DISNEY BUYS MURDOCH
A. Michael Noll
December 16, 2017
© Copyright 2017 AMN
Walt Disney is purchasing Murdoch’s entertainment empire for over $50 billion. Is this a great deal – or a huge challenge for the future of Disney?
The vision is a future in which video entertainment (and sports) is downloaded over the Internet directly from the source, bypassing the middle distributors, such as the cable TV company, the satellite company, or the phone company. This vision has been known as cable bypass. But it assumes an Internet that is “free.”
Disney, and its Bob Eger, should be frightened that the FCC just terminated “net-neutrality,” which means that the middle distributors can charge different Internet rates depending upon the source and the content.
Rubert Murdoch is known as a very shrewd businessman. The fact that he wants to sell his entertainment properties should be the cause of suspicion. If it looks like a good deal, it most likely is a good deal – for Murdoch.
Indeed, the Internet was not designed for the delivery of broadband video. The bandwidth (or data capacity) and need for instantaneous delivery, coupled with the one-way nature, of video is costly. One solution is to charge more, as now allowed by the elimination of net-neutrality. Another solution would be a network optimized for the technological demands of video – but that would require technological innovation. Unfortunately, the Bell Labs of the past that used to give us such innovation is no more, and the telephone companies, such as AT&T, simply are not innovative.
A. Michael Noll is Professor Emeritus of Communications at the Annenberg School for Communication and Journalism at the University of Southern California. He has written many articles and opinion pieces about the telecommunications industry and technology.
November 20th, 2017
November 20th, 2017
James H. Quello
A Biographical and Historical Note
Compiled by Lauren Lincoln-Chavez for the James Quello Archive
James Henry Quello (April 21,1914-January 24, 2010) was born in Larium, Michigan, a northern Italian copper mining colony. In the 1920’s, the Quello family relocated to Detroit, where Quello’s father opened a grocery store in Highland Park, later working for Ford Motor Company as a factory worker and foreman. In a neighborhood dominated by the Klu Klux Klan, James H. Quello experienced discrimination and racial violence due to his Italian-American heritage. He describes his early years as where he “start[ed] becoming a strong believer in self-defense in school and in life.” After prohibition was repealed, the Quello family returned to Larium, opening a thriving saloon across from the police station.
As a college student at Michigan State University, Quello served in the ROTC and pursued journalism with the intention of becoming a newspaperman. He worked multiple positions for MSU’s college newspaper, including columnist and editor, and served as a newscaster on WKAR; a 500-watt college radio station. He graduated with a Bachelors of Art from the College of Arts and Letters in 1935 and was awarded an honorary Doctor of Humanities degree in 1977 from Michigan State University. In 1975, he received an honorary Doctor of Public Service from Northern Michigan University.
A World War II hero, James H. Quello served as a Lieutenant and Lieutenant Colonel, earning several commendations for his service. He survived amphibious landings in Africa, Sicily, Italy, and France, and assault crossings on the Rhine and Danube in Germany. In addition to serving as Lieutenant of the infantry, Quello was paid to write articles for service papers. At the summons of Lieutenant Colonel Sandlin, he witnessed the horrors of the Dachau concentration camp before it was deemed off limits. At the end of the war, Quello was assigned to Camp Blanding, Florida, to train an infantry battalion in preparation for Japan.
In July 1945, James H. Quello began his position as Publicity Director for the Lone Ranger and Green Hornet at the WXYZ-AM Detroit station, where he became the personal liaison between Bing Crosby and the ABC radio network. After WXYZ-AM station was purchased by the ABC network Quello took a position as General Manager at WJR-AM, the dominant 50,000-watt clear channel station. Later, he was promoted to Vice President, where his broadcast executive leadership was distinguished by a doubling in WJR (FM)’s power, the implementation of affirmative action policies, and the placement of J.P. McCarthy in a key drive-time spot; where he was the highest rated morning man for 28 years. Under Quello’s leadership, WJR was awarded numerous awards and citations.
During his tenure, WJR implemented affirmative action policies; hiring the first black Disc Jockey, Bill Lane, in 1949. Quello was the architect of “complete range programming,” featuring minority and adult programming. WJR was the only station to feature a 16-piece orchestra and choir training program for high performing high school students, “Make Way for Youth.” Amongst the graduates were prominent black choral members Freda Payne and Ursula Walker. WJR served as the leader in coordinating with national news networks during Detroit’s 1967 rebellion, providing comprehensive local and national coverage. Quello also wrote articles for fourteen community newspapers, titled “Radiograms” by Jim Henry, and was a Detroit stringer for Variety magazine.
James H. Quello had extensive involvement in the Michigan Association of Broadcasting (MAB), where he served as president and government relations chairman. He was appointed by four different Mayors to serve as a member of the Detroit Housing and Urban Renewal Commission for a total of 21 years, where he advocated for open occupancy and low-cost housing for minorities. He also served as a trustee on the Michigan Veterans Trust Fund for 22 years, where he was appointed by four different Governors, and facilitated innovative initiatives. Quello’s broadcasting career provided a practical foundation for his career as an FCC Commissioner and Chairman (1993).
Federal Communications Commission
James H. Quello’s 24-year career as an FCC Commissioner, 1974-1998, was greatly influential, assisting the FCC in ushering in revolutionary technological changes during a global cultural shift in media and communications. His advocacy for communication and broadcasting policies brought new telecommunications options to the American public through the development of cable and satellite TV, high-definition digital broadcasts, and personal communications services. Quello’s regulatory philosophy was guided by a desire to create flexible policies to accommodate quickly changing technologies, as the world began to expand through economic and political initiatives into new territories, technologies, and cultures.
Known for the longest and shortest confirmation hearing, 8 days and 15 minutes, respectively, James H. Quello was first appointed as an FCC Commissioner in 1974 by President Richard Nixon on the recommendation of the Vice President, Gerald Ford, who built his political career representing Michigan in the House of Representatives until 1973. Despite Quello’s bipartisan support, his appointment was heavily contested by Ralph Nader, who viewed Quello as a pawn of the radio and broadcasting industry. Throughout his career as an FCC Commissioner, James H. Quello advocated for equal opportunity; minority ownership; affirmative action policies; free universal television; and deregulation; taking a strong position against sex and violence in television broadcasting, and financial interest and syndication rules. He heavily pursued the fining of shock-jock Howard Stern for anti-indecency rule violations.
Commissioner Quello was a champion for public broadcasting; committed to free over-the-air broadcasting, deregulation, and limiting violence in television broadcasting. He assisted with the modernization of broadcasting transmission systems, bringing HDTV into the modern age with minimal government oversight. A strong proponent of must-carry rules and retransmission consent, he believed these regulations would be beneficial for broadcasters and viewers. Commissioner Quello served as Chair of the TCAF committee, providing assistance to public broadcasting stations seeking financial stability. In the final year of his career as an FCC Commissioner, James H. Quello worked on the 1996 Communications Act, enabling cross-ownership between telecommunications companies; designed to foster marketplace competition, but which was followed by greater concentration of media ownership.
