Cinema Sector Still Tangled Up In Revenue Sharing Models

Cinema Sector Still Tangled Up In Revenue Sharing
Models: The Turkish Competition Board Decided Not To Initiate a Full-fledged
Investigation

(1) Introduction

The reasoned decision[1] of
the Turkish Competition Board (the "Board") concerning
the  preliminary
investigation initiated by the Turkish Competition Authority (the "Authority")
against four movie producers and their professional union has been published on
the official web-site of the Authority on March 8, 2019 (the "Reasoned
Decision").

The preliminary investigation was
initiated on July 26, 2018 further to a complaint filed with the Authority by a
third party on July 20, 2018 with a confidentiality request alleging that
leading local movie producers, namely (i) Beşiktaş Kültür Merkezi A.Ş., (ii)
Tam Aile Filmleri Fabrikası Stüdyo Film ve Organizasyon Sanayi Ticaret A.Ş.,
(iii) Nulook Prodüksiyon ve Film Yapım A.Ş. and (iv) Çamaşırhane Film Yapım
A.Ş. violated Articles 4 and
6 of Law No. 4054 on the Protection of Competition ("Law No. 4054") by way of intervening to the prices, discounts and similar
sales conditions in the movie exhibition market via their professional union,
namely Televizyon ve Sinema Filmi Yapımcıları Meslek Birliği.

To put the subject matter of the Reasoned Decision
into context, it might be beneficial to highlight that the ongoing disputes
between the local movie producers and the movie exhibitors reached to its peak
in December 2018 and drew the attention of the public as a result of the comprehensive
press coverage. There is even room to argue that the publicity of the disagreements
might have accelerated the process regarding the finalization and promulgation
of Law No. 7163 ("Law No. 7163")[2] on
the Amendment of Law No. 5224 on Evaluation, Classification and Support of
Motion Picture Films ("Law No. 5224") which aims to
streamline certain fundamental issues that cause certain disagreements between
the players operating at different levels of the sector.

To that end, although the cinema sector was previously
scrutinized by the Authority in a comprehensive manner by way of various
decisions[3] of
the Board as well as the Sector Inquiry Report concerning Cinema Sector[4]
(the "Sector Inquiry Report"), the approaches to be adopted by the
Board in light of the amendments to Law No. 5224 are highly anticipated. That
being said, the decision at hand was rendered prior to the promulgation of Law
No. 7163 and the Reasoned Decision does not delve into any details on this
front despite briefly referring to certain ongoing legislative amendments at
that time. Nevertheless, the Reasoned Decision recaps the Board's current
understanding of the dynamics and competitive landscape of the sector while
also giving subtle hints for the potential competition law concerns that might
still come into play even after the legislative amendments within the scope of
Law No. 7163.

(2) A closer look to the revenue sharing models: the
Board's assessments regarding the dynamics and competitive landscape of the
cinema sector

Before taking a position in terms of the relevant
market definition and delving into the details of the case at hand, the
Reasoned Decision opts to first echo certain key elements regarding the
dynamics of the cinema sector by way of explicitly referring to the findings and
conclusions set forth within the Sector Inquiry Report.

To that end, the Reasoned Decision briefly summarizes
the scope of the activities of the (i) producers, (ii) distributors and (iii)
exhibitors to illustrate their roles and interactions within the scope of the
supply chain as well as the manner in which they generate their revenues. In a
similar vein, to also put the violation allegations into context, the Reasoned
Decision emphasizes that the revenue to be generated by a movie producer in
terms of the screening of a movie is generally determined in accordance with the
principles of a 50-50% revenue sharing model. In this respect, the Reasoned
Decision further elaborates that a movie producer first needs to come to an
agreement with a movie distributor that will in return determine the
appropriate movie theatres and deals with the exhibitors operating these movie theatres.
Consequently, the exhibitors report the revenues they generated through the
sale of tickets for the screening of the relevant movie; the distributor
collects the share of the movie producer in accordance with the pre-determined
revenue sharing model and transmits it after deducting its own distribution
commission.

