The fight against the Competition Commission’s decision goes on, although since much of that continues to go on in darkened boardrooms and we occasionally get whispers of the latest developments, it’s hard not to feel a little disenfranchised at the moment. So with my own involvement in the campaign reaching a temporary lull, partly because of allowing the likes of Cineworld to pursue their own appeals and partly because, to paraphrase Derek Zoolander, I’m really really ridiculously busy right now with things that don’t relate to the inside of a cinema, I felt it was an ideal opportunity to dig deeper into one of the aspects of the debate that’s bothered me most.
When coming to the conclusion that the Cineworld and Picturehouse cinemas were in direct competition, one of the pieces of supporting evidence revolved around the fact, supported by evidence from some of the cinemas, that the divide between art house and multiplex cinemas is breaking down and that digital projection allows cinemas to program a wider variety of films. Here’s some relevant paragraphs from the Commission’s final report on the issue.
Distributors are responsible for the marketing of the films they handle. Their aim is to maximize a film’s profitability through promotional activity, the timing of the film’s theatrical release and the subsequent exploitation of DVD and television rights.
Although the number of film releases has increased rapidly in recent years, the majority of new films do not achieve widespread release. Films are generally classified as mainstream or specialized (or non-mainstream), the latter category including foreign language and subtitled films, feature documentaries, art-house productions and films aimed at niche audiences. The BFI told us that the definition of specialized films included both films which were obviously specialized but also a range of films which were not inaccessible or challenging but which appealed to a specific demographic. Specialized films generally account for about 8 per cent of box office revenue.
Cinema exhibitors told us that digital technology had delivered a number of benefits: it had given a high-quality experience to customers, enabled the growth of 3D, and made it easier to change programming and advertise with shorter lead times. Odeon commented that the full benefits of this had yet to be realized, as there was potential to programme even more flexibly… In particular, Odeon anticipated that digital distribution would reduce the requirement for a fixed number of shows per week (historically a minimum of 21) and might result in any digital cinema being able to programme more varied content each week.
That gives some general background on how the industry currently sees itself. Now, something a little more specific from the cinemas, and the only paragraph I can find in the report that shows the cinemas are in competition in terms of programming, above and beyond a revenue comparison.
Non-multiplex cinemas are typically located in town centres. Some of the non-multiplex cinema chains and independent cinemas focus more on showing specialized films. Some of these cinemas show exclusively specialized films (and are typically referred to as ‘art-house’ cinemas), but the majority show a mix of mainstream and specialized films. Vue told us that in its opinion there were only a very small number of cinemas that played only specialized films, for example the Cornerhouse in Manchester, the Watershed in Bristol and the Showroom Cinema in Sheffield. Odeon said that there was no longer a differentiation in the eyes of the industry between ‘Hollywood films’ and ‘art-house’ films and that the distinction between different types of cinemas had been eroded by more complex fragmentation, with cinema exhibitors trying to meet commercial targets by programming the most successful films for each cinema on a week-by-week basis. A number of parties told us that they expected to see more overlap in future between film programming in multiplex and non-multiplex cinemas as digitization allowed all cinemas to be more flexible in their film programming.
So the view of the industry appears to be that the barriers are falling down. This must mean that access to the specialized films is becoming ever easier for customers, right? Although given that they only make up 8 percent of the market, maybe they’re not commercially appealing enough. What it doesn’t indicate is whether price or choice is viewed as more important. There is one paragraph that does comment on this, however.
Similarly to the parties, Everyman told us that Picturehouse offered a different experience, product and programming mix to Cineworld. However, Everyman also stated that it competed with both Cineworld and Picturehouse in that they operated in the same industry but did not currently operate sites in locations where they competed directly against one another. Everyman believed that if it were to compete with Cineworld and Picturehouse it would be on a mixture of product offering and quality of service and that price would not play a major factor. We also received a considerable number of letters from the general public stressing the differences between the product offerings of the Picturehouse cinemas and the Cineworld cinemas in Cambridge and Bury St Edmunds. A smaller number of letters commented on competition between cinemas in Aberdeen.
So at least one independent cinema chain, and the customers of the cinemas themselves, appear to contradict the views of the rest of the industry that these lines are blurring. But don’t worry, the rest of the industry was keen to contradict its own customers one more time.
By contrast, Vue and Odeon did not draw such clear distinctions between the positioning of multiplexes and independent cinemas. Odeon told us that it was constantly evolving its cinema offer and attempting to ensure that each cinema catered for the widest demographic and taste and gave examples of refurbishments and upgrades it had carried out to meet specific needs. Vue stated that ‘a cinema is a cinema’. These views were echoed by Curzon: it believed that there was a large overlap between cinema types, with 60 per cent of customers willing to go both to multiplexes and independent cinemas.
There is clearly a marked divide between how much of the industry perceives itself, and the opportunities that digital distribution can provide, and how the customers in the affected areas see this. But are Aberdeen, Bury St Edmunds and Cambridge unique cases, or symptomatic of a greater national divide?
There is only one way to find out, and that’s to look at what cinemas across the country are currently showing. To do that, I’ve taken a snapshot of the fifty largest urban areas in England and Wales. I will admit up front that I’ve taken a slightly different approach to the Competition Commission; they effectively stuck a pin in the centre of an area and drew a twenty minute circle around it to consider how far people would travel. I’ve considered urban areas, simply on the basis that it’s easier for me to work out, but also on the presumption that public transport would allow access for anyone within that urban area to see the films listed. The full list of areas can be found here, and Cambridge – our test case in terms of the Commission debate – is the 45th largest urban area on the list.
I’ve then looked at the films showing this week, between Friday 29th November and Thursday 5th December, in any cinema in each of those 50 urban areas. I’ve narrowed the field slightly; I’ve looked at those films given some form of general release in the calendar month of November, so either in this week or the four preceding weeks. I’ve taken my list from the films listed at Launching Films. (Cinema listing times have been taken from Google’s cinema listings pages.) There are a handful of mainstream films, including Thor: The Dark World, Jackass Presents Bad Grandpa and Captain Phillips that were released prior to this date that are still showing in the majority of areas. A number of cinema chains have had advanced previews this weekend, including screenings of Frozen in a number of cinemas. As well as that, the Picturehouse chain had advanced screenings of Nebraska on Sunday, Cineworld had The Secret Life Of Walter Mitty on Monday and Showcase had previews of Additionally, I’ve ruled out live events and Bollywood films for now to make the count easier – I’m hoping to automate the counting process with some of my IT knowledge from my day job, so that in future I can cover those too.
So of those films released in November, there are a total of 30 still showing somewhere in one of those 50 urban areas this week. I believe they break down into three distinct categories: the mainstream films, which are showing exclusively at the multiplex type cinema (or their smaller cousins); there are the specialized films, which are showing pretty exclusively at the Picturehouse or independent cinemas; and then there’s the crossover films, those films likely to be showing in almost any cinema that has the capacity. This last list is the shortest, and they can be easily categorised at this time of year by the approach of awards season. If you had to go through the list of thirty and pick out the four most likely to be on awards ballots come January next year, it would be these four. Consequently, they have a broad, cross-demographic appeal that neither of the other lists can claim.
Here’s the list of films, and the number indicates how many of those urban areas are still showing the films in question.
