Question and answer

Q. Why has the OFT been looking at newspaper and magazine distribution?

A: The OFT’s announcement follows its review over the past two years of the system of newspaper and magazine distribution based on exclusive territories. It stems from the government’s order amending UK Competition Law by removing from May 2005 the Vertical Agreement (Exclusion) Order which permits, for example, the granting of exclusive territories for the distribution of goods. The DTI chose to apply agreements within the UK EU legislation designed to prevent restrictions on distribution across national borders – an example of UK “gold plating” of EU legislation.

Q. What are vertical agreements?

A: Vertical agreements are the contract agreements whereby a publisher assigns a nominated wholesaler sole rights known as: absolute territorial protection (ATP) to supply newspapers and magazines to a given geographical area, ‘an exclusive territory’

Q. What are the benefits of exclusive territories ?

A: It is simply the most economic way for 14 million newspapers to be delivered to 54,000 Retailers in this country in a 3-4 hour time window every night, a process described by the Freight Transport Association as the “nightly miracle”.

As the independent economic expert Professor Paul Dobson of Loughborough University has pointed out, it is the most efficient route to market - minimising transport costs as well as allowing small publishers to enter the market to ensure that their titles can also be widely distributed. The MMC recognised in its 1993 report into the industry that the system of exclusive territorial distribution that allows this was ‘not against the public interest’.

Q. What have the OFT said this time?

A: In substance, the draft opinion is what we were promised by an OFT assuring us it was “trying very hard to be helpful”: it provides a framework for self assessment by publishers, distributors and wholesalers to judge whether their distribution contracts are lawful.

The issue in contention is that ATP is outlawed under UK and European competition rules UNLESS the conditions of a four step test can be satisfied. The conditions of each one of the four “limbs” of the test have to be met and if they are not, then the arguments for maintaining ATP fall.

Helpfully, the OFT has provided clarification of those four conditions in relation to what it has been told about the nature of newspaper and magazine retail supply chain contracts. It goes to great pains to stress that individual contracts in different territories have to be assessed individually as to whether they do or do not pass the test.

And very helpfully the OFT this time goes to great pains to stress that newspapers and magazines are subject to exactly the same tests. There is no blanket suggestion that “newspapers are okay – magazines are not” as the draft opinion of last May suggested.

Q. So why aren't you happy?

A: The OFT has added a great deal of comment to its framework opinion, much of it suggesting that both newspapers and magazines will find it very hard though not impossible - to satisfy the conditions of the first and/or subsequent limbs.

Very unhelpfully, the OFT's chief executive, John Fingleton, has stated that he would welcome national distribution driven by the major supermarkets ' a comment which PPA regards as completely inappropriate given the reliance the Press places on having a route to market free of potential censorship (commercial or otherwise) by powerful supermarkets.

Q. What is the 'universal guarantee of supply' and why is this threatened?

A: A 1993 industry inquiry by the Monopolies and Mergers Commission (MMC) concluded 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- were guaranteed. This was written into the Newspaper code of practice and as a result, news retailers have risen from 45,000 ten years ago to 54,000 today ' so that today 99.936% of the country is within a five minute drive of a newsagent. Threatening the existing system of exclusive territorial distribution for newspapers and magazines would make universal service for all parts of the country commercially unviable: no wholesaler could undertake such an obligation without a guarantee of exclusivity.

Q. And what about the claims on magazine titles disappearing or newspaper prices going up?

Undermining the cost basis of the current distribution contracts would put costs up for the whole industry, threatening the existence of a large number of magazine titles as well as threatening price rises for newspapers and magazines. In his report to the OFT, Professor Paul Dobson states:

'If small retailers sought to obtain supplies in an open competition system they would have no buyer power whatsoever in respect of obtaining competitive terms ' instead, all the beneficial terms would simply go to multiple retailers. The result is likely to be thousands of small retailers exiting the market, leading to 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 perhaps reduced product choice (as loss-making titles were withdrawn).'

Q. But isn't it a good thing that small retailers should have a choice of wholesaler?

A: The truth is this is that it is not the small but the big multiple retailers who are likely to benefit at the expense of the small retailers. The multiples will 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 (ie. multiple retailers) in other territories. This would put up costs for wholesalers in those other territories and quickly make it uneconomic for them to supply less profitable (ie. 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 any differently from any other product?

