Note on: In Re: M/s. K Sera Sera Digital Cinema Private Limited Vs.

Digital
Cinema Initiatives, LLC & Others

TIMELINE

22.04.2015 8.12.2015 8.6.2016 9.11.2016

(CCI) (COMPAT) (CCI) (COMPAT)

FACTS: Informant (. K Sera Sera Digital Cinema Private Limited) is one among India’s leading
digital cinema service providers having tie up with 300 cinema theatres across India. OP1 is a
joint venture formed by the parent companies of OP2 to OP7, engaged in the business of release
and distribution of movies produced by their parent companies in India. Informant has alleged
that OP1 is a cartel formed to dominate and monopolize the market of digital cinema exhibition
in India as OP2 to OP7 have entered into an anticompetitive agreement in the form of OP1 to
release their movies in India in digital format only through Digital Cinema Initiative (DCI)
compliant servers and projectors. This has forced the Indian companies to adhere to their
standard which is in contravention to Section 4(2) (b) of the Act.

Allegations by Informant*:

The primary allegation made by the informant/appellant is the use of anti-competitive practices
by the respondents, though they have also alleged abuse of dominance. The appellant has alleged
that respondents were forcing tie-in arrangements so that digital service providers would have to
buy DCI compliant equipment. It has further alleged that opposite parties’ conduct and
agreement result in exclusive supply agreement restricting cinema owners from acquiring or
otherwise dealing in equipment of informant and similarly placed companies other than those of
the few handfuls of companies certified by and accredited to Opposite Party No.1. The appellant
has also alleged that the alleged agreements among respondents were towards limiting and
controlling supply of Hollywood films in India. Because of the conduct of the opposite
parties/respondents, the alleged agreement results in refusal to deal as cinema owners using their
technology are forced to not to deal with company such as the appellant.

Reply by defendants:

Order of the commission (dated 22.04.2015):

The Commission observed in the absence of no material being placed before it to infer anti-
competitive agreement as envisaged in section 3 of the Act, and the failure of the informant to
show that the alleged conduct is likely to have appreciable adverse effect on the competition that
prima-facie no infringement of section 3 of the Act is made out.
With regard to abuse of dominant position, the commission held that the Informant has not
submitted any cogent material to show that any of the Opposite Parties is dominant in the
market, therefore in view of the facts and circumstances obtaining in the present case, the
Commission does not deem it necessary to define the relevant market as the alleged conduct of
the OPs do not appear to fall in the category of abuse in terms of the provisions of section 4 of
the Act.

The Informant has alleged that:

(i) OPs are imposing their revenue sharing agreements on the cinema theatre
owners which leads to increase in the ticket prices in contravention of the
provisions of Section 3(3)(a) of the Act,
(ii) OPs are not allowing the cinema theatre owners to install the servers and
projectors of their choice which deprives a large number of viewers from
watching movies
in a theatre of their choice at a competitive ticket price inviolation of Section
3(3)(b) of the Act.
(iii) the conduct Ops result in tie-in arrangement as they require the cinema
theatre owners and digital cinema technology companies to purchase and use
the equipment certified/ accredited by them as one of the conditions to purchase/
play the movie in their theatres in contravention of Section 3(4)(a) of the Act.

(iv) OPs are restricting cinema theatre owners from acquiring the equipment of
the Informant or other companies which are not certified by OP 1 in contravention
of Section 3(4)(b) of the Act,
(v) OPs are restricting the cinema theatre owners from dealing with the Informant
which is in contravention of Section 3(4)(d) of the Act,
(vi) OPs are imposing unfair condition in purchasing, installing and using the DCI
compliant equipment by the digital cinema technology companies and the cinema
theatre owners which limits and restricts the provision of services of movie
exhibition/ screening and marketing in contravention of Section 4(2)(b) of the Act,
(vii) OPs are denying the consumers of cinema theatres which use non-DCI
compliant equipment to watch Hollywood movies in their preferred theatres at
competitive ticket prices in violation of the provisions of Section 4(2)(c) of the Act,
and
(viii) OPs are using their dominant position in the movie production to enter into
and monopolize the market of digital cinema service providers in contravention of
Section 4(2)(e) of the Act.

