As the OFT says it will not refer the newspaper and magazine distribution sector to the Competition Commission over practices including the printing of prices on covers, does this mean the sector is de facto immune from competition laws? Zoe Hare reports.
Who: Office of Fair Trading ("OFT")
When: 24 September 2009
Law stated as at: 24 November 2009
Powers of the OFT
As part of its general powers of market review, the Office of Fair Trading ("OFT") may make a market investigation reference ("MIR") to the Competition Commission ("CC"), under section 131 of the Enterprise Act 2002 (the "Act"), if 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 United Kingdom or a part of the United Kingdom".
This is known as the reference test.
In December 2006, the National Federation of Retail Newspapers ("NFRN") requested that the OFT investigates the supply chain for newspapers and magazines in the UK. NFRN considered that the OFT should review the market and assess whether it should make a reference to the CC under s131 of the Act.
The OFT commenced an investigation into this area, culminating in the publication of a proposal not to refer the matter to the CC on 22 October 2008. The proposal was accompanied by guidelines, aimed at assisting publishers, distributors and wholesalers to assess whether their distribution agreements fell foul of competition law. However, the proposal was, by its nature, not the OFT's final decision. The OFT opened a consultation on the proposal, setting the deadline for responses as May 2009, and published its final decision on 24 September 2009.
In accordance with s131 of the Act, the OFT concluded that there were reasonable grounds to suspect that the following individual features of the newspaper and magazine distribution sector prevented, restricted or distorted competition:
(a) absolute territorial protection ("ATP") – wholesalers being granted exclusive territories by publishers and distributors, who in turn prevent passive sales between those territories;
(b) cover prices – publishers printing the price of magazines and newspapers on their cover; and
(c) copy allocation for magazines – wholesalers and publishers controlling the allocation of magazine copies to individual retailers.
Furthermore, the OFT asserted in its decision that, taken together, these features contributed to a high degree of publisher control over the distribution process, i.e. publisher-led distribution Therefore the criteria of the reference test were satisfied.
However, even if the reference test had been met, the OFT could choose to exercise its discretion not to refer the matter to the CC.
Having considered the criteria, the OFT decided to exercise its discretion and not make a reference to the CC of newspaper and magazine distribution in the UK. The key reasons for this were:
1. many publishers and distributors had completed an initial self-assessment of their wholesale agreements, which resulted in magazine distributors removing ATP from their agreements;
2. a reference would not be proportionate as the customer benefits achieved from cover prices, as publisher-set cover prices are often lower than retailer-set prices, outweigh the likely distortion of competition;
3. since October 2008, many publishers have re-tendered their distribution agreements and awarded new contracts. The OFT considered that there remains a reasonable prospect of further changes in the market which will benefit consumers; and
4. although the third largest UK wholesaler, Dawson News, exited the market during the consultation period, thus increasing concentration in the wholesale market, the OFT considered that publishers and distributors would still be able to exercise their power in the supply chains to generate effective competition between wholesalers.
Why this matters:
This case demonstrates how the OFT will be proactive in investigating potential anti-competitive behaviour, while at the same time being confident in its own ability to assess the market. The OFT does not always consider that the CC needs to be involved in order to conclude that there is or is not an adverse effect on competition.
The case is also reassuring in that the OFT reiterates how the effect on the end consumer is of paramount importance. Indeed, Louis Christofides, OFT director, stated:
"What matters to consumers is being able to get newspapers and magazines where and when they want them, at competitive prices."
All newspaper and magazine publishers, distributors and wholesalers should now be reviewing their agreements to ensure that they comply with the OFT's guidance. Taking a diligent and cautious approach will ensure that those in the sector do not find themselves as the subject of an OFT individual investigation.
However, the OFT has not given the sector a complete green light. As set out above, it does consider that there are reasonable grounds for suspecting that some features of the newspaper and magazine distribution markets prevent, restrict or distort competition. In its final decision, the OFT identified examples of industry best practice which would further improve the effectiveness of competition if adopted.
Finally, the OFT has stated that it may conduct a further review of the sector in two years, if this would result in further consumer benefits. However, considering that this investigation and review took three years to complete, we are unlikely to see any further changes until 2014.