CD import reforms: should restrictions on importing compact discs be removed?

Issue outline by J M McInerney

What they said ...
`Prices might not fall overnight, but they will fall'
Mara Bun, the manager of policy and public affairs with the Australian Consumers Association

`Artists are going to get smaller royalties and the changes will open the door for bootleg recordings and pirated recordings'
Michael Gudinski, Mushroom Recording Company

On September 29 it was reported that the federal Cabinet was considering a plan to abolish import controls on compact discs. A number of consumers groups have welcomed the plan as likely to lead to lower CD prices. The recording industry in Australia and a number of Australian performers have been critical of the proposal.

Background
Currently five major recording companies control around 70 per cent of CD sales in Australia.
These are multinational companies, which have their home offices overseas. They are Polygram, based in the Netherlands; Sony, based in Japan; Warner, based in the United States; EMI, based in Britain and BMG, based in Germany. (The other two major companies are Mushroom, owned by Rupert Murdoch's News group and Shocked, an Australian company.)
All those who import CDs have to do so through the Australian offices of these record companies. These companies hold exclusive rights to the Australian market and ban direct overseas imports. It is currently not possible for a wholesaler or a small retailer to import CDs from overseas via the Internet or any other direct means.
These are referred to as parallel import restrictions. Under parallel import restrictions the original overseas copyright holder retains the exclusive rights to sell an artist's work in Australia. These import restrictions provisions are part of the Australian Copyright Act 1968.
The government is proposing to replace parallel import restrictions with a limited six month monopoly. After this period the big music companies would be forced to compete with independent operators who can undercut their prices.
With regard to the economic impact on the recording industry in Australia, under current arrangements about 95 per cent of all CDs sold in Australia are made here, mainly by Australian divisions of international companies. It has been suggested that the removal of parallel import restrictions would alter this.
Various claims have been as to the amount of employment the industry provides. Industry spokespeople have claimed that some 55,000 people work within it. Figures released by the Australian Bureau of Statistics on October 3, 1997, suggest that the 153 music companies operating in Australia directly employ 3,866 people. Of these, 1300 are employed by the seven largest companies.
Figures supplied by Music Retailers of Australia indicate that another 3,900 people are employed in the retail sector. This suggests that a total of some 8,000 are employed in production and retail within the music industry.
In the 1995-96 financial year Australian Bureau of Statistics figures indicate that recording companies made a total of $15.5 million operating profit.
The recording companies claim that the higher CD prices they are currently able to charge pay the royalties of local artists and encourage investment in the local music industry. Australian artists currently enjoy higher royalties than are paid overseas.
The issue of parallel import restrictions has been debated by government in the past. The previous Labor Government also considered removing these restrictions. This move was strongly and publicly opposed by the Australian music industry.
The result was that though the issue was debated in Cabinet five times in four years it was ultimately decided to retain protection.
This issue does not appear to have been extensively canvassed on the Internet.
There are, however, at least two interesting and relevant contributions on the Internet, each prepared as either a submission to or background briefing for the Australian Parliament. Each essentially supports the removal of parallel import restrictions.
One is the
Australian Consumers' Association Submission to the Inter Departmental Committee Inquiry Into CD Prices, February 1997.
The other is a
Current Issues Brief 15 1996/7 prepared by the Economics, Commerce and Industrial Relations Group under David Richardson and titled, Copyright and Monopoly Profits: Books, Records and Software.
This is a valuable source of background information. It is lengthy, 15 pages, and deals with the impact of the parallel import restrictions of the Australian Copyright Act 1968 on books, CDs and computer software. Each is treated under separate headings so it is possible to simply consider the situation regarding CDs. It also supplies a brief history of previous government attempts to address the issue.

