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Copyright and Monopoly Profits: Books, Records and Software
David Richardson
Economics, Commerce and Industrial Relations Group
Contents
Major Issues
Introduction
Economic considerations
Books
Recorded Music
Computer software
Conclusions
Endnotes
The prohibition on parallel importation under the Copyright Act 1968
has allowed the development of monopolistic control over the majority
of books, sound recordings and computer software sold in Australia. The
effect of the anti-competitive structure of those markets is evident in
the higher prices charged in Australia for products identical to those
sold elsewhere in the world. Higher prices support both inefficient distribution
systems and high profits. The beneficiaries tend to be foreign multinationals
and their local agents.
Copyright over intellectual property is necessary to provide the economic
rewards necessary to encourage the production of creative work. The critical
issue is, having sold the CDs once legally, should the recording company
or other copyright holders have the right to prevent further sales in
different markets?
If copyright holders are allowed not only to be the sole producer of
copyright protected product, but also to control the distribution chain
beyond the factory gate, opportunities are created for monopolistic exploitation.
The price differentials established by the Prices Surveillance Authority
(PSA) show that this monopolistic position has indeed been used by the
copyright owners to charge excessive prices. In many cases profits may
have been excessive. However, the result need not always show up in profits.
There may also be excessive non-price competition, such as through advertising
and promotion efforts. Inefficient practices in distribution may be encouraged
since there are no competitive challenges from alternative suppliers.
There may be problems with availability as distributors do not feel the
need to compete for custom on the basis of their range of product.
When the question of relaxing the prohibition on parallel imports has
been raised the industry has reacted vigorously. Estimates in the paper
indicate that parallel importation prohibitions have been worth well over
$1 billion for recording companies since the first PSA report which is
on top of any profits those companies make on sales in their home markets.
Such amounts create a powerful incentive to respond forcefully to any
challenge to control over the Australian market. Some of the objections
raised could be considered questionable. Mostly the objections have been
emotive, with threats of doom for the industry concerned. It has also
been fairly easy to find high profile creators of copyright material who
have suggested we will ruin our cultural heritage and deny opportunities
for our artists. Hard-nosed multinational businesses have been portrayed
as altruistic supporters of Australian artists. The industry assertions
have been found wanting by many observers. In the case of books, where
there was some limited relaxing of the prohibitions on parallel imports,
there has been an increase in the amount of work received in the printing
industry.
Change in this area has been slow, despite the general disposition for
deregulation in other areas and in other industries. Apart from statements
in Opposition criticising the prohibitions on parallel importation, there
have been no indications of how the present Government is going to act.
As early as 1739 the printing industries outside England were such a successful
source of competition that legislation was required to prevent even the
copyright owners from importing works printed abroad.
Copyright Law Review Committee(1)
The Chair of the Australian Competition and Consumer Commission, Allan
Fels, was recently reported as saying that a new Compact Disk (CD) in
the US 'is now about $10 cheaper than in Australia - nothing to do with
tax'.(2)
Early in 1994 the Prices Surveillance Authority (PSA) showed that on
the streets of Australia a sample range of CDs was selling for $29.95
compared with US prices equal to $A19.29 to $A22.26. Later in the PSA's
1993-94 Annual Report it was able to observe that while the CD prices
increased to $29.95 during the year, the standard price in the US is about
$US 14.99 with discounters selling up to $US 2 cheaper. It pointed out,
'[A]s a result, local retailers [in Australia] could buy records today
at retail in the US for the equivalent of $A21 and sell them in the Australian
market for $30, and still maintain their normal margin.'(3)
The successor to the PSA, the Australian Competition and Consumer Commission,
has not conducted any formal surveys. However, the Sun-Herald reported
that while Warner is now charging $31 a CD, the same CDs can be purchased
in New York for $A16 or $A17(4). Earlier PSA reports tended to show that
the price differences held up when adjustment was made for tax arrangements.
The PSA has also noted that while the price differentials fluctuate with
exchange movements, over a decade or so they show a remarkable persistence.
Under the Uruguay Round of the General Agreement on Trade and Tariffs
(GATT), countries agreed to convert all of their non-tariff trade barriers
into tariffs and then gradually reduce them. Australia has managed to
get rid of most of its non-tariff barriers, perhaps the main examples
being quotas on motor vehicles and the textiles, clothing and footwear
industries. One non-tariff barrier which remains largely intact is the
protection afforded to owners of copyright over the distribution of imported
copyright material, chiefly books, recorded music and computer software.
However, partial relaxation in respect of unavailable books was given
in the 1991 amendments as outlined below.
In Australia the importation of recorded music or other copyright material
to sell to the Australian public is the same offence no matter whether
the import is an unauthorised pirate copy with no royalties paid to the
copyright owner, or an entirely legal copy in the country where it is
offered for sale, made by the owner of the copyright, and on which all
royalties have been paid. Because copyright is involved, it is not legal
to buy, from the American copyright holder, copies of a CBS/Sony CD (on
which all relevant royalties have been paid) and market those copies in
Australia unless a licence is obtained from the person or company in Australia
which is authorised to assert copyright. In Interstate Parcel Express
Co. Pty. Ltd. v. Time-Life International (Nederlands) B.V. (1977)
138 CLR 534, the importers tried to argue that by purchasing legal copies
abroad they effectively had an implied licence from the copyright owner
to import the copies. They were unsuccessful(5).
