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APPENDIX B
MEMORANDUM OF SUBMITTAL, ACCOMPANYING REPORT OF COMMITTEE ON CHAIN BROADCASTING, AND CONCLUSION OF THE COMMITTEE'S REPORT
[Excerpt from Committee Report dated June 12, 1940, pp. i-vi and pp. 133-138]
TO THE FEDERAL COMMUNICATIONS COMMISSION:
There is transmitted herewith the report of the Committee on chain broadcasting made pursuant to Order No. 37, authorizing an investigation to determine the necessity for and the nature of special regulations applicable to radio stations engaged in chain or other broadcasting which are required in the public interest, convenience, and necessity.
This report deals with the following subjects: The predominance of network organizations in the radio broadcast field; contractual relation of network organizations to station licensees; radio broadcasting and the supply of talent; transcription services in the radio broadcast industry; and multiple ownership of radio broadcast stations. There is attached to the report, as appendix A, an exhaustive and detailed digest of the evidence received by this Committee during the extensive hearings held by it as well as of other related material in the official files of the Commission. There is also attached, as appendix B, a report compiled by the law department entitled "Report of Persons and Other Entities Holding Stock Interest In, Control Over, or Official Relationship to More Than One Standard Broadcast Station Reported to the Federal Communications Commission to April 1, 1940."
The Committee is of the opinion that these materials form an adequate basis upon which the Commission may proceed to a consideration of the need for a revision of its licensing policy in the radio broadcast field in order to correct the serious inequities and arbitrary practices which have developed in connection with chain broadcasting.
The record discloses an unhealthy predominance of the network organizations in the radio broadcasting field which is due, in large measure, to the contractual arrangements forced upon stations seeking affiliation with a network. These contractual arrangements have resulted in a grossly inequitable relation between the networks and their outlet stations to the advantage of the networks at the expense of the outlets. These advantages have, in turn, led to further and further expansion of the networks' activities and a sharp curtailment of the scope of activity of the outlet stations.
The provisions of these contracts which forbid the outlet to accept programs from any other network, which prohibit the outlet from accepting programs from national advertisers at rates lower than those charged by the network, and which require the outlet to keep available for the use of the network all, or almost all, of its time, stifle competition and tend to make the outlet the servant of the network rather than an instrument for serving the public interest. The station is thereby rendered incapable of serving as a medium of local self-expression through the broadcast of local programs.
The onerous burden of proof placed upon the outlet when it desires to reject a commercial network program has resulted in the almost universal acceptance of all such network programs and the delegation by the licensee-outlet of its duty to operate in the public interest.
The long life of these contracts and the retention by the networks of the option of renewal, without according a like privilege to the outlet, give the chains a dominant bargaining position sufficient to enable them to dictate policies to the station licensees.
A disproportionate share of the receipts from a network broadcast is retained by the network organization under these contracts. We believe that individual and corporate licensees should be independent and successful if they are to serve fully the public interest.
It is the committee's opinion that many of the evils of chain broadcasting can be removed by the elimination of certain provisions now found in the regular network-outlet contract. The committee believes that there is authority under the statute to deal with the problems raised by these contractual arrangements. Section 303 (i) of the Communications Act of 1934 provides that the Commission shall "have authority to make special regulations applicable to radio stations engaged in chain broadcasting." It is our opinion that, the authority so granted by the act includes the power to make regulations governing the contracts entered into between a licensee and a network where such contracts affect the duty or ability of licensees to operate in the public interest. The power conferred by section 303 (i) is buttressed by the grant of authority contained in sections 307 (d) and 309 (a) requiring the Commission to refuse licenses or renewals thereof unless the Commission finds that public interest, convenience, or necessity would be served by granting the license or renewal. It is our opinion, based upon the extensive investigation which we have just completed, that public interest, convenience, or necessity are adversely affected by inclusion in the network-outlet contracts of many of the contractual provisions referred to above.
As the report clearly shows, the activities of the principal networks in the fields of electrical transcription and talent supply raise problems which vitally concern the welfare of the industry and the listening public. These and other network practices which have tended to restrict competition in the radio broadcast field can be eliminated or, at least, ameliorated by a redefinition of the licensing policy of the Commission. The problems in the chain broadcasting field are interdependent and closely related with one another and with the network-outlet contract. The elimination of arbitrary and inequitable contractual arrangements will tend to subject the networks to active competition and will render the independent station more secure within the industry, and better able to cope with the networks in all fields of broadcast activity.
