The sky was the limit when Congress launched the Communications Satellite Corp. 22 years ago.
The Kennedy administration had proposed the quasi-governmental corporation to build a space network of satellites that would revolutionize communications around the world -- transmitting international telephone calls in seconds, allowing customers to wish distant relatives happy birthday by telegram, or bringing live television coverage to the remotest sections of the globe.
But today, after 20 years of monopoly over the access of U.S. companies to satellite service, Comsat's very existence may be threatened. Many federal regulators and industry analysts believe that new, affordable technologies and the free enterprise system may have rendered Comsat obsolete.
Comsat controls the U.S. end of the international satellite market through its involvement with Intelsat, the global communications consortium it helped create in the 1960s. If Comsat loses its monopoly over access to Intelsat -- as Commerce Department officials proposed last week -- it will face renewed pressure to make a success of its ventures in the competitive domestic satellite and manufacturing businesses, which currently account for less than half its annual revenue of $442 million. While Comsat is working to make its competitive businesses more profitable, critics say it has been less than successful in its efforts so far and some doubt it will be successful in the future.
Those in the higher echelons at Comsat disagree. Although Chairman of the Board and Chief Executive Officer Joseph Charyk and President Irving Goldstein concede that Comsat has had its problems, they say those days are behind them and that the company is on the verge of becoming more competitive.
"Comsat deserves enormous credit for what it did in being the major force behind the creation of Intelsat," said Henry Geller, director of the Washington Center for Public Policy Research. "You have to admire what it did on a political and technical basis."
Now, however, technological advancements and demand for new services have piqued entrepreneurial appetites for competition in the next frontier: space. And, at the same time, questions are being raised about whether Intelsat still needs Comsat's marketing skills and technical advice to sell its satellite services.
As the U.S signatory to Intelsat, Comsat manages the satellites in the Intelsat system -- making sure they are up-to-date and functioning correctly. While Intelsat operates much like an international wholesaler, Comsat functions as the only U.S. retailer, charging a mark-up to sell Intelsat services to U.S. common carriers that are authorized to provide global communications service. Comsat owns 23 percent of Intelsat.
"The international marketplace is evolving and U.S. government policy is trying to create a more competitive system," said Will Demory, a vice president at Gray & Co. and an expert in international communications who recently left the Federal Communications Commission. "The move away from monopoly policy affected American Telephone & Telegraph Co. and will affect Comsat -- it's a general trend in the U.S. system."
Entrepreneurs challenged U.S. policy a few years ago when they asked for FCC permission to launch private satellites to provide international services that would compete with Intelsat. In recent months, the White House approved limited competition with Intelsat, allowing other private satellites to carry private-line communications for businesses but not calls over the public telephone network.
Undersea fiber-optic cables scheduled to be in place by 1988 also will challenge Intelsat's dominance in the global communications market.
As more competition is introduced, Reagan administration officials say customers must have direct access to Intelsat -- bypassing Comsat and the mark-up it charges common carriers for the services it resells.
Last week, David J. Markey, assistant secretary for communications and information at the Commerce Department, asked the FCC to grant such access.
"We're not here to advance the cause of any one company, we're here to do the best job and get the best services we can for the consumer and the public," said a Reagan administration official who asked not to be identified. "Direct access to Intelsat may happen; that's the cheapest way to do business. It sounds hard on Comsat to say they've done their job, but to a certain extent, that's true."
Comsat insists Intelsat is not a marketing organization and needs a representative, like Comsat, in each country to coordinate Intelsat services for the companies that want them. "It is a profound misunderstanding of Intelsat" to say that Comsat is no longer needed, said Bob Allnutt, Comsat's vice president of government affairs.
"Intelsat is a cooperative that belongs to the people who invest in it; Intelsat would not be welcomed marketing its own services in any country," he said. Each of the 109 countries that make up Intelsat has an agency similar to Comsat.
But Comsat may not be able to survive without its monopoly, said David Leach, a senior policy advisor for the House Telecommunications subcommittee.
"Congress created a company that may not be able to exist in the marketplace, even after 22 years," Leach said. The company has been insulated from having to fight for its place in the market because of rules that guaranteed it common-carrier customers such as AT&T and minimum amounts of communications traffic, Leach said.
Because of government policies, Comsat has not had to be sensitive to the needs of the marketplace, say entrepreneurs who have left the company. This, they say, is why Comsat has not yet been a great success in its more ambitious, competitive lines of business.
According to Comsat's critics, the company provided products that were the equivalent of Maseratis -- technically superior but very costly -- in a market that could have made do with Chevettes.
"Comsat took the same approach as putting together Intelsat," said Herb Lustig, who worked in corporate development and new business ventures at Comsat from 1980 to 1982. "They were working as though they were doing a moonshot -- they were burning money. But building in costs makes you noncompetitive." Lustig is now director of business development at General Instrument, a New York-based company that is a major manufacturer of cable TV hardware and satellite video equipment.
The company insists that customers demand data and television services of the highest quality -- even if they cost more than services other competitors provide.
Nevertheless, Comsat sustained a net loss of about $100 million on Satellite Business Systems, a digital business communications company in which Comsat recently divested its one-third share. Comsat may also have lost the same amount in its aborted satellite-to-home television venture, Satellite Television Corp., according to sources close to the company. Two STC satellites costing $113 million still must be paid for.
