8.2. A BRIEF HISTORY OF THE RADIO INDUSTRY IN THE UNITED STATES
As we shall see below, some of the most interesting economic questions in the context of
the contemporary radio industry concern the effects of ownership consolidation and cor-
porate control; the response of the medium to new competitors and opportunities created
by technological change; the tension that can exist between exploiting economies of
scope and serving local demand; and the appropriate role for regulation in any industry
that is far from being a natural monopoly but which makes use of public airwaves. Inter-
estingly, many of these questions are recurrent themes in the history of the broadcast
radio industry in the US, and this brief history is intended to help place contemporary
issues in context.
7
Radio technologies had been developed for maritime and military purposes in
the years leading up to and during World War I, and, under the Radio Act of 1912,
there were over 13,000 licensed amateur radio operators in the US by 1917. KDKA
in Pittsburgh was the first US station to provide a regular programming schedule in
November 1920. KDKA was owned by Westinghouse, which viewed the provision
of programming as a natural way to drive sales of its radio receivers. Westinghouse,
together with General Electric and AT&T, formed the Radio Corporation of America
(RCA) in 1919. Similarly, New York station WEAF, in 1922, the first station to broad-
cast a commercial (for an apartment complex in Jackson Heights, with the developer pay-
ing the station $100), was owned by AT&T, which claimed a monopoly on producing
transmission equipment (
Hillard and Keith, 2005, p. 26). After KDKA’s success there was
a rapid growth of the industry, with 622 stations licensed to provide general broadcasts by
the end of 1922.
Unfortunately, these stations were licensed to just two frequencies (750 and 833 kHz)
so that there was considerable interference and many stations were regularly inaudible.
Despite this problem, sales of radio receivers grew rapidly and Commerce Secretary Her-
bert Hoover organized a series of “radio conferences” in the mid-1920s in an attempt to
bring some organization and coordination to the industry. Hoover’s power to allocate
stations to specific frequencies and time slots was successfully challenged in court. This
led Congress to pass the Radio Act of 1927, which created the Federal Radio Commis-
sion (FRC), succeeded by the Federal Communications Commission (FCC) under the
Communications Act of 1934, with the power to issue and deny licenses and regulate the
industry with the goal of making sure that the industry operated for the “public conve-
nience, interest or necessity.”
8
At this point, one could have imagined radio developing in at least two different
ways. One way might have involved a large number of local stations operating largely
7
The facts in this section can be found in Albarran and Pitts (2001) unless otherwise noted.
8
Communications Act of 1934, ch. 652, } 303 (codified in 47 U.S.C. } 303, 1994).
345
Radio
or completely independently. An alternative would have been for national networks to
provide common programming through a small number of powerful stations. The latter
was the successful model from the late 1920s through to the 1950s. RCA launched its
NBC network in 1926, with the programming being provided to local affiliates through
special telephone wires provided by AT&T. RCA added a second NBC network 2
months later, with the networks being known as the Red and Blue networks. CBS
entered in 1927, followed by a cooperative network, the Mutual Broadcasting System,
in 1934. The FRC supported the development of national networks through its licens-
ing policies. In particular, it licensed a relatively small number of 50,000-W “clear
channel” stations. These could reach hundreds of thousands or millions of listeners,
especially at night when their AM signals would travel further as they reflected off
the Kennelly–Heaviside layer in the atmosphere. This was important in making big-city
programming available to rural listeners, and 21 out of the 24 initial clear channel
assignments went to network affiliates. Local stations were licensed but typically they
were restricted to operate at much lower powers, such as 250 or 500 W, with hours
of operation limited to the daytime when most family listening took place in the eve-
ning. The network structure was very successful in commercial terms and radio spread
rapidly. By 1935, 60% of American households owned radios, and, because listening to
the radio was free once the receiver had been purchased, the medium flourished during
the Depression.
Network programming was initially oriented toward music (classical, dance, and jazz)
but over time comedy shows and drama played an increasing role. The networks also
carried a very large number of commercials, which was perhaps natural at a time when
national and regional brands were starting to develop, radio was the only national
medium and the networks formed a concentrated oligopoly where competition for
listeners may have been limited. In 1932 CBS and NBC carried 12,546 commercial
interruptions in 2365 h of programming, an average of 5.3 interruptions per hour.
In comparison,
Sweeting (2006, 2009) found that music stations in the period
1998–2001 carried between two and three commercial breaks per hour.
More surprisingly, the networks did not initially broadcast much news programming.
