Prepared by
Mara Bún, Policy and Public Affairs Manager
Steve Horrocks, Senior Communications/IT Policy Officer
Australian Consumers' Association

Publishers of: CHOICE Magazine (comparative consumer information)
ComputerChoice Magazine (home technology)
Consuming Interest Magazine (policy and campaigning)
CHOICE Moneyline (financial services telephone line)

The justice of parallel importing

Fighting Piracy

The Government must deliver on its promises to strengthen piracy. In addition to supporting proposed amendments, ACA proposes a strategy that encourages ordinary people to participate in the fight against piracy, as well as regulatory agencies. We also caution that our response should be based on reliable information rather than speculation.

A comprehensive piracy multi-stakeholder review as a condition of allowing for parallel importation could examine not just smugglers but the more fundamental threat from cyberspace.

Parallel import restrictions will of course not slow ‘cyberpiracy’.

Creators and rights holders need to prepare for a new paradigm for the control and distribution of intellectual property. We should be building our stake in the global music market. We can start by helping our creative talent to develop their Internet presence and by providing them with opportunities to market Australian music through the Internet. A vital objective is to strengthen our artists’ bargaining power in relation of global on-line copyright.

With parallel importation Australian consumers will -

• pay less for music
• buy more CDs as a result, and
• be able to purchase the music they want to hear.

We will also begin to reduce the gap between the affordability of music for "technology haves" and the growing inaccessibility of music for "technology have nots". Because not everyone can afford to log onto the Internet to hear the music they want to hear, and with inflated CD prices many of those who can’t are turning into music window shoppers.

Australia has international obligations to protect copyright entitlements as a signatory to the Universal Copyright Convention and to the Berne Convention, administered by the World Intellectual Property Organisation (WIPO). Australia has also acceded to the Uruguay Round on Trade Related Aspects of Intellectual Property Rights (TRIPS) which requires that other countries be treated no less favourably than Australians in respect of the protection of intellectual property.

The World Trade Organisation Intellectual Property Agreements do not require distribution arrangements to be protected by parallel importation restrictions. Any US action under the General Agreement on Tariffs and Trade (GATT) would be without a valid legal basis.

According to Mark Davidson, writing in the Federal Law Review of the Australian National University, "At present, no multi-lateral international treaty requires its members to prohibit parallel importing. The issue is not addressed in the Berne Convention, and the TRIPS agreement, which is contained within GATT, expressly states in Article 6 that "nothing in this Agreement shall be used to address the issue of exhaustion of intellectual property rights". This means GATT cannot be used to prevent the changes to copyright laws such as the introduction of parallel importation.

The removal of parallel importation controls would not breach our international obligations. Japan, Canada, Singapore and Malaysia allow parallel importation and the European Union allows parallel importation between countries in the Union - none of these regimes have been challenged in the WTO.

Furthermore there is a doubt whether restricted import arrangements area sustainable in the long term, in a liberalised trade environment. Emerging technologies are likely to render parallel importation arrangements meaningless. In this respect our existing method of cultural development through industry subsidy, flawed as it is, may not be sustainable in the longer term.

The Attorney-General’s Department has recognised that "the enforcement of copyright in the digital environment is a major concern for copyright owners" Provisions in the new WIPO treaties provide for a general requirement to outlaw devices and activities designed to circumvent "technological’ copyright protection such as encryption.

The Attorney-General’s Department has also proposed a new right of making available to the public on-line be introduced under Australian copyright law. This policy is generally consistent with developments in international copyright fora.

In Attachments please see a paper about parallel imports presented by US economist James Love, Director of a non-profit consumer organisation (called Consumer Project on Technology) created by leading consumer advocate Ralph Nader. The paper explores the merits of parallel importation of pharmaceutical drugs into South Africa to reduce the cost of life-saving drugs. The parallel importation issue has a number of profound international implications ranging from domination of culture, vital medicines, and essential software.

The largest beneficiaries of growing world trade are the TNCs who enjoy enormous economies of scale in production and the ability to shift profits across national borders. Importantly, TNCs also benefit from intellectual property rules and the transfer of consumer culture that modern communication technologies enable. An UNCTAD report on transnationals says that TNCs control about one-third of the world’s productive assets in the private sector, and their overseas investment is "a bigger force in the world economy than world trade", as reported in the Financial Times. With $5.5 trillion in sales outside the country of origin compared to $4 trillion of total world exports.

Recorded music is the most concentrated global media market. The leading five companies, in order of global share, are PolyGram (19%), Time Warner (18%), Sony (17%), EMI (15%), BMG (13%). Estimates vary on the combines sales of these companies as between 80 to 90 per cent of global markets.

Transnational corporations are not unique to the twentieth century. Private control of trade between states has existed for thousands of years. In modern times foreign direct investment ("FDI") in developing countries, which fuels growth in exports, is highly concentrated among key transnationals. About 1% of transnational corporations (TNCs) own over half of the total FDI stock in developing countries - and this does not include non-equity arrangements which enable TNCs to exert corporate control "off balance sheet".

Media and entertainment TNCs also have a commercial incentive to ‘homogenise’ culture. Economies of scale exist for large scale production of ‘popular’ culture and the Creators are in a weaker negotiating position if they are competing with suppliers of a broadly similar commodity. After the previous government backflipped on its decision to allow parallel importation for CDs, Ann Capling published the following forceful rebuttal to the music industry’s lobbying triumph in Arena Magazine,

At the

heart of the debate about transnational transfer pricing is the question of accountability.

According to The Economist, a director of Fiat once claimed the transnational was "the most powerful agent for the internationalisation of society." Indeed the fantasies of transnational executives go even further. The sometime chairman of Dow Chemicals is quoted in The Economist as having:

It is anything but comforting for ordinary people to witness such a positive yearning for civil accountability from a leading global corporate citizen!

MIn a global economy fuelled by the growth of information and entertainment, multinational record companies are becoming increasingly opaque in terms of economic and taxation policies. Restrictions on parallel importations provide the opportunity for price discrimination between countries. TNCs are able to set prices at the level that they think the local market will bear, rather than allowing the free flow of goods between countries to determine price.

The fundamental aim of the modern transnational media and entertainment conglomerate is the same as the historical transnational riding on the back of colonialism: to control the supply of tradeable goods and to maximise profits. Transnational corporations are able to engage in price discrimination between countries where they market their goods.

The practice of exclusive territorial licensing of intellectual property enables TNCs to set prices well above cost because they do not face competitive price pressures.

While many claim there is a degree of ‘multinational bashing’ taking place in the current debate on CD prices, there is no doubt that TNCs in the media and entertainment sector retain a powerful influence in the cultural development of host countries. The Australian Bureau of Statistics reports that 94% of Australian music sales are foreign titles - this is the most revealing statistic about the cultural influence of TNCs in Australia.

To justify market protection, TNCs argue that they altruistically develop the local industry. But in reality transnational corporations serve their own economic interests. Thethe altruistic argument, that without transnational corporations retaining control over the supply of copies of music, Australian music will die, is not plausible. Transnational corporations are not charities. A decision by a transnational to invest in a local artist will not be undertaken to share profits with citizens of the host country but because this will in some way increase profits - profits that are to be repatriated to the parent organisation.

Parallel importation will still provide an opportunity to make healthy profits in Australia - but this will be on a more competitive basis. The questions for Australian music isare:

• Is there a better way to support local culture than forcing consumers to subsidise large transnational profits? The answer is yes.

• Under parallel importation, will the transnationals still be prepared to invest in artists that demonstrate commercial viability? The answer is yes.

Parallel importation will allow both record companies and independent wholesalers to supply and distribute legitimate CDs which have been produced in other markets. Retailers will be able to obtain stock from overseas based wholesalers who are able to provide legitimate recordings.

An example of how this works exists in the UK where music retailers are able to obtain stocks of legitimate CDs produced by major companies in Europe. These cheaper CDs are able to be imported into the UK from EU members due to free-trade conditions. However, the UK does not allow what is effectively ‘parallel importation’ from non-EU countries.

The imports from European countries have been cited as leading to lower retail prices in the UK.

