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26 Oct 2005 : Column 125WH—continued
Magazine Distribution Arrangements
4 pm
James Brokenshire (Hornchurch) (Con): I am grateful for this opportunity to discuss an important sector of the British economy.
The debate has been given the somewhat dry and sterile title of the Office of Fair Trading review of magazine distribution arrangements. That does not necessarily indicate the issues that I seek to address, as it suggests that it is about the maintenance of a vibrant, independent retail market, in which small and large stores can compete on an even footing. In fact, it is about the simple ability to pop round the corner to buy publications on a wide range of pastimes that matter to individuals, from angling to aviation, fashion to finance and pig breeding to news reading; the sheer breath of the range of titles that exists; and the simple pleasure of waking on a lazy Sunday morning and finding a copy of one's favourite newspaper waiting on the doormat and browsing through it with a hot cup of tea and a piece of toast. All of that could be under threat as a consequence of a desire to interfere in a well-established market on the mistaken premise of a drive to promote competition and modernisation, which already exist.
Earlier this year, the competition rules that regulated distribution arrangements for newspapers and magazines were changed. Until May, the Competition Act 1998 and the (Land and Vertical Agreements Exclusion) Order 2000 excluded wholesale agreements from the ambit of that Act. However, in order to give effect to a review of EU competition rules, the exclusion order was repealed, leaving great uncertainty as to whether the longstanding agreements that awarded wholesaling rights to a single company in a specific area were lawful. I know that the Minister, because of his background, the Minister is well aware of the industry and understands how it is constructed.
That prompted calls for the Office of Fair Trading either to recommend exemption of the agreements from the 1998 Act or to give guidance as to their status and likely validity. It took the latter course, and came up with the draft opinion that has prompted so much concern in the industry. In essence, it said that there was a fundamental difference between the newspaper distribution market and the magazine market. As a consequence, the OFT indicated that the newspaper agreements were likely to be compliant with competition law whereas the magazine agreements were not, unless the wholesalers' absolute territorial protection under the magazine agreements was removed. There was a debate about what is known as passive sales, and whether somebody could approach another wholesaler outside that territory.
The distinction between newspapers and magazines was made on the ground of apparent special features attaching to newspapers, stated as being their highly perishable nature, their very narrow production time frame and the presence of an industry code of practice governing the relationship between newspaper wholesalers and retailers, underpinned by statutory undertakings given by those wholesalers. That approach prompted stringent criticism at all levels of the industry. It was suggested that the OFT had failed properly to understand the supply arrangements, and
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that magazines and newspapers were two sides of the same market segment, each competing for the same advertising space, for the same editorial talent and for the same readership and circulation.
A more detailed analysis suggests that the three differentiating issues highlighted by the OFT do not appear to be as clear cut as might be suggested. Several magazines, particularly trade magazines and magazines that focus on current affairs, are very perishable and go out of date extremely quickly because the news that they contain is very current. The Economist, for example, describes itself as a newspaper but can be perceived on many levels as a magazine in which timing is critical.
Only last week, a newspaper retailer told me that if the first day's sales of a magazine are lost, that week's sales can be expected to be down by about 40 per cent.
The Parliamentary Under-Secretary of State for Trade and Industry (Mr. Gerry Sutcliffe) : Rather like the leadership contest of the Conservative party, news of which is out of date very quickly.
James Brokenshire : I am pleased to say that that issue will be dealt with quite quickly, and we look forward to moving forward very positively with a new leader.
Some newspapers, particularly local or regional ones, are also weekly, so do the same issues apply to them? More fundamentally, I struggle to see where a newspaper ends and a magazine begins, particularly when increasingly most weekend newspapers can generate continuing sales only by creating a strong magazine feature. The T2 section of The Times, which I read today on the District line tube to Westminster, is almost a magazine that is set up as a newspaper. It is therefore difficult to understand the fundamental distinction that the OFT was seeking to draw. The fundamentals of building the circulation of a magazine or newspaper, on a sale-or-return basis, incur high intrinsic costs on both sides of the market, so again I do not see how the fundamental distinction was drawn.
The maintenance of the newspaper code, which the OFT gave as another reason for trying to differentiate between the two sides of the market, was a quirk of fate in many ways. In 1993, the Monopolies and Mergers Commission produced a report on the supply of national newspapers following a reference by the OFT. Following that report, the code was introduced to address certain practices which the MMC concluded were not in the public interest.
As the Minister knows, the code in effect obliges wholesalers to supply to all retailers within their geographical area who can commit to a minimum number of sales. It is somewhat perverse of the OFT to argue that it recommended 10 years ago that the MMC investigate the newspaper market, which resulted in the establishment of this code of practice, so that somehow justifies treating the market as different. It is particularly perverse, given that wholesalers largely adhere to the newspaper code when dealing with magazines and that the industry is willing to establish a formal code of practice to provide substantially the same protections on that side of the market.
