Copyright Amendment Bill (No.2) 1997

Minority Report -Part 2

The consequences for participants in the music industry

Major record companies

Labor Members of the Committee have deliberately chosen to refer to the major companies in the recording industry first because we are in no doubt that the political rationale which is driving the Government in its advocacy of this Bill is to damage or destroy it and its owners..

Professor Fels' evidence

The evidence of Professor Fels – a passionate and long time critic of the major record companies - gives the clearest possible proof that this is the case. In fact, Professor Fels is quite blatant about it.

For example, he candidly admitted that whilst there were independent people in the music industry "this is really - and the record companies well understand it - an assault on multinational privilege which has cost Australians a lot". (Fels, Hansard, p13)

We found it interesting to note that Professor Fels continually referred to the "multinational" record companies.

Indeed, we came to the conclusion when reading Professor Fels' written submissions and when listening to his oral evidence that the Professor has developed what could be regarded as an unhealthy obsession.

The problem for us is that this obsession coloured Professor Fels' evidence to an extent that we found disappointing and unhelpful from someone in the Professor's position, and which detracted markedly from his credibility on this issue.

We shall give two examples of this unhelpful outcome.

First, the Professor's apparent obsession led him to make a blatantly misleading statement of the law, which tended to undermine the evidence he gave to the Committee on the issue. Moreover, not only did he make this misleading statement in his written submission, he repeated it up front in his oral evidence. What Professor Fels misleadingly said was that "the law confers a monopoly or an exclusive right on multinational record companies in Australia to import their own CDs". (Fels, Hansard, p2, see also ACCC, Sub 159, p1)

However, as any first year student of copyright law would know - and as our discussion above has demonstrated - the exclusive rights Professor Fels refer to are in fact owned by a wide variety of interests in Australia, not exclusively by multinational record companies.

Professor Fels neglected to mention, or chose to ignore that in thousands of cases the rights are held by independent Australian-owned record companies. And they are often held by the artists or bands themselves. Professor Fels also failed to even have regard to the exclusive rights in the underlying musical works - the songs - which are usually held by publishing companies - foreign owned and Australian - and often by an individual songwriter or composer.

Unfortunately for Professor Fels - and for his credibility on this issue - this was not an isolated omission. In the first 2 pages of his written submission the Professor referred to the "multinationals" or "foreign-owned multinational" only on 7 occasions, when he was actually discussing the rights and interests of all owners of copyright in music CDs.

This pattern of omission, and repetitive reference to the multinationals, could simply be evidence that Professor Fels is ignorant of the nature of copyright law and of the rights it provides.

Another interpretation would be that it is part of a deliberate plan to capitalise on perceived opposition in the community to "evil" multinational companies, thereby obscuring the damage being done to local interests with which the community may have sympathy, such as independent record companies, publishing companies, composers and artists.

Certainly we have noted that the Prime Minister is not above this sort of thing. For example, in his interview of 16 October 1997 to which we have already referred the Prime Minister could not help but mention that the issue was about a group of companies who "are largely overseas owned companies".

Perhaps we should now wait with baited breath for the forthcoming attack by Mr Howard on foreign owned multinationals in the, car industry, oil industry and, closer to home, in the computer software industry.

In Professor Fels' case, perhaps the best we can do is repeat an observation made by Senator Jim McKiernan during the course of Professor Fels' evidence:

"Listening to you speaking, I thought I had Professor Ted Wheelright in front of me, rather than Professor Alan Fels, because of his work against the 'evils' of the multinationals." (McKiernan, Hansard, p14).

Professor Fels' apparent obsession with the multinationals led him to also dismiss other music industry participants opposing the Government's Bill as mere stooges of the major record companies.

For example, when asked why the independent record companies are opposed to the change, Professor Fels says that their source of nervousness is that "they, too, have been visited by the record companies". (Fels, Hansard, p13). But no tangible evidence was offered.

Similarly, the Australian Music Retailers Association were dismissed as being "too close to ARIA". (Fels, Hansard, p9)

To put it mildly, this 'conspiracy theory' type of evidence was singularly unhelpful to the Committee's deliberations.

Labor Members of the Committee were pleased to see that each of the industry participants that had been impugned in this way took the opportunity, before the Committee, forcefully to deny the implication.

Effect on major record companies

But of course the ultimate irony of the foregoing discussion is that the one message which came through the evidence loud and clear was that of all the interests in the music industry that will be affected by this Bill the major record companies are the least likely to be damaged.

This was a view that was put by a wide variety of industry representatives.

Mr David Caswell, a successful Australian song-writer of long standing, said that if the Bill does become law it will not hurt the multinational record companies very much. They will merely change from being manufacturing and distribution organisations to become import organisations. (Caswell, Hansard, p73).

James Woodruff said it more bluntly:

"By bringing this (the bill) in the multinationals are the only ones who will not get hurt". (Woodruff, Hansard, p136)

Ms Riccobono, the General-Manager of the long-established Australian publishing company J. Albert and Son Pty Ltd, stated:

"You are not going to hurt the multinationals. You are going to hurt us". (Riccobono, Hansard, p86)

The Australasian Music Publishers Association said that the Bill will most severely and directly affect independent Australian companies, not the multinationals (AMPAL, Sub 147, p3)

And finally, even Mr Dwyer candidly admitted that he does not believe the Bill will really cause the multinationals much pain. (Dwyer, Hansard, p103).

That these comments were made should not have come as a surprise. It should be obvious that if the investment environment for the multinationals in Australia becomes too adverse the prospect is they will simply seek alternative environments where the value of their investment is secure or profitable..

Thus the irony of the fact that the multinationals are least likely to be adversely affected by this Bill was not lost on us, and certainly not lost on Mr David Caswell:

"The worst case scenario is that, in sorting out these 'greedy' multinational record companies, you are going to wipe out the small business artists, the small independent writers and the small independent record stores. You are going to put a lot of people out of work." (Caswell, Hansard, p77).

Independent record companies

As we have alluded to above, we became very concerned during the course of some of the evidence before this Committee that insufficient regard was being paid to the interests of independent Australian-owned record companies.

Perhaps the most extraordinary example of this was the reaction of Professor Fels when he was directly asked by Senator Murphy about the effect of this Bill on the interests of the independent Australian record companies. After first refusing to address the question he went on to say that:

"It is a minority; that is the key point". (Fels, Hansard, pp5-6).

We found this response particularly disturbing. If the implication is that, because the independents do not control a majority of the Australian music CD market their interests can be sacrificed, we reject this totally.

First, the interests of the independents are just as relevant in the consideration of this Bill as the interests of the major record companies. These companies also employ Australians, invest in and develop Australian artists and repertoire, and export Australian music overseas.

Secondly, although a minority of the industry the independents nonetheless represent a substantial and important part of the market.

As Shock Records pointed out in their written submission, there are over 200 independent Australian-owned record companies and all of these will be affected by the change in the law. (Shock, Sub 90, p4).

