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How Antitrust Ruined the Movies

Tags Big GovernmentCorporate WelfareLegal SystemMedia and Culture

05/15/2009Mark Thornton

Hollywood ain't what it used to be. For the most part — and with known exceptions — the quality and content of today's movies have plummeted when compared to the Golden Age. With the movies' parade of sex and violence, they're an easy target for cultural critics to say capitalism inflicts grave damage on the culture.

Let's take another look. It wasn't the free market, consumerism, or capitalism that killed the movies after World War II. It was antitrust regulation, as enforced by the Federal Trade Commission.

This government intervention in the 1940s radically altered the structure of the film industry for the worse. The direct and immediate result was a decline in acting, scripts, scores, content, and the cultural contribution of films.

From the turn of the century, when movies became marketable to the public, the industry realized the benefits of owning and controlling the whole production process, from the set to the theater. Economists call this vertical integration, a structure that is suitable and beneficial when quality control is the primary concern.

The movie industry used vertical integration to maintain quality, keep the competition at bay, and stabilize profits. This allowed moviemakers to pool their resources, make exclusive contracts and tying agreements, and maintain control over distribution and exhibition.

Although the Justice Department attacked this practice under the Sherman Antitrust Act as early as 1912, and later demonized it, vertical integration actually offered tremendous benefits to consumers. The "cartel" could only be held together so long as it functioned efficiently. Ticket prices had to be low and quality high.

For example, the first private film cartel — the Motion Picture Patents Company — lost its market power by not switching to longer feature films and by failing to grasp the power of the "star system." Dissident firms led by William Fox, Carl Laemmle, and Adolph Zukor saw the power of stars like Charlie Chaplin and Mary Pickford. They successfully bid for talent and developed their own vertically integrated companies.

So it went with every industry change through the teens and twenties, as Paramount displaced General Films, which then merged into Famous Players-Lasky Corp., which was outcompeted by First National Exhibitors, which went belly up only to be taken over again by Paramount. In each case, the industry tended towards the vertical pattern. Filmmakers, distributors, and exhibitors shared ownership or closely cooperated through tying agreements.

In the 1930s, this frenzied competition settled into the greatest means ever created for making movies: the studio system. Critics confirmed what I found in my own informal survey of adults. Movies made in this period are more highly regarded than those made after the late 1950s. In just the magical year of 1939, the studio system made "Gone With the Wind," "Stagecoach," "Mr. Smith Goes to Washington," "Wuthering Heights," and "The Wizard of Oz."

It's no coincidence that 1939 was the high-water mark of the studio system before it was broken up by government as an "oligopoly" — a small number of large, vertically integrated firms that controlled a majority of the business. At the same time, there were no legal restraints on entering the industry. Dozens of independent producers and theaters worked to compete and gain a market share.

The major studios — Fox, Lowe's, Paramount, RKO, Warner Brothers, Columbia, United Artists, and Universal — competed with each other while seeking tying agreements with everyone with whom they did business. This provided a competitive advantage over the upstarts and independents, and offered some measure of financial security; the system survived and even flourished in the midst of the Great Depression, for example.

To maintain market position, the studios learned the advantages of developing star talent and signing actors to long-term contracts. Studios invested in their actors the way companies invest in employees as versus contract workers. They cultivated them, trained them to act, provided voice lessons and dance lessons, and protected their public personas and, with morals clauses, their private lives as well.

Actors were not required to sign long-term contracts, but studios made sure they were well compensated when they did.

Despite Bette Davis's famous tirades about being a corporate slave, artists actually had considerable freedom to turn down roles, choose their own material, and provide input into the production process.

At the same time, the studios made sure their actors always appeared in the best light, and didn't play unsuitable roles.

Though actors were very well paid, wages were lower relative to today's standards. But this meant that casts could be larger and, more importantly, even bit parts were played by excellent character actors. Directors, producers, writers, and composers were also signed to long-term contracts.

There were sound business and artistic advantages in the assembling of a diverse group of specialists under a single corporate structure. These talented individuals were able to grow and learn and work together in ways that enriched them all, as well as the capitalistic organizations they served.

The studios owned the theaters where movies were shown, and did careful market research to ensure they contributed to the beauty of cities and inspired audience loyalty to the studio. This gave birth to ever more and nicer movie palaces (2,550 were built in 1928), with all the amenities (the average investment zoomed tenfold from 1920–1929) including low-price refreshments.

The studio took a strong interest in the employees at theaters around the country. They had to dress properly, put on the best face, and were trained to deal with any inappropriate conduct in the audience. Their services added to the overall happiness of movie goers.

