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Xerox University Microfilms 300 North Zeeb Road Ann Arbor, Michigan 48106



Greenwald, William Irving, 1920The motion picture industry; an economic study of the history and practices of a business, Hew York 19£ 0 .

iii,280 typewritten leaves, 29cm. Thesis (Ph.D.) - Hew York Univer­ sity, Graduate School, 19^0, Bibliography: p,263-280.



University Microfilms, Ann Arbor, Michigan 48106





William If Greenwald

February 1950

A Dissertation in the Department of Economics sub­ mitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy at New York University*



Very little of a genuinely analytical character has been written about the motion picture industiy.

Most of the literature relating to the industry

has been concerned with its artistic, social, and cultural functions with an attendant neglect of economic and technical aspects.

Even less has

been written about the industry concerning its rank and importance in relation to the service industiy, the amusement industry, or to general industrial activity.

Very little historical research has been devoted to

uncovering the developmental patterns of this business for the purpose of comparing the design of its growth with that of other major industries. As a result, a significant body of knowledge is not available for under­ standing and explaining the contemporary structure and functional charac­ teristics of the industry. Legally and corporally it is difficult to justify such a tradition­ al classification but conventionally the film industiy has been categor^4d into production, distribution, and exhibition branches.

The industry as a

unit, for empirical purposes, has generally been classified as a service industiy.

At the same time, however, as a business it is more comparable

to manufacturing.

The basic distinguishing feature of film production

from other commodity manufacture lies in the inherent nature of the prod­ uct which is produced, priced, and sold.

Due to the particularistic

nature of this product the film industiy has developed trade and business I

practices which are exceptionally unique.

A superficial examination of

such practices might lead one to believe that the film industiy is great­ ly different from other businesses.

Actually, however, as will be demon­

strated in the course of this study, a^ configurative and careful


examination of the industry's financial, legal, and economic development reveals a typical industrial enterprise. In any descriptive or analytical study of an industry the question of general methodology arises.

An analytical and descriptive method which

is synoptic in scope relates the specific characteristics of an industry to the historical changes through which an industry has moved.

All the

unique patterns and processes of the film industry have takenxplace in historical time and have been influenced by developments in other indus­ trial sectors of the economy.

Only by such an approach has it been pos­

sible to unveil the underlying structure and operations of the film indus­ try.

Such a detailed historical inquiry dovolopcd has given rise to in­

ferences and generalizations which have been basic for a genuine under­ standing of the contemporary constitution of.the industry.

A detailed

historical study of this sort, however, does not necessarily imply a study in detail.

By a careful and deliberated selection only those factors

which have been relevant and important have been incorporated into the exposition. Historical analysis does not merely represent a stucjy in dynamism. Evaluations and inferences about the generalized business behavior of the film industry are dependent, in part, upon the dynamic patterns revealed. Out of a knowledge of the growth and speed of development of the film industry has arisen a revealing perspective of the common bend of progress in the film industry with general

industrial activity.

For this reason,

in part, pure statistical and quantitative analysis has not been relied upon.

An empirical analysis which is not complimented by other types of

analyses too frequently fails to reveal much about underlying patterns, processes, and changes.

Therefore, in studying the economic, financial,


technical, and corporate developments of the film industry it has been necessary to examine, measure, and analyze the qualitative, factual, statistical, and legal developments. In establishing this as the aim of this paper, the artistic, social, cultural, and moral characteristics and influences of the film and the industiy producing the film have not been studied or measured.


often one or more of these factors acted as the major stimulus for material change.

Where such factors were the significant ones in affect­

ing the economic, technologic, or financial structure of the film indus­ try, they have been examined and their importance noted.

Only in this

way has it been scientifically possible to study the motion picture in­ dustry in its structural, functional, and dynamic form and shape.




Introduction Part One The Development of the Industry 1888-1930 I

The Early Years of the Industry, 1888-1908


A Premature Combination, The Motion Picture Patents Com­ pany and Subsidiary, The General Film Company, 1908-12


The Era of the Silent Film, 1912-1926


16 31

Appendix A to Chapter III, F.T.C. vs. Paramount Famous


Players-Lasky Corporation Appendix B to Chapter III, Standardized Techniques for the Mass Production of Films IV


Sound and the Silence of Competition, 1926-1930


Part Two Trade Practices V

Contracts, Arbitration, and Credit



Film Amortization Schedules



Run, Zoning, and Clearance


VIII Block Booking and Blind Buying IX


The Legalization of Trade Practices, The Code of Fair Competition for the Motion Picture Under the National


Recovery Administration


The Film and Public Policy


- Contents -



Part Three The Maturity of the Industry 1930-1948


Challenging the International Structure of the Industry



A Mature Industry Confronts the Troublesome'Thirties


Appendix A to Chapter XII, Analysis of Double Features


XIII The Conflict and Aftermath of Two Wars




The Industry and Its Future

Part Four Appendices


The Availability and Reliability of Statistical Data on the Motion Picture Industry



Definitions of Trade Terms



Bibliography on the Motion Picture Industiy


TABLES Number IV-1

Page Total Assets and Net Earnings of Warner Brothers, Inc., 1925-1936



Theaters Annually Services by E.R.P.I., 1928-1936



Structural Relation Between the Electrical and Film Industries, 1929-1936


Summary of Claims Handled by Boards of Arbitration in the United States, 1924-1928




Summary of Cases of Arbitration in the United States,

1924-1928 V-3

Bases of Claims Filed by Distributors in the United States,

1928 V-4



Bases of Claims Filed by Exhibitors in the United States,

1928 VI-1

Hypothetical Film Amortization Schedules


Film Amortization Schedules of the Seven Leading Compan­ ies for 1935j 1940, and 1946

102 109



Geographic Areas Covered by AmortizationSchedules



Legislation Intended to Abolish Compulsory Block Booking and Blind Selling, 1927-1939



Theoretical Booking Schedule



Percent of Cases Handled by 31 Grievance Boards Under the N.R.A., 1933-1935


291 Code Authority Decisions on Appeal Under the N.R.A., 1933-1935


Films Approved by the Production Code Administration, 1935-1945



Affiliated Theaters in the United States, 1945



Comparison of Exhibition with all Amusement,1939



Expenditures on Motion Pictures and Other Amusements, 1929-1947


ix-3 XII-1

- Tables -






Representative Financial Aggregates of the Motion Pic­ ture Industry Compared with all Industry, Service, and other Amusement, 1944


Employment in Production, Distribution, and Exhibition, 1939


Receipts of Motion Picture Theaters, 1927-1947




Chapter I The Early Years of the Industiy,

1888-1908 One of the unusual features of the motion picture industry is that the date of its birth can be set.

The history of the moving picture, itself,

was almost as old as the history of photographic techniques.

The scien­

tific principles had been established after centures of experimentation with mechanics, chemistry, electricity and optics. been discovered as well as the magic lantern.

The photograph had

The attainment of moving

pictures on a screen had to await the synthesis of these principles for the film to finally evolve.

The fruitful technical experiments which

led to the development of the film camera and projector were carried out in the eighteen-eighties, more or less simultaneously, in several coun­ tries by the Lumiere Brothers in France, by Friese-Grien in Britain, and by Edison in the United States.

Therefore, the initial phase of the in­

dustry was primarily concerned with its technical development. Its greatest technical impetus was received in the United States. At first a camera was needed which was capable of taking photographs in rapid succession, a substitute for the glass plates used in photography. In 1888 Edison experimented with a revolving cylinder, which did not work too satisfactorily.

He realized that he needed a photographic material

which could be fed into a camera and subsequently into a viewing machine on a belt.

The problem was solved by the use of the new cellulose nitrate

film of George Eastman.

George Eastman perfected the flexible film called

the 'roller photography' just at the time Edison needed it, making possible the latter's invention of a marketable motion picture camera.

On October 6,

1889 Edison ran a film on his machine, named it the Kinet^oscope and put it


aside, considering it only another technical problem solved.


Edison at first set the machine aside because he did not consider it com­ mercially feasible, it was subsequently exploited by him.

Therefore, in

its initial appearance the camera was a mechanical rather than an artistic discovery.

Since that time the industiy using the camera has been signifi­

cant because of the comparatively limited time in which expansion has taken place. A "Kinetoscope Parlor" presenting a group of little Edison peepshows was first opened by Thomas Lombard at 1155 Broadway in New York City on April 15, 1894.

These peepshows became a minor commercial commodity repre­

senting cheap amusement available mainly in penny arcades.

But the

Kinetoscope was not satisfactory to the public because of certain inherent drawbacks.

The film was enclosed in a small black box and could be viewed

by only one person at a time.

In addition, the maximum amount of film

which could be handled by a Kinetoscope was limited to approximately fifty feet.

This suggested to those interested in the film that if many people

could watch a picture at the same time, a larger market would be available. Such a solution was possible only if the machine invented could throw pictures on a large screen.

A secret race began to invent such a projection

machine and several machines appeared simultaneously, a circumstance which kept the industry in patent litigation for many years,

in 1896, Edison

brought out a commercial projector called the Vitascope, developed by Thomas Armat.

Screen projection made a public showing possible and on

April 23, 1896 the Armat (Edison) Vitascope, manufactured by Edison, made possible the first performance of a motion picture seen in America.^" "'’This took place at Koster and Bial's Music Hall in New York (now the site of E. H. Macy and Company), then the leading vaudeville theater in New York. A minority of motion picture historians insist that the first public show­ ing of a motion picture occurred on May 21, 1895 > when Otway Latham ex­ hibited a film occupying four minutes of screen time, depicting a prize fight.


The development of the projector established the motion picture as a new kind of group entertainment, and the peepshow began to be replaced. A new 2 class of amusement buyers sprang into existence as quickly and apparently as magically as the screened picture itself had appeared.

Other inven­

tions had as their primary objectives the saving of labor and time but the main attraction of the moving picture was a realistic representation of people and things in nature.

Such an invention in the mechanical age

created unusually widespread astonishment and interest. At first pictures were included by way of novelty and variety in music hall shows between other turns, showing news items and everyday events in short one-or-two minute films.

But from the beginning the de­

mand for the picture seemed insatiable, with a large amount of the demand for films and apparatus emanating from country and suburban areas through­ out the land.

Despite the demand and the attempts of many entrepreneurs to

establish themselves as movie manufacturers, three American companies were able to limit the field until the early 1900*3.

Edison and Biograph, which

had been in the business since the peepshow days, had each bought separate key inventions at about the same time and each owned the patent rights to cameras and projectors.

The Vitagraph Company entered the field in 1897

but did not start its commercial exploitation until 1899*

The three

pioneer companies served almost the entire market and tried to keep the new and expanding field under their joint control by refusing to sell cameras to others, although Biograph at first was willing to rent its projectors.

The screen projector had made possible the amazing growth of

2 As noted, "the longing of the people for amusement .was now being satis­ fied for the first time in history by this weird novelty". Benjamin B. Hampton, "A History of the Movies", Covici Friede Publishing Co., New York, 1931, p. 19.


the movies as the great American form of entertainment and it helped establish the rough outline of the industry.

The successful projector

made the problem of distribution more serious, although the potential eco­ nomic problems of distribution remained few with the demand greater than the supply, and little sales promotion was necessary.

The first group to

feel the pressure of the demand aroused by the projector and to sense the real money making opportunity of films were the exhibitors.

Toward the end of 1900 a single event sharply revealed the strong popular appeal and commercial value of movies. Vaudeville managers had combined into a trust to keep down the wage scale of actors. To meet the challenge the actors organized into a union called 'The White Rats', after a London actors' organization, and the union called a strike. Caught un­ awares, many vaudeville theaters closed. Others, determined to keep open at all costs and beat the strike, began to feature moving pictures. For the first time programs consisting solely of movies were offered to the public. To the theater managers' great astonishment people came and came again. Before long the vaudeville trust declared the moving picture to be its surest weapon against 'the dissolution, bankruptcy, and humiliation' engineered by the strike. Its success as a scab for vaudeville was evi­ dence of the movies' own appeal. This first substitution of movies for vaudeville anticipated by a quarter of a century the eventual near-disappearance of vaudeville itself.^

But not all vaudeville managers had enough imagination to take advantage of the new opportunity arising from this cheap form of amusement and the arcade owners were the first to develop the money making possibilities of the new medium.

The success of the new type of theater showing movies ex­

clusively circulated throughout the country and soon hundreds of arcade owners, showmen, and businessmen were converting their arcades and empty stores into movie houses.

At the same time the average film, at first

fifty to one hundred feet in length, gradually lengthened to five hundred feet.

The film was bought outright by these exhibitors who merely specified

3 Lewis Jacobs, "The Rise of the American Film — A Critical History", Harcourt, Brace and Company, New York, 1939* p. 5.


the length and general character of the subjects which they wanted, leaving the selection of the program to the manufacturer or jobber. Since the value of equipment depended upon a supply of films (neither a motion picture camera nor a projector having any other use) companies which manufactured equipment undertook the production of films, thereby establishing a degree of market concentration, as they were the same firms manufacturing and selling motion picture equipment.

In these early days

the limitations of equipment, finances, and mechanical machines made luck an important factor, as paralleled by other industries.

The gradual ac­

cumulation of earnings by manufacturers was responsible for the ability to finance production.

Film making became merely a corollary to maintain

and increase the demand for equipment.

Competition for the real profits

depended mainly on the rental and sale of the Edison and Vitascope projec­ tors, with a tiny stream from a few other inventions.

Control actually

stemmed from the ownership of the basic film and equipment patents by Edison, which meant concentration in the mechanical and technological end of the business.

Edison lawyers persisted in asserting that all inven­

tors, manufacturers, and producers of films in America were operating in violation of the Edison patents.

The constant threats of lawsuits did not

deter new competition because there were no established studios or labo­ ratories, "a business office, a camera, and enough money to pay for the film and to cover the cameraman's modest salary being the only necessaries".^ The majority of films were made in so casual, random, and unstable a manner that ordinary business methods were impossible.

Since the capital require­

ments for the production of films were not very great many producer and manufacturing companies found new ways into the trade.

k Ibid, p. 9.

Some imported


cameras from Europe, others got them by lease, copy, and rental, others borrowed or bootlegged by disguising American inventions and then sold or rented them as their own.

Since pictures were absorbed faster than they

were manufact Tired many individuals, unable to get cameras, resorted to trading in ready-made imported or domestic films.

The films were manu­

factured by the foot, cost and profit were computed by the foot, and they were sold on a linear basis.

Quality played no part at all since "they

were sold at a good price, regardless of quality, the speed of the output

5 being all that mattered". The development of lamps for artificial lighting and mercury rays made possible, for the first time, the construction of studios.^

In 1906

the Edison Company constructed the first studio in the Bronx, New York, specifically built for the making of films.

In the same year the Biograph

Company, the chief rival of Edison in the patent war, also abandoned the streets and backyards to set up studios on the roofs and in the lofts of buildings.

Most other producers worked in anonymity guarding every studio,

idea, and employee, located far from Edison and Biograph.

Since many com­

panies used the Edison camera without paying royalties or legal permission, great precautions were taken against being discovered or watched.


provement, as a result, proved to be exceedingly accidental and slow as there was no opportunity for manufacturers to help one another or to pool discoveries.

With the most important branch of the industry being manu­

facturing, despite the great demand for equipment and films there were still

5 Ibid,

p. 57.

6 At the time, and for a number of years, they were known as factories. For definitions of terms peculiar to this industry refer to Appendix B. 7 The established manufacturers tried to discourage these practices by selling films which were trade-marked.


only four recognized producers in America in 1906; namely, the Edison Company, Biograph Company, Vitagraph Company, and Lubin Company.


tional films were supplied by the imports of French films by George Melies of Pathe Freres and George KLeine of Chicago, both of whom had established agencies in the United States.

In 1907 the Selig Polyscope Company, the

Kalem Company, and the Essanay Company began production under producing licenses from Edison.

Picture making was still regarded as a shaky occu­

pation and many more acknowledged businessmen did not enter the business because

8 "people were ashamed of contact with the movies."

In those

companies and studios which were set up a division of labor was being developed.

Specialization started in acting, writing, directing, produc­

ing and photographing.

Separate crafts started to arise for laboratory

workers although they were generally on a par with one another.

In order

to keep from paying higher wages no screen credit was given to any asso­ ciated employee for the work he had done.

The pictures manufactured were

crude, imperfect, cheap, made at low cost and quickly.

A large number of

negatives could be manufactured from the positive, packed in cans and sent to all parts of the country, serving any number of screens. The element of desirability which was largely responsible for the in­ crease in the demand for movies was the transition of movie subjects from staged scenes toward drama.

The subject of movies began to evolve from

bits of passing movement toward simple real life scenes.

In 1903 the first

story picture in America, "The Life of an American Fireman", was exhibited. The real turning point in the history of pictures came three months later (also in 1903) when Edwin S. Porter’s "The Great Train Robbery" was first

8 Jacobs, op. cit., p. 59.

seen, resulting in the film story phase of motion pictures.


there was an increase in the value of all devices connected with the indus­ try.

The fictional and fantastic treatment of subjects meant that films

became longer and a different type of commercial exploitation was possible. Until the story film, films had ranged between 250 to 500 feet in length. A short story or the essentials of a stage play could be recorded on a r e e l,^

the screen time of which was about fourteen minutes.

one-reelers flooded the market and became general by 1906.

These popular The simple

stories and episodes were transferred to celluloid with the least possible expense and these story films remained supreme until the introduction of the multiple reel in 1911.

As noted, these films were priced by the foot

or reel, being "sold outright to the exhibitor, largely by mail order, the prices ranging from ten to twenty-five cents a foot".

The investment of

exhibitors, as a result, became increasingly heavy and they began exchanging and trading pictures among themselves.

The exhibitors started to set up

exchanges which they ran for the sole purpose of getting a supply of films for their theaters.

The interest of producers suffered, as a consequence,

since less than the maximum rentals was being derived from the sale of pic­ tures.

But the need for a variety of films by exhibitors was not being

completely met by the exhibitor-owned exchanges.

This awkward method of

distribution was replaced by a more efficient system of exchanges formed by jobbers on the theory that it would be profitable to own a supply of films and rent them to successive exhibitors.

9 These were referred to as story films or one-reelers. was 1,000 feet in length.

A standard reel

10 Rex Pascal Barrett, "Organization of the Motion Picture Industry", Ph. D. Thesis, Graduate School of the University of Missouri, University Micro­ films, Publication Number 153, Ann Arbor, Michigan, 1934> p. 9«


Among the first to become aware of the need for a business which neither made nor showed films but distributed them was a free-lance cameraman, Harry J. Miles. With his brother, Herbert, he established early in 1903 what proved to be one of the most important and profitable developments in the motion picture industry, a film exchange. Miles Brothers Exchange in New York City bought films from the manufacturers and rented them to exhibitors at one-quarter the purchase price.... So successful was the Miles Exchange that the entire movie growth was quick­ ened and the Miles Brothers soon were competing with a dozen rivals. Some of the larger manufacturers established exchanges of their own. By 1907 there were over one hundred film exchanges in thirty-five key cities throughout the United States.

While the jobber was a novel figure in the mercantile world, the wide adoption of the exchange system facilitated and quickened the commercial development of the industry.

The purpose of film distribution at this

stage of the industry’s development was premised on the major consideration that the owner of a stock of films could make a profit by renting a single print to a number of exhibitors in succession.

The exchangeman or jobber

could continue to rent out films long after they had more than paid for themselves.

The manufacturers now had one large customer who practically

guaranteed to buy most of their output, and usually at higher prices.


hard necessity of financing distribution in the early days forced most of these distributors to operate on a cash basis.

The market for films also

increased since exhibitors, paying less for pictures, could make more fre­ quent changes in the program.

The independent producers sold their


tures to 'states-rights' exchanges which bought films outright or secured exclusive leasing rights for a specified period, leasing their films in turn to exchanges within their territories.

While exchanges continued to

grow in importance, the ’states-rights1 type of exchange started to decline in number and importance after a relatively short existence.

11 Jacobs, op. cit., pp. 52-3.


The development of the exchange system established a route of com­ munication from the audience through exhibitors, distributor, to the producer, enabling patrons to make their wishes known to the makers of the pictures.

The exchange system also meant programs at a much lower

cost making it possible for exhibitors to stimulate their business by more frequent changes of programs.

The exhibitors saved time and trouble

involved in the selection of pictures, since a variety of films of differ­ ent manufacturers were now collected under one roof.

Y/hile exchanges were

welcomed everywhere, marketing problems started to arise from the very be­ ginning.

Rival exchanges realized the advantage of getting the newest

pictures before competitors and more money was offered to the manufacturers for the privelege of first choice.

The selling prices of films as well as

the rental prices started to increase as exchanges by fair means or foul sought to get even one day's advantage over rival exchanges in buying and booking pictures.

There was no standard for film sales or rental prices

and each exchangeman suspected that competitors were getting better terms. The exhibitor demand was so great that the exchangeman would buy almost everything from any producer, domestic or foreign, knowing that the rentals would yield a large profit.

The exchangeman realized, however, that he was

making an investment in a rapidly depreciating asset.

When the exhibitor

ordered his film by mail the exchangeman often took advantage of the ex­ hibitor by sending him different pictures than those ordered or old prints hardly fit for showing. An effect of these exchanges was the establishment of a new standard of market value for a picture.

Exhibitors outbidded each other to such an

extent to get the latest films first that rental prices soon began to be graded, crudely at first, according to the showing or run of a film.


competition was forcing prices up, exhibitors started to sublet the films which they rented from the exchanges.

The most dishonest and underhanded


tactic indulged in by both the distributor and exhibitor was the duping of negatives.

The distributor or exhibitor would buy a positive print,

the duplicate of the negative or original film, and send it to a labo­ ratory to have a negative photographed from it.

The duped or duplicated

negative would then be used to supply prints which an exchangeman could sell or rent to an exhibitor, or which an exhibitor could sublet.


few producers tried to circumvent the practice

by printing trade marks on the sets and photographing them into their products hoping, in vain, that audience recognition of their product might frighten the 'darners' and shift exhibitors into the paths of commercial rectitude,

The resulting confusion in exhibition and distribution served further to highlight the need for some stabilization within the industry. In 1900 there was not a single movie theater in the United States, but in a few years a new type of theater arose which was the direct fore­ runner of the movie theater we have today.

On April 2, 1902, 'The Elec­

tric Theater', devoted entirely to motion pictures, opened its doors on South Main Street in Los Angeles.

In June 1905 John P. Harris and his

brother-in-law, Harry Davis, real estate operators, opened the first motion picture house in Pittsburgh.

A piano, ninety-six seats, and a

movie projector were put into a vacant store.

Porter's, "The Great Train

Robbery", the first one-reeler made in 1903 and running from 12-20 min­ utes, was featured in the opening.

The charge for admission was a nickel,

and there was a continuous performance running from seven in the morning to midnight. in.

The venture was a brilliant success and the customers packed

The catchy name of the place, the colorful surroundings, the musical

12 Hampton, op. cit., p. 60.


renditions, and the story film kept the ninety-six seats filled with customers.

The nickels poured into the cash box so rapidly that the re||

ceipts were soon averaging over $1,000 weekly.

It was named the Nickel­

odeonH, the first nickelodeon, in order to maintain its dignity and at the same time to advertise its cheapness. nickelodeons began to open everywhere.

It was such a success that

Penny arcades, empty stores,

dime museums, warehouses, lofts, and unused theaters blossomed forth as nickelodeons overnight. country.

From 1905-1910 this nickelodeon craze swept the

Many of the men who were later to became leaders of the indus­

try- Fox, Laemmle, Loew, Zukor -began with these store theaters and shows. In 1910, even though the vaudeville houses were becoming the chief outlet 13 for pictures, between 8,000-10,000 nickelodeons operated throughout the nation.

The profits from the nickelodeons were quick and large but depend­

ed greatly upon a constant turnover of customers.

Most nickelodeons could

accomodate only between 100 to 200 patrons at a time and the programs had to be short and run continuously from morning to midnight to assure a con­ stant turnover.

Changes in the program were made as frequently as possible,

some changes even being made in the middle of the day in order to assure turnover.

The program usually lasted from twenty minutes to a full hour,

often including a single reel film, a comedy, and a novelty.

At first a

'lecturer1 was occasionally employed during the showing of the main film to explain the story to the uneducated and stir up excitement at crucial points.

This practice, popular at first, gradually disappeared as audiences

and film makers became more familiar with the medium.

On such a basis the

nickelodeons survived and men associated with them accumulated the financial resources needed for expansion, while "successful business men, shrewed

Jacobs, op. cit., p. 56.


financiers, and captains of industry passed these movie gold mints day after day and ignored them”. ^ Even from the earliest days of the film it was continuously subject to attacks from outside agencies,

These attacks tended time and again to

effect the direction in which the industry was moving.

At this time movie-

baiting was most common among ministers, social reformers, legitimate theater owners, property holders, all shrilling in protest.

Though these

critics were eloquent,

the chief motive underlying the flood of abuse was not disguised. Dressed in moral terms it was essentially economic. The movies had suddenly become a competitor of the church, saloon, and vaudeville. Their tremendous popularity had put all of these out-of-pocket. The church collection plate had lost much of its jingle, the corner saloon had to alter its variety programs with more acts and novelties, businessmen complained that real estate had been boosted to prohibitive highs by nickelodeon owners,.5

These groups cloaked their economic fear in moral censure and by this sub­ terfuge sought in every way to smash the movies, but they were confronted by a formidable economic competitor.

The development of the industry being

an irrepresible force the movie men, seeing their livelihood endangered, did not idly sit by.

Realizing that they were waging a losing battle, the

upshot of the conflict at the time was that reformers changed their tactics and formed an alliance with the movies instead of continuing to fight them. Vaudeville managers found that the number of patrons increased when movies were added to their regular programs.

Saloons found that an occasional

movie returned old patrons along with new ones.

In later years, while the

desirability of movies was conceded, these same agencies were periodically

14 Hampton, op. cit., p. 60. 15 Jacobs, op. cit., p. 63. For an interesting analysis of this problem see pp. 64 ff.


to hammer away at the need for some public regulation or private censor** ship.1^ The early years of the industry’s development were of necessity chaotic. The industry from the beginning was involved in an endless series of lawwuits concerning the right to exhibit, rent, or produce in violation of various patents which affected thr projector, film, camera, and other es­ sentials of the trade.

The patent disputes and quarrels consumed time and

profits and retarded new inventions, accessories, and improvements.


strong internal dissension produced jealousies, endless arguments, cut­ throat practices, and many violations of law and ethics.

But under its

steady growth, the industry by 1908 had managed to ascend from the level of petty commerce to that of a large pemanent business with the rough outline of the three distinct branches which were to characterize it.

There were a

dozen well established producers with large studios, with scores of other concerns engaged in producing films or importing them from abroad.


lary companies and individuals were engaged in inventing and selling cameras, projectors, and the other instruments necessary to photograph, develop, print, and exhibit films.

The exchange system had arisen for pur­

poses of trading in domestic and foreign pictures and special distribution

16 As early as February 16, 1915 the Committee on Education of the House of Representatives submitted "A Bill For a Proposed Federal Motion Picture Commission11 (63rd. Congress, third Session, Report Number 1411). Amongst other things the report called for the necessity of censoring pictures be­ cause the inadequacy of private, state, or municipal censorship was obvious. Since it was felt that motion pictures were essentially articles of inter­ state commerce^ the report required a licensing of all films intended for interstate commerce or offered for copyright. If a film was not licensed by the Commission it was not to have been allowed to be transported in interstate commerce or granted a copyright. A fee was proposed for the licenses to defray the expense of the Coomission with a supplementary tax to be imposed on amusement tickets for revenue purposes. For a favorable discussion of the proposed bill see Reverend J. J. Phelan, NMotion Pictures as a Phase of Commercial Amusement -- In Toledo, Ohio”, Social Survey Series III, Little Book Press, Toledo, Ohio, August 1919, pp. 234-73.


techniques and practices started to appear.

Exhibition had become the

most important phase of the industry with the largest capital investment in the form of special movie theaters.

The demand for the film continued

to mount phenomenally, for the movies were becoming a commodity for the masses.


The potentialities of the business were completely recognized

when in 1908 the Motion Picture Patents Company was formed for the pur­ poses of integrating the industry.

17 As Jacobs has noted "being a commodity, the movie depended for its exis­ tence primarily upon the money it made. As a potential art, it demanded new techniques, as a social force, it was to represent both business and art, with an influence proportional to its own genius and vitality." Op. cit., P. 23.

Chapter II


A Premature Combination The M.P.P.C. and Its Subsidiary, the G.F.C. 1908-1912

The history of patent litigation until the formation of the Motion Pic­ ture Patents Company involved 202 actions with approximately 300 replev­ ins and the like.l

The beginning of the legal strife which continued for

years started when the first suit was brought by Edison against the In­ ternational Film Company^ for infringement of patent rights.

The number

of inventions responsible for further litigation kept constantly increas­ ing.

Albert E. Smith applied the ’loop port' slack^ to the projector

which he had invented in 1900.4 in 1903 by John A. Pross.

Smith's projector was further perfected

At the same time, Thomas Armat and Charles F.

Jenkins received patents covering improvements on their projection ma­ chines.

Woodrille Latham invented and patented a further improvement on

this projector.

By 1907 Edison had the two basic patents, one covering

the apparatus for photographing objects in motion and another one cover­ ing the film strip which had replaced the photographic plate.


sold to exchanges and rented to exhibitors were used with projectors cov­ ered by the patents of Edison, Smith, Pross, Jenkins, Latham, and Armat.

1 Terry Ramsaye, "A Million and One Nights", Simon and Schuster, New York, 1926, Volume I, p. 387.

2 Thomas A. Edison vs. Charles H. Webster, et al, filed in the United States Circuit Court for the Southern District of New York on December 1897. a discussion of this case see J. Byron McCormick, "Some Legal Problems of the Motion Picture Industry", American Bar Association Journal. Volume XVII, No. 5, May 1931, p. 317 ff. 3 A loop of free film above and below the film at the aperture. 4 It had already been applied to the camera.


The Biograph Company proceeded to form its own group under the projection

machine patents of Latham and Pross and at the same time signed an agree­ ment with the owner of the Armat patents. • It then sought legal protection for its patents on parts of the projection machine.

Edison, in turn,

sought protection for the patents on parts of the camera through a combi­ nation of manufacturers with licenses issued by the Edison Film Patent Company.

In 1908, although the main mechanical and chemical difficulties

in moving pictures had been overcome by many inventors, Edison instituted lawsuits against all American inventors and manufacturers concerning whomhe could obtain evidence of the use of alleged illegal cameras, projectors, and other instruments.

Hie institution of this suit made many producers

and importers hasten to become licensees of the Edison Film Patent Company. The suit was aimed particularly at Biograph and its importer ally, George H e i n e of Chicago.

Shortly afterward Biograph instituted counter-proceed­

ings against the Edison Company and its licensees under its Latham, Armat, and Pross patents, charging

the invalidity of the projection machine

parts used by the Edison group.

Each group, therefore, started litigation

under its own patent rights in an attempt to restrain the other. Both groups banded together in order to stabilize the industry and forestall further wrangling, conflict, and litigation over patent rights. At a meeting on December 18, 1908, a peace treaty was entered into by the main contenders.

Represented were nine manufacturers including Vitagraph,

Edison, Biograph^, Essanay, Kalem, Selig, Lubin, Pathe Freres, and Melies, the latter two being French companies.

Also included was George Kleine,

the originator of the combination idea, a leading distributor and importer of foreign films and equipment.

On January 1, 1909, the formation of the

5 Biograph at first refused to be a party to the compromise.


Motion Picture Patents Company^ was announced. For mutual protection each of the nine parties acknowledged that the Edison Kinet^oscope patents had a priority and were basic.

They agreed to

pay Edison a royalty for the right to operate under these patents and an appropriate royalty provision was incorporated in the licenses.


in turn, acknowledged the legality and soundness of the various patents owned by the other members of the merger.

All the outstanding Edison,

Smith, Pross, Latham, Armat, and other patents on film and equipment were assigned and pooled by the group and all parties agreed to compensate the several owners for the use of their respective devices.

In this patents

combination control was imposed to make all the essential patents noncom­ peting and the industry was freed from further litigation.

In return for

the pooled patents each member became a privileged picture-maker under a complicated system of licensing under patents, essentially a cross-licens­ ing arrangement.

Uniform licenses were issued to the ten producers and

exchanges in the merger which permitted them to manufacture movies tinder all the patents and devices owned by the trust.

Essentially this meant

control of the movie market by the companies manufacturing, leasing, and selling equipment, since licenses entitling companies to produce and re­ lease films were issued only to members.

The arrangement was completely

restricted to the original parties when they agreed that no other licenses were to be granted.?

The license gave manufacturers the right to use the

camera, make, and lease pictures for use in those projection machines which embodied the patents controlled by the M.P.P.C.

As a consequence,

$ Hereafter referred to as M.P.P.C. 7 Actually each member was free to make any film he desired as well as dis­ tribute a film through any channel, so long as the exchanges were licensed by the M.P.P.C.


no ousider could enter the market without their consent or without being confronted with injunction and patent litigation. The license system also extended from the manufacturers to the ex­ changes.

The licenses carried a clause and agreement for the exclusive

use of the licensed products by the licensees.

The exchanges were obliged

in the licenses to deal only with theaters which recognized the validity of the M.P.P.C. patents and which would bind themselves to the exclusive use of the products of the licensed manufacturers.

On paper it appeared

that no one could use a camera nor distribute the finished film without a license from the M.P.P.C. which charged one-half cent a foot of film. The lawyers and engineers who examined the patents and inventions of the M.P.P.C. apparently proved to the complete satisfaction of the M.P.P.C. that its control of machinery, equipment, and processes was complete, and that films could not be successfully photographed, developed, printed, or exhibited without their consent.

Despite the concern of other combina­

tions over the Sherman Act the legal advisors of the M.P.P.C. felt that it could enjoy an impregnable monopoly in this industry by virtue of the patent laws.