Indeed, Professor Fels', in his own statistics, stated that these independents together account for 28% of the total wholesale market for sound recordings. (ACCC, Sub 159A, p7).

Thirdly, and perhaps most importantly, it must be recognised that the independents frequently perform a different role to the majors in finding and developing Australian talent. As Ms Michel Hryce of the Media Arts and Entertainment Alliance pointed out, these are the people who find talent and invest in it at a very early stage. (Hryce, Hansard, p71).

So it is clear, on any objective analysis of the evidence that the independent Australian-owned record companies are a vital part of the Australian music industry whose interests must be taken into account.

We are disappointed that the Government Members of the Committee failed to do so. Had they been more open-minded, we suggest that they would have had no hesitation in concluding and recommending to government that this Bill would be shelved.

It is important to note that virtually all independent record companies have strongly and consistently opposed this Bill. Moreover they have reached this position independently, and we regard it as an insult to suggest, as Professor Fels did, that "they, too, have been visited by the record companies". (Fels, Hansard, p13).

The reasons for this opposition were meticulously explained by Mr David Williams, the Managing Director of Australia's largest independent record company, Shock records, in his oral evidence before this Committee.

Mr Williams explained how the three levels of Australian artists, and their development by independent record companies, will be affected by this Bill. (Williams, Hansard, p122).

At the ground level, development of new Australian artists will be affected by lack of retail space as retailers rush to import. It is already difficult for independent record companies to persuade music stores to place the CDs of new, up-coming artists on the limited retail space available. The introduction of unrestricted imports will only further minimise the retail space available to these CDs, as retailers, especially the large retailers, increase their stocks and display of imported CDs.

At the next level, in respect of artists that the independent record companies are trying to break, it will be very difficult for the company to spend money breaking the artist without concerns for people "free-riding" and bringing in imported copies. In addition, the companies are able to make money investing in international artists through exclusive distribution rights, which enables the companies to afford to risk the expense of breaking Australian artists, will be substantially reduced.

At the highest level, in the case of successful artists, the concern is with overseas "deletions" coming back into Australia.

Thus it can be seen that the foremost adverse effect of this Bill on the independent record companies will be in respect of their investment practices, particularly in relation to the development of Australian talent.

This effect was succinctly summarised by Shock Records in its written submission:

"Small record companies will not be competing with the multinational record companies, but rather with importers, especially those seeking to free-ride by importing product that others are marketing." (Shock, Sub 90, p6).

It should also be noted that independent record companies will also suffer in relation to the new piracy provisions (which will be discussed below). For present purposes we simply note the submission made by Shock Records that the cost for an independent record company in monitoring imports of their product and launching legal actions would be prohibitive for a company the size of Shock. (Shock, Sub 90, p6).

Artists and Managers

It is appropriate to discuss the position of artist and managers after that of the record companies because the two are closely connected.

First, as we have noted before, the copyright in the sound recording - one of the copyrights in music CDs that is being affected by this Bill - will ordinarily lie in either the record company or, less commonly, the artist.

Secondly, and more important for present purposes, the discovery, development and promotion of Australian artists is at the very heart of the business of record companies.

It should therefore be obvious that the success of local talent (and therefore of the managers who manage them) is closely tied up in the success of the record companies and of the recording industry. For artists and managers therefore, the investment environment which exists for record companies to invest in the discovery, development and promotion of talent is as important to them as it is to the record companies.

Indeed, this was the very strong theme which underlay the oral and written submissions of many of the artists, managers and their representatives (especially, the International Managers Forum) who appeared before the Committee.

For example, Ms Sarah Longhurst of the IMF made the telling point that for a developing Australian artist to succeed requires an initial and ongoing investment - in things such as live shows, promotion, creation of video clips, advances for them to live on:

"An extremely important thing to understand is that getting to that point requires investment and ongoing investment. Allowing parallel importation threatens that investment environment. That is something that we feel very strongly will be an unintended consequence of this Bill". (Longhurst, Hansard, p108).

In a similar vein, Ms Hryce raised the concern that if companies are not earning the money to invest back into the Australian industry, Australian performers are not going to develop:

"If the majors no longer feel obliged to produce anything in Australia, markedly reduce their presence and become a post-office box in Australia for a bit of distribution from somewhere else, they are not here looking at artists or having our artists throw themselves in front of them. . . . . It means every Australian will have to go overseas, which is a major problem." (Hryce, Hansard, p70 & p75).

Thus at a general level, artists and managers will be adversely affected by this Bill because, for the reasons we have already articulated, the environment for investment in those artists is undermined.

Moreover, there are some specific aspects of this problem that Labor Members of the Committee would like to highlight.

First, it should be noted, as Mr Michael McMartin of the IMF noted, that one of the biggest loss leaders for record companies, particularly for the major record companies, is investment in Australian acts. In short, very few Australian acts in which investment is made ultimately become successful. (McMartin, Hansard, p109). This of course has the obvious consequence that where the investment environment is tighter - as will be the result of this Bill - investment in local talent will likely be the first to fall by the wayside.

As the Shock submission succinctly put it: "(the Bill) will make investment in unproved local talent too great a financial risk." (Shock Records, Submission 90, p3).

Secondly, the Australian Copyright Council made the important point that the local presence of multinational record companies (and music publishers) provide a gateway to international release of Australian music (ACC, Sub 164, p4). Thus to the extent that the multinational presence is diminished by this Bill the international gateway is made smaller for Australian artists.

Thirdly, a related point made by Mr David Williams is that most overseas companies want to see some sort of success in the home territory before they will invest in an artist. (Williams, Hansard, p127). Thus, with less investment by locally based record companies there is likely to be less local success and therefore reduced prospects of international success.

Clearly then Australian artists stand to lose a great deal from the Bill in terms of the potential for their discovery, development and promotion.

But unfortunately for them, that is not the only adverse impact of this Bill.

The other negative relates back to the problem of free riders and deletions. Put simply, to the extent that the Bill encourages the production of CDs outside of Australia that are subsequently brought back into the country, the performers income will be reduced - there record companies will not receive the appropriate returns on the imported CDs and as a consequence, neither will the artist. (Hryce, Hansard, p70).

The evidence we have heard makes it crystal clear to us - and frankly, we have difficulty understanding why it is not crystal clear to the Government Members of the Committee - that the negative impact this Bill will have on investment by record companies in Australia will inevitably have a negative impact on the development of Australian artists and on the Australian culture which they foster.

We regard this as a simple but obvious conclusion.

We can only wonder how on earth Professor Fels came to the conclusion that he does "not foresee very much effect at all" on artists. (Fels, Hansard, p3).

Perhaps a clue is given by his ensuing comment that "most (artists) will be a bit better off because they will get cheaper CDs". (Fels, Hansard, p3).

Only a man who is long past listening to rational counter-argument could One wonders what type of person would believe that artists are more concerned with getting cheaper CDs for themselves then developing their own career and receiving appropriate rewards when they succeed.

