A Reexamination of the Prophecy of Doom for Cable Television

The economic literature on the prospects for cable television in the nation's major television markets is universally pessimistic. The conventional wisdom, as expressed by Park and Mitchell in the pages of this Journal, is that cable systems will not be able to enroll many subscribers in areas served by three commercial stations. Given that the FCC has limited the importation of distant independent signals in a number of ways, the prospective additions to a viewer's television menu from cable television are thought to be quite limited in areas of three or more stations. This traditional view is challenged in this paper, for it is the authors' opinion that the potential of cable television is greatly underestimated if attention is focused solely upon importations of broadcast signals and low-quality local originations. Cable television opens up the possibility for a price-rationed system of entertainment in the home which far surpasses the current television medium. When reasonable assumptions, drawn from the cable industry and the capital market, are inserted into the Comanor-Mitchell model of cable-system performance, rates of return on prospective investment are consistently above the cost of capital. One needs only to assume that pay cable will allow systems to attract 50 percent of the homes passed by the cable and that revenues per subscriber will increase at a rate of 2 percent per year in order to obtain this more sanguine result. Such assumptions seem far more realistic as the basis for long-run projections of the future of cable television.