Old Hollywood, Meet New Hollywood

News of Disney’s impending streaming service launch only further raises questions that have begged answer for far too long now. How close can Disney toe the lines laid down to break up the studio oligopoly of old Hollywood and do these same rules even matter in films new frontier?

These questions by no means have straight-forward answers. Essentially, what must be understood about the old Hollywood studio system pre-1948 is a small handful of major studios dominated the market. They were known as the “Big Five” made up of Paramount Pictures, 20th Century Fox, Metro-Goldwyn-Mayer (MGM), Warner Bros. and Radio Keith Orpheum (RKO Pictures). Supplementing the Big Five was the “Little Three” of Columbia Pictures, Universal Pictures and United Artists. The difference between these two contingents was the former owned theaters and the latter did not (more on this later).

In their heyday between the 1930’s and 1940’s these major studios were responsible for 90% of American film production and 60% of world production. They did so by strictly controlling the production, distribution, and exhibition of their product. In this way, studios used vertical integration to dominate both the manufacturing and customer facing components of the film industry.

One of the tensions created by the old system was the lack of incentive placed on studios to create quality material. Since the Big Five owned theaters they were able to ensure the uninhibited exhibition and profit of all of their investments. If the studios were dealing with independent theaters, they routinely engaged in a practice known as “block booking”, in which they forced sales of large blocks of movies “sight unseen” to theaters. Sight unseen meant the theaters didn’t get to watch the movies before the sale. These blocks consisted of a mix of A-class, big budget features and second-rate throw away material. Because the deals were sight unseen there was no form of quality control. In truth, negotiation was futile because the studios could simply refuse sale and exhibit exclusively in their own theaters and independent theaters willing to do business.

This eventually changed after the landmark 1948 Supreme Court decision, United States v. Paramount Pictures, Inc. Much of the pressure was applied by the Little Three studios who felt the system gave unfair advantage to theater owning majors. The Supreme Court decision outlawed the practice of block booking and forced the Big Five to outright sell their theater chains.

Now, divested from exhibition and unable to sell in blocks, studios had to treat each film as a commercial good, an investment who’s return must be weighed. Without the security of their own theaters, a new distributor/exhibitioner relationship was formed, both needed the other to complete a films product lifecycle.

Some important outcomes arose thanks to the Supreme Court decision. Less movies were produced by studios as they became more selective. Studio movies could no longer simply rely on the structure of the exhibition model to ensure profits, they had to compete on quality without sight unseen block booking. The playing field was made more competitive, not just between the Big Five and Little Three but also between the major studios and independent filmmakers and unestablished small studios. Film quality, as a whole, improved as production values and budgets rose.

Separating film producers and distributors from exhibition went a long way to even the playing field. The generation after the 1948 Supreme court decision saw a rise in auteur filmmakers, spurred by the weakening studio grip and increasing demand for quality content. The “Golden Age” of Hollywood had grown stale, formulaic, and complacent. The new age called for a reimagining of what movies were capable of and how they should function in society. Indeed, society itself was calling for a change, disillusioned by decades of studio artifice and laziness, society demanded more.

A lot has changed between then and now. I have no intention of arguing that we are back to a studio oligopoly or a Disney Monopoly, but I will argue the inequalities that the United States v. Paramount Pictures, Inc decision intended to correct, have returned. It is hard to ignore what Disney, in particular, is doing, primarily in how they handle the exhibition of their content.

Disney doesn’t own a theater chain, at least not traditionally, but not since 1948 has a studio comes as close. A lot of this has to do with audience consumption patterns and how the distributor/exhibitor relationship has developed over the years. Less people go to movies today. While 12 of the top 15 highest domestic grossing films have come out in the last decade only two of them remain in the same list adjusted for inflation. With the 2018 ticket price average held constant older movies made more money, this is because viewer attendance in previous decades was simply higher. So while it certainly looks like movies make more money today, that isn’t true.

The movies that make the most money and get the most attention are, very obviously, studio blockbusters. These movies are also referred to as “tent poles” because they quite literally support the overall financial performance of a movie studio. These are the studio’s most highly prized commodity of trade, while audiences may not be spending as much in proportion to past audiences the money they do spend in large part goes here. Theaters can’t afford to miss out on these movies, let alone ruin their relationships with these distributors. Negotiations have become increasingly one-sided.

Nowhere is this more evident than Disney. Back in November 2017 The Wall Street Journal published a piece about Star Wars: The Last Jedi. The article detailed how Disney, in preparation for the impending release, brought theaters some of “the most onerous” terms that have ever been seen. Disney demanded for 65% of the ticket revenue, a new Hollywood studio high. They also required screening in each theater’s largest auditorium for at least four weeks. Any breach of these requirements and Disney is granted an additional 5% of the ticket revenue bringing them up to 70% of the sales from a movie that went on to make an estimated $620 million dollars domestically.

The truth is Disney can walk this line back as far as they feel legally safe. No exhibitor can really feel good about denying Disney’s business. In almost every case theater’s need Disney’s blockbusters to provide financial windfalls throughout the year. These movies, unlike so many of their competitors, provide an invaluable commodity, a guarantee for heavy audience turnout. The pull of a new Star War or Marvel movie creates unnegotiable leverage for a studio over an exhibitor. The risk of losing Disney’s business is potential bankruptcy for a theater. One film buyer said, “They’re in the most powerful position any studio has been in, maybe since MGM in the 1930’s.” They may not own a theater but, once again, Disney has assumed an unrivaled control over the release of their movies.

This brings us to the tricky business of streaming. Netflix has shown the world there is a viable business structure in producing and exhibiting, through their streaming service, profitable original content. This is huge. The idea that movies don’t need to be played in the theaters anymore is a massive change in the economic structure of the film industry. Straight to DVD used to be adeath knell for the financial upside of a feature film. If a distributor did not have confidence in the money making potential of a movie they would cut their losses by bypassing marketing, print, advertisements, and a theatrical release for straight to home viewing. Netflix has not only made this viable, they have made the model in vogue.

Disney is fast to recognize the potential of the streaming model; they see it is the clearest step towards studio exhibition in decades. As audiences show an increasing willingness to stream content, at what point do the scales tip and we recognize streaming as a legitimate model of film release. And once we get to that point, when do we recognize that, in fact, Disney has regained the vertical integration of production, distribution, and exhibition. Disney has no plans of abandoning the the theatrical release model, their extreme control makes it a very profitable revenue stream. However, at the same time they continue to be proactive about their release strategies. By getting into streaming Disney is able to extend their control of their film. Instead of licensing the lucrative digital lifetime of their movies to a middle man they can exhibit it themselves. If the world is slowly turning from theaters to their their laptops, as Netflix believes, Disney’s distribution department has no intentions of playing catch up.

Disney has found ways to maximize their advantage in a system that works within the constraints of the United States v. Paramount Pictures, Inc decision. Perhaps more significant, with streaming Disney is preparing to manufacture a level of control the Big Five never dreamed of. After 70 years maybe it’s time to reconsider the macro-implications of studio exhibition.