Composers and publishers

We turn now to composers and publishers, those participants in the music industry who benefit from the second copyright in music CDs - the copyright in the underlying musical work, the song.

We have found during the course of the debate around this parallel importation issue that composers and publishers have been the forgotten parties. For example, if you look at the record of government statements on this issue the focus has seemingly always been on record companies and artists, with the composers and publishers apparently languishing as irrelevant.

Indeed, even the detailed evidence that was initially submitted to this Committee by Professor Fels made virtually no mention of the interests of publishers and composers, despite the fact that their copyright is also vitally affected by this Bill.

Mechanical royalties

Composers and publishers are affected because of the crucial role copyright law plays in providing them with royalties for their songs. These are the so-called 'mechanical royalties' which are the financial rewards for composers and publishers for the reproduction of their works.

In practical terms, the present copyright provisions ensure that when a music CD is sold to the public in Australia, the royalties due to the composer and/or publisher of the works reproduced on the CD are paid in Australia, according to Australian standards of equity, probity and business practice, regardless of whether the CD has been manufactured in or imported into Australia. (APRA, Sub 145, p2)

Under the terms of this Bill, composers and publishers will lose this assurance.

Instead, royalties on works that are reproduced overseas and imported into Australia will be paid according to the copyright law of the overseas country.

As we shall see, the royalty regimes of many other countries from which music CDs may be imported under this Bill are vastly inferior to that which exists in Australia.

For that reason, Mr Jeremy Fabinyi of the Australasian Mechanical Copyright Owners Society was certainly not exaggerating when he said that the Bill will render valueless rights which publishers have spent tens of millions of dollars acquiring. In short, rights which have cost a lot of money will become meaningless if the Australian copyright owner cannot collect the royalties from the exploitation of those rights in this territory. Therefore, the rights for which the owner paid large sums of money evaporate. (Fabinyi, Hansard, p81).

The first problem that the proposed change in the law will produce is in relation to the amount of royalties that will be paid.

The Australian Music Publishers Association gave some important evidence on the amounts of royalties that will be received by Australian composers and publishers when their works are reproduced overseas even though they are imported into and sold in Australia.

The rate of royalty for a musical work reproduced in Australia is $1.68. However, if the work is imported from France the royalty will be $1.37, from the US the royalty will be $0.91 and from Malaysia the royalty will be $0.29. (AMPAL. Sub 147, p10).

It will therefore be obvious to all that to the extent that the Bill permits and encourages imported music CDs to replace locally manufactured CDs, there will be a significant reduction in royalties earned by Australian composers and publishers.

We note that the Majority Report, relying on a submission by the Department of Communications and the Arts, attempted to argue that such a reduction could be counter balanced by increased royalties flowing from increased sales flowing from price reductions. The problem with this analysis however is that it requires demand for music CDs to be price sensitive.

The evidence before us was that this is not the case. For example, Mr Williams of Shock Records gave evidence that he experiments quite a bit with pricing, and it does not necessarily result in selling thousands of records. (Williams, Hansard, p125).

Moreover, we are reminded that in his 1990 PSA Report, Professor Fels expressly found that demand for music CDs is not price sensitive.

The second problem, related to the first, is that payment of royalties in accordance with the copyright law of the country in which the work is reproduced will lead to increased delays in the receipt of the royalties and new uncertainty about the proper calculation of that royalty. (APRA, Sub 145, p2). For example, even in the case of imports from the US, the composer and/or publisher will suffer delays in receiving the royalties, will have lost withholding tax and will find it extremely difficult to attempt to obtain verification of the royalty calculation.

Similarly, Mr Eric McCusker, one of Australia's successful songwriters, gave evidence of the extreme difficulties that would be had in collecting royalties from countries such as Brazil and Korea (McCusker, Sub 133, p2).

Extraordinarily, as the APRA submission noted:

"All these difficulties will be presented to the Australian songwriter in relation to records sold in Australia to be enjoyed by Australian consumers". (APRA, Sub 145, p4).

Sadly for the Australian composers and publishers these consequences of the Bill on royalties are by no means the worst effect of it.

The most devastating problem arises because, as AMPAL have pointed out, the Bill will actually allow imports from countries with no copyright laws at all. (AMPAL, Sub 147, p17). (As an aside we were astonished to see in the ACCC's supplementary written submission - which at last dealt with composers and publishers - the assertion that the Bill only facilitates parallel imports from countries with copyright protection - ACCC, Sub 159A, p9. Put simply, this assertion is wrong.)

In these countries without copyright laws no consent is required from the copyright owner of the musical work, and there is no obligation to pay the copyright owner one cent. As Mr Brett Cottle of APRA stated:

"As a result of this legislation, if CDs are imported into this country from countries such as Taiwan, the Philippines, Thailand or, closer to home, Papua New Guinea, there will be no royalty paid to any composer anywhere. . . . In those countries there are no royalty collection mechanisms in place . . . . and there is no court or administrative infrastructure to ensure that royalties are paid at a reasonable rate in accordance with normal commercial conditions". (Cottle, Hansard, p58).

To take the example of PNG, a record producer could go to PNG and record karaoke versions of Midnight Oil and sell them in Australia without the consent of the band or songwriters and without payment of any royalty to the songwriters. (AMPAL, Sub 147, p17).

To put it mildly, this is an outrageous outcome and, in itself, should have been sufficient to persuade the Government Members of the Committee to recommend to government to abandon this Bill.

Indeed, we note with the interest that when the PSA last reported on the parallel importation issue it itself recognised this appalling outcome and addressed it by recommending that imports only be allowed from countries with "comparable levels of protection over the reproduction of musical works and sound recordings".

Labor Members of the Committee find it extraordinary that the ACCC - by supporting imports from any country irrespective of the comparability of the levels of copyright protection - has now come to a position which, by its own admission, is inconsistent with the position previously taken by the PSA. (Lee, Hansard, p17)

And we find Professor Fels' explanation for this change of heart totally unsatisfactory:

"that was in 1990 and the piracy enforcement has tightened up a lot in Asia since then." (Lee and Fels, Hansard, p17)

The hypocrisy of the Professor's reference to the irrelevance of 1990 will only become apparent when we refer later to his attempts to rely on the same 1990 report, and 1990 evidence, to support his position on price.

As to the notion that enforcement in Asia has tightened up since that time, all the evidence before the Committee was to the contrary.

Furthermore, as the evidence outlined above establishes, the problems of imports from countries without comparable copyright protection extends far beyond the piracy issue.

Other adverse consequences

Unfortunately, the negative effects of this Bill for composers and publishers do not only relate to payment of royalties.

First, up and coming composers rely on investment from publishers just as much as up and coming artists rely on it from record companies. And the same conclusion follows - this Bill will undermine the investment environment for publishers, discouraging them from investing in untested composers.

