CHAPTER 4

MATTERS RAISED DURING THE INQUIRY

Introduction

4.1 The purpose of this Chapter is to canvass the major issues that were raised in submissions and during the Committee's program of public hearings. Some of the evidence put before the Committee sought to cast doubt on the `legality' of the Bill in the sense of its conformity with Australia's obligations under international conventions and agreements. Others who gave evidence doubted the wisdom of the policy underlying the Bill, and drew attention to a range of possible consequences including its effect on royalty income, employment and investment in the industry, and the threat of piracy. Other witnesses referred to practices and tactics within the music industry. These issues are discussed in greater detail below.

4.2 However, before discussing these specific issues, a number of preliminary observations should be made. The Committee received evidence from a wide range of witnesses, including the Departments concerned with drafting and administering the Bill, industry participants and their representative organisations, consumers, academics, and others. In conducting its inquiry, the Committee has attempted to determine the likely effects of a change in policy as expressed in the proposed Bill. Opinions about these likely effects are no less valid because they are put by individuals outside the music industry, or, indeed, because they are put by individuals from within that industry who may be thought to speak with a measure of self-interest.

4.3 Secondly, as one witness observed, the greatest difficulty faced by the Committee during the inquiry was that it was constantly presented with hypothetical extremes - with worst case or best case scenarios:

The worst case scenario is basically: what would happen if a record company decided to try to launch an Australian act in the Philippines or in Afghanistan and for some reason the local area produced 10,000 copies of that act … and only two of them sold in Afghanistan? If parallel importing were allowed would we not experience the arrival of 9998 copies from Afghanistan, all of which would be sold for a dollar in Australia?

This is a purely hypothetical situation. It is not a reality. The truth of the matter is that we do not know what is actually going to happen if we get rid of parallel importing … Those sorts of negative scenarios are there, but I do not think that they are realistic.

The positive scenario is: if we open the market up completely, then almost for sure the price of records will decline fairly dramatically. If this occurs and the laws of supply and demand operate, then we can reasonably assume that teenagers who, in the last decade, have chosen a lot of other alternatives will return to the record industry in a major kind of way and buy very substantial numbers of records, albeit ones that have been imported. [1]

4.4 Thirdly, the Explanatory Memorandum to the Bill makes clear that the introduction of parallel imports is likely to have both costs and benefits, with consumers receiving the greatest benefit. The distribution of these costs and benefits is conveniently set out in the following Table taken from the Explanatory Memorandum.

Table 3: Effects Of the Bill on Various Stakeholders [2]

STAKEHOLDER	DISTRIBUTIONAL EFFECT
Consumers	+ Lower retail prices (estimate in range of $1.60-$10) + Improved access to wider range of titles (only 20 % of titles currently released by companies).
Independent Retailers	+ Lower wholesale prices due to competition between local and overseas suppliers. + Easier access to titles released overseas. + Choice of suppliers.
Australian Music Retailers Association	+ Lower wholesale prices. + Easier access to titles released overseas. + Choice of suppliers.
Major Retailers	+ Lower wholesale prices, + Easier access to titles released overseas. + Choice of suppliers.
Music Artists	? Sales may generate increased overall income from royalties. ? Investment in artist development by major companies may change. ? Composers may receive less mechanical royalties from parallel imports.
Music Companies	- Profits may decline. - Increased competition from suppliers overseas.
Compact Disc Manufacturers	- Imported copies of sound recording may be substituted for locally manufactured compact discs if these are not price competitive with imports.
Commonwealth Government	+ Increased revenue from sales tax if sales increase. + Less purchasing from Internet will minimise loss of sales tax revenue. + Less regulation of legitimate trade. + Simplification of penalties for intellectual property piracy. + Alignment of penalties with Commonwealth criminal law provisions. - Strong reaction from US, UK and some EU members.

4.5 The ultimate question posed by the inquiry is whether the likely benefits promised by the Bill, when aggregated, outweigh the likely costs.

4.6 Finally, it is arguable that many of the problems which the Bill seeks to address are, in many cases, the result of (or exacerbated by) practices within the music industry itself, which ought themselves to be addressed. As one witness observed:

the problem should not be a problem for the government or for the consumer. This essentially is a problem between musicians, their management, the various organisations who represent them and the large multinational companies, most of whom they are signed to. [3]

The relationship of the Bill to the TRIPs agreement

4.7 ARIA and AMPAL suggested that the Bill did not conform with Australia's obligations under the Agreement on Trade-related Aspects of Intellectual Property (TRIPs). [4] This argument was also supported by the Australian Copyright Council. [5]

4.8 It is clear that Article 6 of TRIPs permits members of the World Trade Organisation to parallel import, and Australia's former Ambassador to the General Agreement on Tariffs and Trade (GATT) stated simply that “any inference or implication that parallel importing is inconsistent, either with the Agreement on Trade Related Aspects of Intellectual Property or the General Agreement on Tariffs and Trade itself is utterly wrong”. [6] Indeed, he suggested that parallel import restrictions in themselves probably contravened the basic precepts of the GATT in that they constituted a restriction on trade which was not a tariff.

4.9 The Attorney-General's Department also addressed this issue, concluding that restrictions on parallel imports were debated at length during the TRIPs negotiations, but that “there was no international consensus in favour of copyright control over parallel importation at the time of the conclusion of the TRIPs negotiations. [7]

4.10 In general terms, ARIA conceded that the TRIPs Agreement imposed no particular rules in relation to parallel imports. [8] However, it argued that the Bill was potentially in breach of TRIPs through the operation of Articles 41 and 51 of the Agreement.

4.11 Article 41 requires member nations to provide effective enforcement procedures for copyright. Article 51 requires member nations to prevent the importation of “pirated copyright goods”. As defined in the Agreement, “pirated copyright goods” are goods that have been made without the consent of the copyright owner and which, if made in Australia, would have constituted an infringement of copyright in Australia.

4.12 In essence the argument as put by ARIA is that, in at least three situations, the Bill would allow the importation of “pirated copyright goods” as defined in TRIPs. These situations are:

• imports from countries in which there is no copyright law;
• imports from countries where recordings can be made through mechanical licences; and
• (possibly) imports of unauthorised compilation records. [9]

4.13 With regard to the first situation, ARIA set out its analysis thus:

The assumption appears to be that anything made “in accordance with copyright” or “without infringing any copyright” [in paragraph (a) of the definition of non-infringing copy] must necessarily be made with the consent of the copyright owner.

… however, there are a number of countries which do not have any copyright law at all. In such countries it would be possible for someone to make a completely new recording of a musical work which, although protected by copyright in Australia, is not protected by copyright in the place where the recording is made because that country does not have any copyright law. Copies of that recording will satisfy all the criteria for legal importation set out in the Bill. They will have been “made without infringing any copyright in a literary, dramatic or musical work under the law of the country in which the copy is made” and the requirements of paragraph (b) in the definition of “non-infringing copy” will also be satisfied. Such copies, however, are clearly “pirated copyright goods” for the purposes of TRIPs. Moreover, copies of that sort are clearly infringements which the owner of the copyright in Australia in the musical work should be able to control. [10]

4.14 With regard to the second situation, ARIA set out its analysis thus:

The Bill and the AG's Submission refer to the consent of the copyright owner or producer of “the sound recording”. But a recording will also contain musical work(s) and lyrics in which copyright may also subsist. There is no requirement in the Bill for the consent of the copyright owner in the music (or the associated lyrics) to be obtained … the same problem [as that canvassed in the first situation, above] arises where the new recording is made pursuant to a mechanical licence or some other type of statutory or compulsory licence. Such copies are clearly made without the consent of the owner of the copyright in the musical work and would, if made in Australia, be infringements of copyright here. Thus they are “pirated copyright goods” for the purposes of TRIPs. [11]

4.15 With regard to the third situation, ARIA set out its analysis thus:

It is arguable that the Bill will legalise the importation of “compilation CDs” ie, recordings which contain a number of tracks from different legitimate recordings: a sort of “do it yourself `Best of…'”. This danger arises because it is not clear what the relevant sound recording is for the purposes of applying paragraph (b) of the definition of non-infringing copy. [12]

4.16 In response, Australia's former Ambassador to the GATT told the Committee that this assertion of breach was narrow and based on narrow (if not exceptional) circumstances:

The definition of non-infringing copy which is proposed in the government's bill may allow imports of pirated material from the handful of countries which do not have copyright law or permit what is called statutory licensing. In both cases, it is argued that Australia would be in breach of an obligation that the consent of the author is required for any reproduction of the author's work.

These loopholes, if that is what they are, do not appear to be of such weight that they would undermine the overall effect of the Australian bill. The conflicts of obligation to which the writer points are not inherent in the Australian bill, but in the provisions of the WTO TRIPs agreement itself, in my view. The presumption that a challenge under the WTO procedures against the Australian provision would find against them is uninformed.

Firstly, there is no record of interpretation of these issues upon which to base any such presumption. The treaty is new and so are its disputes procedures. Secondly, one of the contentions is that under TRIPS a country may restrict imports from a country on terms which it has no international obligations to meet. It breaches one of the very fundamental principles of the GATT. The author has been quite intelligent and analytical here and has touched on a very murky point to which there would be no quick conclusion. Therefore, the presumption that an automatic breach exists is uninformed.

