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

Home , Elihu Thomson, GE True, Mazda (light bulb), Tungsram

Leonard S. Reich

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 antitrust 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 efficiency, lower costs, and maintain product leadership, but it also nullified competitors, both large and small, and neutralized government intervention. The picture that emerges from this examination 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 anticompetitive 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 engineering 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- there were fifty-eight companies in the lamp business in 1894, forty-four in 1895, and thirty-five in 1896. Competition forced out most who withdrew at this time (see p. 92). 7 Passer, The Electrical Manufacturers, 331-33. 8 The association was based on Westinghouse patents because GE's contracts with some utility companies precluded licensing its lamp patents to others. Bright, The Electric-Lamp Industry, 103-4; United States Tariff Commission, Incandescent Electric Lamps, Report no. 133, 2d ser. (Washington, D.C., 1939), 32-33. Since GE's production costs were lower than those of the smaller competitors and all parties sold lamps for about the same price, GE made greater profits per lamp on a far higher sales volume. Lighting the Path to Profit I 309 cult economic conditions transformed president Charles Coffin into a very conservative businessman, far more interested in stability and control than in innovation. He thus used the severe economic conditions of the mid-1890s to dictate terms to GE's often-foundering competitors and to achieve formal control of the electrical industry. In 1901 Coffin developed a scheme that allowed the company to dominate the lamp market more completely without crushing small competitors. The Sherman Antitrust Act had been passed in 1890 and, although it had not yet been used to discipline large corporations for anticompetitive behavior, GE management recog- nized the need to be careful.9 While buying out most of the independent manufacturers, therefore, they maintained the charade that the companies remained independent. They accomplished this with the assistance of F. S. Terry, president of the Sunbeam Incandescent Lamp Company, and B. G. Tremaine, head of the Fostoria Incandescent Lamp Company, both members of ILMA. Terry and Tremaine realized that GE kept all the small companies dependent and weak under the ILMA agreements. Why not make them dependent and strong instead? With resources supplied by GE, Terry and Tremaine acquired most of the independent manufacturers between 1901 and 1906, setting up the National Elec- tric Lamp Company to control the overall business. By 1911, they ran eighteen subsidiaries that continued operations under each company's own name, with coordination and technical services supplied from the Cleveland headquarters. To maintain the appearance of competition to its fullest, companies sometimes filled orders under the brand of another affiliate, putting the others markings on the product and billing the customer on that firm's letterhead.10 GE's role in this arrangement was largely financial, and it paid off handsomely. With an initial outlay of $150,000, GE acquired 75.2 percent of National's common stock and an option to buy the remainder. Because it owned most of National and received the majority of its dividends—a total of over $600,000 by 1910—GE was content to let National take over a substantial portion of the lamp business. A decade after its 1901 founding, National's share of the U.S. market was 38 percent, compared to GE's 42 per-

9 Standard Oil was not so careful and found itself dismembered within the decade. 10 Quinn, Giant Business: Threat to Democracy, 50. Theodore Quinn worked at the National Electric Lamp Company and later rose to be a GE vice-president. Leonard S. Reich I 310 cent.11 If we discount National's share by a quarter (to reflect the amount that GE did not own), then GE's portion of the American electric lamp market in 1911 was about 70 percent. It actually controlled considerably more through patent-licensing agreements with Westinghouse and other companies. Only a few of the principals at National and the top management at General Electric knew about GE's ownership of the puta- tively independent organization. Most National employees believed that they worked for a company competing with the Elec- tric Trust, and the public had the same impression. GE carried the ruse so far as to bring suit against a number of the National companies for infringement of lamp-making patents in 1904.12 To solidify its control of the industry further, GE entered into agreements with manufacturers of lamp-making equipment and glass bulbs. GE provided expertise and patent rights to equipment producers in exchange for the ability to dictate to whom lamp- making products could be sold. It contracted with major bulb suppliers to purchase most of their output in return for guarantees that they would charge the smaller producers more. GE's contracts with the glass bulb makers rested on market power rather than on technological leadership; thus, the company leveraged its market position to control the costs of other producers.13 During these early days of the electrical industry, as lamp technology changed significantly, GE maintained control through both purchase of patent rights and in-house technical development. When the company was formed in 1892, Edison's original invention—a carbon-thread filament in an evacuated glass bull)— had undergone little change since its introduction. The major problem with this technology was its inefficiency. Five percent of the power that went into a lamp came out as light; the rest was lost as heat. As long as GE maintained control of the American lamp market through the ILMA during the 1890s, there seemed few reasons to work for improvement. Company figures reveal that only about $9,000 was spent on lamp development in 1894, $5,000

11 Tariff Commission, Incandescent Electric Lamps, 33. 12 W. F. Mattes, "GE's Great Bulb Caper," The Nation, 30 June 1969, 823-24 (Mattes worked in GE's lamp division for forty years before writing the article); Paul Keating, Lamps for a Brighter America (New York, 1954), 49-56; Bright, The Electric- Lamp Industry, 147. A thorough examination of GE's relationship with National can be found in the following court case: U.S. v. General Electric et al., 272 US 476, 808-63, argued 13 Oct. 1926. 13 Bright, The Electric-Lamp Industry, 152-53. Lighting the Path to Profit I 311 in 1895, and $15,000 in 1896. Little of this went to filament research, where breakthroughs would likely be made, although GE did engage Thomas Edison's West Orange laboratory to inves- tigate new filament types.14 Considerable lamp development went on outside GE, however, both in America and abroad. In the United States, several researchers were working on gas-discharge lamps that created a bright glow from ionizing gases rather than from filaments. West- inghouse supported one of the best of them, Peter Cooper-Hewitt. In Europe, strong physical science programs at the universities and longstanding university-industry connections led to research on a number of promising filament materials. Certain metals, inherently more efficient than carbon because of their capacity to operate at higher temperatures, became the focus of research efforts. In 1898, Austrian electrochemist Carl Auer von Welsbach developed a filament made from the metal osmium that was 60 percent more efficient than GE's carbon filament and longer last- ing as well. Although its fragility and expense limited the osmium filament to the European market (where electric power was considerably more expensive), this advance served notice that the carbon filament's days were numbered.15 GE paid attention. At the urging of its most creative engineer, Charles Steinmetz, the company in 1900 established a research laboratory whose primary purpose was to work on lamp development.16 GE's new lab had mixed success in advancing electric lamp technology during the following decade, but the company was able to purchase the patent rights for all of the important innovations that the lab did not produce. In 1905, research laboratory director Willis Whitney developed an improved carbon filament, known as the "GE Metallized," or GEM. Very rugged

