The Hollywood Antitrust Case of 1948 and its Aftermath

1. The Hollywood Antitrust Case of 1948and its Aftermath When does “Smart Business” become a Monopoly?

2. Typical movie audiences – circa 1946 In 1946, the Hollywood film industry experienced its most profitable year ever. $1.7 billion dollars domestically. This was not only a record for its short 50-year history, but would also be the record for the 50-plus years to come. Hollywood films had provided easy distraction and relief from the war effort and the conflict overseas Now that the war was over, attendances immediately swelled as returning veterans and civilians alike poured into theatres to watch almost anything Hollywood had to offer.

3. Attendance * “A Short History of the Movies”, Gerald Mast “In the 1930s Americans went to the movies; in the 2000s they went to a movie. The difference is not merely semantic. In 1938, there were some 89 million movie admissions every week, representing 65 percent of the population of the United States… “ “In 2008, (annual) admissions were about 1.4 billion” (approximately 27 million per week, or less than 9percent of population). The box office took in $9.6 billion. Adjusted for inflation this was still not as high as the 1946 box-office gross, which was $18.55 billion in 2008 dollars.”*

4. The Only Game in Town In today’s dizzying world of digital choice, it is easy to forget that in 1946, and for the previous 50 years since its invention, film in general, and Hollywood in particular, was virtually unchallenged by any other medium in the delivery of cheap and readily accessible, mass entertainment: live theatre was confined to the larger urban centres; the record album was still an unstable and expensive novelty; even the advent of broadcast radio in 1930, didn’t live up to its anticipated threat of cutting into Hollywood’s dominance. By 1935 Hollywood had absorbed it.

5. Zukor Fox Warner Laemmle Mayer The period from 1930 to 1946 is generally considered the Golden Era of Hollywood and its Golden Boys were Adolf Zukor, of Paramount Pictures; Carl Laemmle of Universal, Jack Warner and his 3 brothers of Warner Bros.; William Fox of Twentieth Century Fox, and Louis B Mayer of Metro Goldwyn Mayer. Each the son of European Jews who had emigrated to America in the late 1800s, each one the unlikely owner of some enterprise that respectable citizens would not consider “legitimate” (textiles, Tin-pan Alley, Amusement Arcades, Vaudeville theatres). They found themselves ideally situated to get involved in a young industry that no one quite knew what to do with yet, and no one quite trusted yet either.

6. Mayer with Joan Crawford in 1953 Of all these colourful, dictatorial movie moguls of the Golden Era, Louis B. Mayer best epitomizes the mogul and the studio system they created. Mayer was born Lazar Meir in 1884 to a Jewish family in the Ukraine. The family immigrated to America in 1887; in 1907 Meyer bought his first of five movie palaces in New England. With the profits made from being a movie theatre entrepreneur he moved to Los Angeles in 1918 to form his own production company, Louis B MayerPictures Company. In 1924, he was hired to run the new Metro Goldwyn Studios, adding his name to the company marquee before the year was out. By 1929, though he held no shares in MGM, Mayer was able to gain control of the company by outmaneuvering his boss who was planning to sell the studio to William Fox. Mayer installed himself as studio boss where he remained for 27 years.

7. Yet, despite the staggering success of Hollywood in 1946, it was all about to change. And it would never quite recover from these changes. What happened over the next 10 years would lay the ground work for how movies are produced and exhibited to this day.

8. The 5 major studios (MGM, Paramount, Warner Bros, RKO and20th Century Fox) were about to (again) come under the microscope of the US Justice Department for their vertical ownership of the means of production, distribution and exhibition. In addition, Hollywood had also been using its clout to force independent exhibitors to accept block bookings of Hollywood product into their theatres - programing many films an exhibitor didn't necessarily wish to show in order to have access to a particular film.

9. These practices had come under the scrutiny of the Congress as early as the 1920s and 30s. But first the depression and then the outbreak of the Second World War postponed any action. During the war, the government needed Hollywood and Hollywood was keen to help, in return for favourable consideration once the war had ended. Stars helped sell war bonds, while the studios provided the masses with entertainment, at home and overseas. Hollywood also produced training films for the Army, battlefield documentaries, and war movies that carefully portrayed the conflict in the government-approved light which shifted subtly as the US entered the war and allegiances shifted.