The fundamental issue at point should not be lost sight of. As advice from A-Gs makes abundantly clear, the WTO TRIPS agreement was expressly framed to permit members the right to parallel importing if they so desired. This can be asserted because proposals to restrict parallel importing were put forward when the agreement was being negotiated and were not agreed. [13]

Benefits for consumers

4.17 As noted in Chapter 3 of this Report, the Bill aims to benefit consumers by encouraging lower prices for CDs. Based on varying assumptions, the EM states that CD prices would fall by between $1.60 and $10. The Bill also aims to benefit consumers by making a wider range of CDs available in Australia.

4.18 A number of witnesses spent much effort and artistry asserting that parallel imports would not bring about cheaper prices in Australia for legitimate CDs. [14] Indeed, the Australian Music Retailers Association (AMRA) suggested that the Bill might bring about an increase in prices. [15]

4.19 Many industry witnesses asserted that current Australian CD prices were internationally competitive. ARIA, for example, referred to a series of local and international price reviews, and summarised their conclusions as follows:

• international price comparisons over 5 years clearly show that Australia is a lower price country for CDs;
• when retail price data is compared with information on the availability of parallel imports, there is no correlation between markets which are open to parallel imports and low prices;
• the PSA compared Australian prices with those of other countries in the absence of any discussion of differences in market conditions – when these differing conditions are recognised it becomes clear that there are other explanations for price differences (eg, differing tax levels, copyright royalty levels, market size and economies of scale);
• extra tax and royalties account for approximately $6.72 of the difference between Australian retail prices and those in America; and
• Australia's wholesale prices compare very favourably with those in other countries and there is increased price competition at the retail level – while in the 1980s discounting of records was infrequent, the 1990s has seen it become the norm, with department stores discounting the top 20 CDs by amounts between $4 and $7. [16]

4.20 This information was updated by Professor Ronald Bewley, who developed two scenarios involving the importation of CDs in commercial quantities in batch sizes of 100 or 1000, with `break-even' exchange rates that would yield a selling price of approximately $25. He assumed an effective sales tax rate of 26.4%, a retail margin of 27.5%, and `mid-range' titles.

4.21 Prof Bewley's calculations showed that, to make legal parallel imports from the US profitable, an exchange rate of US$0.845 or higher would be needed for a batch size of 100, and US$0.765 or higher would be needed for a batch size of 1000:

The average weekly batch size currently purchased by stores across Australia is 30. The only legal retailers to benefit are those who can afford to cut retail margins on selected high volume product. Thus only chain stores would be able to benefit.

So what of the various claims for price reductions? $7 off is a common claim by the Government for the price reduction following changing the parallel importing legislation. To achieve this using US imports, and a batch size of 100, the exchange rate would have to appreciate to $US0.93 assuming that the $7 discount is off full-priced CDs otherwise the $A would have the break through parity and appreciate to US$1.22 [17]

4.22 He concludes that “CDs cannot be legally imported from the USA to Australia at cheaper prices and current exchange rates”. [18]

4.23 Prof Bewley also updated ARIA's international CD price comparisons. Excluding Indonesia and Malaysia (where current financial instability had produced unrealistically low prices), Australian prices were almost identical to those in New Zealand and below all but Canada, Singapore and the USA. [19]

4.24 In response, the ACCC stated that the striking feature of its international price comparisons was that “prices in Australia have remained consistently higher than `best practice' or competitive markets, such as the US, often substantially so” for many years, and going back to the late 1970s at least. Australian prices had also generally exceeded those in Europe, although by lesser amounts. [20]

4.25 ACCC comparisons, after allowing for tax differences, indicated that Australian prices exceeded US prices by 42.3% in 1989; by 35.3% in September 1993; by 38% in November 1994, and by 38.8% in April 1995. In June 1996, with sales tax equalised, Australian prices were, on average, 44% higher than US prices, and 34% higher than Singapore prices. By June 1997, the price differential with the US was 33%. [21] The ACCC continued:

The point to be made here is that price relativities must be viewed over the longer term. A sharp deterioration of the $A against the $US has occurred at the time of writing this submission and once previously at the time of a Cabinet decision on sound recordings. An argument put then to Ministers was that the industry had overcome the pricing problem. However, the price gap was quickly opened again as exchange rates moved back to trend and the multinationals re-imposed the optimal pattern of international price discrimination. The only way that the price gap in sound recordings will disappear is if there is a structural shift in the market, such as a fundamental change in consumption patterns or the removal of the import monopoly and increased competition. [22]

4.26 The ACCC concluded that it was not suggesting that CD prices in the US, the UK or Singapore were necessarily optimal – it understood that record companies were currently under investigation for alleged price fixing in the US market. Nor was it suggesting that Australian prices would fall to the levels which prevailed in those countries. It was likely to be the threat of imports rather than imports per se that would place pressure on prices, and this would enable local companies to bargain more effectively with their suppliers. [23]

4.27 The Australian Consumers Association stated that it had updated ACCC research, using the same methodology, and concluded that substantial price savings existed – up to $7 compared to prices in the US. [24] ACA also provided the Committee with a `snapshot' retail survey of the prices of 6 named CDs in 22 countries (including Indonesia and Taiwan), with results expressed in Australian dollars at recent exchange rates, adjusted to incorporate Australian tax rates. In each case the Australian price exceeded the 21 country average price by between 17% and 25%. [25]

4.28 Woolworths Ltd stated that its Big W Division sold in excess of $30 million of CDs each year – mostly Top 30 material – at a current retail price of $23.82, which represented a margin of 7.64%. In expressing its strong support for parallel importing, Woolworths noted:

We do not believe this will result in a significant growth in parallel importing but will produce a competitive market that will force the major suppliers to supply to the retail industry at a cost level which is more equivalent to world costs. We believe that this will result in a drop in the price to retailers of approximately 25% to 30%. In view of the fiercely competitive nature of the retail market, this will result in a similar drop in the selling price of CDs at the retail level. This will, in our view, result in a significant increase in the purchasing of CDs in the marketplace, giving a large boost to retail sales … This will result, we believe in a growth of business at retail level with resultant additional jobs and indeed we would argue opportunities for local artists.

On the basis of experience overseas, we are also confident that the range of product available to the Australian public will be greatly expanded to ranges more consistent with markets overseas. [26]

4.29 In one area of the market there is already competition from imports. As noted in para 3.7, the import restriction does not prevent individuals from importing copyright goods for personal use. An increasing number of people (particularly young people, who are the major market for recorded music) are using the Internet to import CDs in this way. [27] The Committee received some anecdotal evidence which indicated that, for example, a single classical CD which retailed for $A30 in Australia (and was difficult to purchase) could be bought for approximately $A19 over the Internet. [28] Part, but only part, of this price difference is attributable to sales tax savings. The growing strength of the trend to on-line purchasing is itself an indication that the Australian distribution market is not internationally competitive. [29]

4.30 However, in a real sense, attempts to precisely quantify the potential price effects of parallel imports are not the issue. The argument has essentially been put in terms of economic principle, based on experience, and competition policy. As a matter of economic principle, (and notwithstanding market imperfections) competition should produce the lowest possible price. As a policy matter, encouraging competition ensures that the lowest possible price is maintained. The Bill seeks to encourage competition in the distribution of CDs and so achieve the lowest possible price. Should that be the existing price, then consumers have lost nothing. There may, however, be costs to others in the market, and it those potential costs that the Committee now considers.

Effect on Australian recording artists

4.31 A number of those who provided evidence to the Committee asserted that the Bill would disadvantage Australian recording artists. [30] The Explanatory Memorandum (see Table 3 at para 4.4 above) suggests that the likely effect of the Bill on artists is problematic – royalty income may increase if lower prices produce greater sales, but investment in artist development by record companies may change.

4.32 In the first instance, it should again be noted that most Australian music is marketed and sold within Australia. Parallel imports cannot affect this music. To suppose that a band selling 2000 copies of a CD in Australia would be confronted with 50,000 copies of that CD produced in Malaysia and then shipped to Australia was not a real world scenario.

4.33 More generally, as DOCA points out, recording artists who are signed by a record company commonly receive a payment from that record company which is tied to the number of sales. This is a matter of contractual negotiation between the record company and the artists. The removal of the import restriction will not directly affect payments to these musicians.

Furthermore, it is unlikely that an Australian artist performing on a recording will receive any payment from record companies unless their work is successful in overseas markets, because of the accounting practices adopted in recording contracts. Distribution of payments to recording artists does not occur until all costs of development, marketing, distribution etc are recovered from sales. [31]

4.34 A similar observation had been made by the PSA, which pointed out that most artists were in an “unrecouped” position in relation to their artists royalties (and often in relation to any mechanical royalties they may be due), [32] and was endorsed in evidence to the Committee by Mr Phil Dwyer:

If you enter into a contract with a record company, you do not get one cent in artist royalties until all the costs of producing the record and the video, which can be somewhere between $100,000 and $200,000 are recouped. So the artist in effect subsidises the creation of the recording. The copyright in it is owned by the record company. That is not a bad thing, because the record company takes the financial risk. But do not turn around and say that the artist will have a reduced income if the retail price is reduced. They have no income. If they happen to be one of the lucky few who recoup and who are selling records to that extent, my argument has always been that they would make more by selling more. If you reduce the price, you will sell more. That is the argument. [33]

4.35 Recording artists might be affected by parallel imports in a number of specific situations:

• where the Australian rights and the international rights are owned by different record companies;
• where an internationally successful Australian band issues a record governed by an `old' contract;
• where an internationally successful Australian band has a contract which quarantines their Australian royalties from the recoupment of expenses incurred overseas; and
• the dumping in Australia of CDs deleted overseas.

