FEDERAL COURT OF AUSTRALIA
Australian Competition & Consumer Commission v Universal Music Australia Pty Limited [2001] FCA 1800
TRADE PRACTICES – restrictive practices – proceedings for pecuniary penalty brought against each of two major record companies and executives of them in respect of refusal to supply retailers who dealt in imported compact discs following the legalisation of parallel importing – whether each record company had substantial degree of market power as a result of the need for retailers to stock chart music and back catalogue titles, notwithstanding market share of approximately 15% - whether record companies took advantage of market power in refusal of supply – whether contravention of s 46 or s 47 of the Trade Practices Act 1974 (Cth)
TRADE PRACTICES – restrictive practices – whether each of the record companies contravened s 45 of the Trade Practices Act 1974 (Cth) in requesting action to be taken in Indonesia to restrict supply by Indonesian related companies to wholesalers in Indonesia desiring to sell to Australian retailers
TRADE PRACTICES – restrictive practices – accessorial liability – whether individual respondents knowingly concerned in or party to contraventions by their employer of ss 46 and 47 of the Trade Practices Act 1974 (Cth) – whether evidence of participation sufficed to prove participation in or knowing concern of acts constituting contraventions
Trade Practices Act 1974 (Cth) ss 45(2)(a)(ii), 45(3), 45(4), 45(8), 46, 47(2), 47(3), 47(10), 47(13), 75B
Tru Tone Ltd v Festival Records Retail Marketing Ltd (1988) 2 NZLR 352 at 360 cited
United States v E I du Pont de Nemours & Co 351 US 377 (1956) discussed
United States v Eastman Kodak 853 F Supp 1454 (1994) cited
Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177 applied
Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 178 ALR 253 at 258 applied
D & R Byrnes (Nominees) Pty Ltd v The Central Queensland Meat Export Co Pty Ltd (1990) ATPR 41-028 cited
Australian Competition and Consumer Commission v Boral Ltd (2000) 106 FCR 328 considered
Dowling v Dalgety Australia Ltd (1992) 34 FCR 109 cited
Eastern Express Pty Ltd v General Newspapers Pty Ltd (1992) 35 FCR 43 cited
Standard Fashion Company v Magrane-Houston Company (1921) 258 US 346 considered
SWB Family Credit Union Ltd v Parramatta Tourist Services Pty Ltd (1980) 32 ALR 365 distinguished
Trade Practices Commission v Tepeda Pty Ltd (t/as Metro Motor Market) (1994) ATPR 41-319 distinguished
Hecar Investments No 6 Pty Ltd v Outboard Marine Australia Pty Ltd (1982) 41 ALR 697 cited
Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd (1982) 44 ALR 173 at 191-2 cited
Monroe Topple & Associates Pty Ltd v The Institute of Chartered Accountants in Australia [2001] FCA 1056 cited
News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410 cited
Brunt, “Market Definition Issues in Australian and New Zealand Trade Practices Litigation” (1990) 18 ABLR 86
S. Salop, “The First Principles Approach to Antitrust, Kodak and Antitrust at the Millennium” Antitrust Law Journal (2000) Volume 68 Issue 1, p 187
D Turner, Antitrust Policy and the Cellophane Case 70 Harv L Rev 281 (1956)
R Posner, Antitrust Law: an economic perspective (1976)
Hausman, Leonard and Zona, “Competitive Analysis with Differentiated Products” Annales, D’Economie et de Statistique, 34 (1994).
Kaysen and Turner, Antitrust Policy (1959)
Geroski, Market Dynamics and Entry (1991)
AUSTRALIAN COMPETITION AND CONSUMER COMMISSION v UNIVERSAL MUSIC AUSTRALIA PTY LIMITED (FORMERLY KNOWN AS POLYGRAM PTY LIMITED) & ORS
N925 OF 2000
AUSTRALIAN COMPETITION AND CONSUMER COMMISSION v WARNER MUSIC AUSTRALIA PTY LIMITED & ORS
N924 OF 2000
HILL J
14 DECEMBER 2001
| IN THE FEDERAL COURT OF AUSTRALIA |
|
| N 925 OF 1999 |
| BETWEEN: | AUSTRALIAN COMPETITION AND CONSUMER COMMISSION APPLICANT
|
| AND: | UNIVERSAL MUSIC AUSTRALIA PTY LIMITED (formerly known as PolyGram Pty Limited) (ACN 000 158 592) FIRST RESPONDENT
SUSAN ELIZABETH COHEN SECOND RESPONDENT
CRAIG HANDLEY THIRD RESPONDENT
PAUL DICKSON FOURTH RESPONDENT
|
| DATE OF ORDER: | |
| WHERE MADE: |
THE COURT ORDERS THAT:
1. The matter be stood over to a date to be fixed with counsel to permit argument on the form of the orders to be made and to set a timetable for the filing of such other evidence, if any, as may be desired to be filed on the question of pecuniary penalty.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
| IN THE FEDERAL COURT OF AUSTRALIA |
|
| NEW SOUTH WALES DISTRICT REGISTRY | N 924 OF 1999 |
| BETWEEN: | AUSTRALIAN COMPETITION AND CONSUMER COMMISSION APPLICANT
|
| AND: | WARNER MUSIC AUSTRALIA PTY LIMITED (ACN 000 815 565) FIRST RESPONDENT
GARY SMERDON SECOND RESPONDENT
GREGORY MAKSIMOVIC THIRD RESPONDENT
|
| JUDGE: | HILL J |
| DATE OF ORDER: | 14 DECEMBER 2001 |
| WHERE MADE: | SYDNEY |
THE COURT ORDERS THAT:
1. The matter be stood over to a date to be fixed with counsel to permit argument on the form of the orders to be made and to set a timetable for the filing of such other evidence, if any, as may be desired to be filed on the question of pecuniary penalty.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
TABLE OF CONTENTS
INTRODUCTION.......................................................................................................... [1] - [6]
THE COPYRIGHT ACT PROVISIONS...................................................................... [7] - [9]
RELEVANT PROVISIONS OF THE ACT.............................................................. [10] - [12]
THE ACCC CASE AS PLEADED – UNIVERSAL................................................. [13] - [22]
THE ACCC CASE AS PLEADED - WARNER....................................................... [23] - [26]
OUTLINE OF THE MATTERS DEALT WITH IN EVIDENCE........................... [27] - [34]
UNIVERSAL - AUSTRALIAN CONDUCT............................................................ [35] - [96]
The steps taken by Universal after the legalisation of parallel importation..................
............................................................................................................. [35] - [47]
Other meetings attended by Mr Handley and/or Mr Dickson not the subject of pleading but which concerned communication of the PolyGram Policy
.......................................................................................................... [48] - [66]
The evidence relating to the formulation of the Universal policy (also referred to as “the PolyGram Policy”)................................................................................................................... [67]
Implementation of the Policy? The refusal to sell to Mr and Mrs Delaney[68] - [85]
The refusal by PolyGram to sell to Compact City............................... [86] - [96]
UNIVERSAL OVERSEAS CONDUCT - PREVENTING THE EXPORT OF RECORDINGS FROM INDONESIA TO AUSTRALIA.............................................................................. [97] - [109]
WARNER OVERSEAS CONDUCT - PREVENTING THE EXPORT OF RECORDINGS FROM INDONESIA TO AUSTRALIA.................................................................................................... [109] - [114]
WARNER – AUSTRALIAN CONDUCT............................................................. [115] - [136]
The Warner trading terms threat......................................................... [115] - [118]
Action taken by Warner in refusing supply – the closure of the Raiders’ account[119] - [136]
EVIDENCE CONCERNING THE MARKET FOR CDS IN AUSTRALIA - GENERAL[137] - [140]
IMPORTERS (TEMPO)...................................................................................... [141] - [155]
THE RETAIL MUSIC MARKET – ITS STRUCTURE, PARTICIPANTS AND OPERATIONS [156] - [288]
Sanity................................................................................................ [157] - [158]
The significance of chart music and back catalogue......................................... [159]
Substitutability and customer behaviour.............................................. [160] - [167]
Wholesale unit cost variations prior to parallel importing...................... [168] - [171]
Trading terms between the major record companies, including Universal and Warner and major retailers, such as Sanity and HMV............................................................... [172] - [173]
The 1996 Warner price increase........................................................ [174] - [182]
The hypothetical consequence of one of the record companies increasing their prices [183] - [186]
Marketing and promotion – customer buying preferences.................... [187] - [190]
HMV................................................................................................ [191] - [197]
The reaction of HMV to parallel importing..................................... [193] - [196]
Warner trading terms with HMV - before and after parallel importing......... [197]
Big W............................................................................................... [198] - [205]
Target............................................................................................... [206] - [211]
Kmart............................................................................................... [212] - [218]
JB HiFi.............................................................................................. [219] - [229]
Fish Records..................................................................................... [230] - [237]
Colonel Clint’s Crazy Bargains Pty Ltd (“Clints”)............................... [238] - [243]
Collectors Corner and Second Spin................................................... [244] - [250]
Wow Records and Wow Music......................................................... [251] - [257]
Angel Records and related companies................................................ [258] - [261]
Evidence of Universal Activities.......................................................... [262] - [284]
Advertising by wholesalers................................................................. [285] - [288]
CONCLUSIONS FROM THE EVIDENCE ON MARKET............................... [289] - [344]
Distribution........................................................................................ [298] - [299]
Wholesalers....................................................................................... [300] - [301]
Retailers........................................................................................................ [302]
Music retail chains............................................................................. [303] - [306]
Sanity........................................................................................................ [303]
Leading Edge............................................................................................ [304]
HMV............................................................................................ [305] - [306]
Diversified retailers............................................................................ [307] - [310]
Coles Myer Limited Group........................................................................ [307]
Big W....................................................................................................... [308]
JB HiFi and other diversified retailers............................................. [309] - [310]
Non-traditional retailers................................................................................. [311]
Categories of customer.................................................................................. [312]
Product differentiation and chart music............................................... [313] - [319]
Price and trading terms...................................................................... [320] - [323]
Discounts and allowances.................................................................. [324] - [327]
Parallel importation - an alternative source of supply........................... [328] - [331]
Disadvantages to the retailer of parallel importing................................ [332] - [335]
Non-price competition....................................................................... [336] - [337]
Marketing and promotion................................................................... [338] - [343]
Artist and repertoire investment...................................................................... [344]
ECONOMIC EVIDENCE..................................................................................... [345] - [401]
Market Definition............................................................................... [349] - [351]
The tests to establish market power.................................................... [352] - [369]
The state of competition in the market................................................ [370] - [372]
The countervailing power of retailers.................................................. [373] - [374]
The claimed indicia of market power as suggested by Mr Ergas - General...............
......................................................................................................... [375] - [382]
Product differentiation and substitution - the significance for market power[383] - [388]
Concentration and its significance on market power........................ [389] - [390]
Barriers to entry............................................................................ [391] - [396]
Retailing and the effect on market power.................................................... [397]
The significance of “free riding”...................................................... [398] - [400]
Other matters on which expert evidence was given..................................... [401]
THE CASE UNDER s 46....................................................................................... [402] - [445]
General.............................................................................................. [402] - [403]
Power in a market............................................................................. [404] - [438]
Was there a “taking advantage” of market power?.............................. [439] - [441]
Purpose............................................................................................. [442] - [445]
THE CASE UNDER s 47....................................................................................... [446] - [485]
General............................................................................................. [446] - [457]
Must there be a specifically identified competitor?............................... [458] - [459]
Was there a purpose or effect of substantially lessening competition?.......................
......................................................................................................... [460] - [485]
THE CASE UNDER s 45 - THE OVERSEAS CONDUCT................................. [486] - [498]
General............................................................................................. [486] - [495]
The proscribed purpose................................................................................. [496]
Was there a substantial lessening of competition brought about as a result of the arrangement entered into?..................................................................................................... [497] - [498]
ACCESSORIAL LIABILITY................................................................................ [499] - [530]
The requirements of s 75B................................................................. [500] - [501]
Mr Handley....................................................................................... [502] - [510]
Mr Dickson....................................................................................... [511] - [517]
Ms Cohen......................................................................................... [518] - [527]
Mr Smerdon and Mr Maksimovic of Warner..................................... [528] - [530]
CONCLUSION....................................................................................................... [531] - [532]
| IN THE FEDERAL COURT OF AUSTRALIA |
|
|
|
| JUDGE: | |
| DATE: | |
| PLACE: |
INTRODUCTION
1 The Australian Competition and Consumer Commission (“ACCC”) seeks pecuniary penalties and other relief in two proceedings brought by it under the Trade Practices Act 1974 (Cth) (“the Act”). The first, (N925 of 1999), is a proceeding against Universal Music Australia Pty Limited (“Universal”); Ms Susan (“Sue”) Cohen, at relevant times Director of Legal and Business Affairs for Universal; Mr Craig Handley, at relevant times its General Manager, Sales; and Mr Paul Dickson, at relevant times the Group Managing Director, Music Operations. The second, (N924 of 1999), is a proceeding against Warner Music Australia Pty Limited (“Warner”); Mr Gary Smerdon, at relevant times the Finance and Business Affairs Director of Warner; and Mr Greg Maksimovic, at relevant times the NSW State Manager of Warner.
2 The two proceedings were heard together. However, much of the evidentiary material, so far at least as it concerned the market for recorded music in Australia and expert economic evidence, was common to both proceedings and hence was treated as evidence in the two proceedings. Not all the evidence admitted in respect of the conduct of the corporate respondents was admitted against the individual respondents.
3 Universal was formerly named PolyGram Pty Limited. It changed its name as a result of a merger in March or April 1999 between what may be referred to as PolyGram and Universal. Prior to that merger there was a company known as “Universal Music Australia” which had, as will be seen, approximately 4% to 6% of the recorded music market in Australia. It was in no way related to the entity PolyGram Pty Limited, which marketed recorded music under the PolyGram label. A consequence of the merger was to bring together the two labels of Universal and PolyGram, with the original PolyGram company (PolyGram Pty Limited) changing its name to “Universal Music Australia Pty Limited” and, at least for practical purposes, the company originally marketing recorded music under the Universal label (Universal Music Australia) ceasing to trade. To avoid confusion, the original Universal company will be here referred to as “6% Universal”. The company originally named PolyGram Pty Limited and which is now the first respondent will be here referred to as “PolyGram” when reference is made to events up to and including the merger and as “Universal” when reference is made, either to events post merger, or when reference is made to its position as a respondent in the present proceedings.
4 Each proceeding is concerned with conduct which is alleged to contravene the Act and which related to the marketing in Australia by Universal and Warner of compact discs (“CDs”). The background to each is the amendment of the Copyright Act 1968 (Cth) (“the Copyright Act”) in 1998 by the Copyright Amendment Act (No 2) 1998 (Cth) (the relevant amendments are here referred to as “the Copyright Amendments”) to make it possible, legally, for the importation into Australia of CDs from other countries, so long as they did not infringe the copyright laws of the country in which they were manufactured. Prior to the Copyright Amendments the importation into Australia of CDs manufactured outside Australia (at least where copyright protection was available in Australia) without the licence of the owner of copyright in Australia was an infringement of copyright and an offence. Such imports were and are popularly referred to as “parallel importing”. However, as and from 30 July 1998, as a result of the Copyright Amendments, but subject to the provisions of the Copyright Act, parallel importing was, generally speaking, no longer illegal, at least so long as the imported CD did not infringe the copyright laws of the country in which it was manufactured. The present law is set out later in these reasons. Those CDs which were able to be imported legally into Australia without the consent of the Australian copyright owner are here referred to as “non-infringing copies”. Those which were not, because they were manufactured overseas without the licence of the copyright owner, are here referred to as “infringing copies”. Where in these reasons reference is made to the legalisation of parallel importing that reference is intended to refer to the legalisation of the importation into Australia and without consent of the Australian copyright owner of non-infringing copies.
5 It is not surprising that the legalisation of parallel importing into Australia was not greeted with enthusiasm by those who manufactured and sold CDs in Australia with the consent of the copyright owner for Australia. Whereas prior to 30 July 1998 these manufacturers (and both Universal and Warner were such manufacturers) had a statutory monopoly on the manufacture in Australia and thus wholesale sale of CDs as a result of the copyright protection they enjoyed, that statutory monopoly substantially disappeared and the prospect opened of the importation into Australia for sale by others of non-infringing copies that were effectively the same as the Australian manufactured CDs. The importation could be effected by those who wished to sell the non-infringing copies by wholesale to record retailers or by the retailers themselves for sale to the public.
6 It is well known that the record companies in Australia lobbied long and hard to have the amendments to the Copyright Act defeated in Parliament. In that they were not successful. However, they did succeed in having the amendments passed in a form which, to some extent at least, rendered the position of the importer somewhat uncertain. The uncertainty arose because of the requirement of the amendments that it would continue to be an infringement of copyright in Australia to sell imported CDs (and other musical works, such as records and cassettes) unless the importer or vendor was able to establish that the musical work was manufactured with the licence of the copyright owner overseas. Given that the question of who the owner of copyright might be in other countries is not a matter of public record and given also that many of the record companies are members of international groups of companies, where the ownership of the relevant copyrights may be in the hands of more than one company in the group situated, perhaps, not in the country where the CD was manufactured, but in rather more obscure locations which international taxation laws might render advantageous, the burden of proof placed upon the importer or vendor to show the imported copy was a non-infringing copy might well be thought to be difficult if not impossible to satisfy. Indeed, as will be seen, the effect of the legislation and particularly the burden of proof provisions made it not unlikely that the manufacturers of CDs in Australia might, with little reason to believe it to be the case, allege that CDs imported or sold were infringing copies and thus stop the sale of what were alleged to be, although in fact were not necessarily, infringing copies.
THE COPYRIGHT ACT PROVISIONS
7 Under the Copyright Act, copyright will subsist at the least in both the words and the music of a musical work which is embodied in a CD. Such copyright is infringed if the work is reproduced on a sound recording. Likewise, copyright may subsist in the recording itself. It will be an infringement of a relevant copyright if a person not the owner of the copyright does anything in Australia without the licence of the copyright owner which the Copyright Act stipulates that the copyright owner has the exclusive right to do: ss 36 and 31 of the Copyright Act. It will thus be an infringement in Australia to reproduce a musical work as a sound recording, to reproduce a sound recording or to sell or distribute for trade the sound recording, without the licence of the relevant copyright owner. It also constitutes an infringement of copyright to import into Australia a CD for the purpose of selling it, where, if the importer had manufactured the CD in Australia, that manufacture would constitute an infringement, unless the CD imported is a “non-infringing copy of a sound recording”: s 44D. “A non-infringing copy” is defined in s 10AA of the Copyright Act to mean:
“… [a copy] made by or with the consent of:
(a) the owner of the copyright or related right in the sound recording in the country (the copy country) in which the copy was made; or
(b) the owner of the copyright or related right in the sound recording in the country (the original recording country) in which the sound recording was made, if the law of the copy country did not provide for copyright or a related right in sound recording when the sound recording was made; or
(c)…
(2) If the sound recording is of a work that is a literary, dramatic or musical work in which copyright subsists in Australia, the copy is a non-infringing copy only if:
(a) copyright subsists in the work under the law of the copy country; and
(b) the making of the copy does not infringe the copyright in the work under the law of the copy country; and
(c) the copy country meets the requirements of subsection (3).”
[Subsection (3) is generally concerned with whether the country is a party to the international copyright convention or a member of the World Trade Organisation.]
8 Section 130A of the Copyright Act provides that in an action for infringement involving a copy of a sound recording:
“… it must be presumed that the copy is not a non-infringing copy unless the defendant proves that the copy is a non-infringing copy.” (emphasis added)
9 Each of the present cases is concerned with steps alleged to have been taken by Universal and Warner respectively to deter importers and others from parallel importing in the period shortly after the Copyright Amendments were passed. In general terms it is alleged that each engaged in conduct which constituted a breach of ss 45, 46 and 47 of the Act. Each denies that such conduct as it engaged in was a contravention of these sections. It will be convenient, before considering the evidence led in the cases, first to set out the relevant provisions of the Act said to have been contravened and then to outline the cases brought against each corporation (and its respective officers or employees) as pleaded.
Relevant Provisions of The Act
10 Section 45 relevantly provides as follows:
“45 Contracts, arrangements or understandings that restrict dealings or affect competition
…
(2) A corporation shall not:
(a) make a contract or arrangement, or arrive at an understanding, if:
(i)…
(ii) a provision of the proposed contract, arrangement or understanding has the purpose, or would have or be likely to have the effect, of substantially lessening competition; or
(b) …
(3) For the purposes of this section and section 45A, competition, in relation to a provision of a contract, arrangement or understanding or of a proposed contract, arrangement or understanding, means competition in any market in which a corporation that is a party to the contract, arrangement or understanding or would be a party to the proposed contract, arrangement or understanding, or any body corporate related to such a corporation, supplies or acquires, or is likely to supply or acquire, goods or services or would, but for the provision, supply or acquire, or be likely to supply or acquire, goods or services.
(4) For the purposes of the application of this section in relation to a particular corporation, a provision of a contract, arrangement or understanding or of a proposed contract, arrangement or understanding shall be deemed to have or to be likely to have the effect of substantially lessening competition if that provision and any one or more of the following provisions, namely:
(a) the other provisions of that contract, arrangement or understanding or proposed contract, arrangement or understanding; and
(b) the provisions of any other contract, arrangement or understanding or proposed contract, arrangement or understanding to which the corporation or a body corporate related to the corporation is or would be a party;
together have or are likely to have that effect.
…
(8) This section does not apply to or in relation to a contract, arrangement or understanding, or a proposed contract, arrangement or understanding, the only parties to which are or would be bodies corporate that are related to each other.
…”
11 Section 46 relevantly provides as follows:
“46 Misuse of market power
(1) A corporation that has a substantial degree of power in a market shall not take advantage of that power for the purpose of:
(a) eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market;
(b) preventing the entry of a person into that or any other market; or
(c) deterring or preventing a person from engaging in competitive conduct in that or any other market.
(1A) For the purposes of subsection (1):
(a) the reference in paragraph (1)(a) to a competitor includes a reference to competitors generally, or to a particular class or classes of competitors; and
(b) the reference in paragraphs (1)(b) and (c) to a person includes a reference to persons generally, or to a particular class or classes of persons.
(2) If:
(a) a body corporate that is related to a corporation has, or 2 or more bodies corporate each of which is related to the one corporation together have, a substantial degree of power in a market; or
(b) a corporation and a body corporate that is, or a corporation and 2 or more bodies corporate each of which is, related to that corporation, together have a substantial degree of power in a market;
the corporation shall be taken for the purposes of this section to have a substantial degree of power in that market.
(3) In determining for the purposes of this section the degree of power that a body corporate or bodies corporate has or have in a market, the Court shall have regard to the extent to which the conduct of the body corporate or of any of those bodies corporate in that market is constrained by the conduct of:
(a) competitors, or potential competitors, of the body corporate or of any of those bodies corporate in that market; or
(b) persons to whom or from whom the body corporate or any of those bodies corporate supplies or acquires goods or services in that market.
(4) In this section:
(a) a reference to power is a reference to market power;
(b) a reference to a market is a reference to a market for goods or services; and
(c) a reference to power in relation to, or to conduct in, a market is a reference to power, or to conduct, in that market either as a supplier or as an acquirer of goods or services in that market.
…
(7) Without in any way limiting the manner in which the purpose of a person may be established for the purposes of any other provision of this Act, a corporation may be taken to have taken advantage of its power for a purpose referred to in subsection (1) notwithstanding that, after all the evidence has been considered, the existence of that purpose is ascertainable only by inference from the conduct of the corporation or of any other person or from other relevant circumstances.”
12 Section 47 relevantly provides as follows:
“47 Exclusive dealing
(1) Subject to this section, a corporation shall not, in trade or commerce, engage in the practice of exclusive dealing.
(2) A corporation engages in the practice of exclusive dealing if the corporation:
(a) supplies, or offers to supply, goods or services;
…
on the condition that the person to whom the corporation supplies, or offers or proposes to supply, the goods or services or, if that person is a body corporate, a body corporate related to that body corporate:
(d) will not, or will not except to a limited extent, acquire goods or services, or goods or services of a particular kind or description, directly or indirectly from a competitor of the corporation or from a competitor of a body corporate related to the corporation;
…
(3) A corporation also engages in the practice of exclusive dealing if the corporation refuses:
(a) to supply goods or services to a person;
…
for the reason that the person or, if the person is a body corporate, a body corporate related to that body corporate:
(d) has acquired, or has not agreed not to acquire, goods or services, or goods or services of a particular kind or description, directly or indirectly from a competitor of the corporation or from a competitor of a body corporate related to the corporation;
…
(10) Subsection (1) does not apply to the practice of exclusive dealing constituted by a corporation engaging in conduct of a kind referred to in subsection (2), (3), (4) or (5) or paragraph (8)(a) or (b) or (9)(a),
(b) or (c) unless:
(a) the engaging by the corporation in that conduct has the purpose, or has or is likely to have the effect, of substantially lessening competition; or
(b) the engaging by the corporation in that conduct, and the engaging by the corporation, or by a body corporate related to the corporation, in other conduct of the same or a similar kind, together have or are likely to have the effect of substantially lessening competition.
…
(13) In this section:
(a) a reference to a condition shall be read as a reference to any condition, whether direct or indirect and whether having legal or equitable force or not, and includes a reference to a condition the existence or nature of which is ascertainable only by inference from the conduct of persons or from other relevant circumstances;
(b) a reference to competition, in relation to conduct to which a provision of this section other than subsection (8) or (9) applies, shall be read as a reference to competition in any market in which:
(i) the corporation engaging in the conduct or any body corporate related to that corporation; or
(ii) any person whose business dealings are restricted, limited or otherwise circumscribed by the conduct or, if that person is a body corporate, any body corporate related to that body corporate;
supplies or acquires, or is likely to supply or acquire, goods or services or would, but for the conduct, supply or acquire, or be likely to supply or acquire, goods or services; and
…”
THE ACCC CASE AS PLEADED – UNIVERSAL
13 The further amended statement of claim commenced by alleging the existence of both a wholesale recorded music market and a retail recorded music market. Alternative markets were also alleged, for example, a wholesale and retail CD market, a wholesale and retail “chart music market”, and a wholesale and retail “chart CD market”. It is not necessary to explore the alternative markets pleaded as ultimately the parties were agreed that the relevant markets were wholesale and retail markets for recorded music, of which CDs formed by far the greatest segment. By the time the events in question occurred, vinyl recordings and tape cassettes were, or were in the course of becoming, obsolete. The downloading through computers of digital information which translated into music and the burning of CDs from that information were both technologies in their infancy and for present purposes may be disregarded.
14 The pleading contained a number of prefatory averments. For example, it was alleged that Universal was a supplier of CDs in the wholesale market and held between 15-17% of market share. Other suppliers in that market included Warner with approximately 17-18% market share, Sony Music Entertainment Australia Pty Limited with approximately 25-27% market share, EMI Music Australia Pty Ltd with approximately 17% market share and BMG Australia Limited with approximately 7-8% market share. These five companies are referred to in these reasons as “the five major record companies”.
15 Next it is alleged, and of this there is no dispute, that Universal was part of a worldwide group of companies which at the relevant time manufactured and distributed CDs under the PolyGram label. PT PolyGram Indonesia (a company incorporated in Indonesia and relevant to the conduct later described as the “overseas conduct”) was also a member of that group. Each of the other four companies making up the five major record companies was likewise a member of a worldwide group manufacturing and selling throughout the world CDs under the Sony, Warner, EMI and BMG labels.
16 Reference is then made to what the pleading describes as “chart music”, that is to say music that is highly popular, although usually for a relatively short period, such that it appears on a chart, for example, “the Top 40”. It is said to be invariable or, alternatively, common that Universal had at any time some of its catalogue music on such a chart. For chart music in the Universal catalogue Universal was, before parallel importing was legalised, the sole source of supply in Australia. It is said to have been at all material times a “practical or commercial necessity” for all but a few music retailers to be able to obtain supplies of CDs, particularly chart music, from Universal. However, such small independent wholesalers as there were could not supply, at least prior to parallel importing being legalised, an exclusive or comprehensive range of CDs in the Universal catalogue.
17 The amendments to the Copyright Act, it is averred, brought about the situation that independent wholesalers (including Tempo International Pty Ltd (“Tempo”)) could import and offer for sale non-infringing copies. This, it is said, would be likely to affect competition by bringing about a downward pressure on prices of both chart music and back catalogue CDs. However, there were still difficulties for wholesalers to import non-infringing copies.
18 The particular behaviour alleged to contravene the Act is dealt with in the further amended statement of claim under a number of headings. The first heading is “Action against Australian retailers stocking non-infringing copies”. It relates to communications with Leading Edge Music Group Pty Ltd (“Leading Edge”); Claric 218 Pty Ltd and Palm Lake Pty Ltd, trading as Sanity Music (“Sanity”); Fish Records Pty Ltd (“Fish Records”); Centrey Music Pty Ltd, trading as Mall Music (“Mall Music”); and JB HiFi Pty Ltd (“JB HiFi”) to the effect that Universal reserved the right to review the terms and conditions of its trading relations if the other party chose to import non-infringing copies of their catalogue. For convenience, this group of allegations may be referred to as “the trading terms communications”. In fact the reference to Claric 218 Pty Ltd and Palm Lake Pty Ltd should have been a reference to a group of companies including Claric 218 Pty Ltd and Palm Lake Pty Ltd.
19 The second conduct complained of is the adoption by Universal of a policy and subsequent communication of that policy to a number of retailers. The policy complained of concerned retailers which stocked imports consisting, inter alia, of non-infringing copies and included a term that Universal might cease to have a trading relationship with them should they choose to stock imports which were non-infringing copies of Universal’s catalogue. For convenience this group of allegations may be referred to as “the Universal policy”.
20 The next conduct complained of is that Universal ceased to supply a number of retailers because they had acquired imported non-infringing CDs from a competitor of Universal. The retailers named are Trevan Enterprises Pty Ltd, trading as Bull Creek Compact City (“Compact City”); West’s (Burwood) Pty Ltd, trading as West’s Sound Bar and Ultimate Music Pty Ltd (“Wests” and “Ultimate Music”). In both cases it is alleged that trading relations were ultimately resumed.
21 The next conduct complained of relates to what is said to be “Curtailing imports of non-infringing copies from Indonesia”. There is averred to have been an arrangement or understanding entered into by Universal (with any one or more of a Mr Shih, PT Warner Music Indonesia, PT Sony Music Entertainment Indonesia, PT PolyGram Indonesia, PT EMI Indonesia and the relevant BMG trading entity in Indonesia) to prevent or minimise the export from Indonesia to Australia of the then PolyGram range of recorded music. In the context of the claim against Universal this is referred to as “the overseas conduct”.
22 The individual respondents are alleged to have aided or abetted the contraventions of the Act by Universal or to have been knowingly concerned therein, by reason of conduct which is particularised in the further amended statement of claim and need not be set out here.
THE ACCC CASE AS PLEADED - WARNER
23 The preliminary averments in the Warner proceedings are in similar terms, save that it is alleged that Warner had at relevant times a share of approximately 17-18% of the wholesale market by sales value.
24 It is alleged that Warner likewise entered into an arrangement or understanding with any one or more of Mr Shih, PT Warner Music Indonesia, PT Sony Music Entertainment Indonesia, PT PolyGram Indonesia, PT EMI Indonesia and the relevant BMG trading entity to prevent or minimise the export from Indonesia to Australia of Warner recorded music. That alleged conduct in the context of Warner is here referred to as “the overseas conduct”.
25 In addition it is alleged that Warner took action against Australian retailers who stocked non-infringing copies. The conduct complained of is said to be the following:
· That on or about 20 July 1998 Warner advised its Australian retailers that if they ceased to source recorded music in the Warner catalogue exclusively from Warner or sourced supply through parallel imports of non-infringing copies, Warner would no longer provide trading benefits, including support of sales and promotional teams, extensive point of sale material, television, print and radio advertising and promotional visits. This conduct is here referred to as the “Warner trading terms threat”.
· That Warner closed the account of Raiders Music Pty Ltd (“Raiders”) because Raiders had stocked parallel imports of non-infringing copies. It is alleged that the account was ultimately reopened.
26 The amended statement of claim alleges that the individual respondents aided and abetted Warner in the alleged conduct or were knowingly concerned therein. Particulars are supplied of what is said to give rise to their accessorial liability.
OUTLINE OF THE MATTERS DEALT WITH IN EVIDENCE
27 There was a veritable flood of evidence at the hearing which came to resemble a royal commission into the record industry in Australia. In essence the evidence fell into three categories.
28 First, there was evidence led as to the conduct alleged. That evidence was admissible only against the particular record company with which it was concerned and not against the other. Not all the evidence led against the particular record companies was admissible against the individuals charged with accessorial offences. The discussion hereafter outlines the evidence as admitted against the corporate respondents. It does not necessarily reflect the findings I would make on the more limited evidence admitted against the particular individual respondents. That is dealt with later in these reasons.
29 Secondly, there was evidence which went to the market, that is to say the record industry as a whole. Of course the separation between conduct evidence and evidence going to the market was not a true dichotomy. However, it can be said generally that the market evidence was admissible against all parties in all proceedings.
30 Finally, there was economic evidence. For the ACCC evidence was given by Mr Henry Ergas and for both Universal and Warner evidence was given by Professor Hausman. That evidence was likewise admitted not only as against the corporate respondents, but also against the individual respondents.
31 Although virtually all of the evidence in chief (other than the large amount of documentary evidence which was tendered, mainly by agreement but subject on many occasions to relevance) was on affidavit, many of those who gave evidence were cross-examined at some length. Generally it can be said that there was little cross-examination directed at the credit of the witnesses.
32 None of the individual respondents gave evidence, a matter which drew comment from senior counsel for the ACCC on the basis of “the rule in Jones v Dunkel”. That rule, applicable, without question, in civil cases generally, requires that the failure of a party, in the absence of an excuse, such as the unavailability of the witness, to call evidence from a person whose evidence might be expected to throw light on an issue in the case permits the inference to be drawn that the evidence of that party would not assist the case of the party not calling the witness. The failure to call the witness also enables the trial judge more comfortably to draw an inference that was otherwise open.
33 Where the proceedings are criminal (and the present proceedings are not; they are proceedings, inter alia, for the recovery of a civil penalty) it might be thought that the failure of the accused to go into evidence should not lead to the drawing of Jones v Dunkel inferences. After all it is clear that a witness can not be compelled to give evidence which is likely to incriminate the witness or expose the witness to a penalty. However, even in criminal cases it has been held that the failure of the accused, who is in a position to deny, explain or answer the evidence adduced by the prosecution, to give evidence will permit the jury to draw inferences adverse to the accused more readily: see Azzopardi v R (2001) 179 ALR 349, affirming Weissensteiner v R (1993) 178 CLR 217. A fortiori, therefore, the failure of a respondent to proceedings for recovery of a pecuniary penalty to give evidence on a matter relevant to an issue in the proceeding and deny, explain or answer the evidence adduced against the respondent will permit the Court more readily to draw the inferences to which the decision in Jones v Dunkel refers.
34 It will be convenient to set out the evidence under the three headings – Conduct, Market and Economic evidence. Matters of conduct will be separated into the evidence so far as concerned Universal and the evidence as concerned Warner. The conduct evidence hereafter discussed is not, however, limited to the conduct relied upon by the ACCC and pleaded by it as constituting breaches of the Act, although the evidence discussed includes that conduct. That part of these reasons as relates to conduct will deal also with other conversations, meetings or actions of the respondent record companies so far as those conversations, meetings or actions throw light on the purposes of those companies, or so far as evidence of them is otherwise necessary to place in context the conduct alleged to breach the Act. Unless otherwise indicated it may be taken that I have accepted the witnesses whose evidence is referred to as witnesses of truth and that the summary of evidence which follows represents my findings of primary fact. Indeed, it was only rarely that it could be suggested that evidence of a witness should, or even could, not be accepted.
UNIVERSAL - AUSTRALIAN CONDUCT
The steps taken by Universal after the legalisation of parallel importation
35 The potential amendments to the Copyright Act were the subject of concern to the record industry and the executives of Universal. PolyGram reacted as soon as 15 July 1998 by contacting a number of retailers to advise them of what Universal, in response to a notice given by ACCC (“the s 155 notice”), referred to as the “PolyGram Policy”. So on that date Mr Handley spoke with Mr Gavin Ward of Leading Edge, a cooperative buying group at that time consisting of some 200 independent retailers to which, among others, Mr and Mrs Delaney of Wests and Ultimate Music belonged. It is admitted in the response to the s 155 notice that Mr Ward was advised that PolyGram reserved its right to review the terms and conditions of its trading relationship with Leading Edge if it chose to parallel import PolyGram recordings. Universal’s response continues by asserting that Leading Edge reserved its right to parallel import but would continue to obtain PolyGram titles from PolyGram and inform it if it proposed to parallel import PolyGram recordings. Mr Ward did not give evidence.
36 The same day there was held what a minute recording the meeting refers to as the “parallel importing brainstorming session” (“the brainstorming meeting”). Present at that meeting were, among others, Mr Dickson and Mr Handley. There was discussion of a threat from three countries, Indonesia, Malaysia and Thailand. Both Indonesia and Malaysia manufactured CDs but needed “regional permission” to do so. The threat from imports was seen to be “mainly chart pop product, big name acts and a little classics”. The “cool” product would come in through Europe and would be quite expensive and thus not a threat.
37 The meeting then considered the probable reaction of retailers. It was appreciated that HMV was a “major threat”, presumably because it was big enough to withstand pressure, but also might well be large enough to import itself. Mr Handley was of the view that a 2% discount HMV was receiving on advertising should be dropped and the original trading terms (which presumably did not include that discount) should be reinstated. Big W was of less concern because it had no intention to import. It did not have the necessary “systems” to do so. On the other hand it was thought that Sanity, Central Station and Sound Waves would import. Most of the discussion, at least as recorded, focused upon a variety of discounts that could be given to retailers to allow them to reduce price. Price reduction was something that customers would expect. Those present noted that the ability of retailers to purchase at least some titles on the basis of sale or return (“SOR”) was something that could not be matched should retailers import recordings. A decision was made to mark Australian CDs as “Made in Australia” and to include an extra bar code to enable Australian product to be recognised.
