The Master Switch

by Tim Wu

  And yet as the 1910s progressed, the Trust grew ever weaker, and the Independents grew stronger. Why?

  We can make the matter more perplexing by comparing the struggle in the film industry to what was happening concurrently in the telephone industry. Both featured a group of “Independents” opposing a would-be monopolist, in one case the Edison Trust, in the other, AT&T. And yet we see opposite outcomes: AT&T would bury the farmers and their barbed wire, going on to rule American telephony for decades, while Tinseltown would reduce film’s East Coast origins to the subject of a trivia question.

  While there was no one key to the film Independents’ victory, we might say they won by a process of funded innovation—by guessing right about what the next step in film could be and attracting capital to their guess. Rather than the endless pulp offered by the Trust, the Independents imported big European pictures (such as Queen Elizabeth) or produced films of similar ambition and complexity, creating the demand their product was fulfilling.

  In An Empire of Their Own: How the Jews Invented Hollywood, Neal Gabler makes this point a different way, by comparing WASP and Jewish cultural sensibilities at the time. For the former, movies “would always be novelties.” These “aging WASPs,” he writes, “were increasingly losing touch with the predominantly young, urban, ethnic audience—the audience from which the Jewish exchangemen and theatre owners had themselves recently risen.”26

  Hollywood’s entrepreneurs, moreover, were adept at gaining Wall Street financing, at a time when the idea of a bank funding a cultural product was unheard of. In contrast, the Trust was slow to turn to banking, doggedly relying on its system of fixed prices.27 But the set fees paid to producers meant an upper limit on budgets, limiting production flexibility and ensuring that a Trust film would never be as unusual or eye-catching a confection as independent or foreign films. As Zukor once put it: “what they were making belonged entirely to technicians. What I was talking about—that was show business.”28

  We might say, more simply, that the Trust, unlike AT&T, did not have the House of Morgan behind it, and perhaps that is all that need be said. For as we shall see, the history of American culture is as often a story of financing as of artistic merit. The Trust overrelied on its prices, the patent law, and lawyers, whereas AT&T relied on its financial power, a much more dependable asset.

  As a general rule, cartels try to stay away from courts, just as a fugitive, even one wrongly accused, advisedly steers clear of the police station. Oddly enough, the Trust spent most of its time in court, and that is where it met its final fate. For in an act of industrial jujitsu, in 1912 Fox and Laemmle both filed antitrust actions against the Trust in their defense against the patent lawsuits.

  The Trust was in name and fact a tempting target for the antitrust laws, as it made no secret of being a price-fixing cartel, and as James Grimmelmann writes, “the Ninth Circle of antitrust hell is reserved for price fixers.”29 The countersuits gained the attention of the Taft administration, which began its own investigation.

  The Trust’s defense against price-fixing charges was fascinating and colossally unpersuasive. In court, they openly admitted their purpose of dominating the film industry. But they argued that their existence was necessary both to “improve the art” of cinema and to perform censorship on behalf of the government, fulfilling a “neglected function of the State.” The Trust proposed, in effect, that it was due an exemption from the law because, as a private regulator of free speech, it was performing a public service.

  The claim to be a surrogate censor probably seemed less bizarre in that jurisprudential and cultural climate than in our present one. Nevertheless, the theory failed to impress the courts, and the Trust was unable to strike a lifesaving deal. Not that there was much to save by then, the Trust’s ranks and coffers having been depleted. In 1915, a federal district court finally ordered the tattered Trust be dissolved.30 The American film industry was, for the first time, an open industry.

  As American film opened up, it took off in directions few could have imagined. An industry famous for its lack of imagination entered an era of astonishing creative breadth, soon to challenge Europe as it never could before. The sheer volume of producers and exhibitors now working meant that every genre could be explored to its outer limits, and the demand was there to meet supply. Four thousand, two hundred and twenty-nine films were reviewed by the industry press in 1914 alone (an average of more than eleven new films every day). Specialty films proliferated for every niche market perceived: for blacks, Jews, and Irish, for socialist, racist, anarchist, trade unionist and antilabor. As the film historian Steven Ross writes, “the relatively inexpensive costs of production and the constant demand for films allowed producers to indulge their political sentiments, or those of their directors and writers.”31 Film in the late 1910s through the 1920s was consequently an astonishingly diverse and fecund medium—“as diverse as human thought,” to borrow the description a Supreme Court opinion of the 1990s would use for the Internet.32

  The beginning of the First World War in Europe gave the Americans a wide-open path to global supremacy. The European film industry, like other aspects of the culture, would never fully recover from the Great War, and Paris lost its place as the world capital of film. Once-mighty Pathé was sold off in pieces. George Méliès, the most famous director of the early 1900s, met a harsh fate. With his studios commandeered by the French army, Méliès, desperate for cash, sold his entire film archive to a junk merchant who melted it down to make footwear. In the 1920s, Méliès was discovered selling candy and toys in a booth at the Montparnasse train station.

  What happened to the Edison Trust? All its members quickly passed into obscurity or were bought out, with the exception of Eastman Kodak, which had already left the Trust by the time of its collapse. By the 1920s, the cartel that a decade before had ruled American film, seemingly invincible, had been completely eliminated.

