Economic Control of the Motion Picture Industry
Excerpt from Huettig, Mae D., Economic Control of the Motion Picture Industry: A Study in Industrial Organization (Philadelphia: University of Pennsylvania Press, 1944) (permission University of Pennsylvania Press)
Excerpted by Aimee-Marie Dorsten
Contributor’s note: Footnotes from the original. I have preserved the style of the original notes.
THE MOTION PICTURE INDUSTRY TODAY
SOME QUESTIONS TO BE ANSWERED
Despite the glamour of Hollywood, the crux of the motion picture industry is the theater. It is in the brick-and-mortar branch of the industry that most of the money is invested and made. Without understanding this fact, devotees of the film are likely to remain forever baffled by some characteristics of an industry which is in turn exciting, perplexing, and irritating. Emphasis on the economic role of the theatre is not meant to belittle the film itself. Obviously, it is the film which draws people to the theatre. Nevertheless, the structure of the motion picture industry (a large inverted pyramid, top-heavy with real estate and theatres, resting on a narrow base of the intangibles which constitute films) has had far-reaching effects on the film itself.
This may seem farfetched. Most writers on the motion picture industry rather studiously avoid its duller aspects, i.e., those dealing with the trade practices, financial policies, intercorporate relationships, etc. But the facts indicate clearly that there is a connection between the form taken by the film and the mechanics of the business, even if the connection is somewhat obscure. It is true, as one student has pointed out, that “the issues involved are not peculiar to the motion picture history.” 1 Despite this lack of uniqueness, the problems of organization, intercorporate relationships, and financial policy in the motion picture industry deserve more than passing mention. The attitude of the industry itself toward discussion of these problems has not been completely candid. 2 A great reluctance to disclose factual information with respect to its operations has unfortunately characterized most of the leaders of the industry.
Among the many questions which lack a reliable answer are: How many people attend movies? How often? How large is the industry in terms of invested capital and volume of business? What is the annual income of all theatres? How many theatres are owned by what group? What type of films is most uniformly successful? What is the relationship between the cost of films and their drawing power? Little is known of the industry’s place in the broader pattern of American industry, or its method of solving the specialized problems of commercial entertainment. There are few reliable statistics available (and of these none is compiled by the industry itself) with regard to these questions.
WHAT IS THE ECONOMIC IMPORTANCE OF THE INDUSTRY?
There are various ways of measuring the role of an industry in our economy. The indices most commonly used are: (1) volume of business, (2) invested capital, and (3) number of employees. The value of such criteria is limited, since comparison between all types of industries produces results too general to be significant. However, in the case of the motion picture industry, these indices are valuable as a means of delimiting its economic importance and recording some basic information regarding its size… […]
Here, then, let it be noted that in so far as size of industry is measured by dollar volume of business, the motion picture industry is not only not among the first ten, it is not even among the first forty. It is surpassed by such industries, to name only a few, as laundries, hotels, restaurants, loan companies, investment trusts, liquor, tobacco, and musical instruments.
Table II shows the relative importance of the various industries with respect to volume of business. Viewed thus as a part of our national economy, the motion picture industry is not a major bulwark. There are forty-four other industries, out of the total of ninety-four industrial groups enumerated by Statistics of Income (Bureau of Internal Revenue), that reported a larger gross income in 1937 than did the combined motion picture producing and exhibition corporations. In terms of employment, the motion picture industry accounts for somewhat fewer than 200,000 persons in all three branches of production, distribution, and exhibition, as Table III shows.
When motion picture corporations are compared with those in other branches of the entertainment field, another story is presented. The entire field of commercial amusement, including billiard halls, bowling alleys, dance halls, etc., id dominated by the motion picture industry.3 Motion picture corporations, constituting 44 per cent of the total number of amusement corporations in 1937, accounted for 78 per cent of the gross income and 92 per cent of the total net income of the group. This should prove what has long been suspected and probably needs little proof: that movies are the favorite form of entertainment for most Americans.
PRODUCTION VERSUS EXHIBITION
From the point of view of the movie-going public, one of the most important questions about the industry is: Who decides what films are made; or as it is more commonly put, why are films what they are? From the industry’s point of view, too, this question of the kind of product released is ultimately its most important single problem. Quality of product is increasingly vital now that the motion pictures business is settling down into a semblance of middle age, devoid of the novelty appeal it formerly had.
The answer to the question posed above is in the relationship between the various branches of the industry. By virtue of the division of labor within the business, film distributors and exhibitors are much more closely in touch with the movie-going public than are the producers, and they trade heavily on their advantageous positions. From their seat in the box office they announce that so-and-so is “poison at the box office,” that what the public wants is musicals or blood-and-thunder westerns, that English stars murder business, and that sophisticated farce comedies leave their audiences completely cold.
Broadly speaking, and omitting the relatively unimportant independent producers, the relationship between the three branches of the industry may be described in two ways. First, there is the relationship between a major producer and theatre operators not affiliated with his company. Secondly, there is a relationship within a major company between the various departments of production, distribution, and exhibition. The intra-company relationship is the more important with respect to the kind of films made, since contact within the organization is much closer than contact between the unaffiliated exhibitors and producers. The unaffiliated exhibitors are not generally consulted by producers with respect to the nature of the films to be made. However, they occasionally make their views known through advertisements in the trade press and probably express their opinions quite freely in talking with the sales representatives of the producers. Most of their arguments are ex post facto, however, and affect the future line-up of product negatively, or not at all.
