Eventually, after repeated demonstrations, Logie Baird was able to raise funding and a company was launched in early 1927 with a public subscription. This elevated Baird’s lifestyle but brought interference from the board chairman, who was also chairman of Daimler Motors. Baird circumvented this problem by having the entrance to his laboratory made of sufficient width to allow him entrance, but deny that of his rather portly chairman. The problems which faced Baird, though, extended beyond his own chairman. Later in 1927 AT&T announced its own successful transmission of pictures based upon technology which had similar antecedents to that of Logie Baird. This would have appeared extremely threatening given the resources of AT&T, but the threat was never to materialise as AT&T maintained its lack of interest in broadcasting and eventually discontinued the research on the basis that it would not result in a cost-effective sound-and-picture telephone. In this decision AT&T was both right and wrong. The company was correct in the limitations of the disk technology, but wrong in the prospects for picture transmission. AT&T was not alone in working on picture transmission and other members of the patent pool were following the same path. Eventually the work of GE, Westinghouse and RCA was pulled together in RCA Victor Company under the supervision of a Russian émigré named Vladimir Zworykin. Simultaneously on the US West Coast, a young scientist named Philo Farnsworth was working towards the development of a television system that avoided the problems associated with mechanical scanning.
What followed from the work of Zworykin and his associates and Farnsworth was in many respects similar to the trials and tribulations of the early days of radio. RCA visited Farnsworth to investigate the worth of his inventions, and they were sufficiently impressed for Sarnoff to make an offer to buy out his patents, but not sufficiently threatened to make the offer an overly lucrative one. Farnsworth on the other hand wished to maintain ownership of his patents and receive a royalty in return for their use – and hence refused the $100,000 offer. RCA would not countenance the payment of royalties: as Sarnoff was reported to have frequently stated, RCA was in the business of collecting royalties, not paying them. RCA was confident in its position, not so much from the scientific angle as from the commercial one. Radio manufacturers could not remain in business without a licence for RCA, and which one of them would risk their financial future by betting on a new unproven technology from an under-financed company when to do so would surely result in the revocation of their manufacturing licence? Hence RCA felt confident that, through litigation and market power, Farnsworth’s operation could be brought to heel.
Certainly when Logie Baird had agreed broadcasting terms with the New York station WMCA, and received approval from the Wireless Commission in Washington, Sarnoff and RCA quickly appealed and ensured a ruling against foreign ownership of any broadcasting in America. Farnsworth struggled against the pressure exerted by RCA to the extent that ironically the only option appeared to be to try and penetrate the market in Britain – where the BBC had been broadcasting television programmes for some time but were labouring under the limitations of Baird’s mechanical scanning system. The trip to Britain was to prove successful and provide some much-needed revenue for Farnsworth, sustaining his company in the ongoing litigation against RCA.
The eventual result was that RCA lost the patent verdict and was forced to license Farnsworth’s inventions for the remainder of their patent lives. In the meantime, though, the market power of the radio trust had attracted increasing disquiet and eventually the companies were forced to break their links. RCA, though, was to emerge from this with its virtual monopoly on radio intact, and with Sarnoff’s position strengthened by the removal of the influential corporate shareholders. Sarnoff had proven the victor in most of his battles, including those involving erstwhile allies at GE and Westinghouse. He could no longer circumvent the patents held by Farnsworth, who had survived more than ten years of pressure from RCA, and in 1939 was forced into an agreement with the resolute patent holder. RCA was to augment its dominance of the radio broadcasting industry with a similar strength in television, now that it had secured access to the necessary patents to complete the picture broadcasting system.
For Farnsworth the future was less bright. His television company proved unable to compete with the giant RCA and other competitors who entered the market, and with the expiry of his patents the company was eventually taken over by ITT, with Farnsworth fading from sight.
Conclusions
The technology of the radio was substantially less well-developed than that of the telephone at the time funds were raised. Despite this, radio companies found little difficulty in raising capital. The most obvious reason was the generally prosperous economic conditions of the time and the earlier stock market success of some emerging industrial companies. Whereas with the telephone, the depression of the 1870s and the accompanying bankruptcy of many railroads was still fresh in the public’s mind, in the early 1900s attitudes to investment were influenced by the resilience and growth that these industrial companies had shown after the recession of 1893. A period of six to seven years of steady profits growth and share price rises were fresh in investors’ minds.
Moreover, there were the profits of some other wonderful new technologies to be marvelled at. The growth of the Bell Companies under their protective patent umbrella, and their later transformation into AT&T, made many investors regret the opportunities they had missed. Meanwhile, companies such as GE and Westinghouse appeared to typify a new kind of corporate potential, with their professional management and increasing influence. Investors viewed the future with confidence and were on the lookout for the ‘new Bell’. At the time, they could not have realised that even the mighty AT&T had only earned the margins it had done because of the barriers to entry. Its profits had already peaked. Despite the fact that the industry would continue to grow, earnings per share would fall as competition intensified.
