After two relatively unsuccessful years, the reality of the situation was recognised and Marconi changed strategy from direct sales to leasing. A new subsidiary was set up to provide service for a fee. Thus a client wishing to enjoy wireless communication would enter an agreement with the Marconi International Marine Communications Company. In return Marconi would provide a full service, including the equipment and an operator. Since the charge was for the period of the lease, and not for individual messages, there was the added benefit that some of the British government’s monopoly restrictions could be circumvented. Most importantly of all, since the equipment stayed in the hands of Marconi operators, it was possible to enforce a rule that only communication with other Marconi users would be allowed.
The commercial logic of this was relatively straightforward in that it was the route to creating a monopoly or dominant market share. The application of this strategy was more difficult and required that Marconi secure an anchor client who would effectively compel other users to join the network. In the early part of the 20th century that client was Lloyd’s of London, the hub of the maritime insurance world. At the time, the British merchant navy accounted for half the total shipping tonnage and was five to six times the size of its nearest competitor, the American merchant navy. In 1901 Lloyd’s signed a 14-year exclusive deal with Marconi. With this agreement in place, it was now prudent for the company to establish the necessary network of coastal radio stations.
Marconi’s Wireless Telegraph Company
The Marconi Company in Britain – to be precise, Marconi’s Wireless Telegraph Company – issued its initial set of accounts under the name the Wireless Telegraph and Signal Company Ltd. The company name was tied directly to the company’s objectives, which were to provide a wireless alternative to the telegraph. Unlike the US subsidiary, the British company was able to attain a sufficiently powerful market position to reach profitability within a relatively short space of time. The critical element in this, spelt out in the company accounts, was the agreement reached with the maritime insurance market of Lloyd’s of London on the compulsory carrying of Marconi equipment on vessels insured at Lloyd’s.
This was the first stage in the development of Marconi. The UK parent company relied mainly on the income generated from maritime operations within the sphere of influence of the British Empire. Returns on investment were sufficient to keep the company in business, but were no more than respectable at best – with a return on equity that rarely exceeded 10% and a return on assets of barely half that. Growth in income over the first ten years was moderate at best, and little profit accumulated on the balance sheet, as the company deployed the revenue it earned to fund expansion and repeatedly asked its shareholders for additional funds. Returns were always running behind the cost of expansion.
7.3 – Marconi: great inventor, average company
Source: British Marconi annual reports. Stock Exchanges London and Provincial Ten-Year Record of Prices and Dividends, Fredc. C. Mathieson & Sons, 1897 to 1931 issues.
The second stage in the Marconi story came when the overseas operations turned profitable. The most important of these was the American Marconi Company, which made no meaningful returns until its absorption of United Wireless. The acquisition of United Wireless gave American Marconi a dominant position in the US market. The UK parent company would undoubtedly have benefited from remitted income and dividends through its shareholding had not World War I intervened. Just before the war, income was rising and reasonable returns being earned. Since much of the equipment had been amortised, cash flow would have been positive and allowed expansion without recourse to outside funding.
The problem for the UK Marconi company was that when the war ended the US government forced it to sell its shareholding in the US subsidiary to GE and end any British influence on the company’s operations. As this took place just as the demand for radio broadcasting was about to explode, the return on investment for UK Marconi shareholders was massively curtailed. This might not have been so damaging if Marconi had been able to exploit the British radio market as RCA did in the US. Unfortunately, it had neither the patent pool protection nor the access to the nascent broadcasting industry that RCA enjoyed, as the British government extended public control of the postal and telegraphic networks to the airwaves.
The long-term returns on Marconi’s Wireless Telegraph Company were therefore relatively poor, given that it was the company which was at the forefront of the creation of a new industry. Converting historic income into today’s figures reveals a different picture to the one you get if you simply look at the historic numbers. On this basis it is clear that the earnings peak of the company coincided with the acquisition of United Wireless by Marconi’s US subsidiary. After that, the story was one of slow decline, a hugely disappointing result for investors, who must have believed that they had picked the right horse in a technological sense, and astutely avoided all the stock market scams and hype that surrounded other sections of the industry.
The overall conclusion has to be that without a complete monopoly, point-to-point radio operations were simply not a sustainably high-margin growth business. The high-growth business proved to be in broadcasting. Unfortunately the principle of public ownership in the UK prevented Marconi from participating on one side of the Atlantic, and government regulation aided by RCA prohibited it on the other. Investors in Marconi therefore had the unfortunate outcome of being largely excluded from an industry the company had helped to create. Eventually the company was subsumed within the growing electric conglomerate which was to become GEC, until history turned full circle and the Marconi name again appeared as a listed company in the UK until it was later sold to British Aerospace.
