CABLE TELEVISION UNDER THE 1972 FCC RULES AND THE IMPACT OF ALTERNATIVE COPYRIGHT FEE PROPOSALS AN ECONOMIC ANALYS IS by BRIDGER M. MITCHELL in Association With ROBERT H. SMILEY September 20, 1972 INTRODUCTION Final rules of the Federal Communications Commission governing cable television service in the 100 largest television markets went into effect March 31, 1972, following six years of FCC proceedings during which development of CATV service in major cities has been effectively blocked by interim regulations prohibiting the importation of distant television signals. The rules as effective allow limited importation to occur, varying with the size of the market and the locally-receivable signals, but at the same time provide broad "exclusivity" protection to local stations for their programs, thus requiring cable systems to delete programs from the imported signals. No provision for payment of fees by cable systems to the copyright owners of television broadcast programming shown on those systems is included in the FCC rules, and under the Fortnightly decision cable systems are not liable for copyright. Nevertheless, the Commission anticipates Congressional legislation to require copyright payments and would regard its enactment as a reaffirmation of the FCC's regulatory program toward cable tele vision. 1/ Fortnightly Corporation v. United Artists, 392 U. S. 390 (1968) This study assesses the profitability of cable television in the major markets under the final FCC rules and determines the impact of alternative copyright fee schedules which have been proposed. Our research builds on the computer simulation method and detailed cost and revenue data developed by Comanor and Mitchell in their published study of the impact of the FCC rules as proposed in July 1970. We have considerably modified and expanded their work to include the following: .the March 1972 FCC rules .more accurate and detailed predictions of penetration in major markets .the effect of the exclusivity provisions on penetration .a comprehensive set of cable system parameters encompassing market type, available signals, system location and subscriber and construction characteristics .four alternative copyright fee schedules (including no fees) In outline, the analysis of CATV profitability focuses on a number of market and system characteristics which can be identified as typical or representative of a cable system if it were to be constructed under current rules. By varying the characteristics (e.g., system size, or lineup of local signals, or housing density) over a comprehensive set of characteristics, the outlook for cable in nearly all parts of the major markets can be assessed. In this analysis, costs and prices have been measured in 1970 values; costs, revenues and rates of return are consequently in "real" terms. Except for rules changes since July 1970, cost figures are based on Comanor and Mitchell's detailed report. Throughout this study when discussing the size of a cable system we refer to the number of subscribers in its fifth year of operation, at which point it has virtually achieved its final size. Our analysis includes revenues from subscribers, determined by penetration rates dependent on local and distant signals carried, and a realistic amount from advertising on a local origination channel. No revenues or costs have been attributed to the development of leased channels. All systems considered in this study are newly constructed. The effect of potential copyright fees on existing systems in comparable market circumstances would be somewhat different only in the short run. For several years, these already-built systems would experience reduced profitability and the systems' Owners would earn lower returns than they had anticipated. At the same time, revenues would still exceed operating costs, so that the original systems would not actually go out of business. But subsequently, when the systems required rebuilding, the copyright fees could make reconstruction unprofitable, since nearly the same investment considerations apply either to rebuilding an existing system or to constructing the same system in a similar but unwired community. |