Hasbro, Inc.

Company Profile
Reference Code: 1B81864B-E7C8-465C-AC5C-3B4FEDFFCB88 Publication Date: Sep 2006

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Table of Contents

TABLE OF CONTENTS Facts & Overview... 4 Business Description.. 5 History... 7 Major Products & Services... 10 Revenue Analysis... 11 Key Employees.. 12 Key Employee Biographies.. 13 Locations & Subsidiaries.. 16 Company View... 17 SWOT Analysis.. 21 Top Competitors... 25

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Company Overview

COMPANY OVERVIEW
Hasbro is one of the leading toy makers in the US. The company also publishes interactive games, puzzles and other related entrainment products for children and teens. The company primarily operates in the US and Europe. It is headquartered in Pawtucket, Rhode Island and employs about 5,900 people. The company recorded revenues of $3,087.6 million during the fiscal year ended December 2005, an increase of 3% over 2004. The operating profit of the company was $310.5 million during fiscal year 2005, an increase of 6% over 2004. The net profit was $212.1 million in fiscal year 2005, an increase of 8.2% over 2004.

KEY FACTS

Head Office 1027 Newport Avenue Pawtucket RI 02862 USA Phone Fax Web Address Ticker # Employees Turnover (US$ Mn) Financial Year End http://www.hasbro.com New York: HAS 5,900 3,087.6 December
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Business Description

BUSINESS DESCRIPTION
Hasbro is a leading provider of childrens and family leisure time and entertainment products and services. It designs, manufactures and markets games and toys ranging from traditional toys to electronic toys. Its core brands include Playskool, Tonka, Super Soaker, Milton Bradley, Parker Brothers, Tiger and Wizards of the Coast. The company operates in more than 25 countries, selling a range of toys and games marketed in the US, together with some items that are sold only internationally. The company divides its operations in four segments, US toys, games, international and other operating segment. The US toys segment is engaged in the design, marketing and selling of boys action figures, vehicles and play sets, girls toys, electronic toys, plush products, preschool toys, infant products, childrens consumer electronics, electronic interactive products, creative play and toy related specialty products. In the US toys segment, the companys products are categorized as boys toys, girls toys, preschool, childrens consumer electronics, creative play and other products. The boys toys product line includes GI Joe and Transformers action figures, the Tonka line of trucks and interactive toys. Other products include entertainment-based licensed products, based on popular movie and television characters, such as Star Wars toys and accessories, and other licensed products, such as Beyblade tops. In 2005, the companys Star Wars based line of toys and accessories was promoted by the theater and DVD release of Star Wars Episode III: Revenge of The Sith. In the girls toy category, Hasbro provides traditional toys, which include the My Little Pony and Littlest Pet Shop lines as well as the Easy Bake oven. In 2005, My Little Pony brand was supported by the DVD release of My Little Pony: A Very Minty Christmas. These product lines are supported by an animated on-pack video, such as Secret Central, a collectible line of dolls. Hasbro has a broad-based licensing relationship with Disney in the children toys category. The companys preschool products are marketed under the Playskool trademark. The children consumer electronics products include Hitclips micro-music systems and the Videonow portable video players. Other products in the US Toys segment include the Super Soaker line of water products and the NERF line of soft foam sports action toys. The Playskool line includes products such as Mr. Potato Head, Weebles, Sit n Spin and Gloworm, along with Step Start Walk nRide, 2-in-1 Tummy Time Gym and Busy Ball Popper. In teen toy category Hesbro markets its products under the Tiger Electronics brand targeting those children who have outgrown traditional toys. The age group targeted

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by this category is 8 to 12 years old. The companys major teen toys product lines in 2005 included Videonow, I-Dog and Chatnow. The games segment includes the development, manufacturing, marketing and selling of traditional board and card games, handheld electronic games, trading card and role-playing games, learning aids and puzzles. The companys game items include jigsaw puzzles for children and adults, including Big Ben and Croxley. Magic; The Gathering Online, is an online site where players can purchase, trade and play digital cards with other players, build and customize decks and organize their card collections right on their computers. The Milton Bradley, Parker Brothers, Tiger Games and Avalon Hill brand portfolios consist of a broad assortment of games for children, teens, families and adults. In the international segment, the company develops, manufactures, markets and sells both toy and game products in non-US markets. The key international brands include Action Man, Furreal Friends, Play-Doh, Playskool, Monopoly, Beyblade, Magic; The Gathering, Duel Masters and Videonow. The company also acts as distributor for Bratz Dolls in certain European markets. In the other segment, the Hasbro Properties Group provides global licenses for some of the companys intellectual properties to third parties for promotional and merchandising purposes. Operations segment is also responsible for sourcing production of toy products and certain game products from unrelated manufacturers in various Far East countries, principally China.
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History

HISTORY
Two brothers, Henry and Helal Hassenfeld founded Hasbro in 1923. Known as Hassenfeld Brothers, the company began by selling textile remnants and later began manufacturing pencil boxes and school supplies. In 1943, Henrys son, Merrill, was named President of Hassenfeld Brothers, and the company expanded its product line to include toys such as paint sets, wax crayons, and doctor and nurse kits. During the next two decades, the company introduced many new toys to the American marketplace, including Mr. Potato Head, the first toy ever to be advertised on television. Major growth occurred during the 1960s with the introduction of G.I. Joe, one of the most successful toys ever marketed, in 1964. On the back of this, in 1968, Hasbro became a public company and changed its name to Hasbro Industries. The company was involved in a string of acquisitions in the 1980s, using profits and earnings from successful product lines like Transformers, G.I. Joe and My Little Pony. In 1983, Hasbro acquired a number of companies, including Glenco Infant Items and Knickerbocker Toy Company, which brought the company plush toys including the classic Raggedy Ann and Raggedy Andy. In 1984, the company acquired the worlds largest and oldest game and puzzle maker, the Milton Bradley Company, as well as its Playskool subsidiary. By mid-1985, Hasbro united its four subsidiaries - Hasbro Toys, Milton Bradley, Playskool and Playskool Baby - under a billion-dollar corporate parent renamed Hasbro. In 1986, Hasbro went on to acquire Ideal games and Child Guidance products from CBS. By 1990, Hasbro international segment was formed, combining several international markets under one unified management group. Hasbro acquired Tonka Corporation in 1991, which included its Kenner Products and Parker Brothers divisions. The Tonka acquisition brought a new library of classics to its already deep and balanced collection with brands such as Tonka Trucks, Monopoly, Nerf, Easy-Bake Oven, Clue and Play-Doh modeling compound. It entered the growing Asian marketplace in 1992 by purchasing the Nomura Toy Co. of Japan, and Palmyra, a toy distributor in Southeast Asia. Strengthening Hasbros position as leader in the game business, the company purchased the rights to some of the games from Waddingtons in 1994, bringing more premier games, such as Pictionary and Cluedo, into the Hasbro family. The following year, Hasbro expanded

