Proposed acquisition by Clear Channel UK Limited of Score Outdoor Limited

No. ME/1290/02

A report under section 125(4) Fair Trading Act 1973 on the advice of the Director General of Fair Trading, given on 16 July 2002, to the Secretary of State for Trade ad Industry under section 76 of the Act.

ASSESSMENT

Jurisdiction

The merger satisfies the share of supply test in respect of the supply of large billboard advertising.

The parties

Clear Channel UK Limited (Clear Channel) is active in outdoor advertising, with brands such as More O'Ferrall's billboards, Adshel, Squares and Taxi Media. Clear Channel is part of Clear Channel Communications, an outdoor advertising, radio and entertainment company. The principal activity of Score Outdoor Limited (Score) is large billboard advertising in the UK.

Relevant market

The parties overlap in the supply of outdoor advertising.

Outdoor advertising comprises a variety of formats that differ in size and location. These formats and their sizes include: roadside (96, 48, 32, 16 and 6 sheet size panels); transport (96, 48, 6 sheet size panels and non-standard sizes at railway and underground locations, airports and buses); 6 sheet size 'point of sale' panels at supermarkets and shopping malls; and ambient media (petrol pumps, nozzles, posters, screens etc).

Poster advertising involves interactions between several types of player. Site owners rent their land to poster contractors (such as the parties), who own the billboards. Outdoor specialists act as agents purchasing advertising space from poster contractors on behalf of advertisers. Finally, advertising agencies employ the outdoor specialists to fulfil their advertising campaign briefs.

Market definition

Given the variety of outdoor advertising formats that exist, and the extent to which at least some of them may be regarded as interchangeable, there are potentially a number of alternative frames of reference for considering the effect of this merger on competition.

Although many advertising campaigns use a mixture of sheet sizes, different sizes are often used to create different effects. For example, 6 sheet panels are generally used to build the frequency of adverts, and are often placed near the points of sale of the products they are advertising, while 48 and 96 sheet panels are generally used to create impact on sight. Different types of product also tend to be advertised on small (6 sheet) and large (48 and 96 sheet) panels.

The parties, and many third parties, are of the opinion that 48 and 96 sheet panel billboards should be regarded as comprising a single product market, distinct from that of 6 sheet panel billboards. We have adopted this distinction for the purposes of this case.

Geographic market

Approximately one-third of billboard purchasing is in the form of contracts for national billboard coverage concluded with a single supplier. Although some advertising campaigns are regional, there appears to be an increasing trend towards national campaigns. Both national and regional perspectives will therefore be considered.

Horizontal issues

While Clear Channel (through Adshel, one of its subsidiaries) has a 65 per cent share of supply in the 6 sheet billboard segment, the acquisition of Score would give rise to an increment of only 0.5 per cent. I do not consider, therefore, that the merger gives rise to any substantial competition issues in this segment.

The market for large (48 and 96 sheet) billboards in the UK is currently fairly concentrated, with four significant players. The merger would bring together the third and fourth largest players, with shares (by number of panels for roadside and transport formats) of 18.6 per cent and 10.3 per cent respectively (28.9 per cent combined). While two larger competitors, Maiden (34.2 per cent) and JC Decaux (29.4 per cent) would remain, the increase in concentration could raise competition concerns in the absence of mitigating factors.

The parties argue that the ability to offer facilities for national campaigns is becoming increasingly important. Customers often prefer to go to one billboard supplier for their national campaigns, rather than having to co-ordinate the campaign across two or more suppliers. This makes 'one-stop-shopping' a popular trend. At present, the parties' lack of adequate national coverage renders them unable to offer this feature and, as a consequence, unable to compete effectively with JC Decaux and Maiden, who do have the coverage to offer national campaigns. The parties contend, therefore, that the merger is pro-competitive.

Despite the above argument, it remains possible for advertisers to make up a national campaign through a portfolio of regional adverts, although there are higher transaction costs involved in putting together a campaign in this way.

Regional advertising remains an important feature of many advertisers' campaigns. The parties will have relatively high shares of supply in the Midlands, Lancashire, South West England, Wales and Central Scotland, although competition from JC Decaux and Maiden is strong in these areas.

Some third parties expressed concern about the parties' ability to use their relative strength in certain regions in order effectively to bundle billboard advertising across regions by forcing customers to buy a package of billboards that include regions they would not normally choose. Packages, however, are very common in the industry and are offered on both a national and regional basis. Clear Channel claims that buyers generally prefer packages as they are the cheapest and simplest method of buying outdoor media. However, it remains possible for advertisers to select individual panels, and/or panels in individual regions. In addition, many third parties have commented that packages are always negotiable and can be tailored to suit customers' needs.

Barriers to entry

The MMC's report in 1991 in relation to the acquisition by Avenir Havas Media SA of Brunton Curtis Outdoor Advertising Ltd (see note 1) noted that new entry was unlikely due to planning regulations that limit the number of new sites that can be erected. Since the report new entry has occurred, although mainly through acquisition. This includes JC Decaux and Score itself, as well as more recently, Van Wagner, a US company, who have set up primarily in London.

