STUDIO SYSTEM PRACTICES
MARKETING THE BIG PICTURE
ART FILM MARKET
THE NEW HOLLYWOOD
In the film industry, distribution is the intermediary between production and exhibition and involves the following functions: sales, that is, the securing of rental contracts for specific play dates; advertising directed to theaters through trade publications and to filmgoers through the print and electronic media; the physical delivery of prints to theaters; and the method of release. New York City, the media and communications capital of the country, has served as the distributing center of the industry throughout most of its history. Distribution originally serviced motion picture theaters exclusively in the domestic and foreign markets, but as new electronic technologies were developed, distribution subsumed ancillary markets such as network television, cable television, home video, and the Internet. Non the atrical distribution involved similar functions, but serviced educational, social, and religious organizations outside commercial exhibition.
Distributing a feature film, a company charges the producer a fee based on the gross receipts (i.e., rentals) taken in by the film. In Hollywood, the schedule of fees ranges from 30 to 45 percent of the gross, depending on the market. The fees remain in effect for the duration of the distribution contract and are levied each time a film is released to a new "window," for example, home video, cable television, or network television. The revenue from these fees is designed to offset the distributor's overhead expenses in maintaining a permanent sales organization, to recoup advertising and promotion costs, and to generate profits. When the distributor puts up financing for a feature film, the fee also serves to reward the company for taking the risk of production financing.
Hollywood has operated on a global basis since the 1920s. Overseas, American film companies dominated the screen just as they did at home. They distributed the biggest box office attractions and captured the lion's share of ticket sales. Before World War II, about a third of Hollywood's revenues came from abroad; by the 1960s, the proportion rose to about one-half. As demand for film entertainment increased worldwide, especially in western Europe, the Pacific Rim, and Latin America during the 1980s, Hollywood entered the age of globalization. In practice, globalization meant that film companies upgraded international operations to a privileged position by expanding "horizontally" to tap emerging markets worldwide, by expanding "vertically" to form alliances with independent producers to enlarge their rosters, and by "partnering" with foreign investors to secure new sources of financing. Achieving these goals has led to a merger movement in Hollywood that has yet to run its course. The history of these mergers would reveal how today's media giants, such as Time Warner, News Corp., Disney, and Viacom, protected their entrenched positions by strengthening their distribution capabilities.
Considered visual novelties, the first films reached audiences by way of vaudeville. Pioneering companies assembled packages, consisting of projector, projectionist, and films, which traveled the vaudeville circuit as an act that lasted from ten to twenty minutes. In playing a circuit, a new act would typically open in the flagship theater in New York and then move to the other houses in sequence. This so-called peripatetic form of distribution ideally suited the infant film business, with its limited number of film subjects, equipment, and trained personnel.
While films were finding a ready place in metropolitan vaudeville houses, distributors also took to the road. Once projectors became available for purchase on the open market, traveling showmen brought the movies to small-town America by exhibiting their films in amusement parks, lodge halls, and vacant storefronts. Showmen originally had to purchase their films outright from producers, which was expensive, but the creation of film exchanges beginning around 1903 solved the problem by enabling showmen to rent films at a fraction of the purchase price. The availability of films for rental, in turn, stimulated the rise of the nickelodeon theater beginning in 1905.
To capitalize on this growing demand for motion picture entertainment, the pioneering film companies formed the Motion Picture Patents Company in 1909 and attempted to take control of the industry. The Trust, as the MPPC was called, standardized the playing times of films to around fifteen minutes—the playing time of a single thousand-foot reel—and created a national distribution system by licensing the requisite number of existing exchanges. The goal was to supply nickelodeons with a steady supply of shorts for programs that might change daily. In 1910 the MPPC took over the distribution function by forming a subsidiary, General Film. Although the courts eventually ruled that the MPPC setup was illegal, the Trust brought stability to the industry. General Film, for example, improved the chaotic conditions in the marketplace by inaugurating a system of "zoning" so that theaters in a particular locale would not show the same pictures simultaneously, by classifying theaters by size and location, and by regularizing pricing, among other measures.
With the arrival of feature films—defined by the trade as multiple-reel narratives with unusual content that merited special billing and advertising—a new distribution system was needed to generate more revenue to recoup higher production costs. At first, producers and importers used the "states' rights" method, which involved selling the marketing rights of an individual feature territory by territory to local distributors, who would then rent out the picture for a flat fee or on a percentage basis to theaters. Producers and importers also used road showing to market their pictures. The technique got rid of the middleman and enabled a showman to book a theater on a percentage-of-the-gross basis and then take over the actual operations for the run. Such a strategy enabled the producer or importer, rather than the subdistributor, to capture most of the box office revenue should the picture prove to be a hit. From 1912 to 1914, nearly three hundred features were distributed using these methods. States' rights distribution and road showing were satisfactory techniques to exploit one picture at a time, but if producers ever hoped to expand and regularize their output, a better method had to be found.