TThe recent announcement by Woolworths that the price of CDs would come down by around 25-30% if parallel imports were to be allowed, supports the view of the ACA, and others, that there will be significant price benefits arising from the proposed changes.

Please see below the comparative pricing survey highlighting the impact of shifting currencies on CD prices.

While sales are dominated by those artists that are fortunate enough to be heavily promoted by record companies, there are many people who have diverse or non-mainstream tastes. As a multicultural society, Australia has many communities who prefer music in languages other than highly commercialised English.

Parallel imports will allow Australian music lovers to purchase from a greater range of titles. Retailers will be able to access overseas suppliers and to supply direct to their customers the music they were previously unable to hear.

Overseas experience indicates that record companies are prepared to invest in local music if there are sound commercial reasons to do so. The current exclusive market provides local subsidiaries with the opportunity for a low risk strategy of importing prepackaged products and reselling them without undertaking development costs.

If the local subsidiary is faced with competition from overseas suppliers, then, as well as lowering prices, it will be more inclined to differentiate music product. Developing a market for local artists is an obvious way to specialise in the Australian market. Australian consumers have shown that they enjoy Australian music and will continue to do so if Australian artists are given a fair go in the market place.

Through exclusive territorial licensing rights, the majors dictate terms to the retail and music production sectors in Australia. However, consumers know every time they enter a record store that they are paying too much for CDsCds - how much could it really cost to produce?. Those consumers who are fortunate enough to travel overseas or who are purchasing CDs through the Internet know the difference between local and overseas prices. When these consumers purchase CDs overseas or through the Internet, it is the local industry that is missing out.

Despite this market power, the local industry is essentially reselling a prepackaged product. Not only are the product and the related promotional material including videos prepared overseas, but record companies enjoy the benefits of free advertising through radio and television programming. And all this while imports are prohibited. The consumer pays dearly and gets very little in return. The market power of the record labels is not deserved and is misused..

The industry pushes foreign product because of the high profit margin that is available (and one that is protected by parallel importation restrictions). There is very little left of the consumer dollar to support local artists.

Most Australian music is generated for the local market and very few Australian titles are produced overseas - there would not be a large overseas supply of Australian titles in the first instance. Overseas suppliers will face a disadvantage in being able to supply a market at the peak of demand which normally occurs for the short period after a title is released.

As 94% of music sold in Australia by the multinationals is overseas sourced, the benefits of this exclusive right are almost totally accrued by transnational corporations and foreign artists. To the extent that there is a standard retail mark-up in the industry (27.5%), then similarities in retail prices would result largely from similar prices charged by wholesalers to retailers. Any attempt by record companies to impose a common wholesale price would reflect the intention or result of fixing pricing unilaterally, in violation of the Trade Practices Act.

The Trade Practices Act prevents ‘cartel’ price fixing arrangements and also prohibits, in conjunction with international anti-dumping laws the ‘dumping’ of sound recordings which have been deleted from record company catalogues - in the same way as other manufactured commodities cannot be sold for less than they cost to produce in the original market.

ACA has received reportss from our US sister organisation, Consumers Union, that the recording giants are currently being investigated by the US Federal Trade Commission (FTC) on price-fixing charges, and although the FTC is not able to formally confirm to us that this is the case, we have been referred to media reports which support the allegation.

Suggestions that price fixing is prevalent in the US have grave implications for Australian consumers. The inference is that in the US, where CD prices tend to be price competitive compared to much of the rest of the world, record companies are engaged in unfair and anti-competitive prices. Australian consumers could be bearing a double dose of unfair pricing practices - first where so much of the music is sourced, then where it is marketed and sold.

The record companies use their monopoly powers to maintain profit margins by setting the price for imported music higher than what the price would be if we could import directly. Because imported music is popular and there are no substitutes for any individual artists once these have developed market pull, the big record companies will charge as much as they can. Look at what is happening with prices of tickets for overseas performances.

Price discrimination may not be attractive to those consumers who end up paying too much, but under current arrangements is not illegal. To learn more about the latest developments, see the attached promotion of a seminar by Ernst & Young "tailored to larger multinationals" with interests in Australia, the US, UK, and New Zealand.

Australian consumers are often forced to wait for weeks or months for local rights holders to release titles which are already available in overseas markets. Delayed release has been cited as one reason for the growing popularity of ordering CDs through the Internet, along with lower prices. Parallel importation will allow Australian retailers to obtain copies of any legitimate sound recording as soon as it has been released anywhere in the world without the need to obtain the permission of the local rights hold.

Few Australian-owned record companies release titles by Australian artists in overseas markets. Parallel importation will therefore not affect the bulk of Australian artists as their recordings are only released locally. The record companies do not release all titles to the Australian market.

The growth of Internet purchasing has been due to the benefits of increased choice as well as price.

Profile of the world’s largest record multinat

ional

For many observers of this Inquiry, the most profound figure to emerge from the

The recent ABS review reveals that 86% of total recorded music product in Australia was sourced from overseas businesses, while for the majors, 94% of sales of licensed product was sourced from overseas. Here they are selling foreign product overwhelmingly.

for selected text quoted in this section, including a review of financial performance since 1988).

Polygram’s story, told through its 1996 Annual Report (http.www.polygram.com/html - see Appendix ___ ) shows strong global growth over the past eight years. Sales grew from US$1.713 billion in 1988 to US$5.499 in 1995, at an average annual growth rate of 12%. Profits more that tripled from US$0.82 per share to US$2.57 per share. Most impressively, Polygram’s net income as a proportion of average shareholder’s equity (the "return on equity" or single most important measure of financial performance) was a whopping 30% for 1996.

To put this in perspective, the ACA becomes concerned oligopoly profits ofwhen our powerful major banks reach a return on equity of 18%, and; Telstra in its virtual monopolistic position achieves a return on equity of close to 20%; and even the Microsoft giant’s return on equity is around ___%. [the ABS music statistics do not include equity or any measure of shareholders’ investment as noted in section ___ above - therefore they fail todo not provide a particularly useful measure of profit performance]. Polygram’s local performance may not be as strong, but its apparent strategy for local artist development here compared to overseas is relevant.

Australian consumers are often forced to wait for weeks or months for local rights holders to release titles which are already available in overseas markets. Delayed release has been cited as one reason for the growing popularity of ordering CDs through the Internet, along with lower prices. Parallel importation will allow Australian retailers to obtain copies of any legitimate sound recording as soon as it has been released anywhere in the world without the need to obtain the permission of the local rights hold.

Few Australian-owned record companies release titles by Australian artists in overseas markets. Parallel importation will therefore not affect the bulk of Australian artists as their recordings are only released locally.

The record companies do not release all titles to the Australian market. The growth of Internet purchasing has been due to the benefits of increased choice as well as price.

Curiously111996 was a particularly strong year for local music development and sales worldwide according to Polygram CEO Alain Levy. "National repertoire has moved up the charts and attracted audiences who once bought mainly American or British pop music" we are told. Here the company which distributes Elton John, Sheryl Crow, Celine Dion and the Spice Girls tunes intowaxes lyrical about Seiko Matsuda from Japan, Grupo Limite from Mexico and E o Tchan from Brazil.

`

The magnitude of local music development outside of Australia is impressive. Ithe following gnraphs reproduced from Polygram’s annual report trace the split of national, international and classical music sales for Asia and Latin America. In Brazil 60% of 1996 music sales were national, and in Venezuela the percentage is closer to 75%. In Hong Kong and Japan the figures are comparable.

Polygram is actively developing local content for sale in these potentially large markets while pushing export potential as well. "The main reason for success in Japan this year has been National Repertoire". To further the argument "We decided to concentrate as aggressively on local artists as on international recordings, and we have been successful in a short time span" says Norman Cheng, President of Polygram Far East.

Has the opposite decision been made in Australia? And does it relate to possible higher profits if the foreign material is imported, riding on radio and television airtime and glossy marketing, even though it’s overpriced?

The statistics on foreign sales compared to domestic product speak for themselves: Polygram has chosen a different strategy to maximise profits in large domestic markets. Why should Australian consumers pay higher prices under the import monopoly? What are we getting in exchange by way of artistic development and cultural benefits? If parallel importation were allowed, the major record companies would not be able to get away with this behaviour.

