Wednesday, December 29, 2004

Price fixing at a cinema near you?

It's the season to go to the movies. And on the face of it, Australians are incredibly well served. We have more cinema screens per head than just about anywhere outside the United States.

And yet our prices, disturbingly, are higher than in the US. An adult ticket to see The Incredibles in New York costs between $11 and $13. In Sydney it costs $14.50 to $15.30 - quite an imposition, and one that competition appears not to have lightened.

If you want to get an idea of why this might be the case, try going through the Yellow Pages and a Sydney street directory. After a tip-off I did it myself the other day. I wrote the letter "H" on those parts of the Sydney map that hosted a Hoyts complex and the letter "G" on those parts that hosted a Greater Union or a Village complex.

(Greater Union and Village operate their suburban cinemas as 50-50 joint ventures.)

West of Parramatta there are only H's for Hoyts, except for the south-west, where there are only G's for Greater Union. North of the harbour there are only G's, except for the shopping meccas of Chatswood and Warringah Mall, where there are only H's.

It's as though someone has drawn lines on the map allocating territories... the sort of thing that would happen if Coles had the supermarkets west of Parramatta and Woolworths had the south-west.

(The division isn't precise. For example, the new Greater Union complex in Bondi Junction is in the middle of what would otherwise be Hoyts territory and the Hoyts complex at Bankstown mars an otherwise clean sweep in Greater Union-Village's patch.)

I say it's "as though" there is an understanding about territories, but that's exactly what has been alleged in the Federal Court.

The US-owned chain Reading Cinemas went to the full Federal Court in 2001 seeking evidence in a dispute with a member of the Village group over access to a Brisbane shopping centre.

Among the documents it sought from Village were any referring to "the territorial division of cinemas in Australia by the Hoyts Group of companies on the one hand and/or by [Village-Greater Union] on the other".

Reading's chief operating officer at the time, Neil Pentecost (a former Hoyts executive), said he knew how the separation worked. In an affidavit quoted in the judgement he said that in Perth everything south of the Swan River was Hoyts territory, while everything north of the river was Greater Union-Village territory. In Queensland, Hoyts was limited to the Brisbane city centre and Surfers Paradise, and the rest of Queensland was left to Greater Union-Village. The other states were divided in similar fashion.

Speaking about his time as a senior executive of Hoyts, he said: "I knew that I could make my own commercial decisions on the basis that GU-Village would not be a competitor against Hoyts in its acknowledged territories. To the best of my knowledge I do not recall an instance when GU-Village and Hoyts competed for a site."

Indeed, at times the two swapped sites. He said that in 1996 Hoyts and Greater Union-Village swapped their Blacktown and Parramatta sites to ensure Hoyts consolidated its control of Sydney's outer-western corridor, while Greater Union-Village consolidated at Parramatta.

It is easy to see how such an arrangement would work to keep ticket prices high. With geographical separation, most Hoyts cinema managers, for example, would know there was no risk of a Greater Union cinema down the road cutting its prices to steal customers. There would be no Greater Union cinema down the road. There would be no need for a price war in order to get customers back.

If the arrangement that was described in the Federal Court is deliberate, Australia's two big cinema chains would appear to make up a cartel. The Australian Competition and Consumer Commission describes cartels as "a cancer on our economy". Its chairman, Graeme Samuel, says he has 40 under investigation. His definition includes companies that engage in "market sharing".

The Federal Court believed that the territorial division of cinemas was worth investigating. In 2002 it granted Reading the right to obtain the documents it sought. Justice Bryan Beaumont noted the evidence about territorial division was unchallenged by Village and its associates during the procedural hearing, a fact he thought was significant.

But whatever documents there may have been never saw the light of day. Shortly after being given the right to obtain documents from Village, Greater Union and Hoyts, Reading discontinued its case. It settled out of court with Greater Union and Village.

The competition commission has the power to take the investigation further. For all I know, it may be doing so. It will not reveal the names of the 40 suspected cartels it is investigating. But its previous record on cinemas gives theatre goers little cause for hope.

In 2000 it approved an arrangement whereby Greater Union, Village and Hoyts centralised their separate Sydney city centre operations. The commission's then chairman, Allan Fels, said at the time that the three had assured him they would continue to compete while at the combined George Street site.

"Hoyts and Greater Union will each utilise six screens and Village will utilise five. Each will buy films independently from distributors, program their own screens and determine ticket prices."

I don't know about Fels, but the last time I went to George Street I couldn't tell which company owned which screen, and the price for each screen was the same: $15.30 - just about the highest in Sydney.

The commission is to be applauded for its work busting cartels in the cardboard box industry. It has obtained $11 million in fines from freight companies which divided up the Australian market. It obtained $4 million from cement-lined-pipe companies for offences including market sharing.

It might be time for it to ask whether there is market sharing of our screens.

Reading Entertainment Australia Pty Ltd v Birch Carroll & Coyle Ltd [2002] FCAFC 109