Engines That Move Markets (2nd Ed)

by Alasdair Nairn

  7.10 – Chequebook journalism appears

  Source: New York Herald, 21 April 1912.

  The impact of the sinking of the Titanic was greatly to increase the impetus towards some form of regulation of the airwaves. Up to this point, the radio – more accurately, the wireless telegraphy industry – had targeted only those markets that the cable-based telegraph systems could not serve. It had not really become the potent threat to the telegraph and telephone companies that some of its protagonists had hoped, nor had it raised sufficient prospect of this threat to force these companies to buy them out. It was not that AT&T had ignored radio, simply that no imminent threat had been perceived. Nor had any new opportunity been discerned – and the thinking of the time remained fixed on existing methods and uses of information transmission. The following decade would alter all this, but not because of any new ‘vision’. Rather, the technology embodied in the radio produced a number of spin-offs that proved to be of vital importance to existing companies. Soon to be overlaid on this was the outbreak of World War I, where the strategic importance of the radio demanded a new approach to the industry from government. This would fundamentally change the market environment for Marconi, who by 1912 had achieved the dominant industry position.

  While the Marconi companies had achieved a dominant position on both sides of the Atlantic, they had done so with a technology where substantial upgrades were soon to be required. Fessenden’s efforts had not produced a viable company. NESCO was in receivership and the only remaining sign of his involvement in the industry was the International Radio Telegraph Company, which came to hold his patents. De Forest’s series of companies, on the other hand, had been more concerned with selling shares to the public than developing viable businesses.

  In both cases, however, they had worked with technology whose potential in certain respects exceeded Marconi’s capabilities. In Fessenden’s case, this advance related to the use of continuous wave generation and in De Forest it was the audion, the improvement on Fleming’s diode. Marconi had improved the reception capabilities of his equipment, but the most obvious area where the Marconi equipment was still lacking was in its reliance on spark technology for generating signals. By the immediate pre-war period it was evident that continuous-wave technology both produced more reliable signals and ones that carried the potential for voice transmission. Marconi was aware of this, and steps were taken to close the technological gap.

  Unfortunately World War I intervened, causing a suspension of experimental work and the exercise of control over the network by the British government. Any experimental work targeted military needs. The focus was therefore on applications such as portable wireless, message-interception capability and direction finders to trace enemy signals. Above all, the focus was on massive expansion of the number of stations and trained operators. In this environment, research on continuous-wave-generated signals was simply not possible. Research and development into the radio therefore effectively stalled on one side of the Atlantic. On the other side, the opposite would prove to be the case.

  Commercial spin-offs from the radio

  The main commercial spin-off from the development of the radio was the triode or audion invented by De Forest. Like all major inventions it was surrounded by controversy and would be the subject of repeated litigation and conjecture as to who could claim to be its true ‘inventor’. The basic position was that Fleming had invented the diode, drawing on his theoretical knowledge and his background and experience with Edison. The diode markedly improved reception and De Forest then produced the triode, or audion, as an incremental improvement to the same purpose.

  Perhaps the matter would have rested there, had it not been the case that the triode had attributes making it much more than an incremental improvement to the receiver. While this was not conclusive, history suggests that De Forest recognised the triode’s amplification properties but failed to see the potential applications that were available if this property could be developed and harnessed. The patent rights to the triode or audion had followed De Forest and his chequered financial history. They thus resided not in the United Wireless Company purchased by Marconi, but in the financially troubled Radio Telephone Company. This company also held some of the ex-Bell scientist John Stone Stone’s patents, which had been purchased by De Forest from his friend for the company.

  The relationship with Stone was important for two reasons. First, Stone’s background in the telephone industry made him acutely aware of the desperate need for amplification of signals for long-distance calls. Second, although he had been fired from AT&T in 1899, Stone remained a respected figure within the company and continued to have influential contacts at its top levels. For Stone, the properties of the audion made him immediately consider it a potential solution to the telephone industry’s principal technological problem. The conversations between Stone and De Forest would lead to contact with AT&T and a trial to determine whether the audion could be used to boost long-distance signals and act as a ‘repeater’. Although the initial work did not quickly reach a successful conclusion, it was sufficient to lead AT&T down the path of acquiring the audion patents from De Forest. This it did in stages, as it became more convinced of the prospects for the improved equipment. Initially, in 1913, it spent $50,000 ($2.5m) for the exclusive rights to the audion for non-wireless telegraphy. Later it extended its access to include its use on a non-exclusive basis in the wireless area for a further $90,000 ($3.7m), and finally the exclusive rights for $250,000 ($10m) in 1917. Despite all the troubles De Forest had faced – ranging from bankrupt companies to allegations of fraud – he could again afford the trappings of wealth.

