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one educational station.

These signals are imported by microwave,

averging 3 hops of 35 miles each per channel.

Within five years the system is assumed to reach maturity, apart

from further growth due to rising incomes or enlargement of its

franchise area.

Penetration is predicted to be 28.1% if the distant

signals are fully available, but 27.2% as a result of exclusivity protection on the independent channels.

Part B summarizes the growth of penetration, subscribers, and system revenue (including advertising) over the first 10

years.

In Part C we may assess the impact of copyright fees on profitability. For each of the four fee schedules described earlier

we report two rates of return--one assuming a 10 year average lifetime of capital, the second assuming 15 years. If fixed capital equipment is replaced about every 15 years, this system will earn a 10.4% real rate of return on total invested capital absent any copyright fees. Alternatively, the statutory schedule (number 3)

reduces the rate of return to 9.3%, and the flat 16.5% fee lowers returns sharply to 5.5%. A shorter lifetime for equipment reduces these returns by 2.5 to 3 percentage points.

In the analysis below we report rates of returns based only

on 15-year lifetimes. Fifteen years represents a compromise between somewhat longer physical lifetimes for some parts of the cable plant and rather shorter economic lifetimes of currently operating systems experiencing technological obsolescence. It appears

unlikely that 20-channel systems built today will remain competitive beyond 1985 without major rebuilding.

RESULTS-- -IN DETAIL

The financial prospects for cable under the final FCC rules

and the impact of alternative copyright fee schedules are contained in the seven tables which follow. While we shall briefly review

the major findings here, the reader should consult the tabulations for particulars. Tables 4 and 5 report the expected experience in

middle markets of large and intermediate sized systems respectively.

Line 1 of Table 4 restates the example system discussed in

detail above.

Lines 2 and 3 are for similarly situated communities

Penetration ranges

with somewhat different sets of local signals. from about 22-27% and rates of return from 7.5 to 10.4% when there

are no copyright fees. Despite somewhat higher penetration rates, systems in the second 50 middle markets earn lower returns, principally because of reduced density, while in the lowest ranked markets there is great variation, with profitable, 55% penetration systems when one network is missing from the local signals.

Intermediate-sized systems in middle markets are decidedly below the 10% rate of return needed to attract investment funds.

Except where quite large systems of 25,000 or more subscribers can be built, central city areas of the major markets are not bright prospects for cable under present rules, even without copyright payments.

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In these tables, N means network, I means independent, E means educational; V means NHF, U means UHF.

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15.8 15.4

9.1

# = minimum origination facilities and no advertising revenues. *= negative return

The prospects for large systems at the edge of major markets (Table 6) are brighter. In the top 50 markets penetration is in the 34-38% range with rates of return 11.0-12.6%. In the second 50 markets penetration ranges up to 45% with rates of return from 9.713.4%. In the smaller markets and also the fringe (outside) areas we find more heterogeneous results, with quite profitable CATV possibilities where fewer than three networks are available.

The corresponding intermediate-sized edge systems are again unprofitable in all 3 network cases. This indication of the importance of large systems, or economics of scale in technical terms, is developed in more detail in Table 8, by systematically varying the size of the most profitable system from each of the four market types in Tables 4-7. While large systems would seem feasible in the major metropolitan areas, as of March 1971 only 20 systems had more than 20,000 subscribers and the largest had less than 50,000 11. Some fraction of these economies of scale can be achieved when a series of smaller systems are under common ownership and thereby realize savings from efficient use of management and technical personnel and can share local programming and and signal importation expenses.

The results presented in tables 4-8 are based on market, economic and construction factors which typify the most common situations which will be encountered in middle and edge locations of each of the four types of markets. Of course, within each category there will be a degree of variation,

clustered around the typical situa

11/ Television Digest, CATV and Station Coverage Atlas.

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