A~Rralian Competition & Consumer Commission
Assessment in respect of
an exclusive dealing notification lodged by
Football Federation of Victoria
for its apparel licensing program
Date: 31 October 2007
Notification no. N92852
Public Register no. C20071709
DEFINITIONS
Australian Competition and Consumer Commission
Alphington Junior Football Club
Alphington Park Junior Football (Soccer) Club
Baxter Soccer Club Inc
Bentleigh Greens Soccer Club
Boronia Junior Soccer Club Inc
Dandenong Thunder Soccer Club
East Bentleigh Soccer Club Inc
Eastern Lions Soccer Club
Football Federation Victoria
Gisborne Junior Soccer Club
Glen Waverley Junior Soccer Club
Keilor Park Soccer Club Inc
Kingston City Football Club Inc
Knox City Soccer Club Limited
Old Carey Soccer Club Incorporated
Reservoir United Soccer Club
Sherbrooke Rangers Junior Soccer Club
Soccer
Southern Suburbs Pythagoras Soccer Club
Stonnington City Soccer Club
Springvale White Eagles Soccer Club
The Trade Practices Act 1974 University of Melbourne Women's Soccer Club
ACCC
AJFC
APJFC
BSC
BGSC
BJSC
DTSC
EBSC
ELSC
FFV
GJSC
GWJSC
KPSC
KCFC
KCSC
OCSC
RUSC
SRJSC
Football
SSPSC
SCSC
SWESC
The Act
UMWSC
Westvale Soccer Club WSC
Introduction
The Australian Competition and Consumer Commission (ACCC) is the Australian Government agency responsible for administering the Trade Practices Act 1974 (the Act). A key objective of the Act is to prevent anti- competitive arrangements or conduct, thereby encouraging competition and efficiency in business, resulting in greater choice for consumers in price, quality and service.
Section 47 of the Act describes conduct known as exclusive dealing. Broadly, exclusive dealing involves one trader imposing restrictions on another's freedom to choose with whom, in what, or where it deals. The Act prohibits exclusive dealing in certain circumstances.
A common form of exclusive dealing is third line forcing. Third line forcing involves the supply of goods or services on condition that the purchaser also acquires goods or services from a third party. Subsections 47(6) and 47(7) prohibit third line forcing per se, meaning that a breach of the Act can be established regardless of the effect on competition.
Businesses may obtain immunity for conduct that might risk breaching the third line forcing provisions of the Act by lodging a 'notification' with the ACCC in accordance with subsection 93(1). Legal immunity conferred by a third line forcing notification commences 14 days after the notification is validly lodged.
The ACCC may revoke a third line forcing notification if it is satisfied that the likely benefit to the public from the conduct will not outweigh the likely detriment to the public from the conduct. Revoking a notification removes the immunity conferred by the lodging of the notification.
Prior to issuing a notice to revoke a notification, the ACCC must issue a draft notice setting out its reasons and providing an opportunity for the notifying party and other interested parties to request a conference in relation to the draft notice.
The notification
Notification N92852 was lodged by the FFV on 15 March 2007 for third line forcing conduct associated with a licensing program (licensing program) for the supply of match apparel.
The FFV governs, administers and regulates soccer/football, hereafter referred to in this assessment as football, in Victoria. The FFV was fonnally known as the Victorian Soccer Federation, changing its name in 2005.
There are over 450 metropolitan clubs that compete under the FFV banner. These clubs range from Senior Men's and Women's clubs, Thirds and Masters and a large number of Junior clubs. The clubs compete in 34 different grades, ranging from the Foxtel Premier league, to junior and wheelchair soccer competitions.
2.4 The FFV submits that there are currently 34,063 registered FFV football players. This number is expected to increase to 45,000 in 2008.'
2.5 The licensing program covers shirts, shorts and socks worn during official FFV matches. Under the licensing program, players must wear uniform components bearing the FFV logo in all FFV competition games. The uniform components with the requisite logos are only available from manufacturers that have entered into a licence agreement with the FFV.
2.6 All competitions run by the FFV and its affiliates are bound by the program, including all Victorian regional FFV competitions.
2.7 All clubs must nominate a 'home' and 'alternate' playing strip. According to the FFV 2007 Rules of Competition no part of the alternative playing strip (shirts, short & socks) is permitted to be the same as the nominated home playing strip.
2.8 The notified conduct may be described as follows:
+ 9: *"'
~h;'kootball ~edergtion ~ i i t & s 1'ne ( F ~ ~ ~ ~ O & tirequire &I&& ' ' . '
which participate in FFV competitions to use only licensed apparel during FFV Competitions. In the event that licensed apparel is not used in fac penalty or remeay aeemea approprlare ~y rne r, . .
~tches, c nands, 1 . . - .-. - -1 -
:lubs m: be dedu . 3 - .- -
ly be ex cted ch: 1 -
pelled, (
ampion! . . . disquali ship poi
1. T1
fed, s i ! nts or 6 RV
ace anoi I, fined, ther
' FFV, Form G - N92852,15 March 2007.
Important dates
DATE 15 March 2007 2 1 March 2007
29 March 2007
13 April 2007 18 May 2007
7 June 2007
4 July 2007
25 July 2007
6 August 2007
24 August 2007
3 October 2007
19 October 2007
3 1 October 2007
ACTION Exclusive dealing notification lodged with the ACCC.
Interested party consultation commenced
FFV receives automatic immunity to engage in notified conduct
Closing date for submissions fiom interested parties.
Closing date for response and provision of further information from notifling party.
FFV provides further information to the ACCC and responds to issues raised by interested parties.
ACCC releases a draft notice proposing to revoke notification N92852
Closing date for submissions on draft notice FFV proposes amendments to the apparel licensing program
Closing date for submissions in respect of the proposed amendments
FFV proposes further amendments to the apparel licensing program
Closing date for comments in respect of the further amendments
ACCC releases assessment of N92852, proposing no further action at this time.
