What did E. W. Hammons mean?

[Rob King]

Since Rob Stone's been posting such nice Educational press sheets of late, here’s an industry/economics-oriented question on the same company: why exactly was Educational Pictures left out of the mergers ca. 1926-1927 which saw the major studios entering into distribution arrangements with the leading independent producers of short subjects (e.g., Christie aligning itself with Paramount, the rumors about Sennett teaming up with the same organization, Roach siding with MGM, etc.)?

I've tended to assume that it was simply poor management on E. W. Hammons' part - perhaps the first of the big strategic errors which hounded Educational until its demise at the end of the 1930s. However, after recently reading Joseph P. Kennedy's “The Story of the Films” (which reprints a series of lectures given by various industry leaders at Harvard Business School in 1927), I'm now wondering if another explanation is possible. Hammons gave one of the lectures; and at one point, an audience member asks him the burning question:

“Would it not be an economic move for your company to hook up with one of the larger organizations like Famous Players, that has its own chain of theatres?”

Here’s Hammons’ answer, in full:

“We have been approached several times on that subject, and I had to decide no. My reason for doing that was that while we could get their business – and their business would help us a great deal – we are tied up with one of the big theatre chains at the present time. I shall take a few minutes to tell you about that.

“When we first produced pictures ourselves, we released through independents [i.e., independent exchanges] on a percentage basis, but we did not get the percentage we were entitled to. We finally opened our own branches. I went to the big theatre chains in the various districts. Here in this New England territory Mr. Gordon owned the biggest chain of theatres. I sold him a forty-nine per cent interest in this particular exchange, retaining a fifty-one per cent interest. In Chicago we went to Balaban and Katz and sold them a forty-nine per cent interest in that exchange. In the beginning that was fine, because all these theatres were interested with us. Then they tried to use that interest for the benefit of their theatres and tried to pull down the price. They thought that because there were interested with me, they could pay anything they liked for their film. I told them that would be satisfactory to me if they gave me a fifty-one per cent interest in their theatres. If they did that, they could make their own price for pictures, but until that time I was going to sell to the theatre that paid me the most money.

“The business we have received from the Famous Players theatres has been about one-tenth of our gross. We are in thirteen thousand five hundred theatres. Such a combination as you speak of might be a good thing and it might not. It is really a debatable question. I am not always sure in my mind that I have made the right decision. I hope time will prove that I have.”

Of course, time quickly proved that Hammons’ decision was wrong, and his exchange network would subsequently be folded into Fox at bargain basement prices in early 1933. Still, Hammons’ answer here confuses me. He seems to be implying that his contracted exhibitors were preventing him from teaming up with the majors because they held large interests in Educational’s existing distribution network. But surely exhibitors would have seen advantages in Educational’s teaming up with a big studio? Why would financial interests in Educational’s exchanges have counted for more with theater owners than access to major studio programming? Or, perhaps, is Hammons simply ducking the question?

Best wishes for the New Year to all of you at SiComMafia!

[Richard M Roberts]

Since Rob Stone's been posting such nice Educational press sheets of late, here’s an industry/economics-oriented question on the same company: why exactly was Educational Pictures left out of the mergers ca. 1926-1927 which saw the major studios entering into distribution arrangements with the leading independent producers of short subjects (e.g., Christie aligning itself with Paramount, the rumors about Sennett teaming up with the same organization, Roach siding with MGM, etc.)?

I've tended to assume that it was simply poor management on E. W. Hammons' part - perhaps the first of the big strategic errors which hounded Educational until its demise at the end of the 1930s. However, after recently reading Joseph P. Kennedy's “The Story of the Films” (which reprints a series of lectures given by various industry leaders at Harvard Business School in 1927), I'm now wondering if another explanation is possible. Hammons gave one of the lectures; and at one point, an audience member asks him the burning question:

“Would it not be an economic move for your company to hook up with one of the larger organizations like Famous Players, that has its own chain of theatres?”

Here’s Hammons’ answer, in full:

“We have been approached several times on that subject, and I had to decide no. My reason for doing that was that while we could get their business – and their business would help us a great deal – we are tied up with one of the big theatre chains at the present time. I shall take a few minutes to tell you about that.

