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Finally, lines 4, 5 and 6 demonstrate the effect of utilizing all of our assumptions, including a mature penetration of 64.8 percent. The rate of return rises to 28.5 percent in the face of $67.92 per subscriber per year with no growth, and it rises to a heady 36.8 percent in the face of 4 percent growth. Thus, our most favorable assumptions have produced a trebling of the rate of return for this sample system, but more than half of this increase occurs even if we assume that revenues per subscriber do not increase from today's level.

Turning to our own calculations embodying the assumptions detailed at the outset of this section, we obtain much larger rates of return than Mitchell. Tables E-3 through E-7 present the results for each market category. Appendix A contains the detailed cash flows from the computer printouts for these and other simulations.

Clearly, if cable systems are able to achieve the 64.8 to 65.3 percent subscriber penetration which the owners are expecting, all systems of 10,000 subscribers will be able to earn considerably more than the required 15 percent on investment even after a copyright fee schedule such as #4 is imposed. With a modest growth rate of 2 percent applied to revenues per subscriber, the lowest rate of return before copyright fees is 18.62 percent. With a 4 percent growth rate, this rises to 22.72 percent. If we make the more pessimistic assumption that cable systems in the top 100 markets will not be able to improve upon their average subscriber penetration of 55.3 percent, rates of return fall slightly, but no system with 10,000 subscribers earns a return of less than 18. 29 percent with 2 percent revenue growth and no copyright fees. At a 4 percent growth rate, the minimum rate of return rises to 22.36 percent.

We also estimated the profitability of larger and smaller systems, utilizing the C-M cost data, and our results were predictable. For 25,000 subscriber systems, for example, the rates of return were

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consistently in excess of 25 percent and often above 30 percent while for smaller systems with but 5,000 subscribers, the rates of return were in the range of 12 to 18 percent. These enormous differences derive from the C-M overestimates of the efficiencies of size, of course, but even with this substantial bias incorporated, the rates of return for small systems were greater than the cost of capital when 4 percent revenue growth was assumed.

One might also ask how more pessimistic penetration assumptions affect our calculations. Even if penetration at maturity is expected to be but 40 percent of homes passed in future years for a typical cable system, 10,000 subscriber systems will realize rates of return between 18.33 and 23. 35 percent under our assumptions with 4 percent growth in revenues per subscriber. Combining this exceedingly low penetration figure with only a 2 percent growth rate in revenues per subscriber yields rates of return of 14. 28 to 19. 21 percent.

It is clear from these comparisons, that projected growth in subscriber revenues are critical to any calculation of profitability. While our assumptions of 2 percent and 4 percent are not particularly staggering they overwhelm Mitchell's projected rate of 0.00 percent growth. Since we are projecting revenues and costs over an infinite horizon, it is particularly important to allow for the probability that the average subscriber in the year 2000 will contribute more than $64.60 per year to revenues even after adjusting for inflation. Mitchell's method applied to the telephone industry at a similar stage in its development would have led to an estimate in 1915 that revenues per telephone installed would remain at $30 forever without improvements in productivity! Obviously, such a projection would have been a woefully inadequate guide for regulatory policy in the ensuing 58 years.

Another striking result of our calculations is the minor effect

of our alternative copyright fee schedules. This result obtains simply because the average fee paid in the first few years is a very small percentage of revenues. Even schedules #3 and #4 provide for payments of only 1 to 3 percent and 2 to 6 percent of revenues, respectively, in the first five years for systems with only 10,000 subscribers. This percentage increases as the revenues grow, but none of our calculations posit average payments of as much as even 5 percent per year in these first five years; thus, the effect of the copyright fee schedules currently under discussion is de minimis from the standpoint of estimating current profitability.

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