On the other hand, the sales and theatre people within the integrated companies are extremely important in determining the type of picture to be made, the number of pictures in each cost class, the type of story, etc. It is not intended to give here a detailed account of the manner in which these decisions are reached, but in general the procedure is as follows: The person in charge of distribution announces the number of films wanted for the following season. This figure is presumably based on some estimate of what can be profitably sold, but it is also related to the needs of the company’s own theatres for product. The chief executive announces the amount of money available for the total product. The amounts vary among the individual companies from $7 or $8 million for the smaller companies to $28 million for Loew’s. The next step is the division and allocation of the total amount to groups of pictures. The names given these classes vary, but the grouping is in accordance with the quality to be aimed at as defined by the amount of money to be spent. That is, there are the “specials” and the more ordinary “program” features. There are “A” pictures and “B” pictures. The latter are designed, more or less frankly, to meet the need for the lesser half of the double-feature program. Once the allocation of production funds is made, the next step is that of determining the budgets for the individual picture with each group. The amount spent on a given picture presumably relates in some way to the anticipated drawing power of the particular combination of talent and production values planned for the given picture. 4 After the detailed budget is worked out, a tentative release schedule is prepared for the use of the sales force (distribution). From this point on the problems belong primarily to the production department.
Note what this cursory outline reveals. Company executives, i.e., theatre, sales, and production people, determine the following: the number of pictures to be made, the total amount of money to be spent, the distribution of the funds between the various classes of pictures, the budgets of the individual pictures, and the dates when the pictures are to be finished.
It is not meant that all such issues are decided by ukase and handed down from the front office to the production staff. The interdepartmental conference technique is customary, with every department chief valiantly defending his own position. At work are all the usual subterranean factors which determine where power ultimately rests. There are, however, certain objective factors which are present to some degree in each of the five large majors. These tend to give decisive policy-making power regarding the kind of films made to the groups farthest removed from production itself, i.e., the men in distribution and theatre management.
The objective factors are found in a prosaic listing of the various sources of income to the five principal companies. In approximate order of importance, they are: (1) theatre admissions, (2) film rentals, (3) the sale of film accessories, and (4) dividends from affiliated companies. The relative importance of each source varies for the individual majors, but in almost every instance the chief single source of income is theatre admissions. Although there is an inseparable connection between the quality of films and company earnings from film rentals and theatres, the division of functions within the company structure operates to give the preponderance of power to those nearest the principal source of income, i.e., the theatres, Furthermore, the earning power of a given chain of theatres depends not so much upon the quality of films made by its parent company as on the quality of films in general. If successful films are available, the dominant group of affiliated theatres in a given area generally has preferential access to them, regardless of which major produced them. In other words, the successful theatre operations for a major company is not directly dependent on the quality of its own pictures, although this contributes of course. By virtue of the regional division of the theatre market, there is in effect a pooling of the product; the affiliated theatres in their separate areas gave access to the best pictures available. Consequently, competition in the production of pictures has no real parallel in the theatre organization. A good picture, i.e., one successful at the box office, rebounds to the benefit of each of the theatre-owning majors since each shares in the box office. This interdependence seems a unique characteristic of the motion picture business. In other industries, an exceptionally good product is feared and disliked by other producers or sellers of similar goods. But of the small groups of dominant movie companies, it is really true that all good of one is the good of all.
The production and exhibition phases of the business behave toward each other like a chronically quarrelsome but firmly married couple and not without reason. The exhibitor group controls the purse strings; it accounts for more than nine-tenths of the invested capital and approximately two-thirds of the industry’s income. Nevertheless, it requires films. Consequently, the conflict between the two groups more nearly resembles a family quarrel than is ordinarily true of trade disputes, since the essential interdependence between production and exhibition is recognized by all. To a theatre operator there is no substitute for “celluloid.” Conversely, the producers of movies have no real alternative to the theatres as outlets for their products. The normal interdependency between supplier and customer is accentuated in the motion picture industry by the combination of functions within the same corporate framework. But difficulty results from the fact that while the selling of entertainment is a commercial process, making films is largely creative and artistic in nature. Movie-makers, like artist in other fields, are generally inclined to experiment with new techniques and are not above wanting to interpret or affect their surroundings. Exhibitors, on the other hand, may not know much about the art of the film, but they know what has been good box office before. Consequently, theirs is the conservative influence; they are the traditionalists of the trade, exerting their influence in the direction of the safe-and-sound in film making…
Howard T. Lewis, The Motion Picture Industry, p.13. ↩
Lewis points out that the industry has made no real attempt to give the public any thorough-going, unbiased discussion of its organization, operation, or profits and that such information as has been given has been frankly unbiased and intended primarily to promote friendly public relations. Ibid., Introduction, p. x. ↩
In 1938, amusement corporations constituted roughly 2 per cent of the entire number of active corporations filing income tax returns. The gross income of all amusement corporations was slightly over $1 billion, or less than 1 per cent of the total gross income ($120 billion) of all corporations filing return. Net income (less deficit) of amusement corporations was $52 million. Bureau of Internal Revenue, Statistics of Income, 1939. ↩
It is claimed by the people within the industry that an accurate estimate can be made of what any given picture will gross if the talent is known. This seems doubtful in view of the great number of unknowns affecting public taste for films, but some students of the industry apparently accept this hypothesis. See, for example, Howard T. Lewis, op. cit., p. 39, where he states that the budget of individual pictures were based on statistical knowledge of the starring artist’s value as a box office attraction. ↩