Economic Control of the Motion Picture Industry: A Study in Industrial Organization [Reprint 2016 ed.] 9781512817041

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ECONOMIC CONTROL OF THE MOTION PICTURE INDUSTRY

UNIVERSITY OF PENNSYLVANIA

ECONOMIC CONTROL OF THE MOTION PICTURE INDUSTRY A S T U D Y IN I N D U S T R I A L ORGANIZATION

A DISSERTATION IN INDUSTRY PRESENTED TO THE FACULTY OF THE GRADUATE SCHOOL IN PARTIAL F U L F I L L M E N T OF THE REQUIREMENTS FOR T H E DEGREE OF DOCTOR OF PHILOSOPHY

MAE D. HUETTIG

PHILADELPHIA 1944

Copyright

1944

UNIVERSITY OF PENNSYLVANIA PRESS Manufactured

in the United

States of

America

PREFACE THIS STUDY was undertaken in conjunction with the Motion Picture Research Project and made possible by a research fellowship from the Rockefeller Foundation. T o the Foundation and its representative, John Marshall, the writer is grateful. T h e work was conducted in Hollywood over a period of two years from April 1939 to April 1941. T h e Motion Picture Research Project, financed by the Carnegie Corporation and directed by L e o C. Rosten, collected and analyzed a great wealth of material. Much of it had never before been accessible to anyone outside the industry. Originally the study undertook to analyze the economics of film production. However, it quickly became evident that the production of films is not an industrial phenomenon which can be studied by itself. Almost every question concerning film production led into distribution and exhibition. H o w many pictures are produced? By whom? What are the limits on the number of pictures made? H o w many producing companies are there? W h y are there not more? What is the relative importance of each? H o w does a company get to be a major producer? H o w much do pictures cost? What constitutes "cost" in the making of films? H o w much do they earn? Is there any relationship between what a film costs and what it earns? The answers to these and a host of related routine questions are explicable only in terms of the structure and organization of the industry as a whole, including distribution and exhibition. More than most industries, it appeared, the motion picture industry is a maze of intricate relationships. N o one aspect is intelligible except as part of the whole. T h e intricacy is due in part to the nature of the product and in part to the unique interdependency of the major companies. Every phase of the business as well as the development of the film itself has been affected by this interdependency. Since the objective of the study was a synthesis of the industry as a whole, it was necessary to put together fragmentary evidence collected from numerous sources. Confusing, though not unexpected, was the fact that most people who were thoroughly familiar V

vi

MOTION P I C T U R E INDUSTRY

with production knew little about distribution or exhibition; to a lesser extent the people in the latter fields knew little about production. The literature on the industry displays the same kind of split personality. The principal task consisted of piecing together a variety of information to see what bearing the facts had on each other and finally to work out a pattern which fitted most of the industry most of the time. The results of this study are presented in the following pages. I am indebted to several persons who participated in one way or another. Of the numerous individuals within the motion picture industry who helped me read meaning into the voluminous data, Matthew Fox, vice-president of Universal Pictures Company, was invaluable. He gave freely of his time and, most important, of his insight and judgment. Dr. Isador Lubin was intrumental in making available unpublished governmental data. To Dr. J . Frederic Dewhurst I am indebted for sustained encouragement dating from the start of the study. He read the manuscript tirelessly and made many constructive suggestions. Dr. Anne Bezanson, in the role of faculty adviser, contributed patient and thoughtful guidance. For the restraint and patience which both she and Dr. Ralph A. Young exhibited, I am grateful. To my co-worker on the Motion Picture Research Project, Dorothy B. Jones, I am indebted for the urging and prodding which completion of this study required. Several people in the industry and in various governmental agencies have requested that their contributions remain anonymous. To them, too, I am grateful. T o Lester M. Huettig I owe much for the good nature with which he endured the entire process of my making this study. It remains only to add that none of the persons named is responsible for the various sins of commission and omission probably scattered throughout the text. MAE D.

December 1943

HUETTIG

CONTENTS Chapter

Peg*

PREFACE

ν

INTRODUCTION

ι

I. D E V E L O P M E N T O F T H E M O T I O N INDUSTRY

PICTURE 7

Définitions Early History, 1889-1908 T h e Motion Picture Patents Company, 1908-15 T h e Film Itself, 1903-15 Theatres, 1905-16 Production as It Affected Distribution Practices, 1912-19 Integration of Production, Distribution, and Exhibition, 1917-23 Preparation for the Advent of Sound, 1923-26 Sound, 1927-29

7 9 14 17 20 24 31 39 42

II. T H E M O T I O N P I C T U R E I N D U S T R Y T O D A Y

54

Some Questions to Be Answered W h a t Is the Economic Importance of the Industry? Production versus Exhibition Structure of the Industry T h e Majors W h a t Kind of Theatres Do the Majors O w n ? W h y Are the First-run Theatres Important? Relationship between the Big Five and the Little Three Role of the Majors in Production and Distribution

54 55 58 61 64 74 77 84 87

III. H O W P R O F I T A B L E IS T H E M O T I O N T U R E BUSINESS? Ratios of Profitability Executive Remuneration and Dividends IV. T H E M A R K E T I N G

OF FILMS

Films as * Commodity

PIC96 98 101 113 113

vii

MOTION PICTURE INDUSTRY The Principal Trade Practices: General Description Block-Booking Arguments For and Against How Block-Booking Works Designated Play Dates Protection Circuit Buying Power The Consent Decree V. C O N C L U S I O N

1141 116 117 120 124 125 131 139 143

BIBLIOGRAPHY

151

INDEX

155

TABLES I. Volume of Business, Eight Major Motion Picture Companies, 1935-41

52

II. Reported Volume of Business of Motion Picture Corporations as Compared with Corporations in Other Industries, *937

56

I I I . Number of Persons Employed in the Motion Picture Industry, 1939

57

IV. Analysis of Asset Items on Individual Balance Sheets of Six Major Motion Picture Companies, 1939

68

V. Analysis of Liability Items on Individual Balance Sheets of Six Major Motion Picture Companies, 1939

68

VI. Income from Domestic Film Rentals as Per Cent of Total Volume of Business, Five Major Motion Picture Companies, 1939

70

VII. Gross Film Rentals from Distribution Within the United States of T e n Motion Picture Companies, 1939

71

VIII. Number of Exhibitions Received by Feature Releases of Six Major Motion Picture Companies during 1936-37 Season

72

IX. Size and Location of Theatres in United States, 1938

75

X. Film Rentals, by Exchange Cities, for Five Major Producing Companies, 1938

j6

XI. Number of Feature Films Released by Eight Major Motion Picture Companies

86

XII. Net Profits per $100 of Tangible Net Worth after All Charges of Six Major Motion Picture Companies

98

ζ

MOTION PICTURE INDUSTRY

Χ Ι Π . Ratio of Total Profits to Invested Capital of Six Major Motion Picture Companies X I V . Total Profit per $ 1 0 0 of Invested Capital of Eighteen Industries X V . Executive Remuneration as Per Cent of Net Earnings of Seven Major Motion Picture Companies, 1941 X V I . Executive Remuneration per $ 1.00 of Dividends of Seven Major Motion Picture Companies X V I I . Number of Theatres Operated by Five Major Motion Picture Companies, 1940

INTRODUCTION No I N D U S T R Y in the world has had so much publicity lavished on it as the motion picture industry. The press happily publishes studio handouts, movie gossip columns, reviews of the latest films, and paid advertisements. A startling number of magazines are devoted to the lives and loves of the stars. News of the latest Hollywood coiffure is brought to the housewife over the air waves. Anyone who ventures out of doors is beset by poster and theatre marquee whether he be in Times Square or Las Vegas, Nevada. But for all this purveyance of glamour, remarkably little is known about the basic structure and economics of the industry itself. In many ways the motion picture industry is unique. It is most certainly complex. This chapter is intended as a point of departure for the understanding of the details. Many questions will doubtless occur to the reader, but it should be remembered that detailed argument and evidence are omitted at this point and follow in the later chapters. T h e motion picture business includes the production, distribution, and exhibition of films. Although the three functions are quite distinct, requiring different types of skill and organization, the development of the industry has been such that the major corporate units are highly integrated, combining the various functions. There are eight such companies today, known throughout the industry as "the majors." They are: Warner Brothers} Paramount Pictures, Inc.; Loew's, Inc.; Twentieth Century-Fox; Radio-Keith-Orpheum Corporation ; Columbia Pictures, Inc. ; Universal Corporation ; and United Artists. Of these, the first five are fully integrated, i.e., they make, distribute, and exhibit films. Columbia and Universal engage in production and distribution only. United Artists is a rather special case, acting until late in 1941 as distributor only. The importance of the majors with respect to control of various aspects of the industry is indicated in the following figures: There were ninety-two companies reported actively engaged in production in 1939; the eight major companies alone released 396 or 82 per cent of the 483 full-length feature pictures produced in this I

MOTION PICTURE INDUSTRY

2

country.1 There are approximately 3,700 active motion picture corporations with a gross income of $936 million from production, distribution, and exhibition.1 The total income of the eight major companies is nearly $500 million, or 53 per cent of the total. This clearly establishes the concentrated importance of the small group of companies constituting the majors. The importance of the major companies is greatest in the realm of production and distribution. Whether the criterion of impor tance be volume of output, value of product, volume of business, or invested capital, producing companies other than the eight majors pale into insignificance. Independent distributors of films are entirely marginal. On the other hand, in the exhibition phase of the business, as will be shown in greater detail later, there is an important group of theatre-owning companies not affiliated with the majors. These are the independent circuits. According to the most recent figures available, 394. independent theatre chains operated a total of 4,130 theatres, or 24 per cent of the total number of theatres in the country.8 The nature of the relationship between these chains and the theatres operated by the integrated majors will be discussed elsewhere. For the moment it is sufficient to note that the independent chains operate, for the most part, in areas where affiliated theatres are few. Competition in such situations is between the chains and the independently operated, individual theatres. In order to understand the way in which the industry functions it is important that the role of the "independent" in both production and exhibition be understood. In the trade all companies other than the big eight are customarily referred to as "independents." There are several independent producing companies, notably Republic and Monogram, with their own distribution facilities; most independent producers, however, sold their films until recently through independent distributors known as "states-right exchanges." These independent organizations bought film outright or secured exclusive leasing rights for a specified period, leasing the film in turn to exhibitors within their territories. For a number 1

U . S. D e p a r t m e n t of C o m m e r c e , M o t i o n Picture D i v i s i o n , Bulletin,

1940. A c a d e m y of M o t i o n Picture A r t s and Sciences, Reference

List of

March

15,

Productions,

1934-39. 1

U. S. T r e a s u r y , B u r e a u of Internal Revenue, Statistics

1

U. S. D e p a r t m e n t of C o m m e r c e , M o t i o n Picture D i v i s i o n , Bulletin,

1940.

of Income,

193g. March

15,

INTRODUCTION

o J

of reasons the states-right exchanges have rapidly declined in number and importance. T h e r e is a group of producers whose status is somewhat anomalous. T h e y are "independent" in the sense that they finance their own productions in whole or part, secure talent, and make pictures. H o w e v e r , their pictures are released by one of the majors, an arrangement usually made in advance of production. Once finished, the pictures are treated by the releasing company as part of its season's product and handled for the producer on a percentage basis. So far as the market for films is concerned, the important thing to the buyer of films is not that the picture ivas independently produced but that it is distributed by one of the majors. F o r all practical purposes producers operating in this manner are not independent in any important sense, inasmuch as access to the market for their pictures is dependent upon distribution by a major company. T h e exhibitor, too, in making his arrangements to secure the films of independent producers, deals not with the producer but with the same majors that control the bulk of his needed product. F o r this reason, the term "independent producers" as used hereafter refers to those whose product is not distributed through the major companies. As will be demonstrated later, it is no accident that the test of an independent producer is his method of distribution. As an indirect result of the integrated structure of the major companies, the film itself is but a part of the commodity sold. In its entirety the product consists of the right to look at a film, in a given type of theatre, at a given time with reference to the original release date of the film. This has resulted in a differentiated market which makes possible the high degree of integration and control existing today. Still another characteristic of the business has greatly influenced its development. Namely, the fact that only briefly in the commercial history of the motion picture has the chief emphasis been on the product itself. At first the business was dominated by companies interested primarily in the manufacture and sale of motion picture equipment. This is attested to by the formation of one of the most famous and successful patent pools in this country's history, the Motion Picture Patents Company. Organized in 1908, soon after the new industry was definitely launched as a commercial enterprise, the pool consisted of seven producers of equipment operating

MOTION PICTURE INDUSTRY

4

with Edison patents, the Edison Company itself, and several producers and distributors of films. T h e company extended licenses to exchanges f o r handling films produced by the company; the exchanges, in turn, agreed to sell only to such theatres as used projection equipment made under the pool's patents. T h e power of this group reached its peak in 1 9 1 2 , by which time it had succeeded in buying fifty-seven of the fifty-eight exchanges then in operation under threat of revocation of licenses. 4 T h e story of the patent pool and what happened to it will be told elsewhere. H e r e it is sufficient to note that f r o m the beginning the film has often been exploited, not primarily as a thing profitable in itself but as a means of profiting f r o m the exploitation of related merchandise, i.e., equipment, real estate, etc. T o d a y , the motion picture industry is once again closely affiliated with manufacturers and distributors of certain types of equipment, 5 primarily electrical. T h i s development f o l l o w e d immediately the advent of sound in film since, with unimportant exceptions, financial control of the basic patents in the sound equipment field is held by two groups: Western Electric C o m p a n y , subsidiary of the American Telephone and T e l e g r a p h , and R . C . A . Photophone, a subsidiary of Radio Corporation of America. As is generally known, these two groups are dominated by M o r g a n and R o c k e f e l l e r interests respectively. H o w e v e r , the nature of the current relationship between film producers and the manufacturers of equipment differs f r o m that of the early period, as will be shown later. T h e fact that the m a j o r producers of films have not been forced to rely exclusively on the excellence of the product itself f o r profits may contribute to an understanding of many questions concerning the progress of the film as an art-form. Originally, a movie was an object of curiosity; people went to see what it was like. W i t h astonishing rapidity, movie-going became a mass habit f o r which there is no strictly analogous precedent. T h e habit is based on the fact that there is virtually no other activity which inexpensively meets so many differing needs of large numbers of people. A s Seldes has pointed out in his refreshing book," most people g o to the movies simply to be at the movies : F . L . Vaughan, Economics of Our Patent System, p. 55. ° Howard T . Lewis, The Motion Picture Industry, p. 2. "Gilbert Seldes, The Movies Come from America, ρ 9. 4

INTRODUCTION

5

T o leave one's home, to enter a place designed for entertainment, to experience the sort of contagious pleasure which several hundred other people feel at the same time—all of these things used to be the privilege of a comparatively small number of people. . . . The movie is mass entertainment and both these words are important because the feeling that a large crowd is sharing one's experience is cherished by almost all human beings. A comic movie is funnier, a tearful one draws more tears, if it is seen in a large company . . . so we must write down that people go to the movies for a kind of physical pleasure which is not directly connected with the quality of the movies themselves. . . . The phrase "going to the movies" is the magic formula upon which the success of the moving picture as an industry is based. . . . The producers may spend vast sums of money to attract people to see this or that star, or a film based on a popular book, or on a great classic ; and it is perfectly true that people will say: "There is a Garbo picture playing tonight, let's go see it." Or they may say : "I want to see that film about Robespierre or Nero" ; or they "cannot wait" for the next Chaplin or Marx Bros, picture. But these are the refinements; the fundamental passion is a desire to go to the movies which means to go to any movie rather than not go at all. This is the prime phenomenon of our time. The radio can reach more people at any given moment but one does not pay every time the radio is turned on, one does not leave home to go to an auditorium to listen to what the radio may bring. Never before in the history of the world has there been an actually universal entertainment. . . . Everything that is strong and everything that is weak in the moving pictures must have its source in this same attempt at being universal—its wealth in money, its poverty in taste, its splendid achievements, and its disastrous failures. All the other arts were aristocratic in their beginnings. Books were written for the few who could read; music composed for court circles; paintings and sculptures made for patrons. And only the church, which used these arts to a certain extent did anything to save the arts from becoming exclusively the pleasure of a very few. Seldes' statement of the reasons why people go to the movies furnishes an indispensable clue to the nature of the demand for films, a basic factor in any discussion of the economic aspects of the motion picture industry. The outstanding economic fact about the motion picture industry is this: that by means of the ownership of a relatively small number of theatres, five firms have achieved within less than twenty years apparently stable control over an industry consisting originally of thousands of independent units, operating as three fairly dis-

6

MOTION PICTURE INDUSTRY

tinct branches of the industry, scattered geographically, and quite unorganized. There are some 15,OCX) theatres operating in the United States at the present time.* Approximately 16 per cent, or 2,600, are owned by the five integrated major companies.8 Through the ownership of this relatively small proportion of the total number of theatres, these five companies dominate the industry. The term "dominate" in this context means several things: ( 1 ) The majors can and do influence substantially the business practices of thousands of non-affiliated theatres. (2) The affiliated theatres by reason of their nature and location enjoy the bulk of theatre attendance. They are the source of as much as from 50 to 65 per cent of the total film rentals received by the majors. This leaves a disproportionately small share of the market for both the unaffiliated theatres and the independent producers. (3) By means of their ownership of these strategic theaters, the majors can, if they so desire, prevent independent producers from securing effective distribution of their product thereby blocking off alternative sources of film to independent theatre owners. The majors are then in a position to charge the independent theatres for their films what the traffic will bear. In other words, the control mechanism works from two directions: first, by their ownership of key theatres they are able to skim the cream off the market and influence a much larger number of theatres than they own; second, by virtue of this same ownership they can prevent films other than those released by them from reaching the market, thereby enhancing the value of their product to the independent theatre owners who are left with no alternative but to buy the majors' films if they are to continue operations. What made possible this particular form of concentration and control? How was it achieved, and with what effects? These are among the questions discussed in the following pages. * U. S. Dept. of Commerce, Bureau of the Census, Places of Amusement, 1939· * U. S. Dept. of Justice, Petition of United States v. Paramount Pictures, Inc., et al., amended October 1940. The five companies are : Paramount, Warner Brothers, Twentieth Century-Fox, R.K.O., and Loew's, Inc.

I

D E V E L O P M E N T OF T H E MOTION PICTURE INDUSTRY DEFINITIONS DESPITE THE integrated nature of the major companies it is still convenient for descriptive purposes to use the old classification of functions. 1 Several self-evident definitions follow. Producers are those who make pictures. A distinction should be made between individual producers and companies which produce pictures, since the term "producers" as commonly used may refer to either. An individual producer is usually retained on a salary basis by a company to supervise the production of a picture. Or a producer may be one who secures his own financing, story material, and stars for a picture to be distributed by one of the major companies on a sharethe-profits basis. Unless otherwise stated, the term "producer" will refer here to a company engaged in producing pictures. T h e constituent elements of pictures are primarily story ideas, personnel (actors, directors, writers, cameramen, and various other specialists), plant, film, and photographic equipment. Production involves the entire film-making process up to and including the printing of the necessary number of positive prints. Distribution includes the process of selling (or more accurately, leasing) film to exhibitors, arranging for play dates and delivery, and collection of film rentals. The physical aspects of distribution are in themselves complicated, involving large sales staffs, the maintenance of branch offices (known as exchanges) with fireproof vaults, and efficient film delivery service. Each film, before a theatre receives it, is inspected, rewound, and repaired between showings.2 1

The term "integration" as applied to the motion picture industry refers always to the vertical type of integration in which operations are combined in such a way that the finished product of one is the raw material of another. Cf. Arthur R. Burns, The Decline of Competition, pp. 418 ff. ' The costs of distribution for the industry as a whole are very high, since each of the major companies maintains its own exchange in the thirty-one key cities of the country. This duplication of facilities has been pointed to as one of the most wasteful practices of the industry. See, for example, The Public and the Motion Picture Industry, by W. M. Seabury, written as long ago as 1916 but still applicable to the industry today. 7

8

MOTION PICTURE INDUSTRY

The complexity of physical distribution is as nothing, however, compared with the problems of iftarketing, pricing, and trade practices which constitute distribution in the economic sense. Exhibition is the retailing division of the industry. The principal function of the exhibitor is securing a supply of films and operating theatres. According to the most recent census figures, there were 1 5 , 1 1 5 motion picture theatres in operation in 1939. Their total receipts amounted to $673 million, or 67.5 per cent of the total receipts of all places of amusement in the United States.® Of the total number of theatres in operation it is estimated that 450 or approximately 3 per cent are first-run theatres located in cities with population of over ιοο,οοο.4 Of necessity, any coherent account of the economic development of the motion picture industry must proceed along the three parallel levels—production, distribution, and exhibition. The important thing is not what happened in any one of these phases at a given time, but the repercussions and interaction between each of them. This complicates the narrative and probably makes for difficult reading, but failure to relate the events in the various phases of the industry to each other would mean an inaccurate and incomplete account. Once the industry got under way, many things happened simultaneously. The motion picture industry dates from the invention of movie cameras and projectors, both of which were in existence by 1895. In large part, its early history was dominated by problems of equipment. Until cameras and projectors became reasonably accessible, all other problems of production were secondary. There was not much point in a producer's worrying about cast, story material, or production costs until he possessed the indispensable camera. Similarly, the would-be theatre entrepreneur of those days was relatively untroubled by problems of pricing or trade practices. His first concern was to get a projector. His next concern was operating the projector free of legal or even physical attack by the representatives of the tightly controlled Edison equipment. Later, the emphasis shifted. With the lifting of the restrictions * U. S. Department of Commerce, Bureau of the Census, Places of Amusement, •939' Motion Picture Producers and Distributors of America (the Hays Office),

Film Facts, 1941.

DEVELOPMENT

9

on motion picture equipment, distribution and market problems assumed more importance. Demand for better films forced increases in production costs ; these, in turn, required more effective distribution so as to increase the return on films. More effective distribution first took the form of national organizations of independent distributors handling the product of several producers. Later, this proved unsatisfactory to the stronger producing elements; they assumed the distribution of their own product. As distribution became organized and film costs rose, horizontal consolidation of theatre interests took place. This was followed by vertical integration of production, distribution, and exhibition in the five major companies. This account, it need hardly be said, vastly oversimplifies the process. At times the sequence of events was so rapid that cause and effect are indistinguishable. This chapter is devoted to an analysis of the major forces affecting the development of the industry in each of its phases. E A R L Y HISTORY,

1889-I9O8

Despite the fact that movies seem an intrinsic part of our culture, the commercial origins of the industry extend only as far back as 1896, the year in which the first screening of a film took place. Edison's motion picture camera was invented in 1889. By 1895 projection machines were in existence. Seldes, referring to Edison's underestimation of his own invention, has suggested that the history of the motion picture industry might well be called " T h e Mistakes of Edison." 5 H e was interested in motion pictures only as an adjunct to the talking machine.® Even after he had seen a moving picture, Edison considered the underlying inventions useful only because they made possible photographic reproduction ' Gilbert Seldes, of. cit., p. 18. * "Edison, deep in numerous laboratory experiments, was too far removed from the public to realize that his invention was anything· more than a toy. His mind was so occupied with other research work which he regarded as more important that he did not even carry out his original intention to combine talking machine and movies, and let his business partners manage the kinetoscope department without giving it much of his own thought." Β. B. Hampton, A History of the Movies, P· 7· "Edison, however, persisting in his belief that the moving picture was a short-lived novelty, refused to consider the idea of screen shows, and the many mechanical and electrical difficulties involved in making them a reality were worked out by half a hundred other inventors." Ibid., p. 10.

IO

MOTION PICTURE INDUSTRY

of operas or plays. T h e projection of movies on a screen did not seem commercially feasible to him. H e reasoned that if hundreds of people could see it at one time a picture would too rapidly exhaust its potential public. A s Seldes has said: " T h e moving picture had to be taken away from its inventors by aggressive and ignorant men without taste or tradition, but with a highly developed sense of business, before it could be transformed from a mechanical toy into the medium of the first popular art." F e w industries are of lowlier origin than the motion picture. Originally made in single rolls fifty feet long, films were used in peep-show machines, the forerunner of the motion picture theatre. T h e first peep show was opened at 1155 Broadway, N e w Y o r k City, on April 1 4 / 1894. T h e business was so disreputable that even later, when the peep show had been displaced by the nickelodeon, David Warfield, the actor, kept secret his investment in one of these enterprises for fear his name on the stage would be ruined. Despite the unsavory surroundings of peep shows, penny arcades, and their like, public demand for the medium itself, the moving picture, was insatiable. Viewing a film was still an individual matter; only one person at a time could look through the peep-show device. Edison, besieged by demands for a device which would liberate the films from the peep show and permit projection on a screen, showed no enthusiasm for the idea. Raff and Gammon, his agents, however, sensed the enormous money-making possibilities of screen-projected films; they investigated a projector invented by Thomas Armat, named it the Vitascope, and arranged for its manufacture and marketing as an Edison device. 8 T h e first screening of a motion picture took place as the last act on a vaudeville program at Köster and Bial's Music H a l l , at Broadway and Thirty-fourth Street, N e w York, in April 1896. T h e intimate association between the movies and vaudeville is important. It was there that most of the men later responsible for the development of the motion picture industry had their early training in showmanship, the effects of which are still evident in many of the films made. "Vaudeville and Pictures" was what the Loew houses offered; not for another ten years was the line changed to "Pictures and Vaudeville." Vaudeville circuits showed films as 1

Will Hays, See and Hear, p. 9. p.

II.

DEVELOPMENT

II

added attractions, thereby unwittingly digging the grave of vaudeville. Their patrons clearly enjoyed the novelty of the film, but the real devotees from the very beginning were a new class of amusement buyers—the customers of the arcades, the peep shows, and the dime museums. Men, women, and children who had never before been inside a theatre crowded to the converted storerooms to gaze with awe and delight at the flickering celluloid—at first because it answered the need for amusement which was inexpensive and soon because it provided undreamed-of new pleasures. A demand for apparatus and films came from suburban and country towns throughout the land. Nothing like this had ever happened before; no one was prepared for the feverish growth of a toy into an industry. First to feel the pressure of demand and to sense the real moneymaking opportunities of films were the exhibitors. They made every effort to keep pace with the public but were at once confronted with the shortage of equipment and films. T h e youthful industry, with no experience . . . to guide it, with insufficient machinery to satisfy the sudden, astonishing desire of the public— even without tools to build the machinery—and with no internal or external organization to give it direction or cohesion, was forced by the populace into a maelstrom of expansion that is without counterpart in business history.®

During this time, as was to be true in a different sense later, the industry was dominated by companies engaged primarily in the manufacture of motion picture equipment. The value of the equipment was clearly dependent upon a supply of films since neither a motion picture camera nor a projection machine has any other use. Consequently, the companies which manufactured equipment undertook the production of films. While the industry was still in the peep-show stage, the market for both films and equipment was almost entirely dominated by Edison's Kinetoscope Company. Edison, however, in his general disregard for the value of his own invention had neglected to obtain foreign patents, with the result that men in France and England were soon producing peep-show cabinets and cameras. These quickly found their way to this country, partially meeting the avid demand for equipment. The Edison Company was still *B. B. Hampton, of. cit., p. 17.