4.36 The first scenario was illustrated in the example of the band Mondo Rock (which was signed to Mushroom Records in Australia, but to one of the majors for the rest of the world). [34] It can also be seen in the recent recording history of Savage Garden. Having failed to interest the major record companies in signing this band, their manager financed the band's first record personally and then by selling the Australian rights (for three albums for three years) to Village Roadshow.

The Australian company, which is Village Roadshow, own the rights to Savage Garden in Australia. The rights then revert back to me and the band again. Fundamentally, they invested a slab of money to buy those rights, which is the money we finished the record with. We got the record mixed in America with that money. We came back here. They made three videoclips. They have since spent close to one million dollars on television advertising for the record. They have broken three singles. But they own and at the moment are protected by owning the Australian rights.

I then took the rights offshore. I sold them to Sony, which is an - here is the evil word – multinational … Multinational corporation Sony bid on this band in a large way. They bid on it in a number of contracts and in a number of territories which are not cross-collateralised; it is a point I will get to in a minute. Fundamentally, they bid on this band in those areas, and the band became hugely successful. By far theirs is the single biggest album this year in Australia …

We sold 800,000 albums in Australia and New Zealand. We treat them as one territory at this point. However, obviously, as it progressed and as the single went to No. 1 in America and it became hugely successful in the rest of the world, Sony music acted for ego reasons …. the egos within the Sony group of companies were out of control, and still are, as to why they do not have the Australian territory and why their Australian owned department missed seeing the band in the Australian territory …

Having gone to that point, they were incredibly jealous of the fact that they were missing these sales here. Under the new regime that you guys are suggesting, very obviously, some of those 800,000 records - I think the album was released on exactly the same day in every territory in the world - well over half of them would have originated through the Sony deal, not the Australian rights holder. In other words, the person who paid for the Australian rights, promoted the Australian album and paid for the Australian videos would only be allowed, under the new suggested regime of lifting the parallel importation restrictions, to pick up half the sales that were due to them out of the Australian marketplace. [35]

4.37 However, it is likely that Savage Garden (or their management) would receive royalties, or would have received an advance against royalties, for all overseas sales notwithstanding the position of Village Roadshow. Secondly, this factual situation would seem to be rare. While Savage Garden's CD spent 47 weeks continuously in the charts, and received simultaneous worldwide release, most music has a much shorter `shelf life', and it is likely that domestic sales would have peaked long before parallel imports could threaten. Thirdly, many of these problems are essentially contractual in nature. And, finally, the dilemma would not have arisen had the first rights holder purchased not just the Australian rights, but the world rights or an option over them.

4.38 A suggested example of the second scenario involved the Australian band Men At Work who were internationally successful some years ago:

Their records are released according to contracts that were signed a long time ago, so they cannot change the terms of their contracts. If they put out a greatest hits record, that would be released probably all over the world because they are famous all over the world. There may be 30,000 or 40,000 copies come from a number of different territories into Australia because they still have a very strong base in Australia. So they stand to lose not only the writers' royalties but perhaps completely from the very real possibility of discs sourced from Asia. [36]

4.39 The third situation was described by reference to the band The Angels:

I had one band, the Angels, that I signed worldwide to an Australian record company. I found, as are a lot of bands finding to their chagrin, the following scenario. You can have a successful record in Australia - somebody pointed out that it is the first step in the equation in order to get it away - and you can get yourself a $200,000 royalty cheque about to come down the pipeline. If you are signed worldwide and all your deals are cross-recoupable, they can recoup their expenditure out of your royalties from wherever they come in. They can recoup their American expenses out of your Australian royalties, for example.

One film clip in America wipes out your whole Australian royalty cheque … Having worked for two years in Australia to get yourself to that point where you are about to launch your band around the rest of the world, suddenly your royalties are wiped out a multinational worldwide record deal.

I started doing deals based in Australia yet signed offshore first. The Australian royalties were quarantined. In other words, even though it may have been signed to the same company, because we were coming back into Australia and signing it second, we were saying, `You cannot recoup any expenses.' The American market is hugely expensive. It will eat up all my little Australian royalties ...

If you allow parallel importation, it will wipe that straight out. Especially if it is with the same company, they will say, `We're looking down the barrel of having to pay them $200,000 worth of royalties in Australia. Can we import $200,000 worth of royalty bearing units from the rest of the world so that we pick that up?' In other words, `Don't ever get them into credit in the Australian royalty account. We will sell American records, which are then paid royalties in America, into the Australian marketplace to keep them at a zero balance in their royalty account.' That is how I would run the business. I am painting a fairly evil picture of these people, but that is how I would run the business. [37]

4.40 The final situation involves `cut-outs' or deletions. A deletion is a record that is deleted from a record company's catalogue as a result of extremely low sales. Deletions are sold at extremely low prices, often less than the cost of manufacture. It is usually a contractual term that no royalties are payable on deletions. [38]

4.41 The `parallel dumping' of deletions was seen to have ramifications on both a general and a particular level. On a general level, given that Australian consumers had only a limited budget for recreational items such as CDs, it was feared that they would choose to spend this money on cheap `parallel dumped' deletions in preference to full-priced, Australian-produced CDs. This might affect the prospects for developing Australian bands. [39]

4.42 The dumping of deletions might also directly affect some Australian artists who had attempted international success and failed, but who still retained a large home market. A hypothetical example was given using an artist such as Tina Arena:

Tina Arena can manufacture a record here, sell it here and have some success. Simultaneously, which is the way it often works now, she releases in America. She does not have the same success in America as she would like to have here. The record company in America sells it off through one of their dumping shops at a $1 per unit. Somebody goes there, buys it, brings the record back here and sells against Tina and obviously causes havoc. I have always considered that a very sensible and valuable argument …

The arguments against it are twofold. First, it is essentially a contractual thing. At the outset, you should have a clause in your recording contract that there will be no deletions within 12 months of release, because we have a short window of opportunity here anyway, such as three to six months. It is no good somebody parallel importing against your product six to 12 months after the release because by then it has run its race. You can stop that by contract.

I have also said that the villain is the record company in America which owns the copyright and has dumped the product. Is this really a problem for the Australian taxpayer? Is it not a problem for the American copyright owner? Having said that, I recognise it as a problem. It needs to be addressed. [40]

4.43 Given industry practices and the operation of US law, including a contractual term which directly prohibits an overseas record company from parallel importing into Australia does not seem a practical proposition. Such a clause was apparently included in a recent contract for the artist Julia Darling, but was variously described as “relatively useless” and as “a nice piece of fluff in a contract otherwise overladen with boiler plate”: [41]

The clause in the agreement says that Wind Up Records in New York will not directly sell from their manufacturer to any territory in which they already have a licensing agreement for Julia's product. At the same time, the lawyers expressed to Andrew Watt, the manager … `You cannot under American law prevent us from selling to a one-stop and for them to on-sell to anybody else anywhere.' [42]

4.44 For others, particularly those involved in less popular forms of music, the issue of royalties was less important than the wide dissemination of their music:

I actually do not care very much about the money that I receive in royalties; I care much more that large quantities of the product be easily available worldwide at low prices. I say that because the royalty rates are in any case negligible and because if 10,000 units of one of my recordings are sold at $14 I actually get slightly more money, even on a vastly reduced royalty rate, than if 500 units are sold at $31 [43]

Effect on Australian composers

4.45 The Explanatory Memorandum (see Table 3 in para 4.4 above) identifies the likely effect of the Bill on composers as problematic. It suggests that composers may receive reduced mechanical royalties from parallel imports.

4.46 As noted in paras 2.13 and 2.14, there are essentially two copyrights involved in a music CD – one relates to the sound recording, and the other to the song or underlying musical work. The most important source of income for most composers and their music publishers is the `mechanical royalty', which is paid to the owners of the copyright in a musical work when reproductions of that work are recorded for retail sale. [44]

4.47 Mechanical royalties may be calculated in different ways, and at different rates, in different territories. In Australia, composers are entitled to 6.25% of the retail price (or, by industry agreement, 9.306% of the wholesale price equivalent – the Published Price to Dealers). This represents about $1.68 on a full price CD. These royalties are paid quarterly, and Australian composers and publishers have a right to audit record companies licensed in Australia.

4.48 In countries in the European Union, the mechanical royalty rate is similar to that in Australia. However, AMPAL points out that Australian composers and their publishers in fact receive less money on records sold in Europe (and other foreign markets) given the involvement of foreign sub-publishers, collecting societies and withholding tax deductions. Even though CD prices are higher in France than in Australia, Australian composers would receive approximately 20% less in royalties on French sales, and would receive these royalties a year later than in Australia.

4.49 In the US, mechanical royalties are calculated at a fixed rate of 6.95 cents per track, or 1.3 cents per minute, whichever is the greater. Negotiations are under way which would see this rate rise to 7.1 cents per track with effect from January 1 1998. However, this US rate is often subject to a “controlled composition clause” contained in many artists' contracts. Under such a clause, a record company's obligations on each CD are limited to only 75% of the mechanical royalties that would be payable on 10 tracks.

