The Competition Commission demolished all the barriers to HMV's acquisition of Ottakar's: what were its conclusions?

<p>Joel Rickett</p><p>It is the biggest government investigation that the book industry has seen since the collapse of the Net Book Agreement: for 17 weeks the finest legal brains at the Competition Commission held hearings, ran consumer research, crunched statistics, visited bookshops and publishers' offices, and sifted through a record number of third-party submissions.</p><p>Diana Guy, CC deputy chairman and chair of the inquiry into HMV's proposed takeover of Ottakar's, says it is the most high-profile case she has seen. "Books are an emotional subject," she observes, drily. The arguments of authors, publishers and consumers against the takeover are largely "anecdotal and impressionistic, and difficult to get a real fix on", she continues. "We didn't feel, fundamentally, that consumers would be deprived of choice."</p><p>What follows is a summary of the CC's central arguments.</p><p>Market definitions</p><p>The CC puts Waterstone's share of all UK book sales at around 17% and Ottakar's at 7%, with both selling a "somewhat higher proportion of deep-range titles" than some of their rivals.</p><p>That last phrase suggests that the inquiry panel did not agree with the arguments, partly backed by the Office of Fair Trading, that the book market could be split into "large range retailers" and generalists such as the supermarkets.</p><p>"We did not think that this distinction was appropriate for the purpose of market definition," the CC concludes, "because many titles have widely differing sales rankings during the course of a year, and there are no retailers selling only deep-range titles."</p><p>Consumer research commissioned by the CC finds that "book-buying patterns vary . . . some [people] want to buy a bestseller cheaply, whilst others are looking to browse; some plan a purchase ahead of time whilst others make a decision on the spur of the moment; and some are looking to own the book immediately, whilst others are prepared to wait for delivery."</p><p>The CC considers browsing an important aspect of book buyers' behaviour, but finds that there is no clear relationship between different types of buyer and different types of retailer. In other words, it does not define the market along the lines of style of retailing; it does, however, concede that sales of deep-range titles will be "moderately concentrated" if the proposed merger goes ahead.</p><p>Competition</p><p>A merger of Waterstone's and Ottakar's will not concentrate deep-range sales at a national level, the CC concludes. It estimates that W H Smith, Waterstone's, Ottakar's and Borders represent 45% of the market combined, and 55% of deep-range sales.</p><p>Initial concerns of the OFT that "competitive restraints" provided by Borders, WHS, and other booksellers would fail to keep the enlarged book chain on its toes, are dismissed in the CC's report. It argues that vigorous competition to the newly-merged chain exists, and that internet and supermarket competition in particular would prevent prices going up.</p><p>"[Waterstone's and Ottakar's are] only one way of promoting books," Guy says. "There is WHS and Borders, and supermarkets sell a wide range of titles in their bigger stores." In fact, she describes the UK book industry as in "rude health".</p><p>Consumer research </p><p>Ottakar's provides a "distinctive book-buying experience" that is valued by its customers, according to the OFT. But the CC's survey of 2,454 book buyers reflects "no difference in people's perceptions of the quality of experience", whether they are shopping at Ottakar's or at Waterstone's.</p><p>The CC report says that people's main reasons for choosing to visit either Waterstone's or Ottakar's are convenience of location and the likely availability of the books they want. Survey respondents rate the two chains better on range, quality of environment and service than the next best alternative, but slightly worse or no different on the price of books.</p><p>In addition, 30% of Waterstone's and Ottakar's customers have bought a new book online during the past 12 months. Guy sums up: "Despite their sentiments, people were pretty promiscuous. They bought from all sorts of places."</p><p>Buying and local power</p><p>Contrary to the arguments of many authors and publishers, the inquiry team believe that the stock buying policies of Waterstone's and Ottakar's are "remarkably similar". The report says: "The degree of centralisation in the choice of range at Ottakar's, and the degree of local flexibility in range at Waterstone's, ran contrary to public perception."</p><p>"Both chains have local lists and try hard to match their range to local areas," Guy says. "Managers in both chains have autonomy over non-price promotions." Countering publishers' claims, she adds: "If [buying] is all central, why are they still bothering to send reps around to shops?"