The mega-industry of exhibiting first-run motion pictures is extremely complicated and very competitive but predictable. As Earvin "Magic" Johnson continues to increase his holdings in this dog-eat-dog business, he is presented with many excellent examples of what "not" to do. It began with an MVP for the Los Angeles Laker who has created his own brand of "showtime". Together with Sony Retail Entertainment and Loews Theaters, Magic Johnson has begun. distributing first-run movies to an important under-served market in this country.
Constructing and operating first class theater facilities in lower to middle class predominately black neighborhoods, Magic Johnson Theaters debuted with remarkable success. Since June of 1995 these theaters continue to rank as some of the top grossing theaters in the nation. The first screens were opened in the Baldwin Hills area of Los Angeles and have been a huge success. The second theater complex opened in Atlanta, Georgia in 1996 and a third was finished in Houston, Texas in 1998. Magic Johnson Theaters recently announced expansion into 15 other markets. When complete, this will bring their holdings up to 18 sites with over 200 screens.
These figures and expansion estimates sound ambitious but this new contender in the first-run movie market is still an infant and a light-weight. This industry is much tougher than the NBA and this path which Magic Johnson has set for himself is littered with the skeletons of many capable men and companies. Just as Magic Johnson inspired many young athletes and served as a role model for a nation, there are those men who do the same in the movie industry. Unbelievable aggressive and effective, some of these businessmen are role models and hero's to a nation of economists and believers in free enterprise. Magic would do well to study the following case very closely.
In 1948 Raymond J. Syufy, President and CEO of Syufy Enterprises, was instrumental in winning the Paramount Consent Decrees. This Supreme Court case and these decrees helped end the monopolistic strangle-hold that major motion picture producers, such as Paramount Studios, had on the small exhibitors that delivered first-run motion picture films to the general public. Ironically, in June of 1986, Raymond Syufy himself was being charged with the same antitrust violations which he had fought so hard to defeat 38 years earlier.
Syuly Enterprises, which owns and operates Century Theaters, is a remarkable regional competitor in the first-run movie industry. This company is a privately held, family owned business that originated in San Francisco, California in 1940. Its headquarters and central offices are located at 150 Pelican Way, San Rafael, California. The President and CEO is Raymond W. Syufy, the SEVP is Joseph Syufy, the head of corporate development is David Shesgreen and the SVP in charge of operations is William L. Hume.' At its best, Century Theaters (Syufy Enterprises) is an aggressive, strongly effective, competitor in the regional first-run movie market and will only serve to make this market better. At its worst, this company is an aggressive monopolist and will eventually devour every competitor and customer it comes in contact with. From its inception, this company has operated on the cutting edge of efficiency in this industry and certainly will, left unchecked or unregulated, continue to assume an even more effective, aggressive posture.
Syufy Enterprises opened the doors to its first movie theater 58 years ago in Vallejo, California. The Syufy family were innovators and pioneers then and continue that tradition today. Even as a small company, this family was efficient and extremely aggressive. This David went to court in 1948 against the Goliaths of the motion picture industry to help break the monopoly power they (Paramount, MGM, Wamer Brothers, RKO, Fox) held over the exhibitors of the films they produced. The Big Five, as these producers came to be known, were fully integrated across all three vertical stages--production, distribution, and exhibition. This monopoly owned 70% of all first-run movie theaters in the country and exercised near absolute control of the supply of first run movies. They illegally fixed ticket prices in the lowest stage (exhibition), completely monopolized the distribution of Hollywood movies, and effectively conspired to eliminate all competitors in the production stage(2).
One of the small exhibitors who was instrumental in helping the district courts, and later the Supreme Court, break this monopoly was Raymond Syufy. The Big Five were ordered by the Supreme Court to divest themselves vertically of all holdings (first-run theaters) and relinquish their control of the first-run exhibition market. The Supreme Court ruled and then enforced with the Paramount Decrees that the production and distribution phases of this huge industry remain forever apart from the exhibition phase(3). One effect of these decrees was to insure a profit foundation for Syufy Enterprises and many other small exhibitors which eventually led to many other important innovations. In 1971 Syufy designed, constructed and began operating some of the first multiplex (multiple screen) theaters. Today, the multiplex theater is the only format in use and is the strategic and economic backbone of this industry. Other early Syufy innovations were the incorporation of arcades into the theater lobbies and the construction of cafes in conjunction with the movie theaters.
