Minority Report

Copyright Amendment Bill (No.2) 1997

Minority Report

by Labor Senators

Hon Nick Bolkus - Jim McKiernan - Shayne Murphy

Introduction

This Committee has been asked to report on the necessity for the Copyright Amendment Bill (No. 2) 1997, and in particular, on the benefit and detriment that is likely to flow from the legislation.

We have been assisted in our deliberations by almost 200 written submissions and by public and private hearings over the course of 7 days.

This is of course indicative of the broad interest which the subject matter of this Bill - the removal of the prohibition on parallel importation of music CDs - has in government, amongst interest groups and to the general public.

This fact that the overwhelming majority of submissions were opposed to the Government's proposed legislative change is also indicative of the strength and breadth of feeling there is against the removal of the parallel import restriction.

It is very important to note that of the 192 submissions that were received by the Committee, less than 20 were supportive of the Government's Bill, and over 160 were opposed.

Indeed, support for the Bill could only really be found amongst major retailer chains and amongst some familiar advocates for the Government's cause, most significantly and predictably, Professor Alan Fels of the Australian Competition and Consumer Commission.

Although we regard it as important that opposition to the Bill is well founded across a broad range of the community, and that the Government's support derives from a very narrow sectional base, this, in itself, has not been decisive in leading us to conclude that we should oppose the Government's proposed Bill.

Rather, Labor Members of the Committee firmly believe the Copyright Amendment Bill (No. 2) 1997 should be rejected by the Senate because it is bad policy.

The Bill is bad policy at its core because it proceeds from an entirely erroneous assumption that parallel importation is an issue about industry protection, free trade and monopoly privilege. The evidence overwhelmingly demonstrated that parallel importation is in fact an issue about the protection, development and enhancement of intellectual property rights, especially of copyright in musical works and sound recordings.

The Bill is bad policy because it fails properly to take into account the inevitable damage which it will inflict on the Australian music industry. The evidence clearly proved that most, if not all, the players in the Australian music industry will have their interests damaged or destroyed by this legislation.

The Bill is bad policy because it is highly unlikely to deliver anything like the reductions in CD prices that have been suggested by the Government in the popular press. The evidence on the price issue demonstrated one overwhelming certainty - that the prospects for any fall in CD prices, or of any substantial fall, are uncertain.

In short, the Bill is bad policy because it fails to strike the appropriate balance between potential damage to the music industry and potential savings to the consumer.

We are pleased to note that government members of the Committee have also reached the same conclusions that the Bill is bad policy, and that it's foundations are flawed. Labor members are disappointed that the government members of the Committee sought to disguise these facts by recommending that the Bill be passed with reservations and suggestions for other actions.

Even if the government accepted the majority's recommendations and implemented then, all the defects contained in it would not be corrected.

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

Parallel importation is about intellectual property, not industry protection

The issue

During the course of the evidence, and indeed in the broader public discussion of this issue, there has been a constant debate about the nature and effect of the prohibition on parallel importation, and therefore of the Government's proposal to remove that prohibition.

The written submission by the Australian Music Publishers Association Ltd probably best encapsulated the two sides of this debate when it stated:

In other words, the Government - and indeed Coalition members of the Committee - tend to regard the prohibition as a form of music industry protection, which hinders free international trade in music CDs.

Removal of the prohibition is therefore viewed by the Government as a trade liberalisation measure which will increase competition in the Australian CD music market, thus allowing the forces of supply and demand to force down the prices of CDs.

On the other hand, participants in the music industry emphasise that the prohibition is an integral and intrinsic aspect of intellectual property, and that it is a necessary part of the property right known as copyright. They therefore see the removal of the prohibition as the direct removal of private property rights in the intellectual property they have created, namely, the sound recording or underlying musical work - the song.

The evidence

There may be some superficial attraction in the Government's view that parallel importation is an industry protection issue. In short, a prohibition on imports looks and sounds like an industry protection issue.

However, the evidence which was placed before this Committee overwhelmingly demonstrated that such a view is ignorant in the extreme, and reflects a fundamental misunderstanding of the nature of copyright and of the importance of the private property rights it provides.

That evidence clearly proved, at least to anyone who had an open mind, that the prohibition on importation is fundamentally an issue about intellectual property, and specifically, about copyright.

Indeed, the fact that the Bill being proposed is an amendment to the Copyright Act would seem to provide a fairly big hint that the Bill is fundamentally about copyright, not industry protection.

