Market definition
Market definition entails distinguishing between new films shown exclusively in cinemas, known as “first run films”, and others: film distribution in — television, video and
cinema
First, a distinction must be made between first run films, which are shown exclusively in cinemas, and films which are no longer first run and which may be exhibited by any one of the three sectors, or even all three at once.
Given that first run films are available only in cinemas, do consumers consider older films (or
indeed other forms of entertainment) available on other media, as close substitutes? That is an empirical question, of course.
are producers likely to consider television or video as alternatives to cinema houses for new films?..In the near future such a change does not appear to be likely. but new technology could alter such a calculation soon
For first run films, distributed in cinemas, the producer must determine whether certain cinemas are preferable to others because of their location or the ancillary services they offer. Thus, cinemas situated in key markets will be preferred, since box office results — in light of which the value of television and video rights and foreign sales is negotiated — are often based on fairly limited markets; likewise, cinemas which offer greater financial guarantees, for example, will be sought after by producers.
For films which are no longer first run, the producer has to assess whether the return would be
the same if the film were distributed in the cinema, on television or on video, and which one promises more cash.
For older films, the film viewer’s order of preference is likely to be television, then video and
finally the cinema.
There is evidence that once new techniques, and available frequencies, allow films to be broadcast on television and on video, video will become close substitutes for the cinema.
because of the potential return which these new opportunities offer, the time-lag between when a film is shown in the cinema and when it is broadcast on television and video is continuing to decrease significantly.
However, when considering television, the producer must distinguish between encoded and
unencoded channels. Subscribers to encoded television channels, who have to pay more than for unencoded television, are greater consumers of films on television than unencoded television viewers,
However, the regular viewer of pay-per-view film channels is the
biggest consumer of films. Pay-per-view film channels, which are only now becoming prevalent as a result of new technology, offer the producer a significant new source of revenue. These channels may someday compete with, or supplant, first run exhibition.
Horizontal (circuit) integration, and concentration
Once the film distribution market has been defined, the degree of concentration of the industry is an important element to be taken into consideration. there is a trend toward the
creation of even larger enterprises by merger. In competition analysis, however, it is not the absolute size of a firm which by itself is important, but the resulting market share (the relative size of a firm).
In the cinema industry there is consolidation into a limited number of
circuits, each of which control several cinemas in a given market. few independent cinemas survive. Television broadcasting is highly concentrated in most markets, with
relatively few broadcast channels available. The advent of cable television, which provides many more channels, and of satellite broadcasting, is rapidly altering the television environment, however.
Film production, on the other hand, appears to be less highly concentrated, as independent producers, produce successful films from time to time. but the trend toward vertical integration in the industry, adversely impact this situation, however.
In competition analysis, of course, high concentration and substantial market shares are not by
themselves a cause for concern; are there possible barriers to market entry which
could exclude competitors.?
Types of barriers to entry
— regulations, which exist in some countries, to protect distribution in the cinema from
the development of television and video; such regulations may provide that new films released
in the cinema may not be shown on television or marketed on video for a fixed clearance
period; they may also provide for the following hierarchy in film distribution: cinema, video
and finally television. Regulatory clearance periods may also vary according to the nationality
and box office success of a film, thus creating further discrimination, as marketing on video
may increase the film producer’s return. Thus, many producers demand longer
clearance periods [between marketing and broadcasting] to increase returns;
– the growing dominance of large cinema circuits in many
markets squeeze cinemas which do not belong to a circuit out of the film releases. they may also be forbidden to exhibit older films which are no longer being shown as first runs by competitors who are members of a circuit. The circuit members keep this option, thus controlling
all of a film’s revenues until its box office value is exhausted. Similarly, major circuits squeeze out small producers, showing films by powerful producers only;
— Entry barriers in television are quite different, and more significant than in cinema
markets. The number of available broadcast channels is limited, and closely regulated. In
most markets, television cable service is a regulated monopoly.
The cable network is bringing about changes in this regard.
also, entry to satellite (DBS) is difficult, and is characterised by large
economies of scale, regulatory barriers, and possible shortages of available programming.
Vertical integration
Vertical integration may be common ownership, or of contractual provisions…..co-ordination of decisions [upstream and downstream] are the result, replacing the competition incentives that existed before, when cos were acting independently.
