The Competition Authority ("Authority") announced the outcome of the recently finalized "Cinema Services Sector Report" to the public ("Report"). It may be observed that such sector report particularly aims to analyze the AFM/MARS merger, which was conducted in the film projection market, and within this context, examine the variances in the competition conditions of various markets, such as production, distribution and projection markets. The report also aspires to examine the digitalization process that is rapidly growing in recent years. Within the context of such intent, it may be observed that the report deals with all markets in the cinema industry, and especially analyzes the impacts of digitalization in the projection market, as well as changes encountered following the AFM-MARS decision.
The said report consists of four main sections as set out, below:
- General information on the cinema market
- Digital transformation process in Turkey
- Prominent sector-related decisions of the EU, the USA and Turkey
- AFM-MARS decision and the current situation
General Information on the Operation of the Cinema Sector
It can be observed that the Competition Authority evaluates the activities of the cinema sector under three main fields; namely, production, distribution and projection. Within this context, the production (making) market is considered as the phase in which an idea turns into a movie and becomes appropriate for screening in movie theatres. One of the main findings in the report is that the number of both domestic and foreign movies being released in the last ten years is regularly increasing. The Authority also ascertains that aside from such increase in the number of movies, filmmaker undertakings are comprised of small-scale businesses operating in a discordant manner, and such undertakings achieve almost half of the total number of film-goers of the six production companies attracting the most number of viewers. It is pointed out in the Report that 70% of the actors operating in the production market are able to produce a film; however, less than 1% of these actors are able to produce more than 10 films. Thus, these six undertakings have more significant market power as compared to 352 other undertakings operating in the market.
The Competition Authority also assesses the distribution market. The Competition Authority has determined that 46 undertakings entered into the market in the last 10 years; however, these undertakings were only able to operate in the market for a very limited period of time. The most significant determination of the Competition Authority is that the distribution market is highly concentrated, and the percentage of total turnover of the first three undertakings with the highest market shares constitutes 75% of the total market share. The MARS Group entered into market in 2014, and has obtained a significant market share, and has become the undertaking with the second highest market share.
The Report determined that both the number of audience, and the total turnover of the undertakings, increased. Accordingly, the number of viewers annually increased at an average rate of 9.4%, and reached 61.4 million in 2014, and the total turnover annually increased at an average rate of 15.1%, reaching TRY 654 million in 2014. However, it is underlined that the amount of tickets sold per person was only 0.8; whereas, the same amount was an average of 1.8 in EU countries1. Furthermore, the Report also indicated the total number of viewers in the countries where the total population is approximate to Turkey; accordingly, the total number of viewers in France was 209 million, and 122 million in Germany. It may be concluded that the Report calls attention to the potential growth in this projection market.
Similarly, the Competition Authority calls attention to the increase in the number of movie theaters. In accordance with the recent trends in the projection market, the Report points out that the single movie theater businesses have been replaced by multi-movie theater businesses located in shopping malls, and that 71% of movie theaters in Turkey are located in shopping malls. The market share of the movie theater chains is behind the market share of the independent movie theaters due to the increase in the recent years, and has reached a market share of 58%. The Report also points out that 60% of the projection services are provided by 10 movie theater chains, and among these movie theater chains, the market share of MARS is significantly higher than its closest competitor. Therefore, it is projected that the MARS Group will preserve, or even increase, its market power due to the increase in the market shares of the movie theater chains that are located in shopping malls.
The Report also makes certain determinations as to consumer preferences in the Turkish cinema industry. Accordingly, despite the fact that the number of foreign films projected in Turkish cinemas increases every year, local films have a higher audience rate. 59% of viewers watch local films; whereas, foreign films attain 41% of the audience. In this respect, the Turkish market distinguishes itself apart from other European markets, and it is the market where local films are watched the most among other European markets. Additionally, the Report points out that only 14 films (11 local and 3 foreign films) among 357 films has passed the threshold of 1 million viewers. These 14 films attracted 48% of the total number of viewers. Therefore, it is possible to conclude that consumers prefer certain popular and successful foreign and local films.
Digital Transformation Process
Under this section, the Competition Authority assesses the impact to the market of the process of transformation from 35 mm films to digital films, as well as the investments required to be made by the movie theaters. The Report indicates that the digitalization process accelerated and almost completed by the movie theater chains in the recent years; however, other movie theater operators could not complete such process due to financial issues. In this respect, the Report points out a system referred to as "VPF" pursuant to which producers share the benefit arising from the cost advantages incurred from the use of digital copies with movie theater operators and, therefore, support the investment for the digitalization process. Accordingly, movie theaters that project films with digital copies are remunerated for each film.
The Report also finds that the VPF system was formed late in Turkey, and underlines certain problems with respect to this system. Due to its market power, the MARS Group concludes agreements with more favorable contractual terms in respect of VPF; whereas, other projectors concluded a VPF agreement in 2015 via an aggregator firm (DCINEX). The Competition Authority states that the VPF agreements are in conformity with competition legislation. However, the Report underlines that in order to benefit from the VPF system, the movie theaters must profit a certain amount from the sale of the cinema tickets, but small-scale movie theaters are usually unable to fulfill such condition. The Competition Authority gives special importance to the risk of eliminating small scale movie theaters from the market due to the exclusive use of digital copies. The Competition Authority determines that the relevant situation may enforce the concentration in micro geographical markets. Therefore, the Competition Authority points out the risk associated with the digitalization of the market that may end up with the elimination of small-scale movie theaters from the market, and with higher concentration in the market.