12

MOTION PICTURE INDUSTRY

the foremost manufacturer of projectors as well as films, but it was quite unable to meet the demand of the exhibitors. The company policy was to rent projectors, and later to sell them; but it would neither sell nor rent cameras, the intention being to retain control of the production and sale of pictures. Little by little, however, thinly disguised versions of the original Edison camera came into circulation. Patents were granted amateur inventors on devices which were real or purported improvements on the basic principle. Within three years from the time movies were first shown, several new companies had entered the business of making cameras, projectors, and producing films. Anyone in those days who could rent, buy, or steal a camera could become a picture producer; he needed no experience or elaborate equipment. All that was required was to set up the camera, shoot anything animate, develop the negative, print positives, and sell them at virtually any price. Without an understanding of the intensity and suddenness of the demand for movies, much of the history of the industry is incomprehensible. Edison's company held the major patents through which control of equipment and film was being perilously maintained; it was the bottleneck of the industry. The company's lawyers insisted that all inventors and manufacturers and all producers of films in America were violating the basic patents. They started lawsuits and enjoined the violators, but to no avail. The opportunity for quick profits was too alluring; equipment and films continued to appear in the market, where they were absorbed with no questions asked by the exhibitors or the public.10 Problems of distribution were few. Since the demand for films was vastly greater than the supply, little sales promotion was needed. Exhibitors ordered films from a catalogue describing the 10 "Violations of Edison's patent rights, and allegations of violations, increased in proportion to the general prosperity of the industry in America. Cameras had to be acquired by men who wanted to make pictures, and without projection machines no screen show could operate. I f cameras and projectors could be obtained legally and at prices satisfactory to the buyers, they would obtain them legally j if legal machines were hard to get, or if the prices seemed too high, many men were willing to traffic with illegal makers and dealers. 'Bootleggers' of movie equipment, raw stock, and completed films violated the patent laws as nimbly and cheerily as the liquor oligarchy later scorned the Volstead A c t . " Β . B. Hampton, of. cit., p. 6+.

DEVELOPMENT

13

subjects and listing prices; they bought the films outright, paying from $10 to $25 a film, using them until they literally fell apart. Marketing problems became much more involved, however, when screen projection took the place of the peep show. The need for variety of films, plus the fact that films no longer useful to one exhibitor still had value to other exhibitors, led to the idea of a film exchange. In 1902, Harry J. Miles, a San Francisco exhibitor, set up the first exchange. H e purchased films from producers, leasing them to various exhibitors for a week at a time at half the original price.11 By 1907 there were a number of film exchanges throughout the country, perhaps 125 to 150, which bought films at ten cents a foot from the producers and rented them to exhibitors. Movie patrons paid five to ten cents admission at this time. The number of producers or suppliers of film was small. Ten concerns, some of which manufactured both equipment and films, were the principal competing sources for the rapidly growing industry.1 2 This competition lasted a short time only; the patent situation was too inviting to permit continuation of vigorous and costly rivalry between the manufacturers of either equipment or film. Since each manufacturer was concerned with selling films, it became common practice for the seller to restrict the use of his machine to his films, or, if the film was sold, to restrict its use to projectors made by him. But the rapid expansion of the motion picture market made it exceedingly difficult for the leading manufacturers to retain control. " Howard T . Lewis, of. cit., p. 4. " A m e r i c a n Mutoscope and Biograph Company, New Y o r k C i t y ¡ a New Jersey corporation known as the Biograph Company; Edison Manufacturing Companys Essenay Film Manufacturing Company; Chicago Kalem Company, New Y o r k ; George Kleine, a large importer of films, representing nine foreign companies; Lubin Manufacturing Company, Philadelphia; George Milies Manufacturing Company, Chicago, an important importer of foreign films, and also a producer of American films; Pathé Frères, New Y o r k C i t y ; Selig Polyscope Company, Chicago; and Vitagraph Company. Each principal producing company was, in fact, a manufacturer of equipment, holding patents on various devices which modified or improved the basic machinery designed by Edison. Each contended that its patents gave it the right to continue in business without the consent of Edison. In addition to fighting against Edison, they fought bitterly among themselves, and still more bitterly against the group which was then still on the outside trying to break into the industry by means not strictly legitimate. Equipment was rented, borrowed, or stolen, to be taken to machine shops where copies were made.

14

M O T I O N PICTURE INDUSTRY T H E MOTION P I C T U R E P A T E N T S C O M P A N Y , I 9 0 8 - 1 5

Competition of this kind has a logic all its own. It did not take the ten manufacturers long to realize that all would benefit from some "stabilization" program. In 1908, less than five years after the organization of the motion picture industry on a commercial basis, the Motion Picture Patents Company was formed. Four of the ten companies assigned their sixteen patents to the Patents Company." This company owned no property except the patents assigned to it with the understanding that it was to reassign these, upon dissolution, to their former owners.14 The patents pool granted uniform licenses to the ten member companies to manufacture and use cameras and to manufacture and lease motion pictures. They agreed to lease their films only to exchanges and exhibitors using licensed machines, to lease films only to those exchanges that dealt exclusively in the films of the ten manufacturers and at prices not lower than those stipulated in the agreement. In addition, each manufacturer contracted to place conspicuous labels on all boxes containing films stating the conditions under which they could be leased by a rental exchange. The trust undertook to collect royalties of two dollars a week for its members from all exhibitors using projection machines embodying its patents, to issue licenses to make and sell such machines upon condition that they be used solely for exhibiting films leased by one of the ten manufacturers, and to charge a royalty of five dollars on every such machine manufacturered. An attempt to control competition from abroad was also made. George Kleine, an importer, not a manufacturer, was licensed to import positive films from two foreign manufacturers in amounts not exceeding three thousand feet per week, although he had previously imported much greater amounts from nine or ten foreign manufacturers. License agreements between the trust and individual exchanges were very restrictive. The big ten could lease their pictures only to licensed distributors or exchanges; the latter could lease pictures only from licensed manufacturers—those who conformed to all the restrictions described above. The trust reserved the right to termiu Editon, Biograph, Armât, and Vitagraph. " F. L . Vaughan, of. cit., p. j j .

DEVELOPMENT

15

nate or change the license agreement on fourteen days' written notice to the distributor. For a period of two years, between 1908 and 1910, there was an armed truce in the industry ; independent producers, unregimented exchanges, and dissatisfied exhibitors were gathering strength for battle against the pool. Until 1910, the patent combine maintained the structural distinction between the three groups—manufacturers (or producers), distributors (exchanges), and retailers (exhibitors) — b y virtue of its restrictions on entering the business. But not for long. T o o many persons were interested in the possibilities of the motion picture to enable the Patents Company simply to close the door to newcomers. Unlicensed and unregulated producers of pictures continued to make pictures and managed, somehow, to find a market for them, thanks to what seemed an unlimited demand on the part of exhibitors for films. Independent exchanges also continued to operate; even the licensed exchanges of the trust succumbing to the temptation of greater profit in unsanctioned deals did not always abide by the terms of their licenses." Consolidation and control of the exchanges by the Patents Company seemed the only method by which the situation could be kept in hand by the equipment manufacturers. In 1910 they organized the General Film Company as a distribution subsidiary. This marks the beginning of the integration process in the motion picture industry. T h e General Film Company bought out sixty-eight rental exchanges; others were driven from business by withdrawal of the supply of film, price-cutting, discrimination, etc.18 T h e simple withholding of films served in most cases to exterminate the small distributor whose business depended on a constant stream of new product. Within a year only one of the former rental exchanges remained." W i t h this exception, the General Film Company was u " T h r o u g h its ability to influence, usually to determine, the price to be paid to the producers and the rentals to be charged to exhibitors, the wholesaling branch of the business had acquired the balance of power, and prosperous exchange owners were very unwilling to accede to any conditions that interfered with their freedom. T h e y evaded or defied trust regulations, and many of them were suspected of g i v i n g preference whenever possible to manufacturers not licensed by the patents company." B. B. Hampton, of. cit., p. 69.

* F. L . Vaughan, of. cit., p. J5. " W i l l Hays describes the period as one during which discipline came into the industry and it prospered as never before. Of. cit., p. 1 g.

16

MOTION PICTURE

INDUSTRY

then the sole distributor of motion pictures. It established fifty-two branch exchanges throughout the country and divided the territory between them. T h e one exception, however, was partly instrumental in the later undoing of the combine. William Fox, then operating theatres, was the owner of the exchange which refused to disappear. Faced with a shortage of film, he opened a studio of his own and undertook national distribution of his films. H e was very successful and steadily increased his holdings of theatres in the N e w Y o r k area. Carl Laemmle, then also an independent producer, chose to fight the trust, both in the market and in court. Despite the logical system of control built up by the trust and its creature, General Film Company, the stability which it brought was not destined to endure. Patent disputes continued to harass the original ten companies ; some of their patents expired. Finally the Federal government brought suit against both companies, charging them with combination in restraint of trade aimed at monopolizing the industry T h e end and purpose of the combination . . . was not to protect the patent rights . . . but the control of the patents was made a feature of the scheme in the belief, or at least the hope, that this would render the scheme (otherwise illegal) not open to the condemnation of the law.

e court concluded that the combination was illegal, finding that the contracts enumerated in the petition and the combination there described, were a conspiracy in restraint of trade a m o n g the several states . . . and were and are illegal . . . and that the defendants have monopolized a part of the trade . . . among the several states . . . consisting of the trade in films, cameras, projecting machines, and other accessories of the motion picture business. 18

T h e contracts used by the General Film Company were declared void j together with the trust, it was ordered to abandon the methods used in the conduct of its business. This was in 1915. Not until the introduction of sound a decade later did patent rights again assume the importance of this early period. Although patents were apparently ruled out as instruments of control in the motion picture industry, the history of the patents "225

Federal Reporter, 8oo, 8 1 1 , October 1 9 1 5 , quoted in F. L . Vaughan,

°t· "t., p. J 8.

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17

trust had been very instructive. It had demonstrated that control rested with distribution and that distribution had to be on a national basis to obtain maximum earnings on films. T h e strategic element in distribution worked in two directions} exhibitors were dependent upon distributors for films ; producers were equally dependent upon them for outlets. In barest outline, these were the mechanics indicated for achieving domination of the motion picture industry at that time. Later, when the process of integration had rendered distribution an almost mechanical subsidiary of producing companies, the emphasis shifted to first-run theatres, but this did not happen until the early twenties. T H E F I L M ITSELF,

I9O3-I5

In the production phase of the business, other factors were at work. Changes in the nature of the product, improvements in the quality of films, played an important role in the development of the industry as a whole. Movies, in the early days, had been primarily fodder for nickelodeons and consisted almost entirely of serial thrillers, one reel in length. T h e companies licensed to produce films by the trust felt this was an entirely satisfactory form of entertainment for a class of people probably incapable of appreciating anything on a loftier level; besides, other types of film would undoubtedly be more costly. T h e y lacked faith in the future of the film as a medium of mass entertainment and failed completely to anticipate that day, not far off, when patrons would stand in line to pay two dollars to see The Birth of a Nation. T h e members of the trust approached the selling of films as a merchandising problem, most easily solved by dealing with standardized units. W h a t they sold was a service—so many feet of film, furnished regularly at certain times of the week, and paid for by the foot.1® It was the policy of General Film Company to take no account of " A price of ten cents per foot for the positive prints was charged by the producers. " I f , for example, fifty copies of a one-reel negative were used by the exchanges, the producer received approximately $100 per copy, or a total of about $5,000. . . . T h i s figure of ten cents had not been determined arbitrarily¡ it represented the average costs of experienced producers plus an attainable commercial profit, and was based on wage scales that presumably would remain at about the existing levels, or would advance no more rapidly than wage scales in other industries." B. B. Hampton, of. cit., p. 84.

18

MOTION PICTURE INDUSTRY

individual pictures or of individual actors or directors, and the flat rate per foot applied without regard to the number of separate pictures furnished, the quality or character of the pictures, or the size of the theatre.10 The advantages of such a policy, in terms of merchandising ease are apparent. But in the motion picture industry, considerations other than simplicity of sales systems were then more important. Both the movie-going public and theatre operators were interested in better pictures. As soon as the novelty of films paled somewhat, merely viewing a given number of feet of film was insufficient. Marcus Loew, operating a string of nickelodeons, was one of the first to realize that the industry would be stifled at birth unless production improved. He constantly demanded pictures that told stories, pictures that were dignified, pictures that would appeal to a more intelligent public than the peep-show addicts. The demand of such theatre operators as Loew, reflecting their greater intimacy with the public wants, received no recognition from the trust or its affiliates. It displayed an imperviousness to public taste which contributed largely to its downfall. All demands for better quality in films were met by the argument that increased cost of production would necessitate higher film rentals from the theatres; these presumably would force higher admission prices, and it was the opinion of the trust members that admission prices could not be raised above the prevailing five- and ten-cent level without discouraging consumer demand. Their only concession to the exhibitors' request was the making of two-reelers instead of onereelers. Probably an important factor in the resistance of the trust to the demands for better films was its remoteness from the film audience. Most of the men who dominated the major companies at that time had never been exhibitors and made no effort to discover what the public might want. It was sufficient for them that they had developed a system for standardization of production and distribution; let the film fans see serials, they said. But their opponents were, for the most part, former exhibitors; many of them retained their interests in nickelodeons after becoming producers. Frequent visits to their theatres and daily reports from their managers kept them constantly advised of audience responses " H o w a r d T . Lewis, of. cit., p. 7.

DEVELOPMENT

1

9

and built up an invaluable sense of showmanship. They were quick to realize that habits of discrimination and selection were growing in their audiences, that interest in screen personalities was replacing an omnivorous passion for the novelty of "living pictures." Thus the demand which the trust refused to meet was both fostered and supplied by the independent producers, struggling to prevent obliteration by the pool. They made good use of the trust's inflexibility. Following the example of European producers already making longer, more serious pictures, several of the more intelligent independents started turning out features, gambling on the chance that the formula of the serial thriller could be displaced. In 1903 the Edison studios had made a one-reel film called The Great Train Robbery. It marked a turning point in the history of the movies. It had a complete story, a chase which became the stereotype of both serious and comic films, a dance sequence} it was based on a crime, and ended with a touching close-up. It ran for years in the nickelodeons which, until nearly 1914, constituted the major part of motion picture exhibition. With The Great Train Robbery as a model, the independent producers began turning out four- or five-reel features. Until 1914 there were only three producers of feature films in the United States.81 With longer and better pictures, these independents hoped to undermine the trust. For three or four years, Lasky, Zukor, and Bosworth, Inc., stole their way into the market with ingeniously contrived films, catering to public demand for something other than the standardized one- or two-reel serials produced by the Patents Company. Not until 1915, the year before its dissolution, did the trust awaken to the possibilities of better films; even then recognition was halting and half-hearted. One of the greatest filmmakers of all time, D . W . Griffith, then at Biograph, a member of the trust, made The Birth of a Nation in 1915. This picture not only summarized all that was then known about the art of making movies but set a standard which was not surpassed for many years. It exceeded all previous records for cost, however, and frightened the members of the trust. They refused to advance the additional funds required and, after the original allotment had been spent, tried to withdraw. T h e president of Mutual Film put in $25,000. " U. S. Federal Trade Commission Decisions, XI, 200.

20

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INDUSTRY

W h e n the directors of his company refused to approve, he made it a private investment, profiting by a quarter of a million dollars. 22 But even when the twelve-reel film was completed, the heads of the industry were so unaware of its value that they seriously considered cutting it up and issuing it serially, one reel a week. Only Griffith's determined opposition prevented the act of mayhem. Opening in N e w Y o r k City at a regular theatre, charging theatre admission prices, the picture was an overwhelming success. Nearly ten years later it was still breaking attendance records in large movie houses. It is said that no picture made in the next decade came within $2 million of earning as much as this film did} nor did any other movie contribute as much toward making the industry reputable and esteemed. This, it should be remembered, was in 1915. T h e lesson it contained came too late to save the Patents Company from the combined effects of internal dry rot and legal disapproval, but it pointed unmistakably the road to be taken by the independent producers. 13 THEATRES,

1905-16

W h i l e the independent producers were struggling with problems of production, changes were taking place in the realm of exhibition. Between 1896 and 1905, with very rare exceptions, films had been exhibited as the incidental part of vaudeville bills. There had been tentative beginnings of a screen theatre ; the first opened, appropriately enough, in Los Angeles. T . L . T a l l y , famous showman, announced in 1902 that the Electric Theatre would provide for the price of ten cents an hour's amusement in a "vaudeville of moving pictures," including Capture of the Biddle Brothers and New York in a Blizzard. Business was so good that matinees were instituted following the opening night." In 1903, a small movie theatre was opened in New Castle, Pennsylvania, by two brothers, Sam and Harry Warner. But for the most part, showmen regarded the film as an appendage to the stage except in the underworld of " Gilbert Seide«, of. cit., p. 24. Still further evidence of the trust's attitude towards attempts at improvement of the quality of films is the treatment accorded an imported five-reel film, The Life of Moses. General Film distributed it, but at the rate of one reel a week, just like any other serial ; they then pointed to its lack of success as proof of the public's dislike for quality films. 11

" W i l l Hays, of. cit., p. 16.

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21

the film, the peep shows, shooting galleries, and penny arcades. It was here that the men who later dominated the industry had thenstart. Adolph Zukor, Marcus Loew, and William Fox all ran penny arcades during this period. Zukor and Loew were partners in the Automatic Vaudeville, a company which exploited peep-show motion picture devices in penny arcades. Their first show place was opened in Union Square and made $20,000 the first year. In 1905, a real estate operator in Pittsburgh took a vacant storeroom and turned it into a motion picture theatre by the simple expedient of putting in a movie projector, a piano, and ninety-nine seats. T h e film shown was The Great Train Robbery, admission was five cents. Response was overwhelming. Nickelodeons swept the country, replacing the penny arcades. By 1907 there were five thousand of them,25 vastly increasing the demand for films. This period has been described elsewhere as follows: From the time that movies made their first appearance in low-priced exhibition rooms, the public demand had increased so rapidly and persistently that every department of the infant business had been in a money-mad turmoil. T e n million—maybe twenty million . . . new entertainment buyers had suddenly appeared in all parts of America, and were pouring their nickels into the ticket-windows. T h e small coins of the masses had created, within a decade, a business larger in volume than that of all spoken-drama theatres, dime museums, variety houses, lecture bureaus, concert halls, circuses, and street carnivals combined. Experienced purveyors of entertainment and amusement were dazed. There were no precedents by which such an extensive public movement could be appraised. Not only were movies new to the world, but this surge of millions of people to ticket-windows was something incomprehensible, incredible, fantastic. It could not be real—or if, by any chance, it was real, it could not endure. Soon the appetite of this vast new public would be satisfied, the craze would die, the nickelodeons would be empty, the movie business would be "busted flat." Everyone in the film business worked in feverish haste to grab a share of the golden flood of nickels before the inevitable day of reckoning. 26 One of the showmen of this period was Girl Laemmle, later president of Universal. H e employed a bright messenger boy "Ibid.,

p. 17.

" Β. B. Hampton, of. cit., pp. 56-57.

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named Sam Katz to play the piano. This same M r . Katz later became head of the powerful chain of Paramount theatres. By 1913, the motion picture theatre was a fixture on Broadway and the Main Streets of the lesser cities. At first, as the need for a setting other than that of the penny arcades and nickelodeons seemed desirable for the showing of the feature films, legitimate theatres were leased. Soon, however, the showing of films commanded larger audiences than regular stage presentations. Men like Loew began unloading nickelodeons and purchasing larger, more dignified houses, carefully selected with reference to population shifts and neighborhoods. It is said that occasionally it was necessary to regenerate particular theatres before nice people would start going to them." One of the theatres purchased by Loew was an old burlesque house in Brooklyn called the Cosy Corner. It had been raided by the police so often that it was finally closed and taken over by the Salvation Army. Loew bought it cheap, fumigated it physically and then morally by putting on a troupe of Italian actors who played only Shakespeare and d'Annunzio. In a few months, as The Royal, it had become one of the most dignified motion picture theatres in Brooklyn, a worthy addition to the Loew circuit. Almost as soon as it became evident that the movies were here to stay, chains of theatres appeared as well as booking combines for theatres individually owned. As early as 1912, local theatre chains were important factors in the market for films.28 In 1916, theatre chains in New Orleans and Philadelphia were strong enough to force their own terms on producers, insisting on lower film rentals for all the theatres of a particular chain on threat of refusing to book the pictures at all. Circuit booking, as it came to be called, became a recognized method of defense on the part of exhibitors against the dominant producers.2® In 1918 the Federal Trade Commission issued an order against the Stanley Booking Corporation of Philadelphia, one of the largest and most successful combinations in the country. It was declared * " L o e w ' s Inc.," Fortune Magazine, September 1939, p. 18. " T h e Gordon theatres in Boston, Kunsky in Detroit, M a r k in N e w Y o r k , and Swanson in Salt Lake City. Howard T . Lewis, of. cit., p. 9. " W . M . Seabury, of. cit., p. 17.

DEVELOPMENT

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to be guilty of unfair methods of competition and directed to cease and desist from the following practices: ( a ) Procuring the cancellation of contracts for the exhibition of films made by its competitors and the producers of films. ( b ) Procuring films which had been announced for exhibition by its competitors and displaying them in advance of the date announced by its competitors in their neighborhood, for the purpose of harassing and embarrassing its competitors. (c)

M a k i n g contracts for rental of films conditional on the understanding that the exhibitor will not rent films from any competitor of the respondent.

( d ) Employing threats and intimidation to induce exhibitors to pay it, the respondent, a sum equal to 10 per cent of the cost of the films booked, or any sum whatsoever. ( e ) T h r e a t e n i n g independent exhibitors that unless they booked through the respondent their supplies of film would be cut off. ( f ) T h r e a t e n i n g producers of films and film exchanges with withdrawal of patronage in order to induce the producers to cease supplying certain of their competitors with films.

Certain obvious consequences followed from such practices as "those described above. First, the exhibitor who entered into such a booking combine was unable to make individual choices of pictures particularly suited to his neighborhood needs; he had to take and exhibit the picture selected for him under the blanket rental contracts which were negotiated by the company in control of the predominant chain of theatres in his neighborhood. If he wished to reject the picture, he was subject to all the coercive pressure inherent in the situation, including the knowledge that if he did not take what the circuit offered he could not have other desirable pictures which he needed and which the circuit alone controlled. T h e distributor was no less affected. By virtue of the greatly increased buying power of the combine, he was confronted with the alternative of selling to the entire circuit at a price fixed by the circuit or of having the circuit reject his pictures entirely for all of its theatres. Inasmuch as booking combines have declined in number and importance, the reason for describing them in detail is that their chief characteristics reappear later in somewhat altered form. T h e y

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MOTION PICTURE INDUSTRY

also played a not insignificant role in causing the major producing companies to take the final step in the process of integration, i.e., the buying of theatres of their own. P R O D U C T I O N AS IT A F F E C T E D DISTRIBUTION P R A C T I C E S ,

I912-I9

Changes in the nature of films produced also took place. T h e feature film and the star system were rapidly becoming important, with immediate and resounding repercussions on distribution practices. When films had consisted primarily of one-reel serials, all substantially on the same mediocre level, problems of pricing were few and simple. But with the variations in quality presented by the differences in features and the popularity of individual players, the old program system employed by the trust was no longer suitable. The exhibitor could no longer be "serviced" with a regular number of reels each week at a price based only on total footage and the film's age from release date. Under the star system, the exhibitor was offered groups of pictures in which there were several series featuring a given star. Six Pickfords, seven Harts, etc., were sold rather than so many pictures or so many feet of film. This system was largely the innovation of Adolph Zukor. A newcomer to the ranks of producers, his personal history is one of the fables of our time. An immigrant with $40 in the lining of his coat, he went from the manufacture of novelty furs to the moving picture business via penny arcades. H e began producing films, fighting the trust virtually singlehanded, with ideas about how great the movie might be if it told a story and had good performers. It was Zukor who organized a company known as "Famous Players," around the slogan "famous players in famous plays." H e planned to produce approximately thirty pictures a yearj but because he did not think there were that many famous plays or stage stars, the product was to be divided into Class A, which was to be all that the slogan claimed, and Class B, in which known moving picture players as contrasted with famous players were to appear; there were also to be some Class C films for which few claims were made and the less said the better.30 The system of " G i l b e r t Seide«, of. cit., p. 18.

DEVELOPMENT

25

grading films which he started is with us yet. The unpredictable public, then as now, did not like all the Class A pictures. In the Class Β pictures they discovered something they did like—Mary Pickford. Thus began the star system. From then on, the anonymity of motion picture players vanished. The names of persons supplanted titles such as "the Biograph girl" or "the Gaumont girl." Here again the response of the trust lagged conspicuously behind public demand, not entirely without reason, since the sudden and instantaneous interest on the part of movie-goers in the personalities of the films was astonishing and completely unexpected. Once the names of movie actors became known to the public, production was scarcely able to keep up with demand. John Bunny, one of the first comics of the screen, was welcomed in as many one-reelers as he could make, about two dozen a year. Broncho Billy, the Gene Autry of his day, called forth packed houses, soon to be equally enthusiastic about Tom Mix. Mary Pickford made about twenty pictures a year; not one too many according to the box office. The lack of awareness on the part of the trust did not indicate exceptional obtuseness since even the independents who were sponsoring the star system were overwhelmed by the reaction ; however, the independents were quick to capitalize on it while the trust hesitated, fuming over the increased costs. In the hesitant interval, the independents lured away any players suspected of being potential stars by the simple expedient of offering higher salaries. Unlike the trust members, they believed that the profitability of film production justified and supported the increased salary demands of the players. Most of all, they believed in the future of their industry. This was the origin of the apparently extravagant salaries of stars which, to this day, provokes much eyebrow-raising in other more sober lines of business. Even then the reaction of the leaders of the industry, i.e., the Patents Company executives, was that of annoyance and disgust. T h e entire performance seemed so childish, and silly, so unnecessary and ridiculous, so contrary to sane industrial practice and sound economics, that the well-trained brains of trust rulers denounced it as a fad,

26

MOTION PICTURE INDUSTRY

an exhibition of popular foolishness that would presently exhaust itself and depart without having affected their business seriously.' 1

And well they might be annoyed and disgusted. They had planned their business on certain assumptions with respect to costs; their distribution practices and pricing policies flowed logically from these assumptions. Obviously the structure could not be maintained when suddenly the raw material of their films, the actors, decided that they were artists, not factory hands, and that as artists they could perform only when happy. Their state of mind, in turn, seemed to be a direct function of their salaries. Thanks to the bidding from the side lines by the independent producers, their earnings doubled and tripled overnight. In the summer of 1913 an English pantomimist, Charlie Chaplin, refused an offer to appear in films for $75 a week. After the offer was raised to $150, Chaplin accepted. He appeared in the first of the feature-length comedies, Time's Punctured Romance. Almost at once it was recognized that here was an important personage. Bidding for his services, other companies pushed his salary up until, a year after he had begun work at $150 a week, Chaplin signed with Essanay for $1,250 a week. (Seldes repeats a delightful story in this connection. It is said that in the course of the negotiations Chaplin was offered $1,000 a week; he demanded $1,075. When asked why he had to have that much, he said he wanted $75 a week to live on.)" A year later Chaplin signed for $10,000 a week with a bonus of $150,000. Even in those days (1914) remuneration in the motion picture industry was not wholly an economic phenomenon. Factors of prestige and rivalry were fully as important in determining amounts paid the stars as any economic considerations of scarcity of talent. When Chaplin was signed for $10,000 a week, it became imperative that Miss Pickford, under contract to a rival company, should receive at least as much. Not only did the stars compete with each other for the highest salaries, but the companies competed for the privilege of paying the highest salaries. It is said that Mutual at one time, in an attempt to secure the services of Pickford as well as Chaplin, then earning over half a million dollars a year, " Β. B. Hampton, op. cit., pp. 90-91.

