Cable, Cities, and Copyrights

Bridger M. Mitchell and Robert H. Smiley

Bell Journal of Economics, 1974, vol. 5, issue 1, 235-263

Abstract: The Federal Communications Commission has enacted final rules for cable television systems in the 100 largest television markets, restricting cable service to a greater degree than previously proposed. Most systems will be limited to importing only two distant television signals. Furthermore, they are required to "black-out" imported programs that duplicate a local station's showings at any time up to a year before or after they are locally broadcast. Left unresolved is the issue of payment of royalties to copyright owners for the programs carried by cable. This paper examines the profitability of major market cable systems subject to the final FCC rules with particular attention to the effects of several copyright fee proposals, including one incorporated in pending legislation. It uses an earlier model constructed to evaluate the 1970 FCC proposals for cable, with substantial modifications to include both the effects of the new rules and recent research findings on cable demand and cost parameters. The results indicate that, except where atypical conditions prevail, cable systems will be unprofitable in central urban areas having good broadcast reception, but marginally profitable on the edges of the larger cities. In these latter cases rates of return are not far above the estimated cost of capital. However, copyright fees of the magnitude that have been proposed are likely to deter cable construction in many of these areas, since rates of return are sensitive to the additional costs and, because demand is price-elastic, higher prices could not increase revenues.

Date: 1974
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