Legend has it that RKO was created in a 1928 meeting between RCA president David Sarnoff (1891–1971) and Boston financier Joseph Kennedy (father of JFK) in the Oyster Bar in New York's Grand Central Station. While the meeting itself may have been apocryphal, Sarnoff and Kennedy did in fact control the elements that would merge to create RKO. Most of those elements had been in place for years, dating back to a 1921 alliance between Robertson-Cole, a British import-export firm, and a minor US distributor, Exhibitors Mutual, which launched a modest Hollywood production operation on a 13.5-acre site at the corner of Gower and Melrose. The company was reorganized in 1922 as the Film Booking Offices of America (FBO), and functioned primarily as a distributor of European and independent American films, along with the company's own output of decidedly second-rate genre pictures. FBO was bought in 1926 by Kennedy, who had little impact on operations beyond the installation, a year later, of William LeBaron (1883–1958) as studio chief.
Meanwhile, Sarnoff was looking for an entry into the movie business to demonstrate RCA's new "optical" (sound-on-film) system, Photophone, as an alternative to Western Electric's dominant sound-on-disk system. In early 1928, as Warner Bros.' The Jazz Singer (1927) ignited the "talkie boom," Sarnoff acquired substantial interest in FBO and, with Kennedy, began shopping for a theater chain. They finally settled on the Keith-Albee-Orpheum (K-A-O) circuit of some 700 vaudeville houses. The legendary Oyster Bar meeting in late 1928 purportedly closed the K-A-O deal, with RCA controlling the $300 million company—dubbed Radio-Keith-Orpheum—and Sarnoff taking command as board chairman.
Sarnoff installed a management team including former FBO executive Joseph I. Schnitzer (1887–1944) as president, B. B. Kahane as secretary-treasurer, and William LeBaron as production head. Schnitzer immediately signaled RKO's presence as a major studio power by paying hefty sums for the screen rights to several major Broadway hits, most notably the Florence Ziegfeld musical Rio Rita , which quickly went into production at the Gower Street facility and was released in September 1929, giving RKO its first hit. The Wall Street crash a few weeks later scarcely dimmed Sarnoff's hopes or undercut his effort to develop RKO-Radio and RCA's other media subsidiary, NBC (then a radio network, although television was in serious development as well), into America's first entertainment conglomerate. Sarnoff also expanded RKO's physical capabilities with the purchase in 1929 of a "ranch" in the San Fernando Valley for exterior sets and locations, and the 1930 acquisition of the US holdings of the French film giant Pathé, including production facilities, contract talent, a newsreel division, and an international distribution network.
These added resources became a serious burden when the Depression finally hit in 1931, as were RKO's inefficient production operations and its theater chain (roughly 160 of which were wholly owned, making RKO responsible for the entire mortgage and debt service). In an effort to enhance efficiency as well as the quality and consistency of the studio's output, Sarnoff aggressively pursued young David Selznick, the son of an industry pioneer who already, at age twenty-nine, had extensive experience as a production executive at both MGM and Paramount. Sarnoff hired Selznick in October 1931 as RKO's vice president in charge of production, and the results were swift and significant. Selznick consolidated production at RKO-Radio (the main studio at 780 Gower Street) and cut production costs substantially. He hired Merian C. Cooper (1893–1973) and Pandro S. (Pan) Berman (1905–1996) as his executive assistants, planning to give them their own production units, and he also recruited top filmmaking talent like director George Cukor (1899–1983) and ingénue Katharine Hepburn (1907–2003). Selznick's own tastes were evident as well, particularly in several "woman's pictures" and high-class adaptations that were resisted by the New York office but emerged as solid commercial hits. These included two Cukor-directed films in 1932, What Price Hollywood? and A Bill of Divorcement , the latter costarring John Barrymore (1882–1942) and Hepburn in her screen debut. Hepburn was top-billed in the Cukor-directed Little Women (1933), which secured her stardom.
Despite this success, Selznick's executive prowess was severely compromised when an executive shake-up at RCA in 1932 put NBC president Merlin ("Deac") Aylesworth in the chief executive role at RKO-Radio (parent company of RKO Pictures). Aylesworth tried to run the movie studio as well as the radio network, which led to increasing conflicts with Selznick, who left to supervise his own production unit at MGM in early 1933—only weeks before RKO fell into receivership (i.e., bankruptcy). Although it would take the studio nearly a decade to climb out of receivership—versus Fox, Paramount, and Universal, all of which recovered from bankruptcy in far less time—RKO continued to produce and release pictures, enjoying considerable success in the mid-1930s, due largely to decisions made by the outgoing Selznick. One was the approval and ongoing support of Cooper's pet project, King Kong (1933), which he coproduced, coscripted, and codirected with Ernest B. Schoedsack (1893–1979). King Kong was released some two months after Selznick's departure (he is credited as executive producer) and was a major critical and commercial success. Selznick also approved a screen test for Fred Astaire (1899–1987), which led to an RKO contract and a supporting role in a late-1933 release, Flying Down to Rio , in which he and Ginger Rogers (1911–1995) first teamed in a musical number.
Selznick also left behind two well-trained executives in Cooper and Pan Berman, each of whom served briefly as studio production head from 1933 to 1934. Cooper left to launch Pioneer Pictures and Berman soon returned to the producer ranks, where his main responsibility was the Astaire-Rogers musicals that were so vital to RKO's Depression-era fortunes. These included The Gay Divorcee in 1934, Roberta and Top Hat in 1935, Follow the Fleet and Swing Time in 1936, Shall We Dance in 1937, Carefree in 1938, and The Story of Vernon and Irene Castle in 1939. Five of the eight films were directed by Mark Sandrich (1900–1945), who along with Berman was the chief architect of a cycle that deftly blended the dance musical and romantic comedy genres, exploiting the two stars' considerable versatility as actors and musical performers. While the Astaire-Rogers films gave RKO a signature star-genre formula and reliable box-office commodity, the rest of its output was wildly eclectic and generally inconsistent. Berman supervised most of the studio's A-class productions, many of them directed by freelance filmmakers in short-term or nonexclusive deals—as with John Ford's The Informer (1935), a surprise hit that won its director an Oscar ® , and Howard Hawks's (1896–1977) Bringing Up Baby (1938), the screwball comedy classic with Grant and Hepburn that was a major critical and box-office disappointment on its initial release.
The unevenness of RKO's output was due in large part to the rapid turnover of top executives and frequent shifts in ownership and control, as a half-dozen chief executives passed through the front office between 1933 and 1938. A crucial change in ownership occurred in 1935, when Floyd Odlum's Atlas Corporation purchased half interest in RKO from RCA. Despite RCA's diminished ownership, its association with broadcasting—and especially television, then in an active experimental mode—did attract major independent producer Walt Disney, who left United Artists (UA) in 1936 for a distribution deal with RKO. The war would postpone television's arrival for another decade, but the Disney deal did give RKO its biggest hit of the era, Snow White and the Seven Dwarfs , a late 1937 release that was Disney's first feature-length animated film and Hollywood's biggest box-office hit of the decade.