As a supporter of freedom of speech and First Amendment rights, Commissioner Quello supported the deregulation of commercial limitations in television broadcasting (1981). He adamantly argued against the imposition of three hours of educational programming in children’s television programming, contending that educational programming regulations would impose on First Amendment guarantees of freedom of speech, and quantitative regulations would be difficult to uphold in court. He later reversed his position in 1996, after outraged demands from congressmen and senators.
During his career as a Commissioner, the FCC initiated affirmative action policies utilizing rigorous standards of equal opportunity employment to increase minority hiring and ownership in broadcasting. Licensees were required to understand the community they served and make efforts to recruit employees represented in the community. In 1977, the Commission adopted affirmative action policies for the review guidelines for EEO license renewal, requiring an in-depth staff review for stations with six to ten full-time employees and no minority or female employees. In 1980, the Commission tightened the EEO review policy, increasing the standards for equal opportunity employment in the broadcasting industry; imposing sanctions on broadcast stations that did not provide opportunities to minorities.
James H. Quello was a consistent advocate for the review of ownership rules. He was the first FCC commissioner to demonstrate support for minority ownership, advocating for affirmative financing policies in commercial broadcasting station ownership. Commissioner Quello also pushed for distress sales to minorities at 75% of appraisal value versus license revocation and for tax certificates with tax breaks for minorities. Clear Channel Communications was the first network to sell a broadcasting station to minority owners, as they were forced to divest due to ownership limitations imposed by the FCC. Commissioner Quello supported improvements to UHF broadcasting to facilitate the development of local public broadcasting initiatives and minority ownership.
Personal Communication Services
Considered the “Father” of Personal Communication Services (PCS), Quello’s initiative helped spurr the development of the cellular industry. Quello served on a commission, which established the regulatory framework for PCS; developing the band plan and regulatory scheme for private land mobile devices. Quello’s staff advocated for a regulatory framework of the Low Earth Orbiting Satellites (LEOS), that made mobile communications globally feasible. Commissioner Quello ushered in a vision of global communication networks.
In 1993, James H. Quello was appointed Acting Chairman by President Bill Clinton, during which the FCC Commission implemented the Cable Act; imposing rate regulations on cable television broadcasting and lifting long-standing restrictions on television networks from entering the market for reruns and syndication. Congress granted the FCC auction authority, raising over $20 billion for the U.S treasury. Additionally, the FCC cleared the way for new wireless phone and two-way data services, expanding opportunities for personal communications services globally. His tenure as Acting Chairman was lauded as a period of transparency and collaboration.
Michigan State University
In 1998, James H. Quello assisted James Spaniolo, Dean of the College of Communication Arts and Sciences, in the development of the James H. and Mary B. Quello Center for Telecommunication Management and Law at Michigan State University, as a multi-disciplinary center within the Department of Media and Information. The Quello Center’s original mission was to support social research of changing communication technologies, industries, and consumer choices through rigorous interdisciplinary research initiatives, global professional opportunities to facilitate cross-disciplinary dialogues, participation in communication policy developments, and expertise and independent research for public and nonprofit institutions. This mission remains central to the Quello Center moving into the digital age. Quello played a major role in the development of the Quello Center, helping to generate over 200 gifts for the Center through a general endowment that has grown to $5 million by 2017. James H. Quello died on January 24, 2010, at the age of 95, in his home in Alexandria, Virginia.
Joelle Gehring, PhD, a biologist for the FCC, works with communications tower operators to minimize bird collisions with towers, which are so serious that they are posing risks to endangered migratory birds. Dr Gehring noted that current estimates are that “6.8 million birds … collide with U.S. and Canadian communication towers during migration.
Joelle described the development of her research aimed at identifying what features of communications towers are leading to so many birds colliding with and being killed by collisions with these towers. The title of her talk was ‘Reducing Avian Collisions with Communications Towers: From Research to Implementation’. Living in Michigan, and studying wildlife ecology at Purdue University, she latched onto the problem of bird deaths being caused by them colliding with the towers. Her study looked systematically at such factors as the weather, the location of towers in the surrounding landscape, the tower support system (guide wires), the heights of the towers, and the tower lighting systems. Height makes a difference with broadcast towers being among the tallest and projecting into the flight paths of migratory birds. But whether the towers had lights that were constantly on or blinking turned out to be a surprising and important finding. Simply by ensuring that towers switched to blinking, flashing lights, created a far more bird friendly lighting system – saving tens of thousands of birds over time.
Dr Gehring’s research is one of the best examples of a clear and insightful project having major policy implications. Hers is research with a clear and major impact on migratory birds.
This week, the Quello Center had the privilege of hosting Federal Communications Commission (FCC) Biologist, Dr. Joelle Gehring (event page) to discuss her work on reducing avian collisions with communications towers. Dr. Gehring’s work, which was recently profiled by NPR, presently involves collaborating with federal regulators such as the Federal Aviation Administration (FAA) and communication tower owners to adjust tower lighting in order to reduce migratory bird collisions.
Back of the envelope calculations suggest that the efforts of Dr. Gehring and her colleagues have the potential to reduce avian fatalities by 4-5 million per year in the U.S. and Canada alone. Moreover, as Dr. Gehring pointed out, the efforts that tower owners need to undertake are relatively minimal and result in reduced maintenance and energy costs. Dr. Gehring briefly outlines the steps that tower owners should undertake here (additional FCC guidance here) and a more complete set of guidelines is available from the FAA.
Dr. Gehring’s work reminded me of ongoing FCC developments concerning the broader topic of environmental compliance by tower owners, an issue dealt with by the FCC Wireless Telecommunications Bureau’s Competition & Infrastructure Policy Division (CIPD). In particular, as Bill Dutton, Mitch Shapiro and I discuss in our Wireless Regulatory Analysis (see Section 3.1), the FCC’s rules for environmental review ensure that licensees and registrants take appropriate measures to protect environmental and historic resources. In light of all the other major FCC related developments that are grabbing headlines (Susan Crawford tees up some of these here), one that may have been much less noticed is a soon to be released Notice of Proposed Rulemaking and Notice of Inquiry (NPRM and NOI) concerning the FCC’s environmental and historic review.
Specifically, the NPRM and NOI commence an FCC examination of the regulatory impediments to wireless network infrastructure investment and deployments in an effort to expedite wireless infrastructure deployment. Among the topics discussed by the NPRM are potential changes to the FCC’s approach to the National Environmental Policy Act (NEPA) and the National Historic Preservation Act (NHPA). Presently, a new tower construction requires, among other things, approval from state or local governing authorities as well as compliance with FCC rules implementing NEPA and NHPA.
NEPA compliance requires three different levels of analysis depending on the potential environmental impact. Actions which do not have a significant effect on the (human) environment do not require an environmental assessment or impact statement and are categorically excluded. For actions that are not categorically excluded, a document presenting the reasons why the action will not have a significant effect on the environment must be prepared. A detailed written statement is required when an action is determined to significantly affect the quality of the environment.
