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The Economic History of the International Film Industry
Gerben Bakker, University of Essex
Like other major innovations such as the automobile, electricity, chemicals and the airplane, cinema emerged in most Western countries at the same time. As the first form of industrialized mass-entertainment, it was all-pervasive. From the 1910s onwards, each year billions of cinema-tickets were sold and consumers who did not regularly visit the cinema became a minority. In Italy, today hardly significant in international entertainment, the film industry was the fourth-largest export industry before the First World War. In the depression-struck U.S., film was the tenth most profitable industry, and in 1930s France it was the fastest-growing industry, followed by paper and electricity, while in Britain the number of cinema-tickets sold rose to almost one billion a year (Bakker 2001b). Despite this economic significance, despite its rapid emergence and growth, despite its pronounced effect on the everyday life of consumers, and despite its importance as an early case of the industrialization of services, the economic history of the film industry has hardly been examined.
This article will limit itself exclusively to the economic development of the industry. It will discuss just a few countries, mainly the U.S., Britain and France, and then exclusively to investigate the economic issues it addresses, not to give complete histories of the industries in those countries. This entry cannot do justice to developments in each and every country, given the nature of an encyclopedia article. This entry also limits itself to the evolution of the Western film industry, because it has been and still is the largest film industry in the world, in revenue terms, although this may well change in the future.
In the late eighteenth century most consumers enjoyed their entertainment in an informal, haphazard and often non-commercial way. When making a trip they could suddenly meet a roadside entertainer, and their villages were often visited by traveling showmen, clowns and troubadours. Seasonal fairs attracted a large variety of musicians, magicians, dancers, fortune-tellers and sword-swallowers. Only a few large cities harbored legitimate theaters, strictly regulated by the local and national rulers. This world was torn apart in two stages.
First, most Western countries started to deregulate their entertainment industries, enabling many more entrepreneurs to enter the business and make far larger investments, for example in circuits of fixed stone theaters. The U.S. was the first with liberalization in the late eighteenth century. Most European countries followed during the nineteenth century. Britain, for example, deregulated in the mid-1840s, and France in the late 1860s. The result of this was that commercial, formalized and standardized live entertainment emerged that destroyed a fair part of traditional entertainment. The combined effect of liberalization, innovation and changes in business organization, made the industry grow rapidly throughout the nineteenth century, and integrated local and regional entertainment markets into national ones. By the end of the nineteenth century, integrated national entertainment industries and markets maximized productivity attainable through process innovations. Creative inputs, for example, circulated swiftly along the venues – often in dedicated trains – coordinated by centralized booking offices, maximizing capital and labor utilization.
At the end of the nineteenth century, in the era of the second industrial revolution, falling working hours, rising disposable income, increasing urbanization, rapidly expanding transport networks and strong population growth resulted in a sharp rise in the demand for entertainment. The effect of this boom was further rapid growth of live entertainment through process innovations. At the turn of the century, the production possibilities of the existing industry configuration were fully realized and further innovation within the existing live-entertainment industry could only increase productivity incrementally.
At this moment, in a second stage, cinema emerged and in its turn destroyed this world, by industrializing it into the modern world of automated, standardized, tradable mass-entertainment, integrating the national entertainment markets into an international one.
In the early 1890s, Thomas Edison introduced the kinematograph, which enabled the shooting of films and their play-back in slot-coin machines for individual viewing. In the mid-1890s, the Lumière brothers added projection to the invention and started to play films in theater-like settings. Cinema reconfigured different technologies that all were available from the late 1880s onwards: photography (1830s), taking negative pictures and printing positives (1880s), roll films (1850s), celluloid (1868), high-sensitivity photographic emulsion (late 1880s), projection (1645) and movement dissection/ persistence of vision (1872).
After the preconditions for motion pictures had been established, cinema technology itself was invented. Already in 1860/1861 patents were filed for viewing and projecting motion pictures, but not for the taking of pictures. The scientist Jean Marey completed the first working model of a film camera in 1888 in Paris. Edison visited Georges Demeney in 1888 and saw his films. In 1891, he filed an American patent for a film camera, which had a different moving mechanism than the Marey camera. In 1890, the Englishman Friese Green presented a working camera to a group of enthusiasts. In 1893 the Frenchman Demeney filed a patent for a camera. Finally, the Lumière brothers filed a patent for their type of camera and for projection in February 1895. In December of that year they gave the first projection for a paying audience. They were followed in February 1896 by the Englishman Robert W. Paul. Paul also invented the ‘Maltese cross,’ a device which is still used in film cameras today. It is instrumental in the smooth rolling of the film, and in the correcting of the lens for the space between the exposures (Michaelis 1958; Musser 1990: 65-67; Low and Manvell 1948).