Arguably, Polygram Australia did not perform well in 1996, and that’s why you will find few mentions of our performers in the global annual report. Bear in mind that this transnational’s operations span 44 countries of which we are a mall part of the equation. Easy profits through protected import rights to American and British pop hits music - that appears to be the strategy for us.

In reality it is the local independent sector that supports musicians in their early stages of development. Major labels will only sign an artist to a recording contract after they have demonstrated their market potential. Artists or their record labels must sign distribution deals with a major company if they wish to access overseas markets on a large scale.

In 1996-97, independent labels released 673 albums of Australian artists while record companies released only 411. Yet the major record companies released 2783 titles by non-Australian artists while the independents released 2753. Independent labels are without doubt the more significant supporter of local music - these statistics demonstrate the different roles that the major and independent sectors play in promoting the development of emerging artists.

It is ludicrous to argue that without the majors Australian artists would not receive support - because they only receive substantial support when they have established their commercial viability - and that is a factor that is hardly likely to change because of the introduction of parallel importation.

In fact, the need to provide a differentiated product has been shown in other markets to be a viable strategy. The best way to compete with foreign competition (apart from asking regulators to establish trade protection) is to develop a unique product - and, in the music business, the obvious source of a differentiated product is local talent.

Independent labels will have a head start in a more open marketplace in that they already provide local and specialised products to the market. The ABS statistics show that there is a greater number of Australian titles distributed by independents as by the majors. The major record companies will still come to Australia and sign independent international distribution deals with ‘hot’ independent artists and their labels.

Independents will be able to compete effectively with overseas suppliers for the Australian market. Because these titles are produced in small quantities overseas, they are unlikely to find their way into the Australian market.

The Australian supplier with:

• a good knowledge of the local market, and
• proximity to consumers in terms of manufacture

will retain a comparative advantage over foreign importers but will of course need to respond to price pressures.

"90 per cent of Warhead’s sales are to overseas markets. This is because we have been shut out of the local market by the majors - we cannot compete in Australia.

"The control the majors have in Australia from receiving parallel import protection means we cannot get equal access to the retail market or to the media. But overseas our music is treated equally and we are able to compete.

"Because the focus of the majors is on selling replicated repertoire, and all the infrastructure is geared to follow these primary suppliers, then the predominant amount of money is being pushed towards foreign product. The profits go overseas and there is very little left of the consumer dollar for local artists.

"A few years ago ARIA scrapped the ‘independent’ charts and renamed them the ‘alternative’ charts. This means that we no longer have a guide to sales of music produced by independent labels - they are now swamped by the ‘alternative’ music produced by the majors. ARIA simply refused to recognise the independent label as a valid business status.

"Because of ARIA’s decision, 80% of Australian bands have no chance of charting (and the charts determine what stores stock, what radio plays, what consumers buy and so on...) This has been made worse by the fact that sales of ‘alternative’ music from the big stores like K-Mart, HMV, Brash’s and so on are also included in the ‘alternative charts’. Alternative! What a joke! The consumer simply does not have access to a diverse range of music. We are only allowed to buy what the record companies think we should have.

"For example there is an alternative Norwegian artist called ‘Kari’. Kari is popular overseas but is not available in Australia. Consumers can not buy Kari in Australia because the company that has the Australian licence is not prepared to import it.

"If we had parallel imports then a lot of Australian bands would become self-employed rather than part-time because they will be able to compete on a level playing field with overseas artists.

"We are not worried that our products will be brought back in from overseas as we control the distribution - it will be easy to compete with our own product! We collect a lower royalty from overseas - but we do less work there - as the marketing is the responsibility of the overseas licensee.

ARIA’s submission to the Committee states at page 20 that "Domestic manufacturing has replaced previously high levels of imports and encouraged development of a (sic) export sector in Australia. By any international benchmark Australian distribution facilities are amongst the most efficient in the world". Under parallel importation, Australia’s competitive manufacturing sector will continue to enjoy the benefits of comparative efficiency in production and access to the market place.

A reliable assessment of the proportion of the cost of a CD that can be apportioned to manufacturing is very difficult as the only information available is self-generated by ARIA. However, we believe certain conclusions can be drawn from available information:

wThe ACA contends that with the introduction of parallel importation the manufacture of CDs will continue to take place in Australia, thoughbut that wwholesalers and retailers will face price pressure from the potential supply of product from overseas.

It is currently illegal for Australian retailers to import music in commercial quantities direct from an overseas supplier without the permission of the local rights holder. They must purchase their stock only from the Australian distributor of the music.

The main consumer market is in new products rather than old. The bulk of record sales for the majority of artists generally takes place within three months of initial release - sometimes within the first 3 to 4 weeks. With parallel importation Australian retailers will supply music to consumers more quickly as the local music industry must take advantage of its geographical advantage and supply consumers before overseas competitors can ship to the Australian market. Consumers will benefit from price savings on new releases and in timely access to the latest music.

The Australian music retail sector is dominated by a number of large chains. These include specialist music chains, such as Sanity and HMV and the music departments of large retailers such as K-Mart, Big W and Target. Independent retailers survive by providing a more specialised and personal service often serving particular tastes of music such as dance, independent, jazz and world music.

The larger retailers currently have a market advantage in being able to achieve discounts through bulk purchases from local manufacturers. Under the proposed changes, both large and small retailers will access suppliers whose commercial terms more closely approximate the real cost of production. The price differential between bulk discounts and standard non-bulk wholesale price will therefore not be as great.

Smaller retailers will be able to provide more competitively priced music to consumers once they are able to source wholesale products at better prices - and more quickly as well.

Sales declined by more than 7.5% in the first half of 1997 compared to the same period in the previous year. The ability to access a wider range of recordings at lower prices following introduction of parallel importing will stimulate the retail sector and increase sales overall.

"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 the 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. There is no level playing field when it comes to service.

"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 out margins which are tight already.

"It hurts me to not be able to offer my loyal customers a better deal, and I believe music is getting less and less affordable at these prices.

"More and more of them are getting a better sense of what’s out there on the internet, especially the younger ones. I’ve been here for awhile and I talk to my customers. I know that some of them are already using the internet.

"Do I think people would buy more if CDs were cheaper? You bet. Why do you think discounts work to get sales volumes up? It might not make a difference for every single person or for each purchase, but on average for all customers, over time, sure, sales would go up.

"Every once in a while someone asks for some CD that’s slightly obscure. Sometimes classical, sometimes foreign music, or jazz or even an old collection I don't have in stock. It can take a while to get the music to my customers because of how things work now. It’s depressing and someone should fix it.

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Door to door delivery for Internet purchases takes as little as four working days. The Australian Tax Office has reported that Australian consumers can save up to $30 if they choose to purchase just 4 CDs from Internet suppliers instead of buying from Australian retailers.

Please see AttachmentsAppendix ___ for a recent copy of the ACA’s new home computer magazine Computer CHOICE for a brief description of on-line CD purchasing.

As more Australians access the Internet, particularly young people who are the major market for recorded music, the market share of local retailers will decline. Unless retailers are able to access a competitive supply at the wholesale level. There are important equity issues associated with the use of new technologies. We seek to avoid a society of technology haves - with cheaper prices, the ability to compare, and vast choice alternatives - richwith a society of technology have nots - which is more expensive, has restricted choice, and offers less information about new horizons in cultural development.

Policy development which improves the affordability and access to conventional purchasing of music is as important as further development of on-line industry policy for artists and on-line access for consumers.

Australian musicians deserve the credit for their successes in Australia and overseas. Talent is a prerequisite to success. Australia’s ability to continue producing talented popular music artists will guarantee a place for Australians in global markets.

Australian artists who are successful overseas will receive overseas royalty rates. Copies of their music which is sold under Australian licenses will receive Australia royalties.

Because of the high level of foreign titles sold in Australia, locally sourced content receives little benefit from the existence of parallel importation restrictions. Decisions to promote local talent under current arrangements are made on the basis of potential profits. A purely business case for investment may never be sufficient, however, if our agreed social objective is a rich and diverse local industry that is produced in reasonable volume. Though we have some excellent local music success stories, the need for a more effective supporting infrastructure policy is evident.