38 On 16 July 1998 Mr Dickson and Mr Handley met with Mr Agostinelli of Sanity in Melbourne. As at mid-1998 a Mr Hazell of HMV estimated Sanity’s share of the market to be about 20%. As soon as the legislation was amended Mr Dickson had immediately phoned Mr Agostinelli and asked him not to do anything until they met, as PolyGram had a “better deal” for Sanity. According to the response to the s 155 notice, PolyGram, at the meeting which followed, reserved the right to review the terms and conditions of its trading relationship with Sanity if that company chose to parallel import PolyGram recordings. Mr Agostinelli recalled the meeting but made no reference to the “reservation” on the part of PolyGram. His evidence was that he had told Mr Dickson and Mr Handley that while Sanity would like to support the record companies, the market would be more competitive with people sourcing products from anywhere around the world and in consequence achieving lower retail prices. Mr Dickson had said that before Sanity sourced products from overseas PolyGram would match any prices that Sanity could obtain through purchasing in Asia.
39 Approximately a week later there were negotiations between Sanity and PolyGram concerning trading terms. Mr Handley and Mr Dickson told Mr Agostinelli that if Sanity were to go offshore it might lose the current trading terms it had in place. By trading terms Mr Agostinelli understood such advantages as sale or return as well as other benefits Sanity enjoyed. Mr Agostinelli responded by saying that if the market became competitive, Sanity would have no choice but to source product overseas.
40 On 20 July, according to the responses to the s 155 notice, a meeting took place between Ms Cohen, Mr Handley and Mr Dickson in an attempt to develop for PolyGram a policy in response to the Copyright Amendments. All available legal options were to be evaluated and consideration given “as well” to addressing concerns about piracy. Just what legal options are referred to is not clear.
41 The next day Mr Handley and Ms Allen (the NSW State Manager of PolyGram) met with Mr Nemeth of Fish Records. In 1998 Fish Records had seven retail stores in and around the city and inner suburbs including one at the international airport terminal.
42 According to Mr Nemeth, Mr Handley said that PolyGram’s policy regarding parallel importing was that PolyGram would be prepared to review the terms of the trading relationship if Fish Records chose not to parallel import PolyGram recordings. PolyGram would review advertising subsidies, allowances for returns of unsold recorded music and the level of support provided by sales representatives. However, according to Mr Nemeth’s evidence in chief, Mr Handley said:
“… if you parallel import, PolyGram would also review its terms of trading and it may cease to have a trading relationship with you. We won’t look upon you with any favours if you parallel import. It’s not good for the industry.”
43 Mr Nemeth chided Mr Handley not to threaten him, saying that he was happy with the PolyGram marketing strategy and at that point would not parallel import. However, he said that if his direct competitors, eg HMV, did, Fish Records would be obliged to take a look at it, but otherwise would stay on the fence.
44 It was put to Mr Nemeth in cross-examination that Mr Handley had in the passage quoted above said “could” and not “would”. Mr Nemeth indicated that he could no longer say which word had been used. However, he agreed that the meeting had ended amicably. I think it is more probable than not that Mr Handley used the word “would”.
45 On or about the same day (21 July 1998) Mr Dickson phoned Mr Bonouvrie of Mall Music. Mr Bonouvrie did not give evidence. Mall Music had approximately 0.3% of the retail market. According to the response to the s 155 notice Mr Dickson outlined the PolyGram Policy noting that PolyGram reserved its right to review the terms and conditions of its trading relationship should Mall Music choose to parallel import. It is said that Mr Bonouvrie was advised that PolyGram reserved its right to cease supplying PolyGram recorded music to Mall Music if that company chose to parallel import PolyGram’s recordings. It is said that Mall Music responded by reserving its right to do so.
46 A memorandum dated the same day from Mr Dickson to Mr Handley and others recorded the results of the brainstorming meeting. Mr Dickson advised that Big W and Sanity were not the threat it was originally thought they would be and that HMV would set the pace on parallel importing. Mr Dickson indicated that his view was that Universal could hold its price per dealer on all price points, but would have to wheel and deal and play to Universal’s strengths, not its weaknesses. He predicted that turnover would be down 7% for 1998.
47 Also on 21 July 1998 Mr Handley had a telephone conversation with Mr Durrant of JB HiFi. That company had stores in Victoria, NSW and Queensland with about 4 to 5% of the Australian music market, at least in Victoria. The company held itself out as a specialist in back catalogue material across all genres of music. Approximately 85% of its wholesale purchases were with the major record companies. According to the response to the s 155 notice, Mr Handley advised that PolyGram reserved the right to review terms of trade and to cease supplying PolyGram Australia recorded music if JB HiFi chose to parallel import. Mr Durrant is said to have likewise reserved the rights of JB HiFi to parallel import. Mr Durrant could not recall the terms of such a conversation, although recollected that he had had conversations with Mr Handley about parallel imports. In cross-examination by senior counsel for Universal Mr Durrant said that he had done nothing different from what he ordinarily would have done as a result of the conversation. Given the admission by Universal in the response to the s 155 notice I would find that Mr Handley did have a conversation with Mr Durrant in the terms admitted.
48 In addition to the meetings already noted, either or both of Mr Handley and Mr Dickson met with or spoke by telephone to executives of other retailers to make known their attitude to the importing of parallel imports. Among the executives with whom they met or spoke by telephone to were, according to admissions made by Universal, executives of Hockey Enterprises Pty Ltd, trading as Record Market (“Record Market”); Chatminister Pty Ltd, trading as Toombul Music Centre; The Music Shop; Vox Retail Group Limited (“Vox”); Woolworths Ltd, trading as Big W (“Big W”); Target Australia Pty Ltd (“Target”); Kmart Australia Ltd, trading as Kmart (“Kmart”); and One Stop Entertainment Pty Ltd. The responses to the s 155 notice refer to these meetings as having discussed the substance of a PolyGram Policy involving either or both of the reservation of the right to review the terms of the PolyGram trading relationship or the reservation of a right to cease supplying in the event that the retailer chose to parallel import. Apart from the tender of the responses, no affidavit or oral evidence was called by the ACCC concerning these meetings other than the evidence of Mr Holman and Ms Kells of Big W.
49 According to the evidence of Mr Hardiman of Target there was no meeting with him as suggested by the responses to the s 155 notice. Rather, it would seem, the meeting referred to was with his assistant Mr Shane Richardson. Mr van Wessem of Kmart did not recall a conversation on the date on which Universal suggested in its responses to the s 155 notice such a conversation had taken place, but did have a conversation some days later.
50 Among the most important of the meetings at which the policy was communicated, was a meeting with Mr Hazell of HMV held on 23 July 1998. Mr Hazell, who was a most impressive witness and whose evidence I wholly accept, swore affidavits in the proceedings and was cross-examined upon them.
51 HMV Media Group PLC was until March 1998 a wholly owned subsidiary of EMI PLC (“EMI”), an international record company. HMV Australia Pty Ltd, trading as HMV (“HMV”), was and is a wholly owned subsidiary of HMV Media Group PLC. In March 1998, as a result of a management buy out, the interest of EMI was reduced to approximately 45%. EMI continued to have representation on the board of HMV with one director.
52 In 1998 HMV had a little under 10% of the recorded music market in Australia, with a retail turnover of around one hundred million dollars. By the year 2000 HMV had 29 stores located in Queensland, Victoria and New South Wales (it can be assumed that the situation was not materially different in mid-1998). It is a specialist music retailer seeking to cater to a wide range of interests amongst record buyers. Mr Hazell was Managing Director of HMV from 1 January 1998 and continued in that position until 30 April 2000. Prior to that time he had had extensive experience in the recorded music industry, both with EMI and as a consultant to various record companies.
53 According to the Universal responses to the s 155 notice, Messrs Dickson and Handley met with Mr Hazell on 23 July 1998 and advised him that PolyGram reserved the right to review the terms of trading with HMV and to cease supplying HMV if it engaged in parallel importation of PolyGram labels. Mr Hazell in his affidavit evidence said that he arranged to meet with the senior people of the various record companies to discuss reviewing the terms and conditions of trading following the changes in the copyright law. A meeting with Messrs Dickson and Handley took place at some time in July. At that meeting Mr Dickson expressed his disappointment at the copyright law being amended, noting that the introduction of parallel imports was very bad for the industry and absolutely the wrong decision. Mr Dickson then said:
“Our legal advice is that we can withdraw supply of PolyGram product to any retailer who parallel imports as we do not have a dominant market share in the industry.”
54 Mr Hazell questioned this advice, pointing out to Mr Dickson that effectively PolyGram had a monopoly on PolyGram artists and that there would be no other source if a retailer wished to purchase a locally released artist who had not been released in another territory. The discussion continued with the participants referring to particular retailers who were likely to parallel import, including Big W. Mr Dickson then said that PolyGram would have absolutely no hesitation in stopping supply to Big W or to any other retailers that chose to parallel import, particularly if PolyGram did not see the retailer as contributing to the industry. He said that he felt confident that he could legally do so.
55 Mr Hazell signalled to Mr Dickson that HMV would purchase locally unless the commercial benefits were so attractive or HMV felt it was becoming uncompetitive in the minds of consumers. Mr Dickson then replied that he hoped PolyGram would be able to support HMV so that it did not feel it necessary to parallel import as PolyGram viewed HMV as integral to the development of the Australian music industry.
56 At this point Mr Handley or another PolyGram representative took out of a bag three CDs and placed them on a table, saying that the particular CDs, which were imported CDs, had been purchased by HMV prior to the change of the copyright law. A Mr Wright of HMV then checked the CDs on a computer system and on returning to the meeting said that they had been originally sold to HMV by PolyGram through the PolyGram indent system, ie they were not imported in breach of the then copyright law.
57 The meeting concluded with Mr Hazell stating that he would not wish to jeopardise the mutual support that characterised the relationship between PolyGram and HMV for the sake of importing one or two products. However, he said that if HMV were exposed it would have no hesitation in exercising its legal right to import.
58 Mr Hazell was cross-examined about this meeting. He said that either at this meeting or at another meeting there had been some discussion about the fact that those who imported CDs were “picking the eyes out of the product”, that is to say, only importing and selling the big selling items. Such retailers, it was said, gave nothing back to the industry and had an opportunity to be able to “free ride” on the marketing of the record company. Mr Hazell emphasised that he had told the PolyGram representatives that HMV would not want to jeopardise the relationship with PolyGram for the sake of importation of one or two titles. Mr Hazell, not surprisingly, did not remember all the detail of what was said at this meeting. Indeed, it would seem that the subject of parallel importing had arisen at this and other meetings, including meetings prior to the amendment of the copyright law.
59 Mr Hazell accepted that one of the PolyGram representatives could have said at this meeting that free riding by retailers could alter PolyGram’s business structure. At this or some other meeting there was discussion that PolyGram’s ability to invest in new artists could be inhibited and that the market could contract.
60 There is little doubt that Mr Hazell’s overall aim in negotiations with PolyGram and indeed other record companies both before and after the legalisation of parallel importing was to extract the best trading terms he could for HMV. Indeed, from the time he arrived in Australia, he was charged with the responsibility of improving the trading terms which HMV obtained from the record companies.
61 Although HMV had taken a publicly neutral position on the proposed amendments to the copyright law it had, Mr Hazell said, no firm plans to take advantage of the ability to parallel import. On the other hand, HMV was possibly in a position to be able to exploit its position in the market place with the record companies to its best advantage by seeking out better trading terms (eg discounts, rebates, etc) in return for agreeing not to import, although reserving the right to do so. HMV did, however, investigate the feasibility of importing non-infringing copies.
62 In around September 1998 Mr Hazell prepared a “Strengths, Weaknesses Opportunities and Threats” (SWOT) analysis of sourcing products from overseas. In that analysis Mr Hazell noted that the HMV percentage margin, although not necessarily its cash margin, could increase if it imported CDs and that retail price would fall. He noted, further, that HMV could use parallel importing as a lever to negotiate better discounts in the long term. Among the difficulties he saw with parallel importation from the point of view of HMV were the fact that not the whole range was available in Asia, that there were extended lead times, that there could be “increased out of stocks”, that importation from Europe where the range was greater would result in a higher retail price or lower margin, that there would be no contribution from the local suppliers towards marketing, no returns available for imported product and there would be a need for storage and distribution infrastructure. The strategy he arrived at by the time he had completed the analysis was to look to the various record companies for their support to neutralise the threat they and HMV faced from parallel importation. The feasibility of HMV importing non-infringing copies was deferred until at least into the new year. To this end Mr Hazell had various meetings with record industry executives.
63 In October 1998 Mr Hazell noted that Big W was, for the first time, advertising 5 PolyGram chart CDs for under $20. He immediately wrote to executives of the major record companies, other than PolyGram but including Warner, seeking to enquire what they intended to do to defend the margin and position on price of HMV. In the case of PolyGram, he had further discussions with either or both of Mr Handley and Mr Dickson and learned that Big W had been able to price the CDs offered for sale at reduced prices because of some bulk purchase deal done between Big W and PolyGram.
64 Later in the month Mr Hazell wrote to the major record companies, including the President of PolyGram in Australia, Mr Read, referring to a television program in which, apparently, HMV had been criticised for not responding to the opportunities by then available to parallel importers. Mr Hazell noted the inference that HMV competitors were selling CDs (presumably imported) at reduced prices. He stated that HMV had continued to support local supply despite the fact that competition had increased but now needed to respond if it was to maintain its strength in the retail market. He said that his commitment to PolyGram had always been to discuss all options before importing and accordingly he would be calling upon Mr Read to establish what alternatives were open to HMV. Mr Read, however, was at the time out of the country and unavailable. Because by then PolyGram was in the course of merger, no meeting took place.
65 In January 1999 HMV reached an interim agreement with PolyGram on trading terms. The interim agreement was to continue for about three months. The change in terms coincided with PolyGram by then matching its trading terms to those of 6% Universal as a result of the merger. By the time agreement was reached in June for an annual agreement HMV was obtaining more generous trading terms than it had previously obtained.
66 In February 1999 HMV made available for sale in its flagship stores in Sydney, Melbourne and Brisbane some 1000 or more copies each of three titles which had been imported. Sales of these titles were good in comparison with sales of locally manufactured product and in the result HMV imported a similar quantity of another 15 titles. The fact that HMV intended to give customers a choice of imported versus local titles was the subject of a press release at the time. These initial titles were largely Sony titles imported from an HMV related company in Canada. The selection of Sony titles appears to have been intended to put pressure on Sony to improve the trading terms that company had with HMV. Pressure was placed on Sony at this time with HMV threatening that without agreement it would increase parallel imports of Sony labels. The pressure was successful. Around the same time HMV threatened not to carry product of Festival Mushroom Group as a result of an arrangement at that time apparently entered into between Sanity and Festival Mushroom Group relating to Internet downloading of artists contracted to Festival Mushroom Group.
67 The response to the s 155 notice admits that on 22 July 1998 a policy which Universal refers to as “the PolyGram Policy” was agreed at a meeting attended by Ms Cohen, Mr Handley and Mr Dickson. Legal advice had by then been taken and consultations had taken place with the PolyGram Regional Head Office in Hong Kong. As set out in the response the policy was as follows:
“PolyGram would be prepared to review the terms of its trading relationship with those retailers with whom PolyGram had an existing relationship who chose not to parallel import PolyGram recordings;
The commercial matters in respect of which PolyGram may be prepared to review its trading relationship would include:
(a) advertising subsidies to be provided by PolyGram to retailers,
(b) the allowances which would be provided by PolyGram for returns of unsold PolyGram Australia recorded music,
(c) the level of support that PolyGram sales representatives would provide to retailers,
(d) the time within which PolyGram Australia recorded music must be paid for by the retailer,
PolyGram may also review the terms of its trading relationship with those retailers who chose to parallel import PolyGram recordings.
PolyGram may cease to have a trading relationship with those retailers with whom PolyGram (sic) who chose to parallel import PolyGram recordings.”
Implementation of the Policy? The refusal to sell to Mr and Mrs Delaney
68 Mr and Mrs Delaney were involved in two retail outlets. The one outlet, trading as West’s Sound Bar, was a music store in Westfield Shopping Mall at Burwood. It was under the proprietorship of West’s (Burwood) Pty Ltd and was run by Mrs Delaney, who also controlled West’s (Burwood) Pty Ltd. In the year to 30 June 1998 that store had a retail turnover of around $800,000, of which approximately 90% resulted from sales of recorded music. Total music purchases were approximately $500,000. Approximately 20% of the stock sold was sourced from PolyGram, although the percentage varied depending upon perceptions of popularity. At the time the events here narrated occurred, Westfield Shopping Mall was in the course of closing down, presumably for renovations. In the result, the store itself was to close down and its closure was advertised around mid-August of 1998.
69 Approximately one third of sales by Wests was of chart music. The balance represented back catalogue. International (alternative musical traditions) and classical titles represented one third of sales and the remaining one third was mainly popular music and jazz. The international titles were not available in Australia through the major record companies but were purchased through small independent wholesalers including, at the relevant time, Tempo.
70 Mr Delaney was a director of Ultimate Music. He was not a director of Wests. Mrs Delaney, however, was a director and shareholder of Ultimate Music, although apart from an involvement in the company when it originally opened for business she did not thereafter appear to have much involvement at all. Ultimate Music operated a music retail store located in Carlingford Court shopping mall. That store was run by Mr Delaney. Recorded music comprised 70% of the turnover of Ultimate Music and of this 70%, 30% represented chart music. Turnover for recorded music was, as put to Mr Delaney in cross-examination and which he accepted, approximately $200,000. Stock purchases were made as to 15% from Leading Edge and the balance from the major record companies. In the 1998 year Ultimate purchased stock from PolyGram of approximately $55,000 to $60,000, which represented approximately 20% of recorded music sales. This would suggest turnover of a somewhat higher figure. Nothing, however, turns upon the accuracy of these figures.
71 On 25 August 1998, Ms Allen phoned Mrs Delaney to inform her that Wests’ account with PolyGram and the account of Ultimate Music with PolyGram had been closed. It seems that Ms Allen had, the preceding Saturday, discovered that Wests had sold some imported CDs. There had been a trap purchase involving two titles, being respectively, “Grease, 20th Anniversary edition” and “Postcards from Heaven” by The Lighthouse Family.
72 Ms Allen said, according to Mrs Delaney, that Mrs Delaney was within her legal rights to sell imported CDs but that PolyGram had taken a stance to support those who supported Australian products and manufacturers. She said that it was Mrs Delaney’s choice to purchase the imported CDs but that PolyGram had made a decision. Ms Allen said that the Credit Manager of PolyGram would contact Mrs Delaney. Mrs Delaney complained that the sale of imported titles had nothing to do with the Carlingford store. Ms Allen, however, said that the two accounts were closed because Mrs Delaney was a director of both Wests and Ultimate Music. It may be noted that there was no suggestion made by Ms Allen to Mrs Delaney that the imported titles were infringing copies or, in normal parlance, “pirated”.
73 According to Mrs Delaney, she then telephoned her husband and told him the substance of the conversation. Senior counsel for Universal cross-examined Mr Delaney to make the point that Mr Delaney had referred to the particular titles in a conversation he narrated at hearing as having taken place with his wife on the day the trap purchase occurred, that being the first time he had learned that his wife had purchased parallel imported titles, yet in his affidavit he had stated that he had been told by his wife that she had purchased these titles, being imports, from Tempo some time earlier. I have no doubt that Mr Delaney was confused by the cross-examination, but I accept him to be a witness of truth. The detail of when he first knew is an irrelevant detail for present purpose.
74 The same day as Mr Delaney learned from his wife that the Ultimate account was closed, he called the Credit Manager of PolyGram and requested that an account be opened for Ultimate guaranteed by him. The Credit Manager refused, indicating that PolyGram did not have to supply anyone any more because Ultimate could source its product elsewhere. Mr Delaney said that this was impossible, that he had done nothing wrong and that Ultimate had never had an imported or pirated CD in the shop. He was told that there was nothing that could be done. There was to be a meeting with Mr Handley when a decision would be made.
75 That day Mr Delaney made contact with the ACCC. It would seem that he spoke directly to Professor Fels and an arrangement was made for him to meet officers of the ACCC the following afternoon. On 26 August 1998 Mr Delaney faxed to Mr Dickson a letter, which so far as is relevant said:
“On Saturday August 22 at approx. 1.15pm Joanne Tomic a previous employee of Polygram Pty. Ltd. and a part time employee of ours, observed Ms. Wendy Allen, the Sales Manager of Polygram, in the music store known as Wests Sound Bar, 5 Westfield Shoppingtown, Burwood N.S.W. Ms Allen left the store and very soon after a person unknown purchased two cd’s both of which are distributed by Polygram.
The customer was then seen by Joanne Tomic to give the cd’s to Wendy Allen who was waiting outside the store next door.
The next contact with Ms. Allen was on Tuesday morning when she telephoned my wife and in a very matter of fact way informed her that the account was closed due to the fact that the cd’s purchased on Saturday were imported and that although she was legally within her rights Polygram had to take a stand.
My wife was further informed that because of her involvement in the business at Carlingford, by way of directorship we presume, as she has no responsibility other than that, that the account was also closed.
I spoke later in the day with the Credit Manager Mr. Amar Khoury who reconfirmed Ms. Allens stand and at that time advised me that he was no longer obliged to supply me with goods as they could be sourced from another area. What a contradiction….”
76 Mr Delaney asked that there be reconsideration of the closing of the account, suggesting that both principle and legality were at issue. The letter indicated that Professor Fels had become involved and prominence was given to the fact that a copy of the letter had been sent to Professor Fels.
77 The next day Mr Dickson replied to Mr Delaney. There is a strong inference, more readily to be drawn in the absence of Mr Dickson giving evidence, that the suggestion, apparently made by PolyGram for the first time, of copyright infringement was prompted by the knowledge that the ACCC had become involved. The letter, which was headed “Wests Sound Bar Lighthouse Family ‘Postcards from Heaven’” said, relevantly:
“You are of course aware of the recent changes to the Copyright Act 1968 which permit the direct importation into Australia, for commercial sale, of non-infringing copies of CDs made overseas. Both the Australian Government and the ACCC have spent considerable time and resources explaining the so-called benefits of this new legislation to the Australian consumer, and particularly the retailer, with the emphasis on encouraging you, the retailer, to import from overseas (and not to buy locally).
This new parallel import regime provides a substantial opportunity for counterfeit stocks to come into Australia. Legitimate stocks may be mixed with infringing copies, giving the already overburdened Customs Department, a virtually impossible task of detection.
The new Legislation now places the onus on the importer/the retailer to be responsible and to satisfy all the legal requirements set out in the Legislation in every respect. Unless a retailer can do this to the satisfaction of the copyright owner (with this title, being PolyGram, for example) and also to the satisfaction of any court, then the copy will be deemed an infringing copy.
You’ve chosen to import from the South East Asian Region, a part of the world where piracy is rife and where there is a high likelihood of product being ‘infringing’. This should make you more vigilant and require you to be more cautious. A handwritten note from an exporter won’t help you to satisfy the onus of proof required by law.
Just by looking at the product you’ve imported and without yet the benefit of technical reports (currently being done), anyone can easily see that the copy purchased from your Wests Sound Bar compared to a legitimate copy, is ‘suspect’, for example:
Different wording on disc
Logos in different position and size
Different type and font
Poor artwork quality
Tray different colour
Incorrect spelling
The list could be longer.”
After a further discussion of the copyright law with emphasis on the burden of proof being upon Mr Delaney to establish that the imported recordings had been made with the licence of all relevant copyright owners in the place of manufacture, the letter continued:
“As to your point concerning the Carlingford business, we have no obligation to supply anyone.
You do have an alternative. You can stop importing PolyGram repertoire from these suppliers. We would rather have you as a customer, than as a litigant.”
78 It may be remarked that the tests when carried out in fact demonstrated that the copy of the Lighthouse album was not an infringing copy at all. There is no reference in the letter to the Grease CD. A suggestion was put to Mrs Delaney in cross-examination that the Grease album contained a CD-ROM track and was thus not protected by the Copyright Amendments, which apply only to audio. She said that by the time Mr Dickson’s letter was received, the Grease CDs had been sold to members of the public and that she was unable to say whether the album did in fact contain a CD-ROM track. The copy that was the subject of the trap purchase was not the subject of any test report in evidence and in fact had been lost. In cross-examination Mrs Delaney was asked whether she was aware that the CD had a CD-ROM track, to which she replied, “presumably, yes”. Immediately after that answer, however, she said that she had never looked at the “slick”, being the insert. The person who could have given evidence one way or the other as to whether the recording purchased did have a CD-ROM track on it was Ms Allen. There was no explanation of the failure to call Ms Allen.
79 I do not find it necessary to determine whether the particular album was or was not pirated. I accept the evidence of Mrs Delaney that the issue of piracy had never emerged until the letter of Mr Dickson to her husband and that the possibility of piracy had not occurred to her before that. She had purchased the title from Tempo whom she regarded as reputable, although she had heard that proceedings had been brought at some time or times against that company for infringement. I am of the view that the issue of infringement, raised for the first time by Mr Dickson in the letter, was prompted by the intervention of the ACCC. It is also possible that the reference to “litigant” in the last line of the extract of the letter set out earlier was a reference not to litigation for infringement, but a reference to the possibility of litigation under the Act. However, it is unnecessary to resolve that.
80 It might be here noted that there was tendered without objection a statement signed by Ms Allen and dated 21 September 1998, well after the complaint to the ACCC, in which she says that her visit for the purpose of the trap purchase was prompted by a report from two members of her staff saying that they had seen PolyGram CDs at Wests which they suspected were pirated CDs. The document (hardly a contemporaneous record, as suggested by counsel for Universal and most likely prepared for the purpose of litigation involving the ACCC after it had become involved) states that the CD booklet with the title “Postcards From Heaven” was of poor quality and had a statement that it was “made in Indonesia for the Indonesian market only” and that the other CD was “the Grease Soundtrack which contained CDRom tracks”. No attempt was made, as I have said, to call Ms Allen to permit cross-examination on the unsworn statement. I would accordingly not rely upon what was in it. Ultimately there is little relevance anyway whether the Grease CD was or was not an infringing copy. In my opinion, the evidence as a whole suggests that the attitude of those who were concerned with trap purchases was that any imported CD was to be treated as an infringing copy.
81 The next day, Mr Delaney replied to Mr Dickson pointing out again, inter alia, that Mr Delaney had no connection with Wests, that he was loyal to the Australian record companies and that his good reputation and image had been severely damaged. He asked that the account facilities of Ultimate Music be restored, rather than it be punished by association because of “some others alleged wrongdoing”.
82 On 2 September 1998 Mr Delaney telephoned Mr Ward, the General Manager of Leading Edge, and complained that he was sick of being pushed around when he had done nothing wrong. Mr Ward reassured him that the problem would be fixed within a couple of weeks. For Mr Delaney this was not soon enough. He told Mr Ward that he contemplated legal proceedings against PolyGram. Twenty minutes after that conversation Mr Ward rang back to tell Mr Delaney that his account had been reinstated. That was confirmed the next day by Ms Allen who, in evidence not admitted against either Mr Handley or Mr Dickson, said that the reinstatement was on condition that he did not sell any imported stock and that he did not supply Wests with PolyGram stock. Mr Delaney conceded that Ms Allen may have said something about pirated or “dodgy” CDs at this meeting. I attach no significance to that.
83 Wests’ account was never re-opened and in any event the store closed down on 27 September 1998, so Mrs Delaney made no attempt to get more stock from PolyGram.
84 On 9 September 1998 Mr Delaney attended the annual Leading Edge conference. Mrs Delaney did not. The subject of parallel importing arose. This was not surprising since a note had been sent to all Leading Edge stores on 26 August 1998 indicating that “a record store was found to be stocking and selling parrell (sic) import product. As a result their account with that particular supplier has been closed and is ceased trading. Just for your information, this is only a word of advice, not a ruling”. A reference was made in passing to Mr Delaney’s experience with PolyGram in comments, perhaps jokingly, from Mr Ward. This and the fact that Mr Delaney around the same time spoke to a number of retailers is relied upon by the ACCC as demonstrating that the news of what happened to the Delaneys swiftly spread to those in the retail market, thereby signalling that PolyGram would take action to cancel accounts if retailers (or at least small retailers) sold imported titles from the PolyGram label. So too is the fact that the Sydney Morning Herald on 9 September 1998 published an article referring to the fact that the Delaney account had been closed. The trade journal “Inside Retailing” of 21 September 1998 also gave prominent coverage to the closure of the two accounts, while noting that the Ultimate Music account had thereafter been opened.
85 On 22 September 1998 Ms Cohen wrote a memorandum, addressed to Mr Handley and others, referring to the article in the Sydney Morning Herald and press interest in parallel importing. The letter read relevantly as follows:
“… I think it is opportune that we again remind our State Managers and account managers of the commercial rationale of our strategy.
The recent changes to the Copyright Act 1968 permit the direct importation into Australia, for commercial sale, of non-infringing copies of CDS made overseas.
This obviously has significant commercial ramification on PolyGram Australia’s music business.
Briefly, we should constantly remember:
Piracy
· This new parallel import regime provides a substantial opportunity for counterfeit CDs to come into Australia. Legitimate product may be mixed with pirate product, giving the already overburdened Customs Department, a virtually impossible task of detection.
· The penetration of pirate product into the market place, will be to the commercial disadvantage of legitimate retailers and therefor us, as record companies.
· Increased penalties for pirates in the Copyright legislation will have little effect. The cost of piracy to the Australian music industry is currently $10M in lost sales. This cost will increase dramatically. We have seen this to be the case in the last month already.
· Legal costs in fighting piracy will be an additional burden on us as a record company.
Onus on Retailer
· The onus is on the retailer / importer to prove that the imported copy is non-infringing.
Retail Market
· In a high risk industry, we need the support of local retailers. Why should be support retailers / importers who seek to undercut our business?
· It doesn’t make commercial sense to invest in marketing and promotional campaigns for our international releases, so that retailers / importers can ‘free ride’. All the monies spent by PolyGram on marketing and promotion would effectively be subsidizing (sic) retailers who don’t buy from PolyGram and who import from overseas. These retailers are not paying or contributing to any marketing or advertising costs, but are taking the benefit of what PolyGram invests and ‘risks’ to promote their own imported sales.
· Most of our revenue is generated from the Top 40 Hits. Parallel imports of these titles will erode our profits, and leave us less to invest and develop new artists (international and local) here in Australia.
· If importing substantially increases, this will force us to hold less catalogue, reduce our advertising and promotional budgets and provide a reduced sales service to retailers. Less revenue, means smaller music business for PolyGram in Australia.
Australian culture
· If our revenue falls due to parallel importing, then our ability to continue to invest in local Australian talent by way of tour support, videos, new signing, will have to be reconsidered.
Returns
· We must be vigilant to ensure we do not accept returns of imported product. This could have a devastating effect on our business.
General
· We must do everything we can to sustain a healthy and growing Australian music industry and not permit the music industry to shrink in size due to opportunistic importers looking at the short term.
· PolyGram Australian (sic) has always taken a long term view in respect of growth and investment in this market. Artists take time to nurture and develop. Development means financial investment and market exposure. PolyGram Australia have been committed to this.
· If we subsidise or support retailers who are importing PolyGram product, this affects PolyGram Australia’s music business
· Our strategy is to recognise the commercial ramifications of the legislation and to take responsible actions to try and combat this. We are not obliged to supply PolyGram product to everyone but can refuse simply on reasonable commercial grounds if we make sure that, in doing so, we are complying with the Trade Practices Act. We can reconsider and state our trading terms with any retailers. We will consider each account and do whatever is commercially necessary to try and protect our business, consistently with our obligations to comply with the Trade Practices Act.
Please ensure that you continue to liaise with Craig Handley, Tim Read, Frank Staebe and myself when you come across parallel imports and / or suspected pirate products, so we can act effectively.”
The refusal by PolyGram to sell to Compact City
86 From 1990 to 1999 Trevan Enterprises Pty Ltd carried on the business of selling cassettes, CDs and accessories at Bullcreek in Western Australian under the name Bull Creek Compact City. Mr Howson was the store manager at relevant times. Recorded music sales accounted for between 80% and 90% of the store’s business. Compact City was one of the top ten independent recorded music retailers in Perth and one of the largest six accounts for PolyGram amongst independent retailers in Perth. The store was a specialty store selling more rare and specialty titles and less chart titles. Nevertheless, half of its sales were chart albums and singles, with the remainder being included in back catalogue. 80% of its sales were sourced from the five major record companies. PolyGram’s accounting records suggested that the purchases from PolyGram for 1998 were approximately $80,000 for singles and albums combined.
87 Even before parallel importing became legal Compact City had ordered titles from overseas, including chart titles not yet released in Australia. Approximately 10% of sales came from imported titles, mainly from a one stop supplier in the United States (“US”), another in the United Kingdom (“UK”) and, for approximately two years, from a Canadian distributor “One Stop”. A one stop supplier is a supplier which offers for sale titles from all the main record companies. At least before the Australian dollar fell steeply, titles could be purchased from Canada and landed at prices slightly less than those prevailing in Australia and could be delivered within approximately four or five days, indeed sometimes faster than the same titles could be delivered after order in Australia. Titles manufactured in Australia could often be purchased overseas, although the double handling and duty made the cost somewhat more than if they had been purchased in Australia.
88 It would seem that at least on some occasions imports prior to 30 July 1998 were in breach of the Australian copyright law.
89 Some time in mid-August 1998 Mr Howson had a discussion with a PolyGram sales representative. The conversation was not admitted in evidence against the individual respondents. The representative said that anyone who parallel imported would be the subject of trap purchases. Mr Howson did not recall if there was at that time any threat to cancel the retailer’s account with PolyGram.
90 Mr Howson, some time before the change in copyright law, endeavoured to purchase from PolyGram copies of an album then on the chart (the artist was Shania Twain and the title “Come on Over”). Because of demand he said that he was unable to purchase any. In consequence he placed an order with a Canadian one stop supplier. The order was fulfilled before 30 July 1998. The importation would have constituted a breach of copyright (even though the shipment was accompanied by a letter and invoice from the supplier to the effect that copyright royalties had been paid) unless the import was made with the licence of the Australian copyright owner. Sale could have been either before or after 30 July 1998. Mr Howson said, and I have no reason to disbelieve him, that he believed that what he had done was legitimate because the title was unavailable (at least to him) in Australia. He had for a number of years imported titles that were not released in Australia without the consent of the Australian licensee and without complaint.
91 On 21 August 1998 Mr Handley sent a fax to Mr Howson advising that there had been a trap purchase of “Come on Over”. Canada was the source of supply. The fax continued:
“Whilst we are aware that parallel importing is now permissable (sic) into Australia, PolyGram has decided not to supply your store until further notice.”
In so far as it is relevant Compact City was selling the title at the same price as locally manufactured CDs.
92 Mr Howson telephoned Mr Handley immediately the fax was received and asked him what was going on. Mr Handley said that there had been a trap purchase and that in consequence the imported Shania Twain CD had been found. He said that PolyGram had a right not to supply the store and that “this” was happening all around Australia. The reference to “this” was probably a reference to trap purchases, although it is possible that it referred to the closure of accounts. Mr Howson complained that he was not asked to explain why he imported the title before the account was closed. Mr Handley replied that “this” was happening all around Australia and that there was no time to ask people for reasons. Mr Handley suggested that Mr Howson put his complaint in writing and that Mr Handley would see what he could do about it. In cross-examination Mr Howson denied that he had told Mr Handley that the title had been imported before the change in the copyright law and that Mr Handley had told him that the importation was illegal. I accept Mr Howson’s denial.
93 On 22 August 1998 Mr Howson wrote, as suggested, to Mr Handley, conveying his disappointment that the account had been closed without his being able to explain the “mitigating circumstances”. He did not deny selling the copy and said that he strongly opposed parallel importing. He wrote that he only imported when products were unobtainable in Australia. The letter then sets out in detail the steps Mr Howson said he had taken to obtain copies of the title in Australia before he had placed the order in Canada. He emphasised that this was an isolated incident and asked that the account be reinstated, with consideration being given to the fact that he had traded with PolyGram from that store for some ten years and overall for some fourteen years. He expressed his regret that the “situation” had happened and offered his word that it would never happen again.
94 Subsequently Mr Howson rang Mr Young, Sales Manager for Western Australia of PolyGram, to enquire whether his account had been re-opened. He was told that it had not been reinstated, but that he, Mr Young, would let Mr Howson know as soon as Mr Young knew. Mr Young suggested Mr Howson write a brief letter indicating that he would not parallel import again and that he would stick by PolyGram’s terms and conditions. In consequence, Mr Howson wrote to Mr Young on 28 August, applying formally for reinstatement of the account so that Compact City could continue to trade with PolyGram. Mr Howson wrote, inter alia:
“We wish to state for the record that we did not knowingly parallel import as we were under the impression the CD in question was unavailable in Australia.
We can only offer our word, in writing, that this situation shall not arise again.”
95 On 1 September 1998 Mr Young telephoned Mr Howson, advising that the account had been re-opened. However, when Mr Howson attempted to place a telephone order the account was still blocked. It took approximately 10 days from the time the account was closed until it was reopened. Thereafter the normal relationship with PolyGram was resumed.
96 On or around 19 October 1998 Mr Howson received new trading terms from PolyGram. The document appears to be PolyGram’s standard trading terms. Under the heading “Imports”, the dealer is reminded that unauthorised importation of copyright records could give rise to civil and criminal prosecution. It is, however, stated that PolyGram reserves the right to change any trading terms (eg discounts or rebates) or not to supply the dealer where he, she or it has imported or proposes to import a substantial quantity of goods from the PolyGram repertoire, rather than obtaining them directly from PolyGram. Any such decision is to be at the discretion of PolyGram and be subject to compliance with PolyGram’s obligations under the Act and any other relevant legislation. In the last section of the document PolyGram reserves the right to suspend or discontinue supplying goods or to refuse to deal with a dealer which engages in activities in breach of or inconsistent with the trading terms.
Universal overseas conduct - preventing the export of recordings from Indonesia to Australia
97 The evidence which was adduced concerning steps taken in Indonesia to prevent the export into Australia of CDs under the PolyGram label has to be seen against the background both of the concern which executives of PolyGram had that parallel imported CDs would damage its Australian business and the steps which were taken by wholesalers and retailers to import CDs in the period between the amendments of the copyright law and the taking of action in Indonesia.
