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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.

Financial

measures are consequently in real (constant dollar) terms.

The

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

is recovered.

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."

RESULTS--AN EXAMPLE

We are now prepared to analyze the financial results for typical

systems in the several market situations discussed earlier.

For

each system, the computer simulates the complete revenue and cost

experience to be expected, using the parameters supplied by the

analyst.

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

sets.

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

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Perat. at 0.1

8.2%

15,0%

21.8%

25.8%

27.2%

27.87

28.3%

28.9%

29.4%

33.0%

[blocks in formation]

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

franchise area.

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

years.

In Part C we may assess the impact of copyright fees on pro

fitability.

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

copyright fees.

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.

It appears

unlikely that 20-channel systems built today will remain competitive

beyond 1985 without major rebuilding.

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