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Session 2005 - 06
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Standing Committee Debates

Films (Exclusivity Agreements) (Revocation) Order 2005




 
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Seventh Standing Committee
on Delegated Legislation

The Committee consisted of the following Members:

Chairman:

Mr. Christopher Chope

†Blackman-Woods, Dr. Roberta (City of Durham) (Lab)
†Blunt, Mr. Crispin (Reigate) (Con)
†Campbell, Mr. Alan (Tynemouth) (Lab)
†Havard, Mr. Dai (Merthyr Tydfil and Rhymney) (Lab)
†Iddon, Dr. Brian (Bolton, South-East) (Lab)
†Jones, Mr. David (Clwyd, West) (Con)
Kawczynski, Daniel (Shrewsbury and Atcham) (Con)
†Key, Robert (Salisbury) (Con)
†Khabra, Mr. Piara S. (Ealing, Southall) (Lab)
Lamb, Norman (North Norfolk) (LD)
†McKechin, Ann (Glasgow, North) (Lab)
†Michael, Alun (Minister for Industry and the Regions)
†Prisk, Mr. Mark (Hertford and Stortford) (Con)
†Reid, Mr. Alan (Argyll and Bute) (LD)
†Seabeck, Alison (Plymouth, Devonport) (Lab)
†Smith, Mr. Andrew (Oxford, East) (Lab)
†Stewart, Ian (Eccles) (Lab)
Geoffrey Farrar, Committee Clerk
† attended the Committee


The following also attended, pursuant to Standing Order No. 118(2):

Whittingdale, Mr. John (Maldon and East Chelmsford) (Con)

 
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Wednesday 11 January 2006

[Mr. Christopher Chope in the Chair]

Films (Exclusivity Agreements) (Revocation) Order 2005

Motion made, and Question proposed,

    That the Committee has considered the Films (Exclusivity Agreements) (Revocation) Order 2005 (S.I. 2005, No. 3098).—[Mr. Michael.]

2.30 pm

Mr. Mark Prisk (Hertford and Stortford) (Con): I welcome you to the Chair, Mr. Chope. May I also welcome the Minister? I understand that he is taking the place of the Under-Secretary of State for Trade and Industry, the hon. Member for Bradford, South (Mr. Sutcliffe), for reasons that he will explain.

The Minister for Industry and the Regions (Alun Michael): My hon. Friend the Under-Secretary is attending the funeral of WPC Sharon Beshenivsky, because of the constituency interest. However, although this matter is not part of my brief, I hope that I can assist the Committee in responding to the issues that the hon. Gentleman and others may wish to raise.

Mr. Prisk: I am grateful to the Minister. May I associate Opposition Members with the Under-Secretary’s natural concern with that dreadful event? Our thoughts and our prayers are with the officer’s family and the whole police force of West Yorkshire.

The order revokes the Films (Exclusivity Agreements) Order 1989. In doing so it will affect an important and often unrecognised part of the film industry. Film exhibitors employ around 16,000 people on approximately 600 sites. As those who know the film industry well will realise, that is more people than are employed on the film production side of the industry as a whole. Indeed, many of those people are employed across the UK and not predominantly in the areas around Pinewood studios and in the north and west of London. The exhibition part of the film industry is therefore extremely important. It is also important because many of those exhibitors, and the ones who may be affected by the order, are small concerns. I understand that approximately 50 per cent. of the sites have fewer than four screens.

The revocation of the 1989 order is based on the recommendations and analysis of the Office of Fair Trading. I see that the explanatory memorandum sets them out in detail. I understand from that and from other representation that it is the view of the Office of Fair Trading that there has been

    “substantial change in the structure of the exhibition of films since the early 1980s.”


 
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It is on that assumption that the OFT recommends that the Government should change the regulatory framework.

