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How Competition Created an Industry That Changed the World The intense rivalry between NBC's David Sarnoff and CBS's William Paley propelled them to improve the quality of early radio.

By Donald Miller Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

In 1926, David Sarnoff, a combative 36-year-old immigrant from Belarus, formed the National Broadcasting Company, later known as NBC. It was the world's first radio network, a chain of stations with strong ties to the mother organization, the Radio Corporation of America, a communications colossus that Sarnoff had helped to create.

Sarnoff was a completely self-made man. Shortly after arriving in New York City from a European village that was almost medieval, he landed in 1906 a job as an office boy then became a telegraph operator at a communications company headed by Guglielmo Marconi, the inventor of wireless communication. Enthralled by the miracle of wireless telegraphy, Sarnoff tuned into the "invisible empire of the air, " as Lee de Forest called it, and never tuned out.

Rising rocketlike in his company, Sarnoff in 1915 proposed changing wireless radio from "point to point" to "point to mass" transmission so its audience would not be one listener but millions. He envisioned a receiver that would be a compact "radio music box" that families could place in their living rooms. By broadcasting interesting programs, the company would create demand for the music boxes it would manufacture in its plants.

In the early 1920s after Sarnoff's idea gained approval by his company (which had evolved into RCA), radio became almost overnight a household utility, as indispensable to many families as a telephone. By 1923, commercial radio was the fastest growing industry in the United States and New York City become the capital not just of radio broadcasting but also the manufacture and retail sale of radio equipment.

Sarnoff's mission was to provide listeners with a dose of culture -- what he called sententiously a liberal arts education. But the public hungered for more than symphonic music and opera. In 1927, with Sarnoff struggling to find a mix of culture and light entertainment that would appeal to listeners, he bucked heads with a young radio upstart who transformed the industry, as I documented in my book Supreme City.

That year, William Paley, the playboy son of a rich Philadelphia cigar maker, arrived in New York and purchased a financially struggling radio network that he reorganized and renamed the Columbia Broadcasting System (CBS).

Related: Is Competition a Catalyst for Innovation?

Paley's only competition was Sarnoff, whose company presented a formidable challenge. Catching up to and overtaking NBC, a network backed by the corporate behemoth RCA, became Paley's commanding obsession. Paley immediately spotted NBC's weakness and set out to exploit it. Unlike the self-made engineer Sarnoff, known as "Radio's Wonder Boy," Paley knew virtually nothing about radio technology but he had audacious ideas about programming and promotion and his family's money to gamble with.

Tall and strikingly handsome, this jocular man about town couldn't replace a radio tube if his life depended upon it, but Paley marveled at radio, which to him was a magical instrument. "I never got over the surprise and the fascination," Paley recalled. "I often sat up all night, glued to my set, listening and marveling at the voices and music which came into my ears from distant places."

Initially, Sarnoff refused to recognize CBS as a serious rival. After meeting 26-year-old Paley for the first time, the 36-year-old Sarnoff began calling him "kid" behind his back. Sarnoff had built NBC having started at the company at an entry level role , while Paley, a child of privilege, presided over CBS with inherited money. But the reigning emperor of network radio underestimated this pretender to the throne.

Boyishly charming William Paley was as ferocious a corporate warrior as David Sarnoff. In describing his strategy for overtaking NBC, Paley said, "Quite early in the game, I ... came to believe that the crux of this business was programming -- i.e. what went on the air." He added, "It seemed logical to me that those who put on the most appealing shows won the widest audiences, which in turn attracted the most advertisers and led to the greatest revenues, profits, and success."

While Paley soon broadcast some of the finest classical music and drama ever put on radio, he was more interested in popular entertainment -- from comedians Jack Benny and Will Rogers, jazzman Duke Ellington and the sensational young crooner Bing Crosby.

Related: The Grand Ole Opry Gets Hip to Hashtags to Harvest a New Audience Online

Sarnoff started off in the business hating advertising, seeing it as "a new and noisy method of letting peddlers into your home," according to Empire of the Air by Tom Lewis. He initially had wanted to make radio a public service and hoped to pay for his talent -- opera divas and renowned orchestra conductors -- by selling radio sets made by RCA.

In the late 1920s, when competition from Paley forced Sarnoff to take on an increasing number of advertisers, he avoided meeting with ad executives, delegating the odious task to subordinates.

