This classification covers establishments primarily engaged in the distribution (rental or sale) of theatrical and nontheatrical motion picture films or in the distribution of videotapes and disks, except to the general public. Establishments engaged in both distribution and production are classified in SIC 7812: Motion Picture and Videotape Production. Establishments primarily engaged in renting videotapes and disks to the general public are classified in SIC 7841: Videotape Rental. Those businesses engaged in the sale of videotapes and disks to individuals for personal or household use are classified in SIC 5735: Record and Prerecorded Tape Stores.
421990 (Other Miscellaneous Durable Goods Wholesalers)
512120 (Motion Picture and Video Distribution)
The U.S. motion picture distribution industry in the early 2000s was stratified into two distinct categories: majors and independents. Major studios control the lion's share of movie distribution revenues and show films in large multiplexes and community theaters alike, whereas independent distributors rely more heavily on smaller art houses and rarely achieve the box-office blockbusters enjoyed by the majors. In recent years, majors invested heavily in purchasing many of the leading independent distributors, such as Miramax and New Line Cinema, in a massive trend toward vertical integration. The remaining independents benefited from the unexpectedly robust box-office success and critical acclaims of a string of high-profile independent films, briefly breathing new life into this struggling market sector. However, by the early 2000s, independent distributors were once again struggling in the shadows of industry giants.
According to the Motion Picture Association of America (MPAA), in 2002 domestic box office returns equaled $9.5 billion, up more than 13 percent from the previous year's record. This represented the eleventh consecutive year of box-office expansion and was the greatest annual increase in 20 years. Admissions increased more than 10 percent that year, the greatest increase in 45 years. Ticket prices steadily increased during the early 2000s, rising from an average of $5.39 in 2000 to $5.66 in 2001 and $5.81 in 2002.
During the early 2000s, more than 93 percent of domestic box office revenues were attributable to the 10 leading distributors. A total of 467 films were released in 2002, down from 482 the previous year. Of these, 449 were new releases and 18 were reissued films. Major studios produced 225 of these, 29 more than in 2001, whereas independent distributors released 242 films, a decline from the 287 in 2001. Although these numbers seem to favor independent distributors, those films generally maintained very limited reach; in recent years, nearly 90 percent of all ticket sales were accumulated by the handful of leading major distributors. A landmark was surpassed in 1999 when for the first time two distributors, Buena Vista and Twentieth Century Fox, topped $1 billion in box-office receipts. In 2002, the average feature film grossed $21.2 million, up from $18.2 million in 2001 and $16.7 million in 2000.
World markets for films and television programs have long been critically important to U.S. producers and distributors. Over the past 30 years, foreign markets have generally accounted for about one-half of major U.S. producers' total sales in these industries. The success of American films and television productions in world markets is indicated both by industry trade balances and by comparisons with other film and television exporting nations. The United States has historically exported more than three times the total television programming exports of the next three leading exporting nations combined. For years, U.S. studios were limited significantly by a variety of barriers to trade in foreign markets. In the mid- and late 1990s, they welcomed the relaxation of such restrictions as a result of free trade agreements enforced by the World Trade Organization. By the early 2000s, the increasing adoption of the English language gave U.S. filmmakers an edge over foreign competitors. Growth in the pay television and home video markets were other factors benefiting the industry abroad.
The organization and structure of the motion picture industry has become concentrated in the major Hollywood studios who have taken control over its three major divisions: production, distribution, and exhibition. The organization of the industry into companies that have become fully integrated producers/distributors/exhibitors represents a structure that existed in the 1920s and 1930s but was disbanded under antitrust regulation and then rekindled during the Reagan Administration. This structure has hurt film distributors without established alliances or reputations, known in the industry as "independents," because many of the nation's prime theater venues have relationships with the major distributors who book the larger theaters months in advance.
