Newspaper and magazine
distribution in the United
Kingdom
Decision not to make a market investigation reference
to the Competition Commission
September 2009
OFT1121
© Crown copyright 2011
This publication (excluding the OFT logo) may be reproduced free of charge in
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CONTENTS
Chapter
Page
Executive summary
4
1 Introduction
13
2 Background
17
3 Overview of sector and market definition
26
4 Analysis of the features of the supply of newspapers and magazines
50
5 Decision on a reference
104
6 Guidance and possible further update review
119
Note:
This document has been edited for publication in accordance with Part 9 of the
Enterprise Act 2002. Among other things, Part 9 requires that the Office of Fair
Trading has regard to the need for excluding from the published decision, so far
as is practicable, commercial information whose disclosure it thinks might
significantly harm the legitimate business interests of the undertaking to which it
relates. Where commercial information has been excluded from this published
decision, pursuant to Part 9, this is indicated by the [ ] symbol.
EXECUTIVE SUMMARY
The OFT's decision on a reference
The Office of Fair Trading (OFT) has decided not to make a market investigation
reference (MIR) to the Competition Commission (CC) under section 131 of the
Enterprise Act 2002 (EA02) for an investigation into newspaper and magazine
distribution in the UK. The OFT consulted publicly on a proposed MIR decision
not to make a reference, which was published on 22 October 2008.
The OFT has based its decision on:
•
the evidence and analysis set out in the proposed MIR decision,
•
the evidence in the responses to the public consultation on the
proposed MIR decision,
•
other relevant information and evidence submitted by parties, and
•
to the extent not covered by the points above, evidence regarding
recent developments in the newspaper and magazine supply
chains.
The market investigation reference process
In December 2006, the National Federation of Retail Newsagents (NFRN)
submitted a request for the OFT to investigate the supply chains for newspapers
and magazines in the UK. It asked the OFT to consider whether the conditions
for making an MIR to the CC were met, and if so, whether undertakings in lieu
of a reference may be available.
That request arose in the context of two pre-existing strands of OFT work in
relation to the distribution of newspapers and magazines: the OFT's Opinion,
and the OFT's review of the National Newspapers Code of Practice (the Code).
The NFRN's request enabled the OFT to build on those existing work-strands
and undertake a wide-ranging analysis of the newspaper and magazine supply
chains. The OFT's Opinion and the OFT's Code review were published alongside
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the proposed MIR decision. Those documents may provide useful further
background to parties regarding the OFT's decision not to make an MIR.1
The OFT's consideration of the MIR request has also taken place during a period
of significant economic challenge in the newspaper and magazine sector.
Between 2007 and 2008, the circulation per issue of national daily newspapers
declined by 3.4 per cent, while the level of advertising expenditure in national
newspapers has declined by 6.6 per cent. For magazines, the number of copies
sold per annum has decreased by 7.3 per cent and advertising expenditure in
consumer magazines has decreased by 5.8 per cent.2 This decline, while
accelerated by the economic cycle, reflects a more general trend across a
number of media sources as some advertisers and readers move to alternative,
mainly on-line, media, although the longer term extent of this migration is not
yet clear. Against this backdrop, the OFT's analysis has had to be mindful of
how these trends affect the nature of, and scope for, competition in the sector.
The OFT invited comments on its proposed MIR decision from the date that the
proposed MIR decision was published up until 28 days after the decision by the
Secretary of State for Business, Enterprise and Regulatory Reform3 that national
newspaper wholesalers would be released from undertakings to comply with the
Code.4 The preponderance of the comments directed towards the consultation
were from industry parties and industry representative bodies. The OFT
considered in its analysis of the sector these comments and other comments
related to the newspaper and magazine supply chains but not directed towards
the consultation on the proposed MIR decision.
1
www.oft.gov.uk/shared_oft/reports/comp_policy/oft1025.pdf (The Opinion).
www.oft.gov.uk/shared_oft/reports/comp_policy/oft1026.pdf (The Code review).
2
Based on the OFT's analysis of the Advertising Association's Advertising Statistics Yearbook
2009, WARC. This is the most recent, authoritative, source of information to which the OFT has
access on this issue.
3
From 5 June 2009, the Department for Business, Enterprise and Regulatory Reform became
part of the Department for Business, Innovation and Skills (BIS).
4
The Secretary of State published his decision on the Code on 20 April 2009.
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The OFT's reasons for deciding not to make a reference to the CC are set out in
this document. Where respondents commented on particular elements of the
analysis in the proposed MIR decision, these views have been included, where
appropriate, within the analysis presented in this decision document.
The reference test
Under section 131 of EA02, the OFT may make an MIR to the CC where it has
reasonable grounds for suspecting that any feature, or combination of features,
of a market in the United Kingdom for goods or services prevents, restricts, or
distorts competition in connection with the supply or acquisition of any goods or
services in the UK or part of the UK.
In its request, the NFRN raised several features which it considered prevented,
restricted or distorted competition. The OFT has considered these features, and
identified five individual key features of the conduct of publishers and
wholesalers for analysis under the reference test. These are:
•
Absolute Territorial Protection (ATP): ATP results from agreements
between publishers / distributors on the one hand, and
wholesalers on the other in which the former grant the latter
exclusive territories for distribution of their products from which
all competing wholesalers are excluded. The exclusive territorial
rights conferred by the agreements are underpinned by contractual
provisions prohibiting both active and passive sales between
territories.
•
Competition for the market: the process by which publishers
tender territories to wholesalers for the distribution of their
magazines and newspapers, and wholesalers bid to win those
tenders.
•
Sale or return (SoR): the system by which retailers can return
unsold copies to wholesalers and be reimbursed for them.
•
Copy allocation: the degree of control that newspaper and
magazine publishers exercise over the allocation of titles and copy
numbers to retailers.
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•
Cover prices: the printing by publishers of prices on the cover of
publications and the limits that places on retailer pricing.
Analysis of the features
The OFT has engaged extensively with stakeholders and has received a wide
range of submissions and data from relevant parties. The OFT has also
appreciated the views and representations made by industry parties and their
willingness to attend several meetings, provide written information to assist the
OFT's assessment, and their responses during the consultation period. In so far
as it is relevant, information received and analysis conducted in relation to the
other work-strands, namely the Code review and the Opinion, has been shared
for the purposes of the MIR decision. This has reduced the burden of
information provision for stakeholders.
Following its analysis, the OFT considers that there are reasonable grounds for
suspecting that three of the five features identified above individually prevent,
restrict or distort competition:
•
ATP for newspapers and magazines: by awarding wholesalers
exclusive territories and by preventing passive sales between
those territories, ATP may well remove the potential for
competition to emerge between wholesalers for a proportion of
the individual retailers within some of these exclusive territories.
•
Copy allocation for magazines: in contrast to newspapers, there is
considerable scope for retailers to differentiate their magazine
ranges. Longer distribution timescales for magazines should also
give more scope for wholesalers to respond to individual orders or
requests from retailers to reflect local demand preferences. This
scope for a retailer to compete on the basis of their magazine title
ranges may be restricted by the degree to which wholesalers, in
conjunction with publishers, control the allocation of magazine
copies to individual retailers.
•
Cover prices for newspapers and magazines: cover prices appear
to restrict the ability of retailers to increase their prices
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independently and control their margins. Cover prices might also
be expected to limit the ability of retailers to compete on nonprice dimensions of their newspaper and magazine offer. In
addition, although they do not restrict retailer discounting directly,
cover prices may generate a degree of pricing inertia at the retail
level, particularly for magazines.
The OFT has also examined the collective impact of the five individual features it
has analysed. The OFT considers that, taken together, the individual features
contribute to a high degree of publisher control over the entire distribution
process for newspapers and magazines (publisher-led distribution) and that:
•
In relation to newspapers, the very limited time-window for the
distribution of newspapers, the limited range of titles, the
unpredictability of content from day-to-day, and the habitual
nature of consumer purchases mean that there is limited scope
and incentive for retailers to differentiate their newspaper offers.
As such, the OFT considers that there are not reasonable grounds
for suspecting that publisher-led distribution for newspapers is a
feature that prevents, restricts or distorts competition.
•
In relation to magazines, however, the OFT considers that there is
significant scope, in the absence of such a high degree of
publisher control over the distribution process, for retailers to
differentiate their magazine offers and for wholesalers to respond
to more individualised retailer demands and local demand
preferences. The OFT considers that this degree of publisher
control over the distribution process for magazines affects not
only the ability of retailers, in competition with other retailers, to
influence the range of magazines they offer, but also their ability
to promote individual titles, offer different types of discount to
customers, and to improve the availability of titles, sensitive to
local demand and demographics. The OFT therefore considers
that there are reasonable grounds for suspecting that publisher-led
distribution for magazines prevents, restricts or distorts
competition between retailers in relation to magazines.
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Exercise of the OFT's discretion
Given that the OFT considers that the reference test is met, the decision on
whether to make a reference rests on the exercise of the OFT's discretion. The
OFT's guidance on market investigation references sets out four criteria, all of
which must, in its view, be met before it can decide to make a reference:5
•
Appropriateness of a reference: the scale of the suspected
problem, in terms of its adverse effect on competition, is such
that a reference would be an appropriate response to it.
•
Availability of remedies: there is a reasonable chance that
appropriate remedies will be available.
•
Undertakings in lieu: it would not be more appropriate to address
the problem identified by means of undertakings in lieu of a
reference.
•
Alternative powers: it would not be more suitable to deal with the
competition issues identified by applying the Competition Act
1998 (CA98) or using other powers available to the OFT.
Taking account of the relevant factors outlined in the OFT's guidance for
assessing whether these criteria are met,6 the OFT considers that, although the
reference test is met, the balance of the evidence reviewed and the resulting
assessment points in favour of the OFT exercising its discretion not to make a
reference to the CC of newspaper or magazine distribution in the UK. In
summary:
•
5
6
In relation to ATP, the OFT understands that publishers and
distributors have substantially completed the initial selfassessment of their wholesale agreements. As a result the OFT
understands that:
OFT 511, Market investigation references, paragraph 2.1.
OFT 511, Market investigation references, paragraphs 2.1 to 2.32.
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o
newspaper publishers have retained ATP, or intend to retain
ATP, in their distribution agreements with wholesalers into
the future by retaining bans on passive sales into the
future, and
o
magazine distributors have removed, or intend to remove,
the bans on passive sales, and therefore ATP, from their
distribution agreements with wholesalers.7
As regards, the OFT considers that the removal of the ban on passive sales from
the distribution agreements means that ATP as a feature will not persist in the
future.8 However, where ATP is retained in respect of newspaper and magazine
distribution agreements, then provided there has been a correct self-assessment
by parties, noting the analysis set out by the OFT in the Opinion, ATP will
provide offsetting customer benefits that exceed the likely detriment from any
adverse affect on competition resulting from ATP.
•
In relation to cover prices, the OFT has decided that a reference
would not be proportionate due to the offsetting customer
benefits from cover prices that the OFT considers exceed the
likely detriment from the adverse effect on competition identified.
In particular, the OFT considers that publisher-set cover prices
would, in general, be significantly lower than retailer-set prices.
•
In relation to the individual and collective features of magazine
distribution which are identified above, the OFT considers that the
process of self-assessment of individual distribution agreements
between publishers and wholesalers that has followed the issue
of the Opinion will give rise to a reasonable prospect of a period
7
However, the OFT understands that, for a number of magazines with particularly compressed
distribution timescales, some magazine distributors are continuing to consider whether to retain
bans on passive sales in their distribution agreements with wholesalers on the basis that such
magazines share the relevant characteristics of newspapers which may demonstrate that the
exemption conditions are satisfied. This issue was explicitly considered in paragraph 3.5 of the
Opinion.
8
The OFT understands that the new distribution agreements between magazine distributors and
wholesalers take effect between January 2010 and January 2011.
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of flux. In this connection, the reference to flux is to the changes
that may take place as a result of this process of self-assessment,
which could include changes to distribution arrangements
following the recent tender process.9 This period of flux means
that it would not be feasible for the CC to obtain the requisite
evidence at this point in time to properly assess how the supply
chains are likely to evolve in the short term, and hence the impact
and effectiveness of any remedies. For these reasons it is not
appropriate to make a reference to the CC.
Undertakings in lieu of a reference
Under section 154 of the EA02, the OFT has the power to accept undertakings
in lieu of a reference only when it otherwise intends to make a market
investigation reference. Since in this instance, for the reasons set out above, the
OFT has decided not to make such a reference, the OFT does not have the
power to accept undertakings in lieu.
Guidance on potential next steps for the industry
In the course of its analysis and in its consultation with industry parties, the OFT
has identified a number of instances of best practice which, if adopted more
widely, it considers could enable the newspaper and magazine supply chains to
work more effectively in to the future. In addition, the wider adoption of this
best practice could address some of the concerns raised by certain retailers.
Given the potential benefits of such best practice, the OFT has set out high-level
guidance for industry parties to consider regarding issues such as ensuring
effective competition for the market and addressing some of the apparent areas
of concern of certain retailers. The guidance is offered particularly in the context
of the current process of contract renewal between publishers and wholesalers
and the opportunity that it affords parties to make further developments to their
9
Such changes, and the responses anticipated from retailers, could consequently provide
benefits to magazine consumers in the form of increased choice, enhanced availability and
greater discounting of magazines.
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contractual arrangements (where contracts have not been finalised), but is also
relevant to inform ongoing industry discussions regarding self-regulation.
The OFT also notes the desire of certain industry parties to agree a new code of
conduct in relation to the supply of both magazines and newspapers to retailers,
including mechanisms for redress. Steps towards self-regulation that address the
features of the market which fall within the statutory test for a reference to the
CC, or otherwise address any further issues in the supply chains, would be
welcome. Any such voluntary agreements between industry parties should of
course comply with competition law.
Finally, as part of the OFT's function under section 5 of the EA02 to keep under
review information about matters relating to the carrying out of its functions,
the OFT will consider, after a period of two years following this decision,
whether to undertake a short update review of the newspaper and magazine
distribution sector in relation to the features examined in this decision. Such a
review will only take place where it would be justified following an assessment
under the OFT's prioritisation principles undertaken at that point in time.10 The
impact of any such review on consumer welfare, which is one aspect of the
OFT's prioritisation principles, is likely to be a particularly important
consideration in this connection at that point in time.
The OFT fully recognises that this sector has been subject to significant review
in recent years. Were the OFT to undertake a short update review, it would
focus on new developments in this sector that are relevant to the features
examined in this decision. In addition, any such review would also consider
what action industry parties have taken following the OFT's guidance in relation
to industry best practice.
10
The OFT's prioritisation principles can be found at:
www.oft.gov.uk/shared_oft/about_oft/oft953.pdf.
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1
INTRODUCTION
Decision not to make a market investigation reference to the
Competition Commission
1.1
This document sets out the findings of the OFT's examination into
newspaper and magazine distribution in the UK, including the roles of
publishers, distributors, wholesalers and retailers, following a request by
the NFRN that the OFT should consider whether the conditions for
making an MIR to the CC are met, and if so, whether undertakings in lieu
of a reference may be available. The document also sets out the
reasoning behind the OFT's decision not to make an MIR to the CC and
not to accept undertakings in lieu of a reference.
1.2
The request by the NFRN highlighted a number of features relating to the
distribution of newspapers and magazines in the UK that it considered
were features that prevent, restrict or distort competition. These
features were concerned in particular with the supply chains for daily
national newspapers and consumer magazines11 and are outlined in
paragraph 2.2 below. Other publications, such as regional newspapers
and business magazines, mainly use different means of distribution and
are not, therefore, the focus of this decision. Future references in this
document to 'newspapers' and 'magazines' should, therefore, be read as
references to national newspapers and consumer magazines
respectively.
The Enterprise Act 2002
1.3
Under section 131 of the EA02, the OFT may make an MIR to the CC if
the OFT has reasonable grounds for suspecting that any feature, or
11
Consumer magazines are typically aimed at customers' leisure interests and generally made
available through retail channels, although they may also be sold via subscription, as distinct
from business magazines or other periodicals which are typically focused on an industry or
profession and are generally distributed via subscription and not available in retail outlets.
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combination of features, of a market in the UK for goods or services
prevents, restricts or distorts competition in connection with the supply
or acquisition of any goods or services in the UK or a part of the UK.
Section 131(2) provides that, for this purpose, reference to a feature of
a market is to be construed as a reference to:
a)
the structure of the market concerned or any aspect of that
structure
b)
any conduct (whether or not in the market concerned) of one or
more than one person who supplies or acquires goods or services in
the market concerned, or
c)
any conduct relating to the market concerned of customers of any
person who supplies or acquires goods or services.
In addition, section 131(3) provides that 'conduct' includes any failure
to act (whether or not intentional) and any other unintentional conduct.
1.4
It is also important to note that the OFT has the discretion, rather than a
duty, to make a reference where the statutory test set out in section
131 appears to be met. In its MIR guidance published in March 2006,
the OFT provides that it will only make references to the CC when the
reference test set out in section 131 of the EA02 and, in its view, each
of the following criteria have been met:
•
It would not be more appropriate to deal with the competition issues
identified by applying the Competition Act 1998 (CA98)12 or using
other powers available to the OFT or, where appropriate, to sectoral
regulators.
•
It would not be more appropriate to address the problem identified
by means of undertakings in lieu of a reference.
12
The CA98 prohibits agreements which have the object or effect of preventing, restricting or
distorting competition (the 'Chapter I' prohibition), and the abuse of a dominant position (the
'Chapter II' prohibition). These two prohibitions are described in further detail in the OFT's
published CA98 Guidance OFT 401 and OFT 402 respectively.
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•
The scale of the suspected problem, in terms of its adverse effect on
competition, is such that a reference would be an appropriate
response to it.
•
There is a reasonable chance that appropriate remedies will be
available.
The OFT's decision
1.5
The OFT has decided that, although there are reasonable grounds for
suspecting that there are certain features of a market which prevent,
restrict or distort competition in connection with newspaper and
magazine distribution in the UK, there are currently several factors which
mean that it is not appropriate to make a reference to the CC. The OFT's
analysis and reasoning for this decision is set out in the following
chapters.
1.6
Under section 154 of the EA02, the OFT has the power to accept
undertakings in lieu of a reference only if it considers that it has the
power to make a reference under section 131, and it otherwise intends
to make such a reference. Since in this instance the OFT has decided not
to make such a reference for the reasons set out in chapter 5, the OFT
does not have the power to accept undertakings in lieu.
Structure of the decision
1.7
The remainder of this document is structured as follows:
•
Chapter 2 provides background to the market investigation request
by the NFRN and the context of the OFT's work on this request,
alongside its work on the Opinion and the Code review.
•
Chapter 3 provides an overview of certain key characteristics of
newspapers and magazines and the different stages of the supply
chains, before considering recent developments in those supply
chains. It also sets out a definition of the relevant markets.
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•
Chapter 4 sets out the OFT's analysis of the features of the markets
for the purposes of the reference test set out in section 131 of the
EA02.
•
Chapter 5 sets out the reasons why the OFT considers the reference
test pursuant to section 131 of the EA02 to be satisfied and why the
OFT has decided to exercise its discretion not to make a reference
applying the criteria as set out in the OFT's guidance.
•
Chapter 6 sets out the OFT's high-level guidance on potential next
steps for the industry to consider, and refers to the possible further
update review.
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2
BACKGROUND
The request from the National Federation of Retail Newsagents
2.1
In December 2006, the NFRN submitted a request for the OFT to
investigate the supply chain for newspapers and magazines in the UK
and to consider whether the conditions for making a market investigation
reference to the CC were met, and if so, whether undertakings in lieu of
a reference may be available. In its request, the NFRN highlighted a
number of features which it considered prevented, restricted or distorted
competition.13 The NFRN indicated that its main concern was the degree
of publisher control over the newspaper and magazine distribution
process which, it argued, required a wide-ranging examination of the
supply chains.
2.2
In relation to publishers' control over aspects of the supply chains, the
NFRN argued that the OFT should examine eight particular features of
the distribution process for newspapers and magazines, comprising:
•
the two-sided nature of the markets
•
the existence of ATP
•
the way in which publishers award contracts to wholesalers
•
the use of cover prices
•
the sale or return process
•
the use of carriage service charges (CSCs)
•
cross-subsidisation of the distribution of newspapers by the
distribution of magazines, and
•
poor terms of supply to retailers.
13
The NFRN supplemented its request by several further submissions and meetings with the
OFT, both before and after the issue of the proposed MIR decision.
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2.3
In a subsequent submission to the OFT in September 2007, the NFRN
argued that, following an investigation under section 131 of the EA02,
the OFT should exercise its powers under section 154 of the EA02 to
establish a code of practice between members of the industry in the
form of statutory undertakings in lieu of a reference to the CC.
The context of the MIR Request
2.4
The request for the OFT to consider an MIR arose in the context of two
pre-existing strands of OFT work in relation to the distribution of
newspapers and magazines: the OFT's Opinion, and the OFT's Code
review. The scope of each of these strands of work is summarised
below in order to provide background to the approach taken by the OFT
in response to the MIR request. In addition, the OFT's holistic
assessment, for the purposes of the MIR request, of both magazine and
newspaper distribution throughout the supply chains is introduced
below.
The OFT's Opinion
2.5
14
Until May 2005, newspaper and magazine distribution agreements
benefited from an exclusion from scrutiny under the Chapter I prohibition
of the CA98. That exclusion was by virtue of the Vertical Agreements
Exclusion Order (VAEO).14 On 17 June 2003, the then Department of
Trade and Industry (DTI) proposed that the VAEO should be repealed in
the light of changes to the rules relating to enforcement
SI 2000, No. 310, Competition Act 1998 (Land and Vertical Agreements) Order 2000.
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of EC competition law (these changes are referred to as
'Modernisation').15 The decision to repeal the VAEO was confirmed on 1
March 2004, and took effect on 1 May 2005.
2.6
Following this announcement, newspaper and magazine publishers,
distributors and wholesalers expressed concern about the repeal of the
VAEO, as it meant that newspaper and magazine distribution agreements
would cease to be automatically exempt from the Chapter I prohibition
of the CA98. On 7 May 2004, a group of publishers, distributors and
wholesalers known as the Block Exemption Initiative made a submission
to the OFT putting forward its case as to why the OFT should
recommend to the DTI that it grant an industry-specific block exemption
under section 6 of the CA98 to remove newspaper and magazine
distribution agreements from the scope of the Chapter I prohibition. The
request for a block exemption was subsequently followed by a request
that, should the OFT decline to recommend such a block exemption, it
should issue an Opinion instead. Given the background and the very
specific circumstances of the case, the OFT considered it appropriate to
provide guidance to the industry in the form of an Opinion.
