The Master Switch: The Rise and Fall of Information Empires - Tim Wu (2010)

Part I. The Rise

Chapter 6. The Paramount Ideal

Since 1909, when it had opened boasting “the world’s finest theatre pipe organ,” Tally’s Broadway had become Los Angeles’s leading “first-run” theater, the place to see the latest and best.1 The proprietor, Thomas Tally, was a true forerunner in the film industry, even credited by The New York Times with coining the term “motion picture.” He had also been a stalwart ally of the Independents in their fight against the Trust, faithfully subscribing to W. W. Hodkinson’s “Paramount Program” of thoughtfully selected Independent offerings. But for all Tally’s loyalty, in 1916 a salesman from Paramount visited him with some most unwelcome news.

Things had changed at Paramount since founder Hodkinson’s expulsion and the firm’s merger with a group of producers. The new management was now offering terms very different from those Tally had known before. Hereafter, if he wanted Paramount’s “star” films, he would be required to buy en bloc—a full year’s worth of films, all from Paramount’s production partners.2 He would, moreover, be obliged to buy the films “blind,” or without preview.

The agent represented Adolph Zukor, the onetime rebel Independent who that year had taken over Paramount, implementing the star system, whereby recognizable names became the essential asset in film. Among the essential assets he controlled, the greatest was Mary Pickford, the most popular actress of the 1910s and the anchor that made his block sales model feasible. “As long as we have Mary on the Program,” one of Paramount’s salesmen said, “we can wrap everything around her neck.”3 To get Mary, you had to buy the block.

While the Independents had just recently broken the chokehold of the Trust, Zukor was now showing every sign of wishing to reestablish empire, but with himself as the presiding mogul of American film. In some sense the latter objective was already in hand. Having engineered the takeover of Paramount, merging his Famous Players production studios with Paramount’s distribution might, he was now president of the largest motion picture company in the United States, if not the world. While never public about his ambitions—indeed, he spoke out frequently about the “evil” of combinations—his actions left little room for doubt.

In 1917, Tally and some like-minded theater owners decided to defy Paramount. After a meeting in New York they announced the formation of the “First National Film Exhibition Circuit.” The group comprised twenty-six major exhibitors, from San Francisco, Chicago, Philadelpia, Boston, New York, and other cities. At the meeting was Samuel “Roxy” Rothafel, manager of what was at the time the largest theater in the United States, the Strand on Broadway. First National’s goal was simple: “to find means of repressing Zukor before he could acquire dictatorial power.”4

The stage was set for another of the great industrial battles over an information medium, by now a familiar sort of contest, though in truth, no two will prove entirely alike when one considers the specific distribution of advantages and blind spots, the array of heroes and villains, or the distinctive consequences for American culture. In this instance, we have on the one side the Independent theater owners—a disparate group numbering in the thousands, not so formidable individually but, for now, holding collectively the preponderance of power in the industry. Their opponents, far fewer, were the new generation of big producers who had supplanted the Trust, including William Fox, Carl Laemmle, and, with his ascension at Paramount, the greatest of them all, Adolph Zukor.

At stake: not just control of the industry—Would it be open or closed to all but a handful of studios?—but also the character of the medium: Would it continue to be varied and independent, tailored to a variety of sensibilities, or produced at previously unexampled scales and nationalized, so to speak, for a single homogeneous audience?

AN IDEOLOGICAL CONFLICT

William W. Hodkinson had had his own strong ideas about the ideal structure of the film industry.5 Readers will remember he’d been the odd man out, the gentile from Utah who became a key ally of the Jewish immigrant insurgent leaders. Having started as a member of the Trust, Hodkinson, with an ornery streak, came to believe strongly that every “layer” of the film industry should remain separate—in other words, that producers should focus exclusively on making films, exhibitors on running theaters, and distributors on bringing the two together. Otherwise, he concluded, the quality of film would suffer: “The history of the business has shown that the most successful pictures have been developed by individual efforts rather than by mass production.”6

What Hodkinson opposed is what economists call vertical integration—the stacking, as it were, of the parts of an industry that perform different functions (here, production, distribution, and exhibition) to create a consolidated single entity. (The phenomenon is distinguished from horizontal integration, the more common effort to dominate a single function, in the way that Bell progressively took over nearly every telephone company, different firms that were doing the same thing but in different markets.)

