Is Vertical Integration in the Film Industry Legal Again?
About a year ago a federal judge granted a motion to terminate the movie industry’s previous licensing rules which had been in effect since the 1940s and largely prevented any vertical integration in the film industry from occurring. So does this mean that vertical integration in the film industry will once again be legal? How will the termination of the Paramount Consent Decrees which previously eliminated vertical integration impact the film industry in the future?
What is Vertical Integration & How Does it Apply to the Film Industry?
Let’s set the stage in explaining vertical integration in the film industry and how it impacted Hollywood 75+ years ago and continues to impact studios to this day.
Vertical integration occurs when a film production company owns two or more businesses that are responsible for the production and distribution of a film.
In our previous post, “What is vertical integration in film” we addressed the example of 20th Century Fox. In which the media company owns several film studios in Hollywood.
Prime Example
As well as multiple cinemas which distribute the films that are produced in their studios. Fox also owns TV channels that distribute their films and previously owned DVD rental stores.
Which distributed the films they produced. This is a prime example of vertical integration and antitrust laws that were initiated in the 1940s previously limited the extent to which film studios were legally able to engage in such activity.
Federal Antitrust Laws Explained
In the early days when filmmaking first became powerfully popular among audiences. Studios controlled all aspects of the filmmaking process from production to distribution
And down to the actual exhibition of films. The studio would produce the film, distribute it in their theaters, and control how frequently the film was accessible.
Or what other films would be accessible alongside it controlling 100% of the profits. If this sounds like something that wouldn’t be allowed in today’s society? You’re right!
The Paramount Consent Decress
Federal antitrust laws, particularly a lawsuit that was initiated by the United States government, would place specific licensing rules on studios to eliminate such control.
The ruling from the U.S. government lawsuit came to be known as The Paramount Consent Decrees.
The result of which being a landmark decision in 1948 in the case United States v. Paramount Pictures. Thus, studios had to divest themselves of their exhibition holdings or in other words.
Studios were not allowed to control exhibition of the films they produced and distributed. Therefore they no longer owned 100% of the profits.
Unfair Demands
This also meant that other theater owners would no longer be subjected to the unrealistic and unfair demands that major studios, like Paramount, had previously been legally able to make.
Rules would be established to govern the relationship between film studios and the licensing of the films produced.
Since then, theater owners and major studios were held to the licensing regulations that had been set forth.
And The Paramount Decrees effectively limited vertical integration in the film industry for the next 72 years.
Changes to Vertical Integration Regulations
Things would change when The Paramount Decrees were under scrutiny under the Trump Department of Justice in 2020. Where there were previously laws against vertical integration.
And bans on practices such as block-booking which otherwise allowed the bundling of films into a single theatrical license, now those regulations would be changing.
So what did the 2020 ruling that turned over, or terminated The Paramount Decrees, mean for the film industry now?
The following changes are possible without The Paramount Decrees:
- Block-booking becomes once again possible. Which means studios are once again able to force a theater to show blocks of movies. Including the good, and the bad, if they intend to work with the studio.
- Circuit dealing becomes once again possible, which means that films can no longer be licensed on a theater-by-theater basis. This means that Disney could potentially ONLY sell their movies to a single theater, such as AMC if they so chose to do.
The Significance
So what’s the big deal? These two particular instances, as well as many other potential scenarios, mean that independent theaters are now back under pressure from the “big dogs” to conform to their requests which can be incredibly challenging for them.
For example, an independent theater would now be potentially forced to enter very specific contracts by the filmmakers and major studios.
Which could mean deals that require them to reserve a certain number of screens or to work with certain studios or else risk not having access to their movies all together.
Consider This
As an example, we’ll use Disney again. Consider if a small, independent theater wished to show an upcoming Disney film that everyone in the community is interested in seeing.
The theater knows that having this film available is important to their market. And that if they don’t show this film it’s likely that members of the community will find another theater.
One outside the community, where they can see this particular Disney film. So the independent theater makes a deal with Disney.
Disney’s Demands
But in doing so, Disney demands that a certain number of screens in their theater be available for the film regardless of the number of spectators or demand.
Disney also requires that, if they’re going to show this particular film? They purchase a block of films (block booking) and show 2 other films that Disney has released.
Which are not “good” and certainly not drawing external interest from the community. But Disney will not let the theater purchase distribution rights for one movie without taking on the other two.
The Effects
Can you see how this is going to impact independent theaters? Those with limited budgets that cannot compete with the bigger companies are going to suffer.
As they make decisions between showing particular films and keeping their doors open.
They can now be railroaded into making purchases that do not benefit and will not benefit their theater in order to get access to a single film.
Other Hypotheticals
And, what happens when Disney then decides to build its own theaters?
The independent theater will no longer even have access to the Disney films with, or without, all of the rules and stipulations.
Decrees Ruled No Longer Required for Public Interest
According to U.S. District Court Judge Analisa Torres, times have changed and the rules surrounding antitrust and vertical integration in the film industry must also change.
Thus it was ruled that The Paramount Decrees are no longer in the best interest of the public.
As it is “unlikely that the remaining Defendants would collude to once again limit their film distribution to a select group of theaters in the absence of the Decrees.”
What does all of this mean?
It means that there is great potential for independent theaters throughout the United States to soon fall victim to the scenarios and situations previously mentioned.
And that vertical integration in the film industry is no longer illegal or a violation of antitrust laws, at least not for now. It means that times are changing.
The way people watch films is changing (to streaming online, to fewer instances of in-theater viewing, etc). And it means that you might begin to see fewer independent theaters over the next few years.
Which means access to independent films could also change. It means, times are changing, and so too will the way you enjoy independent films.