U.S. Department
of Justice
Appendix - Response Of The United States To Public Comments On The Proposed Final Judgment : U.S. V. Regal Cimemas, Inc. And Consolidated Theaters Holdings, GP.
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APPENDIX Public Comment from Robert B. Burner (June 26, 2008) A Public Comment from Robert B. Bruner (July 22, 2008) B Public Comment from Voluntary Trade Council, Inc. (July 13, 2008) C June 26, 2008 John R. Read, Chief This letter is a public comment to the proposed Final Judgment regarding the merger of Regal Cinemas, Inc. ("Regal") and Consolidated Theatres, GP ("Consolidated") (the "Merger"). More specifically it focuses on the competitive effect of the Merger in the Southern Charlotte, North Carolina, market area. As noted below, even after the divesture of the Crown Point 12 the HHI for the Southern Charlotte market will be 5,032 points, nearly three times the 1,800 point threshold for a highly concentrated market set forth in the Merger Guidelines. Further, the Merger will still cause a HHI increase of 1,281 points, more than 25 times the 50 point increase for highly concentrated markets that the guidelines specify potentially raise significant competitive concerns and more than 12 times the 100 point increase threshold that the guidelines specify create a presumption of the creation or enhancement of market power or the facilitation of its exercise. Merger Guidelines Sec. 1.51c. As discussed in detail below, to obtain an accurate view of the competitive effect of the Merger in the Southern Charlotte market the inclusion of the Park Terrace Theatre in the market and the exclusion of the Village Theatre in the market is required. With these two adjustments, the Herfindahl Hirschman Index ("HHI") will more accurately reflect the market concentration and the competitive effect of the Merger in the Southern Charlotte. As this revised HHI clearly shows the divesture by Regal of the Crown Point 12 does not eliminate the anticompetitive effects of the Merger in the Southern Charlotte market. Thus, additional changes to the proposed Final Judgment are necessary to reduce the market concentration of Regal in the Southern Charlotte market area. Because of its location, the entry of the Village Theatre into the Southern Charlotte as a true first-run commercial movie theatre will, in reality, most likely be more beneficial to the consumers then the divesture of Crown Point 12. The elimination or waiver of Regal's Stonecrest's clearance will allow the Village Theatre to enter the first-run commercial movie market in Southern Charlotte which will provide additional consumers a choice of venues1 for first-run commercial movies in Southern Charlotte and help to deconcentrate the market and offset the anticompetitive effects of the Merger2. The Complaint On April 29, 2008, the United States of America brought a civil antitrust action to enjoin the proposed Merger of Regal and Consolidated and to obtain equitable relief (the "Compliant").As stated by the United States in the Complaint, the Merger would substantially lessen competition and tend to create a monopoly in the theatrical exhibition of first-run commercial movies 3 in the Southern Charlotte market area in violation of Section 7 of the Clayton Act. Regal is the largest operator of theatres in the United States. Consolidated is the largest operator of theatres in the Southern Charlotte area. As stated in Paragraphs 14-17 of the Complaint, tickets at theatres exhibiting first-run commercial movies usually cost significantly more than tickets at sub-run theatres. Art movies are released less widely than first-run commercial movies. The relevant product market within which to access the competitive effects of the Merger is the exhibition of first-run commercial movies. Paragraph 19 of the Complaint sets forth the theatres in Southern Charlotte that the United States used in its review of the competitive impact in this market area, including its calculation of the HHI. As discussed below, Paragraph 19 of the Complaint wrongly includes the five screen Village Theatre in the relevant market and excludes the six screen Park Terrace. Paragraph 30 of the Complaint states that the newly merged entity would control four of the six first-run commercial theatres in the Southern Charlotte area, with 56 out of 83 total screens and a 75% share of the 2007 box office receipts. The market concentration as measured by the HHI would increase 2,535 points to 6,050 points; substantially above the merger guidelines. The Complaint also states that the Merger is likely to lead to higher ticket prices for moviegoers (see Paragraph 34 of the Complaint) and that the entry of a first-run commercial movie theatre in the Southern Charlotte area is unlikely (see Paragraph 37 of the Complaint). The Complaint states that the likely effect of the Merger would be to lessen competition substantially for first-run commercial motion picture exhibition in violation of Section 7 of the Clayton Act, 15 U.S.C. Section 18. The Proposed Final Judgment At the same time the Complaint was filed, the United States also filed a proposed Final Judgment stating that it will eliminate the anticompetitive effects of the Merger. In the Southern Charlotte market area, under the proposed Final Judgment, Regal is required to divest its ownership of the Crown Point 12 theatre. In the Southern Charlotte market the exhibitors of film product are highly concentrated and the HHI for that area greatly exceeds the merger guidelines. Even after the divestiture of assets proposed by the United States the HHI in the Southern Charlotte market will increase by almost 130% from the pre-merger HHI. Comment - The Final Judgment does not adequately reduce or eliminate the anticompetitive effects of the Merger in Southern Charlotte United States has found that the Merger would substantially lessen competition in the Southern Charlotte market and is in violation of Chapter 7 of the Clayton Act. See Exhibit 14. The post-Merger HHI shows an excessive concentration of the market in Southern Charlotte as a result of the Merger. After divesture by Regal of the Regal Crown Point 12 Theatre the post-Merger HHI would still be an extremely high 5,032 points, reflecting an excessive concentration of the market after the Merger. See Exhibit 2. In Paragraph 34 of its Complaint, the United States asserts that the Merger will enable price increases by the merged firm to be profitable because of the lack of remaining competition in the market Paragraph 37 of the Complaint notes the unlikelihood of new entry in Southern Charlotte to reduce the market power of the merged firm. However, the United States' Competitive Impact Statement, which orders the divestiture of the Crown Point 12, provides no analysis or data as