The OP 1 is alleged to be a joint venture of OP 2 to OP 7, which has been formed with an object to
dominate and monopolise the market of digital cinema exhibition in India and elsewhere. It is further
alleged that the studios of OP 2 to OP 7 have entered into an anti-competitive agreement amongst
themselves to release their movies in India in digital form only through Digital Cinema Initiatives
(DCI) compliant servers and projectors. The cartel constituted by the OPs is alleged to have forced
the Indian companies, engaged in the business of digital cinema technology, to adhere to their
standards and conditions even if the Indian companies have better technology. The cartel is alleged to
have resolved not to distribute movies to the Informant and similarly placed other companies in
India. The concerted action of the OPs is alleged to be in violation of the provisions of Act.
It is also stated that the whole digital cinema has two categories. The first being D-cinema for which
technical requirement/specification are defined by DCI. The DCI standard requires 2K or 4K
resolution projectors with a defined minimum contrast ratio, precise brightness level on screen and a
calibrated minimum colour gamut. The second category is that of E- cinema. It is stated that e-
cinema is everything else which is non-DCI compliant. That it typically uses 3-chip DLP projectors,
which produce better quality than 35mm film in most situations. It is further stated that the
manufacturing and installation charges for DCI compliant equipment are much higher than the non-
DCI compliant ones. The Informant also submitted that its proprietary Sky Cinex technology is a
non-DCI compliant technology but is not inferior to the DCI approved and promoted technology.

It is alleged that the Informant and similarly placed other companies are not allowed by the OPs to
exhibit/screen the movies produced by them and subsequently released in India. The OPs have
compelled the cinema
theatre owners as well as the digital cinema technology companies across the country to adopt and
use servers and projectors specified by them only from their list of manufacturers/vendors or else
lose business of screening/ exhibiting the movies produced by them.

The Informant has alleged violation of the following provisions of section 3 of the Act:

a) Section 3(3)(a) : That OPs are imposing their revenue sharing agreements on the cinema owners
which leads to the increase in the ticket prices in the country.
b) Section 3(3)(b) : That they are not allowed to install the servers and projectors of their own
choice, thus, depriving a large number of viewers from enjoying or watching the movie in a theatre
of their choice at a competitive ticket price.
c) Section 3(4)(a) : The OPs conduct and agreement result in tie-in arrangement as they require the
cinema owners and digital cinema technology companies to purchase and use the equipment (servers
and projectors) as one of the conditions to purchase/play the movie in their theatres.
d) Section 3(4)(b): OPs are restricting cinema owners to acquire or otherwise deal in equipment of
the Informant or similarly placed other companies which are not certified by and accredited to OP 1.
e) Section 3(4)(d): The conduct of OPs amounts to refusal to deal as their agreements and conditions
restrict the cinema theatre owners from dealing with companies such as the Informant company and
vice- versa.

The Informant has alleged violation of the following provisions of section 4 of the Act:

a) Section 4(2)(b): The conduct of OPs by imposing unfair condition of purchasing, installing and
using the DCI compliant equipment by the digital cinema technology companies and the cinema
theatres owners limits and restricts the provision of service of movie exhibition/ screening and
marketing results in the non DCI compliant equipment users inability to exhibit/screen movie. It is
averred that compelling consumers to pay high price for ticket to watch movies or limiting their
option to watch the movies in theatres of their choice causes prejudice to the interests of the
consumers .
b) Section 4(2)(c): The consumers of cinema theatres which use non-DCI equipment will be denied
to watch the Hollywood movies in their preferred theatres at competitive ticket prices.

Section 4(2)(e): The OPs are using their dominant position in the movie production sector to enter
into and monopolise relevant market of digital cinema service providers.

