3.3 Access to exhibition and distribution for European films
 
European producers often complain that they find it difficult to get access to screens, and that major distributors discriminate against European films in favour of US products. These complaints are part of the campaign to give European films favourable treatment either in terms of tax breaks, production subsidies and other regulatory measures that can be expected to work in favour of European films. Before investigating the potential effectiveness of certain measures in the following case studies we want to evaluate the claim of problems of access to exhibition and assess the problem also from an exhibitors point of view.
 
First, it is necessary to investigate the claim that there are not enough screens available for European films to be shown, ie that there is a general screen shortage in Europe. Second, there is the question whether the current distributor-exhibitor relationship leads to a bias against the exhibition of European films in European cinemas. Third, we want to look at the issues raised more generally about the degree of concentration at the level of distribution and the extent to which vertical integration between distribution and exhibition in various European countries operate against the interests of European film-makers.
 
 
Access to European screens
 
In the study Retailing European Films(19), London Economics examined the distribution and exhibition practises of US majors and European distributors to investigate whether European producers get fewer opportunities to exhibit their films on screen. One of the questions addressed was whether a shortage of screens prevented access to screens for European film-makers. Another set of questions raised the issues of market positioning and the role of distribution over that of exhibition in retailing European films. The results of this study are highly relevant for the central topic of this paper and can be summarised as follows:
(19) Retailing European Films: The Case of the European Exhibition Industry; A report for the MEDIA Business School; London/Madrid; January 1993.
 
 
Screen shortage
 
The survey of cinemas in the EU showed that there is no evidence of shortage of screens in the EU, with the possible exception of the UK. The fall in demand for cinema admissions in the past twenty years have been greater than the fall in number of screens per person. Moreover, the development of multiplexes, which has successfully reversed the downward trend in admissions in some countries, has changed the relationship between distributors and exhibitors in others. Exhibitors now have greater flexibility in booking films and matching films to potential audiences.
 
 
Market position
 
Even in the light of such positive developments, however, it is difficult to think of European films that can sell across national borders in the way US productions do. European films and Hollywood productions are different, and in many cases do not appeal to the same viewers as the US blockbusters. As long as large portions of the public are willing to see the latest mainstream US film, it is only natural that a large number of exhibitors would program their screens with such films. They would have no interest in refusing to show a film that offers good earning potential.
 
The research presented in this report showed that there are definite differences in the market positioning of US and European films. US films are more likely to appeal to the largest audience: the young, frequent film-goer. In addition, what weighs against European film-makers is the established reputation of the US majors and the fact that they can supply a steady pipeline of product. This points the line of questioning away from exhibition to the role of distribution.
 
 
Access to distribution
 
US distributors are able to offer exhibitors particular advantages: they are part of the well-established marketing network of the US majors, and they offer a supply of films that cater for mainstream audiences across all countries that have been tested in the US market. This represents an important cover against risks for the exhibitors. US distributors thus enjoy a leading position in virtually all foreign markets.
 
The study found that in many European countries there is evidence of a bias against European productions by US distributors. US distributors make more money out of the EU films they distribute than from the average US film. As they obtain higher margins on their own products, the US majors need to achieve higher returns from a European film to compensate. As a consequence, they only distribute European films which they expect to fare above average.
 
Relationships between distributors and exhibitors change in time to reflect the considerable degree of mutual advantage that is to be gained by minimising the risks that are intrinsic to the film industry. They can join forces to release the right films at the right time and with the appropriate marketing campaign. US majors are in a privileged position to offer such advantages. US distribution companies can sometimes use their dominant position to impose block-booking practises, by which they tie the sale of a (usually) successful film with that of another (less successful) film. While this practice may be, under certain circumstances, an entirely reasonable way to deal with uncertainty over the likely success of a bundle of films, it may be considered anti-competitive in others.
 
 
Recommendations
 
In order to increase European film-makers' chances of commercial success, Retailing European Films argues that they should be able to offer to the exhibitors mainstream films as a viable alternative to the pipeline offered by US majors. This may be assisted by the establishment of an effective European distributor offering a pipeline of attractive films to European exhibitors.
 
