In a policy shift that will affect the global commercial-launch market, the U.S.-Russian joint venture that sells the Russian Proton and U.S. Atlas rockets will no longer compete to launch satellites weighing less than 4,500 kilograms. Company officials said the change is necessary because the lower end of the market offers insufficient return on investment.

International Launch Services (ILS) will thus abandon a 10-year policy of seeking to maximize its market share and instead focus on a smaller, but more profitable segment of the launch services business, ILS President Mark Albrecht said.

“There was a potential advantage in the past [in gaining market share] that is no longer there,” Albrecht said in a July 6 interview. “In this congested market, you need to find where your sweet spot is. Ours is launching satellites weighing between 4,500 and 6,500 kilograms to geostationary transfer orbit.”

ILS was formed in 1995 by Lockheed Martin Corp., which builds the Atlas rocket series, and Moscow’s Khrunichev State Research and Production Space Center, prime contractor for Russia’s heavy-lift Proton rocket.

As was expected when the company was formed, most of the ILS’ commercial contracts have been for Proton launches. When launch prices collapsed in the late 1990s, ILS was able to retain market share by offering Proton vehicles built in a ruble-based economy in which the cost of labor and some materials were far lower than in Europe, Japan or the United States.

The policy often permitted ILS to equal, and occasionally surpass, the number of contracts signed by Europe’s Arianespace in a given year despite the fact that Arianespace’s business model — launching two satellites at a time on Ariane 4 and Ariane 5 vehicles — in principle offered lower per-satellite launch prices. The low-cost Proton during this period was playing the role Lockheed and Khrunichev intended for it, but launch prices continued to sag with the crash of the telecommunications satellite market, which left a satellite industry with an oversupply of launchers.

Chicago-based Boeing, which had spent more than $1 billion developing its Delta 4 vehicle line for the U.S. government and global commercial markets, abandoned the commercial side because prices were too low.

Lockheed Martin also made clear that it would not be selling Atlas at prices that did not generate a return.

In the past two years, Russia’s economy has recovered somewhat with the rise in energy prices. Moscow is now one of the world’s most-expensive cities, and Proton’s once-formidable cost advantage has all but disappeared, Albrecht said.

“A lot of things happened at about the same time,” Albrecht said. “The Atlas owners made a decision to return Atlas 5 to profitability, and the U.S. government agreed to invest more money in the system. In Russia, a clear decision was made to support the space industry by the government, and in a period of several months Russian authorities arrived at the same conclusion as Lockheed Martin.”

Albrecht said the shift in strategy came at around the same time as a change in management at Khrunichev and a decision by Russian President Vladimir Putin to exercise tighter control over the space sector. But these moves only reinforced a decision that was in the pipeline, he said.

Commercial launch prices have been rising for the past two years, but it remains a business of low profit margins and relatively high fixed costs. For that reason, McLean, Va.-based ILS, which is 75 percent owned by Lockheed Martin, will probably not sign any more contracts like the one it signed in November to launch the 2,500-kilogram Thor 2R telecommunications satellite owned by Norway’s Telenor Satellite Broadcasting.

One industry official said recent satellite-launch competitions confirm a shift in ILS’s focus away from many of the smaller satellites.

ILS’s two main competitors have addressed the changes in the market in part by investing in smaller vehicles to launch satellites weighing 3,500 kilograms and less.

Sea Launch’s Land Launch version, operated from Russia’s Baikonur Cosmodrome in Kazakhstan, is preparing its inaugural launch in 2007. Arianespace, backed by the European Space Agency, is financing operations of Russia’s medium-lift Soyuz vehicle from Europe’s French Guiana spaceport starting in late 2008.

Both are selling launches for less than $50 million each, according to industry officials.

Albrecht dismissed both efforts as another version of the business model ILS is now rejecting.

“We currently have no plans to introduce a smaller vehicle,” Albrecht said. “The message from us to satellite owners, whose operating margins we all know about, is that if they do not permit launch-service providers to make an acceptable return on their investment, sooner or later there will be no launch vehicles in the market.”

An official with one satellite-fleet operator said satellite owners would pay rates dictated by the market, but could not be expected to pay rates agreed to by government customers in the United States and Europe.