So if you want to see time travelling turkeys or futuristic child slaying, you’re in luck as those are the two films guaranteed to be showing everywhere this week. If you live in Barnsley, you may have to make do with those, as it’s the one area not showing Carrie and no longer showing Gravity. You also can’t see Saving Mr Banks there, and if you live in Slough you’ll also have to travel. So this shows that there are effectively eight films fighting for the largest share of the box office, showing in more than two-thirds of areas, and whether or not you can see the other films is a form of cinematic postcode lottery. In terms of the overlap between cinemas, only one film provides any evidence: Joe Swanberg’s Drinking Buddies, a film from a small but prolific American director with a more mainstream cast, had one-off showings in thirteen Vue cinemas on Tuesday night. It certainly shows the potential of digital alluded to in the report, but it’s hardly being exploited to the full benefit of customers yet.
But it’s not one that relates to the size of the area that you live in. Of the thirty films, I couldn’t find five of them showing in London this week, but there were still screenings at other cinemas around the country. But this is how the urban areas break down in terms of the proportion of those 30 films you can see this week in your area.
While the larger areas have congregated towards the top, there are a few anomalies. The people of the larger areas of Birkenhead and Luton would likely be looking at a long journey to catch most of the films listed, although in Luton’s case there are a high proportion of Bollywood titles on offer as well; Birkenhead residents are faced with a trek to at least Liverpool to catch a wider variety of films. At the other end of the spectrum, Ipswich performs very well thanks to a community based cinema, and both Oxford and Cambridge perform especially well. Cambridge manages to come out joint second, despite having only three cinemas, and actually has performed consistently well; if you look at the list of specialised films in the first table, every one of those films has shown in Cambridge during November. A total of 24 of those 30 films have shown in Cambridge at some point in the past three months, a figure which makes me very glad to live where I do. You can then add in special, one-off screenings of classic releases or themed events, which would put another four onto the Cambridge total this week alone; the areas with cinemas engaged in such activities are almost all in the first column of that second table.
So the diversity of films available in Cambridge is significant, and is the rival or the superior of any city outside London. But when the Office Of Fair Trading and the Competition Commission are fighting for the interests of customers over price, who is protecting the interests of customers over choice? Not the Department Of Culture, Media And Sport, who seem to have no interest in this debate (and a number of us have written to them, and received dismissive replies). But what are customers truly seeking? What’s most important to cinema customers in terms of what their local cinema offers them? If only we had some form of survey to answer that question, such as the independent survey undertaken by GfK for the Competition Commission as part of their investigation.
This is slide 31 from their full presentation, available here. It shows that, of the 21,000 people surveyed, the choice of film is the single biggest driver to their reasoning. It would have been fascinating to see if that survey had given people the choice of one or the other, price or choice, to see which is the single biggest factor.
So the residents of the Cambridge area remain worried that their privileged position of cinematic choice is being put in jeopardy in an effort to protect them from a potential price rise. But my survey also shows that the ideas of the cinema chains such as Vue, Odeon and Curzon that the barriers of the marketplace are breaking down are nowhere near coming to fruition. Only two multiplexes, one in Cardiff and one in London, are showing Blue Is The Warmest Colour this week, a film only released a week ago and winner of the Palm D’Or at Cannes this year. Almost everything else on the specialised list is studiously being avoided by the big cinemas outside of London, and while the likes of Odeon and Curzon are diversifying heavily in their London outlets, that pattern is the complete opposite of the rest of the country.
There is still a clear divide in terms of cinema exhibition, with Picturehouse, Curzon’s London cinemas and a selection of independents (Manchester Cornerhouse, Leeds Hyde Park Picturehouse, Watershed Bristol, Showroom Sheffield, Newcasatle Tyueside, Broadway Nottingham and a few others) on one side showing a wide mix of crossover and specialised films, and the remainder (Cineworld, Odeon, Vue, Showcase, Reel, Empire and Everyman, plus smaller independent cinemas not in large urban areas) showing a mix of crossover and mainstream films. The only stipulation from the Commission is that cinemas have to be sold as a going concern, so any sale of the Picturehouses in Cambridge, Bury St Edmunds and Aberdeen could be to a cinema operator in the second list, not showing specialized films or at a drastically reduced rate, and at present no-one is fighting that corner on behalf of the customers who rate that more important than the price concerns raised by the OFT and the Competition Commission.
This survey isn’t intended as a critique of any one particular cinema or chain of cinemas, but a call to all of them to be doing the most they can for their customers. I intend to run this survey on a regular basis, hopefully at least monthly, in an effort to understand if there is any movement in the right direction, and that movement needs to be on a national basis, not just in one area. In a world where these specialized films make up just 8% of revenue already, does that seem commercially appealing to new operators of cinemas when the regulatory bodies are prioritising competition over choice? So who is going to fight for choice in our cinemas, not just in Cambridge or the other affected areas but across the country? The BFI? (Here’s a copy of their letter to the Competition Commission on 30th August, expressing just these concerns, but which didn’t carry the same weight as the cinema operators in the final analysis.) Maybe it should be other local independent film trusts and film clubs? Maybe it’s the customers of the cinemas, who surely should have the most influence over the operators if they put their mind to it? Or does the answer simply start with you?
(In case you're interested in more detail or want to check my workings - a move that I'd always encourage - here's the spreadsheet I compiled with my review of the 50 areas: State Of The Nation Spreadsheet - November 2013 Any and all feedback welcome, as always.)
I’ve written a huge amount about the Competition Commission’s decision making process over the past few months, but one thing has been at the core of all the debates, and that’s how you define a cinema and its market. The Competition Commission and The Office Of Fair Trading have taken counsel from the people who ought to know how this works: the industry itself. However, the definition that they’ve come up with is one which simply differentiates between multiplex and non-multiplex cinemas, and has missed that there are other types of cinemas out there.
I do wonder if there had been a more accurate definition of the different types of cinema in the marketplace that we wouldn’t be in this mess now. What I do strongly feel is that, no matter the outcome of this process, that if we get into this debate again over any future mergers or acquisitions that the cinemas need to understand their own market and their customers better.
So I believe the market actually consists of five main types of cinema:
Cinemas that focus on American and high profile British films currently on general release, typically with five or more screens. They may have some form of social area, and serve a small range of food and drink concessions to be taken into screenings. They will usually be found in either out-of-town areas in areas of high population concentration and are likely to form part of a large chain. They will focus on digital projection of films.
As Large Standard (similar range of films shown and food and drink offered) but with less than five screens. They may be found either in or out of town, typically in smaller towns that cannot support a Large Standard cinema. They will typically be required to upgrade to digital projection if they haven’t done so already.
As Large Standard (similar range of films shown via digital projection and food and drink offered), and may form part of a Large Standard cinema. They will offer increased comfort and at-seat food and drink in return for ticket prices higher than those of a Large Standard cinema.
Cinemas that show a mix of both American and high profile British films, as well as world cinema and lower profile British films. They will offer a greater range of special interest events and showings of classic films, will have an alcohol licence and will offer hot and cold food for consumption in a dedicated area. They will also retain analogue film formats wherever possible.
Cinemas that will focus almost exclusively on world and low profile British cinema at the expense of American and high profile British films. They are most likely to have screenings of older films or special interest events. They will have little or no focus on food or drink offerings, and will also retain analogue formats wherever possible.
