The birth of broadcasting
One of the by-products of World War I was the creation of a US-owned corporation at the forefront of the radio business. Without government intervention it is unlikely that American Marconi would have been easily displaced from its position of strength. Just as AT&T had survived the threat of the independents when its patent protection ran out because of the extensive network it had in place and the critical mass this created, so the Marconi network would have provided a formidable barrier to entry. In the aftermath of war, though, strategic interests were never likely to be subordinated. As a consequence, RCA was born.
The war also contributed to the development of radio in another way. During the war there was insatiable demand for those who could act as radio operators and many of those who filled this need were drawn from the ranks of the amateur radio community, many of whom used the medium to ‘broadcast’ messages to other enthusiasts. When they returned from the war they naturally sought to again engage in their broadcasting hobby. It took some time before the wartime broadcasting ban was lifted, but eventually it was removed in 1919 and interest levels began to again rise. The corporate sector was not to realise the significance of one-to-many broadcasting for some considerable time, remaining focused on one-to-one communication. Others were less constrained in their thinking. De Forest, whose prior commercial ventures had met with mixed success, certainly understood the potential for the radio as an alternative medium to newspapers and theatres for the transmission of information, sport and entertainment. De Forest had maintained the rights to use his audion for such broadcasting in his agreement with AT&T.
AT&T certainly required the audion for the improvement of its mainstream telephony, but treated other potential uses with disdain. “To AT&T, such broadcasting was frivolous, a hobby, and certainly not a pastime that related in any ways to its corporate goals.”⁷² This sentiment was commonplace at the time and bears an eerie resemblance to the rejection of the telephone by Western Union some 35 years earlier. Thus AT&T spurned the patent rights for the radio. Unlike Western Union, though, the position was to be retrievable – and what was in danger of being lost was not its hold on an existing business, but a whole new industry.
The returning signalmen picked up their hobby with a vengeance and within two years of the war’s end there were over 10,000 licensed amateur broadcasters. These ‘amateurs’ were amateur only in the sense that there existed no broadcasting profession; they were certainly not amateur in their level of knowledge, and most sought access to the tubes which would allow them to broadcast on continuous waves rather than the intermittent signals of spark technology. There was a parallel with the differences between the telegraph and the telephone: spark technology could only transmit signals, like the telegraph; and continuous-wave technology could transmit the human voice, like the telephone. Another parallel – though it lay a considerable distance in the future – would emerge with the nascent personal computer industry, when large corporations left the field open to so-called ‘amateurs’ until they belatedly realised the commercial potential.
One has to be careful not to exaggerate historic comparisons, though, since perhaps the most significant boost to the fortunes of the radio came through the activities of an employee of one of the major corporations. This was a Westinghouse employee named Frank Conrad, who had managed the production of Westinghouse portable wireless equipment for the armed forces during the war. Conrad returned to his amateur broadcasting after the war to find that his music broadcasts were enthusiastically received. Soon demand for portable wireless increased and Westinghouse recognised the potential for this new avenue of sales. To further stimulate demand, Conrad was instructed to complete a broadcasting station within Westinghouse premises and in November 1920, KDKA, the new station began broadcasting.
These broadcasts had the effect of igniting a wildfire demand for the radio. Initially the newspapers generally ignored the phenomenon, a head-in-the-sand approach given that broadcasting was simply a different form of information and entertainment dispersal to the newspaper. The corporations involved in the manufacture of components did not, however, ignore it – GE, RCA and AT&T set up their own broadcasting facilities. There was no single view as to its ultimate purpose, but nevertheless the broadcasting industry had been born. So far as the sale of equipment was concerned, RCA was the principal beneficiary through its patents, network and agency sales agreements for GE and Westinghouse products. The impact of the growth in radio and the difference from the early Marconi years is detailed in the analysis of American Marconi/RCA later in this chapter.
Development of the broadcasting industry
There were three main schools of thought regarding broadcasting as a medium. The first came from the equipment manufacturers, who saw broadcasting as a mechanism to stimulate demand for product. The second came from amateur broadcasters who saw broadcasting as an exciting new hobby. The third school of thought was founded on the wider vision of broadcasting as a commercial industry in its own right. This final school of thought was based on the growing demand for information and entertainment by an increasingly wealthy and educated population. This demand had been demonstrated by the rapid growth of newspapers, and the radio would have seemed a natural progression – with the caveat of having to work out how broadcasts could generate revenue.
The obvious answer lay in advertising, a medium which proved to be an instant success when first tried in 1922. To give an idea of the audience growth involved: in the years up to the Depression the growth in radio sales averaged 100% per annum. Radios were not inexpensive items and in 1921 a ‘quality’ radio set from Westinghouse retailed at $60 ($1,600), with a lower-end appliance retailing at around $10 ($270). At RCA David Sarnoff had become general manager and was a strong advocate of the commercial possibilities of broadcasting in its own right as opposed to simply a method of selling sets. The first advert was a ten-minute talk extolling the virtues of a particular housing development, but others soon followed from major corporations such as Tidewater Oil and American Express. This first commercial was broadcast in the early 1920s on WEAF, a station of AT&T, the company which had earlier treated the prospects for radio broadcasting with disdain.
