TUESDAY 17 JUNE 2003

MR STELIOS HAJI-IOANNOU AND MR JAMES ROTHNIE

  Q480  Mr Flook: Yes, but there is quite a big capital outlay for those, whereas your capital outlay for a three year fairly cheap Milton Keynes business is not quite comparable to buying a jet and hoping that people will want to go and fly on one of those jets. How many people live within, say, five miles or ten miles of your multiplex in Milton Keynes? And is it a captive audience? How far do they have to go if they do not go to Milton Keynes?

  Mr Haji-Ioannou: Well, Milton Keynes, as it happens, has two cinemas; a brand new expensive one and what has now been converted into easyCinema which was the first multiplex in the country 20 years ago. So it is a very interesting experiment to see how far you can grow the market. I think my point still remains; why are these people refusing to allow price to be determined by supply and demand?

  Q481  Mr Flook: And as I said, I have no remit for them whatsoever and I hope you succeed, but it could well be that after six weeks or whatever it is—because you must have spoken to them before—they still have not got used to your business model and big organisations have to seek permission up, down, sideways to work out how to deal with you.

  Mr Haji-Ioannou: Well, it is a problem. I am not denying the fact that the largest single risk I have, as a business at the moment, is if the distributors decide that this is not acceptable to them. And it is the risk of doing business.

  Q482  Mr Bryant: Thank you, Chairman. You have raised some very interesting points about the tendency to move towards a monopoly in an industry which has two features; one, the vertical integration, the fact that—

  Mr Haji-Ioannou: Distributors and exhibitors.

  Q483  Mr Bryant: Exactly. And secondly, the marginal cost being irrelevant. You know, when another person walks through the door it does not cost any more. It is exactly the same in television; it does not cost any more to get another person watching the television programme than to have one fewer. The difference is in terms of how to get people in through that door, seems to depend, from everything we have been told by everybody who makes films, on marketing and that that is the key. So there is maybe a marginal cost which is in terms of the marketing, which you are not then being prepared to pay into.

  Mr Haji-Ioannou: I believe that even for the biggest blockbuster, the most heavily marketed and hyped movie, let us say it is released on the Friday, if you go in on the Tuesday after at 3pm, you will find empty seats. So they are leaving money on the table and the only reason they are doing it is because they are afraid that price competition will be a slippery slope that would lead to an efficient market. You know, they are not filling the cinema every day, every hour. They are just saying "I would rather not start this game. Look what happened to the airlines when they started price competition. I would rather keep the price constant and only compete on creativity, hype, PR".

  Q484  Mr Bryant: I know they are not filling all the cinemas. Last Thursday when I was moving house and there was no furniture to sit on in my house I went to watch Ripley's Game at the cinema and I was literally the only person in the cinema which had 650 seats. And that makes me worry a little bit about your future because if it is £5.35, not a large amount of money to go to the cinema in Llangarron, and if you are going to charge people 20p, you have got to get 25 extra people to sit with me in that cinema on a Thursday evening.

  Mr Haji-Ioannou: Perhaps I should say—and there was an earlier question about whether you should subsidise the construction of more cinemas—I think this country and most other countries, as a result of the recent boom in multiplexes, have over-supplied. I do not think this industry needs any more capacity. And one of the reasons I rent is because there are too many of them. But the way capitalism should work in these circumstances is whoever builds the cinema should lose their money and then the next person should get the capacity at a more reasonable price, at a rationalised cost of capital, and then try and fill it at a different cost base. The person who made the mistake is the person who built the multiplex in the first place and there is no reason to sustain high prices now.

  Q485  Mr Bryant: You talked about the distribution problems that you have. In places like my constituency where most of the cinema going is actually people going to their local community centre where they have cinema going facilities, like the Pontygwaith Community Centre or the Park and Go, these are tiny places in a way, they do not seem to have difficulty having first run movies. Why are you?

  Mr Haji-Ioannou: What do they charge? I do not know. I am not familiar with this—

  Q486  Mr Bryant: It varies between £2.50 and £4.60 in a very price sensitive area with a lot of people with not a lot of disposable income.

  Mr Haji-Ioannou: Well, I suspect that the distributors are worried that if we start price competition it will be a slippery slope and that is the only way I can explain it, but perhaps you should ask them. You know, I have seen examples of allowing films to be shown in cinemas that are marginally cheaper than others and they allow even the same cinema to have a pound off here or there for matinée performances and everything else. What scared them is the idea of wholesale price competition and the consumer transparently seeing the difference between a good movie and a bad movie. If it is cheap, it means it is not good, it is not in demand and that scares them, I think.

  Q487  Mr Bryant: I have flown on easyJet quite often, but only on short flights, and I have never been on a flight, I think, where there was a film shown. Did easyJet ever show any films?

  Mr Haji-Ioannou: No.

  Q488  Mr Bryant: So did you have any distribution issues? Because it is one of the things that we have not referred to at all, but of course the airline industry is quite a source of money for the British film industry.

  Mr Haji-Ioannou: The average length of an easyJet flight is one hour and 20 minutes, so to show a film does not even come into it and we have not got the facilities anyway.

