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The Studio System and the Antitrust Campaign

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The major combatants in the movie industry’s antitrust battles during the 1940s were the Department of Justice and Hollywood’s major studio powers: MGM, Paramount, Warners, 20th Century-Fox, RKO, Universal, Columbia, and United Artists (UA). Through the 1920s and 1930s, these studios steadily refined a “vertically integrated” system of film production, distribution, and exhibition, creating what economists term a “mature oligopoly”—that is, a cartel of companies cooperating to control an industry. 9 In the Justice Department’s view, the net effect of that control was a veritable monopoly of the movie business, a view that led the attorney general to file the 1938 antitrust suit against the studios.

Actually, the Justice Department’s antitrust suit was simply one facet of a widespread government initiative against the studios. Scarcely coherent or unified, the antitrust campaign against the movie industry was waged on numerous fronts, from local courts and state legislatures to Congress and the Justice Department; it also involved a range of legal and regulatory efforts, from civil and class-action suits to state laws and federal regulations. Because of the structure of the movie industry, however, only the federal government had the authority to regulate the complex nationwide system of marketing and exhibiting movies. Moreover, the antitrust battles eventually involved not only the Hollywood studios with their affiliated theater chains but also several large unaffiliated theater circuits.

The Roosevelt administration, the Justice Department, Congress, and the federal courts were in many ways at odds with one another about whether any antitrust action against the movie industry was necessary, and if so, exactly what action to take. And this disagreement applied to many other industries besides motion pictures. Since the mid-1930s, in fact, the antitrust division of the Justice Department had been involved in a fierce, ongoing battle with the White House over the New Deal and, more specifically, over the National Recovery Act (NRA), which FDR pushed through Congress shortly after his inauguration in 1933. The NRA, in essence, provided government sanction for monopolistic trade practices in certain industries, including motion pictures, as a means of combating the Depression. Significantly enough, the Supreme Court had declared the NRA unconstitutional in 1935, but by then trade practices were in place which clearly were benefiting leading U.S. industries, and which the dominant powers in those industries were altogether unwilling to give up.

Thus, the Justice Department became heavily involved in “trust-busting” in the late 1930s—seeking, in effect, to undo what had been done under NRA sanction during the first few years of FDR’s administration. The head of the department’s antitrust division was Assistant Attorney General Thurman Arnold, who by 1938 already had won antitrust cases in the medical, oil, dairy, fertilizer, and construction industries, among others. Arnold fielded countless complaints about unfair trade practices from the movie industry’s so-called independent exhibitors—the theater owners with three or fewer movie houses whose business dealings were virtually dictated by the studios. Arnold grew increasingly sympathetic to their plight, and on 20 July 1938, he filed U.S. ?. Paramount Pictures et al . in New York Federal District Court, citing the so-called Big Eight Hollywood studios for violating the Sherman Antitrust Act.

Interestingly enough, the suit against the studios did not center on film production but rather on two other factors: first, the integration of production and distribution through various trade practices, which were facilitated by the Big Eight’s trade association, the Motion Picture Producers and Distributors of America (MPPDA); and second, the further control of distribution and exhibition by the five studios which also owned theater chains. Although their control of actual film production was not central to the suit, there was no question but that the Big Eight studio-distributors dominated that end of the business as well. By the late 1930s, they produced about 75 percent of all U.S. feature films, which generated 90 percent of all box-office revenues. Hollywood features also accounted for some 65 percent of all films exhibited worldwide; one-third of the studios’ revenues came from abroad." 11 The studios’ foreign and domestic revenues enabled them to keep their production factories running at full capacity; in the late 1930s, that meant turning out about one feature film per week, along with assorted serials, newsreels, shorts, and cartoons. The lone exception was UA, which was not a studio per se but rather a distributor for Hollywood’s major independent producers; UA released only fifteen to twenty pictures per year.

As important as film production was to the major studios—and to the studio system—the real key to studio control of the industry lay in the distribution and exhibition sectors. In fact, the single most complex question raised by the antitrust suit, and a question which would plague the Justice Department and the courts for a full decade, was whether film distribution or exhibition was the key to studio hegemony. The Big Eight had a virtual lock on all feature film distribution, completely controlling the movie marketplace and taking in around 95 percent of all domestic (U.S. and Canada) rental receipts.

