A Decree Is Up for Review for Falling Behind the Times — It Once Guaranteed the Diversity of American Film

Judged on its own terms, the Paramount Decree really has fallen behind. If the review takes in the new forms of monopoly and the new threats, it may turn out to be good for Hollywood.

A landmark ruling is up for reconsideration because the times have changed.

The Paramount Decree, handed down 70 years ago, may be one of the most consequential events in film history. Almost everyone working in film today still lives under the rules it laid down. It created the earliest notions of commercial film and independent film; it helped horror, splatter and other genres climb out of the B-movie bin; it gave rise to the art house; it left room for big chains like AMC, Regal and Cinemark to exist; and it broke up the studio system, laying the groundwork for the media-empire model Hollywood runs on now.

The decree itself was not complicated. It said studios could not own or control theater circuits, and it banned a set of studio practices that squeezed independent exhibitors. Such simple rules had such a large effect for one reason: they broke Hollywood's hold on the entire film business.

In August 2018, the U.S. Department of Justice announced that it would review the Paramount Decree. By the department's account, a great deal has changed in the film industry over the 70 years since the ruling: none of the companies named in the case still owns a large number of theaters; most big cities now have more than one cinema; in the 1930s and 1940s a theater had a single screen and could show only one film at a time, whereas today a multiplex runs different films on several screens at once; and theaters are no longer the only way to see a movie — after the theatrical run, audiences can watch on television, DVD and the internet.

"Based on these many changes, and the fact that the Paramount Decree has been in place for 70 years, the Department of Justice has decided to review the decree to determine whether it should be modified or terminated."

The decision set off a loud argument. Judging by the public comment letters, what people fear is that if the decree is scrapped, studio dominance over the circuits — and the old monopoly structure — will come back.

Still, the department is not wrong about how the landscape has shifted, and it did say that modifying the decree is one of the possible outcomes. On its own terms the decree does look dated, because new forms of monopoly have appeared that it cannot touch: consolidation for synergy, and internet streaming. The department treats streaming as a way to widen the audience for films, but it carries a monopoly threat of its own.

If the review can take these new forms of monopoly into account and change the decree accordingly, that may well be good for Hollywood.

How the Paramount Decree came about, and what breaking the monopoly did

Go back 70 years and Hollywood was enjoying a golden age built on monopoly. The form it took was the vertical monopoly: control of every link in the chain. In the film business, that meant production, distribution and exhibition.

Paramount Pictures got there first. By buying up theater circuits, the studio came to control every stage of a film's life. The other studios copied it, and Hollywood settled into the "Big Five" (Paramount, Warner Bros., Loew's/MGM, 20th Century Fox and RKO) and the "Little Three" (Universal, Columbia and United Artists). The Little Three owned no theaters, but by working with the Big Five they helped keep newcomers out. The studio system that shaped Hollywood's structure and its house style took form here.

That left the studios holding all the cards when they sat down with independent theaters. Out of it came block booking: if a theater wanted the films audiences were lining up for, it had to take the other titles bundled with them. Studios could sell small pictures to exhibitors by tying them to star vehicles. Theaters could not choose what they showed, and studios could not lose money.

The vertically integrated companies held only a small share of the country's 15,000 theaters — in the mid-1920s Paramount owned 500, MGM only 200 — but the chains they did control included many of the large first-run houses, which was enough to make them rich. By the late 1920s, three-quarters of box-office revenue came from those big theaters. Theaters in small towns and farm country waited for prints after the first run.

Just as Hollywood's vertical integration reached its peak, the Justice Department — which watched Hollywood closely and had always been wary of monopoly — filed the Paramount suit in 1938, charging that the Big Five and the Little Three had colluded to monopolize the film industry in violation of antitrust law.

After a series of trials, the Supreme Court issued its final ruling in 1948, finding that both the Big Five and the Little Three had engaged in monopolistic conduct. The Big Five held a monopoly through their theaters; the Little Three were found to have shut other companies out of the market through their cooperation.

The court ordered the studios to divest their theater circuits and banned block booking along with other practices that hurt independent exhibitors, such as setting minimum ticket prices. The studios complied. The Big Five kept their production and distribution arms and sold the theaters.

The ruling was good for Hollywood's creativity. With block booking gone, exhibitors could fill empty slots with independent films, and independent films duly grew in budget, in number and in range of ideas.

According to David Bordwell's Film History: An Introduction, annual output of independent films more than doubled between 1946 and 1956, reaching 150 pictures. United Artists, one of the Little Three, distributed nothing but independent films, and released as many as 50 a year on its own. For comparison, A24, which has put out a string of critical successes in recent years, released 15 films in 2017.

Under the studio system, the producer and the star held the power. As the Paramount ruling and the rise of postwar television pushed that system to its end, directors gained it instead. Young filmmakers of the time — George Lucas, Martin Scorsese, Steven Spielberg — took the opening and made Star Wars, Taxi Driver and Jaws.

What is the new monopoly threat? Consolidation for synergy

Capital tends toward monopoly. Companies chase profit, so they keep looking for the arrangement that pays most. Once the Supreme Court ended the vertical monopoly, Hollywood was not going to stop trying — it simply switched to synergy.

In 2018, 41 years after the first Star Wars opened, George Lucas topped the Forbes list of America's richest celebrities, his net worth of $5.4 billion well clear of Steven Spielberg's $3.7 billion in second place. On films alone, though, Spielberg is far ahead: he was the first director in history to pass $10 billion at the box office, while Lucas does not make the global top ten.