3. Background
Implementation of the licensing program
3.1 The FFV's licensing program was originally implemented in 1998. The FFV submits that the licensing program was developed to ensure that apparel worn by clubs in matches meets a certain minimum standard.
3.2 The FFV submits that clubs in breach of the apparel licensing arrangement may be liable to a fine of up to $1,500 for each breach.
3.3 Further, regulation 18 of the FFV Regulations stipulates that
Member Clubs, Clubs or Affiliated organisation, or any member of a member club, club, league, affiliated league or affiliated organisation, player, officer or official of any member club, club, league, affiliated league or affiliated organisation of FFV may be charged with misconduct or with behaviour prejudicial to the interests of the game and the federati~n.~
The FFV submits that regulation 18 of the FFV Regulations may also be applied to a breach of the apparel licensing arrangements. Regulation 18 provides that the FFV may impose one or more of the following penalties if one of the parties listed breaches the regulations:
FFV Regulations, reg. 1 8, p.27
expulsion
disqualification
suspension
fines
reprimands
deduction of championship points
bonds or
another penalty or remedy deemed appropriate by the FFV.
Licensed suppliers
3.4 The FFV advises that new license agreements are entered into with manufacturers every three years subject to a tender process. The FFV states that there is no guarantee that an incumbent licensee will submit an application, or win a new licence, at the end of the tender process.
3.5 Currently four apparel manufacturers are licensed under the program for the period 2007 - 2009. The four apparel manufacturers currently licensed under the program are Covo Sports, Nike, Adidas and Kelme. Licensees prior to the entering into of the 2007 - 2009 licence agreements were Covo Sports, Nike, Patrick and Only Sport.
3.6 As discussed at paragraph 3.31 the FFV now proposes to increase the number of licensed suppliers to eight, if practical.
3.7 Football clubs bound by the program submitted that Covo Sports is the only apparel manufacturer which has been appointed and consistently remained a licensee since the programs inception in 1998.
3.8 The FFV advises that the process used to renew or appoint 2007 - 2009 licensees was:
In June 2006 an invitation was issued to apparel manufacturers by mail and posted on the FFV's website to contact the FFV to obtain an official application form (tender document).
Official application forms were provided to those manufacturers who contacted the FFV.
Manufacturers submitted application forms along with samples.
Licensees were selected.
Non exclusive license apparel agreements were entered into with successful applicants.
3.9 Licence agreements entered into with licensees are on standard terms. The 2007 - 2009 agreements provide for the licensee to pay the FFV an annual
license fee of $10,000, plus GST. Licensees are also required to pay the FFV a royalty of 8% of gross sales with a minimum annual royalty payment of $8,000, plus GST.
3.10 Licensees are also required to annually provide to the FFV licensed product to the (wholesale) value of $2,500. Further, licensees must purchase badges to be affixed to licensed apparel from the FFV at a price of 50 cents per badge.
3.1 1 Licensees receive one free advertisement per annum on the FFV's website, displayed on the website for a minimum of 4 weeks. The FFV will also, at the licensees request, include advertising and other promotional material concerning the licensee in a maximum of two mailouts annually to FFV members, affiliated leagues and organisations. The licensee is required to cover all costs of such mailouts, including postage, and provide the relevant advertising material.
3.12 License agreements provide that the licensee must not produce or sell any licensed product unless the product has been approved by the FFV as to quality, design (including but not limited to the identity, appearance, size and positioning of badges and marks), dimensions, materials, fabric and pricing structure.
3.13 The FFV reserves the right to terminate license agreements if the license produces products that, in the FFV's opinion, are of inferior quality or standard to the samples approved by the FFV.
3.14 Clubs remain free to buy stock from any retailer that stocks licensed apparel. The FFV submits that licensed manufacturers stock a large number of retail outlets around Victoria.
3.15 As noted at paragraph 3.29 the FFV has proposed changes to its licensing program to permit licensed manufacturers to sell apparel directly to clubs rather than only through retailers.
3.16 At the time of lodging the notification, where an existing licensee was not reappointed, clubs that had bought uniforms from that licensee were required to replace them within 12 months with uniforms purchased from one of the newly appointed, or reappointed, licensees. However, as noted at paragraph 3.30, the FFV now proposes to abolish this requirement.
3.17 The ACCC understands that football clubs typically make bulk orders for uniforms from licensed suppliers.
Enforcement of the licensed apparel requirement
3.18 The licensing program is administered and managed by the FFV's Commercial Operations Department to ensure that the program is adhered to by clubs.
3 .I9 Team sheets required to be completed by referees on match days include a section for the referee to report any breaches of the licensing program by clubs. The Commercial Operations Department follows up each report with a letter to the club requesting an explanation for any breach.
3.20 The FFV states that there have only been two instances of breaches of its regulations dealing with licensed apparel which have resulted in penalties being imposed, one of which was overturned on appeal. Specifically, in 2006 a club was fined $1,000 for wearing a non licensed brand. However, the fine was revoked on appeal. In 2004 a club was fined $500 for a goal keeper wearing a non licensed brand.
Financial history of the Licensing Program and distribution of funds
3.21 The FFV submits that the annual average revenue raised by the licensing program from 2003 to 2006 ranged between $9 1,000 and $147,000.
3.22 The FFV did not provide any details of the costs of administering the licensing program, beyond stating that these costs are negligible. The FFV states that it administers the tender process internally and referees complete a team sheet before each match.
3.23 The FFV submits that the revenue raised by the licensing program is used to help pay for the administration of the FFV and helps keep costs lower for clubs and players.