Typically, a motion picture studio distributes or licenses the rights to its film to an independent distributor, who in turn sells these rights to theaters or exhibitors across the country and abroad. The distributor licenses films to exhibitors by either bidding or negotiation. To obtain the maximum revenue from motion pictures, they are released in a series of runs to theaters across the country. "First run" indicates a picture's initial widespread release to "high gross" theaters across the country. Subsequently, the films are released to lower gross theaters across the country until the earning capacity of the film is finally depleted in the exhibitor market. The film is then marketed abroad by foreign distributors, then released in video format, and offered on cable television before it is syndicated to the television broadcast network.
When an independent distributor pays for the rights to market a specific film from a Hollywood studio, that company then forms a contract with the exhibitor market to show the end product. These contracts take many forms but normally include several key features. The distributors create "zones" or geographic boundaries for their pictures. Normally, within each zone a distributor would only release a particular motion picture to one theater for exhibition. This practice ensures that the distributor will obtain the largest audience for a film, and it prevents other theaters in close proximity from competing for the same customers who might wish to see that particular movie. There is usually a clearance clause in the contract that relates to the amount of time that must elapse between the end of the first run of a motion picture and the beginning of its subsequent runs. Longer clearances provide more first-run revenues for a picture. Finally, many of the distributors of "A" rated films also practice block booking. Block booking is the practice of offering for license one feature, or a group of features, on a condition that the exhibitor also license another feature, or group of features, released by a distributor during a given period. Block booking ensures outlets for a motion picture regardless of its quality or box-office potential. The practices of block booking and blind bidding (requiring an exhibitor to bid for a film before reviewing it) by distributors are now regulated in approximately half of the states in the United States. These statutes, although primarily concerned with curbing the practice of blind bidding, also regulate the whole bidding process.
Since the formation of the motion picture industry by individuals such as Thomas Edison, Louise and August Lumiere, C. Francis Jenkins, and Thomas Armat in the 1880s, movie producers and distributors have attempted to control the industry by engaging in a multiplicity of tactics. Originally, monopolies were attempted through the ownership and protection of patents on the equipment and technology needed to produce and exhibit motion pictures. As technology advanced, the power that these patents could provide decreased. In an attempt to maintain control, industry leaders, led by Edison, merged their companies and formed a cartel, the Motion Picture Patents Company (MPPC).
At first, the MPPC wielded its power by pooling all of the licenses and patents that its individual members held. It defended its position by bringing numerous lawsuits against those who infringed on their rights. At the same time, motion picture exchanges developed to distribute the movies that the MPPC was producing. These entities purchased or leased films from producers and rented them to theater owners. These exchanges became quite profitable, and the MPPC purchased most of them in a vertical integration marketing strategy. As the MPPC purchased exchanges, it instituted practices that were designed to increase its bargaining power and ability to control the exhibitors who needed the product. Using its patents to force compliance from the exhibitors, the MPPC imposed restrictions on these exhibitors, including stipulations that implemented a system of distribution based on theatrical runs, geographic zones, and clearances (the amount of time contracted for between the first run of a motion picture and subsequent runs). The MPPC's successful control over distribution was short-lived. A motion picture antitrust action brought by one of the few exchanges that MPPC did not operate resulted in the dissolution of the trust arrangement. The first attempt by movie producers at organized distribution had failed.
Although this decision brought an end to the MPPC, it was not successful in curtailing the control that motion picture producers and distributors had now gained. In 1916 Paramount Pictures Corporation, a fully integrated production and distribution company, arose from the ashes of the MPPC. Paramount, as a producer, had contracts with many popular film stars. It was able to use the appeal of the stars together with its distribution capabilities to create a new mechanism for control through block booking. Although Paramount was a dominant force in the industry, other companies gained similar control by engaging in similar practices. Block booking, along with the established run-zone-clearance system, effectively put the exhibitors at the mercy of the producer/distributor companies.
