25,000 individual copyright contracts. It would be an unreasonable burden.

At this point then, I will turn the microphone over to Dr. Bridger Mitchell, who will address what economic data we have been able to develop, Senator.

Dr. MITCHELL. Senator McClellan, Senator Burdick, my name is Bridger Mitchell. I am appearing at this hearing in my capacity as an economic consultant to the National Cable Television Association. While I am affiliated with the University of California at Los Angeles, and the Rand Corp., the views and conclusions expressed are those of the author and should not be interpreted as representing those of the university or the Rand Corp., or any of the agencies sponsoring its research.

In the context of the American economy, cable television today is a small industry. About 7 million homes buy its television reception service, paying on average of slightly more than $5 per month.

This year, approximately 3,000 cable systems are in operation, with annual revenues of about $400 million. Ownership of a number of these systems is by a single firm. The 10 largest firms account for about 44 percent of all subscribers.

Cable's development to date has been almost exclusively in the smallest television markets and in the fringe reception areas of a few larger cities. In those areas, the willingness of consumers to subscribe is due to the limited number of broadcast television signals available and their frequently poor reception quality which results from distance from the transmitter, or intervening terrain.

The major promise for cable television is yet to be realized. As Mr. Foster has emphasized in his statement, about 85 percent of the homes in America are located in the 100 largest television markets, and until March of last year, construction of cable systems in these markets was effectively blocked by policies of the Federal Communications.

Commission.

These markets differ significantly from the communities which have been wired to date, especially in their relative abundance of broadcast signals and generally high-quality aerial reception.

Any projection of the future growth of this industry and the prospective effects of the copyright fee schedules proposed to this committee must incorporate these central facts. I have attempted to provide such an analysis in the paper, "Cable Television Under the 1972 FCC Rules and the Impact of Alternative Copyright Fee Proposals," which has been appended to Mr. Foster's written statement.

Very briefly, the method of analysis I have employed is to construct a financial model of a cable television system which incorporates the major factors affecting a system's size, costs, revenues, and profitability. For example, capital expenses depend on the geographic size of the system in miles, the amount of cable which must be laid underground rather than strung from existing utility poles, and the proportion of homes in the service area which actually subscribe, generally referred to as the penetration rate.

Operating costs are similarly related to the number of subscribers, the number of imported signals, taxes, and regulatory fees. In the same manner, revenues are determined by the monthly subscription charge, the system size, and the penetration rate.

But penetration, the generally employed measure of consumers' demand for cable service, itself depends on the monthly charge and the increase in both the number and quality of television signals on the cable relative to those available using only a home antenna.

This method of describing the economics of a cable television system was first developed in 1970 to analyze the then proposed FCC rules in a paper which Dr. William S. Comanor and I prepared for the Commission proceedings, and a number of researchers have subsequently employed versions of this model to explore related questions about the industry.

By programing the financial model for calculation on an electronic. computer, the effect of a variety of different assumptions and conditions can be readily determined. Thus, I am able to adjust the size, number of broadcast signals, construction methods, and other parameters to the conditions expected to be obtained in several different types of communities.

Consequently, these typical systems are representative of the circumstances and profitability of most cable systems that could be built in the major markets.

My present study takes into account the final Commission rules and is addressed particularly to the impact of alternative copyright fee schedules on cable systems in the large urban markets. Although I have allowed for the effects of providing public access channels and programing locally originated by the cable system, as required by the FCC rules, I haxe excluded from the analysis both the costs and the revenues which may eventually result from leased channels including pay television channels and other nonbroadcast services. Since programing shown on these channels is fully subject to the present copyright laws, cable operators will have to bid for the rights to carry such material, and it is not necessary to examine the operation of that market here.

Let me now attempt to summarize my major findings; greater detail may be found in the paper itself.