" Gilbert Seide», of. cit., p. 29.

DEVELOPMENT

27

drew up a contract offering Pickford that much as a drawing account, a 50 per cent interest in the new company, and a guarantee of a million dollars a year. Some obstacles arose, however, and Miss Pickford signed again with Zukor of Famous Players, with a guarantee of more than a million dollars in two years.38 Increased salaries of the stars constituted only part of the increasing cost of production. Story began to assume importance. During the early days of the industry if a company indulged in the luxury of a scenario, it rarely paid over twenty-five dollars. But suddenly and irresistibly every aspect of film production became more costly, more elaborate. If stars were worth so much money, surely their directors were worth considerable amounts too; even more valuable were the individual producers who told the directors what to do. T h e whole problem was one of derived value ; once the success of stars was assured and the public appetite for films appeared insatiable, all the factors involved assumed great value. In a way, the problem of excessive salaries for stars was created by the producers; in their selling, their advertising, and their publicity so much emphasis was placed on the personalities that the business men themselves fell victims to the publicity. The basic factor, however, was undoubtedly the enormous rate of return then available to successful movies. The producers who first grasped the fact that their market was almost unlimited and that the film was no passing fancy gave eloquent evidence of their faith in their contractual commitments for stars' salaries. The producers who were not quite certain, the men of lesser faith, lost out in the scramble for stars. Changes in distribution practices followed directly after the improvement in the quality of films, the star system, and the introduction of features. At the time that the Patents Company was dominant, it will be recalled, national distribution was undertaken through General Film Company. Before that time distribution had consisted for the most part of states-right exchanges operating through regional franchises. These exchanges made outright purchases of film which were rented to exhibitors at approximately ten cents a foot. They corresponded to local or territorial jobbers in other lines of business; " Ibid., p. 30.

28

MOTION PICTURE INDUSTRY

their problems were essentially those of any wholesaler or middleman. With effective control of the supply of films transferred to the Patents Company, positive prints were no longer sold to the exchanges. They were leased. Title was retained by the producer, who authorized the exclusive use of the print by the exchange within a specified territory on fixed terms. General Film Company set up fifty-two branch exchanges throughout the country, each located in a city which supplied a large territory with films. It also introduced marketing practices which long outlived the trust and influenced profoundly the entire structure of the industry. Perhaps most important at the time was the introduction of a system of theatre classification in accordance with desirability of location. Heretofore, restrictions regarding "release dates"—specified days upon which films could be first shown—had never been adhered to by exhibitors or the independent film exchanges. Movie-goers, eager to see new pictures, flocked to the theatres that first showed a new movie in their town, thereby placing a premium on "first-runs," for which exhibitors were willing to pay higher rentals. Furthermore, the films, when first released, were in better physical condition, less marred and broken. Under the rules of the General Film Company, theatres were classified and rentals standardized in accordance with the class to which a given theatre belonged. This action was intended to eliminate the bargaining and bribery which went on between theatre owners and exchange operators for the privilege of obtaining first-runs. T h e standard rental scale for a weekly program, with a daily change of bill, was $100 to $125 for theatres in the best locations, graduating downward to $ 15 for small or out-of-theway houses." Still another factor in theatre classification at that time was the differences in quality of film shown. Originally, there had been little difference between the various nickelodeons and store-shows; they were all cheap playhouses presenting uniform, standardized amusement. However, with the gradual change in films from one to two reels, from serials to features, both audiences and exhibitors began to recognize distinctions between the various theatres. Since the production of the longer, better films cost more, rentals ** Β. B. Hampton, of. cit., pp. 70-71.

DEVELOPMENT

29

were correspondingly higher; only the more confident and aggressive exhibitors were willing to gamble on the higher rentals. F o r the most part the exhibitors agreed with the trust that the public would never justify the greater cost of better films. T h e y were wrong, as it happened. T h e showmen who displayed the better films not only attracted larger audiences but were soon able to increase the admission price from ten to fifteen cents, occasionally to twenty. T h e y also acquired the reputation of showing first-class pictures and were in a good position to obtain first-runs. M o r e will be said later concerning the importance of the firstrun theatre; for the moment, suffice it to say that they were exceedingly profitable to their owners and formed the initial basis of theatre chains. So effective was the trust system of national distribution in returning higher rentals on films that, even before its final dissolution, a number of other national distributing organizations had come into existence. In 1 9 1 3 , 12.6 per cent of the total number of films produced were distributed by national exchanges as compared with 74.8 per cent distributed by state-right exchanges and 12.6 per cent by exchanges affiliated with the producers. B y 1 9 1 5 their importance had more than doubled; they distributed approximately 26 per cent of the total number of features produced. T h e importance of the states-right exchanges declined rapidly after 1 9 1 3 for reasons closely related to what was happening in the field of production and exhibition. Today it is safe to say that the major distributors handle at least 85 per cent of all nationally shown feature films. Increased costs of film production were reflected in pressure for higher rentals. These could be obtained only from distribution on a national basis. From the point of view of the producer, the states-right exchanges were unsatisfactory for a number of reasons. First, most exchanges were run by exhibitors. T h e y were chiefly interested in getting a supply of film for their own theatres. Giving an exhibitor territorial rights to the distribution of films meant, in effect, giving him the power to use the film most advantageously in his own theatres; a decidedly secondary consideration to him was distribution of the film to other exhibitors." This " Howard T. Lewis, of. cit., p. 11.

3o

MOTION PICTURE INDUSTRY

meant, of course, that the interest of the producer suffered since less than the maximum rental was derived from other theatres. Secondly, because even in that period no one source of films sufficed to meet fully the needs of a theatre, each exchange usually handled the product of several producers. Most producers felt that their product received neither the type nor the amount of promotion it deserved. Very little pressure could be brought by any one producer on the exchange because he needed the exchange more than the exchange needed his films. Moreover, the lack of uniformity in the practices of the various states-right exchanges left room for dishonesty as well as the more usual carelessness and incompetence. The great success of the General Film Company with national distribution had been an object lesson to the producers. The first step in the process of vertical integration was the combination of the functions of producer and distributor. It was clear that the production of films could be much more profitable if the producers controlled the conditions of sale. Higher rentals, longer runs, more favorable play dates—all of these awaited the producer who had his own selling organization. First in the industry to carry through the idea was Adolph Zukor, then head of Famous Players. His pictures, featuring such stars as Mary Pickford, James O'Neill, James K. Hackett, Lily Langtry, John Barrymore, Fanny Ward, Minnie Maddern Fiske, and Geraldine Farrar, were among the most popular of their day. They were distributed by a film-buying combine called Paramount Pictures. This company had been organized by William W . Hodkinson through the consolidation of five regional distributors. Only half of the product distributed by Paramount was supplied by Zukor's company; Jesse L . Lasky and others contributed the balance. The effectiveness of distribution by Paramount, operating on a basis of 35 per cent of the gross volume, is attested to by the more than a million dollars earned by Famous Players in its third year of existence. But Zukor was unhappy because 35 per cent of the total gross remained in the distributor's tills while his alone was the grief of production; furthermore, there was nothing to prevent Mr. Hodkinson from replacing Mr. Zukor's product with another's any time he chose. With these considerations in mind Zukor suggested to Hodkinson a merger of Paramount, Famous Players, and Lasky. Hodkinson did not

DEVELOPMENT

31

agree j he did not believe in integration of the functions of distribution with production, arguing that better products would be turned out if active competition for markets were maintained. Within a year, by the end of 1916, Hodkinson was deposed as head of Paramount ; Zukor had bought control and announced the formation of the "25 million dollar" Famous Players-Lasky Corporation, with himself as president, Lasky, production head, and Paramount, the distributing subsidiary. This was a turning point of major importance in the history of the industry. It suggested the pattern of things to come, and once started they came fast. Much of what happened later is traceable to the aggressive policies adopted by Adolph Zukor at this time. I N T E G R A T I O N OF P R O D U C T I O N , AND EXHIBITION,

DISTRIBUTION,

I917-23

As has been the case in other industries and in the history of nations, pioneers and rebels on achieving success often revert to the pattern of behavior of those whom they have overthrown. N o w , with a large producing-distributing organization to maintain, Zukor began to feel the burden of risk in an uncertain, highly speculative market. Different, too, was the nature of the risk now confronting him. W h e n he had first begun producing pictures, his chief problem had been outwitting the patent monopoly of equipment and films and almost all the essential ingredients of a movie. A l l this Zukor had faced successfully. But now, suddenly, the problem was different. N o w he could make movies; he had equipment, film, and stars. But everything cost so much; he had to be assured of markets. H i s markets consisted essentially of theatres; there were already thousands of them, for the most part individually owned and widely scattered geographically. Direct control of the theatres then seemed out of the question; the other alternative was control of talent. Achievement of this was Zukor's first objective. In this, as in other industries, control of supply need not necessarily be complete to be effective. A strategic hold on the most essential elements making up the product may suffice. Zukor saw this clearly and proceeded to concentrate on gathering together in his organization as many of the popular stars and other talent as he could. From Triangle, he took Douglas Fairbanks, Gloria

32

MOTION PICTURE INDUSTRY

Swanson, William S. Hart, 'Tatty" Arbuckle, D. W. Griffith, Mack Sennett, and Thomas Ince; he already had Pauline Frederick, Marguerite Clark, Blanche Sweet, Cecil B. de Mille. With approximately 75 per cent of the most popular stars in the industry under its control," Famous Players-Lasky was soon in a position to dominate the field. With those producers whose stars he could not wean away, he made deals. In partnership with Lewis J . Selznick, he formed Select Pictures, built around the Talmadge sisters, Nazimova, and Clara Kimball Young, all of whom were under contract to Selznick. His plan bore immediate fruit; in 1916 film rentals were increased sharply, bearing witness both to the higher cost of production and the greater power wielded by Zukor. Zukor also made use of a trade practice, "block-booking," which survived to plague the industry at a much later date. The practice was not new in the motion picture industry but it had never before been particularly effective until Zukor adopted it to push the sales of his less spectacular merchandise. This is how it worked. The pictures of Mary Pickford were in great demand; exhibitors valued them greatly. With the Pickford films as a lever, Zukor persuaded the theatre operators to take a full line of his other films, even though the rental on Pickford films trebled in 1916 and substantial increases were also made in the rentals of others. By 1918 Zukor was distributing some 220 features a year, more than any one company before or since. Exhibitors were alarmed, not only because of the increased rentals on desirable pictures but also because they disliked the necessity of buying unwanted pictures in order to secure the better films; most of all they dreaded the allor-none policy that they sensed in Zukor's selling methods. Like most retailers, exhibitors are notoriously difficult to organize, but the threat presented by Zukor's growing control of the supply of film suggested its own remedy. In 1917 the first organization of exhibitors appeared. First National Exhibitors Circuit was created to act as purchasing agent for twenty-six of the largest first-run exhibitors in the country located in the exchange cities. The formation of First National Exhibitors Circuit was the second major step in the integration of the industry. Unlike the " W . M . Seabury, of. cit., p. 1 8 .

DEVELOPMENT

33

Zukor company, it worked in the opposite direction. Zukor started from production and went first into distribution, then into exhibition. First National began in exhibition, working back to distribution and ultimately into production. T h e end result was substantially the same, as we shall see; but in 1917 it looked as if Zukor's power was seriously threatened. First National consolidated the greatest purchasing power in the industry, combined with a system of distribution which paralleled the national network of Paramount exchanges controlled by Zukor. T h e plan of operation was fairly simple. T h e circuit bought exclusive national rights to a picture and apportioned the cost among the twenty-six members designated as franchise holders. Each was to pay the corporation a percentage of the picture's cost based on the amount to be derived from its distribution in the particular locale of that member. Market conditions were sufficiently well known by this time so that the percentage of total income for a film to be derived from a given territory could be estimated. Thus if a given franchise holder operated in an exchange city known as a 2 or 3 per cent territory, he would be required to pay that proportion of the total cost of a picture acquired by the parent company. In return he received the exclusive right to distribute and exhibit that particular picture throughout his territory. Because the franchise holders were also the owners of first-run theatres, it followed that first-run theatres had their choice of products and play dates, thereby immeasurably increasing their importance and value ; all other theatres in the territory dominated by a franchise holder were dependent on their principal competitor for part of their supply of films ; the profitability of a given theatre became known to the distributor, with the result that, if he (the distributor) coveted the theatre, the exhibitor might be forced to sell out on terms dictated by the distributor or be deprived of a supply of film. T h e reality of this threat to the independent theatre operators is attested to by the fact that, starting out in 1917 with 26 members, First National by April 1919 controlled 190 first-run houses and approximately 40 subsequent-run houses, as well as 366 theatres controlled under subfranchise agreements.37 By January 1920, First National controlled a total of 639 " H o w a r d T . Lewis, of. cit., p. 17.

34

MOTION PICTURE INDUSTRY

theatres; of these, 224 were first-run houses, 49 were subsequentrun houses, and 366 were theatres operated by subfranchise holders. Even Zukor's control over stars was threatened by First National ; the two major stars, Chaplin and Pickford, had been signed by them. Chaplin was given a contract under which he became his own producer, scheduled to make eight two-reel comedies a year for First National release. The company was to advance $125,000 to make each negative, including the star's salary in this sum. The cost of distribution was set at 30 per cent of the total rentals; profits, after all costs had been met, were to be divided equally between First National and Chaplin. For several years, this system was standard for First National's contracts with stars and producers. There was much to be said for it from the stars' point of view: In the first place, it gave them the authority and power for which they had always longed in connection with their own productions; secondly, the profit-sharing feature seemed an eminently fair device by which they could capitalize on their drawing power with the public. First National, primarily a theatre business, was then less concerned with the costs of film production than with the assurance of a supply of film at rentals not too exorbitant. The first concern was defense against Zukor. T o Zukor their defense was an intolerable attack; they, after all, controlled the first-run houses. Let them become independent of Zukor's product and his assured markets would be gone. Two years of watching the operations of First National undermine his acknowledged supremacy sufficed for Zukor. The concentrated buying power in the hands of First National was the most powerful force in the industry at that time. Mr. Zukor decided in 1919 to go into the theatre business. His decision was not, however, motivated solely by fear of the various types of exhibitors' combinations. The hearings on the Federal Trade Commission charges against Famous Players-Lasky contains a report on the industry made in 1919 by H . D . H . Connick to Kuhn, Loeb and Company, on the basis of which the financial firm decided to support Zukor's entry into the business of owning theatres. The report states: . . . the largest returns of the industry result from exhibiting pictures to the public, not from manufacturing them. T h e F a m o u s Players-Lasky

DEVELOPMENT

35

Corporation Sales Department estimates that the gross annual return of the 1 5 , 0 0 0 American theatres during 1 9 1 9 will be $ 8 0 0 , 0 0 0 , 0 0 0 and that the total amount the producers will receive in the form of sales and leases of film and accessories will not be over $90,000,000. It is apparent to anyone who has had theatrical experience that this is not an equitable division. Producers claim that even when full consideration is given to the extra cost of the large orchestra and attractions required of the picture houses, they should receive from 2 2 to 2 5 % of the gross theatre income. . . . From an examination of such records of theatre operation as are available and assuming that the sum required to amortize the building will not exceed 2 % of its cost, and that the amount of the ground rental per annum does not exceed $ 3 0 per seat, and with prices of admission ranging upward to 60 cents, a preliminary guess has been made that a theatre with 3 , 1 0 0 seats will return at least 2 5 % on the investment in addition to the usual first run rental charge in their district for the use of films. T h a t the 2 5 % is conservative is indicated by the fact that the Grauman Theatre of Los Angeles is now earning profits of 1 0 0 % a year; the Rialto in N e w Y o r k at the rate of about 8 0 % a year; the Stillman in Cleveland at the rate of over 1 0 0 % a year.' 8 On the subject of the size of theatres in relation to their profitability, the report states: T h e r e is no doubt as to the financial advantage of the theatre with a large seating capacity over a small one. A n examination of the cost of operating theatres shows that with the same standard of exhibition, the only increase in operating cost in the case of the large houses occurs in the comparatively low-priced items, such as ushers and cleaners. T h e big items—management, film rental and orchestra—remain the same. T h e r e are differences of opinion as to the size of theatres that should be constructed. 89 W i t h facts such as these at his disposal, together with ease in obtaining capital through the facilities of Kuhn, L o e b and Company, Zukor decided to become a theatre owner as well as the producer and distributor of films. A n d on no small scale either. H i s plan was described as "selling the product direct to the people." M r . Zukor, president of the Famous Players-Lasky Corporation, has ** Fedirai

Trade Commission v. Famous Players-Lasky, et al. Complaint No.

835. p· 903· m Ibid., p. 90j.

36

MOTION

PICTURE

INDUSTRY

developed a plan to increase the earnings and percentage of profit to the corporation. Should his plan be carried out they will become the most important exhibitors of motion pictures in A m e r i c a as well as the leading producers and distributors. . . . H e plans to build or acquire about 5 0 theatres properly located in the important cities of the country and several additional ones in the theatrical districts of N e w Y o r k and sell his products direct to the people and take the resulting profits. . . . T h i s circuit of key theatres will enable his corporation to dominate the motion pictures industry in this country and at the same time increase the percentage of profits. 40

In connection with this program of theatre acquisition, Kuhn, Loeb and Company floated ten million dollars' worth of the first public offering of movie securities. By August 3 1 , 1 9 2 1 , Zukor's company had acquired 303 theatres. A gauge of the success of the plan is found in the increasing difficulty experienced by independent producers in securing firstrun releases for the pictures. Goldwyn Pictures Corporation, finding that good releases were increasingly difficult to obtain, announced in 1921 that it had acquired a half interest in approximately thirty theatres in order that it might secure proper exploitation for its films. At approximately the same time Loew's, Inc., a $ 25 million theatre company, bought Metro Picture Corporation, an impoverished producing and distributing company, which had also been experiencing difficulty in obtaining first-run showings. (Metro, it may be observed in passing, had been organized in 1 9 1 5 by a group of exchanges struggling to break through the Patent Company's near-monopoly of films.) Apparently sufficient evidence of the success of Zukor's plan existed to warrant the filing of a complaint against the corporation by the Federal Trade Commission in 1 9 2 1 , charging unfair trade practices and restraint of trade through monopoly control of the first-run theatres in the country. T h e following quotation from the Commission's statement of findings describes the situation: O n J u l y 2 2 , 1 9 1 9 , the board of directors of F a m o u s Players-Lasky Corporation . . . for the purpose of modifying, perpetuating and making more effectual its said distributional policy, i.e., block-booking, as distinguished from the lease of individual pictures, and for the purpose of * Federal Trade Commission v. Famous Players-Lasky, et al. Complaint No. 835, p. 961.

DEVELOPMENT

37

intimidating and coercing exhibitors to lease and exhibit films produced and distributed by Famous Players-Lasky Corporation, adopted a progressive and increasing policy of building, owning or otherwise controlling theatres, especially first-class, first-run theatres in key cities to be used to give to the best picture films produced by Famous PlayersLasky Corporation first-run exhibitions under the most favorable conditions, to advertise and exploit said films, create a popular demand for their exhibition by the patrons of the theatres of the better class in territories adjacent to said several key cities, and to make leases for their exhibition indispensable to the successful operation of such class of theatres. . . . Because of the dominant position of Famous Players-Lasky Corporation in the motion picture industry, its methods of competition, policy and practice are necessarily followed, adopted and maintained by all competitors of Famous Players-Lasky that are strong enough to acquire and operate first-class, first-run theatres to exploit their most meritorious pictures. . . . T h e r e f o r e , it is made difficult for small and independent producers or distributors of films to enter into or remain in the moving picture industry or market, or to lease individual pictures on merit. . . . B y said methods, Famous Players-Lasky Corporation has unduly hindered, and is unduly hindering competitors, lessening competition, and restraining trade in the motion picture industry, with a dangerous tendency toward the creation of a monopoly therein in the several parts of the United States/ 1 W i t h i n t h e industry, this phase of t h e integration process is described as the " B a t t l e f o r T h e a t r e s . " Descriptions of t h e period sound like a journalist's account of a w a r . I n d e e d , at times t h e intensity of t h e drive against resisting t h e a t r e owners was out of all proportion to t h e value of t h e objective, as was later a d m i t t e d by the m a j o r s . T h e admission was reluctantly m a d e in t h e f o r m of t h e r e t u r n of m a n y of t h e theatres to their original owners when centralized operation p r o v e d unprofitable. F r o m t h e point of view of t h e producer-distributors, t h e acquisition of theatres served two i m m e d i a t e purposes: I t g a v e t h e m an assured outlet for their films, and it g a v e t h e m , r a t h e r than t h e independent t h e a t r e owners, t h e revenue f r o m t h e box office. I n most of t h e s m a l l e r towns it was not necessary to acquire all t h e theatres, since m o v i e attendance was likely t o be concentrated in one o r t w o houses. I n t h e l a r g e r cities, m o r e extensive operations albid.

y

p. 961.

38

M O T I O N PICTURE INDUSTRY

were considered advisable in order to obtain a substantial portion of the box office. T h e technique of theatre acquisition involved an encircling movement in which the choice given the independent theatre owner depended upon the earning power of the property. If his was an undoubtedly lucrative house and one which the major company had determined to acquire, he had the alternative of either selling on terms offered or of meeting threatened competition from a new theatre to be located in the immediate vicinity. H e could expect as a matter of course that the new theatre would have first choice of product and play dates. Usually, when an agent of one of the majors approached an independent theatre owner to discuss the purchase of his theatre, he would have with him an option on an admirable theatre site across the street. Most theatre owners, faced with the choice of selling or of competing with an affiliated theatre, sold. Other instances were handled differently. If the theatre was not notably profitable, its importance was chiefly as a buyer of films. In such cases, the theatre owners were often persuaded to give preference to the product of the particular major. A t first Zukor's company was the principal menace to the independent theatre operators. It seems quite clear that the pattern of the relationship between the majors and independents was established by him at this time. Roving representatives of Paramount were soon dubbed "the wrecking crew" and the "dynamite g a n g " by the theatre owners. 41 Much of the bitterness of the exhibitors against the majors goes back to this period of strong-arm dealing and no amount of "public relations" or good-will advertising has quite succeeded in restoring mutual trust to the relationship. One of the first tangible results of the warfare between the independents and the majors was the formation in 1920 of a national trade association of theatre operators, the Motion Picture Theatre Operators of America. By 1921, a membership of over ten thousand was claimed. Zukor, however, was not the only menace to the independents. By 1923 Loew's and Fox had also expanded their theatre holdings considerably. T h e independently owned first-run theatre was rap" T h e story of this period has been told in considerable detail in Β . B . Hampton'« A History of the Movies. A n entire chapter is devoted to the Battle for Theatres.

39

DEVELOPMENT

idly becoming extinct through absorption either by one of the major producer-distributors or one of the unaffiliated circuits. T h e latter were also growing steadily in strength and numbers. Scores, eventually hundreds, of exhibitors, some of w h o m had been in the industry since nickelodeon days, disappeared as the circuits proceeded on their f o r w a r d m a r c h . . . . Soon the Pacific slope, the R o c k y M o u n t a i n states, most of the C e n t r a l states, T e x a s , the southwest and the southeast, w e r e closed to independents; eastern Pennsylvania and D e l a w a r e w e r e controlled by the Stanley C o m p a n y ;

P a r a m o u n t shared N e w

England

with L o e w and P o l i ; L o e w , F o x , P a r a m o u n t , and First National controlled N e w Y o r k . L o e w and P a r a m o u n t had already penetrated O h i o and w e r e strong in C l e v e l a n d and C i n c i n n a t i ;

they w e r e m a k i n g al-

liances in M i c h i g a n . T h e r e remained N e w J e r s e y , M a r y l a n d , the D i s trict of C o l u m b i a and a f e w sections scattered throughout other states that had not come under the domination of Z u k o r , L o e w , First

Na-

tional and their a l l i e s . "

Thus the most important present-day characteristics of the industry were already indicated by 1923. Further development merely gave substance to the skeleton structure. There were several completely integrated units with national systems of distribution and important theatre holdings; there were powerful unaffiliated theatre chains counterposed to the strength of the majors; there were numerous individual theatre operators competing with the chains for both product and patronage; the first-run theatres, already largely preempted by the chains, were clearly established as the site of power in the market. Paramount, First National, Loew's, and Fox were engaged in production, distribution, and exhibition, but not with equal strength in each activity. Paramount dominated production and was becoming increasingly important in exhibition. First National's strength was in its large number of theatres and its volume buying power; Loew's, in the quality of its relatively small theatre chain. Still to appear on the scene were two more major companies, Warner Brothers and R.K.O. Their story is tied up with the development of sound and belongs to another era. P R E P A R A T I O N FOR T H E ADVENT OF SOUND, 1 ^ 2 ^ - 2 6

T h e brief period between 1923 and 1926 was relatively quiet for the motion picture industry, characterized chiefly by the steady 41

B. B. Hampton, of. cit., pp. 2 7 4 - 7 5 .

MOTION PICTURE INDUSTRY growth of theatre chains. Adolph Zukor was the unquestioned head of the industry, his Paramount-Famous Players-Lasky Corporation the most powerful group in motion pictures. The status of the other industrial leaders at the time has been described as follows: Marcus L o e w and William F o x were important personages in movie matters, standing next to Zukor, but Loew had been relaxing his driving urge for several years, enjoying the fruits of his prosperous business, and . . . F o x had not yet acquired the . . . theatre properties that were to increase his stature so mightily by 1 9 2 9 . Laemmle and Universal were active and prosperous, but were definitely in the second flight. L o e w , Fox, and First National were the only competitors worthy of Zukor's attention in the spring of 1 9 2 6 . A few smaller specialized companies were operating successfully, but there seemed to be nothing in the industry that could seriously annoy Paramount."