Despite the assurances that the market has changed dramatically, much of the information that I have looked at suggests that the cinema exhibition market is pretty similar to what it was in the 1980s when the order was enacted. Thus, while there are three or four major players in the market today compared with two in the 1980s, the market share is still dominated by the larger companies. In the 1980s there were two large companies which, from my dim and distant memory, I believe were ABC and Odeon. Now there are three companies which take up about 74 per cent. of the market: Terra Firma, Cine-UK and Vue. Therefore, although the OFT says that the market conditions and structure have changed dramatically and the framework can change, I am not convinced of that argument. The explanatory memorandum suggests that these are uncontroversial changes, but that does not reflect the views that I have heard from the industry.

Mr. John Whittingdale (Maldon and East Chelmsford) (Con): My hon. Friend rightly draws attention to the fact that the explanatory memorandum says that this is an uncontroversial announcement, but did he see the written answer that I received in October stating that the Minister

    “received representations from ministerial colleagues at DCMS, the UK Film Council and the Cinema Exhibitors’ Association”?

Does my hon. Friend agree that to have generated representations from such a wide range of bodies representing the film industry and indeed the Ministry responsible for the film industry in Government suggests that the order is anything but uncontroversial?

Mr. Prisk: I am grateful to my hon. Friend. He is absolutely right.

Alun Michael: Will the hon. Gentleman give way?

Mr. Prisk: I am happy to give way to the Minister if he has an answer to the question whether the order is uncontroversial.

Alun Michael: The point that I wanted to make is that it is not surprising that there were those responses, because, as I understand it, they were representations in response to the consultation that the Department of Trade and Industry rightly carried out on the basis of the recommendations of the Office of Fair Trading. The surprise would be if we had not received responses from those organisations in the light of that consultation.

Mr. Prisk: That is an interesting answer. Let us consider the nature of those representations and see whether we agree.

Mr. Whittingdale: Perhaps I might be allowed to add that in my question I asked the Government what representations they had

    “received concerning the effect of repeal of the . . . Order”—[Official Report, 24 October 2005; Vol. 438, c. 59W.]


 
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The answer states that “concerns have been raised” about the revocation of the order. So, these were not just representations in response to a consultation paper; concerns were raised by the industry and the Government.

Mr. Prisk: I am grateful to my hon. Friend and he is right. The Cinema Exhibitors Association believes that the revocation of the 1989 order, which this order would effect, will mean the end of film-by-film negotiations. It believes that films will start to be linked to the supply of other films outside the programme. Indeed, the industry believes that that could therefore undermine those cinemas that have fewer than four screens, which I mentioned earlier. That would be bad for film operators and, potentially, for small, independent film producers too. The danger—I do not want to overstate it—is the prospect that there will be less choice of films and fewer places for the public to see them.

Alun Michael: I do not want to interfere with the hon. Gentleman’s flow, and I will try to explain this point later, but essentially the order that is being revoked did not prevent what I believe is referred to as bundling, which he mentioned. That is something of a misapprehension that has built up over time. The revocation of the order does not change that position. I understand the point that he makes about the fears, and I will try to address that later, but, as I understand it, bundling was not banned by the 1989 order that this statutory instrument revokes.

Mr. Prisk: I appreciate that the Minister comes to this matter fresh today, but I think that he will find that that is not the view of those involved in the industry. It may be the view of the Office of Fair Trading, but, with the greatest of respect to the OFT, it is not involved in the industry. The nub of the debate is whether what the Minister has just said is correct. I hope that he will be able to enlighten us in his reply.

Mr. Alan Reid (Argyll and Bute) (LD): I draw the hon. Gentleman’s attention to paragraph 4 of article 3 of the 1989 order, which states:

    “This article shall not apply to an agreement if it relates to not more than three films in respect of their exhibition at the cinema in question as a single programme.”

Surely that means that the bundling that the Minister referred to is not outlawed by the original legislation.

Mr. Prisk: The hon. Gentleman clearly has not listened to, or perhaps received, representations from the industry, because there is a significant difference between bundling outside of a programme and bundling within it. That is one of the industry’s concerns. I will explain that, if I may, in a moment.

