This study assesses the profitability of cable television in the major markets under the final FCC rules and determines the impact of alternative copyright fee schedules which have been proposed. Our research builds on the computer simulation method and detailed cost and revenue data developed by Comanor and Mitchell in their published study of the impact of the FCC rules as proposed in July 1970. We have considerably modified and expanded their work to include the following: .the March 1972 FCC rules .more accurate and detailed predictions of penetration in major markets .the effect of the exclusivity provisions on penetration .a comprehensive set of cable system parameters encompassing market type, available signals, system location and subscriber and construction characteristics .four alternative copyright fee schedules (including no fees) In outline, the analysis of CATV profitability focuses on a number of market and system characteristics which can be identified as typical or representative of a cable system if it were to be constructed under current rules. By varying the characteristics (e.g., system size, or lineup of local signals, or housing density) over a comprehensive set of characteristics, the outlook for cable in nearly all parts of the major markets can be assessed. In this analysis, costs and prices have been measured in 1970 values; costs, revenues and rates of return are consequently in "real" terms. Except for rules changes since July 1970, cost figures are based on Comanor and Mitchell's detailed report. Throughout this study when discussing the size of a cable system we refer to the number of subscribers in its fifth year of operation, at which point it has virtually achieved its final size. Our analysis includes revenues from subscribers, determined by penetration rates dependent on local and distant signals carried, and a realistic amount from advertising on a local origination channel. No revenues or costs have been attributed to the development of leased channels. All systems considered in this study are newly constructed. The effect of potential copyright fees on existing systems in comparable market circumstances would be somewhat different only in the short run. For several years, these already-built systems would experience reduced profitability and the systems owners would earn lower returns than they had anticipated. At the same time, revenues would still exceed operating costs, so that the original systems would not actually go out of business. But subsequently, when the systems required rebuilding, the copyright fees could make reconstruction unprofitable, since nearly the same investment considerations apply either to rebuilding an existing system or to constructing the same system in a similar but unwired community. MARKET CATEGORIES AND SYSTEM LOCATION In examining the probable effect of various provisions for payment of copyright fees we will consider separately the characteristics of typical cable systems in four types of markets: the top 50 markets, markets ranked 51-100, markets below 100, and areas located outside television markets. The FCC rules permit different signal carriage in each of these situations, and impose differential requirements affecting system costs. In addition, the density of housing, the prevalence of underground utilities and the level of family income also varies by market size. A tabular summary of these major market characteristics is set forth in Table 1. As R. E. Park's econometric findings 2/ strongly demonstrate, the location within the market is also of fundamental importance to determining penetration levels. For this study we therefore sut divide each of the markets 1-50, 51-100, and 100+ into typical "middle market" and "edge market" systems. Middle market locations are close to off-the-air signals, while edge market systems are approximately half-way between the transmitter and the B-contour limit of the local signals. (The forth category, an "outside market" system, is necessarily at or beyond the location of a typical edge market system.) Thus the typical systems to be analyzed fall into one of seven boxes in the following matrix: 2/ "Prospects for Cable in the 100 Largest Television Markets" 57-786 0-76 pt. 1 34 Market Within each lox, indicating a spe-ific market type system location, we further consider the two or three most likely lineups of available local signals. While we have not reported every combination which can occur, the cases tabulated are representative of the materity of signal patterns to be encountered and they cover a degree of variation sufficient to include most other possibilities. |