- to TRADE PRACTIES TRIBUNAL CATCHWORDS — JUDGMENT No. sdf untoonl othe, TRADE PRACTICES - Victorian Newsagents - review of the Trade Practices Commission authorization of a newsagency distribution system in Victoria - whether the proposed conduct including territorial monopolies of authorized newsagents would substantially lessen competition - whether public benefit outweighs public detriment from the lessening of competition - jurisdiction of the Tribunal under s.88. Trade Practices Act 1974, ss. 45, 88, 90, 101, 102 APPLICATION FOR A REVIEW OF A DETERMINATION BY THE TRADE PRACTICES COMMISSION DATED 30 JULY 1993 GRANTING AUTHORIZATION IN RELATION TO APPLICATIONS A40059, A40060 AND A40061 (PROPOSED NEWSAGENCY DISTRIBUTION SYSTEM FOR VICTORIA) Ql of 1993 V3 of 1993 NSW1 of 1993 Lockhart J. (President), Professor M Brunt, Dr B I Aldrich 11 November 1994 COMMONWEALTH OF AUSTRALIA TRADE PRACTICES ACT 1974 IN THE TRADE PRACTICES TRIBUNAL Nos. Q1 of 1993 V3 of 1993 NSW1 of 1993 APPLICATION FOR A REVIEW OF A DETERMINATION BY THE TRADE PRACTICES COMMISSION DATED 30 JULY 1993 GRANTING AUTHORIZATION IN RELATION TO APPLICATIONS A40059, A40060 AND A40061 (PROPOSED NEWSAGENCY DISTRIBUTION SYSTEM FOR VICTORIA) LOCKHART J. (President); PROFESSOR M BRUNT and DR B I ALDRICH (Members) 11 November 1994 MINUTE OF ORDER THE TRIBUNAL DETERMINES THAT: the determination of the Trade Practices Commission dated 30 July 1993 be set aside. IN THE TRADE PRACTICES TRIBUNAL Nos. Q1 of 1993 V3 of 1993 NSW1 of 1993 APPLICATION FOR A REVIEW OF A DETERMINATION BY THE TRADE PRACTICES COMMISSION DATED 30 JULY 1993 GRANTING Authorization IN RELATION TO APPLICATIONS A40059, A40060, AND A40061 (PROPOSED NEWSAGENCY DISTRIBUTION SYSTEM FOR VICTORIA) LOCKHART J. (President); PROFESSOR M BRUNT and DR B I ALDRICH (Members ) 11 November 1994 REASONS FOR DECISION INDEX ay . INTRODUCTION 2. GLOSSARY OF TERMS, PARTICIPANTS AND WITNESSES 2.1 Terms 2.2 Participants before the Tribunal 2.3 Witnesses 3. THE APPLICATIONS FOR REVIEW OF THE 1993 DETERMINATION AND WHA TH PARTIES NE AND INTERVENERS SEEK 4, RELEVANT LAW - SCOPE OF THE APPLICATIONS AND STATUTORY TESTS 5. RELEVANT DETERMINATIONS OF THE COMMISSTON 5.1 NSW draft determination of 1979 5.2 NSW final determination of 1980 5.3 The 1982 determination 5.4 The 1993 determination THE WORKINGS OF THE NEWSPAPER DISTRIBUTION SYSTEM The Australian pattern The scope of the Victorian system Arrangements for governance Publication and primary distribution The operation of the newsagency The newsagency as a viable business Home delivery of newspapers Sub-agents Directions of change in the system 0 Enforcement of newsagency obligations DAANANAAAAANH FPOOMDNAUPWNEH eee . ANALYSTS OF THE PRESENT SYSTEM Markets and market power The horizontal and vertical restrictions The potential for public benefit from the present system Efficiency effects in the present system Anti-competitive detriment 1 Inefficiency «2 Denial of commercial freedom and economic opportunity Defensible elements of the system NNN ~ WN NNN Mou fb s an BENEFI DETRIMENT FROM THE 1993 DET INATI The 1993 determination Tribunal's assessment omc Nr wo CONCLUSION KRREKERKEEKKKEER 1. INTRODUCTION These are three applications for review under s. 101 of the frade Practices Act 1974 (the Act) of a determination of the Trade Practices Commission (the Commission) dated 30 July 1993 (the 1993 determination). The applicants for review are 7-Eleven Stores Pty Limited (7-Eleven) (V3 of 1993), Australian Association of Conveniences Stores Incorporated (AACS) (NSW1 of 1993) and Queensland Newsagents Federation (QNF) (Q1 of 1993). A fourth application for review of the 1993 determination was made to the Tribunal by Independent Newsagents Association (NSW 2 of 1993); but, on the Association's application, the Tribunal granted leave to it on 26 November 1993 to withdraw the application. The Association took no further part in the review. None of the applicants for review was an applicant for authorization before the Commission. The review concerns the system of distributing newspapers in Victoria. The system is administered by the Newsagency Council of Victoria (NCV) which has as its constituent members The Herald and Weekly Times Limited (HWT), David Syme and Co Limited (David Syme) and Victorian Authorized Newsagency Association Limited (VANA). The system consists of deliveries of newspapers by the two publishing groups (i.e. the HWT group and.the Age group) to authorized newsagents (i.e. newsagents accredited under the rules of the NCV). Each authorized newsagent operates within a defined and exclusive territory, which is the same for both publishers. Within that territory each newsagent has obligations to deliver newspapers to final purchasers of publications (homes, businesses, institutions, etc.) and appoints (at the direction, or with the consent, of the publishers and distributors) a number of retail sub- agents. An authorized newsagent is in practice the sole supplier of newspapers to sub-agents. Sub-agents range in size and type from "look-alikes" (an expression defined later), convenience stores and mini-markets to delicatessens, milk bars and take-away shops. The central features of the system were authorized by the Commission on 28 April 1982 (Application No. A90368, reported (both draft and final determinations) in [1982] ATPR (Com) 50- 035) (the 1982 determination). The Commission said, in the 1982 determination (paragraph 11), that it considered the key anti-competitive feature of the then proposed system was the grant of a territorial monopoly to newsagents. Nevertheless, the Commission said that the territorial monopoly yielded a public benefit of a low-cost, efficient home delivery service and a greater availability of newspapers and magazines than would otherwise be the case, The Commission concluded that this public benefit outweighed the anti-competitive detriment of the system. The Commission accordingly granted authorization except in one respect to which reference shall be made later. The 1982 determination followed a prior authorization granted by the Commission to the system for the distribution of newspapers and magazines in New South Wales ([{1979-80] ATPR (Com) 35-200) to which we shall refer later. In 1987, the Commission commenced an examination of the newsagency systems then in force in Australia; and on 15 May 1990 released an issues paper entitled: "Study of the Distribution of Newspapers and Magazines" (the "1990 issues paper"). The Commission said in its summary of the 1990 issues paper: "The existing distribution systems have been authorized by the Commission over the past 10 years. The Commission believes it is important to remember that' these authorizations effectively grant an exemption on public benefit grounds for arrangements that would otherwise be illegal. The Commission has a responsibility periodically to review such exemptions in the light of changing | : | | | ' | J circumstances, particularly when it receives complaints about them." The release of the issues paper was accompanied by a news release which said that the Commission could consider revoking past authorizations if this would achieve desirable reforms in the industry, but in the short term it preferred to continue encouraging participation in a reasoned and informed debate about the best long term arrangements for the industry. Three applications were later made to the Commission for authorization relating to the Victorian newsagency distribution system which were intended to replace the then existing authorization which had been in place since April 1982. The applicants for authorization to the Commission were NCV, HWT, David Syme and VANA. The Commission conducted its usual inquiries and concluded that the proposed conduct , and arrangements, the subject of the three applications, would result or be likely to result in public benefits which would outweigh the anti- competitive detriments. On 30 July 1993 the Commission granted authorization to the applicants on condition that the rules of the NCV were amended in terms which need not be set out at this stage. It is this determination (the 1993 determination) that is the subject of the review before us. The 1993 determination was expressed in terms that, if an application for review was made to the Tribunal (as it was), the determination would come into force, where the application was not withdrawn, on the day on which the Tribunal made a determination on the review. 7-Eleven, AACS and QNF were dissatisfied with the 1993 determination of the Commission and applied to the Tribunal to review it by the three applications mentioned earlier. They were heard together by consent of all parties and interveners. It is important to bear in mind that the 1993 determination in essence authorized certain modifications to the existing newsagency system, the central features of which had been authorized by the 1982 determination. The 1982 determination, to which more detailed reference shall be made later, dealt with an application for authorization involving a proposed agreement between the publishers, HWT, David Syme and VANA. The proposed agreement had a schedule attached to it which set out in detail the Rules of the NCV. The standard form of agreement to be entered into between each publisher and individual newsagents formed an Appendix to the Rules, as did the standard form of agreement between individual newsagents and sub-agents. The Rules concerned "the publications" of the publishers, namely, HWT and David Syme. The form of newsagency agreement in Appendix C to the Rules was in a similar vein. Both documents referred at different points to the "publications" as being "newspapers and magazines" published by the publishers. Although those publications included magazines they were in a very small minority of the publications which were primarily newspapers. It seems that the 1982 determination approving the proposed agreement between the publishers approved the then "newsagency system" relating to newspapers and magazines published by HWT and David Syme; but when the determination is considered as a whole the scope of the determination did not in our view extend to approval to the proposed newsagency system relating to the publication of magazines by persons or companies other than HWT and David Syme. The great majority of magazines were published by others. One must be careful when reading the 1982 determination to remember that it was not giving approval to the "proposed newsagency system" concerning newspapers and magazines generally but was confining the approval to the proposed agreement between HWT and David Syme concerning the distribution of their newspapers and magazines only. So it is with the 1993 determination. The 1982 determination followed closely upon the relevant determinations which preceded it, namely, the New South Wales draft determination dated 5 February 1979 and the final determination dated 7 February 1980. Both concerned applications for authorization in respect of the system of distributing newspapers and magazines through approved outlets in New South Wales and the Australian Capital Territory, that system being described in the draft and final determinations as "the newsagency system". Those authorizations granted by the Commission were not confined to the system of distributing newspapers but extended to newspapers and magazines because the applicants for authorization were placed by the Commission into three publishing groups "Fairfax, News, and Australian Consolidated Press (ACP)". ACP in particular was a large publisher of magazines. Though the 1979 draft determination and the 1980 final determination relating to the newsagency system in New South Wales concern both newspapers and magazines careful distinction must be drawn between that system and the newsagency system in Victoria approved by the Commission in the 1982 determination and the 1993 determination which concerned the distribution of newspapers and only to a very limited extent the distribution of magazines as mentioned above. Authorizations have not been sought by or granted to the publishers of the vast majority of magazines distributed in Victoria. The interveners in the review before us are the major publishers of magazines in Australia and they seek membership of NCV which is at the helm of the newsagency distribution system in Victoria. They seek to play a role in guiding its affairs as members of the NCV. The publishers of magazines have (to adopt a phrase used in evidence and submissions before us) ""piggy-backed" on to the system of distributing newspapers in New South Wales by allowing the newsagents to act as the vehicle for the distribution of their magazines in Victoria. But these magazine publishers are not members of the NCV and are therefore not within the horizontal structure relating to the newsagency system in Victoria, the parties to which are the publishers who control the NCV. We shall mention later what the parties and interveners before us are seeking in this review; but it is helpful to state briefly at this stage the essential features of their attitudes. QNF's basic stance is that the system as authorized by the 1982 determination is a fine system and needs no change. The changes proposed would harm the system. It feared that the changes made to the Victorian system, which it saw as undesirable, would flow onto Queensland. At the other end of the spectrum are 7-Eleven and AACS which, although separately represented at the hearing before the Tribunal and differing in certain respects from each other in what is sought in the review, seek essentially the same result, namely, that each convenience store be freed from the requirement to obtain its supplies from the newsagent within whose territory it is. HWT and David Syme were not applicants for review of the 1993 determination and played no direct role in the hearing before the Tribunal. The NCV played an active role before us however, as did VANA. As mentioned earlier NCV is a body which has as its constituent members HWT, David Syme and VANA. The views of the Herald group and the Age group were in essence put by the NCV. 2. GLOSSARY OF TERMS, PARTICIPANTS AND WITNESSES A brief description of the participants in the newspaper and magazine distribution system in Victoria is necessary. First, a glossary of terms is required. 2.1 Terms Authorized newsagents. There are 1080 authorized newsagencies in Victoria. The authorized newsagent is responsible for secondary distribution of daily metropolitan newspapers in a designated exclusive territory, as agent for the publishers as_ principals. The typical authorized newsagency in Victoria is a family business based in a retail shop, selling newspapers and magazines, usually also greeting cards, stationery, paperback books, cigarettes and confectionery. The agency role for an authorized newsagent requires, inter alia, operation of a home delivery service for daily newspapers and the supply of sub-agents, within the territory allotted to the agency. -i1- Publications are sold by the newsagent on a sale or return basis. Subject to specified conditions, unsold copies are returned by the newsagency (or by the sub-agency, through the newsagency) and are credited by the publisher. Victorian newsagents are represented on the Newsagency Council of Victoria by a nominee of VANA. Convenience stores. They are retailers of a diverse range of products including food, drinks, general household products, and are usually associated with motor fuel sales. They generally sell newspapers and magazines on a sub~-agency basis. They have long trading hours, often trading during the times that newsagencies are closed. As sub-agents, the present system requires them to obtain supplies from one authorized newsagent and not to deliver publications, The present system does not in theory prevent publishers supplying them direct, although publishers do not in fact supply convenience stores directly, a major complaint made by these stores. The relevant industry association is AACS. Home delivery customers. They are final purchasers of newspapers and magazines who are required to obtain their needs from one authorized newsagent according to territory. A fee is paid to the supplying newsagent. The deliveries are predominantly to homes, but are also made to institutions, businesses, offices, schools etc. (it is customary to use the -12- expression "home deliveries" to encompass all deliveries of this kind). Look-alike newsagents. They are retailers who specialise in newsagency lines that are supplied under sub-agency arrangements with authorized newsagents. Their shops look like authorized newsagencies, but are not in fact authorized newsagents. Supplies are received from authorized newsagents. They share commission with the authorized newsagent who is responsible for the local territory. Many look-alikes are represented by the Independent Newsagents Association. Magazine publishers. They publish and distribute a large number of titles, ranging from high profile, large circulation titles, to special interest magazines of limited circulation. They are not parties to the existing or proposed authorizations in Victoria. Their main means of distribution of magazines is through authorized newsagents, look-alikes and supermarkets. Newspaper publishers. They are publishers of metropolitan daily newspapers, mainly morning newspapers. They also publish a small number of magazines. They are subject to the existing and proposed authorizations. They are members of the NCV. Each publisher enters into newsagency agreements with the same newsagents using standard form contracts. -13- Sub-agents. They are typically small stores, service stations etc. who obtain their supplies from and _ share commission with a local authorized newsagent. Some sub-agents sell newspapers and magazines only after the local newsagency has closed. Look-alikes are sub-agents. Statistics provided to the Tribunal indicate that there are about 5,500 sub-agents in Victoria, supplied by 683 of the authorized newsagents. (The other authorized newsagents, with no sub-agents, are typically general stores in small country towns.) Sub-agents are more common in metropolitan areas, and aé_ée typical metropolitan newsagency might have 8 or 9 sub-agents. One newsagent in a large country town gave evidence that he had 24 sub-agents. Sub-agents who receive their stocks direct from publishers, share commission with the local authorized newsagent, as do those who get their stocks from the newsagent. Under the present system it is only look-alikes who are not permitted to be directly supplied by publishers. Appointment of sub-agents is at the discretion of publishers. Not all people who seek to become sub-agents are accepted. 2.2 Participants before the Tribunal The three applicants for review are OQNF, 7-Eleven and AACS. NCV and VANA were entitled to participate in this review as they were persons to whom authorization was granted by the Commission (s. 109(1) of the Act). - 14- Leave to intervene in the proceeding was granted by the Tribunal to three publishers of magazines: ACP Publishing Pty Limited (ACP); Gordon and Gotch Limited (Gordon and Gotch) and Eastern Suburbs Newspapers (ESN) which is a partnership (s. 109(2)). These three publishers between them account for publication and distribution of almost all magazines in Australia. The Commission appeared. The Commission and all parties and interveners were represented by counsel or solicitors. IZ i) < Authorized newsagents are appointed at meetings of the constituent members of the Newsagency Council of Victoria Limited (NCV), a body incorporated under guarantee. The Council determines other matters that come before it according to its authorized Rules. Under the terms of the 1982 determination of the Commission, the NCV was constituted by agreement between the three constituent members, the two major publishers and VANA. Subsequently, both HWT and Syme were taken over by News Limited and John Fairfax respectively, and constituent membership was increased to five at the time of the NCV's incorporation, with each of the two publishing groups now nominating two members of the NCV. VANA. VANA was established in 1879. It represents the - 15 - interests of newsagents in Victoria. It provides advice to newsagents on how to improve their businesses including the running of a course for potential applicants to purchase newsagencies. It is represented on the NCV. The convenience store industry is a relatively new segment of retailing in Australia that has evolved and appears to be successful because it meets the need of the consumer today for 24 hour service. AACS represents approximately 95% of participants in the convenience store industry (about 500) from the largest (7-Eleven) to the smallest (with only one store). Approximately 275 convenience stores are in Victoria. Convenience stores sell a diverse range of products including food, drinks and general household products, those sales usually being associated with motor fuel sales. 7-Eleven 7-Eleven is the franchisor of 162 7-Eleven convenience stores operating in Victoria, New South Wales and Queensland. There are 84 stores in Victoria. ONF. QNF is a corporation incorporated in Queensland. Its constituent members are the 743 authorized newsagents throughout Queensland. OQNF represents those newsagents on the Newsagency Council of Queensland, which is the administering - 16 - body of newsagencies in Queensland. The present system of distribution of newspapers and magazines in Queensland is that authorized by the Commission on 18 October 1985. The Queensland system is very similar to the system presently in operation in Victoria pursuant to the 1982 determination. QNF's entitlement to participate in the present review arises from s. 109(1) of the Act. It has no direct interest in the newsagency distribution system in Victoria. iad 2] ay) ACP is a company incorporated in New South Wales. It is the largest publisher of magazines in Australia, currently publishing 107 different titles. Network Distribution Company, a division of ACP, distributes a total of 631 different titles in Australia. Gordon and Gotch. Gordon and Gotch is a company incorporated in Victoria where it has been carrying on business for 142 years. It is the largest distributor (it is not a publisher) of magazines in Australia including Victoria. It is currently responsible for the distribution of more than 2,000 individual titles. ESN is a partnership carrying on its business in New South Wales. The members of the partnership are General Newspapers Pty Limited, Double Bay Newspapers Pty Limited and - 17 - Brehmer Fairfax Pty Limited. ESN contains within it various divisions, one of which is Federal Publishing. Federal Publishing currently publishes 209 different magazine titles, 79 of which are published on a regular basis. Newsagents Direct Distribution Pty Limited (NDD) is a company owned and controlled by the companies which are in partnership as ESN. NDD distributes magazines published by Federal Publishing and other publishers. In total, NDD distributes over 600 magazine titles in Victoria. ESN's sales are very much smaller than either of the other two magazine publishers. 