Report on Chain Broadcasting: Chapter III (1941)

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Report on Chain Broadcasting, U. S. Federal Communications Commission, May, 1941, pages 21-25:

III. THE COLUMBIA BROADCASTING SYSTEM
A. FORMATION AND EARLY HISTORY
    The organization which later became the Columbia Broadcasting System was incorporated in New York on January 27, 1927, under the name of United Independent Broadcasters, Inc. Its purpose was to contract for radio station time, to sell time to advertisers, and to furnish programs for broadcasting. Of its original four stockholders, two, Arthur Judson and an associate, were managers of concert artists primarily interested in creating a new market for their managed talent; a third, Edward Ervin, was assistant manager of the New York Philharmonic Symphony Society; and the fourth, George A. Coats, was a promoter.
    In April 1927, before United began actual operations, the Columbia Phonograph Co., Inc., became interested in the project through the Columbia Phonograph Broadcasting System, Inc., which was organized on April 5, 1927, to function as the sales unit of the network. The outstanding stock of Columbia Phonograph Broadcasting System, Inc., was originally issued to Columbia Phonograph Co., Inc., which was active in its financing, and to four individuals.¹
    The effective date of United's contracts with its original network, some of which were signed as early as March 1927, was September 5, 1927, but United experienced some delay in getting under way and the first program was broadcast over the network on September 25, 1927. United contracted to pay each of the 16 stations on its original network $500 per week for 10 specified hours of time. The sales company was unable to sell enough time to sponsors to carry the network under this arrangement, and heavy losses were incurred because of the definite and heavy commitments entered into with the stations.
    Because of these losses, the Columbia Phonograph Co. and the four individual stockholders withdrew from the venture in the fall of 1927 and all the outstanding capital stock of Columbia Phonograph Broadcasting System, Inc., was thereupon acquired by United.² The name of the sales company was changed to Columbia Broadcasting System, Inc., and on January 3, 1929, when the sales company was dissolved, United took over its activities and its name. Columbia Broadcasting System, Inc., has been the name of the network since that time.
    In November 1927 Jerome H. Louchheim, Isaac D. Levy, and Leon Levy acquired a controlling stock interest in United and controlled the network until September 1928, when William S. Paley and his family purchased 50.3 percent of the stock. In December 1927 the original affiliation contracts of March of that year were superseded by contracts which eliminated the commitment of United to pay for the station time under contract whether it was used or not. Under the new contract the station was required to pay United $50 per hour for sustaining programs and United to pay the station $50 per hour for broadcasting commercial programs.
    In 1929 the Paramount-Publix Corporation, traded 58,823 shares of its own stock to CBS stockholders for all of the CBS class A stock (50,000 shares), constituting 50 percent of the outstanding stock of CBS.³ It was agreed that if, during the ensuing 2 years, CBS should earn an average of 1 million dollars a year, Paramount would give the CBS stockholders who had taken Paramount stock the right to "put" the stock back to Paramount at $85 per share. CBS earnings during the 2-year period were in excess of the stipulated amount, but at the end of the period, Paramount was not in a position to pay the agreed repurchase price in cash. Accordingly, the 1929 agreement was modified in the following manner: Paramount sold to CBS 14,156 shares of CBS stock at $82.21 per share, which thereafter became "treasury" stock. It also surrendered the remaining 49,094 shares ⁴ pro rata to the individual stockholders of CBS, and received from them in return the Paramount stock. This transaction released Paramount from its obligation to pay for the stock at $85 per share.⁵
    Out of the 49,094 CBS class A shares returned by Paramount to the individual CBS stockholders, William S. Paley, acting on behalf of himself and other stockholders, sold 24,328 to a banking syndicate headed by Brown Brothers, Harriman & Co. at the same price per share as that used in the sale from Paramount to CBS of the "treasury" stock. The syndicate did not make a public offering of these shares, but placed most of them privately with a few individuals.⁶
    The reason given for the sale of this stock by Paley and his associates to the syndicate was that they held about 10 or 11 million dollars worth of stock in CBS and they wanted to diversify their investments.⁷ Their voting power, however, was not diminished correspondingly; for, on March 10, 1932, at the conclusion of the Paramount transaction, the holders of the CBS class A stock were granted the privilege of cumulative voting in electing one-half of the company's directors, while the holders of the class B stock continued to vote noncumulatively. As of the time of the committee hearings, William S. Paley and his family held about 16 percent of the class A stock and about 54 percent of the class B, or a total of about 33 percent of all the stock of CBS. Since there are 7 directors elected by each class of stock, the cumulative voting of the class A stock together with the noncumulative voting of the class B stock gives the Paley family the power to elect a majority of the entire board of directors of 14 even against the holders of the other 67 percent of the CBS stock.⁸

