The Victor Talking Machine Company

chapter six
1906-1911

1906 was a notable year in Victor's history. On September 1st, the company paid the Consolidated Talking Machine Company (Berliner's holding company) $800,000 for the 8,000 shares of Victor stock which had been issued to them at the time of the company's incorporation. There had been a difference of opinion for some time between the Berliner interests and Mr. Johnson as to dividends on the company's common stock. The Berliner group felt that the future of the business was sufficiently uncertain to justify dividends more in line with current earnings rather than the nominal 6% which was being paid. Mr. Johnson, on the other hand, felt that the earnings should be conserved for plant expansion. To settle the matter, the company finally bought back Consolidated's 8,000 shares. Fifteen years later, these 8,000 shares had a market value of about $10,000,000.

Payment was made by the issuance of $800,000 in gold notes covered by a mortgage on the company's real and personal property through Drexel & Company of Philadelphia. The notes ran from one month to five years. They were oversold and redeemed on schedule. At the time the notes were issued, the company's undivided profits stood at more than $2,300,000.

The First "Victrola" Talking Machine

Until the Fall of 1906, all talking machines had exposed horns. Those made by Victor were known as "Victors." The first instrument with an enclosed floating horn was announced on August 9, 1906, and was known as a Victor Victrola (VV-XVI). The new instrument listed at $200. Its development had been completed and sealed away two years before.

Considering the importance of the enclosed horn type talking machine to Victor's subsequent operation and growth, it is interesting to note that it was not received with any great initial enthusiasm. The transition from the exposed type of horn to the concealed type took several years. The trend of production was as follows:

The original styling (Fig. 22), contributed by the cabinet vendor, was, no doubt, the principal negative although the company and the trade couldn't see much volume at the necessary list. Dealers put the instrument on display as a show piece and were pleasantly surprised that it sold. (p. 61)

(Figure 22)

Auxetophone

During the same year. the company introduced an entirely new method of sound reproduction known as the auxetophone. It was designed to produce greatly increased sound output for auditorium, dance hall, restaurant, and outdoor use. A self-contained air compressor unit forced air through a sound box having a "reed-like" construction. The advance billing was that it was ". . .destined to he the greatest musical instrument the world has ever known," and the results, under favorable circumstances, apparently justified some enthusiasm. However, it required more expert, routine mechanical attention than had been anticipated, and the hoped-for sales never developed. Production was confined to the initial order for 500 units.

Columbia's Grafanola

Victor's enclosed horn type talking machine had not been on the market long when the Columbia Company announced a similar, infringing product which they called the Grafanola. Victor contended that both the product and the name were calculated to confuse the public and unfairly divert sales. This additional incident between Columbia and Victor led to a new cross-licensing agreement on June 3, 1907. The agreement of December 8, 1903, had not been satisfactory from Victor's point of view. It was Victor's contention that Columbia had not kept its agreements-particularly some of the side issues having to do with record importations, etc. However, as a result of fresh assurances, the Berliner patents were now again squared off against the Jones patent with an agreement that there would be no royalty payments until after the Berliner patents expired. Under the new agreement, several pending suits were dropped.

So far as is known, this agreement settled, at least superficially, the many points of friction which had developed between the two companies. The most important incidents, it will be recalled, were as follows:

1. The use of the Bell & Tainter patent in apparent collusion with Frank Seaman against The Berliner Gramophone Company of Philadelphia.

2. The introduction of an infringing laterally cut disc record during the last quarter of 1901.

3. Advertising efforts to take credit from Victor the win at the Buffalo Exposition.

4. Suits for infringing the Jones patent while they, at the same time, were infringing Berliner's patent.

5. Apparent collusion with the Burt Company to injure Victor by the use of inferior materials.

6. An apparent effort to distort results at the St. Louis Exposition.

7. Dubbing and "counterfeiting" records.

8. Failure to keep agreements. (p. 63)

(Figure 23)

While discussing the Columbia Company, it might be interesting to note the "firsts" which they claim:

1. Records engraved on wax.

2. Mr. Easton-first man in the world to offer talking machines for use, sale or rental.

3. Popular priced spring motors.

4. Tainter method of duplicating or copying recorded sounds.

5. "Grand" cylinder records with increased surface speed, fine quality, and greater volume.

