Antitrust Rulings Force Film Studios to Divest Theaters Summary

  • Last updated on November 10, 2022

The U.S. Supreme Court determined that it was a violation of antitrust laws for a film studio to own a chain of movie theaters. The major studios were therefore ordered to divest themselves of the theaters they owned.

Summary of Event

During the 1930’s, the motion picture industry was dominated by five major studios, Radio-Keith-Orpheum (RKO), Warner Bros., Paramount, Loew’s, and Twentieth Century-Fox, that produced, distributed, and exhibited motion pictures. Three other minor firms—Columbia, United Artists, and Universal—produced and distributed significant numbers of motion pictures but did not own any theaters. The five major studios owned theaters accounting for about 45 percent of U.S. film rentals; they owned 70 percent of first-run theaters in cities with populations larger than 100,000 and 60 percent in cities with populations between 25,000 and 100,000. The major studios’ theaters were operated by franchise agreements in which film rental charges were assessed as a percentage of overall receipts. The contracts were detailed and provided circuits (groups of theaters) with options that were not granted to independent theaters. Antitrust enforcement Hollywood studio system;divestment of theaters United States v. Paramount Pictures, Inc. (1948) Supreme Court, U.S.;antitrust law [kw]Antitrust Rulings Force Film Studios to Divest Theaters (May 3, 1948) [kw]Rulings Force Film Studios to Divest Theaters, Antitrust (May 3, 1948) [kw]Film Studios to Divest Theaters, Antitrust Rulings Force (May 3, 1948) [kw]Studios to Divest Theaters, Antitrust Rulings Force Film (May 3, 1948) [kw]Theaters, Antitrust Rulings Force Film Studios to Divest (May 3, 1948) Antitrust enforcement Hollywood studio system;divestment of theaters United States v. Paramount Pictures, Inc. (1948) Supreme Court, U.S.;antitrust law [g]North America;May 3, 1948: Antitrust Rulings Force Film Studios to Divest Theaters[02480] [g]United States;May 3, 1948: Antitrust Rulings Force Film Studios to Divest Theaters[02480] [c]Motion pictures and video;May 3, 1948: Antitrust Rulings Force Film Studios to Divest Theaters[02480] [c]Laws, acts, and legal history;May 3, 1948: Antitrust Rulings Force Film Studios to Divest Theaters[02480] [c]Trade and commerce;May 3, 1948: Antitrust Rulings Force Film Studios to Divest Theaters[02480] Douglas, William O. Hand, Augustus N. Frankfurter, Felix Balaban, Barney

Distribution of films to independent exhibitors Motion picture exhibition was, nevertheless, an important activity if the profit from a film was to be maximized. Since distributors leased rather than sold films, a film distributor had to be concerned not only with existing leases but also with scheduling future leases. Typically, a film was publicized, then distributed to large, high-gross theaters for a “run,” and then distributed to smaller, low-gross theaters (known as “second-run theaters”) for additional runs. Because some days of the week generated larger attendance than others and because transportation of films was a time-consuming, costly process, efficient scheduling of all the runs of a given film at different theaters was a critical activity.

The five major and three minor studios developed numerous business practices to maximize the profits they realized through film distribution. These included specifying admission prices to be charged by the theater; leasing packages of films on an all-or-nothing basis, a practice known as “block-booking”; providing the exhibitor of a film with a promise not to show the film at another theater in the same market for a stipulated period of time, a practice known as “clearance”; and joint operation of theaters in a given market area or a pooling of their revenues. Theater owners complained regularly to the Justice Department and the Federal Trade Commission (FTC) that these business practices excluded entrants in the production and distribution of films and provided the studios with monopoly power in film exhibition.

During the early 1930’s, the Justice Department filed numerous antitrust suits against firms in the motion picture industry, alleging the use of monopolistic contracting practices in particular markets. After a five-year investigation of monopolistic practices in the motion picture industry, the department decided to use a more systematic approach. In July, 1938, the Justice Department filed an antitrust suit against the eight largest integrated motion picture firms. The suit alleged a conspiracy to fix prices in first-run theaters in major cities and to restrict the access of independent distributors to first-run films produced by the eight producers charged in the suit. The complaint asked that production and distribution be divorced from exhibition of films.

The government and the five major studios reached a voluntary agreement, in which the Justice Department issued a consent decree, on November 20, 1940. The consent decree—a judicially sanctioned agreement between two parties—prohibited block-booking of more than five feature films, licensing films without first showing them to exhibitors (a practice known as blind-booking), or tying the lease of a short film to the lease of a feature film. It also forbade the studios from acquiring substantial numbers of new theaters. It was stipulated that conflicts over clearances were to be resolved by independent arbitrators.