Comsat must find ways to diversify successfully if it is to hold its own against its competitors in the future. "They face a very difficult time," Geller said. "They had a cash cow Intelsat they didn't have to market, and you can see the siege coming -- they've never marketed in their life."
The squeeze is on. If Comsat plans to keep its monopoly over Intelsat, it will have to continue to chop prices for those monopoly services, said Richard Colino, director general of Intelsat and a former Comsat employe who held a number of executive positions at Comsat.
"I believe Comsat will pass our charges on at minimal cost if that is what it takes to keep the business -- they'll have to make a profit on the rest of their business" in order to survive, Colino said.
The FCC also is chipping away at Comsat's monopoly. The agency has authorized another new international business service using Intelsat satellites. The FCC also has ended Comsat's monopoly over earth stations that transmit and receive satellite signals, leaving customers free to buy or lease space on cheaper stations. In exchange, Comsat has been allowed to venture into new territory as well.
Instead of being solely a reseller of Intelsat services, Comsat now can solicit customers directly. A bank, for example, can negotiate services directly with Comsat instead of through a common carrier such as AT&T.
"It helps Comsat in being able to have a large niche in the market -- it can now go out and become an international MCI, GTE or AT&T if it wants to," said an FCC official who asked not to be identified.
Comsat, long reined in by the FCC, looks at these recent actions as putting it at the same starting gate that AT&T and other international carriers left in the dust long ago.
"It could have been a lot sooner," said Stephen Day, Comsat's vice president of corporate development in charge of strategic planning. "Comsat has fought to have that freedom one way or another. . . . It's tough to instantly become a viable competitive entity. There has to be some transition."
Looking at how to compete with international carriers is very high on Comsat's priority list, Day said. The company plans to provide international business services for multinational corporations and the federal government.
Comsat also will fight to keep its Intelsat monopoly, but strategically the company concedes that, in the long term, it may be hard for competitive and monopoly businesses to coexist.
"We can maintain the monopoly for a while, but in the long run the company must excel in an area where we choose to compete," Day said. In the past, making competitive moves has been difficult because competitors have raised fears that Comsat might cross-subsidize unregulated ventures with revenue from monopoly ventures, Day said. Such charges are absolutely false, he said.
"Every time we make a move into the competitive field, we have been thwarted," he said, by companies who file accusations against Comsat at the FCC.
Analysts predict that, despite its current problems, Comsat's growth in earnings will be strong in the short run, but not forever.
Comsat reported a slight, $1.1 million increase in 1984 earnings, to $51.2 million ($2.83 per share) on revenue of $442.3 million. By comparison, earnings in 1983 were $50.1 million ($2.77 per share) on revenue of $400 million.
"Their mainstream business as the U.S. signatory to Intelsat will be coming under attack in future years from new competitors," said Harry Edelson, managing partner of Edelson Technology Partners, a New Jersey venture capital firm. "What Comsat will have to do is put some life into their new businesses, namely manufacturing and domestic communications."
On the domestic side of the business, Day said Comsat will "rapidly and profitably expand participation in video and data satellite networks." The company hopes to win more contracts similar to recent deals for a programming distribution network with NBC and for a telecommunications network linking Holiday Inns. The two contracts together are worth $550 million. "We're not satisfied, we want to build on that," Day said.
The company plans to increase annual revenue from its line of telecommunications equipment products from $55 million in 1984 to $300 million by 1989. It also will concentrate on marketing to long-distance telephone companies, Day said, and on manufacturing back-yard satellite dishes.
Perhaps most fundamentally, the company is learning how to be sensitive to customer and market needs. "It takes a while to change your colors -- but we have to do that and marketing is absolutely critical," Day said. The company is also bringing in marketing experts.
Sources close to Comsat have long charged the company's very top management with indecisiveness in getting in and out of businesses. But observors add that 1984 was a year of major change at the company.
"1984 really was a watershed year," said a source very close to Comsat's board. "It was a year for clearing the decks. Now, the fascinating challenge that Comsat faces is making the transition from a monopoly to a free-market business," the source said. "You will see a more aggressive approach to the competitive businesses."
In some instances Comsat will be competing with its own "children," former employes who have gone on to form their own companies. These former officials do not appear to be fearful of the new competition from their old employer, arguing that Comsat has a history of being too late with its entry into new businesses.
For example, an industry official said, in the '70s Comsat passed up manufacturing satellites and other telecommunications equipment, leaving that business to companies such as Ford Aerospace and RCA. Likewise, it chose not to push to become a common carrier like AT&T, the official said. Instead, Comsat launched a domestic satellite system for AT&T, giving up its chance at launching its own systems because of FCC concerns that Comsat would wield too much power in the new market.
The company also passed up opportunities to acquire Scientific Atlanta and the Farinon Division of Harris Corp., the official said. The two companies have become major manufacturers of increasingly popular back-yard satellite dishes.
"We have missed opportunities in the past, there is no doubt about that," Day said. "But so have IBM and other major corporations." Some ventures -- such as launching domestic satellite systems for companies other than AT&T -- were blocked by the FCC, Day said.
Manufacturing satellites on a large scale was not feasible in the 1960s because there was no market for commercial satellites, Day said. Companies such as Ford Aerospace were producing satellites for the military and already had too much of a head start.
But now, Day said, "We will become a successful competitive organization and it will be focused. Joseph Charyk [chairman of the board and CEO] and Irving Goldstein [president] are at the center of it."