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Neutral citation: [2003] CAT 11
IN THE COMPETITION
APPEAL TRIBUNAL
Case No.
1009/1/1/02
New Court Carey Street London
WC2A 3BZ
23 June 2003
Before:
SIR CHRISTOPHER BELLAMY (The
President) PROFESSOR ANDREW BAIN OBE PATRICIA S QUIGLEY WS
Sitting as a tribunal in Scotland
BETWEEN:
ABERDEEN JOURNALS LIMITED
Applicant and
THE OFFICE OF FAIR TRADING
(formerly the Director General of Fair Trading)
Respondent Supported
by
ABERDEEN INDEPENDENT LIMITED
Intervener
Mr Nicholas Green QC (instructed by Messrs Herbert Smith)
appeared for the applicant
Mr Mark Hoskins (instructed by the
Director of Legal Services, Office of Fair Trading) appeared for the
respondent
Mr John Hill of Messrs Shoosmiths appeared for the
intervener
Heard at the Court of Session, Edinburgh, on 29 January
2003
JUDGMENT (Non-confidential version)
Note: Excisions in this
judgment relate to commercially confidential information: Schedule 4,
paragraph 1 to the Enterprise Act 2002. |
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CONTENTS
Paragraph
I
INTRODUCTION
........................................................................................ 1
II
THE CONTESTED DECISION
................................................................... 21
The Director’s finding on
dominance
.............................................................. 22
— Relevant product market
............................................................................ 22
— The alternative product
market definition
.................................................... 33
— The geographic market
.............................................................................. 34
— Dominant position
..................................................................................... 35
The Director’s findings on abuse
..................................................................... 36
— Advertising rates,
pagination and distribution of the Herald & Post
..............
37
— Costs and revenues of the
Herald & Post
.................................................... 41
— Aberdeen Journals’
intentions
.................................................................... 48
— Aberdeen Journals’
counter-arguments
....................................................... 50
The Director’s conclusions on
infringement ..................................................... 52
The penalty
................................................................................................... 54
III
ARGUMENTS OF THE PARTIES ON RELEVANT MARKET AND DOMINANCE
............................................................................................. 55
Introduction
................................................................................................ 55
Aberdeen Journals’ submissions
................................................................ 58
The Director’s primary case is
not proved ........................................................ 58
The Director’s lack of economic
evidence ....................................................... 70
The RBB reports
............................................................................................ 72
Professor Yamey’s evidence
........................................................................... 78
The impact of other media
.............................................................................. 81
Dominance in the Director’s
primary market ................................................... 82
The alternative product market
........................................................................ 83
The Director’s submissions
.......................................................................... 85
The Director’s primary case
............................................................................ 86
The economic evidence generally
................................................................... 97
The RBB reports
............................................................................................ 100
The impact of other media
.............................................................................. 105
Dominance in the Director’s
primary market ................................................... 106
The alternative product market
........................................................................ 107
Aberdeen Independent’s submissions
........................................................... 110 |
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i |
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Paragraph
IV
THE TRIBUNAL’S FINDINGS ON RELEVANT MARKET
AND
DOMINANCE
............................................................................................. 118
1. GENERAL
............................................................................................... 119
A. The relevant law
................................................................................. 119
B. The burden and
standard of proof
...................................................... 123
C. The Tribunal’s
approach to evidence
................................................. 126
2. THE CASE MADE BY THE
DIRECTOR .................................................. 135
A. The characteristics of the products in question
...................................
136
The Press & Journal
............................................................................ 137
The Evening Express
............................................................................ 140
The Herald & Post
............................................................................... 142
The Independent
.................................................................................. 145
Analysis of the characteristics
of the product ......................................... 148
— Paid-for versus free
........................................................................ 151
— Weekly versus daily
....................................................................... 155
— Other differences
............................................................................ 162
— “Substitutes” and
“complements” .................................................... 166
B. The commercial
strategy of the Independent
.......................................
175
The position in 1996
............................................................................ 176
“The Scottish Opportunity –
Aberdeen" ................................................ 177
The launch of the Independent
against the Evening Express .................... 183
The Independent’s
activities after launch
...............................................
186
Mr Robins’ letter of 8 March 2000
........................................................ 190
The OFT meeting of 25 April 2002
....................................................... 192
Was the Independent
launched as a “fireship”, primarily in order to
force a sale to Aberdeen Journals?
........................................................ 194
C. The commercial strategy of Aberdeen Journals
................................
220
The Herald & Post as a
“fighting title” ................................................. 220
The evidence about bundling
................................................................ 227
Mr Farquharson’s evidence
................................................................ 229
D. The further documentary evidence
supplied by Aberdeen
Journals
.............................................................................................. 233
Aberdeen Journals’ letter to the
Director of 10 February 2000 ................
234
Appendix 2 to the letter of 10
February 2000 ......................................... 238
Other documents
................................................................................. 239
E. Did the position change in March 2000?
.............................................
248
F. Conclusion on the Director’s case
....................................................... 256 |
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Paragraph
3. THE CASE MADE BY
ABERDEEN JOURNALS ..................................... 257
A. Criticism of the
Director’s approach to economic evidence ................ 257
B. The RBB reports
................................................................................. 284
C. The Tribunal’s
analysis
...................................................................... 288
D. Conclusion
.......................................................................................... 301
4. ALTERNATIVE MEDIA
.......................................................................... 302
5. DOMINANCE IN THE MARKET
FOR ADVERTISING IN LOCAL NEWSPAPERS IN ABERDEEN
................................................................ 309
6. THE DIRECTOR’S ALTERNATIVE PRODUCT MARKET
......................
314
V
ARGUMENTS OF THE PARTIES ON THE ISSUE OF ABUSE
................
327
A. Aberdeen Journals’
submissions
........................................................ 328
B. The Director’s
submissions
................................................................ 341
C. Aberdeen
Independent’s submissions
................................................. 348
VI
THE TRIBUNAL’S
FINDINGS ON ABUSE ............................................... 349
A. The relevant law
................................................................................. 349
B. Some comments on the
Director’s methodology in the decision .......... 360
The negative contribution of the
Herald & Post ........................................... 362
The issue of printing costs
.......................................................................... 373
The time period for assessing
predation in this case ..................................... 382
The costs treated by the Director
as variable ................................................ 388
C. Analysis of Aberdeen
Journals’ arguments ........................................ 403
Was the Herald & Post
sold at below average variable cost during March
2000? ........................................................................................................ 404
Was the Herald & Post sold at below variable cost
in the last week of
March 2000?
