It came about, for the most part, from
60s FCC rules limiting the time an AM station could simulcast on its experimental FM signal. Since FM wasn't a Cash Cow (only
audiophiles, at first, had receivers), DJs could play
anything. Stations like
San Francisco's KSAN-FM and
New York's WOR-FM played LP cuts by
underground bands - an alternative to the poploop of
Top 40, and a means (alongside
zines and
underground newspapers) to wider exposure for
The Dead, et al.
It inspired the launch of a slew of "groovy, man" imitators across the US - KSAN is lauded as the "first freeform station", but it was really only the first high-profile commercial freeform station; founder Tom Donahue moved on, planting new stations elsewhere... upheavals caused some WOR jocks to move to the imitator-upstarts WNEW-FM and WABC-FM...
Success quickly led to a homogenization into rote format - "album rock" (AOR), and its progeny. There were some interesting experiments in TV simulcasts of concerts (stereo TV! groovy!), and experiments in quadraphonic sound (some US FM stations with "Q" in their call letters were part of this early-70s trend). Much college radio now is free-ish; WFMU (and KFJC) is the Real Deal. "Commercial freeform" has become an oxymoron. A pity.