Part 10: "Caught In The Crossfire"

by Paul Schatzkin

By 1937, the extended Farnsworth family-the "lab gang" Philo had built- had turned "mankind's most fanciful dream into a startling reality." The collective spirit that motivated their work was shattered when company president and financier Jess McCargar fired everyone after arguing with Philo about reducing expenses in the laboratory. The dream of television was a reality, but as long as Jess McCargar remained in control of the finances, Philo Farnsworth's personal dream of creating a self-sustaining research lab by licensing patents instead of selling them seem doomed.

Simply stated, Farnsworth wanted to be in the inventing business. McCarger seemed to think that they were only in the television business. After 10 years of promises and predictions, McCargar, who was getting on in years, began to wonder if his investments in television would pay off in his own lifetime. As time passed, Jess's outlook soured to the point that his influence became an unpredictable threat to the entire enterprise.

The emotional stress that accompanied these issues peaked during the summer of 1937, when a group of Farnsworth intimates convened a special meeting in the living room of the Farnsworth's home on Crescham Valley Road outside Philadelphia.

The meeting was arranged to discuss alternatives to the company's current method of raising money, which had remained basically unchanged since 1929 when McCargar began selling stock in the venture to meet lab expenses. Now the assemblage thought it was time to obtain more substantial underwriting for the company, both to improve its financial standing and to minimize McCargar's destructive influence.

McCargar understood that the meeting was a challenge to his leadership and stayed away to avoid a confrontation. This tacit acknowledgment of his slipping power confirmed what had been happening for years. For, although he had been titular head of the company during the 30s, financial support for Farnsworth's research had increasingly been raised on Wall Street. Philo's first backer, George Everson, enlisted the aid of a former associate, Hugh Knowlton, who was now with Kuhn, Loeb, one of the most established Wall Street investment firms.

Once Kuhn, Loeb became involved in raising funds to support Farnsworth's research, the firm and the investors they represented began to acquire significant equity in the venture. By the spring of 1937, when he fired the entire lab gang, Jess McCargar was serving at the pleasure of a Board of Directors that he had not hand-picked. This shift in the power behind the company carried even more serious implications for Philo, who was still clinging to the last remnants of his dream that success in television would pave the way for success in whatever line of research he chose to follow in the future.

In the past, most of Farnsworth's problems erupted in the form of confrontations with Jess or George Everson, or a Board of Directors largely under their control. By the time the Board of Directors came to meet in Farnsworth's living room, the focus of power in the company was not so readily identifiable. Instead of dealing with just George and Jess, Farnsworth was forced to contend with unfamiliar faces. He knew that behind each face was a man with his own ideas about how Farnsworth should run his business.

Farnsworth did everything in his power to make the Board understand his point of view, but the Wall Street types were adamant about following a more predictable and conventional approach for securing the company's profitability. By dinner the ingredients of a serious proposal started taking shape. Using the services of Kuhn, Loeb, to arrange the necessary financing, the Farnsworth enterprise would acquire a factory and engage in the manufacture and sale of radios until the market was ready for television.

Television up for grabs

Farnsworth's was not the only company that was trying to fortify its position in the industry as the final battles over television approached. The list of entries into the television sweepstakes grew longer each day as companies like Zenith, DuMont, Philco, Crosley, Emerson and others began circling the territory to stake out claims.

As the growth of the new medium accelerated, the focus of interest began to shift from the research labs in New York and Philadelphia to the political corridors of Washington, D.C., where the recently formed Federal Communications Commission was expected to orchestrate the chaos by setting universal signal standards and clearing space in the electromagnetic spectrum for television.

A single set of specifications for all broadcasts, covering scan rates, frame rates, and the like, was essential for all broadcasts in a given area to be compatible with all receivers. Without such standards it would have been necessary to own a different receiver set for every station a viewer wanted to receiver. While standards seemed inevitable, it would be difficult to exploit the invention commercially until they were adopted.

The FCC, however, moved cautiously, realizing that once standards were adopted, the industry would have to live with them for decades, if not centuries, to come. In addition, the FCC was forced to contend with numerous factions that opposed the momentum that television was gaining. Radio broadcasters and set manufacturers joined forces in an alliance with the movie industry and lobbied to stall TV's progress in Congress and the FCC.

In addition to signal standards, the FCC was responsible for locating television within the electromagnetic spectrum. Because it utilizes extremely high frequencies and much greater bandwidth than radio, television broadcasting threatened to gobble up an inordinate amount of finite spectrum space; one TV channel would need as much as a dozen radio channels, thus limiting the number of available channels in any geographic region. Even more spectrum space would be required, it first seemed, for radio relay of TV signals if a national TV network were to be established along the lines of existing radio networks.

Without question the company that was in the strongest position to capitalize on television was the Radio Corporation of America, whose patent domination in the field of radio transmitting and receiving was almost impregnable. All thought the 20s and 30s it was virtually impossible to manufacture any kind of radio apparatus without paying royalties on RCA's patents, which included most elements of vacuum tube technology. Those that attempted to infringe on RCA's patents would have to contend with the company's formidable legal department, which more often than not put the competition out of business.