  For AT&T, the transaction would allow the groundwork upon which to build the vitally important ‘repeater’. It also allowed AT&T to become the first to transmit a voice over the Atlantic in 1915, using the technology embodied in the audion and continuous-wave technology. At this point, the conflict between Fleming’s diode patents and De Forest’s triode version re-asserted itself. The litigation instigated by Marconi for patent infringement would eventually result in a stalemate. It was held that the triode (or audion) did impinge on Fleming’s patent, but at the same time Fleming’s patent did not anticipate the triode. In other words, neither side could produce their triode without the authorisation of the other. The eventual resolution of this difficulty would lead to the creation of an entire new company, and eventually a new industry.

  While the triode or audion became an extremely important part of the telephone business, its development by AT&T was not overly threatening to Marconi given the Fleming patent. What would prove substantially more damaging was the delay in the company’s research into continuous-wave signals. Fessenden had shown the superiority of continuous waves but had never progressed to a practical and commercial demonstration. This was to be achieved by Cyril Elwell, an Australian immigrant to California. Elwell studied at Stanford University, where he investigated the potential of the wireless system. This convinced him of the validity of Fessenden’s opinion on problems of spark technology.

  Elwell had experience in high-frequency oscillators and knowledge of the electric arc, and he believed he saw a practical solution. This involved raising funds to purchase the North American rights to the ‘oscillating arc’, designed by Valdemar Poulsen in Denmark. Arc technology had been developed in combination with the ill-fated venture into arc lighting. This had given rise to the work of Poulsen, who was able to show a small working model of a radio capable of transmitting the human voice. Elwell had to commit to a package of phased payments totalling $450,000 ($25m) to obtain the rights to the Poulsen-Pedersen system and this was funded by recourse to his contacts at the Faculty of Stanford and through the selling of shares to the public.

  On his return to California, Elwell formed the Poulsen Wireless Telegraph Company. The initial years of the company were a qualified success – it managed to stay in business, but only by selling sufficient shares to make the payments to Copenha
gen. To reach commercial viability, the company required sufficient funds to achieve critical mass in terms of network size.

  This was helped by the involvement of a San Francisco banker named Beach Thompson, who injected further capital and reorganised the company into two components: the Poulsen Wireless Company and the Wireless Development company, later the Federal Telegraph Company. The Federal Telegraph Company was quickly to go head to head with the American Marconi Company. Although Elwell was to leave the company after a disagreement over its strategic direction, Federal was in a position to seriously challenge the Marconi equipment through its use of continuous waves. After Elwell’s departure the scientific staffing at Federal included De Forest, who had fled to the West Coast to avoid the repercussions of some of his previous activities, and Leonard Fuller who had previously worked at NESCO. The Federal Telegraph Company was able to make rapid inroads into the growing market for radio communications. Important as its technology was, it was also assisted by the conflict in Europe and the demands of the US Navy to have complete control over the maritime communications network.

  The rationale of the US Navy was no different from that which emanated from the military arm of all governments. Communication could not be left in the control of third-party nations. Britain, through its dominion of Singapore and Malaysia, had control over the supply of gutta-percha, without which cables at the time could not be insulated. If this was not bad enough, the American Marconi subsidiary had also taken over the assets of the United Wireless Company, giving it a near-dominant market share in merchant shipping radio. Purchasing equipment from US-based Federal therefore carried with it the potential for better transmission – and was (arguably) in the national interest. In 1913 Federal received the first in a series of US Navy contracts. Federal’s threat to Marconi was evident in Marconi’s attempts to first enter into a joint venture and then subsequently acquire the company. The attempted acquisition was only frustrated by the US government stepping in and buying the company for the navy in order to avoid it falling into Marconi’s hands. (It later unfolded that of the $1.6m purchase price, over a quarter had ended up directly in the hands of the recently appointed chairman and his associates without the knowledge of his fellow Federal board directors.)

  Although Marconi was thus thwarted in his overtures to Federal, he had other irons in the fire. The high frequency alternator that the Swede Ernst Alexanderson had built for Fessenden had given way to further work in this area at GE. By 1915 Marconi desperately needed continuous-wave technology and negotiations began with the GE research department for its supply. The negotiating process would prove a tortuous one. At the time Marconi’s financial resources were limited by the war, but more than that, the company was seeking to preserve its position by way of an exclusive contract. GE was being asked to build a machine beyond what it had accomplished thus far, and was being asked to give away control of the product it was creating. That the discussions took place over an extended period simply reflected the size of the two companies and the significance of the product being discussed.

