Engines That Move Markets (2nd Ed)

by Alasdair Nairn

  – Telephony, 20 February 1909

  Unfortunately for the householder reported above, the plea for freedom from unsolicited advertising was to fall on deaf ears with the practice simply being extended and refined during the century which followed.

  Music on the telephone

  In the case of the telephone music service, it was first set up in Delaware in 1909 by a company called the Tel-musici Company. The service involved the subscriber calling in and requesting the music to be played. The operator then placed the music on the phonograph and the subscriber switched on the loudspeaking equipment attached to the phone. The service cost three cents a piece and seven cents for grand opera! It was received with much initial enthusiasm before the technology of music reproduction and the radio made it redundant:

  “Much of the success of the system is due to the unique and remarkable loud speaking transmitter… [and] the fact that the cost of installation is very low and that the special receiver and horn attached to it can be mounted in any room however remote from the telephone itself, thus enabling the subscriber to place it where it will be least conspicuous and in the way. It will also be appreciated that another point which strongly appeals to prospective subscribers is the fact that no initial expense is necessary on his part and that all he has to do in order to have the most entertaining of music, whilst at the same time without venturing out into cold or inclement weather, is merely to step to his telephone and notify the central office.”

  – Telephony, 18 December 1909

  3.9 – The opening of a new communication channel: advertising and entertainment uses for the telephone

  Source: Western Electrician, 12 September 1903. Telephony, 20 February 1909 and 18 December 1909. These quotes were found on an excellent website detailing the early history of the radio: earlyradiohistory.us

  * * *

  20 C. Cerf and N. S. Navasky, The Experts Speak: The Definitive Compendium of Authoritative Misinformation. New York: Villard, 1998, p.227.

  21 H. N. Casson, The History of the Telephone, New York: Books for Libraries Press, 1910, p.59.

  22 Ibid., p.48.

  23 J. Francis, A History of the English Railway: Its Social Relations and Revelations 1820–1845 (originally published 1851), New York: Augustus M. Kelley, Reprints of Economic Classics, 1968, p.280.

  24 Casson (1910), p.59.

  25 L. Coe, The Telephone and Its Several Inventors, Jefferson, NC: McFarland & Company, 1995, p.76.

  26 Casson (1910), p.89.

  27 J. Brooks, Telephone: The First Hundred Years, New York: Harper & Row, 1975, p.77.

  28 Ibid., p.88.

  chapter 4

  Lighting Up

  Edison and the electric lamp

  “When the Paris Exhibition closes electric light will close with it and no more will be heard of it.”²⁹

  Erasmus Wilson, professor at Oxford University, 1878

  “[Edison’s ideas are] good enough for our transatlantic friends… but unworthy of the attention of practical or scientific men.”³⁰

  Report of a committee set up by the British Parliament to look into Edison’s work on the incandescent lamp, c. 1878

  The search for illumination

  One of the main scientific quests of the 19th century was the search to find a cheap, effective form of illumination. The Industrial Revolution had generated increased levels of economic growth, population and wealth creation. With them came increased demands for better working and living conditions. Chief among these was the need to improve the standard form of lighting, which was a wick set in animal fat. The candle had been the chief source of light for centuries, and while various qualities of fat were used – including the fat from sperm whales for the high-income end of the market – little progress had been made since ancient times in finding an alternative source.

  The demand was certainly there; so great was it that the schools of whales that once roamed the Atlantic had been hunted out of existence or forced away from their traditional feeding grounds. Whalers had to range as far as the Pacific in search of their prey. As a consequence, supply tightened and costs climbed. Whale oil prices rose to $2.50 per gallon (almost $400 a gallon in today’s terms), promising high potential returns for viable alternatives. In any case, the light produced by these candles was not particularly bright, it was noxious and the danger of fire was ever-present. What was required was a low-cost light of sufficient brightness to complement the other huge advances in production, transport and communication that accompanied the Industrial Revolution.

  At the time there appeared to be two distinct market segments. First, there was lighting for the home, hitherto satisfied by the candle, and second, there was lighting for communal areas, whether these were the workplace, public streets or buildings.

  In the first segment, the main early alternative to animal-fat-based lamps was camphene, a highly flammable turpentine-based oil. While an excellent light source, camphene’s flammability made it a constant fire hazard. Its unfortunate habit of exploding undermined its claim to be the lighting of choice in the family home. A more promising source was coal gas, also known as ‘town gas’, which was distilled from coal and piped through urban areas to provide both street lighting and domestic illumination (for those who could afford it). It was reasonably effective, but the cost made it prohibitive for all but the wealthy. The flammability and illuminating properties of coal gas had been known since ancient times, but its development as a practical source of light on any scale had to wait for progress in the science of chemistry. The study of hydrocarbons had long attracted many scientists as a potential fertile ground for producing a suitable high-quality illuminant. Although an expensive form of lighting, town gas existed as a profitable monopoly. This in turn provided an incentive for the study of other hydrocarbons as substitutes for camphene and town gas.