2.3 Witnesses Statements were filed on behalf of many witnesses, some of whom gave oral evidence and were cross-examined. The statements of those who were not called to give oral evidence were, by consent, admitted into evidence by the Tribunal and accorded the same weight and evidentiary value as if the witnesses had been called and verified their written statements by oath or affirmation (s. 107 of the Act). A list of the persons who furnished statements and were called to give oral evidence and a list of persons who furnished written statements but were not called as witnesses to give oral evidence is annexure A. 3. THR APPLICATIONS FOR REVIEW OF THE 1993 DETERMINATION AND WHAT THE PARTIES NF_AND INTERVENERS SEEK As mentioned earlier, there were three applications for - 18- authorization to the Commission. There are three applications for review before the Tribunal, none of which was made by the corporations which had sought authorization from the Commission, 7-Eleven 7-Eleven objects to the maintenance of the tied sub- agency arrangement authorized by the 1982 determination and continued by the 1993 determination whereby each of the stores of 7-Eleven is bound to take! its supply of newspapers and some magazines from the authorized newsagent within whose exclusive geographic territory the particular 7-Eleven store is located. 7-Eleven in its application for review seeks a determination that any authorization in respect of the distribution system for newspapers and magazines in Victoria should allow sub-agents (including 7-Eleven stores) to be supplied with newspapers and magazines from any authorized newsagency regardless of whether that sub-agent is within the exclusive geographic territory of a particular authorized newsagency; and the rules of NCV should be modified to permit those arrangements. In its final submission to the Tribunal, 7-Eleven submitted that the 1993 determination should be varied by removing the tied sub-agents restriction immediately, but otherwise leaving the 1993 determination intact for a period - 19 - of some two to three years to enable the parties to the arrangements to effect a transition to a system without the present restrictions. It was submitted in the alternative that the Tribunal should refuse authorization in terms which make it clear that the Commission should exercise its power under s. 91(4) of the Act to revoke the 1982 determination, a course which, so it was said, was adopted in Media Council of Australia (No 2) [1987] ATPR 40-774 (also (1987) 88 FLR 1). cs AACS, in its application for review, fastened on the exclusivity of tied arrangements as being the essential vice within the present system and sought total deregulation of the distribution system in Victoria. It modified its stance in its final submissions to the Tribunal, pressing (as did 7- Eleven) that it seeks the capacity to be supplied newspapers and magazines from any authorized newsagent irrespective of the geographical location of that agent. It emphasised that only the broadest freedom would bring about a competitive market. AACS requested the Tribunal to refuse authorization and follow the course taken in Media Council (No 2) mentioned above, Alternatively, it was submitted that if the Tribunal is concerned that revocation of the 1982 determination, without a period of transition, would bring about injustice, authorization should be granted on terms that would be fair in - 20 - all the circumstances, but the exclusivity of the present tied sub-agency arrangements should be removed immediately. ONF QNF's case was that the arrangements encompassed by the 1982 determination result in benefits to the public which outweigh any anti-competitive detriment. It was argued that the changes proposed to be made to the 1982 determination by the 1993 determination would reduce public benefits and cause increased detriment from lessening of competition. ONF is content with the system that presently operates under the aegis of the 1982 determination. In particular, it was argued on behalf of QNF that the improvements which NCV and VANA said would. be introduced by the 1993 arrangements are misconceived. It was argued that there were no real or substantial problems with the working of the 1982 system, and that the proposed arrangements inherent in the 1993 determination would reduce competition for circulation sales of newspapers and magazines. The 1993 determination would reduce the public benefit associated with an efficient low-cost home delivery service and a broad range of titles. NCV NCV sought to uphold the 1993 determination which, it was said, would introduce changes to the system that will diminish the anti-competitive aspects and enhance the public benefits of the present system operating under the 1982 determination. - 21 - VANA VANA also sought to uphold the 1993 authorization for the same reasons in essence as those advanced by the NCV. Magazine Publishers ACP's primary interest (together with the other interveners) was to become a member of the NCV because they are the three principal distributors of magazines in Australia including Victoria. Gordon and Gotch and ESN adopted basically the same stance as ACP. ACP supports the 1993 authorization, but asked the Tribunal to impose a condition of the authorization to the effect that magazine publishers should be entitled to be represented on the NCV and that ACP as a major publisher of magazines should be entitled to be a member of the NCV. The Commission The Commission submitted that the 1993 determination should be approved by the Tribunal, the applications for review should be refused and the applications by the interveners should also be refused. The Commission's 1993 determination should, so it was submitted, be affirmed. Counsel for the Commission said that the Commission sought "phased change" to the system operating under the 1982 determination which, he argued, would be brought about by the ~ 22 - 1993 determination. The Commission saw the 1993 determination as but a phase moving towards a "more market-oriented system" and more responsive to competition and market forces. The case for the Commission was conducted on this basis and is reflected in the statements of the Commission itself which appear in the 1993 determination. Generally NCV, VANA and QNF stressed time after time during the hearing that newspapers and magazines are vital to the dissemination of information within Australian society and therefore vital to the democratic process. This echoed a submission made by the Minister for Business and Consumer Affairs to the Commission when it was considering the New South Wales determination in 1979, that "widespread dissemination of information and of critical comment is regarded by the Government as being of major importance in a democratic society such as Australia". No party or intervener sought to deny the importance and accuracy of this statement; nor do we. Indeed, we too regard it as a fundamental matter to bear in mind when considering the questions before us. NCV, VANA and QNF continued to assert before us that the wide dissemination of information at low cost was an important public benefit. In support of the present exclusive tied - 23 - agency arrangements they stressed what was said to be the "cross-subsidy" of uneconomic home delivery of newspapers (and magazines) by shop sales of those publications made by authorized newsagents and sub-agents. During the course of the hearing there was a significant shift in the stance of the NCV, VANA and QNF and their formulation of the public benefit argument. They ceased to emphasize the cross-subsidy argument because it was apparent, as the review proceeded, that it had little, if any, substance in it. The home delivery of newspapers and magazines by agents is rarely subsidized in fact by shop sales. NCV, VANA and QNF proceeded to emphasize three entirely different matters; first, the fundamental role which advertising inserts were said to now play in the production and sale of newspapers; secondly, the effect of removing the tied sub-agency restrictions upon the goodwill of authorized newsagents; and thirdly, the efficiency of the newsagency system. This change in stance went beyond mere tactical considerations. It shows that a fundamental basis relied upon to support the system which has existed since 1982 and which would still inure in substance under the 1993 determination has shifted to different arguments which, for reasons given later, we find lack substance. - 24 - 4. RELEVANT LAW - SCOPE OF THE APPLICATIONS AND STATUTORY TESTS The three applications before the Tribunal are for review of the Commission's 1993 determination (s. 101(1) of the Act). One of the applications before the Commission (A40059) was made under s. 88(8) of the Act for an authorization to engage in conduct that constitutes or may constitute the practice of exclusive dealing. The conduct that would or may constitute such practice is the granting of sole distribution and delivery rights to newsagents in specified areas and restrictions which prevent sub-agents from delivering newspapers. Application A40060 was made under s. 88(1) of the Act for authorization to make a contract or arrangement or arrive at an understanding where a provision of the proposed contract, arrangement or understanding would or may be an exclusionary provision within the meaning of s. 45 of the Act. The provisions of the contract, arrangement or understanding that would or may be exclusionary provisions are provisions which restrict the supply of newspapers to particular classes of persons on particular conditions. Application A40061 was made under s. 88(1) of the Act for authorization to make a contract or arrangement, or arrive at an understanding, a provision of which would or may have the purpose, or would or may have the effect, of substantially lessening competition within the meaning of s. 45 of the Act. Upon a review of a determination of the Commission in relation to an application for an authorization, the Tribunal is empowered to make a determination affirming, setting aside or varying the determination of the Commission and, for the purposes of the review, may perform all the functions and exercise all the powers of the Commission including the imposition of conditions (s. 102(1)). Such a determination by the Tribunal shall be deemed to be a determination by the Commission (s. 102(2)). The Commission's power to grant the authorization which it did in this case was derived from ss. 88(1) and 88(8). Hence, the Tribunal's power to grant authorization in the present matter arises from the combined operation of ss. 102(2) and 88(1) and (8) of the Act. The appropriate tests to be applied by the Tribunal when making its determination are found in s. 90(6) and (8) of the Act. Section 90(6) and (8) in substance prohibit the Tribunal from granting authorization under s. 88(1) or (8) unless it is satisfied in all the circumstances that the conduct or proposed conduct or the relevant provision of the proposed contract, arrangement or understanding would result, or be likely to result, in such benefit to the public that it should - 26 - be allowed to occur or be made or that such benefit would outweigh the detriment to the public constituted by any lessening of competition that would result or be likely to result from it. As the Tribunal observed in the Media Council of Australia (No 2) at 48,418, the tests are the same whichever of the two subsections of s. 90 applies (sub- sections (6) or (8)). To fulfil its statutory duty the Tribunal must examine on the one hand the anti-competitive aspects of the conduct, proposed conduct and relevant provisions of the proposed contract, arrangement or understanding, and on the other hand the public benefits arising from it and weigh the two. If the Tribunal is satisfied that the public benefits or expected public benefits outweigh the anti-competitive detriment, the Tribunal may determine that the Commission's determination be affirmed with or without conditions. Should the Tribunal reach a different view it shall set aside or vary the Commission's determination. It is important to note (as the Tribunal pointed out in Media Council (No 2)) at 48,418-9) that conduct which answers the statutory description of anti-competitive lessening of competition does not necessarily constitute anti-competitive detriment for the purposes of s. 90. It is erroneous to equate anti-competitiveness with detriment. Anti-competitive behaviour may in certain circumstances be a benefit. The Tribunal must engage in a rehearing in the fullest sense and it must reach its own conclusions on the material before it. The reasoning process of the Commission is not itself the subject of this inquiry: see Media Council (No 2) at 48,419 and the cases there cited. It is also useful to recall that the Tribunal has power where appropriate to grant an interim authorization: Re Queensland Timber Board (1975) 24 FLR 205 especially at 210-1; Re Australian Paper Manufacturers Limited (1976) 25 FLR 504; Re International Air Transport Association (1985) 58 ALR 721 and the cases there mentioned. The 1993 determination modifies the 1982 determination, but preserves its fundamental elements. To understand how the newsagency distribution system would be likely to work under the authority of the 1993 determination it is necessary for the Tribunal to examine how the system works at present pursuant to the 1982 determination. It is impossible to understand the likely operation of a modification to a system without first knowing what that system is and how it works in practice. The Tribunal must, of course, accept the fact of the making of the 1982 determination; but it must proceed to examine how the newsagency distribution system operates in Victoria pursuant to it. It would be artificial for the Tribunal to approach - 28 - its task on the assumption that the system that presently operates pursuant to the 1982 determination necessarily embodies the public benefit or the anti-competitive detriment which the Commission found that it would be likely to have when making its determination twelve years ago. The Tribunal is not reviewing the 1982 determination. It has before it for review the 1993 determination. But the Tribunal cannot apply the tests required by s. 90(6) and (8) with respect to its review of the 1993 determination without examining the whole of the relevant elements and operation of the system presently in force in order to determine public benefits and detriments that would be likely to result from the operation of that determination. The application of the statutory tests required by s. 90(6) and (8) requires the Tribunal to compare a newsagency distribution system as it is likely to operate under the 1993 determination (which necessarily includes the elements of the 1982 determination except as modified by the 1993 determination) with the system presently in force (i.e. as authorized by the 1982 determination, without the changes introduced by the 1993 determination). The observation of the Tribunal in Media Council (No 2) at 48,419 is equally apt in the present case: - 29 - "The comparison is between the future with the relevant conduct and the future without the relevant conduct." We repeat also what the Tribunal said at 48,419: "Tt is doubtful if past benefits may be relied on in support of the present applications for authorization ... except to the extent that the past may be indicative of the future." 5. RELEVANT DETERMINATIONS OF THE COMMISSION To understand the 1993 determination requires an examination of the practical operation of the newspaper distribution system in Victoria since the 1982 determination because the former is based on the latter but introduces certain modifications. The 1982 determination itself arose following the Commission's earlier determinations with respect to the newspaper distribution system in New South Wales, namely, its draft determination dated 5 February 1979 and final determination dated 7 February 1980. A list of the Commission's determinations with respect to newspaper and magaZine distribution systems in Australia was appended to the Commission's Issues paper of 1990 previously mentioned and marked "Attachment B". We attach that list as annexure B. Accordingly, the logical starting point for an examination of relevant determinations is the New South Wales draft determination. -~ 30 - 5.1 New South Wales draft determination of 1979 Applications for authorization were lodged by major newspaper publishers in respect of the system of distributing newspapers and magazines which they conducted through approved outlets in New South Wales and the ACT. The system then in force in Victoria was substantially the same. The draft determination was made on 5 February 1979. It is reported in [1979-80] ATPR (Com) 35-200. The applicants for authorization were John Fairfax & Sons Limited, Associated Newspapers Limited, Mirror Newspapers Limited, Nationwide News Pty Limited, Australian Consolidated Press Limited and News Limited. In paragraphs 60 to 64 the Commission said: "60. In that market [that is the product market for newspapers and magazines in New South Wales and the ACT] competition is effectively excluded. ... the system calls for consideration as one total system. That consideration shows that in return for a territorial monopoly, the newsagents are closely controlled by the publishers collectively as to entry into the business, their operations while in it, and exit from it. Newsagents cannot expand into multiple businesses; there is no possibility of any one of _ them developing any market power that would 'matter as against the publishers. Even their goodwill is not saleable except to persons chosen by the publishers at the publishers' valuation (which relates only to the newsagency side of the business). Thus there is disincentive to run _ the newsagency as a Sideline or develop any other side of the business disproportionately. More innovative and aggressive competitors can be kept out of - 31 - the newsagency trade. The system is likely to secure that selected newsagents (and probably their families as well) will be tied to the newsagency business from the time they buy their way in on the publishers' terms until they sell their way out again on the publishers' terms; meantime they will necessarily be responsive to the publishers' detailed directions notwithstanding that the relationship is not that of employer and employee or principal and agent but supplier and reseller. 61. It is another question whether the system produces public benefit, but the conclusion appears irresistible that it substantially lessens competition in the retail trade. In fact very little room is left for competition at all. Not only are newsagents and the possibility of competition between them closely controlled, but other retailers who might wish to sell newspapers or magazines as a service to their customers and a means of attracting business for their other lines are restricted in doing so. The system has kept the general framework and character of the newsagency trade unchanged, whereas retail trade elsewhere has generally been subject to dynamic change under the pressure of competition and innovation. The many years of regulation might well have entrenched traditional attitudes, so that change might take some time in starting if the system ceased to be enforced, but the potential for change cannot be denied unless the newsagency trade is entirely unique, and much of the tight control is indeed unnecessary. The publishers do not regard any of it as unnecessary, which is tantamount to saying that a free market would procure a different result and that the system restricts competition in order to stop that happening. Apart from actual competition, the constant potential for competition wold itself be a spur towards greater efficiency, lower prices and better service. 62. The publishers themselves admit that in the absence of restrictions competition in shop or point sales would develop. - 32 - However the publishers claim that it is unlikely that competition would develop in home deliveries and in fact home delivery service would be curtailed. The Commission does not accept this claim. At the very least competition is likely 'at the borders' of different newsagents' territories, where the cost of extending a run to a few more houses may be negligible and the homeowners may not be satisfied with the service provided by their existing newsagent. More widely than that, home delivery could become more significant than now as a competitive tool for attracting customers to the newsagent's shop. Moreover the removal of the restrictions could open up an opportunity for home delivery to be undertaken by entities not operating from a shop and operating over several of the existing territories. There is also the possibility that there wold be more incentive for the home delivery of other publications, particularly magazines, and that home delivery may be expanded to or combined with the delivery of free newspapers, advertisements and catalogues of department stores. 63. The publishers claim that whilst the operation of the newsagency system essentially requires an agreement between the publishers that they will not compete with each other in the distribution of printed media, by limiting competition in this particular area the system still allows the publishers to compete, and even enables more effective competition, in many other important areas, such as editorial content, general style of publication, promotion, cover prices and advertising rates. The system enhances competition in these areas, the publishers claim, by ensuring that all of their publications are visually displayed side by side in shops and at other selling points and are marketed to all customers who require home delivery. 64, The Commission does not accept this. Editorial content, general style of publication, promotion, cover prices and advertising rates are all matters of competition which would be vigorously - 33 - utilised by efficient publishers irrespective of the method of distribution which is used. Additionally, if it is an important aspect of competition' that publications be displayed side by side in Shops then the retailer would have a vested interest in ensuring that this occurs as is now the case with other products where comparative display is important." As to public benefit, the Commission found (par. 96) that removal of the territorial restrictions on newsagents would be unlikely to result in the reduction in exposure of publications to the public, that consequently there should be no reduction in overall sales or circulation of publications and there may even be an increase with the greater number of retail outlets and different types of outlets selling them. The Commission said (par. 100) that it could not see why people who presently want and use the convenience of home delivery rather than go to the newsagent to buy their publications over the counter would necessarily change their preference simply because of an increase in the number of over the counter outlets. As to home delivery sales, the Commission said (par. 101) that it did not accept the argument that newsagents would cease home delivery to uneconomic areas in their territories (e.g. more distant homes). It said (par. 102) that if some newsagents could and did increase their booking fee to fully cover the cost of home delivery, the Commission would see no - 34 - public detriment in that: "There is no public benefit in a service being sold at a price that doesn't cover the cost of providing it ~ any benefit to the consumer in the way of a low price is offset by the detriment to others who have to bear the loss involved (in this case, newsagents and/or their customers)." The Commission also doubted whether, if booking fees did increase, the demand for home delivery would in fact be reduced (par. 103). The Commission said (par. 108) that it did not think that the: "abandonment of the publishers' restrictions relating to home delivery by newsagents would result in a decline in circulation of publications, or an increase in overall industry costs to maintain the same circulation." The Commission concluded (par. 136) that, having considered the system as an integral whole, "in terms of sections 90 and 93 ... the system substantially lessens competition and does not result in any benefit to the public". The Commission therefore proposed to deny authorization. 