10. After the war Congress’s memory of Hollywood’s contribution was short. By 1947 the investigation was renewed with swift determination. In 1948 the 5 major Hollywood studios were ordered by Justice to divest themselves of their theatre holdings, disintegrating and separating production and distribution from exhibition. They were also banned, along with another 3 studios (Universal, Columbia, United Artists) from using block booking on independent exhibitors –forcing exhibitors to accept an entire slate of a films in order to have access to the films they wanted to exhibit. Almost overnight, these exhibitors, and the public, could choose what films they wanted to screen. Hollywood studios now had to begin relying solely on quality, not quantity, if they wanted to make their money back. And this was just the beginning of a paradigm shift in the way business was to be done in Hollywood.

11. The Hollywood Ten – the first to be blacklisted by HUAC Three other factors would come into play shortly to further erode Hollywood’s domination of the movie industry. The Red Scare of the Early 50s led to sweeping powers of the House Committee of Un-American Activity (HUAC). Hundreds of talented performers writers and crafts people were lost to the blacklists - which Hollywood instituted. The Invention of the Television made an astounding penetration into the American household. In 1948, there were less than 1 million television sets in the country; within 10 years there were over 60 million. Demographics Shift: people started raising families, moving to the suburbs and reconsidering where to spend their discretionary income.

12. These were important contributing factors to the decline of Hollywood’s dominance in the latter half of the last century. This presentation will primarily focus on the 1948 decision of the United States Supreme Court in its case, known as, The US V. Paramount Pictures, Inc., and the events that lead up to it during the 1st half of the 20th Century.

13. Laemmle circa 1990 Hollywood had been founded 30 years earlier in part by its founders’ desire to escape the anti-trust practices that prevented them from entering the business on the East coast. Men like Carl Laemmle, who later formed Universal, fought hard against Thomas Edison’s Motion Picture Patents Company’s strangle-hold, spending many years in court and eventually defeating it in 1915 (U.S. v. Motion Picture Patent Co.). Thomas Alva Edison

14. How then, by the mid-1920s, did Hollywood come to adopt almost exactly the same business model as the MPPC and run afoul of the US Government over the next 20 years – ending in final defeat in 1948? Did they see themselves as less ruthless than Thomas Edison had appeared to them? Was it simply greed that blinded them to the irony of their actions?

15. * Competition: The Hidden Costs of the Invisible Hand – Michael Perleman Or was this perhaps one of the contradictions of large, capital-intensive businesses that need to stabilize and protect their investment in order to continue manufacturing their product. The flipside of the problem is the question of competition: “Insufficient competition may be harmful to an economy, excessively strong competition may be catastrophic”*, creating an endless spiral of lower prices, lower quality and too many choices for the consumer to ever have brand loyalty. It can be reasoned that if large companies didn’t adopt proactive, read aggressive, solutions to this problem they might be forced out of the market place. Then everyone loses, including the consumer.

16. The Sherman Antitrust Act 1890 *Wikipedia “The law attempts to prevent the artificial raising of prices by restriction of trade or supply. “Innocent monopoly, or monopoly achieved solely by merit, is perfectly legal, but acts by a monopolist to artificially preserve his status, or nefarious dealings to create a monopoly, are not. “The purpose of the Act is not to protect competitors, but rather to protect competition and the competitive landscape.”*

17. MONOPOLY Characteristics of an Monopoly Profit Maximiser: Monopolist maximizes profits. Price Maker: Decides the price of the good or product to be sold. High Barriers to Entry: Other sellers are unable to enter the market of the monopoly. Single seller: In a monopoly there is one seller of the good which produces all the output. Therefore, the whole market is being served by a single company, and for practical purposes, the company is the same as the industry. Price Discrimination: A monopolist can change the price and quality of the product. He sells more quantities charging less price for the product in a very elastic market and sells less quantities charging high price in a less elastic market.

