The excitement surrounding the work of Marconi and the ease with which he was to raise funds in America had the effect of drawing the attention of numerous speculators. The series of articles published in Success Magazine by Frank Fayant in 1907 discussed the excess created by buoyant market conditions and focused on the radio in general, and the activities of De Forest’s associates in particular. The strategy of these promoters was relatively straightforward. The first step was to form a company with some apparent claim on radio technology and allocate shares among themselves. The second step was to raise public awareness and draw attention to the company and its apparent prospects. The third step was to then sell shares to the public at whatever share price could be generated, preferably a share price rising in steps to allow continuing interest and shares sales.
Accomplishing the step of company formation was a relatively simple. So far as acquiring an interest in radio technology was concerned, it was not necessary that either the patents or the staff be credible in a scientific or commercial sense, only that they could be promoted to the general public. Indeed, since Marconi himself came under fire from certain quarters, who could gainsay any alternative companies? The second step required publicity. Just as Marconi gained publicity from public demonstrations, so too did his stock market competitors. The De Forest companies were the most credible alternatives, but the difference was that they relatively quickly became vehicles the primary purpose of which was the raising of funds rather than the creation of a viable business.
The history begins with both De Forest’s original fundraising efforts and those of American Wireless Telephone and Telegraph. The latter, like most radio companies, was heavily promoted using the success of the Bell Companies as an example. One of the subsidiaries of American Wireless Telephone and Telegraph was Federal Wireless, which covered the eastern states. This company was heavily promoted by a Mr L. E. Pike, who had cut his teeth launching oil and mining companies when that was the particular vogue. Federal was quickly absorbed into Consolidated Wireless on a share-exchange basis. Consolidated then had a capital reduction before taking over International Wireless and itself being absorbed by the American De Forest Wireless Telegraph Company. The financial consequences of this convoluted chain of events was spelled out by Fayant:
“$50 (real money) bought $50 worth of Pike’s wireless, January, 1902
= $50 (certificate) watered Consolidated, February, 1902;
= $10 (certificate) unwatered Consolidated, October, 1902;
= $10 (certificate) International, February, 1903;
= $10 (certificate) American De Forest, January 1904;
= $7.50 (company’s money) subscription price of De Forest, St Louis office, October 1906;
= $6.00 (company’s money) subscription price of De Forest, New York office, October 1906;
= $0.85 (real money) cash market value.”
The final three prices are explained by Fayant as follows:
“what these De Forest shares are now worth is something of a mystery. The De Forest home office is in St.Louis, and from this office notice was recently sent me that the price of the common stock has been advanced to $7.50. The manager of the New York office two weeks later denied that any De Forest stock was for sale at this price, and continued to offer it at $6. Meanwhile several brokers in New York and Philadelphia have been offering De Forest stock around eighty-five cents a share… Meanwhile, I am in receipt of this appeal from American De Forest promoters:
‘There is not enough stock to go around. Consider the matter carefully. You have the opportunity. Will you grasp it “at the flood tide” (now) and ride on to the shore of plenty, high and dry above the adversities which often beset old age, to the land of our dreams, where the wealth is unbounded and every wish gratified, where comforts admit of enjoyment and wealth admit of opportunities for yourself and those you love? Or will you hesitate and doubt, and let the chance go by, to remain in senile dependency upon the bounty of others? Think! It is time for you to decide! Think well! Buy! Do it now!’ ”
The statements of opportunity from American De Forest were little different from those that had accompanied its previous incarnations. Consider the extract below from the prospectus of the International Wireless Telegraph Company. Commercial reality rarely seemed to intrude in the marketing of promoters or the perceptions of investors:
Prospectus of The INTERNATIONAL WIRELESS TELEGRAPH COMPANY
How Fortunes Have Been Acquired in Industrial Enterprises Embodying Uses of Electricity
“Some few years ago the General Electric Company was capitalized at $33,000,000, and established factories for manufacturing electrical equipment. Its failure was predicted, its methods were openly derided and the stock for a considerable period was to be had at prices varying from $28 to $34 per share, the par value of which was $100. Within less than five years it has paid such handsome dividends that it has peaked at $270 per share, and predictions are frequently indulged in that it will exceed Standard Oil within a few years, or $850 per share.
“The history of the Bell Telephone stock is almost a household story. It went begging at first for chasers at 15 cents per share, and was sold at even less, and today that same stock is sold at $4,000 per share.
