Archived — Acquisition of Famous Players by Cineplex Galaxy

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Technical Backgrounder

July 2005


This technical backgrounder is intended to summarize the main findings of the Competition Bureau’s review of the acquisition of the Famous Players Division of Viacom Canada Inc. (“Famous Players”) by Cineplex Galaxy Limited Partnership (“Cineplex Galaxy”).

Readers are advised to exercise caution in interpreting the Competition Bureau’s assessment of this transaction. Enforcement decisions are made on a case-by-case basis and the conclusions discussed in this backgrounder are specific to this merger and are not binding on the Commissioner in any future matters.  The legal requirements of section 29 of the Competition Act and the Bureau's policies and practices regarding the treatment of confidential information limit its ability to disclose certain information obtained during the course of a merger review.  Readers should also bear in mind that portions of the Consent Agreement entered into by Cineplex Galaxy and the Commissioner of Competition are confidential with the result that certain details cannot be discussed in this backgrounder.

In late 2004, Cineplex Galaxy contacted the Bureau regarding its interest in acquiring Famous Players.  As a result, the Bureau conducted an extensive merger review to determine the competitive effects of the proposed transactionFootnote 1. The transaction was classified as "very complex" under the Bureau’s service standards.  In conducting its inquiry, the Bureau gathered information from a number of sources including the parties to the transaction, the major Hollywood and Canadian film distributors, other exhibitors, and foreign antitrust authorities who have had recent experience in this industry.  Economic and industry experts were also retained.

As a result of this inquiry, the Bureau concluded that a merger of Cineplex Galaxy and Famous Players was likely to result in a substantial lessening of competition in the exhibition of first-run motion pictures in a number of urban areas.  In order to resolve these concerns, the Bureau entered into negotiations with Cineplex Galaxy regarding  the divestiture of theatres in all of the affected areas with a view to ensuring that the contemplated transaction would not result in a substantial lessening or prevention of competition.  On May 27, 2005, the Commissioner of Competition and Cineplex Galaxy entered into a Consent Agreement pursuant to section 105 of the Competition Act.  It requires Cineplex Galaxy to sell 35 theatres in 17 cities with total annual box-office revenues of about $100 million. The divestiture package includes a mix of stadium and sloped theatresFootnote 2. On June 13, 2005, Cineplex Galaxy announced that it had reached an agreement to purchase Famous Players.  The Consent Agreement was registered with the Tribunal the same day.

The Parties

Prior to the transaction, Famous Players was the leading Canadian film exhibitor, based on box-office revenues, and operated under the following brands: Coliseum, Colossus, Famous Players, Paramount and SilverCity.  Famous Players operated a circuit of 77 movie theatres with 768 screens located in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Quebec.

Cineplex Galaxy was the country’s second largest film exhibitor and operated its circuit of 86 theatres with 775 screens under the Cineplex Odeon and Galaxy brands in the same six provinces as Famous Players.

Product Market

The Bureau determined that the theatrical exhibition of first-run motion pictures constituted the relevant product market at two levels of the industry.  At the upstream level, movie exhibitors compete with each other, most notably, for the licensing of films for exhibition. Distributors license each first-run motion picture on a theatre by theatre basis.  At the downstream level, exhibitors compete to attract patrons to their theatres.

In regard to the downstream level, careful consideration was given to the ability of consumers to view movies on digital video discs (DVDs), pay-per-view or video-on-demand, amongst other entertainment options.  Notwithstanding these options, most first-run motion pictures continue to be released in cinemas first. Moreover, studios/distributors control the time lag between the release of a first-run motion picture in theatres and when it is made available in video stores or on television. This is done so as to minimize demand substitution between the theatre exhibition and the video sales or rental.

There is also an important ambience component in the viewing of films in cinemas as a result of the audio/visual quality of the equipment in place.  The advent of larger multi-screen complexes with “stadium seating” and superior audio/visual quality has served to further differentiate the theatre exhibition market from the home viewing experience.

In addition, the Bureau found clear evidence that competing movie exhibitors monitor each other’s pricing and may adjust their admission prices to respond to competition.  There was no compelling evidence that exhibitors, for example, take DVD prices or rental fees into account in setting admission prices.  Accordingly, while recognizing the evolving market and advances in technology, the Bureau didn’t consider DVDs or other media to be a disciplining factor and the theatrical exhibition of first-run motion pictures was found to constitute the relevant product market.  Antitrust authorities in the U.S., the U.K. and Sweden have recently reached similar conclusions on product market definition.