Three characteristics stand out in this innovation process. First, it was an international process of invention, taking place in several countries at the same time, and the inventors building upon and improving upon each other’s inventions. This connects to Joel Mokyr’s notion that in the nineteenth century communication became increasingly important to innovations, and many innovations depended on international communication between inventors (Mokyr 1990: 123-124). Second, it was what Mokyr calls a typical nineteenth century invention, in that it was a smart combination of many existing technologies. Many different innovations in the technologies which it combined had been necessary to make possible the innovation of cinema. Third, cinema was a major innovation in the sense that it was quickly and universally adopted throughout the western world, quicker than the steam engine, the railroad or the steamship.
The Emergence of Cinema
For about the first ten years of its existence, cinema in the United States and elsewhere was mainly a trick and a gadget. Before 1896 the coin-operated Kinematograph of Edison was present at fairs and in entertainment venues. Spectators had to throw a coin in the machine and peek through glasses to see the film. The first projections, from 1896 onwards, attracted large audiences. Lumière had a group of operators who traveled around the world with the cinematograph, and showed the pictures in theaters. After a few years films became a part of the program in vaudeville and sometimes in theater as well. At the same time traveling cinema emerged: cinemas which traveled around with a tent or mobile theater and set up shop for a short time in towns and villages. These differed from the Lumière operators and others in that they catered for the general, popular audiences, while the former were more upscale parts of theater programs, or a special program for the bourgeoisie (Musser 1990: 140, 299, 417-20).
This whole era, which in the U.S. lasted up to about 1905, was a time in which cinema seemed just one of many new fashions, and it was not at all certain that it would persist, or that it would be forgotten or marginalized quickly, such as happened to the boom in skating rinks and bowling alleys at the time. This changed when Nickelodeons, fixed cinemas with a few hundred seats, emerged and quickly spread all over the country between 1905 and 1907. From this time onwards cinema changed into an industry in its own right, which was distinct from other entertainments, since it had its own buildings and its own advertising. The emergence of fixed cinemas coincided which a huge growth phase in the business in general; film production increased greatly, and film distribution developed into a special activity, often managed by large film producers. However, until about 1914, besides the cinemas, films also continued to be combined with live entertainment in vaudeville and other theaters (Musser 1990; Allen 1980).
Figure 1 shows the total length of negatives released on the U.S., British and French film markets. In the U.S., the total released negative length increased from 38,000 feet in 1897, to two million feet in 1910, to twenty million feet in 1920. Clearly, the initial U.S. growth between 1893 and 1898 was very strong: the market increased by over three orders of magnitude, but from an infinitesimal initial base. Between 1898 and 1906, far less growth took place, and in this period it may well have looked like the cinematograph would remain a niche product, a gimmick shown at fairs and used to be interspersed with live entertainment. From 1907, however, a new, sharp sustained growth phase starts: The market increased further again by two orders of magnitude – and from a far higher base this time. At the same time, the average film length increased considerably, from eighty feet in 1897 to seven hundred feet in 1910 to three thousand feet in 1920. One reel of film held about 1,500 feet and had a playing time of about fifteen minutes.
Between the mid-1900s and 1914 the British and French markets were growing at roughly the same rates as the U.S. one. World War I constituted a discontinuity: from 1914 onwards European growth rates are far lower those in the U.S.
The prices the Nickelodeons charged were between five and ten cents, for which spectators could stay as long as they liked. Around 1910, when larger cinemas emerged in hot city center locations, more closely resembling theaters than the small and shabby Nickelodeons, prices increased. They varied from between one dollar to one dollar and-a-half for ‘first run’ cinemas to five cents for sixth-run neighborhood cinemas (see also Sedgwick 1998).
Total Released Length on the U.S., British and French Film Markets (in Meters), 1893-1922
Note: The length refers to the total length of original negatives that were released commercially.
See Bakker 2005, appendix I for the method of estimation and for a discussion of the sources.
Source: Bakker 2001b; American Film Institute Catalogue, 1893-1910; Motion Picture World, 1907-1920.
The Quality Race
Once Nickelodeons and other types of cinemas were established, the industry entered a new stage with the emergence of the feature film. Before 1915, cinemagoers saw a succession of many different films, each between one and fifteen minutes, of varying genres such as cartoons, newsreels, comedies, travelogues, sports films, ‘gymnastics’ pictures and dramas. After the mid-1910s, going to the cinema meant watching a feature film, a heavily promoted dramatic film with a length that came closer to that of a theater play, based on a famous story and featuring famous stars. Shorts remained only as side dishes.
