• National Innovation Systems: A Retrospettive on a Study •

believe that we have learned a good deal. But there stili is a lot of room forinformed differences of opinion.

Given that there is, it is not simply inappropriate for one group or anotherto argue for its preferred uniformity. While (as this project testifies) it is noteasy to tease out signal from noise, potentially we ali can learn from eachother about what seems to be effective and what is not.

ReferencesDosi, G., C. Freeman, R. Nelson, G. Silvcrberg, and L. Soete (1988), Technical Cbange andTheory, Pinter Publishers: London.Gerschenkron, A. (1962), Economie Development in Historical Perspectives, Harvard University Press:bridge, MA.Krugman, P. (ed.) (1987), Strategie Tratti Policy and thè Neu1 International Economia, MIT Press:bridge, MA.Lundvall, B. A. (1988), 'Innovation as an Interactive Process: From User—Producer Interaction toNational System of Innovation', in Dosi, G., C. Freeman, R. Nelson, G. Silverberg, and L. Soaete,Technical Change and Economie Theory, Pinter Publishers: London.Ostry, S. ( 1990), Governmenls and Corporation! in a Shrinking World, Council on Foreign Relations PrtNew York.Porter, M. (1990), Thè Competitive Advantage of Nalions, The Free Press: New York.

AM versus FM: The Battle ofthe Bands*

S T A N L E Y M . B E S E N(The RAND Corporation, 2100 M Street NW, Washington, DC 20037-1270, USA)

1. Introduction

Between 1946 and 19-48, thè number of Frequency Modulation (FM) radiobroadcast stations authorized by thè Federai Communications Commission(FCC) increased from 456 to 1020 and thè number of licensed stationsincreased from 48 to 142. ' In its Annua! Report for 1947, thè Commissionobserved that: 'The fiscal year witnessed a tremendous spurt of activity in FMbroadcasting, further demonstrating thè important role this new and superiorbroadcast service is assuming in thè postwar era.'2

The Commission was not alone in its view that FM would soon make asignificant contribution to radio broadcasting. Indeed, some industry par-ticipants apparently believed that FM might replace Amplitude Modulation(AM) as thè dominant form of delivery of radio programs. For example, in1945, Paul W. Kesten, then Executive Vice President, Columbia Broadcast-ing Systems wrote:

. . . I believe that FM is not merely one aspect of thè future of audiobroadcasting—but that it contains in itself almost thè whole future of audiobroadcasting. Most of us at CBS have believed, from thè very early days ofFM that, except in certain rural areas, FM was technically destined toreplace AM transmission, as surely and inevitably as thè tungsten lamp wasdestined to replace thè old carbon filament. '

* An earlier version of this paper was presented at a Columbia University Conterence on Major EdwinH. Armsrrong: The Man & His Invenrions hcld on November 9. 1990.

1 Bnadcasiinx/CaMt Year/mit '«9, H-^8, 59.2 Federai Communications Commission. Tbirlettith Annuii! Rtport, Fiscal Year Ended June 30, 19 t ~ .

Washington, DC: US Government Prinnng Office, p. 20.* Kesten, Paul W. and Stanton, Frank, The Transistori From AA1 to /:A1 BnMtf^stìHg, Statements betore

thè Federai Communications Commission, Ducket No. 676iS, Washington. DC, Ju ly 30, 19 15, p. 1. Notethat Armstrong makes thè idcntical point: 'I have long been convmced that given a tree hand FM wouldrapidly supersede AM, except in certain remote areas where an AM sration could perhaps serve thèterrirory more economically. ' Radio Frei/Hemy Modulation, Heanngs betore thè Committee on Intetstate andForeign Commerce Houseot Representativeson H.J. Res. 78(A jo in t Resolution Relating to Assignment ota

^ Section ofthe 50-Megacycle Bandof Radio Ftequencies tor Frequency Modulation (FM), EightiethCongress,|| Second Session, February 3 and 4, 1948) [hereafter cited as Radio Fm/i/enc) Modulation}, p. 38.

© Oxford University Press 1992

-A M versus FM: The Baiile of thè Bandi - -AM versus FM: The Baiile of thè Bands

Similarly, J. E. Brown, Assistant Vice President, Zenith Radio Corpora-jtion, testifying before a Congressional committee in 1948, noted that:

An accurate analysis of thè status of FM broadcasting toward thè end of thèwar would be that it had been tried and proven, was found satisfactory andwas destined to become thè great new postwar development in radio.4

Even after thè FCC shifted FM from thè 42-50 kHz band to thè 88-108 •kHz band in 1945, leaving owners of FM receivers 'stranded' with receivers 1that would soon be unable to receive any FM broadcasts and requiring!existing FM station owners to modify their transmitters, enthusiasm for thè Inew technology continued. In February 1946, in thè inaugurai issue of altrade magazine devoted to FM, thè publisher wrote:

The new vistas opened up by this great new development stagger thèimagmation. Thousands of additional stations wil l be built , ali capable ofsuperior signals, many emphasizing community interests and specializedinterests, thè whole of them destined to give thè radio listener greaterdiversity and a wider choice of programs.5

Moreover, a number of industry participants saw FM as a way to overcome'thè competitive handicap they faced in AM. For example, this was thè view]of ABC, which had obtained NBC's least attractive affiliates when NBC hadjbeen forced to divest one of its two radio networks in 1941. A trade pressireport in 1946 noted that 'ABC President Mark Woods, during an FCCJhearing on thè network's expansion plans testified that he sees in FM thè onlylway ABC can match NBC and CBS power-wise and frequency-wise.'6

Similarly, there was considerable optimism about thè number of FM,receivers that would be sold at thè end of thè War. Armstrong, testified io1948 that: 'The General Electric Co's. executive in charge of radio predicethat 5,000,000 [FM] sets would be sold during thè first year of postproduction. ' 7 In a letter TO MEMBERS OF THE NBC NETWORK' daJanuary 21, 1944, Miles Trammel, President, NBC noted that 'It is almostiforegone conclusion that most, if not ali, American manufacturers will inelude an FM band in their receivers . . .'8 and in a public statement of itposition, NBC concluded that:

^ Ratini l'recfuency Modulatati, p. 48.^ M. Code!, 'A New Industry . . . A New Journal ' , The Journal of Freqtiemy M/tdulaiton, 1, February ^

1946, p. 4.fl 'ABC's Projected FM Network' , l-rtcjntn(y Mndnlation Bmnien, Volume 1, Number 7, Augusr 1946. -

In rhc same story, however, Keirh Kiggins, an ABC vice prcsident is quoted as saying that 'Ir i»|regrettable rhar many srarions look upon an FM application as an "insurance policy" and unless there isreal compecmon for available FM channels, they are for che rime being, sarisfied wi th maintaining isratus quo. '

Armstrong testimony, p. 12. This estimate was apparently made before thè frequency shift.* Nat iona l Broadcasting Company, S'itne Oèservatioas (in FHtfiteticy Modiiltitinn. ) anua ry 21 , 1944.

