Newspaper and magazine distribution agreements: competition issues Standard Note: SN/BT/3334

Last updated: 3 November 2009

Author: Louise Smith

Section Business and Transport Section

This note explains the competition issues associated with newspaper and magazine distribution agreements. These agreements have been the focus of three October 2008 reports by the Office of Fair Trading (OFT) which have focused on three key issues:

• The compatibility of newspaper and magazine distribution agreements with current competition law. The OFT has found that newspaper distribution agreements may be compatible with competition law due to meeting a number of exclusion conditions which allow particular anti-competitive agreements to become lawful. However it has found that magazine distribution agreements may not meet the exclusion criteria. The OFT has issued an “Opinion” setting out the competition standards it expects from this supply chain. It expects those involved to now self-assess their practices against it.

• Whether to refer the supply chain for newspapers and magazines in the UK to the Competition Commission (CC). Although the OFT has said that the conditions for making a reference have been met, it has decided not to make a reference. This is in part because it expects distributors and wholesalers in the supply chain to self-assess their practices in light of the above “Opinion”.

• A review of the Newspaper Code of Practice which requires wholesalers to supply all new retailers who agreed to minimum weekly purchases of newspapers. Having reviewed the Code, the OFT concluded that the Code was no longer needed due to greater commercial incentives to supply new retail outlets which now exist. It has recommended that the Code lapse from October 2009. The Government has agreed.

Newsagents in remote locations are now concerned that lapse of the Newspaper Code of Practice will mean that they are unable to secure a distribution contract at a competitive price. Furthermore since the 2008 reports, one of the three main wholesale distributors of newspapers has exited the sector. Newsagents are concerned that this will reduce choice and restrict the distribution market even further. They would like a full CC investigation into the market. This note explains all of these issues further.

This information is provided to Members of Parliament in support of their parliamentary duties and is not intended to address the specific circumstances of any particular individual. It should not be relied upon as being up to date; the law or policies may have changed since it was last updated; and it should not be relied upon as legal or professional advice or as a substitute for it. A suitably qualified professional should be consulted if specific advice or information is required.

This information is provided subject to our general terms and conditions which are available online or may be provided on request in hard copy. Authors are available to discuss the content of this briefing with Members and their staff, but not with the general public.

Contents

1 The newspaper distribution market: key features and practices 2

2 Distribution agreements: compatibility with competition law 4

2.1 2002-2005: The repeal of the “Exclusion Order” 4

2.2 2005: The OFT review of compatibility with competition law 7

2.3 2006: OFT new draft opinion on compatibility with competition law 10

2.4 2007: delay after request for referral of the market to the Competition

Commission 11

2.5 2008: OFT issues final opinion 11

3 Review of the Newspaper Code of Practice 15

4 Decision about a reference to the Competition Commission 17

5 Newsagents’ concerns 21

5.1 Lapse of the Newspaper Code of Practice 21

5.2 Contraction in the distribution market 21

6 Key documents 23

1 The newspaper distribution market: key features and practices Newspapers have unique characteristics in that: they are delivered to approximately 54,000 retail outlets nationwide everyday; the content changes substantially from day-to-day (they are essentially a new product every day); and demand for them will have all but expired by lunchtime on the day of sale. A 2008 Office of Fair Trading (OFT) report explains that this makes newspaper distribution a unique system:

Although some other products might share one or two of these characteristics, their combination in newspapers means that the process of getting this product from supplier to consumer is substantially different from others in the economy. As a result, newspapers have a distribution system that is largely dedicated to that one product.1

The only other products to be distributed alongside newspapers are magazines. Given that magazines are often sold alongside newspapers in the same sorts of outlets, there are often economies to be made in combining the delivery runs for magazines and newspapers to retailers.2

In the newspaper and magazine distribution market there are broadly three levels in the supply chain: the newspaper or magazine publisher; the wholesale distributor; and the retailer. Agreements made to distribute newspapers and magazines between these levels in the supply chain are known in competition law terms as “vertical agreements”.

1 Office of Fair Trading, Newspaper and magazine distribution in the United Kingdom, Introductory overview

paper on the newspaper and magazine supply chains, October 2008, para 1.1 2 Ibid, para 1.2

2

The OFT notes that unlike supply chains for many other products, which are retailer driven, the newspaper and magazine supply chains are publisher led. In particular, publishers appear to exercise a strong degree of influence over:

• pricing at all stages of the supply chains by printing a price on the cover (cover prices) and setting, or recommending, the margins earned by both wholesalers and retailers

• the volumes of the products received by individual retailers, usually through setting the parameters used by wholesalers to allocate copies to retailers (copy allocation), and

• the nature of the service provided by wholesalers to retailers, through the system of prescribed performance standards which publishers require of wholesalers as part of the agreements between publishers and wholesalers. These performance standards then influence the terms and conditions on which retailers are supplied.3

Until recently, the newspaper and magazine wholesale distribution market in the UK was dominated by three main companies: Dawson News; Menzies Distribution; and Smiths News.4 Following reports in the press of financial troubles, the OFT announced in September 2009 that Dawson News has now “exited the sector”.5

There has been “significant degree of consolidation” in the newspaper wholesale sector since 1992, the OFT explains:

In 1992, there were 78 wholesalers of newspapers operating in England and Wales. By 2007, this figure had fallen to 15 in England and Wales, with a further seven operating in other parts of the UK, including crown dependencies. Three of the wholesalers are multiple wholesalers, namely Dawson News, Menzies Distribution and Smiths News. They wholesale both newspapers and magazines. The remaining wholesalers are independent wholesalers, which wholesale newspapers only and News Retail Services Limited (NRSL), which is part of News International.

5.9 The vast majority of the consolidation mentioned above is due to the acquisition and/or loss of independent newspaper wholesalers. The number of independent newspaper wholesalers declined from 74 in 1993 to 12 in 2007.6

The tight timescales required in newspaper distribution means that wholesalers are limited in the areas that it is feasible for them to serve from their depots. Economies of scale mean that it is “unlikely” that wholesaler distributors would wish to establish smaller depots that compete to serve areas.7 Wholesalers bid for an exclusive contract to supply a particular publisher's titles in a particular area of the country. There are over 100 of these territories in the UK, with the exact number varying by publisher. These are typically organised around postcode area boundaries and are set by publishers. There are some territories in which one

