and near-pr fitable systems and by somewhat less for systems well

bel w the 1% return level.

Thus, in the example system (the first

line of Table 4) the rate of return falls from 10.4 to 9. M.

A re-pant charge in the rate of return on total capital has a

**, ferally larger effect on equity holders. Supp se that one-half

to two-thirds of the cable system is financed by 8x 12' delt arstruments. if leverage a 1% return on total capital will then corres

ped to a return on equity up to 17% - 14%. In consequen, e a
de line to a % return in total capital can reduce the return n
@July by tw to three pervertage points depending in the aptal
of the system. Changes of this ma irit „de are re than
$.『,.、、�མ་ ་་ p*pe or eliminate enstr. tin fable systems
rherwise aƒyear marjinally pr fitatie.

The prep teran e federe in Tables 4-15 is that larje

ref. tef re pyri 2** pa, "er,ta large systems ir ..e markets are

and internet.ate and smaller-sized systems

will be marginally pr f.tal.e fay where spe .ai fa ·

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 1% return--the 50 000 subscriber edge market 51-100 syster in Table 8. Fee payments of this magnitude would effectively halt cable growth in the large cities,

CONCLUSION

The outlook for early devel pment of cable television service

in the mator cities is at best m.xed. As compared with the rules discussed two years ago the final FCC rules more tightly

restrict the choice of broadcast signals a system can provide to its

sube"ribers.

Analysis of the important variations in potential market and cable systems characteristics in these urban areas demonstrates that only the largest systems, or multiply-owned systems of slightly smaller scale will be viable in the central city areas where offthe-air reception quality is high and then only under favorable construction and penetration conditions. At the edges of these

markets returns will be sufficient to attract investment in the largestale systems but systems of 10 033-15 0-0 will be profitable only under especially favorable ir stances.

In an investment environment in which the maturity of urban households can be profitably wired for cable television service

sely when styp: ally propitium cst and demand factors occur to require re than quite limited c pyright payments will significantly retard

or halt CATV expano; e in the urban markets. The prpsed statutory fee schedule in 8.644 tap to of subscriber revenue) would generally lower rates of return on total capital a full percentage point for systems in the profitable range, and in an important proportion of cases ita leveraged effect on equity investors wid be sufficient in create unprofitable systems.

As expected, a fee schedule of one-half that in $.644 reduces rates of return on total capital about one-half a percentage point. Fees of this magnitude would restrict cable construction primarily in market circumstances where returns are already limited for other reasons. In contrast, a flat 16.5% copyright payment would create a decidedly unprofitable investment climate for cable television throughout the top 100 markets, far outweighing the limited prospects opened up by the 1972 FCC rules.

Bibliography

Comanor, William S. and Mitchell, Bridger M., "Cable
Television and the Impact of Regulation, The Bell
Journal of Economics and Management Science, Vol. 2,
No. 1 (Spring, 1971), pp. 154-212.

Comanor, William S. and Mitchell, Bridger M., "The Lost Generation: A Correction," Bell Journal of Economics and Management Science, Vol. 2, (Autumn 1971), pp. 704-705.

Comanor, William S. and Mitchell, Bridger M., "The Costs of Planning: The FCC and Cable Television," Journal of Law and Economics, Vol XV (1), April, 1972, pp. 177-206.

Foundation 70, "Cable in Embryo: Economic Considerations for Urban Franchising," Wellesley, Mass.. processed, September 1971.

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Johnson, Leland L., et al, "Cable Communications in the
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Mitchell, Bridger M., "An Economic Analysis of the Ability of CATV Systems in Top 100 Markets to Pay Copyright Royalities," Washington, D.C.. processed May 15, 1972. Park, Rolla Edward, "Prospects for Cable in the 100 Largest Television Markets," Bell Journal of Economics and Management Science, Vol. 3, No. 1, (Spring, 1972), pp. 130-150.

Park, Rolla Edward, "The Exclusivity Provisions of the Federal Communications Commission's Cable Television Regulations," Rand Corporation, R-1057-FF/MF, June 1972.

Seiden, M.H. and Associates, CATV Report, 1970.