“When we first produced pictures ourselves, we released through independents [i.e., independent exchanges] on a percentage basis, but we did not get the percentage we were entitled to. We finally opened our own branches. I went to the big theatre chains in the various districts. Here in this New England territory Mr. Gordon owned the biggest chain of theatres. I sold him a forty-nine per cent interest in this particular exchange, retaining a fifty-one per cent interest. In Chicago we went to Balaban and Katz and sold them a forty-nine per cent interest in that exchange. In the beginning that was fine, because all these theatres were interested with us. Then they tried to use that interest for the benefit of their theatres and tried to pull down the price. They thought that because there were interested with me, they could pay anything they liked for their film. I told them that would be satisfactory to me if they gave me a fifty-one per cent interest in their theatres. If they did that, they could make their own price for pictures, but until that time I was going to sell to the theatre that paid me the most money.

“The business we have received from the Famous Players theatres has been about one-tenth of our gross. We are in thirteen thousand five hundred theatres. Such a combination as you speak of might be a good thing and it might not. It is really a debatable question. I am not always sure in my mind that I have made the right decision. I hope time will prove that I have.”

Of course, time quickly proved that Hammons’ decision was wrong, and his exchange network would subsequently be folded into Fox at bargain basement prices in early 1933. Still, Hammons’ answer here confuses me. He seems to be implying that his contracted exhibitors were preventing him from teaming up with the majors because they held large interests in Educational’s existing distribution network. But surely exhibitors would have seen advantages in Educational’s teaming up with a big studio? Why would financial interests in Educational’s exchanges have counted for more with theater owners than access to major studio programming? Or, perhaps, is Hammons simply ducking the question?

Best wishes for the New Year to all of you at SiComMafia!

Well, what killed Educational wasn't Hammons refusing to join up with a major studio, it was Hammons trying to become a major studio later on with Mack Sennett and Al Christie in the Sono Art-Worldwide-KBS debacle that ended up bringing them all down. They all refinanced and built new studios at the wrong time, then tried to produce features and distribute them through Educational's exchanges when they didn't have enough theaters to run their product. Educational's exchanges were sold off before they began releasing product through Fox, they became part of the Mascot/Monogram/Consolidated Labs group that then became Republic.

Understand that Educational was essentially a distributor, who then got into the production of short comedies surrepticiously when it found there was such a demand for that product that they began to underwrite independent producers like Jack White to specifically make films for them. But they were never really a Producing Studio per say, like Sennett, Roach, or Christie were, the product they handled was mostly made by independent producers like Christie or Sennett or Jack White, whom they sometimes financed to some degree, with White's operation by far their main and closest controlled production unit. By the time they began releasing shorts through Fox in 1934, they had for all intensive purposes become a completely different entity, a scaled-down independent producer of short comedies with their offices and production facilities situated on the East Coast (they were shooting at the Astoria Studios), supplying product to another distributor. Even this came to an end when Hammons tried to tie up with Grand National in the late 30's.

So at the time Hammons made that speech in the late 20's, it wouldn't have made sense for Educational to align itself with another distributor, it made it's money in the distribution end,not the producing end, and if he had his product playing in major circuits like the Balaban and Katz chain, he was doing very well for himself. In one respect, Hammons was lucky that he didn't get more involved with Joseph P. Kennedy, whose Hollywood finagling sucked up Pathe', FBO, and the Keith-Orpheum circuit and spit out RKO, leaving a slew of ripped-off business partners in his wake. Had Hammons gotten involved with that, Educational might have not even lasted as long as it did.


RICHARD M ROBERTS

[Rob King]

Thanks, Richard, for explaining the issue better than Hammons himself! Actually, I have your excellent essay on Educational from Classic Images in a stack of papers next to my desk (and weren't those essays supposed to be anthologized at some point?).

Anyway, the distinction between production and distribution clarifies things immensely. I'm still a little mystified, however, by the long central paragraph in which Hammons discusses exhibitors' financial interests in his exchanges. Is Hammons implying that his contracted exhibitors were themselves the source of the company's reluctance to side with the majors (which is how I first read the passage)? Or is he simply going a bit off-topic?