6. Wax cylinder records by the "gold molding" process.

7. The laminated disc record.

8. Recording great stars of opera and concert.

9. The Master Works" albums.

License Plan

In 1906, the license plan, which had been started in 1902, was broadened to include shopworn and used instruments, and the company's point of view in reference to fair prices was spelled out in greater detail. Franchises were issued to distributors and dealers who signed the contracts. Subsequently, Semi-Monthly Suspension Reports (Fig. 23) were issued in which franchises were revoked for any one of the following reasons:

1. Failure to comply with the terms of the contract.

2. Business discontinued.

3. Unsatisfactory representation.

The company broadly publicized its point of view with advertisements. press releases. booklets, etc. The following titles reflect the approach:

1. "Price Cutting-A Restraint of Trade"

2. "Price Maintenance-A Bad Name-It Should Read, The Maintenance of Fair Prices."

3. "Who Loses When Prices Are Cut?-You Do!"

Double-Faced Records

On September 17, 1908, the company reluctantly announced that it would issue a limited number of double-faced, black-label records. The Columbia Company had forced Victor's hand. The company particularly disliked Columbia's pricing and the cut-price promotional angle which they had given the development.

Incidentally, while this was an innovation in the United States, C. & J. Ullman had introduced a double-faced record in Germany in 1904 under the name "Odeon Duplex." (p. 65)

Dealers and distributors didn't want the new product any more than the company did. The announcement was met with a hail of protest from the trade. Beyond the prospect of inventory loss, there were initial misgivings that good numbers would be called upon to carry duds. However, plans proceeded, and the company announced 100 ten-inch and 25 twelve-inch records on October 21, 1908. The price schedule was as follows:

The company offered distributors a one-for-one exchange of double-faced records for single-faced without charge except for the difference in cost of the double-faced series against the single-faced, and/or ten-inch as against twelve-inch. This exchange cost the company about $216,000 but was felt to have been a justifiable investment in good will. This was the first of a long list of record exchanges.

The double-faced series was introduced without advertising or other fanfare, and without benefit of the otherwise rigidly observed "Opening Day" releases. Red Seal records were not doubled until 1923.

Canada

The RCA Victor Company. Ltd. of Montreal dates back to 1899 when Mr. Joe Sanders (a nephew of Mr. Berliner's) and Emanuel Blout, who became one of Victor's distributors in New York, set up to do business. They first operated under the name "Berliner," but subsequently became the "Berliner Gramophone Company of Montreal." Mr. Sanders was an expert on record materials and was in charge of the company's manufacturing activities. Mr. Blout was in charge of sales.

Using materials obtained from Mr. Sanders' factory in Washington, D.C., the new company made its own records from the start. For a while, motors were purchased from Northern Electric. However, it wasn't long before the demand was greater than the vendor's capacity, and the Berliner Company started to make its own. In 1906, they started to build a factory building to get all of their manufacturing under one roof. Mr. Sanders left the Canadian Company sometime during 1908, and Mr. Blout followed soon afterward. It was not until 1906 or 1907 that fabricated parts of consequence were obtained from Camden. From this time on, Victor's magazine advertising carried a by-line which read, "Berliner Gramophone Co., Montreal, Canadian Distributors."

In 1909, the company made the first of several investments in the Canadian Company which, in 1928. culminated in full ownership of the manufacturing activities. (p. 66)

Sales Pressure

The company's program of national advertising, aimed at creating public demand for the product, was consistently supported by promotional materials and specific suggestions designed to help the dealers and distributors carry through with sales. Beyond point-of-sales materials, which were innovations at the time, there were also specific plans for building business by mail and by phone, tie-ins with artist appearances, suggestions for the intelligent use of installment selling methods, and so forth. There were systems for ordering and an elaborate method of record cross-references known as the "Ready Reference Labels." The purpose was to make additional sales of similar records and to suggest substitutions. From the earliest days, there were courses of instruction in salesmanship, lessons by mail, booklets, elaborate window displays, and a series of articles in the house organ, "The Voice of the Victor."

One interesting aspect of the work was the persistence with which basic ideas were hammered home. They were hit first from one angle, then from another, but never permitted to die. Another interesting phase was the company's "after-sale" activities. An example would be the attractively bound booklet "How To Get The Most Out Of Your Victrola," calculated to develop record sales.

Educational Activities

On April 1, 1911, Victor established an Educational Department under Mrs. Frances Elliott Clark. Mrs. Clark's experience in music appreciation dated back to 1891 when she was Music Supervisor of Public Schools in Monmouth, Illinois. By 1911, she had become Music Supervisor of Public Schools in Milwaukee, Wisconsin, where she was having conspicuous success in the use of recorded music in music appreciation work.

Mr. Geissler, impressed with her work, invited her to come to Camden to discuss the possible national application of her ideas. She accepted and was subsequently hired. The program which was developed had the far-sighted objective of building a demand for recorded music by developing an early interest in music. This was done by demonstrating how effectively records could be used to this end.