I believe that 99% of cinemas in this country will clearly fit one, and only one, of these definitions. (There will always be the odd exception: take the Prince Charles Cinema in London, which is probably Independent with a bit of Small Standard by these outlines.) There are two things I don’t think you can apply to these definitions: the first is any sense of membership or ticket price definition, as cinemas in most of these sectors offer memberships which differ wildly in concept and execution and ticket prices will vary by geographical area. The second is live events, such as the National Theatre or the RSC, as these are increasingly being shown across all these types of cinemas. It is the films themselves, rather than live streamed events, that create the separation in definition.
These are the kind of cinemas I see fitting into these definitions:
Large Standard: The vast majority of cinemas owned by the major chains, including Odeon, Showcase, Cineworld, Vue and Empire, as well as the larger cinemas owned by Reel.
Small Standard: Cinemas in small towns, typically where there isn’t a Large Standard cinema present, such as some of those owned by Hollywood or Reel cinemas. They may also be the run by provincial operators such as Everyman who would be operating Quality cinemas in areas such as London.
Premium: The Showcase De Lux screens, Cineworld’s Screening Rooms in Cheltenham or the Odeon The Lounge Whiteleys.
Quality: Picturehouse cinemas nationwide, as well as the likes of Curzon and Everyman cinemas in London and major independents such as the Watershed in Bristol, The Cornerhouse in Manchester, The Showroom in Sheffield and the Tyneside Cinema in Newcastle.
Art-house: The ICA or the NFT at the BFI in London.
As digital projection increases, I can see cinemas who are currently small standard looking to make the transition to quality based on a wider range of offerings. The cinema most local to me in Ely, which operates for only one or two days a week, has recently made the transition to digital and they’ve already begun to open up the scope of their events, which is heartening news for locals.
Eventually it may be the case that these definition start to merge, that the distinction between Small Standard and Quality, or between Quality and Art-house, begins to break down. However, change is not always an agent of speed, and this could well take decades rather than years. But for now, there is a fight to protect cinemas in Aberdeen, Bury St. Edmunds and Cambridge which fall into the definition of Quality. If under new owners they become Small Standard, then they simply won’t be able to compete with the Large Standard cinemas in close proximity, and becoming Premium cinemas will remove all of the current customer benefits of price and choice that I and so many others have fought to protect these last few weeks. Hopefully the cinema industry will wake up to itself before it’s too late.
An Open Letter To Anyone Who’ll Listen In Response To The Competition Commission’s Open Letter To Me
This is a long post. I apologise again, but feel the need to be thorough. I will try to summarise at the end if you want to skip to that. Probably after a picture of a kitten or something. If you’re going to read the whole thing, no-one would blame you for getting a cup of tea, then coming back. People have written shorter dissertations than this.
On Monday, around two weeks after it loses the legal ability to make any material difference, the Competition Commission finally issued a response to the questions that I and many others had been asking them since a day after they published their initial report on the 20th August. That date now feels a lifetime ago, and so much has happened since, that it’s starting to become increasingly difficult to disentangle the truth of the situation from the many arguments and counterarguments that have raged ever since. And by arguments, I mean the views of the general public, several MPs, an MEP, at least two Lords, the most significant independent film body in this country and several key members of the film and film journalism communities, and by counterarguments I mean the position of the Competition Commission and my local MP, James Paice, who to this date is still quite literally the only person to have agreed in any way with the Commission’s findings. If you find any more, please let me know, I’m still looking.
So let’s get something clear. In all of this, I still believe that the Commission genuinely believe they are acting in the best interests of the general public. I still think they believe that if they had not acted, that consumers would have been left at risk of a price increase. Not an actual price increase, mind you, a risk of a price increase. Those that know me and have read this blog regularly will know that I’m fond of analogies, and the only suitable one I can think of is trepanning. Sure, there are reasons and occasions why this may be a legitimate and necessary medical procedure, but you shouldn’t go drilling a hole in the head of everyone who’s got a headache; you’re liable to do far more more harm than good. I remain resolutely of the belief that the proposed course of action here will do far more harm, and is far more likely – in fact, guaranteed – to drive up prices, reduce choice and remove the quality of service, than the substantial lessening of competiton ever would have done, and I’m almost more frustrated that the Commission can’t see that than their inability to distinguish on markets.
I’ve tried to remain professional through all this, despite having had to attempt to understand hundreds of pages of documents in a short space of time, many of it written in a legal speak to which I am entirely unfamiliar, in the face of a group of people who to outside observers have seemingly gone as far out of their way as possible not to understand the arguments being made to them, and clinging resolutely to their single defence and line of argument. I am now going to attempt to respond to the points made by the Commission yesterday, and in doing so I apologise in advance if that professional demeanour slips just occasionally, as it nearly did in the title of this post. (Also, dear reader, you keep having the patience to read this stuff, so I’m sure you’ll understand my need to make this as easily readable as possible.) Finally, I’m using edited sections of the full letter here; please refer to the full letter if you need further clarity – it might be worth reading it in full first before you read this if you haven’t – and if you feel I have misconstrued any of the Commission’s points by the edits I’ve taken, please let me know, as my intention is to try to clarify my thinking, not to cloud theirs. Portions of the Commission’s letter are in italics for clarity, and any extracts from the final report are in a smaller font.
After repeated letters to the Competition Commission, including letters sent to the Commission e-mail address on the 3rd and the 10th September this year, in which I sought a response to a number of questions around their findings, the Commission have finally responded to me via the deputy chairman and the head of this particular panel, Alisdair Smith. I am grateful that the Commission have finally engaged in dialogue, around two weeks after their decision has become legally binding.
They have given me a response to my initial queries plus a subsequent post on the condition that I reproduce it in its entirety, without edits, and I do so below. I will be writing my own response to their response tomorrow, but until then feel free to make your own mind up.
AN OPEN LETTER FROM THE COMPETITION COMMISSION TO MARK LIVERSIDGE
In your Movie Evangelist blogs, you have made several reasoned criticisms of the Competition Commission (CC) decision on Cineworld’s acquisition of Picturehouse. Several of your points have been picked up by other commentators or members of the public who have written to the CC.
As you know, the period after the publication of the CC’s provisional findings report in August was when interested parties could influence our thinking. The legal framework within which we operate does not allow us to re-open an inquiry after the publication of the final report.
Nonetheless, we think it is in the interest of public understanding to address the points you have raised. That’s why I am writing this open letter to you. It serves only to state our position on certain issues. It is not being sent to initiate a further debate. And we must stress that the comments that follow are not formal positions; our Final Report, published on 8 October, is the definitive legal statement of our findings.
Letters from the general public
It has been suggested that we have taken no notice of the many comments from the general public we received on our provisional findings of 20 August 2013. That is not the case. We gave these comments careful consideration and indeed sought to address points made in those letters where we felt that our provisional findings had not sufficiently explained our thinking.
In particular, we explained at paragraph 6.5 of the final report how we had taken into account the differentiation between Cineworld and Picturehouse in our analysis of the impact of the merger. Similarly, we responded to your specific and interesting point on the effect of Cineworld’s Unlimited Scheme directly in the final report at paragraph 6.55.
