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MEMORY LANE - Vertical Reality

Thu, 12/31/2009 - 7:20pm
Stewart Schley Media & technology writer, Denver, Colo.

There is a long history of cable industry vertical integration, tracing back to the 1972 creation of HBO by Cablevision

By Stewart SchleyIn the 1940s, the U.S. Department of Justice put a wallop on Hollywood that would have made James Cagney, a popular movie tough guy of the era, tip his fedora hat.

The provocation came from a series of business practices prevalent among the five major movie studios of the day. At the top of the list was “block-booking,” which required that movie theaters accept and run a package of short films and features as a quid pro quo for getting rights to a single attractive release. A cousin, “blind-booking,” meant theaters had to sign up for a broad slate of releases for a forthcoming season based only on thin descriptions studios provided. Taken together, the take-it-or-leave-it practices made the nation’s 18,000 or so movie theaters little more than passive delivery vessels for grand plans drawn up in Hollywood.

How did the studios pull off these feats of business bullying?

Easy. They owned the theaters.

Or at least they owned the theaters that mattered – grand palaces like Paramount Pictures’ El Capitan Theatre in Los Angeles. These opulent theaters exhibited first-run movies that drew big audiences and had enormous influence on the popularity of films. At the time, Paramount controlled about 8 percent of the first-run theaters in major population centers, while Fox and Warner Bros. each accounted for about 3 percent of the total. All together, the five major studios controlled only 17 percent of the nation’s theaters, but those theaters accounted for nearly half of the industry’s film rental revenue. And by maintaining a grip on the theaters that mattered most, the studios were able to dictate terms to all that followed.

One of the intentions of the Justice Department, which began litigation against the studios in 1938, was to crack apart this system of vertical integration – common ownership both of film production and exhibition. On that count, the government was successful. After a 1948 U.S. Supreme Court decision in favor of the government, the studios were forced to divest their exhibition holdings, effectively ending the studio oligopoly and opening up new opportunities for non-aligned filmmakers.

But the forced divestiture didn’t spell the end of vertical integration in the film industry, or the media sector at large. To the contrary, the idea of aligning content and distribution under common ownership and control remains a widely shared ambition. In cable television, particularly, it’s a prevalent theme. The proposed combination of Comcast Corp. and NBC Universal, dramatic though it may be, is only the latest rendition.

There is a long history of cable industry vertical integration, tracing back to the 1972 creation of Home Box Office by a predecessor of the cable company, Cablevision, and including the 1995 acquisition of a controlling interest in Turner Broadcasting System by Time Warner Inc., which itself owned cable systems. When Rupert Murdoch’s News Corp. controlled both DirecTV and Fox Cable Networks, it was practicing the art of vertical integration. The same is true for some of the same movie studios that drew the aim of the Justice Department throughout the 1940s. Movielink, an Internet movie platform, was a joint venture originally involving MGM Studios, Paramount and Universal Studios. They not only supplied content to the venture, they controlled the delivery infrastructure that made it work.

Ironically, the Justice Department’s attack on Hollywood ended up producing a back-handed endorsement of vertical integration. Although the DOJ argued that vertical integration of film production, distribution and exhibition was illegal per se, “the majority of the court does not take that view,” according to the Supreme Court in its ruling. Instead, the court noted that the legality of vertical integration turned on a range of considerations, including whether its impact was to restrain competition rather than merely support legitimate business ambitions.

Although it broke up the Hollywood oligopoly, the Supreme Court’s ruling in United States v. Paramount Pictures Inc. has contributed to the legal case for the legitimacy of media industry integration.

Not only has it given rise to modernday, technology-infused derivations such as Hulu, an online video platform owned by three television networks, it has also inspired some old-school variations. Today, for instance, if you see a movie at the El Capitan on Hollywood Boulevard, you’re taking part in a throwback to Hollywood’s golden era. Not just because the theater has been beautifully refurbished, but because its new owner, The Walt Disney Co., happens to be one of the world’s most prominent film producers. In Hollywood, that’s what they call a sequel.

stewart@stewartschley.com

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