.[Footnote 40] 
Specifically, the administration seeking the frequency assignment is 
placed in the coordination queue and is required to coordinate with 
any other administration that has previously initiated the 
coordination procedure. 

* Notification: No later than 7 years after filing the advanced 
publication information, an administration must notify ITU of the date 
for bringing into use the frequency assignment, to be recorded in the 
master register.[Footnote 41] The administration is also required to 
submit due diligence information on the identity of the satellite 
network, the satellite manufacturer, and the launch services provider. 
[Footnote 42] 

According to ITU, once a frequency assignment has been recorded, ITU 
assumes that the corresponding satellite will operate on a regular 
basis. However, the frequency assignment may be suspended for a period 
of 2 years, during which time the administration must either bring the 
satellite back into operation or replace the satellite.[Footnote 43] 
If this does not occur, the administration loses the orbital 
assignment, which is then removed from the master register and is no 
longer entitled to recognition. The orbital location then becomes 
available to any administration in the queue. 

According to ITU, the 7-year time frame and coordination procedures 
were established to ensure that satellite networks are brought into 
use in a reasonable amount of time, to prevent harmful interference, 
and to discourage administrations and satellite operators from filing 
for assignments that they are unlikely to use. For example, if any of 
the interim milestones are not met and the satellite has not been 
recorded in the master register within 7 years, the filing is 
suppressed and the administration loses its position in the queue. 
According to ITU, the coordination procedures are also meant to 
facilitate entry into the industry by allowing a satellite network 
that does not complete the coordination requirements within the 7-year 
period to receive a provisional recording in the master register. 
[Footnote 44] However, even with these efforts, government officials 
and industry stakeholders identified several factors that may limit 
entry into the fixed satellite services industry and result in the 
inefficient use of orbital resources. 

* Excessive filings: According to ITU and other satellite 
stakeholders, some administrations file numerous applications for 
various orbital locations and frequency assignments in order to 
reserve their place in the queue ahead of other administrations. As a 
result, other administrations filing for the same orbital location and 
frequency assignment are required to coordinate with the 
administrations that have previously filed to avoid interference 
between the eventual satellite networks. According to ITU, meeting the 
coordination requirements is time-consuming, costly, and sometimes 
unsuccessful. In addition, in some cases, administrations are required 
to coordinate with administrations that have previously submitted 
filings that are unlikely to actually result in the launch of a 
satellite. According to ITU, about 20 percent of filings in the 
advance publication stage reach the notification stage in the 7-year 
period. According to State Department officials, the requirement to 
coordinate frequency assignments can act as a deterrent to new entry 
for both incumbent satellite operators and would-be entrants: An 
incumbent operator does not have an incentive to coordinate, 
particularly if the operator has to make costly modifications to an 
existing satellite in order to avoid interfering with the new 
satellite. And if the incumbent operator does not coordinate, the 
would-be new entrant may not be able to obtain financing or may not 
want to make the large investment needed to construct a satellite that 
may not operate fully because of interference from an existing 
satellite. 

Although administrations file numerous applications for orbital 
locations and frequencies, officials from one global satellite 
operator told us that this is necessary as they develop their business 
plans for future satellite launches. Given the cost of constructing a 
new satellite as well as the time it takes to build and launch a 
satellite, operators file for orbital locations and frequencies that 
they expect to need 7 years into the future. During this time, new 
technologies may be introduced that can alter the business plans of 
the satellite operator so that it no longer needs the orbital location 
for which it submitted a filing. However, without the filing, the 
satellite operator runs the risk of not being able to launch a 
satellite it has spent time and money developing. 

* Difficulties in interpreting rules: The definition of "bringing into 
use" required in the notification stage is unclear and is not 
consistently interpreted by administrations, according to ITU and 
other satellite stakeholders. For example, when a satellite is brought 
into use, it may not have the technical capability to operate at the 
frequency bands or over the service areas recorded in the master 
register. In addition, according to one satellite service provider, 
satellite operators might turn on a satellite for only a short period 
of time instead of providing consistent operations or move a satellite 
in inclined orbit into an orbital location as a way to assert 
ownership over a particular orbital location.[Footnote 45] These 
practices could result in the warehousing of orbital resources and 
make it difficult for new operators to enter the industry, since 
orbital locations or frequencies that are not in operation are 
recorded as used in the master register and are therefore unavailable 
to new entrants. According to ITU and other satellite stakeholders, a 
clearer definition of bringing into use is needed to ensure that 
orbital resources are being effectively used. 

* ITU's lack of enforcement authority: Once an administration notifies 
ITU that a satellite has been brought into use and the satellite is 
recorded in the master register, ITU takes the word of the 
administration that an operational satellite exists in that orbital 
location and frequency. ITU has no independent way of verifying that a 
satellite has been launched and is operational. In addition, once a 
satellite has been launched, ITU does not have a direct way of 
determining whether the satellite is operating in all of the 
frequencies in which it was intended to operate or whether the 
operation has subsequently been suspended. For example, several 
satellite stakeholders told us that although administrations are 
required to report unused frequencies and satellites in suspended 
service to ITU, such reporting rarely occurs, and ITU does not have 
the means to ensure that a satellite is operating as specified. The 
Radio Regulations also do not require administrations to submit any 
specific proof to ITU that they have complied with the due diligence 
requirements for bringing a satellite into use. The lack of 
enforcement can hinder entry by not freeing up unused or underused 
orbital resources. 

Given that ITU's Radio Regulations is an international agreement by 
the member administrations, any changes to the regulations that might 
improve the use of orbital resources will require the consensus of all 
member administrations. Although ITU lacks the authority to monitor 
and enforce the regulations, ITU has taken some steps to address these 
issues by more aggressively following up with administrations to 
verify the existence of some satellite networks. For example, since 
2009, ITU has taken a more proactive role in identifying satellite 
networks that are recorded in the master register but do not 
correspond to an operational satellite, by consulting various 
databases that track satellites in orbit.[Footnote 46] ITU contacted 
the relevant administrations to verify the existence of the 
satellites, which has resulted in the total or partial suppression of 
about 100 satellite networks over the last 2 years.[Footnote 47] These 
efforts have therefore led to the removal of some unused frequency 
assignments from the master register, potentially opening these 
locations and frequencies to other users. 

