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 After prohibition was repealed, the Quello family returned to Larium, opening a thriving saloon across from the police station.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.
June 29th, 2016
A. Michael Noll
June 29, 2016
© 2016 AMN
We have been told for decades that technology will reform education. I recall the filmstrip projector and the movie projector and their promise for education – they ended up in the closets of schools. And then along came educational television and distance learning over interactive closed-circuit video – known as tele-education. Today it is the Internet – e-learning and virtual universities.
All these technologies have a role and perhaps are useful – but not a one reformed education. They did offer more alternatives for some students – as did the Open University in England.
For some students who are able to study and learn on their own, educational technologies offer an alternative to the brick-and-mortar institutions. But so too did the postal service of the past and its use by correspondence schools. Textbooks offer personalized distance learning at the student’s pace, and many even have questions and lessons at the end of chapters.
In the end, a key factor is the motivation of the student. A motivated student can learn from a book – or a video – or an Internet course. But then there is the issue of grading and certification.
The Massive Open Online Course (MOOC) promises education to thousands of students and interaction with other students, and even professors. But how can a professor interact individually with thousands of students? Most professors have office hours and are not that easily available. The MOOC seems similar to UHF TV courses of years ago, except now over the Internet with a wider audience. Interactive TV of the past offered interaction, so even the interaction of the Internet is not new. However, the newer aspect of MOOC is the “Massive” audience that is possible through the Internet and World Wide Web.
In the end, the gold standard continues to be the classroom and the social interactions that occur at conventional institutions. But the tuition for this gold standard seems to have outpaced the inflation of gold bricks. It is not faculty pay that has increased that rapidly, but bureaucrats and administrators – and a reluctance by universities to use endowments to fund student scholarships and thus keep costs under control.
Great to visit with Professor Emeritus Steve Wildman today at the Quello Center. He came back to MSU for student dissertations and a viva, but colleagues and I were able to fill him in on recent developments.
We had an interesting discussion of set top box decisions by the FCC, which left me wondering if we are witnessing an electronic highway robbery?
Dear Colleagues and Friends of the Quello Center:
Since my last up-date, our Postdoctoral Researcher, Bianca C. Reisdorf, and Assistant Research Professor, Aleksandr Yankelevich, have come onboard. In collaboration with our Research Associates and Assistants, they have enabled us to move forward on new research proposals with some early success.
Developing Research Foci: Digital Inequalities and Net Neutrality
The mission of the James and Mary Quello Center is to conduct high-quality research that will stimulate and inform debate on media, communication, and information policy for our digital age. A wide range of policy issues have been identified for study, but two general areas have emerged from our early work, which focus on:
Our plan to develop a natural experiment to assess the impact of net neutrality rulings has drawn a number of faculty together across the campus in shaping some preliminary research, and proposals which we hope to submit in the coming months.
Two proposals have been accepted, and several others are submitted or underway to study digital divides and inequalities in Detroit, Michigan, and across the United States.
Researching Locally to Speak Globally
The Quello Center is moving ahead in focusing greater attention on new Internet and digital age policy issues with an even more multi-disciplinary set of researchers and strong additions to our remarkable Advisory Board. We address issues that arise from: problems such as risks to privacy and freedom of expression; innovations such as around the Internet of Things and wearables; policies such as net neutrality, price cap regulation of access services, and universal broadband; and contexts, such as issues in cities like Detroit, and in households. To do so, we draw from theoretical perspectives, such as the Fifth Estate, sociological and communication perspectives on information inequalities, work on the ecology of games as well as game theoretical economics; and from innovative empirical approaches, such as a novel design for a national broadband availability dataset.
Over this last year, the Center has found a number of local developments that present clear opportunities to pursue issues that are of nationwide and global concern. This has led us to anchor more of our research locally, such as in looking at digital divides in Michigan and Detroit, and in developing ideas for new research on the use of wireless spectrum for last mile access, and for experiments addressing digital inequalities and the future of public broadcasting. In these areas, we plan to work with the local public broadcasting station, WKAR, and faculty across the university. Together, we can realize the opportunities created by MSU choosing to forgo the FCC’s incentive auction of spectrum in favor of turning the station and its spectrum into an even greater resources for research, teaching, and service, such as through an MSU partnership announced with Detroit public broadcasting to create more educational programming.