Conditions for the development of cable service vary widely throughout the 100 largest markets. Near the center of these cities, penetration, the percentage of homes that actually subscribe, will range from 22 percent to 35 percent for typical systems. These urban areas generally receive all three network signals and in the larger markets there are one or more independent stations with good reception.

Even in the absence of copyright fees, profit rates for centrally located systems will be lower than returns available to capital invested in other industries. Except in exceptional circumstances, cable systems will not be built in the central cities under present FCC regulations.

Toward the edges of the major markets, signal quality, particularly for UHF broadcast stations, deteriorates rapidly. Typically, systems located in such communities will achieve penetration rates of 34 percent to 45 percent.

As a result, before payment of copyright fees, the large or multipleowned systems will earn before-tax real rates of return of between 9 and 13 percent. These profit rates, while not particularly high, are likely to attract equity investors who are able to finance an important fraction of the system from borrowed capital.

Now, when the schedule of copyright fees proposed in S. 1361, which is graduated from 1 percent to 5 percent of gross revenues, is added to the cable system's operating costs, the effect is to reduce rates of return a full percentage point. For example, a system of 10,000 subscribers at the edge of one of the 50 largest markets would find its profit rate reduced from 11 percent to 9.9 percent, a little more than 1 percentage point.

Depending on the capital structure of the system, such a change can reduce the return to equity capital by 2 or 3 percentage points. While this change may not at first appear particularly large, these figures may be put into perspective by noting that the proposed copyright fees would have reduced the before-tax net income of eight large multiple-system operators by an average of 19 percent last

year.

Because a high proportion of the major market systems would encounter similar subscriber and cost conditions, the prospective returns to cable investors are only marginally attractive when compared with other industries, and then only on the suburban fringes of most cities. In this situation, copyright fees of the magnitude proposed in S. 1361 can be a significant deterrent to construction of many new systems.

I have in addition analyzed the probable effects of a fee schedule exactly one-half of that in S. 1361, that is a schedule graduated from 1/2 percent to 22 percent of gross revenues, depending on systems size. Under such a schedule, profit rates of systems located at both the center and edges of major markets are reduced by about one-half percentage point.

Finally, a flat 16.5-percent copyright fee was analyzed. The effect of additional costs of this magnitude are unambiguous. For every type of cable system that was investigated, the 16.5-percent copyright payment would create a decidedly unprofitable investment climate throughout the top 100 markets, far outweighing the limited prospects for cable development which have been opened up by the 1972 FCC rules.

Let me conclude by noting that, although I have not gone into them in this statement, the 1972 FCC cable television rules substantially restrict the distant signals which may be carried and impose costly requirements for nonbroadcast services. It is primarily these regulatory policies which will limit development of cable service in suburban and fringe areas and result in little or no central city construction.

Because the rules reduce the returns to invested capital to only marginally attractive levels, the prospects for major market cable service are now especially sensitive to relatively small increases in operating costs. The impact of even the copyright fee schedule proposed in the bill before this committee may well be sufficient to delay or cancel construction of an important proportion of systems that would otherwise be built in the next several years.

Thank you.

Mr. BARCO. Chairman McClellan, Senator Burdick, Senator Fong, I am George J. Barco. For the past 17 years, I have served as General Counsel of the Pennsylvania Cable Television Association.

Pennsylvania is the State in which the cable television industry started, and there are some 300 CATV systems operating in over 1,100 communities-more than in any other State in the Nation-serving over 2 million television viewers. It has been my privilege to serve as national chairman, then known as president, of the National Cable Television Association, and I was a member of its board of directors for 15 years.

For the past year, I have served as a member of the NCTA Copyright Committee. Also, for the past 20 years, I have been, and still am, a part owner and the president of several cable television companies. By way of further introduction, I believe I should state a disclaimer, for the benefit of NCTA, and for the information of the committee, that while I have been an active participant in the affairs of NCTA over the years, the views I am about to express on the copyright issues are my own, and in many respects do not correspond with the officially adopted views of NCTA as an organization.