This was a point that was well made by Mr Dobe Newton in a somewhat ironic observation:

However, whilst this is no doubt important, more important in demonstrating that this Bill is essentially about intellectual property and copyright was the overwhelming evidence of the serious, adverse effects the Bill will have on the rights that protect the intellectual property in music CDs; that is, on the copyright in music CDs:

The Bill abolishes private rights protecting intellectual property in music CDs

As was pointed out by AMPAL above, copyright is the lawfully established, internationally accepted way of defining and protecting creative intellectual property - such as sound recordings, musical works, literature and computer software.

Copyright does this by describing the bundle of rights which inhere exclusively to the owner of the copyright, and then proscribing the infringement of those rights.

Importantly, copyright generally, and the specific rights attached to it, are private property rights held exclusively by the owner (or by any licensee). This means that as a matter of law and economics, copyright is as much a piece of property as land or goods. It is a right that can be, and is, bought and sold. It is a right that can be, and is, licensed to others.

It was the man behind the success of Savage Garden, Mr James Woodruff, who reminded the Coalition members of the Committee that:

In the case of music CDs there are actually 2 types of copyright.

One is the copyright in the sound recording, which is generally owned by the record company and/or artist.

The other is the copyright in the underlying musical work - the song - which is generally owned by the music publisher and/or composer.

Under the existing copyright law in Australia, the bundle of rights that inhere to the copyright owners of both musical works and sound recordings include the right to authorise the making of copies of their copyright material, and - most importantly for the purposes of this Bill - the right to authorise their importation into Australia.

It is this latter right that will be abolished by this Bill.

In practical terms, this means that copyright material (both in the sound recording and the underlying musical work) will be able to be parallel imported into Australia without the necessary permission of the respective Australian copyright owners.

In terms of the private rights that protect the intellectual property in the sound recording and musical work, this means that a fundamental aspect of those rights, and of the protection they provide, will be abolished.

As Mr Emmanuel Candi noted in evidence on behalf of the Australian Record Industry Association, this is a central point the Government appears to have missed:

And in a similar vein on behalf of the owners of copyright in musical works, Mr Jeremy Fabinyi observed:

In short, the Bill has the effect of abolishing private property rights - copyright - that protect intellectual property in sound recordings and musical works.

It is always a serious step for any government to abolish private property rights by legislation.

In this present case, we believe it is outrageous that this Government is preparing to do precisely that, yet appears to be ignorant that it is doing so, or at very best for them, simply does not appreciate the nature and seriousness of its proposed action.

We also note in passing that the Majority Report suggests that the private property right that is being abolished by this Bill - the right to authorise importation of a copyright work - is in some sense a secondary right. If this is an attempt to minimise the importance of the right in question it is sadly misdirected. The fact is that as a matter of law, and as a matter of economics, the import right is a property right which gives value to an owner's copyright by preventing that copyright being undermined by unauthorised imports. To abolish it is to inevitably and seriously diminish the value of copyright, both generally, and in the hands of copyright owners.

The Bill will establish a different copyright regime for music CDs

It is important to understand, as was alluded to above, that copyright does not only provide protection for the intellectual property in music CDs.

This point was forcefully made by Mr Brett Cottle of the Australasian Performing Rights Association when he said:

As Mr Cottle mentions, the right which is proposed to be abolished by this Bill in relation to music CDs - the right to authorise importation of the copyright work into Australia - will continue to exist in relation to all other forms of intellectual property.

In fact, as Mr Cottle pointed out in evidence and in his written submission, if the Bill is enacted there will be 3 discrete regimes of treatment of importation under the Copyright Act:

But one could certainly be forgiven for asking: if it is good policy to remove this right in relation to music, why isn't it good policy to remove it in relation to other forms of copyright? What is it that so distinguishes music CDs from other forms of intellectual property that justifies the remarkable difference in legislative treatment?

We can only wonder whether, during the recent meeting between Mr Bill Gates of Microsoft and the Federal Cabinet, the issue of copyright protection was raised with him. We wonder whether the Prime Minister or Communications Minister raised with him the prospect of removing the right enjoyed by Microsoft to authorise importation of intellectual property in software into Australia.

We suspect not.

And we doubt that the Government is able to give any rational justification for treating copyright in music CDs so differently - indeed, so much more adversely - than copyright in other forms of intellectual property.

The Bill is inconsistent with the government's approach to copyright in other countries

Labor Members of the Committee were surprised to hear evidence from a number of parties that Australia has recently been involved in a determined effort to encourage better standards of copyright protection in other countries.