They proved correct temporarily, when the patent litigation

and conflict which had prevailed came to an end.

To strengthen its plan

to control and monopolize the production of films the M.P.P.C. contracted with the largest manufacturer of raw film stock®, the Eastman Kodak Com­ pany, to supply only the licensed members of the pool with raw film.


der this agreement with the Eastman Kodak Company the entire output of raw stock was supplied only to the manufacturers in the combination, "ex­ cepting about three percent of the output which was permitted for

6 A base film upon which pictures are printed.


distribution for scientific, educational, and government purposes”,9 As noted above, no licensed theater was permitted to use a projec­ tion machine made by any manufacturer other than a member of the merger. The licensees were to use the patented machines only with licensed film. Any exhibitor daring to show a film by an 1o u t l a w ' w a s threatened with the confiscation of his projector and the ueeation of all service.


help assure that no 'outlaw1 apparatus or films appeared in the licensed houses a system of taxation was evolved whereby each exhibitor paid a fee (royalty) of two dollars a week for the license to use the projector and the right to rent films from licensed manufacturers and exchanges.


exhibitors who acceded to the stipulations of the trust were assured of an adequate supply of films to maintain their houses, and the exhibitors who refused were in danger of having nothing to exhibit to their patrons. The system was fairly effective, "for 10,000 exhibitors signed with the M.P.P.C.",H

This exclusive leasing of a machine only if licensed pic­

tures made by licensed manufacturers were shown on the screen was later the key factor involved in the suit brought by the government against M, P.P.C. The distribution branch of the industry was not neglected, as licen­ ses were extended to exchanges for handling films produced by the licensed manufacturers.

Exchanges agreed to sell films only to such licensed thea­

ters which used projection equipment covered by the patents of the pool. The license arrangement was restrictive.

If the exchanges did not want

9 Gustavus A. Rogers, "The Law of the Motion Picture Industry", Printed by the Author, New York City, November 28, 1916, p. 9.

10 This name was applied by the M.P.P.C. to any non-member.

11 Jacobs, op. cit., p. 83.


to sell licensed films exclusively their licenses were revoked or they were suspended from doing any further business with the companies in the trust.

The exchanges had little choice in accepting the terms, which in­

cluded set prices, of the trust, for during the early life of the trust it was hard to obtain enough films from independents to fill their screens each week. The step taken by the trust in establishing fixed prices was in ac­ cordance with the best practices of mass production at the time.-^


only method of dealing in films up to that time had been the footage sys­ tem.

The sale of positive prints outright was abolished by the trust.

Substituted was a conditional sale of the print from the producer to the exchange under which title did not pass from the producer to the exchange. The exchanges also started to classify theaters according to class and rental rates of pictures became more standardized with this classification. When an exchange licensed films for theaters in an area the exhibitor was forbidden from changing either the date or the selection of a film once it had been arranged for.

Exhibitors who were in violation were either fined

or wholly deprived of film service by the M.P.P.C. A second method of distribution used by the M.P.P.C. was the 'statesrights' plan of distribution.

In the early part of the century producers

(particularly independents) lacked exchange facilities and they needed financial assistance in making films.

For financing purposes they also

needed a guarantee of the intention of exchanges to deal with them.


help these producers, a guarantee was given by exchanges in advance of the

12 A quantity sale based on the assumption of keeping standard, quality, es­ sential for mass production. Therefore, the trust was for making films a merchandise of standard quality, manufactured in large quantities, and retailed at low prices.


production of a picture.

In return the producer would sell or lease the

distribution rights to the distributor and, in effect, grant him the ex­ clusive right to sell.

The film was usually sold for a flat or lurpsum,

leased with an arrangement for producers to participate in the film ren­ tals, or sold with a division of the proceeds from the sale of a picture on a specified percentage basis.

The early exchanges divided the country

into specific territories in which each individual exchangeman located his own distribution offices.

Films were distributed in respective local ter­

ritories, which usually corresponded with the boundaries of the states. The major disadvantage of this method was apparent after a time.


exchanges handled the films of all producers and hence did not push the product of any single producer.

Pictures were put into blocks without any

regard to the dissimilarities of productions.

The rentals which would be

derived from each picture were minimized as a result.

Despite this, how­

ever, about 116 such exchanges were licensed by the M.P.P.C. to deal in their given territories.

"While the states rights buyers were supposed to

handle the! trust films exclusively, "often they tried to supplement their income by a surreptitious addition of outlaw films''.^

When the trust

discovered such practices they instituted legal actions, withdrawals, or a complete severance of service. Despite this plan for continuous and regular distribution, many im­ portant exchanges kept out from under the tent of M.P.P.C.

Until April

1910, however, the trust tried to maintain a structure of three distinct branches in the industry.

Finally realizing that distribution was the

weak point in solidifying its position in securing monopoly control, the

13 Will Irwin, "The House That Shadows Built", Doubleday, Doran and Company, Garden City, New York, 1928, p. 128.


M.P.P.C. was soon forced to integrate vertically by establishing what it considered to be an ideal national film exchange system. the General Film Company-^ was formed in April 1910.

For this purpose

The G.F.C. was to

serve as the trust's exclusive distribution facility on a nationwide basis for the purpose of insuring a maximum return from the rental of films. Each member of the trust secured one-tenth of the common or voting stock and had full representation on the board of ten directors of the new sub­ sidiary.

The common stock bought by the licensed producers in equal amounts

was to yield a continuous 12$ dividend.^

Profits in excess of the divi­

dends on the preferred and common stock were to be apportioned among the producer-releasors through the G.F.C. "in the same ratio that their num­ ber of releases, weighted by the running footage, bore to the total re­ leases of all producers releasing through G.F.C,".^

Exchanges were to

be purchased by "stocks and notes to be met out of profits".^ This national distribution system was so successful that prior to its court-decreed dissolution no other national distributing organization came into existence.

The company began business on June 6, 1910 by purchasing

the stock of three licensed exchanges.

Other licensed exchanges were

swallowed up by one means or another, but often by the threat of revoking their M.P.P.C. licenses.

Some were bought out, others driven out by with­

drawing their supply of films, others by price cutting and similar dis­ criminatory devices.

The G.F.C. succeeded in absorbing or putting out of

14 Hereafter referred to as G.F.C. 15 Nonvoting preferred stock was also issued bearing 1% interest, meaning the typical control by voting rights.

16 Barrett, op. cit., p. 24. 17 "The Motion Picture In its Economic and Social Aspects", The Annals. The American Academy of Political and Social Sciences.Volume CXXVIII, Philadelphia, November 1926, p. 87


business virtually all of the licensed rental companies.

By January 1,

1912, G.F.C. was practically the sole distributor in the country and at the peak of its power.

With the important exception of New York, fifty-

seven of the fifty-eight exchanges in the country had been absorbed.


the exchanges were in cities which occupied a strategic position from which a larger territory could be supplied conveniently with films.


then looked as if the industry would be brought under a powerful and uni­ fied control. G.F.C. introduced (and enhanced) market practices which influenced the entire structure of the industry and long outlived the trust itself. To this time no complete system of rental prices was in force.


changed this by classifying all theaters and establishing a standard ren­ tal for films.

G.F.C. fixed the price at ten cents per foot for the posi­

tive prints supplied by each of its licensed producers, and the price of ten cents a foot did not vary. trarily.

This figure had not been determined arbi­

It represented the average costs of experienced producers, in­

cluding attainable profits, 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.

The price was higher than before

since the costs for the production of films were higher and the established rentals were made correspondingly higher.

Since the scale of rentals paid,

by the exhibitors was fixed, there was no elasticity and the burden was upon the producers to regulate their studio costs to conform to the price. The factor of location was later introduced in setting rentals.

Under the

G.F.C. there was introduced a system of theater classification in accord-

18 Actually the temporary success of G.F.C. with national distribution became an object lesson to producers in later years, when it became clear that the production of films was more profitable if the conditions of sale were con­ trolled.


ance "with the desirability of locations.

Rentals were further standard­

ized in accordance with the class to which a given theater belonged.


difference in the quality of the film shown in a theater played a secondary role in classifying theaters.^9

Release dates were established which the

theaters were supposed to rigidly observe, and violations resulted in the instantaneous withdrawal of film services. The standard rental scale to an exhibitor for a program changed daily ranged from $100 to $125 a week for the best location and declined gradually to $15 in the smaller houses. Most of the producers which at the start had been omitted from the merger had been small and merely swiping around the edges, the quantity of their production being random and irregular.

Ir^spite of their size, bitter

opposition from all quarters continued to greet the trust combine.


'outlaws' not included in the pool refused to be victimized without a struggle.

To fight the trust many protective organizations were formed,

"the Independent Motion Picture Alliance, Chicago, Illinois, the Associ­ ated Independent Film Manufactures of New York City, and most important of all, the Motion Picture Distributing and Sales Company, with Carl Laemmle as president."


The latter company had prepared to sell and ship the

products of its independent producer-members.

It collected fees and de­

ducted a percentage from its members1 receipts for a common defense fund in the battle against the trust. The demand for films continued to be so great that it was difficult to keep out these newcomers.

These independent producers continued to make

19 Mae D. Huettig, "Economic Control of the Motion Picture Industry-A Study In Industrial Organization", University of Pennsylvania Press, Philadelphia, 1944, p. 28 ff.

20 Jacobs, op. cit., p. 83.


films and many of the licensed exchanges, in violation of their licenses, bought these films.

Unlicensed exchanges came into the market and flour­

ished by buying independent pictures.

Instead of killing competition by

its counter attacks, more competition was engendered by the M.P.P.C. Enough independent projection machines and films came from independent studios to reduce the fear of the licensed exhibitors that the trust would darken their houses.

The bootlegging of films and projectors, an under­

ground business between independent producers and exhibitors, continued to flourish.

The trust countered with raids on 'outlaw' studios, sabotage of

equipment, and subpeonas and injunction to uphold their control legally, but the outlaw companies multiplied and became stronger.

For almost six

years the warfare continued, with open violence and law suits raging be-


tween the independents and the M.P.P.C, and no strategy overlook iby either side.

Independent manufacturers continued to increase in number and status

and by 1912 many independents such as Fox, International Motion Pictures, Rex, Nester, Bison, Keystone, Mutual, Powers, Lux, Universal, New York Mo­ tion Picture Company and dozens of lesser firms were offering stiff oppo­ sition to the trust.

In addition many equipment manufactures had appeared,

Great Northern Italian, Ambrosia, and Eclair being the leading ones. The strongest weapon which the independence employed was an artistic one.

While the M.P.P.C. producers were standardizing and cramping their

pictures, independents sought in every way to better the quality of their films in order to encourage exhibitor patronage.

Independent producers en­

couraged experiment, originality, inventiveness, higher art standards, and technical improvements.

The great improvement by independents caused the

quality of their films to increase.

They even lured many of the trust's

better film makers by offers of higher wages.

The basic deficiency of the

trust was recognized by the independents by offering the better products


at cheaper prices.

The race for quality of films continued side by side

with the race for quantity of films.

The trust film makers began to rec­

ognize the superior products of their independent competitors.

They budg­

eted films at higher costs, increased their personnel, raised artistic standards, and gave their directors greater leeway.

But they clung stead­

fastly to the one-reeler and continued to refuse to distribute features. The trust did not adopt adequate policies at a time when the total volume of business for the industry was increasing. By January 1, 1912 only one free exchange

hadnot succumbed to G.F.C.

This was the "Greater New York Film Rental Company" owned by William Fox. Fox proved powerful enough to withstand the threats of G.F.C., particularly because he owned many theaters in New York City.

Before G.F.C. had arisen

Fox had refused to sell the pictures of M.P.P.C. and as a result his li­ cense had been cancelled.

Shortly afterward he acceded to the demands of

M.P.P.C. in selling their films and his license was reinstated.

When he

refused to sell his exchange to G.F.C. he received another cancellation. When the trust threatened to cut off his supply of films completely Fox be­ gan to produce his own pictures to help him fight the combine in the mar­ ket. 22

His resistance to the exactions and demands of the trust resulted

in his accusation that the trust was a violation of the Sherman Act. led to the suit against the M.P.P.C. under theSherman


Act in 1 9 1 3 ^ and

the federal courts were asked for a dissolution of the combination.


21 For the importance of the change from one-reelers to features, see Chapter III.

22 Fox was one of the first movie men successful in embracing all the branches of the industry, although many maintain it was Adolph Zukor.

23 This was an opportune time, with the strong anti-trust sentiment crystal­ lizing under the progressivism of Woodrow Wilson.


Attorney General, in instituting proceedings against both the M.P.P.C. and G.F.C., charged that the companies had a system of control which constitu­ ted a combination and conspiracy in restraint of trade and was in effect a monopoly of the industry.

Fox, by his support of this action, indicated

that he disagreed with the contention that the patents of the M.P.P.C. of­ fered it immunity from attack under the Sherman Act, especially since the validity of some of its patents continued to be disputed at the same time that others were expiring.

The future position of the federal courts was

apparent for in the same year in which the government filed suit against the trust the courts declared against Thomas A. Edison Company in a suit brought by Fox.

In winning the case the Edison Company was restrained from

cancelling Fox's license and was instructed to sell pictures to him at the same prices as to the other exchanges.^ M.P.P.C. and G.F.C. were condemned by the federal courts on the peti­ tion of the government as being a combination in restraint of trade.^


decision stated that the ownership of patents was not acceptable as a de­ fense to the charge of unlawful combination and that rightful means could not be used, for the purpose of accomplishing wrongful ends.

The trust, con­

tinued the decision, held its position by patent disputes and lawsuits and not by competition.

The contracts which had formed the basis of the M.P.P.C.

and G.F.C. and upon which they had conducted their business were declared to be void and no longer enforceable in effect.

G.F.C. and M.P.P.C. were di­

rected to abandon the methods which they had adopted for the conduct of their

24 The mere commencement of the suit against M.P.P.C. and this decision in favor of Fox seemed to stimulate a stronger resumption of competition. 25 United States vs. M.P.P.C., opinion of Dickinson, J., District Court of the United States for the Eastern District of Pennsylvania, 225 Federal Report 800 (October 1, 1915)» Also 247 U.S. 524» Appeal from above dis­ missed by Supreme Court, June 3, 1918 (October Term, 1917)#


respective businesses.

By 1915 G.F.C. was dissolved by further action of

the federal courts and in 1917 the Supreme Court, in declaring that the purchaser of a patented projector could not legally be forced to exhibit the films of the manufacturer on it exclusively, declared the trust legal­ ly dead. The complete combination died because of its rigidity, for while it was ingenious it proved unable to keep a monopoly for a long time.


though the trust had been brought into court in 1913 and had not been de­ clared legally dead until 1917* it had actually become wholly ineffective by 1914.

Though the legal hearings dragged on in the courts for years the

disintegration of M.P.P.C. was rapid. °

The real war was won years be­

fore by a decision in the market, and by the time the decree was rendered in favor of the government the inevitable result had been fairly well pre­ dicted generally throughout the industry.

The trust had slipped from its

dominant position and had been replaced by others.

It had held a strong

position at first but was put out of business by its own inertia. layed the use of and made valueless many new patents. point should be noted. in clauses.

It de­

Another important

The M.P.P.C. was declared dead on its patent tying-

The M.P.P.C. owned no property but patents and at its legal­

ly decreed dissolution, the patents reverted to the original owners.


before the creation of the M.P.P.C., however, it had become a common prac­ tice for a seller to restrict the use of his machine to his films, or if the film was sold, to restrict its use to a projector made by him.


rapid expansion in the film market, with competitive pressures from all sides, made it exceedingly difficult for the leading manufacturers in the

26 Actually the trust was destroyed sooner than expected when market forces hastened it to its destruction.


M.P.P.C. to retain control on this same basis. G.F.C. failed because of the rigidity of the system which it set up. It based its distribution policy upon the principle of supplying a fixed number of feet of film per week regardless of the length, age, or quality of the picture. too late.

When it ultimately did come to sell ’programs' it was

The suppliers of the G.F.C. ignored the public demand for the

feature and continued to produce nothing but the standardized one-reel films to be sold at the unifoim price.

They apparently were unwilling to

risk the costs of larger and more elaborate films when their hold on the market appeared to be firm and permanent, with large and assured profits guaranteed.

But the character of the market demand for films was chang­

ing, Hollywood was becoming the production center, and the star system was becoming a factor in both production and profits.

The fragments of

the trust which remained after the dissolution order of the courts dis­ appeared in some cases and were absorbed by larger companies in others. The persisting and permanent economic lessons of the Motion Picture Pa­ tents Company and General Film Company to the motion picture industry have been evident in subsequent developments.


Chapter III The Era of the Silent FilmA

1912-1926 By 1909 the industry began to drift out of New York, chiefly to the west. The movement was prompted impart by the attempts of independents to avoid the attacks by the M.P.P.C.

The independents found they suffered less

difficulties from the activities of the M.P.P.C. when their operations were sufficiently removed from New York and Chicago.

Independents migra­

ted from New York, then the center of production activity to San Francis­ co, Florida, Cuba and Los Angeles.

Cuba was a center of disease, Florida

was too hot throughout the year, and San Francisco was too far from the Mexican border.

"Los Angeles proved to be the best haven for the harassed

movie makers for it was easy to get to the Mexican border and escape in­ junctions and subjection."^

At this time, also, outdoor films were become-

ing popular^ and studio investment could be reduced to a minimum in the new climate and the good seasons. dependents to this region.

The larger companies soon followed the in­

The area had good all year round weather, a

cheap supply of labor, a rich variety of topography, and the ready cooper­ ation of real estate and business interests.

Although the first film had

been shot there as early as 1907, it was not until October 1910 that the first studio was established.

By 1913 a suburb of Los Angeles had been so

completely developed as the production center of pictures that it was se­ parated from Los Angeles proper and given the legal name of Hollywood. For a time the very designation of a picture as a Hollywood production acted as a commercial asset since it meant that pictures had fairly high professional standards. 1 Jacobs, op. cit. p. 84.


Hampton, op. cit. p. 77


There were other reasons which brought the studios to Hollywood and established the city as the production center of the industry.


counterbalanced the obvious disadvantage of the geographical concentra­ tion of production so far from the home offices and main markets of the industry.

Directors become more independent away from direct financial

supervision and it became easier to get talent when the production and financial areas were separated.

The centralization of production created

an esprit de corps and a competitive spirit which stimulated creativeness, ambition, and personal rivalry.

To the actors and directors the major ad­

vantages were those of scenery and climate.

The city has about 310 film-

able days a year in which it is possible to walk out and shoot a picture from sunrise to sunset with a small possibility of rain or cloudiness keeping extras and other labor waiting.

This advantage of dependable sun­

shine- permitted outdoor production without delays.

The great variety of

scenery at close range, the ocean on one side and deserts, mountains,, and forests in the other direction cut down the costs of travel.

In later

years the development of two mechanical improvements lessened the advan­ tages of climate which Hollywood had over other cities.

The supersensi­

tive raw film lessened the need for light and the Dunning process per­ mitted, under any condition of action, interior shooting which later could be fitted into outdoor backgrounds and atmosphere.

The advent of

sound in 1926 served further to increase the amount of indoor shooting, further lessening the importance of scenic and climatic factors.


though the natural phenomena were no longer operative the industry has remained there.^ 3 In 1935 taxes were levied by the State of California on personal incomes. The taxes applied to any person who spent six months or more a year in California, and made evasion impossible for those living in some neighbor­ hood state. This tax renewed the discussion of a possible movement of studios to other locations, New York and Florida having been most serious­ ly considered.


The production branch has large investments in real estate, equip­ ment, factories, studio supplies and plants.

The concentration of the

motion picture actors' colonies in Hollywood has made labor and profes­ sional talent readily available.

The concentration of production in

Hollywood shows how relatively immobile a great production center can be once the production equipment, the specialized labor, and the marketing habits of the people become centered in and directed toward the same lo­ cality.

In spite of the attempts of other cities, particularly New York,

to attract production, Hollywood has and probably will continue to main­ tain its supremacy as the center of production.

New York, with its popu­

lation and wealth has remained the most important financial, exhibition, distribution, and exploitation center. The year 1912 was significant from a legal point of view.


laws had not anticipated the advent of pictures and the copyright of the motion pictures had not been provided for by the original copyright sta­ tute.

Since the ideas and characters in a play were not protected by co­

pyright (nor at the common law) many suits on infringement of copy-right had been pressed by producers.^ of Edison versus Lubin5

In 1903 the Federal courts in the case

adjudicated that a number of scenes, where there

was continuity running through the series, were copyrightable under the law as a photograph.

It was not until 1909 that the legislature recog­

nized, in the light of the growth of the industry, that copyright laws

4 Most of the litigation which affected the industry was started by injunc­ tion proceedings, and it was through this agency of the special writ of in­ junction (rarely granted except in clearly defined cases) that relief was afforded to the person or persons in the industry when recourse to the courts was necessary. This is not only interesting but a commentary on the haste with which things were done in that day and age, particularly when affecting a new industry. The exigencies of business required immediate interference by the courts.

5 122 Fed. Rept. 240 reversing 119 Fed. Rept. 993*


were necessary.

The film, of course, had not been invented at all, but

the courts stated in 1912 that Edison was entitled to full credit.

In the

same year the copyright statute was amended to include motion pictures.^ The amendment of 1912 gave pictures a place in the copyright law and per­ mitted motion pictures as such, to be copyrighted.^

Since that time a mo­

tion picture is copyrightable by depositing a title and description and one print from each scene or act. Until 1911 few pictures were more than one reel in length.

In this

year the first multiple reel film was imported from abroad and adopted as a regular film.

Many more full-length pictures, two-five reels in length

began coming from Europe.

These pictures were released by American ex­

changes in installments of one reel at a time,- despite the break in the story.

The most important multiple reel, the Italian film "Quo Vadis",

nine reels long and running two hours, opened on April 21, 1913 at the Astor Theater, the first picture presented in a top class Broadway house. The $1.50 admission price instead of the usual $.15 charge lifted the pre­ sentation out of the nickelodeon class.

This foreign film was greated

with such enthusiastic acclaim that it proved beyond a shadow of a doubt, even to the most conservative American producer, that features were the pictures of the future.

In the United States there had been adequate per­

sonnel, material, and equipment, with a large and increasing market, but no entrepreneur came forth to correlate these factors into the creation

6 The copyright Act of March 4, 1909 as amended by the Act of August 24, 1912, Section 4 (H.R. 24224) 17 United States C.A. 30, 37 United States Statutes at Large 433 c. 356. 7 For a legal analysis of this act and its effects upon the industiy see: Rogers, op. cit., p. 8. This amendment did not end infringement litiga­ tion. Twenty-five years Lhe conflicts were as great as they had been in the early part of/^ffentury. See "Flow of Infringement Suits Plagues Industry", Motion Picture Herald. Vo. 132, No. 3» N.Y., 1933, pp. 15-18.

35 cy

of the multiple-reel product.

"Enoch Arden",

directed by D.W. Griffith,

had been one of the first domestic two-reelers to appear.


this film was released in two parts but the demand for a single showing was so strong that exhibitors were forced to present the two reels to­ gether, making it the first domestic two-reeler exhibited as a unit in the United States.

In the following years D.W. Griffith became the domes­

tic craftsman to firmly establish the multiple reel.

As the leading innog vator he created a new audience and gave the old audience a new standard.7 The multiple reel helped deliver the fatal blow to the M.P.P.C. 'Out­ law' producers had been free to try all experiments which promised to please the public at a time that trust manufacturers were restricted by the footage royalty system under which they operated.

The trust was handicapped by lit­

igation and the tactics of the 'outlaws', and though the independents lacked an organization and revenue, they had this great advantage over the licensed manufacturers of the M.P.P.C.

The supply of feature films produced by inde­

pendents swelled and larger-scale operations became possible, predicated on a mass market.

The newly established feature picture meant, as one conse­

quence, that the nickelodeon was rapidly on its way to extinction.

The fea­

ture picture as opposed to the one-reeler increased the length of a program to two hours so that the old nickelodeon scheme of a short program and quick turnover was no-longer workable.

A new standard for theaters, size, became

necessary since exhibitors had to make up in capacity the receipts lost in

8 Released in 1911.

9 For a while, his success was questioned. In March 1915, the "Birth of a Nation" opened at a regular theater price of two dollars. The.negative cost of this film was approximately $85*000 and after a long Broadway run and nationwide popularity for years, the picture grossed $15,000,000. The success of Griffith and Aitken, his producer, gave rise to great hopes for profits. Financiers were dazzled by the sums earned in a few weeks by Griffith's associates and became willing to entrust vast sums to him.



New houses were built with many times the seating capacity of

those replaced and existing houses were expanded and i m p r o v e d . L a r g e theaters became the standard, many being devoted exclusively to movies. Many of the new movie palaces were built on fashionable thorofares.


tended to make movies more respectable and attracted a new type of audience. The price scales, comfort, and ostentation of movie theaters started to ri­ val legitimate presentations and the great middle class was attracted.


February 1916, approximately 21,000 remodelled or entirely new movie theaters were in operation and by 1917 the nickelodeon had become antique."


The great advance in production methods evidenced by feature pictures ser­ ved to increase the rental rates for films, but even with the greater ren­ tal cost per picture, the increase in the operating expense of the larger theaters, and the decrease in turnover, exhibitors made larger profits, mainly because admission prices were increased from twenty-five to thirtyfive cents. Multiple reel pictures gave rise to the practice of featuring name stars in this period, such as Charlie Chaplin, Mary Pickford, Norma Talmadge, Mae Marsh, and other favorites.

Adolf Zukor, who had competed with

M.P.P.C. for screen time, hit on the idea of filming famous plays with popu­ lar stage stars.^

He began by importing Sarah Bernhardt’s "Queen Elizabeth"

10 Benjamin B. Hampton estimates that 16,000 theaters in 1922 could accomo­ date as many people as 40,000 theaters could in 1912. Benjamin B. Hamption, op. cit., p. 204.

11 E.G., on April 14, 1914 the Strand Theater opened on Broadway in New York, devoted exclusively to movies. Many of these new, large theaters were later to become the key firstrun houses.

12 Jacobs, op. cit., p. 168. 13 Adolf Zukor had also been one of the foremost exponents of the big picture idea.


in 1913 •

The star system had operated on the stage for more than a cen­

tury but the screen was so distant from the stage that film makers to this time had not applied this method of attraction to their own product.


ies were not considered a dignified or respectable medium and large salary offers were made to lure stage stars into film studios.

Where this proved

unsuccessful or impossible stars were lifted from anonymity to stardom by the film companies.

Gradually the power of film companies came to be mea­

sured by the popularity of their stars.^

Producers actively competed for

stars and talent by the simple expedient of offering higher salaries.


costs of pictures tended to rise, as a consequence, but exhibitors contin­ ued to call for favorite stars. hibitors were met.

To assure markets the demands of the ex­

The investment in studios, equipment, and theaters rep­

resented an imposing amount of assets but became small assets in value with­ out box office attractions.

Originally control of patents had been the key

to domination of the industry and now control of talent apparently was the vital factor.

Control of star-value meant control of the exhibitor demand

and Adolf Zukor, as an initiator and firm believer in the star system, set about to monopolize the industry by purchasing all the available talent. In the year 1916 the Famous Players-Lasky Corporation was formed by the consolidation of several producing companies, its distributor being a com­ pany known as Paramount Pictures.

Zukor did not merge all other companies

with his Famous Players-Lasky but followed a policy of absorbing the major star strength of his competitors and "by 1916 three-quarters of the out­ standing stars were under contract to him"

Hardly was the industry

14 See Appendix B to this chapter. 15 Morris L. Ernst, "The First Freedom", The Macmillan Co., New York, 1946, p. 190.


freed of the monopoly and restraint of trade which resulted from the activities of the M.P.P.C. and the G.F.C, than the industry was again confronted with a serious obstacle which flowed from the control of so large a number of the most popular stars by one company.

Star control

in combination with block booking proved to be a very potent technique. The effects of the control of so large a number of motion pciture stars was to place in jeopardy the investment of large numbers of exhibitors in their theaters throughout the country, some of whom could not obtain contracts for the exhibition of the pictures of any of these stars be­ cause contracts for their exhibition had been made with their competing theater owners.^ This period also saw the emergence of the large firms which have re­ mained in control. There were nearly 200 producing and distributing companies in active busi­ ness, fiercely competitive and fiercely ambitious, when the great units began to emerge in 1914. Positive advantages were to be gained from ex­ pansion, consolidation, and affiliation. 17 The bringing of production, distribution, and exhibition under a single management brought the adventurous era of the American film industry to a close.

The significant business consolidation of the second decade

was the formation of Paramount Pictures Incorparated,1®

W.W. Hodkinson,

a successful exhibitor owning larger theaters, together with other in­ dependent theaters owners and 'states rights' exchangemen, formed Para­ mount to finance distribution.

They planned to offer special advantages

to exhibitors, and a nation-wide campaign was launched to win exhibitors

16 William Marston Seabury, "The Public and the Motion Picture Industry", The Macmillan Company, New York, 1926, p. 19. 17 Raymond Moley, "The Hays Office", the Bobbs-Merrill Company, New York, 1945, p. 21. 18 In this period, also, many producing companies were formed which were destined to become the most important in the industry. In January 1914 William Fox's Box Office Attractions Company was formed, releasing its first film on February 9, 1914. Ih 1916 Warner Brothers was launched. These new frffas were concerned with the production of the new multiple reel pictures. In 1915 the Metro Picture Corporation was formed by ex­ changemen.


over to the feature film which they were interested in distributing.


first producers brought into the scheme were A. Zukor and his Fainous-Players Company, one of the original sponsors of the feature, Lasky's Feature Players Company, Polios Pictures and Morosco Pictures. came president of the new enterprise.

W.W. Hodkinson be­

In 1916 Zukor merged his own Fam­

ous Players Producing Company with Lasky's Company, bought the Paramount distributing organization and as president of this consolidation stepped into the leading position in the industry.

With the company specializing

in feature production it proceeded to sign up exhibitors, guaranteeing them two multiple reel pictures every week. The feature film, as noted, had represented a phenomenal advance in production methods and had exerted a material influence on the marketing of films.

The increase in the cost of production coupled with the heavy

expense of maintaining a national distributing organization with many branch offices imposed a heavy drain upon the capital resources of pro­ ducers.

Paramount, therefore, devised a unique distribution plan which

became the model for the industry, the technique of block booking.^9


der the plan an exhibitor contracted, in advance, to buy a stated number of films to be made within a definite time and Paramount, in turn, prom­ ised quality and attractiveness in films.

To show his good faith the ex­

hibitor remitted a certain amount of money in advance. Many national producers or distributors made an sive demands upon thejn for capital by requiring stantial part of the rental upon the signing of of pictures long before a picture was made, the days before delivery of the print.^O

19 "Zukor instituted block booking" —

20 Seabury, op. cit., p. 19.

effort to meet the exten­ exhibitors to pay a sub­ a contract for the rental balance to be paid seven

Ernst, op. cit., p. 190.


The film also ceased being rented to the distributor for domestic use on a footage or flat rental basis and instead a percentage system was adop­ ted whereby the producer licensed the distributor to rent his pictures to the exhibitor on the best terms obtainable.

The producer received approx­

imately sixty-five percent and the distributor retained thirty-five per­ cent of the rentals derived from the exhibitor.

The advantages of the new

system of block booking and price policy were stressed for the exhibitor as well as for Paramount.

Paramount supplied the exhibitor with at least

two new pictures of uniformly good quality every week and eliminated the necessity of the exhibitor having to deal with various exchanges in the selection of a program.

Exhibitors were assured of a steady supply of

films by simply patronizing a single company.

For Paramount the system

meant greater stabilization of production since its studios were now as­ sured of a steady outlet and market for their products.

It became possi­

ble for Paramount to schedule its output since exhibitors were helping to pay part of its costs of production in advance. Paramount, the risks of investment were

Most important for

minimized by the ability to im­

pose this condition on exhibitors. Not all exhibitors became favorably disposed to the new system.


hibitors organized exchanges, cooperatively operated, because of the feel­ ing of distrust which arose between them and the axchangemen, an antagon­ ism which persists to today.

Other exhibitors set up little exchanges to

subrent films leased from distributors.

The new system invoked by dis­

tributors succeeded in eliminating the great problem of cancellation but the problem of bicycling2-*- continued to the end of the third decade when it still formed about one percent of all the cases filed before the Film

21 See definitions in Appendix B.


Boards of Arbitration.

Distributors, in retaliation, often used 'hiking

contracts', contracts in which the amounts were raised after thqy had been signed, by changing a one to a six, etc.

Exhibitors closed situations,

closed territories and used other tactics which will be examined in later chapters.

However, the most pointed and strongest animosity among exhibi-

22 tors was toward block booking as instituted by Paramount. *

Comparable to

most retailers the exhibitors of the industry were late and difficult to organize,^

but the climax came in 1917 when twenty-seven of the most in-

portant and leading exhibitors combined for protection and established a distribution channel of their own, the First National Exhibitors Circuit, which was to exert its purchasing- power in favor of independents to the disadvantage of Zukor. This group was the nearest thing to a nationwide exhibitor-owned theater circuit and has represented the peak in control by exhibitors. Controlled by twenty-seven executives of established theater circuits, in­ cluding many important first-run houses in key cities, the new organiza­ tion offered a severe challenge to Paramount which was then the leading block booking offender.

First National contracted with independent pro­

ducers for pictures but eliminated block booking in rentals by granting subfranchises to exhibitors, franchises which granted an exclusive right

22 "The advance deposit systems by producers helped to finance production. 10-25$ of the purchasing price was paid at the signing of the contract and applied against the last picture played under the contracts. This procedure assured the completion of contracts, stability, and financing of production." Barrett, op. cit., p. 77. 23 It was not until 1920 that the Motion Picture Operators of America was formed, the trade association of theater operators. The Allied States Association of Motion Picture Exhibitors was organized in 1923, disbanded in 1926, and reorganized in 1928. These are still the two most important, nationwide, exhibitor organizations, although there are many regional groups.


to sublease a picture.