Quello Center Seminars and Lectures at MSU, in Washington DC & Worldwide
The Center organizes and promotes an active stream of roundtables, seminars, and lectures to stimulate discussion of policy and regulatory issues. Recent lectures and events have focused on Internet policy and regulation, network neutrality, social media and reputation management, digital inequalities, and social accountability. In addition to holding events at the Center and in Washington DC, we have been speaking at a variety of other universities, conferences, and events organized by others. For example, Quello helps support the Telecommunication Policy Research Conference (TPRC), and the director has spoken recently in Canada, Argentina, Denmark, South Africa, Hong Kong, China, Japan, and Mexico.
A list of past and forthcoming events are available at: http://quello.msu.edu/events/ and videos of many of our events are available on Vimeo at: https://vimeo.com/quellocenter.
Selected Working Papers on Research, Policy and Practice
All of our research reports, working papers, and publications are listed on our Web site at: http://quello.msu.edu/publications/. A set of papers that illustrate the range of our work includes:
Bauer, J. M. and Dutton, W. H. (2015), ‘The New Cyber Security Agenda,’ for the World Bank Development Report. Available at SSRN: http://ssrn.com/abstract=2614545 or http://dx.doi.org/10.2139/ssrn.2614545
Dutton, W.H. and Graham, M. (2014), Society and the Internet (Oxford University Press).
Dutton, W. H. (2015), ‘Multistakeholder Governance?,’ for the World Bank Development Report. Available at SSRN: http://ssrn.com/abstract=2615596 or http://dx.doi.org/10.2139/ssrn.2615596
Reisdorf, B. C., & Groselj, D. (2015). ‘Internet (non-) Use Types and Motivational Access: Implications for Digital Inequalities Research,’ New Media & Society, Online First.
Reisdorf, B. C., & Jewkes, Y. (2016). ‘(B)Locked Sites: Cases of Internet Use in Three British Prisons,’ Information, Communication & Society, 1-16.
UNESCO (2015), Keystones to Foster Inclusive Knowledge Societies. Paris: UNESCO.
The English version is available at: http://unesdoc.unesco.org/images/0023/002325/232563E.pdf.
Yankelevich, A., & Vaughan, B. `Price-Match Announcements in a Consumer Search Duopoly.’ Forthcoming at Southern Economic Journal.
Access to the Work of the Quello Center
Over the past year, we have also made strides to providing numerous ways to keep in touch with the Quello Center’s work. In addition to this newsletter, we have a:
• Quello Center Blog
• Quello Facebook Page
• Twitter handle @QuelloCenter
• Working Paper Series on SSRN
• Videos of most of many of our lectures and seminars on Vimeo
Thank you again, and please keep in touch. Follow the work and ideas of the Quello Center on Twitter or Facebook, and write to the Center at Quello@msu.edu if you have any questions, suggestions, or wish to be added to our email list.
William Dutton, Director
Quello Professor of Media and Information Policy
Growing up, my parents, brother, and I usually avoided restaurants. For my parents, this was initially out of necessity; as Soviet refugees, they did not have the financial means to eat out. However, even having achieved a modicum of success, my parents are not generally in the habit of frequenting restaurants, having perhaps out of a lifetime habit, developed a taste for home cooking. Restaurants are exclusively for special occasions.
Thus, having never eaten at a Chipotle Mexican Grill, they were sufficiently impressed by the restaurant’s façade to wish to eat there, but only when the grand occasion merits such an extravagant excursion. Their two sons were informed as such. Naturally, my brother and I (perhaps spoiled as we are) jumped at the chance to poke fun at our parents for placing Chipotle on a pedestal. This is, after all, a restaurant chain that is victim to some serious defecation humor, not Eleven Madison Park.
For a number of months, my parents were subjected to text messages and Facebook or Instagram posts with visuals of me or my brother outside various Chipotle restaurants, posing next to Chipotle ads, and in one instance, wearing a Chipotle t-shirt (I have no idea how that shirt found its way into my wardrobe). My parents responded, saying things like (and I could not make this up), “I wish someone would take us to that dream place.”