[Richard M Roberts]

Thanks, Richard, for explaining the issue better than Hammons himself! Actually, I have your excellent essay on Educational from Classic Images in a stack of papers next to my desk (and weren't those essays supposed to be anthologized at some point?).

Anyway, the distinction between production and distribution clarifies things immensely. I'm still a little mystified, however, by the long central paragraph in which Hammons discusses exhibitors' financial interests in his exchanges. Is Hammons implying that his contracted exhibitors were themselves the source of the company's reluctance to side with the majors (which is how I first read the passage)? Or is he simply going a bit off-topic?

Okay, one more time, what Hammons is saying is that when Educational has tied themselves up with one of the major theater chains, giving them a large interest in one of their local exchanges, that chain, as a co-owner in that exchange has tried to drive down the price they pay for Educational product, so Educational is actually losing money on the deal! It makes perfect business sense in that regard for Hammons to stay an independent and charge the best price he can to put his product in theaters. It's the old myth of market share, if you're running in 13,000 Balaban and Katz theaters, but they're paying half what you're getting from running your films in the 8,000 Golden Theaters, you're actually making more profit from the Golden Theaters.

RICHARD M ROBERTS

[Bob Birchard]

I'm not sure the others have it quite right with regard to Educational. Hammons claimed to have contracts with 13,500 theaters. That was HUGE, since there were about 20,000 screens in the country at the time. What really happened is that in 1933 the Motion Picture Industry was on the ropes due to the great deprssion--largely due to over-borrowing on theater expansion in the late 1920s. In an effort to try to control costs, the industry attempted to force the distribution arms of all the studios to combine into one or two entities that would handle distribution for all the majors and mini-majors. The only two companies to actually complete such a consolidation were Educational and Fox--this was a perfect pairing, since Fox was said to have the best distribution system for feature product, and Educational had the best distribution mechanism for shorts. But after this merger of distributing companies, all the other studios got cold feet and refused to consolidate. Educational was likely to go by the wayside in any event due to the rise in double features and the decline in short-subject outlets in the later 1930s--but Educational wasn't really "swallowed up" by Fox, rather Fox and Educational did what they were supposed to do by consolidating and Educational was probably hurt more by Fox's continuing money problems related to the bankruptcy of its theater operations (as well as the financial turmoil with other theater chains) than it was by its on-going interests in production.

[Frank Flood]

Sorry for this longish note, but Educational took a lot of twists and turns in its history, and I thought it made sense to put some of these down.

As its name suggests, Educational Film Exchanges, Inc. started out as a distributor of educational and other non-fiction films, and some miscellaneous things. Earle Hammons was apparently convinced that there was a significant market for this sort of product, but in fact, he enjoyed only middling success. In about 1919-20, however, Hammons recognized that a growing demand in a different market - quality short comedies - was developing.

By the late teens, all of the major film producers were focused on providing theaters with a diversified program based on features supported with a variety of short product. Paramount, Fox, First National, Metro, Goldwyn, Pathe, Universal and Vitagraph all released short comedies on their programs. At the beginning of the 1920's the biggest of these companies began curtailing or eliminating comedies, and at the same time began a serious theater-building campaign in the nation's biggest cities. Circuit owners not aligned with the majors also began building new theaters.

Educational went aggressively after the big theater market, as did Pathe and, to an extent, Universal. Hammons did two things in relatively short order.

First, he signed up four producers to distribution contracts: C.L. Chester, who produced animal comedies, in March 1920; Lloyd Hamilton and Jack White in April 1920 (I think) and their Mermaid Comedies; and Al Christie and C.C. Burr who produced Torchy the office boy comedies with Johnny Hines in May 1920.