Because of thè widespread publicity given to Frequency Modulation, it is aforegone conclusion that most receiver manufacturers will include on theirpost-war models a frequency modulation band which they will promoteextensively as a high fidelity static-less type of radio reception. . . . It isgenerally believed by thè manufacturers that any manufacturer who dis-regards FM and offers only a standard band receiver wi l l not be able tocompete with those who have this added facil i ty.9

There were many reasons to be optimistic about FM's future. First, it wasuniversally viewed as a technology that was superior to AM. For example, NBC,in a statement released to thè public, listed thè following technical advantages ofFM over AM: ( 1) FM virtually eliminates static; (2) FM has higher fidelity due tothè use of wider channels; (3) thè effective service area of an FM station is con-Stant between day and night, whereas thè service areas of AM stations canvary widely ; and (4) FM stations can operate in closer geographical proximity onthè same frequency without interference than can AM stations.10

Second, since FM stations would operate in a different portion of thè radiofrequency spectrum from that occupied by AM stations, FM promised asubstantial increase in thè number of radio stations that could be licensed.Kesten of CBS noted that 'thè spectrum space which thè Commission haswisely allocated for FM should permit thè licensing of at least two or three'times as many stations as thè AM band permits.'11

Third, not only would thè new stations offer additional service to listeners,their presence could be expected to increase competition in thè radio broad-casting industry, which could be expected to benefit advertisers and programsuppliers, in addition to viewers. Although this additional competition couldhardly be welcomed by AM broadcasters, thè FCC might have been expectedto be more sanguine. The Commission, in its rules limiting concentration inmedia ownership12 and in its Chain Broadcasting Rules,15 had indicated aconcern about concentration in radio broadcasting, and thè prospect of morestations and more networks should have been welcome.. In short, FM promised not only a technically superior service but a lessfconcentrated industry structure. Although not everyone would gain from|these changes, thè net benefits were expected to be large. u

9 National Broadcasting Company, SOM? Ohserraliotil on Frtqiiern'y Modulation, Radio City, New York,f!944, p. 17.

0 Id., pp. 6, 8.1 Op. ci t . , (n. 3) p. 7.2 See W. K. Jones (1976), Caies and Materials on Electronic Mass Media, Foundation Press, Mineola,

|NY, pp. 74-75, for a summary of these rules.^ See id., pp. 118—134, for a discussion of these Rules.4 Michael L. Katz in his review of an earlier versìon of this paper notes that 'Without . . . an analysis [of

thè costs of swi tching from AM ro FM}, one has no way of knowmg whether thè costs of switching were

i- A M versus FM: The Battle of thè Bands

In just a few years, however, thè picture had changed dramadcally.;Instead of thè optimism it had previously expressed, thè Commission notein its Annual Report fot 19-49 that:

While thè construction planned by many FM broadcast stations was com-pleted during thè year, many of them decided not to instali high poweredequipment because of economie problems. . . . Although FM service wasexpanded by previously authorized stations commencing operation and byexisting stations improving their facilities, thè rate of filing of new FMapplications fell off sharply during thè year. . . . Also, thè total number ofFM stations authorized decreased from 1,020 to 865. 15

As we now know, FM did not supplant AM during this period as thè*dominant source of radio programming—indeed, it did not even supple-jment it to any significant degree. 16 Why did thè apparent prospects for FM]change so markedly in only three years? Was it foreseeable in 1946 that thclrosy outiook that some held for FM was illusory? Were there events that!could not have been anticipated that dimmed thè outiook for this new]technology? What could, and should, thè FCC have done differently?

Explaining thè outcome of thè 'battle of thè bands' between AM and FM isthè objective of this paper.l7 The paper analyzes thè development of FJradio during thè criticai period between 1946 and 1950 when thè belief <some that FM might be 'thè great new postwar development in radio' waslreplaced by a concern over whether FM could survive even as a modestisupplement to thè existing broadcast System. I interpret this history in partjthrough thè use of thè modern economie theory of standards which has asone]of its centrai questions whether, and under what conditions, a new superioritechnology like FM will be able to compete effectively with an inferior tech-inology like AM. 1H A major conclusion of this theory is that an economicallyjsuperior technology may be unable to enter thè market, or may be confinedj

indeed less than thè benefirs. ' As a theoretical matter, Katz is clearly corrcct since a movement tot]technically superior technology may not be economically efficient. Farrell and Saloner (1985) label thil iphenomenon 'excess momentum' while Katz and Shapiro ( 199 1) cali it ' insufficienr fr ict ion' . Nonecheless, Iat thè time that FM was introduced, it was gencrally agreed that thè benefits of switching exceeded thè |costs and policy-makers appeared to have accepted this view. Much of this paper accepts thè premise thatlFM should havc succeeded and analyzes why it did not. The possibility that thè premise is incorrect il-explored briefly in Section 6.

" Federai Communications Commission, Fiftetnth Annual Report, Fiscal Year Ended June 30, 1949, ;Washington, DC: US Government Printtng Office, pp. 39—40.

"' The possibility that FM might have complctely displaced AM in thè short-run does not appear "reasonable in light of thè large investments in both AM stations and receivers. The relevant alternative»'!appear to have been that FM could have: (a) displaced AM as thè dominant force in radio, with AM]retaining a substantial role; (b) become a major addition to AM; or (e) had only a modest impact.

17 David and Bunn (1987, 1988) descnbe thè 'battle of thè systems' between alternating and directicurrent electticity.

'" For a survcy of this theory see Besen and Saloner (1989).

— AM. versus FM: The Battle of thè Bands-

Ito a very limited role, because individuals do not take account of 'networkKxternalities' when they make choices among competing technologies.19

IClarifying thè conditions under which 'excess inertia' will prevent thè adop-[tion of thè superior technology, and what might be done to overcome it, has[been a centrai focus of much theoretical analysis.

One explanation for thè failure of a new technology to develop that has[been explored in thè standards literature is thè inability of suppliers of[complementary inputs to coordinate their behavior.20 In thè present context,Ifor example, even if it were socially efficient for FM to enter thè market,Iconsumers might not purchase AM-FM receivers21 if there were too few FMIStations and broadcaster might not operate FM stations if too few consumers[could receive FM broadcasts. However, since a large number of FM stations didJgo on thè air during this period, purchasers of AM-FM receivers could receiveIFM broadcasts. Thus, a failure by radio broadcasters and receiver manufacturersIto coordinate their behavior does not appear to explain adequately why FM[failed to develop in thè period immediately after World War II.22

The explanation that I offer, although based in part on thè existence of[network externalities among listeners, also takes into account: (1) thè effect[of thè previous shift in thè frequencies on which FM operated on thè willing-[ness of consumers to purchase FM receivers; (2) thè policy of thè FCC that,[by permitting FM stations to 'simulcast' thè programming of AM stations,jmay have limited thè programming benefits of FM reception; (3) thè in-[cremental cost of AM-FM receivers; (4) a variety of technical factors that

E limited thè benefits that purchasers of AM-FM receivers could expect tolobtain; and (5) thè effect of thè frequency shift on thè production of FM

i receivers. When thè combination of these forces resulted in very limited saleslof FM receivers, many FM stations left thè air. This made thè purchases of[FM receivers even less attractive, further reducing thè benefits of operatingSan FM station.

