The vertical challenge…

The decades-old Paramount Decrees in the US restricted the dominant vertical integration of Studio and Exhibitors, banning practices such as block-booking of content. Now the US Department of Justice will soon repeal them. David Hancock considers the implications for exhibitors worldwide — not only in the Domestic market.


WHILE POWELL AND PRESSBURGER’S film “The Red Shoes” was beating George Sidney’s “The Three Musketeers” into top spot at the US box office, and Laurence Olivier’s “Hamlet” was taking both Best Film and Best Actor at the Oscars, 1948 also saw the end to a highly significant anti-trust case that had been rumbling on for most of the previous decade. The case, dubbed The Paramount Decrees, was an amalgamation of two broad strands of dispute: first, the vertical integration of studios from production through to screening the films and, second, the business practices of block-booking films and making circuit-wide deals.

By 1945, studios owned 17% of cinemas in the country, but a telling 45% of film revenue. The case began in 1938 as the US Department of Justice (DoJ) sued the major film studios of the time. The list of defendants is surprisingly well-known to us these days: Paramount, MGM, Warner Bros, 20th Century Fox, RKO Pictures, Universal Pictures, Columbia Pictures, United Artists. Looking from today’s perspective, a notable absentee from this particular list is Walt Disney, which agreed to abide by the ruling (as did others) but wasn’t specifically mentioned in it.
The case itself was won in 1940 but non-compliance by the studios, who formulated a Unity Plan to circumvent the effects, led to a renewed attack. The DoJ won this case in 1945 and an appeal was finally heard in 1948. This appeal led to the overall ruling that the industry now knows as the Paramount Decrees. The ruling coincided with the advent of mass market TV in the USA, with both seeming to take their toll on the movie business. From more than 4bn admissions in the 1930s and most of the 1940s, annual admissions dropped below 2bn in 1957 and below 1bn by 1969. The same impact was felt on the screen base, as cinema withered. From a peak of 20,000 in 1944, the screen base fell back to 13,000 by 1967.

Back to the future…
Fast forward 71 years, and somewhat surprisingly, the Paramount Decrees are back. Except they aren’t; they are being removed from the law books and the conditions imposed on the defendants are being removed. The timing isn’t prompted by any particular hostility to the cinema industry, but is part of a wider removal of around 1,300 legacy decrees that the DoJ considers to be no longer relevant.

The DoJ is terminating the decrees as they feel they have served their original purpose and are no longer in the public interest. There will be a two-year sunset period on the bans on block-booking and circuit dealing to assess the impact on the business. The DoJ considers that the integration that made the decrees necessary are no longer in place, and today’s distributors are not in a position to bring them back, even if it made economic sense. In addition — and significantly — the general advances in anti-trust law will also cover some of the potential negative impacts that the decrees were designed to prevent.

When the subject was first mooted last summer, the exhibitor association NATO commented on the harmful effects of block-booking, which fall within the two-year sunset period. The market has two years to work out a viable position. More recently, the Directors Guild of America, called the changes ‘a step in the wrong direction’ and believes more market scrutiny is needed, not less.

It is true that the market for movies today is vastly different from that in place during and before 1940. The after-market for films is bigger than the box office itself, and the US (domestic) market is less important proportionally to film studios than it was back then, but within the USA, the studios still have a dominant position in the theatrical arena.

Will studios now move back into the theatrical business? The most likely answer is no. The Paramount Decrees only applied to the US, and while studios have been known to own cinemas outside of their domestic market, this has not been common practice and is almost  gone now. The business of cinemas is not a media one; it is a property- and leisure-based one. The studios have enough on their plate working out their response to the more contemporary content-watching avenues, such as streaming, and they have other distribution pipelines that make more  economic and strategic sense. This seems to be the case too for streaming giants Netflix and Amazon, which have been linked to buying cinema chains in the past. While Netflix is acquiring the landmark Egyptian Theater on Hollywood Boulevard, however, this single site seems to be more of a venue and entry route to the major global cinema awards, as well as a conciliatory statement to the wider industry. The possibility is there, though. The DoJ itself acknowledges that the courts of today will look at vertical integration in the light of how it can help the industry, not simply be harmful.

The more likely cause of concern to the exhibition industry is summed up by the phrase ‘theater by theater, picture by picture’, as written about by industry veteran Jim Amos. This was the leitmotif of studio sales teams. Even if they tried all other tactics to pressure exhibitors into taking movies, the explicit demand that one film was taken with another was not allowed.

The first element of this phrase to unpick is ‘picture by picture’ ie the removal of the ban on block-booking (in two years). In an industry consultation process conducted by the DoJ, many of the comments came from smaller exhibition circuits and independent cinemas (the so-called Mom ‘n’ Pop outfits) which considered they didn’t have the scale to resist larger content providers imposing block-booking and would therefore lose their ability to create their own desired programming schedule. This is a credible concern as block booking was often used to bundle lesser content in with attractive films. In an era when the release schedule is already crowded (to the tune of 15 new films a week), filling screen space with films that you have not specifically chosen yourself is not of great interest to mid-to-small-sized exhibitors, even if it is less of a problem to the larger players. The concerns expressed by independent theaters about the ending of the decrees also apply to indie distribution, which can be crowded out by this practice.

The perils of circuit dealing
The other area that is covered in the decrees is that of circuit dealing. This is the practice of making an exclusive deal with a specific circuit, gaining preferable terms by doing so. It is not hard to see how this could harm the market, and harm the screens excluded from such a deal. Areas of the country may not have access to a film, and the impact of a major blockbuster being tied to a certain circuit may end up in losses by the other circuits while that film is being played.

The US is not the only country that took the view that cinema exhibition and distribution should be kept as separate activities, even if it is the most well-known example. There are long-standing examples of vertical integration around the world, even if they are in the minority. In Japan, Toho, and to a lesser extent Toei are both highly integrated, being exhibitors as well as major producers and distributors in the country. In its role as exhibitor, Toho has 18.2% of the screen base and a 27.2% share of distribution

In France, domestic major Gaumont was for many years vertically integrated until it sold off its exhibition activities to exhibition partner Pathé, which is integrated in its own right, as well as operating across a number of countries. In Germany and Austria, Constantin Film has been a major distributor for many years, and is also the owner of the major Cineplexx circuit. In the UK, a smaller player in Curzon operates as a distributor (acquiring Artificial Eye in 2006) and exhibitor or arthouse films, as well as offering a streaming platform (Curzon Home Cinema). Curzon has been acquired by Cohen Media Group (see p15), a US group comprising theatrical distribution and Landmark Cinemas which they acquired last year.

Learning the lessons of the past
It is easy to see how legal rulings from seventy years ago can be dismissed as irrelevant in today’s more complex marketplace. However, there are sufficient similarities between the two eras to warrant some caution. It does seem that the strategic direction of film studios does not include acquiring cinema circuits, but the concern exists for smaller players, both in distribution and exhibition. For these players, the cinema is a self-contained ecosystem, not burdened by issues such as streaming, and any changes in the market dynamics brought about by the removal of the Paramount Consent Decrees could have a significant impact on their business. It is to be hoped that the existing anti-trust legislation is sufficient to avoid major harm.

David Hancock is Research Director, Cinema at IHS Markit (now a part of Informa Tech) and the President of the EDCF.