NBC Is Ordered to Divest Itself of a Radio Network Summary

  • Last updated on November 10, 2022

Threats of antitrust prosecution forced the National Broadcasting Company, a subsidiary of Radio Corporation of America, to divest itself of one of two radio networks, which became the American Broadcasting Company.

Summary of Event

The most important company in the early history of American radio broadcasting was Radio Corporation of America Radio Corporation of America (RCA). Certainly, the Columbia Broadcasting System (CBS) was an important network, and companies such as Philco, Atwater Kent, and Crosley manufactured radio receivers. RCA, however, not only was a major manufacturer of radio receivers but also, through its National Broadcasting Company (NBC) subsidiary, controlled the nation’s two largest radio networks. National Broadcasting Company;antitrust enforcement National Broadcasting Company;radio networks Antitrust enforcement Radio;National Broadcasting Company Radio;antitrust enforcement Chain Broadcasting Regulations [kw]NBC Is Ordered to Divest Itself of a Radio Network (May 2, 1941) [kw]Network, NBC Is Ordered to Divest Itself of a Radio (May 2, 1941) [kw]Radio Network, NBC Is Ordered to Divest Itself of a (May 2, 1941) National Broadcasting Company;antitrust enforcement National Broadcasting Company;radio networks Antitrust enforcement Radio;National Broadcasting Company Radio;antitrust enforcement Chain Broadcasting Regulations [g]North America;May 2, 1941: NBC Is Ordered to Divest Itself of a Radio Network[00220] [g]United States;May 2, 1941: NBC Is Ordered to Divest Itself of a Radio Network[00220] [c]Radio and television;May 2, 1941: NBC Is Ordered to Divest Itself of a Radio Network[00220] [c]Business and labor;May 2, 1941: NBC Is Ordered to Divest Itself of a Radio Network[00220] [c]Laws, acts, and legal history;May 2, 1941: NBC Is Ordered to Divest Itself of a Radio Network[00220] Sarnoff, David Fly, James McNinch, Frank Woods, Mark Noble, Edward John Behn, Sosthenes

RCA was organized after World War I. It was based on American Marconi, which the United States had seized from its parent, British Marconi, at the beginning of the war. After the war, the company was purchased by a consortium of four companies: General Electric, Westinghouse Electric, American Telephone and Telegraph (AT&T), and United Fruit, all of which had an interest in the emerging wireless technology. In its early days, wireless communication was considered to be a form of communication between business and individuals rather than a medium of entertainment.

Westinghouse Westinghouse Electric Corporation and AT&T American Telephone and Telegraph began experimenting with what would become broadcasting. At first, each company established a set of independent stations, each with its own management and programming. In time, first AT&T and then Westinghouse united the stations they owned to form networks. These networks were then joined by independent stations that wanted to share programming with the network stations. Soon, the Westinghouse network came under the RCA umbrella. Both the RCA and AT&T networks were amalgams of independent stations and those owned by the parent companies.

NBC was organized in 1926, when RCA purchased AT&T’s radio stations, the most important of which was WEAF in New York. The new entity was to be called the American Broadcasting Company, but this designation was soon dropped. RCA would own 50 percent of the company, with 30 percent owned by General Electric and 20 percent by Westinghouse. The AT&T network became the Red Network Red Network of RCA, and the Westinghouse network with other stations became the Blue Network Blue Network . These designations originated from the colors of crayon lines drawn on a map of the United States by RCA’s executives as they plotted station locations.

For a while, the networks continued to operate much as they had under their previous owners. The Red Network concentrated on commercial broadcasting, while the Blue Network was geared toward public-service programs. Thus, at first there was little overlap between the two networks’ programming. This soon changed, however, and the Blue Network came to resemble the Red Network. In order to save money, the networks used the same facilities and shared talent. Artists appearing on the networks were under contract to NBC, which decided the programs to which they would be assigned. It was not unusual for an artist to appear on both networks, and on occasion an entire program would be switched from one network to the other.

The networks were quite small in 1926, when between them they owned a total of nineteen stations. They expanded each year, however, passing the one-hundred-station mark in 1936. By then, the networks had overlapping stations in many major markets. In New York City, for example, the Red Network had WEAF and the Blue Network had WJZ. In Boston, there were WNAC (Red) and WBZ (Blue); in Providence, Rhode Island, WJAR (Red) and WEAN (Blue); and in Chicago, WMAQ (Red) and WENR (Blue). NBC’s rivals and critics within the government claimed that this overlap constituted a violation of antitrust laws.

