Competition Bureau Statement Regarding the Proposed Acquisition of Alliance Films Holdings Inc. by Entertainment One Ltd.

OTTAWA, January 3, 2013 — This statement summarizes the approach taken by the Competition Bureau in its review of the proposed acquisition of Alliance Films Holdings Inc. (Alliance) by Entertainment One Ltd. (eOne).

The Bureau today issued a No Action Letter (NAL) to eOne and Alliance indicating that the Commissioner of Competition does not, at this time, intend to make an application under section 92 of the Competition Act in respect of the proposed acquisition.Footnote 1

The Bureau found that eOne and Alliance were significant competitors for the distribution of films in Canada and that they hold substantial market share in the distribution of Canadian films. Additionally, the Bureau concluded that the distribution of Canadian films constitutes a distinct product market as a result of various government cultural initiatives and funding programs dedicated to developing and promoting a domestic film industry. However, the Bureau found that the policies in place affecting the promotion and distribution of Canadian films would make it unlikely that a substantial lessening or prevention of competition for the distribution of Canadian films would result from the proposed acquisition. Further, the Bureau found that for the distribution of non-Canadian films, a substantial lessening or prevention of competition was unlikely due to effective competition remaining in the market.

In the course of this review, the Bureau conducted over 50 interviews with market participants, including film producers, competing distributors, cinemas, broadcasters, film retailers and government agencies.

Background:

On September 7, 2012, eOne and Alliance entered into an agreement whereby eOne would purchase all of the outstanding shares of Alliance. Both eOne and Alliance are Canadian film entertainment companies distributing motion pictures in Canada and internationally.

The film entertainment industry broadly consists of three types of activities: production (the creation of content), distribution (the marketing of films for the purposes of revenue generation), and exhibition (the retailing of films to final consumers). The Bureau focused its review on film distribution where eOne and Alliance are both meaningful competitors.

Distributors compete for the exclusive right to distribute a film. They do this by making offers to film producers. The offers typically include two parts: an upfront financial commitment, referred to as a “minimum guarantee”, and a commission on all revenues generated by the film, referred to as the “distribution fee”.

While there is significant demand among Canadians for films, over 97% of box office revenues generated in Canada are from non-Canadian productions. Even in Canada’s French-language market, where there is more demand for Canadian films, approximately 87% of box office revenues are derived from non-Canadian productions. The Hollywood studios that distribute in Canada include: Walt Disney Studios, Paramount Pictures, Sony Pictures Entertainment, Twentieth Century Fox, Universal and Warner Brothers.  These studios account for the vast majority of box office revenues. As such, eOne and Alliance face vigorous competition for the distribution of non-Canadian films. Therefore, the main focus of the Bureau’s review was on the distribution of Canadian films.

The Bureau concluded that the distribution of Canadian films constitutes a distinct product market as a result of various government cultural initiatives and funding programs dedicated to developing and promoting a domestic film industry. In order to be eligible for the government funding available for Canadian productions, which can comprise the majority of the total funding for a production, a film producer must use a Canadian distributor. This requirement restricts competition for the distribution of Canadian films to Canadian distributors.

The Canadian films distributed by eOne and Alliance account for the vast majority of the revenues generated by Canadian films. The degree of effective remaining competition varies depending on the budget level of the film. For low to mid budget Canadian films, there are smaller distribution companies that effectively compete. With respect to higher budget Canadian films, the Bureau found that eOne and Alliance face limited competition as there are currently very few competitors capable of offering the minimum guarantee required to trigger government funding for these films. The Bureau was therefore initially concerned that the merged entity would be in a position to implement more restrictive distribution terms to producers by increasing distribution fees and/or reducing the minimum guarantee.

However, as a result of its examination, the Bureau determined that the merged entity will likely be constrained in its ability to implement more restrictive distribution terms due to the role of government funding programs. To trigger funding, the distributor is generally required to commit a material upfront minimum guarantee to the producer as evidence that the distributor is committed to the film’s success. Furthermore, distribution fees are typically standard and are effectively capped by funding requirements. Together, the Bureau considered that these requirements will significantly constrain the ability of the merged entity to reduce the minimum guarantee or increase distribution fees.

The Bureau also assessed the potential impact on filmgoers of a possible reduction in the number of Canadian films distributed post-acquisition. The Bureau considered that the merged entity might distribute slightly fewer Canadian films than the total currently distributed by eOne and Alliance. However, there are certain smaller Canadian distributors who see the proposed acquisition as an opportunity to expand and distribute more films. As such, the Bureau is of the view that if the merged entity chooses to distribute fewer Canadian films, it will likely create an opening in the market for these smaller distributors who are looking to expand.  Furthermore, in light of the very low volume of sales associated with some films, the Bureau has concluded that any associated anti‑competitive effects from the proposed acquisition would likely be very small, particularly relative to the efficiencies that are likely to result from the proposed acquisition.

The Competition Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace.

This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.

However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case-by-case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.


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