Engines That Move Markets (2nd Ed)

by Alasdair Nairn

  Propaganda and confidence

  Edison continued a press offensive on the success of his work on electric light and its enormous potential. At the same time, he was working feverishly to try and overcome the technical obstacles with which he was faced. It was an extremely taxing time for him since the work pressure was combined with his own illness and an extremely difficult pregnancy for his wife. If this was not enough, one of his rivals, a gentleman called William Sawyer, visited Western Union and contended that he had progressed further than Edison in terms of improving filament technology. The board was sufficiently concerned to suggest that Sawyer’s patents should be bought out, a suggestion which raised Edison from his sickbed in fury.

  Although Edison decried the efforts of Sawyer, he did admit that he had not researched the work done by others. In order to allay the fears of the board, a researcher called Thomas Upton was hired to investigate any potential threats from existing patents on electricity and incandescent lamps. Upton reported that what Edison had done was indeed new, even if various components drew on existing knowledge, and that Edison alone had understood the critical role of high resistance in creating a filament that worked. Despite this endorsement, the growing cost of Edison’s research worried the directors sufficiently to make them ask for a further presentation before more funds were committed.

  The importance of maintaining confidence with a powerful and convincing presentation was not lost on Edison, and he put on a performance of theatrical proportions, which led to a new contract for Edison himself and the release of new funds. The technical component of the presentation consisted of two lamps; the first a modified form of the Jablochkoff Candle. The second used a spiral of non-fusible metal as the filament. In other words, the presentation relied on Edison’s persuasive skills rather than on an active demonstration of technological advancement. The fact that his audience was financiers, a group of people not typically blessed with in-depth knowledge of technology, undoubtedly helped. Edison continued to raise expectations through the use of the press.

  The scientific community was less impressed. Much of what Edison seemed to be saying was contrary to established wisdom. Experts like William Siemens, for example, said: “Such startling announcements as these should be depreciated as being unworthy of science and mischievous to its true purpose”.³⁶ There were damning rebuttals of Edison’s claims by other contemporaries. “[That the] same wire that brings the light will also bring power and heat”, said one, was “sheer nonsense” and indicated that Edison had the “most airy ignorance of the fundamental principles both of electricity and dynamics”.³⁷ The criticism from the scientific community stemmed in part from pique and also from Edison’s habit of making grand unsubstantiated announcements through the press rather than through formal scientific avenues. The cutthroat nature of the race to be the first to announce advancements no doubt also contributed to the vehemence of the attacks. Nevertheless, aspects of the attacks were accurate: Edison probably did not understand, in a pure scientific sense, some of the fundamental principles as accepted at the time. This ignorance was a substantial contributor to his refusal to accept the impossibility of certain things which his experience suggested to him could be achieved. Edison himself said many times that for this very reason he had been saved from the dangers of accepting such ‘impossibilities’. Edison’s faith in his own ability to solve problems sustained him, and his confident manner would sustain investors through such attacks.

  4.7 – Doubts creep in between prototype and viability

  Source: New York Times, 13 November 1879.

  History records that Edison was eventually successful in confounding his critics and developing the electric light bulb. It also records that the Edison Electric Light Company was eventually merged with other Edison concerns to become the Edison General Electric Company, which itself merged with the Thomson Houston Company to form General Electric (GE).

  Edison had to resolve two issues for the incandescent lamp to be successful. Firstly, he had to overcome the problem of filament combustion. That is, the filament material’s melting or combustion point has to be well above light-producing temperatures. He did this through innovation in both the glass-blowing and vacuum-forming processes. Secondly, he had to come up with a dynamo or generator suitable for powering the system of lamps. It is in this latter area that Edison was overtaken. It was not that he failed – he did successfully produce a direct current generator that could power his lighting system. Rather, he was overtaken by George Westinghouse, who adopted an alternating current (AC) system able to distribute power over longer distance with less leakage and hence much more efficiency. Whether powered by genuine concerns over safety or by an inability to accept that an alternative system could be better, Edison resisted adopting the AC system until it was effectively forced upon him. It is interesting that Edison, who continually proved that through perseverance practical problems could be overcome – most notably expressed in his famous quotation: “Genius is one per cent inspiration and ninety-nine per cent perspiration” – was unwilling to accept that this dictum might also apply to others.

  Edison began the search for a suitable electric generator by attempting to adapt the one developed by William Wallace and used in the demonstration of arc lighting that Edison had disparaged. Edison initially primed the press with the statement that with “[f]ifteen or twenty of these machines recently perfected by Mr Wallace, I can light the entire lower part of New York City”.³⁸ Sadly Edison was wrong in this public assertion. Within three months, he was informing the same newspaper that every problem had been solved with the lamp and the only remaining issue was to find a viable power source – the Wallace generator having proven ill-suited. Eventually this problem was seemingly overcome when Edison’s laboratory built or replicated the work of two Philadelphia scientists (Elihu Thomson and Edwin Houston) to solve the main generator problems. In resolving the practical problems and getting to a stage where commercial contracts in 1881 could be entertained, Edison had spent well over $130,000 (or $10m in current terms). And this was only the research process. The development part was only just beginning and this would prove just as tortuous as the initial stages.