Like ali new technologies in 'network' industries, FM faced a diffkult'battle in its contest with AM, and it is by no means clear that it would have,been an early success even in thè best of circumstances. In this particularI case, however, some actions by thè FCC likely made thè task of FM moreidifficult, although some may have seemed supportive at thè time. I conclude

19 See, for example, Farrell and Saloner (1985).20 Church and Gandal (1989) present a model in which hardware and software are produced by

different firms and software that is developed for one type ot hardware cannot be used with another.21 S. Kempner (1946), 'Broadcaster * Manufacturer * Dealer', 'Greater cooperarion among various

: elements in thè industry is urgenrly needed before any effective sales patterò can be established', TheIJotimal ofFrequemy Modulano», 1, 37, reports that There will be no straight FM sets for thè time being;

ali sets containing frequency modularion will have both AM and FM circuìts.'22 As I discuss below, however, thè limited availability of unique FM programming may partly explain

why more FM receivers were not purchased.

-A M versus FM: The Battle of thè Bands —

by suggesting some policies thè Commission could have pursued that mighave accelerated thè diffusion, and ultimate success, of FM.

2. A Brief History of FM. AuthorizationsE. H. Armstrong received four patents for frequency modulation in 193and thè technology was demonstrated publicly for thè first time in 1935.Subsequently, thè Federai Communications Commission issued a numberexperimental FM licenses and in 1940 it authorized commerciaioperation.24 FM was assigned forty channels between 42000 and 50kilocycles, with each station operating with a bandwidth of 200 kc. In mie1941, there were 69 FM stations under construction.

The entry of thè United States into thè Second World War led tocessation of licensing of broadcast stations by thè FCC, but some of tstations that had already been authorized went on thè air during thè War.thè beginning of 1946, there were 55 operating FM stations.25 Somemembers of loose radio networks in which one station retransmitted „signal of another on a different frequency and there was some interconnectieusmg American Telephone and Telegraph lines. During this period, appromately 500000 FM radio receivers were sold.26

Beginning in 1944, thè FCC conducted a proceeding that led in 1945thè shift of FM broadcasting from thè frequency range in which it hadoperating to a position higher in thè radio frequency spectrum, 88-Kmegacycles. 27 Although existing FM stations were, for a time, permitted icontinue to operate at their old frequencies, ali subsequent FM authoriztions were made at thè higher frequencies. This, together with thè fact ththè existing stations would shortly be forced to move to thè higher _made it clear as early as 1946 that if FM radio were to survive and prosperiwould have to do so at thè frequencies to which it had newly been assigned.^

3. The Licensing of FM. StationsFM did not survive and prosper in thè years immediately following WoriWar II, but its demise was not obvious in 1946, nor did it occur at on

* For some of this history sec Lessing (1969) and Krasnow and Longley (1978).In thè Matter of Aural Broadcasting on Frequencies Above 25 000 Kilocycles Particularly Relau

to Frequency Modulation, Report on Frequency Modulation, Docket No. 5805 (May 20, 1940), 39 FCC JBnaJaili*g/CaUt Yearbwk '89, H-58, 59.

2r> Radio Frequency PAodulalion, p. 11.27 In thè Matter of Allocation ofFrequenc.es to thè Vanous Classes of Non-Governmental Servici

thè Radio Spectrum from 10 Kilocycles to 30000000 Kilocycles (Docket No. 6651), (June 27, 1939J-CC 222. Note that 88 megacycles is thè same as 88000 kilocycles.

2" A rear guard action of sorts was conducted until 1948 seeking to preserve at least a few ofexpenmental stations at their minai frequenc.es, but it was clear that these stations were toc. fewnumber to provide a basis for a new i n d u s t r y .

•AM versus FM: The Battle of thè Bands -

TABLE I29 Frequency Modulation Stations

Authorized On Air

19461947 (6/30)194819491950195119521953 (6/30)1954195519561957

456918926966788

703650601580559557554

55238458700733676637580560552540530

[Table 1 shows thè number of authorized and operating FM stations between«1946 and 1957.

There were only 56 authorized FM stations on June 30, 1945. By mid-1 1946, 456 new FM radio stations had been authorized and approximately[250 FM applications were pending. 30 By thè middle of 1947, thè number of[authorizations had increased 16-fold from mid-1945. Similarly, there was a

1 12-fold increase in thè number of operating stations between 1946 and

But 1949 or 1950 was thè high water market for FM during this period.|By January 1, 1957, there were only 530 operating FM stations, a decline ofUbout 28% from 1950. At thè same time, thè number of authorized FM|stations fell by almost 30%, from 788 to 554.

During thè same period, AM radio stations continued to increase greatlyiin number. In 1949, there were 1912 operating AM stations, so that about[one-fourth of ali operating stations were in thè FM band. By 1957, with>3008 operating AM stations, FM stations represented only about 16% of thè|total. It was not until 1985, when there were 4888 FM stations and 4754SAM stations, that thè number of FM stations finally exceeded thè number of[AM stations.31

9 Broachitslingì Cable Yearbouk '89, p. H-59. Data are for January 1 unless otherwise mdicated.0 Federai Communications Commission, Twelfih Annua! Report, Fiscal Year Ended June 30, 1946,

p. 15.31 AH data are from BroaJcaiiing/ 'Cabli Yearbook '89, H-58, 59. The eventual success of FM is usual ly

attributed to its superior technical characteristics and thè development of high fidelity recording, acombination that ulnmarelv overcame thè headstart of AM.

- AM versm FM: The Battle of thè Bands- - AM versus FM: The Battle of thè Bands-

4. FM Receiver Purchases

The proximate cause of thè declines in thè number of authorized andopetating FM stations after thè initial postwar increases is not difficult toidentify. The proportion of households with receivers capable of receivingFM broadcasts was simply too small to support thè large number of FMstations that had gone on thè air. Table 2 repotts data on receiver purchasesfor four different years during this period.

TABLE 2 Radio Receiver Purchases (ODO)'2

1947 1952 1953 1954

ABCDD/BEFGHH/F

140671059110297294

0.027341519651083882

0.449

655634283164264

0.0775661522412S

0.842

726035763303273

0.0765241326369

0.522

644829662842124

0.042377812853

0.654

A. Home-type radio receivers (except radio-phonograph combinations)B. Socket-powered table modelsC. Socket-powered table models (AM)D. Socket-powered table models AM-FM (includes FM only and FM converters)E. Home-type radio-phonograph combinations, complete setsF. Console modelsG. Console models (AM)H. Console models (AM-FM)

In each of these years, thè proportion of socket-powered table moradios, thè type most commonly sold, that were capable ofFM reception [D/Inever reached 8%. Although AM-FM combinations were much more cormon among more expensive radio-phonograph combinations, ranging fri45 to 84% of purchases [H/F] in thè years for which data are provided, thpurchases were too small to overturn thè conclusion that thè vast majority iali new radio receivers sold could not receive FM broadcasts. In thè four ye

12 Data for 1947, 1952, and 1953 from US Department of Commerce, Bureau of thè Census, Fati)Industry, Home-Type Radio Receivers and Television Sets, Automobile Radios, Phonographs, and ReiPlayers, 1953, May 14, 1954, Quantity of shipments. Data for 1954 from thè same publication, 195JJanuary 15, 1957.

for which data are shown, over 34 million radio receivers were sold, but onlyabout 6% could receive FM. With so few FM receivers being purchased, FMstation owners eventually realized that their market was limited. Not sur-prisingly, they began to return their authorizations to thè Commission andto take stations off thè air. •'•'

5. Why Were So Few FAI Receivers Sold?

This section addresses thè question of why there were so few sales of AM-FMreceivers. I begin with an analysis of receiver demand in order to understandwhy someone might choose to buy an AM-only receiver despite thè fact thatFM appeared to offer better quality reception. After exploring several de-mand side factors, this section concludes with a discussion of whetherlimitations on supply might also help to explain why receiver sales were sosmall.