3 Office of Fair Trading, Newspaper and magazine distribution in the United Kingdom, Introductory overview

paper on the newspaper and magazine supply chains, October 2008, para 2.1 4 OFT, Newspaper and magazine distribution in the United Kingdom: Public consultation on the OFT's proposed

decision on a request for a market investigation reference, October 2008, para 4.33 5 OFT, OFT announces decision on newspaper & magazine distribution sector, 24 September 2009 6 Office of Fair Trading, Newspaper and magazine distribution in the United Kingdom, Introductory overview

paper on the newspaper and magazine supply chains, October 2008, para 5.8-5.9 7 OFT, Newspaper and magazine distribution: Opinion of the Office of Fair Trading - guidance to facilitate self-

assessment under the Competition Act 1998, October 2008, p6

3

wholesaler has been able to obtain the relevant contracts from all newspaper and magazine publishers.8

Some of these exclusive distribution contracts include what is known as “absolute territorial protection” (ATP). ATP is where publishers confer on wholesalers, as part of their distribution agreements, exclusive territories for the distribution of their products from which all competing wholesalers are excluded. This form of restriction on competition is generally presumed illegal. The Competition Act 1998 prohibits agreements which have as their object or effect an appreciable prevention, restriction or distortion of competition within the UK. This is known as a “Chapter I prohibition”. However, the Act does provide for some excluded categories to this prohibition, for example if it can be demonstrated that the agreement has offsetting benefits, such as cost savings which could be passed on to consumers in the form of product innovation or lower cover prices.

From October 1994 there was a National Newspapers Code of Practice which obliged wholesalers to supply all new retailers who agree to minimum weekly purchases of newspapers. This had to be done even if the wholesaler considers that the particular area is already adequately served. Since October 2009, this Code has now lapsed.

2 Distribution agreements: compatibility with competition law 2.1 2002-2005: The repeal of the “Exclusion Order” EU competition law is largely contained in chapter 1 of Part III of the Treaty of the European Community, Articles 81-89. Article 81 prohibits anti-competitive agreements which may have an appreciable effect on trade between Member States and which prevent, restrict or distort competition in the Single Market. Reflecting this in UK law, Chapter I of the Competition Act 1998 Act prohibits cartels and other anti-competitive agreements and sets out what kind of commercial activities constitute anti-competitive behaviour.

In November 2002 EU Member States agreed a package of measures to modernise EU competition law, to replace Regulation 17/62 EEC which had implemented the EC Treaty prohibitions on anti-competitive agreements and conduct.9 As a result of this modernisation, Council Regulation (EC) No 1/2003 was formally agreed on 16 December 2002, and came into force on 1 May 2004.10

The new Regulation required a number of consequential changes in UK regime. The Government issued two consultation documents on how this might be done: in April11 and June12 2003. The second of these looked some of the existing exclusions for agreements from UK competition law and assessed whether they should be removed as part of the package of measures to align UK competition law with the changes in EU law.13

8 Office of Fair Trading, Newspaper and magazine distribution in the United Kingdom, Introductory overview

paper on the newspaper and magazine supply chains, October 2008, para 5.4 9 DTI press notice P/2002/741, 26 November 2002 10 Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition

laid down in Articles 81 and 82 of the Treaty 11 DTI press notice P/2003/221, 1 April 2003 12 DTI press notice P/2003/355, 17 June 2003 13 DTI, UK competition law: Modernisation - a consultation on the Government’s proposals for exclusions and

exemptions from the Competition Act 1998 in light of Regulation 1/2003 EC, June 2003. Responses were invited by 12 August 2003. Vertical agreements are discussed in pp 21-32 of the document.

4

There was an exclusion from competition law for vertical agreements by virtue of the Competition Act 1998 (Land and Vertical Agreements Exclusion) Order SI 2000/310, often referred to as the ‘Exclusion Order’.14 The Exclusion Order automatically excluded all distribution agreements from the application of the Chapter I prohibition of anti-competitive agreements contained in the Competition Act 1998.

Overall, it was thought that it was no longer necessary to retain a UK block exemption for vertical agreements when there was now a block exemption in existence for vertical agreements in EC competition law (BER)15 from which UK agreements which fulfilled certain criteria could benefit.16 The BER creates a 'safe harbour' for vertical agreements that fall within its terms, automatically exempting them from the application of EU competition law that prohibits anti-competitive agreements (Article 81). One of the conditions of the BER is that an agreement must not contain any of five clauses which are black-listed by Article 4. One of the black-listed clauses relates to passive sales, and is defined as follows:

'The exemption provided for in Article 2 shall not apply to vertical agreements which, directly or indirectly, in isolation or in combination with other factors under the control of the parties, have as their object –

[…]

(b) the restriction of the territory into which, or of the customers to whom, the buyer may sell the contract goods or services, except –

- the restriction of active sales into the exclusive territory … allocated by the supplier to another buyer, where such a restriction does not limit sales by the customers of the buyer'.

Publishers, distributors and wholesalers within the newspaper and magazine industry in the UK expressed concern about the repeal of the Exclusion Order, as it meant that their agreements would no longer be excluded automatically from the scope of the Chapter I prohibition. They also expressed concern that agreements may not be protected by the BER because they contained restrictions giving the appointed wholesaler absolute territorial protection (APT).

In March 2004 the Government published a Regulatory Impact Assessment on the effect of repealing the Exclusion Order on vertical agreements in the newspaper distribution industry.17 It examined whether newspaper and magazine distribution agreements would be caught by the BER at EU level, and what effect removing the Exclusion Order (referred to as the verticals exclusion) would have:

Vertical Agreements

[…]

3.6 The possible effects of the repeal of the verticals exclusion on the newspaper and magazine industry require particular consideration. Some publishers, distributors and

14 The OFT publishes guidance on the operation of the Exclusion Order in: Vertical Agreements and Restraints,

OFT 419, March 2000; and, Assessment of Individual Agreements and Conduct, OFT 414, September 1999. 15 Block Exemption for vertical agreements (‘BER’); that is Commission Regulation 2790/1999 on the application

of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices, which came into force on 1st June 2000. It has parallel effect in the UK under section 10 of the Competition Act 1998.

16 OFT press release, OFT announces provisional conclusions on newspaper and magazine distribution 35/05, 23 February 2005

17 DTI, Regulatory impact assessment: giving effect to Council Regulation 1/2003, March 2004 paras 3.4-3.8

5

wholesalers are concerned that the distribution agreements between them may fall outside the BER. There are 8 leading newspaper publishing groups18 and fourteen major19 and several hundred minor magazine publishers20. Almost two thirds of magazines are distributed through three major firms; Market Force, Frontline and COMAG. Three wholesalers dominate wholesaling of national newspapers and consumer magazines: WH Smith News (WHS News), John Menzies and Surridge Dawson. There are approximately 100 independent wholesalers.

