Now have you got that document there?

Mr. SARNOFF. Yes, I have.

Mr. PIERCE. Now, could you explain the terms used in that document?

Mr. SARNOFF. Well, I can only assume what is in his mind and what he is saying here. I know there is no NBC policy that has an NBC 10 percent network distribution charge. I do know of a straight business operating policy, which makes good sense, to try to recover your overhead.

Mr. PIERCE. What does he mean when he uses the term?

Mr. SARNOFF. I think he means 10 percent for overhead.

Mr. MALETZ. And does that 10 percent for overhead include profit? Mr. SARNOFF. According to him, he says no.

Mr. MALETZ. At your third paragraph, it says to repeat: "Our 10 percent is, we hope, an element of profit."

Mr. SARNOFF. He hopes it is an element of profit, and I assume he hopes that overhead would only come to 8 percent profit, he might only have 2 percent, but I can assure you in most cases it is considerably higher.

Mr. MALETZ. As I understand your position, Mr. Sarnoff, this 10 percent

Mr. SARNOFF. If I may interrupt I would like to read a sentence in this paragraph, it may help explain it. He says:

Seven hundred and fifty per half hour is overhead, which is only approximately the overhead of the program department itself, and then 10 percent for what we call profit but which in reality largely recoups more overhead.

It is a difficult business at best to tell where you really have profit and don't. We got into some profit and loss figures before, where you have got a business that is costing you $24 million more than you are getting for that particular activity you can be sure that you are not making much profit in that element of the business.

Mr. PIERCE. Now, is it correct that the William Morris agency is an important packager of television programs?

Mr. SARNOFF. Yes.

Mr. PIERCE. Is it correct that NBC took the position with the William Morris agency, among others, that the agency should not get a 10 percent fee on the overall package but only 10 percent on the above-the-line cost?

Mr. SARNOFF. Yes.

Mr. PIERCE. In other words, has not NBC sought to prevent packagers from obtaining a 10 percent fee on the below-the-line cost? Mr. SARNOFF. No.

Mr. PIERCE. You have not?

Mr. SARNOFF. No. We have sought-I wouldn't say to preventthis has to do with talent agencies, not packagers.

Mr. PIERCE. I realize that.

Mr. SARNOFF. And we are talking about William Morris as a selling agent. And we have taken the position that the talent agenciesand we don't always win-but we have taken the position that as talent agencies they should get their commission from the talent aspects of the show that you yourself has listed as above the line

that the agent then should not receive a commission on below-theline. This has been a battle for sometime, as classic battle of the business.

Mr. PIERCE. If NBC were successful in limiting the package to a 10 percent fee on the above-the-line cost, would that mean that NBC could continue to charge the sponsor this 10 percent so-called network distribution fee ?

Mr. SARNOFF. I don't know that the two are related.

Mr. PIERCE. Let's go back to another memorandum here from Tom Sarnoff to Mr. Gus Margraf, both of whom you previously identified, dated September 13, I guess it is, 1954. Now, I would like to read this paragraph to you:

Before I take NBC's banner into the field on this project, there is one point which has bothered me for sometime and which I find somewhat difficult to uphold. We have taken the position that William Morris is not entitled to 10 percent on this overall package price but merely on those elements which they supply. We have succeeded in this in certain cases as far as below-the-line costs are concerned. My problem is, in view of this position how can we justify NBC's 10 percent of the overall package price for what we call network distribution." I realize that this percentage is designed to cover a number of our operating costs, but presumably so is theirs.

Now, the next paragraph is also in point:

Since it is true that William Morris does far more work in most of these cases than that of merely supplying their artists, they can legitimately expect some additional compensation. It would, therefore, seem to me to be reasonable for them to get either a flat amount per film such as our "administration charge" or perhaps some similar percentage. We have also accepted, I believe the philosophy that we should not get both a 10 percent "network distribution" fee and an "administration charge." Should we, therefore, approach this problem from the point of view of both the William Morris Agency and NBC taking 10 percent (which would probably price most of these packagers out of the market) or should we try to compromise by cutting down the William Morris Agency's take and also NBC's overall fee?

You have read that?

Mr. SARNOFF. Mr. Pierce, I would like to make an observation, if I might, in an attempt to clarify it. It has occurred to me that what we are talking about when we refer to 10 percent network distribution fee, there is such a term in the business, and it is a syndication term in effect. And I think it refers entirely to film. And there is no confusion here I am trying to interpret this, because you can see I was not the addressee.

Some distribution deals on film provide 30 percent for syndicated single-market sales, they provide 20 percent or 25 percent for regional sales. In some cases they provide 10 percent for national sales. It is quite possible that that is what they were referring to. And I am trying to separate that from what I also believe to be a normal operating procedure, which is an attempt to recover your overhead. Mr. PIERCE. Is that what you think they mean when they use the

term

Mr. SARNOFF. I think what they mean by using the term "10 percent net distribution fee," they are talking about the sale of a film series to a national advertiser on the network.