to how that action will reduce or eliminate the substantial market concentration and anticompetitive effects of the Merger in Southern Charlotte. It provides only a conclusionary statement that the divestiture will "preserve existing competition between the defendant's theatres that are or would have been each others' most significant competitor...." This statement is in error with respect to the Southern Charlotte market because the Crown Point 12 is on the periphery of the market on the far eastern edge of the Southern Charlotte market area, approximately five miles from its nearest competitor, the Arboretum 12 located to the west of the Crown Point 12. There are no competing theatres to the north, south or east. Thus, the divestiture of the Crown Point 12 will have no real effect on competition in the Southern Charlotte market. The merged firm, Regal, will still have the power to raise prices and the likelihood of new entry will remain unlikely. The HHI of over 4,577, still an increase of, at a minimum, 1,000 to a maximum (see below) of over 3,000 points is still overwhelmingly establishes a Section 7 violation, particularly with entry barriers admittedly very high. Comment - Competitive Effects in the Southern Charlotte Market The review by the United States of the competitive effects of the Merger in the Southern Charlotte market is incomplete and inaccurate. The determination of which theatres show first-run commercial movies is important in assessing the competitive impact on the Southern Charlotte market. All facts and circumstances must be evaluated to determine the relevant market as a precondition to finding a violation of Chapter 7 of the Clayton Act. In determining whether a particular theatre (which may not clearly be a "first-run commercial theatre") shall be considered a "first-run commercial theatre", the public interest compels inclusion of theatres which are truly first-run competitors and the exclusion of theatres which are not. Consolidated's Park Terrace Should be Included in the Relevant Market. The United States wrongly excludes the Park Terrace Theatre from the Southern Charlotte market. The Park Terrace Theatre, acquired by Regal in the Merger, primarily shows first-run commercial movies. The Park Terrace Theatre is located in the Southern Charlotte market near the Phillips Place Theatre. It has stadium seating and its ticket prices are the same as at other first-run commercial theatres in the Southern Charlotte market area. Prior to the Merger both the Park Terrace Theatre and the Phillips Place theatre were owned by Consolidated. Because the Park Terrace 6 is in the same film zone as Phillips Place 10 (also a part of the Merger) and, more importantly, because the Phillips Place Theatre has only 10 screens, the Park Terrace 6 and the Phillips Place 10 share films5. Most films start their run at Phillips Place and conclude the required run (usually four to five weeks) at Park Terrace. See Paragraph 12 of the Complaint. This relationship is critical. Since Phillips Place has only 10 screens sharing films with Park Terrace allows Phillips Place to exhibit more first-run commercial movies than it otherwise could show. This arrangement allows the film distributors to license more first-run commercial movies to Phillips Place/Park Terrace. Without the ability to "move over" films from Phillips Place to Park Terrace a substantial portion of the Southern Charlotte market would be deprived of many of the best first-run commercial movies. The first-run movies at the Park Terrace Theatre that are "moved over" from Philips Place are still being shown on their first run at other first-run commercial theatres in Southern Charlotte6. Thus, Phillips Place 10 and Park Terrace 6 should be treated, for purposes of determining the competitive effect of the Merger in the Southern Charlotte market, as the Phillips Place/Park Terrace 16. Since the Park Terrace is a theatre that is being acquired by Regal in the Merger, its inclusion in the relevant market will result in a more accurate picture of the competitive effect of the Merger in the Southern Charlotte market. Village Theatre Should be Excluded from the Relevant Market. The United States wrongly includes the Village Theatre from the Southern Charlotte market. Background. The independently owned Village Theatre is a two year old five-plex stadium theatre with state of the art projectors and sound systems. The Village Theatre is the only luxury theatre in Southern Charlotte (and probably the entire Carolinas). It offers an array of amenities for the moviegoers, including valet parking, gourmet desserts, wine and beer, and luxury reserved seating. The Village Theatre has been voted the Critics' Choice award as the best theatre in Charlotte. It is a showcase venue and had hosted numerous world premieres of non-commercial movies. Numerous restaurants are in the theatre building and fronting plaza, all with the option of outdoor seating. The Village Theatre is the centerpiece of a $75mm mixed-use shopping center. Regal's Stonecrest Theatre is in a competitive film zone7 with the Arboretum theatre8 and the Village Theatre. The distance from Regal's Stonecrest to Arboretum is less than three miles (as the crow flies) and from Regal's Stonecrest to the Village Theatre is approximately 2.6 miles (as the crow flies)9. The Arboretum was in operation before Regal's Stonecrest was built. Upon Regal's Stonecrest's opening, there was an agreement between Regal's Stonecrest and the Arboretum that there would be no clearance given to either theatre in that film zone and that each theatre would show the same movies on a "day-and-date" basis10. Even though the Village Theatre has only five screens compared to the 22 screens at Regal's Stonecrest, since the Village Theatre opened in March 2006 (much after the opening of Regal's Stonecrest), Regal's Stonecrest has invoked clearance against the Village Theatre on every first-run commercial movie shown at Regal's Stonecrest while continuing to not invoke clearance against the bigger competitor -the 12 screen Arboretum Theatre. The Village Theatre is the most centrally located of all the first-run commercial movie theatres in the Southern Charlotte area. It has the ability to become an attractive option for customers desiring to see first-run commercial movies in this market. Exclude the Village Theatre. Village Theatre has desired to exhibit first-run commercial movies since it opened but because it is in a competitive or split zone with Regal's Stonecrest and there has been no allocation of product between the Village Theatre and Regal's Stonecrest, Regal's Stonecrest has invoked the benefits of clearance to prevent the Village Theatre from showing virtually all first-run commercial movies. Thus, Regal's Stonecrest's use of