18. OLIGOPOLY Characteristics of an Oligopoly Profit maximization conditions Ability to set price Entry and exit Number of firms Long run profits Product differentiation Perfect knowledge Interdependence

19. The Beginnings 1880 - 1915 Various Camera Designs 1895 -1900 The history of the evolution of the motion picture does not start in any single country. Once photography had become common in the latter half of 19th Century, inventors on both sides of the Atlantic began to put their minds to the task of making pictures move. The countries that had been consumed by the Industrial Revolution, were the most successful at the task.

20. 1872 The Winning Frame 1890 Monkey Shines #1 Eadweard Muybridge’s famous experiment captured all 4 of hooves of a galloping horse in a series of photographs that when played together resembled motion – this experimentwas the result of a bet made by Leland Stanford. In Manlo Park, NJ, Edison’s longsuffering employee, W.K.L. Dickson, created one of the first examples of moving pictures. Entitled, Monkey Shines#1, it seems to shows a standing man waving his arms. The quality of image is so poor that the effect is almost surreal.

21. The 1stexhibition of a motion picture to a paying audience is generally considered to have occurred in the spring of 1895 in New York City by Woodville Latham. Or was it in Paris 6 months later, at the first purpose-built theatre? Regardless, within the year, short films were being screened in all of the countries mentioned above.

22. France The LumiereBros Auguste (l) Louis (r) “Workers Leaving the Lumiere Factory in Lyon” “Feeding the Baby” “Arrival of a Train at La Ciota” The world's first film poster, for 1895's L’Arroseurarrose In France the Lumiere Brothers, Auguste and Louis, were having great success recording real events or staged versions of everyday happenings. In effect creating the first documentaries. The sons of an industrialist, born with the keys to the workshop for anything they wanted to build or dream up to make their movies easier.

23. This uncertain paternity caused a number of problems, not just for any nation wanting to claim bragging rights for being its birthplace, but more importantly for the various inventors of this burgeoning industry, this simultaneous evolution presented opportunities for scores of entrepreneurs who came after them. Many used the Atlantic Ocean and the distances between large urban centres for the duplication and outright theft of each other’s films.

24. Thomas Alva Edison Thomas Edison, Paris, circa 1880s The Kinetoscope The inventor the phonograph, light bulb, Direct Current electricity, to name a few. His contribution to the development of motion pictures was also considerable, though he eventually would come to hinder it before his exit. Invented (or acquired the patents for) many early motion picture devices: one of the first cameras, several viewers, initially interested arcade-style viewers. Eventually patented the Vitascope to project films for larger audiences.

25. The Black Maria – the first movie studio, named for its resemblance to a Police Paddy Wagon David Wark Griffith Mack Sennett In 1895, Edison founded The Edison Film Company. Edison built the world’s firstmovie studio. EFC produced over 3000 films in 20 years. Gave future legends, like D.W. Griffiths, and Canadian Mack Sennett, their start.

26. The Loves of Queen Elizabeth, 1912 Starring Sarah Bernhardt 53 minutes Edison seems to have understood the power of motion pictures well enough, but he was convinced that the future lay in peep-show type arcades. Even when finally embraced theatrical exhibition, he remained convinced the public would not sit through any film longer than one or two reels(about 15 minutes). Compelling evidence to the contrary, in New York and in Europe where films of 40, 60, and 80 minutes or more were being screened to packed houses.

27. By 1900, audiences thirsted for more and new types of product weekly. Public seemed to understand the potential of film even before some of its founders perhaps did. The history of the development of cinema is therefore also the history of its development as a medium of expression. Filmmakers and their audiences became more familiar with its ability to tell stories. Filmmakers began experimenting with close-ups and editing to better manipulate what they wanted the to see, and feel. The first filmmakers had been primarily inventors and men of science, but others soon grasped that there was much more potential for movies as a storytelling medium.

28. * * * Last Scene of The Great Train Robbery Edwin S. Porter 1903, The Great Train Robbery by Edwin S Porter, for Edison’s company. The film was revolutionary for its time. Shooting on location, framing for depth, but specifically cross-cutting the action between bad guys and the posse chasing them, had not been done before, but audiences were ready for this leap.