2.7
The OFT published a draft Opinion for consultation in May 2005. Having
taken account of the points raised in responses to that consultation, the
OFT published a revised draft Opinion for consultation in May 2006.
2.8
Having taken account of the points raised in responses to the 2006
consultation, the OFT's Opinion was published on 22 October 2008
15
On 1 May 2004, EC Council Regulation of 16 December 2002 on the implementation of the
rules on competition laid down in Articles 81 and 82 of the Treaty (Reg. 1/2003/EC) (the
'Modernisation Regulation') came into force. The Modernisation Regulation substantially changed
the framework for the enforcement of European competition law. The Modernisation Regulation,
amongst other things, devolved powers to the courts and designated National Competition
Authorities (NCAs) of the Member States to apply and enforce Articles 81 and 82 of the EC
Treaty ('Article 81' and 'Article 82' respectively) in full. It also requires the NCAs and courts to
apply and enforce Articles 81 and 82 when national competition law is applied to agreements
which may affect trade between Member States. The Modernisation Regulation also established
a 'legal exception' regime.
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alongside the proposed MIR decision document. Reference should be
made to the Opinion for the guidance it provides. 16
The Code review
2.9
2.10
16
In 1993, the Monopolies and Mergers Commission (MMC) reported on
the supply of national newspapers in England and Wales, following a
reference by the then Director General of Fair Trading under the
monopoly provisions of the Fair Trading Act 1973 (FTA73).17 The MMC
concluded that newspaper publishers' adherence to exclusive distribution
arrangements did not operate against the public interest.18 However, the
MMC identified two wholesaler practices which it concluded operated or
may be expected to have operated against the public interest:
•
the refusal by wholesalers to supply newspapers to a new retail
outlet where, in the wholesaler's view, the area was adequately
served, reinforced by,
•
the imposition by the wholesaler of a condition that the retailer must
sell the national newspapers supplied only by retail and from its own
retail outlet.19
The Code, underpinned by statutory undertakings given by the
wholesalers then operating in the market, was accepted by the then
Secretary of State for Trade and Industry (SoS) to remedy or prevent the
www.oft.gov.uk/shared_oft/reports/comp_policy/oft1025.pdf.
17
The reference was made under sections 9(1), 10(3), 10(4), 47(1), 49(1) and 50(1) of the
FTA73.
18
The supply of national newspapers: A report on the supply of national newspapers in England
and Wales, MMC, December 1993, Cm 2422 (MMC (1993)) paragraphs 1.8 – 1.10. The MMC
Report was published under the former regime of the Fair Trading Act 1973, well before the
entry into force of the CA98, in March 2000. As a result, the MMC applied a public interest test
and could not have taken account of the Chapter I prohibition.
19
MMC (1993), paragraphs 11.92 and 11.95.
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adverse effects specified in the MMC's Report.20 Although, due to the
ambit of the MMC's findings, the Code formally applied only in respect
of the supply of newspapers in England and Wales, the Code was also
applied on a voluntary basis in relation to the distribution of newspapers
in Scotland and Northern Ireland.21
2.11
Pursuant to the Code, wholesalers agreed to adhere to a number of
obligations with respect to newspaper supply to new retail applicants.
One of these obligations is that wholesalers must supply all new retail
applicants within a territory who meet the Minimum Entry Level (MEL
obligation).22 In addition, wholesalers were prohibited from accepting an
application for the supply of newspapers from an applicant retailer
located outside the wholesaler's area of operation as defined by the
newspaper publisher or distributor. They also agreed not to permit a
retailer or sub-retailer to sell or transfer newspapers to locations outside
of the wholesaler's area of operation as defined by the newspaper's
publisher or distributor.23
2.12
The OFT has a statutory duty to keep under review the carrying out of
undertakings given under section 88 of the FTA73, such as those which
underpin the Code, and from time to time to consider whether, by
reason of any change of circumstances, an undertaking is no longer
appropriate and either the relevant parties (or any of them) can be
released from the undertaking or the undertaking needs to be varied, or
20
The undertakings were given under section 88 of the FTA73. In addition to the statutory
undertakings, two additional parties signed voluntary undertakings to comply with the Code.
21
Magazine publishers also noted that because of the joint distribution of newspapers and
magazines, the Code, by facilitating the supply of newspapers to new retail outlets, also
facilitated the supply of magazines to those retailers.
22
The MEL obligation is commonly referred to by industry participants as the universal service
obligation. The MEL obligation was introduced to remedy the problem of some wholesalers
refusing to supply certain retailers. The MEL was defined as being half of the average value of
the newspapers invoiced weekly to all existing retailers in the wholesaler's area, calculated as
the average weekly newspaper invoice value for the six months ending 31 March 1994. Only
those newspapers which the wholesaler was capable of supplying to the applicant were included
in the calculation.
23
The Code, paragraphs 1.3 and 6.3.
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21
superseded by a new undertaking. Where it appears to the OFT that any
person can be released or that an undertaking has not been or is not
being fulfilled, or needs to be varied or superseded, it is the duty of the
OFT to give such advice to the SoS as it may think proper in the
circumstances.24
2.13
The OFT announced a Code review alongside the publication of the
second draft Opinion in May 2006. The OFT's advice to the SoS25 on the
Code, based on the Code review, was published on 22 October 2008.26
In summary, the OFT's advice to the SoS was that, due to a number of
changes of circumstances, the undertakings underpinning the Code were
no longer appropriate to remedy or prevent the adverse effects specified
in the MMC's Report and that the parties which signed the undertakings
should therefore be released from them.
2.14
On 20 April 2009, following a consultation with industry parties, the
SoS accepted the OFT's advice and decided to release the parties from
the undertakings with effect from 20 October 2009.27
The interrelationship between the review of the Code, the
Opinion and the request for an MIR
2.15
The analysis undertaken by the OFT in the preparation of its Opinion, the
Code review and the examination of the request for an MIR have
different product and geographic focuses and legal frameworks.
However, given the interplay between the three work-strands and the
overlap between some of the underlying issues, the OFT approached the
three work-strands holistically. In general, whereas the Opinion focuses
on the specifics of the newspaper and magazine agreements between
24
Section 88(4) of the FTA73, which continued to apply in respect of the Code by virtue of
schedule 24, paragraph 14 of the Enterprise Act 2002.
25
The relevant Secretary of State to whom the advice regarding the Code was provided and
who subsequently made the decision regarding the Code was the Secretary of State for
Business, Enterprise and Regulatory Reform.
26
www.oft.gov.uk/shared_oft/reports/comp_policy/oft1026.pdf.
27
www.berr.gov.uk/files/file51049.pdf.
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publishers and wholesalers and the Code review on the performance of
the Code in relation to newspapers, the request for an MIR has allowed
the OFT to take a detailed overview of the distribution of both
magazines and newspapers through the respective supply chains. In line
with this holistic approach, the OFT has not limited its MIR analysis to
the aspects and features of the supply of newspapers and magazines
that the NFRN highlighted, but rather has used the available knowledge
base to make as effective an examination as possible of the MIR request
by reference to a sound understanding of how the relevant supply chains
operate in practice.
2.16
Furthermore, in so far as it is relevant and has been current at the time
of publication of each document, information received and analysis
conducted in relation to one work-strand has been shared with the
others. This has reduced the burden of information provision for
stakeholders and ensured consistency and coherence across the three
distinct areas of work. As a result, the assessment of the NFRN's
request for an MIR has been able to draw on a wide evidential base. The
OFT considers that this has allowed for a detailed and probative
assessment of the appropriateness of a reference in this case.
Proposed MIR decision and consultation28
2.17
In conducting its examination of the MIR request, the OFT engaged
extensively with stakeholders at each level of the supply chain, including
individual parties and trade associations. Prior to publishing the proposed
MIR decision, the OFT had six meetings with the NFRN, as well as
regular meetings with other retailer, wholesaler and publisher
associations and with individual parties. In addition, there were three
iterative information requests on the MIR specifically aimed at different
parties in the supply chain. These helped to refine further the OFT's
28
For clarity, throughout this decision, references to the views expressed during the
'consultation' relate to those views expressed by industry parties during the public consultation
on the proposed MIR decision (including follow-up meetings with those parties), rather than
interactions with industry parties before the publication of the proposed MIR decision.
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understanding of certain features. The OFT valued the constructive
engagement it had in this context with very many stakeholders.
2.18
Following that examination, the OFT published for consultation a
proposed decision on the MIR request on 22 October 2008. The OFT
invited views from industry parties as well as other interested parties
given, among other matters, the complex nature of the markets and
supply chains examined and the complex interplay of the proposed MIR
decision with the Opinion and Code review.
2.19
The OFT's consultation on the proposed MIR decision ran from 22
October 2008 to 19 May 2009 during which time the OFT received a
total of 13 submissions directed towards the consultation from industry
parties. The OFT also received correspondence regarding the newspaper
and magazine supply chains which was not directed towards the
consultation from 30 other parties.29 In addition, as part of its
consultation, the OFT held follow-up meetings with ten parties –
including the NFRN - to explore particular aspects of their submissions,
as well as the impact of recent developments as described below. The
OFT has carefully considered all representations received in coming to its
decision on the MIR request.
Analysis of recent developments
2.20
Since publishing the proposed MIR decision, there have been numerous
significant developments in the newspaper and magazine distribution
sector which have a bearing on the features identified and analysed in
the proposed MIR decision. In particular, the OFT has identified the
following developments as being relevant to the features analysed in the
proposed MIR decision:
•
29
the outcome of the recent tender round and ensuing contract
awards for newspaper and magazine distribution
Including Members of Parliament, Local Authorities and a Trade Union.
OFT1121
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•
changes to the geographic footprint of wholesaler distribution
territories, and
•
the impact of the exit of Dawson News from the supply chains.
2.21
Most of these developments occurred sufficiently in advance of the
consultation deadline for parties to be able to include analysis of the
impact of these developments in their consultation submissions. In
addition, the OFT took the opportunity of the follow-up meetings with
certain parties to explore in detail the possible impact that these
developments may have on the operation of the supply chains and the
features that the OFT had identified in its proposed MIR decision.
2.22
Where relevant to the features the OFT has examined, an analysis of the
impact of these recent developments has been incorporated into the
relevant section of the analysis below.
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3
OVERVIEW OF SECTOR AND MARKET DEFINITION
3.1
This chapter provides an overview of the intrinsic product characteristics
of newspapers and magazines in the UK that are of most relevance to
the MIR analysis and sets out the key recent developments in the
newspaper and magazine supply chains. Further details are contained in
the OFT's Code and Opinion documents. This chapter also deals with
market definition for the purposes of the MIR analysis.
Characteristics of the products: an overview
3.2
The following characteristics of newspapers and magazines in the UK are
key to understanding the complexities of each supply chain and the
nature of competition within them:
•
two-sided markets
•
high perishability, particularly of newspapers
•
demand unpredictability, and
•
high fixed costs, low marginal costs.
These are addressed in turn below.
Two-sided markets
3.3
Newspapers and magazines carry advertising as well as editorial content.
As a result, publishers, unlike retailers or wholesalers, receive income
from the sale of advertising space as well as from copy sales – in other
words they face two-sided markets. The revenue that publishers obtain
from the sale of advertising space depends, amongst other things, on
the size of a publication's circulation. This gives publishers a strong
additional incentive to increase circulation - an incentive that is not
shared by the wholesalers and retailers that distribute the copy.
3.4
A publisher therefore has a strong interest in controlling aspects of the
supply chain in order to achieve particular circulation targets. In
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particular, a publisher desires influence over the price at which its
publications are sold. A publisher may also want to control the risk in the
supply chain to ensure its products are widely available. Magazine
publishers and distributors, in particular, may also want to have control
over where publications are sold in order to target particular local
demographics. The strength of these incentives is linked to how much a
publisher can earn from advertising revenue.
3.5
In this context, it is important to note that advertising revenues are
under considerable pressure. In 2008, there was a decline of 6.6 per
cent in advertising expenditure on newspapers and a 5.8 per cent
decline in advertising expenditure on consumer magazines.30 The
evidence available to the OFT suggests that advertising expenditures
have declined further still in 2009. For example, advertising revenue for
News Corporation's UK newspapers31 declined by 18 per cent in the
quarter ended 30 June 200932 and Trinity Mirror's national newspaper
advertising revenue declined by 10 per cent in July 2009 when
compared with July 2008.33,34
3.6
Despite the decline in advertising expenditure, advertising clearly remains
a significant proportion of publisher revenue. Figure 3.1 shows that the
proportion of revenue derived from advertising is higher for newspapers
(48 per cent) than it is for magazines (36 per cent).35 This indicates that,
on average, the incentives for newspaper publishers provided by the
two-sided nature of the markets are stronger than those for magazine
publishers.
3.7
However, that is not to say that advertising revenues do not generate
incentives for magazine publishers. In particular, the ability of some
30
OFT's analysis of the Advertising Association's Advertising Statistics Yearbook 2009, WARC.
Specifically, The Sun and The Times publications.
32
www.newscorp.com/news/index.html.
33
Trinity Mirror plc's interim results published 30 July 2009.
34
Information available to the OFT shows that there has been a proportionately greater decline
in the total net advertising revenue of regional newspapers than national newspapers.
35
OFT's analysis of the Advertising Association's Advertising Statistics Yearbook 2009, WARC.
31
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magazines to attract niche readerships (for example teenage, male
health) by virtue of their more specific content compared to newspapers,
is likely to be attractive to certain advertisers. In order to maximise
profits from both copy sales and advertising revenues, magazine
publishers may therefore have an incentive to publish a portfolio of titles
targeted at different market niches, and to target these niche readerships
in different locations and through different retail outlets. In this way, the
two-sided nature of the magazine markets may generate stronger
incentives for magazine publishers to control how titles are allocated to
retailers. These incentives are considered further in chapter 4.
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Figure 3.1: Revenue sources of UK newspaper and magazine
publishers in 200836
100
90
Percentage of total
80
70
60
50
40
30
20
10
0
Newspapers
Magazines
Advertising
Copy sales
High perishability
3.8
Around seventy per cent of the daily sales of national newspapers are
realised by 10:00. This gives newspaper publishers a compelling
commercial incentive to get copy to retailers as early as possible. If
newspapers were to arrive at retail outlets a few hours late, most local
demand is likely to have expired.
3.9
For these reasons, newspapers are a highly perishable product.37 The
process of wholesaling national newspapers, involving delivery to
54,000 outlets across the UK needs to be completed within a three hour
36
Advertising Association's Advertising Statistics Yearbook 2009, WARC.
It may be that some newspapers are slightly less perishable than others if their content is less
focused on perishable up-to-date news. This may be the case for weekend newspapers,
although this is unlikely to have much, if any, effect on their distribution timescales.
37
OFT1121
29
window from 03:00 to 06:00.38 The logistics of this operation are very
complex and demand a high degree of coordination between publisher
and wholesaler.
3.10
At the same time, demand for newspapers is sensitive to breaking news.
Publishers compete to have the most up-to-date news and sports
information in their newspapers, and copy deadlines will often be
delayed until the last possible minute in order to capture breaking news
and/or sports events. Publishers also place pressure on wholesalers to be
more efficient in the distribution process, so that time lost due to late
printing can be recouped.
3.11
It follows therefore that newspaper publishers have strong incentives to
control the distribution process in order to ensure that copy is delivered
as accurately and punctually as possible. It is also in the publishers'
interests to ensure that the wholesaler has sufficient operational
flexibility to manage late publisher delivery as a result of breaking news.
As highlighted in the Code review,39 there has been a significant increase
in the number of stringent contractual obligations imposed by publishers
upon wholesalers in recent years. In particular, publishers have agreed
detailed Service Level Agreements (SLAs) and Key Performance
Indicators (KPIs) with their wholesalers, and these are now the norm
throughout the newspaper and magazine distribution sector. All of the
newspaper publishers who engaged with the OFT submitted that they
closely monitor wholesaler performance and have provided information
on the mechanisms used to monitor wholesaler performance. These
mechanisms differ between individual publishers, but typically include
regular meetings with wholesalers to discuss performance issues, a
requirement on wholesalers to provide information to publishers on
performance levels and visits made by the publisher to the wholesaler's
depot. Publishers increasingly include financial incentives into their SLAs
to motivate compliance. They also impose penalties for failure by
38
Based on the OFT's analysis of information provided by newspaper publishers and
wholesalers.
39
See paragraphs 3.9 to 3.21 of the Code review.
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wholesalers to meet their KPIs. This is reviewed in greater detail in
chapter 4.
3.12
Whereas magazines are also perishable, they are relatively less so
compared with newspapers on average because the value of magazine
content does not diminish quite so rapidly. This is highlighted by the
lower frequency of magazines, comprising weeklies/fortnightlies (20 per
cent), monthlies (38 per cent), alternate monthlies (19 per cent),
quarterlies (17 per cent) and less frequently published titles (six per
cent).40 It is also evident from the longer timeline for distribution of
magazines to retailers in the UK. Information available to the OFT shows
that weekly magazines typically take around 18 – 30 hours to pass
through the supply chain,41 with fortnightly and monthly magazines
taking significantly longer still,42 although there are some exceptional
cases where timescales are more compressed than that.43 But even for
these magazines, the period over which the majority of sales are realised
is often considerably longer than for newspapers, for example two to
three days. Thus, given their greater news sensitivity and tight sales
windows, newspapers are considerably more perishable than magazines
on average.
3.13
That is not to say that the punctuality of delivery is unimportant for
magazine publishers, particularly for the more time-sensitive titles. Like
newspaper publishers, magazine publishers and distributors44 have also
implemented SLAs and KPIs. In addition to stringent measures regarding
40
Based on the OFT's analysis of supplementary data provided by the PPA in relation to their
submission dated 20 October 2006.
41
These figures are based on the time taken from collection of the magazine from the printer to
the time of first delivery to retailers.
42
Fortnightly magazines can take between 2-3 days to pass through the supply chain, with
monthly magazines taking up to eight days.
43
For example, the OFT understands that the timescale for certain classified advertising
magazines is around six hours.
44
Magazine publishers often use distributors to act as an intermediary with wholesalers, and to
market their titles to retailers. Distributors often act as an interface between the publisher and
the wholesaler, agreeing contracts with the latter for the distributor's portfolio of titles and
monitoring the wholesaler's performance against those contracts.
OFT1121
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punctuality of deliveries,45 the KPIs imposed on wholesalers measure a
number of different performance indicators which magazine publishers
and distributors regard as most significant. These KPIs relate to the
accuracy of copy allocations to different retailers (in terms of the
product ranges for each retailer and title promotions), the levels of
copies returned unsold and the availability of publications on retail
shelves throughout the on-sale period. These issues are also discussed in
chapter 4.
Demand unpredictability
3.14
Newspaper publisher submissions to the OFT suggest that demand for
newspapers is sensitive to changes in the news agenda and the newsvalue of the headline stories they feature. Because of their proximity to
the news stories, and their understanding of how different content drives
circulation, newspaper publishers are in general in a better position than
retailers to predict consumer demand for each issue. For newspapers,
the role of publishers in predicting demand is particularly important,
given that there is no time for retailers to order additional copies.
Publishers, therefore, have an incentive to ensure that enough copy is
circulated to cover potential peaks in demand. Submissions by
newspaper publishers indicate that there are numerous events each year
(such as major sporting events or the delivery of the Budget) which can
be anticipated to increase demand and, to an extent, can be planned for.
Otherwise publishers use historical data and experience of consumer
behaviour to forecast demand and then seek to respond and modify
supply accordingly.
3.15
Magazine content also varies from issue-to-issue, although for some
magazines the sensitivity of demand to the news agenda is less
significant. Survey evidence seen by the OFT also indicates that
consumers show less brand loyalty in their choice of magazine, and
often make ad hoc decisions in-store as to which title to buy. Magazine
45
This is usually measured by the proportion of magazines that are delivered on their particular
on-sale dates.
OFT1121
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promotions and cover-mounted gifts by distributors can also lead to
fluctuations in sales from issue to issue. For this reason, a title's
circulation can still be variable and publisher or distributor experience is
important for predicting retail sales. However, for weekly, fortnightly and
monthly magazine titles, there is a potential at least for many retailers to
replenish stocks over the course of the sales period so that unexpected
demand can be met through subsequent retail orders. This makes the
initial copy allocation to retailers less decisive, and should in theory give
retailers greater flexibility to manage stocks and cater for local demand.
The issue of magazine copy allocation and re-ordering is considered in
chapter 4.
3.16
For the individual retailer, demand can also be unpredictable. Newspaper
sales fluctuate for an individual retailer both overall and for the sales of
each title. However, for many retailers these fluctuations will be less
significant than those for magazines due to a consistent level of
newspaper sales (approximately 25 per cent)46 through home news
deliveries (HND) for which customers make longer term orders. In
addition, customers often buy newspapers as part of their daily routine
and habitually use the same shop, making sales volumes far more
predictable on a day-to-day basis for individual retailers. For magazines,
survey evidence indicates that many magazine purchases are made on
impulse once a customer has entered a store. Magazine customers are
likely to use a wide range of stores from which they buy magazines,
making it less predictable how many customers a particular retailer might
get for a title in any one week.
High fixed costs, low marginal costs
3.17
46
Each issue of a newspaper or magazine incurs high fixed costs to
generate the content, complete the editorial process, and set up the print
run, but low marginal costs in printing copies - the costs of creating the
first copy are high, whereas printing an extra 1,000 copies in the same
OFT analysis of information provided by one newspaper publisher.
OFT1121
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print run is relatively cheap. In the face of unpredictable demand, there is
therefore an incentive for publishers to print and distribute more copies
as a precaution. Provided the expected marginal revenue from an
additional printed copy is higher than the low marginal cost of printing
and distributing it, a publisher has an incentive to increase distribution. In
line with the two-sided nature of the newspaper and magazine markets
and the unpredictability of demand identified above, this gives publishers
incentives to increase distribution and availability.47
Conclusion on characteristics of the products
3.18
The OFT has examined the above four characteristics – two-sided nature
of the newspaper and magazine markets, high perishability, demand
unpredictability and high fixed costs, low marginal costs – that
distinguish newspapers and magazines from many other products and
which give publishers strong incentives to exercise control over aspects
of the distribution of newspapers and magazines through the supply
chains. These characteristics lie behind some of the unique aspects of
the newspaper and magazine supply chains in the UK that are examined
in the following chapter. The OFT also notes that in relation to the twosided nature of the newspaper and magazine markets, and the
perishability of the products in particular, these characteristics are more
pronounced on average for newspapers than they are for magazines.
47
For some mainly monthly magazines, the marginal print costs can be greater as the quality of
the paper and ink is considerably higher. For these magazines, the incentives to increase
distribution and availability may be somewhat lower.
