Developments in the cinema distribution and exhibition industry Report to the Australian Competition and Consumer Commission by Ross Jones March 1998 ii Contents Summary .........................................................................................................................v Exhibition industry structure ............................................................................................v Distribution market structure...........................................................................................vi Distributor conduct.........................................................................................................vii Recommendations ...........................................................................................................ix 1. Introduction .............................................................................................................1 2. Industry structure ...................................................................................................3 Market size .......................................................................................................................3 Market definition..............................................................................................................3 Ancillary markets .............................................................................................................5 Changes in demand and supply over time........................................................................5 Exhibition market structure..............................................................................................7 Distribution market structure..........................................................................................10 Overall performance.......................................................................................................15 3. Distribution behaviour..........................................................................................16 Film rental fees...............................................................................................................16 Minimum exhibition periods..........................................................................................20 Exclusivity and refusal to supply....................................................................................22 Joint ventures and market power — distributors............................................................25 UIP behaviour.................................................................................................................27 Roadshow behaviour ......................................................................................................28 Twentieth Century Fox behaviour..................................................................................30 Columbia TriStar behaviour...........................................................................................31 Independent distributors .................................................................................................32 Distributor behaviour and the Trade Practices Act ........................................................33 4. Changes in exhibition and impact on competition .............................................34 Suburban expansion .......................................................................................................34 Independents’ pricing behaviour ....................................................................................36 Expansion of non major exhibitors ................................................................................37 Excess capacity...............................................................................................................39 Major exhibitors — Hoyts..............................................................................................40 Major exhibitors — Greater Union ................................................................................41 Major exhibitors — Village............................................................................................42 5. The UK experience................................................................................................43 Conditions of supply.......................................................................................................43 Policy effects ..................................................................................................................44 iii 6. Conclusions and recommendations .....................................................................46 ‘No share’ and minimum seasons...................................................................................46 Misuse of market power: s. 46 issues............................................................................48 Effects of screen use restrictions ....................................................................................50 Guaranteed print access..................................................................................................52 A more flexible model....................................................................................................52 Conciliation and dispute solving ....................................................................................54 Compliance.....................................................................................................................54 Country locations............................................................................................................56 Conclusion......................................................................................................................57 iv Summary In March 1997 the Australian Competition and Consumer Commission (ACCC) requested a report on the developments in the cinema distribution and exhibition industries which may be having an impact on competition in the industry. The request followed a substantial increase in the number of complaints received by the ACCC from cinema exhibition interests. These complaints related largely to access to first release and conditions of film hire imposed by film distributors on small exhibitors. Exhibition industry structure The Australian cinema exhibition industry is dominated by three large companies, Hoyts, Greater Union and Village. These three groups and their subsidiaries control around 50 per cent of Australia’s cinema screens and generate around 70 per cent of total box office revenue. The Australian exhibition sector is undergoing a major expansion with rapid growth in the number of screens and continued strong growth in attendances. Box office revenues grew from less then $300 million in 1990 to in excess of $500 million by 1996. Admissions increased over the same period from 43 million to 74 million. The substantial growth in demand appears to be linked to the expansion in the number of screens. Between 1985 and 1995 the number of screens increased from 742 to 1137 and screens per million population increased from 44 to 64. This screen rate per million population compares to 106 per million in the USA leading many exhibitors and other industry participants to claim that there are still opportunities for further expansion. Between 1985 and 1995 annual cinema admissions per head increased from 1.9 to 3.9 in Australia. In the USA admissions per head have stabilised at around 5 per year, perhaps suggesting that admissions may continue to increase in Australia. Much of the expansion in exhibition has come from the establishment of multiplex and, more recently, megaplex cinemas in the suburbs of major cities. For the purposes of this report, a multiplex is considered to be a cinema complex containing six or more screens and a megaplex as a site containing 16 or more screens. Since 1988 suburban box office shares have increased from 30 per cent to 52 per cent of total Australian box office revenue. Much of this revenue growth has come from the establishment of multiplex suburban cinemas, usually owned by the major exhibitors. Until the establishment of the multiplex sites, suburban cinemas were largely operated by small privately owned groups. The major exhibitors tended to concentrate their interests in the central business districts (CBDs) of the major cities. The move by the major exhibitors back into suburban exhibition after abandoning the suburbs in the 1960s and 1970 has led to a substantial increase in competition in suburban markets. v The major exhibitors, Hoyts, Greater Union and Village dominate CBD exhibition. Apart from the Wallis group in Adelaide (in which Greater Union has some site ownership interests), the major exhibitors control almost every CBD screen in the State capitals. In the suburbs of the major cities the majors also have a significant market presence. In Sydney and Melbourne the major exhibitors have a suburban market share in excess of 75 per cent. The dominance of the three major exhibitors is greater than the market share statistics would indicate. Competition between the majors is significantly reduced by an arrangement between two of the three leading exhibitors. Greater Union and Village have established a joint venture to operate suburban multiplex cinemas, effectively reducing the competition between the major exhibitors. The Greater Union/Village joint venture (with a third partner, the US based Warner Bros film company) eliminates any potential competition between these two exhibition groups. Greater Union’s