As Mr David Caswell stated:

"My ability to survive is because of the seed money that is provided by major companies that have been prepared to advance me money. . . . I could not have survived without that. . . . If this Bill comes in there is going to be no-where for (young talented songwriters) to go". (Caswell, Hansard, p73).

Second, parallel importing will actually be a disincentive to exporting musical works into Asia. As Mr Eric McCusker explained:

"Any sales there would be offset by the potential damage to my local income that imports from those territories would cause". (McCusker, Sub 133, p4).

Given these appalling circumstances that face composers and publishers should this Bill become law, it is very easy to sympathise with the sentiments of Ms Riccobono, General Manager of the Australian publishing company, J Albert & Son, when she said:

"Professor Fels keeps talking about this coming about: its being against the multinationals and how it is going to help the independents. I am an independent and I have not been able to see one thing here that is going to help us". (Riccobono, Hansard, p86).

Even at this late stage, Labor Members can only hope that the Government heeds these warnings, at very least so that Mr Ross Wilson does not act on his threat, if the Bill goes through, to leave Australia and go and live somewhere where his talents and efforts are appreciated and rewarded. (McCusker, Sub 133, p5).

Music retailers, especially small businesses

It was interesting to note that this group of music industry participants - music retailers - were the one group that did not present a united front of opposition to the Government's proposal.

It was more interesting to note that, generally speaking, the division of opinion in the retail sector was very much determined by the nature of the retail outlet - large department stores and large music chains tended to support the Government's Bill, whereas small independent music retailers, including many family run businesses, were by and large vehemently opposed to the proposed changes.

This reasons for this division of opinion will become obvious as we examine some of the evidence that came forward.

Before examining that evidence however, we just want to note the strength of feeling that small business music retailers expressed in opposition to this legislation.

For example, the Australian Music Retailers Association gave evidence of a survey they conducted of 105 small retailers, both members and non-members, about parallel importing. About 95% of these small retailers indicated opposition to the Government' Bill. (Bull, Hansard, p114).

In addition, Mr Barry Bull of AMRA gave evidence that small retailers were sick and tired of being told by the Government and by Professor Fels how parallel importing would be good for them, when they know the reverse is true:

"As small businesses, we are annoyed that Professor Fels, who does not know what it is like to be behind a shop counter seven days a week offering the best service possible, continually tells us how easy it will be to exist as small retailers under the parallel importing regime and how fortunate we will be. He ignores the problems we retailers will face in being forced to import to be competitive". (Bull, Hansard, p114).

We note this evidence because, quite frankly, we are surprised that the Government is apparently ignoring it. Our surprise arises because, of course, this Government constantly claims to be sympathetic to small business in this country, to represent its interest and to champion its cause.

We know however - as do the small music retailers - that this is simply not the case when it comes to the music industry. In fact the Government apparently is selective when it comes to the sectors of small business that it considers worthy of support.

The tragedy is that, blind to the problems that small retailers will face under parallel importation, the Government is prepared to sacrifice their interest in a head long rush to become the champion of the major retailers, including ironically some multinationals.

Professor Fels – you have been alerted.

The problems small retailers will face

Under a parallel importation regime small retailers will have immediate problems in terms of changed trading conditions.

An example given by Mr Barry Bull is the change that will occur in distribution networks, particularly having to handle and take into account changes in the exchange rate:

"The legislation is asking retailers to forego an established and reliable distribution network for a constantly negotiable set of forces. This is a huge expectation on smaller retailers to perform and respond quickly in this competitive chain-dominated environment". (Bull, Hansard, p114).

Another example is the change in trading terms that will apply to small retailers, with AMPAL noting that trading terms from countries such as Asia will not be as favourable as in Australia. For example, small retailers will be very unlikely to obtain terms that are customarily offered by Australian companies, such as those which allow them to return unsold stock - so-called 'sale or return'. (AMPAL, Sub 147, p15).

However, whilst these problems will be significant, by far the most damaging problem that will confront small retailers under parallel importation will be their inability to compete with the big retailers and big chains.

The reason this problem will arise should be obvious to anyone. In a situation where open imports by retailers are promoted, those retailers with large buying power will be able to access better trading terms from overseas wholesalers, including lower wholesale prices.

This was put succinctly in the AMRA written submission:

"Independent music retailers will never be able to compete with the larger chains who have their own well established international distribution and credit facilities. Those with buying power will be able to exploit a situation where open imports are permitted. That is, the rationalists' model of open imports makes the playing field very un-level." (AMRA, Sub 150, p3).

In this statement AMRA alludes to one of the significant specific advantages the major retailers will have - established credit and supply lines, either from the resources of their parent company or directly from the international record companies, that are not available to small independent retailers. (AMRA, Sub 150, p4).

Mr Barry Bull noted another advantage: the major retailers can buy better by dealing directly with the major US record labels whereas the independents can only deal with middle-man wholesalers called one-stops, who add their own margin, thus inflating the price to smaller retailers (Bull, Hansard, p115).

Given this evidence we were not shocked that support for the interests of small music retailers came from some surprising quarters.

For example, the Sydney Morning Herald music critic, Mr Bruce Elder, who was otherwise basically a supporter of the Government's Bill, recognised that large retail organisations will be able to buy in very substantial quantities, but that this:

"would not operate for a small retailer, and it is likely that it would probably produce a fairly negative effect for small retailers". (Elder, Hansard, p55).

That concern even went to the Trade Union movement. Ms Hryce of the Media Arts and Entertainment Alliance, a union not known as a representative or advocate for small business, said she was concerned about how independent retailers are going to compete, particularly as they cannot put in a bulk orders like Woolworths or Sanity. (Hryce, Hansard, p75).

Indeed, one suspects that both Woolworths and Sanity well know there are advantages to being a large retailer under a parallel importation regime, such as being able to buy better by, for example, taking advantage of arrangements under which rebates are given for volume purchases.

In fact, even Professor Fels was capable of recognising the "buying power of the big retailers", although he claimed that small retailers could respond to this buying power in ways which would ensure big retailers would not 'put the squeeze' on them. (Fels, Hansard, p3).

Needless to say, these ideas were dismissed by the people with the hands on experience as opposed to the theoretical expectation - the small music retailers themselves.

The evidence strongly supported the position taken by small retailers that they would be seriously disadvantaged under a parallel importation regime.

We hold very real fears that the proposal will inevitably wipe out large numbers of small music retailers in Australia. Moreover it could very well lead to the situation, recognised by Senator Shayne Murphy during the course of the hearings, where the Bill professes to be about destroying a monopoly on distribution by multinational record companies, but actually creates a monopoly on retailing by multinational retailers.

Indeed, it does not take a genius to understand that this is precisely the reason why big retailers, such as Woolworths, are enthusiastic supporters of the proposal.

The disadvantage suffered by small business - and the prospect of small businesses being wiped out -is in itself a tragedy, and in our view is reason enough for opposition to this Bill.

