94/06    31 May 2006

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.

Download the draft Opinion (pdf 1.02 mb).

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 (see note 2).

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 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. 

John Fingleton said, 
 
It is important that this market, as any other, delivrs choice, innovation and competitive prices for consumers. This draft Opinion questions whether the current system of local monopolies provides sufficient competitive incentives to publishers and wholesalers.
 
'Parties must weigh the harmful effects of their agreements against any benefit they can identify. Today's draft opinion sets out the factors that the newspaper and magazine industry must take into account when assessing their agreements.'
 
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 (see note 4). 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.
 
NOTES

1. The consultation period on the draft Opinion closes on 1 September 2006. Responses to the consultation should be sent to Edward Ray, Office of Fair Trading, 2-6 Salisbury Square, London, EC4Y 8JX; fax: 0208 7211 8354; email: nmd@oft.gsi.gov.uk. Initial comments or enquiries on the Code review can be sent to the same address.

2. The OFT first published a draft Opinion for consultation on 19 May 2005 (see press release 88/05). The OFT announced it would issue a fresh draft Opinion for consultation on 13 March 2006 (see press release 50/06).

Following the responses received in May, the draft Opinion published today differs from that published in 2005. This is because one of the arguments made by the parties during the previous consultation is that newspapers and magazines should be treated in the same way, as the differences between them, as identified in the previous draft Opinion, are not clear cut.

It was also clear, following the previous consultation, that the assessment of a specific agreement would vary according to the factual circumstances in which the agreement operates. The OFT has therefore provided a framework for assessment that applies to both newspaper and magazine agreements. This does not mean however that the same conclusion would be reached for each and every agreement.

3. Agreements that come within the scope of section 2 of the Competition Act 1998 will be prohibited unless they meet all the conditions in section 9 of the Act (the exemption criteria), i.e. if an agreement:
(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; but
(b) does not:
(i) impose on the undertakings concerned restrictions which are not indispensable to the attainment of those objectives; and
(ii) afford the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the products in question.     

4. The OFT has a duty to keep these undertakings under review and advise the DTI whether by reason of any change in circumstances, the parties can be released from the undertakings or whether the undertakings need to be varied or superseded by new undertakings. The review of undertakings will be conducted under section 88 of the Fair Trading Act 1973.

5. Download The Code (pdf 108 kb)

6. Read terms of reference for the code review (pdf 67 kb)