Significant concentration in the Icelandic book market

The Competition Authority has published Report no. 5/2021, Market analysis of the book market. The report covers the markets for the publishing and wholesale of books in Icelandic on the one hand, and for the retail of books in Icelandic on the other. The report is published for the information of market participants as well as other interested parties. The analysis is based largely on a study that the Competition Authority conducted into the markets for Icelandic books in the second half of 2020, in connection with Storytel AB's proposed acquisition of Forlagið ehf. The Competition Authority did not need to take a final position on the merger. as the merger parties withdrew the merger notification Following the Competition Authority's preliminary assessment of the merger's competitive effects.

Audiobook publishing and retail are booming.

The audiobook publishing and retail markets have been growing significantly recently. Thus, turnover in the publishing market tripled between 2018 and 2019, and turnover in the retail market grew by 170%. The majority of this increase can be attributed to the entry of Storytel, which holds an [80-85]% share of the audiobook publishing market and a [95-100]% share of the audiobook retail market. Meanwhile, wholesale and print publishing saw a slight decline, but the total turnover in that market was around seven times that of audiobook publishing.

Indications that printed books and audiobooks would different markets

In recent years, the trend in the book market has been an increased prominence of audiobooks and e-books. One of the key questions the Competition Authority sought to answer was the extent of substitutability between different formats of books. In previous cases, separate markets for printed books have not been defined, and e-books, but the Competition Authority conducted a survey of consumers in October 2020 to further assess the substitutability between audiobooks and printed books among consumers.

The survey revealed that there is evidence to suggest that audiobooks and printed books constitute distinct markets. Thus, her findings suggested that audiobooks are purchased for different purposes than printed books, that audio and printed books fulfil different consumer needs and are used in different situations.

The Competition Authority's analysis only covers the markets for books in Icelandic, as it can be argued that they constitute a distinct market. This definition is in line with the approach taken by the European Commission, which defines book markets according to their language of publication.

Printed books popular as gifts, but audiobooks are convenient

One of the things the Competition Authority's analysis revealed was that printed books appear to be much more popular as gifts than audiobooks. Just over a third of consumers cite this as the main reason for buying printed books, but that figure is only one per cent for audiobooks. Audiobooks, on the other hand, appear to be very convenient for consumers. Almost 60% of consumers cited convenience as the main reason for purchasing audiobooks.

Audiobooks seem to be particularly popular in situations where it is difficult to read a printed book, such as when doing housework, at the gym or on walks. Parents prefer reading printed books to children over listening to audiobooks, and printed books are also more popular when people are on holiday.

Significant concentration in the Icelandic book market

Markets for printed books are characterised by one company having a significantly strongest position, and even having multiple times the market share of its competitors. In the printed book publishing market, Forlagið is the largest, with a [35-40]% market share (based on 2019 turnover), which is three times more than its next competitor, Bjartur & Veröld. In the retail market for printed books, Penninn is the strongest player with a [50-55]% market share, which is more than double the share of Haga, who follow with [10-15]%.

To assess market concentration, the so-called is most often calculated. Herfindahl-Hirschman index (i.e. the HHI index) which generally provides a good indication of how competitive a given market is. Markets where the HHI value is below 1,000 are generally considered to be competitive markets. Concentration is considered moderate when the HHI value is between 1,000 and 1,800, but high concentration is present when the value exceeds 1,800 points.

Looking at the market for the publication of printed books, the value of the coefficient was 1,620 or 1,923, depending on whether the market is measured by retailers' purchase price or publishers' turnover, whereas the publishing markets for audiobooks and e-books are characterised by very high concentration, at 6,795 and 7,608 points in 2019.By comparison, concentration in the capital area's fuel market is around 2,200-2,400 points, and in the capital area's grocery market, it is around 3,600 points.

Concentration is even greater in the retail markets for books in Icelandic. In the retail market for printed books in Icelandic, it is 3,042, but in the retail audiobook market, it is particularly high, at 9,052, which is very close to the maximum value of the HHI index, 10,000. This is because one company, Storytel, has a very dominant position in the market.

The SE's market analysis of the Icelandic book market is available here.

Background information

On 20 July 2020, the Competition Authority received a merger notification regarding Storytel's proposed acquisition of a 70% stake in Forlagið. This prompted a detailed investigation by the Competition Authority into the book market.

The Competition Authority's preliminary assessment of the merger's effects on competition was set out in an objection statement published to the merging parties on 27 November 2020. In it, the Competition Authority justified its preliminary conclusion that the merger between Storytel and Forlagið was harmful to competition, pursuant to Article 17(c) of the Competition Act. These harmful effects on competition consisted of:

· Horizontal effects (a dominant market position would be strengthened in the markets for the publication and wholesale of audio, e- and print books in Icelandic on the one hand, and in the markets for the retail of e- and audiobooks on the other, Storytel would cease to be a potential competitor to the Publisher in the market for the publishing and wholesale of printed books in Icelandic, and the Publisher would cease to be a significant competitor to Storytel in the market for the retail of audiobooks);

· vertical effects (due to the strong market position of the merger parties in the book publishing market on the one hand and the audiobook retail market on the other); and

· synergistic effects (e.g. due to the combined company's ability to integrate different product and service elements).

The Competition Authority has the power to approve a merger that would otherwise have been shown to have harmful effects on competition, by imposing conditions intended to prevent those harmful effects from materialising as a result of the merger. In such cases, the merging parties take the initiative to propose conditions which they believe they can comply with, and the Competition Authority assesses whether they are sufficient to prevent the merger from having harmful effects on competition.

The merger parties were first notified of the Competition Authority's preliminary assessment of the merger's potential adverse effects at a status conference in October, and they first submitted possible commitments to remedy concerns in a letter dated 23 October. On 11 December, following the publication of the statement of objections, the merger parties submitted updated proposals for possible remedies.

The Competition Authority's preliminary assessment was that the proposed conditions would not have been sufficient to prevent the harmful effects of the merger. The Competition Authority did not need to take a final position on the conditions as the merging parties withdrew the merger notification towards the end of the proceedings, on 21 December.