14 M. S. Willson to J. Klenke, 5 Oct. 1927, John W. Hammond file, Hall of History Foundation, General Electric Company Building 2, Schenectady, N.Y. [hereafter cited as Hammond File], item L3357. GE paid Edison $23,000 in 1893 and $14,000 in 1894 and in 1895 for his research services, but he worked on a broad range of topics, not only lamps. Andre Millard, Edison and the Business of Invention (Baltimore, Md., 1990), 130-32. 15 Leonard Reich, The Making of American Industrial Research: Science and Busi- ness at GE and Bell, 1876-1926 (New York, 1985), 62-64. 16 On the establishment of the General Electric Research Laboratory, see ibid., 62-69; see also George Wise, Willis R. Whitney, General Electric, and the Origins of U.S. Industrial Research (New York, 1985), 66-94. Leonard S. Reich I 312 and as much as 50 percent more efficient than the standard carbon filament (with a somewhat shorter life), the GEM lamp was a significant advance. However, more significant improvements were occurring abroad, where researchers succeeded in making filaments of metals such as tantalum, titanium, molybdenum, and tungsten. With the highest melting point, tungsten promised the most efficient lamp, and in 1907 GE purchased rights to the tungsten-filament patent application of Austrians Alexander Just and Fritz Hanaman for $250,000.17 This proved to be an extremely valuable investment. When GE researcher William Coolidge fabricated a ductile tungsten filament in 1909 that was both more efficient and.more rugged than the Europeans' metal filaments, GE had a virtual lock on state-of-the-art lamp technology.18 GE used its patent position and market power to control the lamp market in subtle ways. Unwilling to abandon its carbon- filament business immediately, the company for several years required that wholesalers and utilities accept shipments of carbon- filament lamps in order to get the GEM and metal-filament lamps they wanted. National, which received metal-filament rights from GE, did the same. GE dictated the prices of tungsten lamps, which were held quite high—considerably above prices in Europe, where competition prevailed.19 Acquisition of metal-filament rights also strengthened GE's

17 Willis Whitney, "Research as a Financial Asset," General Electric Review 14 (1911): 327. To be sure of its position, GE purchased other patent rights as well: in 1904 to a tantalum filament from the Siemens & Halske Company in Germany, to an osmium-tungsten filament from Welsbach, and to another tungsten filament from Aus- trian chemist Hans Kunzel. See Reich, The Making of American Industrial Research, 73-79. Total expenditures for metal-filament lamp rights were $760,000, compared to in-house research expenditures of $350,000 through October 1910. Albert Davis to Hinsdale Parsons, 24 Oct. 1910, Hammond File, item L3020. 18 The Europeans' filaments were brittle, which made it difficult to adapt them to high-speed lamp-making equipment. However, the Just and Hanaman patent remained basic; that is, one could not make use of the Coolidge patent without also having rights to the Austrians' invention. 19 The companies began to phase out carbon-filament lamps in 1908, when carbon accounted for 84 percent of sales. In 1910, it was down to 63 percent; in 1912 to 25 percent; and in 1914 to 7 percent. The concomitant rise in tungsten-filament sales was from 6 percent (1908) to 18 percent (1910), to 40 percent (1912), and to 71 percent (1914). GEM lamps made up most of the difference. GE's and National's carbon lamps were considerably more expensive than those of some independent manufacturers, which means that GE made good profits through this arrangement. Bright, The Electric-Lamp Industry, 151—52, 190; summary fom plaintiffs brief, General Electric v. Laco-PhiUips, April 1916, Hammond File, item L244. Lighting the Path to Profit I 313 position in relation to Westinghouse, which had been attempting to establish a strong position of its own in non-carbon lamps. It was forced to take out licenses that limited it to a small share of the market. Westinghouse also underwent bankruptcy reorganization as a result of the financial panic of 1907, became less aggressive, and never again posed a serious threat to the GE interests.20 As the situation with metal-filament lamps made clear, GE needed to be concerned about foreign companies coming into the U.S. market or selling commercially valuable patent rights to American competitors. It mitigated this threat by initiating agreements with a number of foreign firms, some of which it already partially owned as a result of Edison's and Thomson-Houston's earlier forays abroad. By 1905 it held equity in and contracts with British Thomson-Houson, Compagnie Francaise Thomson- Houston, Tokyo Electric Company, Allgemeine Elektrizitats- Gesellschaft (AEG), and Canadian General Electric. These contracts provided for the exchange of patent rights and set out exclusive sales territories—in each case reserving the American market for GE. As of 1905, GE maintained holdings in these companies valued at more than $4.4 million.21 For a number of reasons, GE had no interest in invading foreign lamp markets. First, it already received income from foreign lamp sales through the equity positions just described. Second, it wanted to maintain mutually beneficial relationships with would-be foreign competitors to keep them out of the American market, which regularly comprised about hah0 the lamp sales in the world. Third, lamp prices elsewhere were low as a result of competition. There had been an attempt to run an international cartel in carbon lamps—the International Incandescent Lamp Cartel, founded by the German firms AEG and Siemens & Halske in

20 See Niles Carpenter, Jr., "The Westinghouse Electric and Manufacturing Com- pany, the General Electric Company, and the Panic of 1907," Journal of Political Economy 24 (March and April 1916): 230-53, 382-99. 21 Thomas P. Hughes, Networks of Power: Electrification in Western Society, 1880-1930 (Baltimore, Md., 1983), 179; George Stocking and Myron Watkins, Cartels in Action (New York, 1946), 321—22; General Electric Company, Fourteenth Annual Report, 31 Jan. 1906, 17; Bright, The Electric-Lamp Industry, 155. It is of interest to note that AEG began as an Edison subsidiary (Deutsche Edison Gesellschaft) and always maintained close ties with GE as a result. Economist Robert Liefmann, in Car- tels, Concerns, and Trusts (London, 1932), 248, claimed that GE "stood godfather" for the smaller German company. Leonard S. Reich I 314

1903—but it soon fell victim to metal-filament lamps and to competition from outside producers. The result was unattractively low lamp prices.22 In 1911, GE sat astride the American incandescent lamp market, making large profits on ever-increasing sales.23 Its formidable patent position, invisible National Electric Lamp subsidiary, foreign investments and contracts, and market-sharing agreement with a subdued Westinghouse all resulted from a successfully implemented strategy based on aggressive research and investment, innovative structuring, and financial power. However, the administration of president William Taft, who was then nearing the end of his term and looking toward reelection, decided to prosecute GE under the antitrust laws for its control of the electric lamp market. Standard Oil and the American Tobacco Com- pany had recently been dismembered by decree of the Supreme Court for their anticompetitive activities, and "trust-busting" had become politically popular. The Electric Trust appeared to be a good target. The government's suit, brought against GE and thirty-four other companies, alleged that GE controlled the lamp market through a variety of schemes that inhibited competition, both foreign and domestic. The government's allegations, related to GE's relationship with National, which gave the appearance of competition where it did not exist; to price-fixing and market-sharing agreements with Westinghouse, National, and other companies; to the use of process and improvement patents in the suppression of competition; to the preferential agreements with glass bulb and lamp-making machinery manufacturers; and to the distribution system that required wholesalers to accept a variety of lamp types while maintaining prices at levels chosen by GE.24