These vertical coordinations may be efficiency-enhancing (for the vertical cos)…. However, co-ordinated decision-making, result in exploitation of market power, and/or decisions which disadvantage rivals….In the film industry, vertical integration is enormous, due to the inextricably linked ownership of the three film distribution sectors.
producers and distributors treat cinemas much better if they are circuit (horizontally) and vertically integrated and are given opportunity to exhibit blockbusters, and are also granted deductions in rental fees when they show two films, an extended exhibition period and special preview exhibitions.
— the setting of a clearance period between the end of a film’s first run and the time when it
may be reshown in cinemas which, particularly if this is a long period, allows more income
to be obtained from the first run. If the clearance period is very long a film will exhaust its
box office value and in consequence the operators who have negotiated subsequent
distribution of the film will in reality be out in the cold. Moreover, what income there is to
be earned from redistribution will be captured by video and television;
— zoning, which consists of setting geographic boundaries within which a given cinema will
have exclusive exhibition rights. This practice ensures that the cinema operator will obtain
the largest possible audience for his film and will prevent other cinemas nearby from
competing for the viewers who want to see that particular film. In defence of the practice,
however, it is pointed out that a reasonable zone of exclusivity is necessary to induce the
cinema operator to provide adequate promotion for the film;
— block booking, which is a form of tying, and which is the practice whereby authorisation to
show a film or a package of films is granted on condition that the operator also takes one or
more other films from the distributor. This provides an outlet for poorer quality films or those
with limited box-office potential. Where a producer is linked by contract with the biggest
stars, cinema operators are well-advised to take his less commercial films if they want to have
the more commercial ones. This practice, which prohibits bidding for films cinema by
cinema, makes it impossible for small competitors to obtain first runs and gives an advantage
to those who are affiliated to a major network;
— blind bidding, which is the practice whereby a distributor requires an operator to order a film
without prior viewing;
— advance payments, which are made by the cinema operator before distribution of the film as
security or to effect payment under a distribution agreement;
— a guarantee, which is a minimum amount the cinema operator guarantees the distributor in
return for authorisation to show a given film.
Similarly, by buying out or taking a substantial share in a television channel, a producer can
secure outlets for his catalogue of films and, in so doing, enhance the value of his less popular films.
television companies, for example, like to control film production:
a. to extend their profit
b. to obtain a competitive advantage.
c. excludes producers who do not make films considered suitable for television audiences. This may lead independent producers to become employees, and lose their independence.
Questions for discussion
what very often gives rise to government intervention?: the preservation and encouragement of pluralism and the expression of a diversity of views, together with the affirmation of a country’s cultural identity.
ask yourself
— how they analysed the market in question and how they assessed the degree of substitutability;
— what type of barriers to entry (regulations or practices) they detected;
— what market share appeared to them to present the risk of market power and why;
— what abuse of market power has been observed if any;
— what horizontal restrictions have been identified as likely to exclude competitors from the
market;
— what vertical restrictions have been identified as likely to exclude competitors from the
market;
— whether these vertical and horizontal restrictions have led to economic progress;
— what remedial measures they have implemented and an assessment of the results.
Definition of the relevant market
is there substitutability between films? and is there substitutability between media (cinema, television, etc.)?
where a first-run exhibition market exists, implies that there is a degree of substitutability between first-run films.
ec ruled that an agreement that banned the simultaneous exhibition of films in cinemas and on video tapes restricted competition, which implies that viewing a video tape on television is a substitute for seeing a film at a cinema.
Since consumers consider that exhibition media are substitutable, this curbs the ability of cinemas to exercise market power by raising admission prices. However, if the competition issue concerns discrimination against an independent producer, for example, the DOJ will consider there to be a distinct first run-market in cinema houses. This is because of the potential scarcity of distributors, for if a first-run film cannot be exhibited satisfactorily it will not realise its full commercial value, since the level of television or video tape rights is determined by the film’s box-office success.
ecj: need for a film-by-film approach. But it cannot be inferred from this decision
that every film is a distinct market.
there is substitutability if it can be shown, on statistics, that video tape sales and television broadcast rights have risen in proportion to declining ticket sales. With few exceptions, once a film is available on video, it is no longer viable in cinemas. In practice, however, because films are first distributed in cinemas and only later on video, this overlapping is avoided.
thus, it is difficult to assess the degree of substitutability with accuracy.