The bulk of artist development is undertaken by small independent labels rather than the major record companies. The artist usually pays for the costs associated with development and release through loans extended by record companies that must be paid against royalties from sales of albums.

The major record companies rarely take on local talent until it is clear whether or not the act is likely to be a success. The crucial early stage of artist development is a risk that is mostly borne by small independent labels. The major record companies only become interested when a high level of success is achieved.

"I’ve seen no evidence of any major record company supporting the area of music I’m involved in, apart from the production of an album with young jazz pianist John Foreman that was released on BMG. The original financing came from a grant of $20,000 awarded to John by the Nescafe Big Break Competition in 1990.

"I produced the original version of the CD but BMG eventually expressed interest and made it into a totally different product (which wasn’t released until 1993 and didn’t sell as they didn’t know what to do with it). John currently enjoys a successful career as pianist on the Bert Newton show, but I’ve never heard of another CD being released - so much for artistic development!

"The record industry is largely made up of people who are driven by things other than love and understanding of music, which I think is a prerequisite if one is to be successful in promoting this art form.

"Many independent companies release a lot of jazz CDs from local talent. Apart from the very occasional exception, these are self funded (or funded through Government bodies) and most do not make their costs back. I don’t deny its a difficult business but it would be immeasurably helpful if some of the major record companies, and/or their successful artists, would put some money where their mouths are and do something positive towards supporting the local music scene.

"I also think CDs are overpriced - at $30 to $35 they are way too expensive for most wage-earners to buy on a speculative basis - which means much unestablished talent never gets heard. The actual cost of CD production has come way down - but there has been no reduction in the price of current CDs. There would be many more CDs sold if prices were more in line with actual costs (not inflated record company costs) - which would be good for the local music scene in general."

The royalty issue is mainly concerned with composers as performers have very limited rights under Australian copyright law. The ‘mechanical right’ is the right that provides the composer of a song with an entitlemententltled to royalties from the manufacture of sound recordings containing the composers work.

ABS statistics on Australian culture show that there are only 261 full-time composers in Australia. Obviously, not all of these composers are exporting their songs, or having their works reimported into Australia.

The owner of the copyright must give permission for the release of a song or a piece of music. But the right only exists for the first sale - subsequent sales of individual copies do not generate further royalties.

A re-recording or ‘cover version’ of a song can be made without obtaining the permission of the owner of the song provided a statutory royalty is paid, although an alternative agreement can be made with the owner. The Copyright Act sets a royalty rate of 6.5% of the retail selling price for cover versions. Industry practice in Australia is that this amount usually applies to first release, although is legally open to negotiation.

Many musicians will also be ‘composers’ and derive their income from the sale of recordings from the ‘mechanical right’. However most Australian musicians are part time or derive the greater part of their income from live performance. They do not rely on mechanical royaltiesroyalites for their livelihood - only 261 full-time composers can claimcliam that status.

Australian artists who sell their music overseas will be paid a lower royalty than for sales of Australian copies. Each artist will be in a different situation and nobody can predict whether the artists will benefitbenfefit financially from this adjustment. However, the ACA contends that a local industry that is able to respond to changes in the global market will be better off in the long term.

How will royalties be affected?

The following general circumstances can be stated with certainty:

• A local artist or composer who does not have their music manufactured overseas will continue to receive the Australian royalty rate, although where the royalty rate is calculated on the retail selling price, this will be reduced as CDs become cheaper. However, an increase in volume sold stimulated by a reduction in price could compensate for price drops (as has occurred with home loans as they became more affordable and with overseas phone prices which have fallen along with an increase in overall market size).

• A local artist who has a reasonableresonable degree of success overseas will face the possibility that imports of their music may come into Australia and that these will accrue an agreed international royalty. Australian suppliers of the same material may need to drop their price to resist competition from overseas suppliers.

• A local artist who is highly successful overseas may be at greater risk from overseas supplies - but if such copies are imported and sold in Australia, they will also accrue the internationally agreed royalty. The hypothetical situation where music is ‘deleted’ from an overseas catalogue, meaning royalties are no longer payable, will only arise if a poor business decision has been made and too many copies have been produced for the market.

There are two serious weaknesses to the ‘import of deletion’ theory:

Restrictions on parallel imports do not support royalty payments to Australian artists. Royalties are protected either by industry agreement or through provisions of the Copyright Act that are not subject to the proposedpropsed amendments.

Local musicians will generally continue to enjoy the benefits of the higher rate of local copyright royalty agreements. As most Australian music is only produced in volume for the local market, there will only rarely be high volume runs of Australian titles in overseas plants. Supply of these titles to a competitive Australian market will still provide royalty benefits to musicians - and the sale of a higher volume of product because of the lower price will compensate the lower USA royalty rate.

ARIA recently opposed any additional legislative protection of performer’s rights.

A workable performers’ copyright regime may provide for additional rights to artists which could increase their incomes from royalties.

The nature of the typical recording ‘deal’ also precludes artists from substantial earnings from their initial albums. Artists must fund production of their material and tours through an advance from royalties. Although occasional successes occur, artists generally do not make any significant income from record sales until they have released three successful albums, If recordings fail to sell in large numbers, artists will be left with huge debts to record companies.

Piracy is of enormous concern to consumers because without strong piracy protection, there is less incentive to develop and promote new music.The ACA argues in this submission that there will not be a substantial increase in imported CDs into Australia However . Without such an increase, ARIA’s the industry’s explanation for the predicted increase in piracy, that pirated copies will be harder to detect, has little basis in our viewno basis. .

However, tThe ACA still wishes to counter some of the misinformation about piracy.

Piracy is a high risk enterprise. While those at the beginning of the illegal production may reside in a country where piracy production is tolerated - they will rely on others to operate in countries, such as Australia, where the risk of detection is greater.

A market for illicit CD product must exist before distribution of such material will be attempted. The nearer illegal product comes to entering sophisticated markets such as Australia, where severe penalties exist for piracy, then the more risky the trade will become.

A prospective trader of pirated CDs must therefore take into account the potential price benefits and weigh that against the risk of being caught. The higher the price - which is obviously determined by the local market for CDs, then the more likely such an enterprise will be considered worth the risk.

One of the reasons piracy exists at all is because of the inflated costs of legitimate products to consumers. As parallel importation will bring the price of CDs down in Australia piracy will become less attractive.

DDespite the weaknesses of the ‘greater volume/harder detection’ argument, Australia still needs to look seriously at the piracy risk as there are large volumes of pirated material being produced. Interestingly, the industry’s main approach to the piracy problem has so far been to fund a ‘piracy task force’.

Why doesn’t the industry invest in a consumer campaign to increase awareness about piracy or undertake any other educative programmes? Why doesn’t the industry lobby government and law enforcement agencies about it’s concerns with the situation?

The piracy task force informed the Committee that they do not receive a lot of phone calls from law enforcement agencies. If the industry really thought there was a problem, surely they wouldn’t be waiting around for customs to call them? In an era of inclusive co-regulation involving business, government and the community, ARIA’s approach must begin to change.Instead they would be lobbying for increased priority on the part of to law enforcement agencies. If the problem is so serious, why does the industry limit its response to the establishment of a pseudo-enforcement group?

The evidence so far provided to the Committee of a serious piracy problem in Australia has been very thin indeed. Australia has had periodic ‘busts’ of pirated material, for example the recent capture of pirated copies of Elton John’s tribute to Lady Diana Spencer. But there does not appear to be a large scale problem in Australia.

If indeed theThe ACA contends that the piracy task force is just a publicity stunt for the benefits of this inquiry, other questions should be asked. Why hasn’t the industry presented a comprehensive strategy for dealing with piracy? Where is the music industry’s piracy ‘hotline’ (which the video rental industry has)? Why does the industry not have a public information strategy on the damage that piracy does? Because being able to present the opinion of a member of the industry task force that there might be a problem suits a perceived ‘political’ situation.