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Overview of the stages in the newspaper and magazine supply
chains
3.19
Figure 3.2 below illustrates the main stages in both the supply chains for
newspapers and magazines.48
Figure 3.2: The newspaper and magazine supply chains
Newspaper
Publisher
Magazine
Publisher
Distributor
Wholesaler
R1
Wholesaler
R2
R3
R4
Consumers
Subscribers
Key:
Wholesaler's protected territory
R
Newspaper and Magazine retailer
48
As noted above, the focus of this document is on national daily newspapers and consumer
magazines since these account for the vast bulk of publications delivered through the
wholesalers and retailers. Business publications are in general distributed through mail delivery
systems.
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35
3.20
As figure 3.2 shows, for newspapers, publishers produce and print the
newspaper, including advertisements from advertisers. The newspaper
publisher determines the number of copies to produce and distributes
these to the wholesalers across the country. Magazine publishers
undertake similar tasks, although in some cases, printing is out-sourced
to third parties, and distributors are often used to assist with determining
the number of copies to be printed, the allocation of copies to different
retailers and/or with transporting magazines to wholesalers across the
country.
3.21
The wholesalers collect, sort and deliver both newspapers and
magazines to retailers in the territory for which they have been awarded
a distribution contract. Wholesalers manage the number of copies each
retailer receives in accordance with the requirements of publishers. In
addition, and unlike wholesaling in many other sectors of the economy,
newspaper and magazine wholesalers also collect unsold copies from
retailers, process the returns and then recycle them. For these services,
wholesalers receive a margin agreed as a percentage of the title's cover
price. They also charge retailers a CSC which is a charge for the delivery
of their newspaper and magazine requirements.
3.22
The number of retailers of newspapers and magazines has risen from
around 44,000 in the early 1990s to stabilise at around 54,000 from
2000. There were 54,156 newspaper and magazine retailers in
December 2008.49 Most of this increase occurred around the time of the
1993 MMC report and over the course of the three years following it.
Newspapers and magazines are sold by a number of different retail
outlets, including newsagents, which often provide HND services,
convenience stores, petrol stations, supermarkets, travel points and
roundsmen.50
49
Source: Association of Newspaper and Magazine Wholesalers, Classification of Retail Outlets,
Quarterly Update, JIG Board, April 2009.
50
Roundsmen sell mainly newspapers via home news delivery without having a fixed outlet.
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Recent developments in the newspaper and magazine supply chains
since the proposed MIR decision
3.23
There have been significant developments in the sector since the OFT
published its proposed MIR decision. The OFT has considered the impact
of these developments on its analysis of the features identified in the
proposed MIR decision and in that connection has identified the
following factors as being of particular relevance:
•
the outcome of the recent tender round and contract awards for
newspaper and magazine distribution
•
changes to the geographic footprint of wholesaler distribution
territories, and
•
the impact of the exit of Dawson News from the supply chains.
Recent tender round and contract awards
3.24
Since March 2009, the majority of publishers and distributors51 have
conducted their tender processes for the award of their respective
newspaper and magazine distribution contracts.52
3.25
The main outcome of the recent publisher and distributor tender process
has been the loss by Dawson News of all of its contracts with those
publishers and distributors,53 which had previously generated revenues of
51
News International conducted its tender process in July 2008, which was prior to the
publication of the proposed MIR decision and applied to the distribution of its titles in Great
Britain only. The OFT understands that a small number of other publishers who have yet to
conclude their tender process.
52
The newspaper publishers and magazine distributors which have conducted tender processes
since the publication of the proposed MIR decision are Frontline, Seymour, Comag, Daily Mail
and General Trust, Marketforce, Trinity Mirror (including Independent News and Media) and the
Telegraph Group.
53
It should also be noted that Dawson News lost a significant proportion of its distribution
contracts with News International following the outcome of the News International tender
process in July 2008.
OFT1121
37
over £528m54 (over 76 per cent of Dawson News's revenue in the year
to September 2008).55 Almost all of these contracts were awarded to
Menzies Distribution and Smiths News.56 In addition, each of the
remaining independent wholesalers (except Dash (South West) Limited
and T Weller Wholesale Limited) lost distribution contracts.
3.26
Dawson News's parent company, Dawson Holdings, indicated that
following these contract awards it had no viable alternative other than to
seek an 'orderly exit' from the magazine and newspaper distribution
sector. On 3 August 2009, it placed the relevant subsidiary companies
that performed newspaper and magazine distribution functions into
administration.57
Geographical distribution footprint following contract awards
3.27
As the large majority of Dawson News's contracts were awarded to
Smiths News and Menzies Distribution, the number of firms in the
newspaper and magazine wholesaling market has decreased from three
large multiple wholesalers to two. Menzies Distribution and Smiths News
have acquired many of Dawson News's assets58 and substantially all of
Dawson News staff have transferred to the remaining two multiple
wholesalers.59
54
This figure includes the revenue previously generated from Dawson News' contracts with
News International.
55
Based on OFT calculations from Dawson Holdings interim results for the 26 weeks ended 28
March 2009 (published 20 May 2009), supplemented by information on the impact of the loss
of Dawson News's contracts with Trinity Mirror (announced on 29 May 2009).
56
In the case of News International, certain Dawson News contracts were awarded to Dash and
Weller (although Weller has subsequently exited the market). In London and Birmingham, as well
as a number of other areas, News International introduced in July 2009 a Direct to Retail
service.
57
www.dawson.co.uk/news-detail&item=1025989.
58
Smiths News has acquired 20 Dawson News depots, whereas Menzies Distribution has
acquired 7.
59
The Smiths News/Dawson News transaction has been considered and cleared by the OFT
under the merger control provisions of the Enterprise Act 2002:
www.oft.gov.uk/advice_and_resources/resource_base/Mergers_home/decisions/2009/smiths.
OFT1121
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3.28
In addition to the exit of Dawson News and the subsequent increase in
concentration in the newspaper and magazine wholesaling market, the
recent tender awards also resulted in Smiths News losing several
contracts to Menzies Distribution.60 As a result of these two factors, the
geographical footprint of the newspaper and magazine wholesaling
market has changed since the publication of the proposed MIR decision.
The OFT has considered the argument from certain parties that the
footprint which has emerged from these recent tender awards has left
Smiths News supplying Southern Great Britain and Menzies Distribution
supplying Northern Great Britain.
3.29
Figure 3.3 shows, by way of example, which of Associated
Newspapers' territories are served by Menzies Distribution and which
territories are served by Smiths News.61 Although each of these
wholesalers has primary geographical areas of activity, it also provides
wholesaling services outside those areas (for, example, Menzies
Distribution also operates in East Anglia, London, Kent, Hampshire and
certain areas of Wales, whereas Smiths News also operates in North
East and North West England). It is therefore evident that, although there
is a degree of regional concentration, there is not a clear separation of
the north and south of Great Britain into exclusive Menzies Distribution
and Smiths News territories respectively.
60
More specifically, in Blackpool, Sheffield, Carmarthen and (for magazines) Warrington.
Consultation responses from other publishers indicate that their territorial footprints are very
similar to Associated Newspapers' with regard to the distribution of territories which are served
by Menzies Distribution and Smiths News.
61
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Figure 3.3: Associated Newspapers map of wholesaler territories
62
The impact of supply chain developments
3.30
62
Following Dawson's contract losses, as referred to in para 3.25, Dawson
News decided to transfer its current contracts to Smiths News and
Menzies Distribution and exit the market early.
Information provided by Associated Newspapers to the OFT on 9 June 2009.
OFT1121
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3.31
Given the lead-in times before the commencement of the new contracts
awarded,63 Smiths News and Menzies Distribution had originally planned
for the transition of pre-existing contracts to take place over a
significantly longer period of time. However, Dawson News's decision to
exit the market early has accelerated what is a significant task of
transferring the operations, without leading to significant disruption in
the newspaper and magazine supply chains.64 The OFT has been
informed by several industry parties that this transition will take place
over the course of the next year and will be a significant focus of the
industry's efforts in that time period.65
Market definition
3.32
The OFT's guidance provides that, in making an MIR to the CC, the OFT
must specify the goods or services for whose supply or acquisition
competition is adversely affected and that this will require 'some
consideration of the definition of the relevant market'. It goes on to
provide that '[t]he effects on competition of some feature may be clear
enough that firm conclusions on the definition of the relevant market by
the OFT are unnecessary'.66
3.33
Although in this case the OFT has decided to exercise its discretion not
to make a reference to the CC, given the holistic approach the OFT has
adopted across the three simultaneous work-strands, the OFT has in fact
considered the definition of the relevant markets.
3.34
However, the OFT's objective in this regard has not been to arrive at
definitive conclusions on the definition of the markets concerned, as the
63
These contracts are due to commence between October 2009 and January 2011.
This transition involves the transfer of contracts which involve supply to approximately
14,000 retailers. In most cases this involves the new wholesaler supplying in geographic areas
where it has no physical infrastructure and, in the immediate to short term, using the
infrastructure and systems of Dawson, with which it would not be very familiar.
65
The OFT understands that wholesalers have entered into transitional arrangements with
publishers in relation to the remaining terms of the previous contracts between publishers and
Dawson News.
66
OFT 511, Market investigation references, at paragraph 4.8.
64
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OFT does not consider that to be necessary for an examination of the
features. Instead, the analysis has focussed on what competitive
constraints act on operators at each level.
3.35
The OFT defines the relevant market as comprising all those substitute
products/services and substitute areas that provide a competitive
constraint on the supply of the product or service within the area under
consideration. Given that the OFT's decision concerns the operation of
the newspaper and magazine supply chains, it is necessary to consider
market definitions at three levels: publishing, wholesaling, and retailing.
However, since many of the features examined in chapter 4 concern the
wholesale level, the OFT has assessed this particular market segment in
more detail.
Newspaper and magazine publishing
The product markets
3.36
In relation to the publication of national newspapers, it appears likely
that 'national newspapers' would constitute the relevant product market.
3.37
On the demand side, there are numerous other methods by which
consumers can find out about news items and the other editorial content
included in newspapers, including radio and television broadcasts, and
increasingly online sources. However, there are significant variations in
how these alternative channels transmit the news and other content. For
example, it is often possible for newspapers to cover more of the
background to a news story than can be covered in a TV or radio news
broadcast. Regional newspapers are also likely to be complements to,
rather than substitutes for, national newspapers, given the different
content and advertising they contain.
3.38
Among national newspapers, it is possible that certain categories, for
example broadsheets and tabloids, may not be demand-side substitutes.
However, for the purpose of the OFT's decision, the primary focus of
which is on the distribution process, it has not been necessary to
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develop the analysis at this level. Moreover, there is likely to be some
degree of supply-side substitution between any such categories.
3.39
In terms of supply-side substitutes, there appear to be very few firms
that could easily begin producing national newspapers at short notice
and without incurring significant sunk costs. It is therefore unlikely that
the product market goes wider than this.
3.40
In relation to the publication of magazines, on the demand side, there is
an array of different types of magazines covering a wide range of
different subjects, and it would seem unlikely that consumers would
substitute, for any given title, another title that had very different
content. That would suggest that it is unlikely that there is a single
product market for magazines and instead consumers may view
magazines as forming a number of product markets based on the
content, target audience and frequency of their publication. 67 In terms of
supply-side substitution, there may be some opportunities for
substitution between different categories or types of magazine, which
may broaden the definition of the relevant product market in some
cases.68 There appear to be very few firms, however, that could easily
begin producing magazines at short notice and without incurring
significant sunk costs so the product market is unlikely to be broader
than magazines.
The geographic markets
3.41
The geographic market for magazine publication is likely to be national,
since the content will typically be targeted at a UK audience. The
67
For example, in Anticipated acquisition by Magicalia Publishing Limited of Good Woodworking
magazine from Future Publishing Limited (16 March 2007) the OFT took 'a cautious view and
considered woodworking magazines alone for the purpose of assessing this transaction'.
68
However, in Anticipated acquisition by Future plc of Highbury House plc (14 April 2005) the
OFT found that, while supply-side substitution may be relatively easy within certain segments
(such as motoring and motorcycling), the ease of substitution was less clear across segments,
where publishers would only be able to extract very limited benefit from existing advertising
contacts and expertise, and there was mixed picture of past attempts at such supply-side
substitution.
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geographic market for national newspaper publication may also be the
UK for the same reasons, although the OFT notes that a wider range of
titles is published in Scotland.69 National newspapers typically publish
regional editions70 and it is possible that the geographic market may be
narrower on that basis.
The advertising sector
3.42
As noted above, publishers of newspapers and magazines typically have
two demand relationships. In addition to readers paying for the editorial
content,71 advertisers pay to have their adverts printed. Adverts appear
in a wide variety of media, including newspapers, magazines, radio,
television and the internet, as well as other static and mobile advertising
locations. In order to consider whether these different forms of media
are substitutable from an advertiser's point of view, it would be
necessary to consider the ability of the medium or publication to reach
and influence consumers of a certain type or group. Given the primary
focus of the OFT's decision on the distribution sector, the OFT has not
sought to develop this analysis further.
Newspaper and magazine wholesaling
The product market
3.43
Current practice in the supply chains would suggest that the relevant
product market is likely to be the wholesaling of both national
newspapers and magazines. However, it is possible that there are some
limits to the extent that, for example, some wholesalers that currently
handle just national newspapers may be substitutable for magazine
69
The OFT also notes that there are national newspapers for Wales and Northern Ireland.
The main differences between these regional editions relate to television listings, although
there are also variations in some other editorial content (such as which football matches are
reported) and some advertising.
71
Although readers are likely to be primarily interested in the editorial content, they are also
likely to value the advertising content. For example, readers may be interested in travel
supplements for adverts for hotels as well as editorial material on a featured destination.
70
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wholesalers. This may mean that the market should be defined more
narrowly.
3.44
In relation to current practice, newspapers and magazines are typically
distributed together, although independent wholesalers do not currently
distribute magazines. This is likely to be largely driven by the economies
of scope from joint distribution. In particular, there are significant
economies of scope from delivering newspapers and magazines together
since most retail outlets receive both newspapers and magazines.72
There are also economies of scope73 from packing newspapers and
magazines at the same depot. These arise because magazines can be
packed during the day, allowing for more efficient utilisation of depots
that would otherwise be used only for short periods in the early hours of
the morning.
3.45
In addition to the economies of scope, there is a significant degree of
similarity in terms of the tasks that need to be performed in relation to
newspaper and magazine wholesaling (for example, copy allocation,
packing, delivering and processing returns). There is, however, some
variation in terms of the equipment used, with magazine wholesaling
generally requiring more sophisticated and expensive equipment for
packing and returns processing.74
3.46
However, it is possible that not all newspaper wholesalers would be
substitutable for magazine wholesalers, and vice versa. First, information
provided to the OFT suggests that the remaining independent newspaper
wholesalers may well not be able to provide magazine distribution
services due to their inability to make the substantial investments in the
systems and infrastructure required to meet the stringent service
72
Information provided by multiple wholesalers suggests that over 90 per cent of outlets receive
both newspapers and magazines.
73
Economies of scope arise when the average cost of production falls as the number of different
products that a firm supplies increases.
74
This is illustrated by the significant additional investments that have been made by multiple
wholesalers specifically in relation to magazine packing and returns processing equipment.
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requirements necessary to obtain major publisher / distributor
contracts.75
3.47
Second, there appear to be few practical alternative methods of
distribution other than using existing traditional wholesalers that would
be substitutable for national newspaper wholesalers. In particular, the
need for early morning deliveries within tight time-windows means that
there are few opportunities for economies of scope for delivering
newspapers with other products. In addition, newspaper wholesaling
requires additional tasks, in particular in relation to copy allocation and
processing returned products, which are not typically required of
wholesalers of products other than newspapers and magazines. The OFT
understands that publishers have sought to attract bids from new
entrants but with little or no success to date.
3.48
In contrast, as discussed above, the timescales for distributing
magazines are typically substantially longer than those for national
newspapers, so deliveries could be made at different times of the day to
achieve economies of scope of distribution with other products. This
suggests that publishers of magazines could in theory consider a wider
selection of possible wholesalers than newspaper publishers, and may
consider the wholesaling and delivery of magazines being undertaken
together with retail products other than newspapers (for example,
wholesale suppliers to record stores could also supply magazines), or
possibly by general logistics firms.76
The geographic market
3.49
The geographic scope of the wholesaling market is likely to vary
depending on whether or not publishers award exclusive territorial
contracts, and if so, whether those contracts include ATP. As examined
in further detail in chapter 4, ATP results from publishers conferring on
75
Response by the Periodical Publishers Association (PPA) to consultation on the draft 2006
Opinion, page 84.
76
The OFT understands that this possibility may depend on there being sufficiently large
territories to serve.
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wholesalers, as part of their distribution agreements, exclusive territories
for the distribution of their products from which all competing
wholesalers are excluded. The exclusive territorial rights conferred on
wholesalers by the agreements are underpinned by contractual
provisions prohibiting both active and passive sales between territories.
3.50
In the absence of ATP, retailers would be able to seek passive sales from
a wholesaler outside the exclusive territory who could provide the
deliveries they require. Given the tight timescales involved in newspaper
wholesaling, only those retailers in territories in which a competing
multiple wholesaler has a depot reasonably close by would have a choice
of wholesaler. It is likely that there would be a significant number of
retailers for whom there was no such choice at all. For magazines, the
longer timescales may mean that retailers could choose to obtain supply
from either of the two multiple wholesalers, particularly for supermarkets
or other multiple retailers which may be able to negotiate a regional or
national supply arrangement.
3.51
Where publishers conclude contracts for exclusive territories, the choice
of wholesalers available to them may be wider. When these contracts
are tendered, it is possible that publishers would be able to:
3.52
•
choose between two competing wholesalers that could serve a
particular area from their existing depots, or
•
induce the wholesaler not incumbent in a particular territory to make
changes to its depot locations that would enable it to compete for
additional areas, or
•
induce new entry by firms which do not currently wholesale
newspapers or magazines.
Where contracts include ATP, it may be easier for publishers to induce
changes in depot locations or new entry if, for example, the wholesaler
not incumbent in the territory were guaranteed that only it would serve
all or most of the customers in an area thereby indicating that the
wholesaler's investment would likely be worthwhile. In this way,
although ATP, in so far as it persists, restricts sales across territory
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boundaries, it does not prevent the geographic market for newspaper
and magazine wholesaling in specific territories being wide and possibly
wider than where contracts do not include ATP.
Newspaper and magazine retailing
The product market
3.53
There is a wide range of different types of retailers of newspapers and
magazines in the UK. Typically, retailers sell both newspapers and
magazines, although some only sell either newspapers or magazines, or
a small group of titles.77
3.54
In terms of demand-side substitution, it is relevant to consider whether
consumers find all types of retailer to be substitutable, or whether there
are distinctions between different retailer types, such that they would
not be easily substitutable. This may differ between newspapers and
magazines. As noted above, newspapers are highly perishable, with the
majority of copies purchased before 10:00. Customers are generally
likely to purchase from a convenient local outlet (for example, one on
their route to work, or one that will deliver to their home).
3.55
Customers may have greater flexibility in terms of where they purchase
magazines given the longer time available for purchases, for example
delaying their magazine purchase until they do their weekly shop at a
supermarket. These differences appear to be reflected in the trends in
purchases from different outlet types over time. Figures provided to the
OFT illustrate that the proportion of total magazine sales through
supermarkets has risen from 19 per cent in 1995 to 33 per cent in
2008.78 The proportion of newspaper sales through supermarkets,
77
Retailers that offer a limited range of titles are referred to as niche or specialist outlets. Such
outlets stock a limited range of titles, usually to complement other product categories within
their business. An example of a niche outlet is HMV which stocks NME.
78
These figures were provided to the OFT by the PPA in January 2006 in response to an OFT
request for further information. Updated figures ere provided, following a further request by the
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appears to be significantly lower (around 15 per cent in 2006), although
this represents a significant increase over time79 and sales can also be
higher at weekends.80
3.56
On the supply side, the OFT is aware that newspaper publishers are
seeking to address the general decline in newspaper circulation by
making newspapers available in a wider range of retail outlets,81 for
example, the Guardian is supplied to Starbucks. This implies that there
are further possibilities for supply-side substitution beyond the current
range of retailers. However, such possibilities appear limited. One case
study provided to the OFT showed that this form of expansion, in
respect of one newspaper, only generated increased sales of one million
copies per annum (around 3,000 copies per issue). This suggests that,
although this may be an alternative new channel of supply for national
newspapers in a declining market, it still represents an extremely small
proportion of total newspaper sales.
The geographic market
3.57
In terms of the geographic market, this is likely to be highly localised, in
particular for newspapers given the need for convenient local purchases.
It is possible that the geographic market for magazine retailing is slightly
wider than for newspapers given that, as set out above, customers may
use a wider variety of retail outlets from which to buy magazines.
However, it is likely that the geographic scope of this market is still
local.
OFT, by the PPA on 17 September 2009. The information provided did not indicate whether
these are shares by value or by volume.
79
The proportion of newspaper sales made through supermarkets in 1990 was one per cent
according to information provided by Dawson News on 10 September 2007.
80
Based on information provided by Dawson News on 10 September 2007 and Smiths News on
12 February 2007.
81
Magazine publishers have also tested selling a range of titles through alternative routes to
market other than traditional retailers (for example, placing computer magazines in computer
shops). However, the PPA estimates that sales through these 'niche' outlets account for less
than 0.1 per cent of total sales.
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4
ANALYSIS OF THE FEATURES OF THE SUPPLY OF
NEWSPAPERS AND MAGAZINES
Introduction
4.1
This chapter identifies a number of features of the supply chain for
newspapers and magazines in the UK for the purposes of the reference
test set out in section 131 of the EA02.
4.2
The OFT has set out the following guidance on how it will apply the
reference test:82
•
The test of whether a feature 'prevents, restricts or distorts'
competition is interpreted broadly, in line with EC precedent and past
practice of the CC, to encompass any reduction or dampening of
actual or potential competition.
•
The application of the reference test may embrace several levels of a
supply chain.
•
Information on prices, profitability and other performance indicators
can sometimes be a useful supplement to the OFT's evidence on the
features of the market.
•
The OFT will usually wish to consider a combination of features and
their inter-relationships and will look at various types of information
and sources of evidence.
The features
4.3
82
Following its consideration of the NFRN's request, and in the context of
its holistic approach to the three simultaneous work-strands, the OFT
identified the following distinct features of the supply chain for analysis
in the application of the statutory reference test:
See paragraphs 4.2 to 4.7 of OFT 511, Market investigation references.
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•
ATP: under the system of ATP resulting from agreements between
publishers/distributors and wholesalers, the publisher awards a
wholesaler the exclusive right to serve retailers with its publications
within a defined territory. The exclusive territorial rights conferred on
wholesalers by the agreements are underpinned by contractual
provisions prohibiting both active and passive sales between
territories.