98 It will be recalled that those who participated in the brainstorming meeting on 15 July 1998, to which reference is made above, perceived the “threat” to come from Indonesia Malaysia and Thailand, although only cassettes were manufactured in Thailand. The minutes of that session showed that the preliminary view, at least, was that, of the large retailers, Sanity, Central Station and Sound Waves would import, even if there was less concern about Big W. HMV was seen as “a major threat”.
99 As has already been noted, meetings were scheduled to be held with various retailers with the view to ensuring, as far as possible, that they would not import or purchase imported CDs. Evidence concerning some of those meetings has already been discussed.
100 Further the executives of PolyGram were aware by at least 7 August 1998 that steps were being taken by wholesalers such as Tempo to import from Indonesia, for sale by wholesale, CDs bearing the PolyGram label. Mr Young on that day wrote an e-mail to Mr Handley, noting that Tempo had an order form listing CDs it had available for sale and which were on the Top 40 chart and back catalogue titles, mainly consisting of “Greatest Hits” titles, from the major record companies. These were to arrive by container in Perth the following weekend. By 13 August 1998 Ms Cohen advised the Australian Record Industry Association (“ARIA”) that Tempo had set up an office in Jakarta and was believed to be buying international products direct from Indonesian retailers for export to Australia. She said that PolyGram’s Indonesian company was looking into this further to try to ascertain more details. Evidence which concerns Tempo’s overseas operations is discussed in more detail later at paras 141 to 155.
101 Mr Gani of Central Hiburan, a record distributing company based in Surabaya Indonesia, faxed (it may be inferred) a number of retailers. He obtained their names and addresses from listings in the Australasian Music Industry Directory. One such fax was addressed to Record Market, a retailer in Brisbane. The fax (dated 8 August 1998) offered the services of Central Hiburan to supply Top 40, new release and (in smaller quantities) back catalogue, sourced, it may be assumed, from Indonesia. The fax referred to the fact that restrictions on parallel importing of CDs had just been lifted. The message was accompanied by a price list for the various labels, including both PolyGram and Warner.
102 Record Market forwarded a copy of the fax to PolyGram in Queensland. Mr Wood, the State Manager for PolyGram in Queensland, then forwarded a copy to Mr Handley. Mr Dickson and Ms Cohen also received copies. On 11 August 1998 Ms Cohen sent a copy of the fax to Mr Read and Mr Feeny, Senior Vice President and Regional Controller of PolyGram Far East, asking them whether they could do anything about the fax. Mr Read responded that he would take the fax with him to send it to “Anthony” (Mr Shih) in Indonesia. Mr Shih was the Managing Director of PT PolyGram Indonesia.
103 Ms Cohen spoke to Mr Shih on 12 August 1998. There is no direct evidence of this conversation. According to the response to the s 155 notice, which might be seen to be rather self-serving, it is said that Ms Cohen described the problem of suspected pirate copies of PolyGram recordings being exported from Indonesia to Australia by Central Hiburan and asked how could stock on offer to Australian retailers be legitimate given price levels. It is said that she commented that the prices were suggestive of the CDs being pirated. Mr Shih is said to have replied that he would look into it and reply by letter, indicating that it would be difficult to tell whether the titles were pirated given that importers would not necessarily source PolyGram recordings from PolyGram but from local wholesalers or retailers in Indonesia. It may here be interpolated that the prices quoted by Central Hiburan were consistent with costs said by Tempo to be landed cost. The next day Ms Cohen sent to Mr Shih details of PolyGram’s Australian address and her direct fax details. She wrote that she looked forward to receiving copies of a letter in the course of being sent to Central Hiburan and any other information regarding exports to Australia.
104 On 14 August 1998 Mr Shih sent a fax to Mr Gani in Indonesia, signed by him in his capacity as Managing Director of PT PolyGram Indonesia. He forwarded a copy to Mr Read, Mr Dickson and Ms Cohen. The fax states that it is written by Mr Shih in his capacity as Chairman of the five major record companies, namely Sony Music, Warner, BMG, EMI and PolyGram and in his capacity as the Managing Director of PolyGram Indonesia. The letter is said to represent “our joint position”. The fax reads, relevantly, as follows:
“Further to your recent conversation with Mr. Jusak Irwan Sutionoduring which, he had warned you that export of CDs from Indonesia to Australia is prohibited, I have found further evidence (refer to annex I and II) that you have chosen to ignore this warning and continue to conduct this activity.
May I once again point out to you that products purchased from the 5 major recording companies are only for sales within the Indonesian market, and all products are clearly marked either ‘Manufactured in Indonesia for Indonesian Market Only’, or ‘Special Asian Edition’. Your attempt to export such products to a foreign country is blantantly (sic) in violation of this rule.
Therefore, please be informed that with immediate effect, the joint decision of the 5 major recording companies is to limit supplies to your company as follows:
Compact Discs : Any Single Title : 20 pieces Maximum Limit
Music Cassettes : Any Single Title : 50 pieces Maximum Limit
This decision will remain effective until we find that you have ceased all activities in exporting our products to Australia or any other foreign country.
Should you choose to ignore this final warning once again, we shall be forced to take stronger measures.”
References in the fax to annexures I and II are references to Mr Gani’s letter and price list, respectively.
105 It may be noted that there is nothing in the letter which suggests that Mr Shih’s concern was with counterfeit or pirated copies. Indeed, the letter makes it clear that Mr Gani was purchasing CDs directly from the five major record companies, otherwise the threat that these companies would limit supplies to him would make no sense. As a response to a concern by Ms Cohen about piracy, the letter would hardly have allayed Ms Cohen’s fears (assuming that she had any) concerning piracy. If one accepted that this was Ms Cohen’s concern which she communicated to Mr Gani (and I do not), Ms Cohen’s response might be thought to be somewhat inexplicable. Far from noting that the matter of piracy had not been addressed, Ms Cohen and Mr Dickson as joint signatories expressed to Mr Shih that the ultimate apology from Mr Gani was “a great result” and that Mr Shih’s support and quick action was very much appreciated.
106 The threat appears to have succeeded. Mr Gani wrote to Mr Shih, apologising to the five major record companies for his intention to export CDs and cassettes to Australia and noting that he had faxed another letter to retailers who had received his original fax cancelling and recalling any offer he had made. He guaranteed that no transaction had been or would be conducted outside Indonesia.
107 In a letter dated 4 September 1998 in response to a request of Mr Dickson as to whether the “Postcards from Heaven” album seized from Mrs Delaney’s store was genuine, Mr Shih wrote:
“We have tried to our best to reduced (sic) the possibility of exporting business of our wholesalers, but seems we just couldn’t stop them a hundred percent.”
108 For completeness, it may be noted that Universal in its responses to the s 155 notice suggests that Ms Cohen was somewhat embarrassed at the fact that the record companies had taken joint action. However, she did not give evidence of any telephone conversation to this effect as referred to in the s 155 response. In fact she chose not to give evidence at all.
Warner Overseas Conduct - Preventing the export of recordings FROM INDONESIA to Australia
109 Because the allegations made against Warner relating to overseas conduct are similar to those made against Universal and the Warner actions were precipitated by the same correspondence from Central Hiburan, it is convenient to commence with the Warner overseas conduct before discussing the steps which were alleged to have been taken by Warner in Australia. However, the Warner conduct has, like that of Universal, to be seen against the background of the evidence of what was happening in Australia prior to 8 August 1998.
110 On 10 August 1998 Mr Smerdon sent an e-mail to Sendjaja Widjaja, the Managing Director of Warner Indonesia, with a copy to his counterpart, a Mr Fernandes in Malaysia, noting the repeal of the law prohibiting parallel imports into Australia. He pointed out that the exchange rate situation did not favour importation to Australia from the US or Europe but that the exchange rate of the Australian dollar against the Indonesian Rupiah made Indonesia a major source of supply. He said also that a sales representative had purchased several Indonesian manufactured CDs and that he had received a copy of the Central Hiburan fax, to which reference has already been made, offering to sell to Australian retailers. He noted also that the landed cost of $AUD7.50 referred to in the price list was equivalent to the royalty cost alone. Such imports could be, Mr Smerdon said:
“…extremely damaging to Warner Music Australia’s business in addition to the overall impact on WMI, our employees, artists, publishers etc if we allow this practice to continue.”
111 Mr Smerdon sought Mr Widjaja’s assistance to stop further shipments of Warner product from Indonesia to Australia.
112 Mr Widjaja replied the same day that he was fully aware of what Warner Australia would be facing now that Australia had opened the market to imports. Particularly with the then exchange rate, parallel imports would be a big problem. He said that he had noticed the problem a couple of months before when there was a sudden rise of orders. He said that he had anticipated the problem by controlling the big account orders, such as in Bali, Surabaya and Jakarta, minimising the quantity ordered when it was not normal, refusing to supply titles that had not been released by Warner Music Indonesia, delaying release of major artists for 2 to 3 weeks from the date of international release and inserting stickers in the booklets accompanying CDs showing that the title was marketed and distributed by Warner Music Indonesia. In response to the Central Hiburan fax, Mr Widjaja noted that the order of CDs from that supplier was considered an ordinary order and that he had already warned that organisation not to export or have any overseas accounts with the consequence of termination from Warner Music Indonesia. The e-mail continues:
“The 5 majors will write a strong letter to this wholesaler with the same content as Warner Music Indonesia. So far Mr Hendra Gani told me that he has been approached and no transection (sic) yet with Australian company. He is now fully aware of the sequence of exporting and will follow Warner Music Indonesia policy. Today, we also written (sic) a notice reminding to all wholesalers not to export with the consequences of termination as wholesaler.
I hope our action will temporarily help to minimize the parallel export.”
113 On 11 August 1998 Mr Smerdon replied to Mr Widjaja thanking him for his prompt response “outlining the measures you and the Industry are taking in Indonesia”. He said that he now felt a little more relaxed and that Warner would continue to monitor the situation and advise of any other attempts by distributors to export product to Australia.
114 On 14 August 1998 Mr Widjaja advised Mr Smerdon that the five majors had decided, in addition to giving a termination warning to Central Hiburan, to limit the CD order per title to not more than 20 pieces.
WARNER – AUSTRALIAN CONDUCT
The Warner trading terms threat
115 Change of the copyright laws to permit parallel imports was seen by Warner, as it was seen by Universal, to pose a great threat. Indeed, as early as October 1996, Mr Smerdon had complained in a memo that the Australian Treasury did not understand the record company case that legalising parallel importation would cause damage to the music industry and to Warner. There would be, he said, “chaos in the industry”. He referred to the impact that might be expected in a reduction of sales of local artists (propped up by sales of popular international artists) and the consequences to live venues, the ARIA awards etc. He predicted that retail incentives would cease, inter-company royalty rates may have to be revised upwards, advertising expenditure would be halved, Australian manufacturing operations cut back and “headcount reductions” made at all major record companies. He predicted that total revenues of Warner would fall by 30%, with the major impact being felt at the chart end of the product range.
116 When, ultimately, the legislation was passed (to Mr Smerdon’s express disappointment), he e-mailed his staff noting that for the moment prices and current trading terms would remain as they were, since given the low Australian dollar retailers were not going to run out and import product. He said that:
“Retailers will also have to weigh up the cost of losing product return right privileges, rebate incentives and various promotional support before they consider alternative sources of supply.”
117 On 20 July 1998 a letter was sent by Warner to all retailers under the signature of Mr Harris, the Chairman of Warner. After referring to the change of law and rumours abounding concerning the future role of record companies, Mr Harris wrote that he wished both to outline the Warner position and remind the reader of the substantial benefits of the current trading relationship. Reference is made, inter alia, to commitment to local artists and local manufacturing, support of sales and promotion teams, cooperative advertising, return privileges, favourable credit terms and the provision of point of sale material. Reference is also made to television, print and radio advertising and promotional visits. The letter continued:
“With our market now further exposed to the threat of piracy, it is important you be aware of not only our future intentions, but also the large downside should you wish to alter your source of supply. Such a move will result in us being unable to provide any of the aforementioned trading benefits and will also result in a substantially reduced marketing and advertising spends.”
118 There was some cross-examination of witnesses in the retail side of the industry as to the impact that letter had upon them. Mrs Delaney saw it as a veiled threat, as indeed it was, but it did not deter her from purchasing imported titles. Mr Delaney said he took no notice of it, but then he did not parallel import either. Mr van Wessem of Kmart did not see the letter as a threat, but a position statement by Warner to the industry. Mr Hazell of HMV said that the letter did not deflect him from pursuing the plan he then had to parallel import. Neither he, nor any other witness cross-examined on the subject of the letter, suggested that they had done anything as a result of the letter that they would not have done if they had not received it. Nor was it suggested that they had not done something as a result of the letter that they would have done had they not received it. In particular, no witness was called by the ACCC to say that they were deterred as a result of that letter from themselves importing Warner titles or from purchasing from others who did import non-infringing copies.
Action taken by Warner in refusing supply – the closure of the Raiders’ account
119 Raiders operated retail stores at the Northgate Shopping Centre in Hornsby and Westfield Shoppingtown at Liverpool. At relevant times it also operated temporary clearance stores in Bondi Junction, Chatswood, Brisbane and Tuggerah. The Hornsby Store had originally been run by Edels Music Stores Pty Ltd (“Edels”), a company owned by a Mr Whale. The stock and fittings of that store were, so Mrs Knazko said, purchased in 1998 by a Mr Wilson. It was ultimately the case, it would seem, that the Hornsby store became owned by Raiders in which company Mrs Knazko said she owned two of the three shares. The only relevance of the prior and present ownership lay in an attempt in cross-examination to suggest that Mrs Knazko, who had been General Manager of the Edels chain of nine stores, was in some way a nominee for Mr Whale who had, as a result of the failure of Edels (it closed in January 1998), become bankrupt. The attempt was not successful. I accept Mrs Knazko’s evidence on this, as indeed on all other matters. Mr Whales had, between January and June 1999, been responsible for running Raiders as a salaried employee when Mrs Knazko had been sick, but had, I would find, no equity in Raiders.
120 Mrs Knazko was the Retail Manager of Raiders at relevant times. The company purchased stock, mainly chart, new release and back catalogue music from the major record companies (these accounted for approximately 90% of sales), as well as Festival and Shock Records (“Shock”). Chart music comprised approximately 25% of Raiders’ total sales. It was Mrs Knazko’s business perception, which I accept, that there was a need for Raiders to stock the full range of chart music to meet the demand of her customers and that the stores were heavily reliant on sales of chart music.
121 Raiders had an account with Entertainment Distribution Company Pty Ltd (“EDC”), which acted as an agent for Sony, EMI and Warner in maintaining accounts for customers of those companies. In the period between April 1996 and June 1999 Raiders purchased, so Mrs Knazko said, more than one million dollars worth of recorded music through EDC.
122 On or about 15 September 1998, Mrs Knazko arranged for Raiders to buy about 300 imported CDs from an Australian wholesaler, Much More Music Pty Ltd (“Much More Music”), including thirty copies each of three titles from the Warner label. The Warner CDs were “Ray of Light” by Madonna, the “City of Angels” soundtrack and “Forgiven Not Forgotten” by The Corrs. The cost was $14 per CD. Each CD displayed on its cover the name “Warner Music Indonesia”, had an orange and green tag with a numbered code and a sticker with the words “Made in Indonesia” on the back. Further imported CDs were purchased by Raiders prior to Christmas 1998.
123 The first intimation that Mrs Knazko had that her EDC/Warner account was closed came on Tuesday 29 September 1998 when the store manager of the Hornsby store told her that he had tried to place an order and had been told that the account had been closed.
124 On 30 September 1998 Mrs Knazko rang Mr Maksimovic, the then NSW State Manager of Warner, and asked him why her account had been closed. According to Mrs Knazko, he replied that this was because Raiders was parallel importing. She asked what was wrong with that. To that question Mr Maksimovic replied that the decision of Raiders to use another supplier for Warner product was against the Warner terms of trade. He said that the Raiders’ orders were low anyway and Raiders was not buying much from Warner. Mrs Knazko said that she had tried to do a deal with Warners the previous week but the representative had not called her back. She explained to Mr Maksimovic that she had started buying imports because she could get them cheaper elsewhere than through Warners. Mr Maksimovic then responded that if that is what Mrs Knazko wanted to do Warners could not supply Raiders because Raiders was breaking Warner’s trading terms. He said that advice had been taken and Warners was not obliged to supply if it did not want to. Mr Maksimovic further said that while Raiders was following the law in buying elsewhere (ie buying parallel imports), non-supply was the Warner policy. Mrs Knazko then asked Mr Maksimovic what she had to do to have the account reopened. Mr Maksimovic said:
“You have to deal with us exclusively. Stop parallel importing and deal with us only… [Y]ou have to buy them (ie Warner CDs) from Australia only… We have to protect ourselves.”
125 Mr Maksimovic said that Warner could not afford to give Raiders discounts as it had to pay millions in television advertising and that the other Warner accounts were happy not to sell imports. Mr Maksimovic then said that he knew that PolyGram had closed Wests’ account but that they had not had any Warner titles among their imported stock. So far Raiders was the only one who had. Mrs Knazko then said to Mr Maksimovic:
“Okay Greg, I just want to make sure that I understand you. I’ve written all this down, so I just want to double-check my notes. Basically what you’re saying is that I’m not allowed to buy your product from any wholesaler other than you exclusively, and the only way I’ll get my account re-opened is if I buy Warner products from Warner Music Australia exclusively.”
126 Mr Maksimovic confirmed that this was correct. However, when asked to put this in writing Mr Maksimovic was less forthcoming.
127 On 1 October 1998 Mrs Knazko had a telephone conversation with a Ms Dickie, Credit Manager of EDC, seeking notification that the account had been closed. Ms Dickie said that EDC had not closed the account, Warner had. Mrs Knazko complained that she had not been notified in writing of the closure. When asked to do so Ms Dickie refused to commit to writing, saying that she would get in touch with Mr Smerdon, the Finance and Business Affairs Director of Warner, so that he could talk to Mrs Knazko. Ms Dickie then contacted Mr Smerdon who by e-mail replied to her that he did not plan to write a letter advising why the account had been closed. The e-mail made mention of the three Warner titles the subject of a trap purchase.
128 Later that day, Mrs Knazko spoke with Mr Smerdon. He repeated that the account had been closed because Raiders had been parallel importing and the purchase from an alternate source of Warner product was a breach of the Warner trading terms. He said that Warners could not afford the market to be bastardised by imports when it spent money on television. He said that he did not think it necessary that closure of the account be notified in writing as he had already told her the fact over the telephone. He further refused to put in writing the fact that the account had been closed because Raiders had been parallel importing. The way to the re-opening of the account was for Raiders to deal exclusively with Warner for Warner product. He said that if Raiders wanted the account reopened it would have to satisfy Warners that it would not parallel import Warner product. In response to a verbal offer by Mrs Knazko that Raiders would not parallel import Warner product Mr Smerdon merely responded that the account was closed.
129 As it happened, Raiders at the time had a small credit balance in the account. Mrs Knazko was told that it would take some days before a cheque could be sent to her, because money could not be transferred out of the account without formal notification. There was something of a stalemate because Mrs Knazko was insistent that there be sent to her a letter notifying her that the account had been closed before she sent a letter requesting the refund to her of the credit balance.
130 There was no further communication between Warner or EDC on the one hand and Raiders on the other until 16 October 1998. Mrs Knazko was forced to purchase Warner products, on a credit card, from another retailer (Kmart), or special orders from other retailers, at retail prices, to satisfy demand from her customers for popular Warner titles, or to purchase a small number of imported CDs through Much More Music. Mrs Knazko claims that there was a substantial loss of sales. She was cross-examined about the credit card transactions and was able to produce copies of vouchers which corroborated her evidence. A suggestion that she made the purchases so as to assist the making of a case against Warner is, with respect to senior counsel, who presumably put it on instructions, fanciful.
131 Mrs Knazko contacted the ACCC once she learned that the Raiders’ account had been closed and kept, at the suggestion of officers of the ACCC, a detailed note of the conversations which took place. Her evidence was in accordance with the notes she made and I accept that her account of them was truthful. This assessment takes into account that when she told Mr Smerdon that she did not intend to purchase imported CDs in the future she was not telling him the truth. In fact she was saying to Mr Smerdon what he had told her would be necessary for him to hear from her in order to have the Warner account re-opened.
132 On 7 October 1998 the ACCC sent the notice under s 155 of the Act addressed to Warner to which reference has already been made.
133 Mrs Knazko’s solicitor wrote to Mr Maksimovic on 9 October 1998, demanding that the Raiders’ account be reopened and that Warner recommence supply. The letter referred to the fact that Mr Maksimovic had told Mrs Knazko that the reason her account had been closed lay in her parallel importing. On 16 October 1998 the solicitors for Warner responded, advising that the relevant persons at Warner were away and, accordingly, Warner had not been able to look into the matter raised. Presumably those at Warner neglected to tell their solicitor that Mr Smerdon (clearly a relevant person) was not away but in fact at his office. Mr Smerdon contacted Ms Dickie on 16 October 1998, advising her that the lawyers would be writing to Raiders about the reopening of the account. Without any admissions the solicitors’ letter notes that Warner had agreed to restore supply of stock pending consideration of the issue raised.
134 Raiders placed its first order after the account was re-opened on 19 October 1998. Subsequently Mrs Knazko met with Mr Maksimovic on 28 October 1998. Mrs Knazko sought a better margin and the conversation turned on ordinary trading matters, such as discounts. Mr Maksimovic later advised Mrs Knazko that a special deal he had proposed had been rejected by the Warner National Sales Manager. It is unnecessary to refer in detail to the subsequent relationship between Warner and Raiders, save to say that according to Mrs Knazko visits from sales representatives ceased, she received no in-store merchandising displays and could not find out about new releases. In other words, she perceived that she was being denied support by Warner.
135 I accept the suggestion that Warner thought it could make an example of Raiders for being involved in parallel importing by closing its account and that in this Raiders were somewhat of a scapegoat.
136 I might record that in its response to the s 155 notice served upon it, Warner suggested that the significant reason the account had been closed was the fact that it considered Raiders to be a credit risk. It is conceded, nevertheless, that Warner became aware that Raiders had commenced purchasing imported product. So far as there is the suggestion that the closure of the account was a result of credit risk, rather than the fact that Raiders had chosen to purchase imported Warner titles, I reject the suggestion.
EvIdence concerning the market for CDs in Australia - General
137 There was a considerable body of evidence adduced both by the ACCC and the record companies directed at the way the record industry operated in Australia and the structure of both the wholesale and retail markets for recorded music in Australia. This evidence was admissible in both proceedings and against all respondents. In general terms this evidence was concerned, inter alia, with identifying the participants in the markets at wholesale and retails levels, the particular significance of chart music and back catalogue music to retailers and the effects on the markets of parallel importation. The evidence is relevant both to the question of the market power of each of Universal and Warner and to the question of the effects or potential effects of the conduct, to which reference has already been made, engaged in by Universal or Warner, as the case may be, in the wholesale and retail markets.
138 There was a considerable volume of evidence directed at the behaviour of consumers in the retail market (relevant specifically to the issue of substitutability). There was some evidence of the contractual relationships that existed in the industry between record companies and artists. There was also some evidence from small recording companies which went to the question of barriers to entry into the wholesale market. It will be necessary to discuss this market evidence in some detail. Apart from the evidence directed at the behaviour of consumers (much of which might be thought to reflect common experience), there was really little dispute about the market evidence, although much dispute about its significance.
139 The sheer bulk of this evidence and the range of subject matters addressed by it (not all of which might be thought to have other than peripheral relevance) makes it difficult to separate out subject matters upon which conclusions of fact may be drawn. At the risk of prolonging what will be an overlong judgment in any event, I see no alternative but to summarise the evidence given by each witness, indicating from time to time where there were common subject matters. As was the case with the evidence which went to conduct, I accept the evidence of all witnesses except where I have indicated otherwise.
140 At the end of my summary of the market evidence I propose then to set out briefly some conclusions drawn from that evidence. Readers not wishing to descend into the detail of the market evidence might wish to proceed directly to the conclusions.
IMPORTERS (TEMPO)
141 As noted in the discussion concerning the Universal overseas conduct, Tempo was, at relevant times, a wholesaler of recorded music in Australia and, through an agent, in New Zealand. The company is headquartered in Perth but employs staff across Australia. It also has its own record label and has “signed” 12 artists to that label. In addition, Tempo has licences with a number of overseas record companies to distribute under the Tempo label music from some 170 artists in the area of classical, folk, jazz and blues.
142 Before July 1998 Tempo imported CDs not part of the catalogue of the Australian record companies, as well as compilations of popular classical recordings which sold at a budget price. These budget priced compilations were offered to retailers on a sale or return basis. The retailers supplied by Tempo (and there were some 1000 of them at this time) were generally small retailers located in all capital cities and many regional or country areas. Apart from Sanity and some small orders from JB HiFi, Tempo did not sell to the large retailers or chain retail outlets.
143 As soon as the Copyright Act was amended, Mr Karam, Tempo’s Managing Director and majority shareholder, was eager to start importing CDs in addition to those which he already imported. He saw this as a means of expanding Tempo’s business. In the twelve months to 30 June 1999 imports totalled approximately one half of the entire Tempo annual turnover. In the early stage of importing, Tempo concentrated almost exclusively on importing chart music, relying upon charts published by Sanity, the West Australian newspaper, the Sunday Times, the Billboard charts and the ARIA chart. The company concentrated on the top 20 albums on the charts, for these were thought to be able to be sold in high volumes. Later, from approximately January 1999, Tempo began to import significant quantities of back catalogue titles as well.
144 Following the legalisation of parallel importing, established retailers commenced to purchase all the imported titles that Tempo offered for sale. However, after approximately two months, some retailers started to return non-parallel imported stock they had previously purchased on a sale or return basis. Some returned, so Mr Karam said, virtually all the stock that they had purchased in a twelve months’ period. Tempo sales representatives and others claimed that they were told by customers that this was brought about by fear on the part of Tempo’s customers of reprisals from the large Australian record companies. There is no evidence that this was the case. It was only after HMV and Big W started bringing in CDs from overseas that those retailers who had returned stock recommenced dealing with Tempo. It was put to Mr Karam that the return of stock was a result of complaint by retailers. He denied the suggestion and I accept his evidence.
145 The matter of whether customers did return stock was the subject of a considerable amount of cross-examination. Perhaps the purpose of the cross-examination was to seek to contradict Mr Karam’s assertion that the actions of the record companies had caused him to suffer loss, although the question whether any person suffered loss as a result of the conduct of Universal or Warner is not a relevant one in these proceedings except, perhaps, so far as it might bear on penalty. Perhaps, however, the purpose of the cross-examination was to seek to destroy Mr Karam’s credit. As must by now be clear, if this was the purpose, it was unsuccessful. The same comments apply to the cross-examination directed at suggesting that Tempo was insolvent. If it is a relevant matter, and I do not think it is, I would find that Tempo is and was, at relevant times, a profitable operation and was not insolvent. I would also find that Mr Karam took all practical steps he could to ensure that titles imported by him were not “pirated”, that is to say, were not infringing copies, even if proceedings were at one time brought by Festival in respect of one imported CD alleging it to be an infringing copy. According to Mr Karam these proceedings were ultimately settled and the copy was said by Mr Karam ultimately not to have been an infringing copy.
146 Shortly before parallel importing became legal, Mr Karam opened an office in Indonesia under the name “Tempo International Pty Ltd, Indonesia”, with a view to sourcing CDs and other products from that country for sale in Australia and perhaps New Zealand. There was much cross-examination directed to the status of this Indonesian office and in particular the relation between Tempo and a Mr Limanto who staffed that office. It seems that there was some sort of joint venture between Tempo, Mr Boland, the original owner of Tempo who had sold a half share in the company to Mr Karam, and Mr Limanto but nothing turns upon this, nor upon whether any CDs were or were to be exported to New Zealand. If the cross-examination was intended to reflect upon Mr Karam’s credit as, for example, by the suggestion that Mr Karam was involved in “fraudulent invoicing”, in the method adopted in an attempt to acquire CDs in Indonesia for export to Australia despite the actions of the record companies there to prevent products coming into Australia and, one must assume, thereby maintaining at an artificially high level the retail price of CDs in Australia, it likewise failed in its purpose. I have no reason to disbelieve Mr Karam and in fact accept his evidence.
147 Ultimately Indonesia as a place of sourcing product for the Australian market was not viable for a number of reasons. First, the price at which imported CDs could be imported from Indonesia increased. A significant factor in the increase was currency fluctuation. It became as expensive to purchase CDs from Indonesia at that time as it was to purchase Australian product. Another factor was reliability (by this is meant the arrival in Australia of imported CDs on time and in the quantities ordered). Singapore became more reliable than Indonesia. Importation from Indonesia also became less profitable, particularly when one of the Indonesian suppliers required payment for CDs before they were supplied and allowed no credit at all. A significant factor was also the actions taken by the record companies in Indonesia discussed under the heading “overseas conduct” earlier in these reasons, which made it virtually impossible for Tempo to purchase CDs in that country for export to Australia.
148 No doubt the fact that other suppliers such as Big W, Much More Music and HMV commenced importing and thus competed with Tempo for sales was also a factor in discontinuing the Indonesian office, although I accept Mr Karam’s evidence that it was not a significant factor. I also reject the suggestion put to Mr Karam by counsel for Universal that a reason why he closed the Indonesian office was because piracy was a significant problem there. That, in my view, played little or no part in Mr Karam’s decision. Evidence before me from the International Federation of Phonographic Industry in a publication entitled “The Recording Industry in Numbers” suggests not that there is more piracy in Indonesia than other Asian countries, but rather that with the exception of Japan, where the percentage of piracy is a low 10%, piracy in Indonesia is at the lower level, from 10-25% in 1998, compared to from 10% to 50% in the other countries of the region and above 50% in Malaysia, China, Pakistan and Hong Kong.
149 There was also evidence from Ms Ching, a project officer of the ACCC, which led to an admission by the respondents that as at March 2000 she had purchased various CDs which appeared to be non-infringing copies. This was said to prove that non-infringing copies were available at that time in Indonesia and to permit me to infer, as I would, that non-infringing copies were also available to be purchased in the period from July 1998 until the end of 1999. Her evidence also showed that CDs were able to be purchased in Indonesia which were said to be “enhanced CDs”, but which when played would not be infringing copies, because they contained no material other than words or music. I accept the evidence, although it is difficult to see how it assists in proving, as it was said to do, that the Grease CD sold by Mrs Delaney was likely a non-infringing copy. That logically does not follow.
150 After August 1998 Tempo imported CDs not only from Indonesia, but also from Singapore and Brazil. The company has also considered importation from Malaysia and Canada. Details of the many orders for CDs that were imported by Tempo from the time parallel importing became legal and the financial terms on which the orders were placed and accepted are set out in Mr Karam’s affidavit evidence. The evidence shows also that the dollar value of sales of parallel imports increased in the first six months of 1999 on average over those for the months from August to October 1998, but that since July 1999 sales of parallel imported CDs have decreased. In part, it would seem that the decrease in sales was brought about by the inability of Tempo to acquire overseas the volume of titles it desired, because the amount available for export was limited and because there had been, particularly in recent times, a time lag of between 1 to 14 weeks from the release date of a CD in Australia to the time the title became available from the overseas supplier for export to Tempo.
151 Finally, Mr Karam gave evidence that the quality of imported titles was consistently good and on a par with that of locally manufactured CDs. Likewise the artwork was of the same quality as that on the Australian manufactured version.
152 Ms Blake, Mr Karam’s personal assistant, also gave evidence and was cross-examined in detail on matters concerning Tempo’s business; often on matters which, it might be thought, Mr Karam might have been more qualified to answer than Ms Blake and which in many cases had not even been raised with Mr Karam.
153 She gave the impression that she would only answer a question if she was one hundred per cent certain of the answer. One possibility, and I think it is the likely one, is that she was concerned lest by giving an answer which she was not absolutely certain was correct she might be accused of not having told the truth. Another possibility, which I think is not correct, is that she was being untruthful. Clearly if the first possibility was the correct one, she was excessively cautious.
154 The affidavit evidence of Ms Blake merely exhibited a number of CDs which she had personally purchased from Tempo, presumably for the purpose of demonstrating that they were not infringing copies. It was not suggested that they were infringing copies and I accept they were imported by Tempo not in breach of the copyright law.
155 Ms Blake was cross-examined. A deal of the cross-examination concerned correspondence between Tempo and suppliers in Indonesia and Singapore, much of which had not been put to Mr Karam, who might be thought to have had more knowledge of the matters dealt with in that correspondence than Ms Blake. Orders were placed usually by the warehouse manager, although with the knowledge of Mr Karam who did not necessarily approve all titles, but clearly was the person with the ultimate financial interest in the affairs of Tempo. The correspondence confirmed, generally speaking, some of the problems to which Mr Karam had referred when referring to the unreliability of supplies. One matter (its relevance could only be the credit of Mr Karam, and one might think would have been better put to him in cross-examination than to Ms Blake) was correspondence with an Indonesian supplier called “Disk Tara”. Mr Karam had given evidence that he had not dealt with that supplier. The correspondence showed that there had been arrangements to deal with Disk Tara, but they had been cancelled and at some cost. Strictly the correspondence did not negate what Mr Karam had said in his evidence.
The retail music market – its structure, participants and operations
156 As may be expected, there is a large number of participants in the retail market for CDs in Australia. The following list of participants and their approximate market share was compiled by Mr Ergas, one of the economists who gave expert evidence, from some of the affidavit evidence read in the proceedings. It provides a convenient summary of that evidence, although the figures compiled by Mr Ergas do not always agree with estimates made by some of the witnesses in their oral evidence.
· Sanity, a national chain of specialist music stores (accounting for approximately 15-20% of retail sales).
· Kmart, a budget department store and member of the Coles Myer Limited Group (accounting for approximately 8-12% of retail sales).
· Target, a budget department store and member of the Coles Myer Limited Group (accounting for approximately 4-6% of retail sales).
· HMV, a chain of specialist music stores located in major metropolitan areas on the East Coast of Australia (accounting for approximately 6-8% of retail sales).
· Big W, a budget department store and member of the Woolworths Limited Group (accounting for approximately 4-6% of retail sales).
· Grace Bros/Myer, a department store and member of the Coles Myer Limited Group (accounting for approximately 4-6% of retail sales).
· Vox (Chandlers, Billy Guyatts and Archie Martins), a national electronics goods retailer with a specialist music section (accounting for approximately 4-6% of retail sales).
· Leading Edge music stores, a group of independently owned specialist music stores (accounting for approximately 12-14% of retail sales).
In addition there were a number of smaller locally based retailers. These included:
· Fish Records, a specialist music retailer located in the inner suburban suburbs of Sydney and at Sydney Airport (accounting for approximately 1% of retail sales);
· Gaslight Records, a specialist retailer in Melbourne (accounting for approximately 1.9% of retail sales);
· JB HiFi, a specialist music retailer with a number of stores in Victoria and with a small presence in New South Wales and Queensland (accounting for approximately 4% of retail sales);
· CC Records (accounting for approximately 2% of retail sales); and
· Angel Music (accounting for approximately 0.5% of retail sales).
Further, since 30 July 1998 there has grown up a number of smaller discount variety retailers whose combined retail sales account for a small percentage in value of sales of recorded music sold in Australia. These retailers have generally sold imported CDs and cassettes since 30 July 1998. They include:
· Clints Crazy Bargains, a discount variety store;
· Crazy Clarks, a discount variety store primarily based in Queensland;
· The Reject Shop, a discount variety store;
· Silly Solly’s, a discount variety store primarily based in Queensland;
· Chicken Feed, a discount variety store primarily based in Tasmania; and
· Strathfield Car Radio, a discount provider of electronic equipment.
Sanity
157 Brazin Ltd, or a group of companies of which it is the holding company, trades under the name “Sanity”. Sanity is the largest recorded music retailer in Australia, having a percentage of the retail market of which estimates ranged from 17.2% to 25%. Evidence was given about its operations by Mr Agostinelli, its Chief Executive Officer, responsible for strategic decisions about purchasing stock and negotiating trading terms. I accept his evidence.
158 Brazin Ltd in fact operates stores under the names IN2 Music, CC Records and Delta Music as well as under the Sanity name. Another division, Dance Arena, operates within some Sanity stores. The total combined number of stores in 1998 was approximately 210, located in each State and Territory of Australia. Stores are, however, tailored to locality. CDs account in these stores for 95% of music sales by dollar value. The target market for each of the branded stores differ. That for the Sanity stores is from 15 to 35 years, for IN2 it is 20 to 50 years and for Dance Arena it is from 15 to 35 years. Dance Arena caters for those interested in dance music. Suppliers to Sanity include all the major record companies, as well as Festival Records, Mushroom Records and Shock. Together these suppliers supply 95% of the recorded music sold by Sanity. While the majority of the recorded music sold at Sanity stores is “rock and pop”, the stores also stock other genres such as dance music, hard rock, classical music, jazz music and country music.
The significance of chart music and back catalogue
159 Sanity compiles its own top 50 chart of top-selling singles and albums. The chart is compiled by reference to sales for the preceding week made by Sanity stores. Titles may appear on the Sanity chart regardless of genre. The top-selling 20 singles and albums will, at any time, generally comprise approximately 40% of Sanity’s total sales in dollar terms. Singles and albums that are on the chart for a particular week are displayed on a wall in Sanity stores. The Sanity chart overlaps with the ARIA chart, but the two charts are not coextensive. Generally the first five titles will be similar, because they are popular everywhere. However, Sanity’s younger target market could affect the extent to which they differ. Other factors which could lead the two charts to diverge would be if Sanity had a promotion of a particular title and sold more of that title or if the title was advertised in the magazines “Sain” and “Sain Unlimited”. Both Warner and Universal could be expected to have one album in the top ten in each week, although there could be a week, from time to time, where this was not the case.
Substitutability and customer behaviour
160 In his affidavit, Mr Agostinelli said that it was important for Sanity’s business that there be available to it for sale new release albums and singles from each of the major record companies on the day the titles are released in Australia. If the titles are even one day late, sales are lost as customers go to competitors to purchase the title. He said that it was critical that the company have the full range of chart music at any particular time and that its reputation as a music retailer would suffer if it did not. His view was that consumers generally would not purchase a substitute album or single by a similar artist if the title they wanted was not available, but would instead go to another retailer. Even albums of a similar style of music were no substitute for a consumer.