Even if one accepts the OFT's argument that there is a distinction between newspaper and magazine distribution, the impact of changing the system, as the
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OFT suggests, could be dramatic. A report by Professor Paul Dobson of Loughborough university business school suggested that wholesaling costs might increase significantly for the industry if the current exclusive territory system were replaced with more retail-led open competition. Larger retailers could use their clout to obtain more favourable terms and treatment at a time of greater overall cost because of a duplication of effort.
Those costs would need to be met somewhere, and the fear is that they would be loaded on to the smaller retailers, causing a significant number of them to exit the market. In particular, the professor suggested that as many as 9,000 to 12,000 smaller newsagents could be forced to close. To be fair to the OFT, it seems to recognise that when it says in paragraph 3.29 of its draft opinion on the overall concept of the market that
—that is, magazines and newspapers—
"would naturally continue to be distributed together . . . at least to independent (non-multiple) retailers."
That suggests that the OFT understands that the big multiples will use their position and their buying strength to renegotiate with the wholesalers. When one considers that the wholesale market is in the region of £80 million, an amount that Tesco could probably make in a fortnight, it shows the disparity in the bargaining position. It is almost a David-and-Goliath situation that underpins the concern about the consequences of a change, which would also have hidden consequences. Fewer retailers would mean less circulation for publications. Given that the large retailers are focused on a smaller range of publications, much more so than the independent retailers, which stock a broader range—that is part of the differentiation of the market—it would deny certain publications access to a broad market. It is worth noting that the smaller independent newsagents are the ones that underpin the home delivery service—the paperboys and papergirls who serve homes throughout the country.
Circulation is a key aspect of the industry. The unintended consequences of a change envisaged by the OFT could be that newspaper sales will fall, hitting advertising revenue and possibly the viability of certain titles. That would be an ironic result, given that the OFT wants to protect the distribution mechanism on the newspaper side of the market.
It is therefore hardly surprising that an extremely diverse group of people have voiced their strong criticism of the OFT's view: they include the National Federation of Retail Newsagents, the Periodical Publishers Association, the Newspaper Publishers Association, Which?, the Consumers Association, the Federation of Small Businesses, the Rural Shops Alliance and even the Mayor of London.
It is not intuitively obvious that a competition regulator should feel comfortable in its judgment when it is seemingly opposed by virtually every interest group in the sector. Last week, even the Minister's colleague, the Secretary of State for Culture, Media and Sport, said that she is extremely worried by the OFT approach.
There is the question of how the matter has been dealt with by some of the case officers in the investigation. The OFT has never specified what it believes to be inadequate about the economic analysis provided by the industry other than to suggest in the press that it is
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scaremongering or excitable sloganeering. However, in such a complex and important case that raises the question why the OFT has not carried out its own independent analysis of the workings of the industry and the supply chain. Effectively, it has hypothesised that matters may simply not turn out as the industry expects. The arguments being advanced need more depth and robustness.
In that context, it is worth examining other countries. For all the talk of European competition requirements, the issue does not seem to be one of the regulations that has appeared on the radar screens of many European regulators. In Europe, no other competition regulator has come up with an approach that resembles that of the OFT. In Germany, publishers have concluded exclusive distribution agreements with wholesalers that have a territorial monopoly in their territory for the duration of the contract. There is an exclusive territory system in France at wholesale and retail levels. In Italy, the distribution of newspapers and magazines is undertaken by national publisher-controlled distributors and regional wholesalers operating in exclusive distribution territories. Unfortunately, the impression is given that that attitude is another case of over-interpretation and enforcement of European regulation, that it is gold-plating but with knobs on this time.
In some respects, the more worrying aspect is the experience in the United States in 1995, when there was a lot of deregulation. In the 10 years since then wholesalers in the market have gone down from about 180 to only four, which control 90 per cent. of the market. The risk is that that could happen here. The newspaper and magazine sector is a valuable part of the British economy, making about £12 billion. The sector is diverse: larger retailers focus their newsstands on monthly publications; smaller retailers provide a greater breadth of coverage and titles, and they build on that with a home delivery network.
It seems strange that the regulator seeks to intervene in a competitive market. Some four out of five new magazines entering the magazine market fail. It is extremely competitive, and a consensus seems to be building from the magazine side around establishing a code of practice. That would in some ways address the rightful concerns of small retailers who say that they do not benefit from the arrangements and that they need greater protection. That could be provided by a code of practice backed up by an independent ombudsman.