Network Externalities and thè Fear of 'Stranding'

A network industry is one in which thè value of a product to a user dependsnot only on its intrinsic qualities but on thè number of others who have

; compatible products. M In such an industry, a prospective purchaser, who is; either deciding whether to join a new network, choosing among networks de':f nova, or contemplating a shift from one network to another, must anticipate[thè choice that others will make.

The purchaser may, perhaps naively, base his assessment on thè currentnumber of those on each network, thè 'installed base', so that he is morelikely to join a network if it is large than if it is small.35 Alternatively, thèputchaser may attempi to forecast thè future size of thè network in a more

f sophisticated manner. For example, thè consumer may expect a product to; have a large network because thè brand-name of its producer will cause others: to believe that thè network will be large and make their purchase decisions! accordingly. If many consumers share such expectations, thè product will

Succeed and thè expectation will be fulfilled. Such self-fulfilling expectations

ì3 The sorry performance of thè sales of FM in thè immediate postwar period apparently contrasts; sharply with thè saies of FM teceivers prior to thè War. S. Kempner, op. c i t . , p. 37, notes that 'The nrsti new AM-FM lines thereafter were shown in June 1941, and were those of Philco and Stromberg-Catlson.

In practically every community where these teceivers were displayed to dealers, thè orders fot these sets', ran fat ahead of those on straight AM. In many instances, thè sales of AM-FM were as much as eight to|one over those of straight AM. '

54 Note that these networks can be real, e.g. thè telephone network, ot metaphorical, e.g. thè netwotk

Iof VHS videocassette recorder owners or thè network of IBM-compatible computer owners. The commonelement is thè dependence of thè utility from ownership on thè number of other users of'compatible' products.

" A r t h u r ( 1989) contains a model of this type.

•AM versus FM.: The Battle of thè Bandi- AM versus FM: The Battle of thè Bands

may explain why many choose to purchase a product although it has a smallinstalled base.3(S

However, a shift to a new technology that would make ali users better offmay not occur if consumers adopt a more conservative strategy and cannotcoordinate their behavior. If each consumer is concerned that there may befew other adopters, so that he may be 'stranded' with thè wrong technology ifhe makes an early purchase, each may choose to defer his purchase until thèinstalled base is large enough to make thè purchase worthwhile. But if eachconsumer adopts a 'wait and see' approach, thè process of adoption may neverbegin even if ali consumers would be better off if it did.^1 This result has beenlabeled 'excess inertia'.38

There are various ways in which inertia might be overcome. First, usersmay coordinate their behavior.39 Second, there may be pressure from thègovernment to achieve coordination.40 Third, subsidies may be paid to early ;adopters to reduce their risks.41 Fourth, there may be an externally-imposedrequirement that ali users switch.42 Finally, some users with foresight maystart thè 'bandwagon' to thè new technology.43 Nonetheless, since thèprocess of coordination may be formidable, thè movement to thè bettertechnology is not guaranteed to occur.44

A consumer might also purchase a new product in a network industry if heis given an inducement to do so by its sponsors. Since purchases by earlyadopters are pivotal, because they may influence thè choices made by others,firms that are attempting to get a new technology introduced may employ'promotional pricing.' By offering low, perhaps below cost, prices to earlypurchasers, these firms may be able to increase thè future demand for their

Vl Katz and Shapiro (1985) analyze ' fu l f i l led expectations' equilibria of this type.""' Of course, thè significance of stranding depends on rhe additional costs that must be incurred to

purchase FM receivers and on thè benefits from having an FM receiver even if thè installed base is small.*H Farrell and Saloner, op. cit .w However, users tend not to be well represented in organizations where standards are chosen. Horwitt

(1987, p. 43) notes, for example, that 'User organizations stili are not taking an active role in Communi-cations standards development efforts. . . .' User participation is l ikely to be especially limited whereusers are households rather than firms.

40 Besen (1990, pp. 529—530) describes efforts by thè Council of thè European Communities topromote standardizarion of relecommunicarions technologies.

4 1 Subsidies may also be required where some users shift to thè new technology and others do not butforai welfare would be larger if ali shifted. See Dybvig and Spatt ( 198.3) for an analysis of thè need for suchsubsidies.

42 Since everyone is compelled to move, no one need fear being stranded with thè new technology. -41 Bresnahan and Chopra ( 1990) attribute thè choice of a factory Locai Area Network srandard to efforts

by large users.44 Farrell and Saloner, op. cit. , also show that 'excess momentum,' where there is a movement to thè

new technology but thè net effect on users is negative, may occur. In such cases, some consumers are madebetter off by thè shift but others, who adopt thè new technology to minimize their losses, are made worseoff by a larger amount. Moreover, Ar rhur (1989) shows that thè ' r ight ' technology wi l l not always beselected when a dioice is macie bcrween compc-rmi; srandards.

[products.45 However, where many firms offer a new product, thè incentivefor any one to engagé in promotional pricing will be reduced because most ofthè benefits from doing so will be captured by other firms.46

Potential buyers of FM receivers could not be certain during thè postwar[period that others would purchase such receivers. Because thè benefits fromI owning an FM receiver depend, in part, on thè number of others who do so,[this may have caused consumers to defer their purchases. Thus, 'inertia' ofi thè type described in thè theory may partly explain thè small number of FMfsets that were purchased.

A second factor that may have contributed to this inertia is thè rapidE growth in thè number of AM stations that occurred during this period, The[argument here is based on thè earlier point that, in choosing which of twoI competing technologies to adopt, a consumer will make a forecast about thè[size of thè respective networks that each technology will obtain. Although•.thè number of authorized FM stations grew rapidly during this period, thèrate of growth in thè number of authorized AM stations was even faster.47 If

! potential purchasers inferred from thè rapid growth in thè number of AMstations that FM's programming inferiority would be more or less perma-

i nent, they would be less likely to purchase FM receivers. This inference. might have been prevented if thè FCC had limited thè growth of AM and• channeled thè demand for radio to FM. But, of course, it did not do so.

In addition to thè standard 'network externality' explanation, thè shift ofFM from thè frequencies that had been assigned to it before World War II isalso likely to have played a role in limiting thè demand for FM receivers. By'stranding' listeners with receivers that were obsolete, thè FCC's action addedto thè inevitable uncertainty that is faced by adopters of a new technology.Having been 'burnt once', or having seen others been burnt, listeners werereluctant to purchase FM receivers during thè period immediately after thèfrequency shift . In this view, a concern about stranding by potential purchasers

I of FM receivers which would exist under any circumstances, was exacerbatedby thè FCC's decision to shift thè FM frequencies, in fact stranding those

I who had owned FM receivers in 1945.48

4^ Katz and Shapiro ( 1986) analyze thè use of promotional pricing by two firms that olfer incompatibleproducts.

46 The incentives of thè Radio Corporation of America, a major receiver manulacturer, to engagé inpromotional pricing were somewhat attenuated by its large intercsts in AM radio and televisionbroadcasting, both of which could be expected to compete with FM.

47 For example, between January 1, 1946 and January 1, 1950, thè number ot authorized FM stationsincreased from 456 to 788, or 73(^, while thè number ot authorized AM stations grew trom 1004 to2234, or 1259? .

