Mr. WICKS. Well, sir, I think from my point of view, there is more certainty setting up a number in a schedule, than there is leaving this

to a tribunal.

Mr. BADILLO. But you can't make a recommendation, so, how are we supposed to get to an amount?

Mr. WICKS. Well, I don't think it would be proper for me to make that determination.

Mr. BADILLO. No further questions.

Mr. KASTENMEIER. The gentleman from New York, Mr. Pattison. Mr. PATTISON. I have no questions.

Mr. KASTEN MEIER. That concludes the questions. Mr. Wicks, we appreciate your appearance here this morning.

[The prepared statement of Mr. David Wicks and exhibits follow:]

STATEMENT OF DAVID O. WICKS, JR., BECKER COMMUNICATIONS ASSOCIATES My name is David Wicks. I am a Vice President of Warburg Paribas Becker Inc., headquartered in Chicago, Illinois. Our firm, and its predecessor, A. G. Becker and Co., Incorporated, has for a number of years rendered investment banking and other financial services to members of the CATV industry. During the last three years, Becker and its affiliates have been one of the principal sources of CATV financing. During this period, I have been primarily responsible for obtaining debt financing for the larger multiple system cable television operators.

In 1973, A. G. Becker organized Becker Communications Associates as a limited partnership for the purpose of lending to the cable television industry in partnership with insurance companies, banks and other institutional lenders. I was instrumental in the formation of Becker Communications Associates and have a partnership interest in the firm. I appear here today as a representative of Becker Communications Associates.

I will not address myself to the pros and cons of copyright legislation for the cable industry. However, I wish to make two points with respect to the impact of H.R. 2223 on cable television financing as we see it today. First, the copyright royalty schedule provided in section 111(d) of the Bill will have a substantial and adverse effect on the net income of CATV operators and on their ability to raise additional capital either in the debt or equity market. An increase in the level of these fees would have even more severe consequences.

Second, the provision in section 802 of the Bill for an adjustment in the royalty rates after July 1, 1977, and during calendar year 1984 and in each subsequent fifth calendar year thereafter, introduces a serious financing uncertainty which will impede the industry's ability to obtain both medium and long term capital investment. In our opinion, the combined effect of the liability imposed by the Bill for copyright royalty payments together with uncertainty as to the future level of these payments will operate to substantially reduce the availability of both debt and equity financing.

It is recognized that cable television is a capital intensive industry. In its report entitled, "Broadcasting and Cable Television: Policies for Diversity and Change," the Committee for Economic Development notes that the future development of cable television will be determined in great measure by the availability and cost of capital. Yet, the Report continues: "Because of the economic and regulatory climate, venture capital is presently in very short supply. These difficulties are compounded by the fact that the construction of the cable system requires a very heavy initial investment. Furthermore, the return in the early years is slow. It may be 10 years or more before an investor realizes substantial profit."

Our findings confirm this point. Exhibit I presents data on the nine leading CATV companies for which such data is publicly available. This group had total revenues in 1974 of $265.5 Million and outstanding long-term debt of $517 Million. By comparison, Dennis McAlpine of the investment banking firm of Tucker, Anthony & R. L. Day, in testimony on May 22, 1975, before the Senate Anti-Trust Subcommittee chaired by Senator Hart, reported that the nine leading broadcasting companies generated revenues of $3.6 Billion, about 13 times as great, but had long-term debt outstanding of $573 Million, only slightly greater than that of the nine leading CATV companies. Stated another way, the CATV companies

had approximately $1.95 of debt per dollar of revenue as compared to 16 cents for the broadcasters.

In such a highly leveraged industry as cable television, what might be considered small changes in costs can have a major impact on net income and consequently on the ability to raise additional equity capital, which in turn provides the base for additional debt financing.

Becker Communications, and its affiliates, are in continuing contact with lenders to the CATV industry and regularly compile statistics on the availability of debt and equity financing. Within the last several months, in connection with a report which was submitted to the Federal Communications Commission, we have contacted the leading lenders to the industry and have developed statistics on capital availability in 1975 and 1976 from 32 commercial banks, 10 intermediate term lenders and 34 insurance companies.