Arguments against removing import restrictions on CDs
The principal argument offered against removing parallel import restrictions is that because the Australian recording industry and Australian recording artists primarily serve an isolated and limited market the volume they can expect to sell and the returns they will earn are relatively small.
It has been claimed that our limited Australian market means it is unreasonable to expect recording companies and performers in this country to compete on equal terms with those in the United States and Europe.
It has been claimed that unrestricted international competition might destroy the local recording industry.
Michael Gudinski, who is the director of one of Australia's most successful local record companies, has claimed that his company Mushroom, its publishing division and its subsidiary, Liberation, which imports CDs under licence, would be `shot to pieces'.
Mr Michael Gudinski has said that not only Australian companies such as his own would suffer.
It has also been claimed that if import restrictions were removed there would be less incentive for international recording companies to invest in the Australian recording industry.
Mr Gudinski maintains that the Australian divisions of all the major recording companies based in this country will be affected.
`Sony, who have invested millions here, will be devastated,' Mr Gudinski has claimed.
Relatedly, it has been claimed, if their profit margins were reduced, recording companies would be less able to invest in the development and promotion of Australian artists.
Mr Andrew McGee, managing director of the local independent label, Shock Records, has claimed, `As the margins become lower we may as well just buy from overseas. We talk about supporting our own industry, but this is where the Government has lost the plot.'
The same point has been made by Mr Denis Handlin, chairman of Sony music, who has claimed, `If this proposal goes through, Australia will become an outback outpost to sell Billy Joel and Mariah Carey. There will be no interest to invest in local acts because there will be no incentive.'
It has also been claimed that Australian artists would be harmed in other ways. Not only would there be less money spent on developing and promoting local performers, it has also been claimed that more established performers would earn less.
It has been argued that the royalties paid to Australian performers on each copy of their work that is sold would be reduced.
Royalty payments in Australia are high by international standards. Supporters of a protected local music industry maintain that this does no more than help compensate performers for the relatively lower volume of sales to be expected in the smaller Australian market.
It is feared that if parallel import restrictions were removed then Australian artists would be likely to receive royalty payments in line with those paid overseas.
It has also been argued that removing import restrictions would expose the Australian market to cheap, counterfeit CDs, otherwise known as bootleg or pirated recordings.
These are unauthorised, illegal copies of the work of a particular performer or group. They are generally of inferior quality and are offered to the consumer at a much lower price. Their production and deliberate sale and distribution is illegal in most countries.
They damage performers because they receive no royalties on their sale and because they are generally inferior reproductions of their work. They also damage recording companies because they gain no profit from their sale.
These concerns have been summed up by Mr Michael Gudinski, who has claimed, `Artists are going to get smaller royalties and the changes will open the door for bootleg recordings and pirated recordings.'
It has been claimed that the overall effect of the removal of import restrictions on CDs would be the loss of some 50,000 of the 55,000 jobs currently claimed to be supplied within the music industry.
Sony Music chairman, Mr Denis Handlin, has claimed that deregulation would, for example, force his company to relocate its $30 million CD manufacturing and distribution plant from Sydney to South-East Asia. If this were to happen, it has been argued, significant job loss would result.
Finally it has been claimed that if the Australian Government is concerned to reduce the price of CDs to consumers, it can do so without removing parallel import restrictions.
Those who favour the retention of these restrictions claim that that cost of compact discs could be reduced if the Government dropped the 22 per cent sales tax it currently charges on CDs.
Mr Phil Tripp, a music industry analyst, has argued, `There is no sales tax on books, magazines, pornography, computer software or newspapers. If the Government would bring music into line with these other cultural items then you could get people flocking into record shops again.'

Arguments in favour of removing import restrictions on CDs
The primary argument offered in favour of removing import restrictions on compact discs coming into Australia is that this will reduce the cost of CDs to the Australian consumer.
New-release CDs in Australia currently cost approximately $30. It has been claimed that music CDs sold in the United States are some $7 cheaper than the same item sold in Australia.
It is also claimed that consumers in Canada, the United Kingdom, New Zealand and Singapore are also able to buy cheaper CDs than are available in Australia. Critics maintain that only Germany is more expensive.
Supporters of the proposal to remove import restrictions on CDs argue that the immediate effect will be to reduce the cost by between $1.60 and $3 per compact disc. It is also claimed that over time the cost of CDs to the Australian consumer will be further reduced.
Mara Bun, the manager of policy and public affairs with the Australian Consumers Association has claimed, `Prices might not fall overnight, but they will fall.'
In addition, it has been argued, having the government remove import restrictions will not harm the Australian music industry.
Firstly, it is claimed, the cost of CDs in Australia is artificially inflated by the virtual monopoly which has operated here. It has been argued that this monopoly is already effectively over because private consumers can now use the Internet to order much cheaper CDs from overseas.
Supporters of the removal of import restrictions claim that the Australian music industry is going to have to adjust to competition regardless of the stance the government takes on import restrictions.
Supporters of lifting the ban on parallel imports argue that all this will do is force the record industry to face the reality of competition.
It has further been argued that reducing the cost of CDs in Australia may ultimately boost disc sales here. It has been claimed that consumers in the United States buy an average of four new CDs a year. In Australia the figure is less than three.
Supporters of the government scheme also note that CD sales slumped 7.5 per cent in the first six months of this year.
It has been suggested that this apparently reduced demand is the result of bulk purchases of CDs being priced outside the reach of the Australian consumer. A reduction in the cost of CDs, it has been suggested, might promote their sale and thus assist the music retail and recording industries in Australia.
Relatedly it has been suggested that a reduction in the wholesale cost of CDs would assist small retail outlets to compete with large outlets which are currently better able to offer discounts.
It has also been claimed that such a probable growth in sales will prevent jobs being lost in the retail sector of the record industry. Mara Bun has claimed that, in particular, `specialist and small retailers stand to be a job-creating sector, because they will be able to source cheaper CDs overseas and will try to increase their sales through lower prices.'
This view has been promoted by Senator Richard Alston, the Communications Minister as a major reason for lifting the ban on parallel imports.
Those who support removing import restrictions also claim this will not expose the Australian CD market to pirate CDs, that is cheap, counterfeit copies that deny the record companies their returns and the recorded artists their royalties.
According to supporters of the government scheme it will be in retailers' interests to ensure that they do not sell their customers inferior copies. The government is also considering introducing new penalties for those making and distributing pirated CDs, including up to five years jail for offenders.
In addition, it has been claimed that opening the CD market up to foreign competition will not affect local industry investment in Australian performers.
According to those who favour the removal of import restrictions most of the money earned from CD sales in Australia goes to international parent companies, not toward developing Australian music talent.
This claim has been made by Professor Alan Fels, head of the Australian Competition and Consumer Commission. Professor Fels maintains that most of the revenue is shipped off to head offices overseas.
It has been claimed that to the extent to which financial support of the development of Australian artists currently occurs it will continue to take place because it is in the interests of recording companies to find and promote marketable performers.