Horizontal concentration of distributors and vertical relations with producers
whether a horizontal concentration of distribution should be limited so as to avoid exclusive
dealing in the distribution, which would in effect eliminate independent producers.
despite the large number of independent distributors, they do not wish to take risks and prefer to distribute films that will appeal to the broadest
possible public, thus de facto excluding more marginal (eg.artistic cinema)productions.
As regards the exhibition market, there is a very high concentration of cinemas, primarily in Zurich and Geneva, which do the marketing and success of new films.
the large distributors exercise market power over cinemas through contracts that include restrictive clauses such as block booking and setting minimum exhibition periods. Although there is little vertical integration, the concentration of the various exhibition media is cause for concern.
UIP case,: this case has continued since the 1989 decision, giving rise to new requests by the parties c for the authorisation of new agreements, to which the EC. The 1989 case concerned an agreement under which three studios controlling large market shares (the exact percentage
was not disclosed) combined their distribution network within a common subsidiary. This agreement contained a clause giving this subsidiary the exclusive right to distribute the three parent companies’ films,including on pay-per-view television. It also included a profit-sharing clause, which gave each parent company a share of the others’ revenues.
After lengthy discussions, some changes were introduced that allowed the Commission to authorise the agreement for a limited period of time in order to assess whether there was a risk of possible collusion, within this common subsidiary. This period has now expired and it is necessary to consider whether the terms of this agreement should be renewed and whether additional terms should be authorised. negotiations: the exclusive distribution clause was
replaced by a right of first refusal; the deciding Committee did not include representatives of the parent companies; the parties agreed to exclude pay-per-view television from the agreement; UIP also agreed to distribute films that had not been produced by the parent companies and freely to produce or acquire European films and distribute them through UIP; the clause on sharing revenues was eliminated and the parent companies promised that they would not consult each other as to the dates and locations where films distributed by UIP would open.
Vertical integration between distributors and cinema owners
The Chairman stressed that vertical integration between distributors and cinema owners was a
cause for concern in many countries and asked the United States Delegation to describe the “Paramount” decrees, which are an important judicial precedent for analysis in this field, and also to specify to what extent these decrees are still relevant.
The United States Delegation explained that the “Paramount” decrees were rulings made in 1948 in response to the domination of the film market by eight distributors, five of which were major film studios that were completely vertically integrated; these studios not only produced and distributed films, but also owned cinemas. The three other distributors produced and distributed films but did not own cinemas. At that time, vertical integration led to price fixing detrimental to consumers’ interests. Producers and distributors were in fact in a position to impose whatever price they wished on consumers in as much as they could deny access to the film exhibition market to newcomers that might sell tickets at a lower price.
The District Court ruled in favour of a formal bidding process for film licences; the Supreme
Court did not uphold this method, which it found difficult to apply in practice, particularly as regards the active supervision by the courts that it involved, and decided in favour of a form of “structural relief” as a way of dismantling these kinds of vertical integration. Ultimately, the District Court ordered these holding companies to break up vertical relations by divesting their theatres so that the owners of production studios and distribution circuits could not also own cinemas. Moreover, a number of restrictions were imposed regarding the granting of exhibition rights.
Experience has shown that these Paramount decrees have successfully dismantled these vertical relations and that this has stimulated competition by enabling new competitors to enter the market. Since then, the situation has changed significantly with the development of television and video, which consumers consider as substitutes to some extent. As a result, because of competition from television, cinemas cannot charge filmgoers whatever admission price they like; in this respect, television certainly limits cinemas’ possibility of exercising market power.
The Paramount decrees have, on the whole, reduced barriers to entry, enabling new operators to enter the market, although they have not eliminated these barriers altogether. Some practices, such as selecting exhibitors, continue to exist and the government attempts to monitor them. However, the government’s main concern is now not so much the cinema as the broader telecommunications sector, and it monitors whether all films have access to this sector.
