The recording industry would have changed dramatically if Thomas A. Edison had agreed, in October 1911, to a proposal made in earnest by Columbia's Edward Easton. The idea was to consolidate the Edison and Columbia companies. After feelers and preliminary discussions, Easton finally outlined his proposal in detail to Frank L. Dyer, President of Edison's National Phonograph Co. Soon afterwards, on October 5, Dyer wrote a memorandum for Thomas A. Edison summarizing what Easton had said, then analyzed benefits and drawbacks of consolidation. After weighing pros and cons, Dyer urged Edison for consolidating. Obviously Edison rejected the plan, but the arguments he used (if any) in rejecting the offer is unknown. He might have simply said "No!" and discussion was at an end.
When Peter Fraser visited the Edison National Historic Site in 1995, he xeroxed the original 1911 memo written by Dyer. Fraser kindly gave me a copy, and I duplicate the memo here as written--no changes in spelling or punctuation, no textual cuts. I did break a few of Dyer's very long paragraphs into shorter paragraphs for the sake of readability. I also supplied headers and Roman numerals for Dyer's 14 arguments for consolidation. The text here is otherwise identical to the original. It will eventually be published in Victrola and 78 Journal with further comments and analysis.
This memo gives us a unique look at both the Columbia and Edison companies in October 1911. We learn how each company was doing, or at least what Easton wanted Edison to believe about how well Columbia was doing. We learn how a top Edison executive perceived the strengths and weaknesses of Columbia, how he perceived the business affairs of his own company, and how he thought a consolidation would affect Victor's business.
The timing of the proposal--late 1911--is interesting for several reasons. The Edison Company would soon develop the Blue Amberol and Diamond Disc, marketing them about a year later. Dyer stresses that times are not good for Edison, stating that "our phonograph business is in a most unhealthy and hazardous condition" (this evidently would spur the development of the Blue Amberol and Diamond Disc). Dyer carefully lists the many benefits of consolidation. While citing a few possible drawbacks of consolidation, Dyer describes Easton in unflattering terms: Easton was regarded as "unscrupulous and unreliable" in the industry. According to Dyer, Victor's Eldridge R. Johnson disliked Easton.
Obviously nothing came of the proposed consolidation. The only consolidation for Edison was that of the Edison Phonograph Works, which had manufactured phonographs since 1888, and Thos. A. Edison, Inc., which had merchandised the products since 1896. This merging was effective September 1, 1924, according to the September 1924 issue of The Talking Machine World. An article states on page 28, "Both interests are located in Orange, N.J. The name 'Thos. A. Edison Incorporated' will continue to be used, but hereafter will represent both the manufacturing and merchandising branches of the Edison phonograph industry. The purpose of the merger is to bring about a greater co-ordination of the Edison manufacturing and selling divisions."
What follows is the memorandum written for Thomas A. Edison by Frank Dyer and dated October 5, 1911.
Before Mr. Cromelin left he told me that he had been approached by Mr. Lyle, General Manager of the Columbia Phonograph Co., with the request that he try to interest us in some plan by which there could be a consolidation of the two interests, whereby very great savings in manufacture as well as administration could be secured.
I told Mr. Cromelin to find out from Mr. Lyle what kind of a plan he had in mind. Mr. Lyle's first proposition was that we would take over the entire assets of the Graphophone and Columbia Companies, with the exception of Cash and Accounts Receivable, assume current liabilities of $600,000, guarantee the payment of 6% on $1,500,000 in bonds, guarantee the payment of debentures and coupon notes amounting to about $135,000, and guarantee the payment of 7% dividends on $4,720,000 preferred and common stock.
After Mr. Cromelin left Mr. Lyle took up the question again, and I have seen him and Mr. Easton a number of times. Of course, in a general sense, there cannot be any doubt as to the wisdom of industrial combination, where money can be saved, provided the elements can be brought together on a fair basis. It seemed difficult to do this, because on one hand you could not assume continuing burdens which might become a charge on your property, and on the other hand the Columbia people could not turn over everything to us and depend upon our sense of fairness to push their business.