The feature film emerged when cinema owners discovered that films with a far higher quality and length, enabled them to ask far higher ticket prices and get far more people into their cinemas, resulting in far higher profits, even if cinemas needed to pay far more for the film rental. The discovery that consumers would turn their back on packages of shorts (newsreels, sports, cartoons and the likes) as the quality of features increased set in motion a quality race between film producers (Bakker 2005). They all started investing heavily in portfolios of feature films, spending large sums on well-known stars, rights to famous novels and theater plays, extravagant sets, star directors, etc. A contributing factor in the U.S. was the demise of the Motion Picture Patents Company (MPPC), a cartel that tried to monopolize film production and distribution. Between about 1908 and 1912 the Edison-backed MPPC had restricted quality artificially by setting limits on film length and film rental prices. When William Fox and the Department of Justice started legal action in 1912, the power of the MPPC quickly waned and the ‘independents’ came to dominate the industry.
In the U.S., the motion picture industry became the internet of the 1910s. When companies put the word motion pictures in their IPO investors would flock to it. Many of these companies went bankrupt, were dissolved or were taken over. A few survived and became the Hollywood studios most of which we still know today: Paramount, Metro-Goldwyn-Mayer (MGM), Warner Brothers, Universal, Radio-Keith-Orpheum (RKO), Twentieth Century-Fox, Columbia and United Artists.
A necessary condition for the quality race was some form of vertical integration. In the early film industry, films were sold. This meant that the cinema-owner who bought a film, would receive all the marginal revenues the film generated. In the film industry, these revenues were largely marginal profits, as most costs were fixed, so an additional film ticket sold was pure (gross) profit. Because the producer did not get any of these revenues, at the margin there was little incentive to increase quality. When outright sales made way for the rental of films to cinemas for a fixed fee, producers got a higher incentive to increase a film’s quality, because it would generate more rentals (Bakker 2005). This further increased when percentage contracts were introduced for large city center cinemas, and when producers-distributors actually started to buy large cinemas. The changing contractual relationship between cinemas and producers was paralleled between producers and distributors.
The Decline and Fall of the European Film Industry
Because the quality race happened when Europe was at war, European companies could not participate in the escalation of quality (and production costs) discussed above. This does not mean all of them were in crisis. Many made high profits during the war from newsreels, other short films, propaganda films and distribution. They also were able to participate in the shift towards the feature film, substantially increasing output in the new genre during the war (Figure 2). However, it was difficult for them to secure the massive amount of venture capital necessary to participate in the quality race while their countries were at war. Even if they would have managed it may have been difficult to justify these lavish expenditures when people were dying in the trenches.
Yet a few European companies did participate in the escalation phase. The Danish Nordisk company invested heavily in long feature-type films, and bought cinema chains and distributors in Germany, Austria and Switzerland. Its strategy ended when the German government forced it to sell its German assets to the newly founded UFA company, in return for a 33 percent minority stake. The French Pathé company was one of the largest U.S. film producers. It set up its own U.S. distribution network and invested in heavily advertised serials (films in weekly installments) expecting that this would become the industry standard. As it turned out, Pathé bet on the wrong horse and was overtaken by competitors riding high on the feature film. Yet it eventually switched to features and remained a significant company. In the early 1920s, its U.S. assets were sold to Merrill Lynch and eventually became part of RKO.
Number of Feature Films Produced in Britain, France and the U.S., 1911-1925
Source: Bakker 2005 [American Film Institute Catalogue; British Film Institute; Screen Digest; Globe, World Film Index, Chirat, Longue métrage.]
Because it could not participate in the quality race, the European film industry started to decline in relative terms. Its market share at home and abroad diminished substantially (Figure 3). In the 1900s European companies supplied at least half of the films shown in the U.S. In the early 1910s this dropped to about twenty percent. In the mid-1910s, when the feature film emerged, the European market share declined to nearly undetectable levels.
By the 1920s, most large European companies gave up film production altogether. Pathé and Gaumont sold their U.S. and international business, left film making and focused on distribution in France. Éclair, their major competitor, went bankrupt. Nordisk continued as an insignificant Danish film company, and eventually collapsed into receivership. The eleven largest Italian film producers formed a trust, which terribly failed and one by one they fell into financial disaster. The famous British producer, Cecil Hepworth, went bankrupt. By late 1924, hardly any films were being made in Britain. American films were shown everywhere.
Market Shares by National Film Industries, U.S., Britain, France, 1893-1930
Note: EU/US is the share of European companies on the U.S. market, EU/UK is the share of European companies on the British market, and so on. For further details see Bakker 2005.