3.7 How far these firms are affected by removal of the Verticals exclusion is not clear. The network of distribution agreements between the firms may affect trade between Member States (for example because the barriers to entry are sufficiently high to foreclose the UK market) and therefore may fall under EC law. If so, the Verticals exclusion provides no benefit to these agreements and removal would therefore have no effect. At present, the OFT and the EC Commission have indicated that they cannot exclude the possibility that EC law applies. The Verticals exclusion provides protection only from the Chapter I prohibition of the Competition Act. It is also possible that several larger firms (and smaller firms in niche markets) may be dominant in certain markets21 and their supply arrangements could be considered therefore under the Chapter II prohibition. Equally, the sector has been considered by the Monopolies and Mergers Commission in the past and could be subject to further consideration under the Market Investigation powers in the Enterprise Act. The distribution agreements could therefore be considered in this context. However, the removal of the Verticals exclusion does enable the industry distribution agreements to be challenged by third parties in the courts under the Chapter I prohibition.

3.8 Opening up the agreements to scrutiny does not necessarily result in the agreements becoming void under competition law. The agreements may fulfil the conditions for exemption under the Competition Act or under Article 81. If so, the agreements will be lawful without prior notification after May 1st 2004. The industry has already begun discussions with the OFT aimed at determining whether the sector distribution agreements meet the conditions for exemption. Any amendments, which may be necessary to ensure that they are fully competition compliant, could be made during the renewal.22

As explained in section 3.8 of this Impact Assessment above, there remains an exemption for anti-competitive agreements against prohibition in Competition Act 1998 if they meet all the conditions in section 9 of the Act:

(1) An agreement is exempt from the Chapter I prohibition if it—

(a) contributes to—

(i) improving production or distribution, or

(ii) promoting technical or economic progress,

while allowing consumers a fair share of the resulting benefit; and 18 News International, MGN, Daily Mail & General Trust, United Newspapers, Telegraph, Guardian, Financial

Times and Independent 19 IPC, EMAP, Bauer, BBC, Future, National Magazines, Haymarket, DC Thompson, Northern & Shell, Attic

Futura, Hello, Dennis, G&J and Conde Nast 20 The Periodical Publishers Association has almost 300 members 21 News International and WH Smith News have shares of the overall publishing and wholesaling markets

respectively in excess of 30% (Source: “The Impact of Proposed National Distribution Developments on the UK Magazine and National Newspaper Markets” - Professor Paul Dobson, Loughborough University, August 2000).

22 DTI, Regulatory impact assessment: giving effect to Council Regulation 1/2003, March 2004 paras 3.4-3.8

6

(b) does not—

(i) impose on the undertakings concerned restrictions which are not indispensable to the attainment of those objectives; or

(ii) afford the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the products in question.

The Government decided to withdraw the Exclusion Order.23 It was revoked by the Competition Act 1998 (Land Agreements Exclusion and Revocation) Order SI 2004/1260. It was presented to the House on 30 April 2004 and came into force on 1 May 2005. In the Standing Committee on Delegated Legislation, the Parliamentary Under-Secretary of State for Trade and Industry (Gerry Sutcliffe) set out the reason for the delaying the implementation of the revocation by one year:

Our conclusion is that the exclusion has outlived its usefulness. We believe that the framework established by the EC block exemption and section 9 of the 1998 Act, allowing countervailing benefits to be taken into account when the lawfulness of restrictions on vertical agreements is considered, should be sufficient. However, to ensure that businesses will have time to adjust and, if necessary, seek advice from the OFT on the implications for any agreements about which there is concern, we propose that repeal should not come into force for a year.24

2.2 2005: The OFT review of compatibility with competition law Having the removed the Exclusion Order there was uncertainty about the legality of the exclusive distribution agreements between newspaper and magazine publishers and wholesalers. This uncertainty prompted the OFT, in early 2005, to begin an assessment of the compatibility of such agreements with competition law.

On 23 February 2005 the OFT published its provisional conclusions saying that the current agreements for newspaper distribution were compatible with the Competition Act, but not for magazines:

The OFT has provisionally concluded that current distribution agreements for newspapers are likely to be compatible with the Competition Act. The OFT has also provisionally concluded that, without ‘absolute territorial protection’ restrictions, distribution agreements for magazines would be likely to be compatible with the Competition Act … ‘Absolute territorial protection’ prevents wholesalers from meeting unsolicited requests to supply retailers outside their allocated territories. The OFT has found that this restriction is likely to be anti-competitive and is unlikely to be necessary for the efficient functioning of the distribution system for magazines.25

Following this provisional conclusion, there was concern by some smaller newsagents that the breaking up of absolute territorial protection (ATP) would mean that distributors would no longer find it economical to supply them with magazines. There was also concern that larger supermarkets would then be able to exert more control over the supply chain.26

23 DTI, Government response to the consultations on giving effect to Regulation 1/2003 and aligning the

Competition Act 1998 including exclusions and exemptions, March 2004 p 1 24 First Standing Committee on Delegated Legislation, 26 April 2004 cc 9-10 25 OFT press notice 35/05, OFT announces provisional conclusions on newspaper and magazine distribution,

23 February 2005 26 For example, “Magazine publishers to be warned of supermarkets’ influence”, Financial Times, 2 May 2005;

“Magazine ruling by OFT expected to hit small shops”, Times, 16 May 2005.

7

Initially it was anticipated that the OFT’s final opinion would be published by 1 May 2005, but it was not until 19 May that a draft advisory opinion was released for consultation.27 As this consultation document explained, “although the OFT is not under any obligation to consult on opinions, in the interests of transparency, and in particular given the high level of public interest in this matter, the OFT considers it appropriate to solicit the views of interested parties on the guidance contained in the draft opinion.”28 A summary of the draft opinion was given in a press notice:

Under existing distribution agreements, newspapers and magazines are distributed to retailers through a system of exclusive territories, reinforced by absolute territorial protection. This means that a retailer must use the wholesaler allocated to its area and is prevented from seeking a better deal elsewhere. Absolute territorial protection would normally be banned under competition law.

In the case of newspaper agreements, the OFT is nevertheless satisfied that the restrictions are necessary to ensure the benefits that flow from the agreements. Newspaper distribution has special characteristics, in particular the very narrow overnight time-frame for distribution and the newspaper code of practice (the Code). The Code obliges wholesalers to supply all retailers within their exclusive territory meeting the minimum supply level. The OFT sees this obligation – which ensures that even small and remote retailers can stock a full range of newspapers – as one of the key benefits justifying the current system for newspaper distribution … The Code does not extend to magazines.

In the case of magazine agreements the OFT believes that territorial exclusivity but not the further restriction of absolute territorial protection is likely to satisfy the criteria for exemption. Retailers should be free to seek better deals than those offered by the appointed wholesaler for their territory. Absolute territorial protection prevents alternative, and potentially more efficient, arrangements for magazine distribution emerging.

