FTC advisory opinion digest

No. 88. Three.way promotional plan set up hy radio station and flnanced by participating retailers and their suppliers. A radio station has been advised by the Federal Trade Commission that its proposed three-party promotional plan as origina11y presented would be unlawful because it would not be available to all competing customers in a practical business sense, but that subsequent revisions in the basic plan , coupled with the addition of an alternative plan , now bring the basic plan within the requirements of functional availability. However, the revised plan contains one defect which wi11 be discussed later, and which wil1 require correction before Commission approval can be given. The proposal involves the furnishing of background music and in-store commercial announcements to retail establishments. The radio station would install, without cost, the necessary receiving equipment in each participating retail store. The prod- ,

ucts advertised wi1 be limited primarily to grocery store items. Each store would pay a fixed amount for the background music depending upon the number of speakers (one speaker for every 600 square feet of floor space). The value of the in-store message to the partieipating supplier wi1 be measured and paid for on the basis of the total number of persons exposed to the in-store commercials at a fixed rate per thousand estimated weekly transactions. As origina11y submitted, no alternative plan or plans would be offered.

In its first advisory opinion , the Commission said that the legality of the proposed plan raised the fo11owing two questions: (1) Did it meet the requirement of functional availability sinee there was no provision for an alternative plan or plans ? (2) Did it provide for payments to a1l competing purchasers on proportiona11y equal terms if the method of payment for the in-store commercials is based upon the number of customers who are exposed to said commercials? With respect to the first question, the Commission noted that a promotional plan must be within the reach of a11 competing customers of the supplier in a practical business sense , otherwise it does not comply with the requirement of functional availability. After having examined the plan , the Commission concluded it would not be available to a1l competing customers in a practical business sense for a variety of reasons. In the first place " the Commission said retail outlets such as drug and department stores which may carry some food products but which may also carry a variety of other products may find it impractieal to participate in the plan , since due to the layout of these stores , the broadcasting of commercials limited primarily to food products, may interfere with their sales of other products. Second, retailers who already have existing contracts for background music from other sources would find it diffcult, if not impossible, to operate under the proposed plan. Third, those food stores which do not carry a11 participating brands could not be expected to broadcast in-store commercials promoting the sale of products which they do not stock and which may be carried by their competitors. We have doubts that the alternate solution offered under the plan would resolve these diffculties. In the first place, an assumption of contracts of competitors by the radio stabon under the circumstances might raise other antitrust problems. Second , although the proposed plan provides that any store may discontinue the plan at the end of the first year without any obligation for outstanding charges if the credits earned for in-store commercials do not ADVISORY OPINION DIGEST 1871 offset music and speaker charges, this provision would in no way eliminate possible discrimination against such stores during subsequent years. The Commission was of the opinion that the foregoing- examples " clearly demonstrate that the basie plan would not available in a practical business sense to a substantial number of competing retailers and therefore would not meet the requirement of functional availability. " Under these circumstances and in the absence of an alternative plan or plans for those who cannot use the basic plan, the Commission concluded that the proposed plan, if enacted, would not be in conformity with the requirements of Sections 2 (d) and (e) of the Robinson-Patman Act. It cited with approval the following portion of its announcement of September 21 , 1965 , setting forth certain guidelines for three-party promotional assistance plans:

'" .. * a reasonab1e alternative means of participation must be included in uch plans for eligible customers who arc unable to use the basic plan. Having concluded in its original opinion that the proposed plan does not meet the test of functional availability, the Commission did not find it necessary to discuss or reach a conclusion with respect to the second question presented by the request as to whether the method of payment for the in-store commercials, which is to be based upon the number of customers exposed to said commercials, meets the requirement of proportionality. Commissioner Philip Elman dissented to the abovc opinion. Shortly after the Commission issued its original opinion, counsel for the requesting party filed an amendment to the original plan. The amended plan made provision for an alternative plan for those who could not use the basic plan , and also made certain revisions in the basic plan.

Revisions of the basic plan provide for the installation of broadcast equipment in drug and department stores in such a manner that the in-store commercials will not interfere with the sale of other products. Retailers who presently suhscribe to background music from other sources may have equipment installed by the requesting party, without cost, which would permit interruption of the music by spot announcements (alternative plan 1). Retailers who do not cany all pl'ducts sponsOled under the plan can have in-store announcements which merely urge customers to buy those products identified by the sponsor s markel' rather than promoting- specific brands (alternative plan 2). A third alternative plan has also been proposed under which the facilities of retail stores wjJ be provided with promotional and advertising services at the point-of-sale of the sponsor s products. Under both the basic plan and the alternative plans, the value of the services performed by the retaiJers for the participating supplier wi1J be measured and paid for on the basis of the total number of persons exposed to the in-store commercials and point-of-sale material at a fixed rate per thousand estimated weekly transactions.

After having reviewed the plans as now proposed, the Commission was of the opinion that the basie plan now meets the requirement of functional availabilty. The Commission was also of the opinion that under the circumstances of the intended use of this plan, the proposed method of payment for the in-store commereials and point-of-saJe advertising, which is to be based upon the number of consumers exposed to said advertising, meets the requirement of proportionality under Sections 2 (d) and (e) of the Robinson-Patman Act.

Insofar as using the number of consumers exposed to the commercials as the standal'd for measuring payments to retaiJers the Commission felt this method accords with the value of the service to the supplier and in the long run wi1 probably correspond fairly closely to the amount of purchases of the supplier product, One reason for this is that suppliers probably wjJ not join the plan or stay with it if they find they are making payments to stores without any corresponding increase in their volume of sales by those stores, Therefore, under these circumstances the Commission felt it was reasonable to permit proportionalization to be based on the estimated number of customers, particularly \vhere, as in this case, the measure for estimating the number of customers is weighted in favor of the smaJler stores.

The Commission, however, was of the opinion that the proposed plan must be rcjected because the rate of payment under the alternative p1ans is one-half the amount paid under the basic plan and is therefore clearly not proportionally equal to the payments to be made under the basic plan. The Commission feels that such discriminatory payment provisions cannot be justified on the ground that the services rendered under the basic plan may bc more valuable to the supplier. In a typical case under the basic plan, a store with 20 speakers would clear approximately $65 per month over and above the amount it would pay for music charges, whereas an equhralent size store utilizing the alternative plan would clear approximately $5. Thus , if a supplier ,vere to fUl'njsh free music to one store and not to its