In the United States there has recently been a major trend towards vertical integration in the media sector, which has given rise to two main concerns. The first involves the supplying of programmes, and not only as concerns films, but also specialised programmes such as news and sports programmes, etc.
For these programmes to be exhibited fully, there must be broad access to all media. The phenomenon of market exclusion that led to the Paramount decrees in 1948 no longer applies only to cinemas, but affects the media as a whole. The second concern involves competition between these media and the possibility that some of them may be excluded from acquiring these programmes because of the vertical integration stemming from numerous mergers. The merger of TCI and Liberty described in the United States Delegation’s contribution provides an illustration of this possibility.
At the Chairman’s request, the Delegate of the United Kingdom discussed the MMC report on
vertical integration and the anticompetitive practices to which it leads. In particular, he said that there was virtually no vertical integration between distributors and exhibitors, but that there were very strong links between them. The Commission had analysed whether these links increased efficiency and posed a risk of creating barriers to entry on the exhibition market. In particular, it had looked at the damaging practice of alignment, whereby distributors offer their films first and then discuss their timing and release strategy with their aligned exhibition circuit.
Moreover, since a distribution circuit knows that all its cinemas will be given the latest blockbuster film whatever their individual merits, there is less pressure on exhibitors to compete by improving their facilities.
The Commission also examined other practices, such as setting minimum exhibition periods, the refusal to supply films to independent exhibitors, attempts to fix prices or to exert pressure on cinemas by distributors in order influence admission prices. It also looked carefully at the phenomenon whereby distributors in the United Kingdom find it more profitable to supply only one cinema rather than to share the receipts generated by a film among a number of cinemas, which obviously creates a barrier to market entry. Lastly, the Commission closely examined the practice of dumping by cinemas charging low admission prices.
In reply to the Chairman, the Portuguese Delegation described the Lusomundo case, after first
having pointed out that the distribution market was concentrated horizontally while the exhibition market was vertically integrated. The dominant position of the distributor Lusomundo was the result of the fact that it has exclusive distribution agreements for Portugal with the main US. production studios. Moreover, the fact that it controls a large number of cinemas (26 per cent nation-wide and 46 per cent in Lisbon) makes it difficult for other distributors and producers to have access to the exhibition market. Moreover, Lusomundo recently made major investments in cinemas, in association with Warner. Two complaints against Lusomundo are currently pending. The first concerns discriminatory behaviour by Lusomundo in its distribution of films to independent cinemas and its own cinemas. The other concerns a threat of refusal to supply films to cinemas that also do business with other distributors.
An analysis of the agreement with cinemas showed that the distributor had imposed unfair clauses, such as a clause requiring cinemas exclusively to exhibit films distributed by Lusomundo, the possibility of the distributor replacing one film with another without prior notification to the exhibitor in question or of inspecting the exhibitor’s facilities, receipts, etc. However, the Portuguese Delegate emphasised, these clauses are generally the result of the restrictive and binding clauses that US. producers impose in their contracts with Lusomundo.
Barriers to entry on the exhibition market At the Chairman’s request, the US Delegation briefly presented the Syufy case concerning an operator that had acquired virtually all the cinemas in the Las Vegas area. The Court ruled that this concentration did not raise problems of competition, arguing that i) this operator did not charge customers higher admission prices and that ii) it did not charge more for its services (popcorn sales, etc.). Moreover, the Court also considered that this situation did not threaten competition as regards distributors, since the rights paid by Syufy to distributors were the same as those paid by other exhibitors on other markets. Similarly, it ruled that this operator’s position did not create any special barriers to entry.
On the whole, the Department of Justice considers that although the Paramount decrees have done much to reduce barriers to entry, these barriers still remain in a number of markets. There are still more or less close vertical links between distributors and cinemas that lead to restrictive practices, such as the elimination of small independent cinemas from the schedule of blockbuster film releases. Thanks to the emergence of new technologies such as pay-per-view television and video tapes, which can in some cases be substitutes for the exhibition of films, these barriers to entry are currently tending to disappear. This trend should accelerate further with the introduction of high-definition television.