The Rise of Hollywood
Once they had lost out, it was difficult for European companies to catch up. First of all, since the sharply rising film production costs were fixed and sunk, market size was becoming of essential importance as it affected the amount of money that could be spent on a film. Exactly at this crucial moment, the European film market disintegrated, first because of war, later because of protectionism. The market size was further diminished by heavy taxes on cinema tickets that sharply increased the price of cinema compared to live entertainment.
Second, the emerging Hollywood studios benefited from first mover advantages in feature film production: they owned international distribution networks, they could offer cinemas large portfolios of films at a discount (block-booking), sometimes before they were even made (blind-bidding), the quality gap with European features was so large it would be difficult to close in one go, and, finally, the American origin of the feature films in the 1910s had established U.S. films as a kind of brand, leaving consumers with high switching costs to try out films from other national origins. It would be extremely costly for European companies to re-enter international distribution, produce large portfolios, jump-start film quality, and establish a new brand of films – all at the same time (Bakker 2005).
A third factor was the rise of Hollywood as production location. The large existing American Northeast coast film industry and the newly emerging film industry in Florida declined as U.S. film companies started to locate in Southern California. First of all, the ‘sharing’ of inputs facilitated knowledge spillovers and allowed higher returns. The studios lowered costs because creative inputs had less down-time, needed to travel less, could participate in many try-outs to achieve optimal casting and could be rented out easily to competitors when not immediately wanted. Hollywood also attracted new creative inputs through non-monetary means: even more than money creative inputs wanted to maximize fame and professional recognition. For an actress, an offer to work with the world’s best directors, costume designers, lighting specialists and make-up artists was difficult to decline.
Second, a thick market for specialized supply and demand existed. Companies could easily rent out excess studio capacity (for example, during the nighttime B-films were made), and a producer was quite likely to find the highly specific products or services needed somewhere in Hollywood (Christopherson and Storper 1987, 1989). While a European industrial ‘film’ district may have been competitive and even have a lower over-all cost/quality ratio than Hollywood, a first European major would have a substantially higher cost/quality ratio (lacking external economies) and would therefore not easily enter (see, for example, Krugman and Obstfeld 2003, chapter 6). If entry did happen, the Hollywood studios could and would buy successful creative inputs away, since they could realize higher returns on these inputs, which resulted in American films with even a higher perceived quality, thus perpetuating the situation.
Sunlight, climate and the variety of landscape in California were of course favorable to film production, but were not unique. Locations such as Florida, Italy, Spain and Southern France offered similar conditions.
The Coming of Sound
In 1927, sound films were introduced. The main innovator was Warner Brothers, backed by the bank Goldman, Sachs, which actually parachuted a vice-president to Warner. Although many other sound systems had been tried and marketed from the 1900s onwards, the electrical microphone, invented at Bell labs in the mid-1920s, sharply increased the quality of sound films and made possible the change of the industry. Sound increased the interests in the film industry of large industrial companies such as General Electric, Western Electric and RCA, as well as those of the banks who were eager the finance the new innovation, such as the Bank of America and Goldman, Sachs.
In economic terms, sound represented an exogenous jump in sunk costs (and product quality) which did not affect the basic industry structure very much: The industry structure was already highly concentrated before sound and the European, New York/Jersey and Florida film industries were already shattered. What it did do was industrialize away most of the musicians and entertainers that had complemented the silent films with sound and entertainment, especially those working in the smaller cinemas. This led to massive unemployment among musicians (see, for example, Gomery 1975; Kraft 1996).
The effect of sound film in Europe was to increase the domestic revenues of European films, because they became more culture-specific as they were in the local language, but at the same time it decreased the foreign revenues European films received (Bakker 2004b). It is difficult to completely assess the impact of sound film, as it coincided with increased protection; many European countries set quotas for the amount of foreign films that could be shown shortly before the coming of sound. In France, for example, where sound became widely adopted from 1930 onwards, the U.S. share of films dropped from eighty to fifty percent between 1926 and 1929, mainly the result of protectionist legislation. During the 1930s, the share temporarily declined to about forty percent, and then hovered to between fifty and sixty percent. In short, protectionism decreased the U.S. market share and increased the French market shares of French and other European films, while sound film increased French market share, mostly at the expense of other European films and less so at the expense of U.S. films.
In Britain, the share of releases of American films declined from eighty percent in 1927 to seventy percent in 1930, while British films increased from five percent to twenty percent, exactly in line with the requirements of the 1927 quota act. After 1930, the American share remained roughly stable. This suggests that sound film did not have a large influence, and that the share of U.S. films was mainly brought down by the introduction of the Cinematograph Films Act in 1927, which set quotas for British films. Nevertheless, revenue data, which are unfortunately lacking, would be needed to give a definitive answer, as little is known about effects on the revenue per film.
