Contribution from commercial cinema owners, Denmark We, Michael Obel, Kim Brochdorf and John Tønnes own and manage both smaller commercial cinemas with few screens and multi screen cinemas forming part of larger chains, including international chains of cinemas. We represent cinemas located in various areas in Denmark. For a further description of our business and market position, we can refer to the detailed description in the complaint in the Danish Cinema case ( CP 229/2010). With this complaint is included supportive evidence on the points discussed below and elaborated further on the issues highlighted below. Our comments can be divided into the following main issues: 1. Introduction We find it very important that EU rules regulating subsidies to cinemas are included in the future state aid assessment criteria for films and other audiovisual works and that there is an express definition of the rules applying to the exhibition sector, cf. item 41 in The Issues Paper. We also find it very important that such future rules strike the balance between the legitimate need to support art cinemas and smaller cinemas in truly remote areas and the urgent need to implement rules that ensure that state aid of commercial cinemas disguised as art cinemas do not distort competition on the commercial cinema market and in the longer term endanger the viability and existence of the commercial cinemas. We think that the principles introduced in the Finnish state aid decision (State aid NN 70/2006) should be reflected in the rules, i.e. especially the need for a cap ensuring that the aid intensity is kept at a reasonable level. We refer to item 28 c ( a level of EUR 5000 a year per cinema which we find acceptable) in the Finnish decision and refer to the fact that according to the existing Danish legislation unlimited support can be given ( meaning that the de minimis rules do not apply to the present Danish legislation) see for further elaboration on this issue the complaint in the Danish cinema case. Furthermore, we agree that a geographical criteria can also be introduced in order to allow support for cinemas in truly remote areas due to their cultural importance. However, the geographical criteria has to take into account the geographical conditions and market conditions of each member states and the fact that the take-up area for cinema customers in for instance Denmark is 30 km from the location of the cinemas. For further proof of this we again refer to the evidence presented in the Danish cinema case. 2. A brief description of market development/changing market conditions and problems with commercial cinemas disguised as art cinemas The exhibition market has changed dramatically since the introduction of digital cinema. This has
created new challenges in order to maintain a healthy balance in the exhibitions sector, between the subsidized exhibitors and the commercially driven mainstream exhibitors. In Denmark the state and municipal aid to so called local cinemas and to art cinemas has existed for many years. There has been two purposes for the Exhibition support.;firstly, to make sure that small remote communities despite their size, could maintain a local cinema running. And the other purpose has been to secure the existence of art film cinemas in big city areas. Before the introduction of digital Cinema, the state and municipal aid given to selected art and remote cinemas have not created any serious competition problems for their neighbor competitors; the commercially run cinemas, because the cost of distributing a traditional 35 mm prints has been high, and this has been limiting the distribution of print to only include the commercially run cinemas. Before digitization, the subsidized exhibitors received the prints in their second circulation, after the print has served at the first run to a commercial cinema. Normally, this meant 8 weeks after the commercial exhibitors opening day. After digitization, the cost of print has despaired and this means that the natural circulations rings with 8 weeks (holdback) between a first runner commercial cinema opening of a mainstream film and the 8 weeks later 2 nd opening of the same mainstream film at the art subsidized cinema is no longer existing. The result is that the subsidized art cinema now is running the same mainstream films at the same time, competing against the non subsidized commercial cinema. It is important to bear in mind that some of the art subsidized cinemas are literally neighbors to commercial driven cinemas with distances as low as few hundred meters between them. This is an unintended side effect of the intention behind the state and municipal support for ART cinemas. Art cinemas are receiving subsidy because they are programming a NON commercial ART repertoire. But the temptation for the ART cinema programmer, to run commercial mainstream film is extremely high in the new digitized marketplace, because they are tempted to make more money by showing the boxoffice films and programme the art movies for instance on morning shows, late evening shows etc. By clamming that you are an Art house repertoire Cinema, but in reality running mainstream movies at the primetime programming, the Art cinema owners are gaining the best of two worlds > tax financed subsidiary money and commercial box-office profit at the same time. This dilemma has created an unfair competition balance between some of the subsidized ART cinemas, who in fact are commercial cinemas in disguise as art cinemas competing against NON subsidized neighbor commercial cinemas. A solution is needed that will maintain the subsidy for the clean ART cinema and the remote countryside cinema, without supporting commercial cinemas in disguise as art cinemas The solution could be some regulations for subsidized cinemas 1) Min distance of 30 km to nearby commercial driven cinema 2) Holdback period of 8 weeks from commercial on opening days for mainstream film Make a ART film repertoire lock definition, that classify what film that can be run from the first opening day
3. A description of the geographical conditions in Denmark the take-up area for cinema customers The take up area for a cinema in Denmark is on average at least 30 to 35 km. in a linearly measured distance. This is evidenced by several large analysis of ticket bookings, as it is possible to establish the home addresses of our guests based on information provided by our guests or by tracking the phone numbers used for the reservations. See as evidence of this, documentation included in the complaint in the Danish cinema case. As such, cinemas placed closer than 60-70 km. from each other (measured linearly) compete about any guests situated in between such cinemas and thus cannibalize on each other s revenue potential. In order to avoid a massive cannibalization from a publicly supported/funded cinema towards a privately funded cinema simultaneously with leaving room for a fair geographical density of cinemas, we believe that a reasonable compromise would be to establish that public support to a certain cinema is not unreasonably distorting competition, if the supported cinema is placed more than 30 km. from any privately funded cinema (measured linearly). The reason for a relatively large take up area for Danish cinemas is the fact that we have fine roads, good public transportation, a tradition for commuting in rural areas and last but not least, no large lakes and no mountains or scarcely populated areas, forests etc. separating or isolating any area from neighboring areas or blocking the ability to go from one place to another. 