Mises Daily

A
A
Home | Library | Microsoft and the Movies

Microsoft and the Movies

September 27, 2000

The Supreme Court has declined to put the antitrust case against Microsoft on fast track, decreasing the chances that the lower court and the antitrust division of the Justice Department will succeed in their efforts to break the company into two parts.

To understand why this is a victory for consumers, consider a case 50 years ago when the Supreme Court played the key role in splitting up the film industry. U.S. vs. Paramount Pictures (1948) bears many of the same features as the Microsoft case and sends some strong warning signals that recovery from software breakup would be slow indeed. After all the redistribution of wealth, software and computers would never be the same.

In 1938, at the prodding of the Roosevelt administration and disgruntled independent theaters, the Federal Trade Commission began an antitrust investigation of the major movie studios. The government charged the major defendants in the case (Paramount, Loew's, RKO, Warner, and 20th-Century Fox) with conspiracy to restrain trade and monopolize the motion picture industry
(even though together, they produced less than half of all movies).

Put on hold for the war, the suit was resumed in 1944. The government concluded that: the studios' combination of producing, distributing and exhibiting motion pictures monopolized the profitable first-runs of the best movies; by licensing films to theaters as a group, the studios were
making illegal tying agreements; by having long-term contracts with actors and employees they monopolized the best talent; and by "blindselling" unseen films to theaters, it was evidently putting undue pressure on theaters and blocking outsiders.

In its broad outlines and its details, the allegations of licensing agreements and tying arrangements are similar to the charges against Microsoft. Like the computer software industry, the movie business was born of a major technological breakthrough. Both industries advanced quickly
with an entrepreneurial spirit largely untouched by government interference. In both case, it was the disgruntled competitors of the dominant players who brought or cheered on the government's breakup.

Indeed, two decades prior to the Great Depression was a period of frenzied "cutthroat" competition in the movie business. It resulted in a small number of big studios "dominating" the industry. It also made movie fans out of millions of Americans, who, like their modern counterpart in the computer software and game market, couldn't wait for new releases.

In the 1930s the motion picture business settled into the greatest means ever created for making movies: the studio system. Professional critics confirm what I found in my own informal survey of movie buffs: movies made in this period are more highly regarded than those made after the Justice Department broke up the industry. The year 1939 was the high-water mark for the studio system with such legendary movies as "Gone With the Wind," "Stagecoach," "Mr. Smith Goes to Washington," "Wuthering Heights," and "The Wizard of Oz" competing for Oscar.

The major studios competed with each other while seeking tying agreements with everyone with whom they did business. This provided some measure of financial security for everyone involved. There were no legal restraints on entering the industry, so that dozens of independent producers (such as Walt Disney) and theaters worked to compete and gain a market share.

The studio system was a product of ownership and long-term contracting which allowed entrepreneurs to make the investments that were necessary for the development of new and superior products. Actors, for example, were offered lucrative long-term contracts with artistic freedom that often provided free training, voice and dance lessons, and morals clauses, which
protected their careers as well as the studios' investment. Everyone behind the camera was also cultivated and promoted through a system of long-term contracting.

Most important were the theaters themselves, which constituted up to 95% of the studios' total investment. The studios owned the theaters to control the environment where their product was consumed. They did careful market research to ensure the theaters contributed to the beauty of cities and inspired audience loyalty to the studio.

These arrangements gave birth to ever more and nicer movie palaces (2,550 were built in 1928 alone), with all the amenities (the average investment zoomed tenfold from 1920-29) including low-price refreshments. The studios also made sure that the theater employees were properly dressed, highly disciplined, and well trained to prevent disruptive behavior during the movie.

All of this changed with government's lawsuit. After a massive investigation and a frantic effort by the industry to falsify the charges with haphazard restructuring, a New York District Court came down hard on the industry. It recommended a break up very similar to the one Judge Thomas Penfield Jackson called for against Microsoft. The production of movies (the operating system) were to be split from showing of movies (the applications). The Supreme Court upheld the decision in every important respect and forced seven studios to divest themselves of their theaters.

By 1957, the last of the divestitures were completed. The government had expropriated the studios' property and smashed a world-renowned industrial creation.

At the time of the Court decision, everyone predicted that the quality, consistency, and availability of movies would go up and prices would fall. The opposite happened. By 1955, the numbers of produced films had fallen by 25 percent. More than 4,200 theaters (or 23 percent of the total) had shut their doors. For a quarter of a century or more the quality of movies and acting languished while the grand old theaters deteriorated and were replaced by the proverbial black box, dreary and flat. Even the price of movies, which should have fallen because of competition from television
actually increased after the breakup.

As a replacement for movie palaces, drive-ins boomed, even with their notoriously grainy pictures and bad sound. The reason was clear: they could stuff 2,500 people into one showing, making it the most cost-effective way to exhibit (even if some of the consumers weren't there to watch the
movie).

There were exceptions to the malaise of the 1950s and 60s. Alfred Hitchcock attempted to revive parts of the studio system and his films have proven to be classics. But Hitchcock had his enterprise undermined when his successful production team was broken up by yet more antitrust litigation in 1962.

Today, the movie business has rebuilt itself on a foundation of strong independent studios and the multiplex theaters with advanced technology and comfortable stadium seating. This suggests a new Golden Age for Hollywood. But half a century is a long time to have waited for the
quality of films and the viewing experience to recover their losses from a draconian antitrust decision.

A breakup of Microsoft would have led to more timid entrepreneurship from Microsoft, its successor companies, as well as other leading companies. The pace of innovation would slow and the quality of products would diminish. For example there would be increased compatibility problems and numerous low quality competitors. Software developers would face greater risks and would be less able to anticipate product configuration and timing of the introduction of the products. In addition, we could expect prices to rise, just as they did with movies.

Even if the case goes no further, Judge Jackson and the Justice Department have already done immense damage. Many important product and marketing decisions are now made (or not made) by the legal departments of large firms rather than the entrepreneurs. Perhaps with the Supreme Court’s decision not to put the Microsoft case on fast track, the tragedy of what was done to the movie business won’t be repeated in the software industry.


Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

Follow Mises Institute