Where substantial efficiencies arise from distributing magazines jointly with newspapers, as will often be the case, joint distribution is likely to continue naturally, unforced by anti-competitive restriction.29

In the draft opinion the OFT argued that there were two important differences in the distribution of magazines to that of newspapers:

The OFT … notes that the legal obligations imposed by the Code, and consequently the benefits of the Minimum Entry Level (“MEL”) obligation, do not extend to magazines, i.e. the wholesalers are not required to apply the Code’s provisions to magazines, as this is beyond the statutory undertakings. As long as the MEL obligation applies to newspapers, and given that it is likely magazines will continue naturally to be delivered jointly with newspapers to a large extent, then magazines are likely to continue to be made available through newspaper wholesalers even absent an equivalent to the MEL obligation. This means that, unlike the situation for newspapers, the Code does not provide a justification for absolute territorial protection.

Second, the OFT notes that the distribution of magazines does not need to take place in as tight a time-frame as it does for newspapers, since most magazines appear weekly or monthly and are less ‘perishable’, due to their content and reading

27 OFT, Newspaper and magazine distribution: public consultation on draft opinion May 2005 28 OFT, Newspaper and magazine distribution Public consultation on draft opinion of the Office of Fair Trading,

May 2005, p 3 29 OFT press notice 88/05, Newspaper agreements likely to get green light, 19 May 2005

8

patterns.30 This means that the economies of network density to be gained through having exclusive territories are less crucial to a viable distribution network for magazines than they are for newspapers. Indeed, there may even be some potential for magazines to be delivered alongside other items, such as milk or bread. These alternatives would only arise if they were more efficient. As such, any competition across the boundaries of exclusive territories for magazines, due to the removal of absolute territorial protection, is less likely to result in higher overall costs.

In the OFT’s view, therefore, absolute territorial protection for magazines is not indispensable for the attainment of the benefits identified above. In addition, as highlighted in the paragraph above, it may prevent alternative, and potentially more efficient, distribution methods arising.31

Although it was expected that the OFT would publish a final opinion on newspaper distribution in late 2005, it did not. In October 2005 James Brokenshire MP raised the issue in a debate in Westminster Hall;32 the Member argued that the distinction drawn by the OFT between the supply of newspapers and that of magazines was deeply flawed:

The distinction between newspapers and magazines was made [by the OFT] on the ground of apparent special features attaching to newspapers, stated as being their highly perishable nature, their very narrow production time frame and the presence of an industry code of practice governing the relationship between newspaper wholesalers and retailers, underpinned by statutory undertakings given by those wholesalers. That approach prompted stringent criticism at all levels of the industry. It was suggested that the OFT had failed properly to understand the supply arrangements, and that magazines and newspapers were two sides of the same market segment, each competing for the same advertising space, for the same editorial talent and for the same readership and circulation.

A more detailed analysis suggests that the three differentiating issues highlighted by the OFT do not appear to be as clear cut as might be suggested. Several magazines, particularly trade magazines and magazines that focus on current affairs, are very perishable and go out of date extremely quickly because the news that they contain is very current. The Economist, for example, describes itself as a newspaper but can be perceived on many levels as a magazine in which timing is critical. …

Some newspapers, particularly local or regional ones, are also weekly, so do the same issues apply to them? More fundamentally, I struggle to see where a newspaper ends and a magazine begins, particularly when increasingly most weekend newspapers can generate continuing sales only by creating a strong magazine feature … [and that] the fundamentals of building the circulation of a magazine or newspaper, on a sale-or-return basis, incur high intrinsic costs on both sides of the market.33

In response the Parliamentary Under-Secretary of State for Trade and Industry (Gerry Sutcliffe) set out what he as Minister would do, within the parameters of the law regarding the independence of the competition authorities:

30 The OFT accepts that some magazines are more time sensitive than others. For example, news magazines

such as The Economist (which actually refers to itself as a newspaper) may include coverage that reflects current events as they happen and be subject to extremely tight publication deadlines. It remains the case, however, that the window during which most daily newspapers need to be delivered to retailers is considerably narrower than that for most magazines.

31 OFT, Newspaper and magazine distribution Public consultation on draft opinion of the Office of Fair Trading, May 2005, para 3.30-32

32 HC Deb 26 October 2005 cc 125-132WH 33 HC Deb 26 October 2005 cc 125-6WH

9

We want to develop a well founded principle. The United Kingdom has one of the best competition regimes in the world and the development of the OFT will be dealt with by the incoming team. It is right and proper that we use the Competition Commission as the route through that and do not have Ministers becoming involved in matters about which they do not have the full information, although I am not saying that they should not have a view or an opportunity to express the concern of their colleagues … The formal route must be through the OFT, but I assure the hon. Gentleman that I shall do everything in my power to make sure that a decision is made sooner rather than later and that maximum discussion will take place among people on both sides of the argument.34

2.3 2006: OFT new draft opinion on compatibility with competition law

On 13 March 2006 the OFT announced that it would issue a fresh draft opinion for consultation:

The OFT will issue a fresh draft Opinion for consultation on the compatibility of newspaper and magazine distribution agreements with competition law. This decision follows an internal review, requested by senior management in the light of consultation responses received following the provisional conclusions set out in the draft Opinion published last year.

The OFT will publish its new draft Opinion, setting out its provisional views and the reasons for them, by the end of May 2006. At that point, all interested parties will have the opportunity to submit their views to the case team before the OFT proceeds to its final Opinion, which it aims to publish by the autumn. Since all interested parties will be given the opportunity to comment upon the draft Opinion, the OFT will not respond individually to submissions or representations made before the publication of the draft Opinion.35

The new draft opinion was published on 31 May 2006. A press notice summarised the OFT’s findings as follows. It also announced a new review of the Newspaper Code of Practice. The OFT said that a final opinion was likely to be published in the first quarter of 2007:

Current arrangements for distributing both newspapers and magazines that award local monopolies to wholesalers may harm consumers and be difficult to justify in terms of competition law, said John Fingleton, OFT Chief Executive today, at the publication of the OFT's draft Opinion on newspaper and magazine distribution agreements … The draft Opinion sets out a framework for assessing whether newspaper and magazine agreements comply with competition law. When finalised following consultation, the Opinion will provide guidance to help publishers and distributors assess their specific agreements …

Many current agreements involve each publisher awarding wholesalers an exclusive territory in which to distribute their titles to retailers. The wholesaler is prevented from selling to retailers located outside of its exclusive territory. This means that retailers cannot seek a better deal from rival wholesalers and the wholesaler is protected from competition. Restrictions on competition of this kind are illegal, unless it can be demonstrated that they have offsetting benefits, such as cost savings, that could be passed on to consumers - for example, in the form of product innovation or lower cover prices.