3.24 The FFV did not provide specific details of how revenue raised by the program is distributed or spent.
Draft Notice
3.25 On 4 July 2007 the ACCC issued a draft notice proposing to revoke notification N92852. The ACCC considered that the likely benefit to the public from the notified conduct would not outweigh the likely detriment.
3.26 The ACCC's primary concern with the FFV's licensing program was that it forced clubs and players to acquire products from a limited range of third party suppliers, thereby restricting choice in terms of price, quality and service.
3.27 The ACCC was also concerned that the revenue raised by the program was directly offset by the costs incurred, by clubs to the extent that license and royalty fees are reflected in the cost of apparel purchased, and by licensees, to the extent that they absorb these costs themselves.
3.28 Further, the ACCC was concerned that the requirement on clubs to replace uniforms purchased from licensees within one year if the licensees license is not renewed resulted in significant wastage of apparel and additional costs to clubs.
Proposed amendments to the licensing program
3.29 On 6 August 2007, the FFV advised the ACCC of proposed amendments to the licensing program. Broadly, the FFV proposed to:
permit licensed manufacturers to sell directly to clubs, rather than only through retailers
increase the number of licensees from four to between six and eight
require clubs to replace uniforms purchased from licensed suppliers within 24 months, rather than 12 months as is currently the case, if the licensees license is not renewed.
3.30 On 3 October 2007, the FFV proposed hrther amendments that would result in the abandonment of any requirement on clubs to replace uniforms purchased by licensed suppliers even if the licensees license is not renewed.
3.3 1 The FFV also advised the ACCC that the number of licensees would be increased to eight if practical.
4. Statutory test
4.1 Subsection 93(3A) of the Act provides that the ACCC may give notice removing immunity for conduct described in subsections 47(6) and 47(7) if it is satisfied that the likely benefit to the public from the conduct or proposed conduct will not outweigh the likely detriment to the public from the conduct or proposed conduct.
4.2 Before revoking the immunity obtained by a third line forcing notification, the ACCC must issue a draft notice of its intention (subsection 93A(1)) and give the applicant and interested parties the opportunity to respond and to call a conference in relation to the draft notice (subsection 93A(2)).
5. Submissions received
5.1 In response to an initial request for submissions, the ACCC received twenty two submissions in relation to the notified conduct from the following parties:
Only Sport
Baxter Soccer Club Inc (BSC)
Reservoir United Soccer Club (RUSC)
Dandenong Thunder Soccer Club (DTSC)
Southern Suburbs Pythagoras Soccer Club (SSPSC)
University of Melbourne Women's Soccer Club (UMWSC)
Springvale White Eagles Soccer Club (SWESC)
Westvale Soccer Club (WSC)
East Bentleigh Soccer Club Inc (EBSC)
Boronia Junior Soccer Club Inc (BJSC)
Gisborne Junior Soccer Club (GJSC)
Eastern Lions Soccer Club (ELSC)
Alphington Park Junior Football (Soccer) Club (APJFC)
Kingston City Football Club Inc (KCFC)
Glen Waverley Junior Soccer Club (GWJSC)
Bentleigh Greens Soccer Club (BGSC)
Old Carey Soccer Club Incorporated (OCSC)
Alphington Junior Football Club (APJFC)
Stonnington City Soccer Club (SCSC)
Knox City Soccer Club Limited (KCSC)
Keilor Park Soccer Club Inc (KPSC)
Sherbrooke Rangers Junior Soccer Club (SRJSC)
5.2 The ACCC also received two submissions from interested parties which were excluded from the public register at the parties request.
5.3 The ACCC also sought submissions in relation to its draft notice, and the changes to the licensing program proposed by the FFV. The ACCC received submissions from:
Keilor Park Soccer Club Inc
East Bentleigh Soccer Club Inc
Boronia Junior Soccer Club
Bentleigh Greens Soccer Club
Attack Sports
Knox City Soccer Club
Mr Trevor Allen
5.4 The ACCC also received three further submissions fkom interested parties which have been excluded from the public register at the parties request.
5.5 The views of the FFV and interested parties are outlined where relevant in section 6 of this assessment. Copies of all public submissions and correspondence between the FFV and the ACCC relating to the notification are available on the ACCC's website www.accc.gov.au, by following the links to 'Public registers', 'Authorisations and notifications registers' and 'Exclusive dealing notifications register'.
6. ACCC assessment
6.1 Since releasing the draft notice on 4 July 2007, the FFV has proposed certain amendments to the licensing program. As the program currently stands, it can be surnrnarised as follows:
Clubs will be required to buy apparel from licensed suppliers.
There will be eight licensees, if practical, at any one time.
Clubs will be able to buy directly from manufacturers of apparel.
Clubs will not be required to replace uniforms if a licensees license is not renewed.
The relevant markets
6.2 Generally, the first step in assessing the public benefit and public detriment from notified conduct is to consider the relevant market or markets in which that conduct occurs. However, depending on the circumstances, the ACCC may not need to comprehensively define the relevant markets as it may be apparent that a net public benefit will or will not arise regardless of the scope of the defined market.
6.3 The FFV considers that the relevant markets are:
the market between retailers and purchasers of sporting apparel in Victoria and
the market between manufacturers and retailers for sporting apparel in Victoria.
6.4 The FFV contends that football apparel does not constitute a market in its own right.
6.5 The ACCC considers that the relevant markets in this case are wholesale and retail markets for sporting apparel. In particular, the ACCC notes that there is degree of supply substitutability between the manufacture of football apparel and other sporting apparel.
6.6 While the relevant markets may be broader to include more general apparel and recreational uniforms, the ACCC does not consider that its assessment of the notified arrangements is overly affected by the possible variations in market definition.
Counterfactual
6.7 In order to identify and measure the public benefit and public detriment generated by the notified conduct, the ACCC applies the 'future-with-and- without test'. This involves identifying a counterfactual; that is, the ACCC makes a judgement as to what, on the information and evidence before it, is the most likely situation in the absence of the immunity accorded by the notification.