A viable strategy for dealing with piracy could include the following proposals.

• Establishment of better cooperation between international law enforcement bodies that is transparent to the record industry.

• A review of mechanisms for the transfer of ‘intelligence’, or information about piracy, to law enforcement agencies from all levels of the music industry and from consumers. Australia can play a role in attacking the source of piracy, and our relatively widespread access to the Internet - particularly among young on-line consumers - could facilitate using digital technologies as a creative, transparent enforcement tool..

• Investigation of documentation administrative practices within the import distribution to see how detection of pirated music can be improved and streamlined. Tightening and adjustment of controls at the point of entry into the country can make it more difficult for pirated material to enter the Australian market.

• Training of law enforcement officers, retailers and consumers in the detection of illicit music. Investment in an educative program may produce more success - both in detection and as a deterrent - in stopping piracy. From the evidence presented to the Committee, the current approach of industry does not seem to have produced any results.

• Examine corporations law to see whether some of the alleged difficulties in identifying principals of Australian companies responsible for importing illicit CDs can be more effectively pursued. Legal issues for combatingcombatting this particular form of organised crime should be scoped. For example are there particular ways that we can deal with ‘repeat offenders’? What big regulatory sticks could be designed if more participative enforcement fails in certain circumstances?

Australia needs to make it even more difficult for pirates to consider Australia a profitable destination. We already know that as a formalised marketplace, Australia is less likely to offer piracy success on the scale we see in other markets. To suggest otherwise is absurd.

Effective enforcement of piracy has been shown overseas to have an impact on piracy, as reported in the US:

"Recent prosecutions of copyright pirates and the closure of their factories led to a drop in the number of unauthorisedunauthorized recordings during the first half of 1997, according to the Record Industry Association of America (RIAA).

"Seizures of pirated cassettes dropped by almost 57% compared to the first six months of 1997. Despite the drop in seizures, authorities still confiscated 194,979 cassettes.

"Compact disc seizures dropped by 8.6%, to 820,000 during the first half of this year. The RIAA attributes the decline to diminished availability of bootleg CDs in a large degree to Operation Goldmine, which has resulted in indictments and arrests of more than a dozen copyright pirates."

(Reuters/Variety, 4/9/97, Christopher Stern - http://www.grayzone.com/1097.htm)

IInternational cooperation is increasingly evident in the global fight against piracy.

China has recently cracked down on piracy (with very strong penalties), in response to US pressure, and Bulgaria is also under pressure to deal with the production of pirated CDs through its proposed membership of the World Trade Organisation:

"IFPI is calling on the Commission to make anti-piracy enforcement an immediate top priority in the current negotiations over Bulgaria's accession to the World Trade OrganisationOrganization (WTO).

"It should be noted that Bulgaria was given a 'special mention' on the Special 301 list published by the United States Trade Representative on April 30, 1996 and was given six months to improve its enforcement record or the Americans may impose sanctions on Bulgaria."

(cited from http://www.grayzone.com/996.htm)

Australia should examine its involvement in international piracy and law enforcement fora and upgrade its vigiliance against piracy.

Australian consumers are generally fair minded and appreciate the importance of paying for legitimate copies of works. Retailers, wholesalers and the music industry as a whole understand the threat to their livelihood posed by piracy.

The Australian market is not suitable for large scale piracy. Because of our remoteness, we are also a high cost transport destination for pirates. Best practice law enforcement is likely to have a strong deterrent to pirate operations consideringcosnidering the Australian market.

The retail sector in Australia is different from other markets.

In South Africa, pirates "usually operate where there's a captive audience, such as in mine complexes, in underprivileged and illiterate communities, where people often don't even know what a genuine cassette looks like".

Mike Snow from the Associated South African Music Industry (Asami). Asami has contracted Snow - a former soldier in the British army - to lead its crackdown on the pirate business.

Part of Asami's strategy has been a trial strategy to woo the hawkers, who sell mostly products in the simple piracy category, explain the problems to them, give them a starter pack of 50 to 80 titles and introduce them to genuine suppliers who can sell them the cassettes at competitive rates. Asami says it has had a lot of success with the approach, which produces an army of anti-piracy agents as a by-product.

Another approach has been to help train officials from Customs and Excise to detect pirated material as it comes across the border.

Asami says thousands of items were seized last year following these efforts. The industry is also negotiating with the likes of Mozambique to persuade them to enact copyright legislation.

(http://www.mg.co.za/mg/news/97mar2/31mar-piracy.html)

Copyright on the Internet is likely to pose an increasing problem as consumers start exploring the Internet for music. Illicit copies of music can then be downloaded - the providers of such information will be difficult to detect although money such sites have already been closed down.

Liquid Audio offers offers an encryption technology that uses a password to ensure that only the person who purchases a music download will be able to play it back. The downloads can be transferred to a recordable CD, but only once. What's more, if the company finds a CD that has been bootlegged with music from Liquid Audio's site, the company can trace the track to the individual who originally downloaded it.

(http://www.cnet.com/Content/TVTv/Stories/Piracy/)

The import of illegitimate sound recordings is primarily a problem in countries with poor intellectual property protection regimes and a large informal retail sector. ARIA has indicated that its members would not willingly stock illegitimate sound recordings. It would be hard to conceive that a country such as Australia, with a reputable and well-established retail sector, could experience the import of illegitimate recordings on a major scale.

Government agencies and the music industry should maintain a strong dialogue on piracy issues to identify any administrative changes that will help maintain vigilance on illegitimate imports. The creation of a dedicated web site on which public and private sector enforcement could be reported would greatly improve transparency and public confidence in our ability to effectively combat piracy.

The Government should consider a ‘reward’ for Australians who successfully identify pirated material. A $500 reward for each successful prosecution, for example, would help toThis would help enhance the strong culture of national compliance which we believe already exists in contrast to many other countries with endemic piracy problems. Aggressively marketed through a public "hot-line", this approach would begin to broaden the community’s stake in combating piracy, especially if combined with a creative education campaign.

ARIA’s most embarrassing claim has been that parallel imports will cost 55,000 jobs. ABS statistics reveal that there are 3,866 workers in the industry, while the Australian Music Retailers Association estimates that the music retail sector employs 3,900 full-time workers.

The real long-term threat to job losses will occur as more and more consumers use the Internet to purchase cheap CDs, and in the longer term to download music. Current estimates are that 40% of Australians over the age of 16 have used the Internet. The Internet is of course popular with younger consumers who are the main market for the music industry.

Whatever the real level of employment in the music industry, it is absurd to claim that the entire industry would be wiped out by the removal of import controls. The ACA argues there is a different aspect to this important concern:

• jobs have the potential to increase in the retail sector as consumers purchase more music, and they most definitely are under threat if sales continue to decline

• by investing in development of on-line music delivery there will be greater long term employment and a higher Internet profile for Australian musicians.

• Where is the $270 million the industry promised it would spend on the Australian industry when the Labor Government reversed its 1995 decision to allow parallel imports?

• One major music company, Warner Bros, increased the recommended retail price of its new release CDs to $31 in 1996, despite promises of price discipline following the 1995 "deal". A recent price survey by the ACA has found Warner CDs costing.......

The Australian record industry continues to claim that the sales tax on CDs in Australia is "a whopping 22%". While consumers would prefer not to pay tax on any goods or services, taxes are here to stay and any discussion of an appropriate level of tax for CDs or any consumer good is a separate issue from whether a particular industry and its dominant players should receive import protection. The appropriate level of sales tax must be addressed in the context of the social and economic implications of tax policy as a whole.

It is true to say that the wholesale sales tax is 22% of the wholesale price in Australia of CDs. However, this tax does not apply to printed matter included in the CD which exempt from sales tax. As CDs are sold together with exempted printed matter for one inclusive price, under Australian tax law, the taxable value of the music CD component is the price for which it could reasonably have been expected to have been sold, if sold separately.

Rather than calculate the value of the printed material and the music content for each CD package, ARIA and the ATO have agreed a basis for the determination of taxable values of music CDs by members of ARIA. The agreement (under section 43 of the Sales Tax Assessment Act 1992) provides for the taxable value of the music compact disc component to be deducted by 16.7% for full price CDs, 12.89% for Mid priced CDs and 4.85% for budget priced discs.