One option would be for distributors in the EU to team up to build a strong operation. Another option would be to set up a single European distributor who could be helped to achieve a strong position throughout the EU and supply a steady pipeline of products. In this way exhibitors can rely on the distributor's established reputation (as now happens with the US majors) and they can be more or less guaranteed that a few successes can make up for the box office failures that may be included in the pipeline. In Retailing European Films, Italy's distribution company Penta was mentioned at the time as a likely candidate to become the promoter of European mass appeal films, given the dominant position it achieved in its home country and the evident European ambitions of its chief, Silvio Berlusconi.
 
These options are contrasted with the fact that not all European film-makers want to access the mainstream screens: most European films are aimed at a different type of audience from that of US productions. Hence, a distinction must be made between European films that compete directly with US productions and films that place themselves in a different, and less commercial, segment of the market. For the first, the real issue is that of ensuring that European films are distributed by an operator that can play as well as the US majors. For the non-mainstream production, there is a case for government support of quality and art cinemas.
 
Public funds can be used to subsidize art-house cinemas and to facilitate the distribution of less commercial European productions. These two aspects are explored in greater detail in later sections of this paper.
 
 
Links between exhibition and distribution, and the US majors
 
Chapter 2 of the White Book on the European Exhibition Industry highlighted the extent to which in some countries distribution and exhibition are becoming more integrated through common ownership or shareholdings. This raises the issue whether major distributors can exert market power based on the level of concentration in distribution and exhibition, and the existence of vertical links between the two operations. A large distributor facing a very fragmented exhibition sector is obviously in a much more powerful position than it would be if confronted with a strong exhibitor. Exhibitors that are vertically integrated with a distributor are likely (but this may not be always the case) to deal exclusively with their own distribution operation. The table below shows the market share obtained by integrated operators in the distribution and exhibition sector in various European countries.
 
Table 39: 
Market share of vertically integrated distributors 
Country Distributors
Distribution
Exhibition
Germany Warner, Neue Constantin
40.0%
6.0%
Belgium Belga, Indep.Films, Cinélibre, Excelsior
25.0%
12.0%
Denmark Warner-Metronome, Camera, MGM/UIP/Nordisk (1)
56.0%
38.5%
Spain UIP/Cinesa, Lauren Films
25.0%
13.0%
France UGC, Gaumont, AMLF (Pathé)
30.2%
33.5%
Ireland Abbey (Ward Anderson)
12.0%
47.0%
Italy Penta (Cine5), Istituto Luce
37.5%
3.3%
Netherlands -
-
-
Portugal Lusomundo, Castelo Lopes
60.0%
65.0%
UK UIP1 (UCI, MGM), Warner, Rank
51.0%
71.6%
Greece Elke, Spentzos, Prooptiki
13.5%
15.0%
Note (1) Partially integrated
Source: BIPE Conseil/MEDIA Salles 
 

Distribution activities of the US majors: a five-country comparison
 
In Table 40 we look at the size of the five largest distributors (in terms of box office grosses) in each of five national markets for which data are available. For France, Spain and the UK, the figures are based on a five-year average for the period 1988 to 1992; for Germany they are based on the period 1990 - 1992, and for Belgium on the two years 1990/91 and 1991/92. These five national markets represent around 70 per cent of total European box office, estimated at £1.6 billion in 1992.
 

Table 40 
Top five distributors, five year averages (Million UK £)
  

 
Belgium
%
France
%
Germany
%
Spain
%
UK
%
Total
%
Total Box  
Office 
31.1
100.0
360.2
100.0
308.0
100.0
158.5
100.0
251.2
100.0
1109
100.0
Warner/ Disney*  
6.7
21.5
60.5
16.8
74.1
24.1
35.2
22.2
68.3
27.2
244.8
22.1
UIP 
 