clearance has effectively kept the Village Theatre from being a first-run commercial movie theatre. Since June 1, 2006 the Village Theatre has shown only three first-run commercial movies while Regal's Stonecrest has shown over 300 first-run commercial movies. For example, for the summer of 2008 the Village Theatre has not been able to obtain Indiana Jones, Get Smart, The Hulk, Ironman, Sex and the City, Hancock or any other first-run commercial movie. Therefore, for purposes of determining the competitive effect of the proposed Merger, Village Theatre cannot be considered as a first-run commercial movie theatre and it should not be included in the relevant market or the calculation of the HHI. As discussed below, the Village Theatre should only be included in the calculation of HHI if the clearance of Regal's Stonecrest is eliminated so that the Village Theatre can show first-run commercial movies on a "day and date" basis with the Regal's Stonecrest Theatre, Impact on Market Concentration in the Southern Charlotte Market Area. Based on the facts above, the Park Terrace Theatre should have been included in the review of the competitive impact on market concentration in the Southern Charlotte market area and the Village Theatre should have been excluded. Exhibits 3 and 4 set forth the revised figures for the competitive effect of the Merger with to the inclusion of the Park Terrace Theatre and the exclusion of the Village Theatre. Exhibits 3 and 4 show a major increase in the market concentration from that set forth in Paragraph 30 of the Complaint. The benchmark for determining the competitive effects of the Merger on the Southern Charlotte market is the HHI before the Merger. After giving effect to these changes (before the divesture of Crown Point 12), after the Merger Regal would control five of the six first-run, commercial theatres in the Southern Charlotte market area (instead of four of six as shown in the Complaint), with 62 out of 84 total screens (instead of 56 of 83 as shown in the Complaint), and a 78% share of the 2007 box office receipts (instead of 75% as shown in the Complaint). The market concentration as measured by the HHI would increase 2,867 points to 6,618 points as compared to the increase of 2,535 points to 6,050 points as set forth in Paragraph 30 of the Complaint, a substantial additional increase in the Regal's actual post-Merger market concentration. Exhibit 6 is a summary of the Competitive Effects of the Merger on the Southern Charlotte market. As discussed above, Paragraph 30 of the Complaint erroneously included the Village Theatre and excluded the Park Terrace Theatre. Exhibits 3 and 4 accurately reflect the competitive effects before the Merger, after the Merger and after the divestiture of Crown Point 12 by including the Park Terrace Theatre and excluding the Village Theatre. Comment - New Entry into the Southern Charlotte Market The entry of an additional first-run commercial movie theatre in the Southern Charlotte market is beneficial from a competitive effects point of view because the new entry will obtain a share of the market, thereby reducing Regal's market concentration. More importantly it will give moviegoers in Southern Charlotte another real choice of venues11 for viewing first-run commercial movies in a market in which, as the United States states in Paragraph 37 of its Complaint, the entry of an additional first-run commercial movie theatre in Southern Charlotte is very unlikely. However, there is an opportunity to have a new entry exhibiting first-run commercial movies in the Southern Charlotte market. With the elimination of clearance between Regal's Stonecrest and the Village Theatre12, the Village Theatre would enter the Southern Charlotte market as an additional first-run commercial movie theatre. The entry of the Village Theatre as an additional first-run commercial movie theatre in the Southern Charlotte market benefits competition because the Village Theatre will obtain a share of the market and thereby reduce Regal's market concentration. The impact of this action on the market is shown on Exhibit 5. it will benefit consumers by giving them an additional choice of venues for first-run commercial movies in a heavily concentrated market. Eliminating clearance is a more effective way to increase competition and give moviegoers a choice of venues than divesting the Crown Point 12. Comment - Conclusion The Competitive Impact Statement filed by the United States in United States v. Regal Cinemas, Inc. and Consolidated Theatres Holdings, GP is in error with respect to the Southern Charlotte first-run commercial movie market. It wrongly asserts that the divestiture of the Regal Crown Point 12 will preserve existing competition between the merging entities and eliminate the anticompetitive effects of the Merger. In point of fact, the divestiture will have little effect on the extremely concentrated market because of the location of the Crown Point 12 on the periphery of the market. Further, the divestiture will not begin to overcome the presumption contained in the Merger Guidelines which follows from the very substantial increase in the HHI in a highly concentrated market like Southern Charlotte. The Competitive Impact Statement also wrongly excludes the six screen Park Terrace Theatre and includes the five screen Village Theatre in the Southern Charlotte market, rendering the market definition inaccurate and less concentrated than actually is the case. The post-Merger HHI is actually about 6,618 points if the market is correctly defined and remains at an alarming 5,032 points even after the divesture of the Crown Point 12. Although the United States asserts that new entry for a first-run commercial movie theatre is unlikely there is one potential new entrant, the independently owned five screen Village Theatre, waiting in the wings in a prime location in the Southern Charlotte market. As shown on Exhibit 5, this new entry will have a positive effect on the post-Merger market concentration of Regal. The United States should therefore act to assure a more competitive market and provide additional consumer choice by enabling the Village Theatre to become a viable first-run commercial movie venue in Southern Charlotte. To do so, clearance for first-run commercial movies that Regal's 22 screen Stonecrest exercises against the Village Theatre in Regal's Stonecrest's film zone must be eliminated. The elimination or waiver of Regal's Stonecrest's clearance will permit the Village Theatre to enter the first-run commercial movie market in Southern Charlotte, will provide additional consumer choice of venues13 for first-run commercial movies in Southern Charlotte, will eliminate Regal's unreasonable restraint of trade, and will help to deconcentrate the market and offset