In response to these practices, the exhibitors gained bargaining power by forming chains and circuits. In 1917 the First National Exhibitors Circuit was formed. This group of exhibitors gained power and market domination through anticompetitive practices of their own. As a consequence of the power that these exhibitors had gained in their circuits, control of these cinemas meant control of the entire industry, and they became targets for purchase by the big producers. The studios' purchasing was influenced by the realization that if they could control every level in the motion picture industry, from production to distribution to exhibition, they would not only be able to control prices and ensure access to screens for the exhibition of their own pictures, but they would also be able to prevent competition from independent producers and gain control over the entire industry. The studios began to purchase exhibitors to make this complete control a reality. As a result of these monopolistic activities, with studio-owned circuits gaining control over entire exhibition markets, the government felt it was necessary to intervene.
By 1930 the government had filed numerous lawsuits against the circuits and distributors in an attempt to curtail these practices. The industry was clearly dominated by a group of eight major studios. The top five vertically integrated firms—all with a major presence in distribution, exhibition, and production—were Warner Brothers Inc., MGM Inc., Paramount, Twentieth Century Fox Film Corp., and RKO. The other three included Universal Studios and Columbia Pictures (involved solely in production and distribution) and United Artists (distribution only). The majority of these suits charged the defendants with illegally restraining trade by adopting various anticompetitive practices, including the use of arbitrary clearances, discriminatory zoning methods, and block booking. Although the government succeeded in forcing the studios to restrict their conduct, it ultimately lost the battle, as the anticompetitive atmosphere had taken over the industry. By the end of the 1930s, the majority of the most powerful circuits had been purchased by the major studios.
In 1938, as a result of these anticompetitive practices, the U.S. government filed a case against the major studios, which has come to be known as the "Paramount case." The suit alleged that the motion picture producer defendants had attempted to monopolize and had monopolized the production and distribution of motion pictures. Although the case never went to trial, the major defendants signed a three-year consent decree that enjoined them from block booking more than five pictures, blind bidding, and requiring unreasonable clearances from exhibitors. The agreement also stifled forced rentals and limited the defendants in their quest to purchase exhibitors. This decree was unsuccessful in bringing about change in the industry because the government did not require the separation of production and distribution from exhibition.
In the late 1940s and early 1950s, the government reopened the Paramount case. The final result of this action was that all major motion picture studios were required to license motion pictures on a picture-by-picture basis, solely on the merits and without discrimination in favor of affiliated theaters, circuit theaters, or others. In addition, the government forced the five major companies to divest specific theaters and theater circuits. This action dismantled the fully integrated motion picture industry. The grip that studios had once held over the industry had finally been loosened. By eliminating the domination of vertically integrated studios, the hold over motion picture distribution was sufficiently weakened to give independent producers and distributors access to screens and a chance to prosper in the industry. The number of independent producers grew from 70 in 1946 to nearly 170 in 1950. In early 1953, the U.S. Justice Department concluded that the industry had become "demonopolized" and that competitive bidding and negotiations had become the dominant method of film licensing and distribution. In this environment, independent theaters were given the chance to compete equally for the right to exhibit first-run movies.
The industry operated under this format until 1980, when President Reagan allowed studios to once again become vertically integrated by giving them the right to own movie theaters. This new application of the antitrust doctrine under President Reagan was used by the studios to reshape the motion picture industry. Under the Reagan administration's policies, the Paramount consent decrees were not enforced, and the movie studios once again reassembled the vertical integration path abandoned in 1948. By 1985, the studios were overcome with acquisition fever and were purchasing theaters at a record pace. Although some studios waited with cautious observance to analyze the Justice Department's response to these acquisitions, it raised no objections. Between 1985 and 1988, movie companies spent more than $1 billion to purchase independent movie theaters. The entire motion picture industry reverted back to the structure that existed before circuit divorcement and theater divestiture in 1948.
