Report on Chain Broadcasting: Chapter VII (1941)

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Report on Chain Broadcasting, U. S. Federal Communications Commission, May, 1941, pages 46-79:

VII. THE EFFECT OF NETWORK-AFFILIATE RELATIONS ON COMPETITION IN THE RADIOBROADCAST INDUSTRY
    The Communications Act "recognizes that the field of broadcasting is one of free competition."¹ In certain other industries, such as railroads, telephones, and bituminous coal, where competition has not been effective in protecting the public interest, Congress has substituted detailed governmental control of rates, prices, finances, or other matters for the principle of free competition. But in regulating radio, "Congress intended to leave competition in the business of broadcasting where it found it."²
    It has long been a basic hypothesis of the American system that competition in a free market best protects the public interest. This hypothesis, moreover, has been given the force of law throughout the entire field of interstate commerce. For more than half a century contracts and combinations in restraint of trade, and monopolization or attempted monopolization of interstate commerce, have been outlawed.³ The fundamental purpose of this legislation is "to secure equality of opportunity and to protect the public against evils commonly incident to destruction of competition through monopolies and combinations in restraint of trade."⁴ The Sherman Act was enacted "to preserve the right of freedom to trade"⁵ and it is "based upon the assumption that the public interest is best protected from the evils of monoply and price control by the maintenance of competition."⁶
    The prohibitions of the Sherman Act apply to broadcasting.⁷ This Commission, although not charged with the duty of enforcing that law, should administer its regulatory powers with respect to broadcasting in the light of the purposes which the Sherman Act was designed to achieve. In the absence of Congressional action exempting the industry from the antitrust laws, we are not at liberty to condone practices which tend to monopoly and contractual restrictions destructive of freedom of trade and competitive opportunity. Had we liberty in this regard we should require a very clear showing that such practices or restraints, because of conditions peculiar to the industry, promote the best interests of the listening public. In any event, preservation of the fullest possible measure of competitive opportunity consistent with furnishing the public adequate broadcasting service is one of the elements to be considered in applying the statutory standard of "public interest, convenience, or necessity."
    The nature of the radio spectrum is such that the number of broadcasting stations which can operate, and the power which they can utilize, is limited. The limitations imposed by physical factors thus largely bar the door to new enterprise and almost close this customary avenue of competition. NBC's brief, taking cognizance of this situation, states: "Free competition in any enterprise exists only when the field is open to everyone." The conclusion which NBC draws is that, because one of the usual concomitants of free competition is barred by physical factors, the members of the industry should be permitted to erect contractual barriers against any competition.
    Precisely the opposite conclusion is required. An inherent restriction on competitive opportunity does not justify the superimposition of artificial restraints, but rather makes such restraints peculiarly onerous. Restrictive affiliation contracts might be tolerated if there were a dozen potential stations of comparable character in every city; they are intolerable when there are few cities which have (or can have) more than four stations of all kinds.
    The very fact that in the broadcasting industry competition is restricted renders it all the more imperative that competition be not throttled by restrictive agreements. The words of Mr. Chief Justice Hughes, speaking for a unanimous Court in an important case, are applicable:⁸

    The fact that, because sugar is a standardized commodity, there is a strong tendency to uniformity of price, makes it the more important that such opportunities as may exist for fair competition should not be impaired.

    The Commission has recently had occasion to emphasize the public benefits of competition among radio stations:⁹

    Competition between stations in the same community inures to the public good because only by attracting and holding listeners can a broadcast station successfully compete for advertisers. Competition for advertisers which means competition for listeners necessarily results in rivalry between stations to broadcast programs calculated to attract and hold listeners, which necessarily results in the improvement of the quality of their program service. This is the essence of the American system of broadcasting.

    The benefits of competition are equally clear in the field of network broadcasting. If national networks compete for station outlets on the basis of performance, there will be a direct incentive to improve and expand the programs, both sustaining and commercial, which they offer to the public. Likewise, if stations are not tied exclusively to a single national network over a long period of time and if stations compete for access to one or another national network--a matter often essential to profitable operation--each will be stimulated to improve the quality of the programs which it offers and hence its value as an outlet of a national network. This two-way competition--among network organizations for station outlets and among stations for network affiliation--will insure the listening public a well-diversified, high quality program service.
    Competition among stations will, however, necessarily remain a thing of shadow rather than of substance as long as conditions now prevailing are permitted to continue. As the facts set forth in this report demonstrate, profitable operation is often contingent upon a station's participation in national network broadcasting.¹⁰ NBC and CBS now dominate this field; their ownership and operation of important radio stations and their restrictive long-term contracts with other stations enable them to maintain indefinitely their present monopolistic position.¹¹ These conditions prevent their one existing competitor (Mutual) from seriously encroaching on their domain and practically foreclose the possibility of new competition; affiliated stations are treated as, and constitute, mere adjuncts of NBC and CBS.
    NBC and CBS contend that the networks compete, and compete vigorously. Certainly there is a considerable degree of competition among networks for advertisers and for listening audiences; but this does not mitigate the restraints found with respect to network-station relationships. In the radiobroadcasting field, three different markets must be distinguished--the market in which networks and stations meet advertisers, the market in which networks and stations meet listeners, and the intermediate or internal market where stations meet networks. It is in this intermediate network-station market that current practices have most directly restrained competition; no considerations of the extent to which the networks may compete for advertisers or listeners can conceal the extent to which they do not compete in the network-station market.
    The restraints which we here consider have not been achieved in either of the two more common ways--through coalescence of the networks or through coalescence of the stations. Rather, they have been achieved through coalescence of some stations with one network and other stations with another. But the result is nonetheless, to destroy the free market and to substitute for interplay of competitive forces a sort of monolithic rigidity. Stations bound by the usual 5-year exclusive contracts are not free to bargain with other networks for programs; networks are not free to bargain with those stations for time; and the door is closed against new networks. The result is to restrict the flow of programs from producers to listeners.
    The present stratification in the field of network broadcasting is largely the result of the efforts of NBC and CBS to maintain their dominant position. The way in which the restraints in this field have grown up is significant both in understanding their actual effect, and the intent with which they were adopted:

    (1) CBS, almost from the first, tied up its stations with contracts which had the obvious and calculated effect of removing them from competition for 4- and 5-year periods.
    (2) NBC did not adopt the restrictions during the early years. Indeed, in 1931, NBC's president asserted with justifiable pride that NBC "holds its network stations together only by the superiority of its network program service and by the demand of listeners for NBC network programs."¹² But when a new network, Mutual, entered the market, NBC abandoned its reliance upon program superiority and listener demand and removed its stations from competition through 5-year exclusive contracts modelled on the CBS pattern. Mutual thus remained the only adherent to the theory of a free station-network market until 1940.
    (3) Thereupon a fourth network organization was projected: Transcontinental Broadcasting System. The stations on the NBC and CBS networks were inaccessible. Mutual stations, however, were open to advances from the new network, but there were few desirable stations with which Mutual could offset such losses. Mutual, like NBC earlier, promptly introduced restraints into its more important affiliation contracts.
    (4) The upshot of the whole business is that today only a negligible proportion of the Nation's total nighttime broadcasting wattage is free to bargain in the network-station market.

    NBC and CBS oppose the opening of the network-station market to competition. Although requested at the oral argument to present proposals for the furtherance of competition in the industry, no such proposals have been forthcoming. Instead, both urge that they deserve a kind of protected status because of their pioneering and their "first comer" position. NBC says that regulations of the type we propose would make it "easier to reap where NBC has sown." CBS says that "the fruits of enterprise must be preserved."
    Clearly the Communications Act neither grants, nor authorizes the Commission to recognize, the claim to a vested right which is asserted. The grant of a station license confers upon the licensee no vested right to continuous operation.¹³ A network organization, which is superimposed upon station licensees, cannot give rise to rights superior to those upon which it itself rests.
    A contention similar to that urged by NBC and CBS was squarely rejected in Federal Communications Commission v. Sanders Bros. Radio Station, 309 U. S. 470. It was there urged that the Commission, before authorizing construction of a new station, was required to determine whether such action would cause economic loss to an existing licensed station. The Court, in holding that the Commission was not required to give such loss "separate and independent" consideration, said (p. 476):

If such economic loss were a valid reason for refusing a license this would mean that the Commission's function is to grant a monopoly in the field of broadcasting, a result which the Act itself expressly negatives * * * [Italics added.]

    We are not aware that existing networks entered the field believing that they had exclusive franchises; nor are we aware that the networks have accepted the duties customarily associated with such franchises. So far as "preserving the fruits of enterprise" is concerned, we note that NBC and CBS are not immature enterprises which, having invested heavily in preliminary exploration, are now about to enjoy the fruits of their investment. Both have reaped, and reaped richly, almost since the time of their foundation. When the tremendous returns on investment which each has received, amounting in 1938 alone to 80 percent of the investment in tangible property in the case of NBC and 71 percent in the case of CBS, are pointed out, both defend such rates of return by insisting that networks are service enterprises in which profits are not a function of investment. They can hardly argue simultaneously that their investment, already returned many times over, is an essential element in radiobroadcasting which deserves to be protected by monopolistic rights.
    The established position of NBC and CBS in the industry is a reason against, rather than for, permitting them to consolidate that position by restrictive covenants or by ownership or operation of stations. Their financial resources, diversified activities, trade contacts, and established listener goodwill ¹⁴ impose handicaps, difficult enough to overcome, upon any rival in the field of network operation.
    Mutual states that there should be competition in the broadcasting field, but proposes, for example, that exclusivity be abolished and option time restricted only with respect to those stations serving cities with three or fewer comparable full-time stations. The effect of Mutual's proposals would be to open up the field to competition among the existing networks; but these proposals would buttress their positions vis-à-vis all others. Such a result, while no doubt welcome to Mutual, would hardly ensure the degree of competition which the Communications Act envisions and the public interest requires.
    A constantly improving service to the public requires that all the competitive elements within the industry should be preserved. The door of opportunity must be kept open for new networks. Competition among networks, among stations, and between stations and networks, all of which profoundly affect station service, must be set free from artificial restraints. It is not in the public interest for any licensee station to make arrangements which tend to close that door or restrain that competition. Pursuant to the mandate of Congress that it grant licenses and renewals only to stations operating in the public interest, this Commission must refuse further to license stations which persist in these practices.

A. EXCLUSIVE AFFILIATION
1. Licensee allowed to broadcast programs of only one network
    NBC and CBS, by contractual arrangements with their affiliates, prevent the great majority of them from broadcasting programs of any other national network. This restriction hinders the development of other national networks. The evidence is convincing that the purpose, as well as the effect, of exclusive affiliation, is to prevent the growth of other national networks.
    Since its first contract in 1927, CBS has had an exclusive affiliation clause designed to obstruct what it calls "wildcat networks." NBC, however, did not adopt its exclusivity clause until 1936, after certain of its affiliates had begun to broadcast Mutual programs. The NBC vice president in charge of station relations testified at the committee hearings:

    At the very outset, this was something which we had assumed, this exclusivity of arrangements between the network and the station. It was something that we didn't think had to be put into writing and it was not until about 1936 that it did become phrased in this particular way, and that was only due to the fact that these exceptions were beginning to grow up where there was not that recognition by the stations of the viewpoint which I have expressed (Hedges, Tr. 1859).