  On-off enthusiasm in the markets

  Claims and counterclaims passed back and forward in the press. Since the probability of a successful outcome was unknown, investors became affected by prevailing sentiment. In the early days, the extent to which incandescent lighting could actually be achieved – let alone compete with electric arc or gas lighting – could not have provided a backdrop of financial security. Such were the mood shifts that in 1879 the directors of the Light Company were joking in black humour as to whether or not they would be able to find anyone gullible enough upon whom they could unload their stock.³⁹ The history of the movements in the share price of the Edison Electric Light Company is somewhat patchy; it was not a heavily traded security and the available information comes only from records of private transactions. The picture appears to be one where the initial excitement surrounding Edison’s progress lifted the shares from a low of under $200 to well over $3,000, a level which was not sustained for any meaningful time. The share price then moved sharply back down as the realities of the timescale of development and profitable implementation became clearer.

  4.8 – Perception and reality not always the same thing: Edison Electric share price

  Source: Thomas A. Edison Papers, Rutgers, The State University of New Jersey. Thomas A. Edison Papers Microfilm Database, part I (1850–1878), University Publications of America. New York Times, 16 January 1880. R. Conot, Thomas A. Edison: A Streak of Luck, New York: De Capo Press, 1979, p.217.

  So far as the share price of gas companies was concerned, the reaction was almost the mirror image. The initial share price response was collapse. Editorials in the major newspapers forecast the imminent demise of the gas industry and share prices fell precipitously. The Manhattan Gas Light Company share price fell by over 20%, that of the M
etropolitan by 25%, and the Harlem Gas Light Company by 45% over a period of days.

  These falls, which happened in response to Edison’s announcements, were only a small part of a bigger picture. The share price chart of Manhattan Gas shows how the market crash of 1873 caused a share price decline before a strong recovery. Arguably the strength of the gas company’s monopoly position helped the share price as part of a ‘flight to quality’ after the crash. Not much later, the positive sentiment surrounding arc lighting began to have an effect, and the share price of Manhattan Gas began to slip in both absolute and relative terms.

  4.9 – On the way out: the eventual share price of Manhattan Gas relative to US market

  Source: Commercial and Financial Chronicle.

  Eventually the gas companies were forced to react to the development of electrical light by merging. In 1884, the New York, Manhattan, Metropolitan, Knickerbocker and Harlem Gas Companies merged to form the Consolidated Gas Company of New York. Later, many of the gas and electrical distribution companies merged to try and avoid further competition. The San Francisco-based Pacific Gas and Electric Company was one example, but many others can be found from Cincinnati to Chicago. The merger period caused some excitement before share prices fell again. A slight recovery (relative to market movements) then followed, but the peaks recorded before the advent of electric light were never again reached. This was the longer-term picture; it does scant justice to the ebb and flow of opinion on the future prospects for the incandescent lamp. The gas companies would lose their main market to electricity. They were, however, in a position to diversify away from lighting where they were at a technological disadvantage, and into heating and cooking where the position was a much more even one. Thus the massive infrastructure of gas pipes etc. did have future cash flow to sustain it and the companies were able to survive and in some cases prosper. The technological defeat was only a partial one.

  The immediate reaction of share prices notwithstanding, the apparent lack of success to back up Edison’s extravagant claims for a period left him a soft target: “Edison is not a humbug. He is a type of man common enough in this country – a smart, persevering, sanguine, ignorant show-off American. He can do a great deal and thinks he can do everything.”⁴⁰ His penchant for talking directly to the press was criticised as part of his extravagant opinion of himself, and the scientific and commercial content of his work came under scrutiny.

  The following article is noteworthy in its own right. Not only does it display the understandable scepticism of the time, it also must deserve a place in history as a scientific critique which simultaneously dismisses both the light bulb and the telephone as practical technological innovations!

  4.10 – Doubly dammed: the telephone and electric light dismissed in an article

  Source: New York Times, 16 January 1880.

  Even when Edison successfully demonstrated his illumination at his Menlo Park research centre, a substantial part of the press refused to believe it was anything other than a further publicity stunt. In this they were joined by enemies of Edison. William Sawyer used his own lack of success in overcoming the practical problems to argue that Edison could not have achieved what he claimed. A particularly damning piece was published in the Saturday Review in January 1880 shortly after Edison’s New Year’s Eve demonstration: “Three times within the short space of 18 months he has had the glory of finally and triumphantly solving a problem of worldwide interest. It is true that each time the problem has been the same [but] there is no reason why he should not for the next 20 years completely solve the same problem of the electrical light without in any way interfering with the interest or novelty.”⁴¹

  Eventually Edison prevailed, and the New Year’s Eve drama and further demonstrations shifted the attacks from the success of the lamp to whether or not it was his invention. For Edison and his company the next step was to try and demonstrate commercial viability. Once again, this demanded his powerful presentation skills. Edison had focused on providing power in a densely populated urban area. This would minimise the power loss by reducing the distances current would have to be supplied from the central generator. His DC generators did supply enough power for his lamps but could not overcome the leakage problems endemic with solely-DC power supply.

