How Hollywood Studios Have Kept Once Step Ahead of Regulators – The Hollywood Reporter

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The rumors, news and inside gossip that herald mega media deals of Discovery Inc. and Warner-Media, and Amazon and MGM, repeat a familiar tale of consolidation and control among the apex predators of the entertainment business. The idea has been to staple together the flow charts of production, distribution and exhibition (vertical integration) while extending sovereignty length-wise across kindred media, now known as platforms (horizontal integration). Why fight tooth and claw on a level playing field when you can corner the market? The trick is to rake in the winnings without running up against the Sherman Anti-Trust Act of 1890, or at least federal attorneys willing to enforce it.

Yet the seizure of the means of production — not in the Bolshevik but in the Robber Baron sense — has been the default mode for motion picture makers since the birth of the medium. Although federal regulators are now eying what would be named Warner Bros. Discovery, as well as mergers between major agencies like CAA and ICM, the feds have been traditionally a step slow in keeping up with Hollywood moguls’ aspirations to dominate the marketplace.

The first big power grab came close to year zero, when Thomas Edison, the wizard of Menlo Park and a genius at credit-hogging, claimed a patent on perforated celluloid and a lot else, effectively acquiring a legal monopoly over the entire art. Deploying high-powered copyright lawyers, who showed up at production companies with cease-and-desist orders, and broad-shouldered thugs who showed up on locations with baseball bats, the Edison Trust held a vise grip over motion picture production. (One of the reasons the filmmakers of the nickelodeon era lit out for Hollywood, besides the weather, was to put some distance between themselves and Edison’s army). Carl Laemmle, then a scrappy independent and soon to be the founder of Universal Pictures, fought Edison in court and in 1912 won the case. “That a monopoly [over motion picture production] does not in effect exist is due chiefly to Mr. Laemmle and to the brilliant, resolute fight he has made against heavy odds,” commented Billboard in 1915.

Not too long after the plaintiffs defeated the Edison Trust, they formed a group of their own in 1922, the Motion Picture Producers and Distributors of America, the lineal ancestor of today’s Motion Picture Association. The immediate inspiration for the organization was a series of lethal drug and sex scandals that cast Hollywood as the Sodom on the Pacific in the eyes of Christian America, but it soon evolved into an exclusive club to crush competition from non-member riffraff. Especially after 1927, when sound technology required an industrial-strength shop floor, the MPPDA facilitated the economic structure that defined the classical Hollywood studio system, where the same studio entity owned the backlot, controlled the supply chain, and mounted the screenings.

In a closed, circular system, profits from the exhibition end flowed back to the production centers which in turn financed more films for the theaters. The happy arrangement allowed the studios to maintain elaborate soundstages and meet huge weekly payrolls. For the studios atop the pyramid — dubbed the Big 5 (Warner Bros., RKO, Paramount, MGM, and 20th Century-Fox) and the Little Three (Columbia, United Artists, and Universal) — the model assured a standard of assembly-line quality that producers outside the golden circle found impossible to match. By 1946, with all the pistons firing in sequence, the dream factory was riding high, with 90 million or more Americans per week flocking to the movies at ornate motion picture palaces or cozy neighborhood venues (“nabes” in trade lingo). The vaunted “genius of the system” was also an ingenious oligopoly.

Then, le deluge — television, a specter haunting Hollywood since at least 1927 when the first video pictures were transmitted onto a small screen (among the first images, symbolically enough, was a dollar sign), was siphoning away audiences. In October 1947, the House Committee on Un-American Activities launched its first round of hearings into alleged communist activity in Hollywood, leading to a blacklist that strangled careers and creativity.

However, the real body blow came in 1948 and struck at the economic heart of the industry. The effort went back to 1938, when the anti-trust division of FDR’s Justice Department charged that the major studios had engaged in both a “horizontal conspiracy” with each other and a “vertical conspiracy” with distributors and exhibitors to kill competition from independent producers. To the feds, it was a textbook example of a monopoly operating in restraint of trade. (Jack and Harry Warner, ardent supporters of FDR’s New Deal, at least for other people, felt personally betrayed by the prosecution.) Of course, the government’s charges were self-evidently true. (In 1945, belatedly realizing they had admitted as much with the very name of the Motion Picture Producers and Distributors, the studios hastily changed the name of the group to the Motion Picture Association of America.)