A: We believe there should be wider issues at play here, including the very serious potential damage to the rights of people to universal access to news and information. In other European countries people's rights of access to information and news are often enshrined within law, that is why they continue to offer protection for their distribution systems- quite often due to democratic liberties having been denied in the last century- after all we are not talking about a can of baked beans here, this is nothing less serious then peoples right of access to a free press in a democracy.

Q. Are there any other countries to adopt a free market model?

A: Yes. In the USA, in 1995 the big retailers took control of the supply chain. An intensely competitive environment was created for wholesalers, in which companies battled with each other to see who could offer the large retailers the cheapest deal. The result has been that wholesalers fell from 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, down 27 per cent. The only people to benefit were the multiple retailers, who massively increased their market share. Do we want this here?

Q. So what is the alternative?

A: The so called 'Heseltine Initiative' for the whole industry to work together to bring about the changes to the supply chain that the Joint Industry Group (JIG) has been struggling to achieve, through a new code of practice. The OFT has promised to review the newspaper code and PPA, ANMW, NPA and NFRN have been arguing for a number of months that this could be the best way forward, making changes to the supply chain written into a new code to improve efficiency, give retailers a good say and ensure transparency and accountability for wholesaler performance, but at the same time ensuring the guaranteed universal supply that exclusive territorial distribution can provide.

In its Press Release, following the OFT's announcement, the NFRN states: 'This new draft opinion does not change the NFRN's position which has always been to implement a new, all-inclusive, industry Code of Practice, enforced through legal undertakings and overseen by an industry funded Ombudsman. The NFRN is ideally placed to assume the role of 'honest broker', lead industry discussions on proposed solutions and look after the interests of consumers. We look forward to working with the OFT and our news industry partners in the coming months.'

While some retailers (not any of the majors) have made it clear they would like to challenge publisher contracts with wholesalers the NFRN is clear they would rather effect change in an orderly manner ' through evolution rather than revolution. On behalf of its 20,000 or so independent retailer members it recognises the value of the universal service ' and the potential damage to its members of a supply chain driven by supermarkets.


