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stand-by independent has particularly attractive programming,

or when importation costs are less dependent on distance, as

could occur with satellite transmission.

Regarding importation costs, we have assumed for all systems

in this study that distant signals are delivered by cable

system-owned microwave links of 50-100 miles per channel

imported. Average distances to the first and second closest

independents (in the top 25 markets) are tabulated in the appen

dix.

These averages range from 91 to 208 miles to the closest

signal, and 125 to 325 miles for the next closest for several types

of markets.

Thus the microwave cost estimates used here must be

considered generally low, although they may be closer approximations

for markets with several closely spaced systems which pool their

microwave facilities.

16

COPYRIGHT FEE SCHEDULES

In the analysis which follows we consider four alternative

fee schedules for payment by cable systems to copyright owners.

Schedule 1 is the baseline case of zero fees.

Schedules 2 and

3 levy successively larger fees as the system's revenue grows.

Schedule 3 (incorporated in Bill 5.644) begins at 1% of subscriber

revenues, and rises to 5% of revenues exceeding $640,000 annually:

Schedule 2 is exactly half of Schedule 3.

For the fourth Schedule

we consider a flat fee of 16.5% of subscriber revenues, regardless

of the size of annual revenue.

The exact details of these fees are

set forth below and in the accompanying figure i.

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alternative fee schedules, we keep unchanged the subscriber price

as well as the system size and other attributes of the CATV service.

Cable television systems have some of the attributes of a "natural

monopoly," flowing principally from their high fixed-low variable

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cost nature.

But, in practice, the behavior of

cable systems is

increasingly limited by local and federal reg

ulation, and by competition among firms for franchises.

Both of

these forces sharply restrict the ability of cable firms to adjust

price or output at will.

Present regulation and competition for new franchises, plus

the threat of more extensive regulatory action if firm behavior

is perceived as excessive, has kept monthly subscriber rates

virtually constant in current prices over several years.

Seiden,

in 1970, found most recently franchised systems charging between

$5.00 and $7.00 per month.

In their sample of Factbook systems

Comanor and Mitchell reported a mean price of $5.00 per month.

Park in 1972 has an annual average price of $63 for his sample of

A-contour cable systems.

The assumption that moderate cost increases,

including copyright fees, cannot be passed on in the form of higher

prices is consistent with the recent market experience.

Assuming no price response by cable firms if a 16.5% surcharge

were imposed requires further discussion.

Firms would doubtless

make strong representations to local authorities about the need for

higher prices, and bids for new franchises would quote higher

rates.

But granting for the moment that regulators allowed part

or all of the surcharge to be translated into higher subscriber

rates, how would cable profits be affected?

The answer depends primarily on how rapidly penetration would

decline as prices were raised; in technical economic terms, on the

elasticity of demand.

If, for example, a 16.5% increase in price,

from $5.00 per month to $5.83, results in a 16.5% decrease in pene

tration, say from 30% to 25% of homes passed, then the higher price

has (approximately) 4/ no effect on total subscriber revenue--it is

fully offset by reduced demand for service.

A basic result of economic theory states that consumers' demand

for a service will be increasingly sensitive to its price as more

and closer substitutes are available for that service.

Thus house

holds in areas with a diversity of broadcast signals, with generally

clear reception and with a variety of entertainment alternatives can

be expected to decline service rapidly as prices rise.

This

availability of good substitutes for CATV describes most top 100

markets.

The econometric work of R.E. Park confirms this degree

of price elasticity of demand in such areas; in fact, the figures

in the example above correspond almost exactly to Park's statistical

findings. 5) 6/

4 calculating the percentage changes, for convenience, in terms

of the original price and penetration, results in a slight approximation. A more exact result is obtained using the

average of the old and new price and penetration. 5 Park, "Prospects for cable...", p. 140. 6 For a discussion of the effect of demand elasticity on maximum

rates permitted by a regulatory authority, see Comaner and Mitchell, "The costs of planning: The Fcc and cable Television":

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