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THE EFFECT OF THE EXCLUSIVITY RULES

The new FCC rules require cable operators to "black-out" numerous classes of programs on imported signals when those programs are also shown by a local station. The degree of pr tection provided varies with the type of programming and may extend up to two wo years. For our purposes the primary effect of these rules is to reduce the attractiveness of distant signals to subscribers and thus reduce cable penetration. Aside from providing for one channel-switching device for each imported signal. we have not allowed any additional costs of performing the blacking out function itself, keeping records, etc.

At this writing, evidence on the magnitude of the exclusivity effect is limited to a preliminary study by R. E. Park, The Exclusivity Provisions of the Federal Communications Commission's Cable Television Regulations. From detailed program listings for four stations---two networks and two independents---plus partial listings for ten other stations, Park synthesizes the expected proportion of a broadcast week that a distant signal would be blacked out. A portion of his findings are reproduced in Table 2. Park's results indicate, for example, that in those top 50 markets in which local service provides three networks and one independent, the cable system importing two additional independents will be required to black them out about 39% of the time. If it imports a third independent (on a stand-by basis, since the rules

TABLE 2

PERCENTAGE OF TIME DISTANT SIGNAL CHANNELS ARE BLACKED-OUT

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Source: R. E. Park, "The Exclusivity Provisions of the Federal

Communications Commission's Cable Television Regulations,"

Table 2, p.5.

allow only two distant signals at any moment on the cable) and "fills in the blanks" where possible, it can reduce the blackedout time to about 24%. Importing a fourth independent further reduces this to 15%, etc. The boxed-in figures represent the expected effect when no stand-by signals are imported.

The impact of the exclusivity rules on subscriber penetration is likely to be at least as great as the reduction in viewing hours. Programs receiving protection will be predominantly those with large audiences, many of whom would value an earlier or alternative viewing date or time which cable could otherwise provide. Nevertheless, lacking data to refine an estimate of this effect, we assume that exclusivity protection is equivalent in its impact on penetration to a proportionate reduction in the number of full-time distant independents carried on the cable, using the appropriate boxed figures from Table 2.

Will it be profitable for a cable system import stand-by independent signals? The costs of additional imports will rise as the CATV system must go further to find each additional independent. Concurrently, the proportion of time that can be filled

in with each extra signal is declining. The exclusivity rules thus place the cable firm in a situation of sharply diminishing returns as regards additional penetration from distant signals. Generally, the answer will be "no." Exceptions may occur where the

stand-by independent has particularly attractive programming, or when importation costs are less deper lent on distance, as could occur with satellite transmission.

Regarding importation costs, we have assured for all systema

in this study that distant signals are delivered by cable

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system-owned microwave links of 50-100 miles per channel Imported. Average distances to the first and second closest in jepen tents (in the top 25 markets) are tabulated in the appenThese averages range from 91 to 28 miles to the closest signal, and 125 to 125 miles for the next closest for several types of markets. This the microwave cost estimates used here must be considered generally low, although they may be closer approximations for markets with several closely spaced systems which pool their

microwave facilities.

COPYRIGHT FEE SCHEDULES

In the analysis which follows we consider four alternative fee schedules for payment by cable systems to copyright owners. Schedule 1 is the baseline case of zero fees. Schedules 2 and 3 levy successively larger fees as the system's revenue grown. Schedule 3 (incorporated in Bill S.644) begins at 1% of subscriber revenues, and rises to 5% of revenues exceeding $640,000 annually Schedule 2 is exactly half of Schedule 3. For the fourth Schedule we consider a flat fee of 16.5% of subscriber revenues, regardless of the size of annual revenue. The exact details of these fees are set forth below and in the accompanying figure 1.

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In comparing systems in different market circumstances and with alternative fee schedules, we keep unchanged the subscriber price as well as the system size and other attributes of the CATV service Cable television systems have some of the attributes of a "natural monopoly, flowing principally from their high fixed-low variable

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