............................................................................................. 411
Did the conduct of the Herald & Post change
materially before the end of
March 2000?
............................................................................................. 416
Did Aberdeen Journals intend to eliminate competition after 1
March
2000? ........................................................................................................ 423
Was there a distortion of competition or a threat to the
Independent in
March 2000?
............................................................................................. 433
The issue of recoupment
............................................................................ 436
Is the period of the predation
too short to constitute an abuse? ...................... 447
Was the Independent an in
efficient entrant? ................................................. 450
US and Australian cases
............................................................................. 451
D. Conclusion
.......................................................................................... 452
VII
EFFECT ON TRADE WITHIN THE UNITED KINGDOM
.......................
453
A. Arguments of the parties
.................................................................... 453 |
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iii |
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Paragraph
B. The Tribunal’s findings
...................................................................... 456
VIII
THE PENALTY
........................................................................................... 464
A. Arguments of the
parties
.................................................................... 464
B. The Tribunal’s
findings
...................................................................... 476
The duration to be considered
..................................................................... 476
The penalty imposed
.................................................................................. 478
Intentionally or negligently
........................................................................ 484
The gravity of the infringement
................................................................ 489
IX CONCLUSION
............................................................................................ 501 |
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iv |
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1 By virtue of
Articles 2 and 3 of the Enterprise Act 2002 (Commencement No. 2,
Transitional and Transitory Provisions Order 2003, S.I. 2003 no. 766, with
effect from 1 April 2003 this appeal is deemed to be made to the
Competition Appeal Tribunal established under section 12 of the Enterprise
Act 2002. Both the Competition Appeal Tribunal and its predecessor, the
Competition Commission Appeal Tribunal, are referred to in this judgment
as “the Tribunal”.
2 Under section
2(1) of the Enterprise Act 2002, brought into force by Article 2 of S.I.
2003 no. 766, the functions of the Director were transferred to the Office
of Fair Trading (“the OFT”) on 1 April 2003, a body corporate created
under section 1 of that Act. As from that date, the OFT has stepped into
the shoes of the Director and is now responsible for the contested
decision by virtue of Section 2 and paragraph 6 of Schedule 24 of that
Act. For convenience this judgment continues to refer to the Director as
the person who took the contested decision and conducted the proceedings
up to 1 April 2003. |
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1 |
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so as to include only sales made
in the urban area of Aberdeen where the Herald & Post and the
Independent are distributed, then Aberdeen Journals’ market share
of advertising in local newspapers in the Aberdeen area in the period from
January to March 2000 falls to 73 per cent by value and 63 per cent by
volume. On the basis of those market shares, coupled with what the
Director finds to be significant barriers to entry, the Director considers
that Aberdeen Journals had a dominant position in the supply of
advertising space in both paid-for and free local newspapers in Aberdeen
or the circulation area of the Herald & Post (paragraphs 144 to
149).
The Director’s findings on abuse
36. As to
whether Aberdeen Journals has abused its dominant position, the Director
relies on the matters set out at paragraphs 150 to 212 of the Decision. He
considers that the legal principles to be applied in considering a
possible predatory abuse where a dominant undertaking deliberately incurs losses to
expel rivals from the market or to deter new entry are those to be derived under Community law from
Case C-62/86 AKZO Chemie v Commission [1991] ECR I-3359
(“AKZO”), and Tetra Pak II (cited above). Within that
framework, the Director undertook a financial analysis of the contribution
generated by the Herald & Post, taking into account the policy
followed by the Herald & Post in relation to advertising rates,
pagination and distribution (paragraphs 155 to 174); the relationship
between the revenue of the Herald & Post and its costs
(paragraphs 175 to 180); the intentions of Aberdeen Journals as disclosed
in certain internal documents (paragraphs 181 to 183); and certain
arguments advanced by Aberdeen Journals by way of defence (paragraphs 184
to 206).
— Advertising rates, pagination and distribution of the
Herald & Post
38. The average
advertising rate of the Herald & Post was cut shortly after the
launch of the Independent from £3.03 per single column centimetre
(“sccm”) in April 1996 to £1.43 per sccm in May 1996. The rate was further
cut in October 1998 to below £1 per sccm. In March 2000, the average rate
was £1.25 per sccm. That was raised to £1.52 per sccm in April
2000. |
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11 |
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Under the heading ‘Herald
& Post’: ‘You view the Herald & Post as a tactical tool
in the company’s armoury. Barwell’s [Keith Barwell owns the
Independent] move to Aberdeen has caused you to increase your
efforts on this and if and when he goes away you will leave a three month
gap between that happy event and running it down again.’
‘Next year’s figure [the annual
budget] would include the £500,000 investment we are making against
Barwell. Whilst you thought it possible that Barwell would cease
publication by Christmas this cannot be built into the
budget.’
Memo dated 1 April 1997, Mr
Davidson to Mr Ian Lovett (Commercial Systems Manager at Aberdeen
Journals):
After references to whether the
Independent is making a profit, or loss, ‘Finally, please keep your
foot on their neck!’
Memo dated 12 May 1998, Mr Davidson to Mr
Scott:
‘You perceive the Independent
to be less of a threat to you and therefore propose to fight it with
the Herald & Post, not the paid-for titles. We authorise an
additional £50,000 to be invested into that and this will be taken into
account when calculating your strive payments at the end of the year. I
would be tempting fate if I recorded that you think the Independent
may cease publishing by the end of this financial year but here goes
anyway!’
‘You also proposed to place
greater separate focus on the Herald & Post so that it is our
only title pitched against the Independent. Again, this is agreed
for this could be an area where we could make substantial profit progress
over the next 18 months to 2 years, given that we are successful in
closing them down.’
Memo dated 29 July 1998, Mr
Michael Pelosi (Deputy Managing Director at Northcliffe) to Mr
Scott:
‘the closure of the Aberdeen
Independent would allow you to reduce gradually investment in the
Herald & Post, resulting in additional profits of between £0.5
m and £1m.’
