The first Hollywood studios emerged between 1912 and 1915, as US filmmaking migrated to the Los Angeles area and quickly developed a standardized mode of production. Several major firms built massive filmmaking factories to accommodate the rapidly expanding industry, the most significant being Universal City, by far the largest in the world when it was completed in 1915. Meanwhile, smaller, independent producers developed modest operations geared for the efficient, systematic output of particular types of film—Thomas H. Ince's (1882–1924)
two-reel westerns, for instance, and Mack Sennett's (1880–1960) comedy shorts. Ince in particular refined a range of production practices to ensure cost efficiency and quality control, including centralized management, shooting scripts as blueprints for production, and a clear division of work roles in an assembly-line operation. The larger studios refined similar practices on a grander scale, enabling them to produce an enormous volume of pictures—up to 250 features, shorts, and serials per year in the case of Universal Pictures.
Another key aspect of the emerging studio system was the vertical integration of film production, distribution, and exhibition within a single corporation. The prime mover here was Paramount Pictures, created via the 1916 merger of a nationwide distributor, Paramount, with two production companies, Famous Players in New York and the Lasky Corporation in Los Angeles. The merger was engineered by Adolph Zukor (1873–1976), who soon controlled the entire operation and thus became the prototypical movie mogul. Zukor's bicoastal operation turned out over one-hundred feature films per year and threatened to corner the market, provoking a group of theater owners to join forces as the First National Exhibitors' Circuit Inc., a nationwide distribution company, and to create a West Coast production studio.
Soon Paramount and First National were competing for top talent, paying them record sums but increasingly controlling their careers. This led three major stars, Charlie Chaplin (1889–1977), Mary Pickford (1892–1979), and Douglas Fairbanks (1883–1939), along with producer-director D. W. Griffith (1875–1948), to create United Artists in 1919, defying the burgeoning studio system but scarcely stemming its development. By then Zukor was moving into exhibition, an expansion effort that peaked with the 1925 acquisition of the Balaban theater. Some studios, notably Fox, Warner Bros., and Metro-Goldwyn-Mayer—developed vertically integrated companies via expansion or merger. Hollywood's corporate power structure fully coalesced with the coming of sound in the late 1920s, when the massive costs of sound conversion and ensuing "talkie boom" weeded out the weaker companies and consolidated the majors' collective control. Talking pictures also spawned RKO (Radio-Keith-Orpheum) Radio Pictures, a fully integrated studio created via merger in 1928 by David Sarnoff, head of RCA (Radio Corporation of America), the parent company of RKO (as well as NBC) and a key force in the coming of sound.
The talkie boom carried Hollywood to its best year ever in 1930, despite the October 1929 stock market crash. The Depression did hit Hollywood with a vengeance in 1931 and 1932, although by then the basic contours of the studio system were firmly in place. The dominant powers were the Big Eight producer-distributors, which included two distinct classes of studios: the Big Five integrated majors—Paramount, MGM, Fox (later Twentieth Century Fox), Warner Bros., and RKO—whose theater chains gave them distinct advantages in size, resources, and market leverage; and the Little Three—Universal, Columbia, and United Artists—which produced top features and boasted nationwide distribution circuits but did not own their own theaters. The Big Five's superior resources enabled them to turn out a higher proportion of A-class films, while Columbia and Universal relied far more heavily on second-rate products. United Artists, meanwhile, saw its mission change as the founder-owners became less active, and by 1930 functioned mainly as a distributor for a handful of major independent producers. "Poverty Row" studios like Monogram and (later) Republic rounded out the system, which produced low-grade B movies but had no distribution or exhibition operations.
Key to the studio system was the Big Eight's domination of all areas of the industry. They enjoyed a monopoly over feature film distribution in the US and exercised indirect control of exhibition via trade practices, most notable a run-zone-clearance system that dictated the flow of film product through all of the nation's theaters, as well as block booking and blind bidding policies that forced theater owners to take a studio's entire annual output, sight unseen. The Big Five's theater chains were crucial here. Even though they comprised only about one sixth of the nation's theaters, they included most of the first-run theaters—that is, the movie palaces and deluxe downtown theaters that generated the lion's share of movie revenues, where all top features were launched. The Big Eight maintained their market controls through their trade association, the MPPDA (Motion Picture Producers and Distributors of America; later MPAA, the Motion Picture Association of America), which encouraged cooperation among the studios while fending off continual threats of government regulation and the relentless complaints from independent producers and theater owners. This effort included the creation in 1934 of the Production Code Administration, Hollywood's self-censorship office, which exercised certain constraints over movie content but defused threats of boycott by the Catholic Legion of Decency as well as threats of government regulation of movie content.
The Depression posed a more serious threat, with four of the Big Eight studios suffering financial collapse. But the studio system survived, due mainly to the support of Wall Street as well as the "national recovery" campaign of President Franklin D. Roosevelt (1882–1945), launched in 1933 when he took office, which effectively sanctioned the studio's market controls while mandating labor organization. This ensured cash flow to the studios and transformed the factory system itself from an open shop into a fully organized operation, with the division of labor now fully codified. The studios' market controls drew heavier fire as the Depression eased, however, and eventually the Justice Department demanded that the studios cease block booking, blind bidding, and other monopolistic practices. The studios failed to comply, resulting in US v. Paramount Pictures et al. , an antitrust suit filed in July 1938. The resolution of the Supreme Court's legendary Paramount case changed the very nature and structure of the studio system.