By reserving for itself the right to license or not license whomever they chose, RCA placed itself in the enviable position of determining who and how big its competition would be.

As a result, most observers assumed during the 30s thatRCAwould extend its domination to the new field of television, into which company president David Sarnoff had already poured millions.

Besides RCA, the American Telephone and Telegraph Company (AT&T) was the only other serious contender. AT&T staked out its claim in 1935, when Bell Labs introduced a wired solution to the problem of sending television transmission from city to city. Their invention was called a "coaxial cable"owing to the fact that one conductor was threaded through the center of a flexible copper tube. With this development, AT&T placed itself in perfect position to give itself the job of wiring together television networks. The FCC tentatively gave AT&T permission to experiment with their cable, and one was strung almost immediately from New York to Philadelphia to begin testing. In the meantime, the FCC opened an inquiry to make certain that AT&T was not about to create another communications monopoly.

Such investigations were familiar territory to AT&T, who along with RCA, GE and Westinghouse, had experienced previous governmental inquiries into their affairs. The inquiries revealed that these giant companies entered into a series of secret agreements during the 1920's upon which the entire structure of the communications business became predicated.

These agreements were ostensibly broad patent cross-licenses. Each company granted the others the use of their vast patent portfolios. Stipulations within the agreements had even greater ramifications, for they established specific restrictions on how each company could use their part of the patent pool. Thus AT&T was able to use all of RCA's patents so long as AT&T stayed out of the radio business, and RCA was able to use all of AT&T's patents so long as RCA stayed out of the telephone business. Conversely, RCA was assured dominance of the radio business as long as AT&T received all the long-lines business from wiring together RCA's radio networks.

These cross-license agreements became notorious during the early 1930s as "The Radio Trust." The original cross licenses were modified-after the threat of anti-trust proceedings-in the "consent decree of 1932," which essentially allowed RCA and AT&T to stick to the same terms, albeit couched in less monopolistic terminology. The basic structure of the early cross-license agreements still stands today.

However, even after the consent decree of 1932 was signed, the agreements omitted one important consideration: television. The AT&T/RCA cross-licenses covered audio transmissions only. There were no provisions at all regarding which company would use what patents in television. In other words, in a field where everything else

was sliced up and nailed down, television was up for grabs. Whoever got there first would call the shots.

Updating the cross-licenses to include television was essential to David Sarnoff's plan for RCA to extend its domination of radio communications into the field of television. With such patent control at its command, RCA would have a lock on virtually the entire electromagnetic spectrum: it would have been impossible to transmit or receive any kind of information via the spectrum without employing some sort of RCA-covered device. RCA would truly become THE Radio Corporation and David Sarnoff would become the undisputed Emperor of the Airwaves.

Only one man stood between David Sarnoff and his dreams of an ethereal empire-Philo T. Farnsworth. Sarnoff knew that in order to add television to the existing cross-licenses, each side would have to have patents central to the new art to exchange. AT&T was well prepared to begin negotiating around its contribution, the coaxial cable, and apparently RCA was expected to deliver its end of the bargain in the form of patents that covered the art of sending and receiving video signals. But as things stood in the middle of 1937, RCA didn't own any of those patents. They belonged to Philo Farnsworth.

Despite the fact that RCA and Farnsworth had been litigating over his patents for years, the RCA portfolio covering TV camera tubes lay in ruins. After nearly 15 years of consideration the U.S. Patent Office had still not issued a patent for the Iconoscope on the basis of Vladimir Zworykin's 1923 patent application. In numerous decisions the Patent Office held that the tube disclosed in 1923 and the Iconoscope were not the same tube. Furthermore, engineers who had been working with the Iconoscope in the field reported that the tube was a nightmare to use. The signal was noisy and needed a lot of filtering. Shading the picture never ceased to be a source of anguish. The RCA research philosophy-if they couldn't own an invention, they would engineer their way around it-was finally coming back to haunt them.

Sometime early in 1937, some of the men working at the RCA Labs in Camden gave the boss something new and exciting he could report to the increasingly nervous RCA Board of Directors. The engineers had re-designed the Iconoscope in such a way that it would soon be capable of producing much sharper, cleaner picture than any of its predecessors. The legal department assured Sarnoff that the development was completely original to RCA, and moved quickly to file patents. Mean while, the trademarks department came up with a name for the new tube: the "Image Orthicon." His confidence restored, David Sarnoff told the RCA Board of Directors that he had chosen a date for launching commercial television service-at the New York World's Fair in April, 1939.

Caught in the crossfire

Philo Farnsworth stepped directly into the crossfire between the giants in 1937 when the Federal Communications Commission invited him to express his opinions on the future of television.