By 1982, using extremely effective business tactics and producing a superior product, Syufy Enterprises had expanded its operations dramatically. The Justice Department indicates that between 1982 and 1985 Syufy owned and operated at least 33 indoor theaters comprising 133 screens, and 23 drive-in theaters with 108 screens. During this time they were doing business in California, Nevada, Utah, Arizona and New Mexico. Gross box office receipts for Syufy in 1984 were approximately $150,000,000(4). The Justice Department considered Syufy (Century Theaters) a large regional motion picture circuit. A motion picture circuit is defined as one company procuring and showing first-run movies in many different markets and theaters. When Syufy began operations in Las Vegas, Nevada during January of 1981 there were only three other regular exhibitors of first-run films in the area. The perceived effects of the company buy-outs (horizontal mergers) which took place in the Las Vegas movie theater market between 1981 and 1984 compelled antitrust attorneys for the US government to file a complaint and institute a civil antitrust suit against Raymond Syufy and Syufy Enterprises.
The Government Case
The government case contended that even if there were no legal or financial barriers to entry into the Las Vegas market, Syufy's effectiveness gave him an unfair advantage. Even if he didn't harm the public or monopolize the price for his product, his business tactics precluded any committed entrant from considering this market. Century Theaters had in essence raided the Las Vegas market, driven out the competition and established an illegal pattern for barring the entry of any serious long term competition. Even if an uncommitted entrant could easily enter the Las Vegas market it would not be in for the long haul because this entrant would find itself with such a small share of gross box office receipts as to be unprofitable. The Justice Department stated "Entry, after all, must, to be effective to dissipate the monopoly power that Syufy has, entry must have some reasonable prospect of profitability for the entrant, or else the entrant will say, as Mann theaters said.. this is not an attractive market to enter. There will be shelter. And the reason is very clear. You must compete effectively in this market. And, witness after witness testified you would need to build anywhere from 12 to 24 theaters, which is a very expensive and time consuming proposition. And, you would then find yourself in a bidding war against Syufy"(5).
The Syufy Defense
In retrospect, the Syufy defense demonstrates what a poor choice of battlefields the government chose to try to correct how the antitrust laws concerning horizontal merger situations were enforced during this time. Free enterprise demands and is founded upon the philosophy of aggressive economic competition. It is these everyday decisions, strategies, and maneuvers that determine what and how much will be produced everyday in this country. It is also this tough economic competition that drives out weaker more inefficient rivals to free up resources with which to produce better goods and services for the public. Raymond Syufy understood all this very well when he entered the first-run exhibition market of Las Vegas in 1981. As a stronger, more committed rival enters a market it precipitates a filtering out of weaker competitors. This is exactly what happened in Las Vegas. The three established rivals could not compete with Syufy in quality of theaters, number of screens or concession services to the public. In their retreat from the Las Vegas market they all sold out to Syufy.
Admittedly, this did give Syufy 100% control of the first-run motion picture screens in Las Vegas but market share is not a determining factor when defining monopoly power. The law defines monopoly power as the ability to exclude competition or control prices. The courts agree "a high market share, though it may ordinarily raise an inference of monopoly power, will not do so in a market with low entry barriers or other evidence of a defendant's inability to control prices or exclude competitors"(6).
The government's civil actions, penalties and accusations were strongly denied by the District Court for the Northern District of California (Civil No. c 86 3057) in June of 1986(7). Despite the strong denial of the government's actions against Syufy Enterprises, the Justice Department filed an appeal (903 F.2d. 659) and in May of 1990 the U.S. 9th Circuit Court of Appeals upheld the lower court decision. Both courts strongly denied the government actions stating "It is a tribute to the state of competition in America that the Antitrust Division of the Department of Justice has found no worthier target than this paper tiger on which to expend limited taxpayer resources. Yet, we cannot help but wonder whether bringing a law suit like this, and pursuing it doggedly through 27 months of pretrial proceedings, about two weeks of trial and now the full distance on appeal, really serves the interests of free competition"(8). After hearing 8 days of testimony about the entry situation during this period of time, the district court and the appellate court both ruled that the ease of uncommitted entry into the first-run movie business in Las Vegas was a trump and that Syufy's operation was legal. They also reiterated that for the government to bring this complaint and pursue it so strongly against Century Theaters was an improper use of departmental power. The court complained it was a waste of tax-payer resources and this type of civil action subverts the competitive nature of free enterprise stating "what business man would willingly compete in an environment in which there was a legal process involving such a continual struggle with government officials and such a huge legal bill just for entering a given market"?