Studio control had steadily consolidated during the 1920s and 1930s, when the major Hollywood powers refined an array of sales policies and trade practices which dictated the flow of movie product through the nation’s movie theaters, minimizing their own risks while maximizing the earning potential of their top features, and effectively stifling any form of competition in the mainstream movie marketplace. Chief among these tactics were blind selling (also known as blind bidding) and block booking. Equally important was the elaborate “run-zone-clearance” system, which favored A-class studio pictures and the all-important first-run movie market. Indeed, studio control of the first-run market was in many ways the essential feature of the Hollywood studio system.

According to the 1941 Film Daily Year Book, there were some 17,500 movie theaters in operation in 1940—one for every 8,000 persons in the United States. The total firstrun market in 1940 included 1,360 theaters in the 400 largest cities in the United States and Canada (i.e., those with a population of at least 12,500). All told, first-run houses generated well over one-half of the industry’s total domestic revenues. The most important of these were the first-run metropolitan houses, which in 1940 comprised about 450 downtown deluxe palaces in the 95 U.S. cities with over 100,000 population. 14 These theaters seated thousands of spectators, ran only top features, which played day and night, and generated the lion’s share of movie revenues.

The run-zone-clearance system sent a picture, after playing in the lucrative first-run arena, through the 16,000 “subsequent-run” movie houses; “clearance” refers to the amount of time between runs, and “zone” refers to the specific areas in which a film played. Typically, a top feature would play its second run in smaller downtown theaters and then move steadily outward from the urban centers to the suburbs, then to smaller cities and towns, and finally to rural communities, playing in ever smaller (and less profitable) venues and taking upwards of six months to complete its run. 15 The average daily attendance per theater was 500, and average attendance per show was 250. 16 But because of the enormous differences in moviegoing patterns and in theater size, ranging from rural houses with only a few hundred seats to the metropolitan movie palaces which seated thousands, these average figures were virtually meaningless. In R EBECCA’S record-setting run in early 1940 at New York’s Radio City Music Hall, for instance, a reported 750,000 saw the picture in its first five weeks—an average of 20,000 per day.

Thus, the logic of the studios’ effort to own and/or control (through joint-ownership ventures) the nation’s first-run theaters. As Mae Huettig stated in her landmark 1939 study, The Economic Control of the Motion Picture Industry, “Despite the glamour of Hollywood, the crux of the motion picture industry is the theater.” Huettig acknowledged the importance of the studios’ movies as the means of attracting audiences to those theaters, aptly describing the movie industry as “a large inverted pyramid, top-heavy with real estate and theaters, resting on a narrow base of the intangibles which constitute films.” 18 Figures from the 1941 Film Daily Year Book indicate just how top-heavy the industry actually was at that time. In 1940, the U.S. movie industry was a $2 Page 17  billion enterprise; of that total, some $135 million was invested in the Hollywood studios and about $25 million in distribution operations, while the exhibition sector was valued at a staggering $1.9 billion.

The overall importance of the exhibition sector was further reinforced by the vastly superior power of the studios which also owned theaters. Those vertically integrated companies—MGM, Paramount, Warner Bros., 20th Century-Fox, and RKO—were without question the governing powers in the movie industry. In fact, there was no real comparison between these so-called Big Five companies and the Little Three nonintegrated studios (Universal, Columbia, and UA) in terms of power, size, and economic value. The net worth of the Big Five in 1940-1941, including their theater holdings, ranged from MGM and Warners at about $165 million each to Fox at $130 million, Paramount at $ 110 million, and RKO at $70 million. Universal and Columbia were each valued at about $16 million, most of which was tied up in their production-related facilities. UA had little book value or assets to speak of, since it was essentially a distribution company.

Taken together, the Big Five studios either wholly owned or held controlling interest in a total of about 2,600 “affiliated” theaters in 1940, most of which were first-and second-run theaters in major urban markets. While their collective theater holdings amounted to only about 15 percent of the nation’s total, they included over 80 percent of all metropolitan first-run theaters." 21 The integrated majors also completely controlled exhibition in 73 of the 95 U.S. cities with over 100,000 in population. 22 And significantly enough, the studios’ affiliated and first-run theaters were not subject to compulsory block booking. In these lucrative venues, the companies cut exclusive deals with one another and played only the best of each others’ pictures. 23 Not surprisingly, this practice reinforced the general perception of collusion among the Big Five.

Another crucial aspect of studio collusion, in the Justice Department’s view, was the geographical dimension of their theater holdings. While each of the Big Five’s chains included several dozen first-run theaters in major cities nationwide, the bulk of each company’s holdings was concentrated in particular regions. Thus, the Big Five cooperated with one another in order to control the first-run market and to gain the full benefit of a nationwide first-run release.