The concerns that I have described are not simply those of the Cinema Exhibitors Association—important as they are. I understand that the concerns are shared by Lord Puttnam, who clearly has significant experience in this matter. I further understand that the UK Film Council has made representations of that nature, as my hon. Friend the Member for Maldon and East Chelmsford (Mr. Whittingdale) has alluded to. I also understand—
 
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perhaps the Minister will have to respond to this in writing, rather than verbally—that other Departments are reported to be unhappy about the nature of the revocation. Can the Minister tell us, for example, the nature of the representation that he received from the Department for Culture, Media and Sport? In particular, does the films Minister unequivocally support the recommendations of the Office of Fair Trading and therefore the order?

The film world and exhibitors in particular are not convinced that revoking the order and relying on competition legislation is appropriate. Indeed, there is a genuine fear that the order could end film-by-film negotiations, leading to the loss of a number of cinemas throughout the UK. I have some questions that I hope the Minister will answer and I hope that he will provide the industry with the assurance it needs. My purpose is to find clarity and assurance for the film industry. I suspect all Committee members support the industry and wish to see it blossom, and I seek that clarity so that it is able to continue to do so.

First, given the Government’s commitment to choice, is it the Minister’s wish that the current wide choice of films continues to be available? What assessment has his Department made, independent of the Office of Fair Trading, of the likelihood of linkage of the supply of films outside the same programme if the order is enacted? What assessment has the Department made of the impact on cinemas of such linkage? If no assessment has been made by the Department in preparation for the order, why not? Does the Film Council support the OFT’s recommendations, particularly those regarding the danger of what it calls barring?

My final question centres on this point: the film industry believed that the 1989 order introduced the concept that all films must be offered by a distributor and booked by an exhibitor on a film-by-film basis. If the 1989 order is revoked, will that still be the case? I do not believe that it is the intention of the Under-Secretary, the Minister or the Department of Trade and Industry to see the end of film-by-film negotiations and smaller cinemas driven out of business.

In conclusion, I ask the Minister a question to which he may wish to respond carefully on reflection, but perhaps not today. It would be good to have his response on record, but I would be happy if it were considered carefully by the Department so that we get the right answer and not something hurried. I ask him to put on record that if the 1989 order is revoked it remains the Government’s intention that films must be booked on a film-by-film basis, with no linkage to other films, except those within the same programme. A clear and unequivocal answer would be welcomed by myself and those in my party, but more importantly, it will provide an important assurance to those affected.

The movie industry in this country faces a lot of problems. I do not believe that the tax credits related to film will help production; I shall not stray any further than that. However, this side of the film industry is important and if we lose smaller cinemas and the range of choice, and the independent operator
 
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is unable to continue because of—perhaps inadvertent—errors in the order, the Minister will come to regret it.

2.43 pm

Mr. Reid: It is a pleasure to serve under your chairmanship, Mr. Chope.

I am against over-regulation on principle, and I support the regular review of regulations by the OFT to see which ones we can revoke. There have been changes in the UK cinema market since the 1989 order came into effect. At that time, two exhibition chains received the bulk of exhibition revenue, whereas today six major exhibition chains receive films primarily from six major distributors. There has been substantial investment in cinema since the 1980s. The growth in the number of multiplexes, for example, has meant that the number of cinema screens has more than doubled over the period.

When the OFT investigated, it considered that the change in the structure of exhibition through the emergence of more national chains and the increase in screen numbers made it unlikely that there would be a return to the barring system if the 1989 order were revoked. That is because greater competition between exhibitors makes it much more difficult to impose a barring agreement and distributors face less incentive to accept such a system.

In view of the OFT investigation, I am minded to support the order, but I have one concern—the impact on very small cinemas. I hope that the Minister can assure us that the removal of the 1989 order will not mean that small cinemas face a situation in which the large distributing companies can impose agreements on them. They should be able to show the films that they want to show without having to enter into agreements to show some less popular films.

2.45 pm

Dr. Roberta Blackman-Woods (City of Durham) (Lab): I am sure that the Minister is aware that the creative industry, of which film making is a vital part, underpins a great deal of the economic development in the north-east of England, where my constituency is located. I would be grateful if he confirmed that revoking the 1989 order will enable the film industry to expand and the number of films that it produces to grow, or at least that it will not get in the way of that.