Complaints from independent exhibitors continued after the consent decree, and in August, 1944, the government asked the studios if they would agree to amend the consent decree to mandate that they sell their theaters. The studios rejected the proposed breakup of their vertically integrated firms, and the government responded by reviving the 1938 antitrust case. The eight different cases resulting from this decision were consolidated as United States v. Paramount Pictures, Inc. They were tried before a three-judge panel of the U.S. District Court for the Southern District of New York beginning on October 8, 1945. Augustus N. Hand—a judge on the U.S. Court of Appeals for the Second Circuit who had previously sat on the district court—was temporarily reassigned to the district court to head the panel. On June 11, 1946, Hand issued the opinion of the court. The panel had decided that the studios had not monopolized the production of motion pictures. The court also found, however, that the distribution practices of the five major studios did violate the Sherman Antitrust Act.

Once this opinion was issued, the trial continued to a judgment phase, in which the court heard arguments and solicited proposals from all parties as to the appropriate remedy for the studios’ distribution monopoly. The district court’s final ruling was issued on January 22, 1947: It ordered both the major and the minor studios to cease practices such as block-booking, dictating minimum ticket prices, requiring “arbitrary” runs and clearances, making “formula deals” that tied a film’s rental fee to a percentage of its national gross revenues, and pooling the management of allegedly competing theaters. The court also ordered the major studios to institute competitive bidding in film distribution.

Both sides appealed the case to the U.S. Supreme Court, and on May 3, 1948, the Court, by a 7-1 vote, affirmed portions of the district court’s decision and reversed other portions of the decision. Writing for the Court, Justice William O. Douglas condemned many of the trade practices employed by the studios and observed that small independent operators “have been the victim of the massed purchasing power of the larger units in the industry.” Douglas rejected, however, the district court’s proposed remedy for the violations, that film distribution be conducted by competitive bidding. He argued that firms with the deepest pockets would possess too large an advantage and noted practical difficulties with such auctions. The Court then remanded the case back to the district court for reconsideration of the appropriate remedy for the violations. Justice Felix Frankfurter dissented in part, claiming that, because the lower court had read thousands of pages of evidence that the high court had not seen, the Court should not presume to second guess the district court’s judgment.

In 1949, Judge Hand ruled for the district court that divestiture by the studios of their exhibition businesses was necessary to restore competition in the industry. Between 1948 and 1953, four of the five majors divested their exhibitor subsidiaries. Divestiture of theaters by Loew’s was delayed by arguments over the allocation of its debt between the two new production and exhibition companies, but its spin-off of theaters was completed in 1959.

Significance

It is particularly difficult to judge the impact of the Paramount case because of the other massive changes in the film industry that occurred in the post-World War II period. The most obvious factor affecting the motion picture industry was the rise of a new and powerful competitor in the entertainment business: television Television;effects upon motion picture industry . Between 1946 and 1953, average weekly attendance at film theaters fell from eighty-two million to forty-six million people. Exhibitor net income fell from $325 million to $46 million over the same period. Between 1946 and 1955, consumers reduced the share of their income devoted to theater tickets and concessions by one-half, to 0.5 percent. The number of theaters remained roughly constant, at about nineteen thousand, between 1946 and 1955, but about four thousand indoor theaters were forced to close as a result of competition from a similar number of new drive-in theaters. The drive-ins were often operated by new entrepreneurs, and owners of indoor theaters complained that these theaters were receiving the business they had expected to receive after the Paramount decisions.

Television was not the only reason for the film industry’s decline. The postwar baby boom left young parents with less leisure time. Hiring babysitters to care for young children raised the cost of seeing movies substantially. Innovations in other entertainment industries, such as nighttime baseball games, created new diversions during a time when people traditionally viewed movies. Movement to the suburbs also meant that individuals spent more time commuting and working on their homes, leaving less time for motion pictures.

The rise of television also changed the product that consumers demanded from Hollywood. Much of the type of entertainment provided by B-films was now provided on a daily basis by network television. To encourage parents to take time away from their busy lives to see a film, the experience had to represent a distinct improvement over two hours of television. Hollywood responded by producing more quality motion pictures, with larger budgets.

The move away from B-films may help explain why admission prices increased at the same time that overall attendance was falling. Individuals were willing to pay more to see a film if the average quality was expected to be higher. The average price of a film at an indoor theater rose from $0.36 in 1948 to $1.24 in 1967, an increase substantially greater than the increase in the consumer price index. The higher prices of films may also have resulted from the closure of competing theaters in some market areas, increased distribution costs brought about by changes in distribution practices mandated by the Paramount case, or increased markups imposed by newly independent exhibitors who could set their own ticket prices.

The Paramount case also subjected the defendants to a large number of private antitust suits. Federal courts allowed independent exhibitors to use the Paramount decision as evidence that the studios had conspired to violate antitrust laws prior to 1948. An exhibitor needed only to prove that it had been harmed by the conspiracy and show the extent of its damages. Damages in private antitrust suits were trebled, representing substantial potential liabilities for the studios. Simon Whitney reported that total claims in these private antitrust suits amounted to $600 million but that most claims were ultimately settled at a deep discount.