W. W. Hodkinson (1881–1971), a former General Film exchange man, created such a system in 1914 by convincing a group of regional states' rights exchanges to join forces and form Paramount Pictures Corporation, the first national distributor of feature films. Hodkinson's plan guaranteed exhibitors a steady supply of features because Paramount would help producers finance and advertise their pictures with advance rentals collected by the exchanges. In return, the company would charge producers a distribution fee of 35 percent of the gross to cover operating costs and a built-in profit margin. This innovative scheme attracted the country's best producers—Adolph Zukor's Famous Players, the Jesse L. Lasky Feature Play Company, among others—who signed long-term franchise agreements granting Paramount exclusive rights to their pictures.
Paramount was geared to release 104 pictures a year, enough to fill the playing time of a theater that changed bills twice a week. Exhibitors contracted for the entire Paramount program, a practice known as block booking. Though block booking would later be much abused, selling poor films on the strength of the good, the practice at its inception worked to everyone's satisfaction. Hodkinson also codified prevailing practices into a system that graded houses playing features from first-run to fifth, depending on size, condition, and location (from downtown in large cities to village). As the "feature craze" spread, other national distributors entered the market, among them Metro Pictures, Universal, and the Fox Film Corporation.
This tremendous expansion of the movie business convinced Adolph Zukor (1873–1976) that Paramount and its producers should merge, not only to effect economies of scale in production, but also to capture a greater share of the market. Hodkinson vetoed the idea, arguing that the three branches of motion pictures—production, distribution, and exhibition—should be kept separate. In his view, better pictures, better distribution, and better theater management would result if a lively independence existed among them. But Zukor was not to be denied. In a series of intricate maneuvers, Zukor had Hodkinson deposed in June 1916. Then he merged Famous Players with the studio owned by Jesse Lasky (1880–1958). Separately they might be the first- and second-ranked producers in the country; together, as the Famous Players–Lasky Corporation, they were in a class by themselves. Paramount became the distribution subsidiary of the new company. (Paramount later became the name of the parent company.) When Zukor completed his consolidations and acquisitions in December 1917, he had created the largest motion picture company in the world. Implementing the next stage of his thinking, Zukor increased film rentals and expanded his production program, so that by 1918, Paramount distributed 220 features, more in one year than any one company before or since.
Zukor's tactics led to a backlash by resistant exhibitors and ultimately to a merger movement that created a vertically integrated industry controlled by a handful of companies at the end of the 1920s—Paramount; Warner Bros.; Loew's, Inc. (MGM); Twentieth Century Fox; and RKO. During the golden age of Hollywood, distribution adhered to the run-clearance-zone system. The country was divided into thirty markets, each of which was subdivided into zones that designated theatrical runs. Theaters first showing newly released pictures were designated first-run. Located in the large metropolitan areas and owned mainly by the circuits affiliated with the majors, these theaters seated thousands, commanded the highest ticket prices, and accounted for nearly 50 percent of all admissions. Second-run houses were typically located in the neighborhoods and charged lower ticket prices. Later-run houses were located in outlying communities and charged still less. Over a course of time, a feature played every area of the country from metropolis to village. This merchandising pattern for movies was similar to that of other consumer goods: first, the exclusive shops; next, the general department store; and finally, the close-out sales.
Spawned during the Great Depression as a two-for-one form of price cutting to attract customers, double features required the majors to produce two types of features, class A and class B. Class A films contained stars, had high production values, and were based on best-selling novels and plays; class B movies were, at best, inexpensive genre films that were considered filler by the companies. To recoup the higher costs of its quality product, companies rented such films on a percentage-of-the-gross basis, while the cheapies were sold at a flat fee. The former practice enabled the majors to benefit from surges at the box office, while the latter allowed them to cover their costs and operate their studios at full capacity.
The trade practices of the industry—run-clearance-zoning, block booking, admission price discrimination—were used by the majors to wrest the greatest possible profits from the market and to keep independent exhibitors in a subordinate position. The US Justice Department, as a result, instituted an antitrust case against the majors in 1938. Ten years later, the Paramount case, as it was called, reached the Supreme Court. In a landmark decision, the court held that the Big Five (Loew's Inc. [MGM], Paramount, RKO, Twentieth Century Fox, and Warner Bros.) conspired to monopolize exhibition. Trade practices such as block booking, whereby the majors rented their pictures to independent exhibitors in groups on an all-or-nothing basis, unfair clearances and runs that prolonged the time subsequent-run theaters had to wait to receive new films, and preferential arrangements among members of the Big Five were declared illegal restraints of trade. To break the monopoly in exhibition, the Supreme Court mandated that the Big Five divorce their theater chains from their production and distribution branches.