  Q489  John Thurso: Forgive me for coming back to the business model again, partly because I am fascinated by it and partly because I would like to know more about it, but also because ultimately if you are wrong and the impact that there could be in the market place is actually destructive to the British film industry, by the time anybody found out it would be far too late to do anything about it. So that is why I would like to look at it. Can I just get from you a little more definition of price elasticity, which I assume would mean that you price down, as in any yield management system, when you think you have got the troughs and price up when you think you have got the peaks. So that for an airline it would be you are looking for an average seat mile revenue, a hotel it is revenue per available room, so you are looking, I do not know, at some sort of average. What is the average? 20p is the headline price?

  Mr Haji-Ioannou: That is the headline price, yes.

  Q490  John Thurso: What is the average that you are looking to make?

  Mr Haji-Ioannou: I believe that given real estate in Milton Keynes and a reasonable cost of film, which is the largest variable here, the one we all know, I think you should be able to do 50% occupancy £1.50, which is well below what the competitors are charging.

  Q491  John Thurso: So £1.50 would be the top price or the average?

  Mr Haji-Ioannou: No, the average.

  Q492  John Thurso: So actually on the busy nights for the good films—

  Mr Haji-Ioannou: It will be £4.00 or £5.00.

  Q493  John Thurso: You are right up there with the—

  Mr Haji-Ioannou: Yes, and that is the idea. Something else we, as the easyGroup, do different to many other people in industries that do practice yield management, we start low and the price goes up. In other words, you reward people for committing in advance which is the opposite of some hotels, for example, that discount last minute, or even airlines. So the analogy here is someone who is willing to say "The Matrix has just come out. I am not really interested in the crowds and the hype of the first night. I will book now to see it three weeks later on a Tuesday". Why does that person not deserve a different price to someone who is willing to sort of stand in the queue on the Saturday night? Logically it is not the same product, why should it be priced at the same price?

  Q494  John Thurso: On the costs side you used the phrase "outsourcing to the customer" and you have stripped out all of the fancy bits and bobs that get added on to that. Presumably outsourcing to the customer also means no service of any kind?

  Mr Haji-Ioannou: We have people on the premises because of safety requirements and the way people gain entry into the screens is they book online, they are invited to print a bar code that serves as a membership card and they use that bar code, scanning it over a turnstile, to get in. So normally, if all goes well, there should be no human intervention. In reality, in practice, there are employees on the premises for safety purposes.

  Q495  John Thurso: If, for example, you take the quoted box of popcorn at £3.50, if you knock off the VAT and look at the average sort of catering margin, you have probably got at least £2.00 to £2.50 of actual bottom line contribution or gross contribution. You did 4,500 seats in your first week, so you are looking £9,000—£10,000 that you have denied yourself. Can you actually save that out of the wages? Because the rest is all fixed cost, the property and the rent, the rates and electricity.

  Mr Haji-Ioannou: Yes, I hope that I will save it out of wages and having a less complex business. I also believe that if you make it cheaper overall, you will get more people in. I think consumers value the whole experience and they say "I can either stay at home or I can take a family of four to see a movie" add the popcorn, add the drinks, it has suddenly become a £40 decision. So I think consumers look at the entire expense and on that basis decide to stay away.

  Q496  John Thurso: So the model that you are proposing is "Because you know it is the operation that I have got, would you arrange to buy your own popcorn or hamburgers or sweeties or whatever stuff and you bring it in with you"?

  Mr Haji-Ioannou: Some people value it and they will go and source it themselves and other people hate it and will not bother at all. But everybody has the knowledge that the whole experience is cheaper.

  Q497  John Thurso: I wish you well.

  Mr Haji-Ioannou: Thank you.

  Chairman: Actually, of course, one of the things that you would achieve is countering all this lonely experience of being one of three or four people in an auditorium. When I was one of three or four people watching Eyes Wide Shut I wished that there were three and it was not me that was among them. Mr Keen.

  Q498  Alan Keen: Obviously it is the number of seats you sell and the money that you take that is important, but what are the comments you have had locally? If you asked me, for instance, I mean I would prefer your cinema to one that sold popcorn because I do not like the smell of them. But what sort of comments do people make to you about your project?

  Mr Haji-Ioannou: Anecdotally the feedback has positive. Customers had a very low expectation to start with. Obviously the projection equipment and the screens are exactly the same, and the seats, so nothing in the hardware as such changed. They made a conscious decision to buy a film. So I did not force them to see one film or the other. And because they paid very little, I think that they came out feeling satisfied. I think consumer satisfaction comes out of under-promising and over-delivering and there is very little we have promised actually to fail. So I think that there are consumers who will continue to go to expensive cinemas. There are examples of cinemas all the way up to £12 with a license to sell alcohol and the full works and it is as expensive as going to a restaurant sometimes and that would be a niche market for those. And I think all the way to the other end you will find people who find the 20 pence three weeks in advance for the kids with some popcorn and Tesco cola is far better and far more satisfying.

  Q499  Alan Keen: This is not so much a question, but I chair the All Party Football Group in Parliament and I have recently been to Brussels to see Mario Monti, the Competition Commissioner. And we all feel in football, right from the top of the Premier League downwards, that if Mr Monti forces the individual Premier League clubs to negotiate separately for their own games that there will be a lot less money going to football and we have got a whole structure, grass roots and lower leagues, to support from that. Now, the film industry has not really got that. We have got people who work in it and we care about them, but to me there is a parallel between the two industries. Have you been to see the competition people in Europe?

  Mr Haji-Ioannou: No, I have not been to the competition authorities in Brussels.