The following plan, however, has been suggested, and Mr. Easton and his associates have said that they would adopt it if it met with your approval:
(1) The Columbia Company will withdraw as the exclusive selling agent for the American Graphophone Co., and Thomas A. Edison Inc. will take its place.
(2) The machines will be known as "Edison Graphophones" or "Edison Talking Machines," and the records as "Edison Disc Records" (zigzag cut), "Edison-Columbia Records" or "Edison Records." Any other names that you suggested would probably be acceptable to the Columbia so long as they were marked "Thomas A. Edison, Incorporated, Exclusive Selling Agent."
(3) Such of the 35 Columbia stores as are profitable and as it is desirable to retain will be kept as distributing branches, which is the main work they are now doing. These stores as distributing branches would be supplemented by such of our present jobbers as it might be necessary to secure. The stores would sell at retail and wholesale cylinder and disc machines of our type, cylinder and disc records of our type, Graphophones and lateral-cut records, Home Projecting Machines and Films and any other of our products that we may have.
(4) The Columbia goods will be consigned to these stores (which will be under our management) at factory cost and will be paid for only as sold. Our own goods will be handled on any basis we choose, without interference.
(5) Out of the profits made in handling Columbia goods (charging them with their proportion of expenses--selling, advertising, administrative, etc.) the Columbia Company will first be paid an amount sufficient to cover the interest on bonds of the Graphophone Company, dividends on preferred and common stock and an amount as a sinking fund to cover its debentures and coupon notes.
In the balance sheet of December 31, 1910, these liabilities are as follows:
Preferred stock 2,095,630
Common stock 2,627,550
Debentures and coupon notes 141,870.
Assuming 6% interest on the bonds, 7% on the common and preferred stocks and that the coupon notes and debentures mature yearly in ten years, these charges, deductible from the profits, will amount to $434,809.60.
I think dividends of 7% on the common stock are too high and I believe these charges can be scaled down under $400,000.
If anything is earned on the Columbia goods over and above these charges, the excess will be divided equally between them and ourselves. Of course, if sufficient net profits are not made on the Columbia goods to pay these fixed charges, there will be no objection on our part to pay them. Whether these charges should be cumulative, any deficiency in one year to be carried over and made good if possible the next, was a point not discussed, but I do not think it should be allowed, as each year should stand on its own bottom. It should be clearly understood that anything the Columbia people get is based strictly on the sale of their goods and they do not in any way participate in profits made on our goods.
6) In order to be sure that their goods are having a fair show, they would want to have Mr. Lyle or some representative co- operate with our Selling and Advertising Departments, the policy of which would be to enforce impartiality on the part of the trade as to the two lines, giving the public the right to buy what they wanted.
7) Practically all administrative expense of the Columbia Company would be wiped out, the business being administrated from Orange and the accounts being kept here. Advertising matter would refer to both lines of goods.
8) While it would be contemplated that at first the Columbia goods would be made at Bridgeport, yet if the plan worked out satisfactorily and it appeared to be a good thing, there could be a gradual concentration of all manufacturing operations at Orange, so as to keep our factory more busy and permit more economical production.
COMMENTS -- ARGUMENT FOR CONSOLIDATION
Naturally, the first question I asked was "why, if you people are doing so well, are you willing to turn your business into our hands?" Mr. Easton said that their books are open to examination by any chartered accountants we may select, and they will show that last year their net earnings were $519,002.52 and that this year they are running much higher and would probably exceed $750,000. He said there never was a time when such a plan was less a necessity. He said that in his opinion they were contributing everything and we very little, because the arrangement would not interfere with our cylinder business, and our disc business was a matter of the future. He believed, however, that the opportunities for effecting economies were so great and we had such a strong trade position and the Edison name was so potent that in the long run they would make more money out of the proposition than if they went on alone. He said, furthermore, that personally he was anxious to get out of the harness, that his old friends and associates in the business had most of them died and that he did not feel the interest in it that he once did.