Several ITU conferences and workshops over the last 15 years have also 
been devoted to improving access to orbital resources. For example, 
ITU held several workshops from 2008 through 2010 on the efficient use 
of spectrum and orbital resources. These issues will also be addressed 
at the upcoming World Radiocommunication Conference, which provides an 
opportunity for member administrations to amend the Radio Regulations. 
Several agenda items for the 2012 World Radiocommunication Conference 
address issues related to fixed satellite services regulations, 
several of which are issues carried over from previous conferences. 
[Footnote 48] For example, one agenda item involves proposals that 
deal with deficiencies in the advance publication, coordination, or 
notification and recording procedures for frequency assignments 
pertaining to space services. According to a satellite industry 
consultant, proposals under this agenda item would specify a time 
frame for what constitutes bringing a satellite into use. In addition, 
the United States has developed several positions for consideration 
related to this agenda item, including a proposal that would clarify 
when an administration must notify ITU that a recorded frequency 
assignment in the master register has been suspended and brought back 
into use. A separate agenda item addresses any difficulties or 
inconsistencies encountered by ITU or the member administrations in 
applying the Radio Regulations. Although the World Radiocommunication 
Conference provides a forum for administrations to improve the 
efficiency and equity of orbital resources, broad changes to the 
regulations are unlikely to occur because consensus is needed from all 
member administrations, according to a senior ITU official. 

Other Factors Affecting Competition: 

Other factors identified by stakeholders we interviewed that could 
affect competition in the fixed satellite services industry include 
the high costs of building, launching, and insuring a satellite and 
foreign ownership restrictions. Specifically: 

* High costs of entry: On average, fixed satellite service satellites 
cost $200 million to $500 million to manufacture, launch, and insure. 
According to FCC officials, these high fixed costs make it difficult 
for new operators to enter the fixed satellite services industry, 
particularly since operators typically need several satellites in 
orbit to have a basic satellite network. DOJ officials and other 
satellite stakeholders also stated that the high costs of entry are a 
barrier for new entry into the fixed satellite services industry. 

* Foreign ownership restrictions: Various foreign markets have 
restrictions on foreign ownership that could limit the ability of 
other companies to provide satellite services in those markets. For 
example, in China, domestically owned satellite operators receive 
preferential treatment over foreign satellite operators, according to 
the Satellite Industry Association.[Footnote 49] In addition, 
satellite stakeholders told us that some countries launch satellites 
for reasons of national pride and do not allow nondomestic operators 
to use the satellites to provide service. 

DOD's Fixed Satellite Service Costs Have Increased, but Contracting 
Officials Expect New Contract Vehicles to Increase Competition: 

Costs since 2003: 

Using data from DOD and a model that took into account a number of 
factors thought to influence the cost of fixed satellite bandwidth, we 
found that the costs to acquire fixed satellite bandwidth increased 
significantly from 2003 through 2010. Specifically, we acquired 
procurement data from DOD for its DSTS-G contract, which was DOD's 
primary mechanism during that time period for acquiring fixed 
satellite services from commercial vendors. We analyzed the cost, 
bandwidth purchased, and other attributes of 470 task orders from 2001 
through March 2011.[Footnote 50] In particular, we conducted a 
regression analysis on the real cost per megahertz (MHz) of bandwidth 
for each base and option period for the task orders on a number of 
variables, including frequency band, region, length of task order, 
option years, and fiscal year in which DISA awarded the task order 
(see app. II for a complete description of our model). According to 
our analysis, the real cost per MHz of bandwidth was about 30 percent 
lower in fiscal year 2003, and lower in all intervening years, than in 
fiscal year 2010[Footnote 51] (see figure 6). 

Figure 6: Estimated Real Costs per MHz of Bandwidth for DSTS-G Task 
Orders as a Percentage of Estimated Costs for Fiscal Year 2010: 

[Refer to PDF for image: vertical bar graph] 

Fiscal year 2003: 70%. 

Fiscal year 2004: 74.4%. 

Fiscal year 2005: 77.4%. 

Fiscal year 2006: 80.3%. 

Fiscal year 2007: 77.9%. 

Fiscal year 2008: 83.4%. 

Fiscal year 2009: 89.6%. 

Fiscal year 2010: 100%. 

Fiscal year 2011: 100.1%. 

Source: GAO analysis of DOD data. 

Note: We derived these estimates from a regression model using data 
from 2001 through March 2011. We omitted 2001, 2002, and 2011 from 
this figure as the estimates were not statistically significant at the 
5 percent confidence level. 

[End of figure] 

Similarly, DOD's own analysis found that bandwidth costs have 
increased since 2005. Annually, the United States Strategic Command 
(USSTRATCOM) prepares a report that documents DOD's commercial 
bandwidth usage and expenditures, including DOD's costs to acquire 
fixed satellite services; the report provides information on the DSTS-
G contract, which accounted for more than 58 percent of DOD's 
commercial bandwidth expenditures in fiscal year 2009. USSTRATCOM's 
latest report examined DSTS-G task orders active in fiscal year 2009, 
with the task orders segmented by the year of award. USSTRATCOM found 
that the average transponder equivalent (TPE) costs for these task 
orders increased from $1.1 million in 2005 to $2.5 million in 2009, a 
$1.4 million (or 127 percent) increase in fixed satellite bandwidth 
costs over a 4-year period when taking into account the fiscal year in 
which the task order was awarded[Footnote 52] (see figure 7). Thus, 
while USSTRATCOM uses a different approach from ours to analyze 
bandwidth costs, both analyses show that costs for fixed satellite 
services on the DSTS-G contract have increased. 

Figure 7: Average Transponder Equivalent Costs of DSTS-G Task Orders 
Active in Fiscal Year 2009 by Award Year: 

[Refer to PDF for image: vertical bar graph] 

Fiscal year: 2005; 
Average ATE cost: $1.1 million. 

Fiscal year: 2006; 
Average ATE cost: $1.4 million. 

Fiscal year: 2007; 
Average ATE cost: $1.5 million. 

Fiscal year: 2008; 
Average ATE cost: $2 million. 

Fiscal year: 2009; 
Average ATE cost: $2.5 million. 

Source: U.S. Strategic Command, Fiscal Year 2009 Commercial Satellite 
Communications Usage Report, June 9, 2011. 

