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and near-profitable systems, and by somewhat less for systems well
below the 10% return level.
Thus, in the example system (the first
line of Table 4) the rate of return falls from 10.4 to 9.3%.
A one-point change in the rate of return on total capital has a
considerably larger effect on equity holders. Suppose that one-half
to two-thirds of the cable system is financed by 8% 12) debt instruments.
Because of leverage, a 10% return on total capital will then corres
pond to a return on equity up to 13% or 14%.
In consequence, a
decline to a 9% return on total capital can reduce the return on
equity by two to three percentage points, depending on the capital
structure of the system. Changes of this magnitude are more than
sufficient to postpone or eliminate construction of cable systems
which otherwise appear marginally profitable.
The preponderance of evidence in Tables 4-10 is that large
systems at the edges of top 100 markets will earn a 10-13% rate of
return before copyright payments, large systems in middle markets are not likely to exceed 10%, and intermediate and smaller-sized systems will be marginally profitable only where special factors operate.
Copyright fees, at the level of Schedule 3. would significantly slow
the rate of growth of cable in the major markets, particularly in
middle areas with good quality signals and in edge market communities
of intermediate size.
In an inflationary period borrowing costs would be higher by
Copyright fee schedule number 2 is exactly one-half the rate of schedule 3, As expected, it has approximately half the effect
of schedule 3 in reducing the rate of return for all systems.
Schedule 4 is the flat 16.5% copyright fee. Its effect on
rates of return is devasting. Of all variations studied in the top
100 markets, only a single system earns a 10% return--the 50,000
subscriber edge market 51-100 system in Table 8. Fee payments of
this magnitude would effectively halt cable growth in the large cities.
The outlook for early development of cable television service
in the major cities is at best mixed. As compared with the rules
discussed two years ago, the final Fcc rules more tightly
restrict the choice of broadcast signals a system can provide to its
Analysis of the important variations in potential market and
cable systems characteristics in these urban areas demonstrates that
only the largest systems, or multiply-owned systems of slightly
smaller scale, will be viable in the central city areas where off
the-air reception quality is high, and then only under favorable
construction and penetration conditions. At the edges of these
markets returns will be sufficient to attract investment in the largest
scale systens, but systems of 10,000-15,000 will be profitable only
under especially favorable circumstances.
In an investment environment in which the majority of urban
households can be profitably wired for cable television service
only when atypically propitious cost and demand factors occur, to require
more than quite limited copyright payments will significantly retard
or halt CATV expansion in the urban markets. The proposed statutory
fee schedule in 8.644
(up to 5% of subscriber revenue) would
generally lower rates of return on total capital a full
percentage point for systems in the profitable range, and in
an important proportion of cases its leveraged effect on equity
investors would be sufficient to create unprofitable systems.
As expected, a fee schedule of one-half that in S.644
reduces rates of return on total capital about one-half a
percentage point. Fees of this magnitude would restrict
cable construction primarily in market circumstances where
returns are already limited for other reasons.
a flat 16.5% copyright payment would create a decidedly
unprofitable investment climate for cable television throughout the top 100 markets, far outweighing the limited prospects
opened up by the 1972 FCC rules.