Of course, nothing could be done unless all the statements made to me concerning the business had been verified by chartered accountants, but, assuming that these statements are verified, I think the plan should have our most careful consideration. Some of the arguments in support of it are the following:
I. EDISON BUSINESS IN TROUBLE
We cannot disguise the fact that our phonograph business is in a most unhealthy and hazardous condition. I do not think the decrease in our business can be adequately explained by general conditions. Read, for example, the attached report from Mr. Maxwell, giving conditions as he found them; also attached letters from Reynolds, Swanson and Pardee, jobbers in Springfield, Ill., Houston, Texas, and New Haven, Conn. These letters reflect a very general condition among jobbers, and we have received numerous others of similar tenor from all parts of the country. Also read attached letters from Wyper, showing the condition in Australia. You know that we have been practically driven out of France and Germany and are slowly being forced out of England.
We hope to be able to re-establish our cylinder business by a hard record, and with that will probably come new forms of reproducers, giving superior results. Our disc will be essentially a De Lux article of fine quality and high price. There undoubtedly exists a very large demand for medium-priced disc records and medium-priced disc machines. Everything points to the fact that the Columbia and Victor Companies are doing a great business. Mr. Lyle, in fact, asked me if we were in position to make 1500 Graphophones for them, because they had orders that they could not fill. In Moody's Manual for 1911 the general balance sheet of the Victor Co. is given (p. 3526), from which it appears that their undivided profits on September 30, 1909, were $2,443,376, and on December 31, 1910, $4,250,196. This represents an increase of $1,806,820 in fifteen months, or at the rate of almost $1,500,000 net per year.
By the proposed consolidation there would be an opportunity to meet this demand, and we would meet it, not by copying our competitors, but by putting out a staple line that is already known to the public. Furthermore, so far as records are concerned, it is an original line, because, as you know, the Victor Company is licensed under the Jones patent while the Columbia machines are licensed under the Berliner patent.
It seems to me that if we could supply our trade with this disc line, which closely parallels the Victor line, we would immediately re-establish a feeling of confidence that they now lack. In many cases jobbers who are wavering between the Victor Co. and ourselves would align themselves strongly with us. We would have very much more to offer than the Victor Company, because we would have substantially as good a disc line as they have, and in addition our own cylinder goods and eventually our own disc.
II. SHARE EXPENSES
We have a very expensive and large organization here, able to handle more business than we are doing and out of proportion to our present sales. We have done everything possible to reduce expense without disruption. By handling Columbia goods a part of this expense would be assumed by the Columbia business, enabling us to make more profits on our own line. Taking, as an illustration, the advertising accounts of the two companies, including magazine and newspaper advertising, catalogues, circulars, mailing and other expenses, these probably amount to upwards of $800,000 per year. Undoubtedly $200,000 could be saved by consolidation, and the service and results would probably be better than now. Our Recording Departments if consolidated would result in great economies, so also with our Selling, Accounting, Legal and Administrative Departments.
Personally I do not think the handling of Columbia goods by us would hurt our cylinder business any more than it is now hurt by the competition of the Victor and Columbia Companies. It might be that it would be helpful, because a dealer, having both lines, would push them more impartially than he does now and would give our line a fairer show. If we made no money at all out of the Columbia business, the assumption by that business of its proportion of general expense would enable us to make a far better showing in the cylinder business, even if the cylinder business was substantially decreased.