4H In rhe restimony of Lee McCanne of Stromberg-Carlson, Radio Fr«///r«r} Modulatimi, p. 71, heargues for 'an announcement that thè high-band FM service is ali set tor a couple ot years. We discussedthè market ins tab i l i ty and rhe facr that people are holding back trom buying sets . . . we th ink that nowsome Symbol and some indicanoti ot scabtlicy would bc a very he lp tu l t h i n g . '

-AM versus FM: The Battle of thè Bandr - AM versus FM: The Battle of thè Bands —

The following colloquy between J. E. Brown of thè Zenith Radio Corpora-tion, and Congressman O'Hara nicely captures this concern:

Mr. O'Hara: And do you find, or did you find during thè terms of theseshifts, people who were certainly in thè purchasing end of it who wereskeptical about buying something when they did not know whether theirset would be any good a year from then?Mr. Brown: That is true, and it was a bad thing commercially.Mr. O'Hara: And has that affected thè various segments of thè FM industry?Mr. Brown: I think it has.Mr. O'Hara: As well as thè purchasing public?Mr. Brown: I know it has.Mr. O'Hara: I know it has me, for one, as one prospective purchaser. I didnot want to buy any FM sets until I knew what was going to happen. I didnot want to buy a set and suddenly find out that it was not any good, and Iwould have to get that fixed up or changed to another band for which thè setwas not originally built.4y

Nonetheless, even after thè shift in frequencies, there were stili those whobelieved that increased sales of receivers would follow once a sufficiently largenumber of FM stations were on thè air. A trade press report in 1946indicated that:

Dark as thè view for FM set production seemed after thè FCC's survey ofradio receiver production was made public, observers familiar with FM arenot too downcast about this year's potentials. When FM stations get on thèair, listeners will demand FM sets, they say. And where there is a demand,manufacturers wi l l not long let it go unsupplied. It isn't so much a questionof how many sets; thè problem is to get them to thè tight places (where thèstations are) at thè right times.50

With hindsight, it is clear that this optimism was misplaced. We turn now ]to some other explanations for why FM receiver sales were so small.

Simulcasting, Receiver Costs and thè Demand for FM Receivers

The incrementai benefit that a listener obtains from owning an AM-FMreceiver instead of one capable of receiving only AM broadcasts51 depends onthree things: First, there is thè value of thè additional programs that are javailable on FM stations but not on AM stations. Second, there is thè value

lv Radio FreqHency Modulativi, p. 62.M) E. Abrams, 'Washington', 'Sets Will be There', Frei/uumy Modulatimi Business, Volume 1, Number

4, New York, May 1946, p. 42.Realistically, few persons were l ikely to purchase FM-only receivers given thè large number of AM

starions rhat were in operarion and, in any cvcnt, there were few, if any , FM-only receivers available to bepurchased.

of improved reception of those programs that are 'simulcast' on AM and FMstations, i.e. that are broadcast simultaneously on an AM and an FM station.Finally, there is thè additional cost of purchasing an AM-FM receiver overthat of buying an AM-only receiver. The smaller are thè amount of additionalprogramming and thè improvement in thè quality of reception, and thèlarger is thè incrementai cost of an AM-FM receiver, thè smaller will be thènumber of AM-FM receivers that are sold.

There are doubts about thè incrementai value of receiving FM broadcastson several scores. First, early in thè history of FM, thè FCC declined to adoptrules that would have limited simulcasting by thè AM-FM broadcast com-binations.52 This was a mixed blessing for FM. On thè one hand, it meantthat listeners could receive popular programs on FM, so that, if FM receptionwas of superior quality, they would have an incentive to purchase AM-FMreceivers and to listen to thè broadcast of these programs on FM. On thèothet hand, since thè incentive to develop programming exclusively for FMwas reduced, and so much FM programming duplicated that of AM stations,thè incentive to purchase FM receivers to obtain programming not availableon AM was reduced. Although widespreadsimulcasting initiallygave listenerssome reason to putchase AM-FM receivers, it may eventually have limited itsprospects.

A number of industry participants argued that permitting simulcastingwould speed thè movement from AM to FM. Typical was thè statement ofPaul W. Kesten of CBS. In thè section of his 1945 statement to thèCommission entitled Identica! Programming will Shorten thè Transition Period,Kesten provides five reasons why simulcasting would have this effect."First, it will accelerate thè purchases of FM sets because thè demand for suchsets will be adversely affected if FM offers 'only second string programs.'5

Second, it will encourage thè entry of new FM broadcasters because access tonetwotk programs [presumably available thtough simulcasting] will increaseFM audiences and create a larger FM listening base for new broadcasters toconsider when deciding whethet to enter thè FM market.55 Third, simul-casting will save thè listener's money because 'with separate programming,

52 For a brief history of early regulation in this area see In thè Matter of Amendment ot Pare 3 ol thèCommission's Rules, regarding AM station assignment standards and thè relationship between thè AMand FM broadcasr services, 25 RR 1615, 1963, para. 11-22. Limits on program duplication wereimposed In thè Matter of Amendment of Part 73 of che Commission's Rules, regarding AM stationassignment standards and thè relationship between thè AM and FM broadcasr services, 2 RR 2d 1658,1964." As we note below, one can construct an argument that permitting simulcasting delays thè

transition. Moreover, this argument for permitting simulcasting implics that provision should be madefor 'sunsetting' simulcasting and, perhaps, for sunsetting AM itselt." Id . , p. 15." Id.. p. 16.

- AM versus FM: The Battle of thè Bands - AM versus FM.- The Battle of thè Eands

he must sooner or later buy a combination FM-AM set or two separatesets.'56 Fourth, simulcasting will avoid listener confusion.57 And, fifth,simulcasting will permit thè maintenance of program standards.

Although there is every reason to believe that these arguments are self-serving, at least two can easily be restated in a Form that is consistent withthè modern economie theory of standards. The contention that allowingsimulcasting will encourage others to construct FM stations can be viewed asa straightforward 'network externality' argument. The logic is that FM setpurchases will be stimulated through permitting simulcasting of networkprograms. This, in turn, will increase thè potential audiences of new FMbroadcasters, who otherwise would have access only to a much smallerinstalled base of listeners with FM receivers. As a result, some FM stationswill go on thè air that otherwise might not.59

Similarly, thè argument that listeners will experience cost saving as aresult of simulcasting can be cast in terms of thè modern theory. Here, thèargument appears to be that simulcasting encourages thè immediate purchaseof AM-FM receivers, where otherwise listeners might delay their purchaseonly to discover later thè need for a separate FM receiver or a replacement fortheir AM-only set. In a sense, allowing simulcasting signals to listeners thatFM will be thè future standard, i.e. it makes it a 'focal' point, so that theyshould purchase receivers now that meet that standard. By giving credibilityto FM, thè fears of listeners that they may be 'stranded' with thè wrongtechnology may be overcome.60

Nevertheless, it is certainly possible to construct an argument underwhich permitting simulcasting would actually retard a transition to FM.Erickson states such an argument succinctly:

. allowing thè AM stations to duplicate their AM programming over FMgave che listener no incentive to own an FM set, gave thè manufacturer noincentive to make FM radios, and did not foster programming uniquelysuited to show off thè benefits of FM listening/'1

In this view, listeners are most likely to purchase FM receivers when theycan obtain differentiated programs, although these might be programs ;

