Report regarding investigation directed to be made by the President in his Executive Order of November 27, 1933, approving the Code of Fair Competition for the motion picture industry (July 1934)

4 GENERAL PROBLEMS OF THE INDUSTRY The years of depression were particularly trying ones for the motion picture industry. Dependent as it is for its financial prosperity upon mass patronage, the tremendous decline in mass purchasing power during the last few years made serious inroads on its theatre revenues. Moreover, tremendous capital investment had been made in studio and theatre equipment as a result of the new era in motion picture entertainment introduced by sound and talking pictures. Faced with the problem of decreased patronage and with the added problems of tremendous fixed charges, the industry was forced both to reduce theatre admission prices and to attempt to improve the quality of entertainment in the effort to attract more people into the theatres. To accomplish this, the producer invited the public with glamorous and more glamorous screen personalities. Producers discovered that the creation of such personalities was a costly process and, moreover, that once created, they were always open to the predatory raids of competing producers. Thus, in the scramble to attract the public, salaries of executives and screen stars were raised to abnormal heights. Stars were given contracts at figures substantially above recently prevailing rates, and far in excess on an average of salaries generally commanded by the outstanding personalities of the silent screen. By this action producers were flying in the face of sound judgment. Business management in every line of commercial activity was drastically reducing operating expenses, including salaries. The combined operation of these trends made it difficult, if not impossible, to adjust production costs to the new era of generally depressed earnings. A series of equity and other receiverships in the industry, affecting the investment of hundreds of thousands of stockholders, was the result. Of the 5 largest companies in the field, 1 is in bankruptcy; 1 is operating in receivership and bankruptcy; 1 undertook capital reorganization to meet an indebtedness of $42,000,000; 1 showed a loss of more than $16,000,000 for the year 1932; and the earnings of 1 were reduced from a net income of $15,000,000 in 1931 to a net income of $7,000,000 in 1932. Moreover, on the basis of the highest quotations to date, the public's equity in the common stock of these five major companies has been reduced from a high of $960,000,000 in 1930 to approximately $140,000,000 at the present time. Among the factors contributing to the distressed financial condition of the motion picture industry were: (a) a greatly reduced mass audience for screen entertainment by reason of wide-spread unemployment; (6) great operating losses, due to undoubted overinvestment in large-type theatres; (c) cutthroat competition for the services of outstanding screen per sonalities, resulting in (d) excessive salary ranges, making it difficult to secure economical production. Inflated capital structures require drastic corrective measures, which come by the operation of the laws of economics during depression periods with operating losses. Increased activity of stockholders in the operations of their companies may result in an incentive to sounder and better management, and such activity has been and should be welcomed by able and competent management. Enforced readjustments, particularly during the past 12 months, have already had a salutary effect upon the financial structure of the exhibition division of the industry. The drastic procedure of receivership and bankruptcy has operated to deflate capital structures. Substantial economies have been imposed upon theatre operation. But no convincing evidence exists to indicate that basic production costs have been greatly reduced, or that any substantial progress has been made toward the elimination of those practices prevalent within the industry which tend to depress the quality of motion picture entertainment offered to the consuming public. Rationalization of production costs remains the essence of the problems in the financial rehabilitation of the production division of the motion picture industry. The seriousness of these problems was given full consideration throughout the negotiations leading up to the final approval of the Motion Picture Industry Code. In support of the inclusion of the suspended provisions in the code, its sponsors contended — (1) That the payment of excessive salaries constitutes a major factor in the maintenance of high production costs, and that rationalization of production costs can best be accomplished by devices to control the payment of excessive salaries. (2) That the provisions dealing with excessive salaries, and with unfair competitive practices utilized in securing the services of certain classes of employees, furnish an effective and practicable method of control. SPECIFIC PRODUCTION PROBLEMS EMBRACED WITHIN THE SUSPENDED PROVISIONS OF THE CODE The industry has made no material progress in setting the production side of its house in order. One general indication of the contribution which salary payments make to the maladjustment of production costs is found in the failure of management to adjust salary ranges of executives or artists to changed earning capacity of the various companies in the industry. The question therefore naturally arises: Why has the situation not been corrected by calculated action on the part of management, or by the operation of natural competitive forces?