[End of figure] 

Factors Affecting Costs: 

Integration in the fixed satellite services industry since 2000 has 
not affected the government's costs to acquire fixed satellite 
services bandwidth, according to DISA and GSA officials.[Footnote 53] 
Government and industry officials maintained that other market 
factors, such as demand and availability of bandwidth and the length 
of a task order, have more effect on price. Our analysis of DSTS-G 
task orders showed that exercising option years resulted in lower 
bandwidth costs, while longer task orders often resulted in higher 
costs. In particular, we found that for each year an option is 
exercised, the cost per MHz of bandwidth decreases by 4.9 percent 
compared with the base year cost. Similarly, each additional 1 percent 
increase in the number of days in a task order increases the cost per 
MHz by 1 percent.[Footnote 54] Our analysis also found that the cost 
per MHz was higher in many regions, including Europe and the Middle 
East, that we analyzed compared with task orders that originated or 
terminated in North America.[Footnote 55] These results are consistent 
with USSTRATCOM's finding that many factors affect bandwidth pricing, 
such as the amount of bandwidth purchased, the length of the contract, 
the specific frequency band purchased, the geographic location of 
satellite coverage, and bandwidth capacity and demand. For example, 
USSTRATCOM attributed the average TPE cost increase from 2005 through 
2009 to the expiration of older task orders that were awarded when 
more capacity was available and market prices were lower. Furthermore, 
fewer launches by satellite operators in recent years compared with 
the late 1990s, along with greater demand for capacity in certain 
regions, have increased the prices for fixed satellite capacity. 
Officials from DOJ's Antitrust Division said that the agency did not 
challenge the Intelsat-PanAmSat or SES-New Skies mergers, partly 
because the agency thought it could not prove in court that these 
mergers would negatively affect the government's ability and costs to 
acquire fixed satellite services. 

DISA, GSA, and industry officials expect the new FCSA program to 
increase competition among eligible vendors and allow the government 
to contract directly with satellite operators, which may exert 
downward pressure on the government's cost to acquire fixed satellite 
services. As previously discussed, three vendors, all satellite 
service providers, were eligible to compete for fixed satellite 
services task orders under DOD's DSTS-G contract. With the FCSA 
transponded capacity and subscription services contracting vehicles, 
there is no limit to how many eligible vendors, including satellite 
operators, can compete directly for fixed satellite services task 
orders. As of July 1, 2011, there were 10 eligible transponded 
capacity vendors. The increased number of vendors eligible to compete 
for fixed satellite bandwidth task orders will theoretically exert 
downward pressure on the cost the government pays to acquire fixed 
satellite services, assuming the additional vendors can provide a 
greater number of solutions for a given requirement. In addition, the 
government's ability to contract directly with a satellite operator 
for bandwidth capacity when additional services are not needed might 
exert downward pressure on the cost of satellite bandwidth capacity, 
since the government can avoid the markup arising from multiple 
companies providing a single service. GSA officials expect that 
competition among the set of eligible vendors will exert a downward 
force on prices, but will be just another factor affecting prices, 
along with supply and demand and the length of the bandwidth lease. 
Officials from DOJ's Antitrust Division told us they recognize that 
the DSTS-G contract limited the number of competitors for the 
government's fixed satellite services, and said there is reason to 
think that expanding the number of competitors under the FCSA 
contracts could result in lower costs. 

DISA officials conducted a preliminary analysis of the new transponded 
capacity and subscription services task orders under FCSA and found 
that prices are similar to prevailing market prices in recent years 
and are generally consistent with bandwidth prices awarded under DSTS-
G during fiscal years 2009 and 2010. DISA conducted this analysis in 
response to a recent press article that costs for task orders awarded 
under the transponded capacity and subscription services were higher 
than costs under DSTS-G. DISA based its analysis on 35 task orders 
that have been awarded through March 2011. DISA officials told us they 
will continue to analyze prices for transponded capacity and 
subscription services and are optimistic that prices will remain 
competitive given the number of vendors that are able to bid on the 
task orders. 

Agency Comments: 

We provided a draft of this report to DOD, DOJ, FCC, GSA, and the 
Department of State. The agencies provided technical comments that we 
incorporated as appropriate. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies to the 
appropriate congressional committees, the Secretaries of Defense and 
State, the Chairman of the Federal Communications Commission, the 
Administrator of the General Services Administration, the Attorney 
General, and other interested parties. In addition, the report will be 
available at no charge on GAO's Web site at [hyperlink, 
http://www.gao.gov]. 

If you have any questions about this report, please contact me at 
(202) 512-2834 or goldsteinm@gao.gov. Contact points for our Offices 
of Congressional Relations and Public Affairs may be found on the last 
page of this report. Major contributors to this report are listed in 
appendix III. 

Signed by: 

Mark L. Goldstein: 
Director, Physical Infrastructure: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

This report examines the state of competition in the fixed satellite 
services industry. In particular, the report describes: (1) how 
current satellite capacity compares to current and forecasted demand; 
(2) the changes that have occurred in the fixed satellite services 
industry since 2000 and the effects these changes could have on the 
relationship between satellite operators and service providers; (3) 
technological, regulatory, and other factors that affect competition 
in the fixed satellite services industry; and (4) how costs for the 
Department of Defense (DOD) to acquire fixed satellite services have 
changed since 2000 and contracting officials' views on the effects of 
changes in the industry and contracts on costs. 

To determine how current fixed satellite capacity compares to current 
and forecasted demand, we used demand and capacity data contained in 
the Executive Summary of Futron's 2010 Forecast of Global Satellite 
Services Demand report, which analyzed trends in the industry from 
2009 through 2019. We took steps to ensure the reliability of the data 
in the Futron report, including determining the procedures and 
controls that Futron used to make estimates about future capacity and 
demand for fixed satellite services. We determined that the data were 
sufficiently reliable for the purposes of our report. We interviewed 
officials from three research firms that analyze demand and capacity 
in the fixed satellite services industry--Euroconsult, Futron, and 
Northern Sky Research--as well as satellite operators, service 
providers, and industry analysts, about factors affecting demand for 
fixed satellite services. We reviewed the Federal Aviation 
Administration's 2011 Commercial Space Transportation Forecasts report 
showing yearly estimates of commercial satellite launches through 2019 
and the Satellite Industry Association's 2011 State of the Satellite 
Industry Report prepared by Futron. We reviewed financial reports from 
the four major satellite operators--Intelsat, Eutelsat, SES, and 
Telesat--for statements on current fixed satellite capacity and demand 
and demand for enterprise networks. 

To determine the changes that have occurred in the fixed satellite 
services industry since 2000, and the effects these changes could have 
on the relationship between satellite operators and service providers, 
we reviewed the Federal Communications Commission (FCC) reports to 
Congress on the status of competition in the markets for domestic and 
international satellite communications services and annual reports as 
required by federal law, as well as comments filed by industry 
stakeholders for these reports.[Footnote 56] We conducted an economic 
literature review of horizontal and vertical integration in the 
satellite and related telecommunications industries and interviewed 
economists with expertise in horizontal and vertical integration about 
the factors that would lead companies to integrate and the advantages 
and disadvantages of such integration for competition. In addition, we 
interviewed officials from the Department of Justice's Antitrust 
Division, which reviewed mergers in the fixed satellite services 
industry, about the department's process for reviewing potential 
mergers and the potential implications of horizontal and vertical 
integration for competition in the fixed satellite services industry. 