'" Id." Id.'" I d . , p. 17.Vl* Later, we consider thè countervail ing argument that new FM srat

from bui lding new stations hecause, although there might be more FMthè new stations face more formidable compermon from popular AM prknow, new FM srations faced thè worst of both worlds. Few FM sets wwith popular AM programs even among listeners who reccived FM br

''" As we note l a r c r . an even srronger s igna l would h;ivc been to :ui

>n owners might be discouragcdeccivers because of simulcasting,)grams. In ,my event, as we now .-Mre sold and they had to competeuicasrs.

mcc thè s u n s c t t i n c of AM

produced at lower costs than if they merely obtained thè popular AMprograms on FM, albeit with improved reception quality.62

There are thus two alternative hypotheses about thè effect of permittingsimulcasting on thè demand for FM receivers. One is that simulcastingincreased demand by giving thè FM access to thè higher quali ty program-ming available on AM. The other is that thè duplication of programmingreduced demand by giving listeners little incentive to incur thè additional

•;t of purchasing AM-FM receivers. Whether listeners would have beenire or less likely to purchase these receivers if thè programming had beenFerent (but possibly inferior) on FM cannot be answered on a priori groundsj it was likely to have been difficult at thè time to decide which hypothesiss correct.63

There is also some uncertainty about exactly how much simulcasting actuallyurred during this period. Because of opposition from thè musician's union,

. various times during this period FM stations were unable to simulcast thèprograms of an AM station, although this was permitted by FCC rules/"4 Onone theory, thè absence of simulcasting may have reduced thè incentive topurchase FM receivers, both because it lowered thè quality of programmingavailable on FM and increased uncertainty about whether popular programswould be available on FM.

Finally, it is important to consider thè additional costs that a listener| would incur to purchase an AM-FM radio instead of one that was capable ofF receiving only AM broadcasts.65 The manufacturing cost of an FM converter• for an existing AM receiver, which presumably exceeded thè cost of addingFM capability to a new receiver, was put at $10, with a retail price of$29.50.66 One estimate put thè incrementai price of FM capability in a new

, 62 Erickson's argument concerning thè effect of allowing s imulcast ing on thè demand for FM receivers\ appears to have two parts. First, listeners have a small demand l'or FM receivers because it offers only thèj same programs. Second, thè programs that are offcred on AM do not exploit ful ly thè advantages of FM£ transmission.

M The Federai Communicarions Commission In rhe Matter of Advanced Television Systems and TheirI Impact on thè Existing Television Broadcast Service, 5 Federa/ Conitiintiiiatidiis Coin»nssii>n Reùird, AugusrI 24, 1990, p. 5627, recently announced that it wi l l award High Definition Television (HDTV) licenses roI existing television broadcasters who are expected to offer thè same programs on both thè stations theyIcurrently own and their new HDTV outlets, i.e. to simulcast. It justitìed this decision in part on thèI grounds that '. . . our selection of a simulcast System will e l iminate confusion for consumers about whichItype of receiver to purchase.' (p. 5628).I M For brief references to thè 'Petrillo duplication ban,' named after thè President of thè musician'sI union, see 'Modulations,' FM Journal, February 1946, p. 31 and Statement of Lee McCanne. GeneralI Manager, Vice President and Director of thè Srromberg-Carlson Co., Radio Fm/nemy Modulatimi, p. ""0. Irihas been diff icult to determine thè precise extent of thè han.

M The trade press reported that only AM and AM/FM combinarions were being sold." Procrea of /-'Al Radio, Hearings before thè Committee on Interstate and Foreign Commerce, l 'nited

IStates Senate, Eightieth Congress, Second Session, on Certain Charges Involving Development of FM* Radio and RCA Patent Policies. March 30, Apr i i 2 Ì . May 12. 1 3 . 2 1 , 19-lS. Ch.irles B. Johffe. Execut ive

Vice P res iden t . RCA Lahoraror ie» Pmsion . R a d i o Corp of A m c r u . i . i s thè Bouree of rhe m.muLu t u r i n s :

• A M versus FM: The Battle of thè Bands - AM versus FM: The Battle of thè Bands -

receiver at $10, approximately $40 in 1991 prices.68 Since thè lowestpriced AM-FM receiver was then selling for about $50,69 adding FMcapability apparently raised thè price of that receiver by about 25% .70 Thus,whether viewed in absolute terms or as a percentage of thè purchase price,thè incrementai cost of FM capability was not trivial.

The Quality of FM Transmissions

In addition to thè effect of simulcasting, two additional factors might makeone skeptical about thè extent of thè improvement in service offered by FMover AM during thè late 1940s. The first concerns thè capabilities of thè FMreceivers that were actually sold during this period. The second involves thèquality of thè network interconnections that linked FM stations.

Although FM receivers were, in theory, capable of receiving transmissionsat 15 000 cycles, some receivers that were sold during this period may havehad a smaller bandwidth. 7 1 Moreover, a trade press account suggests thatthere were formidable difficulties in selling FM receivers, quite apart fromany effect of thè frequency shif t . 7 2 Among thè difficulties identified were:

. . . ali setswith so-called FMcircuits wil l not give identica! performance. . . .retailers must be wary of their selection and sale of FM models. They shouldfavor receivers having maximum sensitivity, minimum noise level andwidest audio range.Furthermore, it will be essential that {dealers} sell and completely instaliantenna systems required for thè new FM sets. These systems will besomewhat more complex than those required for standard btoadcasnng(AM) since transmission and reception on thè upper portion of thè spectrumwill present problems quite different from those encountered up to now.

At thè same time, it should be noted that some industry observers appar-ently believed that thè quality of FM receivers did not constitute a problem.

G. Howe, Office of Information, US Department of Agricul ture, FA1 for You, Washington, DC,October 19, 1945, p. 5. Although thè statement refers to a 'cost' of S10, it is clear both from thè context •and from thè tollowing sentence that it is thè incrementai price that is being discusseci. J. E. Brown ofj/.enith Radio Corporation nored that '. . . Our newest FM set has seven tubes in i t , and a l i seven are usedfor FM and six of them are used for AM reception. It has both FM and AM. It costs us one extra tube in •there for thè FM. ' Radio FreqHemy Modulativi, p. 66.

''" Calculatcd usmg thè Durable goods price indexes for 1946 and 1991, respectively, from Economie jReport of thè Presidenl, I9H9, Table B-60, p. 376, Consumer price indexes, commodities, services, and v

special groups, 1946-88, [1982-84=100], and Economie Report of thè Presidiili, 1992, Table B-58,1p. 364, Consumer price indexes, commodities, services, and special groups, 1950—91, [1982—84= 100], j

r'v Brown, Raditi Frecjuency Modulatori, p. 65.0 Of coursc, for more expensive receivers, thè increase was proportionally smaller.