In 1901 Marconi had been faced with the debacle of the botched coverage of the America’s Cup. His response was to return to England to continue work on his transmitting station in Cornwall. Marconi sought an event that would overshadow the public scepticism stemming from such unfortunate events. The answer lay in the Atlantic. For years, the owners of the transatlantic cables had controlled the passage of telegraphic information across the Atlantic. The big users of this service bitterly resented the pricing power held by the owners. One of the biggest users was the press. When Marconi demonstrated that wireless transatlantic communication was possible, the reception as a consequence verged on the ecstatic, not least from his long-time supporter, the New York Times. It did not matter that a station in Cornwall had only managed to transmit the letter ‘s’ to a station in Newfoundland. The result was everything Marconi could have hoped for: tumultuous praise from the press.
7.4 – Maintaining the publicity momentum: Marconi’s first transatlantic demonstration, 1901
Source: New York Times, 15 December 1901.
Again, the scientific community was critical, verging on the scornful, but this did little to undermine Marconi’s belief. Marconi’s problems in America stemmed not so much from a lack of publicity or any scientific concerns as they did from economic nationalism. Marconi was trying to create a profitable enterprise, and this was what drove him to try and exclude competitors. The policy of leasing equipment and barring communication with rival equipment was very similar to that operated by the Bell Companies for the telephone. By excluding competitors, it effectively tried to create Marconi equipment as the industry standard. The monopoly policy and the cost of leasing were both problematic for the US Navy. From a strategic perspective, to cede control of communication to a new monopoly based in a large competitor nation was not an obvious choice. Entering into long-term leasing contracts was also a problem as, in legal terms, the funding came in an annual appropriation. There was also simple prejudice, with Marconi referred to as part of a ‘Jewish cabal’ (notwithstanding that Marconi was Irish-Italian Catholic).⁶⁹
Despite his public success, Marconi’s business prospects were not easy to discern, which left the field open for entrants such as Fessenden and De Forest to gain the biggest market shares. De For
est was able to do this through his giveaway pricing policies and repeated share issues. It was equally difficult for Marconi in the European countries outside Britain and Italy. Germany, in particular, sought to have Marconi’s non-communication policy annulled, as the strategic importance of encouraging a domestic radio industry was recognised. Britain and Italy resisted this move, while America tended to support it. However, a conference called to discuss the matter was inconclusive, as the requirement for Marconi equipment to communicate with that of other operators had no legal force and existing Marconi clients therefore continued as before. The 1903 International Wireless Conference had been called ostensibly to promote ‘world peace’. The reality was that it was called to promote the interests of the German radio industry, as represented by Telefunken, a new company created out of the radio work of Slaby-Arco, Braun-Siemens & Halske.
7.5 (a) and (b) – Scared wireless: market reaction to Marconi’s progress
Source: New York Times, 22 December 1901 and 26 September 1907.
The results of the 1903 conference proved inconclusive, but as Marconi’s influence grew so did the pressure to remove the monopoly implied by the non-communication policy. Some said there were implications for shipping safety. While this was true, the main thrust of the criticism at the second conference (called in 1906) remained commercial and national. This time the pressure exerted by the American delegates was sufficient to ensure that Marconi would lose the battle and the British government would give way, eventually passing legislation to require inter-communication. For Marconi, the impact was mitigated somewhat by the subsidy granted in return for the change in contracts by the British government. The thrust of his business continued to be the same, to improve the reliability and capability of his radio equipment. This took the form of creating the diode valve by Fleming, which preceded De Forest’s triode or audion, and later the purchase of patents from Oliver Lodge to avoid potential litigation relating to previous advances which embodied Lodge’s work.
The purchase of patents which might otherwise inhibit his commercial application also took place in America. In 1885, Thomas Edison had conducted his space telegraphy tests and in 1891 had received a patent for this work, entitled ‘Means for transmitting signals electrically’. Either through the pressing needs of other work, or because he had not believed in their commercial or technical potential, Edison had not pursued this work. For this reason, despite the apparent success of Marconi in transmitting signals across the English Channel and then the Atlantic, he was willing to assign his patents to Marconi for a fee. The Marconi Wireless Telegraph Company of America paid Edison $60,000 ($4m) for the rights to Edison’s radio patents.
7.6 (a) and (b) – Not too good to be true: the marketing of Marconi’s shares
Source: Commercial and Financial Chronicle, 13 June 1903. New York Times, 8 May 1904.
7.7 – Old technology fights back: cable companies dismiss the wireless threat
Source: New York Times, 27 September 1907.
The five years after the loss of the non-communication policy were financially difficult ones for the Marconi companies. Forced to self-fund development of the transatlantic service, Marconi quickly found that capital was scarce and fiscal austerity was necessary to conserve scarce cash resources. As a consequence, research and development was kept to a bare minimum. What development there was related to small incremental improvements to existing services. In 1908 Marconi was awarded the Nobel Prize for Physics jointly with Ferdinand Braun, but the £8,000 prize ($2.3m) was only a brief ray of light. The task facing Marconi was the simple one of gaining profitability. The route to achieving this lay in two parts. First, agreement had to be reached with competitors where possible. In early 1910 a new jointly owned company was formed with Telefunken in Germany to handle the two companies’ German merchant shipping interests and avoid any future patent disputes. The second element was protection, and in particular attacking patent infringement. As Fessenden had found, litigation was an expensive process, even when eventually successful. Up to 1910, the Marconi companies had not wished to devote resources to this. With the start of the new decade, though, this policy changed and Marconi aggressively pursued patent infringement. This met with real success and considerably reduced competition as a consequence.