Many of the franchise holders were exhibitors who

had at one time been in distribution, and even some of Zukor's exhibitors became members.

While the organization was set up to act as a purchasing

agent for its exhibitor members, it soon formed its own distribution units. The entrance of exhibition into distribution meant that for the first time in the industry the function of exhibition, on an economically significant scale, was unified with the function of local distribution.

While First

National was essentially circuit booking and originally was a consolidation under one control of the greatest purchasing power in the industry for this purpose, it finally integrated to production by setting up stu­ dios.

The studios were used to strengthen its position by influencing

producer-distributor groups, break up the attempted monopoly of the stars, and to insure a constant supply of films for its members. Along and bitter fight between Paramount and First National for con­ trol ensued and some years later Paramount, in order to retain its leader­ ship, was forced to enter the business of exhibition as well as distribu­ tion and production.

William Fox through his ownership of theaters had

fought M.P.P.C. because of its ownership of patents.

Now First National

through its ownership of theaters was in an advantageous position to fight Paramount because they believed that Zukor was on his way to forming a mon­ opoly.

Despite Zukor's counterefforts a temporary suspension of block book­

ing was finally accomplished.

Triangle, the first to compromise with ex­

hibitors, eliminated the requirement of the advance deposit payment for pic­ tures.^

Paramount, was forced temporarily to relinquish block booking,

its first concession in the battle with First National.

In August 1917,

the magazine Photoplay carried the following announcements

24 Jacobs, op. cit., p. 166.

43 An official statement by A. Zukor...after August 5, 1917 anytheater in America can secure Paramount Pictures and Paramount stars just as it chooses to book them...the restrictions are off. By 1918 it appeared that block booking had been completely killed.


C. Pettijohn, in the third and fourth decades a defender of block booking but then a counsel for the Affiliated Corporation stated that The exhibitor is through with the state of things which made him put into his theaters pictures which he did not want, pictures his audiences did not want, in order that he might play pictures which he needed. 25 In 1917 Paramount was not the sole company to find itself temporarily weakened.

Many other companies found themselves backed to the wall.


and investment houses which were gradually entering the business of film financing worked for competing companies simultaneously, although the bat­ tle shaping up between the producers, particularly for theaters, was to prove frenzied, fierce, and ruthless.

For the companies in existence the

costs of production were growing along with increased specialization of crafts made necessaiy by mass production.

New departments, an increase in

personnel, research experts, story

editors, costume designers, and music ex­

perts were some of the additions.

The costs for stars, screen rights to

plays, salaries, equipment, and other elements of production rose.


ately admission prices increased^ and prevented any decline in the profit­ ability of the industry.

At the same time the passage in 1917

er Bill in New York, providing for

of theWheel­

a tax on manufacturing, and coming at a

time when costs were increasing, confirmed the growing feeling among produ­ cers that California and Hollywood would remain the production center for the industry. The War in Europe had given American production a virtual monopoly of 25 Ibid.. p. 167. In part the increase in prices was due to the 10% admission tax of World War I. This tax which exempted admissions of $.10 and less, was continued into the postwar. The first law for taxes of*motion picture films had been Title IX, Section 906 of the Revenue Act of 1913* and this was passed along to exhibitors.


the world movie market.

Despite mounting costs, particularly of chemicals,

necessary for the manufacture of films and accessories, the industry grew without interruption and participated in the general war boom.

Owing to

the strain of war the motion picture industries in the strongest competing countries France, Italy, Germany, Sweden, Norway, and England, were weak­ ened and collapsed, although a few had been as well established as those in the United States.

In other Eurpoean countries social and economic fac­

tors had apparently operated effectively to prevent anything like the ex­ traordinary spread of movies that had occurred in the United States, mak­ ing for a more limited national market. The war, also, served to send some of the original domestic firms up and others to oblivion.

Kalem and Melies dropped out of business.

son sagged, discontinued production, and in 1918 sold its studio. graph shifted in many unsuccessful attempts and then expired. was declared legally dead in 1917* sted away.

Edi­ Bio­

The M.P.P.C.

The General Film Company gradually wa­

Vitagraph, Lubin, Selig, and Essanay merged under the company

name of V.L.S.E.

William Fox acquired a sufficient capital and went into

enlarged production.

Universal Company under Carl Laemlle was building a

steadily increasing clientele among small neighborhood theaters.


was launched as an exhibitor company. At the end of the war American films were firmly established at home and in all parts of the globe.

After the war the rehabilitation of Europ­

ean industry was retarded by the lack of capital, the destruction of pur­ chasing power, the heavy tax burden, and the pressure of essential recon­ struction.

Foreign production had been less developed, technically, in

manufacturing pictures of popular appeal and the war not only ended the development of the film abroad but created a closer relation between indus­ try and government because of the financial and export assistance needed by


foreign industry.

European competition, however, was never able to re­

cuperate due to the limits imposed by markets, capital, and inexperience. The full force of the American development was felt at the moment that European competition was weakest.

The American industry took advantage

of its position by establishing distributing organizations in Britain, the chief competitor, and succeeded in achieving almost a full monopoly on British screens.^

In later years the main use of these distribution agen­

cies was to fullfill the compulsary quota requirements imposed in Britain. With American films firmly established in European cinemas and popular ta­ ste, the revival of foreign production very slow, and foreign production stifled by the increasing power of Hollywood, American producers proceeded to establish their own distribution centers throughout the world.

The un­

limited finances in the United States after the war helped to completely capture the world market.

The domestic industry was supported by a high

standard of living, a high level of purchasing power, the automobile ena­ bling transportation of rural residents to amusement centers, a plentitude of capital, and the development of the technique. The very ascendancy of t he industry was almost the cause of chaos in the domestic market.

For years, unrivaled by foreign films, war pictures

were a relative box office asset, despite the absence of millions of men at the front.

War films were eventually the only things which were being

played by exhibitors on Armistice Day.

On November 10 war pictures were

saleable merchandise and on the night of November 11, 1918 they were no

27 For a discussion of the effects upon the British industry during the First World War, see: "The Factual Film", The Arts Inquiry, A Survey Sponsored by the Dartington Hall Trustees, Published on Behalf of the Arts P.E.P. (Political and Economic Planning), Geoffrey Cunberlege, Oxford University Press, London, 1947, P» 194 ff.

46 longer marketable.

The A-gjiistice nearly wrecked the industry.

The prin­

cipal item of production had been war pictures and practically nothing else had been made.

Overnight the Armistice caused a loss of millions of

dollars in property.

Many producers, left with quantities of pictures no

one wanted, were ruined as a result of the sudden dislike of war films, expressed in a loss of patronage coming with a boycott of war pictures. The shift of taste presented the industry with the problem of enticing people back to the movie theater.

The broadening of tastes consequent

upon Armistice Day left producers with no prediction factor upon which to base analyses or guesses, and greater caution was exercised in production. The producers who hesitated lost ground in the struggle which was shaping for the final test of industrial survival.

Some manufacturers recklessly

consigned war stories to the scrap heap or rented them to cheap theaters at any price possible.

With available capital and borrowings they start­

ed filming new plays dealing with romance and adventure, recipes and for­ mulas which had been successful before the war.^8

Many producers and

distributors who were cautious waited and lost ground steadily, week by week. The termination of the war was not alone responsible for the crisis the industry faced at this time.

In the J.ate summer of 1918 influenza

entered the United States and spread throughout the country.

By October^

28 See Appendix B to this chapter. 29 Mortality rates from influenza per 100,000 population in thirty five ci­ ties, raised to an annual basis, increased from a low of two in August to a high of 1,774 in October, and declined steadily to twenty-four in May of the following year when the epidemic was considered over. '•Mortality from Influenza and Pneumonia in fifty large cities of the United States, 1910-1929" — United States Public Health Service Reprints, Report 1415, Washington, D.C., 1934, p. 6.


large casualties reports were coining in from all parts of the country in­ dicating that hospitals and doctors were unable to check the fury of the disease.

Public health officials started to close schools, theaters, and

other places of public congregation in all seriously affected areas in the country.

Thousand of theaters, including legitimate playhouses, closed

down for periods of one week to three months, and the drop in patronage re­ sulted in losses estimated at $40,000,000.-^

Many producers closed some

studios entirely or operated them only part time. In this period the continued operation of manufacturing or the pro­ motion of firms within, the industry required a larger capital investment than in the preceding decade, although not as large as the initial capi­ tal investment needed in such industries as the automobile. was no longer a matter of a few thousand dollars.


The cost of a standard

negative had risen from $1000-^2000 in 1909 to $25000-$100,000 in 1919. Much larger finances were needed to maintain the national systems of dis­ tribution.

The promotion of new companies, once a striking characteris­

tic of the industry declined to almost a vanishing point in 1918, although it was revived with some vigor again in 1919-20.31

The sharp rivalry be­

tween companies was causing vertical integration to proceed concomitantly from both ends of the industry.

A movement towards horizontal combination

was proceeding among exhibitors taking the forms of chains, cooperative buying associations, and booking combines.^2

They were able to control

local markets and force the giants to lower rentals because of their

30 Jacobs, op. cit. p. 170. 31The coming of prohibition and the closing of the saloon enhanced exhibihion greatly, and ther^4' 'e the demand for films. 32 The latter two type

/fere to decline in importance in a few years.

48 ownership of theaters.

Many of their theaters were strategically impor­

tant because building restrictions had caused a virtual cessation of con­ struction during the war.

In the integration of the processes of produc­

tion and exhibition, the common selling practices relating to block book­ ing and clearance, however, far from losing acceptance, were ramified by a dozen other customs and practices.

From this point of view the industry

was enjoying a period of stability, but from another, the industry was a bedlam of disorganization.

The lineaments of big business were being crea­

ted in the struggle for mass markets.

Gigantic production interlocking

organizations supported by the star system, block booking, and new cinema houses were beginning to function on a large scale.

The full scale inte­

gration was to be started by Zukor, who had an essential monopoly of screen stars in 1918. In 1919 Paramount, fearing the loss of supremacy in trade, decided to acquire a large number of theaters.

Zukor realized that he would have to

enter exhibition to win against First National, since First National had some 3» 400 theaters with which to fight Paramount, some of which were the largest and most important in the United States.

Zukor recognized the

importance of first run outlets in key cities in the fight, and he real­ ized that more could be earned by owners of key theaters than by those denied outlets.

Zukor realized that if the exhibitor was to create the

product for himself and endanger the product outlets, particularly the first-run outlets, he could not hope to succeed. the field to insure his first-run outlets.

At first he went into

Actually, however, theaters

owners were afraid for they had realized what was happening, and they wanted a pledge from all producers and distributors that they would re­ main out of exhibition.

But Zukor set his plan for a new producer-exhi-

bitor combination in operation in 1919, moving rapidly and surely to ac­ complish his purpose.

He enlisted the support of a Wall Street firm in

49 the autumn of 1919 when Kuhn Loeb and Company and associated bankers sold a $10,000,000 issue of preferred stock for the Famous Players-Lasky cor­ poration, and both the preferred said common shares of the company were listed on the stock exchange.

Investors bought the preferred issue readi­

ly and trade in both issues became active.

The success of floating this

issue placed Zukor in the position of obtaining by public financing any sums necessary for expansion into other fields. At first reorganization of distribution within the company was the goal and block booking, broken up in 1917, was reestablished. next into exhibition.

Zukor moved

Large and elegant theaters were built in key cities

to compete with First National and designed to squash them.

Existing thea­

ters were bought up quickly with special efforts made to buy out the mem­ bers of First National one after another.33 suit.

other competitors followed

Loews', formerly one of Paramounts chief customers and Metro, a

new producing company, fought for the big theaters by squeezing indepen­ dent theater owners out of business and forcing out producers with no thea­ ters.

In a few years nearly all the major and first run houses in the

United States and Canada had been acquired by the above companies and large circuits affiliated with First National.

Several years had to pass before

33 The plan of Famous Players-Lasky Corporation was so successful that the F.T.C. filed a complaint against this company and those affiliated with it charging a restraint of trade amountijjq. to monopoly of the first run theaters of which there were about 200 in different parts of the country. See Appendix A to this chapter. The expansion movement extended into Canada as well. As late as 1931 an independent theater in Canada was spoken of as one in which Famous Players Canadian Corporation, Ltd. had no direct or indirect financial interest, and a closed town as an area where the only theater or theaters were operated by Famous Players or a subsidiary or affiliate of Famous Players. See "Investigation Into an Alleged Combine in the Motion Picture Industry in Canada", Department of Labor, Report of Commissioner, (Combines Invest­ igation Act), April 30, 1931, Canada, p. 106.

50 > other firms in the industry were to recognize the deep significance of the first-run theater, and that marketing was only successful if good key cen­ ter theaters were o w n e d , K e y showings were indispensible and the bulk of the revenue was in these theatres. ters meant control of the industry.

The control of these big gross thea­ There was some hesitancy in getting

theaters due to the inability of many manufacturers to get a clear view of the first-run power because of the time required to produce and distribute a film.

Two to eight months or more might elapse between the beginning of

production and the release date of a picture and about another year had to pass before domestic earnings were complete.

Therefore, for a few years

or more a producer did not know the magnitude of his rentals hoping all this time, that the picture would be a success.

Costs could not be reduced

to conform to earnings as these producers did not realize as did the inte­ grating firms that total investment is not changed much by the success or failure of any one picture,35 The year 1921 was a period of deflation and depression which wrecked and crippled many industries.

Many motion pictures companies, particular­

ly independents, formed in 1919 and 1920tsuspended never to resume opera^tions again.

Other companies which were disintegrating under the centrali­

zation of theaters gave way under pressure of the sharp depression.


the first time the box office wavered as patronage fell for a few months, but theaters endured the strain without any serious dislocation.

Many of

34 First run theaters assured not only a definite number of theater outlets for producers, but a longer length of life and definite revenue on which to base future production. In addition, they serve as an effective means of keeping rival producers and independents off the screen. 35 This reasoning applies, of course, only to those companies manufacturing many features. On the other hand, the returns on investment for many in­ dependent producers does depend upon the success or failure of a single picture.


the larger companies suffered from the depression along with a slight re­ newal of competition from foreign films, but the industry recovered quickly in the general readjustment from the deflation. In 1920 and 1921 scandals among the stars aggravated the increasing animosity against the movie makers.

The continuing succession of scandals

involving film personalities antagonized social a g e n c i e s . R e l i g i o u s and educational groups capitalized on the scandals by advocating and agitating for government censorship to reduce the production of salacious films.


March 11, 1922 the Motion Picture Producers and Distributors of America was incorporated for purposes, presumably, of making peace with the reform groups by creating ethical standards.

Will Hays resigned as Postmaster-

General to head the new group of nine members.^7

One of the most important differences between the Hays office and other trade associations is that it has sought not only to change the habits of its members, but the taste of its customers. It has had to amend the law of supply and demand.3°

Essentially a lateral or horizontal agreement was consummated to impose a moral standard on content by the rejection of action stories.

The group

combination aimed at censorship by agreement in controlling the type, amount, content, and character of the films reaching the public through a life and death power over scripts.

The group was financed by the member

companies exclusively, and no major could violate a Hays interdict and no

36 A detailed analysis of these scandals do not concern us in this paper, 37 The membership grew until it included twenty-eight companies comprising the big eight, various productive units controlled by them, manufacturers of film and equipment and non—theatrical, and therefore noncompeting pro­ ducers. The two most important independent producers after the big eight, Republic and Monogram,! have not been included. 38 Raymond Moley, op. cit., p.



independent could afford to do so.

"The censorship costs in the silent

days were #3,500,000 a year."^9 The reform institutions were not completely satisfied.

In 1922 the Federal Council of the Churches of Christ in America issued its first critical pronouncement against the motion picture industry in an article entitled 'The Motion Picture Problem' by Charles N. Lathrop. Mr. Lathrop's article also called attention to Mr. Hays' first efforts to clean up the industry by adoption of the 'Thirteen Points', which consti­ tuted a sort of 'Gentlemen's Agreement' between the trade association and the producers. Censor boards continued to grow.^

A contract containing a resolution incorporating the 'Thirteen Points' and new self-imposed regulations was signed by all the producer members of the association on June 8, 1927.

The Hays Production Code itself was

adopted on March 22, 1930, and the feal of approval on July 15, 1934 No affiliated theater could show a picture without the seal of approval, and any theater that did was subject to a .$25,000 fine, never yet imposed. In an Appeal Board for the Code, producers were able to argue for exemp­ tions from restrictions, but rarely has this been done.

'Warner Brothers

in a disagreement on censorship withdrew for a short time in the late 1930's, presumably because M.G.M. and Twentieth-Century Fox were a com­ bine within a combination, but returned shortly afterward. The field of distribution was still chaotic when this semi—carte­ lized group appeared and in the succeeding years the M.P.P.D.A. gradually increased its influence and authority while gradually codifying its ideas

39 Howard T. Lewis, "Motion Pictures", Encyclopedia of the Social Sciences. Vol. XI-XII, 1942 reprint, p. 60. 40 Olga J. Martin, "Hollywoods' Movie Commandments", The H.W. Wilson Company. New York, 1937, p. 18.

U For a lenghier discussion of these developments and their effects upon a depressed industry see Chapter XII to this essay.


about cinema properties.

In the 1920's Film Boards of Trade were esta­

blished in key cities by producers and distributors.

These boards at­

tempted to allocate preferential and subsequent runs to theaters within their zones and determine clearance periods.

In addition to the uniform

clearance and zoning schedules set up for all the majors to follow, they regulated arbitration and credit.

The Hays office denied that these

boards were connected with it although they were financed by the same ma­ jors and had the same counsel and general attorney.^

Independent thea­

ters and producers charged that the Service Department of the M.P.P.D.A., which concerned itself with exhibitor relations, allowed the Film Boards to use its statistical information in setting up zoning

clearance plans.

The plans were later to be declared illegal by the courts and the boards to diminish in number and importance.^ A sister association in Hollywood, the Association of Motion Picture Producers of California, a California Corporation nominally independent of the M.P.P.D.A., but with many of the same members, has had concurrent aims and purposes in general matters, but has been specifically concerned with studio activities.

It has determined Hollywood Practices with re­

spect to wage scales, labor disputes and unions, the talent guilds, and the prevention of excessive competitive bidding for stars.^

The M.P.P.D.A.,

itself, has represented its members before federal and state legislature bodies.

Charles Pettijohn, general counsel of the M.P.P.D.A., appeared

on every occasion to extol the virtues of block booking.

Although originally

42 ^Refer to Ernest, op. cit., p. 218. See Chapter VII to this paper. 44 Murry Ross, "Stars and Strikes", Columbia University Press, Morningside Heights, New York, 1941, pp. 25, 54-55, 58, 144, 214.


the organization sought to avert government control, little has been done to eliminate state censorship, despite its resistance to state tax measures as a means to control films.

"When the state of Connecticut imposed a tax

of $10,000 a reel on films, the organization declared a boycott against the state, intimating that an object lesson would be made of Connecticut."^ The Foreign Department of M.P.P.D.A. tries to squash foreign proposed quota systems and negotiates agreements with other governments for the en­ tire industry. In the 1920's theater expansion continued until the control of the industry lay not in manufacturing but in retailing.

Despite the fact that

the overhead costs of theater operation were rising, theaters were ac­ quired at excessive prices during a growing period of inflation.


ers built elaborate and luxurious theaters and bought others in neighbor­ hoods and cities where they were not needed in order to insure a market and stave off competition.

Mergers were the economic order and indepen­

dents were eliminated or submerged. absorbed by chains and producers.

Exhibition properties were gradually By 1927 exhibition was virtually mono­

polized, making it the controlling factor, with production and distribu­ tion of secondary importance.

Universal had several houses, Goldwyn-

Godsol had several, and Fox had a chain.

Zukor was finally successful in

weakening First National* s control by acquiring one of its largest chains in 1928, the Katz—Balaban unit, which was merged with Paramount,


National was completely weakened by the loss of its major circuit, and Eventually expired after Warner Brothers acquired the only remaining valu­ able circuit in 1929, the Stanley group.

In 1929 the fight for theaters

as the key to the control of the market came to an end.

45 Ernst, op. cit., p. 207.


The newly acquired theaters forced producers to expand their output and keep it at a high pace with a lesser regard for quality.

The labor

costs of making sound pictures were higher^ and accompanied the normal pattern of extravagence peculiar to this industry.

Along with sound the

introduction of color had added heavily to the cost of pictures.


Technicolor Company was formed in 1929 and the first feature using color was released the same year. ^

These rising costs kept profits from in­

creasing as rapidly as box office receipts.

The costs of theater opera­

tion rose substantially and were reflected in higher admission prices, but costs were being disregarded in the scramble for exhibition properties. The higher rentals were based on the high real estate values caused by the building and real estate boom.

When the building boom collapsed the big

theater holdings and real estate inventories depreciated swiftly.

The ex­

pansion in theater ownership had taken place at the peak of inflationary conditions at prices far above normal.

The expansion resulted in the accu­

mulation of heavy funded and floating debts and the rapid depletion of cash reserves.

The indebtedness took the form of direct obligations, subsidiary

bonds and mortgages, bank loans and contingent liabilities, such as repur­ chase agreements.

Theaters were generally part of larger buildings and

speculative units containing offices, stores, and lofts and they collapsed in value along with these real estate values. The stock market crash came in October 1929. all industries and fortunes were lost overnight.

The depression affected Motion picture patronage

46 On June 5* 1929 the Actors Equity Association announced its intention to bring under its jurisdiction the workers in motion pictures. This was the first serious union problem faced by the industry. 47 The first color film, a short, had been released in 1922 under the auspices of the United Artists.


and receipts not only remained steady but continued the climb started with sound.

Admission prices moved up despite the fact that the pocket books of

the populace were emptier.

"Financiers, economists, and movie makers ig­

nored the fact that the industry had grown to a prodigious size because it could provide entertainment for all the people, and the admission prices of 1929-30 were very high for hard times.

The increase in attendance gave

rise to the theory that this was the soundest industry of all, a 'depressionproof' theory.

The theory reasoned that in a business depression the box

office was the last business to show unfavorable economic conditions and the first to participate in the increasing returns attendent upon normal or prosperous times.

Since this business is a cash business and it has economic advantages, it is the nearest approach to maximum steadiness that modern commerce has known to date, with a stability conceded by the most conservative bankers who are familiar with the industry. In periods of general business de­ pression the box office of the picture theater is the last to show unfavor­ able conditions, because in time of stress working people attend the motion picture theater frequently. Yet it is the first enterprise to participate in the increasing returns during normal or especially prosperous periods.A9

To this time the industry had been considered fairly speculative but influ­ enced by this theory banking and investment houses injected themselves into the industry and started to consider the industry a legitimate field of activity.

Certain developments in the earlier part of the decade were, in

part, responsible for the fact that they were prepared to enter the industry with such confidence at this time. The cost of entering this type of business until 1919 had been relative­ ly small.

For those who entered the problem was to acquire capital for the

48 Hampton, op. cit., p. 412. 49 Harold B. Franklin, "Sound Motion Pcctures", Doubleday, DOran and Company Garden City, New York, 1929, p. 190. *


financing of an individual picture.

Producing companies were able to fi­

nance a large portion of their pictures out of earnings and this self-fi­ nancing of the industry lasted a long time.

The financial expansion of

firms was met out of the current earnings at first, supplied by private loans from the bankers and personal acquisitions.

When these older meth­

ods were no good financial companies for a while had a place in the in­ dustry far greater than they subsequently enjoyed.

With the increased

willingness of banks to cooperate and the increased financial strength of the companies themselves, the place of motion picture financing companies became less important. At

Until 1919 financial houses played a small part in the industry, flbi part because of the risk and in part because it was not considered respec­ table.

In 1919> A.Zukor induced Kuhn Loeb and Company to float a large

loan for his firm.

For a while other companies did not avail themselves

of this type of financing and a series of events first had to precede this conversion.

The first significant development was the creation of the

M.P.P.D.A. in 1922, a trade association which could act as a clearing house on policy matters relating to the industry.

"The significane of

this movement was clear to the banking interests of the country.


had a responsible headquarters to go to for information on financing cer­ tain phases of the industrial operations."-’®

Banking interests had found

it difficult, sometimes impossible, to accurately evaluate the general balance sheets of the motion picture companies when submitted to them.

50 J. Horner Platten, "Motion Pictures-A New Public Utility?", The Bankers Magazine, Vol. CXIII, No. 4, October 1926, p. 458.


"A 'best practice1 balance sheet was devised by the financial officers of the larger motion picture companies in cooperation with the Federal Reserve Bank of New York, the New York Clearing House, Public accountants and the banks which were currently engaged in motion picture financing."51

In addition, there was the "decision of companies to adopt amortization schedules in order to have their stock listed on the New York Stock Ex­ change".^

Banks, as a consequence, became more seriously interested in

this type of financing. The entrance of banking firms interested in the floatation of new se­ curities was necessary for the general program of theater expansion which had started in the early part of the third decade.

"Theater properties,

unlike films, presented the familiar aspect of real estate, something against which bonds could be issued and as such seemed reasonably good in­ vestment risks."53

The non-theatrical people were impressed by the new

emphasis on capital assets in the form of buildings, land, and real estate. Producers were going into exhibition for outlets and show windows.

In the

competitive scramble of producers to buy and build theater holdings in a relatively short period of time it was necessary to turn to investment ban­ kers for assistance.

The rapid expansion and the recurrent refinancing put

producers in a difficult position and at the mercy of these investment houses.

The bankers helped the industry refinance on the basis of the

strength of an active stock market.

This refinancing, brought control by

the financial houses and increased the concentration of financing, marking

51 Ibid., p. 488. 52 Howard T. Lewis (editor), "Cases on the Motion Picture Industry", Harvard Business Reports, Compiled by the Graduate School of Business Administra­ tion of Harvard University, McGraw-Hill Book Company/^ol.''VIII, 1930, p. 92* 53 Huettig, op. cit., p. 50.


the influx of big business into the film business.

Other financial hel­

pers, as a consequence of the advent of sound and the rapid expansion of box office receipts (and larger profit margins) caused by sound, also en­ tered the industry.

The Rockefeller and Morgan interests went after sound

films with the firm determination to control them and their primary objec­ tive in achieving this was to gain control of the more important American patents on sound.^4 By 192/+ the securities of a dozen companies were being handled by Wall Street and in three more years practically every major organization was listed on the New York Stock Exchange.

The financial houses of the

east gained wide influence and control in Hollywood by having members on the boards of directors and financial committees of the companies.55


executives appointed by the eastern financiers ended the reign of indepen­ dent producers and directors.

All additional attempts by the movie people

to maintain their control further entrenched financiers when the continu­ ation of theater expansion in the late 1920's necessitated constant calls on investment bankers to supply the funds needed.

By 1929 all the power­

ful film executives, except William Fox and Carl Laemmle, had allowed the financial control of their enterprises to slip out of their hands into those of their backers.

The original leaders, the pioneer executives who

had come from the marginal and shabby zones of enterprise, were no longer in control.

Fox lost his control in 1935 and the last one to lose his

54 See Chapter IV. 55 For a most complete study of the financial developments, tie-ins, and structure of the industry, refer to F.D. Klingender and Stuart Legg, "Money Behind the Screen", A Report Prepared On Behalf Of the Film Council, Lawrence and Wishart, London, 1937, p. 69 ff.

60 grip was Carl Laemmle, who in 1936 sold his stock to Universal Pictures. Furthermore, the resistance of the industry to the stock market debacle surprised Wall Street interests to the extent that in the years subse­ quent to 1929 an all-out attempt was made to capture the industry.


the control banks exerted on the industry, mergers and combinations were hastened and, as will be shown, progress in the industry thereafter took the form of an increase in concentration.


Appendix A to Chapter III

F. T. C. Versus Paramount Famous Players-Lasky Corporation In 1921 the F. T. C. filed a complaint'*" against Paramount and affiliated companies and studios that their integrated production, distribution, and ownership of theaters was in violation of the trust laws.

The pro­

cedure temporarily halted Zukor's operations within First National, but it did not stop him from continuing his expansion policy, nor did it prevent his conquest of First National later.

In the amended complaint



charges were expanded to include three counts; namely, use of coercion in obtaining theaters, block booking, and the exclusion from Paramount con­ trolled theaters of pictures made by other producers.

The F. T. C. found

its anti-trust suit a difficult case to bring to completion. heard on the complaints from April 23, 1923 to July 23, 1926.

Hearings were Finally the

3 F. T. C. issued an order to cease and desist.

The F. T. C. did not pursue

the case immediately but sponsored a Trade Practice Conference to solve block booking, a conference held in New York City on October 10, 1927.


conference did not succeed in solving any of the basic problems and, in addition, Paramount disregarded the order to cease and desist.

It was for

the purpose of bringing block booking to a stop that the F. T. C. petitioned the United States Circuit Court of Appeals to enforce their cease and de­ sist order against Paramount directing them to cease and desist from the

1 Original complaint, Docket 835» F. T. C. August 30, 1921.

2 Amended complaint, Docket 835» F. T. C. February 14, 1923. 3 Decision and order to cease and desist, Docket 835» F. T. C. July 9» 1927*

practice described by the petition.

The size of the record was of necessity one of the considerations which led the commission to agree that the issue before the court might be con­ fined to paragraph two of the order relating to block booking, and as a result of this decision, considerable time has been devoted to negotia­ tions looking to the elimination of such of the testimony and exhibits as are irrevelant to the point at issued

Negotiations resulted in a reduction of the record to be printed to 2,000 pages.

In a decision handed down on April 4, 1932^ the court denied the

petition of the government, and ruled against the F.T.C. contention that block booking was in violation of any federal law.

The court held that

block booking was not an unfair method of competition and, furthermore, j

the distributor had the right to select his customer, sell in quantity, or refuse to sell at all to any exhibitor.

The F.T.C. issued a report

on December 1932 and announced it would expend no further effort to en­ force its block booking order against Paramount.

After eleven years, 17,

000 pages of testimony and 72B documentary exhibits, comprising 15,000 pages, making a combined total of 32,000 pages, the most voluminous re­ cord compiled in any litigation involving trade practices, the case was abandoned.

4 F.T.C. "Annual Report for the Fiscal Year Ending June 30, 1930'*, Wash­ ington, D.C., p. 96. For the full developments on this case see the annual reports of the F.T.C. for 1927-33. 5 57 Federal (2nd) 152.


Appendix B to Chapter III Standardized Techniques For the Mass Production of Films The star system, formula films, and advertising were the ingredients es­ sential for large scale output of films.

The first to be developed was

the star system, in part an outgrowth of the trust war.

By 1910 patrons

were favoring certain players and expressed other preferences, although the names of screen idols wert; unknown.

Producers kept this information

secretive in an attempt to keep from paying higher wages to jthe actors.

It was Carl Laemmle, head of International Motion Picture, the leading independent, who made the first star. Casting about for a means of draw­ ing customers away from his licensed competitors, he acquired the exclu­ sive services of Florence Lawrence, one of the most popular players of the day, the Biograph Girl.

He offered the star not only the advantage of an increased salary, but being a firm believer in advertising, he offered her widespread publicity.


producers followed and the campaigns to establish stars got under way. effects of Zukor’s campaign have been dealt with in Chapter III.



producers turned to Broadway for a steady supply of stars and players with established reputations.

Many of these stars were unknown to the public

and the industry had to build up their reputations or create its own stars. In the rivalry there was not only competition for an arrived star to use in production but also the attempt to keep opposition firms from possessing the potential money makers.

The licensed companies of the M. P. P. C.

opposed this innovation as upsetting their production scheme and they re­ mained aloof.

As a result, many actors left the licensed producers to seek

the publicity offered by the independents.

1 Jacobs, op. cit., p. S6.

The trust now angrily ruled that if an actor was discovered to have left a licensed company for an independent he would be blacklisted in all the trust studios.2

After a time, however, the trust companies had to bend to the new system. Vitagraph, Lubin, and Kalem were the first of the licensed group to adopt the star system.

Biograph protested but was forced into line when it real­

ized that favorites could be counted on to attract movie-goers fairly regularly.

In the intense bidding for stars the actors decided that they

were artists, and their willingness to respond became a function of the salaries offered.

Salaries became regulated by supply and demand.


salaries became the index of a player's value and this, as a result of competitive bidding, nearly was the financial undoing of the producers. Players became more important than the business itself, and in their im­ portance many stars formed their own production companies.

Many incorpo­

rated themselves, as incorporation became the sign of success, although most of them were not too successful.

The most satisfactory effect for the

producers of films preceding the advent of the talking picture was the quick emergence and submergence of these stars. In the growing need for specialization and standardization, requisites for large scale production, the industry found it hard to standardize its product.

The star became a prime means of stabilizing production.

A star

is a monopoly and the uniqueness of a personality places it in an almost unchallengeable bargaining position.

In a star a firm has a production

value, a trade-mark value, and an insurance value real and potent in guaranteeing the sale of a product.

2 Ibid., p. SB.

The star, also, satisfied the need

for a common denominator of the feelings, philosophies, wishes, and temperaments of different people.

Even spiritual needs became satisfied

with a standardized article which offered each customer something and which was manufacturable.

Despite the variation in the number of stars in each

company, a comparison of pictures with and without stars indicates that the former type does exert an upward effect upon box office receipts.

In re­

cent years, however, the percent of a picture’s cost received by stars plus participation-in-earnings accretions has raised the question of whether the industry can get along without personalities.

Certainly many success­

ful films have been made without stars, in fact many of these films have made stars.

The heavy dependence of producers on the talent of individuals

makes it appear that the loss of stars would have a pronounced adverse effect on earning power.

In this respect the large companies are in a

more vulnerable position than the small ones.

The large companies carefully

watch the fan mail of each star and depending upon the amount of the mail the salary of the star goes up and down.^

The industry finds that this tech­

nique is a very subtle machine to gauge the fluctuating popularity of stars in order to stabilize one of the ingredients for box office success. The second factor facilitating standardization was found to be themes of formula pictures, stereotyped in pattern and treatment.

