RESULTS--AN EXAMPLE

We are now prepared to analyze the financial results for typical systems in the several market situations discussed earlier. For each system, the computer simulates the complete revenue and cost experience to be expected, using the parameters supplied by the analyst. The detailed cost and revenue schedules have been built into the Comanor-Mitchell computer program, modified to include the changes in FCC rules, penetration and costs discussed earlier and in the appendix of this study.

As an example, consider the abstract of the computer output reproduced in Table 3. Part A indicates that this example is representative of a 25,000 subscriber system located near the middle of a top 50 market. Density is assumed to be 200 homes per mile, and family income $12,200. Annual subscriber rates are $62.40, corresponding to $5.00 per month plus a small additional amount for second sets. Since this is a central urban location, 20% of the cable miles are underground, and standard local origination equipment has been budgeted. Revenue from advertising on the cablecasting channel has been estimated at $2.20 per subscriber annually. The table of signals carried shows that 3 VHF networks plus one viewingtest network are available off-the-air. In addition there is one UHF independent and a VHF educational station. In addition to these broadcast signals, the cable system imports two independents and

one educational station.

These signals are imported by microwave,

averging 3 hops of 35 miles each per channel.

Within five years the system is assumed to reach maturity, apart

from further growth due to rising incomes or enlargement of its

franchise area.

Penetration is predicted to be 28.1% if the distant

signals are fully available, but 27.2% as a result of exclusivity protection on the independent channels.

Part B summarizes the growth of penetration, subscribers, and system revenue (including advertising) over the first 10

years.

In Part C we may assess the impact of copyright fees on profitability. For each of the four fee schedules described earlier

we report two rates of return--one assuming a 10 year average lifetime of capital, the second assuming 15 years. If fixed capital equipment is replaced about every 15 years, this system will earn a 10.4% real rate of return on total invested capital absent any copyright fees. Alternatively, the statutory schedule (number 3)

reduces the rate of return to 9.3%, and the flat 16.5% fee lowers returns sharply to 5.5%. A shorter lifetime for equipment reduces these returns by 2.5 to 3 percentage points.

In the analysis below we report rates of returns based only

on 15-year lifetimes.

Fifteen years represents a compromise be

tween somewhat longer physical lifetimes for some parts of the cable plant and rather shorter economic lifetimes of currently operating systems experiencing technological obsolescence. It appears