The Cineworld / Picturehouse Competition Commission Decision: My Interim Findings

In the three and a half years I’ve been blogging, that may be the most serious blog title I’ve ever written. But suddenly we are living in serious times, with a threat to the cinematic options of thousands of people being presented today by the initial findings of a Competition Commission investigation into the purchase by Cineworld Group plc last year of City Screen Limited, the group which operates the Picturehouse chain across the UK.

I believe I stand a chance of being the single individual to be most affected by this decision, but I would be far from the only person to suffer if these changes are forced through. Since I moved to the area in 2007, I have made around 750 trips to the cinema, of which over three quarters have been to four local cinemas. I live twenty-five minutes from Bury St. Edmunds, where I am a regular at both the Cineworld and the Abbeygate Picturehouse, and thirty minutes in the other direction is Cambridge, where I occasionally visit the Vue cinema, but more regularly the Cineworld and the Arts Picturehouse. Today the Competition Commission announced their initial findings into an investigation they started in April, and their recommendation to prevent the adverse effects that could be created by the merger is to sell off one of the two cinema chains in three affected towns and cities: Aberdeen, Cambridge and Bury St. Edmunds. That means that either the Picturehouse or the Cineworld would be no more in those three areas.

Reading the documentation is a strange descent into legalese, which I would presume most people (myself included) would only encounter in the event of a house purchase or making a will. The key paragraph from the initial findings is this:

“…the creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition (SLC) in the market for cinema exhibition services in the Aberdeen, Bury St Edmunds and Cambridge areas.”

So there is no requirement on the commission to prove an SLC, just that one may occur. This seems oddly arbitrary, but I’m not here to question the workings of the process. The Commission is, in case you weren’t aware (taken from their own website):

“…an independent public body which helps to ensure healthy competition between companies in the UK for the ultimate benefit of consumers and the economy. It conducts in-depth investigations into mergers and markets and also has certain functions with regard to the major regulated industries.”

I am happy to trust implicitly that the commission is not politically motivated, but my instincts are telling me that I cannot see who is well served by the prospects of the sale of these cinemas. From a personal perspective, either would be catastrophic. I have a membership with Cineworld which gives me free tickets and discounted concessions, and an average travel time to my two nearest cinemas of 27 minutes. If the Cineworlds were sold off, then my nearest two venues become Huntingdon (40 minutes) and Haverhill (50 minutes), increasing my journey times by 60%. I see an average of eight films a month at Cineworld and simply couldn’t afford to do that without Cineworld’s Unlimited scheme – no other chain or independent operates a similar scheme. For the Picturehouses, my nearest alternatives would be Norwich, Hackney or Stratford (all over an hour away), and suddenly independent cinema would be reduced from four films a month to probably one a quarter.

But I would be the first to admit that I am not at the centre of the bell curve in terms of cinema attendance, instead very much in the top quintile (possibly the top percentile). So in an effort to understand the fairness and implications of the Commission’s decision, I’ve looked at a number of key areas for a more average cinema attendance to see if their findings stack up. (I’m leaving out Aberdeen from my comparison as it’s not local to me, but many of these points may also apply.)

Comparable demographics

The first point I’d like to consider is what constitutes sufficient competition. If you look at the definition within the findings, the Commission has considered an area thus:

“For the geographic market definition, we established the boundaries of the markets based on 20-minute isochrones around the parties’ cinemas, but we recognized the need to apply this rule flexibly when assessing competition in specific local areas.”

Or in other words, it considers a twenty minute journey to be the reasonable upper limit for times to reach each cinema for these purposes.

I’ve compared Cambridge with a number of similar sized areas. If you consider the urban areas defined in the 2011 UK census, then of the nine others most similar in size to Cambridge, only three other built up areas have more than one cinema. Oxford is particularly blessed, having three other major cinemas in addition to its Picturehouse, but the median average of this sample is 1. Since the average cinema for this sort of area is 1, it seems likely that the average population of areas of similar size to Cambridge can typically only support one cinema, unless there is some other factor in the diversity of those cinemas. (Since Bury St. Edmunds has a population of only c. 35,000, it clearly falls into the same category, so can be considered fortunate to retain two cinemas at present.)

In this table, Burnley is a slight oddity in that a cinema in another town is just within geographic reach. However, in the other three cases, those areas of similar size that can sustain an additional cinema – York, Oxford and Cambridge – all count a Picturehouse as one of their cinemas. These were all Picturehouses well established prior to the purchase of City Screen limited, suggesting a public demand for what the Picturehouse cinemas have to offer.

When considering the services offered by City Screen Limited, the Commission also considered the distribution services offered by the company. With reference to this point, they observed:

“…we found that Picturehouse’s programming services are advisory and customers typically make the ultimate programming decisions.”

This would seem to support that, in these areas, customers are seeking the offerings made by the cinemas, and that in areas that can support more than a single cinema that is only possibly because customers are seeking a more diverse offering.