“There is no reason why International Wireless Telegraph Company’s stock will not share in even a more phenomenal increase; it has no necessity for erecting costly wire circuits, developing expensive conduits or purchasing franchises at an exorbitant figure. The public is eagerly awaiting a practical application, and it has only to manufacture its instruments, install its stations, and the message will flash to every quarter of the area controlled by its patents and franchises with even greater certainty than if sent by wire or cable, for no fallen trees can interrupt its business, no blizzard or flood undermine its avenues of communication, no careless lineman ground an entire circuit for miles, nor even the demonstrations of nature’s reserve force of electricity interfere with its operation, but make transmission of messages more certain than the best wire or cable system ever used. Therefore, is it not reasonable to suppose the future holds great possibilities in store for our stockholders? Within its immense expanse of territory are located millions of people whose only hope for cheaper telegraph and cable rates rests in a form of wireless communication, as the limit of economy in wire telegraphy has been reached for some time past, and therefore a large number of wireless stations will be bound to be equipped in the near future in their stead.
“Even at the rate of ten cents for ten words, as against the prevailing twenty-five cent rate, not only will the Company receive all of the existing telegraph and cable business between the stations which it may erect, but much new business will be created and obtained because of the cheaper cost.
“In wireless telegraphy a speed of twenty to thirty words per minute (without the use of codes) may be considered a fair average, although as high as forty-five words has been attained. At the average rate of thirty words per minute, at ten cents per ten words, one station working to its capacity for twenty-four hours would receive in gross earnings $432, but as at least one-half the words transmitted would consist of addresses and signatures, for which no charge would be made, a more correct estimate would be less than one-tenth this sum, say about $20 per station per day.
“Five hundred such stations would mean an average gross daily income of $10,000. A year’s work at these rates would mean a pretty income from operations alone. One of our licensed stations sent over 200 messages in one day. These figures, prodigious though they seem, we believe are really an underestimate of the true earning capacity of the Company after it is in full operation, because it has within its territory sufficient sites for probably ten times that number of stations. The claim is not made, however, that all of these would be worked to their full capacity, even in view of the great stimulation of telegraphic business following the cheaper rates, but we do believe that this company will have a dividend-earning power that will equal, if no
t exceed, that of any other industrial company.”
Unfortunately, for investors, the above sequence of events was only the beginning of the fundraising exercises. The attractions of raising easy capital brought in more and more speculators. In the case of the De Forest companies the main actor was one Abraham White. White mutated the De Forest companies numerous times once he had obtained control. In each case similar tactics were used to achieve the same end: selling paper to the public. The common theme was use or manipulation of the press to promote his stock, whether by way of extravagant demonstrations, or through planted news stories or fictitious financial releases. Eventually, after the departure of De Forest, the company ended up as the United Wireless Company which was promoted as the vehicle under which the Marconi and De Forest systems would be brought together. Note that the Marconi Company was sufficiently concerned in the reporting of this scheme that it was forced to explicitly refer to it in its annual report, despite the fact that it had no foundation in truth.
What were the implications for the investor? For the equity investor, the holder of the common stock, an exchange was being offered from the effectively worthless American De Forest Company into United Wireless. For the investor who took added security by investing in bonds rather than equity, the preferred status on assets and profits served little purpose since the exchange being offered was at an effective discount of 80%, and into equity not to instruments of similar credit rank. Moreover, all those who exchanged had to leave their new stock in an escrow account for two years. One would have imagined that such a diminution of value would have deterred investors from subscribing but the opposite was actually the case. Such was the optimism in the ‘new’ technology of the day that investors were willing to continue backing promises. The scheme was only ended when the main players were incarcerated and the company lost its litigation battle with American Marconi, at which point it was subsumed by its main commercial protagonist. Put otherwise, $50 invested in the wireless became 85 cents by 1907 and zero by 1911.
7.2 – A fool and his money – a cautionary tale
Source: International Wireless Telegraph Company prospectus. Frank Fayant, ‘Fools and Their Money’, Success Magazine, vol. 10, no. 155, April 1907.
De Forest continued with his new Radio Telephone company and was able to bring to it an invention that subsequently became the bedrock of the radio. Like his other work, this invention could be seen as a revision of existing work, but it was deemed to be sufficiently different that in 1907 he gained a patent for the ‘audion’.
In Britain, John Ambrose Fleming had been working on improving reception and to this end had drawn on his previous experimental work as an adviser to the Edison companies. During that time he had worked with incandescent light and vacuum chambers. The result became known as the ‘Fleming valve’ and was patented in Britain in 1904 and the US in 1905. This valve brought with it the ability to receive the human voice. De Forest’s contribution was to add a third element that allowed the valve both to receive and amplify these signals. There has been a debate ever since about the extent to which scientist was influenced by the other, and who could claim to be the true inventor. From a commercial perspective, the important point was that both individuals were awarded patents for their work. The contradictions caused by both patents being issued were later to cause a stalemate in the use of these valves.
De Forest was once more in a position to begin another stock marketing campaign. This time, though, it was based on a brand new concept, namely that the radio be used to broadcast to the general public in return for a licence fee. The field here was relatively open since Marconi and his main competitors remained focused on point-to-point signalling. Once more, headline-grabbing demonstrations were arranged accompanied by grandiose claims. In 1908 De Forest broadcast a message from the Eiffel Tower which was picked up at the coastal port of Marseilles nearly 600 miles away. The subsequent stock sales were successful, with De Forest and a sales team headed by James Dunlop Smith targeting potential investors. The company did not survive as long as his first vehicle, however. The capital raised was soon frittered away and by the end of 1909 it was bankrupt.