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its collection of outdoor action and adventure toys by purchasing the Larami Corporation and its popular Super Soaker toy line. That same year, Hasbro entered the CD-ROM game market by creating a new division, Hasbro interactive. Its first title, Monopoly CD-ROM, was an instant success, and was followed by CD-ROM versions of the popular board games such as, Trivial Pursuit, Scrabble, Yahtzee, Battleship, Risk and Clue. Hasbro interactive also converted some of the Hasbros classic toy properties to life on CD-ROM such as Tonka, Mr. Potato Head and Play-Doh modeling compound.In 1997, Hasbro interactive introduced an updated version of the 1980s classic, Frogger. Hasbro interactive growth continued in 1998 with the acquisition of a large portion of Ataris portfolio of the 1980s popular video games. In addition, Hasbro interactive also acquired MicroProse, a leading developer and publisher of entertainment software for use on CD-ROM-based personal computers, in the same year. Hasbro expanded its growth in the toy industry and entered the candy business through the acquisition of Cap Toys and OddzOn Products, both subsidiaries of Russ Berrie and Company. Cap Toys marketed a variety of products, including dolls, novelty toys and the Spin-Pop interactive candy line. OddzOn was known for its Koosh brand and sports activity products. In 1998, Hasbro strengthened its presence in the electronic entertainment category by acquiring Tiger Electronics, a company involved in the development and distribution of electronic hand-held games, toys and learning aids. Also in 1998, Nintendo of America selected Hasbro to develop and market a line of toys and games based on Pokemon, a Nintendo Game Boy video game that involved finding, capturing, collecting and training 150 virtual pet monsters. In 1999, the company concluded an agreement that allowed Hasbro interactive to develop, publish and distribute interactive games based on 11 Namco properties. This enhanced its position in the action games category. Also that year, the company acquired Wizards of the Coast, a publisher of hobby games, fantasy and science fiction literature. Hasbro sold its Interactive division to Infogrames Entertainment in 2001 to comply with its strategy of cost reduction. In 2002, the company introduced several new games such as the Trivial Pursuit 20th Anniversary Edition, Scrabble Folio Edition and Monopoly America Edition. During June 2005, the company reacquired the digital gaming rights from Infogrames Entertainment (These rights were transferred to Infogrames, through a license agreement in 2000 with an expiration date in 2016). In September 2005, Hasbro
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acquired Wrebbit, a creator and manufacturer of innovative puzzles, including three dimensional (3D) puzzles marketed under the Puzz-3D brand. In January 2006, Brian Goldner, a toy industry veteran who has held a number of senior posts within the company, was appointed as Chief Operating Officer. In the following month, Phil Jackson, who has more than 20 years toy and game industry experience was appointed as Senior Vice President, Marketing and Product Development for games. In July, the company announced a $350 million share repurchase program.
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Major Products & Services
MAJOR PRODUCTS & SERVICES
Hasbro specializes in the design, manufacture and marketing of toys, games, interactive software, puzzles and infant products. The companys key products and services include the following: US toy segment: Boys action figures Toy vehicles Play-sets Girls toys Preschool toys Infant products Creative play products Games segment: Traditional board and card games and puzzles Handheld electronic games Electronic interactive products Childrens consumer electronics Electronic learning aids Trading cards Role-playing games International segment: Boys action figures Toy vehicles Play-sets Girls toys Preschool toys Infant products Creative play products
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Revenue Analysis

REVENUE ANALYSIS
The company recorded revenues of $3,087.6 million during the fiscal year ended December 2005, an increase of 3% over 2004. For the fiscal year 2005, the US, the companys largest geographic market, accounted for 59.8% of the total revenues. Hasbro generates revenues through its four business divisions: international (39.9% of total revenue during fiscal year 2005), US toys (34.8%), games (23.7%) and other segments (1.6%). Revenues by Division During the fiscal year 2005, the international division recorded revenues of $1231.8 million, an increase of 3.1% over 2004. The US toys division recorded revenues of $1,074.5 million in fiscal year 2005, an increase of 12.8% over 2004. The games division recorded revenues of $730.6 million in fiscal year 2005, a decrease of 8.2% from 2004. The other segments division recorded revenues of $49.9 million in fiscal year 2005, a decrease of 2.6% from 2004. The operations division recorded revenues of $0.8 million in fiscal year 2005, a decrease of 69.6% from 2004.

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Key Employees

KEY EMPLOYEES
Name Basil L Anderson Alan R. Batkin Frank J. Biondi, Jr Jack Connors Michael Garrett E Gordon Gee Jack Greenberg Claudine B. Malone Edward M Philip Paula Stern Brian Goldner David Hargreaves Frank P. Bifulco Simon Gardner Barry Nagler Deborah Slater Martin Trueb Alfred J Verrecchia Alan G Hassenfeld Job Title Director (Since: 2002) Director (Since: 1992) Director (Since: 2002) Director (Since: 2004) Director Director (Since: 1999) Director Director (Since: 2001) Director (Since: 2002) Director (Since: 2002) President, US Toys (Since: 2000) Chief Financial Officer (Since: 1999) President, North American Sales President, Europe Senior Vice President, General Counsel, Secretary Senior Vice President and Controller Senior Vice President and Treasurer President, Chief Executive Officer (Since: 2003) Chairman of the Board (Since: 2003) Non Executive Board Senior Management Senior Management Executive Board Senior Management Senior Management Senior Management Senior Management Senior Management Non Executive Board Non Executive Board Non Executive Board Non Executive Board Non Executive Board Non Executive Board Non Executive Board Non Executive Board Non Executive Board Board Non Executive Board Total Annual Comp. -
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Key Employee Biographies

KEY EMPLOYEE BIOGRAPHIES

Basil L Anderson

Board: Non Executive Board Job Title: Director Since: 2002 Mr. Anderson has been a Director of the company since 2002. He has been Vice Chairman of Staples, an office supply company, since 2001. Prior thereto, he served as Executive Vice President, Finance and Chief Financial Officer of Campbell Soup Company since 1996. He serves as a Director of Becton, Dickinson and Company, Charles River Associates, Moodys Corporation and Staples.

Alan R. Batkin

Board: Non Executive Board Job Title: Director Since: 1992 Mr. Batkin has been a Director of the company since 1992. He has been Vice Chairman of Kissinger Associates, geopolitical strategic consulting firm, since 1990. He serves as Director of Diamond Offshore Drilling, Overseas Shipholding Group and Cantel Medical Corporation.

Frank J. Biondi, Jr

Board: Non Executive Board Job Title: Director Since: 2002 Mr. Biondi has been a Director of the company since 2002. He has been Senior Managing Director, WaterView Advisors, private equity fund specializing in media, since 1999. Prior thereto, he was Chairman and Chief Executive Officer of Universal Studios from 1996 to 1998. He is a Director of Amgen, Harrahs Entertainment, The Bank of New York and Vail Resorts.

Jack Connors

Board: Non Executive Board Job Title: Director Since: 2004
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Mr. Connors has been a Director of the company since 2004. He has been Chairman of Hill, Holliday, Connors, Cosmopulos, marketing communications company, since 1995. He serves as a Director of John Hancock Financial Services.

E Gordon Gee

Board: Non Executive Board Job Title: Director Since: 1999 Mr. Gee has been a Director of the company since 1999. He has been Chancellor of Vanderbilt University since 2000. Prior thereto, he served as President of Brown University from 1997 to 2000 and President, The Ohio State University. He is a Director of Dollar General Corporation, Gaylord Entertainment Company, The Limited and Massey Energy Company.

Jack Greenberg

Board: Non Executive Board Job Title: Director Mr. Greenberg has been a Director of the company since 2003. He has been Chief Executive Officer of McDonalds Corporation from 1998 to 2002. He served as Chairman of McDonalds Corporation from 1999 to 2002. He served as President of McDonalds Corporation from 1998 to 1999. He serves as Director of Abbott Laboratories, The Allstate Corporation, First Data Corporation and Manpower.

Claudine B. Malone

Board: Non Executive Board Job Title: Director Since: 2001 Ms. Malone has been a Director of the company since 2001. She has been President and Chief Executive Officer of Financial and Management Consulting since 1984. She serves as a Director of LaFarge North America, Lowes Companies, Novell and Science Applications International Corporation. Ms. Malone previously served as a Director of Hasbro from 1992 to 1999.