What made Lucas rich was not the Star Wars films but the Star Wars brand. In today's entertainment business a film is not a thing on its own; it is one link in an intellectual property. Box office is no longer the goal but a way of measuring what the property is worth. So we get Star Wars toys and Star Wars lands in theme parks, and the merchandise can out-earn the movies: the films have taken $9.5 billion at the box office, the licensed goods more than $40 billion.

In that world, consolidation for synergy, not vertical integration, is what pays. Disney is the model. (Disney was never named in the Paramount suit, but it, like the studios that came later, followed the ruling.) When we say Disney now we do not mean a film studio; we mean a media empire of film, television and theme parks that threads the IP business through every part of itself. Buying Marvel, Pixar, Lucasfilm and 21st Century Fox has kept enlarging its stock of characters.

Take Disney's $71.3 billion purchase of 21st Century Fox's assets. With the 20th Century Fox studio in hand, Disney means to fold the X-Men, Deadpool and the Fantastic Four into the Marvel Cinematic Universe. For an MCU that has already taken $17.5 billion worldwide and enters a new phase after Avengers 4, a fresh supply of characters to develop is exactly what Disney wants.

The Justice Department did raise monopoly concerns about the deal, but not over the studio — over sports channels. Disney paid more for 21st Century Fox's 22 regional sports networks than it did for 20th Century Fox. It hoped the regional channels would complement its cable network ESPN and give it leverage to push down rights fees when negotiating with the leagues.

That hope came to nothing. In approving the purchase, the department attached a condition: Disney had to sell the 22 sports channels to satisfy antitrust rules. Holding the regional networks, it worried, would let the company charge more in local markets.

When the department announced the review, some people started worrying about the future of movie theaters and the return of block booking. But antitrust enforcement in the United States had already loosened in the 1980s, permitting things that would once have been clear violations: TriStar Pictures, founded by CBS, HBO and Columbia Pictures, bought the Loew's chain; Warner Bros. bought several circuits; Paramount spent $300 million on more than 100 theaters, into which Warner later put more money.

Think about it, and the media empires' current grip on theaters has little to do with vertical mergers. The three largest American circuits — AMC, Regal and Cinemark — belong to no media group, and the empires still get their way. That leverage comes from consolidation for synergy.

A Wall Street Journal report used Disney as its example: distributing Star Wars: The Last Jedi, Disney demanded 65% of ticket revenue, a record. Most films give the studio about 55%; some blockbusters get 60%.

Disney's terms also required theaters to play The Last Jedi in their largest auditorium for at least four weeks and not to cut planned showtimes. A theater that broke the agreement owed Disney another 5% of ticket sales. The Last Jedi took $620 million, the year's biggest gross, but some small theaters passed on it, afraid they could not meet the conditions.

Streaming, the other monopoly to watch

The Justice Department's statement treats streaming as a cure for monopoly. The truth is probably the reverse: Netflix is becoming one, and it is beyond anything a 70-year-old decree can restrain.

Hollywood has already felt the pressure.

In 2016 The Hollywood Reporter published a piece on Hollywood's fear that Netflix would corner content. It quoted FX chairman John Landgraf: "I think it's bad for the creators of stories when one company is controlling 40, 50 or even 60 percent of the content in the marketplace."

That year Netflix put $6 billion into content, far more than HBO's $2 billion. Sources told the magazine that Netflix no longer gave creators a free hand; Beau Willimon, who ran the first four seasons of House of Cards, left after disagreements with the platform. (Willimon declined to comment.)

Netflix has not eased off. Its announced content budget for 2018 reached $8 billion, and reports put the real number at $13 billion. Many of the filmmakers who work with Netflix say they get complete freedom, which contradicts what The Hollywood Reporter heard. Even so, the way a monopoly's leverage can smother creative work is worth watching for.

Netflix is not the only player in streaming, but calling it dominant is no exaggeration. It has 77% of American streaming subscribers, 21 points ahead of Amazon in second place (people may subscribe to several services at once). Smaller services, meanwhile, have died for want of customers — among them FilmStruck, which carried much of the Criterion Collection's catalogue of masterworks.

Reports that Netflix and then Amazon were interested in buying Landmark Theatres are easy to read as studio-style vertical integration. On vertical integration the Paramount Decree might have something to say. On streamers building synergy the way media groups do, it has nothing.

In July 2017 Netflix made the first acquisition in its 20-year history: Millarworld, a comics company. Millarworld has created 18 characters, including established properties such as Kingsman, Kick-Ass and Wanted. Does the move invite comparison with Disney buying Marvel? Netflix, at least, seems happy to have it made. In a public statement, chief content officer Ted Sarandos called Millarworld's founder, Mark Millar, a modern Stan Lee.

Look back at the 70-year-old decree from here and it plainly belongs to another era. In the 1940s film was one of the few entertainments available and you could only see it in a theater, so controlling theaters meant controlling the market. Today the entire annual American box office is smaller than Netflix's yearly revenue. With distribution scattered across so many channels, pulling studios and theaters apart no longer keeps monopoly in check.

What the Paramount Decree still means today is a reminder that the threat of monopoly never goes away. The question has always been to spot a monopoly where it exists and find new ways to protect the market's inventiveness and vitality. So this time, reviewing the decree, will the Justice Department aim at Disney or at Netflix?

Cover image and images in this article from: Wiki Commons, Flickr, Douban Movies