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Vertical integration in the film industry

Since the earliest days of the cinema the development of vertical integration—ownership of the means of production, distribution and exhibition by the same company—has been contentious. In December 1906 Pathé Frères, by then perhaps the most powerful producer in the world, opened one of the first purpose-built cinemas in Paris. By 1909 Pathé had a chain of 200 cinemas in France and Belgium. Pathé had also been a pioneer of the practice of renting film prints to exhibitors rather than selling them outright. This gave the distributor the valuable advantage of controlling which cinemas showed which films and for how long. It also led to the creation of a pecking order among exhibitors: those with the greatest market power could have releases first. The ‘first-run’ concept allowed a higher rental to be charged for new films.
        In 1909 the Danish distributor Fotorama introduced 'stable customer service', probably the first instance of block-booking of films in cinema practice, which spread rapidly. Exhibitors had to sign up for a package of films of varying appeal in order to secure the most desirable titles.

American monopoly tendency
However, it was clearly in the interests of producers/distributors to show films first in cinemas that they themselves owned, or at least to exclude competitors' films as far as possible. This was a substantial reason for the creation in the USA of the Motion Picture Patents Company (MPPC), set up in 1908 by Thomas Edison and others to exercise control by means of patent enforcement (and failing that, violence) over film production and exhibition.
        Although on the production front the strategy was a hard-fought failure—independent producers simply crossed the country to work in California—it had a major impact on the exhibition sector. European films, which had a 70 per cent market share before the MPPC was formed, were effectively excluded from the North American market; only Pathé, because of its power, was allowed to join the Trust, as it was known from the start. The Trust was deemed illegal by the Department of Justice, but it took almost a decade for it to be broken up by the Supreme Court, too late to save the European industry.
        Vitagraph became the first US producer to own cinemas (it bought two New York sites in 1914) and Fox Film Company was founded the following year with vertically integrated intentions. Famous Players-Lasky, became the first modern studio when it achieved vertically-integrated status in 1919, considerably strengthened in 1925 by its merger, under the name of its earlier Paramount Pictures acquisition, with exhibitor Balaban & Katz.
        By 1938 the power of the Hollywood majors was such that the Department of Justice intervened with an anti-trust suit against eight studios for unfair practices. A consent decree settled in 1940 proved ineffectual and the case was re-opened in 1944. In the ‘Paramount consent decree case’ of 1948, the US Supreme Court ruled that for producers and distributors also to own cinema chains amounted to ‘price-fixing conspiracies’. Distribution companies had to dispose of their exhibition interests—a process that was not completed for the next nine years. (This also had the effect of killing off any idea of the Hollywood majors controlling or buying into television.)

European integration
In Germany Universum-Film AG (Ufa) created the first production-to-exhibition enterprise in 1917 with covert help from the Kaiser's government. In 1925 Ufa was rescued from near collapse by a major investment from MGM and Paramount in a reciprocal distribution deal that favoured American productions.
        In the UK exhibition was extensive but highly fragmented until the mid 1920s. The formation of Gaumont British Picture Corporation in 1926 was an attempt at vertical integration, amalgamating Gaumont, C M Woolf's distribution interests and Simon Rowson's Ideal Productions, with investment from the Ostrer Brothers, who also had exhibition interests. In 1929, Gaumont's takeover of Provincial Cinematograph Theatres gave it a chain of 287 screens.
        In 1927 the government intervened with the Cinematograph Films Act to establish a screen quota to protect British films from foreign competition. This had the effect of stimulating production through the creation of new production companies, although exhibitors were not too happy about losing time for popular American films. However, American production companies soon formed UK subsidiaries to make films to capitalise on the demand. The so-called 'quota quickies' further damaged the industry by debasing the quality.
        Nowhere was the gap between un-integrated production and exhibition better illustrated than in France, where a French move in March 1928 to delay distribution of imported American films by imposing stricter censorship conditions, coupled with an existing quota scheme, caused an overall shortage of films in French cinemas.