The Economics of the Interwar Film Trade
Because film production costs were mainly fixed and sunk, international sales or distribution were important, because these were additional sales without much additional cost to the producer; the film itself had already been made. Films had special characteristics that necessitated international sales. Because they essentially were copyrights rather than physical products, theoretically the costs of additional sales were zero. Film production involved high endogenous sunk costs, recouped through renting the copyright to the film. The marginal foreign revenue equaled marginal net revenue (and marginal profits after the film’s production costs had been fully amortized). All companies large or small had to take into account foreign sales when setting film budgets (Bakker 2004b).
Films were intermediate products sold to foreign distributors and cinemas. While the rent paid varied depending on perceived quality and general conditions of supply and demand, the ticket price paid by consumers generally did not vary. It only varied by cinema: highest in first-run city center cinemas and lowest in sixth-run ramshackle neighborhood cinemas. Cinemas used films to produce ‘spectator-hours’: a five-hundred-seat cinema providing one hour of film, produced five hundred spectator-hours of entertainment. If it sold three hundred tickets, the other two hundred spectator-hours produced would have perished.
Because film was an intermediate product and a capital good at that, international competition could not be on price alone, just as sales of machines depend on the price/performance ratio. If we consider a film’s ‘capacity to sell spectator-hours’ (hereafter called selling capacity) as proportional to production costs, a low-budget producer could not simply push down a film’s rental price in line with its quality in order to make a sale; even at a price of zero, some low-budget films could not be sold. The reasons were twofold.
First, because cinemas had mostly fixed costs and few variable costs, a film’s selling capacity needed to be at least as large as fixed cinema costs plus its rental price. A seven-hundred-seat cinema, with a production capacity of 39,200 spectator-hours a week, weekly fixed costs of five hundred dollars, and an average admission price of five cents per spectator-hour, needed a film selling at least ten thousand spectator-hours, and would not be prepared to pay for that (marginal) film, because it only recouped fixed costs. Films needed a minimum selling capacity to cover cinema fixed costs. Producers could only price down low-budget films to just above the threshold level. With a lower expected selling capacity, these films could not be sold at any price.
This reasoning assumes that we know a film’s selling capacity ex ante. A main feature distinguishing foreign markets from domestic ones was that uncertainty was markedly lower: from a film’s domestic launch the audience appeal was known, and each subsequent country added additional information. While a film’s audience appeal across countries was not perfectly correlated, uncertainty was reduced. For various companies, correlations between foreign and domestic revenues for entire film portfolios fluctuated between 0.60 and 0.95 (Bakker 2004b). Given the riskiness of film production, this reduction in uncertainty undoubtedly was important.
The second reason for limited price competition was the opportunity cost, given cinemas’ production capacities. If the hypothetical cinema obtained a high-capacity film for a weekly rental of twelve hundred dollars, which sold all 39,200 spectator-hours, the cinema made a profit of $260 (($0.05 times 39,200) - $1,200 - $500 = $260). If a film with half the budget and, we assume, half the selling capacity, rented for half the price, the cinema-owner would lose $120 (($0.05 times 19,600) - $600 - $500 = -$120). Thus, the cinema owner would want to pay no more than $220 for the lower budget film, given that the high budget film is available (($0.05 times 19,600) - $220- $500 = $260). So the low-capacity film with half the selling capacity of the high-capacity film would need to sell for under a fifth of the price of the high capacity film to even enable the possibility of a transaction.
These sharply increasing returns to selling capacity made the setting of production outlays important, as a right price/capacity ratio was crucial to win foreign markets.
How Films Became Branded Products
To make sure film revenues reached above cinema fixed costs, film companies transformed films into branded products. With the emergence of the feature film, they started to pay large sums to actors, actresses and directors and for rights to famous plays and novels. This is still a major characteristic of the film industry today that fascinates many people. Yet the huge sums paid for stars and stories are not as irrational and haphazard as they sometimes may seem. Actually, they might be just as ‘rational’ and have just as quantifiable a return as direct spending on marketing and promotion (Bakker 2001a).
To secure an audience, film producers borrowed branding techniques from other consumer goods’ industries, but the short product-life-cycle forced them to extend the brand beyond one product – using trademarks or stars – to buy existing ‘brands,’ such as famous plays or novels, and to deepen the product-life-cycle by licensing their brands.