</p><p>Neither does Guy pay heed to the argument that the head office buyers of a merged chain will hold undue power. "Nobody can promote or give prominence to all new books. Judgements have to be made." She points to the market transparency afforded by Nielsen BookScan data. "A book selling well is picked up by rivals within a week," she says.</p><p>The CC's analysis also supports HMV's view that by introducing its Phoenix Version 9 stock system to Ottakar's, range in many stores would increase. There was no danger that a post-merger Waterstone's would reduce range.</p><p>Price promotions</p><p>The commission shows that the majority of the chains' price promotions overlap, and although 500 titles were promoted by Ottakar's and not by Waterstone's during 2005, most of those books were available in Waterstone's at full price.</p><p>Guy says that arguments against the merger "overstate the importance of promotions within Waterstone's and Ottakar's", as there are many other routes to market, including through rival retailers, and by means of media exposure and publicity events.</p><p>Overlap stores</p><p>An "econometric evaluation" by the OFT posits that in the 33 locations where both chains operate, Ottakar's works harder to differentiate itself. But the CC identifies only two slight differences in these overlap locations: book signings and store refurbishments. It dismisses signings as "not that important" to consumers, and sees no "systematic approach" to refurbishments.</p><p>Scotland </p><p>In Scotland, where the outcry against the deal is fiercest, the situation is no different. "We take the Scottish concerns seriously, but it is clear that both companies have a similar core range for Scotland," Guy says. "We were unable to conclude that Scotland formed a separate geographic market, or that the competitive situation in Scotland was substantially different from that in the rest of the UK."</p><p>She notes that Borders has a relatively strong position in Scotland, with three stores competing directly against branches of both Ottakar's and Waterstone's.</p><p></p><p>Indies</p><p>Many of the third-party submissions to the inquiry are from independent booksellers. Guy points out that independents are "more frightened of Ottakar's than Waterstone's", especially as Ottakar's often targets tertiary locations. She adds: "A merger may be an opportunity for indies."</p><p>Closures</p><p>HMV says it has no plans to close any substantial number of Ottakar's stores post-merger. "When Waterstone's has taken over chains in the past it has not necessarily closed shops," Guy says. "We didn't get the impression that there would be closures."</p><p>Alternative scenarios</p><p>The report also considers the "counterfactual"; in other words, what might happen if the merger was blocked. In the absence of any firm offers from other bidders, it concludes that the likely outcome if the deal was blocked would be for Ottakar's to remain independent, either as a stock market-listed company or owned by a private equity group.</p><p>The CC expects that, given Ottakar's current trading performance, the bookseller may cut costs, affecting some of its differentiating characteristics. "It is clear that Ottakar's is going to have to exercise more central control, tighten on costs, and invest in a stock management system," Guy says.</p><p>If WHS offers for Ottakar's, the OFT process will begin again, Guy says. "We would be back to square one. But there is no indication that that will happen."</p><p>Publishers</p><p>The CC dismisses many of the concerns raised by publishers about the merger. For example, it does not accept that the "incentive" to publish or promote new books will be affected. "Any titles not promoted by the merged entity could still be promoted by other retailers or by other methods," Guy says. "Publishers still have a lot of cards in their hands--they decide what is going to be published and set the r.r.p. The big publishers can look after themselves."</p><p>Terms</p><p>Any deal is expected to bring about a "small improvement" to Waterstone's buying terms, but the inquiry concludes that this will not lead publishers to raise r.r.p.s. "Nor did we believe that publishers would reduce discounts to independents or other retailers as a response to an improvement in buying terms for the merged entity."</p><p>Learning from Ottakar's</p><p>Guy believes that Waterstone's could stand to learn from Ottakar's best practice, particularly in selling children's books and in communications. "Waterstone's may learn things from the inquiry process and do things differently in future. There's an opportunity for it to pick up the positive features of Ottakar's."</p>