Farnsworth's appearance was scheduled as part of the ongoing investigation into the growth of monopolies in the communications business. As usual RCA and AT&T were the targets of most of the Commission's concern. Specifically, the FCC was trying to determine if AT&T was employing monopolistic practices by its apparent failure to issue any licenses for the use of the coaxial cable. It seemed that AT&T was reserving use of the cable for itself and this would clearly be restraint of trade.

Farnsworth had appeared before the FCC on several previous occasions, as when he applied for a special license to conduct on-the-air experiments with his invention. Philo felt he had been treated fairly by the commission in the past, and was at ease.

Unknown to Farnsworth, AT&T President Walter S. Gifford sat quietly in the hearing room that day, listening intently as the Commissioners began to question Farnsworth about his experiences in obtaining licenses for his patents. Philo told them that he did not hold a license for use of the AT&T coaxial cable, nor had he tried to obtain one.

At this point Gifford, hoping to prove a point in front of the Commission, rose to his feet, interrupting the next question, and introduced himself. He then asked Farnsworth if he would care to enter into a cross-license agreement with AT&T. Farnsworth, a bit stunned, responded that, of course, he would welcome an exchange of patents with AT&T. "Then see me after you are through here," Gifford said, as he sat down, leaving the rest of the room in silence.

Unlike RCA, which had staked its entire future on developing electronic television on its own, AT&T had nothing to lose from offering Farnsworth a cross license, and everything to gain. By making the offer in the presence of a Commission that was investigating the company's business practices, Gifford seemed to contradict the charges of monopoly, and his clever staging cast AT&T as the champion of free enterprise.

It took more than six months for AT&T and Farnsworth to iron out the specifics of their cross-license agreement, but when the deal was finally announced, it sent shock waves through the industry.

If David Sarnoff was reading Business Week on August 14,1937, he would have discovered the truth in print: The AT&T-Farnsworth deal "means that the grip which the Radio Corporation was generally assumed to have on the future of television was relaxed," because "Farnsworth now obtains access to the basic broadcasting patents. In other words, he is now able to compete with RCA on more equal terms. The road is no longer blocked should Farnsworth decide to enter manufacturing."

In effect, Farnsworth had sneaked in through the back door and raided Sarnoff's kingdom. If they wanted to, AT&T and Farnsworth could have launched commercial television themselves, and left RCA standing in the cold.

The Farnsworth deal with AT&T had immediate implications for the rest of the industry, which greeted the news as a major coup for Farnsworth. The announcement gave others the confidence to begin purchasing equipment from Farnsworth without fear that RCA would interfere with the transaction. The Columbia Broadcasting System was one of the first companies to buy Dissector tubes from Farnsworth for TV experiments they were conducting from the Chrysler Building in New York City.

All this activity was a clear signal to Sarnoff that the industry was beginning to accept Philo T. Farnsworth on his own terms. Still, Sarnoff continued to play his own hand, confident that the Image Orthicon would provide his ace in the hole. Tests with the new device showed that the tube out-performed all their earliest expectations. Almost the moment the Orthicon was proven, RCA junked its research on the Iconoscope, with a quickness that suggests the only reason the Iconoscope ever was developed by Zworykin was to get around Farnsworth's patents. Having failed to accomplish this purpose, RCA moved rapidly on to something else.

Sarnoff was probably not too worried about the AT&T-Farnsworth deal until the day his lawyers informed him that their patent search had encountered U.S. patent #2,087,633, which revealed that Philo T. Farnsworth had been issued patents that covered important features of the Orthicon design, in 1933, four years before the tube was developed at the RCA labs.

The legal department initiated interference proceedings with the U.S. Patent Office over the conflicting claims but this effort met the same result as every previous RCA challenge. Priority on claims relating to the Image Orthicon tube were awarded to Farnsworth. The only ingredient on which the Patent Office would award priority to RCA was the name itself, "Image Orthicon," which RCA had registered as a trademark. So, the Orthicon tube, the workhorse upon which the television industry was built in the 40s and 50s, was basically a Farnsworth invention wearing an RCA name.

(aside: Ever wonder where the name of the "Emmy" awards came from? It was derived from the "Immy" Orthicon tube. Which means that every year, the television industry honors its patron saint with its most prestigious award -- and hasn't got a clue that they're doing so.)

By 1938 David Sarnoff had spent nearly $10 million for research in television, but RCA was unable to obtain a single patent that was essential to the new art. On the other hand, Farnsworth's research had cost less than $1 million, and his portfolio controlled the art. Sarnoff was outspending Farnsworth by 10 to one, and had nothing to show for it. Such is the difference between trying to engineer an invention and inventing one.

About this time Sarnoff began to change his tune. In public addresses, he mentioned Farnsworth several times by name and acknowledged his contributions to the art of television, although he was always mentioned in the company of other inventors, particularly Zworykin. Nevertheless, as Farnsworth's people learned about such utterances, the Wall Street grapevine confirmed their conclusion: RCA's change of heart was real. So in the early months of 1938, lawyers for Farnsworth and RCA sat down to begin negotiating the long-awaited cross licenses.

End of Part 10

Continue with:

Part 11: "Tears In His Eyes"

 

 


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