With the increasing popularity and mainstream critical acclaim of independent hits in the late 1990s, the motion picture distribution industry experienced an evertightening link between independent producers and Hollywood distributors, who saw in the former's products a lucrative and refreshing break from the increasingly formulaic, sequel- and budget-driven Hollywood market. In that spirit, major distributors entered into revenue-sharing agreements with independents, in which the majors took a share of the receipts in exchange for wider exposure. This practice encapsulated the decade-long efforts of major studios to reach into the independent market.
Meanwhile, rising advertising costs made it more difficult for independents to turn a profit and were likely to result in fewer films in an attempt to scale back budgets, with advertising and exposure efforts devoted to the more hopeful products. Although few independent distributors could expect to reap Hollywood-scale rewards at the box office, some were able to break into the major-studio stratosphere in the late 1990s. Independent films enjoyed spectacular revenues at theaters from widescale features like The English Patient, Shakespeare in Love (both of which won several Oscar Awards, including Best Picture), Good Will Hunting, and The Full Monty. Meanwhile, the unlikely runaway success of the independent Artisan's The Blair Witch Project ; with $140 million in box-office revenue, generated a record in profitability, as the documentary-style film was produced for less than $60,000.
The major independent studios included October, Fine Line, Fox Searchlight, and Artisan. The number of independent films released doubled between 1995 and 1998. The bread and butter of independent films were the smaller art houses, which have diminished in number with the trend toward enormous multiplexes, which are dominated by the major distributors. Along with the rising numbers of independent film productions, this has created a fiercely competitive distribution market among independents. As a result, this market has become internally stratified as distributors concentrate their production and promotional budgets on those films likely to achieve the greatest success. Sixty-eight independent films grossed $1 million in 1998, compared with $48 million in 1997, but far fewer earned more than $20 million.
For the independent exhibitors, distributors, and producers, one of the most unsettling aspects of the resurgence of major studio involvement in distribution and exhibition was that the studios hoped to guarantee their access to screens. Although the Paramount decree required divestiture and mandated that motion pictures be distributed theater by theater solely on merit and without discrimination, the reintegration of the industry has removed these safeguards altogether. As affiliated and nonaffiliated circuits continued to grow in size, independent circuits were virtually eliminated from the competition to obtain first-run motion pictures. Although there was no evidence of collusive or discriminatory behavior by distributors or affiliated circuits, the market power of the large affiliates was allowed to resurface.
In an attempt to rectify the imbalance of bargaining power that distributors maintained over exhibitors in the licensing of motion pictures, many states passed statutes to regulate motion picture licensing. The majority of these statutes regulated the licensing of motion pictures and the bidding practice used to gain control of a motion picture. Motion picture licensing usually occurs under a competitive bidding, competitive or noncompetitive negotiation, or track system. With competitive bidding, distributors send exhibitors solicitation letters informing the exhibitors of the release of new films. This correspondence contains a minimum amount of information about the film, possibly the stars and a brief plot synopsis, and suggested terms for the licensing of the film. If the distributor is unhappy with the bids that it receives, it will either solicit new bids or negotiate directly with the exhibitors. Lastly, the track system is used when there is an established relationship between an exhibitor and a distributor.
Exhibitors themselves have also attempted to obtain some bargaining strength against the major studio distributors with the use of "split agreements." Split agreements are the practice whereby exhibitors in a given market split the rights to negotiate for the rental of upcoming films. These agreements ensure that each split member has an initial right to bid or an opportunity to negotiate for certain films without competition from other split members. Because other split members agree not to submit bids for films that have not been designated to them, participants in split agreements initially face competition only from exhibitors who are not members of the split. Distributors have tried to fight these agreements in court in order to maintain their bargaining strength.