29. By the 1905 another breed of entrepreneurs wanted in on the action. They understood the potential of this new medium and were ideally situated to take advantage it. Jewish businessmen, mostly immigrant sons of families that had fled persecution in Europe owned theatres or management companies, amusement parks and penny arcades – the business that “legitimate” entrepreneurs might not have touched. The theatre was still considered an unfortunate occupation and unsavory profession. Many Gentile businessmen didn’t see the initial arrival of the movies as anything different.

30. As Vaudeville entrepreneurs, were well versed at making money from mass entertainment, Were able to see the potential of this new medium. While the inventors were focusing more on protecting their patents than seeing the future… …these producers, who were used to providing mass entertainment that required many hands to get it up in front of an audience every night, were quick to see the cost benefit of showing films instead. Perhaps mostintriguing for these men was that this new industry had no pre-existing establishment or Old Boy’s Network to deal with.

31. By 1905, Edison was becoming increasingly frustrated at the number of competitors now in the business of mass entertainment. Felt they were able to easily steal his technology to make their own films, even stole his films outright, presenting them in smaller markets to an unsuspecting public – a practice Edison himself had not been above. Other entrepreneurs were able to buy their equipment from other countries, such as England or France, thereby sidestepping Edison’s patents completely. He regularly dragged these “upstarts” through the courts. Also resorted to hired thugs to disrupt their productions and smash their equipment when he felt the courts were not doing their job.

32. Oversight of patent law for this new industry was lax and difficult to enforce, making the early days of cinema seem more like the lawless Wild West. The Edison Trust In 1908, Edison established the Motion Picture Patent Company with the 9 established production companies in an attempt to control the production and distribution of films in the US. Quickly became known as The Edison Trust. Trust also had the cooperation of many key service providers including Eastman Kodak, which agreed to sell its film stock only to MPPA companies.

33. The Trust was also determined that the public only wanted short films, it then formed The General Film Company to handle the exhibition of the films made by the Trust. This blocked the exhibition of foreign films that were proving to be popular with audiences ready for longer, more complex fare. Independent producers, such as Laemmle and Zukor, immediately cried foul and took their complaints to the US Government.

34. It took 7 years, but in 1915, in US v. The Motion Picture Patent Company, The Edison Trust was ordered to disband; the General Film Company ceased to exist the next year. During those 7 years, many of these independent producers had moved to California where land was cheap, weather was consistent, and the Edison Trust was far away. By 1915, Hollywood was well established as a new centre of movie production.

35. 1915 - 1925 By 1915, Edison’s dominance of the film industry had now hurt the American Film Industry, hindering its growth relative to the other industrialized nations that had also begun to experiment with it in the 1880s. However, two things were happening that would change all that at home and around the globe…

36. First, the independent producers who set up shop in California no longer had to worry about East coast interference. They could now make the kinds of films they felt sure that people wanted to see. Secondly, the First World War was about to devastate all of Western Europe and with it the national film industries within these countries. By the time these countries had all rebuilt their industries over the next 10 years, Hollywood had established itself as the dominant film producer.

37. Movie production had grown from an invention to an industry in just 20 years. By 1920, it was now the 5th largest industry in America, behind agriculture, transportation, oil and steel. 1921 was a record year of profit for the studios, with 854 feature films. By 1922, 40% of Americans went to the movies every week.

38. Charlie Chaplin Despite the enormous success of Hollywood, making movies for mass entertainment was not for the faint of heart: Films were becoming very expensive to make. The Hollywood Star System had now been in place for 10 years. Stars were receiving astronomical salaries 1917 Chaplin was the 1st to command one million dollars a year. By 1920 his salary was far from unique.

39. Unknown production Stills escalating salaries, constant innovations in equipment, competition from independent producers, and of course the fickle taste of a public who occasionally rejected certain films outright. It is reasonable to see why the studios felt they needed certain insurances in place to protect their investment – After all, if the outcomes could be made more predictable, everyone wins. Right? Since many of these studio heads had started out owning theatres, it seemed like a natural next step to reinvest in them...