We were surprised because, as the written submission by the Australian Copyright Council demonstrated, this Bill - which reduces copyright protection in Australia - is inconsistent with these international efforts (ACC, Sub 164, p6).

This was painted in the most graphic terms by Mr Cottle of APRA:

And by Mr Fabinyi of AMPAL:

This evidence makes it clear that in comparison to the copyright standards Australia is asserting for the rest of the world the proposal in this Bill moves in completely the opposite direction.

We also mention briefly that there was a strong suggestion made in the evidence before us - for example, by AMPAL - that this Bill will place Australia in breach of its international obligations in relation to protection of intellectual property (under the TRIPs Agreement). We did not find the evidence that was presented on this issue conclusive in any way and therefore prefer not to pass judgement on this issue.

Suffice to say for present purposes that, irrespective of whether the Bill is in breach of TRIPs, one could be forgiven for accusing the Government of telling the rest of the world, and our region in particular, to do as it says not as it does.

The Bill is inconsistent with the copyright regime for music CDs in most other countries

One of the most extraordinary features of the arguments put forward by the Government in support of their Bill has been their reference to cheaper CDs prices in other countries which, ironically, have the same prohibition on parallel importation that this Bill is seeking to take away in Australia.

The hypocrisy of these references did not surprise us.

What did surprise us was the lack of appreciation by the Government that these references effectively broke any alleged nexus between the prohibition and price (we will discuss the price issue later); and that they illustrated all the more starkly how important the prohibition is regarded in other countries as part of their copyright regime.

The examples of countries with a prohibition on parallel importation are numerous.

All major countries concerned mainly with Western music have import provisions in their copyright law - most importantly, the USA, but also the UK, Canada, New Zealand and the European Union. (ARIA, Sub 153, p36).

Indeed, the UK specifically preserved their import provisions after a 1994 Inquiry by the UK Monopolies and Mergers Commission. The Commission's Report found that repealing the parallel import rights would be inconsistent with international developments in intellectual property. (ARIA, Sub 153, p3)

More recently, Hong Kong moved to strengthen laws prohibiting parallel importation of intellectual property, even though it is regarded, and regards itself, as probably the most free trade country in the world.

And even as this Senate Inquiry was collecting evidence, we learned that the Norwegian Parliament has voted down a proposal by the conservative party to lift Norway's current ban on parallel imports of recorded music.

Indeed, the only significant countries that have adopted the path Australia is proposing to tread are Japan (which is largely dominated by Japanese language music and protected because it is in the Japanese language) and Singapore (which we will see later is suffering from an epidemic of piracy).

Put simply, we find it extraordinary that the Government can be so blind to the importance of copyright in music CDs when the practice in the rest of the world provides such a shining example of that importance.

We also note in passing that the Majority Report suggests, and attempted to show, that the parallel import issue remains a live issue internationally. Unfortunately however, the example that were chosen could not have been more inappropriate. The UK and Norway we have already dealt with. Both have recently confirmed their support for a prohibition on parallel importation. As for the United States, it is true that a recent Supreme Court case has reflected on the issue.

However, as the correspondence from the US Ambassador to this Committee shows (it is quoted in the Majority Report) the opposition of the US Government to this proposed Bill remains as strong as ever.

The Conclusion

The evidence before the Committee overwhelmingly demonstrated that the parallel importation issue is fundamentally about intellectual property and copyright.

Quite frankly, when regard is had to the very nature of the Bill and to the immense damage the Bill will do to intellectual property rights, it is extraordinary that the Government could continue to believe that parallel importation is about industry protection and prices.

Indeed, we are reminded of a statement made by the Prime Minister at the time the Government's decision was announced:

The kindest thing Labor Members of the Committee can say about this comment is that it was ill-informed. To be less kind would be to accuse the Prime Minister of being even more deceiving than even we in the Opposition had believed.

The relevance of this misguided belief is that it means the Bill is bad policy at its core because it proceeds from an entirely erroneous assumption.

It means that the Government is blind to the damage the Bill will inflict on the music industry generally, and on participants in the industry specifically.

And it means the Government's hopes for a substantial fall in CD prices are highly unlikely to be realised.

The Bill will damage the Australian music industry, and participants in it

The importance of copyright to investment

Generally

In order to understand the damage this Bill will inflict upon the Australian music industry, and on those who are part of it, it is necessary to appreciate the importance of copyright to investment in the industry generally, and in sound recordings and musical works in particular.