Although the majors concentrated their production efforts on the big picture, demand for low-budget films remained strong until the advent of television in the 1950s, especially in small towns. During the 1930s and 1940s, the industry defined exploitation films as those films that dealt with social problems in a sensational way, such as Warner Bros'. I Am a Fugitive from a Chain Gang (1932), which exposed the sordid conditions in a Georgia prison and the same studio's Black Fury (1935), which dramatized labor and industrial unrest in the coal mines of Pennsylvania. After television came in, exploitation films became associated with low-budget science fiction, horror, rock 'n' roll, and drag racing films designed to appeal to teenagers and the drive-in trade. The distribution of these films was handled by independent producers and small studios outside mainstream Hollywood, such as Edward Small (1891–1977), Columbia's "Jungle Sam" Katzman (1901–1973), Allied Artists (formerly Monogram), and American International Pictures.
Although the Paramount decision restructured the industry, it by no means reduced the importance of the big companies. By allowing the majors to retain their distribution arms, the court, wittingly or not, gave them the means to retain control of the market. The reason, simply stated, is that decreasing demand for motion picture entertainment during the 1950s foreclosed the distribution market to newcomers. Distribution presents high barriers to entry. To operate efficiently, a distributor requires a worldwide sales force and capital to finance twenty to thirty pictures a year. Since the market absorbed fewer and fewer films during this period, it could support only a limited number of distributors—about the same as existed at the time of the Paramount case.
After World War II, things were never the same for the motion picture industry. Beginning in 1947, the winds of ill fortune blew incessantly for ten years, during which movie attendance dropped by one-half. Television, the main culprit, replaced the movies as the dominant leisure-time activity of the American people. Studios cut back on production, and audiences became selective and more discerning in their moviegoing tastes. Motion pictures, therefore, were produced and marketed individually. During the 1960s, Hollywood adopted a blockbuster formula to reach the masses. The new formula to "make them big, show them big, and sell them big" succeeded; it resulted in family-oriented hits like Around the World in Eighty Days (1956), Ben-Hur (1959), Exodus (1960), The Sound of Music (1965), and Fiddler on the Roof (1971).
STEVEN J. ROSS
b. Steven Jay Rechnitz, Brooklyn, New York, 19 September 1927, d. 20 December 1992
Regarded in the industry as a consummate deal maker, Steven J. Ross's greatest coup was orchestrating the merger of his company Warner Communications with Time, Inc., in 1989 to create Time Warner, the world's largest media and entertainment company. Anticipating the need to strengthen Warner Communications' distribution capabilities as Hollywood entered an era of globalization, Ross brokered a $14 billion deal that combined his company's record labels, book division, cable television systems, and Hollywood studio with the magazines of Time's publishing empire. Ross became chairman and co–chief operating officer of the new Time Warner, and he received as compensation nearly $80 million in 1990, more than any other executive of a public company.
Ross started out during the Great Depression selling trousers in New York's garment district. Marrying well to Carol Rosenthal in 1954, he joined his father-in-law's funeral business in Manhattan as a trainee. A plan Ross devised to rent out the company's limousines in off hours ultimately led to the creation of Kinney National Services—a conglomerate, which Ross headed, that operated funeral homes, a car rental agency, parking lots and garages, and a building maintenance service. Ross expanded into entertainment by purchasing the Ashley Famous talent agency in 1967 and then, in 1969, the ailing Warner Brothers-Seven Arts, a Toronto-based television syndicator that had recently acquired the venerable Warner Bros. studio in Hollywood, along with its post-1948 film library and record labels. He then branched out into cable television by launching Warner-Amex Cable Communications in partnership with American Express (which he later bought out), and he eventually added toys, cosmetics, video games, and other businesses to his company, which he renamed Warner Communications in 1972 after selling off the old Kinney business.
Following the collapse of Warner's video game business in 1982, Ross downsized the company, selling off Warner's peripheral operations to become a vertically integrated entertainment conglomerate engaged in film and television programming, recorded music, and mass market book publishing. The restructuring allowed for diversification while enabling the company to meet increased demand worldwide for feature films and television shows, videos and compact discs, and cable TV.
During Ross's stewardship, Warner's film division consistently captured top shares of the box office, producing blockbusters such as the Superman, Batman, and Lethal Weapon series, Steven Spielberg's The Color Purple (1985), and numerous Clint Eastwood action films, including The Unforgiven (1992), which won Academy Awards® for best picture and best director. Ross came under criticism for saddling the company with enormous debt to pay the cost of the merger with Time, for his pay package, and for his lavish treatment of Warner's stars. Nonetheless, Ross is remembered as a creative entrepreneur who was willing to take great risks to realize his vision of a global media complex.
Bruck, Connie. Master of the Game: Steve Ross and the Creation of Time Warner. New York: Simon & Schuster, 1994.
