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FINANCIAL RATE OF RETURN

(15 year life)
Copyright Fee Schedule No.

2

3

Size=10,000 1. 3NV,110, 1EV inv

Markets 1-50 Density=150 $12,200

Underground=10% 11.7% 11.3% 10.9%

21, 1E

50.5%

6.0%

3I, 1E

11,400

49.5

11.5

11.1

10.7

5.8

9.9

5.2

Markets 51-100 Density=125 $11,400

Size=10,000

Underground=5% 8.7%

8.3%

4

3NV, 1EU

21, 1E

48.4%

7.9%

3.2%

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SIGNALS

5TH YEAR

Local

Viewing Test

Penetration

Imported
by cable

Family
Income

2. 3NV , 1EU

3. 3NV, 11, 1IU

1 EU

11, le

12, 200

45.9

10.7

10.3

5. 2NV, INU

6. INV, 2NU

Size=7,500 #

Markets 101 +
Density=100
$10,000

Underground=5%
13.4% 13.1% 12.7%

7. INV, 2NU

11, 1E

55.3%

7.09

8. 2NU

Size=7500 #

$ 9,000

9. 2NV

IN, 31, 1E

10.2NU

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and near-profitable systems, and by somewhat less for systems well

below the 10% return level.

Thus, in the example system (the first

line of Table 4) the rate of return falls from 10.4 to 9.3%.

A one-point change in the rate of return on total capital has a

considerably larger effect on equity holders.

Suppose that one-half

to two-thirds of the cable system is financed by 8% 12/ debt instruments.

Because of leverage, a 10% return on total capital will then corres

pond to a return on equity up to 13% or 14%.

In consequence, a

decline to a 9% return on total capital can reduce the return on

equity by two to three percentage points, depending on the capital

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The preponderance of evidence in Tables 4-10 is that large

systems at the edges of top 100 markets will earn a 10-13% rate of

return before copyright payments, large systems in middle markets are

not likely to exceed 10%, and intermediate and smaller-sized systems

will be marginally profitable only where special factors operate.

Copyright fees, at the level of Schedule 3, would significantly slow

the rate of growth of cable in the major markets, particularly in

middle areas with good quality signals and in edge market communities

of intermediate size.

12

In an inflationary period borrowing costs would be higher by
approximately the expected rate of inflation.

Copyright fee schedule number 2 is exactly one-half the rate

of schedule 3,

As expected, it has approximately half the effect

of schedule 3 in reducing the rate of return for all systems.

Schedule 4 is the flat 16.5% copyright fee.

Its effect on

rates of return is devasting.

of all variations studied in the top

100 markets, only a single system earns a 10% return--the 50,000

subscriber edge market 51-100 system in Table 8.

Fee payments of

this magnitude would effectively halt cable growth in the large cities,

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CONCLUSION

The outlook for early development of cable television service

in the major cities is at best mixed.

As compared with the rules

discussed two years ago, the final Fcc rules more tightly

restrict the choice of broadcast signals a system can provide to its

subscribers.

Analysis of the important variations in potential market and

cable systems characteristics in these urban areas demonstrates that

only the largest systems, or multiply-owned systems of slightly

smaller scale, will be viable in the central city areas where off

the-air reception quality is high, and then only under favorable

construction and penetration conditions.

At the edges of these

markets returns will be sufficient to attract investment in the largest

scale systeins, but systems of 10,000-15,000 will be profitable only

under especially favorable circumstances.

In an investment environment in which the majority of urban

households can be profitably wired for cable television service

only when atypically propitious cost and demand factors occur, to require

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generally lower rates of return on total capital a full

percentage point for systems in the profitable range, and in

an important proportion of cases its leveraged effect on equity

investors would be sufficient to create unprofitable systems.

As expected, a fee schedule of one-half that in S.644

reduces rates of return on total capital about one-half a

percentage point.

Fees of this magnitude would restrict

cable construction primarily in market circumstances where

returns are already limited for other reasons.

In contrast,

a flat 16.5% copyright payment would create a decidedly

unprofitable investment climate for cable television through

out the top 100 markets, far outweighing the limited prospects

opened up by the 1972 FCC rules.

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