Hodkinson’s Paramount, in its original form, was composed of eleven distributors, collectively serving as America’s first national distributor of feature-length films, and as such a crucial link between the Independents and the market.7 Paramount advanced funds to the producer in exchange for exclusive distribution rights, and all relations were contractual. By furnishing such security, Hodkinson thus hoped to encourage longer films of higher quality, according to his motto, “Better Pictures, Longer Runs.”8

The structure of the film industry

When the Trust began to crumble, Adolph Zukor soon became Hodkinson’s ideological rival among the Independents. As allies against the Trust, they had been rather like Trotsky and Stalin—united merely for convenience of the revolution, the former preoccupied with a great vision, the latter with power. But Zukor’s plan for the film industry was predicated on achieving a system of mass production not much different from that favored by other magnates of the time, such as Henry Ford. The central idea was to control as many parts of the business as possible. In steel, that meant owning the mines, the trains, and the mills. In film, it required owning the talent—stars, directors, and writers—as well as the studios, the distribution networks, and, ultimately, the theaters.

Hodkinson believed in what is sometimes called craft, or authorial filmmaking, wherein one creator did nearly everything, writing, directing, producing, and casting his own film.9 He was, in fact, among the original backers of a tradition that we identify now with directors like the Coen brothers, Peter Jackson, Woody Allen, and Francis Ford Coppola. In contrast Zukor saw not craft but the latest methods of production as the true stock-in-trade. He would come to promote the “central producer” model, concentrating most of the decision-making authority in the producer rather than the director. With streamlined production and virtually guaranteed audiences, films could be grander and more elaborate than ever. It was a new idea for a cultural industry: there was no need to settle for the meager profits of the nineteenth-century model still ruling the stage; with the twentieth-century methods of production, one could have a balance sheet to match!

In the Hodkinson-Zukor divide emerges a recurrent contest over American culture. Zukor’s ideology foresaw one mighty firm in control at every level, coordinated, integrated, and centralized, with one mogul at the hub, in this case himself. Where Hodkinson’s revolt against the Edison Trust was abstractly conceived as a break with the machine, Zukor’s ambitions, no less the product of his times, were more nearly a usurpation, a revolt to replace one machine with another. As the historian Lewis Jacob writes, “To be important a thing had to be big—and so the movie became one of the biggest things in American civilization.”10 Everywhere, businesses were growing into giant, consolidated operations, powered by Wall Street money. It was no giant leap to imagine film as a national monopoly, and Zukor planned to make it his own. For despite every disadvantage in youth he believed himself destined for greatness in the land that had received him. This meant success not in something insubstantial as culture but a respectably large American enterprise, such as he dreamed movies could become. Those born into the ruling class, like the founders of the Edison Trust, could afford to lord it over a cut-rate cash cow. Zukor’s ambitious self-creation called for something grander.

In 1916, Zukor’s proposal of an alternative machine called into question what the Independents had stood for in their heroic revolution: Throw off domination, or simply throw off East Coast think-small domination?11 Hodkinson, for his part, was in no doubt, baldly refusing to give up on the “Paramount Ideals.” He would to the bitter end continue to regard the curatorial model of funding and distribution as essential to the creative vitality of the industry. In a later interview, he would continue to insist on the distributor as a “neutral” middleman, rather than one “trying to pull the chestnuts out of the fire for some producer of unworthy pictures or giving exhibitors something for nothing.”12