Klein, Alec. Stealing Time: Steve Case, Jerry Levin, and the Collapse of AOL Time Warner. New York: Simon & Schuster, 2003.
The big picture transformed the three-tier playoff of the run-clearance-zone pattern to a two-tiered playoff. Typically, a blockbuster was released in each market, first to selected houses for extended runs as road shows or exclusive engagements, and subsequently to large numbers of theaters to capture the leavings. Another way of characterizing this distribution pattern is "slow and fast."
The blockbuster changed release schedules as well. Instead of releasing pictures throughout the year at regular intervals, companies brought out their important pictures during the Christmas and Easter holidays and at the beginning of summer.
Largely shut out of the American market since the 1920s, foreign films did not really reach US theaters until after World War II. Before the war, foreign films played only in New York and in a few other major cities. After the war, they played in a growing number of art film theaters around the country and created a subindustry known as the art film market, which was devoted to the acquisition, distribution, and exhibition of foreign-language and English-language films produced abroad. Waves of imported feature films from Italy, France, Sweden, Britain, and Japan entered the country, represented by such classics as Roma, città aperta (Open City, Roberto Rossellini, 1945), Lesvacancesde Monsieur Hulot (Mr. Hulot's Holiday, Jacques Tati, 1953), Det Sjunde inseglet (The Seventh Seal, Ingmar Bergman, 1957), Hamlet (Laurence Olivier, 1948), and Rashomon (Akira Kurosawa, 1951). Foreign films paled in significance to Hollywood fare at the box office, but their influence on American film culture was enormous. Foreign films became regular subjects of feature stories and reviews in the New York Times, mass-circulation magazines, high-brow periodicals, and the trade press. They were also promoted by museums, film festivals, and college film and literature departments around the country.
Foreign film distribution was handled originally by small independent companies operating out of New York, such as Joseph Burstyn, Janus Films, and Lopert Films, but by the 1960s the art film market had been taken over by Hollywood. The commercial potential of the art film market became apparent when films like Et Dieu … créa la femme (And God Created Woman, Roger Vadim, 1956), starring Brigitte Bardot, and Pote tin Kyriaka (Never On Sunday, Jules Dassin, 1960), starring Melina Mercouri, broke box office records. Since foreign films might have difficulty securing a seal of approval from the Production Code Administration because of their sexual content, the majors got around the problem simply by forming art film distribution subsidiaries. The new subsidiaries either acquired the distribution rights to completed films or formed alliances with new talent by offering young directors production financing. Soon, the majors had absorbed nearly the entire pantheon of European auteurs, including Michelangelo Antonioni (b. 1912), Luchino Visconti (1906–1976), and Federico Fellini (1920–1993) of Italy; Tony Richardson (1928–1991), Joseph Losey (1909–1984), and Karel Reisz (1926–2002) of Britain; François Truffaut (1932–1984), Jean-Luc Godard (b. 1930), Louis Malle (1932–1995), and Eric Rohmer (b. 1920) of France; and Ingmar Bergman (b. 1918) of Sweden.
The core audience for foreign films consisted mostly of America's "cinephile" generation, university students in their twenties and thirties. In response to this student interest, colleges and universities began offering courses in film history, theory, and criticism. Colleges and universities also supported an estimated four thousand film societies, which were attracting 2.5 million persons annually by 1968. Foreign films were a mainstay of these societies, which also showed Hollywood classics, documentaries, and experimental films. To cultivate this audience in the so-called 16 mm nontheatrical market, independent foreign film distributors such as Janus Films and New Yorker Films abandoned regular art film distribution and concentrated on the university scene. They were soon joined by the Hollywood majors, who also wanted a share of the bonanza. Since the art films in distribution had already made names for themselves in the theatrical market and in the national media, companies catering to the 16mm market promoted their rosters mainly through catalogs, which simply described the content of the films and listed the rental terms. This market had existed since the 1930s and had done most of its business renting instructional films to colleges and schools until foreign films came along.
The art film market declined after 1969, as American films with adult themes targeted at the youth market, such as In the Heat of the Night (1967), The Graduate (1967), and Bonnie and Clyde (1967), captured the spotlight. The demise of the Production Code in 1968 and a cultural revolution in the United States ushered in a period of unprecedented frankness in the American cinema that rivaled most anything on the art film circuit. Although university film societies replaced the art film theater during the 1970s, they too declined when home video made huge numbers of old films—foreign and domestic—available for rent. Since 1970, the art film market has functioned as a niche business that depended on foreign-language films and English-language films produced abroad without any US backing. Although the majors reentered the art film market during the 1990s either by forming classics divisions or by acquiring successful independent distributors, such as Miramax and New Line Films, the market continued to generate only a few hits each year.
