U.S. v. Paramount Pictures, et al.

In the early days of Hollywood, a handful of studios and distributors controlled nearly all movie theatres in the United States. They employed a system called “block booking,” whereby theatres owned by the major producers showed only their own company’s films; if an independent showhouse wanted rights to movies from a particular studio, they had to reserve in advance – and exclusively – thereby foregoing the products of rival conglomerates. In controlling distribution through such strong-arm tactics, these leviathans dictated not only where and when their movies would be shown, but set non-negotiable admission prices as well.

Clearly anti-competitive – the Federal Trade Commission opined that 98% of domestic films were thus monopolized – the U.S. Justice Dept brought suit in 1929 against Paramount, First National Pictures, Metro-Goldwyn-Mayer, Universal, United Artists, 20th Century Fox, Pathé Exchange, FBO Pictures, and the Motion Picture Producers and Distributors of America. Declared monopolistic in the lower courts, the Supreme Court affirmed the decision in November 1930.

That was right at the start of the Great Depression. And then there was the war. Studios ignored the decision. The government didn’t enforce it. But once the economy began to improve and hostilities ended in Europe and the Pacific, the Justice Dept filed a second suit. Many prominent individuals not originally party to the first suit (e.g., Charlie Chaplin, Samuel Goldwyn, Orson Welles, Walt Disney) were deposed this time around. Settlement negotiations faltered. And in May 1948, in U.S. v. Paramount Pictures, et al., the U.S. Supreme Court again agreed with the lower courts on most counts, including affirming the prohibition against price-fixing and block booking.

This high court decision still controls movie distribution and exhibition in the U.S. to this day, and it permits all theatres to negotiate with all studios for all movies.

But the playing field is hardly level – the major studios are still 800lb gorillas, the Supreme Court be damned.

So most modern contractual agreements runs like this: during a movie’s initial release, the bulk of gross ticket sales go to the studio, often as much as 95% of the revenue from a film in its first week, 85% in the second week, and so on.

By the end of a movie’s run, when the fewest people are going to see it, the theaters are taking the lion’s share of the gross. But when averaging earnings over a film’s entire run, a theater might only realize 20% of overall ticket sales.

This system provides a strong incentive for studios to make movies with much buzz and built-in demand from popular stars; they want films that can open with a bang during that period when they, the studios, are raking in most of the revenue. The theatres then get the left-overs as the film heads for DVD and large-screen oblivion.

Over time, it’s not even uncommon that theatres will take a loss on a given movie based on ticket sales alone. There’s really little that theaters can do about this; they still have limited leverage in negotiations, regardless of what the Supreme Court says. The theatres can’t make movies themselves, and certainly they can’t turn away major blockbusters from their screens, lest people stop going to their theater altogether.

This means that theaters must find other ways to make money outside of ticket sales.

The solution was, and remains, to charge ridiculous prices for concessions. This is from where much of a theatre’s profits come.

Or, as Jack Oberleitner, a long-time veteran of the business side of Tinseltown, once observed, theaters have “left the movie business and [are] in the popcorn business.”

Now, is there an explanation for the outrageous prices charged in airports for food and drink?

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