Raising money for early ventures involves activating the more speculative compartments of the investor’s brain. These projects face a high likelihood of failure and have realized few proven results. Profits seem far more remote than losses. Some promoters might go too far and mischaracterize the nature of the investment, making it seem like a sure thing. Some new companies and their managers go further still and fabricate evidence or dedicate so much focus on raising money that the actual business is neglected, or in any case takes on a secondary importance.
These things have happened far more recently but one example of excessive investment promotion dates to the advent of radio, or wireless telegraphy, at the start of the 20th century. The American De Forest Wireless Telegraph Company and United Wireless Telegraph Company were so active raising money from investors that they seemed more like investment sales companies than radio operators.
Wireless Telegraphy
The use of electromagnetic radiation, like radio waves, for communications came about in the late 19th century. Before radio was a term in common use, radio waves were called ‘Hertzian waves’ and their application was in ‘wireless telegraphy’, in contrast to your typical wired telegraph services. The term ‘radio’ instead of ‘wireless’ only became dominant in the 1920s. Nonetheless, the terms refer to the same thing, at least in the setting of the start of the 20th century.
Regardless, after some experimentation in Europe, the ‘wireless’ inventor Guglielmo Marconi arrived in the United States in 1899 at the invitation of the New York Herald to report on that year’s America’s Cup yachting competition using radio waves. This arguably marks the beginning of wireless telegraphy in the United States though the first wireless telegraphy station in the U.S. was only built by Marconi’s company three years later.
In contrast to today’s use of radio in mass media, the most important early application of wireless telegraphy was in marine communications. This is perfectly understandable; while communications improved with land-based telegraph much earlier in the 19th century, ships were still uncontactable once out of port, so a wireless solution was necessary. Up until this moment, ships still communicated with each other using lights (at night) and flags (during the day) and could not communicate with land that was not in sight. Wireless telegraphy, even with a limited range in its early days of no more than 150 miles, could allow ships to stay in contact with each other and, at least when near a coast, to communicate with wireless stations on land.
American De Forest
In 1902, the same year that Marconi built the first wireless station in America, the De Forest Wireless Telegraph Company was formed. It was a collaboration between Lee de Forest, an inventor, and Abraham White, a market speculator who became president of the new company which was capitalized with $3 million.
De Forest was an inventor of modest means and humble origins. White was a rich investor who made his first money from placing bids, with no deposit required, for government bonds that soon thereafter traded at a premium. He profited from the gap between the issue and resell price and risked no money of his own; his only cost was the letter sent down to Washington D.C. to place his bid for $7 million of bonds. White was someone known for making something from nothing.
Stock promoters saw in the De Forest company a chance to raise millions riding the coattails of the big global wireless company established by Marconi. Later that same year, another company was formed by White and de Forest, the American De Forest Wireless Telegraph Company. This was a subsidiary of the first company and was capitalized with another $5 million, which increased to $15 million in 1904; American De Forest also absorbed a rival company, International Wireless Telegraph Company.
Share Promotion
Raising money for these two De Forest companies was not honest work. Not only were shares in these companies sold with optimistic and excited claims, the degree of exaggeration was wild and little was said of the potential for loss. White pitched that “just as soon as the company is on a dividend basis, the common stock with the preferred should advance to figures practically without limit”. Favorable comparisons were made to Bell Telephone and Western Union but with the caveat that the De Forest companies would be even more profitable.
Lee de Forest’s expertise as an inventor was leveraged in sales pitches, as were the company’s successes, albeit enhanced with outright lies. In 1906, a signal from the company’s most powerful station, in Manhattan Beach, New York, was picked up in Ireland but too faint to receive an entire message. Nonetheless, Abraham White placed a half-page ad in the first page of the New York Herald to report “messages being received clearly” across the Atlantic.
At least $5 million in annual revenues, from selling receiver equipment and facilitating marine, transoceanic, and inland communications, were predicted in advertising. Wireless stations were also being built by American De Forest in order to induce new investment rather than because of their business merits. One was built in Atlanta, a rather unusual interior location not near a coast or within communicating distance of other stations, only to help raise money from local investors. It worked; the station cost just $3,000 to establish but led to the sale of about $50,000 in additional shares.
To support demand, stock was offered for sale on an installment purchase plan. American De Forest shares were being sold directly to investors at prices of, depending on which office you contacted, around $6.00 to $7.50 a share around early 1907. However, at that time, shares were being offered on the secondary market, likely offloaded by earlier investors, at prices well below $1.00 per share. Someone responding to the company’s advertising offering the shares at high prices could have acquired the same shares for very little had they purchased them in the secondary market.
Many, if not most, of the shares sold were the personal holdings of de Forest, White, and the company’s other promoters, divided amongst themselves at the company’s inception. So, only some of the money raised by selling the shares went to the benefit of the company and its new investors. It did not stop with American De Forest; in the first years of the 20th century, there were other companies raising money for wireless telegraphy ventures of dubious merit such as the American Wireless Telephone and Telegraph Company. Abraham White even began planning a related Amalgamated Wireless Securities Company with a fresh $10 million capitalization, right after American De Forest was formed, though this never came to fruition.
United Wireless Telegraph Company
The De Forest companies never became profitable or made much effort in becoming profitable. It did conduct some real business though, building wireless stations for newspapers, governments, and private companies in need of communications infrastructure. An example included building wireless stations in Panama and Costa Rica for the United Fruit Company. The company also built wireless stations for itself, but shipping customers who they served were few and overhead costs high.
The result was that American De Forest was running out of money. Making matters worse, it was sued for patent infringement. In December 1906, American De Forest defaulted on a $500,000 bond issue and the stock was worthless by 1907. Yet, remarkably, this was not the end of the share pumping by White and others.