Among the agents Zukor dispatched to sell his vision was Benjamin Hampton, who would later write an important history of the period. Hampton recounted how he pressed Zukor’s case to Hodkinson: “I said bluntly that the owners of Paramount were in business to make money and that his adherence to what he called ‘Paramount ideals’ would come to nothing.” Zukor, he warned, would simply buy out the partners and force him to quit. Not that Hodkinson was unaware what he was up against; he simply didn’t care. “I am right,” he replied, “and if I’m put out of Paramount for being right, there will be another place for me in the industry.” Finally, as Hampton relates, “he turned in his revolving chair and gazed at the pigeons wheeling above the marble portico of the Astor Library. Silence settled on the room. He could not change his point of view.”13

Zukor stealthily made good Hampton’s prediction, buying out a majority of Hodkinson’s partners. On July 13, 1916, at a dramatic board meeting, Hodkinson was ousted from the presidency in a single vote. The new president of Paramount, Hiram Abrams, announced: “On behalf of Adolph Zukor, who has purchased my shares in Paramount, I call this meeting to order.”14

With one of the original proponents of separating production and distribution gone, Zukor made himself head of the new combination, the first major integrated studio in America and now the largest film corporation in the world.*

We have now seen something of Zukor in action. It is worth studying the man a bit more in establishing a profile for the defining mogul archetype that figures so often in this narrative. He was, as we’ve said, a figure from central casting, and if we were making a film, he might be rejected for any role requiring a measure of nuance: an orphaned immigrant Jew of small stature but pugnacious, who spent his teenage years boxing larger foes. The newspapers would call him the “Napoleon of Motion Pictures,” but what he sought was something more akin to boss-of-bosses status in the industry, dispensing decisive preferments and punishments in accordance with his personal code of honor. He liked to operate in secret, leaving others to wonder what he was up to until he sprang his plans. “I began to compare him with the many industrial and financial magnates whom I had met,” wrote Hampton. “I soon decided that nothing like Zukor had yet appeared in America.” The director Cecil B. DeMille recalls “the steel and iron, the indomitable bravery and driving determination, in that little man.… There would come a time when he would put his two clenched fists together and, slowly separating them, say to me, ‘Cecil, I can break you like that.’ ”15

THE BLOCK AND THE CHAIN

With his takeover of Paramount, Zukor became a de facto leader of the Independents, arriving nearly where he wanted to be: in the place of prime mover of motion picture. What lay between Zukor and the absolute control over film he craved? Not his fellow studio executives. True, these rebel comrades, including William Fox, head of Twentieth Century–Fox, Carl Laemmle at Universal, MGM, and the Warner brothers, were technically his competitors, but in effect they were still operating jointly as a cabal, their common roots on New York’s Lower East Side having forged a lasting if unofficial (or at least undisclosed) unity. No, Zukor’s real opponents, as we’ve said, were the theater owners, recently organized in the First National Exhibitors Circuit. At 3,600 strong, they were still a mostly disaggregated and diverse mob, but as they held the power to decide what would be exhibited and what wouldn’t, they controlled most of the industry’s revenues.16

Soon after organizing, Tally and the First National leadership demanded an end to block sales and blind booking, backing up the move with a boycott of Paramount, the primary purveyor of film blocks. By the summer of 1917, Zukor had blinked. His official statement in Photoplay magazine said: “After August 5, 1917, any theatre in America can secure Paramount Pictures and Paramount Stars just as it chooses to book them.… The Restrictions are Off.” Flexing its newfound muscle, the theater coalition went further, making a startling announcement in 1918: First National had acquired film’s two biggest cash cows, Charlie Chaplin and Mary Pickford, the latter “America’s Sweetheart” and the beating heart of Zukor’s business.

There was no great cleverness behind the coup, only more money and creative freedom. Tally’s group offered Pickford and Chaplin each an unprecedented million-dollar contract, together with the right to make any films they wanted. Details of Chaplin’s deal survive: eight two-reel films a year, at $125,000 per film, and his own studio on Sunset Boulevard.17

Zukor, despite his wealth, could not match these offers or the financial might of the theater owners. As Hampton relates, Zukor tried promising Pickford $250,000 simply to retire for five years, but she refused, saying, “Oh, I couldn’t do that, Mr. Zukor. I love pictures, and I’m just a girl. I couldn’t quit now.”18

As was his custom when not taking action, Zukor would remain silent for some time after First National had stolen his stars and broken his block booking program. In hindsight, we can see that it was during this quiet interval that the entire plan for the Hollywood studio was hatched in Zukor’s head. He came to understand that if his studio and the others wanted to control the entire industry, they would need to control distribution. And so he blazed the path that the rest of the studios would soon follow.

