The movie industry has been characterized by concentration, vertical integration, and tightly bound contractual arrangements from the very beginning. There are three basic aspects to this industry: production, distribution, and exhibition. Until about 1950 all three phases were dominated by a few firms. Today there is some competition in film making, but distribution and exhibition continue to be tightly controlled.

When Edison first introduced motion pictures in 1894, these were viewed by one person at a time. Edison was able to dominate the industry because of his patent on both the motion picture camera and viewing machine. By 1905, movie projectors allowed films to be viewed simultaneously by larger audiences; and Edison and a few others tried to continue their control of the market, again through their patents on the cameras, projectors, film, and other equipment.⁽¹⁾

In the early 1900s, the Supreme Court sanctioned both the Edison and Biograph patents on movie cameras. This lead to a series of patent infringement suits. The situation was resolved in 1909 through a collective agreement and the establishment of the Patents Company which monopolized the industry. The Motion Picture Patents Company was a patent pooling agreement between the sixteen major players. Each producer had an exclusive arrangement with the Patents Company, and had to pay a royalty to it. Eastman Kodak, the sole supplier of film stock, collected the royalty. Exhibitors--or nickelodeon operators, as they were then called--signed exclusive contracts with the Company. When some competition did emerge, a General Film subsidiary was established to squelch it.⁽²⁾

With the emergence of feature films, an exclusive distributing arrangement was created in 1914 under the name Paramount. This gave a dominant position to the production and distribution aspect of the industry; and exhibitors had to accept the terms dictated to them. The exhibitors responded by forming a group called The First National Exhibitors Circuit. Both of these groups--the producers-distributors on the one hand, and the exhibitors on the other--began to merge vertically. By 1925, only a few giant vertically integrated companies ruled the industry. With the coming of "talkies", Western Electric (a subsidiary of AT&T) dominated the audio end of the market, and the major film distributors began a practice of mutual cooperation which amounted to "a tacit form of shared monopoly."⁽³⁾ This was initially accomplished under the National Industrial Recovery Act of 1933, but continued even after the NIRA was ruled unconstitutional. Furthermore, the Webb-Pomerene Act allowed the industry to form an export cartel, the Motion Picture Export Association (MPEA). This organization continues to dominate the world film distribution market to this day even though the Act itself was repealed some twenty years ago.

By the late 1930s, the film industry was dominated by the Five Majors who were fully vertically integrated--that is, they controlled all three phases of the industry: production, distribution, and exhibition--together with three minor distributors. This pattern of vertical integration was combined with various price fixing practices to virtually exclude any independents from entering the industry. Beginning in 1938, this situation was attacked by the Antitrust Division of the Justice Department in what was known as the Paramount Case.⁽⁴⁾ Under various consent decrees with each company, the courts ordered vertical divestiture of exhibition from production-distribution. Competitive bidding was also suggested, although not mandated, to encourage open access in film exhibition.
 
 
 

The Rise of Television

Although television was invented during the 1930s, it did not become generally available until the late 1940s because of the interruption of the Second World War. Television soon became a major competitor to the movie industry. At first the motion picture industry attempted to boycott television and barred the stars whom they had under contract from appearing on TV. However, by the mid-1950s movie distributors began to realize that it would be better to form an alliance with television. Television came to replace the third-run theaters that had existed earlier in the movie industry. Thus a film would be shown in movie houses for a first run and possibly a second run appearance, and then rights to the film would be sold to television.

At first television networks would compete for rights to the major films. But this greatly increased the costs of these top films. To avoid this the practice evolved of buying rights to a film before it was distributed--in other words, before one knew the potential market for the film. By buying rights to a package of films in this way, the networks could be assured continuous programming, and that at least some of these films would be of high caliber. On the other hand the motion picture distributors would be assured income from all their films, no matter how successful they might be at the box office.