Edward M Philip

Board: Non Executive Board Job Title: Director Since: 2002
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Mr. Philip has been a Director of the company since 2002. He has been general partner of Lake Partners, private investment firm, since 2004. Prior to that, he served as Senior Vice President of Terra Networks, global internet company, from 2000 to 2004. He has served as Chief Financial Officer and Secretary of Lycos from 19952000 and Chief Operating Officer of Lycos from 1996 to 2000.

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revenue, including co-branded products like the Star Wars edition of the Monopoly game and our very own Darth Tater. Star Wars is an example of Hasbro at its very best, as measured by everything from product development, marketing and retail distribution, to our collaboration with Lucasfilm. Star Wars remains a valued and longterm strategic license for Hasbro and we expect it to contribute meaningfully to our business in 2006 and beyond. Clearly STAR WARS has proven we can maximize an opportunity with the right license at the right time. We believe our newly announced agreement with Marvel is another example of a strategic licensing opportunity. Through this agreement, we have acquired rights to develop toys and games based on Marvels renowned Super Hero franchises, such as Spider-Man, Fantastic Four, X-Men and Captain America. In 2006 we will be expanding our Nickelodeon range of games with a broader line based on the strength of their portfolio of the hottest and best loved preschool characters, including the introduction of the Spongebob Squarepants edition of MONOPOLY, an innovative game with breakthrough packaging. Driving Core Brand Growth In 2005 we continued to invest in our core brands by reinventing them to make them relevant to todays consumers. Our girls business was up significantly on a global basis, with strong performances from core brands, including Littlest Pet Shop and My Little Pony. Another core brand, NERF, had an excellent year, with revenues up 70%. We have a great deal of innovation going on within our Playskool brand as well with products that help infants and preschoolers learn, grow and develop, while providing parents with ideas for playing and connecting with their children. These are all good examples of how our strategy of introducing innovative products under existing brands is being successfully executed. Although our boys action figure business, other than Star Wars, was down for the year, there was good news in this category as we closed 2005. We had a successful fourth quarter launch of our new G.I. Joe Sigma Six line, which we expect to be one of our growth brands for 2006. Transformers had a solid year and is a major priority for us in 2006, as we build up to the much-anticipated 2007 scheduled release of the live action Transformers film from DreamWorks Pictures and Paramount Pictures. Action Mans A.T.O.M. brand, our new European action figure, was launched in the fourth quarter with good television ratings, and we expect it to do well in 2006. In 2005 the results were mixed in our global games business. The international board game business delivered strong revenue growth of 5% for the year, helped by the success of Monopoly Here And Now throughout Europe. However, revenues in our US games business were down year over year. While the traditional board game business both domestically and internationally continued to deliver operating margins

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which uses patented denta-mandibular sound transmission technology to give kids a fun new way to brush to an effective clean, and will be hitting stores later in 2006. Governance In terms of board governance, we continued to add expertise to our Board of Director s with the addition of our newest independent director, Michael Garrett, formerly an Executive Vice President of Nestle S.A. Michael has extensive international consumer product experience, and we are looking forward to his guidance as we seek to continue to grow on a global basis. On a sadder note, we lost our good friend, long-time board member, and our Presiding Director, Eli Segal, to cancer in early 2006. He was a remarkable individual who made a tremendous difference through his immense contributions to the community, the government sector, the business world, and to Hasbro. He left behind a tremendous legacy that wont be forgotten as other s help to further the causes he so generously contributed to. He will be greatly missed by all of us at Hasbro. At Hasbro, corporate social responsibility continues to be very y important. We are active with the Inter national Council of Toy Industries (ICTI) Care Process in driving ethical manufacturing. We continue to be involved with the communities in which we live and work. Through our charitable grants and in-kind product donations, we have helped to improve the lives of millions of children who were impacted by tragedies like the Asian Tsunami and Hurricane Katrina. We will continue to do our par t in 2006 in helping to make the world a better place. While our industry is undoubtedly changing, it is still a wonderful business with many opportunities. Toys and games hold a special place in consumers hearts and are as relevant as ever. We are committed to making the necessary investments to ensure that we successfully evolve and remain an industry leader. Our focus continues to be on generating strong cash flow, improving profitability, and creating greater value for our shareholders.
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SWOT Analysis

SWOT ANALYSIS
Hasbro is a leader in childrens and family leisure time and entertainment products and services. It designs, manufactures and markets games and toys ranging from traditional toys to electronic toys. The company has an array of successful brands such as PlayDoh, G I Joe, Playskool, Tonka, Milton Bradley, Parker Brothers, Tiger and Wizards of the Coast. A strong brand portfolio gives the company an edge over its competitors. However, intense competition could affect the companys revenues and margins.

Strengths Strong core brands Relationship with Disney Low cost manufacturing Opportunities Booming US computer and video game market Launch of new products Maximizing licensing opportunities Threats Intense competition Piracy Short lifecycle of products Children getting older younger Weaknesses Inconsistent revenues Low profitability and returns

Strengths

Strong core brands Hasbro dominates the board game business with Parker Brothers and Milton Bradley. The company has an array of brands from PlayDoh to G I Joe. Some of its successful brands are Playskool, Tonka, Milton Bradley, Parker Brothers, Tiger and Wizards of the Coast. Its preschool line is marketed under the PlaySkool line and its girls lines include My Little Pony, whose re-introduction has been well received. Hasbro has focused upon the tweens market with lines including VideoNow and FurReal Friends. The company has significant focus on building its core brands. A strong brand portfolio gives the company an edge over its competitors. Relationship with Disney In addition to designing and developing products based on its brands, Hasbro produces products based on popular entertainment properties developed by other parties through a license. The entertainment properties released theatrically for which the company has a license include Star Wars or Disney related productions. Hasbro is the master toy licensee for all of Disneys event films, in addition to some classic properties. The company is the official toy and game company for Walt DisneyWorld,
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Disneyland and Euro Disney. The company has been leveraging the popularity of Disneys products to gain attract customers. Low cost manufacturing The companys products are manufactured in third party facilities in the Far East and the company-owned facilities located in East Longmeadow, Massachusetts and Waterford, Ireland. However, majority of its toy products are manufactured in China. The company takes advantage of cost efficiencies through sourcing of the products from the low cost production destinations.

Weaknesses

Inconsistent revenues The company has been experiencing inconsistency in its revenue growth in the recent years. In the fiscal 2003, revenues increased by 11.4%, followed by a decline of 4.5% in fiscal 2004. In the fiscal 2005, the companys revenue grew marginally by 3%. Any continued inconsistencies in revenue growth could adversely affect investor confidence. Low profitability and returns Hasbros profit margins and returns have been low compared to the industry average in the recent past. Its operating and net margins in the five year period 2001-2005, were 9.3% and 4.8%, respectively, much lower compared to the industry average of 15.5% and 9.7%. During the same period its return on assets, investments and equity was 4.4%, 6.2% and 10.1%, respectively, lower compared to the industry average of 11.8%, 16.8% and 21%. Low profit margins reflect inefficient cost structure of the company, while low returns suggest ineffective utilization of resources.