Second, he expanded his national film exchange system by selling what we would call franchises to major exhibitor chains and independent exchanges in all of the country's film exchange centers. For example, I believe Sol Lesser had one of the West Coast franchises. An Educational exchange would be opened in say, San Francisco, owned 51% by Educational and 49% by Lesser interests. Educational got the benefit of partnering with knowledgeable local film men and the local partner could make money selling comedies to his theaters and those of his competitors. Both parties only needed to pay about half what they would normally pay to develop the exchange. The Hudson Bay Company had a hand in financing this expansion. A good exchange system combined with popular comedies and profitable markets made Educational quite successful.

While Chester, Torchy, and other producers provided product for a season or two throughout the twenties, Educational's mainstays were Christie, which always acted as a true independent producer providing product for a distributor, and the production units that began as Hamilton-White Comedies. In 1922, Hamilton-White dissolved, with Chase Bank providing financing for the creation of Jack White Comedy Company (to produce Mermaid, Cameo, and Juvenile Comedies) and Lloyd Hamilton Corporation (to produce Hamilton Comedies). Jack White was the overall supervisor and director-general, with Hamilton retaining some significant autonomy in making his films. The other two "producers" that were formed to produce comedies under White's supervision were Lupino Lane Comedy Corporation and Goodwill Comedies, Inc. (which seems to have been the successor of Reel Comedies, Inc. the secret Arbuckle project that produced Tuxedo Comedies.) I am not completely clear about ownership and control issues, but I believe that these were more like profit sharing arrangements rather than any kind of independent production. By 1926 these four companies were controlled by something called Gauntlett & Co., whatever that is.

In November of 1926, after some months of rumors, both Paramount and MGM announced that they were forming short subject divisions that would provide comedies. There were also rumors that First National would make a similar move. The Loews, First National,and various Paramount-controlled theater chains were right in the heart of Educational and Pathe's primary market, and as a result all of the major comedy producers were put into play. At this time, there was speculation that Educational would merge with Paramount. Of course, it was subsequently announced that Hal Roach would move distribution from Pathe to MGM and Christie would move from Educational to Paramount.

Hammons ended up going in entirely different direction, which only in retrospect looks like a bad decision. In February of 1927, Educational announced that all 36 of its exchanges in the US and Canada and the producing interests that were making the bulk of output would be consolidated and operated under a new holding company called Educational Pictures, Inc. Investment bankers Dillon, Read & Co. raised the refinancing proceeds that these mergers required starting in November 1926 (over-leveraged holding companies were all the rage at this time, and contributed to the economic unpleasantness that started a couple of years later). The intention was to provide greater working capital and enable Educational to engage more extensively in production, functioning as a producer-distributor organization. Educational’s exchanges had been operated by subsidiary corps, the majority of which stock was held by Educational Film Exchanges. These subsidiaries became wholly-owned subsidiaries of Educational Film Exchanges and the exchanges' minority shareholders received stock in Educational Pictures for their shares in the exchanges. The consolidation also included the four producing companies that had been controlled by Gauntlett, and the subsidiary corporation that owned Educational Studios.

As they say, past performance is no guarantor of future success. Hammons, who had been very savvy in building a successful business out of scratch, could have joined his operations with a stronger company as did Roach and Christie. He decided instead to have Educational itself become a stronger company. Almost everything that subsequently happened undermined that decision:

1. Christie's departure required the Jack White operation to produce many more comedies in a given season, straining their creative resources.

2. Lloyd Hamilton, their biggest name, became involved in a quasi-Arbuckle style scandal that resulted in his being banned after the 1927-28 season.

3. Talking pictures hit, resulting in a significant disrupting of how Educational's comedies had been made and who was in them.

4. Educational's second biggest name, Lupino Lane, returned to England.

5. Christie's place was belatedly taken by Mack Sennett. Sound had similarly disrupted how his comedies were being made and who was in them. Sennett had also come into the late 1920's overextended by the costs of his new studio facilities.

6. The Christies returned to Educational release after three seasons at Paramount. They too were tottering economically, having spent a great deal of money on acquisition, expansion and sound conversion of what was known as Metropolitan Sound Studios, as well as a hotel and other non-film investments.

7. The Christies refinanced both Metropolitan and Christie Film Company in September 1930, and promptly saw most of the independent producers who made films there (Harold Lloyd, Harold Hughes/Caddo Company, M.H. Hoffman, Sono-Art, Al Rogell, Brown & Nagel, etc) leave.