In its consultation with the industry to date, the OFT has examined some evidence that the current system encourages wholesaler inefficiency and is not working well for

34 HC Deb 26 October 2005 c 132WH

10

customers. For example, the OFT is aware of repeated complaints from retailers of excessive wholesaler carriage charges and late or insufficient deliveries. Many newspapers and magazines are wasted, with over 1.7 million national newspapers unsold each day, and at least one million magazines returned. Furthermore, in over half of all distribution territories, there is only one bidder for the distribution contract, suggesting that competition for the market, as well as competition within the market, is limited …

The OFT recognises the potential for conflict between the draft Opinion and aspects of the Newspaper Code. It is therefore launching a fresh review of the Code to establish whether the newspaper industry undertakings are still appropriate, and will advise the Secretary of State accordingly … It will approach key stakeholders directly as part of this process. The OFT's final Opinion will be published once the Code review has concluded. This is likely to be by first quarter 2007.36

2.4 2007: delay after request for referral of the market to the Competition Commission

In March 2007 the OFT announced that it had received a request from the National Federation of Retail Newsagents (NFRN) to consider whether to refer the market for the supply of newspapers and magazines in the UK to the Competition Commission (CC) for a market investigation.37 An accompanying press notice explained that considering this request would impact on the timing of being able to issue its final opinion and on the review of the Code of Practice:

This request has to be addressed in addition to the OFT's current work on the draft Opinion and the review of the Code of Practice. While these fall to be examined under separate and distinct legal frameworks, the OFT recognises the close links between these three pieces of work. The need to examine the NFRN's request properly, in tandem with the existing processes, will impact on the timing of the Code review and the Opinion. While the OFT is aware of the need for expediency, it is essential to ensure consistency between these pieces of work.38

2.5 2008: OFT issues final opinion The OFT therefore had three pieces of related work into the market for the supply of newspapers and magazines: producing a final opinion on the compatibility of Absolute Territorial Protection (ATP) with competition law; the review of the Newspaper Code of Practice; and the decision on whether to refer the market to the competition commission. The work produced in relation to the latter two of these is dealt with in subsequent sections in this note.

In October 2008 the OFT issued its final ‘Opinion’ about how the current practices of publishers and distributors are compatible or not, with the Competition Act 1998. The OFT’s full Opinion is available online: OFT, Newspaper and magazine distribution: Opinion of the Office of Fair Trading - guidance to facilitate self-assessment under the Competition Act 1998, October 2008.

35 OFT press notice, OFT to issue framework Opinion on newspaper and magazine agreements, 13 March 2006 36 OFT press notice, Competition concerns about newspaper and magazine distribution agreements, 94/06, 31

May 2006 37 OFT, OFT asked to consider referring the market for the supply of newspapers and magazines to the

Competition Commission, 8 March 2007 38 Ibid

11

The OFT noted that “almost all” agreements contained restrictions granting ATP to wholesalers. As a consequence of this the OFT said that such agreements would fall outside the scope of the EC Verticals Block Exemption (BER).39 The OFT therefore provided an assessment only against compatibility of the agreements with the exemption conditions given in section 9 of the Competition Act 1998. The OFT’s Opinion states that section 9 effectively provides four conditions to be met for the exemption from competition law relating to anti-competitive agreements to be permissible. Condition one is that the agreement

contributes to—

(i) improving production or distribution, or

(ii) promoting technical or economic progress,

The second condition is that the agreement:

….allow[s] consumers a fair share of the resulting benefit; and

The third exemption condition is that the agreement does not:

impose on the undertakings concerned restrictions which are not indispensable to the attainment of those objectives; or

The fourth exemption, that the agreement does not:

afford the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the products in question.

Overall the OFT concluded that newspaper distribution agreements may meet the exemption conditions, but that magazine distribution agreements may not:

As a whole, therefore, for the supply of newspapers, there are factors that may demonstrate that the Agreements benefit from exemption under the CA98. For the supply of magazines, however, these factors appear less likely to apply such that it may be difficult to demonstrate that magazine Agreements benefit from exemption under the CA98. The parties will need to consider whether the arguments discussed in this Opinion apply in relation to their Agreements, and the evidence that they would be able to present if called upon to support their judgement.40

The OFT expects that publishers and distributors will self-assess their agreements with wholesalers in light of this Opinion, which it believes will address competition concerns:

Where ATP is not compatible with the Competition Act 1998, one would expect parties to self-assess correctly in line with the OFT's guidance and to resolve the issues arising from the agreements in the short term. In such circumstances, the feature giving rise to competition concerns would not persist.41

The first condition: contributing to improving production or distribution, or promoting technical or economic progress In relation newspaper distribution agreements and the first exemption condition, the OFT found that ATP could provide efficiency benefits: 39 OFT, Newspaper and magazine distribution: Opinion of the Office of Fair Trading - guidance to facilitate self-

assessment under the Competition Act 1998, October 2008, para 4.28 40 OFT, Newspaper and magazine distribution in the United Kingdom: Public consultation on the OFT's proposed

decision on a request for a market investigation reference, October 2008, p12 41 Ibid, p8

12

In relation to the first exemption condition, that is that the agreement contributes to improving production or distribution, or promoting technical or economic progress, this Opinion sets out a number of factors that may demonstrate that ATP in the Agreements generates potential objective efficiency gains in relation to the newspaper supply chain. The main potential efficiency benefits discussed are that ATP:

• may make 'competition for the market' more effective, enabling publishers to achieve reduced margins and improved service quality from wholesalers and providing a 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.42

In relation to magazine distribution agreements, the OFT concluded that it was “more difficult to demonstrate that magazine agreements satisfy the first exemption condition”:

The applicability of these factors to the Agreements between magazine publishers / distributors and wholesalers is also discussed. It would appear likely that, in relation to the first exemption condition, the potential objective efficiency gains regarding ATP in Agreements relating to magazine distribution are not as significant as for newspaper distribution as there is greater scope for 'competition in the market' to emerge in the absence of ATP. In addition, there is less likely to be a need for an obligation to supply since consumers are likely to be able to purchase from a range of retail outlets. Consequently, it may be difficult to demonstrate that magazine Agreements satisfy the first exemption condition.43

The second condition: giving consumers a fair share of the benefits resulting from the agreement The second exemption condition requires that consumers are allowed a fair share of the benefits resulting from the agreement. In relation to newspapers, the OFT said whether this test was met, would depend on two “key considerations”:

