1946 had been a bonanza year for Hollywood with combined profits of the five major, and three minor, movie studios reaching the all-time high of $122 million ($1.6 billion in today's money). But without any discernible warning, the following year millions of Americans suddenly stopped going to the movies. Hollywood's profits in 1947 dropped to $89 million and the decline accelerated to less than $60 million in 1948.
The demographics of US moviegoers changed substantially after the war ended and complex factors combined to both lower attendance and change audience tastes. War-time audiences had been primarily women, made up of the mothers, wives, daughters and sweethearts left behind by the fighting men who had shipped out to Europe and the Pacific. Servicemen returning from WWII had little taste for the fictional and somewhat frivolous onscreen entertainment that paled in comparison to what they had witnessed and experienced on the battlefield. Furthermore, a vast majority of early post-war movies were naïve and of poor quality, and Hollywood was slow to realise that cinema audiences were now carefully selecting the films that they wanted to watch. Moviegoers had become more sophisticated than previously supposed, and the post-war baby boom meant that the millions of new parents had far less time and money to spend on entertainment.
The studio moguls were stunned and perplexed, for they had believed that the correlation between the industry's early post-war boom and America's weekly habit of going to the movies would continue well into the next decade. Bereft of any immediate ideas of how to lure mass audiences back into cinemas, Hollywood was then hit with a series of events that would sound the death knell for the industry's studio system.
The most important of these events occurred in 1948 when the Justice Department challenged the monopolistic practices within the movie industry. Moreover, they were able to persuade the Supreme Court that the film industry's studio system was in fact a criminal conspiracy designed to strengthen their hold on the exhibition field.
A key element – and the most profitable part of the studio system – was the block-booking of movies to independent exhibitors. The "big five" studios owned or controlled a network of some 1,400 movie theatres situated in the major urban areas of the US. These "picture palaces" were primarily first run theatres premiering the big name stars' A-releases, which also allowed the industry to charge high ticket prices. But when independently owned theatres – mainly located in the rural areas of America – wanted to rent these big-budget pictures, they would also have to take an entire year's worth of films from the individual studios without having the opportunity to screen them in advance. These block or blind-booking units would invariably include a number of mediocre low budget movies. The studios' B-movie units provided an indispensable training ground for contracted novice actors and directors. By bundling together these low budget productions with major features guaranteed the studios a profitable return on every film in the unit. As a consequence, if the independent movie houses did not take a certain number of these lesser quality films, plus cartoons and newsreels, they would not get the prestige productions their paying customers wanted to see.
This was considered an unfair trade practice and a violation of the federal anti-trust law, and in the case of The United States vs Paramount Pictures, et al, block booking was outlawed as an abuse of market power. If that was not bad enough, the five major studios were also forced to divest themselves of their theatre chains to allow for a true free market enterprise. This meant that Paramount, Warner Bros., 20th Century Fox, RKO and MGM no longer had a guaranteed outlet for any of their motion pictures. It was a devastating blow for the movie moguls.
Worse was to follow for the moguls when just a year later, the full impact of an entirely separate legal case – that had its origins in 1943 – adversely affected a key element of the studio system.
Olivia de Havilland was under contract with Warner Bros. and, much to this serious actress's chagrin, was often cast alongside the swashbuckling Errol Flynn as his "love interest". However, when she was loaned out by the studio, first to MGM for Gone with the Wind (1939) and then to Paramount for Hold Back the Dawn (1942), both her performances garnered her Academy Award nominations. This was proof to de Havilland that the maudlin films she was forced to appear in at Warner's were holding her back as a dramatic actress. However, her continual request that she be given better scripts with top rate directors fell on deaf ears. She had been suspended several times during her eleven-year tenure at WB for refusing some of the mundane roles offered to her. But after completing the hopelessly trivial Princess O'Rourke (1943), she refused to report to the studio. She was informed by the studio legal department that her contract would be extended for aggregates of the lay-offs and her non-attendance period. Foreseeing years of endless suspensions and extensions that would shackle her to WB for the rest of her acting life, she hired a first class attorney to get her out of her contract. Invoking California's ancient anti-peonage law, that limited seven calendar years as the maximum in which an employer could enforce a contract against an employee, her attorney filed for declaratory relief from Miss de Havilland's studio contract. After many months of endless hearings, the Los Angeles Superior Court finally found in her favour.
Her legal triumph (still known today in US legal terms as "The de Havilland Decision") sent shock waves throughout Hollywood, as movie employee contracts were at the very heart of the studio system. A furious Jack Warner, head of WB Studios, immediately blacklisted de Havilland, threatening any other studio who wanted to hire her with a lawsuit if they did so. Consequently, Miss de Havilland was not offered any film work for three long years.
This unfair punishment alarmed the majority of contracted movie stars, who decided it best to maintain the status quo. But when James Stewart, a former lover of Miss de Havilland's, returned to Hollywood after the war, in which he had served as a bomber commander in the US Air Corps, he too decided to take his case to court. This was in regards of the term of suspension being added to his contract whilst serving his country in the armed forces. Studio boss Louis. B. Mayer threatened the actor with "...you'll never work in this town again". To which Stewart replied, "You know what Mr. Mayer? I don't know that I even want to be an actor anymore".
When the judge ruled in Stewart's favour, MGM did not challenge the decision. Stewart eventually signed up with the MCA agency and Lew Wasserman took over as his personal agent. In 1949, Wasserman negotiated with Universal studios to finance two motion pictures starring his client. The deal was that the actor would take no up-front fee but instead share a percentage of the net profits. If the films were successful it would earn Stewart a lot more than he might have otherwise been paid. The first of these two pictures, Winchester '73 (1950), became a massive box office hit and this one movie alone would go on to deliver over half a million dollars into Jimmy Stewart's bank account.
Olivia de Havilland's action against Warner Bros. rewrote motion picture history as a stand against the ruthless exploitation of movie stars by the studios. And James Stewart's arrangement with Universal established a precedent for points, or percentage deals, that would eventually break the studio's firm hold on employees' long-term contracts.
The "old style" movie industry was now in total turmoil, with the moguls desperately trying to regain control of their moneymaking machine. But the mass production of an invention – whose full development had been held up by the war – would soon deliver the final and fatal blow to the Hollywood studio system.