In 1933, NBC and CBS agreed with the American News Publishers Association and the
wire services, in what was known as the “Biltmore program” (after the New York hotel
in which the deal was negotiated), that they would forgo developing their own news-
gathering organizations and instead carry only two 5-min newscasts every day, with each
news item limited to 30 words, and to not carry news that was less than 12 h old
(
Barnouw, 1968, p. 20)!
9
For the networks, there were probably two economic
9
While the Biltmore program may seem surprising to us, in the UK the BBC also carried a very limited
amount of news and did not develop its own news department when it was first created because of pressure
from newspapers. See
http://en.wikipedia.org/wiki/BBC (accessed February 28, 2014).
346 Handbook of Media Economics
motivations for what to us now seems a startling agreement. First, they may have wanted
to avoid starting a race between themselves in programming quality that would likely
increase their costs quite dramatically, especially if they tried to cover local news. Second,
radio stations relied on newspapers to publish their schedules and so needed their co-
operation. Indeed, when WOR in New York started running its own extended news-
casts that proved to be popular with listeners, the newspaper association tried to pressure
their New York members not to publish WOR’s schedule. However, they refused to do
so as WOR was owned by R. H. Macy’s, the department store, one of the biggest news-
paper advertisers in the city (
Barnouw, 1968, p. 21). This example, the willingness of
large companies, such as Esso, to sponsor radio news shows, and the desire of non-
network stations to use news to compete for listeners undermined the Biltmore program
and by the late 1930s all of the radio networks had their own news departments.
However, there was also a trend toward newspapers taking over radio stations. In
1940, one-third of all radio stations were owned by newspapers, and in 100 US cities,
local newspapers owned the city’s only radio station.
While radio continued to grow into the 1950s, when it began to face increasing com-
petition from television, which was operated by the same networks, federal regulations
started to impose important limits on the networks in the 1940s. In 1941, the FCC issued
its Report on Chain Broadcasting (the network structure was referred to as “chain
broadcasting” because the links were AT&T’s telephone cables). This led to new rules
that made ties between stations and networks non-exclusive (allowing affiliated stations
to buy programming from multiple networks), prevented the networks from demanding
options on large amounts of station time (which allowed stations to develop their own
programming), and shortened the length of time that a station was bound by a network
contract from 5 years to 1 year (
Hillard and Keith, 2005, pp. 50–52). It also prohibited
licenses from being issued to stations that were affiliated with a network organization that
maintained more than one network, which was true of NBC.
When the new rules were upheld by the Supreme Court in 1943, NBC divested the
Blue network, which became ABC (
Hillard and Keith, 2005, p. 52). The shift of regu-
lation toward favoring independent broadcasters continued until the 1980s. For example,
in 1975 the FCC prohibited a newspaper from owning broadcast stations (radio or TV) in
the same market (
Gomery, 2002), a rule that was only relaxed in 2007 when the FCC
adopted an approach of considering cross-ownership on a case-by-case basis (
FCC,
2010
), partly because of the declining finances of the newspaper industry.
The FCC also used regulations to promote locally produced and focused program-
ming. In 1946, the Main Studio Rule required stations to have their main studio in
their city of license, while Program Origination rules required that at least 50% of pro-
gramming was locally produced, although this was achieved initially by airing local
programming outside of primetime (
Hillard and Keith, 2005, p. 46; Silverman and
Tobenkin, 2001
). In 1950, an FCC Report and Order defined radio transmission as an
347Radio
“opportunity which provides for the development and expression of local interests, ideas,
and talents for the production of programs of special interest to a particular community …
a station cannot serve as a medium for local self-expression unless it provides a reasonably
accessible studio for the origination of local programs” (
Hillard and Keith, 2005, p. 48).
Faced by the expansion of television, with largely national programming, in the
1950s, a focus on local service was a natural commercial response too. At the same time,
the spread of portable transistor radios and the development of car radios also led radio
stations to focus more on daytime programming rather than trying to compete with tele-
vision during primetime. While the 1950s is often viewed as a time of decline for radio,
and it certainly did lose listeners to television, the industry did not decline financially.
Radio’s total advertising revenues increased from $624 million to $692 million over
the decade. The networks’ share of those revenues did, however, fall dramatically, from
25% to only 6% during the same time period (
Sterling and Kitross, 2002, p. 362).
The new focus also shifted the type of programming that stations offered toward
music, first with the development of the Middle of the Road (MOR) format, offering
a wide range of music with broad appeal, and then to the development of the Top 40 pro-
gramming with a limited playlist of songs played frequently.