Opportunities

Booming US computer and video game market Demand for computer and video games is expected to grow rapidly. The US video and computer games sales reached approximately $7 billion in 2005 and are expected to reach $11 billion in 2006. Every household in the US has on an average two video games. About 42% of the Americans are expected to purchase video games in 2006. Increasing demand for computer and video games in the US would mean higher business for Hasbro since it generates almost 60% of its revenues from the US. Launch of new products
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The company plans to launch new products to address this market. Hasbro had a successful fourth quarter launch of new G.I. Joe Sigma Six line, which is expected to be one of the companys growth brands in the short term. Action Mans A.T.O.M. brand, Hasbros new European action figure, was launched in the fourth quarter with good television ratings, and is expected to further gain popularity in 2006. Moreover, Hasbro plans to focus on its Transformers line as it can face a surge in popularity as a result of release of the live action Transformers film from DreamWorks Pictures and Paramount Pictures in 2007. Hasbro expects to leverage its popularity among the US tweens market and is planning to enter into other related businesses. One of the companys new product in the oral care aisle market is Tooth Tunes musical tooth brush, which uses patented denta-mandibular sound transmission technology. The new product is scheduled to be launched in the market in late 2006. Further, in 2006, Hasbro intends to introduce many new products in the newly-created tweens electronics business. The products in the pipeline are Twister Dance DVD, ICat, Mini I-Dog, and the national launch of Zoombox, a portable and easy to use entertainment projector that plays DVDs, CDs and connects to most gaming systems. The companys focus on launching new products for tweens could increase its revenues and market share in US tweens market. Maximizing licensing opportunities Hasbros licensing agreements provide it with significant co-branding avenues. For instance during 2005, its product line of Star Wars generated $494.1 million in revenue, including co-branded products like the Star Wars edition of the Monopoly game. Star Wars product line depicts the success of Hasbros collaboration with Lucasfilm, the licensor of Star Wars. Having acquired the license, Hasbro indulged in product development, marketing and retail distribution. The company has recently announced an agreement with Marvel, one of the worlds most prominent character-based entertainment companies. Through this agreement, Hasbro has acquired rights to develop toys and games based on Marvels Super Hero franchises, such as Spider-Man, Fantastic Four, X-Men and Captain America. These films which are as popular as Star Wars would provide the company significant growth opportunities.

Threats

Intense competition The gaming industry is intensely competitive. Although the company is one of the leading players in the market, it faces intense competition from companies such as
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Take Two Interactive Software, Lucas Arts, UBI Soft and Vivendi Universal Games. Increasing competition has imposed pricing pressures on Hasbro. Intense competition would adversely affect the market share enjoyed by the company. Piracy Interactive entertainment software is susceptible to piracy and unauthorized copying. Unauthorized third parties may be able to copy or reverse engineer companys products. Well organized piracy operations have proliferated in recent years resulting in the ability to download pirated copies of software over the internet. The video game industry lost more than $3 billion to piracy in 2005. An increase in piracy levels worldwide would reduce the Hasbros sales. Short lifecycle of products The interactive entertainment software market is characterized by short product life cycles and frequent introductions of new products. New products introduced by Hasbro may not achieve significant market acceptance or achieve sufficient sales to recover development, manufacturing and marketing costs. Historically, few interactive entertainment software products have achieved sustained market acceptance. Even the most successful titles remain popular for only limited periods of time, often less than nine months. Also delays in product releases or disruptions in the release of one or more new products could adversely affect operating results of Hasbro. Children getting older younger In the recent years, a major source of innovation in every walk of life has been technology. Changing technology ushered new forms of entertainment for kids in the US, which gave birth to the concept of children getting older younger. This represents a phenomenon whereby young children are shifting from traditional toys to electronic devices, such as MP3 players, cell phones and other entertainment and lifestyle products generally aimed at teenagers and young adults. Changing entertainment trends have been adversely affecting the toy business in the US, and these trends are expected to further increase in impact in the future. This could affect Hasbros revenues and margins.
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'The catalogues for these seasons are produced well in advance, both reflecting the propensity of customers to buy in advance for forthcoming seasons,
FAME (Financial Analysis Made Easy) - online publisher (Bureau van Dijk). Key Note, 'Toys & Games 2001 Market Report', page 9.
In 2000, 55% of sales were made in the final quarter (Mintel, 'Toy Retailing, Retail Intelligence UK Report', November 2001, page 13, figure 5).
Key Note, 'Toys & Games 2001 Market Report', page 19. Mintel, 'Toy Retailing, Retail Intelligence UK Report', November 2001, page 86. Office of Fair Trading 10
particularly in the case of clothing, but also ensuring the catalogue is available for the full potential sales period. High Street retailers, on the other hand, can alter their product and price offering at any time. Although catalogue retailers can produce supplemental leaflets or brochures containing special offers, the basis of the retail pitch must be the main catalogue itself. This means that catalogue operators, particularly if they are also discounters, must go to [the] market with prices which are as keen as possible. This may well have effects on market prices in the High Street. High Street retailers have the opportunity to undercut but may find it difficult to do so if the catalogue operators have adopted keenly competitive pricing in their catalogues.'11

Investigation

The then Director General of Fair Trading (the 'Director') started an investigation into price-fixing by Hasbro in March 2001. The investigation looked first into possible price-fixing and/or resale price maintenance ('RPM') by Hasbro and a number of its distributors (this investigation resulted in the then Director's Decision CA98/18/2002 of 28 November 2002). As part of the process of investigating the distributors case information was sought from Hasbro about its dealings with retailers. Hasbro applied on 14 September 2001 under the then Director's leniency programme for total immunity from financial penalty in respect of its dealings with retailers or, in the alternative, a reduction in the level of penalty. Leniency was granted on the then Director's usual terms, and in particular on condition that Hasbro co-operated fully with the OFT's investigation. The investigation was then expanded to look at possible pricefixing agreements between Hasbro and retailers, in particular Argos and Littlewoods. INVESTIGATION INTO HASBRO AND THE RETAILERS
On 10 August 2001, the OFT sent Notices under section 26 of the Competition Act 1998 to Hasbro and a number of retailers seeking information. On 26 and 27 September 2001, OFT officials carried out on-site investigations under section 27(3) of the Act at the headquarters of Argos and Littlewoods. A large number of e-mails and other documents were obtained as part of the investigation.

For the purpose of this Decision, 'electronic games' are console games, handheld electronic games and personal computer (PC) games. 'Traditional games' are defined as all games excluding electronic games. There are many clear differences between electronic games and traditional ones. Currently, there is little overlap between the suppliers of electronic games and the traditional toy manufacturers. Nintendo, Sony and Sega Enterprises Ltd dominate the market for electronic games. Electronic games are often supplied through different retailers, such as specialist electronic games retailers, audiovisual retailers or electrical goods retailers. Many such games require expensive hardware before they can be used. They are sold at price points that are much higher than those associated with most traditional games. Research conducted for Hasbro by Griffin Bacal states:
'principles of this [electronic games] differ from traditional board game play: mainly solo play manual dexterity/skill pace, speed mastery/control fast moving visual images Office of Fair Trading 16
visual and sound elements integrate as enhancers of excitement/ reward.'
The research goes on to say 'Handheld electronics deliver similar styles and types of game play, but are generally viewed as separate additional items not substitutes.' A comment from Hasbro in a Key Note report supports the view that traditional games form a separate market from electronic games. It believes board games will remain popular even in the Internet age, stating that 'the social interaction that board games bring is unique to home entertainment.'18 RELEVANT GEOGRAPHIC MARKET
As noted in paragraph 22 above in this case the OFT is under no obligation to come to a conclusion as to market definition for the purposes of establishing an infringement of Chapter I of the Act. However, market definition is the first step in assessing penalties. The OFT considers that it is unlikely that the market can be defined more narrowly than national. If a wider geographic definition were adopted this could have the effect of increasing the parties' relevant turnover and therefore penalty. For the purposes of calculating penalties the OFT is proceeding on the basis that the relevant market is that for toys and games in the UK. CONCLUSION
In the circumstances of the present case, the OFT does not consider it necessary to choose between the wider definition of all toys and games or the narrower definition given below of separate markets for each separate category. It is not necessary in this case to arrive at a precise definition in order to demonstrate an infringement of the Chapter I prohibition. However, the calculation of level of penalties depends partly on definition of the relevant market.The OFT has taken a narrow view of the market which results in penalties which are lower than if a broader definition had been adopted. Therefore, for the purposes of this Decision and in particular for the purpose of assessing the level of penalties the OFT has considered the relevant turnover of the parties in each of the following 10 categories of toys and games: 1) Infant and pre-school 2) Infant Pre-school