22 The cartel included the major producers in Austria, Germany, Hungary, Holland, Switzerland, and Italy. It was intended to fix prices and establish quotas but had trou- ble doing either. See Bright, The Electric-Lamp Industry, 160-61. 23 American industry-wide lamp sales went from $3.4 million in 1899, to $15.1 million in 1909, and to $51.7 million in 1919, as GE market share rose from about 50 percent to over 70 percent. Company records indicate that its lamp sales were $2.0 million in 1900, $5.0 million in 1903, $7.5 million in 1906, $13.3 million in 1909, and $18.5 million in 1911. Bright, The Electric-Lamp Industry, 151, 489; "Value and Quantity of All Lamps Sold by Edison and National Works of General Electric Company," 3 June 1929, Hammond File, item L3976. The 1903 and subsequent figures include National. 24 Tariff Commission, Incandescent Electric Lamps, 33-34; "Electric Trust Must Dissolve," The New York Times, 13 Oct. 1911, 8. For a general discussion of the antitrust proceedings, see Bright, The Electric-Lamp Industry, 156-59. Lighting the Path to Profit I 315

After careful consideration of its position and of the possible consequences, GE management decided to surrender on all points except one: the company's ability to use patents for market control. GE argued that patents were inherently monopolistic; indeed, that was their raison d'etre. Provisions for the granting of patent rights could be found in the U.S. Constitution. Although these rights were intended to protect the interests of inventors directly, the courts had generally permitted inventors to sell or assign patent rights as they saw fit. GE thus claimed that its use of patents was within the scope of the patent laws as well as in the spirit of the Constitution, all of which preempted the recent antitrust laws. The federal judge accepted this argument and arranged a consent decree whereby GE and its codefendants admitted no guilt but agreed to cease all anticompetitive activities except those associated with patent control.25 In practice, this meant that GE acquire the remainder of National's stock and make its ownership known; that it terminate special agreements with Westinghouse and with the glass bulb makers and lamp-making machinery suppliers; that it discontinue market-sharing arrangements with other manufacturers; and that it stop setting the prices that wholesalers and retailers could charge for GE's lamps.

The Middle Years

The consent decree had little effect on GE's domination of the American electric lamp market. Stripped of its disguises and barred from its special agreements, the company made formidable use of its patent position and, drawing on its legal talent, devised a new way to control retail lamp prices. Coolidge's ductile tungsten patent, granted in 1912, became the basis of GE's position, and the company soon added many improvement patents, from techniques for making non-sagging filaments to tipless and frosted glass bulbs. Patent-licensing agreements now became the vehicle for GE's dominance. As of March 1912, for example, Westinghouse held licenses for more than two hundred GE lamp patents on highly restrictive terms. Westing-

25 The consent decree explicitly acknowledged that patent licenses could specify prices, terms, and conditions of sale, though not the fixing of prices charged by the wholesaler and retailer. Leonard S. Reich I 316 house was limited to 17.25 percent of the two companies' combined lamp sales on a patent royalty rate of 2 percent; for sales exceeding that amount, it paid 10 percent. Westinghouse could export lamps only to the same countries as GE and only with GE's permission. Westinghouse granted GE royalty-free licenses under all its present and future lamp patents for the duration of the contract and permitted GE to sublicense those patents. It also agreed to share relevant technical information and admitted the validity of all GE patents and patent applications. This removed Westing- house's incentive to conduct lamp research on its own or to acquire new inventions. GE offered even more restrictive arrangements to other manufacturers. They received far smaller sales limits, with higher royalty rates, and they were required to purchase their lead-in wires, filaments, and lamp bases from GE (which also helped GE keep track of their production). The small manufacturers were not permitted to export, and they had to provide GE with royalty-free licensing for the life of any patents they acquired during the term of the agreement, even if the agreement were later terminated. GE had the right to sublicense any of these patents. By 1915, less than 5 percent of American lamp sales lay beyond the company's grasp.26 To skirt the price-fixing prohibition in the consent decree, GE established an "agency" sales system, whereby it retained legal ownership of the lamps while they were in the possession of wholesalers and retailers (who accepted them on consignment). Retailers were required to take regular inventories of lamp stocks and to report back to the wholesalers, who reported to the company. This reinforced the perception that they acted as agents rather than as merchants. Because GE retained ownership of the product until it was in the hands of the consumer, the company could set any price it chose. The Federal Trade Commission (FTC) declined to give its imprimatur to this arrangement but never objected to its use.27 With the passing of the consent decree and the consequent

26 Westinghouse alone was permitted to share the GE lamp trademark "Mazda,' which made the GE and Westinghouse lamps virtually indistinguishable to the consumer. "General Electric Lamp Information," Hammond File, item L3438; Bright, The Electric-Lamp Industry, 236-37, 239-40; Kendall Birr, Pioneering in Industrial Research (Washington, D.C., 1957), 147; Frank Kottke, Electrical Technology and the Public Interest (Washington, D.C., 1944), 57; Floyd Vaughan, The United States Patent System (Norman, Okla., 1956), 76. 27 See Mattes, "GE's Great Bulb Caper, " 824, for the comments of an insider. Lighting the Path to Profit I 317 patent-licensing agreements and agency system, GE entered a new phase in its domination of the American electric lamp industry. The company concentrated its efforts on expanding the entire market while preventing the emergence of major new competitors. This pleased its licensees, whose production quotas were linked to GE lamp sales. Still smarting from the antitrust suit, GE took pains to shed the Electric Trust image through public relations efforts and by improving lamp efficiencies while lowering prices. These actions, combined with decreases in electric power rates, lowered the cost of lighting to American consumers by a factor of four between 1910 and 1930. ^ This helped to expand the market, transforming the incandescent lamp into a true mass market product during the 1920s. GE's tungsten-filament lamp prices went down rapidly during the 1910s and 1920s, yet the product remained highly profitable because GE tied prices closely to decreasing costs. Prices for the standard 60-watt lamp are representative of the entire line: a dollar per lamp in 1911, 75 cents in 1912, 40 cents in 1914 (held more or less constant for the next eight years during rapid inflation), 32 cents in 1924, and 20 cents in 1929. Decreases in the cost of manufacture came from mechanization of the lamp-making process developed in GE's lamp-machinery laboratory and from economies of scale. GE's lamp production increased from 80 million units in 1910 to 210 million in 1920 and to 319 million in 1928.29 Accounting for about one-fifth of the company's sales during the 1920s, electric lamps provided approximately $20 million annually in profits, generally about half of the company's total. Figures for 1920 and 1930 (the only ones available for this period) show lamp market profits of $19 million compared to total company profits of $35.4 million in 1920 (54 percent), and $23 million lamp market profits compared to $57.5 million company profits in 1930 (40 percent). These lamp profits represented an annual