After the strongly worded appellate court decision some economists and certainly the Department of Justice began to criticize the wisdom of the decision. In a speech given in April, 1996, Jonathan B. Baker stated "The Syufy decision missed the main point of the government's argument. The court misses the point about committed entry because it conceives of entry in terms of abstract, structural barriers, rather than connecting entry analysis to the question of whether new competition solves the competitive problem created by merger. As a result it may lead courts to presume that a firm that could enter the market likely would find it profitable to do so. Yet when entry requires significant sunk investment, its profitability--entry likelihood--is a matter for analysis not presumption. The judges responsible for the Syufy decision only appear to believe they needed to discipline an out-of-control government agency"(9).
This was an interesting and unusual case. On the surface it also seems straight forward and fairly simple. It was anything but straight forward or simple. Not only was it a precedent setting case but it is a prime example of what the courts describe as "ease of entry is a trump". Obviously, the Justice Department and FTC were growing weary of the courts using this trump and wanted to make a concerted attack on this ideology. The Syufy trial was the battleground on which the government chose to wage war against this proposition. They promptly got their heads handed to them. The government's economic logic pertaining to committed vs. uncommitted market entry was sound and in later cases made some inroads for their entry analysis theories, but their timing and wisdom about trying to argue this theory in the Syufy trial was a disaster.
Was it possible that the government's case and economic logic went over the heads of these learned judges as was stated previously? Maybe, as the government contends, these judges actually went after the Justice Department to teach them a political lesson. I believe it was neither. The government's argument was so complex and economically intricate that it was of much less interest and lesser merit than the court's perception. The court perceived this entire trial as nothing but the persecution of a paper tiger by the Justice Department. After the Syufy attorneys presented their overwhelming defense, the Justice Department looked foolish trying to define Syufy as a monopolist. They lost an opportunity to make progress towards their agenda of changing the ease of entry precedent.
On the surface its a little hard to see what all the fuss is about until you take a serious look at this astounding industry. The litigation and sheer bulk of legal action which has transpired throughout the history of this complicated mega-industry is almost unbelievable. It is obvious why the federal courts, the FTC and the Justice Department would all like to eliminate some of these court proceedings and huge legal burden for the tax payers. Since the beginnings of this industry there have been over 800 anti-trust suits filed against producers, distributors and exhibitors. Over 1600 hundred cases have been brought just for violations of the 1948 Paramount Decrees(l0). The cost for the tax payers of this country have been enormous.
At the heart of this conflict is the adversarial relationship between wholesalers and retailers of first-run films. The distributor-exhibitor relationship in the first-run Hollywood movie industry has been a continual source of litigation and government civil action for decades. In 1980, Alan Friedberg, president of the National Association of Theater Owners, described the motion picture business like this. "The relationship between the exhibitor and distributor is more adversarial and hostile than is true of the typical wholesaler/retailer situation in any other field of endeavor. The wholesaler, in this case the motion picture distributor, in effect operates in a controlled environment. The fact is, that if this was truly an openly competitive industry where the wholesaler, like other wholesalers, chases his customers and competes with other wholesalers then you wouldn't have the situation where all the customers compete with one another for the favor of the very few wholesalers in the field. That is why it is bitter, and that is why it is so adversarial"(11).
Raymond Syufy and Syufy Enterprises not only survive in this dog-eat-dog business but they thrive. In court many times in its 58 year history, this company very seldom loses ground. As a matter of fact, after its precedent setting victory in US. v Syufy Enterprises this company went on an expansion tear. Definitely a monopsonist, Syufy Enterprises would become a monopolist given the slightest chance. This industry demands extremely effective business tactics, aggressive business dealings and winning negotiations. There is no room for weak competitors. Raymond Syufy understands this better than anyone and is a major force in the exhibition market now and could very soon be the largest exhibitor in the world. Using the same aggressive business tactics with which he took control of the Las Vegas market, Syufy is now dominating markets all across the country. He is still strongly entrenched in all the markets he has attacked, including Las Vegas.