5.2 New South Wales final determination of 1980 The draft determination of 5 February 1979 was followed - 35 - by the final determination of 7 February 1980 which is reported in (1979-80}] ATPR (Com) 35,200. In the meantime, the Federal Minister for Business and Consumer Affairs had issued a media statement which stated that the Government had decided to intervene in the matter, that it had received many expressions of concern about the possibility of disappearance of the present exclusive newsagency arrangement, representations coming in particular from newsagents and from members of the Parliament. The statutory conference was held by the Commission on 20 March 1979 and attended by a large number of persons including a representative of the Minister. After the predecision conference, the publishers redefined their position and had discussions with representatives of the newsagents and of the Minister (par. 11 of the Final Determination). In pars. 16 to 19 the Commission said: "16. The force of those remarks' was apparently recognised, because the publishers sought by their amendments to reduce the anti-competitive effect of the system. They (i) relaxed the control over newsagents; (ii) admitted a representative of the newsagents to membership of the Council that was to administer the system; —- 36 - (iii) introduced an appeal from decisions of the Council to an independent Appeal Tribunal; (iv) made it specifically clear that each publisher can individually decide to supply publications to any business in a_ territory other than the accredited newsagent provided the business is not clearly identifiable as a newsagency specialising in the sale of a wide range of newspapers and magazines. 17. The result of (i), (ii), and (iii) above is that newsagents are more independent than they were before. For example, they have appeal rights and a share in the administration of the system, they are now somewhat less subject to publishers' directions and demands for information, and they have some freedom as to the total range of publications they will stock. They can sell out at their own price to ae party of their own choosing, with the Council retaining only a limited right of veto (on grounds of financial means, business capacity and standing) subject to appeal to the Appeal Tribunal. The price need no longer be related wholly to circulation items, and, if a newsagent increases trade in other goods or services, he will have' the opportunity to reap the benefit of it when he comes to sell out. Meantime he will be free to engage in other business activities provided he meets his obligations under the Newsagency Agreement. He will be entitled to own up to three newsagencies. 18, There is still, however, considerable control over the way the newsagent conducts his business (claimed to be for the purpose of securing efficiency and good services to the public). And an essential part of the system remaining is that the newsagent cannot fix his own delivery charge according to his own costs of delivery but must not charge more than the maximum fixed by the publishers even if this is unprofitable to him and has to be subsidised by his over-the-counter - 37 - sales. 19. The heart of the system - _ the territorial monopoly of newsagents - remains. Newsagents themselves are prevented from breaking it down by selling outside their own territories. Publishers are prevented from breaking it down by selling to outlets that are or become newsagencies and that are not accredited. As to the possibility of breaking it down by selling to outlets such as supermarkets, publishers retained some individual freedom in this matter before, and there were only two particular magazines that were so supplied. But now (see (iv) in para. 16 above) it is underlined that supply must not reach the stage of making any other outlet in effect a newsagency." It is clear that the submission of the Government to the Commission played a very large role in the deliberations of the Commission in reaching its conclusion to grant authorization including the submission by the Government (see par. 33) that it saw: "the widespread availability of newspapers and magazines and the availability of a prompt and low cost home delivery service as being the principal public benefits arising from the system. Newspapers and magazines provide a great range and depth of information and comment. Widespread dissemination of information and of critical comment is regarded by the Government as being of major importance in a democratic society such as Australia." The weight given by the Commission to the Government's views is illustrated further by par. 36 which reads: "If the requirements imposed on newsagents continue - as the price of their territorial monopoly - that will perpetuate subsidisation of home delivery in outlying areas, extended shop hours, and the assured availability of a wide range of newspapers and magazines to the public. As a result, particular parts of the market will continue to be served that might otherwise be served only at a higher price or not at all. Persons who may want newspapers and magazines will be able to get them, at times and by methods which are convenient for them, even if satisfying some of that demand means that others pay part of the cost; it is the kernel of the public benefit case that the newsagency system secures that result. The Government submits that it is a matter of public benefit to secure that result, because of the importance to be attached to the dissemination of news and comment in a democratic society. The Commission accepts that submission, coming as it does from the elected Government speaking as to matters of political and social judgment with regard to the community at large." In conclusion (par. 37) the Commission said: "When it comes to balancing public benefit against anti-competitive detriment, it has to be remembered that the lJlatter is substantial (see para. 20 above), although less than it was before because of the changes to the system made by the applicants since the draft determination. Having accepted the kernel of the public benefit case (see para. 36), there is difficulty in balancing its qualitative nature against the detriment which is of a more usual economic nature. However, in finding public benefit, the Commission has given special weight to the Government submission for the reasons set out in para. 36, and the same approach indicates a high value for the public benefit - sufficient to outweigh the detriment. This is what the Commission finds." The Conmission granted authorization to the relevant applications as amended by the applicants for authorization after the publication of the draft determination. 5.3 The 1982 determination Application was lodged on 9 November 1981 with the Commission for authorization to certain proposed agreements between HWT, David Syme and VANA, which together' then constituted the NCV. The Commission made a draft determination dated 3 December 1981 in which it granted authorization to the proposed agreements, subject to any pre-decision conference that may be requested pursuant to s. 930A of the Act (par 4.10). The draft determination is reported at [1982] ATPR (Com) 50-035. The Commission referred (par. 2 of the draft determination) to the New South Wales draft and final determinations, to which reference has been made. It noted (par. 3.3) that the applications for authorization in respect of the Victorian system were in respect of agreements which were similar to those then governing the New South Wales newsagency system as authorized by the Commission, but with some differences reflecting different circumstances in Victoria. The Commission noted (par. 4.1) that the proposed Victorian system was broadly the same as the system authorized - 40 - by the Commission in respect of NSW in a structural sense and in the basic objectives of the system and the methods employed to achieve them. The Commission's draft determination culminated in its conclusion (pars. 4.8 and 4.9) that it was satisfied that the differences between the proposed Victorian system and the NSW system were not such as to justify a different conclusion on anti-competitiveness and public benefit of the system as a whole. It said that the matters in respect of which there was a difference between the two systems were of no great consequence from the point of view of competition and public benefit analysis. The key anti-competitive feature of both systems was the grant of territorial monopoly to newsagents. The Commission was satisfied that it was the territorial monopoly that yielded the public benefit of a low-cost, efficient home delivery service and a greater availability of newspapers (and magazines) than would otherwise be the case and that that public benefit outweighed the anti-competitive detriment of the system. The final determination of the Commission was dated 28 April 1982 (reported in [1982] ATPR 50-035) and relied substantially upon the draft determination. The Commission proceeded to grant authorization "to the application". - 41 - It is plain from a perusal of the draft and final determinations that the Commission relied heavily on its previous determination made in respect of New South Wales and the ACT. As mentioned earlier, the Commission commenced in March 1987 an examination of the newsagency system in Australia. On 15 May 1990 it released the Issues paper previously mentioned: Study of the Distribution of Newspapers and Magazines. The Commission consulted with the parties to the agreements authorized under the 1982 determination, and with other interested persons, to achieve changes which it believed were necessary: "to minimise anti-competitive effects and to ensure continuing benefits to the public. Lengthy discussions have taken place with a range of people who have an interest in the issues, including look- alikes, convenience stores, business agents, magazine publishers and distributors, retailers and individuals as well as the parties with a direct interest": par. 1.8 of the 1993 determination. 5.4 The 1993 determination Subsequently, on 16 September 1992, three applications were lodged by the applicants for authorization with the Commission. On 26 March 1993 the Commission issued a draft determination proposing to grant authorization. A pre- decision conference was held on 3 May 1993. The Commission's final determination was made on 30 July 1993 (the 1993 - 42 - determination). In its summary of the 1993 determination the Commission said: "The proposed system includes provisions which allow: "(a) for the development of delivery only newsagents who, as delivery specialists, are expected to offer greater efficiency by being able to be more responsive than shop based newsagents to the needs of delivery customers; (b) removal of conflict between retailing and delivery functions of shop based newsagents, leading to sub-agent networks being developed and serviced to the optimum economic level; (c) flexibility in commission sharing between authorised newsagents and sub-agents, and between publishers and authorised newsagents; (d) direct supply by publishers to all types of retail outlets, where it is judged commercially viable; and (e) reduced involvement of the Newsagency Council in the retail side of newsagencies." Also in the Summary the Commission made the following statements: . It identified as public benefits likely to arise from the proposed system, the provision of a low-cost, efficient home delivery service for daily morning newspapers and - 43 - the widespread availability of a broad range of publications. The obligation of newsagents to deliver, if required, to all addresses in a territory was said by the Commission to be a guarantee to the public of timely and convenient access to newspapers. The proposed system would bind home delivery customers and sub-agents to one newsagent and the Commission had been assured that the publishers would respond to valid complaints by requiring newsagents to rectify particular problems, and in extreme cases terminating newsagency agreements. . The NCV informed the Commission that it would approve cross territory supply to sub-agents by applying certain criteria relating to inadequacy of service by newsagents. The Commission believed the application of those provisions would reduce the anti-competitive aspects of the binding arrangements. The Commission considered that the proposed system would provide structural changes to the newsagency distribution system in Victoria and the catalyst for a change of attitude by publishers, newsagents and sub-agents in the way they relate to each other. This should lead to a - 44 - more pro-competitive environment in keeping with changes that were taking place generally in the marketplace in Australia. The Commission believed that the authorization of the applications would introduce necessary change in a measured way which would allow for a period of adjustment for the industry which is characterized by many small family businesses. Once its determination had been finalized the Commission would wish to discuss with industry participants the implications and possible application of the changes in Victoria to other States. The Commission expressed the view (par. 3.3) that the highly regulated system, particularly the way it regulates retailing operations and the supply by newsagents to other retailers, has prevented the industry from adapting to wider changes occurring in the marketplace and has insulated newsagents from the need to be innovative in meeting the demands of those changes. The system, the Commission noted, may therefore no longer be achieving the benefits for which authorization was granted and may be inhibiting the development of a more efficient distribution system for newspapers and magazines. The changes to the system proposed in the applications before the Commission seek to address the need for a more market oriented system. - 45 - This sufficiently recites the Commission's statements and findings in the 1993 determination. Although the 1993 determination is for an indefinite period, the Commission plainly hoped it would be of a temporary nature, leading in due course to a system substantially freer of anti-competitive detriment and more responsive to market forces and competition, a system which would: "take the Victorian newsagency market closer to a deregulated system with a minimum of disruption to a large number of small businesses. The new arrangements create the environment for a more market oriented industry." (par. 10.12) The Commission said (par. 10.1): "the arrangements involved in these applications present the opportunity for measured change." The Commission said it would monitor the operation of the newsagency arrangements in Victoria that would exist following the changes made to the present system by the 1993 determination. Counsel appearing for the Commission at the hearing before us reaffirmed those perceptions of the Commission. - 46 - 6. THE WORKINGS OF THE NEWSPAPER DISTRIBUTION SYSTEM 6.1 The Australian pattern The most common system in Australia for the supply of newspapers and magazines to the final consumer distinctively relies on the specialized local newsagency. In towns and settlements that are not large enough to support a specialized newsagent, newspapers and magazines are typically sold by the local general stores. Specialized newsagencies and country general stores alike can be appointed collectively by newspaper publishers in each state as "authorized newsagents" within a designated territory, through a central administering body usually known as the Newsagency Council. The authorized newsagencies receive newspapers directly delivered to them by publishers, and typically they undertake both retail sale and further local distribution of the newspapers, by supplying other retail outlets in their territory and by arranging direct home delivery. This pattern of business in Australia has a long history. Australia's major newspapers are published in the state capital cities and in Canberra. Publishers have been concerned to develop and refine systems of distribution that allow newspapers to be offered for sale, in both metropolitan and country areas, quickly, reliably, at low cost and with minimum unsold surplus. It can be no surprise in these circumstances that the publishers developed distribution procedures allowing close management and control of the detail of newspaper distribution, and that took advantage of opportunities for fruitful cooperation among competing publishers in that respect. The traditional Australian system, relying on _ the authorized newsagent, as both retailer and secondary distributor of newspapers, is the norm in New South Wales, Victoria and Queensland. The relevant commercial arrangements in these States are conducted under current authorizations of the Commission. Authorizations are also in force for systems in South Australia and Western Australia that are somewhat different, but still involve the appointment by publishers of authorized distribution newsagents. The South Australian system, as amended in 1988, is of interest because it provides for authorized agents who do not operate a retail shop and limit their business to delivery to homes and retailers. In Western Australian, with only one major newspaper publisher, authorized retail agencies are distinguished from delivery agents. Authorized arrangements in Tasmania provide for yet another variant: there is no Newsagency Council, and the newspaper publishers separately authorize agents with exclusive territories in the distinct regions of the state where each newspaper is primarily distributed. Publishers of newspapers in Darwin and Canberra adopt distribution arrangements that do not rely on authorization under the Act. The Tribunal heard detailed evidence about a - 48 - distribution alternative recently introduced by the "Canberra Times", under which individual customers in Canberra and Queanbeyan can purchase subscriptions at advantageous prices. The "Canberra Times" manages a sophisticated system of direct home delivery of the newspaper to these subscribers, by-passing and competing with the parallel home delivery arrangements offered by newsagents operating in Canberra under the authorized New South Wales system. Authorized newsagents are also the major channel for distribution of magazines in Australia. The major magazine publishers have elected over many years to take advantage of the newsagency system and of the secondary distribution networks that the authorized newsagents operate for newspapers, to place a wide variety of magazines beside newspapers in retail outlets across the country. Practice varies between States as to whether the magazine distributors are formally parties to the authorized systems, and whether they enter formal agency agreements with the newsagents that retail and distribute their products. 6.2 The scope of the Victorian system The distribution of newspapers and other periodicals in Victoria is wider in its compass than the 1982 determination, which is confined to the conduct of the two publishers who peint and distribute Melbourne's major newspapers, and to the conduct of the more than 1,000 local newsagents across - 49 - Victoria, who are authorized newsagents and who distribute the two publishers' products in accordance with a system of authorized agreements and understandings, and in conformity with the decisions and rules of the NCV, which has representatives of both newspaper publishers and newsagents as its members. The distribution of magazines does not fall within the scope of the authorized system, except in regard to those magazines that are published by the Age group. Three other companies which publish and/or distribute magazines (who together with the Age group supply almost all the magazine market) take advantage of the system. to distribute their products through authorized newsagents and sub-agents, while remaining outside the Victorian authorization and outside the related administrative structure of the NCV. Nor do other Victorian newspapers, including country newspapers, fall within the authorization, except in so far as they may be owned by one of the two major newspaper publishers. Free suburban newspapers are also outside the distribution system, and newsagency agreements with publishers require that such newspapers not be delivered in conjunction with the delivery of publications that fall within the system. 6.3 Arrangements for governance Control of the distribution system for metropolitan daily ~ 50 - newspapers in Victoria is exercised by the NCV, through the application of its Rules as authorized by the 1982 determination, to the parties to the distribution system, viz. the publishers, the authorized newsagents and the sub-agents. These Rules provide for and in practice interlock with agreements between each of the publishers and the individual newsagents, the standard form of which was also authorized by the 1982 determination. Each sub-agent is also required to enter a standard form of agreement with the authorized newsagent supplying that sub-agent. The only constituent members of the NCV, and hence the parties taking collective decisions under its Rules, are the publishers (or particular associated or subsidiary companies of the publishers) and VANA, with the publishers in the voting majority. The newsagency agreements (and supplementary agreements required of corporate owners of newsagencies) include the following restrictive elements . Requirements pertaining to the operation of the newsagency's business; for example, as to shop hours, display of the publisher's material, standards of performance for home delivery within the newsagent's designated territory, the sale of classified advertisements, and the general right of the publisher to give instructions to the agent in certain respects. The right of the publisher to direct the appointment of a sub-agent, and approve all sub-agency appointments. : Limitations and requirements relating to the _ sale, ownership and management of the newsagency, complementing similar rules of the NCV. The right of the publisher to set a maximum level of fee that the newsagent can charge home delivery customers for the service. The right of the publisher to terminate the agreement because of non-compliance, subject to the NCV's consent, and subject also to the appeal process provided for in the Rules of the NCV; and the right of the publisher to issue default notices in accordance with the Rules of the NCV. The standard form of sub-agency agreement with the newsagent requires that the sub-agent be supplied only by that newsagent, and precludes the sub-agent from the delivery of newspapers. The publisher must approve the commission rates applying. With the publisher's approval, the newsagent may terminate the agreement on a broad range of grounds. 