suscmtnr No... ACH J FG, Sage CATCHWORDS TRADE PRACTICES - advertising - review of ACCC revocation of authorisation of Accreditation System of Media Council of Australia —- accreditation of advertising agencies - rules for commission allowed to accredited agents - whether material change of circumstances - Accreditation System operates to inhibit price competition in advertising services and to constrain general patterns of trade between agencies, advertisers, and media. / Trade Practices Act 1974: s. 91(4) APPLICATIONS FOR REVIEW OF A DETERMINATION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION REVOKING "Authorisation NO. A3005 BY HERALD AND WEEKLY TIMES LIMITED, 2KY BROADCASTERS PTY LTD AND SOUTHERN TELEVISION CORPORATION LIMITED ON BEHALF OF THE MEMBERS AND ASSOCIATE MEMBERS OF THE MEDIA COUNCIL OF AUSTRALIA (NSW 2 OF 1995) THE ADVERTISING FEDERATION OF AUSTRALIA LIMITED (NSW 3 OF 1995) LOCKHART J. (PRESIDENT) DR M BRUNT DR B ALDRICH SYDNEY 26 JULY 1996 COMMONWEALTH OF AUSTRALIA Trade Practices Act 1974 IN THE AUSTRALIAN COMPETITION TRIBUNAL Lockhart J. RE BY 26 July 1996 NSW 2 of 1995 NSW 3. of 1995 APPLICATIONS FOR REVIEW OF A DETERMINATION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION REVOKING Authorisation NO. A3005 HERALD AND WEEKLY TIMES LIMITED 2KY BROADCASTERS PTY LTD AND SOUTHERN TELEVISION CORPORATION LIMITED ON BEHALF OF THE MEMBERS AND ASSOCIATE MEMBERS OF THE MEDIA COUNCIL OF AUSTRALIA (NSW 2 OF 1995) THE ADVERTISING FEDERATION OF AUSTRALIA LIMITED (NSW 3 OF 1995) (President), Dr M Brunt and Dr B Aldrich MINUTE OF ORDER THE TRIBUNAL ORDERS THAT: 1. 2. Authorisation No. A3005 be revoked. Operation of the revocation be suspended until 3 February 1997. COMMONWEALTH OF AUSTRALIA Trade Practices Act 1974 IN THE AUSTRALIAN COMPETITION TRIBUNAL Lockhart J. 26 July 1996 RE BY NSW 2 of 1995 NSW 3 of 1995 APPLICATIONS FOR REVIEW OF A DETERMINATION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION REVOKING Authorisation NO. A3005 HERALD AND WEEKLY TIMES LIMITED 2KY BROADCASTERS PTY LTD AND SOUTHERN TELEVISION CORPORATION LIMITED ON BEHALF OF THE MEMBERS AND ASSOCIATE MEMBERS OF THE MEDIA COUNCIL OF AUSTRALIA (NSW 2 OF 1995) THE ADVERTISING FEDERATION OF AUSTRALIA LIMITED (NSW 3 OF 1995) . (President), Dr M Brunt and Dr B Aldrich CONTENTS Introduction 1 Participants and witnesses 4 1978 determination of the Tribunal 6 The Commission's determination 14 The cases of the parties and interveners 21 The Act and the appropriate tests especially Ss. 91(4) The Australian advertising industry 33 11. 12. 13. The Accreditation System A framework for analysis of revokcation issues Market definition, market power and competition Has there been a material change of circumstances since 1978? Assessment of benefit and detriment resulting from the Accreditation System Conclusion COMMONWEALTH OF AUSTRALIA Trade Practices Act 1974 IN THE AUSTRALIAN COMPETITION TRIBUNAL NSW 2 of 1995 NSW 3 of 1995 RE APPLICATIONS FOR REVIEW OF A DETERMINATION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION REVOKING Authorisation NO. A3005 BY HERALD AND WEEKLY TIMES LIMITED 2KY BROADCASTERS PTY LTD AND SOUTHERN TELEVISION CORPORATION LIMITED ON BEHALF OF THE MEMBERS AND ASSOCIATE MEMBERS OF THE MEDIA COUNCIL OF AUSTRALIA (NSW 2 OF 1995) THE ADVERTISING FEDERATION OF AUSTRALIA LIMITED (NSW 3 OF 1995) Lockhart J. (President), Dr M Brunt and Dr B Aldrich 26 July 1996 REASONS FOR DECISION 1. Introduction These are two applications for review of a determination of the Australian Competition and Consumer Commission ('the Commission') made on 5 October 1995 revoking an earlier authorisation. The applicants in matter No. 2 of 1995 before the Tribunal are Herald and Weekly Times Limited, 2KY Broadcasters Pty Limited and Southern Television Corporation Limited, on behalf of the members and associate members of the Media Council of Australia ('the MCA'). Application No. 3 of 1995 is made by the Advertising Federation of Australia Limited ('AFA'). The Commission's determination relates to an authorisation granted by the Tribunal (then known as the Trade Practices Tribunal) on 30 March 1978 (the Tribunal's reasons were given on 10 February 1978), pursuant to an application for authorisation No. A3005. The applicants for that authorisation were the same three entities who have made application to the Tribunal for review in the current matter, No. 2 of 1995. By its 1976 determination the Commission granted conditional authorisation to the applicants to continue to be parties to an agreement contained in the rules of the MCA governing the accreditation of advertising agencies. On review of the matter before the Tribunal (reported as the Media Council Case (1978) ATPR 40-058), the Tribunal granted authorisation to the Accreditation Agreement embodied in the Accreditation Rules and related codes and standards, provided amendments were made to certain of the rules. The Commission made another determination dated 10 January 1986 (Media Council of Australia (1986) ATPR (Com.) 50-107) whereby it granted authorisation to the MCA and members of its constituent and affiliated organizations to adopt certain codes as standards to which the rules of the Media Council governing the accreditation of advertising agencies would apply. The Australian Consumers' Association later applied for review of this determination of the Commission (Re Media Council of Australia (No 2) (1987) ATPR 40-774). The Tribunal refused to authorize the voluntary codes of conduct of the MCA because they would not be likely to result in overall public benefit. The Tribunal, however, allowed a reasonable time within which the MCA could propose appropriate amendments to its code system. The matter was the subject of further evidence and submissions and was considered again by the Tribunal (Re Media Council of Australia (No 3) (1989) ATPR 40-933). The Tribunal was satisfied that the codes were likely to operate in a fashion which would provide overall benefit to the public subject to compliance with certain conditions. We mention these applications to the Commission and the Tribunal concerning the voluntary codes of conduct because there is a nexus between the Accreditation System and the Code System. Rule 32 of the authorized Accreditation System requires that all media advertising lodged by accredited advertising agencies conform to the codes. In practice a breach of this rule exposes the accredited agency to sanctions under the rules. The Accreditation System, as embodied in the MCA's Accreditation Rules is central to the present inquiry. The Code System, though formerly part of the Accreditation System, is not at the centre of our present inquiry. 2. Participants and witnesses Although the three companies previously mentioned are the applicants for review on the record on behalf of the MCA, in fact their case was presented by the MCA. The MCA is an unincorporated voluntary association with a present membership of large media companies and associations of companies in specific sections of the media. It was established on 19 December 1967 by resolution of its original constituent associations. Its formation and growth has brought together a number of organizations of particular types of media: metropolitan newspapers, country newspapers, magazines, commercial radio stations and commercial television stations. Nearly all proprietors of commercial media in Australia are directly or indirectly members of the MCA and are bound by its objects and rules. All the self-regulatory codes emanate from the MCA. The MCA is the body responsible for the accreditation of advertising agents. The AFA is the representative body of Australian advertising agencies, with 74 member agencies and 126 branches throughout Australia. The authorisation which was revoked by the Commission concerns the rules governing the accreditation of advertising agencies ('the Accreditation Rules'). Those rules apply to and are binding on media proprietors and all accredited agencies who have applied for and received accreditation from time to time and who hold accreditation in accordance with the provisions of the Accreditation Rules. There are approximately 227 accredited agencies in accordance with the Accreditation Rules, of whom approximately 98 are members of or subsidiaries of members of the AFA. The AFA has approximately 28 further advertising agency members which are not accredited. The Accreditation Rules play a vital part in the business of all the members of the AFA, whether accredited or not, and govern the manner in which the member advertising agencies of the AFA do business in many significant respects. The AFA'S member advertising agencies account for approximately 80% of the total expenditure by all advertising agencies with the media. The Tribunal gave leave to the Australian Association of National Advertisers ('AANA'), Colgate-Palmolive Pty Limited and Toyota Motor Corporation Limited ('the interveners') to intervene in the proceedings before it. Advertisers range from individuals through to large corporations, and the AANA represents many of them, especially major advertisers. The MCA, the AFA and the interveners were separately represented by counsel and solicitors. The Commission appeared by counsel and solicitors. The Tribunal heard evidence from 15 witnesses and received many documents into evidence. The hearing occupied 8 days and we had the benefit of full submissions, both in writing and orally, from counsel and solicitors for the parties, for the interveners, and for the Commission. 3. The 1978 determination of the Tribunal The applicants for review before the Tribunal in that matter (being the same applicants as in the present matter No. NSW 2 of 1995) sought a review of the Commission's determination granting authorisation to the applicants to continue to be parties to the agreement contained in the MCA's rules governing accreditation of advertising agencies and certain associated 'Standards and Codes'. The Commission's authorisation was subject to the condition that one rule (Rule 23) be amended and that another rule (Rule 19) be abandoned. The following statement of facts is taken from the Tribunal's reasons for decision as reported in (1978) ATPR 40-058. The Accreditation Rules establish a system ('the Accreditation System') under which advertising agencies became and remained accredited. Such accreditation entitles the advertising agent, without any further need to establish credit worthiness, to place the advertisements of advertiser clients on the basis that payment need only be made within the time allowed by the Accreditation Rules and that the agent accepts personal liability to make such payment within that time. In 1978 the Accreditation System was administered by the Australian Media Accreditation Authority which was a committee of the MCA. The Accreditation Authority consisted of representatives of the constituent members of the MCA. Affiliated associations were not represented. Limited representation had been extended to the AFA. The Accreditation Rules provided that no accredited agent shall accept from any media proprietor any higher rate of commission than the maximum rate prescribed by the Association of which the proprietor is a member. Rule 19 provided that only accredited agents shall be eligible to receive commission and that such commission shall be payable only to the accredited agent preparing and lodging copy and then only upon payment for the relevant advertisement. Rule 23 (as -amended to comply with the condition imposed by the Commission) provided that the commission allowed by a media proprietor to an accredited agent shall not directly or indirectly be shared with or rebated to any advertising principal. Accredited advertising agents are responsible for payment of all their clients' accounts; and all orders placed by them with media proprietors are to be signed by the accredited agent and not 'for and on behalf' of any client. Rule 31 of the Accreditation Rules provided, inter alia, that all advertising submitted to a media proprietor shall conform to the standards of the media proprietor concerned, and shall conform strictly with any advertising standards or Code of Ethics which may be published by the MCA from time to time. The MCA had published such a Code of Ethics. The overall effect of the provisions of the Accreditation Rules was that an accredited advertising agent must ensure that all advertising submitted by him conformed strictly with the Code of Ethics (at 17,598). The Tribunal said at 17,599 that at the heart of the efficient working of the Accreditation System was the accredited agent's entitlement to receive 'credit' from media proprietors in respect of all advertising which he lodged, and his assumption of del credere liability in respect of the charge of such advertising. As the Tribunal noted at 17,603 and 17,604, the question before it was whether' the authorisation which the applicants sought (an authorisation which embraced the provisions of Rule 19) should be granted. The resolution of that question involved the finding, assessment and weighing of benefit and detriment. The Tribunal said at 17,605 that its power to grant authorisation in the matter before it was contained in s. 88(1) of the Trade Practices Act 1974 (''the Act') which, by reason of the provisions of s. 102, applied to and conferred power upon the Tribunal on the hearing of an application for review. The Tribunal said that there were two appropriate tests to be applied, namely, ss. (7) and (8) of s. 90. The Tribunal found at 17,606 that on the material before it the conclusion was compelled that real and substantial benefit to the public had resulted and continued to result from the MCA's Accreditation System. That benefit to the public was stated by the Tribunal to be under the following headings: (a) Efficiency; (b) Cost Savings; (c) Efficiency, Cost Savings and Public Benefit; (d) Standards in Advertising; and (e) General. Under the heading of (a) Efficiency, the Tribunal found that the MCA Accreditation System had contributed significantly to the elimination of unnecessary duplication of effort and transactions, and to the increase of efficiency in relation to the placement of advertising in the Australian media. By requiring as part of its Accreditation System observance not only of its own standards but, where appropriate, of standards laid down by statutory bodies or constituent associations, the MCA had introduced a degree of overall rationalization of standards of advertising in the Australian media, even in those areas where the advertising agent was required to be conscious of more than one set of standards. The contribution which the MCA's Accreditation System had made to uniformity of standards for Australian advertising was clearly conducive to the elimination of duplication and to the promotion of the increased efficiency among advertising methods. The Tribunal also found that the accreditation system had likewise contributed in significant - 10 - ways to the efficiency of Australian media proprietors who are directly, or through their membership of constituent or affiliated associations, parties to it. The contribution which the Accreditation System made to efficiency among media proprietors was an independent one. An overall accreditation system was likely to be more reliable than any one of a number of accreditation systems dealing only with advertising and particular types of media. The more reliable the accreditation system, the more successfully a prudent media proprietor can eliminate duplication of checks of credit worthiness. For that reason the Accreditation System contributed more effectively to the efficiency of media proprietors than did any of the particular systems which it proposed. As to (b) Cost Savings, the Tribunal found that while it was impossible to put a precise figure on them, there were costs savings to media proprietors and advertising agents resulting from the Accreditation System which were 'substantial in total' (thereby adopting the words of the Commission in its Determination). Regarding (c) Efficiency, Cost Savings and the Public Benefit, the Tribunal found at 17,610 that increased efficiency among accredited advertising agents was, in view of their numbers and the functions they performed, itself of benefit to the public. Increased efficiency among media -1l1- proprietors was likewise of benefit to the public. Cost savings to the general class of advertising agents and the general class of media proprietors were of benefit to the public regardless of whether they were passed on to advertisers. The increased efficiency and cost savings in relation to the placement of advertisements which resulted from the Accreditation System were also, in the Tribunal's view, of benefit to the public in that they were of benefit to advertisers generally - facilitating the placement of advertising on an Australia-wide basis, and being conducive to the reduction of advertising charges which the advertiser would otherwise have been required to pay. The difference between the overall cost of advertising under an inefficient system and the cost under an efficient system was likely to be reflected in the cost which the consumer was ultimately required to pay for the relevant goods. Under (d) Standards in Advertising, the promotion of standards and Codes of Ethics for the purpose of promoting honesty, fairness and responsibility in advertising was found by the Tribunal to be clearly in the public interest. The Tribunal concluded that there were benefits to the public resulting from the establishment of and adherence to the MCA's Codes and Standards and that those benefits should properly be regarded as resulting from the Accreditation System. - 12 - Under the heading (e) General, the Tribunal found that the facilitation of Australia-wide advertising, when considering the Accreditation System's contribution to efficiency, constituted a benefit to the public resulting from the Accreditation System (at 17,611). The Tribunal found that the encouragement and preservation of small media proprietors and small advertising agents which resulted from _ the Accreditation System were of benefit to the public; and it also found (at 17,612) that in the opportunities which it affords the smaller and medium-sized agencies, as against the very large, the Accreditation System contributed to the maintenance of a certain degree of Australian ownership and participation - another contribution which was considered to be a benefit to the public, The Tribunal found that the substantial contribution to overall efficiency among advertising agents, the promotion of standards of honesty and fairness in advertising, and the facilitation of placement of advertising on an Australia-wide basis (all of which it found to result from the Accreditation System), were of benefit to advertising in general and to the overall advancement of the interests and public standing of advertising agents as an occupational class. Those five heads of benefit were explicitly found by the Tribunal. We identify, however, a further benefit implied from the findings of the Tribunal regarding what it saw as the main detriment of the arrangements the subject of that -13- application for authorisation, namely, that 'an advertising agent may not directly or indirectly rebate for the benefit of his principal the commission which he receives from a media proprietor'. As the Tribunal saw it (at 17,620-17,621): 'A restriction which has the effect that both advertiser and advertising agent can only enjoy the benefits which flow from the Accreditation System if the agent is prepared to place himself in a position of conflict of interest and duty and if the advertiser is prepared to employ an agent who is subject to such a conflict is anti- competitive in a manner that transcends ordinary economic consideration. Such a provision not only restricts competition: it tends to eliminate competition according to ordinary commercial standards in that, contrary to the policy"*of the. law, it promotes and requires a conflict of duty and interest in a fiduciary agent (see, for example, North & South Gas Co. v. Berkeley (1971) 1 W.L.R. 470 at 478ff.). The Tribunal concluded that the public benefits resulting from the agreement embodied in the Accreditation Rules (including Rule 19) outweighed the detriment constituted by any lessening of competition if, and only if, the rules were amended to avoid the conflict of interest and duty which resulted from the provisions of Rule 21(b) and the modified Rule 23. The Tribunal granted authorisation of the agreement contained in the MCA's Accreditation Rules, including Rule 19 and the associated codes and standards, provided that certain amendments were made to the rules. The amendments were to ensure that the advertiser client was fully informed of the amount of the commission allowed and that the commission was in the ordinary case passed on by the agent to his principal. To avoid the Accreditation Rules being undermined by the use of 'dummy' accredited agents, the Tribunal considered that the prohibition against sharing commission with, or rebating commission to, an advertiser client should be permitted to remain in relation to any excess of commission over the fee which the accredited agent charged in respect of the relevant advertising. The Tribunal said (at 17,623) that any authorisation would be subject to a rider requesting the Commission to examine from time to time the working of the MCA's Accreditation System for the purpose of considering whether, by reason of altered circumstances, it is appropriate that the authorisation granted should be varied or revoked. 4, The Commission's determination On 12 January 1995 the Commission issued a notice to the MCA and other interested parties announcing a review of the Accreditation System and calling for submissions. Included in the notice were seven material changes of circumstances identified by the Commission, namely: (ii) (iii) (iv) (v) (vi) (vil) financial requirements for agencies seeking accreditation; the size profile of agencies holding accreditation; control of advertising by multi-national agencies; agencies operating outside the Accreditation System; the emergence of media buying agencies; application of the Advertising Codes; and Australian ownership and participation. Following consideration of the submissions made by interested parties, the Commission: was satisfied that a material change of circumstances had occurred since 1978 with respect to items (i), (ii), (iv), (v), (vi) and (vii) above; was satisfied that each of those material changes of circumstances was sufficient to warrant revocation of the authorisation No. A3005; and e was not satisfied that changes in the control of main media advertising by multi-national agencies ((iii) above) constituted a material change of circumstances since 1978. The Commission was satisfied that a substantial diminution of public benefit from the Accreditation System had occurred since 1978. Diminution was attributed to the decline in benefit from application of the Codes through the Accreditation System and the encouragement that it provided to smaller agencies. The Commission concluded that other public benefits associated with the system had not increased since 1978 to offset the diminution in those benefits: Media Council of Australia (1995) ATPR (Com.) 50-199 at 56,150. The Commission also was of the view that public benefit from the contribution that the Accreditation System made to. the encouragement and preservation of smaller agencies had diminished since 1978 primarily due to: e the tightened financial requirements for agencies seeking accreditation that had made it more difficult for smaller agencies to enter the system; and ° the emergence of media buying agencies that had enhanced the competitive position of smaller agencies (at 56,151). -17- The Commission was satisfied that public benefits associated with the preservation of small media proprietors and the savings and cost efficiencies from operation of the system had not increased since 1978; and it also found that examination of the system in 1995 revealed no new benefits to the public that may be attributed to its operation. The Commission found (at 56,152) that in 1995: The Codes could now operate effectively without the Accreditation System. Benefit to the public from application of the Codes through the Accreditation System - had diminished significantly. The encouragement and preservation of most smaller agencies was now provided by factors that were exogenous to the Accreditation System. Benefit to the public from the preservation of media proprietors had not increased. Cost savings and efficiencies associated with the Accreditation System had not increased. There were no public benefits associated with the Accreditation System which had emerged or increased since 1978. The Commission was satisfied that there had been a significant decline in the value of the benefit found by the Tribunal in 1978, namely, the public benefit associated with application of the Codes and the encouragement and preservation of small agencies which the Tribunal had found to be important and substantial. The Commission concluded (at 56,152) that it was satisfied that since 1978: ° financial requirements for agencies seeking accreditation had increased; ° the size profile of accredited agencies had changed in favour of medium and large-sized agencies; e the number of unaccredited agencies had grown substantially; and ° media buying agencies had emerged to capture a significant share of the market. The Commission also concluded (at 56,152) that public benefits associated with the Accreditation System in 1978 - 19 - continued to apply through: e the application of advertising codes and _ standards through the System; e the encouragement and preservation of smaller advertising agencies; e the preservation of small media; and e cost efficiencies and savings. The Commission noted, however, that benefit to the public from cost efficiencies and savings, and from the preservation of small media, had not increased since 1978 and that over the same period there had been a substantial diminution in the value of public benefits associated with application of the Codes through the Accreditation System and the encouragement that it provided to smaller agencies. Changes in other benefits to the public from the System had failed to offset that diminution. While new agencies had entered the market since the authorisation was granted, the majority of those entrants had chosen to remain outside the System. The Commission considered that the primary reasons for this trend were changes to the financial requirements for agencies seeking - 20 - accreditation and the emergence of media buying agencies. The tightened financial requirements had restricted access to the System while the media buying agencies had enhanced the competitiveness of unaccredited agencies. With regard to anti-competitive detriment, the Commission was satisfied that there had been no diminution since 1978. Accordingly the System continued to maintain severe anti- competitive detriment through: e the financial and other restrictions on access to the System; e the imposition of maximum rates of commission; e the restriction on payment of commission by media proprietors to accredited agencies; and e the prohibition on rebating of commissions to advertising principals (at 56,153). The Commission noted (at 56,153) that despite this stability in anti-competitive detriment there had been enormous changes in the market circumstances such as the rise of television, the development of alternative media, technological advances in the creation, planning and placement of advertising, shifts in public attitudes, and shifts in public policy on competition issues. The Commission found (at 56,153) that '[a]mid these changes the System has become a shackle upon the capacity of the advertising agency to adjust to the present world'. Accordingly the Commission was satisfied that the Accreditation System continued to give rise to severe anti- competitive detriment compared with the circumstances that would be likely to prevail were the System not to exist. The Commission was also satisfied that public benefit associated with the System had diminished significantly since 1978, such that the public benefit was no longer sufficient to offset the anti-competitive detriment. The Commission revoked authorisation No. A3005 by its determination of 5 October 1995. The Commission said that if an application for review were made to the Tribunal, the determination would come into force: e on the day that the Tribunal made a determination on the review, and granted authorisation; or e where the application for review was withdrawn, on the day that the application was withdrawn (at 56,153). 