Affected market: Publication of books
The OFT’s decision on reference under section 33(1) given on 19 April 2006. Full text of decision published 21 April 2006.
Please note that square brackets indicate figures or text which have been deleted or replaced with a range at the request of the parties for reasons of commercial confidentiality.
Hachette Livre SA (Hachette) is a wholly owned subsidiary of Lagardere SCA, France, which operates in the UK through Hachette Livre UK Limited. Its key publishing businesses in the UK include, Hodder Headline Limited; Orion Publishing Group; Octopus Publishing; and Watts Publishing Group. It distributes its own and third parties' books in-house through Littlehampton Book Services and Bookpoint Distribution Centre.
Time Warner Book Group Inc and Time-Life Entertainment Group Ltd (referred to collectively as TWBG) are wholly owned subsidiaries of Time Warner Inc. TWBG publishes under imprints including, Abacus; Atom; Little Brown; Orbit and Virago. TWBG does not distribute its own or third parties' titles. TWBG's UK turnover in 2005 was £[ ] million.
On 6 February 2006 Hachette agreed to acquire the entire issued share capital of TWBG. The acquisition was notified to the OFT on 23 February 2006. The statutory deadline is 5 June 2006.
As a result of this transaction Hachette and TWBG ceased to be distinct. The UK turnover of TWBG is less than £70 million therefore the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is not met.
However, the parties overlap in the publication of books and for the purposes of the share of supply test, they submitted that combined, they will account for [20 to 30] per cent of hardback fiction book sales and [25 to 35] per cent of paperback fiction book sales in the UK in 2005. Accordingly, the share of supply test in section 23(2) of the Act is met. The OFT therefore believes that it is, or may be the case that a relevant merger situation has been created.
FRAME OF REFERENCE
For most readers the most important factor in choosing a book is the author or title. Therefore, on the narrowest possible basis, each individual title might be viewed as a separate market. However, with regard to general literature works, most publishers are active across the range of categories and customers purchase books from across a wide variety of genres. General literature works are therefore considered together.
The European Commission has drawn a distinction between hardback and paperback general literature (see [Note 1]) but third parties have previously told the OFT (see [Note 2]) that there is competition between the different formats and many publishers have similar shares of supply in each of the two segments. Share data from the parties suggests this is still the case.
The OFT has previously (see [Note 3]) segmented publishing into nine categories of books (see [Note 4]). The parties and the majority of third parties agreed with that segmentation in this case also. Two third parties submitted that the total supply of books comprises a single market. However, there is no need to reach a firm conclusion on product scope, as the merger does not raise concerns in any case.
Publishing houses active in the UK make most of their sales in the UK and books are written in the English language. Therefore, the relevant geographic frame of reference for this assessment is the UK.
The parties overlap in the publication of all books; general literature in hardback; general literature in paperback; and children's books; academic and professional; and science, technical and medical books. The merged entity's shares are estimated at less than 20 per cent (with increments of less than 5 per cent) in each of these segments. Although the merged entity will be the largest player in a number of segments, the second and third largest players are generally of a similar size and the market is relatively fragmented with over 2000 publishers in total.
Some third parties submitted that the merged publisher will have a monopoly over those titles it supplies which are ‘must haves’ but this would not appear to change as a result of the merger. Information on the parties’ shares of supply of bestsellers (see [Note 5]) shows that post merger, Hachette will continue to be the second largest publisher of the 100 bestsellers in 2005, with Random House, continuing to be the largest. HarperCollins and Pearson will continue to be significant players also. In addition, there is evidence that smaller publishers will continue to exert a constraint on the merged entity (see [note 6]).
The potential theory of harm in this case is that increased market power would allow the merged entity to raise prices to booksellers by offering less favourable terms of trade, such as lower discounts off the recommended retail price. This could then be passed on to consumers in the form of lower discounts. However, in view of the small increments in the merged party's shares in each of the overlapping segments and given the presence of other similar sized competitors, the OFT is satisfied that no concerns arise as a result of the merger.
In light of these factors, the OFT does not consider this transaction could lead to a substantial lessening of competition in book publishing in the UK.
The parties’ share of supply for the provision of distribution services to third parties is below 15 per cent therefore this is not expected to raise any vertical competition concerns (see [Note 7]).
THIRD PARTY VIEWS
Third party competitors were unconcerned.
Customers were concerned to differing degrees about the parties’ potential increased market power post merger, which would allow them to harmonise or reduce the terms offered to customers. These concerns have been addressed above.
The parties will be the largest UK publisher of all books; general literature (hardback and paperback); children’s books; academic and professional; and science, technical and medical books. However, their combined shares of supply will not exceed 20 per cent in any of the overlapping segments and the increments are small (at less than 5 per cent). All product segments are fragmented with competitors who are not significantly dissimilar in size to the combined entity.
Based on the moderate shares of supply and small increments in each case, it is unlikely that the merged entity would acquire market power as a result of this acquisition. Other publishers such as Random House, Pearson and Harper Collins (see [Note 8]), which are a similar size to the parties in all of the segments considered, are expected to continue to constrain the parties’ behaviour post merger.
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.
- Lagardere/ Natexis/ VUP Case No. Comp/M.2978, 7 January 2004.
- Hachette Livre SA/ Hodder Headline Limited OFT Decision of 15 September 2004.
- Hachette Livre SA/ Hodder Headline Limited OFT Decision of 15 September 2004.
- General literature in hardback; general literature in paperback; children's books; school text books; academic and professional; scientific, technical and medical; dictionaries; encyclopaedias; and consumer education.
- Based on the Guardian's top 100 bestseller (2005) list.
- Recent examples of smaller publishers with disproportionate market power include, Bloomsbury when it first published 'Harry Potter' and Profile Books with 'Eats, Shoots and Leaves'.
- In Lagardere (see note 1) the European Commission identified a separate market for distribution of books by third parties (excluding in-house distribution). Although a certain degree of substitution between in-house and external distribution services is possible, the EC found that in-house production was essentially intended for producers' own use; and there was no direct competition between in-house production and production offered to outsiders because of the substantial investment on in-house capacity and the need to obtain a return on it. Therefore, only the services provided to outsiders constitute a market on which supply is matched to demand.
- The OFT has no evidence to suggest that TWBG competes more closely with Hachette compared to these three (larger) publishers.