2.46 pm

Mr. Whittingdale: I hope that the Minister and the Committee will forgive me if I am unable to stay until the end of the proceedings, as I have to chair a meeting at 3 o’clock.

I want to make one or two points, although my hon. Friend the Member for Hertford and Stortford (Mr. Prisk) has expressed our concerns extremely well. We are told that the order is essentially a tidying-up exercise. The OFT has decided that the 1989 order is redundant because the cinema industry has changed. However, even if the OFT is absolutely right in its
 
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strict interpretation, that is not how the order is viewed in the industry, which thinks that it will have the effect of preventing the bundling of film. It may be incorrect, but that is the perception.

The Cinema Exhibitors Association wrote to me:

    “Even if OFT’s strict interpretation is correct, since 1989 the effect of the Order has been that distributors have not sought conditional/block booking because they believe, as does the whole industry, that the Order forbad it as the negotiation had to be conducted on a film-by-film basis.”

If the industry thinks that the 1989 order prevents bundling, its revocation may well lead distributors to think that they can resume that process. That would be highly undesirable.

I hope that the Minister will make it clear that the Government are firmly opposed to the bundling of film. I also hope that he will make it clear that if distributors see the revocation of the order as a green light to resume bundling, the OFT and the Government will come down on them very fast to make it clear that bundling is still unacceptable and illegal as the law stands.

2.48 pm

Alun Michael: I am grateful for the opportunity to deal with these issues under your chairmanship, Mr. Chope, and I hope that I will be able to satisfy all the Members who have spoken about the nature of the order and to offer some reassurances.

I thank the hon. Member for Hertford and Stortford for his helpful remarks about the priority that rightly prevented my hon. Friend the Under-Secretary from being with us today. I will pass on the remarks about the horror that we all share at the events that led to the death and the funeral that my hon. Friend is attending. I hope that I can offer reassurance to the hon. Member for Argyll and Bute (Mr. Reid), whose general support I welcome, that we have the interests of very small cinemas in mind.

I hope, too, that I can reassure my hon. Friend the Member for City of Durham (Dr. Blackman-Woods) and the hon. Member for Maldon and East Chelmsford on his concerns. I will start with the hon. Gentleman’s last comments: Ministers and parliamentary Committees must deal with the law as it is, rather than any misapprehensions that might exist in any quarter. This, however, is an opportunity for us to set the record straight. I welcome the way in which he framed his point and sought clarification.

I can explicitly give one or two of the assurances that members of the Committee have asked for. If the 1989 order is revoked—in practice, it has been revoked by the signing of the order—it remains the Government’s intention that films must be booked on a film-by-film basis. Competition legislation does not micro-manage the order in which films are exhibited. As I will make clear, I would encourage industry members to ensure that the Office of Fair Trading is made aware of any examples of film bundling or any other potentially anti-competitive practices so that action can be taken. I will develop that point in a moment, but we have no evidence of any problems in that regard. If problems are experienced anywhere or appear to develop, the right avenue to go down is to bring them to the
 
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attention of the OFT. The policy objectives are quite clear and therefore there is no disagreement between us on that. The intention is to be robust in taking action.

Mr. Prisk: I am grateful to the Minister for making it clear that the Government wish films to continue to be booked on a film-by-film basis. Without wishing to appear to be a pedant, I know that the industry will want to hear the other words that go with that, which are that films should be booked on a film-by-film basis, with no linkage to other films, except within the same programme. That is the key point.

Alun Michael: Yes, that is the case. I am sorry if I was using shorthand, but I am happy to confirm what I mean.

Let me dispose of another question before I come to the substance of the decision before us. The DCMS raised issues passed to it by the Cinema Exhibitors Association and the UK Film Council in responding to the DTI consultation asking for responses to the OFT recommendations. It understood the position and views of the OFT, and indeed the position taken by DTI Ministers, and is content that adequate protection against barring exists.

The DCMS would also agree with this point about bundling, which is that it is not covered by the order that is being revoked. Perhaps I can go into some detail on that, but those points address some of the headlines of today’s debate. Essentially, I hope that I have demonstrated already that there is no difference between us in terms of the objectives relating to the revocation of the order and how we are approaching these issues.