6.8 The ACCC then compares the public benefit and public detriment arising in the future if the notification is not revoked with the public benefit and detriment arising under the counterfactual.
6.9 While the FFV has been operating its apparel licensing program for almost 10 years absent the immunity afforded by the notification, it has presumably been doing so unaware of the potential concerns under the Act which the program, as currently structured, could raise. Given these concerns, which are summarised in paragraphs 1.2 and 1.3 of this assessment, the ACCC considers that the most likely counterfactual in the absence of the immunity afforded by the notification is that the FFV would not continue to require its clubs to use only licensed apparel supplied by third parties in FFV competitions.
6.10 This is not to say that some elements of the arrangements could not or would not continue. For example, the FFV could continue to require that shirts and shorts be branded with its logo.
6.1 1 Further, the FFV could continue to impose minimum standards of quality of uniforms worm by clubs, without requiring that uniforms be purchased from a limited list of approved licensees.
6.12 It would also be open to the FFV, for example, to continue a licensing arrangement for suppliers of FFV branded apparel without requiring that clubs acquire products from these suppliers. The ACCC notes that the Act does not prevent arrangements where consumers still have the choice whether to acquire from licensed or other suppliers.
Public detriment
6.13 In its draft notice, the ACCC identified that potential public detriment from the licensing program could result from:
(a) distortions to prices associated with the royalty payments made by licensed suppliers
(b) wastage of apparel as a result of the requirement that clubs replace uniforms purchased from licensees within one year if the licensees license is not renewed
(c) distortions in prices associated with reduced competition as a result of restrictions on supply and
(d) any administration costs, whether borne by the scheme or absorbed by other bodies.
6.14 The ACCC's consideration of each of these potential detriments, in light of the proposed changes to the licensing program, is discussed below.
Royalty payments
6.15 As noted, licensed suppliers pay an annual fee of $10,000 and a royalty of 8% of gross sales (with a minimum royalty of $8,000 per annum) to the FFV to participate in the licensing program.
The ACCC considers that the licensing program royalties are a direct cost to licensed football uniform suppliers. Only Sport submits that the need to recoup the licence fees and associated administration cost will inevitably lead to higher cost of apparel. The ACCC considers the effect of royalty payments is that either the cost will be fully reflected in the prices of licensed goods, or the cost will be reflected in part in the prices of licensed goods and the licensee will absorb the remainder. If a licensee absorbs its royalty payments, this may be reflected in other areas of the licensee's business.
In either case, the ACCC considers that the entire amount of licence fees and royalty payments made by licensed suppliers (in the range of $91,000 to $147,000 per annum based on the licensing program as it existed at the time the notification was lodged) is likely to constitute an additional supply cost and as such a detriment to the public.
Some interested parties submitted that the proposed changes to the licensing program, in particular, the proposal to increase the number of licensees to eight, may increase the price of apparel to clubs. Interested parties noted that under the proposed changes, eight licensees, rather than four, would incur, and either absorb or pass on, the $10,000 annual fee.
It was also noted that while the total annual fee paid by licensees (in addition to the per unit royalty payment) would increase from $40,000 to $80,000 there would be no corresponding increase in the customer base from which these fees could be recovered. Indeed, it was noted that, given the proposed abolition of the requirement to replace uniforms if a licensees license is not renewed, the customer base is likely to decrease.
The annual fee charged to licensed suppliers by the FFV is a reflection of the value of the exclusivity of supply to FFV clubs conferred by the licensing program. As the number of licensed suppliers increases, and the corresponding extent of the exclusivity of supply diminishes, it would be expected that the value manufacturers place on being a licensed supplier would similarly decrease. It would be expected that this will be reflected in licensing fees charged by the FFV in the future.
The increase in the number of licenses should also increase competition between licensees, both in respect of price and quality of service.
In addition, the FFV submits that allowing clubs to source apparel directly from manufacturers will also reduce the cost of apparel. Although, as discussed at paragraphs 6.100 to 6.1 10, the ACCC has not placed great weight on this argument.
Further, as discussed in greater detail at paragraphs 6.28 to 6.32, the ACCC notes that the abolition of the requirement for clubs to replace uniforms if a licensees license is not renewed will result in less replacement of uniforms by some clubs, also reducing costs incurred by them.
However, at the very least, licensees are likely to be required to pay some sort of annual license fee as well as an 8% royalty on all sales. As noted, the ACCC considers that the entire amount of these license fees and royalty
payments is likely to constitute an additional supply cost and as such, a detriment to the public.
6.25 The FFV submits that even though the licensees pay a licence fee and royalty under the licensing program, this has not resulted in an increased cost to the clubs or players for apparel.
6.26 While this may be the case, there does not need to be evidence of an increase in prices since the programs inception. What is important is the price of apparel to clubs under the program versus the price for comparable, or indeed identical, apparel without the program. In this respect, the licence fee and royalty payments are costs arising from the program which would not otherwise be incurred. They are costs to suppliers, and are likely to ultimately be reflected in the prices andlor quality of their goods and services.
6.27 The ACCC considers these costs to be a public detriment that must be weighed against any public benefits flowing from the program.
Wastage of apparel
6.28 Generally, particularly in recent years, licensees have been appointed for three year periods, with four licensees appointed for each three year period. At the end of each license period a fresh tender process is run. The result of the tender process to supply licensed apparel for the period 2007 - 2009 was that only two of the four existing licensees were reappointed.
6.29 In its draft notice the ACCC considered that the requirement that clubs replace uniforms purchased from licensees within one year if the licensees license is not renewed generates significant public detriment. At the extreme, it could require clubs to unnecessarily replace recently purchased, and in some cases rarely used, uniforms of good quality simply as a means of generating additional revenue for the FFV and its licensees.