At the same time, let me state that I believe my views reflect those of many, many cable operators all over the country. There is no single matter which has concerned the CATV industry for the past 7 or 8 years more than copyright. Over this period, I have talked on a person-to-person basis with literally hundreds of cable operators and virtually every industry leader on the subject.

Let me state finally by way of introduction, that I view my task today as awesome and the situation for the cable industry as critical, if not desperate. Under the circumstances, I can only state the situation as I see it fully and frankly to the committee, without regard to certain existing predelictions, interests and objectives among the forces interacting on the copyright issue, within and without NCTA. I'm appreciative of the opportunity of appearing before you today.

In October 1968, the Board of Directors of the Pennsylvania Association, following a careful consideration of the copyright issue, adopted what has been termed as the Pennsylvania Position on Copyright. Its underlying principle is simply that television signals received off the air should not be subject to the payment of copyright fees so long as similar payments do not apply to reception by conventional antennas in the same community.

The position recognizes that copyright fees should be payable for copyrighted programs received by microwaving or similar long-distance transportation, and that such microwaving should be subject to regulation in view of its impact on television broadcasting, copyright property rights, and the interrelated market patterns of both.

While recognizing the legitimate interests of many who are interested in providing direct television program services, and a variety of other communication services in the metropolitan area by cable, the Pennsylvania Position urges that the television reception function for off-the-air signals by CATV should not be colored by the possible future development of cable television, nor should the inherent rights in such reception be traded as a part of any compromise between the conflicting interests concerned in large city cable television develop

ments.

The Pennsylvania Position has received wide support in the industry throughout the Nation for it was grounded on the basic concept and fact of CATV performing the community antenna reception function

for signals received off the air. Further, it seemed incomprehensible that liability to copyright fees should depend on the accident of topography, or in the real-life situation of the television viewer, whether he was living in the high area where a conventional antenna did the job, or whether he lived behind the hills or along the river where community antenna service was required or desirable to provide satisfactory television reception.

How could there be any justification for requiring the subscribers to make an additional payment to the copyright owner who had already received payment in his contractual arrangements for the broadcasting, paid ultimately by the television viewers, including CATV subscribers, in the advertising costs of purchased products?

Besides, until recently, the copyright owners made repeated public assurance that they were not interested in payments related to such television reception services, but were interested in only the large city markets where distant signals were to be imported.

And most important of all, the Supreme Court of the United States in the United Artists case made a determination, in June 1968, recognizing and establishing in legal terms the concept always understood by cable men in practical terms by the very nature of their operations.

Yet, in the intervening years from 1968, the membership of National Cable Television Association was sharply divided on the copyright issue. One segment considered any payment of copyright fees for signals received off the air an infringement of very basic rights, for the reasons just mentioned.

The other segment viewed payment of copyright across the board as the only realistic means for securing importation of distant signals thought to be necessary for the economic viability of cable television for the large cities if and when such system construction occurs.

To fully understand the circumstances of this division, it must be understood that the membership of NCTA is not a homogeneous group; and that all members of NCTA are in the cable industry, but a substantial number of them, and particularly some large multiple system owners, also have other interests which are at variance with CATV interests as such, as, for example, television broadcasting and copyright interests.

It is not surprising that the persuasions of the copyright payment segment within NCTA have been weighted and influenced by these interests and still are today.

As is well known, the event of decision came in November 1971, in the context of the Office of Telecommunications Policy Compromise, which was approved by the NCTA Board of Directors because it appeared to represent the only available basis upon which there was any possibility for removing the Federal Communications Commission freeze on cable television development, particularly in the large markets.

Whatever differences there may have been within NCTA over philosophy as it relates to the regulatory scheme and the payment for copyright, I can state that I believe that every possible effort was made by the NCTA Copyright Committee, and others of the CATV industry concerned with the implementation of this decision, to accommodate to the situation.

I can state from my own personal knowledge that the attitude, demands and conduct of those representing the movie copyright own