Before television, feature films played in motion picture theater almost exclusively; after television, the new medium extended the commercial life of films by creating ancillary markets. During the 1950s, studios in desperate need of money sold off their pre-1948 film libraries to television syndicators, who, in turn, leased the films to local television stations to fill out their programming schedules. The studios were free to dispose of the pre-1948 films since they controlled television performance rights and all ancillary rights to their pictures. The sale of recent vintage Hollywood films to television had to wait until 1960, when Hollywood reached a settlement with the talent guilds regarding residual compensation. NBC became the first network to use post-1948 Hollywood films for prime-time programming in the fall of 1961 by launching NBC Saturday Night at the Movies. ABC followed suit in 1962 and CBS in 1965.
Thus, by the 1960s, network television had become a regular secondary market for theatrical films. The development of home video and "pay TV" created additional ancillary markets for feature films. Today, after a feature film completes its theatrical run, it is released to the following "windows" at specific intervals: first to home video and pay-per-view, then to cable television, and finally to network and syndicated television. Going through the distribution pipeline, a motion picture is exploited in one market at a time, with the exception of home video, which has a window that remains open almost indefinitely. At each point, the price of the picture to the consumer drops. Economists call the process "price tiering," which can be explained as follows: movies are first released to theaters at top prices to "high value" consumers, that is, those who are most eager to see them and are thus willing to pay the most for a ticket; movies are then released to "lower value" consumers at prices that decline with time. Thus a consumer willing to wait long enough will eventually get to see a favorite film for "free" over network television. Distributing pictures in this manner allows a distributor to tap every segment of the market in an orderly way and at a price commensurate with its demand. Home video became the most lucrative of the ancillary markets, and by 1989 had surpassed revenue from the domestic theatrical box office by a factor of two.
The same electronic distribution systems that created new ancillary markets for feature films also created new distribution channels for pornography. Once a clandestine industry operating on the fringes of society, the pornography market has now gone mainstream. The VCR enabled adult entertainment to enter the home during the 1980s. Today, adult films can be purchased or rented from local video and music stores and major chains, they can be ordered at home and in the finest hotels on cable TV with video-on-demand, and they can be accessed on the Internet. The widespread acceptance of pornography has created an industry that rivals that of Hollywood in both revenues and size. Located in the nearby San Fernando Valley, the porn industry consists of 75 or 85 major production companies that churn out literally thousands of titles a year, generating billions of dollars in revenues.
After undergoing a period of conglomerization in the late 1960s and 1970s, the "New Hollywood" that emerged targeted the youth audience almost exclusively. To hit this target—the "teen and preteen bubble" demographic, consisting of avid filmgoers ages ten to twenty-four—studios developed high-concept blockbusters and star vehicles for the mainstream theatrical market. High-concept blockbusters went hand in hand with saturation booking, particularly during the fourteen weeks in the summer between Memorial Day and Labor Day when school is out. A standard marketing practice since Jaws in 1975, saturation booking was designed to recoup production costs quickly by opening a new film simultaneously at over two thousand screens, backed by an
intensive national advertising campaign. Saturation booking took advantage of changing demographics by servicing shopping-center theaters in the suburbs, far away from the decaying central cities and their fading motion picture palaces.
Although television had already become a potent advertising medium, Hollywood publicity campaigns continued to rely on the print medium almost exclusively until the 1970s, when television became the principal medium to advertise most pictures. Studios relied more and more on massive media advertising to sell their films; today, the cost of selling a picture might equal its actual production cost. Simultaneously, studios relied more and more on merchandising tie-ins. At one time, merchandising was a form of free advertising, but during the 1970s the sale of all manner of consumer goods, such as T-shirts and toys, became a profit center. Following the Walt Disney Company's lead in the licensing of rights to use film characters, all the studios got on the bandwagon, and in the case of Twentieth Century Fox's Star Wars (1977) and The Empire Strikes Back (1980), Columbia's Close Encounters of the Third Kind (1977), Universal's E.T. the Extra Terrestrial (1982), and Warner's Superman (1978), merchandising revenues could sometimes even rival the box office.
Hollywood also relied more and more on market research in devising their advertising campaigns. During the studio system era, companies sometimes relied on sneak previews to pretest new films by simply asking audiences for their written comments as they went out. In the New Hollywood, companies used more sophisticated means. Columbia Pictures became the most
research minded of the major film companies after Coca-Cola acquired it in 1982 and tested the proposition that it could sell movies like soft drinks. Marketing research was used at first to evaluate newspaper ads, television commercials, and radio spots in an attempt to get a reaction from the public before a distributor committed massive amounts of money to the advertising campaign. Tests were devised to discover how to categorize a picture as to genre, create a viable competitive position in the market, determine a target audience, and choose the best media to reach the target audience.