The Justice Department claims, Syufy has found a loophole in the law. He can continue to raid and plunder market after market because the federal courts still rule that easy uncommitted entry is a trump. Syufy has only to prove to the courts the possibility of easy uncommitted entry. He then makes his operation so effective that it is unprofitable for other committed entrants to enter the markets profitably. With the courts as an ally and with a well established profit base this company has expanded dramatically since 1989 and is becoming even more ambitious and aggressive.
At Century Theaters the corporate development department has a slogan: "One thousand by the year 2000". David Shesgreen, Senior executive Vice President of Century Theaters says "that is no idle boast. With the best product and highest grossing screens in the industry, owning and operating 1000 screens by the year 2000 is a minimum goal". Shesgreen, the company's head film buyer for 16 years, heads up corporate development and states emphatically that "With our expansion programs we'll be able to offer audiences throughout the West the best movie experience there is. We have the resources, the management talent, and the commitment to usher in the new century with the greatest circuit of screens the country has ever seen. At Century Theaters the future is already here. As we've done in other markets our expansion is based on a strategy of exploring and subsequently developing new markets"(12).
"No idle boast" is well said. Century theaters is presently completing expansion plans into Texas, Colorado, Oregon, and Alaska. As of 1998 they have opened 142 new screens adding to their already impressive 550 screen total. Another 150 screens are contracted for and will be operational by the end of 1999. Many new sites have been selected and construction begun in the very successful San Jose market and also in the greater San Francisco Bay area. This company is now actively seeking entrance into Chicago, Dallas/Ft. Worth and other large regional markets. Early in the new century this firm will expand its theater holdings into larger eastern markets as well(13).
From its humble beginnings in 1940 Syufy Enterprises has always been described as efficient, effective, and aggressive. No company survives the first-run movie business without those characteristics. Even in the early 1940's the books and literature of that day, written about this business, read the same as they do now. This is a quote from a book published in 1944. "Dog-eat-dog, bitter, and adversarial describe the first-run motion picture business. Without the courts and all the watch dogs this industry would be total chaos. All the players are monopolistic in their behavior and would without a doubt power their way over all the others if they could"(14). The federal courts are, and seem to have always been, caught in the middle of this continual battle. At present the courts favor shelter for the expansion minded exhibitors but the government would further define the rules of entering this market. It is very easy to believe that there is much evolution left for the antitrust laws in dealing with production, distribution and exhibition in the first-run movie business.
1 Hoovers on-line, (http://www.hooversonline.com), Company Capsule, Century Theaters, November, 1998.
2 The Motion Picture Mega-Industry. pg. 65, Litman, Barry R., 1998.
3 The Motion Picture Mega-Industry, pg, 67.
4 United States of America, Plantiff, V. Syufy Enterprises; and Raymond J. Syufy, Defendants.
5 Government contention in original suit (c86 3057) filed in June, 1986.
6 US 9th Court of Appeals Decision, US vs Syufy Enterprises, (903 F.2d 659), Written Opinion of Circuit Judge Kozinski, May, 1990.
7 Decision, US vs Svufv Enternrise, District Court Northern District of California, c86
3057, June, 1986.
8 Decision, US vs Svufv Enterprises, US Ninth Circuit Court of Appeals, 903 F.2d 659 (9th Cir.), 1990.
9 Speech, Baker, Jonathan B., Boston, Mass., The Conference on Economists' Perspective on Antitrust Today, The Problem with Baker Hu~hes and Svufv: On The Role Of Entry In Merger Analvsis, April 25,1996.
10 American Film Distribution, Donahue, Suzanne M., Pg. 140, 1987.
11 American Film Distribution, Donahue, Suzanne M., Pg. 103, 1987.
12 Syufy Enterprises Literature, (www.centurytheaters.com), The Best Seat For The 21 st Century, October, 1998.
13 Syufy Enterprises Literature, Corporate DeveloDment, October, 1998.
14 Economic Control of The Motion Picture lndustrv, Huettig, Mae D., 1944.