5. The cases of the parties and interveners We shall briefly summarise the principal submissions made - 22 - on behalf of the parties and interveners. Detailed consideration of those submissions will be made later under the relevant headings. The MCA relied essentially on the 1978 determination. The AFA generally supported the MCA's submissions but added some submissions of its own and contributed to the analysis of the problem. The interveners were primarily concerned with the changes that have occurred to the Accreditation System since 1978, especially the basis on which commission is paid to advertising agencies and what was said to be the conflict inherent in the system. The Commission adopted its usual approach of assisting the Tribunal with presentation of supplementary material and submissions. 6. The Act and the a jate tests especial s. 91(4)) The conclusions of law that follow in this section and later sections are those of the President: see s. 42 of the Act which entrusts to the President decisions on questions of law arising on a review. - 23 - Central to the Tribunal's review of the Commission's revocation of the 1978 Authorisation is s. 91(4) of the Act. This is the first occasion on which that sub-section has come before the Tribunal for analysis; but see McIlwraith McEacharn Limited and Howard Smith Pty Limited (1991) ATPR 41-140. Section 91(4) provides as follows: '(4) If, at any time after the Commission has granted an authorisation, it appears to the Commission that the authorisation was granted on the basis of evidence or information that was false or misleading in a material particular, that a condition to which the authorisation was expressed to be subject has not been complied with or that there has been a material change of circumstances since the authorisation was granted - (a) the Commission shall give notice accordingly to the corporation to which the authorisation was given and any other persons who appear to the Commission to be interested and afford them a reasonable opportunity of making submissions to the Commission in the matter; and (b) where, after so notifying the corporation and other persons (if any) and considering any submissions made by those persons, the Commission is satisfied that the authorisation was granted on the basis of evidence or information that was false or misleading in a material particular, that the condition has not _ been complied with or that there has been such a material change of circumstances, the Commission may make a determination revoking the authorisation and, if it considers it appropriate to do so, granting a further authorisation in substitution for the authorisation so revoked.' The Tribunal's jurisdiction to review the Commission's Determination revoking the 1978 authorisation is derived from s. 101 of the Act. The Tribunal is required by s. 101(1) to review that determination of the Commission; and a review by the Tribunal is a rehearing of the matter that was before the Commission (s. 101(2)). There is a curious hiatus in relation to the functions and powers of the Tribunal when hearing a review of the revocation by the Commission of an authorisation. Section 101(2), after stating that a review by the Tribunal is a rehearing of the matter, goes on to say that ss. 90(6), (7), (8) and (9) apply in relation to the Tribunal in like manner as they apply in relation to the Commission. Section 90 provides for the determination of applications for authorisation by the Commission; and it requires the Commission to be satisfied about certain matters before granting authorisation. In substance, subsections (6), (7), (8) and (9) provide that the Commission shall not make determinations granting authorisations unless it is satisfied in all the circumstances that the relevant provision of a proposed contract, arrangement or understanding or proposed conduct, as the case may be, or a proposed acquisition of shares (the last in the case of subsection (9)) would result or be likely to result in benefit to the public and, in the case of subsections (6) and (7), that such benefit must outweigh the detriment to the public constituted by any lessening of competition that would otherwise result or be likely to result. As each of subsections (6), (7), (8) and (9) of s. 90 are concerned only with determinations by the Commission granting authorisations, they have no direct relevance to the question whether an authorisation granted by the Commission should be revoked, Likewise, s. 102(1) empowers the Tribunal to make a determination affirming, setting aside or varying a determination of the Commission; and provides that, for the purposes of the review, the Tribunal may perform all the functions and exercise all the powers of the Commission. But subsection (1) applies only to 'a review of a determination of the Commission in relation to an application for an authorisation'. Notwithstanding the wide meaning attributed to the words 'in relation to' in various statutory contexts (s. 102(1) being no exception), it is plain that s. 102(1) is not intended to apply to a review of a determination of the Commission revoking an authorisation (see also the language of s. 102(1A)). There is thus no section in the Act which is specifically directed to the functions and powers of the Tribunal when conducting a review of a determination of the Commission revoking authorisation apart from s. 101 which, as mentioned - 26 - earlier, directs the Tribunal to review such a determination of the Commission (subsection (1)) and provides that a review by the Tribunal is a rehearing of the matter (subsection (2)). To perform its statutory duty to review such a determination as a rehearing, the Tribunal must, by implication, have the same powers as those specifically vested in the Commission by s. 91(4)(b), namely, to revoke the authorisation and, if the Tribunal considers it appropriate to do so, grant a further authorisation in substitution for the authorisation so0 revoked. We leave aside ss. 103 to 110 which deal generally with matters of procedure and evidence in proceedings before the Tribunal. Those provisions do not bear on the question of the functions and powers of the Tribunal when considering revocation issues. Thus, the function of the Tribunal in the present matter is to review by way of rehearing the determination of the Commission. The Tribunal is obliged to engage in a rehearing in the fullest sense. It must reach its own conclusions on the material before it: Re Media Council of Australia (No 2) (1987) ATPR 40-774 at 48,419. The reasoning process of the Commission is not itself the subject of this inquiry: see Re Media Council of Australia (No 2) at 48,419 and the previous decisions of the Tribunal there cited. - 27 - Although sub-sections (6), (7), (8) and (9) of s. 90 do not strictly apply in relation to the MTribunal when considering revocation issues, questions of public benefit and detriment, including anti-competitive detriment, must be at the heart of the Tribunal's functions and powers. Reference to the Commission's powers is useful. Before the Commission is empowered to grant an authorisation it must first be satisfied that the requisite degree of benefit to the public exists and that it outweighs the detriment to the public constituted by lessening of competition. That is at the core of the Commission's task (see s. 90(6), (7), (8) and (9)). For the Commission to conclude, pursuant to s. 91(4), that revocation of an authorisation is justified on the basis that there has been a material change of circumstances since the authorisation was granted, consideration of matters going to public benefit and detriment to the public are fundamental. So it must be with the Tribunal, because it is engaged in a rehearing of the matter that was before the Commission. Before the Tribunal can revoke an authorisation it must be satisfied that there has been a material change of circumstances since the authorisation was granted, and that in all the circumstances it is appropriate to make a determination revoking the authorisation. If it considers it appropriate to do so, the Tribunal may grant a further authorisation in substitution for the authorisation so revoked: see s. 91(4). The words 'such a material change of circumstances' in paragraph (b) of subsection (4) of s. 91 refer back to the expression 'a material change of circumstances since the authorisation was granted' in the opening provisions of subsection (4). We reject the submission made on behalf of the applicants that those words, in the context of a review by the Tribunal, refer only to a material change that has been the subject of a notice by the Commission under s. 91(4)(a) and referred to in the notice. To accept that submission would be to deny the statutory obligation of the Tribunal to conduct a review in the fullest sense of the matter. It would also lead to the extraordinary result that evidence bearing on the question of material change of circumstances may not come to light until after the Commission has revoked the authorisation and yet be excluded from consideration by the Tribunal on the issue of material change of circumstances. If the Commission is considering revocation of an authorisation it must first appear to it that there has been a material change of circumstances since the authorisation was granted and, if so satisfied, it is then required to give notice to the corporation to which the authorisation is given and other persons who appear to the Commission to be interested, and afford them a reasonable opportunity of making submissions to the Commission in the matter (s. 91(4)(a)). After this has been done and the submissions, if any, made by those persons have been considered by the Commission, if the - 29 - Commission is satisfied that there has been a material change of circumstances since the authorisation was granted, it may then revoke the authorisation. The initial satisfaction of the Commission, followed by the giving of notice in accordance with s. 91(4)(a) and the consideration by it of submissions made by the relevant persons, are conditions precedent to the exercise of the Commission's power, if it is satisfied that there has been a material change of circumstances since the authorisation was granted, to revoke the authorisation if it thinks it appropriate to do so. But although these preliminaries must have been attended to before the Commission may revoke the authorisation, they have no relevance to the exercise of the function and powers of the Tribunal in a rehearing of the revocation of an authorisation. Nor is there any requirement for the Tribunal to issue a fresh notice of the kind mentioned in s. 91(4)(a); unlike the Commission which is specifically required to do so under s. 91(4). That requirement is spent once the Commission has disposed of the matter before it. Further, the Tribunal is not, when rehearing the matter, limited to the terms of the notice given by the Commission in accordance with s. 91(4)(a), or to the matters contained in the submissions to the Commission, or to those matters in the Commission's determination or reasons. To determine whether there has been a material change of circumstances since the authorisation was granted, the Tribunal must commence by examining the circumstances as they existed at the time the authorisation was granted. From that point the Tribunal then moves forward to the circumstances as they exist on the material before the Tribunal at the time it conducts the rehearing, Circumstances is a word of wide import which includes all facts, matters and conduct relevant to an authorisation and to a revocation. The starting point in the present matter must be the decision of the Tribunal in the Media Council Case in 1978; but the Tribunal in the present matter is not limited to the circumstances as found by the earlier Tribunal at the time of granting the authorisation in 1978. Rather, the Tribunal in the present matter must examine for itself the circumstances as they existed in 1978, The material before the Tribunal at the present time may (although in fact it does not in this case) reveal circumstances that existed in 1978 that are material to the inquiry and yet were not before the Tribunal at the earlier time. Nevertheless, as a practical matter, the reasons for decision of the Tribunal in 1978 would be the starting point for the consideration by the Tribunal in its review at the present time. It would be impermissible for the Tribunal today to go behind the reasoning expressed by the Tribunal in its 1978 determination and conclude that the authorisation should not then have been granted or would not be granted on the same facts today. But that is entirely different from saying, as we do, that it is for the Tribunal today to consider and assess the facts as they appear to us to have then existed. Still, in the course of examining for itself the circumstances as they appear to have been in 1978, the Tribunal would be fully justified in accepting the earlier Tribunal's findings of fact expressed in the 1978 determination if no challenge, reasonably based, is made to them in the later review before the Tribunal. In fact, no party, or intervener, or the Commission in the review before us has pointed to any circumstances that existed in 1978 beyond those discussed and determined by the Tribunal in its 1978 determination. Having determined what the circumstances were in 1978, the Tribunal's task is then to examine what has happened in the intervening period. If the Tribunal finds that there has been a change of circumstances in the intervening period, it must determine whether or not that change is material. A material change of circumstances includes a change of circumstances which has a significant impact upon the benefits to the public or upon the detriment, including anti- competitive detriment, arising out of the conduct or the provisions in question. If the Tribunal is satisfied that there has been a material change of circumstances in the intervening period, then it must determine, in the exercise of its discretion, whether or not such change of circumstances is of a kind or of such magnitude or significance as to warrant the Tribunal revoking the authorisation previously granted (see the word 'may' in s. 91(4)(b)). The determination of public benefit and detriment is germane to both tasks of the Tribunal, namely, in first determining whether there has been a material change of circumstances, and secondly, if so, whether such change warrants the Tribunal's revocation of the authorisation, In the course of determining relevant public benefit and detriment the Tribunal must compare the position which would or would be likely to exist in the future, on the one hand if the authorisation were to continue, and on the other hand if it were absent. This has been called the 'future with-and- without' test: Re Queensland Independent Wholesalers Limited (1995) ATPR 41-438 at 40,928 and 40,960; see also Re Media Council of Australia (No 2) at 48,419; Re QCMA and Defiance Holdings Limited (1976) ATPR 40-012 at 17,244; Re G & M Stephens Cartage Contractors Pty Limited (1977) ATPR 40-042 at 17,459-60; and Re John Dee (Export) Pty Limited (1989) ATPR 40-938 at 50,206. - 33 - If the Tribunal is satisfied that the authorisation should be revoked, a further question then arises as to whether a further authorisation should be granted in substitution for the authorisation so revoked. That exercise would involve the Tribunal in comparing the position which would or would be likely to exist in the future with the previous authorisation revoked and no further authorisation granted, with the position in the future that would or would be likely to exist if the further authorisation were to be granted in substitution for the previous authorisation. 7. The Australian advertising industry 7.1 The general context Advertising is pervasive in Australia. Persons and organisations from time to time wish to communicate a defined message to segments of the community, and paid advertising in commercial media is one device by which such messages are disseminated. Media advertising is overwhelmingly directed to the sale of goods and services, and is displayed through a variety of commercial media - newspapers or magazines, television or radio, signs and bill-boards, cinema screens. In any instance, the advertiser's choice in using one medium rather than another will depend on the suitability of the medium with respect to cost, the availability of time, and the size and characteristics of the wanted audience. Available media statistics refer to 'main media'. The - 34 - MCA considers 'main media' as coincident with its own membership, i.e. owners of commercial radio and television, 'major' print media (taken to comprise metropolitan, suburban and regional newspapers and many magazines), and members of the cinema and outdoor advertising industry associations. MCA statistics are assembled from audited returns from accredited advertising agencies. They are considered to be correspondingly reliable, but do not pretend to a wider ambit than that source allows. Statistics published by the Commercial Economic Advisory Service of Australia ('CEASA') adopt a somewhat broader definition of 'main media', but the differences do not seem significant to this determination. CEASA statistics are more comprehensive, and are derived from a variety of sources. Because the MCA Accreditation System as authorised in 1978 is not applicable to classified advertisements, which are placed directly by small advertisers, it useful to distinguish classified advertisements in the statistics. A comprehensive summary report by CEASA assembled for the Tribunal lists advertising expenditure in main media in 1976 as $900,000, or $738,000 excluding classified advertising. $522,000 was classed as national advertising (i.e. excluding classified, retail, amusements and other essentially local advertising). For 1994, the last full year for which comprehensive data are available, main media advertising expenditure as estimated by CEASA can be summarised as follows: Table 1 Main media advertising expenditure, 1994 (by class of advertising) $m % % excl classified National advertising 2,955 55 68 Classified advertising 1,055 19 - Retail advertising 701 13 16 Other 'non-retail' 703 13 16 Total expenditure 5,414 10 —_ Total expenditure excluding classified advertising 4,359 Table 2 Main media advertising expenditure, 1994 by class of media (excluding classified advertising) $m % Metropolitan newspapers 821 19 Regional & country newspapers 288 7 Suburban newspapers 165 4 Magazines 324 7 Business & rural publications 145 _3 Total print media 1,743 40 Metropolitan television 1,459 34 Regional television 411 _9 Total television 1,870 43 Metropolitan radio 305 7 Regional radio 165 4 Community radio 7 _o Total radio 477 11 Outdoor advertising 238 5 Cinema advertising 31 1 Total expenditure excluding classified advertising 4,359 100 The Tribunal heard no credible estimate of the number of advertisers, who must surely amount to many hundreds of thousands if classified advertisers are included. Those advertisers who opt for a more' prominent 'display' advertisement in the print media, or for a broadcast 'spot' on radio or television, are obviously fewer, but were agreed in evidence to number many thousands. Officers of the AANA, which has a membership of 112 companies, claimed that its member companies account as national advertisers for 70% to 75% of media advertising expenditure other than classified advertising. The CEASA statistics suggest that this claim must be exaggerated, but certainly some large companies spend very large sums in media advertising, in addition to the sums they allocate to other forms of product promotion. Evidence was given that the retailer Coles Myer Limited spends $100 million annually on main media advertising, and that the retail franchise chain, Harvey Norman, spends $50 million to $55 million annually. Telstra is another considerable media advertiser, as are the major automotive companies and several international companies supplying branded consumer goods. A recent survey of AANA members, which elicited 49 responses, indicated an average of $13 million per annum in media advertising expenditure for these respondents. It suffices for the purposes of this determination to note that a limited number of major Australian and international companies account for a very significant proportion of media advertising in Australia. Media advertising is only one of the communications devices that may be used to sell products. A supplier of goods or services can post notices in public places, have pamphlets or catalogues distributed door-to-door, or employ direct mail. A company may sponsor a public event, such as entertainment or sport, with the intention that consequent publicity will promote a product brand name. The choice among available tools for promotion will depend on estimates of cost and likely effectiveness. Large advertisers commonly adopt a mix of the promotional options, including media advertising; Coles Myer, for example, submitted evidence that it applied a further $100 million annually to promotional methods other than media advertising, mainly the distribution of catalogues and forms of direct marketing. Media vary in their commercial dependence on advertising revenue. Media which distribute their product gratis - free-to-air commercial radio and television stations, outdoor advertising companies, and free suburban newspapers - earn effectively all their revenue from advertising. For media that charge a cover price - most newspapers and magazines, and cinema screens - advertising provides a second stream of revenue. - 38 - Media differ as to the type of advertising to which they are most suited. On the one hand, because the Broadcasting Services Act 1992 limits the number of television licences that can be operated and the proportion of broadcast time that can be devoted to advertisements, the number of opportunities for television advertisements is limited, and television advertising can command high prices at popular times in the broadcast schedule. Also, television advertisements are by their nature more expensive to produce than print or radio advertisements. In consequence the use of television advertising is of less interest to small and occasional advertisers than to major advertisers of branded products, and to those who plan substantial advertising campaigns. On the other hand, newspapers allow low advertising production costs and short lead-times before publication. Newspapers are in consequence especially suited to the display of numerous small, simple advertisements such as classified advertisements, to advertising of topical events and amusements, and to local retail advertising. Newspapers also offer a way to distribute specially printed advertising inserts, as a substitute for direct mailing or door-to-door delivery. Radio and magazines similarly have characteristics that make them useful media for particular advertisers. Cost-effectiveness in advertising requires attention by the advertiser both to the form and content of the - 39 - advertisement, and to the advantageous placement of the advertisement in such media or such a combination of media as will best reach the desired audience of potential buyers. The skills demanded by this dual requirement justify the existence of the advertising services function, which is performed by advertising agencies, media specialists, production houses, and individuals who can apply experience, expertise and imagination in support of intending advertisers. Because advertising, in seeking to attract notice, will often pursue an original and imaginative presentation of the advertising message, there is the possibility of excess, and a corresponding capacity to offend. Further, it is of the nature of advertising, whether in print, in, broadcast media, on bill-boards, or at the cinema, that reasonably prudent behaviour will not ensure that a member of the public can avoid an offensive advertisement if it is published or broadcast. In a newspaper or magazine, significant advertisements are consciously interspersed through' the editorial text, so that it is more likely that they will be noticed. Television and radio commercials are likewise inserted unannounced among the scheduled program content. The unwanted observation of an _ outdoor sign or cinema advertisement, so placed as to demand attention, is an incidental result of other activity. - 40 - Awareness among the community and in governments that the right to advertise may be abused has led in Australia and in other developed countries to the introduction of procedures, and on occasion statutes, directed to regulating the content of advertising. Codes of practice are in common use. The intention of these various devices is to discourage or prevent publication or broadcasting of advertisements that breach perceived standards of public taste and decency, or that display or encourage any activity that is contrary to public policy. 