161 This evidence was explored in some detail in cross-examination. According to Mr Agostinelli approximately half of the customers of Sanity stores had a particular title in mind when they shopped and usually purchased “chart”. Of the remaining customers, some had a number of titles in mind and could be influenced in what they bought. Others were browsers or impulse buyers who could be influenced by the music being played over the sound system and positioning of products in the store. Sanity stores were in fact designed in an attempt to induce the public to buy on impulse.
162 I would make a number of comments about this evidence, comments which relate to all witnesses who were cross-examined about this topic.
163 First, Mr Agostinelli used the word “chart” often to refer to the Sanity chart. As the cross-examination of Mr Agostinelli sought to make clear, there never could be a problem for Sanity not being able to purchase chart music (if the word “chart” is used in this sense) for the simple reason that a title would never appear on the Sanity chart unless the title had been sold by Sanity in the previous week. However, when Mr Agostinelli spoke of the need for Sanity to be able to purchase “chart” music he was using the word “chart” in a different way. He was referring not to titles that appeared on a particular chart of top 20, 30, 40, 50 or 100 singles or albums but to a type of music which is regularly released by all the major record companies and is at least hoped by the companies and for that matter by the retailers to be so popular that it would appear on all or substantially all of the charts. Perhaps the ARIA chart is the most well known of the general “charts”. However, most of the large retailers have their own charts reflecting their sales of popular music. While there is no perfect correlation between one chart and another chart there is considerable similarity. Clearly those in the industry understood that there is a class of recorded music that can be identified as “chart” or “chart music”. That class of music will, if popular, appear on the ARIA chart, the Sanity chart, the HMV chart etc.
164 Secondly, while it is true that not all retailers will sell all chart music and even more obviously true that not all retailers will sell all back catalogue music, a reference in the evidence to the need to be able to sell that music is a reference to the need of a retailer to be able to select stock for purchase from the new releases of chart music and from the back catalogue of the major record companies in order to meet the demand of its customers. Chart music sells in volume precisely because it is popular. Retailers will additionally purchase from back catalogue having regard to the particular music genre which the store deals in. The bigger the retailer, no doubt, the more the retailer is likely to need to have available the widest selection of both chart and back catalogue titles.
165 Thirdly, it would seem that no one has done a market survey of customer buying habits. Hence the evidence about consumer buying habits given by retailers derives from what the witness has observed about customer behaviour. How accurate that observation is may well be debatable. What is clear to me is that the general view of almost all witnesses was that the majority of customers (at least those not impulse buying as a result of a display or hearing a record or browsing) generally went to buy a particular title and that the greatest percentage did not want some other title. If the desired title was not available, the customer would go elsewhere. Now it is true that in cross-examination, when asked to stipulate percentages, witnesses varied in their views. However, my impression from this evidence is that none of the witnesses could, merely by observation, give anything more than the most generalised impression of the buying process. Some witnesses were uncertain and, depending on how the question was asked, sometimes appeared to change their views as to the percentage of customers who would go elsewhere if a title was unavailable or perhaps not make a purchase at all. However, generally I think that their original view of customer behaviour was the most considered view and the view which I accept.
166 Other evidence on the question of customer behaviour is to be found in the summary of the evidence of Mr Durrant of JB HiFi, Mr Nemeth of Fish Records, Mr van Wessem of Kmart, Mr Hazell of HMV and Mr Holman of Big W.
167 I would find that the majority of customers (the percentage is over 50% and it is impossible on the evidence to put a precise figure upon the percentage) do come to retail outlets with the desire to purchase a particular title. The great majority of those customers will not purchase some other title suggested to them if the title they initially wish to purchase is unavailable and if their choice is unavailable are likely to go elsewhere to make the purchase or perhaps not make a purchase at all. I find also that should unavailability of popular titles continue, the unavailability would have a serious effect upon the business of the retailer. The major exceptions to this behaviour will be customers purchasing a title as a present for someone else (for example, at Christmas or perhaps Easter) or where the purchase is by way of gift voucher. Some percentage of customers engage in impulse buying and may be attracted to a particular title by browsing through the display of recordings in racks or shop windows. No doubt some customers, unable to purchase their desired title, may be persuaded to buy a substitute.
Wholesale unit cost variations prior to parallel importing
168 Mr Agostinelli gave evidence that wholesale list prices did not vary from record company to record company prior to the introduction of parallel importing. However, given the range of discounts and rebates, not to mention other assistance that might be given to a retailer by the wholesaler, it is not a simple task to conclude what the trend in real prices was whether before or after the legalisation of parallel importing.
169 Evidence on this topic was given by Mr Cameron and Mr Sullivan, both of Universal. No comparable evidence was adduced by Warner. The Universal evidence left me somewhat uncertain what the real position was. I would find that while clearly different trading terms were given to different retailers both before and after the legalisation of parallel importation, there was some, but not a great deal of, reduction in the bottom line cost of recordings to retailers in the period of six to twelve months after parallel importation occurred. The levels of discounts and rebates adduced by Universal are clearly confidential and for this reason are not set out in these reasons.
170 Mr Agostinelli at one point in his evidence suggested that before parallel importing became legal there had been little in the way of rebates or discounts. The books and records of Sanity, so far as they were in evidence, did not suggest this was true, at least in the early stages after parallel importing began. While ultimately it is true that the bottom line price dropped at least to some extent after parallel importation became legal, the trading terms of Sanity with PolyGram for the period immediately after 21 July 1998 seem to be identical to those which prevailed in the year ending 30 June 1998. The trading terms negotiated after the merger between PolyGram and the old 6% Universal were, on the other hand, substantially more favourable to Sanity, although this might have come about because the trading terms of 6% Universal before the merger were more favourable to retailers than those of PolyGram. After the merger there was no difference in trading terms offered for the different labels.
171 Retail prices were generally determined by commencing with the unit cost of the wholesale product (including distribution costs and freight) and adding to that a profit mark up of 27½%. Sanity’s purchase price might take into account volume rebates or discounts allowed by the record company to Sanity.
172 Generally, the terms of supply between the major retailers and the record companies were negotiated on an individual basis, each record company negotiating separately with each retailer. Matters negotiated and which determined the bottom line price paid by the retailer included volume discounts or rebates; cash discounts or rebates, especially on a product by product basis for a particular artist or promotion; favourable terms for delayed payment; cooperative advertising arrangements (whereby the record companies contributed to advertising costs, for example, in Sanity’s in house magazine “Sain”, or contribution towards the cost of the “Sanity Chart”, or, in the case of HMV, “artist of the month” or “Single or album for the week”); television “tag advertising” (involving the record companies paying for television commercials which proclaimed that the particular title was available at a particular store or at a particular location); supply on sale or return; returns allowances (permitting the return of a negotiated percentage of sales each quarter or six months); “privileged returns” (allowing a percentage of total purchases to be returned); rebates for product positioning; provision of point of sale material (not used by HMV); and provision of excess stock without charge to increase the volume of orders on other purchases. The terms negotiated by a record company with retailers differed from retailer to retailer. As an incentive to take particular titles a record company might discount a title to enable retailers to offer the title at a lower retail price as a loss leader. Sales representatives went from store to store, providing advice and assistance to retailers.
173 The particular discounts and rebates afforded to Sanity and some of the other companies from whom evidence was taken at the hearing were the subject of confidentiality orders. In any event the detail of them is not important. What is important is that in every case discounts or rebates of varying and often substantial amounts were remitted or allowed off invoices either with each invoice or on a periodical basis.
The 1996 Warner price increase
174 It seems that generally each of the major record companies had list prices for its CDs at levels roughly approximating the list price charged by the other record companies. However, in or around 1996, Warner notified retailers that it proposed to increase the price of “premium price” CDs. Mr Agostinelli could not recall the precise amount of the increase, but thought that it was less than one dollar, as that was the amount by which Sanity increased the retail price of Warner premium CDs.
175 Mr Agostinelli protested the increase by ceasing to order Warner titles for several weeks and took steps to reduce the exposure of Warner by placing Warner product at the back of the store. In consequence, sales of Warner titles in Sanity stores declined. Ultimately, however, Mr Agostinelli was of the view that Sanity had no option but to purchase from Warner. He sought to have Warner cancel the price increase but without success. For a period of time Sanity did not increase the retail price but because, so Mr Agostinelli said, the rest of the industry (ie other retail stores) increased the price, ultimately Sanity did too. The price increase led to consumer confusion and some resistance. Of Sanity customers who came to buy Warner titles at the increased price, some 70% made the purchase. Of the remaining 30% half purchased other titles and the remainder none at all.
176 Mr Agostinelli was of the view that had Warner attempted to increase prices after the legalisation of parallel importing, it would have been less successful in doing so as Sanity (and presumably other retailers) would then have purchased product from overseas.
177 Evidence on this topic was also given by Mr Hardiman of Target, Mr Durrant of JB HiFi, Mr Hazell of HMV, Mr van Wessem of Kmart and Mr Cameron of Universal.
178 Mr Hardiman said that the price increase did not in fact happen. According to his evidence, Warner put out a price list which showed a higher price for “premium price CDs”. However, notwithstanding the price list, there were in fact no titles sold under the category of “premium price CDs”. He was the only witness who suggested this to be the case. His affidavit evidence was inconsistent with his oral evidence. In his affidavit he said that Target had absorbed the price increase and had not passed it on to customers. Either his affidavit was completely misleading on this topic or his oral testimony was incorrect. I would propose to disregard his oral evidence on this point, because it is completely inconsistent with the evidence of the other witnesses referred to.
179 Mr Durrant of JB HiFi referred to the Warner increase as being “around $1” and said that his company had absorbed the increase so that the price of Warner albums in this range was the same as the price of albums from the other record companies.
180 Mr Hazell of HMV noted in his evidence that the cost price to HMV of all Warner titles (presumably he meant premium priced albums, not singles) was approximately $1 more than that of the other record companies. HMV passed on the increase and sold Warner titles at $1 more, retaining the same absolute margin as with CDs manufactured by the other record companies.
181 Mr van Wessem of Kmart recalled that Warner had increased prices on its CDs at some time prior to July 1998, although he could not remember the precise date or the amount of the increase. At the time Kmart believed it was constrained by market pressure to absorb the increase and thus sold Warner product at a lower margin than it sold the product of the other record companies in order that Kmart remained competitive.
182 Mr Cameron, the NSW Sales Director of Universal, recalled the Warner price increase as being approximately $1 in 1996. He said that Universal had not increased the price of its competing product because to do so was not necessary and because it took the view that it was not in the best interest of Universal to do so. No evidence on the subject was adduced for Warner.
The hypothetical consequence of one of the record companies increasing their prices
183 Mr Hazell of HMV and Mr Holman of Big W were both asked in cross-examination what the hypothetical consequences would have been in mid-1998 had one of the record companies increased its prices to retailers (after taking into account all discounts and rebates). Mr Hazell was asked the question by reference to a hypothetical record company, Mr Holman by reference to Sony.
184 Mr Hazell said that HMV would first endeavour to negotiate to stop the increase. If the negotiation was unsuccessful, HMV would try to pass the increase on to its customers. If all its competitors did this there would be little difficulty. If not, then HMV would be uncompetitive. If HMV were unable to pass on the increase, it would be in its interest to try to sell other and more profitable titles. If chart music was available from competitors at lesser prices, customers might seek to avail themselves of the cheaper prices and not purchase from HMV. In that sense, chart music was more price sensitive than would be the case with back catalogue.
185 Mr Holman said that after parallel importing became legal his immediate reaction to a price increase would have been to talk to the supplier and try to negotiate. In the case of Sony CDs (the question was raised in the context of Sony CDs), there would be little opportunity to source the product from anyone else so Big W would probably have to accept a 10% rise. If the title was in the Top 30 it would be impossible to pass a 10% rise on to the consumer for it was Big W policy that all titles in the Top 30 would be sold at a common price to the consumer, irrespective of cost price. It would become necessary to see whether to change the policy and have a two tiered structure of prices. He thought that if this happened customers would continue to buy, because buying was title specific. Hence a price increase of 10% was not likely to affect sales volume. He said that if it became necessary for Big W to absorb all or a part of the price increase this would not mean that Big W would set about promoting a label where the margin was more favourable to Big W. It might be different if the title was not in the Top 30 category, for Big W had to be seen as a credible alternative to other retailers and it would not be so seen if the Big W Top 30 was seen to be significantly different from the top 30 of other stores eg HMV with its Top 40 or the ARIA Top 50.
186 Mr Holman agreed that he would consider parallel importing, bearing in mind what he referred to as the “limitations” parallel importing had, for example, the delay in getting product into the store in Australia.
Marketing and promotion – customer buying preferences
187 Essentially record buying depends upon customer tastes. These are, according to Mr Hazell, informed by a number of factors, viz:
· marketing and promotion activities of the industry in relation to an artist and the products associated with an artist;
· media coverage of the artist in the press and radio, as well as television performances and personal appearances;
· live tours by the artist, particularly where the artist has a reputation for live performance;
· recommendation by retailers to customers;
· product display and merchandising;
· airplay; and
· exposure given to video clips of products of the artist on television programs, such as “MTV”, “Video Hits” or “Rage”.
188 Less marketing effort is necessary if there has been prior marketing of the artist, for example in respect of other titles or perhaps overseas exposure.
189 Most money is spent on the marketing of a record in the first few weeks after release. A single is often released before the album which incorporates it. The expenditure of the record companies is greater than that spent by other participants in the industry. HMV as a retailer may adopt an artist and this adoption may be seen as leading to the success of the artist. Generally, since parallel importing became legal, titles were released in Australia at approximately the same time as they were released in the UK or the US. There are fads in particular genres of music.
190 However, while HMV itself influenced demand by point of sale displays, playing of music in stores, window displays and the like, no amount of merchandising could make a poor product successful.
HMV
191 Evidence was given by Mr Hazell from HMV. Some parts of his evidence have already been referred to.
192 HMV did not try to compete with discount retailers on price. Rather, it provided a greater range and quality of service to its customers. Its focus was on persons for whom music was a lifestyle driver. Such persons might have more than one title in mind to purchase so that if a particular title was unavailable they would probably buy another. The store layout adopted by HMV was designed to attract browsers. While there was a greater degree of substitutability in the case of singles, this was less so with albums which were more expensive. It was, however, not a given that a customer would purchase another single where the desired title was unavailable. A price increase could lead some customers to purchase from discount retailers, at least if the discount retailer absorbed the increase. Switching because of price would be dependent on the following factors:
· the amount of the increase;
· the availability of the album at competing retailers;
· the HMV price relative to the price at discount retailers;
· whether the changes in price broke through significant price points (eg $14.95, $19.95 etc);
· whether the product sold was a single or an album, the former being more price sensitive; and
· whether the CD was chart or back catalogue – chart would be more price sensitive than back catalogue.
The reaction of HMV to parallel importing
193 Around September 1998, HMV did an analysis of pricing product from various locations from which titles could be imported. An important factor in deciding whether to import was the rate of exchange of the Australian dollar. The exchange rate could make imports from the US or the UK unattractive. Canada was a more attractive source of supply. Importing would require a grater investment in additional stock holdings. This in turn would mean that HMV would need a greater profit margin. In general terms, however, the majority of back catalogue could be sourced from Asia or Canada.
194 HMV also investigated the landed costs of potential parallel imports of CDs from Thailand, Indonesia and Singapore. Potential suppliers were identified and a test shipment recommended. The advantages thought to be available to HMV if it became involved in parallel importing were first, an improved percentage margin (although not necessarily an improved cash margin), secondly, a reduction in retail price and thirdly, there would be less incremental volume from imported product if the retail price of the local product fell. Also parallel importing could be used as a negotiation lever against the record companies.
195 One of the disadvantages perceived was that the level of investment in marketing in Australia would be reduced if HMV went on to import titles. Further, there would be a need for HMV to set up its own distribution facilities. While HMV had a holding facility, it had no warehousing facilities. In contrast the record companies were able to be efficient in distribution because of economies of scale.
196 The advantages and disadvantages of importing as seen by HMV were finely balanced, according to Mr Hazell. He had a view as to how the record companies would react, but thought that HMV was better placed than most retailers to deal with the record companies because he knew that HMV was important to the record companies because of its position in the market.
Warner trading terms with HMV - before and after parallel importing
197 Mr Hazell came to Australia, among other things, with the aim of improving to HMV’s advantage the trading terms with the major record companies. He was successful in so doing with all the record companies except Warner. In the result, the real cost of Warner products to HMV was 2% greater than the products of Warner’s most expensive competitor. Negotiations with Warner commenced in early June 1997 but had got nowhere by August of that year. To pressure Warner, a policy was implemented of purchasing less product from Warner than it had previously purchased, compensating for this by the purchase of titles from other suppliers. Within months of this policy being implemented, Mr Hazell was able to negotiate an improvement in the Warner trading terms. The strategy of reducing stock purchases was then abandoned and never revived. It was only after parallel importing was legalised that the bottom line price Mr Hazell hoped to achieve with Warner (Mr Hazell wanted to achieve a file discount from the published wholesale price of a specified percentage, which may still be confidential and is thus not here set out) was, in fact, realised.
Big W
198 Big W Discount Stores is a division of Woolworths Ltd. At the relevant time, Big W accounted for approximately 4-6% of retail sales in recorded music. It had some 87 (84 in mid-1998) stores around Australia. Evidence was given from Mr Holman, the Merchandise Manager for home appliances and electronics for Big W at the relevant time, and Ms Kells, who was buyer of music and video for Big W and who reported to Mr Holman.
199 Big W, unlike HMV, however, did not seek to maintain an extensive back catalogue of CDs but rather was concerned to sell the most popular CDs. It was the view of Ms Kells and Mr Holman that Big W needed at all times to stock the relevant weekly Top 30 chart CDs, otherwise it would stand to lose its reputation as a reliable and competitively priced retailer of chart products to consumers. Like HMV, Big W compiled its own chart of the thirty most popular CD albums and single titles, based on its previous week’s sales. It gave its sales figures to ARIA for compilation of its chart, so that the ARIA chart would reflect Big W sales. Generally, the Big W and the ARIA charts were similar, although ranking of individual titles could differ.
200 According to Ms Kells, customers were influenced to buy CDs by the marketing of a particular title, especially through national advertising, the presence in Australia on tour of artists currently or in the immediate future and the amount of airplay the title received on radio. Customer demographics also played a part and hence different Big W stores in different locations ordered different titles.
201 After the legalisation of parallel imports, Ms Kells commenced investigating alternative sources of supply from overseas. She found, initially, that it was possible to land parallel imported CDs at around $AUD15-16. By late August 1998 she had discovered that Big W could buy the titles it wanted to purchase (it is not clear whether she meant this on the basis that she could continue to purchase from the record companies titles not readily available overseas or at least at competitive prices) and in the quantities it required. Prices were around $12 a CD from a reliable source. Her inquiries extended to possible suppliers in South East Asia and Canada, as well as the possibility of sourcing product from Tower Records in Hong Kong. The details of her inquiries were discussed in evidence but need not be repeated here. It seems that ultimately some orders were placed with Much More Music (an Australian importer) for imported CDs and the first shipment was probably received in December 1999 (according to Mr Holman’s evidence, although Ms Kells believed it was January). It was put to Ms Kells that in fact Big W sold imported CDs before Christmas 1998 but I would find that they were not sold until January 1999, irrespective of the date the CDs arrived in Australia.
202 These inquiries while not, necessarily, undertaken to provide a lever for negotiations with the Australian record companies, no doubt did so in fact, for they enabled Mr Holman to say at a meeting attended by Mr Dickson and Mr Handley on 5 August 1998 that while Big W wished to support the local industry, it had the option of parallel importing at lower prices. At the meeting Mr Holman challenged PolyGram to match the prices that would be paid for imported CDs. There is little doubt that PolyGram was put on notice that Big W was looking for an improvement in trading terms, whether or not this was the subject of the meeting held that day. It does not appear, however, that PolyGram was responsive to changing trading terms. Whether at this meeting or in a telephone call around the same time, Mr Holman said to Mr Dickson that he had heard rumours that PolyGram was considering stopping supply to retailers who sold parallel imports and was told that PolyGram was at that time looking at its options and obtaining legal advice to see if it could cease supply to a retailer who had an alternative source for obtaining PolyGram product. Mr Holman asked Mr Dickson to put this in writing. Not surprisingly, he never received any such letter.
203 On 25 August 1998, Ms Kells rang Mr Layton, the National Account Manager of PolyGram, and asked him what PolyGram was going to do if Big W engaged in parallel importing. Later Mr Layton called her back and told her that if Big W imported, PolyGram would close the Big W account. She communicated, it may be inferred, the substance of this conversation to Mr Holman.
204 It should be noted that the evidence of these conversations (save that of Mr Holman to the extent that he asked that Mr Dickson put PolyGram’s position in writing, which was admissible against Mr Dickson) was not admitted in evidence against the individual respondents.
205 In late September or early October 1998, Big W suggested to PolyGram that it should match, at least in respect of some titles, the price at which imported CDs could be brought into Australia. PolyGram agreed in respect of five titles to give an additional discount which enabled Big W to sell these titles at under $20. While Ms Kells did not agree that she threatened PolyGram that without this concession Big W would import selectively, it is not unlikely that it was seen this way by PolyGram. However, this additional discount was a one-off transaction.
Target
206 Target is a wholly owned subsidiary of Coles Myer Limited. In 1998 it had approximately 122 stores throughout Australia and between 4 and 6% of total recorded music sales. Other companies in the same group include Kmart and Myer/Grace Bros, both of which also sold recorded music. In fact, Target, Kmart and Myer/Grace Bros stores operated separately and had no coordinated buying policies, even if the idea of such a coordinated policy was theoretically possible. Kmart was the principal competitor of Target. Evidence of Target’s activities was given by Mr Hardiman, the National Manager for “Target Home”, one of the Target trading divisions.
207 Target had its own chart drawn from its own sales. The Target “chart” was rather more directed at the middle of the road consumer than the ARIA chart. Chart music, in the sense that it was seen by Target, was, in the relevant period, responsible for approximately 70% of the total recorded music sales for Target, while back catalogue sales comprised approximately 30% of retail sales. Target’s focus was on retailing the top 100 titles rather than titles forming part of back catalogue. It discounted all product in the chart. It was able to do this because of assistance from the record companies and also because of the volume of sales it had. Mr Hardiman rejected the suggestion that discounting could determine the particular position a recording had on the charts. In his view position on the chart was determined solely by the volume of sales.
208 Target dealt with all major record companies in Australia. In the financial year 1997-1998, PolyGram titles represented 16.2% and Warner titles 18.3% of Target’s business. The biggest supplier was Sony with 31.9% of the business. Target terms of trade included file discounts (a discount depending on the size of business); volume rebates; cooperative advertising, offsetting the cost of catalogues put out by Target; point of sale material supplied, including the supply of labour for the removal and erection of displays; and payment for space occupied by “dump bins” for the display of titles, which bins were provided by the record companies. Target was also able to purchase on a sale or return basis chart music that did not make it into the top 40, from the major record companies other than PolyGram. Sale or exchange (“SOE”) was also offered by the major record companies on certain titles and, from time to time, retail markdowns of particular titles were subsidised by the record company.
209 Mr Hardiman was of the view that inability to access the titles of a particular record company such as PolyGram or Warner would have a detrimental impact upon the business of a retailer of recorded music.
210 In about mid-1997 Mr Hardiman investigated the overseas market for recorded music in anticipation of the legalisation of parallel importation. In particular he located two or three music companies in Hong Kong who were willing to export. However, supply was on a 40 to 60 day basis and, having regard to the landed cost of the product, he formed the view that it would not be worthwhile for Target to import. While importing might have appeared profitable on the surface, Mr Hardiman said that once the protection of sale or return, or sale or exchange, together with subsidised markdowns and other discounts or rebates was taken into account, parallel importation was unattractive to Target.
211 After parallel importation did become legal, Mr Hardiman formed the view, although on his evidence not from any conversation with Mr Handley (the response to the s 155 notice from Universal admits that there was a conversation with Mr Handley in which he, Mr Handley, said words to the effect that PolyGram reserved its right to cease suppling to Target if it chose to parallel import), that the record companies including both PolyGram and Warner might review trading terms if Target did import titles into Australia. Titles that were available from overseas represented approximately 90% of the product which Target sold. The greatest problem with importing such titles was the lead-time it took between order and delivery, particularly when what recordings were on the chart changed dramatically on a weekly basis.
Kmart
212 In the relevant time Kmart had between 8 to 12% of the total Australian retail market for sales of recorded music including cassette sales, with 150 stores Australia-wide. It was one of the largest retailers of recorded music in Australia. Evidence was given of Kmart’s activities by Mr van Wessem who was Business Manager, Entertainment and Home Office with Kmart until August 1999.
213 Kmart did not provide details of its sales figures to ARIA for preparation of the ARIA chart. It prepared from its own sales figures a Top 30 chart, although this was not published for its customers. The ranking was used by Kmart to decide what titles should be displayed, with particular prominence being given to the top 10 in the display. However, it also took notice of the ARIA chart. According to figures which Kmart supplied to the ACCC in connection with the proposed merger of PolyGram and Universal, PolyGram titles amounted to 17% and Warner titles 22% of Kmart’s business. Sony accounted for 31% of Kmart purchases in the 1997-1998 period.
214 Kmart negotiated and received the same kinds of financial assistance from the record companies, such as discounts, rebates, sale or return or exchange, promotional assistance etc as did Target.
215 Mr van Wessem was of the view that customers desiring to purchase chart music would not select another title if that title was unavailable but would rather go to another retailer (or perhaps not purchase at all). Customers purchased artists rather than labels. Hence, inability to purchase chart music would have, in Mr van Wessem’s experience, a detrimental effect on a retailer. He conceded, however, in cross-examination that the detrimental effect of one record company refusing supply would be negated if the titles were available to be sourced from elsewhere for the same cost or better. The basic tenor of his evidence as a whole, however, was that purchase from overseas of titles would both be more expensive and require too great a lead time between order and delivery.
216 Mr van Wessem was cross-examined on the buying habits of consumers, a topic already touched upon in the discussion of the evidence given by Mr Agostinelli. Mr van Wessem agreed that there were three identifiable categories of customers: a majority who had a particular title in mind, slightly fewer that did not, but merely wanted to buy a CD, and impulse buyers. There were, he thought, few customers of Kmart who browsed and as a result purchased CDs.
217 When parallel importation became legal Kmart formed the view that it would not be advantageous for it to import CDs. Among the considerations which led to this conclusion was that the costs of setting up warehousing and distribution would be too great. The existing distribution infrastructure could not be used, as music product had to be ordered and delivered continuously to allow efficient trading. The cost of establishing importing, warehousing and distribution systems when factored into landed cost made the cost of importation very high. Also relevant to the view that parallel importation would not be advantageous for Kmart was the fact that there was no sale or return or exchange terms available for imported titles. Also relevant was the need for reliable and speedy supplies in sufficient quantities. That did not, Mr van Wessem believed, exist. Further legal advice which Kmart obtained from its solicitors emphasised the difficulty of proving, if required, that the imported title had been made with the licence of the copyright owner and was thus not an infringing copy.
218 While this was an interim position, Kmart never ruled out the possibility of importing titles. Hence, if a record company in Australia stopped supplying Kmart with competitively priced goods, Kmart would be forced to look to alternative sources of supply, including importation. Thus, in its negotiations with the record companies on trading terms, Kmart made it known that it reserved the right to import titles into Australia.
JB HiFi
219 JB HiFi is a retailer which, at the time of hearing, had some 10 stores in Victoria, 2 in New South Wales and one store in Queensland. At the relevant time it had some 4-5% of the share of the retail Australian music market (at least in Victoria). It specialised in back catalogue material across all genres of music (chart music was not all that important to it, although it represented between 15% to 25% of its music sales). Recorded music was only part of the company’s business.
220 JB HiFi obtained its supplies of recorded music for sale from some 35 to 40 suppliers in addition to the major record companies. Approximately 15% of its purchases were from Warner, 17% from PolyGram, 6% from 6% Universal and the largest supplier was either Sony or EMI with approximately 18% of supplies each.
221 The retail price at which it sold CDs did not generally vary. However, record companies would sometimes introduce singles at a discount for a period to promote the artist or likewise would promote albums at an introductory price. The major competitors of JB HiFi were Sanity and HMV. Evidence of JB HiFi’s activities was given by Mr Durrant, who from 1988 to 1990 had been employed by PolyGram as a sales representative in Victoria and for another one and a half years as its State Manager for South Australia and who had been employed by JB HiFi since 1992 in a number of capacities including CD supervisor with responsibility across all stores.
222 JB HiFi did not directly source supplies of recorded music from overseas upon parallel importing becoming legal for a number of reasons. These included the fact that the number of titles available was limited, because it would be necessary to set up a separate infrastructure for importation and storage, because of the time delay in obtaining titles, because there would be no guaranteed right to return faulty products and because there was thought to be an uncertainty of supply. Mr Durrant regarded services supplied by the record companies, for example, advertising, the provision of dump bins, artist promotion and the like also to be important as a factor in the decision not to import.
223 However, JB HiFi did purchase some imported titles from Tempo in February 1999 and again in January 2000. JB HiFi also purchased titles from local wholesalers, Siren Pty Ltd, Stomp and Riot Distributors who acquired stock from Pacific One Stop Limited in the US. Imported titles represented between 1 and 2% of JB HiFi sales. JB HiFi only purchased Warner or Universal titles where these were not available from Warner or Universal in Australia.
224 The attitude of JB HiFi to parallel importation was communicated by Mr Durrant to Mr Handley in a conversation which took place at some time between October and November 1998.
225 JB HiFi prepared its own chart according to its own record of sales. This was used as a merchandising tool to sell product. Although there was overlap between the JB HiFi chart and the ARIA chart, the two could vary dramatically from week to week. They could fluctuate between 40% concurrence and 80% concurrence.
226 It was Mr Durrant’s view that the top 100 were not generally substitutable one for another. He accepted that some customers might browse and decide to buy. However, other customers would have fixed views on what they would purchase and could not be swayed from the selected title. It was his view, however, that over the past five years there had been a greater willingness for customers to purchase other titles if their choice was not available. The timing of the purchase was relevant. So persons purchasing presents at Christmas or Easter were not so fixed in their choice and of course those redeeming gift vouchers would substitute because they were locked in to purchasing at a particular store. But there was more willingness to substitute genres than there was titles or artists.
227 Mr Durrant was, like others engaged in the retail trade, of the opinion that most customers would go to another retailer if JB HiFi was unable to supply the CD they wanted. Thus he was of the view that the inability to access items from the catalogues of Universal or Warner would have a substantial impact on the business of JB HiFi. He noted that each of these companies had exclusive arrangements with particular artists for the release of their albums solely through them. However, some artists over time changed labels.
228 At least in 1998, Mr Durrant regarded the growth of parallel importation as having a negative effect on the business of JB HiFi because it would allow small volumes of chart CDs to be sold at a much cheaper price in non-traditional outlets and this could affect sales of JB HiFi.
229 Like the other major retailers, JB HiFi had various trading arrangements with the major record companies, including Warner and Universal, which included sale or return or exchange, although the availability of SOR and SOE was not particularly important to it because it had a policy of attempting not to send titles back to the record companies but rather to discount them in sales to the public. Hence its rate of return of product to the supplier was no greater than 3%.
Fish Records
230 As already noted, Fish Records had some 7 retail stores in Sydney at the relevant time. Chart music represented approximately 30% of its sales of recorded music in the relevant period and back catalogue 70%. It saw its main competitor as HMV because it carried a similar range of music, in contrast to Sanity which concentrated on chart music and only cheap back catalogue. Evidence concerning the activity of Fish Records was given by Mr Nemeth, its manager and a director of the company.
231 Fish Records purchased approximately 80% of its supplies from the major record companies. The balance came from other suppliers such as Shock. At the relevant time PolyGram supplied approximately 18%, 6% Universal from 2-7% and Warner 15-18%. All the major record companies provided allowances on returns, SOR or SOE, advertising subsidies and provided point of sale material, as well as dump bins. SOR and SOE were not greatly important to Fish Records, both because it seldom needed to return stock and because it seldom purchased stock on this basis. However, it was important to Fish Records to have sales representatives call because it enabled the company to remain informed about new albums. It also provided an opportunity to negotiate with the representatives deals on particular titles. Because Fish Records was a high volume seller, the volume rebates were particularly important. So too were advertising subsidies.
232 Each Fish Records store’s chart is based on its top-selling albums and singles. However, titles were sometimes included in the chart where it was considered that the title was likely to become popular. Fish Records transmitted its sales figures to ARIA for use in the preparation of the ARIA charts.
233 Mr Nemeth was of the view that it was difficult to persuade a customer to buy a different title from the particular title the customer had in mind to purchase. About 60% of customers came into Fish Records’ stores to buy a specific title. However, this was affected by the demographics of the store. If stock was unavailable for purchase, customers would either seek to buy the title elsewhere or perhaps not buy it at all. Mr Nemeth suggested that Fish Records was a destination point for shoppers who would go there to buy a particular title. As might be expected, there was more browsing by customers in shopping centres and mall sites and thus, presumably, more impulse buying.
234 Mr Nemeth said that if the full catalogue was unavailable from a particular record company Fish Records would buy more stock drawn from the catalogue of other suppliers and stock that prominently. What Fish Records stocked, and in what quantities, was influenced significantly by the price which the particular record companies offered the product to it.
235 For some considerable time prior to the legalisation of parallel importing, Fish Records imported CDs from overseas. Principally, however, the imports were not chart music. Imported recordings were, at this time, usually acquired from one stop shops in the US. To the extent that titles of Universal or Warner were imported, this was only when they were not available for immediate purchase in Australia. The importation was with the implied, at least, knowledge and consent of Universal or Warner. The change in the law affecting parallel importation did not bring about any change for Fish Records which continued to import product from the US and UK. At all relevant times imports amounted to approximately 5% of sales. Mr Nemeth did make inquiries from Much More Music (an Australian importer) about importing product from Indonesia but rejected the option because Mr Nemeth thought only a limited number of titles were available and thought the presentation “cheap” and the quality not as he desired. Fish Records did, however, import one chart title through Much More Music in about March 2000.
236 Mr Nemeth saw the disadvantage of parallel imports of chart music or newly released titles to be the time it would take to land products in Australia. Further, because prices overseas varied substantially (presumably because of currency fluctuations), it would be impossible to retain price consistency in selling overseas product. It was for this reason that Fish Records substantially purchased stock in Australia.
237 Mr Nemeth was of the view that Fish Records could not be an effective operator if it did not have available to it for purchase the full chart music of the major record companies. Chart music was the top seller for Fish Records. The company could also not survive in Mr Nemeth’s opinion if it did not have available to it the full back catalogue from the major record companies. Gaps in Fish Records’ available titles would cause the company to be perceived as a retailer of poor standing. Inability to supply would, he said, be seriously detrimental to the company’s business. In the longer term, sales lost by being unable to supply titles would not be recovered, the company’s credibility would suffer and there would be a negative effect on its business.
Colonel Clint’s Crazy Bargains Pty Ltd (“Clints”)
238 Clints is a company with some 70 stores throughout Australia which sells a range of merchandise at discounted prices. Included in that range are CDs. Customers are attracted to the stores either by advertising the sale of particular titles at specified (and discounted) prices, or simply because the store is known as a bargain store.
239 Volandu Pty Ltd (“Volandu”), now a wholly owned subsidiary of Clints, operated to import recorded music from Indonesia from December 1998 to August 2000. Volandu acted as buying agent or wholesaler for Clints and five other discount chains. Evidence of the activities of these companies was given by Mr Rashid who, at relevant times, was the Merchandise Manager or Buying Coordinator of Clints.
240 Prior to the legalisation of parallel importing, discount chains sold budget product sourced locally from distributors and wholesalers. Once parallel importing became possible, Clints turned to selling chart music at discounted prices. Stock was then sourced mainly from overseas. The Clints chain policy was not usually to import or offer products for sale unless they could be offered for sale at lower prices than most other retailers charged. The first purchases of imported CDs after July 1998 was from Much More Music and was for a relatively small volume.
241 Around the time the Copyright Act was amended, Mr Rashid made inquiries in a number of countries about the availability of recorded music CDs and cassettes. He found that Indonesia was the only country in which the price of CDs was low enough to enable Clints to sell in Australia at a significantly cheaper price. The prices from Hong Kong, Malaysia and the US were too high. Mr Rashid was deterred from buying in Thailand because he perceived there was a risk that titles purchased there would be infringing copies and their importation thus illegal. Considerations which had to be taken into account in determining the price at which titles could be sold in Australia were not only the landed cost but other costs such as head office/administration and distribution costs. When Volandu first began importing, it was able to sell the imported CDs in Australia at $14.95 and still make a small profit. Generally, Volandu was able to import stock into its warehouse in Australia in two weeks, with another week before distribution to the discount chains was effected. This still enabled the chains to catch the market at its peak.
242 From the time it commenced importing, Volandu purchased from distributors who in turn purchased from the agents for the major record companies, eg PolyGram Indonesia. At times, a supplier would place small orders over the course of several weeks to ensure that a large order would be fulfilled. It may be inferred from the evidence as to overseas conduct discussed earlier that this came about because of difficulties in placing orders for large numbers with the agents for the major record companies, or at least some of them. There was also a difficulty in obtaining titles which were requested. On average Volandu received between 50% and 80% of the titles it ordered. Ultimately, an increase in the price in Indonesia and a less favourable rate of exchange made it difficult to purchase CDs from Indonesia and sell them at prices significantly below the normal Australian retail price.
243 In the period to August 2000 Volandu generally only sought to import titles that were on the Top 50 chart put out by ARIA, since these were the titles most likely to sell. Because Volandu supplied bargain variety stores it did not seek to import a wide range of titles and restricted itself to those titles that were popular in Australia. It did not import titles by Australian artists in order to try to avoid any adverse publicity from these artists.
Collectors Corner and Second Spin
244 Collectors Corner at relevant times targeted audiences who listened to the music genres electronica and alternative music. It imported titles directly from overseas, with some titles sourced from music distributors in Sydney. About 30% of its purchases come from the major record companies in Australia. Typical customers of Collectors Corner were university students, afficionados of electronica or those who liked alternative music.
