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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.
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%
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 1 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.
7 Plus $1.00 for second television sets in 20% of households. 8 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.
MEASUREMENT OF CABLE SYSTEM PROFITABILITY
To summarize the profitability of the typical cable systems
of this study we will calculate the (pre-tax) financial rate of
return on total capital invested in each system.
(or internal) rate of returng/is the single comprehensive measure
of investment in a cable system.
Unlike ratio measures for a
particular year (e.g. net revenues divided by total capital) it
correctly recognizes the opportunity cost of front-end financing,
i.e. that several years are required before systems achieve full
penetration, during which time invested funds are needed.
the financial rate of return permits us to compare the profitabil
ity of funds invested in CATV systems with other types of invest
ments, and thus the likelihood of cable systems being constructed.
The rate of return required to induce investment in a cable
system will depend on the proportion of total capital which can be
obtained through debt instruments and the associated borrowing
rates, and the minimum return demanded by equity investors.
cause the cable industry more closely resembles a high-risk growth
industry than a public utility, at least at the present time, both
lenders and investors demand higher rates of return than for
9 The internal rate of return is that discount rate which equates
the present value of revenues and costs over the lifetime of the system. For further discussion, see Comanor and Mitchell, "Cable Television and the Impact of Regulation," p. 184.
For this study we have held both revenues and cost at 1970
price levels over the full life of the cable system.
measures are consequently in real (constant dollar) terms.
corresponding rate of return concept is the financial return
which would occur if prices did not rise throughout the economy :
whereas in an inflationary period, investors expect price increases
and demand higher returns in money terms to compensate them for
the otherwise reduced value of their funds when their investment
Thus if investors expect a 4% rate of inflation
to continue indefinitely and will invest in enterprises comparable
to cable television only when they return 15% on average, the
required rate of return in constant prices would be 11%.
A detailed investment survey 10 of the CATV industry in late
1971 reports that mature cable companies with demonstrated earnings
have found long-term credit expensive, and that institutional
investors are looking for a 15% return as a combination of interest
and equity appreciation.
As a standard of minimum profitability
necessary to generate investment in new cable systems, we will use
a 10% constant-dollar financial rate of return on total capital.
This is on the low side of recent financing experience of established
CATV companies, and would therefore apply to new systems constructed
by the larger multiple system owners today.
New CATV firms lacking a
track record will face higher costs of capital and will require
somehwat higher rates of return to justify their construction.
& Stieglitz, Inc., "The Cable Television Industry."
We are now prepared to analyze the financial results for typical
systems in the several market situations discussed earlier.
each system, the computer simulates the complete revenue and cost
experience to be expected, using the parameters supplied by the
The detailed cost and revenue schedules have been built
into the Comanor-Mitchell computer program, modified to include
the changes in FCC rules, penetration and costs discussed earlier
and in the appendix of this study.
As an example, consider the abstract of the computer output
reproduced in Table 3
Part A indicates that this example is
representative of a 25,000 subscriber system located near the middle
of a top 50 market. Density is assumed to be 200 homes per mile, and
family income $12,200.
Annual subscriber rates are $62.40, correspond
ing to $5.00 per month plus a small additional amount for second
Since this is a central urban location, 20% of the cable
miles are underground, and standard local origination equipment
has been budgeted.
Revenue from advertising on the cablecasting
channel has been estimated at $2.20 per subscriber annually.
table of signals carried shows that 3 VHF networks plus one viewing
test network are available off-the-air.
In addition there is one
UHF independent and a VHF educational station.
In addition to these
broadcast signals, the cable system imports two independents and