28 "GE Lamp Engineering Report for 1925," 15, quoted in Wise, Willis R. Whitney, 157. 29 Bright, The Electric-Lamp Industry, 269, 348-50; Wise, Willis R. Whitney, 157, 241; Charles M. Ripley, Facts About General Electric (Schenectady, N.Y., 1929), 39. The Consumer Price Index (1967 = 100) for 1911-14 was approximately 29, for 1924—29 approximately 52. This means that in constant 1911 dollars, the 60-watt lamp price dropped from one dollar (1911) to 11 cents (1929). Lamp efficiencies went up about 17 percent from 1920 to 1925, and another 11 percent by 1930. For consumer prices, see Historical Statistics of the United States, Colonial Times to 1970 (Washing- ton, D.C., 1975), E135-73. Leonard S. Reich I 318 return on investment of 23-34 percent.30 With such a reliable source of income, the company could invest substantial resources in the development of new product lines—for example, entering and quickly gaining control of the home refrigeration market between 1927 and 1930. GE's new refrigerator assembly facility cost the company $18 million, and it spent millions more on marketing and distribution.31 GE's lamp sales increased for several reasons in addition to lower prices. Around 1907, the company began to market lighting strongly as a consumer product, stressing repeatedly the importance of higher lamp efficiencies. Because GE's lamps had the highest efficiencies in America, this approach made obvious sense. But it benefited the company in another way as well: for a given type of lamp, higher efficiency generally resulted in shorter life (for example, 750 hours rather than 1,000), so more efficient lamps had to be replaced more often. Developing its own special field of "Illuminating Engineering," GE promoted the use of greater num- bers of lamps for all kinds of applications. GE "researchers" took their instruments into homes, factories, even into the White House, to see how many lumens of illumination were at work brightening American lives and saving American eyes. Stories planted in high-circulation magazines like McCall's and The Ladies Home Journal sent the message that more light was needed to assure health and welfare, especially of children.32 In 1922 a new top management team came in to run GE. President Gerard Swope and chairman Owen Young worked hard to change the company's image, because they realized that in the emerging mass market economy of the 1920s, effective marketing and sales would be at least as important as development and production. To the extent that it was known to the general public at all, GE remained the Electric Trust. Swope and Young hired corporate marketing pioneer Bruce Barton and embarked on a cam-

30 General Electric Company, Annual Report for 1940, 14. Profitability figures from "Financial Data Relative to Lamp and Lamp Parts Business," 8 Aug. 1941, Reed File, Gerard Swope Papers, Hall of History Foundation, General Electric Company Build- ing 2 [hereafter, Swope Papers]. 31 Ruth S. Cowen, "How the Refrigerator Got Its Hum," in The Social Shaping of Technology, ed. Donald MacKenzie and Judy Wajcman (Philadelphia, Pa., 1985), 208- 11; Quinn, Giant Business: Threat to Democracy, 89-90. 32 George Wise examined the efficiency versus longevity tradeoffs and looked at GE's promotion of lighting during this period in "Long Live the Light Bulb? General Electric and the Development of Incandescent Lamp Technology, 1879-1940," unpub. MS, c. 1980; see especially 19-25. Lighting the Path to Profit I 319 Use 3 lights at the old cost of One

, j For the same money f' that you now pay for current for the old-style carbon lamp, you can have your choice of 3 times as much light in each room—or 3 times as many rooms lighted--or 3 times as many hours of light if, instead of the carbon lamp, you use Edison Mazda Lamps Do you know the difference between the Edison Mazda Lamp and the old-style carbon lamp? Look at the pictures. Note the difference in internal con- struction of these two kinds of lamps. Then look at your lamp. Which kind are you using ? lour nearest electrical dealer or lighting company 'Aill gladly show you the various sizes of Edison Mazda Lamp:-. General Electric Company Largest Electrical Manufacturer in the World

Advertising GE Lamps' Greater Efficiency • General Electric was quick to exploit the efficiencies of the tungsten-filament lamps. In advertisements such as this, the company touted the lower cost of the improved design and urged consumers to expand their use of electric lighting. (Photograph reproduced courtesy of the Hall of History Foundation, General Electric Company, Schenectady, N.Y.) Leonard S. Reich I 320 paign during the 1920s to transform public perceptions by promoting the advantages of electrification while stressing GE's central role in the process. Their goals were to create greater demand for the products of the electrical industry (virtually all of which GE manufactured), to associate GE closely with progress in the public mind, and to make GE's two-letter trademark known nationwide as "A Symbol of Service, The Initials of a Friend. " Before the decade was over, they had succeeded.33 Swope took over the chief executive role from Charles Coffin and ran GE very tightly. An engineering and sales manager who had developed new markets for the Western Electric subsidiary of AT&T since his 1895 graduation from the Massachusetts Institute of Technology, Swope had joined GE to run its international sales and marketing subsidiary in 1919. By demonstrating his command and control of international operations, Swope quickly earned the right to replace the retiring Coffin. Very much a hands-on manager, Swope took responsibility for all policy decisions of importance, often frustrating vice-presidents and other subordinates. He frequently consulted with chairman Owen Young, who offered counsel but never became involved in running the company.34 The 1920s were very good years for GE's lamp market interests. Largely because of its rights to the Just-Hanaman and the Coolidge tungsten-filament patents (which did not expire until 1930), GE controlled the industry with ease. To assert its patent rights, the company brought a series of infringement and injunc- tion actions in 1923, even threatening a few large purchasers of unlicensed products with contributory infringement. The sizes and types of lamps that GE chose to produce became the industry standard, and the company worked to limit the number of base types, power ratings, and line voltages in order to boost the efficiency of lamp production and distribution. Improvements in lamp-making machinery emerged regularly from GE's development laboratories, increasing labor productivity more than fourfold during the decade. Its licensees obtained their equipment and supplies from GE or from manufacturers licensed under GE's patents. In the latter case, GE controlled to whom the equipment