245 Second Spin has now three retail stores in Melbourne, one specialising in the sale of vinyl records. The other two stores carry an extremely broad range of music over every music genre. 95% of sales are second hand CDs. They also sell new CDs sourced from the major record companies and from CD Fulfilment, a Melbourne wholesaler. New CDs sold by Second Spin were predominantly chart music.
246 The activities of these stores was described by Mr Snow who, at relevant times, owned them. At some time Mr Snow was also involved with an independent label Crash Records. That label appears to have been unsuccessful. Mr Snow’s stores differed from stores like Sanity, Target and Woolworths, in that the last three were mass market stores, whereas Mr Snow’s stores specialised in particular genres of music, rather than concentrating on the sale of the top 100 titles.
247 Mr Snow said that it was possible to buy at least small quantities of CDs of Australian artists at one stop stores overseas. In 1998, when the Australian dollar was stronger, it was possible to purchase almost any titles available in the world from Shock. Mr Snow ordered something like two hundred thousand dollars worth of stock from Shock and at prices comparable or cheaper than those for which the same titles would be sold by the Australian record companies. However, given the change in the value of the Australian dollar, it would be more expensive now to do so rather than to buy in Australia.
248 Mr Snow said that very few Australian artists overall achieved international releases, although a substantial proportion of those who made the charts did have their recordings released overseas. Orders could be placed by phone, e-mail or Internet with the one stop shops overseas. There was less variety able to be purchased in South East Asia than through the one stop shops.
249 Mr Snow noted that about 6 months before giving his evidence he had become aware of a Melbourne wholesaler owned by Shock called CD Fulfilment. He said that he discovered that he would be able to obtain the full range of the catalogue of the major record companies from CD Fulfilment but at a price 5% more than the major record companies would charge. Its distribution system was, however, more efficient than that of the major record companies. It may not have been in existence in mid-1998. The evidence threw no light on either trading terms or whether titles were available for purchase in large quantities.
250 He noted also that large overseas acts no longer dominated the charts and further that the market had become more fragmented across genres. Further independent record labels had doubled in the past ten years so that they now had from 3-6% of the market.
Wow Records and Wow Music
251 Wow Music has two retail outlets, one in Padstow and one in Menai in outer Sydney, with a combined turnover of about $1.2 million. Approximately 20% of its stock at the relevant time was sourced from PolyGram. Other significant suppliers were Warner, BMG, Sony and EMI. The two stores sold the top 20 chart and new releases, catering for young purchasers aged between 12 and 25 who bought rock and pop music. Evidence about the activities of these stores was given by the proprietor of Wow Music, Mr Nicolas. He was also managing director of Wow Records, which company had two artists contracted to it and which had released two albums and four singles to date.
252 According to Mr Nicolas, most customers who came to the stores came asking for a CD which they had heard on the radio. In many instances his customers heard CDs through the ABC youth radio station Triple J. In his view, radio exposure was much more important in advertising titles than in-store advertising.
253 Mr Nicolas’s experience was that if he was unable in his stores to provide a customer with the requested title, particularly one in the ARIA Top 40 (there being no ARIA Top 40, presumably he meant the ARIA Top 50), generally the customer would go to another music retailer such as Big W. He said, however, that where customers were purchasing music as gifts at Christmas or Easter they were likely to be less specific in what they wished to purchase. Christmas sales accounted for between 30-40% of yearly sales.
254 Mr Nicolas said that he, as an independent retailer, relied upon being able to sell a full range of CDs to customers and, especially, a full range of chart CDs in the ARIA Top 40 (sic) chart. Because it was likely that each of the major record companies would at any time have titles in the chart, it followed that retailers such as he required access to supplies of product from each of the major record companies. If that access was not available, customers would, in the long term, be lost. In the short term, customers would probably go to an alternative retailer.
255 Wow Music received discounts on chart music from the major record companies, including a volume discount from Universal and sometimes a discount price on non-chart products. Discounts were more readily available to it when a store such as Big W was selling titles at a low price.
256 Wow Music was a member of the Leading Edge Music Buying Group, of which West’s Sound Bar (Mrs Delaney) was a member. He was also friendly with her and learned from her that her account had been closed and that she was being made an example of by PolyGram because of having purchased imported recordings. He later went to a PolyGram industry night promoting a particular CD and had conversations with PolyGram sales representatives who told him that the account had been closed but that they were not allowed to talk about it.
257 Wow Records is mainly concerned with recording and marketing a band “Stella One Eleven”. Mr Nicolas said that it was his experience that it was difficult for a small independent music label to distribute its product without a distributor. He found that the network of retail shops to which Wow Records had access was extremely limited. His distributor has only been able to get his recording into sixty independent music retail stores in the country, approximately ten HMV stores and approximately five Sanity stores. In-store promotion in record stores was virtually impossible.
Angel Records and related companies
258 Salgara Pty Ltd is a holding company with a controlling interest in a chain of six music entertainment retail shops, which trade under the name “Angel Music”, “Angel Records” or “Angel Entertainment”, operating in various shopping centres in Sydney. Its Managing Director, Mr Bugler, gave evidence of its activities so far as they concerned imported CDs.
259 Mr Bugler said that he sought to purchase stock at the cheapest price. Mr Bugler said that he had purchased stock from Indonesia from time to time. The landed cost of that stock was $15.50. The same stock sourced from Australia cost approximately $20.70 wholesale. The sound quality was the same as locally sourced CDs. There was a slight difference in the quality of the printed material on the cover. Turn around time from order to delivery was two weeks and his customers seemed to be satisfied with the product.
260 The Angel shops had a reputation for being able to supply current chart music and popular back catalogue music. He expressed the view that he would not be able to obtain the range or quantity of supply he needed from Indonesia to meet the demands and expectations of his customers.
261 Mr Bugler considered purchasing stock from Amazon.com of the US or a one stop shop probably in the US. He found the wholesale prices considerably greater than those which would need to be paid for imports from Indonesia. The consequence was that he would be unable to retain his retail profit margins if he had sourced product from these sources.
Evidence of Universal Activities
262 Evidence was led from Mr Cameron, the Sales Director of Universal, who prior to the merger had been employed by PolyGram but around the time of the merger at least was employed by 6% Universal. After the merger, he was employed by Universal, that is to say, the entity that was previously PolyGram. The evidence of Mr Cameron was largely concerned with the activities of PolyGram and thereafter the merged company. There was no comparable evidence led of the activities of Warner. Much of the detail of Mr Cameron’s evidence was confidential and confidentiality orders were made to protect that evidence. It is for that reason that some of the discussion which follows is expressed in generalities and omits specific financial details.
263 Retailers desiring to purchase supplies of Universal products are differentiated by that company into those which are key or major customers and those which are not. Account managers are allocated to key account customers such as Big W or HMV having regard to size and liaise with a Head Office Buyer who orders major releases from Universal for the customer and participates in marketing campaigns with them. In addition, there are account managers who deal with individual stores (usually, I would infer, more than one) in geographic areas. The account manager for a particular key customer, say HMV or the Leading Edge Buying Group, might also be an account manager for particular stores in a geographic area, such as northern Sydney.
264 The decision to release a title in Australia is made at monthly meetings of product managers on the basis of whether it is thought the release would be commercially viable in Australia. Matters that are taken into account include current trends, past sales history of the title overseas and of other recordings of the artist in Australia, the level of commitment on the part of the artist to participate in promotion, feedback from retailers and the subjective reactions of those making the decision. Release schedules, which include the release date, announcements of releases, advertising and marketing of titles that are to be released are also discussed. A sale plan is then prepared by Mr Cameron which includes target quantities for sale to the large and small customers and whether there are to be special discounts or other offers. Australian music accounted for between 17% and 25% of total sales or, in an average year, in the high teens.
265 When a particular album or single is released it will be advertised using media such as television, radio and glossy magazines (“front line advertising”) for between 90 and 120 days. The front line advertising might extend in a number of phases over considerable time, for example, two and a half years, depending upon the success of marketing. Once front line advertising ceases, the title is treated as “catalogue” and may then only receive less costly advertising. Catalogue product might be the subject of more extensive advertising from time to time to coincide, for example, with anniversaries of the birth, death or tour of an artist.
266 A decision may be made not to release a particular product in Australia on the basis that such release would not be commercially viable. These are then made available for purchase through an indent scheme under which Universal will order at the request of a customer specific titles in specified quantities from overseas affiliates.
267 Universal has a large number of actual account customers. They fall into various categories, being specialist chains, for example, Sanity; department stores; mass merchants, such as Kmart and Big W; casual music outlets, such as service stations and the like who sell music as a part of their overall sales; and independent outlets, being owner/operator retail music operations, including one-off stores and small retailers.
268 In addition, Universal deals with various sub-distributors of which Bruce Ingram and Associates Pty Ltd and One Stop Entertainment Pty Ltd were mentioned in evidence. Sub-distributors are, effectively, treated in the same way as retailers and have account managers allocated to them, are afforded volume discounts, future release information and advertising material in the same general way that retailers, or at least the larger retailers do. However in cross-examination it emerged that at least one and probably all sub-distributors had agreed either not to supply to pre-existing customers of PolyGram, or at the least to advise PolyGram before doing so, making it difficult to see them as alternative sources of supply, at least for retailers who purchased or had purchased from PolyGram. As will be noted, the suggestion that there was a serious alternative source of supply to retailers of PolyGram products was made by Mr Cameron. I do not accept it. The real function of these sub-distributors was to supply retailers in areas which were not serviced by PolyGram, for example, some parts of Western Australia. It would have been quite unlikely that a retailer to whom PolyGram would not sell its products would have been able to purchase that product from a sub-distributor.
269 Customers wishing to deal with Universal were required to complete an account application, sign a copy of Universal’s trading terms and place an opening order so as to ensure that a reasonable volume of Universal stock was held by that retailer. The various rebates and discounts available were generally negotiated on a yearly basis, although sometimes negotiations could be more frequent. As may be expected, rebates had regard to the sales volume of the customer. As other evidence demonstrates, and Mr Cameron confirmed, trading terms included SOR or SOE, and merchandising support such, for example, as trade fairs. The largest customers obviously had the best chance of exacting the best trading terms.
270 It is Mr Cameron’s view that there is fierce competition between the record companies in areas such as advertising, trading terms, retail distribution, market share and competition to sign artists, as well as in poaching staff. Although I think it true there is competition between record companies for sales, I would treat Mr Cameron’s evidence on this point and indeed other matters with some caution. First, there is a question of just how Mr Cameron is using the word “competition” in his evidence. Second, there is a question as to his credit which I deal with later.
271 The market share of PolyGram changed from time to time. It had been as high as 23% at one time but in the relevant period had slipped to approximately 17%. In the same period, Sony was market leader with 23% of the market, EMI and Warner had each 15-16%, BMG between 8-9%, 6% Universal about 6-7% and other manufacturers, such as the Festival/Mushroom group, Jive Zomba, Shock and Village Roadshow divided the remaining 15% among them.
272 The extent of music sales was governed by marketing and advertising by the record companies, designed to get customers to purchase particular titles through retailers. Some television advertising in particular also identified or “tagged” particular retailers. Radio airplay also had a significant part to play in promoting titles, as did exposing new product to other media. Marketing, on the other hand, concentrated upon the artist. I accept Mr Cameron’s evidence that record companies such as Universal created demand for their product, particularly by promoting the image of an artist, and that the creation of that demand was important not only to Universal but to the retailers. I accept also that a considerable part of the CDs that are now imported are titles which are advertised in Australia at the expense of the Australian record company.
273 Mr Cameron expressed the view that retailers who could not obtain product in the Universal catalogue from Universal would mostly be able to obtain it from other sources, for example from large overseas wholesalers or from sources in South East Asia and South America or from sub-distributors as earlier discussed. No doubt this is literally true, although there would be some titles that were not available overseas because the artists were Australian and for whatever reason a decision was made not to release the title overseas. But the evidence ignores both the landed cost of importation (which depends not merely on transport costs but also on relevant exchange rates which fluctuate) as well as the time it would take from order to delivery in Australia.
274 According to Mr Cameron, there have been substantial changes in trading terms since the advent of parallel importing and in favour of Universal’s customers. In the result, while the list wholesale price remained the same, the price actually realised on sale after discounts and rebates was reduced. The level of discounts and rebates, etc depended, Mr Cameron said, on the volume of sales of the retailer and in part on the skill of negotiators and in part upon general market factors. However, a confidential table showing discounts and turnovers per customer prepared by Universal did not support what Mr Cameron said. In cross-examination he was forced to admit that there was no real correlation between size of turnover and the rebates and discounts given to customers. It is also difficult from the table to see that discounts and rebates were significantly increased after parallel importing was legalised, although this would be expected to have happened at least so long as Universal took no action to prevent parallel importation by its customers by threats of reprisals etc. The table shows in total only a small increase in overall rebates and discounts, hardly a significant increase and thus reduction in overall price. It may be that the table does not reflect the cost of other assistance given by Universal, such as advertising subsidies etc and so does not reflect the real position. I am unable to find one way or the other whether there was any significant overall increase in discounts and rebates and thus, as Mr Cameron claimed, a reduction in the real wholesale price.
275 At least when Mr Cameron was involved in negotiating trading terms, the possibility of parallel importation was used by customers in an attempt to negotiate better deals. It is not so clear whether Mr Cameron was actually moved by any threat of this kind to afford customers better trading terms than would have been given had the threat not been made. Certainly he does not say that he was. However, it is true, as appears from the evidence of Mr Agostinelli, that Sanity reduced its purchases of Universal product to pressure Universal to give better trading terms (and were successful) and that some pressure was put upon Universal by Big W in negotiating better trading terms by the retailer pointing out its ability to import from overseas. I accept, however, as I have noted, the evidence of Ms Kells of Big W that parallel importation was not specifically used as a threat by that company.
276 At this point, however, it is necessary to keep in mind, when assessing Mr Cameron’s evidence, that there is another view of the negotiations between Universal and the large retailers, particularly that of Big W and Sanity. To the extent that there is a conflict, I prefer the evidence of those from Big W and Sanity to that of Mr Cameron. Mr Cameron made an attempt to suggest in his evidence that Universal was not in any strong bargaining position and that Sanity had all the bargaining chips. In doing so he attempted valiantly to avoid answering questions, the answers to which were almost self-evident, and in so doing and in the way he gave his evidence generally, he gave quite an unfavourable impression, to the point that I would treat with considerable care the evidence he gave, particularly where it was self-serving (or, at least, serving the interest of his employer), as indeed much of his evidence was. In my opinion, Mr Cameron, to the extent that he personally participated in negotiations with the large retailers, knew that Universal had, ultimately, the dominant position by being able to refuse supply and knew that both practically and economically it would be impossible for retailers to obtain supplies of recordings of Australian artists not available overseas or some parts of the back catalogue to retail at a competitive price. In a memorandum dated 13 March 2000, Mr Cameron spoke of his hope that there would be an influx of hit singles which would provide Universal with leverage over Sanity at a time when Sanity was, at least temporarily, not purchasing Universal product. The point is that over time the major record companies did have leverage over retailers, precisely because retailers needed to stock those new releases as quickly as possible. On the other hand, it is clear both from correspondence and from the evidence of Mr Hazell that HMV used the potential of parallel importation as a bargaining card and did, as a result, achieve better terms.
277 Finally, it may be noted that Mr Cameron suggested a doomsday scenario resulting from what he saw as the possibility of a significant decrease in Universal’s revenue following upon the opening of the Australian market to imported CDs. He said that Universal’s ability to operate its business would be in jeopardy. Ultimately it would be caused to cut back on marketing expenditure, employment would be affected, fewer new artists would be signed, the number of new releases would be reduced, price would become the significant factor and the range and scale of recorded music would diminish and specialist retailers and independents would almost totally disappear. Of course the scenario was dependent on the premise that there would be a significant decrease in Universal revenue. It ignores what would also be a reality, that there would be a transfer of profit from the Australian wholly-owned subsidiary of an overseas organisation to the parent or another related organisation so that looked at on a group basis the need to advertise would continue, as would the need for new signings. I do not find the scenario particularly compelling, especially where there is a real likelihood of transfer pricing. Although Mr Cameron did not appear to have much knowledge about what happened overseas, it was clear from his evidence, for example, that some overseas marketing costs were at least up to 50% in fact paid for by artists out of royalty shares, at least where the title was successful and royalties became payable to artists. Global costs of marketing including video clip production, samples, posters and displays, some advertising and promotional tours by artists were, it seems, in part recouped from royalties if ultimately payable to artists.
278 Mr Cameron in the course of cross-examination agreed that he knew that during the second half of 1998 PolyGram had adopted a policy of reserving the right not to supply to or to change terms of trade of those who parallel imported. He conceded that the news of the closure of the Delaney’s account by PolyGram went around the retail industry like wildfire, that accounts closed were only those of small independent retailers and that he knew that the closures would have a serious effect on the business of those retailers. He saw the closure of Mrs Delaney’s account as being an over reaction.
279 Evidence was also given by Mr Sullivan, the Group Finance Director of Universal since January 1999. Before that time Mr Sullivan had been Finance Director of the old 6% Universal. The merger occurred, according to him, in April 1999 as a result of the acquisition by the Seagram company, a public company listed on the New York Stock Exchange, of the worldwide operations of PolyGram Australia in December 1998. Again the detailed figures were the subject of confidentiality orders and are therefore excluded from my reasons.
280 His evidence detailed the relationship, at least in part, of the international group of companies of which Universal is a member. As a result of inter-group licence agreements Universal is now the licensee for Australia of Universal titles which include the international repertoire of largely UK and US artists. For some titles an artist might grant copyright only to the Australian company for the Australian territory, leaving it open for the artist to deal with the overseas copyright. As a result of licence agreements, royalties are paid on each album sold of which Universal is the licensee to a Netherlands company which is part of the Universal group. Presumably taxation reasons govern the choice of Netherlands incorporation for that purpose. Details of royalty arrangements, the manner of calculation and the like which Mr Sullivan gives in his affidavit do not appear to me to have any real significance in the case.
281 As would be obvious, sales to retailers account for the significant part of Universal’s income and of that the highest proportion is the international repertoire. According to Mr Sullivan, and in contrast to the evidence of Mr Cameron, in the period from 1998 to 2000, a high percentage of Universal’s income came from international releases. Mr Sullivan gave in evidence details of production and other costs which need not be here repeated. His evidence shows that production costs for domestic artists were significantly greater than production costs for international releases. However, his evidence showed also that, at least where a title is successful, recording costs will be borne by the artist and are payable from royalties earned as are other additional costs including initial art designs and the like. Obviously only a small number of releases will be successful. Artists receive an advance as a non-recourse loan repayable from royalties. While I accept that costs associated with a new release will be high, it is not correct that the record companies necessarily pay all these costs. Some costs of production of Australian music will be recouped from the artist out of royalties. Likewise, promotional costs of international repertoire may often be recouped from royalties payable to the artist.
282 Mr Sullivan’s evidence also discussed the spending by Universal on marketing, including television advertising and on point of sale displays, cooperative advertising etc. A strategy document prepared in February 1998 by 6% Universal suggested that the major companies on average spent approximately 15% of turnover on marketing and promotion, with 6% Universal spending around 12%. Interestingly, and in conflict with Mr Sullivan’s evidence, the document suggests that there is no difference in the amount spent promoting domestic repertoire and that spent promoting international repertoire.
283 The overall thrust of Mr Sullivan’s evidence was that costs relating to Australian recordings were considerably greater overall than those relating to releases of international repertoire. He exhibited figures which also showed, according to his affidavit evidence, that discounts in respect of PolyGram products increased over the period from 1995 to 1999 and again from 1999 to June 2000 so that while the published price to dealer remained more or less static over time (but for the reduction in price brought about by the abolition of sales tax and its replacement by GST at a lesser effective rate) the actual price realised reduced. In cross-examination, Mr Sullivan accepted that there was no significant price reduction as a result of discounts etc in relation to full price PolyGram product. It would seem that for PolyGram full-priced CDs, significant increase in discounting did not happen until May 1999 with parallel importing being a factor as well as competitive pressure in the market place, perhaps brought about by retailers or at least the big retailers having in their negotiation armoury the threat of importation.
284 While Mr Sullivan agreed with Mr Cameron that it was likely that Universal would reduce investment in local artists if it suffered a decline in revenue, any decision to do so would be made overseas consequent upon a serious threat being reported in writing to head office. He conceded that no such report had been made by him when parallel importing was legalised. In cross-examination he agreed that total units of PolyGram products sold actually increased after parallel importation became legal and that discounts for full priced products remained relatively constant to 1999 with any significant level of discount increasing after that time. Expenditure on domestic repertoire increased after legalisation of parallel importation.
Advertising by wholesalers
285 Evidence was adduced in Universal’s case from Mr Porter, the Managing Director of The Media Edge (“Media Edge”), a media planning and buying agency providing media buying and planning services, inter alia, to Universal.
286 His evidence suggested that television advertising was the most effective, if not the most efficient, form of advertising music and probably the most expensive. Younger consumers to whom popular music was directed were a difficult audience for advertisers to reach because they were low consumers of traditional media and moved between different types of media. However, television presented the best possibility of reaching them. There was a relationship between the size of the advertising budget and the size of the record company. The amount of advertising placed had also some relation to the price discounts available from Media Edge.
287 Advertising was particularly important as a tool for marketing music. Each title was a separate product to be marketed and in this way music recordings differed from other goods. However, sales of CDs depended not only on advertising, but on the strength of the reputation of the artist. The artist was, for this purpose, rather like a brand would be for other products.
288 Universal in conjunction with Media Edge prepared advertising campaigns for CDs. The amount expended and the manner in which it was expended are confidential. Suffice it to say that the amounts spent are considerable, peaking prior to the Christmas period as one might expect. Mr Porter expressed the opinion that while some recorded music, because of the artist, might sell with little advertising support, in general, less established artists would effectively fade away unless given considerable advertising support.
CONCLUSIONS FROM THE EVIDENCE ON MARKET
289 The market for recorded music consists of dealings in CDs, cassettes and vinyl records. Each is sold in three formats: “singles”, “albums” and “compilations”. Over time, sales of vinyl records and cassettes have decreased as sales of CDs increased so that for the relevant period CDs accounted for by far the most significant proportion of sales. Retail sales of CDs were at least 90% of overall recorded music sales in 1998-1999. Although recorded music can now be obtained by downloading from the Internet the impact of the Internet on sales during the relevant period was minimal.
290 Australia is a significant world market for music sales. In the 1997 calendar year Australia ranked eighth in the total world retail sales of recorded music (the data would seem to include cassettes and vinyl recording as well as CDs), with an overall $US739.1 million of sales ($AUD972.1 million). The following year Australia had slipped to ninth place with overall sales of $606.7 million ($AUD964 million). There was thus a 1% reduction in sales when valued in Australian currency, said to be a result of the legalisation of parallel importing.
291 At the time before the merger between 6% Universal and PolyGram there were in fact six major record companies operating in Australia. They accounted for over 90% of sales in 1998 and 1999. The percentage shares of the six major record companies as determined by ARIA in a document entitled “Record Industry Code of Practice for ARIAnet Charts” for the calendar year 1998, as contrasted with estimates made by each of Universal and Warner at the time, were:
|
| ARIA (%) | PolyGram (%) | Warner (%) |
| Sony | 26.35 | 27.21 | 26.9 |
| Warner | 15.89 | 18.17 | 17.0 |
| PolyGram | 17.61 | 15.45 | 16.2 |
| 6% Universal | 5.85 | 7.46 | 6.7 |
| EMI | 18.15 | 17.03 | 19.1 |
| BMG | 7.82 | 6.59 | 7.1 |
| Others | 8.34 | 8.09 | 13.7 |
292 In addition to the five major record companies, which at all relevant times included Universal and Warner, three other companies stand out. They may be described as independent record companies. These include Mushroom, which commenced life as an independent manufacturer, but was subsequently taken over by Festival Records (a division of News Ltd), Festival itself and Shock. The latter accounted for up to 5% of national sales. Smaller independents included Village Roadshow. Most of the independent record companies specialise in particular genres of music and operate by entering into exclusive pressing and distribution arrangements with the larger record companies.
293 Each of the five major record companies is part of a worldwide group, the members of which have similar names and have the exclusive rights within designated territories to distribute and in some cases also to manufacture the whole or part of a unique repertoire of recorded music. The unique range is generally referred to as “catalogue”. That part of the range for which exclusive rights exist in Australia can be referred to as the “Australian catalogue”. It includes both Australian labels and overseas labels. Within each designated territory, members of each group typically perform the roles of scouting for new talent to be added to the catalogue, obtaining the relevant copyright and other rights and of marketing and distributing recorded music from within the existing catalogue.
294 For example, for the year ended 31 December 1998, Warner Music Group’s (“WMG”) record music activities were conducted in more than 60 countries outside the US by Warner Music International (“WMI”) and its subsidiaries, affiliates and non-affiliated licensees. WMG’s record labels in the US – Warner Bros., Atlantic, Elektra and Sire – each with a distinct identity, would discover and sign musical artists from many different genres. Artists would generally receive royalties based upon the sale of their recordings and music videos, and many receive non-refundable payments recoupable from such royalties. WMG is a vertically integrated music company. After an artist has entered into a contract with a WMG label, a master recording of the artist’s music is produced and provided to WMG’s manufacturing operation, which replicates the music, primarily on CDs and cassettes. Another operation prints the material that is included with the CD and cassettes and creates packaging for them. WMG’s distribution networks sell product and deliver it, either directly or through sub-distributors and wholesalers to record stores, mass merchants and other retailers throughout the country. The promotion, marketing, advertising and publicity departments place advertisements in print and electronic media, work to get a new album airtime, reviewed and mentioned in publications and the artist booked for appearances on radio and television. If a music video featuring the artist has been produced, the label is distributed and promoted to music video outlets. A concert tour may also be organised to further promote a new album. In addition to new releases, each label markets and sells albums from extensive back catalogues, which the labels generally continue to own the copyright in perpetuity. WMI engages in the same activities as WMG’s domestic labels, operating in more than 60 countries around the world. In most cases, WMI also markets and distributes the recordings of those artists for whom WMG’s domestic record labels have international rights. In certain countries, WMI licences to unaffiliated third-party record labels the right to distribute its recordings.
295 Similarly the operations of Universal and its affiliates globally encompass the development, production, manufacture, marketing, promotion, sales and distribution of recorded music and exploitation of copyrights in sound recordings embodying recorded music through a network of Universal subsidiaries, joint ventures and third party licensees in 40 countries or territories around the world. Universal affiliates in each territory sign artists under agreements which typically included an assignment in perpetuity of the worldwide copyright in sound recordings produced by the artist. The affiliates are parties to an “All-in-Fee Agreement” under which each, for a fee, licences the worldwide copyright (outside its territory) to a central entity and receives in return a licence to exploit (within its territory) the copyright of others. Before its merger with Universal, PolyGram and its worldwide affiliates signed artists under similar agreements and were parties to a substantially identical All-in-Fee Agreement.
296 The signing of an artist by a record company may result in that artist being bound to the record company for the whole of the artists’ recording career. This will often arise in practice because most artists produce no more than two successful albums during their career and the agreement between the record companies and the artist typically gives the record company rights (or options) in respect of between two and seven albums. Some artists however may record different titles over time with different record companies.
297 Repertoire for more than 70% of recorded music sold in Australia originates overseas. For Universal the figure was higher in the relevant period. Consequently it is important for the Australian major record companies to have access to a worldwide catalogue. Conversely, access to the Australian market by each of the majors was not unimportant, given that Australia is one of the ten largest markets in the world for sales of recorded music.
Distribution
298 The majors each have highly developed distribution systems which enable them to place products in a timely fashion with a wide range of retail stores throughout Australia. Sony, EMI and Warner at relevant times distributed their respective catalogues to retailers through a joint venture distribution company Entertainment Distributors Company Pty Limited (“EDC”). Universal on the other hand undertook its own distribution.
299 There were, in addition to EDC, a number of sub-distributors who obtained supply from the majors and sold to retailers but whose sales accounted for a very small proportion of total wholesale sales. These included One Stop Entertainment Pty Ltd (based in Queensland) and Bruce Ingram and Associates Pty Ltd (based in Western Australia). These sub-distributors serviced only those retailers whom it was not worthwhile for the majors to service. Indeed the practice of One Stop Entertainment Pty Ltd was to ask permission of the majors before supplying a particular retailer. A retailer denied supply by a major record company would not be able to purchase the stock not available for purchase through a distributor at an economic price or perhaps at all.
Wholesalers
300 Some local wholesalers operated in the Australian market. However, they were unable to supply the volumes required at least by the large retailers such as Sanity. Local wholesalers included Siren Pty Limited, Stomp Pty Ltd and Riot Pty Ltd. JB HiFi purchased international titles from local wholesalers to meet specific customer orders. However, local wholesalers would not have been a substitute source of supply for retailers wishing to stock chart music or other titles generally. Bruce Ingram and Associates Pty Ltd and Sound Wave were two wholesalers selling recorded music from the catalogues of the Australian music companies, including chart music. However, as the evidence of Mr Howson made clear, it would not have been possible for a retailer to obtain all its requirements from them either. At best only 40% of requirements could be sourced from them. A retailer solely dependent on these sources would lose sales and profits. At least one wholesaler, One Stop Entertainment Pty Ltd, felt it necessary to have the approval of the record companies before supplying its products to retailers. It is not unlikely that other wholesalers took the same attitude. Generally it would seem as if some, perhaps most wholesalers who sold the locally released product of the major record companies only supplied titles in remote areas where it was uneconomical for the record companies to operate.
301 In addition overseas wholesalers, generally referred to as “one stops” (although there existed also a company of that name), stocked titles available internationally and after parallel importing became legal could sell into the Australian market. Tower Records was one such company. However, exchange rates, transportation costs and time of delivery made it difficult, even if not impossible to source all international titles from such wholesalers. To the extent that a particular hit record was manufactured in Australia and not released internationally, that title would obviously not be available from overseas sources, except where the title was first exported overseas and then reimported, a course which involved additional cost. Obviously such titles would not be available in the volume that would be required by an Australian retailer.
Retailers
302 At relevant times the retail market was relatively concentrated. The main categories of sellers in the retail market were traditionally:
· specialist music retailing chains, collectively accounting for 30-40% of national retail sales;
· locally based independent specialist music retailers collectively accounting for 35-40% of national retail sales; and
· diversified retailers collectively accounting for 20-30% of national retail sales.
Music retail chains
Sanity
303 Growing rapidly in the 1990s, by mid-1998 Sanity (including IN2 Music, CC Records and Delta Music) was the largest specialist retailer of recorded music in Australia with approximately 210 stores. Its market share was about 15-20%. It had its own warehousing and distribution system in place that could be, at additional cost and inconvenience, used to distribute its own product.
Leading Edge
304 Leading Edge was a cooperative buying group comprising of about 200 independently owned specialist music stores (including Wests in Burwood and Ultimate Music in Carlingford) collectively accounting for approximately 12-14% of national retail sales.
HMV
305 EMI was one of the biggest record companies in the world with the top two or three catalogues of titles of any record company. Until March 1998 when a management buy-out occurred, HMV was vertically integrated with EMI in that it was a wholly owned subsidiary but independent at the retail level. EMI thereafter held 45% of HMV. HMV was the biggest or one of the biggest retailers of recorded music in the world with more than 276 stores and a worldwide distribution network with access to the catalogues of other HMV record companies worldwide. In Australia, HMV had a chain of 29 specialist music stores located in Queensland, Victoria and New South Wales and approximately 6-8% of national retail sales.
306 Smaller, locally based specialist music retailers included Fish Records, Compact City and Raiders. For each of these specialist music retailers, the sale of CDs constituted a very large part of its turnover.
Diversified retailers
Coles Myer Limited Group
307 About the same size as the Woolworths Group, the Coles Myer Limited Group comprised Target, Kmart and Myer/Grace Bros, all wholly owned subsidiaries. The group enjoyed approximately 20% of the market and were serious competitors in the market but did not sell much back catalogue. Each entity operated independently of the other and although the potential was there to operate in a coordinated manner, they did not. Target is a discount store having an estimated 4-6% of the market; Kmart is a budget department store with 135 stores around Australia accounting for approximately 8-12% of the market; Myer/Grace Bros is a department store having 64 stores around Australia with about 4-6% of the market.
Big W
308 Big W is a budget department store and division of Woolworths Ltd with 87 stores around Australia with a market share of 4-6%. Other divisions (Dick Smith, Crazy Prices) of Woolworths also purchased recorded music in an indeterminate amount. Next to Coles Myer Big W was Australia’s other retail giant and serious supplier of recorded music in Australia.
JB HiFi and other diversified retailers
309 With 9 stores located in Victoria and one located in each of New South Wales and Queensland, JB HiFi held 4-5% of the retail market (at least in Victoria).
310 Other diversified retailers with stores around Australia included ABC Retail with 26 stores; David Jones, a department store with 26 stores; and Vox Retail (trading as Chandlers) with 124 stores.
Non-traditional retailers
311 Towards the end of 1998 and as a result of the availability of parallel imports, a number of “non-traditional” retailers in the form of $2 stores, discount or budget chains began to emerge.
Categories of customer
312 Customers vary in their purchasing habits. A majority of customers (excluding those who buy on impulse) will go to retailers with a particular title in mind and will be satisfied with nothing else. If the desired title is unavailable the customer will go elsewhere to make the purchase or perhaps not make the purchase at all. Other customers may go to stores with a number of possible titles in mind so that they can be persuaded to buy from within the list of titles one or more which is or are available. Yet others will browse and select their purchases from titles on display or purchase on impulse.
Product differentiation and chart music
313 Sales are driven by the preferences of consumers for particular titles or for the recordings of particular artists. Those preferences change significantly over time. They are informed by factors which include the amount of media exposure given to the title or artists at a particular time. Price is a relevant factor but not necessarily the determining factor. Record companies’ marketing is generally aimed at creating specific demand for specific titles.
314 “Chart music” refers to the top selling recorded music within a designated period. It is generally but not exclusively in the “pop” music genre. The nature of chart music is that a particular title becomes extremely popular for a short period of time, usually measured in weeks. This popularity may be reflected in “Top 50” charts published weekly by ARIA based on sales data collected from retailers throughout Australia as well as in “Top 100”, “Top 40” and “Top 20” charts published periodically by ARIA and by individual retailers. The charts themselves serve both to measure existing demand and to stimulate further demand. The period of extreme popularity of a chart title is usually very soon after the first release when sales may be high. Generally these sales will quickly subside and taper away, unless the title is successful, when sales may continue to grow.
315 Another feature of chart music is that it is notoriously difficult to predict in advance which titles will achieve a high level of popularity and which will not. Of the large number of releases, only a few will become “hits”. Producing chart music is in part a function of expertise in picking “winners”, in part the product of the promotion of the title or artist and in part the result of unpredictable, random forces.
316 The industry rule of thumb is that 80% of sales comes from approximately 20% of stock. Almost all retailers carry chart titles; very few carry no chart. Depending on the marketing strategy adopted, chart music typically accounts for anywhere between 15-70% of the sales of recorded music by individual retailers. Each of the majors would usually, although not invariably have a certain number of its titles in the chart at any given time, if only because of the size of its repertoire. It would be rare for a major record company not to have a part of its Australian catalogue in the chart. This is to be contrasted to that of the numerous independent record companies whose presence in the charts is occasional or sporadic. Thus it was commercially imperative for most retailers to stock or have immediate or timely access to the Australian catalogues, including chart (and for some specialist music retailers, to the whole or part of the back catalogue), of each of the majors.
317 However smaller retailers could not carry, and never have carried, the depth and range of catalogue carried by a retailer such as HMV. Rather, they sell a selection of titles from that catalogue. Department stores and bargain stores carried chart music, although not necessarily all the chart. Many carried a narrow range of back catalogue. JB HiFi specialised in back catalogue material across all genres and was not dependent on the supply of chart music. Sanity would tailor its range according to the locality in which the particular store was operating.
318 A number of large retailers, for example, Sanity and HMV, maintain their own charts which reflect sales of popular music in their own stores. There is considerable overlap between the ARIA chart on the one hand and these particular charts, although they are not coextensive. This is hardly surprising since sales of popular music are to a considerable extent driven by advertising and media exposure.
319 Retailers, particularly the large retailers play an important role in the promotion of titles and in consequence the commercial success of titles that are promoted.
Price and trading terms
320 Before the change in copyright law, CDs typically sold, both by wholesale and by retail, at three “price points”: full price, mid-price and budget price. The most sales by value were at full price. The sales at full price included, most significantly, sales of chart music. A new release typically followed a life cycle which saw its release at full price (at which it would remain while in the chart) followed by its eventual movement to mid-price or budget price. While mid-price and budget price CDs were often sold on an SOE basis, full price CDs (including chart music) were normally sold on a firm sale basis. Generally the record companies did not charge more for their top selling hits. There was often discounting of new releases before they reached the chart. There was sometimes discounts on “Number 1” albums, but not from PolyGram.
321 Wholesale list prices, referred to as the published price to dealer (“PPD”) remained relatively constant over the period prior to parallel importation becoming legal. However, the PPD provided both before and after the legalisation little indication of the real cost to retailers. The record companies including Universal and Warner gave particular discounts and allowances to retailers which reduced the actual price to dealer. Generally volume discounts were available to retailers. Other discounts and allowances are dealt with later.
322 PPD and recommended retail prices (“RRP”) applicable during 1998 were as follows:
· Full price - $18.40 (PPD), $29.95 (RRP)
· Mid-price - $12.17 (PPD), 19.95 (RRP)
· Budget price - $8.99 (PPD, $14.95 (RRP)
323 The only evidence of any increase in PPD in the period with which the present case is concerned is evidence involving an increase by Warner of the price of premium priced CDs dealt with in these reasons at paras 174 to 182.
Discounts and allowances
324 As noted each of the major record companies offered a variety of discounts and allowances which varied from retailer to retailer. The evidence does not suggest that there was a real correlation between the volume of purchases of a particular retailer and the size of the total discounts obtained, although volume of purchases was often a significant factor in determining the level of discount given. Other factors relevant to the amount of discount included the state of turnover of the supplier at the time, the general market conditions, the degree of skill of the negotiators on behalf of the retailer and on behalf of the record company, and the level of support the retailer might give to the record company and the level of support the record company might seek to give to the retailer.