These could be

made regularly and quickly and represented the mechanical or assembly line in Hollywood.

The themes of these formula films have been generally

trivial, requiring a certain amount of conflict, suspense, and credibility before a happy ending.

They were categorized (and exploited as such) into

drama (originally melodrama), romances, westerns, comedies, actions, and


industry encourages this correspondence. Jacobs estimates that as early as 1919 one-quarter of a million dollars was spent annually on corre­ spondence between stars and fans. Jacobs, op. cit., p. 294.



Everything going into these films has been standardized including

the plot, director, star, action, and the rendition as a whole. lization made wholesale production and distribution easy.

Such formu-

These classi­

fications became the staples upon which productions depended for year-in and year-out profits.

The pendulum in the kind of formula film produced

has constantly swung in cycles according to their relative profitabilities. Hollywood movie makers have been encouraged to repeat the same formulae and to use the same stories all the more confidently because the financial success of these products encouraged it.

There are many interesting quanti­

tative questions which it would be desir^able to answer about these films. What is the percentage of films in each category? earning power of each type of formula film? earning power than formula films?

What is the comparative

Do nonformula films show better

These questions cannot be empirically

answered except to note that since the latter part of the second decade each studio plans its year’s output to include a number of films in each of these formalized categories. The third instrument for standardizing production, large scale adver­ tising, was used to stabilize mass consumption by keeping the demand active. With the growth of keen competition for the consumer dollar advertising, exploitation, publicity, and appeal were invented by the industry and be­ came a factor in profits.

Industry advertising originally aimed and suc­

ceeded in making movie-going a national habit so that people would attend regardless of the presentations offered.

The industry has been selling an

intangible product, entertainment, but this entertainment has been provided by personalities who are symbolic tangibles.

Advertising has been the

medium through which the products are merchandised, as brands and product


*4* differentiation ha# been unimportant and meaningful only to the exhibitor. The main attention in advertising has been devoted to the themes, the stars, and the costliness of the product. In a sense publicity is the dissemination of interesting reading matter which is not standardized.

The publicity and exploitation of the

industry has used every conceivable tool to attract attention and profit to a theater.

The success of the publicity has depended upon the creativeness

of the exploiter and his ability to sense public trends.

The purpose has

been to create interest, although a large amount of money has been paid for interest which is already created.

By buying a successful book the

industry buys ready-made advertising value with the knowledge that the public has already registered its liking for the book in unmistakable terms. Since advertising is a commercial commodity a reasonable estimate is avail­ able of the amount spent for advertising in newspapers, magazines, bill­ boards, and other media.

In 1947 $57,000,000 was spent on advertising by

the industry and this indicates its importance to the industry.

There is

no accurate data available on the relative amounts spent by different branches and the amounts spent on different types of films, on the relation of advertising cost to box office receipts, the advertising cost per dollar spent on the cost of a film, the advertising of independents versus af­ filiates, the geographical distribution of advertising, and the like.


its importance, in combination with the star and formula systems, has been basic in maintaining the traditional standardized output policies of the industry.


Chapter IV

Sound and the Silence of Competition 1926-1930 The classic era of the silent film had lasted for a long time and audiences were growing tired.

The willingness of the public not to demand too much of the film during the silent era created a general tendency to exaggerate the potentialities of the medium and to overestimate its actual achievements.^

Audiences began going to theaters or vaudeville houses to be entertained by vaudeville, prologues, concert organs and orchestras, and incidentally by other short subjects with a full length picture to top it off.

The year

1926 was characterized by a halt, a slackening in the rate of growth of the steady progress in the popularity of movies due to such a discriminating audience.

Competition from radio was beginning to be felt and increased

the hunger for sound.

The industry was snatched out of the doldrums sudden­

ly in this year by the advent of sound.

Sound and the start of the de­

pression were important crises met by the industry in this decade. The experiments which resulted in the synchronization of sound on film were not new, for sound had existed almost as early as the film.

Edison had

combined his Kinetoscope with a phonograph to make a Kinetophone as far back as 1894, but the satisfactory ^amplification of the sound remained the un­ solved problem.

Since the combination was not widely used the synchronizing

device was soon withdrawn.

In 1913 Edison again tried to market the Kine­

tophone, but a fire in the Edison laboratories on December 9, 1914 destroyed the motion picture department, and the manufacture of talkies was not resumed.

1 Maurice Bardeche and Robert Brasillach, "The History of Motion Pictures", translated and edited by Iris Barry, W. W. Norton Company and the Museum of Modern Art, New York, 1938, p. 374*


After World War I, electrical engineers again began to apply to films the principles developed in radio and telephony.

In 1920, Dr. Charles A.

Hoxie demonstrated a sound-on-film device at the General Electric Labo­ ratories.

The principles which served as the basis for sound-on-film

recordings as opposed to phonographic discs became more clearly established. Important solutions to some of the problems had been discovered, although none of the results was capable of practical application outside the labo­ ratory.

By the fall of 1924, however, talkies were a laboratory actuality

in Western Electric and were economically feasible for the first tame.


The solution of two technical problems in synchronizing sound made the sound film possible; first, the recording of sounds completely and accurate­ ly and second, the reproduction of the recorded frequencies with enough volume to pervade all parts of a theater auditorium.

The second problem

was solved according to the individual acoustical characteristics of each specific theater. approaches, same. method.


The first and more important problem was solved by two

although the essential principles in both systems were the

The first method was a sound-on-disc method, a wax disc phonographic This more expensive disc method was like a recording for phono­

graphs synchronized with film.

The basic deficiency in this method proved

to be the difference in the speed of the synchronization in the devices put on the market. on-film method.

The second and finally adopted technique was the sound-

In making films microphones would pick up the sound and

2 Several other laboratories, as RCA, achieved a practical solution at about the same time. See Joel Swensen, "The Entrepreneurs Role in Introducing the Sound Motion Picture", Political Science Quarterly. Volume 63, Number 3, September 1948, pp. 409-10. 3 A third approach, the norisynchronous disc system, was experimented with but never widely adopted.


convert it into electrical impulses of corresponding variations.

A record

of these impulses was taken on a sound-track which was photographed on the film negative. waves on a film.

The film represented sound photography in the form of light The variations in the vibrations photographed on the film

correspond to the variations in the sound vibration picked up by the micro­ phones.

In a theater the process is reversed by means of a photo-electric

cell which reproduces the sound.

The sound and vision are synchronization

when projected on the screen. The initiator of sound was Warner Brothers.

Warners had good pictures

but few first-run outlets and in a desperate attempt to ward off bankruptcy they turned to a novelty, sound.

At the beginning of 1925 Western Electric

was prepared to market a synchronization process.

In this year, on April 8,

1925, Warners had purchased all the capital stock of the Vitagraph Company of America, one of the pioneer film manufacturing concerns.

A year later,

in April 1926, a third company, The Vitaphone Corporation, was organized by Warners and Western Electric to make sound pictures.

Warners owned

seventy percent of the stock of the company and by the next year owned one hundred percent of the outstanding stock.

Western Electric, through the

Electrical Research Products, Inc. entered into a formal license agreement with Vitaphone.

The film "Don Juan", originally scheduled by Warners as a

silent picture was converted into a talkie.

On August 26, 1926 this film,

the first with sound accompaniement, opened at the Manhattan Opera House in New York City and was made more auspicuous by an address by Will Hays, re­ corded on the film sound track, welcoming sound to the world of the cinema. This event took place relatively unnoticed, but its producers were very pleased by the results,

Warners proceeded to advance and consolidate its

position by presenting to the public the first feature film synchronizing

71 speech as well as music with the action.

On October 6, 1927 "The Jazz

Singer" was shown in the Warner Brothers Theater in New York City, the producers relying on the novelty of partial sound to carry the picture. While the audience reaction to the film was mixed from that evening on sound became the imperative element of production, and a new phase of film production began.

Warners was catapulted from the verge of bankruptcy into

the position of a major.

Like other majors they started to add theaters to

their holding and like the others, the large proportion of the funds used for expansion were obtained by increasing their funded debt and, consequent­ ly, their fixed charges.

At the height of its buying spree Warners added

200 theaters in less than sixty days.^- The expansion of Warner Brothers is indicated clearly by Table IV-1.

Table IV-1 Total Assets and Net Earnings of Warner Brothers, Incorporated 1925-1932 (Thousand dollars) Fiscal Year Ending

Total Assets

March 31, 1925 March 27, 1926 August 28, 1926 August 27, 1927 August 31, 1928 August 31, 1929 August 30, 1930 August 29, 1931 August 27, 1932



5186 10683 10754 15913 15785 167189 230185 (b) 213857 182728

Net Profit or Loss $

1102 -1338 -279 30 2045 14514 7075 -7919 -14095

Joel Swensen, loc. cit., p. 416.

a Experimental period. b Highest point reached in pre-World War II.

Poor's Analytical Service, "Analysis of Warner Brothers Pictures, In­ corporated", Poor's Publishing Company, New York, July 14, 1932, p. 13.


Despite the success of the "Jazz Singer",


all producer companies to enter the sound field.

it was not the signal for When they finally did

enter, the subsequent fight for control of sound brought patents into promi­ nence again.

The introduction of sound had come suddenly and the innovation

did not alarm the industry, although the entire economic structure of the industry, based as it was on international distribution, was to be shaken and reshaped by it.

Film companies hesitated, in part, because they were

confused by the simultaneous appearance of many new inventions, as color cinematography,


the grandeur-screen, television, and three-dimensional depth,

each hailed as a revolutionary technique.

Each new discovery sent a shock

through the already nervous industry with the realization that with any single one of them the entire industry would have to be revamped. In working with Western Electric on the development of sound Warners re­ ceived eight percent of the gross rentals on the equipment as a royalty fee, of which amount J>% was to accrue to the Vitaphone Corporation,^ owned by Warners.

In December, 1926 Warners granted a sublicense to William Fox, who

six months before had tried to launch his own more flexible system of sound. On July 23, 1926, William Fox entered into an agreement with Theodore W. Case and E. I. Sponable, co-inventors of the Movietone sound-on-film method of recording.

The Fox-Case Corporation was formed primarily for the commercial

development of a sound system.

In January 21, 1927 Fox-Case presented a

5 As noted "The phonograph and radio had created a gigantic appetite for canned voice, just as the spoken stage had for centuries built up an immense desire for entertainment through canned drama, the ‘celluloid monstrosities' which so shocked and horrified the intellectuals of 1886-1914." Hampton, op. cit., p. 3^5.

6 While later this was to prove to be a good combination with sound, color, costing more than black and white, has not added much to the box-office, and has always been secondary to sound. At the time, the innovation -of sound re­ vived interest in color and other novelties. 7 Poor's Analytical Service, op. cit., p. 10.


series of sound on short subjects at the Sam Harris Theater in New York City. Until May 11, 1928, Warners and Fox were the only two major pro­ ducers manufacturing sound films.

The other majors were unwilling to

accept sublicenses from Warners on the ground that tribute, in the fora of royalties, would be paid to a competitor.

They ,also realized that

licenses alone were insufficient for production since new studios and equipment would be needed.

While they ignored the invention, and con­

fidently hoped and expected it to fail, the enthusiasm of the public was so pronounced that the companies met to decide the action which should be taken.

After a council held by the leading five silent companies in

December 1926, the decision was reached to buck the talkies.

The big five,

by an agreement of February 1927, resolved to fight the so-called 'Warner g Vitaphone peril' on various grounds which Jacobs has summarized as follows: 1.

Present equipment would have to be discarded and expensive talking equipment would have to be bought.

2. Such equipment could be obtained only by paying royalties to a competitor. 3. Obeisance to Warner Brothers meant a loss of prestige. 4. The technique of production would have to change radically. 5. Long term contracts with silent stars and directors might prove to be frozen liabilities. They agreed to install no sound equipment for one year and no one was to adopt sound equipment unless they all did, and when they did they agreed to use the same device.

If their opposition proved unavailing they were

prepared to rush the installation of sound apparatus for their own use.

8 Jacobs, op. cit., p. 299.


The plans set up by these companies failed in large part because the Western Electric equipment was the best on the market.

Western Electric,

itself, was eager to come to terms with the larger companies because of the larger profits such an alliance could make possible, and they en­ couraged the alternative of rushing the installation of equipment.


a termination agreement between Warners and Western Electric, a new setup was established under which Warners no longer operated under an exclusive contract but became a licensee.

Warner conceded the elimination of the

condition under which of the eight percent royalty three percent was to go to Vitaphone.

In return for giving up its exclusive contract and its

royalty "a provision was setup under which Western Electric must account to them (Warners) for all royalties received from other producers, and out of them must pay over a sum equal to three percent of the other producers' gross talkie receipts for twenty years, no matter what royalty Western

9 Electric received." The repercussions on the financial structure of the industry wrought by sound overshadowed the technological aspects.

Although patents had

apparently been ruled out as an instrument of control in the industry the history of the M.P.P.C., the patents trust, had been very instructive. Patent control originally seemed to convey the lesson that control rested with distribution and that distribution had to be on a national basis, with key outlets, to maximize the earnings on a film.

The advent of sound

raised the ghost of the attempt to control via patents and patent rights became important for a second time.

Sound picture patents, subsequently,

involve a history of litigation and lawsuits and a tangle of interests,

9 Fitzbugh Green, "The Film Finds its Tongue", G. P. Putnams Sons, The Knickerbocker Press, New York and London, 1929, p. 303.

75 arrangements, and accommodations.

One can start at the top of the cinema

pyramid and work his way down through a confusion of financial interlock­ ings and corporate dovetails through banks, stock syndicates, patent pools, and license arrangements to an astonishingly narrow base of eight major and minor film companies and their endless chain of subsidiaries.

It is

the base, nevertheless, which is solid enough to afford a great degree of comfort, security, and profit.

In this industry it was the electrical

companies which became the increasingly important factor, and their owner­ ship of sound patents was to serve as the entering wedge which created a new link between the industry and other industries. On December 30, 1926 the Electrical Research Products, Incorporated, A Delaware Corporation, was organized to take over the commercial develop­ ment of electrical devices and inventions controlled by Western Electric for exploitation in nonutility fields.

The products sold and distributed

by E.R.P.I. were developed and patented by the Bell Telephone Laboratories, Incorporated.

E.R^P.I. did no manufacturing, but granted licenses to other

companies to manufacture, use, and sell machines, apparatus, methods, and processes developed by the Bell Telephone Laboratories. equipment of Western Electric to various licenses,

It also leased the

E.R.P.I. as a wholly

owned subsidiary of Western Electric for the exploitation of commercial fields outside the telephone business was not interested in the exploitation of sound pictures directly.

It granted licenses and furnished equipment for

sound pictures by leasing rather than selling the equipment in this country and abroad.

Other independent manufacturers of reproduction equipment sold

equipment outright.

Like the M.P.P.C., however, E.R.P.I. was attempting to

affect control by the sound patents it held.

An exclusive license dated

April, 20, 1926 was granted by Western Electric to Vitaphone with the exclu­ sive distribution rights to all sound equipment manufactured by Western

% Electric and the exclusive license to issue sublicenses for the use of sound equipment.

E.R.P.I. retained title to the equipment and assumed

the entire burden of distribution, installation, financing replacement, and servicing of the sound equipment.

Royalties were to be paid, based

on the reel, with Western Electric receiving a $500.00 royalty for each reel made by the licensed producers of sound equipment.^


issued one sublicense agreement dated December 31, 1926 to the Fox-Case Corporation.

In January 1927 Fox closed a contract with Western Electric*

Tor the development of Movietone which led to a cross-licensing arrange­ ment with Vitaphone.

As already noted, five of the larger motion picture

producers, Paramount Famous Players-Lasky Corporation, Fimatone Corpo­ ration (First National Pictures Corporation), United Artists, Universal Pictures Corporation, and Metro Goldwyn Pictures Corporation decided in February, 1927 to postpone for one year action on the introduction of the new art, unless negotiations thereafter were collectively conducted be­ cause of the legal, technical, and financial questions involved.

A com­

mittee was appointed to study the desirability of the different equipments available. Even prior to E.R.P.I.'s incorporation the relationship with Vitaphone had become unsatisfactory to Western Electric.

Shortly after its formation

E.R.P. I. began negotiations with Vitaphone with regard to terminating the latter1s exclusive license agreement which had been consummated by three agreements of May 18, 1927.

Under the termination agreement the exclusive

contract was abrogated, E.R.P.I. acquired Warners patent rights, E.R.P.I.

"^*See Joseph Barkin, "The Principal Non-Utility Activity of the Bell System: The Exploitation of the Sound Motion Picture Industry", Unpublished M.A. at New York University, May 1, 1937, p. 4$. Also, Anna Rochester, "Rulers of America", International Publishers, Nix**, 1936, pp. 185, ff.


was released from further obligations in consideration of the payment of back royalties, and E.R.P.I, regained the exclusive right to market and service Western Electric sound equipment.

With the distribution and ser­

vicing functions restored to E.R.P.I., Vitaphone became a licensee of E.R.P.I. as did the Fox-Case Corporation.

After the expiration of the agreement of

February 17, 1927 between the five large producers to postpone the adoption of sound pictures for one year, E.R.P.I. granted producer-license agreements to the other companies.

M.G.M., Paramount Famous Players-Lasky Corporation,

United Artists, and the Fimatone Corporation were granted licenses on May 11, 1928, Hal Roach Studios on May 18, 1928, Universal on July 18, 1928, and Columbia Pictures Corporation on September 25, 1928.

By means of contractual

letters executed simultaneously with the recording licensee the producers agreed to install Western Electric reproduction equipment in all the theaters under their control or in which they had an interest.'*''*'

Similar license agree­

ments were executed with other motion picture producers who in the summer of 1928 tried to catch up, and E.R.P.I. secured exclusive contracts with prac­ tically the complete industry.

E.R.P.I. became the dominant firm furnishing

sound reproduction equipment (see footnote [a] to Table IV-2).

Since there

was no other real competitor in the field at the time, equipment was furnished by E.R.P.I. on a lease basis with many restrictions on the use of equipment. Licensees were guaranteed against loss from infringement suits.

The licenses

limited the combinations of Western Electric recorded films with non Western

11 Installation of equipment completely eliminated the summer slump in 1928 and attendance increased ^i'ter two years of stable attendance. At about this time, also, Eastman Kodak^fe^et up a sound-on-film department, concerned with the photographic aspects of recording, processing, and reproducing sound pic­ tures, in order to meet the great increase in the demand for this type of film. This was important since this company, through its patents, controlled about 90$ of the raw film stock sold in the countiy. See Eastman Kodak Co. vs F.T.C., 7 Fed. (2nd) 994.

78 Electric reproducing equipment or non Western Electric recorded films with Western Electric recording equipment (noninterchangeability).

This limita­

tion of films made with Western Electric sound equipment being projected only over Western Electric sound machines was later to be the basis by which other competitors entered the field.

Finally, royalties were paid to E. R.P.I.,

based on the reel, and the servicing was to be done exclusively by E.R.P. I. With the success of Western Electric other makers of talking pictures appeared.

All except one company had promptly signed long term contracts

for the use of Western Electric equipment.

The one exception was R.K.O.

which had a contract for the Photophone sound system developed by R.K.O.'s parent company, R.C.A.

On February 11, 1927, the General Electric;Co.,

R.C.A., and Westinghouse sponsored a demonstration of their devices at the Rivoli Theater in New York City.

General Electric, which marketed its de­

vice through R.C.A., offered it to the public through a newly formed sub­ sidiary, R.C.A. Photophone Corporation. in the industry.

R.C.A. made absolutely no headway

In an attempt to obtain access to the market for sound

equipment they established another major to make sound films, R.K.O., a new organization to replace the important First National.

It was formed by the

combination of R.C.A., American Pathe, the Kieth-Albee-Orpheum Circuit, and the Film Booking Offices, an independent producer-distributor.

R. K.O. was

supplied with sound equipment by R.C.A. and for a while was the only major producer dealing with R.C.A., as other companies had signed so-called 'suicide contracts' with E.R.P.I. At the beginning interchangeability had been no problem due to the limited amount of E.R.P.I. equipment.

When R.C.A. entered it tried to get

a statement from E.R.P.I. on this and threatened to invoke the Sherman Anti-trust Law and bring suit.

A conference was held between them in Decem­

ber 1928 and E.R.P. I. dropped the interchangeability clause.

In a year,


competing sound installations were larger than Western Electric installations. By the end of 1929 competition had developed and there were 3,267 Western Electric installations and 4,926 non Western Electric installations. IV-JL).


In later renewals of licensing agreements subsequent to November 1932,

the interchangeability provision was omitted from the contracts of Western Electric licenses.

Although the original threat of anti-trust litigation in­

duced Western Electric to drop one restrictive practice, several years later the issue was brought forth again.

In May 1935 R.C.A. threatened suit against

A.T.T., Western Electric and E.R.P.I. in order to achieve relief from the E.R.P.I. royalty system.

On October 10, 1935 Western Electric dropped the

other limiting provisions in its contracts and royalties were waved.


License agreements were then made with all picture producers based on a pre­ vious patent pool arrangement.

A cross-licensing agreement was signed by

R.C.A. and A.T.T. which represented a radio-audio patent agreement,^


cost of this agreement to the producers and to the public is not known and cannot be estimated. This was not the only struggle involving sound. developed his own sound company, Movietone.

William Fox had also

A more violent struggle to wrest

patent rights from Fox came to an end with a victory for E.R.P. I.

Fox had a

stronger position than Warner Brothers since he had retained personal control of the company and personal ownership of the patents.

Western Electric sought

12 "Investigation of the Telephone Industry of the United States." Report of the F.C.C. on the investigation of the Telephone Industry in the United States, made pursuant to $iblic Resolution No. 8, 74th Congress; 76th Congress, First Session, House Document No. 340, U.S.G.P.O., Washington, D.C., 1939» p. 406. 13 The royalty fees were passed on by the producers to exhibitors in the foim of a charge of ten cents per seat. Business Week. September 17, 1930, p. 22. Also, F.C.C., "Investigation of the Telephone Industry of the United States", op. cit., p. 407.

Table IV-2 Theaters Annually Serviced by Electrical Research Products Incorporated3, 1928-1936


1928 1929 1930 1931 1932 1933 1934 1935 1936

Average Number of Theaters Sound Serviced by E.R.P.I.0 Theaters*5 (2) (1) 451 4,630 10,994 13,504 14,142 14,393 14,827 15,566 17,025

451 2,101 4,122 5,109 5,457 5,234 5,168 4,740 4,571

Percentage of Total Theaters Serviced by E.R.P.I. (2)1(1) (3) 100.0 43.5 37.5 37.8 38.6 36.4 34.9 30.5 26.8

Average Revenue per Theater per Week0 (4) $40.34 30.86 25.80 19.03 17.03 15.94 15.78 12.22 5.00

a Before 1928 the number of theaters wired for sound was relatively small and all were serviced by E.R.P.I. In December 1937 E.R.P.I. sold all of its contracts to the Altec Service Corporation (organized by former em­ ployees of E.R.P.I.) for servicing theater equipment and its contracts for furnishing repair and replacement parts on an annual fee basis. A more significant and desirable comparison to make is between theaters which used Western Electric Equipment and those which used other types. On December 29, 1928, ninety-five theaters used sound reproducing equip­ ment not manufactured by Western Electric, and 1,046 theaters used equip­ ment manufactured by Western Electric (source as noted in footnote (c), p. 403). This data is not available for other years, b "Film Daily Yearbook", published by the Film Daily. New York, various issueg. Includes open and closed theaters, and represents a two year moving average of January 1, data to put on a June 30 basis, c "Investigation of the Telephone Industry in the United States." — Re­ port of the F.C.C. on the investigation of the Telephone Industry, 76th Congress, 1st Session, House Document No. 340, 1939,page 407.


first to break his control on the company at a time when he was attempting, unsuccessfully, to get financial backing.

He was threatened with receiver­

ship and finally anti-trust charges were filed against him because of his contemplated Fox-Loew merger.

The litigation was finally settled in 1935

when Fox was forced to sell out his voting stock for $18,000,000.^ Before sound, motion picture producers operated independently of any licensing agreements on their equipment.

The electrical companies' relation

to the industry greatly resembled the M.P.P.C. method of operation.


the patents trust had been obliged to enter production and distribution of films in order to create a market for equipment, the electrical companies found a ready market at hand and never took direct part in the industry it­ self.

The principle interest in the industry was the sale of recording and

reproduction apparatus, and consequently, no attempt was made to build up an equity interest in the industry.

The industry through patent ownership,

however, was indirectly under a monopoly control far beyond the early trust. By the sound patents concentration between Western Electric and R.C.A. there was joint control by two domestic financial groups which frequently used the threat of patent litigation to keep other manufacturers out.^

The diagram

constructed in Table IV-3 shows, in simplified form, the pattern of inter­ corporate relationship which existed. An international licensing, or cartel agreement also was consummated. In the late part of the third decade, Western Electric had brought suits


For a fascinating confession (as dictated to the author) of the problems faced by one of the pioneers in the industry, including part of this episode, see "Upton Sinclair Presents William Fox", published by the author, Upton Sinclair, Los Angeles, California, 1933* Also, see Chapter XII to this study. 16 N.I.R.A. "Hearings Held Before the National Recovery Review Board in the Matter of the Motion Picture Code", U.S.G.P.0., Washington, D.C., April 3> 1934, Vol. Ill, p. 307.


Table IV-3 Structural Relation Between the Electrical and Film Industries 1929-1936

Telephone Interests


Western Electric (manufacturing)

Each had a minority interest*in the other

* Holding and operating units*-

Radio Interests


Bell Telephone Westinghouse Laboratories Electric and (research) (non-profit) Manufacturing Co R.C.A. (manufacturing)

E.R.P.I.------- > Contractual or license agreement «(sales and service)

Licenses for sound pictures

R.C.A. Photophone (sales and service)

I Licenses for sound pictures

Source: Moody's Industrials, KLingdender, op. cit., and"F.C.C. Report On the Telephone Industry", op. cit. For the purpose of this diagram all relations unrelated to the specific demonstration at hand have been excluded. These include the intricate sub­ sidiary and other relations of film and electrical parent companies as well as those of the subsidiaries themselves.


in Switzerland, Holland, Austria, Hungary, and particularly in Germany against the German Tobi3-Klangfilm Company, which had the European sound patents.

Because of the patent controversy American films, before the

signing of the agreement, could not be shown with German reproducing machines. On July 22, 1930, the Paris Sound Picture Conference was held at which German and American electrical and film interests signed a world patent pact "for an exchange of patents and rights"


and technical information.

The companies

involved included E.R.P.I., R.C.A., A.T.T. and subsidiaries and the chief film producers for the United States and A.E.G., Siemans and Halske, and Tobis-Klangfilm for Germany.


The pact apportioned the various parts of the

world for the sale of sound reproducing and recording equipment.

For the

manufacture and sale of sound apparatus, the convenant divided the world so that countries were reserved for the sale of apparatus made in the United States (United States, British Empire, and Russia), countries were reserved for the sale of German made apparatus (most of the central European market), and countries were open to both German and American manufacturers on the basis of free competition.


In the last named areas producers could obtain licenses

to produce sound films under both German and American patents, meaning that pictures could now be shown on the machinery of either interest.

Finally, the

agreement provided for the interchange of patents, manufactured items, and technical information.

The result was that "for film producers it means


European countries are now wholly open to the promotion of American films."

17 Me Cormick, loc. cit., p. 318. 18 For a fuller discussion, see Business Week. September 17, 1930, p. 23. Refer also, to Siegfried Kracauer, "From Caligari to Hitler", Princeton University Press, New York, 1947, pp. 204-5. 19 Anna Rochester, op. cit., p. 185. Also see source for footnote 20.


Standard Statistics Company, "Standard Trade and Securities", Vol. 57, No. 56, section 1, New York, September 9, 1930, p. T-10.

Despite this agreement and the existance of sound in Europe at the same time as in the United States, silent pictures expired first in the United States and later in Europe.

The public enthusiasm for sound in the

United States was not denied or ignored for too long.

Every uncertainty of

an extensive innovation confronted the industry but it tried to make a rapid readjustment.

The '.other firms plunged headlong into the new venture and

overnight rushed to catch up with Warners by accelerating the rate of the installation of sound.

The entire industry, in panic, rushed into the

production of sound pictures and quantity alone became important.

At first

the industry tried to play all sides by having their schedules include part talkies, all talkies,

and silent films.

The feeling persisted that the

talkie and silent picture would continue side by side in sharing the screen. As time went on and more theaters became wired for sound, talkies entirely supplanted the silents, and the 100$ talkie became recognized as the esta­ blished form for all future production.

By using its large financial re­

sources for advertising, publicity, and direct appeal to its audiences to completely kill the silent film and establish talkies, the industry suc­ ceeded in digging the grave of the silent film. The new drive in the industry rendered released pictures obsolete and required drastic write-offs.

Silent equipment which became obsolete overnight

in the attempt to make talkies the norm was written-off.

The changeover in a

short space of time necessitated turning to outside financing to cover cost of equipment, new talent, stage sets, overhead, new writers, loss of time through experimenting, and the use of more film.

All of this required a

pi money investment of one-half billion dollars.

New production methods,

21»Annual Report of the M.P.P.D.A.", New York, 1932, p. 2.

both technical and artistic, ^hd to be evolved.

The new expensive recording

and sound equipment in the reconverted studios and laboratory (as well as in theaters) required a new type of technical personnel, and such engineering personnel came primarily from the radio broadcasting field.

In building new

studios, liquid capital was directed into fixed channels in an industry in which a high degree of flexibility and liquidity was essential. But there were many offsetting factors.

In silent picture production,

once a season’s film output was produced there was a layoff for a while. With sound, the intervals between production and release were shortened.


Film turnover was speeded and the amount of capital tied up in negatives and inventories was reduced, thereby improving the liquid capital position of producers.

Other costs, flowing from the shorter interval between production

and release, as the costs of duplicate sets, wage variations, diversifying film types, and seasonal costs were also reduced.

The costs of plant oper­

ation were increased by the expense of new sound stages and studios, the em­ ployment of new types of personnel such as voice teachers, new laboratories for the developing of sound films, new printing equipment for printing positive films from sound negatives,


the license fees for sound equipment

and the royalty charges based on the footage of sound film produced under licenses. The changeover to sound resulted in technological casualties, with tech­ nological unemployment and a large and rapid labor turnover.

There was a

22 In the case of many new inventions the production of one commodity merely replaces that of another and the results are similar to^those of labor saving inventions. For an excellant discussion, see Emil Ledeyer, ’’The Problem of Development and Growth in the Economic System", Social Research, Vol. 2, No. 1, Feb. 1935, pp. 20-3S. 23 At first the three kinds of films, silent, sound-on-disc, sound-on-track, increased the distribution expense because of the need for three types of negatives.

86 considerable turnover in personnel amongst actors as the contracts of many silent stars had to be worked out, often proving costly.

Silent stars

disappeared as not all of them had the training and technique of acting which the repertory actor derived from speaking to an audience, and many ji could not develop the new technique.

Salaries decreased markedly as new

and less expensive Broadway personnel was hired. thrown out of work.

Thousands of extras were

In exhibition, the change to sound affected primarily

two groups of theater employees, motion picture machine operators and mu­ sicians*

The change to sound affected operators gradually by increasing

their earnings without any appreciable change in the number employed.


ever musicians, in large numbers, were put out of work as they were no longer able to find jobs in movie theater orchestras.

"The compensating

factor in the amusement industry is the increased employment of musicians for radio broadcasting purposes. "24 The marketing methods, while never on the same level as production methods, were also affected by sound. unknown worth at the box office.

The talking picture at first was of

Producers and distributors, unable to mea­

sure the true potentiality of the sound film, tried to profit from increased attendance.

In some cases, price increases of films were made in proportion

to the expected increase in gross receipts at the box office.

In others* an

arbitrary percentage, from a wide range of percentages, was composed to cov­ er the new factor of sound in flat rental prices.

In doing this producers

were trying to get as high a price as possible, as it is "a sound policy to charge higher prices on novelty and style goods than on stables, and sound pictures were a

24 United States Bureau of Labor Statistics, "Effects oft Technological Changes Upon Employment in the Motion Picture Theaters of Washington, D.C.", Monthly Labor Review. Vol. 33 > No. 5, Washington, D.C., November 1931> P« 10*

87 25 novelty.11

Distributors were not able to determine rental increases accurate­

ly especially since the pricing of silent pictures had been based upon prece­ dent.

Furthermore, there could not be a standard percentage increase because

with sound a new set of factors were introduced which increased the cost of production and had a diverse effect upon the pricing situation, which element made it difficult to base price on cost. Since there had been no true understanding of the relation between the cost of producing silent films and the cost of producing sound films and: the new prices, despite attempts, could not be based on the prices of silent films.

In an attempt to solve this problem some distributors decided to ex­

periment with a system of percentage rentals under which the exhibitors would guarantee a given amount, usually less than the flat rental paid for silent films, and all receipts over and above a given amount were to be split ac­ cording to a percentage mutually agreed upon.

The new price established was

to cover not only the additional costs of production but also was to allow the producer to share in the increased profits sound pictures were giving to exhibitors, despite higher overhead expenses.

Both exhibitors and dis­

tributor agreed that since the advent of sound might be expected to have a revolutionary effect, an opportunity was being offered for experimenting with percentage-pricing.

Some exhibitors, at first, not wishing to be burdened

with higher flat rentals for pictures of unknown drawing power, acceded to the percentage system.

Some exhibitors signed because they realized that silent

films were losing their entertainment value and the market for silent films would disappear.

Other exhibitors agreed because distributors refused to rent

sound films under any other plan.

Finally, for a time the system of protec­

tion evolved by distributors was upset, but this was minimized by the rapid

25 Howard T. Lewis (editor^), Vol. VIII of Harvard Business Reports, op. cit., P. 334.

88 installation of sound equipment. By 1929 exhibitors were postponing the bookings of silent films contracted for at the beginning of the 1928-29 selling season.

With the acceptance of

sound the market for films became a single unit and ceased consisting of the three types.