Therefore, for a full priced CD package, about $3 of wholesale value will not be subject to sales tax meaning the effective sales tax payable is about 18% of the wholesale price.

To convert the Australian wholesale sales tax to a retail equivalent, we can assume that for each dollar of a CD’s value, the wholesales sales tax adds about 18 cents. Noting that retail margins are normally calculated from the final retail price, a retail margin of 27.5% means the final price from the $1.18 wholesale price is $1.63 (ie 1.63 x 72.5% = $1.18). If the actual sales tax of 18 cents is deducted, the notional price is $1.45. The sales tax of 18 cents, expressed as a percentage of $1.45 gives a retail sales tax equivalent of 12.43%.

It is also misleading to compare the Australian wholesale price with overseas retail sales tax because the former is taxed from a lower base price. To demonstrate this we can convert the Australian wholesale tax to a retail equivalent so that a more effective comparisons can be made to the retail or value-added taxes imposed overseas.

ACA comments on tax policy insofar as consumers are impacted both through the level of taxation and the availability of public goods funded through taxation which in turn have significant consumption implications. Please see Attachments Appendix ___ for our policy views on tax including analysis of the impact of changing the tax mix between direct and indirect taxes on different types of consumers. Alternatively, this analysis is available on-line at http://www.sofcom.com.au/ACA/taxtune.html with links to academic web sites with further economic inputs to our analysis as well as other relevant statistics.

As part of the debate over whether any GST should be introduced and, if so, what exemptions if any should be created, it is important to bear in mind that CDs are luxury goods - from an equity point of view there are surely higher priorities for exemptions falling into the basic needs category such as food .

Without doubt, the retail sales tax on CDs differs considerably around the world, and even differ between cities depending on tax structure. In Europe sales or Value Added Tax ranges from 15% to 20%. Asian sales tax is lower, from zero to 8% (though these rates may change with the imposition of IMF structural adjustment programs). North American countries charge between 8% and 15%, and in South America the countries we surveyed had sales tax ranging from 18% to 21%. The following table reveals the broad parameters, noting that nNot a single OECD country participating in our survey is free from some degree of retail sales tax on CDsCds.

ARIA’s propaganda that CD taxes should be eliminated, as stated in marketing inserts into all new CDs, is nonsensical in light of current taxation principles, values about taxation fairness, and debate about the social impact of tax reform. The music industry is equally out of touch with tax policies in so many overseas countries in which leading ARIA members operate.

The PSA found that when sales tax on sound recordings – as reduced from 32.5% to 20% in Austin September 1985 – only one of the six major record companies reduced prices following that cut and in fact there were substantial price increases in the following twelve months.

Recent financial turmoil in Asia has led to volatile currency markets. While the Australian dollar has performed well against Asian countries - with CD prices in our region down to as low as one third of the Australian price - the Australian dollar has declined against the US dollar and some other countries. This means that CD prices today are relatively high compared to some countries than they were six months ago, and relatively low in others.

Because our CD imports are impacted so strongly by changing US costs as the US$ strengthens, there is a real risk that prices will go up in the Australian market. This risk of inflation in particular goods has been highlighted by a range of financial analysts and commentators.

So while at present a comparison between local and US prices will show that the cost of an Australian CD is only XXXX more than a CD purchased in the US, increased costs for access to foreign music may soon be passed on to the consumer building inflationary pressures.

This ARIA sourced breakdown of a $30 CD cost has been in the public domain for a few years. The Australian dollar would have had an exchange rate of around $0.75 to the US$ we believe. The following table represents our estimate of the proportion of this CD which must be paid for in US dollars. It is an estimate and we welcome feedback from industry sources as to its conclusion that either CD prices are likely to go up, as US royalty and marketing costs increase due to currency changes or TNC profits will gradually erode with currency losses.

To establish how much of this overall price could be subject to import price inflation associated with a weaker Australian dollar, we estimated the import value of each cost component.

The ACA estimates that around $11 dollars of each $30 CD sold can be traced back to a US dollar denominated cost. This component is therefore the proportion of a CD’s price that is subject to consumer price inflation if the Australian dollar weakens. The impact on either predictable CD price increases or reduced record industry profits is estimated as follows:

This analysis shows, for example, that at an exchange rate of A$0.60 for each US$1, there is underlying pressure for the price of a $30 CD to increase by $2.14. Alternatively record companies could absorb a loss of $1.29 per CD (if you believe ARIA’s cost pie chart outlined above) in order to maintain consumer prices at the $30 level (noting some CDs are already sold at $31). If less conservative figures about the US dollar component of a CD are used, the inflationary potential is much higher.

Over several years the ACCC has investigated local prices compared with overseas prices for CDs. We will not duplicate their arguments here other than to note that, in early 1997, ACA updated the ACCC research using the same methodology and our research concluded that substantial price savings existed - up to $7 compared to the US.

We are convinced Australian consumers are subsidising overseas creators and distributors - but because Australia is a small marketplace, the monopoly rents earned from this price discrimination are unlikely to create additional incentives for overseas creators and distributors to subsidise Australian artists. Parallel importation will change the capacity of the record companies to hurt Australian consumers through unfair price discrimination.

One of our greatest assets in the global marketplace - our English - can be a liability at home, especially when combined with our limited market size. The aggressive investment in local languages in markets such as Japan, France, and Brazil do not compare well with Australian sales of mass produced foreign music.

How do our CDs currently compare in price with overseas countries?

• ACA conducted a snapshot survey of 22___ countries in connection with their local consumer groups.

• These consumer organisations representing over 15 million members and subscribers worldwide support parallel importation for CDs in the interests of fair competition and consumer justice.

• We selected six albums and asked our research colleagues to obtain prices from a "large mainstream outlet".

• We then translated the price into local Australian dollars as of the day the price was given.

• The tax paid on each CD was then subtracted from the tax-inclusive price, and added back in so that it reflected the existing 12.43% Australian retail tax.

This means the results are in Australian dollars at recent exchange rates, and are adjusted to have the same exact tax rate as we have.

Here are the summary results.

The Australian prices we compared these international results to was sourced as follows:

We sourced US prices more extensively than from other countries, getting prices from Tower Records from seven locations.

Our conclusion - on average Australian CDs cost more than A$6 compared to other countries surveyed. Some countries were much cheaper, including some Asian currencies with weak currencies currently. These differences are not sustainable in the longer term. In 1987 then Treasurer Keating’s "banana republic" speech spoke to a drop in the Australian dollar of $0.67 compared to the US dollar (identical to today’s rates). During the late 1980s and early 1990s the Australian dollar recovered.

Other countries have clearly risen in cost relative to local prices - please see the table above for each country’s results.Australian CDs are overpriced compared to _____ and are cheaper than in other countries. Overall, our prices are __% higher than the average of __ countries reviews.

Ultimately when it comes to price, the testimony of some major retailers provides evidence that significant price savings to consumers could be achieved if parallel imports were allowed.

Do lower prices increase demand for consumer goods and services?

In the United Kingdom, for many decades British Telecom (BT) had an expensive and confusing pricing structure. BT’s pricing structure remained largely unchanged from the 1950s to the early 1990s. Apart from customer dissatisfaction, BT had other reasons for improving prices in the early 1990s. The industry regulator, Oftel, had mandated BT to cut its overall prices heavily. Also changes in technology, starting with new digital technology, had altered the cost of various call types, giving competitors the opportunity to reduce price on high margin call types - mainly long distance and international. BT reduced its access charges (the "interconnect" price paid by BT’s competitors to use its infrastructure) and prices to customers. Revenue increased as lower prices stimulated greater demand.

** Thanks to BT Australia for provision of this information.

"Following a major customer research programme, BT established a clear new pricing structure and large price cuts costing 900 million pounds per year. BT had succeeded in increasing revenue despite lower prices by stimulating the total market." Hugh Davidson

"The experience of international call markets is that as prices have come down, the volume has increased. When we look at the weekly rate specials we can see that volume goes up immediately" Stuart Corner

During recent years there have been considerable competition in the home loan market, with a range of new entrants using different funding techniques entering the market. In fact, none of the big banks rank in the five most competitive home loans on offer, and rates are several percentage points lower than a few years ago.