In 1919 Zukor made a bold move, issuing a $10 million stock offering, unheard of by the standards of the film business, and with those funds, as the 1920s began, he launched a direct assault on the exhibition industry. His plan was to acquire every theater he could, build new ones, and reintroduce block bookings. As was his wont, however, he disavowed being up to anything at all, insisting that Paramount “had no desire to enter into the exhibition business unless forced to do so because of a lack of proper theaters in a particular community, or because of our inability to obtain proper representation for its product.”19

In this struggle between Zukor and the theaters we see the lineaments of a classic contest between a single, integrated firm and a disaggregated, loosely allied, industry; this opposition reveals what the economist Mancur Olson has described as the organizational advantages of a small group (like the Hollywood cartel) over a group comprising thousands (the theaters).20 Zukor, as the leader among the studios, adopted the very soul of divide-and-conquer. He established a presence in large cities, but without trying to take on the powerful theaters in New York or Los Angeles. Instead, his campaign targeted the weakest links in the theater alliance, in small towns, particularly in the South, New England, and the Midwest.

In New England, Zukor joined forces with a man named Alfred Black, who “was so successful in persuading or frightening exhibitors that he soon had thirty or forty houses in New England.”21 For his Southern strategy Zukor relied on a team headed by a tough character named S. A. Lynch. As Hampton writes, “the methods of the energetic Lynch in dealing with theater owners were hardly gentle. His emissaries soon became known by such names as ‘the wrecking crew’ and the ‘dynamite gang.’ ”22

Lynch crisscrossed the South like Sherman and presented the top theater in each town with a choice of either the chain or the block: either sell out and join the “chain,” or else agree to exclusive or preferential showing of Paramount films—the “block.” Those who would not comply were punished with a new theater built next door, or threats of worse. Here is how the Saenger Amusement Company, a Lousiana theater operator, described the experience in a full-page newspaper ad: “The methods they are using are as near Bolshevism as anything I know of. They hope to gain a hold for each tentacle of their octopus by threats and brute financial force.”23

In this, the first use of the chain model to destroy independent theaters, we see the application of Henry Ford’s credo of central organization to the point of sale.24 The chain approach had been pioneered in the 1910s by firms like A&P and Woolworth’s, decades before Walmart would use it to conquer retail to a degree previously unimaginable. But taking the chain concept to the film industry was an entirely radical innovation, one introducing consequences, cultural as well as economic, that continue to this very day.

As he began to build and acquire theaters, Zukor also infiltrated First National, and by 1921 he had, in addition to more than three hundred theaters, three seats on First National’s board. There were rumors (later proved true) that he had bought out the members he supplanted. Soon the rest of the First National board were thoroughly “demoralized,” as the historian Richard Koszarski writes, and “no longer sure which of their number was now in the enemy camp.”25

As his campaign wore on, other facets of Zukor’s character appeared. Meeting obstacles and resistance, denounced by the theater owners at every turn, he nonetheless refused to be cast as the villain, instead displaying a fascinating adroitness at placating and befriending his enemies. One memorable incident of 1921, for example, has Zukor arriving alone at the organization of independent producers. He apologized for the excesses of the Southern strategy. “Tears rolled down his cheeks,” writes Hampton, “as he declared his lack of personal responsibility for the acts of oppression committed by the Black and the Lynch crews.”26 Perhaps deep down he had some misgivings, betraying those with whom he had fought the Trust. As recently as 1918 he had been fulminating that “the evil of producing and exhibiting coalitions is one of the gravest perils that has ever confronted the motion picture industry. If the business is to progress, it must advance on the basis of free and unhampered selection of product for exhibitors, large and small.”27

Strange words from the man who founded the Hollywood cartel and destroyed independent film in America. If ambivalence ever troubled his mind, it never stayed his hand.