Control so thorough was necessary because ownership of theaters comprised 95% of the studios' capital and the bulk of their profits. These profits were in turn used to subsidize their other operations. Theater ownership was also the key to quality control. If the studios couldn't control the way the films were distributed and exhibited, they would lose much of their incentive to keep up quality in every other area.

"With the movies' parade of sex and violence, they're an easy target for cultural critics to say capitalism inflicts grave damage on the culture."

This free-market system encouraged just the right mix of tradition and innovation. To make long-term profits, theaters had to show films that met the general expectations and conventions of society. They also had to be creative within those guidelines or risk not making an impression on audiences.

The original guidelines on the content of the movies were established by the industry itself. In 1934, the Motion Picture Producers and Distributors of America (MPPDA) established a production code to review scripts and films. Projects that did not pass the code had to be reworked, dropped, or produced by independent studios and shown in risqué independent theaters. All this was enforced with internal fines as high as $25,000.

The code contributed to the lasting success of movies during this period. It forced everyone to do less with explicit words and actions and more with direction, eye contact, camera angle, and emotions. Films could not celebrate the destruction of property or life. They had to have literary and artistic merit, or at least not offend those standards.

All that came to an end in 1938, when, at the prodding of the Roosevelt administration and disgruntled independent theaters, the Federal Trade Commission began an investigation. The government charged five studios, 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 they produced less than half of all movies).

Put on hold for the war, the suit was resumed in 1944. The government complained that: by owning the theaters, the studios monopolized the profitable first runs of the best movies; by having long-term contracts with actors and employees, they monopolized the best talent; and, by imposing the code, they unfairly discriminated against independent producers.

After a massive investigation and a frantic effort by the industry to falsify these charges with haphazard restructuring, only the third charge stuck. In 1949, the Supreme Court forced seven studios to divest themselves of their theaters. By 1957, the last of the divestitures was completed. The government had expropriated the studios' property and smashed their magnificent industrial creation.

Looking back at film history, it's clear that government's action demarcates the Golden Age from the New Hollywood. Movies in general haven't been the same since. By no longer controlling final output, studios could no longer profitably enforce the code or its quality standards. That's why nostalgia for the pre-1948 movies will always be so high.

At the time of the Court decision, everyone said the quality, consistency, and availability of movies would go up and prices would fall. Quite the opposite happened. By 1955, the number of produced films had fallen by 25 percent. More than 4,200 theaters (or 23 percent of the total) had shut their doors. More than half of those remaining were unable to earn a profit. They could not afford to rent and exhibit the best and most costly films, the ones most likely to compete with television.

Another strange result: drive-ins suddenly 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).

Gone are the days of beautiful theaters, quiet audiences, well-mannered employees, and reasonably priced refreshments. When indoor theaters finally made a comeback, they looked more like long garages with screens at the back, and the more that can be stuffed into a single building the better.

Not even the price of movies — one of the ostensible reasons for government intervention — has benefited the moviegoer. The studio system was said to gouge the consumer. But despite the advent of television, which itself should have driven ticket prices down, prices went up and continue to do so.

The end of the studio system meant "free agency" for actors and the higher monetary potential that such agency provides. Their salaries are bid ever higher as they shift from role to role, and producers can no longer afford many good actors. Wondrous technological feats have been the substitute.

Today, actresses get more money than ever, but they are cast in peculiar roles, a nun one movie, a prostitute the next, then a teacher, an alien, or drug addict. Hollywood doesn't develop characters like Bette Davis anymore. Technology is abundant, but discipline, efficiency, creativity, and quality control of the studio system are lost.

The FTC action also broke down the code. Gone were the community-friendly standards that were once the hallmark of the industry. Producers had no incentive to keep out rubbish that, in the old days, would have brought disgrace on the entire studio, including all theater employees.

Today, the system is so diffuse that no one suffers from offending the artistic sensibilities of the viewing public. In 1956, when the code was revised, its purpose was only the narrow one of regulating obscenity, profanity, and bloodshed. But broader thematic controls — the very core of the original code — were wiped out.

There have been attempts to revive something like the vertical integration of Hollywood's heyday. Alfred Hitchcock is the best example, and, again, his films have proven to be classics. But Hitchcock had his career undermined when his successful production team was broken up by antitrust actions in 1962.

The films of the Golden Age continue to inspire us, but thanks to the political class, it's all a memory. Today, every politician and cultural critic takes slaps at Hollywood's decadence. Better that they leave the movies alone, repeal Sherman, and abolish the FTC. Here and elsewhere, it's government intervention, not capitalism, that poses the threat to our economy and culture.


Contact Mark Thornton

Mark Thornton is the Peterson-Luddy Chair in Austrian Economics and a Senior Fellow at the Mises Institute. He is the book review editor of the Quarterly Journal of Austrian Economics, and has authored seven books and is a frequent guest on national radio shows.