However, recently, my mother sent a group text directing the family to a news report about dozens of confirmed E.Coli cases related to Chipotle (even the FDA got involved) and asking for alternative dining suggestions. The text responses, in order, were as follows:
Me: California Tortilla
My Wife: Taco Bell
My Brother: Sushi
My Mother: Eating In (with picture of latest home cooked meal)
My Brother’s Girlfriend: Bacon
How does a reasonable individual interpret this chain of responses? As an economist with some regulatory and antitrust experience, I found the answer obvious. I sent the following group text (modified for concision): “Has anyone noticed that this text conversation has turned into the classic antitrust debate about appropriate market definition, with each subsequent family member suggesting a broader market?”
Surprisingly, no one else had noticed, but I was asked to unpack my statement a little bit (my mom sent a text that read: “English please.”).
The U.S. Department of Justice and the Federal Trade Commission’s Horizontal Merger Guidelines stipulate that market definition serves two roles in identifying potential competitive concerns. First, market definition helps specify the line of commerce (product) and section of the country (geography) in which a competitive concern arises. Second, market definition allows the Agencies to identify market participants and measure market shares and concentration.
As the Agencies point out, market definition focuses solely on demand substitution factors, i.e., on customer’s ability and willingness to substitute away from one product to another in response to a price increase or a corresponding non-price change (in the case of Chipotle, an E.Coli outbreak might qualify as a reduction in quality). Customers generally face a range of potential substitutes, some closer than others. Defining a market broadly to include relatively distant substitutes can lead to misleading market shares. As such, the Agencies may seek to define markets to be sufficiently narrow as to capture the relative competitive significance between substitute products. For some precision with this regard, I refer the reader to Section 4.1.1 of the Guidelines.
As for the group texts above, the reader can now infer how market definition was broadened by each subsequent family member. To reiterate:
Me: California Tortilla (Mexican food in a similar quality dining establishment to Chipotle.)
My Wife: Taco Bell (Mexican . . . inspired . . . dining out, generally.)
My Brother: Sushi (Dining out, generally.)
My Mother: Eating In (Dining, generally.)
My Brother’s Girlfriend: Bacon (Eating.)
Why is market definition relevant to the Quello Center at Michigan State University? As the Center’s website suggests, the Center seeks to stimulate and inform debate on media, communication and information policy for our digital age. One area where market definition plays a role with this regard is within the Quello Center’s broad interest in research about digital inequality.
Digital inequality represents a social inequality with regard to access to or use of the Internet, or more broadly, information and communication technologies (ICTs). Digital inequalities can arise as a result of individualistic factors (income, age and other demographics) or contextual ones (competition where a particular consumer is most likely to rely on ICTs). Market definition is most readily observed in the latter.
For instance, consider the market for fixed broadband Internet. An immediate question that arises is the appropriate geographic market definition. If we rule out individuals’ ability to procure fixed broadband Internet at local hotspots (e.g., libraries, coffee shops) from the relevant market definition, then the relevant geographic market appears to be the home. This is unfortunately a major burden for researchers attempting to assess the state of fixed broadband competition and its potential impact on digital inequality because most market level data in use is at a much more aggregated level than the home. The problem is that when an aggregated market, say a zip code, contains multiple competitors, it is unclear how many of these competitors actually compete in the same home.
Thus far, most studies of fixed broadband competition have been hampered by the issue of geographic market definition. For instance, Xiao and Orazem (2011) extend Bresnahan and Reiss’s (1991, 1994) classic studies of entry and competition in the market for fixed broadband, albeit at the zip code level. Wallsten and Mallahan (2010) use tract level FCC Form 477 data to test the effects of competition on speeds, penetration, and prices. However, whereas there are approximately 42,000 zip codes and 73,000 census tracts in the United States, there are approximately 124 million households, which implies a fairly large amount of aggregation that can lead researchers to conclude that competition is stronger than it actually is.
Another question that arises is whether fixed broadband is too narrow a product market and if the appropriate market definition is simply broadband, which would include fixed as well as mobile broadband. Thus far, because of data limitations, most studies of wireline-wireless substitution have focused mainly on voice rather than on Internet use (e.g. Macher, Mayo, Ukhaneva, and Woroch, 2015; Thacker and Wilson, 2015) and so do not assess whether mobile has become a medium that can mitigate digital inequality. Prieger (2013) has made some headway into this issue by showing evidence that as late as 2010, mobile and fixed broadband were generally not complementary, and that mobile only broadband subscription was slightly more prevalent in rural areas. However, because of data limitations, Prieger does not estimate a demand system to determine whether fixed and mobile broadband are substitutes or complements as the voice substitution papers above do.
