Report on Chain Broadcasting: Chapter VI (1941)

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Report on Chain Broadcasting, U. S. Federal Communications Commission, May, 1941, pages 30-45:

VI. SCOPE AND MANNER OF OPERATION OF THE NATION-WIDE NETWORKS
    In determining how best to cope with the problem of stations engaged in chain broadcasting, two matters are of especial importance.
    One is the position of dominance in the broadcast field occupied by the two largest chain organizations, NBC and CBS. Because of the basic nature of the network broadcasting system, the ability to transmit high quality programs and the volume of commercial programs which flow through these companies, affiliation is a desirable factor for the individual broadcast stations. NBC and CBS were the first and second to enter the field (after the Telephone Co. abandoned broadcasting), and through the years they have taken steps to perpetuate their leadership and dominance.
    The second set of circumstances is the nature of the contractual arrangements between networks and stations. These have a pronounced effect upon the service rendered by the affiliated stations.
    In what follows, we shall occasionally contrast Mutual with NBC and CBS in respect to size, contractual structure, and mode of operation. It should be made clear that in making these contrasts we do not seek to approve Mutual practices or to set them up as ideals or models. On the contrary, we find a tendency in Mutual to follow the paths toward restrictive practices blazed by CBS and NBC. Mutual is chosen for contrast with the two larger chains merely because it is their only national competitor, and because in some respects the obstacles which it has faced clearly exhibit the restrictive effects of NBC and CBS practices.

A. PREDOMINANCE OF NBC AND CBS IN THE BROADCASTING FIELD
    Of the three national network organizations, NBC and CBS are by far the largest and most powerful. Mutual was not organized until 1934, after the other two networks were already successfully established and had secured affiliations with a great number of the more desirable broadcast stations in the country.

1. Stations affiliated with NBC and CBS
    At the time of the committee hearings in 1938, approximately 161 stations in the United States and the Territories and possessions were affiliated with the Red and Blue networks of NBC, 113 with CBS, and 107 with Mutual. At the end of 1940 the figures were, respectively, 214, 121, and 160. These figures, however, do not give an accurate picture of the relative predominance of NBC and CBS, for, by and large, the stations associated with Mutual are less desirable in frequency, power, and coverage.
    The networks operated by CBS and NBC at the end of 1938 were composed of 267 stations in the United States. The 267 stations were classified, as to power and time designation, as follows:

Item	Class and time designation	Number commercial stations in networks of CBS and NBC			In United States	Ratio of number in net- works to total number
Item	Class and time designation	CBS	NBC	Total	In United States	Ratio of number in net- works to total number
1 2 3 4 5	Clear channel (50 kw. or more) unlimited time Clear channel (50 kw. or more) part time Clear channel (5 kw. to 25 kw.) unlimited time Clear channel (5 kw. to 25 kw.) part time Total clear channel	11 --- 5 2 18	17 4 9 2 32	28 4 14 4 50	30 4 14 4 52	Percent 93.3 100.0 100.0 100.0 96.2
6 7 8 9 10	Regional (high power) unlimited time Regional (1 kw. to 5 kw.) unlimited time Regional (250 w. to 5 kw.) limited and daytime Regional (250 w. to 5 kw.) part time Total regional	4 58 2 4 68	4 80 3 8 95	8 138 5 12 163	8 196 68 33 305	100.0 70.4 7.4 36.4 53.4
11 12 13	Local (50 w. to 250 w.) unlimited time Local (50 w. to 250 w.) day and part time Total local	20 1 21	33 --- 33	53 1 54	227 76 303	23.3 1.3 17.8
14	Total	107	160	267	660	40.5

It may be seen from the foregoing table that CBS and NBC together had in their networks all but two of the clear channel stations (WGN and WOR, which own Mutual), and most of the full-time regional stations. Excluding low-powered local stations, more than half of all the stations in the country were affiliated with CBS and NBC, and even including the full-time local stations, more than half of all stations were so affiliated.
Another index of network predominance is found in the proportion of the Nation's broadcasting power utilized. The 475 unlimited-time commercial stations in the United States at the end of 1938 accounted for 86.3 percent of the total time sales of all 660 commercial stations and had a total nighttime power of 1,869,400 watts ¹ or 97.9 percent of the total. This total was distributed as follows:²

Total num- ber of com- mercial stations		Number of unlimited- time sta- tions	Total night watts of un- limited-time stations	Percentage of watts of unlimited time-sta- tions
135 102 74 25 5 341 319 660	Affiliated with NBC only Affiliated with CBS only. Affiliated with Mutual only Affiliated with NBC and Mutual Affiliated with CBS and Mutual Total affiliated with national networks Total unaffiliated with national networks Totals	119 102 93 55 5 297 178 475	959,950 658,050 117,350 ¹ 82,800 11,200 ¹ 1,829,350 40,050 ¹ 1,869,400	51.4 35.2 6.3 4.4 .6 97.9 2.1 100.0

    Stations on the NBC and CBS networks alone thus had over 85 percent of the Nation's nighttime wattage.

2. Ownership of stations by NBC and CBS
    Apart from contractual affiliation, NBC and CBS have cemented their position as the leading radio networks by the acquisition of stations having excellent power and coverage. NBC is now the licensee of 10 stations,³ of which 7 are clear-channel stations operating with the maximum power (50,000 watts) permissible under our regulations. CBS is the licensee of 8 stations,⁴ of which 7 are clear-channel stations, operating with 50,000 watts. Almost half of the Nation's highest power clear-channel stations, accordingly, are licensed to CBS and NBC. Four other important stations in three leading markets (Washington, San Francisco, and Boston) are also licensed to NBC or CBS.