Such tests were conducted after a film was finished but before it was released. Later, companies used marketing in advance of production in an attempt to discover what the public might want in the way of entertainment. Pretesting, for example, was designed to obtain movie-goer feedback to concepts for films or to key elements while a picture was in preproduction or being evaluated for pickup. Fortunately, the studio executives never discovered what motivates an audience to see a movie or determined in advance all the ingredients of a hit picture. The unpredictability of audiences has remained a significant factor in making motion pictures such a viable art form.
Balio, Tino. United Artists: The Company That Changed the Film Industry. Madison: University of Wisconsin Press, 1987.
Conant, Michael. Antitrust in the Motion Picture Industry. Berkeley: University of California Press, 1960.
Dale, Martin. The Movie Game: The Film Business in Britain, Europe, and America. London: Cassell, 1997.
Daly, David A. A Comparison of Exhibition and Distribution in Three Recent Motion Pictures. New York: Arno, 1980.
Goldberg, Fred. Motion Picture Marketing and Distribution. Boston: Focal Press, 1991.
Guback, Thomas H. The International Film Industry. Bloomington: Indiana University Press, 1969.
Lewis, Howard T. The Motion Picture Industry. New York: Van Nostrand, 1933.
Mayer, Michael. Foreign Films on American Screens. New York: Arco, 1965.
Squire, Jason E., ed. The Movie Business Book. Englewood Cliffs, NJ: Prentice Hall, 1983.
Wilinsky, Barbara. Sure Seaters: The Emergence of Art House Cinema. Minneapolis: University of Minnesota Press, 2001.
Wyatt, Justin. High Concept: Movies and Marketing in Hollywood. Austin: University of Texas Press, 1994.
What It Means
Distribution is the movement of products from manufacturers to sales outlets to customers. Products and services usually pass through several different agents as they move from the manufacturer to the customer. For example, a sneaker manufacturer in the Philippines may ship its shoes to a distributor in Phoenix, Arizona, who in turn sells the shoes to a buyer employed by a sporting goods retailer in a Phoenix suburb, which then sells the shoes to customers in its local stores.
The path a product takes as it moves from producer to end user (the consumer) is called a channel of distribution. A channel of distribution provides a manufacturer with an efficient way to get its products to customers. All companies use channels of distribution, whether they have a sales force within their company that sells directly to consumers or whether they use other means, such as distributors, wholesalers, or retailers, to get their product to the consumer. Although many channels of distribution involve the physical movement of goods (this is sometimes called “logistics”), manufacturers of services also rely on distribution channels to reach customers. For instance, an airline uses its own telephone system and website as well as travel agents to provide customers with different ways to make airline reservations.
One of the most important decisions a business must make is determining how to distribute its goods or services at a low cost. Often this boils down to a choice between using a wholesaler or a retailer. A wholesaler (sometimes called a middleman or distributor) sells goods and services in large quantities and at lower prices to retail businesses, merchants, industrial firms, and other businesses. Traditionally the manufacturer pays less to distribute its goods through a wholesaler. A retailer, on the other hand, sells individual items directly to the consumer, usually in a store. Generally it costs manufacturers more to distribute goods through retailers.
When Did It Begin?
The economic history of the United States has shaped the way goods and services have been distributed over time. The goods produced in colonial America were mostly from agriculture, mining, and other industries that removed material from the land or sea. Typically the people who had farmed, mined, logged, and collected these goods also played the role of distributor and merchant. In general, the person who produced a product also sold it to a customer. Later, the general store provided a way for some producers of such items as soap, food staples, and tools to sell their products in one place. Unlike today, many households did not purchase such goods, but made their own. Merchants distributed goods mainly to those well-to-do households who could afford to purchase essential goods, rather than make them.
The Industrial Revolution had a profound effect on the distribution of goods. The development of steamships, trains, and, later, automobiles changed the way goods were transported. Technological developments made it possible to produce and distribute goods on a much larger scale and to reach merchants and customers in far-off places. The general store that sold many different goods was gradually replaced by more specialized merchants who focused on selling textiles, drugs, or hardware, for example.
By the early twentieth century manufacturers were selling their products either to consumers or to industrial operations for use in production of other goods. Distribution of goods through wholesalers became more common, and wholesalers often resold products to retailers. Another event that drastically affected distribution was the beginning of chain stores and mass-retail stores. Such large department stores as Sears, Roebuck and Company; J.C. Penney Company; and Woolworth Company typically purchase the goods they offer to consumers directly from manufacturers. The local, independent merchant selling a range of products to consumers became increasingly obsolete.
More Detailed Information
Distribution channels can be very simple. When manufacturers sell directly to a customer, it is called direct distribution. This is usually the simplest and cheapest way to reach customers. Because of the development of the Internet and e-commerce (electronic commerce) many companies sell directly to customers without using an intermediary such as a retailer or distributor. For example, some financial companies developed websites where customers could directly trade stocks without using an intermediary called a broker.