S/S 2001

Source: catalogues of Argos and Littlewoods, as summarised in Document D.5 of Annex A. * 'Additional Toys' are the toys mentioned in the e-mail of 18 May 2000 from Hasbro to Littlewoods (see paragraph 69 below). ** This includes Interactive Pikachu which was priced by both Argos and Littlewoods at 23.75 (see paragraph 75 below). *** This includes the two Tweenies dolls (Tweenies Pop Star Poseable Plush and Tweenies Doodles) that were the subject of discussions in the autumn of 2000 and which were subsequently priced by Argos and Littlewoods at the same price (see further at paragraph 107 below).
Autumn/Winter 1999 catalogues 57 The Argos and Littlewoods Autumn/Winter 1999 catalogues were the first catalogues for which the Hasbro account managers for Argos and Littlewoods had applied the process that is described in paragraph 53 above. When the catalogues were published in July 1999, it became clear to Hasbro that Argos and Littlewoods had priced nearly all the Action Man products and core games at the levels they had indicated to Hasbro, normally at Hasbro's RRPs.52 This had been very different in the three previous catalogues, as shown in Table 3 (paragraph 56 above). Before the Autumn/Winter 1999 catalogues came out, there was uncertainty about whether Hasbro's pricing initiative would work. The actual price levels in the catalogues reassured both Hasbro and retailers that the price levels of Hasbro products would be at or close to RRP. As indicated at paragraph 55 above, Ian Thomson says in his witness statement:
'The impact of the new Hasbro 1999 Terms by Argos and Index was felt throughout the trade and nearly all of our customers stuck to the price points
Witness statement of David Bottomley, paragraph 22; witness statement of Neil Wilson, paragraph 34; witness statement of Ian Thomson, paragraphs 69 to 71. Office of Fair Trading 29
because Argos and Index who were the price leaders had demonstrated that the new strategy was working.'53
Spring/Summer 2000 catalogues 59 It is clear that after A/W 1999, the arrangements for the Action Man range and core games were in operation for the S/S catalogues in 2000. However, there were fewer discussions on pricing between Hasbro and each of Argos and Littlewoods.54 This was partly because the Autumn/Winter season is more important for toy sales than the Spring/Summer season, because the Autumn/Winter catalogue applies in the Christmas period, when the majority of toys is sold. In addition, at the time that the prices for the S/S 2000 catalogues had to be set, in November or December 1999 and hence before the Christmas period, Argos and Littlewoods were still concerned about possible undercutting of their prices. Neil Wilson says in his witness statement:

him.93 The continuation of the arrangement is also shown by the e-mails of November and December 2000 referred to in paragraphs 84 and 107 below. The prices of core games, the Action Man range and the additional toys listed in the e-mails of 18 May 2000 were again identical in the Argos and Littlewoods Spring/Summer 2001 catalogues in respect of all but one product (see Table 3 at paragraph 56). Autumn/Winter 2001 catalogues 80 When the OFT visited Hasbro's premises on 15 May 2001, the prices for the Argos and Littlewoods Autumn/Winter 2001 catalogues were being finalised. The arrangement was still in place at that time, as is shown by an e-mail that David Snow, Hasbro's National Account Executive for Argos from June 2000, sent to Charles Cooper on 23 February 2001, which mentions 'the Argos/Index agreement for A/W 2001' (see further at paragraph 105).94 This is also shown by an e-mail that Ian Thomson sent to Charles Cooper, who had replaced Neil Wilson as Hasbro Business Account Manager for Argos, on 3 April 2001. Thomson's e-mail states:
'Index are keen to price the Ferris Wheel at the Argos S/S price of 49.99 in their A/W 2001 catalogue. Can you ensure that Argos will match the price and if you know of any retail price difference will you try and get them to comply.'
Charles Cooper replied the next day that 'no change planned' by Argos.Also, on 24 April 2001, David Bottomley stated in an e-mail to Charles Cooper:
Witness statement of Neil Wilson, paragraphs 71 and 72. See also witness statement of David Bottomley, paragraph 42.
Ian Thomson's recollection of this e-mail exchange in his witness statement (paragraphs 143 and 144) is different. Thomson believes that Charles Cooper replied that Argos would not be listing the Ferris Wheel in its Autumn/Winter 2001 catalogue. Ian Thomson then informed Garry Smith of Littlewoods (an assistant to Alan Burgess) that it would be safe to price the Ferris Wheel at 49.99. Both Argos and Littlewoods charged this price for the Ferris Wheel in their Autumn/Winter 2001 catalogues.
'Re: ARGOS ACCOUNT UPDATE Charles, please follow this up urgently, as we can not allow a 14.99 price on the dinghy.96 thanks DB'
David Bottomley explains in his witness statement that designers, who were contracted by Hasbro, had incorrectly priced the dinghy at 14.99 in 'a double page spread for the Argos catalogue for Action Man which included the dinghy'. Bottomley states:
' As a result of this e-mail, the error was corrected and the dinghy was priced at the RRP. I was the person who spotted that potentially we could have had a retailer undercutting RRP, which we could not allow given the arrangements which were then in place and working well.'97

OVERALL AGREEMENT AND/OR CONCERTED PRACTICE BETWEEN HASBRO, ARGOS AND LITTLEWOODS 92 An 'agreement' does not have to be a formal written agreement to be covered by the Chapter I prohibition. The prohibition is intended to catch a wide range of agreements and concerted practices including oral agreements and gentlemen's agreements as, by their nature, anti-competitive agreements are rarely written down.107 There is no requirement for the agreements to be legally binding or
Witness statement of Ian Thomson, paragraph 136; witness statement of Neil Wilson, paragraph 61. Witness statement of Neil Wilson, paragraph 24. This process is also described by Ian Thomson in paragraphs 79 to 81 of his witness statement.
Witness statement of Ian Thomson, paragraph 135.
See paragraph 2.7 of OFT Guideline 401, 'The Chapter I Prohibition', March 1999. See also the judgment of the European Court of Justice regarding gentlemen's agreements in Case C42/69 ACF Chemiefarma NV v Commission [1970] ECR 661 (in particular paragraphs 106-114). Office of Fair Trading 44
formal. As held by the European Court of First Instance, for an agreement to exist 'it is sufficient if the undertakings in question have expressed their joint intention to conduct themselves on the market in a specific way.'A 'concerted practice' has been defined by the European Court of Justice as:
' a form of co-ordination between undertakings which, without having reached the stage where an agreement properly so called has been concluded, knowingly substitutes practical co-operation between them for the risks of competition.'109
The European Court of Justice has also confirmed that it is not necessary to characterise, particularly in the case of complex infringements, an arrangement as either an agreement or a concerted practice. 110 These concepts are intended 'to catch forms of collusion having the same nature and only distinguishable from each other by their intensity and the forms in which they manifest themselves.'111 Given the level of collusion facilitated by Hasbro but the absence of evidence of direct contact between Argos and Littlewoods, the collusion between the parties may better be characterised as a concerted practice. However, it is not necessary for the OFT to come to a conclusion on the issue in order to demonstrate an infringement of the Chapter I prohibition. It is the OFT's view that Hasbro's pricing initiative led directly to an overall infringing agreement and/or concerted practice between Hasbro, Argos and Littlewoods. This overall agreement included two bilateral infringing agreements and/or concerted practices, contingent on each other, between Hasbro and Argos and between Hasbro and Littlewoods, which formed part of a pattern of continuous conduct with a common objective. These agreements and/or concerted practices may thus be read together as one agreement and/or concerted practice.112 The OFT contends in each case that where there was no