3. Proportion of broadcasting business handled by NBC and CBS
    The predominance of NBC and CBS within the broadcast industry is further indicated by the distribution of proceeds from net time sales among the various units in the industry. The net time sales for the entire industry (all networks and 660 stations throughout the country) in 1938 amounted to $100,892,259, of which $44,313,778, or 44 percent, represented NBC and CBS network net time sales. The 23 stations owned or operated by NBC and CBS,⁵ most of which were located in well-populated and lucrative markets, had net time sales for nonnetwork programs of $6,734,772, or 7 percent of the total net time sales of the entire industry. Accordingly, the CBS and NBC networks and the stations owned or operated by them accounted for more than one-half the total business of the entire industry. In sharp contrast, the 1938 net time sales of Mutual were only $2,015,786, or about 2 percent of the net time sales of the industry.

4. Payments to stations affiliated with NBC and CBS
    Of their total network net time sales in 1938 ($44,313,778), CBS and NBC retained 73 percent ($32,046,218) and paid only 27 percent ($12,267,560) to the 253 affiliated stations on their networks during the year. Thus CBS and NBC retained over two and a half times as much of the proceeds from the sale of network time as they paid to all the 253 affiliated stations. This is accounted for in part by the usual contractual arrangements under which sustaining programs and wire-line connections are furnished to the affiliates without a separate charge.
    Of the amount retained by CBS and NBC ($32,046,218), the 23 stations owned or controlled by them were credited with $5,347,388 as compensation for the broadcasting of network programs. This amount is more than one-third of the amount which was paid by NBC and CBS to the 253 affiliated stations. The large amount "paid" by the networks to their own stations is accounted for, in part, by the power and favorable market location of these stations.

5. Proportion of industry income received by NBC and CBS
    The predominance of network organizations and their owned and controlled stations in relation to the industry as a whole, is further demonstrated by reference to net operating income.⁶ The consolidated net operating income of the entire industry for 1938 was $18,854,784, of which $4,349,446 was operating income of the three national network organizations from network operations, and $14,505,338 ⁷ was that of the 660 stations, including payments to them by networks for the broadcast of network programs. This latter amount in turn was composed of $9,696,156, in the aggregate, for the 327 stations affiliated with but not owned or operated by the three major networks;⁸ $4,958,289, in the aggregate, for the 23 stations owned or operated by CBS and NBC;⁹ and a loss of $149,107, in the aggregate, for the 310 unaffiliated ¹⁰ stations. The consolidated net operating income of NBC and CBS from network programs ($4,319,062) plus the consolidated net operating income of the 23 stations which they owned or operated ($4,958,289) equalled about one-half of the consolidated net operating income for the entire industry.
    Mutual's net operating income for 1938 totaled only $30,384. This is accounted for by the fact that Mutual is in effect a cooperative enterprise, rendering service to its associated stations substantially at cost.

6. Income and investment ¹¹ of NBC and CBS
    The broadcasting industry does not require large capital investments. The NBC and CBS investment in tangible property devoted to broadcasting at the end of 1938 totaled $9,276,019. In that year their net operating income ($9,277,352) was actually in excess of this investment in tangible property. Their entire broadcasting investment, including intangible as well as tangible items, was $13,411,102; their net operating income was equal to 69 percent of this amount.
    NBC's investment in tangible property at the end of 1938 totaled $4,284,032. Its earnings for that year ($3,434,301) equaled 80 percent of this investment.
    CBS had an investment in tangible property at the end of 1938 amounting to $4,991,988 and during that year its net earnings ¹² ($3,541,741) equaled 71 percent of its investment in tangible property.

7. Disposition of NBC and CBS profits
    NBC and CBS profits have been large, and for the most part have been distributed to stockholders. In the case of NBC, total earnings from November 1, 1926, the date of its formation, through 1938, totaled $22,319,833. NBC began to pay dividends in 1935, and from 1935 through 1938 paid to RCA, its only stockholder, $18,100,000 (cash dividends of $14,900,000, lease negotiation fees of $2,200,000, and research and development fees of $1,000,000). Of the remaining $4,219,833, losses on financial investments unrelated to broadcasting have consumed $1,171,763; and $673,333 appropriated for goodwill and other intangibles has been charged off. At the end of 1938 $2,374,738 remained on the company's books as earned surplus.
    CBS net earnings during the 12-year period of its existence through 1938 totaled $22,522,471. Of this amount. $13,329,688 has been paid to its shareholders in cash dividends, and $3,543,175 in stock dividends; the remainder was largely current assets at the end of 1938.