In August 1983 the then Attorney-General, Senator Gareth Evans, referred
the import provisions of the Copyright Act to the Copyright Law
Review Committee. Those are the provisions which make it an offence to
import, without the permission of the copyright owner, copyright material
such as sound recordings, films, software, and books. The Copyright Law
Review Committee reported in September 1988 and recommended that, in the
main, the provisions applying to parallel importation should remain unchanged;
but, in order to overcome availability problems, it recommended relaxing
parallel importation for articles not available in Australia within a
reasonable time, or where the importer has received a specific order by
a customer.
The CLRC also recommended that the importer of non-pirate articles should
not be subject to criminal proceedings, and that the possibility of civil
proceedings be sufficient.(6) While generally in favour of the status
quo the CLRC did observe in passing that it had received very little input
from consumer interests but much input from those with vested interests
in copyright. In the meantime the Prices Surveillance Authority, while
inquiring into the effects on prices of the exchange rate appreciations,
had expressed concerns about the effect on competition and pricing of
exclusive rights to import books.(7) Following that expression of concern
the Government asked the PSA to inquire into the effects of parallel import
prohibitions on the competitiveness of the Australian market.
As the PSA points out, the economic rationale for copyright 'considers
intellectual products as property that can be exploited as a reward for
intellectual labour and skill'.(8) The aim of copyright protection is
to ensure that the authors of artistic and other works are able to capture
the benefits of their work, free from competition from copies not authorised
by the author. Copyright legislation attempts to trade off the incentives
needed to reward intellectual effort and the interests of the consumers
of copyright product. The consumer interest is in low prices for this
as in other products. 'Put succinctly, the dilemma is that without a legal
monopoly too little of the [copyrightable] information will be produced
but with the legal monopoly too little of the information will be used.'(9)
This is the traditional way of looking at copyright issues and, in effect,
asks to what extent the creator should be given a monopoly over copies
of the creation.
While the perspective of the trade-off between the artist and the consuming
public is the traditional way of looking at this issue, it has been pointed
out that the trend in protection has gone increasingly in favour of the
creator. 'The presumption now is that anything nominally creative should
receive legal protection. Thus we see the emergence of property rights
in such disparate creations as a characteristic voice, musical style,
or public image, a distinctive restaurant decor, and recombinant animals...Creative
work of any stripe is now protected - presumed justified - until proven
otherwise.'(10)
Beyond some point copyright protection becomes state sanctioned anti-competitive
conduct and there is certainly a strong belief that the prohibition on
parallel importation has become just that. We might look at how restrictions
on parallel imports might play a role in the trade-off between the rights
of the generators of intellectual property to an income and the rights
of consumers. When someone like Michael Jackson is making a fortune as
an artist it hardly seems necessary to provide the incentive of even higher
royalties per recording that go with the even higher prices he commands
in the Australian market. Of course, the bulk of the margin above world
prices does not go to Michael Jackson at all and part of the debate, as
we shall see below, relates to the use to which the excess is put. Industry
claims it is used to foster local talent.
A new element in this discussion was introduced by the Copyright Law
Review Committee. In its lengthy examination of the historical antecedents
of current copyright law the CLRC found that:
[T]he precursors of the present importation provisions were, as was copyright
generally, designed to protect not only the rights of authors but the
investment of capital in the publication, printing and dissemination of
books. The common perception of the function of copyright as being to
balance the interests of the copyright owner on the one hand and the copyright
user on the other, disguises the fact that in most copyright situations
there are actually three separate interests involved: the creator, the
user, and in between, the producer.(11)
The English antecedents of copyright law were indeed designed in part
around the needs of a relatively high cost local printing industry which
successfully used import provisions in copyright law to prevent British
authors having their works printed abroad and undercutting works printed
in England. Copyright is no longer normally seen in this perspective.
Nevertheless, and echoing the earlier history of copyright law, the CLRC
said in its conclusion:
the Committee prefers the propositions put forward by the publishing houses,
record manufacturing companies, film and video companies and distributors
and computer software interests that repeal of the sections would have
a detrimental effect on a number of matters including:-
- Australian manufacture, technology and technical know-how.
- Support and subsidisation of local authors, composers and performers.
- The ready availability of a wide variety of books and, to a somewhat
lesser extent, of sound recordings, films and videos and computer software.
- Consumer back-up services.(12)
However, there are grounds for arguing that the CLRC's analysis was faulty
because the analogy with earlier protection for printing did not hold.
The CLRC did not test the submissions put by the producers, nor did it
try itself to identify the nature of the protection afforded by the array
of forces shaping the industry. It did not try to identify competitive
strengths and weaknesses of the industry in any formal way. For example,
unlike the English printers of yore, multinational recording companies
for example have not set up CD production facilities in Australia as a
result of the protection we provide to CD manufacturing. In fact, as far
as the multinational is concerned there are no incentives to produce in
Australia - there is no artificial incentive to press a CD in Australia
rather than source it from the US or elsewhere. In the same way there
is no artificial incentive to source from Australian repertoire. Indeed,
contrary to the submissions of the main recording companies, little seems
to be done to promote or develop Australian acts until they have made
it through the second tier of recording companies (names such as Larikin,
Mushroom etc.). Indeed, a lot of the commercial risk of producing a recording
is borne by the performers who are asked to put up capital or surrender
their right to the royalty payments until debts have been repaid.
