Lighting the Path to Profit: GE's Control of the Electric Lamp Industry, 1892-1941

Leonard S. Reich Lighting the Path to Profit: GE's Control of the Electric Lamp Industry, 1892-1941 Founded in 1892, General Electric set out to dominate the American electrical industry. This article is an explanation of how the company accomplished this goal in the highly profitable electric lamp ("light bulb") market. GE's techniques included technology leadership through in-house development and the purchase of patent rights, discrimi- natory agreements with suppliers based on market power, and cartel arrangements of various sorts, both foreign and domestic. The article shows how one company was able to use financial and market power, combined with early control of a rapidly developing technology, to gain and then hold a major American market for half a century. he General Electric Company (GE), an early innovator in Telectric lighting and power, dominated the highly profitable American electric lamp market for fifty years. It also protected its home market from the commercial advances of foreign firms and realized royalties on technology and expertise shipped abroad. The explanation of how its achieved these remunerative arrangements is both fascinating and instructive. In this article I will consider GE's transformation of an early advantage in the electric lamp market into a solid and enduring domination. A full-time producer of electrical goods, it enjoyed a number of advantages over smaller competitors, including substantial financial resources, strong scientific and technological capabilities, economies of scale and scope, and market power as both seller and purchaser. Its management developed technological, legal, and marketing strategies that significantly increased GE's lamp market share, then retained that share in the face of LEONARD S. REICH is associate professor of administrative science at Colby College. Business History Review 66 (Summer 1992): 305-334. © 1992 by The President and Fellows of Harvard College. Leonard S. Reich I 306 continuing competitive threats—an approach that the company used successfully with other important product lines as well.1 Within the confines of the increasingly restrictive American anti- trust laws, GE developed mechanisms of market control as its most valuable patent rights expired, permitting the company to maintain a high level of profits for half a century. As we shall see, the "visible hand" involved in GE's management of the electric lamp industry might better be characterized as an "iron fist," sometimes gloved in velvet, sometimes not.2 GE management not only rationalized operations to improve effi- ciency, lower costs, and maintain product leadership, but it also nullified competitors, both large and small, and neutralized gov- ernment intervention. The picture that emerges from this exami- nation of GE's methods calls into question the image of an industrial leader that achieved its position through advanced technology and innovation, a vision of corporate operations that has been effectively promoted by company publicists since the 1920s and that is now generally accepted by historians. This article will show that such an image of GE during its decades of industrial dominance (approximately 1895—1950) is in fact quite misleading. The Early Years When the Edison General Electric Company and the Thomson- Houston Electric Company merged in 1892 to form GE, the new company dominated the American electrical industry. With more than twice the sales of its only major rival, Westinghouse, GE quickly developed techniques to control burgeoning markets in electrical machinery, electric traction, and incandescent electric lamps—the ubiquitous "light bulbs" of Edison's invention. GE 1 These other market areas included, for example, electric motors, steam turbines, and refrigerators. See Ralph G. M. Sultan, Pricing in the Electrical Oligopoly (Boston, Mass., 1974), 1: 6-16; T. K. Quinn, Giant Business: Threat to Democracy (New York, 1953), 84-95. 2 The well-known term "visible hand" is of course from Alfred D. Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge, Mass., 1977). Chandler described "the visible hand of management [which] replaced what Adam Smith referred to as the invisible hand of market forces. The market remained the generator of demand for goods and services, but modern business enterprise took over the functions of coordinating flows of goods through existing process of production and distribution, and of allocating funds and personnel for future production and distribution" (p. 1). Lighting the Path to Profit I 307 president Charles Coffin had come to the electrical industry after a career in the highly competitive shoe manufacturing business, and he combined an organized and directive management style