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stand-by independent has particularly attractive programming, 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 appendix. These averages range from 91 to 208 miles to the closest signal, and 125 to 325 miles for the next closest for several types Thus the microwave cost estimates used here must be

of markets.

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 S.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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In comparing systems in different market circumstances and with 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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480

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Schedule 1 =

no fee

5000 Subscribers

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cost nature. But, in practice, the behavior of

cable systems is increasingly limited by local and federal regulation, and by competition among firms for franchises.

Both of

these forces sharply restrict the ability of cable firms to adjust price or output at will.

Present regulation and competition for new franchises, plus the threat of more extensive regulatory action if firm behavior is perceived as excessive, has kept monthly subscriber rates virtually constant in current prices over several years. Seiden, in 1970, found most recently franchised systems charging between $5.00 and $7.00 per month. In their sample of Factbook systems Comanor and Mitchell reported a mean price of $5.00 per month. Park in 1972 has an annual average price of $63 for his sample of A-contour cable systems. The assumption that moderate cost increases, including copyright fees, cannot be passed on in the form of higher prices is consistent with the recent market experience.

Assuming no price response by cable firms if a 16.5% surcharge

were imposed requires further discussion.

Firms would doubtless

make strong representations to local authorities about the need for higher prices, and bids for new franchises would quote higher rates. But granting for the moment that regulators allowed part or all of the surcharge to be translated into higher subscriber rates, how would cable profits be affected?

The answer depends primarily on how rapidly penetration would decline as prices were raised; in technical economic terms, on the elasticity of demand. If, for example, a 16.5% increase in price, from $5.00 per month to $5.83, results in a 16.5% decrease in penetration, say from 30% to 25% of homes passed, then the higher price has (approximately) 4/ no effect on total subscriber revenue--it is fully offset by reduced demand for service.

A basic result of economic theory states that consumers' demand for a service will be increasingly sensitive to its price as more and closer substitutes are available for that service. Thus house

holds in areas with a diversity of broadcast signals, with generally clear reception and with a variety of entertainment alternatives can be expected to decline service rapidly as prices rise. This availability of good substitutes for CATV describes most top 100 markets. The econometric work of R.E. Park confirms this degree of price elasticity of demand in such areas; in fact, the figures in the example above correspond almost exactly to Park's statistical 5/ 6/

findings.

4/ Calculating the percentage changes, for convenience, in terms
of the original price and penetration, results in a slight
approximation. A more exact result is obtained using the
average of the old and new price and penetration.
Park, "Prospects for Cable...", p. 140.

5/

6/

For a discussion of the effect of demand elasticity on maximum rates permitted by a regulatory authority, see Comaner and Mitchell, "The Costs of Planning: The FCC and Cable Television!

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