It may be argued that by prohibiting parallel imports, all that is really
achieved is that, having decided where to manufacture a Dylan recording,
only CBS or its local subsidiary is allowed to take a CBS CD from the
factory gate to the retailer. Whether the factory is here or abroad, the
activity of taking the recorded material from the factory gate to the
record shop is not an activity worth protecting - it is not even a core
activity for a recording company. However, the effect of bans on parallel
importation is that the copyright owner is permitted to discriminate between
markets on the basis of price. Markets like Australia can be forced to
pay higher charges than more competitive markets like China, where the
competition is pirate copy. Indeed, legitimate CDs are said to be selling
there for $US6 according to The Canberra Times(13) and $US3 or
$US4 according to The Australian Financial Review.(14) Price discrimination
to this extent is only possible if the record company can institute arrangements
to prevent nationals from high price countries importing copy from the
low price country and selling in the high.
As part of the GATT Uruguay Round, the US had been pushing for parallel
importation provisions throughout the world. It has failed to obtain agreement
for that.(15) During the American attempts to obtain agreement there may
have been an argument to the effect that relaxation of parallel importation
provisions would have been seen by the Americans as provocative. However,
that position is no longer sustainable.
Against the overall tenor of its recommendations, the CLRC was concerned
that the monopoly position of the copyright owners meant that specialist
interests were being ignored. Accordingly it recommended that there should
be some relaxation of the prohibition on parallel imports for books and
recorded music 'if the articles are not available in Australia or if the
importer holds a written order for the article or articles from the person
or persons proposing to use them, that is the consumer.'(16)
Following the CLRC report, references were given to the PSA to inquire
into books in 1989, recorded music in 1990 and then computer software
in 1992. These references were more tightly focused on the economic effects
of the prohibitions against parallel importation of copyright material.
While there are common issues to do with parallel importation in regard
to books, sound recordings and computer software, there are also unique
issues in the case of each. The slow release of new books in Australia
had been a constant theme.(17) Piracy is not an issue in the case of books,
but the legacy of the territorial divisions between UK and US publishers
has been a critical factor in shaping the structure of the publishing
industry all over the English speaking world.
Historically British publishers had a monopoly over publishing in the
colonies and later, the countries of the Commonwealth. The British cartel
was supported by the 'British Publishers' Traditional Market Agreement'
which divided the English speaking world in two, to be shared by British
and American publishers.(18) The British had Britain itself and the former
British empire while the Americans had the US and its dependencies. Publishers
in one or the other had exclusive rights to their own territory. This
formal arrangement was upset by an antitrust action in the mid 1970s which
prohibited US publishers from engaging in market sharing. However, since
then, as noted by the PSA, publishers have been able to maintain the status
quo through means such as the territorial tying of copyright as well as
tacit understandings on the part of publishers. In the case of Australia
this was enforced through the provisions banning parallel importation
of books. The effect was that while availability was a concern, so too
was price. Australia was served by the more expensive British publishers
and there was the extra markup over British prices.
Against this background the CLRC was the first to report. The views of
the CLRC have already been noted. The CLRC basically recommended the status
quo but, to address a perceived complacency in meeting specialist interests,
the CLRC recommended a relaxation of the prohibitions in the case of books
(and recorded music) unavailable in Australia or specifically requested
by a consumer.
The PSA's 1989 report into book prices found, among other things, that
the importation provisions of the Copyright Act 1968 prevented competition
in Australia between alternative UK and US editions of the same book.
Publishers were able to close the market through Australian subsidiaries
or exclusive agents to import or produce and distribute in Australia.
This market structure allowed Australian prices to be kept above international
levels. For example, Canada, which had access to both UK and US editions
had prices below the UK. In Australia, with access only to the UK publishers,
prices were 31 per cent more than Canadian prices. For specialist and
technical books the price in Australia could be up to four times higher
than in the UK. The PSA felt the price of books would fall by about that
much if the market were opened up for competition. Booksellers had complained
of waiting up to two years before a book published overseas became available
in Australia.(19) There were additional problems when no British publisher
took up the opportunity to publish American books. For example, the Vietnam
war was not of major interest to British readers and so important American
books never made it to Australia. This apparently remains a problem(20)
despite recent changes (see below). The PSA reported that competition
would increase the number and range of titles available as suppliers would
be forced to be more responsive to consumer needs. With direct importing
the PSA also believed that availability after overseas publication would
be immediate.(21) Generally the Australian consumers were seen to be paying
too much and waiting too long for overseas releases.
The importation provisions of the Copyright Act 1968 have been
used by publishers to exercise international price discrimination, which
has resulted in excessively high prices for books in Australia. Although
retail price maintenance for books was rejected by the TPC [Trade Practices
Commission] in 1972, effective price competition by retailers has been
thwarted by the operation of the closed market(22).
During the inquiry the PSA had been criticised for taking too narrow
an economic perspective and allegedly ignoring the value of culture and
reading. However, the PSA concluded that prohibitions on parallel importation
were detrimental to information, culture and learning and that books were
too important to be priced out of reach of ordinary people and simply
not made available. The PSA noted that we abide by the Florence Agreemen,t
which provides for a tariff-free and quota-free importation of scientific,
educational and cultural works, but we allow publishers to do the same
thing - to impose quotas and raise the domestic prices of books.