Naturally, wireless providers seeking to enhance service and expand throughout the U.S. have raised concerns that the FCC’s environmental and historic preservation review processes increase the costs of deployment and pose lengthy delays. Issues that have been raised include the need to compensate Tribal Nations claiming large geographic areas (including several full states) within their geographic areas of interest for review of submissions, the burdens of dual reviews by local authorities and State Historic Preservation Officers (SHPO), and the expense of environmental compliance in cases where minimal likelihood of harms are alleged by wireless providers.
The NPRM seeks to mitigate some of the issues, asking stakeholders to weigh in when and what kind of Tribal Nation compensation is justified, how to deal with delays that may result from SHPO review broadly, and whether or not to include categorical exclusions for small cells and distributed antenna systems (DAS) facilities. These actions may all be well intended, well-reasoned, and ultimately in the public interest, but what concerns me is how one sided the FCC’s NPRM reads at the moment. The NPRM elaborates on and in some instances quantifies the cost of NEPA and NHPA review, but little attention is devoted to attempting to qualify or quantify the potential benefits of these additional review processes, or alternatively the potential costs of NOT undergoing NEPA and NHPA review.
Having learned about this NPRM quite late in the game myself, I noticed that the FCC’s Electronic Comment Filing System contains comments from stakeholders on both sides, including wireless service providers and infrastructure owners on one side along with Native Tribes and parties concerned with historic and environmental preservation on the other (the relevant Docket Numbers are 17-79 and 15-180). However, having searched for the word “comment” throughout the NPRM, I observed that the FCC has only cited the former in the NPRM (e.g., see footnotes 72 citing Sprint and Verizon, footnote 73 citing the Competitive Carrier Association, Crown Castle, and Verizon, and so on). Is this an indication that the FCC has already made its decision regarding what to do and simply unveiling the NPRM to indicate that it has thought about the issue before making a ruling? I sincerely hope not, but I am concerned.
Thus, in light of the lack of press concerning this issue I urge the following: If you are worried about the impact that the expansion of wireless infrastructure has on the environment, please make your voice heard. If you have an opinion regarding the extent to which wireless infrastructure developers and/or regulators should consider historic preservation, please tell regulators why you think historic preservation is important. If you are an expert in either of these issues, please try to quantify your response to the FCC. I can’t stress enough the last part: the FCC needs to perform a cost benefit analysis, or stated differently, compare the costs of delays to broadband expansion to those of degradation of environmental preservation standards. If the FCC can place a dollar amount on both issues, it makes it far more likely that a socially and economically sensible decision could be reached.
Dr. Gehring’s own work, which was started over a decade ago during her time as a Conservation Scientist with Michigan State University, highlights the importance of reaching and listening to stakeholders on all sides of the debate. Through her teams’ relentless efforts, regulators were able to come up with environmentally friendly approaches that also reduced costs—a win-win. I hope that regulators can learn from Dr. Gehring’s accomplishments.
The Chief Economist of the Federal Communications Commission is a temporary position—with a term of a year or so of late—typically bestowed on economists with impressive credentials and experience related to media or telecommunications. Having worked at the FCC long enough to overlap with several chief economists, I noticed an interesting pattern. Many join the FCC full of hope—capable as they are—that they will reform the agency to better integrate “economic thinking” into regular policy decisions, but to quote a former colleague, “leave the agency with their sense of humor intact.”
I have heard many a former FCC economist rail against the lack of economic thinking at the FCC, with some former chief economists going very much on the record to do so (for instance, see here and here). Others (not necessarily affiliated with the FCC) have gone as far as to point out that much of what the FCC does or attempts to do is duplicative of the competition policies of the Department of Justice and Federal Trade Commission. These latter points are not a secret. The FCC publicly says so in every major transaction that it approves.
For example, in a transaction that I have had the pleasure to separately write about with one of the FCC’s former chief economists and a number of other colleagues, AT&T’s acquisition of former competitor Leap Wireless (see here and here), the FCC wrote (see ¶ 15):
Our competitive analysis, which forms an important part of the public interest evaluation, is informed by, but not limited to, traditional antitrust principles. The Commission and the Department of Justice (“DOJ”) each have independent authority to examine the competitive impacts of proposed communications mergers and transactions involving transfers of Commission licenses.
This standard language can be found in the “Standard of Review” section in any major FCC transaction order. The difference is that whereas the DOJ reviews telecom mergers pursuant to Section 7 of the Clayton Act, the FCC’s evaluation encompasses the “broad aims of the Communications Act.” From a competition analysis standpoint, a major difference is that if the DOJ wishes to stop a merger, “it must demonstrate to a court that the merger may substantially lessen competition or tend to create a monopoly.” In contrast, parties subject to FCC review have the burden of showing that the transaction, among other things, will enhance existing competition.
Such duplication and the alleged lack of economics at the FCC has led a number of individuals to suggest that the FCC should be restructured and some of its powers curtailed, particularly with respect to matters that are separately within the purview of the antitrust agencies. In particular, recently, a number of individuals in Donald Trump’s FCC transition team have written (read here) that Congress “should consider merging the FCC’s competition and consumer protection functions with those of the Federal Trade Commission, thus combining the FCC’s industry expertise and capabilities with the generic statutory authority of the FTC.”
I do not completely disagree—I would be remiss if I did not admit that the transition team makes a number of highly valid points in its comments on “Modernizing the Communications Act.” However, as Harold Feld, senior VP of Public Knowledge recently pointed out, efforts to restructure the FCC present a relatively “radical” undertaking and my main motivation in writing this post is to highlight Feld’s point by reminding readers of a recent court ruling.
In 2007—well before its acquisition of DIRECTV and its offer of unlimited data to customers who bundle its AT&T and DIRECT services—AT&T offered mobile wireless customers unlimited data plans. AT&T later phased out these plans except for customers who were “grandfathered”—those customers who signed up for an unlimited plan while it was available and never switched to an alternative option. In October 2011, perhaps worried about the implications of unlimited data in a data hungry world, AT&T reduced speeds for grandfathered customers on legacy plans whose monthly data usage surpassed a certain threshold—a practice that the FTC refers to as data throttling.
The FTC filed a complaint against AT&T under Section 5 of the FTC Act, alleging that customers who had been throttled by AT&T experienced drastically reduced service, but were not adequately informed of AT&T’s throttling program. As part of its complaint, the FTC claimed that AT&T’s actions violated the FTC Act and sought a permanent injunction on throttling and other equitable relief as deemed necessary by the Court.
Now here is where things get interesting: AT&T moved to dismiss on the basis that it is exempt as a “common carrier.” That is, AT&T claimed that the appropriate act that sets out jurisdiction over its actions is the Communications Act, and not the FTC Act. Moreover, AT&T’s position was that an entity with common carrier status cannot be regulated under the section that the FTC brought to this case (§ 45(a)), even when it is providing services other than common carriage services. This led one of my former colleagues to joke that this would mean that if AT&T were to buy General Motors, then it could use false advertising to sell cars and be exempt from FTC scrutiny.