First National was then successfully disposed of by Zukor. H e simply bought out the individual members of the combine until most of the strongest units were absorbed and the company disintegrated from within. The culmination of this policy was reached with the purchase of a controlling interest in the Balaban and Katz theatre chain of Chicago. This group, the foremost exhibitors in First National, had aggressively advocated expansion of the company into a fully integrated unit on an effective level with Paramount. When Sam Katz, the guiding spirit of this movement, went over to Paramount, the whole scheme quietly collapsed; most of the units which had considered participating in the expansion were acquired by Paramount. 45 The Warner brothers were then in a precarious position. They had grown from nickelodeon operators to fairly good film producers. They had also built up their own system of national distribution through a chain of states-right exchanges. Their problem, however, was the constantly increasing difficulty of obtaining releases in first-run theatres plus the growing reluctance of financial sources to supply production funds to the theatre-less independents. A s theatre lines grew tighter and tighter, and one company after another disappeared from production and distribution because of in44

B. B. Hampton, o f . cit., p. 363. " Ibidpp. 363-64.

DEVELOPMENT

41

ability to obtain first runs, the condition of the Warners reached its most acute stage. . . . [They] were making fairly good pictures but inch by inch they were slipping down hill because of insufficient theatre connections. Apparently they were destined to go the way of the great majority of the fighting army that had passed out of the industry.4" That they survived is a tribute to their courage and imagination. It was largely the Warner brothers who were responsible for the commercial development of sound in films. In the process of promoting sound, they broke through into the ranks of the major companies where they have remained ever since. Merely the lull that precedes the storm, 1926 marked the end of an era in motion picture history. T h e coming of sound to films caused repercussions in the structure and finances of the industry that quite overshadowed the technological aspects. Although reliable figures are lacking, it appears that 1926 was characterized by a halt in the steady progress of the popularity of the movies. Like many other young industries, a slackening in the rate of growth is regarded with apprehension by its leaders, even though the general level of operations may still be favorable. Competition from radio was beginning to make itself felt. Movie audiences showed signs of developing a disconcerting discrimination. Good pictures did exceedingly well; run-of-the-mill product was received with a distinct lack of enthusiasm. Industry leaders were disturbed; lengthy conferences were held on the subject of what to do about the declining attendance. The consensus was that theatre expansion had been too rapid. This expansion was part of the general real-estate speculation of the time since theatres were usually part of larger building units containing offices, stores, etc. Consequently, many districts—chiefly those in which the real-estate boom was most hectic—were "over-seated." Competition between theatres for patronage took the form of offering additional attractions, i.e., expensive vaudeville and orchestras in addition to the film. The costs of theatre operation rose substantially and were reflected in higher admission prices. (At another and later day, confronted with a decline in attendance, theatre operators met the problem with double features, give-aways of dishes, refrigerators, and Bingo.) Higher admission prices, in "ibid., pp. 381-82.

42

MOTION PICTURE INDUSTRY

turn, acted further to depress movie attendance and a general feeling of alarm spread throughout the industry. SOUND,

1927-29

It was at this time that the Warner brothers, faced with extinction as their films disappeared from the first-run theatres, seized upon talking pictures as the life-saving straw. A l l the other major companies, except Fox, had seen and rejected the Bell Telephone Company experiments with sound. Sam Warner conducted extensive research and experiments to make the basic device practicable, quieting the kleig lights and the camera and adapting the synchronizing technique to studio conditions. H e worked together with the Telephone Company's engineers and its manufacturing subsidiary, Western Electric Company. On the strength of exclusive licensing rights given their subsidiary, Vitaphone Corporation, the Warners invested approximately $800,000 in the development of sound. Until then, the major companies maintained that motion picture audiences would never tolerate the disturbing raucous sound of talking pictures. Like the patent trust in its day, they operated on the theory of letting well enough alone. Except for William Fox, the majors scorned the whole idea. Originally, the Telephone Company gave the Warners exclusive distribution rights to all sound equipment manufactured by it.47 However, this arrangement was not destined to last. The instructive story of what happened between the Warner brothers and the Telephone Company need be told here in summary form only. In essence, this is what occurred: Vitaphone (Warner Brothers) originally had an exclusive license to issue sublicenses for the use of sound equipment. The Fox interests received one such license. The other major producers, however, decided in February of 1927 to postpone action on the introduction of sound for a year unless negotiations were collectively conducted.48 When this happened it appeared that the Western Electric attempt to promote its " R e p o r t of the Federal Communications Commission on the Investigation the Telephone

Industry

in the United

of

States, House Document No. 340, 1939,

p. 402. " T h e companies were : Paramount-Famous Players-Lasky Corporation, First National Pictures, United Artists Corporation, Universal Pictures Corporation, and M e t r o - G o l d w y n Pictures Corporation. Ibid., p. 402 n. 9.

DEVELOPMENT

43

equipment through an outside middleman might be blocked. It was decided to operate directly rather than through a motion picture company. Consequently, Electrical Research Products, Inc., was incorporated at the end of 1926 as a wholly-owned subsidiary of Western Electric Company for the exploitation of commercial fields outside the telephone business. E.R.P.I.'s principal activity has been the granting of licenses and the furnishing of equipment in connection with motion pictures. One of its first official acts was abrogation of the exclusive contract given Vitaphone and restoration to E . R . P . I . of complete distribution and servicing functions. Vitaphone was reduced to the status of the other licensees, which now included all the rest of the industry. Unwilling as they had been to accept licenses from their competitor, Vitaphone, the large majors now proved eager customers for the Telephone Company, agreeing to install Western Electric reproducing equipment in all theatres under their control or in which they had an interest. In other words, they undertook to use not only Western Electric recording devices but also the reproducing machinery, thereby committing the vast theatre market controlled by them. Within a year, the Telephone Company had secured exclusive contracts with 90 per cent of the film industry." T h e Telephone Company's relationship to the motion picture industry, it should be noted, greatly resembled the Motion Picture Patents Company's method of operations. Because of the strength of its position (there was no effective competition at the time — R . C . A . had sound devices but only a rudimentary organization for manufacturing and distribution), it was able to include provisions in its contracts with both exhibitors and producers which secured its hold on the market. Among the most important provisions were the following: ( 1 ) those which prohibited interchangeability, i.e., films produced with Western Electric sound equipment could be exhibited only with Western Electric reproduction apparatus; (2) those which required that royalties must be paid not only for the use of Western Electric equipment but also for sound records made by any patent or embodying any of the inventions under which licenses were granted by E . R . P . I . to its licensees ; this, in effect, called for double royalties as a penalty '

"ibid., p. 402.

44

MOTION PICTURE

INDUSTRY

for the use of alternative systems of sound recording ; ( 3 ) the provision that all servicing of equipment and supply of repair and replacement parts be done exclusively by E.R.P.I. 5 0 Not until 1935, when R . C . A . threatened litigation and anti-trust action did the Telephone Company group waive the additional royalties collected from producers using other than E . R . P . I . equipment. T h e similarity between these provisions and the restrictive practices of the patents trust outlined earlier in this book is apparent. One important difference exists, however ; whereas the patents trust had been obliged to enter the production and distribution of films in order to create a market for its equipment, the Telephone Company found a market ready at hand and consequently has rarely found it necessary to take a more direct part in the motion picture industry itself. By the time the Radio Corporation of America came on the scene with its rival equipment, this was no longer the case. T h e market for sound equipment was virtually closed to any but the Telephone Company. R.C.A., therefore, had to employ different tactics if it wished to share the market. Rapid though the development of sound had been, there was a period of approximately a year during which the Warners and Fox enjoyed the benefits of being first in the field. Not until the enormous success of The Jazz Singer, produced by Warners in 1927, did the other major companies reluctantly concede that sound was here to stay. In the year during which the Warners were the exclusive agents for sound, they hastily made deals with the theatre-owning majors. T h e first-run screens, almost entirely closed to them, became once more accessible in exchange for the right to use Vitaphone and Western Electric equipment. 51 This was fine for the Warners but not entirely satisfactory to the Telephone Company whose chief interest then, as now, was in the sale of sound equipment. T h e telephone group feared, among other things, that the majors might decide collectively to limit sound films to their own theatres, thereby achieving an immeasurable superiority over competing theatres but also seriously limiting the market for the product of the Telephone Company. Given access to the better theatres, Warner Brothers profited hugely from its talking " T h e Federal Communications Commission, of. " B . B. Hampton, of. cit., p. 389.

cit., p. 406.

DEVELOPMENT

45

pictures. The first all-sound feature, The Jazz Singer, cost $500,000 and grossed $2.5 million. T h e industry agreed that this was remarkable. With their advantageous start in the production of talking pictures, Warner Brothers converted the losses of the period between 1926 and 1928 into a profit of $17 million in 1929. No longer was it necessary for them to beg for funds with which to finance their pictures. Waddill Catchings of Goldman, Sachs took over their financing, with results which were spectacular even for a spectacular industry. In 1928, Warner Brothers was a $16 milIon corporation j within two years, their assets totalled $230 million. This two-year period was devoted to a tremendous theatrebuying campaign. The Warners compensated with enthusiasm for their tardy arrival on the scene. Their theatre acquisitions were made possible by the increased speculative value of Warner Brothers' common stock which rose from $39 to $139 a share in the spring of 1929. Almost all the common stock had been held by Renraw, the Warner Brothers' personal holding company. This stock was sold by them and the proceeds lent to the company. In 1929, the loans amounted to $5 million. On the strength of the greatly increased value of the stock, Waddill Catchings engineered the merger which placed Warner Brothers in the ranks of the majors once and for all. The merger was with the Stanley Company, one of the most powerful theatre circuits in the country. It then controlled approximately 250 theatres as well as a third of First National Pictures, a first-rate producing company. Having these, the Warners were able to obtain cash from the banks with which to purchase an additional third of First National. Complete ownership of the latter was secured later through the purchase of William Fox's shares for $10 million. The principal hurdle confronting the Warner brothers in their drive for the status of a major company had been the acquisition of theatres. Once this was accomplished, the remainder was relatively simple. T h e stock market of 1928 and 1929 readily absorbed debentures and a great deal of common stock.52 Funds thus ob" During 1 9 1 6 and 1927 motion picture securities to the value of $200 million were financed through W a l l and L a Salle Street investment houses. Motion pic-

46

MOTION PICTURE

INDUSTRY

tained were used to increase their theatre holdings. During the first half of 1930, an average of more than one new theatre a day was acquired, until their holdings amounted to more than five hundred theatres. T h u s it came about that Warner Brothers ceased to be precarious independent producers and became one of the largest companies in the business. H a d it not been for their precocious promotion of sound, theirs might well have been the fate of the in-again, out-again inmates of Poverty Row where the small independent makers of films carry on. R.C.A.'s attempt to obtain access to the market for sound equipment involved the creation of another major motion picture company, Radio-Keith-Orpheum. If American Telephone & Telegraph had not attempted to secure exclusive and permanent control of the market for sound apparatus, R . K . O . would not today be in existence. Radio Corporation of America had perfected a system of sound recording and reproduction called Photophone. There were no mechanical reasons why films recorded by the Western Electric system could not have been reproduced with Photophone equipment, but the exclusive licensing arrangements on which the Telephone Company had originally insisted meant virtual exclusion of the R . C . A . product from the market—this, despite the fact that both R . C . A . and A . T . & T . were parties to the 1926 cross-licensing agreement which permitted each party to manufacture, use, lease, and sell apparatus made under the patents of either. 53 Pressure was exerted upon the Telephone Company by both the R . C . A . group and theatre owners to modify its agreements with exhibitors. A n increasing number of sound films made with equipment other than the Telephone Company's appeared and exhibitors were eager to use them. R . C . A . went so far as to threaten suit against the Bell system, writing to them as follows regarding the non-interchangeability provision of their license agreements: " W e regard such practices as unlawful, but before instituting legal proceedings feel that it is only neighborly that we should ascertain at ture securities were sold to the public in large quantities. In 1927 sixty thousand individual shareholders held the seven motion picture issues traded in on the New Y o r k Stock Exchange at that time. See The Motion Picture Industry as a Basis for Bond Financing, published by Halsey, Stuart & Co., 1927, p. 22. ™ Federal Communications Commission, of.

cit., p. 405.

DEVELOPMENT headquarters

whether

our information

47

is c o r r e c t . " "

This

letter

r e s u l t e d in a c o n f e r e n c e at w h i c h t h e B e l l interests a g r e e d

that

producer-licensees c o u l d distribute t h e i r p r o d u c t f o r r e p r o d u c t i o n on a n y e q u i p m e n t w h i c h g a v e r e a s o n a b l y satisfactory results.

By

this t i m e , h o w e v e r , m o s t of t h e m a j o r c o m p a n i e s w e r e t i e d to teny e a r a g r e e m e n t s w i t h the T e l e p h o n e C o m p a n y , a n d R . C . A .

had

no satisfactory outlet f o r its P h o t o p h o n e . C o n s e q u e n t l y , t h e R a d i o g r o u p chose to create an outlet b y f o r m i n g a f u l l y i n t e g r a t e d m o t i o n picture c o m p a n y , R . K . O .

Corporation."

H a v i n g o r i g i n a t e d in circumstances so d i f f e r e n t f r o m t h e o t h e r majors,

R.K.O.

Telephone industry

naturally

Company's

developed

principal

has been in r e v e n u e s

reproducing

apparatus;

along

interest from

consequently,

in

d i f f e r e n t lines. the

t h e sale of no attempt

motion

The

picture

recording was

made

and to

b u i l d u p an equity interest in the i n d u s t r y itself. 5 8 T h e R a d i o g r o u p , on t h e o t h e r h a n d , b e c a m e an a c t i v e , a g g r e s s i v e f o r c e in p r o d u c t i o n , distribution, a n d

exhibition.

" Ibid., p. 405. Although not directly part of the history of the motion picture industry, later developments in the field of sound equipment are of interest. From 1 9 1 8 to 1 9 3 5 , A . T . & T . had virtually complete control of the market, except for the R.K.O. group. In 1 9 3 5 , R.C.A. threatened litigation charging violation of the Sherman Anti-trust and Clayton acts, and demanding that the Telephone Company refrain from collecting royalties from concerns using other than A . T . & T . equipment. The two companies reached an agreement on this point. Immediately thereafter, Warner Brothers, Fox Film Company, and Columbia Pictures installed R . C . A . recording machinery to supplement their Western Electric equipment. At the present time, the market for sound recording and reproducing apparatus is divided almost evenly between R.C.A. and A . T . & T . Four of the seven major motion picture companies have both sound systems in their studios. Loew's, Paramount, and Universal still use the A . T . & T . equipment exclusively. Once the picture companies were given some choice as to the brand of equipment they might use, R . C . A . made rapid progress. For one thing, the studios welcomed an additional source of supply. For another, R.C.A. offered much better terms than A . T . & T . Studios using the Telephone Company equipment paid royalties as well as a fee for the privilege of leasing the equipment. When R . C . A . entered the picture, it required merely royalties, dispensing with the lease price. Within a period of two years, R.C.A. had charged off the costs of the equipment and obtained a very secure place in the industry. Today, R.C.A. claims 60 per cent of the total number of theatres as its customers. The Telephone Company has given indications of retiring from active competition with R . C . A . The Federal Communications Commission, of. cit., pp. 4 0 1 - 1 j . " Ibid., p. 4 1 0 .

48

M O T I O N PICTURE INDUSTRY

The history of R.K.O. might well be called, " H o w to Become a Major Motion Picture Company, Even Though Late." The process was as follows: First, a holding company, R.K.O. Corporation, was set up. It functioned as the parent organization for theatre and production subsidiaries in which it held stock. Control was divided originally among three groups (in effect, really only two): Radio Corporation of America, Atlas Corporation, and Rockefeller Center, Inc. R.C.A. provided R.K.O. Corporation with Photophone facilities. A producing organization was acquired through the purchase of F.B.O. Productions, Inc.—the name of which was changed to R.K.O. Radio Pictures, Inc. Very soon thereafter a controlling interest was acquired in one of the country's largest theatre chains, Keith-Albee-Orpheum. Additional theatres were purchased until a total of approximately two hundred was reached. Management control of R.K.O. Corporation was initially in the hands of the R.C.A. group." The chairman of the board of directors was a vice-president of R.C.A., and a number of other prominent officials of this group were board members. Unlike most of the other major companies, R.K.O. Corporation was run from the start primarily by financial men rather than the old-line showmen.58 In the first year of its existence, R.K.O. was hailed in some quarters as signifying definite changes in the type of executive management. It was expected that "more of a system" Securities & Exchange Commission, Registration Statement of R . K . O . C o r poration, J u n e , 1 9 4 0 . R . C . A . and Atlas Corp. together held j 8 per cent of the total preferred. T h e i r holdings of the common stock plus those of Rockefeller Center, Inc., amounted to 58 per cent of the total outstanding. " T h e business experience of R . K . O . ' s principal executive officers is described in its registration statement with the Securities & Exchange Commission as f o l l o w s : ι . Richard C. Patterson, chairman of the board of directors. Financial. N o previous motion picture experience. 2. Peter Rathvon, chairman, executive committee. Atlas Corporation. No previous motion picture experience. 3. George Schaefer, president. Formerly vice-president and general manager of Paramount. P r i o r to M a r c h 1 9 3 6 , a vice-president and general manager of United Artists. E n g a g e d primarily in distribution and marketing. 4. Ned E . Depinet, vice-president. In charge of distribution f o r R . K . O . f o r the past j years. j . William M a l l a r d , secretary. Independent consultant on reorganization eng a g e d by Atlas Corporation.

DEVELOPMENT

49

atized method [was] in prospect for governing the whole business of producing, distributing, and exhibiting pictures.'"" The manner in which this worked out probably disappointed those who looked for substantial improvements in the operating efficiency of a company dominated by men of unquestioned reputability in other fields (although it should be remembered that it began functioning just at the start of the Great Depression). In 1 9 3 1 , after two years of business, it was reorganized. Six out of the twelve years of its existence were characterized by deficits; in 1933, the fifth year of its existence, the company went into receivership, followed by bankruptcy in 1934 from which it emerged in June of 1940j it has never paid any dividends; its relative proportion of the industry's volume of business has declined; its history has been marked by almost continuous internal wrangling between the producing group and the theatre-operating units, with the latter objecting vehemently to subsidizing unprofitable production activities; it has experienced great instability in its executive personnel with a most disruptive turnover. However, R . K . O . Corporation is still a force to be reckoned with in the industry. It has some of the best theaters in the country, particularly in and around New York City. It receives currently about 1 0 per cent of the total volume of business of the eight major companies, ranking fifth in size on this basis and fourth largest in terms of asset value. T h e introduction of sound was thus directly responsible for the emergence of two additional major companies, with a substantial change in the existing balance of power. Warner Brothers became one of the largest theatre owners, second only to Paramount in the number of theatres owned. R.K.O., by virtue of its operation of the two Radio City theatres, became an important competitive factor in New York City, the source of approximately 14 per cent of total film rentals. Arriving relatively late on the scene, the two companies had much in common and have tended to cooperate in various ways. Another, and by no means unimportant, consequence of the introduction of sound was the first entry on a large scale of financial interests heretofore negligible in the industry. Until 1919, the

"Howard T. Lewis, of. cit., p. 26.

5o

MOTION PICTURE INDUSTRY

industry had usually financed itself out of earnings. As described earlier, Zukor's expansion in the theatre field in 1919 was effected through a $ 1 0 million issue of preferred stock floated by Kuhn, Loeb and Company. Prior to this time there had been virtually no public financing by film companies except for Triangle and World Films, with both instances resulting in loss to the investors.60 Between 1919 and 1927 there were occasional excursions into the stock market for funds by various producing groups, but on a very minor scale. Independents had experienced great difficulty in securing funds for production, being forced at times to pay as much as 40 per cent interest on short-term loans.61 To some extent they were financed by distributors and exhibitor combines, but always at considerable expense. Not until nearly 1926, when the acquisition of theatres was in full swing, did the banks and investment houses regard the industry as a legitimate field of activity. Theatre properties, unlike films, presented the familiar aspect of real estate, something against which bonds could be issued, and as such seemed reasonably good investment risks. So good did they seem at one time that when a relatively small producing company like Warner Brothers with assets of $16 million in 1928 embarked on a program of theatre acquisition, it grew, through bond issuance, within a scant two years into a $230 million corporation. It was, of course, most fortunately timed from the point of view of the Warners. Probably at no time before or since the 1928-29 era could this miracle of expansion have taken place. Not all instances worked out so successfully, however. William Fox is a case in point of the pioneer movie magnate whose dream of expansion proved fatal to his own position within the industry. Looking back on the episode now, Mr. Fox must be a somewhat bewildered man, for his plan had overlooked few humanly predictable factors. He had good theatres and a competent producing unit. H e possessed the American rights to the Tri-Ergon sound patents (those vised in the continental Klangfilm system), and in every legal battle until 1935 his right to them was upheld by the courts. This was probably fatal to his plans. As long as he held these patent rights, he presented a threat, or at least a barrier, to " Β. B. Hampton, of. cit., p. 243. " "Warner Brother», Inc.," Fortune Magazine, December 1937, p. 1 1 2 .

DEVELOPMENT the Telephone Company, since his vast theatre holdings were beyond the reach of the Bell system. Perhaps then he should not have borrowed $ 1 5 million from the telephone group and a similar amount from the investment firm of Halsey, Stuart. Fox intended these loans to finance a three-way expansion: the purchase of an important theatre circuit in New England (the Poli group), acquisition of a controlling block of Loew's stock, and half the voting stock of the holding company which controlled the British motion picture firm, Gaumont-British. H a d these plans been carried out, the motion picture industry might today consist substantially of Fox interests, but several factors intervened. In the first place, there was the stock market crash. Fox had planned to refinance his loans by the issuance of stock. The loans came due between the fall of 1929 and spring of 1930. When the time came, Fox learned that surrender of his control over his company was a condition of any refinancing by his creditors. Frantically he tried to get funds elsewhere, but no other banking group was willing to array itself against the interests allied with the Telephone Company. His situation was further complicated by the filing of an anti-trust action aimed at the proposed merger between the Loew interests and Fox ; the merger, needless to say, did not take place. T h e matter was resolved by the sale of Fox's voting stock for $ 1 8 million to Harley L . Clarke, a Chicago associate of the Insulls in middle-western utilities and a manufacturer of electrical equipment. Clarke replaced Fox briefly as president of the company. One of the first acts of the new controlling group was a new licensing arrangement with the Telephone Company interests for the use of their sound equipment, rejecting the free use of the TriErgon patents offered by Fox. M r . Fox is no longer active in the motion picture industry. The largest single stockholder in the Fox companies today is Chase National Bank. But this does not end the story of the changes wrought in the industry by the coming of sound. In the realm of exhibition there were also repercussions. Faced suddenly with the problem of financing and installing the strange new equipment, many of the smaller independent exhibitors were thrown into utter confusion. Their position with respect to the large theatre circuits was rendered even more disadvantageous than usual by the ability of the latter to

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DEVELOPMENT

53

spread the costs of buying and maintaining the sound equipment over a large number of theatres. M a n y of the independents simply gave up and sold out to the circuits. Concentration of ownership of theaters proceeded rapidly; both affiliated circuits and independent chains increased their holdings at the expense of the independents. At the close of 1930, the five majors owned more theatres than they ever had before or since. Shortly thereafter, they may have regretted their omnivorous absorption of real estate. A t the time, however, with the new impetus given by sound, the earnings of their theatres were record-breaking. T h e widespread popularity of talkies was reflected in the earnings of the f e w large corporations remaining in business at the close of 1 9 2 9 . Paramount's balance-sheet for that year showed total assets of $230,000,000 and net income of $15,500,000. F o x ' s profits amounted to $ 1 3 , 5 0 0 , 0 0 0 and L o e w ' s to about $12,000,000. W a r n e r Brothers' net income . . . was $17,000,000 and R K O ' s $2,000,000. T h e total commerce of the American film industry was probably in excess of a billion and a half dollars a year; some estimates placed it above two billion."

W i t h the exception of Loew's, none of the companies named above ever repeated the earnings record of that year. In fact few even approached the performance of 1929 until the war boom of 1942. Table I shows the relative stability in recent years of the gross volume of business. " Β. B. Hampton, of. cit., p. 408.

II T H E

M O T I O N

P I C T U R E

I N D U S T R Y

T O D A Y

SOME QUESTIONS TO BE ANSWERED

glamour of Hollywood, the crux of the motion picture industry is the theatre. It is in the brick-and-mortar branch of the industry that most of the money is invested and made. Without understanding this fact, devotees of the film are likely to remain forever baffled by some characteristics of an industry which is in turn exciting, perplexing, and irritating. Emphasis on the economic role of the theatre is not meant to belittle the film itself. Obviously it is the film which draws people to the theatre. Nevertheless, the structure of the motion picture industry (a large inverted pyramid, top-heavy with real estate and theatres, resting on a narrow base of the intangibles which constitute films) has had far-reaching effects on the film itself.

DESPITE THE

This may seem farfetched. Most writers on the motion picture industry rather studiously avoid its duller aspects, i.e., those dealing with the trade practices, financial policies, intercorporate relationships, etc. But the facts indicate clearly that there is a connection between the form taken by the film and the mechanics of the business, even if the connection is somewhat obscure. It is true, as one student has pointed out, that "the issues involved are not peculiar to the motion picture history." 1 Despite this lack of uniqueness, the problems of organization, intercorporate relationships, and financial policy in the motion picture industry deserve more than passing mention. The attitude of the industry itself toward discussion of these problems has not been completely candid.* A great reluctance to disclose factual information with respect to its operations has unfortunately characterized most of the leaders of the industry. Among the many questions which lack a reliable answer are: How many people attend movies? How often? How large is the 1

Howard T . Lewis, The Motion Picture Industry, p. 13. Lewis points out that the industry has made no real attempt to give the public any thorough-going, unbiased discussion of its organization, operation, or profits and that such information as has been given has been frankly biased and intended primarily to promote friendly public relations. Ibid., Introduction, p. x. 1

54

THE INDUSTRY

TODAY

55

industry in terms of invested capital and volume of business? W h a t is the annual income of all theatres? H o w many theatres are owned by what groups? W h a t type of film is most uniformly successful? W h a t is the relationship between the cost of films and their drawing power? Little is known of the industry's place in the broader pattern of American industry, or its method of solving the specialized problems of commercial entertainment. T h e r e are few reliable statistics available (and of these none is compiled by the industry itself) with regard to these questions. W H A T IS T H E E C O N O M I C I M P O R T A N C E OF T H E

INDUSTRY?

There are various ways of measuring the role of an industry in our economy. T h e indices most commonly used are: ( i ) volume of business, (2) invested capital, and ( 3 ) number of employees. T h e value of such criteria is limited, since comparison between all types of industries produces results too general to be significant. However, in the case of the motion picture industry, these indices are valuable as a means of delimiting its economic importance and recording some basic information regarding its size. This question assumes importance partly because the industry itself seems to be under some misapprehension with respect to the answer. It may well be true, as W i l l H a y s frequently says, that the motion picture is a great social necessity, an integral part of human life in the whole civilized world, 3 but this value is in no way minimized by an accurate statement as to the industry's economic importance. "Standing well among the first ten (or the first four) industries in this country," 4 has so often prefaced the remarks of industry spokesmen as to indicate that the facts are not generally known. H e r e , then, let it be noted that in so far as size of industry is measured by dollar volume of business, the motion picture industry is not only not among the first ten, it is not even among the first forty. It is surpassed by such industries, to name only a few, as laundries, hotels, restaurants, loan companies, investment trusts, liquor, tobacco, and musical instruments. Table I I shows the relative importance of the various industries with respect to volume of business. ' W i l l Hays, See and Hear, p. 4. 'Ibid., p. 34.

