Held Hostage: The Plight Of The American Movie Theatre

I have often wondered why an industry, like the motion picture exhibition business would continually rely on suppliers who consistently act against their customers interests. If I were a grocery store and my produce vendor delivered substandard product, raised the prices, then at the same time conspired with my competitors to undercut me, then in most situations that grocery store would be looking for another produce vendor or may just decide to go directly to the farmer themselves.

I wonder often on the this question; why would a business rely on parties that consistently conspire to diminish income and opportunity? As I think deeper on this question, I realize that the ideal of Hollywood, the exciting dream factory ruled by innovative showmen and fascinating creators is long gone. It has been replaced by legions of money managers and Wall Street analysts that have as their sole goal as a direct to the consumer relationship.

There is a psychological term that is used that I think really accurately captures the place in which movie theatres find themselves in, Stockholm Syndrome.

Stockholm syndrome is psychological response wherein a captive begins to identify closely with his or her captors, as well as with their agenda and demands.

The name of the syndrome is derived from a bank robbery gone wrong in Stockholm, Sweden. In August 1973 four employees of the Swedish Bank, Sveriges Kreditbank were held hostage in the bank’s vault for an agonizing six days. During the standoff, a seemingly odd bond developed between captive and captor. One hostage, during a telephone call with Swedish Prime Minister , expressed the view that she fully trusted her captors but feared that she would die as a result of a police rescue attempt.

The most infamous example of Stockholm syndrome in the USA may be the one that involved kidnapped newspaper heiress Patricia Hearst. In 1974, 10 weeks after being taken hostage by the Symbionese Liberation Army, Hearst helped her kidnappers rob a California bank. She also adopted the revolutionary name, Tanya.

Psychologists who have studied the syndrome believe that the bond is initially created when a captor threatens a hostage’s life, taunts the hostage with this threat, and then chooses not to kill the hostage. The hostage’s relief at the removal of the death threat is transposed into feelings of gratitude toward the captor for giving him or her life. As the Stockholm bank robbery incident proves, it takes only a few days for this bond to take hold, proving that, early on, the victim’s desire to survive overtakes the natural urge to hate the person who created the situation.

I am going to make the claim that since the 1980’s , the motion picture exhibition industry, like those Swedish bank employees have been taken hostage. Taken hostage as a result of a shift in business practices during the Reagan-era is a period in movie making history during which a political regime served as an agent of altering trends in Hollywood’s political economic structure, mode of production, and construction of the success ethic. Deregulation allowed media entities to merge, for example the merger of Time, Inc. and Warner Bros. in 1989 created a media conglomerate with interlocking interests in filmed entertainment, cable television distribution and programming, music recording and publishing, and books and magazines.

Consolidation of political and economic power also occurs through the concentration of stock ownership of such companies in the hands of banks and common boards of directors. Vertical integration resulted in the consolidation of political and economic power. This newly found power was utilized as part of a broader policy making apparatus and were employed by the media entertainment firms to capture technologies such as satellite communications and cable television into their ever increasing portfolios.

The 1981 Economic Recovery Tax Act, passed by a surprisingly cooperative Congress, promoted greater short term banking investment in the entertainment industry by lowering corporate tax rates. The measure initiated massive waves of mergers and acquisitions which turned Hollywood transformation into a cluster of huge integrated communications conglomerates. Vertical integration involves the expansion of a business enterprise through the control of its operations from the point at which raw materials are acquired to the point of sale of the final product. A vertically integrated system of movies incorporates the production of the movie or program, its distribution, and its final presentation. Horizontal integration similarly refers to a high concentration of ownership in a particular industry and/or medium.

When that consolidation occurred in the 1980’s, Hollywood for all intensive purposes ceased to exist. The rule of the MBA’s and CPA’s covered the once proud bastions of American creativity with a dark web of forecasts, spreadsheets and statistics. The tradition of showmanship was thrown into a dark closet and soon forgotten. Movie theatres became hostage to the filings required by the Securities and Exchange Commission. Slowly any true self control was removed from the independent theatre owner and soon the independent theatres barely survived in a culture that ensured that it could only barely sustain itself.