Following the PSA report the Government introduced changes to the importation
provisions of the Act to meet some of the concerns outlined in the report.
The amendments were essentially a compromise between the CLRC and PSA
views. The 1991 amendments modify the rights of a copyright holder by
causing the rights in relation to a work to lapse in the event that the
copyright holder fails to deliver according to the 30 day rule for new
publications or the 7/90 day rule for previously published titles. Under
the 30 day rule, the copyright holder must supply a written order for
a new title within 30 days. Under the 7/90 day rule the copyright holder
has 7 days in which to respond to a written request for a title indicating
whether the title can be supplied within 90 days. Failure to meet these
rules means booksellers can import and distribute non-pirate copies in
parallel with any distribution by the copyright holder.
A review of the impact of the amendments to the Act by the PSA was published
in April 1995. The PSA found that book prices were still too high, especially
for technical, professional areas and the mass paperback area. However,
the PSA found that the amendments had improved the speed with which new
releases were made available, had produced efficiency gains in book distribution
and may have had some price impact through the threat of competition from
parallel imports. Also contributing to some price moderation in the PSA's
view was its own price monitoring and the threat of the review itself.
The PSA claimed that only effective competition can be relied upon to
give reasonable prices and an open market is the only way competition
can be ensured. While traditional territorial division between US and
UK publishers would limit the benefits of parallel importation, the PSA
nevertheless felt an open market may facilitate the gradual erosion of
the territorial divisions. A further important point made by the PSA was
that by using subsidiaries or appointing exclusive agents to import, retailers
were forced to deal with a large number of small suppliers - which increased
costs all round. The prohibitions on parallel importation prevented the
development of specialist book wholesalers 'who could be expected to reduce
such inefficiencies by streamlining distribution'.(23)
While recommending an open market without prohibitions against parallel
importation as its preferred option, the PSA also recommended that, in
the absence of open competition and as a second best, replacing the 7/90
rule with a universal 30 day rule would be desirable.
The Industry Commission has since pointed out that the 30 day and 7/90
day rules have acted to stimulate the local printing industry - a result
which appears not to have been anticipated by the PSA.(24) Basically publishers
have been making arrangements to have books printed in Australia so as
to meet the 30 day rule and guarantee the availability of books within
that period. So long as Australian printers can come in under the costs
of air freight, Australian printing should receive the benefit of publishers
wanting to make their product available. Of course, if the 30 day rule
has that effect then a completely open market should also stimulate local
printing. Publishers will want to aim for virtually simultaneous release
in different markets so as to prevent others bringing in (legal) alternative
supplies. Simultaneous release would presumably be more manageable if
copies are printed locally. Pacific Magazine and Publishing also submitted
to the Industry Commission that the changes had encouraged UK publishing
houses to test the Australian book producers and establish they were competitive
and, as a result, they had generated continuing import replacement.(25)
Before leaving the issue of books in Australia, it is also worth noting
that Australian book publishers and printers have enjoyed protection for
many years in the form of the book bounty. Recall that it would have been
against the ideals of the Florence Agreement to have imposed protection
for book production by way of tariffs or quotas. In the 1996 Budget the
Government announced that no new bounty claims would be considered. It
later said new claims would be considered beyond 20 February 1997 but
payments would not be made after 20 August 1997.
While prices have been an important issue, the question of availability
has also been a major concern. In the late 1980s record sellers, organised
as the Australian Record Sellers' Association, were lobbying governments
to change import provisions on the grounds that the major record companies
were simply not interested in catering for minority tastes and were taking
up to three months to fill orders. It was suggested that record companies
were dictating what the public could or could not buy and were only interested
in the mass market where the large profits were.(26)
In February 1990, following publication of the PSA's report on books,
the then Minister for Consumer Affairs and Minister assisting the Treasurer
for Prices, Senator Nick Bolkus, asked the Prices Surveillance Authority
(PSA) to look at sound recordings. It was expected that the PSA inquiry
into sound recordings would make similar findings, given the similar copyright
arrangements. In its final report of December 1990 the PSA concluded:
The first set of conclusions is that the basic preconditions exist which
make it possible for the industry to charge high, excessive prices and
to price discriminate in a way which works strongly against the interests
of Australia. Those preconditions are:
- a demand for records which is relatively insensitive to prices
compared both with many other products and many other countries.
Prices can therefore be more readily raised in Australia than in
many other countries;
- there is limited wholesale price competition between suppliers
of records in Australia ie. the major record companies which dominate
the market. They tend to compete with respect to variables other
than price, such as advertising and promotion. This means there
are few pressures within Australia to prevent the industry as a
whole from raising its prices;
- the import restrictions attached to the Copyright Act are of significance
for two related reasons. First, they prevent competition in the
domestic market from overseas sources. Second, they make international
price-discrimination possible in a way which particularly disadvantages
Australia.