US involvement in British production and exhibition
Warner Bros established a showcase cinema in Leicester Square as early as 1938. In August 1941 Warner Bros acquired a 25 per cent stake in Associated British Picture Corporation (ABPC). Three months later, J Arthur Rank's General Cinema Finance Corporation (GCFC)—which had bought into the Odeon cinema chain in 1938—took over Gaumont-British Picture Corporation. Included in the deal were Gaumont-British’s 251 cinemas and the Lime Grove studios at Shepherds Bush, west London, giving the Rank Organisation a chain of over 600 cinemas and boosting its production capacity. ABPC has 442 cinemas. These two chains, later known as the 'duopoly', then controlled 24 per cent of all UK screens (a proportion that rose to more than a third by 1944 and two thirds by 1966) and dominated exhibition for the next 50 years. Both were also involved in production.
        By 1945 Warner's attempt to gain control of ABPC led to a 10-year agreement with the Board of Trade that it could benefit from its increased shareholding but not with voting rights. In theory, Warner would distribute ABPC films in their 800-screen US cinema chain, while ABPC would show Warner films in its UK cinemas. However, few British productions resulted from the tie-up (Look Back in Anger was one of them) and in 1961 Warner agreed with the Board of Trade to sell its shares.
        In March 1943 UK's most successful producer, Sir Alexander Korda, agreed a merger of his London Film Productions with MGM, only to buy the business back in 1945. The company had no exhibition interests. However, the Rank Organisation, which did, sold its unused Amalgamated Studios at Elstree, acquired in 1938, to the Prudential Assurance Company in 1947, which promptly sold the facility on to MGM, whose involvement in UK production was to prove far more prolific than Warner's.
        EMI bought a stake in ABPC in 1968 by acquiring the remaining Warner Bros shares and launched a bid for full control. In 1970 MGM closed its studio at Elstree and in partnership with EMI formed EMI-MGM Elstree Studios at the former ABPC studios but MGM withdrew from the arrangement in 1973.

Monopoly and intertia
The 'duopoly' of Rank/Odeon and ABPC/ABC was a major source of concern in both government and the industry. In 1966 the Monopolies Commission published a report that concluded that the resulting rigid industry structure was detrimental to the public interest. Little by way of remedy resulted.
        In 1983, on a reference from the Director General of Fair Trading, the same body—by now the Monopolies and Mergers Commission—concluded that a scale monopoly existed in respect of the film exhibition activities of EMI Cinemas and Rank Leisure (Odeon). A scale monopoly also existed in distribution in favour of Columbia-EMI-Warner and United International Pictures (UK) and that overall there was a 'complex monopoly' created by the combined activities of these distributors and exhibitors, and in particular the 'barring' arrangements, whereby certain cinemas gain exclusive territorial rights to screening films. This latter practice caused delays in other exhibitors gaining access to films and the MMC recommended that the practice should cease. Again little happened as a direct consequence, although by now the nadir in exhibition in the 1980s was followed by a restructured revival as the multiplex building boom began.
        EMI merged with electrical giant Thorn in 1979, signaling a potential change of direction. In April 1986 Thorn EMI sold its Screen Entertainment division, principally comprising the ABC cinema circuit, for £110m to Australian media owner Alan Bond, who sold it a week later to Cannon Classic for £175m in a deal also including Elstree Studios. The Cannon Organisation—already a vertically-integrated group with cinemas and a low-budget film production operation—sold the studios two years later to Brent Walker Entertainment Group, arguing that it was cheaper to shoot elsewhere.
        The big studio names re-emerged into UK exhibition. MGM Cinemas came onto the scene in 1990 but was soon embroiled in financial problems and scandals and was in receivership by 1991; the UK cinemas and the US studios were sold off by the principal creditors, Crédit Lyonnais, in 1995 and 1996 respectively. Warner, present in the West End since 1938, began to expand exhibition interests, building a chain of 329 screens that were sold in 2003 to become Vue Cinemas. Rank has now sold off all its film and cinema interests.

Sources:
PEP: The British Film Industry (PEP, May 1952).
Thomas H Guback: The International Film Industry: Western Europe and America since 1945 (Indiana University Press, 1969).
Margaret Dickinson and Sarah Street: Cinema and State: The film industry and the British government 1927-1984 (BFI, 1985).
Vincent Porter: 'All Change at Elstree: Warner Bros, ABPC and British Film Policy, 1945–1961' in Historical Journal of Film, Radio and Television, Vol 21, No 1, 2001

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Page updated 19 August 2008
© David Fisher