7.2 Advertising services 7.2.1 The scale of the advertising services business in Australia For 1992-93, the Australian Bureau of Statistics ('ABS') has estimated the value of sales of goods and services by businesses engaged in advertising services at $842 million. This figure, which includes production work for advertising material as well as fees earned in the preparation and placement of advertisements, pertains to 858 businesses. The MCA recognised 224 accredited advertising agencies in 1994; and from its records it identified a further 699 unaccredited agencies as having placed media advertising through accredited agencies in that year. Other experienced evidence suggested that significantly more unaccredited advertising agencies exist than this. Estimates of agency numbers omit businesses and freelance individuals contracted by advertising agencies - 41 - for production and other inputs that are out-sourced. Also, the MCA list of accredited agencies overstates the number of business entities involved; some large advertising agencies operate branch offices that are each separately accredited. It suffices here to note that numerous business entities engage in the supply of advertising services, and that their number is much larger than the number of business entities operating as accredited advertising agencies under the MCA System. Agencies publish claims for their annual 'billings', but it is notorious in the industry that such figures are inflated in particular instances, and confidential evidence provided confirmation of this. The 'billings' of an* agency refers to its gross turnover, including the gross cost of media advertising organised by the agency, production services organised through the agency, service fees and commissions. Tabulations that rank agencies by the size of their estimated billings are published annually by advertising journals such as AdNews and B&T. The total funds handled by advertising agencies (their 'pbillings') are commonly many times greater than their actual gross revenue from fees, commissions and the like, just as is the case for other agents, such as real estate and travel agents. The gross income of particular advertising agencies is not published unless statutory accounts must be publicly lodged. Apart from the ABS estimate, no statement of the total value of advertising services supplied by various advertising agents was offered to the Tribunal in evidence, such as would allow published industry statistics to be broadly checked for consistency with the ABS estimate. However MCA statistics suggesting that 85% of the total value of media advertising represents the price of purchased media, if applied to the $5,414 million in total advertising expenditure estimated by CEASA for 1994, leads to an estimate of $812 million in advertising services, whereas ABS reports $842 million in 1992-93. It is sufficient for the purposes of the Tribunal to note that advertising services in Australia amount to an activity of this approximate magnitude, and that the published industry statistics and accepted rules of thumb are broadly consistent but should not be considered precise. 7.2.2 Distinct roles within advertising services The traditional advertising agency is customarily termed a 'full-service agency', and offers an advertiser all the support functions that might be needed to mount a substantial advertising campaign. The component functions are usefully categorised under four heads: The creative role The advertiser commonly looks to the advertising agent to propose for approval a concept for effective and distinctive presentation of the attributes and benefits of the advertiser's product or service, having regard to the advertising budget available, and the medium to be used. The concept then is converted into an explicit proposal with respect to words, visuals, sound etc. for approval and production. The production function The planned advertisement is produced in a final form for approval by the advertiser and for submission to the media for publication or broadcast. The finished advertisement may be produced in-house by the agency, or where specialised skills are required or are appropriately used, as with the filming of a television commercial, production may be contracted out. The media services function This duty relates to the complex advertiser needs concerned with the planning of a media campaign, optimal choice of media, the purchase of space or time in the selected media with regard to optimal placement in reaching the desired audience and at a price acceptable to the advertiser, and subsequent audit to check that the advertisement was in fact printed or broadcast as placed. The advertising agency undertaking these duties does so on the client's behalf, on the basis of in-house experience, access to media research, and detailed knowledge of media pricing practice. - 44 - The compliance function The media, the advertising agent and the advertiser each have a self-evident interest in knowing that an advertisement complies in its form and content with the law, with public standards of taste and decency so as not to give offence, and more generally with particular ethical and professional standards. Lack of compliance could put commercial interest and reputation at risk. Because the advertising agent is the party proposing the style of the advertisement and the words and pictures in it, and is usually also responsible for production of the final advertisement, agencies commonly assume contractual responsibility for compliance. However in practice, media and advertisers often also maintain close watch for potentially damaging problems. 7.2.3 Specialisation of advertising agencies The stereotype of advertisers engaging full-service advertising agencies to perform the above functions so that advertisements appear in the media is the commercial model that was adopted when the rules for the MCA accreditation system were formulated. However statements and oral evidence to the Tribunal tendered on behalf of the MCA, the AFA, interveners and the Commission are consistent in showing that the division of work in the above respects between media, advertisers and business entities supplying advertising services takes numerous and diverse forms in Australian advertising practice. Specialisation within the broad - 45 - 'advertising agency' ambit allows particular advertising services to be purchased separately. Also, full-service agencies can be willing to 'unbundle' their services for clients who wish to purchase only certain elements of their total capability. Atypical relationships are thus possible and have become widespread, such as that adopted by the Victoria WorkCover Authority, which prepares its own advertisements in-house before submitting them for publication through an agency specialising in media placement. The most common specialisation distinguishes between 'creative' agencies that focus on the concept and form of the advertisement, and business houses that perform the media services functions. As described more fully in 7.5, the skills and capabilities required in these two respects have tended to diverge as new technologies have been introduced. The specialised media services businesses are variously termed 'media independents', 'media consultants' and 'media buying houses', and the Tribunal adopts this last term. The Australian market is served by five major media buying houses ° AIS Media ('AIS') is owned by the Japanese advertising agency, Dentsu Pacific. ° Media Decisions is a subsidiary of George Patterson Bates, Australia's largest advertising agency, which is ~ 46 - in turn owned by Cordiant PLC of the U.K. e Merchant and Partners, founded in Sydney in 1974, is now owned by the international agency group, Interpublic. ° Mitchell and Partners was founded in Melbourne in 1976 and remains independent under Australian ownership. e Total Media is an Australian-owned Melbourne media consultancy The significance of the media buying houses in the market is enhanced by their capacity to aggregate the buying power of their numerous clients and to negotiate advantageous prices with media proprietors. Media buying houses compete with full-service agencies by attracting business from advertisers that employ specialised creative agencies to prepare their advertising material. Also, accredited agents with full-service capabilities not unusually buy advertising time through a media buying house that can offer a media price advantage or favourable placement for a client. To maximise buying power in price negotiations for television time, major full-service advertising agencies and media buying houses also combine into 'media buying groups' while otherwise operating independently. - 47 - The share of business conducted through specialised media buying houses is not clear from relevant evidence. MCA statistics derived from the annual returns of accredited agencies show media buying on behalf of other agencies at 17% of total media billings, but the Tribunal considers that this methodology could well underestimate the extent of specialised media buying within the workings of the market. Mr Mooney, on behalf of AIS, estimated the total capitalized billings of four of the five major media buying houses by applying an assumed earning rate to their revenues as shown in published statutory accounts, concluding that these four media buying houses accounted for 20% of the value of media advertising. The fifth, the private company Mitchell and Partners, claims to be the second largest of the buying houses, and other small media specialists were listed in evidence to the Tribunal. From this and other inductive evidence, the Tribunal is satisfied that the media buying houses represent a substantial and commercially significant element of the market for media services. Direct purchase of advertising (other than classifieds) by the advertiser, rather than through an advertising agency or a media buying house, is also practised, notably where the requirements of advertising content and form are reasonably straightforward, and in regional and country media. In this last respect, it may be relevant that while the advertising market is distributed across the country, almost all - 48 - advertising agencies are located in the capital cities, with the large agencies centred in Sydney and Melbourne. Harvey Norman, the retail franchise chain, is a large national advertiser which has chosen to purchase advertising space and time directly, without involving a media buying house, having taken the view that this course allows best use of the group's buying power and a better focus on the group's marketing needs. Harvey Norman's annual advertising budget exceeds $50 million. The company's own large media department, which employs 25 persons, is thought better able than a conventional advertising agency to develop and produce direct marketing and catalogue material, in addition to media advertising. Production of television commercials is contracted out. Metropolitan television stations screen little advertising that has been placed directly; Southern Television in Adelaide, for example, receives 91% of its advertising revenue as agency placements, with much of that business arranged through network links with channels in other states. On the other hand, Riverland Television, which services a relatively small part of rural South Australia, receives 40% of its revenue from local small business, without the involvement of advertising agencies, and employs three persons to assist in the production of such advertising. The Launceston Examiner in northern Tasmania receives 15% of its - 49 - advertising revenue as national advertising placed through agencies. The remaining 85% is sold directly to local advertisers. Radio stations exhibit a similar variation. Mr Rutherford of the MCA estimated that the better performing metropolitan radio stations receive 70% to 80% of their revenue from agency placements, while a low-rated station might receive only 30% of advertising through agencies. Regional radio stations are more dependent on _ local advertisers. For the year ended June 1995, the Australian Broadcasting Authority has reported agency advertising revenue as a proportion of total advertising revenue as follows: . ° Capital city radio stations (38 in number) 60% ° Large regional markets (42 stations) 34% e Other stations (84) 21% Again, advertisements broadcast on behalf of direct advertisers are usually written and produced by the stations. The sum of evidence before the Tribunal indicates that, while the full-service advertising agency remains the predominant mode of delivery of advertising services, substantial segments of the market are satisfied by other commercial models. Direct purchase of advertising, without the involvement of advertising agencies, is a significant - 50 - practice in radio and in regional markets. Also, specialized media buying houses are an important force in the market, drawing business from advertising clients and from creative advertising agencies that have specialized by mounting no internal media capability. The implications of the specialization of advertising agencies are discussed further later in these reasons. 7.3 Payment systems A distinctive feature of the advertising industry is that the media pay commission (conventionally at a rate of 10%) to accredited advertising agencies placing advertisements with them, so that accredited agents derive income from both the media and their advertising clients. Because the MCA accreditation system includes relevant rules, and also because the Tribunal in its 1978 reasons remarked on the potential conflict of interest inherent in the payment of commission by the media to the agent of the advertiser, the procedures and transactions linking advertiser, agent and media are central to determination of this matter. While it is unusual in Australian business practice for a buyer's agent to receive income from the seller, payment of media commission is common in advertising industry practice in countries other than Australia. A survey of advertising business practice in 20 other countries was conducted by the AANA in 1995, and the raw data of the survey, with some summary tabulations, was submitted in evidence. Advertiser organisations in each country responded to a= simple questionnaire in regard to the payment of commissions, the control of credit, and the administration of advertising codes. The Tribunal also received oral evidence concerning overseas practices, and detailed evidence in particular respects in regard to the U.K. and New Zealand. In the U.K., U.S.A., Canada, and in all but a few of the countries surveyed, the rate of media commission is said to be traditionally 15%, but it is usually negotiable to figures up to 15%. In New Zealand, the common rate of commission is 20%. Only in Sweden is the rate of commission as low as 5% (6% for radio), with Norway commonly adopting 5% to 14% rates depending on the medium. The customary Australian commission rate of 10% appears to be lower than the international norm. The payment of media commission reflects a further distinctive characteristic of advertising industry practice - that the advertising agency may (and commonly does) contract as principal in the buying of advertising space and broadcast time. Although direct placement of advertising by the advertiser is entirely possible and is employed, the predominant business practice in Australia is for an advertising agent to purchase advertising media space or time as if the agency were the principal in the transaction, and to - §2 - receive media commission as if the agency were the sales agent of the media. In Australia, the advertising agent receiving media commission accepts the full credit risk and liability associated with both transaction and advertisement. The same scheme is used in some other countries also, as one credit management option that media and agencies may adopt. It is instructive to compare the sequence of transactions for these two types of business system, The advertiser as principal Where the advertiser elects to purchase media space or time directly, without the interposition of an advertising agent, the form of the transaction conforms to general commercial practice: a price is agreed according to the ruling price offered by the media proprietor, or after negotiation where the advertiser buys media on a scale that allows the exercise of some buying strength. Advertising agents who are engaged to assist the advertiser, whether full-service or specialised, whether they are to do creative and production work on the planned advertisement or to give advice on media planning and buying, do so as contractors or consultants to the advertiser, and are paid accordingly. Possible variations might have the advertiser performing all or some advertising services in-house and assuming relevant costs, or arranging the capacities of the media proprietor to be employed so as to perform creative and production services - 53 - for an agreed supplementary fee. Terms of trade regarding credit between advertiser and media proprietor are agreed in conjunction with the price as settled. Evidence to the Tribunal indicates that 30 days credit is commonly allowed to established direct advertisers that have a known credit record or acceptable financial standing. Other direct advertisers are required to pay cash at the time of lodging the finished advertisement for publication or broadcast. The advertising agent as principal This second business system, with its associated sequence of transactions, is particular to the advertising industry, and is predominant in Australia and in some other countries. In Australia, its use is available only to advertising agencies that are accredited under the MCA Accreditation System, as described in 8 of these reasons. When proceeding according to this scheme, the Australian advertiser commonly engages an accredited full-service advertising agency to perform the required range of advertising services and to undertake all associated commercial arrangements on the advertiser's behalf. Or the advertiser may engage a media buying house with access to the privileges of accreditation to undertake all arrangements for placing its advertising, whether it has been prepared by the advertiser in-house or by a creative advertising agency. In assuming commercial responsibility for the media purchase arrangements, and committing as principal for the purchase of advertising space or time, the full-service advertising agency or media buying house accepts the corresponding credit risk, relying on reimbursement of the media cost by its advertiser client. For accepting the role as principal, the agency is rewarded by receiving commission from the media. Oral evidence to the Tribunal indicates that in practice an Australian agency is typically not obliged to outlay cash in settlement of the media invoice prior to receiving payment from the advertiser. The advertiser is billed promptly on appearance of the advertisement for payment within 30 days, whereas the agency receives from the media up to 75 days credit (45 days after the end of the month of publication or broadcast). The full-service agency that prepares the advertisement in addition to arranging its media placement commonly seeks from the advertising client a total fee amounting to about 17.5% of the total cost to the advertiser. This total fee (termed the service fee) is usually negotiated with the advertiser as an explicit percentage, but may on occasion be contracted as a fixed sum, or as a fee for service, or to a sliding percentage scale relating to the volume of advertising budgeted by the advertiser. In Australian practice the media commission of 10% is credited to the advertiser's account and thus is deducted from the 174% gross fee. Where the media commission is earned by a media buying house, a buying commission (in the range 2% to 5%, and commonly 2.5%) is deducted before the residual passes ultimately, sometimes by an obscure process, to the advertiser's credit. The attractions for the media of dealing with the accredited advertising agency or media buying house as principal are immediately apparent. Such dealings will be less burdensome than the alternative, both as to administrative cost and the need for close management attention. A high proportion of media revenue will thereby be derived from sales by a limited number of experienced intermediaries with known credit records and established financial standing. Associated price negotiation, credit Management and sales administration will be simplified. The payment of commission might also be conducive to recommendations that advertising expenditure be directed to main media advertising ahead of other modes of product promotion. Friendly and continuing commercial relationships can be established. On the other hand, direct separate dealings with very numerous advertisers, many of them occasional and of unknown credit standing, are conducive to higher administrative costs and a higher level of bad debts. - 56 - Evidence from media companies confirms that the cost of sales is higher for direct purchases of space and time by advertisers than for purchases through accredited agencies. Media bad debts also are higher for advertising placed directly. Evidence submitted for the Commission collated the statutory accounts of major advertising agencies to conclude that their provision for bad debts is commonly of the order of 2%. The assumption of del credere risk by the agencies relieves the media of this direct cost and of associated credit administration. Media bad debts associated with sales through accredited agencies are less than 0.1%. Trade insurance is available to advertising agencies in respect of their credit risks, if only for 80% or 85% of the value of the debt, with premiums at about 0.015% . The fact that many agencies seek accreditation, and elect to assume del credere risk in regard to the full value of their media purchases, shows that they see commercial advantage in doing so. They secure an assured cash flow and earn 10% commission on it. Also, a preferred relationship is established with relevant media, and an option in advertising services can be offered to clients that may not be offered by potential competitors. The Tribunal can similarly accept that many advertisers will be comfortable to adopt customary arrangements that simplify the implementation of their advertising effort, and reduce a complex and perhaps unfamiliar process to a few discrete steps that can be delegated to a trusted specialist. These steps conclude in the normal course with payment of the agency's consolidated invoice, which includes the cost of media purchased on the advertiser's behalf, net of the 10% media commission. Agency credit-—worthiness Self-evidently, an advertising agency can adopt a role as principal in the purchase of media, and it can accept the corresponding credit risk, only if it first establishes credit standing with the relevant media proprietor at the level of the substantial sums that are involved in the purchase of media time and space for advertising. . The credit risk is disproportionate to the scale of the agency business. A full-service advertising agency assuming del credere risk for the advertising that it places for a client is entering on a demanding financial undertaking, its gross commission and fees from the transaction amounting to perhaps 17% of the total value of the advertising being bought and for which full credit responsibility is being assumed. A media buying house assuming the del credere risk faces an even more formidable prospect, as it retains only 2.5% or perhaps 5% of the media commission as its gross income and passes the remainder on to other parties as described elsewhere in these reasons, The media buying house thus - 58 - assumes the credit risk for sums forty times, or at best twenty times, its corresponding gross income. In Australia, the MCA Accreditation System evaluates the credit-worthiness of advertising agencies on behalf of all the media, and approves accreditation for suitable candidates. Media buying houses are deemed to be a class of advertising agency that may be similarly accredited. In 1968, the MCA system superseded earlier arrangements under which each sector of the media separately accredited advertising agents, and efficiencies resulting from this earlier rationalisation were adjudged to yield public benefit by the Tribunal in reaching its 1978 decision. In today's circumstances, a further alternative to a central accreditation system might be for each media company to develop its own view of the credit-worthiness of the purchasers of advertising time or Space with which it deals. Several other approaches to credit administration are also plainly available. The AANA survey of practices in 20 other countries indicates that various practices are in use overseas to facilitate advertising agencies establishing credit-worthiness as purchasers of media. Most countries surveyed, including the U.K., Canada and New Zealand, have some form of accrediting authority for agencies, acting either on behalf of all media or separately in regard to the print media, television and radio. However several other countries, ~ 59 - notably the U.S.A., France and Germany, do not. 7.4 Media pricing Much cross-examination before the Tribunal was directed to probing the commercial logic of the 10% commission, in support of argument that such a level of commission is excessive and competitively favourable to the advertising agent at the expense of the direct advertiser. The Tribunal found this direction of inquiry unhelpful in isolation, because commission-related rebates are but one element in the ultimate price of advertising space or time payable by the advertiser. The Tribunal also heard evidence that substantial advertisers who buy media directly commonly seek to negotiate price discounts that are reasonably comparable with the commission rate available to agencies. The Chairman of retailer Harvey Norman referred in evidence to that company's ability to negotiate highly advantageous direct advertising rates with the media at large. Confidential evidence on negotiated direct rates for retail advertising in print media demonstrated that a strong direct buyer can negotiate a pricing structure that is favourable in comparison with other direct buyers, but which is not necessarily favourable in comparison with pricing under the Accreditation System. - 60 - Radio and print media prices in Australia are based ultimately on published 'card rates', to which various negotiated adjustments, allowances, commissions and discounts subsequently apply. The card rate for a = particular advertising opportunity is related to the number of prospective buyers that the seller estimates an advertisement will reach when placed in the page or program location offered. Alternative placements in the same journal command different prices, because the impact on readers will differ according to size of advertisement, use of colour, position and prominence in the publication, and so on. Similarly, different broadcast times for advertising on the same radio station will command different prices, because the number of listeners varies according to the time and associated program content. Mr Cooper of the Launceston Examiner described pricing practices for that newspaper. The newspaper's rate card for advertising space is set annually, having regard to both internal costs and market acceptability. Rates vary on a sliding scale according to the amount of money the advertiser spends, with loadings for colour and position or for the insertion of a separate catalogue. Simple production for a local advertiser is done at no charge, although services such as illustrations or photography enjoin a charge. Where demand for advertising increases, the size of the newspaper is increased accordingly. ~ 61 - In the general case, the sales representatives of each radio station or print publication negotiate variations to the card rates with advertising agents or with direct advertisers, having regard to other factors such as the volume of advertising being purchased by the client, alternative demand for the desired page positions or broadcast times, and whether placement is being negotiated early or late in the assembly of the medium's advertising schedule. Confidential examples of negotiated advertising contracts with metropolitan print media that were submitted to the Tribunal show complex tabulations of price according to advertising volume and the details of placement and presentation. Commercial television stations do not' usually publish generally applicable rate cards. Rather, the rates that will eventually apply to a specific purchase are negotiated in three stages. Prior to the start of each calendar year, each network separately talks with groups of buyers negotiating jointly, to agree on a 'base rate card' specific to each group, having regard to the total advertising expenditure commanded by the group. Five major groups of buyers are involved, with secondary buyers negotiating subsequently. The membership of the five groups can be somewhat fluid, but they seem typically to be associated with the five major media buying houses. In a second stage, also at the start of the calendar year, the agency or media buying house separately negotiates with each network to settle discounts applicable to each client, with regard to advertising volume and to particular client requirements. The third stage involves actual purchases of media time, with the previously agreed general rates and discounts taken as the starting point. The final price in regard to an advertisement will be settled with regard to such considerations as the client's advertising volume and the ratings of programs within which 'spots' might be bought. 