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For this study we have held both revenues and cost at 1970
price levels over the full life of the cable system.
measures are consequently in real (constant dollar) terms.
corresponding rate of return concept is the financial return
which would occur if prices did not rise throughout the economy;
whereas in an inflationary period, investors expect price increases
and demand higher returns in money terms to compensate them for
the otherwise reduced value of their funds when their investment
Thus if investors expect a 4% rate of inflation
to continue indefinitely and will invest in enterprises comparable
to cable television only when they return 15% on average, the
required rate of return in constant prices would be 11%.
A detailed investment survey 10 of the CATV industry in late
1971 reports that mature cable companies with demonstrated earnings
have found long-term credit expensive, and that institutional
investors are looking for a 15% return as a combination of interest
and equity appreciation.
As a standard of minimum profitability
necessary to generate investment in new cable systems, we will use
a 10% constant-dollar financial rate of return on total capital.
This is on the low side of recent financing experience of established
CATV companies, and would therefore apply to new systems constructed
by the larger multiple system owners today.
New CATV firms lacking a
track record will face higher costs of capital and will require
somehwat higher rates of return to justify their construction.
10 Halle & Stieglitz, Inc., "The Cable Television Industry."
We are now prepared to analyze the financial results for typical
systems in the several market situations discussed earlier.
each system, the computer simulates the complete revenue and cost
experience to be expected, using the parameters supplied by the
The detailed cost and revenue schedules have been built
into the Comanor-Mitchell computer program, modified to include
the changes in FCC rules, penetration and costs discussed earlier
and in the appendix of this study.
As an example, consider the abstract of the computer output
reproduced in Table 3
Part A indicates that this example is
representative of a 25,000 subscriber system located near the middle
of a top 50 market. Density is assumed to be 200 homes per mile, and
family income $12,200.
Annual subscriber rates are $62.40, correspond
ing to $5.00 per month plus a small additional amount for second
Since this is a central urban location, 20% of the cable
miles are underground, and standard local origination equipment
has been budgeted. Revenue from advertising on the cablecasting channel has been estimated at $2.20 per subscriber annually. The
table of signals carried shows that 3 VHF networks plus one viewing
test network are available off-the-air.
In addition there is one
UHF independent and a VHF educational station.
In addition to these
broadcast signals, the cable system imports two independents and
one educational station.
These signals are imported by microwave,
averging 3 hops of 35 miles each per channel.
Within five years the system is assumed to reach maturity, apart
from further growth due to rising incomes or enlargement of its
Penetration is predicted to be 28.1% if the distant
signals are fully available, but 27.2% as a result of exclusivity
protection on the independent channels.
Part B summarizes the growth of penetration, subscribers,
and system revenue (including advertising) over the first 10
In Part C we may assess the impact of copyright fees on pro
For each of the four fee schedules described earlier
we report two rates of return--one assuming a 10 year average life
time of capital, the second assuming 15 years.
If fixed capital
equipment is replaced about every 15 years, this system will earn
a 10.4% real rate of return on total invested capital absent any
Alternatively, the statutory schedule (number 3)
reduces the rate of return to 9.3%, and the flat 16.5% fee lowers
returns sharply to 5.5%.
A shorter lifetime for equipment reduces
these returns by 2.5 to 3 percentage points.
In the analysis below we report rates of returns based only
on 15-year lifetimes. Fifteen years represents a compromise be
tween somewhat longer physical lifetimes for some parts of the cable
plant and rather shorter economic lifetimes of currently operating
systems experiencing technological obsolescence.
unlikely that 20-channel systems built today will remain competitive
beyond 1985 without major rebuilding.