In order to regulate the fast-growing radio industry, Secretary of Commerce Herbert Hoover Hoover, Herbert convened a series of conferences, out of which, in 1927, the Federal Radio Commission arose. That commission took no immediate action upon the antitrust accusations leveled against NBC. In 1934, the Federal Radio Commission was replaced by the Federal Communications Commission Federal Communications Commission (FCC), which had broad regulatory powers. At the time, it was said that the radio industry “live[d] in fear of the FCC and in love with the sponsors of commercial programs.” Since in theory the airwaves belonged to the public, and radio stations existed at the sufferance of the FCC, such a belief was understandable.

In the mid-1930’s, the FCC decided that the existence of two networks owned by the same company was no longer satisfactory. Talk began of forcing NBC to divest itself of one of its networks. Frank McNinch was named acting chairman of the FCC in 1937 after the death of Chairman Anning Prall. Under the leadership of McNinch—a Democrat from North Carolina—some movement in the direction of forced divestiture began. That action was continued and accelerated by James Fly, the Texas Democrat who became FCC chairman in 1939.

Fly was even more activist than was McNinch. From the first, he spoke of the need for divestiture. This prompted David Sarnoff, RCA’s president and future chairman and the radio industry’s leading figure, to brand him as “irresponsible, dangerous, and socialistic.” Fly was hardly a radical. He wanted more competition on the airways, more public-service programming, and greater freedom for the networks’ affiliated stations. Arguably, none of these goals posed problems for NBC: NBC had provided optional programming for its networks since 1935, something CBS refused to do. Still, Sarnoff remained cautious in regard to Fly, especially after Fly called upon NBC and CBS to divest themselves of their captive talent agencies, which he said created a conflict of interest.

When speaking of the need for NBC to sell one of its networks, Fly observed that in 1927, 7 percent of all radio stations, or 48 stations, had been affiliated with NBC. Ten years later, the figure had risen to 25 percent, or 161 NBC affiliates. Indications were that NBC meant to add more stations to its rosters. Moreover, the two NBC networks shared talent and facilities, which Fly believed was clearly unfair to the competition.

Despite his rhetoric, Sarnoff thought Fly’s recommendation in this area was at least justifiable. Mark Woods, NBC’s treasurer who had been with the company since 1922, agreed. He thought that both networks would benefit by being separated. Because the Red Network was stronger, he recommended that NBC retain it and sell the Blue Network. As early as 1936, Woods and NBC President Nick Trammel had tried to purchase the Blue Network from its parent company: They wanted to leave NBC and oversee the new network on their own, but at that time Sarnoff was not ready to negotiate. As time passed, his reluctance faded. By 1941, Sarnoff was prepared to place the Blue Network on the block.

Sarnoff had little choice, because Fly was applying pressure. On May 2, 1941, the FCC issued the first commercial licenses for broadcast television stations. On the same day, it came out with a series of regulations forbidding any company from owning more than one broadcasting network, whether radio or television. NBC was the only such entity, and the regulations clearly were aimed at it. If it wanted to enter the new market for television programs, it would have to signal its willingness to follow the regulations immediately. The rule was so narrow, though, that NBC’s attorneys first recommended an appeal on constitutional grounds. The appeal took two years to work its way through the courts, but the Supreme Court in National Broadcasting Co. v. U.S. (1943) National Broadcasting Co. v. U.S. (1943) ultimately found in favor of the FCC, although it granted RCA leeway in making the divestiture.

Significance

Late in 1941, Sarnoff and Woods considered potential purchasers. Their asking price was in the wide range of $6-12 million dollars, depending on which stations were to be included in the deal. More than one hundred prospective purchasers expressed interest, but all thought the price was too high and withdrew. Dampening their interest was that in 1942 the NBC Blue Network earned only $66,000 after taxes.

Meanwhile, NBC took measures to separate the two networks. Everything was divided, including equipment, offices, and talent. Early in 1942, the Blue Network was incorporated as a separate company, with Woods as its chief executive officer. The process of separating the assets of the two networks continued into 1943, however. The investment banking house of Dillon Read offered to form a syndicate, one that included Woods, to purchase the network for $7,750,000. This offer might have been accepted immediately had it come earlier. Shortly before the offer was made, however, Edward John Noble, who had made his fortune with Life Savers candy and who already owned New York station WMCA, had joined with publisher James McGraw McGraw, James of McGraw-Hill to offer $8 million for the network. Part of the agreement, however, was that RCA would sponsor a series of programs on the newly independent network, for which RCA would pay the new network more than $1 million. In effect, the Woods offer was the higher of the two because of the $1 million that would flow back to Noble and McGraw.

Any deal would require FCC approval. Fly grilled Noble and Woods, attempting in the process to discover the views of both men on the First Amendment, specifically whether either man would object to selling time to certain advertisers, such as labor unions. Woods refused to discuss the matter, insisting that he was more interested in profits than in having opinions aired. Noble, on the other hand, said that he would have an open mind on such matters, indicating a vague support for free speech.