7.5 Changes in the advertising industry Evidence pointed to changes in the Australian industry since the Tribunal's authorisation in 1978 in four respects: ° growth in advertising volume; . e international linkages; ° technological change; and ° changes in the structure of the advertising services sector. To make reference here to such changes is not to imply that they have been material in terms of s. 91(4) of the Act. That issue is addressed in 12 of these reasons. Growth The statistical fact of continuing growth in advertising expenditure between 1976 and 1994 (in each case the last year of available statistics prior to the successive Tribunal ~ 63 - hearings) has already been noted in 7.1 above. Total advertising expenditure increased over the period from $900,000 to $5,414 million, i.e. six times. Over the same period, Australia's Gross Domestic Product increased 5.5 times. International linkages Evidence in this respect related to the significance of international advertisers, to purported increases in international ownership of Australian advertising agencies, and to growth in the number of advertisements designed for use in several countries, including Australia. Mention was also made of trends to international aggregation of media ownership, and the fact of radio, satellite television and the Internet as media that cross national boundaries. In its 1978 decision, the Tribunal accepted that 'the preservation of a degree of Australian ownership (both in overall billings as well as numbers) [is] a legitimate and desirable objective.' In 1978, they noted evidence that 14 of the then top 21 advertising agencies were owned or controlled by overseas agency groups, and that overseas controlled agencies represented about one-half of all billings. Evidence to the 1996 hearing that significant Australian agencies had since been acquired by international groups, and that the market ~ 64 - share of international agency groups had increased to an estimated 70% to 80%, was not contested. It is not apparent to the Tribunal that this change could in any way be a possible consequence of the MCA Accreditation System. Correspondingly, international companies are major advertisers in Australian media, and evidence comparing and questioning Australian against overseas advertising practice and outcomes was presented by senior officers of Colgate-Palmolive Pty Limited and Toyota Motor Corporation Limited as intervening parties. Mr Koltai of Colgate-Palmolive in oral evidence described how Colgate headquarters in U.S.A. has recently placed all the group's advertising service work world-wide in the hands of one agency, Young and Rubicam, and will be remunerating that agent on a common basis in all countries. The agreement is being applied in Australia despite the new arrangements (on the face of it) not being consistent with the rules of the MCA Accreditation System. Several witnesses referred in statements and oral evidence to the growing recent practice of 'world advertisements' being prepared for particular international advertisers, and published or broadcast in several countries. An article in AdNews in April 1994 reported that for television advertising, 'Foreign content levels are growing at twice the rate predicted when the 20% air-time limit was imposed in 1991'. Such advertising by-passes altogether the creative and production functions of advertising services within Australia, and reduces the role of the Australian advertising agent at best to the media services function of media planning and placement. Technological change The tendency for agencies to specialize, so as to focus either on the creation and production of advertisements (creative agencies) or on media research, planning and Placement (media buying houses), has been reinforced by the appearance of new technologies that distinctively support one or other of the two strands of advertising services. Advances in computer technology in the last decade, facilitating the creation and manipulation of graphic images, now allow individuals and small groups to engage readily in the creation and production of sophisticated advertising material. The investment of $30,000 to $50,000 that is required for equipment is not so high as to preclude establishment of small business ventures that exploit these technologies. In conjunction with the parallel development of media buying agencies of a size to negotiate competitive media prices for their smaller clients, the new situation has facilitated the emergence of numerous small creative advertising agencies. This trend was stated in evidence to have been in the first instance damaging to the business of larger established agencies, who responded by acquiring many successful small agencies, together with the creative skills of their owners. Nevertheless, small creative agencies are now far more numerous than before. The MCA estimates 699 unaccredited agencies (which by their lack of accreditation are confined to creative work) as against the number of 40 unaccredited agents mentioned in evidence to the Tribunal in 1978. At the same time the number of accredited agencies (including accredited branch offices) has fallen from 276 in 1976 to 224 in 1994. Correspondingly, significant changes in technology have influenced the conduct of media planning and placement. Raw research data that allows analysis of television viewing, radio listening and print readership habits is today collected and offered in computer-accessible form by media research companies. The selling price of this research is high; Mr Robertson of Merchant and Partners quoted the total annual purchase cost for a single buyer of complete television, radio and print research data as $340,000. It follows that purchase can be justified only against very substantial placement business, and is within the reach only of the largest agencies and major media buying houses. Advanced software is also required to analyse the research data, so that media buying is optimised to suit the demographic profile being targeted by each advertiser. Such | -~ 67 - software is either proprietary and can be purchased, or is developed by the buying house to suit its perceived needs. Mr Robertson stated that Merchant and Partners has invested 'many hundreds of thousands of dollars' in software programs to improve media buying efficiency. The high investment cost now required to conduct the media planning and buying roles at the level of sophistication allowed by modern technology must introduce significant economies of scale into the conduct of the media buying business. This effect presumably has contributed to the aggregation of the media buying function largely into the hands of a few major operators, and to the out-sourcing of media planning and buying by accredited advertising agencies. Structural change The proliferation of small creative advertising agencies and the emergence of a few strong media buying houses has already been described. The advertising services sector is today no longer overwhelmingly comprised of full-service advertising agencies, whereas in 1976 , according to evidence submitted by the Commission, media buying specialists held only 3% of the market. Likewise, the willingness of full-service agencies to unbundle the services they sell reflects a market where advertising clients distinguish increasingly between creative and production services and the media services function, that is between the task of creating - 68 - the finished advertisement and the action of buying media so that the advertisement is displayed to potential customers. Evidence from several sources served to amply demonstrate this awareness among Australian advertisers. The corresponding trend to advertiser recognition of media buying as a distinct commercial operation exists in some other countries. In U.S.A., the Association of National Advertisers recently published a comprehensive survey of member companies, Trends in Agency Compensation: 1995 , which reports that 47% of responding advertisers contract for their media buying under a separate arrangement to that applying to other advertising services, whether they use the one agency for both purposes or employ a media buying service. The effect is similarly exhibited in the U.K. by the place of media buying houses in that market. A tabulation from the U.K. trade journal Media Week in February 1995, reprinted this year in the Australian trade journal B&T , shows media buying houses holding the first three places in billings among U.K. agencies, and seven of the top ten places, The structural change in the Australian market is reflected also in the response of the full-service advertising agencies to the emergence of independent media buying houses. The distinguishing of Media Decisions as a separate structural entity within George Patterson Bates, the largest advertising agency, has already been mentioned. The acquisition of the media buying house Merchant and Partners by the Interpublic group of agencies, which separately owns the international full-service agencies Lintas and McCann Erickson, is another example. A further response has been the appearance of the 'master media account' arrangement, which facilitates the use of alternative full-service agencies by a major advertiser, while consolidating the media buying strength of the advertiser into the hands of one agency when media prices are being negotiated. The base rates negotiated by the 'master agent' apply irrespective of which accredited agency places subsequent advertising for that advertising client. 8. The Accreditation System 8.1 The Rules Rules Governing Accreditation of Advertising Agencies were authorised by the Tribunal in 1978, and have been amended from time to time, which amendments have also in their turn been authorised. The Rules are binding on all members of the MCA, on the members of media associations that are members of the MCA, and on advertising agencies accredited under the Rules. The Rules have effect in two broad respects, and there are two corresponding administrative structures, each with its system of procedure and practice. - 70 - First, numerous rules stipulate circumstances in which advertising agencies may be granted and may retain accreditation, and they lay down the obligations of accredited agencies, including obligations relating to payment for advertising space or time. These rules, and procedures designed to implement and enforce them, are administered by the Australian Media Accreditation Authority ('AMAA'), a body appointed by the MCA in accordance with its Objects and Rules. Where an agency breaches the Rules, the AMAA has the power to suspend or cancel accreditation, or in effect to fine the agency by imposing a reduction in media commission. Secondly, a single rule (Rule 32) requires that advertising submitted to a media proprietor shall conform to the MCA Codes of Advertising. A breach of this rule by an advertising agency, as with the other rules, renders the agency liable to the imposition of a penalty by the AMAA. The Codes of Advertising are administered and enforced by the MCA through a_- structure, with associated procedures, comprising the Advertising Standards Council and a number of Codes Councils that are concerned with the review and possible amendment of specific advertising codes from time to time, so that they remain suited to their purpose. The present form and procedures of the Advertising Standards Council and the associated Codes Councils were authorised by the Tribunal in 1988. The form and workings of the Codes System are described in 8.3. The AMAA and the rules that it applies constitute a system of credit management, adopted jointly by all media proprietors associated with the MCA, and applying to all transactions under which accredited agencies purchase media space and time for advertising. This credit management system, consequent on the substance of the relevant rules, can be described in summary: ° Advertising agencies satisfying certain defined financial requirements (or equivalent criteria) may be accredited by the AMAA. Accredited agencies have automatic access to credit when placing advertising with all Australian commercial media (excluding only those few media that are not members of the MCA or of an association which is an MCA member). Unaccredited agencies and other advertisers purchasing media space or time will necessarily make their own separate credit arrangements in each instance or pay cash with the submitted advertisement. ° Uniform credit terms are available to accredited agencies, requiring payment 30 days after the end of the month in which the advertisement appeared, with 15 days grace thereafter. Accredited agencies thus receive from 45 to 75 days credit, according to the day in the month in which the advertisement appeared. - 72 - The media proprietor allows an accredited agency commission at the rate of 10% on the total invoiced cost of the advertising lodged by the agency, so that in practice the agency is liable to pay only 90% of invoiced cost, subject to disallowance of the commission on a specific transaction if payment is late. The maximum rate of commission payable to accredited agents in each media section is prescribed under the Rules by the relevant sector association that is a member of the MCA. The present prescribed maxima are: 10% for metropolitan newspapers, country daily newspapers and television stations; 12.5% for radio stations; and 15% for country newspapers that are not published daily. However, in practice a 10% commission rate applies fdr all media. The accredited agency keeps detailed accounts, audited at such intervals as the AMAA nominates for the agency, and opens them to inspection by representatives of the AMAA. The continuing adequacy of the agency's finances, and hence the justification for continuing accreditation, can thereby be closely and confidently monitored. Agencies that are considered by AMAA to fall short of acceptable financial standing (or otherwise breach the rules) may have their accreditation suspended or cancelled, or have a lesser penalty imposed. The rules provide for appeal in such circumstances. - 73- No applicant is eligible for accreditation if an advertising principal (i.e. an advertiser) holds any financial interest in the agency, or if the agency or any member or employee has any relevant association with an advertiser. Changes in ownership, shareholding or executive control of an agency must be brought to the attention of the AMAA. A financial interest in any medium by any officer or employee also prospectively renders an agency ineligible for accreditation, but this requirement may be waived. A related rule requires that notice shall be given to AMAA of any shareholding or interest in a media company by an agency or agency principal. The accredited agency accepts direct responsibility for the payment of the advertising client's accounts for all media purchases made by or through the agency. Orders 'for and on behalf of' a client are not accepted. The accredited agency also provides the media proprietor with an indemnity for any penalty or liability consequent on the publication of an advertisement. Only accredited agencies (the relevant rule capitalises the 'ONLY') are eligible to receive commission from a media proprietor, and shall not accept commission at a higher rate than that the MCA from time to time prescribes or approves. - 74 - e Commission received by the agency is credited to the advertising client (and is required to be 'clearly shown' in the agency's account to the client). However, the Rules state that, if the fee that the agency charges the client is less than the commission, the agency may not rebate the excess media commission to the advertiser. Rather the agency may retain the excess fee with the advertiser's consent, or must return it. Hence the MCA Accreditation System as authorized defines a credit management system for media advertising that is substantially broader in its scope and reach than conventional credit management arrangements. 8.2 The Accreditation System in practice 8.2.1 Accreditation criteria An advertising agency seeking accreditation submits an application to the AMAA that gives exhaustive information on the agency's ownership and executives, its premises, staffing and equipment, and its past and prospective financial situation. Declarations are required as to possible relevant connections with advertising principals and media companies. Past balance sheets and profit and loss accounts, details of actual and projected annual billings, details of borrowings and credit facilities, and a forecast of overheads, in addition to business references and supporting letters from intending clients, are also required. The AMAA provides intending applicants with a memorandum setting out the criteria that the AMAA applies in evaluating the application. These criteria are described as 'guidelines', and the memorandum to intending applicants states that the AMAA has discretion to vary the 'financial standards' if an applicant offers an acceptable alternative proposal. The guidelines that new applicants for accreditation must presently satisfy include: ® a minimum tangible asset cover of $1.25 for each dollar of liability; e working capital, as represented by the excess of current assets over current liabilities, to be no less than 2.5 months overheads; ° a minimum of 5 unassociated clients, with no single client providing a dominant share of the agency's business, unless the obligations of that large client are covered by debtor insurance; e share capital at defined minimum levels, which vary according to location in Australia; or an irrevocable bank guarantee to an equivalent amount; and ° debtor insurance 'in the initial years' to cover all clients for no less than 80% of the applicable debt (except for governments and government undertakings). Mr De Silva, Financial Controller of the AMAA, gave evidence of the significance of these criteria in practice during AMAA credit assessment. He stated that asset coverage and working capital ratio (the first two criteria above) were considered the most important, and that discussion often resulted in sufficient assurances of the applicant's credit-worthiness in other respects being provided on some alternative basis. In 1995, four of the eight agencies accredited had satisfied the AMAA on the basis of alternative proposals. Whether the above criteria or equivalent arrangements with equal force apply to accredited agencies, they constitute demanding criteria for any company engaged in a _ service industry to satisfy. Numerous commercial media operations across Australia are engaging under the MCA System to accept advertising, often at short notice, and to give credit, without any credit limit applying, to any accredited agency wherever in Australia the agency is located, in respect of sums that are a substantial multiple of the gross revenue that the agency will itself earn from the transaction. The commercial risk is palpable. Mr Sully, a chartered accountant and partner of KPMG Hungerford, who advises AMAA professionally in regard to the accreditation of particular agencies, expressed the opinion in evidence that the criteria with respect to tangible assets cover and working capital are reasonable ways to assess the credit-worthiness of an accredited agent, and are set by the AMAA at 'ratios that any prudent credit provider would consider reasonable'. Nonetheless the AMAA guidelines amount to standard financial requirements that are being applied generally to a diverse advertising services sector. As already noted, the full-service agency stereotype which applied when the Rules were originally devised no longer describes the generality of advertising .agencies, in that specialization of agency function is now common. Evidence was submitted to the Tribunal that application of AMAA's financial guidelines can in practice lead to inequitable outcomes, in that they are more easily satisfied by full-service agencies that earn in total a substantial percentage of billings as total fees. Mr Mitchell, the Chairman of Mitchell and Partners, pointed "to the effect of the asset cover requirement as it applies to a media buying house. He compared two cases. A full-service agency billing $1 million, where typically the billing includes a net 7.5% service fee paid by the client, in addition to 10% media commission, is required by the asset backing requirement (1.25 times the net media liability) to have tangible assets of $1.046 million. The arithmetic works differently for a media buying house, where the gross margin of the business is typically narrow. Mr Mitchell instanced an example where the arrangement with the client required a burdensome asset backing of $1.237 million for a $1 million campaign. This example may represent an extreme case, but the point is valid. The AMAA asset cover requirement bears significantly more severely on an agency charging low fees to its client than on an agency charging higher fees. During the hearing counsel for the AFA informed the Tribunal of a prospective relaxation in the AMAA financial requirements, which would reduce the required tangible asset cover to $1.20 for each dollar of liabilities, and the working capital requirement to a level of two months' overheads. However consequent changes to the AMAA accreditation guidelines are not yet in force. 