At the beginning of the twentieth century the film industry was a new emerging high technology industry. The fastest growing firms invested substantially in developing or acquiring technology, and portfolios of patent rights were used as a means of competition - either to keep competitors out, to fight them or to force them into co-operation. The late 1890s and early 1900s were marked by prolonged court battles between many different companies.
In the United States these patent battles ultimately resulted in a trust, the Motion Picture Patents Company (MPPC), which pooled the patents of all important film producers and, using licensing, tried first to control distributors and exhibitors and then to monopolise distribution. For a few years the MPPC was successful, but increasingly it met competition from new companies that defied the patents. The U.S. government started an anti-trust case which finally led to the dissolution of the MPPC in 1917, at which time it had already become a marginal company. In Europe, the leading film companies fought many court cases, but since it was not possible to file “fundamental” patents on the basic principle of cinematography, as could be done in the US, patents played a smaller role in the organisation of the industry. The main European companies openly tried to organise a European patents company, but failed to reach an agreement.
From the mid-1910s onwards a shift took place in the film industry. As film production mainly involves high endogenous sunk costs in creative inputs, sets and ‘special effects’, a sudden growth in market size - as took place in the US at the time - induced several bold entrepreneurs to escalate their spending to unprecedented levels, recouping the enormous sunk costs by getting a larger share of a grown market. This strategy proved very risky, as most companies that started an escalation strategy were taken over, dissolved, or went bankrupt. The companies that survived developed into the eight Hollywood studios, most of which still exist today.
In the new situation, after the chaotic escalation game, collusion and co-operation again took place. The eight Hollywood studios all had their head offices close to each other in New York and regularly met. Rights to creative inputs were used to co-ordinate their activities: the studios often rented each other their stars, and licensed or sold their rights to novels and plays. Where the MPPC used patent licenses to force exhibitors to take only MPPC output, the Hollywood studios used the rights to famous stars and stories to force cinemas to take exclusively their output (“block-booking”). While European patent laws made it impossible for the MPPC to use their rights internationally, the Hollywood studios could and did use their rights to creative inputs to exercise control over foreign distribution and exhibition, and pre-emptively bid on any emerging competing European creative inputs. The second situation also ended with an anti-trust suit, and in 1949 the US Supreme court ordered the ending of most of the collusive practices, as well as the vertical disintegration of the industry.
This paper will argue that before the escalation phase, property rights to technology were the main instrument of competition and collusion. During the escalation game, patents ceased to be of importance, and another intellectual property right started to shape the organisation of the industry: the right to creative inputs. Studios acquired copyrights to famous novels and plays and drew up seven-year contracts with the best creative inputs that explicitly gave the studio the right to the image and likeness (and later the voice) of the actor. The “escalators” all tried pre-emptively to get exclusive rights to the creative inputs.
Based on detailed research on sources in the U.S., Britain and France, the paper will examine how exactly patent rights and copyrights/contracts shaped the institutional structure and organisation of the industry, what the commonalities and differences were, and how both rights could lead to similar situations of strongly vertical integration and collusion. Among other analytical frameworks, the paper employs transaction cost theory and Oliver Williamson’s work on vertical integration. It seems that the withholding of rights was a powerful tool in punishing firms that deviated from the collusive strategy. The first part of the paper will analyse the institutional structure of the industry under the “patent regime”, the second part will examine institutional structure in the copyright and contract era. The third part will compare the two structures and also study the chaotic transition period from the one structure to the other. Throughout the paper, the European institutional environment, industry and markets will be compared with the U.S. situation.