Satellites--On the Rise or Rest in Peace?

Since the early 1970s, two technologies have competed to carry telecom traffic--satellites and cable. (By cable, I mean a wire--what today is called fiber optic cable--not cable television.) Let's look at the history of these technologies, their regulation, and their relative positions today.

Before creation of the global satellite system (INTELSAT) and U.S. coverage "domsats," telecom traffic was distributed via copper wire. Large strands of wire for long-distance routes, a pair of wires into each home (the red and green ones--the yellow and black are either unused or for a second line). But, by the mid-1970s cable and satellite fought for the same traffic--long distance voice, data and video.

For some time, the pace of technological improvement ensured that no single technology dominated. Any innovation resulting in greater efficiency in satellites was matched soon after by progress in cable transmission. In essence, the two technologies "leapfroged" each other for years and fought for each customer--exactly the outcome you'd expect in a competitive market.

Naturally, the government couldn't keep its hands off. Instead, the FCC developed a complex set of policies to "balance" the "loading" of traffic between satellite and cable. In other words, the FCC split the market, requiring that each U.S. international carrier put half its traffic on satellite, half on cable. If AT&T and Western Union tried this, it would be unlawful under the antitrust laws. But, the FCC assured all it was protecting the larger public interest. Whatever.

Anyway, this lasted until the early-mid 1980s when two thing changed. First, Ronald Reagan named a new FCC chairman, Mark Fowler, a free market conservative. Chairman Fowler opposed governmental intervention in private decisionmaking, and began to narrow balanced loading rules. By the end of the Reagan Administration, the FCC repealed the remaining requirements. Distribution of United States International Carrier Circuits Among Available Facilities During the Post-1988 Period, 3 FCC Rcd 2156 (1988).

Second, cable technology suddenly got much better--bigger, cheaper--with the change from electrons on copper wire to photons on fiber optics. (As an example, the last analog cable across the North Atlantic (TAT-7) could carry fewer than 4,000 simultaneous voice calls; the first North Atlantic fiber cable (TAT-8) could carry nearly 40,000.) This led to dramatic price reductions. By the early 90s, for some traffic, cable and satellite were no longer competitive--and cable kicked satellite's butt.

But not for everything. Today, virtually all voice calls and most data traffic transmit via fiber optics. (Remember the echo formerly on overseas calls? That was a satellite call. When was the last time you heard echo?) Nonetheless, satellites retain one crucial advantage: they have wide coverage. A trans-ocean cable extends between a few pre-established locations--for example Los Angeles, Hawaii, Guam, Japan, Korea, China for a trans-Pacific cable. That's great for transmissions with a single origin and a single end point, like a long-distance call. But what if you want to feed several locations simultaneously with same transmission? Such "point-to-multipoint" offerings still use satellite, because everywhere within the downlink "footprint" can receive the same signal without diminishing the signal available to anyone else.

In other words, satellites are great for broadcasting. That's why direct-to-home providers (DirecTV, EchoStar for television, XM and Sirius for radio) still use satellites. But those companies have their own, specially designed satellites, operating at different frequencies from conventional satellites. What of the pre-existing satellite networks that used to compete with cable?

Many of those companies are gone, the unlucky ones forfeiting their licenses when the money dried up. Others consolidated into larger organizations (something like 70 percent of "regular" global satellite capacity comes from just three firms: SES Astra (Luxembourg), Hughes/PanAmSat (Rupert Murdoch), and Intelsat (U.S./Bermuda/U.K.)). Those that remain face a declining demand plus huge overcapacity. Something's got to give.

And something will. Expect still more mergers and maybe bankruptcies. I'm not a stockmarket expert, but I don't see a long-term investment strategy involving non-broadcasting satellites. But as any economist knows, bankruptcy often signals a healthy market, because it suggests strong competitive pressures to reduce prices and increase service quality. In short, it's good for you and me.

What's the lessons? First, government regulation is justified only where the market demonstrably has failed. (If there had been, god forbid, a "Federal Personal Computer Commission," we'd all still be typing on an IBM "Peanut" because each successive innovator would have been required to prove that it's entry would not hurt existing manufacturers.) Second, competition, coupled with technological progress, actually will provide better, cheaper services for the public, just like in the textbooks!

Of course, individual businesses may fail along the way, creating some disruptions, including short-term unemployment, thus provoking Congressional consternation and calls for increased protectionism for American firms. These populist outcries must be resisted. Low prices and improved services are good--and when the government intervenes, they are imperiled. So tell Congress "hands off!" After all, Adam Smith never promised competitors a rose garden--just consumers.