•
Competition for the market: the process by which publishers tender
territories to wholesalers for the distribution of their magazines and
newspapers, and wholesalers compete to win those tenders.
•
SoR: the system by which retailers can return unsold copies to
wholesalers and be reimbursed for them.
•
Copy allocation: the degree of control that newspaper and magazine
publishers exercise over the allocation of titles and copy numbers to
retailers.
•
Cover prices: the printing by publishers of prices on the cover of
publications and the limits that places on retailer pricing.
4.4
The OFT has considered whether there are reasonable grounds for
suspecting that, individually and/or in combination, these features
prevent, restrict or distort competition. In this connection, the OFT has
also considered the NFRN's concern in relation to the degree of control
exercised by publishers over the respective supply chains overall. This is
addressed in the final section of this chapter.
4.5
As part of its request, the NFRN also suggested four other possible
features of the supply chains for consideration. These are the two-sided
nature of the markets, CSCs, poor terms of supply to retailers, and the
possible cross-subsidisation of wholesaling activities – whether in terms
of wholesalers cross-subsidising the cost of wholesaling newspapers
with the margins they earn on magazines, or whether in terms of
wholesalers cross-subsidising the cost of supplying some territories with
the margins they earn on supplying to other territories.
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4.6
As analysed in chapter 3, the OFT considers the two-sided nature of the
newspaper and magazine markets to be an intrinsic characteristic of the
newspaper and magazine products, rather than a free-standing feature
which should be addressed in isolation. On that basis, the consequences
of the two-sided markets, and the incentives they create, are examined
throughout this chapter in the context of the other features analysed. In
relation to CSCs – the charge that wholesalers levy on retailers for
delivery – the fact of the charge itself as the price for delivering a
service to retailers is not considered to be a feature of supply that merits
analysis as a potential competition concern. However, the level of the
charge may provide evidence of an underlying competition concern if
that level is not sufficiently constrained by competition. The OFT has
analysed the level of CSCs in the context of its analysis of competition
for the market below in order to determine whether they provide
evidence of a competition concern at the wholesale level. In relation to
the NFRN's request for an examination of cross-subsidisation as a
feature in the supply chain, this is considered in the context of the
analysis of competition for the market. The supply terms received by
retailers are also considered in the analysis of competition for the
market, as well as in the context of the analysis of publisher-led
distribution.
4.7
In its consultation response to the proposed MIR decision, the
Association of News Retailing (ANR), representing convenience retailers,
argued that following the recent developments in the newspaper and
magazine supply chains and in particular the increase in concentration at
the wholesale level (referred to in chapter 3), the OFT should examine
the emerging market structure as a distinct feature. As noted in
paragraph 3.23 recent changes to the structure of the wholesale level of
the newspaper and magazine supply chains have been a significant part
of the OFT's analysis as part of the consultation. The extent to which
these changes may affect competition is examined in relation to the
relevant features below.
4.8
Finally, alongside its analysis of the individual and collective features
outlined, the OFT has looked at relevant indicators or measures of
whether competition is functioning effectively to see if these indicate
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any competition concerns. Certain indicators, such as high price and
profit levels, or a high volume of complaints, may be symptomatic of an
underlying issue with the way competition functions in these supply
chains. This is consistent with OFT guidance that performance indicators
can be a useful supplement to analyse market features.83 The specific
performance indicators which the OFT has examined are the volume of
complaints against wholesalers, the level of wastage, the level of CSCs,
and the levels of wholesaler profitability.
4.9
The analysis in this chapter takes into account the responses provided to
the consultation on the proposed MIR decision as well as other
representations received. Where respondents to the consultation
commented on particular features in the proposed MIR decision during
the consultation, these views have been included, where appropriate,
within the analysis of that feature. Where respondents made more
general comments on features of the market, these have been
summarised, where relevant, in separate sections towards the end of the
analysis of each feature.
Analysis of individual features
Absolute Territorial Protection
4.10
The system of ATP results from agreements between newspaper
publishers and, historically, between magazine publishers/distributors on
the one hand, and wholesalers on the other, in which the former grant
the latter exclusive territories for distribution of their products from
which all competing wholesalers are excluded.
4.11
The exclusive territorial rights conferred by these agreements are
underpinned by bans on both active and passive sales between
territories. The ban on active sales means that a wholesaler is prevented
from actively marketing its products to retailers outside its allocated
territory. The ban on passive sales means that the wholesaler supplying
83
OFT 511, Market investigation references, paragraph 4.5.
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newspapers and/or magazines is contractually barred84 from responding
to unsolicited requests to supply those products from retailers outside its
allocated territory. The combination of exclusive territories and bans on
active and passive sales across distribution territories results in ATP.
4.12
Although it is possible that two or more wholesalers can serve the same
territory with different publications (a 'split-sheet' territory), this is
increasingly rare.85 Given the cost efficiencies in combining deliveries of
different newspapers and magazines to retailers, one wholesaler will
usually be awarded contracts by all publishers for a particular territory.
This means that, for the duration of each publisher-wholesaler contract,
retailers in that territory are tied to one wholesaler for deliveries of all
their publications. The potential for competition between wholesalers for
retail customers to emerge within that territory (competition in the
market) is, therefore, removed.
4.13
Furthermore, each publisher-wholesaler contract providing for ATP exists
alongside similar agreements entered into by other publishers in respect
of the same territory and by the same publisher (and other publishers) in
respect of other territories. These agreements providing for ATP entered
into by the same publisher are mutually reinforcing in that the exclusive
territory awarded to one wholesaler is protected by restrictions in the
agreements providing for ATP with other wholesalers in neighbouring
territories which prevent those other wholesalers (either explicitly or
implicitly) from engaging in active or passive sales into areas outside
their own territories.
84
The prohibition imposed upon wholesalers concerning passive sales is also included in
paragraph 1.3 of the Newspaper Code of Practice. This has typically been incorporated into
contracts between newspaper publishers and wholesalers. However, with effect from 20
October 2009, wholesalers will be released from their statutory undertakings to comply with the
Code.
85
In 2008, approximately 71 per cent of the postcode areas in the UK were full-sheets, whereas
around 29 per cent were split-sheets.
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4.14
The degree to which the existence of a system of ATP restricts
competition depends on the degree of competition in the market that
might be expected to emerge in the absence of ATP.
4.15
In relation to newspapers, it might be expected that a degree of
competition would emerge between wholesalers within territories absent
ATP. However, there are two limitations on this. First, the very limited
time window for the distribution of newspapers by wholesalers means
that wholesalers can, in effect, only deliver to retailers within a one hour
drive-time of a depot. Depots, therefore, need to be sufficiently
numerous and the geographic scope of territories sufficiently small, to
ensure retailers can be supplied within this time window. Second,
distribution from a depot is characterised by economies of scale86,
scope87 and density88 which means that it would rarely be cost effective
for more than one depot to serve a particular territory.
4.16
Overall, the nature of newspaper distribution appears to determine a
pattern of wholesaling whereby one depot serves a largely separate
territory that is determined by the distances that can be reached within a
one-hour drive time of a depot. Therefore, in the absence of a system of
ATP as a feature of newspaper distribution, competition in the market
between newspaper wholesalers is likely to be limited to competition
between newspaper wholesalers to serve those retailers that are situated
at, or near, the boundary of some territories. The extent of competition
that could emerge in any particular territory is likely to depend on the
circumstances of that territory, notably in terms of whether a rival depot
86
Economies of scale arise when the average cost of production falls as the quantity produced
increases.
87
Economies of scope arise when average costs fall as the number of different products that a
firm supplies increases.
88
Economies of density arise when average costs fall as the number of customers in the same
area increases.
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is located close enough to the boundary in a neighbouring territory to
make such supply viable.89
4.17
To the extent that a system of ATP for the distribution of newspapers
removes the possibility that competition between wholesalers in the
market could emerge around the boundaries between some territories or
elsewhere, the OFT considers that there are reasonable grounds for
suspecting that ATP for newspapers is a feature that prevents, restricts
or distorts competition in this market.
4.18
In relation to magazines, the time window for distribution is significantly
longer. Wholesalers are, therefore, not constrained to deliver within such
a short radius around their depot, and could compete for retailer
contracts and passive sales across a much wider area.
4.19
The OFT considers it likely that the scope for effective competition in the
market to emerge between magazine wholesalers, in the absence of a
system of ATP as a feature of magazine distribution, is greater than for
newspapers. The OFT, therefore, also considers that there are
reasonable grounds for suspecting that ATP as a feature of magazine
distribution removes the potential for competition in the market to
emerge between magazine wholesalers in a number of territories and,
therefore, is a feature that prevents, restricts or distorts competition in
this market.
The OFT's Opinion
4.20
Following the guidance issued in the OFT's Opinion, it was expected that
publishers and distributors would self-assess their agreements with
wholesalers. In the Opinion, the OFT provided guidance that it appeared
that there were factors that may demonstrate that ATP in newspaper
agreements satisfies the exemption conditions set out in section 9(1) of
89
There may also be scope for some large retailers, situated further from the boundaries, to
attract a rival wholesale supplier by virtue of the high volume of copies they can take.
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the CA98,90 whereas it may be difficult to demonstrate that ATP in
magazine agreements would satisfy the exemption conditions.
4.21
In response to the OFT's consultation on the proposed MIR decision,
publishers and wholesalers have indicated to the OFT that they are
taking account of the OFT's Opinion in relation to their distribution
agreements.
Other views of consultation respondents
4.22
Retailer representatives (namely, the NFRN and the ANR) and Dawson
News submitted to the OFT in the consultation that although magazine
contracts might no longer prohibit passive selling, the scope for passive
selling was reduced following the recent tender losses by Dawson News.
Retailer representatives submitted that the outcome of recent tender
awards would result in the formation of two regional areas of exclusive
territories, with Smiths News in the south of Great Britain and Menzies
Distribution in the north of Great Britain. The arguments concerning
future prospects for the development of magazine passive sales are
considered in chapter 5 below.
90
Where parties to a newspaper or magazine distribution agreement have self-assessed and
deemed that agreement to benefit from exemption under section 9(1) of the CA98, it is
important that parties ensure that all of the exemption conditions are met, as the exemptions
conditions are cumulative. Furthermore, as the application of the exemption conditions is a
dynamic concept, parties should also review the agreement in question regularly to ensure that
the exemption conditions continue to be met over time. For example, in assessing the
indispensability of an agreement, the restriction may only be indispensible for a certain period of
time. In order for the parties to make the relevant assessment in this connection, due account
should be taken of the period of time required for the parties to achieve the efficiencies that
justify the application of the exemption under section 9(1) of the CA98. See paragraphs 4.102
to 4.113 of the Opinion and Commission Notice, Guidelines on the application of Article 81(3) of
the Treaty (2004) OJ C101/08, paragraph 81 and the references made there.
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Conclusion on ATP
4.23
In relation to newspapers, the OFT considers that a system of ATP
removes the possibility that competition between wholesalers in the
market could emerge around the boundaries between some territories or
elsewhere. In relation to magazines, the OFT notes that given the
significantly longer time window for distribution than newspapers, the
scope for effective competition in the market to emerge between
magazine wholesalers that is removed by a system of ATP is greater
than for newspapers, where such a system exists. The OFT therefore
considers that in relation both to newspapers and magazines, there are
reasonable grounds for suspecting that ATP is a feature that prevents,
restricts or distorts competition in these markets.
Competition for the market
4.24
Publishers91 usually award exclusive territorial contracts with ATP to
wholesalers for a period of up to five years on the basis of a tender
process, although the OFT understands that the contracts for the recent
magazine distribution awards did not include ATP provisions. The bidding
that takes place between wholesalers to win a contract to serve a
publisher's specified territory is referred to as 'competition for the
market'.
4.25
When assessing tender bids for a territory, a publisher will consider a
number of factors, including the wholesale margins92 offered in the bids
by different wholesalers, wholesalers' plans for investment in improved
91
In the case of magazines, wholesaler contracts are controlled and tendered by distributors
acting on behalf of publishers. However, the large magazine publishers typically have
shareholdings in magazine distributors. For the purposes of this section, the term 'publishers'
is used to cover both newspaper publishers and magazine distributors, unless specified to the
contrary.
92
Most newspaper publishers typically sell their titles to wholesalers at a discount from the
newspaper cover price (retaining a publisher margin). The wholesaler, in turn, takes a margin
(negotiated in advance with the publisher, and known as the 'wholesale margin') and then
sells the newspapers to the retailer.
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technology, as well as the performance record of wholesalers in
delivering to retailers against KPIs agreed between the publisher and the
wholesaler in previous tender competitions. This tendering process, and
the desire to succeed and be awarded a contract, is currently the main
driver of competition between wholesalers.
4.26
In the proposed MIR decision, the OFT assessed concerns raised by the
NFRN and others that such competition for the market does not
represent a process of competitive bidding, that multiple wholesalers
have strong advantages in the bidding process and are able to crosssubsidise their bids for some territories, and that the process favours the
incumbent wholesaler in bidding for a territory. In the subsequent
consultation, and following the recent tender rounds, the NFRN has
expressed concern that the increase in concentration at the wholesaler
level in the newspaper and magazine supply chains will dampen
competition for the market in future tender rounds or will result in lower
service standards to publishers and/or retailers over time.
4.27
In light of such concerns raised, the OFT has looked in detail at the
operation of the tender process and outcomes of previous tender rounds,
including the most recent tender round, in order to assess whether
wholesalers exercise a significant degree of market power in relation to
competition for the market. In this context, the OFT has received
evidence both from publishers and wholesalers about the intensity of
competition between wholesalers in the recent tender rounds and the
anticipated future intensity of competition for the market.
4.28
Market power arises where a firm does not face effective competitive
pressure,93 that is, where the constraints which would usually ensure
that a firm behaves in a competitive manner are not working effectively.
It is often described as the ability to raise prices consistently and
profitably above competitive levels. However, market power might also
enable a firm to supply goods or services of a lower quality, or restrict
output to a lower level than would be supplied in a competitive context.
93
See OFT 415 'Assessment of Market Power', paragraph 1.3.
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4.29
The analysis below considers five factors that might give wholesalers a
degree of market power in relation to competition for the market – the
proportion of tenders won by the incumbent wholesaler (the incumbency
advantage), other barriers to entry, the degree of consolidation at the
wholesale level, the ability of wholesalers to cross-subsidise their bids
from one product to another and/or from one region to another (crosssubsidisation), and the carriage service charge (CSC) charged by
wholesalers to retailers. The analysis then examines ways that
publishers can use their buyer-power, and their control over the bidding
process, to constrain any market power among the two multiple
wholesalers and ensure a competitive process of bidding across
territories.
4.30
The final section considers whether certain indicators at the wholesale
level (wholesale profitability, wholesale margins,94 CSCs, and wholesaler
service quality) provide evidence of wholesaler market power. The
analysis throughout this section, which includes the evidence in relation
to such indicators, indicates that, on balance, competition for the market
provides a sufficient competitive constraint on wholesalers. However,
the analysis also indicates that there may well be scope for
improvements in the tender process to further improve the efficacy of
competition for the market.
Factors that may give rise to wholesaler market power
4.31
In line with submissions from parties, including those received from
parties during the consultation, the OFT has considered a number of
factors that may give rise to a degree of market power which could lead
to a unilateral increase in price or decrease in service at the wholesale
level. These are:
•
94
Incumbency advantage: the OFT's analysis of the results of a number
of tender rounds by newspaper publishers between 2004 and 2006
indicates that, on average, 62 per cent of territories in those tender
As defined in footnote 93 above.
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rounds had one bidder. The analysis also indicates that, on average,
the incumbent firm made the winning bid in 90 per cent of tenders.
This historical data would seem to indicate that the incumbent bidder
may have an advantage in tendering for territories.
Several parties have indicated to the OFT, both before and during the
consultation, that incumbent wholesalers may have had an advantage
in past tender rounds from the fact that the contracts of different
publishers for a territory did not start and finish at the same time. The
argument was that if during one publisher's tender round, a
wholesaler already has a large number of contracts with other
publishers for that territory, it will have a considerable cost advantage
in bidding for the new publisher contract. That is because the
wholesaler already benefits from the economies of scale and scope
associated with delivering for all the other publishers in that territory.
In addition, an incumbent wholesaler may also have an advantage in
the tendering process because it can readily demonstrate the
competencies required to service a territory and would avoid the
perceived disruption (both to the publisher and the retailers served)
associated with a switch of wholesaler or the creation of a split-sheet
territory. Some publishers have indicated that concerns regarding the
perceived disruption related to a switch of wholesaler, in terms of the
maintenance of accuracy and timeliness of supplies to retailers, could
influence their tender decisions in favour of the incumbent, and/or
against a new entrant.
However, recent changes that have taken place in the shares and
territories of different wholesalers indicate that incumbency
advantages are not decisive. Publishers have indicated to the OFT
that through the design of the bidding process, for example by
holding the tender rounds around the same time as other publishers
and awarding contracts a year before they come into force, they can
continue to encourage wholesalers to bid for each others' territories,
regardless of any current incumbency. In this respect, the OFT notes
that in the most recent tender round, several publishers tendered for
their contracts in close succession. As referred to in chapter 3, that
tender round resulted in (a) Dawson News losing all of its contracts,
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(b) Smiths News losing contracts to Menzies Distribution and (c)
independent wholesalers losing almost all of their contracts. The
removal of the incumbent wholesaler in particular territories appears
to indicate that the incumbency advantage did not prevent publishers
from switching contracts between wholesalers, at least for some
territories.
•
Other barriers to entry: the absence of entry by new firms at the
wholesale level of the newspaper and magazine supply chains may
also indicate the existence of barriers to entry for new wholesalers
trying to win contracts. In this regard, it is noteworthy that there
have been no significant new entrants to newspaper and magazine
wholesaling over the past ten years. However, this absence of new
entry may equally be explained by the fact that newspaper
circulations have been declining, and that wholesaling of newspapers
and magazines has undergone a significant degree of consolidation
over the past fifteen years.
In its consultation response, one magazine distributor indicated that
there may be barriers to entry for firms that have little previous
experience of magazine wholesaling. These relate to the additional
complexity of the systems required to process retailer magazine
allocations and manage returns of unsold copies compared to
newspapers, and the risk of supply chain disruption should those
systems fail. In view of that, a single publisher may be reluctant to
take on a relatively inexperienced wholesaler particularly if there was
a risk that the new wholesaler may not win sufficient contracts from
other publishers to make its operation viable. However, consultation
responses from publishers have also indicated ways in which
publishers can reduce any such barriers by (a) publishers tendering
their contracts in parallel or close succession so that there is a
reasonable chance that a new entrant can win further contracts from
other publishers, and (b) allowing sufficient lead in times between
contract awards and contract start dates so that the necessary
investments and training can be completed. These are examined in
further detail below in paragraph 4.32.
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•
Consolidation: there has been a significant degree of consolidation at
the wholesale level of the newspaper and magazine supply chains
over the years. This initially occurred as the larger multiple
wholesalers acquired independent wholesalers and then won the
territories that were served by those independent wholesalers in
subsequent tender rounds. More recently, increased concentration
has taken place as a result of Dawson News losing contracts to
Menzies Distribution and Smiths News, as discussed in chapter 3.
In 1992, there were 78 wholesalers of newspapers95 operating in
England and Wales. By 2009, that figure had fallen to seven
throughout the UK. There are now two large multiple wholesalers
with a combined market share of over 90 per cent of sales: Smiths
News has a [50-60] per cent market share and Menzies Distribution
has a [40-50] per cent market share.
High degrees of concentration, coupled with broadly symmetric
market shares may be conducive to coordinated behaviour – such as
price setting or market sharing - between wholesalers. The OFT has
not found any evidence of such behaviour among wholesalers.
Moreover, in paragraph 4.32 below, the OFT considers how
publishers can use their buyer power and their control over the
bidding process to encourage competitive bidding for territories.
An additional factor that may give rise to market power at the
wholesale level is that the two large multiple wholesalers have built
up clusters of territories to form a region or regions where each is
the major wholesaler.96 In their consultation responses, some retailer
organisations argued that this meant that both wholesalers would
benefit from serving significant areas of the country in respect of
which it was unlikely to face rival bids in future tender rounds, and
could operate, in effect, as a regional monopolist. However, the OFT
95
This information relates to wholesaling of newspapers as MMC (1993) did not consider the
wholesaling of magazines.
96
As discussed in chapter 3, Smiths News has a large cluster of territories in the south of Great
Britain and Menzies Distribution has a large cluster of territories in the north.
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also notes that both of the major wholesalers have also been
awarded contracts to service territories outside these regions (see
figure 3.3). In paragraph 4.32 below, the OFT examines how
publishers have been able to use competition in these and other
contested areas to leverage competitive bids for territories that may
be less contested.
•
Cross-subsidisation: as noted in paragraph 4.5 above, the NFRN has
raised concerns that multiple wholesalers, when bidding for
contracts, are able to cross-subsidise their bids for territories
tendered by newspaper publishers through the higher wholesale
margins they earn on magazine wholesaling. Since independent
wholesalers do not wholesale magazines, the NFRN argues that the
independent wholesalers are at a disadvantage when competing for
newspaper tenders. The NFRN also contends that multiple
wholesalers can cross-subsidise their bids for some territories by the
higher wholesale margins they earn in other territories. In that way,
the NFRN claims, multiple wholesalers have been able to outbid
competing independent wholesalers.
The OFT would note that enabling publishers or retailers to make
different contributions to fixed costs may be an efficient way for
wholesalers to recover fixed costs and expand demand. In particular,
expanding demand across territories and across products by charging
different prices to publishers and retailers may allow wholesalers to
realise economies of scale and scope, and thereby reduce average
costs.97 There are economies of scale at the firm-level and the regionlevel that come primarily from wholesale firms centralising functions,
such as call centres and returns processing across a number of
territories, and these have been a major factor in the regional
consolidation of wholesalers (see below). As such, the OFT would
not necessarily consider that charging different margins for supplying
different territories or products to be an indication of a competition
concern in this context. If, however, wholesalers were earning a total
97
See footnotes 86 and 87 for descriptions of economies of scale and scope respectively.