As mortgage rates declined, however, home loans became more affordable for consumers, and lending volumes increased.

The Final Report of the Financial System Inquiry in 1997 (the "Wallis Report"), found that:

• This compares with population growth of 29 per cent over the same period." Wallis Report p.624

The banks’ share of lending has fallen, but, according to the KPMG 1997 Financial Institutions Performance Survey, "there is no doubt that the non-bank commercial mortgage sector is growing rapidly". A fall in consumer prices has brought a range of consumers who otherwise would find a home loan unaffordable back into the housing market.

Even though the banks have suffered a fall in the share of new home loans written, their financial performance has continued to improve year after year on each measure considered by KPMG in its assessment of performance trends.

Across a range of consumer goods, more diverse products and lower prices have meant more demand and industry growth. Consumers become more engaged in the market place. A significant change in the price of CDs, in the order of $4-6 will generate a strong public perception that music is worth exploring once again as a value-for-money entertainment option.

A wider range of music to choose from will also stimulate demand by increasing awareness in new types of music.

This is a limited snapshot survey, but it confirms the pricing trends researched by the ACCC over several studies. In connection with the inflation risk imposed by a strong US dollar, this presents an unfair for Australian consumers. Now is a good time to begin to fix the problem.

How successful will the Australian music industry adjust to developments in music distribution technologies over the next five to ten years. While the CD format can be expected to be around for some time, the Internet is quickly emerging as an efficient and engaging way for consumers to access diverse and competitive global markets.

Consumers have already been shopping on the Internet for CDs. But on-line distribution of music removes the cost of physically shipping CDs and replaces it with increasingly cost-effective ‘downloading’ of music files.

Purchase and download of music through the Internet is currently available from a number of sites, including sites that promote Australian music. The music can be stored on CDs using CD recorders which presently cost from around $600. The writable CD discs cost from $5. The music can be played using a range of supporting applications.

Support for On-line Delivery

The Australia Council’s recent Internet based LOUD festival generated huge interest in the community. The LOUD web site received an average of 375,000 hits per day during the festival. The festival was developed to assist people to establish themselves in the media by using alternative mediums as well as alternative outlets.

From the LOUD experience we can see that interest in Internet culture is growing amongst the young people.

The commercial opportunities will be enormous as the on-line music market continues to develop. But to be a part of the global market the Australian music industry needs to develop an Internet ‘presence’. We need to further develop our knowledge and skills in the on-line music business with the objective of promoting and selling Australian music through the Internet.

However, there are some important barriers to development of on-line music distribution, which need to be recognised. These include:

• the size of the consumer market - which is dependent upon access to affordable equipment and telecommunications services, and acceptance of the Internet as a purchasing experience;
• development of secure Internet transaction technologies, and
• the availability of standardised portable storage mechanisms (such as writable CDs and DVD).

Online music will make up:

• 10% of yearly sales by 2000 - Jupiter Communications
• 15% of yearly sales by 2002 - Iconoclast (Internet marketing company)

While there are varying estimates on the number of people accessing the Internet world wide and in Australia, the upward trend is consistent. For example, predictions for usage of cable modems, which facilitate the downloading of large volumes of information at high speed, include growth from 430,000 at present to 16.4 million in the next 5 years. ISDN connections are forecast to grow from 7 million to 29 million. However the relatively high cost of ISDN services in some countries acts as a comparable barrier to overall market size growth as parallel import restrictions pose to growth in the market for CDs.

While an ordinary modem is all that is required to download music, competition between technologies, and in particular, broadband technologies, will help to drive the overall downloading costs down. If competition rules are strongly applied and Internet access costs are reduced, then consumers will also benefit as liberalisation of telecommunications markets encourages global communications competition.

Improvements in technology means telecommunications networks will continue to provide faster transmission speeds, which also helps to drive costs down.

The storage costs for digital music follows the same trend. The downloading of digital music will become extremely cost competitive with the distribution of CDs in the next 2 to 4 years.

The costs of hardware will also continue to decline. While computer software typically becomes more complex and demands more computer ‘memory’, digital music files do not follow this trend. In fact, improved compression technologies help reduce the cost of downloading music files. Therefore there will be lower transmission costs will have a direct effect on the cost of downloading music.

"Parallel import restrictions will become redundant in the near future as the rest of the world starts to sell directly, through the internet, music into the Australian Market.

"I this will Australian artists rather than being a disaster. At the moment Australian artists sign record deals which give them varying royalty rates in each territory. Under these deals artists get one royalty rate in Australia, and a lesser and varying royalty rates in the US and other territories.

"Often an artists recordings are not released worldwide due to a number of factors associated with cost, promotional problems or the unavailability of a suitable company to release and promote the product in that territory.

"With a digital delivery system in place artists could be released worldwide, paid sooner, more often, and more accurately.

"I expect that in the not too distant future a system where, as soon as a consumer purchases a song or group of songs from a particular artist, that transaction is credited to the artist’s bank account. It would make no difference if the song was purchased in Brisbane or Berlin the same amount of money has changed hands, it takes the same amount of money to process each transaction, and the same amount of money to deliver the product.

"Whether the consumer leaves that file on their computer and plays it off their hard disk or burns [records] a CD themselves, it is up to them. There is no cost for transport, storage or unnecessary manufacture of unwanted CD's that the consumer (and the Artist) pay for in increased costs for product.

"Recently with the advent of "MPEG3" files which are extremely close in quality to traditional CD tracks but in a highly compressed state (meaning much quicker download times over the Web) the internet becomes a medium able to deliver content to the consumer.

"Apart from OzNoise there are other sites such as Liveconcerts.com (www.liveconcerts.com) an American site, which let the user hear live concerts from artists from varied musical styles.

"There are already many sites where the user can "preview" or listen to a reasonable rendering of a song in realtime and then purchase and download the "CD quality" version."

The 12 to 25 age group dominates the market for commercial music and also comprises a significant proportion of Internet users. As the cost of access and equipment comes down, younger consumers will move from being the ‘early adopters’ to constituting a mainstream market.

‘Surfing’ the Internet is obviously a different experience to searching the local record store. But it should not be underestimated. The Internet offers wider access to the music, artwork, video, and detailed biographical information of the consumer’s favourite artist.

The consumer can interact with the Internet site, with the artist and with people sharing the same taste in music. Internet sites are easy to update and new material can be made available instantly, rather than the months can often take for new releases to make their way to Australia in CD format.

The Internet is also perfect for the sale of single songs rather than whole ‘albums’. Consumers can pick and choose the songs they enjoy the most from their favourite artists by listening to samples first. A number of different singles from different artists can then be purchased separately by the consumer and stored in whatever arrangement or format they wish.

Music is the perfect commodity for the Internet market-place. Not only is digital music easily and cheaply transmitted but Internet users are often keen consumers of commercial music. Nevertheless, the internet itself as an effective method for delivering music could be bypassed with the advent of digital television.

"News Corp’s 40% owned BskyB group has taken a 49% stake in a joint venture owned by Warner Brothers and Sony Corp that sells 24 hour music programming. It aims to offer the service as part of its digital TV operation starting in June [1998]. ...the move will enable it to sell as many as 60 separate 24-hour digital music channels, uninterrupted by advertising or disc jockeys, to consumers who buy its digital services."

(The Australian Financial Review, 13/2/98, "BSkyB Digital alliance", p. 41.)

The importance of enabling CD consumers to purchase music at more reasonable prices and in greater diversity has never been more important as we approach newer and more cost effective technologies which are not universally accessible. We mustn’t allow the technology poor to become music poor.

A barrier to the growth of on-line shopping, including music products is that payment typically involves electronic payment mechanisms. Most Internet sites presently rely on credit cards for the payment of goods but for consumers there is a perceived risk that personal can be misused.

New systems such as ‘digital cash’ and the use of trusted intermediaries such as electronic banks will provide a more secure means of payment for Internet purchases including music. Low-cost, secure payment systems are becoming more accessible. The risks for electronic payment systems should greatly diminish by the year 2000.