325 At all relevant times the record companies offered file or flat discounts, which were guaranteed irrespective of turnover, and volume discounts. Record companies would provide a retailer with an incentive to take particular titles (either new releases, chart or “evergreens” of the back catalogue) by discounting titles so that the retailer would be able to offer them at a lower retail price and thereby drive sales. Discounts of 10-15% were relatively usual. Even smaller retailers received discounts from all the majors on chart prior to parallel imports.
326 In the months immediately following the passing of parallel import legislation, Sanity and Big W were able to secure additional trading benefits from either Universal or Warner. At least one smaller retailer gave evidence that discounts available from the record companies improved throughout 1998. Discounted PolyGram titles advertised by Big W were made possible by a significant discount from PolyGram in September/October 1998. The fact of parallel imports gave HMV an additional lever in negotiating decreases in its bottom line price. HMV negotiated better trading terms with Universal in 1999 (not earlier as HMV had its Christmas campaign that it did not wish to upset). For Sanity, the prices started going down within the first seven days. PolyGram offered immediate 20% discounts on titles applied to “Head Office drops” of between 10,000 and 15,000.
327 Other allowances/trading terms included:
· Rebates - incentives given by a particular record company to increase the volume of its business with a particular supplier; Sanity preferred price incentives in the form of rebates rather than discounts. Big W’s rebate was a negotiated percentage of the overall business.
· Privilege returns/returns allowance - offered to Sanity by some suppliers different percentages were negotiated with different suppliers; some were more flexible than others.
· Sale or return (SOR) and sale or exchange (SOE) - SOR applied principally to singles and SOE to mid-price and budget catalogue. SOR and SOE (only on specific albums) were applied to chart releases. Big W, apart from chart albums, bought virtually every product on SOR terms (including new releases and singles, if on television). At least one retailer, Fish Records, was not interested in SOR and SOE.
· Cooperative advertising - record companies made a financial contribution to production of the Sanity chart, and Sanity’s magazine “Sain” was largely funded by the record companies. Suppliers subsidised the cost of producing Target’s retail catalogues.
· Free stock, provided to retailers by record companies prior to the introduction of parallel imports, had the effect of a direct contribution to the bottom line. Free stock was offered in exchange for taking more volume on other titles.
· Additional price terms (prior to the change in copyright law) - individual stores negotiated additional price concessions from record companies on a store to store basis.
· Credit terms.
Parallel importation - an alternative source of supply
328 The legalisation of parallel importation removed the statutory monopoly (at least in theory) which the record companies had as a result of the copyright laws which prevented importation without the licence of the holder of the Australian copyrights. Since approximately 80% of the sales of retailers were derived from some 20% of titles, it was obvious that importers would target those titles. The record companies took seriously what they perceived to be a threat to their business by the opening up of the Australian market to imported product. There was an increase in the level of imports from South East Asia in the last four months of 1998. However the overall level of imported CDs increased dramatically only in January 1999. Most of the imports were from Indonesia, a country which offered at that time the dual benefit of cheap prices and weak currency.
329 Existing or new wholesalers, including Much More Music and Volandu, imported popular titles. Tower Records of Hong Kong was prepared to supply chart music to retailers from Hong Kong and back catalogue from Singapore. It was, however, logistically easier for Australian companies, even such a large organisation as Big W, to deal with Australian importers rather than with Tower Records.
330 The supply of imports to non-traditional retailers, which began in late 1998 started to have an impact on the retail market by February 1999 when chart CDs began to be sold in discount stores at retail prices of $19.95 or lower. The number of non-traditional stores which stocked imported titles was by that time estimated by Sony to be over 200 stores. As earlier noted, product was available to be imported from one stop companies from the catalogues of all major record companies, although local titles not released overseas would present difficulties. The economics of purchasing titles from overseas depended on matters such as exchange fluctuations and transportation costs. Delay between order and delivery was a significant factor in whether a retailer would choose to import. So too there were difficulties in obtaining from overseas large quantities of popular titles. There was some evidence that in mid-1998 product could be purchased from Canadian one stop suppliers and be in store within 4 to 5 days. At that time the exchange rate of the Australian dollar to the Canadian dollar was 1:1. It can be inferred that this source of supply was financially impractical later as Canada was not substantially used to source parallel imported titles later that year or in 1999. However, the evidence as a whole suggested that one stop suppliers were not a satisfactory substitute for purchasing directly from the Australian supplier.
331 Non-infringing copies from the Australian catalogues of the major record companies, at least if released internationally, were available to be imported from various overseas suppliers once parallel importation became legal. It seems at that time that prices in the US, Canada and the UK were comparable to Australian prices and hence importation from these countries was not financially viable. However, CDs could be imported from a number of South East Asian countries at a landed price well below the prevailing wholesale price in Australia. As already noted, at that time Indonesia was the most attractive source of supply.
Disadvantages to the retailer of parallel importing
332 It was not possible to source from overseas all of the chart music within the Australian catalogue of the majors. It was unusual for Australian titles, and especially Australian singles, to be released overseas (unless they made the charts, of which only a relatively small percentage did). This meant that the majors were, and would continue to be, the only source of supply for most Australian titles within their respective catalogues. Moreover, there was no certainty of titles being released overseas being available at the right time or in sufficient quantities to meet demand in Australia, yet timeliness of supply for new releases was of critical importance to a traditional music retailer. Not all back catalogue was available overseas from a particular supplier.
333 For Target, the variation between landed cost of CDs from overseas and buying locally, and taking all the terms into account, the gap was not large enough to warrant going overseas. For Sanity there was a 10 day delay between placing an order and delivery at the wharf. Volandu stated there was 2 week delivery to warehouse out of Indonesia. JB HiFi preferred to deal with the local record companies for efficient, reasonable supply of titles wanted. HMV took account of the difficulty in obtaining singles, fluctuations in the foreign exchange rate and difficulties obtaining some stock on short notice in deciding whether to parallel import.
334 One logistic difficulty for large retailers at least who might otherwise source titles from overseas lay in the need to have appropriate warehousing and distribution facilities. The larger retailers, however, were less vulnerable to any threat. Smaller retailers who might consider importing titles from overseas or purchasing imported stock from Australian importers were vulnerable to retaliatory action from the major record companies.
335 From December 1998 Sanity began importing CDs from the Australian catalogues of each of the major record companies in significant quantities. In February 1999 HMV imported between 1000 and 1500 copies of three titles which it sold in its flagship stores in Sydney, Melbourne and Brisbane. From February to April of that year HMV imported 15 titles overall in quantities averaging 1000 copies and had these available for sale in its stores from about March. In January 1999 HMV and Sanity significantly reduced their purchases from the major record companies. Sanity went so far as to temporarily cease purchasing from Sony. Sanity used this as a lever to extract greater discounts from the record companies. In the result both Warner and Universal began increasing the level of discounts offered to retailers reducing thus the price to dealer. Approximately six months elapsed between the legalisation of parallel importing and the decline in wholesale prices through increased discounts and otherwise more favourable SOR or SOE conditions.
Non-price competition
336 Record companies compete with each other to sign successful new or established artists, to obtain distribution rights to records, to poach well performing staff from other record companies or to take over an independent label which had achieved success. If one of the major record companies had a record that was a success, other record companies would often put out a similar product, or, as it was put, “jump on the band wagon”. The record companies compete for radio airplay, notwithstanding that the decision what record to play will remain one for the radio station.
337 Promotion of titles on television radio and in the press is the subject of competition between the record companies who bypass the retailers and promote titles direct to the public to stimulate demand. Television advertisements are often “tagged” with retailers negotiating with record companies to be identified in company funded television advertising. Other forms of promotion included in-store promotions in cooperation with the record companies. Sales of CDs were affected by the way CDs were displayed in the store, the positioning of bins etc. The record companies provided point of sale material and often paid for space for dump bins to hold CDs which were for sale. The record companies offered the large retailers such as Target and Big W financial incentives to have their product placed in particular and prominent positions in the store. They contributed financially to advertising by the large retailers such as JB HiFi and Kmart and gave consideration for special location in some stores, such as those run by HMV. They made contributions to the cost of the HMV in-house magazine through advertising. They also financed promotional tours by artists.
Marketing and promotion
338 Expenditure by the majors on marketing and promotion was budgeted to be between 12% to 15% of turnover.
339 Universal has typically allocated that budgeted figure at an operational level to expenditure on particular titles, maintaining and reviewing a schedule of proposed releases of new titles. The decision to release a title is made in conjunction with a decision on the implementation of marketing and promotional activities relating to the title. Marketing and promotional expenditure is incurred (or continued) only where it is likely to yield a return – the greater the likelihood of success of a title the greater the expenditure. More is spent on marketing and promotion of titles by established artists (who have been successful in the past and are perceived as likely to be successful in the future) than on the marketing and promotion of titles by unknown artists. There is no significant difference in approach to the marketing and promotion of Australian artists from the marketing and promotion of overseas artists save for the timing of any television advertising. Because the vast majority of titles released in Australia originate from overseas it is arguable that promotional activity in Australia may have a reduced importance in a global market. In turn, the Australian expenditure on promotion may be less than would otherwise be required. In particular promotional activities in Australia can be undertaken more cheaply using material (most importantly, video clips) developed or produced by overseas affiliates. Record companies, however would still have to pay TV stations for television advertising.
340 An important factor in the formation of consumer preferences is the amount of radio airplay received by the title or artist concerned. The potential range of marketing and promotional activities that may be undertaken in relation to a title include:
· the provision of video clips for television and cinema;
· promotional tours;
· radio and television advertising;
· print advertising; and
· point of sale advertising and in store promotions.
341 Video clips produced for exposure on video programs on free to air and pay television are standard promotional tools. In relation to titles by local artists, half the cost of production of a video clip is typically recouped as a deduction from the royalties paid to the artists. In relation to titles by international artists, a video clip is ordinarily made available to a major record company from its overseas affiliate free of charge as part of the All-in-Fee reciprocal understanding.
342 Although critical for the breaking of developing artists, promotional tours account for a small part of total marketing and promotional expenditure. Radio and television advertising are comparatively expensive. Television advertising is used extensively to promote some titles of Australian and international artists. Indeed for Universal, it would seem that television advertising accounts for a quite substantial percentage of its total advertising and promotional budget. A part of that expenditure is recoverable from the royalty payable by Universal to the artist under the All-in-Fee Agreement in respect of its sales of international titles - 50% for popular international new releases and up to 75% for international back catalogue). Largely because of its expense, television advertising is little used to promote new releases by unknown artists, and is more typically confined to announcing new releases by established or “superstar” artists, to driving volume after success in the initial phase of the new release and to marketing compilations of previously successful releases.
343 Print advertising accounted for a smaller, but still not inconsiderable percentage of Universal’s total advertising and promotion budget. Point of sale advertising (posters and displays) together with in-store promotions accounted for a slightly greater percentage than print advertising.
Artist and repertoire investment
344 In addition to marketing and promotional expenditure, record companies incur expenditure in scouting for and developing Australian artists, known as “artist and repertoire” or “A&R” investment. While part of this expenditure could be recouped from the royalties paid to an artist in the event of success, because of the uncertainties involved, on average 50% could not, and appropriate provision was made in the company’s accounts. Universal and PolyGram figures for 1997-1998 through to 2000-2001 showed a fourfold increase in sales turnover and a threefold increase in expenditure on marketing and promotion in relation to domestic repertoire for the combined entity.
ECONOMIC EVIDENCE
345 As I have already noted, economic evidence was adduced from Mr Henry Ergas for the ACCC and from Professor Jerry Hausman for both Universal and Warner. In accordance with the Court’s practice relating to the giving of expert evidence, the two witnesses were directed to confer and ultimately produced a document setting out the areas upon which they agreed and the areas upon which they disagreed. The greater predominance was in the areas of disagreement. Both were sworn and gave evidence each responding to the views of the other where they disagreed. Each can fairly be said to have been an advocate for the party for whom he was called. Although it was submitted that I should disregard the evidence of Mr Ergas on the basis that he was too biased in favour of the ACCC (and I do not accede to the submission) the same could have equally been said of the evidence of Professor Hausman. Indeed, it may be noted (although no submission was made to me concerning the fact) that Professor Hausman had been engaged as a consultant for the past three years to the major record companies in the US.
346 Mr Ergas is the Managing Director of the Network Economics Consulting Group Pty Ltd, with degrees from Sussex University and the University of Queensland. He has taught as a tutor, fellow or Professor at Macquarie University, the University of Queensland and Monash Universities as well as having worked with the Organisation for Economic Cooperation and Development in Paris, and been adviser to the Trade Practices Commission, the predecessor to the ACCC. He has also been Visiting Professor in the Kennedy School of Government at Harvard University, at Bocconi University in Milan, the Ecole Nationale de la Statistique et de l’Administration Economique in Paris and at the University of Auckland in New Zealand. He has been consultant to various bodies, including the World Bank and has published numerous articles and monographs on various topics, many, probably most, of which are competition related.
347 Professor Hausman is the MacDonald Professor of Economics at the Massachusetts Institute of Technology, with a degree of D Phil in economics from Oxford University. He specialises in econometrics. His curriculum vitae is most impressive with numerous academic awards. He has significant experience in antitrust disputes in the US, where he has given evidence in nine antitrust trials, and in the UK, the European Community as well as Australia and New Zealand, and has written numerous articles on antitrust subjects.
348 In the discussion which follows I have adopted the significant subject headings used by the witnesses to identify their competing views, outlining those views briefly and indicating the conclusions I would reach. One possible difficulty in reconciling the competing views or choosing between them which did become apparent was that much of Professor Hausman’s evidence was coloured (I use that word without any disrespect to Professor Hausman) by his US antitrust experience. While there is considerable similarity in antitrust concepts used in the US and the trade practices concepts adopted in Australia, the context could be important. The debate on market power illustrates the problem. It is a problem to which I will return in some detail when discussing the Australian law and the submissions made by the parties on it.
Market Definition
349 There was no real dispute between the witnesses on the question of the definition of the relevant market in which the respondent record companies were engaged. Each agreed that it was the wholesale market for recorded music Australia wide. Both agreed that there was also a retail market for recorded music, although Mr Ergas believed that there were smaller retail markets which could span small towns and cities. I am of the view, and it is not suggested that there would be any difference in the outcome if Mr Ergas’ view was adopted, that the appropriate retail market should be accepted to be Australia-wide, while noting that there are perhaps regional differences in the way the retail market operates. For example, country and western music might have more appeal in some rural areas than it has in urban areas.
350 There is a difference between the witnesses on whether there is, as Mr Ergas suggests, a chart sub-market. There is a problem in my view with the concept of sub-market in Australian competition law. In so far as the Act requires delineation of markets, for example, in the application of s 46 or s 50 of the Act, a factual finding as to the relevant market is all that is required. So, the question of market power relevant to s 46 of the Act, for example, requires consideration of market power in the market, not market power in some sub-market. What can be said, however, is that the delineation of sub-markets can be useful as pointing to a particular characteristic, a structural dimension, of the market, ie how the market works, once the market has been defined. I accept the view of Professor Brunt in her useful article “Market Definition Issues in Australian and New Zealand Trade Practices Litigation” (1990) 18 ABLR 86 at 117 that the concept of sub-market in Australian jurisprudence is a “tool of analysis and not … an element of a legal standard to attract liability”. The concept of a sub-market of chart music, particularly in the present case, allows short-run effects to be noted, and may be helpful in clarifying how competition works, although it may be misleading if used uncritically to assess long term competition effects: Re QCMA and Defiance Holdings (1976) ATPR 40-012 at 17,247, and In re Tooth & Co Ltd; In re Tooheys Ltd (1979) ATPR 40-113 at 18,197.
351 I have little doubt that those in the record industry, and for that matter, consumers, have no difficulty in understanding the concept of “chart music”, even if, as the evidence shows, there do exist different charts which do not correlate absolutely and that a distinction is drawn between particular titles that are such that they appear on one or more of the “charts” and titles that do not. However, I approach the present case in the same way as the New Zealand Court of Appeal approached the matter in Tru Tone Ltd v Festival Records Retail Marketing Ltd (1988) 2 NZLR 352 at 360, namely, that commercial reality demands that one identify the market as involving a flow of product, some of which will, in the short term have distinctive characteristics (reflected in the popularity of chart ratings) and others of which will not and that to analyse dominance by reference to short lived advantage ignores commercial realities, focusing on “a snapshot rather than a moving picture of continuing commercial activity”.
The tests to establish market power
352 Professor Hausman in his report uses the term “market power” to mean “the ability of a firm to charge a price significantly above the competitive level for a non-transitory period of time”. By “price” he means not merely the actual price of goods or services but also the supply of inferior goods or services. To adopt the almost cliched expression used in competition law, Professor Hausman is referring to the ability of the firm to “give less and charge more”. By adopting this definition he is able to conclude that because neither Universal nor Warner could raise its prices for CDs above the competitive level because other competing record companies significantly constrain the price of CDs sold by them there could be no market power held by Universal or Warner. He concludes that if either sought to raise prices, sufficient consumers would switch to make the strategy unprofitable. The percentage market shares of each, in the range of between 15% and 18% demonstrated, he said, the absence of market power. Further there was, he said, countervailing power on the demand side possessed by the large retailers such as Sanity and HMV demonstrated by the power each had to extract large discounts and obtain improvements in the terms of trade, particularly by threatening not to buy product. This countervailing power was, he said, inconsistent with the claim that either Warner or Universal alone had market power.
353 Mr Ergas, by contrast, was of the opinion that Professor Hausman’s test was too narrow in focusing upon price, even accepting the extended meaning Professor Hausman gave to that term. In Mr Ergas’ view market power referred to “the ability of a firm to act persistently in a manner unconstrained by competition”. Mr Ergas would not restrict market power to the ability to raise prices in the extended sense of that word. So, for example, a firm able to act in a way designed to restrict competition by refusing supply or imposing restraints which it would otherwise not be able to impose in a competitive market would have market power, irrespective of the ability to raise prices. The ability to reduce quality or deter efficient entry would, under this definition, be indicative of market power, particularly in the latter case where this was the anti-competitive conduct complained of.
354 Mr Ergas said that there was a number of factors inherent in the wholesale recorded music market in Australia which “underpinned” the market power of each of Universal and Warner and, by implication, the other major record companies. These were:
· a high degree of product differentiation;
· the fact that the market was moderately concentrated, with stable participation by the five multinational companies and a fringe of small independents;
· the fact that entry barriers were significant because of the “high endogenous sunk costs” associated with advertising and promotion; and
· the fact that competition was characterised almost exclusively by non-price competition, particularly advertising and promotion and the avoidance of price competition.
These features, combined with the nature of the retail market, translated into a substantial degree of market power for each major record company.
355 Professor Hausman was critical of the indicia of market power suggested by Mr Ergas. The analysis was, said Professor Hausman, inconsistent with current economic analysis.
356 The difference between them arises in part because Mr Ergas is concerned to explain market power by reference to the context of s 46 of the Act, concentrating upon the conduct and purpose or effect with which that section is concerned. The very language of s 46 of the Act requires that eliminating or damaging a competitor, preventing entry to the market or deterring persons from engaging in competitive conduct can, at least in a particular case, be outcomes of the exercise of market power. From this it must follow that market power encompasses at least the ability to engage in anti-competitive conduct of this kind. That leaves open the question whether there is nevertheless a need to demonstrate as well that the firm said to have substantial market power have the ability to maximise profits by charging a price in excess of marginal cost. The evidence and my reading of some of the American economics literature in the area of antitrust leaves me uncertain whether the expression “market power” or even more significantly, the expression “substantial market power” is or are used by economists other than by reference to the specific context of competition law in a particular country. I suspect not. However, for present purposes I am prepared to assume that the expression “market power” is one that economists use and to which they attribute a meaning, although I would accept that the meaning of the expression will need to take consideration of the context in which the expression is used.
357 The point is discussed in an interesting article by Professor Steven Salop, of Georgetown University Law Center: “The First Principles Approach to Antitrust, Kodak and Antitrust at the Millennium” published in the Antitrust Law Journal (2000) Volume 68 Issue 1, p 187-202and which is relied upon by Mr Ergas as supporting the approach he takes. Professor Salop argues that what he refers to as a “principled approach” to antitrust law is to approach the question of market power not by considering it (or for that matter the question of market definition) as threshold tests divorced from the conduct and allegations about the effect of that conduct which are made. He says that it is impossible to evaluate market power accurately without understanding the anti-competitive conduct and anti-competitive effect claims at issue and analysing market power in the context of those claims. Instead, he says market power should be measured “as the power profitably to raise or maintain price above the competitive benchmark price, which is the price that would prevail in the absence of the alleged anticompetitive restraint”. It will be noted that this approach does not discard altogether price as a relevant matter. What it does require, however, is a greater focus on the factual (and legal) context in which the question arises.
358 In merger cases the key issue is whether the acquisition permits the acquiring firm to achieve or enhance its market power. However, in other cases where the competitive concern is a different restraint or price effect the use of a threshold test disconnected from the conduct and effect allegations could lead, Professor Salop says, to a variety of traps. Among the traps to which he refers are what he refers to as “The Marginal Cost Trap” and “The Price-Up Trap”. The former is defined as:
“Mistaking a firm’s inability to profitably raise price above its marginal cost for an inability to exercise market power by excluding rivals; and vice versa, that is, mistaking a firm’s ability to profitably raise price above its marginal cost for an ability to exercise additional market power by adopting alleged anticompetitive restraints.”
359 The latter is defined as:
“Mistaking a firm’s inability to profitably raise price above the current level for an inability to exercise market power by preventing competitors’ conduct that otherwise would reduce price below the current level, thereby mislabeling a maintenance of market power as a lack of market power.”
360 I find Professor Salop’s view very persuasive. It is somewhat contrary to the view expressed by Professor Hausman who would appear to focus exclusively on the ability or lack of ability of a firm (here, Universal or Warner) to charge higher prices in the sense which Professor Hausman uses the concept of price. In some of Mr Ergas’ evidence, however, the concept of ability to raise price seemed to disappear entirely. I do not think that Professor Salop goes that far. There is no doubt that the standard test of market power as the expression is used by economists is the ability to raise prices over the firm’s marginal cost. The question that I have to decide is whether it is possible for a firm to have a substantial degree of market power for the purposes of s 46 of the Act, notwithstanding that firm is unable to raise existing prices as a result of competitive constraint, but where nevertheless the firm is able to act in a way that is unconstrained by competitive forces to bring about a result of the kind contemplated by s 46, the result of which might be expected in turn to bring about a reduction in the prevailing competitive price. Ordinarily, at least, to act in a manner unconstrained by competition in one area, say by engaging in the conduct of exclusive dealing or by imposing vertical restraints will be unlikely to be successful in a situation where the firm is unable to charge higher prices because of constraints imposed upon it by competition. The final resolution of the question is, however, more appropriately left to the later discussion in these reasons of the construction of s 46 of the Act.
361 An important step in the argument advanced by Professor Hausman is his view that if Universal or Warner had market power and acted rationally it could be assumed that they would have raised their prices above the competitive level, yet they had not done so. Indeed a smaller record company Jive Zomba, which according to Professor Hausman could on no view be said to have market power (Mr Ergas was not quite prepared to concede it did not, although he seemed to be of the view that it did not), priced its products at the same price level as charged by both Warner and Universal. Mr Ergas, since he eschewed the simple equivalence of the ability to raise prices and market power, regarded the example as irrelevant. He asserted, in any event, that prices might already have been above the competitive level at the time parallel importation became legal. Given that competition from imported recordings was legally banned, this may well be the case.
362 Professor Hausman criticised Mr Ergas’ analysis as suffering from what Professor Hausman referred to as “the Cellophane fallacy, fallacy”. The phrase is a rather America-centric way of saying that Mr Ergas is taking a rather too narrow view of the overall situation by ignoring the prices charged by other firms in the market without market power. If Warner and Universal were charging the same prices, then Professor Hausman would argue it followed that those companies likewise had no market power.
363 The reference to the Cellophane fallacy is a reference to the decision of the United States Supreme Court in United States v E I du Pont de Nemours & Co 351 US 377 (1956), a decision heavily criticised. The classic exposition of what is said to have been an error committed by the Court and has become known as “The Cellophane fallacy” is to be found in Donald Turner, Antitrust Policy and the Cellophane Case 70 Harv L Rev 281 (1956). It is discussed also by R Posner Antitrust Law: an economic perspective (1976) p127-129.
364 The question in the du Pont case was whether du Pont, which had a monopoly in the production of cellophane, had a monopoly in a relevant market. It was held that there was an overall market in flexible wrapping materials and in this market du Pont had around a 20% share and accordingly did not have a monopoly. In arriving at its decision the Supreme Court of the United States (Warren CJ, dissenting) placed considerable emphasis on the responsiveness of the sales of one product to price changes of the other as a factor in defining the market. It noted that a slight decrease in the price of cellophane would cause a considerable number of customers of other flexible wrappings to switch to cellophane and took this as an indication that a high cross-elasticity of demand existed between cellophane and other flexible wrapping materials. The criticism of the decision is that the Court failed to recognise that cross-elasticity of demand is in part a function of the price at which it is measured. The Court assumed that the current price at which cellophane was sold was a competitive price, when it was probably not, given the monopoly du Pont had with respect to cellophane. Thus the fallacy the Court is said to have committed arose, it is argued, from an analytical error that failed to consider the market power a firm had already exercised in raising its prices above the competitive level and instead counted only the market power the firm had not yet used. So the Court may have mistakenly interpreted du Pont’s inability to raise its prices higher as an indication that it had no market power, and not as an indicator that it had already exhausted its market power. If the interchangeability seen by the Supreme Court in fact existed it would presumably be able to be inferred that if du Pont could attract business from others, it could also lose business to others upon any price change which made cellophane more expensive. But that would depend upon whether the du Pont price had exhausted the monopoly price which rationally it would be assumed it had, if acting rationally.
365 Professor Hausman was, as I understood him, suggesting that a similar fallacy would be committed where a narrow view is taken of what is actually happening in the market and hence regard is not had to the prices charged by other firms in the market without market power. I think it is unfair to Mr Ergas to claim that he did this. Indeed, he rather suggested that it was likely that the prices charged by the five major record companies was not a competitive price.
366 A considerable part of the debate between the experts concentrated on the question of cross-elasticity of demand for CDs in a market with a high degree of product differentiation, a matter heavily relied upon by Mr Ergas. There was agreement between them that over the range of titles put out by the music companies there is elasticity of demand. Professor Hausman expounded a mathematical formula (as I understood the formula originates with a mathematician/economist after which the formula is named: the Slutsky formula) to calculate price elasticity, which he said was generally accepted by all econometricians. Mr Ergas was inclined to the view that it was irrelevant in the circumstances but did not criticise the formula itself. Professor Hausman endeavoured to explain the formula, although it is not necessary to expound its basis here. A discussion of it is to be found in a paper coauthored by Professor Hausman with G Leonard and D Zona: “Competitive Analysis with Differentiated Products” Annales, D’Economie et de Statistique, 34 (1994). By the use of the formula he demonstrates that there was an implied price elasticity for Universal products of about –3.0 or greater and for Warner of about –4.2, meaning that for both companies’ products, consumers would switch to substitute products if the prices increase. (A cross elasticity of –3.0 means, so Professor Hausman said in his oral evidence, that if Universal raises its price by 10 percent it is going to lose 30% of its customers. A cross elasticity of -4.2 it would seem would mean that if Warner raises its prices by 10% it would lose 42% of its customers.) The goods or services of a monopolist would have a price elasticity greater than +1.
367 Mr Ergas, as already noted, did not dispute the formula. However, he pointed out that while what Professor Hausman said was true over the whole range of products produced by Universal or Warner, a record company might decide not to distinguish in its pricing between one title, the price of which it could increase, and another the price of which it could not, because of practical matters, such as, for example, the costs which might be incurred in distinguishing in pricing between the one product and the other. He pointed out, that, in fact, the companies did distinguish between product ranges (premium priced, mid-priced and others) which to some extent differentiated between titles that were in particularly strong demand and those for which demand was weaker.
368 At the heart of the controversy is the concept of what Mr Ergas referred to as “temporary monopoly”, an expression he uses to refer to the phenomenon apparent in the record industry (it would exist also in the market for books, magazines and films) that the popularity of a particular title gives to the record company which produces it temporary powers to act unconstrained by competition. Although Mr Ergas referred to the article by Professor Brunt to which reference has already been made as an acknowledgment of the concept, it is not really fair to say that the usefulness of the concept in analysis is supported by what Professor Brunt says in the article. In one sense it means no more, so far as I can see, than the fact there is a significant element of product differentiation in a market dominated by hits. While it is true that particular titles are more popular than others and I accept that the evidence shows that significant numbers of purchasers at the retail level (over 50%) would not purchase another title if unable to purchase the particular CD they sought, I think that it is correct that economists, at any rate, would not regard the fact that there were titles which have great popularity and which are less likely to have high cross-elasticity of demand as demonstrating market power in the context of competition law in the US.
369 Professor Hausman criticises Mr Ergas for suggesting that there could be practical difficulties in raising prices when notification of a particular price increase for a particular title could easily be accomplished by a facsimile message. The criticism is not quite fair. The evidence was that when Warner increased its price on a class of CD (see my findings at paras 174 to 182) many, perhaps most, retailers did not increase the retail price because to do so would cause confusion to customers. It is true that the increase in price may have been relatively small, certainly no more than $1 a CD, although it is not as clear to me from the material referred to by Professor Hausman that it was, as he says, only $0.27 or 1.4% where prices appeared anyway to change from year to year. There is another reason why increasing the prices of particular titles presents difficulty for record companies and that is that prices are set (the evidence would suggest that the contractual arrangements for discounts, rebates etc operate for a six or twelve monthly or other set period) for categories of CDs before the CDs are released and into the stores, although particular titles may attract special discounts. It is clear that prerelease publicity, particularly from overseas, may make it likely that a particular CD will make it to the top of the chart, but it does not necessarily follow that a CD which is popular overseas will necessarily attain the same popularity in Australia. Further, in respect of chart music, discounts may be given to “nudge”, as Mr Ergas put it, the title into a higher position in the charts with the prospect that the extent of demand will be increased and ultimate higher prices will be obtained for a higher volume of sales.
The state of competition in the market
370 Mr Ergas was of the view that prior to parallel importing being legalised, competition in the market primarily took the form of non-price competition, namely the steps taken by the record companies to ensure they had a stream of hits to release into the market. His view of the evidence was that the published price to dealer (or PPD) remained more or less constant, although adjustments were made to the prices of particular titles to improve the positioning of a title on the chart or to deal with a perceived softness in the market. Such changes were not a result of price competition, but reflected instances where retailers did negotiate over terms of trade. After parallel importation was legalised there was an increase in the extent of price pressure, ie an increase in both non-price and price competition. Professor Hausman expressed the view that both before and after parallel importation was legalised the record companies engaged in both price and non-price competition, ie that neither Universal nor Warner could increase their prices significantly above the competitive level and had not done so.
371 This dispute reflects a tendency to use experts to decide rather than elucidate within their area of expertise, factual matters. So far as the evidence shows, there were levels of discounts and rebates offered both before and after July 1998 with little change overall until around May 1999 in the case of Universal. There seem not to be similar comparative figures for Warner.
372 Really, both agreed that there was an impact on PPD after July 1998 because of the importation into Australia at cheaper prices of virtually identical product. The difference between them is that Mr Ergas believed that such price changes as there were pre July 1998 did not reflect constraints imposed by competition. That came about only after July 1998 and was related to the involvement by the ACCC in what became the present proceedings. Professor Hausman was of the view that both before and after July 2001 PPD was a result of individual bargaining with retailers and that this demonstrated significant competition in the market. I would find that with the legalisation of parallel importing, matters such as discounts and the like which effected price changes did reflect competitive behaviour. In so saying, I would find that this was brought about by the intervention of the ACCC, although not necessarily by the serving of notices under s 155. The intervention of the ACCC preceded by a short time the giving of these notices. Such evidence as there was of PPD before July 1998 does not suggest that there was much scope for retailers to negotiate better terms of trade through greater discounts, rebates, or other non-price benefits.
The countervailing power of retailers
373 It was Professor Hausman’s view that the major customers of the record company (eg Sanity; HMV; the Coles Myer Limited Group; and Woolworths), each had a high degree of countervailing market power. Otherwise, the fact that improved terms of trade followed a boycott or threatened boycott of purchases could only be explained by the record companies acting irrationally. Mr Ergas on the other hand accepted that some retailers had a degree of bargaining power arising from their ability to afford the record company market exposure but that the retailers, particularly the specialist music retailers (the smaller retailers accounted for a fair percentage of the market), were dependent upon the record company to provide a timely supply of a full range of titles (or at least those it needed to order) and did not have countervailing power.
374 It is, I think, somewhat inappropriate for expert witnesses to argue for the outcome of an issue which is to be decided in the case. However, although I would find that the major retailers had a degree of countervailing power which enabled them to negotiate improved terms of trade once parallel importation was legalised, the same is not true of the smaller retailer who depended on access to chart and back catalogue of the majors and who had no countervailing power at all.
The claimed indicia of market power as suggested by Mr Ergas - General
375 It will be recalled that Mr Ergas relied on four matters in combination (not alone) as indicating that each of Universal and Warner had substantial market power. They were, nevertheless, invariably dealt with individually.
376 As to the first, product differentiation, it is common ground that there are high levels of product differentiation in the recorded music market. The difference between the experts turned on whether product differentiation has anything to say about antitrust market power. Professor Hausman says that on its own it does not. In one sense Mr Ergas was not suggesting that on its own product differentiation showed market power, but merely that it was a factor to be taken into account with the other three factors to which he referred.
377 Professor Hausman was of the opinion in any event, that low market share implied low market power and said that this was accepted by all reputable economists, so the discussion was of no assistance. He asserted that a market share below 30% could not be consistent with a substantial degree of market power. Mr Ergas in reply referred to what was said by the Chairman and Commissioners of the Federal Trade Commission in the US in relation to a settlement reached by the Commission with the major record companies in concerning an alleged violation by the record companies of s 5 of the Federal Trade Commission Act. The document to which Mr Ergas referred and which the ACCC sought to have adduced in evidence was a statement down-loaded from the Internet, (its authenticity or provenance was not in issue) being a statement made by the Chairman and Commissioners of the Federal Trade Commission in a matter concerning Time Warner Inc and other record companies. Contrary to what was submitted by senior counsel for Universal, the document is not merely a press release. However, it clearly is not a considered decision of the Commission, although presumably it represents at least the prima facie view of the Chairman and Commissioners whose statement it is. I am of the view that it is in no different position to an article in a journal written by a person or persons who is, or are, an expert or experts in the field and I have no doubt that the Chairman and Commissioners of the Federal Trade Commission are experts in the area of competition law. The statement concerned settlement of a case against the major record companies in the US in relation to cooperative advertising said to prevent price discounting by retailers. The case had been brought under § 5 of the Federal Trade Commission Act alleging that the five companies had engaged in practices that restricted competition in the domestic market for prerecorded music and settled without admission of liability. The Chairman and Commissioner say:
“The five distributors together account for over 85 per cent of the market… and each has market power in that no music retailer can realistically choose not to carry the music of any of the five major distributors.”
378 The significance of the statement is that at least it is not a totally unrealistic position to assert market power where a particular corporation has less than 30% share of the market as Professor Hausman suggests, although always the question will depend both upon the particular facts and the context in which the question arises.
379 As already noted, Mr Ergas’ view is also supported by the article by Professor Salop, to which reference has already been made.
380 In my view, depending upon context, it is possible that a particular record company or companies could have a degree of market power, notwithstanding that it or they each had less than 30% of market share. I should say that I gain little or no assistance from the fact (said to support the case of Universal and Warner) that the ACCC approved as not contravening s 50 the merger between PolyGram and 6% Universal, to which reference has on a number of occasions been made. The ACCC may have been right or it may have been wrong in so approving the merger. The issue it had to decide was whether the merger would result in a substantial lessening of competition. It was not one directly concerning market power. The findings of the ACCC are, anyway, in a different position than to the statement of the Federal Trade Commission. The latter statement is put before me merely to demonstrate that a view contrary to Professor Hausman can be held. The findings of the ACCC are, however, sought to be relied upon by the record companies and Professor Hausman, not because they show that it is possible to hold the view that there was no market dominance by PolyGram/6% Universal before or after the merger, but rather to suggest that this view is correct.
381 A cogent criticism from Professor Hausman was the rhetorical question whether Mr Ergas would regard Jive Zomba, with 3% market share, but titles clearly popular and high on the chart (for example, Britney Spears and the Backstreet Boys are two artists contracted to the company) as having market power. While I accept that the question of market power is one of degree, there must come some point where the absence of market share does impact on the question of market power. I would find that it does at the 3% share level, whatever the situation may be at the level of around 15%. Mr Ergas avoided answering the question about Jive Zomba on the basis that he did not have sufficient information. However, he did concede that it would be unlikely that it did have market power.
382 Ultimately, as I have already indicated, I think the question of market power is not in an industry such as the present (it does differ from the normal case of industries with differentiated products, such as particular ranges of refrigerators) solely to be determined by market share. It is relevant to consider not merely the fact that there are differentiated products, albeit with sometimes a short life time in the charts, but also the commercial need for retailers, big and small to be able to access for sale to customers the whole catalogue of a record company, chart or non-chart, depending on the retailer’s degree of specialisation and the music genre that the retailer sells. Prior to July 1998, while for the record companies retailers were important avenues for promotion and floor space for display of product (and its sale), the retailers had little bargaining power other than in respect of such matters. Once parallel importation was legalised and with the involvement of the ACCC, retailers, so long as they were able to continue to have access to product unavailable overseas (whether because the landed price was too high, delivery too slow or because a particular title was not released there) had very significant bargaining power with the record companies. Without such access (and backed by the role of the ACCC in the background), their countervailing power was relatively limited even where the retailer was large and nonexistent where it was not.
Product differentiation and substitution - the significance for market power
383 There was common ground that no two titles were perfect substitutes for one another. However, the experts differed on the question of the extent of substitutability between titles and the relevance of this to market power.