The District Court for the Northern District of California happened to consider this matter after the FCC reclassified mobile data from a non-common carriage service to a common carriage service (in its Open Internet Order), but before the reclassification had gone into effect. The Court concluded that contrary to AT&T’s arguments, “the common carrier exception applies only where the entity has the status of common carrier and is actually engaging in common carrier activity.” Moreover, it denied AT&T’s motion because AT&T’s mobile data service was not regulated as common carrier activity by the FCC when the FTC suit was filed. However, in August 2016, this decision was reversed on appeal by the U.S. Court of Appeals for the Ninth Circuit (see here), which ruled that the common carrier exemption was “status based,” not “activity based,” as the lower court had determined.
Unfortunately, this decision leaves quite a regulatory void. To my knowledge, the FCC does not have a division of Common Carrier Consumer Protection (CCCP), and I doubt that any reasonable individual familiar with FCC practice would interpret the Open Internet Order as an attempted FCC power grab to attempt to duplicate or supplant FTC consumer protection authority. Indeed, the FCC articulated quite the reverse position by recently filing an Amicus Curiae Brief in support of the FTC’s October 2016 Petition to the Ninth Circuit to have the case reheard by the full court.
So what’s my point? Well first, the agencies are not intentionally attempting to step on each other’s toes. By and large, the FCC understands the role of the FTC and the DOJ and vice versa. Were AT&T to acquire General Motors, it is highly probable that given the state of regulation as it stands, employees at the FCC would find it preferable if the FTC continued to oversee General Motors’ advertising practices. A related stipulation applies to the FCC’s competition analysis. Whereas the analysis may be similar to that of the antitrust agencies, it is motivated at least in part by the FCC’s unique mission to establish or maintain universal service, which can lead to different decisions being made in the same case (for instance, whereas the DOJ did not challenge AT&T’s acquisition of Leap Wireless, the FCC imposed a number of conditions to safeguard against loss of service).
Of course, one could argue that confusion stemming from the above case might have been avoided had the FCC never had authority over common carriage in the first place. But if making that argument, one must be cognizant of the fact that although the FTC Act predates the Communications Act of 1934, prior to 1934, it was the Interstate Commerce Act, not the FTC Act, that lay out regulations for common carriers. In other words, legislative attempts to rewrite the Communications Act will necessitate changes in various other pieces of legislation in order to assure that there are no voids in crucial protections to competition and consumers. Thus, to bolster Harold Feld’s points: those wishing to restructure the FCC need to do so being fully aware of what the FCC actually does and doesn’t do, they must take heed of all the subtleties underlying the legislation that lays the groundwork for the various agencies, and they should be mindful of potential for interpretation and reinterpretation under the common law aspects of our legal system.
Following the 2016 U.S. Presidential election, in a letter to FCC Chairman Wheeler, Republicans urged the FCC to avoid “controversial items” during the presidential transition. Shortly thereafter, the Commission largely scrubbed its Nov. 17 agenda resulting in perhaps the shortest Open Commission Meeting in recent history. Start at 9:30 here for some stern words from Chairman Wheeler in response. Viewers are urged to pay particular attention to an important history and civics lesson from the Chairman in response to a question at 17:20 (though this should not indicate our agreement with everything that the Chairman says).
So what is the Commission to do prior to the transition? According to the Senate Committee on Commerce, Science, and Transportation, the FCC can “focus its energies” on “many consensus and administrative matters.” Presumably, this includes the FCC’s ongoing incentive auction, now set for its fourth round of bidding, and subject to its own controversies, with dissenting votes on major items released in 2014 (auction rules and policies regarding mobile spectrum) by Republican Commissioners concerned about FCC bidding restrictions and “market manipulation,” along with a statement by a Democratic Commissioner saying that FCC bidding restrictions did not go far enough.
The Incentive Auction
Initially described in the 2010 National Broadband Plan, the Incentive Auction is one of the ways in which the FCC is attempting to meet modern day demands for video and broadband services. The FCC describes the auction for a broad audience in some detail here and here. In short, the auction was intended to repurpose up to 126 megahertz of TV band spectrum, primarily in the 600 MHz band, for “flexible use” such as that relied on by mobile wireless providers to offer wireless broadband. The auction consists of two separate but interdependent auctions—a reverse auction used to determine the price at which broadcasters will voluntarily relinquish their spectrum usage rights and a forward auction used to determine the price companies are willing to pay for the flexible use wireless licenses.
What makes this auction particularly complicated is a “repackaging” process that connects the reverse and forward auction. The current licenses held by broadcast television stations are not necessarily suitable for the type of contiguous blocks of spectrum that are necessary to set up and expand regional or nationwide mobile wireless networks. As such, repackaging involves reorganizing and assigning channels to the remaining broadcast television stations—that remain operational post-auction—in order to clear spectrum for flexible use.
The economics and technical complexities underlying this auction are well described in a recent working paper entitled “Ownership Concentration and Strategic Supply Reduction,” by Ulrich Doraszelski, Katja Seim, Michael Sinkinson, and Peichun Wang (henceforth Doraszelski et al. 2016) now making its way through major economic conferences (Searle, AEA). As the authors point out with regard to the repackaging process (p. 6):
[It] is visually similar to defragmenting a hard drive on a personal computer. However, it is far more complex because many pairs of TV stations cannot be located on adjacent channels, even across markets, without causing unacceptable levels of interference. As a result, the repackaging process is global in nature in that it ties together all local media markets.
With regard to the reverse auction, Doraszelski et al. (2016) note that (p. 7):
[T]he auction uses a descending clock to determine the cost of acquiring a set of licenses that would allow the repacking process to meet the clearing target. There are many different feasible sets of licenses that could be surrendered to meet a particular clearing target given the complex interference patterns between stations; the reverse auction is intended to identify the low-cost set . . . if any remaining license can no longer be repacked, the price it sees is “frozen” and it is provisionally winning, in that the FCC will accept its bid to surrender its license.
The idea is that the FCC should minimize the total cost of licenses sold on the reverse auction while making sure that its nationwide clearing target is satisfied. As Doraszelski et al. (2016) note, the incentive auction has various desirable properties. Of particular note is strategy proofness (see Milgrom and Segal 2015), whereby it is (weakly) optimal for broadcast license owners to truthfully reveal each station’s value as a going concern in the event that TV licenses are separately owned.
Strategic Supply Reduction
However, the author’s main concern in their working paper is that in spite of strategy proofness, the auction rules do not prevent firms that own multiple broadcast TV licenses from potentially engaging in strategic supply reduction. As Doraszelski et al. (2016) show, this can lead to some fairly controversial consequences in the reverse auction that might compound any issues that could arise (e.g., decreased revenue) due to bidding restrictions in the forward auction. Specifically, the authors find that multi-license holders are able to earn large rents from a supply reduction strategy where they strategically withhold some of their licenses from the auction to drive up the closing price for the remaining licenses they own.
