Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 349 - 359)

TUESDAY 27 APRIL 1999

MR JOHN DEACON, MR JOHN KENNEDY AND MR MARTIN MILLS

Chairman

  349. Good morning, Mr Deacon. Perhaps you could introduce your two colleagues and then we will begin.

  (Mr Deacon) Yes, Mr Chairman. To my right is John Kennedy, who is Chairman and Chief Executive of Universal Music, which is one of the larger record companies; and to my left is Martin Mills, who is Managing Director of Beggars Banquet, which is probably one of the most or the most successful independent record company.

  350. Thank you. What is your response to the allegation that parallel trade is an important part of your industry's activities and it is actually reliant upon selling large quantities of stock? Is this assumption true and, if it is true, why do some record companies allow parallel trading?

  (Mr Deacon) May I first explain that perhaps, unlike most of the people around who have been before you, copyright is absolutely essential to us. The trade mark aspect is one which is important but nowhere near as important as the copyright aspect. As far as parallel trading is concerned, within Europe there is a good deal of parallel trading which goes on. As it happens, at the present moment, because of the strength of the pound, we are probably the recipients of a good deal of that parallel trading. In times when, in fact, the pound was weaker, we took advantage of that. So there is parallel trading which goes on within Europe. As far as the international trade is concerned, I do not know whether John would like to give a view as far as the major companies are concerned.

  (Mr Kennedy) I am not aware of us ever encouraging parallel imports when it suits us and discouraging parallel imports when it does not suit us. We have very much taken the view over the years that at one time we wanted to buy British. Now we accept that we are members of Europe so we encourage buying European, but we discourage any product from coming outside Europe to damage the market in Europe.

  351. You said that there have been occasions when opportunism has determined aspects of parallel importing. Is it price or availability that causes parallel importing at times? How much parallel trade is there into the United Kingdom?
  (Mr Kennedy) Parallel trade into the United Kingdom?
  (Mr Deacon) Very little indeed, I would think.
  (Mr Kennedy) Within Europe.
  (Mr Deacon) Within Europe, but I have already explained the European bit.
  (Mr Kennedy) The very important distinction we make is that there is certainly parallel trading within Europe, which we accept is completely legal, do nothing to discourage, and accept as part of market forces with a strong pound. We suffer from that. With a weak pound, I suppose, in theory, we would benefit from it. However, in terms of parallel trading outside of Europe, we do not experience anything untoward and we would consider it comprehensively damaging to our business, with job losses, and damaging to our investment in the United Kingdom record business.

  352. I find it a wee bit confusing when I go into a record shop and I see three identical CDs—the same artist, same music, the same length of time—and they charge maybe three different prices. I look at it and one is produced in one country and one is produced in another. There may be a Japanese import which is exactly the same but I cannot read the sleeve notes. Do you not think in some respects that companies do not have a sufficient control? That one part of an international chain does not really know what the other part is doing.
  (Mr Kennedy) I think you have taken a tiny part of the market and distorted the effect on it, with the greatest respect. A very small percentage of records would be the Japanese imports or even American imports. In fact, those types of records which you are describing are parallel imports in one sense, but far from being at a lower price they are actually at a higher price because there is not sufficient demand in this country to make them available on a local production basis, so they are imported at vast expense with import duties to supply a very small niche market. Most of the records, which you will find in the shops in the United Kingdom specially, are manufactured in Europe with local employees, and many of them are as a result of this very substantial A&R investment in the United Kingdom. Our company alone invest 20 per cent of its turnover in developing the United Kingdom record industry. That is a sum of £50 million put back into A&R development.
  (Mr Mills) May I add something to that. We run some independent record stores and we import from other countries, but we import specialist repertoire mainly from America, which is more expensive in our stores than local repertoires. A lot of those imports are not parallel. They are prerelease imports but they are always more expensive.