    NBC's assumption apparently had not been shared by its affiliates; for a substantial number of them had, in fact, carried Mutual programs. When the rise of Mutual posed the question of exclusivity as a practical problem for the first time, NBC countered with the present exclusivity clause. It is a fair inference that NBC's desire to entrench its position and to hinder the growth and development of a new national network played an important part in the decision to incorporate an exclusivity clause in the standard NBC affiliation contract.
    But whatever the purpose of the exclusory clause, there is no doubt as to its effect. At the present time there are 45 cities with a population of more than 50,000 served by NBC or CBS or both to which Mutual cannot obtain any access whatever. In over 20 more, including Cleveland, Indianapolis, Houston, Birmingham, Providence, Des Moines, Albany, Charlotte, and Harrisburg, it can obtain only limited access to facilities. The difficulties facing a new network under these circumstances would be well-nigh insurmountable.
    Of the 92 cities of more than 100,000 population, less than 50 have 3 or more full-time stations, even including locals, and less than 30 have 4 or more. Since a national network must have outlets in the more important markets of the country, it is readily apparent that exclusive network affiliation contracts severely limit the number of national networks which may do business.
    But figures on the limited number of stations outside the NBC and CBS domain do not fully show the extent of their present dominance. NBC and CBS have, by their exclusive contracts, tied up the largest stations in the most desirable markets. This is evidenced by the fact that of the 30 clear-channel stations in 1938, there were 28 licensed to or affiliated with NBC or CBS; and this dominance of the clear channels is typical of NBC and CBS dominance with respect to high-power regional stations as well. Thus even where stations are available to a new network, they are, with few exceptions, locals or low-power regionals not able to compete effectively with the superior stations under exclusive contract to NBC and CBS.
    As previously noted, there are natural obstacles making the formation and operation of a new network difficult enough at best; the existence and enforcement of exclusive contracts make it practically impossible. Obstacles should not thus be heaped one upon the other. Exclusive contracts, which foreclose the possibility of new networks, deprive the public of the improvement in station program content which could reasonably be expected to flow from competition by new national networks.
    In the many areas where all stations are under exclusive contract to NBC or CBS, the public is deprived of the opportunity to hear Mutual programs. Restraints having this effect are to be condemned as contrary to the public interest irrespective of whether it be assumed that Mutual programs are of equal, superior, or inferior quality. The important consideration is that station licensees are denied freedom to choose the programs which they believe best suited to their needs; in this manner the duty of a station licensee to operate in the public interest is defeated. The Mutual programs which the stations would broadcast if permitted freedom of choice are, in these areas, withheld from the listening public. In addition, the very fact that Mutual is denied access to important markets immeasurably restricts its ability to grow and to improve program quality.
    Not only is regular Mutual program service banned from large areas, but even individual programs of unusual interest are kept off the air. A concrete example of the manner in which exclusivity clauses operate against the public interest may be seen in the broadcasting of the World Series baseball games of October 1939. Mutual obtained exclusive privileges from the baseball authorities for the broadcasting of the series with the Gillette Co. as commercial sponsor. Thereupon it attempted to obtain time from various stations, including stations which were then under exclusive contract to NBC and CBS. CBS and NBC immediately called upon their outlet stations to respect the exclusive provisions of their contracts. Disregard of this reminder would have jeopardized a station's rights under the contracts. This prevented certain licensees from accepting a program for which they believed there was public demand and which they thought, would be in the public interest.¹⁵ It also deprived the advertiser of network advertising service in some areas, and prevented the licensee from receiving income which could have been obtained from acceptance of the program series. As a result, thousands of potential listeners failed to hear the World Series of 1939.¹⁶
    Only strong and compelling reasons would justify contractual arrangements which have the results we have described. We turn, therefore, to a consideration of the arguments proffered by NBC and CBS in support of their contention that the exclusivity clauses are necessary to the proper operation of network broadcasting. NBC seeks to justify exclusivity on the ground that it eliminates "confusion" on the part of the radio audience concerning the affiliation of any particular station and enables the listening audience to know where to turn for the programs of any given network. But it is a well-known fact that audiences are keenly aware of the quality and merit of particular programs and follow their favorite programs from station to station. Numerous ratings of programs show that the power of programs to attract listeners varies widely among programs broadcast over the same station. Indeed, the whole effort to improve programs by spending large sums on talent and material is founded upon the theory that good programs attract large audiences. NBC's chief statistician testified that listening audiences do not stay tuned to a particular station but shift around to hear certain programs:

    It [a survey of listening audiences] merely shows that there are wide shifts of the audience from station to station, depending on programs; that the audience does not stay with any particular station throughout the morning or afternoon; in this case only the morning. There are wide shifts of programs as listening increases and decreases, depending upon the programs that happen to be on. There is no constant level of listening, nor constant level of listening to any one station (Beville, Tr. 418-19).

    NBC's fear of listener confusion is apparently not shared by NBC's chief statistician.
    A second argument advanced by NBC to justify exclusivity is that network broadcasting is a joint venture in which NBC spends large sums on sustaining programs to build up goodwill for station and network alike. It is urged that it would be unfair to NBC for an affiliated station, by disposing of its time to another network, to trade on the goodwill which has been built up through the broadcasting of NBC programs, and that it would remove the incentive for furnishing good sustaining programs to its affiliates.¹⁷
    For various reasons this line of argument also fails to persuade. If we assume that NBC's incentive for supplying good sustaining programs to affiliates is its desire to build up a listening audience for NBC commercial programs, this does not aid its argument. For this would only give NBC a legitimate interest in seeing that the station did not broadcast poor programs during its non-NBC time. It is hardly to be presumed and, indeed NBC does not contend, that a station given free rein would choose a program from another network less attractive than the program which would otherwise have been broadcast.
    The evidence introduced at the committee hearings leads to the conclusion that the elimination of exclusivity will not bring any deterioration in the overall quality of network sustaining programs. Indeed, as an historical matter, NBC supplied its affiliates with sustaining programs for some 10 years before it adopted exclusivity. No attempt was made to show that the introduction of exclusivity improved in any way the quality of the sustaining programs furnished by NBC to its outlets.
    Moreover, sustaining programs are not a gratuity; they are sold like any other service.¹⁸ From 1926, when NBC first began broadcasting, until 1935, a period of about 9 years, NBC charged its affiliates for its sustaining programs. CBS during most of the first year of operation also charged affiliates for sustaining programs. But after NBC and CBS abandoned direct payment for sustaining programs, affiliated stations were still required to furnish a valuable quid pro quo for these programs. The changed method, which is now in effect, provides that affiliated stations receive no compensation for a specified number of hours of network commercial programs, and reduced compensation for certain additional hours. To the extent of these hours, the network is paid by advertisers but does not have to share its receipts with station licensees. In short, stations pay handsomely for sustaining service, just as they always have done in the past. If NBC and CBS do not supply adequate sustaining programs, we cannot believe that others will not be ready and willing to take their place once the field is opened to them.
    As we point out elsewhere in this chapter, the public interest will be better served if networks compete for outlet stations. Such competition undoubtedly will encourage the networks to supply sustaining programs whose good quality will induce stations to carry their commercial programs.
    We are driven to the conclusion that the real purpose and function of NBC's exclusivity is to prevent competing networks from making any use of the audiences of its affiliates. But those, audiences are not NBC's to use or withhold as it sees fit, even though NBC claims that they were attracted in part by virtue of its sustaining programs. The licensee must remain free to use its time and facilities, when they are not being utilized by NBC, in any way that it sees fit in the public interest. No station should be permitted to enter into an exclusive agreement which prevents it from offering the public outstanding programs of any other network or hinders the entrance of a newcomer in the field of network broadcasting.
    Finally, it is broadly argued by NBC that the elimination of exclusivity will destroy the entire fabric of network broadcasting. "Destroy that provision," stated the chairman of the board of NBC, "and you will have destroyed the American system of network broadcasting." These forebodings are in strange contrast to the words of a former president of NBC who testified that NBC "holds its network stations together only by the superiority of its network program service and by the demand of listeners for NBC network programs".¹⁸
    The testimony of NBC's chairman must also be read in the light of his statement that he did not believe in competition between networks for stations. He testified: "The competition, it seems to me, is in the program end, rather than in the facility end, and this is as it should be." We cannot agree that so essential a factor in the operation of a network--the number and character of the affiliated stations which are its customers--should be removed from the field of competition. We cannot agree that the field should be forever limited to the present incumbents.
    The president of CBS contends that the freedom of an affiliate to broadcast the programs of any network might be a stimulus for what he called "wildcat" networks operated by "opportunists who would have no permanent investment:

    If Columbia continued to have a call on station time but didn't have the exclusivity clause, the station could take the program from any network and that might be a stimulus for the so-called wildcat network. *               *               *               *               *               *               *                    I believe that if the present system were disturbed there would develop a class of opportunists who would have no permanent investment, who might have their office in their hat, who would be competing for temporary affiliations, with the result that the important elements of responsibility and reliability and high standards would be seriously impaired to the detriment of the public (Paley, Tr. 3464, 3465).

    Obviously, CBS' exclusivity clause, assertedly designed to prevent "wildcat" networks, would as effectively preclude the competition of responsible networks. Indeed, CBS has a far greater stake in precluding the establishment of responsible networks which could offer real and continued competition to it than it has in barring the door to newcomers lacking in reliability. Their deficiency in this respect would bring their quick exit.
    It is interesting to note that in another connection, in arguing that the rate of return, upon its invested capital was not too high, CBS took a very different position on the importance of capital in network broadcasting. The brief states: "Broadcasting, as any other advertising enterprise, is a service business, the value of which is not dependent upon or determined by the value of the tangible assets devoted to the business."
    The president of CBS also testified that there was no reason for organizing another network because a new network could not do any better than CBS was doing:

    I cannot see any advantage in organizing something new which I do not think would have any particular advantages or could do a particular job in any better fashion than we can do it. I don't think the public interest is involved just because two people happen to supply a service as against having one person supply an adequate service, especially since by having the one person supply the adequate service we can have greater solidity and permanence of the very thing he is trying to build up (Paley, Tr. 3556).