But this view is strengthened when regard is also had to the broader consequences should larger retailers gain substantial dominance of the retail market.

For example, we note that comments by Mr Barry Bull that Woolworths has no interest in the development and future of Australian artists and of the Australian music industry, only in the commodity it knows as a CD. They do not support the range which independents must carry or provide the service or knowledge to support that range. They use highly discounted CDs merely to induce customer traffic into their stores. (Bull, Hansard, p114).

Similarly, we note the evidence of AMRA that choice of music will suffer as major retailers concentrate on importing high demand (top selling) product - the fast moving product which Australian distributors rely on for their capacity to maintain stock of the wider slower moving back catalogue. (AMRA, Sub 150, p5).

Given all this we cannot help but be somewhat bemused by a comment made by Professor Fels when reflecting on the reasons AMRA and small retailers are opposing the Government's Bill - they are "very nervous about change". (Fels, Hansard, p9).

Frankly, they have good reason to be.

Manufacturers

In this Minority Report, we can deal with the position of CD manufacturers very briefly because, regrettably, their position under a parallel importation regime is all too predictable.

At present 95% of CDs sold in Australia, are manufactured in Australia by Australian workers.

Unfortunately for them, this Bill provides an explicit incentive for CD manufacturers to move their manufacturing offshore - to source their product where the costs are cheapest - and then to import the material back into Australia. (AMPAL, Sub 147, p4).

Indeed, we note that even Professor Fels conceded that "to the extent that there are more direct imports of CDs made overseas (as a result of this Bill), there is a reduction in the number of CDs manufactured in Australia". (Fels, Hansard, p7).

Others in the industry

Given the impact on manufacturing, it is undoubted that job losses will occur in that sector should this Bill become law.

Initially there will also be job losses in the publishing and recording industries as these industries inevitably contract in the more hostile investment environment this Bill will impose. (AMPAL, Sub 147, p4).

These effects on employees in the music industry are, regrettably, all too obvious.

But we should also bear in mind that job opportunities in a myriad of related fields will also be affected as the Australian music industry inevitably contracts in the wake of this Bill. (AMPAL, Sub 147, p4).

This includes opportunities in music related businesses such as rehearsal studios, freelance sound recording services, music video businesses, concert promoters, venue operators, booking agents, advertising agencies, retailers, performers and songwriters.

The most recent evidence of the number of people employed either directly in the business of recording, publishing or manufacturing CDs or indirectly in these music related businesses was provided by Price Waterhouse in 1993 - 50,000 employees. (AMPAL, Sub 147, p4).

The Copyright Amendment Bill puts the jobs of each and everyone of these 50,000 people at risk.

Not all of them will lose their jobs - but many of them will. A strange ambition for a government in a country where job security is a priority and unemployment is far too high.

The consequences for piracy

There is no doubt that the Government itself knows that the introduction of parallel importation of CDs would, in itself, lead to an increase in pirated CDs entering this country.

Indeed, this was precisely the point that was made by the written submission of APRA:

"The fact that the Government has decided to increase penalties for piracy at the same time as repealing the import rights is itself, of course, acknowledgment that the increased importation of pirate product into Australia is indeed a likely result of the removal of the import right". (APRA, Sub 145, p4).

The Government's response, however, has been to say that any increased piracy that would otherwise arise will be discouraged by the proposal to increase the penalties for piracy and to allegedly "make it easier to prove offences of piracy in the courts by reversing the onus of proof". (Fels, Hansard, p2).

Unfortunately for the Government, it is easy to demonstrate that this is a flawed response.

The key is the fundamental role the existing copyright law currently provides as the threshold identification mechanism - the very mechanism that will be lost under this Bill.

Identification of piracy

The existing restriction on parallel imports provides a mechanism for identifying pirated CDs at two important points - the point of import and the point of sale (or at least, stocking for sale).

The written submission of AMPAL gave a detailed explanation of the identification mechanism at the point of import. (AMPAL, Sub 147, p23).

The existing provisions give the copyright owner the right to exclusively import a CD in which copyright is owned. In practice, this means a CD importer is required to have an import licence from the Australasian Mechanical Copyright Owners Society (AMCOS - acting on behalf of the copyright owner) prior to importation into Australia. When a shipment of CDs arrives in Australia Customs has the power to seize CDs which have been imported by someone other than the licensed CD importer, and to hold such product until AMCOS institutes proceedings for unlicensed importation. Thus, under the existing provisions Customs and AMCOS automatically know that if a shipment of CDs was not imported by the licensed CD importer it must be a pirated CD imported in breach of copyright law.

Under the changes proposed by this Bill, as we have seen, the exclusive right of copyright owners to import CDs into Australia is removed. This means AMCOS will no longer have the right on behalf of the copyright owner to require a CD importer to hold an import licence, or indeed to bring proceedings for unlicensed importation; similarly Customs power to hold unlicensed imports is rendered meaningless. The problem with this however, in terms of pirate identification, is that Customs and AMCOS will no longer automatically know that a shipment of CDs imported by someone other than the copyright owner or exclusive licensee is a pirated CD imported in breach of copyright law. The shipment could have been lawfully imported by someone else pursuant to their right to parallel import CDs into Australia.

It can therefore be seen that the existing provisions are vital to control piracy at the point of importation.

The respected piracy investigator, Mr Michael Speck, gave an explanation of the identification mechanism at the retail point. (MIPI, Sub 142, p6).

Under the existing provisions, the only stocks of CDs that should be in retail stores are those made by the Australian copyright holders or exclusive licensors. When stocks are identified that are not made or authorised by the local copyright owner these are immediately suspect as pirates. Indeed, with 95% of CDs made in Australia, stocks not made in local factories are automatically suspect.

Under the changes proposed, the mere presence of stocks of CDs in retail stores not made or authorised by the Australian copyright owner would not prima facie mean anything other than that an import has taken place. In order to ascertain whether the import was illicit, the country of manufacture would need to be known as well as other details - usually not known or offered by the importer.

Thus it can also be seen that the existing provisions are vital to control piracy at the point of sale (or stocking for sale).

In summary then if the restriction on parallel imports is repealed identifying and therefore prosecuting pirated product becomes in a practical sense impossible.

Why the Government's response is flawed

This last statement explains why the Government's response is flawed.

The Government's response is directed solely to making prosecution (allegedly) easier and to increasing penalties after a successful prosecution.

But these points will never be reached if identification of pirated product is practically impossible. No pirates will ever be identified to be subject to prosecution or to increased penalties.

Other problems with the Government's response

In relation to the Government's proposal to increase penalties for piracy we can be very brief.

We endorse completely the comment by Ms Baulch of the Australian Copyright Council that:

"it is difficult to believe that somebody who is undeterred by a fine of $250,000 is suddenly going to be deterred by a fine of $275,000". (Baulch, Hansard, p65).