Geographic Market

At the upstream level, motion picture distributors have established “zones” for the purpose of licensing their movies to theatres. These zones may range in size from several city blocks to several square kilometers depending primarily on population density and demographics, as well as other factors such as transportation access.  Zones in which only one theatre is located are referred to as ‘free zones’ and these theatres generally have access to all movies available from distributors.  Where there are two or more theatres located in the same zone, this is referred to as a “competitive zone”. The practice is for distributors to generally license each new release to only one theatre in a competitive zoneFootnote 3.

Downstream competition for movie patrons takes place at the local level with respect to price, film and facilities.  However, the Bureau concluded that a ‘zone’ was too narrow a definition of the relevant geographic market, as consumers will travel across zones to access a particular movie, influenced by factors such as theatre quality and admission prices.  As a consequence, the Bureau concluded that relevant geographic markets are local.  Urban areas were generally regarded as relevant geographic markets for the purpose of the Bureau’s analysisFootnote 4.

Barriers to Entry

While there has been some entry and expansion by competitors, particularly in Ontario and Quebec in recent years, the Bureau identified three barriers to entry into the motion picture exhibition industry.  The first and most significant is access to commercially high value motion pictures.  Given the distribution policies of the major studios and distributors, a new entrant cannot be assured in advance of entry that it will obtain access to commercially valuable motion pictures.  This will depend primarily on the location of the theatre and the willingness of distributors to treat it as a free zone versus a competitive zone for film licensing.  This risk and uncertainty over access to film can affect investment and financing decisions.  A related concern raised by some stakeholders was that the merged entity could potentially leverage distributors to gain favorable access to the top grossing film releases in competitive zones.  This would deny competing exhibitors access to the most profitable releases in these competitive zones.

The second barrier to entry is the acquisition of a suitable site or location for a movie theatre.  Locating and securing free zones within a local urban market has become increasingly difficult, in part due to the significant build-out of new stadium theatres initiated in 1997.

The third barrier is the sunk costs and risks incurred for the construction of a specialized single purpose building.  The vast majority of new theatres being built are stadium-seating complexes which are single-purpose buildings representing significant sunk costs.

Remaining Competition

The merged entity would be clearly dominant in the six provinces in which Cineplex Galaxy and Famous Players competed.  However, as indicated, competition in this industry occurs at a local level.  In 17 overlap areas where the Bureau identified a concern, the merged entity would have had 100% market shares in seven of them and near monopolies in five others.

In Montreal, Cinémas Guzzo has become a significant local competitor.  AMC has a competitive presence in Montreal, Ottawa and TorontoFootnote 5. Outside of these areas, the merged entity would have faced limited competition from smaller local or regional players, or no competition at allFootnote 6.

Assessment and Remedies

The Bureau examined the full competitive impact of the merger in each of the cities where Famous Players and Cineplex Galaxy competed.

The Bureau determined that the transaction would likely reduce competition substantially in 17 overlap areas in regard to both price and non-price factors (such as theatre quality, film choice and innovation). To resolve these concerns, the Bureau required the divestiture of 35 theatres in the following cities: Victoria, Vancouver, Calgary, Edmonton, Lethbridge, Saskatoon, Winnipeg, London, St. Catharines, Kitchener, Hamilton, Kingston, Ottawa, Toronto, Gatineau, Montreal and Quebec City.  The locations to be divested, which include a number of modern stadium-style theatres, have box-office revenues of about $100 million.

In considering the cities in which divestitures would be required, the Bureau examined a number of factors including pre- and post-merger market shares, theatre locations, the quality and style of theatres and remaining competition (including recent or pending entry)Footnote 7.

As a general rule, the Bureau sought to reduce the merged entity’s market share to approximate the pre-merger market share of the larger of Cineplex or Famous Players in each city.  In a limited number of instances, this was not achieved given particular market circumstances such as the proximity of theatres and differences in theatre attributes, including sloped versus stadium seating.  With respect to the possibility that the merged entity could use its multipoint purchasing power to gain preferential access to commercially valuable motion pictures, the divestitures reduce its ability to do so.

In regard to licensing of film from distributors to exhibitors, the vast majority of Cineplex Galaxy and Famous Players theatres are located in free zones where they do not compete for filmFootnote 8.  The divestitures required to address the Bureau’s downstream concerns include theatres in all of the competitive zones in which Cineplex Galaxy and Famous Players operate theatres.

Implementation of the Remedy

The Consent Agreement between the Commissioner of Competition and Cineplex Galaxy has been filed and registered with the Competition Tribunal pursuant to section 105 of the Competition Act.  It provides that if Cineplex Galaxy is unable to divest the 35 theatres, a trustee will be appointed to complete the sales process.  An independent manager will be  appointed to oversee pricing and film booking for the theatres to be divested during the divestiture process.

Conclusion

The Bureau is satisfied that with the implementation of the divestitures required by the Consent Agreement, the transaction is unlikely to result in a substantial lessening or prevention of competition.

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