with a strong interest in marketing and innovation.3 Like many other American industries of the late nineteenth century, the electrical industry was involved in buy-outs, mergers, legal suits, and collusion as companies attempted to suppress "ruinous competition." For example, Edison General Electric and Thomson-Houston, seemingly arch rivals, declined to compete with each other for certain electric street railway contracts in the years before their merger, and they rigged bid prices for others.4 Edison General Electric pressed patent suits against its rivals to maintain control of electric lamp technology, and this forced many smaller companies out of the business. Soon after its formation in 1892, GE became known as the "Electric Trust" for its anticom- petitive activities.5 In an era before consumer appliances, electric lamps consti- tuted the primary consumer-product market available to GE, and the company pursued it aggressively. Through the in-house engi- neering of a mechanized ("unit") system of production and the acquisition of an important Italian lamp-making patent, GE developed efficiencies in manufacture that lowered its costs. It thus managed to retain about half of the American lamp market after its Edison patents on the carbon-filament lamp expired in 1894. Yet competition from Westinghouse and from numerous smaller firms depressed prices so far that even GE made very little profit. Other manufacturers lost money, and some withdrew from the field.6 3 For an analysis of Coffin's career at Thomson-Houston and GE, see W. Bernard Carlson, Innovation as a Social Process: Elihu Thomson and the Rise of General Elec- tric, 1870-1900 (New York, 1991). 4 Harold Passer, The Electrical Manufacturers, 1875-1900: A Study in Competition, Technical Change, and Economic Growth (Cambridge, Mass., 1953), gives numerous examples of buy-outs, suits, etc. On the Edison General Electric-Thomson-Houston collusion, see W. Bernard Carlson, "From Thomson-Houston to General Electric," MS, 1990, 15. 5 The trust was an arrangement whereby a number of companies in an industry placed their securities in an unincorporated holding company (managed by trustees— hence the name), which ran them as a cartel. During the late nineteenth century, trusts appeared in the petroleum, lead, cotton oil, whiskey, sugar, cattle, and cordage industries, to name a few. See Chandler, The Visible Hand, 319-31. 6 Arthur Bright, The Electric-Lamp Industry: Technological Change and Economic Development from 1800 to 1947 (New York, 1949), 103-^4. The Italian patent, on an improved process to evacuate the bulb, came from engineer Arturo Maliganani. GE's annual sales volume was about six million lamps in the mid-1890s. Bright found that Leonard S. Reich I 308 During the mid-1890s, GE and Westinghouse together controlled about 75 percent of the American electrical industry, but they stalled each other through competitive pricing (and under- pricing) and through hundreds of patent-infringement suits. As profitability declined, accommodation became increasingly desir- able for them both. After extensive negotiations, GE and Westing- house reached an agreement in March 1896 whereby they exchanged licenses to all of their patents except those for electric lighting. The value of production under the agreement was to be in a ratio of five to three, GE's favor. If either company exceeded its share, it would pay the other a substantial royalty.7 Through this arrangement, GE institutionalized its dominance of Westing- house. Next, GE gained control of the incandescent lamp market in an arrangement that involved Westinghouse and sixteen of the smaller manufacturers, most of whom had been its bitter competitors. Together, they controlled 95 percent of American lamp sales. In early 1897, GE established a cartel, the Incandescent Lamp Manufacturers Association (ILMA), based on improvement patents held by Westinghouse. The association fixed proportional output keyed to GE's sales and set prices based on GE's prices. GE was allotted 50 percent of the market, Westinghouse about 12 percent, and the remaining 35-40 percent went to all the others. Lamp prices immediately increased about 30 percent.8 In this way GE stabilized and controlled its major markets. It was able to do so because the company maintained reasonably good financial health during the aftermath of the Panic of 1893. Financed through the banking houses of J. P. Morgan (New York) and Lee, Higginson (Boston), GE was forced to sell off some of its utility holdings at a loss to pay obligations and to support operations in 1894, but it had the ability to raise more funds when needed and was rarely thereafter short of cash. However, the experience of shepherding the weakened company through diffi-

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