  The founders of Hollywood, for the most part, went on to riches and fame, including the very first rebels, Laemmle, Fox, and Hodkinson. Their studios—Universal, Twentieth Century–Fox, Warner Bros., and Paramount—continue to dominate American film. But as we shall see, more important still than any of these would be that man waiting outside that office in New York City, Adolph Zukor. It was he, above all, who would manifest that rare trait Schumpeter described as “the dream and the will to found a private kingdom.”

  * The French title is Les Amours de la Reine Elisabeth.

  CHAPTER 5

  Centralize All Radio Activities

  It is inconceivable,” said Herbert Hoover, secretary of commerce, at the first national radio conference in 1922, “that we should allow so great a possibility for service, for news, for entertainment, for education, and for vital commercial purposes to be drowned in advertising chatter.”1 Hoover’s remarks reflected the accepted wisdom of the times: that advertising on radio was unacceptable. That is to say, they reflected what radio broadcasting was in the early 1920s: a decentralized industry founded on a rather idealized notion of an emergent technology, the technological utopia of its time.

  Hoover would convene several more such meetings in Washington, D.C., to create a form of self-rule for the broadcast industry. He believed not in law, command, or controls, but rather in what he called “voluntarism.”2 That ideal inescapably implied meetings to build consensus on shared norms in a friendly environment.

  According to a report of the first conference, all agreed that “direct advertising in radio broadcasting service [should] be absolutely prohibited.” J. C. McQuiston, the head of publicity for radio manufacturer Westinghouse, spoke for many when he wrote that advertising “would ruin the radio business, for nobody would stand for it.”3

  “Advertising by Radio Cannot Be Done; It Would Ruin the Radio Business, for Nobody Would Stand for It.”

  Yet despite Hoover, and the idealism of radio’s dreamers, other forces had designs of their own on the future of the medium. Listeners who were tuned
in to New York’s WEAF at about 5:15 p.m. on Monday, August 28, 1922, heard this:

  Let me enjoin upon you as you value your health and your hopes and your home happiness, get away from the solid masses of brick, where the meager opening admitting a slant of sunlight is mockingly called a light shaft, and where children grow up starved for a run over a patch of grass and the sight of a tree.4

  This, the world’s first major radio advertisement, was a promotion for a housing development named Hawthorne Court. In format rather like what we’d now call an infomercial, the spot urged listeners to leave Manhattan for the leafy comforts of Queens. It was also the opening shot in what would become the battle to redefine radio and ultimately to make it a closed medium.

  WEAF was the flagship station for AT&T, the telephone monopolist. More than Hoover or any other individual or entity, AT&T, it turns out, would define American broadcasting and entertainment in its inception. Indeed, while NBC sometimes calls itself “America’s First Network,” Bell actually got there first; by 1924, its National Broadcasting System (NBS) comprised sixteen stations reaching 65 percent of the American homes with radios.5 To a degree few understand, the mighty broadcast networks, CBS, ABC, and NBC, that would dominate American domestic life in the twentieth century were all ideological descendants of the Bell system.

  AT&T had a unique advantage in early radio broadcasting: monopoly ownership of the nation’s only practical means of moving sound around the nation, namely, its long distance network. The network built for carrying telephone traffic was perfectly suited to carrying radio programs as well.* As an unanticipated dividend of Vail’s adroitness, AT&T was the only company in a position to form an entity the world had never seen before: a broadcast network. The value of a network, as opposed to a mere station, is in the power to harness economies of scale. Even in the early 1920s, producing one show for sixteen stations meant that AT&T could pool the revenues from sixteen different audiences to create a single, higher quality product. The network is what made possible the production of broadcast news and entertainment as we would recognize it. The NBS network also made it possible for American presidents, beginning with Calvin Coolidge, to give speeches reaching the entire nation at the same time, the form of political address that would reach its apotheosis with Roosevelt’s “fireside chats.”

  But we are getting ahead of ourselves. The development of AT&T’s network, the National Broadcasting System, immeasurably important as it was, was preceded by another Bell first: advertising. Advertising is a force with few peers in the cultural history of the twentieth century, but its significance in the 1920s was to create a new and more sustainable business model for a radio station. Selling radio sets—the old revenue model—was a good if limited business, for ultimately few households would need more than one radio every few years. But advertising revenues could expand indefinitely—or so it seemed then.

  Advertising, in time, proved almost a license to print money, and the effects on broadcasting of the revenue model it introduced can scarcely be overstated. It gave AT&T, and later the rest of the industry, an irresistible incentive not just to broadcast more but to control and centralize the medium. To see why, compare the older model: When revenues came from the sale of radio sets, it was desirable to have as many people broadcasting as possible—nonprofits, churches, and other noncommercial entities. The more broadcasters, the more inducement for the consumer to buy a radio, and the more income for the industry. But once advertisements were introduced, radio became a zero-sum game for the attention of listeners. Each station wanted the largest possible audience listening to its programming and its advertisements. In this way advertising made rivals of onetime friends, commercial and nonprofit radio.