Accordingly, the Reasoned Decision accentuates that
the revenue to be generated by a movie producer from the screening of its movie
does not correspond to a fixed monetary amount that it unilaterally determines
beforehand. On the contrary, such revenue of the producer is directly based on
its fixed share of the revenues to be realized by the exhibitors as a result of
the ticket prices that they will determine. To that end, the Reasoned Decision
underlines that the pricing decisions of the exhibitors (e.g. discounts and
promotions) directly affect the essential revenues to be generated by the movie
producers. The reasoned decision indicates that although the exhibitors could compensate
the decrease in their own revenues (arising due to their own ticket pricing
decisions) by way of theatre-curtain advertisements and sales at the snack bars
of the movie theatres, the producers cannot introduce a similar solution during
the screening of the movie to offset the decline in their revenues.
Accordingly, the Reasoned Decision acknowledges that a movie producer might
self-righteously deem that it is legitimate to require the exhibitors to consult
with it in advance before applying any discounts or promotions in terms of their
ticket prices for a specific movie.

By way of also referring certain reports prepared by the
antitrust authorities[5],
the Reasoned Decision indicates that the globally utilized revenue sharing
model indeed hands over the reins to the exhibitors to some extent in terms of
the revenues to be generated by the movie producers and thus, occasionally
results in certain disputes. Having said that, the Reasoned Decision emphasizes
that although one of the main reasons for these disputes is the nature of the
revenue sharing model itself, another one is that the sharing process (such as
the reporting and similar necessary procedures on this front) is managed by the
exhibitors to a great extent. In this respect, the Reasoned Decision states
that allowing an efficient and transparent inspection by the movie producers in
terms of the revenue sharing process might come into play to avoid potential
disputes. To that end, the Reasoned Decision explicitly spells out that the
Authority is aware that certain meetings are being organized by the Ministry of
Culture and Tourism of Republic of Turkey to discuss this ongoing disagreement
within the sector as well as similar potential solutions.

All in all, in terms of the relevant market definition
for the matter at hand, the Board preferred to leave the relevant product
market and relevant geographic market definitions open by way of referring to
paragraph 20 of the Guidelines on the Definition of Relevant Market and stating
that a conclusive definition on this front would not change the result of the
analysis for the matter at hand. Nevertheless, the Reasoned Decision still
refers to the precedents of the Board concerning the sector [6]
and set forth that the relevant product market for this case at hand could be
considered as "the market for motion-picture exhibition services". Similarly,
the Reasoned Decision briefly refers to the decisional practice of the Board
and indicates that although the movie producers are active throughout Turkey,
narrower regional relevant geographic markets have been defined in terms the
activities conducted by the movie exhibitors.

(3) The Board's analysis in terms of the violation
allegations raised by the complainant

(3.1.)
The nature of the evaluated actions by the movie producers and their
professional union: Is there a meeting of minds between the producers and
exhibitors?

The complainant asserted that the local movie
producers violated Articles 4 and 6 of Law No. 4054 by way of intervening to
the prices, discounts and similar sales conditions in the movie exhibition
market via their professional union.

Within this context, the Reasoned Decision explains
that the relevant actions concern the attempts of the movie producers to keep
the ticket prices of the movie exhibitors at a certain rate, in an effort to
maintain their own revenues within the scope of the applicable revenue sharing
model at a certain level. The Reasoned Decision further elaborates that such
attempts by the producers could materialize upon the approval of the movie
exhibitors and therefore they would constitute price-fixing agreements that would
need to be evaluated within the scope of Article 4 of Law No. 4054.

Accordingly, the Reasoned Decision sets forth that the
analysis of the matter at hand concerns whether the requests of the movie
producers conveyed via their professional union in an attempt to fix the ticket
prices of the movie exhibitors in the downstream market and to require their
permission in advance before applying any discounts regarding the ticket prices
would constitute a violation of Article 4 of Law No. 4054 in terms of directly or
indirectly fixing purchase or selling prices or any other trading conditions of
goods and services.

With regard to the alleged violation of Article 6 of
Law No. 4054, the Reasoned Decision clarifies that further to the information
and findings obtained during the preliminary investigation, the alleged actions
could not be evaluated within the scope of Article 6 of Law No. 4054 (i.e. abuse
of dominance). In this respect, by way of referring to the precedents of the
Board and the Sector Inquiry Report, the Reasoned Decision emphasizes that due
to the market power of Mars Sinema Turizm ve Sportif Tesisler İşletmeciliği
A.Ş. ("MARS") in the movie exhibition market, it is considered that
the producers do not have sufficient bargaining power that would allow them to
intervene with the activities of the movie exhibitors. To that end, also taking
into account the nature of the alleged actions, the Reasoned Decision opts not
to analyse the competitive landscape of the market for movie production.[7]