4.50 In general terms, AMPAL states that “composers and publishers often get paid lower mechanicals in the US than they do in Australia for full-priced CDs. However, on budget product the mechanicals may be significantly higher in the US. [45]

4.51 In many developing countries, there has until recently been “no culture of paying mechanical royalties to writers, and there is still no effective infrastructure to collect royalties”:

In an effort to introduce the royalty concept, publishers and composers agreed to an artificially low royalty rate in many countries in Asia, with the promise of incremental increases over the next few years.

In the Philippines and in Thailand the introduced rate was 2.7% of the PPD - compared with 9.306% of the PPD in Australia and the European Union. In Malaysia the current rate is 4.5% of PPD (for foreign works). In Indonesia it is 5.4% of PPD.

The rate forms part of the equation in calculating the mechanical royalty. Another important component is the price. Record companies set their pricing policies according to individual market conditions. In Asia … record companies set artificially low prices in order to more closely compete with the pirates and to develop the market.

Under the Government's proposal the mechanical royalties payable to Australian copyright holders would be based on the price in the country of manufacture not the price the product would actually be sold for in the Australian market. [46]

4.52 AMPAL provided the following figures to indicate the potential reduction in royalties which might be faced by some Australian publishing companies representing Australian composers. For full-price, first release records sold and licensed in Australia, the publisher would generally receive a mechanical royalty of $1.68. [47] For the same record, retailing in Australia for the same amount, but manufactured and licensed in France, the publisher would receive a mechanical royalty of $1.37. For the same record manufactured in the US (assuming 12 tracks), the publisher would receive $0.91, or $0.57 if the record were subject to a controlled composition clause. For the same record manufactured in Malaysia, the Australian publisher in Australia would receive $0.29.

4.53 One direct example of the potential effect of the Bill was provided by Mr Eric McCusker:

I recently bought a CD of Rick Springfield's Greatest Hits on which he recorded a song of mine called `State of the Heart'. I bought this at my local supermarket. It is on Camden Records, which is a budget line for BMG Records. It was discounted in the shop to $9.95 with some 19 tracks, of which one is mine. All things considered with publishers taking a commission, for a $10 CD I would probably end up making one cent. The chain of the money would go from the retailer, to the record company, to my publisher and then to me, as things stand. I think that would be over two accounting periods if you take into account six-monthly accounting periods, which is the way the industry works. That may not be a sensible way to work but that is the way the industry works and it would be very hard to change.

If the bill goes through as proposed and this record was released around the world, people would be able to source that record from any number of territories. In my letter I explained what would happen if it was sourced from Brazil and Brazil is not a worst case or extreme scenario. Brazil has quite a healthy respect for copyright. They have reasonable mechanisms, although there is some dispute about the mechanical copyright rate in Brazil at the moment.

This is what would happen to my royalty from the sale of the Rick Springfield CD if that record was then imported from Brazil: the money would go from the record store at the supermarket, which is a kilometre away from where I live, and it would go, I presume, to the importer. It would then go from the importer to a wholesaler in Brazil and then from them to a Brazilian record company or a Brazilian branch of BMG. Then from there to a Brazilian mechanical collection agency; from there to a Brazilian publisher; from the Brazilian publisher to the Australian publisher in a branch of the same company; and then to me.

So it will go from basically two steps to six steps and with each of those steps, there is usually a delay with a six-month accounting period. Also in several of the steps commissions are taken out. I calculated that, even from a fairly reliable copyright country like Brazil, my one cent would be down to 0.3 or 0.2 of a cent.

If I get a royalty statement now and I say, `This doesn't seem right. I thought I had sold more records than that,' then I can ring up my publisher here, my record company here, and get to the bottom of it reasonably easily. I have a legal right to audit them and find out … If this was going to Brazil … I would be trying to verify all of these steps in a foreign country where I do not have the legal right to audit.

If I did find a mistake, I would be trying to conduct a court case in Sao Paulo or something; I would be on the phone trying to work out where my money has gone. You must understand that, from my viewpoint, this legislation is a vast impediment to my ability to fairly do business … If my local record store sources Rick Springfield's Greatest Hits from a territory in Asia like Malaysia or the Philippines, I will not see any money for that basically. [48]

4.54 Other examples involved the importation of CDs from countries with no copyright law (such as Papua New Guinea), or from countries with a copyright law that does not protect foreign rights holders (such as Taiwan), or from countries with a copyright law which enables copies to be made under a compulsory licence (ie, without the consent of the owner of the copyright in the musical work). [49] In each case, CDs could be imported into Australia without payment to an Australian composer.

4.55 The Committee was told that the Singapore legislation, which permits parallel importation, does not apply to articles made under compulsory licence, and the provisions in the Australian Copyright Act which allow the importation of books similarly do not apply to books produced overseas under compulsory licence. [50]

4.56 In response, DOCA noted concerns that composers might receive lower royalty rates (and potentially less royalty income) from imported CDs which included their compositions. However, the Department also pointed out that:

• the threat of imports was likely to provide sufficient incentive for CD wholesalers to lower their prices – to the extent that this happened, royalty rates received by composers would not fall;
• the majority of royalties received by Australian composers derive from recordings of their work by Australian performers - in many cases the bands of which they are members. Recordings by Australian artists are not usually released overseas until they have had substantial success on the local market, and, in practice, only a small proportion of Australian recordings will be made overseas and then imported into Australia; and
• if the royalty rate received by composers does fall, this will not necessarily mean that total royalty income received by composers would fall, as increased sales might generate increased income. [51]

Effect on Australian music

4.57 The Explanatory Memorandum (see Table 3 in para 4.4 above) observes that the Bill will affect “music companies” in two ways: profits may decline, and they may face increased competition from overseas suppliers.

4.58 A number of witnesses expressed concern about the impact of these aspects of the Bill on the Australian music industry generally. [52] This concern was expressed in a number of ways:

• investment in new Australian music and the promotion and development of new Australian artists would fall if the Bill were passed;
• the Bill, in effect, appropriated an existing property right; and
• the Bill, in effect, treats the music industry differently from other similar industries.

Investment and promotion

4.59 Declining investment and promotion was a concern put both by record companies and music publishers. Shock Records, for example, reported that:

• without the ability to protect its copyrights, and in a market driven purely by price, “we expect we will be forced to reduce our investment in local repertoire by around 50%”;
• being forced to “artificially” lower prices would also affect its ability to market and develop new artists – “pricing decisions fundamentally affect the level of funds allocated to marketing”;
• investment in new artists was already extremely difficult and risky – a market dominated by imports, in which it would be increasingly difficult to obtain retail space, would result in an inevitable reduction in investment in new local talent by all record companies; and
• with fewer new signings and fewer funds available for marketing, it was likely that Australian artists would have less success domestically, and also internationally (as overseas interest was invariably driven by local success). [53]

4.60 In some cases, a failure to invest could have significant consequences:

It is very expensive to try to break through artists. I could put my finger on half a dozen artists that I will not be able to put that sort of investment into. Those artists are at a stage where they would need to spend $30,000 to record an album. If I cannot put the investment into the marketing and I am unsure of the quantities to be sold, there is no option but to let the artist go. It is not reducing the investment. It is a case of `That's it. Sorry, see you later'. The stigma attached to an artist dropped by a record company is such that that artist would never get another deal. [54]

4.61 Shock Records stated that, while the majority of the product it sold in Australia involved international artists, it used its profitable overseas licences to cross-subsidise its investment in local artists. [55]

4.62 This view on investment was put on behalf of both the majors and smaller record companies. [56] A similar view was put on behalf of music publishers:

If our business suffers a substantial reduction on royalty income, I will not be able to invest in the careers of songwriters to anything like the extent that Mushroom has in the past. With profitability and cash flow reduced, the funding will not be there and, given the decreased returns, the investment is not as attractive. Please bear in mind that between Mushroom Records and Mushroom Music, we have signed about half the acts in Australia. If we reduce our roster, it will have a significant impact on the local industry. [57]

4.63 However, attention should be drawn to the PSA's conclusion that investment by record companies in Australian artists was a commercial undertaking rather than a benevolent one. [58] This was affirmed by one major industry participant who pointed out that:

Investment in the music industry has nothing to do with benevolence. In my 20 or 25 years, I have never acted for one artist who has ever been given one dollar on a benevolent basis from one record company. I have acted for many artists who have terribly exploited record companies. I have been involved in many situations where record companies have exploited artists …

We are talking about risk and return. A record company has to decide to make an investment with certain risks and certain returns. Often they get it wrong and lose. Sometimes they get it right and win. With Men At Work, Sony invested $250,000 and had a gross return of $100 million from it. That was not a bad win. [59]

4.64 To similar effect, a representative from a major music publishing company, noting her company's principled support for Australian music and Australian songwriting over many years, nevertheless also conceded “we were in the red for years, but always with the hope that when one got away it would pay big”. [60]

4.65 The PSA's conclusion was also affirmed by ACA, which considered it “ludicrous” to argue that, without the majors, Australian artists would not receive support. Under the existing law, artists only received substantial support from the majors once they had established their commercial viability, and this was a factor that was unlikely to change because of the introduction of parallel imports. [61]