MOTION PICTURE

56

INDUSTRY

Viewed thus as a part of our national economy, the motion picture industry is not a major bulwark. There are forty-four other industries, out of the total of ninety-four industrial groups enumerated by Statistics of Income (Bureau of Internal Revenue), that reported a larger gross income in 1 9 3 7 than did the combined motion picture producing and exhibition corporations. In terms of employment, the motion picture industry accounts for somewhat fewer than 200,OCX) persons in all three branches of production, distribution, and exhibition, as Table I I I shows. TABLE

II

R E P O R T E D V O L U M E OF BUSINESS OF M O T I O N P I C T U R E AS COMPARED W I T H

CORPORATIONS IN O T H E R

CORPORATIONS

INDUSTRIES

•937* (000 omitted) Rank I 2

3 4 5 6 7 8

9 IO 1 I 12

3 14 15

1

1 6

17 18

»9 20 2 I 22

23 24 15 26

17 28

»9

Industry Wholesale Trade Retail Trade Miscellaneous Wholesale & Retail Trade Petroleum & Mineral Oil Producta Motor Vehicles Steam Railroads Packing House Products Iron and Steel Electric Light & Power Companies Domestic Service (Laundries, Hotels, etc.) Printing and Publishing Allied Chemical Substances Miscellaneous Metal Products, etc. Clothing and Apparel Miscellaneous Food Products Investment Trusts Paper, Pulp, and Products Miscellaneous Insurance Miscellaneous Machinery Bakery and Confectionery Products Telephone and Telegraph Companies Stone, Clay, and Glass Products Miscellaneous Textiles Liquors Hardware, Tools, etc. Musical and Scientific Instruments Tobacco Products Electrical Machinery & Equipment Miscellaneous Construction (Underground)

Gross

Incomeb

$ 1 8 , 7 3 1 , 1 6 1

i7>'9°>33° 8,468,263 5,286,864

4,75 I ,795 4>6iJi9 I 7 4,397,336 4 , 2 0 9 , 1 3 9

2

>747>44°

2,5$J,8O8 2,438,222

i»4>i.î79 ».376,454 I)149>699 2 , 1 3 6 , 4 2 7 1,944,107 1,888,069

1.747.987 1,653,636 1,582,918

'.557.799 >,535,949 1.475,874 1,396,400 1,355,201 1,301,482

. 49,744

I 1

1,240,532

THE

INDUSTRY

TODAY

1,193,868

Mill Products Chemicals Proper Oil and Gas Cartage and Storage Cotton Goods Real Estate and Realty Holdings Metal Building Material and Supplies Building and Construction Metal Mining Miscellaneous Wood Products Life Insurance Companies Saw Mill and Planing Mill Products Canned Products Bituminous Coal Loan Companies MOTION PICTURE CORPORATIONS'

3° 31

31 33 34 3S 36 37 3« 39 40

4> 4* 43 44 45

57 «ι°ί 3.440 1,027,063 1

>OI5>794

1,024,278 1,020,921 1,012,245 1,004,374

999.5S* 990,834 961,410 939,262

93 2 ,5S 6 928,042 885,822 81 8 , 3 1 8

* Bureau of Internal Revenue, Statistics of Income, 1937. b Total income of corporations reporting net income and of those reporting deficits. 0 Includes both producing and theatre corporations. TABLE

III

N U M B E R OF PERSONS EMPLOYED IN T H E MOTION PICTURE INDUSTRY

•939* Average Number of Wage-earners Production Exhibition Distribution Total

Salaried Officers and Employees

Total

24,052

9>63S

33.687

125,684

6,717

132,401

">33i 161,068

_

16,352

b

ι',33» 177,410

* U. S. Bureau of the Census, Sixteenth Census of the United States, ¡940. Not given.

b

W h e n motion picture corporations are compared with those in other branches of the entertainment field, another story is presented. T h e entire field of commercial amusement, including billiard halls, bowling alleys, dance halls, etc., is dominated by the motion picture industry. 5 Motion picture corporations, constituting 4 4 per cent of "In 1938, amusement corporations constituted roughly 2 per cent of the entire number of active corporations filing income tax returns. The gross income of all amusement corporations was slightly over $ 1 billion, or less than 1 per cent of the total gross income ($110 billion) of all corporations filing returns. Net income (less deficit) of amusement corporations was $52 million. Bureau of Internal Revenue, Statistics of Income, 1939.

58

MOTION PICTURE INDUSTRY

the total number of amusement corporations in 1937, accounted for 78 per cent of the gross income and 92 per cent of the total net income of the group. This should prove what has long been suspected and probably needs little proof: that movies are the favorite form of entertainment for most Americans. P R O D U C T I O N VERSUS

EXHIBITION

F r o m the point of view of the movie-going public, one of the most important questions about the industry is: W h o decides what films are made; or as it is more commonly put, why are films what they are? From the industry's point of view, too, this question of the kind of product released is ultimately its most important single problem. Quality of product is increasingly vital now that the motion picture business is settling down into a semblance of middle age, devoid of the novelty appeal it formerly had. T h e answer to the question posed above is in the relationship between the various branches of the industry. By virtue of the division of labor within the business, film distributors and exhibitors are much more closely in touch with the movie-going public than are the producers, and they trade heavily on their advantageous positions. From their seat in the box office they announce that soand-so is "poison at the box office," that what the public wants is musicals or blood-and-thunder westerns, that English stars murder business, and that sophisticated farce comedies leave their audiences completely cold. Broadly speaking, and omitting the relatively unimportant independent producers, the relationship between the three branches of the industry may be described in two ways. First, there is the relationship between a major producer and theatre operators not affiliated with his company. Secondly, there is the relationship within a major company between the various departments of production, distribution, and exhibition. T h e intra-company relationship is the more important with respect to the kind of films made, since contact within the organization is much closer than contact between the unaffiliated exhibitors and producers. T h e unaffiliated exhibitors are not generally consulted by producers with respect to the nature of the films to be made. H o w e v e r , they occasionally make their views known through advertisements in the trade press and probably express their opinions quite freely in talking with the sales

THE INDUSTRY T O D A Y

59

representatives of the producers. Most of their arguments are ex post facto, however, and affect the future line-up of product negatively, or not at all. On the other hand, the sales and theatre people within the integrated companies are extremely important in determining the type of picture to be made, the number of pictures in each cost class, the type of story, etc. It is not intended to give here a detailed account of the manner in which these decisions are reached, but in general the procedure is as follows: The person in charge of distribution announces the number of films wanted for the following season. This figure is presumably based on some estimate of what can be profitably sold, but it is also related to the needs of the company's own theatres for product. The chief executive announces the amount of money available for the total product. The amounts vary among the individual companies from $7 or $8 million for the smaller companies to $28 million for Loew's. The next step is the division and allocation of the total amount to groups of pictures. The names given these classes vary, but the grouping is in accordance with the quality to be aimed at as defined by the amount of money to be spent. That is, there are the "specials" and the more ordinary "program" features. There are " A " pictures and " B " pictures. The latter are designed, more or less frankly, to meet the need for the lesser half of the double-feature program. Once the allocation of production funds is made, the next step is that of determining the budgets for the individual pictures within each group. T h e amount spent on a given picture is presumably related in some way to the anticipated drawing power of the particular combination of talent and production values planned for the given picture.® After the detailed budget is worked out, a tentative release schedule is prepared for the use of the sales force (distribution). From this point on the problems belong primarily to the production department. Note what this cursory outline reveals. Company executives, i.e., * It is c l a i m e d by people w i t h i n the industry that an accurate estimate can be made of w h a t any g i v e n picture w i l l gross if the talent is k n o w n . T h i s seems d o u b t f u l in v i e w of the g r e a t n u m b e r of u n k n o w n s a f f e c t i n g p u b l i c taste f o r

films,

but some students of the industry a p p a r e n t l y accept this hypothesis. See, f o r e x a m p l e , H o w a r d T . L e w i s , of.

cit., p. 39, w h e r e he states that the b u d g e t s of indi-

v i d u a l pictures w e r e based on a statistical k n o w l e d g e of the s t a r r i n g artist's v a l u e as a b o x office attraction.

6o

MOTION PICTURE

INDUSTRY

theatre, sales, and production people, determine the following: the number of pictures to be made, the total amount of money to be spent, the distribution of the funds between the various classes of pictures, the budgets of the individual pictures, and the dates when the pictures are to be finished. It is not meant that all such issues are decided by ukase and handed down from the front office to the production staff. T h e interdepartmental conference technique is customary, with every department chief valiantly defending his own position. A t work are all the usual subterranean factors which determine where power ultimately rests. T h e r e are, however, certain objective factors which are present to some degree in each of the five large majors. These tend to give decisive policy-making power regarding the kind of films made to the groups farthest removed from production itself, i.e., the men in distribution and theatre management. T h e objective factors are found in a prosaic listing of the various sources of income to the five principal companies. In approximate order of importance, they are: ( i ) theatre admissions, ( 2 ) film rentals, ( 3 ) the sale of film accessories, and (4) dividends from affiliated companies. T h e relative importance of each source varies for the individual majors, but in almost every instance the chief single source of income is theatre admissions. Although there is an inseparable connection between the quality of films and company earnings from film rentals and theatres, the division of functions within the company structure operates to give the preponderance of power to those nearest the principal source of income, i.e., the theatres. Furthermore, the earning power of a given chain of theatres depends not so much upon the quality of films made by its parent company as on the quality of films in general. I f successful films are available, the dominant group of affiliated theatres in a given area generally has preferential access to them, regardless of which major produced them. In other words, the successful theatre operations of each of the majors depend largely on the return from the theatres. But successful theatre operation for a major company is not directly dependent on the quality of its own pictures, although this contributes of course. By virtue of the regional division of the theatre market, there is in effect a pooling of the product j the affiliated theatres in their separate areas have

THE INDUSTRY T O D A Y

61

access to the best pictures available. Consequently, competition in the production of pictures has no real parallel in the theatre organization. A good picture, i.e., one successful at the box office, redounds to the benefit of each of the theatre-owning majors since each shares in the box office. This interdependence seems a unique characteristic of the motion picture business. In other industries, an exceptionally good product is feared and disliked by other producers or sellers of similar goods. But of the small group of dominant movie companies, it is really true that the good of one is the good of all. T h e production and exhibition phases of the business behave toward each other like a chronically quarrelsome but firmly married couple and not without reason. T h e exhibitor group controls the purse-strings j it accounts for more than nine-tenths of the invested capital and approximately two-thirds of the industry's income. Nevertheless, it requires films. Consequently, the conflict between the two groups more nearly resembles a family quarrel than is ordinarily true of trade disputes, since the essential interdependence between production and exhibition is recognized by all. T o a theatre operator there is no substitute for "celluloid." Conversely, the producers of movies have no real alternative to the theatres as outlets for their product. T h e normal interdependency between supplier and customer is accentuated in the motion picture industry by the combination of functions within the same corporate framework. But difficulty results from the fact that while the selling of entertainment is a commercial process, making films is largely creative and artistic in nature. Movie-makers, like artists in other fields, are generally inclined to experiment with new techniques and are not above wanting to interpret or affect their surroundings. Exhibitors, on the other hand, may not know much about the art of the film, but they know what has been good box office before. Consequently, theirs is the conservative influence ; they are the traditionalists of the trade, exerting their influence in the direction of the safe-and-sound in film making. S T R U C T U R E OF T H E

INDUSTRY

According to Statistics of Income (published by the Bureau of Internal Revenue) in 1939 there were 3,163 corporations engaged

62

MOTION PICTURE INDUSTRY

in motion picture exhibition, as compared with 547 producing corporations. There are several unfortunate limitations to these data. In the first place, the number of theatre corporations is not an accurate index to the size of the theatre business because approximately 40 per cent of the total number of theatres operating in this country are unincorporated businesses.7 In the second place, the number of producing corporations obviously includes an overwhelming proportion of concerns engaged in making films not meant for the regular entertainment market. W e know from other sources that there are probably not more than a total of thirty companies actively engaged in producing for the theatres. The rest probably make commercial, educational, and industrial films. The estimate of thirty producing companies was derived from a count of motion picture production organizations listed in the Motion Picture Almanacy 1939-40. Allowing for understatement as to the number of theatres and gross exaggeration of the number of producing companies, we may estimate that the ratio of theatres to producing companies is approximately five hundred to one.8 (15,000 theatres—30 producing companies). In terms of the invested capital, the amounts represented by production, distribution, and exhibition are difiicult to ascertain because of the integrated nature of the major companies. Figures published by trade sources give the invested capital as follows: 9 Theatres Studios Distribution Total

$1,880,000,000 112,000,000

20,000,000 $2,012,000,000

These figures are manifestly implausible.10 The total assets re1

U. S. Department of Commerce, Bureau of the Census, Places of

Amusement,

'939· " A most important defect of Statistics of Income data on the motion picture industry arises out of the manner in which the corporations are classified as "producing" or "theatre." T h e classification is presumably based on the business activity which accounts for the greatest percentage of total receipts. However, investigation revealed that each of the five large major companies, several of which are known to derive the bulk of their revenue from exhibition, classed themselves as producing companies, thereby distorting the entire series by causing the figures on volume of business of the theatre corporations to be understated and accordingly overstating the volume of business of the producing corporations. T h e same objection must be made to the data of assets.

* Motion Picture Almanac, ¡g^g-jo. " T h e U. S. Department of Commerce, reprinting these figures in it» Motion

THE INDUSTRY

TODAY

63

ported by all producing, distribution, and theatre corporations filing income tax returns are under a billion dollars. 11 Even though this compilation does not include unincorporated businesses, it is unlikely that these are of sufficient size to account for the additional billion dollars claimed in the trade figures. It is very likely that the investment in theatres exceeds that of the studios and distribution companies by an amount even greater than is indicated by the industry's estimate, although even by this figure over 90 per cent of the total capital in the motion picture industry is in theatres. After all, the capital required for acquisition of production facilities is fractional as compared with the cost of a regional or national chain of theatres. When, in addition, it is recalled that the number of theatres exceeds the number of producing companies in the ratio of perhaps 500 to 1 , the differences in the amount of capital invested in each phase of the business are apparent. There is probably nothing unique in this ratio of retailers to producers, or in the manner in which the invested capital is distributed. Other industries undoubtedly present similar or even more extreme ratios. In the motion picture industry, however, the product is directly affected by this form of industrial organization. Not only is the theatre phase of the business vastly stronger in terms of size, number of units, and capital invested, but the five major producing companies are similarly constituted, i.e., they too have most of their capital invested in theatres which are the source of most of their income. This fact explains in part why the power to decide the nature of films to be made rests only incidentally in the producing division of the major companies. It might be objected that this argument applies, after all, to only five companies out of the entire industry. 12 These five, however, account for approximately 57 per cent of the total assets of all motion picture corporations, (including both theatre and producing Picture Bulletin (which, incidentally, is cited as a source by the official industry publications), remarks: " . . . the statistics quoted were prepared from statements by leaders of the motion picture industry, trade organizations, and the trade press. The Department of Commerce does not assume any responsibility for their accuracy." " U. S. Treasury, Bureau of Internal Revenue, Statistics of Income, Source Boot. 11 Loew's, Inc., Paramount Pictures, Warner Brothers, Twentieth Century-Fox, and RJC.O.

64

M O T I O N PICTURE INDUSTRY

concerns) and 45.6 per cent of the industry's total income from all sources." Indeed, their importance as film producers is even greater than either of these figures indicates, as will be demonstrated shortly. As exhibitors, their position is also very strong, with the result that policies adopted by them in either realm are likely to be industry wide. As a result of the dominance of the integrated companies, the structure of the motion picture industry cannot be described along simple functional lines of production, distribution, and exhibition. Each of the major companies is a replica of the industry in all its activities. In addition to the five majors, there are approximately six or seven producing-distributing concerns (principally Universal, Columbia, United Artists, Monogram, Republic, and Producers' Releasing Corporation) and a large number of exhibition companies. These, in turn, are divisible into two groups: the individually operated theatres and the chains of four or more theatres. The distribution of films is no longer important as an independent activity. All the major companies and most of the smaller producing concerns have their own distribution mechanisms. While recent figures on the total volume of business handled by all film exchanges are not available, the independent exchanges probably account for considerably less than 10 per cent of the entire volume of business. The product handled by the independent exchanges is not only insignificant with respect to volume but also with respect to the type of films distributed. Since almost any film regarded as having a reasonable chance of success in the lucrative theatre market will be distributed by one of the major companies, the films distributed by the independent exchanges are largely the serials, wild-west thrillers, and lurid sex dramas exhibited by that relatively small group of theatres which specializes in this line of product. THE

MAJORS

The best single source of information about the major motion picture companies is the Securities and Exchange Commission, with which registration statements and annual reports are filed.14 These " U. S. Treasury, Bureau of Internal Revenue, Statistics of Income, Source Book. " Unfortunately, the records of the S.E.C, do not make posible an industry-

THE INDUSTRY T O D A Y

65

provide considerably more factual data than have ever before been available to outsiders, making it possible to delineate the structure of the companies and their relationship to each other with respect to size, volume of business, their financial policies, profitability, executive remuneration. Examination of the list of subsidiaries reported by any one of the five large companies indicates that the production of films is merely one of many activities and not necessarily the most important. Warner Brothers Pictures, Inc., for example, lists 108 subsidiaries. They include the following: a film laboratory, Brunswick Radio Corporation, and a radio manufacturing subsidiary, a lithographing concern, a concern that makes theatre accessories, 10 music publishing houses, real estate companies, booking agencies, several broadcasting corporations, a company called Warner Brothers Cellulose Products, Inc., theatre management companies, recording studios, and a television company—all this in addition to a filmproducing unit and numerous theatre subsidiaries, controlling approximately 507 theatres. Loew's, Inc., consists of approximately 73 subsidiaries controlled more than 50 per cent, plus 20 additional corporations in which effective control was disclaimed. T h e subsidiaries are primarily theatre concerns, but include distribution companies, vaudeville booking agencies, music publishing houses, and several realty concerns. In fact, three of Loew's most important subsidiaries are registered with the S.E.C, as real-estate corporations. Control without majority ownership of the stock in many of the theatre subsidiaries operates either through written agreements or through acquiescence of the remaining stockholders. In practice, this generally means that the owners of the theatre have agreed to share control with Loew's in exchange for a franchise to exhibit Loew's pictures. Paramount Pictures, Inc., is the most complex of the five, although its activities are apparently less ramified than Warner Brothers. Whereas it originally bought out entire circuits of theatres, w i d e analysis since only those companies report whose stocks are traded

in on

public exchanges. E v e n with respect to the m a j o r s , there are i m p o r t a n t omissions. United Artists is a p r i v a t e corporation and hence files no i n f o r m a t i o n .

R.K.O.

filed an a n n u a l report f o r the first time in 1 9 4 0 , on e m e r g e n c e f r o m a protracted r e o r g a n i z a t i o n . Most of the unaffiliated theatre circuits, p r i v a t e l y no reports.

owned,

make

66

MOTION PICTURE INDUSTRY

financing most of the purchases with bonds, reorganization in 1935 brought with it many changes in policy and structure. Today, most of its theatre enterprises are partnerships; Paramount participates but does not exercise complete control. This is borne out by the fact that only 95 of its 203 subsidiaries are controlled 50 per cent or more. Decentralized theatre operations have been the approved policy at Paramount since the failure in 1933 of an attempt to manage in detail some 1,600 theatres from New York. It is estimated that at least half of Paramount's theatres are now run by their original owners on a part-ownership and contract basis, and that Paramount's average interest in its theatres is somewhat less than 70 per cent. T h e smaller producing companies are less complicated in structure and less far-flung in their activities. However, even concerns like Columbia Pictures and Universal Pictures operate twenty-eight and thirty-four subsidiaries respectively. Most of these are distribution units. Universal Pictures Corporation is itself a subsidiary of Universal Corporation, a holding company which controls almost all its common stock. Both Universal Corporation and Columbia Pictures Corporation are managed by voting trusts. T h e diversity of functions demonstrated by the large movie companies is reflected in the executive personnel, that is, the directors and officers of the companies. If the production of movies is but one aspect of the corporate existence, it follows that representation will be given to the other activities in some proportion to their importance. Take Paramount, for instance. Its board of directors includes the following: Harvey D . Gibson, banker, affiliated with the New York Trust Company, Manufacturers' Trust Company, the Textile Banking Company, etc.; A. Conger Goodyear, manufacturer and financier; John D . Hertz, partner in Lehman Brothers, founder of the Yellow Cab Company; Maurice Newton, partner in Hallgarten and Company, investment banker with diverse interests in tobacco, rubber, petroleum, and real estate. The president of Paramount is Barney Balaban, a Chicago theatre man; vicepresident is Frank Freeman, also originally a theatre operator. Chairman of the executive committee is Stanton Griflis, broker and partner in Hemphill, Noyes. M r . Adolph Zukor, the company's founder, occupies the somewhat honorific post of chairman of the board of directors.

THE INDUSTRY TODAY

67

The executive group of Radio-Keith-Orpheum presents a similar concentration of non-theatrical personnel. Chairman of the board is Richard C. Patterson. Atlas Corporation is represented by Peter Rathvon, chairman of the executive committee, and W. Mallard, described in the company's registration statement with the S.E.C, as an independent consultant on reorganization. Of the five principal executive officers, only two have had any previous experience in the motion picture industry: George Schaefer, president of the company, and Ned E . Depinet, vice-president, had both previously been concerned with distribution. Neither is primarily a production person. The board of directors includes Floyd Odium, president of Atlas Corporation; William Hamilton, a partner of J . P. Morgan j James G. Harbord, formerly chairman of the board of Radio Corporation of America; and Lumford P. Yandell, also associated with R.C.A. Universal Corporation, the parent company of Universal Pictures, is controlled by seven voting trustees, only one of whom is a motion picture person.15 The production company itself is operated by a group of men thoroughly familiar with the theatre business but relatively new to problems of production. The structure of the major companies is important because there is a real and direct connection between the way in which they are set up, the kind of people who run them, and the kind of films produced. This is the reason for emphasis on the fact that the capital assets of the dominant companies are so largely land, buildings, and real estate. Where the investment takes this form, it is not surprising that the executive personnel should consist of men skilled primarily in the art of selecting theatre sites, manging real estate, and financing operations, rather than of talented producers. The balance sheets of the five theatre-owning majors show that from half to three-quarters of their total assets are "land, buildings, and equipment." 16 On the other hand, for the two producingdistributing companies (Universal and Columbia), this proportion " G . N. Armsby, P. S. Brown, J . Checver Cowdin, J . A. Rank, Charles R . Rogers, Ottavio Prochet, and Daniel M . Schaeffer. " Twentieth Century-Fox represents a somewhat different situation. It has a 42 per cent interest in National Theatres Corporation and this is listed as an "investment" rather than a fixed asset.

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100.0

31

1.2

of the other majors, but its income from film rentals is substantially lower than that of three other companies with fewer theatres. T h e difficulty of interpretation here is increased by the fact that individual companies may have varying policies with respect to film rentals charged their affiliated theatres. F o r instance, in one company it may be desirable for the controlling group to show greater profitability in theatre operations than in production; accordingly, low film rentals may be charged up against the theatre department. H o w e v e r , there is no way of allowing for factors of this kind. W e can only take the figures at their face value, keeping in mind complications arising from metaphysical accounting practices. If there is no direct correlation between theatre ownership and income from film rentals, what is the chief value of the integrated form of organization? If a company owning relatively few theatres can earn more from its films than one with many theatres, w h y does it bother with theatre operation at all? T h e answer to these questions has already been indicated. E v e n Loew's, the most successful producer-distributor in the industry, probably receives less than half of its total income from the production phase of its business. Furthermore, as it happens, Loew's was originally a theatre concern, going into production at first primarily to secure a supply of films for its theatre operations.

MOTION PICTURE INDUSTRY

72

From the producer's standpoint, theatre ownership is valuable for two reasons. Theatres function as a kind of insurance policy, in that ( i ) they provide first-run exhibition, and (2) they offer a minimum market for films which might otherwise not be well received. This market is difficult to evaluate, but it is unlikely that the affiliated theatres of a given company account for more than 25 per cent of its total film rentals. Paramount, for example, the largest theatre owner, is said to receive approximately 25 per cent TABLE NUMBER

OF E X H I B I T I O N S R E C E I V E D B Y

F E A T U R E R E L E A S E S OF SIX

MOTION

DURING

PICTURE

COMPANIES

Number

Company

Number of Pictures

Loew's 20th Century-•Fox Paramount R.K.O. Warner Bros. Columbia Total

VIII

jo 65 53 47 60 38 313

Total

of

1936-37

MAJOR

SEASON

Exhibitions

Highest

409,265 5*8,731 413,500 340,081

11,542 12,232

43*,«57 217.491

11,421 10,696

12,900 10,981

I,341,7I5

Lowest

A ver age

1,261

8,185 8,134 7,802

8,338 7,946 7,300

7.235 7,211

7,425 6,754 5,619

>,763 4,ioo 3,155 3,838 2,012

5,723

Median

7,481

of its film rentals from its own theatres.18 It is reasonable to assume that the other majors, with substantially smaller theatre holdings, receive an even smaller proportion of their total film rentals from their theatres. Loew's receives approximately 10 per cent of its total film rentals from its affiliated theatres. None of the major companies receives a dominant share of its film rentals from its own theatres. They could not, in other words, guarantee great success for films which would otherwise find no market, but they do act as a partial buffer against complete failure. This is quite clearly demonstrated in an analysis of the number of exhibitions received by the features of the various majors. "Number of Exhibitions" refers to the number of theatres which contract to show a given picture. The detailed figures are presented in Table V I I I . " " P a r a m o u n t Pictures, Inc.," Fortune Magazine,

March 1937.

THE INDUSTRY

TODAY

73

These figures make clear the chief value of theatre ownership to the producers in the major companies. T h e larger the theatre chain, the narrower the range of risk, regardless of the box-office popularity of the pictures. N o Paramount feature received fewer than 4,100 exhibitions. Loew's, on the other hand, with the smallest theatre holdings of the group, had feature pictures which received as few as 1,261 showings, despite the fact that the average (median) number of exhibitions received by Loew's films was substantially higher than that of any other company. Loew's consistently produces more successful films than any of the other majors. This is proved by its substantially larger income from film rentals. Nevertheless, because its theatre holdings are quite small, when it produces a picture which is below its usual standard it fails to get the distribution which an equivalent Paramount picture would receive. The complete lack of relationship between the number of affiliated theatres and the return from production of films is proved by an analysis of the earnings of individual films released during a given season. A tabulation of the rentals from 323 feature films shows that 32, or 10 per cent, of the total number returned over a million dollars. Of these, 14 were released by Loew's. Furthermore, despite the smallness of Loew's theatre chain, it alone released films which grossed as much as two million dollars each or over. The corollary of this is in the figures on low-grossing pictures. Nearly half of the 323 films returned less than $250,000. Only 1 2 of these were Loew's, as compared with 32 Warner Brothers, 31 Twentieth Century-Fox, etc. T o summarize: The major motion picture companies engage in a variety of activities. The production of films is one such activity, but not the most important one with respect to the amount of corporate income for which it is directly responsible. This is reflected in the fact that executive personnel of the large majors is chiefly financial and composed of real estate men rather than experts in the realm of production. Control of the producing companies passed into the hands of the present financial group when they became primarily theatre concerns, with the consequent emphasis on problems of financing theatre expansion and real estate operation. Today, approximately two-thirds of the total capital of the majors is invested in theatres. Furthermore, most of their income is derived

74

MOTION PICTURE INDUSTRY

from theatres. There is, however, no apparent connection between the number of theatres controlled and the profitability of the company's producing activities. The highest grossing films are produced by the major with the fewest theatres, i.e., Loew's. From the point of view of the producing groups within the majors, the chief advantage of having affiliated theatres is the assurance of a minimum market. From the point of view of the theatre departments within the majors, however, the advantage of having production facilities is incalculably great. It gives superiority over competing unaffiliated theatres whose choice of product is always secondary to that of the dominant major in any given area. Thus the chief advantages of integration are in the domain of exhibition. W H A T K I N D OF T H E A T R E S DO T H E M A J O R S OWN?