4. A description of the attempt to reach an agreement on support for digitization on the Danish market a few years ago which failed because the commercial cinemas disguised as art cinemas did not support it The privately funded cinemas, typically planning investments in the cinema industry with a 10 to 15 years perspective, already realized the potential threats from digitization 8 to 10 years ago and especially saw that larger cinemas would lose bargaining power towards distributors and simultaneously meet increased competition from a significantly increased number of cinemas getting one of the in principal unlimited number of copies of larger blockbusters. We realized that most cinema operators publicly funded or not - measure success in admission levels, and that the digitization would lead to almost all cinemas playing the same blockbusters at the same time, rather than many smaller/publicly funded cinemas specializing and screening art movies. Combining this foreseeable trend with the vaguely formulated Danish rules and practice allowing unlimited public support for discretionary selected cinemas, we have for 7-8 years tried to convince politicians locally and centrally, and to convince the Danish Film institute, that it was necessary to secure rules for state aid, that would help cinemas in remote rural areas and real art cinemas to survive digitization and at the same time limiting a completely unregulated bonanza of public support to cinemas using the access to copies and the state aid to take up direct competition with commercial cinemas. Furthermore, we initiated and for years have tried to negotiate and push a so called National Compromise via the Danish Association of Cinemas, trying to establish a situation, where the commercial cinemas should accept and politically support significant public support to all the typically smaller cinemas not being able to get payment under the Virtual Print Fee-regime or the like. In order to reach such a compromise, the publicly supported cinemas should accept to continue a film booking system, where they would not have access to mainstream blockbusters etc. before some weeks, e.g. 6-8
weeks after the premiere date in the privately funded cinemas. Such a compromise would have secured all the typically smaller second run cinemas unchanged booking opportunities compared to the analogue business model with a limited number of celluloid film copies, and at the same time secure same smaller cinemas that they would be the only beneficiaries of any available public support. All this in order to get everyone well through the digitization. Most cinemas actually realized that this model would be a balanced solution to the challenges at hand, but 20 to 30 smaller (and fully or partly publicly financed) cinemas saw an opportunity to get the best of both worlds, i.e. going for full public payment of the conversion to digital and thereupon expand their art cinemas or specialized/smaller cinemas into larger cinemas also screening all the blockbusters and other mainstream content competing directly with and cannibalizing on the privately funded cinemas. The management at said 20 to 30 cinemas saw an opportunity to shift from being small to becoming real business men with large and very important cinemas without investing and risking anything because it was all financed by state aid paid ( the Danish film Act art 18 see for further elaboration on this the complaint in the Danish cinemas case) 6. Cinema operation ia a marginal business Cinemas are scale business with huge investments tied up in real estate, equipment, and a lot of other fixed cost simultaneously with being completely dependent on the line up of films without having any influence on the same and no alternative income source if the films do not attract a sufficient number of guests in a certain period or on a more permanent basis. If we lose just a few per cent of our guest, such downturn in revenue will significantly hurt our earnings, and loosing e.g. 10-15 % of our revenue will completely take out our earnings.in our circuit we have invested more than 1 billion DKK in the Danish Cinema Market over the past 10 years, and our financial results are crucial to our business and to our ability to convince our shareholders to continue investing in the exhibition industry by keeping up with the increasing demand for development and investment in cinemas for the future. If we are not able to deliver reasonable earnings, e.g. by losing 5-10 % of our guests to cinemas competing at no risk and on the basis of public financial support, we will end up in a situation, where private investors (85-90 % of the cinema market) will disappear, and the only ones benefiting from such a development is the remaining 10 to 15 % of the cinema market, being smaller local cinemas without the ability whatsoever to cover up for the loss of the by far largest part of the cinema market, i.e. the privately run and financed cinemas. 7. A brief description of the different support schemes on the Danish cinema market The State Aid for cinemas in Denmark is not only unlimited and given at the local mayors own discretion. It is also very difficult to track as it has many shapes and sizes affecting all elements of the cinema exhibition industry. Se for further elaboration the evidence supported with the complaint in the Danish cinema case. As a commercial cinema, we have no chance of competing with a cinema in our market area that is showing the same movies as us, but has been publicly funded for the digitalization, operates from premises rented out by the municipality at 10% of the market price for the square meters, and can operate with volunteer workers who are not receiving any salaries. 8. 8. A brief description of the indirect support from the distributors
The digitalization is leading to the number of opening prints of any given movie is rising drastically. E.g. the average number of opening prints on the big movies (box office top-20) was from 2005 to 2009 between 72 to 86 prints per movie. In 2010 the average number of opening prints of a top-20 movie was 102 prints. This happens because the cost for a print which has to be covered by the film distributors is going down by around 90% when the cinemas are digitalized. The increase in opening prints means that very small cinemas often formerly known as art/up market cinemas are now competing with the privately funded commercial cinemas. Also it means, that the bargaining power of the commercial cinemas towards the film distributors are diminished. We have a situation where the business model of the privately funded cinema is under attack from: 1) Cinemas which are based on State Aid are starting to play mainstream movies, because they are now available due to the digitalization. 2) Movie distributors gaining more bargaining power over the cinemas due to the increase in opening prints on any given movie. 3) Movie production companies wishing to diminish the time that movies are launched in the cinemas, latest seen in the US with the introduction of Premium VOD only 2 months after the opening of a movie. Kind regards, Michael Obel John Tønnes Kim Brochdorf