CCI Fines Digital Cinema Service Providers UFO Moviez And Qube Cinemas For Anti-Competitive Agreements

Facts of the case

The Opposite Parties, UFO Moviez India Ltd., engaged in supplying Digital Cinema Equipment (DCE), which was necessary to play digital films, to Cinema Theatre Owners (CTOs), who typically leased rather than purchased these systems from Digital Cinema Service Providers (DCSPs). Scrabble Digital Ltd., also an Opposite Party and a subsidiary of UFO Moviez, handled post‑production services, allegedly controlling nearly 90% of that market. Qube Cinema Technologies Pvt. Ltd., another key DCE supplier, was once slated to merge with UFO, but the deal was withdrawn in 2019, though QubeCinemas was still reputed to be under UFO's influence. To ensure compatibility and quality across screens worldwide, all DCEs had to meet standards set by the Digital Cinema Initiative (DCI), an association comprising Disney, Fox, MGM, Paramount, Sony Pictures, Universal, and Warner Brothers. The informants, PF Digital Media, contended that UFO Moviez had entered into anti-competitive agreements with CTOs to favour the business of its subsidiary, Scrabble Digital, which they alleged was a violation of the provisions of the Competition Act. They specifically referred to exclusivity clauses in equipment lease agreements between UFO Moviez and CTOs. The informants alleged that UFO Moviez was the dominant player in the market for cinema theatre screens playing digital format films and that the agreements with CTOs resulted in a denial of access to all cinematograph films that were not post-production processed by Scrabble Digital, which contravened Section 4(2)(c) of the Act. The Competition Commission, through a prima facie order dated 17.09.2021, found that equipment lease and content‑supply agreements imposed unlawful tie‑in arrangements and exclusive‑supply obligations, prompting a further investigation by the Director General through an order dated 17.09.2021, based on which the current order was issued.

Contentions of Opposite Party

The Opposite Parties argued that the Director General (DG) had misunderstood the different ways in which UFO offered access to DCI-Compliant Digital Cinema Equipment (DCI-DCEs). They contended that leasing DCEs as part of a bouquet of Digital Cinema Services (DCS)—including in-cinema advertising, content delivery (PPP services), and Video Projection Fee (VPF) collection—was an indivisible service that had been incorrectly conflated with simple flat-rate leases of DCEs. They claimed the DG had failed to properly assess substitutability from the perspective of Cinema Theatre Owners (CTOs), particularly given the lower rent under the DCS model.

While responding to the allegations of tie-in arrangements and exclusive supply obligations, the parties submitted that, for such an arrangement to be considered anti-competitive under Section 3(4) of the Act, there must be evidence of coercion resulting from market power that forced CTOs to purchase the DCS bouquet against their will. They argued that the DG had failed to provide such evidence, asserting that CTOs opted for DCS voluntarily due to its cost-effectiveness, streamlined services, and reduced operational requirements. The CTOs, they claimed, had the freedom to choose between DCS, flat-rate leases, or outright purchases of DCEs. They further pointed out that none of the ten large CTOs interviewed by the DG had alleged any coercion. They maintained that the DCS offering was a 'composite service' rather than a tie-in of separate products and that CTOs were free to source content from any party.

Regarding the alleged exclusive supply agreement, the Opposite Parties submitted that their standard sale agreements did not require CTOs to purchase other services from UFO, thereby allowing them to choose their own suppliers, including for content delivery. They argued that exclusivity in content delivery was only required in cases where UFO was responsible for collecting the VPF on behalf of theatres, to ensure accurate payment by producers.

Observations by the Commission

The Commission, while dealing with the issue of tie-in arrangements between the opposite parties, held that a tying arrangement take place when the purchase of one product is made conditional on the purchase of another. For such an arrangement to be recognized under the competition law, certain conditions had to be met, including the existence of two separate products, a conditional sale, significant market power in the tying product, and a notable impact on commerce.The Commission found that the opposite parties had engaged in a tie-in arrangement by leasing DCI-Compliant Digital Cinema Equipment (DCE) only if the content was also procured from Qube Cinemas or its affiliates. Although UFO Moviez claimed that the offering constituted a single 'composite service,' the Commission observed that the DCE and the content could be obtained separately and that UFO Moviez imposed exclusive use of its equipment. The Commission concluded that the opposite parties had tied the lease of DCE with content supply, thereby restricting free competition.

Further, the Commission observed that the opposite parties were engaged in exclusive supply agreements in violation of Section 3(4)(b) of the Competition Act. These agreements restricted CTOs (Cinema Theatre Operators) from sourcing digital film content from any provider other than the opposite parties or their affiliates. Statements from Yash Raj Films (YRF) and other film producers like Reliance Entertainment revealed that KDMs (Key Delivery Messages), essential for playing content on DCEs, generated by other service providers did not work on the DCEs leased from the opposite parties due to encryption/firewalls installed by them. Only KDMs issued by the opposite parties were functional, effectively forcing CTOs to rely solely on them for content delivery. Statements from CTOs confirmed that under the lease agreements, Qube Cinemas alone handled cloning and content delivery, reinforcing the exclusivity. The Commission found no valid justification for these restrictions and rejected the arguments of the opposite parties. It concluded that the opposite parties were engaged in anti-competitive exclusive supply agreements, preventing CTOs from sourcing content from alternative PPP service providers, thus restricting market competition.

Additionally, the Commission found that the opposite parties were engaged in practice of "refusal to deal" under Section 3(4)(d) of the Competition Act by restricting CTOs leasing their DCEs from sourcing film content processed by other PPP service providers. The commission relied on the statement of CTOs to establish that only KDMs generated by Scrabble Digital worked on UFO Cinemas' leased DCEs due to server restrictions imposed by the company, despite international norms allowing compatibility between various DCEs. Submissions from competitors like K Sera Sera and SDC Techmedia, as well as statements from CTOs and film producers, confirmed that UFO Cinemas enforced exclusive content supply. These practices limited fair competition and prevented CTOs from choosing alternative service providers. The Commission therefore concluded that the opposite parties had engaged in anti-competitive refusal to deal in the Indian PPP services market.Finding that the opposite parties had engaged in unfair and anti-competitive practices, the Commission ordered that UFO Moviez and Qube Cinemas must not enter into any new DCE lease agreements that restricted theatre owners from sourcing content from other providers. It further directed that all existing lease agreements be modified to remove such content-supply restrictions.The Commission also imposed monetary penalties of ₹104.03 lakh on UFO Moviez and ₹165.8 lakh on Qube Cinema Technologies, both payable within 60 days of the order.

Case Title:Ravi Walia vs M/S Ufo Moviez India Ltd

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