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AOL, RCA, and The Shape of History

February 2, 2000

“ [It] has helped to create a vast new audience of a magnitude which was never dreamed of… This audience, invisible but attentive, differs not only in size but in kind from any audience the world has ever known. It is in reality a linking-up of millions of homes.”

“The miracle of [it]. I cannot tell you how it transformed our lives… Television never had its me-to-you intimacy.”

These two quotes are not about the Internet. They are about radio in the 1920s. The first one is excerpted from a 1929 report prepared for RCA by Owen Young, then Chairman of General Electric. The second is from a personal memoir of Alan Jenkins – The Twenties – published in 1974 by Peerage Books, London.

Both comments illustrate how radio -- especially when combined with the growth of automobile and air transport -- revolutionized Man’s perception of space and time in the 1920s, just as the Internet is doing, again, today.

What motivated me to look back at radio in the 1920s was the following graph, discovered in a recent issue of The New Yorker over the Thanksgiving holidays. It was originally created by Topline Investment Graphics, which produces charts about almost everything, and kindly reconstructed this one for us.

Obviously, RCA’s rise and collapse were part of the broader boom and depression of the 1920s and 1930s. Moreover, graphs of this sort, comparing the price patterns of unrelated assets in periods far apart, often amount to little more than teasing curiosities. However, the whole Internet craze is so reminiscent of past speculative bubbles that I felt compelled to look into the parallel with radio in the 1920s.

Investigating historical parallels is a tricky exercise. Most historians recognize that human attitudes and crowd behavior tend to oscillate in pendulum-like fashion. These oscillations result in many different cycles of various lengths affecting the economy at any given time.

In theory, combining these overlapping cycles into a mathematical model should make it possible to predict the future with reasonable accuracy. Yet, even the most elaborate studies of past economic cycles have failed to produce a reliable forecasting tool.

The reason, in my view, is that the shape of economic progress is not strictly cyclical: rather, it probably looks more like a spiral such as the one below.

In this illustration, point B will display enough similarities with point A that economists with a good memory will experience a strong sense of déjà vu. Yet, between these two periods, many structural changes will have taken place – in societies, in world trade and in technology, for example. As a result, point B will resemble point A, but it will also be different in enough respects that precisely forecasting what B will look like or when it will occur is all but impossible. The only certainty is that there will be a point B.

Many parallels have been drawn between the current stock market euphoria over the Internet and past episodes of investor infatuation with new technologies. In the 1920s, the number of passenger cars on the road increased from 7 million to 23 million and, by August 1929, $10,000 invested in GM a decade earlier would have been worth $1.5 million.

In a recent issue, Barron’s charted the progress of automobiles in the 1920s against that of computers in the 1980s. The uncanny parallel was made all the scarier by Warren Buffett’s reminder (reported inFortune) that investors in the 1920s who could foresee the car industry’s tremendous long-term potential, “must have seen automobiles as the obvious road to riches.” Yet, “after corporate carnage that never let up,” America’s 2,000 car manufacturers came down to just three – “themselves no lollapaloozas for investors.”

Even Jeff Bezos, founder and CEO of, professes to be deeply perturbed by the fact that everybody now uses “dot-com” in the same way that it was de rigueur, in the 1920s, to use “Motors” in corporate names.

But, in many ways, the historical parallel of the Internet with radio is even more striking than that with the automobile.

In 1916 David Sarnoff, an engineer with Marconi’s American subsidiary, had sketched out an idea for a “radio music box”, for people who lacked the patience or know-how to build their own, as thousands of “hams” were doing all over America and Britain.

Until 1919, however, radio broadcasting did not appear to have much of a future. “Most people looked [on it] as a harmless eccentricity or as something practical only in the narrowest sense, such as communicating with ships at sea”. There were less than five thousand radio sets in the United States, used mostly by professionals, kids and techies that made their own sets. Yet, to prevent Britain’s Marconi from monopolizing the expansion of this new technology, the US Navy pressured GE, AT&T, Westinghouse and the United Fruit Company to pool their patents into a cartel. Thus was born The Radio Corporation of America (RCA).

The first radio broadcasting stations were opened in 1920. Pittsburgh’s Station KDKA began broadcasting the first scheduled programs -- music records and sports results -- to amateur (ham) listeners, first from a barn and then from a Westinghouse warehouse. (That same year, Marconi opened the Public Broadcasting Station in Britain).

To better grasp how revolutionary radio was for the times, consider that 1920 was also the year when:

  • Rudolph Valentino starred in the silent movie The Sheik;
  • The Nineteenth Amendment granted suffrage to women;
  • The first regular commercial-airline service began, linking Key West to Havana.

Then, later that year, returns of the Cox-Harding presidential election were broadcast in real time, creating the first real public excitement about radio. Within a year, eight more stations were created, and within two years there were 564. David Sarnoff, who eventually became president of RCA, pioneered the concept of linking sales of radio receiver sets to organized broadcasts. The success of this concept enabled RCA to become America’s largest US radio manufacturer.

In 1922, AT&T opened WBAY, in New York, which would provide its services to anyone who would pay for them. WBAY was soon followed by Station WEAF, which started offering airtime for sale to advertisers. The first commercial, for apartments in Jackson Heights, NY, cost $100 for 10 minutes. So began commercial radio.