The nature of motion picture distribution was dramatically altered by the rise of home video in the 1980s and 1990s. Distributors increasingly relied on small-screen revenues to recoup their costs. With box-office receipts shared between distributors and theater operators, the home video market came to be an important part of the distribution system. In 1998, movie distributors earned about $8.5 billion in video rentals from U.S. and Canadian theaters and a similar amount overseas. On the other hand, video sales and licensing films for television broadcast brought in more than $12 billion. Nevertheless, home video has become the leading source of profit for distributors. It offers many movies a new lease on life, because films that would otherwise go straight into the company vaults are now routinely released on video without a theatrical run. However, box-office performance remains critical to a film's future success in the home video and television markets.
Another growing market for film runs in the late 1990s was in satellite broadcasts. By 1999 made-for-satellite films constituted a $543 million distribution market. There were approximately 10 million pay-per-view subscribers in the United States, a figure that was expected to increase with the further proliferation of DirecTV service. Furthermore, satellite broadcasters were leaning increasingly toward on-demand video service, in which customers could download any film licensed to the broadcaster directly to their homes. Several major Hollywood directors, including Francis Ford Coppola and John Landis, boosted the satellite movie market by producing made-for-satellite films, in which producers contract directly with satellite broadcasters for exclusive rights to show the films.
Although a number of very successful independent films were released during the early 2000s—including My Big Fat Greek Weeding —this sector of the film market was not attracting the attention it had during the late 1990s. As larger industry players swallowed up independent distributors, some observers argued that profits had become a primary concern and the quality of the films had suffered. As Newsweek explained in September 2001, "Truly independent films are subsidized by multiple credit cards, loans from Mom or lucky encounters with the idle rich. And it is those films that are struggling to reach moviegoers today. …Like so much of what ails Hollywood, the slump in the art-film scene is directly tied to the pursuit of profits. The studio-owned specialty-film divisions like Fox Searchlight were partially victimized by their own success. Movies with modest expectations like 'The Full Monty' turned in huge earnings, making the studio parents expect similar profits from subsequent films. Independently financed movies couldn't meet that unreasonable test, so the studio-owned outfits started producing more of their own movies, but the results were generally unimpressive and left less room for films made outside the studios."
Conditions such as these led to outcries from independent producers, some of whom claimed that a distribution crises existed for those with small budgets. These problematic conditions extended to the home video market, in which distribution companies owned by the largest industry players pushed smaller distributors out of the way. On the bright side, the rapid adoption of digital video disc (DVD) technology opened up a new market for independent distributors. Variety reported that potential revenue from DVD sales was helping to increase the outlook for independent film companies in search of financial backing. According to the MPAA, the number of titles available on DVD increased from 8,500 in 2000 to 20,000 in 2002. During this period, average DVD prices declined from $22.65 to $20.78, inspiring movie enthusiasts to purchase movies with enhanced content and extra features for their entertainment libraries, as opposed to renting them. Citing figures from Adams Media research, the MPAA reported that DVD sales increased almost 103 percent from 2000 to 2001, growing from 188 million units to 382 million units. Sales climbed another 84 percent in 2002, reaching 702 million units.
By the early 2000s, the transition to digital technology was underway in the film industry. Citing figures from Texas Instruments, the MPAA revealed that the number of digital cinema screens increased from 31 in 2000 to 45 in 2002, and then spiked to 124 in 2002. However, digital technology also was making an impact in the way movies were delivered to viewers. In late 2002, Warner Brothers forged an agreement with CinemaNow in which, for $3 to $4, consumers could download movies to their personal computer for a period of 30 days. By the spring of 2003, 20th Century Fox had also entered into an online distribution agreement with CinemaNow. In November of 2002, a competing online movie service called Movielink—a joint venture between Paramount Pictures, Metro-Goldwyn-Mayer Studios, Warner Bros., Universal, and Sony Pictures Entertainment—began serving customers. According to The Online Reporter , by 2005 feature films delivered via the Internet were expected to result in revenues of $882 million.
In terms of box office market share, six large producer/distributors consistently lead the film entertainment industry: Warner, Disney, Universal, Sony, Fox, and Paramount. Competition is fierce, and rarely does a single company hold the top position for long. The multimedia conglomerate AOL Time Warner was the industry leader in 2001; Universal and Paramount were close behind. Disney, Fox, and Sony rounded out the top six. Together these companies accounted for about 70 percent of domestic box office sales in the early 2000s.