The primary allegation made by the informant/appellant is the use of anti-

competitive practices by the respondents, though they have also alleged abuse
of dominance. The appellant has alleged that respondents were forcing tie-in
arrangements so that digital service providers would have to buy DCI compliant
equipment. It has further alleged that opposite parties’ conduct and agreement
result in exclusive supply agreement restricting cinema owners from acquiring or
Otherwise dealing in equipment of informant and similarly placed companies
other than those of the few handfuls of companies certified by and accredited to
Opposite Party No.1. The appellant has also alleged that the alleged agreements
among respondents were towards limiting and controlling supply of Hollywood
films in India. Because of the conduct of the opposite parties/respondents, the
alleged agreement results in refusal to deal as cinema owners using their
technology are forced to not to deal with company such as the appellant.

The Informant has alleged that: (i) OPs are imposing their
revenue sharing agreements on the cinema theatre
owners which leads to increase in the ticket prices in
contravention of the provisions of Section 3(3)(a) of the
Act, (ii) OPs are not allowing the cinema theatre owners to
install the servers and projectors of their choice which
deprives a large number of viewers from watching movies
in a theatre of their choice at a competitive ticket price inviolation of Section
3(3)(b) of the Act, (iii) the conduct OPs
result in tie-in arrangement as they require the cinema
theatre owners and digital cinema technology companies
to purchase and use the equipment certified/ accredited by
them as one of the conditions to purchase/ play the movie
in their theatres in contravention of Section 3(4)(a) of the
Act, (iv) OPs are restricting cinema theatre owners from
acquiring the equipment of the Informant or other
companies which are not certified by OP 1 in
contravention of Section 3(4)(b) of the Act, (v) OPs are
restricting the cinema theatre owners from dealing with the
Informant which is in contravention of Section 3(4)(d) of
the Act, (vi) OPs are imposing unfair condition in
purchasing, installing and using the DCI compliant
equipment by the digital cinema technology companies
and the cinema theatre owners which limits and restricts
the provision of services of movie exhibition/ screening
and marketing in contravention of Section 4(2)(b) of the
Act, (vii) OPs are denying the consumers of cinema
theatres which use non-DCI compliant equipment to watch
Hollywood movies in their preferred theatres at competitive
ticket prices in violation of the provisions of Section 4(2)(c)
of the Act, and (viii) OPs are using their dominant position
in the movie production to enter into and monopolise the
market of digital cinema service providers in contravention
of Section 4(2)(e) of the Act.

Reply by defendants:

Order of the commission (dated 22.04.2015):

The Commission observed in the absence of no material being placed before it to infer anti-
competitive agreement as envisaged in section 3 of the Act, and the failure of the informant to show
that the alleged conduct is likely to have appreciable adverse effect on the competition that prima-
facie no infringement of section 3 of the Act is made out.
With regard to abuse of dominant position, the commission held that the Informant has not submitted
any cogent material to show that any of the Opposite Parties is dominant in the market, therefore in
view of the facts and circumstances obtaining in the present case, the Commission does not deem it
necessary to define the relevant market as the alleged conduct of the OPs do not appear to fall in the
category of abuse in terms of the provisions of section 4 of the Act.

The OPs have also drawn attention of the Commission regarding increase in the efficiency of
distribution and exhibition of movies and quality of images. The Commission also notes that the
Informant has not been able to show that the alleged conduct is likely to have appreciable adverse
effect on the competition (AAEC). Taking the totality of the facts and circumstances, the
Commission is of the view that prima-facie no infringement of section 3 of the Act is made out.

The Informant has not submitted any cogent material to show that any of the Opposite Parties is
dominant in the market. However, in view of the facts and circumstances obtaining in the present
case, the Commission does not deem it necessary to define the relevant market as the alleged conduct
of the OPs do not appear to fall in the category of abuse in terms of the provisions of section 4 of the
Act.