This media monolith was just waiting for the day when it could cast off the theatre owner in favor of a direct to the consumer relationship.

The horizontally and vertically integrated structures of what consumed Hollywood’s major studios and the resulting damage was compounded by the concentration of control over their operations in the hands of chief executives and board members. It was soon discovered that while shares in media companies are widely held among public stockholders, power of those companies in fact only resides with as little as 5 or 10 percent of their stock holders, exerting control over their operations. In 1985 the officers and members of the boards of directors of Warner Communications held 2.5% of its stock; Coca-Cola Company (Columbia), 7.9%; Walt Disney Productions, 7.5%; MCA (Universal), 10.6%; and Gulf & Western (Paramount), 6.2%. Consolidation of political and economic power occurred through the concentration of stock ownership of large companies in the hands of banks and boards of directors. Concentrations of ownership enabled these executives to act in unison in developing and colonizing new communications media.

In the past the threat of anti-trust law enforcement kept these companies in check. In the 1980’s the threat of anti-trust dissipated. This encouraged the reintegration of the major movie studios’ production and distribution activities with movie exhibition. The Justice Department challenged only 0.7 percent of the mergers between 1982 and 1986 in which the parties were required to file for antitrust approval. The Carter Presidency maintained a 2.5 percent rate of challenging mergers. The owners of the major studios also added to their ownership of movie distribution networks with common investment in first-run exhibition chains centralized within large urban markets. This was the explosion of the multiplex. In essence the effect of the 1948 Paramount decree was quickly erased. As mall multiplexes replaced older downtown auditoriums, Hollywood focused on movies with pre-sold, crossover appeal to solely suburban audiences. The diversity which was celebrated in the cinema in the 1970’s was, like showmanship, a thing of the past. The placement of multiplexes in densely populated areas put back into place the studio system’s strategy of constructing movie theaters in key urban locations.

The Financial Interest and Syndication Rules,commonly known as the fin-syn rules, were a set of rules imposed by the Federal Communications Commission in the United States in 1970. The FCC sought to prevent ABC, CBS and NBC from monopolizing the broadcast landscape by preventing them from owning any of the programming that they aired in prime time. The rules also prohibited networks from airing syndicated programming they had a financial stake in. The fin-syn rule was relaxed slightly during the 1980s.Following the severe changes in the television landscape, such as the rise of the Fox network and cable television, the Financial Interest and Syndication Rules were abolished completely in 1993. This law prevented the consolidation of the media landscape and its removal saw a rapid re-design of the modern media industry.

The Federal Communications Commission’s repeal of regulations prohibiting cross-ownerships between media also enabled the major conglomerates to release blockbuster and A-list titles in theatres and on cable television by negotiating partnerships with cable networks. The Federal government’s implementation of the Cable Franchise Policy and the Communications Act of 1984 provided large cable operators with a wish list of provisions that allowed them immense control over every program and service they carried. The Cable Act of 1984 promoted horizontal integration by taking all power over the granting of franchises from municipalities and giving it to cable juggernauts. Decision making power shifted away from the public and cities and moved towards cable operations. The bill dramatically curbed cities’ rights after 1987 to regulate rights and programming or to influence franchise renewal. These created a huge amount of momentum and allowed companies like COMCAST to begin gobbling up other media properties.

Back in 1983, approximately 50 corporations controlled the vast majority of all media in the United States. Today, ownership of the news media has been concentrated in the hands of just six incredibly powerful media corporations. These corporate behemoths control most of what we watch, hear and read every single day. They own television networks, cable channels, movie studios, newspapers, magazines, publishing houses and music labels. The six corporations that collectively control U.S. media today are Time Warner, Walt Disney, Viacom, Rupert Murdoch’s News Corp., CBS Corporation and NBC Universal. Together, the “big six” dominate news and entertainment in the United States. That media concentration increases everyday. Enough is never enough for these companies. There stock prices depend not on production of consistent revenue as they are reliant solely on the measurement of growth.