the anticompetitive effects of the Merger14. The Final Judgment should therefore be amended to enhance consumer choice and allow entry of the Village Theatre into the Southern Charlotte first-run commercial movie market by eliminating the exercise of clearance by Regal's Stonecrest Theatre. Sincerely submitted, _______________/s/________________ Appendix A Clearance in General. "Clearance" refers to an agreement between a theatre and a film distributor that a particular film will not be played simultaneously for a particular period of time at two different theatres located the same film zone. See United States v. Paramount Pictures, 334 U.S. 131, 145 (1948). Clearance agreements are allowed in the film exhibition industry for the legitimate business purpose of ensuring that a particular theatre's income from a film will not be greatly diminished because the film is also being shown at a nearby competing theatre. See id. If clearances are reasonable, they are considered allowable restraints of trade. See id. at 146. Clearances between theatres not in substantial competition are per se unreasonable. See id. at 145-46. Thus, clearance is a reasonable restraint of trade only when each of the following factors are met: (1) the clearance is used for the legitimate business purpose of ensuring the exhibitor that that its income from a film will not be greatly diminished because the film is also being shown at a nearby competing theatre., and (2) the theatres which are subjected to clearance are in substantial competition. As discussed below, the clearance between Regal's Stonecrest and the Village Theatre does not satisfy either condition. Regal's Stonecrest and the Village Theater are not in Substantial Competition. As stated above, there should be no clearance between theatres not in substantial competition.15United States v. Paramount, 334 U.S. 131 at 145-46. The Village Theatre cannot be considered a first-run commercial movie theatre, since it has shown only three first-run commercial movies since June 1, 2006 as compared to Regal's Stonecrest's showing of 300-plus first-run commercial movies in the same period. Thus, Regal's Stonecrest and the Village Theatre are not in substantial competition, and the use of clearance by Regal's Stonecrest against the Village Theatre is an unreasonable restraint of trade and should be prohibited. Regal's Stonecrest's invocation of clearance against the Village Theatre is not for a proper business purpose. As stated above, even if Regal's Stonecrest and the Village Theatre were determined to be in substantia! competition, clearance can be reasonable only if it is necessary to ensure the exhibitor's expected income will not be greatly diminished because the film is also being shown simultaneously or soon thereafter at a nearby competing theatre. See United States v. Paramount Pictures, 334 U.S. 131 at 145. Regal's Stonecrest's invocation of clearance against the Village Theatre is unjustified. See Theee Movies of Tarzana v. Pacific Theatres inc., 828 F.2d 1395,1399 (9th Cir. 1987). First, the Village Theatre has only five screens while Regal's Stonecrest has 22 screens. Having only five screens will reduce the number of first-run commercial movies that the Village Theatre will be able to exhibit at any one time. With 22 screens, Regal's Stonecrest has the ability to exhibit practically every first-run commercial movies that is available. This summer Regal's Stonecrest has shown some of the blockbuster movies (which are the most popular and thus the most profitable) on up to six screens. Obviously, with only five screens the Village Theatre cannot show a movie on six screens. Given the requirements of the film distributors that films show for a four to five week run, the Village Theatre does not have the capacity to greatly diminish the expected income at Regal's Stonecrest. See Paragraph 12 of the Complaint. Second, Regal's Stonecrest's voluntary waiver of clearance against the Arboretum, a theatre with over twice the number of screens as the Village Theatre, demonstrates that Regal's Stonecrest does not need clearance in its film zone to ensure that it's expected income will not be greatly diminished. See id. Third, Regal's Stonecrest's use of clearance discriminatorily against the Village Theatre while waiving it as to the Arboretum thus operates to deprive movie consumers of choice, injures the Village Theatre and unreasonably restricts competition between the theatres in the zone. Id.; U.S. v. Paramount Pictures, 66 F. Supp. 323, 346 (S.D. N.Y. 1946), opinion issued, 70 F. Supp. 53 (S.D.N.Y. 1946) and judgment aff'd in part, rev'd in part on other grounds, 334 U.S. 131, 68 S. Ct. 915, 92 L Ed. 1260 (1948). Therefore, the use of clearance by Regal's Stonecrest against the Village Theatre is an unreasonable restraint of trade and should be prohibited. The Clearance between Regal's Stonecrest and the Village Theatre is an Unreasonable Restraint of Trade. The clearance between Regal's Stonecrest and the Village Theatre cannot be justified on the grounds that the theatres are in substantial competition and that clearance is being used to assure Regal's Stonecrest that a distributor will not license a competitor to show a movie at the same time or so soon thereafter that the Regal's Stonecrest's expected income will be greatly diminished. See Theee Movies of Tarzana, 828 F.2d 1395 at 1399. Regal's Stonecrest and the Village Theatre are not in substantial competition because the Village Theatre cannot be considered a first-run commercial move theatre. Moreover, clearance is not necessary to ensure Regal's Stonecrest's expected income will not be greatly diminished. See id. This is obviously true because the Village Theatre has only five screens compared to the 22 at Regal's Stonecrest. Also, Regal's Stonecrest has voluntarily waived clearance against another theatre, the Arboretum Theatre, in the same film zone with which it is substantially competitive, and the invocation of clearance against the Village Theatre operates primarily to injure the Village Theatre and overly restrict competition between theatres in the zone.16Id. The clearance is, therefore, an unreasonable restraint of trade. See United States v. Paramount, 334 U.S. 131 at 145-46; see Theee Movies of Tarzana, 828 F.2d 1395 at 1399. Exhibit 1 Per DOJ Calculations - After the Merger; Before the sale of Crown Point 12
Exhibit 2 Per DOJ Calculations - After the Merger: After the sale of Crown Point 12
Exhibit 3 Include Park Terrrace 6; Exclude Village 5 - After the Merger: Before the Sale of Crown Point 12
Exhibit 4 Include Park Terrrace 6: Exclude Village 5 - After the Merger: After the Sale of Crown Point 12
Exhibit 5 Include Park Terrrace 6: Include Village 5 - After the Merger: After the Sale of Crown Point 12
