Vertical challenges that test our futures

The recent OFT announcement is explained by Ian Locks

Q: Why has the Office of Fair Trading been looking at newspaper and magazine distribution?

A:
The OFT’s recent announcement follows its review of the system of
newspaper and magazine distribution based on ‘exclusive wholesaler
territories’. It stems from a Government decision to amend UK
competition law by removing from May 2005 the Vertical Agreement
(Exclusion) Order, which permits the granting of exclusive territories
for the distribution of goods. The Department of Trade and Industry
announced last year that it would be doing this to bring UK competition
law into line with the EC competition regime, but it wanted newspaper
and magazine publishers, wholesalers and retailers to have an
opportunity to discuss any possible consequences beforehand with the
OFT.

Q:What are vertical agreements?

A:
They are the contract agreements whereby a publisher assigns a
nominated wholesaler sole rights to supply newspapers and magazines to
a given geographical area.

Q:What are the benefits of exclusive territories?

A: It is the most economic way for newspapers to be delivered to retailers every night.

Q:The
OFT has accepted the case for absolute territorial protection for
newspapers and has gone some way to acknowledging its importance for
magazines, so why aren’t you happy?

A: We welcome the OFT’s
decision regarding newspapers, and for magazines in most respects, but
our concern is that the OFT has indicated it is minded to limit the
exclusivity granted for the wholesaling of magazines.

In particular, by not accepting the need for a ban on ‘unsolicited requests’

(e.g.

from
large multiple retailers) to supply magazines to retailers outside
exclusive territories, the OFT runs the risk of seriously harming the
economics of not only magazine, but also newspaper, distribution and
undermining the logic of its own positive assessment of the need for
newspapers ‘absolute territorial exclusivity’.

Q:Why is the distribution of magazines and newspapers so inextricably linked?

A:
Both are delivered in the same way, often in the same vehicle by the
same wholesalers, offering considerable cost savings compared to
separate deliveries.

Q:What is the ‘universal guarantee of supply’ and why is this threatened?

A:
The 1993 inquiry by the MMC concluded that the operation of the system
of exclusive distribution territories was ‘not against the public
interest’ – but that it would be best if universal service to all
retailers, no matter how small, could be guaranteed. This was duly
written into the Newspaper Code of Practice and as a result, the number
of UK news retailers has risen from some 45,000 ten years ago to 54,000
at present.

Q:What about the suggestion that magazine titles could disappear or prices for publications go up?

A:
With thousands of small retailers exiting the market, there would be a
considerable fall in circulation levels and lost income for the
industry as a whole. Consumer detriment would then arise from reduced
outlet choice and, in the longer term, higher cover prices and
potentially also reduced product choice, as loss-making titles were
withdrawn.

Q:The NFRN has welcomed this announcement; isn’t it a good thing that small retailers should have a choice of wholesaler?

A:To be fair, the NFRN has not called for a completely free market solution.

In
truth, it is not the small but the big multiple retailers who would be
likely to benefit from an end to the current system, largely at the
expense of the small retailers. The multiples would be able to approach
wholesalers outside their territories in order to build their own
regional or national distribution systems, while wholesalers would come
under pressure to ‘cherry-pick’ the most profitable accounts (i.e.

multiple
retailers)n in other territories. This would put up overall costs for
wholesalers in their territories and make it uneconomic for them to
supply less profitable (generally smaller) remaining retailers.

Many of these retailers would then cease to be served and many would go out of business completely.

Q:Why should newspapers and magazines be treated differently from any other product?

A:
The arrangements for newspaper and magazine distribution need to be
compatible with competition law, yet there are also wider issues at
stake, notably the right of universal access to news and information.

Q:Are there any other countries which adopt a free market model?

A: In the USA the big retailers took control of the supply chain in 1995.

An
intensely competitive environment was created for wholesalers. The
result has been that wholesalers fell from around 180 in 1995 to only a
handful, with the number of magazine titles falling from 9,311 in 1998
to 5,340 in 2002; meanwhile from 1996-2001 the number of retailers
declined from 180,000 to approximately 132,000.

Q:What happens now? Is the OFT’s recent announcement the final say on the matter?

A:The
OFT has made it clear that its statement on 23 February represents its
provisional view and that it will be consulting further before reaching
a final decision. We will obviously be responding to that consultation
as well as discussing our position with others in the industry and with
relevant Government departments in the period between now and the OFT’s
final conclusions, expected in May.

Ian Locks is chief executive of the Periodical Publishers Association

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