This year the good folks who control the movie pipeline will offer theatres just about 100 movies that will end up having some form of wide release. The total amount of theatrical releases, of which some will have had only a single screening will come close to 800. It is obvious that compared to 1980 where there 110 movies released in total to movie theatres that there is probably a problem with the oversupply of movies. In 1980, close to a billion movie tickets were sold, in 2017 1.2 billion tickets were sold. In 1980 there were 17,000 screens, in 2017 40,000. With the doubling of screens why are there not more movies in wide release?

Why with the ease of digital distribution and the immediacy of social media are the theatres being held to a release pattern that has been consistent for the past 40 years. The number of theatre screens have grown and the population has grown by 100 million, so why has the release pattern been maintained. Well it’s simple, it has to do with concentrating opportunity within a set group of companies and control of that opportunity.

Independent Theatres have to ask the simple question, if by more than doubling the amount of theatres resulted in a marginal increase in box office, what was the purpose of building all these theatres? Well, the bottom line is that the deal to finance the theatres and the resulting conception of growth on Wall Street was fare more important than the resulting business. Everyone made money on the inflated value for the stock and the real estate transaction. When the time comes to pay the piper only the theatre owner is left to pay an often exorbitant rent and they would find themselves hostage to the machinations of Wall Street as studio increase their box office share and manipulate release patterns.

Let us take a very quick look at one Wall Street firm working in this space, EPR REIT. REIT by the way stands for real estate investment trust. EPR REIT was founded in 1997 as “Entertainment Properties Trust,” and it formally changed the name to EPR Properties in 2013, reflecting the expanding nature of its portfolio. The company started with 12 theaters, all operated by AMC. Based in Kansas City, it was only natural that AMC would be it’s initial tenant. Nineteen years later, EPR has expanded into the recreation and education markets. They are building private schools and charter schools, (these are bright guys because they see a political environment where the privatization of education is the next growth area). Entertainment still represents over 50 percent of its holdings. The firm now owns 154 theaters or megaplexes as EPR refers to them, including four Alamo Drafthouses. The “megaplexes which EPR owns are in turn operated by folks like AMC, CINEMARK and REGAL.

So let’s take a closer look at the Wall Street web that has descended on our business.

There is an asset management firm called Vanguard. Vanguard controls $4.08 trillion in assets. To put this into context, the gross national product of India last year was $2.2 trillion. In 2016 Vanguard made $276 billion or roughly the same as the Gross National Product of Ireland. This is an immense amount of wealth concentrated within one group of companies.

Now let’s connect some of the dots.

Vanguard owns approximately 11% of EPR REIT. Vanguard also owns $5 billion of APPLE, $1 billion of COMCAST,$ 1 billion in Disney, $400 million of CHARTER and surprise surprise…$800 million in Netflix. There is a ton of mixed motivations at play here and at the end of the day the tradition of movie going in this country is not even a consideration. There is little chance that it will change anytime soon since Vanguard is responsible for a huge amount of pension fund holdings.

Since 1980 independent movie theatres have been held hostage by the studios. Held hostage by a system where almost daily their value has been diminished, held in place until the day the when the studios and their masters could establish a direct to consumer relationship. With the launch of the on demand version of ESPN by Disney that day is here. As the ascendancy of the new on demand Disney services begin, independent movie theatres must take drastic measures in order to survive. Complying with their captors will no longer do.

The basic human survival instinct is at the heart of the Stockholm syndrome. Victims live in an enforced dependence and often interpret an act of kindness in the midst of squalid conditions as favorable treatment. They often become hyper sensitive to the needs and demands of their captors as opposed to their needs, making the misplaced psychological tie between the captors’ well being and their own.

By the 21st century, practicing psychologists had expanded their understanding of the Stockholm syndrome from hostages to other groups, including female and male victims of domestic violence, cult members, prisoners of war, sex trade worked, and abused children.

By the way, Jack Bogle the founder of Vanguard thinks that his companies have gotten way too big for the good of the economy. I would heartily agree.

To quote George Lucas, “We are all living in cages with the doors wide open”