    This attempted justification of exclusivity, however, fails to take into account the function of competition in our economy. CBS programs may be good; they are not perfect. CBS has not been granted an exclusive franchise to engage in network broadcasting; it has no right to exclude others from the field on the ground that it is already furnishing adequate service to the public, or on any other ground. Competition is in the public interest not because the particular service offered by a new unit is better than the existing service, but because competition is the incentive for both the old and the new to develop better services.
    Both large network organizations also contend that, were it not for exclusivity, the station in each community with the best coverage would get all the superior programs; the less favored stations would get only the leftovers. As a result, they argue, existing inequalities in facilities would be accentuated and effective competition by the small stations rendered impossible. This solicitude for the smaller station is not easy to reconcile with the NBC and CBS policy of tying up the best possible stations in a city and refusing their programs to the smaller stations. The contention comes with little grace, too, from network organizations whose restrictive practices have tended to prevent the rise of new networks which might supply these less favored stations with programs.
    Nor do we believe that the elimination of exclusivity will have the predicted results. On the contrary, its elimination should lead to an increased number of networks and, consequently, a larger supply of available network programs and a wider latitude for all stations in obtaining network programs. Then, too, there should be a gain in quality as well as quantity as a result of increased competition among networks for the time of outlet stations. Not only the more powerful stations, but those with less desirable facilities, and the public as well, will benefit.
    From a practical standpoint, this contention by the networks overlooks the highly important matter of cost of time. The large stations in each city cannot monopolize the best commercial programs unless the advertising sponsors are willing to pay the higher rates charged by such stations. A great variety of factors will affect the sponsors' decisions on this matter. To be sure, if a sponsor desires effective coverage of all his best markets on a national scale, he will not be content with a network of low-power stations; as we have seen, the fact that NBC and CBS have tied up the best facilities in every important market has been the main obstacle to other networks. But in determining precisely how many high-powered stations should be purchased, each sponsor will want to consider, in the light of his radio advertising budget, such matters as the geographical location of each station in relation to his merchandising problem, its ratio of urban, suburban, and rural listeners, the income status of its audience, and numerous other such matters. Facilities highly desirable for one advertiser may be wasteful for others.
    A glance at the network rates for these big stations is sufficient to show the importance of the cost factor. In Louisville, Ky., for example, there are four stations: a 50-kilowatt clear-channel station affiliated with CBS, a 5-kilowatt regional station affiliated with NBC's Red network, and two low-powered local stations, one of which is affiliated with Mutual and the other with NBC's Blue network. The full hourly rate for the local station is, in each case, about $120; for the regional station, $200; and for the big station, $475. Clearly, the big station will not be able to draw commercial programs away from the regional station unless the sponsor is willing to pay well over twice as much for the privilege. An advertiser who has been utilizing one of the local stations would have to quadruple his payments.
    Applying the same test on the basis of some 25 cities suitable for a "basic" network, and of a 52-week program series, the results speak even more eloquently. If, in each of those cities, the program series were to be furnished to the most powerful station, the cost to an advertiser would apparently exceed by roughly $50,000 the cost of using the CBS or the NBC Red networks. If, in addition, the advertiser wished to cover the dozen or so cities which have 50-kilowatt stations but which are not included in any basic network, the advertiser would pay, for a 52-week series, roughly $37,000 more if he used the 50-kilowatt station in each city than if he used the CBS or NBC Red network stations in those cities.
    Perhaps, in some cases, an advertiser will be willing to pay the additional amounts required to secure an unusual number of large stations for his program. But it is also likely that, in other cases, advertisers will seek to lower their costs by using fewer high-powered stations. The elimination of exclusivity, accordingly, seems likely to introduce a greater amount of flexibility into the situation by giving advertisers a wider range of choice with respect to rates and coverage. Finally, if the dominant stations should take commercial programs during the more desirable broadcasting hours to the exclusion of public service programs, they would undermine their own position. Degeneration in the quality and variety of their programs might cause them to lose listeners, and bring about a weakening of their competitive commercial situation. Furthermore, stations enjoying the benefits of a public license have an obligation to render the public its due in the form of the best program service that the capital and intelligence of the licensee permits. This obligation is particularly clear where the license authorizes the use of high power, with the concomitant benefits of coverage, opportunity for profit, and exclusion of others from the spectrum. Accordingly, such tactics would render the dominant stations vulnerable to applications for their facilities by other stations or persons willing to furnish a better-rounded service.
    Our conclusion is that the disadvantages resulting from these exclusive arrangements far outweigh any advantages. A licensee station does not operate in the public interest when it enters into exclusive arrangements which prevent it from giving the public the best service of which it is capable, and which, by closing the door of opportunity in the network field, adversely affect the program structure of the entire industry.

2. Network allowed to send programs to only one station
    Hitherto we have dealt only with exclusivity of affiliation which obligates an outlet to broadcast the programs of only one national network. The correlative of this exclusivity is territorial exclusivity, whereby the network agrees not to transmit its programs to any other station in the "territory" of an existing affiliate.
    The NBC vice president in charge of station relations testified that fidelity of the network to the station as well as of the station to the network is inherent in the American system of network broadcasting. He testified further that about the same principles apply to territorial exclusivity as to exclusivity of affiliation. He added, however, that NBC had granted territorial exclusivity as a matter of contract right in only a few cases. Such exclusivity is granted to a station most reluctantly by NBC, and only after what he characterized as a "knock-down and drag-out fight," because, according to the witness, "the less restrictions that we have upon us are always to be preferred." There is no evidence in the record, however, that NBC ever sends its programs to other stations in the same area as its outlets, and the testimony of NBC's chairman would indicate that it does not.¹⁹
    CBS, on the other hand, regards fidelity of the network to the station more rigorously. In the very provision of its affiliation contract which makes its affiliates exclusive CBS outlets, the affiliate is granted protection against the competition of CBS programs from other stations:
    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 the city, except in case of public emergency.
    Mutual grants its associated stations territorial exclusivity. At the time of the committee hearings, five organizations, including the Don Lee regional network, were given this protection against competition in their affiliation contracts; and, as a matter of practice, Mutual affords similar protection to its other outlets.
    The question of territorial exclusivity is an important one because, among other reasons, network affiliates take only some of the programs offered them by the networks. With few exceptions,²⁰ stations may select freely from among the sustaining programs of their respective networks those that they want to broadcast and reject the others. An affiliate may reject a sustaining program because of its quality, or because it does not fit the program structure for a given day, or for any reason whatsoever. The affiliate's right to reject network sustaining programs is not restricted in the same way as its right to reject network commercial programs.²¹
    Territorial exclusivity arrangements are important from the point of view of over-all program structure. To be sure, usually it would be wasteful duplication of service for a network simultaneously to send identical programs to stations whose service areas approximately coincide. If the only effect of territorial exclusivity were to prevent duplication, no fault could be found. But exclusivity goes much further; it protects the affiliate from the competition of another station in the same area which may wish to use network programs not carried by the affiliate.
    Under territorial exclusivity, programs rejected by affiliates, sustaining or commercial, may not be offered by the network to other stations in the service area of the affiliate which rejects the program. An example of the adverse effect this may have upon the public is given in a brief filed August 7, 1940, by station WBNY at Buffalo, N. Y.²² WBNY related that Mutual outlets in Buffalo rejected a sustaining program series known as "The American Forum of the Air," but that its efforts to obtain this program were futile. Consequently, this worth-while program was not broadcast to the Buffalo area despite the desire of WBNY to carry it.
    It is not in the public interest for the listening audience in an area to be deprived of network programs not carried by one station where other stations in that area are ready and willing to broadcast the programs. It is as much against the public interest for a network affiliate to enter into a contractual arrangement which prevents another station from carrying a network program as it would be for it to drown out that program by electrical interference.
    This is not to say, of course, that all programs not carried by an affiliate must be offered to all other nearby stations. Nor need sustaining programs be offered free of charge. Suitable arrangements for compensating networks for sustaining programs and stations for commercial programs will be arrived at between the parties. The crucial point is that it is not in the public interest for a station licensee to enter into an arrangement with a network to preclude other stations in the area from broadcasting network programs which it rejects.

B. LONG-TERM AFFILIATION CONTRACTS
    Another way in which the national networks obstruct the growth of new networks is by means of long-term contracts with their affiliated stations. The standard NBC affiliation contract is for a term of 5 years with the right granted to NBC, but not to the station, to terminate the contract upon a year's notice. The record in this proceeding shows that the purpose of the 5-year term is to prevent the affiliates from becoming affiliated with another national network. Perhaps the most conclusive evidence is the fact that the term of the NBC contracts was changed from 1 year to 5 in 1936, soon after Mutual was launched. According to the NBC vice president in charge of stations relations, NBC adopted the 5-year plan because competitors were taking away its stations and NBC wanted to keep its network intact:

    Our present contracts run up to 5 years. The reason for that was simply this. With a contract of this nature, which I have just described, where a station may caned upon a year's notice, we were exposing ourselves to our competition. Our competition, so we were informed, were perfectly willing to sit down and negotiate contracts with such of our affiliates as they desired and bide their time for the year to elapse before they could take over the stations.
    It seemed rather poor business for us to leave ourselves in such a vulnerable position and for that reason we decided to further stabilize our business and to stabilize the network business not only for our own benefit but for the benefit of all those affiliates associated with us, by retaining the network in as intact order as was possible subject, of course, to the individualities that were involved and whose individual determinations in each case might induce further change within the network. For that reason, we adopted a 5-year plan (Hedges, Tr. 1819-20).

    Furthermore, the change that occurred in 1936 affected only the obligation of the station, but not that of NBC. NBC retained the right, upon 12 months' notice, to terminate the contract with or without cause. NBC's contractual obligation was thus limited to a single year. There was no effort to stabilize the network-affiliate relationship on a 5-year basis. The new contract was clearly an effort to tie up the station for 5 years, if the network wanted to utilize it that long.
    There was some testimony and argument to the effect that long-term contracts are indispensable to stable and efficient network operations, because NBC itself has certain long-term commitments. The argument is made in NBC's original brief that it entered into leases for studio space and invested large sums in equipment on the strength of these 5-year contracts, which would not have been done without contractual assurance that these studios would be useful for more than 1 year.
    Analysis of the evidence shows that this contention is in the nature of an afterthought. From 1927 to 1938 NBC built 17 studio plants at a total cost of $7,719,200. Eleven of these seventeen studio plants, built at a cost of $5,519,700, or 71 percent of the total, were completed prior to 1936, while the term of the NBC affiliation contract was still only 1 year.
    Nor is NBC's argument as to the need for long-term contracts consistent with its declared policy of "flexibility" in its dealings with the stations. NBC may decrease the network station rate of any one of its affiliates upon 90 days' notice if at the same time it reduces the rates of a majority of its affiliates; it may increase the network station rates of its affiliates; and it may terminate any of its affiliation contracts on 12 months' notice. NBC insists upon those rights on the ground that the network business is dynamic and ever changing, and that NBC must be in a flexible position at all times:

    This clause gives to NBC a degree of flexibility in respect to rates which is absolutely essential to meet any possible general reduction which might be made by other advertising media.
    It must be remembered that the depression, recession or whatever you want to call it, is still upon business generally although there has been some upturn. Nevertheless, when you are with stations for a period so long as 5 years, there is no telling what may happen and if a depression were to suddenly come about it might be very necessary in order to keep the network functioning as a national advertising medium to reduce those rates to meet the competition of national magazines or other media which advertisers may employ for national advertising purposes (Hedges, Tr. 1824).