6.4 Publication and primary distribution Melbourne's daily newspapers are printed in a series of - 52 - editions, commencing late at night. Each edition is promptly distributed, with the first edition of both papers going to country and interstate customers, because of the time required to reach the reader while the paper is timely and in demand. Later editions are directed in turn to closer destinations according to the distance to be covered and the commercial priorities of the publisher. Distribution to newsagents in time for early morning home delivery receives priority attention, because such deliveries represent for the publisher secure pre-ordered sales without significant returns of newspapers. About 41% of sales of The Age are home delivered, and 32% of sales of the Herald Sun. Newspapers. for metropolitan retail sale are the last to be delivered, because direct retail sales by newsagents and sub-agents are generally made after home deliveries have been completed. The Herald Sun, being an all-day paper, also prints a day-time edition only for retail. With few exceptions, the primary distribution by publishers is to authorized newsagents only, although the rules of the NCV allow the publishers to deliver also to non-newsagency customers (an infrequent occurrence). The Age has 1121 direct accounts, as against 1080 authorized newsagents. In the few cases where a publisher may elect to deliver direct to a sub-agent, the ordering of newspapers and the related administration remains the responsibility of the authorized newsagent in whose territory the sub-agent is - 53 - located. Delivery to newsagents is performed by contractors, usually owner-drivers. The Age operates 60 metropolitan delivery runs on weekdays, and 132 on Saturdays when the newspaper is so large with classified advertisements that it must be delivered in two sections. There are 13 country delivery runs on weekdays, and 26 on Saturdays. A further 103 secondary "feeder runs" carry The Age to more remote country areas. The Herald Sun operates 66 metropolitan delivery runs, 16 country delivery runs, and 125 feeder runs. About 8 or 9 metropolitan authorized newsagents are served by each metropolitan delivery run of each newspaper, but the runs of the two newspapers do not coincide and are subject to variation as required. Sales of The Herald Sun are spread across the Melbourne metropolitan area, while sales of The Age are concentrated in Melbourne's southern and eastern suburbs. Publishers retain a stock of newspapers at their production plant for urgent metropolitan delivery to cover shortages. These "extras" are supplied after a telephoned order by an authorized newsagent. The long-standing practice among publishers of distributing newspapers through retail and delivery:'agents on a "sale or return" basis places pressure on the publishers to control tightly the acceptance of orders and the timeliness of - 54 - delivery for sale. The normal variation in sales from one day to another, according to the current news story and factors, such as the weather, increases the difficulty of managing print runs and controlling the level of returns. Newspapers returned unsold are costly for the publisher because the cost of printing one copy of a newspaper will not uncommonly exceed its cover price, and certainly its "wholesale" price (i.e. its price less the 25% commission commonly paid to newsagents). This situation arises because newspaper revenue is derived from both the cover price and from advertising. The Herald Sun derives about 60% of its revenue from advertising, and The Age about 80%. The production cost of a copy of The Age on a Saturday, with its major content of classified advertising, is about $2.50, while the cover price is $1.20, and the price at wholesale 90 cents. Unsold returns of The Age are 9% on weekdays, and 7% on Saturday. Newspapers with lower circulations tend to have correspondingly higher unsold returns; for example 15% for The Australian Financial Review, and 30% for Stock and Land. Returns of HWT publications show a similar pattern - 10% for the Herald Sun on weekdays, and 9% at weekends, 20% for The Australian on weekdays and 15% on Saturdays, 14% for The Weekly Times. The Circulation Director of HWT told the Tribunal that an increase of 1% in the level of unsold copies of the Herald Sun returned from newsagents would reduce annual profit by $100,000. The Tribunal notes the highly unusual business predicament of the publishers in respect of unsold returns, in that a production cost higher than the selling price makes effective control of the level of unsold returns critical to the economics of a business that conventionally sells its highly perishable product on a sale or return basis. The importance of advertising to newspaper economics also encourages publishers to consider the demography of its readers, and to offer advertisers ways to focus more efficiently on specific groups of consumers. The production of distinct newspaper editions that are distributed particularly to country or metropolitan areas, for example, allows advertisers some limited opportunity for market segmentation. The Herald Sun's new Westgate plant has five presses that potentially can turn out editions for distinct regions. The Westgate plant also incorporates high-technology equipment that allows coloured advertising inserts to be placed in small runs of newspapers that can then be separated and delivered to distinct districts for sale. The advertising insert service is popular with small advertisers serving a regional market, and with chain stores wishing to confine a promotion to one district. Some practical difficulties are being experienced by HWT, and advertising inserts are at present subject to a minimum run of 100,000 copies. However, the insertion equipment is in principle capable of inserting advertising material down to the level of one truck run to a ~ 56 - local delivery area, i.e. about 8 or 9 metropolitan newsagents. The Age also offers an insert service to advertisers, but the insertion process is not automated. 6.5 The operation of the newsagency The central business of a typical authorized newsagency is the retailing and secondary distribution of newspapers and magazines within a defined territory, as the contracted agent of the newspaper publishers, and on behalf of magazine publishers and distributors. Evidence to the Tribunal suggests that typically more than half of the gross revenue of a newsagency is derived from the delivery and sale of newspapers and magazines. Other elements of the business are commonly the retailing of greeting cards, stationery, cigarettes and confectionery, and sometimes the operation of other agencies, such as Tattslotto, dry cleaning, bank and post office agencies. Operation of an authorized newsagency is demanding on the small business owner-operator and his family, because of the leng working hours intrinsic to running an early morning home delivery service in conjunction with a retail shop displaying a wide range of items. The newsagent's day will commonly begin at 3:30 to 4:00 a.m., when the first deliveries of newspapers are expected, and the newsagency's retail shop will commonly close around 6.00 or 6.15pm. Staffing of the business for seven days each week typically requires employed staff as well as direct involvement by the agent and the agent's family. The first task each day for a newsagent is to break up the bundles of papers received from the publishers into the quantities required for home delivery and for sub-agents. With typically 1,000 newspapers or more to allocate in a metropolitan agency, and in due course account for, close documentation is required. According to a 1993 survey by VANA, almost half of the newspapers for home delivery were then wrapped, and wrapping is obligatory in wet weather. Because plastic wrapping is preferred by home delivery customers, it is increasing with encouragement from the publishers. When wrapping is complete and home delivery is under way, it is the turn of sub-agents to receive their papers. In principle, newsagents should deliver to sub-agents, and many do so. However, work pressures on newsagency staff can delay delivery, and many sub-agents choose to collect their newspapers from their supplying agent to ensure that they have supplies in time for early customers. Supplies to sub-agents can be disrupted by late delivery of newspapers from publishers, as home delivery customers are served first. The newsagent is also responsible to the publisher for collections and related administration in respect of home delivery and sub-agency customers, and for the close control - 58 - of day-to-day orders for home delivery, for retailing in the agent's shop, and for sub-agents in the agent's territory, so that the level of unsold returns is kept to a minimum. Publishers encourage newsagents to install computers, the better to document and control the detailed daily administration that is intrinsic to a newsagency business. The 1993 survey by VANA' showed that Victorian newsagencies sold on average 31.7% of their papers from the agency shop, 33.1% through sub~agents, and 35.2% by home delivery. In addition to newspapers, the newsagent will receive and display in the newsagency shop a wide range of magazine titles, will home deliver them if asked, and will supply sub-agents, who commonly sell only the more popular titles. Whereas the authorized newsagency will commonly stock and display several hundred magazine titles, and in the case of some authorized newsagencies as many as 2,000 titles, sub-agents may only sell a dozen or twenty titles. With magazines as with newspapers, the newsagent is responsible for orders, payments and returns of unsold copies to the magazine publisher or distributor. Unsold returns of magazines represent a much higher proportion of supplies than is the case with newspapers, with 60% returns not uncommon. The more popular magazines achieve lower returns of unsold copies. - 59 - 6.6 The newsagency as_a viable business The newsagent's income from the sale of newspapers and magazines is derived from commissions, almost always at 25% of the cover price. When sales are made through the newsagent's sub-agents, the commission is normally split 50-50, so that the newsagent retains 12%%. These rates of commission are customary, and are stipulated by the publisher. Witnesses for the NCV and VANA indicated comfort with commissions at these levels. In addition, home deliveries attract a delivery fee for the newsagent, charged to the customer at various rates laid down by the publishers, and currently 50 cents a week (Monday to Sunday) for one daily newspaper. The Age also offers newsagents a promotional subsidy of 70 cents where the customer orders newspaper delivery for all 7 days in the week. Newspaper-related income is earned also from the commission at 10% on the value of classified advertisements placed through the newsagency. The commission payable on classified advertisements is set by the publisher under the terms of the Newsagency Agreement. Other shop activities earn additional income, yielding gross profit at around 30% on sales, but commission income from the sale of newspapers and magazines typically represents more than half of the gross profit of the newsagency. Witnesses generally assented to figures of 52% to 55% of newsagency gross profit being typically derived from sale of publications and from advertising. - 60 - Evidence put to the Tribunal indicated that the profit generated by newsagencies varies within wide bounds, reflecting such factors as the size of territories, the location of the retail shop relative to local retail centres, the scope for home deliveries and for sales to sub-agents, the availability of parking, and the diligence and business abilities of the owner. The Tribunal was told that newsagents might earn gross profit in the range of 20% to 35% on their original investment in the business, with the less successful operators not surviving, and the more successful selling out at an enhanced price. Because the control of costs is crucial to the achievement of a pleasing personal income for the newsagent, VANA offers advice to newsagents in that regard. The demand from willing buyers for newsagencies is apparently strong, indicating that an authorized newsagency is seen to constitute a satisfactory livelihood for a hard-working owner-operator with access to capital. The market value of a newsagency derives primarily from the goodwill of the business. Valuations of the goodwill are performed by the NCV for all newsagencies that are to be offered for sale, using financial information compulsorily supplied by the newsagent under the terms of the Newsagency Agreement. The method of valuation employs a formula that values the goodwill arising from each element of the business as equal to the revenue earned net of purchases, in a given number of weeks. The formula places a higher valuation on - 61 - gross profit earned from newspapers and magazines, than from other strands of the business. Valuations by the NCV are accepted by lending institutions as independent and authoritative, and therefore assist a would-be newsagent who wishes to finance a planned purchase. Earlier arrangements where the NCV involved itself directly in the sale of newsagencies and in the setting of the selling price were not authorized by the Commission in 1982, and no longer are in effect. The actual selling price of a newsagency is determined by the market, and at present tends to be higher than the valuations indicated by the NCV. Nonetheless, evidence to the Tribunal showed that the typical newsagency has evident economic weaknesses as well as strengths. Every Victorian newsagency conducting its agency business for the sale and secondary distribution of newspapers and magazines has four distinct sources of earnings available to it: . commission and delivery fees earned from home delivery of newspapers, less related costs (wages, hire of contractors, wrapping materials, administration and Capital charges); . commission on newspapers and magazines sold through the newsagency shop, less general shop expenses, wages and - 62 - rentals; half-commission on sales of newspapers and magazines through sub-agents located in the newsagent's territory, less the cost of delivery if applicable, and related administration; . commission on classified advertising placed through the newsagency, less associated expense. Evidence showed that these four sources of income contribute quite differently to the net profit of the business in relation to the owner's. input of effort and capital resources. Plainly the four activities complement each other and together normally contribute in present circumstances to the existence of a viable business, but viewed separately as far as this is possible, the four strands differ as to profitability. Home delivery is addressed in detail in the next section. Direct retail sale of publications by the newsagent is evidently the most profitable arm of the agency business - full 25% commission is earned, and only the general shop expenses are incurred. (Other retail lines, which commonly sell on a 30% margin or better, are also good earners.) Classified advertising earns 10% commission, but involves little expense in conducting the business. Excluding home - 63 - delivery from the comparison, sub-agency business is the least profitable - the commission is split, and significant administration and attention of the newsagent is required. Smaller sub-agencies are seen by newsagents to be often unprofitable, and such sub-agencies are retained only because the publisher requires it. Larger sub-agencies are profitable to service, with the newsagent bearing costs of perhaps 5% from the 12% commission. 6.7 Home delivery of newspapers Home delivery of morning newspapers is central to this matter. (The term "home delivery" conventionally includes standing orders of morning newspapers delivered to business premises as well as private residences.) The Commission in its successive determinations in Victoria and other States has given weight to reliable, low-cost home delivery services as a major source of public benefit arising from the operation of the authorized systems. For the newspaper publishers, home delivered newspapers - pre-sold, and normally representing standing orders - are commercially important. They constitute a confident revenue base without the unsold returns that are unavoidable when newspapers are sold by retail. Home delivery sales are achieved without extra commission being paid by the publisher. The newsagent's delivery fee, which is set by the publisher and is intended to cover the agent's extra costs, is charged - 64 - to the customer. Under the authorized system, the publisher retains effective control over the newsagent's standard of performance with regard to home delivery, and potentially can enforce desired standards through sanctions applied by the NCV. Publishers increasingly promote home delivery to potential customers, with the aim of increasing sales of this type. Many, but certainly not all, newsagents view home delivery differently, as a burdensome obligation that must be borne as the price of having an otherwise attractive livelihood from an exclusive distribution territory for newspapers and magazines, within which other retail outlets hold a subordinate and disadvantaged position. Certainly the home delivery obligation is the underlying reason for the agent's long working hours. The delivery responsibilities of the newsagent can be capital intensive. Delivery vehicles may be purchased, as an alternative to the employment of home delivery contractors or of young people on bicycles. Increasingly the customer expects delivered newspapers to be plastic-wrapped, and hand-wrapping is expensive and time-consuming, so newsagents are moving to install wrapping equipment at a capital cost of $8,000. The need to manage the credit accounts of delivery customers and sub-agents, together with other agency administrative tasks, encourages newsagents to install a - 65 - computer at a cost of perhaps $6,000. Optimum utilization of such capital items points to the existence of potential economies of scale in home delivery of newspapers. 6.8 Sub-agents Sub-agents are at the end of the newspaper distribution chain. They sell about one-third of all newspapers sold, and about one half of newspapers sold through retail outlets; but the bulk of sub-agents are either small operators, or more commonly sell papers and magazines as only a small part of a larger, more general, retail business. Some sub-agents sell less than 10 newspapers each day, some sell a hundred or more. For sub-agents who are general retailers, the 12%% commission rate received is unlikely to be attractive in itself, as it is much lower than the customary retail margin. Rather, their sale of newspapers and magazines is justified on the basis that it attracts business to the sub-agent's retail outlet. It seems that publishers and newsagents have no difficulty attracting a sufficient number of sub-agencies to form a comprehensive retailing network for newspapers and magazines across Victoria. Sub~agents have exercised little bargaining power during the long history of the newspaper distribution system as it has developed, and the practice of the system today makes few concessions to their convenience or commercial aspirations. Rather, the system is overtly designed to meet and maximize - 66 - the market for publications, while suiting the commercial interests of a coalition of the publishers and the authorized newsagents. The sub-agent can elect to sell newspapers in accordance with the system as it exists, or not sell newspapers at all. Because sub-agents operate according to procedures and commercial terms over which they cannot expect to (and do not) exercise influence, their only feasible responses are acceptance or complaint. The hearing before the Tribunal, where two of the applicants for review were groups of sub-agents seeking greater commercial freedom and advantage in the sale of newspapers, was in the main concerned with complaints; but it is obvious enough that the preponderance of sub-agents accept the system as it is, or are indifferent to its form. Mixed businesses that act also as newspaper sub-agents, operate at the boundary between the authorized newspaper distribution system and the unregulated structure of general Australian retailing. These mixed retail businesses include the chain convenience stores that submitted evidence to the Tribunal. Sales of newspapers and magazines by Victorian convenience stores represent 4% to 6% of total store sales. One of the larger convenience stores might expect to sell 100 newspapers a day in present circumstances, compared with the 350 papers sold by retail daily by a typical metropolitan newsagent. While representing only about 200 among 5,500 Victorian sub-agents, the convenience stores provided an insight into the workings of the newspaper system in practice and in the larger market context, and through the eyes of experienced and professional retail managers. The Tribunal has considered the complaints put in evidence by the convenience stores in this light, while recognising that the comments expressed, being self-interested, may warrant a degree of qualification, and may in some instances be unrepresentative. The members of AACS include 7-Eleven, and also the chains ef convenience stores run in association with the petrol stations of the major oil companies. Shell has 25 Shell Select convenience stores in Victoria, operated as franchises. (Shell also operates some 200 smaller Shell Shops at Victorian petrol stations, that may sell newspapers and magazines as sub-agents, but cannot be described as convenience stores.) The average sales of '"newsagency items" by Shell Select stores, at $1,270 a week, represents 4% to 6% of total sales. BP Australia has 36 franchised Food Plus convenience stores in Victoria, as well as 7 smaller stores, directly owned, named BP Shop plus. Average weekly sales of newspapers and magazines in Food Plus stores amount to about $1,335, comprising 65% sf total sales. There are 20 Ampol Pantry stores in Victoria, all operated as franchises. Sales of - 68 - newspapers and magazines, at $700 average per week, comprise 4% of total store sales. The 27 Quix stores in Victoria are associated with Mobil petrol stations. Sales of newspapers and magazines constitute 45% of total sales at $750 weekly per store. Generally, convenience stores sell newspapers and magazines on a sub-agency basis, trade for long hours, often during the period that the businesses of newsagents are closed. Convenience stores offer particular benefits to the public of accessibility including extended hours and on-site carparking. All of the Victorian members of AACS obtain their supplies of newspapers pursuant to the tied sub-agency arrangements authorized by the 1982 determination. Gross sales generated by 7-Eleven stores are in excess of $260m per annum. Approximately $8.5m of that figure ($6m in Victoria) is generated by the sale of newspapers and magazines. Of that $8.5m approximately 60 per cent is represented by the sale of newspapers and 40 per cent by the sale of magazines. 7-Eleven is a wholly owned Australian company which franchises 7-Eleven stores to individual operators. The 7- Eleven franchise is a full serviced business franchise involving a close working relationship between 7-Eleven and the individual franchise owner. The franchise accounting system is structured such that 7-Eleven provides a bookkeeping service for each franchise owner and pays that owner's - 69 - individual invoices on his or her behalf. 7-Eleven provides a merchandising service, although franchisees are at liberty to set their own retail prices and determine their own range of stock. Most 7~Eleven stores trade 24 hours a day, 7 days a week. They have been carrying on business in Australia since 1977. 