To determine the technological, regulatory, and other factors that 
affect competition in the fixed satellite services industry, we 
reviewed FCC's competition reports to further understand the 
regulatory factors that could affect competition and interviewed 
officials from FCC's International Bureau about its process for 
licensing fixed satellites and the effects of the International 
Telecommunication Union's (ITU) regulations on competition. ITU is an 
international organization formed to promote international cooperation 
and develop consensus positions within the telecommunications and 
information technology industries. We reviewed information on ITU's 
Radio Regulations governing the use of orbital resources; the 
regulations are agreed to by the member administrations (countries) of 
ITU. We interviewed a senior ITU official about the effect of these 
regulations on competition in the fixed satellite services industry 
and obtained additional documentation about proposals to modify these 
regulations to improve the efficient and equitable use of orbital 
resources. We interviewed officials from the Department of State, two 
industry officials with regulatory expertise identified through our 
interviews, and satellite industry stakeholders about the regulatory 
factors that could affect competition. 

To determine how costs for DOD to acquire fixed satellite services 
have changed since 2000, and to obtain contracting officials' views on 
the effect of changes in the industry and contracts on the cost for 
the government to acquire fixed satellite services, we obtained data 
from the Defense Information Systems Agency's (DISA) Annual Usage 
Report Database on total fixed satellite services expenditures and 
bandwidth costs across various contracts DOD uses to procure 
commercial satellite services.[Footnote 57] We limited our analysis to 
task orders under the department's Defense Information Systems Network 
Satellite Transmission Services-Global (DSTS-G) contract because it is 
the primary contract DOD uses to acquire fixed satellite services, 
accounting for more than 58 percent of DOD's fixed satellite services 
expenditures in 2009. In particular, we analyzed bandwidth costs on 
470 DSTS-G task orders awarded from 2001 through March 2011 by 
regressing the real cost per megahertz of bandwidth on a number of 
variables thought to influence bandwidth costs, including frequency 
band, region, length of the task order, options years, and fiscal year 
in which DISA awarded the task order, to determine whether costs had 
increased over time[Footnote 58] (see appendix II for a detailed 
description of our model). We obtained a tutorial on the database from 
DISA officials responsible for maintaining the database to determine 
how the data are collected, what controls are in place to ensure the 
reliability of the data, and any limitations to the data. We 
determined that the data were sufficiently reliable for the purposes 
of our review. We compared the results of our analysis to DISA's own 
analysis of bandwidth costs using the same data set. Specifically, we 
reviewed spend analysis reports prepared by DOD, as required by 
federal law, on commercial satellite communications services used by 
the department, and annual usage reports prepared by the United States 
Strategic Command with assistance from DISA on the department's use of 
and expenditures for commercial satellite communications services. 
[Footnote 59] These reports include DOD analyses on the costs to 
acquire fixed satellites services on the DSTS-G contract calculated on 
a transponder equivalent (TPE) basis, where one TPE is equal to one 36-
megahertz transponder for a duration of 1 year. We interviewed DISA 
and General Services Administration (GSA) officials to obtain their 
views on how changes in the industry have affected the cost for the 
government to acquire fixed satellite services and how new contract 
vehicles developed by DISA and GSA could affect costs. We also 
interviewed officials from three major broadcast companies with 
responsibility for procuring commercial satellite bandwidth for their 
programming in order to obtain the commercial perspective on costs 
compared to the government perspective. We selected the companies 
based on the number of cable networks owned, whether the company had 
affiliated television broadcast networks, and the prime-time ratings 
of the cable networks. 

[End of section] 

Appendix II: Regression Model and Analysis of the Costs DOD Incurs to 
Acquire Fixed Satellite Services: 

This appendix describes the model we developed to analyze the costs 
that DOD incurs to acquire fixed satellite services from commercial 
vendors. Specifically, we discuss (1) background information on the 
factors that affect the cost to acquire fixed satellite services and 
DOD's analyses, (2) the data we used in our analysis, and (3) our 
estimation methodology and results. 

Background: 

DISA acquires fixed satellite services for DOD from commercial 
vendors. According to DISA officials, a variety of factors affect the 
cost to acquire satellite bandwidth, including a number of intangible 
factors. For example, DISA officials noted that option years on a base-
year contract are exercised 90 to 95 percent of the time, which 
increases their value to industry. Furthermore, DISA officials said 
that the fill rate--the percentage of a satellite's capacity utilized--
plays a role in price; namely, higher fill rates, which imply less 
available capacity, are associated with higher bandwidth costs. 
Private equity ownership of Intelsat and other satellite operators is 
influencing the number of satellite launches occurring and the fill 
rates of those satellites. 

Annually, the United States Strategic Command (USSTRATCOM) prepares a 
report that documents DOD's commercial bandwidth usage and 
expenditures, including DOD's costs to acquire fixed satellite 
services on the DSTS-G contract, which accounted for more than 58 
percent of DOD's commercial bandwidth expenditures in fiscal year 
2009. DISA obtains information on DOD bandwidth expenditures by 
surveying its departments using a standard data collection template. 
The data are reviewed for accuracy and completeness, and comparative 
analyses are conducted across various factors, including region, 
frequency band, satellite operator, and customer.[Footnote 60] In 
addition, bandwidth costs are normalized by converting the total lease 
cost to an annualized 36-megahertz TPE cost for comparison purposes. 
USSTRATCOM's latest report found that DOD's average TPE costs 
increased from $1.1 million in 2005 to $2.5 million in 2009, a $1.4 
million (or 127 percent) increase in fixed satellite bandwidth costs 
over a 4-year period when taking into account the fiscal year in which 
the task order was awarded.[Footnote 61] 

Data Source and Descriptive Statistics: 

To conduct our analysis, we acquired procurement data from DISA for 
its acquisition of fixed satellite services. The dataset included 527 
task orders awarded from fiscal year 2001 through March 2011 for the 
DSTS-G contracting vehicle, which was DOD's primary mechanism during 
that time period for acquiring fixed satellite services from 
commercial vendors.[Footnote 62] Within the dataset, each task order 
was represented by one or more observations; one observation 
represented the base period (all task orders had a base period) and 
one or more additional observations represented option periods (not 
all task orders had option periods). The dataset included the 
following information for each observation: (1) contract number, (2) 
task order number, (3) start date, (4) end date, (5) number of days 
covered by an observation, (6) the fiscal year when a task order 
began, (7) the fiscal years covered by a task order, (8) vendor, (9) 
satellite operator, (10) satellite number, (11) bandwidth capacity, 
(12) frequency band, (13) three location fields generally designating 
regions of the world from which bandwidth was transmitted and 
received, (14) total cost, (15) bandwidth cost, (16) "other" costs, 
(17) annualized 36-megahertz (MHz) TPE cost, and (18) a yes/no field 
indicating whether or not a contract is recurring. In addition, each 
observation contained this information for the base year in which the 
task order was awarded as well as any option years that may have been 
exercised, which are indicated by the fiscal years covered in a task 
order. 