The radio therefore arrived at the right time. It hit a fertile market and prognostications about its long-term viability were to be proven correct. The long run proved to extend to more than 20 years and success when it came took a form that no one at the time had foreseen. Moreover, for the investor the choice of company to invest in would have been bewildering. Those who understood the technology might logically have been led to invest in NESCO under Fessenden, whose technology was superior to Marconi – but whose company ended in bankruptcy. A knowledge of the ultimate uses to which the audion could be put, and respect for the industry’s most visionary figure, would have drawn investors to De Forest. Their money would have been lost in the many nefarious stock manipulation schemes with which he was associated and for which he was subsequently penalised.
The ultimate ‘winner’ of the wireless race was American Marconi, a company whose ownership structure was effectively determined by the US government. This change in structure ultimately guaranteed its success, since in its efforts to create a national champion the government created exactly what it had in other cases been seeking to destroy, namely a monopolistic trust. The monopoly was created in an industry whose demand was ultimately to explode, though it was not to happen until the 1920s and only then in a direction – broadcasting – that few had foreseen and many were slow to react to. Putting this into a modern context, one has to imagine how the personal computer industry would have developed had a patent pool been formed at the behest of the Justice Department, to exclude new competitors and maintain monopoly margins so as to finance a move into broadcasting.
The lessons for the investor at the formative stages of the technology were expressed succinctly at the time by Fayant (figure 7.13). What he pointed out was that if a company had to rely on relentless issues of new stock to continue, and was unable to make sufficient profit to pay a dividend, then the only likely winners were the stock promoters themselves. This lesson is timeless and presents one of the most obvious parallels with the dot-com mania which seized part of the investing world in the late 1990s. The importance of dividends in creat
ing value for stakeholders is evident in all long-term studies of stock market returns. Anyone wanting a vivid illustration of their importance need only compare the share price return of British Marconi with the total return including dividends. Fayant also pointed to the fragility and risk of a company which cannot generate sufficient cash flow to pay a dividend and depends for its existence on continual capital injections to keep it alive. Another lesson for investors concerns the importance and limitations of patent protection. For wireless investors, this lesson should have been evident in advance since it had been a constant feature in the development of the telegraph, telephone and electric light. Patent rights were vital in the development of the wireless industry, but not in themselves sufficient to guarantee success. Substantial financial backing and strong nerve were also required. Even when legally in the wrong, incumbent companies would seek to use litigation, cost and time as competitive tools with which to sustain their position. As a consequence, new entrants that lacked the necessary support could find themselves, as Fessenden and Farnsworth did, in a position where technical superiority did not bring the financial rewards that many would have expected.
The bull market of the period and enthusiasm it generated was not slow in alerting speculators to the returns which could be made. The excesses are vividly set out in a series of expose articles published in a series named ‘Fools and Their Money’ by Frank Fayant, published in Success Magazine during 1907. The articles are almost timeless in their content and should be read by anyone with an interest in the history of stock market speculation. Excerpts are set out below which relate to the general environment, but also to some specific examples.
“The man who has money to invest, and who rightly demands that it shall bring him a larger return than is made to him by the savings banks, wants to know what return he is likely to receive from investments in stocks of all these companies now offering their shares through all the newspapers all over the land …
“How many of these companies, in the advertising of which the English language is drained of superlatives, are going to live and pay dividends? The same question was asked five years ago about a mass of new companies advertised with the same reckless use of superlatives. During the winter of 1900–1, the investors of the country went mad over stock speculation. The country was in full swing of an unprecedented era of commercial prosperity. Great industrial and railroad mergers, creating hundreds of millions of new securities, inflamed the public mind. The public invaded Wall Street, and went on a speculative debauch, culminating for a time in the Northern Pacific panic when the stock of a railroad only a little while before almost worthless sold at $1,000 a share. The mania for getting rich quickly through the speculation in stocks affected the whole country. The shame of it was that the debauch was led by men of standing in the community, who were intoxicated by their greed for gold … what has become of hundreds of companies brought out then?