7-Eleven is controlled by Mr Russell Withers and wholly owned by him and his' family. Mr Withers recognized the opportunities that may be offered by stores of the kind which 7-Eleven now conducts. He saw the probable decline of the local corner store or milk bar, as it used to be, with the changing face of Australian society, and decided that it left a gap to be filled by businesses of the kind which 7-Eleven conducts. The expansion of 7-Eleven convenience stores in Australia to 162 stores on the eastern seaboard reflects the general retailing trend towards the provision of extended hour convenience stores, providing a wider range of products than traditional milk bars, bright modern surroundings, on-site carparking, and frequently motor fuel. The Tribunal notes that the chain convenience stores are a relatively recent form of retail outlet for newspapers and magazines, and (absent the present authorized system as it applies to them as sub-agents) are potentially a source of market strength challenging the newspaper publishers, whose market dominance in Victoria is at present institutionalized and made legitimate by the current authorization of the newspaper distribution system. The newspaper publishers cannot be expected to favour such an outcome. The convenience stores criticized all aspects of the dealings between particular convenience stores and _ the newsagents for whom they act as _ sub-agents. Clearly the problems facing convenience stores are not encountered universally. However, the overall pattern indicates a deep-seated discontent, within which there are four underlying themes: 1. A wide-spread belief exists among convenience' store operators and their franchisors that the supply arrangements for newspapers and magazines to their stores constitute an out-dated and unreasonably demanding commercial anomaly, when judged against the norms of modern retail practice. For all other products stocked in convenience stores, including other perishables supplied on a sale or return basis, they say that the stores or their buyer are able to deal directly with the supply house, negotiate prices and supply arrangements suited to both the product and the store, and apply the most efficient methods of stock management to balance the risks of out-of-stock situations and over-stocking. On the other hand, for newspapers (and by extension for magazines), the arrangements are non-negotiable, are mandated to suit other interests, and commonly (the convenience stores contend) result in erratic, unreliable and inadequate supply and service. The convenience stores, which rely on 24-hour 7-day a week service to attract their customers, claim that they are frequently out of stock of newspapers and popular magazines, and are unable to remedy the difficulty promptly, because all ordering on their behalf, and judgments as to the adequacy of their stock, are in the hands of their supplying newsagent, who has other priorities and with whom they are in competition. Ordering is said to be inflexible, and to be unduly sensitive to pressures of the publishers to control and limit unsold returns. In response, newsagents either denied the poor service claimed, or said that they implement the system as it is authorized, and as required by the publishers. 2. Convenience stores are dissatisfied with the reliability, timeliness, and sometimes the absence, of deliveries by the newsagent. Newsagents, at the direction of publishers, give priority in the early morning to servicing their home delivery customers, and may not receive enough papers to supply a large sub-agent. Convenience store owners who wish to. sell newspapers to early morning customers may prefer to have their stores' orders picked up from the newsagency premises at their own expense rather than waiting for delivery in due course. In response, newsagents pointed to the frequency of late deliveries from publishers as a cause of late supply to sub-agents, and pleaded staff shortages at the relevant time because of the priority necessarily given to home delivery. The Tribunal notes that the Newsagency Agreement provides for compensation to the newsagent who incurs extra costs due to late delivery, but that there is no corresponding redress for the sub-agent who loses business. For magazines, deliveries to sub-agents seem to be fitted into the newsagent's daily schedule. Convenience stores complain that popular magazines may not be received on the day of publication, so that sales are lost; and that magazines in limited supply can be allocated by the newsagent in ways that disadvantage the convenience store. Complaints were also made that on occasion the newsagent retrieves copies of magazines from the convenience store's shelves to replenish the agent's own retail stocks. It seems that convenience stores rarely, if at all, receive morning papers directly delivered by the publisher, although convenience stores have asked for this service. Direct delivery to a sub-agent would require the publisher to assume marginal delivery costs that would otherwise fall to the newsagent's account. Some deliveries of the late edition of The Herald Sun are made direct to convenience stores, presumably because the publisher wishes for this edition to maximize sales by avoiding the delays inherent in two-stage distribution. However, in such cases, ordering remains the responsibility of the newsagent. For magazines, no direct - 73- deliveries are made to convenience stores. 3. The convenience stores are concerned that the system, by relying on newsagents - each with a territorial distribution monopoly and a retail outlet - places the convenience store in competition with the newsagents in the sale of newspapers and magazines. The system confers both the commercial power and the commercial incentive upon newsagents to administer their distribution of newspapers and magazines to the disadvantage of a nearby convenience store that competes with the newsagency at retail. Obviously this is true in principle, because sales through the newsagency outlet attract full commission for the newsagent, while sales through sub-agents yield only half-commission and involve supplementary administration. The Circulation Director of the HWT agreed in evidence that the authorized newsagent competes at retail with sub-agents, and argued that sub-agents would for this reason prefer to be supplied by a delivery-only agent. However, newsagents' responses to specific complaints in this regard denied wrongful behaviour, or denied the fact of retail competition in practice. 4, The systems of billing and certain other administrative practices employed by many authorized newsagents are considered by the convenience stores to be primitive and unprofessional in today's retail context. Numerous petty instances of poor administration of accounts were put in -~ 74 - evidence. The response of newsagents was that the documentation supplied is adequate to needs. The Tribunal notes that each convenience store deals with a different newsagent, and that the quality of documentation will obviously vary. Newsagents are small business people, who will in the ordinary course be concerned only that their procedures - albeit in many cases computerized - are sufficient for their own needs, the needs of the publishers who closely oversee them, and the demands of the body of their many customers. They are understandably not inclined to introduce a particular and detailed system of billing to suit a small number of convenience stores in their area. On the other hand, chains of convenience stores operate with sophisticated management systems compatible with the norms of modern general retailing, and they rely on the efficacy of these systems to gain a commercial edge over small business competitors in their district who may not buy as well or control their business as well. This disagreement about the adequacy of sales administration procedures seems to reflect a fundamental difference in management philosophy and expectation to the task of administering a retail system, between convenience stores and authorized newsagents. 6.9 Directions of change in the system The newspaper distribution system in Victoria as it exists today is not identical to the system as described and authorized by the 1982 determination. The place of the NCV in the valuation and sale of newsagencies is diminished. The publishers have lately determined that they must more strictly enforce sanctions against newsagents that serve their customers poorly. One newspaper offers different commission rates to newsagents for retail sale and home delivery. The system of distributing newspapers has necessarily responded to a changing society and a changing market, as the wider media market has responded. News, information and advertising is distributed to the community at large today through a widening variety of electronic media as well as through the printed media. As several witnesses told the Tribunal, the previously clear boundary between the role of the magazine and that of the newspaper has become less distinct. Changing community habits, attributed to television, have caused The Herald, Melbourne's only evening newspaper, to cease publication, so that the timing of demand for newspapers is very different to that which applied in 1982. Circulation figures for the remaining newspapers are tending to fall, except for the major Sunday newspapers, which did not exist in 1982. The pattern of retailing has changed, with new forms of retail outlets emerging. The trend away from the strip of small suburban shops on a busy main road, to the suburban shopping complex with ample parking for cars, is becoming more obvious. In such a situation, the position of the specialized authorized newsagencies, commonly in a traditional location, deriving income from a territorial monopoly with boundaries determined years ago in other circumstances, is vulnerable to changes in the business environment, as much_ evidence revealed. lLook-alike newsagents, unburdened by obligations to perform a home delivery function or to supply other small retailers as sub-agents, are in many cases thriving. in better locations in suburban shopping centres, despite their poor commissions on sale of newspapers and magazines. The convenience stores, who are among the larger and more commercially valuable sub-agents, are increasingly demanding. The Tribunal was unable to elicit a clear picture of the aims or expectations of the publishers or the NCV {where they constitute a majority) as to the likely form of an evolving newspaper distribution system. The Circulation Director of HWT, when asked what changes he wished to see in the system, spoke only of small refinements, such as the plastic wrapping of all home-delivered newspapers, and of adjustments to the boundaries of newsagency territories in his capacity as Chairman of the NCV. He referred to the problem of rationalizing territories in areas where demographic change has meant that a district has too many authorized newsagents, and of the exercise of the NCV's authority to split a territory on the suburban outskirts that was considered to have grown too big for one newsagent to handle well. -77- It seems to be common ground that the exercise of the home delivery function would work better with a clearer focus and at a larger operational scale than at present. The 350 papers a day home delivery operation of the typical newsagent is a poor earner when compared to a hypothetical agent delivering say 1000 papers a day. Experienced industry witnesses agreed that an economic home delivery operation, operating independently of a retail shop, such as exists in some other States, and as envisaged under' the 1993 determination of the Commission, would be substantially larger in scale that the typical exclusive territories at present allotted to Victorian newsagents. The Distribution Development Manager of The Age mentioned the possibility of setting up distribution depots for his paper. In the Western Australian system, delivery agents pick up their papers at depots to which the publisher delivers, and they sort and wrap them there for delivery. Such arrangements are at present precluded under the 1982 determination. Here too the publishers are clearly sensitive to the possible impacts of changed arrangements on established newsagents, and talk of any changes occurring over many years. They also talk of a newsagent purchasing the delivery round of a neighbouring newsagent, as a way to achieve more economical home delivery without undue disruption. Magazine distributors oppose the concept of delivery-only newsagents, because they consider them a less effective means for selling magazines - 78 - than retail newsagents. Few magazines are supplied to home delivery customers in Victoria. Yet, whatever the direction of change, the publishers wish to retain close and effective control over the form and operation of the commercial system that distributes their product. As one witness for the NCV put it: ",,.it is essential that the publisher has complete control over the distribution outlets ..." The centrality of the issue of control by the publishers was stressed also in several submissions from the newsagents. An illuminating instance of the publishers' concern for total control of the system emerged in response to the suggestion that a sub-agent wishing to obtain better service might be permitted to negotiate supply from a newsagent in an adjoining territory. Such a possibility was described by representatives of both publishers as introducing an "administrative nightmare", by disorganizing a finely tuned logistical system (within which of course the publishers manage numerous other daily variations in the normal course). They spoke also of damage to the commercial interests of newsagents affected. They stressed alleged major problems that would arise in the management of the distribution of papers with advertising inserts within a defined territory. The publisher has the technical capability of placing advertising inserts into newspapers selected for distribution ~ 79 - to as few as perhaps 8 newsagents by a single truck delivery run, and understandably wishes to take full commercial advantage of such precision in distribution. But, to enable say, one convenience store, situated in the presently exclusive territory of an authorized newsagent, and who chooses to obtain deliveries from another newsagent in an adjacent territory, to receive newspapers with advertising inserts destined for distribution only to newsagents within that adjacent territory of his supplying authorized newsagent, seems to involve a minor change to the publisher's distribution system, readily able to be accommodated. However, it seems that the publishers regard the grant of commercial flexibility to any sub-agent as dangerous to the survival of the distribution system in a form that they would find acceptable. For the newsagent, any commercial flexibility for a sub-agent to obtain supplies from a different newsagent opens both dangers and opportunities, as witnesses recognized. One newsagent said that he would take advantage of such an easing of the system by trying to capture attractive sub-agencies from his local competitor, and he would also try to abandon very small and uneconomic sub~agencies in his territory, which he is presently required by the publishers to supply. 6.10 Enforcement of newsagency obligations While the obligations of newsagents to their publishers as principals under their Newsagency Agreement are detailed and sweeping in their scope, the ability of publishers to enforce those obligations are in practice limited. There is only one sanction available under the standard newsagency agreements adopted by both publishers (but it is a powerful sanction) - the withdrawal of the newsagent's licence to act as prime seller and distributor of newspapers in the agency's hitherto defined territory, or in other words the loss of his livelihood and of the goodwill value of the agency business. Under the Rules of the NCV, the responsibility for a decision to terminate an agency because of poor performance lies with the NCV, where the newsagents are represented through VANA. A publisher who concludes that a newsagent is not performing in accordance with the newsagency agreement or with instructions issued by the publisher under the terms of the agreement, may issue a default notice to the agent. Should more than three default notices be issued by publishers within a 12 month period, the authorized newsagent's licence is withdrawn, subject to the NCV accepting after due review of the circumstances that the default notices have been properly issued. No lesser sanction is available to the publishers or to the NCV, either in the newspaper agreement or in the Rules and processes of the NCV. Officers of the publishers stated in evidence that they are loath to implement such a drastic penalty for poor performance by a newsagent, so that the termination of an agency occurs in practice only in the most extreme circumstances. It was stated that newsagents respond to issue of a default notice by improving their performance. A list of defaults issued over a recent three month period by HWT was submitted in evidence. They were 13 in number, of which seven related to overdue payment of newsagency accounts to the publisher and the remainder to failure to perform home delivery on schedule. Decisions of the NCV as to termination of licences of agents, or as to variation of territories of agents may be appealed against by newsagents to an appeal tribunal, said to be independent. Little evidence was submitted as to the working of this appeal system in practice. 7. ANALYSIS OF THE PRESENT SYSTEM 7.1 Markets a market power How we view the newsagency system, it is plain, is very much dependent upon our assessment of the market structures in which it is embedded. It was Professor Officer's view, forcefully presented, that the newsagency system is an efficient construct whose design and implementation have been driven by competitive pressures upon the newspaper publishers: "To achieve profit maximization, and to compete effectively with the range of substitute products for newspapers, the publishers' main objective must be_ to establish an efficient distribution network. Newspaper publishers operate in a competitive market for goods which provide news and information," Further he thought it was artificial to attempt to separate out various functional markets such as "wholesaling" by newsagents to sub-agents: the publisher distributes its own product through its own independent contractors and through shared agents and sub-agents. Counsel for VANA developed Professor Officer's position by submitting that there are two relevant markets to be broadly defined. The first is the market for news, information and comment containing a number of "products", both goods and services, including the daily Melbourne newspapers published by the publishers; the interstate and national newspapers; the "free to air" television stations; the pay television stations soon to be introduced; the numerous "free to air" radio stations; the suburban newspapers and weekly newspapers; the magazines, in particular, weekly current affairs and business magazines; and computer based information services. The second is the advertising market, advertising goods and services through the same media. He pointed out that the greater part of revenue for both the Age and the Herald Sun is from advertising. Both markets, he submitted, are very competitive. - $3 - Professor Williams had a different view. He conceded that the publishers of newspapers and magazines are subject to some extent to competition from other media but nevertheless Maintained that the newspaper publishers have significant market power. While this market power arises mainly from their agreements, he said, it is permitted by the competitive environment. Further, he thought it important to distinguish three functional levels: publishing, wholesaling/distribution and retailing. This was because, he said, it is appropriate to define markets so as to focus attention on the issue that is being analyzed. The principal issue raised by the application for review made by 7-Eleven is the role and efficiency of the territorial monopoly of wholesaling that is granted to authorized newsagents. Professor Williams pictured the authorized newsagents as performing three functions: home delivery, wholesaling to other retail outlets (the sub-agents) and over-the-counter retailing. In our view it is appropriate to distinguish two product markets of relevance in these applications: first, the market for the publication and distribution of metropolitan daily newspapers offering two interconnected products: news, information and entertainment; and classified and display advertising. We distinguish this from the market for magazine publication and distribution, again with two interconnected products: magazine articles, fiction etc. and advertising. ~ 84 - We reject the view that the newspaper publishers are subject to close competition from the other media. Undoubtedly they are subject to some competition. Undoubtedly, too, the newspaper publishers' circulations are under considerable pressure. But we have concluded that this results from a variety of somewhat diffuse factors playing about the industry's products, rather than upon the existence of such close substitute products as would eliminate the publishers' market power. Such factors include changed working and shopping hours, changed modes of travel, expanded life-style possibilities, the demands upon working wives, even the abandonment of six o'clock closing and the role of the pub, as well as the rise of new media outlets. There is some initial difficulty in deciding what functional market classification is most helpful to these proceedings. As was said in Dowling v Dalgety Australia Ltd {1992} ATPR 41-165 we seek "the identification of a market that best enables the Court to evaluate the issues" (40,268) and, we can add, to analyze the relevant competitive processes in light of the issues subject to the law. 