Long distance telephone services

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Business Failures

Many companies have built successful businesses sending television programs, computer data, long-distance phone calls, and other information around the world via satellite. Satellites are able to send information to people across an entire continent and around the world. Orbiting high above Earth, a satellite can simultaneously send the same information to a vast number of users within its coverage area. In addition, satellites are not affected by geography or topography and can transmit information beyond the reach of ground-based antennas. This characteristic, in particular, attracted entrepreneurs eager to make a profit by using satellites to provide telephone service for people who live or work in remote locations or in developing nations that have underdeveloped terrestrial communications systems.

Failures in the Satellite Telephone Industry

But while some satellite systems have proven successful by offering advantages not matched by ground-based systems, the satellite telephone business has had a more difficult time. This difficulty is in part because cellular telephone companies greatly expanded their reach while the satellite systems were being built. Cellular systems use ground-based antennas, and it is generally much less expensive to use a cellular phone than to place a call with a satellite phone.

Two satellite telephone companies were forced into bankruptcy in mid-1999 because of limitations in their business plans, and because the communications business evolved while the companies were still in development. One of the companies, Iridium LLC, began service in 1998. The firm, however, could not attract enough customers to pay back the $5 billion it had borrowed to place sixty-six satellites in orbit to provide a global satellite phone system that would work anywhere on Earth. In late 2000, the newly formed Iridium Satellite LLC purchased the Iridium satellite system and associated ground systems for $25 million, a fraction of its original cost. Iridium Satellite soon began selling Iridium phone service at much lower prices than those of its predecessor.

Another satellite phone company, ICO Global Communications Ltd., had to reorganize and accept new owners, who bought the company at a large discount. ICO found it difficult to raise money from lenders after the failure of Iridium. ICO evolved into New ICO and developed a new, more diversified business plan that was not limited to satellite phone service. As of early 2002, New ICO had not yet started commercial service.

A third satellite phone venture, Globalstar LP, also ran into financial difficulty shortly after beginning commercial operations in 2000, and the company filed for bankruptcy protection in February 2002. Two other firms, Constellation Communications Inc. and Ellipso Inc., were unable to raise enough money to build their planned satellite phone systems.

The Reasons for the Difficulties

Iridium, ICO, and Globalstar ran into trouble because of the high cost of building a satellite system compared to the relatively low cost of expanded multicontinent cellular service, which relies on less expensive ground-based antennas. Satellites are expensive to build, and a complete satellite system can take years to complete. In addition, rockets can cost tens of millions of dollars to launch and they sometimes fail, requiring companies to buy insurance in case a rocket fails and destroys the spacecraft it was supposed to take into orbit.

These costs helped make satellite telephone systems much more expensive to use than cellular systems, while at the same time cellular networks were rapidly expanding the amount of territory for which they provided coverage. The cost difference, combined with the rapid growth of cellular networks, helped reduce the size of the potential market for satellite phone service during the very time that systems such as Iridium's were being developed.

In addition, satellite telephones are bigger and costlier to buy than cellular phones, and they must have an unobstructed view of the sky in order to work. Cellular phones, by contrast, work even indoors. These disadvantages further hurt the satellite phone industry.

Not all satellite phone companies have been unsuccessful. One, Inmarsat Ltd., has run a strong business providing mobile voice and data services for more than twenty years. But Inmarsat uses just a few satellites in geostationary orbit to serve most of the world, whereas Iridium, ICO, and Global-star designed their systems around relatively large fleets of spacecraft located much closer to Earth. Such low-or medium-Earth orbit systems are intended to reduce the satellite delay associated with geostationary satellites, but they are also more costly and complex to build and operate.

The Related Failures of Launch Vehicle Makers

In addition to costing investors billions of dollars, the satellite phone industry's difficulties also deflated the hopes of several companies hoping to build a new series of launch vehicles designed to carry satellites into space. For example, Iridium and Globalstar each have several dozen satellites in their systems, and the expectation that the companies would have to replenish those spacecraft after several years helped inspire several firms to propose reusable rocket systems to launch new satellites.

