The Reemergence of the Studio Cartel System

The cinema landscape is going through a monumental shift brought on by the lockdowns and a court, which lifted restrictions on the studios from owning theaters and eventual block booking and circuit dealing.

In August, a Federal Judge in New York sided with the US government’s recommendation in November to end the so-called Paramount decrees that ceased Hollywood’s monopoly on producing, distributing, and exhibiting films. 

US District Judge Analisa Torres said the Antitrust Division of the Department of Justice “offered a reasonable and persuasive explanation” for why terminating the consent decrees would “serve the public interest in free and unfettered competition.” 

The decision reverses 70 years of antitrust law implemented by the Supreme Court in 1948 that held that the biggest studios had illegally monopolized the distribution and theatrical market.

The only question remaining is which conglomerate Amazon, Disney, Comcast’s NBCUniversal, or AT&T’s WarnerMedia, will be first to acquire AMC or Cinemark at a bargain-basement price.

Will Studio Monopolies Reign Again?

“As the movie industry goes through more changes with technological innovation, with new streaming businesses and new business models, it is our hope that the termination of the Paramount decrees clears the way for consumer-friendly innovation,” Makan Delrahim, the Justice Department’s top antitrust official, said at an American Bar Association conference in Washington, DC on Monday.

The only innovation that will be developed by this decision is financial innovation that allows only a handful of companies to control the dissemination of information and entertainment.

The market structure in the 1930s and ’40s eventually led to the cooperation and illusion whereby the studios established a cartel to limit the screening of first-run features in their own theaters and closing off these same theaters to their competitors.

The Justice Department said the decrees were not necessary after multiplexes, broadcast and cable TV, DVDs, and the internet changed how people watch movies, and because studios no longer dominated film theater ownership. Not yet, anyway.

The Independent Cinema Alliance (ICA) and the National Association of Theatre Owners (NATO) opposed the decision citing that the consent decrees “serve as a yardstick of acceptable behavior, exerting a normative effect on industry actors.”

Furthermore, the ICA and NATO with respect to distribution and licensing practices, that the restrictions on block booking and circuit dealing should be preserved.

Block Booking & Circuit Dealing

The Paramount decrees separated Hollywood’s monopolization of film distribution and exhibition through specific three measures. 

First, it outlawed block booking, which forbade exclusive licensing agreements that forced theaters to license multiple films under a single license. Second, the decision also ended circuit dealing, which was the licensing of films to theaters under common ownership rather than theater-by-theater. Finally, the new rules also made it illegal for studios to unreasonably limit how many theaters could show movies in specific geographic areas. 

Although there have been some minor exceptions and creative loopholes over the years, the Paramount decision forced all eight film distributors to completely divest their theater operations.

The Paramount decision has been a bedrock of corporate antitrust law. Thus, it is cited in most cases where issues of vertical integration play a prominent role in restricting fair trade. However, for at least the last 20 years, federal regulators have allowed the media landscape in the United States to be dominated by fewer and fewer parties. 

The order from Judge Torres includes a two-year sunset provision for ending the block booking and circuit dealing bans to reduce any market disruptions. 

The Death Knell of Independent Theaters

The government’s decision will likely be the death knell to independent theaters, and thereby independent films on the big screen in the United States. The number of independent theaters has plummeted in this age of significant media consolidation. Only three chains, AMC, Regal, and Cinemark, control over half of the nation’s 41,000 screens. 

RELATED: According to sources, Amazon, the e-commerce giant, and second-largest streaming service has been in talks since May to acquire AMC, the parent of the AMC and Carmike in the US and the Odeon Cinemas in the UK. 

“On both the distribution and the exhibition sides of the business, the drive toward consolidation continues unabated,” said the ICA in a submission last year.

Independent distributors have been struggling for years to secure screens to release their films after the explosion of big-budget franchises. Likewise, small theater owners cannot afford the predatory distribution terms demanded by studios to screen their blockbusters. 

Unlike independent distributors, which only retain 40-45% of ticket sales, major studios have forced independent theaters to pay up 70% of ticket sales. 

In 2019, five films were responsible for 30% of the box office receipts, four of which were released by Disney, which is now the owner of 20th Century Fox.

“If exhibitors were forced to book out the vast majority of their screens on major studio films for most of the year, this would leave little to no room for important films from smaller studios,” NATO argued. 

FilmTake Away

Last year, a three-judge panel for the Circuit Court of Appeals in DC ruled unanimously with the trial judge’s ruling to allow the acquisition of Time Warner by AT&T. The court held that “generic statements that vertical integration can lead to an unfair advantage over its rivals do not come close to answering the question before the court.” 

This case was the first time in 40 years that the US government fully litigated a matter to challenge vertical integration. Its loss might now strengthen the industry’s resolve to pursue more aggressive horizontally mergers between large competitors.

With already so much of the media held in only a few hands, it would not be surprising if soon Comcast and AT&T or Disney and Verizon gain approval for yet another largest merger in media history.