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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 S.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 1.

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In comparing systems in different market circumstances and with 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 regulation, 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
Firms would doubtless

were imposed requires further discussion.

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 penetration, 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.
Park, "Prospects for Cable...", p. 140.

5/

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"

How, then would cable systems' profits be affected by a 16.5% copyright payment and a concommitant rise in subscriber rates? Revenues would be unchanged, while operating costs would increase sharply by the amount of the copyright payments. There would

be some small offsetting changes in other incremental costs, resulting from the saving achieved by not serving the subscribers who do not purchase service at the higher price. For typical systems, there are rather small costs of installing additional drop lines, additional maintenance and billing expenses and slightly higher

taxes and dues related to numbers of subscribers.

In consequence, the net effect of allowing higher subscriber rates in conjunction with 16.5% copyright fee payments would be to reduce rates of return to nearly the same levels as would be achieved by holding subscriber rates unchanged with the same 16.5% copyright fees. In addition, penetration would be lower, providing a narrower base for future leased-channel services capable of generating additional payments from cable systems to program suppliers. We remind the reader that the discussion in the preceeding

several paragraphs assumed a degree of upward price adjustment which has not been observed. In the remainder of this study we adhere to a fixed monthly price of $5.00 7/ for maximum cable broadcast service allowed by the FCC rules. 8/

An analysis of the profitability of systems under the alternative assumption of higher rates and consequently reduced penetration would yield approximately the same findings.

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7 Plus $1.00 for second television sets in 20% of households. One other reminder may be in order. Since we are considering all prices and costs in 1972 terms, increases in the monthly subscription rate at about the rate of increase of consumer prices generally will not contradict our observation that real subscription rates cannot be adjusted.

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