33 On the marketing campaign, see Publicity Department of the General Electric Company, General Electric Publicity, 1924 (Schenectady, N.Y., 1924), which contains many examples of advertisements placed in magazines and journals. 34 On Swope's management of GE, see David Loth, Swope ofGE (New York, 1958), especially 106-81. Lighting the Path to Profit I 321 could be sold, and in both cases it required that the equipment be returned to GE should the license expire. Given the structure of the lamp market, bankers were extremely hesitant to provide capital for lamp producers not incorporated under the GE umbrella. Unlicensed competitors thus lacked the resources to challenge the leader on production and costs, product technology, and especially marketing, where the greatest inroads might have been possible. By 1927, the output of independent companies had been forced down to about 3 percent of the market.35 If this hold on the market seems too tight to be legal, the U.S. Justice Department thought so as well and in 1924 brought another antitrust suit against GE. The crux of the complaint was GE's patent-license agreements with Westinghouse, which kept a powerful competitor in a perpetually subservient position, and the agency system of distribution, which many saw as a transparent evasion of the 1911 consent decree on price-fixing. However, GE was quite confident of its position based on the power of its patent rights as set out in 1911. Indeed, a federal district court quickly dismissed the case, and the government's appeal to the Supreme Court brought the same result. The High Court's ruling stated that GE owned patent rights that "cover completely the making of the modern electric lights with the tungsten filaments, and secure to General Electric the monopoly of their making, using and vend- ing. " In other words, with these patents in force, GE could do nearly anything it wanted in tungsten lamp production, distribution, and sales.36

International Relations

GE enjoyed this freedom of operation in the American market pri- marily because, over the previous two decades, the company had worked out a number of international agreements that effectively

35 Bright, The Electric-Lamp Industry, 243, 348-60, 388n; Tariff Commission, Incandescent Electric Lamps, 40-41; Witt Bowden, Technological Changes and Employment in the Electric-Lamp Industry, Bureau of Labor Statistics Bulletin no. 593 (Washington, D.C., 1933), 30-32. 36 Confident in its legal position based on earlier rulings and agreements, GE actually challenged the government to bring suit after hearings in the New York legislature brought forth numerous allegations. Electrical World 83 (29 March 1924): 637; Bright, The Electric-Lamp Industry, 253-55; United States v. General Electric Co., 272 U.S. 476 (1926), 480-81. Leonard S. Reich I 322 divided the world market. Mention has already been made of contracts dating from the early twentieth century, of GE's equity positions in foreign electrical firms, and of a generally unsuccessful attempt by European concerns to form a lamp cartel prior to the First World War. After the war, GE's interests became more international in scope, and it is important to consider the Ameri- can company's role in the worldwide electric lamp industry. Compared to GE's well-organized U.S. market, the European situation was chaotic. The struggling International Incandescent Lamp Cartel of 1903 was strengthened somewhat in 1911 when the three leading German firms pooled their metal-filament patent rights (including ductile tungsten rights acquired from GE) in an attempt to control the German market. They also made agreements with non-German cartel members for rights within their home countries. Nonetheless, the years after 1910 saw an inrush of new metal-filament competitors, and the beginning of the war in 1914 destroyed the cartel completely. The two strongest European companies before the war, AEG and Siemens & Halske, suffered considerably from the appropriation of their foreign subsidiaries in England, Holland, and Russia during the war and from the absence of strong capital markets in Germany afterward. In addition, foreign competitors such as the Dutch company Philips NV had expanded their facilities during the hostilities, resulting in significant worldwide overcapacity in electric lamps at the war's end.37 To offset these difficulties, the German firms combined their lamp business in 1919. AEG, Siemens & Halske, and Auergesell- schaft (founded by the chemist Carl Auer von Welsbach during the 1890s) merged their lamp operations into a company called Osram. Osram quickly acquired several of the lesser German electric lamp manufacturers, leaving only one of importance beyond its control. To expand the German presence internationally, Osram purchased or established subsidiaries in Czechoslovakia, Sweden, Poland,

37 Bright, The Electric-Lamp Industry, 303-4; Harm Schroter, "A Typical Factor of Internationa] Market Strategy: Agreements between the U.S. and German Electrotech- nical Industries up to 1939, " in Multinational Enterprise in Historical Perspective, ed. Alice Teichova et al. (Cambridge, England, 1986), 161. Overcapacity is based on esti- mates of the British Committee on Industry and Trade report of 1928, referenced in Stocking and Watkins, Cartels in Action, 323. Lighting the Path to Profit I 323

Switzerland, and Austria during its first five years, making it by far the strongest lamp company in Europe, with Philips falling to second.38 Osram and its major competitors caused GE some concern. The size of the American market was so great and the profits to be made there so large that the aggressive European concerns were bound to enter GE's home market eventually unless barriers could be erected to keep them out. If these companies did not invade America themselves, they might sell their own patented lamp- making equipment to GE's unlicensed American competitors, removing one of GE's important advantages over the smaller companies. Accommodation was therefore very important.39 Accordingly, GE set out to deal with Osram. Using its Inter- national General Electric (IGE) subsidiary, the American company pursued contacts in 1920.40 Negotiations did not go smoothly, however, because Osram wanted to establish and dominate an international cartel, whereas GE held equity positions in a number of European producers, including Philips, with conflicting interests. Osram intended to regain some of the market that Phil- ips had taken during the war. As the largest and most powerful electrical company in the world, GE was used to getting its way, an expectation that was reflected in its dealings with Osram. IGE's head negotiator, on being questioned about provisions in a pro- posed agreement, replied to his Osram counterpart, "But after all we [GE] have to control the light bulb business in the world."41 This approach caused resentment among the Germans, who did not agree. The outcome of these talks was a nonaggression pact between the two companies. They agreed to exchange patent rights, to provide each other with technical assistance, and to set out "exclusive sales areas for the two contracting parties, and thus set territorial limits to the competition between [them] for the . . .