1 S. Kempner, op. ci t . , notes rhat 'Some models of ditferent manufacturers wil l provide for ireproduction up to I 5,000 cycles . ' (emphasis addcd) This suggests, of course, that some models did noea t f a i n thesc f r equcn t it-s

For example, in answer to a question from thè Chairman of thè HouseCommittee on Interstate and Foreign Commerce concerning thè quality oflow-price sets, Brown of Zenith Radio Corporation testified that 'they dogive excellent service.'73

The second factor involves thè bandwidth of thè interconnections beingused to l ink FM stations to catry network broadcasts. Although some of thèearly FM network connections involved one station retransmitting thè signalof another station taken directly off thè air, some used telephone lines leasedfrom thè telephone company. However, these lines, initially at least, wereincapable of carrying thè entire frequency range of FM broadcasting. Writ-ing in 1944, W. B. Lewis noted that thè connection between Cleveland andNew York was

over a telephone wire capable of carrying not more than 5,000 cycles;ideal ly , Frequency Modulation requires 15,000 cycles. The FM transmittercould send to your set, and yout FM ser could receive, no more quality thanthè telephone line delivered.74

Some improvements in telephone circuits did take piace after thè wat, andthè telephone company promised even further ones. For example, AT&T isquoted as indicating that:

With facilities now available and in ptospect, thè Telephone Companieshave a wide degree of flexibility in meeting future requirements for FMbroadcasting stations . . . we believe we are already in a position, when watresmctions are relaxecl, to give thè FM broadcasters nation-wide networksmeeting any transmission requirements which they select as desitable.

Nonetheless, for a time, thè higher bandwidth capabilities of FM wereunderexploited, further reducing any advantage it might have over AM.

Testifying in 1948, Lee McCanne of Stromberg-Carlson noted that:

At rhe present t ime [FM networks] cannot get enough telephone circuitsand those telephone citcuics are expensive. . . . There is a big differencebetween 5,000 and 8,000 cycles over a telephone line, and thete is anotherbig diffetence that is sttived for from 8,000 to 15,000 cycles. . . . A 15,000cycle line takes as much room on their coaxial cable or on theit wire circuiias 5 telephone conversations, and they have to charge as if it were 5telephone conversations.76

7* Radio Frequency Modulation, p. 65.74 W. B. Lewis, 'The Possibility ofa Fifth Network,' FM anJTelernim. Novemher 1944. p. 18. Lewis

Iso noted that phonograph records 'were delivering to thè transmitter 4,000 cycle qual i ty or less, and thè' rransmitter could broadcast no more than it received.'

"' ' I V O O O (Vele-, j'or A l i N e t w o r k s . ' F \\ .:•:.: T-..'-.: :..•• •:. F e h r u a r v N ̂ . C .? 4

- A M versus FM: The B alt le of thè Bands - - A M versus FM: The Battle of thè Bands-

If FM networks found it too expensive to use thè 15 000 cycles, they wouldhave been providing lower quality transmissions than what was theoreticallypossible using FM.77

Supply Limitations

I have been interpreting thè small volume of FM receiver sales as a 'demandside' phenomenon, i.e. that few sets were sold because few people wantedthem because of network externalities and programming and technical limi-tations. However, some contemporaneous observers offered 'supply side'explanations. Por example, Armstrong, stated in response to a questionabout whether manufacturers were making a large quantity of FM sets that:

Some of them are, Congressman, and some of them have dragged their feet.That has been done for a variety of reasons. I can teli you from thèstandpoint of an inventor, there has never been anything more heartbreak-ing than to see thè full capacity of a good deal of our radio industry grindingout AM sets when if our wave lengths had not been changed, they wouldhave been bui lding FM sets.™

In testimony at thè same hearing, J. E. Brown of Zenith Radio Corpora-tion emphasized thè supply explanation:

In 1947, fewer than 7 percent of thè radio receivers manufactured in thèUnited States contained FM. While many factors may have contributed tothis poor showing, there is reason to believe that thè most predominantfactor was thè problem of thè design and manufacture of receivers for publicuse for thè 100-megacycle band, a problem which had never before beenmet by thè radio-receiver industry. ";

Brown and thè Chairman of thè Subcommittee also engaged in thèfollowing exchange:

The Chairman: How much, inyouropimon, did thechange in thè frequenciesdelay thè production of FM receivers in volume?

If FM stations had been permicted to setve large areas, thè dependence of FM netwotking ontelephone lines would have been reduced somewhat because some stations could have retransmitted thè \signals of others that were taken directly off thè air. However, thè FCC's Single Market Pian for FM ,eftectively l imited thè range of FM stations, making this al ternative infeasible. As McCanne notes in hUtes t imony, '. . . wc would l ikc to see thè single market pian waived [for thè low FM band}, so that . . .]relay stations, takmg thè piace of telephone lines, can cover just as much area as possible.' Radio frequency \Mutilila!mi. p. 7 1 .

Statement of Edwin H. Armstrong, Radia Frequemy Motiìilation, p. 32. Note that attributing thèsmall production rate to thè ftequency switch can have either a demand or a supply interptetation. Thedemand explanation is that thè switch discouraged thè purchase of FM receivers. The supply explanationis t ha t m a n u f a c f u r e r s hud d i m t u l t y in tetooling to manuhicturc- reccivcrs at thè higher frequencies.Armstrong appcars fo bc emphasiz ing thè supply sidc ar t h i s po inc

'' A> , , / / , . F.v / / „ ,„ . \\:,,l,,/ ,, ,, J-

Mr. Brown: In volume, certainly 2 years. We have not had up to now agood FM receiver producrion, I would say from now back unr i l rhe rimewhen that decision was made, 2 years.80

It should be noted, however, that a contemporary trade press report madea somewhat less pessimistic assessment of thè effect of thè frequency shift onFM receiver production: 'According to thè best-informed estimates, a radicaishift in FM frequencies will delay thè major part of postwar radio productionby six to eighteen months.'81 However, thè same publication observed thatif FM stayed at thè lower frequencies, 'Botti transmitters and receivers,representing substantial improvements over prewar models, have been de-signed, field-tested, and can be put into production as soon as authority isgranted by thè WPB [War Production Board].'82

6. What Could Have Been Done Differently?FM was generally recognized as a superior method of radio broadcastingduring thè 1940s. Nonetheless, for a variety of reasons, few people purchasedFM receivers and, subsequently, many FM stations went off thè air. As I havepreviously shown, thè various policies that thè FCC adopted during thisperiod either failed to contribute to thè growth of FM or may actually havediscouraged it.

One possible explanation for thè behavior of thè FCC is that it did notbelieve that thè rapid adoption of FM was socially efficient. Not ali users maybenefit from thè introduction of a new superior technology.8' Moreover, anew technology may be adopted even when thè losses exceed thè gainsbecause early adopters do not take into account thè resulting losses toothers.84 Clearly, in such cases, thè government should either discourage thèinefficient adoption of thè superior technology or, at least, not encourage it.Viewed in this light, policies that had thè effect of slowing thè growth of FMmay actually have been socially beneficiai.

Nonetheless, thè FCC claimed that its policies were intended to help FM,so that it is reasonable to ask whether there were other policies that could

. have been pursued that would have changed this outcome and led to thè

"° Id. at 64."' 'What's New this Month', 'FM Broadcast Frequencies', /-"Al aaiiTtlei-isiim, Volume V Number -\,

New York, Aprii 1943, pp. 4, 83.82 'Final Decision on FM Frequencies', 'We don't want a Successtul Operation and a Dead Patient on

our Hands', FM and Teleì'ision, Volume 5, Number 2, New York, February 1945, p. 19.** Losers include both those who remain with thè old technology but who are on a smaller 'network'

because of thè existence of thè new technology and those who switch to thè new technology to be on alarger network but were bettet off before rhe new rechnology was introduced.