AFM/MARS decision in light of the prominent decisions in the EU and USA
The reason behind the Competition Authority initiating sector research in the cinema services sector is the merger of AFM and MARS, as well as the new market structure following this merger. Therefore, the Competition Authority is concentrating on the changes in the market following the merger of AFM and MARS, and the effects of the vertical integration of the MARS Group.
The Report primarily mentions the Paramount Pictures decision of the US Supreme Court, from 1948. The Competition Authority notes that in this decision, the court states that the five largest film studios, acting in a vertically integrated way, shall be prohibited from acting in such a vertically integrated manner. It then states that the Commission's decisions in the EU do not resemble the Supreme Court decisions, and a number of Competition Authority decisions are noted to reflect Turkish practice. However, the main examination was made around the AFM/MARS decision in the fourth section of the report in question.
The Competition Authority determined that with regard to the undertakings given for the problematic five micro markets in which one of the movie theatres is closed, some of the remaining were transferred, again, after the decision. Within this framework, in the Report, the opinions of cinema managers and distributors concerned the inability to protect the competitive structure as a result of the decision. The decision stated that although some undertakings entered the movie screening market, there is no other undertaking in the market that comes close to the size and the growth rate of the MARS group. For the screening market, after the decision, the market share of the MARS group is determined as 34-36% with regard to the ticket numbers, and 42-45% with regard to ticket revenues. However the closest competitor of the MARS group has a market share of 7-8% for both of these areas; therefore, the undertaking has a significant market share. In the Report, the market structure was reviewed for İstanbul, Ankara, İzmir and Antalya, and it was determined that the market share of the MARS group did not increase more than what was expected in the AFM/MARS decision.
The Competition Authority determined that the said undertaking has been active in the screen advertisement market after the AFM/MARS decision, and its market share is nearly 88%. It is observed that the MARS group receives much more of the advertisement revenue than its competitors. In the Report, end-user prices are also examined; however, a competitive concern was not mentioned. In the said Report, the purchasing power of the MARS group was also reviewed. In this scope, as a result of the acquisition, it was stated that the MARS group has important purchasing power in the screenings of foreign movies of small-medium size distributors; however, its purchasing power has no reflection on the market conditions. However, it was mentioned that the MARS group has determining influence over the dates on which these movies are released as a result of its purchasing power.
The competitive concerns of the Competition Authority are stated with regard to the vertical integration activities of the MARS Group and its new acquisitions. As a result of the acquisitions, the MARS group is seen to have become vertically integrated in 2014. Within this scope of the sector examination, the undertakings that are active in both the distribution and screening markets are observed to have voiced their concerns on vertical integration. Additionally, again in the examination, it is provided that the MARS group has acquired few movie theatres with the last year; however, these acquisitions were not subject to authorization, since they were beneath the thresholds stated under Communiqué numbered 2010/4.
The sector report of the Competition Authority regarding cinema services determined the changes of the sector and the effects of digitalization after the AFM/MARS acquisition. Within this scope, in the said report, the structure of Turkey's cinema industry was examined, and the potential of its growth was mentioned. Within this scope, the development of the cinema industry, which has expanded significantly over the last ten years, is likely to continue when compared to the similar sized countries of the EU.
The changes in the cinema industry are not limited to viewing numbers. It is observed that the movie theatres in malls and the chain movie theatre business have increased their market share in the past few years; whereas, small businesses with one screening room that are not in a mall, have lost their market shares. Another element that might negatively affect these small cinema businesses is the digitization process that has emerged with developing technology. The small cinema businesses that are unable to make the necessary investments because of financial constraints are likely to be eliminated from the market.
In the market, apart from the increase of the influence of the chain movie theatres within malls, and the developments leading to a more vertically integrated screening market, since 2014, the MARS group has formed a vertically integrated structure that includes all of the distribution and screening markets. Thus, it must not be overlooked that there is a possibility for this undertaking that has a significant market share as compared to its closest competitor, to act in a discriminatory manner to the benefit of its own movies, especially with regard to the release dates of competing movies. When the market power resulting from the high market share of the MARS group is concerned, such discriminatory behavior may lead to barriers to entry or diminish consumer preferences.
In the last year of sector reports, it is clear that a solution must be introduced for acquisitions by the MARS group that are not subject to the Competition Authority authorization since they are below-threshold transactions. Since competitive concerns may emerge as a result of these transactions in the micro geographical markets, the most certain solution would be an amendment of Communiqué numbered 2010/4 regarding mergers and acquisitions. From another point of view, it may be said that it would be more appropriate if, instead of an ex ante merger and acquisition supervision, and ex-post abuse of dominant position supervision is adopted. However, it is obvious that allowing undertakings with high market powers to grow through below-threshold transactions contradicts the spirit of merger and acquisition control.
 For more detailed information on viewer numbers, please see Competition Authorty's Cinema Services Sector Report, p. 16: http://www.rekabet.gov.tr/File/?path=ROOT%2f1%2fDocuments%2fSekt%C3%B6r+Raporu%2fsinemasektor.pdf (Access date : 03.05.2016).
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