384 For Mr Ergas, the record industry differed from other industries where product differentiation occurred. The difference lay both in the need for variety in the titles available (ie an assortment of titles) and the fact, where chart music was involved, that there was rapid turnover of new product as it rose or fell in the charts – a continuous stream of hits. I accept that the evidence shows that more than half of the consumers will not purchase a substitute product, although clearly some may be talked into doing so and some may purchase on impulse. Before July 1998 copyright law ensured that there could be only one single legitimate supplier from whom a Warner or a Universal title was available (except perhaps in remote areas supplied by a nominated wholesaler) and that legitimate supplier was Warner or Universal as the case may be.
385 Professor Hausman was of the view that the record industry was not as unique as Mr Ergas said. The film industry was in the same situation. So too, he suggested was the American breakfast cereal industry, where there were large numbers of brands with new cereals being created each year. Each brand could be characterised as involving a temporary monopoly. Absent substitutability, there would be no point in sales taking place in record stores. The fact that they did showed there was substitutability. Finally, he argued, if back catalogue was so important as a factor in market power, it might be expected that it would be available at a premium price if the record companies acted rationally, when there is no evidence that it is. Ultimately the debate was no more than a reflection of the difference in views between whether market power relates only to the power to increase price or whether it is not necessarily related to such power. There is an explanation for why at least some chart music is not sold at higher prices which I put to Professor Hausman and which he accepted. When a title is released and it proceeds quickly or is likely to proceed quickly to the top of the chart there is no or little substitute for the title at that time. Further, having regard to the fickleness of the charts it is known by the record companies that the situation may reverse within a quite short time. Hence it could only be titles which had considerable pre release publicity from overseas or which were on the charts for any length of time which might be the subject of a sufficient monopoly to allow the record company to increase prices. But even then the chance of the title dropping in the charts within a short time was always there.
386 Finally, Professor Hausman pointed out that in all product differentiated industries there was need for only a small number of consumers to shift product to restrain prices. The fact that 50 or 60% of people would not shift products does not mean that there is not a restraint on prices he said. He referred to the testimony he had given and which was accepted in the US in United States v Eastman Kodak 853 F Supp 1454 (1994) where it was found that Kodak with 36% of the worldwide market (the market found to be relevant) did not have market power. There was a high interchangeability between Kodak and Fuji film, of similar quality, each a good substitute for the other, so Kodak did not have market power. The high cross-elasticity between Kodak and Fuji film was accepted as showing that consumers found Fuji an acceptable substitute for Kodak film.
387 Mr Ergas complained that the argument set out above was not relevant to the present case. Here we were not concerned with what would happen if price increased by a small amount at the margin. What was at issue in the present case was a comparison between the situation before parallel importing and the situation after it was legalised, where if parallel importation grew and became entrenched, market prices would be much lower than they had been. So, it was said, the question for the record companies was, when they came to decide to withdraw supply, whether the retailers could afford to do without the range put out by the record company, with a view to marginally postponing the time when prices would fall or slow the rate at which they would fall.
388 In summary, the significant difference between the witnesses was that for Professor Hausman market power could only be present where there was the ability to raise prices. For Mr Ergas the question in the present case was a different one. It was whether Warner and Universal had the power that Jive Zomba may or may not have had, to use the threat of a refusal to supply so as to impose a unilateral vertical restriction that had anti-competitive effect. Ultimately, as I have said, that raises a very important question of construction of s 46.
Concentration and its significance on market power
389 The proposition put by Mr Ergas, with which Professor Hausman disagreed, is that it is relevant to the ultimate conclusion of market power that there is a small group of major record companies which have dominated sales for many years. The concentration (the five major record companies account, as we have seen, for something over 80% of sales by volume, even although individual sales between them fluctuate from time to time) is, he argued, conducive to reaching an orderly oligopolistic outcome, which can sometimes lead to a lack of workable competition. He says that where the market is, as here, characterised by product differentiation what matters is the “diversion ration”, the proportion of sales which would be lost to rival firms in the event of a price increase or other use of market power. This in turn depends on the ability of other firms to offer an alternative and acceptable product. If the diversion ratio is high, a high proportion of sales will shift; if it is low, few sales will be diverted and the ability of the supplier to increase prices or use market power in other ways will be substantial. The effect of concentration is related as well to the question of barriers to entry. If the barriers to entry are not low then the concentration of supply could facilitate reaching a monopolistic outcome. This is particularly so where the small number of firms act (albeit without collusion) in a similar way.
390 It is appropriate therefore to turn to the question of barriers to entry, with which the issue of concentration is said to be associated.
Barriers to entry
391 There was common ground that the existence of barriers to entry was a relevant matter to be considered. This was because of the need to understand whether one of the major record companies, if it threatened to refuse supply, would face the discipline of the erosion of the market power that it might use by a new entrant being able to come into the market in a way that was sufficiently likely, timely and sufficient in scale to undermine the market power which, absent entry, the firm might have.
392 Professor Hausman argued that the modern view (presumably in America, it does not seem to date to have figured in the Australian jurisprudence) was that not only were barriers to entry important, but so too were barriers to expansion. In his view, there were here no barriers to expansion in the record industry, nor were there significant barriers to entry. He pointed to the fact that independent record companies (examples are Festival or Mushroom or Jive Zomba) established themselves and became successful.
393 Mr Ergas on the other hand pointed to various factors as constituting a barrier to entry in the record industry. These included:
· copyright law, which prevented new entrants having free access to existing works and thus not being in a position to compete on price;
· the fact that talent was contractually tied to record companies;
· the economies of scale, particularly of distribution, which had the result that new entrants would usually tie distribution to the major record companies; and
· high advertising and promotional costs of at least 12% of overall sales, which the larger record companies could spread over a large repertoire, but a new entrant could not.
394 He noted that while there had always been new independent companies emerging and while they had played an important role in the industry, they tended to do so with artists or in genres which the major record companies had either overlooked or regarded as too risky (they were “pickers”, while the major firms were “promoters”). He pointed out that it was unusual for fringe firms to progress to the core of the market.
395 By contrast, Professor Hausman emphasised that while there was a history of independent record companies coming in and going out of the market, they played an essential role in the industry and demonstrated that the barriers to entry were small. Labels like Mushroom and Festival were examples of independents which had emerged as significant record companies in their own right.
396 On one view, barriers to entry into the recorded music industry in abstract are not high if what is meant is the costs of recording, pressing or distributing CDs. But that is to ignore the hit related nature of the industry. The essential and distinguishing feature of the industry is the continuous need for new product. This is a problem as much for the majors as it is for new entrants. New talent may be contractually bound to one label. Some artists may be tied for a long time, others for shorter periods. If the latter is the case, the artist will be free to move. The evidence did show that some artists had their work on more than one label, indicating that they had changed from one company to another over time. Promotion costs for new artists are high. Existing companies can to some extent amortise these costs over a large repertoire. On the other hand, this does not seem to have deterred independents such as Jive Zomba with few artists and little back catalogue. The need for distribution agreements does impact the question but the facts show that distribution arrangements change from time to time as independent record companies changed distributors.
Retailing and the effect on market power
397 Mr Ergas argued that the nature of record variety, and in particular the public demand for variety, also significantly underpinned the market power of Universal and Warner and the competitive effects of their refusing supply. This is not really a separate matter, but relates to the general issue of whether one CD was a close substitute for another.
The significance of “free riding”
398 The issue of free riding arises in the context of whether either of Universal or Warner if they had market power were actually taking advantage of that power and goes also to the purpose of their conduct in refusing supply.
399 It is no doubt true that the industry is “hit driven” and that large amounts of money are spent on promotion of titles, when only a few titles actually become hits and make the charts. It is obviously also true that persons desiring to import titles from overseas are more likely to import hit recordings than non-hit recordings, for that is where the consumer market is. The evidence clearly shows this to be the case. Professor Hausman argues that there is an economic incentive on the record companies to try to prevent free riding as he calls it and in a competitive market record companies would impose a vertical restraint to do so. Vertical restraints are not, it may be accepted, necessarily anti-competitive. Indeed, in the US, while originally vertical restraint was a per se violation, it is now accepted that it can be pro competitive. The distinction is between a restraint that affects inter-brand competition and one that affects intra-brand competition. Free riding decreases inter-brand competition according to Professor Hausman. If it is allowed to continue there would ultimately (to be fair, Professor Hausman does not suggest this would necessarily be the case) be less promotion, less new artists, less new product as the incentive to invest in inter-brand competition is reduced. The elimination or reduction of free riding is, according to Professor Hausman, pro-competitive because it leads to more investment in new releases and increased consumer choice. The overall effect will be increased inter-brand competition.
400 With respect to Professor Hausman, the evidence, such as it is, shows that since the advent of parallel importing (and ignoring the present conduct which continued for but a short time) the dire predictions of reduced promotion through to reduced production and ultimate market failure have simply not happened. If anything, the evidence shows a continued increase in titles, promotion and production and at the same time at lower prices. It may be that those at Universal and Warner believed that Professor Hausman’s doomsday scenario was a likely outcome. Such a belief, if held, has not been brought to fruition.
Other matters on which expert evidence was given
401 There were a number of other matters on which the experts touched in their testimony. These included matters which were really questions of fact, such as the duration of the conduct complained of and whether there was any signalling effect brought about by the conduct. They included among other matters, evidence which related to the overseas conduct. Because I do not find the evidence on these matters helpful, either because the testimony really only involved submission as to facts I should find or concerned matters which I regard as irrelevant, I have not attempted to summarise it.
THE CASE UNDER s 46
General
402 The object of s 46 was said by the High Court in Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177 at 191 to be to protect the interest of consumers and, by the same Court differently constituted in Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 178 ALR 253 at 258, to promote competition, the former policy being effected by the latter. It does this by proscribing conduct which involves the use by a corporation of power in the market, which is unconstrained by competitive forces, for a purpose which Parliament has identified as anti-competitive. The section is not, as senior counsel for Warner emphasised on more than one occasion by reference to Queensland Wire at 190-191, 194 (and see Melway at 260), concerned to regulate behaviour merely because it may be seen to be reprehensible, or blameworthy. Nor, as the majority of the High Court said in Melway, is the section concerned to protect the private interests of particular persons or corporations.
403 For a case such as the present to fall within s 46 of the Act it will be necessary for the following matters to be found:
(i) a corporation with power in a market;
(ii) that the corporation has that power to a substantial degree;
(iii) the taking advantage of that power by the corporation; and
(iv) the requisite purpose, here, the preventing the entry of a person into a market or, perhaps, the preventing a person from engaging in competitive conduct in a market.
It is necessary to consider each of these elements in turn.
Power in a market
404 The expression “power in a market”, when read with the definition of “power” in s 46(4) of the Act, is critical to s 46. Not only must a corporation charged with an offence under the section have that market power to a substantial degree, but the conduct it engages in must also take advantage of it.
405 As the discussion of the economic evidence shows, the expression “market power”, at least in the context of competition law, will ordinarily be taken to mean the power to increase prices beyond the competitive level. By price in this context is meant not merely the monetary price but also the ability of a firm to supply inferior goods or services and the ability to impose unfavourable terms and conditions. But the expression necessarily comprehends more than that. In Queensland Wire at 200, Dawson J, in a passage referred to with apparent approval by the majority in Melway at 264 said:
“The term ‘market power’is ordinarily taken to be a reference to the power to raise price by restricting output in a sustainable manner. … But market power has aspects other than influence upon the market price. It may be manifested by practices directed at excluding competition such as exclusive dealing, tying arrangements, predatory pricing or refusing to deal… The ability to engage persistently in these practices may be as indicative of market power as the ability to influence prices.”
406 His Honour referred to Kaysen and Turner, Antitrust Policy (1959) at 75 where the learned authors wrote:
“A firm possesses market power when it can behave persistently in a manner different from the behaviour that a competitive market would enforce on a firm facing otherwise similar cost and demand conditions.”
407 The majority of the High Court in Melway at 264 then added:
“The notion of market power as the capacity to act in a manner unconstrained by the conduct of competitors is reflected in the terms of s 46(3). Such capacity may be absolute or relative. Market power may or may not be total; what is required for the purposes of s 46 is that it be substantial.”
408 Later in the judgment their Honours returned to the question, saying at 269:
“As Dawson J explained, in Queensland Wire, market power means capacity to behave in a certain way (which might include setting prices, granting or refusing supply, arranging systems of distribution), persistently, free from the constraints of competition. This is the generally accepted meaning of the concept and it is reflected clearly in the provisions of s 46(3). Barriers to entry into a market by competitors are a common reason for the existence of market power. They could exist, as in the present case, because of technological factors, or they might result, for example, from legislation which gives a statutory monopoly. Freedom from competitive constraint might make it possible, or easier, to refuse supply and, if it does, refusal to supply would constitute taking advantage of market power. But it does not follow that because a firm in fact enjoys freedom from competitive constraint, and in fact refuses to supply a particular person, there is a relevant connection between the freedom and the refusal. Presence of competitive constraint might be compatible with a similar refusal, especially if it is done to secure business advantages which would exist in a competitive environment.”
409 Although the passages cited refer to the normal test of power over prices as being indicative of market power, there is nothing in what is said that makes power over prices the sole test of market power. Indeed the comments of Dawson J are to the contrary. Nor would that be expected to be the case. If s 46 were concerned with monopoly power (and § 2 of the Sherman Act 1890 (US) (15 USC § 2) upon which the present section may be said to be based is) then it could be expected that the power to raise prices above a competitive level and, for that matter, market share would both indicate monopoly power, subject to the question of ease of entry for new participants in the market. As it happens, in Queensland Wire, BHP produced approximately 97% of the steel made in Australia and supplied about 85% of Australia’s requirements for steel and steel products. Melway, which was conceded to have a substantial degree of market power had in excess of 80-90% of the retail market share for Melbourne street directories, the remaining three companies each had insignificant shares. On the other hand, Boral Ltd, which was held by the Full Court of this Court to have market power and to have abused it (see Australian Competition and Consumer Commission v Boral Ltd (2000) 106 FCR 328) had, in an oligopolistic market, approximately 30% of market share, but was able by predatory pricing to take advantage of its market power for a proscribed purpose.
410 The expression “market power” or the expression used in s 46 and written out in full with the aid of the definition in s 46(4), “market power in the market”, is not really a technical expression. The words are ordinary English words. They appear in a statute directed towards those who conduct activities in trade or commerce. In the context in which they appear, the words refer to the power of a corporation in the market by exercising that power to affect competition in one of the ways to which the section by implication refers when stating the proscribed intention. It is simple to infer that Parliament contemplated that the intention to which reference is made must be one which is capable of being given effect to by the use of the market power. No doubt economists, whose study is concerned with matters of competition in markets, can elucidate the words and give example of the anti-competitive effects of market power, just as their evidence may assist in the identification of the market with which s 46 is concerned, its operation and structural qualities. But ultimately the question whether market power in the relevant sense exists will not be determined by economists or the way economists may use the words in economic texts but by the court informed, nevertheless, by the evidence of economists derived from their study of market behaviour, and having regard to the factual matrix from which the conclusion must be drawn.
411 It is clear from the judgment of Mason CJ and Wilson J in Queensland Wire that market share is not irrelevant to the issue of market power, although on its own it is not determinative. Adapting the language of Reed J in United States v Columbia Steel Co (1948) 334 US Rep 495 their Honours at 528 said that:
“The relative effect of percentage command of a market varies with the setting in which that factor is placed.”
412 It may be conceded that the lower the percentage of market share, the less likely it will be that the firm with the low percentage will have market power, or at least market power to a substantial degree. Hence in D & R Byrnes (Nominees) Pty Ltd v The Central Queensland Meat Export Co Pty Ltd (1990) ATPR 41-028it was held, albeit in an interlocutory judgment, that a corporation (which, when combined with related companies, had 15% of market share) did not, in the circumstances of that case, have market power. However, as Lockhart J pointed out in Dowling v Dalgety Australia Ltd (1992) 34 FCR 109 at 140, a corporation may have weapons in its armoury which are relevant to the factual matrix whether it has market power. These may include arrangements or understandings with others. I see no reason in principle why the armoury might not, in a particular case, extend to cases where a particular product might give to a firm temporary monopolies on a frequent basis, so that while the firm might not have a large percentage of market share overall, it nevertheless can be said to be able to behave independently of competition or competitive forces in the market.
413 The historical background of s 46 makes it clear that the section extends beyond monopoly power, the context in which in the US regard is had to market share. The background is discussed in some detail in the illuminating judgment of Finkelstein J in Boral, even if some part of that judgment, at least so far as it relies on the decision of this Court in Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (1999) 90 FCR 128, must be treated with caution, having regard to the later decision of the High Court to which reference has already been made.
414 As originally enacted the section only applied to a firm which was “in a position substantially to control a market for goods or services”. The section was amended in 1986 and the amendment lowered the threshold to the present test of “substantial degree of power in a market”. No doubt, in its amended form, the section included within its reach a firm with monopoly power, that is to say, a firm which could act without constraint in raising prices beyond the competitive level. But it was no longer limited to such a firm. In the second reading speech to the Trade Practices Revision Bill 1986 the then Attorney-General noted that the original section had proved to have limited effectiveness principally because it applied only to monopolists or those with overwhelming market dominance. It was for this reason thought desirable to make the section more effective so that it would “apply to major participants in an oligopolistic market and in some cases, to a leading firm in a less concentrated market”.
415 The Explanatory Memorandum to the bill reinforced this by explaining that it was not intended that the section apply only to firms which substantially controlled the market or had the power to determine the prices of a substantial part of the goods in a market. It emphasised that subs (3) was to provide “a guide to the way in which ‘market power’ is to be determined”. The Memorandum pointed out that more than one firm could have a “substantial degree of power in a market”. Substantial was intended to signify “large or weighty” or “considerable, solid, or big”and to import“‘a greater rather than less’ degree of power”.
416 Finkelstein J points out in Boral at 411 that a firm that is not in an immediate position to set its price above marginal cost may still have market power, for such power can exist when the firm has power to exclude competition. This was recognised by the Supreme Court of the United States in du Pont referred to at paras 363 to 364 of my reasons. In that case Reed J said at 391 that monopoly power was the power to control prices or exclude competition. Whether the two tests really differ need not concern us here. What is important is that Finkelstein J approached the question of market power by reference to the conduct that was proscribed (at least by implication) by s 46(3). He said that it was the exclusionary conduct that established market power and not the reverse. His Honour’s approach was not markedly different on this aspect of the case from that taken by Merkel J, see at 388.
417 One constraint preventing both Universal and Warner from behaving independently of competitive forces in the recorded music market is the presence of the large retailers in the market. While they, no doubt, would be both unhappy and indeed, inconvenienced if they were unable to purchase from any of the five major record companies (and the need for warehousing and distribution facilities to cope with imports if access to any or all the companies’ catalogues were unavailable would present initial difficulty and cost), the fact is that the record companies needed the large retailers at least as much as the large retailers needed the record companies. That is ultimately the explanation why it was possible for HMV to refuse to purchase the product of Sony (see para 66) as a means of extracting better trading concessions. It is the explanation why none of the large retailers were unduly perturbed by such threat as there was contained in the Universal policy as conveyed to them both in writing and in conversation. It may also explain why the Warner letter of 20 July 1998 left little impression upon those from the large retailers who gave evidence before me.
418 The small retailers were in a quite different position. They lacked the countervailing power of the large retailers. They lacked the ability to import competitively. They required access to chart music (assuming they did not specialise in a particular genre of music where chart music played no part) and some part, at least, of the back catalogue. I think it likely that many would not survive if they could not purchase directly from the record company and on reasonable terms. A consequence would be that there would most likely be a reduction in competition at the retail level if the record companies refused to deal with the small retailers unless they purchased all their needs directly.
419 In Eastern Express Pty Ltd v General Newspapers Pty Ltd (1992) 35 FCR 43, Lockhart and Gummow JJ, after commenting that market power was concerned with power which enabled a corporation to behave independently of competition and of the competitive forces in a relevant market, said that the primary consideration in determining market power was whether there were barriers to entry in the relevant marker. The question was thus:
“To what extent is it rational or possible for new entrants to enter the market …?”
420 Constraints upon a firm’s business behaviour depend not only on the number and market share of existing participants in the market, but also upon the extent to which there are barriers to entry of new firms which would produce close substitute products from outside the industry (including firms not yet in contemplation). As Professor Brunt says in her article on “Market Definition Issues in Australian and New Zealand Trade Practices Litigation”substitution may be effected on the demand side by customers in their purchase decisions and on the supply side by producers in their entry decisions and output mix in response to relative price incentives.
421 There is in the judgment of Finkelstein J in Boral at 413 – 415 a useful discussion of what constitutes barrier to entry and of some of the economic discussion on the topic. His Honour appeared to favour a definition given by Geroski, Market Dynamics and Entry (1991) p 160:
“Barriers to entry are obstacles which inhibit the ability of firms outside a market to enter and compete with established insiders.”
422 His Honour makes the point that many economists now accept that the behaviour of incumbent firms to exclude rivals by a variety of restrictive practices is as much a barrier to entry as any structural condition that might exist in the market. This is, however, not a view accepted by all. The present is a case where the ability of the major record companies to prevent retailers from selling imported CDs in fact does operate as a barrier to the entry into the market of sellers of imported Warner or Universal titles. However, it is not necessary to decide whether that is properly to be seen as a barrier to entry.
423 There is, as I have noted in the discussion of the economic evidence, no really significant barrier to entry to the record industry generally, as indeed the growth from time to time of independents demonstrates. (The fact that new entrants may ultimately be absorbed by the major record companies does not seem to me to necessitate an opposite conclusion.) New entrants must compete with existing participants for artists. At least so far as new artists are concerned, new entrants might be expected to have no greater or less chance of recognising what is likely to be a “hit” than existing companies. Further, new artists might more readily be prepared to contract with new entrants to the market than established artists. Indeed it may be surmised that in some cases, not only might new artists be ignored altogether by the five major record companies, but even if they were not ignored might also be given more prominence by new entrants than would be the case with the larger established record companies. Production costs are relatively low for CDs. Distribution can be contracted out, as has been the case with many independents in the past. Publicity and promotion, the greatest cost ingredients in recorded music, are high in comparison with other costs, but save for a carryover effect from international publicity of international artists, are (perhaps subject to volume advertising discounts) neither more expensive for nor less accessible to new participants than for existing participants. It is not suggested that radio, television or print media are less accessible to new entrants than to existing participants. On the other hand, it must be acknowledged that new entrants would not immediately have a large repertoire of existing product. That takes time to develop. More importantly it would be very difficult indeed for a new entrant to the market to be able to put on the market the constant stream of hits which constitute chart music.
424 The real question that arises in the present case is whether, having regard to the structure of the recorded music market and the significance which hit music has in that market, barriers to entry should be considered by reference to the overall flow of recordings in the market for recorded music generally, where they are not high, or whether regard should be had to the monopoly which is afforded to each record company in respect of such CDs as feature on the chart at a particular point of time as a result of the Copyright laws. Clearly enough, new firms can not enter the market of producing titles covered by copyright protection held by a particular record company. Absent any exclusive dealing conduct on the part of particular record companies directed at importers coming into the market, there would be no barrier for entry for them either. It must be added, however, that the drafting of the law permitting parallel importation, casting as it does the onus upon the importer to show each record imported was produced with the licence of the copyright holder in its place of manufacture, may in many cases make it almost impossible for an importer to avoid legal action by a determined record company wishing to impede competition.
425 I find the issue of market power and its related issue of barriers to entry extremely difficult to decide. It is really at the heart of the controversy between the parties. The case of a firm operating in an oligopolistic market with only 15% market share and unable to fix prices in the overall market above the competitive level but which has, as a result of a temporary monopoly power over a limited number of products in that market, substantial power to exclude competitors is not one which has been the subject of any authority in Australia or, so far as my researches indicate, in any other country. Having regard to the context of the US antitrust law it could not arise in that country.
426 It is not unreasonable to ask what kind of power was Universal (or Warner) seeking to exercise when it set out to deter retailers from parallel importation by the conduct which it engaged in. It was only because it had power in the market that it could achieve its aim, at least with so much of the retail market as comprised the smaller retailers. The threat to refuse supply was not one which the small retailers could ignore, especially once it became clear that it was more than a threat and would be implemented. The retail business was threatened, particularly if more than 50% of customers were likely to go elsewhere to purchase the title which the retailer no longer stocked. Even the large retailers would be likely to think twice before importing CDs from overseas, if only because of the inconvenience of having to import their entire stock and in many cases having to establish a separate warehousing and distribution network. They would still not be able to stock some locally released titles unavailable overseas. In my view, whatever may be the view of economists, particularly, American economists, business people in Australia would regard such behaviour as involving both market power and the exercise of that power.
427 In reaching this conclusion I am conscious that the definition of the market requires that a common sense approach be taken so as not to concentrate on what is but a snapshot of the market at a particular point of time. I accept that the definition of market focuses in a case such as the present upon the continuous flow of product over time in a process where new albums displace old so as to compete for the attention of the public. But I do not think that acceptance of this definition of market requires me to ignore the way that the market operates in considering the issue of market power. The fact is that chart music in particular has a significance in the market which can not be ignored. It is this significance which would empower a participant in the market such as Universal or Warner to take steps to prevent the entry of a person seeking to import non-infringing copies into the market.
428 I was referred on behalf of the ACCC to the decision of the Circuit Court of Appeals for the First Circuit in Standard Fashion Company v Magrane-Houston Company (1921) 258 US 346, said to be analogous to the present case. In that case, decided under § 3 of the Clayton Act, what was at issue was the legality of a vertical restraint between a pattern manufacturer and distributor, and a retailer, under which the retailer agreed not to sell patterns of competitors. In holding that the restraint was one which substantially restricted competition and tended to create a monopoly the Court noted that the manufacturer, or its holding company, with two other companies, controlled two fifths of the agencies in the country. The Court endorsed what had been said in the Court below as follows:
“The restriction of each merchant to one pattern manufacturer must in hundreds, perhaps in thousands, of small communities, amount to giving such single pattern manufacturer a monopoly of the business in such community. Even in the larger cities, to limit to a single pattern marker the pattern business of dealers most resorted to by customers whose purchases tend to give fashions their vogue may tend to facilitate further combinations; so that the plaintiff, or some other aggressive concern, instead of controlling two fifths, will shortly have almost, if not quite, all the pattern business.”
429 Each case must be decided on its own facts. What is said in the passage cited is not in my view apposite to the present case. Nor does Warner or Universal have alone or in combination, anything like 40% control of the overall recorded music market. It was suggested that Judge Posner in an article “Antitrust in the new economy” (2001) 68 Antitrust LJ 925 at 936 endorsed the decision. I am not so sure that this is correct. But even if it is, it should be noted that he makes the point that competing manufacturers might be able to set up their own retail outlets, but who would shop there if the most popular brand was not available there. One can see how incomplete the analogy is from that comment. There is no record company in Australia of whom it might be said that it was the most popular brand. All that can be said is that it is necessary for retailers to stock CDs drawn from all the major record companies to meet consumer demand and (except in the case of specialist stores) to stock chart music and have available for sale such parts of the back catalogue as it might wish commercially to order.
430 In deciding whether the action of Universal and Warner in refusing to supply stock to retailers who sold imported CDs was in breach of the Act, a relevant matter to be considered is whether it would be practical or even possible for retailers, big or small, to import their entire stock of recordings of Warner or Universal titles. It is also relevant to consider whether it would be practicable or even possible for wholesalers to import the whole of the Warner or Universal catalogue. There is no evidence which suggests that any wholesaler has sought to do so. Indeed, such importation as there has been by wholesalers has, on the evidence, been importation of particular popular titles.
431 While the evidence makes it clear that most of the catalogue of the major record companies is available to be imported from overseas sources at least in small quantities, it is also clear that both Warner and Universal can take steps in countries like Indonesia to ensure that stock will not be available to be exported in largish quantities at least to Australia for resale. Transportation delays can result in important titles not being available for sale. The evidence in the case varied from suggesting that only a few days would pass from order to delivery to suggesting that some weeks could pass. Delay of weeks would be commercially disastrous for a retailer wishing to have the title in store as soon as it is released in Australia and so as to take advantage of the pre-release publicity and subsequent advertising and promotion. So far as overseas hits are concerned, the advanced success of albums or singles overseas may offer a lead-time if releases occur overseas before they occur in Australia. If releases are simultaneous, then importation will invoke a time delay. How significant that delay would be would depend upon circumstances.
432 Another factor which would make importation of the entire range of a record company or even the chart range of that record company impractical would be that the cost of importation would be affected by exchange rate fluctuations. The same difficulty would have to be faced by a wholesaler who sought to import for sale the entire or substantially the entire catalogue of Warner or Universal. As rates fluctuated it could be necessary to change suppliers from country to country. History has not shown many occasions in recent times when the Australian dollar has increased in value. But manufacturing promotion and other costs, including general costs of living are likewise reflected in downward exchange adjustments.
433 Then there is the problem that some (although not all) Australian releases are never released overseas and thus are unavailable to be imported at all. There is a trend over time for Australia to lose the cultural cringe which existed in the past and indeed to value its own artists and culture. The inability to purchase those titles would put retailers unable to purchase them at a disadvantage.
434 As already noted, warehousing and distribution facilities would present some difficulties for large chains of retailers (although it might be assumed that such large chains would more easily be able to pay the capital costs of setting up the necessary facilities). While smaller retailers would not have that problem if they purchased from wholesalers who imported or imported recordings themselves, the latter course would come with inconvenience and expense.
435 The requirement that there be a substantial degree of market power is a requirement that the power in the market be neither trivial nor minimal. It is used in a relative sense and signifies the requirement that market power be real and of substance: see per Wilcox J in Mark Lyons Pty Ltd v Bursill Sportsgear Pty Ltd (1987) 75 ALR 581 at 591 – 592 and cf the discussion of the word “substantial” in Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees’ Union (1979) 42 FLR 331 at 348.
436 No doubt it can be said (and this was the submission made on behalf of the corporate respondents) that each record company (and for that matter, even the minor Jive Zomba) has, as a result of a particular hit recording or recordings in respect of which it has copyright protection, some degree of power in the overall market in the sense I have sought to use the expression. So, it was suggested, by way of reductio ad absurdem that a consequence of the view that Universal and Warner both had market power would be that Jive Zomba with only a few, although quite significant, artists and little in the way of back catalogue would have market power.
437 No doubt the concept of “substantial” market power is one of degree and one of judgment. The question whether Jive Zomba did have market power would require investigation into more facts than are before me. If Jive Zomba threatened not to supply if retailers parallel imported its titles, it is unlikely that the threat would have much teeth given the limited number of recordings it produced, even if such recordings are of popular artists. As presently advised I do not think it likely that Jive Zomba would have market power.
438 In my view both Warner and Universal did have market power in the sense that expression is used in s 46 of the Act and in the context of the structure of that market that market power was substantial.
Was there a “taking advantage” of market power?
439 The words “take advantage” mean no more than use the relevant market power: Queensland Wire at 213. The words do not have the connotation they would have when used in the context of taking advantage of a person. They import no implication of reprehensive conduct.
440 In Melway the majority of the High Court, by reference to the decision of the Privy Council in Telecom Corp of New Zealand Ltd v Clear Communications Ltd [1995] 1 NZLR 385 at 402 pointed out the danger of proceeding too quickly from a finding as to purpose to a conclusion about taking advantage. In Melway the cancellation of an exclusive distributorship agreement, with the consequence that the applicant was unable to acquire for sale the respondent’s Melbourne street directory, did not lead to a conclusion that there had been a taking advantage of market power. Refusal of supply, even where a firm has market power, did not necessarily mean that the market power has been exercised. On the facts of that case the refusal to supply was but a manifestation of the distribution system which the appellant had implemented.
441 Here, once it is decided that Universal and Warner had each a substantial degree of market power in the market by virtue of each having hits or back catalogue which it was essential for retailers to access, I think that no other conclusion is open but that they had exercised that market power by threatening to refuse and thereafter refusing supply to retailers who imported non-infringing copies of Universal or Warner titles as the case may be. I should add that the so-called Universal policy, which went no more than to threaten retailers that if they dealt in imported titles Universal might consider whether or not to supply or reconsider trading terms, of its own would not be a breach of s 46. It was the implementation of the policy by actually refusing supply which constitutes the breach.
Purpose
442 In the present case the purpose alleged is the prevention of entry of other persons into the market, these being, essentially, persons desiring to import non-infringing CDs into the market. (There is no requirement that these other persons be identified, it suffices that they can be inferred to exist or potentially exist.)
443 Purpose in the present context involves intention to achieve a result: see Melway at 262, citing Queensland Wire at 214 per Toohey J. On the evidence I have no difficulty in inferring that the refusal by Universal and Warner to supply was motivated by their intention to bring about the result that persons would not import recordings into Australia, whether those persons were wholesalers who carried on the business of importing or were retailers who purchased their requirements from overseas.
444 I am unimpressed by the free riding argument, so far as it is raised in this context. First, while free riding was a matter of concern, it could only come about if there were to be permitted into Australia non-infringing copies. Prevention of free riding is but a consequence of prevention of importation. So far as free riding can at all be seen to stand alone as a purpose divorced from the purpose of preventing the importation into Australia for sale of non-infringing copies, I do not think that either Warner or Universal has succeeded in showing that there was a separate purpose of preventing free riding. Any attempt on the part of Universal to suggest that the action taken by it was taken to prevent piracy I would reject. In my view piracy or more accurately breach of the copyright law was not the principal matter of concern, although I accept it was a matter of some concern. What was of principal concern was the bringing into Australia of non-infringing copies at a price cheaper than that prevailing in Australia and with the result of adversely affecting the bottom line profit of the respondent companies. Likewise, I reject the suggestion that the action taken by Warner was a reaction to the retailer being insolent. Nothing in the evidence supports this argument.
445 In my opinion, not only did each of Universal and Warner take advantage of the substantial market power it had, but also each did so to prevent the entry into the wholesale market of persons who would sell imported recordings under Universal or Warner labels by wholesale or wholesalers from overseas with access to non-infringing copies who wished to export to Australia.
The case under s 47
General
446 The ACCC seeks also to bring the facts of the present case within the terms of s 47 of the Act.
447 There are three issues which need to be resolved before an offence under s 47 is made out. These are:
· Whether Universal or Warner supplied or offered to supply goods (ie CDs) or services (ie aspects of its trading terms) on the condition that the acquirer would not acquire non-infringing copies of titles marketed by Universal or Warner as the case may be in Australia for resale from a competitor.
· Whether the words “a competitor” in s 47(2)(d) and 47(3)(d) require there to be a specific identified competitor at the time of imposition of a condition.
· Whether the conduct pleaded had the purpose, effect or likely effect of substantially lessening competition in a relevant market.
448 In its case against Universal the ACCC claims that each communication of the PolyGram Policy to a retailer constituted an offer to that retailer to supply either recorded goods or services being continued trading benefits on condition that the retailer agreed not to acquire product within the Australian catalogue of PolyGram from a competitor of PolyGram. In addition, or cumulatively, the ACCC relies upon the conduct of Universal towards each of Wests, Ultimate Music and Compact City as involving a breach of the section. In its case against Warner it is alleged that the letter of 20 July 1998 (see paras 117to 118) constituted an offer to retailers to supply services (continued trading benefits) on condition that the retailers agreed not to acquire products within the Australian catalogue of Warner from a competitor. In addition, or cumulatively, the ACCC relies upon the conduct of Warner towards Raiders as involving a breach of the section. My findings of fact on these matters are to be found at paras 119 to 136.
449 It is clear from s 47(13) that the condition of which the section speaks need not be enforceable. It suffices that there is a supply on condition. The terms of the condition may be inferred, cf Re Ku-ring-gai Co-operative Building Society (No 12) Ltd (1978) 22 ALR 621.
450 The evidence (it is dealt with in paras 35 to 66 of these reasons) shows that Universal did communicate with a number of retailers to the effect that it would be prepared to review the terms of its trading relationship with those retailers who chose to parallel import and that it reserved its right to cease supplying such retailers with PolyGram recordings. The threats made to Big W and to HMV went close to suggesting that the preparedness to review the trading terms could be interpreted as more than that, although it is also clear that neither HMV or Big W were likely to be intimidated by such threats, if only because the large retailers were as necessary to the record company as the record company was to them and knew that. Nevertheless, the threats would not have been without any impact, given that the need to import all titles would be both inconvenient, and, if warehousing and distribution arrangements had to be put into place, expensive.
451 The evidence concerning the Delaneys (see paras 68 to 85for the evidence relating to Wests and Ultimate Music) and Compact City (see paras 86 to 96) goes much further. In each case there is to be found in the conversations following closure of accounts an offer to supply only if parallel imported product were not acquired for resale in the future. In each of these cases I would find the requirement of an offer on condition satisfied.
452 In the case of Warner the ACCC relies on the letter of 20 July 1998 from Mr Harris, Warner’s Chairman, to all retailers. The letter is set out in more detail at paras 117 to 118. To aid understanding here it is convenient to set out that part of it as is relied upon by the ACCC:
“As a key retail partner dealing exclusively with us, you will continue to receive the support of our sales and promotions teams, co-operative advertising, return privileges, favourable credit terms and the provision of extensive POINT-OF-SALE material…
…it is important you be aware of not only our future intentions, but also the large downside should you wish to alter your source of supply. Such a move will result in us being unable to provide any of the aforementioned trading benefits and will also result in a substantially reduced marketing and advertising spends.” (emphasis added)
453 There is some, although not much, evidence that the letter found its way to retailers. The evidence that it did was the evidence of Mr and Mrs Delaney of Ultimate Music and Wests, Mr Hazell of HMV, Mr van Wessem of Kmart and Mr Holman of Big W. However, I have no reason to believe that it was not sent to all retailers and would infer that it was. There seems no reason to draw an inference adverse to the ACCC in failing to call retailers who would say they received the letter and were intimidated by it when receipt of what on its face was a circular letter intended for all retailers was hardly a matter fundamentally in dispute.
454 I think that the evidence makes clear that there was also an offer by Warner to supply services (relating to retailers’ accounts) on condition that parallel imported titles not be acquired for resale. The evidence relating to Raiders likewise makes it clear that there was an offer by Warner to Raiders to supply goods but on condition that Raiders did not acquire imported Warner titles.
455 I do not think that the printed trading terms either of PolyGram or of Warners on their own would satisfy the requirement of an offer subject to a relevant condition. This is because there is a difference between offering to supply on condition that the purchaser not acquire from someone else and the offer to supply coupled with the stipulation that if you acquire from someone else the offeror would consider no longer supplying. It is not merely one of form.
