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7. The previously proposed 5% "public dividend" tax

for support of non-commercial broadcasting has been
eliminated.

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Rate of subscribers growth over time. Park's recent
research on cable penetration completed after the
publication of the Comanor-Mitchell Report, indicates
a more rapid maturation of cable growth than was pre-
viously assumed. While the precise growth path has
not been definitively established, for this study we
have increased the rate of subscriber growth so that
the typical system reaches its mature size in the fifth
year. Thereafter, some additional growth occurs as real
incomes of potential subscribers are assumed to rise
at a rate of 2% per year.

As compared with Comanor-Mitchell, the effect of these
modifications is to increase the size of typical systems
in two ways:
a) study systems gain subscribers more rapidly in

early years;
b) the size of a study system is measured in its fifth

year, rather than its size after twelve to fifteen years.

Figure Al provides a graphical comparison of the growth curve used for this study and the earlier ComanorMitchell study.

As in the Comanor-Mitchell Report, financial (internal) rates of return are calculated for a firm of indefinite life by assuming that the firm reaches an equilibrium of revenues and costs after one 15-year lifetime, or generation, of equipment. Thereafter, the plant is rebuilt periodically, while subscriber penetration is held constant at the mature level. The rate of return is generally robust with respect to exact assumptions about conditions in later generations. Another solution to this terminal value problem is to assign the firm a value at the end of its first generation, based on operating characteristics such as revenues, subscribers, etc. For an example of this method see L. L. Johnson, "Cable Communications in the Dayton Miami Valley: Basic Report."

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Growth Curve used in this

study

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The Penetration Equation

Technical details of the penetration equation are summarized below. For further discussion see R. E. Park, "Prospects for Cable in the 100 Largest Television Markets."

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) = -8.159 + 3.098 log XN + 0.290 log XD

+0.212 log XI + 0.298 log Xe 0.540 log XF

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Vi = number of B-contour off-air OHF signals of type i

Vi = number of B-contour off-air VHF signals of type i

Pen= penetration = subscribers/households passed by cable

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In order to use Park's estimated equation to predict penetration for the typical systems investigated in this report, representative values must be assigned to the variables of the equation. The following values are employed in all of the simulations:

P = $62.40, corresponding to the $5 per month plus $1

per month for 20% of subscribers as a charge for
second set.

C = 50%. The effect of varying color set penetration

is not estimated with sufficient precision to incorporate variations in color set ownership across different types of markets.

u = 80%

90%
95%
99%

if o local network UHF signals
if i local network UHF signal
if 2 local network UHF signals
if 3 local network UHF signals

F = 0. Foreign stations are not included among the

signals carried by study systems.

In simulating cable systems for this study, we consider systems located in the central area of a television market, where off-the-air signal quality is generally high, and outlying areas of the same market, where quality is diminished. In the penetration equation the distance variable d is a measure of the reduction in quality. A d value of 0 corresponds to a viewer in the center of the market, while a value of l represents a viewer at the B-contour of the off-the-air signal.

For the systems in this study we have used the following values:

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Tables 9 and 10, "Ten Percent Most Favorable Penetration conditions," are calculated using 133% of the penetration implied by Park's equation above. This corresponds approximately to the penetration value at the upper 10% confidence limit.

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