In your blog dated October 8, you make several points and ask a number of questions. I respond below to some of the numbered questions – although this does not mean that we agree with the other points you have advanced but on which I have not commented.
1. Was there no requirement to set a suitable threshold of competition in a particular area?
The task of the CC in a merger inquiry is to decide whether there is a substantial lessening of competition in a particular case referred to it by the Office of Fair Trading (OFT), given a particular set of circumstances. Our task was not to consider the whole landscape of competition in cinema exhibition in the UK.
The CC is required by law to identify the market that is relevant to the merger in question. The market for cinema exhibition is largely a local market, so the question becomes whether there is a substantial lessening of competition in particular localities. Indeed, cinema exhibitors told us the specific local conditions of areas were key drivers of their product offering. The report summarises the evidence we received on this matter in paragraphs 6.6 to 6.20. There is no simple rule which determines how many competing cinemas could successfully operate in a given area.
There may well therefore be communities comparable to Bury St Edmunds which are served by a single cinema operator, but that has no bearing on whether this merger results in a substantial lessening of competition in Bury St Edmunds.
2. The OFT’s initial report indicated that Cineworld and Picturehouse operate in different markets
This is not the case: paragraph 110 of the OFT’s report of June 5 referring the merger to the CC states: “The OFT has analysed the transaction against a market for film exhibition services in this case. It has considered whether it is appropriate to segment this wider market by art-house and multiplex cinema. The parties failed to provide sufficient evidence in support of their arguments that the product market should be further segmented, Further, a number of pieces of evidence including: survey evidence, entry analysis, price concentration analysis and film overlap analysis indicates that there is competition between art-house and multiplex cinemas and it would not be appropriate to segment the market in this case.”
3. Why is it believed that introducing another party to these areas will have the effect of reducing prices?
The evidence discussed in paragraphs 6.14 – 6.20 and the econometric analysis of the relationship between prices and local concentration in Appendix C suggest that the extent of local competition affects prices.
4. Why were membership schemes excluded from the CC’s analysis?
Membership schemes were not excluded from the CC’s analysis. In our survey, as described in 4(b) of Appendix D on consumer surveys, separate questions were asked about membership schemes. We agree that the Cineworld membership scheme effectively sets a national price for membership. However, the results of our analysis gave us more concern about future Picturehouse prices than Cineworld prices in Aberdeen, Bury St Edmunds and Cambridge. The Picturehouse membership scheme is different the Cineworld scheme and does not insulate members from local price increases. The different cinema membership schemes are described at paragraph 6.22 of the Final Report and the specific point made by you about Cineworld’s Unlimited Scheme is considered at paragraph 6.55.
5. Is there any evidence of any other part of the country where competition alone is successful in influencing prices? On inspection, the prices seem to be set at a level more related to the general cost of living than the factors used in the correlation in the report, and comparisons with local areas with both more competition and no competition do not suggest any evidence of a strong effect of competition on prices in this sector. The subsequent fear is that any competitor purchasing either of the cinemas will not be able to be restricted from raising prices from current levels, and I would be keen to understand the Commission’s powers to influence in this regard.
As explained in the CC’s merger assessment guidelines, competition between firms is generally expected to create incentives for firms to cut price, increase output, improve quality, enhance efficiency, or introduce new and better products.
In relation to cinemas specifically, our econometric analysis found local competition effects after allowing for local cost effects. It is the strength of local competition which will restrict a purchaser of the cinemas to be divested from raising prices.
6. What controls will the CC put in place to prevent price increases as a result of a change in ownership?
The CC is not proposing price controls and we see no reason why a change in ownership should result in a price increase.
You entitled a blog of October 13 “A request for the Competition Commission to explain basic economics to me”, and particularly asked about “GUPPI”.
GUPPI calculations, described and used in Appendix F to the Final Report, on Pricing incentive analysis, are a standard tool for considering the effects of reduced competition following a merger in markets, like cinema exhibition, where sellers offer products which are differentiated from the products of their competitors. It is perhaps worth adding that the GUPPI calculations were only one element which went into the judgements about whether there would be a substantial lessening of competition.
Primacy of the Final Report
We hope this open letter goes some way to help you and other critics of the CC come to a better understanding of our findings on Cineworld’s acquisition of Picturehouse. We must stress again in conclusion that these one-off comments are intended solely to help you and the wider public understand our reasoning; and the CC’s final report remains the definitive legal statement of our reasoning.
Inquiry group chair on behalf of the inquiry group and staff
 http://www.competition-commission.org.uk/assets/competitioncommission/docs/pdf/non-inquiry/rep_pub/rules_and_guide/pdf/11_03_25_a_quick_guide_to_uk_merger_assessmentpdf.pdf explains the framework within which the CC operates and how it approaches merger inquiries.
I have come to realise over the weekend that this whole Competition Commission situation is getting very complex. So I’ve tried to summarise the current research and findings in some short paragraphs and to answer the questions that I’ve most often been asked when speaking to people.
Summary of the current position
Cineworld Group plc, which runs one of the largest chains of multiplex cinemas in the UK, late last year purchased City Screen Ltd, which among other activities also runs Picturehouse Cinemas. After a referral from the Office Of Fair Trading, the Competition Commission published an initial report in August investigating the potential loss of competition. They confirmed their findings in their final report which they confirmed on Tuesday 10th October, instructing Cineworld Group to sell either the Cineworld or Picturehouse in each area to resolve the substantial lessening of competition (SLC) they believe has happened. Cineworld Group have decided to sell the Picturehouse in Aberdeen and Bury St. Edmunds and are yet to decide which of the Cambridge cinemas to sell.
1. The current cinema benefits of Picturehouse which are at risk of being lost
Cineworld bought Picturehouse to gain entry to a different part of the market, namely the art house sector. At the time of the purchase they stated an intent to run the two as separate businesses and that the two could learn from each other while preserving their identities. So far they have been true to their word.
Picturehouses offer a completely different experience to a standard multiplex (multiplexes are cinemas with more than five screens).
- The Picturehouse cinemas offer cafe bars where hot meals are served and alcohol can be purchased and taken into the screens. The findings from the Commission ignored the role these play in attracting customers, who are looking for a different experience to a normal multiplex cinema.
- The cinemas offer a much wider choice of films, typically at least double the number of films per screen per week than a multiplex, and while a proportion of the revenue comes from films shown at both cinemas, the Picturehouses show a wide range of films and live events not regularly offered at the multiplex cinemas.
- The Picturehouses also offer a range of screenings for parents with young children, senior citizens and those on the autism spectrum and their carers, as well as a monthly club for students with free screenings. Very few other cinema chains offer these services and none with the frequency of the Picturehouses.
- These cinemas also support a wider cinema culture in the form of trusts and festivals that take place year round. Cambridge hosts the country’s third oldest film festival and all three cinemas have a high number of themed or festival-type screenings.
- The cinemas are also capable of a wider range of projection than multiplex cinemas – the Cambridge Arts Picturehouse being one of the few cinemas in the country that can still show 70mm films, and they are reliant on existing expertise.
- Without a Picturehouse, Cambridge and Bury residents would have to travel to London to see these films and Aberdeen residents to Edinburgh, none of which are practical options for most customers.