  After a number of years the discussions were moving closer to a conclusion, but the role of national interest was soon to intrude. Marconi’s history and negotiating position over exclusivity was an issue not just with the US Navy. Other governments had also made representations over their potential inability to gain supply from GE if an exclusive deal was signed with Marconi. Reacting to these pressures, the US government and navy pursued a more radical solution: the removal of foreign ownership and the creation of a new American radio company.

  RCA – the national champion

  The creation of RCA did not happen overnight. For a number of years the US Navy had tried to extend its dominion over the airwaves and voiced increasing frustration at the absence of a dominant American company. After the outbreak of World War I, the US government sought to maintain its position of neutrality towards the European nations and as such insisted that no military messages be sent from Marconi stations or those from the Telefunken subsidiary Atlantic Communication. However, this censorship proved extremely difficult to enforce. The sinking of the Lusitania by German U-boats in 1915, with 1,200 casualties, fanned the flames of public opinion in America. Eventually, after increased tension, America joined the war in 1917.

  Immediately the shore stations of Marconi and Atlantic Communication were taken under US Navy control. The US Navy then worked to bring standardisation and quality improvements to the apparatus and stations they had inherited. This involved effectively enforced cross-fertilisation of ideas and a temporary setting aside of commercial secrecy and patents. The navy was particularly concerned to end the primacy of Marconi and this led to the purchase of Federal Telegraph and then the purchase of the Marconi shore stations for $1.6m ($65m). By the end of the war, the US Navy had therefore almost established a dominant position in the wireless industry in America. There remained some areas outwith the navy’s control, such as the Marconi long-distance stations, and these therefore represented the next target.

  By this time, however, there had been a shift in sentiment against direct government involvement in business. During the war the commercial results of government-controlled companies had been poor. Losses had been made despite higher prices, and the public backlash had begun. When the navy sought to increase its control, therefore, it found that the halls of power were not only no longer receptive, but were in fact positively antagonistic. Demands were made that the assets be returned to their previous owners. Faced with such vociferous opposition there remained only one alternative: the creation of a new American-owned company. Moreover, this needed to be concluded with some speed; if Marconi signed an alternator contract with GE the company would almost inevitably regain its dominant position in radio. Preventing this from happening exercised minds at the highest level of government, including the acting secretary to the navy, Franklin D. Roosevelt, and the president, Woodrow Wilson.

  The plan for private ownership was supported at the highest level, but it took months of negotiation and review for a workable document to be prepared. Most important of all was the stick wielded by the navy over prospective business for GE and return of equipment to American Marconi. After a number of false starts an agreement was eventually reached whereby the Radio Corporation of America would be created out of American Marconi. Foreign ownership (i.e. British Marconi ownership) would be removed with a gross payment of nearly $3m (roughly $90m) from GE, which in turn would receive shares in the new entity, with the world markets to be divided up between British Marconi and RCA. For British Marconi a sum had been received equivalent to a healthy premium over the previous traded share price and at the same time access to the GE alternator had been assured. For the previously named American Marconi, it now had a new shareholder in GE with access to GE’s developmental work. More importantly, American Marconi in its new guise of RCA no longer had to contend with the enmity of one of its potentially biggest customers.

  The formation of RCA also paved the way for resolution of the main barriers to development of the radio. First, there was the long-standing conflict between Fleming’s diode and De Forest’s audion. Now that RCA held the American rights to the diode, it was in a position to negotiate with the licencee of De Forest’s patents. Thus AT&T found a receptive audience when it began negotiations with GE regarding cross-licensing agreements. The circle was completed when Westinghouse joined the group. Westinghouse had acquired the remaining Fessenden patents through its acquisition of the International Radio Telegraph Company and with this the RCA combination had the complete system from continuous-wave transmission to amplified reception. A radio ‘trust’ had effectively been formed largely at the instigation (or certainly with the complicity) of the US government. The government rationale had been principally one of national security and American control of radio technology, partly a long-time legacy of Marconi’s policy of maintaining control of its sales through leasing a service rather than selling equipment. For the
commercial interests involved, it was a method of removing a number of the historical constraints associated with the patchwork development of the technology and the fragmented ownership of patent rights.

  However, the one thing that had not changed was the attachment to the notion that the commercial application of wireless technology revolved around point-to-point communication. It was not to be long before the huge opportunity that had been ignored and left in the hands of a minority of enthusiastic amateurs would explode on the market. The interesting parallel for current times would be if a government decided that a particular industry was of national interest and effectively forced a compulsory purchase from foreign owners and turned control over to its national champions. How would foreign investors be likely to react?