5.4
17.4
51.9
14.4
53.8
17.5
33.7
21.3
66.2
26.4
211.0
19.0
Columbia 
 
3.8
12.2
34.6
9.6
42.8
13.9
17.1
10.8
24.3
9.7
122.6
11.1
Independent Films
3.7
11.9
47.5
13.2
33.3
10.8
14.5
9.2
21.0
8.4
120.0
10.8
Fox/UGC  
 
2.5
8.0
30.2
8.4
29.1
9.4
13.7
8.6
23.6
9.4
99.1
8.9
Total
22.1
71.0
224.7
62.4
233.1
75.7
114.2
72.1
203.4
81.1
797.5
71.9
* In the meantime, Warner and Disney separated in 1993.
Source: London Economics' analysis and estimates based on national agency data/MEDIA Salles. Data for France are estimates based on figures for Paris box office.
 
Over the five years, 1988-1992, Warner Brothers, distributing Walt Disney films as well as the studio's own, had the largest share of the market. UIP was in second place. The two companies together accounted for around 40 per cent of the European market. Behind UIP came Columbia, followed by a national distributor (whose market position would chiefly be due to being distributors of Carolco's blockbusters in their own market, as is the case with Guild in the UK or AMLF in France) and Twentieth Century Fox. Positions 3, 4 and 5 might vary from market to market.
 
The size of the top two companies' market share tends to vary according to how concentrated each national market is. The UK has the most concentrated market of the five countries and one of the most concentrated in Europe. In the UK, the top two distributors account for more than 50 per cent of the market. The UK is followed by Spain. What the two countries have in common is strong integration between distribution and exhibition; in the UK, nearly 60 per cent of screens are owned by exhibition circuits with distributor links (this includes operators like Artificial Eye, Curzon and Mayfair, as well as MGM, Odeon, UCI and Warner). In Spain, the largest exhibitor, Cinesa, with around half the screens in the two major local markets, Madrid and Barcelona, is owned by UCI.
 
All the major exhibitors whose parent companies are also in distribution - MGM, Odeon, UCI and Warner - insist on arms-length relationships between the exhibition and distribution operations. While Warner and UCI operate showcase cinemas in London which show almost exclusively parent company product, the circuits as a whole deal with many distributors, and the distributors deal with many exhibitors, and we would expect there to be no preferential treatment between related exhibition and distribution companies.
 
In short, the Majors have not fully integrated distribution and exhibition and there would be little benefit in them doing so, unless they never (or rarely) had to resort to product and/or outlets supplied by third parties.
 
This situation is different to the one encountered among the specialised integrated distributor/exhibitors - those who predominate in the distribution and exhibition of European films - whose primary commercial interest is to pick up product to show in their own cinemas and to have cinemas in which to show their own product. They are less interested in third parties, unless, as distributors, they have a very successful film, in which case they will supply it on terms established (essentially) by the Majors and the large circuits.
 
The relations, then, between parent companies and subsidiaries, and between the various subsidiaries themselves, become a question of commercial logic. The subsidiaries are not in competition with one another any more than with the parent, and each benefits from the best performance by the others: UIP wants the strongest films that it can distribute most successfully; UCI or MGM expect no more favourable terms from UIP than from other distributors and aims to maximise its business with films from whatever source, with a tendency to favour the major "pipelines", i.e. the other US majors' distribution arms.
 
 
Review of the UIP exemption by the European Commission
 
Over the next few months - or possibly years - the Competition Directorate, DGIV, of the European Commission will decide whether to grant a new exemption under Article 85(3) to UIP, the joint-venture distribution company owned by MGM/UA, Paramount and Universal. The conclusion reached by the Commission in 1988, which it is currently in the process of reviewing, stated that UIP is effectively a cartel but its impact on the market was in the public interest. Specifically, the Commission took the view that UIP was able to provide a better service to exhibitors than its owners, acting separately, would be able to do, distributing more films more effectively. The extra revenue thus gained, coupled with the savings derived from the joint-operation, the Commission believed were being ploughed back by UIP's parents in the form of investment in cinemas and in European films, either at the production stage or, post-completion, when UIP picked up a European film to distribute in one or more European country. The Commission, furthermore, made the granting of the exemption contingent on a number of undertakings given by UIP to continue to support European films.
 