Robert L. Wright, the tenacious anti-trust lawyer who spearheaded the case for the DOJ, said the purpose of the lawsuit was to assure a level playing field, where the success of a studio would depend “upon the merits of its product” rather than “because it holds a monopoly.” Paramount, the most prominent target in the crosshairs, ultimately settled out of court with the DOJ — hence “the Paramount Decree,” the name that stuck for the historic divorcement of exhibition from Hollywood production. Facing years of costly litigation, the other studios soon threw in the towel. The details of the settlement, worked out in 1948-1949, took years to fully implement, but the jig was up, the racket was busted.

Needless to say, Hollywood’s lawyers and accountants, usually considered the most creative people in the business, found new and original ways to violate the spirit of the Paramount Decree. The obvious frontier was television, which the more far-sighted executives saw less as a rival than a savior. The liaison with broadcasting had actually been initiated years earlier with television’s immediate predecessor. The weak sister among the Big Five, RKO (Radio-Keith-Orpheum), grew out of a hybrid of three entertainment tributaries: vaudeville theaters (the Keith-Albee-Orpheum circuit), the Radio Corporation of America, and Joseph P. Kennedy’s Film Booking Office.

The inaugural postwar gambit occurred in 1951, when the American Broadcasting Company, then a distant third in the emergent television trinity, and United Paramount Theaters, Inc., only recently divorced from the parent company, announced plans for a merger. The deal required the approval of the Federal Communications Commission, which held hearings to mull the propriety an arrangement that seemed to be at odds with what had been decreed in 1948. These FCC hearings were far more important to the executive ranks in the industry than the other sets of hearings still being conducted by HUAC.

Opponents to the merger, which included the FCC’s own advisory Broadcast Bureau, argued that permission should be denied “because of the basic conflict of interest between radio-TV and movie exhibition” and approval would mean that “the entire anti-trust policy would be junked.”  The fear, a prophetic one as it turned out, was that the merger would ultimately result in “the eventual complete unification of the motion picture industry … with the television-radio industry.” ABC argued the infusion of cash from the theater chain would “enable us to serve the public better.”

On February 9, 1953, the FCC formally approved the merger and thereby “set a precedent removing bars from participation in television previously thought to exist against film companies which have been involved in anti-trust action.” That is, having just forbidden a monopoly, the government seemed to be giving a green light to a duopoly.

No one navigated the new media environment of the postwar era better than Walt Disney. (It may not be coincidental that his institutional legacy has prospered so spectacularly in the new media environment of the current era.) Disney had kept out of the theater ownership game and instead branched out horizontally, first into merchandising, then into television and theme parks. Debuting in 1954, ABC-TV’s prime time Disneyland and, in 1955, the Monday through Friday pre-teen ritual The Mickey Mouse Club served as small screen billboards for his big screen releases and the real-world magic kingdom in Anaheim. On July 17, 1955, Disney achieved peak synergy with the live telecast of Dateline Disneyland to commemorate the formal dedication of the title real estate. “An unbeatable ‘teaser’ to whet the appetites of millions for a personal visit to the source of the telecast,” enthused The Hollywood Reporter, impressed that the American Motor Company and Gibson Greeting Cards would bankroll a 90-minute commercial for another commercial entity.

In the decades since the big break up of 1948, the tango of cross-pollination and centralization across the entertainment food chain has often been too serpentine even for the Department of Justice to untangle, which may be why, more often than not, and despite the ebb and flow of laissez-faire Republican and (nominally) more interventionist Democrats, the DOJ has been mainly hands off. One notable non-economic exception: in 1972, Richard Nixon hit man Patrick Buchanan threatened the news divisions of the television networks with anti-trust action if they didn’t give more time to conservative viewpoints.

The coda to the most transformative of all government interventions into Hollywood’s business model is at once ironic and instructive.  In 2020, at the DOJ’s own request, the Paramount Decree was overturned, its rationale rendered moot in the age of streaming. “As the Court points out, Gone With the Wind, The Wizard of Oz, and It’s a Wonderful Life were the blockbusters when these Decrees were litigated,” declared Assistant Attorney General Makan Delrahim in a DOJ press release, overstating the profit margin of the last of the trio. “Without these restraints on the market, American ingenuity is again free to experiment with different business models that can benefit consumers.”

After all, the benefit of consumers is always paramount in such matters.    



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