The lenders included in this survey have provided a substantial portion of the total available debt financing for CATV construction and operation. Accordingly, their projections as to future financing plans provide the best and most authoritative indication of expansion prospects for the cable television industry. A copy of this report is attached as Exhibit II. Our survey showed the availability of approximately $185 to $200 Million in each of the next two years, dependent upon what assumptions are made as to improved profitability of specific firms within the industry

While it is difficult to accurately project the true capital requirements of the CATV industry over this time frame, we believe this level of financing is inadequate to provide for any substantial expansion of service or construction of new plant facility. As a reference point, under Proposed Regulations of the Federal Communications Commission, a large number of cable companies serving the top 100 markets would be required to make substantial expenditures on existing plant in order to bring their systems in compliance with the Commission's 1972 Rules on channel capacity and two-way communication capability. The National Cable Television Association has estimated the cost of this upgrade program to be approximately $423 Million, if completed by the Commission's deadline of March 31, 1977.

If the cable television business is to raise even a fraction of the capital estimated to be necessary before it comes into compliance with the Commission's rules and builds substantial additional capacity, it must become a profitable industry. Exhibit I shows, however, that the nine leading CATV companies lost a total of approximately $16.3 million in 1974. Obviously, these results must improve before substantial new capital will become available.

This is not to say that the nine leading companies whose results are summarized in Exhibit I represent a cross section of the entire industry. Most CATV operators are small privately owned firms. However lenders generally tend to view, the industry in terms of the publicly available data for the large firms and we do not have any evidence that financing is more easily obtained by smaller firms. Indeed, the experience of Becker Communications Associates is that such smaller firms have greater difficulty obtaining financing.

In our opinion, the copyright royalty rate provided for by section 111(d) of the Bill, even though it has been said to be a nominal rate by some, will substantially impede the ability of both the larger publicly owned and the smaller privately owned companies to obtain additional invested capital.

Let me illustrate the impact of copyright royalty payments by a specific example which is applicable to both large and small operators. At the present time, the average revenue per subscriber is in the range of $5 to $6. Assuming a relatively high level of $6.50 per month, our studies of representative firms in the industry show that the level of operating and general and administrative costs have been approximately 62 percent, interest approximately 14 percent, and depreciation approximately 19 percent, leaving a pre-tax profit of about 5 percent, or 33 cents in our example of a monthly subscription rate of $6.50. The imposition of a 2%2 percent royalty rate introduces an additional cost of 16 cents per month, reducing pre-tax profits to 2.3 percent, a decline of 50 percent in pre-tax profits. This is an unacceptably low return on revenues either for debt or equity financing purposes. It might be argued that a fee of this magnitude can be passed on to the cable subscriber and profitability improved. However, the experience of the industry has been that local franchising authorities are reluctant to increase rates on a timely basis to keep pace with increasing costs and both the Committee on Economic Development and a leading economic consultant to the industry have found indications of market resistance to increased subscriber rates over the currently

prevailing levels. (See Mitchell and Smiley, Cable Cities and Copyrights. 5 The Bell Journal of Economics and Management Science 235 (Spring, 1974). Committee on Economic Development, Broadcasting in Cable Television: Policies for Diversity and Change (1975).)

I have alluded to a second concern of those in the business of lending funds to this industry and otherwise arranging financing, and that is the potential for successive increases in the copyright royalty rate during the term of long-term financing. This could result from action by the Copyright Royalty Tribunal which would be created by section 802 of the Bill. The Bill sets no limit on the rate which might be imposed in a future year, thereby raising at a minimum the possibility of significant changes in the assumptions upon which such financing was arranged. Lenders can be expected to respond to this uncertainty by increasing their rates, lending smaller amounts for shorter periods of time or imposing other less favorable terms on CATV borrowers. Thus, uncertainty has its own separate cost to the industry.

In conclusion, Mr. Chairman, although we are not here to question the concept of liability for payment of a copyright royalty fee, the amount of that fee must be viewed in terms of the impact which it will have upon the industry's ability to obtain the additional financing which is essential to its growth and development as a significant communications medium. Further, the uncertainty created by the open-ended power granted by section 802 to the Copyright Royalty Tribunal to adjust that fee in future years is itself a significant impediment to the industry in obtaining such financing.

