Modified Costs and Revenues

Several cost items in the Comanor-Mitchell Report have been modified for this study, either to take account of the FCC rules as finally adopted or as a result of the availability of more recent information. A brief summary of those costs which were modified for all systems investigated in this report is presented below:

1. Local Franchise Tax. 5% of gross revenues annually.

2.

3.

4.

5.

6.

FCC Fee. $35 initial fee plus $0.30 per subscriber annually.

Channel switchers. One switcher included in capital equipment costs for each imported signal.

Pole rent. All results reported here include pole
rent of $250 per aerial mile in top 100 markets,
$175 in other markets.

Local origination. We assume the Comanor-Mitchell
standard systems, with capital costs of $38,000 and
annual operating expenses of $4300, and for smaller
systems a minimum system, with capital costs of
$11,000 and operating expenses of $2500 per year for
live origination. All systems are assumed to provide
a time-and-weather channel.

Public service channels. The final FCC rules require CATV systems to provide 3 non-broadcast channels for non-commercial public access, educational access, and government access respectively. The public access channel is to be provided without charge, while the other two channels will be free for five years. The costs of meeting these provisions are taken to be an additional 75% of the capital costs assumed for local origination, plus $4875 per year for part-time technician salaries.

7.

8.

The previously proposed 5% "public dividend" tax
for support of non-commercial broadcasting has been
eliminated.

Rate of subscribers growth over time.
research on cable penetration completed after the
Park's recent
publication of the Comanor-Mitchell Report, indicates
a more rapid maturation of cable growth than was pre-
viously assumed. While the precise growth path has
not been definitively established, for this study we
have increased the rate of subscriber growth so that
the typical system reaches its mature size in the fifth
year. Thereafter, some additional growth occurs as real
incomes of potential subscribers are assumed to rise
at a rate of 2% per year.

As compared with Comanor-Mitchell, the effect of these modifications is to increase the size of typical systems in two ways:

a) study systems gain subscribers more rapidly in

early years;

b) the size of a study system is measured in its fifth year, rather than its size after twelve to fifteen years.

Figure Al provides a graphical comparison of the growth curve used for this study and the earlier ComanorMitchell study.

As in the Comanor-Mitchell Report, financial (internal) rates of return are calculated for a firm of indefinite life by assuming that the firm reaches an equilibrium of revenues and costs after one 15-year lifetime, or generation, of equipment. Thereafter, the plant is rebuilt periodically, while subscriber penetration is held constant at the mature level. The rate of return is generally robust with respect to exact assumptions about conditions in later generations. Another solution to this terminal value problem is to assign the firm a value at the end of its first generation, based on operating characteristics such as revenues, subscribers, etc. example of this method see L. L. Johnson, "Cable Communications For an in the Dayton Miami Valley: Basic Report."

The Penetration Equation

Technical details of the penetration equation are summarized below. For further discussion see R. E. Park, "Prospects for Cable in the 100 Largest Television Markets."

Ui - number of B-contour off-air UHF signals of type i

V1 = number of B-contour off-air VHF signals of type i

Pen- penetration = subscribers/households passed by cable
P = annual price

In order to use Park's estimated equation to predict penetration for the typical systems investigated in this report, representative values must be assigned to the variables of the equation. The following values are employed in all of the simulations:

P = $62.40, corresponding to the $5 per month plus $1
per month for 20% of subscribers as a charge for
second set.

C = 50%. The effect of varying color set penetration
is not estimated with sufficient precision to incor-
porate variations in color set ownership across dif-
ferent types of markets.

In simulating cable systems for this study, we consider systems located in the central area of a television market, where off-the-air signal quality is generally high, and outlying areas of the same market, where quality is diminished. In the penetration equation the distance variable d is a measure of the reduction in quality. Ad value of 0 corresponds to a viewer in the center of the market, while a value of 1 represents a viewer at the B-contour of the off-the-air signal.

For the systems in this study we have used the following values:

In middle markets:

d = 0 for local stations

d = 1 for viewing-test stations

In edge markets:

d = 0.5 for local stations

d = 0.75 for viewing-test stations