The Movie Evangelist

The Cineworld / Picturehouse Competition Commision: Brief Thoughts On The Full Report

Posted on August 22, 2013 Updated on August 22, 2013

Following my post yesterday regarding my thoughts on the initial findings of the Competition Commission’s review into the purchase of City Screen Limited and the Picturehouse chain by Cineworld Group plc, the commission have now published their full findings into the purchase which support their recommendation that one of the two arms of the new business should be required to sell their holdings in Aberdeen, Bury St. Edmunds and Cambridge in order to offset the impact of the substantial lessening of competition (SLC) created by the purchase.

I will now, briefly, give my thoughts on the four questions I posed at the end of my initial report and what I’ve learned from an initial scan through the fuller findings. I am likely to come back to update this as the findings plus appendices run to over 240 pages, and I have a full time job and both a trip to FrightFest and hosting a Q & A at one of the affected cinemas to prepare for at the weekend (yet another example of an activity and a benefit to the public that may be potentially lost if it was the Picturehouse arm to be sacrificed). However, both the publication of the report and the following discussion, of which I have been but a small part, seem to have prompted strong emotions and so I wanted to take an initial opportunity to reflect on the fuller report and to see if we could better understand the findings.

The other thing I would say at this juncture is that I fear there’s a risk I may be seen to be working to protect the commercial interests of a public limited company. I have no shareholder interest in the company, and my most direct involvement is to take part in events organised in its cinemas. (I will have been involved in Q & As at both Cambridge Arts and Abbeygate Picturehouses this year, and I give up my time voluntarily to watch screeners and to prepare for these sessions, as do a whole host of other people. The cinemas are also not charging a premium for these events.) I believe that it is right that we have an independent body seeking to protect consumers from damaging changes to their interests, but that any proposals need to be measured from a quality as well as a cost perspective. I would also add that I would love to see a growth in both areas of competition and especially of more independent cinema, especially in those areas outside the city and town centres referred to, but this doesn’t appear to be within the scope of the current report.

Anyway, to the questions, and my thoughts on where we might go next.

1. Why is competition a requirement in areas such as Cambridge and Bury St. Edmunds, when geographical areas of similar size do not typically have such competition?

The report and its findings have done a very thorough job into examining the surrounding competition, but there seems to be no setting of a particular requirement for competition in a given area. This is potentially more of a problem for Bury St. Edmunds than it is for Aberdeen or Cambridge, as it represents a removal of competition rather than an a reduction. Analysing the results of the regression analysis in the report is also somewhat difficult as confidential information has had to be removed, but the key statistic would seem to be that there are mean of 1.8 fascias (cinemas) within the 20 minute radius defined as suitable travel time of Cineworlds outside London, and 2 for Picturehouses, if in both cases you exclude small cinemas. However, the report has not considered these ratios or statistics for any other chains, or what the prevailing market conditions should be.

What I’ve also not yet been able to find in the report – and please feel free to guide me to this if I’ve missed it – is any analysis as to whether competition in the market is having an effect on prices over the course of time, i.e. did the period prior to the acquisition see prices fluctuate or change thanks to the benefit of competition? There is a large amount of anecdotal evidence provided that the cinemas monitor the prices of other cinemas in the surrounding area, but I cannot then see any connection to those cinemas adjusting prices. I would be keen to understand the effects of this both in the markets under scrutiny and those such as Norwich which have high levels of competition among other chains, but where at present competition doesn’t appear to be doing much at face value to impact on prices.

2. Why are the Cineworld and Picturehouse chains being deemed to be in competition when Picturehouses are generally complementing the offering in other areas rather than challenging it, and when the Commission’s own findings demonstrate that these are appealing to different demographics, have little overlap in terms of content,  and the Picturehouse has an appreciably different experience surrounding the exhibition?

I have been able to find reference in the report to the overlap in terms of revenue, which at the Bury St. Edmunds cinemas is listed at 26%. However, I believe this hasn’t truly grasped the nature of the offerings of the Picturehouse cinemas. There is a statistical principle known as the pareto principle, or in layman’s terms the 80-20 rule. This states that typically, 80% of the effects come from 20% of the causes. It is likely that a small number of the showings at the Picturehouses, coinciding largely with those that overlap with the other multiplexes, represent the larger proportion of their revenue. But in my analysis, the Cambridge Cineworld is showing 22 films in a 10 day period over 9 screens – that’s an average of 2.33 films per screen. The Cambridge Arts Picturehouse is showing 21 films and events in the same period over 3 screens, an average of 7 films per screen, and the Abbeygate in Bury has a similar ratio. It is that diversity that its patrons are keen to protect, and the report in prioritising revenue as a deciding factor in customer decision making has neglected to examine the effect of, or on, consumer choice within the programming of each cinema.

The local market also needs to be taken into account, and by that I mean the number of available screens. In my extensive experience, the Picturehouses in Cambridge and Bury have some of the most diverse programming of the Picturehouse chain. There are a reasonable number of films that I would be able to watch at larger Cineworlds such as Stevenage (16 screens) or Enfield (15) or those nearer to London in a more competitive market such as West India Quay (10 screens, but with much less overlap of programming with Cineworlds in Cambridge or Bury). The Cineworlds in Cambridge and Bury have only nine and eight screens respectively, and this has driven a market condition where the programming is being driven to be more diverse by the requirement for greater consumer choice. The implications of the removal of either of these chains from the local market would need to be carefully considered, as I would have presumed it unlikely that any prospective buyer would be able to increase the screen counts of any of the cinemas.