4.66 However it was challenged by others. Shock Records, for example, observed:

We are not necessarily putting all the Australian artists out because we see that one day we will make zillions of dollars out of them. One of our driving reasons is that we have a strong belief in Australian artists and in trying to promote the talents of Australian artists. There are certain amounts of disdain in some international territories for Australian artists, which is outrageous. I have always wanted to promote Australian artists on an international stage. [62]

4.67 The PSA also drew attention to the likelihood that any expansion in sales volume brought about by a reduction in prices would work to increase returns. [63]

4.68 A related complaint put by the industry was that parallel imports would be able to `free-ride' on promotional activities undertaken by the local rights holder:

Parallel imports will mean that there will be free riding on the considerable promotion activities, especially in regard to the Top 40 and the best sellers ... [This] is aimed at what pays for everything else in terms of the consumer and retail services offered by the wholesalers. [64]

4.69 While conceding that this argument had some validity, Mr Phil Dwyer pointed out that `free riding' in this form would only work if there were not a competitive price in Australia. Also, where there is a simultaneous world-wide release, “is it not up to the company that controls the copyright and which does the release to control that situation? It is not up to us”. [65]

4.70 With regard to `free riding', the PSA concluded that:

The companies claim that the protection afforded by the importation provisions is necessary to maintain the current high levels of advertising and promotion expenditure and by implication that this level is optimal. However, this is far from obvious, since it seems to be mostly directed at influencing market shares rather than market size. Furthermore, since the licensors would still benefit from the `free-riding' sales of parallel importers, there would seem to be room for any problems to be overcome through re-contracting. This may be somewhat more difficult for Festival and others who license product from unaffiliated companies overseas, but is unlikely to be a problem for the multinational companies. [66]

4.71 In general terms DOCA felt that it was “unlikely” that the Bill would bring about stagnation in the industry, as industry development depended on:

• a “dynamic grassroots sector”, both as a source of emerging artists and audience commitment – the health of this sector was not directly related to the profits of the majors, but rather to institutions such as Triple J and community radio (which were government-funded);
• the opportunities presented by the emergence of new technology which was seeing new or independent artists increasingly choosing to self-publish, promote and distribute their records directly to consumers; and
• Government initiatives such as the Contemporary Music Export Development Fund, which will make available $1.7 million over two years to assist emerging musicians on the verge of international success to promote their works overseas, and the Playing Australia and Festivals programs. [67]

Property rights

4.72 The point was also made that the Bill would deprive the industry of a long-standing property right of economic significance. ARIA, for example, observed that:

Nowhere in the public or the parliamentary debate has one of the fundamental points of this been touched on. It is notably absent from anything that has ever come out of the ACCC or the PSA and it is absent from the Explanatory Memorandum - that is, these rights that we are talking about here today and that the Senate has been asked to contemplate to wipe out are private property rights. They are individual pieces of private property owned by various people resident in Australia. There has been no focus or debate on the fact that this bill seeks to negate these private property rights. There are hundreds of thousands of these property rights because every track and every song is a piece of property. Hence, copyright is called intellectual property. [68]

4.73 AMPAL similarly pointed out that the Bill would render valueless rights which publishers had spent tens of millions of dollars in acquiring. It asserted that those rights would become “meaningless” if Australian copyright owners could not collect the royalties flowing from the exploitation of those rights in Australia. [69]

Discrimination

4.74 A third objection to the Bill suggested that it effectively discriminated against producers of music. As APRA pointed out, [70] following the enactment of the Bill, there will be three discrete regimes covering importation under the Copyright Act: one for books (providing for a limited right to parallel import where a book is not made available by its Australian copyright holder); another for records (parallel imports permitted without restriction); and yet another for all other forms of intellectual property (parallel imports not permitted). APRA concludes by asking:

it must be bad public policy to have different statutory regimes as complicated as these are for what are different species of the same property. That must be bad public policy in terms of the public's understanding of what copyright is about. It does not make any sense from the point of view of rationality. If it is good policy to remove this right in relation to music, it must be good policy to remove it in relation to other forms of copyright.

What is more important to the Australian economy in terms of structure? Is it music? Is it software? Is it information in the form of literature or other forms? It seems to me that music must rank very highly culturally, but in terms of structural economic considerations, it cannot be treated at the same level as software or information. [71]

Effect on Australian culture

4.75 A number of witnesses suggested that music was more than an industry – it was an important cultural force, and contemporary Australian music was our most popular art form. It was suggested that the Bill, in making changes to the music industry, would also damage Australian culture. [72]

4.76 This damage was seen to occur as a result of the `message' conveyed by the Bill:

The passing of this Bill would be a message to me that that what I do as an Australian musician both at home and abroad is not a valued activity and that the Australian government is more than happy to see Australia as some kind of cultural parasite, relying on US and UK culture for its definition of itself. [73]

4.77 It was also seen to occur more directly, as a result of the predicted lack of investment by and disinterest of the majors:

we are concerned that, 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 throwing themselves in front of them ... It means every Australian will have to go overseas, which is a major problem. [74]

4.78 However, ACA challenged the role of the record industry in cultural development:

The record industry does not `subsidise' artists – it commercially exploits them. A distinction needs to be drawn between the music industry as a commercial venture and the development and promotion of music as a cultural objective. The record companies do not, and should not, have responsibility for promoting cultural development through their activities. [75]

4.79 ACA went on to observe that cultural investment should be `transparent' and directed at those areas identified as being in the interest of the general community. To justify restricting parallel imports on the basis that transnational corporations were making `cultural investment' decisions on the community's behalf was seen as “insulting”.

4.80 Others challenged the proposition that Australian culture would necessarily be damaged by changes to the import restriction. For example, Dr Ann Capling argued that the exclusive import rights held by the majors had undermined Australia's distinctive national culture:

In essence, the import monopoly right allows the majors to determine what CDs they will release in Australia. Because profits are generated by volume sales - 30 per cent of their revenue is typically generated by their top five sellers - the majors release only what they expect will be big sellers. In Australia, this amounts to only about twenty percent of their `lists'. Moreover, this is the music heard on commercial radio stations which play only what the majors make available to them. As a consequence, less `mainstream' is rarely broadcast and is hard to find, especially for people living outside major urban centres. The import monopoly also makes it difficult for Australian performers and composers to get airplay in Australia. Since they are in business to make money, the majors have no desire to promote Australian acts which are unlikely to become internationally profitable. As a result, alternative and specialist music by Australian performers is marginalised by the domination of the (predominantly US-owned) majors.

There is little doubt that this particular aspect of copyright facilitates the globalisation of a mass culture of commercialised mediocrity. [76]

4.81 While some contended that what made Australian artists internationally successful was their `Australianness', [77] it is arguable that, with some exceptions, internationally successful Australian music is often only indistinctly Australian. Most internationally successful music is `international' or `mid-Atlantic' in character. Whatever their other virtues, the Spice Girls tell us as little about British culture, as ABBA told us about Swedish culture, and Aqua tells us about Danish culture.

4.82 A similar point can be made about many of the Australian artists (for example, Olivia Newton-John, Kylie Minogue, Air Supply and AC/DC) who have achieved major international success – their music is `global' rather than local, and, in this very important respect, Australia's music industry differs from its film industry. As ACA affirmed, transnational corporations which operate in media and entertainment have a commercial incentive to `homogenise' culture. Economies of scale exist for large scale production of `popular' culture …” [78]

Effect on Australian record manufacturers

4.83 As noted in para 1.15, CD manufacturing in Australia is world-competitive. The industry comprises ten manufacturers, two of which are controlled by major record companies. The Committee was told that the eight independent manufacturers had invested in excess of $100 million in high technology capital equipment, and employed in excess of 1500 people in highly skilled jobs. [79] As noted in para 1.29, the ABS estimated the industry's profit margin at 16.3%.

4.84 The Explanatory Memorandum (see Table 3 at para 4.4) identifies CD manufacturers as potentially adversely affected by the Bill. It states that, if the Bill is passed, imported copies of sound recordings may be substituted for locally manufactured CDs if these are not price competitive with imports.

4.85 CD manufacturers themselves told the Committee that:

Our research has been gained from talking to both record companies and retailers and would indicate that, should the proposed bill be passed, somewhere in the order of 25 per cent of products will be imported into the country … a drop in the volume of the order of 25 per cent out of the Australian manufacturing industry will lead to the merging or going out of business of a number of manufacturers in this country at the present time …

This government and previous governments have been insistent on the development of Australian manufacturing, on the development of jobs, on the development of capital equipment and on the development of high technology. We have done all of that. We have hundreds of millions of high-tech capital investment. We employ many hundreds of people. We have reduced imports to the point where 95 per cent of the products in Australia being sold are made locally.