6.30 Following the release of the draft notice, the FFV proposed to extend the grace period for the replacement of uniforms to 24 months. Subsequent to continued concerns raised by interested parties and the ACCC, the FFV now plans to abolish any requirement on clubs to replace uniforms if a licensee's license not being renewed.
6.3 1 Subject to uniforms continuing the meet the FFV's quality standards and specifications, clubs will be free to replace uniforms as and when they see fit.
6.32 The abolition of the requirement to replace uniforms if a licensee's license is not renewed addresses the ACCC's concerns in this area.
Reduced competition
Before the draft notice
6.33 The FFV submitted that the possibility of detriment to the public from the licensing program is decreased because there are no restrictions on the number of licensees.
6.34 However, the ACCC understood that since the programs inception, there have only ever been four licensed apparel manufacturers at any one time. The tender application forms in respect of the most recent license period also envisaged the appointment of four licensees and four were ultimately appointed. In addition, as submitted by the FFV, the greater the degree of exclusivity for the licensee, the greater value that licensee will place on obtaining licensing rights. Therefore, in the draft notice, the ACCC did not place any weight on the FFV's submission that the absence of restrictions on the number of licensees mitigates the potential affects on competition of the arrangements. In practice, the number of licensees was restricted, generally to a maximum of four.
6.35 The FFV also submitted that the benefits of the licence program have been achieved whilst retaining a high level of choice for clubs. The FFV stated that the four licensed manufacturers produce a large range in style, materials, price and colours. In particular the FFV stated that quality of the licensed apparel varies between the licensed manufacturers providing the clubs a different price range for licensed apparel.
6.36 However, interested parties contended that four licensed apparel manufacturers did not amount to a 'high level of choice' as claimed by the FFV. BJSC stated that the limit of four suppliers did not constitute a high level of choice when the market is looked at more broadly. BJSC contended that there are many suppliers that offer similar, if not better, quality products for the same price or less than those available under the scheme.
6.37 EBSC submitted that prior to the licensing programs inception, clubs were able to bargain with sporting apparel retailers and manufacturers. Following the introduction of this program, and the restriction of licensed apparel manufacturers to four, EBSC contended that clubs were no longer in a position to do this.
6.38 BJSC contended that there is little, if any incentive for licensees to reduce their prices to compete for the market available as they are already assured that they will receive a certain level of business as a result of the licence agreements and the rules and regulations of the FFV.
6.39 In considering these issues in its draft notice the ACCC noted the following.
6.40 The licensing program places a restriction on the number of suppliers from which football clubs and players may choose to acquire competition uniforms. Where potential suppliers are unable to supply clubs with goods because of the licensing program, competition is reduced, which may cause prices to be higher, quality to be lower andlor service to be poorer than in the situation without the licensing program.
Manufacturers do compete to become licensed suppliers through the tender process every three years. One of the factors the FFV takes into account in appointing licensees is the quality of apparel manufactured. In this respect, the FFV submits that it appoints manufacturers producing a range of styles, materials, colours and prices. However, prospective licensees are not required to prove information regarding prices of apparel they will supply clubs as part of the tender process. Although, license agreements do provide that the licensee must not produce or sell any licensed product unless the FFV has approved the products pricing structure.
Further, the cost of license agreements, a $10,000 fee plus royalties of 8% of gross sales (minimum $8,000), may also favour higher priced suppliers who are more readily able to recoup these costs.
While, as a general proposition it may be that higher prices (beyond that necessary to recovery of fees and royalty payments) may be a function of the superior quality of apparel produced, clubs choice as to the range of quality and prices of apparel is still reduced by the arrangements.
Appointing four suppliers for each period also provides for a degree of ongoing competition for the supply of apparel during the life of licensing agreements, albeit a reduced level of competition from that which would prevail absent the arrangements. In this respect, the concerns of some clubs as to the range of apparel offered, both in terms of price and quality, under the licensing program were noted.
Further, while the ACCC did not receive submissions on this issue, it may be that the nature of the licensing agreements, being three years in duration with no guarantee of renewal, forecloses the possibility of clubs entering into long term relationships with preferred suppliers, even where they are (currently) licensed suppliers.
In summary, the ACCC concluded that restrictions such as those placed on the suppliers from which clubs and players may choose to acquire competition uniforms invariably lessen competition and create inefficiencies, ultimately resulting in higher costs to consumers and a dead weight loss to society. Although, it was noted that the appointment of four suppliers, following a competitive tender process, lessens the anti-competitive effect of the program.
The ACCC considered that the costs of participating in the licensing program, along with the general restriction on the number of licensees may also constitute a barrier to entry to the market which results in fewer suppliers of apparel than might otherwise be the case. In addition, the arrangements prevent apparel manufacturers already in the market, other than licensed suppliers, supplying clubs.
However, the ACCC did not consider that the impact of the notified arrangements on competition for the more general supply of these goods (that is, for supply other than to FFV clubs) was significant, given the small number of potential customers, relative to the overall size of the market, to which access is restricted by the arrangements.
Following the draft notice
6.49 As noted above, on 6 August 2007 the FFV proposed certain amendments to the licensing program, including expanding the number of licensees to between six and eight. Further, on 3 October 2007, the FFV proposed to increase the number of licensees to eight, where practical.
6.50 Attack Sports submits that an increase in the number of licensees is of concern to prospective licensees as the size of the market in Victoria is not large enough for more than four licensees to gain a return on their invested dollar. Attack Sports contends that even if the market were to be divided equally between all eight licensees, it would not be sufficient to obtain a reasonable return. Further, Attack Sports contends that this will inevitably result in manufacturers being forced to increase prices.