The success of sound in theaters depended upon appropriate

acoustical treatment in theaters (as well as in studios) and the new noise­ less recordings, freed from mechanical sounds, helped solve the problem.


cost for the installation of sound, depending upon the theater and acoustical requirements, ranged from $8,000-$15,000 in 1927, $5,000-$12,000 in 1928, and $5,00L'-$7,000 in 1929.

Exhibitors began to complain that the introduction

of sound and the installation of equipment was being used to accelerate the concentration of theater ownership.

In the refinancing necessary for instal­

ling sound, many independents surrendered their theaters, helping to hasten theater integration.

At the same time affiliated and unaffiliated circuits

increased their holdings at the expense of the independents.

Electrical com­

panies were prone to grant priorities for sound installation to the circuits, causing additional losses to independents.

When independents were unable to

afford the installations of equipment some producers paid the cost of putting in the new projectors, screens, and cooling systems (introduced at this time for year-round exhibition) in return for the exhibitor buying films, and in this way secured a stranglehold on many houses.

26 The figures for these years are drawn, respectively, from National Re­ covery Administration, "The Motion Picture Industry", Division of Review, Evidence Study No. 25, prepared by Daniel Bertrand, Washington, November 1935, p. 55j Standard Statistics Company, "Theaters, Motion Pictures, and Amusement", Standard Trade and Securities, Vol. 51, No. 5, New York, January 11, 1929, p. 23; National Recovery Administration, "The Motion Picture In­ dustry", Office of National Recovery Administration, Division, of Review, Work Materials No. 34, prepared by Daniel Bertrand, Industry Studies Section, Washington, February 1936, p. 30.


A second major complaint also arose.

Exhibitors had always objected to

the 'score charges1 when scores were sold in conjunction with silent films. With sound, the 'score charge1 was included in the cost of the rental.


ducers were passing on the royalties for the license to use music and sound equipment in the foim of a score charge to the exhibitor as part of the li­ cense and rental fee of a picture.

Exhibitors objected to the score charge

on the ground that a score charge, after all, is a film rental and two charges were being paid for the same picture.

In addition exhibitors took the posi­

tion that the score charge was a cost of production, and that "royalties for the use of sound equipment, incurred on the basis of the running time of the film and the cost of production are considered an additional direct cost of 27 the negative." The magnitude of the changes wrought by sound were even greater than those following the feature picture in 1913.

At the same time a different

demand was developing for this new commodity than had existed for its pre­ decessor, since it served to satisfy altogether new needs.

Talking pictures

broadened the field of movies and opened up new channels of art and drama, evidenced by the fact that the demand for original stories became greater than the supply.

The camera became the slave of the microphone as stories

were told in dialogue instead of action. The combination of general prosperity and sound gave an unparalleled upswing to attendance in 1929 and the increase in attendance was more than sufficient to compensate for the increase in costs. innovation saved many firms from going bankrupt.

In all probability, this

Small theaters were placed

27 Harry M. Iverson, "Accounting for the Distribution of Motion Picture Productions", N.A. C. A. Bulletin. Vol. XXII, No. 4, Section 1, October 15, 1940, p. 158.


on a par with large theaters by their accessibility to the best entertain­ ment.

The absolute power of Paramount vanished as other companies could

now easily challenge Zukor and his big theaters.

Sound, also, had the

effect of diversification by producers within and without the exclusive amusement field.

Spontaneous inventions often result in the creation of

new branches of production which are incorporated into the existing economic system without any disturbance.

Inventions also may bring about competition

with other existing capital-made commodities because of the creation of en­ tirely new needs.

"Talking machines came to compete with the musical in­

strument industry and motion pictures severely shook the basis of the institution of the theater."

The affiliation of interests with producing

companies broadened to include music publishing houses, phonograph companies, ancillary firms, the legitimate theater, and even to radio broadcasting chains, despite the increasing competition from radio in this period.


some cases diversification necessitated absorbing unessential divisions in order to obtain control over some other function which was deemed a necessary adjunct to the motion picture industry. This diversification and expansion caused great overcapitalization. funded debt (consisting of bonds and mortgages) increased.



fixed charges, in the form of interest, debt amortization, and depreciation were also greatly increased.

The failure to meet the requirements on their

debt services subjected many companies to the threat or experience of re­ ceivership and bankruptcy in the 1933 depression.

Many independents had to

abandon the field because of the capital necessary to engage in continuous operation.

The cost of production radically affected the independents, and

28 Lederer, loc. cit., p. 24.


in the depression they concentrated on the box-office and sacrificed the quality of their output.

At the same time more expansion was engendered.

For a number of years foreign expansion had been limited but sound corrected the downward trend in exports.

The foreign market was broadened by pro­

ducing pictures in different languages.

In establishing studios abroad,

production facilities were decentralized into other countries. But the intercorporate relations between pictures and electrical manufacturers were most important.

Much in motion picture practice was

bent into new shapes by the demands of engineering.

The scarcity of sound

reproducing equipment and priority rights in installations secured by many chains from electric manufacturers, the competitive advantage in securing good location, and unusual stock market conditions also contributed to the growth of concentration.

The structure of the industry today is traceable

to the dynamic changes and patterns created by sound.


Chapter V

Contracts, Arbitration and Credit

A lively debate has existed for a long time as to the legal character of the contract between the distributor and exhibitor concerning the exploi­ tation of the film.

We have in this industry, together with the complete

or partial assignment of the copyright, the physical alienation of the film negative and the film copy.

Some legal authorities emphasize the

copyright aspect of the contract and treat the transaction as being essen­ tially a transfer of copyright.

Others lay stress more on the alienation

of the material object and regard the contract as being either a contract of sale, or in certain circumstances, a contract of leases.


then, in the relations between film distributors and theater lessees or owners, some writers continue to emphasize the copyright and others the film copyright as a material object. The problem of the contract was serious in the industry and was ironed out in a variety of ways.

Before 1923^ contracts were so different and

varied that no two contracts were alike.

There was a dire need for a con­

tract which would prove equitable to both parties.

Litigation over con­

tracts was expensive and the industry found it more and more difficult to tolerate the lengthy litigations.

A large number of transactions were

covered under each contract and each of these transactions remained a pos­ sible source of a wide variety of confusion and argument.

The many poten­

tial controversies lurking in each of the contract provisions related to the place of exhibition, the payment of the rental, priority of run, right

1 From the accounting point of view before this time outstanding contracts meant nothing on a balance sheet.


of the exhibitor to clearance against the showing of a film within his competitive zone until a prescribed time had elapsed, the delivery and return of prints, the loss and damage to prints, advertising, delays in a prevention of performances, taxes, minimum admission charges and innum­ erable other matters.

Distribution faced the additional problem of buy­

ers of theaters failing to assume the contracts of the selling exhibitor. Pictures were never paid for or never returned to distributors, although some exhibition contracts were arithmetically distorted by distributors to demand additional cash payments.

A wholesaler who ships merchandise

and gets paid for it at a future time knows that part of the merchandise can be recovered if he is not paid, but there was nothing recoverable in this industry.

Distributors before 1922 began to ask for advance depo­

sits of 25% or more of the aggregate rentals in the contract. distributors could at any time demand additional cash payments.

With time, In case

of default, contracts allowed the distributors to terminate the contract or withhold delivery.

Exhibitors felt that this new contract meant they

would finance the producers.

In many cities, in addition, local mana­

gers of exchanges organized film clubs, agencies in which exchanges pool­ ed their information concerning the credit standing and business prac­ tices of customers. On December 2, 1921 steps were taken to organize the M.P.P.D.A.


year later Hays noted that 4>000 legal suits concerning contracts between distributors and exhibitors were pending.^

After a series of conferences

between distributors and representative exhibitors from all over the coun­ try with the M.P.P.D.A., the Uniform Exhibition Contract was agreed upon, adopted, and made effective in the industry in April 1923*

2 McConnicfr. loc. cit., p. 320.

It is possible


that such a uniform contract would ultimately have resulted without the interposition of Hays.

The actual agreement allowed some differences in

contracts between competitors.

In part the agreement controlled credit,

but more important were the arbitration clauses.

Arbitration boards were

set up in the centers of distribution by the Film Boards of Trade, the lo­ cal distributors* organization.

The arbitration awards were to be final.

If an exhibitor refused to arbitrate or comply with the award, all distri­ butors having contracts with him were required to demand a cash deposit as security on each contract and to suspend service were the exhibitor to de­ fault. ^

The decision of the boards were to be enforceable in any cotart of

competitive jurisdiction.

Exhibitors waived the right of trial by jury on

any issue arising under the contract, thereby agreeing to accept as con­ clusive the findings of fact made by the boards.

Since no picture was sold

unless a contract was signed, it was incumbent and compulsory upon the ex­ hibitor when he signed the contract to agree to arbitration.

As a result

of the compulsory arbitration it was less necessary to have advance depo­ sits given to distributors. The compulsory arbitration was attacked in a threefold manner.


exhibitor maintained that there was an inherent prejudice against his in­ terests.

He felt that compulsory arbitration was against the exhibitor* s

will and mainly a system to collect debts due to distributors from exhibi­ tors.

The system was deemed unfair to exhibitors, since the arbitration

tribunals were partial and controlled by distributors.

A second criticism

from within the industry was that the machinery was inadequate and unsatis­ factory.

Finally, the Department of Justice later was to assert that the


See 39 Y.L.J. 884 (April 1930)


clause provided for the submission to a board of arbitration of all dis­ putes arising from contracts for pictures and distributors leased pictures only by such contracts.

With ninety-eight percent of distributors parties

to such agreements arbitration was an unreasonable restraint of trade, es­ pecially since positive films were considered to be articles of trade and commerce.

The mere adoption of compulsory arbitration did not contravene

any law, but collective agreement to compel arbitration could run afould of anti-trust legislation when the arbitration resulted in arbitrariness. Many individual distributors began to add clauses to their contracts, and exhibitors continued to agitate for a new contract.

After conferences

in 1925 and the early part of 1926 between distributors and exhibitors for the purpose of improving the Uniform Exhibition Contract, a new contract was agreed upon.

The Standard Exhibition Contract was agreed upon on Feb­

ruary 6, 1926 and became effective March 1, 1926.

The rules and regula­

tions relating to arbitration and other provisions remained substantially the same as under the Uniform Exhibition Contract. Shortly afterward the government entered into the picture. initiated a conference on July 6, 1927.

The F.T.C.

The purpose of the meeting was

to have the industry develop arrangements for the marketing of films. conferences were held October 10-15, 1927*


There were two delegates from

each of the thirty-two geographic zones into which the United States had been divided for commercial purposes.

The representation was as follows:

Producers Distributors Affiliated or Circuit Dxhibitors Unaffiliated Exhibitors

43 25 59 66

delegates delegates4 delegates delegates

4 Independent distributor members of thirty-two Film Boards of Trade were represented by proxy and the power of attorney by C.C. Pettijohn.


They agreed upon codes of fair competition for the industry and adop­ ted t h e m . T h e F.T.C. tried to encourage arbitration.

A contract committee

5 While it is not pertinent to our discussion at this point, it certainly is worthwhile to summarize the results of this Trade Practice Conference approved by all the groups represented, including the F.T.C. Rule (l) Develop a uniform contract and uniform rules of arbitration. A standard contract and arbitration are fair trade practices. Rule (2) It is an unfair trade practice to have commercial advertis­ ing in pictures leased by producers to exhibitors. Rule (3) It is an unfair trade practice to substitute a picture of a specified star for another film. Rule (A) It is an unfair trade practice if the distributor forces the exhibitor, when leasing, to buy from another distributor. Rule (6) Bicycling is an unfair trade practice. Rule (7j It is an unfair trade practice if an exhibitor deliberately returns a picture late in order to get additional exhibition time without rental. Rule (10) An exhibitor cannot show a picture contracted for in one thea­ ter in any other theater. Rule fll) The exhibitor has to report the results in percentage bookings. Rule (12) Exhibitors cannot allocate among themselves the films of dis­ tributors, thereby eliminating competition in the rental of pictures. Rule (13) Distributors cannot contract to prevent an exhibitor from get­ ting a picture. Rule (14) No overbuying is permitted in order to corner the market, force a competitor out of business, or compel the exhibitor to sell his theater. Rule (3.8) Non-theatrical production is an unfair trade practice because of competition with exhibitors. Rule (19) It is deemed a fair trade practice for a producer to lend an employee under contract to another producer for an amount equal to his con­ tract and a reasonable amount to absorb the pro rata of such employees idle time. I have indicated just those rules adopted which I consider most im­ portant. Actually, four sets of rules were adopted. Group I, involving the rewriting of the then existing standard uniform contract and changes and modifications in the system of arbitration, was approved by the F.T.C. Group II, to raise the moral tone of production to higher standards, was received by the F.T.C. and accepted as expressions of the trade. Group III, on non-theatrical exhibition, the F.T.C. disapproved. Group IV, on trade practices, the F.T.C. held in abeyance without further action due to the differences between the different branches in the industry. For the complete record and report of the hearings, refer to: "Trade Prac­ tice Conference for the M.EJl.", F.T.C., Held at New York City, October 10-15, 1927, U.S.G.P.O., Washington, D.C., 192S.

of nine was appointed consisting of three producer-distributors, three unaffiliated exhibitors, and three affiliated exhibitors with no right to vote.

They met in Chicago in January and February 1928 and agreed upon

the New Standard Exhibition Contract which became effective May 1, 1928. It was approved by the F.T.C., distributors, and exhibitors and the con­ ference agreed, with one exception, to support arbitration.

There was no

change in the compulsory arbitration clause except to specify a time with­ in which the awards of the Boards must be complied with. There were thirty-two boards of arbitration, as noted, each having six members, three from the Film Boards and three from exhibitor organi­ zations in the territory.6

The new time limit was based on the location

of the arbitration board, e.g., a seven day period if New York City was the base.

If either party refused to arbitrate, the contract could be

cancelled and economic pressure brought to bear to induce submission to arbitration.

The additional objectionable part of the arbitration clause

provided for a minimum penalty which might be imposed on the exhibitor. In the everiof the failure of the exhibitor to submit to arbitration or abide by the decision of the arbitrators the distributor, at his option, could demand as security for the performance of each such contract the payment of an additional sum. not to exceed $500.00 under each contract. This was retained by distributors until all contracts were performed.


the security was not paid in seven days after demand the distributor could teminate the contract or service.

If he chose the latter alterna­

tive and service was suspended for ten days the distributor could cancel the contract.

The proposed standard contract also incorporated a clause

6 The distributor representatives comprised the local Film Boards of Trade which represented, practically all motion picture distributors in the United States.

called the "5-5-5" clause.

An exhibitor could cancel 5$ without payment,

5% with half payment, and 5$ with full payment, but with extended playing time on other features.

This allowed the cancellation privilege of 15$,

provided the exhibitor was not in default of any existing contract, and if the average license and rental fee for pictures under contract was less than $400.

While the "distributors agreed amongst themselves that the

Standard Exhibition Contract would be used for all contracts with exhibi­ tors" ,7

it was never widely adopted because of subsequent legal develop­

ments. The history of arbitration from the Uniform Exhibition Contract through the Standard Exhibition Contract is shown in Table V-l.

The success of the

intra-industry judicial procedure is clearly emphasized by an examination of Table V-2.

"While it would be preferable to note the changes in claims

filed from year to year by distributors and exhibitors, this information is available just for 1928 (Tables V-3 and V-4). Up to this time disputes and conflicts rarely had found themselves in court because the arbitration clause contained in the contracts proved effective.

Disputes arising were arbitrated by boards, located at the ex­

change centers, consisting of an equal number of exhibitors and exchange managers.

The plan represented concerted action in the requirement to ar­

bitrate and concerted effort to apply the rules of arbitration.

The boards

were remarkably successful and thousands of cases were settled yearly with­ out resort to litigation. The further history of the conditions rrevailing before the adoption of the arbitration, the nature of the arbitration clause adopted, and the

7 William F. Whitman, "Anti-Trust Cases Affecting the Distribution of Mo­ tion Pictures", Fordham Law Review. Volume 7, No. 2, May 1938, P» 193*




to to



of Claims





H NO to -3



® w


Includes: 125 claims involving $104,929 for entry judgements upon awards rendered; seven injunctions involving $19,943, by exhibitors, to restrain distributors from enforcing awards in Buffalo and Pittsburgh; two motions to compel arbitration, under New York Arbitration Statute, involving $6,262.



101 Table V-3 Basts of Claims Filed by Distributors* in the United States 1923

Percentage Distributions

Claim For breach of contract for not exhibit­ ing pictures For returned checks For pictures unpaid for delivered to an open account Late return of print Damaged print Lost print ISwitching Violation of copyright!*- iBicycling Declaratory award

Validity of contract -(Interpretation of contract

Number of cases


81.7 3.0

90.6 0.95


3.9 0.13

0.6 1.7 0.41

0.09 0.008

0.06 0.8






To exclude because of racial or religious sub­ 0.009 ject matter To obtain percentages of box office statements 2.9 0.84 Other claims filed 100.000 Total



0.005 0.15


Same as Table V-l.


In percentage of total number of claims and of total amounts filed by distributors.

102 Table V-4

Bases of Claims Filed by Exhibitors* in the United States


Percentage Distributions

Claims Failure to deliver picture (missouts) Violation of protection or run clause Failure to designate playdates Change of title, star, or director (Validity of contract Declaratory award |interpretation of contract To exclude ten percent of total number of pictures purchased To exclude because of racial or religious subject matter Other claims filed Total


Number of Cases


38.5 18.2 7.5 1.7 5.3 2.5

10.2 26.84 5.7 0.75 12.0 4-3



0.1 26.2 100.0

.009 40.2 100.000

Same as Table V-l, p. 8.


In percentage of total number of claims and of total amounts filed by exhibitors.

103 result of its adoption are to be found in the petition, answer, briefs, and the opinion of Judge Thacher of the Federal court of the Southern District of New York.®

The government maintained that the contract itself

was unfair, and arbitration merely a means of enforcing a particular inter­ pretation and thus of attaining certain definite ends.

The defendents

said 500,000-750,000 contracts were entered into annually, more than eleven million deliveries of pictures were made each year, and eleven million sub­ sequent agreements were made on playdates. greements

Judge Thacher enjoined the a-

and particularly the provision relating to compulsory arbitra­

tion in the contract.

The court held that the Standard Exhibition Con­

tract, as adopted with an arbitration clause, was evidence of a conspiracy in restraint of trade. A second problem also had existed for the industry.

Distributors had

suffered many losses due to the sale or transfer of theatres by exhibitors with uncompleted contracts, without providing for the assumption by the buyers of such existing contracts.

When the new owner failed to complete

the contract, the films were thrown back to the distributor, in many cases after the pictures had become stale. titious in many cases.

These transfers of theaters were fic­

In 1927 the aggregate rentals involved in such un­

completed contracts of theater transfers to new owners was $7,297,374 and in 1928 $9,843,970.^

Combined action by distributors brought the adoption

of uniform rules and regulations known as the Credit Rules.

The plan was

carried out by the Film Boards of Trade made up of exchange managers

8 United States vs. Paramount Famous Players-Lasky Corporation, decided on October 15, 1929 in U.S.D.C.-S.D.N.Y. 34 Fed. (2nd) 9849 United States vs. first National Pictures, Incorporated, U.S.D.C.-S.D.N.Y. 34 Fed. (2nd), 815, 819 (September 25, 1929)*


representing ninety-eight percent of the film distribution in the United States.

In applying the rules they were interested in the credit standing

of new owners.

The boards would attempt to get information on whether the

purchaser of a theater would assume and undertake the obligation of the existing exhibition contract.

In addition, a cash security deposit, not

to exceed $1,000, was required for the performance of each contract at a theater.

In a second case in 1929 the cash security used to protect the

credit relations and the credit rules were declared legal.

The decree for

the defendants appeared to be a vindication for the credit rules adopted. The decree of the district court on arbitration was affirmed by the Supreme Court on November 24, 1930.^ The court decided that the practices of the distributing division of the industry were in restraint of trade.^ The court held that the agreement of the distributors not to contract with exhibitors, except upon a standard form requiring compulsory joint action on the part of distributors with reference to arbitration, was in restraint of trade.

The devices of standardization, arbitration^-and self-regulation

were involved and declared illegal. At first the industry thought the arbitration provision would be up­ held.

After such a decision, however, a number of distributors allowed

exhibitors to choose between an Optional Standard License Agreement with

10 United States vs. Paramount, et al, 51 Sup. Ct. 42 (1930) affg., 34 Fed. (2nd) 984; also, 282 U.S. 30 (1930). On November 29, 1930 the Supreme Court reversed the decision in U.S. vs. First National Pictures, Inc., et. ajt. (see footnote 9) and said that the credit rules were in restraint of trade. The Supreme Court took a different view of these rules from that taken by District Judge Thacher. The case was reversed and remanded. 51 Sup. Ct. 45,47 (November 1930).

11 Films moving in interstate commerce are interrupted only long enough to fulfill existing contracts.


a further option of arbitration, and the distributors own form of contract.^ "Standardization is ineffective unless there exists a means of making the standard forms prevail; this is done by not contracting with persons who de13 cline to use them." J

Anticipating the possible Illegality of arbitration

provisions, on July 31, 1930 a new standard contract was agreed upon, in which arbitration was voluntary.

The Optional Standard Licensing Agreement

was adopted by the industry in 1933, in which the arbitration clause reap­ peared in contracts to be signed at the option of the exhibitor.

This form

was adopted by the Code Authority under the N.R.A., but since the illegality of the N.R.A., this form of contract has continued to prevail and is in use today.

12 A copy of the license agreements of distributors is reproduced in the "In­ ternational Motion Picture Almanac", Quigley Publications, New York, 19371938, P. 899. 13 40 Y.L.J. 640 (February 1931), 645-6; See also, "Status of the Standard Form Contract In the Motion Picture Industry", Yale Law Journal, Volume XLII, No. 3, January 1933, pp. 431-4.

106 Chapter VI Film Amortization Schedules

The film is an intangible value and it is impossible to measure its value directly.

Since it is an article liable to very rapid depreciation, film

amortization is a key factor.

An appraisal based on anticipated earnings

is the method used to measure the value of a film.

Any difference in the

relative value of released films results from the difference of writing such values off from time to time.

Since films are frequently marketed

on a deferred payment basis and production costs are written off on a de­ ferred charge basis "ihis contravenes good bookkeeping, which say profits should not be taken on the books until earned",^ As a result of better inventory methods and accounting techniques films are inventoried at production cost.2

The production or negative

costs include studio and staff overhead, location, film, title, effects, lighting, props, set, wardrobe, acting, star, directing, miscellaneous costs.

scenario, and

Involved is the accumulation of all the expenses in­

cidental to making a film and, from an accounting point of view, they rep­ resent a sizable amount of deferred charges, even though they are included in current and working assets.

The resulting inventories consist of nega­

tives, completed and released and those completed and not yet released, positives cf films released and those not yet released, the negatives of films in the process of production, and the positives of films in the pro­ cess of production.3

All the released and unreleased films are carried on

1 William R. Donaldson, "Valuing the Inventories of Motion Picture Producers", The Journal of Accountancy, Vol. 43, No. 3, March 1927, P« 6.

2 Inventories are generally thought of in terms of cost on the market, but this basis is hard to apply to films. 3 Donaldson, loc. cit., p. 4»


the books at the cost of production.

The adjusted and true inventories,

however, represent the negative cost of films in the process of comple­ tion and the unamortized cost of films released for exhibition. the inventory viewpoint,


the original cost is reduced by the proportion

of earning power which has lapsed, leaving to be expressed in the balance sheet only the residual amount."^ ... With the modern system of cost control and conservative polices re­ garding depreciation, film inventory values are written off rapidly after each release date.

The amortization schedules currently used charge off

and extinguish production costs more rapidly than was the former practice. The proportions to be written off are not determined arbitrarily.

In lea­

sing films the flat rental charges vary from as little as $5.00 a day to over a thousand dollars and percent contracts from fifteen to fifty percent of gross receipts.

From these rentals experience-tables are derived which

are built up showing the normal life of different kinds of films and the approximate rate at which film cost is returning during each time period after release.

This is the film amortization schedule.

Even though the

physical condition of a film may remain the same, the entire value of a film can be eliminated leaving no residual value.

The obsolescence of

films is frankly noted in a film's inability to bring any additional in­ come and is recognized by a fast depreciation. This is not the only method of amortizing films.

Films could be

amortized on a straight line basis over a fixed period or they could be written off to the full extent of the rentals received until each picture is fully amortized.

4 Ibid., p. 6.

The major producers amortize the cost of released


productions in proportion to the estimated receipt of income from the ex­ hibition of released pictures.^

The inventory remaining is cost less a

proportion of such cost written off on the basis of the length of time the film has been released. considered.

In building these tables various factors are

The tables themselves are based upon the weekly or monthly

receipts of pictures during prior seasons.

They may be based on an aver­

age of the earnings of different types of films or the earning power of all films combined.

The tables, consequently, represent the average ex­

perience of a company in the disappearence of the earning power of pic­ tures and they vary with the time, place, and picture.

The amortization

of production costs against film rentals helps determine operating pro­ fits.

If income is in excess of the amortized percentage there is a pro­

fit, and if there is a failure to reach the amortized figure there is a loss.

The industry uses an "amortization schedule rather than a depre­

ciation schedule because of the similarity of a motion picture f ilm to a leasehold and its dissimilarity to merchandise subject to depreciation through wear* and tear".^

An examination of Table VI-1 shows the broad

structure of these schedules. The tables are adjusted periodically when experience indicates that it is desir^able to change the rates according to the changed income from films.

If receipts are faster, amortization is accelerated.


may also increase amortization charges to reflect rising costs.

A change

in the type of film being produced may bring changes in the tables.


tables of a company may be varied in order to accomodate a special film,

5 For a thorough discussion of each method refer to Harry M. Iverson, "Accounting for the Distribution of Motion Picture Productions", NACA Bulletin. Vol. XXII, No. 4, Section 1, October 15, 1940, p. 162 ff.

6 8 H.B.R. 87.

109 Table VI-1 Hypothetical Film Amortization Schedules

Negative Costs____________

Months3, 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Percent written off each period (perceni^3 t • •

12.5 14.0 12.0 #9.5 8.0 6.0 7.0 6.0 5.0 4.0 3.5 2.5 2.5 2.5 1.5 1.5 1.0 1.0

Accumulated percent

Residual inventory value

•• • 12.5 26.5 38.5 48.0 56.0 62.0 69.0 75.0 80.0 84-0 87.5 90.0 92.5 95.0 96.5 98.0 99.0 100.0

100.0 87.5 73.5 61.5 52.0 44.0 38.0 31.0 25.0 20.0 16.0 12.5 10.0 7.5 5.0 3.5 2.0 1.0 0.0

Positive Costs Percent written off each period

a In some cases by weeks instead of months. b Source:

H.B.R.,op. cit., pp. 88-89 respectively.

Accumulated percent • • •

14.0 14.5 14.0 13.0 10.0 8.5 7.0 6.0 4.0 3.5 3.0 2.5

14.0 28.5 42.5 55.5 65.5 74.0 81.0 87.0 91.0 94.5 97.5 100.0

Residual inventory value 100.0 86.0 71.5 57.5 44.5 34.5 26.0 19.0 13.0 9.0 5.5 2.5 0.0


If the quality of a film, the size of production, the method of distribu­ tion, or the exhibition outlets change, the tables change.

One unfortunate

result is that if a change in the method of depreciation is adopted, the value of previous statements for comparison purposes is destroyed'.


pective of the changes, however, over a period of years film amortization charges must equal the actual cost.

But this accounting method tends to

accentuate variations in profits from one year or period to the next.


gross receipts increase we have an overstated profit, especially since any increase in film costs tend to be less rapidly reflected in amortization charges.

Conversely, a decline in gross income compels a reduction in

costs but amortizing on the older expensive films continues high for some time.

The high costs in the 1930's were due, in part, to the inability of

the industry to adjust downward both its production costs and its schedules for writing off existing films as rapidly as revenues receded.

The old

scale had to be adapted to fit the depression attendance records.

Once the

high cost inventories were eliminated, the amortization charges were re­ duced and earnings benefited.

In prosperity, if a schedule is retained

when attendance increases, there is a less conservative policy with over­ stated profits. While broadly comparable, the amortization schedules and the rates of amortizing inventory tend to differ in certain particulars and vary for different companies.

Companies find they have had different experience

and each maintains its own tables based upon it,s own estimates of residual values.

The different methods of distribution and the variations in terms

of selling account for the differences.

For example, in recent years some

companies release a film to many theaters simultaneously while other follow the past procedufe of releasing to a few at first followed by a general


release later.

Other differences are also reflected in the schedules of

of the different, companies.

In looking at Table VI^-2 which compares

schedules for the five majors and the two producing minors two things can be noted.

One is a comparison of the rates within the specified year.

The second factor is a comparison of the changes in the schedules of any company over time.

Twentieth-Century Fox in 1946, as a result of distri­

bution which had to be effected promptly, wrote off costs from its books rapidly.

Fifty percent of the receipts were estimated for collection with­

in eighty-four days from the date on which films were released for distri­ bution.

An analysis of Paramount's revenue expectations in the same year

indicates that sixty-nine percent of revenue was expected for the same period regardless of what was earned and the prospects for continued re­ venue.

It is apparent that high percentages of costs are expected to be

recaptured in the first three months at home.

Within the first year after

releasing a film each company apparently has had the experience of earnings between ninety-four and one half to ninety-nine and three tenths of its earnings.

This indicates that the revenue-bearing life of a picture is

usually short, except for foreign sales and trickling domestic rentals.


a film has a long earning life or re-run value, the entire earning beyond this initial period, aside from distribution costs, represents pure profit. An advantage of this rapid write off is that producers who need commercial and long term credits on customary trade terms can be financed more rapidly In noting the changes in amortization from 1935 to 1946 it is apparent that each company has accelerated its rates.

The outstanding exception is Twen­

tieth Century Fox, which has maintained its schedules for the three years considered, despite the difference in the economic conditions.7 7 For a further analysis of amortization schedules see Iverson, loc. cit., p. 163 and Donaldson, loc. cit., p. 11,


Table VI-2 Film Amortization Schedules for 1935, 1940, and 1946 Cumulative rates at which feature pictures are written off after date of release3, (percentages)



1935 15.00

1940 15. C







Paramount_ 1935 35.0



1940 29.8

1946 29.8



































26 28

95.9 69.95

69.9 85.1

39 40












1940 19.3

1946 14.0


3 5.0









84.25 96.5 93.75





Warner Brothers



100.0 100.0



113 Table VI-2 (concl.)

Twentieth Century Fox




























































7 17
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141 the House of Representatives.

Under consent decrees with some companies

subsequent to the anti-trust suit brought by the Department of Justice in 1938* the blocks were decreased in size for an experimental period.


the trade practice of block booking has not materially been affected by these actions of the government or actions within the industry.


booking is an evil only when it is practiced by a monopoly but, though it is actually an economic issue, it has been presented to the public as a question of community morals."


The success of the public relations

hand of the industry, which is highly organized, in doing this goes far in explaining the reasons for the persistance of the practice.

17 Margaret Farrand Thorp, "America At the Movies", Yale University Press, New Haven, 1939, pp. 159-60.

142 Chapter IX

The Code of Fair Competition for the Motion Picture Industry Under the N.R.A,

On August 8, 1933, Sol A. Rosenblatt, Deputy Administrator of the N.R.A, (General Hugh Johnson was Administrator) called a meeting of representa­ tion of the industry from producers, distributors, and exhibitors. meetings lasted for two weeks.


On August 23, 1933 the exhibitor group

and producer-distributor group each submitted a set of proposals for a code to the N.R.A. Public hearings were then held in Washington on these proposals, on September 12, 13 and 14, 1933. hearings, many problems remained unsolved.

Despite progress at the After two more weeks of con­

ferences between the disagreeing factions, it was finally dismissed by Rosenblatt because producers, distributors, and exhibitors could not agree on the code.

As a result of the conference many revisions of the first

draft of the proposed code had been made.

Rosenblatt had drawn up a first

draft, submitted it to the groups represented, but they rejected it. same happened to the second draft.


The third draft was not submitted to

them and it was this one which Roosevelt signed. Motion Picture Code was signed by Roosevelt.

On November 27, 1933 the

It became effective as the

Code of Fair Competition for the Motion Picture Industry^"

on December 7,1933>

1 United States, National Recovery Administration "Codes of Fair Competition" - Code Numbers 1-557 (last code 557 approved March 30, 1935) 23 Volumes, Vol. 23 Index pp. 417-5S7* and "Code of Fair Competition for the Motion Picture Industry as approved on November 27 1933". Approved Code No. 124, Vol. 3, p. 215-57. $structure of the Motion Picture Code Preamble Article I Definitions Article II Administration Article III General Provisions on Labor Article IV Labor Provisions

143 Footnote 1 (concl.) Article

Article Article Article Article

V Unfair Practices A General B Producers C Producer-Distributors D Distributors E Exhibitors F Distributor-Exhibitors VI Set up Grievance Boards and Clearance and Zoning Boards VII General Trade Policy Provisions VIII Miscellaneous Provisions IX Mandatory and Amending Provisons

N.R,A« Sequence on the Motion Picture Industry

Code and Amendments Approved Motion Picture Code Explanation of Article VI, Part Two Section Eight for the Industry Extension of time within which to file required reports for the industry Providing for Fair Practices Provisions Amendment, Number I Extending time to put code into effect Amendment, Number II Indefinite suspension of code provision relevant to employee salaries, etc. Amendment, Number III Amendment, Number IV










3- 3-34 6- 6-34 6-13-34 7- 3-34 7-27-34

7 11 12 12 14

725 815 235 694 179

9- 5-34 10- 8-34 3-11-35

16 17 22

557 365 133

144 but as a result of an understanding with the Administrator, the effective date was Monday, December 11, 1933.

