Select Committee on Trade and Industry Minutes of Evidence


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 INDEPENDENT MUSIC INDUSTRY

    (a)  The British music industry is a world-wide success out of all proportion to the size of our market.

    (b)  Independents—indigenous companies which create employment and pay taxes principally in the UK—represent 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 marginally profitable.

    (e)  Crucially, independents sub-licence overseas—they 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 survive—no copyright creator can break even out of the UK market.

2.   THE OVERSEAS PRICE COMPARISON

    (a)  The US.

      (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 US—the 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.

    (b)  Australia

      (i)  The story is still unwinding—it's too early to tell.

      (ii)  Price cutting has been very selective.

      (iii)  Sanity—the best music chain in the country—has 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 OF PARALLEL IMPORTS

    (a)  Experience has shown that cost-savings by retailers will not be passed onto consumers—they take the increased margin, partly to compensate for less favourable purchase terms (lack of returns allowances, co-op advertising, etc).

    (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 minimal.

    (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 sales—for 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.

    (F)  IT IS WORTH CLARIFYING THAT MOST OVERSEAS SALES ARE LICENSED AND LOCALLY MANUFACTURED, NOT EXPORTED.

    (G)  MANY IMPORTS INTO THE UK EXIST AT THE MOMENTGENERALLY IN SPECIALIST PRE-RELEASE REPERTOIRE, INVARIABLY AT A HIGHER PRICE THAN THE EVENTUAL DOMESTIC RELEASE.

 4.  PIRACY

    (a)  Piracy runs at 33 per cent of the world music business—when 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 ones.

    (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 doorstep—Russia, Ukraine, etc.

5.  CONCLUSIONS

    (a)  If parallel import restrictions are removed, imports will increase dramatically, mainly from developing markets.

    (b)  This will not result in reduced UK shop prices.

    (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 related industries.

    (g)  It will reduce income to artists, since sales will be from low royalty territories.

6.  CODA

  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



 
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Prepared 8 July 1999