The committee believes that the Commission should proceed at once to deal with these problems to the extent that Congress has given it authority in the Communications Act of 1934. In our opinion, the Commission possesses ample power under the Communications Act to redefine its licensing policy and require the elimination of inequitable and arbitrary contractual arrangements which affect the duty of the licensee to serve the public interest.
The committee believes that competition in the radiobroadcast field can be further enhanced by a revaluation of the so-called clear-channel policy, whereby new stations are refused access to clear channels regardless of the service which the new station would be able to render and regardless of how small the interference to the clear-channel station would be. The record evidences that all but two of the high-power clear-channel stations in the United States are on the Columbia and National networks as well as all the high-power regional stations. The exclusive grant of a clear channel to a station which can only serve limited areas prevents people in other sections of the country from receiving service from stations which could otherwise operate on the clear-channel frequency. In our opinion, the Commission should consider the wisdom and practicability of utilizing the clear channels so that people living in all sections of the United States can have the benefit of radio reception at present denied them.
The committee desires also to direct the attention of the Commission to the following problems suggested by the report:
1. The necessity and advisability of requiring networks to be licensed by the Commission.
2. The ownership of stations by networks.
3. The ownership of more than one station by an individual or corporation.
4. The control of talent by networks.
5. The dominant position of National in the transcription field.
6. The difficulties involved in supervising the transfer of control of corporate licensees because of their stock being listed on stock exchanges.
The actual administrative experience which the Commission will obtain under its new licensing policy will enable it to suggest to the Congress the enactment of amendatory legislation to deal with these problems if such is later found to be necessary.
The committee recognizes that various benefits to the public may be achieved through the proper operation of chain broadcasting. It is the opinion of the committee that through the exercise of the powers of the Commission in dealing with the contractual relations between network and outlet, the potential advantages of the chains in this country can be retained. At the same time, the abuses which have prevented many of its potential advantages from being realized can be corrected. It is the committee's belief that the removal of arbitrary and inequitable provisions from network-outlet contracts will eliminate many of the detrimental practices involved in chain broadcasting without sacrificing any of the benefits.
By the committee.
THAD H. BROWN, Vice Chairman. PAUL A. WALKER, Commissioner. FREDERICK I. THOMPSON, Commissioner.
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VI. CONCLUSION OF COMMITTEE REPORT
The record reveals at every turn the dominant position of the network organizations in the field of radio broadcasting. Of the 660 standard broadcast stations in operation during the year 1938, major networks served 350. These 350 stations included almost all of the high-power stations in the country.
In order to buttress their dominant position in the broadcast industry, the chain organizations have established the practice of owning or otherwise controlling powerful and profitable stations. During the year 1938 Columbia and National alone owned or controlled 23 such stations. The record reveals that the chains have been developed around these network owned and controlled stations and have been operated largely for the networks' benefit. The interests of the independent outlet stations, which are the real foundation of nation-wide broadcasting, have been subordinated to the interests of the network owned and controlled stations.
The problem with respect to the ownership of two or more stations by the same person or group of persons is not unlike that of network ownership of stations. The record evidences a definite trend toward concentration of ownership of radio stations. The 660 commercial stations in 1938 were owned by a total of 460 persons, both natural and corporate. Eighty-seven of these persons owned more than one station each and received in 1938 approximately 52 percent of the total business of all commercial broadcasting stations. To the extent that the ownership and control of radio-broadcast stations falls into fewer and fewer hands, whether they be network organizations or other private interests, the free dissemination of ideas and information, upon which our democracy depends, is threatened.
The predominance of network organizations is evidenced by their disproportionate share of the income of the broadcasting industry. The net operating income of all the stations and networks for the year 1938 was $18,854,784. Of this amount, $9,277,352 or about half of the total went to National and Columbia and their 23 owned or otherwise controlled stations. The remainder had to be divided among the 310 stations which were not on any chain and the 327 chain stations which were not owned or controlled by National and Columbia.
