Notice published pursuant to Article 19(3) of Council Regulation No 17(1) concerning an application for a renewal of the Commission decision of 12 July 1989 to grant an exemption pursuant to Article 81(3) of the EC Treaty

(Case No IV/C.2/30.566 - UIP Cinema)

(1999/C 205/06)

(Text with EEA relevance)

1. INTRODUCTION

The agreement establishing United International Pictures BV (UIP) were first notified to the Commission on 11 February 1982. A summary of the notification was published(2) pursuant to Article 19(3) of Regulation 17. In a decision of 12 July 1989(3) the Commission exempted UIP for five years with effect from 27 July 1988 and with expiry on 26 July 1993. On 22 June 1993 the Commission received a request for a renewal of the exemption of the agreements establishing UIP.

2. THE PARTIES TO THE UIP AGREEMENTS

UIP is a joint film distribution company established by Paramount Pictures Corporation, Universal Studios Inc., and Metro-Goldwyn-Mayer Inc. (the Partners). The Partners are all engaged, directly and indirectly through their subsidiaries, in the financing, production and distribution of feature films and other entertainment programmes for exhibition in cinemas, on television and other media.

3. THE MARKET

The UIP agreements concern the market for the distribution for exhibition in cinemas of feature films, short subjects and trailers. The relevant geographic market in the film business is national due to differences in the industry in the various Member States such as language, governmental regulations and different patterns of distribution and exhibition. While the market for theatrical exhibition generally has enjoyed a positive trend over the past years, UIP's average Community market share has fluctuated around 20 % throughout the period since the exemption decision in 1989 depending on the films released. In 1997 UIP's market share was as low as 13 %. The recent merger(4) of the activities of Polygram Filmed Entertainment with those of Universal Studios only adds moderately to UIP's total market share.

4. CHANGES MADE TO THE RE-NOTIFIED UIP AGREEMENTS AND UNDERTAKINGS GIVEN BY THE PARTIES FOLLOWING THE INTERVENTION OF THE COMMISSION

On the basis of the analysis carried out by the Commission and of the comments received from third parties during this procedure certain features of the re-notified UIP agreements appeared to be incompatible with Article 81 of the EC Treaty. Therefore, in this procedure, the parties made new amendments to the UIP agreements and provided new undertakings, in addition to the undertakings already given during the procedure leading to the exemption decision of 12 December 1989.

4.1. Amendments proposed by UIP and the Partners to the agreements re-notified in 1993

4.1.1. The right of first refusal provision

Under the UIP agreements, UIP has a right of first refusal to distribute the Partners' films. The right of first refusal means that the Partners are obliged first to offer their films for distribution to UIP and if UIP decides not to distribute a film, the Partners are free to use other distributors. Under the current provision, the whole Community is considered as one single territory. The Parties have offered to amend this provision so that each Member State is considered as a single territory, except for Belgium/Luxembourg and the UK/Republic of Ireland, each of which shall be treated as one territory.

The Commission considers that this amendment of the right of first refusal will reduce the restrictions of competition flowing from the UIP agreements. The amendment means that the Partner holding the distribution rights to a film will be free to seek alternative distribution for the film in territories where UIP elects not to distribute such film. In addition to the lessening of the restrictions of competition flowing from the UIP agreements, this amendment will in the Commission's opinion lead to a diversification and improvement of the supply of films in the Member States.

4.1.2. Best efforts

Currently, the shareholders agreement contains an obligation for UIP to maximise gross receipts for each film distributed by it. The Parties have undertaken to delete this obligation from the shareholders' agreement.

This modification meets the concerns that retaining the best effort provision in the shareholders agreement could be seen to extend the contractual obligation to maximise profits to each individual Partner in respect of every film distributed by UIP. This could be seen as an incentive to undertake an anti-competitive co-ordination of the release of films through UIP.

However, the Commission has accepted that a best efforts provision will be retained in the individual franchise agreements concluded between UIP and the individual Partner. The provision confirms UIP's commitment towards each individual Partner to maximise the gross receipts of each individual Partner's film. The purpose is to make it clear that each Partner will satisfy the requirements of their contractual partners (producers, talent and other profit participants) to ensure the most profitable individual distribution possible of a film through UIP. The Commission considers that retaining the best efforts clause in the individual franchise agreements will not act as an incentive for the parties to coordinate their distribution activities.

4.2. Undertakings from the 1989 decision as repeated and amended by UIP and the Partners

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4.2.1. Co-financing and distribution of films of third parties in the EEA

UIP and the Partners have agreed to repeat the undertakings(5) that UIP will make itself available, based upon its commercial judgement, to co-finance, acquire distribution rights to or distribute feature films of third parties in the EEA.

4.2.2. Publication of availability

UIP has agreed to provide an undertaking to publicise such availability to independent producers and will introduce and make known its procedures to assist such producers to contact UIP concerning their film projects.