World markets for films and television programs have long been critically important to U.S. producers and distributors. During the past 30 years, foreign markets have generally accounted for about one-half of major U.S. producers' total sales in these industries. The success of American films and television productions in world markets is indicated both by industry trade balances and by comparisons with other film and television exporting nations. The United States has historically enjoyed tremendous advantages in these areas.
Motion picture and home video distribution to other countries is, however, hindered by several factors. Trade problems encountered in the media industries fall into two general classes: government-imposed nontariff barriers and various forms of film and video piracy. These problems greatly reduce American industries' revenues in many markets. Nontariff barriers include various quantitative restrictions, limitations on the repatriation of earnings, and discriminatory taxes, usually aimed at protecting domestic markets from foreign competition. Perhaps even more important in terms of its effect on export earnings is video piracy. Producers' and distributors' losses due to piracy have increased enormously as a result of the growth of new copying and distribution technologies. Copyright enforcement problems of varying degrees are encountered in all markets throughout the world. Moreover, the nature and severity of copyright infringement differs among individual markets and channels of distribution. Copyright infringement problems fall into four broad categories: unauthorized public exhibition, print theft, videocassette piracy, and theft of broadcast signals.
The first of these activities, unauthorized public exhibition, has been reported to occur primarily in more developed countries. Unauthorized presentations of copyright-protected films often occurs in hotels, cafes, homes, and theaters around the globe. A second, related category of copyright infringement is the actual theft of film prints themselves. Copies of prints can be stolen at various stages of distribution, and the negatives can subsequently be used to produce unauthorized prints. The third, and perhaps most widespread, form of copyright infringement is videocassette piracy, which has become a global phenomenon. Analysts estimate that hundreds of millions of dollars are lost to videocassette piracy each year. These copyright infractions, coupled with other forms of piracy such as the theft of broadcast signals, has resulted in poor relations between U.S. producers and distributors and foreign agencies. As motion picture technology converts to a purely digital format, as it is expected to during the 2000s, film distributors are hoping to outpace pirates in establishing safeguards against illegal copying with the new technology. In that spirit, a number of telecommunications and film companies joined forces in 1998 to implement a restrictive encryption standard on digital films and music to prevent piracy.
Advancements in technology in the multimedia marketplace are being incorporated into the motion picture industry and are changing the way traditional products are being developed, licensed, and distributed. Film is becoming a digital media and is acquiring many of the similarities found in software products such as video games. Conventional film companies are exploring the opportunities in interactive transmission and technology. Companies are digitizing their film libraries and exploring new ways to make this product available to distributors and consumers. The transformation of the motion picture industry to a digital format and the increase in new technologies available to cable companies, the broadcast networks, and consumers will provide the public with an array of viewing possibilities.
Improved technology also has made the World Wide Web a film-viewing medium, thus creating an inexpensive outlet for filmmakers without significant financial backing. With decreased production costs and inexpensive computer software, these filmmakers only need space on a Web server to bring their films to public exposure.
By the 1990s, distributors and producers were far less wary of new technologies than they had been. The arrival of home video recording in the late 1970s, once viewed as a threat, had proven to be a vastly lucrative new source of income. Hence, the arrival of the new DVD digital video format—which allowed an entire film to be stored on a disc similar to a CD—in late 1996 was widely supported by the industry. Copy protection systems and a regional coding system that prevented discs manufactured in one country from playing on players manufactured in another country assuaged fears that a given country would be flooded with high-quality digital copies of a motion picture before its actual theatrical release. During the early 2000s, rapid adoption of DVD technology was underway throughout the world. In addition to new releases, distributors remastered and re-released older films with extra features on DVD, which consumers purchased for their home entertainment libraries.
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