Hollywood Shows How Antitrust Laws Can Flop

Bloomberg Opinion , December 05, 2019

In 1939, about 80 million Americans — more than 60 percent of the population — bought movie tickets every week. To meet the demand for fresh entertainment, Hollywood studios released new movies at the rate of one a day, 365 in all.

The year’s motion pictures counted so many classics — including “The Wizard of Oz,” “Dark Victory,” “Goodbye, Mr. Chips,” “Stagecoach,” “Ninotchka,” “Mr. Smith Goes to Washington” and, of course, “Gone with the Wind” — that 1939 is often called Hollywood’s greatest year.

A decade later the studio system that produced these touchstones and made movie-going an everyday pastime was largely gone — destroyed by a combination of antitrust action and marginal tax rates that reached 90 percent for the industry’s well-paid salaried employees.

In its place, Hollywood adopted an early form of the gig economy, with project-based contracts and profit participation, taxed at lower capital gains rates, instead of steady employment.

A winner-take-all system of star talent and blockbuster bets replaced the diverse ecology of working actors, staff writers, B-movies and cheap tickets at second- and third-run theaters. Film rental and ticket prices rose, the number of films produced fell, and, by 1950, the number of actors and directors under contract had plummeted to a third of what it was at its height. (Unions offered benefits and some protections, but in 2018, to take one example, only 6,057 of the 20,000 members of the Writers Guild of America West earned any income.)

Today, as a resurgent left, sometimes joined by the populist right, demands a return to punitive taxes and blunderbuss enforcement of U.S. antitrust laws, the Hollywood experience offers a timely reminder of how economic crusaders can destroy what they don’t understand. By hampering creativity and increasing risk, ill-informed antitrust action can ultimately harm the consumers it is supposed to protect.

Last month, the Justice Department filed a motion to drop the Paramount consent decrees that have governed most of the movie industry for more than 70 years. The rules have prevented studios from owning theater chains and imposing film rental terms that antitrust enforcers deemed anti-competitive. (Disney, which was not involved in the original case, is exempt.)

Times have changed, Assistant Attorney General Makan Delrahim said in a speech to the American Bar Association. We no longer have to worry about practices such as “block booking,” in which a studio bundles its releases to a given theater.

“Today, not only do our metropolitan areas have many multiplex cinemas showing films from different distributors, but much of our movie-watching is not in theaters at all,” said Delrahim, who oversees the Justice Department’s antitrust division. These days, .

Delrahim only hinted that the antitrust cases might have been misguided even in their own day.

“It is important,” he said, “for antitrust enforcers to recognize the risks of misapplying antitrust law in creative fields that experience significant change.” He was talking about today’s tech companies, but he could have been referring to movies on the cusp of the television era, when a landmark Supreme Court ruling forced movie studios to divest themselves of their theater chains.

The vertical integration and licensing contracts that regulators interpreted as monopolistic actually dated back to the wildly competitive early days of feature films in the 1910s, when producers evolved effective ways to deal with risks and uncertainties specific to their business.

Each movie is a unique product requiring a large upfront investment. Nobody knows whether it will succeed until people see it, and even popular films can take time to build an audience. All these factors led studios to emphasize long-term relationships and multiple-film licensing deals with “greater flexibility than the short-term, one-picture, one-theater contacts that the courts prescribed in the decrees,” write economists Arthur De Vany and Ross D. Eckert in a 1991 article in Research in Law and Economics.

Take the studios’ use of block booking. Los Angeles Times reporters Ryan Faughnder and Anousha Sakoui recently described it as “essentially telling cinemas they had to take the studios’ likely flops if they wanted the hits.”

This common characterization misses the point. Before movies hit the screen, no one knows which ones audiences will embrace. Producers surely had high hopes for “Charlie’s Angels” and “Terminator: Dark Fate,” to take a couple of recent disappointments, while “Joker” surpassed expectations.

Rather than a nefarious plot to foist lousy flicks on unwilling exhibitors, block booking permitted cinemas to buy in bulk. The practice evolved in the 1910s as a way to keep theaters supplied with enough movies to change their offerings as often as twice a week. As more costly talkies emerged in the 1920s, contracts shifted from straight rentals to revenue-sharing deals.

Regardless of the structure, “block booking was simply intended to cheaply provide in quantity a product needed in quantity,” writes economist F. Andrew Hanssen in a 2000 article in the Journal of Law and Economics. Cinema owners didn’t want to run around shopping for movies to show.

They said as much at the time. ‘‘The exhibitor is in the position of buying a sufficient quantity of quality product for his theater to insure a continuous supply of merchantable pictures,” declared the exhibitors’ trade association in 1938. “To quit block booking would be to greatly increase the price of pictures.’’

Besides, duds don’t seem to have posed a major problem. Examining contracts between Warner Bros. and independent cinemas in the Long Island area, Hanssen found that theater owners canceled fewer movies than their contracts allowed and ran them for longer than the minimums required — not the choices that dissatisfied customers would make.

Block booking was also one of several ways studios avoided the biggest potential risk for a movie producer: having no place to show a film. Studio-owned theaters were another way to reduce this risk. Most were ordinary theaters that showed movies from a variety of studios.

In a 2010 article in the Journal of Law and Economics, Hanssen analyzed booking sheets from Wisconsin cinemas owned by Warner Bros., a rare source of information on both how long a film was supposed to play and how long it actually did play. He compared these records with the film runs advertised for independent cinemas in the New York Times, using Sunday ads for the projected runs and tracking actual runs in the daily paper.

He found that the studio-owned theaters were more likely than independent cinemas to drop films before their minimum runs were over, usually substituting a movie from a different vertically integrated studio for the original. The evidence suggests, he says, that the antitrust case’s Big Five studios were in fact colluding — but not in the way regulators feared.

“The cooperation allowed film companies to better match films to audiences so that consumers could see more of the movies they valued most,” Hanssen writes.

Antitrust enforcers hated the way studios rolled out their movies, with first runs reserved for the best theaters, followed by second-, third-, fourth- and even fifth-run venues, with rental prices getting cheaper as time went on. Nearly three-quarters of first-run theaters were owned by the studios — a statistic the Supreme Court cited as damning in its 1948 ruling in favor of the antitrust action.

With the consent decrees in place, thousands of theaters upgraded to first-run showings, the number of discount cinemas fell, and simultaneous releases replaced gradual rollouts. The new pattern gave each new film less time to find an audience.

“Earnings per screen in a first-run booking decline faster and generally are lower under a wide-release pattern, so more widely shown films have shorter runs,” observe De Vany and Eckert. One result was a decrease in the variety of films, with an increasing emphasis on big-budget pictures. Another was stricter enforcement of minimum run requirements, even for obvious flops.

“It is argued that the steps we have proposed would involve an interference with commercial practices that are generally acceptable and a hazardous attempt on the part of judges unfamiliar with the details of business to remodel its delicate adjustments which have hitherto provided the public with what is a new and great art,” wrote the U.S. District Court in its Paramount decision, which was affirmed by the Supreme Court. “But we see nothing ruinous in the remedies proposed.”

Hollywood did indeed survive. But neither theater owners nor studios nor the moviegoers were well served by the results. “Nothing ruinous” is an awfully low standard.