38 "Osram" is a contraction of the metal-filament types osmium and wolfram (tungsten). Stocking and Watkins, Cartels in Action, 323-24. 39 United States Federal Trade Commission, Supply of Electrical Equipment and Competitive Conditions, 70th Cong., 1st sess., Senate doc. no. 46 (Washington, D.C., 1928), 142. 40 IGE was established in 1919 under Gerard Swope as the center for foreign operations. Its creation signified growing concerns about international trade in the postwar era as GE's businesses expanded. On IGE, see Loth, Swope ofGE, 93-105. 41 Stocking and Watkins, Cartels in Action, 331n. The quotation is from the notes taken by the Osram negotiator, quoted in Schroter, "A Typical Factor of International Market Strategy," 165. Leonard S. Reich I 324 protection of the home market."42 But that was all; and no other manufacturers were involved. Extremely concerned about excess lamp capacity among the European manufacturers, Osram moved to establish a cartel for the maintenance of lamp prices. In 1921, working with Philips and six other Central European lamp makers—and negotiating a sepa- rate contract with the British—it established the International Union for Regulating Prices of Incandescent Lamps. However, this group soon succumbed to internal bickering (especially between the Germans and the French) and to external opportun- ism. By February 1924, the International Union had "broke[n] down utterly."43 At this point, GE stepped in. Believing that its interests were best served through stability and expecting the Germans to be more compliant both because of the chaotic situation and because GE had recently acquired a major equity share in AEG, IGE negotiators suggested reopening talks on a full-fledged cartel. Dis- cussions began in April 1924 with J. M. Woodward, head Euro- pean representative for IGE, serving as coordinator. Agreements between Osram and Philips were especially difficult to achieve, as each believed that it deserved a larger share of the market. GE sweetened the pot for Osram, lending the company $1.5 million on excellent terms to help it pursue its business plans.44 This dem- onstrated the power of GE's deep pockets. On 24 December 1924, with everyone finally accommodated, the Convention for the Development and Progress of the International Incandescent Lamp Industry was signed. GE's role in its creation is apparent from Woodward's report to his supervisor:

I have taken advantage of the entire freedom of action which you left me, to develop the affair into a living partnership. For a long while it appeared as if the only thing which it would be possible to achieve would be a naked agreement between the parties as to quota. . . . Gradually the European owners and managers came to like the idea of a permanent relationship . . . and we took advantage of every opportunity offered to advance this idea. ... I may say without being misunderstood that the European parties are entirely amateurish, for reasons which arise from their historic division of interest. They realize this, and

42 Federal Trade Commission, Supply of Electrical Equipment, 143; League of Nations, Review of the Economic Aspects of Several International Agreements (Geneva, 1933), 70, quoted in Tariff Commission, Incandescent Electric Lamps, 57-58. 43 Stocking and Watkins, Cartels in Action, 330; J. M. Woodward to A. W. Bou- chard (both of IGE), 7 April 1924, quoted in United States v. General Electric et al., 1364 D.N.J. (1943), Ex. 2112-G. 44 Stocking and Watkins, Cartels in Action, 331, 340. Lighting the Path to Profit I 325

that realization coupled with their still active mistrust of each other has caused them to accept our leadership and to invite its continuance.45 Cartel members established a Swiss corporation called Phoebus S.A. to administer production quotas, prices, exchange of technical information, and sharing of patent rights. Within Phoebus, the General Assembly set policy, the Administrative Board issued rules to carry out that policy, and the Board of Arbitration adjudi- cated disputes. In addition, a testing laboratory worked to assure consistent quality among members' products, and a marketing division promoted the use of electric lighting, particularly the lamps of cartel members instead of those of outsiders. Companies' production was tied to the share of the lamp market that they held during the 1922-23 fiscal year. These production rights could be traded or sold among members. The cartel's original members included Osram, Philips, Tungsram (Hungary), Associated Electri- cal Industries (Britain), International General Electric of New York (Britain), Compagnie des Lampes (France), and the Brazil- ian, Chinese, and Mexican subsidiaries of GE. Other important lamp makers, such as Societa Edison Clerici Fabbrica Lampage (Italy) and Tokyo Electric (Japan), joined later. Conspicuously absent from the roster was GE itself, though Phoebus operations were for some time managed on its behalf by IGE's Woodward.46 GE did not join Phoebus because doing so would have been both unwise and unnecessary. American antitrust laws reflected a very different view of corporations' role in society than existed in Europe. In the United States, big business had preceded big government and, as government power grew, lawmakers tended to take an adversarial position toward large corporations, usually because of past abuses. Rather than working in concert with government for the national good, American corporations were seen as benefiting mainly their owners and managers, often at public expense. As the Electric Trust, GE had come in for more than its share of scrutiny and animosity. In addition to the antitrust suits already mentioned, the Senate initiated an FTC investigation of GE's role in the electrical industry, with an eye toward dismem- bering the company, at about the same time that Phoebus was

45 Woodward to A. W. Burchard, 23 Dec. 1924, quoted in United States v. General Electric (1943), Ex. 2117-G. 46 Ibid., 332-35; Bright, The Electric-Lamp Industry, 305-6; Quinn, Giant Busi- ness: Threat to Democracy, 74. Woodward became a Phoebus employee. Leonard S. Reich I 326 being formed. In such an environment, appearances were very important, and joining Phoebus would have been quite inexpedi- ent.47 Because of the agreements that GE had already made—and continued to make—with the major lamp producers, it had no need to join Phoebus in any case. Through its IGE subsidiary, the company adjusted its existing agreements, bringing them into line with cartel operations and using language similar to the cartel's for exchanging patent rights and technical information, limiting competition geographically, and maintaining prices. Because its patent position was considerably stronger than those of the cartel members, GE was able to insist on certain patent-based royalty fees and service charges, taking in about $5 million from cartel members during the 1920s and 1930s. GE thus benefited from the export of lamp technology even where agreements barred it from exporting the lamps themselves. All such agreements with cartel members fully protected GE's home interests (which continued to account for nearly half of world sales through the 1930s) and set out secondary markets in which it was permissible for both parties to sell lamps, often with restrictions favorable to GE. For example, IGE's late 1920s agreements with Philips and Osram permitted them to do business in South America, but only at minimum prices set by GE, whereas GE could sell for whatever prices it chose.48 GE also interwove its operations with those of the cartel by purchasing substantial portions of the principal members' stock and by entering into joint ventures. Its 1929 holdings, expressed as a percentage of the other companies' outstanding stock issue, were: Osram, 29 percent; Philips, 17 percent; AEG, 25 percent; Compagnie des Lampes, 44 percent; Tungsram, 10 percent; Asso- ciated Electrical Industries, 46 percent; International General Electric of New York, Ltd., 34 percent; and Tokyo Electric, 40 percent. Usually the largest single shareholder by far, GE had a very strong voice in company policies. GE thus used its considerable financial resources (mostly accumulated through retained earnings) to control potential competitors. Given these holdings, it was not difficult for the American company to enter into joint