The satellite phone systems in service in the early twenty-first century were launched using conventional rockets, which carry their payloads into space and then are discarded. Reusable rockets are intended to save money by returning to Earth after transporting a load into orbit and embarking on additional missions. But uncertainty about the satellite phone industry's future hurt the prospects of companies such as Rotary Rocket Co., Kistler Aerospace Corp., and Kelly Space & Technology Inc., which had looked to the satellite phone industry as a key source of business. Short of funds from investors, these firms have yet to develop an operational launch vehicle.

see also Communications Satellite Industry (volume 1); Financial Markets, Impacts on (volume 1); Insurance (volume 1); Launch Vehicles, Reusable (volume 1); Reusable Launch Vehicles (volume 4).

Samuel Silverstein


Gordon, Gary D., and Walter L. Morgan. Principles of Communications Satellites. New York: John Wiley & Sons, 1993.

Richharia, Madhavendr. Mobile Satellite Communications: Principles and Trends. Boston:Addison Wesley, 2001.

Internet Resources

NASA Experimental Communication Satellites.<http://roland.lerc.nasa.gov/~dglover/sat/satcom2.html>.

Satellite Communications. <http://ctd.grc.nasa.gov/rleonard/regcontents.html>.

Whalen, David J. "Communications Satellites: Making the Global Village Possible."NASA Headquarters. <http://www.hq.nasa.gov/office/pao/History/satcomhistory.html>.

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TELECOMMUNICATIONS ACT of 1996 represented a bipartisan effort to overhaul the nation's telecommunications laws. It encouraged deployment of new telecommunications technologies and promoted competition among providers of local telephone service, between local and long distance telephone companies, and among providers of cable and broadcast television programming. The act in large part replaced the Communications Act of 1934, which was enacted at a time when technology was less mature and telephone and broadcast telecommunications were largely compartmentalized.

The Telecommunications Act significantly restructured local and national telephone markets. Local phone service had long been considered a natural monopoly. States typically awarded an exclusive franchise in each local area to a specific carrier, which would own and operate the infrastructure of local telephone service. By the early 1990s, however, technological advances made competition among local carriers seem possible, and the act ended the regime of state-sanctioned monopolies. The act prohibited states from enforcing laws impeding competition and imposed on existing local carriers a number of obligations intended to encourage competition. The most prominent of these duties was the requirement that such carriers share their networks with potential competitors. In exchange for opening local markets to competition, the act removed restrictions that prevented local carriers from providing long distance telephone service. By removing limitations on competition in both the local and long distance markets, the act made it possible for telephone companies to offer integrated long distance and local telephone service to the public.

The act also made significant changes to the regulation of cable and broadcast television in order to encourage competition. One of the more important changes was the authorization of telephone companies to provide cable television services. The act also eliminated the regulation of cable television rates, except for basic broadcast service, and liberalized prior restrictions on "over-the-air" television broadcasters that limited the number of broadcast stations that any one entity could own.

In addition to its provisions encouraging competition, the act contained controversial rules regarding obscenity, indecency, and violence on cable and broadcast television and on the Internet. It pressured television networks to establish a rating system for their programs, and required manufacturers of television sets to install "V-chips," circuitry that would allow viewers to block violent or sexual programming. The act also required cable television operators that provide channels dedicated to sexually oriented programming either to completely scramble the channel or to limit the channel's programming to nighttime hours. In 2000, the Supreme Court struck down this latter provision in United States v. Playboy Entertainment Group, saying that the provision regulated speech protected by the First Amendment and that the provision was not the least restrictive means of protecting children from inadvertently viewing offensive programming.

The most contentious of the act's provisions sought to protect minors from "indecent" communications on the Internet through the use of criminal penalties for people sending such communications or for providers of Internet service that knowingly facilitated such communications. This part of the act was controversial in part because it regulated not only obscene communications, which do not receive constitutional protection under the First Amendment, but also those that were "patently offensive as measured by contemporary standards." The Supreme Court struck down this provision within a year after it was passed. In the 1996 case of Reno v. American Civil Liberties Union, the Court explained that the regulation of nonobscene communication was a content-based restriction of speech and that such a restriction merited careful scrutiny. The Court, troubled by the possible "chilling effect" the provisions would have on free speech, held that the provisions were too broad, vague, and undefined to survive constitutional challenge.