Memo dated 6 December 1999 from Mr Davidson to Mr
Scott:
‘You agree to produce 2 scenarios
as far as the Independent is concerned. The first assumes that we
acquire them. The second assumes that you are given a sum of money to
neutralise them.’
Memo dated 5 January 2000 from
Mr Davidson to Mr Taymour Ezzat (then Northcliffe’s London Financial
Controller):
‘The purpose of your visit is to
help Aberdeen construct three operational and financial scenarios relating
to the Aberdeen Independent. These can be summarised as: 2.1 To
continue with the existing policy 2.2 To purchase the Aberdeen
Independent; and 2.3 To considerably enhance our existing activity
with a view to denying the Independent all commercial
oxygen.’
Review of Aberdeen Independent
by Mr Ezzat (undated, but responsive to Memo dated 5 January 2000 from Mr
Davidson to Mr Ezzat):
After reviewing competition
between Aberdeen Journals and Independent: ‘The current position is
one of stalemate’ (page 2). |
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Recommendation (page 5) ‘to
purchase the Independent from Barwell and merge the title with our
own free title ... Unfortunately Barwell is currently on a roll and may
feel that he can demand a higher price. NNG will therefore need to move
forward by developing the Herald & Post and increasing the
pressure on Barwell. ... Our response to Barwell was very vigorous and
most publishing entrepreneurs would not have been able to fund these
losses over four years.
Assuming the OFT risk is minimal,
open negotiations with Barwell as we need to bring his price expectations
down. On the basis that he will not accept our views, we need to continue
with the development of the Herald & Post at the same
time.
NNG have to be prepared to
maintain this approach for a sustained period (6 to 12 months) in order to
convince Barwell that we will not allow the Independent to break
even.
I believe that maintaining the
pressure on Barwell by attacking the Independent more aggressively and
satisfactorily resolving the OFT queries will eventually ensure he will
accept our offer.’”
49. On the above evidence, the
Director presumed what he describes as “predation” by Aberdeen Journals in
March, May and June 2000, contrary to the Chapter II prohibition. The
Herald & Post’s prices were below average variable cost during
that period, even taking into account only costs which were regarded as
variable over a reference period as short as one month (paragraph
184).
— Aberdeen Journals’
counter-arguments |
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50. |
According to paragraphs 185 to
205 of the decision, Aberdeen Journals raised three
counter |
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arguments to rebut the Director’s
presumption of predatory conduct, namely that: (i) Aberdeen Journals was
merely meeting competition; (ii) by 1 March 2000 Aberdeen Journals had
changed its strategy, so no predation could be established after that
date; and (iii) in any event, there was no predation in May and June 2000
by Aberdeen Journals since extra costs were incurred in those months
because the threat of industrial action in Aberdeen compelled it to print
the Herald & Post in Leicester.
51. As to those arguments, the
Director considered (i) that Aberdeen Journals did not react
proportionately to the Independent’s entry, but rather initiated
and maintained a strategy designed to expel the Independent from
the relevant market, using the Herald & Post as a “fighting
title” (paragraphs 186 to 189 of the contested decision); (ii) that there
was no significant change in the situation after 1 March 2000 so as to
rebut the presumption of predation during the month of March (paragraphs
190 to 200), since Aberdeen Journals did not take any decisive action to
reduce its variable costs until the end of March
2000 |
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Secondly, there is survey
evidence which, although subjective, can be given probative value through
appropriate methodology. Thirdly, there is subjective evidence which may
emanate from the alleged infringer, the complainant or another source,
from documents or observed conduct. However, unless given in direct
evidence before the Tribunal, such evidence constitutes multiple hearsay
and must be treated with considerable circumspection: a document may not
represent the current opinion of its author, it may have been corrected
subsequently, or it may be based on errors. The motivation of the author
is also relevant: for example, unverified evidence from Aberdeen
Independent should be given very little credibility, given that it has a
clear interest in the outcome of the case. Further, internal documents
reflect the supply side, whereas it is the demand side which is the litmus
test for product market definition. According to Aberdeen Journals, the
Director’s approach in the present case, which is to rely almost entirely
on past conduct and statements by the supplying parties, as distinct from
evidence of the attitudes of consumers and users, is without precedent in
EC law.
63. Similarly, the Director’s discussion, in
the decision, of “paid versus free” and “weekly versus daily” (paragraphs 75 to 85) yields nothing of
evidential weight. No mention is made of the Competition Commission report
in Johnston Press/Trinity Mirror, cited above, which tends to show
that paid-for dailies and weekly free titles are complements, not
substitutes. Again the views
of advertisers on the importance of such matters as cover price and
periodicity have not been sought. Mr Alan Scott’s witness statement of 1
February 2001 indicates that those differences between the newspapers in question
are crucial. |
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that the ordinary meaning of the
documents on which the Director has relied in the contested decision is
not the correct meaning.
90. Aberdeen
Journals is wrong, says the Director, to claim that he has adduced no
contemporaneous evidence that
Aberdeen Journals’ strategy regarding the Independent lasted until
March 2000: such evidence is contained in the memoranda cited at paragraph
181 of the decision, the last one
dated January 2000, and in Graphs 1 and 2 of Annex 2 to the decision.
Even in March 2000, says the
Director, advertising rates of the Herald & Post were cut and
pagination increased. The
Director relies on the Tribunal’s comment in Napp Pharmaceuticals Limited v Director
General of Fair Trading [2002] CAT 1 [2002] CompAR 13 (“Napp”) that “it is relevant to
take facts arising before 1 March 2000 into account for the purpose … of
throwing light on facts and matters in issue on and after that date” (at
paragraph [217]). For example, the letters concerning Aberdeen Journals'
practice of giving exclusionary discounts show a consistent strategy from
May 1996 to January 1999. There is nothing to suggest that the product market
definition changed in January 1999 or at any other time in the relevant period. Aberdeen
Journals' termination of such discounts was prompted not by a changed
perception of th e market, but because of regulatory pressure from the
Director.
