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22 HARVARD BUSINESS REPORTS
Another problem requiring attention was the lack of control over the exchanges operated by the members. It was becoming increasingly apparent in the industry that distribution was a function which required centralized control and uniform policies. It seemed that without that control no company could hope to develop its own trade-mark, establish its stars and pictures in the mind of the public, or even gain a reputation for its service and methods of dealing with exhibitors. No national advertising could be conducted by a company as decentralized as was First National Exhibitors' Circuit, Incorporated.
Having the solution of these and other problems in mind, the stockholders of the company in 19 19 formed Associated First National Pictures, Incorporated. This company assumed the activities and acquired the stock of the old company, placed its own stock in a voting trust, and centralized the control of the various exchanges under its head office.
The new company took over the exchanges then being operated by the franchise holders and organized them into a national system of exchanges under the control of the head office of the company. It obtained control by purchasing the assets of the exchanges on appraisal. It then placed the employees of the various exchanges on its pay roll. In this way, the control of the individual exchanges was removed to Associated First National Pictures, Incorporated, which in turn was owned and controlled by the franchise holders through ownership of stock. All exhibition contracts were required to be approved by the company. By its approval or rejection the company could control the conditions under which its pictures were being shown and the prices at which they were sold.
Stock in the new company was issued to franchise holders in the same proportions and in the same manner as the stock in the old company had been issued. Upon the formation of the new company, however, it was desired to protect the ownership of the stock so that competing distributors could not buy blocks of stock and eventually obtain control of the company. All the stockholders, therefore, placed their stock in voting trust with a board of five trustees selected by the board of directors. In this way, efforts of outsiders to buy into the company were blocked for a time.
The method by which the new company allocated the prices to the exchanges differed from the method used formerly. When a new picture was purchased by the company it sent assessment