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revenue for some territories below the incremental cost98 of delivery
to those territories, then that could be evidence of a competition
concern insofar as it persisted and competition did not emerge to
compete that cross-subsidy away. However, the OFT has seen no
substantive evidence that wholesalers are bidding for territories at
prices below the incremental cost of delivery to them.99
•
Carriage service charges: in addition to the wholesale margin agreed
with publishers, wholesalers receive revenue from retailers by levying
a weekly charge for the delivery of newspapers and magazines to
retailer outlets. This charge is known as a CSC. Whether a retailer
chooses to stock newspapers and magazines will be influenced, at
least in part, by the level of the CSC levied by the wholesaler to that
retailer. CSCs are set at a national level which means that it is less
likely, for example, that wholesalers would vary CSCs to reflect
different competitive conditions between territories or the type of
retailer supplied (for example, whether the retailer is a smaller
independent retail outlet or another type of retail outlet). CSC
templates are structured around a fixed charge, based on the number
of days' delivery per week and the types of product delivered (for
example, newspapers and magazines, or newspapers only) and a
variable charge which depends on the value of newspapers and
magazines delivered to the retailer. Wholesalers also tend to fix a
minimum and maximum charge.
98
The incremental cost measures the change in cost when increasing distribution output by a
specific increment. In this case, reference is being made to the cost of increasing the number of
retailers served by one additional unit, or alternatively the cost saving resulting from a reduction
in the number of retailers served by one unit. The OFT is not aware of what proportion, if any,
of retailers are served at below incremental cost. Wholesaler submissions to the OFT indicate
that it is not possible to isolate the incremental costs of supplying any one retailer in the
distribution network. This is understandable given the high common costs and the fact that the
incremental costs of supplying a retailer (such as additional fuel and labour) will depend to a
significant extent on how a delivery run is sequenced between retailers.
99
Any assessment of the incremental profit received by a wholesaler in supplying a new territory
would also need to take into account the revenue it received from CSCs.
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In its consultation submission, the NFRN argued that wholesalers
have no incentive to compete on CSCs because retailers are not
involved in the competition for the market process, and that once a
wholesaler has obtained an exclusive territory it can charge a high
CSC price to retailers since it does not face a competitive constraint.
The NFRN further considers that the recent increase in concentration
at the wholesale level of the supply chains will give the remaining
wholesalers an additional incentive and ability to increase CSCs
above the cost of distribution. It also claims that, on average, the
wholesaler revenue from CSCs exceeds the costs incurred by
wholesalers of delivering newspapers and magazines to retailers.
In paragraph 4.32 below, the analysis considers the incentives and
ability of publishers to place competitive constraints on the level of
CSCs charged by wholesalers. In paragraph 4.37, the analysis
considers evidence in relation to the levels of CSCs, and whether
they are above the cost of delivering newspapers and magazines to
retailers.
Factors constraining wholesaler market power
4.32
The OFT's has examined a number of ways in which the nature and
structure of competition for the relevant newspaper and magazine
wholesaling territories, coupled with some features relating to the
conduct of publishers in the supply chains, serve to counteract any
market power that a wholesaler could potentially gain from the factors
described above. These are:
•
Publisher buyer power: when tendering for contracts, publishers hold
a degree of buyer power. News International (The Sun, The Times)
accounts for 34 per cent, Associated Newpapers (Daily Mail) 21 per
cent and Trinity Mirror 13 per cent, respectively, of the circulation of
national daily newspapers. In relation to magazines, the market
shares of the largest magazine distributors are: Frontline - 34 per
cent, Market Force - 30 per cent, Comag - 25 per cent and Seymour
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-11 per cent.100 Magazine distributors will tender contracts for their
whole portfolio of magazine titles thereby increasing the degree of
buyer power they can exert.
•
Publisher control of the bidding process: publishers will invariably
tender all of their UK territories in one round and publishers
determine the structure of each of the subsequent rounds of bidding
from applicant wholesalers. In this way, a publisher can ask
wholesalers to bid for all, or a significant bundle, of territories at a
single price. Wholesalers who might otherwise not be interested in
bidding for a single territory for a single publisher, may nevertheless
be enticed to bid competitively for that territory if it is offered as part
of a bundle. That is because a bundle of territories would allow a
wholesaler to realise greater economies of scale at the firm level and
the region level. In addition, territories that are more contestable can
be offered as inducements to encourage wholesalers to bid for less
contestable territories. 101 For example, wholesalers might be
expected to compete aggressively for territories at the borders of the
regions they serve in an effort by each to expand their regions and
thereby increase their regional level economies of scale. By bundling
such territories with territories that are potentially less attractive, a
publisher can receive competitive bids across a wider number of
different territories. The OFT notes, however, that the recent
increase in concentration at the wholesale level has decreased the
number of regions where the multiple wholesalers have contiguous
territories and that may have some impact on the effectiveness of
such bundling and the level of buyer power in the future.
100
Based on the OFT's analysis of the Advertising Association's Advertising Statistics Yearbook
2009, WARC and magazine distributor submissions. Market shares for distributors are calculated
by retail sales volume in 2007.
101
A territory served by wholesaler A could be more contestable because, for example, it is next
to a region operated by a competing wholesaler B and would, therefore, allow wholesaler B to
extend its region and benefit from additional economies of scale or because it is a split-sheet
territory in which a competing wholesaler B is already present, and wholesaler B can increase its
economies of scope and scale by distributing additional titles.
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•
Publishers can determine when to start the tender competition:
publishers can organise tender rounds so that negotiations are
completed well in advance of the time a contract comes into force. A
wholesaler obtaining a contract can then use the period between
agreeing the contract and commencing service to locate and equip a
new depot. Many of the recent tender rounds finished around a year,
if not before, the contracts were due to start. The extra lead in time
encouraged wholesalers to compete for each others' territories. In
such circumstances, publishers not only benefit from more intense
bidding, but also from having time to monitor a wholesaler's progress
towards an appropriate depot infrastructure in a new territory.
•
Parallel tenders: although different publishers do not tender contracts
for their territories at the same time, publishers tendered their most
recent contracts in close succession. In such circumstances, a
competing wholesaler may be able to bid for a sufficient number of
contracts at once to overcome the incumbency advantage that a
competitor may have.
•
Using its buyer power, a publisher can also build up a competing
wholesaler to contest another wholesaler's region in a future tender:
for example, the OFT received submissions that in a recent tender
round one wholesaler was awarded a number of territories in a
region where previously another wholesaler held most contracts.
That afforded the new wholesaler a significant foothold in the region,
placing it in a stronger position to bid for tenders in that region in the
future.
•
Publishers can restrict wholesale margins: publishers print prices on
the covers of their publications. As examined below, cover prices
allow publishers to have a degree of control over the wholesale
margins that a wholesaler can earn on copy sales. The OFT notes
that publishers agree wholesale margins with wholesalers in their
contracts as a percentage of the cover price. They also recommend
margins for retailers. As a result, a wholesaler is constrained in its
ability to exploit any market power by charging higher margins in the
supply chains. Furthermore, incentives for publishers to increase
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circulation in a two-sided market indicate that they would wish to
set low cover prices (so as to maximise their profits from advertising
as well as sales). There is thus an incentive for publishers to further
limit margins that can be earned at the wholesale level.102 Evidence
on the levels of wholesale margins and wholesaler CSCs is reviewed
in paragraphs 4.36 to 5.37 below.
102
•
Regular monitoring of wholesaler service level provision: publishers
scrutinise previous performance by wholesalers regarding the
provision of services to retailers as part of the tender process.
Publishers set performance targets, which are measured by regular
monitoring of KPIs, in their service level agreements with
wholesalers. The OFT has also seen evidence that publishers build
financial incentives into contracts to incentivise the maintenance of
particular service levels. The OFT is also aware of wholesalers that
have been penalised as a result of poor service levels. As such,
competition for the market does allow for competition to develop
between wholesalers on the basis of service performance.
•
Publisher incentives to constrain CSC levels: the two-sided market
gives publishers a strong incentive to act where CSCs could be set
at a level that discourages retailers from selling newspapers and
magazines. The potential impact that CSCs can have on the
availability of newspapers and magazines gives publishers the
incentive to keep a degree of influence in relation to CSCs. Indeed
one publisher explained in its consultation response that its new
contracts would oblige wholesalers to provide the publisher with
details of any changes in CSCs. The publisher claimed that this
would have two effects. First, there would be a deterrent effect
because the wholesaler would need to provide a valid commercial
reason to the publisher for increasing the CSC, and so unwarranted
increases would be unlikely to transpire. Second, in the event that an
increase in CSCs was not commercially warranted, the publisher
could intervene in advance to put pressure on the wholesaler not to
See paragraph 5.21 for an explanation of the effect of cover prices in a two-sided market.
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increase the charge. Another publisher indicated in its consultation
response that, if in its view an increase in CSCs could discourage
retailers from selling its magazines, it could, depending on the cost
involved, offer a rebate to retailers.
The OFT is also aware that some magazine distributors include CSCs
in their KPI monitoring. As such, it is possible that publishers will
consider the level of a wholesaler's CSC as a factor when deciding to
which wholesaler to award a contract. Further, the consultation
responses of several publishers indicated that the level and structure
of CSCs have been relevant considerations in recent tender rounds.
Indeed, as publishers have a strong interest in maintaining an
extensive retailer network, they will be concerned should CSCs start
to threaten the extent of that network.
It is important to stress, however, that this does not necessarily
mean that publishers will act in every instance of an increase in CSCs
(for example, the recent increase by Menzies Distribution of its CSCs
by two per cent), but only in circumstances where it is likely that
CSCs could be set at a level that discourages retailers from selling
newspapers and magazines.
•
103
Retailers' ability to constrain CSC levels: the OFT also notes that
following the recent increase by Menzies Distribution of its CSCs by
two per cent, it announced that it would be freezing its CSCs until
September 2010, despite likely increases in costs.103 This followed
negotiations between the NFRN and Menzies Distribution, which
demonstrates that retailers, through their industry associations, may
be in a position to restrict CSC increases. In addition, as discussed in
chapter 5, at least for magazines, there remains a reasonable
prospect that retailers, particularly multiple retailers, will be able to
switch wholesalers if they are unhappy with CSCs levels in the
future when the distribution agreements arising from the last tender
Retail Newsagent, 11 September 2009, page 1.
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round take effect. This also creates a potential constraint on CSCs in
the future by encouraging negotiating of CSC levels.
•
4.33
Publishers can initiate new distribution models: Publishers' responses
to the consultation suggested that there are options open to them to
develop publisher-led alternative distribution models where a
wholesaler does not offer the required level or cost of service. These
responses, typically from newspaper publishers, indicated that the
alternative distribution models could take two general formats:
publishers delivering directly to retailers (such as the direct-to-retailer
model used by News International in several parts of the UK) and/or
publishers inducing entry by undertaking some of the complex tasks
historically carried out by wholesalers. These publishers suggest that
by undertaking more tasks in-house they can lower some of the
barriers to entry which prevent general logistics firms from entering
newspaper and magazine wholesaling.
During the recent consultation, only one newspaper publisher indicated
to the OFT that, given the increase in wholesaler concentration, it was
not clear that it would continue to be able to constrain its wholesalers in
future tender rounds. Most publishers, however, expressed no concerns
about their continued ability to ensure future tender rounds were
competitive and therefore constrain, if necessary, wholesalers from, for
example, unilaterally increasing their wholesale margins or lowering
service quality.
Wholesale level performance indicators
4.34
The OFT has also looked at a number of indicators or measures to see
whether they provide evidence of potential competition concerns at the
wholesale level. These include an assessment of the level of wholesaler
profitability, wholesale margins, the level of CSCs, and the volume of
complaints in relation to wholesaler service performance.
4.35
The OFT has seen recent figures dating from 2007 for the operating
profit of the then three major wholesalers: Menzies Distribution, Smiths
News and Dawson News. Although it is difficult to infer economic
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profitability from accounting data - and the OFT has not conducted a
comprehensive analysis on this - the evidence seen by the OFT does not
indicate a significantly high degree of wholesaler profitability. This
appears to be in line with information in the public accounts of the
wholesalers reviewed by the OFT.
4.36
In terms of wholesale margins, evidence supplied to the OFT from
wholesalers suggests that the wholesale margins for newspapers agreed
with publishers declined over the period 1992 to 2009. During the OFT's
consultation, publishers made clear that they negotiated further
significant reductions in wholesale margins in the most recent tender
round. Prevailing wholesale margins would, therefore, appear to be
consistent with publishers having a degree of buyer power regarding the
process of competition for the market amongst other things.
4.37
In relation to CSCs, the multiple wholesalers have provided the OFT with
evidence which suggests that CSCs do not recover the full cost of
distributing newspapers and magazines. The OFT also conducted an
analysis of financial data provided by two multiple wholesalers the
results of which also suggest that CSCs do not exceed the costs of the
distribution of newspapers and magazines.104 In its consultation response
to the OFT, the ANR noted that wholesalers had increased their CSCs in
2008, by approximately 10 per cent, in line with fuel price increases but
had not decreased CSCs when fuel prices subsequently fell. However,
even with this increase, it is unlikely that CSCs recover greater than 100
per cent of the cost of delivering newspapers and magazines.
4.38
Complaints by retailers in relation to the service quality of newspaper
and magazine wholesalers have been longstanding. In its preconsultation submission to the OFT, the NFRN highlighted issues in
relation to unsuitable delivery timing offered by wholesalers, late
deliveries, poor delivery quality (for example, missing or damaged
copies), difficulty obtaining the quantity and variety of titles requested
104
The financial data received by the OFT pertained to 2006/2007 for one wholesaler, and 2007
for the other.
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and receiving titles that were not ordered.105 The NFRN stated that the
problems are generally of a minor nature but that cumulatively they
result in operational difficulties for retailers. The NFRN also noted that
there is a significant level of variation between the levels of service
provided by different wholesalers: the wholesaler with the highest
number of complaints has had twice as many complaints compared to
the second most-complained-about wholesaler.
4.39
However, it is not clear that the level of wholesale service complaints
regarding serious or persistent issues is in fact high. The Industry
Standard of Service Agreement (ISSA) sets out different categories of
wholesaler performance and a complaints procedure for retailers which is
intended to address serious or persistent breaches in service standards.
The frequency of complaints regarding newspaper and magazine
wholesalers issued under the ISSA system seems to be reasonably low.
In the twelve months to September 2008, only 493 ISSA complaint
forms were issued.106 This figure would equate to less than one per cent
of all retailers complaining once per year.107 It is also noted that around
60 per cent of these complaints refer to the timing and quality of
newspaper deliveries, in respect of which, given the very tight time
windows and the incentives for publishers to delay distribution for late
breaking news, wholesalers face considerable logistical challenges (as
discussed in paragraph 3.9 above).
4.40
The NFRN has claimed in the recent consultation that the ISSA is not a
reliable indicator of retailer satisfaction with wholesaler service, given
limited awareness of ISSA amongst industry parties. However, the OFT
notes that the ISSA is widely referred to in industry periodicals108 and
105
Between January and December 2006, the NFRN call centre received approximately 5,695
telephone complaints from its members related to wholesaler service issues which were
allocated into 21 categories.
106
ISSA report 2007/08, January 2009.
107
Some retailer associations have argued that the complaints process is cumbersome, and that
may explain why take up is so low.
108
Such as the Retail Newsagent.
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survey evidence provided to the OFT indicates that over 35 per cent of
surveyed convenience retailers were aware of ISSA.109 This indicates
that a significant proportion of retailers are likely to have some
awareness of ISSA, such that if there were significant retailer concerns
about particular aspects of wholesaler service, these concerns would be
reflected in the ISSA complaint figures.
4.41
Publishers also scrutinise wholesaler service performance in the tender
process and set performance targets in their SLAs with wholesalers.
These are measured by regular monitoring of KPIs. As noted above, the
use of SLAs and KPIs has become the norm in the newspaper and
magazine distribution sector over the past decade and they are now used
extensively by publishers/distributors. Publishers also benchmark the
performance of wholesalers against their performance in other territories
and against the performance of other wholesalers. The OFT has also
seen evidence that publishers are increasingly building financial
incentives into contracts to incentivise the maintenance of agreed
service levels, and it is also aware of wholesalers that have been
threatened with the loss of a contract or otherwise penalised as a result
of poor service levels. Consequently, when publishers compare
competing bids between wholesalers to serve territories (competition for
the market) the service performance record of different wholesalers is an
important additional factor for publishers. Moreover, evidence seen by
the OFT suggests that publishers have added, in the current negotiations
of new SLAs following the recent tender round, additional KPIs and to
set higher minimum standards for the KPIs already in place.
4.42
The evidence reviewed above appears to indicate that competition for
the market does provide a competitive constraint on the behaviour of
wholesalers in general, and that this has also been a characteristic of the
most recent tender round. However, the effectiveness of competition for
the market may vary between individual tender rounds and depend on
109
Association of Convenience Stores, Research of Convenience Store Sector, March 2007.
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how each individual tender is structured. In that respect, it is still
possible that the impact of competition for the market may be variable
between territories and wholesalers. Finally, whereas the volume of
complaints may not be especially high, the OFT has taken note of the
strength of certain retailer views particularly in relation to issues such as
copy allocation. These views are explored further in the section on copy
allocation below.
Conclusion on competition for the market
4.43
The OFT's analysis has highlighted a number of ways in which
publishers are able to use competition for the market pursuant to the
tender process to generate effective competition between wholesalers,
even with increased concentration at the wholesale level of the supply
chains. There is also evidence that competition for the market is used by
publishers to drive enhanced wholesale service delivery performance
and, if required, to constrain the level of CSCs. Finally, there are other
constraints that would appear to counteract any potential market power
at the wholesale level, including publishers' ability to control wholesale
margins through cover pricing.
4.44
The OFT's analysis has paid particular attention to the impact the recent
increase in concentration at the wholesale level may have on the
effectiveness of competition for the market, and this aspect of
newspaper and magazine distribution was raised by and/or discussed
with a number of respondents to the OFT's consultation on the proposed
MIR decision. Although the performance indicators are backward
looking, and do not reflect recent market changes, they suggest that
publishers have been effective in using their buyer power and their
control over the bidding process to leverage competitive bids from
wholesalers. Evidence from the recent tender rounds indicates that
publishers obtained competitive bids, even where it was clear to the
remaining multiple wholesalers that Dawson News would be exiting the
market.
4.45
In addition to the foregoing, the relevant performance indicators
examined by the OFT, including wholesaler profitability, do not provide
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75
evidence that competition for the market is currently failing to provide a
competitive constraint on wholesalers overall. For those reasons, the
OFT considers that there are not reasonable grounds for suspecting that
competition for the market is a feature that prevents, restricts or distorts
competition.
4.46
However, at various points in this section, the analysis has indicated that
the behaviour of publishers, and in particular how they structure and
time their tender rounds and contract start dates, can serve to improve
the functioning of competition for the market. For example, it has been
noted that the close sequencing of recent tender rounds by publishers
may have been beneficial in overcoming any wholesaler incumbency
advantages and other barriers to entry. Sufficient lead-times between
contract awards and start dates may also reduce barriers to entry or
expansion. Regular contract tendering would also serve to improve the
functioning of competition for the market. In this context, the OFT
considers that contracts should be tendered as frequently as is feasible
and, in any event, ideally more frequently than every five years. These
examples of best practice are considered in chapter 6.
4.47
The OFT also notes that competition for the market, although providing a
competitive constraint on wholesalers, serves to make publishers, rather
than retailers, the primary customers of the wholesaler. In this respect, it
is the demands made or targets set by the publisher, such as SLAs and
KPIs, that a wholesaler will respond to in the first instance, and a
wholesaler's success in meeting those targets will determine its success
in subsequent tender rounds. Publishers, not retailers, are therefore the
wholesalers' focal point of competition for the market. That is unlikely to
create tensions in so far as the incentives of publishers and retailers are
aligned. However, there may also be scope for retailers to exert greater
influence in relation to those aspects of the supply chains in respect of
which their incentives may not be as clearly aligned with those of
publishers. It can be a source of frustration for retailers on issues such
as copy allocation where, as a result of the two-sided nature of the
markets, retailer incentives are not necessarily aligned with those of
publishers or distributors. The issue of copy allocation is examined
further below.
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Sale or return
4.48
Through SoR, publishers reimburse wholesalers and retailers for copies
of newspapers or magazines that are not sold at the end of the sale
period. Retailers can return unsold copies to wholesalers and be
reimbursed for the wholesale copy cost. This process is administered by
the wholesaler, on the publisher's behalf and at its expense. Newspapers
and almost all magazines are supplied on this basis.
4.49
SoR is not unlimited, and the degree to which wholesalers and retailers
can benefit from SoR varies from title to title, and sometimes from issue
to issue. In line with the number of copies of an issue they print and
their expected sales, publishers set a SoR limit beyond which they will
not compensate for any unsold copies. This limit is agreed between a
publisher and wholesaler (and the distributor in the case of magazines).
It is then up to the wholesaler, in conjunction with the publisher, to
allocate copies to retailers to ensure that the SoR limit is not exceeded.
Risks and availability
4.50
SoR means that publishers, rather than retailers or wholesalers, carry the
product-specific financial risk in the supply chain, while retailers continue
to carry risks associated with the provision of retail space and services.
In this respect, it departs from usual supply chain practice whereby the
product is sold at each stage of the supply chain on a firm sale basis and
each level of the supply chain takes the product risk.110
4.51
The publisher incentives for SoR stem from the product characteristics
examined in chapter 3: namely the two-sided nature of the product
markets, the perishability of newspapers and magazines, demand
unpredictability and low marginal costs of production.
110
It is noted, however, that there are other examples of perishable products such as bread and
sandwiches, or products such as books and CDs, where there might be unpredictable demand,
where some degree of SoR has been used in the supply chain.
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4.52
The primary incentive for a publisher to use SoR is to ensure the wide
availability of its titles. There are numerous reasons why retailers and
wholesalers are more risk averse than publishers, and why, under a fixed
sales system whereby retailers carry all the risk for any unsolds, retailers
might have a tendency to order too few copies and/or a narrower range
of titles to meet demand. These are:
•
Individual retailers can be exposed to significant fluctuations in the
sales of titles from period-to-period given the diminishing value of the
information, the short period which the product is on the shelves,
and the fact that many purchases are made on impulse.111 These
fluctuations are likely to be strongest for magazine titles on average.
Publishers, on the other hand, are less exposed, as store-level
fluctuations are evened out on aggregate.
•
The marginal cost of an unsold publication is also considerably higher
for the retailer than it is for the publisher. For the former, the
marginal cost is the cover price minus its margin discount. By
contrast, for the publisher, the marginal printing costs are low (see
paragraph 3.17 above). In this respect, the financial loss of an
unsold publication would be greater for a retailer than for a publisher
and one would expect retailers to be more risk averse as a result.
•
In addition, in a two-sided market, publishers have a greater
incentive to maximise availability than wholesalers or retailers in
order to increase circulation and maximise profits from both copy
sales and advertising. Thus, publishers would be more willing to
111
Evidence of impulse buying in the magazine category provided by the PPA submission to the
OFT dated 20 October 2006. The research indicates that consumers often purchase magazines
on impulse. In addition, the PPA's research indicates that, on average, only 50 per cent of
consumers knew which magazine they were going to purchase before entering a store,
indicating that some consumers do not display brand or title-based loyalty. The PPA notes,
however, that although consumers may not consistently purchase the same title, they often
display significant loyalty to a portfolio of titles from which they will consistently choose a title.