  Edison’s corporate ventures

  The Edison Electric Illuminating Company was incorporated in December 1880 with the purpose of funding the development of Edison’s lighting system. After the research work, the next step for Edison was a commercial demonstration. The US site he chose was Lower Manhattan, an area which included within its boundaries the financial district, the New York Stock Exchange and many of the financial and banking powerhouses of America. This was the scene of one of Edison’s earlier triumphs – the invention of the stock ticker machine. Perhaps as a consequence, his plan was enthusiastically received by both the press and his financial backers.

  Edison was to construct a central generating plant which would supply the electricity for his lighting system, but before he could do this he had a number of obstacles to overcome. In order to lay the necessary power cabling he had to obtain the permission of the New York City Board of Aldermen. The aldermen had to be persuaded of the merits of electricity over the gas lighting system with which many of them were comfortable, and allow the streets to be dug for cables for this new untried venture. Edison tackled the problem with his normal aplomb. The aldermen were provided with a discourse on the technical aspects of his system at his Menlo Park laboratory. When boredom was obviously setting in, Edison clapped his hands and the room was illuminated by incandescent lamps to reveal tables groaning with food provided by New York’s Delmonico’s restaurant.

  4.11 – Stepping up the propaganda barrage: extract from Edison Electric ‘news’ bulletins, designed to maintain confidence

  Source: Edison Electric Light Company Bulletins 2 (7 February 1882) and 6 (27 March 1882).

  The Edison Electric Illuminating Company was granted the franchise in April 1881. This company licensed its technology from Edison Electric and after many practical problems, innumerable missed deadlines and an expenditure of $480,000 (triple the original budget and equivalent to roughly $38m today) the Pearl Street Station and its distribution cables were completed. Operation began on 4 September 1882 and by the end of that year the company served a district of one square mile with just over 1,000 lamps. Twelve months later it had grown to service over 500 customers, with over 10,000 lamps. Edison sought to counter the negative press regarding his progress by circulating ‘Bulletins’ of press cuttings, which recorded any favourable comment on his work and any negative comment on gas lighting (see figure 4.11). These bulletins were passed to agents of Edison Electric and to the press.

  In the early phases, lamps which cost $1.40 to manufacture were sold at $0.40. The simple reason was that they had to be held at competitive price levels until such time as the industry was established and the infrastructure built out sufficiently to allow economies of scale to kick in. This loss-making price was held constant for an extended period and it was a number of years until the production cost finally fell to $0.22 and both positive cash flow and profits could be recorded. This was achieved only after capital expenditure exceeding $50m (nearly $4bn). The Pearl Street Station sold electric lighting below cost for an extended period and operated at a loss until 1890 when it finally turned profitable, only to suffer the ignominy of being destroyed by fire.

  In the wider industry context, though, it was an unqualified success. Although the lack of profitability made the Edison company wary of investing further and bankers such as J. P. Morgan were concerned by the extremely heavy capital cost and the lack of an adequate return to justify it, others were more willing to invest on the perception of future profits to be earned. Perhaps the explanation was public perception versus the private financial knowledge of the participants. Whatever the reason, by June 1882, 67 Edison plants had been constructed under franchise and utilities in cities as f
ar apart as Detroit, New Orleans, Boston and Chicago. Within a further four years there were over 700 stations powering over 180,000 lamps in the US alone.

  The Edison companies

  Edison Electric Light Company

  The annual accounts of the Edison Electric Light Company are not particularly revealing, and even between the years of 1885 and 1886 substantial changes took place in their structure which serve to obscure the underlying picture. In 1885, items which would normally be taken as expense items on the profit-and-loss account were capitalised on the balance sheet. Presumably the absence of meaningful profits in the start-up phase influenced the decision to treat them in such a manner. By 1886 some of these expenses had been removed to a separately shown profit-and-loss account. The asset side of the balance sheet had been maintained largely by including, under stocks and bonds, the Edison railway company and higher values for the Electric Illuminating companies. Edison Electric was effectively a patent holding company, so to the extent that new licences were granted in return for stock, it would have been legitimate to increase assets on the balance sheet accordingly. This, though, would not account for the change in treatment year to year. It also means that the assets on the balance sheet and profits would largely be at the discretion of the company, since the treatment of experimental expenses continued to be capitalised. Furthermore, the patents themselves had a limited lifespan and would require to be depreciated over the longer term – and, as the reports indicated, protection from infringement was also required in the shorter term, necessitating a litigation reserve.