    However, NBC failed to give any reason why the network-affiliate relationship should be dynamic for the purpose of giving NBC flexibility but static for the purpose of binding the affiliates for long periods of time.
    NBC also contends that network-outlet contracts for a single year are impractical for the reason that a national advertiser's use of broadcasting is quite different from a spot announcement which a local merchant may buy in an effort to find immediate customers. It is pointed out that the most important return which any national advertiser secures from his expenditures in broadcasting is the goodwill of listeners resulting from attractive programs over the same stations for a period of years. It is urged that national advertisers must have some reasonable assurance that the same stations will be available for several years, or they may be expected to take their advertising to other media which can assure continuity.
    The evidence in the record fails to support this contention. The NBC vice president in charge of sales testified that NBC does not make any commitments with advertisers for a period longer than 1 year because it is difficult in the broadcasting business to determine what the situation will be after a year:

    We do not make commitments beyond 52 weeks because it is pretty difficult in this business to determine exactly what the situation would be after a year and we do not want to commit ourselves beyond a year. We don't know what new regulations may develop; what we may find it necessary to do. This radio business has changed pretty rapidly since it started, and we always want to be in the flexible position, as far as we are concerned, so that we can make any necessary moves, and we don't want to be cramped by longer than 52-week contracts (Witmer, Tr. 2166-2167).

    This testimony shows conclusively that NBC does not give advertisers any assurance that they may use its facilities beyond a period of 1 year.
    To summarize, NBC does not believe that there should be competition between networks for outlet stations, and adopted the 5-year affiliation contract for the purpose of precluding such competition. NBC's chairman testified that, if contracts with affiliates were for 1 year instead of 5, the stability of networks would be seriously affected; for there would be competition between the networks for stations. He said that the competition was, and should be, in programs rather than in facilities.²³
    The term of the standard CBS affiliation contract, like that of the NBC contract, is for 5 years. CBS, but not the station, may terminate it upon 1 year's notice. As evidence of a viewpoint similar to that of NBC, note should be taken of the following testimony of the CBS vice president in charge of station relations:

    It has been my personal experience that a length of time up to 5 years has been the practical period of time (for term of affiliation contracts) because should there be a year-to-year situation you would be continually renewing and renegotiating and renewing contracts, and you would also be vulnerable from a competitive standpoint (Akerberg, Tr. 3719). [Italics supplied.]

    The long-term contracts of CBS and NBC were intended to, and do, prevent any real competition in the network-station market. The public is thus deprived not only of the advantages that might flow from the establishment and development of new networks, but it also loses the benefits of competition between existing networks for the better outlets.
    Regardless of any changes that may occur in the economic, political, or social life of the Nation or of the community in which the station is located, CBS and NBC affiliates are bound by contract to continue broadcasting the network programs of only one network for 5 years. The licensee is so bound even though the policy and caliber of programs of the network may deteriorate greatly. The future necessities of the station and of the community are not considered. The station licensee is unable to follow his conception of the public interest until the end of the 5-year contract.
    The option of CBS and NBC to terminate the contract upon a year's notice, without a correlative option in the affiliate, gives the network the whip hand over the outlet. Such an arrangement is lacking in mutuality.
    In general, Mutual's contracts with its affiliated stations permit both parties to cancel their affiliations after the first year, upon a year's notice. The contracts between Mutual and its seven stock-holders, however, are for a 5-year period, but give to those stock-holders, rather than Mutual, the privilege of cancelation upon a year's notice at any time after the first 2 years.
    We conclude that long-term network affiliation contracts remove the choice outlets from the network-station market and thus prevent the establishment and development of new networks; that, under such contracts, stations become parties to arrangements which deprive the public of the improved service it might otherwise derive from competition in the network field; and that a station is not operating in the public interest when it so limits its freedom of action.
    We are supported in this view by the fact that Congress has foreclosed vested rights in the field of radio broadcasting. Congress also provided that no radio station should be licensed for more than 3 years; licenses issued by the Commission in fact run for only 1 year. While the network-outlet contract is necessarily contingent upon the Commission's granting license renewals, we nevertheless conclude that, as a matter of policy, no radio station should even partially or contingently bind over its facility to a network for as long a period as 5 years.
    With respect to the maximum term of the contract, no showing has been made that there is any business need for an affiliation contract longer than 1 year. On the contrary, competition will be strengthened if opportunity is provided for annual readjustments on the basis of comparative showings of networks and stations. We conclude, therefore, that station licensees will best serve the public interest if they refrain from entering into such contracts for periods in excess of 1 year and hold themselves free to negotiate with networks annually.

C. NETWORK OPTIONAL TIME
    At the time of the committee hearings, both NBC and CBS had network optional time provisions in the affiliation contracts with their outlet stations. Mutual entered into similar arrangements with its 7 stockholders early in 1940, covering some 50 stations owned or operated by the stockholders or affiliated with their regional networks. Upon 28 days' notice NBC may call upon its outlet stations to carry a commercial program during any of the hours specified as network optional time. This covered the entire broadcast day for 29 outlets of NBC in the far west and, for substantially all the rest of its affiliated stations, 8½ specified hours on week days and 8 specified hours on Sundays. Three and a half evening hours are included each day, and 4 evening hours on Sunday. The evening hours between 8 and 11, which are included within the NBC option, are the most profitable and valuable of the broadcast day.
    In spite of the fact that it optioned such substantial periods of time, in 1938 NBC used for network commercial programs only 58.1 percent of the optioned time of stations on the basic Red network, and only 19.4 percent on the basic Blue network. The percentages, of course, would far smaller if figures for all the supplementary stations were included, because the basic stations, located in the important markets and usually available to advertisers only as a group, carry far more network commercial programs than the supplementary stations.
    NBC affiliates may utilize the optioned time only subject to 28 days' notice that NBC wants that time. This limits severely their ability to sell their own time. The NBC vice president in charge of sales testified that 13 weeks is the minimum time necessary for an advertising campaign to take hold:

    We feel in radio a new advertiser is likely not to feel the benefits of his radio advertising until he has been on the air a considerable length of time. It depends upon the circumstances. It may be necessary for him to be on 26 weeks before he begins to get a real lift from his radio advertising. He may be on only a matter of a few weeks; one program may give him a tremendous reaction. It all depends upon the circumstances, but by and large we feel that 13 weeks of radio advertising is about the minimum from which an advertiser can expect to get results (Witmer, Tr. 2165-2166).

    To the extent that, and in the field where this is true, the provision for option time would make it impossible for the stations themselves to make any effective contracts for advertising programs.
    To be sure, it is less difficult to shift the time of a local commercial program involving only one station than that of a network commercial program. Nevertheless, shifting a local commercial program may seriously interfere with the efforts of a sponsor to build up a regular listening audience at a definite hour, and the long-term advertising contract becomes a highly dubious project. This hampers the efforts of the station to develop local commercial programs and affects adversely its ability to give the public good program service.
    NBC's time options likewise affect the ability to serve the public interest of those few of its affiliated stations (not subject to an exclusivity clause) which are affiliated also with Mutual. As of January 17, 1939, 25 NBC stations also served as outlets of Mutual. NBC's contractual right to utilize the time of these stations on 28 days' notice gives it the whip-hand over any other network broadcasting over these stations. Mutual's general manager gave testimony as to how this works out:

    For an example, a program would be developed to go on three radio stations at a particular hour. It would become a popular program; they would want to expand the program; we would find ourselves in the position of say, [sic] "If you desire to expand the program, we must provide certain facilities, subject to 28 days' notice." Some one else in direct solicitation of the same thing said, "We can supply either a different facility, either a better facility, or in many instances, the same facility where we can guarantee the time to you." We lost through our faults, we lost Lucky Strike. We could go through a number of specific things which we lost in the development.
    Now in analyzing that and while we realize that we are going to continue to grow and do the things which aggressive operation is expected to do, you do reach a certain point where people begin to understand the relative function which you can perform. As of today the function that we can perform is understood to be partially restrictive (Weber, Tr. 5103-94).

    This uncertainty in the availability of NBC's affiliates to other networks places a serious obstacle in the way of the development of new networks. Few sponsors are willing to spend large sums in building up a program series to be broadcast over a definite number of stations at a certain hour if some of the important stations are subject to withdrawal upon order of a dominant network. Stability for NBC cannot be justified if attained at the cost of instability on the part of NBC's competitors and of their consequent inability to expand and provide the radio listening audience with effective program service. NBC's optioning of time has an even more adverse effect upon the broadcasting of national spot commercial programs by means of transcriptions. The NBC exclusivity clause does not apply to transcriptions, but the optional-time provision does. The fact that transcription broadcasts, which fall within the periods optioned to NBC, can only be scheduled subject to a 28-day call by NBC, is a serious obstacle to obtaining sponsors for such programs. Like sponsors of other programs, they endeavor to build up regular listening audiences and this takes longer than 4 weeks. By keeping a 4-week call on the best time of its affiliates, NBC renders transcription programs a less effective competitor.
    The CBS optional-time provision restricts the outlet stations even more than does that of NBC. While NBC optional time for most of its outlets covers 8 or 8½ specified hours per day, CBS optional time covers the entire broadcast day. Upon 28 days' notice CBS may call upon its outlet stations to carry a network commercial program at any hour.²⁴ This has the same restrictive effect upon other types of programs broadcast by CBS affiliates as does the NBC optional-time provision. Notwithstanding these disadvantages from the optioning by CBS of all the time of its outlets, CBS during 1938, used for commercial programs only 39 percent of the optioned time of its basic network stations.
    Only five CBS affiliates were, as of January 1939, outlets of Mutual as well. The optioning of time by CBS restricts the broadcasting of Mutual programs over these five stations. Upon the elimination of the CBS exclusivity clause, the restrictive effect of the present optional-time provision upon the development of new networks would be apparent at once. Indeed, as a practical matter, it is not unlikely that, even if exclusivity as such were eliminated, the present network optional-time provisions would, unless likewise eliminated, perpetuate exclusivity.
    From the time of its organization in 1934 until 1940, Mutual did not option any of the time of its associated stations. Early in 1940, however, Mutual entered into optional-time arrangements with its seven stockholders. These arrangements are less inclusive than those of NBC and CBS in that they cover only 3% to 4% specified hours on weekdays and 6 specified hours on Sundays and apply to only about half of the stations associated with Mutual. The contracts expressly provide that the optional-time provision shall lapse if the Federal Communications Commission prohibits that practice or the other national networks voluntarily abandon it.
    NBC and CBS argue that some form of time optioning is indispensable to network operation because broadcasting competes with other advertising media, such as newspapers and magazines, which are free to guarantee to advertisers definite coverage in terms of time, space, and circulation. But firm commitments and guarantees for broadcast advertising are not dependent upon time options. Historical analysis shows that the networks did not institute time options to protect themselves against competition from newspapers or magazines. NBC adopted optional-time provisions because CBS had already done so and was thereby deriving a competitive advantage. NBC's vice president in charge of station relations testified:

    At least one of our competitors [CBS] was in a much more fortunate position in that respect, having a substantial number of contracts, so we understand and believe, which enabled it to secure right of way at any time of the day or evening. Of course that made it possible for the competitor to tell one of our clients who was dissatisfied with the inadequate network turned up, as a result of our availability requests, that he was in a position to deliver complete coverage and he would show the list of stations. As a result, we have lost considerable business (Hedges, Tr. 1722-1723).