6.5 1 As noted in the draft notice, the licensing program places a restriction on the number of suppliers from which football clubs and players may choose to acquire competition uniforms. Where potential suppliers are unable to supply clubs with goods because of the licensing program, competition is reduced, which may cause prices to be higher, quality to be lower andlor service to be poorer than in the situation without the licensing program.
6.52 The ACCC is of the view that increasing the number of licensees to eight will alleviate some of the concerns raised by interested parties and the ACCC in its draft notice with regard to restrictions on competition. Just as the appointment of four licensees following a competitive tender process went someway to addressing the ACCC's concerns regarding reduced competition for the provision of apparel to clubs, potentially doubling the number of licensees further reduces the restriction on competition that the arrangements would otherwise generate.
6.53 Further, increasing the number of licensees has the potential to result in additional competitors being introduced at all price points for apparel.
6.54 However, as noted in the draft notice, restrictions such as those placed on the suppliers from which clubs and players may choose to acquire competition uniforms invariably lessen competition. The program would be of little value to licensees if this were not the case. As such, the ACCC remains concerned that the arrangements may increase prices (beyond any increase in price directly related to the license fees and royalty payments) and create inefficiencies, ultimately resulting in higher costs to consumers and a dead weight loss to society. Although, such concerns are alleviated to some extent by the proposed increase in the number of licensees.
Administration costs
6.55 In addition to the royalty payments and the effect on competition, the FFV's licensing program also imposes administrative costs on the FFV.
6.56 The FFV submits that the administrative costs of the licence program are negligible. In particular, the FFV submits that it administers the tender process internally and that referees check on compliance at matches.
6.57 While the tender process is administered internally by the FFV, such that its cost is absorbed in the FFV's day to day administrative costs, that is not to say that administering the process does not in itself generate costs. While the FFV has not provided any details of these costs, other than to state that they are negligible, it is difficult to envisage how such a tender process could be administered without some costs to the FFV.
6.58 The ACCC continues to consider that these costs, whatever their quantum, to be a public detriment that must be weighed against any public benefits flowing from the program.
6.59 The ACCC also considers that the licensing program imposes a cost on licensees in addition to royalty payments. For example, the administration costs associated with entering into and complying with the licence agreement and the cost, for both successful and unsuccessful manufacturers, of tendering to become an approved licensee. While the ACCC has not received any information to suggest that these costs are significant, they are none the less costs that would not be incurred absent the licensing program and which therefore need to be weighed against any benefit generated by the program.
6.60 The ACCC accepts that the general costs of ensuring compliance with the program on match days are unlikely to be significant, involving no more, in most instances, than match referees checking uniforms and filling out an additional section on team sheets. Further, the ACCC accepts that this cost is likely to still be incurred, absent the notified conduct, if referees were still required to check players uniforms.
Public benefits
6.61 The public benefits claimed by the FFV are:
(a) a minimum standard of quality will be achieved
(b) timely supply of apparel will be guaranteed
(c) the image of the game will be kept to a high standard
(d) the FFV brand will be protected and promoted
(e) income will be generated for the FFV and
(f) increased efficiency through the acquisition of apparel directly from manufacturers.
Minimum standard of quality
6.62 The FFV submits that the tendering process for the licence program ensures that there is a minimum standard of quality for licensed apparel. The FFV is of the view that the minimum standard of quality arising from the licence program results in clubs saving money in the long term due to the greater durability and quality of the licensed apparel.
The FFV submits that prior to the licence programs inception it was aware of incidents where apparel did not last the whole season resulting in clubs being required to acquire new apparel the following season. The FFV states that clubs are able to acquire unlicensed apparel at a lower cost, but that the unlicensed apparel that is available at a lower cost is likely to be of an inferior quality to the licensed apparel.
Interested party submissions contend that there is no specialised knowledge needed for purchasing a set of uniform apparel beyond the normal capacity to buy clothing. Further, many interested parties dispute the assertion by the FFV that the licensing program ensures better quality apparel than would be the case without the program. Clubs also state that they have previously purchased good quality items from different manufacturers and/or suppliers, and that they have been able to do so at a more competitive price.
Some clubs further contend that some of the lower cost apparel available in the market, which the FFV submits is of inferior quality to licensed apparel, was previously licensed by the FFV. Clubs also state that, to the extent the licensing arrangements do ensure the quality of apparel worn by them, this comes at significant cost to the clubs.
The ACCC accepts that the licensing program is likely to assist in ensuring that apparel worn by clubs conforms with minimum standards of quality. Specifically, the license agreements provide that the licensee must not produce or sell any licensed product unless the product has been approved by the FFV as to quality, design, dimensions, materials, fabric and pricing structure.
However, as noted by some clubs, the FFV, through the setting of a minimum standard of quality, is assuming that that clubs are unable to assess their own needs. It may be that the licensing program results in higher quality apparel being worn by clubs than may otherwise be the case, however, it is not necessarily the case that the standards imposed by the FFV are necessary or desirable, particularly as they come at a cost.
While it may be in the interest of the FFV and its clubs collectively that uniforms worn by clubs in high profile competitions are of a high standard, whether there is a benefit in the FFV imposing the same standards on teams in lower grades or junior competitions is more open to question. It could be expected, in respect of these competitions, that individual clubs would be well placed to assess the needs of the teams they field.
However, as noted, more generally the ACCC accepts that the licensing program does assist in ensuring the standard and quality of apparel worn by teams competing in FFV competitions. The ACCC also accepts that ensuring such standards does, in many instances, generate a public benefit by enhancing the overall image of FFV competitions and presentation of matches.
