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AMENDMENT TO H.R.2223
The following amendment cleans up the language
in section 111 (e) relating to the necessarily nons imultaneous
carriage of television stations by CATV systems located in
Alaska, Hawaii and the various territories and possessions.
on page 17, beginning on line 29, strike out "or"
and all that follows down through line 33 and insert
in lieu thereof ":Provided, however, that a nons imul
taneous further transmission by a "cable system" not
located in whole or in part within the boundary of
the forty-eight contiguous States, territories or
possessions of a."
Mr. KASTENMEIER. Next the Chair would like to call Mr. David O. Wicks, Jr., representing Becker Communications Associates.
I would observe this is our second witness, if we take as long with the second as we did with the first, the energy bill will be completed before we are.
Mr. Wicks, we welcome you. You have a statement here?
Mr. KASTENMEIER. Without objection your statement and exhibits will be received for the record, and you may proceed. TESTIMONY OF DAVID O. WICKS, JR., BECKER COMMUNICATIONS
ASSOCIATES Mr. Wicks. Thank you, sir. I will attempt to be as brief as I can and refer to the statement at various points.
Mr. Chairman, my name is David Wicks. I am a vice president of Warburg Paribas Becker, Inc., headquartered in Chicago, Ill. With me today on my right is Charles W. Petty, of Mayer, Brown & Platt, counsel for Becker.
Our firm, and its predecessor, A. G. Becker & Co., Inc., has for a number of years rendered investment banking and other financial services to members of the CATV industry. During the last 3 years, Becker and its affiliates have been one of the principal sources of CATV financing. During this period, I have been primarily responsible for obtaining debt financing for the larger multiple-system cable television operators.
In 1973, A. G. Becker organized Becker Communications Associates as a limited partnership for the purpose of lending to the cable television industry in partnership with insurance companies, banks, and other institutional lenders. I was instrumental in the formation of Becker Communications Associates and have a partnership interest in the firm. I appear here today as a representative of Becker Communications Associates, and at the request of the [NCTA] and various individual CATV operators. However, I wish to point out that the views I will give are my own and may not be representative of these various interests.
I will not address myself to the pros and cons of copyright legislation for the cable industry. However, I wish to make two points with respect to the impact of H.R. 2223 on the television financing as we see it today.
First, the copyright royalty schedule provided in section 111(d) of the Bill will have a substantial and adverse effect on the net income of CATV operators and on their ability to raise additional capital either in the debt or equity market. An increase in the level of these fees would have even more severe consequences.
Second, the provision in section 802 of the bill for an adjustment every few years introduces a serious financial uncertainty and impedes the industry's ability to obtain both medium- and long-term capital investment. In our opinion the combined effect of the liability imposed by the bill for copyright royalty payments, together with uncertainty as to the future level of these payments, will operate to substantially reduce the availability of both debt and equity financing.
As pointed out by the Committee for Economic Development, cable television is a capital-intensive industry, and our findings certainly
confirm this point. Exhibit 1 presents data on the nine leading CATV companies for which such data is publicly available. This group had total revenues in 1974 of $265 million, and outstanding long-term debt of $517 million.
By comparison, Dennis McAlpine, of the investment banking firm of Tucker, Anthony & R. L. Day, in testimony earlier this year before Senator Hart's commitee, reported that the nine leading broadcasting companies generated revenues of $3.6 billion, or about 13 times as great as the CATV companies, but had long-term debt outstanding of $573 million, only slightly greater than that of the nine leading CATV companies.
Put in a different perspective, these CATV companies have approximately $1.95 of debt per dollar of revenue compared to 16 cents for the broadcasters.
In such a highly leveraged industry as cable television, what might be considered small changes in costs can have a major impact on net income and consequently on the ability to raise additional equity capital, which in turn provides the base for additional debt financing.
Becker Communications, and its affiliates, are in continuing contact with lenders to the CATV industry and regularly compile statistics on the availability of debt and equity financing. Within the last several months, in connection with a report which was submitted to the Federal Communications Commission, we have contacted the leading lenders to the industry and have developed statistics on capital availability in 1975 and 1976 from 32 commercial banks, 10 intermediate term lenders, and 34 insurance companies which combined represent the bulk of the financing for the industry. A copy of this report is attached as exhibit II. Our survey showed the availability of approximately $185 to $200 million in each of the next 2 years for the CATV industry dependent upon what assumptions are made by the various lenders as to improved profitability of specific firms within the industry.
While it is difficult to accurately project the true capital requirement of the industry-as pointed out by these institutions- we believe this level of financing is inadequate to provide for any substantial expansion of service or construction of new plant facilities. As a reference point, under proposed regulations of the Federal ('ommunications Commission, a large number of cable companies serving the top 100 markets would be required to make substantial expenditures on existing plant in order to bring their systems in compliance with the Commission's 1972 rules on channel capacity and two-way communication capability. The NCT A has estimated the cost of this upgrade program to be approximately $123 million, if completed by the Commission's deadline of March 1977.
If the cable television business is to raise even a fraction of the capital estimated to be necessary before it comes into compliance with the Commission's rules and builds substantial additional capacity, it must become a profitable industry. As Mr. Bradley pointed out, and as exhibit I shows, the nine CATV companies lost a total of approximately $16.3 million in 1974. Obviously, these results must improve before substantial new capital will be available.