Luckily, NTIA’s State Broadband Initiative (SBI) and more recently, the FCC, have enhanced researchers’ ability to assess competition at a fairly granular level by providing fixed broadband coverage and speed data at the level of the census block. Similarly, new data on Internet usage from the U.S. Census should allow researchers to better tackle the wireline-wireless substitution issue as well. The FCC has also hopped on the speed test bandwagon by collaborating with SamKnows to measure both fixed and mobile broadband quality. In the former case, the FCC periodically releases the raw data and I am optimistic that at some point, mobile broadband quality data will be released as well (readers please correct me if I am glossing over some already publically available granular data on mobile broadband speed and other characteristics).
The Quello Center staff seeks to combine such data, along with other sources, to study broadband competition and its impact on digital inequality. We welcome your feedback and are presently on the lookout for potential collaborators interested in these issues.
I thought I’d write a short follow-up in response to the exchange of comments following my recent post on issues related to impacts of the FCC’s Open Internet order on ISP investment.
I very much appreciate the responses to my post, especially from Hal Singer and Mark Jamison, whose work was the target of my sometimes insufficiently respectful criticism. It helped me understand the substantive issues better and also reminded me that respectful dialog on important and controversial issues may not always be easy, but is certainly worth the effort…and that I’m still somewhat haltingly learning that lesson.
I especially appreciated the content and tone of Mark’s comment, including:
I won’t make the claim that my approach revealed reality and that yours did not. We have too little information for that. And even if we had sufficient data for a proper study, there would still be errors. That said, I would be glad to work with you and/or your colleagues on a study once sufficient data are available.
In my view this pretty well describes the aim of the Quello Center’s investigation of this policy issue: to gather as much useful data as we can and to apply to it a mix of the most useful modes of analysis to understand what’s going on and to refine the models we use to understand and predict policy outcomes. I hope to be part of that process, contributing my best skills and strengths, being humble enough to acknowledge their limits, and learning from others who have different expertise and perspectives.
Mark’s comment reminds me of the story about the blind men trying to describe the elephant, all of them describing it differently based on which part of the massive creature they were feeling with their hands. While I wouldn’t describe all of us focused on this issue as blind, I think it’s fair to say that we (and, as Mark notes, our methods) all suffer from some form of perceptual limitation. Some of us are nearsighted, others farsighted and perhaps others see clearly only with one eye…and occasionally we all may feel compelled to close our eyes to avoid seeing something that makes us very uncomfortable.
Though when it comes to policy research we may never be able to see and agree on “the truth,” my hope is that the Quello Center’s research team can be part of an effort to carefully study this and other policy “elephants” from as many angles as we can, and work together to understand their key dynamics, while at the same time remembering the value of respectful dialog, even when a voice inside our head might be telling us “that guy describing the elephant’s tail must be a fool or a scoundrel.”
In the past week or so I’ve seen several articles that remind me how important the Quello Center’s empirically-grounded study of net neutrality impacts is for clarifying what these impacts will be—especially since net neutrality is one of those policy topics where arguments are often driven by ideology and/or competing financial interests.
As far as I can tell, this series of articles began with an August 25 piece written by economist Hal Singer and published by Forbes under the following headline: Does The Tumble In Broadband Investment Spell Doom For The FCC’s Open Internet Order? Per his Forbes bio, Singer is a principal at Economists Incorporated, a senior fellow at the Progressive Policy Institute, and an adjunct professor at Georgetown University’s McDonough School of Business.
Singer’s piece was followed roughly a week later by two op-ed pieces published on the American Enterprise Institute’s web site. The title of the first AEI piece, authored by Mark Jamison, was Title II’s real-world impact on broadband investment. This was followed a day later by Bronwyn Howell’s commentary Title II is hurting investment. How will – and should – the FCC respond?