10
This way of programming,
combined with the fact that radio was the primary way in which listeners could learn
about new songs, meant that it was very valuable for musicians and record labels to secure
places for their songs in the rotation. Therefore it is not surprising that the 1950s saw a
number of so-called payola scandals where DJs were found to have accepted payments in
return for playing particular songs (see
Section 8.9.2 for more details).
The 1960s and 1970s also saw the steady transition of radio listeners from the AM
band to the FM band, with FM first accounting for the majority of listenership in
1978. As well as the greater sound quality of FM (FM stereo broadcasts were allowed
after 1961, while AM stereo was only approved in 1980), the rise of FM was also helped
by a freeze on issuance of new AM licenses in the mid-1960s because of concerns about
crowding and interference on the AM band.
The rise of FM was associated with two significant changes in radio programming.
First, greater sound quality aided the rise of music programming, and there was a partic-
ularly rapid growth in the number of specialized music formats, many of them orientated
toward rock music, which was relatively little played on the MOR and Top 40 stations
on the AM band. On the AM band, stations began to specialize into News, Talk, Sports
and, at least in some regions of the country, commercial Religious programming. Sec-
ond, the growth of FM listenership contributed to the rise of public radio broadcasting in
the US, as a portion of the FM band (88.1–91.9) had been reserved for non-commercial
10
The name “Top 40” is often attributed to the fact that jukeboxes held 40 records, and it was from seeing how
jukebox users chose the same songs repeatedly that radio programmers started developing the format.
348
Handbook of Media Economics
broadcasters since 1945, whereas there was no similar reservation of AM spectrum.
11
The
1967 Public Broadcasting Act led to the creation of the Corporation for Public Broad-
casting, with National Public Radio (NPR) being created in 1971.
In the 1970s, the FCC also enforced rules that required commercial stations to allocate
6–8% of their broadcasting time to public affairs. Since 1949, the so-called Fairness Doc-
trine required stations to “devote a reasonable percentage of their broadcasting time to
the discussion of public issues of interest in the community served by their stations and
that such programs be designed so that the public has a reasonable opportunity to hear
different opposing positions on the public issues of interest and importance in the
community” (
Hillard and Keith, 2005, p. 60).
12
While most academic work on the radio industry has focused on what happened fol-
lowing the 1996 Telecommunications Act, this Act was only one of a series of deregu-
latory reforms that started under the Carter Administration, and which relaxed both
regulations on ownership and regulations on programming content.
In 1987, the Fairness Doctrine was removed, under pressure from broadcasters who
believed that it violated their rights under the First Amendment and tended to increase
production costs. The rise of political, personality-driven talk radio on AM stations,
involving controversial personalities such as Rush Limbaugh, is often attributed to the
demise of the Fairness Doctrine (
Soley, 1999).
13
The Main Studio Rule, which was also
seen as being expensive for stations to implement (
Silverman and Tobenkin, 2001), was
relaxed so that broadcasters were only required to have a local studio capable of producing
programming rather than actually using it. This started a trend toward more stations being
operated remotely, and this trend was strengthened as it became possible to provide pro-
gramming to local stations via satellite. The FCC also abandoned rules about regulating
the amount of local content.
Changes in ownership rules involved a steady progression toward more relaxed stan-
dards. Prior to 1984, a broadcaster was limited to own nationally a maximum of 7 AM
stations, 7 FM stations, and 7 TV stations nationally (the rule of the 7s). That year the caps
were raised to 12, 12, and 12, then in 1992 to 18, 18, and 12, respectively. The 1996 Act
removed national ownership limits for radio stations entirely (
FCC, 2010).
11
The FCC first reserved spectrum for non-commercial educational radio use in 1938 (41–42 MHz band),
before changing the reserved band to 88–92 MHz in 1945 (
http://transition.fcc.gov/osp/inc-report/
INoC-31-Nonprofit-Media.pdf, accessed February 15, 2015).
12
Specifically in 1974 the FCC argued that previously it had not exercised its powers because broadcast
stations had followed the spirit of the Fairness Doctrine voluntarily, but “would future experience indicate
that [voluntary compliance] is inadequate, either in its expectations or in its results, the Commission will
have the opportunity—and the responsibility—for such further reassessment and action as would be
mandated” (
FCC, 1974).
13
In response to a Supreme Court ruling that the FCC was not required to enforce the Fairness Doctrine,
both houses of Congress passed new legislation requiring the FCC to do so. However, President Reagan
vetoed this bill.
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Radio
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