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 (Re Queensland Co-operative Milling Association Ltd, Defiance Holdings Ltd [1976] ATPR 40-012 (QCMA); Queensland Wire Industries Pty Ltd v fhe Broken Hill Proprietary Company Ltd (1989) 167 CLR 177 (QWI)). - 65 - The current transactions between newsagents and sub- agents are not in fact in close competition. They are the subject of contractual regulation by the newspaper publishers. We agree with Professor Officer that it is inappropriate to refer to these transactions as falling in a wholesaling "market". We do not agree, however, with his proposition that these transactions are a form of efficient vertical integration. As to the QWI perspective that a market can refer not just to actual transactions but to potential transactions that would be subject to close substitution, we are uncertain where such boundaries might lie, were the distribution of the two publishers' newspapers (and the magazines) opened up to competition. Accordingly, the approach suggested by counsel for 7-Eleven, namely, to define the market as the distribution of newspapers and magazines within Victoria at various functional levels, has some appeal. However, the uncertainty as to functional market boundaries relates to the wholesaling route. We can be quite specific about the identification of a retailing function which currently embraces both the newsagents (over-the-counter sales and home delivery) and the other retail outlets, all offering close substitute products. The hearing proceeded on the basis (accepted, it seems, by all participants in the review) that the geographic market for primary distribution is Victoria, while for retailing it is a series of local market areas. - 86 - We have concluded that the market power of the newspaper publishers is considerable. The elements of market structure we would emphasize are: . first and foremost, the agreements and practices constituting the Victorian newsagency system; second, the long history of stable association in joint distribution of daily newspapers, extending back some 70 or 80 years, and authorized in current form in 1982; . third, the very high market concentration - a duopoly of two very strong newspaper groups, the HWT group and the Age group, with strength that extends far beyond Victoria; and . finally, the generally conceded high barriers to entry. We take it as significant that the applicants did not seek to persuade us of the existence of modest barriers to entry, but rather relied upon their contention that the newspaper publishers are subject to strong competition from other media. At the same time we would not wish to ignore what we have termed the somewhat diffuse pressures upon newsagency circulations. Nor should we ignore the rivalry that exists between the publishers in content and advertising. The generalization that strikes us as apt is that of Professor Williams: "partial collusion" as expressed in the newsagency system. There is some evidence of small modifications to customary understandings on distribution practices in recent times. The "Australian" has recently broken ranks on the customary 25% newsagency commission, and is now offering 26% for delivered papers and 24% for over-the-counter sales. The "Age" has currently a special offer for delivery subscriptions at much reduced rates. Yet these instances of independent initiatives are but small exceptions to the overall system. We do not see VANA's presence in the NCV as diminishing the market power enjoyed by the system. Certainly there was evidence that it acts as some constraint upon the publishers' area of discretion in some categories of decision-making, especially delivery fees and the splitting of retail territories. But in its discussions and bargaining, VANA is in no sense the agent of market forces. Rather it is engaged in a kind of political process. Indeed, if anything, it would seem that VANA's presence in the NCV serves to buttress the market power enjoyed by the system. Finally, it is clear that any market power that exists at the retail level of operations is the creation of the system. Absent the system, entry would be easy. But, as things stand, - 88 - the newspaper publishers operate a private licensing system that creates high barriers to entry, determining who shall enter retailing and in what capacity. 7.2 The horizontal and vertical restrictions The present newsagency system has been established by a tightly interlocking set of horizontal and vertical agreements between the two newspaper publishers, VANA, the newsagents and the sub-agents. (We use the term "horizontal agreement" in the conventional sense to refer to an agreement at the same stage of the production and distribution chain leading to the consumer; we use the term "vertical agreement" to refer to an agreement between a customer (or customers) and a supplier (or suppliers). ) The horizontal agreements are between the publishers and are largely embodied in formal documents: the agreement, with VANA, to constitute the NCV and to be bound by its rules; the Rules of the NCV; the drafting of standard form Newsagency Agreements between each publisher and newsagent; the drafting of standard form Sub-agency Agreements between each publisher and Sub-agent; and some subsidiary agreements. It is plain that it is the publishers who drive the system, in terms both of design and implementation. Mr Prowse spoke of "the strength we have had in directing this industry". Mr Killingbeck said "The current system exists as ~ 99 - it does at the discretion of the publishers". We should comment upon the position of VANA in the NCV. With one exception, noted below, it has minority voting rights. There are five members of the NCV, two from each publishing group and a fifth from VANA. The original application for authorization was made by the publishers in 1975; but in the course of discussions with the Commission, it was decided to constitute the NCV and to admit VANA to membership of it. Perusing the Rules of the NCV we see that some decisions and procedures are to be made or implemented by the NCV, some by the publishers or a publisher. It is "the NCv" (the expression used in the Rules) that determines the territories; and must approve an incoming newsagent and approve a transfer or change in control of a newsagency. It is "the publishers" who give "direction" or ""consent" in the appointment of sub- agents by the authorized agents; and that have the right to fix the maximum delivery fees. It is "a publisher", with the "prior approval of the Council", that may terminate a newsagency agreement. The "unanimous approval of the Council" is required for the transfer of a portion of a territory from one newsagent to another. "Each publisher" has the obligation "to provide authorized newsagents with an adequate supply of newspapers and magazines". "Each publisher ... may not ina territory supply to a business clearly identifiable as a - 90 - newsagency specializing in the sale by retail of a wide range of newspapers and magazines except for railway and airport bookstalls", i.e. each publisher may not supply to 1look- alikes. The standard form Newsagency Agreement, forming an Appendix to the Rules, contains terms that are complementary to the Rules of the NCV and add (inter alia) that the Company appoints the Newsagent "to act as its agent" on a consignment, or sale or return, basis: that "the Newsagent shall not without written approval of the Newsagency Council ... sell or deliver publications inside any territory other than his territory nor sell, nor allow any sub-agent to sell, publications to a person in circumstances where such publications are to be resold"; and that the Newsagent shall, subject to the Company's instructions, "make early and efficient delivery of the publications within the territory and in no other areas" subject to the Council authorizing substitute deliveries for a defaulting Newsagent. The Sub-Newsagency Agreement, also in standard form, is between the Agent and the Sub-agent, but confines the Sub—- agent to sales from specified premises, at a commission "agreed by the Publishers", subject to a right of termination by the Newsagent with "the approval of the Publishers". - 91 - In addition to the formal agreements, there is a heavy overlay of long-standing parallel practices. It is "industry practice" that the newsagents receive a commission of 25%, remitting 124% to any sub-agents. The Tribunal enquired as to the origin of the present commission rates and was told that they "have been in force in Victoria for very many years, and no one presently in the industry knows precisely when they commenced". Mr Lyons was able to confirm that the 25% commission existed when he started in the industry in 1945. As to the sub-agency commission, the Sub-Newsagency Agreement provides that it shall be "at a rate agreed upon by the Publishers"; but Mr Prowse said that only about 12 sub-agents (of the 5,500 sub-~agents) receive any more than the standard 124%. There is a common maximum fee charged for home delivery since its introduction in 1952. In recent times this common fee has been subject, in practice, to negotiation between the publishers and VANA, while still being enforced by the publishers. While some sub-agents may receive what is called "direct delivery" from a publisher "where we physically take it from our plant to theirs", it is industry practice that they not be given "direct supply" in the sense of running an account with the publisher. The paperwork and handling of returns are still undertaken by the newsagent who still receives the 12% commission. The formal position is different from this, in that the Rules of the NCV state that "each publisher (adopting its own criteria for the purpose) is free to make its own individual commercial judgment concerning the supply of its publications or any of them to any outlet in a territory other than the authorized newsagent", subject to the exception previously noted prohibiting direct supply to look-alikes. Nevertheless the evidence regarding actual practice was to the contrary. Mr Prowse said that there are, in fact, only 40 direct accounts between the HWT and retailers who are not authorized agents. In his written statement he put it this way: "Under the present Victorian arrangements, the publishers have always had the right to supply their products directly to any outlet other than to look-alike newsagencies, but the publishers have not in general exercised that right largely because of their concern that it may detrimentally affect their newsagents." It was Mr Withers' evidence that all 84 7-Eleven stores in Victoria are supplied as sub-agents; none receives a commission greater than the standard 124%. He related how he had "over the years made a number of attempts to deal with the publishers to find alternatives to the present arrangement for the distribution of newspapers and magazines including a variation of the commission split". He detailed a number of alternative arrangements which he had canvassed, without success, none of which would have involved direct supply by the publishers to all 7-Eleven stores at 25% commission. ~ 93 - Mr Burns, who gave evidence about Food Plus, told of how he had approached the HWI group "about possibilities of direct supply, direct accounting, and negotiable margins" as well as making use of the Food Plus central bill-paying system. He said "I met with a complete refusal to contemplate any change at all." He referred to "the stance" that Mr Prowse "has always taken, which is that current supply and accounting arrangements are simply not open to discussion". The NCV insisted, in the course of argument, that the system is one and indivisible, a characterization with which we must agree. It is bound together not only by agreements and parallel practices but also by the existence and organizational structure of the NCV. In sum, the NCV system is an industry system, where the newspaper publishers have entered a horizontal agreement or understanding to use the same agents, to adopt certain common commercial practices, and to exercise control over their shared agents through joint administrative and disciplinary procedures. The 1982 determination concluded that "the key anti- competitive feature of the proposed system is the grant of territorial monopoly to newsagents" (Final Determination, at 55,397). In our view, the key anti-competitive feature is the horizontal agreements and understandings between the publishers. These, in turn, interlock with the parallel vertical agreements to deliver an anti-competitive outcome ~ 94 - that is qualitatively different from that which would obtain from the practice of territorial exclusivity by independent publishers subject to market forces. We have concluded that in this case it is the horizontal coverage of the system, a coverage that blankets the whole metropolitan daily newspaper publishing and distribution industry, coupled with the somewhat muted competitive pressures playing about' the industry, that gives rise to an exclusionary effect that is anti-competitive in a very fundamental sense. The magazine publishers have been accorded ready access to the system, so much so that their inclusion reinforces the barriers to entry that exist against alternative distribution modes. The evidence is that this exclusionary power has been directed against alternative distribution techniques, such as delivery specialists, and against alternative forms of retailing. It is striking that the applicants for authorization, though pressed by the Tribunal to present relevant international comparative material, were unable to produce any overseas examples of industry-wide systems of territorial exclusivity. While the practice of territorial exclusivity is very common overseas, it is a practice that is organized by individual publishers. For example, the recent U.K. Monopolies and Mergers Commission Report (The Supply of National Newspapers, 1993) analyses an exclusive supply system - 95 - in England and Wales whereby each publisher contracts with wholesalers for distribution of its papers to retail outlets. The publisher gives an exclusive right to each wholesaler to distribute within a designated area. A wholesaler may have one or more exclusive areas for each title it distributes. There may be different wholesalers operating for different newspapers and the territory boundaries may be different; a retailer may have to draw the different titles from more than one wholesale depot. In short, while territorial monopoly exists, it is in relation to the wholesaling of each publisher's product. Not unexpectedly, there is greater variation in delivery systems in the United States. Nevertheless the common feature is that the distribution is organized by the individual publisher. Mr Lederthoug, with extensive experience in newspaper distribution, wrote: "Generally speaking, the distribution of newspapers is carried out by individual newspaper proprietors, usually by contractors or distributors, for designated geographic areas. A large percentage of newspapers are ordered on a subscription basis and are delivered through their delivery agents or employees by the newspaper proprietors." Mr Samaras' evidence is also relevant here. The computerized subscription system of the "Canberra Times" for home delivery (that runs parallel to the newsagents' delivery - 96 - system) is based upon similar systems in the United States and uses off-the-shelf software available there. When asked about U.S. practice more generally, he described how the individual publishers in the United States will often combine a computer- driven subscription service with the use of "walkers" who pick up their papers for delivery at regional depots. Two publishers can have two runs along the same street. 7.3 The potential for public benefit from the present system As has been said, to understand how the newsagency system would be likely to work under the authority of the 1993 determination it is necessary that the Tribunal examine how the system works at present pursuant to the 1982 determination. The essential question for the Tribunal is whether the proposed changes to the present system would likely result in an enhancement of net public benefit. We proceed therefore in systematic fashion, first seeking to identify the nature of benefits and detriments to which the existing system gives rise and then, in the next section, seeking to identify any likely increment to net benefit from the proposed changes to the system. We need to know how the present system works today before we can judge whether the proposed changes would effect an improvement. Implicit in the s. 90 test for authorization is the requirement of causation. We seek to establish whether the conduct under scrutiny results or is likely to result in net - 97 - public benefit. This "must involve consideration of the circumstances which are likely to prevail in the absence of such conduct" (G & M Stephens Cartage Contractors Pty Ltd on behalf of the Members of the Concrete Carters Association (Vic) [1977] ATPR 40-042 at 17,453). In the present matter the relevant circumstances are those that would prevail were the system not to exist, i.e. were the distribution of newspapers to be organized in a fashion that is compatible with the requirements of Part IV of the Act. Public benefit has been, and is, given a wide ambit by the Tribunal as, in the language of QCMA (at 17,242), "anything of value to the community' generally, any contribution to the aims pursued by the society including as one of its principal elements (in the context of trade practices legislation) the achievement of the economic goals of efficiency and progress". Plainly the assessment of efficiency and progress must be from the perspective of society as a whole: the best use of society's resources. We bear in mind that (in the language of economics today) efficiency is a concept that is usually taken to encompass "progress"; and that commonly efficiency is said to encompass allocative efficiency, production efficiency and dynamic efficiency. The object of the restrictive practices provisions of the Act is the promotion of competition. Nevertheless, the very existence of authorization points to the recognition that there may be exceptional circumstances in which business conduct associated with a lessening of competition may have value to society. We cannot rely upon the functioning of competitive markets to delivery everything "of value to the community generally". In the present matter, the question is what are the special characteristics of the publishers' product or of the newsagents' activity that would justify a non~competitive organization as yielding public benefit. The circumstances surrounding the 1980 New South Wales determination, specifically intervention of the Commonwealth Government, gave rise to a conventionally accepted formula for public benefit that was then carried into the 1982 determination in Victoria: "a low-cost efficient home delivery service and a greater availability of newspapers and magazines than would otherwise be the case" (Final Determination at 55,497). Likewise the applicants for authorization to the Commission in 1993 continued to claim these two benefits before the Tribunal, but added a third, namely, the claim that the present system in Victoria for the distribution of newspapers and magazines is very efficient. The efficiency contention was at the forefront of the proceedings before this Tribunal. Counsel for the NCV said in opening: - 99 - "It will be a centre of our case that the system is extremely efficient. It is efficient in the sense that it delivers an enormous number of newspapers to a wide variety of outlets every day. The other efficiency aspect is the home delivery system. see virtually every address in Victoria can require the agent to home deliver." Professor Officer gave his opinion that: "The objective of the existing system for newspaper distribution in Victoria is to provide the most effective distribution network for publishers by granting exclusive distribution territories to newsagents and the service obligations imposed on newsagents. These arrangements attempt to ensure that there is an optimal number and location of retail outlets, and that efficient levels of investment in delivery services and promotional activities by newsagents occur." This, he said, was for two reasons: to achieve profit Maximization and to compete effectively with the range of substitute products for newspapers. Some of Professor Officer's argument drops away, since we do not accept that the system is motivated by strong competitive pressure. But we must also consider his contention that the system is a reflection of the publishers' motivation to maximize profits (and minimize costs) and thus would lead to an efficient distribution system. - 100 - There were five categories of special characteristics of the newspaper publishers' products that were claimed to require an anti-competitive organization of distribution in order to secure public benefit: (i) the importance of the wide availability of newspapers as a source of information and comment in a democratic society; (ii) the requirements of a universal home delivery service, namely: (a) the existence of route economies (b) the necessity for cross-subsidization; (iii) the capacity of the system to target readership for advertising inserts; (iv) the extreme perishability of the product; and (v) the need to protect newsagents' activities from ""cherry-picking". There was also an implicit assumption (implicit in that in argument and evidence it was assumed, though it was not expressed) which for convenience we shall number (vi) that a newsagency is a valuable small business institution. Explicitly, the concern was directed at preservation of the newsagents' goodwill, a concern we will consider in due course. But there was also an implied thesis that a small business sector made up of authorized newsagents represents a desirable business structure, a distinctive and socially ~ 101 - useful form of business that should be valued and perpetuated. We think it desirable to add this contention to the list and deal with it on its merits. It was largely the representations of newsagents that led to the Government's intervention in 1979; and, while the Government's submission to the Commission in August 1979 did not, in the language of the determination, put the small business argument as being a principal public benefit arising from the system, the submission did say (par. 28): " it is in the public interest for efficient and competitive small business in Australia to be fostered and promoted. The retail distribution of newspapers and magazines provides significant opportunities for small business. The Government is committed to encourage the maintenance and development of a vigorous small business sector in _ the Australian economy. Consistent with this commitment, the Government believes the revised agreement is in the public interest because it contributes to the viability of newsagencies which constitute a significant sector of small business in Australia." Information and comment (see i above) The "wide availability" argument has certainly dated. Perhaps the argument had some relevance when the publishers exercised control over newsagencies in their shop-retailing functions, and the retail sector generally was more bound by - 102 - tradition. If it has any relevance today it must be only by reference to home delivery (discussed next). For today's retail over-the-counter service there is no _ shortage of diverse retailers positively clamouring for the consumer's attention. To say that it is inappropriate for an "important" product to be subject to the free market is a non sequitur, as contemplation of the retail organization of other important products such as food demonstrates. Nor are we reliant upon newspapers or other forms of printed media for information and comment. In any event, there is much in newspapers besides "information and comment": e.g. sport, real estate, hobbies, entertainment. Home delivery (see ii above) We have concluded that there is some merit in the argument that a territorial monopoly of home delivery can give rise to "route economies", i.e. the avoidance of duplication of delivery runs along the one street. We will consider this contention more closely in the following section. The cross-subsidization argument, however, was largely disposed of in the course of the proceedings. We considered it earlier, but shall develop it further for present purposes. Prior to the hearing, the applicants for authorization claimed that the tied sub-agency system was necessary to subsidize uneconomic home delivery; and both economists' statements proceeded on the basis of this assumption. No doubt the ~ 103 - specification of the sub-agency as the source of the subsidy was prompted by the focus of the applicants for review upon the tied sub-agency restriction. But logically, any required subsidy to the delivery function would be drawn from the newsagency's operations generally, including over-the-counter retailing. There was no dispute as to the concept of cross~subsidy, namely, a shortfall in revenue to cover directly attributable costs of the delivery function. Nor was there any dispute as to the relevant categories of costs - mainly delivery wages, wrapping and computer costs - nor that an allowance was appropriate for extra business generated when a delivery customer came in to make arrangements or to pay the bill. As to the evidence, Mr Prowse was unwilling to say that the cross-subsidy of home delivery was greater than "a small amount". Mr Killingbeck tabled calculations comparing the gross