The only two other art house chains are Curzon and Everyman. Curzon has five London cinemas and one in Knutsford in Cheshire and Everyman has nine cinemas, mainly in London and the south but also with one in Leeds. While they do offer some of the above services, they do so at a lesser level than Picturehouses. There are also other true independent cinemas around the country who attempt to offer these services and come closest to the Picturehouse offering.
2. The cost of cinema tickets
The reason for attempting to retain competition is to control prices that cinema customers have to pay. The Commission believe that less competition is likely to lead to a risk of higher prices. They also commissioned independent research as part of their investigation.
However, cinema operators look at a number of factors when setting price, including what people can afford in each area. Consequently, areas with more cinemas don’t necessarily have lower prices, as the cinemas are all judging what customers can afford and setting prices locally.
The multiplex and art house chains also have different considerations on offering incentives and memberships to customers. The multiplex chains offer the following schemes.
- Cineworld offer an Unlimited scheme for £15.90 per month nationally, which allows you to see any film at any non-West End cinema.
- Odeon run a points scheme, where seeing 12 peak time films will earn enough points to see another peak time film. Points can also be redeemed for food and other items.
- Showcase run an Insider scheme which is free to join and offers £5 tickets for Sunday night, Monday and Tuesday.
- Neither Vue nor Empire currently offer membership schemes.
The art house chains also offer memberships for between £33 and £40 a year. While Curzon and Everyman offer customers two free tickets and £1 discounts, Picturehouse have three free tickets and £2 off per ticket.
Additionally, Cineworld and Picturehouse have dispensed with booking fees. Cineworld all other cinemas offer a myCineworld scheme which is free to register and offers 10% off for online booking. All other chains charge between 21p and 75p for online booking or administration charges online.
So even if another chain comes in to either cinema and charges standard ticket prices for the industry or the local market, customers of whoever takes over a Cineworld or Picturehouse will end up paying more. The real issue is why the other operators aren’t doing as much as Cineworld Group to compete on price, yet they are the two cinemas being penalised. While there is no suggestion that cinemas are actively engaging in price fixing, comparisons of local prices suggest that competition is not doing much to drive prices down.
3. The economic effects of competition
The Competition Commission used a calculation called Gross Upward Pricing Pressure Index, or GUPPI, to work out if there was a risk from reduced competition. What the GUPPI attempts to work out is how much profit a cinema would make from raising its prices, and specifically what Cineworld or Picturehouse would make from raising prices in one and then customers going to the other, which would mean Cineworld keeps the profits. The Commission’s calculations state that the GUPPI would be high enough in the three affected areas to give Cineworld Group an incentive to put its prices up, which is why they need to sell a cinema.
Aberdeen and Cambridge have reduced from three cinema operators to two (both also have a Vue) and Bury St Edmunds from two to one, as Cineworld now own both of the cinemas in the area. They have based their calculations on people travelling up to 20 minutes to reach each cinema. However, if you look at similar sized geographical areas across the country to Aberdeen and Cambridge, they only tend to have two cinemas, and areas the size of Bury to have one within that 20 minute radius. So these areas had a higher level of competition than normal, and the merger has simply reduced them to the national average. The only areas that have more cinemas tend to be those with a Picturehouse, which can sustain against the other cinemas because its offering is so different.
The independent research asked people what they would do if the ticket prices went up by 5%. They made the following findings:
- Members of Cineworld or Picturehouse would retain their memberships and would continue to attend the same cinema.
- For non-members at any of the Picturehouses, no more than 3% of customers would go to the Cineworld instead.
- For non-members in Aberdeen’s two Cineworlds, around 7% of customers would have switched to the Picturehouse but over 20% would have gone to the competitor (i.e. Vue) or not gone at all.
- For non-members at Cambridge Cineworld, around 10% of customers would have switched to the Picturehouse but 30% would have gone to the competitor (i.e. Vue) or not gone at all.
- For Bury St. Edmunds Cineworld, around 19% of customers would have switched to the Picturehouse but 4% would have not gone and another 11% would have gone to a competitor, even though all the competitors are more than 20 minutes away.
Increasing prices by 5% would provide a small amount more profit, but the numbers of customers who would take their business elsewhere would be a loss of all of that profit and turnover. Additionally, around 30% of cinema revenue comes from the sale of food and advertising, and Cineworld / Picturehouse would lose out on this as well from the 20% or so of customers who had left them.
No sensible business – especially not one such as Cineworld which is a public listed company and has shareholders to be accountable to – would raise their prices knowing this. The Commission’s own research has demonstrated it would be financially better for Cineworld and Picturehouse to keep their prices in line with other cinemas, rather than raising them, and giving no economic benefit to selling a cinema either.
4. The question of whether or not Cineworld and Picturehouse operate in the same market
The whole reason for the judgement being passed is that the Competition Commission believe Cineworld and Picturehouse are in direct competition. They have received two sets of submissions, arguing for and against this point.
The only people who support the view that these cinemas operate in the same market are Odeon, Vue and Curzon cinemas. They all had contact with the Commission during the investigation, and expressed their view that there is no significant distinction between the two cinemas. Vue currently operate in two of the three areas under review and Odeon and Curzon would be potential purchasers for Cineworld and Picturehouse respectively, so could not be considered impartial. Odeon have also written to the Commission with a list of further concerns, including that they believe the Commission were wrong to find that three further areas – Southampton, Greenwich and Brighton – did not have an SLC and Odeon believe Cineworld should also be required to sell a cinema in those three areas. Odeon currently operate in those three areas.
Arguing that Cineworld and Picturehouses are in separate markets and should not be judged to be in competition are:
- Over 600 members of the public who wrote directly to the Commission to argue against the investigation.
- A petition which has over 14,000 signatories and counting, which includes thousands of comments from customers supporting this view. (The petition and discussion also received support on social media from industry figures including Mark Cousins, Neil Brand, Peter Bradshaw, Karen Krizanovich, Andrew Collins and Sight And Sound magazine.)
- Letters from industry figures at the time of the original investigation, including Lord Puttnam and David Heyman, producer of the Harry Potter films.
- Following the publication of the interim report the British Film Institute also wrote expressing their concerns.
- Local MPs including Julian Huppert and Andrew Lansley have now voiced their concerns in Parliament
All of the letters sent to the Commission have been published and can be found here on the Commission’s website.
Alisdair Smith, the deputy chairman of the Commission and the leader of this panel, also confirmed in an interview with BBC Radio Cambridgeshire that he believed the two Cambridge cinemas would appeal to different prospective buyers, which would also question why the Commission believe them to be in competition.
5. The potential solutions
The Commission, as well as investigating the potential problem, were also required to come up with a solution. There are two types of solutions: structural remedies, which in this case would be the sale of a cinema, or behavioural remedies, such as price controls on the existing cinemas.
All three local councils in the affected areas proposed that they were willing to put such price controls in place. The Commission said that they were not a feasible solution, as they would be complex to design, difficult to enforce and would end up costing the Office Of Fair Trading money, and selling a cinema in each area is simpler. The sale of a cinema is also agreed by each of the parties to be an effective solution: the arguments listed above would seem to suggest that’s not the case.
So at present the only solution the Commission are prepared to accept is a sale of a cinema in each area.
6. Next steps
A group of local concerned individuals, including myself and those connected to Take One magazine, are continuing the fight. Since we believe that there are losses to either cinema being sold in any area, that the proposed solution isn’t necessary on the basis of the Commission’s findings and that that implementing this solution will cause more damage than not implementing it.