COMPAT

There is
also no doubt that introducing efficiency in delivery of service through
process of standardization is a desirable objective for economic reasons.
However, it is also a matter for consideration as to at what point forcing
standards can lead to pushing out competition. It needs to be seen that by
introducing complex standards, economic players do not force competition
out of the market. This can happen in two ways, first necessitating, by virtue
of strong position in the market, compliance with standards which forces
those players who follow different standards to leave the market and second
by sourcing from those producers, only who produce according to certain
standards. In such situation as long as there is pluralism in the standards,
all coexist and market demands determine their survival. The argument here
is not against high standards but only to indicate how standards can create
anticompetitive conditions in the market or what is termed ‘tyranny of
standards’ in trade literature. There are many instances where Private
standards have muted competition in many ways. In the instant case on a
prima facie reading, it can be argued that Hollywood films as a class can
only be shown in India by adoption of DCI compliant technology as those
who do not comply with that technology will not have access to films
produced by Respondent Nos.2 to 7, who as alleged by the appellant, have a
90% share of the Hollywood films market. It will be difficult to prove prima
facie the adverse impact on competition as a consequence of such a
practice unless facts and figures are examined and relative strengths of and
market response to technologies are studied. If Hollywood films can only be
shown by one set of technology, this can also suggest potential
monopolisation of the market. It is not our view that this is necessarily the
case in the instant matter or that this is the only possibility in the present
matter and there are no other anti competitive possibilities.

A perusal of the impugned order shows an inference

drawn by the Commission largely on the basis of the statements made by
the opposite parties/respondents on the superiority of the technology.
Further a very significant possibility is also suggested in the above
argument on how technical regulations can lead to ‘limiting or controlling’
supply of products thereby forcing competition out.

view that this matter

should be remitted to the Competition Commission for reconsideration
whether or not a case for directing investigation under Section 26(1) of the
Competition Act is made out. In their reconsideration they shall, inter alia, also
examine the potential of technical regulations in creating anti
competitive conditions and establishing monopolistic conditions.

CCI:
CCI observed that the Informant was aware at the time of entering the relevant market that OPs were
not releasing their movies in non-DCI compliant equipment. However, the Informant preferred not to
use DCIcompliant equipment. Further, Informant has been unable to disclose any evidence which can
show that there exists an agreement among OPs which can be considered anti-competitive and in
violation of Section 3(4) of the Act. Further, the information does not disclose any case of abuse of
dominant position in terms of Section 4 of the Act. Hence, disposed the information

COMPAT:

To our discomfort we have not seen anything by way of value addition

in Commission's impugned order in the present appeal over the earlier order
dated 22.04.2015 made by the Commission. The Commission had the benefit
of the presentations made by the respondents particularly the one made by
M/s Fox Star Studios India Private Limited, respondent No. 3 before the
Commission which is an elaborate description of the respondents' case. The
Commission in paragraphs 18 and 19 of the impugned order has explained
the technical features of the respondents D-Cinema technology. The salient
features of the technology have been drawn from written submission of
respondent No. 3 made before the Commission after the remission of the
case for reconsideration. It can be clearly seen that both the paragraphs are
summarization of respondents detailed description of their technology.

The Commission further quotes in para 20 of the order from a 2010

communication of the European Commission to the European Parliament
which states that the D-Cinema technology has turned into standards by the
Society of Motion Picture and Television Engineers (SMPTE) clearly
indicating that the particular technology had become a private standard and
were being considered for adoption as voluntary international standards by
the ISO.

In paragraph 21 the Commission discusses the consequence of

adoption of multiple technologies/equipments on competition. It states,
"Alternatively, to avoid investing in multiple equipments, theatre owner would
invest in equipment compatible to screen/ show the content of the largest
Hollywood producer. This would foreclose the market for other Hollywood
studios, equipment manufacturers as well as smaller production houses; this
would in turn limit the consumer choices." Thus Commission itself recognizes
that there could be a foreclosure of competition if technology choices are
severely constrained.

While in Commission's order the issue of cartel has been addressed to

some extent, we do not find any prima facie examination of the question of
dominance as alleged in the information. In the normal practice we have
observed that Commission in such cases defines relevant market and then
goes on to examine the issue of dominance and the likely abuse. In this
particular case somehow this approach has not been adopted. We also
observe that in order to form a prima facie view Commission has drawn
significantly from the submissions made by respondents particularly the
elaborate response submitted by respondent No. 3 and little analysis of its
own.

We understand quite well that the Commission is not expected to have

an in depth understanding of technical issues involved in matters related to
product standards. In view of the questions raised by the Tribunal in its earlier
order it would have been fair for the Commission to further investigate the
matter involving a larger body of stake holders rather than carry out a
laborious exercise at its own level.