Mr Laxton

  353. Last year, Australia and New Zealand started to allow parallel imports. What makes their market so different to ours here in the United Kingdom is that they felt able to do that, when here there are all sorts of concerns about jobs and associations with parallel trading. Why are they so different to the United Kingdom?
  (Mr Kennedy) Mr Deacon can give you some specific details of the report from the Australian record industry. I do not think they are very different. The picture I would paint of allowing parallel imports to come in from round the world would be a very bleak picture. I would be stunned as to why we would want to do that. For me, having watched the United Kingdom industry develop fantastically successfully for local artists and the Government in terms of balance of trade, all of a sudden to say, "We are now going to give the creative stage to the United States and the manufacturing stage to Asia," I have no idea why we would do that. Effectively, that is what Australia has done. They had a burgeoning local record industry with artists who were selling records around the world. I believe that in 12 months' time you will see no local investment because there will simply not be the profit and in the meantime their manufacturing industry is hit by the fact that almost all records sold in Australia in a very short period of time will come from Asia and I really cannot see why the Australian government saw any great advantage in that or why we would see any great advantage in giving the United States, who do not allow parallel imports, or Asia the benefits of all our investment and driving investment out of the United Kingdom market and losing jobs, amongst other things.

  354. Before one of your colleagues comes in, how would you respond to the fact that the Australian Consumer and Competition Commission has had a look at this whole process and maybe would not share that view at all? Their view is simply that since October 1998 prices have fallen and they make the comment "without great impact on record companies". You are talking as if it is Armageddon, the whole industry has been wiped out in Australia. That is not a view they would share.
  (Mr Kennedy) I did not quite say that. I said that I think the long-term view is much bleaker because a company such as a record company plans its budget over a 12-month period. We have not yet seen a cycle of 12 months of the Australian record industry whereby it sees its turnover reduced and its profits reduced and is no longer able to justify local investment. I think you need to look at it after a couple of years and I firmly believe that it would be Armageddon. I think it is demonstrable that it would be Armageddon, but Mr Deacon does have a report from the Australian record companies.
  (Mr Deacon) Yes. I think what has actually happened there is that you are getting imports coming in. Unfortunately, where they are coming in from is Indonesia and Thailand, which are two countries which probably have the lowest, or one of the lowest, intellectual property protection. A colleague of mine has just returned from Australia and, in fact, there are two windows. One window is the local product and the other is the imported product from Indonesia and, in fact, the warning is that they may not necessarily be the same. Our indications are that piracy has gone up to something like 30 per cent. since this took place. Piracy—and we can talk about this later—is a massive problem for the record industry and in Australia, which had a good creative base, I think what we are beginning to see is that that creative base is becoming decayed and, as John Kennedy said, we shall see in a year's time but it does not look very good at all.

  355. So in essence the Competition Commission's view is a little bit premature that everything is "hunky-dory"?
  (Mr Mills) I think, strangely enough, they looked at it for quite a considerable time but I happen to feel that Australia and New Zealand—and New Zealand is a smaller market, of course—I think the representations which the British Government made to them were right, and America, for that matter, that they took a hasty short-term view which I think is going to be to the detriment of the local industry.

Mr Butterfill

  356. In your evidence to us, which is about prices, you say, "a higher level of service is provided in the UK than in the US" in the sale of CDs. What sort of service is actually required to sell a CD? We just go into the shop and pick it off a shelf and buy it?
  (Mr Deacon) I do not think it is so much that, Mr Butterfill. It is before that takes place. What we are saying is that in the United Kingdom record companies actually deliver to the retailers around the country. In fact, what tends to happen in America is that they actually collect them from a base because of the large volume, so they can collect large quantities. The delivery takes place over here to all the retailers around the country, whereas in America the collection takes place by the wholesalers themselves. That is the difference.

  357. So the delivery is direct to the retailers here?
  (Mr Deacon) Yes.

  358. But is that not because we have very powerful retailers, people like W H Smith and Our Price and that sort of thing? They are going to demand that you deliver to them, are they not?
  (Mr Deacon) In fact, every retailer, be he in John o'Groats or wherever, gets delivery, so there is no differentiation with W H Smith, as it were. All retailers get deliveries by record companies.

  359. What proportion do you sell through wholesalers? Virtually none, is that right?
  (Mr Kennedy) No, a large percentage is sold through wholesalers. There is one particular company which would describe itself as more sophisticated than the wholesaler. It is called the EUK and it supplies Woolworths, Asda and Tesco's. About 22 per cent. of the business is done through them. In terms of the services, we have a sales team that goes round and services each of the retail outlets in the United Kingdom. We give an astonishing 24-hour delivery in order that a customer can get a record he wants at very short notice and also the retailer does not have to hold extensive stock. We will take returns where records have not sold, and we will take back records described as faulty.


 
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