We will be writing to both the Department For Business and Vince Cable, and the Department For Culture, Media And Sport and Maria Miller to look to have this finding overturned. We are also investigating the possibility of an appeal to the Competiton Appeal Tribunal. I have also written to nine other MPs whose constituents have signed the petition looking for their support, but parliamentary rules state that MPs can only act on behalf of their own constituents, so we are looking for constituents in those areas – or any area, as up to 10% of customers travel for an hour to get to the cinemas – to also contact their MPs. We are also encouraging people to continue to write to the Commission in the hope that they see sense, but I am not personally expecting them to change their position without outside intervention.
We would still welcome the support of any other individuals or groups that share our belief, and the belief of so many others, that this is wrong, and please e-mail me at firstname.lastname@example.org if you wish to join the campaign or to offer further suggestions on what we can do to overturn this.
I have written today to my local MP and to ten other MPs whose constituencies contain or border the cinemas under threat from the Competition Commission. However, MPs in the UK are only supposed to act on behalf of their own constituents, so those other 10 MPs may not be able to do anything directly to follow up on my letter.
So I am making publicly available the letter that I’ve written. If you intend to contact your MP you have my permission to attach a copy of this letter to your contact.
The letter in full – you may wish to exclude those paragraphs in square brackets:
Dear Member Of Parliament,
[I am writing to you as both a constituent in one of your areas (East Cambridgeshire), but also on behalf of over 13,700 people that recently signed a petition to protest the sale of cinemas that your constituents currently attend, and those 13,700 people include constituents in each of your areas. I will try to summarise the situation as briefly as possible.]
Cineworld Group plc, which runs one of the largest chains of multiplex cinemas in the UK, late last year purchased City Screen Ltd, which among other activities also runs a chain of independent cinemas. After a referral from the Office Of Fair Trading, the Competition Commission published an initial report in August which they confirmed yesterday, instructing Cineworld Group to sell either the Cineworld or Picturehouse in each area. Cineworld Group intend to sell the Picturehouse in Aberdeen and Bury St. Edmunds and are yet to decide which of the Cambridge cinemas to sell.
I believe this decision is wrong for a number of reasons, and that that the research commissioned into the problem is fundamentally flawed.
- There is no evidence, either supplied by the Commission or independently, that competition is effective in setting prices in this industry. Cinema chains set prices at similar levels in geographic areas, with competition seeming to have a much weaker effect than the local cost of living and other factors, and forcing the sale of one cinema will just bring in another cinema with no obligation to charge lower prices, and when considering the other operators in the market a likelihood that prices will increase.
- Typically, a geographic area the size of Aberdeen is capable of sustaining two cinemas, and of Cambridge and Bury St. Edmunds only one, based on the national average. Counting Cineworld’s cinemas as one, there would still be two operators in Aberdeen and Cambridge, and one in Bury St. Edmunds. While competition has lessened, it has only lessened to the national average, when it was above this originally.
- Following the referral, the OFT published a report in June, where they considered that Cineworld and Picturehouse were operating in different markets. Cineworld is a multiplex, whereas Picturehouses follow an independent or arthouse model. The Competition Commission instead found that these cinemas were in direct competition, yet their deputy chairman Alisdair Smith has admitted since the report was published in an interview on BBC Radio Cambridgeshire that they would expect different buyers for the Cineworld or Picturehouse should they be sold, clearly supporting that the markets are different.
- The research was based on a single adult ticket price, and the likelihood of customers to switch cinemas if prices were to increase by 5%. The Commission’s own research showed that 58% of Picturehouse customers are members and receive discounts on every ticket of more than 5%. Additionally, market statistics show that around 1 in 8 tickets purchased from Cineworld cinemas nationally are under some form of membership discount. The myCineworld scheme offers a greater discount – 10% – to anyone booking online with no commitment, and again the research did not consider this. Cineworld is the only multiplex operator to run such schemes.
The Commission claim to have considered customer feedback in compiling their final report, but have not addressed any of these concerns, which were addressed to them directly prior to the publication of the final report.
The two chains in question currently have the best record in the industry of offering discounts to their customers nationally, and in a like for like comparison in any areas where they operate they are offering lower prices than their competitors. Any enforced sale will not just impact prices for consumers.
- The Picturehouse cinemas offer cafe bars where hot meals and alcohol can be purchased and taken into the screens. The findings from the Commission ignored the role these play in attracting customers, who are looking for a different experience to a normal multiplex cinema.
- The cinemas offer a much wider choice of films, typically at least double the number of films per screen per week than a multiplex, and while a proportion of the revenue comes from films shown at both cinemas, the Picturehouses show a wide range of films and live events not regularly offered at the multiplex cinemas.
- The Picturehouses also offer a range of screenings for parents with young children, senior citizens and those on the autism spectrum and their carers. Very few other cinema chains offer these services and none with the frequency of the Picturehouses.
- These cinemas also support a wider cinema culture in the form of trusts and festivals that take place year round, and are also capable of a wider range of projection – the Cambridge Arts Picturehouse being one of the few cinemas in the country that can still show 70mm films, and they are reliant on existing expertise. Without a Picturehouse, Cambridge and Bury residents would have to travel to London to see these films and Aberdeen residents to Edinburgh, none of which are practical options for most.
Any enforced sale of these cinemas will result in higher prices for your constituents, a loss of the ancillary services and a significant reduction in choice. A comparison to any of the current operators in either market shows that each charges the same or higher for tickets with less discounts, offers less choice in their programming and doesn’t support the ancillary services to the same extent. The sale of these to an independent operator without the resources of a chain behind it could see the cinemas quickly fold; the Bury St Edmunds cinema was in trouble prior to the Picturehouse takeover, and Aberdeen’s Picturehouse is being subsidised by the local council after also running into difficulties, and without the resources of an operator such as City Screen they may soon be back in a similar position.
Before the Commission published its final report, the local council in each area proposed to put in place behavioural remedies, where they would put some measure of price controls on the existing cinemas. Two of the councils gave detailed proposals and had run similar controls previously. The Commission dismissed these proposals on the grounds that they would not increase competition – when the sole purpose of increasing competition is to attempt to restrict prices – and that the OFT would have incurred costs in supporting such schemes. Instead, these costs will be passed directly to your constituents in the form of higher ticket prices.
I would urge you to take the appropriate steps to set aside or overturn the findings of the Commission, on the basis that:
- All of the research showed a clear differentiation in the market between arthouse / independent and multiplex cinemas, which if considered would have negated the findings.
- The findings were based on a flawed assumption of a single ticket price and incorrectly excluded membership schemes. The surveys on which they based their findings excluded these and are therefore fatally flawed.
- There is still a level of competition at least at the national average in these areas following the takeover, so there is no requirement to increase competition further in these areas.
Failing that, I would ask that the behavioural remedies proposed by the local councils be re-examined as these appear to be a better option for your constituents than the structural remedies proposed of selling cinemas.
[I enclosed links to my more detailed research and to other material on the situation, and I would be happy to provide further clarification on anything here:
I will be advising those who signed the petition to contact you for your support, and I would expect you all to hear from them in due course, if you haven’t already.