In contrast, Paley recruited his talent solely with advertising dollars. He dreamed up ideas for radio shows of all types and took those ideas to advertisers and entertainers alike, serving as a matchmaker. If both parties were interested, an audition followed. Then if the chemistry was right, a new CBS program was created. These programs were produced by the sponsor's advertising agency and named after the sponsor's product.

As "radio's super-salesman," Paley would merchandise "more products for more different companies" and send out "more and different entertainers on more different programs, than anyone in the history of mankind," wrote journalist David Halberstam in The Powers That Be.

Paley relished the business of advertising. With his instincts for salesmanship and his keen comprehension of popular taste, he turned radio "from an advertising sensation" into an "advertising success," the world's first business supported entirely by advertising, according to Fortune.

Related: A (Kind of) Brief History of Marketing (Infographic)

While no one could produce and sell radios like Sarnoff, Paley was expert at producing and selling programming. From the day Paley took command of his new network, he served as its chief program director, its "talent scout," he said. He was "born with a sense of what was important to the American public," he told his staff. By 1931, CBS's net profits were roughly $2.25 million, almost the same as NBC's.

This forced iron-willed Sarnoff to change. He no longer "sniffed at" the money brought in by advertisers, according to a 1932 Fortune article. Though Sarnoff hated comedy and left the room when his wife turned on Amos 'n' Andy, a popular comedy about black people in Harlem that was voiced and written by white vaudeville performers Charles Correll and Freeman Gosden, he paid dearly to retain the show for NBC.

For every star performer Paley recruited, Sarnoff recruited two. Their competition for talent turned radio into a true medium of mass entertainment, with advertising at the forefront. Radio gave advertisers "a latch key to nearly every home in the United States," declared one ad executive cited in Daniel Czitrom's Media and the American Mind. It opened to advertisers the largest captive audience in history, nearly 52 million people by the early '30s. By then, the typical radio program on NBC or CBS was one-fifth advertising and four-fifths entertainment, about what it is today.

Sarnoff changed his business philosophy so completely by the mid-1930s that CBS could not overtake NBC in the ratings war. The Association of National Advertisers had established in 1930 the first audience rating system, a survey based on phone calls to nearly half a million listeners.

In 1935, Sarnoff's NBC had the five most popular shows on radio. But Paley kept gaining on Sarnoff. The next year, CBS shocked the radio world by briefly overtaking NBC in the ratings. In the 1936-37 season, four of the top five radio programs were on CBS. Paley pulled this off by robbing Sarnoff's talent bank, paying head-turning sums to steal three of NBC's most popular entertainers.

Related: Desi Arnaz & Lucille Ball

Until now, the competing networks had abided by a gentleman's agreement to not poach one another's talent. But Paley began violating it out of frustration. Sarnoff had proved to be a far sharper rival in programming than Paley had anticipated. Forced to play CBS's game, Sarnoff did so with panache and with deeper resources than Paley could initially call upon. (If Sarnoff's network ran into trouble, RCA would bail it out.) Paley was performing a high-wire act without a safety net.

Only in the late 1940s, when CBS embarked on more sweeping talent raids on NBC, stealing away Amos 'n' Andy, did Paley overtake Sarnoff, first in radio and then in television programming. But it was Paley's "sure sense of how to entertain the American public," not his lawless audacity that was "the rock upon which ... he had built a [broadcasting] empire," said The New York Times. "He is to the medium as Carnegie was to steel, Ford to automobiles, Luce to publishing and Ruth to baseball."

At a 1966 banquet honoring Sarnoff, Paley complimented his rival: "David will always be broadcasting's Man of the Future, [its] most imaginative prophet." For 40 years Paley had battled Sarnoff for broadcasting supremacy and he had the "scars to prove" it, he said.

Their rivalry increased the range and quality of American radio and television. Sarnoff, the engineer-manager, put his radio box into the American home, and Paley, more than anyone else, determined what came out of those boxes.

Had CBS and NBC not been run in the 1920s by innovative risk takers who responded to competition imaginatively and with vigor, one or another of these players could have been driven out of business early on. It was creative entrepreneurship, coupled with vigorous completion, that allowed both to survive and thrive and make New York the undisputed media center of the world.

Related: The Video Revolution Will Not Be Televised

Donald Miller

Author, Historian

Donald L. Miller is the John Henry MacCracken Professor of History at Lafayette College in Easton, Penn., and author of nine books, including City of the Century: The Epic of Chicago and the Making of America and Supreme City: How Jazz Age Manhattan Gave Birth to Modern America.

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