    Similarly, in 1940 Mutual adopted a number of optional-time provisions in its more important contracts in order to compete with the other national networks.
    A station licensee must retain sufficient freedom of action to supply the program and advertising needs of the local community. Local program service is a vital part of community life. A station should be ready, able, and willing to serve the needs of the local community by broadcasting such outstanding local events as community concerts, civic meetings, local sports events, and other programs of local consumer and social interest.
    We conclude that national network time options have restricted the freedom of station licensees and hampered their efforts to broadcast local commercial programs, the programs of other national networks, and national spot transcriptions. We believe that these considerations far outweigh any supposed advantages from "stability" of network operations under time options. We find that the optioning of time by licensee stations has operated against the public interest.
    The fact that NBC was able to carry on its business for 7 years without time options, and changed only when CBS began to derive a competitive advantage from its time options, as well as the somewhat similar experience of Mutual, lead us to the conclusion that time options, with their restraint upon the freedom of licensees, are not an essential part of network operations. With all the networks operating on an equal footing, the absence of optional time as it now exists will not, we believe, hamper network operations or drive advertisers to other media.

D. REJECTION OF NETWORK PROGRAMS
    While station rejection of network programs is not solely a problem of competition, its close relation to optional time and its general importance as an element of network broadcasting require its consideration.
    It was noted in the preceding chapter that most NBC and CBS affiliates are required to take network commercial programs unless such programs are not in the public interest.²⁵ NBC even goes so far as to require that the licensee "be able to support his contention that what he had done has been more in the public interest than had he carried on the network program." Thus, the burden of proof is placed upon the licensee.
    Practical difficulties confront a licensee who conscientiously seeks to carry out his duty to furnish the public with the best available programs. Precise information concerning the program the network proposes to distribute is not usually furnished and is not always easy to furnish. If, in addition to this obstacle, the licensee is not allowed to reject a program unless he can prove to the satisfaction of the network that he can obtain a better program, his efforts to exercise real selection among network programs become futile gestures, and he soon proceeds to broadcast network programs as a matter of course. The limitation on the right of rejection contained in the NBC and CBS contracts removes the licensee's incentive to find out what the network program is going to be.
    It is the station, not the network, which is licensed to serve the public interest. The licensee has the duty of determining what programs shall be broadcast over his station's facilities; and cannot lawfully delegate this duty or transfer the control of his station directly to the network or indirectly to an advertising agency. He cannot lawfully bind himself to accept programs in every case where he cannot sustain the burden of proof that he has a better program. The licensee is obliged to reserve to himself the final decision as to what programs will best serve the public interest.
    We conclude that a licensee is not fulfilling his obligations to operate in the public interest, and is not operating in accordance with the express requirements of the Communications Act, if he agrees to accept programs on any basis other than his own reasonable decision that the programs are satisfactory.
    Even after a licensee has accepted a network commercial program series, we believe he must reserve the right to substitute programs of outstanding national or local importance. Only thus can the public be sure that a station's program service will not be controlled in the interest of network revenues.
    These are principles of general application based on sections 301, 309, and 310 of the Communications Act. They apply to stations receiving programs from national networks, from regional networks, or from any other person engaged in supplying programs.²⁶ The licensee himself must discharge the responsibilities imposed by the law.

E. NETWORK OWNERSHIP AND OPERATION OF STATIONS
    At the present time, NBC is the licensee of 2 stations each in New York, Chicago, Washington, and San Francisco, 1 in Denver, and 1 in Cleveland, or 10 stations in all. CBS is the licensee of 8 stations, 1 in each of the following cities: Charlotte, Minneapolis, St. Louis, Los Angeles, Chicago, Washington, New York, and Boston. Mutual has never owned any stations. At the time of the committee hearings, however, Mutual was owned by the licensees of stations WGN at Chicago and WOR at Newark. In January 1940, as previously set forth,²⁷ stock in Mutual was issued to 5 additional affiliates.
    The 18 stations presently licensed to NBC and CBS are among the most powerful and desirable in the country. Of the 25 I-A clear-channel stations in the country, NBC and CBS are the licensees of 10. They are located in the largest and richest markets and their station rates, time sales, and revenues are among the highest for all stations.
    Long-term affiliation contracts, with their exclusivity and optional-time provisions, seriously interfere with competition among networks. Ownership of broadcast stations by networks, however, goes even further. It renders such stations permanently inaccessible to competing networks. Competition among networks for these facilities is nonexistent, as they are completely removed from the network-station market. It gives the network complete control over its policies. This "bottling-up" of the best facilities has undoubtedly had a discouraging effect upon the creation and growth of new networks.
    Furthermore, common ownership of network and station places the network in a position wnere its interest as the owner of certain stations may conflict with its interest as a network organization serving affiliated stations. In dealings with advertisers, the network represents its own stations in a proprietary capacity and the affiliated stations in something akin to an agency capacity.²⁸ The danger is present that the network organization will give preference to its own stations at the expense of its affiliates.²⁹
    Assuming that the question were presented as an original matter at this time, the Commission might well reach the conclusion that the businesses of station operation and network operation should be entirely separated. However, this Commission and its predecessor, the Federal Radio Commission, have heretofore approved as in the public interest the acquisition by NBC and CBS of most of these owned or operated stations and have periodically renewed the licenses of such stations. From a legal standpoint these circumstances confer no vested rights upon NBC or CBS, but we think it inadvisable to compel these networks to divest themselves of all of their stations.
    In New York, Chicago, and Los Angeles or San Francisco, network operations have become so interwoven with station ownership that we do not deem it in the best interests of radio broadcasting to divorce the two at this time. Stations in these "key" cities make available a substantial minimum audience for network sustaining programs and enable the networks to make provision for adequate studios and other facilities on an economic basis at talent centers. They permit the networks to experiment with new techniques of program production and new ideas in program content and balance, and give assurance that the experiments will have a fair test over good facilities. In the light of these conditions and the fact that there exists in these cities the largest supply of stations, we do not deem it advisable to prohibit a national network organization from being the licensee of one station in these "key" cities.
    Different considerations apply to other stations licensed to NBC and CBS. We do not believe, for example, that any substantial justification can be found for NBC's operation of two stations in New York, Washington, Chicago, or San Francisco. In none of these cities are the better radio facilities so numerous as to make it in the public interest for any one network organization to control two stations; in each case such dual ownership is bound to obstruct the development of rival networks and the establishment of new networks. In Washington (excluding local stations) there are but three regional stations, of which NBC controls two, and one clear-channel station, which is owned by CBS. In Chicago, the equivalent of two of the four 50,000-watt full-time facilities are owned by NBC,³⁰ and one by CBS. In San Francisco, the only two stations with better than regional power are NBC's. Competition will be greatly strengthened if the best facilities in important cities are not so tied in the hands of a single network organization. Even in New York, where desirable facilities are more plentiful, NBC's ownership of two clear-channel stations gives it a dominant position which tends to restrict competition on even terms from other networks.
    We find, accordingly, that the licensing of two stations in the same area to a single network organization is basically unsound and contrary to the public interest. In any particular case, of course, networks will be given full opportunity, on proper application for new facilities or renewal of existing licenses, to call to our attention any reasons why the principle should be modified or held inapplicable.
    In several cities where NBC or CBS owns one station, the available facilities are so few and of such unequal coverage that network ownership is undesirable. In Cleveland, a most important radio market, the only broadcasting facilities are one clear-channel station (owned by NBC), two full-time regionals, and one part-time regional. Charlotte, N. C, has but two stations, one of which is a 50,000-watt station owned by CBS. It seems clear that no network ownership whatsoever should be allowed in either of these cities. In several other cities, such as Denver (NBC), Minneapolis (CBS), and Washington (NBC and CBS), the available facilities are somewhat more plentiful, but the disparity among the facilities raises serious doubts whether any network ownership should be permitted. We find that it is against the public interest for networks to operate stations in areas where the facilities are so few or so unequal that competition is substantially restricted.
    NBC and CBS have such competitive advantages over any actual or potential rival that no additional stations should be licensed to either and they should be required to dispose of some of the stations now licensed to them. "We do not, however, deem it advisable to specify at this time a precise maximum figure for network ownership. In exercising our licensing powers with respect to the renewal of the licenses now held by NBC and CBS, we propose to consider the applicability of the two principles hereinbefore set forth. Subject to the right and opportunity of CBS and NBC to show at hearing in a particular case that public interest requires otherwise, the Commission will not license to a single network organization more than one station within a given area, nor will it license stations to any network organization in communities where the available outlets are so few or of such unequal desirability as to require that all facilities be open to competition among networks for outlets and among stations for networks. In considering methods of divorcement, we will seek to ensure that the divorce of stations from networks shall be actual as well as formal, and will permit the orderly disposition of properties.
    Mutual presents a somewhat different problem. The network corporation itself does not own or operate any stations; however, the stock of the network corporation is owned by various station licensees. This difference has several important practical aspects. To begin with, the licensees which own Mutual are not under common control and, therefore, there is no concentration of ownership or control of radio facilities in any one organization. Likewise, and probably more important, the network cannot control its owners; on the contrary, it is controlled by them. The stations which own Mutual can terminate the ownership relation by disposing of their stock. The choice in the case of Mutual is with the station, rather than with the network as in the case of NBC and CBS.
    However, the foregoing does not completely solve the problem. The licensees which own Mutual have an interest in the network which tends to cause them to prefer Mutual programs over those of other networks. The judgment of licensees in making a choice among available programs should not be subject to distortion by such extraneous considerations. Under some circumstances, therefore, licensee ownership of networks might be subject to serious objection. However, there seem to be at least two reasons for not taking action in this connection at the present time. First, the three substantial interests in Mutual (25 percent each) are held by station licensees in New York and Chicago and a regional network (Don Lee) on the Pacific Coast which controls four California stations. Thus, the dominant interests in Mutual roughly parallel the direct ownerships of NBC and CBS which this report does not seek to disturb. Secondly, Mutual does not own studios, station facilities, or any substantial amount of property. It is largely a corporate vehicle for a cooperative network arrangement. Consequently, the licensee stock interests in Mutual are, at present, from an investment standpoint, largely symbolic. For the present at least, and particularly in the light of the dominant position of CBS and NBC, there is no reason to require these licensees to divest themselves of their stock interests in Mutual. Accordingly, at this time we find no reason to establish a definite policy concerning licensee ownership of networks. If, in the future, the question becomes significant, we will give it further consideration.

