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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 pro

hibiting 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 pro

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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 origi

nation 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.

MARKET CATEGORIES AND SYSTEM LOCATION

In examining the probable effect of various provisions for

payment of copyright fees we will consider separately the

characteristics of typical cable systems in four types of markets:

the top 50 markets, markets ranked 51-100, markets below 100,

and areas located outside television markets.

The FCC rules permit

different signal carriage in each of these situations, and impos e

differential requirements affecting system costs.

In addition, the

density of housing, the prevalence of underground utilities and the

level of family income also varies by market size.

A tabular

summary of these major market characteristics is set forth in

Table 1.

As R. E. Park's econometric findings 2/strongly demonstrate, the

location within the market is also of fundamental importance to

determining penetration levels.

For this study we therefore sub

divide each of the markets 1-50, 51-100, and 100+ into typical

"middle market" and "edge market" systems.

Middle market

locations are close to off-the-air signals, while edge market

systems are approximately half-way between the transmitter and the

B-contour limit of the local signals,

(The forth category, an

"outside market" system, is necessarily at or beyond the location

of a typical edge market system.)

Thus the typical systems to be

analyzed fall into one of seven boxes in the following matrix:

2"Prospects for Cable in the 100 Largest Television Markets"

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Exclusivity protection Capacity requirements

20 channels 2-way capability

20 channels 12 channels

12 channels 2-way capability 12-way capability -way capability

Local origination

standard; minimum below 10,000 subscribers

standard; minimun standard; minimum minimum below 10,000

below 10,000 subscribers

subscribers

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