THE BLOCK

Zukor would continue for two more years before his campaign of theater buying and reintroduction of the block attracted federal attention. In 1921 the Federal Trade Commission announced Complaint No. 835, an investigation into the trade practices of Adolph Zukor’s Paramount Pictures.28 Zukor, the complaint alleged, had conspired to “monopolize the motion-picture industry, and to restrain, restrict and suppress competition in the distribution of motion picture films.…”29 The gathering of evidence began, and the investigation would last for years, centering on questions never answered to everyone’s complete satisfaction, even to this day: Was block booking really such a bad thing? Why did the exhibitors oppose it so vehemently?

Interestingly, it was W. W. Hodkinson, the deposed founder of Paramount Pictures, who had first introduced a prototype of block booking through his “Paramount Program” in 1914—a move he would live to repudiate, writing in an essay: “I am a Frankenstein. I created the thing which has grown into an uncontrollable monster!”30 And at the time he used it, the practice was actually welcomed by theaters. But by the late 1910s, after Zukor’s rise and thereafter, the independent theaters vociferously rejected being forced to buy films they did not want. And the studios had begun to insist upon the defense they would ever after cling to: block booking was simply a form of bulk sales, such as any scaled-up modern industry depends on. As large, modern operations, the studios could not be expected to tailor their menus to the tastes of thousands of independent theaters.

There was a crucial difference between Hodkinson’s block sales and those of Zukor et al.: under Hodkinson, the distributor chose the best films he could find and sold them as a package. For years after Zukor had combined distribution and production, however, theaters would complain of the block as merely a device for coercing them to buy many third-rate films just to get a few good ones.

At some level, what most galled the theater owners was not being sold a bill of goods, literally, but the loss of discretion. “The exhibitors demand that they be given a voice in the selection of entertainment for their people,” wrote one of them, a P. S. Harrison, in 1935.31 The theaters had lost not only a say in the business decision of what to carry but also their cultural power to curate: to promote tastes and views, to fit their programs to local audiences. Here we see a rift that will appear in virtually every information industry, the fault line between the virtues of centralized and of decentralized decision making, between the imperative to produce at scales that justify production costs and the desire for variety.

And it was not exclusively a matter of taste. Men like Harrison were less vocal about the right to choose the films they would show than about the right not to show those they considered objectionable. “The question,” he wrote in The Christian Century, “is whether the American people will continue vesting in a small clique of picture producers the right to control a medium which has so much influence upon the lives and minds of the people, particularly upon the minds of our young men and women.”32 In essence, then, some theater operators opposed block booking because it denied them the right to censor films for their audiences.

As we shall see, the Supreme Court would in 1948 and again in 1962 agree with Harrison and other independent exhibitors that block booking did indeed violate the antitrust laws.33 How? By “add[ing],” the Court found, “to the monopoly of a single copyrighted picture that of another copyrighted picture which must be taken and exhibited in order to secure the first.”34 Most economists who have studied block booking since the 1960s, however, have tended to defend it as harmless and in some ways efficient. Most famously, in 1963 George Stigler, a Nobel Prize–winning star of the Chicago school of economics35 disputed the idea that bundling could “extend” a monopoly, arguing it did not confer any advantage or leverage a firm holding copyrights didn’t already have.36 In 1983, the economist Benjamin Klein suggested as justification the avoidance of “oversearching”—the time and expense of bargaining over particular films, which he called “goods of uncertain and difficult to measure quality.”37

Stigler and Klein might be right that block booking cannot, by itself, extend or expand the monopoly power of a particular copyright, and that selling by giant lots can be efficient for a studio supplying thousands of theaters. But what they neglect to consider are the potential consequences for the nature of the product itself.