(3.2.)
The nature of the "vertical" relationship between the movie producers and
exhibitors: No benefit from the protective cloak of the block exemption

The Reasoned Decision emphasizes that the subject of
the matter at hand concerns the assignment or licensing of certain intellectual
property rights (the "IPRs") to the movie exhibitors for a
limited period of time in terms of the screening of the motion-pictures rather
than purchase, sale or resale of a certain product or service. The Reasoned
Decision underlines that the primary object of such agreements between the
exhibitors and producers or distributors is the screening of the motion picture
and thus, they resemble a mere licensing of certain IPRs (where the purchase or
sale of certain goods or services does not come into play under any
circumstances).

Accordingly, the Reasoned Decision concludes that such
vertical agreements do not fall within the scope of Block Exemption Communique
No. 2002/2 on Vertical Agreements (the "Communique No. 2002/2"), by
way of referring to the definition of "vertical agreements" within the scope of
Communique No. 2002/2 as well as the relevant sections [8] of
the Guidelines on Vertical Agreements (the "Vertical Guidelines")
providing further guidance in terms of the vertical agreements containing
provisions on IPRs.[9]

Nevertheless, the Reasoned Decision underlines that
the mere fact that such agreements cannot be evaluated within the scope of
Communique No. 2002/2 would not change the fact that the undertakings could
still restrict competition by way of these agreements. In this respect, the
Reasoned Decision further elaborates that in case the producers, distributors
and exhibitors were to agree on and jointly determine the final ticket prices
that will be charged to the end customers by the exhibitors, such actions would
constitute a violation of Article 4 of Law No. 4054. To that end, the Reasoned
Decision refers to United States v. Paramount Pictures [10]
case of the U.S. Supreme Court and reiterates that the relationship in terms of
the IPRs would not warrant an intervention to the final ticket prices which
would eventually restrict the competition among the movie exhibitors.

(3.3.)
The merits of the violation allegations and the findings of the Authority

Within the scope of the preliminary investigation, the
Authority conducted on-site inspections at the premises of the relevant movie
producers as well as their professional union and also requested certain
information pertaining to the time period between 2016 and 2018 (e.g samples of
the agreements executed with movie distributors, performance reports presented
by the exhibitors or distributors). Further to the Reasoned Decision it appears
that the Board relied mainly on four findings collected during the on-site
inspections. These four findings could be summarized as follows:

The professional union drew an official warning letter
to the movie exhibitors underlining the shortcomings of the movie exhibitors in
terms of their record keeping and reporting mechanisms regarding their box
office returns emphasizing the inaccuracies, non-transparency and delays on
this front which inevitably result with unjustified financial losses of the
producers within the scope of the revenue sharing model. In a similar vein, the
professional union also stated that within the warning letter that the
promotional campaigns applied by the exhibitors in conjunction with the sale of
the movie tickets without the permission of the producers result with significant
unfair monetary losses to the detriment of the producers.

To that end, three movie exhibitors drew official
response letters to the professional union stressing that the IPRs would not
justify an intervention by the producers to their pricing strategies and they
cannot operate without applying discounts/promotional campaigns. In this
respect, the Reasoned Decision highlights that the exhibitors explained within
their official response letters that they would not reconcile with the
professional union on this front. Accordingly, the Reasoned Decision concludes
that the exhibitors refused the request of the professional union to constitute
an agreement which would result in the determination of the price of a service
within the scope of Article 4 of Law No. 4054.

The first one of the other two findings concerns the
copies of invoices collected by a producer from the movie theatres of different
movie exhibitors (e.g. Cinemaximum, Avşar, Cinemarine, Cinetech, Cinema Pink
and Cinetime) at various cities in Turkey in an effort to understand whether
the exhibitors oblige that the movie tickets are purchased together with
popcorn and if so, the amount of the overall discount that is reflected to the
ticket price within the scope of such promotional campaign. In this respect,
the Reasoned Decision indicates that further the review of the invoice copies,
it appears that such mandatory promotional campaigns are not a common practice
throughout Turkey, although certain exhibitors require the purchase of popcorn
to be able to benefit from the discounted ticket prices.

The last finding refers to a meeting organized by the
Ministry of Culture and Tourism of Republic of Turkey to consider potential
solutions in terms of the ongoing problems within the sector, including but not
limited to such promotional campaigns.