However without the introduction of economy-wide privacy legislation under the Commonwealth Government the opportunities that electronic transactions and electronic commerce enable will not be fully realised. Internet privacy is, according the US Federal Trade Commission, the single most important consumer protection concern of the 1990s.

While many artists will choose to go to an existing Internet site to market and distribute their music - the cost effectiveness of the Internet would permit many to develop their own sites. The cost of an artist to develop an Internet marketing site range from $200 for a basic site advertising music available by post to about $1000 for a site with a music sample (low quality) and a few interesting graphics.

Again , it is reasonable to expect that the costs of these elements will also come down over time. The ability to market directly to consumers around the world offers huge potential for Australian music.

An example of how Bands can currently market their talent is by having their singles placed on the OzNoise site (www.OzNoise.com.au). The fee is $300 for the first single and $10 for every single thereafter. Users can download these singles for free. The sound quality (using ShockWave) is equivalent to FM radio. A review of some of the sites where music is currently available in Australia is included in theat Attachments....

Sites that plan to provide sales and distribution of music will need a strong customer focus and investment in ‘concept development’ - the key to capturing the attention of music consumers. Musicians and their management will need a sound understanding of Internet business.

If Australia is to grasp the on-line opportunity, we need to have a coherent strategy to migrate our music talent to the Internet market - to make sure that it is Australian musicians (and Australian consumers) and not just the transnational corporations that receive the financial rewards.

The growth of online delivery of music will have several implications for parallel importation:

• sales of copyright material will occur directly between consumers and overseas suppliers

• arguments for a geographical separation of copyright markets (by prohibiting parallel importation) disappear in the face of a technology that substantially reduces the significance of geography"

The on-line copyright issue is potentially a significant obstacle for the music industry. The World Intellectual Property Organisation has proposed the adoption of a ‘making available’ right which give online publishers a form of copyright protection that is better suited to online technologies.

Understanding how to put together an Internet site is the key problem for a music creator wishing to develop an Internet presence - but this offers huge export potential for independent Australian musicians.

Sites that plan to provide sales and distribution sites will generally need a strong customer focus and investment in ‘concept development’. An overall business strategy is as important for commercial success as the creative content and the actual Internet presence.

One of the great advantages of Internet music distribution is that consumers can listen to free samples of tracks from their homes and purchase the ones they like. At present to download a 45 minute CD costs about $17 through Telstra’s Big Pond service and $9 through ISDN - although there are significant set up costs (which are also expected to come down over the next 2 to 4 years. And of course the consumer will still have to pay the artist for the music file.

The Internet offers the Australian music industry an opportunity to break the shackles of foreign domination. Investment in this sector at this point in time offers potentially enormous financial (and cultural) returns. But the investment strategy needs to be sound and based on a realistic understanding of the needs of musicians in the online environment.

Being ‘export ready’ is an important prerequisite for artists looking to the Internet as a market outlet. This will be important to ensure that funds are wisely spent as well as to develop our international market reputation.

Development of Internet marketing skills amongst contemporary musicians will be a sound investment. This can be achieved through direct funding for Internet site development or through offering support for training of marketing and distribution skills.

To provide this type of support, the Australian Government could either:

• expand the current Australia Council Initiative to cater for an increase in demand for Internet marketing and distribution skills and for export development assistance, or

• establish a separate more specialised program.

A targeted program will potentially include both skills development and direct assistance in the areas of:

• Online concept and marketing development

• Online music business strategy development

• Internet site development.

A coordination role for Australia’s online music industry will enhance the effectiveness of the development strategy.

The record industry does not ‘subsidise’ artists - it commercially exploits them. A distinction needs to be made 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.

The music business is a commercial venture, and industry development assistance should occur in much the same way as in other industries - to provide assistance in areas where there is a potential market failure to ensure skills or product development. Cultural investment should be ‘transparent’ and directed at those areas identified as being in the interest of the general community - to justify parallel import restrictions on the basis that transnational corporations are making such decisions on our behalf is insulting.

For example, the Internet offers the potential to provide Australian musicians to global export markets. Not only through Internet sales of CDs but eventually through the actual distribution of music directly to the consumer. Australia needs to make sure that Australian artists have access to Internet markets, whether through commercial sites that market and distribute music - or by the artist directly.

The Government currently supports contemporary music through the Australia Council. While the Australia Council is mainly interested in non-commercial cultural activities, the Council also manages the Contemporary Music Export Marketing Initiative. Under the initiative, funding is provided to contemporary musicians in the form of advances. The advances assist with expenses such as travel and freight costs to and from target markets. These advances help artists overcome cash flow problems when they are ready to export their product.

The program is for artists who, although they may be operating in a niche market, are ‘export ready’, meaning that they have established themselves as a live act, have a current full length CD with good sales and national airplay.

The Australia Council also has a range of other programs that indirectly support Internet development, but these are not presented as being specifically for that purpose. For example, the State Theatre of South Australia receives funding for its market development program from the Council - and this includes the development of an Internet site.

The industry will continue to make commercial decisions to sign Australian bands, hopefully at an even greater level than the days when the market for local music was so often overlooked because monopoly imports provided such an easy way to profits. Bolstered by Australian consumers whose purchases will increase in prices as CDs become more affordable, we are confident that this industry will in fact grow as it increasingly meets the needs of its customers.

- Lawyer Phil Dwyer (Sunday Program, Channel 9, 12 October 1997)

Submission by James Love, an economist, at the Center for Study of Responsive

Law's Consumer Project on Technology (US, Ralph Nader Organisation), Washington - Comments on South Africa’s Pharmaceutical Legislation, Discusses Parallel Imports and Health Registration Data (http://www.cptech.org/pharm/sa/sa-10-97.html)

Consuming Interest , ACA policy magazine, tax reform article (http://www.sofcom.com.au/ACA/taxtune.html)

ComputerCHOICE, ACA home technology magazine, brief introduction to internet purchasing

Promotion by Ernst & Young seminar about price discrimination "tailored to larger multinationals" with interests in Australia, the US, UK, and New Zealand

Explanation of different types of copyright

Attachment - Explanation of different types of copyright

Mechanical right - the right to record a song onto record, cassette or CD. This is administered either by the APRA under an arrangement with the Australasian Mechanical Copyright Owners' Society (AMCOS) or by music publishers.

Synchronisation right - the right to use music on the soundtrack of a film or video. Administered as per the mechanical right.

Performing right - the right to broadcast a work, perform it in public and transmit it by cable. This is administered by APRA.

Generally speaking, copyright in a musical work lasts for the life of the composer plus 50 years. However, if a work is first published, broadcast or performed after the composer's death, then copyright lasts for 50 years from the date of first publication.

The first owner of copyright in a musical work is the composer, and the first owner of copyright in lyrics is the lyricist. However, where a work is written by an employee as part of his or her employment, the employer is regarded as the legal author of the work.

Where a work is commissioned, generally the commissioning party will not automatically own the copyright, unless there is an assignment to the contrary. They will however be entitled to use the music for the purpose for which it was created.

Songwriters and publishers assign APRA their performing right on joining the Association. APRA then administers the performing right on behalf of its members: collecting royalties in the form of licence fees from music users, such as radio and TV stations and venue operators, and distributing royalties to members whose works have been publicly performed or broadcast.

APRA has reciprocal arrangements with similar copyright collection agencies overseas. When music composed by APRA members is played overseas, the relevant agency collects royalties on their behalf and forwards these to APRA for distribution.

If you or your organisation is giving or authorising a public performance, broadcast or diffusion (cable transmission) of copyright music an APRA licence is usually required.

Public performance includes playing music by radio, TVradio,TV, CD/tape player or background sound system as well as live performance. Different annual licence schemes are available for different music uses.

Generally, the proprietor of premises where music is played or the promoter of the performance is responsible for obtaining the appropriate APRA licence.

As far as broadcast licences are concerned, APRA has licence agreements with all radio and television stations in Australia, New Zealand and Fiji, including the Australian Broadcasting Corporation and the Special Broadcasting Service.