I have not previously mentioned one further aspect of section 802 which is a cause for concern. It is not clear from this provision that the tribunal's power of adjustment would be limited to the amount of the fee itself. Section 802 appears to provide that the tribunal can also change the revenue basis on which the royalty fee is assessed, perhaps even to include services which do not involve copyright issues at all. We are not certain how broadly this power might be construed and that, of course, is the point. Uncertainty has its own costs.

I appreciate the opportunity to appear before this Subcommittee to present our views on the impact of H.R. 2223 on cable television financing. I will be happy to respond to your questions.

EXHIBIT II

BEFORE THE FEDERAL COMMUNICATIONS COMMISSION, WASHINGTON, D.C.

(Docket No. 20363)

In the Matter of: Amendment of part 76 of the Commission's Rules and Regulations relative to postponing or cancelling the March 31, 1977 date by which major market cable television systems existing prior to March 31, 1972, must be in compliance with section 76.251 (a) (1)-(a) (8)

COMMENTS OF WARBURG PARIBAS BECKER, INC.

In connection with the above-referenced Notice of Proposed Rulemaking soliciting comments on the March 31, 1977 deadline for compliance with the provisions of Section 76.251(a)(1)–(a)(8) of the Commission Rules, The Becker and Warburg-Paribas Group, Inc., by its Attorneys, hereby records with the Commission, its following findings of available Capital Financing for the CATV Industry, particularly concerning funds available for so called system "rebuild". The Becker and Warburg-Paribas Group, Inc. ("BWPG") and its predecessor, A. G. Becker & Co. Incorporated, has over 80 years of experience in the field of investment banking. Its activities include the granting and distribution of debt issues, the evaluation of debt and security issues for public and private clients. The firm is a member of the New York, American, Mid-West and Pacific Stock Exchanges, as well as the Chicago Board of Options Exchange and numerous regional stock exchanges. BWPG engages in international investment banking through its European partners, S. G. Warburg & Co. London and Cie Financiere de Paris and des Pays Bas in Paris. Further, Becker Communications Associates ("BCA") is an active lender to the CATV industry with approximately $20 million in loans and commitments outstanding and BCA and Warburg Paribas Becker ("WPB") (a wholly-owned subsidiary of BWPG which handles the corporate finance activities of BWPG) have five officers who specialize in CATV. In connection with their corporate finance activities in CATV, the Becker groups are in continuing contact with the lenders to the Industry and regularly compile statistics on the lending activities to the Industry In order to provide the Commission with statistics on the available capital to the Industry, particularly as it might relate to the capital requirements imposed by 76,251, they have, within the last several weeks contacted the leading lenders to the industry and have developed statistics on capital availability in 1975 and 1976. The data supplied herein, therefor, is extremely current.

As a basis for this study, WPB personnel contacted by phone or in person or compiled data from its files on 32 commercial banks, ten intermediate term lenders and 34 insurance companies. For many reasons, including the fact that many companies would not make their figures public, (being prohibited in certain instances from doing so by contractual obligations) available financing facilities from the equipment suppliers to the Industry or from equipment leasing companies are not included. The bulk of the contacts with the sampled lenders occurred in the months of January and February 1975. We believe it to be as complete a study as has been done to date and certainly the only study which has been done to our knowledge on this aspect of the CATV lending situation.

As shown in Chart 1, the lender groups had loans outstanding to CATV companies at December 31, 1974 of approximately $1 billion. This group anticipates lending approximately a further $185 million to the industry in 1975 with a range of $360 million to $74 million if the economy and available cash flow should change appreciably for the better or worse.

Impacting significantly on these general projections will be the level of deficit financing by the Federal Government. As demonstrated in 1974, during periods of tightening of available funds, CATV companies find it proportionately more difficult to get commitments for financing. Further, the emphasis of many commercial banks is to shorten the maturity of their loans which has the effect of making construction loans to new CATV systems difficult to justify economically. The institutions expect to lend slightly more funds in 1976 based, in part, on an expected improvement in the overall economy and a continued emphasis on improving reported profits within the major CATV companies.

The projections for 1975 and 1976 are generally speculation or guesstimates on the part of most institutions since they generally react to loan proposals rather than actively seeking loans. However, the most accurate predictions come from