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used to see changes on a
year-on-year basis. (c) RBB do not have information on the actual prices
of the three titles on which to base reliable conclusions. (d) RBB have
based their analysis on changes in circulation on the basis that a
decrease in circulation represents an increase in the effective price of
advertising. However, most advertisers are likely to be less sensitive to
changes in circulation than of price: since most advertising in the
Evening Express, the Herald & Post and the
Independent is focused on Aberdeen, changes in circulation in the
outlying areas (which the changes in question were), are less significant
to advertisers than a change in price. (e) RBB fails to take account of
the fact that advertising for the Evening Express and the Herald
& Post was sometimes bundled together by Aberdeen Journals, as
noted in paragraphs 111 to 115 of the decision. Such bundling will distort
switching between these titles and the Independent, as will
Aberdeen Journals' discounts for exclusivity. (f) The data relied upon by
RBB is incomplete: nearly 20 per cent of the relevant data is missing, all
in relation to the Independent. (g) RBB takes no account of any
time lag in switching. Because advertising campaigns are planned and
booked in advance, it may take weeks or months for advertisers to react to
price changes.
102. Furthermore, the
detailed findings in the first and second RBB reports are neither
objective nor based on a balanced assessment of the data presented. In
particular, says the Director, RBB has ignored results which could be
indicative of switching between the Evening Express and the Independent and has overstated
the extent of behaviour indicating a lack of substitution. For example,
RBB overlooked Virgin Cinema which between December 1999 and March 2000
placed an increase of its advertising in the Independent, following
an increase in the distribution of the latter, rather than in the
Evening Express which had carried all Virgin’s advertising up to
that point.
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Evening Express. As
regards the 22 advertisers who were subject to a rate change, the Director
identified two examples where the evidence appeared to indicate switching
between the Evening Express and the free titles (Odeon Cinema,
Castlegate Arts Ltd). The remainder were either not inconsistent with
advertisers viewing the Evening Express and the free titles as
substitutes (7 examples) or were not determinative either way (11
identified by RBB and a further 2 identified by the Director). As regards
the 28 advertisers who were subject to distribution changes only, the
Director identified two examples where the evidence appeared to indicate
switching between the Evening Express and the free titles (Virgin
Cinema, Messrs Jamieson and Cradock). The remainder were either not
inconsistent with advertisers viewing the Evening Express and the
free titles as substitutes (7 examples); or were not determinative either
way (11 identified by RBB and a further 7 identified by the Director).
Only one case indicated a lack of substitutability. Overall, the Director
claims that his review of RBB’s analysis demonstrates that the evidence it
presents is not inconsistent with the Evening Express being
regarded by advertisers as a substitute for the free titles.
The impact of other media
105. The Director
submits that paragraphs 86 to 92 of the decision deal properly with
possible constraints from alternative advertising media. Aberdeen Journals
does not seriously contend that alternative media form part of the
relevant market, only that the Herald & Post and the
Independent together form
a separate market.
Dominance in the Director’s primary market
106. The Director points out (defence in the
first appeal, paragraphs 29 et seq) that his finding of dominance is based on both high market shares
and barriers to entry. He was entitled to rely on market shares alone: see
Case 85/76 Hoffman-La Roche v Commission [1979] ECR 461
(“Hoffman-La Roche”), paragraph 41; Case T-30/89 Hilti v
Commission [1991] ECR II-1439 at paragraph 92. There are no
“exceptional circumstances” here to rebut the presumption following from
Aberdeen Journals’ high market share. The loss by the Herald & Post
of |
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Aberdeen Journals or the
Independent, which has not been disclosed to Aberdeen Independent
for reasons of confidentiality. Up to 20 per cent of the data about the
Independent is apparently missing from RBB’s sample. The basis on
which the analysis was undertaken is impossible to work out: for instance,
how have they treated smaller classified advertisements which form a large
proportion of the whole ? Aberdeen Independent identifies substantive
errors in the second RBB report, including seven omissions from a list of
advertisers who used the Evening Express but not a weekly free
newspaper in March 2000. In any event, says Aberdeen Independent, there
are so many variables in an advertiser’s decision to place an
advertisement that it is very difficult to draw conclusions from
statistical analysis.
IV THE TRIBUNAL’S FINDINGS ON RELEVANT MARKET AND
DOMINANCE
1. GENERAL
A. The relevant law
119. In the Tribunal’s
judgment of 19 March 2002 in the first appeal, at [86] to [94], we
summarised the relevant law in the following terms:
“86. … In order to fall within the
Chapter II prohibition, it must be established that the undertaking in
question has a dominant position. As traditionally defined, a dominant
position is:
“a position of economic strength
enjoyed by an undertaking which enables it to prevent effective
competition being maintained on the relevant market by allowing it the
power to behave to an appreciable extent independently of its competitors,
its customers and ultimately of the consumers.” |
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“A preliminary point to note is
that, according to settled case-law, the definition of the market in the
relevant products must take account of the overall economic context, so as
to be able to assess the actual economic power of the undertaking in
question. In order to assess whether an undertaking is in a position to
behave to an appreciable extent independently of its competitors and
customers and consumers, it is necessary first to define the products
which, although not capable of being substituted for other products, are
sufficiently interchangeable with its products, not only in terms of the
objective characteristics of those products, by virtue of which they are
particularly suitable for satisfying constant needs, but also in terms of
the competitive conditions and the structure of supply and demand on the
market (see the judgment of the Court of Justice in Case 322/81
Michelin v Commission [1983] ECR 3461, paragraph 37).”
“it is settled law that account
must also be taken of the consumer’s point of view” (paragraph
40)
94. The overall
effect of the above case law is summarised in the judgment of the Court of
First Instance in Case T-504/93 Tiercé Ladbroke v Commission [1997]
ECR II-923 at paragraph 81:
“According to settled case-law,
for the purposes of applying Article [82] of the Treaty, the relevant
product or service market includes products or services which are
substitutable or sufficiently interchangeable with the product or service
in question, not only in terms of their objective characteristics, by
virtue of which they are particularly suitable for satisfying the constant
needs of consumers, but also in terms of the conditions of competition
and/or the structure of supply and demand on the market in question (Case
31/80 L’Oréal [1980] ECR 3775, paragraph 25; Case 322/81
Michelin v Commission [1983] ECR 3461, paragraph 37; Case C-62/86
AKZO Chemie v Commission [1991] ECR I-3359, paragraph 51; Case
T-30/89 Hilti v Commission [1991] ECR II-1439, paragraph 64, and
Case T-83/91 Tetra Pak v Commission [1994] ECR II-755, paragraph
63).”