The incentive auction aside, strategic supply reduction is a fairly common phenomenon in standard economic models of competition. Consider for instance a typical model of differentiated product competition (or the Cournot model of homogenous product competition). In each of these frameworks, firms’ best response strategies lead them to set prices or quantities such that the quantity sold is below the “perfectly competitive” level and prices are above marginal cost—thus, firms individually find it optimal to keep quantity low to make themselves (and consequently, their competitors) better off than under perfect competition.
In the incentive auction, a multi-license holder that withdraws a license from the auction could similarly increase the price for the remaining broadcast TV licenses that it owns (as well as the price of other broadcast TV license owners). However, in contrast to the aforementioned economic models, in which firms effectively reduce supply by underproducing, a firm engaging in strategic supply reduction is left with a TV station that it might have otherwise sold in the auction. The firm is OK with this if the gain from raising the closing price for other stations exceeds the loss from continuing to own a TV station instead of selling it into the auction.
Consider the following highly stylized example of strategic supply reduction: There are two broadcasters, B1 and B2, in a market where the FCC needs to clear three stations (the reverse auction clearing target) and there are three different license “qualities,” A, B, and C, for which broadcasters have different reservation prices and holdings as follows:
|B1 Quantity||B2 Quantity||Reservation Price|
Suppose that the auctioneer does not distinguish between differences in licenses (this is a tremendous simplification relative to the real world). Consider a reverse descending clock auction in which the auctioneer lowers its price in decrements of $2 starting at $10 (so $10 at time 1, $8 at time 2, and so on until the auction ends), and ceases to lower its price as soon as it realizes that any additional licensee drop outs would not permit it to clear its desired number of stations (as would for instance happen when quality A and B licenses drop out). Suppose that a broadcaster playing “truthfully” that is indifferent between selling its quality license and dropping out remains in the auction (so that for instance, A quality licenses are not withdrawn until the price falls from $10 to $8).
In a reverse descending clock auction in which broadcasters play “naïve” strategies, each broadcaster would offer all of their licenses and drop some from consideration as the price decreases over time. However, there is another “strategic” option, in which B1 withholds a quality C license from the auction (B1 can do so by either overstating its reservation price for this license—say claiming that it is $10—or by not including it in the auction to begin with):
The results of the naïve bidding versus the strategic bidding auction are quite different. In the naïve bidding auction, the auctioneer can continue to lower its price down to $4 at which point B1 pulls out its B quality license and the auction is frozen (further drop outs would not permit the desired number of licenses to be cleared). Each broadcaster earns $4 for each quality C license with B1 earning a profit of 2×($4-$2)=$4.
Suppose instead that broadcaster B1 withheld one quality C license. Then the auction would stop at $8 (because there are only three licenses left as soon as A quality licenses are withdrawn). Each broadcaster now earns $8 per license sold, with B1 earning a profit of ($8-$6)+($8-$2)=$8. Moreover, B2 benefits from B1’s withholding, earning profit of $6 instead of $2, as in the naïve bidding case. The astute reader will notice that B1 could have done even better by withholding its B quality license instead! This is a result of our assumption that the auctioneer treats all cleared licenses equally, which is not true in the actual incentive auction. Finally, notice that even though B2 owns three licenses in this example, strategic withholding could not have helped it more than B1’s strategic withholding did unless it colluded with B1 (this entails B2 to withhold its quality A licenses and B1 to withhold both quality C licenses).
Evidence of Strategic Supply Reduction
Doraszelski et al. (2016) explain that certain types of geographic markets and broadcast licenses are more suitable for strategic supply reduction. They write:
First, ideal markets from a supply reduction perspective are [those] in which the FCC intends to acquire a positive number of broadcast licenses and that have relatively steep supply curves around the expected demand level. This maximizes the impact of withholding a license from the auction on the closing price . . . Second, suitable groups of licenses consist of sets of relatively low value licenses, some with higher broadcast volume to sell into the auction and some with lower broadcast volume to withhold.
What is perhaps disconcerting is the fact that Doraszelski et al. (2016) have found evidence indicating that certain private equity firms spent millions acquiring TV licenses primarily from failing or insolvent stations in distress, often covering the same market and in most instances on the peripheries of major markets along the U.S. coasts. Consistent with their model, the authors found that many of the stations acquired had high broadcast volume and low valuations.
Upon performing more in depth analysis that attempts to simulate the reverse auction using ownership data on the universe of broadcast TV stations together with FCC data files related to repacking—the rather interesting details of which we would encourage our audience to read— Doraszelski et al. (2016) conclude that strategic supply reduction is highly profitable. In particular, using fairly conservative tractability assumptions, the authors found that simulated total payouts increased from $17 billion under naïve bidding to $20.7 billion with strategic supply reduction, with much of that gain occurring in markets in which private equity firms were active.
Suppose that in our example above that the quality C stations held by broadcaster B1 were initially under the control of two separate entities, call these B3 and B4. Then, if B1, B2, B3, and B4 were to participate in the auction, strategic withholding on the part of B1 would no longer benefit it. However, B1 could make itself better off by purchasing one, or potentially both of the individual C quality licenses held by B3 and B4. Consider the scenario where B1 offers to buy B3’s license. B3 is willing to sell at $4 or more, the amount it will earn under naïve bidding in the auction and Bertrand style competition between B3 and B4 will keep B1 from offering more than that. With a single C quality license, B1 can proceed to withhold either its B or C quality license, raise the price to $8, and benefit both itself, and the other broadcasters who make a sale in the auction.
This result, whether realized by the FCC ex-ante or not, is problematic for several reasons. First, it raises the prospect that revenues raised in the forward auction will not be sufficient to meet payout requirements in the reverse auction. As is, this has already occurred three times, with the FCC having had lowered its clearance target to 84 megahertz from the initial 126 megahertz; though we caution that the FCC is currently not permitted to release data regarding the prices at which different broadcasters drop out of the auction, so we cannot verify whether final prices in earlier stages of the reverse auction were impacted by strategic supply reduction. Second, as is the case with standard oligopoly models, strategic supply reduction is beneficial for sellers, but not so for buyers or consumers.
Third, strategic supply reduction by private equity firms raises questions about the proper role and regulation of such firms. The existence of such firms is generally justified by their role in providing liquidity to asset markets. However, strategic supply reduction seems to contradict this role, particularly so if withheld stations are not put to good use—something Doraszelski et al. (2016) don’t deliberate on. Moreover, strategic supply reduction relies on what antitrust agencies often term as unilateral effects—that is, supply reduction is individually optimal and does not rely on explicit or tacit collusion. However, whereas antitrust laws are intended to deal with cases of monopolization and collusion, it does not seem to us that they can easily mitigate strategic supply reduction.