In addition to this the movie companies began to distribute television programs, such as situation comedies and other series made specifically for television. During the 1980s, under the much more lenient Justice Department's Antitrust Division of the Reagan administration, a great many mergers took place within the motion picture industry--despite the earlier Paramount decision.

To the average American it may seem that there are many independent channels of distribution for films and television programs, but the fact is that many of them are all tied together, either by joint ownership or by contractual agreement. The United Artists Theater Circuit, for example, has expanded greatly through mergers as well as the construction of new theaters for the exhibition motion pictures. What is even more interesting, however, is that it is controlled by Telecommunications, Inc. (TCI), the leading cable system operator which owns cable distribution in more locations than any other cable system operator. In 1988, TCI also bought stock in Blockbuster Video Stores--the leading chain of some 600 stores in which video cassettes of motion pictures, rock concerts, and other forms of entertainment are either sold or rented. TCI also partially owns Turner Broadcasting Systems which in turn controls CNN, WTBS, and TNT; the Black Entertainment Network; the Cable Value Network; and Tempo; and fully owns the American Movie Classics cable channel.

Home Box Office began to offer pay cable television programming in 1972 with very current, advertisement-free movies; special sporting events; and night club acts. Pay television later received a boost both from the use of satellites, rather than microwave towers, to transmit television signals, and by a U.S. Appeals Court decision in 1977 which voided all programming regulations which had been imposed on pay cable networks by the FCC. Again, although it may seem that there are a number of competing pay television networks, the fact is that many of these are owned by the same parent company. Thus, Cinemax is really a subsidiary of HBO. Furthermore, HBO owns a film subsidiary, Silverscreens, which joined CBS and Columbia in starting the production-distribution company, TriStar and has exclusive contracts for the films of Columbia, CBS and Orion. In 1983, Showtime and the Movie Channel joined with Warner Brothers, Universal and Paramount to merge the second and third largest pay cable networks. The Justice Department objected to this. However, with the withdrawal of the motion picture companies from the agreement, Showtime and the Movie Channel were allowed to merge. This combined entity then signed an exclusive exhibition agreement with Paramount.⁽⁵⁾

Today, the general practice is for the rights to a block of films to be sold before they are distributed to be shown successively by movie theaters, pay per view channels, pay television channels, VCR tape distributors, and network television channels, as well as to be sold for foreign distribution. All of this is narrowly controlled by a few companies with little opportunity for independents to get into the act. Thus, although it would seem that there are many channels for film distribution, in reality only a small number of parent companies decide what films the general public will have the opportunity to see.⁽⁶⁾

1. For the early history of the industry, see for example: A. R. Fulton, Motion Pictures: The Development of an Art from Silent Films to the Age of Television (Norman, OK: University of Oklahoma Press, 1960); and Tino Balio, Ed., The American Film Industry, rev. ed. (Madison, WI: University of Wisconsin Press, 1985).

2. There were some challenges to this monopoly as in: U.S. v. Motion Picture Patents Co., 225 Federal Reporter 800 (1915).

3. Barry R. Litman, "The Motion Picture Entertainment Industry," in Walter Adams, The Structure of American Industry, 8th ed (New York: Macmillan Publishing Company, 1990), p. 187.

4. U.S. v. Paramount Pictures, 334 U.S. 131 (1948).

This decision had several significant consequences at the time. However, for a good discussion of how little this dicision affected concentration in the industry in the long run, see: Thomas Guback, "The Theatrical Film," in Benjamin Compaine, Who Owns the Media?: Concentration of Ownership in the Mass Communications Industry, 2nd ed. (White Plains, NY: Knowledge Industries, 1982).

5. See, for example: Lawrence White, "Antitrust and Video Markets: The Merger of Showtime and the Movie Channel," in Eli Noam, Ed., Video Media Competition: Regulation, Economics and Technology (New York: Columbia University Press, 1985).

6. See: Barry R. Litman and Suzannah Eun, "The Emerging Oligopoly of Pay TV in the USA," Telecommunication Policy, 5 (June 1981).