Forgive us if we are confused if we are now being asked to consider, as a country, reversing that trend, to encourage imports, to reduce jobs and to reduce capital investment. It honestly does not make much sense to us. We very much want to put the manufacturers' point that we will be severely damaged - critically damaged - if this bill goes ahead. [80]

4.86 This issue was considered by the PSA in 1990 in the following terms:

Record companies have suggested that if the market was opened to parallel imports, local manufacturing would cease to be cost effective, with consequent negative impacts on employment. This rests on the assumption that parallel importers will be able to skim the cream off the market, reducing volumes to uneconomic levels. There seems little reason to accept this argument. If local suppliers match import prices, it seems likely that retailers will continue to source from them, with the advantages of local support and reliability of supply. If lower prices result in an expansion of the market, local production and employment are more likely to expand than contract, in manufacturing, distribution and retailing. [81]

4.87 It should be reiterated that the law as it stands does not prevent imports - it only restricts the class of importers. Currently, record companies may source their production from anywhere in the world. As the CD manufacturers have pointed out, the fact that major Australian record companies choose CDs manufactured in Australia in preference to CDs manufactured in their own plants in Asia or elsewhere - and actually own some of those Australian manufacturers - suggests that the local CD manufacturing industry is very efficient. This observation was made by, among other, ACCC, DOCA and ACA. [82] It was also endorsed by the manufacturers themselves:

The record companies are under no obligation to buy from any manufacturers in Australia. They nearly all - certainly the majors - have mother plants in the USA, Europe and wherever, and in South-East Asia. So you might ask: why do they buy 95 per cent of the product that they sell from us? We are not protected. We have never had any protection. In fact, until recently, all our raw materials were subject to levies but you can import a fully made up product free of duty

So we had no protection. Why do they buy from us? Because of quality and service, not protection. Therefore, we can say quite honestly: yes, we are trying to preserve the distribution system that currently exists in Australia because it maintains the volume of business and gives us security, but, no, we have never had the protection of the tariff from the record companies because they are always free to go elsewhere out of the country [83]

4.88 For these reasons, DOCA concludes that, after the Bill is passed, it is likely that most sound recordings sold in Australia will continue to be manufactured locally. CD manufacturing in Australia is a profitable and globally competitive activity that can respond quickly to local conditions. [84]

Effect on Australian record retailers

4.89 It is currently illegal for retailers to parallel import CDs. Indeed, some evidence to the Committee referred to the `ruthless and overzealous pursuit' by major record companies of certain small retailers who had tried, in the past, to parallel import in niche markets. [85] The Explanatory Memorandum (see Table 3 at para 4.4) identifies record retailers as likely to be advantaged by the Bill. In general terms, it states that retailers should enjoy lower wholesale prices, easier access to titles released overseas and a choice of suppliers.

4.90 However, retailers themselves seem divided on the Bill. Major retailers (who already have a market advantage through being able to achieve discounts for bulk purchases) have expressed support for the opportunity to parallel import. [86] Some smaller retailers have also expressed support, albeit anonymously:

I operate an inner Sydney CD shop but I can't disclose which one because the wrath of the record companies could come down on my shop. It's not so much that they would outright stop supplying, but things like late or lost deliveries and strictly applied terms of credit could really hurt.

Who cares about whether they would stop sending me promotional material – they never have anyway. That stuff goes to the bigger chains. In fact Sony is the biggest company and I haven't seen one of their reps in a decade …

I support this proposal because I know exactly where I'd go to source imports cheaper, and there's no way I'd touch pirate CDs. We all would know where to go to get legit music, and we're waiting for the government to give a green light so that these ridiculously high prices can go down without killing our margins which are tight already. [87]

4.91 However, the Bill was opposed by 95% of the 105 retailers who responded to an AMRA survey, [88] and AMRA itself said:

[Professor Fels] ignores the problems we retailers will face in being forced to import to be competitive.

Importing involves a number of basic new rules for us. One of the most important of these is handling a fluctuating exchange rate, which further exasperates our problems. The legislation is asking retailers to forgo 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. [89]

4.92 Some felt that small retailers would be destroyed by large retail chains. For example, Shock Records emphasised that only the large, overseas controlled retail chains would benefit under the Bill - small retailers would be unable to compete with their volume discounts, or their access to trading terms or credit facilities in foreign markets. Shock concludes that “the price war which would result from a new copyright environment will drive small Australian-owned businesses broke”. [90] Where these small retailers were also small independent record producers, interested in developing new Australian talent, the loss would be doubly felt. [91]

4.93 Others felt that small retailers would thrive, but at the expense of other sectors of the industry:

If the parallel import provision goes through, the independent music stores will then be able to circumvent the bulk order requirements of the multi-national companies in Australia and will have access to overseas recordings that will allow them to thrive without the need or dependence upon locally recorded and produced material. With this kind of competition what hope have local artists and local record companies to compete? The record stores, whether chain stores or independent, are, in the final analysis, interested in survival and their ultimate profit when the chips are down … all lip-service to the empowerment of the Australian music industry becomes meaningless. [92]

4.94 The ACCC summed up its more optimistic view as follows:

The question of whether small retailers and specialist retailers could compete with large retailers after deregulation was addressed in the ACCC's written submission. It was concluded that smaller retailers and those in specialist music markets such as Christian music are unlikely to be squeezed out of the industry. Indeed, in the Commission's view, both retailers and wholesalers should be able to prosper in a deregulated environment, with lower prices offset by lower costs and much greater demand …

Individual small retailers in any industry are usually unable to match the prices of large retailing chains, but they do not need to in order to survive. They have important non-price advantages, including convenience of location and customer service. Moreover, buying and marketing groups are often formed by small retailers, such as in retail pharmacy and whitegoods. Such groups not only ensure greater bargaining power on prices, they also provide a range of services including management advice, promotional activities and a corporate image. Sometimes wholesalers and manufacturers are involved in the arrangements. The Commission cannot identify any particular impediments in music retailing that would inhibit it evolving in the same way as other industries. As reported in its written submission, a buying group already exists in Christian music …

There is also the important point that small retailers currently pay more on average for CDs from wholesalers, and it is not evident why the structure of discounts on imports would be any different in effect to that which applies now. [93]

4.95 ACCC concludes that eventually independent `one-stop' wholesalers could be established in Australia if local suppliers do not reduce prices. [94]

4.96 DOCA similarly notes that the Bill will enable innovative retailers to choose freely between suppliers on terms of price, service, availability and reliability. Increasing the range of titles available at lower prices will attract consumer interest and bring greater sales. While the market for Top 40 material is now dominated by chain stores, smaller retailers who cultivate specialist markets and provide specialised customer service are likely to succeed. The Bill's ultimate promise - to consumers and retailers alike - is lower wholesale prices. [95]

Piracy [96]

4.97 No issue aroused more heat during the inquiry than the issue of the Bill's effect on the availability of pirated recordings. Piracy is a term usually used to refer to “unauthorised commercial reproduction and distribution, or intended commercial distribution, of material in which copyright subsists”. [97] However, the Bill permits only the importation of legitimate, authorised recordings. It provides procedural assistance for those bringing actions for piracy, and substantially increases the penalties for music piracy. In these terms, the ACCC referred to the piracy debate as a “real red herring”:

The proposal is simply to allow into this country CDs which are validly released in other countries in accordance with their copyright laws. It is to let in copyrighted products, not pirated products. The reforms have nothing to do with pirates. It will continue to be illegal to have pirates in Australia or to import them. I might mention that one cause of piracy is the high gap between our prices and overseas prices. If the gap closes, you will have less piracy. [98]

4.98 Yet a number of industry organisations claimed that the Bill, in allowing for uncontrolled imports, would in a practical sense “provide ideal conditions for the inflow of counterfeit materials”. [99] Indeed, AMPAL/AMCOS went further, claiming that the Bill `actively encouraged' imports of pirated copyright goods – importers who sourced their product in countries with no obligation make copyright payments, or from countries where no copyright was payable in the foreign jurisdiction, would have a clear advantage over Australian producers. [100]

4.99 Australia has a low piracy rate, estimated at less than 5% of the market. The Department of Communications and the Arts contended that piracy was primarily a problem in countries with weak intellectual property protection laws and large informal retail sectors dominated by street selling and markets – neither of which applied in Australia. [101] However, industry organisations considered that Australia's low rate was because the parallel import laws provided effective customs protection:

Under Australia's current legislation, no distinction is drawn between the importation of legitimate product and of pirate product. It is the importation itself which is the infringement if it is done without the licence of the owner of the copyright or the exclusive licensee in Australia. With 95% of CDs made here, stocks not made in local factories are automatically suspect. [102]

4.100 As AMPAL/AMCOS added, by way of example:

If a consignment of CDs is being imported by someone other than a licensed importer, Customs can stop the shipment and notify AMCOS. AMCOS then has a very short time period in which to analyse the material being imported and commence legal action – or face a possible action for damages from the importer. If AMCOS can quickly satisfy itself that the works in question are controlled by its members, and that the importer was not licensed by AMCOS, it can confidently move to have the sound recordings seized.

If the parallel importation provisions are removed, then AMCOS would only be able to take action on the basis that it is sure that the CDs infringed the rights of the copyright owners of the musical works in the country of manufacture. In virtually every case it would be unable to do this.

If AMCOS was to take an action and later it was demonstrated that the musical works were “legitimately” recorded in the country of manufacture (regardless of whether any licence fees or royalties had actually been paid to the copyright owners) then it would be liable to substantial damages claims. [103]

4.101 Other points made about music piracy, include:

• it is large scale, highly organised and international in its operations;
• despite considerable industry assistance to Customs and the AFP, criminal prosecutions for CD piracy had been difficult to satisfactorily finalise, with no prosecutions, offending companies in liquidation, and offending individuals able to continue their activities elsewhere;
• pirated CDs were often manufactured locally; [104] and
• civil actions were expensive, difficult, and of doubtful use – with professional pirate CD manufacturers `factoring in' civil actions as a cost.