This portfolio is often a limited subset of magazines within a category.
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'push' copy into the system than wholesalers or retailers would be
willing, in the absence of guaranteed demand, to 'pull'.
•
4.53
Finally, publishers have a better understanding of variations in
demand that might result from the content of different editions and
the news headlines.
Given the scope of the SoR system in this supply chain, and its
prevalence since 1992, it is difficult to compare the implications of a
SoR system against a fixed sale system in terms of availability and
increased circulation of publications. However, all publishers and
wholesalers submitted views to the OFT that a fixed sales system would
reduce the availability and circulation of their titles. As evidence,
magazine distributors pointed to the performance of part-works titles
which are sold on a fixed sales basis and where there is evidence that
retailers under-order and engage in significant re-ordering.
New launches of magazine titles
4.54
By alleviating demand unpredictability at the retail level, SoR may also
facilitate the launch of new magazine titles by publishers.112 New titles
are often given a high SoR allowance by publishers faced with the
unpredictability of sales. Distribution of a new title is, therefore, easier
under SoR than under a fixed sale system where the retailer may often
not take the risk of an untested product. In this way, the PPA attributes
much of the growth in magazine titles over the 1990s to the
introduction of SoR in 1992 (see figure 4.1 below).
112
New title launches are relatively frequent in the magazine sector owing to shifting leisure
interests and fashions and to the desire of publishers to attract particular demographics and
niche readerships (see paragraph 3.7 above). SoR would in principle facilitate the launch of
new newspaper titles as well, but in practice these are rare.
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Figure 4.1: Number of consumer magazine titles, 1988-2005
3,500
Number of consumer magazine titles
3,300
3,100
2,900
2,700
2,500
2,300
2,100
1,900
1,700
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
1,500
year
Source: PPA
4.55
Wider availability and greater product choice should in principle benefit
all parts of the magazine supply chain, including final consumers.
4.56
In its consultation response, the NFRN submitted to the OFT that,
particularly in the case of magazines, the consumer-facing benefits of
SoR are limited in as much as it can result in there being shortages in the
supplies of certain magazines made available to independent retailers and
also in that it does not provide for all titles being made available through
all outlets.
4.57
However, for the reasons discussed in paragraph 4.52 above, compared
to a fixed sales system, where retailers would carry the risk of the
unpredictability of sales, SoR comprises a distribution model that
increases the number of retail outlets in which consumers can find their
desired publication and, as a result, consumer welfare is enhanced.
Survey evidence seen by the OFT gives some indication that consumers
value a wide choice of titles, although this is by no means conclusive.113
113
The survey was conducted in 2006 by Other Lines of Enquiry and analysed by Wessenden
Marketing on behalf of the PPA. A sample of 600 respondents was used.
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4.58
However, excessive variety could be a competition concern. First, by
publishing a very wide range of titles, publishers could make it more
difficult for new entrants to find market niches or to distinguish
themselves from existing titles.114 Second, in a situation of limited retail
shelf space, existing publishers might use the variety of their titles to
crowd-out titles of new publishers by limiting their access to shelf space.
In both of these ways, excessive variety may act as a barrier to entry.
Finally, an excessive range of titles may result in allocative inefficiency,
for example where less popular titles absorb resource that could
otherwise be deployed to improve more popular titles or to innovate.
4.59
The OFT does not have specific evidence that existing publishers have
expanded their ranges of magazine titles in order to crowd out new
publishers in either of the ways described above, and no concerns have
been raised to this effect by parties. Moreover, title proliferation could be
a sign of strong competition between publishers in terms of product
innovation. As noted in paragraph 3.7 above, magazine publishers have
a strong incentive to experiment with different formats and content in
order to isolate different demographic groups and enhance their
advertising potential.
4.60
SoR can also ease the route of smaller publishers and niche titles to
market by reducing the retailer risk associated with new products. In this
connection, it is instructive that evidence indicates that smaller magazine
publishers continue to be present in the market. There were 2,375
businesses in the periodical publishing industry in 2008 of which 87 per
cent employed fewer than 20 staff.115
114
See, for example, Scherer, FM (1979), 'The Welfare Impact of Product Variety: An
application to ready-to-eat cereal', The Journal of Industrial Economics, 28(2), pp 131-34.
115
Information obtained from the ONS's UK Business: Activity, Size and Location 2008:
www.statistics.gov.uk/downloads/theme_commerce/PA1003_2008/UK_Business_2008_optimiz
ed.pdf. However, the OFT notes that these figures may also refer to periodicals not covered by
this decision (for example, business magazines).
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Effects on retail competition
4.61
By relieving retailers of some of the commercial risk, SoR may take away
some of the incentives for retailers to compete with one another in terms
of price. In particular, SoR could eliminate the incentive for retailers to
clear stock at the end of the sales period by reducing the price below the
level they would be reimbursed under the SoR system.
4.62
However, SoR does not eliminate the incentive to discount altogether if
retailers can still make some margin on top of the wholesale price. In
particular, retailers still carry the risk associated with retail costs (shelf
space, retail service) of any unsolds, and therefore have an incentive to
make some margin on a sale. In addition, there are various reasons,
independent of SoR, as to why retailers may not be inclined to discount
magazines and newspapers. These are examined in the section on cover
prices below.
Conclusion on SoR
4.63
It would not be appropriate to interfere in the determination of the
efficient allocation of risk through the supply chains unless there were
clear distortions of competition that resulted from this allocation. By
encouraging wide availability and facilitating the route-to-market, in
particular for smaller publishers and new titles, SoR is likely to have a
positive effect on competition and ultimately consumer welfare.
Furthermore, the OFT has found no evidence to indicate that SoR has a
detrimental effect on competition or entry at the publisher or retail level
of the newspaper and magazine supply chains.
4.64
The OFT therefore considers that there are not reasonable grounds for
suspecting that SoR prevents, restricts or distorts competition.
Copy allocation
4.65
A feature of distribution related to SoR is that publishers and wholesalers
have a substantial influence over the variety and quantity of newspapers
and magazines that a retailer receives by managing their copy allocation.
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4.66
In this way, the system of newspaper and magazine distribution is
primarily a 'push' system whereby the quantities of titles that are
distributed to retailers are managed by allocation choices at the top of
the relevant supply chain, rather than a 'pull' system whereby individual
retailers decide the range and number of titles they wish to stock and
order them from wholesalers.
4.67
The copy allocation process is linked to the SoR system. As noted
above, publishers agree with wholesalers the SoR limit for the number of
unsold copies for a particular title that can be reimbursed. On the basis
of these limits, publishers and wholesalers will also agree targets for the
level of unsolds that can differ according to areas or retailers. The
purpose of the targets is to balance ensuring availability of copies with
moderating the level of unsolds. Publishers determine how many copies
of a title to print based on a forecast of demand derived from their
knowledge of the news agenda and experience of consumer behaviour
and historic sales levels. It is then for the wholesaler, in conjunction with
the publisher (or the distributor in the case of magazines), to allocate
copies between retailers so that the unsold target is met.
4.68
As already noted, there are benefits associated with a degree of
publisher control over retailer copy allocation. In particular, publishers
have a better understanding of how overall demand for different titles is
driven by content and the news agenda. They also appear better placed
to take on the risk of demand variability and to ensure availability of
titles through SoR.
4.69
The issue is, therefore, whether the degree of publisher control over
copy allocation, and the way in which control is exercised, prevents,
restricts or distorts competition.
Scope for retailer influence over copy allocation of
newspapers and magazines
4.70
An individual retailer's allocation of newspaper and magazine titles is
decided by the wholesaler, in conjunction with the publisher or
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distributor, in order to meet targets for minimising the number of unsold
copies and to ensure availability of titles for consumers.
4.71
Allocations of newspapers and magazines are usually assessed on the
basis of previous sales data in the first instance. These will then be
amended to cater for any predicted fluctuations in demand as a result of
the news agenda or promotions. In relation to magazines, factors such
as the type of retailer, its location, and the amount of display space will
also be relevant for managing the range of titles and the number of
copies that a retailer receives. The OFT also understands that larger
retailers may be able to agree 'range agreements' with wholesalers or
publishers to increase the number of copies of certain titles they receive
or to limit the range of magazine titles they receive.
4.72
Within the copy allocation framework, the evidence available to the OFT
indicates that there are currently three main ways in which a retailer
might try to amend its copy allocation:
116
•
For newspapers and magazines, the large multiple wholesalers have
put in place centralised call centre and on-line functions so that
wholesale depots can respond to retailers' order requests and amend
their allocations.
•
For magazines only, wholesalers have been expanding a sales based
replenishment (SBR) system since 2000. This allows a wholesaler to
use a retailer's electronic point of sale (EPOS) data to monitor the
availability of a particular magazine title in store. The wholesaler can
use this data to trigger replenishment, supplying copies of the title
throughout a title's sale period (for example, fortnightly or weekly).
This often goes hand-in-hand with a reduction in the retailer's initial
supply. The top 300-350 magazine titles are available through
SBR,116 and although this figure is growing, it still represents a
limited proportion of all available titles. In addition, to qualify for
SBR, retailers have to use EPOS systems, which are generally only
options for large retailers, and to sell a minimum level before
PPA meeting with the OFT December 2006.
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qualifying for additional stock. Many smaller retailers do not,
therefore, currently qualify for SBR, although they may benefit from
magazine fulfilment systems.117
•
For magazines only, multiple retailers and symbol groups can have
some control of magazine copy allocation through the specification
of 'hard ranges'. Hard ranges allow retailers to choose specific
magazine titles to be allocated to them.
4.73
In terms of newspaper allocations, the evidence seen by the OFT
suggests that extensive use is made of call-in facilities to adjust delivery
orders. For example, Smiths News allows retailers to alter their allocation
on a daily basis provided notification is made before a deadline.118
Smiths News indicates it receives in excess of [ ] amendments to
newspaper allocations in a typical week, and that 97.7 per cent of
retailer amendments to newspaper orders are implemented.119 The OFT
is not aware of retailers wanting more influence over their newspaper
copy allocations than this. That seems to be confirmed by evidence seen
by the OFT of local trials in 2006 in which retailers the option of day-today control over the number of newspaper copies that are delivered to
them. The vast majority of retailers did not make use of this provision.
4.74
Certain retailer submissions received by the OFT, however, highlight a
particular concern in relation to magazine allocation and ordering.
Submissions from the NFRN indicate that one of the most frequent
complaints received from its members relates to problems independent
retailers have with their allocation of magazine titles and their requests
to increase or reduce particular allocations regarding their wholesale
delivery.120 Retailers can, in principle, change their allocation of a
117
A fulfilment system is one in which retailers are able to obtain additional magazines from
stock held by a wholesaler at a depot.
118
Smiths News submission to the OFT dated 20 October 2006.
119
Smiths News submission to the OFT dated 12 February 2007.
120
The evidence obtained from the NFRN call centre complaints (referred to in footnote 107)
showed that complaints in relation to delivery shortages and order amendments are the first and
third most frequent complaint categories from NFRN members contacting the NFRN call centre.
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particular magazine up to two days before the on-sale date by calling
their wholesaler. However, the NFRN claims that, whilst a wholesaler
will take note of a retailer's order, the order is typically not processed by
the wholesaler's allocation system.
4.75
The British Retail Consortium (BRC) points to evidence that wholesalers
have allocated magazine titles to retailers which the retailers had
explicitly requested not to receive. The BRC has also argued that it is
difficult to keep track of orders, deliveries and invoices since there is
little visibility in the wholesaler system – inaccuracies exist by title and
by issue. It stresses that the bulk of these problems occur in relation to
magazines. The BRC also points to problems integrating supermarkets'
normal ordering systems with wholesalers' SBR systems.121 In its
consultation response, one multiple retailer also complained that hard
ranges are ineffective because they only allow multiple retailers to set
the title range for all of their stores, rather than allowing the retailer to
set a range by region, or on a store-by-store basis. Because of its limited
flexibility, hard ranging may not be particularly useful in helping multiple
retailers to tailor their magazine offering to meet local or regional market
demand.
4.76
The ANR stated that the current copy allocation system results in
'[magazine titles] being in the wrong place'.122 It quotes research by one
of its members that almost half of its stock returned to wholesalers
should never have been delivered in the first place.
4.77
The OFT notes that wholesalers are trying to broaden initiatives, such as
SBR, in order to meet retailer concerns about magazine allocation.
However, these initiatives have already been underway for some time,
and it would seem there is some way to go before these ordering
facilities satisfy retailer concerns. For example, in its consultation
response, one wholesaler indicated that it is in discussions with suppliers
of EPOS systems to develop a system which would allow independent
121
122
BRC meeting with the OFT on 11 December 2006.
ANR submission to the OFT dated 20 October 2006.
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retailers to automatically order replenishment stock by communicating
daily sales data to the wholesaler.
4.78
It is likely that these identified retailer concerns stem, at least in part,
from the fact that magazine publishers/distributors and retailers have
different incentives in terms of copy allocation as a result of publishers'
desire to maximise profits from advertising as well as copy sales.123 In a
situation of limited shelf space, a publisher will want to allocate its titles
in order to maximise expected profit from both copy sales and
advertising revenue. So even if the chance of a title selling at a particular
retailer is low, the publisher may allocate this title over a more popular
one if the revenue that an additional sale may generate in advertising is
sufficiently high. Magazine publishers may also choose particular titles
for a retailer in order to target a particular advertising demographic.
4.79
Magazine publishers are also interested in the performance of their own
titles whereas retailers are interested in the performance of the category
as a whole. Publishers use shelf-space as a way of advertising their titles
and (particularly for magazines) have incentives to place their publication
on the shelf in preference to rival publications. Publishers use promotions
and guidance to wholesalers to achieve this, particularly for new titles.
In contrast, retailers may not wish to stock an individual magazine
because it would take away space from other more popular publications
on which they could earn higher revenues.
4.80
In this respect, wholesalers are likely to face competing demands from
publishers and retailers in relation to copy allocation. As discussed in
paragraph 4.47, competition for the market means that publishers are
the primary customers of wholesalers. As such, most conflicts between
the allocation instructions of publishers and the orders of retailers are
likely to be resolved by wholesalers in favour of the former. It is,
therefore, not clear that an ordering system managed by wholesalers
could result in more effective retailer influence over magazine copy
allocation. Instead, it appears that greater retail influence over copy
123
See paragraphs 3.3 and 3.4 above for a description of the two-sided markets.
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allocation would require close interaction between publishers and
retailers in this connection.
The importance of retailer influence
4.81
Publisher copy allocation limits the degree to which a retailer can
differentiate its offer from other retailers in terms of its newspaper and
magazine range in order to respond to local demand. As a consequence,
a retailer might be unable to match local consumer preferences, and
competition between local retailers can be restricted, resulting in both
allocative and dynamic inefficiencies.
4.82
The competition restriction that results from an inability of a retailer to
influence its allocation of titles might be expected to be more significant
in the case of magazines than newspapers. Most retailers will want to
take the full range of national newspapers in large part because there are
only ten national titles124 which occupy a limited amount of shelf
space.125 There is thus less scope for retailer differentiation in terms of
product range in the case of newspapers. Moreover, to the extent that
demand for newspapers varies most significantly in relation to the news
agenda, retailers generally seem to prefer to give publishers a degree of
control over the number of copies delivered to each retailer as noted
above.
4.83
For magazines, there are many possible titles that a retailer could
stock.126 There is thus much greater scope for a retailer to use the
variety of magazines that it stocks as a means of differentiating its retail
offering to that of its competitors. A retailer is also in a better position to
know about local requests or interests and reflect these in the titles it
stocks. And although many retailers need guidance from a wholesaler in
124
The ten national daily newspapers are Daily Express, Daily Mail, Daily Mirror, Daily Star, Daily
Telegraph, Financial Times, The Guardian, The Independent, the Sun and The Times.
125
Submissions by various wholesalers to the OFT. A number of wholesalers noted that there
are only two daily newspapers which some retailers preferred not to stock.
126
The Key Note Limited Market Report Market Report Consumer Magazines 2009, indicates
that there were 3,243 consumer magazine titles in 2008.
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managing the complex magazine category, this need not be at the
expense of the retailers' influence over the range and number of titles
they stock.
Wastage
4.84
At the end of a publication's shelf-life, retailers return unsold copies to
the wholesaler for recycling where possible.
4.85
The level of wastage is an indicator of whether newspapers and
magazines are being allocated efficiently to retailers. The OFT's analysis
of submissions by newspaper publishers shows the level of newspaper
unsolds to be 18 per cent on average across all titles. By contrast, the
circulation data for a sample127 of magazine titles seen by the OFT
shows the average level of wastage for magazines to be 41 per cent
with a standard deviation from the average of 6 per cent. Although this
was a small sample, this figure conforms with the average levels of
wastage indicated in submissions from magazine publishers and
distributors. Wholesaler records supplied to the OFT also indicate that
many titles have persistently high levels of wastage, ranging from 25 per
cent to 54 per cent, with an average of 40 per cent.
4.86
However, the PPA argued that waste volumes of newspapers are
considerably higher than those of magazines. Given the availability of a
very wide range of magazine titles (compared with 10 daily national
titles), a large proportion of these magazines will be specialist titles, with
only 1 or 2 copies per store. Consequently, the 'unsold' volumes will
therefore be relatively small. The OFT takes account of the impact, in
percentage terms, that such small 'unsold' volumes will have on
relatively small copy allocations. The data received by the OFT,
however, included a range of both popular and specialist magazine titles.
Analysis based on this data indicated that wastage appeared to be
consistently high for magazines in the round.
127
The sample consisted of circulation data for each issue of 18 titles, covering categories such
as music, cars, computing, art, women's interest and others, across a period of between one
and two years. The sample included information from 2006, 2007 and 2008.
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4.87
The circulation data from wholesalers also shows a high average level of
wastage for magazine titles, but a low standard deviation from this
average from issue to issue. This suggests there is not a significant
variation in the level of unsolds overall from issue to issue of a title.
Taken together this suggests that, relative to newspaper publishers,
magazine publishers consistently print considerably more copies than are
demanded for many titles.
4.88
As noted in chapter 3, there are reasons to expect a degree of wastage
in the newspaper and magazine supply chains given the product
characteristics relating to the two-sided nature of the markets,
perishability, demand unpredictability and the low marginal costs of
production. The OFT also notes that the impulse nature of magazine
purchases, compared to newspaper purchases, means that it is less
predictable where and when a sale might occur. As such,
publishers/wholesalers might be expected to build in a higher margin in
the number of copies of magazines they allocate to retailers to allow for
this risk, compared to newspapers in respect of which a customer's
choice of retailer and title is more predictable.
4.89
However, whilst recognising these factors, a consistent level of wastage
of around 40 per cent or more for many magazine titles seems high.
Whilst the OFT has not extensively examined the degree of magazine
sales volatility at the level of individual stores, it does not appear as
though the consistent level of wastage can be easily explained by
fluctuations in demand. This extent of wastage may, therefore, be
connected with a lack of retailer influence over the copy allocation of
magazines.
Other views of consultation respondents
4.90
The majority of respondents to the OFT's consultation agreed with the
OFT's assessment, although some publishers highlighted (a) ways in
which retailers can manage copy allocation, and (b) that there is
significant fluctuation in the demand for magazines which gives rise to
wastage. Several publishers noted that they continue to expand the
availability of SBR, and that SBR initiatives may help to lower the level
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of wastage by allowing wholesalers to allocate stock to those retailers
with the greatest demand.
Conclusion on copy allocation
4.91
As stated above, demand for newspapers is sensitive to the news
agenda. This means that, together with wholesalers, newspaper
publishers appear, in general, better placed than retailers to allocate
copies more efficiently. In addition, given the limited number of
newspaper titles, there is less scope for publisher control over copy
allocation to result in allocative inefficiencies than in the case of
magazines. Evidence on newspaper wastage seems to support this.
4.92
In addition, publisher and retailer incentives are better aligned in the case
of newspaper copy allocation since newspaper publishers do not face
the same incentives as magazine publishers to target advertising
demographics in their copy allocation to different retailers. Neither do
newspaper publishers face the same challenge as magazine publishers to
have the full range of their titles displayed on a retailer's shelf.
4.93
The OFT therefore considers that there are not reasonable grounds for
suspecting that newspaper copy allocation is a feature that prevents,
restricts or distorts competition.
4.94
In relation to magazine copy allocation, the OFT has noted that there is
significantly more scope for retailers to respond to local preferences and
more scope for allocative inefficiency to result from a centralised control
of copy allocation by publishers. The analysis has also highlighted the
different incentives faced by magazine publishers and retailers as a result
of advertising, and how this might result in magazine publishers and
retailers taking different views as to which magazine titles should be
stocked on a retail shelf. This analysis, coupled with the evidence on
wastage and certain retailer complaints, points to a potential competition
concern. For these reasons, the OFT considers that there are reasonable
grounds for suspecting that magazine copy allocation is a feature that
prevents, restricts or distorts competition.
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Cover prices
4.95
Publishers print prices on the covers of their newspaper and magazine
titles. This section considers the extent to which cover prices limit intrabrand competition between retailers on price, and other components of
the retail offer. It also considers whether cover prices affect price
competition between publishers.
Effect on retail price competition
4.96
In principle, cover prices are prices that publishers recommend to
retailers for pricing each individual title (recommended retail prices). In
practice, however, cover prices appear to restrict the ability of retailers
to raise prices. In order to increase their price above the cover price,
retailers would need to ensure that the new price is properly displayed
and in such a manner as to avoid customer confusion. In line with
consumer law, this would usually mean putting a new price sticker over
the cover price on each copy. Given the tight timescales and potentially
large quantities of copies involved of both newspapers and magazines
(particularly in relation to newspapers), the need to 'over-sticker' the
cover price is likely to act as a significant obstacle to many retailers
raising the price. In addition to the effort required, smaller retailers also
complain that it is very difficult for them to over-sticker cover prices
with a higher retail price, since this would be perceived adversely by
customers. Finally, the OFT has also noted provisions in some
agreements between wholesalers and retailers that preclude retailers
from raising the price of certain newspaper titles. In this sense, cover
prices can operate contractually, as well as in effect, as maximum
prices.
4.97
In terms of whether cover prices restrict retail discounting, retailers
would be free to reduce prices below the cover price simply by placing
signs in the shop indicating a certain amount off the marked price.
Moreover, there are numerous other ways that retailers might discount a
title apart from lowering the price (for example, two-for-one offers,
product bundles, and by charging less for bundled services such as
HND).