We wish to quote paragraphs 23 and 24 from the impugned order.

"23. The Commission observes that the Informant has entered
the digital cinema market in 2010-11. At the time of entry,
it was well aware that OPs were not releasing their movies
in non-DCI compliant theatres and therefore, it had the
choice to opt for DCI-compliant equipment, if it wished to
show Hollywood movies in its theatres. But, the Informant
preferred not to use DCI-compliant technology in its
theatres.

24 Moreover, as submitted by the OPs, the Informant has

entered into a joint venture with United Media Works to
become the third largest digital cinema integrator in India.
Evidently, non-availability of Hollywood movies does not
impede the growth of the Informant. Also regional movies/
markets constitute a significant portion of the Indian
cinema market. A press release on their websites states
that:
“K Sera Sera and UMW have a little over 5% market
share individually at present. After the merger, the
Company aims to capture 25% market share in the next
two years and plans to spend over Rs. 100 Crore to beef
up its services. The new company will distribute movies
to about 600 screens in Bihar, Jharkhand, Uttar Pradesh,
Gujarat, West Bengal, Karnataka, Delhi, Punjab,
Haryana, Uttarakhand, Maharashtra, Himachal Pradesh,
Chhattisgarh, Madhya Pradesh and Andhra Pradesh. It
plans to increase the count to 2000 screens within two
years and expand its footprint across southern and
eastern India. There are around 5000 screens in the
southern markets and are mostly Cineplex’s. It
constitutes 60% of all cinema theaters in India.”
16. We express our complete disagreement with the approach taken by
the Commission in these two paragraphs, firstly in paragraph 23
Commission's observation that the informant was well aware at the time of
his entry in the market that he would have to adopt DCI-compliant equipment
if it wished to show Hollywood movies in its theatres, but he preferred not to

use DCI-compliant technology in its theatres, in our view is a strange

argument because it sounds prima-facie anti competitive. On the one hand
the respondents claim that their technology is voluntary, on the other they
create potential entry barriers by releasing their films only to those who opt
for digital technology. The respondents no doubt have a right to use their
intellectual property in a manner that it is not misused but the conditions in
accordance with the Act have to be reasonable. What is reasonable and to
what extent restrictions can be imposed is a matter of appreciation and
therefore, necessarily involves fact finding. In para 24, the Commission has
taken a irrational position on the relationship between non availability of
Hollywood movies and growth of the informant's business. The explanation
for this view offered by the Commission smells of pre-liberalization stance on
size of business which are no more relevant unless the size of business is
used to create abusive impact on competition in the market.

In times where technology is proving to be a guiding factor in evolution

and definition of markets, there is no doubt that more and more cases will
come before Competition authorities where technology would play a
significant role in creating competitive environment. Many a times from the
face of a proposition, it might appear restrictive and anti competitive unless
examined in depth. It is also important that such proposition is examined in a
broader context of stake holder perception because that is what would help in
validating claims and counter claims as well as in assessing what fulfills the
criteria of consumer welfare. We clearly do not see, in the impugned order,
effort at appreciating the above points and the points which the Tribunal had
made in its earlier decision. Rationally speaking, it would have saved time
and efforts of all those involved in this matter if Commission had ordered an

investigation by the Director General instead once again more or less

reiterating its earlier views.

For the reasons mentioned above, we hold that the Commission

committed serious error by declining to order an investigation under Section
26(1) of the Act. Accordingly, the impugned order is set aside and the
Director General is ordained to conduct investigation into the allegations
contained in the information filed by the appellant.

Respondents have defended their act by stating that their technology is

superior in nature, it provides piracy proof exhibition and the adoption of
technology is entirely voluntary. The respondents have further stated that
their line of business has strong sensitivity to potential intellectual property
infringements and therefore, use of such technology is necessary for them.
They have also stated that the adoption of this technology is entirely
voluntary. However, they further state that in order to protect their intellectual
property they release their films only to those who adopt this particular
technology. In order to justify their conduct, respondents have claimed the
protection of Section 3 (5) of the Competition Act, which allows some
reasonable restrictions by an intellectual property owner in order to protect
intellectual property against infringements.