Thus, the main value of stars and stories lay not in their ability to predict successes, but in their services as giant ‘publicity machines’ which optimized advertising effectiveness by rapidly amassing high levels of brand-awareness. After a film’s release, information such as word-of-mouth and reviews would affect its success. The young age at which stars reached their peak, and the disproportionate income distribution even among the superstars, confirm that stars were paid for their ability to generate publicity. Likewise, because ‘stories’ were paid several times as much as original screenplays, they were at least partially bought for their popular appeal (Bakker 2001a).
Stars and stories marked a film’s qualities to some extent, confirming that they at least contained themselves. Consumer preferences confirm that stars and stories were the main reason to see a film. Further, fame of stars is distributed disproportionately, possibly even twice as unequal as income. Film companies, aided by long-term contracts, probably captured part of the rent of their popularity. Gradually these companies specialized in developing and leasing their ‘instant brands’ to other consumer goods’ industries in the form of merchandising.
Already from the late 1930s onwards, the Hollywood studios used the new scientific market research techniques of George Gallup to continuously track the brand-awareness among the public of their major stars (Bakker 2003). Figure 4 is based on one such graph used by Hollywood. It shows that Lana Turner was a rising star, Gable was consistently a top star, while Stewart’s popularity was high but volatile. James Stewart was eleven percentage-points more popular among the richest consumers than among the poorest, while Lana Turner differed only a few percentage-points. Additional segmentation by city size seemed to matter, since substantial differences were found: Clark Gable was ten percentage-points more popular in small cities than in large ones. Of the richest consumers, 51 percent wanted to see a movie starring Gable, but altogether they constituted just 14 percent of Gable’s market, while the 57 percent poorest Gable-fans constituted 34 percent. The increases in Gable’s popularity roughly coincided with his releases, suggesting that while producers used Gable partially for the brand-awareness of his name, each use (film) subsequently increased or maintained that awareness in what seems to have been a self-reinforcing process.
Popularity of Clark Gable, James Stewart and Lana Turner among U.S. respondents
April 1940 – October 1942, in percentage
Source: Audience Research Inc.; Bakker 2003.
The Film Industry’s Contribution to Economic Growth and Welfare
By the late 1930s, cinema had become an important mass entertainment industry. Nearly everyone in the Western world went to the cinema and many at least once a week. Cinema had made possible a massive growth in productivity in the entertainment industry and thereby disproved the notions of some economists that productivity growth in certain service industries is inherently impossible. Between 1900 and 1938, output of the entertainment industry, measured in spectator-hours, grew substantially in the U.S., Britain and France, varying from three to eleven percent per year over a period of nearly forty years (Table 1). The output per worker increased from 2,453 spectator hours in the U.S. in 1900 to 34,879 in 1938. In Britain it increased from 16,404 to 37,537 spectator-hours and in France from 1,575 to 8,175 spectator-hours. This phenomenal growth could be explained partially by adding more capital (such as in the form of film technology and film production outlays) and partially by simply producing more efficiently with the existing amount of capital and labor. The increase in efficiency (‘total factor productivity’) varied from about one percent per year in Britain to over five percent in the U.S., with France somewhere in between. In all countries, this increase in efficiency was at least one and a half times the increase in efficiency at the level of the entire nation. For the U.S. it was as much as five times and for France it was more than three times the national increase in efficiency (Bakker 2004a).
Another noteworthy feature is that the labor productivity in entertainment varied less across countries in the late 1930s than it did in 1900. Part of the reason is that cinema technology made entertainment partially tradable and therefore forced productivity in similar directions in all countries; the tradable part of the entertainment industry would now exert competitive pressure on the non-tradable part (Bakker 2004a). It is therefore not surprising that cinema caused the lowest efficiency increase in Britain, which had already a well-developed and competitive entertainment industry (with the highest labor and capital productivity both in 1900 and in 1938) and higher efficiency increases in the U.S. and to a lesser extent in France, which had less well-developed entertainment industries in 1900.
Another way to measure the contribution of film technology to the economy in the late 1930s is by using a social savings methodology. If we assume that cinema did not exist and all demand for entertainment (measured in spectator-hours) would have to be met by live entertainment, we can calculate the extra costs to society and thus the amount saved by film technology. In the U.S., these social savings amounted to as much as 2.2 percent ($2.5 billion) of GDP, in France to just 1.4 percent ($0.16 billion) and in Britain to only 0.3 percent ($0.07 billion) of GDP.