Another major postwar trend in the motion picture industry was the decline in the number of foreign and domestic feature films released. From an average of 476 annual releases between 1937 and 1942, the number of releases declined to 295 in 1954 and 283 in 1955. Most of the decline in output was concentrated among the eight largest producers, and much of it was related to the decline in demand for motion picture entertainment.

Some exhibitors attributed the “product shortage” to the forced sale by the five major studios of their exhibitor subsidiaries. It was alleged that the studios had less of an interest in filling theater screens, since they no longer owned those screens. Ironically, during the early 1950’s a trade association of exhibitors (Theater Owners of America) attempted to contract with independent producers to ensure a steady flow of films. In 1955, a second trade association of exhibitors (Allied States Association of Motion Picture Exhibitors) called upon the Justice Department to allow the newly independent exhibitor firms to begin producing their own films.

The Justice Department had argued in the Paramount case that the business practices of the five majors had acted to prevent independent producers from gaining access to theaters. If the decision in fact restored competition to the industry, one would likely observe more independent firms entering the production business. Entrance may well have been stymied by the decline in the film industry after the war. Nevertheless, it is interesting to observe that after the major studio divestitures, independent firms produced a smaller proportion of domestic feature films. Between 1942 and 1945, independents produced 31 percent of domestic motion picture releases; between 1952 and 1955, independents produced only 21 percent of the total. In addition, over the same period, independents distributed a smaller proportion of foreign feature films.

After the 1950’s, it became much more difficult to make meaningful comparisons. By 1960, the studio system that had been in place for more than forty years was coming to an end. Studios ceased to be self-contained entities in which actors, writers, directors, and all other key occupations were under contract. As the nature of film production changed, its relation to distribution changed as well. Antitrust enforcement Hollywood studio system;divestment of theaters United States v. Paramount Pictures, Inc. (1948) Supreme Court, U.S.;antitrust law

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Adams, Walter, ed. The Structure of American Industry. 11th ed. Upper Saddle River, N.J.: Pearson/Prentice Hall, 2005. Presents the history, structure, and economics of twelve major American industries. Contains a thoughtful chapter by Barry Litman analyzing the structure, conduct, and performance of the motion picture industry.
  • citation-type="booksimple"

    xlink:type="simple">Balio, Tino, ed. The American Film Industry. Rev. ed. Madison: University of Wisconsin Press, 1985. An excellent review of the film industry’s development, including discussions of the industry’s early days, its development into an oligopoly during the 1930’s, and its reorganization after World War II. Contains a chapter by Michael Conant analyzing the impact of the Paramount case on the motion-picture industry.
  • citation-type="booksimple"

    xlink:type="simple">Blair, Roger, and David Kaserman. Antitrust Economics. Homewood, Ill.: R. D. Irwin, 1985. Uses fundamental principles of economics to analyze major issues in antitrust law. Provides an assessment of numerous controversial business practices and presents original analysis of important antitrust cases. Chapters 11-16 provide a careful analysis of the business practices that were attacked by the Justice Department in the Paramount case.
  • citation-type="booksimple"

    xlink:type="simple">Calvani, Terry, and John Siegfried. Economic Analysis and Antitrust Law. 2d ed. Boston: Little, Brown, 1988. Presents short excerpts from many important articles by economists analyzing the impact and efficiency of antitrust law. Chapter 4 provides a general analysis of the business practices that the Justice Department attacked in the Paramount case.
  • citation-type="booksimple"

    xlink:type="simple">Kindem, Gorham, ed. The American Movie Industry: The Business of Motion Pictures. Carbondale: Southern Illinois University Press, 1982. Presents the views of established scholars from several fields on the history, marketing strategies, product innovations, industry structure, and contracting practices of the American film industry. Simon Whitney’s chapter on antitrust policies and the motion picture industry provides an excellent analysis of the Paramount case’s impact.
  • citation-type="booksimple"

    xlink:type="simple">Lev, Peter. Transforming the Screen, 1950-1959. History of the American Cinema 7. New York: Charles Scribner’s Sons, 2003. Discusses the state of the motion-picture industry throughout the 1950’s in painstaking detail. Contextualizes the results of the Paramount decision by explaining the general changes in cinema in the 1950’s.
  • citation-type="booksimple"

    xlink:type="simple">Schatz, Thomas. Boom and Bust: American Cinema in the 1940’s. History of the American Cinema 6. Berkeley: University of California Press, 1999. Part of a definitive series on the history of the American motion-picture industry; provides a comprehensive overview of the state of the industry in the 1940’s. Essential context for the Paramount case.
  • citation-type="booksimple"

    xlink:type="simple">Waldman, Don E. The Economics of Antitrust: Cases and Analysis. Boston: Little, Brown, 1986. Waldman presents excerpts from major twentieth century antitrust cases and uses economic theory to analyze the principles used by judges to decide these cases.

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