B. GROWTH OF CBS NETWORK
    The original CBS network (then United) consisted of 16 stations. At the end of 1938, CBS had 113 outlets. The following chart shows the growth of the network:

Date (end of year)	Number of CBS out- lets	Approximate percentage of CBS outlets to total num- ber of licensed stations		Date (end of year)	Number of CBS out- lets	Approximate percentage of CBS outlets to total num- ber of licensed stations
1927 1928 1929 1930 1931 1932 1933	15 28 47 69 82 92 92	2.2 4.1 7.6 11.4 13.6 15.4 15.8		1934 1935 1936 1937 1938 1940 ¹ 1940	97 97 93 110 113 117 121	16.6 15.7 14.4 16.0 15.7 15.3 14.6

¹ Feb. 1.

The first station purchased by CBS was station WABC, its basic New York outlet, which was acquired in 1928. As of the time of the committee hearings, CBS was the licensee of nine stations, all of which were owned by it except WEEI in Boston, which it leased. In 1939 CBS sold one station,⁹ so that it is now the licensee of the following eight stations, all of which operate with unlimited time:

Station	Location	Power	Date of ac- quisition
WABC WJSV WBT WEEI WBBM WCCO KMOX KNX	New York Washington Charlotte, N. C. Boston Chicago Minneapolis St. Louis Los Angeles	Watts 50,000 50,000 50,000 5,000 50,000 50,000 50,000 50,000	1928 1932 1929 1936 1929 1931 1931 1936

In addition, CBS now holds 45 percent of the stock of Voice of Alabama, Inc., the licensee of station WAPI in Birmingham, Ala., and it has a commitment to accept, by purchase of a new issue, 40 percent of the capital stock of Pacific Agricultural Foundation, Ltd., licensee of station KQW, San Jose, Calif.
In every year since and including 1929, CBS has operated at a profit. Both gross and net income have, with few exceptions, increased year by year as is shown by the following table:

Year	Time sales (after dis- counts; before agency com- missions)	Net income for the year (before Fed- eral income tax)		Year	Time sales (after dis- counts; before agency com- missions)	Net income for the year (before Fed- eral income tax)
April. 5, 1927, to Dec.- 31, 1927 1928 1929 1930 1931 1932 1933	¹ $176,557 ³ 1,409,975 4,453,181 6,957,190 10,442,305 11,518,082 9,437,100	² $220,066 ²179,425 474,203 985,402 2,674,158 1,888,140 1,083,964		1934 1935 1936 1937 1938 1939 1940	$13,699,649 16,391,565 21,449,676 25,737,627 25,450,351 30,961,499 35,630,063	$2,631,407 3,228,194 4,498,983 5,194,588 4,329,510 6,128,686 7,431,634

    ¹ Agency commissions have also been deducted from the figure for this short period.
    ² Deficit.
    ³ Includes sale of talent and other services.

C. MANAGEMENT OF ARTISTS BY CBS
    In December 1930, CBS acquired 55 percent of the stock of Columbia Concerts Corporation, which had been organized that year by the merger of a number of concert artist managements. Columbia Concerts Corporation has been engaged in the business of managing concert artists in all fields of entertainment. Most of its business with respect to radio relates to the appearance of its managed artists on commercial programs over national networks. Practically all negotiations for the sale of its talent are carried on, and the contracts are made, with advertising agencies. The artists managed by Columbia Concerts Corporation have appeared frequently on commercial programs over NBC as well as CBS. Indeed, the total bookings of Columbia Concerts artists for appearances over NBC, from and including the 1931-32 season to January 1939, were greater than their bookings for appearances over CBS. For the fiscal year from June 6, 1937, to June 4, 1938, the total revenue of Columbia Concerts Corporation was $426,413, and the profit for that period was $94,038. For the 1938-39 season Columbia Concerts Corporation had under management contract approximately 120 artists and in addition about 17 dancing groups, special attractions, and ensembles.
    Columbia Concerts Corporation, through a division of its business known as Community Concerts Service, engages in the business of organizing and managing concerts in various communities in the United States. As of the time of the committee hearings Community Concerts had concert courses in about 375 cities and towns. Its revenue from bookings for the fiscal year from June 6, 1937, to June 4, 1938, was $165,454, and the profit for this period was $20,418.
    In addition to the concert artists managed by its subsidiary Columbia Concerts Corporation, CBS through another wholly owned subsidiary, Columbia Artists, Inc., also manages radio artists in all fields of entertainment. The income of Columbia Artists, Inc., comes from three sources: the booking of performances by managed artists, the sale of wires to hotels and night clubs from which dance bands are picked up, and income from the use of time by dance bands. At the time of the committee hearings, Columbia Artists, Inc., managed approximately 110 radio artists. For the 52 weeks ending January 1, 1938, the total revenue of Columbia Artists, Inc., was $194,757 and its profit $82,671.¹⁰
    CBS' role as both employer of, and agent for, artists was the subject of complaint by independent artists' representatives just as in the case of NBC.¹¹

