544 key that 20-channel systems built today will remain competitive one educational station. These signals are imported by microwd. beyond 1985 without major rebuilding. averging 3 hops of 35 miles each per charnel. within five years the system is assumed to reach maturity, apat from further growth due to rising incomes or enlargement o! 145 franchise area. Penetration is predicted to be 20.IX 18 the 0.1*** 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 say assess the impact of copyright lees on profitability. For each of the four fee schedules described earl.at we report tvo rates of return--one assuming a 10 year average lite time of capital, the second assuming 15 years. 1! fixed capita: equipment is replaced about every 15 years, this system will earn 10.4% real rate of return on total invested capital absent ary copyright fees. Alternatively, the statutory schedule inaber ) reduces the rate of return to 9.), and the flat 16 * tee lovers returns sharply to 5.5%. A shorter litetime for equipment redac. these returns by 2.5 to 3 percentage points. In the analysis below we report rates of returns based only on 15-year lifetines. Fifteen years represents a compromise be tvoen somewhat longer physical lifetimefor some parts of the cati. plant and rather shorter economic lifetimes of currently operating systems experiencing technological obsolescence. It appears payments. for particulars prospect, for cable under present rules, even without copyright can be built, central city areas of the major markets are not bright Except where quite large systems of 25.000 or more subscribers below the 10% rate of return needed to attract investment funds. Intermediate-sized systems in middle markets are decidedly systems when one network is missing from the local signals. ket, there is great variation, with profitable, 55% penetration pally because of reduced density, while in the lowest ranked sar. systems in the second 50 middle markets carn lover returns, DekSCI are no copyright fees. Despite somewhat higher penetration rato from about 22-27% and rates of return from 7.5 to 10.4% when there with somewhat different sets of local signals. Penetration ranges detail above. Lines 2 and 3 are for similarly situated communitie Line 1 of Table 4 restates the example system discussed in middle markets of large and intermediate sized systems respective. the major findings here, the reader should consult the tabuist. Tables 4 and 5 report the expected experience in in the seven tables which follow. While we shall briefly revien and the impact of alternative copyright fee schedules are cola:sed The financial prospects for cable under the final recruien RESULTS--IN DETAIL In these tables, N means network, I means independent, E means educational; V means NHF. U means UHF. MEASUREMENT OF CABLE SYSTEM PROFITABILITY Por this study we have held both revenues and cost at 1970 Mit levels over the full life of the cable system. Financial To summarize the profitability of the typical cable systems of this study we will calculate the (pre-tax) financial rate of return on total capital invested in each system. The financial corresponding rate of return concept is the financial return (or internal) rate of returng/is the single comprehensive seasure which would occur 16 prices did not rise throughout the economy: of investment in a cable system. Unlike ratio measures for a bertas in an inflationary period, investors expect price increases particular year (e.g. net revenues divided by total capital) it correctly recognizes the opportunity cost of front-end financing. 1.e. that several years are required before systems achieve full recovered. Thus if investors expect a 4% rate of inflation penetration, during which time invested funds are needed. Dring als de indefinitely and will invest in enterprises comparable the financial rate of return penito us to compare the profitabil. tatie television only when they return 15% on average, the ity of funds invested in CATV systems with other types of invest regnred rate of return in constant prices would be 11%. ments, and thus the likelihood of cable systems being constructed. A detailed investment survey 10/ of the CATV industry in late The rate of return required to induce investnent in a cable 9: reports that mature cable companies with demonstrated earnings wave found long-ten credit expensive, and that institutional system will depend on the proportion of total capital which can be obtained through debt instruments and the associated borrowing errors are looking for a 15% return as a combination of interest rates, and the minimum return demanded by equity investors. De and equity appreciation. As a standard of minimum profitability cause the cable industry more closely resembles a high-risk growth Secessary to generate investment in new cable systems, we will use .constant-dollar financial rate of return on total capital, Industry than a public utility, at least at the present time, both lenders and investors demand higher rates of return than for is so the low side of recent financing experience of establish can companies, and would therefore apply to new systems constructe seasoned investments. by the larger sultiple system owners today. New CATV firms lacking The internal rate of return i. that discount rate which eates the present value of revenues and costs over the lifetime < the system. For further discussion see Conansr and Niede. *cabie Television and the impact of Requiatcm. p. 184. meo Stieglitz, Inc., "The cable Television Industry." |