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Finally, we might pose the question of ability to pay in a slightly different manner: What percentage of revenues could each system pay every year without allowing its rate of return to fall below 15 percent ? The answers to this question appear in Tables E-8 through E-10.

Combining the NCTA's own predictions about subscriber penetration with a modest 2 percent growth rate leads to estimates of 13. 45 to 25. 13 percent of revenues realized as excess returns. An increase in revenue growth to 4 percent leads to estimates of 30.56 to 39. 80 percent of revenues as excess returns. Even the more modest 55.3 percent penetration assumption for the top 100 markets yields estimates of 12. 52 to 22. 28 percent of revenues in excess of those required to cover the cost of capital with our modest 2 percent growth rate. This rises to 29. 82 to 37.57 percent when 4 percent growth is assumed. Even if penetration is a meager 40 percent of homes passed at maturity, 4 percent revenue growth would yield estimates of excess returns of 17 to 30 percent of revenues for a 10, 000 subscriber system.

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F. CONCLUSIONS

Based on the foregoing calculations, our conclusions on the ability of cable systems to develop in major markets and to pay prospective copyright fees is much more sanguine than that offered by Mitchell. The difference derives largely from the unsupportable assumptions made by Mitchell in his analysis--assumptions wholly inconsistent with NCTA members' predictions and recent behavior in cable system sales. Once Mitchell's low penetration rates and conservative revenue estimates are replaced by more reasonable industry estimates, rates of return rise strikingly, even in the face of rather substantial copyright fee payments.

Despite our rather substantial revision of Mitchell's calculations, our estimates of prospective system profitability remain quite conservative for six major reasons.

First, we use Comanor-Mitchell's capital and operating cost data with very little alteration. These estimates have been criticized as considerably high and will probably prove to overestimate cable system costs in future years.

Second, we utilize Mitchell's arbitrary maturity path in our calculations. As cable is built in larger, denser markets, it may be easier for cable operators to enroll subscribers at a more rapid pace.

Third, we assume that no installation fees are collected by system owners despite obvious evidence to the contrary.

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