The parties claim however, that entry costs to the outdoor media industry on a regional basis are very low. A new entrant would firstly need to locate a suitable site for erection of a large billboard and secure a lease with the landowner. Entry at the level of three 48 sheet rotating panel billboards would cost an estimated […] in terms of capital expenditure. Operating costs of about […] would then yield a net income of around […] per annum. The parties acknowledge, however, that a 5 per cent share of the UK large billboard segment implies ownership of […] panels in volume terms or sales of […] (see note 2) in value terms.

Any new entrant on a national basis would also need to be able to offer a certain number of billboards in key regions, so there is a minimum scale efficiency requirement. Entry on a national basis would therefore not be easy, other than perhaps through acquisition.

Thus while it appears possible to operate as a poster contractor on a local basis with just a few sites, barriers to entry appear to be significant on a national basis.

Buyer power

Over 95 per cent of billboard purchasing in the UK is in the hands of six outdoor media specialists. These specialists have knowledge of the industry and should be regarded as sophisticated buyers. They also appear to be able to obtain volume discounts from the poster suppliers. Although these discounts can be based on total annual spend, they are also dependent on market conditions and can be individually negotiated. In addition, some outdoor specialists have told the OFT that they are able to negotiate the composition of different packages with the poster contractors. Thus there appears to be a degree of countervailing buyer power.

Collusion

There has been a history of joint selling agreements within the industry. In 1981, the MMC (see note 3) found that poster contractors had collectively marketed a number of panels that they would otherwise have sold in competition but accepted that some joint selling arrangements were necessary in order to meet the needs of the industry to facilitate national campaigns. The MMC recommended that the central selling agency that had been set up to enable advertisers to co-ordinate campaigns across the sites of several larger poster contractors, British Poster Limited, should cease to exist. In addition, the MMC recommended undertakings in relation to future joint selling arrangements. Since the publication of the MMC report, the motivation for marketing panels collectively has decreased significantly, given that large poster contractors are able to offer national campaigns independently.

Factors that would contribute towards a propensity tacitly to collude do not appear to be strongly evident, although substantial barriers to entry already exist at national level and symmetry of market shares will certainly exist post-merger. The differentiation in the quality of locations implies that even billboards of the same size on the same format will be differentiated products. There is little or no price transparency as actual prices are often individually negotiated and not reflected on the published rate cards. In addition, demand is highly seasonal and there is a degree of buyer power.

Vertical issues

No vertical issues arise as a result of this merger.

Views of the parties

In the parties' view there are a number of factors that contribute to providing customers with significant buyer power. First, outdoor specialists have substantial information on the location and quality of sites. Outdoor specialists are also able to negotiate the price and composition of packages. On the other hand, the poster contractors have a fixed inventory of sites and their ability to influence prices, through negotiation with their customers, diminishes the closer they get to a period when the relevant billboard space will be available. Finally, the parties argue that customers would switch to using other advertising media if they charged excessive prices.

The parties also commented on their inability to use bundling to coerce customers into buying sites in regions they do not want. They explained that customers buy either national or regional campaigns. For regional campaigns it would not make sense to force a customer to buy sites in a region they did not want.

Third party views

The OFT received a number of representations from customers of the parties. Concerns raised have been taken into account in the above assessment.

CONCLUSION

The merger qualifies for investigation under the share of supply test of the FTA. The parties overlap in the supply of outdoor advertising. In this analysis, 6 sheet panel billboards and large (48 and 96 panel) billboards have been considered as distinct products in both the regional and national contexts. No substantial competition concerns arise in respect of the former.

In respect of the supply of large billboards, where the parties are currently the third and fourth largest suppliers, the merged entity will have a combined share in the UK (by number of panels for roadside and transport) of 28.9 per cent. Concentration in the industry will increase as a result of the merger as the number of significant players will be reduced from four to three, and barriers to entry on a national level appear substantial. In the absence of mitigating factors, concerns would arise about the effect of the merger on competition.

However, the merger will increase the parties' ability to compete with the two existing major players on a national level. Conditions do not appear very propitious for tacit collusion.

There is evidence of buyer power. Six outdoor specialists together account for over 95 per cent of billboard advertising purchases in the UK. They are able to negotiate the price and tailor the composition of their purchases to suit advertisers' needs.

Finally, there is some indirect competitive constraint insofar as advertisers can switch to using other forms of media for their advertising campaigns.

On balance, therefore, it appears that the merger will not give rise to a substantial lessening of competition in the supply of billboard advertising.

I therefore conclude and recommend that you should not refer this merger to the Competition Commission.

NOTES

1. Avenir Havas Media SA and Brunton Curtis Outdoor Advertising Ltd, MMC, Cm 1737, published in November 1991

2. Actual figures have been excised, at the request of the parties.

3. Roadside Advertising Services: A report on the Supply in the United Kingdom of Roadside Advertising Services, MMC - HC (1980 – 81) 365, published in July 1981.

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