Consumer choice and the question of direct competition

If you compare the programming lists for a ten day period at both Cineworld and Picturehouse in Cambridge and Bury St. Edmunds, that diversity shows through very clearly:

In that 10 day period (Tuesday 20th – Thursday 30th August 2013), both Cineworlds are showing 22 different films. Only 9% of those films are also showing at the Picturehouse in Cambridge, and although the Bury figure is higher, it’s only 18%. These are clearly two different cinemas offering to two different demographics, and these programming choices are being dictated by consumers. There are a couple of films showing at the Cambridge Arts Picturehouse that previously ran at the corresponding Cineworld, but this would just demonstrate the advantage of two cinemas allowing a longer run for films that appeal to a particular audience. If one or other chain were forced to pull out of this area, then the variety would be significantly diminished and consumer choice reduced.

Which makes it difficult to understand how these cinemas can be seen to be in competition. This is all the more baffling in light of two statements in the Commission’s findings. Firstly, this set of comments:

“Cinemas are of various sizes, and a distinction is generally made by the industry between multiplexes (which have more than five screens) and other cinemas.”

So the commission recognises that the industry itself differentiates at a basic level between the kind of cinemas represented by Cineworld and its direct competitors, and that of the Picturehouse chain. The Arts Picturehouse has three screens and the Abbeygate two, so there is a clear divide between the two arms of the new business. The statement continues:

“Operators of multiplexes tend to focus on showing mainstream films and to offer a largely undifferentiated service… Operators of smaller cinemas, which are generally located in town and city centres, may differentiate themselves from multiplex operators not only through the location of their cinemas and the mix of films they show (which will generally include both mainstream and specialized films), but also through the ancillary services and general ambience their cinemas offer to their customers.”

So there is a recognition here that not only do the Picturehouse cinemas offer a different cinematic experience to that of the standard multiplex, but also a different cultural experience. Both Picturehouses have a bar, offering hot and cold food and a selection of alcoholic beverages which can be taken into screenings.

However, having clearly established this differentiation in market and offering, the Commission inexplicaby – as in no explanation for this decision is given in the document – then decides to disregard its own differentiation in coming to a decision.

“We defined the relevant product market as the market for the provision of cinema exhibition services, and we saw no reason to include within the definition of the relevant product market other leisure activities and/or food and beverages.”

I have attended eleven Cineworlds and four Picturehouses in the last two years, and while a few Cineworlds offer an on-site bar, they typically don’t then allow alcohol or other foodstuffs purchased outside of the concessions stands to be taken into screenings. What I can testify to is that in general, a Cineworld is very comparable in terms of exhibition and concessions to the other major chains (Odeon, Vue, Showcase, Empire and Reel, as I have attended cinemas in all of their chains in the past three years), whereas the Picturehouse is a markedly different experience. No reasonable definition of what the cinemas are offering can disassociate the wider experience from the exhibition, and I would urge the Commission to reconsider this point. Visiting the cinemas themselves may offer additional insight into this point, if they have not yet done so (and no indication is given that they have).

The only other differentiation that I can find that relates to the findings is that where most multiplexes are defined as out of town, the three Cineworlds in question – Aberdeen, Cambridge and Bury St. Edmunds – are all effectively in town and within walking distance of their competition. The Commission gives no direct indication that this has been a factor in their decision.

The effect of a potential purchase and competitive pricing

Within the Commission’s findings, there is one key paragraph that outlines the potential impact of an SLC (substantial lessening of competition) that the decision to recommend a sale of cinemas seems to hinge on, having ruled out any possible impacts from planned expansion of either chain or from City Screen Limited’s distribution role:

“…may be expected to result in a substantial lessening of competition (SLC) in the markets for cinema exhibition services in the Aberdeen, Bury St Edmunds and Cambridge areas, leading to adverse effects, for example in the form of higher ticket prices than would be the case absent the merger.”

According to the BFI Statistical Yearbook 2011, in that year 62% of the UK population visited the cinema at least once a year, and 19% at least once a month. Let’s now consider the potential effect of a sale on the pricing for the cinemas in question for these two groups of people. 

Firstly, let’s consider the financial the group that visits once a year or more. That group is making irregular purchases, so is most likely to notice the effect of a change in a single price ticket. Let’s firstly compare the prices of a ticket for the main cinemas in both Cambridge and Bury St. Edmumds. The price shown is that for a single adult ticket purchased on arrival at the cinema for a showing this coming Friday evening (23rd August 2013) – it should be noted that all three chains offer concessions and have a day with reduced ticket prices for all customers, and there are similar differentials in price for those options.

So if you compare the standard price ticket at Cineworld to that of the area’s main competitor, Vue, then the prices are favourable, and the Picturehouse seats are cheaper than a standard ticket at the Vue in Cambridge, even though I would argue that it’s not a direct comparison due to the programming point made earlier (the Vue is also showing 22 films in the ten day period, all of which are showing at one of its competitors with the exception of a single afternoon screening for seniors).

