Lessons from Hollywood on vertical integration

29 Jun

I was working on something related to movies the other day and came across an interesting slice of history I was not aware of that could have some bearing on a particularly contentious debate going on today. Last week, I wrote about how regulators should go ahead and allow free reign to so-called vertical integration, where large internet and telecom companies also own broadcasters. In Canada, the CRTC is in the midst of hearings on whether such a situation could turn anti-competitive.

My argument was to let ‘er rip – as long as consumers have fair access to the internet and a good chunk of monthly data usage, there will be tons of competitive options that will keep the vertically integrated companies from abusing their customers.

However, it does appear we’ve been on this ride before. Back in the 1940s, the U.S. courts struggled with a similar situation. Under the so-called studio system, Hollywood itself was thoroughly integrated for much of the first half of the 20th century. The likes of Warner Bros. and Paramount not only produced films, they also owned the theatre chains that showed them.

Theatres were thus required to take part in a process called block booking, where they had to purchase a bunch of crappy movies if they wanted the good ones. Not only that – they also had to buy a lot of these movies without first seeing them.

The parallels to today are obvious. In the first instance, television subscribers today commonly have to get a bunch of channels they couldn’t care less about in order to view the ones they actually do want. Many viewers would prefer to get their channels a la carte, where they only have to pay for the ones they want. Of course, many poorly viewed channels would go under if this scheme were put into effect. Once again, I say let ‘er rip – but that’s a debate for another time.

The more important parallel is that of the vertical integration. While the two situations – of yesterday and today – are not exactly alike, the similarity in both  is that the content owners also control the means of distribution.

The studio system was eventually smashed, first by the Paramount decision, which forced that studio to limit its block booking, and then by Howard Hughes who was the first to split off theatres from his RKO studio.

This structural separation, a term that is increasingly getting tossed around these days in regards to telecom companies, took a huge toll on Hollywood’s profits. Actors were laid off and fewer films were produced, but the industry of course recovered as it settled into a newly competitive paradigm.

While the court’s antitrust moves were probably wise at the time, they may not have been necessary in hindsight because of the inevitable encroachment of technology. The court cases started in the 1930s, when no one could have predicted what the arrival of television in the late 1940s and early 1950s would eventually mean. Indeed, television caused movie attendance to plummet and took almost as big a chunk out of Hollywood’s revenue as the end of the studio system.

Studios were thus forced to compete, which is when they came up with their own new technologies, such as widescreen movies, 3D and, of course, Smell-O-Vision.

That’s where the big difference is between yesterday’s film integration and today’s telecom/broadcast situation. While courts and regulators couldn’t see that technology would eventually make their interference unnecessary, today it’s already very obvious, which is another reason to allow vertical integration to go ahead unhindered.

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Posted by on June 29, 2011 in movies, telecommunications


5 responses to “Lessons from Hollywood on vertical integration

  1. Daniel Friesen

    June 29, 2011 at 12:37 am

    Just a little thought here though. The combination of being isolated and the advent of the TV caused studios to innovate. If those court decisions didn’t force the studios and producers to separate what might have happened?
    Without the forced separation couldn’t this have gone down a path where the producers desperately tried to resist the innovation of the TV and protect their studios. Wouldn’t that path have delayed the rise of the TV, and left us potentially without widescreen, 3D movies, and other innovations the separated studios made to protect themselves from fall?

  2. russellmcormond

    June 29, 2011 at 2:30 pm

    Just a caution that “let ‘er rip”, or “let market forces decide” only applies when market forces are allowed to decide. It sounds to me like a form of technological determinism, where one believes that technology can overrule government policy and regulation.

    I’m all for allowing vertical integration (and inevitable fall) of phone/cable/studios/etc if at the same time we had regulation to ensure that citizens had control over their own technology (IE: laws prohibiting non-owner locks on technology as well as anti-competitive ties between content and technology brands) as well as control over the “last mile” to their homes (IE: that right-of-way access came with a mandatory neutrality).

    The reality is that market forces don’t exist in these markets, and we need government regulation to deal with the existing non-owner locks, tied selling and non-neutral networks. Unfortunately our legislators and regulators are heading in the opposite direction. Vertical integration in the current political climate will only make existing problems worse, not solve any — and definitely not allow consumers to decide.

    Technology will not make their interference unnecessary, as it is not a technological issue or question. It is is good policy being required to counteract existing bad policy.

  3. Michael Ivey

    June 29, 2011 at 2:44 pm

    This only properly applies if there’s competition.

    Up here in Canada the vertically integrated companies act more like a cabal than as competitors. If one implements a more restrictive policy, everyone else will as well because they can get away with it. Most areas are essentially a duopoly, anyway.

  4. Marc Venot

    June 29, 2011 at 8:09 pm

    Since South Korea seems the frontrunner it would be easy to show how far behind a country is.

  5. Craig Bamford

    June 30, 2011 at 4:19 am

    This seems to be a very odd analysis. How on earth do we know that Hollywood’s vertical integration would have been no big deal? The better analogy is to Ma Bell, and technology clearly didn’t have any serious effect on that, except to *heighten* the opportunity and effects of monopolistic concentration.

    You (correctly) stated that usage-based-billing was a bad idea, yet missed the fact that the entire reason why they can get away with usage-based-billing is the same reason why they can get away with vertical integration: the natural monopolies over cable and phone lines. How is this in any way analogous to movie theatres? You can just make more of them. You can’t make more wired connections (you’d never get the land rights), and you can’t generate more wireless bandwidth. The same regulatory capture that led to UBB can (and quite possibly will) will lead to a spectrum giveaway to existing players.

    We don’t need counterfactuals. We already know where things stand, and we already know that unless things change, it’s extremely likely that the telecoms will be able to amass additional power. UBB was just the tip of the iceberg.


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