Yet the broadcasting business was not immediately lucrative and neither were many of the concerns profit-making entities – some by design, others by default. The economics of the broadcasting business were unclear, and the delivery of the service was hampered by the anarchic nature of frequency use. Eventually government regulation was required to stop competing broadcasters from using the same frequencies as each other and causing reception problems through interference. With the commercial principle established, the big battalions began to respond in earnest. AT&T followed the establishment of WEAF in New York with an attempt to restrict competition by refusing to allow competitors access to its lines to deliver signals to remote areas. This use of power by AT&T was extended to forcing those who used its transmitters to play AT&T commercials or pay higher charges (or both).
This placed AT&T in conflict not just with small broadcasters, but also its erstwhile patent partners. This group, known as the ‘radio’ group, lobbied for changes and eventually binding arbitration was required to remove the impasse. The arbitration found in favour of the ‘radio’ group and the commercial framework for establishing a freestanding viable business was thus established. In 1926, at the instigation of David Sarnoff of RCA, a new joint venture was formed with GE and Westinghouse to exploit this opportunity. This new entity leased AT&T telephone lines to allow programmes to be distributed to a network of stations and purchased WEAF from AT&T as its flagship for $1m ($23m). The entity was named the National Broadcasting Company (NBC) and marked the true beginning of broadcasting. The economics of network broadcasting were based on the distribution of the same content across the whole system. So successful was the model that NBC expanded until effectively two networks were born, the red and the blue networks. Later these two networks w
ould be completely split.
It was not long before a competitor arrived in the form of the United Independent Broadcasters (UIB). This was later augmented by a phonograph competitor of RCA who joined the financially suspect UIB company to provide access to the airwaves. The Columbia Phonograph Company thus became CBS, although its financial fortunes did not take an immediate upturn and it required a financial injection from one of its major clients to survive. CBS was therefore for a period controlled by the Congress Cigar Company of Philadelphia. In the meantime the growth of the sale of radios had continued apace and RCA had tried to mitigate increasing competition by licensing a number of companies, including one named Zenith, to manufacture radio sets.
7.11 – Suddenly everyone wants a wireless
Number of radio sets produced and number of broadcasters in the US, 1921–41
Source: US Department of Commerce, Historical Statistics of the United States, Colonial Times to 1970, Bureau of the Census, 1975. pp.775–830.
American Marconi/RCA
The shareholders of American Marconi were treated to neither a detailed annual report nor any profits for the first ten years of the corporation’s life. The annual report typically consisted of a letter to shareholders and a balance sheet. The early letters to shareholders continued to promise progress in the development of wireless transmission. No income statement was provided until the company returned its first profit in 1911/12. Up to that point any profits or losses were treated as an entry on the asset side of the balance sheet. A profit-and-loss account was only recorded on the liabilities side when the accumulated losses of the company were finally overtaken by profits. The other feature of the annual reports in the first ten years was an almost continuous reference to litigation against patent infringement, the most frequent targets being Fessenden, De Forest and their respective companies. Relatively strong language is used in a number of cases, in particular in the 1907 annual report about a scheme to induce American Marconi shareholders to swap their stock for that of United Wireless as part of an alleged (but fictitious) merger with American De Forest. The most intriguing comment came in the 1912 annual report where the shareholders were advised that “matters of great importance, both regarding the welfare of this Company and also of the entire Marconi System, are now pending; these matters cannot be discussed in full as yet.” The eventual result of these discussions was a resolution of the litigation and the purchase of United Wireless, and with it close to a monopoly position in maritime radio off the American seaboard.
The financial statements up to 1912 show a company in the early stages of technological and commercial development. Losses were being made, but they were not of a magnitude to be alarming from a cash flow perspective. The returns might not have lived up to the grand promises of the early advertising, but neither was the company in a perpetual state of raising new capital. The problem in the early years, aside from the technology itself, was the competitive nature of the market and the actions of competitors willing to operate at substantial losses funded by issues of equity. This phase ended with the purchase of United Wireless, which immediately reversed the loss-making position. The returns could hardly be deemed excessive, with the return on assets barely exceeding 5% by the end of the war. This was not a spectacular figure after ten years where no profits were earned at all. For shareholders to have made any money, they would have had to have done so by selling into speculative share price moves. The market power needed to sustain returns over longer periods was never in place long enough. Before such returns could be earned, the business was transformed into RCA. For shareholders in RCA, by contrast, the ride to profits was an immediate one. Not only was there the benefits of the network that American Marconi had built up, but the pooling of patents by its major shareholders meant that the government had in effect sponsored the creation of a monopoly.