profit margin from home delivery with the direct costs incurred for typical home delivery runs of 300, 400 and 450 homes. In each case there was a positive contribution to the general shop overheads. In addition a detailed analysis of gross profit figures for 40 newsagencies recently sold was tabled by the NCV. Putting the evidence together, it is clear that the different territories have different revenue patterns, giving - 104 - rise to some variation in the contribution made by each category of business to covering general newsagency overheads. In the typical case, there is no cross-subsidy of home delivery, although it is conceivable, as Mr Prowse pointed out, that there could be "some small general stores" that would find delivery uneconomic. Further, within the one delivery territory, there may be instances of some delivery customers "cross-subsidizing" others, in that an element of averaging takes place. But then we reflect that an element of averaging of revenues and costs is very common in retailing generally, in that it is not worthwhile to make the calculations and charge each customer separately. So we have concluded that there is no significant cross- subsidy of the delivery function. What this means is that there is no necessity to compel home delivery upon a reluctant newsagent. However, Mr Killingbeck was keen to emphasize that an average newsagent could not live on the profit (i.e. the contribution margin) from delivery alone - a reminder that we need to address the question on a more fundamental basis of, hypothetically, what might happen to the home delivery function were authorization for the system to go. We do not find the need to predict in any detail how the delivery function might be organized were there greater reliance upon the incentives of the marketplace. We are content to say - 105 - that, on all the evidence, it is inconceivable that either publisher, acting independently, would fail to promote home delivery. For it is the loyal delivery customers who give stability to circulation, reassure the advertisers and have no "returns",. There may be extreme cases of distant home delivery customers for whom differential charges are appropriate. We do not discern any reason, in today's world, for: newspapers to be treated any differently from other categories of merchandise in this respect. What does need careful consideration, on the other hand, is the efficiency contention - the contention that home delivery is most efficiently organized under the present system. We will shortly consider this. Targeting readership for advertising inserts (see iii above) This contention appears to be new. We considered it briefly earlier, but now add findings which are relevant under the present heading. Certainly the 1982 authorization was not based upon a benefit of facilitating advertising inserts. The claim was first made in the NCV's Reply to 7-Eleven's Statement of Facts and Contentions as follows: "60-70% of the income of HWT and DS is derived from advertising. A breakdown of the territorial system would jeopardise this income base and therefore would impact on both the cover price of newspapers and the cost of maintaining the home delivery system. Both HWT and DS consider that advertising revenue will - 106 - increasingly be determined by their ability to insert advertisements which are targeted to particular geographical and demographic areas. fhe recently completed Plant of HWT at Westgate, Melbourne has been specifically designed to enable advertising of this kind to be inserted into HWT's newspapers and to_ create regional editions. The ability of sub- agents to acquire newspapers from other areas would mean that the publishers would be unable to guarantee that advertisements would reach the target audience. Indeed, such advertisements could even reach the wrong target audience. The result would be to seriously undermine the publisher's revenue base." Much evidence and argument was devoted to this contention, but in the end we have concluded it has no substance. The first question raised is the size and variability of the targeted areas. The evidence was that the targeted areas would be lIlarger than the individual territories. The delivery trucks of the publishers cater to more than one authorized agent (typically, 8 or 9) and their runs can be varied according to circumstances. Next there is a concern about possible uncertainty as to the identity of the readership were channels of supply to be freed up. We think this possibility should not be overstated. Were the system to be freed up, stable supply relationships would doubtless develop on the basis of contiguous geographic areas. We also note that the use of advertising inserts is a modern trend introduced overseas where very different distribution systems have been able to accommodate the - 107 - practice. In any event, we accept the submission of counsel for 7-Eleven and for AACS that it would be inappropriate to allow the publishers' desire to add to their advertising revenue by the use of advertising inserts, to dictate the preservation of the current rigid supply relationships. Extreme perishability of the newspaper product (see iv ' above) Earlier we described the problems posed by this characteristic of the product. The problem is exacerbated by variations in daily demand and the necessity for daily print runs. There is a requirement for the utmost speed and adaptability and for low returns. We think there is real substance in this claim and defer its consideration, along with route economies in home delivery, to a detailed examination under the heading of "Efficiency Effects". Newsagents' proprietary rights as protection against "freeloaders' cherrypicking" (see v above) Professor Officer suggested that the territorial monopoly given to newsagents was akin to the franchise that protects some categories of retailer from undesirable free-riding. In his statement he said: - 108 - "Territorial franchises enables security to undertake investment and develop a territory. Less than satisfactory levels of investment in delivery networks or promotional activities by retailers in a market without territorial franchises may occur either due to the existence of fixed costs or due to external effects associated with those activities." However, Professor Officer in oral testimony said that this was a speculation based upon general considerations which should be tested against the publishers' evidence. There was in fact no direct evidence to substantiate this possibility. Our general impression is that it is the publishers who engage in promotional activity. Encouragement of smal} business (see vi above) In our view, the issue is not whether small business would survive were the present system to be modified or dismantled; the issue is rather what kind of small business might be encouraged to exist. The Commission's initial determination on the S.A. newsagency system (Advertiser Newspapers Ltd [1988] ATPR (Com.) 50-071) gave particular attention to this issue. 'Two of their comments bear quoting: "While the monopoly minimises the need to respond [to market forces], the restrictions imposed upon these businesses also limit the ability of a newsagent to - 109 ~ respond to market forces even if the newsagent should wish to do so." (at 57,288) "Whilst the system tends to protect those small businesses within its ranks, it operates to inhibit other small businesses from progressively expanding their operations or from otherwise responding to market forces as they see fit (beyond the point that the system allows)" (at 57,295) Were the system to be modified or abandoned, we do not doubt that there would continue to be a large role for retailers located close to the consuming public, stocking a wide array of newspapers and magazines as part of their core merchandise. Indeed, the evidence is that some 87 or 88 look- alikes have prospered, even though required to exist on a commission of 124%. What would be different is that retailers would enjoy greater freedom to respond to market forces. One country newsagent who gave evidence was invited to imagine what it would be like in a free market situation. He said: "In a deregulated situation I'm now allowed to consider myself. I'm not there basically for the public interest." There are issues here, not only of efficient response to market forces, but also of equity. It seems to us that commercial freedom is a value neglected by the present system -in relation to the newsagent as well as, most obviously, the sub-agent. - 110 - That many sub-agents must be dependent upon a direct competitor for supplies is not only inefficient, as giving rise to distorted incentives; it is also inequitable. The convenience stores themselves are a new field of small business opportunity whose growth is inhibited by the newsagency system. 7.4 Efficiency effects in the present system We have carefully considered the evidence and accept that there are substantial efficiencies to be gained by each publisher adopting some form of territorial exclusivity, both in primary distribution to retailers and in home delivery. In primary distribution the need for speed, adaptability and control of returns by information systems makes a telling case for some form of territorial exclusivity. As for home delivery, there are undoubtedly economies in having a single vehicle running down the one street. Yet this is not to make the case for a joint distribution system, as we will spell out in the remainder of this section. It was submitted on behalf of VANA that a joint system enables: "(a) cost savings associated with the avoidance of duplicate territorial systems and, in particular, a low cost and efficient home delivery service; and - 111 - (b) the widespread availability of publications in terms of the range of publications, the number of outlets at which they are available and the times of availability." As to (b), there is no explanation as to why an elaborately designed contractual system enforced by sanctions of the two publishers is required to ensure that their products are widely displayed in the same shops. We have already rejected this "widespread availability" argument. But we need to give closer attention to (a). It has two aspects: the home delivery system and the sub-agency system. No doubt there is an avoidance of duplication in the home delivery function; and we were at first inclined to think of home delivery as a natural monopoly (in the sense of one supplier being able to deliver at lowest cost). But it became apparent that this can only be true if the assumption is made that territorial boundaries and modes of delivery need never be changed. Under the system, the delivery run is confined by the largely historically determined boundaries of the newsagent's territory, and there was compelling evidence of the enormous difficulty experienced in attempting to rationalize the inner metropolitan zones. We were told, for example, of the situation in Sydney Road, Brunswick/Coburg, where there remain 13 newsagents over a distance of 4 kilometres, a legacy of the days of six o'clock closing, evening newspapers and paperboys. As Mr Killingbeck put it, - 112 - "Those days have changed but unfortunately those newsagencies haven't changed with them and they've still remained in the tight territories that they had at that time." In the United States with individual publishers organizing their own distribution there can be multiple deliveries along the one street. Our attention was drawn, too, by Mr Samaras' evidence, to the old-fashioned techniques that are still being used. He detailed the benefits available from greater use of central computer programming for delivery scheduling, subscriber information and billing. It seems that competition in home delivery could promote efficiency. As to the sub-agency system, again there is avoidance of duplication through both publishers being reliant upon the one newsagent to supply all sub-agents within the one territory. But again it is an inflexible system, one that has difficulty in accommodating new forms of retailing such as supermarkets and convenience stores. It is the rule so far as the newspapers are concerned - the magazine publishers are prepared to be more flexible - that new forms of retailing must be classified as sub-agents and thus be dependent upon the one source of supply, often a competitor, for supply at pre-arranged commission. There is little room to depart from this rigid structure or to experiment with new structures. to meet changing circumstances. - 113 - The burden of the evidence of Mr Withers (Chairman of 7- Eleven) was that the structure of retailing is changing; he is trying to develop a new style of convenience retailing, one that might have a place alongside the large supermarkets; but he finds it impossible to achieve the kind of flexibility in arrangements for supply that will enable him to compete on suitable terms in the new world. When asked what his motivation was in making his application for review, he said "to get out of the sub-agency trap." When Mr Prowse extolled the virtues of the present system - "rather like a military operation" - it seems he was thinking of its virtues as a physical distribution system, using a largely invariant distribution structure. Yet it must be recalled in this context that the 25% commission given to newsagents represents the cost of this element of the distribution system (i.e. in addition to the cost of the independent contractors employed by the publishers) - a cost, moreover, which automatically rises with the increasing cover price. It is a high cost; it may be a necessary cost; but we do not know because it has not been put to the market test. The publishers described the system as "very efficient", but they had their own concept of efficiency in mind - a command system that responds to the imperatives of the task of physical distribution and simplifies administration. But in the context of the Act, efficiency as a benefit must mean - 114 - obtaining the best use of society's resources. Using the language of QCMA (at 17,245), an efficient system is one that would deliver "the kinds of goods and services the community wants ... supplied in the cheapest possible way", recognizing that both the composition of output and the organization of supply must be responsive to changing demands and conditions of supply. Professor Officer said that the publishers' profit motive can be relied on to design an efficient system and to adapt it to changing circumstances. We do not agree. In our view, such a tight system of interlocking horizontal and vertical restraints of its very nature must inhibit adaptation to a changing environment - whatever the publishers' motivation may be. Also, change must be negotiated - which must inhibit change. In any event, the common 25% margin is always there ~ to be paid by the publisher whatever the possibilities for efficient restructuring and cost reduction. We would expect the costs of the system to rise to the level permitted by the margin available. In short, it is a system driven by rules and regulations rather than by incentives. There are few prizes, indeed opportunities, for independent innovation. There is another mechanism at work that serves to perpetuate the current structure of newspaper distribution. This is the NCV formula for the calculation of goodwill upon sale of a newsagency, a "trusted formula" as Mr Prowse put it, - 115 - accepted by banks and other financial institutions as the basis for loans to these small businesses. The applicants for authorization were keen to emphasize that there is no longer a requirement for sales to take place at the NCV valuation, but we were not surprised to be told that the market price of newsagencies is quite closely related to the NCV valuation (though somewhat above it). As we earlier explained, the assessment of goodwill by the NCV is a systematic and detailed procedure that places a higher valuation on gross profit earned from newspapers and magazines than from other strands of the business. In our view the very existence of these elaborate calculations and the reliance of financial institutions upon them introduces a bias into newsagency operations which can then be viewed as an organization to maximize goodwill as calculated by the NCV, rather than the capitalization of future profits arising from competitive activity. In answer to the Tribunal's questions Mr Prowse said: "really we do not want newsagents taking their eyes off the ball and the ball to us is newspapers and magazines and some other articles like cards and paperbacks and stationery. So, the weight has been in there so that when they come to think about their business plans and their day- to-day operation, that they concentrate on newspapers and magazines ... It is a 'trusted formula' arrived at over the years." - 116 - Question: "But it also represents, does it not, the profile of the kind of person you are looking for and therefore that is a reason it} could be of interest to financial institutions?" Answer: "Yes, it does." There is another consideration. The three modes of distribution for newspapers and magazines - home delivery, Supply to sub-agents, newsagency retailing - have been created and are enforced by the publishers' agreements. The coincidence of the three functions in the one enterprise has not been subject to the market test. It has been protected by the grant of territorial monopoly which finds only partial justification in public benefit. As Professor Williams said there is no reason to expect that optimal scale for each of the three functions would coincide in that one establishment. Further, the evidence was that there is a diversity in the contribution to profit made by each of the functions in different geographic areas; yet each territory is locked in to the same three-fold structure. Furthermore, there is no reason to expect that the three functions would be perpetuated in light of changing tastes and technologies if subjected to Market forces. - 117 - There was very general agreement amongst witnesses from all sides that there is a need for the development of delivery-only newsagents ("delivery specialists"); a need to consolidate some old newsagency zones; a need for a mechanism that would improve supply to look-alikes and other non-~- newsagency outlets. But there was disagreement as to whether the revisions envisioned by the Commission's 1993 determination could be the vehicle for a desirable and sufficient process of change. In sum, the benefits and detriments of the newsagency system are two sides of the one coin, in that both flow from the restraints of the system. From some viewpoints an element of benefit appears only to be swallowed up by the offsetting detriment - the excesses of a territorial distribution system that blankets a whole industry. Our overall assessment is that the system is inefficient. 7.5 Anti-competitive detriment In the present context, anti-competitive detriment refers, in the language of s. 90(6) to "the detriment to the public constituted by any lessening of competition that would result, or be likely to result" from the system under examination. As with the assessment of benefit we give the characterization of the "detriment to the public" a wide ambit, namely, any impairment to the community generally, any harm or damage to the aims pursued by the society including as - 118 ~ one of its principal elements the achievement of the goal of economic efficiency, in the sense we have adopted. We find that there are two major classes of detriment: inefficiency . denial of commercial freedom and economic opportunity. That this is the case must be abundantly clear from the preceding paragraphs. At this point we highlight in encapsulated form the nature of the detriment that flows from the present system. 7.5.1 Inefficiency As with the identification of benefit, we take a "with and without" approach, seeking to identify the likely outcome were the system not to exist; yet we can foresee likely results only broadly because the precise outcome must be determined by the working of market forces. It is one of the functions of the competitive market, here denied operation, to discover "the kinds of goods and services the community wants supplied in the cheapest possible way". The inefficiency stems, at base, from the following facts: the somewhat muted competitive environment; the horizontal agreement between the newspaper publishers largely not to compete in the distribution function; the rigidities of - 119 - the highly integrated system they employ; and the substitution of rules, regulations and committee processes for market incentives. Accompanying the rigid margins, the rules and regulations, there is a standardized and inflexible newsagency service, focused upon the three functions of delivery, shop selling and sub-agency supply. The style of retail shop is governed by the publishers' criteria. Newsagents must be selected by the NCV and respond to the weighting of the various items in the goodwill calculation. The scale of the shop is constrained by the need to accommodate the other functions within the defined territorial boundary. Alternative styles of retailing to the newsagency have aifficulty in obtaining supplies on suitable terms. All this flows from the fact that the newspaper publishers operate a private licensing system that creates high barriers to entry, determining who shall enter retailing and in what capacity. For the delivery customer faced with poor service, or inflexibility in delivery arrangements or billing disputes, there is no choice of supplier. For consumer sovereignty there is substituted a complaints system of very doubtful utility. We were told that there are few consumer complaints in fact. In all the circumstances we take that as an indication, not of consumer satisfaction, but of consumer submission. - 120 - One example of the standardization of service is the trading hours of the authorized newsagent, to a large extent determined by the delivery function. Subject to exceptions (from location in shopping centres and trading in Tattslotto) there is a commonality of closing time: about 6 or 6.15pm. One obvious reason for this is that the newsagent, under the current system, must be tired from the need to rise at 3.30 or 4am in order to commence delivery at 5.30am. So much for the characteristics of the retailing service as perceived by the consumer. Turning to the organization of supply, the outstanding fact is its rigid and historical structure as reflected in the specification of functions, limitations upon scale, and double~handling as between agent and sub-agent. Much of this rigidity is claimed to be justified by the provision of "low-cost home delivery", yet we have found that the system has built-in disadvantages in performing the delivery function, namely, the inflexibility of territories, the tie of home delivery to other newsagency functions and the limited access to modern information and control systems. Finally, we review the performance of the system from the standpoint of dynamic efficiency. This is perhaps' the outstanding detriment. It arises from the perverse structure of incentives, the rigidity of system design, the need to negotiate change in the publishers' joint interests. We refer - 121 - not just to the insulation of the system from new techniques of physical distribution, but also to new forms of retailing. It is striking that, whereas in so many fields of retailing over the last 30 or 40 years there has been a revolution in retailing forms,, the newsagency trade remains the same. 7.5.2 Denial of commercial freedom and economic opportunity We were told that there is no shortage of people wishing to become newsagents. Yet it is a hard life, in many ways, driven by the need to maintain or increase goodwill according to the publishers' formula. There is only a restricted range of business decisions open. There is forced supply to sub- agents who may well be competitors. There are built-in limitations upon the scale, functions and merchandise range. A newsagent may operate no more than three stores. There is limited opportunity to innovate. The only alternative form of retailing represented before the Tribunal was the convenience stores, but we bear in mind that their complaints are of wider application. The essential complaint of the convenience stores is the denial of economic opportunity that is associated with the system. They say, in the words of counsel for the AACS: "There is no choice of supplier; supply is most often sourced from a potentially competing retailer; there is no flexibility as to terms of supply; and sub-agents' commission is effectively non- - 122 - negotiable." The Tribunal concludes that alternative forms of retailing - and not just the convenience stores - are denied the opportunity to discover, and to demonstrate, what they are capable of achieving. The Tribunal had before it a lengthy tabulation of complaints from 7-Eleven sub-agents regarding supply and service from authorized newsagents, the newsagents' replies to the specific allegations and the 7-Eleven responses to these replies. Whatever the substance may be in any particular allegation, it is clear that the essential problem the tabulation reflects is that the sub-agents have no alternative source of supply, and that supply is often in the hands of a direct competitor. 