8. By 1930, most of the companies that both produced films and owned theater chains (MGM, Paramount, Warner Bros./First National, and RKO) were releasing a full complement of short subjects. Only Fox owned theaters but did not release comedies. Educational, Pathe, Universal and Columbia were releasing short comedies into an increasingly restrictive market.

9. In 1931, Educational absorbed the failing Christie film operations and took over Metropolitan Studios. Al Christie sort of becomes what Jack White was in the 1920's - head of production, but largely an employee. By this time, almost all of Educational's short comedies other than the Sennett comedies are produced in-house.

10. In mid-1931, Educational took over Sono-Art / World Wide, a struggling company that had just taken over Tiffany Productions, itself struggling.

11. Sennett left in 1932 for Paramount, creating a large hole in the release schedule.

12. The Depression caused theaters to drop like flies.

13. The theaters that remained open increasingly relied upon double features to bring in customers. This pushed two reel shorts off programs entirely.

As 1932 headed into 1933, the entire film industry was on the brink of disaster. In January 1933, creditors forced both Paramount and RKO into equity receivership (what we would call Chapter 11 bankruptcy today). The Fox theater chain went under as well, and real estate-burdened Warner Bros. was very close to receivership. This was not just the movies' problem. Within a month, Michigan declared a bank holiday closing all of the state's banks, with many other states following directly. If it was not official before, it was now: the nation's economy was collapsing.

Too many bad things had happened for Educational to survive without major changes. In January 1933, Educational's creditors, led by Chase Bank and Electrical Research Products, Inc. (ERPI), restructured the company in an out-of-court workout.

Chase, which was also Fox's major creditor, required Educational to close all of its exchanges, laying off their staffs. Fox took over the physical distribution of the Educational films in the United States. Out of the country distribution arrangements remained in place; which is why the titles of all Educational films released after January state that they were "Distributed in the U.S.A. by Fox Film Corporation." This reduced the expenditures of one Chase borrower and increased the revenues of another.

ERPI, which was the Western Electric subsidiary that installed and financed sound equipment in theaters and studios, took over both the Educational and the Metropolitan studios in Hollywood, renaming the Metropolitan studio General Service Studios, Inc. At the same time, as part of Paramount's insolvency proceedings, ERPI took over Paramount's East Coast Studio, in Astoria, Long Island, and renamed it Eastern Service Studios, Inc. ERPI operated both as rental studios for independent producers. Educational continued in business as one of these independent producers, providing product for Fox / Twentieth Century-Fox.

Educational's loss of its studios and exchanges and the arrangement with Fox was not part of any industry plan to consolidate operations. It was a shotgun marriage, plain and simple. The industry trade press, going back to the teens, was always carrying stories of combinations of this concern with that concern. There were always rumors, and rumors of rumors. The big changes in the early 1930's were creditor driven.

Never giving up dreams of feature production, Hammons became involved in Grand National in 1937 or so, and 1937-38 was the last season of comedy production.

Frank

[Bob Birchard]

Educational's loss of its studios and exchanges and the arrangement with Fox was not part of any industry plan to consolidate operations. It was a shotgun marriage, plain and simple. The industry trade press, going back to the teens, was always carrying stories of combinations of this concern with that concern. There were always rumors, and rumors of rumors. The big changes in the early 1930's were creditor driven.Frank

While you are correct about the particulars, it was reported that the Fox-Educational exchange merger was only the first first such combination with others to follow. Creditors were pushing for this consolidation throughout the industry. Warners pushed back, as did others, and the plan went no further.

[Frank Flood]

The reason that the Chase-sponsored moving of Educational's US distribution to Fox made sense was that there was not much product overlap between them. In 1932-33, Fox's only short series were the Magic Carpet travelogues and the Movietone News. While Educational did release some non-fiction series (Battle for Life, Bray Naturgraphs, Camera Adventures, Do You Remember?, Lyman Howe's Hodge-Podge) it clearly specialized in comedies (Andy Clyde, Baby Burlesks, Gleason's Sport Featurettes, Great Hokum Mystery, Ideal, Mermaid, Moran & Mack, Tom Howard, Torchy and Vanity) as well as Paul Terry-Toons cartoons, musical reels (Operalogues, Spirit of the Campus) and Broadway Gossip celebrity reels. The Fox-Educational product combination gave Fox a complete shorts program.