For each task order, we used information on the bandwidth cost, 
bandwidth capacity (the amount of bandwidth leased), number of days 
covered by an observation, frequency band, and region where the 
bandwidth transmission originated and terminated. We used this 
information for the base period and for each option period of the task 
order. In addition, we aggregated those observations for a task order 
that occurred in the same fiscal year in order to obtain yearly 
observations. Specifically, to aggregate observations within a fiscal 
year, we: 

* computed the duration by ascertaining the difference between the 
earliest start date and the latest end date; 

* summed bandwidth costs, total costs, and other costs to derive the 
aggregate costs across observations for the fiscal year; 

* derived a "weighted MHz" by computing (1) the number of days covered 
by an observation and dividing it by the duration; (2) multiplying the 
respective bandwidth capacity by the number resulting from (1); and 
(3) summing the numbers resulting from (2); and: 

* ascertained whether a task order so aggregated into a fiscal year 
encompassed varying frequency bands or regions and, if it did, 
recoding those fields as "Multiple" to reflect this multiplicity. 

Once we completed the aggregation process, we eliminated those task 
orders that had no bandwidth costs and verified any anomalies with 
DISA. This resulted in a total of 470 task orders for our analysis. 
The resulting dataset is considered a panel dataset in which task 
orders are tracked through time. However, every task order is not 
present in every year. Hence, the final dataset is an unbalanced 
panel, since the number of observations for each year is not the same. 
Finally, we converted the costs into 2010 dollars. 

Table 2 presents the yearly descriptive statistics for our dataset. 
Column 2 shows the average cost per task order by year, deflated using 
the Producer Price Index for Communications Systems and Equipment, 
including microwave and space satellites. Column 3 shows the average 
bandwidth acquired by year. Column 4 presents the average cost per MHz 
of bandwidth. Column 5 presents the average number of days per task 
order. Column 6 shows the proportion of task orders that use the Ku- 
band frequency, which is the most commonly used frequency band; the C- 
band accounts for most of the remaining frequency. Column 7 shows the 
proportion of task orders using multiple frequencies; since each task 
order could comprise several contracts, these independent contracts 
might use more than one frequency. Finally, column 8 presents the 
number of task orders per year in our dataset. 

Table 2: Descriptive Statistics: 

Fiscal year: 2001; 
Real cost (2010 dollars): $942,676; 
Bandwidth (MHz): 12.24; 
Average cost per MHz: $97,256; 
Days in task order: 304.40; 
Ku-band frequency: 60.00%; 
Multiple frequency: 0.00%; 
Number of task orders: 5. 

Fiscal year: 2002; 
Real cost (2010 dollars): $3,339,774; 
Bandwidth (MHz): 77.30; 
Average cost per MHz: $64,255; 
Days in task order: 336.91; 
Ku-band frequency: 86.96%; 
Multiple frequency: 0.00%; 
Number of task orders: 23. 

Fiscal year: 2003; 
Real cost (2010 dollars): $2,259,241; 
Bandwidth (MHz): 52.69; 
Average cost per MHz: $41,459; 
Days in task order: 250.54; 
Ku-band frequency: 75.61%; 
Multiple frequency: 2.44%; 
Number of task orders: 41. 

Fiscal year: 2004; 
Real cost (2010 dollars): $1,700,018; 
Bandwidth (MHz): 43.47; 
Average cost per MHz: $39,370; 
Days in task order: 249.81; 
Ku-band frequency: 74.32%; 
Multiple frequency: 6.76%; 
Number of task orders: 74. 

Fiscal year: 2005; 
Real cost (2010 dollars): $1,472,920; 
Bandwidth (MHz): 38.03; 
Average cost per MHz: $36,763; 
Days in task order: 236.16; 
Ku-band frequency: 73.15%; 
Multiple frequency: 5.56%; 
Number of task orders: 108. 

Fiscal year: 2006; 
Real cost (2010 dollars): $1,781,709; 
Bandwidth (MHz): 44.76; 
Average cost per MHz: $57,859; 
Days in task order: 292.53; 
Ku-band frequency: 74.31%; 
Multiple frequency: 4.59%; 
Number of task orders: 109. 

Fiscal year: 2007; 
Real cost (2010 dollars): $1,674,661; 
Bandwidth (MHz): 44.69; 
Average cost per MHz: $41,302; 
Days in task order: 261.63; 
Ku-band frequency: 75.78%; 
Multiple frequency: 2.34%; 
Number of task orders: 128. 

Fiscal year: 2008; 
Real cost (2010 dollars): $2,140,518; 
Bandwidth (MHz): 52.37; 
Average cost per MHz: $50,214; 
Days in task order: 309.98; 
Ku-band frequency: 72.66%; 
Multiple frequency: 3.91%; 
Number of task orders: 128. 

Fiscal year: 2009; 
Real cost (2010 dollars): $2,177,265; 
Bandwidth (MHz): 51.65; 
Average cost per MHz: $40,775; 
Days in task order: 262.48; 
Ku-band frequency: 73.49%; 
Multiple frequency: 3.01%; 
Number of task orders: 166. 

Fiscal year: 2010; 
Real cost (2010 dollars): $2,733,764; 
Bandwidth (MHz): 66.06; 
Average cost per MHz: $44,497; 
Days in task order: 268.63; 
Ku-band frequency: 75.19%; 
Multiple frequency: 6.20%; 
Number of task orders: 129. 

Fiscal year: 2011; 
Real cost (2010 dollars): $706,645; 
Bandwidth (MHz): 60.01; 
Average cost per MHz: $15,643; 
Days in task order: 95.82; 
Ku-band frequency: 71.43%; 
Multiple frequency: 10.71%; 
Number of task orders: 28. 

Source: GAO analysis of DOD data. 

[End of table] 

Estimation Methodology and Results: 

We modeled the task order cost as a function of a number of variables 
thought to influence the cost to acquire fixed satellite services, 
such as the bandwidth acquired, frequency band, and region. As 
discussed previously, our final dataset is an unbalanced panel, since 
the number of observations for each year is not the same. In addition, 
we assumed that there is an unobserved effect within each task order 
that is independent of the rest of the explanatory variables. 
Therefore, we estimated our model with a random effect regression. In 
particular, we estimated the following equation: 

1nCii = a + B1 option it + B2 1n days it + B3ku it + B4 multi_freq it 
+ &year_dummies it + yregion_dummies it + a1 + u it; 

where: 

a = intercept: 

ln Cit = the logarithm of the real cost per megahertz of bandwidth for 
task order i in year t (in 2010 dollars). 

option it= a variable that indicates if task order i is exercised in 
option year t. It is the difference between the initial year the task 
order was awarded and the year the option is exercised. 

ln days it = the logarithm of the number of days task order i was 
active in year t. 

ku it = a dummy variable indicating if the frequency for task order i 
and year t is the Ku-band. 

multi_freq it = a dummy variable indicating if the frequency for task 
order i and year t is more than one band. 

year_dummies it = a set of dummy variables controlling for each year 
using 2010 as the reference year. 

region_dummies it = a set of dummy variables controlling for the 
origination and destination transmission regions using the North 
America region as the reference region for task order i in year t. 

ai = task order unobserved effect assumed to be uncorrelated with the 
explanatory variables. 

u it = error term assumed to be independent and identically 
distributed with a normal distribution with zero mean and variance s2. 