Further implications
On October 7, the Minister for Communications, Senator Alston, received in principle agreement from Cabinet to proceed with his proposal to remove parallel import restrictions.
However, this issue is likely to continue to attract attention.
It has been claimed that the Australian Record Industry Association intends to launch a $250,000 campaign to oppose the government's scheme.
As part of this campaign, the record companies, backed by high-profile artists, will lobby the Senate to block the legislation.
On October 8, the Australian Democrats indicated that they believed the music industry needed some protection and thus claimed they would not back the proposed legislation when it came before the Senate.
The Government appears determined to introduce its legislation as quickly as possible, perhaps before the end of October, in an effort to forestall the opposing campaign to be conducted by the Australian Record Industry Association.
It appears that the Government is not inclined to negotiate on this issue. Senator Alston has stated that the Government could not afford to be controlled by music industry `scaremonger' tactics.
Senator Alston was reported as having told his Cabinet colleagues, `I mean, otherwise, government's paralysed - all you've got to do is put out a scaremongering press release and the government throws in the towel, and they say "you're weak, no leadership, all that sort of thing.'
The government also appears to hope that if it can bring in the legislation and avoid the Australian Record Industry Association's campaign, this may gain it some electoral advantage with CD consumers. The government pledged to reduce CD prices as part of its election campaign and appears to believe that this would be a popular achievement.

Sources
The Age
29/9/97 page 3 news item by Gervase Greene, `Import plan for cheaper CD'
30/9/97 page 1 news item, `CD prices to fall by $5 or more'
30/9/97 page 3 news item by John Mangan and Gervase Greene, `CD prices to fall by more than $5 under new policy'
30/9/97 page 3 news item by John Mangan, `Music chief laments import plan'
30/9/97 page 12 editorial, `CD policy sounds sweet'
30/9/97 page 13 comment by Mara Bun, `Recording industry must face the music'
2/10/97 page 6 news item by Gervase Greene, `Alston rules record companies off-key on CDs'
4/10/97 page 8 news item by Gervase Greene, `Government firm on CD changes'
6/10/97 page 2 news item by Gervase Greene, `Government won't change tune on CDs'
9/10/97 page 8 news item by Gervase Greene, `Noisy CD fight falls on deaf ears'

The Australian
29/9/97 page 5 news item by George Megalogenis, `CD prices to fall $3 in Cabinet import plan'
2/10/97 page 3 news item by George Megalogenis, `Cabinet must stand up to CD companies: Alston'
8/10/97 page 1 news item by George Megalogenis, `CD prices to fall $3 ... if it's OK with Barnesy'
9/10/97 page 3 news item by George Megalogenis, `Senators line up against CD price cut plan'
11/10/97 page 3 news item by George Megalogenis, `Artists change tune on CDs in fear of retribution'
11/10/97 page 18 editorial, `Extended play on CDs lowers price'

The Herald Sun
30/9/97 page 3 news item by Clinton Porteous and Nui Te Koha, `CD price cut battle'
1/10/97 page 15 news item by Clinton Porteous, `CD price rise fear'
7/10/97 page 10 news item by Andrew Cummins, `Cheaper CD plan goes to Cabinet'

Internet
This issue does not appear to have been extensively canvassed on the Internet.
There are however at least two interesting and relevant contributions on the Internet, each prepared as either a submission to or background briefing for the Australian Parliament. Each essentially supports the removal of parallel import restrictions.
One is the Australian Consumers' Association Submission to the Inter Departmental Committee Inquiry Into CD Prices, February 1997. This can be found at http://www.sofcom.com.au/ACA/CDsubmission.html
The other is a Current Issues Brief 15 1996/7 prepared by the Economics, Commerce and Industrial Relations Group under David Richardson and titled, Copyright and Monopoly Profits: Books, Records and Software.
This is a valuable source of background information. It is lengthy, 15 pages, and deals with the impact of the parallel import restrictions of the Australian Copyright Act 1968 on books, CDs and computer software. Each is treated under separate headings so it is possible to simply consider the situation regarding CDs. It also supplies a brief history of previous government attempts to address the issue. It can be found at http://par18.aph.gov.au/libwww/pubs/cib/1996-97/97cib15.html