  At first AT&T denied any interest in advertising, simply describing its place in the radio business in terms that had saved its telephone hegemony: “common carrier” of the airwaves. As the firm prepared to operate WEAF at 660 AM, it issued an announcement: “Anyone desiring to use these facilities for radio broadcasting should make arrangements with Mr. Drake, general commercial manager.”6 As with the telephone network, for a fee anyone could get on the AT&T radio network and broadcast as they liked. In some sense, the common carriage concept provided cover and plausible deniability of any change in modus operandi: AT&T wasn’t advertising—its customers were.

  Such caution, too, informed the types of advertising AT&T initially allowed. It barred any mentions of price, or other possibly jarring details such as the color of a package or the location of a store. In consequence, ridiculous as it may sound, many of the first advertisements took a form more educational than commercial. Gillette’s first radio ad, for example, was a lecture on the history of beards.7 In time, NBS would also develop the idea of sponsored programs and acts, among the first the A&P Gypsies and the Eveready Hour.8 And so it was NBS that originated “entertainment that sells,” and NBS that pioneered radio programming aimed at turning citizens into consumers—the basic formula that has dominated American radio and television for more than eight decades.

  Within a few years, the rest of the radio industry was feverishly trying to imitate AT&T’s model—no surprise, considering how obvious and overwhelming its advantages were. Advertising and sponsorship gave radio stations a sustainable financial base—real money to pay speakers and musicians, who had formerly worked for free, with all the limitations on quality that that arrangement implies. But there was only so much the competition could accomplish without AT&T’s long distance network.

  When a utopian, open medium such as radio had been begins to close up, sinister forces may seem to be at work. There is sometimes truth to that impression, an extreme instance being the Third Reich’s creation of a centralized broadcast system for propaganda. But just as often, the closing is driven by a hunger for quality and scale—the desire to improve, even perfect the medium and realize its full potential, which is limited by openness, for all its virtues. It was the Eveready Hour that led the way toward broadcast fare of higher quality and polish.9

  Let there be no doubt that AT&T had a typically clear idea of what the structure of the radio industry should be. The company saw no reason not to apply Vail’s winning ideals again, envisioning a vibrant, high-minded radio monopoly to go with its telephone monopoly. As A. H. Griswold, an AT&T executive, disclosed in a speech in 1923 with all the can-do hubris of that corporate culture:

  We have been very careful, up to the present time, not to state to the public in any way, through the press or in any of our talks, the idea that the Bell System desires to monopolize broadcasting; but the fact remains that it is a telephone job, that we are telephone people, that we can do it better than anybody else, and it seems to me that the clear, logical conclusion that must be reached is that, sooner or later, in one form or another, we have got to do the job.10

  To close the loop entirely, AT&T set about designing its own radio sets, presenting President Coolidge with one of its handsomer models.11 In a final stroke, such as to this day inspires heated debate over network neutrality, AT&T’s new radios were engineered to receive only AT&T broadcast frequencies—and, not surprisingly, only AT&T programming.*

  RADIO RESISTANCE

  By the mid-1920s it seemed likely, if not certain, that AT&T would dominate the radio industry. The firm held the all-important long lines, and its president, Walter Gifford, was aggressive and, in the mold of his predecessors, fond of conquest. The only thing standing in his way was a company that the U.S. government had already sanctioned to monopolize radio, just as AT&T had been granted a warrant to rule telephony. And so the clash that was shaping up for the future of broadcasting would be, if not quite one of fellow titans, substantially different from the war Bell had earlier waged against its Lilliputian rivals in telephony.

  We first encountered the Radio Corporation of America ringside at a boxing match in 1921, but this strange creature needs a better introduction via a few historic analogues. Structurally the RCA was rather like the BBC, a nationa
l champion; but unlike the British company, it was neither established nor sustained with public duties. Rather, in 1919, the RCA was formed mainly in response to the navy’s insistence that all vital radio technologies be held by an American firm, in the interests of national security.12 And so RCA was fashioned out of the existing American Marconi Company to pool and exploit the rights to use more than two thousand patents owned by General Electric, United Fruit, Westinghouse, and AT&T. In consideration for the licenses, General Electric was made majority owner of RCA, but AT&T and Westinghouse also had substantial stakes. Hence one of the odder features of the contest for broadcasting: AT&T was in a battle with its own property.

  RCA’s general in the battle with AT&T was David Sarnoff, a genius of industrial combat also present at that boxing broadcast in 1921, who shall play a recurring role in this drama.13 Sarnoff was in midcareer, a rising star within RCA, when he was suddenly presented with a chance to take on AT&T and become the defining mogul of American broadcasting. The metaphor has been used before, but Sarnoff loved to imagine himself David confronting Goliath. For his part, AT&T’s Gifford at first refused outright to negotiate with Sarnoff, whom he is said to have declared an “abrasive Jew.”14

  While AT&T was a phone company first and foremost, it was also the larger and more aggressive of the two champions, and it seemed to hold a decisive advantage: ownership of the network, the nation’s only quality long distance lines. Against AT&T, RCA would face some of the same problems of access and interconnection that had doomed the telephone Independents in the 1910s.