Exhibit 6
(1) See Exhibit 1 B From: Bruner, Robert [rbb@BallantyneVillage.com]
John R. Read, Chief This letter is Supplement #1 to my letter dated June 26, 2008 (the "Comment Letter") commenting on the proposed Final Judgment regarding the merger of Regal Cinemas, Inc. ("Regal") and Consolidated Theatres, GP ("Consolidated") (the "Merger"). The Comment Letter and this Supplement #1 focus on the competitive effect of the Merger in the Southern Charlotte, North Carolina, market area. For purposes of this Supplement #1 all terms used herein shall have the same meanings as used in the Comment Letter. On July 9, 2008, in the case styled as Village Theatre, LLC, v. Consolidated Theatres Management, LLC, et al, Civil Action No. 008-CVS-11031, currently pending in the General Court of Justice, Superior Court Division, Mecklenburg County, North Carolina, Regal filed a Motion to Dismiss, Answer and Counterclaims, in which they declared as follows: "The [Village] Theatre has been operated as an independent art film theatre since its March 2006 opening date." Therefore, Regal admits that the Village Theatre, as it operates today, should not be treated as a "first-run commercial movie theatre" in the Southern Charlotte market. This allegation is in direct conflict with the Department of Justice's proposed Final Judgment, which is predicated in part upon the fact that the Village Theatre was a "first-run commercial movie theatre". Since this is not the case then the relevant market is incorrectly defined in the proposed Final Judgment. From an anti-trust point of view, the Merger remains highly suspect. The Merger was determined by the United States to be illegal and in violation of Section 7 of the Clayton Act. As stated in the Comment Letter and as shown in the Exhibits to the Comment Letter, the exclusion of the Village Theatre as a first-run commercial movie theatre further increases the market concentration of Regal's Stonecrest Theatre in the Southern Charlotte market. Without the inclusion of the Village Theatre as a "first-run commercial movie theatre", the post-Merger market concentration of Regal in the Southern Charlotte area (even after the sale of the Crown Point 12 Theatre and irrespective of the treatment of the Park Terrace Theatre) will be excessively high. The United States should impose requirements on Regal necessary to reduce its market concentration in the Southern Charlotte market to as close to the pre-Merger level as is possible. The most obvious, and simplest, pro-competitive, pro-consumer solution is to require Regal's Stonecrest Theatre to waive clearance against the Village Theatre. This is obvious and simple because Regal's Stonecrest Theatre has for years voluntarily waived clearance with respect to the Arboretum Theatre which is also in the Regal's Stonecrest Theatre film zone. Regal's Stonecrest Theatre's voluntary waiver of clearance against the Arboretum Theatre demonstrates that Regal's Stonecrest Theatre does not need clearance in this film zone. Since Regal's Stonecrest Theatre has already waived clearance against the 12 screen Arboretum Theatre it is not too burdensome to require the waiver of clearance in the same film zone against the much smaller five screen Village Theatre. This small action will greatly increase consumer choice and increase competition. Clearance must be removed so that the Village Theatre can be considered a "first-run commercial movie theatre" and, thus, reduce Regal's market concentration in the Southern Charlotte area. Requiring Regal to waive clearance with the five screen Village Theatre simply authenticates the proposed Final Judgment, greatly enhances consumer choice, and is necessary given the excessively high post-Merger market concentration of Regal. Sincerely submitted, Robert B. Bruner C FOR THE DISTRICT OF COLUMBIA
PUBLIC COMMENTS The Voluntary Trade Council, Inc., a Virginia non-profit corporation, respectfully files the following public comments regarding the Proposed Final Judgment in the above-captioned case. Introduction and Interest of Commenter On April 29, 2008, the Antitrust Division of the United States Department of Justice (the Division) filed with the Court a Complaint against Regal Cinemas, Inc. (Regal) and Consolidated Theatres Holdings, GP (Consolidated), alleging Regal's contract to purchase Consolidated was illegal under 15 U.S.C. § 18, commonly known as the Clayton Act. Regal and Consolidated did not contest the Division's Complaint, and they acceded to the Division's demand to sell certain assets in order to allow their merger to proceed. Accordingly, on May 15, 2008, the Division published a notice in the Federal Register containing a proposed Final Judgment and supporting documents. Under 15 U.S.C. § 16, the proposed Final Judgment is subject to a 60-day public comment period, and the Court is required to review any comments received, along with the Division's response, before deciding whether entry of the Proposed Final Judgment is in the "public interest." The Voluntary Trade Council, Inc.1 (VTC), is a research center dedicated to antitrust and competition regulation. Working in the tradition of the Austrian School of economics, VTC offers free-market criticism of the Department of Justice, the Federal Trade Commission and other agencies that intervene to prevent the voluntary exchange of goods, services and ideas. In the past six years, VTC has filed public comments in dozens of DOJ antitrust cases, providing independent economic and legal analysis.2 Summary The Division claims it was necessary to intervene in Regal's acquisition of Consolidated in order to preserve competition in the market for the "theatrical distribution of feature length motion picture films" in the Charlotte, Raleigh and Asheville areas of North Carolina. The Division alleges a voluntary combination of Regal and Consolidated's movie theaters in these markets would "eliminate competition" and likely lead to higher ticket prices and "reduced incentives to maintain, upgrade, and renovate their theaters." To remedy these hypothetical harms, the proposed Final Judgment requires Regal and Consolidated to sell four movie theaters located in the three areas to a buyer approved by the Division. The Division's claims of consumer harm are not supported by the facts or economic principles. The Complaint presents a false and misleading analysis of the marketplace and relies heavily on an irrelevant mathematical formula to justify the violation of Regal and Consolidated's property rights. The "public interest" in this case is best served by rejecting the Division's meritless intervention. The Court should not enter the Proposed Final Judgment. Argument "Movies are a unique form of entertainment," according to the Division's complaint.3 Beyond this unremarkable insight, the