The value of theatre ownership is not a function of number only but of location, size, and quality as well. Average seating capacity of all theatres in the United States is 623." The de luxe metropolitan houses, most of which are affiliated with the major producing companies, have an average seating capacity of 1,445; the theatres owned by independent circuits average 897 seats as compared with an average of 515 for the independently owned theatres. For the theatre group as a whole, ownership of seating capacity is reported to be as follows: Of a total of approximately i l million seats, affiliated theatres have 22 per cent; unaffiliated circuits, 27 per cent; independently operated theatres (less than 4 theatres operated by the same individual or group of individuals), 51 per cent. The situation in a specific area is described in figures recently published by the New York Film Board of Trade. The total number of theatres in the greater New York area in 1940 was 1,208. Of this number, 197 or 16.3 per cent were affiliated with the major producers. Their theatres contained 28.4 per cent of the total number of seats in the area, averaging nearly 2,000 seats per theatre, as compared with an average seating capacity of 1,093 for independent chain theatres and 777 for individually owned theatres.10 It is rele" Motion Picture Producers and Distributors of America (the Hays Office), Annual Report of Theater Service Department, February 1 9 3 9 . " Report of New Y o r k Film Board of T r a d e , reprinted in Boxoffice, February 1 , 194.1.

THE

INDUSTRY

TODAY

75

vant to note that the affiliated theatres provide the major producers with nearly 70 per cent of their entire film rentals from the New York area. Since film rentals usually represent a percentage of the box-office gross, it is reasonable to conclude that the affiliated theatres probably received a proportionate share of the total theatre receipts for the area. A further point to be made in this connection concerns the location of the theatres owned by the major producing companies. Seating capacity is highly concentrated in the large metropolitan centers. As shown in Table I X , 2.5 million seats out of the total of approximately H million were in 13 cities with population of over 500,000 each. These 1 3 large cities have 2 , 2 5 1 theatres located therein and, while housing almost one-fourth of the total seating capacity in the entire country, represent only 1 4 per cent of the number of theatres. In other words, a very large number of the theatres in the United States are small theatres in small t o w n s . " TABLE

IX

SIZE AND LOCATION OF T H E A T R E S

Population of

Town

Over 500,000 500,000 to 200,000 200,000 to 100,000 100,000 to 50,000 50,000 to 20,000 20,000 to 10,000 10,000 to 5,000 5,000 to 2,500 2,500 to 1,000 Under 1,000

Number of Theatres

IN U N I T E D STATES,

Cumulative Total

Number of Seats

1938*

Cumulative Total

2,251 1,104

3.355

2,426,986 1,010,079

3.43 7,o6j

783

4,138

754,669

4.I91.734

760,579 1,053.807 992,570 1,006,388 961,516

4.95».313

1.113,357

10.079.9Î1

801 1,202 1,34'

1,626

4,939 6,141 7,482

1.9Í9

3,221

9,108 11,067 14,288

3>*53

17.541

844,533

6,006,120 6,998,690 8,005,078 8,966,594 10,924,484

* Motion Picture Producers and Distributors of America, of. cit.

As a result of this concentration of large theatres in the metropolitan centers, 60 per cent of the total film rentals of the major producing companies was derived from the exchange areas containing the 13 cities with population over 500,000. Table X gives figures on film rentals from each of the exchange areas. * Motion Picture Producers and Distributors of America, of. cit.

TABLE

Χ

F I L M R E N T A L S , B Y EXCHANGE CITIES, FOR F I V E M A J O R PRODUCING COMPANIES,

1938

Per Cent of Gross Revenue from Film Rentals Received from Each Exchange Territory in the Unitei Stales and Canada Company Exchange City Albany Boston Buffalo New Haven New York Philadelphia Cincinnati Cleveland Pittsburgh Washington Detroit Indianapolis Kansas City St. Louis Chicago Des Moines Milwaukee Minneapolis Omaha Atlanta Charlotte Dallas Memphis New Orleans Oklahoma Denver Los Angeles Portland Salt Lake City San Francisco Seattle New Jersey H.O. Sales, etc. Brooklyn Total Total Grand and

Columbia

Loevj's (M-G-M)

Warner Bros.

20 th Century

Universal

1.4.5

1.69

1.76

1.49

1.47

5-94

6.66

6.25

6.24

6.50

2.49

2.86

z-54

2.48

2.50

1.88

2.03

2.01

ι.71

1.96

17.41

9.70

7.20

14.03

14.15

6.66

7.10

6.99

6.35

6.44

3.29

3.19

2.94

3.32

3.42

3.19

3-33

3.27

3.24

3.02

3.83 4.31

3.91

4.25

4.20

4.08

3-95 3-93 4.50

3-59

3.88

3-51

3-51 3-41 3-93

2.30

2.08

2.19

2.35

2.23

2.73

2.01

2.04

2.13

2.25

2.21

2.24

2.50

2.36

2.67

5-3°

J.84

5.92

S· 57

5.87 1.17

1.43

1.30

1.4S

1.54

1.92

2.17

2.09

1.96

2.35

2.1 1 2 -S3

2.74

3.08

2

0.86

1.10

1.13

I.XO 3-34 1.83

·53 •9» 3-55

3.05

3-54

3.09

2.12

1.90

1.90

3.72

3-5^

3-S

2

3-35

4.13

1-33

1.12

1.07

1.09

Ι.30

1.37

1.50

1.41

1.61

1.42

1.44

1.20*

1.30

1.16*

1.60*

»•57 4-53

1.49

1.36

4.40

4.29

ι-45 4· 2 5 • 94

4-47 1.08

1.86

1-53

1.01

.91

.84

1.39

1.39

1.17

ι.38

1.54

3.76

3.67

3.64

4.48

1-57

1.50

3-77 1.45

1.52

1.54

6.10

4.17

U. S. 100.00 Canada Total U. S. Canada 1 0 0 . 0 0

* Oklahoma City

IL

•74 S-72 100.00

100.00

96.23

100.00

3-77 100.00

100.00

100.00

100.00

THE INDUSTRY

TODAY

77

T h e most important aspect of theatre ownership, however, arises out of the differentiated nature of the theatre structure. Just as various products may be distinguished from each other on the basis of price or quality, so, in the case of theatres, can the distinction be made almost entirely in terms of the " r u n " that each has. " R u n " refers to priority rights in the showing of films for the particular community in which the theatre is located. T h e first, second, and third runs account for all but a small proportion of total theatre receipts. First-run theatres receive a share of the business altogether disproportionate to their number as well as to their size, although this latter disparity is less marked. Most first-run houses are owned by the five major companies. T h e y own or control the operations of 126 out of 163 first-run theatres in the 25 largest cities of the country. Only 37 first-run theatres in the entire country are independently owned and operated. T h e number of first-run theatres each controls, through either ownership, management contract, or pooling arrangement with a competing distributor, is distributed as follows : iJ

Company Paramount Warner Bros. 20th Century-Fox Loew's R.K.O. Non-affiliated Total

Number of Controlled First-run Theatres 28 26

14 '9 37 163

T o summarize: T h e theatres owned by the major companies are among the largest in the industry, located for the most part in the metropolitan centers, and include 77 per cent of the important first-run houses. W H Y ARE T H E FIRST-RUN T H E A T R E S I M P O R T A N T ?

First-run theatres are important because: ( 1 ) they receive the bulk of the business; ( 2 ) producers receive a substantial proportion " Based on data assembled by the Department of Justice in iti recent antitrust suit against the m a j o r s ; quoted in Variety, August i o , 1940.

78

MOTION PICTURE

INDUSTRY

of their total film rentals from first-run showings; (3) control of these important theatres is, in effect, control over access to the screen; last, and probably least important, they provide a testing ground for the pictures by means of which the prices to be charged for individual films may be determined. A s long ago as 1921, the importance of the first-run theatres in the key cities was noted in the complaint of the Federal T r a d e Commission against Famous Players-Lasky. A "key city" is one which acts as a distributing center for the majors. There are thirty-one throughout the country. T h e Commission's findings include the statement that "approximately 50 per cent of the revenue from a film is derived from first-run showings within six months from the date of release of the picture, and the remaining revenue from second and repeat runs in other theatres, extending over a period of two to three years.'" 3 W h i l e it is still true today that the substantial part of total film rentals is derived from its early showings, the prteUe importance of the first-run theatres varies from city to city. In general, the larger the city, the less the relative importance of the first-run, and the more important the neighborhood houses. In N e w Y o r k and Philadelphia, for example, the first-run theatres provide between 20 and 30 per cent of the total film rentals, whtreas in Atlanta and Kansas City they provide well over 50 per ant of the total. T h e importance o f the first-run houses appears to depend on the nature of the theatre-control situation in each paticular city. In Philadelphia, for example, where the first-run theitres account for less than 30 per cent of the film rentals, Warntr Brothers, the dominant company in that area, owns not only firl-run houses but also many subsequent-run houses. It has eight Urge theatres in Philadelphia and 183 others in Pennsylvania. N a i e of the other majors has a first-run outlet in Philadelphia. In this situation the relevant question is not h)W much of the gross comes from first-run theatres, but how mich comes from the affiliated theatres. Philadelphia is almost eitirely Warner Brothers' territory by virtue of the absorption in 1919 of the Stanley Company, one of the most powerful theatre circuifc in the country. O v e r 75 per cent of all film rentals from the Phladelphia area is * U. S. Federal Trade Commission, Decisions, XI, 197.

T H E INDUSTRY T O D A Y

79

derived from affiliated theatres, which means, in this case, Warner Brothers theatres. In Atlanta, on the other hand, over 80 per cent of the total film rentals comes from first-run theatres, of which there are five. Paramount owns four; Loew's, one. The extent to which the majors absorbed other than first-run theatres in any given area apparently depended upon the nature of local movie-going habits. Movie-goers in large decentralized cities tend increasingly to patronize neighborhood theatres, with a consequent reduction in the relative importance of the first-run movie palace. In such situations, the majors extended their theatre ownership to include the subsequent-run houses, the source of most of the patronage. In Atlanta, and most of the smaller cities, however, patronage is concentrated in the de luxe theatres. Unaffiliated theatres are permitted to retain that portion of the total volume of business which remains for the subsequent runs. Nearly threequarters of the total film rentals paid by Atlanta theatres are derived from affiliated houses. In New Yode City, on the other hand, first-run theatres produce not more than 20 per cent of the total. Of the total subsequent runs, affiliated theatres produce in the neighborhood of 80 per cent. For the city as a whole, affiliated theatres of all runs produce nearly 70 per cent of all film rentals. Thirteen per cent of the total film rentals paid in the United States are from New York City. To summarize: It is very likely that in all but the largest cities of the country the first-run theatres provide well over 50 per cent of the total revenue, in some areas as much as 80 per cent. Where this is the case,' the theatre holdings of the majors are confined to first-run theatres. In that type of theatre situation in which movie attendance is dispersed through neighborhoods, the theatre interests of the majors are more extensive, including strategically located subsequent-rün houses. In any event, the net effect of theatre ownership by the major producing companies (with respect to income from the production of films) is that they are their own best customers. They provide themselves and each other with the bulk of the market for films. By no means less important than the revenue offered by the firstrun theatres is the power which accompanies their ownership. This power rests upon the peculiarities of the market for films and is

8o

MOTION PICTURE INDUSTRY

tantamount to authority to decide what films may reach the public. Originally the first-run theatre developed out of the willingness and ability of enterprising theatre owners to pay higher rentals for the first showings of better-quality films. It then had the effect of stimulating competition among producers for access to this important segment of the market. Today, owned by the major producing companies, first-run screen time is occupied almost entirely by their own pictures. As a market for independent producers (i.e., those other than the eight major companies) first-run theatres are virtually closed. How was it possible for this power to be concentrated in such a small number of theatres? The answer to this question is partly in the realm of applied psychology. It involves the deeper question of why people go to the movies at all and why they go when they do. Inescapable is the fact that at least one factor in influencing movie-going is the advance build-up given a picture, the barrage of publicity and exploitation which accompanies the release of a new film, the reviews by critics who see the film as it opens its run, and all the other multifarious activities of publicity agents. Great importance is attached to these activities by the people within the industry. Consequently, when an inexpensive picture achieves public acclaim without the preliminary fanfare usually reserved for the more costly pictures, it is called a "sleeper," a term which indicates that even the producer of the picture was taken by surprise. A measure of the industry's faith in advertising is the estimated $110 million annually spent on it." Consequently, exhibitors the country over receive requests from their patrons: When is the next Super-Colossal going to show? When is Clark Gable's new picture coming here? They have heard} they know that the leading man in such-and-such a picture is actually in love with the star; they read fan magazines and columnists; they listen to radio programs devoted exclusively to Hollywood gossip—in a word, they care. W h o are the exhibitors to ignore such a wealth of feeling? At first, the importance of first-run theatres was related to the public's "Motion Picture Almanac, 1939-40, p. 810. This figure, if accurate, is approximately 70 per cent of the total estimated cost of production of all films for the 1938-39 season. It it probably no more accurate than other figures in official trade sources.

THE INDUSTRY T O D A Y

81

appreciation of the material superiority of the theatre, its greater comfort and beauty. This in turn gave greater earning power, permitting payment of higher rentals for the better films. T h e process whereby their influence was extended over movie-goers outside their immediate jurisdiction has been described as follows: T h e n e w Palace theatres became liberal advertisers in newspapers and publishers responded by giving their shows publicity in n e w s columns and reviews. T h e newspapers in thirty to fifty metropolitan centers throughout the c o u n t r y — k e y cities—circulate in all neighboring cities and towns, and the advertising and publicity of a first run in a key city create a demand for the picture in the surrounding district. T h e a t r e s in L o n g Island or N e w Jersey, for example, learned that a photoplay first shown at the Strand or the Rialto, in N e w Y o r k , would draw large audiences, while a film with no first run in the metropolis would attract little attention. Soon exhibitors everywhere in the United States followed the line of least resistance, giving preference to pictures with the prestige of keycity first runs, ignoring all others or renting them only at very l o w rates. Within a f e w years photoplays without first runs were not regarded by theatre-goers as first class, and unless a producer could obtain first runs his chance of making money g r e w very slim. 24

As long ago as 1917, representative feature films, if given firstrun exhibition, grossed from $60,ooo to $ιθθ,θθθ; without adequate first-run exhibition, earnings would drop $30,000 to $40,000, amounts which usually failed to cover costs." The line of least resistance adopted by the exhibitors—that is, their refusal to book pictures other than those which had received big city openings—was somewhat short-sighted, as it later turned out. It had the effect of forcing independent producers out of the field, making much simpler the task of the forces working toward control through integration. Obviously, if most exhibitors book only those pictures which receive first-run showings, then control of the first-run theatres is, in effect, control over all the others. Once the independent producers were denied access to the screen, the process of encirclement was complete: T h e major producers were also the major exhibitors. It was for them to say whose pictures would be shown. * B. B. Hampton, A History of the Movies, pp. 172-7 J. "Ibid., p. 174.

8z

MOTION PICTURE INDUSTRY

T h e final result is clear. The majors show their own films and each other's. If the film of an independent producer gives promise of box-office success, they may take over its distribution, showing it in their own theatres and selling it to non-affiliated theatres. For this service they charge the producer a price which usually amounts to 3J per cent of the total gross. Such, for example, is the arrangement whereby R.K.O. distributed the product of the Walt Disney Studios, the beloved Mickey Mouse and Donald Duck cartoons, as well as the more recent feature-length pictures. Such product is, for all practical purposes, part and parcel of the rest of the merchandise distributed by the major; from the point of view of the non-affiliated theatre owner, it is immaterial that the production was independent. His access to it is subject to exactly the same restrictions as surround all other films released by the major; it does not compete independently with the product of the majors. T h e exhibition policy of the first-run theatres is analyzed in the petition of the Federal government in its recent anti-trust suit against the majors. Data collected by the Department of Justice show that, for the exhibition years 1934 through 1937, not less than 95 per cent of all pictures shown in the first-run metropolitan houses of each of the majors consisted of the releases of the eight companies. Over 99 per cent of the films exhibited in Loew's firstrun theatres were released by the majors. "As a result," the petition reads, "the independent producer does not have access to a free, open and untrammelled first-run market in metropolitan cities in which to dispose of his pictures. Entrance to this market by an independent producer is only at the sufferance of (the defendants herein) who control it." 27 T h e petition neglects to add an equally important fact, namely, that with the closing of this market to the independent producer, the remainder of the market, the subsequent run is, in effect, also closed. Consequently, what started as a preference on the part of exhibitors for films which had received metropolitan first-run showings became the means of excluding independent producers from the market to the later distress of the exhibitors. T o illustrate: In Los Angeles, 11 first-run theatres exhibited a total of 405 films during the 1939-40 season. Only five of these were the product of * United States v. Paramount Pictures, Inc. et al., Petition, 1938, p. 71.

THE INDUSTRY TODAY

83

independent companies, i.e., companies other than the eight majors. Four of the five were produced by Republic, one by Grand National.28 In all but one instance, they were shown as the latter half of a double-feature bill, which means that they were unheralded, unsung, and probably unappreciated. An analysis of the distribution of first-run screen time in Los Angeles shows the following: The Loew's theatres exhibited a total of 97 films during the 1939-40 season. Of these, 44 were Loew's product, 46 Twentieth Century-Fox, and 7 United Artists. At the Warner Brothers theatres, out of a total of 67 pictures shown, 50 were Warner Brothers' product, 6 Universale, 5 United Artists', 4 Columbia's, and 2 R.K.O.'s. Out of the approximately 90 films exhibited by the R.K.O. houses, 35 were R.K.O. product, 28 were made by Columbia, and 27 by Universal. The Paramount Theatre, showing a single film accompanied by a stage show, used 42 films during the year, 34 of which were Paramount pictures, 6 Universal, i R.K.O., and 1 from an independent, Grand National. The Fox theatres, subsidiaries of Twentieth Century-Fox, showed 89 films, 41 of which were produced by Loew's, 38 by Twentieth CenturyFox, and 10 by United Artists. Note that Loew's and Twentieth Century-Fox played only each other's pictures plus those of United Artists. Warner Brothers and Paramount, the two largest theatre owners, played primarily their own pictures, filling in with the product of the lesser majors. Los Angeles is but one of many key cities throughout the country, but there is no reason for regarding the exhibition policies of the first-run theatres in Los Angeles as atypical. By now, there are in fact no known independent producers of entertainment films considered good enough for metropolitan exhibition except those whose product is taken over by the majors for distribution through their regular channels. Consequently, as a control device, the development of strategic first-run theatres as the showcases of the industry proved remarkably effective. Ownership of these relatively few theatres gave control over access to the market ; this enabled other sources of supply to be shut out with a consequently enhanced value for the remaining product. Add to this the fact that ownership of these theatres carries with it the bulk of the theatre receipts, and " Variety, Seventh Anniversary Edition, October i i , 1940, pp. 28-29.

84

MOTION PICTURE INDUSTRY

the rationale behind the structure of the motion picture industry becomes dear. R E L A T I O N S H I P B E T W E E N T H E B I G F I V E AND T H E L I T T L E T H R E E

I t might be asked, why are the three smaller companies (Universal, Columbia, and United Artists) included in the category of the majors? (This usage is accepted by the industry at large and all government agencies dealing with it.) They own no theatres, they account for but fractional shares of the industry investment, they receive proportionately little of the total business. What makes them major companies? There seems to be but one reliable criterion here—they have access to the screens of the first-run theatres owned by the Big Five. At that, the access is limited, as we saw in the analysis of the exhibition policies of Los Angeles first-run theatres. In that city, neither Loew's nor Fox's first-run theatres used any product other than their own, each other's, and United Artists. Columbia and Universal pictures received no showing in these houses. R.K.O. theatres, which show more Columbia and Universal pictures than all of the other first-run houses together, used them primarily as fill-ins on double bills, giving chief billing to only seven of the twenty-eight Columbia pictures used and to nine of the twenty-seven Universal pictures. T h e position of United Artists is rather special. It distributes quality pictures, releasing fewer than any of the other majors. Because of the generally high quality and cost of its films, only the better theatres buy its product. Despite the definite limitations on the first-run showings given the product of Universal and Columbia, the question remains, why are they used at all? Why do not the Big Five use their own films exclusively? Briefly, those of the Big Five which use the product of Universal and Columbia do so primarily because their own supply of film is inadequate for their needs and because the product of the other large majors is not available to them, for one reason or another. Particularly since the prevalence of the double feature, the requirements of the theatre-owning majors have been such as to make very useful that portion of their supply which comes from the smaller companies. The effect of the double-feature policy upon the need for film is very apparent. Loew's first-run theatres in Los

THE INDUSTRY TODAY

85

Angeles, playing double bills, exhibited a total of ninety-seven films during the 1939-40 season. Paramount, on a single-feature policy, used forty-two films during the same period. As might be expected, a far higher proportion of the total films used by Paramount came from its own studios than was the case with Loew's— 81 per cent as compared with 45 per cent. The exhibition of double features requires at least twice the number of films customarily shown in single-feature houses. Loew's, however, has a close working arrangement with Twentieth Century-Fox, whereby the two companies give each other first choice of their product. Other companies—Warner Brothers, Paramount, and R.K.O., in areas dominated by Fox or Loew's—are unable to secure either Loew's or Fox films for first-run release. Apparently unable to meet all their needs with product from their own studios, they use each other's films and the films of the smaller companies, the latter primarily as fill-ins on double bills. Approximately three-quarters of the films shown in Warner Brothers' theatres are supplied by their own studioj four other companies divide what remains of the screen time. The answer to the question, why does a theatre affiliated with a major producer show any films of other producers, is basically as follows: No one studio today turns out enough pictures to provide a year's supply of films for a double-feature program. First-run theatres showing double features on a weekly-change policy use from seventy to one hundred films a year. Subsequent-run theatres, most of which run films no longer than three days and play double features, may use three hundred feature films annually. Since, as has already been indicated, the theatres are the chief source of income for most of the integrated majors, their need for good boxoffice films is sufficiently great to warrant opening their screens to the product of other producers on occasion. This also explains, in large measure, why Hollywood as a whole rejoices when a successful picture appears, regardless of which studio produced it. A good picture, as almost anyone in Hollywood can tell you, is one that makes good at the boxoffice. The boxoffice, in part at least, belongs to each of the five majors, although in varying degrees in different regions. For example, the Philadelphia theatre situation is dominated by Warner Brothers. A picture made by Metro (Loew's producing company)

86

M O T I O N PICTURE INDUSTRY

when exhibited in the Philadelphia area appears in Warner Brothers theatres. Loew's has little choice in the matter j all the first-run theatres in Philadelphia belong to Warner Brothers. It is therefore to the advantage of Warner Brothers for Loew's to release successful pictures since it means good business for Warner's theatres. Loew's, it should be noted, benefits doubly from a successful picture: first, in the form of box-office receipts of its own theatres, and, secondly, in the form of higher film rentals from other theatres. No studio in Hollywood today produces more than sixty-five feature films a year as Table X I shows. With the exception of United Artists, most of the companies release between forty-five and fifty-five features} hence, the need of the theatre-owning majors for the product of other companies. The need is not merely for TABLE

XI

N U M B E R OF F E A T U R E F I L M S RELEASED BY E I G H T M A J O R PICTURE

Company Columbia M.G.M. Paramount R.K.O. 20th C e n t u r y - F o x

United Artist« Universal Warner Bros. Total

MOTION

COMPANIES*

'937

*93«

'939

61

54 4« 55 45 60

51 51 63 4« 45

6o

9 47 51

5« 51

403

362

376

49 62

5i 59 IO

5i

* Compiled from Reference List of Productions, Motion Picture Arts and Sciences.

16

published by the Academy of

film, but for films of a special type—for the most part, inexpensive Class Β pictures to make up the lesser half of the double-feature program. This use of fill-in pictures is quite apparent from the fact that so few of the films of the smaller companies are given first place on the program. To summarize: The demand for films is greater than the output of any one major company. While giving preference to its own films in all instances, each of the theatre-owning majors needs supple-

THE INDUSTRY

TODAY

87

mentary product from two or more of the other companies. I f , by some miracle, double features were to cease, a substantial part of the market for the films of Universal and Columbia would disappear. R O L E OF T H E MAJORS IN P R O D U C T I O N AND DISTRIBUTION

Although the total number of active motion-picture-producing corporations is variously cited as 246 {Statistics of Income 1937), iOO (Standard Statistics), and 83 (Biennial Census of Manufacture i 9 3 7 ) j the importance of the eight majors with respect to volume of production is perhaps best indicated by the following analysis. Five of the majors make 100 per cent of the newsreels produced} the eight majors released 396, or 85 per cent of the total of 452 feature films released in 1939. The 1939-40 Motion Picture Almanac lists, under the heading "Motion Picture Production Organizations," the names of 73 companies.2" Of this total, the number actively engaged in producing feature films (including the 17 independent producers whose pictures are released by the majors) is very small, probably not more than 30. A check of the names of the independents against a list of all features released in 1939 reveals that only 10 of the independent companies named had produced any features whatsoever during this period.80 Four of the smaller companies distributed the product of these 10, namely: Republic Pictures, Monogram Pictures, World Pictures, and Victory Pictures. Their combined releases amounted to 56 features, of which Republic released 21, Monogram 20, World Pictures 12, and Victory Pictures 3. These numbers, however, are misleading as a guide to the importance of their productions, since it is very unlikely that any substantial number of these pictures played in the larger city theatres. Almost all the pictures were inexpensive westerns, aimed at a market which holds little interest for the majors. T h e titles of these films serve as an index to their nature: Blue Montana Skies, The Bronze Buckaroo, Code of the " T h e apparent discrepancy between the number of producing companies cited and the number actually producing films for the entertainment market is probably due to the fact that most of the concerns are engaged in the production of commercial or advertising films, rarely exhibited in theatres. " M o n o g r a m , Republic, Grand T o w e r , Webb, and Apex.

National,

World,

Sack,

Victory,

Spectrum,

88

MOTION PICTURE INDUSTRY

Cactus, Code of the Fearless, Comici s Code, Down the Wyoming Trail, Feud on the Range, Frontier Pony Exfress, Home on the Prairie, In Old Montana, Ride 'Em, Co-uogirl—to name a few. Analysis indicates that with the exception of that special class of small theatres which shows primarily westerns, serials, and other more lurid forms of merchandise (Crime of Voodoo, Delinquent Parents, Forgotten Women, Missing Men, Missing Girls, Rebellious Daughters, Sins of the Children, etc.), virtually the entire market for feature films and newsreels is supplied by the releases of the major companies. T h e estimate made by officials of the M o tion Picture Producers and Distributors of America 31 that the majors account for 80 per cent of the value of total film production probably errs in the direction of understatement, since with rare exceptions the amount of money spent by the independents on their productions is fractional compared with the majors. T h e theatre people, however, maintain firmly that no film which has box-office merit has any difficulty in finding a first-run release, that the eagerness of theatre owners for attractive films is so great that it would be impossible for any combination of producers to keep worthy independent product off the market ; furthermore, that the theater-owning majors would probably be the first to book any potentially successful films produced independently since they would thereby profit from increased theatre receipts. This suggests that there may be reasons, other than market restraints, which account for the predominant role of the majors' product. It also raises the question, what is worthy product? Right or wrong, it is a fixed belief in Hollywood and throughout the motion picture industry that the quality of film is generally commensurate with its cost. Theatre operators following this line of reasoning tend to value the product of a given company in accordance with the amount spent (this, it might be noted, is an additional factor in any explanation of the premium on extravagance of which H o l l y w o o d is so proud). Without, at the moment, examining this assumption too closely, let us look at the figures on production budgets of the several companies. " Quoted in a study of the motion picture industry, made by Daniel Bertrand of the National Recovery Administration, Division of Review, February 1936, p. 11.