Undeterred, De Forest and one of his stock salesmen created another company, the North American Wireless Company, and set up another publicity-gathering performance. On this occasion it involved an attempt to broadcast a performance by operatic tenor Enrico Caruso from the Metropolitan Opera. The broadcast had limited success. More importantly, the excesses of previous stock promotion efforts had finally galvanised the government into action and brought the episode to a close, at least for the time being. Whatever the motivations of De Forest, he was one of the first to realise the potential of radio as a broadcasting medium. This would be significant in subsequent negotiations with AT&T over his patents as he retained the rights to the audion for broadcasting purposes.
The Marconi companies
Marconi had been the first to demonstrate the practical application of Hertzian waves, and from the start he had been singularly focused on the commercial applications of his work. His equipment was fairly rudimentary, attracting the criticism of the scientific community which at the same time resented the publicity he was receiving for success that they perceived to be technological backward steps. Marconi was impervious to such criticism. His approach was to seek out potential existing solutions and experiment with them himself. If this failed to overcome the obstacles he hired the necessary talent, most notably Fleming without whom success could never have been achieved. The commercial focus of his work had led him to negotiations in Britain to try and capture the Royal Navy, the world’s largest maritime customer. The frustrations and disappointments of his discussions for land-based communication involving the British-government-controlled monopoly had pushed his interests westwards to the United States.
Marconi faced the need to improve the technical capability of his equipment, the flaws of which his scientific critics were happy to point out, while at the same time ensuring that the news flow was sufficiently reassuring to keep the confidence of his investors. His business model might have differed from De Forest’s only in degree, but one essential difference was that as a matter of policy Marconi refrained from grandiose claims and maintained strict control over financial expenditure. Having said this, as the stock advertisement in figure 7.6 shows, there was little reticence in the financial projections he provided. For the record, the American Marconi Company did not make the profit suggested until 1913, and did not make a profit at all until 1910.
Publicity before profits
Despite Marconi’s establishment of an American subsidiary, and his frustrations in Britain, the company remained decidedly Eurocentric in its early operations. The press in America was assiduously courted, and demonstrations such as the reporting of the America’s Cup were treated as important marketing events, but the commercial structure was focused on Britain. Marconi’s frustrations in Britain stemmed directly from the attitude of the British Post Office, the GPO. The introduction to Preece, effected by Marconi’s mother, proved a mixed blessing. By 1900, the GPO had witnessed a rapid expansion in the number of messages carried on its system, from some 10 million in 1870 to 90 million in 1900. This had not prevented it from accumulating ever-increasing losses. The GPO’s financial position meant it could not afford to take a chance on any innovations. For example, it turned down the exclusive use of the Bell telephone in 1877.⁶⁶ There was also latent resistance from Preece, who had been conducting his own work on wireless transfer of information.
In the early years, the GPO’s involvement with Marconi was driven as much by its desire to monitor his work as it was by the wholehearted support it professed in public. Eventually Preece made an offer to purchase the radio patents, but by this time Marconi had become disenchanted with the relationship, and decided that he could not trust the GPO any more as a partner. In part this was driven by the experience of a series of trials in 1897, where Preece required Marconi to give Ado
lf Slaby access to Marconi’s radio equipment at the behest of the German emperor. Slaby was able to return to Germany and replicate Marconi’s work, which in turn led to the development of the radio within AEG and the establishment of Telefunken.⁶⁷ This was the backdrop to Marconi’s decision to accept the family-related offer of funding for his new company. So far as the GPO was concerned, there was a degree of muted disappointment, but this was tempered by the protection afforded by the British monopoly rights and the view that Marconi’s work was such that any patent issues could be avoided if it was necessary to replicate his radio.
At its inception, Marconi’s company had sought to generate revenue by selling its equipment. The main potential client remained the Royal Navy and extensive trials were conducted using Marconi equipment. Eventually, as tensions rose – with hostilities in South Africa and the Boxer rebellion in China – the Navy finally shook off its hesitation and placed an order. Although initial orders were not large, they were vital. By 1899 Marconi was supplying both the British and Italian navies. The orders produced a capital injection of $6,000 ($2m) and annual income thereafter of over £3,000 ($1m).⁶⁸ Important as the financial boost was, more important was the recruitment of the largest navy in the world as a customer and the validation of the product that this conferred. However, the initial strategy of selling equipment proved misplaced. This was because it relied on the willingness of potential clients to fund capital expenditure to buy the equipment and support infrastructure at a time when its reliability and commercial, as opposed to military, application was far from proven.
Engines That Move Markets (2nd Ed) Page 34