The benefit in the FFV imposing standards of apparel worn through requiring that apparel only be purchased from licensed suppliers is likely to be less with respect to less high profile and more junior competitions. In respect of these competitions it could be expected that a broader, general set of
Timely
6.71
standards would be sufficient to ensure that teams maintained reasonable standards of apparel.
supply of apparel
The FFV submits that restricting apparel manufacturers to four (and therefore increasing the volume sold by each manufacturer), together with the staggered beginning to the football season for different levels of competition will allow manufacturers to plan ahead to meet club's demands on volume and timing of supply. The FFV claims that this in turn allows manufacturers to keep prices low.
Further, the FFV contends that before the licence program started clubs often complained of long delays in the delivery and supply of apparel. The FFV states that it is aware of numerous incidents arising prior to the commencement of the licence program where apparel was not delivered by manufacturers to clubs prior to the commencement of the competition season. The FFV states that this resulted in significant inconvenience to clubs and the players. The FFV argues that this problem has been alleviated following the introduction of the licence program.
Some interested parties submit that the licensing program, and namely the restriction of the number of manufacturers to four, has in fact created issues for the clubs regarding the timeliness of supply. Clubs claim that following the restriction on the number of manufacturers it has been a difficult and frustrating process to try and organise apparel in time for the commencement of the season.
In response the FFV notes that prospective licensees must indicate their lead times and distribution methods in the tender process and that this is one of the criteria considered in awarding licenses. However, standards are not set for the timely supply of balls and apparel in the license agreement.
To the extent that timely supply of apparel would otherwise be a problem, the ACCC considers the degree to which the licensing program addresses this problem would be a public benefit.
On the one hand, limiting the number of manufactures, albeit to eight, licensed to produce apparel may provide for economies of scale in production which would assist in ensuring timely supply.
Alternatively, limiting the number of manufacturers licensed to produce apparel for the FFV's 450 clubs to eight may also result in production bottlenecks.
Based on the conflicting information provided by the FFV and clubs, the ACCC is not in a position to conclude whether the licensing program does assist in ensuring timely supply of apparel. Given the past assertions of clubs that it does not, the ACCC does not place significant weight on the timely supply of apparel as a public benefit resulting from the licensing program, particularly given that the FFV did not address this issue in any detail in its submission in response to the concerns raised by clubs.
Image
6.80
The ACCC notes the proposal to increase the number of licensed suppliers from four to eight. Neither the FFV nor interested parties commented on the effect of this increase on the timely supply of apparel. Accordingly, the extent to which the notified arrangements will improve the timeliness of supply of apparel remains unclear.
of the game
The FFV contends that ensuring quality and the timeliness of supply of apparel will help to lift the profile of football which will in turn help attract players, spectators and sponsorship and will reduce the amount clubs need to pay to participate in FFV competitions.
The FFV further submits that some sponsors may be more likely to be attracted to sponsor a team that is fitted out with a high quality product rather than a low quality product.
BJSC questions the FFV's assertion that sponsors are attracted by the quality of garment their name is being placed on. Further, interested parties argue that sponsors are interested in the potential market exposure gained from sponsoring a FFV team, rather than the brand the teams are wearing.
The ACCC notes that, to the extent that the quality of a clubs uniforms assists in attracting sponsorship, clubs could be expected to take account of this in purchasing uniforms irrespective of the licensing program. That is, clubs will purchase higher quality apparel than would otherwise be the case if the additional sponsorship revenue generated by doing so is greater than the additional cost of the apparel.
More generally, the ACCC considers that initiatives which lift the profile of football, thereby attracting player, spectators and sponsorship constitute a public benefit. While, the ACCC accepts that ensuring the quality of apparel worn by players is one such initiative, it does not place a great amount of weight on this argument. The ACCC considers that there are many other factors that impact far more significantly on the image of the game, such as success in high profile international events such as the world cup and the increasing market share held by football as its popularity increases. Factors such as the quality of uniforms worn by players in FFV competitions are more likely to complement other initiatives rather than have a significant direct influence on the success of football, or FFV competitions.
As noted with respect to the FFV's arguments regarding minimum standards of quality of apparel, while there may be some benefit in ensuring that uniforms worn by clubs in high profile competitions are of a high quality, whether there is a benefit in the FFV imposing the same standards on teams in lower grades or junior competitions is more open to questions.
Further, to the extent that there is a public benefit in ensuring the quality of apparel worn by clubs in FFV competitions this has, to a large extent, been considered in the ACCC's assessment of the FFV's public benefit arguments with respect to minimum standard of quality and timely supply of apparel.
Income generated for the FFV
6.87 The FFV submits that revenue generated by the licensing program helps keep costs lower for clubs and players.
6.88 The FFV submits that there is a direct correlation between the value of a licensing arrangement to a licensee and the degree of exclusivity provided to that licensee. The greater the degree of exclusivity for the licensee, the greater value that licensee will place on obtaining licensing rights. The FFV contends that in order to maximise the value of licensing arrangements to both licensees and the FFV, it is essential for the FFV to be able to guarantee to licensees that their products will be used exclusively.
6.89 Revenue raised by the program over the period 2003 to 2006 has ranged between $91,000 and $147,000 per annum. The FFV did not provide any details of how this revenue has been spent, other than to note that it is used to help pay for the administration of the FFV.
6.90 Following the release of the draft notice, the FFV made a further submission regarding the importance of the income generated by the licensing program. Specifically the FFV noted that it is a not for profit organisation that works within very tight fiscal measures.
6.91 The FFV notes that while the organisation has revenue of approximately $6.5 million, the budget surplus for each year is only 1 %.
6.92 The FFV contends that while the income generated by the licensing program is relatively small, it is critical for the delivery of certain services. The FFV contends that the abandonment of the program would result in the FFV dropping from a budget surplus of $65,000 to a deficit of up to $100,000. The FFV argues that, if the license program was abandoned and income consequently lost, fees for clubs would have to increase and certain services would have to be reduced, such as competition management, financial administration assistance, elite pathways programs, and/or marketing and promotion of the sport.