A third and different way to look at the contribution of film technology to the economy is to look at the consumer surplus generated by cinema. Contrary to the TFP and social savings techniques used above, which assume that cinema is a substitute for live entertainment, this approach assumes that cinema is a wholly new good and that therefore the entire consumer surplus generated by it is ‘new’ and would not have existed without cinema. For an individual consumer, the surplus is the difference between the price she was willing to pay and the ticket she actually paid. This difference varies from consumer to consumer, but with econometric techniques, one can estimate the sum of individual surpluses for an entire country. The resulting national consumer surpluses for entertainment varied from about a fifth of total entertainment expenditure in the U.S., to about half in Britain and as much as three quarters in France.
All the measures show that by the late 1930s cinema was making an essential contribution in increasing total welfare as well as the entertainment industry’s productivity.
After the Second World War, the Hollywood film industry disintegrated: production, distribution and exhibition became separate activities that were not always owned by the same organization. Three main causes brought about the vertical disintegration. First, the U.S. Supreme Court forced the studios to divest their cinema chains in 1948. Second, changes in the social-demographic structure in the U.S. brought about a shift towards entertainment within the home: many young couples started to live in the new suburbs and wanted to stay home for entertainment. Initially, they mainly used radio for this purpose and later they switched to television (Gomery 1985). Third, television broadcasting in itself (without the social-demographic changes that increased demand for it) constituted a new distribution channel for audiovisual entertainment and thus decreased the scarcity of distribution capacity. This meant that television took over the focus on the lowest common denominator from radio and cinema, while the latter two differentiated their output and started to focus more on specific market segments.
Real Cinema Box Office Revenue, Real Ticket Price and Number of Screens in the U.S., 1945-2002
Note: The values are in dollars of 2002, using the EH.Net consumer price deflator.
Source: Adapted from Vogel 2004 and Robertson 2001.
The consequence was a sharp fall in real box office revenue in the decade after the war (Figure 5). After the mid-1950s, real revenue stabilized, and remained the same, with some fluctuations, until the mid-1990s. The decline in screens was more limited. After 1963 the number of screens increased again steadily to reach nearly twice the 1945 level in the 1990s. Since the 1990s there have been more movie screens in the U.S. than ever before. The proliferation of screens, coinciding with declining capacity per screen, facilitated market segmentation. Revenue per screen nearly halved in the decade after the war, then made a rebound during the 1960s, to start a long and steady decline from 1970 onwards. The real price of a cinema ticket was quite stable until the 1960s, after which it more than doubled. Since the early 1970s, the price has been declining again and nowadays the real admission price is about what it was in 1965.
It was in this adverse post-war climate that the vertical disintegration unfolded. It took place at three levels. First (obviously) the Hollywood studios divested their cinema-chains. Second, they outsourced part of their film production and most of their production factors to independent companies. This meant that the Hollywood studios would only produce part of the films they distributed themselves, that they changed the long-term, seven-year contracts with star actors for per-film contracts and that they sold off part of their studio facilities to rent them back for individual films. Third, the Hollywood studios’ main business became film distribution and financing. They specialized in planning and assembling a portfolio of films, contracting and financing most of them and marketing and distributing them world-wide.
The developments had three important effects. First, production by a few large companies was replaced by production by many small flexibly specialized companies. Southern California became an industrial district for the film industry and harbored an intricate network of these businesses, from set design companies and costume makers, to special effects firms and equipment rental outfits (Storper and Christopherson 1989). Only at the level of distribution and financing did concentration remain high. Second, films became more differentiated and tailored to specific market segments; they were now aimed at a younger and more affluent audience. Third, the European film market gained in importance: because the social-demographic changes (suburbanization) and the advent of television happened somewhat later in Europe, the drop in cinema attendance also happened later there. The result was that the Hollywood off-shored a large chunk – at times over half – of their production to Europe in the 1960s. This was stimulated by lower European production costs, difficulties in repatriating foreign film revenues and by the vertical disintegration in California, which severed the studios’ ties with their production units and facilitated outside contracting.
European production companies could better adapt to changes in post-war demand because they were already flexibly specialized. The British film production industry, for example, had been fragmented almost from its emergence in the 1890s. In the late 1930s, distribution became concentrated, mainly through the efforts of J. Arthur Rank, while the production sector, a network of flexibly specialized companies in and around London, boomed. After the war, the drop in admissions followed the U.S. with about a ten year delay (Figure 6). The drop in the number of screens experienced the same lag, but was more severe: about two-third of British cinema screens disappeared, versus only one-third in the U.S. In France, after the First World War film production had disintegrated rapidly and chaotically into a network of numerous small companies, while a few large firms dominated distribution and production finance. The result was a burgeoning industry, actually one of the fastest growing French industries in the 1930s.
Admissions and Number of Screens in Britain, 1945-2005
Source: Screen Digest/Screen Finance/British Film Institute and Robertson 2001.