Division's attempt to define a "relevant market" presents a work of economic fiction that is comparable to the fantastic movies of Steven Spielberg (or even his "non-union Mexican equivalent"4). The Division misrepresents the nature of consumer time preference, confuses products with methods of distribution and wastes an inordinate amount of energy on "special effects" in the form of a useless mathematical formula. In short, there is no economic substance to the Division's complaint -- and thus no rational basis for seeking the relief contained in the proposed Final Judgment. Thomas A. Lambert, an associate professor at the University of Missouri School of Law, responding to the Federal Trade Commission's lawsuit against the merger of Whole Foods Market, Inc. and Wild Oats Markets, Inc. (which this court rejected5), said, "defining markets to consist of specific types of distribution channels, rather then groups of products and services, opens the door to finding narrow 'markets' (and thus market power) everywhere."6 The essence of marketing, Lambert writes, is when sellers "distinguish their products or services by offering them differently than their competitors."7 The Division repeats the FTC's Whole Foods error in this case by improperly defining a method of distribution as a distinct product market. Regal and Consolidated do not manufacture the product - motion pictures - but rather provide distinct venues for their distribution. Like Whole Foods, Regal and Consolidated offer a place where sellers (movie producers) and buyers (movie consumers) meet to engage in voluntary exchange. But the distinctiveness of the venue should not be confused with the nature of the products themselves. A motion picture can be distributed through several channels: First-run theatrical exhibition, sub-run theatrical exhibition, television (including over-the-air broadcast, basic cable, pay and premium cable, and satellite), and direct sales and rentals (VHS, DVD, Blu-Ray, iTunes). A theatrical producer can utilize one, several or all of these channels depending on the nature of the motion picture and its expected audience. Many films begin their journey to the consumer in first-run theatres like those operated by Regal and Consolidated. Others are marketed directly to the consumer, such as the Walt Disney Company's practice of straight-to-video sequels of its classic animated films. However a particular film is marketed to the consumer, the product is the film and not the method of distribution. The Division argues there's a "significant difference between viewing a newly-released, first-run movie and an older sub-run movie," because first-run theatres usually charge higher ticket prices. Sub-run theatres show films that "are no longer new releases, and moviegoers generally do not regard sub-movies as an adequate substitute for first-run movies . . ." It's not clear what "moviegoers" the Division interviewed or surveyed to reach this conclusion. Without any empirical data or deductive arguments, the Division simply concludes there are wholly distinct markets for "first-run" and "sub-run" moviegoers, and never the two shall meet. This argument is just plain wrong. What distinguishes one movie-distribution channel from another is consumers' aggregate time preference. Many consumers will pay a premium to see a "first-run" movie when it is first released, while others may wait and spend less to view the film in a "sub-run" theatre; and others will wait even longer and spend even less to view the film on home video. The problem, which the Division fails to acknowledge, is that time preference varies from product to product - that is, from movie to movie. Some films perform poorly in first-run theatres only to enjoy greater success in later distribution channels (hence the phenomenon of "cult" films.) Other films enjoy overwhelming first-run success and spawn one or more sequels, such as the James Bond, Star Trek and Star Wars films. In the case of these movie franchises, time preference is such that moviegoers will purchase tickets well in advance of these films' release. In other cases, an unknown film may start out with modest sales and gather momentum as "word of mouth" spreads. First-run theatres clearly compete against other distribution channels by persuading consumers that their entertainment demand is best satisfied by paying a premium to see a particular movie now rather then paying less to see it in another distribution channel later. To that end, first-run theatres always have an incentive to improve the quality of their product regardless of the number of first-run theatres in a given geographical area. The Division itself makes a big deal about movie theaters having "stadium seating" - which was an innovation developed in response to competition from other distribution channels such as home video and pay per view cable. Similarly, movie producers are now promoting 3D projection as the future of first-run exhibition. Jeffrey Katzenberg, CEO of DreamWorks Animation, recently announced that his studio's future films will be exclusively in 3D. Disney and its subsidiary Pixar Animation Studios also plan to release (and re-release) future films in 3D. (And the same weekend as this comment was filed, Walden Media released a 3D version of "Journey to the Center of the Earth".) Kevin Maney explains in the July 2008 issue of Portfolio that, Studios are latching onto 3-D for much the same reason that Bob Dole took Viagra. Most of Hollywood's businesses are making money--for all Katzenberg's complaining, DreamWorks' first-quarter profit was up 69 percent--but the sector that makes Hollywood feel best about itself, theatrical showings, is deflating, in large part because the difference between seeing a movie in your local multiplex and on a 52-inch high-definition TV in your family room is not that vast. The Motion Picture Association of America claims that 2007 was a good year for the cinema business, with U.S. box office revenue up 5 percent to $9.6 billion. But that's unsupportable spin. The jump can be almost entirely attributed to a bump in ticket prices. The number of tickets sold in the U.S. stayed flat from 2006 to 2007, at 1.5 billion. (In 1950, while TV was taking off, U.S. theaters sold 3 billion tickets a year--and the population was half what it is today.) Meanwhile, 379 screens were added between 2006 and 2007. Do the math and movies are doing worse than ever in theaters.8 (Emphasis added) The Division incorrectly believes that intra-theater competition between Regal and Consolidated drive innovation and hold ticket prices down. That's not the case, and the Court should not accept the Division's "market definition" at face value. The Division argues, "The experience of viewing a movie in a theatre is an inherently