During the conferences a group of in­

dependent exhibitors representing the Allied States Association of Motion Picture Exhibitors under the leadership of their general counsel, Abram F. Myers, a former F.T.C. Commissioner, quit the conferences alleging that they were unable to get a fair deal.

However, assents were received for

the final code from all the important producers and distributors of the United States, the Motion Picture Theater Owners of America (an important exhibitor organization), from the important theater circuits, and all im­ portant labor organizations in the industry. The motion picture code was the longest of the 557 codes drawn and approved through March 30, 1935.

The most unique function of the code

was the judicial self-regulation allowed the industry to resolve conflict­ ing internal problems.

The processes of self-regulation were to involve

conciliation, adjustment, compromise, and concession.

In recognizing the

principle of self-regulation, specific machinery was provided for by the code, free of cost to the litigants, to translate the conflicts into ac­ tion.

The motion picture code was the sole code adopted which embraced

all the branches of an industry, and was "the only vertical code adopted"? Further,

"The standard of trade relations developed over a period of years, trade practices negotiated in standard and later in optional contracts between distributor and exhibitor factors, methods of arbitration and concilia­ tion worked out over a period of years, all formed the groundwork for a structure of trade relations codified and incorporated in the motion picture code."3


Louis Nizer, "New Courts of Industry: Regulation Under the Motion Pic­ ture Code-Including an Analysis of the Code", The Lonaacre Press, Inc., New York, 1935, p. 148. 3 Will Hays, "Annual Report of the MPPDA", New York, March 26, 1934, p. 13*


The code legalized most of the trade practices in the industry.


practices had been considered but were not included in the final code. Amongst these were the elimination of block booking, the elimination of score charges, the elimination of double features, the regulation of pos­ ter exchanges and the "right to buy" —

"right to sell" controversy.

There were six general types of trade practice provisions in the code, as follows: (1) One set covered the industry in general. (2) Three sets governed trade practices internal to each of the three divisons of the industry. a. Producers b. Distributors c. Exhibitors (3) Two sets related to trade practices of a. Producer-distributors b. Distributor-exhibitors The set of unfair practices covering the motion picture industry, in general, were not very different than those covering other industries. The defamation of character by false information for competitive reasons, the securing of confidential information by unfair methods, the threat of lawsuits and legal procedure not in good faith, and unreasonably excessive salaries were unfair practices.

The code aimed to restrict competition in

order to eliminate these unfair trade practices.

The population character­

istics in each local area were considered in determining the extent of com­ petition.

For this specific industry, the difference in seating capacity

was one of the key factors considered in determining the degree of compe­ tition.

The difference in admission price was an even more important fac­

tor in determining the severity of competition or whether there was Co6


competition at all. Traditionally, there were few trade practices amongst producers and producer-distributors.

Producers were restrained from influencing the

salaries, wages, and activities of agents.

The enticement of employees**

or obtaining the dismissal of stage employees was forbidden.


or joint action to prevent the renting of studio facilities to another producer was made unfair as was the employment of a member of a family as an extra, or any form of nepotism.

It was deemed an unfair practice for

producer-distributors to entice an outside or associate producer to them, to distribute a picture prior to its dramatic performance, to distribute pictures before the date specified, or to give less than sixty days of notice and negotiations before the termination of contracts. The practices of distributor-exhibitors were controlled to a greater extent.’ The Optional Standard License Agreement, adopted by the industry earlier, was prescribed as the standard for the industry, unless the par­ ties agreed to a different form.5

As adopted by the code, the contract

contained a ten percent cancellation clause for elimination rights, which was more restricting than the earlier "5-5-5" cancellation clause of the standard contract.

If an exhibitor contracted for pictures in a block,

the average license fee of all the pictures in the contract being not more than $250.00, the exhibitor had the privilege of cancelling ten percent of the pictures under his contract, without having to pay for them.

If the

license fee was for a percentage picture in the contract, fourteen days notice had to be given by the exhibitor to the distributor, after the


This usually centered about personalities and involved star raiding or cross raiding of talent.

5 This contract is still in use today.

147 general release date.

This cancellation privilege was made retroactive,

although it meant that the exhibitor had to pay for nine pictures before he could cancel one.

Additional prescribed behavior for the operations

of distributor-exhibitors included the arbitration of disputes, no dis­ closure of the receipts of the box office, no breaching of contracts, and no bribing to obtain special privileges. Only the most discernable and non-controversial practices of the dis­ tributors were brough under the code.

Distributors were forbidden to

threaten to acquire or build a theater near a competitive theater.^


distributor-employee was not allowed to have an interest in a theater com­ peting with an exhibitor customer.

Substitutions by distributors were

controlled and they were not permitted to avoid deliveries of contracted pictures by substituting other features for the ones contracted for or de­ signated in any contractual manner.

The code provided for the elimination

of the forcing of shorts by insisting that the number of short subjects sold should be in proportion to the number of features sold.

The code al­

so attempted to control, at the distribution end, a growing problem which bothered exhibitors, the non-theatrical accounts. count pays no license fee or special theater taxes.

A non-theatrical ac­ Exhibitors felt that

they were being deprived of normal and legitimate income when the distri­ butor released to them.

Under the code, if an exhibitor felt that a non­

theatrical account was unfair to an established theater, it was deemed unfair for distributors to license pictures to such accounts.'

Other codes

made it necessary to arbitrate disputes, forbade distributors from divulging

6 Overbuilding of theaters, where unjustified was an unfair trade practice.

7 The code permitted licenses to educational or religeous institutions and institutional shut-ins as the Army,.Navy, traveling passenger ships, etc.

148 anything about the receipts of any single theater, prevented unfair playdates by prohibiting the distributors from forcing exhibitors to play on certain days, except when in the contract, and insisted that distributors offer specials to contracted exhibitors first, thereby giving the oppor­ tunity to regular customers to negotiate first for such special produc­ tions. The major restraints put upon the exhibitors related to premiums and overbuying.

The codes were opposed to premiums as being rebates, a form

of price cutting.

Premiums consisted of bank nights, race nights, screeno,

mailing cards for free admission, two-for-one tickets, offering reduced script books which cut admission prices, and other devices of giving pri­ zes, which directly or indirectly tended to lower the admission prices. Lotteries were affected depending only upon their conduct.

It was not

considered a lottery if a prospective winner paid no consideration for the ticket and could win by remaining outside the theater.

Free parking space

given away was prohibited as an additional service. Rebates were prohibited only when they were unfair to a competing ex­ hibitor, but were not prohibited where there was no competition. the code attempted to eliminate premiums by fines. refering to premiums was not automatic.

At first

The clause in the code

It was necessary to take a vote

of every theater in a competitive zone^defined by the local clearance and zoning board for that purpose}in order to force the elimination of premi­ ums.

Later, premiums were not prohibited, except when seventy-five per­

cent of all the theaters in the territory voted against it as being ille­ gal.

These prohibitions "challenged the economic view that the article

to be sold alone must be featured, and no ingenuity except ordinary adverA tising could be used".8


Nizer, op. cit., p. 68.

& This was not consistent, and yet consistency of

149 the code required prohibitions without compromise amongst the varying schemes.

In many cases double features replaced premiums, and with the

elimination of the N.R.A., exhibitors had both premiums and double fea­ ture. Under the code, also, the lease of the exhibitor was protected by prohibiting any interference in lease negotiations by another exhibitor. The transfer of ownership and other tactics to keep from filling a con­ tract were prohibited.

Neither was the exhibitor allowed to lower the

admission price in his theater below the amount specified in the con­ tract, nor could he exhibit a film before the specified date or adver­ tise it before the prior run was completed.

In selective contracts, the

exhibitor had to cancel twenty-one days after the general release. The second important code affecting the exhibitor was that which re­ lated to over-buying.

The small exhibitor needed relief against over­

buying and the code prohibited buying more than was reasonable. ing takes one of three forms, uses.


(l) The exhibitor licenses more than he

(2) The exhibitor adopts the policy of unnecessarily frequent


(3) The exhibitor exacts from the distributor, as a condition

of his contract, a promise that the distributor will refrain from licen­ sing pictures to a competitor.

In many cases first runs bought second

run products in order to deprive their competitors.7

In other markets

over-buying existed to initially deprive competitors of films, stifle, and eventually eliminate competitors completely.

"Over-buying is least

encountered where there are many competing theaters in a territory, be­ cause it then proves tooexpensive."^®

Distributors did not always like

9 A run can be improved by other methods than over-buying.

10 N.R.A., Work Materials No. 34, op. cit., p. 75.

150 over-buying, for once competition disappeared, there was a loss of re­ venue to them. The problem of over-buying is a plain arithmetic calculation.


ges of three times a week were considered to be a reasonable operating policy under the code.

If an exhibitor made three changes a week, 156

pictures were needed.^

If the number of pictures licensed did not exceed

the number required by more than twenty percent, there was no over-buying. If it was greater than twenty percent, but less than thirty percent, there was the likelihood of an adverse finding.

If buying was greater than

thirty percent there was definite over-buying. (See Table IX-1^

Table IX-1 Theoretical Booking Schedule

Frequency of change per week (1) 1 2 3 4 5 6 7

Limits Films booked per year (2) 52 104 156 208 260 312 364

Lower (2) x 1.20 (3) 62.4 124.8 187.2 249.6 312.0 374.4 436.8

Upper (2) x 1.30 (4) 67.6 135.2 202.8 270.4 338.0 405.6 473.2

The figures in column (2) indicate the number of films anually needed based upon the frequency of changes of films per week (column 1) based on a single feature policy. Under the over­ buying provisions of the N.R.A. if the number licensed ranged from the number in column (2) up to and including column (3) it was con­ sidered reasonable and acceptable booking. If the number licensed ranged from the number in column (3) up to and including column (4) the booking was in the questionable bracket, and each instant was

11 The exhibitor often was able to circumvent this principle by arguing that he had four changes a week.


Notes to table IX-1 (concl.) subject to individual interpretation by the judicial courts in the industry. If the number licensed were greater than the number in column (4), there was definite over-buying. The rigidity of these brackets depended upon what the Code Authorities considered a reasonable operating policy for each indi­ vidual exhibitor. The aim, although not always successful, was to prevent any large scale changes in operating policies after the N.R.A. went into effect, in order to start or continue over-buying. The trend toward double features was given an increased impetus by the decision of the Code Authority that there was no over-buying in a change from a single-picture-policy if an established double fea­ ture territory was in existence.12

In order to establish reasonable protection, Clearance and Zoning Boards were established.

They were supposed to determine, in advance, rea­

sonable and unreasonable clearance schedules.

In most cases local clear­

ance systems had become established by custom, and it therefore proved hard for the Boards to construct uniform schedules for the whole country. The economic differences in different territories made it impossible to standardize clearance and zoning on the basis of only one set of principles. Schedules had to base clearance on geographic considerations, admission prices, and a combination of other marketing considerations.

It was set

down by the Boards that an exhibitor could not advertise unless his prior run had been completed.

But because of the difficulties in constructing

schedules and agreeing upon all the principles by which to construct sche­ dules, the Boards failed to formulate and determine clearance and zoning schedules which were considered to be fair and reasonable for the industry. As noted before, provision was made by the code for judicial self-de­ termination within an industry never before attempted in any other industry.

12 This increase in dual billing favored independent film producers, manu­ facturers of raw films, and companies engaged in film processing.

152 Judicial interpretation rather than the code provisions provided the me­ chanics of relief.

The Code Authority of the Industry acted as the Su­

preme Court of the industry.

Sixty-two intra-industry courts were set up

with local jurisdiction in thirty-one zones of the United States.


one were Clearance and Zoning Boards which performed duties already de­ scribed.

Thirty-one were the Grievance Boards.

Each consisted of five

members, made up of two distributor representatives (l affiliated and 1 unaffiliated), two exhibitor representatives (1 affiliated and 1 unaffi­ liated) and one public representative.

The Grievence Boards were origin­

ally projected to relieve one complaint, over-buying, but they eventually handled all types of complaints.

The types and distribution of cases

handled by the Grievence Boards are shown in Table IX-2.

Under the code,

five day period was allowed to appeal a decision of a Grievence Board.

Table IX-2Percent of Cases Handled by 31 Grievance Boards Under the N.R.A., 1933-35

Type of Violation Involved Over-buying Premature Advertising Rebates, Non-Theatrical Accts., and Fraudulent Transfers Interference with Lease, "Catch All Provisions" 10 percent Cancellation Designated Playdates Forcing of Shorts Miscellaneous Total


Percent 12.0 19.0 52.0 6.0 1.0 0.2 0.2 9.6 100.0

Louis Nizer, "New Courts of Industry", op. cit., pp. 125-133.

The types and distribution of the cases appealed from the Grievance Boards to the highest judicial authority in the industry, the Code Au­ thority, are shown in Table IX-3.


Table IX-3 291 Code Authority Decisions on Appeal* Under the NRA 1933-1935

Type of Vio­ lation Charged


2. 3. 4. 5.


7. 8.

Bank night and like devices Over-buying Prior advertising Interference with lease negotiations Non-theatrical ac­ counts Lowering of admis­ sion price below that specified in contracts 10% cancellation clause Other Total


Number Of Cases Considered By Code Authority

Percentage Distri­ bution

Percentage Of Complain­ ants Granted Relief

150 63 18

51.5 21.7


93.8 28.6 77.8










4 16 291

1.4 5.5

66.7 16.7


"The Motion Picture Industry", Work Materials, Number 34, Prepared by Daniel Bertrand, Office of NRA, Division of Review, Industry Studies Section, February, 1936, p. 57.


Cases which were remanded to local boards for further hearings, or cases in which only partial relief was given, are not included.

The code was approved and signed by 140 labor unions which included virtually every representative type of labor in the industry.

Up to this

time there had not been many labor difficulties in the industry and the maximum hours and minimum salaries provisions were agreed to readily.


attempt was made to control the high salaries of the professionals in the upper brackets of the industry, as here the chief problem centered on

overpayment rather than underpayment.^

Like all codes, this one pro­

vided for the right to organize, bargain collectively, no company unions, compliance with maximum hours, and minimum pay.

There were prohbitions

imposed on strikes and lockouts, and all labor disputes were supposed to be reviewed.

In order to minimize conflicts the code standardized mini­

mum wage differentials within specified and different population areas. This, from the exhibitor point of view, indicated a regard for the earn­ ing capacity of each theater.

By having wage scales bear a proportional

relation to population differentials, an equitable basis of competition with respect to labor costs was established.

Actually, as happened else­

where, there was an "increase in the lower wage brackets effected by the NRA where labor is organized".1^

Finally, the average hours worked per

week were specified by the code but were allowed to vary according to la­ bor contracts and state laws. On March 7, 1934, the Nation Recovery Review Board was created by Executive order.

In the spring of 1934 Clarence Darrow, chairman of the

Board of Review of the NRA, prepared to investigate the motion picture codes.

Hearings were held by the Darrow Board on March 26, March 29,

April 3, April 4, 1934.

The final Darrow report condemned the codes as

heading in the direction of monopoly by oppression and discrimination against the small units by the larger units.

In this industry the small

enterprise was represented by the independents, and Darrow felt that the

13 For a detailed report of all executive, artistic, and technical salaries in the industry, see Sol A. Rosenblatt, "Report Regarding the Investiga­ tion Directed to be made by the President in His Executive Order of Novvember 27, 1933, Approving the cQde of Fair Competition for the Motion Picture Industry", submitted July 7, 1934, Government Printing Office, Washington, D.C., 1934* 14 N.R.A., Evidence Study Number 25, op. cit., p. .18.

155 independent had too little to say about the code.

The report maintained

that the code was written by the big eight in their own interests and, furthermore, the "Darrow investigation proved conclusively that the codes were monopolistic in their t e n d e n c i e s . " T h e Darrow Report1^


the following trade practices: (1) The specified play-date clause. (2) Forcing of shorts. (3) Fixed admission prices. (4) Provisions permitting exhibitors to outlaw double features. (5) The 10^ cancellation allowance. The report made the following recommendations: (1) A new code authority with equal powers to producers, independents and the government. (2) The deletion of the article in the code linking the purchasing of shorts and the rental of features. (3) The abolition of the provisions give$ distributors the authority to control admission prices in leasing films. (4) The removal of the ban against double features. (5) The reorganization of the Grievance and Clearance and Zoning Boards to allow independents to dominate them. (6) The outlawing of the distributor right to specify play dates for films leased on a percentage basis. 15 A.B. Momand, "The Hays Office and the N.R.A.", Copyrighted and Printed by the Author, New York, 1934, p. 22.

16 See N.I.R.A., "Hearings Held Before the National Recovery Review Board In the Matter of the Motion Pictures Code", U.S.G.P.O., Washington, D.C., Volume I, March 26, 1934, Volume II, March 29, 1934, Volume III, April 3, 1934 and particularly Volume IV, April 4, 1934. Also, "Investigation of the N.R.A.", Hearings Before the Committee on Finance, United States Sen­ ate, 74th Congress, First Session, Pursuant to S. Res. 79, U.S.G.P.O., Volume II, 1935, pp. 2018 ff.

156 (7) The lifting of the time limit for filing complaints. (8) Opening the code privileges to all members of the industry, whether or not they had signed agreements. (9) The appointment of a committee to devise a way of insuring the "right to buy" and to formulate a substitute for block booking. (10) The removal of the film code from under the direction of Admistrator Rosenblatt.

The reaction S. Johnson called cism.

from the code administrators was far from mild.^


the Darrow Report unfair and unfit to supply fair criti­

Donald R. Richberg said the report was unfair.

Sol A. Rosenblatt

noted the fact that there was only one decision in the United States (at the time) on the subject of block booking, and this decision declared it to be legal.xo

The code authorities disagreed with the findings, conclu­

sions, hearings, and recommendations of the Darrow Board.

Little action

was taken on the recommendations, but the controversy over the motion pic­ ture code continued until the Supreme Court declared the N.R.A. illegal in 193 5 ^

Contracts, based largely upon code provisions, had already been

prepared for the 1935-36 season when the Schechter decision was handed down.

For another year, therefore, after the death of the N.R.A., the

codes continued to exert an effect upon the operations of the industry.

17 "Replies and Comments by General Hugh S. Johnson (Administrator), Donald R. Richberg (General Counsel, N.R.A.) and Sol A. Rosenblatt (N.R.A. Div­ ision Administrator) upon the Darrow Report Relating to the Motion Picture Industrial Code", reprinted from the Motion Picture Herald. May 26, 1934. 18 U.S. vs Paramount Famous-Players-Lasky, Corporation, et al, 57 Fed. 2nd, 152. See Appendix A to Chapter III. 19 ^ A.L.A. Schechter Poultry Corporation vs. U.S., 295 U.S. (1935)*


Chapter X The Film and Public Policy

The film is a powerful social institution with an international life peculiar to modern times.

This was recognized very early by Thomas A. Edison who said

that "whoever controls the motion picture industry controls the most powerful medium of influence over the people".

Under a moral interdict it (the motion

picture) has created a form of entertainment which had given pleasure and solace to an audience which has found itself with an increase in leisure and, at the same time, an increase in boredom.

This audience, in the main, never

went to the theater and it read few books.

"For a long time the old puritani­

cal code of living in the United States that branded every sort of pleasure as sinful, reduced the business profits in the entertainment field, but in 1 the last decades the spiritual inbreeding of puritanism has been broken...." This art appeals to every class, mainly because stories and plots are con­ structed along effect-producing and non-intellectual lines.

However, whether

the film is dealing with fact or fantasy it has not failed to establish ethical, moral, and cultural standards.

Therefore, film-makers pay attention

to all social, sexual, and racial prejudices in order to keep from arousing antagonism on the part of their customers.

If the industry appealed only to

educated audiences, it probably could not even recoup its negative costs, largely because the film, as a public attraction, has lost many of its early and unique advantages.

While the making of films is largely creative and

artistic, the selling of entertainment is largely commercial.

The motion


picture, therefore, As a giant industry rather than a public service

1 i Rene Fulop-Muller, "The Motion Picture In America", pp. 105-89 in John Anderson's "The American Theater", The Dial Press, New York, 1938, p. 110,


organization and money making, naturally, takes precedence over service to the public.

Furthermore, an inevitable conflict arises between art and

business in an enterprise which must use artists in order to make a profit. It arises due to the fact that the beautiful is not necessarily the popu­ lar and the popular is generally not beautiful, as evidenced by the success and failure of different types of films. The actual final product, amusement and entertainment, is intangible and its value is perishable.

Entertainment as a service, an intangible,-is

different from physical merchandise.

Any discussion of the quality of this

service or commodity has to be carried on largely along intangible lines of morality and social utility.

Symbols rather than material goods are created.

Before a picture is made its actual worth is not known.

The completed pic­

ture is sold solely for entertainment value and not as a physical product to be resold.

It is hard to determine, quantitatively, if one such good

film is equal to one and a fraction of ordinary films in its true quality and value.

The main ingredients used to sell the product to the ordinary

audience are personalities, formulas, and advertising.

Each new picture,

a novelty, establishes a reputation (or one is imagined) and universal demand and becomes a staple.

The start of the evolution to a staple consumes the

time in producing a picture, about twenty-two days.

Because of the unpre­

dictable variation in public taste, the value of a picture is established by its earnings in each theater, and this information is not known until after a sale is made.

Since one cannot determine the value in advance, and

since the true quality of a picture may be in dispute even after box-office reactions are known, it is hard to apply a simple theory to explain its economic worth.

The commodity called a film cannot be repossessed once it

is sold as the value of it is lost once it passes into the ’hands1 of the

159 consumer.

When sold to an exhibitor actual ownership of the commodity seldom

changes hands, inasmuch as the negative film is protected by copyright.


retaining ownership of the commodity, the producer or distributor can con­ tinue to exercise control over certain conditions of the film’s existence and use.

Furthermore, in other industries a good product of a competitor

is disliked and even feared by competitors, but this is untrue of the motion picture industry.

It is felt in this industry that a good film increases the

aggregate demand for all films. The film, by its nature, almost partakes of a monopolistic product in that no one producer makes two identical films and no producer makes a pic­ ture which is identical to that of any other producer. maintained that the film is a distinctive commodity.

Therefore, it is The contention is

made that the film is a distinctive product because its value cannot be known before it reaches the public, but this argument "has less force the nearer a producer comes to mass production and conversely, the fewer pictures he makes, the more the argument holds."


The spokesmen for the indus­

try maintain that the motion picture is a distinctive product through the use of many arguments.

"Motion pictures are not dead things to be regulated

like commodities such as freight and food.

They are evidences of human

thought, and human thought on which progress depends, cannot be tampered with 3 safely."

Nevertheless, the industry is willing to concede that certain

aspects of the industry are subject to control.

"The industry can do much

in the direction of economy by setting in order its complicated patent

2 Howard T. Lewis, op. cit., p. 186. 3

' Will H. Hays, "See and Hear", President of MPPDA, Inc., published by the MPPDA, New York, November 1929, p. 33.

160 structure, the process patents affecting the production of motion pic­ tures. Although there have been many test cases on the issue, the question is not completely settled at lav/ as to the extent and under v/hich circumstances producers, without violating the Sherman Anti-Trust Act, the amendments, and statutory enactments v/hich supplement this law, can operate in the distri­ bution and exhibition of their own products.

Neither has any judicial

decision been rendered, aside from the Supreme Court decision on William Fox which is pertinent in a very indirect way, in the instance of motion pic­ ture mergers.

Fractical economists, themselves, question v/hether it is de­

sirable to have the many advantages of combination repealed by statutes or judicial decisions.

This has been indirectly acknowledged by the government

as the experience of years could point to very few sure cases in which the anti-trust laws have succeeded in completely breaking up consolidations and 5 restoring competition among small units.

"By 1914, anti-trust was no longer

spending its strength on suits for the dissolution of corporations, but in­ stead was working for an amicable dissolution of mergers by inducing big busi­ ness to readjust its affairs voluntarily in order to come into better harmony with the Sherman Law.

As far as the courts have been concerned, no con-

glomerative monopoly exists in the motion picture industry.^

The principal

cases decided by the courts have been those in which the government has

4 »*»« Will H. Hays, "Annual Report Of the MPPDA", New York,/p. 9. ^

. ft*In a few cases involving exhibition the government has been to ^es­ tablish competition in areas controlled by a few exhibitions. See U. S. vs. Griffith, 68 Sup. Ct. 941; also, Schine Chain Theaters vs. U. S.Lfjfc Sup. Ct. 947. ^Frederick L. Paxson, "Recent History of the United States", Houghton, Mifflin Company, Mass. 1926, p. 413. 7 In November 1948 the Supreme Court ordered divestitures of certain theater properties to reestablish some competition. U.S. vs. Paramount, et al, 334 U.S. 131.


found distributors with interests In other branches of the industry acting in concert and in violation of the anti-trust laws.

In such cases there

seems to be some question as to whether sufficient consideration has been given to the reasonableness or unreasonableness of the restraints and their effects upon competition. Many mergers are reasonable restraints of trade and are not in violation of the anti-trust laws, even though the courts have said they are illegal. Even though it is easier to foist a bad product on the public when a monopoly exists, a merger is not necessarily a monopoly.

While pure monopoly is

illegal, there is no rigid rule nor inflexible standard by which industrial mergers can be tested as to their legality or non-legality of existence. If mergers result in a substantial lessening of competition, as in the in­ stant of block booking, and this can be shown, then such mergers might be proved illegal.

This is because the "Supreme Court has been guided by the


principle of economic desirability and business expediency."

The effect of mergers in the motion picture industry has often been to produce better pictures at lower cost, to consolidate for the purpose of obtaining the natural advantages derived from reduced costs of maintenance, and to establish a greater efficiency of methods and better quality of product.

Such consolidations should not only be legal but they are econo­

mically desirable, and the effects of such amalgamations should be welcomed socially, economically, and at the law.

However, if a film merger has been

motivated by factors economically unsound and indefensible at the law, if

8 Ralph C. Bennett, "The Merger Movement In the Motion Picture Industry", The Annals of the American Academy of Political and Social Sciences. "The Anti-Trust Laws of the United States", Editor in charge of volume, John G. Hervey, Volume CXLVII, No. 236, Philadelphia, January 1930, p. 90

162 the results are to crush competition and create monopoly, then the effects are repugnant, economically, and in contravention of anti-trust laws. Mergers with such exceptional powers over supply, output, and price need

9 proper legal constraints as is apparent.

This is relevant to the film in­

dustry, since the general policy does exist of granting exemptions to in­ dustries affected with the public interest, and certainly the film industry is of this type. For the motion picture industry the quality of films and their cost to the public have been the main tests of the effectiveness of mergers.


meet these tests the rate of integration has been continually accelerated by the cumulative effects of competition and the unusual degree of intra­ industry struggle for control, with the frequent and resultant impingements on the anti-trust laws.

The creation by the industry of diverse trade

practices, consequently, has assured a protected market, which has acted mainly to handicap independent activity.

The big eight have been able to

exercise control over the major sources of film financing, the major portion of available studio space, the big distributors, the circuits which favor the large companies, and the major cinema affiliates to eliminate such independents.

If one even starts at the first step in film manufactur­

ing, an independent producer has difficulty in financing his production from the very beginning if he cannot show a distributor that he has an acceptable film to be manufactured on available studio properties.

All the commercial

transactions within the industry involve the sale of license agreements, the rental of films, the shipment and transportation of films and advertising

9 Refer to D. M . .Keezer (editor), "The Anti-Trust Laws: A Symposium", American Economic Review. Vol. XXXIX, No. 4* lone 1949 > pp. 689-724.


matter, and therefore subjects all such agreements and commodities to federal laws.

Despite this, however, little anti-trust action has been


The chief reason the motion picture industry has escaped the enforcement of these laws against it has been the fact that the fundamental and basic principle on which the industry is conducted has been little understood by those whose business it is to understand them, their economic conse­ quences- and their legal effects.

10 William Marston Seabury, "Motion Picture Legislation - A Remedy for Suppressed Competition", Federal Motion Picture Council in America, In­ corporated, New York, 1927, p. 6.



164 Chapter XI Challenging the International Structure of the Industry

When World War I ended the advantage which Americans had in-the world market forced European firms to struggle back into competition.

The war had made

the foreign producers fall twenty years behind the times.

American compan­

ies, on the other hand, had been fortunate in the chance given to them to establish their films so firmly in foreign markets.

A few companies had

perfected their systems of foreign distribution and they were intensively cultivating the field.

As a result, the more ambitious domestically-made

films were being produced with an eye to the export market.

Until the ad­

vent of sound domestic companies continued to maintain a virtual world mono­ poly.

With sound and the early difficulties of language-*- foreign producers

sought to increase their output in order to recapture some markets.


changeability of dialogue, and its economic expediency, became a new factor to American producers, and the problem was quickly solved. to be exported the picture was shown in one of two ways.

When a film was Either it was

projected in its original form, onto which the language had been dubbed by a clever mechanical contrivance of synchronization, or the language coming from the screen was English and the printed dialogue, in the language of the country, was superimposed upon the film. Sixty-five percent of the annual world production of films, measured by footage or screen time, is American-made.

This constitutes eighty-five per­

cent of the value of the world annual output.

The domestic market by its

patronage contributes sixty percent of the world gross revenues, and to a

1 There are seventy-two different languages in use in foreign countries throughout the world.

large extent American exports are founded on this fact.

The importance

of this is evident when one considers the relation between the cost of production and domestic receipts,

American producers have a lucrative

domestic market blessed with a high purchasing power and standard of liv­ ing,

The enormous extent of the home market makes it possible for the num­

ber and buying power of American consumers to support costly films.


markets are of primary importance this is the only country in which cost can be retrieved without an export revenue.

Supported by natural scenery

and climate, furthermore, our films are better in entertainment value, finish, have superiority of direction, have better photography, are more lavish, and are better exploited and sold,

American producers try to re­

tain their advantages by spending large sums on improving their technical facilities, attracting talent, insuring quality, exploitating the natural scenery and climate of the country, and carry on large publicity campaigns to boost ef-their products.

American films continue best from a technical,

mechanical, and dramatic standpoint, and these home-made films continue to set the style and standard for production throughout the world.

In ser­

vicing the market all over the world, the American created product is geared to a broad and universal appeal, so that each film is suitable for the aver­ age of all nations, classes, and cultural levels.

The star system is an

important factor in creating this average product and selling films to the foreign audiences. The large overhead of domestic producers makes it difficult to produce for a limited domestic market, and accounts for the close relation between

^United States Department of Commerce, "Motion Pictures Abroad", Bureau of Foreign and Domestic Commerce, MP-1, Volume 14, No.S-4, Washington, D.C,, March 15, 1940, p. 2. 3 ot The Webb-Eaerrene Act, with special grants of power for joint foreign market­ ing of films free from Sherman Anti-trust violations, encourages these policies.


costs and world earnings.^

Companies derive a substantial portion of their

revenue from abroad, even though the revenues vary from year to year and are greatly affected by foreign exchange fluctuations.

Ninety percent of

the films produced in the United States are consumed abroad and "25-35 percent of the income is returned from abroad, from which profits are made. Since most of the films shown in the world are American, the foreign ex­ pansion of receipts is dependent upon continued distribution abroad.


foreign countries where it is not profitable to have American-owned distri­ bution offices, the film is sold outright.^

The world-wide distribution of

films also assumes a prominent role for trade development. the film almost as dependently as it follows the flag.

Business follows

Before World War II

a successful film which went all over the world was seen by 140 million foreign people a week, fifty-six percent of the world attendance at American-

7 made films which was 250 million a week.

The average price paid for an ad-

mission to theaters throughout the world was fourteen cents.


England has

been the principal overseas outlet for such films, with the British Empire units second in importance.

It is, therefore, of importance to trace the

measures taken by the British to combat American competition.

4 In 1939 of the $3 >000 million invested in the industry the United States capital investment was $2,060 million. 1 5 Sidney B. Self, "Movies Fell Their Age", Barron1s. The National Financial Weekly. Barrons Publishing Company, Volume XIX, No. 36, September 4, 1949, p. 3.

6 Joseph P. Kennedy (Editor), "The Story of the Films", as told by leaders of the industry to the Students of the Graduate School of Business Administra­ tion, Harvard University, George F. Baker Foundation, A. W. Shaw Company, Chicago and New York, 1927, p. 206.

7 I


Rene Fulop-Muller, op. cit., p. 111. In 1939 the Bureau of Foreign and Domestic Commerce estimated approximate world attendance at 235 million of which 150 million was attendance abroad, "Motion Pictures Abroad", (see footnote 2), p. 3. g William J. Perlman (editor), "The Movies on Trial", The MacMillan Company New York, 1936, p. 13. *


American producers have distributed in England through their own dis­ tribution groups.

American companies set up these distribution organiza­

tions in Britain shortly after the first World War.

Independent American

producers without affiliates use British distribution agencies.


tion is so complete that American films get almost automatic exhibition in Britain not on the basis of superior quality, but on the basis of superior distribution.

British exhibitors have become almost wholly dependent Upon

American films for continuous/ exhibition.

Despite British-exhibitor complete

dependence upon United States production, English exhibition was, until re­ cently, relatively uninfluenced through direct control by American companies. As stated by a Britisher, "exhibition, the most lucrative branch of the in­ dustry was, until recent years, the only section able to resist the pene­ tration of American capital.1"^ British producers have found it difficult to secure screen time within their own market as blind, block, and advance booking for the exhibition of thems has been practiced by Americans.

Their technique of control has been

reinforced by the hold which American companies have acquired over various sections of the British industry.

Among the obstacles to independent British

production have been the American companies' control of celluloid stock as well as the dependence of British studios on access to either one of the American sound recording systems (RCA and Western Electric) or to the only British sound system in use, Rank's British Acoustic Company.^

To offset

their disadvantage, many British producers attempt to imitate Hollywood ex­ travagance, but they have been unable to recoup too large a proportion of g Frederick Mullally, "Films - An Alternative to Rank", The Socialist Book Centre, LTD., London, 1948, p. 9. ■^Ibid., p. 21. Originally films had to be recorded on Western Electric equipment to be exported to England and the same was true for English films coming to the United States, See the Darrow Report, Volume III, op. cit., p. 10.