Several European companies attempted to (re-)enter international film distribution, such as Rank in the 1930s and 1950s, the International Film Finance Corporation in the 1960s, Gaumont in the 1970s, PolyGram in the 1970s and again in the 1990s, Cannon in the 1980s. All of them failed in terms of long-run survival, even if they made profits during some years. The only postwar entry strategy that was successful in terms of survival was the direct acquisition of a Hollywood studio (Bakker 2000).
The Come-Back of Hollywood
From the mid-1970s onwards, the Hollywood studios revived. The slide of box office revenue was brought to a standstill. Revenues were stabilized by the joint effect of seven different factors. First, the blockbuster movie increased cinema attendance. This movie was heavily marketed and supported by intensive television advertisement. Jaws was one of the first of these kind of movies and an enormous success. Second, the U.S. film industry received several kinds of tax breaks from the early 1970s onwards, which were kept in force until the mid-1980s, when Hollywood was in good shape again. Third, coinciding with the blockbuster movie and tax-breaks film budgets increased substantially, resulting in a higher perceived quality and higher quality difference with television, drawing more consumers into the cinema. Fourth, a rise in multiplex cinemas, cinemas with several screens, increased consumer choice and increased the appeal of cinema by offering more variety within a specific cinema, thus decreasing the difference with television in this respect. Fifth, one could argue that the process of flexible specialization of the California film industry was completed in the early 1970s, thus making the film industry ready to adapt more flexibly to changes in the market. MGM’s sale of its studio complex in 1970 marked the final ending of an era. Sixth, new income streams from video sales and rentals and cable television increased the revenues a high-quality film could generate. Seventh, European broadcasting deregulation increased the demand for films by television stations substantially.
From the 1990s onwards further growth was driven by newer markets in Eastern Europe and Asia. Film industries from outside the West also grew substantially, such as those of Japan, Hong Kong, India and China. At the same time, the European Union started a large scale subsidy program for its audiovisual film industry, with mixed economic effects. By 1997, ten years after the start of the program, a film made in the European Union cost 500,000 euros on average, was seventy to eighty percent state-financed, and grossed 800,000 euros world-wide, reaching an audience of 150,000 persons. In contrast, the average American film cost fifteen million euros, was nearly hundred percent privately financed, grossed 58 million euros, and reached 10.5 million persons (Dale 1997). This seventy-fold difference in performance is remarkable. Even when measured in gross return on investment or gross margin, the U.S. still had a fivefold and twofold lead over Europe, respectively. In few other industries does such a pronounced difference exist.
During the 1990s, the film industry moved into television broadcasting. In Europe, broadcasters often co-funded small-scale boutique film production. In the U.S., the Hollywood studios started to merge with broadcasters. In the 1950s they had experienced difficulties with obtaining broadcasting licenses, because their reputation had been compromised by the antitrust actions. They had to wait for forty years before they could finally complete what they intended. Disney, for example, bought the ABC network, Paramount’s owner Viacom bought CBS, and General Electric, owner of NBC, bought Universal. At the same time, the feature film industry was also becoming more connected to other entertainment industries, such as videogames, theme parks and musicals. With video game revenues now exceeding films’ box office revenues, it seems likely that feature films will simply be the flagship part of large entertainment supply system that will exploit the intellectual property in feature films in many different formats and markets.
The take-off of the film industry in the early twentieth century had been driven mainly by changes in demand. Cinema industrialized entertainment by standardizing it, automating it and making it tradable. After its early years, the industry experienced a quality race that led to increasing industrial concentration. Only later did geographical concentration take place, in Southern California. Cinema made a substantial contribution to productivity and total welfare, especially before television. After television, the industry experienced vertical disintegration, the flexible specialization of production, and a self-reinforcing process of increasing distribution channels and capacity as well as market growth. Cinema, then, was not only the first in a row of media industries that industrialized entertainment, but also the first in a series of international industries that industrialized services. The evolution of the film industry thus may give insight into technological change and its attendant welfare gains in many service industries to come.
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Gerben Bakker may be contacted at gbakker at essex.ac.uk
 Gross return on investment, disregarding interest costs and distribution charges was 60 percent for European vs. 287 percent for U.S. films. Gross margin was 37 percent for European vs. 74 percent for U.S. films. Costs per viewer are 3.33 vs. 1.43 euros, revenues per viewer are 5.30 vs. 5.52 euros.
 The author is indebted to Douglas Gomery for this point.
Citation: Bakker, Gerben. "The Economic History of the International Film Industry". EH.Net Encyclopedia, edited by Robert Whaples. February 10, 2008. URL http://eh.net/encyclopedia/article/bakker.film