But, at the time, there was also great debate about whether industry, government, or voluntary contributions should subsidize radio. The new medium’s initial development could not depend on advertising as much as Internet does today, because advertising itself was only a budding industry.

Before 1917, nearly all the top advertising men had come up by way of writing newspaper ads for new pharmaceutical drugs, and advertising was still “a marginal, grubby business.” This changed rapidly in the 1920s, however. While figures to measure the rapid growth in advertising are lacking, it is estimated that nearly $1.8 billion (about $40 billion in today’s dollars) was spent on advertising in 1929.

By the end of the 1920s, three out of four radio sets were turned on everyday, and the average listening time was 2 hours and 25 minutes. Radios now incorporated loudspeakers, so that the average audience per set was three persons, adding up to 37-38 million American listeners. “Isolation had been broken, knowledge and leisure were being flattened.” This also marked the beginning of the world’s conquest by American music.

Radio soon began to compete with newspapers and magazines for the fast-growing advertising dollars, because it “took advertising where advertising had always striven to get in -- directly into the home.” By 1930, one-third of radio programs were sponsored by commercial businesses and, from 1928 to 1930, radio’s total advertising budget increased by 150% in just two years.

In the early years, radio stations had been created without any rules by radio set manufacturers, electric utilities, churches, newspapers, etc. All stations broadcast on the same wavelength, and patents were routinely infringed. Starting in 1926, a Federal Radio Commission, predecessor to the FCC, was charged to apportion wavelengths. This allowed corporate broadcasting companies to gain control of the market, with financial mergers greatly accelerating the process.

Sales of radio sets rose from $60 million in 1922 to $350 million in 1924, and $843 million in 1928. RCA, as both the largest manufacturer of radios and the leading broadcaster, dominated the industry.

The company’s earnings increased from $2.5 million in 1925 to nearly $20 million in 1928 and its stock climbed from 1½ in 1921 to 85½. From there, it was propelled to a stratospheric 1929 high of 549, in part thanks to the manipulations of a notorious “stock pool”. At that point, the shares of this highly leveraged company, which expanded rapidly through acquisitions and paid no dividends, sold for 73 times earnings. In 1929, RCA was the most heavily traded stock on the NYSE. (Devil Take The Hindmost: A History of Financial Speculation – Edward Chancellor –Farrar, Strauss, Giroux – 1999).

In case the reader still has doubts about the validity of a parallel between early radio and the Internet, here are two more quotes – both written well before the discovery of the Internet by the stock market.

“Nothing had ever succeeded on so vast a scale in so short a time.”
(America in the Twenties – Geoffrey Perrett – Simon & Schuster – 1982)

“RCA was the leader of an utterly new field of activity, and its potential had barely emerged. It was developing transatlantic telegraph services; it was broadcasting on the airwaves into millions of homes; it was producing the hardware to send and receive the broadcasts; its radio apparatus, constantly being improved, was thus continuously becoming obsolete and requiring replacement; it owned exclusive patents to startling innovations yet to come (such as television). RCA was the epitome of the new business conditions for a new age.” (1929: America before the Crash. Warren Sloat – MacMillan Publishing – 1979).

Most importantly, people who invested in RCA at the top of the 1929 speculative boom were right about radio’s fundamentals, as can be seen from the table below.

Years Radio Sets
(in thousands)
w. Radio Sets
(in thousands)
1922 100 60
1923 500 400
1924 1,500 1,250
1925 2,000 2,750
1926 1,750 4,000
1927 2,350 6,750
1928 3,250 8,000
1929 4,428 10,250
1930 3,789 13,000
1931 3,594 16,700
1932 2,446 18,450
1933 4,157 19,250
1934 4,479 20,400
1939 10,763 27,500

Radio survived the Great Depression and continued to grow at a healthy pace thereafter. The price of RCA’s stock, however, is another story. It collapsed in the early 1930s and my partner Robert Kleinschmidt, who is much older than I am, reminds me that it did not return to its 1929 high until the mid 1960s. Price matters.

Arguably, today’s environment presents many differences with the 1920s, and speculation may not involve as broad a segment of the stock market as it did then. But there are many similarities as well – not least the bulging numbers of “day traders” and the enormity of instant fortunes. In The Great Boom and Panic, Robert Patterson reminds us that, in the late 1920s, stock market fortunes equivalent to $300-$400 million in today’s dollars (my calculation) “were not uncommon”, and that there were many instances of people who had made similar amounts in weeks, months or in only one or two stocks. Most of the famous speculators of the time had accumulated fortunes of several billions in today’s purchasing power.

But, perhaps most dangerous today is the widespread belief by intelligent but inexperienced investors that they understand what is going on – a belief naturally reinforced by every new record of the NASDAQ stock index. In 1929, too, a renowned Princeton economist had asserted that: “the Stock Exchange is the stage whereon is focused the world’s most intelligent and best-informed judgement … It is probable that upon this stage can be discovered the aristocracy of American intelligence”.

Intelligence, maybe. But judgment?.. Today’s stock market infatuation with technology, the Internet revolution and the economy’s new paradigm should not make us forget that, as John Kenneth Galbraith once said, “financial genius is a rising stock market”.

François Sicart

Mr. Francois Sicart is the founder of Tocqueville Asset Management. He manages the assets of high net worth, international families, with global portfolios and complex tax and financial-planning concerns.

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