Paramount’s chain was by far the largest, totaling some 1,250 theaters in 43 states, but it was especially strong in the upper Midwest (chiefly the Chicago area), the Deep South, and New England. Fox owned around 600 houses in 1940 through its National Theaters subsidiary, most of them west of the Rockies, along with limited holdings in various areas in the Midwest. Warners’ chain of about 475 theaters dominated the mid-Atlantic states and the Northeast. MGM (via Loew’s, Inc.) and RKO both had relatively small theater chains—barely one-tenth the size of Paramount’s—but they had two distinct advantages: a relatively high proportion of first-run theaters, and shared dominion over the New York City area, the nation’s leading movie market. Loew’s New York theaters made up one-half of its chain of 150 houses; most of its other holdings were firstrun houses in the eastern half of the United States. RKO, meanwhile, was the least regionally oriented of the Big Five; its slightly more than 100 theaters, most of them former vaudeville houses, were located in major cities across the United States.

These theater chains provided the Big Five with profitable exhibition venues and also valuable real estate holdings, giving them increased leverage with the financial institutions that underwrote production costs. Being in this position enabled them to produce a generally higher grade of pictures than their competitors could, pictures ideally suited   for display in their deluxe theaters. Their affiliated chains also enabled the Big Five to control the point of entry for top features into the movie marketplace. “As a control device, the development of strategic first-run theaters as the showcase of the industry proved remarkably effective,” stated Huettig. “Ownership of these relatively few theaters gave [the integrated majors] control over access to the market.” 25 For the Justice Department, this “barrier to entry” was yet another factor in its case against the studios.

The affiliated chains were clearly the privileged class of movie theater by the late 1930s; they included the majority of first-run houses, relied almost exclusively on top features, and were not subject to block booking. 26 Another privileged class—and another eventual target of the Justice Department’s antitrust division—was the large unaffiliated theater circuits. Because some of the larger circuits included several hundred theaters, they were able to do volume business and had considerable buying power with the studios. Also, some circuits dominated particular regions of the country—the Schine circuit in the Southeast, for instance, or the Griffith circuit in the Southwest—thus complementing the majors’ regional strengths (as exhibitors) and further enhancing the circuits’ status and preferential treatment by the studio-distributors.

Meanwhile, the independent theaters—about 60 percent of all theaters in the United States—had been systematically relegated to the weakest and least profitable position in the movie marketplace. As Garth Jowett has noted, by the late 1930s the “independent theater was in a rapid decline.” Although “by far the largest group numerically,” these theaters were “the least important source of film rentals. More and more, these tended to consist of the smallest houses in the less lucrative locations.” 28 Independent theater owners had been battling the studios and the large circuits since the 1920s. In 1929, they formed their own trade organization, Allied States Association (ASA), to counter the powerful Motion Picture Theater Owners of America (MPTOA), which was dominated by the affiliated chains and large circuits. 29 The independents saw little success, and their situation worsened dramatically with the Depression and with FDR’s National Recovery Act, which enabled the studios to codify, quite literally, such practices as block booking, blind bidding, and run-zone-clearance as standard industry policy. Indeed, the NRA provided what Tino Balio has termed “government sanction for the trade practices that [the majors] had spent years developing through informal collusion.”

As mentioned earlier, the plight of the independent theater owners—whose overall numbers and sheer persistence earned them political clout—was the prime motivation for the Justice Department’s antitrust suit against the Big Eight. In U. S. ?. Paramount, the studios were held in violation of the Sherman Antitrust Act for a range of trade practices—principally block booking, blind bidding, arbitrary designation of play dates, forcing shorts and newsreels (along with features) on exhibitors, discriminatory film rental rates, prohibition of double features (of A-class product), admission-price fixing, pooling of filmmaking talent, and assorted lesser charges. Also at the behest of independent theater owners, Attorney General Arnold filed antitrust suits against several powerful theater circuits, charging them with restraint of trade within specific geographical locales.

In the initial Paramount suit, the Justice Department named all of the Big Eight producer-distributors as defendants, since their collective trade practices had rendered the entire industry a vertically integrated system. But the Little Three protested that, without their own theaters, they exercised nowhere near the same control as their theaterowning counterparts—and, in fact, UA did not even practice block booking. The Little Three’s protest raised the crucial question of whether distribution or theater ownership was the key to studio control; at this point the Justice Department opted simply to deal Page 19  separately with the Big Five and the Little Three. In 1939, the Paramount suit was emended, effectively splitting the defendants into two groups according to theater ownership. While still suing Columbia, Universal, and UA for unfair trade practices, the government increasingly shifted the focus of its case to the five integrated major studios.

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