Like the 1948 Consent Decree whereby the Hollywood Majors agreed to divest their cinemas, the Commission's decision will not, in and of itself, set the seal on the future of the film business in Europe, but it will be a testing-ground of perceptions about the strengths and weaknesses of the US Majors and of their European competitors. The Commission may choose to make an example of UIP. It may decide that the feature film sector is beyond - or not in need of - intervention. Or it may use the opportunity presented by the UIP case to evaluate what needs to be done to enhance both competition in the supply of feature films, and the access enjoyed by European film-makers to Europe's markets.
 
The Commission's attitude towards UIP will be a function of how the EU authorities propose to respond to the competitive advantages enjoyed by the US Majors and the tendency towards greater vertical and horizontal integration.
 
Given the Majors' commercial supremacy, the whole exhibition environment will be strongly determined by the Commission's decisions and the Majors' reactions. Specifically, the Commission could directly constrain the Majors' scope of action by enforcing higher levels of investment in Europe, or else by prohibiting some of their activities, such as exhibition. It could indirectly constrain the Majors by supporting initiatives by individual European countries, such as the imposition of Spanish-like quotas or French-type levies.
 
Alternatively, it is highly improbable that the Commission would introduce sanctions against the Majors which were not also to be applied to Europe-based companies, such as Chargeurs, Silvio Berlusconi's interest, or Philips, whose activities are comparable both in range and scale. Forcing separation or divestiture of production, theatrical distribution, home video and television interests, etc., would be counter to the logic not only of the Majors but also of the value chain for feature films, where the distinction between the various moments in the production and exploitation of a film is becoming ever more blurred.
 
 
Conclusions
 
Distribution is key in the film industry. For producers, it provides the only means of having their product reach an audience. For exhibitors, it means dealing with a more or less risky supply of films to screen.
 
The structure of the relationship between distributors and exhibitors has grown to reflect the considerable degree of mutual advantage that is to be gained by managing the inherent risks, releasing the right films at the right time and with the appropriate marketing campaign.
 
US distributors are especially well-placed to offer European exhibitors deals that are to their advantage, because exhibitors are able to benefit in two important ways from buying Hollywood productions. First, they can tap into the well-established, extensive marketing network of the US majors. Second, US films will have been released in the US before Europe. Since US box office is closely correlated with success in Europe, the US release acts as free market research for both distributor and exhibitor. In buying US films, exhibitors are therefore exposing themselves less to risk than when they buy European product that has not been through the same market test.
 
There is evidence in the UK, Germany and Italy that US distributors make more from the EU films they distribute than from US product. This indicates that US distributors may well be biased towards US product as we would predict, because they need a higher return on European product to achieve the same margin as on their own product. US distributors will distribute films from other countries, but they expect them to exceed the average performance of US films. Since US distributors dominate the market, this means that access for independent productions may be limited.
 
These are some features of the distributor-exhibitor relationship which may lead to less screen time being available for independent productions. This factor is exacerbated by the strong position in most European countries of the distribution arms of the US majors.
 
This fact draws attention to the important point that in any comprehensive discussion of the problems of European producers in placing their product, the market position of that product with respect to competitors should be taken into account. If there is a large market for a certain type of film, then exhibitors will want those films on their screens. Without interference through government intervention, it may indeed be hard for producers of films with lesser audience appeal to have their product screened.
 
There is a case for the argument that distribution is dominated by the US majors, but this should not ignore differences that exist between US and European product. Difference in risk and marketing power aside, if European films were as commercially-attractive to exhibitors as major US titles in competing for prime viewing slots and then there would be little to stop exhibitors from showing those films.
 
Previous research by London Economics has shown that there are definite differences in general in the market-positioning of US and European films. US films are more likely to appeal to the largest audience: the young, frequent cinema-goer. What weighs against European producers is the established reputation of the US majors, and that they can supply a steady pipeline of product. Many films forming this pipeline will be box-office failures, but exhibitors are more or less guaranteed a few successes that will, it is to be hoped, make up for the flops.