This is not to say that the nine leading companies whose results are summarized in exhibit I represent a cross section of the entire industry. However, the lenders to the industry tend to view the industry in
terms of the publicly available data for the large firms, and we do not have any evidence that financing is more easily obtained by smaller firms. Indeed, the experience of my firm is that such smaller firms have greater difficulty in obtaining financing
In our opinion, the copyright royalty rate provided for by section 111(d) of the bill, even though it has been said by some to be nominal, will substantially impede the ability of both the larger publicly owned, and the smaller privately owned companies to obtain additional investment capital.
Let me attempt to illustrate the impact of copyright royalty pay. ments with a specific example. At the present time, the average revenue per subscriber is in the range of $5 to $6. Assuming a relatively high level of $6.50 per month, our studies of representative firms in the industry show that the level of operating and general and administrative costs have been approximately 62 percent; interest approximately 14 percent, and depreciation approximately 19 percent, leaving a pretax profit of only about 5 percent, or 33 cents in the example.
The imposition of a 212-percent royalty rate introduces an additional cost of 16 cents per month on the $6.50, reducing pre-tax profits to 2.3 percent, a decline of 50 percent in pre-tax profits. This is an unacceptably low return on revenues either for debt or equity financing.
It might be argued, as the questions this morning suggested, that the fee might be passed on to the cable subscriber and profitability improved. However, the experience of the industry, as we have seen, has been that local franchising authorities are reluctant to increase rates on a timely basis to keep pace with increasing costs, and there are indications, as we have seen, of market resistance to increased subscriber rates over the currently prevailing levels.
I have alluded to a second concern of those in the business of lending funds to this industry, and that is the potential for successive increases in the copyright royalty rate during the term of long-term financing. This could result from action by the copyright royalty tribunal which would be created by section 802 of the bill. The bill sets no limit on the rate which might be imposed in a future year, thereby raising at a minimum the possibility of significant changes in the assumption upon which such financing was arranged. Lenders can be expected to respond to this uncertainty by increasing their rates, lending smaller amounts for shorter periods of time, or imposing other less favorable terms on CATV borrowers. Thus, uncertainty has its own separate cost to the industry.
In conclusion, Mr. Chairman, although we are not here to question the concept of liability for payment of a copyright royalty fee, the amount of that fee must be viewed in terms of the impact which it will have upon the industry's ability to obtain the additional financing which is essential to its growth and development as a significant communications medium.
Further, the uncertainty created by the open-ended power granted to the Copyright Royalty Tribunal to adjust that fee in future years is itself a significant impediment to the industry in obtaining such financing.
I have not previously mentioned one further aspect of section 802 which is a cause for concern. It is not clear from this provision that the tribunal's power of adjustment would be limited to the amount of the
fee itself. Section 802 appears to provide that the tribunal can also change the revenue basis on which the royalty fee is assessed, perhaps even to include services which do not involve copyright issues at all. We are not certain how broadly this power might be construed and, frankly, Mr. Chairman, I'm almost afraid to ask, and that of course is the point, uncertainty has its own cost.
I appreciate the opportunity to appear before this subcommittee. Do you have any questions?
Mr. KASTEN MEIER. Thank you, Mr. Wicks, for a very useful summation of the financial difficulties of cable television.
Although I observed that you, yourself, and and obviously Becker ('ommunications have great faith in cable television for you to concentrate in investing, financing, you must believe in the future of this industry.
Mr. Wicks. I would say that is a fair statement.
Mr. KASTEN VEIER. It appears to be, perhaps like broadcasting, an industry which would require a great deal of capital at the outset, but which, if successful, would require less as the years go by. Consequently early financial statements in terms of the industry would appear to be not particularly good; but in the long term they would be in terms of showing profit, would be much more promising.
Like television itself, like broadcasting which, in a sense if you compare them, radio broadcasting, two generations old, with television, already a generation old, would have less long-term debts than a relative newcomer, cable itself. But the outlook would not be much different than for the broadcasting industry, is that correct?
Mr. Wicks. Well, I think there are a number of points in your question, sir. I want to point out that I am not as familiar with the other communications industries as I am with cable television. But it would seem to me, one way to answer your question is that a number of the CATV companies have within their plants television studios, which I have been told are on par with the local stations. Therefore, it would seem to me that the level of expenditures a cable television operator has to go through to deliver signals would be greater in total, as you pointed out, in the first stages of the industry.
Mr. KASTEN MEIER. One other question or observation. Obviously, as a financial adviser and consultant as far as the industry is concerned, you are interested in certainty in terms of the risk and cost, and I would therefore presume that you would want this matter resolved one way or the other, rather than for it to be open-ended, for any sort of potential litigation really knowing-notwithstanding the two court suits--not really knowing, ultimately, what the resolution might be on the question of liability for cable television, is that not correct?
Mr. Wicks. That is correct, sir. When we look at a new company, we know there are a number of items within the projection which will be subject to change; and the more we can reduce the changes, or the magnitude of those changes, the easier it is for us to structure a loan that is in keeping with the abilities of the borrower.
Mr. KASTENMEIER. Congressman Badillo referred to another prospect, namely that the principle of the viability be established, and you negotiate from there. Would you not agree that the bill in its present forin already determines a number of questions with some certainty!
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