The Government has stated that it now intends to propose a 10% increase in all relevant fines. This is a classic policy making on the run, and, as usual, the proposal alone cannot repair bad law.

Put simply, we do not believe this increase will provide any deterrent effect whatsoever in the case of pirated CDs, particularly as potential offenders would be safe in the knowledge that detection of their piracy is now all the more difficult.

In relation to the proposal to "reverse the onus of proof" we can also be very brief.

The Government has proclaimed from the outset that this Bill will reverse the onus of proof in cases concerning piracy, arguing that this will make it easier to bring successful prosecutions of piracy cases.

But the evidence before this Committee proved conclusively that the benefits of this change are largely illusory.

First and foremost, the proposed change in the onus of proof does not apply in criminal cases - and so the criminal prosecutions of pirates are not affected.

Second, in relation to civil cases, where the Government claims the change will have an effect, the evidence put before us demonstrated that the Government's Bill does not in fact reverse the onus of proof, and that the change is of little practical, benefit at all.

As was authoritatively stated by the Australian Copyright Council in its written submission:

"The Bill does not 'change the onus of proof' as claimed in the Government's press release of 8 October 1997. As with other infringements, the copyright owner would have to prove all elements to make out a prima facie case, including that the copyright owner had not licensed the act alleged to be an infringement. In an action for unauthorised importation, the copyright owner must also prove that the defendant knew, or ought to have known, that making the imported article in Australia would have infringed copyright.

"The Bill would shift the onus of proof to the defendant only when a prima facie case had been made out. This is no different to the onus of proof in relation to existing exceptions and provisos in the Act, including the provisions which allow the importation of books. The Bill would not remove any of the elements which a copyright owner currently has to prove". (ACC, Sub 164, p7).

And, as AMPAL explained in its submission, the practical result of this is that the benefits of the alleged 'reversal of the onus of proof' are largely illusory. Thus, the copyright owner will still:

have to show that the importer had constructive knowledge that they were infringing rights;

have the same onerous evidentiary burden to establish copyright ownership;

have a very small window of opportunity to advise Customs that imported works are infringing;

be exposed to damages while trying to enforce their rights;

have to argue in court the legality of a licence purportedly issued in a foreign country under foreign laws.

(AMPAL, Sub 147, p25).

Given this detailed and expert testimony, we can only conclude that the Government, and Minister Alston in particular, have been deliberately deceptive in relation to the onus issue, in order to create an impression that prosecutions will be easier when in fact there is no substantial change at all.

Conclusion

Given the obvious flaws in the Government's response to the piracy threat we, and the music industry, are right to be very concerned about the prospect of increased piracy should this Bill become law.

Labor Members of the Committee are particularly concerned about the empirical evidence we heard that piracy has rapidly increased in those few countries in which parallel imports have been allowed.

Here we refer to the evidence of Mr Speck that in Norway, after parallel importation was allowed, there was a dramatic influx of pirated material and the overall level of piracy increased markedly. (Indeed, the problem became so bad that parallel import restrictions were reimposed). And we refer to his evidence that in Singapore since the introduction of parallel importation there has been a significant influx of pirated material. (Speck, Hansard, p94).

We can only conclude that this Bill inevitably poses a grave threat to the Australian music industry in the form of increased piracy. And that the Government's response is woefully inadequate and fundamentally flawed.

The prospects for cheaper CDs

In light of the alarming evidence about the negative consequences on parallel imports on the Australian music industry and on participants in it, we would expect that the evidence presented to this Committee about the alleged beneficial impact on CD prices would be overwhelming. After all, the Government alleges that the removal of the restriction on parallel importation will lead to a decrease in CD prices, and that on balance this consumer benefit is worth any potential damage to the industry.

Frankly, we were underwhelmed by the evidence of potential price reductions.

Missing was any evidence at all that could support the Prime Minister's outrageous claim, at the time the Government's decision was announced, that:

"the decision . . . . will mean that CDs will fall by at least $7 an item". (John Howard, Press Conference, 16 October 1997, Sydney).

Missing was any empirical evidence of the price reduction it is alleged will occur.

Missing in the first instance (that is, until Senator Murphy pointed out the startling omission in the ACCC's initial evidence) was any serious attempt by the supporters of this Bill to examine the cost structures that would confront an Australian retailer seeking to parallel import CDs. (As we shall see, this is the central issue in the price debate).

Rather, this Committee was presented with an argument which simply asserted that the retail price of CDs is lower in some countries, most notably the US; that:

"The cause of the price difference is that the law confers a monopoly or an exclusive right on multinational record companies in Australia to import their own CDs". (Fels, Hansard, p2);

and that:

"It is quite clear that, if the import restrictions are removed, prices of new CDs will fall quite sharply in Australia by several dollars at least, if not more. . . . . It is inconceivable, given the large price differences between Australia and the US, that the price here would not fall". (Fels, Hansard, p2).

The best that can said of this argument is that it is a theoretical conclusion, derived from an erroneous causal assumption, built on an irrelevant price comparison.

For this reason, we believe the argument is seriously flawed ought not be accepted by this Committee.

Indeed, we noted with some humour the suggestion in the Majority Report that many witnesses spent much time and artistry asserting that parallel importation would not bring about cheaper CDs prices. Of course it was Professor Fels who spent all of his time and all of his economic artistry asserting that parallel importation would bring about cheaper CD prices.

The irrelevance of retail price comparisons

It was clear to us at the outset of this Committee process that the most important evidence that would be forthcoming on the issue of price was evidence of the wholesale price in the US and other countries, and evidence of other costs to potential Australian importers.

Our reason for this was obvious: if parallel imports are to reduce the retail price of music CDs in Australia, this could only be because Australian retailers are able to parallel import CDs from overseas cheaper than they can access them here. Clearly, no retailer will import CDs from overseas if that actually results in a higher landed cost than would otherwise be available in Australia.

Thus, it is the whole cost structure that Australian retailers will face when parallel importing CDs that is the central, indeed only, issue - if that cost structure does not make it economical to import, retailers will not do so.

And no price reductions will follow.

It is for this reason that we find any comparison of retail prices entirely irrelevant. The fact that consumers in the US can presently buy CDs cheaper than consumers in Australia is entirely irrelevant. The only relevant fact is whether Australian consumers will be able to buy cheaper CDs in Australia because Australian retailers can import cheaper from the US.

Given these relatively basic propositions, we were astounded during the course of the evidence that none of the promoters of this legislation even attempted to analyse the cost structure parallel importers would face.

The evidence from the Australian Consumers Association was entirely silent on this issue, and chose instead to focus on retail prices.

The initial evidence from Professor Fels and the ACCC also completely neglected the issue, and also gave voluminous evidence about retail prices. Indeed, when challenged by Senator Murphy about his lack of evidence about wholesale prices and potential cost of importing CDs for retail in Australia, the best Professor Fels could come up with was that his "impression" is that you can import, even today at the exchange rate, more cheaply from the US. (Fels, Hansard, p9).