  Most notable among the hydrocarbons was oil. The study of oil at this point was primarily driven by the need for light rather than in anticipation of its use as a propulsion fuel. In 1854 Dr Abraham Gesner applied for the US patent on the process of extracting and manufacturing a ‘new liquid hydrocarbon’, which he named ‘kerosene’, from the Greek words keros meaning ‘was’ and elaion meaning ‘oil’. Meanwhile, in Scotland, James Young had also produced a refining process based on cannel coal, which was used to produce ‘paraffin’. Refining of oil products was not an entirely new process. Oil-based products had been used in various forms for many centuries, stretching back to Babylonian times. In Europe, kerosene equivalents were common, particularly in Eastern Europe and in Romania, where crude oil was extracted from hand-dug shafts and refined into a lighting fuel. In mid-19th-century Vienna, kerosene was a common commercial product. In Eastern Europe in the mid-1800s, it was estimated that annual crude oil production numbered somewhere around 36,000 barrels, minuscule compared by today’s standards but a meaningful figure at the time.

  The real significance of the ‘discovery’ of kerosene was that it stimulated the search for rock oil, or as it is now known, crude oil, which many then saw as a potentially low-cost alternative source for the refining and production of kerosene. The commercial logic was that kerosene was capable of replacing both camphene and town gas as the main source of public and private lighting. That assessment was correct. Kerosene was to capture enough of the residential market for lighting to provide an extremely high return on capital for an extended period. It took more than 40 years from the development of the Pennsylvania oilfields before electricity could be produced sufficiently cheaply to replace kerosene as the dominant source of supply in the residential lighting market.

  Gas: a comfortable monopoly

  In the early part of the 19th century, Britain was the centre of industrial innovation, the pre-eminent industrial power, and (on a relative basis) the most stable society. It was therefore in Britain that the lighting industry had shown the greatest development. The Gas Act of 1847 paved the way for the gas lighting and later the electric light indus
tries. The Act allowed for the right to excavate streets to allow the building and repair of gas pipelines. It therefore signalled official recognition of the role that private companies had played in supplying urban areas with town gas from a central source over the previous 50 years.

  In Britain, the first meaningful demonstration of the potential for gas lighting was made by a German national, Albert Winzer, who promoted its potential by lighting the Lyceum Theatre in London. Winzer, who changed his name to Winsor in order to avoid any nationalistic prejudice, was able to obtain parliamentary approval in 1812 to establish the London and Westminster Gas Light and Coke Company, a joint stock, limited liability company. Winsor’s lack of engineering and financial acumen led to his replacement by Samuel Clegg. Clegg learned his expertise from William Murdoch, the chief engineer of Boulton and Watt, the company formed by steam-engine inventor James Watt. By early 1816, more than 25 miles of gas pipe had been laid. A London and Westminster employee, Friedrich Accum, wrote what was to become the bible of the industry: A Practical Treatise on Gas-Light (London, 1815). In helping disseminate the knowledge necessary to allow gas production, supply and lighting, this book greatly assisted the early development of the gas industry in the USA.

  4.1 – People don’t like monopolies

  Source: New York Times, 25 October 1878.

  Typically the gas companies were awarded fixed-term contracts with exclusive rights to supply gas lighting. The contracts normally specified a fixed return on investment. This in turn was used to determine pricing. This regime – a monopoly with fixed pricing – had an inevitable outcome. As companies were protected within their region from competition, there was no incentive for them to increase efficiency and many soon became complacent. As the gas companies’ profitability grew, so inevitably did consumer resentment. This was reflected in the press of the time. Perhaps public opinion was paid little heed by the gas companies because of the apparent protection provided by their existing supply network. Perhaps the legislative framework sustained the belief that their domination of the municipal/commercial part of the lighting market would endure. Perhaps the companies simply did not believe that any form of electric light could replace them. Whatever the reason, it was not long before this complacent stance had to be rethought. The abuse of the gas companies’ monopoly position fostered the desire for new sources of lighting.

  In the United States, Baltimore was the first city to employ gas lighting in 1816, followed by New York in 1825. In the early years the development was heavily dependent upon knowledge and technology from Britain. As in Britain, gas lighting was only commercially viable for a small proportion of the population. In 1823 the New York Gas Light Company (NYGLC) raised the considerable sum of $200,000 ($35m) simply to begin construction of its gasworks. By 1825, gas was being produced and within eight months over 1,700 burners had been installed in residences, businesses and public buildings.

  Most notable was the lighting of Broadway, which gained the name of the ‘Great White Way’ as a consequence. The cost of obtaining this reputation was considerable. The city had to purchase lampposts at $24 ($4,000) each, with an annual gas charge of $8 ($1,300). Despite the cost, gas lighting was far better than the whale-oil lights it was replacing; although demand was limited by the cost, it was still sufficient to cause a series of new gas companies to be formed. The Manhattan Gas Light Company sought the franchise for that area of New York, and this was swiftly followed by the other major urban centres of the USA. Despite this, the expense of gas lighting and the monopoly pricing policies adopted meant gas would service only a small segment of the lighting market. This was to leave the way open for kerosene to appear later and take away not only the whale-oil segment of the public lighting market but also to capture a share of the residential lighting market for the increasingly wealthy and numerous middle classes.