168 their costs from overseas, particularly since the returns from the United States market remain slender.

Actually, therefore, the British failure is

largely explained by the British inability to obtain overseas distribution. Hollywood produces for a world market and certain distribution, but Britain distributes to a small section of the market.

The British films, without

outlets, are even dependent upon American distributors for distribution with­ in the United States.

Finally, "a far higher proportion of box office re­

ceipts pass to Hollywood, tax free, than to the British film producers. The British have attempted to legally correct the disparities.


12 1927 the first Cinematograph Films Act

was passed in order to increase

the quantity of British feature films produced.

Effective January 1, 1928,

a restrictive quota was established for a ten year period.

The act reserved

a small but annually increasing share of screentime or playtime in allcinemas for British films (the exhibitors quota) and put an obligation upon all renters of imported films to acquire a proportion of British films (the renters quota).^

American producers as renters in Britain, therefore, weie

obliged to assist British producers.

The chief purpose of this provision

T was to assure a certain if limited market for British firms.


quota of British films was scheduled to increase, in the case of the exhi­ bitors, from 5 percent in 1929 to 20 percent for 1936-9 and in the case of the renters, from 7 1/2-20 percent over the same period.

The act also

11 Arts Inquiry, op. cit., p. 190.

See also Chapter XIII.

12 Cinematograph Films Act, 17 and 18, Geo.?.c. 10(1927). 13 The act defined a British film as one produced mainly by a British sub­ ject or company with British labor. The scenario was supposed to have been written by a British subject, and studio scenes were to have been photo­ graphed in a studio in the British empire. A scenario was never defined adequately, and the operation of this part became a facce.


concerned itself with blind, block, and advance selling.

Under the act a

film could not be rented until it had been registered and it could not be registered until it had been trade shown.

The provisions of the act were

administered by a Board of Trade Advisory Committee with power to impose penalties for contravention.^ The act was passed to prevent complete control from passing into for­ eign (particularly American) hands, but the quota restrictions had certain unforseen effects.

Producers in Britain came to be dominated by American

combines as several American companies undertook production in Britain, through production subsidiaries, when they found it more economical to set up production units in order to fulfill their quota requirements.


Americans brought over American technicians and stars, although many of these were employees whose usefulness in Hollywood had been deemed to be coming to an end.

The 1927 Act contained no clause requiring any standard

in the quality of products, not even based on costs, and there was no rea­ son to suppose that the American companies were interested in making good films in Britain, as these competed with the Hollywood product in the British makket.

As a result, quota requirements were often abused by

American fin^/which made cheap and shoddy films in Britain or else com­ missioned British firms to make them on their behalf.

These ’quota quick­

ies’ brought further discredit to the British film industry. Block booking and other distributor practices continued to persist especially in the form of oral agreements.

This failure of the quota sys­

tem was due ^naturallyj to the disinclination of Americans to support measures aimed at their own products.

The main indirect control exercised and used

14 For greater details on the provisions of this act, see Arts Inquiry, op. cit., pp. 187-8.

170 by Americans against the British quota system came from the dependence of British theater owners upon American films and "in failing to support the U Act, they (Americans) have had the help of British exhibitors." The final shortcoming of the 1927 Act was its inability to benefit producers of short, nonfiction and documentary films, as these films were left to develop with­ out legislative protection. In 1936 the British Government appointed a commission, under the chairmanship of Lord Moyne, to consider the position of British films.


government had in mind the then approaching expiration of the Films Act of 1927.

In 1938 a second Films Act, incorporating some of the Moyne Commit­

tee recommendations, superseded the Act of 1927.

The 1938 Act established

new quota requirements, In addition to the important appendage that short films were given protection .for the first time.

The home consumption of

British long films was designed to rise from 15 percent in 1938 to 30 per­ cent in 1947, in the case of the renters* quota, and from 1 1/ 2-25 percent in the case of the exhibitors’ quota.

Further, a cost test was instituted

to dispose of the 'quota quickies' evil.

Under the new legislation no film

could be registered as British unless it was made in a studio within the United Kingdom.

At least one-half of the requisite amount of labor costs

embodied in a film was to have been paid to British subjects ordinarily work­ ing in the United Kingdom.

The cost test used was an alternative to the

much canvassed 'quality test' which was always regarded as desirable, al­ though almost impossible to achieve by. legislation. Under the addition aimed at preventing shoddily made films, the minimum labor costs permitted for a film were one pound a foot, with a minimum total

15 Arts Inquiry, op. cit., p. 207.


of 7*500 pounds a film. introduced.

A further scheme of double and treble quotas was

This wqs aimed at assisting the overseas distribution of

British films, by encouraging the production of more ambitious films.


this scheme, a film costing three times the minimum, that is, at least three pounds a foot with a total of not less that 22,500 pounds in labor costs, wasallowed to count twice its length for the purpose of the renters' quota. A film of over 37*500 pounds, or five pounds a foot, was to count three times its length for the purpose of the renters' quota.

In this way the

renter was offered an added inducement to distribute the more expensive British films.

Finally, as noted, under the 193$ act a separate quota was

introduced for short films.^ Britain, legislatively, was desperately trying to put its industry in a position to compel American producers and distributors to take British producers and distributors seriously.

The country hoped to demand reci­

procity, in the form of a bilateral bargain, and, therefore, monopoly in Britain was fostered in order to equip the British industry to better meet the American industry.

Since the 193$ Act, British feature films production

is the story of Arthur J. Rank's bid for ascendancy.

He believed and still

believes that the British industry would stand or fall upon its ability to capture the interest of the American market.

His great strength in seeking

to achieve this end has also been his great weakness.

As the owner of a

large number of cinemas which require a continuous supply of American films to fill his screens, some accommodations to suit American companies and in­ terests are unavoidable. The effectiveness of Rank's bid, as well as the 193$ Act, was inter­ rupted by the war.

The English developments, subsequent to this point, are

l6 For further details of the 193$ Act see ibid., pp. 190-91.

dealt with in later chapters.

Even during the war, however, Britain prepared

to further strengthen its home and overseas market.

A summary of the conclu17

sxons and recommendations made during the war, in 1944* clearly indicate this. The report pointed out that the minimum essential film needs of the theaters

in Britain could only be met by increasing the production of medium-cost fea­ ture films.

Legislation was proposed to prevent further expansion by British-

owned circuits and American companies.

To assure studio space for the inde­

pendent British producers, Americans were prevented from securing additional studio space, except by government consent.

First consideration had to be

given to independent producers manufacturing medium cost films, and all con­ tracts between exhibitors and producers had to assure an adequate return to independent British producers.

It was proposed that all conditional bookings

in Britain, including all manifestations of block bookings, should be pro­ hibited, as well as having the renters and exhibitors quota of British films increase.

The report suggested that the government assure the independent

exhibitors a reasonable share of feature films, as well as allocating a rea­ sonable share of screentime for independent productions,

A strong British

distribution organization, to be established in the United States, was pro­ posed.

And far from least, the British government was urged to secure the

elimination of the inequitable method of tax assessment on American takings from British films compared to the tax imposed on the receipts of American films in Britain. The story of protectionary devices used against American film makers by other countries is fairly similar to Britains1.


The first country which

"Tendencies to Monopoly In the Cinematograph Film Industry", Board of Trade, Report of a Committee appointed by the Ainematograph Films Council, H.M.S.O., London, 1944-, pp. 34-38. C


had imposed restrictions was Germany which in 1925, through the Kontingent Law, stipulated that foreign films could be imported only with a permit (or Kontingent).

Later a straight import permit was substituted which re­

stricted the number of foreign films imported into Germany.

The French

film decree of February 19, 1928 followed, and it authorized the internal release of foreign films only on the basis of import permits.


Austrian, and Italian laws passed in this year were based on similar regu­ lators'- principles.

After 1928, many such laws were passed by European

countries which could not compete, and the European film producers felt better able to compete by getting government restrictions.

Patronage of

American films, however, continued at a very high level, and the gross in­ come to Americans continued to increase. As time has gone on to the post World War II, American films have had to continue to thread their way through a maze of trade restrictions including tariffs, entertainment taxes, embargoes, quotas, censorships, import licenses, exchange controls,.the withholding of funds, and numerous other devices for preventing imports.

Nearly every film-producing country levies some form of

duty on imported films, reckoned normally on the length of the film, some­ times on its weight, but generally regardless of its subject.

Within these

countries loans or subsidies drawn from funds created from import taxes on feature films have been used to build up large film export industries.


thermore, in a world with a dollar shortage, the attempt has been to increase import duties in order to contract the influx of American films and thereby reduce the large sums annually leaving these countries.

The pressure of

foreign countries has been aimed at breaking the virtual embargo in the American market against foreign films, irrespective of the quality of the foreign films.

Through theater ownership, American producers have succeeded

in keeping foreign films out of this country.

174 Since the domestic industry is built upon a world market which consti­ tutes an important part of their business, the industry has had to respond to foreign protection in some way.

IS The loss of income could compel American

producers to either reduce production costs, open up production subsidiaries in foreign lands, or create international cartels as completely complicated and effective as their international patent cartel.


The industry could

allow foreign films into their theaters in exchange for foreign countries continuing to show American films, and they could do this by helping to dis­ tribute foreign films in the United States.

Since the Spring of 1947 it is

questionable whether any of these measures could reopen markets in certain specific foreign countries.

There is opposition from Eastern European coun­

tries because these countries maintain that American films carry something no other merchandise carries, silent propaganda.

To justify the complete

prohibition on imported films many "foreign countries say that American


films are subversive of decency and public morality."

Motion pictures are not only a national but an international salesman. Films are a universal stimulus to all forms of American business, and its direct contribution is easily visualized.

Even today, in spite of the lan­

guage difficulties brought about by the talking film, met by making trans­ lated versions into foreign tongues, and the stringent regulations imposed by several foreign countries in an effort to encourage native studios, Holly­ wood produces the majority of films shown in nearly every country in the


^ Cf., "The European way came at a time when foreign receipts were a most im­ portant factor in planning production schedules.", Will H. Hays, "Motion Pictures in a Changing World", Annual Report of the MPPDA, New York, 1940, p. 6.

!9 See Chapter IV.

20 Chapter II by the Reverand J. J. Cantwell in William J. Perlman, op. cit., p. 16.



The extent of foreign distribution differs for each American company

but for those that do export a significant portion of their rentals from features come from foreign markets.

The unique position of the American in­

dustry in the world market is due to the fact that the United States is the only country manufacturing enough films to satisfy its own market.


American producers can get back a large part of the costs of their films within the country without the help of export revenues, and consequently the domestic manufacturers find it profitable to supply the world. Most of the statistics on the export and import of films are in linear feet of films.

No figures are available on the value of such films other

than the declared value, which is largely based on quantity rather than on exhibition value.

The declared value of a film exported has no relation to

the amount of revenue derived from the film.

The amount put down by a shipper

of films on his export declaration usually reflects the cost of the film to the exporter.

It is generally nominal compared with the amount of income ex­

pected to be received from a film's showings.

The receipts from a film can­

not be determined until a later time, except when the film is sold outright, which is generally rare.

21 Undoubtedly, the gross revenue to distributors

from the exhibition of American films abroad is considerably more than the amount declared, or approximately 35% of the total revenue received by various domestic companies.

21. They can be estimated based upon past performance of the film within the country and comparable films in the foreign country.


Chapter XII A Mature Industry Confronts the Troublesome 'Thirties

The motion picture, like other industries, has been built upon a plane of prosperity and not depression.

Despite the apparent excess of seating

capacity in the late 'twenties the industry continued to build new theaters in response to the shifts in population.

With the industry operating at

less than capacity, the overcapacity in seats had not served to keep the admission prices at a relatively low level."'’ There was an important differ­ ence in the satuaration point as regards the building of new theaters and their seating capacity.

The saturation point of these theaters was more

than a replacement demand and the additional seating capacity was not reflec­ ted in additional attendance.

Nevertheless, it was cheaper to erect new

theaters and close theaters which were too expensiveeto convert to sound as well as close others because of their size and location.

With a midsummer

slump in attendance in 1930 there came a sudden halt in the building of theaters and the enlargement of chains to complete the rapid expansion from. 1928-30.

In the process of expansion the most desirable theaters had been

absorbed, along with many unprofitable and unnecessary theaters which had been either acquired or built.

Overcapitalization resulted from the huge

property interest, heavy charges, and funded debt which drained the working capital in the face of the coming lower admission prices and reductions in

1 The admission price in the industry has been increased not by decreasing capacity, especially when no rapid increase in attendance is expected, but by greater clearance. For a discussion of this problem see U. S. vs. Para­ mount Pictures, Inc., et al, Civil Action Nol 87-273 in the District Court of the U. S. S. D. of N. I.; amended and supplemental complaint, Novem­ ber 14> 1940.



The heavy funded debt, the excessive stock issues, the ma­

turing short term obligations, and floating debts were incurred as a con­ sequence of this rapid expansion and was to remain a burden until World War II.

So rapid had the expansion been that in many instances there had

been no proper coordination and control of theater units.

This unsound

financial structure made the industry vulnerable to a deflation in its capital structure when recessive forces came into play, as occurred later. Any sudden advent of depression allowed no time for the accumulation of resources for the servicing of debts.

Hardly had the industry completed

its expansion in exhibition when gross receipts began to tumble. The industry, in part, was slow to feel the effects of the depression because the novelty in the appeal of sound had served originally to re­ verse the downward trend in cinema patronage, and this force maintained patronage for another year beyond 1929.

Exhibitors were the first to feel

the effects of the slump when box office receipts started to drop.


spite continued wishful thinking, it became apparent that sound had not innoculated the industry against the depression.

Due to the depression

as well as the influence of low quality films, the novelty of sound diminished and lost its box office potency.

The public grew more critical

and started to repudiate sound films at the box office.


Other tried

formulas, as bettering the quality of films, could not stand against the depression.

The audience became selective and bought tickets for excep­

tional attractions only, some of which continued to fill theaters.


ever, due to stronger price consciousness on the part of fans, they went


In an attempt to reverse the trend the wide screen was introduced, but it contributed only slightly to an increase in the drawing power of films.

once or twice a month instead of once or twice a week.

The depression,

the drop in employment, the reduction in income, and the fear of the future interfered with regular attendance.

Entertainment found itself in a reced­

ing market characterized by a rapidly diminished demand for all consumer goods and services.

Exhibition, itself, contributed to the problem when it

showed the greatest unemployment and wage reduction of all phases of the in­ dustry.

Inconstancy in the number of theaters from season to season became

aggravated when the over-seating problem was accompanied by the lowering of consumer purchasing power.

The prospective theater goers sought less ex­

pensive amusement, such as radio.

The industry, faced with the new ex­

perience of falling profits, demand, and a critical public, was to find that sustained long term profits would have to await a substantial recovery in employment, consumer purchasing power, and quality of films as necessities to stimulate attendance. Distributors, in an attempt to offset the effects of the depression without cutting down the monopoly power of producers, attempted to shift some of the burden of falling receipts to smaller theaters by increasing their film rentals.

But it became progressively harder for distributors

to increase such rental prices, especially since many firms started to reissue old films with new names and titles.

The adoption of booking

on a percentage basis was enhanced to supplant the then obsolete flat booking policy of distributors.

Price cutting, in the form of a reduc­

tion in film rentals, was used by other distributors who were anxious to close contracts for the 1933-4 season. tion

However, despite the viola­

of contracts with distributors a wave of price cutting and reduc­

tions was started by exhibitors throughout the country in an attempt to keep from playing to amply houses.

In the presence of reduced prices, the

dollar intake at the box offices continued to follow the trends in unit



The general admission price cuts were not followed by an in­

crease in attendance and, as a result, the gross receipts declined.


tually, despite cuts in admission prices, these prices were generally still too high.

If the general price line is down at a level lower than

before, it is hard to maintain admission prices at a relatively higher level, in the face of such a decline.

The relative maintenance of prices

kept films in a luxury class in terms of the changed purchasing power allocable o£ the industry.

Films had to be priced within the altered

ability of individuals to pay and had to compare favorably with anything else obtainable by customers within the same price range.

This was evi­

denced by a shift of patronage from first to subsequent run theaters with their lower prices, even though the difference in prices between these runs had not been narrowed. The deliberate refusal of exhibitors to lower prices was not always unfounded.

The relatively high admission prices were due, in part, to

the weight of new federal and state excise taxes imposed on theater ad­ missions.

A federal tax of 10% was imposed on all theater admissions

over forty cents, and this took effect on June 21, 1932.

The tax was

not completely shifted as exhibitors absorbed part of the tax in order to give the consumer an indirect price bargain.

Some small exhibitors,

to further increase the bargain, started double features in their neighborhood houses.


This premium was soon taken for granted and other

inducements as theatrical presentations, vaudeville, elaborate stage shows and presentations, games, cash prizes, and indirect concessions were added to the regular movie program.

3 See Appendix A to Chapter XII.

These rebates added to

180 operating expenses and profits, accordingly, were further reduced.


such extra premiums were recognized as equivalent to lowering the average admission price, there was some increase in attendance.^- However, the increase in attendance proved insufficient to offset the additional cost to the exhibitors.

While chains initially fought such methods they soon

adopted them although they recognized that premiums would be a bar to a higher general scale of theater prices within the near future.

By 193®,

50$ of all theaters were using some sort of incentive other than the movie presentation to lure their customers.

The exhibitors also tried

price reductions for the morning and afternoon performances, in response to the drop in child attendance, and tried to minimize price cuts for the evening performances.

Due to such lower prices there was an in­

creased proportion of attendance at the ’cut rate' afternoon performances (matinees).

Other facts which moved patronage to the earlier hours were

the shorter work week, the growth of part-time work, the increase in un­ employment, the evening competition of radio, and competition from miniature outlets (l6 mm. and non-theatrical).

In the end this shift to

afternoon and morning attendance further cut total receipts.


With a large number of unprofitable theater units being abandoned or closed, companies tried to divest themselves of others in the face of heavy overhead costs and the steady increase in operating deficits.


theaters which could not be sold were abandoned as real estate losses

4 Jacobs insists female patronage was increased by 20-25$ as a result of these measures. See Jacobs, op. cit., p. 430. 5 Refer to Standard Statistics Company, "Standard Trade and Securities", Volume 75» Number 22, Section 2, March 30, 1935.


mounted and theater chains started to collapse.

By bargaining for re­

ductions in leases and rentals of some theaters a greater harmony was maintained by some owners of theaters.

By interbooking and other co­

operative efforts between companies, theater interests were operation­ ally pooled in various cities by the leading companies.

Further, "terri­

torial regrouping of theaters was effected so that encroachment on one anothers' territory would be obviated."


Despite retrenchment in the

diversification policy and the overexpanded plant equipment, motion pic­ ture stocks became a drug on the market when dividends were discontinued. The producers sought to maintain output as eveiy attempt was made to reduce production costs.

Labor costs naturally declined as many of

the gains made by unions in wages and hours were surrendered.

For eight

weeks in 1933 the scale of sill film employees was reduced as staffs were disbanded to cut costs.

These and other production economies were slow

to be put into effect because of the relatively inflexible character of union contracts, film stars* salaries, theater rentals, and excessive fixed charges.

The long term contracts with high salaried persons, the

decline in attendance, and the fact that no film, however good#, was able to gross the income of prior years, threw the industry out of adjustment and called for radical reorganization and rehabilitation.

Moreover, the

volume of output was not easy to control through expense control, as competition made production go on despite all costs. The continued high the costs, as well as/drastic reductions of real estate holdings, were the principal factors which made a few individual companies feel the full

6 Standard Statistics Company, "Standard Trade and Securities", Volume .61, Number 11, Section 2, July 24, 1931, p. T-8. Also refer to Poor's Indus­ try Service, "The Motion Picture Industry", Poor's Publishing Company, New York, June 8, 1933, p. 23 ff.


and final effects of the depression.

Universal was put into receivership

and disposed of all its theaters in the depression, having acquired none since that tine.

R.K.O., the fourth largest company, had a real bank4

ruptcy when on January 27, 1933 it was placed *n equity receivership. was not reorganized in the federal courts until seven years later.



theater subsidiaries of R.K.O., Orpheum Circuit, R.K.O. Western, and R.K.O. Southern, were also placed in voluntary bankruptcy.

On January 26, 1933

the largest company, Paramount Publix Company, filed a petition of bank­ ruptcy and was placed in equity receivership.

"Paramount prefers bank­

ruptcy to the administration of its affairs by a receiver in equity and 7 filed a voluntary petition for this purpose on March 14, 1933."


Company was reorganized in 1935 under Section 77B of the Bankruptcy Act and emerged as Paramount Pictures, Incorporated.

In part, these illus­

trate the financial costs involved in the operation of theater chains. A further decentralization started with William Fox.

The story of

the Fox Film reorganization and his being forced out of his own company was not, however, a rdsult of his theater expansion.

His intricate

finances were endangered by the stock market crash and were wrecked com­ pletely by a series of squeeze plays administered by the powerful tele­ phone companies, banks, and investment houses who were his creditors. Fox* s attempt by buy the controlling stock in Loew' s was frustrated by antitrust action.

The Clayton Act prohibition of stock acquisition

which substantially lessens*competition, together with Fox's financial difficulties, combined to frustrate his third attempt to acquire stra­ tegic control in the industry in 1931. 7 Poor's Industry Service, ibid., p. 23.

A consent decree ordered the

183 Fox interests to divest themselves of a recently acquired control of stock in Loew1s MGM.


The consolidation of the two companies would

have resulted in control of 40$ of film production and 50$ of theater capacity in Mew York.

The Fox Film Company was reorganized voluntarily

in 1931 and again in 1933 (with the consent or its creditors and hold­ ers of its securities) and in 1935 it was merged with Twentieth-Century Company (Joseph M. Schenk and Darryl F. Zanuck) to become the TwentiethCentury-Fox Film Corporation.

In addition to those noted, there were

many other bankruptcies and reorganizations as the condition of other

f*companies moved equally bad.

Because of the many consolidations, re­

organizations, and other corporate changes in this period it is vir­ tually impossible to get accurate financial and operating data on the industry. At the beginning of 1930 six European countries (Great Britain, France, Germany, Italy, Australia, and Hungary) employed restrictive legislation or contingents against foreign produced films.


These re­

strictions, in combination with the cost of putting sound with subtitles in different languages in films, caused a drop in exports.

At the same

time there was an increase in the output and exportation of foreign films.

The competition of meritorious British productions, financed by

the British government, was starting to be felt.

Foreign markets con­

tinued to shrink due to unsettled developments (and subsequent new political alighments) as adverse exchange rates froXe the foreign balances


See U. S. vs Fox Theater Corporation, S.D.N.Y., 3 Fed. Trade Reg. Ser­ vice 3125 (Apr. 15, 1931). 9 See Chapter XI. France eliminated her quota restrictions on American films for a period of one year beginning July 1, 1931 but reverted to them at the expiration of the period.


of domestic companies.

Since the foreign business of the leading pro­

ducers was an important proportion of their aggregate gross receipts, the continued unsettlement of the exchange rate was of considerable im­ portance.

An additional adverse development occurred with the depre­

ciation of foreign exchange rates.

Producers had, in part, anticipated

this depreciation in foreign currencies and in the early part of 1931, foreign accounts were pared to strictly necessary operating funds.


spite this, the widespread depreciation of currencies in 1932 reacted unfavorably upon the domestic companies.

With the general drop in world

prices caused by the devaluation of certain currencies, the resulting effects on international exchange, and the socalled defensive measures which several countries applied or threatened to apply through tariff increases or new and sharper film contingents and quotas, the effects on the American film and sound equipment business Europe were exception­ ally discouraging?"^

The sharp reversal in 1933 helped the American com­

panies as their net returns were favorably influenced by the depreciation of the dollar.

Since the operations abroad yielded a needed revenue in

foreign currencies, the transfer of these funds at the new level of ex­ change rates augmented the dollar income considerably and profitably, the specific gain in net income is difficult to estimate due to the sub­ sequent and rapid fluctuations in exchange rates and the involved methods of applying film amortization charges to films abroad. The development of the industiy, in addition to being effected by the business recession of 1933, was strongly influenced by the pressure

10 See United States Department of Commerce, Bureau of Foreign and Domes­ tic Commerce, "Trade Information Bulletin", Nos. 797 and 801, U.S.P'.Gib., Washington, D.C., 1935*


of organized religions in the fourth decade.

All through the writing

of a scenario, the shooting of a film and the final editing of a film, members of the Production Code Administration actively cooperate with the writing and production units to see that the standards of good taste, as laid down by the Production Code and voluntarily adopted by members of the industry, are maintained.

The Motion Picture Production Code was

voluntarily adopted by the members of the MPPDA on March 31, 1930 (it was later amended November 1, 1939).

The code, subscribed to by all the

leading people in the industry, set up both general principles and spe­ cific applications governing the pictures to be made by any member of the MPPDA. (1)

The basic principles laid down in the code were as follows:

No picture shall be produced which would lower the standards of

those who see it.

Hence, the sympathy of the audience should never be

thrown to the side of crime, wrong-doing, evil or sin. (2)

The correct standard of life, subject only to the requirements of

drama and entertainment, shall be presented. (3)

Law, natural or human, should not be ridiculed, nox shall sympathy

be created for its violation.^ A voluntaiy agreement was entered into by the member companies according to which the code was to be administered by the MPPDA through the Production Code Administrator.

The code machinery was made avail­

able to all producers, foreign or domestic, whether or not thay were members of the association.


A reading of the code adopted in 1930

"^"For the complete code see John George Glover and William B. Cornell, "The Development of American Industries", Revised Edition, Prentice Hall, Incorporated, New York, 1945, p. 809.


Comparable standards were established for advertising in a separate code.


will reveal that it incorporated in it the original thirteen points, the details of the 1927 ’Resolution'.

The basic 'moral' principles had been

suggested by Catholic leaders and urged upon the industry by Protestant groups, particularly the Federal Council of the Churches of Christ in America, which had urged the adoption of similar measures from 1922 on. Producers, however, were not sure that the 1930 code really represented or reflected what the public wanted.

Therefore, the code was more or

less ignored by many producers who simply overruled the efforts of the Production Code Administrator to enforce the code's tenets.

It appears from the records of 1930 to 1932 that the economic resistance of producers against the code had its origin in the fact that dirt in the movies was proving 'pay dirt' and that while but 25% of the total production of the industry was on the sensationally smutty side, that 25% was paying for the industry's losses on the clean 15% which nobody seemed to support. ^

In October 1933, the first impetus was given to the birth of the Legion of Decency.

The Most Reverend Amleto Giovanni Cicognani, Apos­

tolic Delegate before the Charities Convention in New York, Archbishop of Laodicea in Phrygia, may be credited with having put the torch of religion fervor to the dry timber of the heirarchical religious disgust. The conflagration spread rapidly.

Hardly a month passed before an

Episcopal Committee on Motion Pictures was appointed by the American Bishops at their annual meeting in Cincinnati in November 1933*


fall and winter the plans for a comprehensive campaign were carefully and painstakingly worked out.

In April 1934 this Committee declared

13 Olga J. Martin, "Hollywood's Movie Commandments", the H. W. Wilson Company, New York, 1937, p. 30. Her view is a protagonist view. For the discussion which follows I have drawn the main account of the Letion of Decency^from her book.


war on salacious films, to be fought through the Catholic created Legion of Decency.

They launched a militant campaign, the center of the cam­

paign being the headquarters in New York City.

The effects of the Legion

of Decency boycott, started by Catholic groups and in which Protestant and Jewish groups joined was far reaching.

Some estimates place the num­

ber who immediately signed the p l e d g e ^ of the Legion of Decency at two million.

The Legion had expectations of a five million total pledge with­

in a short time.

The total eventually reached eleven at the height of the

campaign. The Legion of Decency exerted an irresistible economic pressure. This pressure came at a most opportune time, for the industry was prac­ tically bankrupt, each ticket at the box office counting in the balance. It appeared that millions of movie goers would no longer appear at theater box officer.

The potential loss of revenue of such a large group of pa­

trons made producers avert the risk of a complete boycott.


the boycott threatened to prevent the full fall seasonal recovery of box office totals in 1934.

Things began to happen in Hollywood with amazing

suddenness, as the industry galvanized into action.

Producers, for eco­

nomic reasons, prepared to accept the Motion Picture Production Code set up for the industry in 1930.

On July 12, 1934 Will H. Hays and the Board

of Directors of the Motion Picture Producers and Distributors concluded action amending and amplifying the Production Code Administration.


Production Code Administration was strengthened by putting Joseph I. Breen at its head.

Under the new arrangement the presidents of produc­

tion companies accepted full responsibility for pictures exhibited.

14 A pledge to boycott offensive films.



company was allowed to exhibit any picture not approved by the Production Code Administration, such approval being printed on the film.

A new and

more stringent administration along with rigorous penalties for violations were instituted for the infringement of the code.

This self-imposed

moral censorship of the industry began functioning July 15, 1934-

It pre­

sumably caused the shelving of many pictures although some believe "the 1$ costs of studios and theaters were not much affected by code provisions." Anticipating these radical changes which went into effect, the reli­ gious groups decided to give the industry another chance to fulfill its promises of moral code enforcement, and pending the action taken by the Hays Office, the boycott was called off on June 21, 1934, just two and one-half months after it went into effect.

The completeness of the regu­

lation by the Code Administrator since that time is clearly brought out by Table XII-1.

The boycott in the United States was partly responsible

for the first papal encyclical issued by Pope Pius XI on the subject of motion pictures in 1936. The government's attempts to relieve the depression by emergency techniques which supplied subsistence and work, saw some of the money put into the market and spent on the box office.

Until 1937 payrolls and

consumer purchasing power were reviving, but the industry lagged badly in responding to the recovery movement.

Admission price*moved only slightly

above the 1933 depression levels, due in large part to the oversupply of theaters and the accompanying excess seating capacity.

Despite this,

with the 1933-37 recovery a new wave of theater building started and houses formerly closed were (reopened.

Increases in costs for some

15 Standard Statistics Company, "Standard Trade and Securities", Volume 69, Number 12, Section 2, July 18, 1933, p. 7.


Table XII-1 Films Approved By the Production Code Administration


Feature Length Films

Domestic Companies Member Nonmember Q companies companies Year 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945

334 337 339 322 366 325 406 369 256 284 230

169 229 228 169 161 154 140 147 141 146 128

Foreign Producers Member Nonmember companies companies 9 0 5

K 55 v 57

4 5 12 • 10 6 14

52 41 49 40 17 18 10 6 17


Total Reissues


564 621 60S 545 584 523 568 546 417 442 389

338 142 55 49 12 7 4 2 0 0 1

902 763 663 594 596 530 572 548 417 442 390

Shorts, Including Serials Total Film;

Year 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945

Domestic Companies Member Nonmember companies companies 564 607 477 683 494 477 641 616 440 514 466

282 223 318 150 215 227 70 66 0 51 55

Foreign companies 0 1 4 0 6 3 10 1 9 2 0

Total Films Approved Features Shorts and shorts 846 831 799 833 715 707 721 683 449 567 521

1,748 1,594 1,462 1,427 1,311 1,237 1,293 1,231 866 1,009 911

Rejected Features and shorts 14 3 9 4 2 2 2 3 1 0 0

Source: "International Motion Picture Almanac", Quigley Publications, New York, 1946-7 issue and prior ones. a Comparable data not available prior to 1935. b Breakdown not available.


companies were offset, in part, by anticipated higher box office receipts. Higher costs of distribution and higher production costs were not offset by the upward inching admission prices, for gains in attendance did not match increases in the costs and output of films.

The returns of many

theater-owning companies were enhanced by the rising receipts from stores and offices located in theater buildings. ^

Had it not been for the

business recession which struck the country with startling suddenness in 1937 that year would have been the best year for the industry subsequent to 1929.

Further inroads were made into the profits of producers in this

year when further labor organization proceeded rapidly. 17 The I.A.T.S.E., affiliated with the A.F. of L., and covering al­ most all workers except actors who then came under The Associated Actors and Artists of America (AAA) of Actors Equity, had started a movement in 1933 to bring actors under the I.A.T.S.E.

A general strike had been

called by the I.A.T.S.E. in that year, and this was the first aggressive labor action in the industry which, until then, had been without weighty labor troubles. time.

The strike had failed because it had come at the wrong

With the passage of the N.L.R.A., in 1935, unionization rapidly

became a part of the giant industry.

One segment of labor after another

succeeded in unionizing despite the disapproval of producers.


ly the Screen Writers Guild was designated and accepted by the producers as the legitimate bargaining agency for the writers.

This action followed

16 This factor always magnifies the earnings fluctuations of the industry during periods of both expanding and declining rentals. See Standard Statistics Company, "Standard Trade and Securities", Volume 85, Number 2, Section 4, July 7, 1937. 17 International Alliance of Theater Stage Employees and Motion Picture Machine Operators of the United States and Canada and Others, a craft union.


the precedent set by the acceptance of the earlier formed Screen Direc­ tors Guild as the legitimate agency for directors.

The Screen Actors

Guild of the Authors League of America was established in 1937 by the N.L. R. 13. after Hollywood studio workers were given the opportunity to choose their unions.


The recession of 1937-8 cut into the revenues of the industry and the industry tried in many different ways to help itself.

The adverse

effect of lower attendance was amplified by a drop in the average admis­ sion price.

Once again, as in 1933, people turned to alternative and

cheaper forms of amusement such as radio.

The industry tried to keep

its actors off the air, in the middle of 1938, in order to fight this effective competitor.

In the fall of 1938, for the first time in the in­

dustry's history, a concerted and most spectacular drive was initiated by producers and distributors to resell movies to the country.

Under the

slogan of "Motion Pictures Are Your Best Entertainment" a one million dollar fund was appropriated, one-fourth having been contributed by exhi­ bitors, to advertise the benefits of the movies.

Newspapers campaigns

were instituted and quiz contests offered prizes to perspicacious movie goers, but the scheme was a failure. to cut production expenses.

