Harrison's Reports (1954)

116 HARRISON’S REPORTS July 17, 1954 In depriving the exhibitors of the benefits of the Excise Tax Reduction Bill the film companies not only are relegat' ing them to the precarious state they occupied prior to the bill’s enactment, but are thwarting the will of Congress. What strange theories dominate the thinking of those who control the film companies and what are their objectives? Do they think the exhibitors can be reduced, like Asiatic peasants, to a bare subsistence level? And if so, do they imagine that they themselves can continue to prosper while their customers fail? It seems absurd to impute such notions to men who have managed their own fortunes which such skill Yet their attitude in recent times gives point and sub' stance to these questions, and the questions must be answered. The Bnsines* Mutt Have Permanence This bulletin is written in the conviction that the matters discussed are of immediate interest and importance to all branches of the industry and to all whose welfare depends upon the motion picture business as a continuing source of income. No immediate gain or advantage should beguile anyone into regarding the motion picture business as a transitory thing to be exploited to the limit while it lasts and liquidated when profits decline. Yet there is apparent in the policies and practices of the film companies an opportunist phib ospohy, a spirit of “Let us eat and drink; for to-morrow we shall die.” How else can we interpret a course of conduct that leads inevitably to the destruction of their retail outlets — first by starving the market so they no longer have any bargaining power; then by exacting exorbitant film rentals and imposing onerous conditions of sale that drain off the profits essential to keep those outlets open; and finally by depriving them of the tax benefits which Congress plainly indicated should be theirs? The management of any corporation naturally wants to make a good showing and the most effective way to impress the stockholders is to pile up profits. When the stockholders receive from management an annual report containing a favorable financial statement and larded with self praise, they usually assume that all is well. They have no means of knowing that the management's selling policies and practices are restricting the market for the company’s products and hence are impairing the future worth of their investments— that is, unless they are informed by interested sources beyond management’s control. Those who have invested in film company securities may be gratified that their company has had a successful year, but that is not their sole concern. Regarded merely as shares in a single year’s business, film company stocks would be a drug on the exchange. In order to maintain the value of its shares, a film company’s business must have permanence. But permanence cannot be secured in an artificially restricted and dwindling market, nor can enduring success be built upon the bleaching bones of the customers. Committing Industrial Suicide Sometime ago Col. H. A. Cole, of the COMPO Tax Committee, expressed his dismay upon learning from exhibitors that the benefits of his labors in their behalf were being drained off by the film companies in the form of increased film rentals. Col. Cole merely reported on the complaints that had been lodged with him; he had not conducted an inquiry to ascertain the various methods by which that dire result was being accomplished. Since then Allied has conducted a survey with the aid of certain of its regional affiliates and recently a committee appointed by President Marcus to consider the subject held a meeting in Washington. Enough information has been gathered to support Col. Cole’s charges and the inquiry is still under way. As of the present time no evidence has been gathered which would support a charge that the film companies have formally agreed among themselves that by manipulation of their pricing practices they would appropriate to themselves all or an unfair portion of the benefits of the tax bill. There is not even complete uniformity among the several companies in the practices employed; nor are the practices employed the same as to all pictures or classes of pictures. The pattern of conduct among the several companies is not in their methods but in the uniformity of results attained. It is not the purpose of this bulletin to set forth an itemized bill of particulars in support of any general charge. The purpose merely is to set forth in broad outline the nature of the complaints that have arisen. It is the belief of Allied’s Committee that the practices complained of are too serious and the complaints too widespread for consideration and adjustment in a case-by-case procedure. The condition can be effectively remedied only by a sweeping revision of sales policies and practices and it is on that basis that the Committee hopes to enlist the sympathetic interest and cooperation of the heads of the film companies. Among the practices by which the film companies are draining off all or an unfair portion of the tax benefits are the following: 1. In certain sections and especially in the East the practice has long existed of granting exhibitors an adjustment of the stipulated film rental at the conclusion of an engagement. Thus if the run of a picture was disappointing, the distributor would adjust the film rental so as to save the exhibitor from a loss and sometimes even to afford him a profit. It is easy to say that this was a bad practice — that the contract terms should be fair in the first place and that the contract should be performed as written. But it was in reliance on promises of an adjustment (known in the trade as a “look”) that exhibitors for many years have been induced to sign contracts calling for higher film rentals than they could possibly afford to pay. This practice was followed for so long a time that it became an established trade custom and was implicit in every film deal regardless of whether it was mentioned in the negotiations or specified in the contract. About the time of the enactment of the tax bill, certain of the companies in licensing their films began to notify the exhibitors that the contract prices would hold and that there would be no “look.” There was, however, no reduction in the contract prices to compensate for the elimination of this beneficial trade custom; on the contrary, prices have quite generally been increased by the devices hereinafter mentioned. 2. Many exhibitors for a long time have bought their films on a scale with floors and ceilings adjusted to the grossing potential of their theatres, as shown by experience. That is to say, the percentage of the receipts which the exhibitor would pay as film rental depended upon the amount of the receipts during the engagement, the distributor’s percentage increasing as the receipts climbed into the higher brackets. The tax bill has had the effect (roughly speaking) to increase the theatres’ gross receipts by 10% to 20% without any corresponding increase in theatre attendance. The increased receipts resulting for tax relief automatically elevates a picture into a higher percentage bracket under the scale and this increased percentage reverts back to the first boxoffice dollar. The film companies have refused to readjust their scales by raising the ceilings so as to allow for increased grosses resulting from tax revision and not due to the unusual drawing power of the pictures. 3. In addition, the minimum percentage terms in percentage contracts, already too high for most exhibitors, have been further increased, so that exhibitors now must pay more for pictures that do not gross beyond the lowest percentage bracket. Thus exhibitors are being crushed between raised floors and lowered ceilings and their tax benefits are being confiscated by the film companies. 4. Increases in the prices of flat rental pictures in the established categories could be easily detected and so that method has not been widely used. However, complaints have been received which indicate that the same result is being achieved by including in the top allocations pictures which formerly would have been placed in the lower brackets. What Will Be The Conceqaences? Unless all the rules of fair dealing and sound economics have changed without our knowing about it, it would seem that the extraordinary policies and conduct of the film companies can lead only to disaster — disaster for all concerned. Even if the theatres should display greater lasting powers than they were credited with in the Sindlinger report, the film companies still stand to lose their market, or a substantial part of it. For in a free American economy there will be a supply for every need; and, one way or another, the exhibitors, working in cooperation with independent producers, will find new sources of product to supplement or supplant the inconstant flow, now reduced to a trickle, from the major companies. (Continued on inside page)