F. NBC'S RED AND BLUE NETWORKS
    Largely because it has 2 networks, many more stations are affiliated with NBC than with any other network organization. When NBC presented evidence at the committee hearings it had 161 outlet stations; the number had increased to 214 by the end of 1940. NBC is the licensee of 2 stations in each of 4 cities. At the time of the committee hearings, NBC had 2 outlets in over 30 cities. The number of cities in which there are 2 NBC stations is now about 40. One is generally a Red network station and the other a Blue network station, although the demarcation is frequently not clear.
    The Red network carries more commercial programs, and the Blue more sustaining programs; the disparity in this respect is marked. In 1938, NBC sent 74.5 percent of its commercial programs over the basic Red and only 25.5 percent over the basic Blue. Although NBC does not separate income and expense as between them, the Red is obviously the money-maker of the two. In 1938 NBC paid its 17 independently owned outlets on the basic Red network $2,803,839 for network commercial programs; to the 18 on the basic Blue network it paid only $794,186.
    Despite this great disparity, NBC's network affiliation contracts do not specify whether a given station is to be affiliated with the Red or the Blue network. NBC retains the right to shift a station from one network to the other, regardless of the station's wishes. This power gives NBC undue control over its affiliated stations.
    NBC's witnesses testified that the Red and Blue networks compete vigorously for listening audiences and for the advertising dollar. But the competition between Red and Blue is largely of an intramural character. Even taking into account the changes which NBC has made in its organization since the time of the committee hearings, there is no complete allocation of stations or programs between the Red and Blue networks, nor any clear demarcation between the properties, personnel, income or expenses of the two networks. No claim is made that the two networks compete for affiliates. So far as competition for advertising and listeners is concerned, it is conducted in a friendly manner under the direction of the NBC board of directors and for the financial benefit of NBC.
    Although the sales and program personnel allocated to the Red or the Blue network may now engage in friendly rivalry, it is hardly to be supposed that this rivalry will ever reach the point where NBC employees are acting against the best interests of NBC. Under such conditions, there can be no competition as that term is properly used.
    NBC's chairman testified that if NBC owned all four networks, there would still be a competitive situation so far as the listener is concerned. This is a time-worn argument of corporations facing charges of monopoly. It proves too much, and reduces the whole theory of our competitive economy to an absurdity. What NBC's chairman was pleased to call "competition" is not the thing that keeps the opportunity to engage in network broadcasting open to anyone willing to risk his capital and energy, nor does it assure the public the benefits of the healthy and vigorous interplay of economic forces among those engaged in the business. If a single company owned and operated all the drug stores in a city, there would be no less a monopoly because the company refrained from closing all the stores but one, or even organized sales campaigns among the various stores. As long as all the efforts of the employees redound to the benefit of a single employer, there is merely the shadow of competition without its substance.
    The operation of the Red and Blue networks by NBC gives it a decided competitive advantage over the other two national networks. In the first place, under the NBC discount policy, a discount up to 25 percent is granted to advertisers based upon the amount of business they do with NBC. This gives the Blue network, for example, a marked advantage over the other networks in getting the business of a national advertiser who is already sponsoring a program over the facilities of the Red network. In addition, NBC grants certain special discounts to advertisers to encourage the sale of time over certain Blue network stations.
    Again, NBC is able to arrange certain of its most attractive facilities into one combination. In view of the differences between the power and frequency of individual stations, NBC's ability to substitute a more desirable station if an advertiser is dissatisfied with the one customarily provided puts its competitors at a decided disadvantage. Likewise, the operation of two networks gives NBC a great advantage in terms of programming. By this arrangement, NBC has roughly twice as many hours at its disposal each day as does either CBS or Mutual. For any single period, CBS and Mutual must make a choice between two commercial programs, or between a commercial and sustaining program, or perhaps between an entertainment and a public service feature. NBC, with two networks at its disposal, can simultaneously send an educational program over the Blue and a variety entertainment commercial program over the Red. Furthermore, NBC is in a position to assure advertisers buying time on one of its networks that they will not meet serious competition for listening audiences from the programs scheduled simultaneously on its other network.
    NBC takes the position that station demand for affiliation with it is the reason for its two networks. But it is not without significance that NBC's second network--the Blue--was formed before this demand had had any real opportunity to manifest itself. The Blue network was organized in 1926, immediately after NBC took over station WEAF (the key station of the Red network) and the Telephone Co. network. RCA already owned station WJZ, and this station was the basis of the present Blue network.
    But without regard to how or why NBC created two networks it seems clear that the Blue has had the effect of acting as a buffer to protect the profitable Red against competition. Available radio facilities are limited. By tying up two of the best facilities in lucrative markets--through the ownership of stations, or through long-term contracts containing exclusivity and optional-time provisions--NBC has utilized the Blue to forestall competition with the Red. We have already noted that Mutual is excluded from, or only lamely admitted to, many important markets. In such important cities as Milwaukee, Toledo, Salt Lake City, and Jacksonville, both the Red and the Blue have outlets, but Mutual can get no affiliation whatever. In Cleveland, Baltimore, New Orleans, Louisville, and Atlanta, both the Red and the Blue have outlets, but Mutual can get only an unsatisfactory facility in terms of power or coverage. In Houston, Birmingham, Providence, Des Moines, Memphis, Oklahoma City, and Tulsa, the Red and the Blue are provided for but Mutual must share an affiliate. The effect upon a new network of NBC's preemption of the best facilities in many markets would, of course, be even more restrictive. The existence of this situation can hardly fail to discourage anyone who might otherwise seek to enter the network broadcasting field.
    We are impelled to conclude that it is not in the public interest for a station licensee to enter into a contract with a network organization which maintains more than one network. With two out of the four major networks managed by one organization, a station which affiliates with that organization thereby contributes to the continuance of the present noncompetitive situation in the network-station market. The reestablishment of fair competition in this market is contingent upon ending the abuses inherent in dual network operation; our regulation is a necessary and proper means of re-establishing that fair competition.
    Our determination that it is not in the public interest for a station to enter into a regular affiliation contract with a network organization maintaining more than one network does not, however, rest merely upon competitive considerations. We are seriously concerned also with the maintenance of a free radio system from the point of view of concentration of power over licensees and their listeners. In most large countries today, radio broadcasting is a governmental monopoly.³¹ The United States has rejected government ownership of broadcasting stations, believing that the power inherent in control over broadcasting is too great and too dangerous to the maintenance of free institutions to permit its exercise by one body, even though elected by or responsible to the whole people. But in avoiding the concentration of power over radio broadcasting in the hands of government, we must not fall into an even more dangerous pitfall: the concentration of that power in the hands of self-perpetuating management groups.
    Under any system of broadcasting, someone must decide what a station will put on the air and what it will not. Someone must select some programs and reject others. Congress has chosen to leave that power in the hands of individual station licensees, subject to the public interest provisions of the Communications Act and the powers delegated to this Commission. Decentralization of this power is the best protection against its abuse. We cannot permit the protection which decentralization affords to be destroyed by the gravitation of control over two major networks into one set of hands. While the concentration of power resulting from operation of a network is unavoidable, the further concentration of power resulting from operation of two networks by one organization can and should be avoided.
    The radio spectrum is essentially public domain. In delegating to this Commission the power to license, Congress was moved by a fear that otherwise control over that public domain would gravitate into too few hands.³² Stations entering into regular affiliation contracts with a network organization operating more than one network defeat the manifest intent of Congress. We conclude that such concentration of power over licensees and their audiences violates the public interest.

G. LIMITATION OF COMPETITION BETWEEN NETWORK AND OUTLET
    Improvement in the quality of electrical transcriptions in recent years has made it possible for individual stations, including network affiliates, to compete with networks for some of the business of national advertisers. In 1934, national spot business involving the use of electrical transcriptions amounted to $13,500,000; in 1938, to $34,680,000. Transcriptions have made it possible for affiliates to compete for national business by offering programs comparable in popularity to those of the networks. Continuing and unrestricted competition between network and outlet for this business will provide the public with steadily improving program service. NBC has attempted to protect itself against competition with its affiliates for the business of national advertisers by inserting the following provision in its affiliation contracts:³³

    If you accept from national advertisers net payments less than those which NBC receives for the sale of your station to network advertisers for corresponding periods of time, then NBC may, at its option, reduce the network station rate for your station in like proportion, in which event the compensation due you from NBC will be likewise reduced but the right of termination provided for in the preceding paragraph shall not thereby accrue to you.

    This provision means that an affiliated station cannot accept the business of a national advertiser at a rate lower than that which NBC has established as the affiliate's rate for network programs without subjecting itself to the risk that this lower rate will be applied to all of the affiliate's network business. A contract of this kind, providing a severe penalty for price-cutting, is equivalent to, and has the same effect as, a price-fixing agreement.
    NBC frankly concedes that the purpose of the provision is to prevent its affiliated stations from entering into competition for national advertising business:

    This means simply that a national advertiser should pay the same price for the station whether he buys it through one source or another source. It means that we do not believe that our stations should go into competition with ourselves. It means that if a national advertiser is able to plan a campaign whereby he could place a partial network order and a partial transcription order on these stations, in order to save money, all network business suffers, and this precaution was put in there to prevent that. However, we have not, up to date, reduced any of the station rates to meet the rates fixed by the stations themselves for national spot advertising, but that is no promise that we will not do it. * * *
    Last summer, one of the leading advertising agencies in the country that places millions of dollars' worth of business in radio advertising, in discussing a particular account that was on the NBC network, pointed out the wide discrepancy that exists at some stations between the charges which the National Broadcasting Co. makes and the charges which the station makes. The discrepancy was sufficiently great that with a list of 15 or 16 stations which were shown to me, if the national advertiser had been willing to sacrifice the advantages of simultaneous live talent broadcasts and substitute therefor electrical transcriptions on those 15 or 16 stations, the client would have been able to save $44,000 in 1 year, and that is not particularly healthy, in my estimation (Hedges, Tr. 1825-26). [Italics supplied.]

    No other explanation of NBC's position was made and no reason appears why the affiliate's national spot rate should be artificially pegged at the network rate. In setting the network station rates of its affiliates, NBC considers primarily the potential circulation or listening audience of each station. According to the testimony of its vice president in charge of station relations, absolutely no account was taken of the local competitive situation. Stations whose potential audiences were the same were given the same network rate whether they were the sole stations in their communities or had to split their audiences with several competing stations. Likewise, no account was taken of the purchasing power of the communities served by the affiliate, or of other factors that might affect the value of the station to advertisers.
    Several factors tend to make national spot rates lower, at least where electrical transcriptions are used, than comparable network rates. In the first place, electrical transcription programs avoid the heavy telephone line charges incident to network broadcasts. Transcription programs are distributed to stations by shipping the actual discs on which the programs have been recorded.
    Furthermore, opinions differ concerning the relative advertising effectiveness of transcriptions and live talent programs. There is no reason why such differences of opinion should not be permitted to play a part in negotiating station rates, or why they should not be reflected in rate differentials between the two types of business.
    Finally, only the less desirable hours of the broadcast day are outside the NBC optional-time provisions and thus available for national spot business without being subject to call by NBC. If time within the option period is sold, such programs are subject to be shifted by NBC on 28 days' notice. This inability to enter into firm commitments makes national spot programs less desirable to advertisers than NBC network programs. While the elimination of option time will remove this factor, the others will, of course, remain.
    It is no wonder, therefore, that many of NBC's affiliates, despite the danger of sanctions, have adopted a national spot rate less than the network rate. One exhibit shows that 53 NBC affiliates have a national spot rate lower than the network rate, whereas only 36 have a higher rate.
    Despite the large number of affiliates whose national spot rates were lower than the network rate, NBC's vice president in charge of station relations testified that NBC had never reduced a station's network rate for this reason. But, he added, "that is no promise that we will not do it." The threat that the network rate wall be reduced is ever present. The failure to invoke the power to reduce the network rate does not show that the provision has been ineffective. The mere retention of the power seems to have been sufficient to prevent the kind of free competition regarded by NBC as "not particularly healthy." Apparently the suggestion made in the summer of 1938 that one large advertiser could save some $44,000 annually by using transcriptions over 15 or 16 NBC affiliates did not develop beyond the stage of a mere suggestion. There is no evidence in the record that any advertiser and group of affiliates had the temerity to carry through such a money-saving project to determine whether NBC would invoke the rate-control provision of its affiliation contract when some real competition was offered.
    We conclude that it is against the public interest for a station licensee to enter into a contract with a network which has the effect of decreasing its ability to compete for national business. We believe that the public interest will best be served and listeners supplied with the best programs if stations bargain freely with national advertisers.