B. CONTRACTUAL ARRANGEMENTS BETWEEN NATIONAL NETWORKS AND AFFILIATES
    At the present time, the relations between a network organization and its affiliates are customarily governed by a detailed written contract. These relationships, however, have not always been on such a formalized basis. Before NBC took over the Telephone Co.'s network in 1926,¹³ the relations between the network and its affiliates were embodied in correspondence only. The arrangements generally called merely for the furnishing of programs by the company on a few specified evenings. The company would pay the affiliated station a certain amount per hour for broadcasting network commercial programs, and the affiliate would pay the company a certain amount for sustaining programs.
    When NBC took over station WEAF and the Telephone Co. network, it assumed these informal contractual arrangements. The amount of network service, however, increased rapidly after NBC took control. The network service supplied by the Telephone Co. had been quite sporadic; network programs were not available to affiliated stations at all hours throughout the broadcast day. But as early as 1927, NBC was on a 16-hour-per-day broadcasting schedule, and at the time of the committee hearings in 1938 NBC's broadcast day was 17 hours.
    Despite this great increase in the volume of its network operations, NBC maintained its relations with its affiliates on the informal basis described above for a number of years. Unlike NBC, however, CBS adopted a formal contractual relationship with its affiliates from the very start of its network operations in 1927. As both networks grew, and competition between the two approached an equal footing, NBC also introduced formal contracts. Today NBC and CBS uniformly embody their arrangements with affiliates in detailed contracts. Since its inception in 1934, Mutual has defined its relationships with its outlet stations in detailed and standardized contracts.
    The committee report states that "the heart of the abuses of chain broadcasting is the network-outlet contract." It is important to scrutinize these contracts and to determine whether station licensees have entered into arrangements which adversely affect the public interest.
    The discussion which follows concerns the standard or typical contract provisions of the three national networks; no attempt has been made to deal exhaustively with detailed exceptions to such provisions found in some individual contracts.

1. Length of affiliation contracts
    Prior to 1936, NBC standard affiliation contracts were for 1 year only. Since 1936, standard contracts have been drawn to bind affiliated stations for 5-year periods but NBC for only 1, since NBC has the right to cancel on 12 months' notice.
    The early CBS ¹⁴ affiliation contracts were for 1 year only. In August 1929, however, CBS entered into new contracts for 2-year periods, with options granted to CBS to extend for two successive terms of 1 year each. Since 1936, CBS, like NBC, has entered into contracts binding affiliated stations for 5 years, but binding upon itself for only l.¹⁵ The termination dates of both CBS and NBC contracts are staggered so that some contracts expire each year.
    As of the time of the committee hearings, Mutual's affiliation contracts bound both parties for the same length of time, 1 year.¹⁶

2. Exclusivity
    The original CBS affiliation contract, effective September 1927, enjoined CBS affiliates from making their facilities available to any other chain broadcasting company; a similar "exclusivity" provision has appeared in subsequent contracts. It was not until 1937, however, that a provision was incorporated which enjoined CBS from furnishing programs to other stations in territories served by its affiliates. The present clause, from the standard affiliation contract introduced in 1937, reads:

    Columbia will continue the station as the exclusive Columbia outlet in the city in which the station is located and will so publicize the station, and will not furnish its exclusive network programs to any other station in that city, except in case of public emergency. The station will operate as the exclusive Columbia outlet in such city and will so publicize itself, and will not join for broadcasting purposes any other formally organized or regularly constituted group of broadcasting stations. The station shall be free to join occasional local, State-wide or regional hook-ups to broadcast special events of public importance.

    NBC did not introduce exclusivity provisions until 1936. Since then its standard contract has contained a clause prohibiting a station from supplying its facilities to any other major network. The clause reads:

    For the purpose of eliminating confusion on the part of the radio audience as to the affiliation and identity of the various individual stations comprising radio networks, you agree not to permit the use of the station's facilities by any radio network, other than ours, with which is permanently or occasionally associated any station serving wholly or partially a city or county of 1 million or more inhabitants.

    The NBC vice president in charge of station relations testified that this clause was designed to prevent NBC outlets from affiliating with "any network which would seek to establish itself as a national advertising medium," and thus compete with NBC. NBC affiliates, he stated, are permitted to affiliate with such regional networks as the Yankee; but--

    * * * if it [Yankee] seeks to extend itself beyond the confines of New England * * * then we will raise objection * * * to the continuance of its affiliation with the National Broadcasting Co. If the Yankee network, for example, should make up its mind * * * to become a national network, it would be perfectly within their right to do so, but they should not expect to be supported by NBC programs (Hedges, Tr. 1868).

    The same NBC representative further testified that, although all NBC affiliates are not as yet bound by exclusivity clauses, NBC's policy is to attempt to procure such clauses in all contracts. There was also testimony that NBC recognized its affiliates as its exclusive outlets in their areas.
    At first, Mutual did not demand exclusivity provisions from its affiliates. The only exception was its contract with the Don Lee network. The parties to this contract state that when it was made, they had to assume a long-term commitment to the Telephone Co. for a wire-line connection between Chicago and Los Angeles; and that to protect this commitment, Don Lee agreed not to accept programs from any other national network and Mutual agreed not to send its programs to any other stations on the Pacific coast. There was testimony on behalf of Mutual that, since this long-term wire commitment is no longer necessary, it is willing to negotiate a new contract with Don Lee without exclusivity provisions.
    Since February 1, 1940, Mutual's contracts with its 7 stockholders prohibit the 50 or more stations owned by these stockholders or affiliated with their regional networks from broadcasting programs of any other national network, or any other network having outlets in New York, Philadelphia, and Chicago. Mutual states that these clauses were designed to prevent its dismemberment by Transcontinental Broadcasting System, Inc., a proposed new network planned during the winter of 1939. The stockholders' contracts provide that the exclusivity clauses shall lapse if the Federal Communications Commission prohibits them, or if the other national networks voluntarily abandon exclusivity.
    Clauses prohibiting Mutual from supplying programs to other stations in territories served by its affiliates were contained in some Mutual affiliation contracts as of the time of the committee hearings, and a Mutual official testified that as a matter of practice Mutual does not send its programs to any station in the area of an existing outlet.