different experience from live entertainment (e.g., a stage production), a sporting event, or viewing a movie in the home (e.g., on a DVD or via pay-per-view)."9 But the question isn't whether these are different experiences; it's whether they are competing experiences that individuals consider when allocating scarce time and money towards entertainment. The Division treats consumers as a monolith that considers only first-run movie theaters to the exclusion of all other forms of entertainment. This approach insults consumers by reducing them to a reactionary mob and has no empirical or deductive foundation. In the Division's perfect economic world, no consumer ever asks, "Should I go to a movie tonight or stay home and watch the football game?' Nor does anyone think, "I really don't want to see that chick flick with my wife and her friends, so I'll shoot pool with the guys." Perfect consumers behave in unison - like background characters in an animated film - and in direct, negative response to short-term price increases. The Division goes to great lengths to explain why "moviegoers do not regard" art and foreign language movies "as adequate substitutes for first-run commercial movies," thus justifying their exclusion from the market definition. Again, the Division misses the point. Every consumer has individual preferences. Sure, many consumers don't watch art and foreign films. But other consumers never watch animated films. Or war films. Or "chick flicks." Or films featuring Mike Myers. And it's unlikely that any moviegoer anytime, anywhere has said, "Honey, I want to see a first-run commercial movie tonight, and nothing else will suffice!" The Division's attempted market definition also ignores the cross-competition that occurs within the entertainment industry. "First-run commercial movies" are not a closed system. Many popular commercial films are derived from other entertainment sources. In 2008 alone, several number-one U.S. box office films were derived from non-film sources: Hellboy II, The Incredible Hulk and Iron Man were based on popular comic books; Sex and the City was based on a long-running premium cable series (which itself was based on a compilation of popular newspaper columns); and Horton Hears a Who! and The Chronicles of Narnia: Prince Caspian were based on popular books.10 Demand for non-film entertainment drives demand for motion pictures, and vice versa. And once again, the number of first-run theatres in a given geographic area is irrelevant to the market's competitiveness. Relying on its misleading market definition, the Division offers a lengthy series of random numbers purportedly representing the "Herfindahl-Hirschman Index" (HHI), which the Division claims is a "measure of market concentration."11 For example, in part of Charlotte, North Carolina, the Division alleges the Regal-Consolidated merger would "yield a post-merger HHI of approximately 6,058, representing an increase of roughly 2,535 points."12 The implication is that a higher HHI indicates a greater likelihood of post-merger consumer "injury" in the form of higher prices. But even assuming that the HHI figures given in the complaint are valid, this alone does not prove the existence of "market power" or justify the Division's proposed Final Judgment. As economics professor Dominick T. Armentano has explained, there is no economic merit to the HHI: Although the general public has the impression that there must be some good reason for the antitrust authorities' choice of particular limits in the Herfindahl Index of market concentration, those limits are completely arbitrary. No one--and certainly not the antitrust authorities--can ever know whether a merger of firms that creates, say, a 36-percent market share, or one that raises the Herfindahl Index by 150 points, can create sufficient economic power to reduce market output and raise market price. No one knows, or can know, whether monopoly power begins at a 36 percent market share or a 36.74-percent market share. Neither economic theory nor empirical evidence can justify any merger guideline or prohibition.13 Ultimately, the Division's complaint rests on the ridiculous proposition that consumers would have been injured by higher post-merger prices but for the redistribution of property mandated in the proposed Final Judgment. The Division's argument is that "[o]ver the next two years, the demand for more movie theatres in [the identified geographic areas] is not likely to support entry of a new theatre," and without additional theaters there would be "an increase in movie ticket prices or a decline in theatre quality."14 The decline in quality issue has already been addressed and dismissed above. As for a hypothetical increase in ticket prices, it's unclear how this would "injure" consumers who are willing to pay. There's no question of fraud: Ticket prices are generally posted and well known to the customer before purchase. Nor has the Division explained how "competitive" ticket prices should be determined outside of, well, the competitive process of the market. The Division simply draws an arbitrary line where pre-merger prices are assumed to be "competitive" and any hypothetical future increase - regardless of cause - is "anticompetitive." By this reasoning, the most logical course of action would be for the Division to simply fix ticket prices, which of course would violate Section 1 of the Sherman Act. The Division's real concern, which it states, is that it fears consumers won't immediately respond to an increase in ticket prices by reducing demand sufficiently to make the increase "unprofitable." But that has nothing to do with consumer injury. Consumers are not legally obligated to adjust their spending habits to accommodate the Division's mathematical models. Nor should sellers be punished because there's insufficient demand to support the number of competing sellers that the Division deems ideal. Ultimately, real markets don't function according to the whims of government lawyers. Conclusion The proposed Final Judgment is built on a series of false, misleading and laughably nonsensical arguments. Just as the "movie palaces" of the 1930s gave way to the multiplexes of the late 20th century, which in turn yielded to the "stadium seating" megaplexes at issue in this case, the subset of the entertainment industry dedicated to first-run theatrical exhibition continually evolves to satisfy shifting consumer demand. This process works best with a minimum of government intervention, especially from unqualified mid-level Justice Department attorneys. The Court can best serve the public interest by rejecting the proposed Final Judgment and ordering the Division to spend less time pretending they're movie theatre executives and more time . . . well, going to the movies.