The Reasoned Decision also discloses that the
professional union filed a petition before the Authority during the preliminary
investigation in an effort to further emphasize that the disagreements between
the producers and exhibitors boil down to the fact that the producers are not
receiving their fair share within the scope of the revenue sharing model due to
inaccurate record keeping, reporting and accounting of box office returns by
the exhibitors coupled with their mandatory promotional campaigns.[11]

(3.4.)
The revenue sharing model does not justify an intervention to the final ticket
prices: No-go decision by the Competition Board due to the absence of a meeting
of minds between the investigated undertakings and the movie exhibitors

In light of the findings and further to the
information obtained during the preliminary investigation, the Board concluded
that the agreements requiring the exhibitors to seek prior approval of the
producers to apply discounts or promotions in terms of the ticket prices would
directly or indirectly involve fixing of the ticket prices at a certain level
and thus constitute agreements with the object of restricting competition
within the meaning of Article 4 of Law No. 4054.[12]

That being said, the Board emphasized that the
preliminary investigation did not reveal any agreements between the producers
and exhibitors that would restrict the competition on this front[13].
Accordingly, the Board unanimously decided not to initiate a full-fledged
investigation against the investigated undertakings[14],
given that almost all[15]
of the movie exhibitors refused the request of the movie producers that would
require them to seek prior approval before applying discount or promotions
regarding ticket prices and thus there is not a concurrence of wills on this
front.[16]

(4) Conclusion

All in all, the Reasoned Decision insinuatingly echoes
the Board's settled practice[17] in
terms of determining the existence of anticompetitive agreements (i.e. seeking
a meeting of minds on a particular issue with the intention of achieving an
anticompetitive effect which leads the parties to feel bound by the relevant agreement).
Although a recent precedent on the necessity of demonstrating the presence of
both of these elements[18] is
still welcomed, the Reasoned Decision relatively falls short of the
expectations to provide at least a preliminary guidance in terms of the Board's
potential approach regarding the potential competition law concerns that might
still come into play within the scope of revenue sharing model even after the
legislative amendments.[19]

To put some additional color to the expectations on
this front, paragraph 3 of Article 13 of Law No. 5224 which amended by Law No.
7163 reads as follows: "With the exception of pricing of discounted tickets
that will be determined by way of the agreement to be executed between the
exhibitor, producer and distributor, if any, the exhibitors cannot realize any
activities regarding the subscription deals, promotions, campaigns or ticket
wholesales in terms of movie tickets.".

Having said that, Law No. 5224 does not provide any
insight in terms of the application of this provision and the last paragraph of
Article 13 of Law No. 5224 provides that the Ministry of Culture and Tourism
will determine the relevant principles and procedure regarding the application
of this article in general (i.e. Article 13 of Law No. 5224) by way of promulgating
a secondary legislation in the form of a regulation.[20]

The wording of the relevant provision sets forth that
the pricing of the discounted tickets for a movie by an exhibitor will be
agreed upon mutually in advance by way of an agreement to be entered by the
relevant exhibitor with the producer and/or distributor of such movie. That
being said, the precise scope of such an agreement and the terms and conditions
that will be mutually determined by the exhibitor and producer/exhibitor on
this front are not yet clear.

Given that, the Reasoned Decision sets forth that the
Board would deem the agreements directly or indirectly involving fixing of the
ticket prices at a certain level as agreements with the object of restricting
competition within the meaning of Article 4 of Law No. 4054, the prudent
approach would be not to interpret this provision as giving room to manoeuvre
to the movie producers and/or distributors for determining the final ticket
prices of the exhibitors.

Taking into account the Board's approach thus far in
terms of the resale price maintanance allegations concerning final ticket
prices, the prudent approach would be inferring that this newly introduced
provision aims that the relevant counterparts mutually agree upon specific discount
rates to be applied to the tickets and thus, refraining from any practices that
might be interpreted as directly or indirectly interfering with the exhibitors'
final ticket prices. Needless to say, it would be prudent for the undertakings to
comprehend and internalize the principles regarding the application of the
mechanism introduced by this provision along with its practical consequences,
once the secondary legislation on this front is promulgated. ¤

Authors:
Gönenç Gürkaynak, Esq., O. Onur Özgümüş, D. Helin Caymazer and Nazlıcan Özgör, ELIG Gürkaynak Attorneys-at-Law

(First published by Mondaq on April 4, 2019)

[1]
The Board's decision dated November, 2018 and numbered 18-42/667-328

[2]
Law No. 7163 has been published on the Official Gazette on January 30, 2019.
All provisions of Law No. 7163 have entered into force on the date of its
publication of the Official Gazette with the exception of certain provisions
that will enter into force on July 1, 2019.