H. INTERRELATIONS AMONG NETWORK PRACTICES
    In considering above the network practices which necessitate the regulations we are adopting (infra, p. 91), we have taken each practice singly, and have shown that even in isolation each warrants the regulation addressed to it. But the various practices we have considered do not operate in isolation; they form a compact bundle or pattern, and the effect of their joint impact upon licensees necessitates the regulations even more urgently than the effect of each taken singly. A few examples will suffice to illustrate the way in which restraints in the network field reinforce one another and cumulatively impair the freedom of licensees to render the best possible public service,
    Consider in the first place the conjoint effect of the restraints on the establishment of a new network. With more than 97 percent of the Nation's nighttime wattage affiliated with existing networks, a new network can hardly be built up from among unaffiliated stations. Nor are many affiliates free to change their affiliation to such a proposed new network, for most of them are under 5-year contracts.
    If stations already affiliated should wish to carry some programs of such a proposed new network, they are restrained by their exclusivity clauses. And even without these exclusivity clauses, time sold to a new national network would be subject for the most part to options on 28 days' notice--thus preventing the development of an effective program series. Thus each doorway into the network field is both locked and bolted.
    The exclusion of new networks from the industry is especially onerous because of the failure of existing networks to render service on a truly national basis. They have left a number of communities, especially in the West and Middle West, wholly without network service, and many more with inadequate service or service from only one network. Under such circumstances, it is especially important to keep the door open for new networks which may be willing to serve areas now unprovided for.
    Consider next the position of a licensee tied to a network by the usual standard affiliation contract when he seeks to procure programs sponsored by national advertisers. The exclusivity clause of his affiliation contract prevents him from accepting such a program from any other network; hence he must either get it through the network with which he is affiliated or else try to get it on a spot basis.
    But in soliciting a national advertiser for spot business, the licensee of a network-affiliated station runs up against the fact that all or the best part of his station's time is under option to the network, subject to 28 days' notice. Hence he cannot enter into a firm contract with the national advertiser for a period long enough to insure the advertiser of building a continuing audience. Some NBC affiliates are also hampered by the clause which enables NBC to penalize them if they sell time to national advertisers directly for less than NBC charges for their time.
    Affiliates are heavily dependent upon their national network for access to national advertisers; but the network may have interests quite disparate from its outlets. It may, for example, own two networks and favor one as against the other. Or it may own stations itself, and hence be in a position where it will profit more by favoring the scheduling of programs over the stations it owns rather than over the full network. In short, the joint effect of the various practices mentioned is to place the licensee to a considerable degree at the mercy of the network with which he is affiliated, but to leave the network free to pursue interests which may be very different from those of the licensees affiliated with it. And, although the network may abandon him on 1 year's notice, a licensee, dissatisfied with the arrangement, cannot renounce it; he is bound for a period of 5 years.
    Consider also the position of a station licensee who seeks to maintain a well-balanced schedule of local, regional, and national programs. He can broadcast important local events during periods when network commercial programs are being offered only if he can sustain the burden of proof that the network programs are not in the public interest. His local programs during all or many hours of the broadcast day can only be scheduled subject to the network's option on those hours. Only under exceptional circumstances can he schedule a local program for a time when the network is offering him a network commercial program. If a local sponsor demands assurances that his broadcast time will not be preempted by the network under its option, the station licensee has the choice between not scheduling the local sponsor's program at all or scheduling it for a period which the network gives to a regular sustaining program, thus depriving listeners of that sustaining program. Nor can the listeners procure that sustaining program through another local station, for the network affiliate has territorial exclusivity either by contract or in practice.
    Consider in the third place the position of listeners in cities like Milwaukee, Toledo, Salt Lake City, and Jacksonville, in which Mutual can obtain no outlet whatsoever. Such listeners are, thanks to the usual exclusivity clause, deprived of Mutual program service even though the station licensees may wish to offer it along with NBC or CBS service. Where an NBC or CBS station rejects a network program, listeners are deprived, thanks to the territorial exclusivity clause, of an opportunity to hear that program even though another station wishes to broadcast it. The time-option clause and the clause restricting an NBC affiliate's right to compete with NBC deprive listeners of an opportunity to hear locally sponsored programs which might otherwise be available. The clause requiring affiliated stations to broadcast all network commercial programs offered during option hours, subject only to the usual "public interest" proviso, deprives listeners of the opportunity to hear other programs which the station might prefer to schedule during those periods.
    At every turn, in short, restrictive clauses taken cumulatively operate with even greater force than their effect considered in isolation would suggest. Our decision to promulgate the regulations considered in this chapter is buttressed by this consideration of cumulative effect. This bundle of restraints upon the station licensees is not compatible with the public interest.

I. STATUS OF NETWORK-STATION RELATIONSHIPS UNDER THESE REGULATIONS
    This report is based upon the premise that the network system plays a vital role in radio broadcasting and has brought great benefits to it. We have carefully drawn our regulations so as not to interfere with any of the three major functions which a network performs--the sale of time to advertisers; the production of programs, both commercial and sustaining; and the distribution of programs to stations.
    Under the regulations herein set forth, a network will still be able to enter into regular affiliation contracts. A station will still be able to hold itself out as the regular affiliate of a given network.
    A network can still sell the use of its facilities to advertisers in accordance with published rate schedules in much the same manner as it now does. The fact that networks must ascertain whether each station has a specific period uncommitted before entering into a firm contract for that period need not unduly hinder their selling activities. The network can and undoubtedly will require that all stations intending to broadcast its programs keep it currently informed of all station commitments.
    The networks' right to produce programs is wholly unaffected. Their right to distribute programs is vastly enlarged, for hereafter any network will be free to distribute programs to any station.
    Similarly, networks will be free to offer program service to stations regularly affiliated with them throughout any or all of the hours of the broadcast day. We do not see that the public interest requires, and nothing in our regulations necessitates or suggests, that stations shift hourly from network to network. We are concerned rather with insuring that, at reasonable intervals, a station will be free to change its regular network affiliation, and, as occasion requires, to broadcast the programs of networks with which it is not regularly affiliated, and to exercise independent judgment in rejecting or refusing network programs. To the extent that the networks' present status rests upon excellence of service rather than coercive power, it will remain substantially unaffected.

J. APPLICATION OF REGULATIONS TO REGIONAL NETWORKS
    Examination of the record herein indicates that the practices of national networks subjected to criticism by us are followed by certain regional networks.³⁴
    We recognize that the regional networks are in a state of more rapid flux than the national networks; and that new regional networks have arisen since the committee hearings were held. Accordingly, we will carefully consider, in particular instances, any showing that the application of the regulations herein adopted to a station affiliated with a regional network will reduce rather than increase its ability to operate in the public interest.
    Regional networks fall into two classes--purely regional networks, and nationally affiliated regional networks which act as conduits for national network programs.³⁵ The record indicates that the conditions which will be affected by the regulations contained in this report are more common among nationally affiliated regional networks than among regional networks not so affiliated.
    Some regional network affiliation contracts contain exclusivity clauses preventing stations from carrying any network programs, regional or national, not sent through the regional network. Some contain clauses which prevent regional networks from sending programs to other stations in areas served by their affiliates; this clause is effective even though the affiliate rejects the network program. Some regional networks have options on substantially all the time of their affiliates; and some stations affiliated with regional networks have signed away their right to reject network commercial programs offered during optioned hours, save only for the usual proviso concerning programs the broadcasting of which would violate the "public interest" provision of the Communications Act. At least one regional network's standard affiliation contract provides that the network may proportionately reduce the compensation of any station which sells time to advertisers at less than the rate which the network charges for that station; thus, the stations are prevented from competing freely with the network for advertisers. Another regional network's contracts are binding upon its affiliates for 5 years, though on the network for only 1.
    Restrictive contracts and the other practices with which these regulations are concerned restrain competition and operate against the public interest whether the network concerned is national, nationally affiliated regional, or purely regional. True, the national network restraints loom larger; but this should not and does not blind us to the need for terminating or forestalling similar restraints whose only distinguishing characteristic is that they are of local or regional rather than national scope. With respect to a given station, a given community, or a given region, a restrictive contract between a station and a regional network, or ownership of many stations by a regional network, may operate to foster a local monopoly and to impair station operation in the public interest just as effectively and as intensively as similar practices on a national scale.
    With respect to nationally affiliated regional networks, the need for applying our regulations is especially clear. When a licensee enters into a long-term exclusive contract containing optional time and other restrictive clauses with a nationally affiliated regional network, the effect, so far as restraint of competition is concerned, is substantially the same as if the station had entered into such a contract directly with a national network. Indeed, in some situations the effect may be even more restrictive. Consider, for example, the plight of a station in Washington or Oregon which wishes to carry Mutual network programs. Mutual has an exclusive contract with Don Lee providing that it will send programs to Pacific coast stations only through Don Lee. The latter, in turn, has an exclusive contract with Pacific Broadcasting Co. providing that it will send programs to stations in Washington and Oregon only through Pacific. The Pacific standard affiliation contract binds a station for 5 years, prevents a station from carrying any network programs not delivered to it by Pacific, places all of the station's time under option to Pacific, and deprives the station of the right to reject network commercial programs except only those which would interfere with a locally originated program of "major public interest or public necessity". Thus, in order to get Mutual programs, a station in Washington or Oregon must subject itself to these restrictive conditions for a 5-year term, and must bind itself to accept both Pacific and Don Lee as well as Mutual programs. And even then its access to Mutual programs is conditional. If Pacific severs its affiliation with Don Lee, or Don Lee leaves Mutual, the station is shut off from Mutual for the life of its contract.
    Exempting the relationship between regional networks and their outlets from the regulations here presented would open the way for permitting this type of arrangement to become the usual pattern of network affiliation. National networks might then surround themselves with a group of associated regional networks, and if stations were permitted to enter into restrictive affiliation contracts with these regional networks, the present restraints would be perpetuated. Our application of the regulations to the relationship between the stations and regional networks as well as to national networks will make impossible such developments.
    Many regional networks now operate successfully within the scope of these regulations. Some of these regional networks are in fact cooperative station enterprises, bound together by mutual interest rather than by formal contract. Others are profit enterprises binding stations to them by contract; such contracts vary all the way from those wholly permissible under the regulations to those transgressing substantially every regulation. In general, it may be said that the more powerful a network becomes, the more restrictions it is able to place upon its outlet stations. We believe that this process of increasing restrictions should be reversed, and that stations affiliated with regional networks should retain their freedom of operation in the public interest as fully as stations affiliated with national networks. Accordingly, we find that the public interest requires the application of the regulations to stations affiliated with regional as well as national networks. In the application of these regulations to regional networks, and particularly the regulation with respect to ownership of stations, the Commission will take into consideration any factors of a local character which tend to remove them from the purposes of the regulations we are adopting.

