Background
Allegations
Definition of relevant markets
CCI observations
Comment
The Competition Commission of India (CCI) recently issued a prima facie order (the Order) against UFO Moviez India Limited and Qube Cinema Technologies Limited. The Order directed an investigation into alleged anti-competitive clauses stemming from equipment lease agreements between UFO and Qube (as lessors) and cinema owners (as lessees).
The information that led to the CCI's investigation was filed by PF Digital Media Services Limited and Ravinder Walia, a film producer (collectively, the Informants).
PF Media provides post-production processing services (PPPS), which Walia had used for his film Roam Rome Main.
UFO and Qube supply cinema owners with digital cinema equipment (DCE). Further, a wholly owned subsidiary of UFO, Scrabble Digital Limited, operates in the same market as PF Media (ie, PPPS).
The Informants alleged that, as per an equipment lease (EL) agreement between UFO and the cinema owners (the "UFO EL Agreement"), UFO enforced certain restraints on the usage of the DCE that it had leased. Cinema owners were, among other things, prohibited from engaging with any other entity, except for UFO or its affiliates, to source films and advertisements (content) and use the UFO-leased DCE to exhibit such material. Further, UFO had made a technological update to the DCE that made it impossible to project a film that did not use Scrabble's PPP services. Therefore, UFO's actions were alleged to have violated section 3(4) of the Competition Act 2002 (the Act).
The Informants also alleged a violation of section 4(2)(e) of the Act, whereby UFO had abused its dominance in relevant market one (which is defined below) in order to foreclose the market for PPPS. This included the restrictive clauses mentioned above in the UFO EL Agreement, which were intended to benefit Scrabble.
In addition, Qube entered into similar agreements with the cinema owners (the "Qube EL Agreement"). Under this, cinema owners could utilise PPPS from other providers if Qube failed to provide such services. However, if the cinema owners used such services from other providers, a penalty was imposed by Qube on the cinema owners for each screening of every film and advertisement.
Definition of relevant markets
The CCI identified two relevant product markets:
- relevant market one: the market for supply of DCE by a digital cinema service provider on lease or rented to a cinema owner; and
- relevant market two: the market for provision of post-production processing services.
The relevant geographic market was defined as India, as cinema was digitised uniformly across the country and digitised content have been provided to cinema owners via satellites.
In its investigation, the CCI considered whether:
- the UFO EL Agreement infringes upon section 3 of the Act;
- UFO and Scrabble are dominant in relevant market one and relevant market two; and
- the Qube EL Agreement violated section 3 of the Act.
UFO EL Agreements
The CCI opined that the mandatory requirement for obtaining PPPS from Scrabble would prima facie form a tie-in relationship. Therefore, producers, exhibitors and cinema owners would need to obtain PPPS from Scrabble in order to receive the DCE from UFO.
Further, as UFO was able to restrict cinema owners from approaching any of Scrabble's competitors, an exclusive supply agreement existed between:
- the exhibitors;
- the producers;
- cinema owners; and
- UFO.
In addition, given that the DCE supplied by UFO was reconfigured to display only content that had been post-production processed by Scrabble, this restriction amounted to a refusal of the exhibitors and producers to deal with service providers of PPPS, such as PF Media.
In light of this, the CCI held that, prima facie, the UFO EL Agreement violated section 3(4) of the Act. The rationale behind the CCI's decision was that:
- the tie-in arrangement could drive existing competitors out of relevant market two and, therefore, there was the potential to cause an appreciable adverse effect on competition (AAEC) in India. Such an arrangement could dissuade new players from entering the PPPS market, thereby negatively impacting its development and innovation; and
- the restrictive practices that were identified could also constitute a refusal to deal, as the DCE supplied by UFO could only play content that was processed in post-production by Scrabble. Given that UFO controls a large number of cinema screens in relevant market one, this could potentially cause an AAEC in both relevant markets.
Abuse of Dominant Position
The CCI observed that there was a significant mismatch in the market share figures submitted by:
- the Informants;
- UFO;
- Scrabble; and
- Qube.
However, the CCI did not delve into the dominance of UFO and Qube in relevant market one; it simply held them to be significant players.
The CCI also did not delve into whether Scrabble was dominant in relevant market two, as UFO was not dominant prima facie in relevant market one.
Qube EL Agreement
The likely adverse implications of the Qube EL Agreement on other shareholders (ie, producers, entities engaged in PPPS and cinema owners) in the value chain was restated by the CCI.
Based on its rationale above, the CCI held that the restrictions covered under the UFO EL Agreement and the Qube EL Agreement seemed to prima facie infringe section 3(4) of the Act. The director general was ordered to investigate the alleged violations by the CCI.
Over the years, the CCI has dealt with a continuous number of complaints as regards the cinema sector. The majority of cases under the Act have corresponded with concerted action by trade associations of producers, multiplexes or distributors. However, recent trends indicate that there have been various cases against intermediary players that render value-added services, which have vertical restraint issues such as bundling and exclusivity.
On a few occasions, the CCI has also investigated the DCE market, but it has had little success. The Order described above has changed the status quo by directing a full-fledged investigation into the market conduct of the offending parties.
The sector has also seen growth and transformation with the introduction of technology-driven innovations and solutions that tackle issues such as piracy. However, the trend across digital markets shows that the cinema sector is not immune from antitrust challenges.
It is, perhaps, this increase in antitrust cases that has prompted the launch of the CCI's formal market study into the business practices and the relationship between the stakeholders in the film production and distribution ecosystem.
For further information on this topic please contact Anisha Chand or Siddharth Bagul at Khaitan & Co by telephone (+91 11 4151 5454) or email ([email protected] or [email protected]). The Khaitan & Co website can be accessed at www.khaitanco.com.