Doraszelski et al. (2016) propose a partial remedy that does not rely on the antitrust laws: require multi-license owners to withdraw licenses in order of broadcast volume from highest to lowest. Their simulations show that this leads to a substantial reduction in payouts from strategic bidding (and a glance at Example 1 suggests that it would be effective in preventing strategic supply reduction there as well). Although this suggestion has unfortunately come too late for the FCC’s Incentive Auction we hope (as surely do the authors) that it will inform future auctions abroad hoping to learn from the U.S. experience.
This post was written in collaboration with Emily Schaal, a student at The College of William and Mary who is pursuing work in mathematics and economics. Emily and I previously worked together at the Federal Communications Commission, where she provided invaluable assistance to a team of wireless economists.
The Quello Center is off and running in creating a digital archive of James H. Quello’s papers. Our archive team includes myself, having never created such an archive, plus Anne Marie Salter at the Center, Valeta Winsloff from Media and Information who supports our design work and blogging, Scout Calvert with the MSU Library, who is orchestrating this project, and Lauren E. Lincoln-Chavez, who has hands on experience in developing archives and special collections, and is based in Detroit.
The collection contains over 1,000 papers, including speeches, statements, letters, and remarks by James Quello during his long tenure as an FCC Commissioner. To this we will be adding our collection of photographs, and videos, as well as photos of his many awards and honors. This promises to be another of the many fun and rewarding projects of the Center.
The archive will be part of our WordPress blog and publicly accessible to anyone who might want a view of over two decades at the FCC through the words of one of its longest serving and most colorful commissioners. I read one of his papers from 1974 saying the he is willing to forgive journalists for getting things wrong at times (before there was a term ‘fake news’) in order to protect freedom of the press, and I imagine he would say the same thing about the users of social media today.
Generally, sifting through this collection is addictive as you follow the history of such issues as the fairness doctrine, cross-ownership rules, and more. I’ll keep you posted on our progress.
On June 14, 2016, the United States Court of Appeals for the District of Columbia (D.C. Circuit) upheld the FCC’s 2015 network neutrality regulations, soundly denying myriad legal challenges brought by the telecommunications industry (U.S. Telecomm. Ass’n v. FCC 2016). Thus, unless the Supreme Court says otherwise, Congress rewrites the rules, or INSERT TRENDING CELEBRITY NAME truly breaks the Internet, we can expect to receive our lawful content without concerns that it would be throttled or that the content provider paid a termination fee. How did we get here? As my colleague Kendall Koning, a telecommunications attorney and Ph.D. candidate at the Department of Media and Information at Michigan State and I lay out in this blog post outlining the history of net neutrality regulation, it has been a long road.
The most recent D.C. Circuit case represented the third time that FCC network neutrality rules had been before that court, the first two having been struck down on largely procedural grounds. The FCC’s 2015 Open Internet Order remedied these flaws by formally grounding the rules in Title II of the Telecommunications Act (47 U.S.C. § 201 et. sq. 2016) while simultaneously exercising a separate forbearance authority to exempt ISPs from some of the more restrictive rules left over from the PSTN era.
The U.S. Telecommunications Association (USTelecom), a trade group representing the nation’s broadband service providers along with various other petitioners, had challenged the FCC’s Order on a number of grounds. USTelecom’s central challenge echoed earlier arguments that ISPs don’t really offer telecommunications, i.e., the ability to communicate with third parties without ISPs altering form and content, but an integrated information service, where ISP servers exercise control over the form and content of information transmitted over the network. As explained below, this perspective was a historical artifact from the era of America Online and dial-up ISPs, but had been used successfully at the start of the broadband era. In a stinging rejection of ISP arguments, the D.C. Circuit not only found that the FCC’s reclassification of Internet access as telecommunications was reasonable and within the bounds of the FCC’s discretionary authority but offered a strong endorsement of this perspective (U.S. Telecomm. Ass’n v. FCC supra at 25-26):
That consumers focus on transmission to the exclusion of add-on applications is hardly controversial. Even the most limited examination of contemporary broadband usage reveals that consumers rely on the service primarily to access third-party content . . . Indeed, given the tremendous impact third-party internet content has had on our society, it would be hard to deny its dominance in the broadband experience. Over the past two decades, this content has transformed nearly every aspect of our lives, from profound actions like choosing a leader, building a career, and falling in love to more quotidian ones like hailing a cab and watching a movie. The same assuredly cannot be said for broadband providers’ own add-on applications.
At present, the FCC states that its current Open Internet rules “protect and maintain open, uninhibited access to legal online content without broadband Internet access providers being allowed to block, impair, or establish fast/slow lanes to lawful content.” In particular, the present rules make clear the following three conditions, each of which is subject to a reasonable network management stipulation (FCC 2015 ¶¶ 15-18):
These rules are, to a degree, a modern version of common carrier non-discrimination rules adapted for the Internet. 47 U.S.C. §201(b) requires that “all charges, practices, classifications, and regulations for . . . communication service shall be just and reasonable.” Whereas in the United States, these statutes date back to the Telecommunications Act of of 1934, common carrier rules more generally have quite a long history, with precursors going as far back as the Roman Empire (Noam 1994). One of the purposes of these rules is to protect consumers from what is frequently deemed unreasonable price discrimination: if a product or service is critically important, only available from a very small number of firms, and not subject to arbitrage, suppliers may be able to charge each consumer a price closer to that consumer’s willingness to pay, rather than a single market price.
Consumers of Internet services are not only individuals but also content providers, like ESPN, Facebook, Google, Netflix, and others, who rely on the Internet to reach their customers. As a general-purpose network platform, the Internet connects consumers and content providers via myriad competing broadband provider networks, none of which can reach every single consumer (FCC 2010 ¶ 24). The D.C. Circuit succinctly laid it out, writing (U.S. Telecomm. Ass’n v. FCC, supra at 9):
When an end user wishes to check last night’s baseball scores on ESPN.com, his computer sends a signal to his broadband provider, which in turn transmits it across the backbone to ESPN’s broadband provider, which transmits the signal to ESPN’s computer. Having received the signal, ESPN’s computer breaks the scores into packets of information which travel back across ESPN’s broadband provider network to the backbone and then across the end user’s broadband provider network to the end user, who will then know that the Nats won 5 to 3.
Thus, when individuals or entities at the “edge” of the Internet wish to connect to others outside their host ISP network, that ISP facilitates the connection by using its own peering and transit arrangements with other ISPs to move the content (data) from the point of origination to the point of termination.
One of the key issues in the the network neutrality debate was whether or not ISPs where traffic terminates should be allowed to offer these companies, for a fee, a way to prioritize their Internet traffic over the traffic of others when network capacity was insufficient to satisfy current demand. Many worried that structuring Internet pricing in this way would enable price discrimination among content providers (Choi, Jeon, and Kim 2015) and might have several undesirable side effects.