Remedies
The German Delegation began by observing that the structure of the German market was more favourable than elsewhere; for example, there was far less vertical integration, even though this might change with the construction of multiplexes. Although there are some competition problems connected with block booking in particular, on the whole they are not important. The rules governing joint purchasing are clear, and exemptions are only granted for joint purchasing agreements under certain well-defined conditions. These primarily concern small and medium-sized enterprises whose market position is relatively weak. In 1985-86, when there was an agreement of this type among the main cinema circuits, the Bundeskartellamt raised objections.
As regards distribution rules, when some ten years ago cinemas complained that they could not obtain blockbuster films or that they received them too late, distributors came to an agreement on objective criteria for rating cinemas in terms of size, location, etc. The cinemas with the best rating are ensured of being able to exhibit blockbuster films as soon as they are released, while less highly rated cinemas only receive them later, once a given first-run exhibition period has passed. This procedure, which is not monitored by the Bundeskartellamt, seems to have worked well so far.
the Australian Delegate discussed distributors’ methods of setting the prices they charged
exhibitors. Generally they receive a percentage of the exhibitors’ receipts. However, since small
independent cinemas have adopted a policy of lower prices, distributors have imposed a per capita system to offset the impact of this policy on their revenues. Under this system, cinemas are required to pay distributors a minimum amount per ticket sold rather than a percentage of their receipts, which creates pressure to raise ticket prices. The Trade Practices Commission is concerned about this practice and is planning to conduct an enquiry into this subject.
He added that another practice is being closely followed, which does not consist of the outright refusal to supply films to small independent cinemas, but rather of supplying them with films under certain conditions, for example, by imposing very long exhibition periods (eight weeks, for example). However, this problem is not easy to solve, given the provisions on the abuse of market power, for until now distributors have successfully defended this practice using arguments of commercial efficiency, despite its questionable impact on competition.
The general discussion that followed the presentations by the Member countries that had provided a written contribution opened with a question from the Secretariat regarding whether cinemas and television were true substitutes from the standpoint of producers. The cinema makes it possible to introduce important differences in price to target a specific public (special prices for students, children under 12, etc.) and certain days of the week, thus making it possible fully to take advantage of different segments of the public, which is not possible with pay-per-view television.
The US Delegate agreed that there was a distinct exhibition market for first-run films in cinemas for a number of reasons, primarily those mentioned by the Secretariat, but also because the overall value of a film and its distribution on secondary markets will primarily depend on its success when it is first released in cinemas. However, with technological progress, one cannot exclude the possibility that television could become a partial substitute and that it will then be possible to secure a portion of the revenues that can be generated by showing first-run films on television.
BIAC noted that the content of films was protected by intellectual property rights and mentioned the decision of the Court of Justice of the European Communities in the McGill case, whereby failure to supply certain markets can be considered to be an abuse of a dominant position. As regards the exhibition of films, he continued, provided the products covered by intellectual property rights come onto the market, the medium used is of little importance, as long as there is market access. He also welcomed the prospects that would soon be opened up by the development of new technologies making it possible to reach an ever-wider audience through methods — including those used to set prices — that are tailored to individual needs. In his view, this trend should solve many of the competition problems mentioned by the various participants.
The Delegate of the United Kingdom pointed out that in many cases it had been decided that
when distributors refused to supply a film to an exhibitor, from their standpoint this was a legitimate way of trying to maximise their revenues from this film.
In reply to the US. Delegation about where were the Competition problems, the Chairman
described the situation in France. The vertical integration prevailing on the market raises problems of market access either for independent producers that cannot find distributors and cannot have access to advantageously located cinemas that will maximise their film’s revenues, or for independent cinemas that are not able to obtain good films to show. This problem of market access can be considered either as a competition problem or as a cultural problem, given that the major distributors in France have close links with US. producers. Thus, French producers complain that they do not have access to screens and, as a result, to consumers, while at the same time it has been many years since a substantial number of new cinemas were opened.
The US Delegation pointed out that this problem of access did not apply in the United States
because of the number of potential alternative media. The Chairman agreed that there were also differences between European countries. Thus, in Germany cable television was much more widespread than in France and was an important medium for exhibiting films. The Representative of BIAC observed that vertical integration also had some very positive effects when distributors invested in production; without this financial participation, independent production would be in an even weaker position. From this standpoint, vertical integration enabled distributor/investors to maximise their revenues.