With all due respect to Professor Fels, we did not find his "impressions" overly helpful.

[Thankfully, the ACCC did in a supplementary submission at least make some effort to address the issue, albeit (as we shall see) erroneously.]

Indeed, the only evidence of any weight supplied to the Committee about the cost structures confronting parallel importers was suppled by the Australian Music Retailers Association. In a sense this at least did not surprise us. After all, if anyone is to understand whether parallel imports will be a cheaper source of music CDs for Australian retailers it would be their industry association.

We shall return to this evidence shortly.

Some comments on the retail price comparisons

As we have shown above, there is no doubt that the evidence presented to this Committee concerning retail price comparisons, although interesting, is entirely irrelevant to this debate.

Indeed, this is one of the reasons why we believe the argument presented by Professor Fels is seriously flawed - it is built on an irrelevant price comparison.

Nevertheless, we believe it would be remiss of us not to make some comments about the evidence that was presented.

The quality of the retail price evidence

First, we found the quality of this evidence very disappointing.

The best example of this was the persistent and central reliance by the ACCC on the previous findings of the PSA Report of 1990. This reliance was suspect for a number of reasons:

the report was actually focussed on the price of music cassettes not CDs; in fact, appendix J of the report convincingly demonstrated that CD prices in Australia were not high in 1990;

the report was completed in 1990 and was based on data from the late 1980s; the industry and market have changed radically in the last 10 years, and even Professor Fels himself dismissed one of his own from 1990 as now irrelevant;

the report failed to take into account whether there were differences in any of the factors which make up the retail price in various countries (these are listed below);

the report failed to consider whether any price differential was out of line with other comparable goods.

(AMPAL, Sub 147, pp13-14).

Retail price differentials for other goods

Secondly, we found it annoying that the price comparison evidence failed to recognise price differentials also exist between Australia and the US for a very large range of goods. AMRA gave examples of goods that are cheaper in the US than in Australia: footwear (Reebok and Nike), designer clothing, tents, jeans, motor vehicles, fishing tackle and cameras. (AMRA, Sub 150, p7).

Indeed, even a 'Big Mac' is only USD$0.99 in the US (that's AUD$1.41 @ 70c USD/AUD, compared to AUD$2.65 in Australia). (AMRA, Sub 150, p7).

Other factors for retail price differentials

Thirdly, we found the evidence of price comparison seriously deficient in that it failed to consider other reasons - besides the prohibition on parallel importation - that might explain the differences in retail prices across countries.

These were listed generally in the AMPAL submission: differences in wholesale prices, royalty rates, sales and value added taxes, typical retail mark-ups, discounts and terms of trade, economises of scale, distribution costs, market idiosyncrasies. (AMPAL, Sub 147, p14)

In the specific case of comparison with the US, AMRA noted the following substantial differences:

US has lower royalty rates;

US has lower sales tax rates; indeed, in some states of the US there is no sales tax at all;

US has bigger economies of scale; and

Australian retailers suffer higher shopping mall rental rates plus other imposts

(AMRA, Sub 150, p7).

In New Zealand, although wholesale prices are the same, retail prices are marginally cheaper because of lower royalty rates and cheaper distribution networks. (ARIA, Sub 153, p6).

And in Asia, CDs may be cheaper because of lower wages rates, very much lower - and in some cases, non-existent - royalty rates, and floods of pirated product. (ARIA, Sub 153, p6).

Thus, it is clear that many other factors besides the restriction on parallel imports may cause differences between prices in Australia and elsewhere in the world.

Indeed, one of the great ironies of this whole debate is that many of the countries which the Government, the ACCC and others consistently allege have cheaper CDs prices - US, UK, Canada and New Zealand - all have restrictions against parallel imports.

It is therefore at least possible to suggest that the one factor that does not explain the differences in retail price is the prohibition on parallel imports.

Certainly we have enough doubt to reject entirely the almost arrogantly definitive statement by Professor Fels that:

"The cause of the (retail) price difference is that the law confers a monopoly or an exclusive right on multinational record companies in Australia to import their own CDs". (Fels, Hansard, p2);

We have already pointed out that this statement is wrong as a matter of law. It is also doubtful as a matter of market economics.

We also note that this another reason why we believe Professor Fels' argument is flawed - it is derived from an erroneous causal assumption.

Legitimate retail price differentials

We found it interesting to note the argument advanced by the Australian Copyright Council that it is not necessarily wrong that a music CD may have different prices in difference markets:

"There may be a number of legitimate reasons for a sound recording being available at a cheaper price in another country, where it would unfair to permit its importation into Australia. For examples:

a) a copyright owner may elect to sell legitimate recordings at a low price in a country where piracy is rife and/or disposable income is low, as part of a strategy to establish a legitimate market; or

b) a recording may be sold as a "deletion" or cut-out in another country, but still be selling at normal retail price in Australia (for example, because it is a local artist)."

(ACC, Sub 164, p3).

Hearsay evidence of retail price reductions

Finally, we were constantly frustrated by the use by proponents of this Bill - particularly the ACCC and Australian Consumers Association - of hearsay evidence from others about likely price reductions flowing from the Bill.

The ACA was the worst offender in this regard. Whilst it gave reams of irrelevant evidence about differences in retail prices, when specifically asked for evidence that prices would fall the best the ACA could come up with was:

"Ultimately when it comes to price, the testimony of some major retailers provides evidence that significant price savings to consumers could be achieved if parallel imports were allowed". (ACA, Sub 166A, p34).

Professor Fels also offended in this way. His approach to giving evidence about likely price reductions was to give hearsay evidence that quite a few retailers have advised there would be significant, substantial price falls. Examples he gave included some outlandish claims that were never backed by testimony (but that were widely reported in the press) that prices would fall by 25 - 30%, that there would be prices in the low $20s, and that possible market price of $19.95 would be reached. (Fels, Hansard, p4).

Indeed, this is the third reason why Professor Fels argument is seriously flawed. The reality is that he has no evidence that permitting parallel imports will reduce CD prices - at best comes to a theoretical conclusion that this will occur because of the effects of increased competition.

We will next show why this theoretical conclusion is actually wrong in practice.

Before doing so we would like to make two relevant comments that arise out of the Majority Report

First, we note that the Majority report relies on evidence supplied by Woolworths about likely reductions in CD prices consequent on this Bill. We found it extremely disturbing that Woolworths were prepared to give written evidence in public, but chose to move in camera when responding to our questions on the content of that submission. This means we are unable to refer to those responses, and note that their evidence remains publicly untested. We therefore believe that the weight of their public evidence as slight. That publicly untested evidence should not have been referred to in the Majority Report and should not be taken into account by this Committee.

Second, we note the extraordinary comment in the Majority Report that "attempts to quantify the potential price effects of parallel imports are not the issue". But of course the Government made it the issue, specifically in its public rationale for the Bill, but all the more so because of the Prime Minister's outrageous attempts to himself quantify the alleged price benefit (we have quoted the comment above).