4.2.3. Appointment of a film executive responsible for identifying and securing EEA films for distribution

UIP and the Partners have agreed to provide an undertaking to facilitate the abovementioned undertakings by employing an experienced film industry executive to be responsible for identifying and seeking to secure distribution of EEA films, which are considered reasonably likely, based on UIP's commercial judgment, to offer an opportunity to generate reasonable earnings in theatrical distribution.

4.2.4. Publication of UIP and the Partners' activities in respect of third party films

UIP and the Partners have agreed to provide an undertaking to publicise annually in the trade press or by some other appropriate publication the nature and extent of its activity in the co-financing, acquiring distribution rights to and distributing the feature films of third parties in the EEA.

4.2.5. Production, financing and distribution of films in the EEA

Each of the Partners have agreed to provide an undertaking to make themselves available individually, based upon their individual commercial judgement to produce, finance, co-finance or acquire distribution rights to local films in the EEA.

4.2.6. Records to show the nature and extent of the Parties' local film activities

UIP and the Partners have agreed to provide an undertaking to continue to maintain records to show the nature and extent of their activity in the production, co-financing or acquisition of distribution rights of films of EEA national origin or made in whole or in part in the EEA(6). A definition of a film of EEA national origin has been included in the undertaking to avoid doubts as to the origin of a particular film.

4.2.7. Undertaking to support professional development of European film makers and film festivals

UIP and the Partners have agreed to provide an undertaking that one or more of them will take initiatives to encourage, support and promote the training and professional development of young European filmmakers and their films by, for example, providing financial support to film schools, funding to film festivals, sponsoring prizes or awards and offering internship opportunities to novice EEA film industry professionals.

4.2.8. No coordination of release dates

UIP and the Partners have offered to maintain the undertaking(7) that no Partners' committee would consider or discuss the plans to release, distribute or market the individual films of any Partner.

Except pursuant to any co-production or co-financing or similar agreement each Partner moreover has agreed to provide an undertaking to set dates for the release of its films through UIP individually without agreeing or seeking to reach agreement with any other Partner as to such date, and UIP shall not disclose such release dates until authorised to do so or the date becomes known to third parties.

The reinforcement of this undertaking is made in order to underline that UIP will not work as a coordination vehicle for the Partners' film distribution activities, which is one of the main concerns that third parties have raised against UIP.

4.2.9. Arbitration

UIP and the Partners have agreed to provide an undertaking to establish a new conciliation procedure in addition to the already established arbitration procedure to resolve disputes between UIP and exhibitors relating to the supply of prints. Moreover, the arbitration procedure has been improved by being designed to operate more quickly. The new mechanisms are to be applied in Member States where no industry arbitration procedures exist.

In the Commission's view the new conciliation and the amended arbitration procedures are useful instruments in ensuring that UIP deals with exhibitors on a fair and equitable basis.

4.2.10. Undertaking never to block book

UIP has agreed to provide an undertaking not to apply block-booking practices, i.e. never make the acceptance of a film conditional upon the acceptance of any other film.

The Commission was concerned that UIP potentially could force exhibitors to accept films they would not otherwise have accepted. This undertaking makes it clear that UIP will not use block booking.

4.2.11. Undertaking not to discriminate between own and third parties' cinemas

UIP has agreed to undertake to supply films to cinemas owned or controlled by the Partners on an arm's length basis, recognising that differences in license terms may be attributable to commercial differences between cinemas.

This undertaking ensures that third parties have access to the Partners' films on fair conditions.

5. THE COMMISSION'S INTENTIONS

The parties have provided a number of changes to the notified agreements and provided additional undertakings to the Commission. Taking into account the heterogeneous character of the film commodity, the amended UIP agreements allow the parties to achieve greater efficiency by avoiding the duplication of distribution organisations and thereby reducing costs. Consequently, the parties are able to release more films in the Community. A less costly distribution organisation results in a more efficient network of branch offices to the benefit of exhibitors and cinema viewers through a ready and regular access to a wider variety of films.

On the basis of the foregoing, the Commission intends to take a favourable view in respect of the agreements subject to the Parties amending the agreements and putting the undertakings into force. Before doing so, it invites third parties to send their observations within one month of the publication of this notice to the following address quoting the reference "IV/C.2-30.566 - UIP Cinema": European Commission,

Directorate-General for Competition,

Directorate C

, Rue de la Loi/Wetstraat 200 , B - 1049 Brussels ; Fax (32-2) 296 98 04 .

(1) OJ 13, 21.2.1962, p. 204/62.

(2) OJ C 286, 10.11.1988, p. 4.

(3) OJ L 226, 3.8.1989, p. 25.

(4) OJ C 309, 9.10.1998, p. 8, Non-opposition to a notified concentration (Case No IV/M.1219 - Seagram/Polygram).

(5) Point 27 of the 1989 Commission Decision.

(6) Point 32 of the 1989 Commission Decision.

(7) Point 31 of the 1989 Commission Decision.