Dated: July 13, 2008 FOOTNOTES for Exhibit A 1. The five screen Village Theatre is Charlotte's only luxury theatre while Regal's Stonecrest is a 22 screen multiplex. 2. Since these calculations were based upon the 2007 box office revenues and since the box office revenues for the Village Theatre should increase after the clearance is eliminated, the market share for the Village Theatre should increase and the competitive effect of the merger in the Southern Charlotte market will be reduced even further than that shown on Exhibit 5. 3. The Complaint did not define the term first-run commercial movies. Generally, as stated in the Complaint, art movies are released less widely than commercial first-run movies. For purposes of this Comment Letter, the term first-run commercial movies will include those movies with an initial release of more than 1,500 prints. This is the lower end of a release of what is typically a first-run commercial movie. 4. The United States did not publish the details of their calculation of the HHI. Therefore, the numbers shown in this Public Comment Letter will not exactly match those of the United States; but there are no significant variations. 5. Although Phillips Place has only 10 screens, from June 1, 2006 to present it has showed 235 first-run commercial movies. This is compared to the 325 first-run commercial movies shown on the 22 screens at the Regal's Stonecrest, its nearest competition. If Phillips Place and Park Terrace were not sharing movies then, because of required commitments to the film distributors to show a film for a certain length of time (typically four to five weeks), Phillips Place would have been able to show less than 150 films over this time period. 6. For example, on June 26, 2008 all six movies exhibited at Park Terrace were also on their first-run at the AMC Carolina Pavilion, four of the six were on their first-run at Regal's Stonecrest. 7. The industry standard for a film zone is a five mile radius around the theatre in question. The only exceptions to the five mile standard are urban areas that are densely populated like New York City. 8. Prior to the Merger, the Arboretum Theatre was a Consolidated theatre; Regal acquired ownership of the Arboretum Theatre as part of the Merger. 9. Competitive zones are calculated upon mileage "as the crow flies" and not based upon road driving distance between the two theatres because the purpose of a competitive zone is to effect upon the moviegoers within that area. 10. The term "day and date" refers to the right of two or more theatres located within the same film zone to exhibit the same movie at the same time. In that case there can be no clearance. 11. The five screen Village Theatre is Charlotte's only luxury theatre while Regal's Stonecrest is a 22 screen multiplex. 12. See Appendix A for a discussion of clearance as it relates to the Village Theatre. 13 The five screen Village Theatre is Charlotte's only luxury theatre while Regal's Stonecrest is a 22 screen multiplex. 14 Since these calculations were based upon the 2007 box office revenues and since the box office revenues for the Village Theatre should increase after the clearance is eliminated, the market share for the Village Theatre should increase and the competitive effect of the merger in the Southern Charlotte market will be reduced even further than that shown on Exhibit 5. 15 The use of clearance presumes that there is an allocation of first-run commercial movies between all of the theatres within the same film zone. Clearly, if one theatre is able to obtain the entire film product, there is no need for that theatre to have clearance to protect against another theatre's showing of the film simultaneously in the same zone. As amply demonstrated above, in the instant case, the Village Theatre has no allocation of product, and Regal's Stonecrest has no need for clearance against the Village Theatre. 16 Even if Regal's Stonecrest and the Village Theatre were in substantial competition and Regal's Stonecrest had demonstrated a need to protect against diminution of its income, as opposed to demonstrating the opposite by waiving clearance against the Arboretum, the clearance Regal's Stonecrest is invoking against the Village Theatre is unduly extended as to duration. See United States v. Paramount, 334 U.S. 131 at 145-46. The common duration of clearance is generally fourteen days. See, e.g., Westway Theatre v. Twentieth Century-Fox Film Corporation, 30 F.Supp. 830, 836 D.C. MD. 1940. (fourteen-day period for clearance was not uncommon in duration and did not, under the particular facts of the case, constitute an unreasonable restraint of trade). FOOTNOTES for Exhibit C 1 Formerly known as Citizens for Voluntary Trade. 2 For a compilation of VTC's public comments, see http://www.voluntarytrade.org/joomlal5/index.php/docs/cat_view/12-voluntary-trade-council-documents/23-p ublic-comments. 4 With apologies to Al Jean, Mike Reiss and Ken Keeler. 5 Federal Trade Commission v. Whole Foods Market, Inc., Civil Action No. 07-1021 (D.D.C. Aug. 16, 2007). 6 Thom Lambert, "Ignoring the Lessons of Von's Grocery: Some Thoughts on the FTC's Opposition to the Whole Foods/Wild Oats Merger," eSapience Center for Competition Policy (June 2007). 8 Kevin Meaney, "The 3-D Dilemma," available at http://www.portfolio.com/culture-lifestyle/culture-inc/arts/2008/06/16/Hollywoods-3-D-Cinema-Dreams. 10 See "Box office number-one films of 2008 (USA)," http://en.wikipedia.org/wiki/Box_office_number-one_films_of_2008_(USA). 13 Dominick T. Armentano, Antitrust: The Case for Repeal, at 85-86 (2d ed, Ludwig von Mises Institute 1999). | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||