8.2.2 The cost of managing credit risk The MCA Accreditation System, as administered by the AMAA, plainly provides the main media with a cheap and effective procedure to contain credit risk and minimise bad debts. The administrative costs of the System were made available to the Tribunal in confidence, and are very small in proportion to the large sums involved each year in purchase of advertising space and time in Australian media. The bad debts associated with transactions under the System are less than 0.1%. However the credit costs for the MCA and the media on dealings with accredited agencies are but a small part of the total cost of managing advertising credit risk. Administrative costs and bad debts for media proprietors associated with direct dealings with advertisers, such as is - 79 - common in radio and in country media generally, have already been described. More importantly, the Rules of the MCA Accreditation System shift the credit risk for the great majority of advertising transactions, and the related burden of detailed credit management, from the media to the accredited agent. Accredited advertising agencies have in consequence assumed the major credit management role in the Australian advertising industry, and the corresponding administrative cost and risk of bad debts, when accepting del credere risk responsibility as a condition of their accreditation. Media buying agencies adopt various approaches to credit management. AIS establishes a credit limit' for every client that they deal with. The credit standing of new clients is assessed after research that examines available financial data, credit reference bureau reports, credit references and the like. Trade debtor insurance is taken out for all clients. Nevertheless their bad debts approximate $500,000 per annum. Merchant and Partners adopts a similar practice of insuring all advertiser clients. In their dealings with John Singleton Advertising, a large unaccredited agency, close working arrangements include the sharing of the insurance cost. Mitchell and Partners adopts a different emphasis, choosing not to insure their debtors. In addition to formal credit assessment of clients, they rely heavily on their executives maintaining a close knowledge of their clients' - B80 - business, sufficient to allow sound and up-to-date judgement of their ability to pay. 8.2.3 Agency attitudes Many agency witnesses expressed support for continuance of the MCA Accreditation System, pointing to advantages for small and medium-sized accredited agencies being able to buy media time and space anywhere in Australia, without a credit limit, and on standard terms of trade. They pointed also to the difficulty and cost of instituting alternative credit arrangements that in any event were unlikely to be as universal and as convenient. However in general, agency witnesses stated that their agency would with little difficulty continue to operate without the Accreditation System. Mr Mitchell of Mitchell and Partners was the most specific, saying in oral evidence: 'Should there not be an accreditation system, our type of business would go on exactly as it has in the past. We would approach the media, we would have commercial arrangements with the media and we would have a strong client base. Already I have got indications from the media that is what would happen ... . The question of being within an accredited system does not have to arise, if our company wants to have an _ on-going commercial arrangement with the major media owners, and I quite clearly approached them ... . I have had quite positive responses ... .' - 81 - Mr Tate of John Singleton Advertising, the largest unaccredited agency, expressed concern that, in the absence of an accreditation system that guarantees credit availability with all media for all agencies satisfying the requirements, the media will extend reasonable credit terms only to the very largest and well-credentialed agencies, and will not find it practical to 'deal with all the players'. Smaller agencies will then book media through a media buying house or a large agency. Mr Webster of the accredited agency Lintas agreed, and predicted that in the absence of an accreditation system the media planning and buying function would become much more concentrated. Other agency witnesses commented similarly, and also expressed worries about disruption to the industry arising from the loss of established entitlements. 8.2.4 Circumventing the System Authorized rules bearing on the payment of commission strictly preclude payment of media commission to bodies other than accredited agencies. Commission may be shared with an unaccredited agency that has engaged an accredited agency to make the media purchase for its client, but may not be rebated to the client directly, except as a credit against the client's fee. However evidence from several sources stated that in practice these requirements of the Rules can be and are circumvented in the normal course. The detail of some evidence was contested, but its general thrust and substance is plain, and is accepted by the Tribunal. The major media buying houses are not accredited agencies, so that to buy media they must formally operate through an accredited agency. Accordingly they often describe themselves as media consultancies. In their earlier years of operation they performed the media planning and buying function as contractors to accredited agencies who elected to out-source some media work from their traditional media department. However, the market niche of the media buying houses developed further when advertisers began to employ their specialised skills directly, to place advertising that the advertising client had separately developed, or had commissioned from an unaccredited creative agency. To meet this market, media buying houses associated closely with another agency that was already accredited, so that they could accept work from unaccredited entities and receive media commission. Both Merchant and Partners and Mitchell and Partners each acquired an accredited agency, and largely integrated the operations of the two entities, accredited and unaccredited. They thereby gave themselves the commercial flexibility to place advertising and receive or share media commission, whether their client was an accredited or unaccredited agency, or an advertising principal. The large accredited agency George Patterson Bates achieved the same market coverage and circumvented constraints from the accreditation system on their manner of doing business, when they formed the unaccredited media buying house, Media Decisions, as a distinct entity within the parent group. Advertisers who prepare their advertising in-house, or who wish to use an advertisement that has been produced overseas, will be liable for agency fees less than the 10% media commission, and will seek ways to have commission surplus to the cost of media buying rebated to them. In practice they commonly achieve this benefit because, while the accredited agency is constrained by the Rules from rebating commission directly to advertising clients, the unaccredited agent, who is not bound by the Rules, is not. Methods are routinely found to ensure that the full benefit of the commission accrues to the advertiser in some manner, methods that may require some commercial imagination and on occasion a willingness of one of the parties to look the other way. A number of such instances were described or alluded to in evidence to the Tribunal. A common practice is for the surplus commission to be paid to a supplier on the advertiser's behalf - for example to a company that prints the advertiser's direct-mail catalogues. Another is the use of an unaccredited 'dummy' agency performing some token duties for the client. Not every participant finds such practices congenial. Indeed the Accreditation System has been strongly criticised and subjected to some ridicule for appearing both to make dubious practices commercially obligatory and to tolerate their continuance. The Tribunal finds it illuminating that in the latter part of the hearing, counsel for the MCA indicated - 84 — that a variation to the Rules, so that direct rebate of the commission to the advertising principal was no _ longer prohibited, could be contemplated by the MCA. Other restrictions on commercial conduct that are imposed by the Rules are less easily circumvented. Notably, it is not possible for an advertiser to become accredited and thereby to gain the price discount that the media commission offers. The MCA and AFA both assert that advertisers have available to them the alternative pathway of directly negotiating with particular media so as to achieve discounted prices. A large advertiser can certainly adopt this course, and may achieve significant discounts if media expenditure is planned on a scale that carries with it some negotiating strength. Nevertheless statements to the Tribunal show a pattern of strong resentment among substantial advertisers that advertising agencies should be favoured with the Accreditation System in its present form. Some large advertisers with unquestioned credit standing appeared before the Tribunal to ask whether they might not sensibly and in equity have direct access to the privileges of media accreditation. They see the system as selectively allowing agencies a substantially reduced price for advertising in all Australian media, with no explicit credit limit, and on generous and uniform trading terms, apparently in return for guaranteeing the advertiser's payment of media costs, while the substantial advertisers who fund a great part of total media advertising revenue, and who - 85 - commonly boast credit-worthiness far exceeding that of the guaranteeing agencies, are not allowed corresponding commercial arrangements with the media. A further Accreditation System rule that cannot' be circumvented is that which precludes advertising agencies that have any relevant association with an advertising principal from becoming accredited. This rule again reveals an apparent determination of the media to exclude advertising clients from the claimed mutual benefits of the Accreditation System, Similar to that already described above. 8.2.5 Accreditation arrangements elsewhere The AANA survey of overseas advertising -business practice in 1995, which has already been referred to, found that in 14 of the 20 countries surveyed media proprietors employed some form of accreditation system to determine the credit-worthiness of advertising agencies and their clients. The U.S.A., France and Germany are notably among the minority who do not have such a system. The survey found a central media accreditation authority only in Korea. In all of the other countries with accreditation arrangements, the print, radio and television sectors of the media have their own separate accreditation systems, as was the case in Australia prior to 1968. However, such accreditation arrangements Overseas are not in the usual case linked either to the payment of media commission or to advertising code administration. In the U.K., the print media operate separate accreditation ('recognition') systems for metropolitan newspapers, regional newspapers and magazines. Copies of the accreditation agreements or applications for all media sectors were submitted in evidence. In the general case, an agency may be 'recognised' without necessarily being listed as eligible for credit. The U.K. radio sector presently accepts an agency's accreditation in another sector rather than run its own credit assessment system. The distinct media sector systems adopt fairly consistent practices: a 'recognised agency' may place advertising, must warrant that all advertisements lodged conform to the relevant advertising codes, and receives commission. A 'credit-listed agency' is in addition eligible for credit, having satisfied certain financial criteria, and is obliged to continue to disclose its complete financial position. The separate media proprietors do not necessarily offer the same credit terms as between themselves, or as between agencies. There are no restrictions on the rebating of commission to advertisers, as there were prior to the intervention of the Office of Fair Trading in 1978-79. In New Zealand, the government and private television networks operate separate accreditation systems in addition to those operated by radio and print media. The four systems - B7 - have much in common, and somewhat resemble also the Australian system. Agencies must satisfy financial requirements to demonstrate credit—worthiness. Agencies warrant that advertisements shall conform to all relevant laws = and regulations, and with the codes and decisions of the New Zealand Advertising Standards Authority, and the media are indemnified in the event of any liability arising. However there are no rules that restrict the rebating of media commission to advertisers. Rules that had this effect, and the effect also of maintaining agency fees at the level of the 20% commission payable in New Zealand, were removed in 1988 when the Commerce Commission instituted a review of the accreditation rules. 8.3 Advertising Codes The Accreditation System as originally authorized by the Tribunal includes a rule that all advertising submitted to a media proprietor by an accredited advertising agency shall conform to MCA advertising standards. The Tribunal in its 1978 authorisation accepted the public benefits resulting from the establishment of these advertising standards as resulting from the Accreditation System. Applications for review of Commission authorisations for amendments to the Codes were determined by the Tribunal in 1987 and 1988. The Tribunal noted the need for wider public input into the formulation of Codes and the adjudication of complaints, and observed that the membership of various MCA committees should reflect the diversity of Australian society in respects such as age, sex, background, ethnic origin and region. Amended Codes and revised procedures for their review and application were put in place in consequence, authorized separately to the current matter. Further to the general Advertising Code of Ethics, the codes as authorized in 1988 include supplementary Product Codes setting down standards of advertising for particular groups of products where the law, public policy or community expectation variously demand limitations on the content of advertising if it is to be acceptable. These product codes relate to the advertising of therapeutic goods, slimming products, cigarettes and alcoholic beverages. 8.3.1 Administrative procedures . The procedures that are in place to enforce the Codes reflect the conditions imposed by the 1988 authorisation. They are comprised of four elements: e procedures for the clearance of advertisements as complying with the Codes, prior to publication or broadcast; ° procedures for considering and responding to public complaints; e procedures for review and revision of the Codes; and e funding of the Codes system. - 89 - Pre-clearance of advertisements All advertisements that are subject to one of the four product codes are scrutinized prior to submission for broadcast, publication or display under procedures set up by the relevant media sector association that is a member of the MCA: FACTS for commercial television, FARB for commercial radio, APB for print media, and by arrangement, the OAAA for both outdoor advertising and cinema advertising. Clearance is signified by issue of an identifying clearance number, and media will not otherwise accept advertisements for products subject to a product advertising code. Statutory restrictions on tobacco advertising limit the media to which the cigarette code is applicable. In addition, the media sector associations each provide an advisory service to agencies who wish, at an early stage in the development of an advertisement, to check for potential code compliance problems. The prior clearance of all television and_ radio advertisements for conformity with the MCA Codes, relevant law and relevant industry codes of practice, is obligatory under the Broadcasting Services Act 1992. The Commercial Acceptance Division of FACTS, and the corresponding clearance system of FARB are thus substantial operations, largely funded by user charges. - 90 - Handling of complaints The Advertising Standards Council is centrally concerned with considering and adjudicating public complaints about advertisements that have been published or broadcast. Such complaints can be made directly to the ASC, but more commonly are referred to the ASC by media or another body to which complaints might be made. The ASC has sixteen members, ten of them public members, including the Chairman, two representing the media, two representing advertisers, and one representing advertising agencies. The Advertising Code of Ethics provides inter alia that advertisements shall not disparage unfairly an identifiable competing product or service. Complaints in, this respect are adjudged by the Joint Committee for Disparaging Copy, which is an industry committee having no public members. Revision of the Codes The four product codes are each subject to revision on the advice of a standing Code Council, each of which includes both industry and public members. Funding The Australian Advertising Industry Council ('AAIC'), made up of members nominated from the media, the AFA and the AANA, is the governing body under which the Codes System operates, in the sense that it manages the funding of the - 91 - operations of the ASC and Codes Councils. Accredited advertising agencies, with the agreement of their clients, pass a levy of 0.017% of billings to the AAIC, thereby funding 80% of associated costs. The remaining 20% of costs is funded by the MCA, in recognition of the advertising that is placed with media direct rather than through agencies. The AAIC has no standing in regard to advice and specific decisions coming from the ASC and the Codes Councils, and has no authority to constrain their independence. 8.3.2 Enforcing the Codes Where an advertisement is held to be in breach of any of the Codes, the advertisement is withdrawn from publication or transmission, and an accredited agency that has lodged such an advertisement is liable for penalty by the AMAA for breach of the MCA Rules. While such penalty might under the Rules amount to suspension or loss of accreditation, in practice no such penalty has ever been applied. The usual sanction, where the circumstances of the breach are thought to justify it, is the loss or a reduction of agency commission, i.e. a fine. As is the case with other aspects the MCA Accreditation System, the reach of defined sanctions is confined to accredited agencies, and pays no direct regard to impacts on unaccredited agencies or on the advertiser. Mr Rutherford of the MCA gave evidence that accredited media buying houses have on occasion not accepted their responsibility to ensure that - 92 - advertisements submitted by them comply with the Codes, and have required MCA counselling. Playing no part in the preparation of the advertisements they are lodging, they commonly pass on to an unaccredited agency the cost of any sanctions arising from an advertisement prepared by that agency, in accordance with a indemnity contracted between them. Moreover, the failure of an advertisement to comply with the Codes can also introduce significant cost to the advertiser, who will usually be obliged to bear the production cost of an advertisement that cannot be used because of non-compliance. Possibly substantial business costs arising from the disruption of a planned advertising campaign by the enforced withdrawal of an advertisement, will also fall to the advertiser's account. . The Tribunal heard strong criticisms from officers of the AANA of the workings in practice of the code compliance system, and evidence was submitted also that the MCA and other interested parties are considering ways to improve matters. Further, the Commission informed the Tribunal that they are about to undertake a review of the authorisation of the Codes System. The problems cited fall into two broad categories: first, there is a belief among some advertisers that complaints can on occasion be decided capriciously and to their serious detriment, because current procedures do not - 93 - allow ASC members enough time for thoughtful and well-informed consideration; secondly, it seems to be agreed generally that the immediate withdrawal of an advertisement from publication or broadcast where a complaint is upheld can in _ some circumstances be too draconian and clumsy a_ sanction. A recent instance (a television advertisement for Dorf taps) was discussed in evidence and argument, where a costly television advertisement had to be discarded, on grounds that were perhaps only marginally a matter of taste, and where decency was not an issue. The matter was subsequently taken before the Federal Court, but no generally satisfactory outcome was achieved. 8.3.3 The link between Accreditation and Codes Systems The MCA's Accreditation System, insofar as it relates to the allowing of credit to advertising agencies, is administratively distinct from the separately authorized Codes System, which requires that media advertising conform to codes, either general in scope or applying to a product sector, that reflect statute, public policy, and community standards of taste and decency. One system is operated by the AAMA, the other is operated by the ASC and the Codes Councils under the limited governance of the AAIC. Yet a nexus between the two systems exists in two respects. First, Rule 32 of the authorized Accreditation System requires that all media advertising lodged by accredited - 94 - advertising agencies conform to the Codes. Second, breach exposes the accredited agency to sanction as provided for in the Rules. In practice, the AMAA has from time to time imposed a fine (formally, a reduction in the rate of commission) on accredited agencies who have _ lodged advertisements that were in some respect in breach of the Codes. This second link is argued by the MCA to signify that the Accreditation System, and its administering body, AMAA, are essential to the enforcement of the Codes, and are essential in practice to general compliance of media advertising with the Codes. Further, the public benefits that are widely accepted as arising from the operation of the system of advertising codes are claimed by the MCA and the AFA as benefits arising from the operation of the Accreditation System. Differences of opinion concerning the practical substance of the link between the Accreditation and Codes Systems were evident in diverse views expressed in statements to the Tribunal on the subject of the likely effect on the Codes System if the Accreditation System ceased to exist. In the opinion of some, one could not continue without the other, because the ability of the AMAA to sanction breaches is essential to compliance in the normal course. Others were less certain of the outcome, but expressed fears that the Codes System could break down gradually in the absence of - 95 ~- adequate sanctions for breach. The possibility was mooted that the media might cease to support the Codes System without the quid pro quo of the Accreditation System existing also, Advertisers argued that if media refused to publish or broadcast advertisements that do not comply with the codes - and it can obviously be argued that it is in the interest of responsible media organisations to adopt this course, as they do now ~ the Codes will be sufficiently enforced in practice, without any supplementary penalisation of advertising agencies being required. Overseas experience is of interest also in this regard. The AANA survey of practice in 20 countries sought responses to the question 'is media commission linked in any way with advertising self-regulation?' Affirmative responses were received only in respect of Canada and Belgium. All countries surveyed operate a system of advertising codes, most commonly a tripartite self-regulation system governed by the media, the agencies and the advertisers jointly, as in Australia. A further question concerning the treatment of advertisements found to be in breach of the codes indicated that overseas code systems rely overwhelmingly on the advertisement being withdrawn by the advertiser and/or by the media. In both New Zealand and the U.K., for which the Tribunal received detailed evidence, the agency lodging an advertisement warrants its compliance with advertising codes, but the evidence revealed no provision or customary practice involving the withholding - 96 - of commission in respect of an advertisement in breach of the codes. Rather, in both countries the media simply will not run the advertisement. 9. A framework for analysis of revocation issues A question very much at the forefront of the Tribunal's thinking has been the extent to which the customary analytic categories that have governed the fTribunal's approach to applications for authorisation remain relevant when the application relates to revocation. These are the categories of market definition, market power and competition, public benefit and anti-competitive detriment. It is these categories and the links between them that have provided a framework for analysis of the evidence in past applications to the Tribunal. The principles governing the determination of public benefit and detriment in relation to applications for authorisation have been extensively discussed in previous determinations and a systematic methodology developed. The key requirement is that the Tribunal be satisfied that the business conduct at issue will give rise to likely benefit to the public that outweighs any likely detriment to the public from lessening of competition. There is thus a requirement of causation. We seek to establish whether the conduct under scrutiny results or is likely to result in net public benefit. Essentially, we have said, the Tribunal is required to consider the likely shape of x the future with and without the conduct in question. That task will generally entail, as the most important element, an understanding of the functioning of relevant markets with and without the conduct for which authorisation is sought: see 10.1 below. Three questions arise in relation to the Tribunal's task under s. 91(4): (1) Has there been a material change of circumstances since the authorisation was granted? (2) I£ so, should the authorisation be revoked? (3) If so, should there be granted a further authorisation in substitution for the authorisation so revoked? It is obvious that if we reach the third question the Tribunal's standard approach would apply, but some consideration is needed to determine the approach that should govern the other two. It was the Commission's submission that it will sometimes be the case that no elaborate analysis is required when the very conduct that was originally authorized is currently not - 98 - being undertaken. The Commission submitted that the present application is such a case. As Mr Comans put it in oral address, 'our primary submission is the simple fact they have moved away from the rules is enough and there is no detriment benefit or economic analysis involved in that at all'. It was the Commission's submission that a straight conduct test is then sufficient, not only to establish 'material change of circumstances' but also to warrant revocation. Various possibilities were envisaged at the level of principle. It could be that the conduct was never in fact undertaken; it could be that the parties have moved away from the conduct; it could be that the evidence shows that the parties do not intend in future to engage in conduct that is authorized or intend to engage in conduct that is inconsistent with the conduct which is authorized. If so, such a 'dead letter authorisation' should be removed from the books. We accept this submission in principle but defer consideration of whether it applies to the present matter. Insofar as the authorized conduct is in fact taking Place, a more elaborate analysis of the first question is required. Necessarily we compare the circumstances of the present and likely future with the circumstances at the time of the original authorisation. What 'circumstances' are relevant? A criterion of relevance is required. "Material change of circumstances' must refer to circumstances that have - 99 - an impact or likely impact upon public benefit and detriment. A miscellaneous catalogue of changes in the industry and its environment etc. in itself will not answer the question. If the second question arises, the approach required is analogous to the standard authorisation test. In identifying relevant public benefit and detriment it is necessary to compare the position which would exist in the future if the revocation of the past authorisation were to be affirmed with the position in the future that would arise if the past authorisation were to continue. In short, the Tribunal applies the standard 'future with-and-without' test with this difference: 'conduct' refers to the arrangements, practices, agreements etc. that were the subject of a past authorisation rather than those that are the subject of a present application for an authorisation yet to be granted. 