Supplementary memorandum submitted by
the British Phonographic Industry
EVIDENCE FROM BEGGARS BANQUET
Following the recent select committee hearing
on parallel imports in which I participated, I thought it would
be useful to write to you to express in headline terms why the
introduction of international exhaustion, should the UK Government
support this initiative, would be so disastrous for British music.
1. THE BRITISH
(a) The British music industry is a world-wide
success out of all proportion to the size of our market.
(b) Independentsindigenous companies
which create employment and pay taxes principally in the UKrepresent
around one quarter of the market, yet are responsible for 40 per
cent of new UK artists achieving gold sales status.
(c) The British music industry is very competitive,
invests to a large extent in new talent, and contributes significantly
to the commercial and cultural well-being of the country.
(d) Independent record companies are only
(e) Crucially, independents sub-licence
overseasthey are not multinationals. Sub-licensed
overseas products (from which record companies receive only a
royalty) being imported at the expense of normal margin UK sales
would put them out of business.
(f) Overseas sales allow independents to
surviveno copyright creator can break even out of the UK
2. THE OVERSEAS
(i) Exchange rates are an artificial
and misleading translation mechanism for price comparisons.
(ii) Anyone who travels to the US knows that
in the marketplace £1 = $1.
(iii) It is only front line product that is cheaper
in the USthe UK has a far larger range of mid and budget
price product. The average trade price of a CD in the UK is £5.00
compared to a full price level of around £9.00.
(iv) The US being a larger market has obvious
economies of scale.
(v) Tax is excluded from US shop prices but included
in UK prices.
(i) The story is still unwindingit's
too early to tell.
(ii) Price cutting has been very selective.
(iii) Sanitythe best music chain in the
countryhas been selling $20 imports at a $30 domestic price.
(iv) Australia is not comparable to the UK in
that its indigenous market is not so significant.
3. THE EFFECT
(a) Experience has shown that cost-savings
by retailers will not be passed onto consumersthey
take the increased margin, partly to compensate for less favourable
purchase terms (lack of returns allowances, co-op advertising,
(b) The UK industry lives with cheap EEC
imports, caused by exchange rate levels, which have not resulted
in lower prices.
(c) The beneficiaries of imports are the
middle men and the carriers. Once they have taken their margin
any price differentials with developed markets are relatively
(d) Most music has a short shelf life. A
new record may live for five weeks, five months if it is lucky.
A new car or medicine may have a market for five years or much
more. Investment in music marketing is therefore extremely heavily
front-loaded, creating an opportunity for importers to freeload
or piggy back on star releases.
(e) UK record companies, independent or major,
are working hard on developing new markets, mainly in Eastern
Europe, parts of South East Asia and the third world. Due to the
low standard of living in these markets, we have to price at a
heavily discounted rate to allow our music to be heard and to
create salesfor example, we are being told we cannot price
our CDs in Russia at higher than $5.
However, if these CDs are imported to the UK,
we will have no choice but to cease working these markets. We
will either have to put up prices to an uneconomical level, or
terminate our licenses and availability. This benefits no-one.
THE UK EXIST
(a) Piracy runs at 33 per cent of the world
music businesswhen this company had a number one album
with Prodigy in 28 countries, our Russian number one was created
by 10,000 legitimate CD sales and an estimated 120,000 pirate
(b) Pirate copies are now virtually indistinguishable
from legitimate ones.
(c) With a greater volume of imports, enforcement
will become impossible.
(d) The worst piracy blackspots are on the
EU's doorstepRussia, Ukraine, etc.
(a) If parallel import restrictions are removed,
imports will increase dramatically, mainly from developing markets.
(b) This will not result in reduced UK shop
(c) This will result in less music being
made available in those markets, and at a higher price, producing
a contrary effect.
(d) Reduction in business will threaten the
existence of UK independents, the lifeblood of the UK music industry.
(e) It will restrict investment in new music
and restrict diversity.
(f) It will create unemployment in this and
(g) It will reduce income to artists, since
sales will be from low royalty territories.
My personal belief is that the internet and
the global market will level worldwide prices to within 10 per
cent either way of US levels within five years in any event. I
view this as being healthy and sustainable. The shock effect of
an imposed and non-organic price levelling regime would be disastrous
and, ultimately, unnecessary, because the market will find its
level in a natural progressive manner which the industry will
be able to adapt to.
13 May 1999