Neil Wilson states:

'Argos were fully aware that the pricing initiative involved Hasbro talking to other retailers. Argos monitored other retailers' prices. If they found out that a retailer was not at the Hasbro RRP, they contacted me to find out why there was a difference. When Argos called me about the apparently lower price of another retailer, they contacted me to see if Hasbro could do something about it, i.e. get the other retailer to go back to RRP. The understanding was that if Hasbro could give Argos an assurance that the other retailer would put the price back up to the
Witness statement of Neil Wilson, paragraph 28. This is supported by Ian Thomson's witness statement at paragraph 91.
Witness statement of David Bottomley, paragraph 18. Witness statement of David Bottomley, paragraph 19. Witness statement of David Bottomley, paragraphs 28 and 33. Office of Fair Trading 47
RRP, Argos would also remain at the RRP. If not, Argos would have to make a decision about how it would price the product usually by matching the competitor's price. I cannot recall being specific about Index in my conversations with Andrew Needham [Argos's buyer of boys' toys]. I would not be specific to Argos about any retailer or any retailer's price. Similarly, Andrew Needham would not specifically ask about Index. However, we would talk about the future anticipated market price and we were both aware that the Index price would be crucial to the outcome of the market price of any particular product. Andrew Needham was certainly aware that Hasbro was communicating with retailers with a view to increasing margins by moving towards RRPs. I know this from conversations I had with him, including when he would pick up the telephone, say that he had seen an Action Man product for, say, 2 less than the RRP, and could Hasbro do anything about it. His purpose in calling me was that he wanted Hasbro to persuade the retailer to go back to RRP or, if we could not do that, to tell him so he could take account of that in his pricing. It was clear from this that he knew that Hasbro was persuading accounts to go to RRP.'120

Ian Thomson states:

' There was no doubt that Alan Burgess [Littlewoods's buyer of boys' toys] knew that I was passing on to the Argos account handler (Neil Wilson) the contents of our discussion and that I would confirm the Argos intentions back to him after Neil had concluded his discussions with Argos.'121

Hasbro's, Argos's and Littlewoods's direct and close involvement is clearly shown by the series of e-mails sent around 18 May 2000 and in particular the two e-mails sent by Ian Thomson (see paragraphs 67 and 69 above). In the first e-mail (circulated internally), he states: 'Neil and I have spoken to our respective contacts at Argos and Index and put together a proposal regarding the maintenance of certain retails within our portfolio' and ' Action Man and Games prices will be maintained as per earlier agreements'. In the second e-mail sent to Littlewoods he states: 'Following on from various conversations regarding Price Points and opportunities to make more margin I am able to confirm a list of products and prices that Argos have committed to.' The witness statements of Ian Thomson, Neil Wilson and David Bottomley show that Argos and Littlewoods did not 'commit' themselves to price at or near Hasbro's RRPs in the sense that they formally bound themselves or guaranteed to adhere to them. In particular, they reserved the option to react to undercutting by another retailer. However, as is demonstrated by the evidence above, Argos and Littlewoods did inform Hasbro of their pricing intentions and Hasbro felt confident that they would price accordingly and in line with its RRPs. David Bottomley speaks of 'an understanding'.124 Even though there were no
Witness statement of David Bottomley, paragraph 48. Witness statement of Neil Wilson, paragraph 69. Witness statement of David Bottomley, paragraph 47. Office of Fair Trading 49
sanctions applied by Hasbro in the event of Argos and Littlewoods failing to adhere to the prices they had indicated, Argos and Littlewoods had a clear incentive not to deviate from Hasbro's RRPs, in the form of higher margins. Moreover, the risk associated with pricing at or near Hasbro's RRPs in the printed catalogues was substantially reduced by Hasbro's role as the middleman.125 Hasbro's confidence in being able to bring about uniform prices increased when the catalogues came out and the prices corresponded to the prices indicated by Argos and Littlewoods in advance (see paragraphs 58, 61 and 76 to 79 above), thus strengthening its ability going forward to persuade the participants to continue the arrangement and then to expand it. For example, Neil Wilson explains in his witness statement:
' Argos had told me what their pricing intentions were and that they were intending to price at Hasbro's RRPs. However, they never formally guaranteed that they would go out at those prices. There were no documents that set out these arrangements. If Argos chose not to charge RRPs there was nothing we could do, as we knew it was illegal to, for example, offer incentives to Argos to adhere to RRPs. That is why we only knew what the actual price would be (and whether Argos had kept to the price they had indicated to me) when we looked at the prices in Argos' catalogue. In July 1999, the Argos A/W 1999 catalogue was published. Argos had priced Core Games and the Action Man range more or less at Hasbro's RRPs. We were therefore reassured that the initiative was working and that, although they had offered no guarantees, Argos had priced [in the Autumn/Winter 1999 catalogue] at the levels that it had indicated to me in the vast majority of cases (i.e. in line with Hasbro's RRPs). in 2000 the pricing initiative 'was extended into other brands'. The extension of the pricing initiative to other products came about because the initial trial period had been successful. I noted in my report that it was recognised that margins were going in the right direction. Sue Porritt [of Argos] was very positive regarding the new terms and that the initiatives that had applied to Action Man and Core Games in 1999 would be extended to other categories. It was recognised in the meeting [in December 1999] that it was crucial that we maintained retail price stability as far as possible across our key brands so that the initiatives could succeed. Sue Porritt felt it was great that Hasbro could help maintain retail price stability, but said that Argos would react if it was undercut in order to remain competitive. By