Mr. PIERCE. Now, I would like to return to the question that I asked you. Now, if NBC were successful in limiting the packager to a 10-percent fee on the above-the-line cost, that would mean, would

it not, that NBC could continue to charge the sponsor this 10 percent so-called network distribution fee?

Mr. SARNOFF. I don't see that the two are related.

Mr. PIERCE. That is what I read from this last paragraph:

Should we try to compromise by cutting down the William Morris Agency's take and also NBC's overall fee?

Now, if that means something other than that, I wish you would explain it to me.

Mr. SARNOFF. Well, remember, I didn't write this memo, I can't tell you what was in the man's mind back in 1954.

Mr. MALETZ. These people are officials of the National Broadcasting Co.?

Mr. SARNOFF. Yes.

Mr. PIERCE. I assume this would be general operations language. Mr. SARNOFF. But you always have to remember, Mr. Pierce and Mr. Maletz, in a growing business as new things develop we are always seeking for the best ways to operate, and some officials of the company or some subordinates have one view and others have another, and it is the job of management to relate the different views. The fact that we read something in a memo doesn't necessarily mean that it becomes company policy.

Mr. PIERCE. Is it your point of view that you can't explain what this means in this memo?

Mr. SARNOFF. I would have some difficulty.

The CHAIRMAN. Is there anyone in your entourage that can explain it?

Mr. SARNOFF. I think the language is perfectly clear, I am not trying to avoid explaining it.

The CHAIRMAN. I understand.

Mr. SARNOFF. But I would say that from the standpoint of not overpricing the show, that if you didn't have a 10 percent on the below-theline elements that could keep the cost of the show down, that the show costing included NBC 10 percent for overhead.

Mr. PIERCE. Mr. Chairman, I would like to offer these

Mr. SARNOFF. It would also keep the price of the show down.

Mr. PIERCE. I would like to offer the documents which we have been discussing in evidence, all of these taken from the NBC files, and subject to verification as to authenticity by NBC.

The CHAIRMAN. They will be accepted.
(The documents referred to are as follows:)

Mr. Gus MARGRAF,

[Teletype]

AUGUST 24, 1954.

National Broadcasting Co., New York, N. Y.:

I have been informed by Tom MeAvity you are going to work out arrangement with William Morris for Tom McKnight property Hildegarde Withers. To bring you up to date on our relationship with McKnight, I have told him and William Morris that we will not accept William Morris package arrangement, nor will we pay 10 percent on overall to them on properties brought to us by McKnight, our employee. We have authorized a script of Alexander Botts property, the rights to which McKnight is acquiring. I have told William Morris that there would be no deal, and we would not go forth with even the script if there were any thought in their minds of WMA commission. I agreed to pay commission on only those elements which they supply, but not on whole

package, and certainly not on below line regardless of whether ultimately series is film or live. We are in strong position on these McKnight properties, as he is in sympathy with us and will support us if we take stand against WMA.

Cc: Messrs. McAvity, Rettig, Denning, NBC, New York.
Cc: Messrs. Wile, Graham, NBC, HD/SD/.

TOM SARNOFF.

Mr. Gus Margraf:

SEPTEMBER 13, 1954.

As you know, I have long been an advocate of the "no 10 percent on the overall package to William Morris" policy. I have gotten into this problem feet first in connection with Tom McKnight and his Alexander Botts property. As you will recall, I told William Morris that we would not proceed on McKnight's pilot script unless it were clearly understood that William Morris could take a commission only on those elements which they supply on any series based upon this property.

This seems to have stirred up quite a storm at William Morris, and has resulted in a series of meetings within their own organization. Apparently, they

are going to throw Sam Weisbord at my head in an effort to overcome this restriction which I have placed upon the deal. Needless to say, this is a matter of basic principle with William Morris, and they will fight hard, as they have in the past, to keep their 10 percent. As far as I am concerned this is also a matter of basic principle for NBC, and at some point we must take a stand against the talent agencies getting 10 percent of a package. It seems to me that this is a perfect test case, since we are discussing a property brought in by one of our own contract employees and "sponsored" by NBC directly.

Before I take NBC's banner into the field on this project, there is one point which has bothered me for sometime and which I find somewhat difficult to uphold. We have taken the position that William Morris is not entitled to 10 percent on the overall package price, but merely on those elements which they supply. We have succeeded in this in certain cases as far as below-the-line costs are concerned. My problem is in view of this position: How can we justify NBC's 10 percent of the overall package price for what we call network distribution? I realize that this percentage is designed to cover a number of our operating costs, but presumably so is theirs.