3. Time options
    By the terms of its first standard affiliation contract, effective September 5, 1927, United Independent Broadcasters, predecessor of CBS, purchased 10 specified hours per week outright from its 16 affiliates at $50 per hour. United lost so heavily on this contract that, although it was for a period of 53 weeks from September 5, it was superseded in December 1927 by a new type of contract.
    This second contract bound United to furnish 10 hours of programs a week, at least half of them commercial, and gave United conditional options ¹⁷ on an additional 20 specified hours.¹⁸ This was the first introduction of the time-option arrangement which has since become standard for both NBC and CBS.
    The third standard contract, dated November 1928, committed CBS to supply network programs for twenty specified hours per week, and gave it an option to take up, on 30 days' notice, 10 additional specified hours per week. The periods covered by contract and option were the same as in the preceding contract.
    The next CBS standard affiliation contract, dated August 1929, granted to CBS an option ¹⁹ on all the time of the station for network commercial programs. This option on all station time has been continued and is the rule today, subject to two limitations introduced at the end of 1937. One provides that a station may require CBS to give not less than 28 days' prior notice before preempting time for programs sponsored by new accounts. The other provides that a station need not broadcast network commercial programs for more than 50 "converted hours"²⁰ in any one week. Since CBS, at least prior to the time of the committee hearings, had never used 50 "converted hours" over any station in any week, the latter provision has never actually functioned to limit the all-inclusive option.
    NBC inaugurated a system of network optional time in 1933. The NBC standard contract clause provides that upon 28 days' notice to a station, NBC can preempt time for commercial network programs during specified hours known as "network optional time."²¹ From its 29 affiliates on the West coast, however, NBC has options covering all time; the reason is stated to be the time differential between New York and the Far West.
    Prior to February 1, 1940, Mutual had no time-option provisions in its affiliation contracts. It entered into definite commitments with advertisers only after it had communicated with associated stations to determine whether or not the time was available. If the particular period had already been sold by any associated station, that station was under no obligation to make it available for network commercial programs.
    On February 1, 1940, however, Mutual entered into time-option contracts with its 7 stockholders covering the 50-odd stations owned by them or affiliated with their regional networks. The options covered from 3¼ to 4¼ specified hours on week days and 6 hours on Sundays. The contracts expressly provide that the time-option provisions shall lapse if the Federal Communications Commission prohibits the practice or the other national networks voluntarily abandon it.

4. Rejection of network commercial programs
    All three national networks have standard contract clauses defining the right of stations to reject network commercial programs. The NBC standard clause, introduced in 1933, reads:

    Upon 28 days' notice, your station will broadcast network commercial programs for NBC during any periods requested by NBC within the hours designated * * * as network optional time, provided, that because of your public responsibility your station may reject a network program the broadcasting of which would not be in the public interest, convenience, and necessity.

    Since the Communications Act of 1934 imposes upon broadcasting stations the duty to operate in the public interest, this clause in effect does little more than permit affiliated stations to reject network commercial programs when to broadcast them would violate the law. The provision is interpreted by NBC to mean that a station may reject a network commercial program if the program or the product advertised is objectionable to the community, or if the station wants to substitute a local sustaining program of public interest. The NBC vice president in charge of the station relations testified:

    * * * If the station believes that the substitution of a local program would be more in the public interest than the program which was offered to him by the network he makes that substitution, but we insist that he must be on firm ground, that he must be able to support his contention that what he has done has been more in the public interest than had he carried on the network program (Hedges, Tr. 1795).

    While an affiliated station may substitute a local sustaining program for a network commercial program under such circumstances, it may not similarly substitute a local commercial program. Indeed, the NBC standard affiliation contract has a special provision for liquidated damages which compels the affiliate to pay over to NBC whatever increased revenue it receives from such substitution:

    Provisions for liquidated damages.--In the event you substitute a program for a network program which you are obligated to broadcast hereunder you agree to pay us as liquidated damages a sum equal to the amount by which the total moneys you receive for broadcasting the substituted program during the scheduled period of said network program exceeds the moneys you would have received from us had you broadcast said network program. This provision is without prejudice to any other rights which we may have under this agreement arising from your failure to broadcast any of our network programs, and shall not be deemed to give you the option to refuse to accept such a network program by making the payments specified in the foregoing sentence.

    This clause effectively removes all monetary incentive to substitute local commercial for network commercial programs.
    The CBS clause covering rejection of programs, first introduced in 1937, reads:

    The station will broadcast all network sponsored programs furnished to it by Columbia during the time when the station is licensed to operate * * *. Either the station or Columbia may on special occasions substitute for one or more of such sponsored programs sustaining programs devoted to education, public service or events of public interest without any obligation to make any payment on account thereof, and in the event of such substitution by either party it will notify the other by wire as soon as practicable after deciding to make such substitution. In case the station has reasonable objection to any sponsored program or the product advertised thereon as not being in the public interest the station may, on 3 weeks' prior notice thereof to Columbia, refuse to broadcast such program, unless during such notice period such reasonable objection of the station shall be satisfied. * * *

    This clause, like the similar clause in NBC contracts, provides in effect merely that stations may reject programs if to carry them would violate the public-interest provision of the Communications Act of 1934.
    As has been noted, Mutual held no options on station time at the time of the committee hearings. No Mutual station was required to accept a network commercial program unless it had the time available, and even then it could reject for any of several reasons. A typical Mutual contract reads:

    * * * It is agreed that each station shall have the right to refuse to accept any contract tendered to it hereunder;
    (a) If in the opinion of the station management the programs which the advertiser purposes to broadcast under such contract are for any reason unsatisfactory in character, quality, or content; or
    (b) If in the opinion of the station management the products to be advertised are undesirable or objectionable; or
    (c) If the station management determines in its sole discretion that the advertiser is not a good credit risk.

