Antitrust Prosecution Forces RCA to Restructure Summary

  • Last updated on November 10, 2022

The Radio Corporation of America was restructured following an antitrust lawsuit, bringing an end to the “radio trust.”

Summary of Event

The action taken by the U.S. government to curtail monopolistic practices of the “radio trust” forced the Radio Corporation of America (RCA) to restructure its corporate organization in 1932, profoundly altering its status and its role in the growing home entertainment field. The U.S. government began to investigate RCA for violations of antitrust legislation in 1924, just five years after the government had played an important part in creating the Radio Corporation of America. In 1919, radio was used primarily for point-to-point transmission between stations and ships at sea. The federal government was concerned that this important service would come under the control of foreign hands, namely, the British Marconi Company. It used its influence to persuade Owen D. Young of the General Electric General Electric Company Company (GE) not to sell some important radio patents to Marconi. With government support, GE acquired the American Marconi Company and joined with the Westinghouse, Westinghouse American Telephone and Telegraph (AT&T), and United Fruit companies to form the Radio Corporation of America. Each of the founding companies held important patents in radio technology and received stock in the new organization in return for putting their patents into the RCA pool. AT&T and United Fruit sold their interest in RCA after a few years of operation, leaving GE and Westinghouse as the principal shareholders. [kw]Antitrust Prosecution Forces RCA to Restructure (Nov., 1932) [kw]RCA to Restructure, Antitrust Prosecution Forces (Nov., 1932) Radio Corporation of America;antitrust lawsuit Antitrust legislation Radio;antitrust violation Radio trust [g]United States;Nov., 1932: Antitrust Prosecution Forces RCA to Restructure[08150] [c]Radio and television;Nov., 1932: Antitrust Prosecution Forces RCA to Restructure[08150] [c]Trade and commerce;Nov., 1932: Antitrust Prosecution Forces RCA to Restructure[08150] [c]Laws, acts, and legal history;Nov., 1932: Antitrust Prosecution Forces RCA to Restructure[08150] Sarnoff, David Young, Owen D. De Forest, Lee Olney, Warren

RCA was created on the foundation of radio-related patents—about two thousand of them in 1920—and given the mission to wrest control of wireless communication from Great Britain. It quickly achieved these goals and successfully acquired many more patents, until it dominated the technology of radio. In the early 1920’s, the astonishing rise of radio as home entertainment brought immense wealth and power to RCA but also changed its relationship with the U.S. government.

David Sarnoff was the force behind RCA’s move into radio as home entertainment. He had first brought the idea of a radio “music box” to the attention of the management of RCA and had directed the company’s strategy of acquiring broadcasting stations and manufacturing radio receivers. Point-to-point transmission of radio messages was usually the preserve of monopolies, but the fledgling broadcast industry was a highly competitive business with hundreds of new companies. Sarnoff saw that RCA’s pool of patents could bring order to this chaos. He encouraged energetic prosecution of patent infringers in the courts.

Once RCA’s key patents had been upheld, the path was clear to establish a radio monopoly. The technology of wireless communication rested on numerous patents, but Sarnoff chose to use the vacuum tube as the means to enforce RCA’s patent holdings and establish its monopoly. The vacuum tube detected and amplified radio waves and was a vital component of radio sets and many other valuable products, such as control devices for industry. RCA’s patent position was especially strong in vacuum tubes, and its research laboratories were constantly producing new types of tubes that brought dramatic improvements in radio sets.

Sarnoff instituted a system of “package licensing” by which a company wishing to enter the radio field could get access to all necessary patents by acquiring one license from RCA. It was impossible to make radio equipment without infringing on RCA’s patents, especially those related to vacuum tubes. In the early days of radio, in the first years of the 1920’s, twenty-five large companies received licenses from RCA in return for substantial fees and a royalty paid on each radio set sold. The conditions of the license favored RCA’s monopoly because the licensees had to agree to use only RCA vacuum tubes in their products. Independent producers of vacuum tubes, such as inventor Lee de Forest, who had created one of the pioneer tubes, opposed this restriction and took their case to the U.S. Congress. Independent radio manufacturers, such as the Grigsby-Grunow company, brought suits against RCA and kept the issue of the radio monopoly in the public eye.