THE INDUSTRY

TODAY

89

Loew's spends $28 million annually on its program of feature films j Twentieth Century-Fox, Paramount, and Warner Brothers spend approximately $ 2 3 to $ 2 5 million. R.K.O. allows $ 2 0 million for its feature films. Universal and Columbia, on the other hand, spend $ 1 1 . 6 million and $8.8 million, respectively." INDICATED

FILM

QUALITY

An Estimate of Box-Office Strength of Feature Classified by Companies

Company Columbia Pictures Loew's ( M G M ) Paramount Pictures R.K.O. •20th Century-Fox Warner Brothers ••United Artists Universal Industry Average

Pictures

Ratings '933

'934

'935

'936

'937

'93s

.260 .582 .380

.301

•335 •519 •4 2 5 .411

.366 .521

•339 .510

•435 .361 .466 .456 .675 .378 .440

•4M .400 .J08 .446 .570

•339 .538 .463

•395 .368 .486 .583 .362 .+14

•SS1 .508 •433 .446 .429 .761 .366 •45 3

•4*7 .468 •75° .366 •439

•35' .428

•365 •515 .463 .703 •395 •457

• F o x Film only to and including September 30, 1935. • • Includes 20 th Century to September 30, 1935. Note—Each feature release is assigned a weight, according to indicated boxoffice appeal (estimated), and a weighted average for the entire year is then computed. A perfect score of 1.000 would result only if every film of each producer were given a " h i t " rating. " T h e chief value of the specially constructed index in the table above is as a comparison of the producing policies of individual companies." Standard T r a d e and Securities, Motion Pictures, Basic Survey, June 1939, Part 1.

As it happens, the order in which the companies are named is almost exactly the order in which they rank in terms of the amounts they receive in film rentals. In 1939, domestic film rentals of the individual companies were: ** While there is little relation between the cost and the actual profit of an individual picture, a company which concentrates on quality production is likely to secure roughly commensurate returns on its entire output. One feature costing $1.5 million or more may fail at the box office, while a low-cost production may prove a success, but a consistent policy of striving f o r quality (when supported by the necessary talent) results in building prestige for a producing company. T h i s permits such a company to obtain preferred playing dates (a vitally important f a c t o r ) , bookings in well-located theatres, and better prices.

MOTION PICTURE INDUSTRY Comfmy

Domestic Film

Rentals

Loew's

»oth Century-Fox Warner Bros. Paramount

R.K.O.

Universal United Artists Columbia Total

3j,iiQ,ooo 21,917,000 28,227,000 18,190,000 14,161,000 13,478,000 1J>I9*>000

*>9i»544»ooo

Without being too critical of the assumption that quality of product is a direct derivative of cost, let us note a few facts about the costs of the smaller companies, those producers of films who do not rank as majors. One of the trade papers recently carried a story about Republic's expanding production. "Republic," the story ran, "will spend $15,000,000—an increase of approximately 50 per cent over the current season's budget—on a program of sixty-six features for the 1941-42 season. . . ."3S Broken down into groups, the Republic program was listed as follows: 6 14 10 2 6 8 8 8 4

De Luxe pictures at from $750,000 to $1,000,000 each Anniversary Specials, from $250,000 to $500,000 each Jubilees at $150,000 each "Premiere" Gene Autry westerns at $500,000 each Autry-Smiley Burnette westerns at $175,000 each Roy Rogers sagebrushers at $100,000 each Don Barry westerns at a total cost of $600,000 "Three Mesquiteers" sagebrushers at a total cost of $600,000 Serials at an average cost of $250,000 each

According to these figures, approximately two-thirds of the company's product will consist of pictures costing less than $250,000 each. Twenty-eight pictures, or 42 per cent of the entire number, will probably cost under $100,000 apiece. None is scheduled to cost over $1 million, and only two over $500,000 each. (It should be remembered that the total amount of $ 15 million represents an increase of 50 per cent over the previous season's expenditures and an increase of only four pictures in the total product. This means that the company's expenditures during the previous year averaged approximately $120,000 per picture.) " Boxoffice, March ι , 1941.

T H E INDUSTRY TODAY

91

Compare tlese figures with a similar breakdown for one of the majors, LoeWs. In 1938, Loew's spent a total of approximately $28 million 01 forty-one feature pictures. Six of these, or 14.5 per cent, cost moc than a million dollars each} over half of the total number of filns cost comer than $500,000 each. None cost as little as $100/300. The average cost per picture was $683,000. As proof o: the importance attached to the cost of films by the industry, witress the advertising of Loew's in the trade press. For example, the -elease of Ziegfeld Girl was announced in a doublepage spread a; follows: Take Your Seats, America! You've got : date with the girls from the Follies! M.G.M. has kept its promise to tip " T h e Great Ziegfeld"! It took money to do it ! It took months of planning, months of dreaming dreams! With No Expense Spared! M.G.M. proudly presents "The Ziegfeld Girl.' It is a Pageant of Stars and Song and Spectacle! Ten marquees coulcnot hold its names in lights! James Stewart. Judy Garland. Hedy Lanarr. Lana Turner. And countless other great entertainers and Girls! Girls! Girls! Darlings in diamonds, honey-haired blondes, red-heads, bruiettes. M.G.M. combed America for its most famous beauties. Celebrated models, famed faces from the magazine covers. Never such a wealth of feminine loveliness! Spectacular musical numbers one after anotler! "Minnie from Trinidad," "You Stepped Out of a Dream," and (thers. More than you'd find in a whole season of Broadway musicals! Lights! Curtain! Bravo! Lest it be bought that this advertisement quoted above is unrepresentative here is Republic's announcement to the trade of one of its exraordinary attractions. This is also a double-page spread in sewral colors. In large letters, the banner is: "Gene Autry's First $500,000 All-Star Production, Melody Ranch, 'Exhibitors Everywhere Can Play This One with Confidence.' " Industryreviewersare quoted as follows: Republic's bid or deluxe playing time for Gene Autry comes off rather handsomely wth "Melody Ranch," a pretentious western dressed up with music, pnduction embellishments, and a cast not usually found in prairie saga. The songs, comedy, and general trouping by cast point to another succesful venture for studio in hoisting the Autry name into class spots.

92

MOTION

PICTURE

INDUSTRY

Gene Autry graduates into big-time musicals . . . an elaborately filmed western which stresses comedy and song . . . far removed from the more familiar riding, shooting, horse operas. A strong supporting cast, an important factor which should aid in introducing the Nation's No. I C o w boy Star to countless fans who avoid typical western fare. Republic has here M r . Autry's first half-million dollar production, sprinkled liberally with singable music and comedy sequences, action shots for those seeking such entertainment. . . .

Throughout the advertising to the trade, attention is persistently called to the costliness of the production. One more illustration of the emphasis placed by the industry on the cost of pictures: Paramount, advertising Virginia in four colors and six pages, describes its product shyly as "the magnificent love story of a beautiful rebel . . . filmed at a cost of millions on actual location in Charlottesville, Virginia." In technicolor, they add. It should not be inferred from this that lavish spending is a sure-fire formula for successful film production. If success is measured in terms of the return-per-dollar-invested, the quickies turned out by Universal and Columbia are frequently ten times more profitable than the all-star spectacles of Metro or Fox. In fact, a tabulation of the earnings of a season's output by one of the more extravagant producers reveals that of a total of 49 films, 14 did not return their negative cost. Of the 14, 8 had cost more than a $ ι million dollars each. Thus it appears that the answer to the question, what makes a major producer, runs as follows: T h e major producers are those whose product has access to the first-run theatres of the country. This access in turn depends partly on the amount of money spent on a production. Only in part, however, since the money is important merely for what it will buy in the way of talent and production values. Thus, having, let us say, $500,000 available for investment in a picture is no guarantee of a first-run release for the finished picture unless talent of recognized standing in the trade can be obtained. For instance, John Hay Whitney is a recurrent investor in film productions. H e does not undertake to make films himself j he enters into an arrangement with a producer of great prestige in the Hollywood community, David O. Selznick, whereby he advances the funds for the production of Gone With the Wind. His

THE INDUSTRY TODAY

93

financing, Selznick's production, and a cast of widely publicized talent suffices to secure a release through Loew's, on terms profitable to all concerned. The point is that the money is not more important in this situation than the fact that a producer of Selznick's status is undertaking to make the picture. Almost any of the established actors, directors, etc., are willing and eager to appear in a Selznick production. Money alone might not suffice to obtain big name actors for a picture unless the persons in charge of the production also had the confidence of the talent groups. The obstacles in the way of securing talent for independently produced pictures are twofold in nature: first, and most obvious, are the contractual commitments of the established players. These contracts do not bind the artists entirely} they generally provide that the company holding the contract has the power to determine the productions in which the person may work. This serves several purposes. In the first place, if the artist is already famous and important, the employing studio regards him or her as a "property," the value of which might easily be impaired by injudicious appearances in unsuccessful movies, or in roles which contradict a carefully nurtured public sentiment about the actor. This factor is quite important in shaping the decisions on lending of players. In the second place, salaries of valuable personnel as fixed by contract are so high, in many instances, that their cost places them beyond the reach of most independent producers. The contract system provides an additional means of controlling talent. For example, when it is considered desirable to punish an actor, he may simply be lent to an independent producer for a picture generally regarded as certain not to succeed. This is the Hollywood equivalent of Siberia, and undoubtedly an effective means of discipline. An additional important obstacle in the way of securing established talent for the independently produced pictures is the artists' fear of jeopardizing their status. The fear may center around the questionable success of the picture. If no major release is obtained for the picture, it is destined for the low-grade markets represented chiefly by the cheaper theatres specializing in horse-operas and lurid sex-dramas. Appearance in such pictures is almost certain to decrease the actor's bargaining power with the major producers. Stars firmly

94

M O T I O N P I C T U R E INDUSTRY

established or with promising careers seldom venture- into independent productions. For the most part, actors in this class of product are either still unknown or passé. Such are a few of the factors affecting the availability of talent to the independent makers of films. The recital may not be complete; certainly the majors deny any monopolistic hold on the market for artists. The facts, however, are indisputable, regardless of the interpretation as to cause. During the years between 1933 and 1939 the seven major producers loaned to each other a total of 2,005 actors, directors, writers, and cameramen. To independents, a total of 180 loans was made.*4 Whatever reluctance the companies may have to lending their personnel to independents is, of course, reinforced by the unwillingness of the artists themselves to work at lower rates of pay than their contracts provide. In fact, it is customary, when a major lends another company one of its stars, for the price paid to exceed the regular contract rate by as much as 75 per cent. In other words, the borrowing company pays not only the salary of the star during the period of the loan, but also a pure rent to the lending company. This extra charge is justified as a means of compensating the home studio for the idle time of contract players, i.e., the time during which they are paid by the home studio but not used. It should, perhaps, be repeated here that none of the obstacles described has any reality for those so-called "independent" producers whose pictures are released through the majors. For example, Selznick was able to borrow Clark Gable from Metro for Gone With the Wind. A major release is, in itself, sufficient to obtain working capital, production facilities, and personnel. One of the first bankers to take an interest in film production said long ago that he would lend the entire cost of production to a producer who has "a good distributing contract in a good distributing organization."" That the situation has not changed appreciably is evident in the following news item: ** United States v. Paramount Pictures et al., civil action No. 87-173, in the district courts of the United States, New Y o r k , amended complaint November 14, 1940. " Statement of A . H . Giannini, former president of Bowery and East River National Bank. Quoted in The Story of the Films, edited by Joseph P. Kennedy, p. 87.

THE INDUSTRY

TODAY

95

Bankers financing film production report a sudden increase in applications for loans from off-the-lot producers [independent producers]. . . . Pressure for loans is stronger than it has been in many years. Financial men say, however, that it is easier to grant a $50,000 loan than $15,000. Virtually all applications for small budget films are being turned down as unjustified by prospective returns. Big loans are more readily granted because pictures in that category are usually intended for a major release which must be set before the banks advance the usual 50 per cent of the cost." This, as the movie-goer often has occasion to say, is where we came in. T h e circle is complete. T h e independent producer is, by definition, one whose pictures are not distributed by the majors. Without such distribution and access to the first-run theatres, his market is extremely limited. This, in turn, makes both talent and capital shy of appearing in independent productions. Hence, independently made films are rarely considered fit for exhibition in metropolitan theatres where audiences have, by now, developed a modicum of sophistication. Because the product of the independents is not considered fit for extensive exhibition the principal market for films belongs to the major companies. If the reasoning seems circuitous, the facts are even more so. "Variety, September io, 1941.

III HOW

P R O F I T A B L E IS T H E MOTION P I C T U R E BUSINESS?

ANY DISCUSSION of the profitability of the motion picture business runs immediately into a number of difficulties. First, the familiar question, what is meant by "the motion picture business"? Production, distribution, or exhibition? Second, what is meant by profitability? The return to the stockholders and other investing groups? If so, which? The recent investors or the group which developed and organized the industry originally? Measurement of the return to each of the separate branches of the industry is virtually impossible for a number of reasons. In the first place, as has already been pointed out, production and distribution are largely concentrated in the eight major companies. Their financial reports give no clear-cut breakdown of the different sources of income. Consequently, only a reasonable guess can be made as to the relative importance of production and distribution. To the extent that the majors own an important segment of the theatre market, this difficulty applies to exhibition as well as to production and distribution. That portion of the exhibition business which is not affiliated with the majors consists for the most part of privately owned corporations. So far as could be learned, financial statements for theatre corporations are not made public. Despite these difficulties, certain limited measures of the earning capacity of motion picture companies can be made by confining the scope of the question to the majors. Even within this limit, the best that can be achieved is recent ratios of profits to net worth and total capital invested on the basis of present book values. Data on original capitalization and changes through the years are not available. Consequently, the current ratios of profitability do not reveal directly how profitable the industry has been to its originators, most of whom no longer hold substantial stock interests in their enterprises. As has occurred in many other industries, there has been a tendency in the movie business for the entrepreneurs to convert their holdings from common stocks to less speculative 9«

HOW PROFITABLE IS THE BUSINESS?

97

securities, i.e., bonds and preferred stocks. In this way, so long as the companies are solvent, stability of income is assured in the form of interest payments which are a prime obligation of the company. If financial difficulties are encountered by the company, this group of debtors has first claim on the corporate assets, and control generally rests in their hands. When to this is added the fact that management groups tend to be self-perpetuating in the motion picture business as elsewhere in industry, with the benefits of executive remuneration at a level determined largely by themselves, it is quite apparent that ratios of net profits to net worth or to total capital do not completely answer questions concerning the profitability of the motion picture business. In addition to determining ratios of profits to net worth or total capital, it is possible to compare the earnings of the smaller companies (Columbia and Universal) engaged in production and distribution only with those of the completely integrated companies. This should tell us what difference, if any, the ownership of theatres has made with respect to earning capacity. It is hardly likely that such a comparison can reveal differences in the profitability of the separate functions of production, distribution, and exhibition. A completely integrated unit is not merely an aggregate of functions operating independently, but the sum of their interactions on each other. In other words, a company which owns production, distribution, and exhibition facilities may have much greater strength than the combined strength of three separate units engaged in each of these activities. Thus, a comparison between the performance of the completely integrated companies with that of these partially integrated can supply, at best, a picture of the effect on total performance of integration. Still another line of investigation is analysis of the relative return to various groups in the industry, i.e., stockholders, bondholders, management, and talent. Although "profits" usually refer to the return on entrepreneurial capital, such an analysis enables us to check on the generally held notion that "while great sums have been earned, the process of earning has been conducted over a grating, down which equally great sums have wastefully slipped.'" 1

F. D. Lombard, "What's Wrong with the Movies?" The Magazine of Wall Street, 1935.

98

MOTION PICTURE INDUSTRY RATIOS OF PROFITABILITY

T h e ratio of net profit to net worth measures the earning power of a business from the stockholders' or proprietors' point of view. Net income is net after all charges j net worth refers to the book value equity of the stockholders.* Data are available as a basis for computing ratios for six of the major companies for the period 1935 to 1939. TABLE

XII

N E T PROFITS PER $ 1 0 0 OF T A N C I B L E N E T W O R T H AFTER A L L OF S i x

Company Warner Bros. Paramount Loew's 20th Century-Fox Universal Columbia

MAJOR MOTION PICTURE

tçj6

•937

1-43

S·' 4 11.85

8.J9

II.JI

8.63 10.98 15.06

'935 1.it

7.09

16.66

—9.36 15.14

—Î4-IJ '4-37

>7-47 —14.62 10.78

a Securities and Exchange Commission, Survey tions, 1938 and 1939.

CHARCES

COMPANIES"

193S

'939

1.67 5.01 10.01 14.10 —1S.90 I-Î3

of American

Listed

»•34 4.68 8.96 8.13 29.90 .02 Corpora-

T h e figures in Table X I I suggest immediately that, with rare exceptions, the major motion picture concerns do not possess any extraordinary earning power from the point of view of the stockholder. Of more general economic interest is the ratio of total profit to total capital. This measures the financial productivity of all capital employed in the business whether derived from the sale of stock or borrowed. "Total profit" includes interest paid on borrowed capital, an item of substantial importance in the motion picture business. T o a larger extent than most other industries, motion picture companies have operated on borrowed funds. Until very recently nearly half of the total capitalization of the six major companies consisted of funded debt. During the past few years of sustained high income, there have been very substantial reductions in the corporate debt of Warner Brothers, Twentieth Century-Fox, and Paramount. Figures on the earnings of invested capital in six major companies are given in Table X I I I . * Capital stock and surplus minus intangibles, deferred charge« and treasury stock carried as an asset.

H O W P R O F I T A B L E IS T H E BUSINESS? TABLE

XIII

RATIO OP T O T A L PROFITS TO INVESTED C A P I T A L OF SIX M A J O R MOTION P I C T U R E C ofTtptXJty

Warner Bros. Paramount Loew's 10th Century-Fox Universal Columbia

'935

371 4.21 8.07 7-45 Net loss 24.28

COMPANIES"

1936

5-37 9.09 9.63 16.06 Net loss 14.07

'937 6.91

8.10 12.43 1

7-94 Net loss 10.60

1938

4.09 J.08 8.80 14.24 Net loss 1.44

'939

3-97 4.82 7-7Î 8.1Î 20.63 •SS

1 "Total Profit" consists of net earnings plus interest. "Invested Capital" is the sum of long-term debt, total capital stock and surplus, and minority interest. Data from S. E. C. Survey.

Generalization is extremely difficult on the basis of such figures, but it appears as if the principal difference between the four fully integrated companies and the two smaller units is in the stability of earnings. The earnings of the smaller companies are apparently much more erratic, although they also occasionally achieve impressive levels. For the group as a whole, in 1939 the total invested capital of $463,417,000 earned $27,660,000, or approximately 6 per cent. In 1937, a peak year for the industry, they earned 10.6 per cent. The moderate nature of these figures raises some question as to the accuracy of the widespread notion that the movie business is more richly rewarding than most of contemporary business. In 1937, for example, the motion picture industry compared with seventeen other industries as shown in Table X I V . If figures of this kind have any meaning at all, they indicate that the motion picture business does not earn the fabulous profits popularly attributed to it. Certainly, as far as the present stockholders are concerned, returns in the form of dividends have been meager. Whoever the principal beneficiaries of the industry may currently be, stockholders are rarely among them. Three of the major companies (Warner Brothers, R.K.O., and Universal) have paid no dividends since 1932. R.K.O. has paid no dividends since its organization in 1929. Loew's, Paramount, and Twentieth Century-Fox have reasonably consistent records of dividend payment, but remain definitely on the conservative side of generosity to stockholders.

ioo

MOTION PICTURE INDUSTRY TABLE X I V

T O T A L P R O F I T P E * $IOO OF INVESTED CAPITAL OF E I C H T E E N INDUSTRIES·

Automobiles Office Machinery 3- Agricultural Machinery 4- Cigarette« 5- Chemicals & Fertilizer 6. Mail Order Houses 7- Chain Variety 8. Containers & Closures 9- Oil Refiners 1 0 . Motion Pictures I I . Sugar Refiners, Beet I 2. Steel Producers Π · Tires & Rubber Products 1 4 · Department Stores IÍ- Sugar Refiners, Cane l 6 . Cement 17· Chain Grocery, Food 1 8 . Meat Packers I.

»554

2.

19-54

* Data from S.E.C.

16.93 16.63 15-95 15.17 14.7g 13.06 10.67 10.63 io.60 7-53 7-x« 6-37

6.io 5.96 5-94 4.90

Survey.

Does it follow, then, that the industry's earning capacity has been grossly exaggerated? Or have groups other than the stockholders been interposed between gross income and net profits with a resultant understatement of the latter? I t has been suggested by various writers3 that a substantial proportion of what is considered profits in the original economic sense, i.e., the return to entrepreneurs for risk-taking and capital investment, may not appear in the net result at all 5 it may have been siphoned off in the form of executive salaries or other forms of overhead before net is computed. This is clearly the case where management operates under bonus systems which relate compensation to company earnings. Present tax laws, with corporation rates substantially higher than individual rates in lower brackets, also act as an incentive to those officers who own stock in small, closely-held companies to take their business profits in the form of salaries rather than divi* W. L . Crum, Corporate Salaries and Bonus Plans; Business?

Size and Earning Power; J . C. Baker, Executive Twentieth Century Fund, How Profitable is Big

HOW PROFITABLE IS THE BUSINESS?

ιοί

dends. Still another variant of the same idea is found in management ownership of funded debt rather than stock. Interest payment is a legitimate expense, payable out of gross income. It obviously affects the net result. Illustrations of both practices are to be found in the motion picture companies. Loew's, Paramount, Warner Brothers, and Twentieth Century-Fox, the four largest concerns, have management bonus systems. In the case of Loew's and Twentieth, a profit-sharing system relates executive participation closely to company earnings. So far as is known, this is not true of Paramount and Warner Brothers. In both the latter, however, the management groups are heavily interested in the funded debt of their companies. Columbia and Universal represent instances of small, virtually privately-owned corporations subject to no external compulsion to show large net profits or otherwise reward stockholders unless the management sees fit to do so. E X E C U T I V E R E M U N E R A T I O N A N D DIVIDENDS

Data on executive remunerations are collected by the Securities and Exchange Commission. "Executives" include only the officers and directors of the companies, none of the talent or production staff} "remuneration" covers both salaries and bonuses. There are 131 executives for the seven major motion picture companies. (United Artists is not included). As a group, they received a total of $6,085,659 in 1939, an amount equivalent to 31.8 per cent of the total net earnings of the seven companies. The recent trend in executive remuneration has been almost constantly upward, starting from the relatively low point of $3.4 million in 1935 and rising to over $7 million in 1941. Detailed figures are given in Table X V . A more valid statement of the relationship between executive remuneration and corporate earnings is that based on the method worked out by J. C. Baker in his study of Executive Salaries and Bonus Plans. By defining "earnings" as net income after all charges, but before executive compensation and interest, it becomes possible to relate remuneration policies to the contributions of the executives as measured by company income before executive payments, the element being studied. More important, it provides a basis for comparison between the shares of corporate income re-

102

MOTION PICTURE INDUSTRY

ceived by executives and stockholders respectively. The exclusion of interest from expense in computing earnings was suggested by the fact that companies vary considerably in their financial policies. With "total earnings" arrived at by adding executive remuneration and interest expense to the declared net earnings, percentages of remuneration to earnings were computed. The same was done for interest and dividends. "Total earnings," thus defined, amounted TABLE

XV

E X E C U T I V E R E M U N E R A T I O N AS P E R C E N T OF N E T

EARNINGS,

(OOO O M I T T E D ) OF S E V E N M A J O R M O T I O N P I C T U R E C O M P A N I E S ,

Comfany Loew's Paramount Warner Bros. 20th Century-Fox R.K.O. Universal Columbia Total

Remuneration

Net

Earnings

1941

Remuneration as Per Cent of Net Earnings

$1,302 1,032

$11,032 9,206

20.9 I 1.2

959 853 430 902 626

5>429 4.9" 539 4,439 456

17-7 1 7-4 19.8 20.3 '37-3

Í7.i°4

$36,023

»9-7

to $35 million for the seven major motion picture companies in I 939· Of this sum, 17.4 per cent went to the executive group of 1 3 1 officers and directors. Bondholders received $9.8 million or 28 per cent of the total earnings on funded debt amounting to $ 1 7 1 million. Dividends amounting to $9.3 million or 27 per cent of total earnings were paid by three of the seven companies in that year. The comparison between the amount of dividends and that of executive remuneration becomes more pointed when the difference in the number of individuals in each group is remembered. There are probably close to fifty thousand stockholders with an equity of over $300 million as compared with the 131 executives. The relative earnings of the two groups (stockholders and management) is graphically shown in the table of amounts paid executives per dollar of dividends from 1935 through 1939. 4 * Taken from data in annual reports of the major companies to the Securities and Exchange Commission.

HOW P R O F I T A B L E IS T H E

BUSINESS?