40. Sound The big innovation that every studio was trying to forestall was the addition of sound. It was an uncharted market; silent films were doing just fine. The associated costs involved in developing or buying the new equipment were huge – plus the retrofitting of all the theatres they owned. An additional cost of the talkies would be the loss of some markets, these new films were now be limited to English language countries, and even then most of their cinemas had to be converted to sound yet. Silent movies had no borders - as we saw with the early days of piracy.

41. But in 1927, The Jazz Singer premiered and sound was here to stay. Studios bit the bullet. While profits did go up with this new invention, sound added greatly to the cost of each movie. The studios needed to turn more to the banks for help with the interim financing of these pictures. Times Sq. Sold out premiere of The Jazz Singer

42. The Kiss, 1896 Mary Irwin , John Rice 47 sec The misplaced enthusiasm of the “Roaring 20s” was mirrored in many of the films being produced during that time. This further raised the ire of religious and citizens’ groups that felt that films portrayed a lack of morality that the public needed protection from. These groups had first become indignant at the sight of The Kiss in 1896 and had remained indignant ever since.

43. The 1st Antitrust Case - 1928 In 1928 the Department of Justice filed its first Antitrust case against Paramount and 9 other studios. The studios were found guilty of violating antitrust law, block booking was identified as the main problem. In 1929 the Great Depression hit and the sentence was never enforced however, and was eventually repealed under the Industry Recovery Act. While the common wisdom was that people still went to the movies during the Depression, initial attendance dropped by 30%.

44. 1935 – 1945 By 1935 the studios had recovered financially and were in good shape again. 1938 they were back in court under charges of monopolization in restraint of trade. As the case gained momentum the studios asked the government to reach an agreement out of court. As a result the Department of Justice issued a Consent degree, effectively calling off the suit. There was an expiration date on this decree of June 1st, 1942 but by then America had entered WWII.

45. 1946 – 1949 When the war was over, Hollywood experienced its most profitable year - ever, though they didn’t know this yet. The Justice Department moved quickly to reopen its investigation of the exhibition practices of the studios. 1948, in US v. Paramount Pictures Inc., 5 of the major studios were forced to dissolve their theatre holdings; Plus the block booking practices of these 5 and 3 other studios, who did not own theatres, were ordered stopped.

46. Post 1948 Finally it was over, the studios had lost. Why did they hold on to this business model for so long? The very model they had rebelled against 30 years before under the Edison Trust; Since 1928, it had come under the intense scrutiny of the Department of Justice and been found in breach on at least 2 separate occasions. Why did the major studios continue to embrace these practices? Did they feel they could beat the rap? Did they think it would go away if they just made nice and helped the government promote the war? Did they feel they had no other choice in order to protect their industry?

47. An Empirical Investigation of the Paramount Antitrust Case, Ricard Gil, UC-Santa Cruz Interestingly, claims from the plaintiff stated that, “the use of these movie blocks (vertical integration) allowed them firms to market low quality movies jointly with high quality movies…Banning would force low quality movies from major studios to compete with movies from independent studios for screen space”.

48. An Empirical Investigation of the Paramount Antitrust Case, Ricard Gil, UC-Santa Cruz The antitrust ruling against Paramount and the other studios had had the objective of making the movie industry more competitive. The Government also said in their submission that banning block booking and vertical ownership of theatres “would force the market place to be more competitive. “This competition would deter major studios from producing some of their low quality movies or induce them to upgrade low quality movies to high quality movies through increases in expenditure budgets. “Both reactions would decrease the amount of movies produced by the studios affected by the Supreme Court ruling.”

49. This would allowthe independent producers to fill that gap, but in the end the ruling did not quite have that effect. The elimination of block blocking did allow independent producers to get their films shown, but the divestiture of theatre ownership is not sited as having had a measurable effect on the marketplace. Shifting demographics and public tastes along with an increasingly out-of-touch Hollywood, led people away from the cinemas - regardless of whose films were on the screens.

50. Post Script This government-mandated competitiveness did not increase the quality of movies either. Hollywood floundered for the next 17 years approximately, making films fewer and fewer people wanted to see. Then after 1965 a new bread of filmmakers began to emerge.