• 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 - this will depend on the intensity of competition between publishers. In addition, 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 (which gives publishers an incentive to hold down prices because of the impact this has on circulation volumes which in turn affects advertising revenues) and the limited ability of newspaper purchasers to switch between retail outlets (which gives retailers limited incentives to cut prices in order to induce purchasers to switch to their outlet), and

• whether consumers benefit from the obligation to supply in publisher-wholesaler contracts - this is likely 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

42 OFT, Newspaper and magazine distribution: Opinion of the Office of Fair Trading - guidance to facilitate self-

assessment under the Competition Act 1998, October 2008, p8 43 Ibid

13

may increase advertising demand, which may also enable publishers to reduce cover prices.44

It concluded that therefore there could be several factors which demonstrate that the second exemption condition is met in relation to newspapers:

Overall therefore, it would appear that for newspapers there are several factors that may demonstrate that consumers receive a fair share of the benefits which, in the event that the first exemption condition is satisfied, result from the newspaper Agreements.45

The OFT found magazine agreements could have some benefit to consumers:

In relation to the Agreements between magazine publishers / distributors and wholesalers and pass on to final consumers, it would appear that magazine publishers are likely to have incentives to pass on any benefits they receive in terms of reduced costs to consumers in the form of lower prices and/or increased quality, for similar reasons to those set out above in relation to newspapers. However, these considerations should be assessed by reference to the fact that there is greater potential for 'competition in the market', which is restricted by ATP, in relation to magazines than there is for newspapers.46

It concluded however, that these benefits are “weaker” in relation to magazine than for newspapers:

In relation to magazine Agreements, however, it would appear that there are likely to be fewer objective efficiency gains regarding ATP for magazines than for newspapers, and that the incentives for publishers to pass a fair share of any such benefits on to consumers may be weaker.47

The third condition: no restrictions which are not indispensable to the attainment of the efficiencies created by the agreement The OFT states that whilst this condition is likely to be satisfied for newspapers, it may not be so for magazines:

Newspapers - where there are limits to the scope for competition 'in the market', the third exemption condition is likely to be satisfied provided that efficiency of distribution is increased by exclusive territories, and ATP makes competition for these territories more effective. In addition, this condition is likely to be met if, in the absence of ATP, it would be impossible, or significantly less likely to be possible, to include an obligation to supply.

Magazines - since the scope for competition in the market is likely to be more significant, it may be difficult to demonstrate that this condition is satisfied, since efficiencies in distribution may be achieved through competition in the market.48

The fourth condition: no possibility of eliminating competition in respect of the product in question The OFT found evidence that this condition is met both in relation to newspaper and magazine agreements: 44 Ibid, p9 45 OFT, Newspaper and magazine distribution: Opinion of the Office of Fair Trading - guidance to facilitate self-

assessment under the Competition Act 1998, October 2008, p9 46 Ibid 47 Ibid 48 Ibid, p11

14

this Opinion provides guidance that there are factors that may demonstrate that this condition is met in relation to both newspaper and magazine Agreements, notwithstanding the impact of ATP on the ability of retailers to switch between wholesalers, and given the particular characteristics of these supply chains. These factors include the extent to which competition would remain at each level of the supply chain, with ATP.49

3 Review of the Newspaper Code of Practice In 1993 the Monopolies and Mergers Commission (MMC) reported on the supply of national newspapers in England and Wales, including the system whereby publishers awarded exclusive geographical distribution territories to wholesalers.50 (The Competition Commission assumed the MMC’s responsibilities in April 1999.) The MMC report concluded that operation of this system was not against the public interest but made two adverse findings in relation to the practices of certain wholesalers mainly concerning refusal to supply retailers.51 Some wholesalers were refusing to supply new retail outlets if they considered that an area was already adequately served.

The industry was invited to propose its own remedies to the MMC’s adverse findings. As a consequence a National Newspapers Code of Practice became effective on 1 October 1994.52 To address the competition concerns, the Code requires wholesalers to supply all new retailers who agreed to minimum weekly purchases of newspapers:

Minimum entry level

In order to ensure that new retail accounts are provided with a wholesale service that meets the minimum commercial and economic requirements of the wholesaler, the following conditions will apply:

2.1 Applicants shall agree to a guaranteed minimum net weekly charge which shall be set at the Minimum Entry Level.

2.2 The Minimum Entry Level for each wholesale area shall be published by the wholesaler and shall be 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 is capable of supplying to the applicant shall be included in the calculation. The initial calculation shall have effect for the first two years following commencement of the Code and thereafter will be subject to annual review.

2.3 Where more than one wholesaler serves an area then such individually determined minimum entry level values shall be afforded to all applicants.

2.4 Wholesalers shall have the discretion to supply below this Minimum Entry Level. Provided that the new retailer has sustained an order in excess of the Minimum Entry Level for at least six months, the wholesaler will extend Sale or Return facilities where

49 OFT, Newspaper and magazine distribution: Opinion of the Office of Fair Trading - guidance to facilitate self-

assessment under the Competition Act 1998, October 2008, p12 50 Monopolies and Mergers Commission, The supply of national newspapers, Cm 2422 December 1993 51 Office of Fair Trading, OFT review of undertakings given by newspaper wholesalers: a consultation paper,

January 2002 p 5. 52 OFT, National newspapers: A review of undertakings relating to the supply of national newspapers in England

and Wales (the Code of Practice), October 2008

15

they are made available and approved by the publisher or distributor, subject to the guaranteed minimum net weekly charge being maintained.53

By virtue of section 88 of the Fair Trading Act 1973 the OFT has a statutory duty to keep such undertakings under review. The OFT has previously reviewed the Code on two occasions, in 1997 and 2002.54 On both occasions, it recommended that the Code should remain in place.55

In May 2006 the OFT announced that it would conduct another review of the Code to establish whether the newspaper industry undertakings were still appropriate.56 The results of this review were published in October 2008.57 The OFT advised the Secretary of State that the Code was no longer required:

The review has found changes in the market since the Code was introduced, and as a result the OFT considers that greater commercial incentives to supply new retail outlets now exist. The OFT has therefore advised the Secretary of State for Business Enterprise and Regulatory Reform, the ultimate decision-maker regarding the review of the Code, that wholesalers should be released from the undertakings underpinning the Code.58

The OFT found that there had been “numerous significant changes of circumstances” since the Code was introduced:

Since the MMC reported, there have been numerous significant changes of circumstances, affecting the publishing, wholesaling and retailing of national newspapers. The OFT considers that three of the changes have impacted on the continued appropriateness of the Code in remedying or preventing the specific adverse effects specified by the MMC. These are the:

• changes in the level of Carriage Service Charges (CSCs)

