RESULTS--IN DETAIL The financial prospects for cable under the final PCC rules and the impact of alternative copyright fee schedules are corta.net in the seven tables which follow. While we shall briefly review the major findings here, the reader should consult the tabulations for particulars. Tables 4 and 5 report the expected experience an middle markets of large and intermediate sized systems respective.v Line 1 of Table 4 restates the example system discussed in detail above. Lines 2 and 3 are for similarly situated communities with somewhat different sets of local signals. Penetration ranges from about 22-27% and rates of return from 7.5 to 10.4% when there are no copyright fees. Despite somewhat higher penetration rates systems in the second 50 middle markets earn lower returns, principally because of reduced density, while in the lowest ranked narkets there is great variation, with profitable, 55% penetration systems when one network is missing from the local signals. Intermediate-sized systems in middle markets are decidedly below the 10% rate of return needed to attract investment funds. Except where quite large systems of 25,000 or more subscribers can be built, central city areas of the major markets are not bright prospects for cable under present rules, even without copyright payments. MEASUREMENT OF CABLE SYSTEM PROFITABILITY 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 (or internal) rate of returng/is the single comprehensive measure of investment in a cable system. Unlike ratio measures for a particular year (e.g. net revenues divided by total capital) it correctly recognizes the opportunity cost of front-end financing, i.e. that several years are required before systems achieve full penetration, during which time invested funds are needed. Using the financial rate of return permits us to compare the profitability of funds invested in CATV systems with other types of investments, and thus the likelihood of cable systems being constructed. The rate of return required to induce investment in a cable system will depend on the proportion of total capital which can be obtained through debt instruments and the associated borrowing rates, and the minimum return demanded by equity investors. Because the cable industry more closely resembles a high-risk growth industry than a public utility, at least at the present time, both lenders and investors demand higher rates of return than for seasoned investments. The internal rate of return is that discount rate which equates the present value of revenues and costs over the lifetime of the system. For further discussion see Comanor and Mitche.i "Cable Television and the Impact of Regulation. p. 184. For this study we have held both revenues and cost at 1970 price levels over the full life of the cable system. Financial measures are consequently in real (constant dollar) terms. The corresponding rate of return concept is the financial return which would occur if prices did not rise throughout the economy: whereas in an inflationary period, investors expect price increases and demand higher returns in money terms to compensate them for the otherwise reduced value of their funds when their investment is recovered. Thus if investors expect a 4% rate of inflation to continue indefinitely and will invest in enterprises comparable to cable television only when they return 15% on average the required rate of return in cunstant prices would be 11%. A detailed investment survey 11′ of the CATV industry in late 1971 reports that mature cable companies with demonstrated earnings have found long-term credit expensive and that institutional investors are looking for a 1% return as a combination of interest and equity appreciation. As a standard of minimum pr-fitability necessary to generate investment in new cable systems we will use a 1% constant-dollar financial rate of return on t tal capital. This is on the low side of recent financing experience of established CATV companies and would therefore apply to new systems constructed by the larger multiple system owners today. New CATV firms lacking a L "The Calle Television Industry " |