Whereas a direct distribution channel is referred to as a zero-level channel, a situation in which a manufacturer sells goods to a retailer, who in turn sells them to customers is called a one-level channel. A two-level channel is when the manufacturer sells to a wholesaler, who sells an agent middleman, who usually receives a portion of the goods’ value when he or she sells them to a wholesaler. The wholesaler in turn sells to a retailer, who sells to customers.
Whenever a distribution channel is more complex than the manufacturer selling directly to the customer, it is said to be indirect. Indirect channels of distribution are essential when “one-stop shopping” is important to customers. A department store, for example, provides different types of goods from different manufacturers to customers, who appreciate the convenience of having to go to only one store for all their shopping needs. Indirect channels of distribution may also allow the customer access to after-sales service or repair on such goods as electronics and appliances.
When a manufacturer determines whether to use direct or indirect channels of distribution, it weighs several important factors. First, the manufacturer determines if it would benefit financially from having a distributor or retailer work with customers and provide efficient access to products. If the manufacturer uses an intermediary of any kind, it must determine how much time, money, and effort will go into that relationship. Also, the manufacturer must analyze how its customers’ loyalty to the product will be affected by using an indirect channel of distribution. When a customer buys an airplane ticket directly from an airline company, for example, the customer feels loyal to that airline company since no other agent has mediated the transaction. Manufacturers must also consider that a distributor, wholesaler, or retailer offers other products besides its own, which compete with the manufacturer’s product.
No matter the type of distribution channel, many different functions are involved in getting a product from manufacturer to customer. They include selling, buying, sorting, storing, transporting, and working with customers. Even if a manufacturer that once used a distributor decides to eliminate that step in its distribution chain, the functions that the distributor performed still need to take place. For example, if the distributor had sorted and stored merchandise until customers bought it, the manufacturer will need to perform these tasks itself if it no longer uses the distributor.
Even after a manufacturer establishes a distribution channel, it must be willing to change it when necessary. Many companies that once used traditional channels of distribution involving salespeople and wholesalers have created websites that give customers additional ways to purchase the company’s goods, interact with company representatives, and learn about the products.
Many aspects of distribution have changed in recent years because of technological developments, including the personal computer (PC) and the Internet. In the early years of the personal-computer industry in the 1970s, a computer company’s sales force distributed computers directly to consumers. Then computer retailers changed that distribution pattern and performed additional functions, such as selling computer hardware and software, selling to individuals as well as businesses, and providing service and repair.
As consumer knowledge of PCs grew during the 1980s, the price and availability of personal computers became their most valued attributes. The growth of the market changed the way the industry handled distribution. Mass resellers purchased large quantities of PCs at a discount and sold them corporate customers willing to place large orders. The Internet became a critical channel for some manufacturers, who sold directly to customers through websites. Computer superstores grew into yet another popular distribution channel.
Other industries, such as hardware, electronics, and office equipment, have also undergone major shifts in their methods of distribution. Consumers today often research products before they buy. Educated consumers may not need personalized service but want a low price and a good product. The Internet, discount stores, and superstores answer these consumers’ needs by foregoing a personalized service experience while offering low prices and a wide array of products.
The manner in which commercial goods are distributed has evolved throughout history. Long ago, consumers directly traded physical goods and services. Eventually, different forms of physical currency, such as coins and paper money, were added to the mix. Increasingly sophisticated methods of communication played an important role in the evolution of distribution. As Purchasing explained, "In the past, to communicate needs, buyers used couriers, which evolved to using water, rail, and air as each new transportation mode came into being. For critical needs, telegraph replaced the horse followed by phone, telex, fax, private networks and, finally, the Internet."
The Internet, and later the World Wide Web, gave birth to e-commerce. For the first time in history, it was possible for buyers and sellers to communicate instantly with one another, regardless of physical location, and make arrangements regarding the exchange of goods and services. While it was relatively simple to enable online payments, the part of the transaction involving the movement of goods was another matter. Physical goods still had to be transported in some manner. On the other hand, digital goods could be transported as quickly as online payments.
Digital goods, also known as soft goods or virtual goods, exist in an electronic format. Digital goods normally include different varieties of information, including text documents, audio, and video. The vast majority of computers used by the public, and by those engaging in e-commerce, are digital devices. At their most basic level, digital computers understand and process information in a binary format of zeroes and ones (0, 1, 10, 11, 100, 111, and so on). The programming languages used to create software like Web browsers, databases, word processors, and spreadsheets are written in formats closely resembling human grammar that ultimately are converted to a computer's machine language of ones and zeroes.
