and $38,000 to capital costs for each system. Thus, for a 10,000 subscriber system, origination alone contributes nearly $5 per subscriber per year to total costs, but for a 25,000 subscriber system, the additional cost is only $2 per subscriber.

A review of the financial statements of five major M. S.O.'s

in the past years reveals that C-M have undoubtedly overestimated the economics of large size inherent in cable system operation. Table C-4 summarizes the performance of these M. S. O. 's and Table C-5 provides a comparison of each company's operating costs with the estimates which derive from the C-M cost parameters for systems of the same subscriber penetration, average size, and population density. It is quite clear that C-M provides a reasonable estimate only at an average size of 10,000 subscribers, overestimating costs for smaller systems and underestimating costs for larger systems. Since we are forced to rely upon the C-M operating cost data for our simulations in Section E, below, we present results only for a typical 10,000 subscriber system. Any other results based upon C-M cost parameters would be seriously biased.

5.

Capital Costs

Since cable television is an extremely capital-intensive activity, Mitchell's assumptions about capital expenditures are crucial to his rate of return calculations. There are four major reasons why his estimates of capital expenditures lead to a downward bias in calculated profitability:

He assumes that underground cable percentages are far above actual and prospective underground percentages in the most dense markets.

He assumes that the entire plant is built at the beginning of the first year.

He fails to account for a less expensive method of
construction in dense middle markets.

He asumes that the entire plant is rebuilt in each generation even though some components of capital expenditure may never be replicated after initial construction.

We shall take issue explicitly with the first two of these assumptions, citing data collected from middle-market systems either in operation or under construction at the present time. In addition, we shall cite a recent Rand study of the prospects for cable in the Dayton-Miami Valley area and the projected temporal pattern of construction for this system. The third and fourth items will be discussed, but we do not alter the assumptions made by Mitchell in these respects in our calculations in Section E, thus again biasing our results downward.

a.

20

Underground Construction. Mitchell's assumptions about the extent of underground construction are unrealistic. He predicts that the average percentage of underground construction will vary by market and by proximity to the middle of the market. A tabulation of these percentages appears as Table C-6.

How does he justify the 20 percent datum for major-market middle

systems? By noting that the following "typical" systems have required extensive underground construction:

All of these systems are located in the sixth largest market-- Boston, Massachusetts. Mitchell appends these data as Table A-2, but he neglects to inform us that:

1. Franchises have been awarded in only Chelsea and Somerville. In Boston and Brookline, system design and franchise awards have not been consummated.

2. In Somerville, current construction plans call for very little digging of new trenches for underground cable since existing telephone company ducts can be used. All told, only 7.3 percent--not 21.6 percent -will be placed underground in existing ducts and in new conduits.

3. Chelsea plans to bury approximately 20 percent underground

in existing utility ducts. No new trenching is planned.

4.

City engineers in Boston are emphatic in stressing that no new underground construction will be allowed in Boston. All underground cable will be placed in existing utility ducts.