456 I would find, notwithstanding a submission to the contrary, that PolyGram knew that the closure of the account of Wests and the related account of Ultimate Music would most likely become quickly known in the industry and would have a signalling effect and would send a “ripple” through the industry, as I would find it did. It is not so clear to me that PolyGram intended to have the Compact City incident made public knowledge, although the possibility that it would was sufficiently likely that it is possible to infer on the balance of probabilities that it likewise knew that it would and what the consequence of that would be. The absence of any Warner witness involved in the Raiders incident allows me more comfortably to draw this inference. I accordingly accept the submission on behalf of the ACCC that because there was no reason to think that a Warner closure would be any less publicised than a Universal closure it was highly likely that Warner’s temporary closure of the Raiders account did come to the notice of retailers.
457 I would find, despite submissions to the contrary, that the actions of the ACCC in intervening quickly brought the failure to supply either goods or services to the affected retailers by both Universal and Warner to an end. It was not, I think, the action of the ACCC serving notices under s 155 which necessarily had this effect, at least with Universal. Each of Universal and Warner were aware that complaints had been made to the ACCC by the retailers whose ability to purchase product had been terminated before the service of the notices under s 155, although the service of the notices clearly underlined the ACCC involvement. In this regard, the failure of each of Warner or Universal to call relevant witnesses as to each account being reinstated makes the inference which arises that it was the intervention of the ACCC which precipitated reinstatement easier to draw.
Must there be a specifically identified competitor?
458 The suggestion by Universal that there is a need for a specific competitor to be identified or designated before an offence is made out under s 47 is not, in my view, correct, as a matter of construction. In support of this argument reference is made by Universal to the judgment of Smithers J in SWB Family Credit Union Ltd v Parramatta Tourist Services Pty Ltd (1980) 32 ALR 365, a case on third line forcing arising under s 47(6) of the Act. In that case his Honour said at 375 that the words “directly or indirectly” as appearing in s 47(6) suggested the construction that the subsection was concerned with proscribing conduct directing at forcing the acquirer to deal with a particular person by way of supply rather than an unidentified random choice. The same conclusion was reached by Davies J in Trade Practices Commission v Tepeda Pty Ltd (t/as Metro Motor Market) (1994) ATPR 41-319, 42,246-7 where his Honour said:
“By the reference to ‘another person,’ the section has in mind a specific person, otherwise the reference would be unnecessary. The provision does not prohibit a requirement such as, eg., that the customer will acquire finance or insurance from a reputable company. The vice with which it deals is a corporation’s requirement that such goods or services shall be obtained from a specified source. Such a requirement tends to have anti-competitive effects and a transaction which incorporates it is defined by s 47(6) to be exclusive dealing.”
459 However, there is a difference in context between s 47(2) and (3) on the one hand and s 47(6) on the other. A condition that an acquirer of goods or services not deal with any competitor is potentially, at least, as much anti-competitive as is one that prevents the dealing with a particular competitor. More importantly, s 47(6) refers merely to “another person”, whereas ss 47(2) and (3) each refer to a “competitor”. The comments of both Smithers J and Davies J depend upon the fact that the third party is merely described as another person and it is not likely that Parliament intended to proscribe third line forcing in relation to any unidentified person. But the same can not be said of ss 47(2) and (3). Accordingly I reject this submission.
Was there a purpose or effect of substantially lessening competition?
460 By force of s 4G of the Act the lessening of competition will include “preventing or hindering competition”. Further, the lessening of competition must be substantial, and in my view this means real or of substance. The word “substantial” is used in s 47 as it is in s 46 in a relative sense as explained earlier in the discussion on s 46: see Cool & Sons Pty Ltd v O’Brien Glass Industries Ltd (1981) 35 ALR 445 and on appeal (1983) 77 FLR 441.
461 I would accept the test adopted by Smithers J in Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd (1982) 44 ALR 173 at 191-2, namely whether “competitive trading in the market has been substantially interfered with”, but encompassing therein so far as both purpose and effect is concerned, likelihood. The purpose need not be the sole purpose, so long as it is a substantial purpose.
462 The purpose in question of the action taken by both Warner and Universal is not difficult to find, as the ACCC submits. It is to discourage retailers from acquiring, whether by import or purchase, non-infringing copies of titles which were within the respective catalogues of Universal or Warner. For reasons dealt with earlier (see paras 398 to 400) so far as free riding is relied upon as constituting a purpose different from that proscribed by the section, I do not think it provides the answer. The purpose of preventing free riding is only able to be carried out if there is also the purpose of preventing the acquisition of non-infringing copies. In any event such purpose as there may have been in preventing free riding was not the substantial purpose for the conduct of either Universal or Warner.
463 In both the case brought against Universal and the case brought against Warner the amount of time during which the refusal to supply continued was brief. This is so, albeit that the conduct came to an end, as I have held, as a result of the intervention of the ACCC. It can not rationally be suggested that on its own that conduct whether of Universal or of Warner could have any real effect on competition. The issue requiring consideration is thus whether, if the conduct had not been cut short by virtue of the intervention of the ACCC and having regard to the impact of signalling, there would likely have been a substantial effect on competition. Alternatively there is the question whether a substantial effect on competition was the purpose of the conduct.
464 It should be noted at this point that while the ACCC relies in its case upon signalling as contributing to the likely effect on competition, that reliance is the subject of complaint by Universal. It is submitted that signalling was not particularised in the ACCC pleadings. This is so. However from the time when the ACCC opened its case it made clear that signalling was relied upon in its case. On a number of occasions when objections on the grounds of relevance were taken by Universal, the admissibility of the evidence was put on the basis that PolyGram signalled to the industry the consequence to retailers of importing. Throughout the evidence the significance of signalling to the ACCC case was emphasised. It is not suggested that there was any prejudice to either Universal or Warner in permitting the ACCC to rely on signalling as part of its case under s 47.
465 The evidence concerning signalling is to be found at para 84 of these reasons. It need not be repeated here. There was clear publicity given both in “Inside Retailing” of 21 September 1998 and in the Sydney Morning Herald of 9 September 1998 to the closure of the Delaney accounts. It was discussed by retailers at the Leading Edge conference. Mr Cameron of Universal agreed that it got around like wildfire. Whether or not Mr Ward’s remarks were merely jocular is not to the point. I accept that there was signalling of the action taken by Universal and that this would have an impact on the smaller retailers. I do not think that the failure of the ACCC to call retailers affected by the signalling is a defect in the ACCC case as submitted by Universal. A public authority does not have unlimited resources to seek that evidence from others, even if retailers were prepared to both talk to the ACCC about the matter or give evidence and precipitate at the least some bad blood between them and the record companies.
466 There is an initial question of construction which can arise under s 47 in a case such as the present. That is whether the reference to “purpose” is a reference to subjective purpose, or whether it is a reference to objective purpose.
467 In Hecar Investments No 6 Pty Ltd v Outboard Marine Australia Pty Ltd (1982) 41 ALR 697, Franki J may have suggested, and at least left open the suggestion, that the test of purpose arising under s 47(10) was subjective. Later in Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd (1982) 44 ALR 173 at 205 Smithers J suggested that in so saying Franki J was using the term subjective in the sense that the purpose was actually in the mind of the person engaging in the conduct. However his Honour criticised the view that purpose was subjective in this sense, noting that the purpose to be identified under the subsection was the purpose which the engaging in the relevant conduct had. In his Honour’s view the language of the section suggested objective purpose. His Honour referred by way of analogy to cases under s 260 of the Income Tax Assessment Act 1936 (Cth) which had held that it was the purpose of an arrangement and not the purpose of a taxpayer that was relevant under that section. In fact it made no difference on the facts of Dandy Power whether the purpose required to be considered under s 47(10) was objective or subjective.
468 More recently, Lindgren J in Monroe Topple & Associates Pty Ltd v The Institute of Chartered Accountants in Australia [2001] FCA 1056 at [241] noted that it was “questionable” whether the relevant purpose to which s 47(10) referred was subjective. Again, however, it made no difference to the outcome.
469 It was not strongly suggested before me that the controversy, if it may be called that, makes any difference to the outcome. Nor do I think it does. While no doubt there is a difference between subjective and objective purpose, in most cases, the best evidence of subjective purpose will be objective effect. It is commonplace that in the law a person is presumed to intend the natural and probable consequences of his or her acts. Where there is no direct evidence of subjective purpose (and the present is such a case) the purpose, so far as it exists in the mind of a person, will need to be inferred from the conduct engaged in and in the light of the surrounding circumstances. Hence practically there will be little difference between subjective and objective purpose. I should say that I would prefer, uninstructed by authority, the view that it is objective purpose with which the section is concerned. However, I note that while the same argument would seem able to be made with respect to purpose in the context of s 45, in fact it has been held that purpose as used in s 45 is subjective, not objective: ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (No 1) (1990) 27 FCR 460 at 474 and Hughes v Western Australian Cricket Association (Inc) (1986) 19 FCR 10 at 38. Hence by analogy the section may really be concerned with subjective purpose, unless the cases on this point decided under s 45 were wrongly decided.
470 Universal, in meeting a case of subjective purpose, sought to rely upon the answers to the s 155 notices given by Universal as evidence and indeed the sole evidence of subjective purpose if that was the test. It is not the sole evidence, so far as there is factual material from which inferences can be drawn. Failure by both Universal and Warner to call direct evidence of those who decided to terminate and ultimately reopen the accounts allows me to infer further that evidence of those witnesses would not assist the respondents. But while the answers to the s 155 notices are in evidence the relevant answers are to a great extent self-serving and are to be treated with caution, particularly where the evidence is not on oath and can not be tested by cross-examination.
471 There is also, so far as concerns subjective purpose, the evidence of Ms Cohen in a memorandum dated 22 September 1998. The memorandum is said to be confidential and is addressed to Mr Handley and seven others (if those to whom copies were sent are included in the head count). The letter is set out in the factual summary at para 85. It refers to an article in the Sydney Morning Herald of 9 September 1998 and what Ms Cohen refers to as “the press interest over the last few weeks regarding PolyGram’s position on parallel importers”. It suggests that it is “opportune” to remind PolyGram State Managers and account managers of “the commercial rationale of” the PolyGram strategy. One may wonder why she saw the need to put in writing this commercial rationale when the letter seems rather to be addressed to those at a management level who might be assumed to know it. The answer is not difficult to deduce absent any evidence from her. First, by this time the ACCC had intervened at the instance of Wests. Indeed, the trade practices question had by the time of the memorandum reached the state where the notice under s 155 had been served. Second, the reference to the Sydney Morning Herald article is the reference to the publicity given by that paper to the PolyGram action in closing the Delaney accounts. In my view these dates are not coincidental and the information in the memorandum was most likely prepared in case ultimate litigation should eventuate and in an attempt to provide evidence negating an improper motive. After all, Ms Cohen was the Director of Legal and Business Affairs and one might infer legally qualified and well understood, I would infer, the trade practices issues.
472 The memorandum refers to piracy, to disadvantaging retailers who do not import and who participate in marketing and promotional campaigns on which those who do free ride, to the effect parallel importing could have on investment in Australian artists and the need to sustain a healthy and growing Australian music industry. It is not, I think, without significance that the letter seeks almost in express terms to present the picture that PolyGram is complying with the Act. I am not satisfied that the picture painted by the memorandum represents an honestly held position.
473 However, the question still remains whether the evidence as a whole shows on the balance of probabilities that the purpose (objective or subjective and whether of the record company acting through its decision making body or of the conduct engaged in by the record company) was substantially to lessen competition or whether the effect of the conduct was likely to substantially lessen competition. That in turn reduces to a question whether if the refusal to deal with the various stores (other than Wests, which was due to close anyway) had not been reversed as a result of the ACCC intervention there would likely have been a substantial lessening of competition, that being relevantly, competition in the market in which the record companies engaged (the wholesale market) or, in the alternative, in the retail market. It is in this sense that objective and subjective purpose coincide.
474 It is submitted on behalf of Universal that a finding that Universal’s conduct in respect of Wests, Ultimate Music or Compact City could affect competition would be perverse. Wests was about to close. The conduct may have been on over-reaction, punitive or even unconscionable, but this, so it is said, is irrelevant. The question was rather whether there was the relevant purpose or effect of substantially lessening competition. To send a message to retailers would require, it was submitted, a selection of some more substantial retailer than any of those in fact selected.
475 There is much to be said for the submission if the conduct against these retailers is looked at on its own and without regard to the threats which had already been made to review trading terms and to the possibility that there would be refusal to supply other firms as it was established that they had in fact acquired non-infringing imported titles. I do not think such a finding in the present circumstances perverse. I have no doubt that the intention of those controlling PolyGram in Australia was to take such action as could be taken to prevent parallel importation and the steps it took were not necessarily the only steps which would have been taken but for the intervention of the ACCC. The same can be said of the steps taken by Warner.
476 The more difficult question is not that which goes to the purpose or effect of the conduct of Universal or Warner, it is the question whether such conduct as was engaged in (including such conduct as may have been undertaken had the ACCC not intervened) was capable of being characterised as substantially lessening competition.
477 Economists instruct us that lessening competition is but the other side of taking advantage of market power under s 46. The point is made in the article by Professor Brunt to which reference has already been made: see at 95 and the reference to Trade Practices Commission v Ansett Transport Industries (Operations) Pty Ltd (1978) ATPR 40-071 per Northrop J. Indeed I did not understand senior counsel for any party to suggest otherwise, either in written or oral submissions.
478 What the conduct of each company was designed to achieve and which was likely to have been achieved had it continued was to deter at least the small retailers or a substantial majority of them at least, and having regard to the inconvenience and cost to the large retailers, them also, from acquiring non-infringing copies of CDs for sale. Those CDs could either be imported directly by the retailer or by an Australian wholesaler or be exported to Australia for sale by an overseas wholesaler. It is thus not difficult to infer that the consequence of the continued conduct would be to prevent wholesalers operating in the market. That in turn would have the consequence of ensuring, in respect of Warner titles, that Warner had a monopoly of them in the wholesale market. It would in respect of Universal titles ensure that Universal had a monopoly of them in the wholesale market.
479 Put in another way, given the conclusion I have reached that both Universal and Warner had market power in the wholesale market in which they operated and that they took advantage of that power to prevent a competitor coming into that market, it must follow that there would be an impact upon competition by force of their conduct. Whether that impact was likely to be substantial is again a matter of degree. It is also a matter of judgment.
480 It is true that the evidence established that there was already competition in the overall wholesale market for recorded music comprising the continuous flow of CDs for sale to the public. In the overall market, chart hits would vary from week to week, although on average it would be expected that each major record company would have at least one recording on the chart each week. It is true that no one of the five major record companies dominated that market. But to ignore the monopoly each record company had with respect to its own CDs is to ignore the way the market in fact operated. Each recording with a Universal or a Warner label imported from overseas was virtually identical to the recording manufactured in Australia. Depending upon the country of source there could be a difference in the quality of printing on the packaging. Depending upon the country of source there could, at least in a particular case, have been a difference in the quality of the recording. Generally, however, they were indistinguishable but for the label pronouncing the country of origin. In my view and in these circumstances a requirement that retailers buy all Universal labelled product from Universal and all Warner labelled product from Warner would be likely to have a substantial effect on competition in the wholesale market. Indeed, the result of free importation of CDs from overseas appears to have been some increase in the discounts available to retailers and in consequence an overall reduction in the wholesale net price to dealers. This supports the view that the freeing up of importation of non-infringing copies has improved competition in the market and enables an inference to be drawn that the deterring such importation by the threat of refusal to supply and subsequent select refusal would, had it been continued, have had the consequence of reducing competition and to a substantial degree.
481 There is a debate in the case law and in the literature on the question whether vertical restraints are necessarily anti-competitive. There will be cases where such restraints increase intra-brand competition, albeit that they reduce or restrict inter-brand competition. The debate is referred to, for example, in Melway at 258-259 and 263. I do not think that debate has relevance here. The example usually given is a vertical restraint preventing a retailer from stocking a competing brand, where the restrain may well increase competition among the brands of competitors, while restricting competition within the brand of the person imposing the restraint. The reasons the argument has no relevance here is that the imported product, while no doubt bearing the brand “Universal” or “Warner”, is not the product of the Australian companies at all. It is the product of a different legal entity, albeit a subsidiary of the parent of the Australian companies.
482 There is probably also a lessening of competition at the retail level brought about by the refusal to supply small to medium level retailers if they dealt in imported non-infringing titles. A consequence may well be that smaller retailers, to the extent at least that they are refused supply, would go out of business. That is the consequence which the evidence suggests they fear. If that fear were to come to fruition, the number of retailers operating in the retail market would be diminished and the market share of the larger retailers (who would be unlikely to go out of business because they could withstand any threat of the record companies), would be proportionately increased. The evidence does not permit me to determine whether such a lessening of competition would be substantial in the relevant sense. On the contrary, it may well be able to be argued that the increase in the power of a number of large retailers in fact would increase rather than reduce competition in the retail market. Retailers such as Sanity, HMV, Kmart and Big W already have considerable countervailing power. Such power would be likely to increase if the number of smaller retailers decreased. Although the submissions of the ACCC referred to a substantial lessening of competition not only in the wholesale market, but also in the retail market, the question was not subject of much discussion.
483 In the course of the economic evidence I put the suggestion to Professor Hausman that one consequence of the actions of Universal and Warner might well be that the number of retailers would be reduced and to that extent there could be a reduction in competition. He replied that he had not considered this, although it could be the case. In any event I do not think there is enough evidence before me one way or the other to reach a conclusion that what was done would be likely to have the effect of substantially lessening competition in the retail market.
484 Given that I would find that the likely effect of the conduct of Universal and Warner with which this part of the case has been concerned would be a substantial lessening of competition in the wholesale market, it would follow that if the test of purpose were objective the ACCC would have made out objective purpose. From that a subjective purpose would likewise be inferred.
485 For these reasons I am of the view that the ACCC has made out its case that each of Universal and Warner contravened s 47 of the Act.
the case under s 45 - The overseas conduct
General
486 The case brought by ACCC against both Warner and Universal under s 45 of the Act can be dealt with quite briefly, for on my view it must fail.
487 The facts relied upon in respect of Universal are set out at paras 97 to 108 and in respect of Warner at paras 109 to 114.
488 It is relevantly an essential ingredient for an offence under s 45 of the Act to be made out that there be a contract, arrangement or understanding to which the respondent corporation is a party. That contract, arrangement or understanding must have the purpose or be likely to have the effect of substantially lessening competition.
489 The case against both Universal and Warner is that they entered into an understanding or arrangement with each of the signatories to the letter dated 14 August 1998 to the effect that those signatories would assist in preventing or minimising the export from Indonesia to Australia of articles containing Universal recorded music and send a letter to Central Hiburan directing it to cease exporting to Australia. It is submitted that a substantial purpose of the arrangement or understanding was to substantially lessen competition in the Australian wholesale market for recorded music in Australia or the retail market.
490 For there to be an arrangement or understanding it is necessary that there be a meeting of minds. However it can be accepted that a meeting of the minds can be inferred from circumstantial evidence: News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410 at 563. It may also be accepted as was said in Re British Basic Slag Ltd’s Agreement [1963] 1 WLR 727 at 747 per Diplock LJ, as quoted in News at 572, that:
“… there are many ways in which arrangements may be made [and] it is sufficient to constitute an ‘arrangement’ between A and B, if (i) A makes a representation as to his future conduct with the expectation and intention that such conduct on his part will operate as an inducement to B to act in a particular way; (ii) such representation is communicated to B, who has knowledge that A so expected and intended, and (iii) such representation or A’s conduct in fulfilment of it operates as an inducement, whether among other inducements or not, to B to act in that particular way.”
491 However, in my view the evidence does not suffice here to infer that either Universal or Warner were party to any relevant arrangement or understanding. It may be noted here that s 45 does not apply to a contract, arrangement or understanding where the only parties are bodies corporate which are related: see s 45(8).
492 It is submitted for the ACCC that Warner became a party to the arrangement or agreement embodied in the letter of 14 August in one or both of two ways. The first was said to be through the agency of Mr Widjaja, the sender of the letter. It is said that I should conclude that Mr Widjaja took the action he did on behalf of Warner. The difficulty with that submission is that Mr Widjaja was an officer of PT Warner Music Indonesia and not an agent of Warner. It might be possible to see him as an agent for the American parent in taking the steps he did. It is difficult to see why I should infer that he was the agent of the Australian subsidiary.
493 It is true that Mr Widjaja was spurred into action by Mr Smerdon of Warner who asked him for help to stop further shipments. It is also true that Mr Shih of PolyGram Indonesia who signed on behalf of that company the letter sent on the letterhead of PolyGram Indonesia to Central Hiburan was spurred into action by telephone conversations with Ms Cohen and by the faxes to which reference is made in the recitation of facts at paras 103 to 105. But to say that the acts of Warner and Universal precipitated action is not to find that in each case the action of the overseas person was done on behalf of the Australian company. It may be inferred that PT Warner Music Indonesia, like Warner Australia, is part of the international Warner group and reports and is responsible ultimately to the American owners. Similarly, it may be inferred that PolyGram Indonesia was, at the relevant time, part of the international PolyGram group which reported and was responsible ultimately to the American parent. At no time, however, did the representative of either Indonesian entity purport to act as agent for the Australian company which requested action. Mr Widjaja, in coming to an agreement with the other record companies in Indonesia, purported to and did act as agent for PT Warner Music Indonesia. Mr Shih purported to and did act as agent for PolyGram Indonesia. It is not to the point that in what each did no benefit passed to the respective Indonesian company. The real benefit was more likely for the ultimate American parent than for the sister subsidiary in Australia.
494 The second way it is said that I should find that Warner was party to an agreement or understanding is by the communication through Mr Smerdon to Mr Widjaja of the need for assistance with the expectation and intention that in consequence of that communication being passed on to them, one or more of the signatories to the letter would act to prevent exports to Australia from Indonesia and by the subsequent action of those signatories in accordance with that expectation and intention. It is sought to be argued that Mr Smerdon was aware that Mr Widjaja was passing on Warner’s need for assistance to the five majors and that he expected that this would result in concerted action. Reference is made to the terms of the e-mail from Mr Widjaja of 10 August 1998 and Mr Smerdon’s response of 11 August 1998. A corresponding argument is advanced in respect of the actions of Mr Shih and the communications between Ms Cohen and him so far as they related to PolyGram.
495 In my view the ACCC has not proved that the overseas agreement (or any understanding or arrangement upon which it was premised) was entered into by or on behalf of Universal or Warner. Accordingly the case based on s 45 must fail.
The proscribed purpose
496 It is well established that the purpose to which s 45 refers is a subjective and not an objective purpose: see ASX Operations referred to earlier in the discussion on s 47. Such purpose may, and indeed will, ordinarily need to be inferred from the surrounding circumstances and the anti-competitive effect of the arrangement etc. I would have little difficulty in inferring that in acting as they did, each of Mr Smerdon and Ms Cohen acting on behalf of Warner and PolyGram respectively contacted their respective counterparts in Indonesia seeking assistance with the purpose of seeking to prevent the importation of imported CDs bearing the Warner or Universal label as the case may be into Australia. In so far as the prevention of such importation had the effect of substantially lessening competition, then I would find each had the necessary proscribed purpose.
Was there a substantial lessening of competition brought about as a result of the arrangement entered into?
497 In my view no different question arises under this heading than has already been discussed in the context of s 47, notwithstanding that the conduct in question is different. It is difficult to see how there could be different conclusions reached under ss 47 and 45 in the present case. The conduct proved was directed at the same end. Nor did I understand counsel to suggest otherwise. My finding that there was a substantial lessening of competition in the case of the conduct said to contravene s 47 is equally applicable to the case sought to be brought in respect of the overseas conduct of Warner and Universal under s 45.
498 It follows, however, that the charges brought under s 45 must nevertheless fail.
Accessorial liability
499 It does not follow from my finding that each of Warner and Universal contravened ss 46 and s 47 of the Act that the individual respondents likewise should be found to have contravened these sections. This comes about because not all evidence admitted against the corporations was admissible against the individual respondents. Likewise, the evidence admitted against each individual respondent was not identical to that admitted against the other individual respondents. It will accordingly be necessary to consider in respect of each individual respondent whether the evidence admitted against that respondent suffices to make out the case alleged that the respondent was a person knowingly concerned in the particular contravention.
The requirements of s 75B
500 I have held that by threatening to refuse supply to retailers, particularly small retailers, and thereafter acting upon that threat, Universal and Warner both contravened s 46 and 47 of the Act. The mere adoption of the Universal “policy” or a similar Warner “policy” without more could not, as I have held, have amounted to a contravention of the Act. I have also held that the ACCC had not succeeded in showing that Universal or Warner contravened s 45 of the Act in regard to the overseas conduct. Accordingly the question now to be considered is whether by force of s 75B of the Act the ACCC has shown on the balance of probabilities that Mr Handley, Mr Dickson and Ms Cohen (all in respect of the contraventions of Universal) and Mr Smerdon and Mr Maksimovic (both in respect of the contraventions of Warner) were “knowingly concerned in” or a “party to”the contraventions which I have found to have been committed.
501 To succeed in these proceedings against the individual respondents the ACCC must show that they had knowledge of the essential facts which constituted the particular contravention: Yorke v Lucas (1985) 158 CLR 661 at 670. In considering the case against each of the individual respondents I must ask whether the acts or omissions proved against them show a practical connection between them and the contravention: Ashbury v Reid [1961] WAR 49 at 51. In the present context it will also be necessary to show that the Respondent knew that the conduct of Universal or Warner, as the case may be, was engaged in for the purpose or had the effect or likely effect of substantially lessening competition.
Mr Handley
502 Mr Handley was the General Manager of Sales of PolyGram. I have no trouble in inferring that Mr Handley was aware of the pleaded Universal policy to the effect that PolyGram might cease to have a trading relationship with retailers who chose to stock parallel imports. It is necessary to observe, however, that the admissions made by Universal in the responses it gave to the s 155 notice are not admissible against Mr Handley or for that matter Mr Dickson or Ms Cohen.
503 As I have already held that policy on its own would not contravene the Act, if only because without more there could be no anti-competitive consequences, particularly if the policy itself was ignored by those who might be affected by it, eg retailers. Further, the policy left it open whether PolyGram would in fact cease to trade with a retailer who chose to stock parallel imports or would decide not to do so.
504 The evidence of Mr Handley’s participation in the brainstorming meeting of 15 July 1998 and the position he held with Universal leaves me in no doubt that, as was submitted by the ACCC, he was well aware of the conditions in the market and the likely competitive consequences of steps that were taken by PolyGram.
505 It is submitted on behalf of Mr Handley that to succeed against him the ACCC would need to show that the policy was adopted by Mr Handley and that a finding to this effect would rest on conjecture and not inference. With respect I do not accept this submission. The evidence to which reference will shortly be made permits, in my opinion, the making of such an inference. More significantly, and contrary to the submissions made on Mr Handley’s behalf, the evidence admitted against him makes it clear that he was knowingly concerned in and indeed participated, at least in a decision making sense, in the steps that were taken by Universal to in fact implement the policy and cease trading with retailers who had chosen to sell imported CDs.
506 It is clear from the evidence of Mr Nemeth of Fish Records that at a meeting which took place on or about 21 July 1998, shortly before the importation of non-infringing copies was legalised, Mr Handley indicated that Universal would be prepared to review the terms of the trading relationship with Fish Records if the latter chose to import. Mr Handley indeed said that in such a case it (ie PolyGram) “would also review its terms of trading and it may cease to have a trading relationship with you”. In that case he obtained Mr Nemeth’s assurance that Fish would not import, and in consequence, no action was taken. However, the statement is, in essence, but an abbreviated form of the so-called policy and the conversation can be seen as indicating that Mr Handley had adopted it.
507 A meeting between Mr Hazell of HMV and representatives of PolyGram (including Mr Handley) in July 1998 had Mr Dickson saying to Mr Hazell that the PolyGram legal advice was that it could withdraw supply and that the company would have no hesitation in stopping supply to a retailer who chose to import. It may well be that HMV would not have seen this as a threat to it. But that is not to the point. I would conclude that Mr Handley did know of and in the relevant sense adopt the policy pleaded. Reference may also be made to the comments made by Mr Dickson referred to later at a meeting with Mr Hazell of HMV at which Mr Handley attended.
508 Further Mr Handley clearly knew and approved of the closure of the accounts of Compact City and the Delaney’s. So much of the evidence of Mr Howson as was admissible against Mr Handley permits the inference to be drawn that Mr Handley was instrumental in ordering the Compact City account to be closed because that company had imported CDs, something that was happening all over the country and obviously a problem which Mr Handley sought to meet. The inference may more comfortably be drawn in the absence of Mr Handley going into evidence on the question. It may also be noted that Mr Howson corresponded with Mr Handley on the very issue.
509 The evidence of Mr and Mrs Delaney so far as admissible against Mr Handley showed that the PolyGram Credit Manager involved in the closure of the Delaney accounts reported to and it may be inferred was directed by Mr Handley (and, of course, Mr Dickson). Again the inferences open may more comfortably drawn in the absence of Mr Handley giving evidence to the contrary.
510 It follows, therefore, that I would hold that Mr Handley contravened s 75B in that he was knowingly concerned in the matters that resulted in Universal contravening both ss 46 and 47 of the Act.
Mr Dickson
511 The evidence against Mr Dickson is, if anything, stronger than that against Mr Handley.
512 First it is to be noted that Mr Dickson was Group Managing Director of Music Operations of PolyGram at the relevant time. In this position it can be inferred that he, like Mr Handley, had knowledge of the market conditions prevailing both before and after the legalisation of importation of non-infringing copies. Like Mr Handley, he participated in the brainstorming meeting of 15 July 1998.
513 Further, Mr Holman of Big W in evidence admitted against Mr Dickson but not against Mr Handley said that in a telephone conversation he had with Mr Dickson in about August 1998 Mr Dickson had said in response to Mr Holman asking him to clarify PolyGram’s position in relation to Big W selling parallel imported CDs against the background of rumours that PolyGram was considering stopping supply to retailers who sold parallel imported CDs:
“We are looking at our options and we are getting legal advice to see if we could cease supply if a retailer has an alternative source of supply for PolyGram product.”
514 Mr Hazell of HMV referred to a meeting at which Mr Dickson and Mr Handley were present (the date of the meeting is suggested as being in July 1998) in the course of which meeting Mr Dickson referred to the fact that Universal had been given legal advice that it could withdraw supply of PolyGram product to any retailer who parallel imported. At the same meeting Mr Dickson said:
“We would have absolutely no hesitation in stopping supply to Big W or to any other retailers that chose to parallel import particularly if we do not see them as a retailer who contributes to the industry.”
515 I think the inference is clearly open that Mr Dickson did participate in the formulation of the policy to consider not dealing with retailers who imported non-infringing copies, ie stopping supply to such retailers and the failure of Mr Dickson to give evidence makes me more comfortable in drawing that inference.
516 So far as the events concerning the Delaneys, it is clear that Mr Dickson participated in the decision making process which led to the accounts being closed. Mr Delaney in fact corresponded with Mr Dickson, writing to him on 26 August. Mr Dickson replied the next day. It is not insignificant that Mr Dickson noted in his reply that PolyGram had no obligation to supply anyone – a phrase reminiscent of the legal advice to which reference is made above. I think it is clear and I would find that Mr Dickson was knowingly involved in the implementation of the PolyGram Policy in relation to Wests and Ultimate Music.
517 Accordingly I would find that Mr Dickson has been knowingly concerned in the contravention by Universal of ss 46 and 47 of the Act and accordingly contravened the provisions of s 75B of the Act.
Ms Cohen
518 It is clear that Ms Cohen participated considerably in the overseas conduct, but since I have found that no contravention of the Act has been made out by that conduct the case against Ms Cohen of aiding, abetting, counselling or procuring that contravention or of being knowingly concerned in it can likewise not be made out.
519 The ACCC submits that Ms Cohen’s participation in the formulation of the Universal “policy” and its implementation is to be inferred. I use here the word “participation” to include for present purposes counselling or procuring or being knowingly concerned in or party to implementation of that which constituted the contravention of the Act by Universal under ss 46 and 47.
520 At the outset it must be said that the case against Ms Cohen is clearly less direct than that against Mr Handley and Mr Dickson. Indeed, it is submitted on her behalf that there is no evidence that she did participate in the specific conduct relating to the Delaneys or the Compact City account.
521 It is submitted on behalf of the ACCC that Ms Cohen had, by virtue of her position (she was Director of Legal and Business Affairs of PolyGram at the relevant time) and by her receipt of the minutes of the brainstorming meeting of 15 July and participation in and receipt of correspondence, knowledge of the essential market conditions and of the likely competitive consequences of the action which PolyGram took against the Delaneys and Compact City. Mere receipt of minutes or correspondence falls short of participation. Something more is necessary. It is therefore necessary to look more carefully at the evidence admitted against her.
522 I think that there is little difficulty in inferring that Ms Cohen was aware of the consequences both legal and commercial of the Copyright Amendments which permitted the importation into Australia of non-infringing copies. It is against that background that one must assess the evidence. She did not participate in the brainstorming meeting, although she was made aware of the discussion as a result of receiving a copy of the minutes. That discussion, while painting the background of the commercial problem which legalised parallel importing presented was not, however, concerned either with the formulation or implementation of the so-called “policy”. Her participation in the events which constituted the overseas conduct made it clear that she was aware of the need to prevent importation from Indonesia. The inference is also clearly open that she was aware that Universal feared the consequences to its business of the legalisation of parallel importation and wished to take some action to prevent it. Her failure to give evidence makes the drawing of such an inference easier. The fact that she was copied with correspondence assists in inferring that she was kept informed of the need of the company to monitor what happened with parallel importation. That falls short of permitting me to find that she participated in the formulation of the policy pleaded.
523 I should say that in my view the ACCC does not need to show that Ms Cohen participated in the formulation of the policy for it is not the formulation of the policy as such which involves the breach of ss 46 or 47. It suffices in my view for the ACCC to show knowledge of the policy, so long as it is also shown that she participated in the implementation of it.
524 Ms Cohen was not present at the meeting which took place between Mr Hazell and Mr Handley and Mr Dickson in July 1998 referred to above. Nor was she present at the meeting between Mr Nemeth and Mr Handley which took place on 21 July 1998. In my view there is simply insufficient evidence to show that Ms Cohen did participate in the formulation of the policy. However, I do think that the evidence suffices to permit the inference that in her position she was aware there was such a policy.
525 So far as I can see there is no evidence of Ms Cohen participating in the closure of the accounts with the Delaneys. Her only involvement, so far as the evidence showed, was to write the memo of 22 September 1998 which is set out at para 85 and discussed at para 471of these reasons. While this memo was, in my view, written to justify the conduct of Universal after the ACCC had become involved in the matter, it does not prove Ms Cohen’s participation in the circumstances concerning the closure of the Delaney accounts.
526 It is clear from the letter written by Mr Howson of Compact City to Mr Handley dated 22 August 1998 of which Ms Cohen was an addressee that Ms Cohen was aware that the account of Compact City had been closed and that the closure turned upon the trap purchase of the one copy of Shania Twain’s CD “Come on Over” which had been imported from Canada. But that is as far as the evidence involving Ms Cohen goes. It does not show any involvement on her part in the implementation of the policy.
527 In my view the case against Ms Cohen must be dismissed.
Mr Smerdon and Mr Maksimovic of Warner
528 Again it is clear that so far as the case of the ACCC against the Warner executives, Mr Smerdon and Mr Maksimovic relates to the overseas conduct it must be dismissed for the simple view that the ACCC has not shown any contravention of the Act by Warner in breach of s 45 of the Act. Accordingly the case against them must be restricted to the circumstances surrounding the closure of the Raiders’ account and the consequent contravention in respect of it by Warner of ss 46 and 47 of the Act. However, the evidence of the involvement of Mr Smerdon and Mr Maksimovic in the events assists is drawing the inferences referred to in the next paragraph.
529 Mr Smerdon was, it will be recalled, the Finance and Business Affairs Director of Warner. Mr Maksimovic the NSW State Manager of Warner. It is easy to infer from the position each held that each was aware of the danger perceived to Warner’s business as a result of the legalisation of parallel importation and it can be inferred would be aware of the consequences of closure of the account of a retailer, the inability of the retailer to purchase Warner titles and the consequent effect on competition. It may also be inferred that each would have seen the letter of 20 July 1998 sent by Warner to all retailers under the signature of Mr Harris which is discussed at para 117 of these reasons. The failure on their part to give evidence permits this inference to be more readily drawn.
530 The facts found by me in relation to the Raiders’ account closures so far as they show respectively involvement of Mr Smerdon and Mr Maksimovic and which are set out in paras 119 to 136 of these reasons suffice in my view to show that each was knowingly concerned in or participated in the Warner conduct. Accordingly I am satisfied that each contravened s 79B of the Act in respect of the Warner contraventions of ss 46 and 47 of the Act.
CONCLUSION
531 It follows that I find that both Universal and Warner contravened ss 46 and 47 of the Act and that the individual respondents, other than Ms Cohen, contravened s 79B of the Act in respect of the conduct of Universal and Warner.
532 I would propose to make a declaration of contravention in due course. However, it will also be necessary to consider the quantum of pecuniary penalty and what other consequential orders should be made, including possible injunctions and cost orders. I would stand the matters over to a date to be fixed with counsel to permit argument on the form such orders should take.
| I certify that the preceding five hundred and thirty-two (532) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hill. |
Associate:
Dated: 14 December 2001
| Counsel for the Applicant: | J Burnside QC and S Gageler SC with P Renehan and M Green |
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| Solicitor for the Applicant: | Australian Government Solicitor |
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| Counsel for Universal: | J Hilton SC with A J Payne |
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| Solicitor for Universal: | Gilbert & Tobin |
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| Counsel for the individual Respondents in the Universal proceedings: | D Yates SC with A S Bell |
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| Solicitor for the individual Respondents in the Universal proceedings: | Coudert Brothers |
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| Counsel for the Respondents in the Warner proceedings: | D J Hammerschlag SC with R I Bellamy |
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| Solicitor for the Respondents in the Warner proceedings: | Tress Cocks & Maddox |
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| Date of Hearing: | 2-4, 9-12, 17-20, 24, 26-27 and 30 April 2001, 1-3 and 22-25 May 2001, 17, 24-26 and 28 September 2001, and 2 October 2001 |
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| Date of Judgment: | 14 December 2001 |