4.102 Internationally, information provided by the US Ambassador indicated that, while progress in the control of piracy had been made in China, Hong Kong, Taiwan and Indonesia, it nevertheless remained a major international problem. For example, it had been estimated that China, Hong Kong, Malaysia, Taiwan and Macau had the capacity to produce 1070 million CDs annually, to satisfy a legitimate local demand of 79 million. [105] The Committee was also told that Singapore, with an ever-increasing piracy rate (currently approximately 30%), was “a powerful illustration of why parallel imports of copyright products is and will be a failure”, [106] and further that:

Once the barriers were freed amongst the European Union states, the anti-piracy investigators put aside the methodology and put aside the collection of statistics altogether. The anti-piracy people were the busiest people in the music industry in most of those countries. The nature of the offences changed; the virulence of the operators changed. Clearly there is an increase in piracy, given an increased opportunity coupled with a decreased opportunity of prosecution. [107]

4.103 Mr Phil Dwyer drew a distinction between the `piracy' argument and the `facilitation of piracy' argument. He considered that the former was “an emotional argument that obviously appealed to a lot of people, including artists, but it was totally irrelevant,” as the parallel import provisions related only to legal product. The essence of the `facilitation of piracy' argument was:

if you allow people to bring in great containers of legal product from Malaysia or whatever, half of them could be pirated. It could make it very difficult for us to differentiate between pirated and non-pirated product' Our response was, Isn't it up to the customs people? Can you really justify this situation simply by it being more easy for us to police pirating?' It was a policing argument, which has also gone by the way. [108]

4.104 The Explanatory Memorandum nominates the Australian Customs Service as the regulator most affected by the Bill in responding to copyright owners' objections. The EM goes on to note that the Bill will enable Customs “to concentrate on detection of pirated products rather than being required to detect all imports not sanctioned by the local rights holders”. Customs indicated that this would not require additional resources. [109]

4.105 In evidence to the Committee, Customs stated that:

• the Bill would make little difference to its operations;
• before Customs could take action under copyright, it required the lodgment of a notice of objection;
• two notices of objection had been lodged with it by copyright owners in 1995 - these had lapsed at the end of 1997 and had not yet been renewed;
• current enforcement procedures required Customs to refer potential matters to the relevant objector – this procedure would continue under the new provisions;
• currently, an objector notified by Customs of the existence of potentially infringing goods could elect to proceed against them as pirated goods or as unauthorised imports – in confining objectors to the piracy ground, the Bill had probably made an objector's task more difficult;
• in endeavouring to detect infringing goods Customs largely relied on information provided by the industry – random inspections of the 20,000 consignments of CDs imported into Australia each year would “certainly prove very ineffective”;
• for Customs to increase its effectiveness in this area it required better industry intelligence rather than more resources; and
• the possibility that Australia might introduce legislation to permit parallel imports had drawn no reaction at a recent international seminar on the implementation of the border enforcement of TRIPs. [110]

4.106 Music Industry Piracy Investigations (MIPI) was critical of the evidence provided by Customs, noting that Customs had made no reference to its lack of training in the enforcement of intellectual property rights, nor to its (statutory) inability to divulge intelligence it receives about copyright infringements to those industry – those best able to use it. [111]

4.107 MIPI also referred to an apparent “specious dichotomy” within the ACS, with field staff and operational management open and frank about its lack of resources, but with senior management happy to agree that any system imposed on it would work. ACS had also failed to mention that it seized only 1000 units of infringing product whereas MIPI had seized more than 250,000. Also, ACS had sent no renewal notices on the lapse of the existing notices of objection, nor had it returned the substantial sureties that it held against them. MIPI concluded that:

You cannot accept that the ACS can deal with any influx of pirated sound recordings, nor any other item, without a significant allocation of resources and the redress of a number of legislative deficiencies. [112]

4.108 The Attorney-General's Department said that, in addition to the penalty and onus of proof provisions in the Bill, Australian market conditions and global trends were expected to counter any possibility of increased piracy. The fact that the majority of Australian CD sales took place in established retail stores which were well known to (and had commercial relationships with) record companies would, of itself, provide a limit on the opportunity for large scale piracy. And serious efforts were being undertaken at an international level to stamp out all forms of copyright piracy. These included:

• obligations on all members of the WTO under TRIPs, including legislation and training;
• a specific bilateral agreement between the US and China (which is not a member of the WTO) which saw China act against many pirate operations; and
• the growing advances in technology, including the International Standard Recording Code information and an initiative known as Digital Media Management in the European Music Sector (MUSE) which, among other things, is developing a system of embedding an indelible, inaudible signal on sound recordings that can be retrieved even after the recording has been tampered with or re-recorded [113]

4.109 ACA also drew attention to impending technological solutions, and suggested a consumer `reward' scheme following a successful prosecution - perhaps in conjunction with a public `hot-line' (as operates in the video rental industry) - as a means of enhancing an already strong national culture of compliance. [114]

`Reversal' of the onus of proof

4.110 As noted in paras 3.15-3.17, the Bill significantly increases the penalties for piracy, and also includes a provision that makes it easier for a copyright owner to establish his case against a pirate importer or a subsequent trader in pirated stock.

4.111 Proposed new section 130A places the onus on the defendant, in civil infringement proceedings brought by a copyright owner or exclusive licensee, to establish that copies of a CD imported without the copyright holder's permission were made with the required consent of the relevant copyright owner or producer of the recording.

4.112 The Attorney-General's Department states:

This is a serious requirement. It is expected to assist considerably in civil infringement actions. Parallel importers and subsequent distributors of parallel imported material will, at their peril, fail to satisfy themselves that the imported copies of sound recordings are legitimate and can be shown to be legitimate in legal proceedings.

A plaintiff in a civil action will still be required to prove a number of elements. Those elements are proof of subsistence and ownership of copyright, importation, the lack of consent of the copyright owner to the importation, that the importation was, in effect, for a commercial purpose, and that the importer ought reasonably to have known that if they had made the recording in Australia they would have infringed the copyright.

The Copyright Act already provides that a plaintiff must prove those elements to establish an infringement action against importation. Those elements will not be changed by the Bill. However, the amendment proposed in the Bill will nevertheless substantially assist plaintiffs … The Bill places the onus on an importer or seller of imported recordings, if challenged, to establish that the copies imported were non-infringing copies. [115]

4.113 However, industry representatives were not as sanguine about the effect of this provision. ARIA, for example, denied that it would provide the sort of practical relief that is currently available at the moment:

The expense involved in litigation and the sanctions a court will impose about legal costs and damages for unjustified threats mean that a copyright owner must be confident it can prove the copies are not non-infringing copies even before it starts proceedings. To institute proceedings without establishing these matters would be foolhardy.

This would involve the copyright owner in having to try and prove the place and country of manufacture of each of the imports (which may be impossible if this is not identified on the copies), the copyright law in that country, the owner of copyright, if any, there and whether or not there are any mechanical or other statutory licences in addition to all the matters which must currently be established … at the least it will be time consuming and very expensive to obtain the necessary information (assuming it can be assembled) as it will require the identification of experts who will be acceptable to the courts and their preparation of expert opinions on the law as well as the considerable expense involved just in collecting evidence in foreign countries. It is highly likely that the time involved will in many, if not all, situations be longer than the tight time periods laid down for customs seizure (10 days with the possibility of a 10 days extension) and quite likely too long to obtain interlocutory injunctions. [116]

4.114 The Committee was told that one of the reasons that piracy was out of control in Singapore was that no witnesses could be found to tell a Singapore court what the actual law of China is to the satisfaction of the court. [117] The Committee notes that proposed section 130A is a stronger anti-piracy measure than is included in Singapore law. [118]

Restricting imports as an industry policy

4.115 A number of submissions drew attention to the relationship between the parallel import provisions and industry policy. For example, the Musicians' Union considered that, in abolishing parallel imports, the Bill was a further example of “an ad hoc approach to industry policy” – the Bill sought to introduce price control by diminishing copyright protection. [119]. The Musicians Union asserted that what the industry needed was development policies which had been well thought out.

4.116 Similarly, Mr Alan Oxley referred to the need for a “proper assessment of the economics of the industry” where the impact of policy measures on the industry could be dealt with empirically:

In a way the justification for maintaining the [parallel import] system is an industry policy argument, and the thing has never been properly looked at by our standard precepts of industry policy”. [120]

4.117 The ACCC observed that:

The use of copyright law as an instrument of industry policy would be inefficient. Almost all of the benefit goes to the multinationals who repatriate most of their profits – there is little `trickle-down' effect. It would be better to subsidise local performers or companies directly. If such protection continues to be considered desirable, it would be better to be transparent, funded directly by the government and aimed at local performers or companies, and not by way of hidden subsidies to multinationals paid for by consumers. [121]

4.118 The Committee sees much merit in making industry policy for the music industry transparent and basing it on empirical data.

Footnotes

[1] Transcript of Evidence, p 54 (Mr B Elder).

[2] Explanatory Memorandum, p 8.

[3] Transcript of Evidence, p 54 (Mr B Elder).

[4] See Submissions No 147, p 16 (AMPAL); No 153A (ARIA and AMPAL).