• changes in the role of publishers in the newspaper supply chain, in particular their increased role in specifying and monitoring the performance of wholesalers regarding the provision of services to retailers and in facilitating supply to new retail outlets directly, and

• changes in the composition and relative prominence of different types of retail outlets, particularly the growth of the significance of multiple retailers in newspaper retailing.59

On the same day the OFT published this recommendation, the government invited views on the OFT's advice to be submitted by 14 January 2009. On 17 April 2009, the Secretary of 53 Monopolies and Mergers Commission, The Supply of National Newspapers: a report on the supply of national

newspapers in England and Wales, Cm 2422, 9 December 1993 54 OFT press notice, Newspaper supply should be liberalised OFT consults on recommendations, 12 December

2002 55 OFT, National newspapers: A review of undertakings relating to the supply of national newspapers in England

and Wales (the Code of Practice), October 2008, p5 56 OFT press notice, Competition concerns about newspaper and magazine distribution agreements, 94/06, 31

May 2006 57 OFT, National newspapers: A review of undertakings relating to the supply of national newspapers in England

and Wales (the Code of Practice), October 2008 58 OFT press release, OFT makes announcements on newspaper and magazine distribution sector, 22 October

2008 59 OFT, National newspapers: A review of undertakings relating to the supply of national newspapers in England

and Wales (the Code of Practice), October 2008, p7

16

State for Business and Enterprise announced that he agreed with the OFT’s recommendation that newspaper wholesalers should no longer have to conform to the statutory code of practice requiring them to supply all new retail outlets. A Department for Business, Enterprise and Regulatory Reform press release summarises the reasoning and states that release from the Code will apply from October 2009:

The decision was taken following a review carried out by the OFT and an open consultation by BERR.

Wholesalers had been obliged to operate in accordance with an agreed code of practice governing distribution of national newspapers in England and Wales. However, changes in circumstances in the market mean the problem the code of practice was designed to address - refusal to supply new retail outlets - is no longer a concern and not likely to re-emerge.

Competition Minister Gareth Thomas said:

"The responses we received to our consultation on this matter indicate widespread agreement with the OFT's advice. We are satisfied it is right to remove these regulatory requirements and leave newspaper distribution arrangements as a commercial matter for the market."

There will be a six month period for businesses in the industry to review and amend contractual agreements before the undertakings are released with effect from 20 October 2009.60

The full, official decision of the Secretary of State is available online: Decision of the Secretary of State for Business, Enterprise and Regulatory Reform on release of undertakings relating to supply of national newspapers in England and Wales

4 Decision about a reference to the Competition Commission 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 a market investigation reference (MIR) to the Competition Commission (CC) were met.61

Under section 131 of the Enterprise Act 2002, the OFT may make a market investigation reference 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 a part of the UK. The features of the market that the NFRN asked the OFT to investigate were:

• the two-sided nature of the markets

• the existence of absolute territorial protection

• the way in which publishers award contracts to wholesalers

• the use of cover prices

60 BERR press release, Regulation to be removed from newspaper distribution arrangements, 20 April 2009 61 OFT, Newspaper and magazine distribution in the United Kingdom: Public consultation on the OFT's proposed

decision on a request for a market investigation reference, October 2008, p4

17

• the sale or return process

• the use of carriage service charges

• cross-subsidisation of the distribution of newspapers by the distribution of magazines, and

• poor terms of supply to retailers.62

In October 2008, the OFT concluded that the conditions for making a reference to the CC were met. This was in relation to three particular features of the newspaper and magazine distribution market: absolute territorial protection agreements; magazine allocation to retailers by wholesalers; and cover price of newspapers and magazines:

• ATP [absolute territorial protection] 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 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.63

However, the OFT has discretion about whether to actually make the reference or not. In a provisional decision the OFT stated that it was minded not to make a reference. This was explained in the OFT’s public consultation in October 2008 on its decision not to make a referral to the Competition:

Taking account of the relevant factors outlined in the OFT's guidance for assessing whether these criteria are met,64

the OFT is minded to decide 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.

In summary:

• In relation to ATP, it is expected that publishers and distributors will self-assess their agreements with wholesalers following the guidance set out in the OFT's Opinion. From the Opinion it would appear that there are factors that may

62 OFT Newspaper and magazine distribution in the United Kingdom: Public consultation on the OFT's proposed

decision on a request for a market investigation reference, October 2008, para 2.2 63 Ibid, p6 64 OFT, Market investigation references: Guidance about the making of references under Part 4 of the Enterprise

Act, March 2006

18

demonstrate that ATP in newspaper agreements satisfies the exemption conditions, whereas it may be difficult to demonstrate that magazine agreements satisfy the exemption conditions. Parties need to assess their agreements in light of the guidance set out in the Opinion. Where ATP is not compatible with the Competition Act 1998, one would expect parties to self-assess correctly in line with the OFT's guidance and to resolve the issues arising from the agreements in the short term. In such circumstances, the feature giving rise to competition concerns would not persist.

• In relation to cover prices, the OFT is minded to decide that a reference would not be proportionate due to the strong offsetting customer benefits from cover prices identified that the OFT considers exceed the likely detriment from the adverse effect on competition identified. In particular, the OFT is minded to find that publisher-set cover prices would, in general, be significantly lower than retailer-set prices.

• 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 is minded to find that it is at least possible that a period of flux will result from the parties' self-assessment following the guidance issued in the OFT's Opinion. The OFT is minded to find that the process of self-assessment and the developments in the sector that may result for a period of time would make it difficult for the CC to gather sufficient evidence at this point in time to enable it properly to assess the state of the markets. This, in turn, would make it difficult, at least in the short term, to assess the impact and effectiveness of any possible remedies in the case of magazine copy allocation and publisher-led magazine distribution in general.65

A final decision by the OFT not to make a reference to the Competition Commission (CC) was published in September 2009.66 One of the reasons for the OFT deciding not to make a reference was the possibility that consumer benefits would come about through industry parties using the self-assessment guidance published by the OFT:

Taking account of the relevant factors outlined in the OFT's guidance for assessing whether these criteria are met, 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:

• In relation to ATP, the OFT understands that publishers and distributors have substantially completed the initial self-assessment of their wholesale agreements. As a result the OFT understands that:

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

65 OFT Newspaper and magazine distribution in the United Kingdom: Public consultation on the OFT's proposed

decision on a request for a market investigation reference, October 2008, p9 66 OFT, Newspaper and magazine distribution in the United Kingdom: Decision not to make a market

investigation reference to the Competition Commission, 24 September 2009

19

magazine distributors have removed, or intend to remove, the bans on passive sales, and therefore ATP, from their distribution agreements with wholesalers.67

Another reason was that since Dawson News had exited the sector, many publishers had reviewed and renewed their distribution agreements. Given this change, the OFT felt 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:

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. 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 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. 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.68

The OFT made clear however that it has not ruled out the possibility of a further review of the sector in two years if it could bring further benefits for consumers:

Finally, as part of the OFT's function under section 5 of the EA02 [Enterprise Act 2002] 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. 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.