Although the trade press saw the Fox - Educational as a harbinger of more to come, who else could combine? Fox, Warner, RKO, and Paramount had gone into receivership or were close to it because of their heavy real estate debt. They had the largest theater chains, had borrowed the most money to build those chains, and when revenues dropped, and real estate values plunged (sound familiar, folks?) these companies were in trouble. Universal was also shaky, not because of theater holdings, but because of zigzagging between expensive pictures that did not make much money and cheap pictures that did not make much money and could not compensate for the losses of the expensive pictures. MGM was in good shape, not having any losing years, because of both superior product and much smaller theater holdings. Columbia was in pretty good shape because it had no theaters, and made a lot of small films and a handful of big films that were, in general, reasonably profitable. The minors (Mascot, Monogram, etc,) were in such trouble that their lab company foreclosed on a slew of them, and combined them to form Republic. There is nothing here that suggests any logical combination option. Why would MGM or perhaps Columbia want to deal with the other debt-ridden majors? How could the companies in financial straits have confidence that their competitors would do a good job of distributing their films? The RKO, Paramount, and Fox theater receiverships were designed to shed debt and reorganize, which they did, with production, studios and theater chains substantially intact.

The interaction between Chase, ERPI, Educational and Fox can be explained by how receiverships and bankruptcies work. There are two types of creditors in any insolvency situation: secured and unsecured. A secured creditor has taken assets owned by the debtor as collateral for the amount owed. The mortgage on your house is a secured loan, as is your car loan. An unsecured creditor is owed money but does not have any collateral securing that loan. Your credit card balance and your gas bill are unsecured debts.

The secured creditors run any insolvency (or pre-insolvency) proceeding where the value of the debtor's assets is less than the amount of the secured debt. In such a situation, if the secured creditor were to simply liquidate the collateral, the game is over, the business is shut down, the secured creditor takes less than its total indebtedness, and no one else gets anything. If there is some value remaining in the business, the secured creditors may attempt to restructure the debtor's business, with the hope that it will get paid more of its debt that it would get from a liquidation. All the other interested parties go along for the same reasons.

From the moves Educational made in January 1933, I would guess that ERPI had a security interest in Educational's Hollywood studios (and Paramount's Astoria studio) and that Chase had a security interest in the balance of Educational's assets. Educational lost its studios, but also lost the expense of paying real estate loans and maintaining the properties.

As to Educational's exchange business, since Chase Bank appears to have been the lead secured creditor on non-real estate loans, and all interested parties wanted to keep Educational going, they would do what Chase wanted. Since Chase was in a similar position with Fox, which was itself teetering on the brink, it would be useful to think of Educational and Fox as wholly owned, but separate, subsidiaries of Chase. Chase could reduce the costs of one of its subsidiaries and increase the revenues of another by closing the Educational exchanges and having Fox distribute the Educational-supplied films.

The loss of its exchanges accelerated Educational's conversion to a film producer. Even in 1932-33, Educational released films from fourteen different independent producers in addition to comedies it produced directly. By 1933-34, many fewer outside producers were involved and significant in-house production had moved to Astoria. Near the end, the only outside producer would be Paul Terry.

Frank

[Ed Watz]

7. The Christies refinanced both Metropolitan and Christie Film Company in September 1930, and promptly saw most of the independent producers who made films there (Harold Lloyd, Harold Hughes/Caddo Company, M.H. Hoffman, Sono-Art, Al Rogell, Brown & Nagel, etc) leave.

While researching the history of Educational Pictures for the Keaton book, I just want to point out that Harold Lloyd did not abandon Metropolitan Studios after 1930; he produced both MOVIE CRAZY (1932) and THE CAT'S PAW (1934) on that lot.