First, welfare might be diminished if prioritization results in a diminished diversity of content (Economides and Hermalin 2012). Second, because prioritization is only valuable when network demand is greater than its capacity, selling prioritization might create a perverse incentive to keep network capacity scarce (Choi and Kim 2010; Cheng, Bandyopadhyay, Guo 2011). Third, ISPs who offer cable services or are otherwise vertically integrated into content might use both of these features to disadvantage their competitors in the content markets. In light of the risk that ISPs pursue price discrimination to defend their vertically integrated content interests, network neutrality can be seen as an application of the essential facilities doctrine from antitrust law (Pitofsky, Patterson, and Hooks 2002) to the modern telecommunications industry.
In response, broadband ISPs have claimed that discriminatory treatment of certain traffic was necessary to mitigate congestion (FTC 2007; Lee and Wu 2009 broadly articulate this argument). ISPs also claim that regulation prohibiting discriminatory treatment of traffic would dissuade them from continued investment in reliable Internet service provision (e.g., FCC 2010 ¶ 40 and n. 128; FCC 2015 at ¶ 411 and n. 1198) and even the FCC noted that its 2015 net neutrality rules could reduce investment incentives (FCC 2015 at ¶ 410). Nevertheless, the FCC partially justified the implementation of net neutrality by noting that it believed that any potential investment-chilling effect of its regulation was likely to be short term and would dissipate over time as the marketplace internalized its decision. Moreover, the FCC claimed that prior time periods of robust ISP regulation coincided with upswings in broadband network investment (FCC 2015 at ¶ 414).
The Commission’s Open Internet rules are far from the first time that the telecommunications industry has faced similar issues. Half a century ago, AT&T refused to allow the use of cordless phones manufactured by third parties until it was forced to do so by a federal court (Carter v. AT&T, 250 F.Supp 188, N.D. Tex. 1966). The federal courts also needed to intervene before MCI was allowed to purchase local telephone service from AT&T to complete the last leg of long-distance telephone calls (MCI v. AT&T, 496 F.2d 214, 3rd Cir. 1974). AT&T’s refusal to provide local telephone service to it’s long-distance competitor was deemed an abuse of its monopoly in local telephone service to protect its monopoly in long-distance telephone service, and featured prominently in the breakup of AT&T in 1984 (U.S. v. AT&T, 522 F.Supp. 131, D.D.C. 1982). Subsequent vigorous competition in the long-distance market helped drive down prices significantly.
The rules developed for computer networks throughout the FCC’s decades long Computer Inquiries were also designed to ensure third party companies had non-discriminatory access to necessary network facilities, and to facilitate competition in the emerging online services market (Cannon 2003). For example, basic telecommunications services, like dedicated long-distance facilities, were required to be offered separately without being bundled with equipment or computer processing services. These services were the building blocks upon which the commercial Internet was built.
The rules that came out of the Computer Inquiries were codified by Congress in the Telecommunications Act of 1996, by classifying the Computer Inquiry’s basic services as telecommunications services under the 1996 Act, the Computer Inquiry’s enhanced services as information services under the 1996 Act, and subjecting only the former to the non-discrimination requirements of Title II (FCC 2015 at ¶¶ 63, 311-313; Cannon 2003; Koning 2015). In particular, 47 U.S.C. Title II stipulates that it is unlawful for telecommunications carriers “to make or give any undue or unreasonable preference or advantage to any particular person, class of persons, or locality, or to subject any particular person, class of persons, or locality to any undue or unreasonable prejudice or disadvantage (47 U.S.C. § 202(a) 2016).”
Internet access specifically was first considered in terms of this classification in 1998. Alaska Sen. Ted Stevens and others wanted dial-up ISPs to pay fees into the Universal Service Fund, which subsidized services for poor and rural areas. The FCC ruled that ISPs were information services because they “alter the format of information through computer processing applications such as protocol conversion” (FCC 1998 ¶ 33). However, to understand this classification, it is important to keep in mind that ISP services at this time were provided using dial-up modems as the PSTN. In other words, in 1998 the Internet was an “overlay” network—one that uses a different network as the underlying connections between network points (see, e.g., Clark et al. 2006). If consumers’ connections to their ISPs were made using dial-up telephone connections, then USF fees for the underlying telecommunications network were already being paid through consumers’ telephone bills.
In this context, applying USF fees to both ISPs and the underlying network would have effectively been double taxation. Additionally, the service dial-up ISPs provided could reasonably be described as converting an analog telecommunications signal (from a modem) on one network (the PSTN) to a digital packet switched one (the Internet), which is precisely the sort of protocol conversion that had been treated as an enhanced service under the Computer Inquiry rules. The same reasoning does not apply to broadband Internet access service, because it provides access to a digital packet switched network directly rather than through a separate underlying network service (Koning 2015). However, the FCC continued to apply this classification to broadband ISPs, effectively removing broadband services from regulation under Title II.
Modern policy concerns over these issues reappeared in the early 2000s when the competitive dial-up ISP market was being replaced with the broadband duopoly of Cable and DSL providers. The concern was that if ISPs had market power, they might deviate from the end-to-end openness and design principles that characterized the early Internet (Lemley and Lessig 2001). Early efforts focused on preserving competition in the ISP market by fighting to keep last-mile infrastructure available to third-party ISPs as had been the case in the dial-up era. However, difficult experiences with implementing the unbundling regime of the 1996 Act, differing regulatory regimes for DSL and Cable (local loops for DSL had been subjected to the unbundling provisions of the 1996 Act, but Cable networks were not; an analysis of the consequences of doing this can be found in Hazlett and Caliskan 2008), and the existence of at least duopoly competition between these two incumbents discouraged the FCC from taking that path (FCC 2002, 2005b). Third-party ISPs tried to argue that Cable modem connections were themselves a telecommunications service and therefore should be subject to the common-carrier provisions of Title II. The FCC disagreed, pointing to its classification of Internet access as an information service under the 1996 Act. This classification was ultimately upheld by the Supreme Court in NCTA v. Brand X (545 U.S. 967, 2005).
Unable to rely on the structural protection of a robustly competitive ISP market, the FCC shifted its focus towards the possibility of enforcing an Internet non-discrimination regime through regulation. During this time period, the meaning and ramifications of “net neutrality,” a term coined in 2003 (Wu 2003), became the subject of vigorous academic debate. Under the computer inquiries, non-discrimination rules had applied to the underlying network infrastructure, but it was also possible for non-discrimination rules to apply to Internet service itself, just as they had been to other packet-switched networks (X.25 and Frame Relay) in the past (Koning 2015). However, there was extensive debate over the specific formulation and likely effects of any such rules, particularly among legal scholars (e.g., Cherry 2006, Sidak 2006, Sandvig 2007, Zittrain 2008, Lee and Wu 2009). Although to that point, there had been no rulemaking proceeding specifically addressing non-discrimination on the Internet, a number of major ISPs had agreed to forego such discrimination in exchange for FCC merger approval (FCC 2015 ¶ 65) and there was still a general expectation that ISPs would not engage in egregious blocking behavior. In one early case, the Commission fined an ISP for blocking a competitor’s VoIP telephone service (FCC 2005a). In 2008, the FCC also ruled against Comcast’s blocking of peer-to-peer applications (FCC 2008). However, the Comcast order was later reversed by the D.C. Circuit (Comcast v. FCC, 600 F.3d 642, D.C. Cir. 2010).
