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Box Office Scandal: Circuit Dealing Pervades Small Towns, Flagship vs. Century Theatres

Thompson on Hollywood By Anthony D'Alessandro | Thompson on Hollywood September 27, 2011 at 11:38AM

In a David vs. Goliath face-off, indie-owned Flagship Theaters recently won an appeal in its crusade against Cinemark’s Century Theatres. Does the age-old practice of circuit dealing — an unethical way for chain exhibitors to muscle studios — still persist? Anthony D’Alessandro digs further into this taboo topic: What is circuit dealing, exactly? It’s a predatory film booking practice whereby multiplex chains strong-arm studios for product in a specific market. If a studio decides to book with the competition in a given community, usually a Mom-and-Pop venue, then the exhibitor will threaten to bar that film (or future films) from playing the entire chain.
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Thompson on Hollywood

In a David vs. Goliath face-off, indie-owned Flagship Theaters recently won an appeal in its crusade against Cinemark’s Century Theatres. Does the age-old practice of circuit dealing — an unethical way for chain exhibitors to muscle studios — still persist? Anthony D’Alessandro digs further into this taboo topic:

What is circuit dealing, exactly? It’s a predatory film booking practice whereby multiplex chains strong-arm studios for product in a specific market. If a studio decides to book with the competition in a given community, usually a Mom-and-Pop venue, then the exhibitor will threaten to bar that film (or future films) from playing the entire chain.
Thompson on Hollywood
Thompson on Hollywood
Thompson on Hollywood
Much like 1920s lawmen’s conversations about bootlegging, circuit dealing is an uncomfortable topic for studio and exhibition executives – even off the record. Nobody wants to jeopardize working relationships, no matter how economically dysfunctional. Furthermore, circuit dealing violates antitrust laws. In sum, it’s the “Code Red” of distrib-exhib movie negotiations. It exists, without being officially documented.

Some execs dismiss such unethical transactions, claiming that in a healthy box office atmosphere, all parties are looking to share the wealth with the least amount of aggravation. “A studio would be crazy to give up another 70% rental,” says one distribution exec, even if it was coming from an independent theater, which are most often the victims of circuit dealing.

Waving off any talk about circuit dealing, one major studio suit described it as “an ancient form of negotiation that occurred 30 years ago,” when regional exhib fiefdoms put the squeeze on distributors.

Even for the National Association of Theater Owners, circuit dealing is a hand-offs topic, despite the organization's concern over such weighty exhibitor issues as early premium VOD and movie theft. Responding to an e-mail from TOH regarding the existence and policing of circuit dealing, NATO President John Fithian stated, “Your questions all relate to a competitive distribution issue with which NATO has no involvement.”

However, chatter about circuit dealing reared after early news this month about the Flagship Theatres of Palm Desert winning an appeal in its five-year legal crusade against Century Theatres/Cinemark USA. Since 2002, when Century acquired the River Multiplex in Rancho Mirage, it allegedly cannibalized first-run titles available to Flagship’s 10-screen cinema, The Palme D’Or, just two miles down the road on Highway 111.

The Palme – a high-end commercial arthouse theater owned by ESPN radio host Steve Mason, Emmy-winning actor/Drive star Bryan Cranston, Brian Tabor, producer Alise-Benjamin-Mauritzson (Ray) and her husband, Andreas Mauritzson—could hardly be considered a threat to the River, a popcorn pic palace for the under-25 bunch.

In what would be an odd maneuver for a tentpole plex, Mason says the River aggressively went after studios' classic slates. “We opened with the most obscure films. None of them were in the 150 films of 2003,” he says. “Our most prolific title that year was Miramax’s The Station Agent ($5.7 million domestic B.O.).”

To further survive, The Palme began to “move over” titles that came off screen at The River very quickly, securing second runs like Under the Tuscan Sun and Lost in Translation. Despite The Palme’s efforts to make superior bids, the chain always triumphed.

In 2008, a lower court ruled in favor of Cinemark, which argued that the case boiled down to clearances -- that is, when a theater obtains the exclusive right from a distributor to play a film over a nearby competing venue. The argument is that playing both locations would dilute receipts. In addition, Cinemark claimed that the River didn’t have sufficient power to cause competitive harm in the market, especially with a Regal Cinemas Rancho Mirage nearby (a chain that, Mason says, doesn’t sideline The Palme over product). Lastly, the Flagship couldn’t demonstrate antitrust injury. In response to Flagship's appeal, Cinemark has remained quiet, simply stating that they will seek a petition for a rehearing and, if necessary, a California Supreme Court review to reverse it.

Regarding studios’ tolerance of circuit dealing, one major studio distribution executive said: “My company doesn’t make a policy of stiffing the little guy in favor of the big one. It’s in no one’s favor. Besides, the studio decides what is competitive and we’re constantly doing research to analyze the environment and what makes it competitive.” The theory is that if there’s a river or a highway separating two theaters, it’s a non-competitive environment.

However, one New York-based micro-distribution head said, “It doesn’t surprise me to hear that Cinemark used its (chain) leverage to have a mom and pop theater cleared. I believe (circuit dealing) exists for the independents -- not so much for the studios, since there’s enough big films to play in a zone. It’s in a small distributor’s best interest to go with the chain’s demands.

"As a small distributor, I need an exhibitor like Cinemark, especially if they’re going to give me 150 playdates," he continued. "If you don’t abide by their demands, they’re apt to nail you in the end on another booking.” And for a chain like Cinemark, it's the primary theater in communities, like Erie, Penn. and Napa, Calif. Upsetting them over one market could potentially shut a distributor out of others.

While it is completely legal for a particular theater to obtain the exclusive run of a film in a market over a competitor, the problem occurs when the larger theater continually clears the indie-owned venue.

Some distributors and exhibitors argue that, thanks to the proliferation of chains, the number of competitive markets has dwindled and so has circuit dealing. Instead there's an A/B booking system whereby a studio allocates first-run tentpoles between two prime venues in a specific city (i.e. if Chain A didn’t get Harry Potter 7.1 last November, then they obtained the right to show Harry Potter 7.2 in July). And nobody wins when the wrong film is played at the wrong venue. A Florida Regal Cinema cleared a prestigious upscale arthouse theater for Palme D’Or winner The Tree of Life in early July. Teens, clueless about Malick, were drawn by Brad Pitt’s name above the title and then walked out, feeling duped. Had Tree of Life played at the arthouse, audiences would know what they’re getting. In Los Angeles, it's also not unusual for larger chains to hold sway over independently-owned arthouses 12 miles away with the exclusive run of studio classic product.

At the start of their trial, The Palme was shut out from playing The Da Vinci Code in 2006, despite offering better terms to Sony than the River. Flagship Palm Desert regularly offered to open films on three screens and guaranteed three months on screen (which The River could not offer) and distributors still accepted lesser offers from Cinemark.

Says one west coast arthouse booker who is cleared by the chains for studio classic titles: “If have you leverage, you apply it and it works both ways, whether it’s a small distributor caving into a big exhibitor or a big distributor holding sway over a small exhibitor. In the end, everyone wants their films to cross over.”

This article is related to: Independents, Studios, Box Office, TV, Exhibition, Warner Bros./New Line, Universal/Focus Features, Fox Searchlight, Twentieth Century Fox, Sony/Screen Gems/Sony Pictures Classics, Paramount/Vantage/Insurge/CBS, MGM/UA, Disney , AMC, 3D


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