The second set of conclusions is empirical. They demonstrate that, by
international standards, Australian record prices are, and have consistently
been, exceptionally high and are explained by the industry's exploitation
of the above preconditions rather than by any other factors such as an
'overvalued dollar' or different taxes.(27)
The PSA's emphasis on copyright provisions is reinforced in the statement:
The importation provisions of the Copyright Act impose a barrier to free
trade in copyright articles such as records. Without such a barrier, it
would be possible and profitable for 'parallel importers' to import goods
into the high priced market from the low priced market.
Prohibitions against an Australian distributor buying legal copyright
product direct from CBS (USA) means that CBS (Aust) is free to charge
almost whatever it likes.
In addition to the main findings, the PSA also observed that the record
companies behaved in a number of anti-competitive ways. For example, they
discussed price increases among themselves, refrained from price competition
and actively discriminated against small retailers. It was a common practice
to refuse to supply retailers who had allegedly breached the Copyright
Act whereas breaches and penalties were rightly matters for the courts.
In other cases in other industries there may well be legitimate grounds
for arguing the merits of protection arrangements. However, in the present
case, all the parallel import provisions protect is the right to carry
product from the manufacturer to the retailer. Under current arrangements
the making of CDs in Australia has to stand on its own two feet. Australia
is a large producer of CDs. However, neither the copyright arrangements
nor any other protection measures have encouraged CD manufacture in Australia.
Where to source the physical production of CDs is purely a business decision
on the part of the recording companies.
The industry put a number of objections to the PSA and in public comment
at the time and since. Following the PSA report record company executives
and rock stars banded together in various public and private lobbing exercises.
The Executive Director of ARIA, Mr Emanuel Candi, was reported as declaring
'that an Australian industry will be destroyed and thousands of people
could lose their jobs'.(28) He is also reported as declaring the PSA recommendations
put up barriers to trade and was 'a complete invitation for international
hostility'.(29) Although many of the industry's objections were answered
in the PSA report, the industry appealed emotionally, with debatable streams
of argument, and repeated earlier assertions made in the PSA hearings
and elsewhere. For example, Peter Garrett of Midnight Oil mistakenly referred
to the effects of 'the repealing of copyright protection'.(30) It would
indeed be serious if the Government had been contemplating the repeal
of copyright protection, but of course one would have to be fairly creative
or mischievous to construe the PSA recommendations as repealing copyright.
One of the objections raised by the industry referred to piracy issues,
with the industry claiming that parallel importation would mean that it
would not be possible to distinguish between a legal and illegal copy.
The counter argument is that lower prices in Australia would reduce the
incentive for pirate copies - and, indeed, home recording for personal
use. However, the PSA had addressed the piracy issue suggesting that parallel
importation only be permitted from countries which give adequate copyright
protection and referred to the detection effort as being critical - as
indeed it is under the status quo. The need for improved arrangements
and penalties was accepted by the Government at the time (see below).
On the question of local employment and production, the PSA answered
industry concerns by pointing out that the decision to manufacture in
Australia was made because Australia is a cost competitive location. If
anything, lower prices will increase demand, which will stimulate production,
and there is nothing in the PSA's recommendations which would alter the
cost competitiveness equation.
The PSA did not accept that the industry used its high Australian income
to develop Australian talent on a non-commercial basis. All the record
companies needed new English speaking acts and Australia was the third
largest source of English speaking material. There was no reason to believe
that a multinational would change the importance of local and overseas
artists in their artist and repertoire program. In any event the Government
decided to put more resources into the music industry as an alternative
source of developing Australian talent.
In October 1991, Cabinet considered a submission on sound recording prices
from the Attorney-General, Michael Duffy, and the then Treasurer, John
Kerin. This submission essentially put the views of the PSA and recommended
that parallel importation be permitted. It was reported that Cabinet deferred
a decision following intense pressure from the recording industry lobby
group, the Australian Recording Industry Association (ARIA), the mainly
multinational record companies,(31) popular musicians who had been encouraged
by ARIA and record company propaganda. Deferral was said to be to allow
Senator Richardson to conduct further consultations with the industry.(32)
It is understood that Senator Richardson worked on alternative plans
to subject the industry to prices surveillance under an industry wide
agreement on prices while retaining the monopoly over distribution. The
PSA maintained its position and pointed out that any pricing agreement
was likely to breach the Trade Practices Act.(33)
Eventually Cabinet's decision was announced on 10 June 1992. The new
arrangements allowing parallel imports were to apply only to non-pirated
copies of recordings from the principal sources, US, EEC and NZ, released
after 1 July 1994. Limiting parallel imports from those countries would
have had the effect of allowing parallel importation only from countries
which provide levels of copyright protection comparable to that in Australia.
Note also that the decision on the list of countries excluded Australia
and so also addressed a complaint of Australian performers to the effect
that they did not want their royalties eroded by possible 'remaindered'
copies brought in from abroad. Other aspects of the decision included
the establishment of a Music Industry Advisory Council (MIAC), and amendments
to ensure specialist sound recordings would be made available within a
reasonable time.