7.6 Defensible elements of the system We use the phrase "defensible elements" to refer to those elements of the system which we judge could be so designed and implemented so as to yield net benefit. We have concluded that some vertical restraints of the publishers could be defensible if they were not designed, implemented and enforced by the horizontal agreements (extending to "understandings") that we have described. In such an alternative world, any prospective industry body would have vastly different functions from those presently undertaken by the NCV. The Rules of the NCV and the standard - 123 - contracts would go. Also, VANA would be restricted to normal trade association functions (which could require authorization by the Commission). There would be a danger, that need not be spelled out, that VANA could be used as a pivot for reconstruction of the system through parallel agreements with each of the publishers. More concretely, we find that a form of territorial exclusivity for each publisher's delivery elements could be justified, if designed and implemented independently. That might be thought to be difficult, given the long history of association of the publishers. But there are forces for change in the external environment; and the abandonment of the formal apparatus of the system would be an important force making for change. These delivery elements could include initial contractors; and second level delivery operators from depots (for home delivery and possibly small retailers). These second level operators could be delivery specialists or distributors with wider functions. In no way do we seek to design a delivery system, only to indicate what could prove defensible under the procedures of the Act. We would not rule out the possibility that each publisher might choose to use the same second level delivery operators upon occasion, whether or not for the same territories. - 124 - In this alternative world, there would be many retailers with no delivery function, and therefore little basis for a distinction between agents and sub-agents - indeed for any agency status at all. In such a case the publisher might well prefer to undertake direct supply to all retailers of any size through its own contractors. In any event, it would be undesirable for any category of retailer to be dependent upon a competitor for supplies - or for a retailer to be forced to supply a direct competitor. It is unwise to be too specific when merely speaking of the "defensible elements" of an alternative system. We would think, however, it would be difficult to make a case for any restraint upon one retailer's obtaining supplies from another. 8. LIKELY BENEFIT AND DETRIMENT FROM THE 1993 DETERMINATION 8.1 The 1993 determination The 1993 determination was supported by the NCV, VANA and the Commission before the Tribunal. Though there were differences in emphasis, the broad position of all was that the 1993 determination would authorize conduct likely to enhance public benefit and diminish anti-competitive detriment. The comparison made was between the proposed arrangements and the state of competition that would exist under the existing authorization. We accept that this is the appropriate comparison. In particular, we take as the base the benefits and detriments we have found to result from the ~ 125 - operation of the present system and ask whether the proposed changes would be likely to effect an improvement in terms of net public benefit. The changes envisaged to the present system are of two types: amendments to the formal agreements (the NCV Rules and the standard contracts) and assurances by the newspaper publishers of the way in which decisions will be made. In their joint application to the Commission the newspaper publishers, the NCV and VANA stated: "The proposed changes, particularly by permitting the development of delivery specialists and the direct supply by the publishers to all categories of retail outlets in a newsagent's territory, will lead to even greater efficiencies and to increased competition between newsagents and other outlets. At the same time, the restrictive aspects of the present arrangements will be reduced, as there will no longer be any Council control over the shop aspects of shop/delivery newsagents, or over shop only newsagents, the limit on the number of newsagencies that can be owned is to be removed, and newsagents are to be a party to decisions as to maximum home delivery fees. The parties do not see such changes as being required to meet any changes that have occurred in the industry over the last ten years, rather they are to meet the perception of the Commission that such changes will further enhance the current system." ~ 126 - The Commission's authorization was largely in the terms proposed by the applicants with one significant addition relating to unsatisfactory service to sub-agents. We now summarize the changes envisaged in a way that will highlight the amendments to the Rules (and contracts) and the assurances given by the publishers as to future conduct. For the most part we draw upon the language used in the application to the Commission. We emphasize that what follows are the changes envisaged by the applicants for authorization, not by us. Direct supply for look-alikes From a formal point of view, the Rules have always permitted the publishers to supply sub-agents directly, other than look-alikes (described in the Rules as a "business clearly identifiable as a newsagency specializing in the sale by retail of a wide range of newspapers and magazines except for railway and airport bookstalls"). It is proposed to remove this restriction in the Rules. "The publishers have given assurances that they will carefully (and individually) consider all such applications favourably if commercially viable" and that "they will be flexible in relation to the amount of commission allowed". There would be a transition period of 2% years within which compensation would be required from any such look-alike - 127 - to the affected newsagent. Separation of delivery rounds Newsagents would be free to dispose of their delivery rounds, provided that the purchaser is approved by the NCV: "Each publisher will individually decide on the terms on which they will supply such newsagents." The shop-retailing function to be freed from control by the NCV The NCV asserted, and the Commission accepted, that an effect of the new arrangements would be to free the shop- retailing function from control by the NCV. Removal of restriction on chain operation The prohibition on a newsagent owning or having an interest in more than three newsagencies would be abolished, but the chain would be subject to the approval of the NCV. Service to sub-agents The Newsagency Agreement would contain a requirement that the newsagent "properly and efficiently service" sub-agents in the territory. Establishment of a delivery fee committee This proposal would operate largely to formalize current practice in determining maximum delivery fees. The committee - 128 - would consist of equal numbers of representatives from the publishers and VANA, and would be chaired by the Appeals Tribunal who would have a casting vote. The Rules would be amended to provide that the maximum delivery fee is to be determined by this committee, rather than "the publishers". Commission condition regarding unsatisfactory service to sub- agents The rule governing territorial exclusivity should be modified to provide that "if the Council is unanimously satisfied that a newsagent has failed to properly and efficiently service a sub-agent, and has continued. such failure after fourteen days' written notice from. the Council requiring him to rectify the problem, then providing a neighbouring newsagent is willing to service that sub-agent, the Council shall give its written approval to such neighbouring newsagent to supply the publications to such sub- agents". 8.2 Tribunal's assessment We now turn to our assessment of the proposed changes. The most striking feature of the proposals is how little the essential structure of the newsagency system would be changed. It would remain largely a joint distribution system administered by the NCV. The Rules of the NCV, the standard contracts with newsagents and sub-agents, would remain. - 129 - Exclusive delivery territories would remain. Sub-agents are still to have no choice of supplier, apart from the possibility that the NCV might effect some relief from an unsatisfactory newsagent. What change there might be would be determined and administered largely by the NCV. There is no movement towards what we have termed the defensible elements of the system. There is nothing to motivate the newspaper publishers to compete in the distribution of their product. Next we note the permissive quality of the changes to the Rules and the standard contracts authorized by the 1993 Determination. In its Summary of its determination, the Commission lists the respects in which the new provisions would "allow" changes to the system. When challenged on this point in the Tribunal, counsel for the Commission said: "At least the gates are open." Another feature is the manner in which authorization would place reliance upon the NCV and the publishers' disciplinary procedures rather than upon market sanctions. The Commission writes in its determination of the manner in which home delivery obligations are: "supported by a commitment from publishers to discipline newsagents who do not meet their obligations. Every instance of a home delivery customer who justifiably complains against an authorized newsagent detracts from the system. The Commission is satisfied that the publishers' commitment to discipline newsagents who do ~ 130 - not comply with their obligations should satisfactorily clear up problems and ensure realization of public benefit." As regards sub-agency supply: "There is now a commitment from publishers that where appropriate, they will issue instructions to newsagents to remedy problems relating to account formats or commissions. The commitment from publishers and a structure for the Council to exercise its power to approve cross territory supply in response to problem situations would be expected to place greater pressure on inefficient newsagents to perform." Yet, having noted these features, we turn to what must be the question for the Tribunal, namely, whether the proposed changes would nevertheless give rise to an improvement over the existing system. The applicants for authorization accepted that the present system is anti-competitive. They claimed that the changes to the system would lead to a reduction in anti- competitive detriment. To some extent they were pointing to a likelihood of increased competition. This they predicted would occur between the look-alikes (with improved supply) and the authorized newsagents, and between delivery specialists and over-the-counter-retailers. To some extent they were relying upon an amelioration of the detriments associated with limited competition through the various disciplinary measures - 131 ~ that, it was said, would be instituted by the publishers and the NCV against recalcitrant newsagents. Some public benefit was also claimed. First, they pointed to the manner in which the amalgamation of delivery rounds could give rise to efficiencies. This would come about from specialization in the delivery function, economies of scale from combining territories, and adjustment of territory boundaries to changed circumstances. They envisaged the possibility of trade in delivery franchises which would be a force, in itself, for increased efficiency. In our view the applicants' claims reflect an appropriate perception of some important defects in the present system. But we are sceptical as to whether the claims are likely to be vindicated; and we are troubled that a degree of success could inhibit the development of a less restrictive alternative. Counsel for the Commission placed most emphasis upon two lines of argument. First, there was the claim that these proposals would give rise to "measured change" (cf the determination at 10.1). Alternative expressions were "phased change" and "managed change". By this it was meant that the authorization would be essentially a transitional phase on the way to a restructuring of the kind envisaged in the Hilmer Report. - 132 - The claim was rejected, not only by 7-Eleven, but also by the NCV. Counsel for 7-Eleven said this could not be a proper characterization in that the authorization would be of indefinite duration and, further, there had been a failure to identify the mechanism for phased change. We accept this submission. In any event, at the commencement of the proceedings counsel for the NCV roundly rejected any such characterization: he said there is benefit to the public from the very existence of the system whose operation would be enhanced by the proposed changes. Given this belief, it would be unreal to characterize the 1993 authorization as facilitating "phased change" to a deregulated industry. The second line of argument is more weighty. This was the contention that precipitate change to the current system would likely result in hardship and economic detriment to existing newsagents. The determination expressed the point thus: "the authorization of the applications will introduce necessary change in a measured way which will allow for a period of adjustment for this industry, which is characterized by many small family businesses". There is a particular concern to protect, at least to a degree, the goodwill of existing newsagency businesses. The Tribunal has given careful thought to the importance and relevance of this consideration. We have reached the conclusion that it is not a persuasive argument for preserving - 133 - the newsagency system for an indeterminate period; nor is it persuasive in support of the 1993 determination. We have come to the conclusion that the existing newsagency system is a shackle upon the capacity of the authorized newsagent to adjust to the present world - and the world that is unfolding. There have been enormous changes in market circumstances since 1980-82: the rise of television; the demise of the evening paper; shifts in the structures and forms of retailing; the emergence of significant newspaper outlets outside the authorized newsagency system; shifts in public attitudes; and shifts in public policy on competition issues. The newsagency too must change; but in a way, and by a process, different from that envisaged in the applications for authorization. In such a case it could be appropriate to build in a period of adjustment, albeit one that is strictly limited. 9. Conclusion We are not satisfied that there would be any benefit to the public from the proposed changes to the newsagency system. We further find that the applications would be likely to give rise to anti-competitive detriment as compared with a continuation of the present system. The present system, in turn, gives rise to severe anti-competitive detriment as compared with the circumstances that would likely prevail were - 134 - the system not to exist. The 1993 determination purports to be directed to providing for the future, but a confirmation of its terms would serve to entrench a system that is increasingly anachronistic. The present system is subject to considerable tensions and pressures for change. The proposals for variation of the system would have the effect of patching up a system that is ripe for fundamental change. In our view, also, the consultative practices endorsed by the 1993 determination would reinforce the joint market power of the newspaper publishers exercised through the NCV. The result of our determination is that the 1982 determination will stand unless and until it is revoked by the Commission. The present system has been in operation for many years and there has been clear change in some material circumstances since the 1982 determination. We realize that for changes to be introduced overnight to completely remove the present problems of anti-competitive detriment would be difficult and possibly cause injustice. In any regime of deregulation some parties will claim that their commercial interests will be damaged. Nevertheless, public policy will require that deregulation shall proceed in an orderly manner. In our view and on the basis of the material before us, the interests of public policy would be met if the - 135 - present bad features of the newsagency system are removed within approximately three years. In these circumstances it is unnecessary to consider the question whether interveners should be entitled to become members of the NCV because it does not arise in the light of our declining to grant authorization. The Tribunal sets aside the 1993 determination of the Commission. I certify that this and the preceding one hundred and thirty~four (134) pages are a true copy of the reasons for decision herein of the Trade Practices Tribunal. Associate E hyahotth Pe Ke Dated: 11 November 1994 Counsel for Queensland Newsagents Federation Mr P L O'Shea Solicitors for Queensland Newsagents Federation Hunt and Hunt oe Mr Styant-Browne & Mr M Walter Counsel for 7-Eleven Slater and Gordon Solicitors for 7-Bleven Mr J Gobbo Counsel for AACS - 136 - Solicitors for AACS Counsel for ACP Publishing Solicitors for ACP Publishing : Counsel for Eastern Suburbs Newspapers Solicitors for Eastern Suburbs Newspapers : Counsel for Gordon & Gotch : Solicitors for Gordon & Gotch Counsel for NCV : Solicitors for NCV : Counsel for VANA : Solicitors for VANA : Counsel for TPC : Solicitors for TPC : Dates of Hearing : oe Date of Judgment Cornwall Stoddart Mr Taperell G Q Taperell Mr DM Yates Gilbert & Tobin Mr R D Strong Mallesons Stephen Jaques Mr C M Scerri Freehill Hollingdale & Page Mr A Kuhn Arthur Robinson & Hedderwicks Mr B J Hess Austrlaian Government Solicitor 4, 5, 6, 7, 11, 12, 13, 14, 15, 19, 20 July 1994 11 November 1994 tt Att Witnesses - In order of examination Anthony Raymond Prowse Circulation Director of Herald & Weekly Times Chairman NCV Daryl Michael Fedden ; National Circulation, Sales and Marketing Manager of Gordon & Gotch Limited Alan Gordon Lyons Circulation Manager of Syme ("The Age" etc) Director of NCV Charles Wallace Killingbeck Field Service Manager VANA Lindsay Albert Hathaway Authorised Newsagents at Traralgon Magdi Batty Authorised Newsagent at Northvale Russell George Withers Chairman of 7-Eleven Stores Pty Ltd Mr Samaras General Manager of the Canberra Times Broderick Ivory National Marketing Manager of Quix Stores Ian Malcolm Burns National Merchandise Manager BP Australia Mr Walsh Managing Director and Publisher of ACP Publishing Dr Philip Williams Assistant Director and Reader in Economics, Gradutate School of Management, University of Melbourne Professor Robert Rupert Officer AMP Chair of Finance & Deputy Directorship of Melbourne Business School James Leslie Longmire Senior Lecturer Economics, University of Queensland Alan Donald Farquhar Director of Farquhar Associates Pty Ltd Urban Research Consultant Statements of Persons who were not called as witnesses Kenneth Garr: r Chief Executive Officer af QNF Ro Dean Newsagent; Chairman, Board of Directors, QNF h rm Professor of Sociology, University of Queensland Clement John Lloyd Professor of Journalism, University of Wollongong Peter Dimopoulos Co-owner of 7-Eleven Franchise, Heidelberg Irene Helen Zeitler Solicitor for NCV Barry Th n Executive Director AACS Jeffrey Rogut National Merchandise Manager of Shell House Peter Matthews Merchandise Manager of Ampol Road Pantry Stores Laurence Bain Fredolin Hi Franchisee of Food Plus Convenience Store, Belmont Davi illiam_ McKern: Franchisee of Shell Store, Kew rl John Stillman Franchisee of Ampol Road Pantry Store, Springvale raeme Clive Ox] Manager of Authorised Newsagency, Heidelberg Neil Chandler Authorised Newsagent at Croydon Rodn n Authorised Newsagent at Balwyn West Murray James Monteith Authorised Newsagent at Belmont Summary of Commission determinations Attachment B State Authortsation Dratt Final ATPA Parties number issued issued ralerence NSW/ACT A15421-A15423 §.2.79 7.2.80 (1980) ATPR = John Fairfax & Sons Lid (Fairfax) A15425-A15426 . (Com} Associated Newspapers Lid A15605 935-200 Mirror Newspapers Ltd ; Nationwide News Pty Ltd =. NSW/ACT A30092 22.12.83 26.4.84 (1884)ATPA Australian Consolidated Press Pty A30093 {Com) Lid (ACP} 950-070 News Lid (News) Newsagents Association Victoria A90368 3.12.81 284,82 (1982) ATPR The Harald & Weekly Times Lid {com) David Syme & Co Ltd 50-035 The Victorian Authorized Newsa- gents Association Tasmania A4782 30.11.83 9.5.84 (1984) ATPR The Mercury Newspapers Pty Lid A4937 {Con} 150-072 Tasmania AS001 30.11.84 62.85 (1985) ATPR + The Advocate Newspaper Pty Lid N90021 (Com). 450-089 Tasmania * A5010 3.10.85 = 21.11.85 (een) ATPR = The Examiner Newspaper Pty Ltd AS013 Com) ASO16 q50-099 A5O18 NS0054 Queensland A2061 26.7.85 18.10.85 (1985)ATPR Queensland Newspapers Pty Ltd A2064 (Com) Mirror Newspapers Lid A2089 qs0-097 ACP Fairfax Newsagents Cooperative Western A102 1.11.85 30.1.86 (85-86) West Australian Newspapers Ltd Australia ATPR ACP con) TVW Enterprises Lid (The Western 50-108 Mail} Nationwide News Pty Ltd Fairfax Newsagents Association Sevth . AGO32_ 23.12.87 30.3.88 (1988) ATPR Advertiser Newspapers Lid Austalia A6042 (Com) Nationwide News Pty Ltd 480-071 Advertiser-News Weekend Publishing Co Pty Lid (ANWP) ACP Fairlax Newsagents Association South A90487 30.6.88 14.11.88 (1988) ATPR Companies owned by News Ltd: Ausvalia AS90488 (Com} Advertiser Newspapers 450-083 ANWP * Gordon & Gotch Ltd ; Nationwide News Pty Ltd trading re as Southdown Press g South A60014 10.7.89 21.8.89 (1990) ATPA ", Australia A60015 (Com) The News (SA) Lid iy 150-088 ACP 5 Fairtax Newsagents Association G0! Fairtax publications in South Australia +g Thesa determinations dealt with amendments to the system dealing with the appointment of sub—agents these applications related only 1o the substitution of Jahn Fairtax Group Pry Lid for John Fairtax & Sons Lid as the disirioutor