The Chairman concluded by observing that the discussion had brought to light a certain ambiguity as to the nature of the problem. Was the real problem one of competition or rather one of market access with an element of cultural identity that makes the issue even more sensitive? Thus, it appears that this problem of market access and competition is found not only in international trade, but also at times in a domestic setting
CONTRIBUTION FROM UNITED KINGDOM
cma: investigation on vertical links which existed between film distributors and exhibitors.
which might reduce the overall level of competition in film markets both
through dampening competition amongst distributors and exhibitors, and by making it more difficult for nonvertically integrated or small companies to gain access to popular films and cinema screens.
cma concluded that two particular vertical relationships operated against the public interest:
a.alignment, the practice whereby a distributor offers its films to one only of the two major circuits of exhibitors, and
b.the imposition of long minimum exhibition periods.
Analytical Approach
The first step in the analysis is to define the relevant market. The MMC then examines the
market structure, including the extent of barriers to entry, and then makes an assessment as to whether firms either individually or collectively have market power. Vertical links and other alleged anti-competitive practices are then examined within this context using what is essentially a rule of reason approach
The Relevant Market
The MMC defined two relevant product markets: film distribution and film exhibition. In
reaching this conclusion the MMC paid particular attention to the fact that cinemas provided the only means
of watching first release films and that viewing a film collectively at a cinema was quite a different
experience to watching a film at home on video or television.
The geographical extent of both markets was taken to be the UK. One of the main factors in this
decision was the existence of national chains of exhibitors who negotiated for films on a UK basis and who operated a national pricing policy. Another factor was the growth of out of town multiplexes which have the effect of strengthening demand side geographic chains of substitution. The MMC did however recognise that competition was strongest where two high street cinemas operated side by side.
Market Shares
The market shares of distributors and exhibitors can be heavily influenced by the success of an
individual film. The MMC thus considered that averaging market shares over the previous four years
provided a better indicator of current market power.
Legal Position
Only MGM, with 26.7 per cent of the exhibition market, qualified as a scale monopolist (that is,
accounted for 25 per cent or more of the market). However the MMC identified complex monopolies in both film distribution (the nine distributors named above) and in exhibition (MGM and Odeon only) in that these companies together had 25 per cent or more of the market and engaged in practices which limited competition.
Vertical Linkages
All the major Hollywood production studios are vertically integrated into distribution. Their inhouse distributors do however compete to distribute films made by independent producers.
Only two production studios, UIP (which owns UCI) and Warner, are vertically integrated into
exhibition. The only other vertical integration is between the Odeon exhibition chain and Rank, an independent distributor with no links to production.
Although vertical integration is relatively recent in the UK, historically the major distributors have been aligned to one of the two major exhibition circuits. UIP and Warner, the two leading distributors, are aligned to the MGM chain, whilst the other leading Hollywood distributors are aligned with Odeon.
Competition in the Film Distribution and Exhibition Markets
The MMC found that the market for film distribution was generally competitive. Competition
to distribute independently produced films is particularly fierce with independent distributors competing alongside studio-owned companies to secure distribution rights. Barriers to entry are very low and indeed many independent producers form their own distribution company specifically to market a particular film.
Although the studio owned distributors do not have to compete to obtain film rights there is still substantial competition between them to market their films and to secure exhibition space. In the UK exhibition market the two leading circuits have historically been dominant. However the evidence available to the MMC suggested that this power had been eroded by the recent entry of new chains of multiplexes most notably UCI. International price comparisons and financial analysis revealed no evidence of excess profits amongst exhibitors or distributors.
Vertical Integration
An independent exhibitor will always wish to screen the film that it expects will maximise its box office receipts. A vertically integrated exhibitor may however prefer to show a less popular in-house film -although revenues may be lower, costs will be too, as it avoids having to pay out rentals to a rival distributor
The MMC was concerned that if in-house films were favoured in this way consumer choice
would be restricted and non-vertically integrated distributors might have more difficulty in gaining access to cinema screens. The MMC carried out a thorough investigation into whether such bias existed in practice. They found however that most vertically integrated exhibitors were run at an arms length basis from their parent distributor. Although there was possibly a very small bias towards showing in-house films, there was no evidence that they had longer runs than they otherwise would or that rival distributors were being offered poorer terms.