120. At [96] to [97] of the
Tribunal’s first judgment, we identified the factors to be taken into
account in defining the relevant product market, as follows:
“96. The foregoing cases indicate
that the relevant product market is to be defined by reference to the
facts in any given case, taking into account the whole economic context,
which may include notably (i) the objective characteristics of the
products; (ii) the degree of substitutability or interchangeability
between the products, having regard to their relative prices and intended
use; (iii) the competitive conditions; (iv) the structure of the supply
and demand; and (v) the attitudes of consumers and users.
97. However, this check list is
neither fixed, nor exhaustive, nor is every element mentioned in the case
law necessarily mandatory in every case. Each case will depend on its own
facts, and it is necessary to examine the |
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advertising in another medium,
for example because it conveys a slightly different message aimed at a
different target audience, it may be complementary to it, in the sense
that it reinforces the advertiser’s overall message and thus increases the
effectiveness of each type of advertising. It is in this sense that the
term ‘complement’ is generally used by advertisers and providers of
newspapers advertising space.
25 It is important to note in the
context of this case that the potential for advertising space in a
particular newspaper to act as a constraint on prices for space in another
newspaper is not necessarily dependent upon whether the former is viewed,
on these terms, as a complement or substitute for the latter. If a
particular advertiser uses two newspapers at the same time, and is to this
extent using them as complements, he is still able to vary his spread of
advertising between the two newspapers, depending on relative prices. Such
switching of advertising spending at the margins is itself capable of
acting as a constraint on prices. In addition, it should be noted that the
degree to which an advertiser will view space in a particular newspaper as
a substitute or complement for space in another newspaper will depend to a
large extent on the relative price of advertising space in the newspapers
concerned. Thus, whereas an advertiser may view advertising space in one
newspaper, at a certain price, as a complement for space in another
newspaper, rather than as a direct substitute, this perception may change
if prices of the former are raised to a sufficient degree.”
“144. However, depending on the
circumstances, the idea that two products are, loosely speaking,
“complements” does not necessarily exclude the possibility that they are
also substitutes. Thus, a particular advertiser may have an advertising
budget that he chooses to divide between different means of communication
in the hope of reaching slightly different audiences, so that the
different media in question are, in a loose sense, ‘complementary’. On the
other hand, depending on the products in question, changes in relative
advertising rates may still lead to switching between the different means
of communication as advertisers choose to devote a greater proportion of
their advertising budget to one product rather than another. Thus the
comments of the reporting panels of the Competition Commission, cited
above, notably [paragraph 4.34 of] the RIM Report, to the effect
that in some circumstances daily and weekly newspaper titles or free and
paid-for newspapers might be viewed as ‘complements rather than
substitutes’ do not exclude the possibility that advertisers might switch
a proportion or even perhaps all their advertising between a daily and
weekly title (or between a free and paid-for title) if the changes in the
advertising rates made it sufficiently attractive to do so. This decision
by advertisers would equally be influenced by such matters as changes in
pagination or distribution area, which might make advertising in one kind
of newspaper rather than another relatively more attractive.”
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54 |
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and therefore Aberdeen Journals
can run at lower distribution levels to contain their losses.
…
Although Aberdeen Journals have
been successful in restricting the battle to the two frees by relaunching
their free title the Evening Express has suffered. I have
summarised below the revenues, volumes yields and % changes period on
period for the Evening Express for the last two years:
[TABLE OF FIGURES OMITTED]
This table cle arly shows the
effect of the battle between the Independent and Herald and Post on the
Evening Express. Average weekly revenues have declined from £95k per
week to £75k (a decline of 21%), volumes from 17k cms per week to 15k cms
(a decline 12%) and a decline in yields from £5.60 per cm to £5.10 per cm
(a decline of 9%).
Half of the decline can be
attributed to the fall in Sits Vac revenues and is not related to the
Independent. However a considerable portion of the remainder is
due to reduced retail/property revenues which can be partly attributed to
the Independent (emphasis added). …
The Independent’s ability
to break even/make a profit is very dependent on the Aberdeen Journals
tactics with the Herald and Post and Evening Express”
[emphasis added].
243. We think it
somewhat improbable that Mr Ezzat’s contemporary view that the
Independent had caused the Evening Express a loss of
business was in fact mistaken, confirmed as it is by Mr Pelosi’s
memorandum of 21 May 1999 (“The approach taken to the Independent
has had a serious adverse impact on yields for property and motors”)
and Appendix 2 to the letter of 10 February 2000 (“… [the
Independent] was having a significantly detrimental effect on AJL’s
advertising volumes with the Evening Express”). However, in our
view the important point is that Mr Pelosi, Mr Scott and Mr Ezzat all
perceived the Independent to be damaging the Evening Express
and acted accordingly. It does appear, moreover, that by 1999, yields
in the Evening Express were falling, despite Aberdeen Journals’
efforts to protect them: see paragraph 281 below.
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74 |
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Table 5
Advertisers with Evening
Express volume of over half a page who also use the free titles, Size
and Distribution of Volume, March 2000 |
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Source: RBB analysis based on Aberdeen Journals’
data.
285. RBB then studied the
behaviour of the top 10 individual advertisers advertising in more than
one newspaper in March 2000 over the period September 1999 to June 2000 to
see whether the relative volumes of advertising placed by those
advertisers in the different newspapers varied in response to price
changes or changes in distribution (according to RBB,
equivalent |
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86 |
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to a price change) over that
period. According to RBB, 6 out of the 10 advertisers representing 23.4
per cent of total advertising volumes in the Evening Express in
March 2000, did not switch advertising in response to the price or
distribution changes studied. RBB concludes that those advertisers view
advertising in the free newspapers as complementary to, rather than
substitutable for, advertising in the Evening Express. The position
as regards the remaining four advertisers was inconclusive, according to
RBB. From this RBB concludes that 84.6 per cent (61.2 per cent + 23.4 per
cent) of advertisers advertising in the Evening Express in March
2000 did not regard the free newspapers as effective substitutes for the
Evening Express.
