Competition Bureau statement regarding the sale of Empire’s Movie Theatres to Cineplex and Landmark

OTTAWA, October 29, 2013 — This statement summarizes the approach taken by the Competition Bureau (the Bureau) in its review of the sale of Empire Theatres Limited (Empire) movie theatres to Cineplex Inc. (Cineplex) and Landmark Cinemas (Landmark).

Background

On June 27, 2013, Empire announced that it had reached an agreement with Cineplex for the sale of 24 of Empire’s theatres in Atlantic Canada, as well as two theatres in Whitby and Kanata, Ontario. At the same time, Empire announced that it had reached a separate agreement with Landmark for the sale of its other 20 theatres in various other cities in Ontario and Western Canada.

Following a three-month review, the Bureau determined that the proposed acquisition by Cineplex of the Empire theatres in Whitby and Kanata would likely lead to a substantial lessening of competition in the relevant markets. After the Bureau advised Cineplex and Empire of its concerns, the parties revised their transactions such that the two Ontario theatres were removed from Empire’s transaction with Cineplex and added to the list of theatres to be acquired by Landmark. Subsequently, Cineplex and Landmark were granted No-Action Letters (NALs) for their revised transactions on October 10, 2013 and October 22, 2013, respectively.

Product market:

The Bureau determined that the relevant product market in which to assess the proposed transactions was the theatrical exhibition of first-run commercial movies.Footnote 1 This definition was consistent with previous Bureau reviews in the industry, as well as recent reviews by competition authorities in other jurisdictions. In making this determination, the Bureau considered, among other things, the following:

  • Evidence from the parties’ documents, which demonstrated that movie-going remains a popular, affordable and unique form of entertainment for consumers, despite improvements in home-entertainment systems and advances in video-on-demand and other methods of delivery for filmed entertainment.
  • Evidence from consumer surveys conducted by the parties, which demonstrated that customers go to the movie theatre to:
    1. see a particular movie soon after its release; and
    2. see it on the big screen with the amenities and viewing experience that a movie theatre provides.
  • Because first-run movies are shown exclusively in movie theatres, typically for several months following initial release, movie-goers wishing to view a particular movie through alternative means would need to wait for a period of time, in addition to foregoing an in-theatre experience that they value.

The Bureau considered that these factors impose switching costs that limit the extent to which movie-goers would substitute away from theatres in the event of a small but significant non-transitory increase in price.Footnote 2

Geographic market

The Bureau considered that the relevant geographic markets were relatively local and based largely on a customer’s willingness to drive to nearby theatres. In considering the relevant geographic market, the Bureau also considered the distances within which the parties monitor competitor pricing and other behaviour when developing their own strategies.Footnote 3 While the Bureau’s conclusions were not sensitive to a precise geographic market definition, the Bureau considered competition within a 10, 15, and 20 minute drive time around each Empire location.

Overlapping markets and market shares

With respect to the Cineplex transaction, Cineplex did not operate any theatres in Atlantic Canada and did not have plans to open any such theatres in the absence of the proposed transaction. As such, the Bureau concluded that the transaction would not impact competition in any relevant markets in Atlantic Canada. However, Cineplex operated every first-run theatre within a 10, 15, and 20 minute drive time of the Empire Kanata and Empire Whitby theatres it sought to acquire. As such, the Bureau concluded that the proposed transaction would have resulted in a merger to monopoly in those two relevant markets. Expanding the geographic market or including other theatres that showed independent, foreign or second-run movies did not significantly alter market share estimates.

With respect to the Landmark transaction, Landmark operated theatres within an approximate 20 minute drive of an Empire theatre in two areas: Winnipeg, Manitoba and Surrey, British Columbia (where Landmark operates a theatre in nearby New Westminster). In both cases, the estimated post-merger shares attributable to Landmark were found to be approximately 15 percent. Further, the overlapping Landmark and Empire theatres were not considered to be particularly close competitors, either because they were located further from each other than from other theatres or they had different characteristics. As a result, the Bureau concluded that the Landmark transaction would not substantially lessen or prevent competition in any local market.

Barriers to entry

The Bureau considered whether Cineplex’s ability to exercise market power in the markets of concern would be deterred by entry from new or existing rivals. The Bureau concluded that entry would be unlikely to occur in a timely manner and on a sufficient scale to constrain Cineplex’s ability to exercise market power.Footnote 4

In reaching this conclusion, the Bureau considered documentary evidence from the parties and public sources describing the maturity of the marketFootnote 5 and the fact that new entry would generally be uneconomical due to the high operating costs and long-term contractual commitments associated with the theatre business.Footnote 6

Evidence of rivalry

In considering the likely impacts of Cineplex’s acquisition of the two Ontario theatres on those local markets, the Bureau relied heavily on documents that demonstrated competition between Cineplex and Empire. In particular, the parties monitored one another’s prices in considering their own pricing strategies, and also reacted to each other’s improvements in service offerings.

Conclusion

The Bureau determined that the acquisition of Empire’s Ontario and Western Canadian theatres by Landmark and the acquisition of Empire’s theatres in Atlantic Canada by Cineplex were unlikely to result in a substantial lessening or prevention of competition in the relevant markets.

The Bureau concluded that if Cineplex were to acquire the Empire theatres in Kanata and Whitby, competition would be substantially lessened in those markets, likely leading to reduced price competition and less incentive for Cineplex to compete on the quality of the in-theatre experience — two areas where the evidence demonstrated direct rivalry between the parties. As a result, the Bureau conveyed its concerns in a meeting with Empire and Cineplex and their counsel. The parties agreed shortly thereafter to modify the transaction to exclude the Whitby and Kanata theatres from the purchase by Cineplex.

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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