Examination of Witnesses (Questions 349
TUESDAY 27 APRIL 1999
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 CDsthe same
artist, same music, the same length of timeand 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.
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.
Piracyand we can talk about this lateris 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
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 Zealandand New Zealand is a smaller market,
of courseI 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.
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
(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
(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
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.