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4.98
However, retailers are unlikely to gain much advantage from discounting
newspapers. Newspapers are regular, low cost purchases which
command strong loyalties to particular titles. Moreover, a customer's
choice of retailer is often determined by their daily routine, and they are
unlikely to break that routine significantly to benefit from a discount.
Nevertheless, there may be opportunities for retailers to discount
newspapers later in the day in order to sell off spare copies.
4.99
Retailer incentives to discount magazines are likely to be stronger given
that customers have greater flexibility about when and where they
purchase magazines. The available evidence indicates that customers
use a range of shops from which to buy magazines. The OFT has also
been provided with examples of magazine discounts that were specific
to certain large retailers. There is also more scope for a larger discount
to be applied to a magazine cover price, given that magazine prices are
generally higher than newspaper prices.
4.100 Although retailers' incentives to discount their publications may not be
large, particularly in the case of newspapers, cover prices may reduce
these incentives further. The fact that retailers do not automatically have
to price the copies or titles they offer, unlike other items they sell,
makes it less likely that they will consider rival pricing and the degree of
price competition on these titles. In this sense, cover prices might
generate inertia in relation to retail pricing, and dampen intra-brand price
competition at the retail level as a result.
Effect on retail margins and non-price components of retail
competition
4.101 Publishers have a significant degree of influence over the margins that
retailers receive from the sale of newspapers and magazines. In the case
of magazines, retail margins are often set in the wholesaler-retailer
supply agreement. For newspapers, publishers usually recommend a
retail margin to wholesalers. However, the combined effect of cover
prices, and the agreements between newspaper publishers and
wholesalers on a maximum wholesale margin, means that the retail
margin is in effect limited to the residual between the wholesale price
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and the cover price. As noted above, retailers can in theory increase
their prices above the cover price, but in practice this appears difficult
and instances of 'over-stickering' are rare. Evidence indicates that some
retailers can negotiate a higher margin with wholesalers (lower wholesale
price), although this seems to be limited to the large multiples. In this
respect, therefore, publishers either directly or indirectly control retailer
margins.
4.102 Publisher control of margins in this way may limit the degree to which
retailers can compete on other dimensions of their retail offer. For
example, such control may limit the ability of a retailer to trade off
higher prices for greater service provision (for example, a late-night
store). Margins that are low may also limit entry into the retailing of
newspapers and/or magazines and, therefore, dampen competition at the
retail level. In this way, cover prices, by potentially limiting the margins
that retailers can earn from the sale of magazines and newspapers, may
restrict the size and variety of the retail network affecting the degree of
competition between retailers.
4.103 However, for a number of reasons any such restriction is likely to be
limited since, in two-sided markets, publishers have a strong incentive to
maximise the availability and circulation of their titles through an
extensive retail network. The rapid expansion of retail outlets selling
both newspapers and magazines during the 1990s reflected, amongst
other things, a desire on the part of publishers to expand retail
availability in non-traditional outlets, such as supermarkets, convenience
stores and petrol stations. Since then the retail network has remained
stable at about 54,000 outlets with those retailers exiting the market
broadly offset by new retailers entering it.
4.104 The effect of cover prices on a retailer's level of service provision (for
example, its level of staff, opening hours, premises) is also likely to be
limited, as there is unlikely to be much competitive advantage for
retailers in offering additional extensive service provision specific to
customers purchasing newspapers and magazines.
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Effect on competition between publishers
4.105 Cover prices increase the price transparency of publications and, by
enabling publishers to observe accurately each other's prices, may in
theory facilitate tacit price coordination or collusion between publishers.
However, the OFT has found no evidence in the context of the three
work-strands undertaken to indicate that either newspaper publishers or
magazine publishers coordinate prices tacitly or collusively in this way.
4.106 Although the OFT has not considered the issue extensively, the evidence
it has seen on price competition between publishers does not indicate a
competition concern. In relation to newspapers, the OFT has seen
evidence of various promotional activities and increases in product
quality that are consistent with active competition in the market. A
number of titles have engaged in regional, or more general, price
reductions (for example and the Independent on Sunday reduced its price
from £1.80 to £1 in selected regions in late 2007 and 2008) and other
price promotions, such as subscription voucher schemes (offered by,
among others, the Telegraph and the Times) and special offers (such as
free or discounted linked purchases, used extensively by the Mail).
Promotions involving cover-mounts, for example DVDs and CDs, are also
common. In relation to magazines, the OFT has also seen evidence of
competition between magazine publishers, for example publishers have
informed the OFT about price discounts (particularly at the time a
magazine is launched), discounts for bundled purchases, and the
widespread use of cover-mounts, such as books and bags on women's
magazines.
4.107 The OFT also considers that many characteristics of competition in the
newspaper and magazine product markets would not be conducive to
price coordination. First, competition between publishers takes place in
many different dimensions, notably in relation to the content, headlines
and quality, as well as price of their publications. Examples of
newspaper and magazine publishers competing on quality include
increases in the amount of colour and adding pages, especially
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supplements.128 These additional dimensions of competition would make
it difficult for publishers to sustain any coordination based on price
alone.
4.108 Second, the two-sided nature of the newspaper and magazine publishing
markets creates significant incentives for publishers to undercut the
prices of competitors, as advertisers compare the circulations of
different titles and usually offer premiums to the market leaders. This
gives publishers additional incentives to lower their cover prices in order
to boost circulation figures. Since the price of advertising space in
different titles is not easily observed, any attempt to coordinate cover
prices could be destabilised by competition in the advertising side of the
market in this way.
4.109 In relation to magazines, the proliferation of titles and the entry of
smaller publishers noted in paragraph 4.60 above, could also make any
coordination or collusion between magazine publishers difficult to
sustain.
4.110 Finally, it might also be expected that competition between newspaper
publishers would intensify in a declining market. With the exception of
2001, total copy sales have been declining steadily for newspapers since
1996. This would also make collusion or coordination of prices difficult
to sustain since there are strong incentives for newspaper publishers to
try to stall falling circulation figures by cutting prices or through other
forms of competition. Indeed, some newspaper publishers have
responded to declining sales by individually cutting prices.
Conclusion on cover prices
4.111 Cover prices appear to restrict the ability of retailers to increase prices
independently and control their margins. The use of cover prices may,
128
From the 1990s onwards the number of newspaper supplements increased significantly
including titles on personal finance, travel, education, sport, food and entertainment listings.
These tend to appear weekly or monthly, although the Guardian and The Times carry daily
supplements G2 and T2, respectively.
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therefore, be expected to limit the ability of retailers to compete on nonprice dimensions of their newspaper and magazine offer. In addition,
although they do not restrict retailer discounting directly, cover prices
may generate a degree of pricing inertia at the retail level, particularly for
magazines. For these reasons, the OFT considers that there are
reasonable grounds for suspecting that cover prices for newspapers and
magazines prevent, restrict or distort competition.
4.112 The analysis has noted, however, that when considered against other
factors that might limit price and/or non-price competition between
retailers, any such restriction resulting from the use of cover prices is
likely to be limited in scale.
Analysis of combined features
Publisher-led distribution
4.113 In addition to considering each of the above features on an individual
basis, consistent with the holistic approach it has taken in considering
the entire newspaper and magazine supply chains, the OFT has also
considered the features in combination. When assessed in isolation, a
particular feature may not of itself indicate competition concerns.
However, when assessed in combination with other features, the overall
effect may be that these features do prevent, restrict or distort
competition.
4.114 Following the OFT's analysis of each feature individually, as set out
above, the OFT considers that, in some cases, there are reasonable
grounds for suspecting that an individual feature prevents, restricts or
distorts competition (as in the case of ATP, copy allocation for
magazines and cover prices), whereas in others, this test is not met,
albeit that the individual feature in question does result in the publishers
gaining greater control over aspects of the distribution process for
newspapers and magazines (for example competition for the market and
SoR).
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4.115 The OFT's analysis indicates that in combination, however, the individual
features examined also result in publishers (via wholesalers) having a
high degree of control over most aspects of the distribution process for
newspapers and magazines, including:
•
the prices of publications
•
the margins earned by wholesalers and retailers
•
the allocation of copies between retailers
•
the process of re-ordering titles to ensure copy availability
•
the degree of risk borne by different levels of the relevant supply
chain, and
•
the timing, and quality of delivery.
4.116 As a consequence, retailers have very little scope to differentiate their
overall offering. However, since there is likely to be little scope for
retailers to differentiate their newspaper offering in any event, this
degree of control may not result in a prevention, restriction or distortion
of competition in relation to newspapers. In relation to magazines,
however, the OFT considers there is far more scope for retailers to
differentiate their offer. As a result, the OFT considers that publisher
control likely results in a prevention, restriction or distortion of
competition. The issue is considered below in relation to each of
newspapers and magazines.
Newspapers
4.117 In relation to newspapers, the scope for retailers to differentiate their
offer is likely to be limited even in the absence of the publisher control of
the distribution process identified. As noted in paragraph 4.82 above,
most retailers will stock the full range of national titles. Copy allocation
does not, therefore, restrict the range of titles a retailer can offer.
Likewise, the degree of customer service offered is usually limited to the
provision of HND which retailers are in general free to provide at their
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own separate prices. Beyond that, evidence suggests that consumers
purchase daily newspapers based on habit and pre-formed perceptions,
and choose retailers that fit with their daily routine. This also indicates
that the scope for retailers to attract customers through particular
retailer-specific newspaper offers or promotions is also limited.
4.118 The scope for differentiation is also limited by the product characteristics
of newspapers. In particular, the very limited time window between the
copy deadline for newspapers and the time by which the majority of
newspapers are sold to customers means that the scope for retailers to
differentiate their offers in the narrow intervening period is also very
limited. For example, there is no scope for retailers to assess their stock
requirements or establish promotions for different issues. Equally, the
scope for wholesaler innovation in relation to the distribution of
newspapers is restricted by the sheer logistical challenge of overnight
national delivery. The need for deliveries to all retailers to take place
between 03:00 and 06:00 determines in large part the nature of the
wholesale process.
Magazines
4.119 In relation to magazines, the OFT considers there is scope for retailers to
differentiate their offers in a number of dimensions. The analysis above
has examined the scope for retailers to differentiate their offer, in
particular with regard to the range of titles they stock. In addition to
that, there is scope for retailers to differentiate their offers in two further
ways:
•
Discounts and promotions: given the greater range of magazine
titles, the longer time window for distribution and the longer on-sale
period, there is more scope for retailers to promote particular titles,
offer linked purchases or other forms of promotion. In addition, as
noted in paragraph 4.99, there is more incentive and scope for
retailers to discount magazines or offer promotions than is the case
for newspapers.
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•
Availability: there is scope for retailers to distinguish their offers in
terms of the availability of titles throughout the on-sale period in
response to consumer demand and the prompt offer of new titles.
4.120 It might also be expected that the scope for retailer differentiation and
competition in magazine supply has also increased with the changing
composition of the retail network. In particular, supermarkets accounted
for 33 per cent of magazine sales in 2008, compared to just 19 per cent
in 1995.129 In addition to that, there has also been an increase in the
variety of outlets seeking to sell magazines. These changes at the retail
level have placed new demands on publishers and wholesalers in terms
of discounting, promotions, availability and other types of supplier
provision.
4.121 Availability levels are usually measured by the percentage of stores that
have unsold stock of a magazine title at the end of the on-sale period.
The OFT understands that, on this measure, availability levels for
magazines are around 70 to 80 per cent. The BRC stated that availability
levels of magazines for members (large multiples including supermarkets
and WHSmith) range from 65 per cent to 85 per cent.130 It expressed
strong concerns to the OFT that this level was too low in comparison to
other products. The BRC also highlighted a number of examples of a lack
of transparency that its members faced in their relationships with
wholesalers, such as the inability of wholesalers to supply full inventory
information to large multiple retailers on request, uncertainty over
whether orders have been fulfilled, and inaccurate invoicing.
4.122 The OFT is aware of some initiatives that publishers and wholesalers
have established to address availability concerns in the context of
industry fora, such as the Joint Industry Group (JIG). These include the
SBR scheme discussed in paragraph 4.72 above. However, the
129
PPA submission to the OFT dated January 2007 and response dated 17 September 2009 to
an OFT request for updated figures.
130
BRC meeting with the OFT, December 2006.
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continuing concerns of certain retailers, as highlighted above, suggest
that these initiatives are not addressing the problems raised sufficiently,
although the OFT notes that recent draft magazine SLAs, which it has
seen, do appear to give greater coverage to SBR.
4.123 As noted in the context of copy allocation, magazine publishers have a
strong incentive to control the availability and timing of promotions of
popular titles in retailers in order to leave shelf-space in retailers to
promote their other titles, meaning that it is unclear that cross-industry
initiatives can provide a solution to these concerns. The OFT is aware
that some newspaper publishers and magazine publishers work with
large retailers in designing retailer-specific promotions.131. Despite that,
the BRC submitted that magazine publishers and their wholesalers have
been unable, or unwilling, to work efficiently within the normal ordering
and promotion processes of large multiple retailers. In this respect, a
general concern expressed by the BRC is that magazine publishers,
together with their wholesalers, do not engage as fully as possible with
retailers in achieving the promotion of titles and driving sales.
4.124 As part of their consultation responses, the BRC and wholesalers
acknowledged that wholesalers are adapting their systems in order to
address these issues, and as such there may be improvements in this
area in the future., However, the level and tenor of complaints indicates
that the problem may not simply be related to the systems that
wholesalers employ, but also reflects the incentives that magazine
publishers and distributors have to control allocation and availability in
the magazine supply chain. As discussed in paragraph 4.80 above, it
appears that greater retail influence over availability and promotions
regarding magazine sales would require closer interaction between
publishers and retailers in this connection.
131
Various submissions from magazine publishers and distributors to the OFT, March 2008.
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Other views of consultation respondents
4.125 Industry respondents to the OFT's consultation generally agreed with the
OFT's analysis. Two respondents to the consultation suggested that the
balance of power would switch from publishers to multiple and symbol
retailers in the future. The OFT notes, however, that the respondents'
assertion was not based on any verifiable factual matrix or hypothesis
that the OFT could readily assess.
Conclusion on publisher-led distribution
4.126 The individual features of the markets – ATP, competition for the
market, SoR, copy allocation and cover prices – combine to give
publishers a high degree of control over the newspaper and magazine
distribution process (publisher-led distribution). As a consequence,
retailers have very little scope to differentiate their offer overall.
4.127 In relation to newspapers, in the absence of such publisher control, the
scope for retailers to compete on the basis of a differentiated newspaper
offer is limited. The very limited time-window for the distribution of
newspapers, the limited range of titles, the unpredictability of content
from day-to-day, and the habitual nature of consumer purchases mean
that there is limited scope and incentive for retailers to differentiate their
newspaper offers. As such, the OFT considers that there are not
reasonable grounds for suspecting that publisher-led distribution for
newspapers is a feature that prevents, restricts or distorts competition.
4.128 In relation to magazines, however, it seems there is greater scope for
retailers to differentiate their offers if the balance of control over the
supply chain were to move, in some degree, away from publishers
towards retailers. Competition between retailers could, therefore, be
improved across a number of dimensions including discounts, promotions
and availability. This is consistent with the view of a number of retailers
expressed to the OFT.
4.129 For these reasons, the OFT considers that there are reasonable grounds
for suspecting that publisher-led distribution is a feature that prevents,
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restricts or distorts competition regarding magazine distribution as it
restricts intra-brand competition between retailers.
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5
DECISION ON A REFERENCE
5.1
This chapter sets out the OFT's decision on a reference in the context of
the statutory reference test and the exercise of the OFT's discretion.
The section 131 reference test
5.2
In order to make an MIR, the OFT must have reasonable grounds for
suspecting that any feature, or combination of features, of a market in
the UK for goods or services prevents, restricts or distorts competition in
connection with the supply or acquisition of any goods or services in the
UK or a part of the UK (the section 131 test). Where this threshold is
met, the OFT has discretion as to whether to make a reference.
5.3
For the purposes of the section 131 test, the relevant market features
can be either structural in nature (relating to the structure of the market
or any aspect of that structure) or relate to the conduct of suppliers,
acquirers, or their customers. As noted in the OFT's guidance,132 in
practice there may not be a clear divide between structural features and
those relating to conduct. Most of the features examined in chapter 4
relate to the conduct of firms in the market, although as noted in the
analysis much of this conduct is closely related to the specific
characteristics of the relevant product.
5.4
The NFRN's request for an MIR raised a variety of features that it
considered prevented, restricted or distorted competition. These are
outlined in paragraph 2.2 above. Following its consideration of the
NFRN's request, including the inter-relationship between the various
aspects of the supply chains, the OFT identified five individual features
132
OFT 511, 'Market Investigation references, paragraph 1.9.
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of the conduct of publishers and wholesalers as features under the
reference test.133
5.5
In the course of its analysis of these features, the OFT has engaged
extensively with stakeholders and has analysed a wide range of
evidence, as well as the responses to the OFT's consultation on its
proposed MIR decision. Following its analysis, which takes into account
recent developments in the newspaper and magazine supply chains, the
OFT considers that there are reasonable grounds for suspecting that
three of the five features analysed in chapter 4 individually prevent,
restrict or distort competition:
•
ATP for newspapers and magazines: by awarding wholesalers
exclusive territories and by preventing passive sales between those
territories, ATP may well remove the potential for competition to
emerge between wholesalers for a proportion of the individual
retailers within some of these exclusive territories.
•
Copy allocation for magazines: in contrast to newspapers, there is
considerable scope for retailers to differentiate their magazine
ranges. Longer distribution timescales for magazines should also give
more scope for wholesalers to respond to individual orders or
requests from retailers to reflect local demand preferences. This
scope for a retailer to compete on the basis of their magazine title
ranges may be restricted by the degree to which wholesalers, in
conjunction with publishers, control the allocation of magazine copies
to individual retailers.
•
Cover prices for newspapers and magazines: cover prices appear to
restrict the ability of retailers to increase their prices independently
and control their margins. Cover prices might also be expected to
limit the ability of retailers to compete on non-price dimensions of
133
The OFT has also considered the view expressed by the ANR that the OFT should consider an
additional feature of 'market structure not conducive to competitive outcomes', which relates to
its view that recent market developments 'points towards a highly concentrated, regionally
clustered duopolistic market structure in newspaper and magazine wholesaling'. The OFT's view
on this issue is included at paragraph 4.7.
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their newspaper and magazine offer. In addition, although they do
not restrict retailer discounting directly, cover prices may generate a
degree of pricing inertia at the retail level, particularly for magazines.
5.6
The OFT's analysis also examined the collective impact of the five
individual features it has identified. The OFT considers that, taken
collectively, the individual features contribute to a high degree of
publisher control over the distribution process for newspapers and
magazines (publisher-led distribution) and that:
•
In relation to newspapers, the very limited time-window for the
distribution of newspapers, the limited range of titles, the
unpredictability of content from day-to-day, and the habitual nature
of consumer purchases mean that there is limited scope and
incentive for retailers to differentiate their newspaper offers. On that
basis, the OFT considers that there are not reasonable grounds for
suspecting that publisher-led distribution for newspapers is a feature
that prevents, restricts or distorts competition.
•
In relation to magazines, however, there would appear to be
significant scope in the absence of such a high degree of publisher
control over the distribution process for retailers to differentiate their
magazine offers and for wholesalers to respond to more
individualised retailer demands, responding to local demand
preferences. The OFT considers that this degree of publisher control
over the distribution process for magazines affects not only the
ability of retailers, in competition with other retailers, to influence the
range of magazines they offer but also their ability to promote
individual titles, offer different types of discount to customers, and
to improve the availability of titles, sensitive to local demand and
demographics. The OFT therefore considers that there are reasonable
grounds for suspecting that publisher-led distribution is a feature that
prevents, restricts or distorts competition regarding magazine
distribution as it restricts intra-brand competition between retailers.
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Conclusion on the section 131 test
5.7
In view of the foregoing, the OFT has therefore concluded that there are
reasonable grounds for suspecting that four features of the market
prevent, restrict or distort competition: ATP in relation to newspapers
and magazines, copy allocation for magazines, cover prices on
newspapers and magazines, and following a collective analysis of these
individual features, the degree of publisher control (publisher-led
distribution) over the magazine supply chain in general.
Exercise of the OFT's Discretion
5.8
5.9
134
As noted in paragraph 1.4 above, the OFT has the discretion, rather than
a duty, to make a reference where the section 131 test for making a
reference is met. The OFT's guidance on market investigation references
sets out four criteria all of which must, in its view, be met before the
OFT decides to make a reference:134
•
Appropriateness of a reference: the scale of the suspected problem,
in terms of its adverse effect on competition, is such that a
reference would be an appropriate response to it.
•
Availability of remedies: there is a reasonable chance that
appropriate remedies will be available.
•
Undertakings in lieu: it would not be more appropriate to address
the problem identified by means of undertakings in lieu of a
reference.
•
Alternative powers: it would not be more suitable to deal with the
competition issues identified by applying the CA98 or using other
powers available to the OFT.
These four criteria are considered below. Taking account of the relevant
factors outlined in OFT's guidance for assessing whether these criteria
OFT 511, 'Market investigation references, paragraph 2.1.
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are met,135 the OFT has concluded that, although the reference test is
met, the balance of the evidence reviewed and the resulting assessment
points in favour of exercising the OFT's discretion not to make a
reference to the CC of newspaper or magazine distribution in the UK.
Appropriateness of a Reference
5.10
In terms of the assessment of whether a reference is an appropriate
response to the scale of the suspected problem, the OFT guidance
provides that the OFT will only make a reference when it has reasonable
grounds to suspect that the adverse effects on competition of the
relevant features of a market identified are significant. In this
connection, it will consider whether the suspected adverse effects are
likely to have a significant detrimental effect on customers through
higher prices, lower quality, less choice or less innovation.136 The
guidance sets out three relevant factors that are taken into account in
assessing the significance of any adverse effects on competition or
customer detriments arising from them:
•
The size of the market.
•
The proportion of the market affected by the feature or features
giving rise to adverse effects on competition.
•
The persistence of the feature or features giving rise to adverse
effects on competition.
Size of the market
5.11
135
136
In relation to the first factor, the OFT notes that the combined value of
sales and advertising revenue for national newspapers and consumer
magazines was close to £7bn in 2008. At the wholesale level, the
combined revenue of the three multiple wholesalers – Dawson News,
Menzies Distribution and Smiths News – was around £3bn in 2008.
OFT 511, Market investigation references, paragraphs 2.1 to 2.32.
Ibid., at paragraph 2.27.
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Taken as a whole, or even in terms of the size of each of the publishing,
wholesaling or retailing segments, the size of the market is substantial.