Let there be no mistake: we regard this comment as a damning admission that the Government itself now admits it is impossible to quantify any price benefits from this Bill, and any attempt to do so publicly in future can only be regarded as cant and hypocrisy.

The cost of importing CDs

We return to the central point that we made at the commencement of this section on price - the only relevant evidence is that concerning the cost structure that Australian retailers will face when parallel importing CDs, especially the wholesale price they will face, as well as other imposts.

In this regard we are indebted to the evidence of the Australian Music Retailers Association.

Their evidence is summarised in the following table (AMRA, Sub 150, p7). It illustrates the cost to an Australian retailer of importing into Australia for retail sale a standard-priced and premium-priced (new release) music CD from the US, assuming an exchange rate of 70c USD/AUD.

 

	Standard	Premium
Import price from US "One stop shop"	USD$11.50	USD$12.20
Converted to AUD @ 70c	AUD$16.43	AUD$17.43
Add sales tax and customs costs @ 26.4%	$4.34	$4.60
Add freight @ AUD$1.00 per CD (this assumes a minimum of 200 CDs)	$1.00	$1.00
Total cost to retailer to import CD	AUD$21.77	AUD$23.03

 

This wholesale cost to the retailer compares with the wholesale cost presently available to a retailer buying locally, including sales tax, of AUD$21.70 - $22.24.

Thus, at an exchange rate of 70c USD/AUD it is cheaper for an Australian retailer to source music CDs in Australian than in the US.

Indeed, allowance must also be made for additional terms of trade differences that the retailer would need to build into the retail margin - for example, the cost of financing (assuming international credit facilities are not available), marketing, and a factor of obsolescence because no returns would be permitted - which would be in the vicinity of $2.00.

This means that at the standard retail mark up a retailer would have to sell an imported CD at AUD$35.00 just to maintain the normal margin.

This in itself is powerful evidence that CDs imported from the US will not be cheaper to the retailer than Australian-sourced CDs. But if further evidence is necessary we also note a case study that was also presented by AMRA (AMRA, Sub 150, p8).

A Melbourne independent retailer randomly selected 6 separate orders from November 1997 just prior to the dive in the Australian dollar's value. Using Abbey Road (a USA one stop) and others from the majors in Australia and from an independent distributor, MRA. The following results were obtained:

 

Distributor	No. of CDs	Cost	Average cost per CD
Abbey Road	43	$950.29	$22.10
BMG	38	$748.51	$19.69
EDC	91	$1,548.71	$17.25
Festival	28	$453.78	$16.20
Polygram	49	$1,018.45	$20.78
MRA	95	$1,625.00	$17.11

 

Thus, the average cost of a CD imported from the US is much higher than the Australian-sourced CD. This disparity would actually now be exacerbated since the decline in the value of the Australian dollar.

To us, this is vital evidence that the price of retail CDs is Australia will not fall if parallel imports are permitted.

The simple fact is that it will continue to be cheaper for the retailer to source CDs from Australian distributors.

Moreover, the suggestion of Professor Fels, repeated in the Majority Report that the threat of imports will in some way cause local distributors to reduce prices is, in this light, fanciful. Such a threat can only have any effect if it is real, and there will not be a real threat so long as local distributors know their product is cheaper than potential overseas imports.

Indeed, it is interesting to note that, once the full implications of this analysis became clear to Professor Fels, he too appreciated its significance and, belatedly, put up some evidence in an attempt to rebut the evidence of AMRA. That evidence was that an Australian retailer could purchase CDs from the US, at an exchange rate of 70c USD/AUD, for a total landed cost of between AUD$19.30 - $20.43; and from the "rest of the world" at a cost of AUD$15.86

We note at the outset that we were very disappointed that this evidence was so late in forthcoming because it did not permit us to question Professor Fels about it. To that extent the evidence is untested by us, and for that reason alone, deserves less weight in our considerations.

More important to us, however, is that the evidence supplied by Professor Fels contained two significant flaws. These were as follows:

• There was no evidence presented about the source of the CDs in the US because of claims by Professor Fels of the necessity for confidentiality. (This contrasts with the AMRA evidence that specifically identified a US CD wholesaler).

   

  • Besides concerns about verifying the ACCC's evidence, this omission is important because if the ACCC's evidence relates to supply directly from distributors in the US it will be completely misleading. Australian independent retailers (like their US counterparts) will have to buy from wholesalers, and therefore will have to pay this wholesaler's mark up also. The fact that the prices quoted by the ACCC are not consistently available to independent retailers in Australia make us suspect that the direct distributor price has been used.

   

  • The evidence assumed a sales tax and customs rate of either 18.3% or 22% (as opposed to AMRA's rate of 26.4%). The former figure is simply wrong, and that latter is only available if the importer is a wholesaler who has a VS number. This is unlikely to be the case for small, independent retailers.

We also note in relation to the comparison with the "rest of the world" that this is simply a worthless exercise. Put simply, there is no way of knowing what countries are included in the comparison (for example, whether Asian countries notorious for piracy or non-payment of royalties are included), whether the price is available for importers and what terms would be available to the importer.

For these reasons we are not persuaded that ACCC's evidence in any way detracts from the credibility of AMRA's evidence on this the core issue - whether an Australian retailer will be able to access CDs from US suppliers cheaper than from Australian suppliers.

At the present exchange rate, and at an exchange rate of 70c, the answer is a resounding no.

Can CD prices fall, and is it worth it?

We want to conclude this report by attempting to objectively answer this the core question asked by the Government's Bill.

In our view, the evidence of a reduction in price consequent on this Bill was uncertain at best. The theory proffered by Professor Fels to explain why a price reduction will occur was significantly flawed. The evidence of the actual cost structure to be confronted by retailers attempting to parallel import music CDs into this country strongly suggested there was no price reduction to be gained from that source.

Indeed, the reality probably is that the only way CDs can be sourced cheaper from overseas is to rely on:

imports from Asia where royalties are less or not paid;

pirated imports; or

'deletions'.

Thus in each case damage in inflicted upon the interests of a significant part of the music industry.

This leads to our more general point.

Although the evidence of price reduction was uncertain, the evidence was very certain in demonstrating that the Australian music industry, and the various interests within it, would suffer damage from parallel imports.

This indelicate balance was best expressed by Mr Dobe Newton when he said:

"We have any amount of evidence to suggest that there is no guarantee that prices will fall. . . . Perhaps we can have cheaper CDs. But there is certainly no guarantee of that unless we are talking about from areas that will damage the interests of Australian artists and people who invest in them." (Newton, Hansard, p146).

This is an indelicate balance that we are not prepared to tolerate.

We cannot and will not support a Bill which seeks uncertain benefit for the consumer at the expense of certain detriment to the music industry.

 

 

Senator N. Bolkus, Senator J. McKiernan and Senator S. Murphy