The industry at the same time tried


despite the patent necessity for lower costs and despite all of the atten­ dant pressure in that direction which has been exerted, Hollywood energies for cost-saving have largely been spent on small-fry economies, leaving 18 The contract signed with the producers had a great effect on the extra situation. A most significant feature of this contract was the provision that all actors appearing on the screen had to be members of the guild. Shortly after the recognition of the guild, it virtually closed its books to new members. For one of the few complete stories of the development of labor organization in Hollywood refer to Murray Ross, "Stars and Strikes", Columbia University Press, Morningside Heights, New York, 1941*


virtually unscratched, those practices and those persons whose financial exactions result in production costs which the market has been unable profitably to support.^-9

As costs continued to move up there were new stringent restrictions on foreign sales which resulted from economic and political changes. Sales to Germany, Spain, Japan, and China practically ceased. smaller countries of Central Europe declined.

Trade with

With France hampered by

duties, with the internal

chaotic state of France for business and with

the high cost

French titles and dialogues on American films,

of imposing

this trade became virtually unprofitable. expected that

American producers hoped and

their films would command a larger world market as American

films on hand in these countries became exhausted.

Although a slight de­

cline in sterling exchange curtailed English profits moderately in and

1938, the

1937 a~r&

relative stability of the English market contributed to

the earnings of domestic producers.

Offsetting the decline in Europe,

business in Australia, Brazil, Argentina and other South American coun­ tries was becoming highly profitable.

Over-all, however, the foreign

film business of Hollywood declined sharply and was yielding a declining proportion of total revenue. This was the condition of the industry when in July 1938 the Depart­ ment of Justice declared war on the industry through its anti-trust suit. A little more than one year later, on September 1, 1939, a second war was to break out.

The effects of the latter war are partially realized

but those of the former war are even more unknown.

19 Motion Picture Herald, December 17, 1938, p. 8.

Appendix A to Chapter XII Analysis of Double Features

Until the early 19301s the accepted movie program consisted of one fea­ ture and a number of accompanying shorts.

The depression caused the

momentum toward double features to increase and by 1931 they were wide­ spread.

The doubling of features shown occurred without an increase in

admission price.

These double features, which originated in the New

England area,^ began to spread toward other areas as they were used as a form of price cutting.

To the consumer the number of features shown was

doubled for the same price.

Due to limitations in the productive capa­

city of the industry, the manufacturing of more films for double feature exhibition was made at the expense of quality films.

Quality became less

important than quantity, in order to cater to patrons shopping for in­ creased quantity at the same price.

The film became mere mass or quantity

standardized entertainment, and its chief drawing appear began to consti­ tute the amount of footage projected on the screen in return for the admission price paid by a patron. Initially, double (and triple) features had been started by the smaller exhibitors in order to compete with larger theaters.

The real

reasons for their rise and acceptance, however, are sti.ll in dispute today, and many explanations have been advanced.

Morris Ernst



that the quality and length of pictures were declining at the time they were introduced, in the face of a bargain-hunting public, and double fea­ tures were started by those exhibitors who were unable to get sufficiently

"''Robert W. Chambers, "The Double Feature As a Sales Problem", Harvard Business Review. Volume 16, Number 2, Winter 193S, p» 229. ^Emst, op. cit., p. 242.

194 strong single attractions.

A second explanation maintains that due to

the excessively long period of protection given to chains, double fea­ tures were originated by independents in the subsequent run houses and Q

were used to mitigate this disadvantage.


E. Beach

feels double fea­

tures were the result of the hard competition in overseated areas. 5

Another explanation traces the origin of double bills to block booking. Ricketson insists that overproduction in pictures helped cause the double bills. ^

The reasoning involved in the last two explanations is that

block booking results in the tendency of exhibitors to overbuy, and this proved a powerful incentive to start double feature policies.

At the

end of each season there was an accumulation of a large number of un­ played pictures.

With large contractual obligations for these pictures,

exhibitors used the excessive numbers by using two pictures at a per­ formance, even though they theoretically could show only one.


explanation argues that double features arose due to the many contractual tie-ins of shorts with features.

However, irrespective of which inter­

pretation is correct, double features gradually became accepted by first run houses.

The depression of 1933 required not only price but non-price

incentives to bring people into the higher priced and more expensive first-run houses.

The first-run theaters had offered other attractions

as a feature with a stage show.

But they could not draw patronage based

3 Howard T. Lewis, "The Motion Picture Industry", op. cit., p. 32$. 4 Edward R. Beach, "Double Features in the Motion Picture Industry", Harvard Business Review. Volume 10, Number 4> July 1932, p. $05. 5 Ibid., p. 506. The author had advanced this dual explanation for the rise of double features, and there is a close relation between the two. 6 Frank H. Ricketson, Jr., "The Management Of Motion Picture Theaters", McGraw-Hill Book Company, New York, 1938, p. 83.


upon these merits alone.

As such incentives as stage talent became more

expensive, and as the first runs found it harder to compete with the subsequent-run houses, many of the first-run houses finally adopted the twin bills.

In other cases double features replaced shorts,in the at­

tempt to increase box office receipts. The exhibitor who adopted double features was able to escape a dependence upon the drawing power of a single feature and to initially gain a competitive advantage over a one feature house in the same area. f As well as improving business, two gilms compensated customers for not availing themselves of the opportunity of seeing pictures earlier in the first-runs.

The exhibitor tried to make a two-for-one policy prove

a greater attraction than a new, earlier run picture.

The first theater

in an area to adopt these double features generally received a competi­ tive advantage, and the immediate effects were reflected in an increase in box office returns.' When a theater started ‘doubling1 in an area, the rest of the exhibitors could do one of two things, either reduce prices or increase the amount of the commodity offered.

Most exhibitors

adopted the latter policy and subsequently even the chains and affiliated houses followed the independents in adopting twin bills.

This occurred

despite the resistance of distributors, as evidenced by the use of

8 “certain license agreements preventing the use of double features”.

7 This is a pure qualitative evaluation. There are no statistics on whether box office grosses increased with double bills over single features. Most material available indicates that the popularity of double features at the time was evidenced by an increase in box office receipts of many individual^theaters.

8 William F. Whitman, "Anti-Trust Cases Affecting the Distribution of Motion Pictures", Fordham Law Review. Volume 7* Number 2, May 1938* p. 196.


The growing adoption of twin bills resulted in a change in the charac­ ter of exhibition.

While the double feature enabled theaters to exhibit

a greater variety of pictures appealing to a larger market, it offered few guarantees of smoothing out gross returns.

With quality programs giving

way to quantity programs, competition took the form of offering a longer show as an inducement to buy tickets.

As a result, attendance occurred

less often when two pictures were seen by the patron at the same time. The length of these programs increased from an average of two hours, for a single feature and a short, to three-five hours for a double feature. The expenses of such exhibitors increased as two features increased the program cost, over and above the cost of eliminating short subjects.


hibitors who at first did not adopt the new policy contended that the double feature would be a shot in the arm which would increase business temporarily, but that attendance would then drop back to the single fea­ ture level.

As stated, ’’many theaters throughout the country have been

turned into laboratories to prove or disprove the theories relative to twin bills".


The results of the experiments are known.

At first the

cost of a double program was offset by increased attendance, but as strong and weak pictures were combined exhibitors asked for lower rentals.


as other competitive theaters started doubling, business in the earlier doublers dropped.

Gradually, when all theaters in an area had adopted

double features, business was no greater than it would have been if all the exhibitors had continued to show only one feature. The application of the percentage pricing system to theaters which adopted double features at first constituted a perplexing problem which

9 Chambers, loc. cit., p. 230


was not easy to solve.

"Percentage pricing was quite impracticable,

generally speaking, where double feature programs are p r e s e n t e d . W i t h time distributors were able to adjust their renting rates to accomodate the double bills.

At first, however, inasmuch as doubles were only used

by some theaters, distributors reduced rentals in an attempt to maintain control in double feature territories.

The decrease in rentals per pic­

ture were offset by the added number of play dates accounted for by double features.

Short subject distribution (and production) suffered,

however, when double feature programs created the demand for full length films.

In production, dual billing for a single price put a heavy burden

upon production facilities but, more important, producers were no longer able to realize full worth in the relation of a picture’s production cost to its income. The double feature, it appears, has become a permanent part of the industry.

In a survey conducted in 1947, the MPAA found that 61.3$ of

all theaters have double features, 25.1$ of which have it every day and 36.2$ of which have them part of the time.

36.7$ of all theaters continue

to maintain a permanent single feature policy.^

Opinion polls show that


twin bills are unpopular but box office receipts show that they are good. It should be noted, however, that a true double feature is actually sel­ dom shown.


Rather what is shown is one feature and one filler of equal


Lewis, "The Motion Picture Industry", op. cit., p. 197, This gook was written at about the time double features were being adopted.

11 "International Motion Picture^Almanac", edited by Terry Ramsaye, Quigley Publications, New York, 1948-49, p. XVI.

12 Chambers, loc. cit., p. 234* The attendance at theaters using double features depends as well on the income and living habits in an area as well as on the state of competition in the area. The quality of films does not appear to play too great a part.


length and inferior quality, a film which replaces a few of the short sub­ jects previously shown.

The acceptance of the two for-the-price-of-one

concept makes it difficult for the industry to free itself, although they try to put pressure on many independents who have gone to a further limit of using three-for-one as an attraction.

Even though many first run and

affiliated exhibitors continue to oppose double features, the elimination of double features would make the position of the satellite companies precarious.

The owners of these theaters, as producers, favor doubles,

as double features have increased the dependence of foreign exhibitors upon Hollywood in doubling the number of feature films required.


there is no doubt that the length of a two feature program has reduced audience turnover by limiting the number of tickets which can be sold in a house with a given capacity.

The newspaper Variety in its December 20,

1944 issue notes the current opinion of the industry on double features.

Fox execs (executives) fee1 that some lower-cost pictures should be pro­ duced in order to service double-feature theaters that would otherwise book products from other distribs (distributors). (The) Firm aims to retain as much of the available playing time as possible as a hedge against the time when the market will be prepared to absorb a greater quantity of films.


Chapter XIII The Conflict and Aftemath of Two Wars

It took approximately two years for the government to prepare its anti­ trust suit against the majors.'*'

This enforcement of the anti-trust laws

challenged the fruitions of the existing policies in the industry as well as the old structure of guaranteed markets and trade agreements which for years had cushioned the eight majors against the consequences of their failures.

To this time the industry had not been forced to abandon its

efforts toward plans for self-regulation, as the industry had always preferred to solve its problems through self-regulation rather than litigation.

On July 20, 1936 the government instituted suit in the

Federal Court in New York charging eight major film companies, twentyfour subsidiaries and associated companies, and 133 private individuals with Violation of the anti-trust laws.

Legal apprehension arose in the

industry at the possibility that the majors might jeopardize their posi­ tion in the trust suit by entering into further concerted agreements for the self-regulation of trade practices.

The suit, as filed, was based

upon the technical features of the industry rather than on the factor of censorship.

This was unexpected as virtually all the bills which had


been introduced in Congress

had had as their purpose pre-censorship in

combination with the elimination of block booking and blind selling. The government's petition asked for the divorcement of production from


For a discussion of the legal developments in the fourth decade until this case refer to 52 Harvard Law Review 846 (1939); 23 Minn. Law Re­ view 689 (1939); Louis Nizer, "Recent Developments In the Law of Motion Pcitures", Film Daily Yearbook of Motion Pictures, New York, 1940.

2 See Chapter VIII.


exhibition, the elimination of block booking, the abolition of unfair clearance, the elimination of Hollywood's talent pool, and the squashing of many other producer-distributor trade practices. O

A consent decree


was signed on November 20, 1940.

The decree was

signed by the Department of Justice and five film producers (Loew's, Para­ mount, RKO, Twentieth-Century-Fox, and Warners).

Columbia, Universal and

United Artists did not consent to the decree on the grounds that since they did not own any theaters they could not dominate, control, or restrain trade in the industry.

Under the decree, arbitration assumed an increased

importance when the sales practice clauses of the decree became effective. The American Arbitration Association was chosen to arbitrate any charges of violations of the selling methods outlined in the decree.


proceeded only with the consent of the defendents, but the right to ini­ tiate arbitration was unilaterally restricted to exhibitors.**

The decree

3 A consent decree is the product of negotiations and compromise by con­ testing parties in which the defendent goes along with the government in avoiding the litigation of an anti-trust case. It is a bargain or agree­ ment reached by the government and defendents with the court not always involved. The decree proceeds on the assumption that protection is proper and necessary in an industry. For a discussion of the consent decree and its use in the motion picture industry see William J. Donovan and Breck P. McAllister, "Consent Decrees in the Enforcement of Federal Anti-Trust Laws", Harvard Law Review. Volume XLVI, Number 6, April 1933, pp. 885932. 4 "The Proposed Consent Decree", Public Statement of the Anti-Trust Divi­ sion, United States Department of Justice, tftfnited States Government Printing Office, Washington, D. C., October 29, 1940. The new selling regulations and trade practices had become operative earlier on Septem­ ber 1, 1940. The consent decree was signed and approved on November 20, 1940 by Federal Judge Henry W. Goddard, U.S.D.C., S.D.N.Y. j Ejb No. 87273*» also the "International Motion Picture Almanac", Quigley Publi­ cations, New York, 1941-42, pp. 776 ff. Also Daniel Bertrand, "The Motion Picture Industry -- A Pattern of Control", T.N.E.C., Monograph Number 43* United States Government Printing Office, Washington, D. C., 1941* Appen­ dix 3, pp. 73-35. ^"Arbitration in the Motion Picture Industry", American Arbitration Journal, Volume 5* Number 2, Spring 1941* pp. 178-94. This provides an extensive discussion of the arbitration procedure under the decree.


also aimed to prevent further theater expansion, as well as serve as the basis for the divorcement of producers from theater ownership, A principle provision of the decree was the modification of block booking to the point where the exhibitor could exercise some selective control.

The majors agreed to limit wholesale selling to blocks of five.

The five majors, also, agreed to eliminate blind selling by previewing or trade showing each film before release, in order to give the exhibitor the opportunity of seeing the film he licensed.

When these trade shows

were held and were sparsely attended the big five insisted this supported their contention about exhibitor indifference.

Harrison, who wrote week­

ly reports devoted to the interests of the exhibitor, insisted that the producer-distributors mis-managed these trade screenings.

He noted that

screenings were set up to suit the theater circuits, there were conflicts in trade shows, and exhibitor attendance was discouraged by distributors. The principal provision of the decree, the mandatory selling of films in blocks of five or less with complete advance trade showings, ended September 1, 1942 because the three minor defendents had not been subject to similar restricting conditions.

Other terras of the decree

remained in effect, as arbitration to settle disputes between exhibitors and producers as well as various conditions of sales, although the three year probationary or trial period of the consent decree expired on Novem­ ber 20, 1943.^ tract.

Negotiations were undertaken for the making of a new con­

In August 1944 the government filed an application for a modi­

fication of the decree to require the five major theater owners to dis­ pose of such theaters as might be necessary to restore competition in the then existing exhibition monopoly.

The government charged, also, that

^Further details of the competitive bidding system established under the decree are available in 70 F. Suppl. 53» 73-4.


the continuation of clearance practices was in violation of the anti-trust acts. n

The trial of the case took place in October 1945.

January 1946

the Federal Statutory Court of New York reserved decision on those phases of the anti-trust suit which sought to divorce production-distribution from theater ownership as well as from using the system of block booking of films.

The court, also, extended until further notice the consent

decree entered into in 1940 for the arbitration of grievances in the in­ dustry.

4 final decree in the government's nine year old anti-trust suit

was handed down on December 31, 1946 by a Special Federal Court in New York.

The court ruled that any producer-distributor interest in a theater

which was less than 95$ owned by him must either be sold or purchased up to 95$ ownership, subject to the court's approval.

The court's decree

also enjoined the producer-distributors from many trade practices.


fixing of minimum admission prices in licenses with exhibitors was pro­ hibited.

Agreements between distributors on uniform clearance schedules

were illegalized.

Formula deals, master agreements, and blanket agree­

ments were forbidden.

Block booking was limited to the extent of allow­

ing a twenty percent cancellation right to exhibitors.

Other trade

practices of a less important nature were involved. Judgment was stayed for sixty days with thirty days extension for appeal to be made (with some exceptions) by either side to the Supreme Court. Both sides promptly appealed, and in April 1947 Justice Reed of the Supreme Court granted a stay which holds until final decision by the Supreme Court. The stay applies to those parts of the decree dealing with minimum price fixing, 'clearance systems', competitive bidding, 7 United States vs. Paramount Pictures, U.S. D. C.S.D. N.Y., 66F. Supp. 323, (1946); 70F Supp. 53 (1947).


block booking, and the arbitration system. Theater operations must free themselves of franchise agreements and pools. With the exception of this, the upholding of the freeze on theater-holding expansion, and the partial divorcement deadline of two years, the stay had the effect of reverting the situation to the status quo ante. Until the Supreme Court speaks again, the monopoly picture of the industry as sketched out above, with minor exceptions as noted, still holds.®

The government expressed its intent to appeal the decision on theater divorcement to the Supreme Court.

In appealing the case monopoly

in production was eliminated as an issue.

The chief argument at the bar

was phrased in terns of monopolization of exhibition, restraints on exhi­ bition, and the like.

"The issue is even narrower ... that of the first

9 run theater."

The court's decision was restricted to this appeal.


court reversed the decision of the lower court and ordered the divesti­ ture of exhibitor properties from the producer-di3tributor corporate body. ^

The opinion of the court was directly based on an analysis of

affiliated theaters (Table XIII-l).

These theaters were mainly located

in 922 towns in the forty-eight states and the District of Columbia,

8 Robert A. Brady, "The Problem of Monopoly", In the Annals of the American Academy of Political and Social Science. "The Motion Picture Industry", edited by Gordon S. Watkins, Volume 254, Philadelphia, November 1947, p. 135* Thi3 article is virtually the clearest statement on combination within the industry. See pp. 125-36. 9 334 U. S. 131, 166.

10 United States vs. Paramount Pictures, Igc., et al, 334 U.S. 131 (May 17, 1948). Number 79 on appeal from the District Court of the United States for the Southern District of New York together with Number 80, Loews, In­ corporated et al vs. United States; Number 81, Paramount Pictures Incor­ porated et al vs. United States; Number 82, Columbia Pictures Corporation et al vs. United States; Number 83, United ijfa'tasSi Corporation vs. United States; Number 84, Universal Picture Company et al vs. United States; Number 85, American Theater Association, Incorporated et al vs. United States et al; Number 86, Allred et al vs. United States, also on appeal from the same court.



Table X III- 1 Affiliated Theaters* In the United States 1945 Number of Theaters

Company Paramount Warner Brothers Loews Twentieth Century Fox RKO Joint ownership by two or more companies Total theaters owned by majors Total theaters in the United States


Percentage Distribution







.7 3.5









334 U.S. 131, 167.

These exclude connections through film buying or management control in which the defendents owned an indirect minority stock interest.

and they returned 45$ of domestic film rentals to the defendents who owned them.

Referring to first runs the Court noted that in 92 cities

with populations over 100,000, 70$ of the first run theaters were affili 1943 which originally had permitted withdrawals by Americans of 50$ of their earnings.

With a re­

lease of all accumulated balances and the unfreezing of funds in 1943* during the remaining war years profits were withdrawn freely. With world markets reopening after the war a distribution agreement was signed in 1946 with Great Britain for the exchange of British and American films.


An Anglo-American treaty was also signed in order to

18 Standard Statistics Company, "Standard Trade and Securities", Volume 95* Number 8, Section 2, January 26, 1940, p. 1. 17 Actually the British were very generous with Americans and the agreement was far from being arbitrary. In Britain from 1939 on there had been & g k e d decline in the volume of British feature film production, though not of necessity in the amount of capital invested. Many studios were requisi­ tioned for government production and only seven large and a few minor studios out of a total of twenty-two studios were in regular use. There was a high excise tax on imported film stock and film stock was allocated film by film Tinder a Board of Trade license. Nontheatrical producers and renters had a general percentage allocation based on pre-war use but American distributors in Britain found it hard to acquire the footage of British films specified in the Films Act. With a labor shortage and the rationing of clothes and other necessities of life, the shortage of ex­ change to pay for American films was just another problem. 18 In the same year a comparable film agreement was signed with France.


eliminate the double taxation which affected the British.

Before the

war, the United States government had imposed a 30# tax on gross recei[ts from all foreign films, meaning small net profits for Britishers.


British government's tax on American films was much less, since an allow­ ance was made to cover both original production costs and distribution expenses in Britain.

The British government had allowed American com­

panies to deduct a substantial percentage (about 70#) from their takings as representing the cost of the film, and the balance was taxed after due allowance for other expenses incurred in Britain,

The United States

Treasury allowed any taxes paid in the United Kingdom to be deducted from the American film company's tax liabilities in the United States of Ameri­ ca.

"British companies are taxed on all gross revenue and subject to a

30# withholding tax, with no allowance made for expenses incurred (by Britishers in the United States).

Therefore, Britishers often sell films

19 outright for the sum of the cost."

The good will created by these two

agreements was dissipated, in. part, when in 1947 the British government increased the quota of British films to be produced to 45#*

A year later

this was decreased-to 40# in order to save American dollars and because Britishers were :not making enough feature productions to fill the quota. The ire of Americans was further aroused when in August 1947> the British government imposed a 75# ad volorem tax on all films imported.

A short

time later a four year agreement was made between the British government and representatives of the American film interests, effective June 14, 1946 and renewable in two years.

Under this convenant Britain promised

19 "Tendencies to Monopoly in the Cinematograph Film Industiy", Board of Trade, Report of a Committee Appointed by the Cinematograph Films Council, H. M. Stationery Office, London, 1944* p. 31.

210 to eliminate the new tax as quickly as possible.

American companies

agreed not to convert more than seventeen million dollars of sterling profits owned annually into dollars, plus a sum of profits equal to the "Britxsn "profits in America. w

The domestic condition of the industry was far more favorable during the war years than was the foreign condition.

A major problem which

faced producers was the shortage of raw film stock.

An initial reduc­

tion in film consumption, effective September 1942, was easily offset through the adoption of conservation measures along with an increased emphasis on quality rather than quantity and the hoarding of films.


was possible as there was self-regulating in the consumption of raw film stock. 1943.

An overall 25# limitation order went into effect on January 1, A large backlog of films had been built up in anticipation of this

cut for, despite the raw film stock rationing, the majors had hoarded on their shelves more than a hundred feature films.

For those films which

continued to be made there was a shift of emphasis in the type of films produced due, in part, to the scarcity of male stars.

Film emphasis was

changed from names to stories, plots were built about female stars or older men, new talent was built up, and a pooling arrangement on talent was made between studios.

One effect of

the amortization charges on films became eliminated from inventories.

this new type of film was that lower as


costfilms were

The unit amortization burden was further

20 . In the same year, 1948, a similar agreement was signed with Franck which remitted a portion of the blocked funds plus a certain amount of current earnings until 1952. See "Motion Pictures", Standard and Poor's Indus­ try Survey, Basic Analysis, Standard and Poors Corporation, New York, MB- • B, Section 3, August 18, 1948, pp. M8-1, 2.


reduced when the industry adopted an extended run (or extended playing time) for its better films.

The holdover policy adopted in key houses

and the reissues used because of the film shortage, also made it possible for the industry to build up a backlog of pictures. The higher costs of production, rising labor costs, and mounting taxes were offset in large part by the higher prices.

The customary

recreational activities and other forms of diversion were restricted or reduced during the war.

The merchandize shortages and the steady con­

traction of spending outlets released a larger proportion of the average family budget for entertainment.

Despite the increase in purchasing

power, the fuel-oil shortages exerted a somewhat depressing influence in some sections of the country during the winter.

The gas restrictions hurt

attendance in those rural districts lacking adequate transportation faci­ lities.

In any case, integrated companies were more favorably situated

than those engaged solely in production.

The year to year gain in box

office receipts reflected advanced admission prices due, in part, to new taxes.


Since admission prices were not subject to the general price

freezing order, the higher box office prices were in line with the general inflationary movement of prices. Due to geographic, political, and economic reasons there was an ex­ pansion in Latin and South American business during the war.


This income

Since the federal tax on admissions was broadened in June 1940 to cover all admission charges over 20 cents instead of the previous 40 cents, the trend of admission tax collections is a more accurate guide to theater attendance. In September 1941 the tax exemption on tickets was lowered further from 20 cents to 9 cents. Further Increased federal taxes on admissions went into effect April 1, 1944 resulting in an additional ad­ vance in ticket prices. Tax increases also effect rentals. Despite the fact that rental increases lag behind the increases in taxes, every in­ crease of 15% in taxes affecting prices is accompanied by an estimated 10% increase in film rentals.


was free from the excess profits taxes.

The tax laws exempted those

American companies from excess profits if 95$ of their income was de­ rived from outside the United States but within the Western Hemisphere. This exemption resulted in a substantial reduction in the tax burden when American firms established subsidiaries abroad.

This fiscal tech­

nique of treating earnings kept the excess profits at a minimum.


favorable tax factor, as well as the law itself, was eliminated exoocre ppofito-teoe- in 1946.

Profits made during the war, however, made it

possible to simplify the unwieldy capital structures in the industry as well as strengthen working capital.

"Senior obligations of seven

majors which formerly represented 51$ of average invested capital have


been cut down to about 24$.11

Aided by the elimination of the excess

profits tax, profits in 1946 reached an all time high of $120,000,000 during the year.

This was ihjpart used to further build up working

capital, reduce the heavy burden of debt, including preferred stock and other fixed charges, and make them invested capital.

a smaller percentage of the total

The prospects for profits did not remain as high

throughout the following year.

One factor responsible for the change

was the House Un-American Activities Committee investigation of commu­ nism in Hollywood in November 1947. Will Hays as head of the HPAA, nists hiring policy.


Eric Johnson, the replacement for

anounced the edict of an anti-comu-

Ellis Amall, president of the Society of Inde­

pendent Motion Picture Producers, publicly repudiated the Johnson edict in order to prevent boycotts and evade the suits filed by those black­ listed by the edict, eventually mounting to sixty-seven million dollars.


Standard and Poors, loc. cit., June 7, 1946, p. 56. Also refer to Standard and Poors, JU>c. cit., August 18, 1946, p. M8-5.

^Formerly the MPPDA.


The year 1948 became the most crucial for the industry in more than a decade.

Ten years after the Department of Justice filed its pre­

cedent-making anti-trust suit against the industry, it appeared that the industry was preparing to fight for sheer economic survival.

The drastic

drop in attendance in this year24 was attributed to the increase in autos, sporting events, the availability of formerly missing consumer goods, the general run of films, the drop in foreign income, the high level of ad­ mission prices'^ and the Supreme Court decision, amongst others.

Late in

October of the year three studios in Hollywood completely stopped production.


The Division of Labor Statistics and Research of the California

Department of Industrial Relations reported the average number employed in production during 1948 was 14,700 compared to 22,100 in the peak year of 1946 and 18,900 in the base year 1940.

Despite the fact that employ­

ment was 78$ of 1940, payrolls were 180$ of payrolls in 1940. Many companies tried to control the shooting time of films in order to save labor costs.

In an attempt to avoid these high labor costs as

well as to circumvent the foreign restrictions which came with the world dollar shortage and the trickling remittances of earnings to American firms, many majors started to produce films in those countries which had blocked their funds.

The A.F. of L. Council became so upset at this

24 Even though attendance dropped Eric Johnson head of the MPAA reported that film rentals were only 8 l/2$ below 1946. New York Times. February 13, 1949. 25 Dr. A m o Johnson, Chief of the J. Walter Thompson Research and Statis­ tical Branch, in a survey made for the industry, reported to it that the desire to attend theaters rather than the ability to pay is the governing factor in ticket sales. New York Times. Februaiy 23, 1949.

26 There was a greater than normal seasonal decline in employment before March 1, but this was originally attributed to the California March 1 taxation date on master negatives, under which studios pay a 5$ tax on all negatives remaining within the state.


new policy that it went to the extreme of advocating an import ban on the production projects which had been transferred to Europe in order to use impounded currency credits, because of the adverse effect on American employment.^7

The industry replied that its high cost inven­

tories had to be amortized in a period of reduced foreign income and declining domestic attendance.

To justify this contention the indus­

try pointed out that total foreign revenues in 1946 were $138 million (seventy million from Great Britain) and in 1948 they were $80 million (twenty milLion from 3ritain), a decline of k3%>

Where the amortiza­

tion rates continued inadequate the industry wrote off against its 1948 income the cost of its abandoned productions, its excess story costs, po

and other excessive inventory values. Nineteen hundred and forty-eight also will be considered the year in which television finally came into its own.

With the annual rate of

sets produced in 1946 a few thousands, and tens of thousands in 1947, there was a jump to over a million in 1948.

By the middle of 1948 it

was estimated that there were 350,000 television receivers, threequarters in the East, one half of which were in New York C i t y . W i t h the increased construction of net work facilities made possible by li­ censes granted by the F.C.C., the number of video stations increased greatly.

A greater increase in televised sponsorship resulted in better

and more varied programs and telecasting programs were scheduled to in-

27 New York Times. February 15, 1949* 28 For the condition of individual companies in 1948 see Moody1s Stock Survey. Volume 40, Number 29, 1948, pp. 138, 144, 145-7. 29 Standard and Poors, loc. cit., August 18, 1948, p. M8-2.



Throughout most most of the year television was located pri­

marily in the New York Metropolitan Area.

On January 11, 1949 at a cost

of construction of $12,500,000 the Bell System of the American Telephone and Telegraph Company opened its coaxial cable linking the Eastern and Midwestern networks.

These networks could now service one-quarter of

the nation’s population. This new industry started to shake up old businesses.


these were the motion picture producers who tended to respond in a variety of ways.


A few film producers signed contracts with televi­

sion producers for specially made films, as the programming of televised movies was expected to increase.

Video programs using films instead of

live actors are expected to have the advantage of greater smoothness as well as being enhanced by the adding of atmosphere and background.


companies equipped theaters with television sets to compete with house­ hold sets and telecast important sports and news events to these theaters. Other producers were dealing for the construction or purchase of stations. Paramount Pictures was particularly fortunate in this respect for they owned two stations, one in Chicago and the other in Los Angeles. also owned a percentage of three Dumont run stations in the East.

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On Cn- CMnO C 1931* PP* 250-54 Spearman, Walter. "The Film Yesterday, Today, & Tomorrow", The University of North Carolina Library Extension Publication, Vol. VII, No. 3, University of North Carolina Press, Chapel Hill, Apr. 1941 Society of Motion Picture Engineers, Transactions Standard and Poor's "The Motion Picture Industry", Industry and Basic Sur­ veys, 1940 to date Standard Statistics Company, "Standard Trade and Securities Service", In­ dustry and Basic Surveys, 1929-1940 "Status of the Standard Form Contract in the Motion Picture Industry", Yale Law Journal. Vol. XLII, No. 3, January 1933* PP* 431-34* Strauss, William V. "Foreign Distribution of American Motion Pictures", Harvard Business Review. Vol. 8, No. 3, April 1930, pp. 307-15* Swensen, Joel. "The Entrepreneur1s Role in Introducing the Sound Motion Picture", Political Science Quarterly, Vol. 63, No. 3* September 1948, pp. 404-23.

"The Technique of Motion Picture Production" A symposium of Papers Pre­ sented at the 51st Semi-Annual Convention of the Society of Motion Picture Engineers at Hollywood, California, Published for The Society of Motion Picture Engineers by Interscience Publishers, New York, 1944 "Tendencies to Monopoly in the Cinematograph Film Industry", Report of a Committee Appointed by the Cinematograph Films Council, Board of Trade, H.M.S.O., London, 1944 Theater Arts Thorp, Margaret Farrand. "America at the Movies", Yale University Press, New Haven, 1939


Thrasher, Frederic. 1946

"Okay for Sound", Duell, Sloan, and Pearce, Mew York,

U.S. Department of Commerce, Bureau of Foreign and Domestic Commerce 1) "Motion Pictures Abroad", Motion Picture Unit, Vol. 1, No. 1 (December 19, 1938 to March 15, 1940) 2) "Motion Pictures and Equipment", Motion Picture Unit, Part 3 of Industrial Reference Service, issued regularly, annually 3) "Trade Information Bulletins", as follows: Way, E.I. "Markets for Industrial and Educational Motion Pictures Abroad", No. 520, Dec. 1927 Golden, N.D. "Short Subject Film Markets of Europe", No. 522, December 1927 Canty, George R. "The European Motion Picture Industry in 1927", No. 542, Apr. 1928 Golden, N.D. "Short Subject Film Markets in Latin America, Cana­ da, The Far East, Africa, and The Near East", No. 544, Apr.

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U.S. Senate (concl.) 6) Hearings before a Subcommittee of the Committee on Inter­ state Commerce, 77th Congress, 1st Session, on S. Res. 152, A Resolution Authorizing an Investigation of War Propaganda Dis­ seminated by The Motion Picture Industry and of any Monopoly in the Production, Distribution, or Exhibition of Motion Pictures, Hearings Held September 9-26, 1941, U.S.G.P.0, Washington, D.C., 1942

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"The Film Game", T. Werner Laurie Ltd., London, 1937

Werne, Benjamin. "Pending Legislation Series: The Neely Anti-Block Book­ ing and Blind Selling Bill — An Analysis", Contemporary Law Pamphlets, Series 6, No. 1, New York University School of Law, Washington Square, New York, 1940 "Whatever Happened to Hollywood", New Republic. January 31, 1949 Whitman, William F. "Anti-Trust Cases Affecting the Distribution of Mo­ tion Pictures", Fordham Law Review. Vol. 7, No. 2, May 1938, pp. 189-202 Wooldridge, A.L. "Unit£ Production Offers Haven for Unemployed Cinema Stars", New York Herald Tribune, February 19, 1933

Zukor, Adolph. "What The Movies Have Taught Me about Business", The Mag­ azine of Business, April 1928, pp. 427-29, 472, 474, 477-8, 480, 482.