286. In the second RBB report,
RBB studied whether those advertisers who had advertised only in the
Evening Express in March 2000 had in fact advertised in another
newspaper in the period between September 1999 and June 2000. According to
RBB some 3,468 advertisers advertising only in the Evening Express
i n March 2000 did not use a free title in the period September 1999
to June 2000 either. Those advertisers represent 46.4 per cent by volume
of advertising in the Evening Express in March 2000. RBB then
studied 50 advertisers who had used the Evening Express only in
March 2000, but had used a free title (even if for only 1 cm of space) in
the period September 1999 to June 2000. RBB concluded that in 28 cases
(representing 9.3 per cent of volume) the advertisers’ response to changes
in price or circulation was inconsistent with those advertisers regarding
a free weekly title as an effective substitute for the Evening
Express. In 22 cases (representing 2.7 per cent of volume) the result
was inconclusive. RBB similarly studied in more detail a further 19
advertisers who had used the Evening Express and a free weekly
title in March 2000, in addition to the 10 advertisers in this category
studied in the first RBB report, making 29 advertisers in all in this
category. According to RBB, 9 of these advertisers (representing 24.5 per
cent of volume) behaved in a way that was not consistent with them viewing
the free weeklies as a substitute for the Evening Express. The
remaining 20 advertisers in this category (representing 8.7 per cent of
volume) yielded results that were not determinative either way. Finally,
RBB carried out the same exercise on a further group who had been omitted
from the first report, and concluded that advertisers representing a
further 0.9 per cent of Evening Express volume did not regard th e
free newspapers as substitutes. From these analyses RBB concludes that
advertisers representing some 81.1 per cent (46.4 per cent + 9.3 per cent
+ 24.5 per cent + 0.9 per cent) of advertising volume in the Evening
Express in March 2000 did not regard the free weeklies as effective
substitutes. |
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87 |
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cent by value (67 per cent by
volume) in the period January to March 2000. If account is taken of the
fact that the Evening Express is partly distributed outside the
geographic market of urban Aberdeen, Aberdeen Journals’ market share in
that period was 73 per cent by value and 63 per cent by volume. On the
basis of those market shares and given the existence of significant
barriers to entry, the Director finds that Aberdeen Journals enjoys a
dominant position in that market (paragraphs 144 to 148 of the
decision).
310. In our view the
Director is correct to conclude that market shares of this order suffice
to establish that Aberdeen Journals was dominant unless exceptional
circumstances are shown: see e.g. Hoffman-La Roche, cited above, at
paragraph 41; AKZO, cited above, at paragraph 60; Case T-30/89
Hilti v Commission [1991] ECR II-1439, paragraphs 91-92; Tetra
Pak II, cited above,
[1994] ECR II-755, at paragraph 109. See also the Tribunal’s judgment in
Napp, cited above, at
[156] to [160]. In our view, that dominance is reinforced in this case by
the fact that Aberdeen
Journals had only one competitor, the Independent, which had been
loss-making for four years. We
also accept that Aberdeen Journals’ reaction to the launch of the
Independent would have been likely to deter others seeking to enter
the Aberdeen marketplace.
312. In any event, what
is relevant here is not what happened to the artificially priced Herald
& Post, but
the combined market share of the Evening Express and the Herald
& Post in March 2000.
Aberdeen Journals has not contested the market share figures of the
Director as far as the period January to March 2000 is
concerned.
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93 |
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readership; and Aberdeen Journals
uses the same production facilities for both titles. In those
circumstances, even on the – in our view unfounded – assumption that
advertising in “paid-for” local newspapers in Aberdeen is a separate
“market” from advertising in “free” local newspapers in Aberdeen, the
links between Aberdeen Journals’ position on both markets are extremely
close. Similarly, Aberdeen Journals’ conduct in relation to its “free”
title is clearly linked to the protection of its “paid-for” title. In
those circumstances, in our view the use by Aberdeen Journals of its
position in relation to advertising in free newspapers in Aberdeen in
order to protect its position in relation to advertising in paid-for
newspapers in Aberdeen may properly be characterised as an abuse of its
dominant position in advertising in “paid-for” local newspapers in
Aberdeen.
325. We add for
completeness that in Tetra Pak II, cited above, the Court of
Justice upheld a finding of
abuse of a dominant position in circumstances where the conduct complained
of on the non-dominant market
(non-aseptic containers and machinery) was not shown to have been directed
at strengthening or reinforcing the dominant position relied on (in
aseptic containers and machinery) see [1996] ECR I-5951, at paragraphs 21
to 31. The present case, however, is a case of an undertaking with a
dominant position in advertising in “paid-for” local newspapers using its
position as regards advertising in “free” local newspapers to protect that
dominant position, thus clearly linking the conduct with the dominant
position being protected. We do not, therefore, need to consider whether
there are special circum-stances of the kind that arose in Tetra Pak
II. Nor do we see anything in the judgment of Laurence Collins J in
Claritas (UK) Limited v The Post Office [2001] ECC 12, as casting
doubt on the conclusion we have reached on the facts of the present
case.
V
ARGUMENTS OF THE PARTIES ON THE ISSUE OF
ABUSE
327. At paragraphs 150
to 212 of the decision the Director found that Aberdeen Journals had
abused it s dominant position by supplying advertising space in the
Herald & Post at below average variable cost in the period 1 to
29 March 2000. That conduct affected trade within the United Kingdom.
Hence, the Chapter II prohibition is
infringed. |
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97 |
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losses, if its conduct had
continued it would have had the potential to drive the Independent
out of the market and to enhance its reputation for aggressive,
exclusionary behaviour.
347. As regards Aberdeen
Journals’ new arguments on average variable costs, the Director objects to
the withdrawal by Aberdeen Journals of its previous concession: see CPR,
14.1.8. The Director in any event rejects the notion that, as a free
newspaper, the Herald & Post could credibly be published
without advertising. The Director considers that he has correctly
identified the period over which the predatory pricing in question should
be assessed.