In order to provide clarity to an industry in desperate need of greater certainty, I have three closing questions for the Minister. First, does he share the increasing concern of the Secretary of State for Culture, Media and Sport at the approach of the OFT, and, if so, what representations will he make to ensure that the views of the industry are properly considered by the regulator?
Secondly, if the OFT's final opinion confirms the view in its preliminary advice, will the Minister consider intervening in the public interest to ensure that the £80 million magazine and newspaper industry is not damaged?
Thirdly, if the Minister is prepared to intervene, is he willing to give appropriate consideration to the establishment of a code of practice to offer protection to retailers in a similar way to the newspaper code?
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I am conscious of the change in senior management of the OFT, and I hope that it will allow the OFT a period of reflection on and consideration of the work that has been undertaken to date, giving it some scope to listen to the industry and to the significant concerns that have been raised. I fear that if the approach that has been taken up to now is followed, the livelihoods of many small businesses will be damaged, and consumers will perversely end up with less choice rather than more.
4.17 pm
The Parliamentary Under-Secretary of State for Trade and Industry (Mr. Gerry Sutcliffe) : I welcome you to the chair for this afternoon's proceedings, Mr. Marshall. I am mindful of the ruling that you gave me about wearing—or not wearing—a jacket, unlike my colleague before me.
I am delighted that we are having a debate on this important issue. Many hon. Members from both sides of the House have either asked me questions or written to me about it. As the hon. Member for Hornchurch (James Brokenshire). said, I have some knowledge of the industry from my previous incarnation as a full-time trade union officer in the printing industry, at that time in the Society of Graphical and Allied Trades, which became the Graphical, Paper and Media Union, and is now part of Amicus.
I am well aware of the issues that the hon. Gentleman raises, and I congratulate him on securing the debate. I am sure that more parliamentary colleagues would have been present were it not for the major debate taking place on the Floor of the House. I am delighted to see the hon. Member for Wealden (Charles Hendry) present as we rekindle our work together and progress through the many issues before us.
This issue concerns the implications of the OFT's preliminary opinion for the magazine market, as the hon. Member for Hornchurch said. It is important to remember that the OFT has not yet issued a final opinion on the matter and is not likely to do so for some weeks. Accordingly, this debate and any comments on the issues raised will relate only to the draft opinion of the OFT published for consultation in May.
It is also important to note that the OFT's preliminary opinion is just that—an opinion. It was issued in response to a request from a group of publishers and wholesalers. The OFT is not changing the law, but advising on what it believes the law means for agreements between publishers and wholesalers; nor, if confirmed, would the preliminary opinion mean that magazines could no longer be distributed with newspapers. Such arrangements could continue, and probably would do so if relevant industry parties considered that that was the most efficient method of delivering magazines.
James Brokenshire : I hear what the Minister says about this just being opinion, but I hope that he appreciates that if an industry receives such guidance, it will have an impact. People will think that it is a clear
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determination and will act accordingly, as a consequence of the advice or guidance given by the OFT.
Mr. Sutcliffe : I recognise what the hon. Gentleman says, and he will know why I am trying to outline the position that the Government are taking on competition law. I will help him with that as we continue. He knows that attempts have been made to have discussions outside the formalised structures that we operate, in order to bring together the industry and the various bodies—protagonists is too strong a word—so that they can try to find a way through.
It is worth recapping why the OFT has been considering the matter. The legislation to modernise UK competition law to make it in line with modernised European Union law was passed on 1 May 2004. As part of that package of legislation, the Government repealed the domestic exclusion for vertical agreements—the Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 2000. However, the repeal did not come into effect until a year later, on 1 May 2005. That delay was provided to give the industry time to adjust, and to take advice, if necessary, on the implications—and, I would say, to give it an opportunity to try to reach a solution. Industry parties did seek advice on the matter from the OFT, and in May the OFT published its preliminary opinion for consideration.
It is also worth recalling why the Government decided, following consultation, to repeal the UK exclusion from competition law for vertical agreements. In summary, we did so because after modernisation we considered there would be limited purpose in retaining a separate domestic exclusion. Modernisation meant UK competition authorities and courts must apply EC law as well as UK law in any case that affects trade between member states.
The UK domestic inclusion for vertical agreements was introduced in 2000 to provide block cover to all vertical agreements provided they met the necessary criteria. At that time, no equivalent exclusion for vertical agreements was provided under EU law. Such an equivalent under EU law was subsequently introduced, so that there is now a block exemption for vertical agreements which applies to all EU member states. Any different features a separate domestic exclusion might have could only have an effect on agreements that had no effect on interstate trade. Relying on the protection for vertical agreements provided by the EC block exemption ensures clarity and consistency in the way that the same types of vertical agreements are treated—irrespective of whether they affect interstate trade—and there is no need for argument about which legal base should apply in a given case.