The success was assisted by the actions of others. The United Wireless Telegraph Company had seen its reputation increasingly tarnished as the press exposed its stock-selling methods, questioning both its claims and its financial viability. The company’s importance as the main supplier to the US Navy helped prompt an investigation by the Justice Department. That investigation revealed fraud on a massive scale and in May 1911 the main company officers received prison sentences as a consequence. This left United Wireless as an irresistible target, so Marconi launched a patent infringement suit. Without top management, and as the likely loser of the suit, the United Wireless Company was in no position to defend itself. In 1912, control of the beleaguered company passed to Marconi in a takeover dressed up as a merger. As a consequence, the Marconi companies now achieved the desired competitive position with a dominant market share in the British Empire and the North American continent. For the first time, the company was actually in a position to become profitable.
7.8 – A costly verdict: American Marconi acquires United Wireless
Source: New York Times, 26 March 1912.
Government steps in
The strategic importance of the radio as a means of military communication had been clearly illustrated during the Russo-Japanese War, and was the driving force for the international conferences that followed. Existing communication companies and related suppliers had shown interest in the medium, but had either been financially constrained from pursuing it, or had judged that the threat could be countered at a late date. In both cases, events were unfolding that would cause the structure of the industry to be dramatically altered.
Before this, though, the industry was to lose part of its anarchic structure and to be subjected to government regulation. The main factor that stimulated this was the sinking of the Titanic. The world’s largest luxury liner had struck an iceberg on its maiden voyage (one on which Marconi was originally booked as a passenger) and immediately radioed for help. Of the two closest ships, one was not equipped with radio, and the other had shut its engines (and hence the radio) off. Consequently, neither had picked up the messages. Not only that, but the help message had been unintentionally distorted by amateur radio operators with the result that two messages from separate ships were combined as a message that “All Titanic passengers safe, towing to Halifax.”⁷⁰
The radio message did serve to save the lives of those adrift in the freezing waters, and the press lauded the efforts of the Marconi operator and his company as a result. However, the lack of order in the airwaves meant that many more lives were lost than would otherwise have been. The public reaction was such that government regulation quickly followed. The regulation of the airwaves was part of the driving force for change in the industry, but the two major forces remained the strategic importance of the industry and the increasing attention being paid to it by the existing industry players.
7.9 – It’s an ill wind… Titanic provided a publicity bonus for Marconi
Source: New York Times, 19 April 1912.
The Titanic: an early example of chequebook journalism
The sinking of the Titanic and the tragic loss of life which accompanied it was an event of such a scale that it shocked the world. It was also the first event which was effectively reported live through the use of the radio. Undoubtedly the radio distress messages saved many lives. Undoubtedly lives were also lost due to conflicting signals and the lack of radio equipment and uniform transmitting protocols. The event accelerated action in all these areas and hence the development of maritime radio use. One other by-product also emerged: a voracious appetite for information – and newspaper proprietors who were willing to pay to satisfy it. One major headline
reported on such an event shortly after the disaster:⁷¹
‘Keep Your Mouth Shut; Big Money for You,’ Was the Message to Hide News
Hold Story for ‘Four Figures’, Marconi Official Also Warned the Carpathia Operator, While Anxious World Waited Details of the Disaster.
“While the world was waiting for three days for information concerning the fate of the Titanic, for part of that time at least, details concerning the disaster were being withheld by the wireless operator of the steamship Carpathia under specific orders from T. W. Sammis, chief engineer of the Marconi Wireless Company of America, who had arranged for sale of the story.”
New York Herald, 21 April 1912
Although the story reported in the paper was accurate in the sense that the radio operator had been advised to sell his story, it was inaccurate in the sense that the world was ‘anxiously’ waiting for information. The message was actually sent when the Carpathia was about to dock, a point which the American Marconi Company was anxious to stress given the public relations issue in question. The company’s rebuttal published in the same newspaper set out the timing and argued that it was only trying to allow the radio operators to earn some additional funds. In this it was largely successful, as subsequent reporting focused primarily on the heroic actions of the Titanic crew, passengers and rescuers, with particular attention paid to the role of the radio and its operators. That the New York Times managed to gain access to a full heart-rending account from the surviving radio operator, Harold Bride, for a fee of $500 ($26,000) no doubt helped to stimulate the articles by its rival paper.
Engines That Move Markets (2nd Ed) Page 35