Yell suffers as OFT calls for directories investigation

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The Independent Online

Investors in Yell, the Yellow Pages publisher, were dealt a blow yesterday when the Office of Fair Trading (OFT) announced it was referring the classified directories market to the Competition Commission for an in-depth investigation.

Investors in Yell, the Yellow Pages publisher, were dealt a blow yesterday when the Office of Fair Trading (OFT) announced it was referring the classified directories market to the Competition Commission for an in-depth investigation.

The announcement took the City by surprise with Yell shares falling 9.8 per cent. Many analysts had expected a relaxation of existing regulations, which include price caps on Yell.

But after a seven-month study, the OFT has concluded that the market for classified directories, which includes Thomson Directories, is not working effectively. The regulator said supply remained highly concentrated, with Yell and Thomson enjoying a 90 per cent market share while their strong branding and scale meant barriers to entry remained high.

"Profits appear high and there seems limited competitive pressure on prices," the OFT said. The commission investigation will be the second of its kind into the market, following a study by the old Mergers and Monopolies Commission (MMC) in 1996.

John Condron, the chief executive of Yell, said: "In the 10 years since the MMC completed its first review, the classified advertising market has become increasingly dynamic and aggressively competitive. We believe this has served customers well. We will, of course, play an active role in helping the commission understand the significant changes in the marketplace and its rapidly changing dynamics."

BT Group, which sold Yellow Pages in 2001, said it welcomed the referral. It re-entered the classified directories market in January 2003 but its presence, along with Trinity Mirror in Scotland, has failed to dent the incumbents' dominant position.

Paul Elliot, the chief executive of BT Directories, said: "The facts speak for themselves. As the OFT has found, Yell has made high levels of profits. It has a very strong market share that hasn't really diminished for quite some time. It's not for us to say what the OFT should do but I think it's fair to say we recognise a lot of the issues that the report highlights. There are difficulties for new entrants to the market and a lot of that derives from Yell's legacy position."

The OFT's reasons for referring the market to the commission are based on, among other things, the assumption that Yell and Thomson do not compete for advertising spend with other media, such as local newspapers, radio and the internet.

BT said that for many customers, classified directories were the only realistic media for advertising. This was the main reason behind the directories' position being so powerful, it said.

The OFT produced data on the return on sales figures for Yell and Thomson to justify its referral. It said Yell had a 37 per cent return on sales while Thomson's was 26.9 per cent - far higher than comparable industries which the OFT examined, notably newspaper publishers and advertising agencies. Even stripping out the latter, comparable figures for newspapers were 3 to 10 per cent.

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