The results from our model are shown in table 3. With the random 
effects panel data estimation, we used fiscal year 2010, C-band, and 
North America as the reference groups for fiscal year, frequency, and 
region, respectively. 

Table 3: Regression Results--Dependent Variable Logarithm of the Real 
Cost per Megahertz of Bandwidth: 

Variable: Option; 
Coefficient: -0.049[B]; 
Standard errors: 0.022; 
P-value: 0.027. 

Variable: Log(days); 
Coefficient: 1.000[A]; 
Standard errors: 0.036; 
P-value: 0.000. 

Variable: Ku-frequency; 
Coefficient: -0.312[A]; 
Standard errors: 0.105; 
P-value: 0.003. 

Variable: Multi-frequency; 
Coefficient: -0.187; 
Standard errors: 0.245; 
P-value: 0.446. 

Variable: Fiscal year 2001; 
Coefficient: -0.336; 
Standard errors: 0.237; 
P-value: 0.157. 

Variable: Fiscal year 2002; 
Coefficient: -0.257; 
Standard errors: 0.176; 
P-value: 0.143. 

Variable: Fiscal year 2003; 
Coefficient: -0.300[B]; 
Standard errors: 0.144; 
P-value: 0.038. 

Variable: Fiscal year 2004; 
Coefficient: -0.256[B]; 
Standard errors: 0.131; 
P-value: 0.050. 

Variable: Fiscal year 2005; 
Coefficient: -0.226[B]; 
Standard errors: 0.101; 
P-value: 0.024. 

Variable: Fiscal year 2006; 
Coefficient: -0.197[B]; 
Standard errors: 0.087; 
P-value: 0.024. 

Variable: Fiscal year 2007; 
Coefficient: -0.221[A]; 
Standard errors: 0.068; 
P-value: 0.001. 

Variable: Fiscal year 2008; 
Coefficient: -0.166[A]; 
Standard errors: 0.053; 
P-value: 0.002. 

Variable: Fiscal year 2009; 
Coefficient: -0.104[A]; 
Standard errors: 0.033; 
P-value: 0.001. 

Variable: Fiscal year 2011; 
Coefficient: 0.001; 
Standard errors: 0.095; 
P-value: 0.991. 

Variable: Asia; 
Coefficient: 0.814[A]; 
Standard errors: 0.208; 
P-value: 0.000. 

Variable: Atlantic Ocean region; 
Coefficient: 0.369; 
Standard errors: 0.219; 
P-value: 0.092. 

Variable: Europe-Middle East-Africa; 
Coefficient: 0.289[B]; 
Standard errors: 0.115; 
P-value: 0.012. 

Variable: Europe; 
Coefficient: 0.430[A]; 
Standard errors: 0.128; 
P-value: 0.001. 

Variable: Middle East; 
Coefficient: 0.395[B]; 
Standard errors: 0.174; 
P-value: 0.023. 

Variable: Middle East-Africa; 
Coefficient: 0.062; 
Standard errors: 0.099; 
P-value: 0.532. 

Variable: Multi-region; 
Coefficient: 0.297[A]; 
Standard errors: 0.077; 
P-value: 0.000. 

Variable: Pacific Ocean region; 
Coefficient: 0.237[B]; 
Standard errors: 0.121; 
P-value: 0.049. 

Variable: Constant; 
Coefficient: 5.160[A]; 
Standard errors: 0.210; 
P-value: 0.000. 

Number of observations: 939. 

Number of groups: 470. 

Overall R-squared: 0.822. 

Source: GAO analysis of DOD data. 

Note: Robust standard errors reported. 

[A] Significance at the 1 percent level. 

[B] Significance at the 5 percent level. 

[End of table] 

Our model results indicate that the cost DOD incurs to acquire fixed 
satellite services have increased since 2003. Controlling for other 
variables thought to influence the cost to acquire fixed satellite 
services, the cost per megahertz was lower in fiscal years 2003 
through 2009 than in fiscal year 2010.[Footnote 63] According to DISA 
officials, the recent increases in costs across most of the industry 
have been driven mostly by the greater fiscal discipline of satellite 
operators, leading to more conservative investments in new satellite 
launches, compared to the highly speculative and aggressive investing 
that the industry underwent in the dot-com era of the late 1990s. 
Fewer and more deliberate launches, coupled with a steady increase in 
demand, have resulted in recent higher utilization rates and, 
therefore, higher prices. 

In addition to the trend in costs over time, our results illustrate 
that exercising an option year is associated with lower costs while 
task orders that last longer are associated with higher costs. In 
particular, we found that for each year an option is exercised, the 
cost per megahertz of bandwidth decreases by 4.9 percent compared with 
the base year cost. DISA officials said that option years on a base- 
year contract are exercised 90 to 95 percent of the time and 
therefore, industry treats these contracts as multiyear procurements, 
which result in lower costs. We also found that each additional 1 
percent increase in the number of days in a task order increases the 
cost per MHz by 1 percent.[Footnote 64] We found that Ku-band task 
orders are associated with 31 percent lower costs than C-band task 
orders. Finally, many regions, including Asia, Europe, the Middle 
East, and the Pacific Ocean region, have higher costs than North 
America. 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Mark L. Goldstein (202) 512-2834 or goldsteinm@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Michael Clements (Assistant 
Director), Pedro Almoguera, Brad Dubbs, Bess Eisenstadt, David Hooper, 
Rosa Leung, Nancy Lueke, Jerry Sandau, and James Tallon made key 
contributions to this report. 

[End of section] 

Footnotes: 

[1] Fixed satellite service refers to a radiocommunication service 
between fixed earth stations at specific locations by means of one or 
more satellite. 

[2] Satellite Industry Association, State of the Satellite Industry 
Report (prepared by Futron Corporation) (Washington, D.C.: June 2011). 

