The Hollywood Antitrust Case of 1948 - PowerPoint Presentation

Slide1

The Hollywood Antitrust Case of 1948 and its Aftermath

When does

“

Smart Business” become a Monopoly?Slide2

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.

Typical movie

audiences

– circa 1946Slide3

“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 9

percent 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.”*

Attendance

* “

A Short History of the Movies”, Gerald Mast Slide4

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.The Only Game in TownSlide5

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.

Zukor

Laemmle

Fox

Warner

MayerSlide6

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 Mayer

Pictures 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.

Mayer with Joan Crawford in 1953Slide7

Yet, despite the staggering success of Hollywood in 1946, it was all about to change.A

nd 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.Slide8

The 5 major studios (MGM, Paramount, Warner Bros, RKO and 20th 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. Slide9

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.Slide10

After the war Congress’s memory of Hollywood’s contribution was short.B

y 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.Slide11

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.

The Hollywood Ten – the

first

to be blacklisted by HUACSlide12

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 1

st

half of the 20

th Century.Slide13

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.).

Laemmle circa 1990

Thomas Alva EdisonSlide14

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?Slide15

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

.

T

hen

everyone

loses,

including the consumer.

* Competition

: The Hidden Costs of the Invisible Hand

– Michael

Perleman

Slide16

“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

.”*

The Sherman Antitrust Act1890

*WikipediaSlide17

Characteristics of an MonopolyProfit 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.

MONOPOLYSlide18

Characteristics of an OligopolyProfit maximization conditionsAbility to set price

Entry and exitNumber of firmsLong run profitsProduct differentiation

Perfect knowledge

Interdependence

OLIGOPOLYSlide19

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. The Beginnings 1880 - 1915

Various Camera Designs

1895 -1900Slide20

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 experiment was

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.

1872

Monkey

Shines

#1

The Winning Frame

1890Slide21

The 1st exhibition 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.Slide22

In France the Lumiere Brothers, Auguste and Louis, were having great success recording real events or staged versions of everyday

happenings.

I

n

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.France

The

Lumiere

Bros

Auguste

(l) Louis (r)

“Workers Leaving the

Lumiere

Factory in Lyon”

“Feeding the Baby”

The world's first film

poster

,

for 1895's

L’Arroseur

arrose

“Arrival of a Train

at La

Ciota

”Slide23

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.Slide24

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.

I

nvented (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.

Thomas Alva Edison

Thomas

Edison,

Paris

, circa 1880s

The

KinetoscopeSlide25

In 1895, Edison founded The Edison Film Company.Edison built the world’s

first movie studio.EFC produced

over 3000 films in 20

years.

Gave future legends, like D.W. Griffiths, and Canadian Mack

Sennett, their start.

The Black Maria –

the first movie studio, named for its resemblance to a Police Paddy Wagon

David

Wark

Griffith

Mack SennettSlide26

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.

The Loves of Queen

Elizabeth,

1912

Starring Sarah Bernhardt

53 minutes Slide27

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.F

ilmmakers 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.Slide28

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.

Edwin S.

Porter

Last Scene of

The

Great

Train

Robbery

*

*

*Slide29

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. Slide30

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

most intriguing for these men was that this new industry had no pre-existing establishment or Old Boy’s Network to deal with.Slide31

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.

By 1905, Edison was becoming increasingly frustrated at the number of competitors now in the business of mass entertainment. Slide32

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. 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 TrustSlide33

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. Slide34

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. Slide35

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…

1915 - 1925Slide36

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.Slide37

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.Slide38

Despite the enormous success of Hollywood, making movies for mass entertainment was not for the faint of heart: F

ilms were becoming very expensive to make.

T

he

Hollywood Star System had now been in place for 10 years. Stars were receiving astronomical salaries 1917 Chaplin was the 1

st to command one million dollars a year. By

1920 his salary was far from unique.

Charlie ChaplinSlide39

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...

Unknown production

StillsSlide40

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.

SoundSlide41

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 SingerSlide42

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.

The Kiss,

1896

Mary Irwin , John Rice

47 secSlide43

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%. The 1st Antitrust Case - 1928Slide44

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 1

st, 1942 but by then America had entered WWII.1935

– 1945Slide45

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.

1946 – 1949Slide46

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?

Post 1948Slide47

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”.

An Empirical Investigation of the Paramount Antitrust

Case

,

Ricard Gil, UC-Santa CruzSlide48

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.”

An Empirical Investigation of the Paramount Antitrust Case

, Ricard Gil, UC-Santa CruzSlide49

This would allow the 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.Slide50

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.

Post ScriptSlide51

But the studios were slow to recognize this. Warner Bros. had so little faith in Bonnie and

Clyde, they offered Warren Beatty, the star and producer, a 40% back-end deal in lieu of his small fee.

The

film went on to gross 70 million dollars.

That same year, 20th

Century Fox released Dr. Doolittle, an expensive musical that flopped spectacularly.Films like

Bonnie and Clyde

captured the zeitgeist of the late 60s and got people interested in the movies again. Slide52

In 1969, Easy Rider came out of nowhere and caught the studios by surprise, made for $500,000 it made over 41 million dollars.

Having lost money for decades now, the heads of these studios in their desperation thought that maybe these young people had the answer.

Cannes Film Festival, 1969Slide53

Suddenly American film had become edgy and morally complex. This period became known as a Hollywood New Wave

, as strikingly original films began being produced into the 1970s. It

lasted for about 12 years before running its course but this period revitalized movie attendance for decades to come.

And some

of the roots of this movement can be traced back to the events of 1948. Hollywood New WaveSlide54

The Justice Department ruling to loosen the reigns of competition in 1948 was also nominally about improving

the quality of the movies made in the 1940s, It could

never have foreseen that

their decision would

create this kind of an effect in the late 60s and early 70s. Slide55

But the divestiture of movie theatres by the studios and the changing demographics in the late 40s and early 50s meant that 100s of cinemas across North America had closed and were sitting empty.

Other independent entrepreneurs in these large urban

centres

saw this as an opportunity to program foreign language films that were proving popular in their home countries.Slide56

These films were Neo-realist and New-wave films from Italy, France or Japan.

These

countries had dug themselves out the 2nd war in less than 30 years and the kinds of films they wanted to make reflected that

ethos.

These films were different from escapist American fare; they explored the human condition, and larger issues that didn’t

provide clear or easy answers. They were all based on original screenplays yet they felt like complicated works of literature.Slide57

By the late 50s and early 60s there was a steady stream of foreign films being shown to a younger American audience living in the urban

centres

again

.

This

wave of avant-garde films inspired a new generation of

filmmakers, and students

studying

to

become

filmmakers, to tell

stories with more complexity and depth than the generations before.

Arthur Penn, Sydney Lumet, Martin Scorsese, Francis Coppola, George Lucas, Steven Spielberg (though he was more influenced by the epic films of David Lean) were trying to get in.

Lumet

Scorsese

Penn

Lucas

Coppola

SpielbergSlide58

Initially, they were met with resistance from 70-year old movie executives who still dressed in business suits every day.But as their little movies began to make more and more money, the executives had to listen.

There are many anecdotes about the privileges, and responsibilities, that were foisted on these sometimes irresponsible talents. Like the studio heads of the 1920s and 30s they had found themselves in the right place at the right time...Slide59
Slide60

Fin