  Competition within the gas industry was broadly restricted to areas where there was no exclusivity clause. In these areas, competition was intense and, more often than not, dangerously unprofitable. The losses in these competitive areas sometimes threatened the existence of companies that attempted to extend beyond the monopoly boundary. Within the monopoly areas, pricing was regulated by charter, but companies otherwise had freedom to operate as they saw fit. Technological advances – for example, new forms of gas production and piping – helped reduce costs, so for those with privileged monopoly positions, the returns were excellent. Most companies made some price reductions to assuage public opinion, but such was the strength of feeling against the companies that electrical light, when it finally appeared, was welcomed with open arms. The extent of the feeling towards gas pricing can be gauged by fact that in New York and Philadelphia enterprising citizens bred and trained dogs specifically to bite gas meter inspectors and prevent the meters being read. These dogs could be sold or leased to cover the appropriate meter-reading period!

  4.2 – Avoiding monopoly pricing: canine protection from gas bills

  Source: New York Times, 22 January 1885.

  The development of electric light

  Just as the use of hydrocarbons for lighting can be discerned in records of ancient times, so too can the knowledge which underpins electricity. The discovery of electricity can, for example, be traced back to 600 bc and the observation by Thales, one of the seven sages of Greece, that small bodies of amber attract. Alternatively one can move forward to 1269 to the description by the French crusader Peter the Pilgrim of the magnetic qualities of lodestone (a natural iron oxide). In the 1600s the term ‘electricity’ – derived from the Greek elektron (meaning amber) – was used in the first English book of physics to describe the attraction. However, it was another 200 years before the big breakthrough appeared.³¹ In 1831, Michael Faraday – building on the work of scientists such as Benjamin Franklin, Alessandro Volta, Charles de Coulomb and André-Marie Ampere – discovered electromagnetic and magnetoelectric induction. Put simply, this was the basis of the dynamo and hence the electric motor; and it was this step, more than any other, which transformed the study of electricity from a science of observation to one of production and usage. Faraday’s discovery was the foundation of modern electricity, and set out the principles by which electrical power could be generated.

  With a potential power source available, early interest naturally revolved around the creation of a new lighting system. The early developers of electric light followed two distinct paths: electric arc lighting and the incandescent lamp. The former made much of the early running. In 1848 a demonstration of the carbon arc lamp had been made at the National Gallery in London. Strictly speaking, this experiment proved unsuccessful, as the fuel cells were unable to provide sufficient power at reasonable cost.

  But, in a broader sense, the early demonstrations were a success. They seized the public’s attention and raised the exciting prospect of a revolution in lighting. Between 1856 and 1870, a series of lighthouses in Britain were fitted with carbon arc lights, and further innovations in electric lighting were not long in coming. In 1878, lights were strung between Waterloo and Westminster Bridges in London, and a soccer match was illuminated at Sheffield’s Bramall Lane.

  In economic terms, this nascent electric light industry was competing against an incumbent gas lighting system, which had substantial sunk cost and was therefore bound to be difficult to dislodge. Any new company seeking to displace gas lighting needed to show the clear advantage of its product if it was to be successful in raising funding.

  Arc lighting was the first type of electric light to be taken up and promoted as a commercial alternative to gaslight. The principle of arc lighting had been demonstrated by Humphry Davy as far back as 1808, when a brilliant arc light was produced by bringing together two pieces of coal connected to a battery. Further development allowed the arc light to be used in other demonstrations, for example at an 1844 production at the Paris Opera. However, arc lighting technology was inhibited by the huge cost of batteries and the noxious fumes produced by combust
ing carbon.

  In the 1860s, Alexander de Lodyguine lit the St Petersburg dockyards with arc lighting that he immersed in an inert gas to retard consumption. But it was his fellow Russian, Paul Jablochkoff, a telegraph engineer working in Paris, whose lamps first grabbed the world’s attention. The ‘Jablochkoff Candles’ used a cluster of carbon rods in each of a group of lamps. This allowed the continuous production of an electric light of much sharper quality than the existing gas lamps. These lamps were used to illuminate the Grands Magasins du Louvre in Paris in 1877. In 1878 commercial trials were run in Britain at Weston-super-Mare, where six Jablochkoff Candles were run for 96 hours at a cost of £40 9s 5d (or $4,500 in today’s figures). This was more than two and a half times the cost of the equivalent gas lighting. It meant that arc lighting was still substantially more expensive than gas, which was already prohibitively expensive for wide-scale use. In the USA, Charles F. Brush had developed a different, though equivalent, system to Jablochkoff, and installed it in John Wanamaker’s department store in Philadelphia. The light met with much enthusiasm and a number of orders for its installation. These orders were not restricted to the US; for example, the British Navy ordered a system from the Brush Company. Given the degree of economic nationalism in government at the time, this speaks highly for the regard Brush’s technology commanded.