The simple fact which came through time and time again in the evidence is that if copyright protection in intellectual property is diminished so too will future investment in that property be diminished.

This simple fact was elegantly explained to the Committee by Ms Baulch of the Australian Copyright Council:

There are in fact two important points to be derived from this explanation.

The first point is a general one: the rights held by copyright owners in intellectual property are the reward for the owner's investment in and creation of that property. In other words, if a composer composes a song, the rights enjoyed by the composer under copyright - that is, the exclusive right to reproduce the song and the exclusive right to authorise importation of the song - are the composer's reward, both as a matter of law and economics. It is this right which the composer can sell, licence or otherwise exploit in order to obtain a monetary reward for the creative effort that has produced the song.

Thus by undermining this right this Bill will actually undermine the potential for reward that the right provides.

We would note in passing that this Government claims to be passionately committed to turning Australia into the clever country, when at the same time it is proposing to undermine the very rights that reward people for creating and investing in intellectual property. This is an extraordinary inconsistency, and we can only wonder whether the Government, and in particular whether Senator Alston, has even thought this issue through sufficiently to understand this.

The second point is a specific one: the proposal contained in this Bill, the abolition of the right to control imports of music CDs, will in itself significantly diminish the value of copyright in recorded music in Australia. The reasons for this is obvious. The right which this Bill does not propose to abolish - the exclusive right to reproduce the work - becomes an almost meaningless economic right if the copyright owner cannot control imports. There is almost no point in a copyright owner being able to stop someone else reproducing the work if that other person can in any event import the work.

Thus, the copyright owner will know that the more he or she invests in promotion, marketing and distribution of a music CD, the more likely it is that someone else will seek to capture some of the success of the music CD by importing copies at a later time. Potential returns on the investment are compromised, and the value of the property is diminished. (APRA, Sub 145, p3).

This depressing outcome was neatly summarised from the perspective of an independent record company by the CEO of Shock Records, Mr Nicholas Caldas:

It is also interesting to note that James Woodruff provided a specific explanation of the importance of copyright to investment in the context of Savage Garden.

Labor Members of the Committee found this explanation particularly instructive given the Government's frequent claims during the debate about this Bill that Savage Garden and Mr Woodruff's own business are prime examples of why their policy is correct.

Mr Woodruff pointed out in no uncertain terms, both in his written submission and in his oral evidence, that these claims by the Government were wrong. (Woodruff, Sub 144, p1)

Mr Woodruff in effect posed a simple proposition:

Thus, in the case of Savage Garden Mr Woodruff explained that Village Roadshow own the rights to Savage Garden in Australia. Mr Woodruff then did a deal with Sony in relation to rights offshore. 800,000 Savage Garden records have been sold in Australia and New Zealand. Under the regime being proposed by the Government some of the 800,000 albums, probably well over half of them, would have originated through the Sony offshore deal, not the Australian rights holder. Mr Woodruff continued:

We believe this evidence alone should make it obvious to any objective observer that the diminution in copyright protection for music CDs proposed by this Bill will lead to a significant diminution in the level of investment in Australia in music CDs, and in the music industry generally.

We note, in passing, that Government members have quoted Mr Woodruff in the Majority Report. They have heard his evidence but abjectly failed to understand or comprehend its significance.

In case there is any doubt, however, Labor Members of the Committee propose to give some detail about the two core reasons why this will inevitably by the case. Those core reasons are:

The "free-rider" problem

The free rider problem was alluded to in the comments of James Woodruff quoted above.

The problem arises where parallel importation is permitted because the Australian copyright owner of a sound recording or musical work cannot prevent other people from importing that sound recording or musical work into Australia. Thus, whilst the Australian copyright owner may have invested considerable sums in Australia developing and promoting the recording or work, if other people are able subsequently to import the recording or work into Australia they enjoy the benefits the development and marketing have secured without having to bear the cost. In effect, these people "free ride" - ie. secure the benefit of - the investment the copyright owner has made in Australia to secure the success of the recording or work in the marketplace.

Clearly this outcome is problematic on a number of levels.

First, it is clear that the "free rider" will have a considerable advantage over the Australian copyright owner. As Mr Woodruff pointed out, somebody who has not paid for the Australian rights or the Australian promotion is definitely going to be able to put a CD into the marketplace cheaper than somebody who has. (Woodruff, Hansard, p138).

Indeed, in these circumstances we find it very easy to accept Mr Emmanual Candi's prediction that with parallel imports there will be free-riding on the considerable promotion activities, especially in regard to the Top 40; ie. in the demand generation industry where heavy promotion must occur to generate Top 40 sales. (Candi, Hansard, p19).