67 OFT, Newspaper and magazine distribution in the United Kingdom: Decision not to make a market

investigation reference to the Competition Commission, 24 September 2009, p9-10 68 OFT, Newspaper and magazine distribution in the United Kingdom: Decision not to make a market

investigation reference to the Competition Commission, 24 September 2009, p10-11

20

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.69

5 Newsagents’ concerns 5.1 Lapse of the Newspaper Code of Practice The decision to let the Newspaper Code of Practice lapse is reported to be of concern to small newsagents who fear that newsagents in more remote locations may be unable to secure a distribution contract at a competitive price:

The decision to let the 1994 newspaper code of practice lapse in October was greeted with dismay by small newsagents, who fear the change would leave them disadvantaged compared with large publishers and wholesalers.

"Before the code there was a stifled quantity of retailers, and when it came in an extra 10,000 opened up in a handful of years," said Stefan Wojciechowski, head of news and magazines at the National Federation of Retail Newsagents, which represents small, independent newsagents.

"This is a highly monopolistic supply chain and we will have to see whether there will now be a contraction in the number of outlets."

A representative for the business department said that the market had changed so much that the rules were no longer needed: "There are now strong commercial incentives for wholesalers to continue delivering."70

5.2 Contraction in the distribution market The OFT confirmed in September 2009 that Dawson News had exited the newspaper and magazine distribution sector.71 As well as the issues surrounding release from the Code, small newsagents are further concerned that with Dawson News leaving the market, their already limited choice of wholesaler will be contracted even more. A press release from the Association of News Retailing in April 2009 explained the concerns:

ANR Managing Director John Lennon said: “Without a statutory obligation to supply, wholesalers may be tempted to price ‘hard to serve’ retailers out of the market by increasing their carriage charges to unacceptable levels. We are working to ensure this doesn’t happen so that retailers can continue to operate even without protection from the Code.

“Our concerns are compounded by recent contract changes that we believe will ultimately see newspaper and magazine wholesaler Dawson News exiting the market, giving the remaining two wholesalers, Smiths News and Menzies Distribution, unprecedented supply chain power.

“The OFT has taken several years to make recommendations or the news supply chain, but all the while the wholesale market has been consolidating to the point where we are heading towards a virtual duopoly. This makes this week’s decision to open up

69 OFT, Newspaper and magazine distribution in the United Kingdom: Decision not to make a market

investigation reference to the Competition Commission, 24 September 2009, p12 70 “Reins on newspaper distribution to be released” Financial Times, 21 April 2009 71 OFT, OFT announces decision on newspaper & magazine distribution sector, 24 September 2009

21

the market to passive selling irrelevant to most retailers who will not be able to receive magazines from an alternative source because the wholesalers who could have provided this service are now out of the market.”72

An EDM was tabled by Simon Hughes MP in May 2009 (EDM no.1424) about newsagents concerns caused by contraction in the distribution market. It currently has 95 signatures:

NEWSPAPER AND MAGAZINE DISTRIBUTION MARKET

05.05.2009 Hughes, Simon

That this House notes that newsagents across the country, as represented by the National Federation of Retail Newsagents and the Association of News Retailers, have expressed serious concern about the recent consolidation of the newspaper and magazine distribution market and the likely emergence of two regional monopolies; values the important role of independent newsagents and is concerned that these changes in the market may force many to close, restricting consumer choice and harming local communities, as well as causing up to 2,800 job losses in news distribution branches across the UK; and calls on the Secretary of State for Business, Enterprise and Regulatory Reform to request that the Office of Fair Trading looks urgently at these recent developments in the distribution market and takes action to safeguard competition for the benefit of consumers, independent newsagents and distribution employees alike.

Following the OFT’s final decision not to refer the market to the CC, the National Federation of Retail Newsagents (NFRN) published an “analysis” of the OFT’s decision.73 The NFRN expressed disappointment that the OFT had not considered the issue of carriage charges charged by distributors in making its decision, which the NFRN calls the “the most serious and anti-competitive issue of all”. The NFRN makes clear that it does not believe that voluntary self-regulation in the sector will be effective and calls for a full market investigation by the CC:

In an industry that features mega-powerful multi-national publishers and distributors, at the top; a wholesale duopoly in the middle and “Mr Patel”, independent corner-shop newsagent at the bottom; it does not take a genius to work out that toothless voluntary self regulation is not likely to be the best solution to deliver supply chain efficiency and eliminate exploitation.

The NFRN has consistently sought a legally underpinned Code as the most obvious means of effectively self-regulating the news industry. However, after thwarting this by refusing to make a referral to the Competition Commission, it is difficult to understand now why the OFT thinks that a voluntary solution offers any kind of satisfactory outcome. The NFRN is calling for a full market investigation by the Competition Commission simply because it is trying to maintain consumer access to a diverse and free press through a network of 30,000 small community retailers across the UK. In today’s tough competitive environment that in itself is no small challenge, now made all the more difficult after the OFT’s decision not to refer the sector to the Competition Commission.74

72 Association of News Retailing press release, ANR Pledges to Support News Retailers Following Removal of

Code, 21 April 2009 73 NFRN, Analysis on the Oft’s Refusal to Refer the News Industry, 28 September 2009 74 NFRN, Analysis on the Oft’s Refusal to Refer the News Industry, 28 September 2009

22

6 Key documents

• Office of Fair Trading, Newspaper and magazine distribution in the United Kingdom, Introductory overview paper on the newspaper and magazine supply chains, October 2008

• Office of Fair Trading, Newspaper and magazine distribution: Opinion of the Office of Fair Trading - guidance to facilitate self-assessment under the Competition Act 1998, October 2008

• Office of Fair Trading, National newspapers: A review of undertakings relating to the supply of national newspapers in England and Wales (the Code of Practice), October 2008

• Secretary of State for Business and Enterprise, Decision of the Secretary of State for Business, Enterprise and Regulatory Reform on release of undertakings relating to supply of national newspapers in England and Wales, April 2009

• Office of Fair Trading, Newspaper and magazine distribution in the United Kingdom: Public consultation on the OFT's proposed decision on a request for a market investigation reference, October 2008

• Office of Fair Trading, Newspaper and magazine distribution in the United Kingdom: Decision not to make a market investigation reference to the Competition Commission, 24 September 2009

23