[3] Consumer satellite services, including satellite television, 
accounted for 82 percent of revenues in the satellite services sector. 
For purposes of its report, the Satellite Industry Association 
separates consumer satellite services from fixed satellite services. 
The remaining revenues in the fixed satellite services sector were 
from managed network services, where a satellite provider delivers 
voice, data, Internet, and video network services for multi-site 
enterprises. 

[4] United States Strategic Command, Fiscal Year 2009 Commercial 
Satellite Communications Usage Report (June 9, 2011). 

[5] Airborne intelligence, surveillance, and reconnaissance systems 
include manned and unmanned airborne systems, and play a critical role 
in supporting current and future military operations and national 
security missions by collecting, processing, and disseminating data. 

[6] Pub. L. No. 106-180, 114 Stat. 48 (2000). 

[7] Mobile satellite service satellites may also operate in 
geostationary orbit. Unlike fixed satellite service satellites, which 
communicate primarily with ground stations located at fixed points, 
mobile satellite service satellites are primarily used to communicate 
with mobile devices. 

[8] A transponder aboard a communications satellite receives the 
uplink signal sent from the ground, shifts its frequency to the 
downlink frequency, amplifies it, and transmits it to the ground. 

[9] This signal degradation is referred to as "rain fade." Higher 
frequency signals are more likely to be susceptible to these effects. 

[10] Hybrid satellites are designed to operate in more than one 
frequency band, for example, both C-and Ku-band transponders on one 
satellite. 

[11] A corporate enterprise network is a communications backbone that 
connects all of a company's networks, such as its computer systems, at 
all of its locations. 

[12] Satellite television is also referred to as Direct-to-Home 
television, which provides television service directly to the home. In 
the United States, DirecTV and DISH Network own and operate their own 
direct broadcast satellites to provide this service to customers. 

[13] Whereas C-band satellites usually cover large areas of the 
earth's surface with one beam, such as the continental United States, 
Ka-band satellites have spot beams that may be sized to cover only a 
metropolitan area. 

[14] The FCSA program will also replace the existing Inmarsat mobile 
satellite services contract; Inmarsat is a mobile satellite services 
operator. The departments within DOD also procure fixed satellite 
services through various other contracts. However, DSTS-G is the 
primary contract through which DOD procures its bandwidth capacity. 

[15] The FCSA program created two new Schedule Item Numbers under the 
GSA Schedule 70 Multiple Awards Schedule for transponded capacity and 
subscription services. The transponded capacity category is for 
dedicated satellite bandwidth in any commercially available frequency 
band, and the subscription services category is for turnkey, pre- 
engineered subscription-based solutions. FCSA also developed two 
multiple award Indefinite Delivery/Indefinite Quantity solicitations 
for end-to-end satellite communication solutions. 

[16] The ORBIT Act also provided a U.S. regulatory framework for the 
privatization of Inmarsat, a mobile satellite services operator. 

[17] See, GAO, Telecommunications: Market Developments in the Global 
Satellite Services Industry and the Implementation of the ORBIT Act, 
[hyperlink, http://www.gao.gov/products/GAO-05-550T] (Washington, 
D.C.: Apr. 14, 2005). 

[18] 47 U.S.C. § 765e. 

[19] 47 U.S.C. § 703. 

[20] Futron, 2010 Futron Forecast of Global Satellite Services Demand, 
Executive Summary (Bethesda, Md: 2010). All Futron data cited in this 
report are from this source unless otherwise noted. 

[21] The fleet utilization rates for the four major satellite 
operators as of their March 2011 financial reports were Eutelsat, 91 
percent; Intelsat, 78 percent; SES, 80 percent; and Telesat, 83 
percent. Futron released its 2010 demand forecast report that 
estimated a 79 percent capacity utilization for 2011 for all fixed 
satellite fleets worldwide in November 2010. 

[22] FCC, Second Annual Report and Analysis of Competitive Market 
Conditions with Respect to Domestic and International Satellite 
Communications Services (Washington, D.C.: October 2008). 

[23] Satellite Industry Association, State of the Satellite Industry 
Report, June 2011. 

[24] FCC, Second Annual Report, 2008. 

[25] This forecast is Futron's baseline or most likely demand 
scenario. We did not have access to Futron's low-and high-demand 
scenarios. A TPE is a traditional industry metric that defines the 
total capacity on a satellite in terms of transponders with a 
bandwidth of 36 megahertz. 

[26] Strategies to meet anticipated demand have long lead times (e.g., 
the time from design to launch is anywhere from 7 to 15 years) and 
might not be responsive to an immediate, unanticipated surge in demand. 

[27] Federal Aviation Administration, 2011 Commercial Space 
Transportation Forecast (Washington, D.C.: May 2011). 

[28] We have reported that planned DOD military satellite programs 
experiencing cost growth have either been delayed or discontinued. 
See, for example, GAO, Space Acquisitions: DOD Faces Substantial 
Challenges in Developing New Space Systems, [hyperlink, 
http://www.gao.gov/products/GAO-09-705T] (Washington, D.C.: May 20, 
2009). DOD officials told us that there are not enough current and 
projected DOD-owned satellites to meet demand and therefore DOD will 
have to lease more capacity from commercial satellites. 

[29] In addition to Intelsat and SES, Telesat and Eutelsat provide 
some limited fixed satellite services to the United States. 

[30] Before it was privatized in 2001, INTELSAT competed with domestic 
satellite operators to provide fixed satellite capacity for services 
to and from the United States. 

[31] Intelsat and SES also have subsidiaries to serve other customer 
groups, such as media companies. 

[32] The acquisition of these subsidiaries enabled Intelsat and SES, 
which are predominantly European-owned, to compete for classified U.S. 
government business for fixed satellite services. Although the 
subsidiaries are owned and controlled by non-U.S. parent corporations, 
they have separate boards and functions from the parent companies. 
Intelsat and SES entered into proxy agreements, as required by the 
U.S. government, to protect against foreign ownership, control, and 
influence. 

[33] DOD department are required to acquire satellite service through 
DISA, and DSTS-G was DISA's primary contract vehicle. However, DOD 
departments could procure satellite services directly from the U.S. 
subsidiaries of satellite operators through other contracts outside of 
DSTS-G. In addition, the U.S. subsidiaries of satellite operators were 
eligible to compete for non-DOD government contracts under GSA's 
SATCOM-II contract. 

[34] A task order establishes the deliverables and costs and includes 
a base period--for example, 1 year--and perhaps one or more option 
periods. 

[35] For example, see GAO, CapRock Government Solutions, Inc.; ARTEL, 
Inc.; Segovia, Inc., B-402490 (Washington, D.C.: May 11, 2010). 