An efficient organization which traveled nationally, lecturing, demonstrating, and organizing, was built up. Courses of instruction were set up with graded lists of records; special records were recorded and pressed; and the music appreciation program was given national attention with the publication of such books as, What We Hear In Music and Music Appreciation For Little Children.

Mrs. Clark was personally active in the organization and administration of important national music club activities and used their forums with great skill and adroitness in preaching her doctrine. Because her dynamic personality was so closely identified with recorded music, and particularly with (p. 67) music recorded by Victor, she was able to get more effective results on a "non-commercial" plane than would have been possible by advocating specific products. The combined net effect of this work over the years is that America is better educated musically, and is a better market for musical merchandise and musical activities than it would have been had it not been for the sustained and effective work of Victor's Educational Department under Dr. Clark.

Copyright Laws

During 1911, the United States copyright law was amended to include talking machine records. It applied to practically all of the records in Victor's catalog. Because the company did not feel that it would be wise to raise the price of the records, increased economies were called for to avoid reduced profit. Copyright laws in foreign countries in which the company was doing business also became an acute problem during 1911.

In 1911, Mr. Johnson said in the board report:

The whole future of our business depends on one's ability to make steady but substantial improvement in the art. Better goods are demanded each year. The cost is increasing: the public wants more and more for their money. We must advance-to stand still is to slide backward. Therefore, we must secure constant economy in manufacturing, irrespective of what the immediate cost may be.

Our present warehouse facilities are entirely in adequate for our requirements. Many of the buildings which are now being used for the purpose of storage are not suitable in construction and in many cases the fire risk is very great.

Recapitalization

Also in 1911, the company increased its capital from 20,000 to 50,000 shares. At that time, Mr. Johnson apparently held 10,000 and the Consolidated Talking Machine Company, or Mr. Berliner, personally held the 1,000 shares which they had received at the start. The 8,000 shares re-purchased from Consolidated in 1906 were still held in the treasury. The remaining 1,000 shares were held about equally by Messrs. Douglass. Atkinson, Haddon and Middleton. On this basis, 38,000 shares were distributed in 1911. It is a fair guess that Mr. Johnson got 15,000 which would have brought his holdings up to 50%, although there is some evidence that his holdings on January 6, 1927, consisted of only 20,000 shares. The following men participated to the extent of about 18,000 shares:

L. F. Douglass
A. C. Middleton
H. B. Babson
A. W. Atkinson
C. H. Haddon
E. Berliner

(p. 68)

1,000 shares were left in the Treasury. The 4,000 shares unaccounted for were possibly held, in part, by Messrs. Royal, Geissler, Staats, Freeman and others not known.

Trustee Stock

Some part of the 4,000 shares were made available to "key" employees under a trusteeship. The plan worked as follows: The employee bought the stock at 80% of its current market value. He was given five (5) years to pay for it. The stock participated in dividends as they were declared. In practice, this worked out very favorably for the employee as dividends at the time were large-large enough in fact to pay the installments on the principal as they fell due. If the employee left the company, or for any reason wanted to sell the stock, he was committed to give the company the first option to buy it at 80% of its market value at that time. Beyond the initial distribution, stock only became available when it was turned back by an original holder. The plan was closed out at the time equity in the company was sold to the banking syndicate. At that time the company waived the 80% clause and repurchased this stock at the full current market.

In 1916, the company had 121 stockholders. Nine were directors or officers, 37 were other employees, and 75 had no direct connection with the company. The 112 stockholders who were not officers or directors held 21% of the company's common stock.

Speaking of Profit Sharing plans, Mr. Johnson wrote William Barry Owen, in the early days of Victor, as follows:

If I could only find a practical plan, I would pay every employee in the business in the same way, even down to the office boy, and we are working toward that end. But, of course, it is difficult to accomplish. It is all right as long as the company is making money, but off years have to be taken into account, and the fact that employees have to have a certain income has to be looked out for. It is not hard with the higher officers, as they generally have capital to last over a period of depression.

Other Activities-1906-1911

1. Mr. Douglass had a nervous breakdown in the Fall of 1906, went West to regain his health, and gave up his active connection with the company. Mr. L. F. Geissler came East from Sherman Clay and Company to take over.

2. The Supreme Court sustained the validity of patent #534,543 on April 1, 1909.

3. During 1909, the company wrote down patents, goodwill, etc., from $2,079,528.80 to a nominal $2.00.

4. The company's financial reports were changed from a fiscal basis to a calendar basis during 1910.

5. The company introduced the automatic brake during 1911.

(p. 69)