One caveat, however, is that in the UK the two studios which are vertically integrated into
exhibition only own multiplexes. In-house bias is much less likely to arise in a multiplex as the exhibitor needs to secure films from all its major rivals in order to fill their screens. Thus while the MMC were satisfied that vertical integration was not presently operating against the public interest they recommended that the situation be monitored.
Alignment
Alignment is the practice whereby distributors normally offer their films first, and discuss their
timing and release strategy, with their aligned circuit.
The MMC argued that this informal vertical relationship restricts competition both between aligned distributors and between the two exhibition circuits. An exhibition circuit for example knows that all its cinemas will be given the latest blockbuster film whatever their individual merits. Consequently there is less pressure on exhibitors to compete by improving a cinemas’s facilities. Similarly aligned distributors do not have to compete so strongly to convince cinemas that they have a good film as they are guaranteed a circuit-wide release.
The MMC identified 20 locations where alignment had a significant adverse effect on competition. These were predominantly places where cinemas of the two exhibition circuits competed side by side and where there was no nearby multiplex (which are not aligned). The MMC considered the argument that alignment served to reduce risks and negotiating costs. However they did not regard these benefits to be of sufficient importance to outweigh the adverse effect on competition. They thus recommended an end to alignment in the 20 locations.
Vertical Restraints
Minimum exhibition periods
Minimum exhibition periods of 2-4 weeks are commonly agreed between distributors and
exhibitors. The distributors argued that they are used primarily to help them plan their release strategy. In particular they reduce the risk that a film scheduled for wide release will not be given sufficient screen time. They are also used to ensure that a particular film will be shown during popular periods e.g. a children’s film during school holidays.
The MMC noted that minimum exhibition periods tied an exhibitor into screening a film for
longer than they might otherwise wish. They were concerned that long minimum exhibition periods used up scarce screen time, particularly in small cinemas, and thus made it more difficult for independent distributors to compete. The MMC’s primary concern, however, was that they prevented exhibitors from switching to a more popular film in response to consumer demand and in so doing reduced competition between distributors. The MMC considered that these anti-competitive effects to outweighed any efficiency gains, and that they restricted consumer choice. They thus found the practice to be against the public interest.
Refusal to supply exhibitors
The MMC investigation had largely been prompted by complaints from independent exhibitors
who had been refused supplies of first run prints for potential blockbuster films. The primary cause of these refusals was that under the present rental system a distributor earns more revenues if its audience is concentrated in one cinema. This means that it is not in a distributor’s financial interest to supply two competing cinemas unless the additional audience generated is sufficient to outweigh both the loss of rentals through shared receipts and the additional cost of the print.
The MMC considered such refusals to supply to be reasonable given that distributors had no
individual market power. Although the MMC remained concerned that the method of calculating rentals was restricting competition between exhibitors they decided against recommending any changes. This was largely due to the fact that the present system enjoyed widespread support amongst both distributors and exhibitors as a means of sharing risk. They did however recognise the concerns of small exhibitors and therefore proposed independent machinery to ensure that refusals were not unfairly discriminatory.
Other matters considered
included distributors’ influence over admission prices, film exclusivity, restrictions on screen use and conditional booking, but no adverse public interest findings were made.
Remedies
— Alignment: The practice should be banned. They also recommended that the parties should submit information to the DGFT to demonstrate compliance.
— Minimum exhibition periods: These should be restricted to two weeks for films on first release and one week for all others. The film could be retained by the exhibitor at the end of the minimum exhibition period by mutual consent.
Although in the case of refusal to supply, conditional booking and restrictions on screen use no
adverse findings were made, recommended that an independent tribunal should be set up to
consider complaints. They also recommended that the extent and effects of vertical integration should be monitored by the cma.
Government response
The Corporate Affairs Minister accepted the cma’s findings and negotiated undertakings with the companies concerned, to cease the practice of alignment, and to limit minimum exhibition periods. He also asked the DGFT to monitor, and encouraged the industry to set up a panel combining industry and independent representatives to draw up guidelines and consider complaints.