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As the first form of industrialized mass entertainment, film was all-pervasive. Like other major innovations, such as the car, electricity, chemicals, and the airplane, cinema emerged in most Western countries at the same time. From the 1910s onward, each year billions of cinema tickets were sold, and consumers who did not regularly visit the cinema became a minority. In Italy, hardly significant today in international entertainment, the film industry was the fourth largest export industry before the First World War. In the Depression-struck United States, film was the tenth most profitable industry, and in 1930s France it was the fastest-growing industry (followed by paper and electricity), while in Britain the number of cinema tickets sold rose to almost one billion a year. Despite its economic significance, rapid emergence and growth, pronounced effects on the everyday life of consumers, and importance as an early case of the industrialization of services, the film industry has hardly been examined by economic and business historians.
In my dissertation I argue that, in the era of the second industrial revolution at the end of the nineteenth century, falling working hours, rising disposable income, increasing urbanization, rapidly expanding transport networks, and strong population growth resulted in a sharp increase in the demand for entertainment. The effect of this boom was the rapid growth of live entertainment through process innovations. At the turn of the century, the production possibilities of the existing industry configuration were fully realized, and further innovation within the live-entertainment industry could increase productivity only incrementally.
In the middle of the boom, a few smart entrepreneurs developed cinema technology from a mere gadget, a trick, a novelty shown at fairs, into the motor of a new, highly organized, concentrated, and internationally integrated entertainment industry, eventually pushing live entertainment to the margins, at least in economic terms. Entertainment companies rapidly adopted cinema technology as a radical product innovation that could make up for the decreasing returns to further process innovations, switching the industry onto a path of higher productivity growth and merging the freshly integrated national markets into an international one.
A few unique firms that made large investments in film production, distribution, and exhibition pioneered the shift to product innovation. Using industrial organization theory concerning endogenous sunk-costs industries, I...