    It should be noted that the Mutual clause explicitly places the right to determine whether a program is objectionable in the hands of the individual station, where the legal responsibility also lies. Moreover, even after a station commits itself to broadcast a network commercial program, it reserves the right to appropriate any or all of the time for broadcasting a local sustaining program of unusual interest.
    The basic problem with respect to rejection of network programs, however, does not rest merely in the precise wording of legal contracts. There is also involved the practical problem of supplying stations with enough information about network programs sufficiently in advance to enable them to make intelligent decisions.
    At present, networks send their affiliates notices stating the length of the program series, the length of each program, the time of broadcasting, the name of the sponsor, the product to be advertised, and the general type of program; that is, whether it is to be variety, drama, dance music, etc. In some cases the names of the persons appearing on the program may also be given. It is obvious that from such skeletal information the station cannot determine in advance whether the program is in the public interest, nor can it ascertain whether or not parts of the program are in one way or another offensive. In practice, if not in theory, stations affiliated with networks have delegated to the networks a large part of their programming functions.
    In many instances, moreover, the network further delegates the actual production of programs to advertising agencies. These agencies are far more than mere brokers or intermediaries between the network and the advertiser. To an ever-increasing extent, these agencies actually exercise the function of program production. Thus it is frequently neither the station nor the network, but rather the advertising agency, which determines what broadcast programs shall contain. Under such circumstances, it is especially important that individual stations, if they are to operate in the public interest, should have the practical opportunity as well as the contractual right to reject network programs.

5. Sustaining programs
    NBC and CBS actually produce a great many of their sustaining programs. They spend large sums of money for such production, as well as for the broadcasting of sustaining programs which they do not themselves produce, such as concerts and special events. Mutual, on the other hand, does not produce sustaining programs itself; it selects programs which it considers suitable for its network from among the sustaining programs produced by its outlets, and distributes such programs to the other stations on the network.
    All three national network companies make sustaining programs available to their respective affiliates at no separate charge; but the cost of producing and distributing them is reflected in the plan of station compensation.
    NBC guarantees most of its outlets 200 "unit hours"²² of network commercial and sustaining programs during each 28-day accounting period; CBS guarantees 60 clock hours a week; and Mutual makes no guarantees. In practice, however, all three networks make programs available throughout the broadcast day--generally 16 or 17 hours.
    Unlike network commercial programs, sustaining programs may be accepted or rejected at will by stations affiliated with (but not licensed to) any of the 3 network organizations. The stations licensed to NBC and CBS, however, are required to broadcast certain so-called "immovable" sustaining programs. NBC Red network immovables numbered 22 at the time of the committee hearings, including the Radio Pulpit, the University of Chicago Round Table, The World Is Yours, and the Metropolitan Opera. The 24 Blue network immovables included the NBC Symphony Orchestra, Dr. Walter Damrosch's Music Appreciation Hour, the Farm and Home Hour, and America's Town Meeting of the Air. CBS "must" sustaining programs for the stations licensed to it totaled 6½ hours per week, and included the New York Philharmonic Symphony Orchestra, the CBS School of the Air, and certain educational programs. Mutual owned no stations, and hence had no immovable sustaining programs.

6. Station compensation
    The early NBC arrangements for compensation to and from its affiliates were modelled on previous arrangements between the Telephone Co. and its affiliates.²³ One of the last Telephone Co. network contracts,²⁴ for example, provided that the station would pay $45 per hour for sustaining programs, and would receive $40 per hour for commercial programs. Similar arrangements were continued after NBC took over the network, and hourly rates were in general standardized. From 1927 to 1930, NBC paid most of its stations $50 per evening hour and $30 per daytime hour for commercial programs, and charged most of them $45 per evening hour and $25 per daytime hour for sustaining programs. The exceptions were the few stations so necessary to NBC that they could insist upon increased rates from NBC for commercial programs or lower charges for sustaining programs.
    NBC maintained the same commercial rates from 1930 to 1932, but sustaining-program charges were reduced to $25 per evening hour and $15 per daytime hour. In 1932, hourly charges for sustaining programs were abolished, and a flat charge of $1,500 per month substituted, regardless of the number of sustaining programs the station used.
    In 1935, NBC introduced a new system of payments to stations in connection with a readjustment of station rates to advertisers which rates, with minor changes, have remained in effect. NBC has stated that, in establishing these rates, it gave primary consideration to the "potential circulation" or number of potential listeners in the area served by each station; and that it did not take into account such factors as the number of stations serving the area or the purchasing power of its inhabitants.
    Advertisers were charged from $120 per evening hour for the smallest stations to $680 per evening hour for larger stations, $720 for WMAQ and WENR in Chicago, and $1,200 for WEAF and WJZ in New York and WLW in Cincinnati.
    Stations were remunerated according to a complex formula based upon these rates to advertisers. For the first 16 "unit hours" of network commercial programs during each 28-day accounting period, a station received no compensation; for the next 25 unit hours it received 20 percent of the average unit rate;²⁵ for the next 25 unit hours it received 30 percent; and thereafter 37½ percent. Under this schedule, stations were not required to pay separately for sustaining programs.
    The following table shows NBC network time sales, its receipts from sustaining program charges, its payments to affiliated stations, and other relevant figures:

Year	Time sales for network programs (after discounts; before commissions)		Compensation to stations ¹ for broadcasting network programs
Year	Commercial programs	Sustaining programs sold to stations	Amount	Ratio to network time sales (percent)
Nov. 1927-Dec. 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940	² $3,384,519 ² 7,256,179 ² 11,353,120 ² 15,701,331 ² 20,455,210 ² 20,915,979 ² 18,005,369 ² 23,535,130 ² 26,679,834 ² 30,148,753 31,436,874 31,783,277 33,540,841 37,118,130	$500,507 770,702 726,335 698,001 903,613 980,818 987,587 1,021,247 941,428 (3) 60,384 20,470 19,398 19,693	$577,522 1,486,146 2,372,740 3,038,112 3,962,047 3,911,346 3,383,995 5,000,650 5,875,188 6,123,749 7,166,363 7,809,014 9,021,872 10,562,212	17.06 20.48 20.90 19.35 19.37 18.70 18.79 21.25 22.02 20.31 22.80 24.57 26.90 28.45

    ¹ "Stations" in this table refers to stations affiliated with but not owned or operated by NBC.
    ² Total time sales; network time sales not available.
    ³ Charges for sustaining programs were abolished by NBC as a part of its network relationship with stations after the revision of its rate structure and system of compensation in 1935.

    CBS's arrangements for station compensation have been somewhat different. In its first standard affiliation contract, in effect from September to December 1927, the network agreed to pay each station $50 per hour for 10 specified hours per week whether or not the hours were actually used by the network. This arrangement was modified in the second contract, dated December 1927, which provided that CBS was to pay the station $50 per hour for all hours used commercially and to supply sustaining programs for the remainder of the time covered by the contract, charging the station $50 per hour for them. The contract provided that at least 50 percent of the hours used by CBS must be devoted to sponsored programs.
    The third CBS contract, dated November 1928, eliminated payments by the station for sustaining programs and provided that the station waive compensation for the first 5 hours of commercial network programs per week. For all network commercial hours in excess of the free time, CBS agreed to pay each station a specified hourly rate. CBS agreed also to furnish sustaining programs for all hours not used for commercial programs, which were either under contract or under an option exercised by CBS.
    The next standard affiliation contract, that of August 1929, established the method of compensation which has remained in effect since. A distinction was made for the first time between an evening and a daytime hour. The term "commercial hour" was defined to include only an evening hour, and it was provided that the compensation to the station for a daytime hour was to be one-half its evening compensation and that the 5 hours of commercial programs per week on which the station waived compensation were to be "commercial hours" as defined in the contract. A "commercial hour" was referred to in later affiliation contracts of CBS as a "converted hour."
    Charges to advertisers for the use of CBS network facilities are determined by the CBS rate card, which lists the stations available, the groups in which they must be purchased, and station rates ranging from $125 to $1,250 per converted hour. The rate applicable to each station is determined by CBS after a consideration of the station's market, its relative popularity, its power and physical coverage, and the price at which it sells time to national advertisers for national spot business.
    The following table shows the increase in annual sales of network time by CBS from 1927 through 1940, the increase in payments to affiliated stations, and the ratio of those payments to the network time sales of CBS:

Year	Time sales for network pro- grams (after discounts; before com- missions)	Compensation to sta- tions ¹ for broadcasting network programs
		Amount	Ratio to network time sales (percent)
1927 (Apr.-Dec.) 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940	² $176,558 ² 1,409,975 ² 4,720,074 ² 8,082,664 9,480,282 10,218,800 8,008,088 11,888,741 14,087,695 18,550,621 21,969,089 21,254,686 26,450,511 31,181,444	(3) (3) $734,163 1,003,749 1,478,307 1,805,211 1,446,827 2,604,854 3,394,428 4,806,699 5,556,623 4,969,688 6,933,887 8,722,303	--- --- 15.55 12.41 15.59 17.67 18.07 21.91 24.09 25.91 25.29 23.38 26.21 27.97

    ¹ "Stations" in this table refers to stations affiliated with but not owned or operated by CBS.
    ² Total sales; network time sales not available.
    ³ Not available.