6.93 To the extent that revenue raised by the program is used by the FFV to promote, foster and develop the sport of football in Victoria through its administration of the competition conducted under its auspices, the ACCC continues to consider this to be a public benefit. Specifically, it may increase participation in the sport, fostering community fitness and recreation.
6.94 The ACCC also accepts that these benefit are likely to increase, the greater the volume of revenue raised by the program. The exclusivity of the license agreements assists in maximising this revenue.
6.95 However, as noted in the ACCC's consideration of the public detriment generate by the program, this benefit is achieved at a direct cost to the clubs.
Promote and protect F%7/ brand
6.96 The FFV submits that quality, consistency and supply of licensed apparel helps to protect the value in and promote the FFV brand. The FFV argues
that this is turn helps maximise licensing revenue and reduces the amount football players need to pay to participate in the sport.
6.97 The FFV submits that in order to protect the intellectual property right the FFV has, it is vital that the FFV is able to determine, in its discretion, the manufacturers it considers to be best qualified to apply the FFV's marks to the apparel.
6.98 The ACCC considers that this is essentially a restatement of other public benefit arguments submitted by the FFV. Any public benefits generated by the licensing program assisting in promoting the FFV brand or from revenue raised by the licensing program are discussed above.
Increased efficiency through the acquisition of apparel directly from manufacturers
6.99 Since the release of the draft notice, the FFV proposes to change license agreements in order to allow clubs to purchase apparel directly from manufacturers, rather than only through retailers.
6.100 The FFV argues that this will have a significant impact on the price of apparel.
6.10 1 KCSC questions the FFV contention that dealing with manufacturers will have a "significant impact on the price of apparel." Further KPSC contends that this may result in prices rising on remaining goods purchased from retailers.
6.102 KCSC queries whether the FFV has sought guarantees from manufacturers regarding certain discounts, and also notes that some manufacturers do not sell direct to purchasers to protect their retail distribution network.
6.103 BJSC submits that whilst buying directly from manufacturers may be cheaper than buying through retailers, manufacturers are unlikely to take up this option as it is easier and more cost effective to deal with one or two retailers rather than thirty or forty clubs.
6.104 BGSC notes that in the past, one of the licensees was a manufacturer, importer and major retailer. BGSC contends that even when they were effectively buying from the manufacturer, it did not have a significant impact on the price of apparel.
6.105 Based on the conflicting information provided by the FFV and clubs it is difficult to assess to what extent buying directly from manufacturers will reduce the price of apparel.
6.106 In particular, while it may be the case that purchasing directly from manufacturers could, by removing a stage in the distribution chain, allow apparel to be supplied at lower cost, the ACCC notes the concerns expressed by some clubs as to: whether manufacturers will exercise this option; and/or the extent to which it will be more cost effective for them to do so in any event.
Balanc
6.1 10
Although the ACCC does note that the expansion of the number of licensees may result in a greater range of licensees, with varying production processes and distribution channels, participating in the program.
It may be that expanding the number of licensees will increase the potential for manufacturers for whom distributing directly to clubs is an attractive option to participate in the program. As such the ACCC considers that this change has the potential to increase choice for clubs.
However, given the conflicting submissions of the FFV and Clubs, the ACCC is not in a position to reach a conclusion as to how significant an increase in choice may result from the proposed change, or indeed, its potential impact on the supply of apparel to clubs.
:e of public benefits and detriments
The ACCCYs concerns in respect of a number of aspects of the FFV's licensing program, as identified in the draft notice, have been lessened as a result of the proposed changes to the licensing program. However, having regard to these changes the ACCC considers the justification for public interest protection for the proposed arrangements is marginal.
Revenue raised by the FFV's licensing program is able to be used to foster, promote and develop the sport of football in Victoria. This serves to increase participation in the sport, fostering community fitness and recreation, which the ACCC considers to be a public benefit.
Against this, revenue raised by the program is directly offset by the costs incurred, by clubs to the extent that license and royalty fees are reflected in the cost of apparel purchased, and by licensees, to the extent that they absorb these costs themselves. Essentially, revenue raised by the program constitutes a wealth transfer from the clubs and licensees to the FFV.
Further, the costs of administering the program, whatever their quantum, necessarily means that the licensing program returns less money to the sport than the amount raised by it (the corresponding detriment).
Moreover, restrictions placed on clubs and players as to whom they can acquire competition uniforms from will invariably lessen competition and create inefficiencies, ultimately resulting in higher costs to consumers and a dead weight loss to society. Although, the ACCC notes that increasing the number of licensees to eight will lessen the anti-competitive effect of the restriction in this instance.
A number of clubs submitted that, when aggregated, these costs impact significantly on their ability to provide services to their players and necessitate the imposition of higher player registration fees for the provision of services. Clubs submit that this impacts on the number of players participating in the sport of football and potentially jeopardises the viability of some clubs.
Against this, as noted, revenue raised by the program is able to be used to foster, develop and promote the sport of football, and in particular, leagues
run by the FFV. This in turn assists in keeping the costs which the clubs would otherwise have to pay the FFV to undertake this role lower.
6.1 17 The ACCC also accepts that the licensing program does assist in ensuring the quality of apparel worn by FFV clubs, enhancing the overall image of FFV competitions and presentation of matches.
6.1 18 On balance, having regard to the proposed changes to the program, the ACCC is not satisfied that the detriments likely to arise from the notified conduct would outweigh the identified benefits. Accordingly, the ACCC does not intend to take any W e r action in respect of the notification N92852 at this time.
6.1 19 While no further action is proposed at this time, the ACCC will watch with interest any issues arising from implementation of the licensing program. In particular, the ACCC would be concerned if the implementation of the proposed changes does not sufficiently address the issues raised in the draft notice.
6.120 As with any notification, the ACCC may review the notification at a later stage should such concerns arise.
