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tions we have reported.
Some communities will have higher incomes,
others will require extensive undergrounding, still others will
require high-cost local origination facilities, etc.
To measure the sensitivity of our findings for typical systems
to such variations, we have rerun all of the intermediate-sized
systems (tables 5 and 7) assuming that penetration is one-third
greater than would be expected on average, for each set of market
A variety of unmeasured factors can cause actual
penetration to vary above or below the average value predicted by
the penetration equation.
In increasing the average value by one
third we have in effect selected only the 10% of the cases in which
penetration is most favorable; in other words, nine out of 10 com
munities having the same signal lineups, income, etc. will have
Turning to the results in Tables 9 and 10 we find that such
unusually high penetration is sufficient to produce at least one
profitable system in each type of market, at least if copyright
fees are absent.
Thus, 7,500-10,000 subscriber systems have some
chance of earning a going rate of return in the top 100 markets
only when local circumstances produce unusually favorable penetration.
We turn finally to the financial prospects for cable when
copyright fees are required.
The predominant effect of Schedule
3, the statutory fees proposed in 5.644, is to reduce the financial
rate of return on total capital a full percentage point for profitable
3. 3NV ,10,11U
1. 3NV, LIU, IEV
2. 3NV, 1EU
5. 2NV, INU
6. INV, 2NU
7. INV, 2NU
IN, 11, 1E
minimum originator facilities and no advertising revenue.
Markets 1-50 Density=150 $12, 200
2. 3NV, 1EU
3. 3NV, 1Iv, 1 IU
Size=10,000 1. 3NV, 1IU, IEV INV
Markets 101 +
7. INV, 2NU
IN, 31, 1E
and near-profitable systems, and by somewhat less for systems well
below the 10% return level.
Thus, in the example system (the first
line of Table 4) the rate of return falls from 10.4 to 9.3%.
A one-point change in the rate of return on total capital has a
considerably larger effect on equity holders.
Suppose that one-half
to two-thirds of the cable system is financed by 8% 12/ debt instruments.
Because of leverage, a 10% return on total capital will then corres
pond to a return on equity up to 13% or 14%.
decline to a 9% return on total capital can reduce the return on
equity by two to three percentage point's, depending on the capital
structure of the system. Changes of this magnitude are more than
sufficient to postpone or eliminate construction of cable systems
which otherwise appear marginally profitable.
The preponderance of evidence in Tables 4-10 is that large
systems at the edges of top 100 markets will earn a 10-13% rate of
return before copyright payments, large systems in middle markets are
not likely to exceed 10%, and intermediate and smaller-sized systems
will be marginally profitable only where special factors operate.
Copyright fees, at the level of Schedule 3, would significantly slow the rate of growth of cable in the major markets, particularly in
middle areas with good quality signals and in edge market communities
of intermediate size.
In an inflationary period borrowing costs would be higher by
Copyright fee schedule number 2 is exactly one-half the rate
of schedule 3,
As expected, it has approximately half the effect
of schedule 3 in reducing the rate of return for all systems.
Schedule 4 is the flat 16.5% copyright fee.
Its effect on
rates of return is devasting.
of all variations studied in the top
100 markets, only a single system earns a 10% return--the 50,000
subscriber edge market 51-100 system in Table 8.
Fee payments of
this magnitude would effectively halt cable growth in the large cities.