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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
These averages range from 91 to 208 miles to the closest
signal, and 125 to 325 miles for the next closest for several types
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
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.
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
But, in practice, the behavior of
cable systems is
increasingly limited by local and federal reg
ulation, and by competition among firms for franchises.
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.
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
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.
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.
availability of good substitutes for CATV describes most top 100
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":