    Mutual has no network rate card similar to that of NBC or CBS; it charges advertisers at the card rates of the stations associated with it. Mutual does not set these rates and has no control over them.
    Mutual receives a 3½ percent commission on all proceeds, after agency commissions, from network programs broadcast over the facilities of its "members" and "participating members"; and 15 percent in the case of its "affiliated stations." All stations on the network, regardless of category, receive a 2 percent commission on the proceeds of programs which they sell on behalf of the network.
    Mutual "affiliates" pay for the telephone circuits from their facilities to the nearest connecting point on the Mutual line. WOR and WGN, the two "member stations," each pay a share of Mutual's budgeted operating expenses; each was paying $3,775 per month at the time of the committee hearings. They also guarantee Mutual's telephone circuit expenses, and underwrite equally any operating deficit which Mutual may incur. Mutual's "participating members" have various arrangements. Colonial pays for its telephone circuit to the Mutual main line in New York; Don Lee contributes five-eighths of the telephone circuit expense from Chicago to the coast. Each contributes to Mutual's budgeted operating expenses equally with WGN and WOR. United Broadcasting Co. pays the cost of the telephone line connecting it with the Mutual system, plus $2,775 per month toward operating expenses. CKLW guarantees to Mutual all the proceeds up to $30,000 of annual net time sales of Mutual programs over its facilities. It pays Mutual 85 percent of the proceeds from the next $25,000 of such sales and 50 percent of sales in excess of $55,000.
    Mutual contends that their associated stations receive a greater share of the proceeds from Mutual network business than do the stations associated with the other two national networks. This is true, since Mutual is a cooperative enterprise. It should be noted, however, that many of the expenses borne by NBC and CBS are, in the case of Mutual, borne by the stations. Whether or not, if computations on a basis comparable to those made in the case of NBC and CBS were possible, Mutual stations would be shown to receive a larger proportion of the network intake cannot be determined.

7. Network control over station rates
    The rate at which NBC bills advertisers for the use of each outlet is specified in the NBC rate card, and also in the NBC affiliation contract with that outlet. The rate usually referred to as the "station rate" is the rate for an evening hour. The rate for other periods is derived by multiplying the evening hour rate by the appropriate fraction; one-half for a daytime hour, three-quarters for a Sunday afternoon hour and one-third for an hour after midnight.
    NBC retains for itself effective control over network station rates. It may increase the network station rate of any affiliate, and it may decrease the network station rate of any affiliate upon 90 days' notice, if at the same time it reduces the rates of a majority of its affiliates. Moreover, it may decrease a single station's rate on 1 year's notice; but if it does so, the station has the option of terminating the affiliation contract. An outlet station does not have the power either to raise or lower its network rate during the period it is bound to NBC by an affiliation contract, the standard term of which is for 5 years.
    Some time after 1935, a clause was incorporated in the standard NBC affiliation contract, which provides that NBC may reduce a station's network rate and compensation from network commercial programs to the extent that the station accepts from national advertisers "net payments less than those which NBC receives from the sale of your station to network advertisers for corresponding periods of time." This provision is intended to prevent outlet stations from securing such revenues as they might otherwise derive from the sale of time to advertisers for national spot business at rates lower than those set forth in the NBC rate card for national network business.
    The network station rates of the outlets of CBS are set forth in the CBS rate card; but as a general rule they are not set out in the individual standard affiliation contracts. The rate for an evening hour is usually referred to as the "station rate." The rate for a daytime hour is derived by multiplying the evening hour rate by one-half, that for an hour after midnight by multiplying the station rate by one-third, and that for a Sunday afternoon hour by multiplying the station rate by two-thirds. A station does not have the power to change its network rate during the term of its affiliation contract. Although the standard affiliation contract is silent on the point, in certain of its contracts with its affiliates CBS has retained the power to change a station's network rates.
    Mutual bills its advertisers for network programs at the rates established by the outlet stations themselves. Each outlet is free to change its rate at any time, and Mutual has no power to alter it.

C. NBC'S TWO NETWORKS--RED AND BLUE
    The NBC "Bed" and "Blue" networks are not separate and distinct entities with respect to the stations comprising them, the programs broadcast over them, their organization and personnel, or their property and equipment. Indeed, in certain respects there is not even the semblance of a distinction between the two networks.
    As of September 1, 1938, 154 stations were licensed to or affiliated with NBC. Of these, 23 constituted the basic Red network and 24 the basic Blue network. Both these basic networks are located in the area from New England to Omaha north of the Mason and Dixon Line, which, although comprising only about one-third of the area of the United States, holds about two-thirds of its population.
    Of the 107 affiliated stations not on either basic network, one was available only to the Red network and six were available only to the Blue network. Thus 23 basic and 1 supplementary station were associated only with the Red network; 24 basic and 6 supplementary stations were associated only with the Blue network. The remaining 100 NBC affiliates were supplementary to either the basic Red or the basic Blue network, at the option of advertisers. Individual stations within this group are often referred to as belonging to that network with which they are most frequently connected; but such designations may be erroneous for specific broadcasts.
    NBC affiliation contracts do not specify with which network a station is to be associated, even in the case of stations actually on the basic Red and the basic Blue networks. Since the contracts omit all reference to the matter. NBC has the power to shift a station from the far more remunerative Red network to the less remunerative Blue network or vice versa at any time, regardless of the station's wishes.
    With respect to programs as well as stations, the Red and Blue networks overlap. Where a program is carried over either the Red or the Blue basic network a distinction can be made. But those NBC sustaining programs which are broadcast over supplementary stations only are neither Red nor Blue.²⁶ NBC does not identify such programs, and there is in fact no way to label them.
    The Red and Blue networks are not separate business enterprises, nor are they even two distinct operating divisions or departments within NBC. All its property, including studios, offices, and equipment, is equally and interchangeably available to both the Red and Blue networks. NBC announcers, musicians, talent, and engineers are used interchangeably; and, with two exceptions, no distinction is made in the duties of NBC personnel either in New York or in the field.
    One exception is the sales department. A special division to promote Blue network sales was established in this department in 1938, and in December 1940, after the close of the committee hearings in this proceeding, the department itself was split into two sections, one for each network. At the same time, the program department was similarly split.
    NBC does not allocate income or expenses between the Red and Blue networks; indeed, its treasurer testified that in view of the many ways in which operations intertwine, it would be practically impossible to allocate between them.
    Additional evidence that the Red and Blue networks do not compete, and that NBC itself considers them integral parts of a single enterprise, is found in the company's discount policy. Discounts range from 2½ percent for advertisers who broadcast 13 weeks or more and whose gross billings total $1,000 a week or more, to 25 percent for advertisers whose gross billings total $1,200,000 a year or more. These discounts are based on combined billings of the two networks, and are granted regardless of whether one network is used or both.