[3]
e.g. Mars-4, January 18, 2018, 18-03/35-22; Mars-Cinecom-Avşar, June 23, 2016,
16-21/371-173; Mars-3, November 20, 2015, 15-41/682-243; Mars-2, September 12,
2014, 14-32/654-289; Movie Distributors, September 27, 2013, 13-55/760-319;
Mars-1, January 26, 2012, 12-03/93-32, Özen Film-2, January 19, 2012,
12-02/73-19; UIP, June 17, 2010, 10-44/765-248; Fida Film-4, September 16,
2009, 09-42/1062-271; Fida Film-3, June 18, 2009, 09-29/632-148; Özen Film, May
6, 2009, 09-21/446-111; Warner Bros.-2, March 8, 2007, 07-19/192-63, Fida
Film-2, July 4, 2007, 07-56/637-219; Fida Film-1, February 2, 2007, 07-16/146-47,
Warner Bros.-1, January 18, 2005, 05-06/48-20.

[4]
The Authority's Cinema Services Sector Inquiry Report dated February 16, 2016

[5]
The Report titled "Developments in the Cinema Distribution and Exhibition
Industry" published by the Australian Competition and Consumer Commission in 1998,
The Report titled "A report on the supply of films for exhibition in cinemas in
the UK" published by the Monopolies and Mergers Commission in 1994.

[6]
Warner Bros.-1, January 18, 2005, 05-06/48-20; Özen Film, May 6, 2009,
09-21/446-111; Fida Film-3, June 18, 2009, 09-29/632-148; UIP, June 17, 2010,
10-44/765-248; Özen Film-2, January 19, 2012, 12-02/73-19; Mars-1, January 26,
2012, 12-03/93-32, Mars-2, September 12, 2014, 14-32/654-289; Mars-3, November
20, 2015, 15-41/682-243

[7]
The Reasoned Decision, para. 33-34.

[8]
The Vertical Guidelines, para. 4.

[9]
The Reasoned Decision, para. 42-43.

[10]
United States v. Paramount Pictures, Inc. 334 U.S. 131 (1948)

[11]
The Reasoned Decision, para. 51.

[12]
The Reasoned Decision, para. 53.

[13]
The Reasoned Decision, para. 54.

[14]
The Board's no-go decision could be subject to appeal before the Ankara
administrative courts within 60 days following the formal service of the
Reasoned Decision. For the sake of completeness, this is a general rule that
applies to all decisions of administrative institutions (such as the Board) and
which is regulated under Article 6 of Administrative Procedural Law numbered
2577.

[15]
The exhibitors of 2,654 movie theatres out of 2,692 movie theatres in Turkey
did not accept this request (The Reasoned Decision, para. 54).

[16]
For the sake of completeness, the Reasoned Decision sets forth that the opinion
of the rapporteur was in line with the Board's reasoning and conclusion (The
Reasoned Decision, para. 5).

[17]
e.g. Ak Beton, June 25, 2014, 14-22/441-199; Aksaray Central Bakeries, April 16,
2014, 14-15/287-120; Aksaray Driving Schools, February 12, 2014, 14-06/127-56;
Bartın Driving Schools, August 13, 2013, 13-47/662-283; Bursa Çimento, October
16, 2012, 12-50/1445-492; Siemens Healthcare, May 29, 2012, 12-28/832-238.

[18]
Bellamy & Child; European Union Law of Competition; Edition 7; London,
2013, p 101 para. 2-035.

[19]
The decision at hand was rendered on November 8, 2018 prior to the publication
of Law No. 7163 on the Official Gazette on January 30, 2019. Having said that the
Reasoned Decision was published on the Authority's web-site nearly after one
month following the publication of Law No. 7163 (i.e. March 8, 2019) and the
Reasoned Decision does not delve into any details on this front despite briefly
referring to certain ongoing legislative amendments at the time of the decision.

[20]
In terms of timing, this provision will enter into force on July 1, 2019 and
the Provisional Article 4 of Law No. 5224 provides that the secondary
legislation will be promulgated within the six months starting from the entry
into force of this provisional article (i.e. January 30, 2019).