[5] Submission No 164, p 8.

[6] Transcript of Evidence, p 209 (Mr A Oxley). See also Submissions No 159, p 3 (ACCC); No 168 (Dr A Capling).

[7] See Submission No 180, p 5 (Attorney-General's Department).

[8] Transcript of Evidence, p 172 (Mr W Rothnie). Mr Rothnie appeared on behalf of both ARIA and AMPAL.

[9] Transcript of Evidence, pp 172, 176 (Mr W Rothnie); Submissions No 153A, pp 2-8; No 153B (ARIA).

[10] Submission No 153B, p 2 (ARIA).

[11] Submission No 153B, p 2 (ARIA).

[12] Submission No 153B, p 2 (ARIA).

[13] Transcript of Evidence, p 209 (Mr A Oxley).

[14] See, for example, Transcript of Evidence pp 24-32 (Prof R Bewley), p 115 (Mr B Bull). See also Submissions No 78, p 2 (Rondor Music Australia Pty Ltd); No 124, p 6 (Mr J Gronow).

[15] See Submission No 150, p 9 (AMRA).

[16] Submission No 153, pp 22-28.

[17] Transcript of Evidence, pp 24-25 (Prof R Bewley).

[18] Transcript of Evidence, p 27 (Prof R Bewley).

[19] Transcript of Evidence, p 27 (Prof R Bewley).

[20] Submission No 159, pp 4, 7 (ACCC). The ACCC provided additional international price information in Submission No 159A, pp 2-4.

[21] Submission No 159, p 5 (ACCC).

[22] Submission No 159, p 6 (ACCC).

[23] Submission No 159, p 5 (ACCC).

[24] Submission No 166A, p 32 (ACA).

[25] Submission No 166A, p 33 (ACA). See also Submission No 184 (Mr W Owens).

[26] Submission No 160, p 2 (Woolworths Ltd).

[27] Submission No 166A, p 19 (ACA).

[28] Transcript of Evidence, p 50 (Mr C Lyndon-Gee).

[29] See, generally, Submission No 81, p 4 (Mr M Davison).

[30] See, for example, Submissions No 7 (P Pomper); No 10 (Ms N Buitenhuis); No 48, pp 5-6 (CMAA); No 157 (Floodboy); No 171 (IMF).

[31] Submission No 186, p 8 (DOCA).

[32] PSA, (1990) p 155.

[33] Transcript of Evidence, p 100 (Mr P Dwyer).

[34] Transcript of Evidence, p 60 (Mr E McCusker).

[35] Transcript of Evidence, p 135 (Mr J Woodruff).

[36] Transcript of Evidence, p 62 (Mr E McCusker).

[37] Transcript of Evidence, p 137 (Mr J Woodruff).

[38] Michele Tayler, Music Speak: A Music Business Lexicon, Victorian Rock Foundation, 1992, p 21.

[39] Transcript of Evidence, p 122 (Mr D Williams).

[40] Transcript of Evidence, p 100 (Mr P Dwyer). See generally Submission No 124, p 2 (Mr J Gronow).

[41] Transcript of Evidence, pp 110-11 (Mr R White).

[42] Transcript of Evidence, p 110 (Mr R White). See also Transcript of Evidence, p 136 (Mr J Woodruff). A `one-stop' is a specialist CD warehousing and international distribution operation.

[43] Transcript of Evidence, p 50 (Mr C Lyndon-Gee).

[44] Submission No 147, p 8 (AMPAL).

[45] Submission No 147, p 9 (AMPAL).

[46] Submission No 147, p 9 (AMPAL).

[47] Assuming that the publisher directly controlled all the works on the CD and that the PPD was $18: Submission No 147, p 10 (AMPAL).

[48] Transcript of Evidence, pp 58-59 (Mr E McCusker).

[49] Transcript of Evidence, p 65 (Ms L Baulch); Submission No 164, p 7 (Australian Copyright Council). These situations are also discussed in the context of the TRIPs agreement at paras 4.12-4.14.

[50] Submission No 164, p 7 (Australian Copyright Council).

[51] Submission No 186, p 8 (DOCA).

[52] See, for example, Submissions No 35 (Mr N Robinson); No 101 (Mr M Lass); No 106 (Warner Chappell Music Australia Pty Ltd); No 128 (Roadrunner Records).

[53] Submissions No 90, pp 3-4 (Shock Records). See also Submission No 128 (Roadrunner Records).

[54] Transcript of Evidence, pp 126 (Mr D Williams).

[55] Transcript of Evidence, pp 125, 127 (Mr D Williams).

[56] Transcript of Evidence, pp 75 (Ms M Hryce).

[57] Submission No 148, p 3 (Mushroom Music). See also Submission No 82 (J Albert & Son).

[58] PSA, (1990) p 155.

[59] Transcript of Evidence, p 99 (Mr P Dwyer).

[60] Transcript of Evidence, p 86 (Ms F Riccobono).

[61] Submission No 166A, p 15 (ACA).

[62] Transcript of Evidence, p 125 (Mr D Williams).

[63] PSA, (1990) p 155.

[64] Transcript of Evidence p 19 (Mr E Candi).

[65] Transcript of Evidence p 100 (Mr P Dwyer).

[66] PSA, (1990) p 151.

[67] Submission No 186, pp 8-10 (DOCA).

[68] Transcript of Evidence p 20 (Mr E Candi).

[69] Transcript of Evidence p 81 (Mr J Fabinyi).

[70] Submission No 145, p 5.

[71] Transcript of Evidence p 56 (Mr B Cottle).

[72] See, generally, Transcript of Evidence, p 64 (Ms L Baulch); p 71 (Ms M Hryce); p 75 (Mr A Caswell); Submissions No 1, p 3 (Mr M Irik); No 37 p 2; No 76 (Ms C Shine); No 113 (Ross Wilson Music Pty Ltd); .No 131 (Society of Australian Songwriters).

[73] Submission No 92 (Mr R Saunders).

[74] Transcript of Evidence, p 75 (Ms M Hryce).

[75] Transcript of Evidence, p 75 (Ms M Hryce).

[76] Dr A Capling, `Trade in Intellectual Property Rights', p 11 - appended to Submission No 168.

[77] Transcript of Evidence, p 100 (Mr R White).

[78] Submission No 166A, p 8 (ACA).

[79] Transcript of Evidence, p 219 (Mr S Hibbins).

[80] Transcript of Evidence, pp 219-220 (Mr S Hibbins).

[81] PSA, (1990) para 9.1.3.

[82] Submissions No 159, p 12 (ACCC); No 166A, p 17 (ACA); No 186, p 10 (DOCA).

[83] Transcript of Evidence, pp 222 (Mr N Price).

[84] Submission No 186, p 10 (DOCA).

[85] Submission No 48, p 14 (CMAA).

[86] For example, Submission No 160 (Woolworths Ltd).

[87] Quoted in Submission No 166A, p 18 (ACA).

[88] Transcript of Evidence, p 114 (Mr B Bull).

[89] Transcript of Evidence, p 114 (Mr B Bull).

[90] Submission No 90, p 5 (Shock Records).

[91] Transcript of Evidence, p 71 (Ms M Hryce).

[92] Submission No 101, p 3 (Mr Martin Lass).

[93] Submission No 159A, p 4 (ACCC).

[94] Submission No 159A, p 4 (ACCC). The Committee received some direct evidence on this point: Submission No 193 (Mr J Harrop).

[95] Submission No 186, p 11 (DOCA).

[96] The relationship between `pirated goods' and the TRIPs agreement is dealt with paras 4.7-4.16, above.

[97] Submission No 180, p 7 (Attorney-General's Department).

[98] Transcript of Evidence, p 2 (Prof Alan Fels).

[99] Submission No 153, p 1 (ARIA).

[100] Submission No 147A, p 7 (AMPAL).

[101] Submission No 186, p 12 (DOCA).

[102] Submission No 153, p 30 (ARIA).

[103] Submission No 147A, p 8 (AMPAL). See also Transcript of Evidence, p 92 (Mr M Speck).

[104] Transcript of Evidence, p 221 (Mr N Price).

[105] Correspondence from US Ambassador, 4 March 1998, p 3.

[106] Submission No 153, p 10 (ARIA).

[107] Transcript of Evidence, p 94 (Mr M Speck).

[108] Transcript of Evidence, p 99 (Mr P Dwyer).

[109] Explanatory Memorandum, p 4.

[110] Transcript of Evidence, pp 239-244 (Mr P Gulbransen).

[111] Submission No 142B, pp 1-3 (MIPI).

[112] Submissions No 142B, p 4 (MIPI); No 147A, Attachment D (AMPAL).

[113] Submission No 180, pp 8-13 (Attorney-General's Department).

[114] Submission No 166A, pp 23-26 (ACA).

[115] Submission No 180, p 9 (Attorney-General's Department).

[116] Submission No 153B, p 3 (ARIA).

[117] Transcript of Evidence, p 174 (Mr E Candi).

[118] Submission No 180A, p 2 (Attorney-General's Department).

[119] Submission No 182, p 3. (Musicians Union).

[120] Transcript of Evidence, p 218 (Mr A Oxley).

[121] Submission No 159, p 3 (ACCC). See also Submission No 81, p 3 (Mr M Davison).