The PSA welcomed this decision with Professor Fels saying it was 'likely
to lead to a significant fall in prices for Australian consumers and to
an increase in competition throughout the industry'.(34) However, Fels
did comment on the 2 year delay as being unnecessary.(35)
Legislation implementing Cabinet's decision was introduced late in 1992
but lapsed with the 1993 election. By late March 1993 Dr David Cousins,
Professor Fels' replacement as chair of the PSA, began to express concern
about the delay in passing the legislation amending the Copyright Act.(36)
As it happened, that legislation was never re-introduced. By November
1993 media reports were appearing suggesting the Government was interested
in reviewing Cabinet's 1992 decision.(37) One Government Minister had
commissioned a report from a consultant (MIAC) which attempted to argue
that the PSA's findings were flawed. The PSA dismissed the report's findings
in its 1992-93 annual report saying '[t]he issues raised by MIAC are not
new. They were widely canvassed in the open PSA public inquiry forum and
extensively debated prior to the Government's decision.'(38)
Caution on the part of some Cabinet Ministers reflected a view that,
whatever their merits, monopoly profits in the industry were being put
back into developing local industry. One might well question whether hard-headed
multinational subsidiaries were spending large sums for altruistic reasons.
There was no incentive in the system to encourage a multinational to develop
local talent rather than promoting off the shelf ready-made hits from
the US and UK markets. Whichever way they go - local or foreign talent
- it is a commercial decision. The record companies are always looking
for English speaking material for international promotion. The expenditures
by the 'Big 6' of the Australian recording industry look more like marketing
hits rather than developing new talent. Indeed, it may be argued that
the Big 6 tend to ignore the small pub bands and so on until they have
made it on their own through recording contracts with the independent
labels.
In December 1993 a joint submission was put to Cabinet by the Minister
for Industry, Technology and Regional Development, Alan Griffiths, the
Minister for Justice, Duncan Kerr, and the Minister for the Arts, Senator
McMullan.(39)
Cabinet eventually announced a series of measures which involved:
- the retention of prohibitions against parallel importation,
- an industry package including commitments negotiated with the six
major record companies to develop and export local artists,
- price monitoring of the record companies,
- extension of performers' rights, and
- measures to ensure the availability of recordings.
These measures were essentially the status quo but with the industry
package designed to make the producers put money into Australian acts.
On the industry package, the press release announced:
The Minister for Industry, Science and Technology will finalise industry
development agreements with these [the six major record companies] companies.
These are worth $270 million. The agreements will guarantee increased
investment in Australian artists and the growing field of multimedia to
create new export Opportunities.(40)
The figure of $270 million referred to the subsequent 3 years, and it
was intended that negotiations with the companies to formalise the agreements
be completed by December 1995.(41) It is not clear that the agreements
amounted to much more than formalising pre-existing planned expenditures.
To date there have been no announcements. Three companies were reported
to be close to agreement with government officials. However, those agreements
are now reported to be on hold until the present Government decides what
it wants to do on the parallel importation issue.(42)
In the six years since the PSA reported CD and cassette sales (as well
as LPs in the earlier years) would have been running in excess of the
32 million reported for 1989, and, as a conservative estimate, prices
would have averaged some $6 above American prices. On that basis it would
seem that Australians have paid record companies $1.15 billion more than
they should have.
Under the Copyright Act 1968, computer programs are protected
as literary works in the same way as other literary works, with protection
given against unauthorised reproduction, publication, adaptation, public
performance, broadcasting and cable transmission. The argument for extending
copyright protection to computer programs is the same as literary works.
However, it is probably easier to copy computer programs than recorded
music, and certainly easier than copying books and other literary works.
The Deputy United States Trade Representative, Ambassador Charlene Barshefsky,
in testifying to the Senate Finance Committee, said:
Today in Hong Kong and elsewhere, $10 000 software packages can be purchased
for as little as $5. Pirate versions of Microsoft's Windows 95 were on
sale in China before it was officially introduced.(43)
In other respects, computer software raises a number of issues similar
to books and sound recordings. Computer software became the third in the
series on the effects of the prohibition against parallel importation
of products protected by copyright. While the issues are very similar
in a number of respects, a major difference is that computer software
is now a significant business input. Prices of computer software can therefore
affect, at least to some extent, the competitiveness of Australian industry.
The PSA undertook a comprehensive survey of prices for a bundle of leading
PC software packages in Australia and the US and found that on average
prices had been 49 per cent higher in Australia.(44) Most of the software
included in the survey was sourced from America, but the PSA found that
most of the price differential arose in the local distribution channel.
There was little competition among wholesalers and local suppliers were
allowed 'to raise prices above overseas levels without fear of being undercut
by parallel importers'(45). It was also suggested that Australian suppliers
were being required by American distributors to take on a greater marketing
and technical support role. All this was made possible by the provisions
of the Copyright Act 1968. Within the recorded music market, there
was not really competition between the Australian copyright holders in
respect of different artists since, for example, Bob Dylan is not really
readily substitutable with other artists, hence the various holders of
different copyrights could largely avoid price competition between themselves.
In much the same way the PSA found that different computer software packages
were differentiated from each other through brand name loyalty, the investment
in prior training and the like. This also allowed local software copyright
holders to avoid competition, something they would have found much more
difficult if they were all selling identical products.
The National Institute of Industry and Economic Research was able to
model the effects of lower software prices on business input costs and
the consequences for macroeconomic activity. The results showed that enhanced
macroeconomic performance would result from lower prices, and a small
initial fall in employment in the software distribution sector would soon
be offset by higher employment elsewhere. According to the PSA:
The analysis clearly indicated that software prices which are too high
because of restrictions on competition have a detrimental effect on Australia's
international competitiveness.(46)
The majority of software is imported and the local developers do not
generally compete in the same market, their role being more to customise
software. The PSA felt they would be relatively unaffected by any parallel
importation.