10. Market definition, market power and competition 10.1 Market definition Market definition was not at the forefront of submissions to the Tribunal. This may have been because the revocation subject-matter is new to proceedings in the Tribunal. The AFA expressed the view in its final written submission that 'the precise characterization of the relevant markets does not determine the questions in issue here'. However it is the Tribunal's view, as just expressed, that much of its standard framework for establishing benefit and detriment will continue ~ 100 - to apply. As has been stressed repeatedly in Tribunal determinations, 'the specification and analysis of the market has significance not just for the identification of detriment but also for the establishment of benefit': Re Tooth & Co Limited and Tooheys Limited (1979) ATPR 40-113 at 18,194. 'The positive side of this weighing process, namely the appraisal of claimed benefits, will commonly depend upon an appreciation of the competitive functioning of relevant markets, with and without the conduct in respect of which authorisation is sought' Re G & M Stephens Cartage Contractors Pty Limited at 17,459. The most recent application of this principle is found in Queensland Independent Wholesalers Limited (1995) ATPR 41-438. In the pre-hearing Outline of its case, the MCA expressed the view, in response to the Tribunal's request that the parties define the markets considered to be relevant: 'Public benefits may extend beyond matters which may be defined by reference to any particular market or markets'. We would agree with this statement so far as it goes. In previous authorisations the Tribunal has concluded that social value, i.e. public benefit, may reside in the very conduct for which authorisation is sought: Re Association of Consulting Engineers, Australia (1981) ATPR 40-202; and Re G & M Stephens Cartage Contractors Pty Limited. It has also concluded that - 101 - value could be found in the very use of a non-market process (e.g. co-operative enterprise) to organize an activity: Re Rural Traders Co-operative (W.A.) Limited (1979) ATPR 40-110. But such findings have been rare; they are unlikely to apply in the present matter; and in the normal course we must inquire into the functioning of relevant markets with and without the authorized conduct. This is because we are required to predict the likely outcomes were the authorisation not in place and were alternative competitive processes at work. For trade practices adjudication, the market is the network of actual and potential transactions between buyers and sellers of goods or services that are, or could be, in close competition. This is to express the concept with complete generality. The choice of market definition, i.e. the specification of relevant markets in the particular case, must depend upon the issues for determination. For the Tribunal's purposes it is the identification of a market or markets that best enables it to evaluate the likely effects of authorized conduct, whether the subject of past authorisation or possible future authorisation. The conduct that is at the centre of the present inquiry is the Accreditation System as enshrined in the MCA's Accreditation Rules, i.e. the Accreditation System as authorized in 1978. The Code System is not at the centre of - 102 - our current inquiry. Since 1978 the Code System has been reworked in accordance with the Tribunal's 1988 authorisation. It is also the subject of a current review by the Commission. Thus while the links between the Accreditation System and the Code System will be relevant in assessing public benefit, our primary focus is upon the credit provisions and associated commission provisions. We identify two markets oof relevance for these applications: e the market for advertising space and time in Australia; and e the market for advertising agency services (including the creation and placement of advertising and market research services) to advertisers in Australia. The main participants in these markets, whether buyers or sellers, are the advertisers, the media and the advertising agencies, traditionally known as the three arms of the advertising industry. The geographic scope of these markets is largely national, but regional and local markets can be relevant. The precise coverage of these markets is not self- evident. As to the first of our markets, we have formed the - 103 - view that it should include not only the traditional main media but also direct advertising by mail, letter box drops etc., and the 'new media' such as the Internet and pay-TV. In recent years expenditures upon direct advertising, in particular, have become very large and are clearly a practical commercial alternative to main media advertising. It was the estimate of Mr Mitchell of Mitchell and Partners, for instance, that direct marketing would be 'worth approximately $4 billion annually', 'approaching the value of advertising in Australia'. This figure was not subject to any corroboration, and certainly the evidence on direct advertising is sparse. We quote it only to indicate the importance that direct advertising has in the eyes of a leading practitioner. We note, too, that Coles Myer currently spends a little over $100 million on catalogues and other forms of direct marketing as compared with $100 million on advertising in main media (TV, radio and print). It was the view of the Commission, expressed in its written submission, that direct marketing should not form part of the relevant market. This was because direct marketing is not subject to the Accreditation System, whether bound by it or influenced by it. Supporting this treatment, it was said, is the tendency for advertising agencies to create 'separate organisations' to conduct direct marketing business. We do not regard either of these considerations as relevant. While - 104 - it is the case that market definition should be chosen by reference to the conduct at issue, this does not mean that the market identified should be co-extensive with that conduct. Rather it should be chosen to reveal the area of close competition within which the conduct would take place. Accordingly we define the market for advertising space and time to include: e television time; e radio time; e newspaper and magazine space; ° outdoor and cinema advertising; ° direct marketing; and . . 'new media' such as the Internet and pay-TV. The market for advertising agency services includes: e full service agencies; e creative agencies; e media buying houses; ° advertisers' in-house advertising services departments; and e media companies' in-house advertising services sections. We use the terminology adopted in 7 and draw on the discussion in that section. The market encompasses both - 105 - accredited and unaccredited agencies. As the AFA emphasised, the internal structure and trading relationships of this market are 'most heterogeneous'. In its written submission it summarized the possibilities thus: ° an advertiser which produces all of its advertising material in-house (TV commercials are sub-contracted) and which buys all its media time and space direct - Harvey Norman; e an advertiser which uses 10-12 creative agencies, some accredited and some not - Coles Myer; e advertisers which obtain all agency services overseas and merely buy time and space in Australia -- Nike; ° advertisers which use all the services of 'full time' accredited agencies; e advertisers which pay fixed fees for creative work (on an hourly or other basis); e advertisers which use all the services of an unaccredited agency plus a media buying house; and ° advertisers which do a world wide deal with a single multinational agency. It is a feature not only that advertisers deal with a variety of advertising services agencies but also that the various advertising services enterprises deal with each other. There is a maze of vertical and overlapping functional - 106 - relationships. Three patterns of market transactions are especially important: ° advertisers employ accredited full-service agencies which place advertisements directly with the media; e advertisers use one or more unaccredited creative agencies which buy time or space through a media buying house; and e advertisers make direct purchases of media time or space (and possibly associated advertising services). In short, some agencies are more specialized than others; some agencies are more vertically integrated- than others. We are reminded of what was said in Re Queensland Independent Wholesalers Limited regarding the desirability of specifying various functional markets whenever there are market transactions between stages of production and distribution: 'It is our view that wherever there are market transactions of significance there is a need to distinguish a _ separate functional level': at 40,951. Here there is a case for distinguishing various vertical sub-markets in agency services between which there are market transactions. Counsel for the Commission commented in final address on the manner in which the media buying houses act as wholesalers between fragmented sets of buyers and sellers. - 107 - Yet as was concluded in 7 above, the sum of evidence before the Tribunal indicates that the full-service advertising agency remains the predominant mode of delivery of advertising services to main media. It is also the case that the internal structure of the advertising agency services Market is to a degree fluid. We have concluded that a formal vertical partitioning of markets is here unnecessary and possibly misleading. Rather, it is important to be aware of the manner in which the organizational structure of the agency services business responds to market pressures, technological change and shifting comparative advantage. The markets and business entities we consider relevant to our task extend beyond the coverage of the Accreditation System. Mr Rutherford noted in his written evidence that in 1993 some 72% of main media advertising (as distinct from total advertising) passed through the hands of accredited agencies, as compared with 61% in 1978. The coverage of the Code System would be somewhat higher than this since any advertising accepted by a member of the MCA is supposed to conform to the Codes, even when the supplier is a direct advertiser or unaccredited agent, neither of whom has an obligation under the Rules to vet their advertisements. And there is also the competition of direct advertising. 10.2 Market structure It is unnecessary to attempt any comprehensive analysis - 108 - of market structure and competitive behaviour. Drawing upon the account in sections 7, 8 and 10 we isolate those features that are of assistance in evaluating the applications before us. While it is conventional in Australian discussions of media to refer to the industry as characterized by high market concentration and high barriers to entry, there are in fact a considerable number of alternatives available to advertisers in the present context. To illustrate, in free-to-air television there are three commercial networks that are dominant. Obvious barriers to entry arise from various regulatory rules - "licensing, cross-— media rules and regional aggregation rules. In print, there are two dominant newspaper publishers, between them publishing two national daily papers and one or two dailies in each metropolitan area. Barriers to entry arise from the cross-— media rules and scale economies in circulation and distribution. But advertisers are not restricted to free-to- air TV or to daily newspapers. There is a range of alternatives available. What is both striking and significant in the present context is what the Tribunal characterized in 1987 as the MCA 'bottleneck': Re Media Council of Australia (No 2) at 48,434). As the MCA states in its own Guidelines for the Establishment - 109 - and Conduct of Advertising Agencies (1995), 'the Media Council represents virtually all commercial media (Print, Radio, Television, Outdoor and Cinema) throughout Australia'. As noted in the consideration of market definition, alternatives to the main media have recently become very important and act as a brake upon the MCA'S market power (although there is some tendency for the same players to reappear in 'new media' initiatives). Nevertheless while there is some dynamism evident in the structure of the media industry as a whole, the MCA Rules constitute a rigid structural feature. The evidence before us is plain: the union of the main media in the implementation of the MCA Rules represents a substantial exercise of collective market power in transacting business with advertisers and agencies. This is especially so in relation to the many thousands of smaller advertisers and many hundreds of smaller agencies. These smaller enterprises are locked into the channels of trade designated by the MCA. To a degree the major advertisers such as Coles Myer, Toyota or Harvey Norman can by-pass the system and secure individual advertising rates and credit arrangements with individual media; but the evidence is that the negotiating process is painful, secretive, and may offer less opportunity for bargaining pressure than might otherwise be the case. - 110 - By contrast with the media, the agency services business is characterized by relatively low market concentration and relatively low barriers to entry. As described in 7 above, there are 224 accredited agencies (1994) and numerous unaccredited agencies. It is a top-heavy structure with the five very large media buying houses estimated to have something over 20% of the value of main media advertising. At the small end are the boutique creative and specialized agencies. In the middle are the full service agencies of a more traditional type. Based upon the MCA data, the largest agency, George Patterson, has around 10% of accredited turnover; the 20 largest have 75% of accredited turnover; and 100 agencies account for around 75% of all main media turnover. Mr Rutherford said that most unaccredited agencies have a small turnover. Of the 699 identified by the MCA, around 550 have a turnover of $150,000 and less. The most striking feature of the market structure of the advertising agencies' business is its dynamism. Section 7 has described the emergence of the twin specialities - the media planning and placement houses and the small creative agencies ~ in response to technological change. It is notable that the very composition of agencies, in terms of turnover, skills and personnel, is somewhat fluid. Also there are shifting co- operative allegiances. There are fluctuations in agency rankings; Mr Rutherford commented that of the top ten agencies in 1988, only four remained in that ranking in 1995. - 111 - Yet there are constraints upon industry structure imposed by the Accreditation System. Most notable is the division between accredited and unaccredited agencies. There is also the independence requirement of the Rules (Rule 11), which has prohibited vertical integration between advertiser and agency or between agency and media, and has thus contributed to the perpetuation of a specialized agency industry. Thus, the final important feature of market structure to be noted is the MCA Rules themselves and the associated Guidelines (cf. the elements of market structure distinguished in Re QCMA and Defiance Holdings Limited at 17,246). In opening, counsel for the MCA said there were only five 'substantial restrictions' imposed by the Rules: e Rule 11: the independence requirement; e Rule 23: restriction of commission to accredited agencies; ° Rule 24: a maximum rate of commission to be prescribed; e Rule 28: payment of accounts within 45 days; and ° Rule 32: conformity to the codes. In making this submission he evidently was assuming - as we cannot - the very existence of the Accreditation System, including: - 112 - e Rule 22: del credere liability; and e Rule 14: financial requirements for accreditation. We would add Rule 27 which contains two significant restrictions upon business conduct: first, the requirement that commission shall be credited against the fee charged by an agency to an advertiser; and second, the prohibition against rebating of excess commission to the advertiser when the commission exceeds the fee. Counsel for the MCA emphasised 'what these rules do not do'. There is no restriction (he said) on the amount of fees charged by accredited agencies to their advertising clients. There is no restriction on the amount of commission beyond observance of specified maxima. There is no obligation for an agency to be accredited. There is no obligation on advertisers to use an accredited agency. There is no restriction on rates charged for space or time. There is no restriction on direct dealing by media and advertisers. We have already commented upon those rules, which impact directly upon market structure. The remaining restrictions impact upon competitive behaviour and will shortly be discussed. 10.3 Competitive behaviour We turn now to review competitive behaviour. It was the - 113 - submission of counsel for the AFA that competition in the two markets distinguished is 'unfettered'. Witnesses repeatedly asserted how 'competitive' the advertising agency business is. But the focus of those generalizations was mainly upon rivalry for market shares. Something more is required. As Re QCMA and Defiance Holdings Limited emphasized at 17,246: 'effective competition requires both that prices should be flexible, reflecting the forces of demand and supply, and that there should be independent rivalry in all dimensions of the price-product-service packages offered to consumers and customers'. The obvious restriction is the fetter upon competition in risk bearing and credit terms. A competitive market in risk bearing and credit terms would perform two functions. First, the market would operate to secure an optimal balance between safety and risk, i.e. an optimal composition of risk bearing, in that there would be undertaken the amount of protective and preventative action it would be worth 'paying for' (whether in dollars or sacrifice of real resources). Second, the market would operate to allocate the risk bearing and credit control function to those which possess a comparative advantage in that function, including but not restricted to specialist risk bearers - the market would operate to discover the structure of risk bearing that minimizes costs for the community as a whole. - 114 - Mr Mitchell of Mitchell and Partners commented that in the direct marketing segment 'agencies seek and obtain credit on market terms and conditions'. He further noted that in some rural areas informal arrangements outside the Accreditation System have grown up: 'the market is developing its own way of handling credit'. However with this exception aside, the Accreditation System operates to yield a fixed term of 45 days; no price concession is available for payment on shorter terms. The Accreditation System operates to shift risk bearing and credit assessment from the media to others (to the accredited agency in the first instance). The rules governing accreditation, the financial ratios and the like, do not operate to eliminate risk bearing and credit checking. Rather, these functions are passed on} and they must be undertaken within the constraints imposed by the System. The incentives that are built into the Accreditation System are different from those that would obtain in a competitive market. There is the fixed 10% for the fixed 45 days; and there is also what in the hearing became termed the 'flat ratio system', namely the fixed financial ratios (in tangible asset cover and working capital) that must be maintained. Thus the remuneration and financial requirements take no account of differing styles of agency business, e.g. the agency with a large imported component in the - 115 - advertisements to be placed. They make no allowance for the circumstances in which the credit control function is assumed in a very active way by the agency. They make no allowance for economies of scale in risk bearing, i.e. from averaging of risks and the use of skilled personnel, as the agency grows. We are aware that in industries where there are a multiplicity of small operators there will sometimes emerge conventional price ratios and the like to facilitate trade. But here we have a situation in which five extremely large media buying houses (whether accredited or acting through associated accredited agencies) are unable to negotiate terms that differ from the rigid 45 days and 10% commission, or to negotiate accreditation terms and procedures. more appropriate to the nature of their businesses. Earlier we noted that many small and medium sized agencies expressed their liking for the Accreditation System (8.2.3). But others have found the requirements for accreditation costly and inflexible. Certainly the requirements are different from any that would emerge in a competitive credit market. Finally we turn to consider the nature of competition in aspects of the advertising business, other than credit control and risk bearing. There is no controversy as to the vigour and usefulness of competition in services provided by ~ 116 - advertisers, agencies and media. It is evident that there is a valuable variety of services responsive to market requirements. It is evident that there is facility in achieving dynamic adjustments to technological change. However there is controversy between the applicants, interveners and Commission over the reality of price competition. Counsel for the MCA submitted that 'the price charged by the agent is negotiated freely with the agent's client, the advertiser' and that the price for media space and time is likewise established competitively. On the other hand, counsel for the Commission submitted that the structure of traditional agency remuneration lacks flexibility, largely consisting of conventional percentage elements: 10% commission and 7.5% service fee, plus production fees. Counsel for the AANA and its witnesses referred to the 'fixed ratio system'. Ms Henley, the Executive Director of the AANA who showed herself to be a well-informed participant in the advertising industry, commented in response to cross-examination that 'while there may be choices to the structure of the agency you choose... all they do is shuffle around the same fixed commission'. She further said that while there has been a 'lot of change in the behaviour in the market-place', 'the price structure has remained fixed'. Professor Officer, on the other hand, regarded the 10% as purely 'nominal', characterizing the efforts devoted to - 117 - reassigning the 10% more appropriately to persons other than the accredited agent as 'frictions'. We have formed a more critical view. There are real costs imposed by the System, not just the costs of circumventing the System but also the effects of inappropriate incentives. For instance, there are real problems in applying the 10% to advertisements that originate overseas, with little work performed in Australia, that encounter Rule 27.2 (no rebate allowed for excess commission). We have concluded, as regards the more general question of the reality of price competition for advertising agency services, that the evidence is somewhat mixed and difficult to evaluate. We do not find that remuneration by way of commission is necessarily anti-competitive. It is a question of whether the commission is, in reality, fixed, and of whether other remuneration structures are available as effective alternatives. There is an artificiality in separating the issue of price competition from the issue of credit competition. Not without difficulty we have concluded that the Accreditation System operates to inhibit price competition in advertising services generally and to constrain the general patterns of trade between agencies, advertisers and media. We are fortified in this conclusion by observing the greater variety and flexibility of pricing arrangements overseas. We think that in the absence of the System there - 118 - would be greater freedom for agencies, advertisers and media, in Mr Mitchell's words, to 'develop competitive aspects of their business'. 