Strategy Beyond Markets

Jan 4, 2022

In 1928, everyone was listening to AM radio. Listeners were stuck with static and low fidelity, but tuned in regardless. In the basement of Philosophy Hall at Columbia University, an electrical engineering professor named Edwin Armstrong was working on a better alternative to the current standard.

AM radio works by modulating the amplitude or signal strength of the radio wave. Armstrong's breakthrough (one of many) was that modulating the frequency of the radio wave (FM) could be stronger and clearer. Armstrong's research had been funded to improve AM radio, but he ended up creating a new and better alternative.

FM was true disruptive innovation, but wouldn't surpass AM radio until the 1980s. (Here's an article from 1979 about Los Angeles' top radio station being FM instead of AM for the first time). Why?

Armstrong had sold some of his patents to the Radio Corporation of America (RCA) in the past, and they had right of first refusal on his future patents. When Armstrong met with his contact at RCA, head of broadcasting David Sarnoff, he didn't receive the warm welcoming he anticipated. Sarnoff had made his career with evangelizing AM radio.

Wide-band FM would mean that there could be more radio stations. But more radio stations meant more competition for the existing stations, and RCA had just purchased NBC. Moreover, consumers would have to buy new devices to support FM.

In the 1930s, RCA mounted a campaign against FM, labelling it experimental and unproven. They touted television as the real improvement to AM, and FM as an unnecessary marginal improvement. The FCC, possibly motivated by the unregulated beginnings of AM, limited FM to a narrow high-frequency band. Enthusiasts couldn't get a new FM station started without heavy upfront investment. Rules banned commercial FM and no manufacturers sold devices to the public. Combined with the Great Depression, companies building on FM found it difficult to convince investors.

In 1945, after WWII, the FCC standardized frequency allocations. FM moved from 50-60 MHz spectrum to the current 88.5-108 MHz. But the FCC also instituted a rule of simulcasting – all FM stations owned by AM stations had to broadcast the same exact programming on each. FM stations used less power and broadcasted further than AM stations, but new FCC rules also dictated that FM stations use even less power, removing their efficiency and range advantage.

These new rules were tough for FM. Any receivers that worked for the old spectrum needed to be replaced for the new spectrum. Armstrong would never see FM overtake AM in his lifetime. RCA eventually moved to FM, choosing to install FM receivers in television for sound. They didn't work with Armstrong, but instead used his technology and claimed they had invented it in-house. Armstrong sued, but the lawsuit lasted the rest of his life (he was not as lucky as Alexander Graham Bell, inventor of the telephone, who successfully fought numerous lawsuits attacking his patent).

There are many lessons to the sad ending to Armstrong's story. Overregulation can stifle even the most disruptive innovations. Better doesn't always win. Narrative matters. Regulation isn't always fair, nor good for the consumer.

Fun fact: Philosophy Hall and the Mathematics building at Columbia University are one of the few buildings named after a discipline, not an individual.