[36] FCC, In the Matter of Constellation, LLC, Carlyle PanAmSat I, 
LLC, Carlyle PanAmSat II, LLC, PEP PAS, LLC, and PEOP PAS, LLC , 
Transferors and Intelsat Holdings, Ltd., Transferee, Consolidated 
Application for Authority to Transfer Control of PanAmSat License 
Corp. and PanAmSat H-2 Licensee Corp., FCC-06-85 (June 19, 2006). 
According to FCC, mergers and acquisitions can eliminate a market 
participant and, at the same time, create a more competitive post-
merger firm if the depth and breadth of its services are greater than 
before the merger. 

[37] FCC's rules for protection from frequency interference are based 
on fixed satellite service satellites operating in geostationary orbit 
at separations of no more than 2 degrees. 47 C.F.R. § 25.140(b)(2). 

[38] ITU Radio Regulation No. 11.44. In addition, ITU requires 
administrations to pay a cost-recovery fee in order to process 
filings, which vary based on the complexity and size of the filing. 

[39] ITU Radio Regulation No. 9.5D. 

[40] ITU Radio Regulation No. 9.1. 

[41] ITU Radio Regulation No. 11.44. 

[42] ITU Resolution 49, Section 2.47. 

[43] ITU Radio Regulation No. 11.49. 

[44] ITU Radio Regulation No. 11.41. A new satellite network can be 
provisionally recorded in the master register prior to completing all 
coordination requirements and receive a definitive recording, if 
during a period of 4 months, both the newcomer and the existing 
satellite network have been in operation without any complaints of 
harmful interference. According to ITU, this provision is intended to 
facilitate the entry of a newcomer even if another administration was 
first in line for a particular orbital location. 

[45] A satellite in inclined orbit is typically one that is near the 
end of its useful life and does not have enough fuel to maintain its 
position over the equator in the north-south direction. Consequently, 
the satellite oscillates in an orbit inclined above and below the 
equatorial plane. Such satellites have limited operational 
capabilities because they typically require the use of specialized 
ground stations. 

[46] ITU has undertaken these actions in accordance with ITU Radio 
Regulation No. 13.6. 

[47] Suppressed filings are removed from the master register. 

[48] World Radiocommunication Conferences are held every 3 to 4 years 
to review and, if necessary, revise the Radio Regulations governing 
the use of the radio-frequency spectrum. The revisions are based on 
the agenda developed by ITU, which take into account recommendations 
made in previous conferences. 

[49] Comments of the Satellite Industry Association to the U.S. Trade 
Representative for its 2010 1377 Review of Telecommunications Trade 
Agreements. 

[50] In total, 527 task orders were awarded on the DSTS-G contract 
from 2001 through March 2011. However, we eliminated task orders that 
had no bandwidth costs and three outliers identified for which 
information was not available. 

[51] Our estimates of the change in cost were not statistically 
significant for fiscal years 2001, 2002, and 2011 compared with fiscal 
year 2010; while our results indicated that the cost per MHz was lower 
in fiscal years 2001 and 2002, and higher in fiscal year 2011, than in 
fiscal year 2010, these results were not statistically significant at 
the 5 percent confidence level. 

[52] United States Strategic Command, Fiscal Year 2009 Commercial 
Satellite Communications Usage Report, 2011. For its report, 
USSTRATCOM calculates the cost of fixed satellite services on a TPE 
basis, where a TPE is equal to one 36-megahertz transponder for a 
duration of 1 year. USSTRATCOM also reported that the average TPE cost 
for all active task orders, which includes task orders awarded in and 
prior to a fiscal year, increased from $1.1 million in fiscal year 
2005 to $1.7 million in fiscal year 2009. 

[53] Two of the major broadcast companies we interviewed said that 
consolidation had not affected the price for fixed satellite service. 

[54] DISA officials said that according to their analysis, when 
measured on a cost per MHz per day basis, task orders with a longer 
duration have lower costs than shorter duration task orders. In other 
words, shorter duration task orders have a higher cost per day than 
longer duration task orders. 

[55] The regions included in our analysis were Asia, Europe, North 
America, Middle East, Middle East-Africa, Europe-Middle East-Africa, 
Atlantic Ocean, Pacific Ocean, and Multi-regions (combinations of two 
or more of the above regions). 

[56] 47 U.S.C. §§ 703, 765e. 

[57] We limited our analysis to DOD's costs to acquire fixed satellite 
services because of limitations on the availability of data. 

[58] There were a total of 527 DSTS-G task orders awarded from 2001 
through March 2011. However, we eliminated task orders from our 
analysis that had no bandwidth costs, as well as three task orders 
that we considered outliers and for which information was not 
available. We limited our analysis to bandwidth costs because we 
wanted to assess satellite-related costs as opposed to costs for 
terrestrial services. In addition, bandwidth costs generally account 
for about 80 percent of overall task order costs. 

[59] See, Commercial Satellite Communications Service Spend Analysis 
and Strategy Report in Response to Section 818 of Public Law 109-163 - 
the National Defense Authorization Act for Fiscal Year 2006 (June 7, 
2006); Pub. L. No. 109-163 § 818, 119 Stat. 3136, 3384 (2006); DOD, 
Investment and Acquisition Strategy for Commercial Satellite 
Capabilities Report in Response to Section 912 of Public Law 110-417 - 
the National Defense Authorization Act for Fiscal Year 2009 (June 3, 
2010), Pub. L. No. 110-417, § 912, 122 Stat. 4356, 4571 (2008); and 
United States Strategic Command, Fiscal Year 2009 Commercial Satellite 
Communications Usage Report (June 9, 2011). 

[60] To ensure the accuracy and completeness of the data, the annual 
usage database is validated annually using historical data collected 
in reports for the past years and the results are reviewed by the 
United States Strategic Command and DOD departments that acquired 
commercial satellite communications services for the year. 

[61] United States Strategic Command, Fiscal Year 2009 Commercial 
Satellite Communications Usage Report, 2011. USSTRATCOM also reported 
that the average TPE cost for all active task orders, which includes 
task orders awarded in and prior to a fiscal year, increased from $1.1 
million in fiscal year 2005 to $1.7 million in fiscal year 2009. 

[62] A task order establishes the deliverables and costs and includes 
a base period--for example, 1 year--and perhaps one or more option 
periods. 

[63] The coefficients for fiscal year 2001 and 2002 are consistent 
with lower costs than fiscal year 2010, and the coefficient for fiscal 
year 2011 is consistent with higher costs than fiscal year 2010, 
further illustrating the upward trend in costs. However, these 
coefficients are not statistically significant. 

[64] DISA officials said that according to their analysis, when 
measured on a cost per MHz per day basis, task orders with a longer 
duration have lower costs than shorter duration task orders. In other 
words, shorter duration task orders have a higher cost per day than 
longer duration task orders. 

[End of section] 

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