What struck me about this series of op-ed pieces published by economists and organizations whose theoretical models and policy preferences appear to favor unregulated market structures was that their claims that “Title II is hurting investment” were all empirically anchored in Singer’s references to declines in ISP capital spending during the first half of 2015. As a member of the Quello Center’s research team studying the impacts of net neutrality, I was intrigued, and eager to dig into the CapEx data and understand its significance.
While my digging has only begun, what I found reminded me how much the communication policy community needs the kind of fact-based, impartial and in-depth empirical analysis the Quello Center has embarked upon, and how risky it is to rely on the kind of ideologically-driven analysis that too often dominates public policy debates, especially on contentious issues like net neutrality.
My point here is not to argue that there are clear signs that Title II will increase ISP investment, but rather that claims by Singer and others that there are already signs that it is hurting investment are not only premature, but also based on an incomplete reading of evidence that can be uncovered by careful and unbiased review of publicly available information.
I hope to have more to say on this topic in future posts, but will make a few points here.
The crux of Singer’s argument is based on his observation that capital spending had declined fairly dramatically for a number of major ISPs during the first half of 2015, dragging down the entire sector’s spending for that period (though its not clear from the article, my sense is that Singer’s reference to “all” wireline ISPs refers to the industry’s larger players and says nothing about investment by smaller companies and the growing ranks of publicly and privately owned FTTH-based competitors). He then briefly reviews and dismisses potential alternative explanations for these declines, concluding that their only other logical cause is ISPs’ response to the FCC’s Open Internet Order (bolding is mine):
AT&T’s capital expenditure (capex) was down 29 percent in the first half of 2015 compared to the first half of 2014. Charter’s capex was down by the same percentage. Cablevision’s and Verizon’s capex were down ten and four percent, respectively. CenturyLink’s capex was down nine percent. (Update: The average decline across all wireline ISPs was 12 percent. Including wireless ISPs Sprint and T-Mobile in the sample reduces the average decline to eight percent.)..
This capital flight is remarkable considering there have been only two occasions in the history of the broadband industry when capex declined relative to the prior year: In 2001, after the dot.com meltdown, and in 2009, after the Great Recession. In every other year save 2015, broadband capex has climbed, as ISPs—like hamsters on a wheel—were forced to upgrade their networks to prevent customers from switching to rivals offering faster connections.
What changed in early 2015 besides the FCC’s Open Internet Order that can explain the ISP capex tumble? GDP grew in both the first and second quarters of 2015. Broadband capital intensity—defined as the ratio of ISP capex to revenues—decreased over the period, ruling out the possibility that falling revenues were to blame. Although cord cutting is on the rise, pay TV revenue is still growing, and the closest substitute to cable TV is broadband video. Absent compelling alternatives, the FCC’s Order is the best explanation for the capex meltdown.
I haven’t had a chance to carefully review the financial statements and related earnings material of all the companies cited by Singer, but did take a quick look at this material for AT&T and Charter since, as he notes, they experienced by far the largest percentage drop in spending. What I found doesn’t strike me as supporting his conclusion that the decline was network neutrality-driven. Instead, in both cases it seems to pretty clearly reflect the end of major investment projects by both companies and related industry trends that seem to have nothing to do with the FCC’s Open Internet order.
My perspective on this is based on statements made by company officials during their second quarter 2015 earnings calls, as well as capex-related data in their financial reporting.
During AT&T’s earnings call, a Wall Street analyst asked the following question: “[T]he $18 billion in CapEx this year implies a nice downtick in the U.S. spending, what’s driving that? Are you finding that you just don’t need to spend it or are you sort of pushing that out to next year?” In his response to the question, John Stephens, the company’s CFO, made no mention of network neutrality or FCC policy decisions. Instead he explained where the company was in terms of key wireless and wireline strategic network investment cycles (bolding is mine):
Well, I think a couple of things. And the simplest thing is to say [is that the] network team did a great job in getting the work done and we’ve got 300, nearly 310 million POPs with LTE right now. And we are putting our spectrum to use as opposed to building towers. And so that aspect of it is just a utilization of spectrum we own and capabilities we have that don’t require as much CapEx. Secondly, the 57 million IP broadband and what is now approximately 900,000 business customer locations passed with fiber. Once again, the network guys have done a great job in getting the Project VIP initiatives completed. And when they are done…the additional spend isn’t necessary, because the project has been concluded not for lack of anything, but for success.