Huber, Peter W., Michael K. Kellogg, and John Thorne. The Telecommunications Act of 1996:Special Report. Boston: Little, Brown, 1996.

Krattenmaker, Thomas G. "The Telecommunications Act of 1996." Connecticut Law Review 29 (1996): 123–174.

Wiley, Richard E., and R. Clark Wadlow, eds. The Telecommunications Act of 1996. New York: Practising Law Institute, 1996.


See alsoCensorship, Press and Artistic .

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BABY BELLS. In response to efforts by the U.S. Department of Justice to split up the company, American Telephone and Telegraph (AT&T) signed a consent decree in 1984 divesting itself of seven regional telecommunications companies. These companies included Bell Atlantic, Bell South, NYNEX, Pacific Telesis, Southwestern Bell, Ameritech, and U.S. West, collectively known as the Baby Bells. The Baby Bells were restricted from offering long distance services, and were required to offer customers equal access to all long distance providers. Passage of the Telecommunications Act of 1996 removed these impediments. Now any company can offer local or long distance service. The breakup of AT&T is credited with reducing long-distance phone rates and fostering more competition on the local level. For the Baby Bells, the transition to long distance carriers was relatively smooth. They managed to provide relatively inexpensive service and maintain both a trained work force and a loyal customer base. Despite the inroads they made into the long distance market, estimated to yield $68 billion in annual profits, the Baby Bells encountered difficulties in the closing years of the 1990s. Through various acquisitions and mergers, four new Baby Bells emerged. Qwest was formed in 1999 by a merger of U.S. West and Qwest Communications. Verizon was formed when Bell Atlantic (which had previously merged with GTE) merged with NYNEX in 1999, a $21 billion merger, the second largest in U.S. history; this merger created the nation's second largest telecommunications company, behind only AT&T itself. SBC Communications was formed from a merger between SBC and Ameritech in 2000. This left Bell South Communications as the only original Baby Bell. Although the Baby Bells operate in a regulated industry, matters were complicated by complaints of price gouging, poor service, and refusal to work with smaller local and long distance companies. The companies have frequently resorted to lawsuits to protect their interests. An analysis of local Bell phone markets published in U.S. News during 1996 showed the consumer-complaint rate had climbed 20 percent since 1991 and reached a five-year high in 1995. Officials in a number of states are responding to the service problems by hitting local phone companies with fines and penalties. At one point, the Baby Bells appeared ready to jump into the long distance and data businesses with little threat to their local residential markets. But competition for customers in local markets was so great, particularly as the Baby Bells found themselves contesting with AT&T and other broadband cable companies such as Comcast and Cox, that business suffered. During the fourth quarter of 2001, for example, the cable industry added nearly 923,000 broadband subscribers, nearly twice as many as the 540,000 customers who opted for the Bells' comparable high-speed digital subscriber line (DSL) Internet service. In addition, the Baby Bells also faced increasing competition from cable companies that now offer local telephone services. Finally, they must come to terms with the problem of wireless communications that are eroding traditional local phone service. According to a study published in 2002, approximately 3 percent of Americans have already disconnected their traditional phone service and rely entirely on cellular phones. The study predicted the use of wireless phones would nearly double by 2005. By contrast, the study forecasts that traditional wireline minutes will drop by 22 percent. The Baby Bells have tried to meet the challenge by forming their own wireless companies such as Verizon Wireless, a joint venture of Verizon and the European mobile phone company Vodafone, and Cingular, which is a partnership between SBC and Bell South.


Elstrom, Peter. "Will the Baby Bells Crack Too?" Business Week (June 18, 2001), p. 112–114.

Kushnick, Bruce A. The Unauthorized Biography of the Baby Bells & Info-Scandal. New York: New Networks Institute, 1998.

Stone, Alan. Wrong Number: The Breakup of AT&T. New York: Basic Books, 1989.

Meg GreeneMalvasi

See alsoAT&T ; Government Regulation of Business ; Telecommunications ; Telecommunications Act .

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