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 correspond 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 structure of the system. Changes of this magnitude are more than sufficient to postpone or eliminate construction of cable systems which otherwise appear marginally profitable.

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.

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 offthe-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 largestscale systems, 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 more than quite limited copyright payments will significantly retard

or halt CATV expansion in the urban markets. The proposed statutory

fee schedule in S.644 (up to 5% of subscriber revenue) would

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 throughout the top 100 markets, far outweighing the limited prospects opened up by the 1972 FCC rules.

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