As radio sets became one of the most popular consumer products of the 1920’s and vacuum tubes were applied to many more products, RCA’s patent holdings became more profitable. By the end of the 1920’s, royalty income was running around $7 million annually and was the main source of revenue for the company. Although RCA allowed smaller companies to acquire licenses, it still held a stranglehold on the booming business of making radio receivers. It increased the amount of royalty payments and placed more restrictions on use of the licenses it issued. Soon, disgruntled radio companies were referring to RCA as the “radio trust.”

Complaints from radio manufacturers led the Federal Trade Commission Federal Trade Commission to launch a four-year investigation into RCA in 1924. That investigation brought many accusations that the company and its owners were restraining trade but no prosecution. In 1930, the U.S. Justice Department filed suit against RCA and its owners, alleging unlawful conspiracy to dictate the terms by which any potential competitor could use any of the patents held by RCA. In terms of the dollar amount of business covered by the prosecution, this was one of the largest antitrust suits ever initiated by the United States.

The announcement of an impending lawsuit against RCA quickly led to negotiations with the Justice Department to find a basis for dropping the prosecution. These negotiations continued through 1931 and 1932. The Justice Department was represented by Assistant Attorney General Warren Olney. The government’s position was that the leading participants in RCA should take their patents back, thus removing the means of monopoly power in the radio field and restoring competition. They favored an open patent pool with no restrictive licenses. RCA argued that the patents were its greatest asset and that removing them would lead to the dissolution of the company. The Great Depression had already begun to take its toll in the radio industry, and RCA’s common stock, which had once been priced at 114, reached its low point.

Several times during 1932, preliminary agreements on terms of the breakup of the radio trust were reached, but RCA backed out because it believed that the conditions were too severe. Many in the company believed that an open patent pool that gave free access to inventions was unfair to those who had worked to produce them, including RCA’s own laboratories. Representatives of each side met daily in an effort to resolve their differences. Opinion within RCA was that no wrongdoing had occurred in their contracts with affiliates, but Owen D. Young argued for compromise to avoid a long and potentially damaging lawsuit. In November, 1932, RCA gave way and agreed to the conditions demanded by the Justice Department two days before the trial was scheduled to begin. It signed a consent decree that did not admit guilt of any antitrust violations.

Significance

The major result of the consent decree was that General Electric and Westinghouse had to divest themselves of stock in RCA. Their employees who sat on the board of directors of RCA had to resign their seats. Owen D. Young, who had been a founder of RCA and had played a major part in forging the agreement with the Justice Department, had to leave the board. GE and Westinghouse agreed to stay out of the business of manufacturing radio sets in competition with RCA for a period of thirty months, by which time RCA was expected to have weathered the transition from monopoly status and become fit to compete.

The agreement also made it possible for AT&T American Telephone and Telegraph to reenter the radio business and begin making its own sets. The telephone companies had been some of the first to investigate wireless transmission because it threatened their long lines. After playing an important part in the formation of RCA, AT&T had sold its shares in the organization in 1922 and in 1926 had abandoned its interests in radio broadcasting. It had exploited the work of its Western Electric laboratories to become a leading force in vacuum tube technology and had established itself as the major supplier of sound equipment for motion-picture studios. It now stood as a dangerous competitor to RCA in the new field of electronic equipment manufacture.

The conditions of the agreement between RCA and the Justice Department were not all unfavorable to the company. Under its old relationships, RCA had been obliged to buy vacuum tubes and transmitting apparatus from GE and Westinghouse and then use them in its own products. Now it was able to make its own tubes and use them in new businesses, such as industrial applications. This opened up several profitable new fields for the company.

The consent decree ended the practice of issuing exclusive licenses that forced radio manufacturers to use only RCA tubes. RCA could no longer pick and choose whom to allow into the radio business because it was forced to license any applicant. RCA no longer dominated the patent pool, and the independent radio manufacturers hoped that they would be able to secure licenses from General Electric or Westinghouse. They saw competition as a means of lowering license and royalty fees. The open patent pool never materialized, and AT&T controlled many important patents. It was not until 1958 that RCA’s licensing power was ended by a Justice Department antitrust suit.

Although the consent decree limited RCA’s monopoly power in the radio field, it did not bring the company to bankruptcy, as many feared it would, nor did it hinder RCA’s growth during the 1930’s. The radio trust might have been broken, but by 1932 the great radio boom was over. Sales of receiving sets had reached the saturation point. David Sarnoff had correctly recognized that the time was right to diversify RCA’s business. To this end, he had moved into the businesses of broadcasting, filmmaking, and the manufacture of phonographs and records.