The PSA spent some time on the piracy question. It felt that the existing
system gave virtually no protection against imported pirate and counterfeit
software as there was no provision for Customs to seize items at the border.
However, for some categories the incentive to use illegal copies was reduced
through large discounts of 70 to 85 per cent for staff and students of
educational institutions, site licences and so on. In other cases, copying
a word processing program for home use is not necessarily a lost sale
for the vendor. Home users would be expected to use one of the shareware
or other alternatives if a way could be found to limit their access to
copied programs. While the PSA did not think relaxing parallel importation
provisions would increase the incidence of piracy, it did draw attention
to 1991 amendments to the Copyright Act 1968 and made recommendations
for further tightening, including provisions for seizure at borders. The
PSA also pointed out that the industry itself could take action against
illegal usage by developing copy protected software. It questioned the
real concern for piracy given that the industry itself takes few direct
steps to counter piracy. However, the PSA also made the point that, by
substantially increasing the incentive for piracy, the parallel import
prohibition, must also take a large part of the blame for piracy itself.
Following the interim report and later, the PSA's recommendations were
supported by software users and rejected by suppliers of software and
their industry associations. Also following the PSA report the CLRC released
an interim report in 1993 and then final report in 1995 on computer software.
This report covered much more than parallel importation. However, on that
critical issue the CLRC completely changed its views between the interim
and final reports, with the interim agreeing with the PSA and the final
opposed to relaxing the prohibitions on parallel importation. Piracy was
the issue which influenced the CLRC, which said:
In the Committee's opinion piracy should not be treated dismissively and
all possible measures should be taken to reduce its incidence and discourage
its growth. Submissions such as those from Dataflow lend considerable
weight to the Committee's view that the threat of piracy is a principal
reason why parallel importation of computer programs and associated manuals
should not be allowed.(47)
The CLRC cites an unsubstantiated passage from Dataflow's submission
which says that without parallel importation prohibitions, no-one will
look after the interests of the overseas copyright owners and we risk
being placed in the same category as Thailand, Hong Kong and Indonesia
in terms of the seriousness of piracy. This seems an enormous leap of
logic on the part of someone with a clear vested interest, and one which
the CLRC failed to test.
The CLRC was also unimpressed with the economic arguments saying that
it 'acknowledges that parallel importation provisions may potentially
be exercised in an anti-competitive manner, but does not think that this
alone justifies their repeal'.(48) It suggested other avenues should be
looked at to see if, for example, changes in the Trade Practices Act
1974 could counter monopoly behaviour on the part of copyright owners.
However, in the opinion of the Industry Commission there are insufficient
remedies under the Trade Practices Act 1974, it is difficult to
prove anti-competitive conduct, and price monitoring is problematic.(49)
The PSA had also said that the provisions in the Trade Practices Act
which deal with abuse of market power do not apply to the misuse of market
power in charging excessive prices to consumers and so the central concern
of the PSA is simply not addressed by proposals to use the Trade Practices
Act 1974.
To date there have been no decisions announced on the parallel importation
provisions as they apply to computer software.
Earlier a view was put to the effect that, in practice, copyright had
gone too far in favour of the copyright holder and against the consumer
of intellectual property. It is now clear that the prohibition on parallel
importation under the Copyright Act 1968 has allowed the development
of monopolistic control over the majority of books, sound recordings and
computer software sold in Australia. Nobody in the debate is suggesting
that copyright not be respected on those products. Copyright over intellectual
property is necessary to provide the economic rewards necessary to encourage
the production of creative work. Once Bob Dylan has recorded and produced
a CD he receives royalties and the record company makes a profit selling
records. Copyright protection means no-one else is allowed to manufacture
those CDs. Wholesalers and distributors in the US can buy and sell Bob
Dylan records as many times as they like. However, parallel importation
restrictions under the Copyright Act 1968 mean that the reach of
his record company goes far beyond those sales if someone tries to sell
those records in the Australian market. Having sold the CDs once legally,
should the recording company or Bob Dylan himself have the right to prevent
further sales in different markets?
If copyright holders are allowed not only to be the sole producer of
copyright protected product, but also to control the distribution chain
beyond the factory gate, opportunities are created for monopolistic exploitation.
The price differentials established by the PSA show that this monopolistic
position has indeed been used by the copyright owners to charge excessive
prices. In some cases profits may have been excessive. However, the result
need not always show up in profits. There may also be excessive non-price
competition, such as through advertising and promotion efforts. Inefficient
practices in distribution may be encouraged since there are no competitive
challenges from alternative suppliers. There may be problems with availability
as distributors do not feel the need to compete for custom on the basis
of their range.
When the question of relaxing the prohibition on parallel imports has
been raised the industry has reacted vigorously. Figures were presented
above suggesting that parallel importation prohibitions have been worth
well over $1 billion for recording companies since the first PSA report.