D. PHONOGRAPH AND TRANSCRIPTION BUSINESS OF CBS
    On December 17, 1938, CBS purchased from Consolidated Film Industries, Inc., the capital stock ¹² of the American Record Corporation which had the following subsidiaries: Brunswick Record Corporation, American Record Corporation of California, Columbia Phonograph Company, and Master Records, Incorporated. Upon acquiring the American Record Corporation, CBS changed the name of that company to Columbia Record Corporation and that company has carried on the manufacture of phonograph records for home use.¹³ In August 1940 it entered the transcription field.¹⁴

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    ¹ Report on Communication Companies, pt. 3, p. 4009.
    ² Ibid. Eleven years later the Columbia Phonograph Co. was acquired by the erstwhile subsidiary. On December 17, 1938, CBS acquired the Columbia Phonograph Co., together with three other phonograph record companies, from Consolidated Film Industries, Inc., for $700,000 cash. Poor's Industrial Manual (1938), p. 1276; (1940), pp. 790, 3023; infra, p. 25.
    ³ At that time there were 17 CBS stockholders. To accomplish the sale to Paramount, the stock of CBS, which theretofore had been of 1 class, was divided into 2 classes, A and B, with equal number of shares. Each of the 17 stockholders received an equal number of A shares and B shares; and each stockholder then sold all his A shares to Paramount.
    ⁴ Between 1929 and 1932 the number of shares of class A stock in CBS held by Paramount bad increased from 50,000 to 63,250. There had been an additional stock issue of 5,000 shares in each class, A and B, and Paramount had purchased 5,000 shares of class A stock to keep its equity in CBS at 50 percent, and thereafter there had been declared a stock dividend or 15 percent, which amounted to 8,250 shares and brought Paramount's total stock interest to 63,250.
    ⁵ The CBS stockholders did not hold the entire 58,823 shares of Paramount stock at that time; for 2 of the 17 stockholders had sold all of their Paramount stock on the market. The other 15 held in the aggregate 47,484 shares which they "put" to Paramount.
    ⁶ Testimony of Ralph F. Colin, General Counsel of CBS, Hearings on the Nomination of Thad H. Brown, Senate Committee on Interstate Commerce, 76th Cong., 3d sess., June 12-August 23, 1940, p. 164. As of December 1, 1938, Brown Brothers, Harriman & Co. were the record holders of only 2.33 percent of the outstanding class A stock.
    ⁷ Ibid.
    ⁸ On August 7, 1929, at the start of the Paramount transaction, the class A and class B stock carried identical rights and voting powers, except that each class of stock voting separately and noncumulatively elected one-half of the directors of CBS. After the Paramount transaction, the privilege of cumulative voting granted to the class A stockholders was the only difference between the rights and powers of the 2 classes of stock. At that time the board of directors of CBS consisted of 10 members; the class B stockholders, voting noncumulatively, elected 5 out of 10 directors and the holders of a majority of the class B shares were able to elect all 5 of these directors; while the class A stockholders, voting cumulatively, elected the remaining 5 directors, and holders of the class A stock had the right to elect 1 director for each one fifth of the class A stock held. On March 24, 1937 (New York Times, March 25, 1937, p. 37), the board of directors was increased to 14, of which the holders of each class of stock had the right to elect 7. The holders of the majority of the class B stock had the power to elect 7 directors, while the holders of each one-seventh of the class A stock had the power to elect 1 director.
    ⁹ Station WKRC in Cincinnati, which had been acquired by CBS in 1931.
    ¹⁰ In California, the management activities of CBS with respect tn both concert artists and radio artists are carried on through still another company, Columbia Management Corporation of California, Inc., which is owned jointly by CBS and Columbia Concerts Corporation. Columbia Management Corp. of California, Inc., performs a function in California similar to that carried on by Columbia Concerts Corporation and Columbia Artists, Inc., in other parts of the country.
    ¹¹ Supra, p. 17.
    ¹² In a suit by a minority stockholder in the Supreme Court of the State of New York it was alleged that a CBS director had purchased 20 percent of the stock and subsequently sold it to CBS at a profit. The Court found for the minority stockholder and ordered the director to make restitution to CBS of $85,000. Mason et al. v. Richardson et al., New York Law Journal, March 5, 1941, p. 992, column 2. CBS attorneys have announced they would probably appeal the decision. Broadcasting, March 10, 1941, p. 58.
    ¹³ Poor's Industrials (1940), p. 3023.
    ¹⁴ Broadcasting, August 1, 1940, p. 21.

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