Abraham White formed a new company, the United Wireless Telegraph Company, in 1907. All of the assets of American De Forest were transferred to United Wireless to deprive the victors of the patent infringement lawsuit of their benefit. In this new venture, Lee de Forest would no longer be involved; he discontinued his partnership with White, leaving with a small amount of cash and control over certain patents.
Investors in American De Forest were offered the chance to exchange their worthless shares for those in the new company. Rather peculiarly though, investors received new United Wireless shares at a ratio determined by how much they originally paid for the old shares rather than the number of shares they possessed. So, an investor who bought the De Forest shares at $7 received far more United Wireless shares than one who acquired his De Forest shares cheaply on the secondary market for very little. At least those who made out particularly poorly in the first White telegraph venture were being favored in this second one.
In any case, White was soon replaced by a new president, another stock promoter named Colonel Christopher Columbus Wilson. Under Wilson too, aggressive share marketing tactics were used. Stock was offered for sale on the basis that management was only going to offer stock in the future at higher prices. As one 1909 advertisement said, “The selling price until May 10, 1909, is $25.00 a share. After that date the price will be advanced somewhere to between $26.50 and $29.50 a share, as the directors may decide.” The arbitrary price did reach as high as $50 per share.
“Because the logical period for the rapid advance in the price of ‘United Wireless’ securities is now. Bell Telephone advanced from the present price of United stock to $3,250 per share in twelve months with less foundation of established value than ‘United Wireless’ offers to-day.” … “It only need be added that a careful study of the situation justifies the conclusion that before very long United Wireless stock will be regarded as one of the best, safest and most profitable investments to be found in the money markets of the world. The company has mastered all the preliminary difficulties and obstacles, and is now on the high road to a magnificent, legitimate and enduring commercial success.” – From an advertisement in Wireless in May 1909
Lackluster Business
United Wireless Telegraph Company inherited the American De Forest network of stations along the Atlantic and Gulf of Mexico coasts. It also inherited about 103 ships as customers from American De Forest. They added more to the system and became the largest private wireless operator in the U.S. and expanded the network in the Great Lakes and Pacific.
However, the business was still a loss making one. Firstly, wired telephone and telegraph was still dominant in overland communications. Inland, wireless telegraphy was mostly used by hobbyists in the first decade of the 20th century. Only in the 1920s would use of radio truely take off.
Marine communication revenues were larger but also insufficient. Between 1907 and 1909, United Wireless earned just $50,000 in revenue. Over those same years, the company spent $180,000 on wireless station installation and $194,000 in operating expenses. Yet, it continued to expand in 1910 with new stations built that year. In 1910, United Wireless contracted with 263 ship customers, up from 114 in 1908.
Yet, it still had to contend with a larger competitor, the Marconi Wireless Telegraph Company of America, also known as American Marconi, which was established in 1899. This company had a large U.K. parent company and like United Wireless focused on serving shipping rather than the internal market. In this area, it was a very strong competitor. Marconi had a deal with the marine insurance marketplace Lloyd’s that meant all major transatlantic shipping lines had Marconi systems installed. An even greater problem presented itself in 1911 when United Wireless Telegraph Company was sued by American Marconi for patent infringement.
Bankruptcy
By the time of that lawsuit, United Wireless was already nearing its demise. To start, several executives, including Wilson, were arrested in 1910 for mail fraud related to their share-selling. They were accused of mass marketing worthless shares. The company was not immediately shuttered but it could no longer raise new money, effectively spelling the end for United Wireless. Costs were cut to preserve funds but revenues were too little to sustain the business.
Wilson was sentenced to three years imprisonment in 1911, the same year United Wireless declared bankruptcy. Its bankruptcy trustees cut back further, closing wireless stations. Remarkably though, the company continued to obtain new customers, serving 426 ships that year. Yet, an independent United Wireless would never return. Its assets were acquired by the British Marconi company in 1912 for $700,000 which then transferred them to the company’s American subsidiary. American Marconi later became the better-known Radio Corporation of America, or RCA.
Lesson
Pitching stock in new companies in new industries relies on stressing the remote chance of large payoffs in contrast to the more likely outcome of minimal or negative returns, often ending with a complete loss. But when does a promoter go to far? Clearly, Abraham White went too far in lying about the range of his company’s wireless broadcasts. Generally though, did investors know about the risks they were taking? Often the answer is yes, or at least approximately a yes.
In this case though, investors were no doubt misinformed. When shares are offered directly to investors at prices multiples higher than could be obtained in the open market then not only is some abuse being committed but its obvious investors were susceptible to making a big mistake with their money. Perhaps encouraging what essentially amounts to gambling on long shot bets whose payoffs are difficult to calculate is a necessary practice. Still, this has often resulted in frauds, manipulations, and what more-or-less amounts to swindling others.
More from the Tontine Coffee-House
Read about the ways in which the telegraph changed financial markets the stock ticker machine in particular. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.
Further Reading
1. Fayant, Frank. “Fools and Their Money.” Success Magazine, June 1907, pp. 387–451.
2. Fayant, Frank. “Fools and Their Money.” Success Magazine, July 1907, pp. 481–509.
3. Kruse, Elizabeth. “From Free Privilege to Regulation: Wireless Firms and the Competition for Spectrum Rights Before World War I.” The Business History Review, vol. 76, no. 4, Jan. 2002, pp. 659–703.
4. Mayes, Thorn L., et al. Wireless Communication in the United States: The Early Development of American Radio Operating Companies. 1989.
5. “United Wireless Telegraph Company Stock Advances From $25 to a Point Somewhere Between $26.50 and $29.50 a Share May 10.” Wireless, May 1909, pp. 1–4.
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