Office of Fair Trading 77
with the competitor towards RRPs for toys to aggressive pricing in other sectors. A lower margin for toys than for other products cannot be a sufficient explanation in itself without any further evidence, as margins for toys and for other products can vary considerably from low to high. 192 The OFT's position is not changed by the witness statement of Hasbro's employees. Both Neil Wilson and David Bottomley mention Argos's desire to increase margins and profitability after it had been taken over by GUS. They state that around the end of 1998 there was pressure on Hasbro from retailers to deliver more margin on its products.161 Neil Wilson states that Hasbro reacted by proposing a number of initiatives, including its listing initiative and its pricing initiative (see paragraph 43 above).162 David Bottomley notes that '[t]he development of the pricing initiative came at the right time insofar as Argos' business strategy was concerned. At that time Argos wanted margin injected into the sector.'163 Also, 'Argos was sympathetic to both initiatives and was actively involved in discussions on pricing. Littlewoods followed Argos' lead, but was also involved in discussions with Hasbro about pricing.'164 Ian Thomson does not mention any change in Argos's policy related to the GUS take-over. Hence, the witness statements of Hasbro's employees do not support Littlewoods's assertions; they rather suggest that Hasbro's pricing initiative was developed in response to retailers' demands for more margin on Hasbro products (on which margins tended to be relatively low) and that Littlewoods went along with Hasbro's initiative once it had received reassurance from Hasbro that Argos was prepared to go along with the pricing initiative. Argos's alleged change in policy is also dealt with in response to Argos's representations (see paragraphs 284 to 287). BUYERS' AUTHORITY TO COMMIT TO RRPs 194 Representations: Littlewoods asserts that 'none of the Littlewoods buyers in contact with Ian Thomson had the authority to set prices. These were set by Lesley Paisley after discussion with the individual buyers and then were subject to approval by the relevant Director and could even be reviewed by the Executive Management Team.' In the oral representations, Lesley Paisley suggested that up to 50 per cent of the initial prices that were set by the buyers were subject to change.
Witness statement of David Bottomley, paragraph 7 to 10; witness statement of Neil Wilson, paragraphs 6 to 9.
Witness statement of Neil Wilson, paragraph 9. Witness statement of David Bottomley, paragraph 10. Witness statement of David Bottomley, paragraph 48. Office of Fair Trading 78
OFT's response: The OFT does not accept that it would be impossible for Littlewoods to agree to set prices at RRP because the buyers had no authority to commit to such prices. The statements from Littlewoods employees do show that prices had to be approved by Lesley Paisley, but they contradict the evidence given by Lesley Paisley. Katharine Runciman stated that in her experience, Lesley Paisley would 'become involved in the detail of about 10% of the lines under consideration, accepting the 90% without too much discussion.' This implies that only about 10 per cent of the prices set by the buyers were likely to be changed or challenged at a later date. Furthermore, Littlewoods accepts that it moved towards recommended retail prices at that time, so that most buyers could be fairly confident that if they agreed to go out at RRP, this would not be challenged by Lesley Paisley. Alan Cowley stated that he had no authority to set prices. However, he went on to say that he was nonetheless inclined to follow RRPs. Further contradictions are evident throughout his statement when he discusses the prices that he settled on. For example, 'If I went out at 14.99 and Argos went out at 12.99 I would have a lot of egg on my face.' This suggests a considerable amount of influence in setting the eventual price appearing in the catalogue. Also, Lesley Paisley mentions the fact that each of the buyers has a target profit margin that is set for them by management. It is hard to see how a system of setting such targets for buyers would work if they did not have any influence in the setting of prices for the products in their area. Finally, the OFT notes that even if the prices set by the buyers were subject to some amendment, this does not preclude the existence of the agreements. The OFT has evidence that shows that Hasbro passed on information about the evolution of prices over time, so that if a price changed from the agreed RRP, this could be communicated to the parties to the agreements. The e-mail from Neil Wilson to Ian Thomson and Mike Brighty of 25 May 2000 is an example of this type of exchange. Interactive Pikachu was confirmed at the RRP of 23.99 in the e-mail that was sent on the 18 May 2000. The follow up e-mail of 25 May 2000 from Ian Thomson stated that Argos had confirmed that Interactive Pikachu would be at 23.75 and went on to ask Neil Wilson to advise Index accordingly. DISCUSSIONS ABOUT THE PRICING OF THE TWEENIES DOLLS

Office of Fair Trading 90
their existence. Similarly, the fact that Ian Thomson was unsure whether there was 'total commitment' does not imply that no agreement existed. Ian Thomson clearly states in his witness statement, for example as quoted at paragraph 115 above, that he believes there was an agreement, despite his uncertainty about the actual prices. Also, as addressed earlier, the OFT finds that the general move to RRPs in 2000 and 2001 partly results from the existence of the agreements. 249 Representations: Ian Thomson says that when he asked Lesley Paisley to delete the e-mail he sent to her on 18 May 2000 (see paragraph 69 above), she said she was surprised he had sent it. Littlewoods puts forward the argument that Lesley Paisley's statement suggests that she was amazed that Thomson could have been confident that Argos had committed to any prices. Lesley Paisley says she does not recall being asked to delete the e-mail, but she does express surprise at its contents. OFT's response: The OFT notes that there are no documents that indicate a response to this e-mail and that Lesley Paisley's apparent lack of response seems implausible given the seriousness of its contents and the fact that all her team were addressees, who may have been persuaded to act upon the information (see earlier paragraph 217 above). Ian Thomson's understanding of Lesley Paisley's surprise, as described in his witness statement, is set out at paragraphs 118 and 217 above. Representations: Littlewoods queries the meaning of the terms 'middlemen' and 'gentleman's agreement' as used in Neil Wilson's and Alpana Virani's statements to OFT officials, respectively. OFT's response: The OFT considers that such terms are well-used in everyday speech and cannot readily see an alternative meaning for them, nor has one been suggested by Littlewoods. Also, irrespective of the exact meaning of such terms, the OFT has sufficient evidence to demonstrate that the arrangement described as a 'gentleman's agreement' amounted to an infringing agreement and/or concerted practice, as shown earlier in this Decision. Neil Wilson has clarified the term 'middlemen' in his witness statement, as quoted at paragraph 99 above. Representations: Littlewoods suggests that Alan Cowley's poor relationship with Ian Thomson is inconsistent with the existence of an agreement. OFT's response: The OFT does not accept Littlewoods's argument that the fact that Alan Cowley had a poor relationship with Ian Thomson is inconsistent with the existence of an agreement. There is ample evidence in the OFT's file

Cases T-202/98 etc Tate & Lyle v Commission [2001] ECR II-2035, paragraph 72. Cases T-25/95 etc Cimenteries CBR v Commission [2000] ECR II-491, paragraph 4862. Case C-199/92 P Hls AG v Commission [1999] ECR I4287, paragraph 163. Office of Fair Trading 93
neither would be likely to commit to RRPs without some form of assurance that the other was doing likewise. 261 Representations: Failure to define the market and to determine whether a pricefixing agreement has as its effect or object an appreciable distortion on competition and on trade is a serious procedural irregularity. Argos refers to the judgments of the European Courts in Vlk, Miller, Erauw-Jacquery and European Night Services.176 OFT's response: The OFT has already dealt with the question of whether there is a legal obligation to define the market (see at paragraph 22 above) and to determine whether the agreements had an appreciable effect (see at paragraph 256 above) in this case. The European Courts have held clearly that it is not necessary either to define the market precisely or to consider whether there are effects on a market or how appreciable those effects might be when dealing with an agreement whose object is the restriction of competition. In addition, as already stated in paragraph 257 above, the OFT cannot accept that price-fixing agreements involving the UK's biggest toys and games supplier as well as the biggest retailer and another major retailer of those products did not have as their object or effect an appreciable restriction of competition, even where applied to market sectors where Hasbro's share may not have been high. The statement of Andrew Needham, an Argos toys buyer, makes clear the importance of Argos and Hasbro to one another. Argos itself argues that some Hasbro products are 'must have' items. HASBRO SOUGHT ADHERENCE TO RRPs 264 Representations: Margins for Hasbro products are low. Hasbro has not been concerned that retailers make a sufficient margin. Hasbro does face the risk of some products being delisted but others are 'must have' items. OFT's response: The OFT accepts that margins on Hasbro products have been low. However, it does not accept that Hasbro was unconcerned about this. There is ample evidence, both documentary and in statements, that Hasbro was seriously concerned about lack of retail margin. An example is in David Bottomley's witness statement where he says: ' The purpose of [an internal Hasbro meeting to present the 1999 trading terms] was to discuss how to increase margin. This meeting was the start of the process that led to Hasbro's pricing initiative/strategy' (this meeting is further discussed at