Later on in the call, another analyst asked Stephens “[a]s you look out over the technology roadmap, like 5G coming down the pipeline, do you anticipate that we will see another period of elevated investment?”
While Stephens pointed to a potential future of moderated capital spending, he made no reference to network neutrality or FCC policy, focusing instead on the investment implications of the company’s (and the industry’s) evolution to software-defined networks.
I would tell you that’s kind of a longer term perspective. What we are seeing is our move to get this fiber deep into the network and getting LTE out deep into the wireless network and the solutions that we are finding in a software-defined network opportunity, we see a real opportunity to actually strive to bring investments, if you will, lower or more efficient from historical levels. Right now, I will tell you that this year’s investment is going to be in that $18 billion range, which is about 15%. We are certainly – we are not going to give any guidance with regard to next year or the year after. And we will give an update on this year’s guidance, if and when in our analyst conference if we get that opportunity. With that being said, I think there is a real opportunity with some of the activities are going on in software-defined networks on a longer term basis to actually bring that in capital intensity to a more modest level.
Charter’s large drop in capital spending appears to be driven by a similar “investment cycle” dynamic. During its 2Q15 earnings call, CFO Christopher Winfrey noted that Charter’s year-over-year decline in total CapEx “was driven by the completion of All-Digital during the fourth quarter of last year,” referring to the company’s migration of its channel lineup and other content to an all-digital format.
A review of the company’s earnings call and financial statements suggests that a large portion of the “All-Digital” capital spending was focused on deploying digital set-top boxes to Charter customers, resulting in a precipitous decline in the “customer premise equipment” (CPE) category of CapEx. According to Charter’s financial statements, first-half CPE-related CapEx fell by more than half, or $341 million, from $626 million to $285 million. Excluding this sharp falloff in CPE spending driven by the end of Charter’s All-Digital conversion, the remainder of the company’s capital spending was actually up 3% during the first half of 2015. And this included a 7% increase in spending on “line extensions,” which Charter defines as “network costs associated with entering new service areas.” It seems to me that, if Charter was concerned that the Commission’s Open Internet order would weaken its business model, it would be cutting rather than increasing its investment in expanding the geographic scope of its network.
To understand the significance of Charter’s spending decline, I think it’s important to note that its 29% decline in first half total CapEx was driven by a 54% decline in CPE spending, and that the company’s non-CPE investment—including line extensions—actually increased during that period. I found it odd that, even as he ignored this key dynamic for Charter, Singer seemed to dismiss the significance of Comcast’s CapEx increase during the same period by noting that it was “attributed to customer premises equipment to support [Comcast’s] X1 entertainment operating system and other cloud-based initiatives.”
I also couldn’t help notice that, in his oddly brief reference to the nation’s largest ISP, Singer ignored the fact that every category of Comcast’s capital spending increased by double-digits during the first half of 2015, including its investment in growth-focused network infrastructure, which expanded 24% from 2014 levels. Comcast’s total cable CapEx was up 18% for the first half of the year, while at Time Warner Cable, the nation’s second largest cable operator, it increased 16%.
While these increases may have nothing to do with FCC policy, they seem very difficult to reconcile with Singer’s strongly-assserted argument, especially when coupled with the above discussion of company-specific reasons for large CapEx declines for AT&T and Charter. As that discussion suggests, the reality behind aggregated industry numbers (especially when viewed through a short-term window of time) is often more complex and situation-specific than our economic models and ideologies would like it to be. This may make our research harder and messier to do at times, but certainly not less valuable. It also speaks to the value of longitudinal data collection and analysis, to better understand both short-term trends and those that only become clear over a longer term. That longitudinal component is central to the approach being taken by the Quello Center’s study of net neutrality impacts.
One last general point before closing out this post. I didn’t see any reference in Singer’s piece or the AEI-published follow-ups to spending by non-incumbent competitive providers, including municipally and privately owned fiber networks that are offering attractive combinations of speed and price in a growing number of markets around the country. While this category of spending may be far more difficult to measure than investments by large publicly-owned ISPs, it may be quite significant in relation to public policy, given its potential impact on available speeds, prices and competitive dynamics.