In response to this legal challenge, the FCC initiated formal rulemaking proceedings to codify its network neutrality rules. In 2010, the FCC released its initial Open Internet Order, which applied the FCC’s Section 706 authority under the Communications Act to address net neutrality directly (FCC 2010 ¶¶ 117-123). Among other things, the 2010 Open Internet Order adopted the following rule (FCC 2010 ¶ 68):
A person engaged in the provision of fixed broadband Internet service, insofar as such person is so engaged, shall not unreasonably discriminate in transmitting lawful network traffic over a consumer’s broadband Internet access service. Reasonable network management shall not constitute unreasonable discrimination.
However, these rules were struck down by the D.C. Circuit in January 2014 (Verizon v. FCC, 740 F.3d 623, D.C. Cir. 2014). The root of the problem was that the Commission had continued to classify broadband Internet access as an “information service” under the 1996 Act, where its authority was severely limited. As the court wrote: “[w]e think it obvious that the Commission would violate the Communications Act were it to regulate broadband providers as common carriers. Given the Commission’s still-binding decision to classify broadband providers not as providers of ‘telecommunications services’ but instead as providers of ‘information services,’  such treatment would run afoul of section [47 U.S.C §]153(51): ‘A telecommunications carrier shall be treated as a common carrier under this [Act] only to the extent that it is engaged in providing telecommunications services (Verizon v. FCC, supra at 650).’”
The FCC went back to the drawing board and issued its most recent Open Internet Order in 2015. This time, the Commission grounded its rules in a reclassification of Internet access service as a Title II telecommunications service. Moreover, unlike in the 2010 Order, which only subjected mobile broadband providers to a transparency and no blocking requirement (FCC 2010 ¶¶ 97-103), the Commission applied the same rules to providers of fixed and mobile broadband in the 2015 Order (FCC 2015 ¶ 14).
In contrast to information services, telecommunications services are subject to Title II common carrier non-discrimination provisions of the Act (FCC 2005b at ¶ 108 and n. 336). As discussed above, these statutes expressly address the non-discrimination issues central to the network neutrality issue. The reclassification permitted the Commission to exercise its Section 706 authority to implement the non-discrimination rules codified in Title II (FCC 2015 ¶¶ 306-309, 363, 365, 434). On June 14, 2016, the D.C. Circuit upheld the FCC’s Open Internet rules as based on this and other statutes from Title II, 47 U.S.C. § 201 et. sq.
Although the Commission’s long evolving Open Internet rules appear to have found a solid legal grounding, it is important to understand that they are not without limits. For instance, crucially, the rules stipulate what ISPs can and cannot do at termination, whereas they do not restrict the terms of interconnection and peering agreements with ISP networks (FCC 2015, ¶ 30). Critically, in contrast to what HBO’s John Oliver might conclude from the FCC’s recent court victory, the Order does not prevent ISPs such as Comcast from requiring payment for interconnection to their networks; it merely subjects interconnection to the general rule under Title II that the prices charged must be reasonable and non-discriminatory. Rather than making any prospective regulations on interconnection itself, the FCC’s 2015 Order leaves those issues open for future consideration on a case-by-case basis (FCC 2015, ¶ 203).
Additionally, academics are far from a consensus regarding the welfare implications of net neutrality. When handing out judgement, the D.C. Circuit was careful to point out that its ruling was limited by a determination of whether the FCC has acted “within the limits of Congress’s delegation” (U.S. Telecomm. Ass’n v. FCC, supra note 1 at 23) of authority, and not on the economic merits or lack thereof of the FCC’s Internet regulations. In contrast to some of the aforementioned theoretical economics articles, there are a number of theoretical studies that find the type of quality of service tiering that is ruled out by the 2015 Order is likely to result in higher broadband investment and increase diversity of content (Krämer and Wiewiorra 2012; Bourreau, Kourandi, Valletti 2015), or for that matter, that under certain circumstances, it may not matter at all (Gans 2015; Gans and Katz 2016; Greenstein, Peitz, and Valletti 2016). The empirical economic literature on net neutrality is at a very early stage and has thus far mostly focused on the consequences of other regulatory policies that might be likened to net neutrality regulation (Chang, Koski, and Majumdar 2003; Crandall, Ingraham, and Sidak 2004; Hausman and Sidak 2005; Hazlett and Caliskan 2008; Grajec and Röller 2012). To the extent that economists and other academicians reach some consensus on certain aspects of broadband regulation in the future, the FCC may be persuaded to update its rules.
Finally, the scope of the existing Open Internet rules remains under debate. For instance, public interest group, Public Knowledge, recently rekindled the debate regarding whether zero rating (alternatively referred to as sponsored data plans) policies that exempt certain content from broadband caps imposed by certain providers constitute a violation of Open Internet principles (see Public Knowledge 2016; Comcast 2016). Although the Commission has not ruled such policies out, in the 2015 Order, it left the door open to reassess them (FCC 2015, ¶¶ 151-153).
Signaling its concern about such policies, the FCC conditioned its recent approval of the merger between Charter Communications and Time Warner Cable on the parties consent not to impose data caps or usage-based pricing (FCC 2016 ¶ 457). Academic research on this topic remains scarce. Economides and Hermalin (2015) have suggested that in the presence of a sufficient number of content providers, ISPs able to set a binding cap will install more bandwidth than ones barred from doing so; to our knowledge, economists have not rigorously assessed zero rating and the FCC continues its inquiry into these policies.
 It should be noted that notwithstanding these claims, congestion control is already built into the TCP/IP protocol. Further, more advanced forms of congestion management have been developed for specific applications, such as buffering and adaptive quality for streaming video, that allow these applications to adapt to network congestion. Whereas real-time network QoS guarantees could be useful for certain applications (e.g., live teleconferencing), these applications represent a small share of overall Internet traffic.
 The categorizations embodied by the Computer Inquiries decisions initially stemmed from an attempt to create a legal and regulatory distinction between “pure communications” and “pure data processing,” the former of which was initially provisioned by an incumbent regulated monopoly (primarily AT&T), and the latter of which was viewed as largely competitive and needing little regulation. The culmination of these inquiries implicitly led to a layered model of regulation, dividing communication policy into (i) a physical network layer (to which common carrier regulation might apply), (ii) a logical network layer (to which open access issues might apply), (iii) an applications and services layer, and (iv) a content layer (Cannon 2003 pp. 194-5, Koning 2015 pp. 286-7).
 One 1999 study found a total of 6,006 ISPs in the U.S. See, e.g., Greenstein and Downes (1999) at 195-212.
 In particular, the Court wrote, “Nor do we inquire whether `some or many economists would disapprove of the [agency’s] approach’ because ‘we do not sit as a panel of referees on a professional economics journal, but as a panel of generalist judges obliged to defer to a reasonable judgement by an agency acting pursuant to congressionally delegated authority.”