That is on top of any profits those companies make on sales in their home
markets. Such amounts create a powerful incentive to respond forcefully
to any challenge to control over the Australian market. Some of the objections
they raise could be considered questionable. Mostly the objections have
been emotive with threats of doom for their industry. It has also been
fairly easy to find high profile creators of copyright material who have
suggested we will ruin our cultural heritage and deny opportunities for
our artists. Hard-nosed multinational businesses have been portrayed as
altruistic supporters of Australian artists. These assertions have been
found wanting by many observers. In the case of books, where there was
some limited relaxing of the prohibitions on parallel imports, there has
been an increase in the amount of work received in the printing industry.
While in Opposition, the Coalition promised to go further in relaxing
parallel importation prohibitions. In response to the 1992 CD decision
which promised to remove the restrictions two years later, the then Shadow
Attorney General and Shadow Minister for Justice, Peter Costello, said
'[T]he Government should introduce legislation immediately to remove import
restrictions immediately to lower record prices immediately.'(50) In late
1993, after Cabinet reportedly deferred a submission aiming to maintain
the status quo, the Opposition spokesman on manufacturing and service
industries, Mr Geoff Prosser, was reported as saying it was vital the
Government stick with its previous decision to lift restrictions on parallel
importation(51). Following the April 1995 reversal of the 1992 decision,
the Opposition spokesman on communications, Senator Alston, was reported
as criticising the decision and suggesting that a Coalition government
would implement the 1992 PSA recommendations.(52)
At the time of writing there has been no indication since the 1996 election
of how the present Government is going to act.
- Copyright Law Review Committee (CLRC), The Importation Provisions
of the Copyright Act 1968, Canberra, AGPS, September 1988.
- The Canberra Times, 10 June 1996.
- Prices Surveillance Authority (PSA), Annual Report, 1993-94,
AGPS, 1994, pp. 111-2.
- The Sun Herald, 21 April, 1996.
- CLRC, op. cit.
- loc. cit.
- PSA, Inquiry into the Effects of Exchange Rate Appreciation on
Prices of Consumer Goods, Report no. 21, 20 May 1989. That inquiry
was established following concerns that while prices in general quickly
responded to earlier devaluations, there seemed to be less than full
passing on of the effects of appreciations.
- PSA, Inquiry into Book Prices and Parallel Imports, Report no.
61, 28 April 1995.
- Cooter and Ulen, cited in Koboldt, C., 'Intellectual property and
optimal copyright protection,' Journal of Cultural Economics,
1995, vol. 19, pp. 131-55.
- Merges, R.P., 'The economic impact of intellectual property rights:
an overview and guide,' Journal of Cultural Economics, 1995,
vol. 19, p. 110.
- CLRC, op cit, p. 281.
- ibid., p. 241.
- The Canberra Times, 4 Feb 1995.
- The Australian Financial Review, 26 May 1995.
- The Australian Financial Review, 26 May 1995.
- ibid., p. 244.
- The Australian Financial Review, 21 Sept 1989.
- PSA, op cit., 1995.
- The Australian, 12 Sept. 1989.
- The Australian, 1 May 1995.
- PSA, Inquiry into Book Prices, Final Report, no. 25, 19 December
1989.
- ibid., p. 39
- PSA, op. cit., 1995.
- Industry Commission, Book Printing, Draft Report, August 1996.
- loc cit.
- The Australian Financial Review, 23 Aug 1989.
- PSA, Inquiry into the Prices of Sound Recordings, Final Report;
Report No 35, 13 Dec. 1990, p. xx.
- The Australian, 31 July 1991.
- The Australian, 5 February 1992.
- The Australian, 5 Aug 1991.
- At the time the six main record companies were CBS Records (now Sony
Music), EMI, Polygram, WEA Records (now Warner Music), RCA (BMG), and
Festival Records (owned by News Corp).
- The Australian, 5 Feb 1992.
- The Australian Financial Review, 7 April, 1992.
- PSA, PSA welcomes Government Records Decision, news release, 10 June
1992.
- The Australian Financial Review, 11 June 1992.
- The Australian, 26 Mar 1993.
- for example, The Sydney Morning Herald, 9 and 12 Nov 1993.
- PSA, Annual Report, 1992-93, Canberra, AGPS, 1993, p. 15.
- The Australian Financial Review, 13 Dec 1993.
- Cook, Sen P., Lee, M., and Kerr, D., 'Bright future for the Australian
music industry', press release, Minister for Industry, Science and Technology,
No 136, 20 April 1995.
- Department of Industry, Science and Technology (DIST), Annual Report
1994-95, Canberra, AGPS, 1995.
- The Australian, 22 June 1996.
- Ambassador Charlene Barshefsky, Deputy United States Trade Representative,
Testimony Before the Senate Finance Committee, 6 June 1996.
- PSA, Inquiry into Prices of Computer Software, Interim Report,
Report No. 44, 12 Oct 1992.
- PSA, Inquiry into Prices of Computer Software, Final Report, Report
No. 46, 15 December 1992.
- ibid., p. 13.
- CLRC, Computer Software Protection, AGPS, 1995, p. 225
- ibid.., p 228.
- Industry Commission, Computer Hardware, Software and Related Service
Industries, AGPS, 30 June 1995.
- Costello, P., 'No need for delay on cheaper records', press release
by Peter Costello, Shadow Attorney General and Shadow Minister for Justice,
11 June 1992.
- The Australian, 18 Dec 1993.
- The Australian, 12 April 1995.
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