Since April 2005 the Competition Commission has been investigating whether any features of the current local ad directory market, dominated by Yell and Thomson with 90% between them, distort, restrict or prevent competition. In August 2005 the Commission published a statement as part of the Inquiry and invited comments.
Who: Yell Group plc (Yell), Thomson Directories Limited (Thomson), BT Group plc (BT) and others
When: September 2005
The Classified Directory Advertising (CDA) market, which concerns the supply of printed classified directories such as Yellow Pages and Thomson Directory, is highly concentrated. As a direct consequence, it has attracted scrutiny from the UK competition authorities for over a decade, as outlined below:
- In March 1996, the Monopolies and Mergers Commission (now the Competition Commission ("CC")) concluded that BT enjoyed a monopoly position through its ownership of the Yellow Pages brand. As a consequence, BT was required to give certain undertakings to the OFT. These included a cap on price increases for advertisements in the Yellow Pages as well as limitations on geographical distribution (BT was not allowed to distribute more than one guide relating to the same geographical area at any one time).
- In 2001, following a review of BT's undertakings, the OFT strengthened the price cap. A month later, BT sold the Yellow Pages brand to Yell, which was required to give identical undertakings.
- In November 2004, the OFT initiated a general study of the CDA services market, stating that it was not clear whether Yell's undertakings were still appropriate in the current market. In particular, a number of players had argued that market conditions had changed such that any continuing regulation by the OFT was inappropriate, with Yell asserting that competition had forced it to reduce its average prices by more than the amount required by its undertaking and that the price for a standard mono advertisement in the Yellow Pages was lower than in 1993.
- On 5 April 2005, after concluding that the market had significant barriers to entry and that the same two companies – Yell and Thomson – still accounted for the large majority of advertising revenue while their respective shares had not changed significantly over the previous decade, the OFT referred the CDA services market to the CC for an in-depth market investigation.
- Under the statutory timetable, the CC has until 4 April 2007 in which to issue its findings – although it is anticipated that the CC's final report should be published by the end of June 2006.
Although the market investigation is barely a third of the way through its expected course, the CC has reached its first key milestone – which was the publication of its Issues Statement on 31 August 2005. The Issues Statement outlines the competition issues which the CC considers may be relevant to its assessment, based on evidence gathered since the start of its investigation. However, it is only an indicator as to the CC's current thinking; the CC has not yet come to any provisional conclusions on the issues identified in the Statement, which include the following:
- market definition – whether the definition of the CDA services market should be expanded beyond printed directories to include, for example, internet search engines (such as Google and Yahoo), internet directories and regional newspapers that provide CDA services;
- barriers to entry – whether there are any barriers to entry and expansion of the market, and the extent to which any such barriers may result from strong brands and from the Yell Undertakings;
- market structure and regulation – whether the OFT's findings on market concentration were accurate and the effect of the Yell Undertakings on the market;
- pricing – including how prices are negotiated or set, the difference in pricing between providers, the factors underlying price movements and price trends; and
- competition – the nature and extent of existing competition in the CDA services market, including the relationship between competition to attract advertisers and that to encourage usage of directories.
The deadline for third party responses to the Statement of Issues expired on 22 September 2005. In terms of next steps, the CC will hold further hearings with interested parties until the end of October, after which the CC intends to publish its so-called "emerging thinking" paper (around mid-November). It is likely that further hearings will then be held before the CC publishes its provisional findings in February 2006. If applicable, the CC will then consider whether any undertakings may be required before issuing its final conclusions by the end of June 2006.
Why this matters:
Although it is too early in the course of the CC's market investigation to attempt to predict the CC's likely conclusions, the CC is undertaking a wide and thorough examination of the market. This potentially paves the way for the CC to adopt a wider market definition – namely that internet search engines and online directories compete with printed directories – an approach strongly advocated by the key players in the market. That said, the CC's working hypothesis is that the supply of printed classified directories in the UK may be the relevant market – which reflects the OFT's approach to date (and which is in line with narrow approach to market definition adopted by the MMC in the original 1996 market investigation).
A clearer understanding of the CC's approach will be gained in mid-November when it publishes its 'emerging thinking' paper. As is so often the case, market definition lies at the heart of this investigation – and the outcome will be crucial in determining the future level of regulation in the market.