On what the OFT's preliminary opinion might mean if confirmed, the present arrangements for the distribution of newspapers and magazines mean that wholesalers are contractually barred from selling newspapers and magazines to retailers located outside their appointed exclusive territory. The hon. Gentleman is right: that came about as a result of a long, historical evolution to do with the changing nature of how newspapers and magazines were produced. Retailers have no choice over which wholesaler they deal with. That significantly restricts competition, and many
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retailers expressed strong views that it placed them at a commercial disadvantage. Agreements that restrict competition may nevertheless be acceptable under the law, if they meet the exemption criteria set out in the Competition Act 1998. The exemption criteria include the need for wider benefits to arise from the relevant agreement and for the restriction of competition involved to be indispensable to achieving those benefits.
The OFT has concluded that agreements granting such exclusive distribution territories for newspapers are likely to meet the exemption criteria in the 1998 Act and, therefore, to be compatible with the law. In the case of magazines, as the hon. Gentleman said, the OFT preliminary opinion is that exclusive territories are not indispensable, and therefore such distribution agreements are not likely to be compatible with competition law, and accordingly retailers could not be precluded from looking elsewhere to obtain supplies of magazines. That is the heart of the problem and where we continue to hope that agreement can be reached.
The OFT has sought to explain to interested parties why it considers agreements for newspapers are likely to meet the exemption criteria while agreements for magazines are not. Further representations have been made about that and the OFT will be considering them carefully before reaching its final position. The hon. Gentleman made a good point about the change in leadership of the OFT. The work undertaken by Sir John Vickers, its outgoing chairman, has been exemplary. It has been a credit to him and his organisation.
There is now a change in the structure of the OFT in that there is a chairman and a chief executive— Mr. Philip Collins and Mr. John Fingleton respectively. I know from preliminary discussions that they are keenly aware of the range of issues that excite Members of Parliament, not least myself. I believe that their final declaration will reflect the worries that have been raised.
The hon. Gentleman referred to the letter from my right hon. Friend the Secretary of State for Culture, Media and Sport. I see no problem with Members of Parliament, in whatever capacity, voicing concerns about genuine issues that affect our communities. He spoke briefly about the role of major retailers as opposed to that of small retailers and the impact that that has on our communities, something that is creating much discussion. That is a legitimate discussion that can take place in a non-party political way, as has happened in the past with matters such as the Consumer Credit Bill—indeed, the hon. Gentleman was a member of the Standing Committee that considered it. Mr. Fingleton and Mr. Collins are aware of the major weighty issues to be considered in addition to the matter of distribution and designation. Clearly, representations can still be made about them.
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This is about the application of competition law and, as such, it is for the OFT and the companies concerned, which need to make arrangements for the distribution of their products. They are responsible for ensuring that those arrangements comply with competition law. The OFT is an independent competition regulator and has sought to help in that regard by providing an opinion on the compatibility of the law of agreements granting exclusive distribution territories.
The Government's long-established policy is to remove themselves from making substantive decisions about competition issues and to leave them to the independent competition authorities. I think that Conservative Members supported the Enterprise Act 2002 and the Competition Act 1998. They had some reservations about them, but I think that they agreed with the broad principle of taking decision making away from Ministers so that they were not involved in matters about which they might not have the appropriate expertise or knowledge. However, I have some knowledge about the issue under discussion, as I said earlier.
We want to develop a well founded principle. The United Kingdom has one of the best competition regimes in the world and the development of the OFT will be dealt with by the incoming team. It is right and proper that we use the Competition Commission as the route through that and do not have Ministers becoming involved in matters about which they do not have the full information, although I am not saying that they should not have a view or an opportunity to express the concern of their colleagues.
There is not enough time to go into detail about each of the three points made by the hon. Gentleman, so I shall write to him. There is a clear procedural route for the OFT in respect of competition rules.
James Brokenshire : The Minister says that he does not have time to deal with my three points, but he has dealt with one of them. The other two relate to a willingness to intervene in some way. He said that he might be prepared to write to me, but can he go further than that to give reassurance to the industry?
Mr. Sutcliffe : The industry is well aware of my concerns and those of all hon. Members. I shall encourage discussion to continue. The formal route must be through the OFT, but I assure the hon. Gentleman that I shall do everything in my power to make sure that a decision is made sooner rather than later and that maximum discussion will take place among people on both sides of the argument. Given what I said earlier, he will understand why I need to stay within the parameters of the 2002 and 1998 Acts.
It would be folly for me to go much further in the time that remains. I am grateful to the hon. Gentleman for raising such matters and I am sure that he will have helped the discussion to go further.
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