One of the advantages of digital goods is their minimal storage requirements. Unlike videocassettes, record albums, compact discs, and paper books, large amounts of digital goods can be stored on magnetic media like a computer's hard drive. This requires less physical storage space for buyers and seller alike. Digital goods also are perpetual. This means that text documents, computer software, digital audio, and digital video can be preserved without fear of deterioration from environmental conditions that might affect physical goods over long periods of time. Additionally, digital goods can be duplicated infinitely with each copy retaining the exact properties of the original, without a loss in quality. While this is an advantage in one regard, it also is a weakness because digital goods can be easily pirated and distributed illegally.
In the early 2000s digital goods presented several different areas of opportunity for third party companies. For example, in November 2000 Virage Inc., a provider of Internet video production software and services, joined with digital commerce services provider Qpass to offer video content providers with an outsourced means of managing, selling, and distributing their content via the Web. Another leading area of opportunity was in the area of security.
Once a consumer pays for digital goods, which are normally received in the form of a downloadable file, it is possible for the recipient to make endless copies of the file and redistribute them for profit or for free. This obviously damages the original seller's profit potential. One area where this kind of fraud has cost manufacturers is software. Pirates are well known for duplicating software applications that cost many hundreds of dollars in stores and selling them at lower costs via online auctions or other means.
Obviously, law enforcement agencies prosecute pirates for copyright violations and online fraud. However, this problem presented a serious roadblock for companies looking to sell digital goods via e-commerce in the early 2000s. While companies like the Wall Street Journal were able to sell information with little concern over privacy (the information quickly becomes outdated), piracy was a more serious threat for companies selling digital goods like books or audio, which had much longer life spans.
In addition to permanent copyright notices called digital watermarks, which serve as means of identifying when illegal distribution has occurred, several measures were being developed to safeguard these kinds of goods during distribution. These involved limiting what people were able to do with digital content after a file was downloaded. One example were digital music files that only played on the computer to which they were downloaded. Another was a system that allowed digital goods to be transferred between media with the condition that they were removed from the system they were copied from, leaving only one copy. InterTrust Technologies Corp. was one company offering technology like this. It offered solutions in the area of digital rights management to content providers, service providers, application builders, and others. Its technology ensured that organizations could "release digital information and profitably benefit from it throughout its full lifecycle by persistently protecting it, implementing a wide variety of business models, monitoring usage, and getting paid."
THE FUTURE OF DISTRIBUTION
Digital goods likely will play more central roles in e-commerce as technology continues to evolve. According to the Association for Computing Machinery, desktop computers will be capable of storing approximately one terabyte of information by 2010, making the long-term storage and use of digital information increasingly practical. Besides scanning and storing items of importance or historical significance, consumers will be able to accept and store vast amounts of digital audio and video content as well, leading to new distribution patterns and preferences, and opportunities for companies supporting the distribution of electronic information.
Bell, Gordon. "A Personal Digital Store." Communications of the ACM, January 2001.
Bulkelely, Michael. "Machines Talk to Machines." Purchasing, December 22, 2000.
"Digital and Analog Information." The PC Guide, May 9, 2001. Available from www.pcguide.com.
"Going Straight." The Economist, April 5, 2001.
Hane, Paula J. "Qpass Teams With Virage for Video-content Solution." Information Today, November 2000.
"The MetaTrust Utility." InterTrust Technologies Corp. May 13, 2001. Available from www.intertrust.com.
Schull, Jonathan. "Infonomics 101: A Map of the Information Economy." Inform, February 1999.
"What is Digital Rights Management?" InterTrust Technologies Corp. May 13, 2001. Available from www.intertrust.com.
SEE ALSO: Fulfillment Problems; Order Fulfillment; Shipping and Shipment Tracking
distribution (statistical or frequency)
A frequency or statistical distribution using observed data should not be confused with mathematical probability distributions, which are hypothetical distributions, the form of which is determined by algebraic formulae. The correspondence between an observed frequency distribution and various hypothetical mathematical distributions will often determine the type of statistical analysis performed on particular data.
Frequency distributions from a survey data-set are usually the first output from the clean and edited data-set, showing the response totals for each possible reply to each question in the questionnaire. Empirically observed distributions can be analysed using measures of dispersion and other statistical tools developed from the three main forms of probability distribution: binomial, Poisson, and normal (Gaussian).
dis·tri·bu·tion / ˌdistrəˈbyoōshən/ (abbr.: distr.) • n. the action of sharing something out among a number of recipients: the government donated 4,000 pounds of coffee for distribution among refugees. ∎ the way in which something is shared out among a group or spread over an area: changes undergone by the area have affected the distribution of its wildlife. ∎ the action or process of supplying goods to stores and other businesses that sell to consumers: a manager has the choice of four types of distribution | [as adj.] an established distribution channel. ∎ Bridge the different number of cards of each suit in a player's hand: strength has two ingredients, high cards and distribution. DERIVATIVES: dis·tri·bu·tion·al / -shənl/ adj.
1. The geographical area (i.e. range) within which a taxon or other group of organisms occurs.
2. The arrangement of organisms within an area.