III. ELIMINATE A COMPETITOR
We eliminate at least one competitor. That competitor is the one most likely to adopt a phonograph-cut disc if we make a success of it. If the proposition is rejected it is not unlikely that the Lindstrom people will buy. They are in this country now and have approached Columbia Co. Lindstrom has recently bought out the Fonotipia, Odeon and International Companies in Europe and is very anxious to get in this field. Mr. Easton told me that he went through their factory in Germany, that it was by long odds the biggest talking machine factory he was ever in and that they are now turning out 2000 machines per day. They make a disc mechanism, including motor, winding crank and turn-table, but excluding cabinet, tone-arm and reproducer, which is sold to the trade for $1. Competition of this sort would certainly be very objectionable and hard to combat.
IV. BUSINESS MACHINES
In handling Business machines relatively great economies could be effected, because much money is now lost in making demonstrations and in putting in trial outfits where eventually Dictaphones are sold and vice versa.
V. FREEDOM FROM LITIGATION
We would get into the business substantially free from litigation and backed by numerous patents relating to the art. Litigation is pending between the Victor and Columbia Companies that may alter the situation, but any arrangement would have to be subject to this. For instance, the Victor Company have sued the Columbia on the use of the name "Graphonola" as interfering with the word "Victrola." I do not think there is any infringement, but if there is, the word "Graphonola" would have to be abandoned. Also, the Victor Company are suing on the Miller patents relating to concealed horn cabinets, but the Columbia Company feel that they will win and I believe they will, as I think these patents are invalid. As to these patents, the Graphophone Company would have to stand behind us, agree to defend the suits and pay any damages. The Victor people have also sued the Columbia Company on the so- called Johnson-cut record patent covering a disc record with a cut sound groove. Contrary to the belief of everyone, this patent was sustained by Judge Ray, but the appeal will probably be argued and decided before anything could be done, and in any event the carrying out of the arrangement would have to depend on the successful termination of this suit or its successful compromise. On the other hand, the Columbia Company have sued the Victor Company under the Jones patent, their theory being that the action of the Victor Company in suing them on the Johnson patent amounted to a renunciation of their license under the Jones patent. If the Columbia people succeed they can very effectively embarrass the Victor Company, because the Victor Company in the past has recognized the Jones patent and has been licensed under it. If the Columbia Company does not succeed, then under the license the Victor Company will have to pay royalties of 2% of the net price on all records.
VI. GAIN MATRICES
We will immediately come into practical possession of a big list of matrices, which must represent a great sum and which will require us many years to duplicate with our own discs.
VII. ACCESS TO GREAT ARTISTS
In addition to having the right to Fonotipia matrices in this country, comprising a very good list of artists, the Columbia Company have made exclusive contracts with a number of artists such as Cavalieri, Mary Garden, Nordica and others.
VIII. FOREIGN TERRITORIES
In some of the foreign territories, such as South America and Mexico, the Columbia business is fairly strong. In England they are holding their own. Mr. Wyper speaks apprehensively of their invasion of Australia. They say that their foreign business shows a profit of over $90,000 per annum; at any rate the books will show. A consolidation of the two lines in foreign countries ought to strengthen our position. Surely, with the exception of Australia, we could not be much weaker than we are now.
IX. GOOD COLUMBIA MEN
The Columbia people have some very good men on their staff that we might make use of or who could replace weak men on our own staff. We will have a chance to pick a selected team from both organizations.
X. LARGEST TALKING MACHINE COMPANY
As a matter of personal price and satisfaction, we would undoubtedly have the largest and most representative talking machine business in the world.
XI. STRENGTHENS OUR HAND WITH JOBBERS
The distributing stores would make us largely independent of jobbers and we could have only such jobbers as were exclusive and were under our control. These stores are now well organized and, they say, are running smoothly. If any of them are not profitable they could be closed. All leases are terminable on short notice and no employee has any contract of employment. If the jobbing trade felt that we had an organization in our hand that would immediately make us independent, I think it would be easier to deal with them than when they think we are willing to grant concessions to retain them. Furthermore, with two lines, jobbers would be much more anxious to represent us exclusively than with a single commercial line and a future undeveloped line. One of the weaknesses of our present position is that we have placed ourselves in the hands of the jobbers, who are difficult to control, most of whom are probably treacherous and all of whom are thoroughly selfish and unreasonable.
