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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

characteristics.

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

lower penetration.

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

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3. 3NV ,10,11U

1EV

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Size=10,000

Underground=10%

4

3NV, 1EU

[blocks in formation]

Size=7,500 #

Underground=5%

11, 1E

$10,000

49.5%

15.1%

14.7% 14.3%

8.4%

1. 3NV, LIU, IEV

2. 3NV, 1EU

5. 2NV, INU

6. INV, 2NU

7. INV, 2NU

8. 2NU

IN, 11, 1E

10,000

73.9

20.1

19.7

19.3

12.3

#

minimum originator facilities and no advertising revenue.

[blocks in formation]

Markets 1-50 Density=150 $12, 200

Underground=10%
11.7% 11.3% 10.9% 6.0%

50.5%

2. 3NV, 1EU

31, 1E

11,400

49.5

11.5

11.1

10.7

5.8

3. 3NV, 1Iv, 1 IU

11,1E

12,200

45.9

10.7

10.3

9.9

5.2

[blocks in formation]

Size=10,000 1. 3NV, 1IU, IEV INV

21,1E

1 EU

Size=7,500 #

Markets 101 +
Density=100
$10,000

Underground=5%
13.4% 13.1% 12.7% 7.09

7. INV, 2NU

11, 1E

55.3%

8. 2NU

Size=7500 #

$ 9,000

9. 2NV

IN, 31, 1E

10.2NU

[blocks in formation]

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%.

In consequence,

a

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

i

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.

12

In an inflationary period borrowing costs would be higher by
approximately the expected rate of inflation.

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.

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