___________________
    ¹ Federal Communications Commission v. Sanders Bros. Radio Station, 309 U. S. 470, 474.
    ² Id., p. 475.
    ³ Secs. 1 and 2 of the act of July 2, 1890 (26 Stat. 209), commonly known as the Sherman Act. Of particular pertinence here is sec. 1 reading in part as follows:
    "Every contract * * * in restraint of trade or commerce * * * is hereby declared to be illegal. Every person who shall make any such contract * * * shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be punished by fine not exceeding $5,000, or by imprisonment not exceeding one year, or by both said punishments, in the discretion of the court."
    ⁴ Ramsay Co. v. Associated Bill Posters, 260 U. S. 501, 512.
    ⁵ United States v. Colgate & Co., 250 U. S. 300, 307.
    ⁶ United States v. Trenton Potteries Co., 273 U. S. 392, 397.
    ⁷ This conclusion would be required even if the Communications Act were silent on the question. Sec. 313, however, expressly declares that the Federal antitrust laws are applicable to broadcasting: Sec. 313. "All laws of the United States relating to unlawful restraints and monopolies and to combinations, contracts, or agreements in restraint of trade are hereby declared to be applicable to the manufacture and sale of * * * radio apparatus and * * * to interstate or foreign radio communications." Sec. 3 (b). "'Radio communication' * * * means the transmission by radio of * * * sounds of all kinds * * *" Sec. 3 (o) " 'Broadcasting' means the dissemination of radio communications intended to be received by the public * * *"
    ⁸ Sugar Institute, Inc. v. United States, 297 U. S. 553, 600. See also United States v. Terminal Railroad Assn. of St. Louis, 224 U. S. 383.
    ⁹ In re Spartanburg Advertising Co., Docket No. 5451, Jan. 9, 1940.
    ¹⁰ It has been shown that in 1938 the 310 stations not affiliated with any national network had a consolidated loss of about $149,000, whereas the 350 remaining stations affiliated with some national network had a consolidated net operating income of about $15,000,000 (supra, p. 33). Moreover, the consolidated net operating income of NBC and CBS and the 23 stations which they owned or operated equalled nearly half the consolidated net operating income of the entire industry (supra, p. 33).
    ¹¹ On the question of the dominant position of NBC and CBS, it has been shown that stations affiliated only with either NBC or CBS represent over 85 percent of the total nighttime power of unlimited-time stations in this country (supra, p. 32). The ratio would not be materially altered by the inclusion of part-time stations or the use of daytime power ratings (ibid). As to the effect of long-term contracts, restrictive contract provisions, and network ownership and operation of stations in stratifying the present setup in the industry see infra, pp. 51-79.
    ¹² In re National Broadcasting Co., Inc. Testimony of Merlin Hall Aylesworth, Docket No. 1221, June 15, 1931, p. 43.
    ¹³ Sec. 304 requires every applicant for a station license to waive "any claim to the use of any particular frequency or of the ether." Sec. 309 (b) (1) provides that the grant of a station license "shall not vest in the licensee any right to operate the station nor any right in the use of the frequencies designated in the license beyond the term thereof." That the grant of a station license confers no vested right is further conclusively shown by the authority given the Commission to refuse to renew a station license (sec. 309 (a)) and by the limitation of all station licenses to a maximum period of 3 years (sec. 307 (d)).
    See also American Bond & Mortgage Co. v. United States, 52 F. (2d) 318 (C. C. A. 7, 1931), cert. den., 285 U. S. 538.
    ¹⁴ See supra, pp. 30 et seq.
    ¹⁵ In a footnote to its supplementary brief. CBS contends that "Mutual was the real party at fault, if any existed. Columbia offered to have its stations carry the broadcast, the sole condition being that it not be forced to advertise its competitor, Mutual" [Italics supplied.] Since it is patent that compliance with this condition was impracticable, the offer was a mere gesture. Moreover, this CBS argument assumes that the affiliated stations in some way belong to CBS. The position seems to be that when an affiliate broadcasts a Mutual program, CBS is advertising Mutual. This confuses a broadcast by an affiliate of CBS with a CBS network broadcast. The network has wide latitude to advertise or refrain from advertising anything it pleases on its network programs. But it is the stations which are licensed to utilize the radio facility in the public interest, and they should be free to accept or reject programs which are in the public interest, whether or not CBS approves.
    ¹⁶ Mutual refused to allow other stations within the territory of Mutual outlets to broadcast the program. This was because of its practice of respecting the territorial exclusivity of its affiliates. Supra, p. 36.
    ¹⁷ "In effect, network broadcasting is a joint enterprise. It is a joint enterprise necessarily because the National Broadcasting Co. has no voice, no articulation without the transmission of its programs by its stations.
    "Being a joint enterprise, it creates a goodwill which is enjoyed by both the stations and the network, and for one party to be faithless to the other to the extent that it barters the goodwill which has been built through the broadcasting of NBC programs by disposing of its time to another network is unfair to the National Broadcasting Co. as it would be unfair to any other network having similar affiliations and providing a similar service to its audience, and to the station * * *
    "There would be no incentive for the National Broadcasting Co. to continue to serve its stations with such a vast amount of sustaining service if it were reduced to a status of a mere time brokerage, as it would be in the case that a station could play fast and loose with its affiliations between networks" (Hedges. Tr. 1853-04).
    "Obviously, if a network spent money, as we are doing, to develop the popularity of an individual broadcasting station in some territory, if we gave them sustaining programs and they attracted a listening audience and they built up circulation, and then some other organization came along that did none of these things, but just had a commercial program, and asked that broadcasting station to take their program and put behind it the goodwill and the circulation and the pioneering that had been done by whoever built that station up, of course, that somebody would have a temporary advantage, but American broadcasting would have a loss" (Sarnoff, Tr. 8521).
    ¹⁸ Supra, pp. 37-44.
    ¹⁸ Supra, p. 49.
    ¹⁹ In answer to the question: "Do you think it equally sound to say that the network ought to obligate itself to the station to render service exclusively to that station in the area which is served by that station?", the chairman of the board of directors of NBC said: "I think so, except where it is known to be rendering service to another station, where it is known in advance that it does so; but, by and large, I should think that that obligation ought to be reciprocal; yes" (Sarnoff, Tr. 8522).
    ²⁰ Supra, p. 40.
    ²¹ Supra, p. 38.
    ²² The facts set forth by WBNY were not controverted by any party at the oral argument or in the supplementary briefs.
    ²³ Q. "If your contracts with your affiliated stations were for, say, a year instead of 5 or more years, do you think that that would materially affect the stability of the networks?"
    A. Yes; I think not only materially but seriously."
    Q. "Well, now, just how? When the contracts expire I suppose that there would be competition with the other networks for that affiliation?"
    A. "There would be competition for the stations, competition between the networks, and since a network, in order to exist, must have certain stations on its network, the local stations would then deal with the highest bidder, and other questions would become subsidiary to that, and there would be a continuous battle back and forth to obtain the more desirable stations on these networks. That would throw the whole structure into a state of confusion. A year does not mean very much. The listener also has become accustomed to dialing to his favorite station on a certain network, and he would continually find that he would have to dial elsewhere. The competition, it seems to me, is in the program end, rather than in the facility end, and this is as it should be" (Sarnoff, Tr. 8542). [Italics supplied.]
    ²⁴ The one limitation on the right of CBS to call upon its stations for time for network commercial programs is that a station is not obliged to broadcast more than 50 converted hours of network commercial programs during any particular week. But this limitation has had no practical effect whatsoever. At the time of the committee hearings no CBS outlet had ever carried as many as 50 converted hours of network commercial programs in any 1 week.
    ²⁵ Supra, pp. 38-39.
    ²⁶ See, in this connection, Applications of Westinghouse Electric & Manufacturing Co. for Renewals of Licenses, Docket Nos. 5823, 5824, 5825, and 5826, September 4, 1940.
    ²⁷ Supra, p. 28.
    ²⁸ Owned or controlled stations have been far more profitable per unit than affiliated stations (supra, p. 33). This, however, does not necessarily indicate that there has been preferential treatment, since owned or controlled stations are, in general, high-power stations located in lucrative markets.
    ²⁹ CBS argues that the ownership of key stations by networks is essential as a reserve source of financing for network sustaining programs in the event network business should recede for a substantial period. It is pointed out in this connection that one of the paradoxes of the radio business is that when advertising revenue falls, the expense of servicing a network rises. It is true that the stations owned and operated by CBS have been extremely profitable, and to that extent they have strengthened the financial position of CBS, But the CBS network business has also been extremely profitable. As early as 1930, CBS had a net income of almost a million dollars, although it owned only two stations. The CBS network has not required any reserve for financing its network sustaining programs, and it is extremely unlikely that its owned stations could furnish such a reserve; for in the event that broadcasting fell on hard days and network income did recede, station income would no doubt similarly recede. Thus investments not dependent on broadcasting revenues would operate as a far more stabilizing factor than investment in stations.
    ³⁰ There are five 50,000-watt stations in Chicago, but two of them (WENR and WLS) share time. NBC owns WMAQ and WENR. WENR is authorized to utilize the great majority of the valuable commercial hours. From Monday to Friday, WENR utilizes the time from 3 p. m. to 6:30 p. m., and from 8 p. m. on. On Saturday, WENR utilizes the time from 3 p. m. to 6:30 p. m., and on Sunday, from noon until 7 p. m., and from 8 p. m. on .
    ³¹ Huth, La Radiodiffusion Puissance Mondiale, passim.
    ³² Federal Communications Commission v. Pottsville Broadcasting Co., 309 U. S. 134, 137.
    ³³ There are no similar provision in either the CBS or Mutual affiliation contracts. For a description of the way in which their contracts operate, see supra, pp. 34-44.
    ³⁴ See supra, p. 29; infra, Appendix D.
    ³⁵ As used in this report "nationally affiliated networks" include not only regional networks directly affiliated with national networks but also regional networks which, like Pacific Broadcasting Co., carry national network programs fed to them by other nationally affiliated regional networks. In both cases the regional network serves as intermediary for the delivery of national network programs to stations. Certain of the outlets of some of the regional networks are also affiliated, on an individual basis, with NBC, CBS, or Mutual. See table on p. 29; see also Appendix D.

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