RCA and the Roaring Twenties
Bryan Taylor, Chief Economist, Global Financial Data
When you think about the Roaring Twenties and the bull market that surged until 1929, the one stock that comes first in everyone’s mind is Radio Corporation of America. During the 1920s, RCA stock rose in price 200-fold, one of the largest increases in the history of the stock market. After the 1929 peak, the stock collapsed, declining from 114.75 in September 1929 to 2.625 in May 1932, a 98% decline. RCA gradually recovered and eventually exceeded its 1929 highs, and after a 3:1 split, rose to a price of 66 when the stock was finally bought out by General Electric in 1986.
RCA started out as Marconi Wireless. The Wireless Telegraph and Signal Co., Ltd. was founded in London in 1897 to promote the radio inventions of Guglielmo Marconi. American Marconi was established as a subsidiary of Marconi Wireless in 1899, and in 1912 it took over the assets of the bankrupt United Wireless Telegraph Co. and became the dominant radio communications company in the United States. As can be seen in Figure 1, Marconi Wireless Telegraph Co. was treated as a utility and made little progress between 1912 and 1920.
Figure 1. Marconi Wireless Telegraph Co. of America, 1912 to 1920
The Radio Corp. of America
The government took control of most civilian radio stations during World War I, and after the war, Marconi Wireless was transformed into the Radio Corporation of America which was 65% owned by General Electric, Westinghouse, AT&T, and the United Fruit Co. The four companies profited from their investment until the Department of Justice brought antitrust charges against the companies in 1930 and forced them to divest their holdings in RCA in 1932.
Although RCA had been initially set up as a company to promote radio communications, or “wireless telegraphy” as it was initially known, during the 1920s, rapid advances in radio communications were made and it was discovered that shortwave communications could be transmitted across the globe. A signal sent from New York could reach London. More importantly, broadcasting was discovered, primarily because of the discovery of vacuum tube radio transmitters. Radio became the internet and AI of the 1920s. The event that really got broadcasting going was the July 2, 1921 Dempsey-Carpentier heavyweight fight from Madison Square Garden which claimed an audience of 300,000 listeners.
After that fight, broadcasting expanded rapidly. Between 1921 and 1923, the number of radio stations in the United States expanded from 5 to 556. Sales of radio equipment increased from $60 million in 1922 to $843 million in 1929. Initially, AT&T financed stations by commercial sponsorship of its programs, but in 1926, AT&T exited radio broadcasting and its stations were purchased by RCA. The company then formed the National Broadcasting Company (NBC) to provide programming across the nation. Eventually, NBC expanded to two networks, NBC-Red and NBC-Blue. In 1941, RCA was forced to divest itself of NBC-Blue because the FCC was concerned that owning the two networks gave NBC too much monopoly power over broadcasting. NBC-Blue was sold to candy magnate Edward J. Noble for $8 million and in 1946, the Blue network was renamed the American Broadcasting Co. (ABC).
In the 1930s, NBC had all of the biggest radio stars in its network, but beginning in 1948, William S. Paley of the Columbia Broadcasting System (CBS) began to raid NBC’s stars. After World War II, stars that made over $70,000 faced a marginal tax rate of 77%. Paley worked out an accounting technique whereby individual performers would set themselves up as a corporation so they could be taxed at 25% rather than 77%. Sarnoff, the head of NBC and RCA, decided this method was legally and ethically wrong and he ended up losing most of his biggest stars. Among the stars who switched from NBC to CBS were Amos and Andy, Jack Benny, Red Skelton, Edgar Bergen, Burns and Allen, Ed Wynn, Fred Waring, Al Jolson, Groucho Marx and Frank Sinatra. CBS established itself as the dominant network in both the radio and television industries for the next two decades.
Figure 2. Radio Corp. of America, 1919 to 1932
Radio was the internet and AI of its day. All you had to do was include “radio” in the name of your company and the price of your stock would shoot up, even if there was very little behind the company. A stock like Kolster Radio, which manufactured radio receiving sets rose from 10 to 95 between 1927 and 1929, then crashed down below one by 1930 when it filed for bankruptcy. During the 1920s, as Figure 2 shows, RCA stock rose from 5.825 in 1921 to 420 in 1928, split 5 for 1 in March 1929 and peaked at 114.75 in September 1929 before beginning its 98% decline to 2.50 in May 1932.
During the skyrocketing increase in price in the 1920s, RCA acquired Victor Talking Machines stock. “Free” radio reduced demand for phonographs, and the Victor Talking Machine Co. was the largest producer of phonographs in the United States. RCA bought Victor for its production and distribution facilities, planning to use its factory in Camden, New Jersey to produce radios that it could sell through the company’s authorized distributors and dealers. As Figure 3 shows, Victor stock rose from 32 in July 1927 to 190 in April 1929. Both RCA and Victor Talking Machines were added to the Dow Jones Industrial Average on October 1, 1928. RCA introduced all-electric Victrolas and 33 1/3 rpm records in 1930, though these were initially a failure, and 45 rpm records in 1949. Victor and the dog listening to phonographs became an important part of RCA.