As news of the impending antitrust suit was reaching RCA in the late 1920’s, Sarnoff was already pressing the directors to turn the company into a self-contained concern that manufactured all the components used in its products. Sarnoff wanted to integrate the company fully by building up its research operation and by creating a strong manufacturing base. He also wanted to make RCA a force in technologies other than radio. Rather than undermining this strategy, the consent decree actually pushed RCA further along this path. RCA acquired several manufacturing facilities from GE and Westinghouse and embarked on the manufacture of a wide range of electronic products. Although the United States was in the grip of a serious depression, RCA continued to be a highly profitable concern. The company had sales of $100 million and profits of $6 million in 1936.

The government’s antitrust suit helped turn RCA from an organization focused on collecting royalty payments into a broad-based manufacturing concern driven by the innovations emerging from its laboratories. The critical cross-licensing agreement that had been the basis of the original idea for the Radio Corporation of America was left untouched by the consent decree. RCA still had access to radio-related inventions produced in the laboratories of GE and Westinghouse and could share in the advance of radio technology. It also had acquired several of their development laboratories. RCA emerged from the antitrust suit as one of the most powerful research and development organizations in American business.

Although Sarnoff publicly mourned the breakup of the radio trust and predicted hard times for RCA after it had been separated from its powerful owners, he was actually pleased that he now had free rein to lead the company. Free from the restraints of operating within the larger corporate control of GE and Westinghouse, Sarnoff seized the opportunity to make RCA into a more flexible and innovative company. Under his tenure, research became one of the foundations of RCA’s operations and the guiding force of its business strategies. Sarnoff’s vision was of an enterprise based on technology, not necessarily the result of accumulating patents but the consequence of an ambitious research agenda. RCA was one of the first companies to investigate the technical and commercial opportunities of television, carrying out important research in the 1930’s. Television became a bigger and more profitable business than radio after World War II and established RCA as the leader in the home entertainment field. Radio Corporation of America;antitrust lawsuit Antitrust legislation Radio;antitrust violation Radio trust

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Aitken, Hugh G. The Continuous Wave: Technology and American Radio, 1900-1932. Princeton, N.J.: Princeton University Press, 1985. The definitive study of the early years of radio. Contains a detailed description of the founding of the Radio Corporation of America.
  • citation-type="booksimple"

    xlink:type="simple">Bilby, Kenneth. The General: David Sarnoff and the Rise of the Communications Industry. New York: Harper & Row, 1986. One among many favorable biographies of Sarnoff, written by an RCA executive who worked with him. Reveals the inner workings of the company up to the 1960’s.
  • citation-type="booksimple"

    xlink:type="simple">Head, Sydney W., Thomas Spann, and Michael A. McGregor. Broadcasting in America: A Survey of Electronic Media. 9th ed. Boston: Houghton Mifflin, 2000. The standard introduction to the institutions of radio and television in the United States.
  • citation-type="booksimple"

    xlink:type="simple">Maclaurin, W. Rupert, and R. Joyce Harman. Invention and Innovation in the Radio Industry. 1949. Reprint. New York: Arno Press, 1976. Although somewhat dated, still an excellent overall account of the formation and first decades of the radio industry. Includes illustrations and index.
  • citation-type="booksimple"

    xlink:type="simple">Sarnoff, David. Looking Ahead: The Papers of David Sarnoff. New York: McGraw-Hill, 1968. Contains selections from Sarnoff’s papers held at Princeton University. Focuses on technology but reveals Sarnoff’s strategies and personality.
  • citation-type="booksimple"

    xlink:type="simple">Sobel, Robert. RCA. New York: Stein & Day, 1986. Good overview of the history of the company, written by a leading business historian for the lay reader. Places the growth of RCA and its technology in the context of the times. Portrays Sarnoff in a more realistic and less flattering light than do other sources.
  • citation-type="booksimple"

    xlink:type="simple">Sterling, Christopher H., and John Michael Kittross. Stay Tuned: A History of American Broadcasting. 3d ed. Mahwah, N.J.: Lawrence Erlbaum, 2001. The standard one-volume history of radio and television in the United States.

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Categories: History