The debate provides a good opportunity to place on the record the original purpose of the Films (Exclusivity Agreements) Order 1989 and the reasoning behind the OFT advice that, after a thorough review, it should be revoked. I want make the point quite strongly that the OFT revisited that conclusion in the light of the DTI consultation on those recommendations and the misapprehensions that appear to exist in part of the industry. It reinforced its conclusions, having taken those comments into account.

Two film orders were made following recommendations being made in Monopolies and Mergers Commission reports in 1983 and 1994 on the supply of films for exhibition in cinemas. Section 88(5) of the Fair Trading Act 1973 requires the OFT to keep under review orders made under section 56 of the Act as a consequence of an MMC monopoly report. Therefore, it is the duty of the OFT to consider from time to time whether, by reason of any change in circumstances, an order should be varied, revoked or superseded by a new order and to give advice to the Secretary of State to that effect, as it may think proper in the circumstances.

In July 2003, the OFT announced a review of the two orders concerning the supply of films to UK cinemas. As a result, in 2004, John Vickers, as chairman of the OFT at that time, advised the Secretary of State for Trade and Industry that the 1989
 
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order should be revoked. Before I refer to the reasons behind that advice, it should be helpful to provide some background information.

In 1983, the MMC found that a system of “barring” existed, and that it operated against the public interest. The bars reflected arrangements between the main exhibitors and prescribed the order in which cinemas in the same locality could show a film. Distributors accepted the bars. To maintain such a system, exclusive agreements had to be made for several films at one time. The MMC recommended that the practice should cease.

The 1989 order made it unlawful for supply agreements between distributors and exhibitors to include exclusivity terms applying to more than one film, or for exhibitors not to exhibit a film on the basis that exclusivity terms for other films had not been agreed. The 2003 OFT review found that there had been substantial change in the structure of the exhibition industry since the early 1980s, very much as the hon. Member for Argyll and Bute emphasised.

Two decades ago, two exhibition chains received the bulk of exhibition revenue. Today, four major exhibition chains receive films primarily from the major distributors. There has also been substantial investment in cinemas since the early 1980s. The growth in the number of multiplex cinemas has meant that the number of cinema screens has more than doubled during the period. The 1994 MMC report said at paragraph 2.132 that the introduction of multiplex cinemas was a more important development in stopping exclusivity agreements than the 1989 order.

Mr. Prisk: Does the Minister not accept, however, that in the 1980s two major chains took up 50 to 60 per cent. of the revenue? Now, three take up 74 per cent., and I think that two of them take up about 60 per cent. In other words, the structure of the market, although it may have changed a little, has not changed that much. A DTI Minister asserts that the structure of the market has changed radically, but that is not entirely the case.

Alun Michael: I am not sure that the hon. Gentleman is right to suggest that percentages reflect the structure of the market. They are two separate things, and there have been major changes during the period. I should go further: during the 2003 review, the OFT found no evidence that a system of barring operates today. It concluded that the considerable change in the structure of exhibition, which is down not to one factor alone, but to the emergence of more national chains and to the increase in screen numbers, makes a return to a system of barring most unlikely should the 1989 order be revoked. That is because greater competition between exhibitors has changed the balance of power in the industry, so that distributors have little incentive to accept such a system. In other words, the rationale for barring no longer exists.

I suggest to the hon. Gentleman that the percentages to which he referred may well be correct, but in essence they do not represent the change in structure to which I referred.


 
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Mr. Prisk: The size of the overall market is not an issue; the question involves the balance of power, which is the competitive question between the distributors and exhibitors. Does the Minister not realise that that is more important than what he referred to—namely, the number of screens? The issue involves the negotiating power between large and small.

Alun Michael: Yes, but I said to the hon. Gentleman that the nature of the market and the balance of power have changed considerably in that 20-year period. That was very much the finding of and the evidence put to us by the OFT, which, as I said, it revisited in light of comments on and responses to the DTI consultation.

Mr. Prisk: I am grateful to the Minister, who has been generous in giving way. Why does he think that that is not the view of the Cinema Exhibitors Association?

 
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