The predominance of network organizations is further evidenced by the fact that all but two of the 30 high-power, unlimited-time, clear-channel stations and all the high-power regional stations are on the National and Columbia networks. The inescapable conclusion is that National and Columbia, directed by a few men, hold a powerful influence over the public domain of the air and measurably control radio communication to the people of the United States. If freedom of communication is one of the precious possessions of the American people, such a condition is not thought by the committee to be in the public interest and presents inherent dangers to the welfare of a country where democratic processes prevail.
Except in those cases where a station is owned or controlled by a network, chain broadcasting is effectuated by means of contracts between the network organizations and its outlet stations. The existing contracts reveal many arbitrary and inequitable practices on the part of the networks. The provision that the outlet station cannot accept programs from any network other than the one to which it is bound by contract deprives the station of profitable business and the listening public of programs for which there is a demand. The practice of requiring stations to set aside all or a major portion of their broadcast time for the utilization of the networks, regardless of whether such time is used or not, places an undue burden upon the outlet station and lessens the ability of the station to serve the local needs of the community. The provision that nonnetwork rates for national advertising business cannot be less than those of the network prevents the outlet station from entering into a healthy competition for advertising business. The provisions of the contract concerning the free use of the first converted hours, combined with low initial compensating rates for the next hours, result in an inequitable distribution of proceeds from network broadcasting. Whereas Columbia and National had aggregate network time sales of $44,313,778 for 1938, they paid to the 253 independently controlled stations on their networks only $12,267,560, approximately one-half of which was paid to 25 of these stations with a relatively strong competitive position based on the need of the networks for their particular facilities. Moreover, the contracts generally cover periods of time far in excess of the period for which the station is licensed and bind the outlet to network policies far beyond the expiration date of the license.
These arbitrary contractual arrangements are further reflected in the program policies of the network organizations. Outlet stations are required by their contracts to accept all commercial programs sent by the network organizations unless they are able to prove to the satisfaction of the networks that a particular program will not serve public interest. Since the outlet stations have only general advance knowledge of the content of the program, they have come to accept whatever the network chooses to forward to them. Furthermore, approximately 90 percent of the commercial programs sent by network organizations are produced by advertising agencies, so that the delegation of program responsibility by the licensee is carried one step further.
The record reveals a number of instances in which chains have gone even further than the regular network-outlet contract and have actually taken over the management of the station. Section 310 (b) of the Communications Act provides that licenses for radio-broadcast stations shall not be transferred or assigned unless the Commission shall decide that such transfer is in the public interest and shall give its consent thereto in writing. The Commission has already taken cognizance of this problem and is engaged in investigating these contracts.
The operation by National of two distinct networks with separate service to two stations in each of many cities is evidence of the complete domination of the licensee stations exercised by the chains through the network-outlet contract. It is also one of the most inequitable byproducts of these contracts. The contracts which stations have with National do not specify to which of its chains the outlet is to be linked. The outlet station is only informed that it is a part of the National network. By virtue of this factor, National has the power to determine the economic fate of any of its outlets by arbitrarily assigning it to the prosperous Red network or to the unprofitable Blue network. These two networks have not been operated as competing units, with the benefit of competition accruing to the outlet station and the listening public, but as two parts of the National system with advantages to National only. The dual-network system has been utilized by National to prevent competing stations and other networks from entering communities served by it.
The predominance of the network organizations is further accentuated by their activities in the talent and electrical-transcription fields. The policy of Columbia and National of placing talent under the management of and exclusive contract to a network organization has the effect of limiting the efforts of much of the best talent in the country to network programs and of arbitrarily restricting the programs of independent competing stations, as well as the communities in which they are located. In the field of electrical transcriptions the National Broadcasting Co. has become a dominant factor. It has gained great competitive advantages in this field from its position in radio broadcasting, and its transcription activities have in turn, buttressed its position in the radiobroadcast industry. Since the unrestricted utilization of electrical-transcription programs is frequently an absolute necessity for independent stations lacking affiliation with a network, National's dominant position in the electrical-transcription field endangers the ability of these stations to serve the public interest adequately.
It seems apparent that the predominance of network organizations, the perpetuation of inequitable relations between such organizations and their outlet stations, and the lack of a more active competition within the radio broadcast industry are, in large part, the result of the contractual provisions that have been described in this report. The heart of the abuses of chain broadcasting is the network-outlet contract. It is the committee's considered opinion that many of the existing inequities and arbitrary practices will find correction in the reformation of these contracts.