11. Has there been a material change of circumstances since 1978? As discussed in 9 above, there are two tests that may be applied: e Is the current conduct that is undertaken by the parties the conduct that was originally authorized; or is it a case of a dead-letter authorisation? e Has there been such a change of circumstances since the date of the original authorisation 'as will have a Significant impact or likely impact upon the balance of public benefit and detriment? We need, therefore, in a preliminary way, to identify the heads of benefit and detriment that will be relevant. The heads of benefit and detriment identified by the 1978 Tribunal make a convenient starting point. Five heads of benefit can be identified in the earlier determination: e Efficiency and cost savings in the credit and Codes systems. e Standards in advertising arising from the Codes system. - 119 - e Encouragement of small business, both agents and media. e Preservation of a degree of Australian ownership and control. ° Avoidance of conflict between interest and duty of advertising agents. It would be fair to say that the third and fourth heads were expressed with some reservations. The first four were explicitly treated as benefits. As mentioned earlier, the last arises by implication. It related to the condition imposed by the terms of the 1978 authorisation designed to avoid what the Tribunal saw as the main detriment of the existing arrangements, viz. the requirement that 'an advertising agent may not directly or indirectly rebate for the benefit of his principal the commission which he receives from a media proprietor' (at 17,620). Amendments to the Rules were required including, in particular, what has become Rule 27.1. For our part we now see a somewhat expanded set of considerations bearing on benefit and detriment as desirable. It remains true that the centre of the inquiry must be the benefit and detriment associated with the Credit System and, to a degree, the Codes System. But more explicit attention can be given to the impact of the rules upon anti-competitive detriment and upon the functioning of relevant markets - 120 - generally. The focus of our attention will be upon: ° Benefits and detriments arising from the credit control system. e Links with the Codes System. ° Conflicts of interest. ° Impacts upon market structure and competitive behaviour generally. There have been numerous changes in the Australian advertising industry since 1978. In considering whether they constitute 'a material change of circumstanées' we have been assisted by classifying the considerations under four headings: e Conformity with the authorized conduct. e Changes in related authorized conduct, viz. codes and the system of codes administration. e Changes in the structure of the relevant markets. e Changes in market conduct in response to the authorisation and to changes in market structure. Conformity with the authorized conduct We first address the Commission's submission that the parties' conduct has departed so far from the authorized - 121 - conduct as to warrant the conclusion that the authorisation has become a 'dead-letter'. We reject that submission. The evidence is plain that the MCA, individual members of the main media, the AFA and individual accredited agents have been meticulous in following the letter of the authorized rules. Further, the only changes since 1978 in the rules and related guidelines have been changes in the detail of financial criteria against which the AMAA assesses' the financial strength of an agency applying for accreditation, and against which continuance of accreditation is justified. Minimum agency turnover requirements applying in 1978 were subsequently increased progressively to provide for inflation and for the increased cost of operating a full-service agency, until the minimum turnover requirement was abandoned altogether in December 1995. The required financial ratios are unchanged (although some relaxation of the requirements has been mooted to the Tribunal). A requirement that newly accredited agents be covered by an appropriate bank guarantee was introduced temporarily in 1991 to provide additional credit protection for the media at a time of recession; the requirement was removed in October 1994. The evidence consistently indicates that the financial criteria for accreditation are applied flexibly in practice, and no evidence was offered of their being applied inequitably. - 122 - It was also said by counsel for the Commission that the basic intent of the authorisation is being circumvented: 'everyone has developed practices which are outside it and go around it'. But this is a different consideration from the foregoing; we deal with it under the fourth heading. The Tribunal concludes that there has been since 1978 no material change in the authorized conduct that is the subject of this application or in its formal observance. Changes in the Codes and system of Codes administration The advertising codes that were set in place under separate authorisation in 1988, and the administrative structures and procedures that were then -also authorized, remain in place and operative, and no evidence was tendered of any change from the authorized conduct. The Commission and the AANA both submitted that the codes system warrants review, variously offering evidence suggesting that: e authorized procedures bearing on the adjudication of public complaints might be advantageously refined in the light of operating experience; e certain product codes have been largely superseded by statutory requirements and by alternative standards; e the sanction on accredited advertising agents that is enabled by the MCA rule requiring that advertisements comply with the Codes has less force than the immediate - 123 - sanction of an unacceptable advertisement not being published or broadcast, which latter sanction is not founded in the Rules; and ° the non-publication sanction is proving harsh = and inflexible in practice, allowing the advertiser no scope to modify a costly advertisement to meet an identified fault. Although the above criticisms appear to have substance, they relate to conduct that is largely separately authorised, and that is subject in prospect to separate review by the Commission. It is true that the relation between the Codes System and the Accreditation System has changed. Yet our central focus in the current appeal is upon .the Accreditation System. The Tribunal concludes that the identified changes in regard to the workings of the Codes System do not constitute a material change of circumstances in regard to conduct that constitutes the Accreditation System. Changes in the structure of relevant markets There have been important changes since 1978 in both the market for advertising agency services and the market for advertising space and time. - 124 - As noted earlier (at 7.2.3 and 7.5), the advertising services industry has in recent years experienced a marked trend towards specialisation of agencies and the unbundling of agency functions so that they might be separately purchased. Notably the market now increasingly distinguishes agencies that focus on the media planning and buying function from those that focus on the creative and production functions. Unaccredited agencies may not usually purchase media on credit, so they are obliged to specialize either in the creation and production of advertisements, or in specialized media consulting, with an accredited agent acting as intermediary in the purchase of advertising space or time. Accredited agencies can elect not to operate an in-house media department, but rather to employ a media consulting agency providing specialized skills. The unaccredited media buying specialist commonly associates with an accredited agency, often under common ownership, so that media services can be offered either to accredited or unaccredited agencies. The emerging market significance of the media buying houses has, on evidence to the Tribunal, been apparent since the mid-80s; the 1978 reasons of the Tribunal did not mention it. Parallel changes in technology have reinforced the trend to specialisation. The emergence oof numerous' small unaccredited creative agencies has thereby been encouraged. In these entities, the talents of imaginative individuals are combined with techniques of computer graphics to prepare ~ 125 - finished advertising copy for an advertiser client, without regard to the issue of accreditation. Advertising generated by unaccredited creative agencies may be placed through the second-tier specialist, the media buying house, either by the creative agent or by the advertiser, making competitive media prices available to such arrangements. Technical change has also encouraged the specialisation of the media functions of research, planning and buying. Media cost represents around 85% of the cost of advertising, and large advertisers increasingly are concerned that their advertising should be cost-effective. The high cost of detailed market research data, and of necessary computer software for the interpretation and optimum use of the data now appears to favour the media buying house that operates on a substantial scale, over the limited media capabilities that can be mounted in-house by an accredited agency of moderate size. Moreover, large full-service agencies and media buying houses are increasingly combining in media buying groups so as to gain the highest bargaining power in price negotiations with media, especially with television networks. Numerous alternative commercial arrangements are feasible as a consequence of this specialization of agencies. Full- service agencies remain the predominant form in the advertising services sector, but other established and shifting arrangements have also developed among advertisers, - 126 - creative agencies, media buying houses and full-service agencies of the traditional form, directed to optimising the performance of the range of advertising services needed by a specific advertising client. Advertisers themselves may play a more active role, including the establishment of their own in-house advertising services departments. This visible ferment within the advertising services sector is far removed in its nature from the straightforward relationships between advertiser, accredited full-service agency, and media that obtained in 1978, when the stereotypical structure was embodied and assumed in the design of the Accreditation System, as then authorised. MCA evidence to this hearing of the Tribunal included the following: 'For practical purposes it should be recognised that an advertising agency is defined as a duly constituted, separate organisation whose primary function is the creation and placement of advertising on behalf of clients with whom the agency is not affiliated or associated, thus performing a recognisable service for advertisers and media'. In short, for the MCA, a 'real' advertising agency remains a full-service agency. In 1978, there were two unaccredited media buying consultancies in Australia, not long formed, and it appears that they held about 3% of the market. Today the major media buying houses participate in the market to an extent that the - 127 - Tribunal has been unable to estimate confidently, but it is plain that the advertising billings for which they are variously associated with unaccredited and accredited agencies are substantial; that the media buying houses are highly influential in the operation of the market; and that there were relatively few unaccredited agencies in 1978, whereas now there are around 700, at least. The Tribunal notes that specialization within the advertising services sector, so that an advertiser can assemble a number of specialized entities to perform a required bundle of advertising services, has expanded the scope of the market for advertising services in a way that was broadly absent at the time of the 1978 authorisation. Now a purchaser of specialized services can substitute them for the internal processes of a full-service advertising agency, and this looks likely in the normal course to lead to different pricing outcomes. There have also been significant changes in the structure of the market for advertising space and time. We refer to the rise of direct marketing and of the 'new media' described in 10.1. These developments are on-going. They not only increase the competitive pressures upon the MCA and the traditional media. They also expand the horizons of participants within the advertising industry generally, leading to fresh ideas as to how commercial relationships - 128 - generally, including credit control and risk bearing, can be undertaken. The Tribunal has concluded that the structural change as described and discussed above represents a clearly material change of circumstances. Changes in market conduct in response to the authorisation and to changes in market structure With such fundamental changes in the structure of relevant markets it is not surprising that there have been significant changes in market conduct. Some of these changes in market conduct broadly operate to circumvent the original intent and formal expression of the Accreditation Rules. The basic commercial intention of the Rules governing the accreditation of advertising agents has always been apparent. The rules institute a uniform accreditation system used by all Australian media, through which preferred advertising agencies of undoubted financial standing assume the del credere risk associated with the obligation to pay a media proprietor for advertising purchased strictly according to defined trading terms, and to indemnify the media for any associated liability. As quid pro quo, all media proprietors confine the direct payment of media commission to those preferred agencies as recipients, and as far as practicable limit the benefit that other parties might gain directly or indirectly from the payment of media commission. - 129 - As described earlier in 8.2.4, the intended effect of the authorised rules is in practice often vitiated or circumvented. The mechanisms adopted are ordinarily directed to circumventing the rule that media commission in excess of the fee that the agency charges the client shall not be rebated to the client; it is not necessary to recapitulate here the various devices used. In its 1978 reasons, the Tribunal stated that authorisation of this rule was intended to prevent undermining of the Accreditation System by the use of 'dummy' accredited agents, and that 'it would, in the ordinary case, be of academic relevance only'. The possibility of media commission being shared with an unaccredited agency subject to no sanction under the Rules, and subsequently rebated to the advertiser was apparently not contemplated as a possibility even of 'academic interest'. It is true that the transcript of Tribunal proceedings in 1978 indicates that the earlier Tribunal regarded Rule 27.2 (as distinct from Rule 27.1) as 'optional'. But the transcript also reveals that this was precisely because the Tribunal thought that it might well be concluded by the parties that there was 'no need' for such a supplementary condition. -.130 - Experience has shown that an evident intention of the Rules, the confining of the direct benefit of commission to accredited agents, has proved impractical to enforce, because of the emergence of large numbers of small, unaccredited creative agencies, and (it seems) a habit of accredited agencies winking at the rebating of commission to advertising clients by them. Further, the circumstances where securing the position of the advertiser as the beneficiary of excess commission can be a significant issue have greatly multiplied, with the rise of media buying houses who charge their clients far less than 10%, so that the bulk of the media commission is ordinarily available to be passed on. The increase in advertisements originating overseas has been part of this development. The use of such 'placement agencies', to adopt a current MCA term, has meant, too, that there has needed to be various contractual arrangements whereby the financial risks associated with advertisements that break the codes are borne by the creative agency or advertiser concerned, again an outcome very different from the original Tribunal's contemplation. A further development has been the granting of discounts by the media to direct advertisers 'in lieu of commission'. Just how general, and how commercially satisfactory, this development might be was the subject of some controversy in ~ 131 - our proceedings. But, again, it is an outcome patently different from what was intended. For it was intrinsic to the intended commercial effect of the Rules that they place the accredited agency in a preferred position as intermediary between the media and the advertisers. The Tribunal concludes that the practical commercial working out of the Accreditation Rules departs materially from what was originally contemplated; much business conduct can be characterized as a circumvention of the formal rules. In this respect, also, there has been a material change of circumstances. 12. Assessment of benefit and detriment resulting from the Accreditation System We have concluded that there has been a material change of circumstances. The next question to be addressed is whether there has been such a material change that the Commission's revocation should be affirmed. As we have said, to answer this question we must assess the likely benefit and detriment to the public resulting from the Accreditation System. In identifying relevant public benefit and detriment it is necessary to compare the position which would exist in the future if the revocation of the past authorisation were to be affirmed with the position in the future that would arise if the past authorisation were to continue. - 132 - 'Public benefit has been, and is, given a wide ambit by the fribunal as "anything of value to the community generally" (QCMA at 182 and 17,242). Likewise public detriment refers to "any impairment to the community generally, any harm or damage to the aims pursued' by the society" (Victorian Newsagency at 42,683), especially anti-competitive detriment': Re Queensland Independent Wholesalers Limited (1995) ATPR 41-438 at 40,960. Counsel for the MCA, in commenting upon the relevance of alternative possibilities, submitted: The benefits exist'. 'it is not open to the fribunal_ to evaluate the benefits and detriments of the Accreditation System by comparing them with the benefits and/or detriments which may result from another system which the Tribunal (or any of the other parties) might consider to be preferable: it does not matter whether or not the fribunal considers the Accreditation Rules are less than ideal.' . question, he said, is whether there are public that are 'lost if the Accreditation System does not We accept that submission. As earlier expressed, it is the 'future with-and-without' test (above at 6 and 9). The e the e the e the The conduct to be assessed has three main aspects: credit provisions; commission provisions; and code provisions, analysis is facilitated initially if we consider them separately. Indeed, it was the argument of the AANA that the - 133 - System is not so much about credit as about commission; and we will consider that argument in due course. 12.1 The credit provisions The essential features of the Accreditation Rules considered as a credit control system are: e the requirement that accredited agents accept liability for advertising charges; e the minimum financial requirements for accreditation; ° the provisions relating to standard terms of credit; and e payment of commission restricted to accredited agents. The rules involved are: ° Rule 14: the financial requirements for, accreditation; e Rule 22: del credere liability; e Rule 23: exclusivity of commission; and e Rule 28: standard terms of credit. In addition, Rule 11 (the independence requirement) contributes to the functioning of the system as traditionally envisaged. Claimed benefits As in 1978 the main benefit claimed for the credit system lies in its contributions to efficiency. Indeed, counsel for the MCA submitted quite generally with respect to all aspects of the Accreditation System that - 134 - 'the public benefits of the System as found by the Tribunal in 1978 have not been seriously challenged during' the hearing and no evidence has been adduced to diminish the substance of the benefits as found by the Tribunal.' Counsel for the MCA quoted lengthy passages from the 1978 Determination expressing the essential argument: with a single credit system, there is avoidance of duplication in credit checking, enhanced reliability, and a standardization of credit terms and requirements; the resulting cost savings to both media and agencies would be passed on to consumers. He added that the earlier Tribunal's conclusions regarding assistance of the System to small media and small agencies remained true; the System enables small media and small agencies to gain access to economies of scale and to bargaining power. He further submitted that 'the facilitation of the ability to place advertising on an immediate and nationwide basis without the necessity to arrange payment or credit with each media proprietor is an efficiency which confers a significant public benefit'. Counsel for the AFA was broadly in agreement but with some differences of emphasis and some additional points. He stressed the comparative advantage possessed by the advertising agent in assuming the credit checking and risk bearing role by comparison with the media itself. In this he emphasized points made by a number of witnesses, but especially Mr Mooney and Mr Mitchell, to the effect that the - 135 - advertising agent knows the advertiser client because the agent deals with the client regularly. Further he said, taking up a point emphasized by Mr Wayling, the advertising agent being an intermediary between the advertiser and the media, can act as a consolidator of credit transactions, reaping efficiencies in a manner analogous to a wholesaler who stands between a manufacturer and a retailer. Mr Catterns conceded that there has been some shifting of agency functions since 1978 as between the full-service agency, the creative boutique and the media planning agency so that the traditional arguments do not necessarily apply in strictly literal fashion. Nevertheless, he submitted, the accredited agency performed a real function as 'the credit gatekeeper'. If the Accreditation system were to go, he said, there would be two possible outcomes: first, a proliferation of transactions between numerous advertisers, agencies and media with accompanying losses in efficiency; the second, to the extent that advertising would be channelled through five or ten major placement agencies who would become the 'only gateway', there would be a less competitive agency structure with 'an increase in dominance by the media buying groups'. Assessment Our assessment of these claimed benefits can proceed in a number of steps. - 136 - A. At a directions hearing the Tribunal raised the following questions: 'What is special about the advertising industry such that you need these special arrangements? Why cannot credit risk be assumed in the ways that it is in other industries? That is one aspect. Another aspect is why do not alternative arrangements come forward? Why does not the market itself provide a suitable credit risk bearing institution or facility?' Also, early in the proceedings the Tribunal requested that there be furnished some international evidence with the thought that claims regarding the necessity for special treatment of credit in the advertising industry might be tested against international practice. The parties responded by supplying much useful information and thoughtful responses to the question asked. In regard to the credit provisions, the following claims, as special or unique characteristics of the advertising business, are the most important: 1) Very large volumes of cash pass through the agency compared to the size of its own turnover and its own assets; the proportion of agency revenue to billings is around 17%% but the agency must fund 100% of the billings. - 137 - 2) Agents are selling a service and hence offer no security based upon stock in trade. 3) There may be large numbers of advertisers and large numbers of media involved in transactions. Therefore the agency may act as a consolidator of credit transactions between the advertiser and media, and will build up a personal relationship with its clients. 4) Advertisements may need to be placed around the country and at short notice. Under vigorous cross-examination, not too much of these claims survived. First it was conceded that there are many industries in which the product is a service. Again, while it must be the case that large amounts of cash are funnelled through the accredited agents, this funnel effect is 'really the result of the system'. Likewise it was put that 'trade finance is required by agencies only because they are accepting the credit risk'. An alternative could be for the media to deal directly with the advertiser; or it could be that some duplication in checking could be avoided by individual media relying upon several peak organizations. Again, the media planning and placement agencies were available to handle considerable amounts of advertising. - 138 - The Tribunal's resulting scepticism was reinforced by the international evidence on accreditation. This is summarized in 8.2.5 above. It is quite clear that the technical features of the advertising industry do not compel adherence to an Australian-style accreditation system. B. What then are the likely or possible alternatives were the Accreditation System to be abandoned? We have said that in order to identify the benefit and detriment resulting from the System we apply the 'future with- and-without' test. In so doing we are not required to predict the detailed shape of the future, only sufficient of its likely salient characteristics for a comparison to be made. We would expect that there would develop competition in risk bearing and credit terms. Our earlier discussion of market structure and competitive behaviour (at 10.2 and 10.3) makes it plain that it is the Accreditation System itself that fetters competition in the relevant markets. Absent the Accreditation System, there might well develop co-operative arrangements for credit assessment; but they would be much looser than the present system. There might be one or more independent reference services. The media planning and placement agencies could be expected to have a comparative advantage in undertaking credit provision and risk bearing, perhaps in association with credit insurance. The various participants in the market place would have available to them - 139 - all the standard credit control techniques available in commerce such as credit insurance, reference agencies, bank guarantees. But it would be for the competitive market itself to determine the precise shape of the future. That shape would not be fixed but would be responsive to changes in market forces, including changing technology and changing media. There was much evidence to support these predictions. We will refer to the evidence of three witnesses in particular. First, there was Mr Day, the Finance Director of Channel 7, a witness called by the MCA. Mr Day said that in his company advertising is accepted not only from accredited agents but also from unaccredited agents and direct advertisers. In the latter two cases, credit is given to the direct advertisers concerned and credit checks are made upon them. Direct advertisers might individually spend up to a million or so per annum. The various credit checks that are made include the use of financial data relating to the advertiser, trade inquiries, reference agencies, banks for references or guarantees, and creditor references. Mr Robertson, a witness called by the AFA, is the CEO of one of the five largest media planning and buying firms. It operates through two trading entities, Merchant and Partners (unaccredited) and MPS Advertising (accredited). Mr Robertson - 140 - stated that 'essentially the professional function that is being carried out by these two entitles is the same'. However, the detail of how the credit risk is handled varies according to whether it is the accredited or unaccredited wing of the firm that is involved. If MPS is involved it receives the 10% commission and passes on approximately 75% to the unaccredited agent. If Merchant and Partners is involved it uses 'the authority of the accredited agent' to buy the media and bills the accredited agent at the end of the month around 245%; the accredited agent takes the credit risk. If MPS is the relevant entity, it bears the credit risk and does credit checks upon the advertiser client and effects credit insurance with Trade Indemnity; it bills the advertiser direct. Mr Mitchell, a witness called by the Commission, is Chairman of Mitchell and Partners, itself unaccredited but with a 100% interest in an accredited agency. Mitchell and Partners is also one of the five largest media planning and buying firms. Mr Mitchell said in oral testimony: '[sjhould there not be an Accredited System, our type of business would go on in exactly the same way as it has in the past.' He explained that he was referring not only to the media planning and placement service. He was also referring to bearing the credit risk: 'I am a little puzzled as to why you are holding yourself out as the party that would handle the debt so that the debt from the advertisers would pass through you and you would perform the function of - 141 - bearing the credit risk?