There is an even more marked difference if you compare the prices for tickets purchased online. Cineworld offer a national scheme called myCineworld, which is free and has no commitment to the number tickets purchased, and offers a 10% reduction and no booking fee. The Picturehouse chain also do not charge a booking fee in any of their cinemas for tickets purchased online, but Vue charge a 75p online booking fee. So the online comparison becomes:

So while the cinemas under threat are currently undercutting their direct competitor in the Cambridge market, the argument made by the Commission is that the market conditions and the reduction of competition will drive higher prices. At face value, there may appear to be some weight to that argument, if you compare the prices of these two Cineworlds to other cinemas in the chain within a reasonable distance.

However, the Commission is proposing that the lack of competition will drive prices up, and in each of those other areas there is no competition, the Cineworld being the only cinema in the area. This would seem to argue against that effect.

Next, let’s consider the East Anglian cousin of Cambridge and Bury St. Edmunds, Norwich. There are four cinemas in Norwich, all of which are in the city centre and would fall within the conditions that the Commission have laid out. The Picturehouse here has similar programming to Cambridge and Bury, while the other three are all offering standard multiplex fare. The Friday night price for each of these is as follows.

There is a key observation to be made from these prices. Although the Vue seat here is cheaper than its comparable seat in Cambridge, the most expensive seat in the area is the same price range as a higher priced seat in Cambridge or Bury. Additionally, a significantly cheaper competitor in the form of the Hollywood appears to be having no effect in driving prices down in the others.

This would suggest that forces other than local competition are having an effect on price. One other possible reason for the higher prices in Cambridge (and by extension Bury St. Edmunds, which is only 35 minutes away by car) is the cost of living in the area. In this 2012 survey on house prices in the UK, Cambridge is shown to be the sixth most expensive in the UK. I would propose that the higher cost of living in the area is also having an effect on ticket prices. I would like to see what research the Commission has done into investigating or eliminating other factors in terms of the setting of ticket prices in these cinemas.

Finally on the single ticket, we must consider the alternatives. Three other major chains operate in the south of England: Odeon, Showcase and Empire. Presuming that there would be no advantage to Vue purchasing one of the Cambridge cinemas, compare the prices of the nearest geographical cinemas in each of the other chains. It should be noted that, in each case, the cinema is the only one within a geographical area of the size stipulated by the commission.

Again, there is a wide variety of prices here, with no guarantee on this evidence that if one of these chains took over a cinema in question that it would cause the local market to become more competitive.

When all things are considered, the price range across all of these tickets is between £7 and £10. I would also like to see evidence from the Commission that those attending the cinema infrequently would be likely to be swayed in their decision by such small price differentials, as such differences may become negligible when factoring in other costs of attending the cinema such as the concessions, travel and parking.

The second consideration is for those attending the cinema more regularly. Two chains in the UK offer national membership schemes for their patrons which offer significant discounts for members, both valid at any cinemas outside of the West End for the rate that would be paid in Cambridge or Bury St. Edmunds. The Cineworld scheme costs £15.90 per month and entitles the holder to attend an unlimited number of screenings, while the Picturehouse charges an annual fee of £35, offers three complementary tickets and then reductions of typically £2 per screening on any further tickets bought. Both chains also offer money off concessions; Cineworld discounts include 25% off for members staying longer than 12 months, and Picturehouse’s 10% discount applies to all bar purchases, including food and alcohol.

The BFI survey indicated that 19%, or around a third of all people who attend the cinema, attend at least once a month. So let’s compare the costs of attending two or three weekend screenings per month across each of the major chains, including the cost of purchasing any memberships.

At two showings per month, the Cineworld and Picturehouse chains are cheaper than anyone except the Empire, who are only £10 cheaper per year. Once the figure rises to three, then the Cineworld becomes the cheapest option, and with no restrictions on further attendances.

I believe, in the light of this, there are a number of questions that need to be answered before further action is taken.

1. Why is competition a requirement in areas such as Cambridge and Bury St. Edmunds, when geographical areas of similar size do not typically have such competition?

2. Why are the Cineworld and Picturehouse chains being deemed to be in competition when Picturehouses are generally complementing the offering in other areas rather than challenging it, and when the Commission’s own findings demonstrate that these are appealing to different demographics, have little overlap in terms of content,  and the Picturehouse has an appreciably different experience surrounding the exhibition?

3. Why would introducing an additional party to these areas drive competition in prices when there is no evidence to support this, and when pricing seems to be driven as much by the local cost of living as by any perceived competition?

4. Why would allowing another major operator to take over these chains be in the interests of consumers, when the price difference for casual attendance is negligible and for regular attendance is either similar or significantly cheaper?

You can find a copy of all of the commission’s initial findings here. If you feel strongly about this, I would urge you to make your feelings known, both to the Commission at cineworldcityscreen@cc.gsi.gov.uk before September 10th and to your local MP, Julian Huppert for Cambridge and David Ruffley for Bury St. Edmunds. Thank you for listening.