47 A resolution in the U.S. Senate on 9 Feb. 1925 officially initiated the FTC investigation, but Senate debate had been ongoing for some months at the time. 48 Stocking and Watkins, Cartels in Action, 337-39; Bright, The Electric-Lamp Industry, 310-11. Lighting the Path to Profit I 327 ventures—for example, making lamps together with Osram and Philips in China and with Osram in Mexico—or to supply lamps to these companies for sale under their names in other locales. Econ- omists George Stocking and Myron Watkins claimed that "Phoe- bus plus General Electric" resulted in a "World Cartel," and it is not difficult to see why.49 How effective was this cartel in controlling output and market shares? Within the United States, where GE reigned supreme, it was very effective, although by the mid-1930s the amount of business outside cartel (that is, GE) control had risen to about 10 percent.50 Elsewhere, the loss of market control was far higher: generally about 40 percent of lamp sales came from nonmembers. There were two major reasons for this. First, the most important metal-filament patents had expired by the early 1930s, and producers everywhere were free to sell lamps that gave efficient service with reasonably long life. Second, the cartel held lamp prices artifically high (as do all successful cartels), making entrance into the industry quite attractive. Given conflicting corporate and national interests, as well as the welter of laws affecting manufacture, transshipment, and sale of lamps worldwide, it is actually rather impressive that Phoebus held on to so much of the market for so long. By the late 1930s, as international tensions increased, Phoebus's effectiveness declined, and the Second World War destroyed it.51

The Later Years

Although GE had protected its American market from the major European and Japanese producers, it nonetheless had to work very hard to control domestic and foreign competitors during the later 1920s and the 1930s. As before, its efforts paid off hand-

49 General Electric Company, Annual Report for 1929, 12; George Stocking and Myron Watkins, Cartels or Competition? (New York, 1948), 82-83; Stocking and Wat- kins, Cartels in Action, 339, 341. 50 GE kept its lamp prices considerably below those of the cartel members, for both competitive and political reasons. As an example, the 1938 price of a 60-watt lamp, sold in the United States by GE for 15 cents, retailed for 22 cents in France, 34 cents in Belgium, 39 cents in Britain, 48 cents in Germany, and 70 cents in Holland. Tariff Commission, Incandescent Electric Lamps, 49. 51 Stocking and Watkins, Cartels in Action, 342-^3; Bright, The Electric-Lamp Industry, 310-11. Leonard S. Reich I 328 somely, bringing the company regular and substantial profits during a time when its other industrial lines sometimes incurred losses. During the late 1920s, GE renegotiated its license contracts with Westinghouse and the smaller American companies. Westing- house pressed for more sales, and GE responded by increasing that company's market share from 17.25 to 25.44 percent, with a royalty rate of 1 percent instead of the earlier 2 percent. At the same time, GE imposed greater restrictions on Westinghouse— for example, substantially increasing penalties for going beyond quota (up from 10 to 30 percent), setting the prices at which West- inghouse could sell lamps, and claiming right of refusal on Westinghouse's choice of distributors. Hence, GE gave up some sales and base royalties in return for an even tighter control of the competition. Contracts with the smaller licensees remained essen- tially unchanged with a royalty rate of 3 percent up to their quotas and 20 percent beyond.52 Important patent rights began to expire in the late 1920s, however, and by the early 1930s unlicensed producers were free to use ductile tungsten technology. In this environment, GE based its market control on improvement patents and especially on process patents that made it (and its licensees) more efficient than competitors. The most important improvement patents were on non-sag filaments and on frosted and tipless bulbs. Although the first two were eventually declared invalid by the courts, these patents pre- vented competitors from producing state-of-the-art lamps through the 1930s, and in the case of tipless bulbs also kept them from using the most efficient production methods. GE's patents covering assembly processes were actually far more important than those on the lamp itself. GE engineers developed most of them in-house, but rights to one important patent, for a weld-feeder device used in filament attachments, were turned over to GE under its patent-sharing agreement with Osram. Productivity enhancements through process automation increased GE's output rate of thirty lamps per worker-hour in 1926 to ninety-five in 1942. Non-licensed competitors could achieve little more than half that rate, which decreased their profits and

52 Ibid., 256-59; George Morrison to Gerard Swope, 28 April 1926, quoted in United States v. General Electric (1943), Ex. 64-G. Lighting the Path to Profit I 329

Mnrcb-Ai>ril 1928

'ational M AZ DA AMPS

Meeting Increased Competition in the 1920s • As GE's patents expired, the company continued to introduce new products such as the frosted bulb, shown here in a spring 1928 advertisement, and to broaden its pitch to consumers on the benefits of good lighting. (Photograph reproduced courtesy of the Hall of History Foundation, General Electric Company.) Leonard S. Reich I 330 placed them at a competitive disadvantage even though they generally paid a lower wage rate.53 The greatest threat to GE's American market domination during the 1930s came from unlicensed foreign competitors, especially the Japanese. When the tungsten-filament patents expired in 1930, non-cartel Japanese manufacturers, who benefited from extremely low labor costs and a recently devalued yen, actively pursued the American market. At a time when GE priced its 60-watt lamp at 20 cents, the Japanese product sold for 10 cents even with an import tariff of 20 percent. Although these lamps had low efficiency, short life, and uneven performance, they appealed to some price-conscious consumers. GE combated the Japanese in three ways. First, it introduced an "economy" lamp, called the Type D, that went head-to-head on price while providing considerably better efficiency. Then, it successfully prevailed on the courts to bar the lamps of certain Japanese manufacturers because of markings that made them look similar to GE products. Finally, it brought suit against selected U.S. distributors (and threatened others), claiming that the imported lamps infringed GE patents. Unable to fight GE's substantial legal and financial resources, many distributors desisted. The Japanese share of the U.S. market, which soared from 1 percent in 1929 to 9 percent in 1932, fell continuously through the remainder of the decade, back to 4 percent in 1937 and to 2 percent in 1940. The invasion had been rebuffed.54 During the Depression years, lamp sales provided GE with a large, steady, and extremely important source of profits. The company achieved this profitability by holding the line on prices as costs fell and by strongly promoting lamp use. GE maintained its lamp prices even during the severe Depression years of 1930-32, holding them on most lines until a major across-the-board decrease in 1935. Although lamp sales slumped somewhat after 1929, larger unit profits more than made up for the loss, and sales began to recover in 1933. At that time, GE started to work with