C. Aberdeen Independent’s submissions
VI THE TRIBUNAL’S FINDINGS ON
ABUSE A. The relevant law
349. In Napp v
Director General of Fair Trading [2002] CAT 1, [2002] CompAR 13 the
Tribunal summarised the relevant law in the following
terms:
“207. In Case 85/76 Hoffman-La
Roche v Commission [1979] ECR 461, which concerned a system of loyalty
rebates operated by the dominant firm which made it difficult for
competitors to enter the market, the Court of Justice stated at paragraph
91:
“The concept of abuse is an
objective concept relating to the behaviour of an undertaking in a
dominant position which is such as to influence the structure of a market
where, as a result of the very presence of the undertaking in question,
the degree of competition is weakened and which, through recourse to
methods different from those which condition normal competition in
products or services on the basis of the transactions of commercial
operators, has the effect of hindering the maintenance of the degree of
competition still existing in the market or the growth of that
competition.” |
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103 |
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“A finding that an undertaking
has a dominant position is not in itself a recrimination but simply means
that, irrespective of the reasons for which it has such a dominant
position, the undertaking concerned has a special responsibility not to
allow its conduct to impair genuine undistorted competition on the common
market.”
209. In AKZO
(Case C-62/86 AKZO Chemie v Commission [1991] ECR I-3359),
where the dominant firm offered prices discounted below cost in order to
force a competitor out of business, the Court held:
“[70] Article 82 prohibits a
dominant undertaking from eliminating a competitor and thereby
strengthening its position by using methods other than those which come
within the scope of competition on the basis of quality. From that point
of view, however, not all competition by means of price can be regarded as
legitimate.
[71] Prices below average
variable costs (that is to say, those which vary depending on the
quantities produced) by means of which a dominant undertaking seeks to
eliminate a competitor must be regarded as abusive. A dominant undertaking
has no interest in applying such prices except that of eliminating
competitors so as to enable it subsequently to raise its prices by taking
advantage of its monopolistic position, since each sale generates a loss,
namely the total amount of the fixed costs (that is to say, those which
remain constant regardless of the quantities produced) and, at least, part
of the variable costs relating to the unit produced.
[72] Moreover, prices below
average total costs, that is to say, fixed costs plus variable costs, but
above average variable costs, must be regarded as abusive if they are
determined as part of a plan for eliminating a competitor. Such prices can
drive from the market undertakings which are perhaps as efficient as the
dominant undertaking but which, because of their smaller financial
resources, are incapable of withstanding the competition waged against
them.”
210. AKZO was
followed in Case T-83/91 Tetra Pak v Commission [1994] ECR II-755),
on appeal, Case 333/94P Tetra Pak v Commission [1996] ECR I-5951
(“Tetra Pak II”). The Court of First Instance, applying the
criteria set out in AKZO, found that certain of Tetra Pak’s prices
were below variable direct costs, and in one case below average variable
cost (paragraph 151), and had no other economic rationale other than
ousting Tetra Pak’s principal competitor (paragraphs 147 to 151, and 188
to 192 of its judgment). On
the subsequent appeal the Court of Justice held at paragraphs 41 to 44:
“41. In AKZO this Court
did indeed sanction the existence of two different methods of analysis for
determining whether an undertaking has practised
predatory |
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104 |
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pricing. First, prices below
average variable costs must always be considered abusive. In such a case,
there is no conceivable economic purpose other than the elimination of a
competitor, since each item produced and sold entails a loss for the
undertaking. Secondly, pr ices below average total costs but above average
variable costs are only to be considered abusive if an intention to
eliminate can be shown.
42. At paragraph 150 of the
judgment under appeal, the Court of First Instance carried out the same
examination as did this Court in AKZO. For sales of non-aseptic
cartons in Italy between 1976 and 1981, it found that prices were
considerably lower than average variable costs. Proof of intention to
eliminate competitors was therefore not necessary. In 1982, prices fo r
those cartons lay between average variable costs and average total costs.
For that reason, in paragraph 151 of its judgment, the Court of First
Instance was at pains to establish – and the appellant has not criticised
it in that regard – that Tetra Pak intended to eliminate a competitor.
...
44. Furthermore, it would not be
appropriate, in the circumstances of the present case, to require in
addition proof that Tetra Pak had a realistic chance of recouping its
losses. It must be possible to penalise predatory pricing whenever there
is a risk that competitors will be eliminated. The Court of First Instance
found, at paragraphs 151 and 191 of its judgment, that there was such a
risk in this case. The aim pursued, which is to maintain undistorted
competition, rules out waiting until such a strategy leads to the actual
elimination of competitors.”
211. In Cases T-24-26 and 28/93
Compagnie Maritime Belge v Commission [1996] ECR II-1201, on appeal
Cases C-395 and 396/96P Compagnie Maritime Belge v Commission
[2000] ECR I-1365 (“Compagnie Maritime Belge”), a liner
conference, Cewal, was found to have abused a dominant position on certain
shipping routes between Europe and West Africa, by selectively lowering
its freight rates to match the rates charged by its main independent
competitor for ships sailing on the same or similar dates, a practice
known as ‘fighting ships’. It was not shown that the members of Cewal had
incurred losses, only a reduction in profits. The Court of First Instance
held at paragraph 146:
“[146] As has already been
pointed out, it has been consistently held that whilst the fact that an
undertaking is in a dominant position cannot deprive it of entitlement to
protect its own commercial interests if they are attacked; and whilst such
an undertaking must be allowed the right to take such reasonable steps as
it deems appropriate to protect those interests, such behaviour cannot be
allowed if its real purpose is to strengthen this dominant position and
thereby abuse it |
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105 |
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July 2000. The use of the word
“losses” in this context is not, in our view, technically correct. In
paragraph 171 the figures in question relate only to the Herald &
Post’s negative contribution to Aberdeen Journals on the basis of the
management accounts, and while those in paragraph 174 take account also of
certain other costs attributed to the Herald & Post, neither
set of figures make any allowance for other operations and overhead costs
whic h are incurred by Aberdeen Journals but not charged to the Herald
& Post in the management accounts. “Operations” not included in
the management accounts include pre-press and printing staff costs.
Overheads could include, for example, the cost of central management and
administration, premises, maintenance and depreciation of machinery,
financial controls and audit, information technology, finance charges and
so on.