Second, as Mr Candi also stated, it is simply unfair to have companies spending hundreds of thousands of dollars to promote a new Australian or international act to create sales, just to have another person - be it a retailer or anybody else - coming in and capturing sales based on that free riding aspect on their promotion:

Finally, it is apparent that the free-rider problem will actually provide a disincentive to export. If an Australian company records, develops and promotes an Australian disc it may be unwise to license that disc overseas. The danger would be that foreign discs could be imported back into Australia to compete with the Australian ones. The foreign disc would have the advantage of free-riding on the Australian investment. The only way the Australian company could protect itself from these foreign free -riders would be if they didn't license the disc overseas. (AMPAL, Sub 147, p22).

Given these problems we were not surprised when even Mr Phillip Dwyer, who tended to support much of the Government's arguments, stated that he has always had sympathy for the "free rider" argument against parallel importation. (Dwyer, Hansard, p101).

In short, it is the classic reason why parallel importation - and this Bill - will inevitably diminish investment in the Australian music industry.

The "deletions" problem

The "deletions" problem was also supported by Mr Dwyer as a very sensible and valuable argument in opposition to parallel importation. (Dwyer, Hansard, p101).

Indeed, even Professor Fels felt compelled to admit that "you can point to individual cases where it (the deletions problem) could happen". (Fels, Hansard, p13)

So what is the deletions problem?

Put simply, it is a problem which will arise because in the US immense quantities of albums are made prior to release. As soon as the title starts to fall down the charts these are sold off as deleted product at a minimal price in respect of which no royalties are paid.

In the absence of a prohibition on the parallel importation of music CDs this will pose an immense problem for the Australian copyright owner.

They face a depressing scenario if there is an unsuccessful attempt to break the Australian recording or musical work in the US. As the recording or work becomes successful in Australia there will be a huge stock of deleted stock waiting in the US. In the absence of an import restriction, these stocks will come flooding back into the Australian market, without the permission of the Australian copyright owner, and without any proceeds of sale finding their way to the Australian copyright owner.

Unfortunately, this scenario will be all too common because there is frequently - indeed, some might say almost inevitably - an attempt to break into the US by an Australian act which has been successful in Australia. The risk to the Australian copyright owner if that attempt fails is that huge quantities of deletions will come flooding back into the Australian market, without reward to the Australian copyright holder.

This consequence was succinctly summarised by Ms Sarah Longhurst, of the International Managers Forum and herself a manager of some up and coming Australian bands:

In this light, it is little wonder that both Mr Dwyer and Professor Fels conceded that the deletions issue was a very real problem for parallel importation.

Indeed, it reinforces the conclusion that this Bill - and its attack on copyright - will inevitably lead to a diminution in investment in the Australian music industry.

Why invest in an industry where your investment can be legally undermined by "free riders" and by deletions?

The importance of investment to the industry

Labor Members of the Committee regard it as self-evident that if investment in sound recordings and musical works is discouraged by this Bill it is inevitable that investment in the music industry as a whole will be considerably diminished, to the obvious detriment of the growth and vitality of the industry.

This was articulately put by Ms Longhurst from the perspective of those who need the investment most, the artists:

Given this, we should all be vitally concerned about some of the estimates given of the reduction in investment that would follow this Bill.

In its written submission ARIA estimated that the Bill would reduce copyright owners' sales by a minimum of 30-40% and profitability by double that, if not more. A 30% decrease in such trade would effectively gut the industry's profitability and thus its ability to continue to invest in generating demand, local activity (artist and capital), exports and consumer services. (ARIA, Sub 153, p40).

Similarly Shock Records, the largest independent record company in Australia, estimated in their written submission that they would be forced to reduce their investment in Australian repertoire by around 50%. (Shock Records, Submission 90, p3).

If this estimates are true - and we have seen no evidence produced by the Government or anyone else to dispute them - it is obvious that there will be significant damage to the Australian music industry.

We find it extraordinary that the Government would even propose a measure that will so obviously damage an industry which is not only the source of thousands of jobs and export earnings, but which is also so fundamental in identifying and explaining, to ourselves and others, Australia's cultural identity.

We are mystified and appalled that the Government fails to heed the serious concerns that have been express by virtually all the participants in the industry about the damage this Bill will do to their individual interests.

We now turn to those various participants.

To Part 2 of Labor's Minority Report