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.