The blank spaces in the table indicate the instances in which no dividends w · 4 7 · See also Exhibition; Distributor» ; Exchanges; Theatres Famous Players Company, 27, 30, 42, 144 Famous Players-Lasky Corporation : Federal T r a d e Commission's charges against, 34-37, 78; organization of, 30-31. See also Paramount Pictures, Inc. ; Zukor, Adolph Federal T r a d e Commission : vt Famous Players-Lasky Corporation, 34-37, 78; vs Stanley Booking Corporation. See also Department of Justice Film rental: affiliated theatres and, 6, 7 2 ; in New Y o r k City, 75, 7 9 ; collection of, 7 ; consent decree ( 1 9 4 0 ) and, 140, 1 4 1 ; earlier f o r m · o f , 1214, 17-18, 1 7 η . 1 9 , 1 8 ; from exchanges, 76 ( T a b l e X ) ; from features, 7 3 ; from first-runs, 78, 80, 81, 127, 143, in Atlanta, 79, in K a n sas City, 78, in New Y o r k City, 78, in Philadelphia, 78, without firstruns, 8 1 ; gross, 70 ( T a b l e V I ) , 71 ( T a b l e V I I ) , in New Y o r k City, 7 9 ; increases in ( 1 9 1 6 ) , 32, for New Y o r k City, 49 ; from independents, 131 ; from independent chains, 1 3 1 ; percentage-of-gross as, 1 2 3 ; population and, 7 5 ; standardization o f , 28; variations in, 1 1 4 . See also T r a d e practices, and under names of individual companies Finances: amortization, 3 5 ; assets, majors', 67, 68 ( T a b l e I V ) ; bonds, 50, 66, 69, 97, 1 0 2 ; bondholders, 69, 97, 108 ·, bonus systems, 100, 1 0 1 ; capital, 2, 35, 6 1 , 62, 63, 69, 99 (Table X I I ) ; control, 1, 4, 5-6, 13, 65-66; debt financing, 69; debentures, 4S, 107) dividends, 60, 69, 70 ( T a b l e VTn.a), 99, 100, 102, 103, 106, 108, ι ί ο , ι n ; earning capacity, 96, 97> 98-100, 1 0 6 ; earnings as basis f o r financing, 5 0 ; executives,

157

67, 73, salaries of, 100, 1 0 1 - 1 2 ; fixed charges, 6 9 ; funded debt, 98, 1 0 1 , 102, 108, 1 0 9 ; income, 2, 8, 3 Ϊ , 56 ( T a b l e I I ) , 60, 61, 69, 70 ( T a b l e V I ) , 7 1 , 73, net income to net worth, 9S ( T a b l e X I I ) ; interests, financial, 49-50, and F o x , 5 1 , M o r g a n , 4, Rockefeller, 4 ; liabilities, majors', 68 ( T a b l e V ) ; management groups, 97, ι ο ί , 103; production, 2, 40, 45, 50, 59, 9 5 ; profits, total, 98, 99 ( T a b l e X H I n . a ) , 100 ( T a b l e X I V ) , and invested capital, 99 ( T a b l e X I I I ) ; profit-sharing system, 101 ; real estate, 4, 36-38, 4 1 , 50, Í 4 , 3> 65, 67, 69, 70η.17, 73, 97, 1 0 7 ; R K O , organization of, 4849 ; securities, first public offering, 36, 45η.52; stock, capital, 107, common, 45, 5 1 , 65, 66, 96, 103, 106, 107, 108, 109, 110, preferred, 50, 97, 103, 106, 107, 108, 109, n o , voting, 5 1 , 106, 1 1 0 - 1 1 ; stockholders, 45η.52, 5 i , 65, 69, 97, 98, ι ο ί , 102, 103, 104, 107, 108, 109, n o , I i i ; subsidiaries, 43, 65-66; trusts, voting, 66, 6 7 ; volume of business, ¡ 2 ( T a b l e I ) , 5 5 ; worth, net, and net income, 98 ( T a b l e X I I ) First National Exhibitors' Circuit, 3234i 39» 40, 4in-4«. 45> m > H 4 · See also Warner Brothers; Zukor, Adolph Foreign markets, 69-70 F o x , W i l l i a m , 16, 2 1 , 38, 39, 40, 45, 50-51. See also Finances; F o x Film Corporation ; Sound ; Twentieth Century-Fox Fox Film Corporation, 42, 44, 470.55, 53,

109,

121

F o x Theatres Corporation,

109,

no,

'37 Freeman, Frank, 66 Funded debts, 98, 1 0 1 , 102, 108, 109. See also Finances; Motion picture industry Gable, Clark, 80, 94, 133, 146, 147 Garbo, Greta, j , 133

158

MOTION PICTURE INDUSTRY

Gaumont-British, 51 General Film Company, 1 5 - 1 6 , a t , 30. See also Integration ¡ Motion Picture Patenets Company General Theatre Equipment Corporation, 70 ( T a b l e V l n . a ) , 109 Giannini, A . H., quoted, 94 Gibson, Harvey, 66 Goetz, William, 109, n o Goldman, Sachs Company, 45 G o l d w y n Pictures Corporation, 36 Gone with the Wind, 92, 94, 147 Goodyear, A . Conger, 66 G r a d i n g , of films, 24-2 j ; of theatre», 28-29, 128-29, 130 Grand National Picture», 83, 87η.30 Great Tram Robbery, The, 19, 21 GrifEs, Stanton, 66 Griffith, D a v i d W . , 19, 20, 32 Grunaur, Ralph, 129 Halsey, Stuart & Company, j i Hamilton, William, 67 Hampton, Benjamin B., 38; quoted, χ ι , 1 7 η . 1 9 , 2 i , 26, 39, 4o, 4 1 , J3, 81 Harbord, Jame» G., 67 Hays, W i l l , 1 1 3 ; quoted, i j n . 1 7 , 55 Hertz, John D . , 66 History of the Movies, A, 38^42. See also Hampton, Benjamin B. Hodkinson, William W . , 30, 31 Ince, Thomas, 32 Independent chains, see Theatre»: chains, independent Integration: 1, 3, 17, 31-39, 74, 97, 1 1 5 , 144, 1 4 8 ; achieved by five majors, 5, 39) beginning» of, 15, 1 7 ; booking combines and, 23-24; consent decree ( 1 9 4 0 ) and, 139, 140; defined, 7 ; Motion Picture Patent T r u s t and, i j , 1 7 ; of distribution and production, 30. See also Distribution) Exhibition; First National Exhibitors' Circuit; General Film C o m p a n y ; M a j o r s ; Motion picture industry) Production) T r a d e practices

Jazz Singer,

The,

44, 45

K a t z , Sam, 21-22, 40 Keith-Albee-Orpheum,

48.

See

also

Radio-Keith-Orpheum Corporation Kent, Sydney, 11 o Klangfilm system, 50 Kleine, George, 13η. 12, 14 Koster and Bial's Music Hall, 10 Kuhn, Loeb and Company, 34, 35, 36, 5°

Laemmle, Carl, 15, 16, 21, 40 Lasky, Jesse L., 30, 31. See also

Fa-

mous Players-Lasky Corporation Lasky, Zukor and Bosworth, Inc., Lewis, Howard T . ,

19

1 1 9 ; quoted, 49,

$4, Ϊ4Π.2, j 9 n . 6 , 1 1 7 - 1 8 Loew, Marcus, 18, 21, 22, 40 Loew's, Inc.: assets of, 68(Table I V ) ; dividends of, 99 ; executive remuneration, 102 ( T a b l e X V ) , 103 ( T a ble X V I ) , 104-0J; features, exhibitions of, 72 ( T a b l e V I I I ) , number of, 86 ( T a b l e X I ) , quality of, 73, 147, rating of, 89; film rental, revenue from, 70 ( T a b l e V I ) , 71 ( T a b l e V I I ) , 73, 74, 90, from exchanges, 76 ( T a b l e X ) , from individual features, 73, from own theatres, 7 2 ; Fox and, 51 ; Gone vAth the Wind and, 93 ; liabilities of, 68 ( T a b l e V ) ; a major company, 1, 39, 1 4 3 ; M e t r o purchased by, 36; Paramount and, 127-28; production budget, 89; profits of ( 1 9 2 9 ) , 53, 98 ( T a b l e X I I ) , 99 ( T a b l e X I I I ) ; sound equipment of, 4 7 ^ 5 5 ; star» controlled by, 133, 146, 1 4 7 ; stockholders, 104, 109; subsidiaries of, 65) theatres, location of, 134 ( T a b l e X V I I ) , number of, 70η.17, 134 ( T a ble X V I I ) , number of first-run, 77, 136, in Atlanta, 79, in Los Angeles, 83, 84, 85, in Philadelphia, 85-86; volume of business of, 52 ( T a b l e I ) , 70 ( T a b l e V I ) . See also Integration; L o e w , Marcus; Major»; Metro-

INDEX Goldwyn-Mayer Picture Corporation ; Salaries, executive ; Stars Lombard, F. D., quoted, 97 Los Angeles, 10, 3$, 82-83, 84, 129 Lubin Manufacturing Company, 13η. 12 Majors, the: assets of, 63-64., 67, 68 (Table IV), 69; capital of, 63; competition between, 61, 145-48; consent decree (1940) and, 139-42; control of industry by, 1, j-6, 31, 69, 73, 8l > 8 3, 97, '43-45, 149i cooperation of, 61, 82, 8j, 115, I2J, 128, 130, 136, 144, 149; distribution by, 3, 6, 64, 82, 114, 145, 146-47! earning capacity of, 96, 97, 98-100, 106; exchanges of, 7η.2, 76 (Table X ) , 78; executives of, 101-112; features, exhibitions of, 72 (Table VIII), number of, 1, 86 (Table X I ) , 145, rating of, 89; film rental, gross revenue from, 71 (Table VII), 90, as percentage of total income, 70 (Table VI), from affiliated theatres, 6, 75; from exchanges, 75, 76 ( T a ble X ) , from first-run, 79; income of, sources of, 60, 63, total, 2 (•939)) 99« integration of, 1, 3, 7η.ι, 64, 144; liabilities of, 68 ( T a ble V) ; members composing, 1 ¡ organization of individual, 67 ; production of, budgets, 89, importance °f> 87-95, income from 70 (Table V I ) ; profits of, 98 (Table X I I ) , 99 (Table X I I I ) ; Securities and Exchange Commission and, 64-65 ; sound, effects of, on, 42-49, 53; stars, controlled by, 94; stockholders, 69, 104 ; subsidiaries of, 65 ; theatres, first-run, 77, 82-83, ' 4 5 , location of, 134 (Table X V I I ) , number of, 6, 74, 134 (Table X V I I ) , operators of, 69, 145, owners of, 72-73, sound and, 53; trade practices among, 11539; volume of business of, 52 (Table I). See also Integration; Motion picture industry; Finances; Theatres ;

159

and under names of individual companies Mallard, William, 48η.58, 6j Management groups, 97, too, 103 Marx Brothers, j , 133 Mayer, Louis B., 104, 105 Mayer, Louis B., Pictures, 104 Melody Range, 91-92 Metro-Goldwyn Pictures Corporation, 42Π.48, 121. See also Loew's, Inc. Metro Picture Corporation, 36 Miles, Harry J., 1 3 Milies Manufacturing Company, George, 13η. 12 Monogram Pictures, 2, 64, 71 (Table VII), 87, 8 7 n. 3 o Motion picture industry: advertising in, 80-81, 92; assets of, 62-63; competition in, 2, 13-14, 23, 61, 14548, 149; control of, 1-2, 5-6, 11, 12, 16, 17, 51, 64, 83, 95, 143-44, ' 4 5 i corporations in, number of, 2, 13, 62, 87, and their gross income, 2; costs, 7η.2, 26, 88, 9i ; distribution in, 7Π2, 113-14; employment in, 56, 57 (Table I I I ) ; equipment manufacturers and, 3-4, 8, 11, 13-17, 18; executive remuneration in, 101, 104, 112; feature films in, 87, 89; film rentals (1919) 35, from first-runs, 78-79; financial interests, and, 4950; history of, 8-14, 20-22, 39-42; importance of, 55-58; income of, 2, 35; integration of, 1, 7η.1, 9, 17, 30, 32, 37, 144; other industries and, 100 (Table XVI), 148-49; interdependence in, 61, 144; product in, 3-5, 7η.ι, 17-19, 24, 41, 58, 60, 80, 83, 90, 113-14, 117-19; profits of, 34, 53, 9«, 99. ' 0 ° , 1 0 0 (Table X V I ) , m ; and real estate, 50, 54, 63; sound and, 51-53; structure of, ' , 7-8, 39, 54, 5«, 61-64, 113; theatres, number in, 6, 62, 75 (Table I X ) (1933-38) 133, number of firstrun, 77, seating capacity of, 74; trade practices in, 115-16, 128; vaudeville . and, 10-11, 41; volume of business, 55-56, 56 (Table IV). See also Fi-

ι6ο

MOTION PICTURE INDUSTRY

nances; Integration; Majors; Sound; Theatres; Trade practices, and under names of individual companies Motion Picture Industry, The, tee Lewis, Howard T . Motion Picture Patents Company: Bell Telephone Company and, 43-44, exchanges and, 4, 14-16; failure of, 17-10, 2 j , 26, ι j o ; Federal government and, 16, 18; members of, 4, i j n . 1 2 ; prices as set by, 14, 17Π.19; purpose of, 3, 1 4 ; salaries and, 2526, 29, 36, 42; star system and, 25; structure of, 14. See also Edison Manufacturing Company; General Film Company Motion Picture Theatre Operators of America, 38 Motion picture public, 4, 5, i i , 17, *1> 79· 80-81, 93, 9Í, " 4 , " 5 . 124, 126, 130, 132, 150 Mutual Films, 19-20, 26 National Theatre Corporation, 67η.16, ι io New York City, 35, 39, 49, 74, 78, 136

Nevi York m Β lizzar dt 20 Newton, Maurice, 66 Nickelodeons, io, 17, i8, 19, 21, 28, 39> 40, " 3 Odium, Floyd, 67 Overbuying, n j , 122, 122η.7, 141. See also Trade practices Paramount Pictures, Inc.: assets of, 68 (Table I V ) ; capital of, 69, 99 ; corporate debt, 98; dividends of, 99; executive remuneration, 101, 102 (Table X V ) , 103 (Table X V I ) ; features, exhibitions of, 72 (Table V I I I ) , 73, number of, 86 (Table X I ) , preference, exhibitors' for, 133; ratings of, 89, Virginia, 92 ; film rentals of, revenue from, 70 (Table V I ) , 71 (Table V I I ) , 90, from own theatres, 72; financial history of, 108; liabilities of, 68 (Table V ) ;

Loew's circuit and, 127-28; a major company, 1, 39, 143; original company, 30-31; personnel, executive, 66; production budget, 89; domination of ( 1 9 2 3 ) , 39; profits of, 53, 98 (Table X I I ) , 99 (Table X I I I ) ; sound equipment of, 47Π.55; subsidiaries, 65-66 ; theatres, acquisition of, 38; location of, 134 (Table X V I I ) ; number of, 49, 65-66, 70, 7on.i7, 134 (Table X V I I ) , 136, 146, number of first-run, 77, in Atlanta, 79, in Los Angeles, 83, 85, in metropolitan centers, 136, value of, 72-73; volume of business, 52 ( T a ble I ) , 70 (Table V I ) . See also Finances; First National Pictures; Integration; Salaries; Stars; Theatres; Zukor, Adolph Paramount-Famous Players-Lasky, 42η. 48 Paramount Theatres, 22 Patent Pool, see Motion Picture Patents Company Patents, see Edison, Thomas; Edison Manufacturing Company; Sound; Motion Picture Patents Company Pathé Frères, 13η. 12 Patterson, Richard, 48η.58, 6η Peep-shows, 10, 11, 21 Personnel, 7 ; executive, 66-67, 69> 73> 101-12 Philadelphia, 22, 78, 85, 136 Photophone, 4, 46, 47, 48 Pickford, Mary, 24, 25, 26, 27, 30, 32, 34. ·20 Play dates, 3, 7, 28-30, 33, 38, n 4 , 115, 124-25, 137, 144 Playing time, 122. See also Trade practices Poli theatres, 29, 51 Population, and number of theatres, 8, 7J, 75 (Table V I I I ) , 131 Poverty Row, 46 Prochet, Ottavio, 67η. 15 Producers: 7, π , i i , 13, 13η.12, 22, 25, 26, 27, 3o, 58, 143, independent, 3, «> ·5> 1 9) 36. 37, S°> 80, 81, 82, 87, 88, 93-95, 146, «49

INDEX Product, 4-5, 7 η . ι , i7-«9» »4. 38, * i , 58, 80, 83, 90, 1 1 3 - 1 4 , 143, »4*. 145, 147, 1 4 8 ; defined, 3 ; effect of organization on, 6 3 ; money available for, 59, pooling of, 60 ¡ poor, and block-booking, 1 1 7 - 1 9 , secondary place, 3 Production: budgets, 89, 9 1 , 9 2 ; capital in, 62; consent decree ( 1 9 4 0 ) , 139, 1 4 5 ; corporations, i , 6 2 ; defined, 7 ; distribution and, 24-31 ; employees in, j 7 ( T a b l e I I I ) ; exhibition and, 61 ; features, 87, 88 ; First National and, 3 3 ; funds, 5 9 ; income from, 70 ( T a b l e V I ) , 71 ( T a b l e V I I ) , 7 3 ; integration of, 1, 3 1 - 3 9 ; Loew and, 1 8 ; majors, importance of, 2, 87-95; newsreels, 8 7 ; organization, effects on, 69 ; profits from, 3 j ¡ stars and, 34; trade practices and, 120, 121. See also Distribution, Exhibition ; Film rental ; Integration; M a j o r s ; Producers; Product, and under names of individual companies Production number, 120, 121. See also T r a d e practices Profitability, see Costs ; Exhibtion ; Film rental; Finances; M a j o r s ; Motion picture industry; Production; Salaries; and under names of individual companies Protection, 1 1 5 , 125-31. See also T r a d e practices Radio Corporation of America, 4, 43, 44, 46. 67 Radio-Keith-Orpheum : asset values of, 49; dividends o f , 49, 9 9 ; executive remuneration, 102 ( T a b l e X V ) ; Disney and, 82; features, exhibitions o f , 71 ( T a b l e V I I I ) , 86 ( T a b l e X I ) , preference of exhibitors for, 133, rating of, 89; film rentals of, revenue from, 70 ( T a b l e V I ) , 71 ( T a b l e V I I ) , 90; financial history o f , 4 9 ; a m a j o r company, 1, 39, 1 4 3 ; origin of, 4 6 - 4 7 ; personnel, executive, 6 7 ; production budget of, 89; profits of,

ι6ι

J3 j structure of, 48-49; theatres, location of, 49, 134 ( T a b l e X V I I ) , 136, number of, 700.17, 134 ( T a b l e X V I I ) , number of first-run, 77, in metropolitan centers, 136; trade practices and, 1 2 1 ; volume of business, 49, 52 ( T a b l e I ) . See also Radio Corporation of America ; Sound Rand, J. Α . , 6 7 η . j Rathvon, Peter, 48η.58, 6y Release dates, see Play dates Renraw, see W a r n e r Brothers Republic Pictures, 2, 64, 71 ( T a b l e V I I ) , 83, 87, 87n.3o, 90, 91-92 Rialto Theatre, 35, 81 R K O Radio Pictures, Inc., 48 Rockefeller Center, Inc., 48 Rogers, Charles R., 67η. 15 Rubin, J. Robert, 104, 105 Run, 77, 130, 1 3 6 ; arbitration o f , 1 4 1 4 2 ; classification by, 1 2 5 ; importance of, 1 2 6 ; no run, 129. See also Theatres, first-run Sack Films, 8 7 ^ 3 0 Salaries: executive, as percentage of dividends, 103 ( T a b l e X V I ) , company earnings, in form of, 104-05, as percentage of net earnings, 102 ( T a b l e X V ) , limits to, 106, company policy, 105-06, 108, profits and, 100, early standard of, 27, trend in, 1 0 1 , total ( 1 9 3 9 ) , 101, variations in, 1 0 4 ; stars, Patent Company and, 25-26, 27, early producers and, 2526, 27, F i m National and, 34, independent producers and, 93, 94. See also Chaplin, Charles; Loew's, Inc.; M a y e r , Louis B . ; Pickford, M a r y ; Rubin, J. Robert; T h i l b e r g , Irving Schaefer, George, 4 8 ^ 5 8 , 67 Schaeffer, D a v i d M . , 6 7η. 15 Schedule of contract, 120-21. See also T r a d e practices Schenck, Joseph M . , 109, Schine chain, 124

no

162

MOTION PICTURE INDUSTRY

Securitie* Exchange Commission, 6465, 6411.14, ι ο ί , ioin.4 See and. Hear, tee Will Hay« Seldes, Gilbert, 4, 5, 16 ¡ quoted, j , 9, 10 Select Picture», 32 Selig Polyscope Company, 1 j n . 1 1 Selznick, David O., 91-93, 94 , Lewis J . , 32 Sennett, Mack, 32 Sleeper, 80 "Some Economic Aspects of Motion Picture Production acd Marketing," see Cassaday, J r . , Ralph Sound: contract, Telephone Company's, 43-44; cross-licensing, 46, 47 ; development of, 4 1 - 4 2 ; exhibition and, 5 1 - 5 2 ; financial interests and, 49-50¡ Τ fu Jazz Singer, 44, 45 ; majors and, 42, 43, 44; importance of equipment manufacturers, 4, 1 6 ; market for equipment, 47η.55 ; profits from, 45, 5 3 , R.K.O. and, 49; theatres install, 4 3 ; Warner Brothers and, 43. See also American Telephone & Telegraph Company ¡ Fox, William ; Photophone ( Radio Corporation of America ; Radio-Keith-Orpheum ; Warner Brothers Spectrum Films, 87η.30 Stanley Booking Corporation, 22, 39, 4$, 78 Star groups (system), 24, 25, 120 Star»: contracts of, 34, 93, 145-46; exhibitors' preferences, 1 1 9 , 1 3 3 ; Famous Players and, 24, 30, 3 1 , 32; First National and, 34; grading of films based on, 24-25; majors and, 93-94, 146; Patents Trust and, 25; independent producers and, 93-94; public and, j , 19, 25, 93, 1 3 2 , 1 4 5 ; salaries of, 25, 26, 27, 34, 93, 94; star system (groups), 24, 25, 1 2 0 ; status of, 93-94. See also Chaplin, Charles; Gable, Clark; Pickford, Mary Statistics of Income, 62η. 8 Subsidiaries, see under names of indi-

vidual companies T a l l y , T . L., 20 Thalberg, Irving, 104, 105 Theatres: affiliated, 2, 6, 38, 60, 7 1 , 7», 74, 7*. 1*3» «*5, 1 1 7 » 1 33» · 3 4 , ' 4 3 . »44» chains, 2, 6, 8, 1 7 , 20-31, 39, 5 1 , S3, 64, 74, " i , 123, 1 2 5 , 128, 1 3 2 , 1 3 3 , 134, 1 3 7 , 1 4 1 , 1 4 7 ; classification of, 28-29, 1 2 5 , 127, 128-29, 1 3 0 ; first-run, 29, 33, 34, 3«, 37, 3*"39> 40, 42, 44, 7*, 77" 84, 85, 88, 92, 95, 1 1 4 , 1 1 5 , 124, 126, 130, 136, 1 3 7 , 143, 1 4 5 ; independent, 2, 6, 33, 34-39, 6 4, 74, 12 77, S> • 3 1 , 1 3 2 , >33-34, ' 3 7 , ' 3 8 , 1 4 6 ; ownership of, 4, 3439, 45, 49, 50, 53, 54, 60, 62, 63, 67, 70η.17, 72-73, 74, 83, 97, 1 1 5 , 126, 1 3 4 (Table X V I I ) , 139, 140, •45 ί seating capacity of, 74, 75, 75 (Table I X ) , 77; subsequent-run, 33, 79, 85, 1 1 4 , >24, 1 3 · , '48 Titles, as basis of sales, 120 Tower Pictures, 87η.30 Trade practices, 8, 32, 1 1 4 - 1 4 2 . See also Blind buying; Blockbooking; Cancellation privileges; Clearance; Consent decree; Overbuying; Play dates; Production number; Protection ; Run ; Schedule of contract ; Zoning Triangle Pictures, 3 1 , 50 Tri-Ergon sound patents, j o , 51 Twentieth Century Films, 109, 1 1 0 Twentieth Century-Fox: assets of, 67 n.16, 68 (Table IV) ; corporate debt, 98; dividends of, 99; executive remuneration, 1 0 1 , 102 (Table X V ) , 103 (Table X V I ) ; features, exhibitions of, 72 (Table V I I I ) , 73, number of, 86 (Table X I ) , exhibitors' preference for, 133, rationing of, 89; film rentals of, revenue from, 70 (Table V I ) , 71 (Table V I I ) , from exchanges, 76 (Table X ) , 90; financial history of, 1 0 9 - 1 1 ; liabilities of, 68 (Table V ) ; and Loew's, 85;

INDEX a m a j o r company, ι , 39, 99, 143) production budget, 89; profits of, 92, 98 ( T a b l e X I I ) , 99 ( T a b l e X I I I ) } sound equipment of, 4 7 ^ 5 5 ; theatres, location of, 39, 134 ( T a b l e X V I I ) , n u m b e r of, 70η. 17, 134 ( T a b l e X V I I ) number of first-run, 77, in Los Angeles, 83, 84, in metropolitan centers, 136; volume of business, 52 ( T a b l e I ) , 70 ( T a b l e V I ) United Artists C o r p o r a t i o n : features, n u m b e r of, 86 ( T a b l e X I ) , r a t i n g of, 89; film rentals of, 71 ( T a b l e V I I ) , 90; as a m a j o r company, 1, 84-87; a private corporation, 64^14; sound and, 42, 4211.48; trade practices and, 121-22; volume of business, j 2 ( T a b l e l ) , 64 Universal Corporation, 66, 67, 103. See also Universal Pictures Universal Pictures: assets of, 67, 68 ( T a b l e I V ) ; dividends of, 99; executive remuneration, 102 ( T a b l e X V ) ; features, importance of double, 87, improvement in, 137-38, number of, 86 ( T a b l e X I ) , exhibitors' p r e f e r ence f o r , 133, r a t i n g of, 89; film rentals of, revenue f r o m , 71 ( T a b l e V I I ) , f r o m exchanges, 76 ( T a b l e X ) , 90; liabilities, 68 ( T a b l e V ) ; as a m a j o r company, 1, 84-87; a private corporation, 66, 67, 103, 106; production budget, 89; profits of. 9 2 > 97, 98 ( T a b l e X I I ) , 99 ( T a b l e X I I I ) ; sound and, 4 2 ^ 4 8 , 4 7 η · ί ΐ > subsidiaries of, 6 6 ; theatres, 145; trade practices and, 121; volume of business o f , j 2 ( T a b l e I )

163

W a r n e r Brothers: assets of, 68 ( T a b l e I V ) ; capital 69, 106-07; control of, 107, 109; corporate debt, 98; dividends of, 99, 106, 108-09; executive remuneration, 101, 102 ( T a b l e X V ) , 103 ( T a b l e X V I ) ; features, exhibitions of, 72 ( T a b l e V I I I ) , number of, 86 ( T a b l e X I ) , exhibitors p r e f erence for, 133, rating of, 89; film rentals of, revenue f r o m , 70 ( T a b l e V I ) , 71 ( T a b l e V I I ) , 73, 90; financial history, 107 ; financial interests and, j o , 106-07; liabilities of, 68 ( T a b l e V) ; a m a j o r company, 1, 39, 143; m a j o r s and, 45-46; origins of, 20, 39, 40-41 ; production budget, 89; profits, 45, j3, 98 ( T a b l e X I I ) , 99 ( T a b l e X I I I ) , stockholders and, 106; Renraw, 45, 106-07; sound and, 42-45, 47η.57; subsidiaries, 65; theatres, location of, 134 ( T a b l e X V I I ) , 136, number of, 70η. 17, 134 ( T a b l e X V I I ) , number of first-run, 77, in Pennsylvania, 78, in Philadelphia, 78, 85-86, in metropolitan centers, 136; as theatre owners, 49, 107; volume of business, 52 ( T a b l e I ) , 70 ( T a b l e V I ) . See alto A m e r ican Telephone & T e l e g r a p h Comp a n y ; Finances; M a j o r s ; Sound W e b b Pictures, 8 7 ^ 3 0 Western Electric Company, 4, 42, 43, 46. See also American Telephone 4 T e l e g r a p h Company W e s t e r n s , 87-88, 90, 91-92, 140

Whitney, J o h n J a y , 92 Willensky, Jeanete, quoted, 121-22 W o r l d Pictures, 50, 87, 87^30 Yardell, L u m f o r d , 67

Variety,

q u o t e d , 9J, 127-28, 129-30

Vaudeville, 10-11, 20, 41 Victory Pictures, 87η.30 Vitagraph Company, 13η. 12, 14 Vitaphone Corporation, 42, 43, 44 Vitascope, 70 Warfield, D a v i d , 10

Zanuck, D a r r y l , 109, 110 Zoning, 115, 125, 126, 129, 130, 137. See also T r a d e practices Z u k o r , Adolph, 21, 24, 27, 30-31, 32, 33, 34, 3 J - 3 6 . 40, 50» 66. See also F a m o u s Players; First N a t i o n a l ; Paramount