OFT campaign Question and answer Press releases Letters Articles Presstream campaign Question and answer Press releases Home	Question and answer Q. Why has the OFT been looking at newspaper and magazine distribution? A: The OFT’s announcement follows its review over the past two years of the system of newspaper and magazine distribution based on exclusive territories. It stems from the government’s order amending UK Competition Law by removing from May 2005 the Vertical Agreement (Exclusion) Order which permits, for example, the granting of exclusive territories for the distribution of goods. The DTI chose to apply agreements within the UK EU legislation designed to prevent restrictions on distribution across national borders – an example of UK “gold plating” of EU legislation. Q. What are vertical agreements? A: Vertical agreements are the contract agreements whereby a publisher assigns a nominated wholesaler sole rights known as: absolute territorial protection (ATP) to supply newspapers and magazines to a given geographical area, ‘an exclusive territory’ Q. What are the benefits of exclusive territories ? A: It is simply the most economic way for 14 million newspapers to be delivered to 54,000 Retailers in this country in a 3-4 hour time window every night, a process described by the Freight Transport Association as the “nightly miracle”. As the independent economic expert Professor Paul Dobson of Loughborough University has pointed out, it is the most efficient route to market - minimising transport costs as well as allowing small publishers to enter the market to ensure that their titles can also be widely distributed. The MMC recognised in its 1993 report into the industry that the system of exclusive territorial distribution that allows this was ‘not against the public interest’. Q. What have the OFT said this time? A: In substance, the draft opinion is what we were promised by an OFT assuring us it was “trying very hard to be helpful”: it provides a framework for self assessment by publishers, distributors and wholesalers to judge whether their distribution contracts are lawful. The issue in contention is that ATP is outlawed under UK and European competition rules UNLESS the conditions of a four step test can be satisfied. The conditions of each one of the four “limbs” of the test have to be met and if they are not, then the arguments for maintaining ATP fall. Helpfully, the OFT has provided clarification of those four conditions in relation to what it has been told about the nature of newspaper and magazine retail supply chain contracts. It goes to great pains to stress that individual contracts in different territories have to be assessed individually as to whether they do or do not pass the test. And very helpfully the OFT this time goes to great pains to stress that newspapers and magazines are subject to exactly the same tests. There is no blanket suggestion that “newspapers are okay – magazines are not” as the draft opinion of last May suggested. Q. So why aren't you happy? A: The OFT has added a great deal of comment to its framework opinion, much of it suggesting that both newspapers and magazines will find it very hard though not impossible - to satisfy the conditions of the first and/or subsequent limbs. Very unhelpfully, the OFT's chief executive, John Fingleton, has stated that he would welcome national distribution driven by the major supermarkets ' a comment which PPA regards as completely inappropriate given the reliance the Press places on having a route to market free of potential censorship (commercial or otherwise) by powerful supermarkets. Q. What is the 'universal guarantee of supply' and why is this threatened? A: A 1993 industry inquiry by the Monopolies and Mergers Commission (MMC) concluded 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- were guaranteed. This was written into the Newspaper code of practice and as a result, news retailers have risen from 45,000 ten years ago to 54,000 today ' so that today 99.936% of the country is within a five minute drive of a newsagent. Threatening the existing system of exclusive territorial distribution for newspapers and magazines would make universal service for all parts of the country commercially unviable: no wholesaler could undertake such an obligation without a guarantee of exclusivity. Q. And what about the claims on magazine titles disappearing or newspaper prices going up? Undermining the cost basis of the current distribution contracts would put costs up for the whole industry, threatening the existence of a large number of magazine titles as well as threatening price rises for newspapers and magazines. In his report to the OFT, Professor Paul Dobson states: 'If small retailers sought to obtain supplies in an open competition system they would have no buyer power whatsoever in respect of obtaining competitive terms ' instead, all the beneficial terms would simply go to multiple retailers. The result is likely to be thousands of small retailers exiting the market, leading to 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 perhaps reduced product choice (as loss-making titles were withdrawn).' Q. But isn't it a good thing that small retailers should have a choice of wholesaler? A: The truth is this is that it is not the small but the big multiple retailers who are likely to benefit at the expense of the small retailers. The multiples will 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 (ie. multiple retailers) in other territories. This would put up costs for wholesalers in those other territories and quickly make it uneconomic for them to supply less profitable (ie. 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 any differently from any other product? A: We believe there should be wider issues at play here, including the very serious potential damage to the rights of people to universal access to news and information. In other European countries people's rights of access to information and news are often enshrined within law, that is why they continue to offer protection for their distribution systems- quite often due to democratic liberties having been denied in the last century- after all we are not talking about a can of baked beans here, this is nothing less serious then peoples right of access to a free press in a democracy. Q. Are there any other countries to adopt a free market model? A: Yes. In the USA, in 1995 the big retailers took control of the supply chain. An intensely competitive environment was created for wholesalers, in which companies battled with each other to see who could offer the large retailers the cheapest deal. The result has been that wholesalers fell from 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, down 27 per cent. The only people to benefit were the multiple retailers, who massively increased their market share. Do we want this here? Q. So what is the alternative? A: The so called 'Heseltine Initiative' for the whole industry to work together to bring about the changes to the supply chain that the Joint Industry Group (JIG) has been struggling to achieve, through a new code of practice. The OFT has promised to review the newspaper code and PPA, ANMW, NPA and NFRN have been arguing for a number of months that this could be the best way forward, making changes to the supply chain written into a new code to improve efficiency, give retailers a good say and ensure transparency and accountability for wholesaler performance, but at the same time ensuring the guaranteed universal supply that exclusive territorial distribution can provide. In its Press Release, following the OFT's announcement, the NFRN states: 'This new draft opinion does not change the NFRN's position which has always been to implement a new, all-inclusive, industry Code of Practice, enforced through legal undertakings and overseen by an industry funded Ombudsman. The NFRN is ideally placed to assume the role of 'honest broker', lead industry discussions on proposed solutions and look after the interests of consumers. We look forward to working with the OFT and our news industry partners in the coming months.' While some retailers (not any of the majors) have made it clear they would like to challenge publisher contracts with wholesalers the NFRN is clear they would rather effect change in an orderly manner ' through evolution rather than revolution. On behalf of its 20,000 or so independent retailer members it recognises the value of the universal service ' and the potential damage to its members of a supply chain driven by supermarkets.
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