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THE EFFECT OF THE EXCLUSIVITY RULES

The new FCC rules require cable operators to "black-out"

numerous classes of programs on imported signals when those

programs are also shown by a local station.

The degree of pro

tection provided varies with the type of programning and may

extend up to two years.

For our purposes the primary effect of

these rules is to reduce the attractiveness of distant signals to

subscribers and thus reduce cable penetration.

Aside from pro

viding for one channel-switching device for each imported signal,

we have not allowed any additional costs of performing the blacking

out function itself, keeping records, etc.

At this writing, evidence on the magnitude of the exclusivity

effect is limited to a preliminary study by R. E. Park, "The

Exclusivity Provisions of the Federal Communications Commission's

Cable Television Regulations." From detailed program listings for

four stations---two networks and two independents---plus partial

listings for ten other stations, Park synthesizes the expected

proportion of a broadcast week that a distant signal would be

blacked out.

A portion of his findings are reproduced in Table 2.

Park's results indicate, for example, that in those top 50

markets in which local service provides three networks and one

independent, the cable system importing two additional independents

will be required to black them out about 39% of the time.

If it

imports a third independent (on a stand-by bas is, since the rules

TABLE 2

PERCENTAGE OF TIME DISTANT SIGNAL CHANNELS ARE BLACKED-OUT

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Source:

R.E. Park, "The Exclusivity Provisions of the Federal

Communications Commission's Cable Television Regulations,"

Table 2, p.5.

allow only two distant signals at any moment

on the cable) and

"fills in the blanks" where possible, it can reduce the blacked

out time to about 24%.

Importing a fourth independent further

reduces this to 15%, etc.

The boxed-in figures rep

sent the

expected effect when no stand-by signals are imported.

The impact of the exclusivity rules on subscriber penetration

is likely to be at least as great as the reduction in viewing

hours.

Programs receiving protection will be predominantly those

with large audiences, many of whom would value an earlier or

alternative viewing date or time which cable could otherwise

provide.

Nevertheless, lacking data to refine an estimate of this

effect, we assume that exclusivity protection is equivalent in

its impact on penetration to a proportionate reduction in the

number of full-time distant independents carried on the cable,

using the appropriate boxed figures from Table 2.

will it be profitable for a cable system import stand-by

independent signals?

The costs of additional imports will rise

as the CATV system must go further to find each additional inde

pendent.

Concurrently, the proportion of time that can be filled

in with each extra signal is declining.

The exclusivity rules

thus place the cable firm in a situation of sharply diminishing

returns as regards additional penetration from distant signals.

Generally, the answer will be "no." Exceptions may occur where the stand-by independent has particularly attractive programning,

or when importation costs are less dependent on distance, as

could occur with satellite transmission.

Regarding importation costs, we have assumed for all systems

in this study that distant signals are delivered by cable

system-owned microwave links of 50-100 miles per channel

imported. Average distances to the first and second closest

independents (in the top 25 markets) are tabulated in the appen

dix.

These averages range from 91 to 208 miles to the closest

signal, and 125 to 325 miles for the next closest for several types

of markets.

Thus the microwave cost estimates used here must be

considered generally low, although they may be closer approximations for markets with several closely spaced systems which pool their

microwave facilities.

16

COPYRIGHT FEE SCHEDULES

In the analysis which follows we consider four alternative

fee schedules for payment by cable systems to copyright owners.

Schedule 1 is the baseline case of zero fees.

Schedules 2 and

3 levy successively larger fees as the system's revenue grows.

Schedule 3 (incorporated in Bill 5.644) begins at 1% of subscriber

revenues, and rises to 5% of revenues exceeding $640,000 annually;

Schedule 2 is exactly half of Schedule 3.

For the fourth Schedule

we consider a flat fee of 16.5% of subscriber revenues, regardless

of the size of annual revenue.

The exact details of these fees are

set forth below and in the accompanying figure 1.

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alternative fee schedules, we keep unchanged the subscriber price

as well as the system size and other attributes of the CATV service.

Cable television systems have some of the attributes of a "natural

monopoly," flowing principally from their high fixed-low variable

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