Suppose the block sale is undertaken by an oligopoly of the top five producers? That in fact is what happened. There was no explicit agreement among the studios to sell by the block. But the absence of collusion doesn’t change the impact of a practice if all subscribe to it. And so, beyond any effects on receipts, a consequence of the general adoption of block booking may have been to displace from prime venues any films not produced by the major studios—to fill, as it were, the shelf space with industry products, a practice I call parallel exclusion. In fact, this was one reason the Supreme Court mentioned for barring the practice in 1962: that exhibitors “forced by [the studios] to take unwanted films were denied access to films marketed by other distributors.…”38

Again we must confront the reality that cultural and information industries pose special problems for standard industrial analysis, complicating the rules of supply and demand by virtue of the product’s less tangible forms of value. We might understand perfectly well how block booking and vertical integration reduced the costs of industrial production, while understanding nothing of what these innovations meant for film as a form of expression. Interestingly, when it comes to products like film, such inefficiencies as “higher search costs” might be a good thing, if the result is greater variety in what gets seen and heard. As the film critic Pauline Kael wrote in 1980, “there are certain kinds of business in which the public interest is more of a factor than it is in the manufacture of neckties.”39

THE TURNING POINT

Few realize that 1926, before the triumph of the “talkies,” was the turning point for American film. In that year Zukor scored his greatest victory—the one that finally broke the independent theater industry—with his takeover of Balaban and Katz, Chicago’s most powerful independent theater chain, the Midwestern backbone of First National.40 With the fall of Chicago, the fight was essentially over. Zukor now had direct control over more than a thousand theaters, including many of the most important.

Zukor’s Publix Theater Corporation, a Paramount subsidiary, was now the first true national theater chain. At its height, it claimed total dominance in the South and Midwest, as well as considerable power everywhere else. Every day, 2.5 million customers came through Paramount’s doors. A hobbled First National, meanwhile, retreated to film production before finally selling out to an ascendant Warner Bros. in 1928. By joining Warner Bros., the nation’s last great independent theaters had given up their war with Hollywood and effectively joined the system.41

In 1927, Zukor and his allies also managed effectively to contain the threat of the FTC investigation.42 In 1926, after heavy lobbying by the film industry, its friend Abram Myers was appointed by Calvin Coolidge to head the commission. Myers’s FTC concluded the block booking investigation and issued a rather weak reprimand of the industry. Variety labeled it a mere “gesture,” and Zukor announced that he would ignore the decree. It was, in any event, reversed by the District of Columbia Court of Appeals in 1932.

The late 1920s would thus prove little more than a mop-up operation. Paramount, MGM, and Universal hunted down and destroyed most of the independent theaters, producers, and distribution companies. Warner Bros., once a small independent producer, managed to join the ranks of the major studios with the first truly successful sound film, The Jazz Singer. Among the others, only United Artists, formed by D. W. Griffith and a group of movie stars, would survive, going on to play, as we shall see, an important role in the film industry of the 1970s.

Meanwhile, Thomas Tally, founder of First National Exhibitors Circuit and onetime Zukor rival, abandoned the film industry. His time had passed: together with his son, he established a ranch outside Los Angeles. As for W. W. Hodkinson, he survived as an independent producer until 1929, nurturing the independence of directors like Cecil B. DeMille. Yet he, too, would quit the industry, moving to Central America, where he started an airline; but to his dying day in 1971 he would maintain that Hollywood had made a giant mistake when it followed “that character” Adolph Zukor.43

The rise of Hollywood and of the Zukor model is another definitive closing turn of the Cycle. In the course of a single decade, film went from one of the most open industries in the United States to one of the most controlled. The flip shows how abruptly industrial structure can change when the underlying commodity is information. For no sooner had the age of the independent theater owners ended than the openness of the film business had, too. And with the rise of the Hollywood studio—our most visible manifestation of mass-produced culture, then as now—began a rule that would last for decades.

* The new combination, called the Famous Players–Lasky Corporation (Jesse Lasky being the one of eight partners to get a credit), would continue to distribute films under the Paramount Pictures trademark, until the entire firm came to be known as Paramount Pictures.