---Yes. Why do you envisage that arising?---I think in a practical sense that we have 500 clients who come and go at varying times... . We want to have advertising bought almost immediately and to facilitate that it would be much better, much quicker and it may be the only way possible in some cases, that we would also stand behind the debt, that is the credit. There are 500 of them, they are not known to the media, necessarily... . Yes, and from what you say, it seems as though you are thinking of this as one of the services that you would supply that would add to the competitive strength. Is that right?---Yes, absolutely'. As earlier mentioned in 10.3 on competitive behaviour Mr Mitchell said that at present there are transactions outside the Accreditation System (direct marketing, rural areas) where 'the market is developing its own way of handling credit'. It was put to him that already one can see developing competition in credit assessment and risk bearing with the participants being quite a variety of entities. He agreed. c. It is consideration of these alternative possibilities that reveals the limitations of the applicants' contentions regarding benefit. The evidence was that the incidence of bad debts for the media is very low. But this does not mean that' the Accreditation System has eliminated the risk of bad debts. Rather, the System operates to shift risk bearing from the media to others (to the accredited agency in the first instance). As earlier described, there can be quite a complex chain of dealings with the accredited agent acting, in ~ 142 - Mr Cattern's phrase, as the 'gatekeeper'. Following the implications of that phrase, the System operates to impose a duplication - sometimes more - of credit assessment. As the Commission submitted: 'The system creates a need, which would otherwise not exist, for [each] accredited agent to check the credit of individual advertisers. If the system did not exist, media proprietors, whether individually, in industry groupings (e.g. as in the U.K.) or by a single umbrella organisation (perhaps the MCA) could undertake credit checking of individual advertisers, and the need for a system to check the credit of over 200 agents would be eliminated'. It is plain that the identification of benefit to the public requires that the overall impact of the System be assessed. When Mr Sully, the chartered accountant engaged by the AMAA, expressed the view (above at 8.2.1) that the asset cover and working capital requirements of the Guidelines were 'reasonable' and 'cost effective' he was appraising the requirements from the perspective of the AMAA. Further, when asked how the Accreditation System compared with other arrangements, he said that he has not been 'consulted on advising on other systems'. In short, a major criterion for judging the System from the perspective of benefit to the public must be its contribution to economic efficiency. Some reference was made in submissions to this criterion. The Commission was ~ 143 - concerned to emphasize that the system must be judged upon its overall effects for society as a whole, with which we agree. Counsel for the AFA submitted: 'An efficient distribution of risks is one that places those risks predominantly with the parties with the greatest willingness to bear them and with the ability to do so in the least costly way. In the present case, agencies are the parties with this ability. It is fundamental to their jobs that they know their clients' business intimately'. We have some problems with this submission. First, as earlier discussed (at 10.3) we need to have regard to a comprehensive concept of efficiency in risk bearing; efficiency requires that there be secured an optimal balance between safety and risk, as well as the cost minimization mentioned. Second, if it is true that agents have a comparative advantage in assessing credit-worthiness we do not understand why it should be necessary for the MCA to mount an elaborate system that contains within its elements compulsion and exclusion. If advertising agents do have an advantage they would have nothing to fear from a more competitive system. But counsel for the AFA threw doubt upon the effectiveness of competition were the System to be revoked: the credit pathway would become 'dominated by five or ten major agents'; and there would be 'an increase in dominance - 144 - by the media buying groups'. It may be that in a world without the Accreditation System, the market share of these agents and groups would increase. But in the view we have formed, on the basis of the totality of the evidence and the discussion contained above at 10, there is no reason to doubt that in the absence of the Accreditation System the relevant markets would be characterised by effective competition. Counsel for the AFA claimed public benefit from Rule 11, the requirement that accredited agencies be independent of advertisers and of media. Effectively the rule operates to protect the specialized advertising agent. Benefit was claimed from an avoidance of conflicts of interest, whether with advertiser clients or with media. The Commission opposed the rule as preventing efficiencies of vertical integration. The evidence of Mr Harvey supports this position. Harvey Norman is an interesting and significant example of a large retailer that prefers to deal directly with the media. Mr Harvey said in his written evidence that it is 'very much an advantage' for the Group to have its own media department, they are able to specialize in the Group's work and adopt 'an integrated approach to main media and direct marketing'. - 145 - We accept the contentions of the Commission that open competition between agencies, including in-house departments or sections operated by advertisers or media, would give adequate protection against conflicts of interest. We find no benefit in Rule 11, indeed the reverse. Plainly there may be efficiencies to be gained from co- operative arrangements in credit assessment that fall far short of the current monopoly system. However, the Commission stated in its written submissions that it does not accept that an efficient credit system: ° must be exclusive; individual media proprietors should be free to deal on any terms of trade with any credit-worthy customer; e must be commission based; ° must involve limitations on ownership of credited agencies; and e must exclude direct advertisers. We accept that submission. Finally, we consider the claim that the Accreditation System protects the small agency, enabling it to have immediate access to credit nationwide. Whatever the public interest might be, the evidence does not support such a claim. The evidence is that the status of the small agency has changed over the last 20 years. It is now much more - 146 - specialized. It can gain access to credit by linking in co-— operative fashion with other agencies, especially the media buying agencies. D. Building upon the immediately preceding discussion and upon the material at 10.3 on competitive behaviour, we can move quickly to identify the anti-competitive detriment effected by the credit provisions. The detriment can be summed up in a phrase - economic inefficiency - which is to say a waste of society's resources. e The Accreditation System gives rise to economic inefficiency in credit provision and risk bearing. It Operates to deny a whole realm of feasible and useful competition in credit provision and risk bearing. That competition could be expected to deliver an efficient outcome in two respects, viz. to achieve an optimal balance between safety and risk, and a structure of risk bearing that minimizes costs for the community as a whole. e The Accreditation System gives rise to economic inefficiency in the structure of the agency market. The System is implemented by a mixture of restrictive rules and arbitrary incentives which creates burdens and opportunities for particular styles of business, unrelated to their capacity to deliver a service. An important example of this effect is Rule 11, the independence rule, that dissuades advertisers and media from establishing in-house advertising services - 147 - departments. ° The Accreditation System gives rise to economic inefficiency through the dead-weight costs of complying with inappropriately burdensome and unduly standardized financial and other requirements for accreditation. e The Accreditation System gives rise to economic inefficiency through the resources devoted to circumventing the Rules. The Tribunal concludes that the credit provisions result in no benefit to the public and to substantial detriment. 12.2 The commission provisions We now focus upon: e Rule 23: restriction of commission to accredited agents; e Rule 24: a maximum rate of commission to be prescribed; ° Rule 27.1: commission to be credited against agent's fee with disclosure of commission elements; e Rule 27.2: prohibition against rebating of excess commission. Claimed benefits The submission of the MCA had three elements. First, it was said: - 148 - 'Media commission is not the creature of the Accreditation System. Media commission exists in other countries around the world even where there are no Accreditation Systems'. Second, the exclusionary provision (Rule 23) is instrumental in the sense that it is but a means to an end. It had been the submission to the 1978 Tribunal that Rule 23 (then known as Rule 19) was essential to achieve adherence by the agents, especially the large agents, to the credit regime - an argument which was accepted by the earlier Tribunal. But third, given that the payment of commission by the media to an agent of the advertiser might give rise to a conflict between interest and duty: 'the rules dealing with media commission are an attempt to bring this monster under control in order to avoid the conflicts of interest and other distortion about which Mr Ellicott QC preached. Commission is not a creature of the Accreditation System, it would exist in any event. Thus any detriments which flow from commission do not result from the Accreditation Rules. The only effect of the Accreditation System is to ameliorate the effects of commission in the public interest by requiring disclosure and non- retention of the benefit of commission without the advertiser's consent, by limitation of commission to those whose receipt of commission can be forced to be disclosed by the system and by limiting the maximum amount of commission so that the advertisers are more likely to be aware of the true amount being paid. All of these matters are public benefits and manifestly outweigh any attendant detriment'. - 149 - The AANA was vehemently opposed to these points. Counsel for the AANA conveyed the thought that the commission system is far from being instrumental. In opening he said: 'The Accreditation System, it is a bit like a Trojan horse, it just is not what it seems. It involves, in effect, the elevation of a credit list in order to lead observers to believe that in this particular industry there is a _ special need to give credit risk a_ special treatment. It involves the media going to extraordinary lengths to ensure.. credit worthiness... when by comparison ... the credit standing of a lot of people who are involved as the advertisers is self evident'. Again, in written submissions: 'The current system is a "Trojan Horse" in that its effect, if not its underlying purpose, is to facilitate a means, and provide an apparent external rationale, for the payment by media of commissions to a class of persons, determined by the media itself, who purchase and negotiate the price of media. There is no commercial rationale or consideration for paying commissions and its effect is to impose a conflict of interest upon its recipients'. Effectively the commission system, he said, binds agents to the media so that 'the advertising agent has become a commission agent of the media, and not the true agent of the advertiser', Assessment We first go to the international evidence on agency - 150 - remuneration. This is mainly the AANA's 20-country survey and the report from the United States, the ANA's Triennial Survey, Trends in Agency Compensation (1995). The international evidence indicates that remuneration of advertising agents by commission is very common, though not altogether universal. Ms Henley's summary in oral evidence of the implications of the 20-country survey is accurate and to the point. She first commented on the convenience of percentage remuneration and then said: 'However, sometimes that commission is based on negotiations between the agency and the client; sometimes between the client and individual media proprietors and sometimes between the client and a group, such as a newspaper publishers' association or something of that nature. So firstly, it's negotiable and secondly, it's negotiable in a number of different circumstances, none of which are the same as the Media Council system'. Further, in all cases in the 20-country = survey, advertiser clients can buy direct from media. Often it is said that they receive 'commission'. In other cases they receive 'discounts', 'rebates', and 'negotiable rates'. The U.S. survey was of 97 major advertisers. The majority of these advertisers - and not media, we note - use some form of commission remuneration. Yet 40% use other bases. There was some variation in the rate of commission, with only 15% of respondents said to conform to the - 151 - 'traditional' 15% commission. There was also some flexibility over time in the form of remuneration and in the rates of remuneration. We do not think the international evidence assists the applicants' case. It was claimed by the applicants that an advantage of the Australian system is that the media are not required to remunerate by commission. Rather the requirement is the inverse, that only accredited agents may be paid commission. Further, it was said, in implementing Rule 24 the Guidelines prescribe different maximum rates; it simply happens that 10% is universal and is non-negotiable. . In our view any justification that the commission provisions might have falls away once we reject the claims of benefit from the credit provisions. Nor does the claim regarding the protection of small media have merit. The argument was that Rule 24, prescribing a maximum rate of commission, would protect small media. But in fact the various maxima permitted under the Guidelines are not always reached. We would see a competitive market to be a better source of protection for small media. - 152 - Yet there remains, it might be thought, the problem of conflict that so engaged the attention of the earlier Tribunal. Might there not be benefit to the public in provisions which attempt 'to bring this monster under control'? Counsel for the MCA proposed that Rule 27 might be amended to remove elements thought to be objectionable and to highlight disclosure. Certainly there is a problem. It has become customary in Australia for commission to be paid by the media seller to the agent of the advertiser purchaser. We were informed of ways in which the advertiser might seek to control the agent, e.g. by use of predetermined budgets and detailed control over the composition of expenditure. Yet it is plain that situations remain in which it might not be in the agent's short-run interest to pursue the interest of the advertiser client (e.g. to pursue redress for a TV commercial that in the event is run in 'dead time'.) In our view, the Accreditation System itself has added to the scope for potential conflict in two ways. We now understand this because we have had the benefit of almost 20 years experience in the working of the System. First, it has operated to entrench media commission; and second, it has inhibited the development of fully competitive markets. Absent the Accreditation System, we would expect more varied remuneration structures to develop; and the advertising agent - 153 - would be subject to the discipline of potential by-pass by the advertiser going directly to the media should the agent fail to pursue the advertiser's best interests. We find no benefit in the commission provisions. We also find that they give rise to anti-competitive detriment in the following specific ways: e While the rules do not compel the payment of commission or any particular rate of commission, the System as a whole operates to entrench commission and to foster uniformity in the rate of commission. It is the combination of the credit rules and the "commission rules, with the exclusivity requirement of Rule 23 giving rise to the privileged position of accredited agents, that has that effect. ° There is a spill-over effect from the uniformity of commission rates to acceptance of customary levels of percentage remuneration of the agents by advertisers, commonly 7%%. As the Commission submitted: 'Remuneration of agents is based on the payment of commission related to advertising spent and service fees commonly (and naturally) follow the commission format'. - 154 - e The prohibition against the rebating of excess commissions (Rule 27.2) has been shown to be inappropriate to current circumstances (see 8.2.4) and to lead to counter-productive schemes of circumvention (of doubtful ethical status). e The commission system, reinforced by Rule 11 denying accreditation to advertisers' in-house advertising departments, erects a barrier to direct trade between advertisers and media. That barrier may sometimes be overcome, with advertisers securing discounts in lieu of commission, but the evidence was that the process is costly and uncertain. Moreover, direct access is more readily achieved by large advertisers, such as Coles Myer and Harvey Norman, giving rise to a discriminatory treatment of smaller advertisers. e The commission provisions, in the context of the Accreditation System as a whole, now operate to promote a conflict between interest and duty on the part of the accredited agents. 12.3 The code provisions The provisions that are relevant for this element of the Accreditation System are: e Rule 32: conformity to the codes; - 155 - e Rule 17: Sanctions for non-observance of the rules; cancellation or suspension of accreditation, reduction in commission. The advertising codes were comprehensively discussed in 8.3. There it was noted that the Code System relies upon two authorisations, the 1978 authorisation that is the subject of our review and_- the 1988 authorisation of particular advertising Codes and collective procedures for review, pre- clearance, and the handing of complaints. There was much debate in the hearing before us about the extent to which the continued operation of the Codes is dependent upon the existence of the Accreditation System. This became known as the issue of 'linkage of the Codes'. It was agreed on all sides that the effective sanction for non-compliance with the Codes is not Rule 17, but the refusal by the media to broadcast or publish. The Commission submitted that much of the content of the MCA Codes is now contained in, and enforced through, other regulatory procedures. In any event, it was said, the Codes are the subject of separate authorisation and the Tribunal could not conclude that the Codes would cease to be complied with by the main media were the Accreditation System to he revoked. Further, the Commission informed the Tribunal that - 156 - the Code System is currently the subject of a separate inquiry as to whether the Commission should give notice under s. 94(4) in respect of the separate authorisation of the Codes. Supporting these points is the fact that much advertising content 'by-passes' the accredited agent in two senses: first, it may be placed with the media by direct advertisers; or second, it may be placed with the media by agencies - 'placement agencies' - that are acting for others undertaking the creative function. On the other hand, counsel for the AFA in a powerful submission argued that 'the 1988 system wholly hangs from the 1978 system'; in the strictly legal sense that is required, the public benefit from the Codes 'results from' the conduct authorized in 1978. He relied upon the enforcement provisions embedded in the Accreditation Rules: 'The 1978 decision authorises the horizontal agreement by which, relevantly, the media agree to impose Rule 32 (and its corollary, the "boycott"). By a vertical agreement, the agencies agree to act as "gatekeepers" for code compliance. The public benefit which results from this relates to the whole code system, as the Tribunal held in 1978. Without the two agreements authorized, the whole system would have no sanction...' He answered the contentions regarding 'by-pass' in two ways: first, irrespective of where advertising originates, the media have collectively agreed to enforce the Codes and are in - 157 - a position to impose a collective boycott upon publication; and second, even if an accredited agent has not created the advertisement it acts (analogously to the 'credit gatekeeper' ) as the 'code gatekeeper' and will pass responsibility down the line through its contractual and trading relationships. He submitted: 'It is meaningless to ask whether, in the absence of authorisation, media and agencies will, as a matter of self- interest or of altruism, continue' to participate in a structure similar to the present: without an authorisation they Cannot participate in any system which guarantees the two functions of sanction and gatekeeper. Nothing in the 1988 authorisations relates to these two functions' (counsel's emphasis). We agree that, at the least, a new authdrisation would be required. But this is not the end of it. The relevant question is what would be likely to happen in the future to the Code System were the Accreditation System to be revoked. We would not wish to pre-empt the Commission's review. In any case, as mentioned earlier, the functioning of the Code System has not been at the centre of the present proceedings. Given that the Tribunal found public benefit in the Code System and its administration in 1988, the sensible course is to accept that the Codes give rise to public benefit, and then to ask whether we are entitled to rely upon some alternative enforcement mechanism being found, and authorized, were the Accreditation System to be revoked. ~ 158 - In support of this position is the international evidence summarized at 8.3.3. Broadly speaking, self-regulation of advertising standards is separate from accreditation and commission practice. However, the development of an alternative enforcement system in Australia would not be without cost and uncertainty. As presently informed the Tribunal accepts that in the code provisions there is an element of net benefit to the public. 12.4 The Accreditation System as a whole We have found that the Accreditation System represents a substantial exercise of market power in transacting business with advertisers and agencies. We have concluded that in the absence of the Accreditation System the relevant markets would be characterized by effective competition. The System operates not just as a fetter upon competition in risk bearing and credit management. It has spillover effects upon the structure of the agency services industry and upon competitive conduct generally. We identify two categories of resulting anti-competitive detriment. First, there is economic inefficiency, a waste of society's resources, And second, there is the exercise of functionless market power - market power which carries with it - 159 - no redeeming benefit to the public; but rather operates to erect unjustified barriers to particular styles of business activity. 13. Conclusion There has been a material change of circumstances since authorisation was granted in 1978. In our opinion the authorisation should be revoked. Counsel for the MCA asked the Tribunal, in the event that it decided (as it has) to revoke the authorisation, to defer the operation of the revocation for sufficient time to enable interested participants to change their practices and shape their affairs consistently with the Tribunal's findings. We agree that this is the fair and just course to follow. , Accordingly, the Tribunal revokes authorisation No. A3005; but suspends operation of the revocation until 3 February 1997. I certify that this and the preceding one hundred and fifty- eight (158) pages are a true copy of the reasons for decision herein of the Australian Competition Tribunal. ? Associate Dated: 26 July 1996 - 160 - Counsel for the Media Council of Australia Solicitors for the Media Council of Australia Counsel for the Advertising Federation of Australia Solicitors for the Advertising Federation of Australia Counsel for the Interveners Solicitors for the Interveners Counsel for the Australia Competition & Consumer Commission Dates of Hearing Date of Decision oe J D Heydon QC R J Wright Blake Waldron Dawson D K Catterns QC Baker & McKenzie R J Ellicott Qc DM Yates Barker Gosling C P Comans 12, 14, 415, 18, 19, 20, 21, 22 March 1996 26 July 1996