All of the major studios in Hollywood (Paramount, MGM, Warner Bros., etc) owned theater chains; the minors, Universal, Columbia, and United artists, did not. The minors, distributed their pictures, by special arrangement, to theaters owned by the majors. The majors booked one another’s films in their theaters.
Vertical integration resulted in a fairly efficient economic system. They produced about 40-60 pictures a year, enough to supply their own and even other studio’s theaters. The majors owned only a fraction of the nation’s theaters, e.g. 3000 of the 18000. But these theaters were large, first run houses and located in big cities. Therefore they generated 70% of the box office receipts.
The majors ensured the profitability of their own theaters and controlled the independents by instituting a series of special distribution practices. These were known as block booking, blind bidding, runs, zones, and clearances.
Block booking refers to the rental of films in large quantity. If exhibitors wanted to rent films, they have to rent the entire yearly output. And since they contracted with the distributors before the film has been made, the distributors were forced to bid for them without seeing them, a procedure called blind bidding. This way the studios could sell the bad pictures with good.
As a result of the system the new films will be first rented to the first run theaters of which the majority was owned by the studios, and then its shown in the second run and sub run theaters after a clearance time of about 7-30 days (to renew demand). Distribution is also guided by a system of zones; only one theater in any particular area is allowed to show a new picture.
The dismantling of the studio system began just before World War II when the U.S. Department of justice’s Antitrust Division filed suit against the 8 studios for the use of their monopolistic methods block booking, blind bidding, runs etc. Hollywood avoided prosecution by agreeing to refrain from some of these practices. But in 1944 after hearing complaints from the independent exhibitors, reopened the suit. In 1948 the U.S. Supreme Court ruled against the studios and were forced to separate production and distribution from exhibition. They were also forced to sell off their theater chains to outside parties.