By this time, McGraw had dropped out of the syndicate with Noble for health reasons. Noble continued his quest for the Blue Network, now offering $4 million in cash and $4 million in the form of a three-year note. Part of the money was obtained by selling a one-eighth interest in the proposed company to Time, Inc., and another one-eighth share to Chester LaRoche, an advertising executive. Sarnoff accepted the offer, and the sale was completed on October 12, 1943, five months after the Supreme Court case was decided.

Noble was not interested in the network as an ongoing business; he merely recognized that it would make a fine investment. For the next decade, he attempted to build it up in preparation for its profitable sale. The generally good market for network programming helped, for even though the network was deemed inferior to its rivals, its listenership expanded. In 1945, Noble changed the network’s name to the American Broadcasting Company American Broadcasting Company (ABC). That year, ABC had time sales of $40 million, and Noble was able to sell a minority interest for $15 million, almost twice the price he had paid RCA for the entire company in 1943.

Noble continued to advertise the company to interested buyers, and in 1951 it appeared that he had located one in the person of Sosthenes Behn, the chairman of International Telephone and Telegraph International Telephone and Telegraph (ITT). By then, ITT had lost most of its overseas businesses and was concentrating on defense contracting and making acquisitions, among them Capehart-Farnsworth, a radio manufacturer. From Behn’s point of view, the combination of Capehart-Farnsworth with ABC would transform ITT into an entity that resembled RCA. At the time, ABC had sixty-three affiliate stations, five of which it owned, and the network was well positioned to obtain space on the television spectrum. Behn recognized that Noble had starved the network by withdrawing as much of its earnings as possible in the form of dividends. ITT had cash to invest, and Behn hoped to use its treasury to rebuild ABC.

Noble asked for $28 million in cash, and Behn offered $22 million in ITT stock. At first neither side would budge. Behn countered with a share-for-share exchange offer. Noble rejected this offer, and while negotiations continued on and off for the next year, Noble looked elsewhere for a buyer. He found one in 1953. Leonard Goldenson Goldenson, Leonard at United Paramount Theatres, which had been taken from Paramount Pictures as a result of an antitrust action, was seeking a partner corporation, and Noble provided one. The new company was renamed American Broadcasting-Paramount, but soon after was renamed American Broadcasting Companies. National Broadcasting Company;antitrust enforcement National Broadcasting Company;radio networks Antitrust enforcement Radio;National Broadcasting Company Radio;antitrust enforcement Chain Broadcasting Regulations

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Archer, Gleason. Big Business and Radio. New York: American Historical, 1939. An early history of radio, with an emphasis on management. Archer offers a contemporary view of the development of networks and the role of the FCC.
  • citation-type="booksimple"

    xlink:type="simple">Barnouw, Erik. A Tower in Babel, to 1933. Vol. 1 in A History of Broadcasting in the United States. New York: Oxford University Press, 1966.
  • citation-type="booksimple"

    xlink:type="simple">_______. The Golden Web, 1933 to 1953. Vol. 2 in A History of Broadcasting in the United States. New York: Oxford University Press, 1968. Barnouw’s is the standard history of radio and television. The first volume contains an account of the origins of RCA and NBC. The second volume has the details of the FCC crusade to force divestiture and the divestiture itself.
  • citation-type="booksimple"

    xlink:type="simple">Bilby, Kenneth. The General: David Sarnoff and the Rise of the Communications Industry. New York: Harper & Row, 1986. An adulatory biography of the RCA chairman, written by one of his chief aides. Bilby is defensive of Sarnoff and strong in his criticism of the FCC. One chapter deals with the divestiture.
  • citation-type="booksimple"

    xlink:type="simple">Hilmes, Michele, and Jason Loviglio, eds. Radio Reader: Essays in the Cultural History of Radio. New York: Routledge, 2002. Collection of essays discussing the cultural meaning and effects of radio upon (predominantly) American society. Contains many essays on the 1930’s and 1940’s, providing background on the importance of the network divestiture.
  • citation-type="booksimple"

    xlink:type="simple">Morton, David L. A History of Electronic Entertainment Since 1945. New Brunswick, N.J.: IEEE History Center, Rutgers University Press, 1999. History of broadcasting beginning with the fledgling ABC competing with the established NBC and CBS networks.
  • citation-type="booksimple"

    xlink:type="simple">Quinlan, Sterling. Inside ABC: American Broadcasting Company’s Rise to Power. New York: Hastings House, 1979. The first history of ABC. Contains chapters dealing with its early history following the divestiture.
  • citation-type="booksimple"

    xlink:type="simple">Sobel, Robert. RCA. New York: Stein & Day, 1986. The first full-scale history of RCA. Contains a long section on the development of NBC and the divestiture problem.

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