Proportion of the market affected
5.12
In relation to the second factor, the OFT notes that the proportion of the
supply chains that is affected by the features identified, whether
individually or collectively, is not small so as to mean that the adverse
effects on competition would be unlikely to lead to significant customer
detriment. In this connection, it is noteworthy that the features identified
affect all newspapers and most, if not all, magazines.
Persistence of the feature
5.13
The third factor – the persistence of a feature – is of particular
relevance to ATP. Following the guidance in the OFT's Opinion, which
was published on 22 October 2008 alongside the OFT's proposed MIR
decision, it was expected that publishers and distributors would selfassess their agreements with wholesalers and resolve potential issues
identified by them arising from the agreements in the short term. In this
context, the OFT notes that the Opinion provided guidance that there
appeared to be factors that demonstrated that ATP in newspaper
agreements satisfied the exemption conditions, whereas it might be
difficult to demonstrate that ATP in magazine agreements satisfied the
exemption conditions.
5.14
Following this guidance, the OFT understands that publishers and
distributors have substantially completed the initial self-assessment of
their agreements with wholesalers. The OFT understands, from the
consultation, that the outcomes of that process of self-assessment are
that, in line with the guidance in the Opinion:
•
newspaper publishers have retained ATP, or intend to retain ATP, in
their distribution agreements with wholesalers into the future by
retaining bans on passive sales, and
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•
5.15
magazine distributors have removed, or intend to remove, the bans
on passive sales, and therefore ATP, from their distribution
agreements with wholesalers.137
As regards magazines, the OFT considers that the removal of the ban on
passive sales from the distribution agreements means that ATP as a
feature will not persist in the future.138 However, insofar as ATP
continues to be a feature of the newspaper and/or magazine distribution
agreements into the future, where parties have self-assessed their
agreements noting the analysis set out by the OFT in the Opinion and
they have determined to retain ATP, that would be on the basis, in
part,139 that they consider that ATP will provide offsetting customer
benefits that exceed the likely detriment from any adverse effect on
competition. This is addressed further in the following section.
Offsetting customer benefits
ATP
5.16
In relation to ATP for newspapers,140 it has been argued in the
consultation on the proposed MIR decision that where parties have selfassessed their newspaper distribution agreements and ATP has been
considered by them to meet the exemption criteria, ATP would provide
offsetting benefits to customers.
137
However, the OFT also understands that, for a number of magazines with particularly
compressed distribution timescales, some magazine distributors are continuing to consider
whether to retain bans on passive sales in their distribution agreements with wholesalers on the
basis that such magazines share the relevant characteristics of newspapers which may
demonstrate that the exemption conditions are satisfied. This issue was explicitly considered in
paragraph 3.5 of the Opinion.
138
The OFT understands that the new distribution agreements between magazine distributors
and wholesalers take effect between January 2010 and January 2011.
139
The OFT notes that the remaining conditions for exemption, as outlined in paragraph 2.3 of
the Opinion, must also be satisfied.
140
And, where appropriate, to magazines which have particularly compressed distribution
timescales (see paragraph 3.5 of the Opinion).
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5.17
The OFT, in its Opinion, identified that there were a number of factors
that may demonstrate that ATP in contracts generates objective
efficiency gains in relation to the newspaper supply chain.141 The main
benefits which were discussed by the OFT in the Opinion were that
ATP:
•
may make 'competition for the market' more effective, enabling
publishers to achieve reduced margins and improved service quality
from wholesalers and providing an ongoing stimulus to wholesalers
to innovate, and
•
may support the wide availability of newspapers, in particular by
enabling publishers to include in their contracts with wholesalers an
obligation to supply all retailers (within reason) in a territory.
5.18 As regards consumers obtaining a fair share of the benefits resulting from
such efficiency gains, the OFT's Opinion considered that there were a
number of factors which were relevant regarding the potential passing on
of benefits to final consumers, namely:
•
whether publishers have incentives to pass the benefits they
receive in terms of reduced costs to consumers in the form of
lower prices and/or improved product quality – the Opinion noted
that this would depend on the intensity of competition between
publishers and that publisher incentives to pass on benefits in the
form of lower prices may be stronger than the incentives for
retailers because of the two-sided nature of the markets and the
limited ability of newspaper purchasers to switch between retail
outlets,142 and
•
whether consumers benefit from the obligation to supply in
publisher-wholesaler contracts – the Opinion noted that this is likely
141
And, where appropriate, to magazines which have particularly compressed distribution
timescales (see paragraph 3.5 of the Opinion).
142
The limited ability of newspaper purchasers to switch between retail outlets potentially gives
retailers limited incentives to cut prices in order to induce purchasers to switch to their outlet.
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to be of direct benefit to consumers since it will reduce the 'costs'
they incur in purchasing their newspapers. If wider availability
increases circulation and reduces the costs of producing the title, it
may also enable publishers to reduce cover prices. Wider availability
leading to higher circulation may increase advertising demand,
which may also enable publishers to reduce cover prices.
5.19 As noted in paragraph 5.15 above, insofar as ATP continues to be a
feature of newspaper and/or magazine distribution agreements, where
parties have self-assessed their agreements noting the analysis set out
by the OFT in the Opinion and they have determined to retain ATP, that
would be on the basis, in part, that they consider that ATP will provide
offsetting customer benefits that exceed the likely detriment from any
adverse effect on competition. For example, such benefits would be in
the form of lower prices and greater availability of newspapers (and
where appropriate, potentially for magazines with particularly
compressed distribution timescales). The OFT can therefore be confident
that where ATP is retained, then provided there has been a correct selfassessment conducted by parties, noting the analysis set out by the
OFT in the Opinion, ATP will provide offsetting customer benefits that
exceed the likely detriment from any adverse effect on competition
resulting from ATP.143
Cover prices
5.20
In relation to cover prices, there appear to be offsetting customer
benefits from publishers setting cover prices for newspapers and
magazines. Given the two-sided nature of the newspaper and magazine
markets, the OFT would expect publisher-set cover prices to be
significantly lower than retailer-set prices.
143
It is for parties themselves to carry out such a self-assessment. The OFT has not conducted a
review of the details of individual parties' self-assessment.
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5.21
Since a title's circulation will increase with a reduction in cover price,144 a
reduction in the cover price should have a positive effect on advertising
revenue over time. Accordingly, the OFT would expect publishers to set
a cover price in order to maximise their profits from both copy sales and
advertising revenue. By contrast, retailers receive revenue only from
copy sales, and might, therefore, be expected to set a higher price (than
publishers) in order to maximise their profits. That is not to say that the
prices of some retailers will not be discounted below the cover price on
some occasions. As noted in paragraph 4.99, the OFT is aware of
retailer-specific price promotions below the cover price of a magazine.
However, in general, a publisher-set cover price is highly likely to be
significantly lower than a retailer-set price due to the two-sided nature of
the newspaper and magazine publishing markets.
5.22
Econometric studies of magazine markets in other countries indicate that
publishers set cover prices low in order to increase advertising revenues
and rely on the latter to cover most if not all of their costs.145 The effect
of the two-sided markets on cover prices of both newspapers and
magazines is also borne out by submissions from publishers that confirm
the importance of advertising revenue when setting cover prices.
5.23
In its consultation submission the NFRN commented that the two-sided
nature of the markets only provides publishers with an incentive to
increase circulation if sufficient income can be earned from advertising.
The NFRN suggested that recent decreases in advertising revenue had
lowered publishers' incentives to lower cover prices. To assess that
144
The OFT received some evidence on price elasticity from newspaper and magazine publishers
from regional or national price experiments they have conducted. This indicated that while some
titles were relatively price inelastic (as would be consistent with a product that is priced lower in
order to benefit from two-sided markets), all were normal goods that is, a price reduction would
increase circulation over time. For magazines, the responsiveness of circulation to a price change
can vary considerably between different titles. However, the precise effects of a price increase
can be difficult to isolate in regional price tests given that other factors such as segment
growth, headlines, content and perceived value for money can play an important role in
circulation.
145
Kaiser, U and Wright, J. (2006) 'Price structure in two-sided markets: Evidence from the
magazine industry', International Journal of Industrial Organisation, vol 24 (2006) 1 – 28.
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claim, the OFT considered evidence in relation to the advertising market
and publishers' efforts in relation to increasing circulation. As noted in
paragraph 3.6, despite recent declines in firms' advertising expenditures,
advertising revenue continued to account for 48 per cent of total net
publisher revenue on newspaper titles, and 36 per cent of total net
publisher revenue on magazine titles in 2008.146
5.24
In view of the foregoing, the OFT considers that a publisher-set cover
price for newspapers and magazines is highly likely to be significantly
lower than a retailer-set price, and that the customer will gain significant
benefits as a result.
5.25
In terms of whether these offsetting customer benefits outweigh the
detriment that arises from the restriction of cover prices, paragraph
4.103 above notes a number of reasons why the restriction cover prices
puts on the ability of retailers to compete on price and non-price
elements of their offer is likely to be limited. The OFT therefore
considers that in relation to cover prices there are offsetting customer
benefits that exceed the likely detriment from any adverse effect on
competition.
Availability of remedies and other practical issues
5.26
146
The OFT considers that the process of self-assessment of individual
distribution agreements between publishers and wholesalers that has
followed the issue of the Opinion creates a reasonable prospect of a
period of flux in the sector. In this connection, the reference to flux is to
the changes that may take place as a result of this process of selfassessment, which could include changes to distribution arrangements
following the recent tender process. Such flux will be particularly
Advertising Association's Advertising Statistics Yearbook 2009, WARC.
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relevant to the features of copy allocation and publisher-led distribution
in relation to magazines.147
5.27
Several responses to the consultation, particularly from independent and
convenience retailers, have argued that these recent tender awards,
whilst producing changes in the newspaper and magazine supply chain,
may also have fixed the key parameters for competition in the relevant
markets in the foreseeable future by eliminating the prospects for
passive sales, thereby reducing the likelihood of future potential flux.
However, several other responses, particularly those from wholesalers,
considered that prospects for passive sales would remain. The responses
argued that this was the case even though the immediate focus of many
industry parties was necessarily on responding to the significant
adjustments arising from the current tender round, rather than currently
exploring alternative distribution methods.
5.28
In relation to the likelihood of passive sales emerging, the OFT notes
that the increased geographical reach of wholesalers as a result of the
recent tender awards may facilitate the emergence of national or
regional distribution arrangements (whereby, for example, a multiple
retailer contracts with a wholesaler to deliver its nationwide or regional
requirement for magazines). That is because the remaining wholesalers
have a greater ability to access different areas of the country. Secondly,
although there has been a reduction in the number of contiguous
territories arising from the recent tender awards, the OFT notes that
many of the remaining contiguous areas are in, or around, major
population centres (including London, Newcastle, Sheffield, Manchester,
Liverpool, Portsmouth and South Wales) and therefore the possibility of
passive sales remains in respect of many retailers. Finally, the OFT notes
that the prospects for passive sales of magazines are not wholly
147
That is because changes that may take place have the potential to give retailers, in particular
multiple retailers, more influence over the allocation of copies, the availability of publications and
the nature and degree of discounting. Such changes, and the responses anticipated from
retailers, could consequently provide benefits to magazine consumers in the form of increased
choice, enhanced availability and greater discounting of magazines.
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dependent on the incidence of contiguous territories, given that the
timescales for the distribution of magazines mean that it is quite
possible for magazines to be supplied by a wholesaler at a significant
distance from the depot at which they are packed, where there is
sufficient scale to make such supply commercially viable.148
5.29 Further, the OFT has received evidence, both in response to the
consultation on the proposed MIR decision and in follow-up discussions
with parties, that several retailers have given specific consideration to the
opportunities made available through the removal of the bans on passive
sales. [ ].
5.30 The OFT considers that these emerging possible developments of
alternative supply via passive sales and/or national models of distribution
will be particularly relevant in the context of any assessment of copy
allocation and publisher-led distribution in relation to magazines over the
short term. That is because such changes have the potential to give
retailers, in particular multiple retailers, more influence over the allocation
of copies, the availability of publications and the nature and degree of
discounting. Such changes, and the responses anticipated from retailers,
could consequently provide benefits to magazine consumers in the form
of increased choice, enhanced availability and greater discounting of
magazines. As such, these changes could be very significant in the
context of any assessment of these features, and if relevant, any
assessment of the desirability or suitability of any remedies.
5.31 In relation to the time-frame over which such changes may take place the
OFT considers that significant developments may be less likely over the
course of the next year as parties across the supply chain are focussed on
ensuring that there will be a smooth transition from Dawson News to
Smith News and Menzies Distribution to ensure undisrupted supplies of
148
The OFT found that even weekly time-sensitive magazines take 18-30 hours to pass through
the supply chain (based on analysis conducted by the OFT of information provided my publishers
and wholesalers) [ ].
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newspapers and magazines and to maintain service levels to Dawson's
previous customers, that is a significant task given the large scale and
very limited timescale for the transition. Following the adjustment to the
significant recent structural changes in the industry, in the run up to and
when each of the revised distribution agreements. Therefore, there
remains a reasonable prospect of a period of flux in the sector meaning
that it would not be feasible for the CC to obtain the requisite evidence at
this point in time to properly assess how the supply chains are likely to
evolve in the short term, and hence the impact and effectiveness of any
remedies. For these reasons it is not appropriate to make a reference to
the CC.
5.32 Alternative powers
5.33 In view of the above, it is not necessary to go on to consider as an
additional rationale for not exercising the OFT's discretion to make an
MIR, the appropriateness of dealing with the competition issues arising
from the features identified pursuant to section 131 of EA02 by applying
the CA98.
5.34 It is noted nonetheless that ATP was the subject of the Opinion, which in
response to a request from members of the industry provided guidance to
assist parties' self-assessment.
Conclusions on the exercise of the OFT's discretion
5.35 In conclusion, the OFT considers that, although the reference test is met,
the balance of the evidence reviewed and the resulting assessment
points in favour of exercising the OFT's discretion not to make a
reference to the CC of newspaper or magazine distribution in the UK.
5.36
The OFT considers that the removal of the ban on passive sales from the
magazine distribution agreements means that ATP as a feature will not
persist in the future. Where ATP is retained, then provided there has
been a correct self-assessment conducted by parties, noting the analysis
set out by the OFT in the Opinion, the OFT can be confident that ATP
will provide offsetting customer benefits that exceed the likely detriment
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from any adverse effect on competition resulting from ATP. In relation to
cover prices for newspapers and magazines, the OFT considers that
there are offsetting customer benefits that exceed the likely detriment
from any adverse effect on competition.
5.37
In relation to the individual/collective features of magazine distribution
that have been identified – publisher control of copy allocation and
publisher-led distribution in general - the OFT considers that the process
of the parties' self-assessment (following the guidance issued in the
OFT's Opinion), which could include changes to distribution
arrangements following the recent tender process, creates a reasonable
prospect of a period of flux in the sector. This period of flux means that
it would not be feasible for the CC to obtain the requisite evidence at
this point in time to properly assess how the supply chains are likely to
evolve in the short term, and hence the impact and effectiveness of any
remedies. For these reasons it is not appropriate to make a reference to
the CC.
Conclusion on reference
5.38
In view of the foregoing, the OFT has decided to exercise its discretion
not to make a reference to the CC.
5.39
Under section 154(1) of the EA02, the OFT has the power to accept
undertakings in lieu of a reference if it considers that it has the power to
make a reference under section 131 and otherwise intends to do so.
Since in this instance the OFT has decided not to make a reference, for
the reasons set out above, it does not have the power to accept
undertakings in lieu.
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6
GUIDANCE AND POSSIBLE FURTHER UPDATE REVIEW
Guidance on potential next steps for the industry
6.1
6.2
In the course of the OFT's analysis and in its consultation with industry
parties, the OFT has identified a number of instances of best practice
which, if adopted more widely, it considers could enable the newspaper
and magazine supply chains to work more effectively into the future. In
addition, the wider adoption of this best practice could address some of
the concerns raised by certain retailers. Given the potential benefits of
such best practice, the OFT has, therefore, set out the following highlevel guidance for industry parties to consider in relation to the following
issues:
•
the process of competition for the market in the future,
•
certain areas of apparent retailer concern (particularly from
independent retailers), and
•
self-regulation and other services available to retailers.
The guidance is offered particularly in the context of the current
process of contract renewal between publishers and wholesalers and the
opportunity that it affords parties to make further developments to their
contractual arrangements (where contracts have not been finalised). In
addition, such guidance may help to inform ongoing industry discussions
regarding self-regulation (referred to at paragraph 6.6).
Ensuring effective competition for the market in the future
6.3
The OFT's analysis, at paragraph 4.32, has highlighted a number of
ways in which publishers are able to use competition for the market
pursuant to the tender process to generate effective competition
between wholesalers, even with an increase in concentration at the
wholesale level of the supply chains. In that connection, the OFT
provides the following guidance for industry parties to consider:
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•
Benefits can be achieved from regular tendering of contracts by
publishers (as frequently as is feasible and, in any event, ideally
more frequently than every five years) rather than rolling over
existing contracts without a further tender process - as that
would ensure strong continued incentives for wholesalers to
improve distribution.149
•
The use of a process of parallel tenders (where appropriate) can
be beneficial as it would enable a competing wholesaler to bid for
a sufficient number of contracts at once to overcome any
incumbency advantage held by another wholesaler.150
•
Allowing for sufficient lead time between the award of contracts
and their start date can be beneficial as it allows wholesalers (and
potential entrants to wholesaling) a sufficient amount of time to
make the necessary investments in depots and training, thereby
facilitating entry or enabling a wholesaler to serve an area outside
its existing geographical area of operation.
The OFT notes that each of the above aspects of the guidance formed
part of the recent tender round and considers that these were beneficial
to the process of competition for the market.
149
In this context, it is also relevant to note that, as the OFT identified in its Opinion, the
frequency of tendering would also be relevant for parties self-assessing whether remaining ATP
provisions in distribution agreements meet the exemption criteria in section 9 of the CA98. That
is because the incentives to improve distribution will be weaker, and therefore the efficiencies
that flow from ATP more limited or less likely to arise, if competition for the market only takes
place infrequently (see paragraph 4.108 of the OFT's Opinion for further detail on this issue).
150
In conducting parallel tenders, publishers should, of course, comply fully with competition
law, particularly in order to avoid any unlawful exchange of competitive information between
publishers conducting a parallel tender and to ensure that the contract award decision by each
publisher is made independently of its competitors.
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Addressing areas of apparent retailer concern
6.4
The OFT has engaged extensively with a range of different types of
retailers throughout its recent work on newspaper and magazine
distribution and has noted the concerns which they have raised by
certain retailers regarding copy allocation and CSCs. These issues have
been reflected in the OFT's analysis in this MIR decision (for example,
CSCs are addressed in relation to performance indicators for competition
for the market). However, the OFT considers that there are numerous
examples of best practice in connection with such matters, which
industry parties may wish to consider when developing and finalising
SLAs, and when subsequently amending them:
•
In relation to copy allocation for magazines, including provisions
in wholesaler SLAs to ensure the development of appropriate
replenishment systems, particularly SBR151 for multiple retailers
and fulfilment systems for independent retailers, would enable
retailers to have greater influence over copy allocation.152
•
In relation to CSCs for both newspapers and magazines, including
monitoring provisions in wholesaler SLAs would enable publishers
to be more readily aware of changes in CSCs so that they can act
to ensure that any rises in CSCs do not risk resulting in significant
retailer exit from the sector. Such provisions could, for example,
require that a wholesaler engages with a publisher in advance as
to the impact of any proposal to increase CSCs or depart from the
indexation formula used to calculate the level of CSC increases.
•
More generally, publishers consulting retailers (or their
representatives) before future tender rounds, would enable
151
For example, timetables for the development of SBR.
The OFT has noted in paragraph 5.36 that flux will be particularly relevant to the feature of
copy allocation. Nonetheless, the OFT considers that there is some possibility for industry
parties to continue to develop replenishment systems to enable potentially greater retailer
influence over copy allocation notwithstanding the reasonable prospect of flux in the supply
chain.
152
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retailers' comments and concerns to be taken into account, where
appropriate, during the tender process.153
6.5
The OFT is fully aware that many publishers include provisions
regarding replenishment and monitoring of CSCs in their existing SLAs.
Where that is the case, the OFT's guidance is that publishers should
consider actively monitoring and enforcing such provisions. To the
extent that such provisions are not included in SLAs, the OFT notes
that the ongoing process of agreeing SLAs arising from the recent
contract rounds could provide publishers with an opportunity to include
such provisions in their future SLAs.
Self-regulation and other services available to retailers
6.6
The OFT notes the desire of certain industry parties to agree a new code
of conduct in relation to the supply both of magazines and newspapers
to retailers, including mechanisms for redress. Steps towards selfregulation that address the features of the market which fall within the
statutory test for a reference to the CC, or otherwise address any
further issues in the supply chains, would be welcome. Any such
voluntary agreements between industry parties should of course comply
with competition law.
6.7
The OFT is also aware of existing wholesaler services which are already
available to retailers, which may be of assistance in addressing the
concerns which they have raised, including the concerns raised by
independent retailers. In particular, retailers may wish to consider taking
advantage of, where applicable website services offered by Smiths
News and Menzies Distribution to give retailers greater visibility and
153
This could involve an initial discussion/survey of retailers, or their representatives, before the
issue of the tender to enable retailers to identify key issues which they would like to be
addressed in the context of the SLAs. This would enable the publisher to take these issues into
account when specifying its requirements in the tender round.
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control over copy allocation (These services are Connect2U154 and iMenzies).155
Possible further update review of the supply chains
6.8
As part of the OFT's function under section 5 of the EA02 to keep
under review information about matters relating to the carrying out of its
functions, the OFT will consider, after a period of two years from the
publication of this decision, whether to undertake a short update review
of the newspaper and magazine distribution sector in relation to the
features examined in this decision. Such a review will only take place
where it would be justified following an assessment under the OFT's
prioritisation principles undertaken at that point in time.156 The impact of
any such review on consumer welfare, which is one aspect of the OFT's
prioritisation principles, is likely to be a particularly important
consideration in this connection at that point in time.
6.9
The OFT fully recognises that this sector has been subject to significant
review in recent years. Were the OFT to undertake a short update
review in the future, it would focus on new developments in this sector
that are relevant to the features examined in this decision. In addition,
any such review would also take into account what action industry
parties have taken following the OFT's guidance in relation to industry
best practice.
154
Further information on Connect2U can be found at: www.connect2u.co.uk/connect2u/
Further information on i-Menzies can be found at:
www.menziesdistribution.com/cgi/public/retailers-online-index.cgi
156
The OFT's prioritisation principles can be found at:
www.oft.gov.uk/shared_oft/about_oft/oft953.pdf
155
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