___________________
    ¹ This figure includes WLW as a 50,000-watt station, its normal power, although it operated experimentally on 500,000 watts until March 1, 1939.
    ² The inclusion of part-time stations or use of daytime power ratings, would not markedly alter the above ratios.
    ³ Supra, p. 16.
    ⁴ At the time of the committee hearings CBS was the licensee of nine stations. See supra, p. 23, n. 9.
    ⁵ These 23 stations include 19 licensed to CBS and NBC and 4 (treating WBZ and WBZA as 1) operated by NBC under management contracts. Supra, p. 16.
    ⁶ Broadcast revenue less broadcast expenses--referred to in the published tabulations of the Federal Communications Commission as broadcast income.
    ⁷ Four hundred and twenty stations showed net incomes totaling $16,728,533; 240 showed net losses totaling $2,223,195.
    ⁸ Of these, 238 showed net incomes totaling $10,753,650: and 89 showed net losses totaling $1,057,494.
    ⁹ Of these, 20 showed net incomes totaling $5,086,390 and 3 showed net losses totaling $128,101.
    ¹⁰ Of these, 162 showed net incomes totaling $888,493, and 148 showed net losses totaling $1,037,600.
    ¹¹ Investment in tangible property is based on cost less depreciation. Investment in intangible property is based on cost less amortization.
    ¹² Broadcast and nonbroadcast income less broadcast and nonbroadcast expenses.
    ¹³ Supra, p. 7.
    ¹⁴ "CBS" refers here and sometimes hereafter not merely to "Columbia Broadcasting System, Inc." but also to its predecessor "United Independent Broadcasters, Inc." The change of name occurred on January 3, 1929.
    ¹⁵ The standard contract of 1936 was for 1 year but gave CBS four successive options to extend for 1 year each. The present standard contract, introduced in 1937, is for a term of 5 years with the right granted to CBS to terminate upon 12 months' notice.
    ¹⁶ In January 1940, however, Mutual entered into contracts with its seven stockholders, binding on Mutual for 5 years, but cancellable by the stockholders on 1 year's notice at any time after the first 2 years.
    ¹⁷ United was given the privilege of using 6 additional specified hours as soon as permanent telephone wires were installed at each station; and, upon 30 days' notice, it was given the option and right to increase the hours to include any of 14 specified hours should additional advertising warrant.
    ¹⁸ The 30 hours specified in the contract included the period from 7 to 11 p. m. 7 days per week and from 3 to 5 p. m. on Sundays.
    ¹⁹ This contract was silent concerning the amount of notice necessary prior to exercise of options.
    ²⁰ One evening hour or 2 daytime hours are generally equivalent to 1 "converted hour"; a Sunday afternoon hour equals two-thirds a "converted hour," 50 "converted hours" on the average require 79 clock hours.
    ²¹ NBC "network optional time" includes the following hours: week days, 10 a. m. to 12 noon; 3 to 6 p. m.; 7 to 7:30 p. m.; and 8 to 11 p. m.; and Sundays, 1 to 4 p. m.; 5 to 6 p. m.; and 7 to 11 p. m.
    ²² A "unit hour" is equivalent to 1 evening hour. A Sunday afternoon hour counts as three-fourths of a unit hour and a daytime hour counts as one-half.
    ²³ Supra, p. 34.
    ²⁴ Contract between the Telephone Co. and the owners of station WLIT in Philadelphia, dated September 10, 1926.
    ²⁵ The "unit rate" is the gross card rate per hour, before deducting discounts or agency commissions.
    ²⁶ At the time of the committee hearings, NBC generally required that the basic Red network of 23 stations or the basic Blue network of 24 stations be purchased as a unit. There was the additional requirement in connection with the Red network facilities that in the evening between 8 p. m. and 10:30 p. m., an advertiser use a minimum of 50 stations. In the daytime, an advertiser was permitted to use less than all the basic Blue, but not less than the basic Red network. NBC supplementary stations were divided into 15 geographical groups largely for selling purposes, and an advertiser could add these stations to the basic networks in groups, and in some cases individually, to meet his merchandising problem.
    CBS generally required an advertiser to purchase a minimum of 24 out of its basic network of 26 stations, but there were some exceptions to this rule during the daytime. The remaining stations affiliated with CBS, known as optional stations, were individually available to advertisers, with the exception of three groups which, because of the long wire haul from the basic network, were available only in units consisting of all or a majority of the stations in each group.
    Mutual generally required advertisers to use a minimum of only three stations, WOR, WGN, and WLW, but an advertiser could use only two of them if be assumed the expense of the wire connection between them. The remaining stations associated with Mutual were for the most part available at the option of advertisers.

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