XII. PATENT ADVANTAGE
I am told that there is a very bitterly contested interference in the patent office between the Victor and Columbia interests on the idea of a laminated record, the interior being of cheaper material than the surface. They say that this interference has now been decided in their favor and that the patents are about to issue. These facts can be verified. The patents may be embarrassing to us in connection with our disc, although, in view of your work on laminated records, I do not see how this is possible. At the same time, it is a fact that the Columbia records are laminated and Victor records are homogeneous, and they tell me that their record surface contains more shellac than the Victor record. To keep the Victor Company from copying the Columbia record in this respect would be important. Having contested the point in interference, they would be stopped from denying infringement or validity.
XIII. PARALLEL TO VICTOR PRODUCTS/INCREASED PROFITS
There is no doubt that the Victor people resent our entrance in the disc field and propose to bitterly fight us as much as they can. Our position in such a fight is not strong. We have to hold our present trade with the cylinder record as well as we can and try to build up an entirely new kind of trade with our disc. Jobbers and dealers are tempted by the profits in the Victor line, however friendly they may pretend to be towards us. I believe we would hold our position very much more strongly while we are developing our disc if we were able to offer dealers a complete line of goods closely paralleling the Victor line. With the proposed arrangement we can do this without expense of investment in manufacture and with a reasonable assurance of profit. For instance, taking last year as a basis, and assuming that no economies were made and that all the duplication of expenses were present, our share in surplus profits would be somewhat over $50,000. But on the same showing, with economies that seem obvious to me, I believe that our profits from the Columbia goods could be increased to $150,000 or more, and that by reducing our expenses in selling our own goods, our own profits would be also substantially increased. Having the same goods to sell as the Victor Company, I do not see why, with our prestige, we should not get at least half of the business in this line.
OBJECTIONS TO THE PLAN
What are the objections to this scheme? In the first place, there is the indefinable feeling that it is human nature for a man who has a good business to leave it alone. I mention above Mr. Easton's reasons for approving the plan. An examination of the books ought to disclose the real situation. In the next place, there is a feeling that has always existed against the Columbia Co. and Mr. Easton personally as being unscrupulous and unreliable. This seems to be almost a tradition with our company. I know that Mr. [Eldridge R.] Johnson entertains the same feeling. Undoubtedly the Columbia people have done many things that were extremely sharp and resourceful, but they have always managed to justify them when the effort has been made to stop the practices. Many of the men who have worked with Mr. Easton for years speak in highest terms of him. Mr. Cromelin, for example, has told me that Mr. Easton has always been most considerate of him and that he regards him most highly. Whatever may be said of the Columbia Company or Mr. Easton, can they possibly be any worse than some of our friends in the moving picture business? Or can they be worse than Mr. Gladstone was? Now that our moving picture friends are securely bound by contract as well as self-interest, we really entertain feelings of affection for them. It seems to me that in the present case the Columbia Company are putting themselves almost entirely in our hands, and I do not see what they could do so long as we tried in good faith to carry out the arrangement and we worded the contract so as to properly cover the situation.
The only serious objection I see to the scheme is that we would have in our organization a representative of the Columbia interests, probably Mr. Lyle, who business it would be to see that the goods were treated fairly and advertised properly. If the scheme worked satisfactorily, probably the co-operation would be smooth, but if things went wrong and because of some caprice in the public taste the demand for the goods fell off, notwithstanding the fact that we might be conscientiously trying to sell them, there would be an opportunity for friction and bickering. While this might be unpleasant, I do not think it would be serious, because there would be nothing that the Columbia Company could do. The situation would not be the same as in the case of a minority stockholder or a cantankerous director, because the representative's sole job would be to try to boost the sale of his particular goods, and, so long as we gave him a fair show, he could do nothing. They would only be able to do something in case our attitude was so unfair and prejudicial to their interests that the contract should be set aside.