7.12 – RCA: archetypal concept stock
Source: American Marconi annual reports. RCA annual reports. CRSP, Center for Research in Security Prices, Graduate School of Business, University of Chicago, 2000. (Used with permission. All rights reserved. www.crsp.uchicago.edu.) New York Times. Commercial and Financial Chronicle.
Even from the early days of RCA, its profitability was reasonable. The pooling of patent interests between AT&T, GE, RCA and Westinghouse provided huge competitive advantages and prevented other competitors joining the market. RCA found itself with exploding sales and margins as a result. For the investor, the different phases of development would have presented different decisions. In the early years, the main issue was technological feasibility. Was Marconi on the right track, and, if so, was there sufficient patent protection? After the United Wireless acquisition, these questions were largely resolved. The issue then became the effective commercial delivery of the service and hence profits. During the war, this would have been difficult to analyse, with the added uncertainty of whether the assets would ever return to the private sector. When they did, and the transition to RCA took place, the shareholders found themselves with the protection of what was effectively a trust structure comprising the most formidable US companies in the business. The main losers were the British Marconi shareholders, who received a premium to the prevailing price but a return that bore little relation to what would have been received if the growth which was to follow had been taken into account. In other words, RCA inherited a structure that was poised for growth and where much of the physical and technical infrastructure was already in place and amortised.
The ten years that followed the creation of RCA were a period of explosive growth for radio-related companies and this is shown clearly in RCA’s returns up to the late 1920s. RCA was in many ways a flagship for the stock market of the period, with rapidly rising sales and net income. In the boom which preceded the 1929 Crash, the share price rose dramatically. The growth in sales was not one which could be sustained, and as saturation point was reached, it fell sharply. Combined with the effect of the Great Depression, and a falling stock market, it was to be many years before this level of sales or net income was reached again. The moral for investors was that care needed to be taken when extrapolating the growth rate of a new product from its initial launch into a more mature phase.
Competitors to the radio – mainly the newspapers – had at first decried, then ignored the new medium. When these tactics had not worked they refused to carry programming schedules. Eventually, however, when it was understood that the new technology was sustainable and growing, they sought to become owners, and where this was not possible, providers of content. Eventually the control of the radio manufacturing industry embodied in the structure set up by the US government became a target, and in 1930 the government filed an antitrust suit. Under pressure from the authorities, the monopoly was broken and NBC was to become a subsidiary of RCA.
Equally, by the 1940s the broadcasting power of NBC was subject to investigation and it was ultimately required to dispose of its ‘blue’ network, which subsequently became ABC. By and large, the newspapers did not change their stance on broadcasting and what perhaps should have been a natural extension of information dissemination from newsprint to voice became an industry under its own steam, one which evolved from the producers of boxes rather than the producers of content.
If the threat of the radio was not sufficient, a further and potentially more potent threat was also evolving during the 1920s. In 1925 John Logie Baird had demonstrated the feasibility of the transmission of images. Although the mechanical technology embodied in his demonstration was ultimately to be superseded by an electrical version that developed into today’s televisions, the message was relatively clear. A medium was coming which could transmit moving pictures and voice both through wires and over the airwaves. One might imagine that for the participants in the industry at the time the significance of this would have been immediately perceived. The reality was that history was yet again to repeat itself.
Television: an idea ahead of its time
The wor
k of John Logie Baird had been based upon the use of the ‘Nipkow’ disk. This was developed by the German scientist Paul Nipkow in the 1880s and provided a method by which an image could be broken into electrical signals, transmitted to a receiver and then reassembled through mechanical scanning. Logie Baird had succeeded in taking the science of the demonstration to a practical form. As with pretty much all inventions, he was not alone in his development work, and much of it was paralleled in Germany, Russia and America. For Logie Baird the development of the television was a difficult path, with financing hard to obtain and ridicule never far away. When he approached Andrew Gray, the general manager of the Marconi Company, the following exchange took place (as related by Baird):
“Good morning,” I said.
“Good morning,” said Mr Gray.
“Are you interested in television?” said I.
“Not in the very slightest degree. No interest whatsoever,” said Mr Gray.
“I am sorry to have wasted your time. Good morning,” I said and left immediately.⁷³
Logie Baird was treated no better by the editor of the Daily Express, who had him removed from the newspaper’s offices doubting his sanity. One might have supposed that newspapers would have quickly realised the potential for the new medium given their own history. The news industry had long used visuals to help increase circulation. The largest selling paper was one that focused on images. The first edition of the Illustrated London News was produced in May 1842, cost sixpence and featured 32 woodcut images ranging from the war in Afghanistan to a train crash in France and a fancy dress ball at Buckingham Palace. The paper was an immediate success, with circulation climbing to over 300,000 weekly, making it nearly six times more popular than The Times.
Engines That Move Markets (2nd Ed) Page 37