“To answer this question I have investigated every company that advertised its shares in the Sunday edition of the New York Herald in 1901 … During the fourteen months under review, the Herald’s income from this advertising was in the neighborhood of $175,000 … How many of all these one hundred and fifty companies of 1901–2 are making money today and paying dividends to their stockholders? One – just one! Just one of these one hundred and fifty companies which sold many millions of stock to the public is today paying dividends. It has paid two dividends of one per cent, each this year, and its stock is selling in the market at less than half what investors paid for it five years ago, although its promoters asserted that ‘it is doubtful whether anything has ever been offered to the public for subscription which gives so much promise for so small an outlay.’ ”
The majority of the investments had ended in bankruptcy with only a very small number surviving. That there were now major industrial companies in the US which had survived the economic woes of the early 1890s and prospered was one of the foundations which allowed such scams to exist. The enthusiasm generated by success, and the examples of the GE and the Bell Companies, helped others to raise capital. It also lowered investors’ perceptions of risk and allowed less-scrupulous promoters to take advantage of the appetite whetted by the apparent potential. Effectively the investor was placing his or her savings in a concept rather than a business. In the case of radio, how would it have been possible to distinguish between rival companies and their competing claims? It would have been difficult enough to distinguish between which companies had as their principal motivation the raising of capital and which ones were genuine aspirants in the new technology. For many the question would have been subordinated in importance by the buoyant market conditions, which seemed to guarantee returns irrespective of the underlying fundamentals of the business in question. As the postscript by Fayant eloquently pointed out, commercial realities can be hidden for a period, but not ignored indefinitely.
7.13 – The dangers of concept investing – a contemporary account
Source: Frank Fayant, ‘Fools and Their Money’, Success Magazine, vol. 10, no. 158, June 1907 and vol. 10, no. 157, July 1907.
7.14 – The irresistible lure of inside information
Source: Punch , vol. 144, 18 June 1913.
* * *
58 C. Cerf and N. S. Navasky, The Experts Speak: The Definitive Compendium of Authoritative Misinformation, New York: Villard, 1998, p.229.
59 S. J. Douglas, Inventing American Broadcasting 1899–1922, Baltimore: Johns Hopkins University Press, 1950, p.xxiii.
60 B. Winston, Media, Technology and Society: A History from the Telegraph to the Internet, London and New York: Routledge, 1998, p.70.
61 H. G. J. Aitken, The Continuous Wave Technology and American Radio, 1900–1932, Princeton: Princeton University Press, 1985, p.46.
62 Douglas (1950), p.80.
63 Ibid., p.56.
64 De Forest’s diary, 9 February 1902.
65 Douglas (1950), p.93.
66 R. F. Pocock, The Early British Radio Industry, Manchester and New York: Manchester University Press, 1988, p.51.
67 Ibid., p.122.
68 Ibid, p.159.
69 Douglas (1950), p.114.
70 Ibid., p.227.
71 This article was reproduced in the website of Thomas White (earlyradiohistory.us)
72 Douglas (1950), p.293.
73 D. E. Fisher and M. J. Fisher, The Tube: The Invention of Television, New York: Harcourt Brace, 1997, p.48.
chapter 8
Making it Count
From adding machines to mainframes
“I think there is a market for about five computers.”⁷⁴
Thomas J. Watson, chairman of the board at IBM, 1943
“Where a calculator on ENIAC is equipped with 18,000 vacuum tubes and weighs 30 tons, computers in the future may have only 1,000 vacuum tubes and perhaps weigh only 1½ tons.”⁷⁵
Popular Mechanics, March 1949
“I have traveled the length and breadth of this country, and have talked with the best people in business administration. I can assure you on the highest authority that data processing is a fad and won’t last out the year.”⁷⁶
Editor in charge of business books, Prentice-Hall, 1957
The business of counting
Until the 19th century, advances in number systems and computation had been relatively limited. Theoretical mathematics and physics had continued to advance, but the practical process of arithmetic calculations remained a laborious one. Indeed, little progress had been made from the abacus of biblical times.
The first major advance had come in the form of the slide rule, which in turn was underpinned by the elucidation of the principles of logarithmic calculations. These principles were first expounded by John Napier in Edinburgh in 1614. Napier had devised a system of logarithms that simplified the task of multiplication and division by using powers to convert the process into the simpler tasks of addition and subtraction respectively. This work was continued and improved upon by
Henry Briggs, who produced an extensive book of logarithmic tables, but it was the invention of the slide rule by an English clergyman, William Oughtred, which enabled logarithms to fulfil a practical purpose. The slide rule was to survive as the principal calculating device for over 300 years.
This is not to say that more elaborate mechanical devices were not tried. Famous scientists such as Blaise Pascal and Baron Wilhelm von Leibniz constructed increasingly complex adding machines in repeated attempts to reduce the time absorbed by completing calculations. Despite their best efforts, the ability to test theoretical propositions empirically remained heavily constrained. Major assistance came from the use of logarithmic and trigonometric tables, based on standard proven relationships, the use of which helped to avoid the need for calculations. But the situation remained unsatisfactory and as the 18th century drew to a close the unfolding Industrial Revolution and the rapid development of the sciences placed increasing emphasis on the need to perform large calculations rapidly and accurately. The initial impetus though came from government and two of its perennial concerns: taxation and defence.
Engines That Move Markets (2nd Ed) Page 38