Since it is true that William Morris does far more work in most of these cases than that of merely supplying their artists, they can legitimately expect some additional compensation. It would, therefore, seem to me to be reasonable for them to get either a flat amount per film, such as our administration charge, or perhaps some similar percentage. We have also accepted, I believe, the philosophy that we should not get both a 10-percent "network distribution" fee and an "administration charge." Should we, therefore, approach this problem from the point of view of both the William Morris agency and NBC taking 10 percent (which would probably price most of these packages out of the market) or should we try to compromise by cutting down the William Morris agency's take and also NBC's overall fee?

I believe that this McKnight property is a stepping stone for us toward arriving at some more equitable formula in our dealings with William Morris. I would appreciate your opinions and advice, as well as that of the others receiving copies of the memo, as I would like to be fully fortified in our position before I join the battle.

TOM SARNOFF.

ce: Rettig, E.; Denning, J.; Sargent, W.; Wile, F.; Graham, R. H.

SEPTEMBER 20, 1954.

To: Mr. Tom Sarnoff, Hollywood.
From: Earl Rettig, New York.

Relative to your memo of September 15, addressed to Mr. Margraf, I have the following comments:

First, as you know, I do not feel Morris should have commission on any elements of a production any more than they do in the motion-picture industry, which usually is none. Whatever commission is paid to them should be paid by the party we employ.

Specifically, in connection with the McKnight Alexander Botts deal, I see no reason for any commission to them, since he is a contract employee of the Na

tional Broadcasting Co. and they are getting commission on the basis of that contract. If McKnight employs talent represented by Morris, TV precedent probably requires us to pay commission on such talent; however, I still do not agree to such practice.

On your third paragraph, our 10 percent is, we hope, an element of profit and, as you point out, a recoupment of operation costs. They went for years earning profits, not getting commission on overall costs. We are just recently getting courage to get to the same position. As you know, if the cost to us, i. e., is $29,000, we add $750 per one-half hour as overhead, which is only approximately the overhead of the program department itself, and then 10 percent for what we call profit, but which in reality only recoups largely more overhead. I do not see that their claim is comparable. When and as you progress in your setup, there should be less for the Morris office to do on these kind of programs.

If we can follow our normal pricing policy, which in some cases may have to be split on account of certain profit-sharing deals, conceivably we could eliminate our 10-percent network distribution charge and agree to give them the same $750 allowance on a 2-hour program that we take. I think where we have taken the distribution charge we have not added profit.

Personally, on the McKnight deal, I think we ought to go ahead with him and make Morris force the issue. I do not think McKnight would want to take a suspension on their behalf.

EARL RETTIG.

cc: Messrs G. Margraf, J. Denning, F. Wile, R. H. Graham, W. Sargent.

SEPTEMBER 27, 1954.

To: Gus Margraf.
From: Tom Sarnoff.
Subject: Alexander Botts.

At the request of Sam Weisbord, of the William Morris agency, I met with him today for a lengthy discussion on the Tom McKnight properties, Alexander Botts and Hildegarde Withers. The subject for discussion was NBC's position with regard to our refusal to accept a William Morris package on properties submitted to us by McKnight. There had obviously been many discussions on this point within the William Morris office, and Weisbord had apparently been designated to make an official protest on behalf of Morris.

Weisbord indicated that the Morris office felt our position was unfair and that they could not exist merely on the commissions which they receive from talent which they book or represent. He claimed that they were entitled to package commissions for all of the "research" and development which they put in for years on this talent which they represent. In other words, he claims that they have developed people like McKnight (a statement at which McKnight scoffs), and they are therefore entitled to compensation for properties which grow out of his abilities. Weisbord likened this to RCA's desire to obtain royalties for inventions made in our laboratories. I must admit that the analogy was a little vague to me.

When I asked Weisbord what the William Morris office would supply that would entitle them to a package commission once the Alexander Botts films were underway, he replied that they would supply all of the same services that they do on such series as Rooney and Loretta Young. I stated that we were not interested in purchasing these services on the McKnight properties, because we were perfectly capable of casting, drawing contracts, accounting, and performing all of the other details of operation without their help and that we did not feel we should pay for services which we did not want. Weisbord's retort was that the Morris office had much to contribute creatively to these properties, and that they have spent years in developing talent and program ideas for which they should be recompensed.

Throughout the discussion Weisbord repeatedly made it clear that he did not want to do anything which would hurt McKnight even if it meant giving up representation of McKnight. He said that I was placing him in an unfortunate position because McKnight was their client. I replied that it was purely coincidental that McKnight was a Morris client and that I would maintain this position in any case involving an NBC contract or staff employee. I was told by Weisbord that I could not expect to get the rights to properties handled by Morris except on a package basis in any other case, but that he was trapped because of the McKnight situation. Weisbord then went on to say that my