Cambridge – Julian Huppert: email@example.com
Huntingdon – Jonathan Djangoly: firstname.lastname@example.org
North East Cambridgeshire – Stephen Barclay: email@example.com
North West Cambridgeshire – Shailesh Vara: firstname.lastname@example.org
South Cambridgeshire – Andrew Lansley: email@example.com
South East Cambridgeshire – James Paice: firstname.lastname@example.org
West Suffolk – Matthew Hancock: email@example.com
Bury St. Edmunds – David Ruffley: firstname.lastname@example.org
Anne Begg: email@example.com
Malcolm Bruce: firstname.lastname@example.org
Frank Doran: email@example.com
In the three and a half years I’ve been blogging, that may be the most serious blog title I’ve ever written. But suddenly we are living in serious times, with a threat to the cinematic options of thousands of people being presented today by the initial findings of a Competition Commission investigation into the purchase by Cineworld Group plc last year of City Screen Limited, the group which operates the Picturehouse chain across the UK.
I believe I stand a chance of being the single individual to be most affected by this decision, but I would be far from the only person to suffer if these changes are forced through. Since I moved to the area in 2007, I have made around 750 trips to the cinema, of which over three quarters have been to four local cinemas. I live twenty-five minutes from Bury St. Edmunds, where I am a regular at both the Cineworld and the Abbeygate Picturehouse, and thirty minutes in the other direction is Cambridge, where I occasionally visit the Vue cinema, but more regularly the Cineworld and the Arts Picturehouse. Today the Competition Commission announced their initial findings into an investigation they started in April, and their recommendation to prevent the adverse effects that could be created by the merger is to sell off one of the two cinema chains in three affected towns and cities: Aberdeen, Cambridge and Bury St. Edmunds. That means that either the Picturehouse or the Cineworld would be no more in those three areas.
Reading the documentation is a strange descent into legalese, which I would presume most people (myself included) would only encounter in the event of a house purchase or making a will. The key paragraph from the initial findings is this:
“…the creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition (SLC) in the market for cinema exhibition services in the Aberdeen, Bury St Edmunds and Cambridge areas.”
So there is no requirement on the commission to prove an SLC, just that one may occur. This seems oddly arbitrary, but I’m not here to question the workings of the process. The Commission is, in case you weren’t aware (taken from their own website):
“…an independent public body which helps to ensure healthy competition between companies in the UK for the ultimate benefit of consumers and the economy. It conducts in-depth investigations into mergers and markets and also has certain functions with regard to the major regulated industries.”
I am happy to trust implicitly that the commission is not politically motivated, but my instincts are telling me that I cannot see who is well served by the prospects of the sale of these cinemas. From a personal perspective, either would be catastrophic. I have a membership with Cineworld which gives me free tickets and discounted concessions, and an average travel time to my two nearest cinemas of 27 minutes. If the Cineworlds were sold off, then my nearest two venues become Huntingdon (40 minutes) and Haverhill (50 minutes), increasing my journey times by 60%. I see an average of eight films a month at Cineworld and simply couldn’t afford to do that without Cineworld’s Unlimited scheme – no other chain or independent operates a similar scheme. For the Picturehouses, my nearest alternatives would be Norwich, Hackney or Stratford (all over an hour away), and suddenly independent cinema would be reduced from four films a month to probably one a quarter.
But I would be the first to admit that I am not at the centre of the bell curve in terms of cinema attendance, instead very much in the top quintile (possibly the top percentile). So in an effort to understand the fairness and implications of the Commission’s decision, I’ve looked at a number of key areas for a more average cinema attendance to see if their findings stack up. (I’m leaving out Aberdeen from my comparison as it’s not local to me, but many of these points may also apply.)
The first point I’d like to consider is what constitutes sufficient competition. If you look at the definition within the findings, the Commission has considered an area thus:
“For the geographic market definition, we established the boundaries of the markets based on 20-minute isochrones around the parties’ cinemas, but we recognized the need to apply this rule flexibly when assessing competition in specific local areas.”
Or in other words, it considers a twenty minute journey to be the reasonable upper limit for times to reach each cinema for these purposes.
I’ve compared Cambridge with a number of similar sized areas. If you consider the urban areas defined in the 2011 UK census, then of the nine others most similar in size to Cambridge, only three other built up areas have more than one cinema. Oxford is particularly blessed, having three other major cinemas in addition to its Picturehouse, but the median average of this sample is 1. Since the average cinema for this sort of area is 1, it seems likely that the average population of areas of similar size to Cambridge can typically only support one cinema, unless there is some other factor in the diversity of those cinemas. (Since Bury St. Edmunds has a population of only c. 35,000, it clearly falls into the same category, so can be considered fortunate to retain two cinemas at present.)
In this table, Burnley is a slight oddity in that a cinema in another town is just within geographic reach. However, in the other three cases, those areas of similar size that can sustain an additional cinema – York, Oxford and Cambridge – all count a Picturehouse as one of their cinemas. These were all Picturehouses well established prior to the purchase of City Screen limited, suggesting a public demand for what the Picturehouse cinemas have to offer.
When considering the services offered by City Screen Limited, the Commission also considered the distribution services offered by the company. With reference to this point, they observed:
“…we found that Picturehouse’s programming services are advisory and customers typically make the ultimate programming decisions.”
This would seem to support that, in these areas, customers are seeking the offerings made by the cinemas, and that in areas that can support more than a single cinema that is only possibly because customers are seeking a more diverse offering.
Consumer choice and the question of direct competition
If you compare the programming lists for a ten day period at both Cineworld and Picturehouse in Cambridge and Bury St. Edmunds, that diversity shows through very clearly:
In that 10 day period (Tuesday 20th – Thursday 30th August 2013), both Cineworlds are showing 22 different films. Only 9% of those films are also showing at the Picturehouse in Cambridge, and although the Bury figure is higher, it’s only 18%. These are clearly two different cinemas offering to two different demographics, and these programming choices are being dictated by consumers. There are a couple of films showing at the Cambridge Arts Picturehouse that previously ran at the corresponding Cineworld, but this would just demonstrate the advantage of two cinemas allowing a longer run for films that appeal to a particular audience. If one or other chain were forced to pull out of this area, then the variety would be significantly diminished and consumer choice reduced.
Which makes it difficult to understand how these cinemas can be seen to be in competition. This is all the more baffling in light of two statements in the Commission’s findings. Firstly, this set of comments:
“Cinemas are of various sizes, and a distinction is generally made by the industry between multiplexes (which have more than five screens) and other cinemas.”
So the commission recognises that the industry itself differentiates at a basic level between the kind of cinemas represented by Cineworld and its direct competitors, and that of the Picturehouse chain. The Arts Picturehouse has three screens and the Abbeygate two, so there is a clear divide between the two arms of the new business. The statement continues:
“Operators of multiplexes tend to focus on showing mainstream films and to offer a largely undifferentiated service… Operators of smaller cinemas, which are generally located in town and city centres, may differentiate themselves from multiplex operators not only through the location of their cinemas and the mix of films they show (which will generally include both mainstream and specialized films), but also through the ancillary services and general ambience their cinemas offer to their customers.”
So there is a recognition here that not only do the Picturehouse cinemas offer a different cinematic experience to that of the standard multiplex, but also a different cultural experience. Both Picturehouses have a bar, offering hot and cold food and a selection of alcoholic beverages which can be taken into screenings.