"4 See Fa t i -e l i and Salone! (1985) and K.itx .ind Stupito ( 19911 Of course, wi th in i r thè assis tami ' of

AM versus FM: The Battle of thè Bands A M versus FM: The Battle of thè Banda

more rapid diffusion of FM. Two such policies are suggested: requiring thatali radio receivers sold be capable of FM reception and 'sunsetting' AM.

Suppose thar ali listeners have FM receivers. An independently owned FMstation could duplicate AM programming and attract more listeners than anAM station with thè same programming because it has a superior signal.85 Ifan AM-FM combination could not either let thè FM station go dark orsimulcast, it would have thè same incentives as an independently-ownedstation because if it chose to abandon ics license an independently-ownedstation could dispiace it. Thus, once ali listeners have receivers that arecapable of receiving FM signals, there should be a rapid shift of program-ming to thè superior FM transmission method. The length of this transitionwould depend on how quickly listeners purchased FM-capable receivers. Oneobvious way to accelerate thè transition would be to require that ali radioreceivers be capable of receiving FM broadcasts.

As part of its effort to overcome thè handicap faced by UHF televisionstations in competing with VHF stations, thè Congress adopted thè Ali ChannelReceiver Law in 1964. The Law, which required that ali television receiverssold in thè United States be capable of UHF reception, was largely unsuccessfulin reaching its objective because thè signals of UHF stations were inferiorto those of their VHF counterparts. Moreover, an analysis of thè effect of thèadoption of thè law concluded that its costs exceeded its benefits.86

The All-Channel Television Receiver Law generated few benefits becausethè lack of all-channel receivers in thè hands of thè public was only part of jthè problems faced by UHF television stations. Because thè signals of UHFstations were inferior to those of their VHF competitors, UHF stations •continued to face significant competitive handicaps even after most receivers'1

in thè hands of thè public could receive UHF broadcasts. Por thè case of FM, !however, thè new technology was widely regarded as superior to thè old one. >Here, thè objective of thè policy would not be to overcome an inherent com-tpetitive handicap faced by FM but rather to overcome thè inertia faced by anynew technology in a network industry. As a result, there is more to recommend]such a policy here than in thè case of thè All-Channel Television Receiver Law. In*any event, such a policy was not adopted and FM continued to languish.

The objective of accelerating thè purchase of FM receivers could also havebeen accomplished if it were known that, at some date in thè future,stations would be shifted to FM, i.e. that AM would be 'sunsetted'. H7 Une

^ A sufficient condition for this to occur is that thè costs of station opetation are che same."'' Webbink ( 1969, p. 561) conclude: that The All-Channel Television Receiver Law was a misi"*' The Federai Communicat ions Commission, Radio Broadcast Services; Advanced Television Systt

56 Federai Resister, Novemher 18, 1991, p. 58211, has tentatively concluded in its High DefinitiTek'vision (HDTV) pnx ec-dm^ rha r ' rhc p u h l u mtcrcsr rc< |u i rcs scrnnt ; a f i r n ) dare or orher triggering

this scenario, listeners would purchase FM-capable receivers not because theywere required to do so but because they know that AM-only receivers wouldsoon be obsolete. This, in turn, would accelerate thè shift of programming toFM, as in thè case where FM receivers were mandated.

However, not only did thè FCC not pursue a policy of sunsetting FM, butit actually permitted thè number of AM stations to accelerate rapidly duringthè period we are considering. A likely result of such a policy was to dis-courage further thè purchase of FM receivers. This, in turn, would havemade it less likely that existing FM stations could stay on thè air and thatnew FM stations would come into being.

7. ConclusionFM faced considerable handicaps in displacing an entrenched AM radioindustry in thè 1940s. To thè inherent handicaps faced by a new technology

'. in a network industry were added economie developments that were peculiarto FM. Nonetheless, there were regulatory changes that might have acceler-ated thè transition to FM, but these were not taken. Nor is this surprising.

: As we know from other contexts, thè initial reaction of thè FCC to a newi technology that threatens thè existing economie order is to adopt policies, that either slow or arrest thè change. Although thè policies adopted by thè, FCC in thè case of FM were not as overtly protectionist as in thè case of cabletelevision, for example, thè effect was no less harmful to thè new technology.

Acknowledgements'. am grateful to Thomas G. Krattenmaker both for very helpful commentsnd thè title of thè paper, Richard Goldstein, a Georgetown University lawiident, for excellent research assistance, and three referees for very valuable

Drts. Research supporr was provided by thè National Science Foundation[(Grant No. IRI-8805845).

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Krasnow, E. G. and L. D. Longley ( 1978), The Politici of Broaikail Regulation, Second Edition, New YoSi. M a r t i n s Press.

Lessing, L. (1989), Man of High Fidelity: Edu-in Malfarti Armstrtmg, New York. Bantam Books.

Webbink, D. W. (1969), The Impaci of UHF Promotion: The All-Channel Television Receiver Law,jl*aw and Contempvrary Problemi, 34, 535—561.

FONDAZIONE ASSI

A PresentationThe Fondazione ASSI for thè hùtory of enterprise was created in October 1986growing out of thè earlier ASSI Association (formed in 1983).

Research on topics of business economics and business history is thè main activityof thè Foundation. Its methodology is based on thè belief that business history andbusiness studies require an approach which goes beyond thè purely narrative andchronological aspects and emphasizes thè necessity of theories and generalizations.Thus a continuous dialogue between economists, historians and sociologists hasbecome a distinctive mark of ASSI research activity, with a focus on a few mainthemes: technological dynamics and thè innovative process of thè firm; financialinstitutions and allocative mechanisms; thè evolution of thè forms of enterprise aswell as of organizational and decisional procedures; historical taxonomies of growthof industries and firms.

ASSI is editing a series of studies and monographs in thè fields of thè history,economics and sociology of enterprise which so far already counts some fifteen titles.Further, thè Foundation is editing three periodicals: thè Annali, an yearbook ofbusiness history, that has reached thè 8th volume; Archivi e imprese, at its third yearof life, and Industriai and Corporate Change.

Moreover, ASSI has been promoting on yearly basis seminars in business historyand workshops on organization history and theory. Most important is thè internationalweek on thè history of enterprise held every two years. The 1993 Conference willfocus on Hierarchies, Markets, Power in thè Economy: Theories and Lessons from Historyand will be held in Milan on thè second week of December.

Finally ASSI has recently created jointly with thè Chamber of Commerce of Milanthè Business History Center aimed at diffusing business history in Italy, fosteringthè conservation and thè protection of business archives in Lombardy, financingyoung researchers and cooperating with other institutions (public, private, acade-mic) concerned with studies and research in business history.

The ASSI Series in Business History

': P. A. Toninelli, La Edison. Contabilità e bilanci di una grande impresa elettrica, 1884—\1916. Bologna: II Mulino, 1990.' F. Amatori, B. Bezza (eds), Montecatini: 1888—1966. Capitoli di storia di una grandeimpresa. Bologna: II Mulino, 1991.G. Sapelh, S. Zan, Costruire l'impresa. La Cooperativa Muratori e Cementisti di Ravenna

\dal 1945 al 1972. Bologna: II Mulino, 1991.). Bezza (ed.), Energia e sviluppo. L'industria elettrica italiana e la Società Edison. 2nd

edn, Bologna: II Mulino, 1991.P. P. Saviotti. L. Simomn, V. Zamagni, Dall'ammoniaca ai nuovi materiali. Storia