Expect to see more on this important topic and the Quello Center’s investigation of it in later posts, and please feel free to contribute to the discussion via comments on this and/or future posts.
Gary Reid and his colleagues at WKAR put together a wonderful video montage for a tribute to Professor Steve Wildman, Founding Director of the Quello Center, which was shown last week at a celebration of this career with other retiring faculty. It is short, entertaining and puts Steve’s career at MSU in the context of the Quello Center.
The Quello Center at MSU is seeking a highly motivated and outgoing individual to serve as an Office and Events Coordinator. In this role the successful applicant will work closely with the Director to coordinate all academic and outreach activities and events, such as seminars and lectures for the Quello Center. This includes day-to-day visits and reception, events at the Quello Center, and events and activities in other locations in the US and abroad. This person will receive visitors to the Center, assist the Director with his calendar and meetings, manage the offices on a day-to-day basis, support public outreach through print and online media, and work with the Director to support the planning, administration and conduct of all Center events, seminars and lectures. Working with members of the Center, such as visiting faculty and students, and administrative staff within the Department of Media and Information and College of Communication Arts and Sciences is essential. Other contributions to the overall functioning and outreach of the Center are expected.
Serve as general office support for the Quello Center;
Manage the Center’s offices on a day-to-day basis, under the supervision of the Department’s Fiscal Officer;
Support the Director in planning, organizing, promoting and holding all Center events, from meetings, seminars, and lectures to large conferences;
Support the Director and Outreach Officer in online and other outreach, such as posting events and news on the Quello Center blog (quello.msu.edu) and Twitter account, and organizing video recordings of selected events and interviews;
Work with the Director in organizing his calendar and meetings with faculty, students and visitors
Characteristic Duties and Responsibilities:
Receive visitors and staff on a day-to-day basis;
Maintain electronic and paper files for the Center;
-Maintain the Director’s calendar and support the efficient allocation of his time;
Answer or follow up on phone calls and routine correspondence with the Center;
Keep the offices organized, professional and attractive for visitors and staff;
Work with the Director to schedule all necessary events and the facilities and resources required for the events;
Interface with external individuals and groups on logistics of events and outreach, such as coordinating the video recording of an event;
Tweet and ensure blogs are posted to promote and summarize events and activities;
Assist Communication and Development staffs on promotional efforts;
Support the drafting of press releases, blogs, tweets, and associated informational material;
Support other activities and responsibilities that the Director might from time to time reasonably expect.
Necessary Skills and Qualifications:
Availability to work normal working hours, 8-5pm at the Quello Center offices;
Ability to collaborate and work effectively with a team;
Excellent interpersonal skills, face-to-face, on the phone and online;
Attention to detail;
Ability to write and draft written material, such as press releases, office memos, online posts, and correspondence in an accurate and engaging manner;
Ability to recognize needs and willingness to take on responsibilities necessary to ensure the effective operation of the Center;
Experience and ability to work with computing and related Internet applications, including Microsoft Office applications, Twitter, WordPress, and new applications that can be of value to managing the Center and performing its outreach activities;
Conscientious in following basic health and safety and other rules and regulations of the University, College, and Departments.
Education and Experience:
Bachelor’s degree preferred;
One year of related and progressively more responsible or expansive work experience in word processing, spreadsheet, databased, calendaring and/or presentation software; or an equivalent combination of education and experience;
Evidence of ability to communicate effectively, such as in writing samples, letters of reference, and during the interview.
Evidence of effective personnel interaction when working with people with diverse backgrounds and skill sets;
Evidence of ability to work online in a Center devoted to work with leading edge developments around communication and information technologies such as the Internet and mobile.
How to Apply:
Submit the following materials to Teresia Hagelberger (email: sielofft at msu.edu) by September 26, 2014:
Cover letter and detailed resume.
Names and contact information, including email addresses, for at least three references.
Jonathan Obar, a Quello Research Associate, spoke with WKAR regarding “net neutrality.” There has been a great deal of discussion around the idea of net neutrality and how it will affect people’s everyday use of the internet. Net neutrality is the debate over free use of the internet and has been going on for several years now. Jonathan’s interview provides a very accessible overview of the idea and the issues that have generated debate over the merits of net neutrality.
Listen to Jonathan’s interview on WKAR.