parties, that a starting point of [between 8 and 10, inclusive]196 per cent of the parties' relevant turnover is appropriate. Step 2 adjustment for duration 388 The starting point for the penalty may be increased to take into account the duration of the infringement. In this respect, part years may be treated as full years for the purpose of calculating the number of years of the infringement.197 The start of the agreements fixing the price of Action Man and core games predates the start of the Act (see paragraph 123 above). Hence, 1 March 2000 is the appropriate starting point for these purposes. The agreements in relation to Action Man and core games are judged to have come to an end at the earliest on 15 May 2001, when the OFT visited Hasbro's premises in Uxbridge under section 27(3) of the Act, and at the latest on 14 September 2001, when Hasbro applied for leniency. Taking either date, the duration of the agreements exceeded one year, since the agreements affected Action Man and core games from the beginning. As noted in paragraph 376 above, for the purposes of calculating the penalty, the OFT has decided to take the earlier date as the date the infringement ended. This implies a potential doubling of the step 1 figure for the categories boys' toys and games and puzzles. Due to the serious nature of the infringement, the OFT does not accept Hasbro's request, made in its written representations to the original rule 14 Notice, not to take account of the period in excess of one year in setting the amount of the penalty. However, the period in excess of one year, for the purposes of calculating the penalty, lasted only for some two and a half months and did not include the period in the run up to Christmas where sales levels are particularly high. In the circumstances the OFT will not double the turnover for these categories, but will multiply it by a factor of one point two. The extended list agreement began around May 2000, was implemented in autumn 2000 and similarly came to an end at the earliest on 15 May 2001 (see also at paragraph 123 above). The extended list agreement covered at the very least the products listed in Ian Thomson's e-mail of 18 May 2000 (see paragraph 69 above). These products fall into the categories girls' toys ('Baby All Gone'), infant and pre-school ('Tweenies All Story Time Product'), creative (the toys listed under 'Get Set' and 'Design & Draw'), plush ('Tweenies All Standard Plush' and 'Tweenies Cuddle and Squeeze Doodles') and hand-held electronic games ('Monopoly' and 'Bop It'). This implies that the turnover for these categories should not be increased. Hasbro claims that the category infant and
The appearance of this phrase here and elsewhere in this decision signifies that the exact figure has been removed on grounds of confidentiality. Paragraph 2.7 of OFT 423. Office of Fair Trading 126
pre-school was not covered in the extended list agreement, because 'Tweenies All Story Time Product' falls within the category plush. However, the OFT cannot accept this. This toy consists of two dolls, one of which has an internal voice-box, and a little story book. When one of the dolls is pressed, it reads the text of the booklet aloud. Although the dolls are soft, they are not as furry and cuddly as plush toys. The toy is intended to be used to encourage children to learn to read, as they can follow the story in the booklet along with the speaking doll. Hasbro has submitted information which shows that NPD, a market research organisation, categorises 'Tweenies All Story Time Product' as plush, along with other soft dolls that contain an internal voice-box. However, the OFT does not find this persuasive in view of the characteristics and intended use of this toy. While it is arguable that it has certain 'plush-like' characteristics, it is clearly aimed at children of pre-school age and is at least equally an activity-type toy. 390 In its written representations to the original rule 14 Notice, Littlewoods claims that the evidence shows that Hasbro's discussions with Littlewoods's buyers ended in early 2000. However, the OFT does not accept this claim. The e-mails of 28 December 2000, 3 April 2001 and 24 April 2001 (see paragraphs 79 to 83 above) show that these discussions were still going on during the later part of 2000 and in 2001. Step 3 adjustment for other factors 391 The penalty may be adjusted as appropriate to achieve policy objectives, particularly deterring undertakings (including non-infringing undertakings) from engaging in anti-competitive practices.198 Indicated below is the OFT's decision on whether it is appropriate to adjust any penalty on these grounds. Step 4 adjustment for further aggravating and mitigating factors 392 The OFT has the power to increase the penalty where there are other aggravating factors, or decrease it where there are mitigating factors.199 It is indicated below which adjustments the OFT has decided are appropriate on the grounds of aggravating or mitigating factors. Step 5 adjustment to prevent the maximum penalty being exceeded and to avoid double jeopardy 393 No penalty which has been fixed by the OFT may exceed 10 per cent of the turnover of the undertaking calculated in accordance with the provisions of the

In its representations, Littlewoods also claims that it has co-operated with the OFT by making its employees available for interviews by the OFT and by providing the OFT voluntarily with explanations and additional documents over and above those found during the OFT's on-site investigation at Littlewoods's headquarters. The OFT accepts this and in recognition of this co-operation with the investigation the OFT has reduced the amount of the penalty by 10 per cent. As a result, there are no increases of the penalty for aggravating factors and the total percentage deducted from the penalty for mitigating circumstances is 10 per cent. The penalty for Littlewoods is therefore determined at 5.37 million. Step 5 adjustment to prevent the maximum penalty being exceeded and to avoid double jeopardy
For the purposes of section 36(8) of the Act, 10 per cent of Littlewoods's turnover (see paragraph 3) exceeds the level of the penalty by a very wide margin and the OFT does not consider it necessary to do the detailed calculations carried out for Hasbro at step 5. There are therefore no further adjustments to the penalty. PAYMENT OF PENALTY
The OFT requires Argos to pay it a penalty of 17.28 million ([*] per cent of its relevant turnover for the 52 week period ended 24 March 2001) and Littlewoods to pay him a penalty of 5.37 million ([*] per cent of its relevant turnover for the financial year ended 30 April 2001). The penalties must be paid within three months of the date of this Decision. If any party fails to pay the penalty within the deadline specified above, and has not brought an appeal against the imposition or amount of the penalty within the time allowed or such an appeal has been made and determined, the OFT can commence proceedings to recover the required amount as a civil debt.
Vincent Smith Director, Competition Enforcement Division

ANNEX A

List of statements and documents relied on by the OFT as evidence of the infringement
A. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. B. 1. 2. 3. C. 1. 2. 3. 4.
Notes of interviews of the following persons (obtained by the OFT prior to the issue of the original Rule 14 Notices): David Bottomley, a Hasbro Sales Director Mike McCulloch, Hasbro's Head of Sales and Marketing Ian Thomson, Hasbro's Business Account Manager for Littlewoods Neil Wilson, Hasbro's Business Account Manager for Argos Charles Cooper, Hasbro's Business Account Manager for Argos (Neil Wilson's successor) Roger Aldis, Hasbro's Field Sales Manager Carol Evans, Hasbro's Category Development Director for boys' toys and preschool brands Alastair Richards, Hasbro's managing director David Snow, Hasbro's National Account Executive for Argos Alpana Virani, a Hasbro Brand Manager Alan Burgess, Littlewoods's buyer of boys' toys, electronics and construction toys Alan Cowley, Littlewoods's buyer of pre-school and musical toys Lesley Paisley, Littlewoods's Buying Manager for toys Witness statements of the following persons: David Bottomley, a Hasbro Sales Director, dated 17 June 2003 Ian Shotbolt Thomson, Hasbro's Business Account Manager for Littlewoods, dated 12 June 2003 Neil Wilson, Hasbro's Business Account Manager for Argos, dated 13 June 2003 Documents: Paper prepared by Hasbro for its meeting with Argos on 17 February 1999 E-mail from Charles Cooper to Jonathan Ward of Hasbro of 15 April 2000 E-mail from Ian Thomson and Neil Wilson to other Hasbro employees of 18 May 2000 (sent at 11.56 am) E-mail from Ian Thomson to various Littlewoods toys buyers of 18 May 2000 (sent at 1.23 pm)