Classified directory advertising services

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On 1 March 1995 the Director General of Fair Trading (DGFT) asked the MMC (see Appendix 1.1) to investigate and report on the supply in the UK of classified directory advertising services. These were defined as the undertaking and performance of engagements to publish advertisements in directories which show suppliers of goods and services classified by reference to the goods or services supplied, and are distributed wholly or mainly to consumers. The main directories covered by the reference are Yellow Pages and the Thomson Local directories. Concerns that led to the reference included the very high rates of return of Yellow Pages (BTYP), a division of British Telecommunications plc (BT), and its scope to act anti-competitively.

BTYP supplies about 84 per cent of the reference services. Thomson Directories Limited (Thomson), since 1994 owned by US WEST Inc, accounts for some 14 per cent of the market; numerous small or local directories account for the remainder of the market. A monopoly situation therefore exists in favour of BT, and we examined whether any aspect of that monopoly situation operates against the public interest.

In 1994 BTYP earned profits of almost £140 million on sales of about £340 million-a return on turnover of 41 per cent and on capital employed of about 130 per cent. Its prices for advertising services have increased steadily in real terms over the last ten years.

BTYP argued that the reference services were part of a wider classified advertising, or general local advertising, market, and that its high profitability reflected its very high value for money compared with other advertising media: it believed its previous price increases in real terms were also justified by improvements in value for money. In our view, there are several significant differences between the characteristics of classified directories such as those supplied by BTYP and Thomson and the characteristics of other media. It is noteworthy that prices of the services supplied by BTYP have increased more than prices of most other media. We have seen no objective evidence that the pricing policies of BTYP, or of other suppliers of classified directories, have been significantly constrained by the prices of other media, or that there has been effective price competition to BTYP from other suppliers of classified directory adver-tis-ing services. BTYP has a number of clear advantages, including the fact that Yellow Pages was the first major classified directory to be supplied in the UK (`first-mover' advantage), and new entry on any significant scale in what is now a mature market is improbable.

We conclude that BTYP's prices are higher than would be the case if competition were effective. This is against the public interest.

We also find that BTYP's recent publication of local direc-tories is likely, given BTYP's dominant market position, to reduce the effectiveness of competition to BTYP. This too is against the public interest, being likely to lead in the longer term to reduced choice and increased prices of the reference services.

On the other hand, our inquiry shows that BTYP is held in high regard by most of its advertisers and users, as regards both quality of the product and, to a somewhat lesser extent, quality of service and value for money. Because of the characteristics of this market, the fashioning of appropriate remedies without putting such generally satisfactory standards of service at risk is far from straightfor-ward.

We examine a wide range of measures with a view to introducing more competition and so constraining BTYP's pricing behaviour. We conclude that divestment of BTYP to a separate owner, or any separation of BTYP into separate regional companies or vertical separation or franchising of particular functions, would not currently be appropriate. Nor do we believe there would be advantage were use of the Yellow Pages trade mark to be more widely avail-able. We believe, however, that there are two measures which will ensure greater transparency of BTYP's business, thereby providing a modest stimulus to competition and assisting in the monitoring of BTYP. We recommend that BT should be required to establish BTYP as a sub-sidiary of BT with appropriate reporting obligations; and that BT should undertake that all arrangements between itself and BTYP should be transparent and on an arm's length basis. These measures will not, however, be sufficient to remedy the adverse effects we have identified with regard to BTYP's prices.

We therefore believe it necessary to resort to an element of price control. We would have proposed a stringent control on BTYP but for our concerns that such an approach may damage existing or future competition. Accordingly we recommend the imposition on BTYP of a relatively mild system of price control, based on an RPI-2 formula. This will afford some benefit to BTYP's advertisers without, we judge, impairing existing or future competition.

To remedy the adverse effects resulting from BTYP's publication of local directories, we recommend that BTYP should be prohibited from publishing or distributing more than one consumer classified advertising directory covering or including all or part of any particular area.

In addition to our formal recommendations, we point to BTYP's need to review its internal disciplines, to ensure that the responsibility that comes with its dominant market position is, and can be demonstrated to be, duly dis-charged. The DGFT will wish to keep the market under review. If there are grounds for concern in future, we envisage the possibility of a further reference to the MMC.

One member of the group, Mrs Blight, although agreeing with the substance of our conclusions and to a large extent with our reasoning, disagrees with the majority in relation to certain remedies; her views are set out in a note of dissent following Chapter 2.

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