53 Bright, The Electric-Lamp Industry, 271-80, 348-53. 54 Tariff duties on tungsten lamps remained at 20 percent. Tariff Commission, Incandescent Electric Lamps, 61-66; Bright, The Electric-Lamp Industry, 261-65; Stocking and Watkins, Cartels in Action, 346-50. Throughout the 1930s, there were over two hundred electric lamp manufacturers in Japan, and it became the second largest lamp-producing country in the world behind the United States. Lighting the Path to Profit I 331 the major electric utilities on a "Better Light, Better Sight" marketing campaign that soon boosted both lamp sales and power consumption.55 The severe economic conditions of the early 1930s hit GE's overall business very hard, but lamp profits helped pull it through difficult times in good condition. Total company sales were off dra- matically, and most of GE's product lines lost money. Heavy appa- ratus and appliances declined precipitously, leading to the layoff of almost half the company's employees. Yet in its worst year, 1933, GE still showed a modest profit because of income from lamp sales: its lamp division returned a profit of $17.6 million, whereas the rest of the company went approximately $11 million into the red.56 Indeed, for the remainder of the decade, the electric lamp division contributed from about one- to two-thirds of the company's profits, with less than 20 percent of the company's sales. This level of regular profitability permitted GE to raise capital more easily and to take risks in markets that would otherwise have been unsound. Company figures show lamp market profits as $17.9 million and total company profits as $28.5 million in 1935, which means that lamp profits contributed 63 percent of the total that year. Comparable figures for 1937 are $18.8/$63.5 million (30 percent), and $17.4/$41.2 million (42 percent) for 1939, on lamp sales averaging $45 million annually. This represents profits of 64 to 88 percent on costs, 39 to 42 percent on sales, and 23 to 30 percent on invested capital. Such figures were possible because GE and its licensees still controlled 87 percent of the American market as late as 1939.57 In an industry whose product line had reached maturity, however, this domination could not go on forever. Both product and process patents continued to expire, and the major agreements reached with Westinghouse and the smaller licensees were sched- uled to run out in 1944. All of those companies were desirous of

55 Total American tungsten-filament lamp sales went from 344 million (1929), to 335 million (1932), to 413 million (1935), to 534 million (1939). Bright, The Electric-Lamp Industry, 265-70. 56 Herbert Northrup, Boulwarism: The Labor Relations Policies of the General Electric Company (Ann Arbor, Mich., 1964), 13; Mattes, "GE's Great Bulb Caper," 824. 57 Bright, The Electric-Lamp Industry, 270; Birr, Pioneering in Industrial Research, 147; "Financial Data Relative to Lamp and Lamp Parts Business," 8 Aug. 1941, Reed File, Swope Papers. Leonard S. Reich I 332

greater market share. Furthermore, fluorescent lighting, developed by GE in response to advances in Europe, went on sale in 1938. This complicated the market for incandescent lamps, because the future impact of fluorescence was uncertain. Hygrade Sylvania, GE's largest lamp licensee, aggressively established its own fluorescent patent position in order to escape GE's control. The final blow to GE's lamp market position came in the form of yet another antitrust suit, filed in January 1941. The government claimed that GE continued to control the lamp market even though all of its important patents had expired (thus negating the patent-rights argument), and that through various agreements, both foreign and domestic, it had established and maintained an illegal monopoly in the production and sale of incandescent lamps. GE contested the suit, but Westinghouse and Hygrade Sylvania, seeing their opportunity, entered consent decrees freeing them from GE control. Before the suit proceeded very far, American entry into the Second World War put it into abeyance. Resusci- tated in 1946, the suit dragged on for almost a decade as GE's lamp market control slipped further and further away. In 1953, the court finally ordered GE to terminate all of its license agreements, to make available free of charge all its existing lamp patents, to license its production patents at reasonable rates, and to license similarly all lamp patents it acquired up to 1958. GE's control of the American lamp market was over.58

Conclusion

How had GE been so successful for so long? From the beginning it developed business and technology strategies based on acquisi- tions, legal formalisms, product leadership, and efficient operations. This approach allowed GE to use its financial strength in combination with a carefully conceived and executed corporate strategy to control technology for as long as possible and to control competitors—foreign and domestic—even after much of its patent protection expired. Once it had achieved dominance of the American lamp market in the early twentieth century, GE worked to increase its market share as much as it could, then did everything possible to maintain

58 Bright, The Electric-Lamp Industry, 287-302; Birr, Pioneering in Industrial Research, 149; Keating, Lamps for a Brighter America, 220-22. Lighting the Path to Profit I 333 that position. Of course, the company had to modify its activities under antitrust pressure, but it was always "pushing the envelope."59 GE dominated lamp-related science and technology in order to control product and process patents, becoming the quality (efficiency) and price leader. These accomplishments brought great profitability, helped it to expand the lamp market while retaining market share and controlling entry, nullified foreign competition, and aided the company in dealing with antitrust issues. Secularly declining lamp prices also helped GE hold its position, both competitively and politically, for as long as it did. Throughout the depressed 1930s, when its more important patent rights had expired, GE dominated the American lamp market largely by the strength of its web of agreements and the abilities of its legal staff. The picture of GE management's goals and methods that emerges from this story is rather different from the one presented in most business histories—for example, in Alfred D. Chandler, Jr.'s Visible Hand and Scale and Scope.60 Indeed, as I noted at the outset, GE managements handling of the lamp market might more aptly be characterized as an "iron fist" than as a "visible hand." The same is also true for many of the company's other markets during this period, from turbines, generators, and transform- ers to refrigerators and (an unsuccessful product) electric cars.61 While GE's marketing department was effectively promoting the benevolence of the corporation to the American public and to the government, the company's management was doing all in its power to gain, maintain, and control self-regulating oligopolistic markets in all areas of the electrical industry likely to be profitable. Several business historians—myself included—have previ- ously hinted at this side of GE's methods, but none has presented

59 This concept comes from the performance envelope of aircraft: flight conditions where they behave predictably. Test pilots sometimes "push the envelope" to see how fast or how high they can go. 60 See, for example, Chandler, The Visible Hand, 42&-33; Alfred D. Chandler, Jr., Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, Mass., 1990), 213-21. 61 In turbine-generator sets, GE held approximately 65 percent of an oligopolistic market from 1900 to 1925, and 60 percent from 1948 to 1963. Sultan, Pricing in the Electrical Oligopoly, 1: 10, 21. Information on GE's interest and intentions in the electric-car market communicated to the author by GE historian George Wise. Leonard S. Reich I 334 such a full-blown interpretation before.62 Doing so here is not intended to call into question the overall rationalization process that Chandler has described so well, but rather to show that there were important exceptions. GE was the dominant firm in a rapidly growing industry, and company management believed that, to maintain its position and its profits, they could not permit normal free-market forces to operate. They had to control competition while remaining within America's ever-changing regulatory boundaries. Thus, through carefully conceived and executed strategies of technological development, acquisition, litigation, licensing, promotion, and financing, they built and for half a century controlled a highly profitable market area without overstepping the bounds of the law. Only as GE's patent position eroded and as regulation became stronger did the company finally lose its position. When, after fifty years of dominance, a mature technology combined with increasing government oversight finally loosened the company's grasp on the lamp market, GE had maintained profitable control of a tech- nologically sophisticated product longer than any other company in American history.

62 See, for example, Reich, The Making of American Industrial Research; Passer, The Electrical Manufacturers; Birr, Pioneering in Industrial Research; Bright, The Electric-Lamp Industry; Wise, Willis R. Whitney; and John Hammond, Men and Volts: The Story of General Electric (Philadelphia, Pa., 1941).