367. However, paragraph
174 of the decision shows that even on the basis of the Herald &
Post’s management accounts, the Herald & Post was failing
by a long way to make a positive contribution to overheads in the months
of March to July 2000. The figures are as follows:
Herald & Post negative
contribution March to July 2000 on the basis of the management
accounts |
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March 2000 April 2000 May 2000
June 2000 £
£
£
£
Income
82,397
68,582
65,225
69,421
Total costs in
management accounts1
122,648
84,380
87,169
88,161
Contribution shown by
management accounts
(40,251)
(15,798)
(21,944)
(18,740) |
July 2000 £
56,314 64,980
(8,666) |
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1Including
Leicester printing costs for May and June.
113 |
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documents. In the first decision
the Director identified these costs as ink, plate and film charges.
Following questions from the Tribunal during the first appeal, further
heads of directly attributable costs were identified by Aberdeen Journals,
namely electricity, transport-fuel, overtime and production pre-press: see
paragraph 162 of the decision. The Director has not apparently verif ied
the data supplied by Aberdeen Journals as to the amount of these costs. We
are not in a position to do so, although we note Aberdeen Independent’s
submission that these costs are even now unrealistically low. For example,
we note that Aberdeen Journals’ estimate of the variable cost ele ment for
pre-press operations was less than 10 per cent of the costs stated to have
been incurred by the Independent for its corresponding pre-press
activity. Taking Aberdeen Journals’ figures at face value, the resulting
figures for the period March to July 2000 are as follows, on the basis of
the table to paragraph 174 of the decision.
HERALD & POST CONTRIBUTION SINCE FEBRUARY
2000 |
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1Including Leicester printing costs for May and
June.
369. It is clear from the
foregoing that the revenues of the Herald & Post were well
below total cost after March 2000, even without taking account of
operations costs and overheads. We have no reason to suppose that the
position changed before early 2001. |
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370. Although the Director has
approached this case on the basis of pricing below average variable costs,
we have already pointed out (at paragraph 355 above) that, in order to
survive in the market, a competitor to a dominant firm must normally cover
its total costs (including overheads) and earn a return on its investment.
Moreover, in our view, in normal commercial business, each product line is
expected not merely to cover its variable costs, but to make
an |
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costs” costs which would still be
incurred if the Herald & Post were not produced for a month.
According to the fax of 17 July 2000:
“These are the short run fixed costs. All other costs are
variable in the short run.”
391. In response to that notice,
Aberdeen Journals supplied certain figures on 1 August 2000, which figures
were updated on 23 August 2000. Costs were allocated between “short run”
fixed costs and variable costs with the following
explanation:
“Editorial
Variable Costs include freelance photographers and
reporters.
Advertising
Variable costs include staff
incentives/bonuses, stationery and other office consumables, vehicle
costs
Fixed costs are salary and
associated costs (employer’s NIC office equipment rental charges) of
permanent employees.
Newsprint
Assumed 100% variable
May and June’s figures include
amounts related to printing at another location (Leicester). These are
exceptional costs and have been deducted in the total variable cost
calculation.
Circulation
Assumed all variable with the
exception of the salary and associated costs of the permanent distribution
employees.
Other Production Charges
Ink charges are based on the
H&P’s newsprint consumption as a proportion of total tonnage consumed
and this is also applied to the overall volumes of ink consumed. Plate
charges are based on the number of mono, colour and blank plates
used.” |
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392. |
Apart from, apparently, rejecting
Aberdeen Journals’ classification of part of the
circulation |
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costs as “fixed”, the Director
appears to have accepted Aberdeen Journals’ figures without further
verification.
393. This part of the Director’s
analysis seems to us to give rise to a difficulty, namely that the figures
supplied by Aberdeen Journals appear to relate to costs that are variable
within a month, rather than what the Director appeared to be
seeking, namely an estimate of costs that are variable from month to
month. Thus, on the figures supplied, editorial costs such as
freelance photographers are treated as variable, while all other editorial
costs are treated as fixed. Similarly, for advertising, the only elements
that are treated as variable costs are staff bonuses, stationery, office
consumables etc, rather than the salaries of the staff.
120 |
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was not wholly clear on this
point either. The table to paragraph 179 of the decision suggests that
some costs (e.g. overtime and pre-press) which would not have been
incurred in May and June 2000 have in fact been allowed, whereas no
adjustment has been made to the Leicester costs in respect of ink, plate
and film charges that would otherwise have been incurred.
399. These various
considerations point to the need, in future cases, for more rigorous
verification and analysis of costs figures submitted to the
Director.
400. Nonetheless, taking
the figures used by the Director in the decision, the conclusion he
reached as to the relationship between the Herald & Post’s
revenues and its variable costs in the period March to July 2000 can be
summarised as follows, on the basis of the table at paragraph 179 of the
decision:
Herald & Post’s variable costs versus income,
2000 (£) |
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1 Treating all
newsprint and circulation as variable, but allocating a large proportion
of editorial and advertising to fixed costs in accordance with Appendix 5
to Herbert Smith’s letter of 1 August 2000; including Aberdeen Journals’
figures for printing costs at Leicester in May and June 2000 as
“variable”, but including nothing for printing labour at Aberdeen in
March, April and July 2000 other than overtime and production pre-press;
and including other additional variable costs not included in the
management accounts: see paragraph 179 of the decision.
2 Includes
Leicester printing costs. |
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401. The Director, in our view
correctly, treated the claimed additional costs of printing at Leicester
as variable costs (paragraph 179 of the decision). However, he accepted
(at paragraph 205) that the threat of industrial action constituted “an
objective justification” for |
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122 |
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Director under Step 4, we think
some more explicit recognition should be made of the fact that the
infringement in this case, as found by the Director, lasted only for one
month.
500. There will be
interest on the penalty pursuant to Rule 27 of the Tribunal’s Rules from
such date and at such rate as the Tribunal may determine in default of
agreement between the parties: see Napp v Director General of Fair
Trading (interest and costs) [2002] CAT 3 [2002] CompAR 160. We will
also deal with any applications for costs.
IX CONCLUSION
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Christopher Bellamy
Andrew Bain
Patricia Quigley
Delivered in open court |
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Charles Dhanowa
23 June
2003
Registrar |
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146 |
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