One century ago this week, in its May 4, 1918 edition, “Motion Picture News” noted the expansion of the offices of the W.W. Hodkinson Corporation:
This company was the latest venture of William Wadsworth Hodkinson (1881 – 1971), one of the pioneers of the business end of the American motion picture industry. Despite having been largely responsible for bringing order to a chaotic early business environment, he had been unceremoniously ejected from his first major business enterprise and was now seeking to regroup and re-establish himself in the industry.
The nickelodeon boom of the early 1900s had established beyond question that there was a lucrative market for the production and exhibition of moving pictures. Early fears that the novelty of seeing photographs move would wear off quickly were set to rest when producers began using these moving pictures to tell stories. Once discovered, narrative cinema became the gift that kept on giving. However, in those early days the system (or rather, systems) for getting the films out to the marketplace might charitably be described as disorganized. In the pre-1900 period, short non-narrative films were sold outright, sight unseen, to exhibitors at a cost of around $25 (roughly equivalent to $700 today). Of course, it didn’t take long for individual films to be played out, leaving exhibitors with a useless print on their hands. Clearly a rental arrangement made more sense. By the turn of the century businesses offering rental of prints to exhibitors began to appear. Some of these “exchanges,” as they were called, would purchase the prints from production companies, while others leased them, making their transactions with exhibitors technically sub-leases.
In addition to solving at a stroke the exhibitors’ twin problems of paying the higher purchase price and of being stuck with the print after it had outlived its usefulness, exchanges provided the added service of maintaining print quality. Prints were regularly inspected and, if necessary, repaired before shipping them out to the next theater.
The exchange business was a localized enterprise, mostly because of the expense and slowness of shipping services. By the time a print could be shipped from one coast to the other, for example, it would no longer be the latest release. Moreover, an exchange several states away could hardly compete for a given theater’s business against an exchange located a few miles away from the theater, since the local exchange’s shipping cost would be negligible by comparison. This gave rise to a so-called “state rights” system, under which production companies would sell exclusive regional rights to their films to regional exchanges, typically at the state level (hence the name). This form of distribution was so prominent in the industry that “Moving Picture World” regularly devoted an entire section to covering it:
The problem with the state rights system for production companies was that the licensing to the local exchanges was at a flat rate. That meant that if a particular release happened to do big business at the box office, the production company did not reap any extra financial benefit from the public’s appreciation of its product. Also, the decentralized nature of the system left the door open for all sorts of mischief, ranging from having to chase down delinquent payments from widely scattered exchanges to exhibitors sharing prints among multiple locations (“bicycling” prints around town) without additional payment.
This is where W.W. Hodkinson enters the picture. After a few years as an exchange operator, he conceived the notion of unifying the fragmented regional distribution system into a nationwide operation that would include a provision for production companies to share in box office profits. The idea didn’t gain much traction at first, but received a crucial push when feature length releases began to supplant programs composed of multiple short films.
In 1914, Hodkinson successfully merged the business interests of eleven regional exchanges to form Paramount Pictures, a distribution company on a national scale. He was able to make exclusive deals to distribute the films of a number of production companies, including Adolph Zukor’s Famous Players Film Company and Jesse Lasky’s eponymously-named Jesse L. Lasky Feature Play Company. Hodkinson’s terms were attractive in part because he offered to provide up-front financing to offset production costs in exchange for 35 percent of the box office gross receipts. The deal was announced in the May 30, 1914 edition of “Moving Picture World”:
While Zukor welcomed the front money for production costs, he chafed at the 35 percent bite on the back end. And in any case, Zukor favored bringing production and distribution under a common corporate ownership. Hodkinson, for his part, strongly opposed combining production and distribution, which put him firmly at loggerheads with Zukor. Consequently, Zukor, by means of some shrewd corporate maneuvering, managed to gain control of a majority of the Paramount stock in 1916. Now in the corporate driver’s seat, Zukor proceeded to force Hodkinson out of the company he had created. Zukor’s hand-picked replacement, Hiram Abrams, was installed as the new president, paving the way for Paramount to become a production company in addition to running a national distribution network. “Moving Picture World” chronicled the change of leadership in its June 24, 1916 edition:
The company referenced in the 1918 clipping above, the W.W. Hodkinson Corporation, was Hodkinson’s latest effort to implement his vision for how the industry should conduct its business. This time his business model entailed exhibitors across the country pooling their resources to form a network of exchanges to handle local distribution of films. As a shareholder in its local exchange, each exhibitor received a cut of the distribution profits, along with the assurance that their local exchange would not be working against the theater’s best interests. Moreover, each exhibitor shareholder in a local exchange also was a shareholder in the central organization and received dividends from that company as well. The central organization, run by Hodkinson, would do business with production companies to secure a steady supply of titles to distribute. The key, of course, was getting a sufficient number of exhibitors to sign on to the program. Hodkinson ran full page ads in the trade papers touting the venture:
Note, by the way, the sly inclusion of a mountain peak in the background, a subtle allusion to Hodkinson’s role as the founder of Paramount, whose famous logo prominently features a mountain peak.
Hodkinson’s new venture initially seemed to take off successfully, but his insistence on keeping production and distribution separate put him, at least for the short term, on the wrong side of history. Back at Paramount, Zukor lost no time in making Paramount both a production company and a distribution company. And ultimately he would add ownership of a chain of theaters, making Paramount a fully vertically integrated company with manufacturing of the product, distribution of the product, and retailing the product to the public all under one corporate ownership. From that point on, vertical integration became the standard model for all the major studios. In fact, it became the defining attribute that distinguished majors from non-majors. In May of 1918 it may have sounded promising that the Hodkinson Corporation was tripling its office space to occupy much of the third floor above the Harriman Bank on Fifth Avenue, but in 1926 Zukor would build the thirty-three story Paramount Building on Times Square, from which he presided over a $150 millon empire.
As for Hodkinson, less than six years later, in 1924, he would again find himself squeezed out of his own company, which was acquired by financier Jeremiah Milbank, who would rename and reorganize the company as the Producers Distributing Corporation for the primary purpose of releasing Cecil B. De Mille pictures following De Mille’s acrimonious departure from Zukor’s Paramount. In 1929, Hodkinson would get out of the movie business altogether to form an airplane manufacturing corporation. In aviation, Hodkinson had found perhaps the only other business in which the ups and downs were as precipitous, and as risky, as in Hollywood.