If the Picturehouse were to be forced to be sold, the two competitors offering the most similar programming across their chains are the Curzon and Everyman cinema chains. Curzon has recently opened its first cinema outside London, increasing its portfolio to six, while Everyman has ten cinemas, four in Surrey and Hampshire and one in Leeds, and both offer similar membership schemes to the Picturehouse chain. All of the cinemas outside London struggle to offer such a high film to screen ratio as the Cambridge and Bury Picturehouses, and any prospective purchasers would not only need to demonstrate an ability to significantly step up their ratios in terms of content, but also their willingness to support the cinema culture, at events such as the Cambridge FIlm Festival which operates extensively at the Picturehouse (and has occasionally in previous years had second screenings at the Cineworld as well). Others more knowledgeable than I would be able to greatly extend the list of other activities taking place in these areas that have grown organically out of the current operations and may be at risk if ownership changed.

All of this seems to have glossed over the initial statement by Cineworld, unchallenged by anyone as far as I can see, that it acquired the Picturehouse chain to gain entry to a segment of the market it wasn’t currently operating in. On that basis, I am struggling to see how the two chains could have seen to be in competition, otherwise there would have been no value to the purchase.

3. Why would introducing an additional party to these areas drive competition in prices when there is no evidence to support this, and when pricing seems to be driven as much by the local cost of living as by any perceived competition?

The report hasn’t answered the question that adding a competitor would increase competition, only that by removing a competitor there is an SLC created. The key new piece of evidence appears to be the mathematics used to draw that conclusion. The Commission have used a gross upward pricing pressure index (GUPPI) to examine the likely impact of the loss of competition, and concluded that the Picturehouse cinemas would be most likely to benefit based on the potential diversion of custom and the respective unit margins on each ticket price. This, I presume, means that the Picturehouse becomes most at risk of being sold off, even though it is in less direct competition with its near neighbour. What this calculation is based on is the standard adult ticket price. There appear to have been reviews made for concessions and for special events, but membership appears to have been excluded – both from the cost of membership, as it doesn’t relate to one-off ticket prices, and it’s impact on individual sales – and when the two cinema chains offer the two most beneficial membership schemes in the industry.

The other calculation that has been used is a regression calculation to assess the pricing, correlated against two key variables: the concentration and controls. Again, the concentration is related to the number of fascias (cinemas), rather than the number of screens or the potential programming, and the controls were the local unemployment rate, the average hourly wage and the proportion of customers under 35. However, what we cannot see is the closeness or fit of the correlation produced by this analysis, so we cannot determine how significant these respective factors have been. I still believe that the cost of living has more impact on current pricing nationally than local competition, and believe that there is much more that could and should have been done to test this hypothesis.

4. Why would allowing another major operator to take over these chains be in the interests of consumers, when the price difference for casual attendance is negligible and for regular attendance is either similar or significantly cheaper?

I think I covered this yesterday, but let me reiterate – the report has covered the possibility of the creation of SLCs, and concluded they will occur in three markets. They have only been able to propose one solution, and that solution for the removal of the Cineworld would see negligible price changes for casual attendance and marked increases for regular attendees. I didn’t cover the membership schemes of the Picturehouse rivals yesterday, but to address that, both other chains offer membership schemes at similar prices for the annual outlay. However, at those price points Picturehouse give three free tickets a year and the others two; Picturehouse also discount other events by up to £2 a ticket, whereas it’s £1 at Everyman and there is no discount at Curzon. The one offering which Picturehouses don’t give is an annual flat rate membership, costing £600 for Everyman (or seeing nearly as many films as I do to get the benefit), or a very reasonable £300 for the Curzon. This equates to around 25 films a year at West End prices, and at Cambridge prices would be around 30 films, so for those seeing 3 films or more a month, a price point such as this would start to give Curzon the edge. However, the price rises to £500 if you wish to include non-cinema events and they do not currently offer anything than a one-off payment option, which would likely put such a charge out of the range of many.

The commission also surveyed a number of customers by both e-mail and telephone, making the two sets mutually exclusive, but there is also some doubt in my mind as to whether those surveyed fully understood the questions being asked. The price rise question was posed in terms of a 5% increase, but if this concern had been expressed in real terms – i.e.. 40 – 50 pence per ticket – would it have generated the same magnitude of proposed response? Also, were respondents aware that their alternate cinema showed only a maximum of 18% of similar films by content and 26% by revenue, thus limiting their options to switch anyway?

But the key for me on this last point is the lack of a suitable alternative. Whatever the pros and cons of the original decision, there has been no direct consideration by the Commission on the possible effects of their one solution, and no matter which chain is sold I can see nothing but an adverse effect on price, choice or both. We desperately need a solution which will protect the interests of consumers for both cost and diversity but still promote free market competition – any ideas extremely welcome. Don’t forget to continue to voice your thoughts to the Commission or to your local MP (links at the bottom of yesterday’s article).