However, having clearly established this differentiation in market and offering, the Commission inexplicaby – as in no explanation for this decision is given in the document – then decides to disregard its own differentiation in coming to a decision.
“We defined the relevant product market as the market for the provision of cinema exhibition services, and we saw no reason to include within the definition of the relevant product market other leisure activities and/or food and beverages.”
I have attended eleven Cineworlds and four Picturehouses in the last two years, and while a few Cineworlds offer an on-site bar, they typically don’t then allow alcohol or other foodstuffs purchased outside of the concessions stands to be taken into screenings. What I can testify to is that in general, a Cineworld is very comparable in terms of exhibition and concessions to the other major chains (Odeon, Vue, Showcase, Empire and Reel, as I have attended cinemas in all of their chains in the past three years), whereas the Picturehouse is a markedly different experience. No reasonable definition of what the cinemas are offering can disassociate the wider experience from the exhibition, and I would urge the Commission to reconsider this point. Visiting the cinemas themselves may offer additional insight into this point, if they have not yet done so (and no indication is given that they have).
The only other differentiation that I can find that relates to the findings is that where most multiplexes are defined as out of town, the three Cineworlds in question – Aberdeen, Cambridge and Bury St. Edmunds – are all effectively in town and within walking distance of their competition. The Commission gives no direct indication that this has been a factor in their decision.
The effect of a potential purchase and competitive pricing
Within the Commission’s findings, there is one key paragraph that outlines the potential impact of an SLC (substantial lessening of competition) that the decision to recommend a sale of cinemas seems to hinge on, having ruled out any possible impacts from planned expansion of either chain or from City Screen Limited’s distribution role:
“…may be expected to result in a substantial lessening of competition (SLC) in the markets for cinema exhibition services in the Aberdeen, Bury St Edmunds and Cambridge areas, leading to adverse effects, for example in the form of higher ticket prices than would be the case absent the merger.”
According to the BFI Statistical Yearbook 2011, in that year 62% of the UK population visited the cinema at least once a year, and 19% at least once a month. Let’s now consider the potential effect of a sale on the pricing for the cinemas in question for these two groups of people.
Firstly, let’s consider the financial the group that visits once a year or more. That group is making irregular purchases, so is most likely to notice the effect of a change in a single price ticket. Let’s firstly compare the prices of a ticket for the main cinemas in both Cambridge and Bury St. Edmumds. The price shown is that for a single adult ticket purchased on arrival at the cinema for a showing this coming Friday evening (23rd August 2013) – it should be noted that all three chains offer concessions and have a day with reduced ticket prices for all customers, and there are similar differentials in price for those options.
So if you compare the standard price ticket at Cineworld to that of the area’s main competitor, Vue, then the prices are favourable, and the Picturehouse seats are cheaper than a standard ticket at the Vue in Cambridge, even though I would argue that it’s not a direct comparison due to the programming point made earlier (the Vue is also showing 22 films in the ten day period, all of which are showing at one of its competitors with the exception of a single afternoon screening for seniors).
There is an even more marked difference if you compare the prices for tickets purchased online. Cineworld offer a national scheme called myCineworld, which is free and has no commitment to the number tickets purchased, and offers a 10% reduction and no booking fee. The Picturehouse chain also do not charge a booking fee in any of their cinemas for tickets purchased online, but Vue charge a 75p online booking fee. So the online comparison becomes:
So while the cinemas under threat are currently undercutting their direct competitor in the Cambridge market, the argument made by the Commission is that the market conditions and the reduction of competition will drive higher prices. At face value, there may appear to be some weight to that argument, if you compare the prices of these two Cineworlds to other cinemas in the chain within a reasonable distance.
However, the Commission is proposing that the lack of competition will drive prices up, and in each of those other areas there is no competition, the Cineworld being the only cinema in the area. This would seem to argue against that effect.
Next, let’s consider the East Anglian cousin of Cambridge and Bury St. Edmunds, Norwich. There are four cinemas in Norwich, all of which are in the city centre and would fall within the conditions that the Commission have laid out. The Picturehouse here has similar programming to Cambridge and Bury, while the other three are all offering standard multiplex fare. The Friday night price for each of these is as follows.
There is a key observation to be made from these prices. Although the Vue seat here is cheaper than its comparable seat in Cambridge, the most expensive seat in the area is the same price range as a higher priced seat in Cambridge or Bury. Additionally, a significantly cheaper competitor in the form of the Hollywood appears to be having no effect in driving prices down in the others.
This would suggest that forces other than local competition are having an effect on price. One other possible reason for the higher prices in Cambridge (and by extension Bury St. Edmunds, which is only 35 minutes away by car) is the cost of living in the area. In this 2012 survey on house prices in the UK, Cambridge is shown to be the sixth most expensive in the UK. I would propose that the higher cost of living in the area is also having an effect on ticket prices. I would like to see what research the Commission has done into investigating or eliminating other factors in terms of the setting of ticket prices in these cinemas.
Finally on the single ticket, we must consider the alternatives. Three other major chains operate in the south of England: Odeon, Showcase and Empire. Presuming that there would be no advantage to Vue purchasing one of the Cambridge cinemas, compare the prices of the nearest geographical cinemas in each of the other chains. It should be noted that, in each case, the cinema is the only one within a geographical area of the size stipulated by the commission.
Again, there is a wide variety of prices here, with no guarantee on this evidence that if one of these chains took over a cinema in question that it would cause the local market to become more competitive.
When all things are considered, the price range across all of these tickets is between £7 and £10. I would also like to see evidence from the Commission that those attending the cinema infrequently would be likely to be swayed in their decision by such small price differentials, as such differences may become negligible when factoring in other costs of attending the cinema such as the concessions, travel and parking.
The second consideration is for those attending the cinema more regularly. Two chains in the UK offer national membership schemes for their patrons which offer significant discounts for members, both valid at any cinemas outside of the West End for the rate that would be paid in Cambridge or Bury St. Edmunds. The Cineworld scheme costs £15.90 per month and entitles the holder to attend an unlimited number of screenings, while the Picturehouse charges an annual fee of £35, offers three complementary tickets and then reductions of typically £2 per screening on any further tickets bought. Both chains also offer money off concessions; Cineworld discounts include 25% off for members staying longer than 12 months, and Picturehouse’s 10% discount applies to all bar purchases, including food and alcohol.
The BFI survey indicated that 19%, or around a third of all people who attend the cinema, attend at least once a month. So let’s compare the costs of attending two or three weekend screenings per month across each of the major chains, including the cost of purchasing any memberships.
At two showings per month, the Cineworld and Picturehouse chains are cheaper than anyone except the Empire, who are only £10 cheaper per year. Once the figure rises to three, then the Cineworld becomes the cheapest option, and with no restrictions on further attendances.
I believe, in the light of this, there are a number of questions that need to be answered before further action is taken.
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?
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?
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?
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?
You can find a copy of all of the commission’s initial findings here. If you feel strongly about this, I would urge you to make your feelings known, both to the Commission at firstname.lastname@example.org before September 10th and to your local MP, Julian Huppert for Cambridge and David Ruffley for Bury St. Edmunds. Thank you for listening.